- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number: 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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
589 FIFTH AVENUE, NEW YORK, NEW YORK 10017
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(212) 326-6170
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the shares of registrant's common stock held
by non-affiliates (assuming, solely for purposes of this Form, that all
directors are affiliates) was $1,775,030,537 as of March 14, 1997 (based on
the closing New York Stock Exchange price on such date).
The number of shares of common stock of the registrant outstanding as of
March 14, 1997 was 105,140,823 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of Form 10-K is incorporated by
reference to the registrant's definitive Proxy Statement relating to its 1997
Annual Meeting of Stockholders.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIME BANCORP, INC.
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS...................................................... 1
ITEM 2. PROPERTIES.................................................... 20
ITEM 3. LEGAL PROCEEDINGS............................................. 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS...................................................... 22
ITEM 6. SELECTED FINANCIAL DATA....................................... 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... 53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 53
ITEM 11. EXECUTIVE COMPENSATION........................................ 53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 53
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 54
8-K..........................................................
SIGNATURES.............................................................. 55
PART I
ITEM 1. BUSINESS
GENERAL
Dime Bancorp, Inc. (the "Holding Company"), a Delaware corporation
headquartered in New York, New York, is the holding company for The Dime
Savings Bank of New York, FSB, a federally-chartered savings bank (the "Bank"
and, together with the Holding Company, the "Company"). On January 13, 1995,
Anchor Bancorp, Inc. ("Anchor Bancorp") and its wholly-owned savings bank
subsidiary, Anchor Savings Bank FSB ("Anchor Savings" and, together with
Anchor Bancorp, "Anchor"), merged with and into the Holding Company and the
Bank, respectively, which were the surviving entities. (These mergers are
collectively referred to as the "Merger." References to "Dime Bancorp" and
"Dime Savings" herein mean the Holding Company and the Bank, respectively,
with respect to periods prior to, and before giving effect to, the Merger.)
The Merger was accounted for on a pooling-of-interests basis.
At December 31, 1996, the Company had total assets of $18.9 billion, total
stockholders' equity of $1.0 billion, and total deposits of $12.9 billion. The
Company's core business activities include consumer financial services,
mortgage banking, commercial and multifamily real estate lending, consumer
lending, and business banking.
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 activities
include interest rate movements, competition from both financial and non-
financial institutions, changes in applicable laws and regulations, and
general economic conditions.
CONSUMER FINANCIAL SERVICES
General
The Company's consumer financial services include deposit products and
related services, securities brokerage services and insurance products. These
products and services are delivered through the Company's multi-channel
distribution network, which also serves as a vehicle for delivering products
and services related to the Company's other business activities, including
mortgage banking, consumer lending and business banking.
During 1996, the Company expanded its bank-by-phone capabilities, and as a
result, most services are now available 24 hours a day and seven days a week.
In 1997, the Company expects to enhance these capabilities in order to improve
service quality, reduce its dependence on relatively higher-costing service
channels and expand cross-selling opportunities. However, no assurances can be
given that such efforts will be successful.
Deposits
At year-end 1996, the Company's total deposits amounted to $12.9 billion.
The Company's principal deposit-gathering market is the greater New York
metropolitan area in which, at December 31, 1996, it operated 85 branches,
consisting of 37 branches in New York City, 23 branches in Long Island, 7
branches in Westchester and Rockland counties in New York, and 18 branches in
New Jersey. The Company also operated one branch in Florida at that date. In
addition to its branch system, the Company's deposit gathering network
includes bank-by-phone and bank-by-mail capabilities, as well as over 100
automated teller machines owned by the Company.
1
The Company attracts deposits by offering a broad selection of deposit
instruments and programs. These include consumer and commercial demand
accounts, savings accounts, money market accounts, time deposit accounts,
individual retirement and Keogh accounts, and automatic payroll and Social
Security deposit programs. Generally, the Company, rather than competing
aggressively on the basis of rates for all categories of deposits, establishes
rates consistent with consumer preferences, its asset/liability management
program and liquidity requirements. The Company's deposit levels are subject
to fluctuations resulting from numerous factors outside the Company's control,
including general economic conditions, market interest rates and competition
both from other depository institutions and alternative investments. Depositor
behavior is affected by numerous factors, including risk-related returns on
other available investments, the rates paid by the Company compared to other
institutions and the Company's ability to satisfy customer needs. These
factors may affect the Company's willingness or ability to compete for
deposits and, therefore, the level of its deposits.
The Bank is a member of the Bank Insurance Fund ("BIF") of the Federal
Deposit Insurance Corporation ("FDIC"), with approximately 68% of its deposits
insured by the BIF and approximately 32% of its deposits insured by the
Savings Association Insurance Fund ("SAIF") of the FDIC, in each case up to
applicable limits. The Bank is subject to regulation, examination and
supervision by the Office of Thrift Supervision ("OTS"), as its primary
regulator, and the FDIC, as the administrator of the BIF and the SAIF.
In December 1996, the Company entered into a definitive agreement to acquire
BFS Bankorp, Inc. and its wholly-owned subsidiary, Bankers Federal Savings FSB
(collectively, "BFS"). At December 31, 1996, BFS had total deposits of $453.5
million and five branch offices located in New York City. For a further
discussion of the pending acquisition of BFS, see "Merger and Acquisition
Activities."
For further information on the Company's deposits, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
Note 8 of the Notes to Consolidated Financial Statements in Item 8, "Financial
Statements and Supplementary Data."
Securities Brokerage Services and Insurance Activities
The Company provides insurance and securities brokerage services through
wholly-owned insurance and brokerage subsidiaries. The services provided by
the Company's securities brokerage subsidiary, Dime Securities of New York,
Inc. ("Dime Securities"), a registered broker-dealer, consist primarily of the
execution of securities transactions, on an agency basis, solely upon the
order and for the accounts of its customers. In addition, Dime Securities
provides standardized and individualized investment and financial planning
advice to individuals or entities. Products sold by Dime Securities, which are
not BIF- or SAIF-insured, include: mutual funds; government, corporate and
municipal bonds; equity securities and equity options; variable annuities; and
unit investment trusts.
Various subsidiaries of the Bank sell certain tax-deferred annuities and
life and disability insurance products issued by specified insurance
companies. In addition to sales by the Company's branch-based sales force,
life and disability insurance products are sold through direct mail marketing
and telemarketing programs.
The Company also offers Savings Bank Life Insurance ("SBLI") in New York
through its customer representatives and direct mail marketing programs. The
Company does not share in the premiums from sales of SBLI, but it is
reimbursed for expenses. The surplus from its SBLI operations is maintained
separately from its assets and liabilities, and the Company is not liable
under any SBLI policy. The Company offers these SBLI services because it
believes it provides an important benefit to its customers.
MORTGAGE BANKING
General
The Company's mortgage banking activities include production of one-to-four
family first mortgage loans and cooperative apartment loans ("residential
property loans"), sales of loans into the secondary market and loan servicing.
A key component of the Company's continuing business strategy is to expand its
mortgage
2
banking activities by focusing on a multi-regional approach, which consists of
strengthening existing operations in its core lending area of New York, New
Jersey and Connecticut and controlled growth into markets outside of that core
lending area. In connection therewith, the Company, in the fourth quarter of
1995, acquired the residential property loan origination businesses of
National Mortgage Investments Co., Inc., a Georgia-based mortgage banking
company, and James Madison Mortgage Company, a Virginia-based mortgage banking
company (the "National and Madison Acquisitions"). During 1996, these two
operations accounted for approximately $1 billion, or 39%, of the Company's
residential property loan originations. In addition to residential property
loan production offices in its core lending area, the Company currently
maintains offices in Arizona, Florida, Georgia, Illinois, Louisiana, Maryland,
Pennsylvania, South Carolina, and Virginia.
During the fourth quarter of 1996, the Company began a restructuring of its
mortgage banking operations, including new executive management, the
relocation of its mortgage banking headquarters from Uniondale, New York to
Tampa, Florida and various strategic initiatives designed to, among other
things, enhance the efficiencies of such operations and further strengthen the
Company's residential property loan production capabilities through the
establishment of additional regional loan origination offices and an expansion
of its correspondent-purchase activities. However, the Company cannot provide
any assurances that these efforts will be successful.
Residential Property Loan Production and Secondary Marketing Activities
The Company produces fixed-rate residential property loans, which are
generally sold in the secondary market, and adjustable-rate residential
property loans, which are generally held in its portfolio. Currently, the
Company produces three basic types of adjustable-rate residential property
loans, the interest rates of which are indexed to United States Treasury
instruments: (i) a loan with a rate that is fixed for a certain period of time
(principally the first three, five, seven or ten years) and then becomes
adjustable annually for the remaining term of the loan; (ii) a three-year
adjustable-rate loan; and (iii) a one-year adjustable-rate loan.
During 1996, the Company originated $2.7 billion of residential property
loans. Of such originations, $1.9 billion were originated through approved
mortgage brokers (which numbered 451 at December 31, 1996 as compared with 280
at December 31, 1995), and $0.8 billion resulted from direct originations
through the Company's branches, sales force and direct marketing. The
Company's residential property loan originations during 1996 were primarily
concentrated geographically in New York (26%), Connecticut (15%), Virginia
(14%), Georgia (12%), and New Jersey (10%).
Of the $2.7 billion of residential property loans originated by the Company
during 1996, 53% were in amounts in excess of the purchase limits established
under Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC") guidelines ("jumbo loans"), which, for single
family homes, were both increased to $207,000 in early 1996. Jumbo loans can
be economically advantageous because they are not significantly more expensive
to originate than loans with smaller principal balances.
The Company's current residential property loan underwriting policies and
guidelines meet or are more stringent than FNMA and FHLMC guidelines and
generally conform to industry standards and practices for fully documented
loans. For residential property loan originations, the Company's underwriting
policies and procedures require an appraisal of the value of the collateral
for the purpose of determining the loan-to-value ratio (i.e., the ratio that
the principal amount of the loan bears to the value of the collateral securing
the loan at the time of origination) and the collateral's adequacy as
security. The collateral's value is deemed to be the lower of the purchase
price or the appraised value, except for refinance loans, where the appraised
value is used. These appraisals conform to the standards of FNMA and FHLMC. In
general, loan-to-value ratios of residential property loans originated or
purchased for the loan portfolio have been 80% or less. With respect to
residential property loans having a loan-to-value ratio in excess of 80% at
the time of origination, excluding loans to finance the sale of its
residential other real estate owned ("ORE"), the Company requires private
mortgage insurance, underwritten by FNMA- and FHLMC-approved mortgage
insurers, on at least the amount of the loan in excess of 80% of the
collateral's value.
3
From 1983 through 1988, Dime Savings originated substantially all of its
adjustable-rate residential property loans under a limited documentation
process. Under this process, Dime Savings focused its underwriting criteria
primarily on the appraised value of the property and the loan-to-value ratio
(which was generally 80% or less at the time of origination), placing less
importance on the ability of the borrower to meet the monthly payment
obligation on the loan. In response to the increasing amount of delinquent
residential property loans it experienced during the period from 1988 through
1991, Dime Savings took various steps, beginning in late 1988, intended to
tighten its loan underwriting requirements for limited documentation loans
and, in early 1991, discontinued use of the limited documentation program in
connection with originations of residential property loans for its own
portfolio.
The Company, during 1996, also acquired $0.3 billion of residential property
loans through purchase activities. Of this amount, bulk purchases amounted to
$0.2 billion and correspondent purchases totaled $0.1 billion. At December 31,
1996, the Company had 26 approved correspondents. During 1997, the Company
plans to increase the number of its approved correspondents and the level of
its correspondent purchases.
The Company administers a formal process for approving and monitoring its
mortgage brokers and correspondents and, in addition, conducts annual reviews
thereof. Mortgage broker performance is assessed by monitoring loan credit
quality and processing efficiency. All loans originated by mortgage brokers
are fully underwritten and closed by the Company. Correspondent-purchased
loans are contractually required to be underwritten by the correspondent in
accordance with the Company's guidelines and, unless a correspondent has been
granted delegated underwriting authority, all loans are re-underwritten by the
Company prior to purchase. Correspondent lenders with delegated underwriting
status are subject to more stringent financial and operational requirements
than those without such status and have undergone a comprehensive on-site
review conducted by the Company. Mortgage brokers and correspondents
demonstrating unacceptable performance or insufficient loan activity are
removed from the Company's programs.
The Company's strategy in 1996 was to sell in the secondary market, with
limited exceptions, its fixed-rate residential property loan production, and
the Company currently expects to continue this strategy during 1997. During
1996, the Company sold $1.1 billion of loans into the secondary market, of
which approximately 59% were sold with the rights to service the loans
retained by the Company. As a result of the National and Madison Acquisitions,
the Company expanded its Federal Housing Administration-insured and Veterans
Administration-guaranteed lending programs and, during 1996, sold all such
loan production without retaining any rights to service the loans. However,
going forward, the Company anticipates that it will retain the servicing
rights to certain of such loans when sold.
Loan Servicing
At December 31, 1996, the Company serviced residential property loans with
outstanding balances of $18.0 billion, including $7.0 billion of loans in its
own portfolio and $11.0 billion of loans owned by others. In return for
servicing residential property loans owned by others, the Company earns fees,
which, on an annual basis, generally range from 25 to 50 basis points of the
outstanding principal balances of the loans. Servicing fees for substantially
all loans serviced under mortgage-backed securities ("MBS") programs are
established by the sponsoring entities.
Loan servicing activities consist of collecting principal and interest
payments from borrowers, remitting aggregate principal and interest payments
to investors, making cash advances when required, accounting for principal and
interest, collecting funds for payment of loan-related expenses such as taxes
and insurance, inspecting the collateral as required, contacting delinquent
borrowers, conducting foreclosures and property dispositions in the event of
unremedied defaults, and generally administering the loans.
For a further discussion of the Company's loan servicing activities, see
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Loan Servicing."
4
COMMERCIAL AND MULTIFAMILY REAL ESTATE LENDING
First mortgage loans secured by commercial and multifamily real estate are
currently made by the Company principally in its core lending area. During
1996, the Company originated $154.2 million of commercial first mortgage loans
and $168.0 million of multifamily first mortgage loans. At December 31, 1996,
approximately half of the Company's $1.9 billion portfolio of commercial and
multifamily first mortgage loans was secured by multifamily properties.
As a result of the acquisition of BFS, the Company's portfolio of
multifamily first mortgage loans will increase significantly. At December 31,
1996, BFS had approximately $561 million of multifamily first mortgage loans,
as well as approximately $17 million of commercial first mortgage loans. For a
further discussion of the pending acquisition of BFS, see "Merger and
Acquisition Activities." In order to leverage existing capabilities, increase
production and provide geographic diversity, the Company opened a commercial
and multifamily first mortgage loan production office in Philadelphia,
Pennsylvania in December 1996 and intends to open a loan production office in
Fairfax, Virginia in early 1997.
The Company's underwriting policies with respect to commercial and
multifamily first mortgage loans are based primarily on the loan-to-value
ratio of the property and an assessment as to the adequacy of the underlying
project's cash flow and its coverage of operating expenses and debt service
payments. The Company's underwriting policies generally also require an
appraisal of the underlying property, an engineer's report and a "Phase I"
environmental assessment. Loan-to-value ratios at the time of origination are
usually not more than 75%.
The Company's commercial and multifamily first mortgage loans generally have
balloon payments of principal due between five and ten years after
origination, and the adjustable-rate loans in this portfolio typically reprice
every three to five years. Therefore, in periods of rising interest rates,
there is a risk that borrowers may not be able to service the debt.
Commercial and multifamily first mortgage loans entail significant
additional risks compared to residential property loans. The payment
experience on loans secured by income-producing properties is typically
dependent on the successful operation of the properties, and thus may be
significantly affected by adverse conditions in these real estate markets or
the economy in general. Therefore, even properties that are currently
operating at a profit may encounter financial problems if vacancies occur or
if leases are entered into, extended or renegotiated at lower market rates. In
addition, certain of the Company's commercial and multifamily first mortgage
loans have been made to business entities (which often have no significant
assets other than their interest in the loan collateral) without recourse to
the principles of such entities. The Company performs lease rollover risk
analysis in an effort to identify any potential or existing risk to the
performance of properties securing its commercial and multifamily first
mortgage loans. There can be no assurance, however, that the Company's lease
rollover risk analysis will identify any such risk with respect to a
particular property.
For a further discussion of the Company's commercial and multifamily first
mortgage loans receivable, see Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 4 of the Notes to
Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data."
CONSUMER LENDING
The Company's consumer loan portfolio, the principal balances of which
amounted to $723.7 million at year-end 1996, includes adjustable- and fixed-
rate home equity loans, automobile loans and lease financing, manufactured
home loans, boat loans, unsecured and secured personal loans, property
improvement loans, government-guaranteed student loans, loans secured by
deposits, and unsecured revolving and overdraft checking loans. During 1996,
the Company's consumer loan originations amounted to $373.4 million.
Home equity loans, which represented approximately 70% of the Company's
total consumer loan portfolio at December 31, 1996, are underwritten following
guidelines similar to those for residential first mortgage loans. The loan-to-
value ratio on any home equity loan, together with any prior lien, generally
does not exceed 80%.
5
Loans made pursuant to home equity lines of credit have adjustable interest
rates that, after an introductory period, are based generally on a fixed
margin over the prime lending rate.
The Company's strategy with respect to consumer lending is to increase loan
production by marketing consumer loan products through its branch network and
expanding the use of telemarketing and direct response channels. During 1996,
the Company introduced several programs that cross-sell home equity loan
products to its existing and new residential first mortgage loan customers.
During 1997, the Company intends to expand its marketing of consumer loan
products (principally home equity loans) to selected markets outside of its
core lending area. However, no assurances can be made that these efforts will
be successful.
For a further discussion of the Company's consumer loans receivable, see
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 4 of the Notes to Consolidated Financial
Statements in Item 8, "Financial Statements and Supplementary Data."
BUSINESS BANKING
The Company originates business loans principally to finance seasonal
working capital needs, expansion, renovation, and equipment purchases. These
loans usually are made on a floating-rate basis. While the Company's business
loans are primarily secured, the ability of the borrower to generate
sufficient cash flows from operations to liquidate the debt is a critical
component of the credit decision.
During 1997, the Company intends to concentrate its business lending efforts
on companies with up to $25 million in annual sales and is seeking to build
relationships with such businesses by providing them with certain additional
banking services, including deposit and cash management products. There can be
no assurances, however, that the Company will be successful in these efforts.
For a further discussion of the Company's business loans receivable, see
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 4 of the Notes to Consolidated Financial
Statements in Item 8, "Financial Statements and Supplementary Data."
COMMUNITY REINVESTMENT ACT ("CRA") LENDING
As part of its CRA activities, the Bank originates loans for affordable
housing (which are loans to low- or moderate-income borrowers or in low- or
moderate-income neighborhoods). In order to generate these loans, the Bank
uses a variety of outreach initiatives, including specifically designated
staff, participation in seminars and housing fairs, such as those targeted to
first-time home buyers, loan application materials in a variety of foreign
languages, and cooperative ventures with not-for-profit groups. The Bank's CRA
lending activities also include community development financing for new
construction and rehabilitation of affordable multifamily housing and targeted
commercial projects. Typically, these project loans are made in partnership
with government subsidy programs. The Bank has received three consecutive
"outstanding" ratings from the OTS for its CRA compliance activities,
including as a result of its most recent examination in 1995.
INVESTING ACTIVITIES
Securities
General. Pursuant to established policies and guidelines, the Company
invests in certain securities available for sale, securities held to maturity
and money market investments. Such investments are made in conjunction with
the Company's overall liquidity, interest rate risk and credit risk management
processes and complement the Company's lending activities, which are currently
its primary focus. In addition, as a member of the Federal Home Loan Bank of
New York ("FHLBNY"), the Bank is required to maintain a specified investment
in the capital stock of the FHLBNY (see "Regulation and Supervision--Federal
Home Loan Bank System").
6
Securities Available for Sale and Securities Held to Maturity. The Company's
strategy with regard to investing in securities available for sale and
securities held to maturity has emphasized the purchase of adjustable-rate MBS
or fixed-rate, medium-term MBS issued by FNMA, FHLMC, the Government National
Mortgage Association ("GNMA"), and private issuers that are rated "AA" or
better. This strategy has been employed primarily in order to limit credit
risk and to enhance the Company's ability to more closely match the maturities
and repricing dates of its assets and liabilities.
The Company, in December 1995, transferred securities with an amortized cost
of $3.6 billion, including $3.5 billion of MBS, from its held to maturity
portfolio to its available for sale portfolio and designated for sale
approximately $1 billion of the transferred MBS. The transfer of these
securities was made in connection with the implementation of a balance sheet
restructuring plan (the "Balance Sheet Restructuring Plan") and guidance
issued in a special report by the Financial Accounting Standards Board (the
"FASB") in November 1995, which allowed entities an opportunity to reassess
their security classifications made pursuant to Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). During 1996, principally in connection with
the Balance Sheet Restructuring Plan, the Company sold $2.3 billion of
securities, including certain relatively lower-yielding MBS.
The following table sets forth the carrying value of the Company's
securities available for sale, which are carried at estimated fair value, and
securities held to maturity, which are carried at amortized cost, at
December 31:
SECURITIES AVAILABLE FOR SALE SECURITIES HELD TO MATURITY
------------------------------ --------------------------------
1996 1995 1994 1996 1995 1994
---------- ---------- -------- ---------- ---------- ----------
(IN THOUSANDS)
Debt securities:
MBS:
Pass-through securi-
ties:
Privately-issued...... $1,228,264 $2,715,097 $ 31,929 $2,520,013 $3,071,166 $5,715,783
FNMA.................. 919,346 747,189 85,824 -- -- 155,347
FHLMC................. 167,073 448,356 336,426 44,711 -- 147,435
GNMA.................. 187,006 22,525 6,188 -- -- 209,373
Collateralized mort-
gage
obligations ("CMOs"):
Privately-issued.... -- -- -- 1,670,983 1,867,318 2,067,039
FNMA................ -- -- -- 94,412 94,636 113,440
FHLMC............... -- -- 9,700 30,089 49,330 60,552
Interest-only....... 1,291 1,679 2,810 -- -- --
---------- ---------- -------- ---------- ---------- ----------
Total MBS............. 2,502,980 3,934,846 472,877 4,360,208 5,082,450 8,468,969
---------- ---------- -------- ---------- ---------- ----------
U. S. government and
federal agency........ 17,969 28,045 34,133 -- -- 65
State and municipal... 43,307 78,053 -- -- -- 110,553
Domestic corporate.... 15,328 17,249 440 -- -- 17,935
Other................. -- -- -- 3,763 3,286 12,375
---------- ---------- -------- ---------- ---------- ----------
Total debt securities... 2,579,584 4,058,193 507,450 4,363,971 5,085,736 8,609,897
---------- ---------- -------- ---------- ---------- ----------
Equity securities....... 9,988 12,672 23,264 -- -- --
---------- ---------- -------- ---------- ---------- ----------
Total................... $2,589,572 $4,070,865 $530,714 $4,363,971 $5,085,736 $8,609,897
========== ========== ======== ========== ========== ==========
At December 31, 1996, the Company's MBS held to maturity portfolio included
$1.8 billion of CMOs, which consisted primarily of sequential pay tranches
(approximately 46%), accretion directed tranches
7
(approximately 19%) and planned amortization tranches (approximately 9%). None
of the Company's portfolio of CMOs were considered "high risk" securities, as
defined by the Federal Financial Institutions Examination Council policy
statement effective February 10, 1992, at the time of purchase. At December
31, 1996, one CMO with a carrying value of $9.7 million was considered to be
"high risk" under that policy statement. The Company cannot provide any
assurances that no other CMOs will be considered "high risk" in the future.
The market risk of CMOs (as well as mortgages and other mortgage-related
assets) is related to the duration of the investment instrument and the
sensitivity of the duration to changes in prepayment rates. Duration is a
measure of interest rate sensitivity for mortgage-related assets and is
calculated by discounting projected cash flows (interest and principal
payments generated by amortization and prepayments) generated by the
instrument over time. Changes in either cash flows or discount factors (i.e.,
general interest rates) may increase or decrease duration and, therefore, the
market risk of CMOs. Generally, interest rates are considered the most
significant factor affecting the level of current and projected prepayment
rates because home mortgage refinancing activity and the related level of
prepayments is directly related to certain changes in interest rates.
Increases in interest rates generally cause a reduction in refinance activity,
thereby reducing current and projected prepayment rates, while decreases in
interest rates tend to cause increases in refinance activity with resultant
increases in current and projected prepayment rates. Accordingly, an analysis
of interest rate risk on CMOs necessarily involves not only the effect of
interest rates on discount factors, but also the changing duration of the CMOs
that results from the impact of changing interest rates on current and
expected prepayment experience. At December 31, 1996, the Company's CMO
portfolio had, in the aggregate, a duration of 2.4 years and an average life
of 2.8 years, with an estimated condition prepayment rate ("CPR") of 11% per
year.
For further information concerning the Company's securities available for
sale and securities held to maturity, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and Note 3 of the
Notes to Consolidated Financial Statements in Item 8, "Financial Statements
and Supplementary Data."
Money Market Investments. The Company invests in a wide range of money
market instruments, including overnight and term federal funds, commercial
paper, time deposits, and repurchase agreements. Money market investments are
used to invest the Company's available funds resulting from deposit-taking
operations and normal cash flow and to help satisfy both internal liquidity
needs and the Bank's regulatory liquidity requirements (see "Regulation and
Supervision--Liquid Assets").
8
Loans Receivable
The Company's loans receivable portfolio includes residential first mortgage
loans, commercial and multifamily first mortgage loans, construction loans,
cooperative apartment loans, and consumer and business loans. A summary of the
Company's loans receivable, net, is as follows at December 31:
1996 1995 1994 1993 1992
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
First mortgage loans:
Principal balances:
Residential........... $ 6,758,901 $5,925,050 $5,485,648 $4,885,338 $4,438,629
Commercial and multi-
family............... 1,856,563 1,813,344 1,834,114 1,211,551 1,219,902
Construction.......... 70,395 68,901 45,835 17,314 31,351
----------- ---------- ---------- ---------- ----------
Total principal bal-
ances.............. 8,685,859 7,807,295 7,365,597 6,114,203 5,689,882
Undisbursed funds on
construction loans in
process............... (33,652) (24,369) (3,254) (1,016) (15,560)
Net deferred yield
adjustments........... 46,783 37,754 6,617 15,155 (13,082)
----------- ---------- ---------- ---------- ----------
Total first mortgage
loans.............. 8,698,990 7,820,680 7,368,960 6,128,342 5,661,240
----------- ---------- ---------- ---------- ----------
Cooperative apartment
loans:
Principal balances..... 1,257,798 1,214,812 1,174,287 1,066,725 1,145,541
Net deferred yield
adjustments........... 3,850 2,218 1,965 (497) (710)
----------- ---------- ---------- ---------- ----------
Total cooperative
apartment loans.... 1,261,648 1,217,030 1,176,252 1,066,228 1,144,831
----------- ---------- ---------- ---------- ----------
Consumer and business
loans:
Principal balances:
Home equity........... 506,534 494,528 503,197 442,401 493,974
Manufactured home..... 60,965 78,319 98,354 110,962 143,368
Automobile............ 43,661 53,947 30,104 7,067 11,789
Loans secured by de-
posit accounts....... 39,684 40,578 40,309 40,191 45,984
Other consumer........ 72,831 85,915 100,853 101,484 115,176
Business.............. 43,138 35,189 31,817 6,899 10,077
----------- ---------- ---------- ---------- ----------
Total principal bal-
ances.............. 766,813 788,476 804,634 709,004 820,368
Net deferred yield
adjustments........... 10,606 4,127 1,776 2,999 2,661
----------- ---------- ---------- ---------- ----------
Total consumer and
business loans..... 777,419 792,603 806,410 712,003 823,029
----------- ---------- ---------- ---------- ----------
Allowance for loan loss-
es..................... (106,495) (128,295) (170,383) (157,515) (248,429)
----------- ---------- ---------- ---------- ----------
Total loans receivable,
net.................... $10,631,562 $9,702,018 $9,181,239 $7,749,058 $7,380,671
=========== ========== ========== ========== ==========
For a further discussion of the Company's loans receivable, net (including
non-accrual loans and loans modified in a troubled debt restructuring
("TDR")), see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 4 of the Notes to Consolidated
Financial Statements in Item 8, "Financial Statements and Supplementary Data."
BORROWED FUNDS
The Company's borrowed funds consist of securities sold under agreements to
repurchase, advances from the FHLBNY, senior notes and certain other
borrowings. As a member of the FHLBNY, the Bank is eligible to apply for
advances secured by the capital stock it holds in the FHLBNY and by certain
other assets. Although historically the largest component of the Company's
total borrowed funds, during 1996, the Company
9
substantially reduced its reliance on such advances. In addition, during 1996,
the Company significantly increased its use of securities sold under
agreements to repurchase as a source of funds, primarily due to their
generally lower cost as compared with FHLBNY advances. However, as part of the
Balance Sheet Restructuring Plan, the Company reduced its overall level of
borrowed funds by $1.8 billion from December 31, 1995 to December 31, 1996.
For additional information regarding the Company's borrowed funds, see Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and Notes 9, 10, 11, and 12 of the Notes to Consolidated
Financial Statements in Item 8, "Financial Statements and Supplementary Data."
MERGER AND ACQUISITION ACTIVITIES
On January 13, 1995, Anchor Bancorp and Anchor Savings were merged with and
into the Holding Company and the Bank, respectively, with the Holding Company
and the Bank being the surviving entities. Anchor Savings, on August 12, 1994,
had acquired all of the outstanding common stock and preferred stock of The
Lincoln Savings Bank, FSB ("Lincoln") for $80.0 million in cash, and
immediately thereafter, Lincoln was merged with and into Anchor Savings (the
"Lincoln Acquisition"). The Lincoln Acquisition was accounted for using the
purchase method of accounting. In addition, during the fourth quarter of 1995,
the Company consummated the National and Madison Acquisitions.
In December 1996, the Company entered into a definitive agreement to acquire
BFS for approximately $92 million in cash. It is expected that the transaction
will be accounted for under the purchase method of accounting. At December 31,
1996, BFS had total assets of $650.5 million, loans receivable, net, of $586.8
million, substantially all of which were multifamily first mortgage loans, and
deposits of $453.5 million. The acquisition of BFS, which remains subject to
regulatory approval, is expected to be consummated during the second quarter
of 1997.
EMPLOYEES
The Company had 3,159 employees at December 31, 1996. The Company maintains
a comprehensive employee benefit program providing, among other benefits, a
retirement income plan, hospitalization and major medical insurance, stock-
based compensation plans, savings plans, and life insurance. Employees of the
Company are not represented by any collective bargaining group. The Company
considers its employee relations to be satisfactory.
COMPETITION
The Company experiences substantial competition both in attracting and
retaining deposits and in making loans. Its most direct competition for
deposits historically has come from other thrift institutions and commercial
banks doing business in the greater New York metropolitan area. The Company
also competes for funds with money market mutual funds, corporate and
governmental debt securities, and other investment alternatives. The Company's
competition for loans comes principally from other thrift institutions,
commercial banks, mortgage banking companies, consumer finance companies,
insurance companies, and other institutional lenders. A number of institutions
with which the Company competes for deposits and loans have significantly
greater assets and capital than the Company.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Holding Company is subject to OTS
regulations, examinations and reporting requirements. The Bank is a federal
savings bank and a member of the FHLBNY and is subject to the regulations,
examinations and reporting requirements of the OTS, as the primary regulator
of federal savings
10
associations, and of the FDIC, as insurer of the Bank's deposits.
Additionally, the Bank is subject to certain limited regulation by the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board").
The description of statutory provisions and regulations applicable to
savings associations and savings and loan holding companies set forth below
does not purport to be a complete description of the statutes and regulations
described or of all such statutes and regulations and their effects on the
Bank and the Holding Company. The regulatory scheme has been established
primarily for the protection of depositors and the financial system generally
and is not intended for the protection of stockholders or other creditors.
Deposit Insurance
The FDIC administers two separate deposit insurance funds, the SAIF and the
BIF. The Bank is a member of the BIF; approximately 68% of its deposits are
BIF-insured and approximately 32% are SAIF-insured. Pursuant to the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the FDIC
established a risk-based assessment system for insured depository institutions
that takes into account the risks attributable to different categories and
concentrations of assets and liabilities. Under this system, both BIF-insured
and SAIF-insured depository institutions are placed into one of nine
confidential assessment risk categories using a two-step process based first
on capital ratios and then on other factors.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the "Funds
Act") was enacted, which, among other things, addressed the previously
existing imbalance between deposit insurance assessment rates for BIF-insured
and SAIF-insured deposits. As of October 1, 1996, the effective date of a rule
issued by the FDIC pursuant to the Funds Act, SAIF-insured deposit assessment
rates were reduced to a range of between $0.00 to $0.27 for each $100 of
insured deposits from $0.23 to $0.31 for each $100 of insured deposits. This
reduction brought SAIF-insured deposit assessment rates in line with existing
BIF-insured deposit assessment rates.
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 (the "FICO Bonds").
Prior to January 1, 1997, assessments to pay the debt service on the FICO
Bonds were 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 established initial assessment rates of $0.0648
for each $100 of SAIF-assessable deposits and $0.01296 for each $100 of BIF-
assessable deposits and currently estimates that they will change to $0.0243
for each $100 of all deposits for the period January 1, 2000, or such earlier
date on which the last savings association ceases to exist, through the year
2017 (the maturity date of the FICO Bonds). For certain BIF-member
institutions having SAIF-insured deposits, including the Bank, 20% of SAIF-
insured deposits will be deemed to be BIF-insured deposits for purposes of
computing FICO Bonds assessments.
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 "Special Assessment").
However, the Funds Act provided for certain adjustments for purposes of
computing the Special Assessment, including a 20% reduction for certain BIF-
member institutions having SAIF-insured deposits, such as the Bank. The Bank's
Special Assessment was $26.3 million.
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.
Until the earlier of December 31, 1999 or the date as of which the last
savings association ceases to exist, the Funds Act also provides that the
federal banking agencies are to take "appropriate action" to prevent insured
11
depository institutions and depository institution holding companies from
facilitating or encouraging the shifting of deposits from SAIF-assessable
deposits to BIF-assessable deposits for the purpose of evading the assessments
imposed on insured depository institutions with respect to SAIF-assessable
deposits for deposit insurance and the FICO Bonds debt service.
For additional information associated with the Bank's deposit insurance, see
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Non-Interest Expense--G&A Expense."
Capital Requirements
Under federal law and OTS regulations, savings associations are required to
comply with each of three separate capital adequacy standards: a leverage or
core capital requirement; a tangible capital requirement; and a risk-based
capital requirement. The OTS is also authorized to establish individual
minimum capital requirements for a savings association consistent with these
capital standards. The OTS has not established any such individual minimum
capital requirements for the Bank. There are potentially severe consequences
for failing to meet these regulatory capital requirements.
The leverage capital requirement adopted by the OTS requires savings
associations to maintain core capital in an amount equal to at least 3% of
adjusted total assets. Core capital includes common stockholders' equity
(including common stock, common stock surplus and retained earnings, but
excluding any net unrealized gains or losses, net of related taxes, on certain
securities available for sale), non-cumulative perpetual preferred stock and
any related surplus, and minority interests in the equity accounts of fully
consolidated subsidiaries. Intangible assets, other than mortgage servicing
rights ("MSR") valued in accordance with applicable regulations and purchased
credit card relationships ("PCCR"), generally must be deducted from core
capital. MSR and PCCR may comprise only up to 50% of core capital. At December
31, 1996, the Bank included $101.7 million of MSR in its core capital and had
no PCCR. In addition, certain deferred tax assets and investments in and loans
to non-includable subsidiaries must be deducted from core capital. At December
31, 1996, the Bank included $116.8 million of net deferred tax assets in
regulatory capital. None of the Bank's subsidiaries are considered to be "non-
includable subsidiaries."
Savings associations are required to hold tangible capital in an amount
equal to at least 1.5% of adjusted total assets. Tangible capital means core
capital less any intangible assets (except for MSR includable in core
capital).
