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 SEPTEMBER 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 106,707,271
- ------------------------------ -----------------------------------------
Class Outstanding shares as of October 31, 1996
1
DIME BANCORP, INC.
SEPTEMBER 30, 1996
FORM 10-Q
INDEX
PAGE NO.
--------
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Income for the three months
and nine months ended September 30, 1996 and 1995 4
Consolidated Statement of Changes in Stockholder's Equity
for the nine months ended September 30, 1996 5
Consolidated Statements of Cash Flows for the nine months
ended September 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 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)
September 30, December 31,
1996 1995
- ----------------------------------------------------------------------
ASSETS
Cash and due from banks $ 147,811 $ 216,532
Money market investments 208,920 18,824
Loans held for sale 98,249 139,370
Securities available for sale 3,303,341 4,070,865
Securities held to maturity (estimated
fair value of $4,414,313 and $4,990,564
at September 30, 1996 and December 4,524,258 5,085,736
31, 1995, respectively)
Federal Home Loan Bank of New York stock 240,547 318,690
Loans receivable, net:
First mortgage loans 8,548,274 7,820,680
Cooperative apartment loans 1,244,967 1,217,030
Consumer and business loans 749,166 792,603
Allowance for loan losses (116,219) (128,295)
- ----------------------------------------------------------------------
Total loans receivable, net 10,426,188 9,702,018
- ----------------------------------------------------------------------
Other real estate owned, net 52,483 60,681
Accrued interest receivable 113,322 118,811
Premises and equipment, net 106,130 112,757
Capitalized excess servicing 26,924 32,604
Mortgage servicing rights 72,798 65,583
Deferred tax asset, net 206,684 223,463
Other assets 155,810 160,686
- ----------------------------------------------------------------------
Total assets $19,683,465 $20,326,620
- ----------------------------------------------------------------------
LIABILITIES
Deposits $12,734,288 $12,572,203
Federal Home Loan Bank of New York 2,179,061 4,602,983
advances
Securities sold under agreements to 3,213,123 1,632,453
repurchase
Senior notes 197,532 197,384
Other borrowed funds 165,210 181,732
Other liabilities 172,605 163,335
- ----------------------------------------------------------------------
Total liabilities 18,661,819 19,350,090
- ----------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share
(200,000,000 shares authorized;
108,262,216 and 99,705,731 shares
issued at September 30, 1996 and
December 31, 1995, respectively) 1,083 997
Additional paid-in capital 914,386 915,210
Retained earnings 137,728 65,981
Treasury stock, at cost (1,815,351 (23,209) --
shares at September 30, 1996)
Net unrealized loss on securities (8,089) (5,468)
available for sale, net of related
income taxes
Unearned compensation (253) (190)
- ----------------------------------------------------------------------
Total stockholders' equity 1,021,646 976,530
- ----------------------------------------------------------------------
Total liabilities and stockholders' equity $19,683,465 $20,326,620
- ----------------------------------------------------------------------
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 Nine Months Ended
September 30, September 30,
----------------------------------------------------------
1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------
INTEREST INCOME
First mortgage loans $156,341 $141,254 $ 457,955 $ 413,408
Cooperative apartment loans 24,591 23,440 72,908 67,771
Consumer and business loans 16,167 19,417 50,280 56,115
Mortgage-backed securities 125,220 137,571 386,974 425,397
Investment securities 8,223 8,139 25,310 24,837
Money market investments 5,009 8,601 18,467 25,476
- --------------------------------------------------------------------------------------------------
Total interest income 335,551 338,422 1,011,894 1,013,004
- --------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 132,943 135,129 396,454 390,042
Borrowed funds 87,889 104,908 272,308 313,449
- --------------------------------------------------------------------------------------------------
Total interest expense 220,832 240,037 668,762 703,491
- --------------------------------------------------------------------------------------------------
Net interest income 114,719 98,385 343,132 309,513
Provision for loan losses 10,250 9,900 31,000 29,750
- --------------------------------------------------------------------------------------------------
Net interest income after provision for 104,469 88,485 312,132 279,763
loan losses
- --------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Banking servicing fees 7,161 5,651 20,347 15,972
Loan servicing fees, net 7,747 7,386 22,336 23,195
Securities and insurance brokerage fees 6,045 3,887 16,352 11,602
Net (losses) gains on sales activities (10,548) (384) (11,993) 10,506
Other 2,542 2,120 8,813 7,938
- --------------------------------------------------------------------------------------------------
Total non-interest income 12,947 18,660 55,855 69,213
- --------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
General and administrative expense:
Compensation and employee benefits 38,104 29,057 103,895 100,022
Occupancy and equipment, net 12,844 13,396 39,053 43,849
Federal deposit insurance premiums 2,875 3,268 8,625 18,673
Other 22,342 18,317 65,619 55,451
--------------------------------------------------------------------------------------------------
Total general and administrative expense 76,165 64,038 217,192 217,995
Savings Association Insurance Fund
recapitalization assessment 26,280 -- 26,280 --
Other real estate owned expense, net 2,404 3,401 7,056 10,417
Amortization of mortgage servicing 2,684 3,440 8,757 9,125
rights
Restructuring and merger-related expense -- 2,393 3,504 5,556
- --------------------------------------------------------------------------------------------------
Total non-interest expense 107,533 73,272 262,789 243,093
- --------------------------------------------------------------------------------------------------
Income before income tax (benefit) 9,883 33,873 105,198 105,883
expense
Income tax (benefit) expense (7,011) 14,865 32,260 46,031
- --------------------------------------------------------------------------------------------------
Net income $ 16,894 $ 19,008 $ 72,938 $ 59,852
- --------------------------------------------------------------------------------------------------
Primary and fully diluted earnings per $ 0.16 $ 0.17 $ 0.67 $ 0.55
common share
- --------------------------------------------------------------------------------------------------
Primary average common shares 108,459 109,943 109,193 109,660
outstanding
Fully diluted average common shares 108,561 110,064 109,327 109,810
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 Nine
Months Ended
September 30,
1996
- -------------------------------------------------------------------
COMMON STOCK
Balance at beginning of period $ 997
Stock issued upon exercise of stock warrant 84
Stock issued under employee benefit plans 2
- -------------------------------------------------------------------
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 plans 1,023
Restricted stock activity 66
- -------------------------------------------------------------------
Balance at end of period 914,386
- -------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 65,981
Net income 72,938
Treasury stock issued under employee benefit plans (1,191)
- -------------------------------------------------------------------
Balance at end of period 137,728
- -------------------------------------------------------------------
TREASURY STOCK, AT COST
Balance at beginning of period --
Treasury stock purchased (25,466)
Treasury stock issued under employee benefit plans 2,196
Restricted stock activity 61
- -------------------------------------------------------------------
Balance at end of period (23,209)
- -------------------------------------------------------------------
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 securities available (2,621)
for sale, net of related income taxes
- -------------------------------------------------------------------
Balance at end of period (8,089)
- -------------------------------------------------------------------
UNEARNED COMPENSATION
Balance at beginning of period (190)
Restricted stock activity (119)
Unearned compensation amortized to expense 56
- -------------------------------------------------------------------
Balance at end of period (253)
- -------------------------------------------------------------------
Total stockholders' equity $1,021,646
- -------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
5
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Nine Months Ended
September 30,
----------------------------
1996 1995
- -----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 72,938 $ 59,852
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and real estate losses 34,036 34,684
Depreciation and amortization of 12,136 13,730
premises and equipment
Other amortization and accretion, net 45,577 45,229
Provision for deferred income tax expense 18,724 41,250
Net decrease (increase) in loans held for sale 41,121 (73,475)
Other, net 33,572 (30,457)
- -----------------------------------------------------------------------------
Net cash provided by operating activities 258,104 90,813
- -----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans receivable originated and purchased (2,017,679) (1,200,026)
Principal payments received on loans receivable 1,258,637 885,559
Purchases of securities available for sale (1,568,740) (55,391)
Purchases of securities held to maturity (192,913) (1,569,006)
Proceeds from sales of securities 1,553,042 25,006
available for sale
Proceeds from sales of securities held to maturity -- 187,342
Principal payments received on 1,456,589 1,220,507
mortgage-backed securities
Proceeds from maturities and calls of 38,323 28,284
investment securities
Net redemptions (purchases) of Federal 78,143 (21,286)
Home Loan Bank of New York stock
Repurchases of assets sold with recourse (20,735) (28,414)
Proceeds from sales of other real estate owned 38,658 47,209
Purchases and originations of mortgage (15,761) (14,552)
servicing rights
Proceeds from sales of mortgage servicing rights -- 1,643
Other, net (21,722) 9,158
- -----------------------------------------------------------------------------
Net cash provided (used) by investing 585,842 (483,967)
activities
- -----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits, exclusive of sales 162,085 120,190
Net cash paid upon sales of deposits -- (262,512)
Net decrease in borrowings with (168,615) (588,444)
original maturities of three months or less
Proceeds from other borrowings 805,000 1,365,000
Repayments of other borrowings (1,495,786) (291,932)
Proceeds from issuance of common and 2,124 1,730
treasury stock
Purchases of treasury stock (25,466) --
Other, net (1,913) --
- -----------------------------------------------------------------------------
Net cash (used) provided by financing activities (722,571) 344,032
- -----------------------------------------------------------------------------
Net increase (decrease) in cash and 121,375 (49,122)
cash equivalents
Cash and cash equivalents at beginning of period 235,356 207,157
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 356,731 $ 158,035
- -----------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid on deposits and borrowings $ 672,182 $ 666,215
Income tax refunds, net 696 7,529
SUPPLEMENTAL NON-CASH FLOW INFORMATION
Net transfers of loans receivable to $ 48,127 $ 69,801
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 (the "Bank") 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 from those estimates. The
results for the three months and nine months ended September 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.
