SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-13094
DIME BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3197414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
589 FIFTH AVENUE, NEW YORK, NEW YORK 10017
(Address of principal executive offices) (Zip Code)
(212) 326-6170 NOT APPLICABLE
(Registrant's telephone number, (Former name, former address
including area code) and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No _______
--------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $0.01 par value 118,684,702
- ------------------------------------- ---------------------------------------------
Class Outstanding shares as of October 31, 1997
DIME BANCORP, INC.
September 30, 1997
Form 10-Q
Index
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of September 30, 1997
and December 31, 1996 3
Consolidated Statements of Income for the three months and nine
months ended September 30, 1997 and 1996 4
Consolidated Statement of Changes in Stockholders' Equity for the
nine months ended September 30, 1997 5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 31
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
Dime Bancorp, Inc. (the "Holding Company" and, together with its
subsidiaries, the "Company") has published, and may continue to publish,
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, new products and markets, and similar matters,
which may be identified by the use of such words as "believe," "expect,"
"anticipate," "planned," and "estimated." 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 its actual results and experience to differ
materially from the anticipated results or other expectations expressed in such
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development, and results of the Company's business
include interest rate movements, competition from both financial and non-
financial institutions, changes in applicable laws and regulations and
interpretations thereof, the timing and occurrence (or non-occurrence) of
transactions and events that may be subject to circumstances beyond the
Company's control, and general economic conditions.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
(Unaudited)
September 30, December 31,
1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 172,879 $ 158,753
Money market investments 23,817 25,764
Loans held for sale 505,257 115,325
Securities available for sale 1,787,279 2,589,572
Securities held to maturity (estimated fair value of $3,709,365 and $4,279,937
at September 30, 1997 and December 31, 1996, respectively) 3,765,766 4,363,971
Federal Home Loan Bank of New York stock 272,176 266,244
Loans receivable, net:
Residential real estate 9,030,897 8,074,905
Commercial and multifamily real estate 2,309,723 1,885,733
Consumer 740,449 734,281
Business 56,940 43,138
Allowance for loan losses (102,061) (106,495)
- -------------------------------------------------------------------------------------------------------------------------------
Total loans receivable, net 12,035,948 10,631,562
- -------------------------------------------------------------------------------------------------------------------------------
Other real estate owned, net 17,201 53,255
Accrued interest receivable 110,180 106,041
Premises and equipment, net 115,894 103,541
Mortgage servicing assets 132,530 127,745
Deferred tax asset, net 134,452 183,672
Other assets 340,218 144,663
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $19,413,597 $18,870,108
===============================================================================================================================
LIABILITIES
Deposits $13,392,320 $12,856,739
Securities sold under agreements to repurchase 3,303,774 3,550,234
Federal Home Loan Bank of New York advances 947,153 925,139
Senior notes 197,749 197,584
Guaranteed preferred beneficial interests in Corporation's junior subordinated
deferrable interest debentures 196,131 --
Other borrowed funds 150,742 142,234
Other liabilities 172,724 175,841
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 18,360,593 17,847,771
- -------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share (200,000,000 shares authorized;
108,262,216 shares issued at September 30, 1997 and December 31, 1996) 1,083 1,083
Additional paid-in capital 914,386 914,386
Retained earnings 247,675 158,956
Treasury stock, at cost (6,769,801 shares at September 30, 1997 and 3,518,297
shares at December 31, 1996) (113,233) (51,498)
Net unrealized gain on securities available for sale, net of taxes 4,177 22
Unearned compensation (1,084) (612)
- -------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,053,004 1,022,337
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $19,413,597 $18,870,108
===============================================================================================================================
See accompanying notes to consolidated financial statements.
3
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ --------------------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Residential real estate loans $163,297 $141,408 $ 461,316 $ 412,444
Commercial and multifamily real estate loans 52,054 39,524 140,517 118,419
Consumer loans 15,803 15,404 46,804 48,044
Business loans 1,222 763 3,298 2,236
Mortgage-backed securities 103,196 125,220 320,154 386,974
Other securities 5,999 8,223 17,250 25,310
Money market investments 9,299 5,009 25,370 18,467
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 350,870 335,551 1,014,709 1,011,894
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 143,143 132,943 415,230 396,454
Borrowed funds 87,560 87,889 242,942 272,308
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 230,703 220,832 658,172 668,762
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 120,167 114,719 356,537 343,132
Provision for loan losses 8,000 10,250 41,000 31,000
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 112,167 104,469 315,537 312,132
- ----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Loan servicing fees and charges 12,856 11,709 37,717 34,764
Banking service fees 8,695 7,309 23,161 20,875
Securities and insurance brokerage fees 5,142 6,045 16,960 16,352
Net gains (losses) on sales activities 2,845 (10,548) 7,727 (11,993)
Other 742 48 1,556 1,621
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest income 30,280 14,563 87,121 61,619
- ----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
General and administrative expense:
Compensation and employee benefits 34,109 38,104 103,324 103,895
Occupancy and equipment, net 14,765 12,844 41,661 39,053
Other 24,706 25,217 74,666 74,244
- ----------------------------------------------------------------------------------------------------------------------------
Total general and administrative expense 73,580 76,165 219,651 217,192
Savings Association Insurance Fund
recapitalization assessment -- 26,280 -- 26,280
Other real estate owned expense, net 351 2,404 4,984 7,056
Amortization of mortgage servicing assets 5,248 4,300 15,717 14,521
Restructuring and merger-related expense -- -- -- 3,504
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 79,179 109,149 240,352 268,553
- ----------------------------------------------------------------------------------------------------------------------------
Income before income tax expense (benefit) 63,268 9,883 162,306 105,198
Income tax expense (benefit) 23,741 (7,011) 62,091 32,260
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 39,527 $ 16,894 $ 100,215 $ 72,938
- ----------------------------------------------------------------------------------------------------------------------------
Primary and fully diluted earnings per common share $ 0.38 $ 0.16 $ 0.95 $ 0.67
- ----------------------------------------------------------------------------------------------------------------------------
Primary average common shares outstanding 103,976 108,459 105,553 109,193
Fully diluted average common shares outstanding 104,155 108,561 105,664 109,327
- ----------------------------------------------------------------------------------------------------------------------------
Cash dividend declared per common share $ 0.04 $ -- $ 0.08 $ --
- ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except per share data)
(Unaudited)
Nine Months
Ended
September 30,
1997
- ------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance at beginning of period $ 1,083
- ------------------------------------------------------------------------------------------------------------------
Balance at end of period 1,083
- ------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period 914,386
- ------------------------------------------------------------------------------------------------------------------
Balance at end of period 914,386
- ------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 158,956
Net income 100,215
Cash dividend declared on common stock ($0.08 per share) (8,248)
Treasury stock issued under employee benefit plans (3,248)
- ------------------------------------------------------------------------------------------------------------------
Balance at end of period 247,675
- ------------------------------------------------------------------------------------------------------------------
TREASURY STOCK, AT COST
Balance at beginning of period (51,498)
Treasury stock purchased (73,476)
Treasury stock issued under employee benefit plans 11,741
- ------------------------------------------------------------------------------------------------------------------
Balance at end of period (113,233)
- ------------------------------------------------------------------------------------------------------------------
NET UNREALIZED GAIN ON SECURITIES AVAILABLE FOR SALE, NET OF TAXES
Balance at beginning of period 22
Net change in estimated fair value of securities available for sale, net of taxes 4,155
- ------------------------------------------------------------------------------------------------------------------
Balance at end of period 4,177
- ------------------------------------------------------------------------------------------------------------------
UNEARNED COMPENSATION
Balance at beginning of period (612)
Restricted stock activity (952)
Unearned compensation amortized to expense 480
- ------------------------------------------------------------------------------------------------------------------
Balance at end of period (1,084)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity $1,053,004
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
---------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 100,215 $ 72,938
Adjustments to reconcile net income to net cash (used) provided
by operating activities:
Provisions for loan and other real estate owned losses 43,406 34,036
Depreciation and amortization of premises and equipment 13,259 12,136
Other amortization and accretion, net 41,710 45,577
Provision for deferred income tax expense 49,460 18,724
Net securities (gains) losses (7,166) 12,179
Net (increase) decrease in loans held for sale (389,932) 41,121
Other, net 125 21,393
- ----------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (148,923) 258,104
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (1,164,713) (1,568,740)
Purchases of securities held to maturity (78,338) (192,913)
Proceeds from sales of securities available for sale 1,568,011 1,553,042
Proceeds from maturities of securities available for sale and held to maturity 1,113,051 1,494,912
Redemptions of Federal Home Loan Bank of New York stock -- 78,143
Loans receivable originated and purchased, net of principal payments (950,107) (759,042)
Acquisition of BFS Bankorp, Inc., net of cash and cash equivalents acquired (85,529) --
Investment in bank-owned life insurance program (150,000) --
Repurchases of assets sold with recourse (13,052) (20,735)
Proceeds from bulk sales of non-performing assets 93,063 --
Proceeds from sales of other real estate owned 35,046 38,658
Other, net (73,485) (37,483)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 293,947 585,842
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 88,085 162,085
Net decrease in borrowings with original maturities of three months or less (1,355,368) (168,615)
Proceeds from issuance of guaranteed preferred beneficial interests in Corporation's
junior subordinated deferrable interest debentures 196,122 --
Proceeds from other borrowings 1,296,510 805,000
Repayment of other borrowings (283,999) (1,495,786)
Proceeds from issuance of common and treasury stock 7,529 2,124
Purchases of treasury stock (73,476) (25,466)
Payment of dividend on common stock (8,248) --
Other -- (1,913)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (132,845) (722,571)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 12,179 121,375
Cash and cash equivalents at beginning of period 184,517 235,356
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 196,696 $ 356,731
- ----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid on deposits and borrowed funds $ 638,227 $ 672,182
Net income tax payments (refunds) 373 (696)
SUPPLEMENTAL NON-CASH INVESTING INFORMATION
Loans receivable transferred to other real estate owned $ 13,328 $ 48,127
In connection with the acquisition of BFS Bankorp, Inc.:
Fair value of assets acquired 633,339 --
Cash paid 93,325 --
Fair value of liabilities assumed 581,596 --
- ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
In the opinion of management, the unaudited consolidated financial
statements of the Company included herein reflect all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation of the
Company's financial condition as of the dates indicated and results of
operations and cash flows for the periods shown. The unaudited consolidated
financial statements presented herein should be read in conjunction with the
consolidated financial statements and notes thereto included in the Holding
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
Certain amounts in the prior period consolidated financial statements have been
reclassified to conform with the presentation for the current period. The
results for the three months and nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
NOTE 2 -- ACQUISITIONS
After the close of business on April 30, 1997, the Company acquired BFS
Bankorp, Inc. ("BFS Bankorp") and its wholly-owned subsidiary, Bankers Federal
Savings FSB ("Bankers Federal" and, together with BFS Bankorp, "BFS"), for $93.3
million in cash (the "BFS Acquisition"). At that time, BFS Bankorp was
liquidated and Bankers Federal was merged with and into The Dime Savings Bank of
New York, FSB (the "Bank"). The purchase price was funded from the normal cash
flows of the Company. Goodwill arising from the BFS Acquisition amounted to
$41.6 million and is being amortized over 15 years using the straight-line
method. Loans receivable, net, of $574.5 million and deposits of $447.1 million
were acquired in the BFS Acquisition. Because the BFS Acquisition was accounted
for under the purchase method of accounting, its impact is only reflected in the
Company's consolidated financial statements beginning on May 1, 1997.