Under the risk-based capital requirement, savings associations must maintain
a ratio of total capital to risk-weighted assets equal to at least 8%. Risk-
weighted assets are determined by multiplying certain categories of the
institution's assets, including off-balance sheet equivalents, by an assigned
risk weight of 0% to 100% based on the credit risk associated with those
assets as specified in OTS regulations. For purposes of the risk-based capital
requirement, total capital means core capital plus supplementary capital, so
long as the amount of supplementary capital that is used to satisfy the
requirement does not exceed the amount of core capital. Supplementary capital
includes, among other things, general valuation loan and lease loss allowances
up to a maximum of 1.25% of risk-weighted assets. The OTS adopted a rule,
effective January 1, 1994, incorporating an interest-rate risk component into
its existing risk-based capital requirement. In March 1995, the OTS extended a
waiver of the interest rate risk capital deduction until it issued a Thrift
Bulletin establishing an appeals process and notified thrift institutions of
the effective date. Although the OTS issued the Thrift Bulletin on August 21,
1995, it also announced that the automatic interest rate risk capital
deduction would not be implemented until the OTS issued a notice otherwise.
Pursuant to FDICIA, the OTS adopted prompt corrective action ("PCA")
regulations that established five capital categories for savings associations
("well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized") and
require certain mandatory actions and authorize other discretionary actions to
be taken by the OTS with respect to institutions in the three
12
undercapitalized categories, with the nature and extent of such actions
dependent primarily on the category in which the institution is placed. The
OTS has specified by regulation the relevant capital level for each category.
Under OTS regulations, an institution is considered well capitalized if its
ratio of total risk-based capital to risk-weighted assets is 10% or more, its
ratio of core capital to risk-weighted assets is 6% or more, its ratio of core
capital to adjusted total assets is 5% or greater and it is not subject to any
order or directive by the OTS to meet a specific capital level.
In addition, an institution's primary federal bank regulatory agency is
authorized to downgrade the institution's capital category to the next lower
category upon a determination that the institution is in an unsafe or unsound
condition or is engaged in an unsafe or unsound practice. An unsafe or unsound
practice can include receipt by the institution of a less than satisfactory
rating on its most recent examination with respect to its asset quality,
management, earnings or liquidity.
For information concerning the Bank's regulatory capital status, see Note 14
of the Notes to Consolidated Financial Statements in Item 8, "Financial
Statements and Supplementary Data."
The Federal Deposit Insurance Act (the "FDI Act") generally prohibits a
depository institution from making any capital distribution (including payment
of a dividend) or paying any management fee to its holding company if the
depository institution would be "undercapitalized." "Undercapitalized"
depository institutions are subject to limitations on, among other things,
asset growth, acquisitions, branching, new business lines, acceptance of
brokered deposits, and borrowings from the Federal Reserve System and are
required to submit a capital restoration plan. The federal bank regulatory
agencies may not accept a capital plan without determining, among other
things, that the plan is based on realistic assumptions and is likely to
succeed in restoring the depository institution's capital. In addition, for a
capital restoration plan to be acceptable, the depository institution's
holding company, if any, must guarantee that the institution will comply with
such capital restoration plan. The aggregate liability of the holding company
under such guarantee is limited to the lesser of (i) an amount equal to 5% of
the depository institution's total assets at the time it became
"undercapitalized," or (ii) the amount that is necessary (or would have been
necessary) to bring the institution into compliance with all capital standards
applicable with respect to such institution as of the time it fails to comply
with the plan. If the depository institution fails to submit an acceptable
plan, it is treated as if it is "significantly undercapitalized."
"Significantly undercapitalized" depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become "adequately capitalized," requirements to reduce total
assets, and cessation of receipt of deposits from correspondent banks.
"Critically undercapitalized" institutions are subject to the appointment of a
receiver or conservator.
Depositor Preference
The FDI Act provides that, in the event of the "liquidation or other
resolution" of an insured depository institution, the claims of depositors of
such institution (including claims by the FDIC as subrogee of insured
depositors) and certain claims for administrative expenses of the FDIC, as a
receiver, would be afforded a priority over other general unsecured claims
against such an institution. If an insured depository institution fails,
insured and uninsured depositors, along with the FDIC, will be placed ahead of
unsecured, non-deposit creditors, including a holding company for the
institution (such as the Holding Company), in order of priority of payment.
Loans-to-One-Borrower Limitations and Loans to Insiders
Savings associations are subject to loans-to-one-borrower limitations under
federal law and OTS regulations. At December 31, 1996, the Bank's loans-to-
one-borrower limitation was approximately $194 million.
Savings associations are also subject to Sections 22(g) and 22(h) of the
Federal Reserve Act. These provisions, among other things, limit a savings
institution's extension of credit to the principal stockholders,
13
directors and executive officers of the savings institution and its affiliates
and to the related interests of these persons.
Liquid Assets
The OTS has promulgated regulations that require savings associations to
maintain, during each calendar month, an average daily balance of "liquid
assets" of not less than 5%, and "short-term liquid assets" of not less than
1%, of their liquidity base (average daily balances of net withdrawable
accounts plus short-term borrowings during the preceding calendar month).
Monetary penalties may be imposed for failure to meet liquidity ratio
requirements.
For additional information on the Bank's regulatory liquid assets, see Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity."
Qualified Thrift Lender ("QTL") Test
Under federal law and OTS regulations, savings associations are required to
maintain 65% of their "portfolio assets" (total assets less goodwill,
intangibles, property used to conduct business and certain liquid assets up to
20% of assets) in "qualified thrift investments," which consist primarily of
loans and other investments related to residential real estate, together with
certain other assets, for nine of every 12 months. Savings associations that
fail the QTL test are subject to substantial restrictions on their activities
and to certain other penalties. The Company believes it is in compliance with
this regulation. At December 31, 1996, the Bank had approximately 96% of its
portfolio assets in qualified thrift investments.
Restrictions on Dividends and Capital Distributions
The principal source of the Holding Company's income consists of dividends,
if any, from the Bank, the payment of which is subject to certain regulatory
restrictions. These restrictions may affect the Holding Company's liquidity as
well as its ability to pay dividends on its capital stock or principal or
interest on its debt. A savings association, such as the Bank, may not make a
capital distribution (or pay management fees to its holding company) if,
following such distribution (or payment), the institution would be
"undercapitalized" as that term is defined for purposes of the PCA provisions
described above. In addition, OTS regulations limit the ability of savings
associations to pay dividends and make other capital distributions according
to the institution's level of capital and income, with the greatest
flexibility afforded to institutions that meet or exceed their OTS capital
requirements. Capital distributions include cash dividends, payments to
repurchase, redeem, retire or otherwise acquire an institution's shares,
payments to stockholders of another institution in a cash-out merger, other
distributions charged against capital and any other transaction that the OTS
determines to entail a payout of capital. To the extent that the OTS
regulations described below and the PCA provisions are inconsistent, the PCA
provisions take precedence.
Under current OTS regulations, a savings association that exceeds its fully
phased-in OTS capital requirements both before and after a proposed
distribution (a "Tier 1 Institution") and that has not been advised by the OTS
that it is in need of more than normal supervision may, after prior notice to
but without the approval of the OTS, make capital distributions during a
calendar year up to the higher of (i) 100% of its net income to date during
the calendar year plus the amount that would reduce by one-half its "surplus
capital ratio" (the percentage by which the institution's ratio of total
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets) at the beginning of the calendar year or (ii) 75% of its net income
over the most recent four-quarter period. In addition, a Tier 1 Institution
may make capital distributions in excess of the foregoing limits if it gives
the OTS 30 days' notice of the proposed distribution and the OTS does not
object within that period. A Tier 1 Institution that has been notified by the
OTS that it is in need of "more than normal supervision" must, under the OTS
regulations, be treated as a "Tier 2 Institution" or a "Tier 3 Institution,"
to which progressively more stringent restrictions on dividends and capital
distributions apply. As of December 31, 1996, the Bank was a Tier 1
Institution.
14
The OTS also may prohibit a proposed capital distribution that would
otherwise be permitted if it determines that the distribution would constitute
an unsafe or unsound practice. Finally, a savings association that has
converted from mutual to stock form, such as the Bank, may not declare or pay
a dividend on or repurchase any of its capital stock if the effect of such
action would be to reduce the regulatory capital of the institution below the
amount required for its "liquidation account."
For a discussion of limitations on the ability of the Holding Company to
issue dividends, see Notes 11 and 13 of the Notes to Consolidated Financial
Statements in Item 8, "Financial Statements and Supplementary Data."
Transactions with Affiliates
Under federal law and regulation, transactions between a savings association
and its "affiliates," which term includes its holding company and other
companies controlled by its holding company, are subject to quantitative and
qualitative restrictions. Savings associations are restricted in their ability
to engage in certain types of transactions with their affiliates. These
"covered transactions" include: (i) purchasing or investing in securities
issued by an affiliate; (ii) lending or extending credit to, or guaranteeing
credit of, an affiliate; (iii) purchasing assets from an affiliate; and (iv)
accepting securities issued by an affiliate as collateral for a loan or
extension of credit. Covered transactions are permitted between a savings
association and a single affiliate up to 10% of the capital stock and surplus
of the association, and between a savings association and all of its
affiliates up to 20% of the capital stock and surplus of the institution. The
purchase of low-quality assets by a savings association from an affiliate is
not permitted. Each loan or extension of credit to an affiliate by a savings
association must be secured by collateral with a market value ranging from
100% to 130% (depending on the type of collateral) of the amount of credit
extended. Notwithstanding the foregoing, a savings association is not
permitted to make a loan or extension of credit to any affiliate unless the
affiliate is engaged only in activities that the Federal Reserve Board has
determined to be permissible for bank holding companies. Savings associations
also are prohibited from purchasing or investing in securities issued by an
affiliate, other than shares of a subsidiary. Covered transactions between a
savings association and an affiliate, and certain other transactions with or
benefiting an affiliate, must be on terms and conditions at least as favorable
to the institution as those prevailing at the time for comparable transactions
with non-affiliated companies. This arms-length requirement applies to all
covered transactions, as well as to: (i) the sale of securities or other
assets to an affiliate; (ii) the payment of money or the furnishing of
services to an affiliate; (iii) any transaction in which an affiliate acts as
agent or broker or receives a fee for its services to the savings association
or to any other person; or (iv) any transaction or series of transactions with
a third party if any affiliate has a financial interest in the third party or
is a participant in the transaction or series of transactions.
CRA
Under the CRA and the implementing OTS regulations, a savings association
has a continuing and affirmative obligation to help meet the credit needs of
its local communities, including low- and moderate- income neighborhoods,
consistent with the safe and sound operation of the institution. Until July 1,
1997, the OTS implementing regulations require the board of directors of each
savings association to adopt a CRA statement for each delineated local
community that, among other things, describes its efforts to help meet
community credit needs and the specific types of credit that the institution
is willing to extend. Following each of the three most recent CRA examinations
of the Bank by the OTS, the latest of which was completed in June 1995, the
Bank received an "outstanding" CRA rating, which is the highest rating that an
institution may receive.
Under new standards, the OTS will assign a CRA rating based upon a Lending
Test, Investment Test and Service Test keyed to, respectively, the number of
loans, the number of investments, and the level of availability of retail
banking services in a savings association's assessment area. The Lending Test
will be the primary component of the assigned composite rating. An
"outstanding" rating on the Lending Test automatically will result in at least
a "satisfactory" rating on the composite, but an institution cannot receive a
"satisfactory" or
15
better rating on the composite if it does not receive at least a "low
satisfactory" rating on the Lending Test. Alternatively, a savings association
may elect to be assessed by complying with a strategic plan approved by the
OTS. Evaluation under the new rules becomes mandatory on July 1, 1997;
however, a savings association could elect to be evaluated under the new rules
beginning on January 1, 1996, although the Bank did not elect to do so. Data
collection requirements became effective January 1, 1996.
Savings Association Investment Powers
Federal savings associations are subject to comprehensive regulation
governing their investments and activities. Among other things, a federal
savings association may invest up to 3% of its assets in service corporations,
an unlimited percentage of its assets in operating subsidiaries (which may
only engage in activities permissible for the association itself) and under
certain conditions may invest in finance subsidiaries. Other than investments
in service corporations, operating subsidiaries, finance subsidiaries, stock
of government-sponsored agencies such as FHLMC and FNMA, and certain "pass-
through investments" in entities engaging only in activities that a federal
savings association may conduct directly, federal savings associations
generally are not permitted to make equity investments. A service corporation
in which a federal savings association may invest is permitted to engage in
activities reasonably related to the activities of a federal savings
association as the OTS may approve on a case-by-case basis and certain
activities pre-approved by the OTS.
Under federal law, a savings association may not acquire or retain, directly
or through a subsidiary, any corporate debt securities that, when acquired,
were not rated in one of the four highest rating categories by at least one
nationally recognized rating agency, unless such activity is done through a
separately capitalized affiliate (other than a subsidiary or an insured
depository institution).
Until June 1983, Dime Savings was a New York State-chartered mutual savings
bank. Dime Savings converted to a federally-chartered mutual savings bank in
1983 and in 1986 converted from mutual to stock form. Federal law and
regulations empower the Bank to exercise any authority to make investments or
engage in activities that Dime Savings was authorized to exercise or engage in
under New York law in effect at the time it converted to a federal mutual
charter, whether or not Dime Savings had utilized such authority as a state-
chartered mutual savings bank. These so-called "grandfathered" powers are in
addition to the powers the Bank possesses as a federal savings bank. Among
these grandfathered powers is the authority to make "leeway" investments.
Under this authority, the Bank, subject to certain limitations, may make
equity and other investments that do not qualify under any other provision of
the grandfathered powers, so long as no one such investment exceeds 1% of the
Bank's assets and the total of all such investments does not exceed 5% of its
assets. However, certain specific types of investments are prohibited under
this provision, including the acquisition of common stock in a commercial bank
or life insurance company. The Merger did not affect the Bank's grandfathered
powers, except that it now also has the grandfathered powers formerly
possessed by Anchor Savings, which are generally similar to those related to
Dime Savings.
The exercise of these grandfathered powers, or any other activity, is
subject to the authority of the FDIC to issue regulations or orders it deems
necessary to prevent actions or practices that pose a serious threat to the
BIF or the SAIF. The FDIC has authority, upon making such determination, to
prohibit a savings association from engaging in that activity.
Acquisition of Control of Savings Associations
The Home Owners Loan Act ("HOLA") prohibits a savings and loan holding
company, directly or indirectly, from: (i) acquiring control of a savings
association or another savings and loan holding company, without prior OTS
approval; (ii) generally acquiring more than 5% of the voting shares of a
savings and loan holding company or a savings association which is not a
controlled subsidiary; or (iii) acquiring control of an "uninsured
institution," as defined in the HOLA. No director or officer of a savings and
loan holding company or individual owning, controlling or holding power to
vote more than 25% of the holding company's voting shares may: (i) hold,
solicit or exercise proxies in respect of any voting rights in a mutual
savings association; or
16
(ii) except with the prior approval of the OTS, acquire control of any savings
association that is not a subsidiary of such holding company.
Federal Home Loan Bank ("FHLB") System
The Bank is a member of the FHLB system, which consists of 12 regional
FHLBs. The FHLB system provides a central credit facility primarily for member
institutions. Members are required to hold shares of the capital stock of the
regional FHLB in which they are a member in an amount at least equal to the
greater of 1% of the member's home mortgage loans or 5% of the member's
advances from the FHLB.
Federal Reserve System
Federal Reserve Board regulations require depository institutions, including
the Bank, to maintain non-interest-earning reserves against certain deposits.
The Bank maintained $34.2 million of such reserves for the calculation period
including December 31, 1996. The effect of these reserve requirements is to
reduce the Bank's interest-earning assets. The balances maintained to comply
with the reserve requirements of the Federal Reserve Board may be used to
satisfy the liquidity requirements imposed on the Bank by the OTS.
The Bank is also subject to additional regulations promulgated by the
Federal Reserve Board, including, but not limited to, Regulation B (Equal
Credit Opportunity Act), Regulation E (Electronic Fund Transfers Act),
Regulation Z (Truth in Lending Act), Regulation CC (Expedited Funds
Availability Act) and Regulation DD (Truth in Savings Act).
FHLB system members are authorized to borrow from the Federal Reserve
"discount window," but Federal Reserve Board regulations require institutions
to exhaust all FHLB sources before borrowing from a Federal Reserve Bank.
Legislative and Regulatory Proposals
The operations of a savings association and a savings and loan holding
company are affected by the economic, fiscal and monetary policies of the
United States and its agencies and regulatory authorities, particularly the
Federal Reserve Board. The fiscal and economic policies of various
governmental entities and the monetary policies of the Federal Reserve Board
have a direct effect on the Company's business operations and the
availability, growth and distribution of the Company's investments and
deposits.
In addition, proposals to change the laws and regulations governing the
operations and taxation of savings associations and other financial
institutions and companies that control such institutions are frequently
raised in Congress and before the OTS and other bank regulatory authorities.
The likelihood of any major changes in the future and the effect such changes
might have on the Company are impossible to determine.
Federal Securities Laws
The Holding Company is subject to the periodic reporting, proxy
solicitation, tender offer, insider trading and other requirements and
restrictions under the Securities Exchange Act of 1934.
TAXATION
Federal Income Taxation
General. The Holding Company files consolidated federal income tax returns
with its eligible 80%- or greater-owned subsidiaries on a calendar year basis.
The maximum corporate federal income tax rate applicable to the Holding
Company and its subsidiaries currently is 35%, subject to the 20% alternative
minimum tax applicable to corporations, as discussed below.
17
Alternative Minimum Tax. The 20% alternative minimum tax applies generally
to taxable income, with certain adjustments, plus items of tax preference
("AMTI") and is imposed to the extent that the alternative minimum tax exceeds
the regular income tax for the taxable year. The amount of AMTI that can be
offset by net operating loss ("NOL") carryforwards is limited to 90% of AMTI.
Therefore, for taxable years in which available NOL carryforwards completely
offset taxable income, the Holding Company (and its subsidiaries) would be
subject to an effective minimum federal tax rate of 2% of AMTI (as determined
before offset by NOL carryforwards). Any alternative minimum tax paid by the
Company would be available as a carryforward tax credit, which, subject to
certain limitations, can be used to reduce otherwise determined regular
federal tax liability.
Bad Debt Deductions. Effective for 1996, federal tax legislation modified
the methods by which a thrift computes its bad debt deduction. As a result,
"large thrifts," including the Bank, are required to claim a deduction equal
to their actual loss experience, and the "reserve method" is no longer
available. Any cumulative reserve additions (i.e., bad debt deductions) in
excess of actual loss experience for tax years 1988 through 1995 are subject
to recapture over a six- to eight-year period. Generally, reserve balances as
of December 31, 1987 will only be subject to recapture upon distribution of
such reserves to shareholders.
In New York State and New York City, legislation was enacted during 1996 and
in early 1997, respectively, that allows 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 law.
State and Local Taxation
New York State and New York City each imposes an annual franchise tax on
banking corporations, based on net income allocable to New York State or New
York City, respectively, at a rate of 9%. If, however, the application of an
alternative minimum tax (based on taxable assets allocated to New York,
"alternative" net income, or a flat minimum fee) results in a greater tax, an
alternative minimum tax will be imposed. In addition, New York State imposes a
tax surcharge equal to 17% of the New York State franchise tax allocable to
business activities carried on in the Metropolitan Commuter Transportation
District and an additional tax surcharge equal to 2.5% of the New York State
franchise tax for the 1996 taxable year, with a scheduled expiration for
subsequent years. NOLs cannot be carried back or forward for New York State or
New York City tax purposes. These taxes apply to the Holding Company, the Bank
and certain of the Bank's subsidiaries. Certain subsidiaries of a banking
corporation may be subject to a general business corporation tax in lieu of
the tax on banking corporations. The rules regarding the determination of
income allocated to New York and alternative minimum taxes differ for these
subsidiaries.
The Holding Company and certain of its subsidiaries are subject to state and
local taxation in states outside New York. For example, New Jersey imposes a
Savings Institution Tax based on net income attributed to New Jersey on the
basis of separate accounting, at a rate of 3%. NOLs cannot be carried back or
forward. In addition, the Holding Company is subject to an annual franchise
tax imposed by Delaware, its state of incorporation. This franchise tax is the
higher of an amount determined by reference to authorized shares or assumed
capital (asset size), but cannot exceed $150,000.
Limitations on Use of Tax Losses; Effect of the Merger
As of December 31, 1996, the Company had certain net deferred tax benefits
(generally, expenses or losses recorded in the financial statements that have
not yet reduced its income tax liability) of approximately $184 million, all
of which had been reflected in the Company's earnings.
The timing of the realization of a substantial portion of the Company's
deferred tax asset may be subject to significant limitation under section 382
("Section 382") of the Internal Revenue Code (the "Code") if the Holding
Company undergoes an ownership change as defined by Section 382 ("Ownership
Change"). In the
18
event of an Ownership Change, Section 382 imposes an annual limitation on the
amount of taxable income a corporation may offset, after the date of the
Ownership Change (the "Change Date"), with NOL carryforwards and certain net
unrealized built-in losses existing on the Change Date. The limitation equals
the product of (i) the fair market value of the corporation's equity on the
Change Date (with certain adjustments, including an adjustment excluding
certain capital contributions made in the two years preceding the Change Date)
and (ii) a long-term tax-exempt bond rate as defined by the Code.
Generally, an Ownership Change occurs with respect to a corporation if any
shareholders who own or have owned, directly or indirectly, 5% or more of the
capital stock of the corporation ("5% stockholders") increase their aggregate
percentage ownership of such stock by more than 50 percentage points over the
lowest percentage of such stock owned by such stockholders at any time during
the testing period (generally the three years preceding). In applying Section
382, under a special rule, at least a portion of newly-issued stock is
considered to be acquired by a new 5% stockholder even if no person acquiring
the stock in fact owns as much as 5% of the issuer's stock. Under this rule,
all of the Holding Company's common stock ("Common Stock") issued to Anchor
Bancorp's common stockholders in the Merger will be considered to have been
acquired by a new 5% stockholder.
Based on the information currently available to the Holding Company, it does
not currently believe that the issuance of shares of Common Stock in the
Merger resulted in an Ownership Change. However, the application of Section
382 is highly complex and uncertain in some respects. In addition, the Merger
resulted in a substantial increase in the percentage of ownership of capital
stock of the Holding Company by 5% stockholders. Accordingly, even if the
Merger did not cause an Ownership Change, it may have increased significantly
the likelihood that there may be an Ownership Change in the three years after
the effective date of the Merger. The acquisition of capital stock of the
Holding Company by a 5% stockholder during this three-year period could cause
an Ownership Change.
The certificate of incorporation of the Holding Company limits transfers of
shares of Common Stock and other interests in the Holding Company that would
be treated as stock by the Internal Revenue Service and certain options that
would either cause a person or entity to become a 5% stockholder or increase a
5% stockholder's percentage ownership interest, in an effort to prevent
transfers from triggering an Ownership Change. However, the Holding Company's
Board of Directors (the "Board") retains the discretion to waive these
limitations or to take certain other actions that could trigger an Ownership
Change should it appear advantageous for the Holding Company to allow an
Ownership Change to take place. A regular trade in the stock of the Holding
Company through a national securities exchange by a person or entity that does
not, and will not, own directly or indirectly 5% or more of the capital stock
of the Holding Company before or after the trade generally will not be limited
by the Holding Company's certificate of incorporation.
Other Tax Information
For additional information regarding income taxes of the Company, see Note
17 of the Notes to Consolidated Financial Statements in Item 8, "Financial
Statements and Supplementary Data."
19
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position of each executive
officer of the Company as of March 1, 1997 and the year in which such person
joined the Company:
WITH THE
COMPANY
NAME AGE POSITIONS AND OFFICES WITH THE COMPANY SINCE
- ------------------------ --- ------------------------------------------------------- --------
Lawrence J. Toal........ 59 Director, Chief Executive Officer, President, and Chief 1991
Operating Officer
Gene C. Brooks.......... 47 General Counsel 1995
D. James Daras.......... 43 Treasurer and Asset/Liability Executive 1990
Fred B. Koons........... 52 Chief Executive Officer, Mortgage Banking 1996
Carlos R. Munoz......... 61 Chief Credit & Risk Management Officer 1995
Cody T Sickle........... 47 General Manager, Consumer Financial Services 1995
Mr. Daras has been employed by the Company for more than five years. The
principal occupation for at least the last five years of each other executive
officer who is not a member of the Board and who is not currently a nominee
for election to the Board is set forth below:
Mr. Brooks served as Vice President and General Counsel of Anchor Bancorp
from its formation until the Merger and as Secretary of Anchor Bancorp from
March 1993 until the Merger. He joined Anchor Savings in July 1987 and assumed
his present position in April 1995.
Mr. Koons joined the Company in December 1996 as Chief Executive Officer,
Mortgage Banking. Prior to his joining the Company, he had been a consultant
to the Company regarding its mortgage banking strategy. Previously, Mr. Koons
was Chairman and Chief Executive Officer of Chase Manhattan Mortgage
Corporation, where he was responsible for all aspects of its residential
lending activities in the United States. He had joined Chase in 1980 and
served in various positions, including Regional Executive, Secondary Marketing
Executive and Production Executive.
Mr. Munoz joined the Company in April 1995 as Chief Credit Officer. Prior to
joining the Company, he served in various positions with Citibank, N.A., where
he was most recently Senior Vice President and a member of the Credit Policy
Committee. In that position, he had been responsible at various times for
credit management and oversight of part or all of Citibank's worldwide
consumer banking activities, as well as Private Banking and Global Finance in
Latin America. He previously served with Citibank in New York, San Francisco
and the Caribbean, including management of the bank's corporate lending
activities in the Western United States and the workout of exposure to the
troubled Real Estate Investment Trust industry in the mid-1970's.
Mr. Sickle joined Anchor Savings in 1972 and was Executive Vice President of
Retail Banking prior to the Merger. He assumed his present position following
the Merger. It is currently contemplated that Mr. Sickle's employment with the
Company will terminate during the second quarter of 1997.
ITEM 2. PROPERTIES
As of December 31, 1996, the Bank had 86 full-service branches. The Company
owned the building and the land for 36 of those branches and leased the
building and the land for the remaining 50 branches. At that date, the Company
also owned the building and leased the land for its remote computer operations
hub in Valley Stream, New York and leased 37 loan production offices in
various states, its principal executive office in New York City, its
administrative headquarters in Uniondale, New York and its loan servicing
operations facility in Albion, New York. For further information regarding the
Company's properties and lease obligations, see Notes
20
6 and 19 of the Notes to Consolidated Financial Statements in Item 8,
"Financial Statements and Supplementary Data."
ITEM 3. LEGAL PROCEEDINGS
On January 13, 1995, Anchor Savings filed suit in the United States Court of
Federal Claims against the United States for breach of contract and taking of
property without compensation in contravention of the Fifth Amendment to the
United States Constitution. The action arose because the passage of the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA")
and the regulations adopted by the OTS pursuant to FIRREA deprived Anchor
Savings of the ability to include supervisory goodwill and certain other
assets for purposes of computing its regulatory capital as the Federal Savings
and Loan Insurance Corporation ("FSLIC") had agreed it could. The direct
effect was to cause Anchor Savings to go from an institution that
substantially exceeded its regulatory capital requirements to one that was
critically undercapitalized upon the effectiveness of the FIRREA-mandated
capital requirements.
From 1982 to 1985, Anchor Savings had acquired eight FSLIC-insured
institutions that were in danger of failing and causing a loss to the FSLIC.
Four institutions were acquired with some financial assistance from the FSLIC
and four were unassisted "supervisory" cases. In acquiring the institutions,
Anchor Savings assumed liabilities determined to exceed the assets it acquired
by over $650 million at the dates of the respective acquisitions. The
difference between the fair values of the assets acquired and the liabilities
assumed in the transactions were recorded on Anchor Savings' books as
goodwill. At the time of these acquisitions, the FSLIC had agreed that this
supervisory goodwill was to be amortized over periods of up to 40 years.
Without that agreement, Anchor Savings would not have made the acquisitions.
When the capital regulations imposed under FIRREA became effective, Anchor
Savings still had over $518 million of supervisory goodwill on its books and
approximately 20 years remaining to amortize it under the agreements with
FSLIC. The FIRREA-mandated capital requirements excluded all but approximately
$124 million of Anchor Savings' supervisory goodwill, over $42 million
attributable to the FSLIC contribution in one acquisition, and, until the
formation of Anchor Bancorp in 1991, $157 million associated with preferred
stock issued to the FSLIC as a result of one of the acquisitions. FIRREA also
required the remaining supervisory goodwill to be eliminated by December 31,
1994 for regulatory capital purposes. The elimination of the supervisory
goodwill resulted in severe limitations on Anchor Savings' activities and
required the disposition of valuable assets under liquidation-like
circumstances, as a result of which Anchor Savings was damaged. The complaint
asks that the government make Anchor Savings whole for the effects of the
loss, which are estimated to exceed substantially the goodwill remaining at
the time FIRREA was enacted.
There are approximately 120 cases involving similar issues pending in the
United States Court of Federal Claims, which has entered summary judgment for
the plaintiffs as to liability, but not damages, in three of the cases. Those
cases, referred to as the Winstar cases, were appealed to the United States
Supreme Court, which, on July 1, 1996, affirmed the decision that the
government was liable for breach of contract.
All of the Winstar-related cases, including Anchor Savings' lawsuit (which
was assumed by the Bank upon consummation of the Merger), have been assigned
to the Chief Judge of the Court of Federal Claims. The Chief Judge has issued
an Omnibus Case Management Order ("OCMO") that controls the proceedings in all
these cases, which imposes procedures and schedules different from most cases
in the Court of Federal Claims. Under the OCMO, the Bank has moved for partial
summary judgment as to the existence of a contract and the inconsistency of
the government's actions with that contract in each of the related
transactions. The government has disputed the existence of a contract in each
case and cross-moved for summary judgment. The government presently is
required to identify any affirmative defenses it is aware of during the second
quarter of 1997. The Bank may reply to the government's submission. No
timetable has been set for disposition of the Bank's motions and the
government cross-motions. If the Bank prevails on any of its motions, it will
be allowed to engage in discovery as to damage issues and any remaining
liability issues. Schedules and procedures for such subsequent proceedings
have not yet been established. It is not possible to predict whether any of
the Bank's partial summary
21
judgment motions will be granted or, if so, when the Chief Judge will schedule
a trial on damages and any remaining liability issues.
There have been no decisions determining damages in any of the Winstar-
related cases. It is possible that any determination of damages by the Court
of Federal Claims will be appealed. It is impossible to predict the measure of
damages that will be upheld in cases in which liability is found. The Company,
nevertheless, believes that its claim is meritorious and that it is entitled
to damages that, as noted, are estimated to exceed substantially the goodwill
remaining on Anchor Savings' books at the time FIRREA was enacted.
The Bank and its wholly-owned subsidiary, Dime Mortgage of New Jersey, Inc.,
have been named in an action entitled Koslowe v. Dime Mortgage of New Jersey
and The Dime Savings Bank of New York, which was filed, as a purported class
action, in the United States District Court, District of New Jersey during the
first quarter of 1997. The plaintiff alleges, among other things, that, in
connection with the making of residential property loans, the Bank and its
subsidiary made certain payments to mortgage brokers in violation of the Real
Estate Settlement Procedures Act ("RESPA") and engaged in unfair acts in
violation of the deceptive trade practices laws of various states. The
plaintiff seeks unspecified compensatory damages plus, as to certain claims,
treble damages. The Company believes that its compensation programs for
mortgage brokers comply with applicable laws and with accepted mortgage
banking industry practices and that it has meritorious defenses to the action.
The Company intends to oppose the action vigorously.
Certain other claims, suits, complaints and investigations involving the
Company, arising in the ordinary course of business have been filed or are
pending. The Company is of the opinion, after discussion with legal counsel
representing the Company in these proceedings, that the aggregate liability or
loss, if any, arising from the ultimate disposition of these matters would not
have a material adverse effect on the Company's consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to the Holding Company's stockholders during the
quarter ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the New York Stock Exchange ("NYSE") under the
symbol "DME." The following table sets forth the high and low sales prices of
the Common Stock based on the NYSE Composite Tape for the periods indicated.
PRICE RANGE
---------------
HIGH LOW
------- -------
1996:
Fourth quarter.......................................... $16.750 $13.500
Third quarter........................................... 14.000 11.250
Second quarter.......................................... 13.375 11.375
First quarter........................................... 12.375 10.750
1995:
Fourth quarter.......................................... 12.000 10.250
Third quarter........................................... 13.375 10.000
Second quarter.......................................... 10.375 8.750
First quarter........................................... 9.000 7.500
There were no cash dividends declared per share on the Common Stock during
the periods set forth in the above table. The Board periodically considers the
payment of dividends on the Common Stock, taking into account the Company's
financial condition and level of net income, its future prospects, economic
conditions, industry practices, and other factors, including the dividend
restrictions described in Notes 11 and 13 of the Notes
22
to Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data" and "Regulation and Supervision--Restrictions on Dividends
and Capital Distributions" in Item 1, "Business."
On March 14, 1997, there were approximately 22,831 holders of record of the
Common Stock.
For discussions of Common Stock repurchase programs announced by the Holding
Company during 1996 and the Holding Company's Stockholder Protection Rights
Plan, see Note 13 of the Notes to Consolidated Financial Statements in Item 8,
"Financial Statements and Supplementary Data."
ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS
DATA
Interest income......... $1,350,698 $1,357,131 $1,136,862 $980,111 $1,243,664
Interest expense........ 889,403 947,505 707,785 589,939 753,288
---------- ---------- ---------- -------- ----------
Net interest in-
come............... 461,295 409,626 429,077 390,172 490,376
Provision for loan loss-
es..................... 41,000 39,650 55,799 95,489 103,684
---------- ---------- ---------- -------- ----------
Net interest income
after provision for
loan losses........ 420,295 369,976 373,278 294,683 386,692
---------- ---------- ---------- -------- ----------
Non-interest income:
Banking service fees.. 27,373 22,325 19,953 19,269 18,677
Loan servicing fees,
net.................. 30,356 30,452 28,213 30,001 32,270
Securities and insur-
ance brokerage fees.. 21,064 15,532 16,885 22,336 22,111
Net (losses) gains on
sales activities..... (12,716) (12,415) 2,925 36,606 28,544
Other................. 12,391 10,273 11,291 14,313 17,112
---------- ---------- ---------- -------- ----------
Total non-interest
income............. 78,468 66,167 79,267 122,525 118,714
---------- ---------- ---------- -------- ----------
Non-interest expense:
General and adminis-
trative expense...... 292,795 285,901 294,474 294,755 323,122
SAIF recapitalization
assessment........... 26,280 -- -- -- --
ORE expense, net...... 10,072 12,892 11,013 77,393 50,204
Amortization of MSR... 11,872 12,107 9,664 19,884 26,650
Restructuring and
Merger-related ex-
pense................ 3,504 15,331 58,258 4,000 3,000
---------- ---------- ---------- -------- ----------
Total non-interest
expense............ 344,523 326,231 373,409 396,032 402,976
---------- ---------- ---------- -------- ----------
Minority interest-pre-
ferred stock dividends
of subsidiary.......... -- -- 11,433 1,312 --
---------- ---------- ---------- -------- ----------
Income before income tax
expense (benefit),
extraordinary item and
cumulative effect of a
change in accounting
principle.............. 154,240 109,912 67,703 19,864 102,430
Income tax expense (ben-
efit).................. 49,984 47,727 (53,138) (68,959) 41,642
---------- ---------- ---------- -------- ----------
Income before
extraordinary item and
cumulative effect of a
change in accounting
principle.............. 104,256 62,185 120,841 88,823 60,788
Extraordinary item-loss
on early extinguishment
of debt................ -- -- -- -- (2,760)
Cumulative effect of a
change in accounting
principle for goodwill,
securities available
for sale and MSR,
respectively........... -- -- (92,887) (1,187) (7,066)
---------- ---------- ---------- -------- ----------
Net income.............. $ 104,256 $ 62,185 $ 27,954 $ 87,636 $ 50,962
========== ========== ========== ======== ==========
Net income attributable
to common stock........ $ 104,256 $ 62,185 $ 27,954 $ 87,636 $ 39,403
========== ========== ========== ======== ==========
Pro forma amounts
assuming the changes in
accounting principles
for goodwill and MSR
were applied
retroactively:
Income before extraor-
dinary item and cumu-
lative effect of a
change in accounting
principle............ $ 120,841 $ 90,133 $ 52,120
Extraordinary item.... -- -- (2,760)
Cumulative effect of a
change in accounting
principle for
securities available
for sale, net of
income tax benefit... -- (1,187) --
---------- -------- ----------
Net income............ $ 120,841 $ 88,946 $ 49,360
========== ======== ==========
Net income attribut-
able to common
stock................ $ 120,841 $ 88,946 $ 37,801
========== ======== ==========
23
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
PRIMARY AND FULLY DILUTED EARN-
INGS PER COMMON SHARE
Primary:
Income before extraordinary
item and cumulative effect of
a change in accounting
principle.................... $ 0.96 $ 0.57 $ 1.12 $ 0.91 $ 0.89
Extraordinary item............ -- -- -- -- (0.05)
Cumulative effect of a change
in accounting principle...... -- -- (0.86) (0.01) (0.13)
-------- -------- -------- ------- -------
Net income.................... $ 0.96 $ 0.57 $ 0.26 $ 0.90 $ 0.71
======== ======== ======== ======= =======
Fully diluted:
Income before extraordinary
item and cumulative effect of
a change in accounting
principle.................... $ 0.95 $ 0.57 $ 1.12 $ 0.91 $ 0.89
Extraordinary item............ -- -- -- -- (0.05)
Cumulative effect of a change
in accounting principle...... -- -- (0.86) (0.01) (0.13)
-------- -------- -------- ------- -------
Net income.................... $ 0.95 $ 0.57 $ 0.26 $ 0.90 $ 0.71
======== ======== ======== ======= =======
Pro forma amounts assuming the
changes in accounting
principles for goodwill and MSR
were applied retroactively:
Primary and fully diluted:
Income before extraordinary
item and cumulative effect
of a change in accounting
principle................... $ 1.12 $ 0.93 $ 0.73
Extraordinary item........... -- -- (0.05)
Cumulative effect of a change
in accounting principle for
securities available for
sale, net of income tax
benefit..................... -- (0.01) --
-------- ------- -------
Net income................... $ 1.12 $ 0.92 $ 0.68
======== ======= =======
AVERAGE COMMON SHARES OUTSTAND-
ING
(IN THOUSANDS)
Primary......................... 109,097 109,742 107,668 97,153 55,344
Fully diluted................... 109,249 109,862 107,700 97,367 55,386
24
AT OR FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FINANCIAL CONDITION DATA
AT DECEMBER 31,
Total assets............ $18,870,108 $20,326,620 $19,647,937 $18,098,984 $16,680,405
Securities available for
sale................... 2,589,572 4,070,865 530,714 658,204 898,279
Securities held to
maturity............... 4,363,971 5,085,736 8,609,897 8,159,747 6,678,036
Loans receivable........ 10,738,057 9,830,313 9,351,622 7,906,573 7,629,100
Allowance for loan
losses................. 106,495 128,295 170,383 157,515 248,429
Deposits................ 12,856,739 12,572,203 12,811,269 11,091,362 13,039,885
Borrowed funds.......... 4,815,191 6,614,552 5,758,734 5,850,575 2,888,269
Stockholders' equity.... 1,022,337 976,530 905,125 904,982 635,843
ASSET QUALITY
Non-performing assets... $ 244,845 $ 315,800 $ 415,866 $ 641,743 $1, 010,877
Non-performing assets to
total assets........... 1.30% 1.55% 2.12% 3.55% 6.06%
Non-accrual loans to
loans receivable....... 1.78 2.60 3.66 3.68 10.19
Allowance for loan
losses to loans
receivable............. 0.99 1.31 1.82 1.99 3.26
Allowance for loan
losses to non-accrual
loans.................. 55.58 50.29 49.84 54.14 31.97
OTHER DATA
Book value per common
share(1)............... $ 9.76 $ 9.03 $ 8.43 $ 8.48 $ 8.79
Tangible book value per
common share(1)........ 9.67 8.94 8.39 7.59 6.81
Net interest margin for
the year............... 2.40% 2.07% 2.36% 2.47% 2.91%
Return on average
assets................. 0.52 0.30 0.15 0.53 0.29
Return on average
stockholders' equity... 10.36 6.56 3.25 11.02 8.21
Average stockholders'
equity to average
assets................. 5.05 4.62 4.57 4.82 3.52
Stockholders' equity to
total assets........... 5.42 4.80 4.61 5.00 3.81
Loans serviced for
others................. $11,036,624 $ 9,514,560 $ 8,713,047 $ 8,265,354 $ 9,039,183
(1) For 1995, 1994 and 1993, the computation assumes that a warrant issued to
the FDIC in July 1993 to acquire 8.4 million shares of Common Stock at
$0.01 per share (the "Warrant") was exercised. The Warrant was exercised
in May 1996. For a further discussion of the Warrant, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Financial Condition--Stockholders' Equity."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company reported net income for 1996 of $104.3 million, a 67.7% increase
from net income of $62.2 million for 1995, which had increased 122.5% from net
income of $28.0 million for 1994. Fully diluted earnings per common share were
$0.95 in 1996, as compared with $0.57 in 1995 and $0.26 in 1994.
During 1996, a key component of the Company's operating strategy was to
continue implementing the Balance Sheet Restructuring Plan announced at the
end of 1995. The Balance Sheet Restructuring Plan was designed to, among other
things, enable the Company to improve its net interest margin, primarily by
selling certain relatively-lower yielding MBS, and provide the Company with
greater flexibility in adjusting to varying interest rate environments. At
year-end 1995, in connection with the Balance Sheet Restructuring Plan and
guidance in a special report issued by the FASB in November 1995 allowing
entities an opportunity to reassess their security classifications made
pursuant to SFAS 115, the Company transferred securities with an amortized
cost of $3.6 billion, including $3.5 billion of MBS, from its held to maturity
portfolio to its available for sale portfolio and designated for sale
approximately $1 billion of such transferred MBS. As a result of this
designation for sale, the Company recognized a pretax loss of $23.6 million in
December 1995, reflecting the write-down of those securities with unrealized
losses to estimated fair value. During 1996, the Company, in
25
connection with the Balance Sheet Restructuring Plan, sold $2.0 billion of
securities, including those designated for sale at the end of 1995, and
incurred a net loss of $8.1 million. The proceeds of such sales were, in large
part, used to repay borrowed funds, the costs of which are generally more
volatile than the Company's deposits.
Net income in 1996 improved $42.1 million as compared with 1995, primarily
reflecting growth in net interest income of $51.7 million, or 12.6%, a $15.5
million decline in securities-related losses associated with the Balance Sheet
Restructuring Plan, an $11.8 million reduction in restructuring and Merger-
related expense, and the final resolution of certain tax filing positions
taken in prior years, which resulted in $12.3 million of tax benefits during
1996. Also contributing to the year-to-year growth in net income were
increases in securities and insurance brokerage fees of $5.5 million, or
35.6%, and banking service fees of $5.0 million, or 22.6%, Merger-related
efficiencies, and a reduced level of federal deposit insurance premiums as a
result of enactment of the Funds Act and other legislation. These factors were
partially offset by a $26.3 million charge in 1996 for the Bank's portion of
the Special Assessment, certain non-recurring personnel expenses during 1996,
and gains on branch sales in 1995 of $18.7 million.
The $34.2 million improvement in the Company's net income for 1995, as
compared with 1994, largely reflected the impact of a $92.9 million charge in
1994 associated with the cumulative effect on prior years of a change in
accounting principle for goodwill, together with a reduction in restructuring
and Merger-related expense of $42.9 million and the recognition of gains on
branch sales of $18.7 million in 1995. The year-to-year improvement was also
due to expense reductions associated with the Merger, federal deposit
insurance legislation and improving asset quality. Partially offsetting these
factors was a $129.9 million reduction in 1994 of the Company's valuation
allowance for deferred tax assets that was credited to operations, coupled
with the write-down to fair value of securities designated for sale in
connection with the Balance Sheet Restructuring Plan, a reduction in net
interest income of $19.5 million, and the full year effect of the Lincoln
Acquisition.
The number of shares of Common Stock outstanding increased to 104.7 million
at December 31, 1996 from 99.7 million at December 31, 1995. This increase was
primarily attributable to the exercise by the FDIC of the Warrant to acquire
8.4 million shares of Common Stock at $0.01 per share, the effect of which was
partially offset by the repurchase of 5.0 million shares of Common Stock
during 1996 (see "Financial Condition--Stockholders' Equity"). The issuance of
Common Stock in connection with the exercise of the Warrant did not impact 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 loan production (which consists of both originations and
purchases) amounted to $3.7 billion for 1996, an increase of $1.4 billion, or
57.0%, as compared with 1995. This growth was largely reflective of the
Company's recent efforts to expand its residential property loan origination
capabilities, which included the National and Madison Acquisitions during the
fourth quarter of 1995. Total residential property loan production increased
to $3.0 billion in 1996 from $1.8 billion in the prior year.
The Company's asset quality continued to improve during 1996. Non-performing
assets, which amounted to $244.8 million at December 31, 1996, declined $71.0
million, or 22.5%, from the level at the end of 1995. At December 31, 1996,
non-performing assets represented 1.30% of total assets, down from 1.55% of
total assets one year earlier.
The Bank's leverage, risk-based and tier 1 risk-based capital ratios
increased to 6.06%, 13.08% and 11.96%, respectively, at December 31, 1996 from
5.16%, 12.01% and 10.76%, respectively, at the end of 1995. These ratios
satisfied the published regulatory standards for a well capitalized
institution.
In December 1996, consistent with its current operating strategy to expand
its loan portfolio and deposit base, the Company entered into a definitive
agreement to acquire BFS (see "Pending Acquisition of BFS").
26
RESULTS OF OPERATIONS
Net Interest Income
The Company's net interest income amounted to $461.3 million in 1996, up
$51.7 million, or 12.6%, from 1995, despite a $548.3 million reduction in
average interest-earning assets during 1996. The Company's net interest margin
of 2.40% for 1996 increased 33 basis points from the level in 1995.
Contributing significantly to these increases were the implementation of the
Balance Sheet Restructuring Plan, together with the impact of growth in the
Company's loan portfolio, a more favorable interest rate yield curve and lower
funding costs. In connection with the Balance Sheet Restructuring Plan, the
Company sold $2.0 billion of securities available for sale during 1996,
including certain relatively lower-yielding MBS, which contributed to the
increase in the average yield on total average interest-earning assets from
6.86% in 1995 to 7.02% in 1996. In furtherance of its objectives to increase
its net interest income and net interest margin, the Company significantly
reduced its level of FHLBNY advances during 1996, while further expanding its
use of securities sold under agreements to repurchase due to their generally
lower cost as compared with FHLBNY advances. These factors, as well as the
lower short-term interest rate environment in 1996 as compared with 1995,
resulted in the Company's cost of funds declining to 4.73% in 1996 from 4.88%
in 1995.
The Company's net interest income of $409.6 million in 1995 declined $19.5
million from 1994, and its net interest margin declined 29 basis points from
2.36% in 1994 to 2.07% in 1995. The reduction in net interest income was due,
in part, to the exchange, in December 1994, of all of the then outstanding
shares of the Bank's 10 1/2% non-cumulative exchangeable preferred stock (the
"Bank Preferred Stock") for $100.0 million in principal amount of the Holding
Company's newly-issued 10 1/2% senior notes due November 15, 2005 (the "10
1/2% Senior Notes"). Dividend payments on the Bank Preferred Stock for periods
prior to the consummation of this exchange are reflected in the Company's
Consolidated Statements of Income as "Minority interest-preferred stock
dividends of subsidiary," whereas interest expense on the 10 1/2% Senior Notes
is reflected as a component of "Interest expense on borrowed funds." If the
dividends on the Bank Preferred Stock for 1994 were considered a component of
net interest income during that year, net interest income for 1995 as compared
with 1994 would have only declined $8.0 million. Also contributing to the
decline in the Company's net interest income in 1995 as compared with 1994 was
the relatively flat yield curve in existence during the greater part of 1995.
The Company's gross yield on average interest-earning assets rose 62 basis
points in 1995 as compared with 1994, due in part to the lagging nature of a
significant portion of the Company's adjustable-rate assets. However, such
growth was more than offset by increases in the cost of deposits and borrowed
funds of 71 basis points and 122 basis points, respectively, largely
reflecting the higher short-term interest rate environment in 1995 as compared
with 1994. Net interest income was favorably affected in 1995 as compared with
1994 by growth in average interest-earning assets, principally due to the
Lincoln Acquisition.
The level of the Company's net interest income in each of 1996, 1995 and
1994 also reflects its use of certain derivative financial instruments in
managing its interest rate risk exposure. These derivative financial
instruments resulted in decreases in net interest income during 1996 and 1994
of $17.2 million and $14.4 million, respectively, as compared with an increase
in net interest income of $10.6 million in 1995. For a further discussion of
the Company's derivative financial instruments, see "Management of Interest
Rate Risk--Derivative Financial Instruments."
Average interest-earning assets declined to $19.2 billion in 1996 from $19.8
billion in 1995, substantially reflecting a $1.3 billion, or 14.5%, decline in
the average balance of MBS as a result of the Balance Sheet
Restructuring Plan. In 1995, as compared with 1994, average interest-earning
assets had increased $1.6 billion, or 8.6%, reflective of the Company's asset
growth strategy during 1994 and most of 1995, including through the Lincoln
Acquisition. The Company's operating strategy has also emphasized the
expansion of its loan portfolio, and, as a result, the average balance of
loans in 1996 increased $816.1 million, or 8.5%, from 1995, which had
increased $966.9 million, or 11.3%, from 1994. Average loans as a percentage
of average total interest-earning assets rose to 53.9% in 1996, from 48.3% in
1995 and 47.1% in 1994.
27
Average interest-bearing liabilities amounted to $18.8 billion in 1996,
$19.4 billion in 1995 and $17.8 billion in 1994. The $597.6 million reduction
in 1996 from 1995 was principally attributable to the repayment in 1996,
pursuant to the Balance Sheet Restructuring Plan, of certain of the Company's
FHLBNY advances. While the average balance of FHLBNY advances declined $1.9
billion in 1996 from 1995, the average balance of securities sold under
agreements to repurchase rose $1.3 billion, reflecting the Company's recent
emphasis on this funding source. The average balance of deposits rose only
$60.6 million in 1996 as compared with 1995. However, reflective of the
interest rate environment, among other factors, the Company's average time
deposits increased $503.1 million in 1996, while the average balance of all
other deposit accounts declined $442.5 million. During 1995, as compared with
1994, average interest-bearing liabilities had increased $1.6 billion,
reflecting the funding of related asset growth, primarily through short-term
borrowings and Lincoln's deposits.
28
The following table sets forth, for the years 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 table below.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ------------------------------- ------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
----------- ---------- ------- ----------- ----------- ------- ----------- ---------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning
assets:
Loans:
First mortgage........ $ 8,363,034 $ 619,607 7.41% $ 7,553,738 $ 556,395 7.37% $ 6,706,711 $ 459,086 6.85%
Cooperative
apartment............ 1,242,476 97,660 7.86 1,192,605 91,657 7.69 1,116,837 78,989 7.07
Consumer and
business............. 758,875 66,842 8.81 801,898 74,374 9.27 757,841 62,512 8.25
----------- ---------- ----------- ----------- ----------- ----------
Total loans........... 10,364,385 784,109 7.57 9,548,241 722,426 7.57 8,581,389 600,587 7.00
----------- ---------- ----------- ----------- ----------- ----------
MBS................... 7,856,066 508,342 6.47 9,187,208 567,885 6.18 8,707,723 482,829 5.54
Other securities...... 514,888 31,910 6.20 460,049 32,596 7.09 515,471 36,160 7.01
Money market
investments.......... 495,395 26,337 5.32 583,510 34,224 5.87 405,266 17,286 4.27
----------- ---------- ----------- ----------- ----------- ----------
Total interest-earning
assets................ 19,230,734 1,350,698 7.02 19,779,008 1,357,131 6.86 18,209,849 1,136,862 6.24
---------- ----------- ----------
Other assets........... 710,519 721,586 618,210
----------- ----------- -----------
Total assets........... $19,941,253 $20,500,594 $18,828,059
=========== =========== ===========
LIABILITIES, PREFERRED
STOCK OF SUBSIDIARY
AND STOCKHOLDERS'
EQUITY
Interest-bearing
liabilities:
Deposits:
Demand................ $ 1,093,311 8,254 0.75 $ 1,052,485 10,849 1.03 $ 1,024,508 10,953 1.07
Savings............... 2,574,273 64,642 2.51 2,981,762 72,721 2.44 3,690,531 102,791 2.79
Money market.......... 2,100,392 80,904 3.85 2,176,214 85,627 3.93 1,548,453 56,285 3.63
Time.................. 6,913,469 377,416 5.46 6,410,394 355,255 5.54 5,461,662 234,540 4.29
----------- ---------- ----------- ----------- ----------- ----------
Total deposits........ 12,681,445 531,216 4.19 12,620,855 524,452 4.16 11,725,154 404,569 3.45
----------- ---------- ----------- ----------- ----------- ----------
Borrowed funds:
Securities sold under
agreements to
repurchase........... 2,672,859 147,561 5.52 1,398,041 84,323 6.03 193,730 9,069 4.68
FHLBNY advances....... 3,081,743 179,338 5.82 4,963,392 303,153 6.11 5,483,232 264,865 4.83
Other................. 364,703 31,288 8.58 416,091 35,577 8.55 368,180 29,282 7.95
----------- ---------- ----------- ----------- ----------- ----------
Total borrowed funds.. 6,119,305 358,187 5.85 6,777,524 423,053 6.24 6,045,142 303,216 5.02
----------- ---------- ----------- ----------- ----------- ----------
Total interest-bearing
liabilities........... 18,800,750 889,403 4.73 19,398,379 947,505 4.88 17,770,296 707,785 3.98
---------- ----------- ----------
Other liabilities...... 134,218 154,102 101,475
Preferred stock of
subsidiary............ -- -- 96,164
Stockholders' equity... 1,006,285 948,113 860,124
----------- ----------- -----------
Total liabilities,
preferred stock of
subsidiary and
stockholders' equity.. $19,941,253 $20,500,594 $18,828,059
=========== =========== ===========
Net interest income.... $ 461,295 $ 409,626 $ 429,077
========== =========== ==========
Interest rate spread... 2.29 1.98 2.26
Net interest margin.... 2.40 2.07 2.36
29
The following table sets forth, for the years indicated, the changes in
interest income and expense for each major component of interest-earning
assets and interest-bearing liabilities and the amounts attributable to
changes in average balances (volume) and average interest rates (rate). The
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.
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 VERSUS 1995 1995 VERSUS 1994
----------------------------------- ----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
----------------------------------- ----------------------------------
DUE TO VOLUME DUE TO RATE TOTAL DUE TO VOLUME DUE TO RATE TOTAL
------------- ----------- --------- ------------- ----------- --------
(IN THOUSANDS)
Interest income:
Loans:
First mortgage........ $ 59,942 $ 3,270 $ 63,212 $ 60,733 $ 36,576 $ 97,309
Cooperative
apartment............ 3,889 2,114 6,003 5,563 7,105 12,668
Consumer and
business............. (3,887) (3,645) (7,532) 3,778 8,084 11,862
--------- -------- --------- -------- -------- --------
Total loans............ 59,944 1,739 61,683 70,074 51,765 121,839
MBS.................... (85,193) 25,650 (59,543) 27,576 57,480 85,056
Other securities....... 3,648 (4,334) (686) (3,924) 360 (3,564)
Money market
investments........... (4,870) (3,017) (7,887) 9,142 7,796 16,938
--------- -------- --------- -------- -------- --------
Total interest income... (26,471) 20,038 (6,433) 102,868 117,401 220,269
--------- -------- --------- -------- -------- --------
Interest expense:
Deposits:
Demand................ 407 (3,002) (2,595) 294 (398) (104)
Savings............... (10,180) 2,101 (8,079) (18,251) (11,819) (30,070)
Money market.......... (2,944) (1,779) (4,723) 24,382 4,960 29,342
Time.................. 27,530 (5,369) 22,161 45,170 75,545 120,715
--------- -------- --------- -------- -------- --------
Total deposits......... 14,813 (8,049) 6,764 51,595 68,288 119,883
--------- -------- --------- -------- -------- --------
Borrowed funds:
Securities sold under
agreements to
repurchase........... 70,932 (7,694) 63,238 71,917 3,337 75,254
FHLBNY advances....... (110,101) (13,714) (123,815) (26,863) 65,151 38,288
Other................. (4,408) 119 (4,289) 3,992 2,303 6,295
--------- -------- --------- -------- -------- --------
Total borrowed funds... (43,577) (21,289) (64,866) 49,046 70,791 119,837
--------- -------- --------- -------- -------- --------
Total interest expense.. (28,764) (29,338) (58,102) 100,641 139,079 239,720
--------- -------- --------- -------- -------- --------
Net interest income..... $ 2,293 $ 49,376 $ 51,669 $ 2,227 $(21,678) $(19,451)
========= ======== ========= ======== ======== ========
Provision for Loan Losses
The Company's provision for loan losses amounted to $41.0 million in 1996,
$39.7 million in 1995 and $55.8 million in 1994. The provision for loan
losses, as further discussed in "Management of Credit Risk-- Allowance for
Loan Losses," is predicated upon the Company's assessment of the adequacy of
its allowance for loan losses.
30
Non-Interest Income
General. The following table sets forth the components of the Company's non-
interest income for the years ended December 31:
1996 1995 1994
-------- -------- -------
(IN THOUSANDS)
Banking service fees....................... $ 27,373 $ 22,325 $19,953
Loan servicing fees, net................... 30,356 30,452 28,213
Securities and insurance brokerage fees.... 21,064 15,532 16,885
Net (losses) gains on sales activities..... (12,716) (12,415) 2,925
Other...................................... 12,391 10,273 11,291
-------- -------- -------
Total non-interest income.................. $ 78,468 $ 66,167 $79,267
======== ======== =======
Banking Service Fees. Banking service fees for 1996 were $27.4 million, up
$5.0 million, or 22.6%, as compared with the prior year. This increase was
principally attributable to certain changes in the Company's fee structure,
coupled with a higher volume of underlying transactions. The level of the
Company's income from banking service fees of $22.3 million for 1995 had
increased $2.4 million, or 11.9%, from 1994, largely reflective of the Lincoln
Acquisition, the effect of which was partially offset by branch sales
activities.
Loan Servicing Fees, Net. Loan servicing fees, net, were $30.4 million in
1996, as compared with $30.5 million in 1995 and $28.2 million in 1994. The
level of loan servicing fees, net, in 1996 and 1995, as compared with the
respective prior years, was positively impacted by growth in the average
balance of the loan servicing portfolio and a lower level of amortization of
capitalized excess servicing. Such amortization declined to $7.5 million in
1996, from $8.5 million in 1995 and $10.6 million in 1994. Loan servicing
fees, net, were negatively affected by reductions in the average loan
servicing fee rate in 1996 and 1995 as compared with the respective prior
years and, with respect to 1996 as compared with 1995, by an increase in
certain loan servicing expenses. For a further discussion of the Company's
loan servicing activities, see "Loan Servicing."
Securities and Insurance Brokerage Fees. Securities and insurance brokerage
fees amounted to $21.1 million for 1996, an increase of $5.5 million, or
35.6%, as compared with 1995. The year-to-year increase primarily reflects
growth in fees from securities brokerage activities of $4.1 million,
principally reflecting new sales initiatives and an expanded sales force. In
addition, fees from insurance activities rose $1.4 million in 1996 as compared
with the prior year, largely attributable to the introduction of certain life
insurance products, together with the implementation of a third party
telemarketing program during the second quarter of 1996. Fees from securities
and insurance brokerage activities had declined to $15.5 million in 1995 from
$16.9 million in 1994, primarily due to lower fees from securities brokerage
activities as a result of competitive factors and a reduced sales force.
Net (Losses) Gains on Sales Activities. The following table summarizes the
components of the Company's net (losses) gains on sales activities for the
years ended December 31:
1996 1995 1994
-------- -------- -------
(IN THOUSANDS)
Net (losses) gains on:
Sales, calls and revaluations of securi-
ties.................................... $(11,265) $(29,044) $ 2,909
Sales of loans held for sale............. 2,630 2,344 (3,457)
Sales of loan servicing rights........... -- 738 1,823
Sales of branches........................ -- 18,637 1,730
Other.................................... (4,081) (5,090) (80)
-------- -------- -------
Net (losses) gains on sales activities..... $(12,716) $(12,415) $ 2,925
======== ======== =======
31
The net losses on sales, calls and revaluations of securities during 1996
and 1995 were substantially attributable to actions taken in connection with
the Balance Sheet Restructuring Plan. During 1996, as part of that plan, the
Company sold $2.0 billion of securities and incurred net losses of $8.1
million. Of such securities sold, approximately $1 billion had been designated
for sale during the fourth quarter of 1995, at which time the Company
recognized a loss of $23.6 million, representing the write-down of those
securities with unrealized losses to estimated fair market value. During 1996
and 1995, the Company recognized losses of $4.7 million and $3.3 million,
respectively, as a result of other than temporary impairment in value of
certain MBS (see "Management of Credit Risk--MBS"). The net gains on sales,
calls and revaluations of securities in 1994 were principally associated with
sales of MBS acquired in the Lincoln Acquisition.
The net gains on sales of loans held for sale in connection with the
Company's mortgage banking operations were positively affected in 1996 and
1995, as compared with 1994, by the Company's adoption, effective as of
January 1, 1995, of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights" ("SFAS 122"). SFAS 122 amended
Statement of Financial Accounting Standards No. 65, "Accounting for Certain
Mortgage Banking Activities" ("SFAS 65"), to require the recognition, as
separate assets, of the rights to service mortgage loans (which includes
cooperative apartment loans) sold, whether those rights are acquired through
loan purchase or loan origination activities. Prior to the adoption of SFAS
122, only those rights to service mortgage loans acquired through purchase
transactions were recognized as assets by the Company. During 1996 and 1995,
originated MSR capitalized by the Company amounted to $7.4 million and $3.3
million, respectively. In addition, the previously existing requirement in
SFAS No. 65 to offset gains on the sales of loans against any related
servicing right assets was eliminated by SFAS 122.
The Company, as a part of its mortgage banking operations, from time-to-time
sells the servicing rights to loans that it was servicing for others. While
there were no such sales by the Company in 1996, the Company sold
approximately $168 million principal amount of loan servicing rights in 1995
and approximately $213 million principal amount of loan servicing rights in
1994. Sales of loan servicing rights are dependent on a variety of factors,
including market conditions and existing operating strategies; thus, the level
of future sales of loan servicing rights, if any, cannot currently be
predicted.
During 1995, the Company sold four Florida branches and one New York branch
with aggregate deposits at the time of sale of approximately $283 million and
recognized a net gain of $18.6 million. The net gains on branch sales in 1994
of $1.7 million resulted from the sale of three branches in Florida and one
branch in New Jersey, which had aggregate deposits at the time of sale of
approximately $63 million.
In connection with its sale in prior years of certain residential property
loans and multifamily first mortgage loans with limited recourse, the Company
maintains an accrued liability for recourse-related expenses. Additions to
this accrued liability amounted to $1.1 million, $0.4 million and $2.7 million
for 1996, 1995 and 1994, respectively, and are included in "Other" in the
above table. For a further discussion of the Company's loans sold with
recourse, see "Management of Credit Risk--Loans Sold with Recourse." Also
included in "Other" for 1996 were losses on the write-down of certain non-
interest-earning assets and, for 1995, net losses of $4.6 million associated
with the disposition and consolidation of certain operating facilities.
Other Non-Interest Income. Other non-interest income amounted to $12.4
million for 1996, as compared with $10.3 million and $11.3 million for 1995
and 1994, respectively. Contributing to the increase in 1996 as compared with
the prior year was $1.0 million of income recognized during 1996 upon
settlement of certain litigation, coupled with growth in loan-related fee
income. The decline in other non-interest income in 1995 from 1994 was largely
reflective of a reduction in loan-related fee income.
32
Non-Interest Expense
General. The following table presents the components of the Company's non-
interest expense for the years ended December 31:
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
General and administrative ("G&A") expense:
Compensation and employee benefits................ $139,358 $131,721 $136,786
Occupancy and equipment, net...................... 52,662 58,285 56,447
Federal deposit insurance premiums................ 8,625 21,373 31,214
Other............................................. 92,150 74,522 70,027
-------- -------- --------
Total G&A expense............................... 292,795 285,901 294,474
SAIF recapitalization assessment.................... 26,280 -- --
ORE expense, net.................................... 10,072 12,892 11,013
Amortization of MSR................................. 11,872 12,107 9,664
Restructuring and Merger-related expense............ 3,504 15,331 58,258
-------- -------- --------
Total non-interest expense.......................... $344,523 $326,231 $373,409
======== ======== ========
G&A Expense. G&A expense of $292.8 million for 1996 increased $6.9 million,
or 2.4%, from 1995 due, in large part, to certain non-recurring personnel
expenses, an expansion of the Company's residential property loan origination
capabilities and investments related to certain of the Company's other
business activities. The realization of cost savings associated with the
Merger and legislation that significantly reduced the Bank's federal deposit
insurance premiums partially offset such factors and were primarily
responsible for a decline in G&A expense to $285.9 million in 1995 from $294.5
million in 1994. The level of G&A expense in 1995 as compared with 1994 also
reflected the full year impact of the Lincoln Acquisition. In the near term,
the Company currently anticipates that it will incur expenses in connection
with its plans to enhance its technological capabilities and expand its
mortgage banking operations and certain other business activities.
Compensation and employee benefits expense amounted to $139.4 million in
1996, as compared with $131.7 million and $136.8 million in 1995 and 1994,
respectively. Contributing significantly to the 5.8% increase in 1996 as
compared with 1995 were charges of $5.6 million recognized during 1996
associated with the retirement, at year end, of James M. Large, Jr., the
Company's former Chief Executive Officer, coupled with severance benefits
associated with a decision in the fourth quarter of 1996 to relocate the
headquarters of the Company's mortgage banking operations from Uniondale, New
York to Tampa, Florida. The level of compensation and employee benefits
expense in 1996, as compared with 1995, was also impacted by the full year
effect of Merger-related staff reductions that had occurred during 1995, as
well as additional Merger-related staff reductions during 1996, the National
and Madison Acquisitions, and higher levels of commissions, incentives, and
temporary employment services. The 3.7% decline in compensation and employee
benefits expense in 1995 from 1994 largely reflected the staff reductions
associated with the Merger, which were partially offset by the effects of the
Lincoln Acquisition, the National and Madison Acquisitions and a higher level
of pension expense. Each of 1996 and 1995, as compared with the respective
prior years, was also impacted by normal merit increases and increased
deferrals of loan origination expenses as a result of expanded loan
origination levels. These expense deferrals rose to $17.2 million in 1996 from
$7.6 million and $4.5 million in 1995 and 1994, respectively. The Company's
full-time equivalent employee complement was 2,872 at December 31, 1996, down
from approximately 3,200 at the date of the Merger.
Occupancy and equipment expense, net, amounted to $52.7 million in 1996, a
reduction of $5.6 million from 1995. This decline was substantially
attributable to Merger-related cost savings, including a decrease in the
Bank's branch network to 86 at December 31, 1996 from 99 at the date of the
Merger, but was partially offset by the effect of the National and Madison
Acquisitions. Occupancy and equipment expense, net, of $58.3 million
33
for 1995 rose $1.8 million as compared with the prior year, principally due to
the Lincoln Acquisition, the effect of which was mitigated by branch sales.
Federal deposit insurance premiums expense declined to $8.6 million for 1996
from $21.4 million and $31.2 million for 1995 and 1994, respectively,
reflective of certain legislative actions during 1995 and 1996. 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 $0.04 to
$0.31 for each $100 of insured deposits from the previous range of between
$0.23 to $0.31. Additionally, in November 1995, the FDIC further lowered BIF-
insured deposit assessment rates for all assessment categories by $0.04 for
each $100 of insured deposits effective for the first semi-annual assessment
period of 1996. In December 1996, pursuant to the Funds Act, the FDIC adopted
a rule, effective as of October 1, 1996, that, among other things, established
a new assessment rate range for SAIF-insured deposits from $0.00 to $0.27 for
each $100 of SAIF-insured deposits, bringing such assessment rates in line
with existing BIF-insured deposit assessment rates. The actual assessment rate
for both BIF- and SAIF-insured deposits continues to depend on an
institution's capital levels and regulatory status and the overall financial
condition of the BIF and the SAIF.
Pursuant to the Funds Act, beginning January 1, 1997, assessments will be
imposed on the Bank with respect to both its BIF- and SAIF-assessable deposits
in order to pay for a portion of the debt service of the FICO Bonds. The Bank
anticipates, based on current deposit levels, that its FICO Bonds assessment
for 1997 will be approximately $3.7 million. For a further discussion of the
Funds Act, see "Regulation and Supervision--Deposit Insurance" in Item 1,
"Business."
Other G&A expense amounted to $92.2 million for 1996, up $17.6 million from
1995. This increase was largely attributable to a rise in marketing expenses
to $14.2 million in 1996 from $9.0 million in the prior year, due principally
to television advertising costs, outsourcing of additional aspects of the
Company's data processing operations and the implementation of various
strategic initiatives, including a third party telemarketing program
associated with life insurance sales. Other G&A expense of $74.5 million for
1995 increased $4.5 million as compared with 1994, primarily as a result of
higher legal expense.
SAIF Recapitalization Assessment. The Bank's portion of the Special
Assessment, which was mandated by an FDIC regulation implementing portions of
the Funds Act, amounted to $26.3 million (see "Regulation and Supervision--
Deposit Insurance" in Item 1, "Business"). This expense was accrued during the
third quarter of 1996 and paid in November 1996.
ORE Expense, Net. ORE expense, net, declined $2.8 million in 1996 as
compared with 1995 following an increase of $1.9 million in 1995 as compared
with 1994. The following table sets forth the significant components of ORE
expense, net, for the years ended December 31:
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
Operating expense, net of rental income.............. $ 6,979 $ 7,533 $10,513
Provision for losses................................. 4,799 6,879 4,665
Net gains on sales................................... (1,706) (1,520) (4,165)
------- ------- -------
Total ORE expense, net............................... $10,072 $12,892 $11,013
======= ======= =======
The Company's provision for losses on ORE includes charges to maintain the
carrying value of ORE at the lower of cost or estimated fair value less
selling expenses, as well as charges for potential future declines in the
estimated fair value of ORE. Further provisions for losses on ORE may be
required in the event of future adverse changes in economic and other
conditions that the Company is currently unable to predict.
For information regarding the Company's ORE, see "Management of Credit
Risk--Non-Performing Assets and Loans Modified in a TDR."
34
Amortization of MSR. Amortization of MSR amounted to $11.9 million for 1996,
as compared with $12.1 million in 1995 and $9.7 million in 1994. The year-to-
year changes largely reflect fluctuations in long-term interest rates and
their resultant impact on the prepayment speeds of the loans underlying the
MSR asset, as well as amortization associated with additions to the Company's
MSR asset, including, upon the Company's adoption of SFAS No. 122 on January
1, 1995, MSR associated with loans originated by the Company for sale in the
secondary market. At December 31, 1996, the carrying value and estimated fair
value of the Company's MSR were $102.4 million and $119.3 million,
respectively. At that date, the loans underlying the MSR asset amounted to
approximately $8.4 billion and had a weighted average coupon rate of
approximately 7.87%.
Restructuring and Merger-Related Expense. Restructuring expense associated
with the Merger and other Merger-related expense amounted to $3.5 million for
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. Such expense recognized during 1995 amounted to $15.3
million and resulted from a revision of the estimated remaining restructuring
costs to be incurred in connection with the Merger and the recognition of a
variety of operating expenses directly attributable to the Merger.
Restructuring expense associated with the Merger recognized during 1994 was
$58.3 million and included various transaction fees, such as legal, accounting
and investment banking services, of $14.3 million, severance and other
personnel costs of $21.3 million, facilities, equipment and systems
restructuring costs of $18.8 million, and other related costs of $3.9 million.
Minority Interest-Preferred Stock Dividends of Subsidiary
Dividends declared and paid by the Bank in 1994 on the Bank Preferred Stock
and reflected as "Minority interest-preferred stock dividends of subsidiary"
in the Company's Consolidated Statements of Income amounted to $11.4 million.