8
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 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 association. The Bank is
a member of the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC"), with approximately 60% of its deposits insured by the BIF
and approximately 40% of its deposits insured by the Savings Association
Insurance Fund ("SAIF") of the FDIC, in each case up to applicable limits.
The Company reported net income of $16.9 million, or $0.16 per fully diluted
common share, for the third quarter of 1996, as compared with net income of
$19.0 million, or $0.17 per fully diluted common share, for the third quarter of
1995. The results for the third quarter of 1996 included (i) a SAIF
recapitalization assessment in the amount of $26.3 million (see "Recent
Legislation" below), (ii) losses of $11.4 million on sales of certain relatively
low-yielding mortgage-backed securities ("MBS"), and (iii) a $5.4 million charge
for certain non-recurring executive personnel expenses. The $24.8 million after-
tax effect of these items was partially offset by an $11.0 million tax benefit
recognized during the 1996 third quarter in connection with the final resolution
of a prior year's tax position. The Company's net income for the third quarter
of 1995 included merger-related expense of $2.4 million ($1.4 million after
tax). Excluding the aforementioned items in the third quarter of 1996 and the
merger-related expense in the 1995 third quarter, the Company's net income
amounted to $30.7 million, or $0.28 per fully diluted common share, for the 1996
third quarter, up 51.0% from $20.4 million, or $0.18 per fully diluted common
share, for the comparable 1995 quarter.
For the nine months ended September 30, 1996, the Company reported net income of
$72.9 million, or $0.67 per fully diluted common share, up from $59.9 million,
or $0.55 per fully diluted common share, for the corresponding 1995 period. Net
income for the first nine months of 1996 included (i) the $26.3 million SAIF
recapitalization assessment, (ii) losses of $12.0 million on sales of certain
relatively low-yielding MBS, (iii) the $5.4 million charge for certain non-
recurring executive personnel expenses, and (iv) restructuring and merger-
related expense of $3.5 million. Partially offsetting the $27.3 million after-
tax effect of these items was the $11.0 million tax benefit during the 1996
third quarter derived from the final resolution of a prior year's tax position.
The results for the nine months ended September 30, 1995 included restructuring
and merger-related expense of $5.6 million ($3.1 million after tax) and gains
from branch sales of $18.7 million ($10.5 million after tax). Excluding the
above items, the Company's net income for the first nine months of 1996 was
$89.2 million, or $0.82 per fully diluted common share, an increase of 70.0%
from $52.4 million, or $0.48 per fully diluted common share, for the first nine
months of 1995.
The number of outstanding shares of the Holding Company's common stock ("Common
Stock") increased to 106.4 million at September 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 during the first six months 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 because the Warrant was considered a Common Stock equivalent during
the period of time it was outstanding.
The Company's total assets declined to $19.7 billion at September 30, 1996 from
$20.3 billion at year-end 1995, primarily due to sales of MBS in connection with
a balance sheet restructuring plan (the "Balance Sheet Restructuring Plan")
initiated during the fourth quarter of 1995. The proceeds from such sales were
principally used to reduce the Company's outstanding borrowed funds. The Balance
Sheet Restructuring Plan is intended to enable the Company to improve its net
interest margin, provide greater flexibility in adjusting to varying interest
rate environments and enable the Company to reduce its
10
asset size, as deemed necessary. The Balance Sheet Restructuring Plan emphasizes
growth in the Company's loans receivable and deposits, while reducing its
reliance on MBS and borrowed funds.
The Company's total loan production, consisting of both originations and
purchases, amounted to $2.9 billion for the first nine months of 1996, up from
$1.4 billion for the corresponding 1995 period. Production of one-to-four family
first mortgage and individual cooperative apartment loans ("residential property
loans") amounted to $2.4 billion for the first nine months of 1996, an increase
of 124% as compared with the same period one year ago.
The Company's asset quality improved, as total non-performing assets declined to
$279.7 million, or 1.42% of total assets, at September 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 5.72%, 11.69% and 12.91%, respectively, at September 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.
From time to time, the Company may publish forward-looking statements relating
to such matters as anticipated financial performance, business prospects, new
products and markets, and similar matters. The Private Securities Litigation
Reform Act of 1995 provides a "safe harbor" for such forward-looking statements.
In order to comply with the terms of the safe harbor, the Company notes that a
variety of factors could cause the Company's actual results and experience to
differ materially from the anticipated results or other expectations expressed
in the Company's forward-looking statements. The risks and uncertainties that
may affect the operations, performance, development and results of the Company's
business include interest rate movements, competition from both financial and
non-financial institutions, changes in applicable laws and regulations, and
general economic conditions.
RECENT LEGISLATION
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the "Funds
Act") was enacted to address the imbalance with respect to insurance premiums
on deposits insured by the SAIF as compared with insurance premiums on deposits
insured by the BIF (see "G&A Expense" below). The FDIC implemented portions of
the Funds Act in a final regulation that became effective on October 8, 1996.
The FDIC regulation mandated a special assessment of $0.657 per $100 of SAIF-
insured deposits as of March 31, 1995 to recapitalize the SAIF and bring it to
its statutorily-required level of $1.25 of reserves for each $100 of insured
deposits (the "SAIF Special Assessment"). However, the Funds Act provided for
certain adjustments for purposes of computing the SAIF Special Assessment,
including a 20% reduction for certain BIF-member institutions having SAIF-
insured deposits, including the Bank. The Company accrued a pre-tax expense of
$26.3 million in the third quarter of 1996 in connection with the SAIF Special
Assessment. The Funds Act further provides for the merger of the SAIF and the
BIF on January 1, 1999 if no insured depository institution is a savings
association on that date.
On October 8, 1996, pursuant to the Funds Act, the FDIC proposed a rule that
would, among other things, establish a new assessment rate schedule for SAIF-
insured deposits. Under the proposal, SAIF assessment rates would range from
$0.00 to $0.27 for each $100 of SAIF-insured deposits. As a BIF-member
institution with SAIF-insured deposits, these rates would apply to the Bank
retroactive to October 1, 1996.