On October 15, 1997, prior to its opening for business, North American
Mortgage Company ("NAMC"), a mortgage banking company which was headquartered in
Santa Rosa, California, was acquired by the Company (the "NAMC Acquisition").
NAMC, subsequent to the acquisition, is operating under that name as a
subsidiary of the Bank. Under the terms of the related merger agreement, dated
as of June 22, 1997 and amended and restated as of July 31, 1997 (the "NAMC
Merger Agreement"), each share of NAMC's common stock outstanding immediately
prior to the closing of the NAMC Acquisition was converted into 1.37 shares (the
"Exchange Ratio") of the Holding Company's common stock ("Common Stock"), and
each outstanding option issued by NAMC to acquire NAMC's common stock was
converted, after giving effect to the Exchange Ratio, into an option to purchase
Common Stock. As a result, the Holding Company issued 19,437,741 shares of
Common Stock and options to purchase 1,862,087 shares of Common Stock at an
average exercise price of $14.18 per share. The purchase price of the
transaction was $351.1 million based on the average price per share of the
Common Stock for the three business days prior to and subsequent to June 22,
1997. The NAMC Acquisition was accounted for under the purchase method of
accounting. Accordingly, its impact will be reflected in the Company's
consolidated financial statements beginning on October 15, 1997.
In connection with the announcement of the NAMC Acquisition on June 23,
1997, the Holding Company also announced a program to repurchase up to
approximately 6.9 million shares of Common Stock. As of September 30, 1997,
1,708,200 shares of Common Stock were repurchased under this program.
NOTE 3 -- ISSUANCE OF CAPITAL SECURITIES, SERIES A AND JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES, SERIES A
On May 6, 1997, Dime Capital Trust I ("Dime Capital"), a Delaware statutory
business trust that was formed by the Holding Company, issued $200.0 million of
9.33% Capital Securities, Series A (the "Series A Capital Securities"),
representing preferred beneficial interests in Dime Capital, in an underwritten
public offering and $6.2 million of beneficial interests represented by its
common securities to the Holding Company. In connection therewith, Dime Capital
purchased $206.2 million of 9.33% Junior Subordinated Deferrable Interest
Debentures, Series A, due May 6, 2027 (the "Series A Subordinated Debentures")
issued by the Holding Company. The Series A Subordinated Debentures, which are,
and will be, the sole assets of Dime Capital, are subordinate and
7
junior in right of payment to all present and future senior indebtedness of the
Holding Company. Dime Capital's obligations under the Series A Capital
Securities are fully and unconditionally guaranteed by the Holding Company to
the extent provided for under the terms of the indenture pursuant to which the
Series A Subordinated Debentures were issued, the Series A Subordinated
Debentures, and the related guarantee agreement, expense agreement, and trust
agreement. The Series A Capital Securities are subject to mandatory redemption,
in whole or in part, upon the repayment of the Series A Subordinated Debentures
at their stated maturity or earlier redemption. Distributions on the Series A
Capital Securities are reflected as interest expense on borrowed funds in the
Company's Consolidated Statements of Income.
NOTE 4 -- BULK SALES OF CERTAIN NON-PERFORMING ASSETS
During May 1997, the Company sold approximately $126 million of its non-
performing residential real estate assets in bulk sales (the "NPA Sales"). Such
assets were comprised of approximately $113 million of non-accrual loans and
approximately $13 million of other real estate owned ("ORE"). In connection with
the NPA Sales, a pre-tax charge of $14.6 million was recognized during the
second quarter of 1997.
NOTE 5 -- RECENT ACCOUNTING DEVELOPMENTS
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
The Company, as of January 1, 1997, adopted the portions of the Financial
Accounting Standards Board's (the "FASB") Statement of Financial Accounting
Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," that became effective as of that
date. SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125," had amended SFAS No. 125 to delay, until January 1,
1998, the effective date of certain provisions of SFAS No. 125 relating to
collateral, repurchase agreements, dollar-rolls, securities lending, and similar
transactions. SFAS No. 125 established 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. The
Company's adoption, on January 1, 1997, of the effective portions of SFAS No.
125 did not have, and is not expected to have, a material impact on its
consolidated financial statements. In addition, the provisions of SFAS No. 125
that are required to be adopted by the Company on January 1, 1998 are not
expected to have a material impact on its consolidated financial statements.
Pursuant to SFAS No. 125, the Company's capitalized excess servicing and
mortgage servicing rights were combined, effective as of January 1, 1997, as
mortgage servicing assets in its Consolidated Statements of Financial Condition.
Prior period balances have been reclassified to reflect this change. In the
Company's Consolidated Statements of Income, prior to the adoption of SFAS No.
125, amortization of capitalized excess servicing was reflected as a component
of "Loan servicing fees and charges," whereas amortization of mortgage servicing
rights was reported as "Amortization of mortgage servicing rights." Such
amortization, effective with the adoption of SFAS No. 125, has been combined and
reclassified in the Company's Consolidated Statements of Income to "Amortization
of mortgage servicing assets."
Accounting for Earnings per Share
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which
establishes standards for computing, presenting and disclosing earnings per
share. SFAS No. 128, which supersedes Accounting Principles Board Opinion No.
15, "Earnings per Share," requires the presentation of basic earnings per share
and, for entities with complex capital structures, diluted earnings per share.
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997. Earlier
application of SFAS No. 128 is not permitted, and all prior period earnings per
share data must be restated upon its adoption.
8
The Company's basic and diluted earnings per share, as computed pursuant to
SFAS No. 128, for the three- and nine-month periods ended September 30, 1997 are
set forth in the following table.
- -----------------------------------------------------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------------- ----------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Basic earnings per share $0.39 $0.16 $0.97 $0.71
Diluted earnings per share 0.38 0.16 0.95 0.67
- -----------------------------------------------------------------------------------------------------------------------
Disclosure of Information about Capital Structure
The FASB issued SFAS No. 129, "Disclosure of Information about Capital
Structure," in February 1997. SFAS No. 129 supersedes specific disclosure
requirements of Accounting Principles Board Opinions No. 10, "Omnibus Opinion-
1966," and No. 15, "Earnings Per Share," and SFAS No. 47, "Disclosure of Long-
Term Obligations," and consolidates them in SFAS No. 129 for ease of retrieval
and for greater visibility to non-public entities. SFAS No. 129 is effective for
financial statements issued for periods ending after December 15, 1997.
Reporting Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. It does not address issues of
recognition or measurement for comprehensive income and its components. SFAS No.
130 requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Under the requirements of SFAS No. 130, an enterprise must classify
items of other comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997 and requires reclassification of financial
statements for earlier periods provided for comparative purposes.
Disclosures about Segments of an Enterprise and Related Information
The FASB, in June 1997, issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements, requires that selected information
about operating segments be reported in interim financial statements issued to
shareholders, and establishes standards for related disclosures about an
enterprise's products and services, geographic areas, and major customers. As
defined in SFAS No. 131, operating segments are components of an enterprise
about which separate financial information is available that is evaluated
regularly by the enterprise's chief operating decision maker in deciding how to
allocate resources and in assessing performance. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. SFAS No. 131
need not be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application is to be reported in financial statements for interim periods in
the second year of application.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company reported net income of $39.5 million, or $0.38 per fully
diluted common share, for the third quarter of 1997, as compared with net income
of $16.9 million, or $0.16 per fully diluted common share, for the third quarter
of 1996. The Company's annualized returns on average stockholders' equity and
average assets for the
9
third quarter of 1997 were 15.14% and 0.78%, respectively, up from 6.72% and
0.34%, respectively, for the third quarter of 1996.
For the nine months ended September 30, 1997, net income amounted to $100.2
million, or $0.95 per fully diluted common share, up from $72.9 million, or
$0.67 per fully diluted common share, for the comparable period in 1996. For the
first nine months of 1997, the Company's annualized return on average
stockholders' equity was 12.83%, as compared with 9.77% for the comparable 1996
period, and its annualized return on average assets was 0.68%, as compared with
0.49% for the comparable 1996 period.