In the fourth quarter of 1994, each outstanding share of the Bank Preferred
Stock was exchanged for $1,000 principal amount of the 10 1/2% Senior Notes.
Income Tax Expense (Benefit)
The Company recorded income tax expense of $50.0 million for 1996, as
compared with income tax expense of $47.7 million for 1995 and an income tax
benefit of $53.1 million for 1994. Income tax expense for 1996 was reduced by
$12.3 million as a result of the final resolution of certain federal, state
and local tax filing positions taken in prior years. In addition, the level of
income tax expense for 1996 was reduced by the effects of certain tax
management strategies implemented during the fourth quarter of 1996. During
1994, based primarily on the increased likelihood, in the Company's judgment
(giving consideration to, among other factors, anticipated benefits of the
Merger and improved asset quality), of the Company generating future taxable
income necessary to realize its deferred tax asset, the Company reversed its
remaining deferred tax asset valuation allowance, which resulted in the
recognition of $129.9 million of income tax benefits. The Company also
reconsidered certain tax planning strategies during 1994 in order to maximize
the realization of the deferred tax attributes and, as a result, incurred
additional current income tax expense of $20.5 million for that year.
Cumulative Effect of a Change in Accounting Principle for Goodwill
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 72, "Accounting for Certain Acquisitions of Banking
or Thrift Institutions" ("SFAS 72"), for that portion of its goodwill not
previously being accounted for under the provisions of this statement. Such
goodwill was associated with a thrift acquisition initiated prior to the
effective date of SFAS 72. In connection therewith, the Company's method of
amortizing such goodwill was changed from the straight-line method to the
interest method over the expected remaining lives of the long-term interest-
earning assets acquired. The cumulative effect on prior years of this change
in accounting principle was $92.9 million, which was reflected as a charge to
1994's operations.
MANAGEMENT OF INTEREST RATE RISK
General
The Company manages its interest rate risk through strategies designed to
maintain acceptable levels of interest rate exposure throughout a range of
interest rate environments. These strategies are intended not only to
35
protect the Company from significant long-term declines in net interest income
as a result of certain changes in the interest rate environment, but also to
mitigate the negative effect of certain 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 its capital and income generating capacity. As a component of its
interest rate risk management process, the Company employs various derivative
financial instruments (see "Derivative Financial Instruments").
The Company's sensitivity to interest rates is driven primarily 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. For example,
mortgages and the mortgages underlying MBS 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 a mortgage loan is
directly related to the level of the existing interest rate on the loan
relative to current market interest rates.
Extension risk on mortgage-related assets is the risk that the duration of
such assets increases as a result of declining prepayments due to rising
interest rates. Certain mortgage-related assets are more sensitive to changes
in interest rates than others, resulting in a higher risk profile. Because 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. In
general, lower interest rate environments tend to accelerate prepayment rates,
which both shorten the duration of mortgage-related assets and accelerate the
amortization of any 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 exposed
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 evaluating and managing its interest rate risk, the Company employs
complex simulation models to help assess its interest rate risk exposure and
the impact, and probability of occurrence, of alternate interest rate
scenarios, which consider the effects 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. Moreover, in order to reduce its sensitivity to interest rate
risk, the Company's investment strategy has emphasized adjustable-rate loans
and securities, as further discussed below, and fixed-rate medium-term
securities.
Of the Company's $8.0 billion of residential property loans receivable at
December 31, 1996, $6.0 billion were adjustable-rate loans. The interest rate
adjustments for these loans are based on a fixed margin over various indices,
including cost-of-funds indices ("COFI") and indices based on certain United
States Treasury interest rates ("Treasury Indices"). Because the repricing of
adjustable-rate residential property loans that are based on COFI
(particularly the National Monthly Median COFI) tends to lag market rate
changes, substantially all of the Company's adjustable-rate residential
property loan production in recent years has consisted of loans tied to the
Treasury Indices. At December 31, 1996, approximately 69% of the Company's
adjustable-rate residential property loans were based on the Treasury Indices,
up from approximately 55% at December 31, 1995. Annual interest rate
adjustment caps on the Company's residential property loans receivable have
generally been two percentage points. Many of these adjustable-rate loans have
lifetime interest rate adjustment caps, which have
36
generally been six percentage points over the initial interest rate. At
December 31, 1996, the Company's adjustable-rate residential property loans
receivable consisted principally of loans with lifetime interest rate caps
ranging from 11.00% to 14.99%.
Of the Company's $1.9 billion commercial and multifamily first mortgage loan
portfolio, approximately 47% were adjustable-rate. Of such adjustable-rate
loans, approximately 37% were based on a fixed margin over the Treasury
Indices and approximately 35% were based on a fixed margin over various FHLBNY
advance rates.
At December 31, 1996, approximately 72% of the aggregate $6.9 billion
portfolio of MBS available for sale and held to maturity consisted of
adjustable-rate securities. The predominant indices underlying these
securities are the one-year Treasury Index and the Eleventh District COFI
published by the FHLB of San Francisco. The Treasury Indices MBS portfolio,
which comprises approximately 37% of the Company's adjustable-rate MBS
portfolio, is backed predominantly by one-year adjustable-rate loans with a
2.00% annual interest rate cap and a weighted average lifetime interest rate
cap of 11.89%. The COFI MBS portfolio, which represents approximately 60% of
the Company's adjustable-rate MBS portfolio, is backed by loans with interest
rates that adjust either monthly with no periodic interest rate cap, semi-
annually with a 1.00% semi-annual interest rate cap, or annually with a
weighted average 1.75% annual interest rate cap. The COFI MBS portfolio had a
weighted average lifetime interest rate cap of 12.19% at December 31, 1996.
Derivative Financial Instruments
The Company uses a variety of derivative financial instruments to assist in
managing its interest rate risk exposure, but does not currently use such
instruments for trading activity purposes. Derivative financial instruments
employed by the Company at December 31, 1996 were interest rate swaps,
interest rate caps, interest rate floors, forward contracts, and options on
certain of these and other instruments. With the exception of interest rate
floors hedging certain MSR, the derivative financial instruments used by the
Company provide protection from rising interest rates. While the Company's use
of derivative financial instruments has served to mitigate the effects of
unfavorable interest rate changes on its results of operations, the Company
continues to be susceptible to a significant level of interest rate risk.
At December 31, 1996, the Company used interest rate swaps and caps with a
notional amount aggregating $2.3 billion for asset/liability management
purposes. The outstanding interest rate swaps at December 31, 1996, all of
which provide for the Company to be a fixed-rate payer and a variable-rate
receiver based on short-term London Interbank Offered Rates ("LIBOR"), are
utilized to convert specified fixed-rate interest-earning assets to a
variable-rate and specified variable-rate interest-bearing liabilities to a
fixed-rate. Interest rate caps employed for asset/liability management
purposes are used to hedge the periodic and lifetime interest rate caps
embedded in specified adjustable-rate loans and MBS or to lock-in maximum
interest costs of certain short-term borrowed funds.
37
The following table summarizes, by category of asset or liability being
hedged, the notional amount and estimated fair value of outstanding derivative
financial instruments used by the Company for asset/liability management
purposes at December 31:
1996 1995
-------------------- --------------------
ESTIMATED ESTIMATED
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
---------- --------- ---------- ---------
(IN THOUSANDS)
Interest rate swaps hedging:
Loans receivable................... $ 660,216 $(2,994) $ 212,747 $(2,195)
Deposits........................... -- -- 150,000 533
Securities sold under agreements to
repurchase........................ 420,000 1,241 -- --
FHLBNY advances.................... 30,000 (690) 928,000 (4,837)
---------- ------- ---------- -------
Total interest rate swaps........ 1,110,216 (2,443) 1,290,747 (6,499)
---------- ------- ---------- -------
Interest rate caps hedging:
Loans receivable................... 424,484 527 -- --
MBS available for sale............. 192,153 239 877,118 961
MBS held to maturity............... 256,787 319 366,061 401
Securities sold under agreements to
repurchase........................ 361,000 4,647 -- --
---------- ------- ---------- -------
Total interest rate caps......... 1,234,424 5,732 1,243,179 1,362
---------- ------- ---------- -------
Options hedging FHLBNY advances...... -- -- 37,000 70
---------- ------- ---------- -------
Total................................ $2,344,640 $ 3,289 $2,570,926 $(5,067)
========== ======= ========== =======
Net unamortized deferred losses of $19.0 million at December 31, 1996 on
closed derivative financial instrument contracts used for asset/liability
management purposes are expected to be amortized over the years set forth in
the table below:
AMOUNT
--------------
(IN THOUSANDS)
Year ended December 31:
1997..................................................... $ 9,097
1998..................................................... 5,799
1999..................................................... 2,940
2000..................................................... 1,150
Thereafter............................................... (31)
-------
Total.................................................... $18,955
=======
With regard to its mortgage banking activities, the Company uses forward
contracts and options to hedge risks associated with its loan sales
activities. In addition, the Company utilizes interest rate floor agreements
to minimize the impact of the potential loss of net future servicing revenues
associated with certain of its MSR as a result of an increase in loan
prepayments, which is generally triggered by declining interest rates.
The following table summarizes the notional amount and estimated fair value
of derivative financial instruments used by the Company for mortgage banking
activities at December 31:
1996 1995
--------------------- ---------------------
NOTIONAL ESTIMATED NOTIONAL ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Forward contracts................... $ 136,770 $575 $ 69,676 $(709)
Options............................. 40,000 64 10,000 22
Interest rate floors................ 996,498 77 1,219,776 1,026
---------- ---- ---------- -----
Total............................... $1,173,268 $716 $1,299,452 $ 339
========== ==== ========== =====
38
The derivative financial instruments used by the Company, though chosen to
remedy specific risk conditions, may, under certain circumstances, behave in a
manner that is inconsistent with their intended purpose. Thus, such
derivatives possess market risk in their own right. The Company has
established internal policies that define the extent of historical correlation
between a hedge and hedged item prior to the use of the derivative financial
instrument as a hedge. The potential exists, however, that this relationship
or "basis" may change due to extraordinary circumstances. The Company, also by
policy, monitors these relationships at regular intervals to ensure that such
correlation is maintained. The Company cannot guarantee that such historically
observed relationships will continue.
For additional information concerning the Company's derivative financial
instruments, see Notes 1 and 18 of Notes to Consolidated Financial Statements
in Item 8, "Financial Statements and Supplementary Data."
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. Although the Company has a large portfolio of adjustable-rate
assets, the protection afforded by such assets in the event of substantial
rises in interest rates for extended time periods is limited due to interest
rate reset delays, periodic and lifetime interest rate caps, payment caps and
the fact that indices used to reprice a portion of the Company's adjustable-
rate assets lag changes in market rates. Moreover, in declining interest rate
environments or certain shifts in the shape of the yield curve, these assets
may prepay at significantly faster rates than otherwise anticipated. It should
also be noted that the Company's gap measurement reflects broad judgmental
assumptions with regard to repricing intervals for certain assets and
liabilities.
At December 31, 1996, the Company had a one-year negative gap, including the
effect of hedging activities, of $2.8 billion, or 15.2% of total interest-
earning assets, as compared with a one-year 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 December 31, 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 "Over
One Through Three Years" category. Savings accounts, despite a recent increase
in their sensitivity to changes in market interest rates, have been spread
ratably over a 20-year period based on the assumption that they are
essentially core deposits and in the aggregate have not been generally
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 December 31, 1996 of $18.1
billion, or 28.2% of total interest-earning assets.
39
DECEMBER 31, 1996
------------------------------------
OVER ONE
THROUGH OVER
ONE YEAR THREE THREE
OR LESS YEARS YEARS TOTAL
-------- -------- ------ -------
(DOLLARS IN MILLIONS)
Interest-earning assets:
Loans.................................. $ 5,238 $2,948 $2,667 $10,853
MBS.................................... 5,167 883 813 6,863
Other.................................. 39 16 328 383
------- ------ ------ -------
Total interest-earning assets........ 10,444 3,847 3,808 18,099
------- ------ ------ -------
Interest-bearing liabilities:
Deposits............................... 9,335 1,249 2,273 12,857
Borrowed funds......................... 4,489 186 140 4,815
------- ------ ------ -------
Total interest-bearing liabilities... 13,824 1,435 2,413 17,672
------- ------ ------ -------
Impact of hedging activities............. (620) 346 274 --
------- ------ ------ -------
Gap (repricing difference)............... $(2,760) $2,066 $1,121 $ 427
======= ====== ====== =======
Cumulative gap........................... $(2,760) $ (694) $ 427
======= ====== ======
Cumulative ratio of gap to total
interest-earning assets................. (15.2)% (3.8)% 2.4%
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 also is subject to credit risk in connection with its use of
derivative financial instruments. The Company has a process of credit risk
controls and management procedures by which it monitors and manages its level
of credit risk.
Non-Performing Assets and Loans Modified in a TDR
At December 31, 1996, non-performing assets amounted to $244.8 million, or
1.30% of total assets, down 22.5% from $315.8 million, or 1.55% of total
assets, at December 31, 1995. Non-accrual loans decreased to 1.78% of total
loans receivable at December 31, 1996 from 2.60% of total loans receivable at
December 31, 1995.
The Company had experienced substantial increases in non-performing assets
during the period from 1988 through September 1991. The increases largely
resulted from the high volume of residential property loans originated from
1986 through 1988, substantially all of which were originated under its
limited documentation program in effect during that period, coupled with a
deterioration in residential property real estate markets and the effects of
the recession, both of which were particularly severe in the Company's lending
areas. The Company's commercial and multifamily first mortgage loan portfolio
was also adversely affected during those years by the decline in commercial
and multifamily real estate markets and the recession.
Prior to 1991, Dime Savings offered adjustable-rate residential property
loans with caps on the amount by which a borrower's monthly payment of
principal and interest can increase. Although they have lifetime interest rate
caps, these loans do not have annual interest rate adjustment caps. During
periods of increasing interest rates, caps on monthly payments can result in
monthly payments that are less than the amount necessary to amortize the loan
by its maturity date at the interest rate in effect in any particular month.
If a monthly payment is not sufficient to pay the interest accruing on the
loan, the shortage is added to the principal balance of the loan ("negative
amortization") and is scheduled to be repaid through future monthly payments
commencing at
40
various times. The Company's potential loss exposure in connection with the
foreclosure of any such loan will be increased to the extent that negative
amortization has increased the related principal balance of the loan. In
recent years, the amount of negative amortization that has actually occurred
on these loans has been limited. However, in the event of a sharp and
sustained rise in interest rates, the Company expects that the amount of
negative amortization could increase significantly.
The following table presents the components of the Company's non-performing
assets at December 31 for the years indicated. Loans modified in a TDR that
have demonstrated a sufficient payment history to warrant return to performing
status are not included within non-accrual loans.
1996 1995 1994 1993 1992
-------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Residential property.... $163,156 $206,230 $214,222 $173,146 $ 608,602
Commercial and
multifamily first
mortgage............... 17,375 34,618 106,778 92,120 144,759
Construction............ 4,307 5,267 5,095 7,931 16,343
Consumer and business... 6,752 9,004 15,769 17,719 7,467
-------- -------- -------- -------- ----------
Total non-accrual
loans................ 191,590 255,119 341,864 290,916 777,171
-------- -------- -------- -------- ----------
ORE, net:
Residential property.... 36,182 38,799 43,881 67,638 202,475
Commercial and
multifamily property... 20,367 24,952 37,368 26,127 39,980
Allowance for losses.... (3,294) (3,070) (7,247) (7,538) (9,294)
-------- -------- -------- -------- ----------
Total ORE, net........ 53,255 60,681 74,002 86,227 233,161
-------- -------- -------- -------- ----------
Non-performing assets held
for bulk sale(1):
Residential property
loans.................. -- -- -- 186,000 --
Residential ORE......... -- -- -- 78,600 --
-------- -------- -------- -------- ----------
Total non-performing
assets held for bulk
sale................. -- -- -- 264,600 --
-------- -------- -------- -------- ----------
Investment securities in
default.................. -- -- -- -- 545
-------- -------- -------- -------- ----------
Total non-performing
assets................... $244,845 $315,800 $415,866 $641,743 $1,010,877
======== ======== ======== ======== ==========
Non-performing assets as a
percentage of total
assets................... 1.30% 1.55% 2.12% 3.55% 6.06%
(1) The non-performing assets held for bulk sale were written-down in 1993 to
the amount of the proceeds anticipated to be received from the sales.
Non-accrual loans are all loans 90 days or more delinquent, as well as loans
less than 90 days past due for which the full collectability of contractual
principal or interest payments is doubtful. When a loan is placed on non-
accrual status, any accrued but unpaid interest income on the loan is reversed
and future interest income on the loan is recognized only if actually received
by the Company and full collection of principal is not in doubt. Loans are
generally returned to accrual status when principal and interest payments are
current, full collectability of principal and interest is reasonably assured
and a consistent record of performance has been demonstrated.
The Company generally has pursued a loan-by-loan/property-by-property
disposition strategy with respect to its non-performing assets, while also
considering the appropriateness of alternate disposition strategies, including
bulk sales of non-performing assets. During 1994, the Company consummated bulk
sales of $264.6 million of non-performing residential property assets. The
Company currently intends to continue to pursue a loan-by-loan/property-by-
property disposition strategy with respect to its non-performing assets, while
continuing to assess the appropriateness of alternate disposition strategies.
41
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 as a result.
The level of loans delinquent less than 90 days may, to some degree, be a
leading indicator of future levels of non-performing assets. The following
table sets forth such delinquent loans of the Company, net of those already in
non-performing status, at December 31, 1996.
DELINQUENCY PERIOD
-------------------
30--59 60--89
DAYS DAYS TOTAL
--------- --------- -------
(IN THOUSANDS)
Residential property loans......................... $ 37,661 $ 19,029 $56,690
Commercial and multifamily first mortgage loans.... 6,703 8,135 14,838
Consumer and business loans........................ 7,421 1,901 9,322
--------- --------- -------
Total.............................................. $ 51,785 $ 29,065 $80,850
========= ========= =======
When borrowers encounter financial hardship but are able to demonstrate to
the Company's satisfaction an ability and willingness to resume regular
monthly payments, the Company often seeks to provide them with an opportunity
to restructure the terms of their loans. These arrangements, which are
individually negotiated, generally provide for interest rates that are lower
than those initially contracted for, but which may be higher or lower than
current market interest rates 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 December 31:
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS)
Residential property loans....... $ 42,684 $ 43,090 $ 21,409 $ 36,960 $ 20,067
Commercial and multifamily first
mortgage loans.................. 170,323 159,097 167,205 177,868 160,724
-------- -------- -------- -------- --------
Total loans modified in a TDR.... $213,007 $202,187 $188,614 $214,828 $180,791
======== ======== ======== ======== ========
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.
42
The following table sets forth the activity in the Company's allowance for
loan losses for the years ended December 31:
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of
year........................ $128,295 $170,383 $157,515 $248,429 $329,899
Merger adjustment............ -- -- (928) -- --
Allowance acquired in the
Lincoln Acquisition......... -- -- 32,579 -- --
Provision charged to
operations.................. 41,000 39,650 55,799 95,489 106,903
Charge-offs:
Residential property
loans..................... (52,191) (46,131) (43,910) (184,478) (176,400)
Commercial and multifamily
first mortgage loans...... (13,244) (37,759) (35,327) (9,085) (23,494)
Consumer and business
loans..................... (5,861) (8,198) (5,547) (9,730) (9,804)
-------- -------- -------- -------- --------
Total charge-offs........ (71,296) (92,088) (84,784) (203,293) (209,698)
-------- -------- -------- -------- --------
Recoveries:
Residential property
loans..................... 5,093 5,220 5,895 11,710 15,663
Commercial and multifamily
first mortgage loans...... 977 1,552 676 1,433 1,483
Consumer and business
loans..................... 2,426 3,578 3,631 3,747 4,179
-------- -------- -------- -------- --------
Total recoveries......... 8,496 10,350 10,202 16,890 21,325
-------- -------- -------- -------- --------
Net charge-offs.......... (62,800) (81,738) (74,582) (186,403) (188,373)
-------- -------- -------- -------- --------
Balance at end of year....... $106,495 $128,295 $170,383 $157,515 $248,429
======== ======== ======== ======== ========
Allowance for loan losses as
a percentage of:
Non-accrual loans.......... 55.58% 50.29% 49.84% 54.14% 31.97%
Total loans receivable..... 0.99 1.31 1.82 1.99 3.26
Net charge-offs during the
year as a percentage of
average loans outstanding
during the year............. 0.61 0.86 0.87 2.49 2.17
The allowance for loan losses, as allocated to the various loans receivable
portfolios at December 31 for the years indicated, is set forth in the first
part of the table below. The second part of the table below sets forth the
percentage of the Company's loans receivable portfolio represented by each
type of loan at December 31 for the years indicated.
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance of allowance for
loan losses at end of year
allocated to:
Residential property
loans(1)................. $ 59,228 $ 68,177 $ 73,562 $ 72,976 $157,258
Commercial and multifamily
first mortgage loans(1).. 39,872 51,138 84,350 55,642 64,024
Consumer and business
loans.................... 7,395 8,980 5,720 5,158 9,855
Unallocated............... -- -- 6,751 23,739 17,292
-------- -------- -------- -------- --------
Total allowance for loan
losses..................... $106,495 $128,295 $170,383 $157,515 $248,429
======== ======== ======== ======== ========
Percentage of loans to total
loans:
Residential property
loans(1)................. 75.2% 73.0% 71.4% 75.5% 73.1%
Commercial and multifamily
first mortgage loans(1).. 17.6 19.0 20.0 15.5 16.1
Consumer and business
loans.................... 7.2 8.0 8.6 9.0 10.8
-------- -------- -------- -------- --------
Total....................... 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
(1) Includes construction loans.
43
The Company has developed models and other analytic tools to assist in the
assessment of estimable and probable losses inherent in both the non-
performing and performing residential property loan portfolios. The Company
periodically reviews and refines these models, analyzing the continuing
validity of the assumptions used, comparing actual experience to that
projected in the models and modifying those assumptions as may, in the
Company's judgment, be appropriate. The Company also regularly analyzes
economic trends and underlying portfolio trends, such as changes in geographic
and property type mix and loan seasoning. The results of these reviews and
analyses, which may yield a range of values, are evaluated in determining the
need during any period for additions to the allowance for loan losses for
residential property loans. However, it should be noted that these various
models and analyses depend upon a large number of estimates and assumptions,
especially with respect to future economic and market conditions and borrower
behavior, that are subject to change, and it is entirely likely that future
events will vary in some respects from those predicted by any particular model
or analysis.
The adequacy of the allowance for loan losses for the Company's commercial
and multifamily first mortgage loan portfolio is based in part on a loan-by-
loan analysis that includes a risk-rating system. The Company's Asset Quality
Review Department ("AQRD") provides an independent review of the analyses
performed by management with respect to commercial and multifamily first
mortgage loans, including the respective risk ratings assigned to such loans.
Pursuant to the Company's policy, the AQRD conducts an annual review of all
commercial and multifamily first mortgage loans that have been assigned
certain risk ratings, with the balance of the portfolio reviewed on a test
basis.
As discussed in Item 1, "Business," during 1997, the Company intends to
expand certain of its business activities, including its commercial and
multifamily real estate lending and business lending. The Company intends to
continue to monitor the credit quality of its loan portfolio closely.
Nevertheless, consistent with these anticipated changes in its lending
activities, the Company expects that the risk profile of the loan portfolio
also may change over time.
Loans Sold with Recourse
In the past, the Company sold certain residential property and multifamily
first mortgage loans with limited recourse, with the majority of these loans
having been securitized with FNMA. The balance of loans sold with recourse was
$751.5 million at December 31, 1996, down from $900.4 million one year
earlier. The Company's related maximum potential recourse exposure was
approximately $196 million and $223 million at December 31, 1996 and 1995,
respectively. Of the loans sold with recourse, $9.4 million were delinquent 90
days or more at December 31, 1996. During 1996 and 1995, the Company
repurchased loans sold with recourse totaling $35.0 million and $30.9 million,
respectively.
During the first quarter of 1994, an agreement was reached with FNMA whereby
the Company would no longer have any recourse obligations with respect to
approximately $664 million of residential property loans previously sold by
the Company with recourse. While the Company's maximum potential recourse
liability did not change as a result of this transaction, the Bank is no
longer required to hold capital, for risk-based capital purposes, against
those loans released from the recourse obligations. The Company paid FNMA $1.7
million to eliminate the recourse liability applicable to these loans, which
was charged to the allowance for loan losses during the first quarter of 1994.
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
available for sale and held to maturity at December 31, 1996 of $6.9 billion,
approximately 21%, in total, were issued by FHLMC, GNMA and FNMA. The
Company's privately-issued MBS, which have been issued by entities other than
FHLMC, GNMA and FNMA, 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. Privately-issued MBS are subject to certain credit-
related risks normally not associated with MBS issued by FHLMC, GNMA and FNMA,
including the limited
44
loss protection generally provided by the various forms of credit
enhancements, as losses in excess of certain levels are not protected.
Furthermore, the credit enhancement itself is subject to the creditworthiness
of the provider. Thus, in the event that a provider of a credit enhancement
does not fulfill its obligations, the MBS holder could be subject to risk of
loss similar to a purchaser of a whole loan pool.
The most common form of credit enhancement for the privately-issued MBS in
the Company's portfolio is a senior/subordinated structure, in which losses
are allocated to a "subordinate class" of the MBS until the principal balance
of that class is reduced to zero, thereby protecting the "senior class" to
such extent. The level of subordination is a primary factor in the
determination of the rating for the senior class of the MBS. Under mortgage
pool insurance, which is another common form of credit enhancement for the
Company's privately-issued MBS, losses of principal and interest to the date
of liquidation on a loan are paid by the insurer up to the specific dollar
amount of the pool policy. The terms of the pool insurance policy specify the
eligibility requirements of losses that are covered. The credit rating of the
provider of the mortgage pool insurance policy is an important factor in the
rating of the MBS. A letter of credit, which is a promise by a bank to
reimburse losses up to a specified amount, is also frequently used either as
credit support for an entire transaction or to cover specified types of risk.
In addition, special hazard policies are usually obtained to protect against
damages to the underlying properties that are not covered by normal home
insurance policies, such as the effects of earthquakes, mudslides and certain
other natural disasters in areas susceptible to these types of risks.
During 1996 and 1995, the Company recognized losses of $4.7 million and $3.3
million, respectively, associated with other than temporary impairment in
value of certain privately-issued MBS. These losses were necessitated by the
erosion in the underlying credit enhancements, coupled with the Company's
projections of estimated future losses on the securities. No assurance can be
given that future losses on these securities, the carrying value of which
amounted to approximately $89 million at December 31, 1996, will not be
incurred. While substantially all of the $5.4 billion portfolio of privately-
issued MBS held by the Company at December 31, 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.
The following table sets forth, by issuer, the aggregate amortized cost and
estimated fair value of the Company's privately-issued MBS pass-through
securities and CMOs, both available for sale and held to maturity, that, at
December 31, 1996, exceeded 10% of stockholders' equity.
AMORTIZED ESTIMATED
ISSUER COST FAIR VALUE
------ ---------- ----------
(IN THOUSANDS)
Residential Funding Mortgage Securities, Inc.......... $1,012,044 $991,255
Prudential Home Mortgage Securities Co., Inc.......... 559,133 550,958
Resolution Trust Corporation.......................... 547,921 534,000
American Residential Mortgage Corp.................... 268,368 263,943
Countrywide Funding Corp. and Countrywide Mortgage
Backed
Securities, Inc...................................... 261,407 258,790
Regal Trust........................................... 239,936 243,967
Housing Securities Inc................................ 237,050 232,689
DLJ Mortgage Acceptance Corporation................... 234,290 230,708
Citibank, N.A. and Citicorp Mortgage Securities,
Inc.................................................. 216,350 208,715
Salomon Brothers Mortgage Securities VII, Inc......... 205,896 205,423
PHH Mortgage Services Corporation..................... 143,582 144,061
Securitized Asset Sales, Inc.......................... 144,871 141,908
Sears Mortgage Securities Corporation................. 124,162 123,216
Ryland Mortgage Securities Corp....................... 121,217 120,767
Bear Stearns Mortgage Securities Inc.................. 105,545 107,744
45
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 use 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 December 31, 1996 or 1995.
In connection with its use of derivative financial instruments, to the
extent a counterparty defaults, the Company would be subject to an economic
loss that corresponds to the cost to replace the agreement. With respect to
interest rate swaps, an added element of credit risk is introduced when there
exists a mismatch in the frequency of payment exchanges (i.e., the Company
makes a payment on a quarterly basis but receives a payment on a different
payment frequency). For interest rate floors, interest rate caps and over-the-
counter option agreements, the Company is also subject to credit risk to the
extent contractual payments required under the agreements have not been
received.
LOAN PRODUCTION
The Company's total loan production amounted to $3.7 billion during 1996,
representing growth of 57.0% from the level in 1995. The significant year-to-
year growth principally reflects an increase in residential property loan
production of $1.2 billion, or 65.0%, as a result of the Company's expansion
of its residential property loan production capabilities, principally through
the National and Madison Acquisitions, the operations of which produced $1.0
billion in residential property loans during 1996. During 1996, as compared
with 1995, the Company also experienced increases of $89.7 million, or 38.6%,
in commercial and multifamily first mortgage loan originations, $78.3 million,
or 26.5%, in consumer loan originations (substantially due to an increase in
home equity loan originations) and $2.1 million, or 7.6%, in business loan
originations.
The following table reflects the Company's loan production, both for
portfolio and for sale in the secondary market, for the years ended December
31:
1996 1995
---------- ----------
(IN THOUSANDS)
Residential property loan production:
First mortgage loans originated........................ $2,418,059 $1,439,073
First mortgage loans purchased......................... 311,375 178,004
Cooperative apartment loans originated................. 267,887 199,360
---------- ----------
Total residential property loan production........... 2,997,321 1,816,437
---------- ----------
Commercial and multifamily first mortgage loans
originated:
Commercial first mortgage loans........................ 154,242 124,069
Multifamily first mortgage loans....................... 168,045 108,481
---------- ----------
Total commercial and multifamily first mortgage loans
originated.......................................... 322,287 232,550
---------- ----------
Consumer loans originated:
Home equity loans...................................... 216,353 138,321
Other consumer loans................................... 157,050 156,831
---------- ----------
Total consumer loans originated...................... 373,403 295,152
---------- ----------
Business loans originated................................ 30,061 27,928
---------- ----------
Total loan production.................................... $3,723,072 $2,372,067
========== ==========
46
Of the Company's residential property loans produced in 1996, $1.9 billion
were adjustable-rate loans and $1.1 billion were fixed-rate loans. During
1995, adjustable-rate and fixed-rate residential property loan production
amounted to $1.0 billion and $0.8 billion, respectively. Substantially all the
fixed-rate loan production in 1996, and $0.6 billion of such production in
1995, was for sale in the secondary market.
Of the $2.7 billion and $1.6 billion of residential property loans
originated by the Company in 1996 and 1995, respectively, approximately 34%
and 30%, respectively, were refinance loans, the proceeds of which were used
in full or in part to prepay loans previously originated by the Company or
other financial institutions. Of such refinanced loans, approximately 31% in
1996 and 89% in 1995 were refinancings of loans originated by other
institutions. The level of origination of refinance loans is influenced by
relative interest rates as well as other factors, including refinancing costs,
the availability of credit on terms acceptable to the borrower and the
Company, and real estate values.
The Company continues to experience significant competition in its loan
origination processes, particularly with respect to residential property loans
and home equity loans. As a result, the Company cannot predict whether it will
be able to achieve continuing growth in any of its lending areas.
LOAN SERVICING
At December 31, 1996, the Company owned the servicing rights to
approximately 137,000 loans owned by others, with principal balances of $11.0
billion. This compares with approximately 125,000 loans with principal
balances of $9.5 billion at December 31, 1995. The properties securing the
loans serviced for others by the Company at December 31, 1996, substantially
all of which were residential properties, were, based upon outstanding
principal balances, located primarily in New York, New Jersey, Pennsylvania
and Illinois. At December 31, 1996, the Company serviced $6.8 billion of loans
for FNMA, $2.9 billion for FHLMC and $1.3 billion for private investors.
Of the Company's total sales of loans in the secondary market during 1996 of
$1.1 billion, $0.6 billion were sold with loan servicing rights retained,
which contributed to the growth in the portfolio of owned loan servicing
rights. In addition, the growth was supported by the consummation of bulk
purchases of $2.5 billion of loan servicing rights during 1996. The Company
anticipates that future additions to its portfolio of loans serviced for
others will result from its loan production activities and, depending on
market conditions and certain other factors, bulk purchases.
FINANCIAL CONDITION
General
The Company's total assets amounted to $18.9 billion at December 31, 1996,
as compared with $20.3 billion at the end of 1995. The decrease of $1.5
billion, or 7.2%, principally reflects reductions in the Company's securities
available for sale and held to maturity portfolios, the impact of which was
partially offset by growth in loans receivable.
Securities
The Company's securities available for sale and securities held to maturity
declined, in the aggregate, from $9.2 billion, or 47.0% of total interest-
earning assets, at December 31, 1995 to $7.0 billion, or 38.4% of total
interest-earning assets, at the end of 1996. Substantially all of the
Company's securities available for sale and securities held to maturity at
December 31, 1996 consisted of MBS.
Securities designated as available for sale are carried at estimated fair
value with unrealized gains and losses recorded in a valuation allowance that
is included, net of related income taxes, as a separate component of
47
stockholders' equity. The securities available for sale portfolio declined
from $4.1 billion at December 31, 1995 to $2.6 billion at December 31, 1996.
This decline reflects sales of $2.3 billion of securities during the year
(primarily MBS), which were largely consummated in connection with the Balance
Sheet Restructuring Plan, and principal repayments. Partially offsetting these
factors were purchases of $1.7 billion of securities available for sale during
1996, of which $1.6 billion were MBS. At December 31, 1996, the Company had
outstanding commitments to sell, in January 1997, approximately $166 million
of MBS available for sale.
The Company's securities held to maturity, which amounted to $4.4 billion at
year-end 1996, declined $721.8 million, or 14.2%, during 1996 as a result of
runoff of the portfolio. Purchases of securities held to maturity during 1996
amounted to $238.7 million.
At December 31, 1996, the Company's securities available for sale portfolio
had gross unrealized gains and losses each of $20.3 million, and its
securities held to maturity portfolio had gross unrealized gains and losses of
$2.3 million and $86.3 million, respectively. These gross unrealized gains and
losses reflect normal market conditions and vary, either positively or
negatively, based primarily on changes in general levels of market interest
rates relative to the yields on the portfolios.
Loans Receivable
The Company's recent operating strategy has focused on growing its loans
receivable portfolio while reducing its reliance on MBS and other securities.
During 1996, the Company's total loans receivable, exclusive of the allowance
for loan losses, increased $907.7 million, or 9.2%, and amounted to $10.7
billion at December 31, 1996. Total loans receivable, as a percentage of total
interest-earning assets, increased to 59.3% at December 31, 1996 from 50.5%
one year earlier.
The principal segment of the Company's loans receivable portfolio is first
mortgage loans, which increased $878.3 million, or 11.2%, during 1996 and
amounted to $8.7 billion at year-end 1996. The principal balances of
residential first mortgage loans increased to $6.8 billion at December 31,
1996 from $5.9 billion at December 31, 1995 and reflect the expansion of the
Company's residential loan origination capabilities, principally through the
National and Madison Acquisitions. During 1996, the Company produced $1.8
billion of residential first mortgage loans for its portfolio, up from $1.1
billion in the prior year. At the end of 1996, the principal balances of the
Company's commercial and multifamily first mortgage loans receivable amounted
to $1.9 billion, up $43.2 million from December 31, 1995. While the
origination of such loans during 1996 amounted to $322.3 million, growth in
this loan portfolio was limited by principal repayments. The commercial and
multifamily first mortgage loans receivable at December 31, 1996 primarily
consisted of rental apartments (42%), office buildings (16%), shopping centers
(17%), cooperative apartments (10%), and industrial properties (9%).
The Company's cooperative apartment loans receivable amounted to $1.3
billion at December 31, 1996, an increase of $44.6 million from the end of
1995. The growth during 1996 reflects production of such loans for portfolio
during the year of $179.9 million, which was offset in part by principal
repayments.