The Funds Act also provides that, beginning January 1, 1997, assessments will be
imposed on insured depository institutions with respect to BIF-assessable
deposits in order to pay for a portion of the debt service of certain bonds
issued by the Federal Financing Corporation ("FICO Bonds"). Prior to January 1,
1997, assessments to pay the debt service on FICO Bonds are applicable only to
SAIF-member institutions. In addition, the Funds Act provides that, between
January 1, 1997 and the earlier of December 31, 1999 or the date as of which the
last savings association ceases to exist, BIF-assessable deposits, for purposes
of the FICO Bonds debt service assessment, will be assessed at a rate equal to
20% of the rate applied to SAIF-assessable deposits. Thereafter, all insured
deposits will be assessed on a pro rata basis. The FDIC has estimated that the
initial assessment rates will be $0.0644 for each $100 of SAIF-assessable
deposits and $0.0129 for each $100 of BIF-assessable deposits, changing to
$0.0243 for
11
each $100 of all deposits for the period January 1, 2000 through the year 2017
(the maturity date of the FICO Bonds). The federal agencies charged with
implementing the assessment for the FICO Bonds have not yet indicated the method
of implementation; however, the Bank would benefit from a 20% reduction in its
FICO Bonds assessment if it is applied in a manner consistent with the FDIC
rules regarding the SAIF Special Assessment. Based on the estimated assessment
rates and the Bank's current deposit levels, and assuming that a 20% reduction
will apply, the Bank anticipates that it would incur pre-tax expense related to
its FICO Bonds assessment of approximately $3.7 million for 1997. The Company,
however, cannot predict the assessment rates related to the FICO Bonds or
whether the Bank will benefit from the 20% reduction in connection with such
assessment.
During the 1996 third quarter, federal legislation was also enacted that
generally eliminates the potential recapture of federal income tax deductions
arising from commonly utilized methods of calculating bad debt reserves for
periods prior to 1988 if an institution with a thrift charter (such as the Bank)
were to change to a commercial bank charter. In addition, this legislation
repeals the reserve method of tax accounting for bad debts used by the Bank and
other "large" thrift institutions, 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. Further, New York State legislation was enacted during the
1996 third quarter allowing thrift institutions to continue to use the reserve
method of tax accounting for bad debts and to determine a deduction for bad
debts in a manner similar to prior state law.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Company's net interest income amounted to $114.7 million for the third
quarter of 1996, an increase of $16.3 million, or 16.6%, as compared with the
corresponding quarter in 1995. For the nine months ended September 30, 1996, net
interest income amounted to $343.1 million, up $33.6 million, or 10.9%, relative
to the same period in 1995. The Company's net interest margin rose to 2.44% and
2.40% for the three and nine month periods ended September 30, 1996,
respectively, from 2.05% and 2.11% for the comparable 1995 periods. The growth
in the net interest margin reflects, in large part, sales of certain relatively
low-yielding MBS during 1996, loan portfolio growth, lower overall funding
costs, and favorable changes in the interest rate yield curve.
The average balance of total interest-earning assets, which amounted to $19.2
billion for both the three and nine month periods ended September 30, 1996,
declined $542.8 million and $435.6 million as compared with the respective
periods in 1995. These declines principally reflect reductions in the average
balance of MBS of $1.3 billion and $1.2 billion for the three and nine month
periods ended September 30, 1996, respectively, as compared with the same
periods one year ago, and include the effect of sales consummated in connection
with the Balance Sheet Restructuring Plan. The reductions in average MBS have
been partially offset by growth in the total average balance of loans of $0.9
billion and $0.8 billion during the three and nine month periods ending
September 30, 1996, respectively, as compared with the corresponding periods in
1995.
The gross yield on total average interest-earning assets was 7.00% for the third
quarter of 1996, up 14 basis points from the corresponding 1995 quarter, and
7.01% for the nine months ended September 30, 1996, up 15 basis points from the
comparable 1995 period. These improvements were largely attributable to
increases in the yield on MBS of 35 basis points and 29 basis points for the
three months and nine months ended September 30, 1996, respectively, as compared
with the same periods one year ago, due principally to the sales of certain
relatively low-yielding MBS in connection with the Balance Sheet Restructuring
Plan. The gross yields on average interest-earning assets also reflect 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).
Average interest-bearing liabilities amounted to $18.7 billion for the third
quarter of 1996 and $18.8 billion for the first nine months of 1996,
representing decreases of $614.1 million and $489.1 million as compared with the
respective 1995 periods. Total average borrowed funds declined $665.2 million
for the 1996 third quarter and $488.0 million for the nine months ended
September 30, 1996, as compared with the related periods in 1995. These declines
were substantially attributable to the effect of the
12
Balance Sheet Restructuring Plan. Total average deposits rose $51.0 million for
the third quarter of 1996 as compared with the third quarter of 1995 but,
despite deposit sales of $283 million during the first six months of 1995, were
virtually unchanged for the nine months ended September 30, 1996 as compared
with the corresponding period in 1995.
The average cost of the Company's interest-bearing liabilities was 4.67% for the
third quarter of 1996, down 23 basis points from the third quarter of 1995, and
4.72% for the nine months ended September 30, 1996, down 12 basis points from
the comparable 1995 period. The cost of deposits declined 7 basis points for the
quarter ended September 30, 1996, but rose 6 basis points for the first nine
months of 1996, as compared with the corresponding prior year periods,
reflecting primarily the net effect of competitive influences, market rate
changes and a migration of deposits from lower-costing savings accounts to time
deposits. For the three and nine month periods ended September 30, 1996, as
compared with the corresponding periods in 1995, the cost of borrowed funds
declined 43 basis points and 41 basis points, respectively. 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
effect of repayments of Federal Home Loan Bank of New York ("FHLBNY") advances
in connection with the Balance Sheet Restructuring Plan and the continued
shifting by the Company from such advances to generally lower-costing securities
sold under agreements to repurchase.
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 $4.9 million and $12.3 million during the three and nine month periods ended
September 30, 1996, respectively, as compared with increases in net interest
income during the comparable periods in 1995 of $0.1 million and $11.1 million,
respectively. For a further discussion of the Company's hedging activities, see
"Management of Interest Rate Risk -- Hedging Activities" below.
13
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.
- ---------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30,
-------------------------------------------------------------------
1996 1995
----------------------------------- -----------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
- ---------------------------------------------------------------------------------------------------------------------------
Assets
- ------
Interest-earning assets:
Loans:
First mortgage loans $ 8,439,295 $156,341 7.41% $ 7,568,141 $141,254 7.47%
Cooperative apartment loans 1,246,944 24,591 7.89 1,204,704 23,440 7.78
Consumer and business loans 741,516 16,167 8.68 795,240 19,417 9.70
---------------------------------------------------------------------------------------------------------------------------
Total loans 10,427,755 197,099 7.56 9,568,085 184,111 7.69
MBS 7,836,345 125,220 6.39 9,108,410 137,571 6.04
Investment securities 531,031 8,223 6.17 448,137 8,139 7.23
Money market investments 377,709 5,009 5.19 591,040 8,601 5.70
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 19,172,840 $335,551 7.00% 19,715,672 $338,422 6.86%
Other assets 670,946 724,591
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $19,843,786 $20,440,263
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ------------------------------------
Interest-bearing liabilities:
Deposits:
Demand $ 1,077,280 $ 2,018 0.75% $ 1,053,151 $ 2,659 1.00%
Savings 2,552,709 16,222 2.53 2,849,854 17,943 2.50
Money market 2,113,742 20,603 3.88 2,220,383 20,228 3.61
Time 6,948,862 94,100 5.39 6,518,125 94,299 5.74
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 12,692,593 132,943 4.17 12,641,513 135,129 4.24
Borrowed funds 6,021,642 87,889 5.72 6,686,826 104,908 6.15
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 18,714,235 $220,832 4.67% 19,328,339 $240,037 4.90%
Other liabilities 124,654 153,259
Stockholders' equity 1,004,897 958,665
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $19,843,786 $20,440,263
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $114,719 $ 98,385
- ---------------------------------------------------------------------------------------------------------------------------
Excess of interest-earning assets
over interest-bearing liabilities $ 458,605 $ 387,333
- ---------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.33% 1.96%
- ---------------------------------------------------------------------------------------------------------------------------
Net interest margin 2.44% 2.05%
- ---------------------------------------------------------------------------------------------------------------------------
14
- ------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