Contributing to the Company's improved earnings for the three- and nine-
month periods ended September 30, 1997, as compared with the corresponding 1996
periods, were the effects of the consummation of the BFS Acquisition, growth in
the net interest margin, higher overall levels of recurring fee revenues, and
the continuation of expense control initiatives.
The first nine months of 1997 included special provisions for loan and ORE
losses totaling $14.6 million recognized during the 1997 second quarter in
connection with the sales, during that quarter, of approximately $126 million of
non-performing assets in the NPA Sales. The results for the three- and nine-
month periods ended September 30, 1996 included losses of $11.4 million and
$12.0 million, respectively, associated with sales of certain relatively lower-
yielding mortgage-backed securities ("MBS"), a Savings Association Insurance
Fund ("SAIF") recapitalization assessment of $26.3 million, certain non-
recurring executive personnel expenses in the amount of $5.4 million, and an
$11.0 million income tax benefit associated with the final resolution of a prior
year's tax position. In addition, the first nine months of 1996 included
restructuring and merger-related expenses of $3.5 million, all of which were
incurred during the first quarter of 1996, associated with the merger, in
January 1995, of Anchor Bancorp, Inc. and its savings bank subsidiary, Anchor
Savings Bank FSB ("Anchor Savings"), with and into the Holding Company and the
Bank, respectively (the "Anchor Merger").
Total loan production amounted to $4.3 billion for the first nine months of
1997. This exceeded the full year 1996 loan production of $3.8 billion.
Non-performing assets, which amounted to $112.4 million at September 30,
1997, declined $132.5 million, or 54.1%, since year-end 1996. During the third
quarter of 1997, non-performing assets decreased 11.6% and, at quarter end,
represented 0.58% of total assets.
ACQUISITIONS
The Company, after the close of business on April 30, 1997, acquired BFS
for $93.3 million in cash in a transaction that was accounted for under the
purchase method of accounting. In connection with the BFS Acquisition, the
Company acquired loans receivable, net, of $574.5 million and deposits of $447.1
million, and recognized goodwill of $41.6 million.
On October 15, 1997, the Company completed its acquisition of NAMC, a
mortgage banking company which, at the date of acquisition, serviced
approximately $12 billion of loans for others, operated in 30 states, and had
104 loan production offices. The NAMC Acquisition was accounted for under the
purchase method of accounting. In accordance with the NAMC Merger Agreement,
holders of shares of NAMC common stock immediately prior to the acquisition
received, for each such share held, 1.37 shares of Common Stock, which resulted
in the issuance of 19,437,741 shares of Common Stock, for a purchase price of
$351.1 million. In addition, under the terms of the NAMC Merger Agreement, each
outstanding option issued by NAMC to acquire NAMC's common stock was converted,
after giving effect to the Exchange Ratio, into an option to purchase Common
Stock, which resulted in the issuance of options to purchase 1,862,087 shares of
Common Stock.
RESULTS OF OPERATIONS
Net Interest Income
The Company's net interest income of $120.2 million for the third quarter
of 1997 was up $5.4 million, or 4.7%, as compared with the third quarter of
1996. For the nine months ended September 30, 1997, net interest
10
income amounted to $356.5 million, an increase of $13.4 million, or 3.9%,
relative to the same period one year ago, despite a decline in average interest-
earning assets of $298.4 million. The Company's net interest margin increased to
2.52% for each of the three- and nine-month periods ended September 30, 1997
from 2.44% and 2.40% for the third quarter and first nine months of 1996,
respectively. Contributing to the growth in the net interest income and net
interest margin levels was the improvement in asset quality, partially
attributable to the NPA Sales, and advantageous changes, due in part to the BFS
Acquisition, in the mix of both average interest-earning assets and average
interest-bearing liabilities. The Company's net interest income and net interest
margins for the 1997 periods, as compared with the 1996 periods, were
unfavorably affected by the issuance of the Series A Capital Securities. In
addition, net interest income and net interest margin levels for the third
quarter of 1997 and, to a limited extent, for the nine months ended September
30, 1997 were negatively impacted by the Company's investment, during the third
quarter of 1997, of $150 million in a bank-owned life insurance program (the
"BOLI Program"). Revenues associated with the BOLI Program are reflected in non-
interest income.
The yield on average interest-earning assets for the third quarter of 1997
was 7.21%, an increase of 21 basis points from the corresponding 1996 quarter.
For the first nine months of 1997, the yield on average interest-earning assets
was 7.14%, up 13 basis points from the comparable period in 1996. These
improvements reflect, in large part, a reduction in non-accrual loans and a
shift to loans from MBS, which typically provide a lower yield than the
Company's loans. For the third quarter and first nine months of 1997, as
compared with the corresponding periods in 1996, average loans rose $1.7
billion, or 16.8%, and $1.2 billion, or 12.1%, respectively, while average MBS
declined $1.6 billion, or 20.3%, and $1.5 billion, or 18.8%, respectively.
The cost of the Company's average interest-bearing liabilities for the
third quarter and first nine months of 1997 of 4.79% and 4.73%, respectively,
increased 12 basis points and one basis point as compared with the respective
prior year periods. These increases were largely driven by higher time deposit
and short-term borrowing costs and the issuance, during the second quarter of
1997, of the Series A Capital Securities. The impact of these factors was
mitigated by growth in average deposits, which are generally less costly than
borrowed funds, as a percentage of total average interest-bearing liabilities to
70.0% and 70.8% for the three- and nine-month periods ended September 30, 1997,
respectively, from 67.8% and 67.1% for the respective periods in 1996. The
Company's cost of average interest-bearing liabilities in the 1997 periods, as
compared with the 1996 periods, also benefited from a shift from Federal Home
Loan Bank of New York ("FHLBNY") advances to relatively lower costing securities
sold under agreements to repurchase.
11
The following tables set forth, for the periods indicated, the Company's
consolidated average statement of financial condition, net interest income, the
average yield on interest-earning assets, and the average cost of interest-
bearing liabilities. Average balances are computed on a daily basis. Non-accrual
loans are included in average loan balances in the tables below.
===========================================================================================================================
Three Months Ended September 30,
-----------------------------------------------------------------------------
1997 1996
-----------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans:
Residential real estate $ 9,030,078 $163,297 7.23% $ 7,866,828 $141,408 7.19%
Commercial and multifamily real estate 2,371,102 52,054 8.78 1,819,411 39,524 8.69
Consumer 721,408 15,803 8.70 707,444 15,404 8.67
Business 52,564 1,222 9.23 34,072 763 8.91
- --------------------------------------------------------------------------------------------------------------------------
Total loans 12,175,152 232,376 7.63 10,427,755 197,099 7.56
MBS 6,249,236 103,196 6.61 7,836,345 125,220 6.39
Other securities 358,062 5,999 6.66 531,031 8,223 6.17
Money market investments 659,669 9,299 5.52 377,709 5,009 5.19
- --------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 19,442,119 350,870 7.21 19,172,840 335,551 7.00
Other assets 789,004 670,946
- --------------------------------------------------------------------------------------------------------------------------
Total assets $20,231,123 $19,843,786
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Demand $ 1,270,050 2,011 0.63 $ 1,077,280 2,018 0.75
Savings 2,496,464 15,626 2.48 2,552,709 16,222 2.53
Money market 1,928,751 18,447 3.79 2,113,742 20,603 3.88
Time 7,632,144 107,059 5.57 6,948,862 94,100 5.39
- --------------------------------------------------------------------------------------------------------------------------
Total deposits 13,327,409 143,143 4.26 12,692,593 132,943 4.17
- --------------------------------------------------------------------------------------------------------------------------
Borrowed funds:
Securities sold under agreements
to repurchase 3,767,712 54,271 5.64 3,106,059 43,390 5.47
FHLBNY advances 1,394,775 21,203 5.95 2,551,652 36,677 5.62
Other 542,377 12,086 8.91 363,931 7,822 8.60
- --------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 5,704,864 87,560 6.02 6,021,642 87,889 5.72
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 19,032,273 230,703 4.79 18,714,235 220,832 4.67
Other liabilities 154,699 124,654
Stockholders' equity 1,044,151 1,004,897
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $20,231,123 $19,843,786
- --------------------------------------------------------------------------------------------------------------------------
Net interest income $120,167 $114,719
- --------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.42 2.33
- --------------------------------------------------------------------------------------------------------------------------
Net interest margin 2.52 2.44
==========================================================================================================================
12
==============================================================================================================================
Nine Months Ended September 30,
---------------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans:
Residential real estate $ 8,545,379 $ 461,316 7.20% $ 7,661,603 $ 412,444 7.18%
Commercial and multifamily real estate 2,171,762 140,517 8.63 1,826,493 118,419 8.65
Consumer 722,844 46,804 8.66 724,702 48,044 8.86
Business 47,424 3,298 9.30 33,440 2,236 8.93
------------------------------------------------------------------------------------------------------------------------------
Total loans 11,487,409 651,935 7.57 10,246,238 581,143 7.57
MBS 6,482,998 320,154 6.58 7,985,997 386,974 6.46
Other securities 360,075 17,250 6.40 549,370 25,310 6.15
Money market investments 616,290 25,370 5.43 463,591 18,467 5.24
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 18,946,772 1,014,709 7.14 19,245,196 1,011,894 7.01
Other assets 779,341 701,988
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $19,726,113 $19,947,184
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Demand $ 1,212,248 6,052 0.67 $ 1,080,502 6,189 0.77
Savings 2,481,954 46,122 2.48 2,605,744 49,133 2.52
Money market 1,964,345 55,278 3.76 2,120,717 61,597 3.88
Time 7,450,215 307,778 5.52 6,829,849 279,535 5.47
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 13,108,762 415,230 4.24 12,636,812 396,454 4.19
- ------------------------------------------------------------------------------------------------------------------------------
Borrowed funds:
Securities sold under agreements
to repurchase 3,799,577 161,449 5.60 2,345,671 96,707 5.42
FHLBNY advances 1,168,252 51,707 5.84 3,473,283 151,894 5.75
Other 449,627 29,786 8.83 369,389 23,707 8.56
- ------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 5,417,456 242,942 5.92 6,188,343 272,308 5.79
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 18,526,218 658,172 4.73 18,825,155 668,762 4.72
Other liabilities 158,059 127,080
Stockholders' equity 1,041,836 994,949
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $19,726,113 $19,947,184
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 356,537 $ 343,132
- ------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.41 2.29
- ------------------------------------------------------------------------------------------------------------------------------
Net interest margin 2.52 2.40
==============================================================================================================================
13
The following table sets forth, for the periods indicated, the changes in
interest income and interest expense for each major component of interest-
earning assets and interest-bearing liabilities and the amounts attributable to
changes in average balances (volume) and average interest rates (rate). The
changes in interest income and interest expense attributable to changes in both
volume and rate have been allocated proportionately to the changes due to volume
and the changes due to rate.