During 1996, the Company's consumer and business loans receivable declined
$15.2 million to $777.4 million. Contributing to this decline was a $17.4
million reduction in manufactured home loan principal balances, as this
product line was discontinued in the past. In addition, certain other segments
of the consumer loan portfolio experienced reductions in outstanding balances,
as the Company focused its efforts on growing its portfolio of home equity
loans. Despite this emphasis, during 1996, the principal balances of the
Company's home equity loan portfolio only rose $12.0 million to $506.5 million
at the end of 1996 because, although originations of home equity loans
increased significantly as compared with 1995, the Company also experienced a
high level of principal repayments. At December 31, 1996, unused home equity
lines of credit amounted to approximately $360 million.
Deposits
At December 31, 1996, the Company operated 86 branches, comprised of 85
branches in the greater New York metropolitan area and one branch in Florida.
Total deposits amounted to $12.9 billion at December 31,
48
1996, an increase of $284.5 million, or 2.3%, from December 31, 1995. Deposit
growth was minimal during 1996 due, in part, to consumer preferences for
alternative investments and the Company's general strategy of not raising
interest rates to attract new deposits.
Borrowed Funds
Consistent with the Balance Sheet Restructuring Plan, the Company reduced
its borrowed funds significantly during 1996. Total borrowed funds were
reduced to $4.8 billion at December 31, 1996 from $6.6 billion at December 31,
1995, a 27.2% decline.
In an effort to reduce its overall cost of borrowed funds, the Company
continued expanding its use of securities sold under agreements to repurchase
during 1996, due primarily to their generally lower cost as compared with
FHLBNY advances. At December 31, 1996, securities sold under agreements to
repurchase amounted to $3.6 billion and represented 73.7% of total borrowed
funds at that date, up from $1.6 billion, or 24.7% of total borrowed funds,
one year earlier. FHLBNY advances declined to $0.9 billion at December 31,
1996 from $4.6 billion at the end of 1995. Securities sold under agreements to
repurchase are subject to various risks, including those relating to the
financial strength of the counterparty to the transaction and the difference
between the carrying value of the securities sold and the amount of funds
obtained. The Company monitors the risks associated with its securities sold
under agreements to repurchase on an on-going basis. At December 31, 1996, all
such agreements were either with the FHLBNY or nationally recognized
securities dealers.
Stockholders' Equity
The Company's stockholders' equity amounted to $1.0 billion at December 31,
1996, an increase of $45.8 million, or 4.7%, from December 31, 1995. Although
the Company recorded net income of $104.3 million for 1996, the growth in
stockholders' equity was limited primarily by the impact of Common Stock
repurchases during the year. At year-end 1996, stockholders' equity
represented 5.42% of total assets, up from 4.80% of total assets at year-end
1995.
During 1996, the Holding Company repurchased a total of 5,025,900 shares of
Common Stock in connection with two repurchase programs. Under a repurchase
program announced in January 1996, which was completed during the second
quarter of 1996, 2,000,000 shares of Common Stock were repurchased at an
average cost of $12.73 per share. Under a second repurchase program announced
in November 1996, which authorizes the repurchase of up to approximately
5,000,000 shares of Common Stock, the Holding Company acquired 3,025,900
shares of Common Stock through year-end at an average cost of $14.87 per
share. No time limit has been established to complete this repurchase program,
and there can be no assurances as to when, or if, this program will be
completed. Of the shares of Common Stock repurchased during 1996, the Company
reissued 1,507,603 shares during the year in connection with its stock-based
employee benefit 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 this 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 Bancorp and the FDIC. Pursuant to this agreement, Anchor
Bancorp exchanged $157.0 million of its Class A cumulative preferred stock for
$71.0 million of its 8.9375% senior notes and a warrant to acquire, at an
exercise price of $0.01 per share, 4,750,000 shares of Anchor Bancorp'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.
LIQUIDITY
The liquidity position of the Company is managed pursuant to established
policies and guidelines and is monitored on a continuous basis. The Company's
liquidity management process focuses on ensuring that
49
sufficient funds exist to meet deposit withdrawals, loan and investment
funding commitments, the repayment of borrowed funds, and other obligations
and expenditures, as well as ensuring the Bank's compliance with regulatory
liquidity requirements.
Loan and MBS principal payments and prepayments continued to be a principal
source of liquidity for the Company in 1996. These payments aggregated $3.4
billion in 1996, as compared with $3.0 billion in 1995. While principal
amortization on these assets is a relatively predictable source of liquidity,
principal prepayments on the Company's MBS and loan portfolios have been, and
are expected to continue to be, significantly affected by the interest rate
environment.
During 1996, cash proceeds of $2.3 billion from sales of securities
available for sale also represented a significant source of liquidity for the
Company. These sales were largely consummated in connection with the Balance
Sheet Restructuring Plan. The proceeds from these security sales were
principally used to repay certain of the Company's borrowed funds.
Other potential sources of funds for the Company include, but are not
limited to, securities sold under agreements to repurchase, advances from the
FHLBNY, net new deposits and net cash provided by operations. Additionally,
the Company has access to the capital markets for issuing debt or equity
securities, as well as access to the discount window of the Federal Reserve
Bank of New York, if necessary, for the purpose of borrowing to meet temporary
liquidity needs, although it has not utilized this funding source in the past.
Excluding funds raised through the capital markets, the primary source of
funds of the Holding Company, on an unconsolidated basis, is dividends from
the Bank, whose ability to pay dividends is subject to regulations of the OTS
(see "Regulation and Supervision--Restrictions on Dividends and Capital
Distributions" in Item 1, "Business"). The Holding Company's principal uses of
funds during 1996 were to buy-back shares of Common Stock in connection with
repurchase programs announced during the year and to fund interest payments on
its outstanding senior notes.
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 December 1996, the Bank's average liquidity ratio was
5.5% and its average short-term liquidity ratio was 4.8%.
REGULATORY CAPITAL
Pursuant to OTS regulations, the Bank is required to maintain tangible
capital of at least 1.50% of adjusted total assets, leverage capital of at
least 3.00% of adjusted total assets, and risk-based capital of at least 8.00%
of risk-weighted assets. The Bank believes it exceeded these capital
requirements at December 31, 1996.
Under the PCA regulations adopted by the OTS pursuant to 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 PCA directive to meet and maintain a
specific capital level for any capital measure. At December 31, 1996, the Bank
met the published standards for a well capitalized designation under these
regulations.
50
The following table sets forth the regulatory capital position of the Bank
at December 31:
BANK REGULATORY CAPITAL
----------------------------------
1996 1995
---------------- ----------------
AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
Tangible capital............................ $1,139,443 6.06% $1,042,736 5.16%
Leverage capital............................ 1,139,443 6.06 1,042,736 5.16
Risk-based capital.......................... 1,245,938 13.08 1,163,931 12.01
Tier 1 risk-based capital................... 1,139,443 11.96 1,042,736 10.76
PENDING ACQUISITION OF BFS
The Company, in December 1996, entered into a definitive agreement to
acquire BFS for approximately $92 million in cash. It is expected that the
purchase price will be funded from the normal cash flows of the Company and
that the transaction will be accounted for under the purchase method of
accounting. At December 31, 1996, BFS had total assets of $650.5 million,
loans receivable, net, of $586.8 million, substantially all of which were
multifamily first mortgage loans, and deposits of $453.5 million. At that
date, BFS operated five New York City branch offices. The acquisition of BFS,
which remains subject to the approval of the OTS, is expected to be
consummated during the second quarter of 1997.
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.
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
51
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 began after December 15, 1994.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
In June 1996, the FASB 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.
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 SFAS 65 and supersedes SFAS 122.
SFAS 125, except as noted below, 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. Statement of Financial Accounting Standards No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125" amended SFAS 125 to delay, for one year, the effective date of
certain provisions of SFAS 125 relating to collateral, repurchase agreements,
dollar-rolls, securities lending, and similar transactions.
52
The Company does not anticipate that the adoption of SFAS 125 will have a
material impact on its consolidated financial statements.
IMPACT OF INFLATION
The consolidated financial statements and related notes presented elsewhere
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most commercial enterprises, virtually all of the assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors.............................................. F-1
Consolidated Statements of Financial Condition.............................. F-2
Consolidated Statements of Income........................................... F-3
Consolidated Statements of Changes in Stockholders' Equity.................. F-4
Consolidated Statements of Cash Flows....................................... F-5
Notes to Consolidated Financial Statements.................................. F-6
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item is contained in "Executive Officers of the
Registrant" in Item 1, "Business" and in the Holding Company's definitive
Proxy Statement for its 1997 Annual Meeting of Stockholders (the "Proxy
Statement"), which is expected to be filed with the Securities and Exchange
Commission (the "Commission") within 120 days from December 31, 1996,
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is contained in the Proxy Statement,
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is combined in the Proxy Statement,
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is contained in the Proxy Statement,
incorporated herein by reference.
53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS
See Item 8, "Financial Statements and Supplementary Data."
(A) (2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules for the Holding Company and its
subsidiaries (including the Bank) have been included in the consolidated
financial statements or the related notes or they are either inapplicable or
not required.
(A) (3) EXHIBITS
See Exhibit Index, page 104.
(B) REPORTS ON FORM 8-K
During the three-month period ended December 31, 1996, the Holding Company
filed with the Commission one Current Report on Form 8-K, dated December 11,
1996, which reported that it had issued a press release on December 3, 1996
announcing: (i) an agreement and plan of merger between the Holding Company
and BFS Bankorp, Inc.; (ii) a program to repurchase up to 5%, or approximately
5,000,000 shares, of its outstanding Common Stock; (iii) a plan to sell a
total of approximately $950 million of MBS, with the proceeds of the sales to
be used to reduce borrowed funds; and (iv) a plan by the Company to further
reduce its MBS portfolio by not reinvesting the proceeds of an additional $300
million in such securities expected to mature during the fourth quarter of
1996.
54
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
/s/ Lawrence J. Toal
By: _________________________________
LAWRENCE J. TOAL CHIEF EXECUTIVE
OFFICER, PRESIDENT AND CHIEF
OPERATING OFFICER
March 31, 1997
Date
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW ON MARCH 31, 1997 BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED.
SIGNATURE CAPACITY
/s/ Lawrence J. Toal Director, Chief Executive Officer,
- ------------------------------------- President and Chief Operating
LAWRENCE J. TOAL Officer (Principal Executive
Officer)
* Chairman of the Board
- -------------------------------------
JAMES M. LARGE, JR.
* Director
- -------------------------------------
DERRICK D. CEPHAS
* Director
- -------------------------------------
FREDERICK C. CHEN
* Director
- -------------------------------------
J. BARCLAY COLLINS II
* Director
- -------------------------------------
RICHARD W. DALRYMPLE
55
SIGNATURE CAPACITY
* Director
- -------------------------------------
E. CHARLOTTE FANTA
* Director
- -------------------------------------
JAMES F. FULTON
* Director
- -------------------------------------
MURRAY HANDWERKER
* Director
- -------------------------------------
VIRGINIA M. KOPP
* Director
- -------------------------------------
JOHN MORNING
* Director
- -------------------------------------
MARGARET G. OSMER-MCQUADE
* Director
- -------------------------------------
SALLY HERNANDEZ-PINERO
* Director
- -------------------------------------
DR. PAUL A. QUALBEN
* Director
- -------------------------------------
EUGENE G. SCHULZ, JR.
* Director
- -------------------------------------
HOWARD SMITH
* Director
- -------------------------------------
DR. NORMAN R. SMITH
* Director
- -------------------------------------
IRA T. WENDER
/s/ Harold E. Reynolds Senior Vice President and Controller
- -------------------------------------
HAROLD E. REYNOLDS
/s/ Lawrence J. Toal
*By: ________________________________
LAWRENCE J. TOAL
ATTORNEY-IN-FACT
56
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Dime Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Dime Bancorp, Inc. and subsidiaries (Dime) as of December 31,
1996 and 1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are
the responsibility of Dime's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dime
Bancorp, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, Dime
changed its method of accounting for goodwill effective January 1, 1994.
/s/ KPMG Peat Marwick LLP
New York, New York
January 27, 1997
F-1
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
------------------------
1996 1995
----------- -----------
ASSETS
Cash and due from banks.............................. $ 158,753 $ 216,532
Money market investments............................. 25,764 18,824
Loans held for sale.................................. 115,325 139,370
Securities available for sale........................ 2,589,572 4,070,865
Securities held to maturity (estimated fair value of
$4,279,937 in 1996
and $4,990,564 in 1995)............................. 4,363,971 5,085,736
Federal Home Loan Bank of New York stock............. 266,244 318,690
Loans receivable, net:
First mortgage loans............................... 8,698,990 7,820,680
Cooperative apartment loans........................ 1,261,648 1,217,030
Consumer and business loans........................ 777,419 792,603
Allowance for loan losses.......................... (106,495) (128,295)
----------- -----------
Total loans receivable, net.......................... 10,631,562 9,702,018
----------- -----------
Other real estate owned, net......................... 53,255 60,681
Accrued interest receivable.......................... 106,041 118,811
Premises and equipment, net.......................... 103,541 112,757
Capitalized excess servicing......................... 25,395 32,604
Mortgage servicing rights............................ 102,350 66,541
Deferred tax asset, net.............................. 183,672 223,463
Other assets......................................... 144,663 159,728
----------- -----------
Total assets......................................... $18,870,108 $20,326,620
=========== ===========
LIABILITIES
Deposits............................................. $12,856,739 $12,572,203
Securities sold under agreements to repurchase....... 3,550,234 1,632,453
Federal Home Loan Bank of New York advances.......... 925,139 4,602,983
Senior notes......................................... 197,584 197,384
Other borrowed funds................................. 142,234 181,732
Other liabilities.................................... 175,841 163,335
----------- -----------
Total liabilities.................................... 17,847,771 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 in 1996 and 1995, respectively).............. 1,083 997
Additional paid-in capital........................... 914,386 915,210
Retained earnings.................................... 158,956 65,981
Treasury stock, at cost (3,518,297 shares in 1996)... (51,498) --
Net unrealized gain (loss) on securities available
for sale, net of related
income taxes........................................ 22 (5,468)
Unearned compensation................................ (612) (190)
----------- -----------
Total stockholders' equity........................... 1,022,337 976,530
----------- -----------
Total liabilities and stockholders' equity........... $18,870,108 $20,326,620
=========== ===========
See accompanying notes to the consolidated financial statements.
F-2
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
INTEREST INCOME
First mortgage loans....................... $ 619,607 $ 556,395 $ 459,086
Cooperative apartment loans................ 97,660 91,657 78,989
Consumer and business loans................ 66,842 74,374 62,512
Mortgage-backed securities................. 508,342 567,885 482,829
Other securities........................... 31,910 32,596 36,160
Money market investments................... 26,337 34,224 17,286
---------- ---------- ----------
Total interest income................... 1,350,698 1,357,131 1,136,862
---------- ---------- ----------
INTEREST EXPENSE
Deposits................................... 531,216 524,452 404,569
Borrowed funds............................. 358,187 423,053 303,216
---------- ---------- ----------
Total interest expense.................. 889,403 947,505 707,785
---------- ---------- ----------
Net interest income..................... 461,295 409,626 429,077
Provision for loan losses.................. 41,000 39,650 55,799
---------- ---------- ----------
Net interest income after provision for
loan losses............................ 420,295 369,976 373,278
---------- ---------- ----------
NON-INTEREST INCOME
Banking service fees....................... 27,373 22,325 19,953
Loan servicing fees, net................... 30,356 30,452 28,213
Securities and insurance brokerage fees.... 21,064 15,532 16,885
Net (losses) gains on sales activities..... (12,716) (12,415) 2,925
Other...................................... 12,391 10,273 11,291
---------- ---------- ----------
Total non-interest income............... 78,468 66,167 79,267
---------- ---------- ----------
NON-INTEREST EXPENSE
General and administrative expense:
Compensation and employee benefits........ 139,358 131,721 136,786
Occupancy and equipment, net.............. 52,662 58,285 56,447
Federal deposit insurance premiums........ 8,625 21,373 31,214
Other..................................... 92,150 74,522 70,027
---------- ---------- ----------
Total general and administrative ex-
pense.................................. 292,795 285,901 294,474
Savings Association Insurance Fund recapi-
talization assessment..................... 26,280 -- --
Other real estate owned expense, net....... 10,072 12,892 11,013
Amortization of mortgage servicing rights.. 11,872 12,107 9,664
Restructuring and merger-related expense... 3,504 15,331 58,258
---------- ---------- ----------
Total non-interest expense.............. 344,523 326,231 373,409
---------- ---------- ----------
Minority interest-preferred stock dividends
of subsidiary............................. -- -- 11,433
---------- ---------- ----------
Income before income tax expense (benefit)
and cumulative effect
of a change in accounting principle........ 154,240 109,912 67,703
Income tax expense (benefit)............... 49,984 47,727 (53,138)
---------- ---------- ----------
Income before cumulative effect of a change
in accounting principle................... 104,256 62,185 120,841
Cumulative effect of a change in accounting
principle for goodwill.................... -- -- (92,887)
---------- ---------- ----------
Net income................................. $ 104,256 $ 62,185 $ 27,954
========== ========== ==========
EARNINGS PER COMMON SHARE
Primary:
Income before cumulative effect of a
change in accounting principle........... $ 0.96 $ 0.57 $ 1.12
Cumulative effect of a change in
accounting principle for goodwill........ -- -- (0.86)
---------- ---------- ----------
Net income................................ $ 0.96 $ 0.57 $ 0.26
========== ========== ==========
Fully diluted:
Income before cumulative effect of a
change in accounting principle........... $ 0.95 $ 0.57 $ 1.12
Cumulative effect of a change in account-
ing principle for goodwill............... -- -- (0.86)
---------- ---------- ----------
Net income................................ $ 0.95 $ 0.57 $ 0.26
========== ========== ==========
Primary average common shares outstanding.. 109,097 109,742 107,668
Fully diluted average common shares out-
standing.................................. 109,249 109,862 107,700
See accompanying notes to the consolidated financial statements.
F-3
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
------------ ---------- ----------
COMMON STOCK
Balance at beginning of year............ $ 997 $ 986 $ 983
Stock issued upon exercise of stock war-
rant................................... 84 -- --
Stock issued under employee benefit
plans.................................. 2 11 5
Merger adjustment....................... -- -- (2)
------------ ---------- ----------
Balance at end of year................ 1,083 997 986
------------ ---------- ----------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year............ 915,210 910,036 907,851
Stock issued under employee benefit
plans.................................. 1,023 4,969 2,385
Restricted stock activity............... 66 205 41
Costs of secondary public offering...... (1,913) -- --
Merger adjustment....................... -- -- (251)
Other................................... -- -- 10
------------ ---------- ----------
Balance at end of year................ 914,386 915,210 910,036
------------ ---------- ----------
COMMON STOCK DEFERRED INCENTIVE SHARES
Balance at beginning of year............ -- 2,994 --
Deferred incentive shares granted, net.. -- 33 2,994
Deferred incentive shares distributed... -- (3,027) --
------------ ---------- ----------
Balance at end of year................ -- -- 2,994
------------ ---------- ----------
RETAINED EARNINGS (DEFICIT)
Balance at beginning of year............ 65,981 3,796 (2,017)
Net income.............................. 104,256 62,185 27,954
Treasury stock issued under employee
benefit plans.......................... (11,281) -- --
Merger adjustment....................... -- -- (22,141)
------------ ---------- ----------
Balance at end of year................ 158,956 65,981 3,796
------------ ---------- ----------
TREASURY STOCK, AT COST
Balance at beginning of year............ -- -- --
Treasury stock purchased................ (70,456) -- --
Treasury stock issued under employee
benefit plans.......................... 18,958 -- --
------------ ---------- ----------
Balance at end of year................ (51,498) -- --
------------ ---------- ----------
NET UNREALIZED GAIN (LOSS) ON SECURITIES
AVAILABLE FOR SALE, NET OF RELATED
INCOME TAXES
Balance at beginning of year............ (5,468) (12,612) (1,734)
Change in net unrealized gain (loss) on
securities available for sale, net of
related income taxes................... 5,490 7,144 (15,510)
Merger adjustment....................... -- -- 4,632
------------ ---------- ----------
Balance at end of year................ 22 (5,468) (12,612)
------------ ---------- ----------
UNEARNED COMPENSATION
Balance at beginning of year............ (190) (75) (101)
Restricted stock activity............... (545) (181) (47)
Unearned compensation amortized to ex-
pense.................................. 123 66 73
------------ ---------- ----------
Balance at end of year................ (612) (190) (75)
------------ ---------- ----------
Total stockholders' equity.............. $ 1,022,337 $ 976,530 $ 905,125
============ ========== ==========
See accompanying notes to the consolidated financial statements.
F-4
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................ $ 104,256 $ 62,185 $ 27,954
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of a change in
accounting principle................... -- -- 92,887
Provision for loan and other real estate
owned losses........................... 45,799 46,529 60,464
Depreciation and amortization of
premises and equipment................. 16,706 17,899 16,766
Other amortization and accretion, net... 59,871 69,038 55,452
Provision for deferred income tax
expense (benefit)...................... 35,666 43,032 (92,266)
Net losses (gains) on sales, calls and
revaluations of securities............. 11,265 29,044 (2,909)
Net gains on sales of branches.......... -- (18,637) (1,730)
Net decrease (increase) in loans held
for sale............................... 24,045 (122,749) 117,743
Other, net.............................. 14,062 (11,745) (38,602)
---------- ---------- ----------
Net cash provided by operating
activities........................... 311,670 114,596 235,759
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans receivable originated and
purchased................................ (2,660,414) (1,795,620) (1,541,709)
Proceeds from sales of loans receivable... 13,510 42,344 6,562
Principal payments received on loans
receivable............................... 1,689,861 1,181,255 1,130,848
Purchases of securities available for
sale..................................... (1,722,633) (55,391) (63,371)
Purchases of securities held to maturity.. (238,674) (2,144,475) (3,038,768)
Proceeds from sales of securities
available for sale....................... 2,290,279 25,279 333,860
Proceeds from sales of securities held to
maturity................................. -- 187,342 --
Proceeds from maturities of securities
available for sale and held to maturity.. 1,842,349 1,920,144 2,191,835
Net redemptions (purchases) of Federal
Home Loan Bank of New York stock......... 52,446 (53,104) 6,298
Acquisitions, net of cash and cash
equivalents acquired..................... (1,284) (7,914) 374,870
Repurchases of assets sold with recourse.. (36,855) (35,946) (62,753)
Proceeds from bulk sales of non-performing
assets................................... -- -- 266,821
Proceeds from sales of other real estate
owned.................................... 50,681 66,763 97,450
Purchases and originations of mortgage
servicing rights......................... (23,378) (17,263) (35,037)
Other, net................................ (39,463) (38,239) (11,707)
---------- ---------- ----------
Net cash provided (used) by investing
activities........................... 1,216,425 (724,825) (344,801)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits,
exclusive of sales and purchases......... 284,536 42,678 (173,263)
Net cash paid upon sale of deposits....... -- (262,512) (61,115)
Net cash received upon purchase of
deposits................................. -- -- 52,112
Net (decrease) increase in borrowings with
original maturities of three months or
less..................................... (1,382,173) 300,797 2,237,631
Proceeds from other borrowings............ 1,111,804 1,365,000 485,000
Repayment of other borrowings............. (1,529,043) (809,549) (2,454,158)
Proceeds from issuance of common and
treasury stock........................... 8,311 2,014 1,499
Purchases of treasury stock............... (70,456) -- --
Other, net................................ (1,913) -- (1,369)
---------- ---------- ----------
Net cash (used) provided by financing
activities........................... (1,578,934) 638,428 86,337
---------- ---------- ----------
Net (decrease) increase in cash and cash
equivalents.............................. (50,839) 28,199 (22,705)
Merger adjustment......................... -- -- 17,406
Cash and cash equivalents at beginning of
year..................................... 235,356 207,157 212,456
---------- ---------- ----------
Cash and cash equivalents at end of year.. $ 184,517 $ 235,356 $ 207,157
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid on deposits and borrowings.. $ 891,102 $ 941,483 $ 694,976
Net income tax (refunds) payments......... (847) (11,758) 60,081
SUPPLEMENTAL NON-CASH FLOW INFORMATION
Net transfers of loans receivable to other
real estate owned........................ 39,216 49,768 64,232
Securitization of loans receivable........ -- -- 66,041
Transfers of securities from held to
maturity to available for sale........... -- 3,616,445 --
Exchange of preferred stock of subsidiary
for senior notes......................... -- -- 100,000
In connection with acquisitions:
Fair value of assets acquired........... -- 2,435 2,016,397
Cash paid............................... 1,284 7,914 80,000
Fair value of liabilities assumed....... -- 1,397 1,936,397
See accompanying notes to the consolidated financial statements.
F-5
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Dime Bancorp, Inc. (the "Holding Company") is the holding company for The
Dime Savings Bank of New York, FSB (the "Bank," and, together with the Holding
Company, the "Company" or "Dime"), which is engaged in banking operations. The
accounting policies applied by the Company conform with generally accepted
accounting principles and prevailing industry practices. The preparation of
consolidated financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated statement of
financial condition and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The
following is a description of the significant accounting policies of the
Company.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Holding Company and the Bank and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain amounts in the consolidated financial statements and accompanying
notes for prior years have been reclassified to conform with the current year
presentation.
On January 13, 1995, Anchor Bancorp, Inc. ("Anchor Bancorp") and its wholly-
owned savings bank subsidiary, Anchor Savings Bank FSB ("Anchor Savings," and,
together with Anchor Bancorp, "Anchor"), merged with and into the Holding
Company and the Bank, respectively, which were the surviving corporations (the
"Merger"). The Merger was accounted for under the pooling-of-interests method
of accounting. Accordingly, the financial information of the Company for
periods prior to the Merger was restated to include Anchor. For a further
discussion of the Merger, see Note 2.
Consolidated Statements of Cash Flows
For purposes of the Consolidated Statements of Cash Flows, cash and cash
equivalents include cash and due from banks and money market investments
purchased with maturities of three months or less.
Cash flows associated with derivative financial instruments used by the
Company are classified in the accompanying Consolidated Statements of Cash
Flows in the same category as the cash flows from the asset or liability being
hedged.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or estimated fair
value, as determined on an aggregate basis. Net unrealized losses are
recognized in a valuation allowance by charges to operations. Premiums,
discounts and origination fees and costs on loans held for sale are deferred
and recognized as a component of the gain or loss on sale.
Securities
The Company classifies its securities as held to maturity, trading, or
available for sale. Securities that the Company has the positive intent and
ability to hold to maturity are classified as held to maturity and are carried
at amortized cost. Securities held for sale in the near term in connection
with mortgage banking activities are classified as trading securities and are
carried at estimated fair value with unrealized gains and losses recognized in
operations. The Company did not maintain a trading securities portfolio at
December 31, 1996 or 1995. Securities not otherwise classified as held to
maturity or trading are classified as available for sale and are carried at
estimated fair value with unrealized gains and losses reported as a separate
component of stockholders' equity, net of the related income tax effect.
F-6
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amortization of premiums and accretion of discounts on securities is
recognized in operations using the interest method over the lives of the
securities, adjusted, in the case of mortgage-backed securities ("MBS"), for
actual prepayments. Gains and losses on sales of securities are determined
using the specific identification method. The carrying values of securities
are reduced through write-downs charged to operations in the event the Company
determines that an other than temporary impairment in value has occurred.
Loans Receivable
Loans receivable are generally carried at unpaid principal balances adjusted
for unamortized premiums, unearned discounts, deferred loan origination fees
and costs, and undisbursed funds on loans in process. Premiums are amortized
and discounts are accreted to income over the lives of the loans using the
interest method. Deferred loan origination fees and costs are recognized as an
adjustment of yield over the contractual lives of the loans.
A loan is deemed a troubled debt restructuring ("TDR") by the Company when
modifications of a concessionary nature, such as the reduction of the interest
rate, are made to the loan's original contractual terms due to a deterioration
in the borrower's financial condition.
Loans are placed on non-accrual status upon becoming 90 days contractually
past due as to principal or interest, or at an earlier date if the full
collectability of principal or interest is doubtful. Interest income
previously accrued but not collected at the date a loan is placed on non-
accrual status is reversed against interest income. Cash receipts on non-
accrual loans are applied to principal and interest in accordance with their
contractual terms unless full payment of principal is not expected, in which
case cash receipts, whether designated as principal or interest, are applied
as a reduction of the carrying value of the loan. Loans are generally returned
to accrual status when principal and interest payments are current, full
collectability of principal and interest is reasonably assured and a
consistent record of performance has been demonstrated.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" ("SFAS 114"), as amended by Statement of Financial Accounting Standards
No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition
and Disclosures." In accordance with SFAS 114, the Company considers a loan
impaired when, based upon current information and events, it is probable that
it will be unable to collect all amounts due, both principal and interest,
according to the contractual terms of the loan agreement. SFAS 114 does not
apply to those large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment, which, for the Company, include one-to-
four family first mortgage and cooperative apartment loans ("residential
property loans"), other than those modified in a TDR, and consumer loans.
Loans reviewed for impairment by the Company are limited to business loans,
commercial and multifamily first mortgage loans and residential property loans
modified in a TDR. Specific factors used in the impaired loan identification
process include, but are not limited to, delinquency status, loan-to-value
ratio, the condition of the underlying collateral, credit history, and debt
coverage. At a minimum, loans reviewed for impairment by the Company are
classified as impaired when delinquent more than six months.
All loans modified in a TDR subsequent to the adoption of SFAS 114 are
considered impaired. However, if the restructuring agreement specifies an
interest rate equal to or greater than the rate the Company was willing to
accept at the restructuring date for a new loan with comparable risk and the
loan is not impaired based on the terms of the restructuring agreement, it is
not included in the Company's impaired loan statistics in years following the
restructuring.
In accordance with SFAS 114, impaired loans are measured using the present
value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
F-7
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
price or the fair value of the collateral if the loan is collateral dependent.
The Company uses the fair market value of the collateral as its principal
method for valuing its impaired loans. The amount by which the recorded
investment in an impaired loan exceeds the measurement value is recognized by
an increase in the allowance for loan losses with a corresponding charge to
the provision for loan losses.
Cash receipts on an impaired loan are applied to principal and interest in
accordance with the contractual terms of the loan unless full payment of
principal is not expected, in which case, both principal and interest payments
received are applied as a reduction of the carrying value of the loan.
Interest income on impaired loans on non-accrual status is recognized to the
extent received in cash and not otherwise utilized to reduce the carrying
value of the loan. For impaired loans not classified as non-accrual, interest
income is recognized on an accrual basis as the Company anticipates the full
payment of principal and interest due.
Allowance for Loan Losses
An allowance for losses is maintained for estimated losses in the Company's
loans receivable portfolio. The allowance is increased by loss provisions
charged to operations and decreased by charge-offs (net of recoveries). In
determining the appropriate level of the allowance for loan losses, the
Company reviews its loans receivable portfolio on at least a quarterly basis,
taking into account the size, composition and risk profile of the loan
portfolio, including delinquency levels, historical loss experience, cure
rates on delinquent loans, economic conditions and other pertinent factors,
such as assumptions and projections of future conditions.
While management considers the allowance for loan losses to be adequate
based on information currently available, additions to the allowance may be
necessary due to future events, including changes in economic conditions in
the Company's lending areas. In addition, the Federal Deposit Insurance
Corporation ("FDIC") and the Office of Thrift Supervision ("OTS"), as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance based on their judgments about information
available to them at the time of their examinations.
Other Real Estate Owned ("ORE"), Net
ORE, which consists of real estate acquired in satisfaction of loans, is
carried at the date of acquisition at the lower of cost or estimated fair
value less estimated selling costs. Write-downs required at time of
acquisition are charged to the allowance for loan losses. Subsequent to
acquisition, the Company maintains an allowance for actual and potential
future declines in value. Provisions for losses on ORE, operating costs and
revenues, and gains on sales in excess of prior charge-offs are recognized in
"ORE expense, net" in the Consolidated Statements of Income. Expenditures
related to the development and improvement of ORE are capitalized to the
extent realizable.
Premises and Equipment
Premises and equipment owned are carried at cost less accumulated
depreciation and amortization. Depreciation is computed using the straight-
line method over the estimated useful lives of the assets. Leasehold
improvements are amortized using the straight-line method over the lesser of
the terms of their respective leases or estimated useful lives. Leased
properties meeting certain criteria are capitalized and amortized over the
terms of the leases using the straight-line method. Maintenance, repairs, and
minor improvements are charged to operations in the period incurred, while
major improvements are capitalized.
Capitalized Excess Servicing
Gains and losses resulting from sales of loans with servicing retained,
including those loans which have been securitized into MBS, are adjusted to
recognize the present value of differences between the retained loan
F-8
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
yield and the normal servicing fee over the estimated remaining lives of the
related loans. The amortization of capitalized excess servicing is charged to
operations over the remaining estimated lives of the loans and is included in
"Loan servicing fees, net" in the Consolidated Statements of Income. The
carrying value of the Company's capitalized excess servicing and the related
amortization is evaluated on a quarterly basis in relation to estimated
servicing values, including actual and anticipated prepayment rates.
Mortgage Servicing Rights ("MSR")
The Company adopted, effective January 1, 1995, Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights"
("SFAS 122"). SFAS 122 amended Statement of Financial Accounting Standards No.
65, "Accounting for Certain Mortgage Banking Activities" ("SFAS 65"), to
require the recognition, as separate assets, of the rights to service mortgage
loans (including cooperative apartment loans) sold, whether those rights are
acquired through loan purchase or loan origination activities. Prior to the
adoption of SFAS 122, only those rights to service mortgage loans acquired
through purchase transactions were recognized as assets by the Company. In
addition, the previously existing requirement in SFAS 65 to offset gains on
the sales of loans against any related servicing right assets was eliminated
by SFAS 122. The initial capitalization of MSR is predicated upon an
allocation of the total cost of the related loans to the MSR and the loans
(without the MSR) based on their relative estimated fair values. MSR are
amortized in proportion to and over the period of estimated net servicing
income, which is consistent with the Company's amortization of its purchased
MSR in periods prior to its adoption of SFAS 122.
In accordance with SFAS 122, MSR are assessed for impairment based upon
their estimated fair value. For purposes of such assessments, the Company
stratifies its MSR, including those MSR purchased prior to the adoption of
SFAS 122, by underlying loan type (i.e., adjustable-rate and fixed-rate) and
interest rate. MSR impairment is recognized through a valuation allowance for
each impaired stratum with the individual allowances adjusted in subsequent
periods to reflect changes in the measurement of impairment. The estimated
fair value of each of the MSR strata is determined through a discounted cash
flow analysis of future cash flows incorporating numerous assumptions
including servicing income, servicing costs, market discount rates, prepayment
speeds, and default rates. Prior to the adoption of SFAS 122, the
recoverability and carrying values of the Company's purchased MSR were also
determined through discounted cash flow analysis. However, the discount rate
utilized was equal to the higher of the current market or the implicit rate at
the time of acquisition.
Change in Accounting Principle for Goodwill
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 72, "Accounting for Certain Acquisitions of Banking
or Thrift Institutions" ("SFAS 72"), for that portion of its goodwill not
previously being accounted for under the provisions thereof. Such goodwill was
associated with a thrift acquisition initiated prior to the effective date of
SFAS 72. In connection therewith, the Company's method of amortizing such
goodwill was changed from the straight-line method to the interest method over
the expected remaining lives of the long-term interest-earning assets
acquired. The cumulative effect on prior years of this change in accounting
principle was $92.9 million, or $0.86 per common share, which was reflected as
a charge to 1994's operations.
Derivative Financial Instruments
The Company uses a variety of derivative financial instruments as part of
its asset/liability management strategy and to manage interest rate risk
associated with its mortgage banking activities. Derivative financial
instruments used for these purposes must be designated as a hedge at their
inception and must remain effective as a hedge throughout their contractual
terms. Derivative financial instruments used by the Company principally
include interest rate swaps, forward contracts, and option-based agreements.