---------------------------------------------------------------------------
1996 1995
---------------------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------------
Assets
- ------
Interest-earning assets:
Loans:
First mortgage loans $ 8,250,549 $ 457,955 7.40% $ 7,470,826 $ 413,408 7.38%
Cooperative apartment loans 1,237,547 72,908 7.86 1,184,230 67,771 7.63
Consumer and business loans 758,142 50,280 8.85 803,174 56,115 9.34
- ------------------------------------------------------------------------------------------------------------------------------
Total loans 10,246,238 581,143 7.57 9,458,230 537,294 7.58
MBS 7,985,997 386,974 6.46 9,187,849 425,397 6.17
Investment securities 549,370 25,310 6.15 457,289 24,837 7.25
Money market investments 463,591 18,467 5.24 577,448 25,476 5.82
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 19,245,196 $1,011,894 7.01% 19,680,816 $1,013,004 6.86%
Other assets 701,988 723,505
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $19,947,184 $20,404,321
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ------------------------------------
Interest-bearing liabilities:
Deposits:
Demand $ 1,080,502 $ 6,189 0.77% $ 1,052,099 $ 8,375 1.06%
Savings 2,605,744 49,133 2.52 3,067,682 55,509 2.42
Money market 2,120,717 61,597 3.88 2,169,252 66,211 4.08
Time 6,829,849 279,535 5.47 6,348,874 259,947 5.47
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 12,636,812 396,454 4.19 12,637,907 390,042 4.13
Borrowed funds 6,188,343 272,308 5.79 6,676,371 313,449 6.20
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 18,825,155 $ 668,762 4.72% 19,314,278 $ 703,491 4.84%
Other liabilities 127,080 153,803
Stockholders' equity 994,949 936,240
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $19,947,184 $20,404,321
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 343,132 $ 309,513
- ------------------------------------------------------------------------------------------------------------------------------
Excess of interest-earning assets
over interest-bearing liabilities $ 420,041 $ 366,538
- ------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.29% 2.02%
- ------------------------------------------------------------------------------------------------------------------------------
Net interest margin 2.40% 2.11%
- ------------------------------------------------------------------------------------------------------------------------------
15
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 Nine Months Ended
September 30, September 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:
Loans:
First mortgage loans $ 16,146 $ (1,059) $ 15,087 $ 43,276 $ 1,271 $ 44,547
Cooperative apartment loans 830 321 1,151 3,106 2,031 5,137
Consumer and business loans (1,257) (1,993) (3,250) (3,062) (2,773) (5,835)
- --------------------------------------------------------------------------------------------------
Total loans 15,719 (2,731) 12,988 43,320 529 43,849
MBS (20,000) 7,649 (12,351) (57,557) 19,134 (38,423)
Investment securities 1,382 (1,298) 84 4,568 (4,095) 473
Money market investments (2,883) (709) (3,592) (4,696) (2,313) (7,009)
- --------------------------------------------------------------------------------------------------
Total interest income (5,782) 2,911 (2,871) (14,365) 13,255 (1,110)
- --------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Demand 60 (701) (641) 221 (2,407) (2,186)
Savings (1,887) 167 (1,720) (8,633) 2,257 (6,376)
Money market (999) 1,374 375 (1,459) (3,155) (4,614)
Time 6,029 (6,229) (200) 19,686 (98) 19,588
- --------------------------------------------------------------------------------------------------
Total deposits 3,203 (5,389) (2,186) 9,815 (3,403) 6,412
Borrowed funds (10,008) (7,011) (17,019) (22,139) (19,002) (41,141)
- --------------------------------------------------------------------------------------------------
Total interest expense (6,805) (12,400) (19,205) (12,324) (22,405) (34,729)
- --------------------------------------------------------------------------------------------------
Net interest income $ 1,023 $ 15,311 $ 16,334 $ (2,041) $ 35,660 $ 33,619
- --------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses was $10.3 million for the third quarter
of 1996, as compared with $9.9 million for the third quarter of 1995, and $31.0
million for the first nine months of 1996, as compared with $29.8 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 nine months ended September 30, 1996 and 1995.
- ----------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
(In thousands) 1996 1995 1996 1995
- ----------------------------------------------------------------------------------
Banking service fees $ 7,161 $ 5,651 $ 20,347 $15,972
Loan servicing fees, net 7,747 7,386 22,336 23,195
Securities and insurance brokerage fees 6,045 3,887 16,352 11,602
Net (losses) gains on sales activities (10,548) (384) (11,993) 10,506
Other 2,542 2,120 8,813 7,938
- ----------------------------------------------------------------------------------
Total non-interest income $ 12,947 $18,660 $ 55,855 $69,213
- ----------------------------------------------------------------------------------
16
Banking service fees amounted to $7.2 million for the third quarter of 1996, an
increase of $1.5 million, or 26.7%, as compared with the third quarter of 1995.
For the nine months ended September 30, 1996, banking service fees amounted to
$20.3 million, an increase of $4.4 million, or 27.4%, as compared with the
corresponding 1995 period. These increases were principally attributable to
certain changes in the Company's fee structure, coupled with a higher volume of
underlying transactions.
Loan servicing fees, net, amounted to $7.7 million for the third quarter of
1996, up $0.4 million as compared with the third quarter of 1995. For the first
nine months of 1996, loan servicing fees, net, amounted to $22.3 million, down
$0.9 million from the comparable period one year ago. The level of loan
servicing fees, net, for the 1996 periods as compared with the 1995 periods
benefited from a reduction in amortization of capitalized excess servicing and
growth in the average balance of the loan servicing portfolio of approximately
$330 million for both the three and nine month periods ended September 30, 1996,
as compared with the corresponding 1995 periods. The effect of these factors was
partially offset with respect to the third quarter of 1996 and more than offset
with respect to the first nine months of 1996, as compared with the related
periods in 1995, by 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 September 30, 1996, the Company serviced $9.3
billion of loans for others.
Securities and insurance brokerage fees amounted to $6.0 million for the third
quarter of 1996, an increase of $2.2 million, or 55.5%, relative to the third
quarter of 1995. For the first nine months of 1996, securities and insurance
brokerage fees amounted to $16.4 million, up $4.8 million, or 40.9%, as compared
with the same period one year ago. Fees from securities brokerage activities
were up $1.5 million, or 41.6%, and $3.7 million, or 33.7%, for the three and
nine months ended September 30, 1996, respectively, as compared with the same
periods in 1995. This growth principally reflects new sales initiatives and an
expanded sales force during the first nine months of 1996 as compared with the
same period one year ago. Insurance brokerage fees rose $0.7 million, or 219%,
and $1.1 million, or 161%, for the three and nine months ended September 30,
1996, as compared with the same periods in 1995, largely reflective of the
introduction of certain life insurance products, together with the
implementation of a third party telemarketing program during the second quarter
of 1996.
The following table summarizes net (losses) gains on sales activities for the
three months and nine months ended September 30, 1996 and 1995.
- -----------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
(In thousands) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------
Net (losses) gains on:
Sales, calls and revaluations of $(10,343) $(1,990) $(12,179) $(3,965)
securities
Sales of branches -- -- -- 18,655
Sales of loans held for sale 544 119 2,007 216
Sales of mortgage servicing rights -- -- -- 359
Other (749) 1,487 (1,821) (4,759)
- -----------------------------------------------------------------------------------
Total net (losses) gains on sales $(10,548) $ (384) $(11,993) $10,506
activities
- -----------------------------------------------------------------------------------
For the three and nine month periods ended September 30, 1996, net losses on
sales, calls and revaluations of securities included losses of $11.4 million and
$12.0 million, respectively, on sales of certain relatively low-yielding MBS in
connection with the Balance Sheet Restructuring Plan. The first nine months of
1996 also included a $1.2 million loss associated with an other than temporary
impairment in value of certain MBS recognized in the second quarter of 1996,
while a similar loss totaling $2.0 million was recognized during the third
quarter of 1995 (see "Management of Credit Risk -- MBS" below). The net gains on
branch sales of $18.7 million during the nine months ended September 30, 1995
were associated with sales, during the first six months of the year, of five
branches with approximately $283 million of deposits. In addition, the nine
months ended September 30, 1995 included net losses of $4.6 million associated
with the disposition and consolidation of certain operating facilities,
consisting of losses of $6.2 million recognized in the 1995 first quarter and
gains of $1.6 million recognized in the 1995 third quarter.
Other non-interest income amounted to $2.5 million for the three months ended
September 30, 1996 and $8.8 million for the first nine months of 1996,
representing increases of $0.4 million and $0.9 million as
17
compared with the respective periods in 1995. The increases were largely due to
growth in loan-related fee income and, with respect to the increase for the
first nine months of 1996, $1.0 million received during the second quarter of
1996 in settlement of certain litigation.
NON-INTEREST EXPENSE
The following table sets forth the components of non-interest expense for the
three months and nine months ended September 30, 1996 and 1995.