===================================================================================================================================
Three Months Ended Nine Months Ended
September 30, 1997 versus 1996 September 30, 1997 versus 1996
---------------------------------- -------------------------------------
Increase (Decrease) Increase (Decrease)
---------------------------------- -------------------------------------
Due To Due To
---------------------- -------------------------
(In thousands) Volume Rate Total Volume Rate Total
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans:
Residential real estate $ 21,095 $ 794 $ 21,889 $ 47,720 $ 1,152 $ 48,872
Commercial and multifamily real estate 12,116 414 12,530 22,235 (137) 22,098
Consumer 309 90 399 (120) (1,120) (1,240)
Business 429 30 459 968 94 1,062
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 33,949 1,328 35,277 70,803 (11) 70,792
- -----------------------------------------------------------------------------------------------------------------------------------
MBS (26,192) 4,168 (22,024) (73,900) 7,080 (66,820)
Other securities (2,856) 632 (2,224) (9,051) 991 (8,060)
Money market investments 3,951 339 4,290 6,259 644 6,903
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 8,852 6,467 15,319 (5,889) 8,704 2,815
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Demand 338 (345) (7) 670 (807) (137)
Savings (348) (248) (596) (2,406) (605) (3,011)
Money market (1,789) (367) (2,156) (4,448) (1,871) (6,319)
Time 9,553 3,406 12,959 25,656 2,587 28,243
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits 7,754 2,446 10,200 19,472 (696) 18,776
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowed funds:
Securities sold under agreements
to repurchase 9,522 1,359 10,881 61,666 3,076 64,742
FHLBNY advances (17,472) 1,998 (15,474) (101,988) 1,801 (100,187)
Other 3,972 292 4,264 5,307 772 6,079
- -----------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds (3,978) 3,649 (329) (35,015) 5,649 (29,366)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,776 6,095 9,871 (15,543) 4,953 (10,590)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 5,076 $ 372 $ 5,448 $ 9,654 $ 3,751 $ 13,405
===================================================================================================================================
Provision for Loan Losses
The Company's provision for loan losses, which is predicated upon the
Company's assessment of the adequacy of its allowance for loan losses (see
"Management of Credit Risk -- Allowance for Loan Losses"), amounted to $8.0
million for the third quarter of 1997, down from $10.3 million for the
comparable 1996 quarter. This decline occurred, despite growth in the Company's
loans receivable portfolio, primarily as a result of a reduction in non-
performing loans. For the first nine months of 1997, the provision for loan
losses was $41.0 million, including a $14.0 million special provision for loan
losses recognized during the second quarter of 1997 in connection with the NPA
Sales. This compares with a $31.0 million provision for loan losses during the
nine months ended September 30, 1996. Net loan charge-offs for the third quarter
of 1997 amounted to $7.0 million, a $12.0 million decrease from the comparable
quarter of 1996. For the nine months ended September 30, 1997, net loan charge-
offs totaled $58.7 million, including $35.8 million associated with the NPA
Sales, as compared with $43.1 million for the corresponding period in 1996.
14
Non-Interest Income
General. The following table sets forth the components of the Company's
non-interest income for the three months and nine months ended September 30,
1997 and 1996.
=======================================================================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
(In thousands) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Loan servicing fees and charges $12,856 $ 11,709 $37,717 $ 34,764
Banking service fees 8,695 7,309 23,161 20,875
Securities and insurance brokerage fees 5,142 6,045 16,960 16,352
Net gains (losses) on sales activities 2,845 (10,548) 7,727 (11,993)
Other 742 48 1,556 1,621
- -----------------------------------------------------------------------------------------------------------------------
Total non-interest income $30,280 $ 14,563 $87,121 $ 61,619
=======================================================================================================================
Loan Servicing Fees and Charges. Loan servicing fees and charges of $12.9
million for the third quarter of 1997 and $37.7 million for the nine months
ended September 30, 1997 rose from the comparable prior year periods by $1.1
million, or 9.8%, and $3.0 million, or 8.5%, respectively. These increases
resulted principally from growth in the portfolio of loans serviced for others
and, to a lesser extent, the introduction of new fee-based programs. Partially
offsetting the impact of these factors were declines in the average loan
servicing fee rate, which were primarily due to additions to the servicing
portfolio of loans with servicing fee rates lower than the portfolio average,
coupled with principal reductions on seasoned loans with servicing fee rates
higher than the portfolio average. The Company's portfolio of loans serviced for
others amounted to $11.0 billion at September 30, 1997, an increase of $1.7
billion, or 18.3%, from one year earlier.
Banking Service Fees. Banking service fees were $8.7 million for the third
quarter of 1997, an increase of $1.4 million, or 19.0%, from the same quarter
one year ago. For the nine months ended September 30, 1997, banking service fees
amounted to $23.2 million, representing growth of $2.3 million, or 11.0%, as
compared with the corresponding 1996 period. These increases reflect changes in
the Company's fee structure, together with volume increases in certain
underlying transactions, due, in part, to a higher level of demand deposit
accounts.
Securities and Insurance Brokerage Fees. Securities and insurance brokerage
fees, which were $5.1 million for the third quarter of 1997, declined $0.9
million from the comparable prior year quarter, primarily as a result of a lower
level of fees derived from sales of insurance products. For the nine months
ended September 30, 1997, fees from securities and insurance brokerage
activities amounted to $17.0 million, an increase of $0.6 million as compared
with the year-earlier period. This increase was driven by growth in fees from
securities brokerage activities, the impact of which was partially offset by a
reduction in insurance-related fees.
Net Gains (Losses) on Sales Activities. Net gains on sales activities
amounted to $2.8 million and $7.7 million for the third quarter and first nine
months of 1997, respectively. In comparison, net losses on sales activities of
$10.5 million and $12.0 million were recognized for the third quarter and first
nine months of 1996, respectively.
The Company recognized securities-related net gains of $3.5 million and
$7.2 million for the three- and nine-month periods ended September 30, 1997,
respectively, as compared with securities-related net losses of $10.3 million
and $12.2 million for the respective periods in 1996. The net gains during the
1997 periods were primarily associated with sales of MBS available for sale of
$1.2 billion during the 1997 third quarter and $1.5 billion during the first
nine months of 1997. The net losses during the 1996 periods were largely
associated with sales of certain relatively low-yielding MBS available for sale
in connection with a balance sheet restructuring plan that had been in effect
during those time periods. Sales of such low-yielding securities amounted to
$297.7 million during the third quarter of 1996 and resulted in an $11.4 million
loss, and amounted to $1.3 billion during the first nine months of 1996 and
resulted in a loss of $12.0 million. The securities-related net losses during
the first nine months of 1996 also reflected a $1.2 million charge during the
second quarter of 1996 associated with other than temporary impairment in value
of certain MBS (see "Management of Credit Risk -- MBS").
15
In connection with its mortgage banking activities, the Company recognized
net gains on loan sales of $0.2 million for the 1997 third quarter, as compared
with net losses of $0.5 million for the 1996 third quarter. For the nine months
ended September 30, 1997 and 1996, net gains on loan sales amounted to $1.9
million and $2.0 million, respectively. The following table summarizes the
principal amount of loans sold in connection with mortgage banking activities
for the three months and nine months ended September 30, 1997 and 1996.
======================================================================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
(In thousands) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Loans sold:
Servicing retained $593,140 $183,232 $ 964,579 $501,416
Servicing released 26,347 67,007 135,810 388,800
- ----------------------------------------------------------------------------------------------------------------------
Total loans sold $619,487 $250,239 $1,100,389 $890,216
======================================================================================================================
Other Non-Interest Income. Other non-interest income was $0.7 million and
$1.6 million for the three- and nine-month periods ended September 30, 1997,
respectively, as compared with less than $0.1 million and $1.6 million for the
respective year-earlier periods. The third quarter and first nine months of 1997
included revenues of $0.7 million associated with the BOLI Program, which was
initiated during the 1997 third quarter. In general, under the BOLI Program, the
Company purchases, owns, and is the beneficiary of insurance policies on the
lives of certain employees who consent to being covered by the program in order
to help defray certain costs associated with the Company's employee benefit
plans. The first nine months of 1996 included $1.0 million associated with the
settlement of certain litigation during the 1996 first quarter.
Non-Interest Expense
General. The following table sets forth the components of the Company's
non-interest expense for the three months and nine months ended September 30,
1997 and 1996.