F-9
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For interest rate swaps and option-based derivative financial instruments
used to modify the interest rate characteristics of designated interest-
earning assets or interest-bearing liabilities, net amounts payable or
receivable under the agreements are accrued as an adjustment to interest
income or interest expense of the designated assets or liabilities. The
estimated fair values of such derivative financial instruments are not
reflected in the Company's consolidated financial statements unless designated
to securities available for sale, in which case the derivative financial
instruments are carried at estimated fair value with unrealized gains and
losses, net of related income taxes, reflected as a component of stockholders'
equity. Any premium paid upon initiation of a derivative financial instrument
used for asset/liability management purposes is reflected as a component of
the carrying value of the designated interest-earning assets or interest-
bearing liabilities. These premiums are amortized to operations over the
contractual terms of the agreements as an adjustment to interest income or
interest expense of the designated assets or liabilities.
For forward contracts and options used to hedge loans held for sale and firm
commitments to originate loans held for sale, realized gains and losses are
deferred and considered, along with unrealized gains and losses, in the
computation of the lower of cost or market valuation of loans held for sale.
Realized gains and losses are recognized in operations upon settlement.
Premiums paid on option contracts are deferred and amortized over the terms of
the contracts.
In the event of the termination of a derivative financial instrument
contract, any resulting gain or loss is deferred, as an adjustment of the
carrying value of the designated assets or liabilities, and recognized in
operations over the shorter of the remaining life of (i) the designated assets
or liabilities or (ii) the derivative financial instrument agreement. If the
designated assets or liabilities are subsequently sold or otherwise disposed
of, any remaining deferred gains or losses are included in the determination
of the gain or loss on the disposition.
If the balance of a hedged asset or liability declines below the notional
value of the related derivative financial instrument, the Company may
designate the derivative financial instrument to other assets or liabilities
or discontinue hedge accounting with respect to the portion of the notional
amount that exceeds the balance. When hedge accounting is discontinued,
derivative financial instruments are marked-to-market in the Company's results
of operations.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Deferred tax assets are
reduced, if necessary, to the amount that, based on available evidence, will
more than likely be realized.
Treasury Stock
Common stock repurchased for treasury is recorded at cost. Upon reissuance,
the treasury stock account is reduced by the cost of such stock on the first-
in, first-out basis.
Earnings Per Common Share
Primary and fully diluted earnings per common share are calculated by
dividing net income by the sum of the weighted average number of shares of
common stock and common stock equivalents outstanding during the
F-10
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
year. Common stock equivalents include the dilutive effect, using the treasury
stock method, of outstanding stock options, stock purchase agreements and
stock warrants.
NOTE 2--MERGER AND ACQUISITION ACTIVITIES
Merger of Dime and Anchor
Upon consummation of the Merger, 41,760,503 newly issued shares of common
stock of the Holding Company, par value $0.01 per share, were exchanged for
all of the shares of common stock of Anchor Bancorp, par value $0.01 per
share, outstanding at the time of the Merger, based on an exchange ratio of
1.77 shares of Holding Company common stock for each share of Anchor Bancorp
common stock. In addition, 56,842,168 shares of newly issued Holding Company
common stock were exchanged on a one-for-one basis for all the shares of the
Holding Company's common stock, par value $0.01 per share, outstanding at the
time of the Merger.
In recording the pooling-of-interests combination, Anchor's results of
operations for its fiscal year ended June 30, 1994 were combined with the
Company's results of operations for its year ended December 31, 1993. In order
to eliminate the effect of including Anchor's results of operations and other
activity for the six months ended June 30, 1994 in both the years ended
December 31, 1994 and 1993, total stockholders' equity was reduced by $17.8
million, including a reduction in retained earnings of $22.1 million.
The following table sets forth an analysis of the activity in the Company's
Merger-related restructuring accrual for the years indicated.
SEVERANCE FACILITIES, TRANSACTION
AND EQUIPMENT FEES
PERSONNEL AND SYSTEMS AND OTHER
COSTS COSTS COSTS TOTAL
--------- ----------- ----------- --------
(IN THOUSANDS)
Provision charged to op-
erations............... $ 21,337 $18,785 $18,136 $ 58,258
Cash payments........... -- -- (9,538) (9,538)
-------- ------- ------- --------
Balance at December 31,
1994................... 21,337 18,785 8,598 48,720
Provision charged to op-
erations............... 2,532 3,004 892 6,428
Cash payments........... (18,947) (3,824) (9,490) (32,261)
Write-offs.............. -- (6,196) -- (6,196)
-------- ------- ------- --------
Balance at December 31,
1995................... 4,922 11,769 -- 16,691
Provision charged to op-
erations............... 764 -- -- 764
Cash payments........... (5,368) (3,053) -- (8,421)
Write-offs.............. -- (5,307) -- (5,307)
-------- ------- ------- --------
Balance at December 31,
1996................... $ 318 $ 3,409(1) $ -- $ 3,727
======== ======= ======= ========
(1) 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.
Acquisition of The Lincoln Savings Bank, FSB ("Lincoln")
On August 12, 1994, Lincoln, headquartered in New York, New York, was
acquired by Anchor Savings for $80.0 million in cash in a transaction that was
accounted for using the purchase method of accounting (the "Lincoln
Acquisition"). The impact of the Lincoln Acquisition is only reflected in the
Company's consolidated financial statements from the date of acquisition. The
purchase price, which was funded by the excess liquidity position of Lincoln,
was equal to the net assets acquired. At the time of acquisition, Lincoln had
total assets of $2.0 billion, loans receivable, net, of $1.2 billion, and
total deposits of $1.8 billion.
F-11
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Acquisition of Residential Property Loan Origination Businesses
In the fourth quarter of 1995, the Bank acquired the assets relating to the
residential property loan origination businesses of National Mortgage
Investments Co., Inc. ("National Mortgage"), which was headquartered in
Griffin, Georgia, and James Madison Mortgage Co. ("Madison Mortgage"), which
was headquartered in Fairfax, Virginia. The assets acquired and liabilities
assumed from National Mortgage and Madison Mortgage were not material. The
aggregate goodwill arising from such acquisitions amounted to $8.2 million and
is being amortized on a straight-line basis over a 15 year period.
Pursuant to the terms of the asset purchase agreement, dated September 15,
1995, between the Bank and National Mortgage regarding certain assets related
to the residential loan origination business of National Mortgage, the Bank is
contingently liable for certain additional payments to National Mortgage on
specified dates through the third quarter of 1997 based on the attainment of
certain loan origination targets related to the purchased assets. Under the
agreement, the Bank, as of December 31, 1996, has made contingent payments in
the amount of $1.3 million and is contingently liable for the payment of an
additional $1.6 million.
Pending Acquisition of BFS Bankorp, Inc. ("BFS") (Unaudited)
In December 1996, the Company entered into a definitive agreement to acquire
BFS, a Delaware corporation which is the parent company of Bankers Federal
Savings FSB, for approximately $92 million in cash. The purchase price is
expected to be funded from the normal cash flows of the Company. It is
anticipated that the transaction will be accounted for under the purchase
method of accounting. At December 31, 1996, BFS had total consolidated assets
of $650.5 million, loans receivable, net, of $586.8 million, substantially all
of which were multifamily first mortgage loans, and deposits of $453.5
million. The acquisition of BFS, which remains subject to regulatory approval,
is expected to be consummated in the second quarter of 1997.
F-12
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--SECURITIES
The amortized cost and estimated fair value of securities available for sale
and securities held to maturity, as well as related gross unrealized gains and
losses, are summarized as follows at December 31:
1996 1995
--------------------------------------- ---------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED ----------------- ESTIMATED AMORTIZED ----------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
---------- -------- -------- ---------- ---------- -------- -------- ----------
(IN THOUSANDS)
SECURITIES AVAILABLE FOR
SALE
Debt securities:
MBS:
Pass-through
securities:
Privately-issued....... $1,232,276 $ 13,399 $ 17,411 $1,228,264 $2,731,267 $ 10,571 $ 26,741 $2,715,097
Federal National
Mortgage Association
("FNMA").............. 916,452 2,936 42 919,346 736,614 11,074 499 747,189
Federal Home Loan
Mortgage Corporation
("FHLMC")............. 165,540 1,974 441 167,073 448,260 1,614 1,518 448,356
Government National
Mortgage Association.. 185,166 1,841 1 187,006 22,625 546 646 22,525
Interest-only.......... 1,850 -- 559 1,291 2,187 -- 508 1,679
---------- -------- -------- ---------- ---------- -------- -------- ----------
Total MBS............... 2,501,284 20,150 18,454 2,502,980 3,940,953 23,805 29,912 3,934,846
---------- -------- -------- ---------- ---------- -------- -------- ----------
U. S. government and
federal agency......... 18,117 -- 148 17,969 28,048 37 40 28,045
State and municipal..... 44,322 86 1,101 43,307 80,763 270 2,980 78,053
Domestic corporate...... 15,467 2 141 15,328 17,274 20 45 17,249
---------- -------- -------- ---------- ---------- -------- -------- ----------
Total debt securities... 2,579,190 20,238 19,844 2,579,584 4,067,038 24,132 32,977 4,058,193
---------- -------- -------- ---------- ---------- -------- -------- ----------
Equity securities....... 10,343 107 462 9,988 13,403 163 894 12,672
---------- -------- -------- ---------- ---------- -------- -------- ----------
Total securities
available for sale..... $2,589,533 $ 20,345 $ 20,306 $2,589,572 $4,080,441 $ 24,295 $ 33,871 $4,070,865
========== ======== ======== ========== ========== ======== ======== ==========
SECURITIES HELD TO
MATURITY
MBS:
Pass-through
securities:
Privately-issued....... $2,520,013 $ 2,033 $ 57,206 $2,464,840 $3,071,166 $ 3,607 $ 84,694 $2,990,079
FHLMC.................. 44,711 231 -- 44,942 -- -- -- --
Collateralized mortgage
obligations:
Privately-issued....... 1,670,983 -- 26,863 1,644,120 1,867,318 274 13,064 1,854,528
FNMA................... 94,412 -- 763 93,649 94,636 -- 144 94,492
FHLMC.................. 30,089 -- 441 29,648 49,330 -- 232 49,098
---------- -------- -------- ---------- ---------- -------- -------- ----------
Total MBS............... 4,360,208 2,264 85,273 4,277,199 5,082,450 3,881 98,134 4,988,197
---------- -------- -------- ---------- ---------- -------- -------- ----------
Other debt securities... 3,763 -- 1,025 2,738 3,286 -- 919 2,367
---------- -------- -------- ---------- ---------- -------- -------- ----------
Total securities held to
maturity............... $4,363,971 $ 2,264 $ 86,298 $4,279,937 $5,085,736 $ 3,881 $ 99,053 $4,990,564
========== ======== ======== ========== ========== ======== ======== ==========
At December 31, 1996, an aggregate of $4.9 billion of securities available
for sale and held to maturity were pledged as collateral for borrowed funds and
other purposes.
F-13
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth, by the period to contractual maturity, the
amortized cost, estimated fair value and weighted average yield of debt
securities available for sale and held to maturity at December 31, 1996.
AVAILABLE FOR SALE HELD TO MATURITY
------------------------------ ------------------------------
WEIGHTED WEIGHTED
AMORTIZED ESTIMATED AVERAGE AMORTIZED ESTIMATED AVERAGE
COST FAIR VALUE YIELD COST FAIR VALUE YIELD
---------- ---------- -------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
MBS(1).................. $2,501,284 $2,502,980 6.76% $4,360,208 $4,277,199 6.42%
Other debt securities:
Due in one year or
less................. 14,600 14,577 5.69 -- -- --
Due after one through
five years........... 27,949 27,299 5.99 250 250 7.75
Due after five through
ten years............ 14,890 14,651 6.55 250 250 7.75
Due after ten years... 20,467 20,077 6.31 3,263 2,238 4.67
---------- ---------- ---------- ----------
Total other debt
securities......... 77,906 76,604 6.12 3,763 2,738 5.08
---------- ---------- ---------- ----------
Total debt securities... $2,579,190 $2,579,584 6.74 $4,363,971 $4,279,937 6.42
========== ========== ========== ==========
(1) The estimated duration of the Company's aggregate portfolio of MBS
available for sale and held to maturity was approximately 1.56 years at
December 31, 1996.
Proceeds from sales of securities and related gross realized gains and
losses are summarized below for the years ended December 31:
1996 1995 1994
---------- ------- --------
(IN THOUSANDS)
MBS available for sale:
Proceeds from sales........................ $2,132,360 $25,279 $313,909
Gross realized gains....................... 8,520 6 3,003
Gross realized losses...................... 13,941 13 523
MBS held to maturity:
Proceeds from sales........................ -- 187,342 --
Gross realized losses...................... -- 717 --
Other securities available for sale:
Proceeds from sales........................ 157,919 -- 19,951
Gross realized gains....................... 69 -- --
Gross realized losses...................... 1,613 -- 22
During December 1995, as permitted under guidelines issued in a special
report by the Financial Accounting Standards Board in November 1995, the
Company transferred securities with an amortized cost of $3.6 billion,
including $3.5 billion of MBS, from the held to maturity portfolio to the
available for sale portfolio. Such securities had an estimated fair value at
time of transfer of $3.6 billion. In connection with the Company's decision to
sell approximately $1 billion of the transferred MBS, the Company wrote-down
those securities with unrealized losses to estimated fair value and recognized
a pretax loss of $23.6 million in December 1995. The sales of the MBS
designated for sale were consummated during the first quarter of 1996.
Additionally, during the first quarter of 1995, the Company, for interest rate
risk management purposes following the Merger, transferred MBS with an
amortized cost of $12.9 million and an estimated fair value of $12.5 million
from the held to maturity portfolio to the available for sale portfolio and
sold MBS held to maturity with an amortized cost of $188.1 million and
realized a loss of $0.7 million.
F-14
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1996 and 1995, the Company recognized losses of $4.7 million and $3.3
million, respectively, associated with other than temporary impairment in
value of certain privately-issued MBS. There were no such losses recognized
during 1994. The recognition of the losses in 1996 and 1995 reflected an
erosion in the underlying credit enhancements, coupled with the Company's
projections of estimated future losses on the securities. At December 31,
1996, these securities had a carrying value of approximately $89 million.
NOTE 4--LOANS RECEIVABLE, NET
A summary of loans receivable, net, is as follows at December 31:
1996 1995
----------- ----------
(IN THOUSANDS)
First mortgage loans:
Principal balances:
Residential.................................... $ 6,758,901 $5,925,050
Commercial and multifamily..................... 1,856,563 1,813,344
Construction................................... 70,395 68,901
----------- ----------
Total principal balances..................... 8,685,859 7,807,295
Undisbursed funds on construction loans in
process......................................... (33,652) (24,369)
Net deferred yield adjustments................... 46,783 37,754
----------- ----------
Total first mortgage loans................... 8,698,990 7,820,680
----------- ----------
Cooperative apartment loans:
Principal balances............................... 1,257,798 1,214,812
Net deferred yield adjustments................... 3,850 2,218
----------- ----------
Total cooperative apartment loans............ 1,261,648 1,217,030
----------- ----------
Consumer and business loans:
Principal balances:
Home equity.................................... 506,534 494,528
Manufactured home.............................. 60,965 78,319
Automobile..................................... 43,661 53,947
Loans secured by deposit accounts.............. 39,684 40,578
Other consumer................................. 72,831 85,915
Business....................................... 43,138 35,189
----------- ----------
Total principal balances..................... 766,813 788,476
Net deferred yield adjustments................... 10,606 4,127
----------- ----------
Total consumer and business loans............ 777,419 792,603
----------- ----------
Allowance for loan losses........................ (106,495) (128,295)
----------- ----------
Total loans receivable, net...................... $10,631,562 $9,702,018
=========== ==========
At December 31, 1996, loans receivable in the amount of $2.6 billion were
pledged as collateral for borrowed funds.
F-15
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Activity in the allowance for loan losses is summarized as follows for the
years ended December 31:
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Balance at beginning of year..................... $128,295 $170,383 $157,515
Merger adjustment................................ -- -- (928)
Allowance acquired in the Lincoln Acquisition.... -- -- 32,579
Provision charged to operations.................. 41,000 39,650 55,799
Charge-offs:
Residential property loans..................... (52,191) (46,131) (43,910)
Commercial and multifamily first mortgage
loans......................................... (13,244) (37,759) (35,327)
Consumer and business loans.................... (5,861) (8,198) (5,547)
-------- -------- --------
Total charge-offs............................ (71,296) (92,088) (84,784)
-------- -------- --------
Recoveries:
Residential property loans..................... 5,093 5,220 5,895
Commercial and multifamily first mortgage
loans......................................... 977 1,552 676
Consumer and business loans.................... 2,426 3,578 3,631
-------- -------- --------
Total recoveries............................. 8,496 10,350 10,202
-------- -------- --------
Net charge-offs.............................. (62,800) (81,738) (74,582)
-------- -------- --------
Balance at end of year........................... $106,495 $128,295 $170,383
======== ======== ========
Non-accrual loans are summarized as follows at December 31:
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Residential property loans....................... $163,156 $206,230 $214,222
Commercial and multifamily first mortgage loans.. 17,375 34,618 106,778
Construction loans............................... 4,307 5,267 5,095
Consumer and business loans...................... 6,752 9,004 15,769
-------- -------- --------
Total non-accrual loans.......................... $191,590 $255,119 $341,864
======== ======== ========
Loans restructured in a TDR, other than those classified as non-accrual
loans, amounted to $213.0 million, $202.2 million and $188.6 million at
December 31, 1996, 1995 and 1994, respectively.
The amount of interest income that would have been recorded on non-accrual
loans and loans restructured in a TDR, if such loans had been current in
accordance with their original terms, was $34.1 million, $40.2 million and
$47.7 million for 1996, 1995 and 1994, respectively. The amount of interest
income that was recorded on these loans was $18.9 million, $20.2 million and
$21.3 million for 1996, 1995 and 1994, respectively.
F-16
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth information regarding the Company's impaired
loans at December 31:
1996 1995
------------------------------- --------------------------------
RELATED RELATED
ALLOWANCE ALLOWANCE
RECORDED FOR LOAN NET RECORDED FOR LOAN NET
INVESTMENT LOSSES INVESTMENT INVESTMENT LOSSES INVESTMENT
---------- --------- ---------- ---------- --------- ----------
(IN THOUSANDS)
Residential property
loans:
With a related allow-
ance.................. $ 3,290 $ (206) $ 3,084 $ 3,170 $ (198) $ 2,972
Without a related al-
lowance............... 11,322 -- 11,322 10,650 -- 10,650
------- ------- ------- ------- -------- -------
Total residential prop-
erty loans............ 14,612 (206) 14,406 13,820 (198) 13,622
------- ------- ------- ------- -------- -------
Commercial and multifam-
ily first mortgage
loans:
With a related allow-
ance.................. 39,388 (3,919) 35,469 66,648 (9,909) 56,739
Without a related al-
lowance............... 8,752 -- 8,752 7,575 -- 7,575
------- ------- ------- ------- -------- -------
Total commercial and
multifamily first
mortgage loans........ 48,140 (3,919) 44,221 74,223 (9,909) 64,314
------- ------- ------- ------- -------- -------
Business loans with a
related allowance...... 107 (53) 54 741 (660) 81
------- ------- ------- ------- -------- -------
Total impaired loans.... $62,859 $(4,178) $58,681 $88,784 $(10,767) $78,017
======= ======= ======= ======= ======== =======
The Company's average recorded investment in impaired loans for 1996 and
1995 was $76.8 million and $83.6 million, respectively. Interest income
recognized on impaired loans for 1996 and 1995 amounted to approximately $3.9
million and $4.6 million, respectively.
The following table presents the contractual maturities of the principal
balances of the Company's commercial and multifamily first mortgage loans,
construction loans, net of undisbursed funds on loans in process, and business
loans at December 31, 1996.
REMAINING MATURITY
-----------------------------------------
OVER ONE
ONE YEAR THROUGH OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- ----------
(IN THOUSANDS)
Commercial and multifamily first
mortgage loans:
Adjustable-rate.................... $142,765 $ 661,037 $147,314 $ 951,116
Fixed-rate......................... 101,378 619,606 184,463 905,447
-------- ---------- -------- ----------
Total commercial and multifamily
first mortgage loans............... $244,143 $1,280,643 $331,777 $1,856,563
======== ========== ======== ==========
Construction loans:
Adjustable-rate.................... $ 15,499 $ 11,949 $ 1,879 $ 29,327
Fixed-rate......................... 6,445 971 -- 7,416
-------- ---------- -------- ----------
Total construction loans............ $ 21,944 $ 12,920 $ 1,879 $ 36,743
======== ========== ======== ==========
Business loans:
Adjustable-rate.................... $ 32,513 $ 9,925 $ -- $ 42,438
Fixed-rate......................... -- -- 700 700
-------- ---------- -------- ----------
Total business loans................ $ 32,513 $ 9,925 $ 700 $ 43,138
======== ========== ======== ==========
F-17
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth by geographical region, the principal
balances, net of undisbursed funds on loans in process, of the Company's first
mortgage and cooperative apartment loans receivable portfolios, as well as
related non-accrual loans, at December 31, 1996.
FIRST MORTGAGE LOANS
------------------------------------
COMMERCIAL COOPERATIVE
AND APARTMENT
RESIDENTIAL MULTIFAMILY CONSTRUCTION LOANS TOTAL
----------- ----------- ------------ ----------- ----------
(IN THOUSANDS)
New York:
Principal balance..... $2,193,243 $1,534,221 $19,403 $1,178,907 $4,925,774
Non-accrual loans..... 70,950 14,302 3,570 12,379 101,201
Connecticut:
Principal balance..... 1,046,085 22,963 -- 6,456 1,075,504
Non-accrual loans..... 24,205 671 -- 244 25,120
New Jersey:
Principal balance..... 793,327 121,339 6,791 69,188 990,645
Non-accrual loans..... 23,728 2,074 737 1,410 27,949
California:
Principal balance..... 538,875 2,725 -- -- 541,600
Non-accrual loans..... 3,882 -- -- -- 3,882
Arizona:
Principal balance..... 268,104 -- -- -- 268,104
Non-accrual loans..... 136 -- -- -- 136
Virginia:
Principal balance..... 266,664 -- -- 101 266,765
Non-accrual loans..... 360 -- -- -- 360
New England (excluding
Connecticut):
Principal balance..... 235,741 14,809 -- 2,643 253,193
Non-accrual loans..... 16,033 -- -- -- 16,033
Florida:
Principal balance..... 200,515 12,567 -- -- 213,082
Non-accrual loans..... 3,552 267 -- -- 3,819
Other:
Principal balance..... 1,216,347 147,939 10,549 503 1,375,338
Non-accrual loans..... 6,277 61 -- -- 6,338
---------- ---------- ------- ---------- ----------
Total:
Principal balance..... $6,758,901 $1,856,563 $36,743 $1,257,798 $9,910,005
Non-accrual loans..... $ 149,123 $ 17,375 $ 4,307 $ 14,033 $ 184,838
========== ========== ======= ========== ==========
NOTE 5--ORE, NET
ORE, net, is summarized as follows at December 31:
1996 1995
------- -------
(IN THOUSANDS)
Residential real estate and cooperative apartments............ $36,182 $38,799
Commercial and multifamily real estate........................ 20,367 24,952
Allowance for losses.......................................... (3,294) (3,070)
------- -------
ORE, net...................................................... $53,255 $60,681
======= =======
F-18
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Activity in the allowance for losses on ORE is summarized as follows for the
years ended December 31:
1996 1995 1994
------- -------- --------
(IN THOUSANDS)
Balance at beginning of year...................... $ 3,070 $ 7,247 $ 7,538
Merger adjustment................................. -- -- 36
Allowance acquired in the Lincoln Acquisition..... -- -- 4,571
Provision charged to operations................... 4,799 6,879 4,665
Charge-offs....................................... (5,572) (12,270) (11,234)
Recoveries........................................ 997 1,214 1,671
------- -------- --------
Balance at end of year............................ $ 3,294 $ 3,070 $ 7,247
======= ======== ========
The following table presents the components of ORE expense, net, for the
years ended December 31:
1996 1995 1994
------- -------- --------
(IN THOUSANDS)
Operating expense, net of rental income........... $ 6,979 $ 7,533 $ 10,513
Provision for losses.............................. 4,799 6,879 4,665
Net gains on sales................................ (1,706) (1,520) (4,165)
------- -------- --------
Total ORE expense, net............................ $10,072 $ 12,892 $ 11,013
======= ======== ========
NOTE 6--PREMISES AND EQUIPMENT, NET
Premises and equipment, net, consisted of the following at December 31:
1996 1995
--------- ---------
(IN THOUSANDS)
Land...................................................... $ 7,594 $ 8,594
Buildings................................................. 61,798 67,823
Leasehold improvements.................................... 46,683 61,348
Furniture, fixtures and equipment......................... 95,043 96,070
Buildings leased under capital leases..................... 3,143 3,143
--------- ---------
Total premises and equipment.............................. 214,261 236,978
Accumulated depreciation and amortization................. (110,720) (124,221)
--------- ---------
Premises and equipment, net............................... $ 103,541 $ 112,757
========= =========
Depreciation and amortization of premises and equipment charged to expense
amounted to $16.7 million, $17.9 million and $16.8 million for 1996, 1995 and
1994, respectively.
NOTE 7--LOAN SERVICING
The Company owned the servicing rights to first mortgage and cooperative
apartment loans owned by others with principal balances of $11.0 billion, $9.5
billion and $8.7 billion at December 31, 1996, 1995 and 1994, respectively.
Such loans are not included in the Company's Consolidated Statements of
Financial Condition. Custodial escrow balances maintained in connection with
loans serviced for others, and included in demand deposits, were approximately
$194 million and $142 million at December 31, 1996 and 1995, respectively.
F-19
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The carrying and estimated fair values of the Company's MSR were $102.4
million and $119.3 million, respectively, at December 31, 1996 and $66.5
million and $83.4 million, respectively, at December 31, 1995. During 1996,
1995 and 1994, MSR capitalized amounted to $47.7 million, $17.3 million and
$36.4 million, respectively, and amortization of MSR amounted to $11.9
million, $12.1 million and $9.7 million, respectively. The valuation allowance
for MSR impairment at December 31, 1996 and the activity in such allowance
during 1996 were not material. The Company was not required to maintain a
valuation allowance for MSR impairment during 1995.
Capitalized excess servicing amounted to $25.4 million at December 31, 1996
and $32.6 million at December 31, 1995. Excess servicing capitalized during
1996, 1995 and 1994 amounted to $0.3 million, $0.2 million and $4.7 million,
respectively. Amortization of capitalized excess servicing amounted to $7.5
million, $8.5 million and $10.6 million for 1996, 1995 and 1994, respectively.
NOTE 8--DEPOSITS
The following is a summary of deposits at December 31:
1996 1995
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT RATE AMOUNT RATE
----------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
Demand............................. $ 1,130,863 0.75% $ 1,084,966 0.74%
Savings............................ 2,460,367 2.48 2,689,343 2.51
Money market....................... 2,007,448 3.78 2,160,161 3.83
Time............................... 7,258,061 5.46 6,637,733 5.70
----------- -----------
Total deposits..................... $12,856,739 4.21 $12,572,203 4.27
=========== ===========
Scheduled maturities of time deposits at December 31, 1996 were as follows:
WEIGHTED
AVERAGE
INTEREST
AMOUNT RATE
-------------- ------------
(DOLLARS IN THOUSANDS)
Year ending December 31:
1997............................................ $ 6,258,151 5.43%
1998............................................ 651,849 5.56
1999............................................ 192,415 5.86
2000............................................ 78,070 5.90
2001............................................ 61,697 5.14
Thereafter...................................... 15,879 5.90
--------------
Total time deposits............................. $ 7,258,061 5.46
==============
Time deposits with balances of $100,000 or more amounted to $663.9 million
and $491.5 million at December 31, 1996 and 1995, respectively. The scheduled
maturities of time deposits with balances of $100,000 or more at December 31,
1996 amounted to $289.0 million in three months or less, $172.1 million in
over three through six months, $122.6 million in over six months through one
year, and $80.2 million in over one year.
F-20
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company sold deposits of approximately $283 million and $63 million
during 1995 and 1994, respectively, and recognized gains of $18.6 million and
$1.7 million, respectively.
NOTE 9--SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information concerning securities sold under agreements to repurchase is
summarized in the table below at or for the years ended December 31:
1996 1995 1994
---------- ---------- --------
(DOLLARS IN THOUSANDS)
Carrying value at year end:
Repurchase liability................... $3,557,145 $1,632,453 $ 9,741
Unamortized premiums on interest rate
caps.................................. (6,911) -- --
---------- ---------- --------
Carrying value at year end............... $3,550,234 $1,632,453 $ 9,741
========== ========== ========
Average carrying value during the year... $2,672,859 $1,398,041 $193,730
Maximum month-end carrying value during
the year................................ 3,629,357 1,824,363 304,434
MBS pledged as collateral at year end:
Carrying value, including accrued in-
terest receivable..................... 3,797,628 1,682,301 10,982
Estimated fair value................... 3,744,227 1,670,958 9,796
Weighted average effective interest rate
at year end............................. 5.64% 5.82% 4.50%
Weighted average effective interest rate
during the year......................... 5.52 6.03 4.68
The following table sets forth certain information concerning securities
sold under agreements to repurchase, exclusive of the effects of hedging
activities, at December 31, 1996. All of the agreements outstanding at
December 31, 1996 require the Company to repurchase MBS identical to those
which were sold.
WEIGHTED COLLATERAL
AVERAGE ---------------------
REPURCHASE INTEREST CARRYING ESTIMATED
LIABILITY RATE VALUE(1) FAIR VALUE
---------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
Maturing in:
30 days or less.................... $2,519,289 5.54% $2,725,903 $2,685,302
Over 30 through 90 days............ 731,052 5.52 748,215 738,123
Over 90 days....................... 306,804 6.04 323,510 320,802
---------- ---------- ----------
Total................................ $3,557,145 5.58 $3,797,628 $3,744,227
========== ========== ==========
(1) Includes accrued interest receivable.
Accrued interest payable on securities sold under agreements to repurchase,
which is included in "Other liabilities" in the accompanying Consolidated
Statements of Financial Condition, amounted to $15.2 million and $5.3 million
at December 31, 1996 and 1995, respectively.
F-21
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--FEDERAL HOME LOAN BANK OF NEW YORK ("FHLBNY") ADVANCES
Information concerning FHLBNY advances is summarized in the table below at
or for the years ended December 31:
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Carrying value at year end............. $ 925,139 $4,602,983 $5,319,271
Average carrying value during the
year.................................. 3,081,743 4,963,392 5,483,232
Maximum month-end carrying value during
the year.............................. 4,652,965 5,921,644 5,901,622
Weighted average effective interest
rate at year end...................... 5.76% 6.07% 6.12%
Weighted average effective interest
rate during the year.................. 5.82 6.11 4.83
At December 31, 1996, FHLBNY advances were collateralized by the Bank's
investment in FHLBNY stock and by certain MBS and residential property loans
receivable.
Scheduled maturities of FHLBNY advances at December 31, 1996 were as
follows:
AMOUNT
--------------
(IN THOUSANDS)
Maturing in:
One month or less........................................... $105,000
Over two through three months............................... 260,000
Over three through six months............................... 5,000
Over one through two years.................................. 455,000
Over two through three years................................ 100,000
Over four through five years................................ 88
Deferred interest rate adjustments............................ 51
--------
Total FHLBNY advances......................................... $925,139
========
NOTE 11--SENIOR NOTES
Senior notes, which are unsecured general obligations of the Holding
Company, were comprised of the following at December 31:
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
Due July 2003, net of unamortized discounts of
$1,211 (1996) and $1,334 (1995); 8.9375% stated
interest rate and 9.18% effective interest rate.. $ 98,789 $ 98,666
Due November 2005, net of unamortized discounts of
$1,205 (1996) and $1,282 (1995); 10.50% stated
interest rate and 10.71% effective interest
rate............................................. 98,795 98,718
----------- -----------
Total senior notes................................ $ 197,584 $ 197,384
=========== ===========
The 8.9375% senior notes due July 2003 (the "8.9375% Senior Notes"),
interest on which is payable semi-annually, were issued in 1993 and are
redeemable at the option of the Holding Company, in whole or in part, at any
time on or after July 9, 1998 at specified redemption prices. The 10.50%
senior notes due November 2005 (the "10.50% Senior Notes"), interest on which
is payable quarterly, were issued in 1994 and are redeemable at the option of
the Holding Company, in whole or in part, at any time on or after November 15,
1998 at specified redemption prices.
F-22
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The 8.9375% Senior Notes and the 10.50% Senior Notes were each issued
pursuant to an indenture which includes covenants with respect to limitations
on, among other things: (i) dividends and other distributions; (ii) funded
indebtedness, as defined; and (iii) mergers, consolidations and sales of
assets and subsidiary stock.
Under the terms of the indenture governing the 8.9375% Senior Notes, the
Holding Company is prohibited from declaring or paying any dividends on, or
purchasing, redeeming or otherwise acquiring or retiring for value any of its
capital stock, or returning any capital to holders of its capital stock (each
a "Distribution"), except that the Holding Company may declare and pay
dividends in capital stock of the Holding Company and make a Distribution in
cash or property (other than the Holding Company's capital stock) if the
amount of such Distribution, together with the amount of all previous
Distributions, does not exceed in the aggregate the sum of (i) $10 million,
plus (ii) 75% of the Company's consolidated net income for each fiscal quarter
after June 30, 1993 (but reduced by 100% of the net losses incurred in any
quarter), plus (iii) 100% of the net proceeds received by the Holding Company
upon issuance of its capital stock subsequent to September 1, 1993.
Pursuant to the terms of the indenture governing the 10.50% Senior Notes,
the Holding Company is subject to a limitation on the payment of dividends or
other distributions on its common stock, as well as purchases, redemptions and
acquisitions of such stock and payments in respect of subordinated debt of the
Holding Company ("Restricted Distributions") until such time as the 10.50%
Senior Notes have been rated "investment grade" for a period of three calendar
months. In general, the Holding Company is not permitted to make Restricted
Distributions if, or to the extent that, at such time or after giving effect
thereto, (a) the Holding Company is in default with respect to the 10.50%
Senior Notes, (b) the Bank fails to meet any of its OTS capital requirements
or (c) the aggregate amount of dividends or other distributions on the Holding
Company's common stock subsequent to December 17, 1994 exceeds the sum of (i)
$5 million, plus (ii) 50% of the Holding Company's consolidated net income
from that date (but reduced by 100% of the losses incurred during that
period), plus (iii) an amount equal to the net proceeds received by the
Holding Company from any sales of its capital stock from that date.
Currently, the Holding Company's principal source of funds to make the
interest payments on and to repay the principal of the senior notes at
maturity is the Bank, whose ability to provide such funds is, as further
discussed in Note 13, subject to federal regulations.
NOTE 12--OTHER BORROWED FUNDS
Other borrowed funds consisted of the following at December 31:
1996 1995
-------- --------
(IN THOUSANDS)
Bonds, loans and preferred stocks transferred in put
transactions............................................. $ 55,110 $ 94,537
Collateralized Real Yield securities ("Reals"), net of un-
amortized discounts of $614 (1996) and $667 (1995)....... 77,386 77,333
Other..................................................... 9,738 9,862
-------- --------
Total other borrowed funds................................ $142,234 $181,732
======== ========
From 1983 to 1985, the Bank had entered into various borrowing agreements
under which it transferred various tax-exempt bonds, tax-exempt loans and
preferred stocks to certain unit investment trusts and others, accompanied by
put options. These borrowings, which are due at various dates through June
2010, had a weighted average interest rate of 8.25% at December 31, 1996 and
8.41% at December 31, 1995. At December 31, 1996, the scheduled maturities of
these borrowings for the years 1997 through 2001 and thereafter were $0.5
million, $4.4 million, $1.5 million, $2.9 million, $3.8 million, and $42.0
million, respectively. During the terms of the agreements, the holders are
entitled to return the assets to the Bank under various circumstances at
F-23
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
specified prices. The underlying bonds, loans and preferred stocks transferred
in the put transactions had aggregate carrying values of approximately $36.9
million, $9.4 million and $8.6 million, respectively, at December 31, 1996. At
that date, the borrowing agreements were further collateralized by designated
MBS.