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
(In thousands) 1996 1995 1996 1995
- --------------------------------------------------------------------------------
General and Administrative ("G&A")
expense:
Compensation and employee benefits $ 38,104 $29,057 $103,895 $100,022
Occupancy and equipment, net 12,844 13,396 39,053 43,849
Federal deposit insurance premiums 2,875 3,268 8,625 18,673
Other 22,342 18,317 65,619 55,451
- --------------------------------------------------------------------------------
Total G&A expense 76,165 64,038 217,192 217,995
SAIF recapitalization assessment 26,280 -- 26,280 --
Other real estate owned ("ORE") expense, 2,404 3,401 7,056 10,417
net
Amortization of mortgage servicing 2,684 3,440 8,757 9,125
rights ("MSR")
Restructuring and merger-related expense -- 2,393 3,504 5,556
- --------------------------------------------------------------------------------
Total non-interest expense $107,533 $73,272 $262,789 $243,093
- --------------------------------------------------------------------------------
G&A Expense
G&A expense increased to $76.2 million for the third quarter of 1996 from $64.0
million for the third quarter of 1995, but declined slightly to $217.2 million
for the first nine months of 1996 from $218.0 million for the corresponding
period in 1995. G&A expense levels for the 1996 periods, as compared with the
1995 periods, were significantly impacted by (i) a $5.4 million one-time charge
in the 1996 third quarter for personnel expenses associated with the previously
announced retirement of the Company's Chief Executive Officer, (ii) costs
associated with current operating strategies, (iii) 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"), (iv) 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, with and into the Holding Company and the Bank, respectively (the
"Merger"), and (v) a reduced assessment rate on the portion of the Bank's
deposits insured by the BIF.
Compensation and employee benefits expense totalled $38.1 million for the third
quarter of 1996, an increase of $9.0 million as compared with the third quarter
of 1995, and $103.9 million for the first nine months of 1996, an increase of
$3.9 million as compared with the first nine months of 1995. Excluding the
effect of the aforementioned $5.4 million one-time personnel charge during the
1996 third quarter, compensation and employee benefits expense would have
increased $3.6 million for the third quarter of 1996, but would have declined
$1.5 million for the first nine months of 1996, as compared with the
corresponding prior year periods, primarily due to the net effect of (i) staff
reductions associated with the Merger, (ii) 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, (iii) additions to the
employee complement resulting from the National and Madison Acquisitions, (iv)
normal merit increases, (v) a higher level of incentive compensation and
commissions, and (vi) a greater use of temporary employment services. The
Company's full-time equivalent employee complement was 2,883 at September 30,
1996, as compared with 2,763 one year earlier and approximately 3,200 at the
date of the Merger.
Occupancy and equipment expense, net, amounted to $12.8 million for the 1996
third quarter and $39.1 million for the nine months ended September 30, 1996,
representing reductions, as compared with the corresponding periods for 1995, of
$0.6 million and $4.8 million, respectively. Contributing to the
18
declines were Merger-related cost savings, including a reduction in the Bank's
branch network to 86 branches at September 30, 1996 from 99 branches at the date
of the Merger, partially offset by the impact of the National and Madison
Acquisitions.
Federal deposit insurance premiums expense totaled $2.9 million for the third
quarter of 1996, a decrease of $0.4 million as compared with the third quarter
of 1995. For the first nine months of 1996, federal deposit insurance premiums
totaled $8.6 million, a decrease of $10.0 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 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. A premium
rebate of $1.2 million for the month of June 1995 is reflected as a reduction of
the third quarter 1995 expense. 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 assessment rate schedule for
SAIF-insured deposits of between 23 and 31 basis points for each $100 of SAIF-
insured deposits was not affected by the actions taken by the FDIC in August
1995 or November 1995. The actual assessment rate for both BIF- and SAIF-insured
deposits continues to depend on an institution's capital levels and regulatory
status. For a discussion of the effect of recently enacted legislation on
federal deposit insurance costs, see "Recent Legislation" above.
Other G&A expense increased to $22.3 million for the three months ended
September 30, 1996 from $18.3 million for third quarter of 1995 and to $65.6
million for the nine months ended September 30, 1996 from $55.5 million for the
comparable period in 1995. The increases were largely attributable to higher
marketing expense, the outsourcing of additional aspects of the Company's data
processing operations and costs associated with a life insurance sales
telemarketing program implemented during the 1996 second quarter. The Company's
marketing expense increased $1.5 million, or 93.3%, and $4.6 million, or 70.4%,
for the three and nine month periods ended September 30, 1996, respectively, as
compared with the corresponding 1995 periods, due principally to television
advertising costs.
SAIF Recapitalization Assessment
During the third quarter of 1996, in connection with the enactment of the Funds
Act, the Company recognized a $26.3 million charge associated with a special
assessment to recapitalize the SAIF. For a further discussion of the Funds Act,
see "Recent Legislation" above.
ORE Expense, Net
ORE expense, net, declined $1.0 million, or 29.3%, for the third quarter of 1996
and $3.4 million, or 32.3%, for the first nine months of 1996, as compared with
the corresponding periods one year ago, reflecting, among other factors, a
reduction in the level of ORE.
The following table presents the significant components of ORE expense, net, for
the three and nine month periods ended September 30, 1996 and 1995.
- ----------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
(In thousands) 1996 1995 1996 1995
- ----------------------------------------------------------------------------------
Provision for losses $1,156 $1,594 $ 3,036 $ 4,934
Net gains on sales (430) (126) (1,460) (637)
Operating expense, net of rental income 1,678 1,933 5,480 6,120
- ----------------------------------------------------------------------------------
Total ORE expense, net $2,404 $3,401 $ 7,056 $10,417
- ----------------------------------------------------------------------------------
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
adverse changes in economic and other conditions that the Company is unable to
predict.
19
Amortization of MSR
Amortization of MSR amounted to $2.7 million for the third quarter of 1996 and
$8.8 million for the first nine months of 1996, declines of $0.8 million and
$0.4 million as compared with the three and nine month periods ended September
30, 1995, respectively. These declines were principally attributable to a
reduction in actual and estimated prepayment levels of the underlying loans.
Restructuring and Merger-Related Expense
Restructuring expense associated with the Merger and other Merger-related
expense amounted to $3.5 million for the first nine 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 nine months ended September 30, 1995, the Company
incurred Merger-related expense of $2.4 million and $5.6 million, respectively,
which was comprised of a variety of operating expenses directly attributable to
the Merger, including training costs for new systems and 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 (BENEFIT) EXPENSE
The Company recorded an income tax benefit of $7.0 million for the third quarter
of 1996, as compared with income tax expense of $14.9 million for the comparable
1995 quarter. The change reflects a reduction in pretax income, together with
the effect of an $11.0 million benefit recognized during the 1996 third quarter
upon the final resolution of tax filing positions taken in a prior year. For the
nine months ended September 30, 1996, the Company recorded income tax expense of
$32.3 million, down from $46.0 million in the comparable prior year period due
substantially to the aforementioned $11.0 million tax benefit realized during
the 1996 third quarter. The level of income tax expense for the first nine
months of 1996 also reflects the recognition of favorable settlements of local
income tax issues during each of the first and second quarters of the year,
which aggregated $1.3 million.
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.
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
20
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 $18.9 billion at
September 30, 1996, approximately $13.1 billion, or 69%, were adjustable-rate.
Of such adjustable-rate assets, approximately 49% were linked to U.S. Treasury
instruments and approximately 37% 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 use such instruments for
speculative purposes. Derivative financial instruments employed by the Company
at September 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. 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.
21
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 September 30, 1996 and December 31, 1995.