======================================================================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
(In thousands) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
General and administrative ("G&A") expense:
Compensation and employee benefits $34,109 $ 38,104 $103,324 $103,895
Occupancy and equipment, net 14,765 12,844 41,661 39,053
Other 24,706 25,217 74,666 74,244
- ----------------------------------------------------------------------------------------------------------------------
Total G&A expense 73,580 76,165 219,651 217,192
SAIF recapitalization assessment -- 26,280 -- 26,280
ORE expense, net 351 2,404 4,984 7,056
Amortization of mortgage servicing assets 5,248 4,300 15,717 14,521
Restructuring and merger-related expense -- -- -- 3,504
- ----------------------------------------------------------------------------------------------------------------------
Total non-interest expense $79,179 $109,149 $240,352 $268,553
======================================================================================================================
G&A Expense. G&A expense amounted to $73.6 million for the third quarter of
1997, a decline of $2.6 million from the corresponding quarter one year ago. For
the first nine months of 1997, G&A expense was $219.7 million, an increase of
$2.5 million from the comparable 1996 period. The Company's efficiency ratios
improved to 49.07% and 49.69% for the three- and nine-month periods ended
September 30, 1997, respectively, from 54.04% and 51.65% for the respective
prior year periods. Excluding the effect of a $5.4 million one-time charge
during the third quarter of 1996 associated with the retirement of the Company's
then Chief Executive Officer, G&A expense increased $2.8 million and $7.9
million for the three- and nine-month periods ended September 30, 1997, as
compared with the corresponding prior year periods, reflecting, in part, the
ongoing expansion of the Company's mortgage banking operations and other lending
activities, the BFS Acquisition, and the implementation of certain other
strategic initiatives, the impact of which was partially offset by lower deposit
insurance premiums.
Compensation and employee benefits expense totaled $34.1 million for the
third quarter of 1997, a decline of $4.0 million as compared with the third
quarter of 1996. For the first nine months of 1997, compensation and
16
employee benefits amounted to $103.3 million, a reduction of $0.6 million from
the comparable period in 1996. Excluding the $5.4 million executive retirement
expense recognized during the 1996 third quarter, compensation and employee
benefits expense increased $1.4 million and $4.8 million for the three months
and nine months ended September 30, 1997, as compared with the respective 1996
periods, largely attributable to the Company's expansion of its lending
operations, the BFS Acquisition, higher commission- and incentive-based
compensation levels, and normal merit increases. The Company's full-time
equivalent employee complement was 3,162 at September 30, 1997, up from 2,883
one year earlier and 2,872 at December 31, 1996.
Occupancy and equipment expense, net, amounted to $14.8 million for the
third quarter of 1997, up $1.9 million from the comparable quarter of 1996. For
the nine months ended September 30, 1997, occupancy and equipment expense, net,
was $41.7 million, an increase of $2.6 million as compared with the
corresponding prior year period. These increases reflect, in part, the BFS
Acquisition, the enhancement of the Company's technological capabilities, and
costs incurred in support of the expansion of certain of the Company's business
activities.
Other G&A expense was $24.7 million and $74.7 million for the third quarter
and first nine months of 1997, respectively, as compared with $25.2 million and
$74.2 million for the respective prior year periods. The 1997 periods included
additional expenses incurred in connection with business expansion efforts,
including through the BFS Acquisition, and various other strategic initiatives.
Other G&A expense levels for the three- and nine-month periods ended September
30, 1997, as compared with the same periods in 1996, also reflect the impact of
decreases in federal deposit insurance premiums of $1.9 million and $5.7
million, respectively, as a result of the enactment of the Deposit Insurance
Funds Act of 1996 (the "Funds Act").
SAIF Recapitalization Assessment. During the third quarter of 1996, in
connection with the enactment of the Funds Act, the Company recognized a $26.3
million charge associated with a special assessment to recapitalize the SAIF.
ORE Expense, Net. ORE expense, net, which is impacted by a variety of
factors, including the level and type of properties owned and general economic
conditions, was $0.4 million for the third quarter of 1997, as compared with
$2.4 million for the third quarter of 1996. For the first nine months of 1997,
ORE expense, net, was $5.0 million, including a $0.6 million special provision
for loss recorded in the second quarter of 1997 associated with the NPA Sales,
down from $7.1 million for the first nine months of 1996. The declines in the
1997 periods, as compared with the 1996 periods, were largely attributable to a
reduction in the level of ORE, primarily as a result of the sales of
approximately $13 million of residential ORE during the 1997 second quarter in
connection with the NPA Sales.
Amortization of Mortgage Servicing Assets. Amortization of mortgage
servicing assets amounted to $5.2 million for the third quarter of 1997 and
$15.7 million for the first nine months of 1997, up $0.9 million and $1.2
million from the respective periods during 1996. These increases principally
reflect the higher level of mortgage servicing assets during the 1997 periods,
as compared with the 1996 periods. Unanticipated prepayments of the loans
underlying the mortgage servicing assets portfolio, which generally result from
declining mortgage interest rates, have an adverse impact on the value of such
assets. During the third quarter of 1997, the Company expanded its use of
interest rate floors as a hedge against its mortgage servicing assets (see
"Management of Interest Rate Risk--Derivative Financial Instruments"). The
amortization of the related premiums paid also contributed, albeit to a
substantially lesser extent, to the higher levels of amortization of mortgage
servicing assets in the 1997 periods, as compared with the 1996 periods. At
September 30, 1997, mortgage servicing assets amounted to $132.5 million.
Restructuring and Merger-Related Expense. Restructuring and merger-related
expense totaled $3.5 million for the nine months ended September 30, 1996. All
such expense was associated with the Anchor Merger and was incurred during the
first quarter of 1996. No such expense was recognized during the first nine
months of 1997. The expense during the first quarter of 1996 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.
Income Tax Expense
The Company recognized income tax expense of $23.7 million for the third
quarter of 1997, as compared with an income tax benefit for the comparable
quarter of 1996 of $7.0 million, which included an $11.0 million tax benefit
recognized upon the final resolution of tax filing positions taken in a prior
year. For the nine months ended
17
September 30, 1997, income tax expense amounted to $62.1 million, up from $32.3
million for the comparable prior year period, which included the $11.0 million
tax benefit discussed above as well as tax benefits of $1.3 million recognized
during the first six months of 1996 as a result of favorable settlements of
local income tax issues.
Excluding the impact of the tax benefits discussed above, the Company's
effective income tax rates declined from 40.4% and 42.4% for the third quarter
and first nine months of 1996, respectively, to 37.5% and 38.3% for the three
months and nine months ended September 30, 1997, respectively. These reductions
were largely attributable to various tax planning strategies.
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 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. In general, 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 may increase 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. In addition, unanticipated
accelerated prepayment rates increase the likelihood of potential losses of net
future servicing revenues associated with the Company's mortgage servicing
assets.
The Company is also exposed to interest rate risk resulting from certain
changes in the shape of the yield curve (particularly a flattening or inversion
- -- also called "yield curve twist risk" -- of the yield curve) 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
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
18
Company's investment strategy has emphasized adjustable-rate loans and
securities and fixed-rate medium-term securities.
The measurement of differences (or "gaps") between the Company's interest-
earning assets and interest-bearing liabilities that mature or reprice within a
given period of time is one 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.
The following table reflects the repricing or maturity of the Company's
interest-earning assets, interest-bearing liabilities and related derivative
financial instruments at September 30, 1997 and December 31, 1996. The amount of
each asset, liability or derivative financial instrument is included in the
table at the earlier of the next repricing date or maturity. Prepayment
assumptions for loans and MBS utilized in preparing the table are based upon
industry standards as well as the Company's experience and estimates. Non-
performing loans have been included in the "Over One Through Three Years"
category. For the purposes of determining its gap position, the Company, prior
to 1997, had assigned its demand deposits and money market deposits to the "One
Year or Less" category and spread its savings accounts ratably over a 20-year
period. Effective in 1997, the Company modified its interest rate sensitivity
assumptions so that its demand deposits, money market deposits and savings
accounts are now allocated to the various repricing intervals in the table based
on the Company's experience and estimates. In addition, the Company, prior to
1997, had reported its cumulative gap as a percentage of total interest-earning
assets. Effective in 1997, the Company is reporting its cumulative gap as a
percentage of total assets. Information in the table below for December 31, 1996
has been restated to reflect the changes discussed above.
19
- ------------------------------------------------------------------------------------------------------------------------
Over One
Through Over
One Year Three Three
(Dollars in millions) or Less Years Years Total
- ------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1997
Interest-earning assets:
Loans $ 5,738 $3,470 $3,435 $12,643
MBS 4,059 897 525 5,481
Other 30 1 337 368
- ------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 9,827 4,368 4,297 18,492
- ------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 7,984 2,423 2,985 13,392
Borrowed funds 4,268 44 484 4,796
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 12,252 2,467 3,469 18,188
- ------------------------------------------------------------------------------------------------------------------------
Impact of derivative financial instruments 1,261 (659) (602) --
- ------------------------------------------------------------------------------------------------------------------------
Periodic gap $(1,164) $1,242 $ 226 $ 304
- ------------------------------------------------------------------------------------------------------------------------
Cumulative gap $(1,164) $ 78 $ 304
- ------------------------------------------------------------------------------------------------------------------------
Cumulative gap as a percentage of total assets (6.0)% 0.4% 1.6%
- ------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996
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 7,194 2,682 2,981 12,857
Borrowed funds 4,489 186 140 4,815
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 11,683 2,868 3,121 17,672
- ------------------------------------------------------------------------------------------------------------------------
Impact of derivative financial instruments 620 (346) (274) --
- ------------------------------------------------------------------------------------------------------------------------
Periodic gap $ (619) $ 633 $ 413 $ 427
- ------------------------------------------------------------------------------------------------------------------------
Cumulative gap $ (619) $ 14 $ 427
- ------------------------------------------------------------------------------------------------------------------------
Cumulative gap as a percentage of total assets (3.3)% --% 2.3%
- ------------------------------------------------------------------------------------------------------------------------
Derivative Financial Instruments
The Company utilizes a variety of 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 currently used by the Company for trading activity purposes.