The Reals, which were issued in August 1988 and mature in August 2008, are
not redeemable by the Bank prior to their maturity. However, the holders of
the Reals have the option of electing early repayment, at par value, in August
1998 or 2003. Interest on the Reals is payable quarterly at a rate reset
quarterly based on the sum of 3.00% plus the percentage change, if any, in the
Consumer Price Index for all Urban Consumers during the preceding twelve-month
period. The interest rate on the Reals was 6.25% and 5.76% at December 31,
1996 and 1995, respectively. At December 31, 1996, the Reals were secured by
certain MBS.
Borrowed funds included in "Other" in the above table, certain of which are
collateralized by specified MBS, had weighted average interest rates of 6.31%
and 5.80% at December 31, 1996 and 1995, respectively. At December 31, 1996,
the scheduled maturities of such borrowed funds were $3.6 million in 1997,
$0.1 million in each of 1998, 1999, 2000, and 2001, and $5.7 million in years
thereafter.
NOTE 13--STOCKHOLDERS' EQUITY
Common Stock
The Holding Company is authorized to issue 200,000,000 shares of common
stock, par value $0.01 per share. The number of common shares issued at
December 31, 1996 amounted to 108,262,216 and the number of common shares
outstanding at that date amounted to 104,743,919. As of December 31, 1996,
6,699,296 shares of common stock were reserved for future issuance under the
Company's stock option, stock incentive and stock purchase plans.
In May 1996, the FDIC exercised its warrant to acquire 8,407,500 shares of
the Holding Company's common stock at $0.01 per share (the "Warrant') and sold
the underlying shares in a secondary public offering. The Holding Company
incurred costs of $1.9 million in connection with the public offering, all of
which were charged to additional paid-in-capital. The Warrant had been issued
originally in July 1993 in accordance with the terms of an agreement between
Anchor Bancorp and the FDIC. Pursuant to this agreement, Anchor Bancorp
exchanged $157.0 million of its Class A cumulative preferred stock for $71.0
million of its newly issued 8.9375% senior notes and a warrant to acquire, at
an exercise price of $0.01 per share, 4,750,000 shares of Anchor Bancorp's
common stock (which was converted to a warrant to acquire 8,407,500 shares of
the Holding Company's 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.
During the first six months of 1996, the Holding Company repurchased
2,000,000 shares of its common stock, at an average cost of $12.73 per share,
completing a repurchase program announced in January 1996. The Holding Company
acquired an additional 3,025,900 shares of its common stock, at an average
cost of $14.87 per share, during December 1996 in connection with a program
announced during that month to repurchase up to approximately 5,000,000 common
shares. No time limit has been established to complete this repurchase
program, and there can be no assurances as to when, or if, this program will
be completed. Of the repurchased shares, 1,507,603 were reissued during 1996
in connection with the Company's stock-based benefit programs.
Dividend Restrictions
The Holding Company's ability to pay dividends on its common stock is
limited by restrictions imposed by Delaware law and, as discussed in Note 11,
the indentures associated with the Holding Company's outstanding
F-24
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
senior notes. In general, dividends may be paid out of the Holding Company's
surplus, as defined by Delaware law, or in the absence of such surplus, out of
its net profits for the current and/or immediately preceding fiscal year.
The ability of the Bank to pay dividends to the Holding Company is subject
to federal regulations and income tax consequences.
Generally, the Bank may not make a capital distribution, which includes cash
dividends, at any time when, after such distribution, its regulatory capital
would be below the regulatory capital requirements of the OTS or below the
standards established by the prompt corrective action ("PCA") provisions of
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
for an institution to be deemed adequately capitalized (see Note 14).
Under OTS regulations, a savings institution that exceeds its fully phased-
in capital requirements, both before and after a proposed distribution, and
that has not been advised by the OTS that it is in need of more than normal
supervision, may, after prior notice to, but without the approval of the OTS,
make capital distributions during a calendar year up to the higher of (i) 100%
of its net income to date during the calendar year plus the amount that would
reduce by one-half its surplus capital ratio (the percentage by which an
institution's ratio of total capital to assets exceeds the ratio of its fully
phased-in capital to assets) at the beginning of the calendar year or (ii) 75%
of its net income over the most recent four-quarter period.
Upon its conversion from mutual to stock form, the Bank was required to
establish a liquidation account for the benefit of certain account holders who
continued to maintain their savings accounts with the Bank after the
conversion, in an amount equal to its retained income prior to conversion. The
liquidation account is reduced annually in proportion to the reduction of
eligible savings account balances. Anchor Savings was similarly required to
establish a liquidation account upon its conversion from mutual to stock form.
The liquidation accounts were not changed in any respect by the Merger or the
formation of the Holding Company or Anchor Bancorp. The Bank may not declare
or pay a cash dividend on, or repurchase any of, its capital stock if the
effect thereof would be to cause its regulatory capital to be reduced below
the minimum amount required for the liquidation account.
In addition, to the extent that distributions by the Bank to the Holding
Company exceed the Bank's accumulated earnings and profits and current
earnings and profits (as computed for federal income tax purposes), such
amounts may be treated for tax purposes as distributions of previously
accumulated preferential bad debt deductions.
Stockholder Protection Rights Plan
On October 20, 1995, the board of directors of the Holding Company (the
"Board") adopted a Stockholder Protection Rights Plan (the "Rights Plan").
Under the Rights Plan, which expires in November 2005, the Board declared a
dividend of one right on each outstanding share of the Holding Company's
common stock, which was paid on November 6, 1995 to stockholders of record on
that date (the "Rights"). Until it is announced that a person or group has
acquired 20% or more of the outstanding common stock of the Holding Company
(an "Acquiring Person") or has commenced a tender offer that could result in
their owning 20% or more of such common stock, the Rights will be evidenced
solely by the Holding Company's common stock certificates, will automatically
trade with the Holding Company's common stock and will not be exercisable.
Following any such announcement, separate Rights would be distributed, with
each Right entitling its owner to purchase participating preferred stock of
the Holding Company having economic and voting terms similar to those of one
share of the Holding Company's common stock for an exercise price of $50.
F-25
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Upon announcement that any person or group has become an Acquiring Person
and unless the Board acts to redeem the Rights, then ten business days
thereafter (or such earlier or later date, not beyond 30 days, as the Board
may decide) (the "Flip-in Date"), each Right (other than Rights beneficially
owned by any Acquiring Person or transferee thereof, which become void) will
entitle the holder to purchase, for the $50 exercise price, a number of shares
of the Holding Company's common stock having a market value of $100. In
addition, if, after an Acquiring Person gains control of the Board, the
Holding Company is involved in a merger or sells more than 50% of its assets
or assets generating more than 50% of its operating income or cash flow, or
has entered into an agreement to do any of the foregoing (or an Acquiring
Person is to receive different treatment than all other stockholders), each
Right will entitle its holder to purchase, for the $50 exercise price, a
number of shares of common stock of the Acquiring Person having a market value
of $100. If any person or group acquires between 20% and 50% of the
outstanding common stock of the Holding Company, the Board may, at its option,
exchange one share of such common stock for each Right. The Rights may also be
redeemed by the Board for $0.01 per Right prior to the Flip-in Date.
NOTE 14--REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly additional discretionary--actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for PCA, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank's assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's regulatory capital amounts and classification are also
subject to qualitative judgments by regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation by the OTS to ensure capital
adequacy (the "Capital Adequacy Regulations") require the Bank to maintain, as
set forth in the table below, specified minimum amounts and ratios of leverage
("tier 1") and tangible capital to adjusted total assets and of risk-based
capital to risk-weighted assets. The Bank believes that, as of December 31,
1996, it was in compliance with the Capital Adequacy Regulations.
Pursuant to FDICIA, the OTS adopted PCA regulations ("PCA Regulations")
which established five capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To be categorized as well capitalized, the Bank
must maintain the minimum risk-based, tier 1 risk-based and leverage capital
ratios set forth in the table below. As of December 31, 1996, the most recent
notification from the OTS categorized the Bank as well capitalized under the
regulatory framework for PCA. There are no conditions or events since that
notification that the Bank believes have changed its category.
F-26
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes, at December 31 for the years shown, the
Bank's actual regulatory capital amounts and ratios, as well as its minimum
requirements under the Capital Adequacy Regulations and under the PCA
Regulations for it to be deemed well capitalized.
MINIMUM CAPITAL REQUIREMENTS PURSUANT TO
---------------------------------------------
PCA REGULATIONS
ACTUAL BANK CAPITAL ADEQUACY TO BE DEEMED
REGULATORY CAPITAL REGULATIONS WELL CAPITALIZED
------------------- --------------------- -----------------------
AMOUNT RATIO(1) AMOUNT RATIO AMOUNT RATIO
---------- -------- ----------- --------- ------------- ---------
(DOLLARS IN THOUSANDS)
1996:
Leverage capital........ $1,139,443 6.06% $ 563,671 3.00% $ 939,452 5.00%
Tangible capital........ 1,139,443 6.06 281,836 1.50
Risk-based capital...... 1,245,938 13.08 762,076 8.00 952,594 10.00
Tier 1 risk-based capi-
tal.................... 1,139,443 11.96 571,557 6.00
1995:
Leverage capital........ $1,042,736 5.16% $ 605,731 3.00% $ 1,009,552 5.00%
Tangible capital........ 1,042,736 5.16 302,866 1.50
Risk-based capital...... 1,163,931 12.01 775,082 8.00 968,853 10.00
Tier 1 risk-based capi-
tal.................... 1,042,736 10.76 581,312 6.00
(1) For leverage and tangible capital, the ratios are to adjusted total
assets of $18.8 billion and $20.2 billion at December 31, 1996 and 1995,
respectively. For risk-based and tier 1 risk-based capital, the ratios
are to total risk-weighted assets of $9.5 billion and $9.7 billion at
December 31, 1996 and 1995, respectively.
NOTE 15--EMPLOYEE RETIREMENT BENEFIT PLANS
Pension Plans
The Company currently maintains a non-contributory, qualified, defined
benefit pension plan covering substantially all salaried employees of the
Company who meet certain age and length of service requirements. Prior to July
1, 1995, the Company also maintained a separate non-contributory, qualified,
defined benefit pension plan covering substantially all salaried employees of
the former Anchor who met certain age and length of service requirements,
continuing the plan previously maintained by Anchor. Effective July 1, 1995,
these plans (collectively, the "Qualified Plan") were merged. Contributions
are made to the Qualified Plan to the extent required and deductible under
federal income tax regulations.
Additionally, the Company maintains certain defined benefit, non-qualified,
unfunded retirement plans (the "Non-Qualified Plans") including: (i) a
retainer continuation plan for its outside directors; (ii) a Supplemental
Executive Retirement Plan (the "SERP"); (iii) a Benefit Restoration Plan (the
"BRP"); (iv) supplemental retirement arrangements for certain senior executive
officers of the Company; and (v) retirement plans for a retired Chairman of
the Board and certain retired senior executive officers of the Company.
F-27
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the funded status of the Qualified Plan and
Non-Qualified Plans and amounts recognized in the Consolidated Statements of
Financial Condition at December 31:
1996 1995
-------------------- --------------------
NON- NON-
QUALIFIED QUALIFIED QUALIFIED QUALIFIED
PLAN PLANS PLAN PLANS
--------- --------- --------- ---------
(IN THOUSANDS)
Actuarial present value of benefit
obligation:
Accumulated benefit obligation:
Vested........................... $115,266 $ 13,404 $126,308 $ 11,132
Non-vested....................... 8,710 1,525 3,400 882
-------- -------- -------- --------
Accumulated benefit obligation..... $123,976 $ 14,929 $129,708 $ 12,014
======== ======== ======== ========
Projected benefit obligation for
service rendered to date.......... $140,556 $ 15,155 $144,141 $ 12,833
Plan assets at fair value (primar-
ily listed stocks and bonds)...... 142,841 -- 142,635 --
-------- -------- -------- --------
Plan assets in excess of (less
than) projected benefit obliga-
tion.............................. 2,285 (15,155) (1,506) (12,833)
Unrecognized net transition (asset)
obligation........................ (4,382) 472 (5,307) 553
Unrecognized net loss (gain)....... 10,869 (1,190) 13,801 221
Unrecognized prior service cost.... 1,164 3,367 882 2,679
Minimum liability adjustment....... -- (2,423) -- (2,634)
-------- -------- -------- --------
Prepaid (accrued) pension cost..... $ 9,936 $(14,929) $ 7,870 $(12,014)
======== ======== ======== ========
Net pension expense associated with the Qualified Plan and Non-Qualified
Plans included the following components for the years ended December 31:
1996 1995 1994
-------------------- -------------------- --------------------
NON- NON- NON-
QUALIFIED QUALIFIED QUALIFIED QUALIFIED QUALIFIED QUALIFIED
PLAN PLANS PLAN PLANS PLAN PLANS
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
Service cost-benefits
earned................. $ 4,859 $1,046 $ 3,809 $ 730 $ 4,226 $ 546
Interest cost on pro-
jected benefit obliga-
tion................... 10,055 961 9,568 869 8,228 533
Actual return on plan
assets................. (15,010) -- (28,659) -- 524 --
Net amortization and de-
ferral................. 533 2,072 16,238 809 (11,305) 303
Other................... -- -- -- 1,101 -- --
-------- ------ -------- ------ -------- ------
Net pension expense..... $ 437 $4,079 $ 956 $3,509 $ 1,673 $1,382
======== ====== ======== ====== ======== ======
In developing the pension benefit information for the Qualified Plan, the
weighted average discount rate utilized was 7.75% in 1996, 7.25% in 1995 and
8.50% in 1994. The expected long-term rate of return on plan assets was 10.00%
in 1996 and 1995 and 9.00% for the Company plan and 10.00% for the Anchor plan
in 1994, while the rate of increase in future compensation levels was 5.00% in
each of 1996, 1995 and 1994. For purposes of developing the pension benefit
information for the Non-Qualified Plans, the weighted average discount rate
utilized was 7.75% in 1996, 7.25% in 1995 and 6.00% and 8.50% for the Company
plans and the Anchor plans, respectively, in 1994. In addition, the rate of
increase in future compensation levels was 5.00% in 1996 and 1995 and 6.00%
and 5.00% for the Company plans and Anchor plans, respectively, in 1994.
F-28
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Postretirement Health Care and Life Insurance Plans
The Company currently sponsors unfunded postretirement health care and life
insurance plans covering substantially all salaried employees of the Company
who meet certain age and length of service requirements. Prior to July 1,
1995, the Company also maintained separate unfunded postretirement health care
and life insurance plans covering substantially all salaried employees of the
former Anchor who met certain age and length of service requirements,
continuing arrangements previously maintained by Anchor. Effective July 1,
1995, the former Anchor plans were combined with the Company's plans. The
estimated cost of providing postretirement health care and life insurance
benefits to an employee and the employee's beneficiaries and covered
dependents is accrued during the years that the employee renders the necessary
service.
The following table sets forth the composition of the accrued postretirement
health care and life insurance benefits recognized in the Company's
Consolidated Statements of Financial Condition at December 31:
1996 1995
-------- --------
(IN THOUSANDS)
Accumulated benefit obligation:
Retirees............................................. $ 36,958 $ 44,494
Fully eligible active plan participants.............. 6,944 4,476
Other active plan participants....................... 3,958 5,308
-------- --------
Accumulated benefit obligation......................... 47,860 54,278
Unrecognized net gain (loss)........................... 3,178 (4,956)
Unrecognized transition obligation being amortized over
20 years.............................................. (30,681) (32,591)
-------- --------
Accrued postretirement health care and life insurance
benefits.............................................. $ 20,357 $ 16,731
======== ========
Postretirement health care and life insurance benefits expense included the
following components for the years ended December 31:
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
Service cost-benefits earned.......................... $1,340 $ 770 $ 910
Interest cost on accumulated benefit obligation....... 3,415 3,888 3,640
Amortization of transition obligation................. 1,910 1,952 1,994
Amortization of unrecognized prior service cost....... -- 50 --
Amortization of unrecognized net loss................. -- -- 86
------ ------ ------
Total postretirement health care and life insurance
benefits expense..................................... $6,665 $6,660 $6,630
====== ====== ======
In determining the accumulated benefit obligation, the Company utilized
weighted average discount rates of 7.75% in 1996, 7.25% in 1995 and 8.50% in
1994. The annual rate of increase in future compensation levels used in the
calculation of the accumulated benefit obligation for the postretirement life
insurance plan was 5.00% for 1996 and 1995 and 5.00% for the Company plan and
5.50% for the Anchor plan for 1994.
For measurement purposes as of December 31, 1996, the average annual rate of
increase in the per capita cost of covered health care benefits was assumed,
for 1997, to be 11.00% for participants less than 65 years old and 8.00% for
all other participants and, in each case, was assumed to decline 1.00% per
year until a floor of 5.00% was reached. Increasing the assumed health care
cost trend rates by 1.00% in each year would increase the accumulated benefit
obligation at December 31, 1996 by $2.0 million and would increase the
aggregate of the service and interest cost components of the net
postretirement health care benefits expense for 1996 by $0.2 million.
F-29
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Savings Plans
At December 31, 1996, the Company maintained a savings plan, the Retirement
401(k) Investment Plan (the "401(k) Plan"), pursuant to sections 401(k) and
401(a) of the Internal Revenue Code of 1986, as amended (the "Code"). Under
the 401(k) Plan, participants may contribute up to 15% of their base pay on a
before- or after-tax basis. The Company currently makes matching contributions
equal to 100% of the first 6% of participant contributions. Participants vest
immediately in their own contributions and over a period of five years for the
Company's contributions. Each member's contributions and matching
contributions are invested, in accordance with the member's directions, in one
or any combination of available investment options, including in a fund that
purchases the Holding Company's common stock. The Company's expense of the
401(k) Plan was $4.2 million, $3.4 million and $2.1 million for 1996, 1995 and
1994, respectively.
The Company also maintains non-qualified arrangements (the "Non-Qualified
Arrangements") under which supplemental amounts in excess of those allocated
under the 401(k) Plan are allocated with respect to certain employees and upon
which earnings are credited. These amounts include supplemental allocations
based upon the amounts that would otherwise be contributed as matching
contributions under the 401(k) Plan on base pay that exceeds the amount for
which matching contributions are permitted to be made under the 401(k) Plan.
The Company's expense of the Non-Qualified Arrangements was not material for
1996, 1995 or 1994.
NOTE 16--STOCK PLANS
Stock Incentive and Option Plans
In 1986, 1987 and 1991, the Company adopted stock incentive plans (the "1986
Stock Incentive Plan," the "1987 Stock Incentive Plan" and the "1991 Stock
Incentive Plan," respectively, and together, the "Stock Incentive Plans"). In
connection with the Merger, the Holding Company assumed stock option plans
that had previously been adopted by Anchor in 1989, 1990 and 1992 (the "1989
Stock Option Plan," the "1990 Stock Option Plan" and the "1992 Stock Option
Plan," respectively, and together, the "Stock Option Plans"). Upon
consummation of the Merger, the number of outstanding options under the Stock
Option Plans was multiplied by, and the per share exercise price divided by,
1.77 (see Note 2). The 1986 and 1987 Stock Incentive Plans and the 1989 Stock
Option Plan terminated by their terms during 1996 and the 1990 Stock Option
Plan terminated by its terms during 1995. The awards granted under these plans
prior to their termination remain in effect in accordance with their terms. At
December 31, 1996, shares of the Holding Company's common stock available for
future grant under the 1991 Stock Incentive Plan, as amended, and the 1992
Stock Option Plan amounted to 1,501,096 and 410,785, respectively.
The 1991 Stock Incentive Plan, which terminates in February 2004, provides
for stock-based awards to eligible employees. The 1986 and 1987 Stock
Incentive Plans, prior to termination, provided for stock-based awards to
eligible employees and outside directors, respectively. Stock-based awards
under the Stock Incentive Plans consist of stock options, stock appreciation
rights ("SARs"), the sale of restricted stock and, with respect to the 1991
Stock Incentive Plan, deferred stock awards, certain loans and tax offset
payments. Participants may be granted one or more types of awards, which may
be granted independently or in tandem. Stock options and SARs that have been
granted under the Stock Incentive Plans have an exercise price equal to the
fair market value of the Holding Company's common stock at the date of grant
and may be exercised over a period not in excess of eleven years. Stock
options issued under the Stock Incentive Plans vest over a pre-determined
period of time, generally three years. At the date of the Merger, all unvested
options outstanding under the 1991 Stock Incentive Plan became exercisable.
Under the 1989 Stock Option Plan, an option was granted to a senior
executive officer to acquire 100,000 shares of Anchor Bancorp common stock,
which, in connection with the Merger, was converted to an option to
F-30
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
purchase 177,000 shares of the Holding Company's common stock, at an adjusted
price based on the price per share equal to the fair market value of Anchor
Bancorp's common stock on the date of grant. The stock option granted under
the 1989 Stock Option Plan, which was exercised in full during 1996, vested
one-fifth on the date of grant and one-fifth at the end of each of the four
years subsequent to the grant date.
The 1990 Stock Option Plan provided options to key employees, while the 1992
Stock Option Plan provides options to all eligible employees, to purchase
shares of the Holding Company's common stock at a specified price, generally
at least equal to, or in excess of the fair market value of such common stock
at date of grant or, with respect to options granted prior to the Merger, the
fair market value of Anchor Bancorp's common stock at date of grant as divided
by 1.77, over a period not in excess of ten years, or in certain
circumstances, ten years and one day. All stock options awarded under the 1990
and 1992 Stock Option Plans have, as applicable, an exercise price equal to
the fair market value of the Holding Company's common stock at date of grant
or the fair market value of Anchor Bancorp's common stock at date of grant as
divided by 1.77. The stock options under the 1990 and 1992 Stock Option Plans
vest over a pre-determined period of time, generally three years. Upon
consummation of the Merger, all unvested options outstanding under the 1990
Stock Option Plan and substantially all of the unvested options outstanding
under the 1992 Stock Option Plan became exercisable. The 1992 Stock Option
Plan does not have an established termination date but may be terminated at
any time by the Board.
A summary of the status of the Stock Incentive Plans and the Stock Option
Plans at December 31, 1996, 1995 and 1994, and changes during the years ended
on those dates, is presented in the table below.
1996 1995 1994
----------------- ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
(OPTIONS IN THOUSANDS)
Outstanding at beginning
of year.................. 4,698 $ 6.86 4,836 $5.93 4,468 $5.74
Granted................... 950 12.76 728 9.40 758 8.21
Exercised................. (1,614) 5.04 (727) 2.68 (248) 2.42
Forfeited................. (100) 9.64 (139) 9.49 (344) 8.96
Merger adjustment......... -- -- 202
------ ----- -----
Outstanding at end of
year..................... 3,934 8.96 4,698 6.86 4,836 5.93
====== ===== =====
Exercisable at end of
year..................... 2,754 7.74 3,719 6.29 2,788 5.83
The weighted average grant-date fair value of stock options granted during
1996 and 1995 was $6.02 and $5.28, respectively.
F-31
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1996.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -----------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
--------------- -------------- -------- ----------- -------------- --------
(IN THOUSANDS) (IN YEARS) (IN THOUSANDS)
$ 1.13--$ 4.91.......... 674 $ 2.50 5.3 674 $ 2.50
5.61-- 9.75.......... 1,660 8.04 7.4 1,406 7.95
10.09-- 13.38.......... 1,188 11.76 8.0 510 11.55
14.47-- 16.14.......... 412 15.16 3.4 164 15.62
----- -----
1.13-- 16.14.......... 3,934 8.96 6.8 2,754 7.74
===== =====
The outstanding number of SARs issued in connection with the Stock Incentive
Plans, all of which have been awarded in tandem with stock options, amounted
to 1.8 million, 2.2 million and 2.0 million at December 31, 1996, 1995 and
1994, respectively. The exercise of SARs issued in tandem with stock options
results in the cancellation of the related stock options. Conversely, the
exercise of stock options issued in tandem with SARs results in the
cancellation of the related SARs. No SARs issued have been exercised. The
Company's outstanding SARs may only be exercised upon change in control of the
Company.
In connection with the Stock Incentive Plans, the Company has sold
restricted stock to certain employees and outside directors, generally for
$1.00 per share. Restrictions on such stock sold to employees generally lapse
at the rate of one-third per year after each of the third, fourth and fifth
years from date of grant, while restrictions on such stock sold to outside
directors lapse after a five-year vesting period. Restrictions also lapse upon
the death, retirement from the Company or, in certain instances, the
disability of the participant. The restrictions on restricted stock sold under
the 1991 Stock Incentive Plan lapsed upon consummation of the Merger.
The following table summarizes restricted stock activity (number of shares)
for the years ended December 31:
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
Outstanding at beginning of year............................ 47 29 102
Granted and purchased....................................... 40 28 2
Repurchased................................................. (6) -- (7)
Lapsed restrictions......................................... (8) (10) (68)
--- --- ---
Outstanding at end of year.................................. 73 47 29
=== === ===
The weighted average grant-date fair value of restricted stock sold during
1996 and 1995 was $11.66 and $8.74, respectively.
During 1994, in connection with a performance incentive program (the
"Performance Incentive Program") adopted in conjunction with the Stock
Incentive Plans, 348,450 deferred shares of the Holding Company's common stock
were awarded to participants, with actual shares of stock to be issued upon
the Company's achievement of performance goals over a three-year period and
with vesting over that three-year period. Upon consummation of the Merger, all
such deferred shares awarded became vested. Deferred shares of the Holding
Company's common stock awarded under the Stock Incentive Plans, separate from
the Performance Incentive Program, were not material during 1996, 1995 or
1994.
F-32
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Compensation expense recognized in operations in connection with the
Company's stock-based compensation arrangements during 1996, 1995 and 1994
amounted to $0.2 million, $0.1 million and $3.1 million, respectively.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 123 encourages entities to account for stock-based compensation
arrangements with employees based on fair value, but permits an entity to
continue utilizing the intrinsic value based method of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") in
accounting for such arrangements. Under the fair value based method of SFAS
123, compensation cost associated with stock-based compensation arrangements
is measured at the grant date based on fair value, whereas, under the
accounting of APB 25, 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. In
implementing SFAS 123, the Company elected to continue accounting for its
stock-based compensation arrangements with employees using the intrinsic value
based method of APB 25. Accordingly, no compensation cost has been recognized
by the Company for stock options granted under the Stock Incentive Plans and
the Stock Options Plans. Had compensation cost for stock options granted in
1996 and 1995 been determined consistent with SFAS 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below for the years ended December 31:
1996 1995
----------- -----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net income:
As reported........................................ $ 104,256 $ 62,185
Pro forma.......................................... 102,510 61,782
Primary earnings per share:
As reported........................................ 0.96 0.57
Pro forma.......................................... 0.94 0.56
Fully diluted earnings per share:
As reported........................................ 0.95 0.57
Pro forma.......................................... 0.94 0.56
As the fair value accounting method of SFAS 123 has not been applied to
stock options granted prior to January 1, 1995, the resulting pro forma
compensation cost used in computing the pro forma information in the above
table may not be representative of that to be expected in future years. In
preparing the pro forma information, the fair value of each grant of stock
options by the Company in 1996 and 1995 was estimated on the date of grant
using the Black-Scholes option-pricing model, with the following weighted-
average assumptions used for the years ended December 31, 1996 and 1995,
respectively: risk-free interest rates of 5.97% and 6.63%; expected lives of
options of 6 years for both years; volatility of 45% and 50%; and dividend
yields of 0.00% for both years.
During the fourth quarter of 1996, the Board approved a new stock incentive
plan for outside directors (the "1997 Stock Incentive Plan"), subject to
approval by the Holding Company's stockholders at its annual meeting of
stockholders to be held in May 1997. The 1997 Stock Incentive Plan, if
approved, will provide for: (i) an automatic one-time grant to each individual
who first becomes an outside director of the Holding Company on or after
January 1, 1997 of an option to purchase 3,000 shares of the Holding Company's
common stock and the right to purchase 1,000 shares of restricted stock; (ii)
automatic annual awards, during its term, to each outside director of the
Holding Company of an option to purchase 1,500 shares of the Holding Company's
common
F-33
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
stock; and (iii) discretionary awards of options and restricted stock to
outside directors of eligible direct and indirect subsidiaries of the Holding
Company. Each option awarded under the 1997 Stock Incentive Plan will have a
term of 11 years, will generally vest over a three-year period and will have
an exercise price equal to the closing market price of the Holding Company's
common stock on the date granted. The per share purchase price of restricted
stock granted under the 1997 Stock Incentive Plan will be $1.00 and related
restrictions will lapse one-third each year on each of the third, fourth and
fifth anniversaries of the grant. The 1997 Stock Incentive Plan will terminate
10 years from the date of its approval by the Holding Company's stockholders.
Under the 1997 Stock Incentive Plan, 350,000 shares of the Holding Company's
common stock will initially be reserved for future issuance.
Employee Stock Purchase Plan
In 1993, the Company adopted an employee stock purchase plan (the "1993
Employee Stock Purchase Plan"), effective in the first quarter of 1994,
reserving 1,000,000 shares of the Holding Company's common stock for purchase
by eligible employees of the Company at a price equal to 85% of the fair
market value on the first date of the relevant purchase period. The 1993
Employee Stock Purchase Plan was amended, effective January 1, 1996, to permit
a purchase price of between 85% and 100%, as established by the Compensation
Committee of the Board (the "Compensation Committee"), of the fair market
value of the Holding Company's common stock on the first date of the relevant
purchase period. The purchase period and number of shares made available to
each eligible participant during a specified purchase period are also
established by the Compensation Committee. During 1996, shares were made
available for purchase in March 1997 under the 1993 Employee Stock Purchase
Plan at a per share price of $12.13, which was equal to the fair market value
of the Holding Company's common stock on the first date of the purchase
period. The number of such shares subscribed to amounted to 63,447 at December
31, 1996. During 1994, 224,145 shares of the Holding Company's common stock
were purchased by employees under the 1993 Employee Stock Purchase Plan. No
common shares of the Holding Company were purchased during 1995 under the 1993
Employee Stock Purchase Plan.
NOTE 17--INCOME TAXES
Total income tax expense (benefit) was allocated as follows for the years
ended December 31:
1996 1995 1994
------- ------- --------
(IN THOUSANDS)
Income tax expense (benefit) attributable to:
Operations.................................... $49,984 $47,727 $(53,138)
Securities available for sale valuation allow-
ance......................................... (4,125) 5,239 (11,176)
------- ------- --------
Total income tax expense (benefit).............. $45,859 $52,966 $(64,314)
======= ======= ========
During 1996, the Company recognized income tax benefits of $12.3 million
upon the final resolution of certain federal, state and local tax filing
positions taken in prior years.
During 1994, an aggregate of $129.9 million of the Company's deferred tax
asset was recognized through the elimination of the balance of the related
valuation allowance. Factors considered included the improved earnings
potential of the Company resulting from the Merger, coupled with the continued
strengthening of the quality of assets. In addition, during 1994, the Company
reconsidered certain tax planning strategies in order to maximize the
realization of the deferred tax attributes. This resulted in the Company
incurring additional current tax expense of $20.5 million during 1994 and
reducing its gross deferred tax asset by approximately $12.2 million.
F-34
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income tax expense (benefit) attributable to operations consisted of the
following for the years ended December 31:
1996 1995 1994
-------- ------- ---------
(IN THOUSANDS)
Current:
Federal.................................... $ 3,286 $ 1,851 $ 26,460
State and local............................ 11,032 2,844 12,668
-------- ------- ---------
Total current................................ 14,318 4,695 39,128
-------- ------- ---------
Deferred:
Federal.................................... 27,605 31,426 (107,623)
State and local............................ 8,061 11,606 15,357
-------- ------- ---------
Total deferred............................... 35,666 43,032 (92,266)
-------- ------- ---------
Total income tax expense (benefit) attribut-
able to operations.......................... $ 49,984 $47,727 $ (53,138)
======== ======= =========
The following is a reconciliation of expected income tax expense
attributable to operations, computed at the statutory federal income tax rate
of 35.0%, to the actual income tax expense (benefit) attributable to
operations for the years ended December 31:
1996 1995 1994
-------- ------- ---------
(IN THOUSANDS)
Expected federal income tax expense at
statutory rate.............................. $ 53,984 $38,469 $ 23,696
Reduction in federal, state and local income
taxes resulting from a change in the balance
of the valuation allowance for deferred tax
assets allocated to income tax expense
during the year............................. -- -- (129,930)
State and local income taxes, net of federal
income tax benefit (excluding the effect of
a change in the valuation allowance for
deferred tax assets)........................ 12,410 9,392 41,248
Non-deductible amortization of goodwill...... 178 196 277
Adjustment of federal deferred taxes upon
resolution of tax filing positions.......... (17,602) -- --
Non-deductible Merger-related restructuring
expense..................................... -- -- 6,146
Non-deductible minority interest-preferred
stock dividends of subsidiary............... -- -- 4,002
Other, net................................... 1,014 (330) 1,423
-------- ------- ---------
Total income tax expense (benefit)
attributable to operations.................. $ 49,984 $47,727 $ (53,138)
======== ======= =========
The significant components of deferred income tax expense (benefit)
attributable to operations were as follows for the years ended December 31:
1996 1995 1994
-------- ------- ---------
(IN THOUSANDS)
Deferred income tax expense (benefit),
exclusive of the effects of other components
listed below................................ $ 35,666 $43,032 $ 37,664
Decrease in balance of the valuation
allowance for deferred tax assets during the
year........................................ -- -- (129,930)
-------- ------- ---------
Total deferred income tax expense (benefit).. $ 35,666 $43,032 $ (92,266)
======== ======= =========
F-35
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The combined federal, state and local income tax effects of temporary
differences that gave rise to significant portions of the deferred tax assets
and deferred tax liabilities were as follows at December 31:
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforward............. $109,611 $116,200 $161,647
Excess tax basis and potential bad debt
reserve deductions relating to non-
performing assets.......................... 54,138 74,186 71,320
Financial statement reserves not yet
realized for tax purposes.................. 9,968 11,602 23,427
Postretirement benefits other than
pensions................................... 9,536 7,575 5,646
Federal alternative minimum tax and general
business tax credit carryforwards.......... 5,976 2,787 988
MSR......................................... -- -- 2,888
Premises and equipment...................... 5,395 3,389 808
Securities.................................. -- 12,350 11,407
Other, net.................................. -- 4,012 4,141
-------- -------- --------
Gross deferred tax assets..................... 194,624 232,101 282,272
-------- -------- --------
Deferred tax liabilities:
Capitalized excess servicing................ (7,921) (7,432) (10,536)
Securities.................................. (228) -- --
MSR......................................... (1,183) (1,206) --
Other, net.................................. (1,620) -- --
-------- -------- --------
Gross deferred tax liabilities................ (10,952) (8,638) (10,536)
-------- -------- --------
Net deferred tax assets....................... $183,672 $223,463 $271,736
======== ======== ========
The timing of the realization of a substantial portion of the Company's
deferred tax asset may be subject to significant limitation if the Holding
Company undergoes an ownership change ("Ownership Change") as defined in
section 382 ("Section 382") of the Code. Section 382 generally provides that,
if a corporation undergoes an Ownership Change, the amount of taxable income
that the corporation may offset with net operating loss carryforwards and
certain net unrealized built-in losses would be subject to an annual
limitation. Based on existing information, the Company has concluded that an
Ownership Change did not occur as a result of the Merger. If an Ownership
Change were to occur and the Company were to become subject to an annual
limitation as discussed above, it might adversely impact the timing of the
realization of a substantial portion of the Company's deferred tax asset.
However, if this were to occur, certain tax planning strategies are available
to help mitigate any adverse effect.
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $313 million, substantially all
of which are available to reduce future federal income taxes through the year
2009. Of such net operating loss carryforwards, approximately $6 million were
acquired in connection with the Lincoln Acquisition. In accordance with
Section 382, the annual maximum utilization of the net operating loss
carryforwards associated with the Lincoln Acquisition, all of which expire on
December 31, 2008, is limited to $4.8 million.
At December 31, 1996, the Company had general business tax credit
carryforwards of $4.1 million which are available to reduce future federal
income taxes. Of such carryforwards, $1.0 million expire in 2009, $1.5 million
in 2010 and $1.6 million in 2011. The Company also has federal alternative
minimum tax credit carryforwards of $1.9 million which are available to reduce
future federal income taxes without expiration.
F-36
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1996, federal legislation was enacted that generally eliminates the
potential recapture of federal income tax deductions arising from commonly
used 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 repealed 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 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 1996, and
New York City legislation was enacted in March 1997, 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
law.