- -----------------------------------------------------------------------------------------
September 30, 1996 December 31, 1995
----------------------- -----------------------
Notional Estimated Notional Estimated
(In thousands) Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------
Interest rate swaps hedging:
Loans receivable $ 314,101 $(1,491) $ 212,747 $(2,195)
Deposits -- -- 150,000 533
Borrowed funds 613,000 2,245 928,000 (4,837)
- -----------------------------------------------------------------------------------------
Total interest rate swaps 927,101 754 1,290,747 (6,499)
- -----------------------------------------------------------------------------------------
Interest rate caps hedging:
Loans receivable 454,799 1,033 -- --
MBS available for sale 205,876 467 877,118 961
MBS held to maturity 275,126 625 366,061 401
Borrowed funds 361,000 6,245 -- --
- -----------------------------------------------------------------------------------------
Total interest rate caps 1,296,801 8,370 1,243,179 1,362
- -----------------------------------------------------------------------------------------
Interest rate floors hedging:
MSR 1,053,411 67 1,219,776 1,026
- -----------------------------------------------------------------------------------------
Total interest rate floors 1,053,411 67 1,219,776 1,026
- -----------------------------------------------------------------------------------------
Forward contracts hedging:
Loans held for sale 118,438 (714) 69,676 (709)
- -----------------------------------------------------------------------------------------
Total forward contracts 118,438 (714) 69,676 (709)
- -----------------------------------------------------------------------------------------
Options hedging:
Loans held for sale 10,000 23 10,000 22
Borrowed funds 20,000 124 37,000 70
- -----------------------------------------------------------------------------------------
Total options 30,000 147 47,000 92
- -----------------------------------------------------------------------------------------
Total derivative financial instruments $3,425,751 $ 8,624 $3,870,378 $(4,728)
- -----------------------------------------------------------------------------------------
All of the Company's outstanding interest rate swap agreements at September 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
September 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,
----------------------------------------------------
2000 and
(Dollars in thousands) 1996 1997 1998 1999 After Total
- ----------------------------------------------------------------------------------------------
Interest rate swaps hedging:
Loans receivable:
Notional amount $103,949 $ 44,352 $ 7,700 $26,500 $131,600 $314,101
Variable-rate receivable 5.50% 5.50% 5.59% 5.61% 5.48% 5.50%
Fixed-rate payable 4.59 5.05 7.17 7.95 6.81 5.93
Borrowed funds:
Notional amount $163,000 $390,000 $30,000 $30,000 $ -- $613,000
Variable-rate receivable 5.50% 5.53% 5.49% 5.66% --% 5.53%
Fixed-rate payable 6.24 5.35 6.24 7.06 -- 5.71
- ----------------------------------------------------------------------------------------------
Total:
Notional amount $266,949 $434,352 $37,700 $56,500 $131,600 $927,101
Variable-rate receivable 5.50% 5.53% 5.51% 5.64% 5.48% 5.52%
Fixed-rate payable 5.59 5.32 6.43 7.48 6.81 5.79
- ----------------------------------------------------------------------------------------------
The Company had outstanding interest rate cap agreements with a notional amount
of $935.8 million at September 30, 1996, which were entered into in order 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 5.71% at September 30, 1996, and the specified interest
rates at that date were 7.50% and 8.50% and averaged 8.00%. The Company also had
outstanding interest rate cap agreements with a notional amount of $361.0
million at September 30, 1996 which were entered into for the purpose of hedging
certain borrowed funds. These agreements provide
22
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 5.43% at
September 30, 1996, rises above a specified interest rate. The specified
interest rates at September 30, 1996 ranged from 6.00% to 7.50% and averaged
7.04%.
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
6.46% and 6.72%, respectively, at September 30, 1996, declines below a
designated interest rate. The designated interest rates at September 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 $22.3 million at September 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 $13.0 million and
$7.8 million at September 30, 1996 and December 31, 1995, respectively. Such
premiums are amortized to operations over the 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 September 30, 1996, the Company had a one-year negative gap, including the
effect of hedging activities, of $2.9 billion, or 15.4% 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 September 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
23
have generally not been sensitive, on a historical basis, to fluctuations in
market interest rates. If all savings accounts were included in the "One Year or
Less" category, the company would have had a one-year negative gap at September
30, 1996 of $5.3 billion, or 28.1% of total interest-earning assets.
- ------------------------------------------------------------------------------------
September 30, 1996
------------------------------------------------
More Than
One Year One Through More Than
(Dollars in millions) or Less Three Years Three Years Total
- ------------------------------------------------------------------------------------
Interest-earning assets:
Loans $ 5,274 $2,755 $2,612 $10,641
MBS 5,602 1,303 720 7,625
Other 220 111 321 652
- ------------------------------------------------------------------------------------
Total interest-earning assets 11,096 4,169 3,653 18,918
- ------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 9,188 1,150 2,396 12,734
Borrowed funds 5,409 16 330 5,755
- ------------------------------------------------------------------------------------
Total interest-bearing liabilities 14,597 1,166 2,726 18,489
- ------------------------------------------------------------------------------------
Impact of hedging activities (587) 431 156 -
- ------------------------------------------------------------------------------------
Gap (repricing difference) $(2,914) $2,572 $ 771 $ 429
- ------------------------------------------------------------------------------------
Cumulative gap $(2,914) $ (342) $ 429
- ------------------------------------------------------------------------------------
Cumulative ratio of gap to total
interest-earning assets (15.4)% (1.8)% 2.3%
- ------------------------------------------------------------------------------------
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/or interest payments.
Non-performing assets amounted to $279.7 million at September 30, 1996, a
decline of $36.1 million, or 11.4%, as compared with December 31, 1995. At
September 30, 1996, non-performing assets represented 1.42% of total assets,
down from 1.55% of total assets at year-end 1995. Total non-accrual loans were
2.16% of total loans receivable at September 30, 1996, as compared with 2.60% of
total loans receivable at December 31, 1995.
24
The following table presents the components of non-performing assets at
September 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.
- ----------------------------------------------------------------------
September 30, December 31,
(In thousands) 1996 1995
- ----------------------------------------------------------------------
Non-accrual loans:
Residential property $188,838 $206,230
Commercial and multifamily first 27,429 34,618
mortgage
Construction 3,516 5,267
Consumer and business 7,472 9,004
- ----------------------------------------------------------------------
Total non-accrual loans 227,255 255,119
- ----------------------------------------------------------------------
ORE, net:
Residential property 33,573 38,799
Commercial and multifamily property 21,829 24,952
Allowance for losses (2,919) (3,070)
- ----------------------------------------------------------------------
Total ORE, net 52,483 60,681
- ----------------------------------------------------------------------
Total non-performing assets $279,738 $315,800
- ----------------------------------------------------------------------
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's level of ORE
and its results of operations were not, and are not currently expected to be,
materially affected.
The table set forth below summarizes loans delinquent for less than 90 days,
other than those on non-accrual status, at September 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 $ 45,135 $ 19,143 $64,278
Commercial and multifamily first 9,643 8,755 18,398
mortgage loans
Consumer and business loans 5,582 1,627 7,209
- ---------------------------------------------------------------------
Total accruing delinquent loans $ 60,360 $ 29,525 $89,885
- ---------------------------------------------------------------------
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 for loans with comparable risk, 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 September
30, 1996 and December 31, 1995.
- ---------------------------------------------------------------------
September 30, December 31,
(In thousands) 1996 1995
- ---------------------------------------------------------------------
Residential property loans $ 41,864 $ 43,090
Commercial and multifamily first 160,007 159,097
mortgage loans
- ---------------------------------------------------------------------
Total loans modified in a TDR $201,871 $202,187
- ---------------------------------------------------------------------
25
IMPAIRED LOANS
In accordance with Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan," 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.
The following table summarizes information regarding the Company's impaired
loans at September 30, 1996 and December 31, 1995. The measurement of loan
impairment by the Company is generally predicated upon the estimated fair value
of the underlying collateral.
- ----------------------------------------------------------------------
September 30, December 31,
(In thousands) 1996 1995
- ----------------------------------------------------------------------
Residential property loans:
Recorded investment:
Without a related allowance $10,890 $10,650
With a related allowance 1,926 3,170
Related allowance for loan losses (120) (198)
- ----------------------------------------------------------------------
Total residential property loans 12,696 13,622
- ----------------------------------------------------------------------
Commercial and multifamily first
mortgage loans:
Recorded investment:
Without a related allowance 8,788 7,575
With a related allowance 38,686 66,648
Related allowance for loan losses (4,260) (9,909)
- ----------------------------------------------------------------------
Total commercial and multifamily first 43,214 64,314
mortgage loans
- ----------------------------------------------------------------------
Business loans:
Recorded investment:
With a related allowance 208 741
Related allowance for loan losses (93) (660)
- ----------------------------------------------------------------------
Total business loans 115 81
- ----------------------------------------------------------------------
Total impaired loans, net $56,025 $78,017
- ----------------------------------------------------------------------
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
September 30, 1996, the balance of loans sold with recourse amounted to $793.6
million, down from $900.4 million at December 31, 1995. The Company's related
maximum potential recourse exposure was approximately $198 million at September
30, 1996, as compared with approximately $223 million at the end of 1995. Of the
loans sold with recourse, $10.6 million were delinquent 90 days or more at
September 30, 1996. During the first nine months of 1996, the Company
repurchased loans sold with recourse totaling $19.1 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.