With the exception of interest rate floors hedging certain mortgage servicing
assets, the derivative financial instruments utilized by the Company provide
protection from rising interest rates. While the hedging activities engaged in
by the Company have served to mitigate the effects of unfavorable interest rate
changes, the Company continues to be susceptible to interest rate risk.
The derivative financial instruments used by the Company, though chosen to
remedy specific risk conditions, may, under certain circumstances, behave in a
manner that is inconsistent with their intended purpose. Thus, such instruments
possess market risk in their own right. The Company has established internal
policies that define the extent of historical correlation between a proposed
hedge and the item to be hedged prior to the use of a derivative financial
instrument as a hedge. The potential exists, however, that this relationship, or
"basis," may change due to extraordinary circumstances. The Company, also by
policy, monitors these relationships at regular intervals to ensure that such
correlation is maintained. The Company cannot guarantee that such relationships,
as have been historically observed, will continue.
20
The following table summarizes, by category of asset or liability being
hedged, the notional amount and estimated fair value of derivative financial
instruments used by the Company for asset/liability management purposes at
September 30, 1997 and December 31, 1996.
- ----------------------------------------------------------------------------------------------------------------------
September 30, 1997 December 31, 1996
-------------------------- ------------------------
Notional Estimated Notional Estimated
(In thousands) Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------------------------------------
Interest rate swaps hedging:
Residential real estate loans receivable $1,035,338 $ (7,639) $ 438,432 $ 414
Commercial and multifamily real estate loans receivable 443,317 (7,273) 221,784 (3,408)
MBS held to maturity 67,122 (286) -- --
Securities sold under agreements to repurchase 421,000 (192) 420,000 1,241
FHLBNY advances -- -- 30,000 (690)
- ----------------------------------------------------------------------------------------------------------------------
Total interest rate swaps 1,966,777 (15,390) 1,110,216 (2,443)
- ----------------------------------------------------------------------------------------------------------------------
Interest rate caps hedging:
Residential real estate loans receivable 341,536 28 424,484 527
MBS available for sale 154,605 13 192,153 239
MBS held to maturity 206,608 17 256,787 319
Securities sold under agreements to repurchase 361,000 1,823 361,000 4,647
- ----------------------------------------------------------------------------------------------------------------------
Total interest rate caps 1,063,749 1,881 1,234,424 5,732
- ----------------------------------------------------------------------------------------------------------------------
Options hedging residential real estate loans receivable 40,000 220 -- --
- ----------------------------------------------------------------------------------------------------------------------
Total $3,070,526 $(13,289) $2,344,640 $ 3,289
- ----------------------------------------------------------------------------------------------------------------------
The table that follows sets forth the contractual maturities of the Company's
interest rate swap agreements outstanding at September 30, 1997, 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 September
30, 1997 levels. All of the Company's outstanding interest rate swaps at
September 30, 1997 provide for it to be a fixed-rate payer and a variable-rate
receiver based on short-term London Interbank Offered Rates ("LIBOR").
- ---------------------------------------------------------------------------------------------------------------------
Weighted Average
------------------------------
Notional Variable-Rate Fixed-Rate
(Dollars in thousands) Amount Receivable Payable
- ---------------------------------------------------------------------------------------------------------------------
Maturing in the year ending December 31:
1997 $ 454,422 5.71% 5.42%
1998 396,928 5.66 6.42
1999 344,977 5.67 6.57
2000 147,437 5.66 6.65
2001 263,213 5.66 6.61
Thereafter 359,800 5.66 6.62
- ---------------------------------------------------------------------------------------------------------------------
Total $1,966,777 5.67% 6.29%
- ---------------------------------------------------------------------------------------------------------------------
Under each of its outstanding interest rate cap agreements at September 30,
1997, 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 September 30, 1997, had outstanding interest rate cap agreements
with a notional amount of $702.7 million that were entered into in order to
hedge the periodic and lifetime interest rate caps embedded in certain of its
adjustable-rate residential real estate 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 September
30, 1997, the one-year CMT was 5.47% and the weighted average specified cap
interest rate on these agreements was 8.00%. In addition, at September 30, 1997,
the Company had interest rate cap agreements outstanding with a notional amount
of $361.0 million that were entered into for the purpose of locking-in maximum
interest costs on certain of its securities sold under agreements to repurchase.
These interest rate cap 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 5.66% at September 30, 1997, rises above a specified
cap interest rate. At September 30, 1997, the weighted average specified cap
interest rate on these
21
agreements was 7.04%. Unamortized premiums on the Company's outstanding interest
rate cap agreements amounted to $8.3 million at September 30, 1997.
The following table sets forth the contractual maturities of the Company's
interest rate cap agreements outstanding at September 30, 1997. 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.
- -----------------------------------------------------------------------------------------------------------------
Notional
(In thousands) Amount
- -----------------------------------------------------------------------------------------------------------------
Maturing in the year ending December 31:
1997 $ 54,358
1998 439,399
1999 373,992
2001 196,000
- -----------------------------------------------------------------------------------------------------------------
Total $1,063,749
- -----------------------------------------------------------------------------------------------------------------
The Company's use of derivative financial instruments for asset/liability
management purposes resulted in reductions of net interest income for the three-
and nine-month periods ended September 30, 1997 of $4.2 million and $13.7
million, respectively, as compared with reductions of net interest income during
the comparable periods in 1996 of $4.9 million and $12.3 million, respectively.
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 mortgage servicing assets as a result of an increase in loan
prepayments, which is generally triggered by declining interest rates.
The following table summarizes, at September 30, 1997 and December 31, 1996,
the notional amount and estimated fair value of derivative financial instruments
used by the Company in connection with its mortgage banking activities.
- ----------------------------------------------------------------------------------------------------------------------
September 30, 1997 December 31, 1996
--------------------------- --------------------------
Notional Estimated Notional Estimated
(In thousands) Amount Fair value Amount Fair value
- ----------------------------------------------------------------------------------------------------------------------
Forward contracts $ 760,482 $(3,957) $ 136,770 $575
Options 90,000 142 40,000 64
Interest rate floors 1,579,502 6,963 996,498 77
- ----------------------------------------------------------------------------------------------------------------------
Total $2,429,984 $ 3,148 $1,173,268 $716
- ----------------------------------------------------------------------------------------------------------------------
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 6.00% and 6.12%,
respectively, at September 30, 1997, declines below a designated floor interest
rate. At September 30, 1997, interest rate floor agreements with a notional
amount of $152.5 million were indexed to the five-year CMT and had a weighted
average designated floor interest rate of 5.30%, and $1.4 billion were indexed
to the ten-year CMT and had a weighted average designated floor interest rate of
5.45%. The Company's interest rate floor agreements outstanding at September 30,
1997 terminate at various dates from August 1998 through September 2002. At
September 30, 1997, unamortized premiums on the Company's outstanding interest
rate floor agreements amounted to $6.7 million.
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
22
utilization 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
The Company's non-performing assets consist of non-accrual loans and ORE, net.
Loans modified in a troubled debt restructuring ("TDR") that have demonstrated a
sufficient payment history to warrant return to performing status are not
included within non-accrual loans (see "Loans Modified in a TDR").
Non-performing assets, which amounted to $112.4 million at September 30, 1997,
decreased $14.7 million, or 11.6%, during the third quarter of 1997, following a
decline during the first six months of 1997 of $117.8 million, or 48.1%. The
significant reduction in non-performing assets during the first six months of
1997 was largely the result of the NPA Sales. Although the NPA Sales
substantially reduced the Company's non-performing residential real estate
assets, certain residential real estate loans have continued to enter non-
performing status and, due to the generally significant amount of time necessary
to resolve loans that become non-performing, new non-performing residential real
estate loans initially have exceeded exits from the existing portfolio. The
Company currently expects that this trend may continue in the near term.
The following table presents the components of the Company's non-performing
assets at the dates indicated:
- ---------------------------------------------------------------------------------------------------------
September 30, June 30, March 31, December 31,
(In thousands) 1997 1997 1997 1996
- ---------------------------------------------------------------------------------------------------------
Non-accrual loans:
Residential real estate $ 68,842 $ 65,092 $155,521 $163,791
Commercial and multifamily real estate 20,086 31,728 20,590 21,047
Consumer 5,943 5,952 6,008 6,645
Business 300 369 526 107
- ---------------------------------------------------------------------------------------------------------
Total non-accrual loans 95,171 103,141 182,645 191,590
- ---------------------------------------------------------------------------------------------------------
ORE, net:
Residential real estate 8,839 10,338 33,917 36,182
Commercial and multifamily real estate 11,515 16,059 17,066 20,367
Allowance for losses (3,153) (2,460) (3,186) (3,294)
- ---------------------------------------------------------------------------------------------------------
Total ORE, net 17,201 23,937 47,797 53,255
- ---------------------------------------------------------------------------------------------------------
Total non-performing assets $112,372 $127,078 $230,442 $244,845
- ---------------------------------------------------------------------------------------------------------
Non-performing assets to total assets 0.58% 0.63% 1.25% 1.30%
Non-accrual loans to total loans receivable 0.78% 0.89% 1.68% 1.78%
- ---------------------------------------------------------------------------------------------------------
Since December 31, 1996, the Company expanded its lending activities and
product mix and anticipates that such expansion efforts will continue. The
Company intends to continue to monitor closely the effects of these efforts on
the overall risk profile of its loan portfolio, which the Company expects will
continue to change over time.