At December 31, 1996, the Bank had approximately $189 million of bad debt
reserves for New York income tax purposes for which no provision for income
tax has been made, of which approximately $47 million are subject to recapture
upon distribution to the Holding Company of these tax reserves. Any charge to
a bad debt reserve for other than bad debts on loans would create income for
tax purposes only, which would be subject to the then current corporate tax
rate. For federal tax purposes, approximately $171 million of the Bank's
previously accumulated bad debt deductions are subject to recapture upon its
distribution to the Holding Company. It is not the Bank's intention to make
any distributions to the Holding Company, or use the reserve in any manner,
which would create income tax liabilities for the Bank.
In order for the Bank to be permitted to maintain a New York tax bad debt
reserve for thrifts, certain thrift definitional tests must be met, including
maintaining at least 60% of its assets in qualifying assets, as defined for
tax purposes, and maintaining a thrift charter. If the Bank failed to meet
these definitional tests, the transition to the reserve method permitted
commercial banks would result in an increase in the New York tax provision as
a deferred tax liability would be established to reflect the eventual
recapture of some or all of the New York bad debt reserve. The Bank's
percentage of qualifying assets at December 31, 1996 was significantly in
excess of the minimum threshold. The Bank does not anticipate failing the
thrift definitional tests for New York tax purposes.
F-37
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses various derivative financial instruments as part of its
overall asset/liability management strategy and to manage certain risks
associated with its mortgage banking activities. Derivative financial
instruments are not used by the Company for trading activity purposes.
The following table summarizes, by category of item being hedged, the
notional amounts and estimated fair values of the Company's outstanding
derivative financial instruments at December 31:
1996 1995
-------------------- --------------------
ESTIMATED ESTIMATED
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
---------- --------- ---------- ---------
(IN THOUSANDS)
ASSET/LIABILITY MANAGEMENT:
Interest rate swaps hedging:
Loans receivable.................. $ 660,216 $(2,994) $ 212,747 $(2,195)
Deposits.......................... -- -- 150,000 533
Securities sold under agreements
to repurchase.................... 420,000 1,241 -- --
FHLBNY advances................... 30,000 (690) 928,000 (4,837)
---------- ------- ---------- -------
Total interest rate swaps....... 1,110,216 (2,443) 1,290,747 (6,499)
---------- ------- ---------- -------
Interest rate caps hedging:
Loans receivable.................. 424,484 527 -- --
MBS available for sale............ 192,153 239 877,118 961
MBS held to maturity.............. 256,787 319 366,061 401
Securities sold under agreements
to repurchase.................... 361,000 4,647 -- --
---------- ------- ---------- -------
Total interest rate caps........ 1,234,424 5,732 1,243,179 1,362
---------- ------- ---------- -------
Options hedging FHLBNY advances..... -- -- 37,000 70
---------- ------- ---------- -------
Total asset/liability manage-
ment........................... 2,344,640 3,289 2,570,926 (5,067)
---------- ------- ---------- -------
MORTGAGE BANKING ACTIVITIES:
Forward contracts hedging loans held
for sale originations.............. 136,770 575 69,676 (709)
Options hedging loans held for sale
originations....................... 40,000 64 10,000 22
Interest rate floors hedging MSR.... 996,498 77 1,219,776 1,026
---------- ------- ---------- -------
Total mortgage banking activi-
ties........................... 1,173,268 716 1,299,452 339
---------- ------- ---------- -------
Total derivative financial instru-
ments.............................. $3,517,908 $ 4,005 $3,870,378 $(4,728)
========== ======= ========== =======
The Company's outstanding interest rate swap agreements at December 31, 1996
are in the form where, based on an agreed-upon notional amount, the Company
agrees to make periodic fixed-rate payments, while the counterparty agrees to
make periodic variable-rate payments that are tied to the one- or three-month
London Interbank Offered Rate ("LIBOR"). The notional amount of the interest
rate swap agreements is not indicative of principal to be exchanged either at
the inception or maturity of the contracts. The utilization of these interest
rate swaps allows the Company to achieve interest income or expense similar to
that which would exist if it had changed the interest rate of designated
assets from a fixed-rate to a variable-rate and had changed the interest rate
of designated liabilities from a variable-rate to a fixed-rate. Of the $1.1
billion notional amount of interest rate swap agreements used by the Company
at December 31, 1996, $713.4 million amortizes on predetermined dates and in
predetermined amounts.
F-38
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the Company's interest rate swap activity
(notional amounts) for the years ended December 31:
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
Balance at beginning of year............. $1,290,747 $1,703,280 $1,415,000
New agreements........................... 584,722 415,210 554,700
Matured agreements....................... (700,469) (800,000) (250,000)
Terminated agreements.................... (7,908) -- --
Amortization............................. (56,876) (27,743) (16,420)
---------- ---------- ----------
Balance at end of year................... $1,110,216 $1,290,747 $1,703,280
========== ========== ==========
The table that follows sets forth the contractual maturities of the
Company's interest rate swap agreements outstanding at December 31, 1996 by
category of asset or liability being hedged, as well as the related weighted
average interest rates receivable and payable at that date. Variable-rates in
the table are assumed to remain constant at their December 31, 1996 levels.
MATURING IN THE YEARS ENDING DECEMBER 31,
-----------------------------------------------------------
1997 1998 1999 2000 2001 THEREAFTER TOTAL
-------- -------- -------- ------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
Interest rate swaps
hedging:
Loans receivable:
Notional amount........ $100,468 $152,165 $133,468 $39,007 $163,779 $71,329 $ 660,216
Weighted average:
Variable-rate receiv-
able................. 5.63% 5.60% 5.61% 5.59% 5.62% 5.63% 5.61%
Fixed-rate payable.... 5.64% 6.16% 6.36% 6.53% 6.44% 6.68% 6.27%
Securities sold under
agreements to repur-
chase:
Notional amount........ $390,000 $ 30,000 $ -- $ -- $ -- $ -- $ 420,000
Weighted average:
Variable-rate receiv-
able................. 5.60% 5.65% -- % -- % -- % -- % 5.60%
Fixed-rate payable.... 5.35% 6.24% -- % -- % -- % -- % 5.41%
FHLBNY advances:
Notional amount........ $ -- $ -- $ 30,000 $ -- $ -- $ -- $ 30,000
Weighted average:
Variable-rate receiv-
able................. -- % -- % 5.54% -- % -- % -- % 5.54%
Fixed-rate payable.... -- % -- % 7.06% -- % -- % -- % 7.06%
-------- -------- -------- ------- -------- ------- ----------
Total:
Notional amount........ $490,468 $182,165 $163,468 $39,007 $163,779 $71,329 $1,110,216
======== ======== ======== ======= ======== ======= ==========
Weighted average:
Variable-rate receiv-
able................. 5.60% 5.61% 5.59% 5.59% 5.62% 5.63% 5.61%
Fixed-rate payable.... 5.41% 6.17% 6.49% 6.53% 6.44% 6.68% 5.97%
Under each of its outstanding interest rate cap agreements at December 31,
1996, the Company, in return for a premium paid to the counterparty at
inception, receives cash payments from the counterparty at specified dates in
the amount by which a specified market interest rate is higher than a
designated cap interest rate, as applied to the notional amount of the
agreement. The Company, at December 31, 1996, had outstanding interest rate
cap agreements with a notional amount of $873.4 million, which were entered
into during 1995 in order to hedge the periodic and lifetime interest rate
caps embedded in certain of its adjustable-rate loans and MBS. Each such
agreement is amortizing in nature and provides for the Company to receive cash
payments from the counterparty when the weekly average yield of the one-year
constant maturity Treasury index ("CMT") rises above a specified cap interest
rate. At December 31, 1996, the one-year CMT was 5.51% and the weighted
F-39
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
average specified cap interest rate on these agreements was 8.00%. In
addition, at December 31, 1996, the Company had interest rate cap agreements
outstanding with a notional amount of $361.0 million, which were entered into
during 1996 for the purpose of locking-in maximum interest costs on certain of
its securities sold under agreements to repurchase. These agreements, the
notional amounts of which do not change during their term, provide for the
Company to receive cash payments when the one-month LIBOR, which was 5.50% at
December 31, 1996, rises above a specified cap interest rate. At December 31,
1996, the weighted average specified cap interest rate on these agreements was
7.04%. Unamortized premiums on the Company's outstanding interest rate cap
agreements amounted to $11.2 million at December 31, 1996.
The following table sets forth the contractual maturities of the Company's
interest rate cap agreements outstanding at December 31, 1996 by category of
asset or liability being hedged. Certain of the amounts set forth in the table
are subject to change in the event that specified cap interest rates exceed
the specified interest rates.
MATURING IN THE YEARS ENDING DECEMBER 31,
-------------------------------------------
1997 1998 1999 2001 TOTAL
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Interest rate caps
hedging:
Loans receivable...... $ 109,366 $ 213,548 $ 101,570 $ -- $ 424,484
MBS available for
sale................. 49,507 96,668 45,978 -- 192,153
MBS held to maturity.. 66,160 129,183 61,444 -- 256,787
Securities sold under
agreements to
repurchase........... -- -- 165,000 196,000 361,000
---------- ---------- ---------- ---------- ----------
Total................... $ 225,033 $ 439,399 $ 373,992 $ 196,000 $1,234,424
========== ========== ========== ========== ==========
The forward contracts used by the Company at December 31, 1996 hedge its
exposure to interest rate risk associated with loans held for sale origination
activities. These contracts, which generally mature within 90 days, represent
firm commitments to deliver MBS or loans at a specified price at a specified
future date. The Company must either deliver the MBS or loans in accordance
with the requirements of the contracts or pair-off the commitments and
recognize the gain or loss based on the change in the price of the underlying
contract (i.e., the specified price minus the repurchase price multiplied by
the notional amount).
Options give the holder the right, but not the obligation, to purchase from
or to sell to the counterparty a designated financial instrument at a
specified price during an agreed upon period of time or on a specific date.
The buyer of an option pays a premium for this right. A put option gives the
buyer the right to sell the underlying financial instrument, while a call
option gives the buyer the right to purchase the underlying financial
instrument, at a specified price during a specified period of time or on a
specified date. The buyer of a put option benefits if the price of the
underlying financial instrument declines by an amount that is sufficient to
cover the option premium. The buyer of a call option benefits if the price of
the underlying financial instrument rises above the agreed upon sales price by
an amount that is sufficient to cover the option premium. At December 31,
1996, the Company had outstanding options of $40.0 million, of which $25.0
million were put options to sell interest rate futures, $10.0 million were put
options to sell MBS and $5.0 million were call options to purchase MBS. The
outstanding options at December 31, 1996 expire during the first quarter of
1997.
The Company's interest rate floor agreements, all of which were entered into
during 1993 and 1994 and are amortizing in nature, have been transacted for
the purpose of reducing the impact of the potential loss of future net
servicing revenues associated with a portion of its MSR that may result from
an increase in loan prepayments. Under each of its interest rate floor
agreements, the Company, in return for a premium paid to the counterparty at
inception, receives cash payments from the counterparty when either the five-
or ten-year CMT, which were 6.21% and 6.43%, respectively, at December 31,
1996, declines below a designated floor interest rate. Of the
F-40
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$996.5 million notional amount of interest rate floors outstanding at December
31, 1996, $181.9 million were indexed to the five-year CMT and had a weighted
average designated floor interest rate of 5.30%, and $814.6 million were
indexed to the ten-year CMT and had a weighted average designated floor
interest rate of 5.54%. The Company's interest rate floor agreements
outstanding at December 31, 1996 terminate at various dates from August 1998
through October 1999. At December 31, 1996, unamortized premiums on the
Company's outstanding interest rate floor agreements amounted to $0.7 million.
The Company must maintain collateral with counterparties to certain of its
outstanding derivative financial instruments that will cover any negative
market value in its position, subject to a minimum call. In addition, if the
Company is subject to an initial collateral requirement, collateral must be
maintained with the counterparty, regardless of what market value changes
occur.
For a discussion of the credit risk associated with the Company's derivative
financial instruments, reference is made to Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Management of
Credit Risk--Derivative Financial Instruments."
NOTE 19--COMMITMENTS AND CONTINGENT LIABILITIES
The Company has entered into non-cancelable capital and operating lease
agreements with respect to Company premises and equipment that expire at
various dates through 2012. Certain leases contain escalation clauses, which
correspond with increased real estate taxes and other operating expenses, and
renewal options calling for increased rents. There are no restrictions imposed
by any lease agreement regarding the payment of dividends, additional debt
financing or entering into further lease agreements.
The projected minimum future rental payments required under the terms of
capital leases and non-cancelable operating leases with terms of one year or
more, and projected sublease rentals, were as follows at December 31, 1996:
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
Year ending December 31:
1997................................................... $ 840 $ 15,791
1998................................................... 833 13,754
1999................................................... 825 12,251
2000................................................... 607 11,872
2001................................................... 172 11,655
Thereafter............................................. 702 70,403
------ --------
Total projected minimum rental payments required..... 3,979 135,726
Projected sublease rentals............................... (137) (13,797)
------ --------
Net projected minimum rental payments required........... $3,842 $121,929
====== ========
Net rent expense under operating leases was $17.7 million, $20.0 million,
and $17.9 million for 1996, 1995 and 1994, respectively.
The Bank and its wholly-owned subsidiary, Dime Mortgage of New Jersey, Inc.,
have been named in an action entitled Koslowe v. Dime Mortgage of New Jersey
and The Dime Savings Bank of New York, which was filed, as a purported class
action, in the United States District Court, District of New Jersey during the
first quarter of 1997. The plaintiff alleges, among other things, that, in
connection with the making of residential
F-41
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
property loans, the Bank and its subsidiary made certain payments to mortgage
brokers in violation of the Real Estate Settlement Procedures Act ("RESPA")
and engaged in unfair acts in violation of the deceptive trade practices laws
of various states. The plaintiff seeks unspecified compensatory damages plus,
as to certain claims, treble damages. The Company believes that its
compensation programs for mortgage brokers comply with applicable laws and
with accepted mortgage banking industry practices and that it has meritorious
defenses to the action. The Company intends to oppose the action vigorously.
Certain other claims, suits, complaints and investigations involving the
Company, arising in the ordinary course of business, have been filed or are
pending. The Company is of the opinion, after discussion with legal counsel
representing the Company in these proceedings, that the aggregate liability or
loss, if any, arising from the ultimate disposition of these matters would not
have a material adverse effect on the Company's consolidated financial
position or results of operations.
The Company had the following commitments to extend credit and purchase
loans at December 31:
1996 1995
-------- --------
(IN THOUSANDS)
Commitments to extend credit:
Residential property loans.............................. $267,150 $324,857
Commercial and multifamily first mortgage loans......... 61,854 54,242
Consumer and business loans............................. 475,146 388,031
-------- --------
Total commitments to extend credit.................... 804,150 767,130
Commitments to purchase residential property loans........ 24,508 97,499
-------- --------
Total commitments to extend credit and purchase loans..... $828,658 $864,629
======== ========
Commitments to extend credit are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Such
commitments generally have fixed expiration dates or termination clauses and
may require payment of a fee. Since certain of the commitments are expected to
expire without being drawn upon, the total commitment amounts may not
represent future cash requirements. The Company evaluates the creditworthiness
of these transactions through its lending policies. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is
based on the Company's credit evaluation of the borrower. The Company's
maximum exposure to credit loss for commitments to extend credit as a result
of non-performance by the counterparty is the contractual notional amount.
The Company had letters of credit outstanding at December 31, 1996 and 1995
of $22.4 million and $3.7 million, respectively. Letters of credit represent
agreements whereby the Company guarantees the performance of a customer to a
third party. The Company requires collateral to support such agreements based
on the Company's evaluation of the creditworthiness of the customer. The
credit risk associated with letters of credit is similar to that incurred by
the Company in its lending activities.
The Company is obligated under various limited recourse provisions
associated with certain first mortgage and cooperative apartment loans sold in
past years. The principal balance of loans sold with limited recourse and
related maximum potential recourse exposure amounted to approximately $752
million and $196 million, respectively, at December 31, 1996 and approximately
$900 million and $223 million, respectively, at December 31, 1995. The
Company's exposure to credit loss on loans sold with recourse is similar to
the credit risk associated with the Company's on-balance sheet loans
receivable.
At December 31, 1996, the Company had commitments to sell MBS available for
sale in the amount of $165.7 million, as compared with no such commitments at
December 31, 1995.
F-42
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 20--FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires the Company to disclose, where
practicable, the fair value of its on- and off-balance sheet financial
instruments. Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial instrument.
These estimates do not reflect any possible tax ramifications, estimated
transaction costs, or any premium or discount that could result from offering
for sale at any one time the Company's entire holdings of a particular
financial instrument. Because no active market exists for a certain portion of
the Company's financial instruments, the fair value estimates for such
financial instruments are based on judgments regarding, among other factors,
future cash flows, future loss experience, current economic conditions and
risk characteristics. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly affect
these estimates. The Company has not included certain material items in its
disclosure as such items, which the Company believes have significant value,
are not considered financial instruments.
The following table summarizes the carrying values and estimated fair values
of the Company's financial instruments at December 31:
1996 1995
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
Financial assets:
Cash and cash equiva-
lents................... $ 184,517 $ 184,517 $ 235,356 $ 235,356
Loans held for sale...... 115,325 115,325 139,370 140,243
Securities available for
sale.................... 2,589,333 2,589,333 4,069,904 4,069,904
Related derivative
financial instruments.. 239 239 961 961
Securities held to matu-
rity.................... 4,362,711 4,279,618 5,082,675 4,990,163
Related derivative
financial instruments.. 1,260 319 3,061 401
FHLBNY stock............. 266,244 266,244 318,690 318,690
Loans receivable, net.... 10,629,479 10,643,631 9,702,018 9,754,487
Related derivative
financial instruments.. 2,083 (2,467) -- (2,195)
Accrued interest receiv-
able.................... 106,041 106,041 118,811 118,811
Capitalized excess ser-
vicing.................. 25,395 25,395 32,604 32,604
----------- ----------- ----------- -----------
Total financial assets... $18,282,627 $18,208,195 $19,703,450 $19,659,425
=========== =========== =========== ===========
Financial liabilities:
Deposits................. $12,856,739 $12,875,158 $12,572,203 $12,606,743
Related derivative
financial instruments.. -- -- -- (533)
Securities sold under
agreements to
repurchase.............. 3,557,145 3,557,860 1,632,453 1,632,453
Related derivative
financial instruments.. (6,911) (5,888) -- --
FHLBNY advances.......... 925,139 925,143 4,603,198 4,601,280
Related derivative
financial instruments.. -- 690 (215) 4,767
Senior notes............. 197,584 210,500 197,384 213,382
Other borrowed funds..... 142,234 145,018 181,732 178,205
Accrued interest pay-
able.................... 32,700 32,700 34,398 34,398
----------- ----------- ----------- -----------
Total financial liabili-
ties.................... $17,704,630 $17,741,181 $19,221,153 $19,270,695
=========== =========== =========== ===========
Interest rate floor agreements used to manage the risk associated with the
Company's MSR, which are not included in the above table, had carrying and
estimated fair values of $0.1 million and $0.7 million, respectively, at
December 31, 1996 and $1.0 million and $1.0 million, respectively, at December
31, 1995.
F-43
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For an analysis of the notional value and estimated fair value of derivative
financial instruments used by the Company, by type of instrument and item
being hedged, see Note 18.
The following methodologies and assumptions were utilized by the Company in
estimating the fair values of its financial instruments at December 31, 1996
and 1995.
Cash and Cash Equivalents. The carrying value of cash and cash equivalents
was deemed to be a reasonable estimate of their fair value due to the short-
term nature of these items and because they do not present significant credit
concerns.
Loans Held for Sale. The fair value of loans held for sale was determined by
outstanding investor commitments, or in the absence of such commitments,
current investor yield requirements.
Securities Available for Sale and Held to Maturity. The estimated fair
values of securities, both available for sale and held to maturity, were
determined by use of quoted market prices or dealer quotes.
FHLBNY Stock. The fair value of FHLBNY stock was estimated to be its
carrying value, which is indicative of its redemption price.
Loans Receivable. For purposes of computing the fair value of its loans
receivable, the Company grouped performing loans with similar characteristics
and applied prices available in the secondary market as a reference and
adjusted for differences in servicing and credit quality. When a secondary
market rate was not available, and for non-performing loans, fair value was
estimated using a discounted cash flow analysis that utilized a discount rate
commensurate with the credit and interest rate risk inherent in the loans.
Accrued Interest Receivable and Payable. The estimated fair values of
accrued interest receivable and payable have been determined to equal their
carrying amounts as these amounts are generally due or payable within 90 days.
Capitalized Excess Servicing. The fair value of capitalized excess servicing
was estimated by discounting the estimated future cash flows associated with
the excess servicing spread to a present value. The discount rates utilized
were based upon current market rates for similar loan servicing.
Deposits. The estimated fair value of deposits without a specified maturity,
which includes demand, savings and money market deposits, was the amount
payable on the valuation date. For fixed-maturity time deposits, fair value
was estimated based on the discounted value of contractual cash flows using
current market interest rates offered for deposits with similar remaining
maturities.
Borrowed Funds. The estimated fair values of borrowed funds maturing or
repricing within 90 days were deemed to be equal to their carrying values. The
fair values of all other borrowed funds were generally estimated based on
quoted market prices or on the discounted value of contractual cash flows
using current market interest rates for borrowings with similar terms and
remaining maturities.
Derivative and Off-Balance Sheet Financial Instruments. The fair values of
the Company's derivative financial instruments were based upon quoted market
prices, or in the absence thereof, on dealer quotes or pricing models.
With regard to its loans sold with recourse, the fair value of such recourse
guarantees would be based on fees currently charged to terminate them or
otherwise settle the obligations with the counterparties. The Company has
determined that it is not practicable to determine the fair value of such
recourse arrangements.
The Company has reviewed its outstanding commitments to extend credit,
commitments to purchase loans and letters of credit at December 31, 1996 and
1995 and has determined that their estimated fair values are not material.
F-44
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 21--PARENT COMPANY FINANCIAL INFORMATION
On May 25, 1994, the Bank consummated a reorganization under which it became
a wholly-owned subsidiary of the Holding Company. On March 29, 1991, Anchor
Savings reorganized into the holding company form of organization and became a
wholly-owned subsidiary of Anchor Bancorp.
Condensed financial statements of the Holding Company (parent company only)
are set forth below. The condensed statement of income and condensed statement
of cash flows for the year ended December 31, 1994 reflect Dime Bancorp, Inc.
for the period of May 25, 1994 to December 31, 1994 and Anchor Bancorp for the
year ended December 31, 1994.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
---------------------
1996 1995
---------- ----------
(IN THOUSANDS)
ASSETS
Cash and due from banks............................... $ 4,449 $ 916
MBS................................................... 1,006 2,636
Investment in the Bank................................ 1,202,026 1,159,941
Receivables from the Bank............................. 2,594 8,048
Other assets.......................................... 15,429 8,934
---------- ----------
Total assets.......................................... $1,225,504 $1,180,475
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior notes.......................................... $ 197,584 $ 197,384
Other liabilities..................................... 5,583 6,561
---------- ----------
Total liabilities..................................... 203,167 203,945
---------- ----------
Total stockholders' equity............................ 1,022,337 976,530
---------- ----------
Total liabilities and stockholders' equity............ $1,225,504 $1,180,475
========== ==========
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
----------- ---------- ----------
(IN THOUSANDS)
INCOME
Dividends from the Bank................. $ 88,000 $ 30,000 $ 10,711
Interest income......................... 87 213 184
----------- ---------- ----------
Total income.......................... 88,087 30,213 10,895
----------- ---------- ----------
EXPENSE
Interest expense on senior notes........ 19,638 19,621 9,446
General and administrative expense...... 3,071 5,282 665
Restructuring and Merger-related ex-
pense.................................. -- 254 22,095
Minority interest-preferred stock divi-
dends of subsidiary.................... -- -- 11,433
----------- ---------- ----------
Total expense......................... 22,709 25,157 43,639
----------- ---------- ----------
Income (loss) before income tax benefit
and equity in undistributed net income
of the Bank............................ 65,378 5,056 (32,744)
Income tax benefit...................... 10,283 10,762 5,584
----------- ---------- ----------
Income (loss) before equity in undis-
tributed net income of the Bank........ 75,661 15,818 (27,160)
Equity in undistributed net income of
the Bank............................... 28,595 46,367 29,484
----------- ---------- ----------
Net income.............................. $ 104,256 $ 62,185 $ 2,324
=========== ========== ==========
F-45
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................ $ 104,256 $ 62,185 $ 2,324
Adjustments to reconcile net income to net
cash provided (used) by
operating activities:
Equity in undistributed net income of
the Bank............................... (28,595) (46,367) (29,484)
Minority interest-preferred stock divi-
dends of subsidiary.................... -- -- 11,433
Other, net.............................. (9,700) (19,902) 16,967
---------- ---------- ----------
Net cash provided (used) by operating
activities........................... 65,961 (4,084) 1,240
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of MBS.......................... -- -- (2,051)
Principal payments received on MBS........ 1,630 764 811
---------- ---------- ----------
Net cash provided (used) by investing
activities........................... 1,630 764 (1,240)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common and trea-
sury stock............................... 8,311 2,014 1,038
Purchases of treasury stock............... (70,456) -- --
Other..................................... (1,913) -- (15)
---------- ---------- ----------
Net cash (used) provided by financing
activities........................... (64,058) 2,014 1,023
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents.............................. 3,533 (1,306) 1,023
Merger adjustment......................... -- -- 1,084
Cash and cash equivalents at beginning of
year..................................... 916 2,222 115
---------- ---------- ----------
Cash and cash equivalents at end of year.. $ 4,449 $ 916 $ 2,222
========== ========== ==========
SUPPLEMENTAL NON-CASH FLOW INFORMATION
Contribution of preferred stock of the
Bank to the capital of the Bank.......... $ -- $ 100,000 $ --
Exchange of preferred stock of the Bank
for senior notes......................... -- -- 100,000
F-46
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 22--CONDENSED QUARTERLY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
1996 1995
-------------------------------------- -------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income......... $338,804 $335,551 $332,815 $343,528 $344,127 $338,422 $342,033 $332,549
Interest expense........ 220,641 220,832 218,737 229,193 244,014 240,037 238,296 225,158
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income..... 118,163 114,719 114,078 114,335 100,113 98,385 103,737 107,391
Provision for loan loss-
es..................... 10,000 10,250 10,250 10,500 9,900 9,900 9,900 9,950
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income af-
ter provision for loan
losses................. 108,163 104,469 103,828 103,835 90,213 88,485 93,837 97,441
-------- -------- -------- -------- -------- -------- -------- --------
Non-interest income:
Banking service fees... 7,026 7,161 6,480 6,706 6,353 5,651 5,142 5,179
Loan servicing fees,
net................... 8,020 7,747 6,926 7,663 7,257 7,386 7,535 8,274
Securities and insur-
ance brokerage fees... 4,712 6,045 5,633 4,674 3,930 3,887 4,275 3,440
Net (losses) gains on
sales activities...... (723) (10,548) (1,906) 461 (22,921) (384) 1,215 9,675
Other.................. 3,578 2,542 4,438 1,833 2,335 2,120 2,791 3,027
-------- -------- -------- -------- -------- -------- -------- --------
Total non-interest in-
come.................. 22,613 12,947 21,571 21,337 (3,046) 18,660 20,958 29,595
-------- -------- -------- -------- -------- -------- -------- --------
Non-interest expense:
General and administra-
tive expense.......... 75,603 76,165 70,833 70,194 67,906 64,038 75,064 78,893
Savings Association In-
surance Fund recapi-
talization assess-
ment.................. -- 26,280 -- -- -- -- -- --
ORE expense, net....... 3,016 2,404 2,159 2,493 2,475 3,401 3,340 3,676
Amortization of MSR.... 3,115 2,684 2,879 3,194 2,982 3,440 2,921 2,764
Restructuring and
Merger-related
expense............... -- -- -- 3,504 9,775 2,393 1,438 1,725
-------- -------- -------- -------- -------- -------- -------- --------
Total non-interest ex-
pense................. 81,734 107,533 75,871 79,385 83,138 73,272 82,763 87,058
-------- -------- -------- -------- -------- -------- -------- --------
Income before income tax
expense (benefit)...... 49,042 9,883 49,528 45,787 4,029 33,873 32,032 39,978
Income tax expense (ben-
efit).................. 17,724 (7,011) 20,539 18,732 1,696 14,865 13,610 17,556
-------- -------- -------- -------- -------- -------- -------- --------
Net income.............. $ 31,318 $ 16,894 $ 28,989 $ 27,055 $ 2,333 $ 19,008 $ 18,422 $ 22,422
======== ======== ======== ======== ======== ======== ======== ========
Primary and fully di-
luted earnings per com-
mon share.............. $ 0.29 $ 0.16 $ 0.27 $ 0.25 $ 0.02 $ 0.17 $ 0.17 $ 0.20
F-47
EXHIBIT INDEX
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
------- -------------------------
2.1 Agreement and Plan of Merger, dated as December 3, 1996, between the
Holding Company, Fifth Avenue Property Corp. and BFS Bankorp, Inc.
(incorporated by reference to Appendix 2 to the Current Report filed
by the Holding Company on Form 8-K with the Commission on December 3,
1996).
3(i) Certificate of Incorporation (incorporated by reference to Appendix A
to the Joint Proxy Statement-Prospectus included in Dime Bancorp's
Registration Statement on Form S-4, filed with the Commission on
November 4, 1994 (No. 33-86002)).
3(ii) Amendment to Certificate of Incorporation dated June 14, 1995
(incorporated by reference to Exhibit 3(ii) to the Holding Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995
filed with the Commission on April 1, 1996, as amended on Form 10-K/A
filed with the Commission on May 15, 1996 (the "1995 10-K")
(Commission file No. 1-13094)).
3(iii) By-laws.
4.1 Stockholder Protection Rights Agreement, dated as of October 20, 1995,
between the Holding Company and the First National Bank of Boston, as
Rights Agent (incorporated by reference to Exhibit (1) of the
Registration Statement on Form 8-A of the Holding Company filed with
the Commission on November 3, 1995).
10.1* Letter of Agreement, dated as of August 2, 1996, from the Bank to
James M. Large, Jr.
10.2* Employment Agreement, dated as of January 1, 1997, between the Bank
and Lawrence J. Toal, together with agreement providing for joint and
several liability of the Holding Company, dated as of January 1, 1997,
as amended.
10.3* Letter of Agreement, dated February 29, 1996, from the Bank to Cody T
Sickle.
10.4* Amended and Restated Employment Agreement, dated as of April 27, 1994,
between Dime Savings and D. James Daras (the "Daras Agreement")
(incorporated by reference to Exhibit 10.4 to Dime Bancorp's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, filed
with the Commission on March 31, 1995 (the "1994 10-K") (Commission
file No. 1-13094)).
10.5* Amendment, effective as of February 7, 1997, to the Daras Agreement.
10.6* Employment Agreement, dated as of April 25, 1995, between the Bank and
Carlos R. Munoz (incorporated by reference to Exhibit 10.5 to the 1995
10-K).
10.7* Dime Bancorp, Inc. Stock Incentive Plan, as amended by an amendment
effective April 27, 1994 (incorporated by reference to Exhibit 4.1 to
the Holding Company's Registration Statement on Form S-8, filed with
the Commission on January 18, 1995 (No. 33-88552)).
10.8* Dime Bancorp, Inc. 1991 Stock Incentive Plan, as amended and restated
effective February 29, 1996 (the "1991 Stock Incentive Plan")
(incorporated by reference to Exhibit 4.1 to the Holding Company's
Registration Statement on Form S-8, filed with the Commission on May
24, 1996 (No. 333-04477).
10.9* Amendment, effective as of October 1, 1996, to the 1991 Stock
Incentive Plan.
10.10* Dime Bancorp, Inc. Stock Incentive Plan for Outside Directors, as
amended effective April 27, 1994 (incorporated by reference to Exhibit
4.1 to the Holding Company's Registration Statement on Form S-8, filed
with the Commission on January 18, 1995 (No. 33-88560)).
104
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
------- -------------------------
10.11* The Dime Savings Bank of New York, FSB Deferred Compensation Plan, as
amended by the First Amendment through the Fourth Amendment thereof
(incorporated by reference to Exhibit 10.14 to the 1994 10-K).
10.12* Deferred Compensation Plan for Board Members of The Dime Savings Bank
of New York, FSB, as amended to and including July 1, 1994 (the
"Directors Deferred Compensation Plan") (incorporated by reference to
Exhibit 10.15 to the 1994 10-K).
10.13* Amendment, effective as of January 1, 1997, to the Directors Deferred
Compensation Plan.
10.14* Benefit Restoration Plan of The Dime Savings Bank of New York, FSB,
amended and restated effective as of October 1, 1996.
10.15* Retainer Continuation Plan for Independent Directors of The Dime
Savings Bank of New York, FSB (the "Retainer Continuation Plan")
(incorporated by reference to Exhibit 10.24 to Dime Savings' Annual
Report on Form 10-K for the fiscal year ended December 31, 1993, filed
with the Commission on September 16, 1994 as Exhibit A to Dime
Bancorp's Report on Form 8-K dated that date (Commission file No. 1-
13094)).
10.16* Amendment, effective as of January 13, 1995, to the Retainer
Continuation Plan (incorporated by reference to Exhibit 10.13 to the
1995 10-K).
10.17* Amendment, effective as of December 31, 1996, to the Retainer
Continuation Plan.
10.18* Amendment, effective March 1, 1997, to the Retainer Continuation Plan.
10.19* Key Executive Life Insurance/Death Benefit Plan of The Dime Savings
Bank of New York, FSB, as restated including amendments effective
through May 25, 1994 (the "KELI Plan") (incorporated by reference to
Exhibit 10.18 to the 1994 10-K).
10.20* Amendment, effective as of February 25, 1997, to the KELI Plan.
10.21* Dime Bancorp, Inc. 1990 Stock Option Plan (formerly Anchor Bancorp,
Inc. 1990 Stock Option Plan), as amended effective January 13, 1995
(incorporated by reference to Exhibit 4.1 to the Holding Company's
Registration Statement on Form S-8, filed with the Commission on
January 18, 1995 (No. 33-88554)).
10.22* Dime Bancorp, Inc. 1992 Stock Option Plan (formerly Anchor Bancorp,
Inc. 1992 Stock Option Plan), as amended effective January 13, 1995
(the "1992 Stock Option Plan") (incorporated by reference to Exhibit
4.1 to the Holding Company's Registration Statement on Form S-8, filed
with the Commission on January 18, 1995 (No. 33-88556)).
10.23* Amendment, effective June 1, 1996, to the 1992 Stock Option Plan.
10.24* Dime Bancorp, Inc. Supplemental Executive Retirement Plan (the "SERP")
(incorporated by reference to Exhibit 10.22 to the 1994 10-K).
10.25* Amendment, effective as of April 4, 1995, to the SERP (incorporated by
reference to Exhibit 10.19 to the 1995 10-K).
10.26* Dime Bancorp, Inc. Voluntary Deferred Compensation Plan, as amended
and restated effective October 1, 1996.
10.27* Dime Bancorp, Inc. Voluntary Deferred Compensation Plan for Directors,
as amended and restated effective as of January 1, 1997.
10.28* Dime Bancorp, Inc. Officer Incentive Plan (the "Officer Incentive
Plan") (incorporated by reference to Exhibit 10.26 to the 1994 10-K).
105
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
------- -------------------------
10.29* Amendment, effective as of December 12, 1995, to the Officer Incentive
Plan (incorporated by reference to Exhibit 10.25 to the 1995 10-K).
10.30* Anchor Savings Bank FSB Supplemental Executive Retirement Plan,
assumed by Dime Savings (incorporated by reference to Exhibit 10.11 to
the Anchor Bancorp Report on Form 10-K for the fiscal year ended June
30, 1992) (Commission file No. 33-37720)).
10.31* Employment Agreement, dated as of December 2, 1996, between the Bank
and Fred B. Koons, together with a letter agreement regarding initial
employment terms.
21 List of Subsidiaries.
23 Consent of KPMG Peat Marwick LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
- --------
* Management Contract or Compensatory Plan or Arrangement
106