26
The Company's allowance for loan losses declined to $116.2 million at September
30, 1996 from $141.7 million at September 30, 1995, reflecting, in large part, a
reduction in the Company's non-accrual loans of $47.0 million during the interim
period. The allowance for loan losses represented 51.1% of non-accrual loans at
September 30, 1996, as compared with 51.7% one year earlier. As a percentage of
total loans receivable, the allowance for loan losses declined to 1.10% at
September 30, 1996 from 1.48% at September 30, 1995. Net charge-offs were $43.1
million for the first nine months of 1996, a reduction of $15.4 million, or
26.3%, from the comparable 1995 period.
The following table sets forth the activity in the Company's allowance for loan
losses for the three and nine month periods ended September 30, 1996 and 1995.
- -----------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
(In thousands) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------
Balance at beginning of period $124,902 $150,744 $128,295 $170,383
Provision charged to operations 10,250 9,900 31,000 29,750
Charge-offs:
Residential property loans (14,644) (10,849) (35,083) (34,874)
Commercial and multifamily first (4,781) (9,532) (10,510) (26,268)
mortgage loans
Consumer and business loans (1,505) (1,677) (4,196) (5,368)
- -----------------------------------------------------------------------------------
Total charge-offs (20,930) (22,058) (49,789) (66,510)
- -----------------------------------------------------------------------------------
Recoveries:
Residential property loans 1,150 1,085 3,938 3,712
Commercial and multifamily first 324 638 816 1,368
mortgage loans
Consumer and business loans 523 1,392 1,959 2,998
- -----------------------------------------------------------------------------------
Total recoveries 1,997 3,115 6,713 8,078
- -----------------------------------------------------------------------------------
Net charge-offs (18,933) (18,943) (43,076) (58,432)
- -----------------------------------------------------------------------------------
Balance at end of period $116,219 $141,701 $116,219 $141,701
- -----------------------------------------------------------------------------------
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 September 30, 1996 of $7.6 billion,
approximately 26%, 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. 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 group of 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 September 30, 1996, these securities,
all of which are classified as available for sale, had an estimated fair value
of $50.9 million, an amortized cost of $59.1 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. While
substantially all of the $5.6 billion portfolio of Privately-Issued MBS held by
the Company at September 30, 1996 were rated "AA" or better by one or more of
the nationally recognized securities rating agencies, no assurance can be given
that such ratings will be maintained and the Company cannot predict whether
losses will or will not be recognized on any such securities.
27
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 September 30, 1996
or December 31, 1995.
In connection with its use 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 is 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 $19.7 billion at September 30, 1996, a
decline of $643.2 million, or 3.2%, from the level at December 31, 1995. This
decline primarily reflects a reduction in securities available for sale and
securities held to maturity, the impact of which was partially offset by growth
in loans receivable and money market investments.
SECURITIES
Securities available for sale, which declined from $4.1 billion at December 31,
1995 to $3.3 billion at September 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 September 30, 1996, the Company's net unrealized loss on its
securities available for sale portfolio, net of related income taxes, was $8.1
million ($14.1 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 nine months
of 1996, the Company sold securities available for sale with an amortized cost
of $1.6 billion, substantially all of which were MBS. The MBS sales were
principally consummated in connection with the Balance Sheet Restructuring Plan.
Purchases of securities available for sale amounted to $1.6 billion during the
first nine months of 1996, of which $1.4 billion were MBS.
28
The following table summarizes the amortized cost and estimated fair value of
securities available for sale at September 30, 1996 and December 31,1995.
- ----------------------------------------------------------------------------------------
September 30, 1996 December 31, 1995
------------------------------------------------
Amortized Estimated Amortized Estimated
(In thousands) Cost Fair Value Cost Fair Value
- ----------------------------------------------------------------------------------------
MBS:
Pass-through securities:
Privately-issued $1,305,545 $1,297,176 $2,731,267 $2,715,097
FNMA 924,532 920,611 736,614 747,189
FHLMC 203,875 204,340 448,260 448,356
GNMA 679,246 681,238 22,625 22,525
Interest-only 1,926 1,469 2,187 1,679
- ----------------------------------------------------------------------------------------
Total MBS 3,115,124 3,104,834 3,940,953 3,934,846
- ----------------------------------------------------------------------------------------
Investment securities:
Debt securities:
U. S. government and federal agency 112,359 110,291 28,048 28,045
State and municipal 63,507 62,421 80,763 78,053
Domestic corporate 15,569 15,426 17,274 17,249
Equity securities 10,923 10,369 13,403 12,672
- ----------------------------------------------------------------------------------------
Total investment securities 202,358 198,507 139,488 136,019
- ----------------------------------------------------------------------------------------
Total securities available for sale $3,317,482 $3,303,341 $4,080,441 $4,070,865
- ----------------------------------------------------------------------------------------
Securities held to maturity, which are carried at amortized cost, amounted to
$4.5 billion at September 30, 1996, a decline of $561.5 million from December
31, 1995. The net unrealized loss on securities held to maturity increased to
$109.9 million at September 30, 1996 from $95.2 million at the end of 1995.
Purchases of securities held to maturity during the first nine months of 1996
amounted to $192.9 million, substantially all of which were MBS. A summary of
the amortized cost and estimated fair value of securities held to maturity at
September 30, 1996 and December 31, 1995 is presented in the table below.
- ----------------------------------------------------------------------------------------
September 30, 1996 December 31, 1995
---------------------- ----------------------
Amortized Estimated Amortized Estimated
(In thousands) Cost Fair Value Cost Fair Value
- ----------------------------------------------------------------------------------------
MBS:
Privately-issued pass-through $2,645,127 $2,574,031 $3,071,166 $2,990,079
securities
Collateralized mortgage obligations:
Privately-issued 1,699,772 1,664,245 1,867,318 1,854,528
FNMA 94,422 92,771 94,636 94,492
FHLMC 81,174 80,678 49,330 49,098
- ----------------------------------------------------------------------------------------
Total MBS 4,520,495 4,411,725 5,082,450 4,988,197
- ----------------------------------------------------------------------------------------
Investment securities:
Foreign governmental debt securities 500 500 505 505
Equity securities 3,263 2,088 2,781 1,862
- ----------------------------------------------------------------------------------------
Total investment securities 3,763 2,588 3,286 2,367
- ----------------------------------------------------------------------------------------
Total securities held to maturity $4,524,258 $4,414,313 $5,085,736 $4,990,564
- ----------------------------------------------------------------------------------------
LOANS
Total loans receivable, exclusive of the allowance for loan losses, amounted to
$10.5 billion at September 30, 1996, an increase of $712.1 million, or 7.2%,
from December 31, 1995, primarily due to growth in the first mortgage loans
receivable portfolio of $727.6 million. In addition, during the first nine
months of 1996, the cooperative apartment loans receivable portfolio increased
$27.9 million, while the consumer and business loans receivable portfolio
declined $43.4 million. The decline in the consumer and business loan portfolio
occurred, despite originations of $275.7 million during the period, due to
portfolio runoff.
29
The following table presents a summary of loans receivable at September 30, 1996
and December 31, 1995.