23
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, at September 30, 1997, such delinquent loans of the Company, net of
those already in non-performing status.
- ---------------------------------------------------------------------------------------
Delinquency Period
-----------------------
30 - 59 60 - 89
(In thousands) Days Days Total
- ---------------------------------------------------------------------------------------
Residential real estate loans $ 40,797 $ 13,348 $54,145
Commercial and multifamily real estate loans 5,951 2,782 8,733
Consumer loans 4,290 1,157 5,447
Business loans 1,916 -- 1,916
- ---------------------------------------------------------------------------------------
Total $ 52,954 $ 17,287 $70,241
- ---------------------------------------------------------------------------------------
Loans Modified in a TDR
When borrowers encounter financial hardship but are able to demonstrate to the
Company's satisfaction an ability and willingness to resume regular monthly
payments, the Company may provide them with an opportunity to restructure the
terms of their loans. These arrangements, which are negotiated individually,
generally provide for interest rates that are lower than those initially
contracted for, but which may be higher or lower than current market interest
rates for loans with comparable risk, and may, in some instances, include a
reduction in the principal amount of the loan. The Company evaluates the costs
associated with any particular restructuring arrangement and may enter into such
an arrangement if it believes it is economically beneficial for the Company to
do so.
The following table sets forth, at September 30, 1997 and December 31, 1996,
the Company's loans that have been modified in a TDR, excluding those classified
as non-accrual loans.
- ----------------------------------------------------------------------------
September 30, December 31,
(In thousands) 1997 1996
- ----------------------------------------------------------------------------
Commercial and multifamily real estate loans $46,834 $170,323
Residential real estate loans 38,550 42,684
- ----------------------------------------------------------------------------
Total $85,384 $213,007
- ----------------------------------------------------------------------------
Impaired Loans
The table below sets forth information regarding the Company's impaired loans
at September 30, 1997 and December 31, 1996. 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.
- ------------------------------------------------------------------------------------------------------------------------------
September 30, 1997 December 31, 1996
------------------------------------- -------------------------------------
Related Related
Allowance Allowance
Recorded for Loan Net Recorded for Loan Net
(In thousands) Investment Losses Investment Investment Losses Investment
- ------------------------------------------------------------------------------------------------------------------------------
Residential real estate loans:
With a related allowance $ 1,690 $ (106) $ 1,584 $ 3,290 $ (206) $ 3,084
Without a related allowance 4,230 -- 4,230 11,322 -- 11,322
- ------------------------------------------------------------------------------------------------------------------------------
Total residential real estate loans 5,920 (106) 5,814 14,612 (206) 14,406
- ------------------------------------------------------------------------------------------------------------------------------
Commercial and multifamily real estate loans:
With a related allowance 20,873 (2,350) 18,523 39,388 (3,919) 35,469
Without a related allowance 7,707 -- 7,707 8,752 -- 8,752
- ------------------------------------------------------------------------------------------------------------------------------
Total commercial and multifamily real
estate loans 28,580 (2,350) 26,230 48,140 (3,919) 44,221
- ------------------------------------------------------------------------------------------------------------------------------
Business loans with a related allowance 300 (282) 18 107 (53) 54
- ------------------------------------------------------------------------------------------------------------------------------
Total impaired loans $34,800 $(2,738) $32,062 $62,859 $(4,178) $58,681
- ------------------------------------------------------------------------------------------------------------------------------
24
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.
The following table sets forth the activity in the Company's allowance for
loan losses for the three months and nine months ended September 30, 1997 and
1996.
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
(In thousands) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $101,026 $124,902 $106,495 $128,295
Provision charged to operations /(1)/ 8,000 10,250 41,000 31,000
Allowance for loan losses acquired in the BFS Acquisition -- -- 13,249 --
Charge-offs:
Residential real estate loans /(2)/ (6,056) (14,644) (57,284) (35,083)
Commercial and multifamily real estate loans (1,803) (4,781) (4,458) (10,510)
Consumer loans (1,148) (1,234) (3,360) (3,917)
Business loans -- (271) -- (279)
- -------------------------------------------------------------------------------------------------------------------------
Total charge-offs (9,007) (20,930) (65,102) (49,789)
- -------------------------------------------------------------------------------------------------------------------------
Recoveries:
Residential real estate loans 909 1,150 3,017 3,938
Commercial and multifamily real estate loans 719 324 1,912 816
Consumer loans 405 467 1,410 1,831
Business loans 9 56 80 128
- -------------------------------------------------------------------------------------------------------------------------
Total recoveries 2,042 1,997 6,419 6,713
- -------------------------------------------------------------------------------------------------------------------------
Net charge-offs (6,965) (18,933) (58,683) (43,076)
- -------------------------------------------------------------------------------------------------------------------------
Balance at end of period $102,061 $116,219 $102,061 $116,219
- -------------------------------------------------------------------------------------------------------------------------
(1) The nine-month period ended September 30, 1997 includes a provision of
$14.0 million associated with the NPA Sales.
(2) The nine-month period ended September 30, 1997 includes charge-offs of
$35.8 million associated with the NPA Sales.
At September 30, 1997, the allowance for loan losses represented 0.84% of
loans receivable, as compared with 0.99% at the end of 1996 and 1.10% at
September 30, 1996. The allowance for loan losses was 107.2% of non-accrual
loans at September 30, 1997, up from 55.6% and 51.1% at December 31, 1996 and
September 30, 1996, respectively.
Loans Sold with Recourse
In the past, the Company sold certain residential and multifamily real estate
loans with limited recourse. At September 30, 1997, the balance of loans sold
with recourse amounted to $672.4 million, down from $751.5 million at December
31, 1996. The Company's related maximum potential recourse exposure was
approximately $182 million at September 30, 1997, as compared with approximately
$196 million at the end of 1996. Of the loans sold with recourse at September
30, 1997, $7.8 million were delinquent 90 days or more. During the first nine
months of 1997, the Company repurchased loans sold with recourse totaling $12.8
million.
25
MBS
In general, the Company's MBS carry a significantly lower credit risk than its
loans receivable. Of the $5.5 billion aggregate carrying value of the Company's
MBS available for sale and held to maturity at September 30, 1997, approximately
17% were issued by the Federal Home Loan Mortgage Corporation ("FHLMC"), the
Government National Mortgage Association ("GNMA") and the Federal National
Mortgage Association ("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 loss protection generally provided
by the various forms of credit enhancements, as losses in excess of certain
levels are not protected. Furthermore, the credit enhancement itself is subject
to the creditworthiness of the provider. Thus, in the event that a provider of a
credit enhancement does not fulfill its obligations, the MBS holder could be
subject to risk of loss similar to a purchaser of a whole loan pool.
During 1996 and 1995, the Company recognized losses of $4.7 million and $3.3
million, respectively, associated with the other than temporary impairment in
value of certain privately-issued MBS. No such losses were incurred during the
first nine months of 1997. The losses in 1996 and 1995 were necessitated by the
depletion of the underlying credit enhancements as a result of losses incurred
on loans underlying the securities, 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 $79 million at September 30, 1997, will not be incurred. While
substantially all of the $4.6 billion of privately-issued MBS held by the
Company at September 30, 1997 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.
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. In
the event of default by a counterparty, the Company would be subject to an
economic loss that corresponds to the cost to replace the agreement. 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 limiting its credit exposure to counterparties of
derivative financial instrument agreements, which policies include consideration
of credit ratings on a continuous basis, collateral requirements and exposure to
any one counterparty. In addition, as deemed necessary, the Company may enter
into master netting agreements, under which it may offset payable and receivable
positions, to the extent they exist, with the same counterparty in the event of
default. There were no past due amounts related to the Company's derivative
financial instruments at September 30, 1997 or December 31, 1996.
LOAN PRODUCTION
The Company's total loan production amounted to $2.2 billion during the third
quarter of 1997, up from $1.0 billion during the third quarter of 1996. The 1997
third quarter loan production increased 74.7% from the immediately preceding
quarter and 163.8% from the 1997 first quarter. For the first nine months of
1997, total loan production was $4.3 billion, surpassing the $3.8 billion of
loan production for the full year 1996 and representing growth of 44.3% as
compared with the first nine months of 1996.
Residential real estate loan production of $1.9 billion for the third quarter
of 1997 increased $1.1 billion, or 142.6%, as compared with the third quarter of
1996. For the first nine months of 1997, the Company produced $3.5 billion of
residential real estate loans, a 47.4% increase from the comparable period in
1996. These increases largely reflect the impact of the Company's recent
restructuring of its mortgage banking operations.
26
Total commercial and multifamily real estate loan production was $131.2
million for the third quarter of 1997, as compared with $141.9 million for the
corresponding quarter of 1996. For the first nine months of 1997, total
commercial and multifamily real estate loan production was $322.3 million, an
increase of 13.3% as compared with the same period one year ago.
Consumer loan originations increased to $131.4 million and $352.7 million for
the three- and nine-month periods ended September 30, 1997 from $102.5 million
and $257.2 million during the respective periods in 1996, substantially
attributable to increased production of home equity loans. During the third
quarter and first nine months of 1997, originations of home equity loans
increased $27.9 million, or 45.1%, and $94.1 million, or 67.0%, as compared with
the respective prior year periods.
The Company has also experienced growth in its business loan production
levels, which increased $22.9 million and $40.5 million during the three- and
nine-month periods ended September 30, 1997, as compared with the corresponding
year-earlier periods.
The following table summarizes the Company's loan production, both for
portfolio and for sale in the secondary market, for the three months and nine
months ended September 30, 1997 and 1996.