- ----------------------------------------------------------------------
September 30, December 31,
(In thousands) 1996 1995
- ----------------------------------------------------------------------
First mortgage loans:
Principal balances:
Residential $ 6,642,090 $5,925,050
Commercial and multifamily 1,837,374 1,813,344
Construction 36,757 68,901
- ----------------------------------------------------------------------
Total principal balances 8,516,221 7,807,295
Undisbursed funds on loans in process (14,104) (24,369)
Net deferred yield adjustments 46,157 37,754
- ----------------------------------------------------------------------
Total first mortgage loans 8,548,274 7,820,680
- ----------------------------------------------------------------------
Cooperative apartment loans:
Principal balances 1,241,586 1,214,812
Net deferred yield adjustments 3,381 2,218
- ----------------------------------------------------------------------
Total cooperative apartment loans 1,244,967 1,217,030
- ----------------------------------------------------------------------
Consumer and business loans:
Principal balances:
Home equity 475,920 494,528
Manufactured home 64,997 78,319
Automobile 46,817 53,947
Loans secured by deposit accounts 38,376 40,578
Other consumer 75,265 85,915
Business 38,507 35,189
- ----------------------------------------------------------------------
Total principal balances 739,882 788,476
Net deferred yield adjustments 9,284 4,127
- ----------------------------------------------------------------------
Total consumer and business loans 749,166 792,603
- ----------------------------------------------------------------------
Total loans receivable $10,542,407 $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 declined to $98.2 million at September 30, 1996
from $139.4 million at December 31, 1995.
For the first nine months of 1996, total loan production was $2.9 billion, or
approximately double that for the corresponding period in 1995, largely
attributable to 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. The Company's total loan production amounted to $1.0
billion for the three months ended September 30, 1996, an increase of $344.9
million, or 51.6%, from the third quarter of 1995. Although residential property
loan originations for the first nine months of 1996 increased 124% as compared
with the same period one year ago, the Company's ability to originate
residential property loans remained under pressure during the 1996 third quarter
due to a reduction in refinancing activity and competitive factors.
30
The following table summarizes the Company's loan production, both for portfolio
and for sale in the secondary market, for the three months and nine months ended
September 30, 1996 and 1995.
- --------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ---------------------
(In thousands) 1996 1995 1996 1995
- --------------------------------------------------------------------------------------
Residential property loan production:
First mortgage loans originated $ 580,274 $444,448 $1,907,061 $ 802,110
First mortgage loans purchased 129,834 48,312 282,319 126,454
Cooperative apartment loans originated 67,894 62,655 200,352 139,953
- --------------------------------------------------------------------------------------
Total residential property loan production 778,002 555,415 2,389,732 1,068,517
- --------------------------------------------------------------------------------------
Commercial and multifamily first
mortgage loans originated 125,099 24,828 225,605 123,606
Consumer and business loans originated:
Home equity loans originated 61,868 41,944 140,453 101,866
Other consumer loans originated 40,583 39,167 116,789 118,268
Business loans originated 8,269 7,573 18,418 18,941
- --------------------------------------------------------------------------------------
Total consumer and business loans 110,720 88,684 275,660 239,075
originated
- --------------------------------------------------------------------------------------
Total loan production $1,013,821 $668,927 $2,890,997 $1,431,198
- --------------------------------------------------------------------------------------
DEPOSITS
At September 30, 1996, the Bank operated 86 branches, comprised of 85 branches
in the greater New York metropolitan area and one branch in Florida. The
following table sets forth a summary of deposits and the related weighted
average interest rates at September 30, 1996 and December 31, 1995.
- ---------------------------------------------------------------
September 30, 1996 December 31, 1995
------------------ -----------------
(Dollars in thousands) Amount Rate Amount Rate
- ---------------------------------------------------------------
Deposits:
Demand $ 1,085,581 0.73% $ 1,084,966 0.74%
Savings 2,520,464 2.48 2,689,343 2.51
Money market 2,075,318 3.77 2,160,161 3.83
Time 7,052,925 5.39 6,637,733 5.70
- -------------------------------------- -----------
Total deposits $12,734,288 4.15% $12,572,203 4.27%
- ---------------------------------------------------------------
BORROWED FUNDS
The Company's total borrowed funds amounted to $5.8 billion at September 30,
1996, down from $6.6 billion at December 31, 1995. The 13.0% decline was
attributable principally to the Balance Sheet Restructuring Plan.
FHLBNY advances represented 37.9% of total borrowed funds at September 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 September 30, 1996 and December 31, 1995.
- ----------------------------------------------------------------------------------------------
Stated Interest Rates September 30, December 31,
(In thousands) September 30, 1996 1996 1995
- ----------------------------------------------------------------------------------------------
Maturing in:
One month or less 5.46% -- 8.80% $ 988,000 $2,722,000
Over one through three months 5.50% -- 5.65% 374,700 474,700
Over three through six months 5.56% -- 5.80% 260,000 1,175,000
Over six months through one year 9.35% 5,000 215,000
Over one through two years 5.78% -- 5.96% 455,000 15,000
Over two through three years 5.86% 100,000 --
Over three years 5.76% 88 88
Net deferred interest rate adjustments (3,727) 1,195
- ----------------------------------------------------------------------------------------------
Total FHLBNY advances $2,179,061 $4,602,983
- ----------------------------------------------------------------------------------------------
Weighted average interest rate 5.66% 6.07%
- ----------------------------------------------------------------------------------------------
During 1996, the Company continued its use of securities sold under agreements
to repurchase as a funding source due primarily to their generally lower cost as
compared with FHLBNY advances. Such
31
borrowings totalled $3.2 billion at September 30, 1996, up from $1.6 billion at
December 31, 1995. The weighted average interest rate on securities sold under
agreements to repurchase was 5.46% at September 30, 1996, as compared with 5.82%
at December 31, 1995.
ACCRUED MERGER-RELATED RESTRUCTURING EXPENSE
At September 30, 1996, the Company's accrual for Merger-related restructuring
expense amounted to $4.3 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 $0.4 million at September 30, 1996,
reflecting a provision of $0.8 million charged to operations during the 1996
first quarter and cash payments of $5.3 million.
The portion of the Merger-related restructuring accrual associated with
facilities, premises and equipment and lease obligations declined to $3.9
million at September 30, 1996 from $11.8 million at year-end 1995 as a 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 amounted to $1.0 billion at September 30,
1996, an increase of $45.1 million from December 31, 1995. While the Company
recorded net income of $72.9 million for the first nine months of 1996, the
growth in stockholders' equity was limited primarily by the $25.5 million cost
of repurchasing shares of Common Stock, as discussed below. At September 30,
1996, stockholders' equity represented 5.19% of total assets, as compared with
4.80% of total assets at year-end 1995.
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 September 30, 1996, 184,649
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 of Common Stock 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, securities sold under agreements to repurchase, advances 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
32
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 Office of Thrift
Supervision (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
September 1996, the Bank's average liquidity ratio was 5.1% and its average
short-term liquidity ratio was 3.2%.
REGULATORY CAPITAL
The following table illustrates the regulatory capital position of the Bank at
September 30, 1996 pursuant to OTS requirements promulgated under the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA").
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Requirement Bank Capital Capital in
----------------------------------- ----------------------------------- Excess of
(Dollars in thousands) Amount Percentage (1) Amount Percentage (1) Requirement
- ------------------------------------------------------------------------------------------------------------------------------------
Tangible $293,782 1.50% $1,120,594 5.72% $826,812
Leverage 587,564 3.00 1,120,594 5.72 533,030
Risk-based 766,624 8.00 1,236,813 12.91 470,189
- ------------------------------------------------------------------------------------------------------------------------------------
(1) For tangible and leverage capital, the percentage is to adjusted total
assets of $19.6 billion. For risk-based capital, the percentage is to total
risk-weighted assets of $9.6 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 September
30, 1996, the Bank met the published standards for a well capitalized
designation under these regulations with a leverage capital ratio of 5.72%, a
tier 1 risk-based capital ratio of 11.69% and a total risk-based capital ratio
of 12.91%.
33
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.
For a discussion of the Company's suit against the United States related to its
"supervisory goodwill," see "Part II, Other Information -- Item 1. Legal
Proceedings" in the Holding Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1996. During the third quarter of 1996, the Chief Judge of
the Court of Federal Claims lifted the stay regarding all of the pending
goodwill actions, including that of the Bank. As a result, the Bank intends to
proceed with the prosecution of its claim; however, no assurance can be given as
to the schedule that will be followed in the action.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
None
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: November 13,1996 By: /s/ James M. Large, Jr.
---------------- -----------------------
James M. Large, Jr.
Chairman of the Board
and Chief Executive Officer
Dated: November 13, 1996 By: /s/ David E. Sparks
----------------- -------------------
David E. Sparks
Executive Vice President
and Chief Financial Officer
35
EXHIBIT INDEX
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
- ------ -------------------------
27 Financial Data Schedule (filed electronically only)
36