- ----------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
(In thousands) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Residential real estate loan production:
Originated $1,246,639 $ 648,168 $2,542,955 $2,107,413
Purchased 640,656 129,834 979,323 282,319
- ----------------------------------------------------------------------------------------------------------------------
Total residential real estate loan production 1,887,295 778,002 3,522,278 2,389,732
- ----------------------------------------------------------------------------------------------------------------------
Commercial and multifamily real estate loans originated:
Commercial real estate loans 51,594 49,954 153,563 118,110
Multifamily real estate loans 79,650 91,961 168,738 166,308
- ----------------------------------------------------------------------------------------------------------------------
Total commercial and multifamily real estate
loans originated 131,244 141,915 322,301 284,418
- ----------------------------------------------------------------------------------------------------------------------
Consumer loans originated:
Home equity loans 89,754 61,868 234,512 140,453
Other consumer loans 41,685 40,583 118,109 116,789
- ----------------------------------------------------------------------------------------------------------------------
Total consumer loans originated 131,439 102,451 352,621 257,242
- ----------------------------------------------------------------------------------------------------------------------
Business loans originated 31,203 8,269 58,950 18,418
- ----------------------------------------------------------------------------------------------------------------------
Total loan production $2,181,181 $1,030,637 $4,256,150 $2,949,810
- ----------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION
General
The Company's total assets amounted to $19.4 billion at September 30, 1997, an
increase of $543.5 million, or 2.9%, from December 31, 1996. This increase was
largely attributable to growth in loans receivable, due in part to the BFS
Acquisition, and loans held for sale of $1.4 billion and $389.9 million,
respectively, coupled with the investment of the proceeds from the issuance of
the $200.0 million in principal amount of Series A Capital Securities. The
effect of such factors was partially offset by an aggregate reduction in
securities available for sale and securities held to maturity of $1.4 billion.
Securities
The Company's securities available for sale amounted to $1.8 billion at
September 30, 1997, a decline of $802.3 million, or 31.0%, since December 31,
1996. Securities held to maturity by the Company, which amounted to $3.8 billion
at September 30, 1997, declined $598.2 million, or 13.7%, during the first nine
months of 1997.
27
The following table summarizes the amortized cost and estimated fair value of
securities available for sale and securities held to maturity at September 30,
1997 and December 31, 1996.
- ----------------------------------------------------------------------------------------------------------
September 30, 1997 December 31, 1996
----------------------------- ------------------------------
Amortized Estimated Amortized Estimated
(In thousands) Cost Fair Value Cost Fair Value
- ----------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
Debt securities:
MBS:
Pass-through securities:
Privately-issued $ 955,818 $ 953,647 $1,232,276 $1,228,264
FNMA 576,271 583,984 916,452 919,346
FHLMC 161,201 164,024 165,540 167,073
GNMA 15,387 15,671 185,166 187,006
Interest-only 1,639 1,323 1,850 1,291
- ----------------------------------------------------------------------------------------------------------
Total MBS 1,710,316 1,718,649 2,501,284 2,502,980
- ----------------------------------------------------------------------------------------------------------
U. S. government and federal agency 11,527 11,639 18,117 17,969
State and municipal 42,946 42,123 44,322 43,307
Domestic corporate 7,753 7,676 15,467 15,328
- ----------------------------------------------------------------------------------------------------------
Total debt securities 1,772,542 1,780,087 2,579,190 2,579,584
- ----------------------------------------------------------------------------------------------------------
Equity securities 7,410 7,192 10,343 9,988
- ----------------------------------------------------------------------------------------------------------
Total securities available for sale $1,779,952 $1,787,279 $2,589,533 $2,589,572
- ----------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY
MBS:
Pass-through securities:
Privately-issued $2,152,084 $2,112,305 $2,520,013 $2,464,840
FHLMC 35,450 36,064 44,711 44,942
Collateralized mortgage obligations:
Privately-issued 1,456,619 1,440,958 1,670,983 1,644,120
FNMA 94,380 93,609 94,412 93,649
FHLMC 24,095 23,904 30,089 29,648
- ----------------------------------------------------------------------------------------------------------
Total MBS 3,762,628 3,706,840 4,360,208 4,277,199
- ----------------------------------------------------------------------------------------------------------
Other debt securities 3,138 2,525 3,763 2,738
- ----------------------------------------------------------------------------------------------------------
Total securities held to maturity $3,765,766 $3,709,365 $4,363,971 $4,279,937
- ----------------------------------------------------------------------------------------------------------
Loans Receivable
The Company's total loans receivable, exclusive of the allowance for loan
losses, amounted to $12.1 billion at September 30, 1997, an increase of 13.0%
from $10.7 billion at the end of 1996. Contributing to this growth was the $2.7
billion of loan production for portfolio during the period, coupled with the
impact of the BFS Acquisition. In connection with the BFS Acquisition, the
Company acquired approximately $588 million of loans, substantially all of which
were secured by commercial and multifamily real estate. A significant component
of the Company's current operating strategy is to seek continuing growth in its
loans receivable portfolio.
Residential real estate loans, which consist of one-to-four family first
mortgage loans and cooperative apartment loans, represented 74.4% of the loans
receivable portfolio at September 30, 1997. This segment of the loans receivable
portfolio rose $1.0 billion as compared with the level at December 31, 1996 and
amounted to $9.0 billion at September 30, 1997. Total residential real estate
loan production for portfolio totaled $2.0 billion during the first nine months
of 1997.
The Company's commercial and multifamily real estate loans receivable
portfolio amounted to $2.3 billion at September 30, 1997, which represents
growth of $424.0 million, or 22.5%, since year-end 1996. At September 30, 1997,
commercial and multifamily real estate loans represented 19.0% of the total
loans receivable portfolio, as compared with 17.6% of the total loans receivable
portfolio at December 31, 1996.
28
The Company's consumer loans receivable portfolio of $740.4 million at
September 30, 1997 rose $6.2 million from the end of 1996. This increase was
largely attributable to growth in home equity loans of $51.7 million, or 9.8%,
the impact of which was partially offset by the repurchase, during the period,
of the Company's portfolio of third-party originated automobile loans by the
seller. At September 30, 1997, home equity loans represented approximately 80%
of the consumer loans receivable portfolio, up from approximately 73% at the end
of 1996.
The Company's business loans receivable amounted to $56.9 million at September
30, 1997. This represents a 32.0% increase from the $43.1 million outstanding at
December 31, 1996.
Deposits
At September 30, 1997, the Bank operated 91 branches, comprised of 90 branches
in the greater New York metropolitan area and one branch in Florida. The Company
experienced deposit growth of $535.6 million, or 4.2%, since December 31, 1996,
largely due to the BFS Acquisition. In connection with this acquisition, the
Company acquired five New York City branches and $447.1 million of deposits.
Also contributing to the deposit growth was a brokered time deposit program
implemented during the third quarter of 1997. This program, which was initiated,
in part, to expand the Company's available sources of funds, resulted in
approximately $138 million of new deposits.
At September 30, 1997, approximately 66% of the Bank's deposits were
assessable by the Bank Insurance Fund of the Federal Deposit Insurance
Corporation (the "FDIC") and approximately 34% of its deposits were assessable
by the SAIF of the FDIC, in each case insured up to applicable limits.
The following table sets forth a summary of the Company's deposits at
September 30, 1997 and December 31, 1996.
- ----------------------------------------------------------------------------------------
September 30, 1997 December 31, 1996
---------------------------- ----------------------------
Percentage Percentage
(Dollars in thousands) Amount of Total Amount of Total
- ----------------------------------------------------------------------------------------
Demand $ 1,272,184 9.5% $ 1,130,863 8.8%
Savings 2,468,315 18.4 2,460,367 19.1
Money market 1,892,013 14.1 2,007,448 15.6
Time 7,759,808 58.0 7,258,061 56.5
- ----------------------------------------------------------------------------------------
Total deposits $13,392,320 100.0% $12,856,739 100.0%
- ----------------------------------------------------------------------------------------
Borrowed Funds
The following table summarizes the Company's total borrowed funds at September
30, 1997 and December 31, 1996.
- ---------------------------------------------------------------------------------------------------------------
September 30, 1997 December 31, 1996
---------------------------- ----------------------------
Percentage Percentage
(Dollars in thousands) Amount of Total Amount of Total
- ---------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase $3,303,774 68.9% $3,550,234 73.7%
FHLBNY advances 947,153 19.8 925,139 19.2
Senior notes 197,749 4.1 197,584 4.1
Series A Capital Securities 196,131 4.1 -- --
Other 150,742 3.1 142,234 3.0
- ---------------------------------------------------------------------------------------------------------------
Total borrowed funds $4,795,549 100.0% $4,815,191 100.0%
- ---------------------------------------------------------------------------------------------------------------
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 ongoing basis.
29
During the second quarter of 1997, Dime Capital, in an underwritten public
offering, issued $200.0 million in principal amount of Series A Capital
Securities, representing preferred beneficial interests in Dime Capital. For a
further discussion of the Series A Capital Securities, see Note 3 of Notes to
Consolidated Financial Statements.
Stockholders' Equity
Stockholders' equity amounted to $1.1 billion at September 30, 1997, an
increase of $30.7 million from December 31, 1996. At September 30, 1997,
stockholders' equity represented 5.42% of total assets and tangible
stockholders' equity represented 5.18% of total tangible assets, as compared
with 5.42% and 5.37%, respectively, at the end of 1996. The Company's book value
per common share and tangible book value per common share amounted to $10.38 and
$9.88, respectively, at September 30, 1997, up from $9.76 and $9.67,
respectively, at December 31, 1996.
In connection with a Common Stock repurchase program announced during the
fourth quarter of 1996 that was completed during the third quarter of 1997,
2,387,100 shares of Common Stock were repurchased during the first nine months
of 1997. In total 5,413,000 shares of Common Stock were repurchased under this
program at an average cost per share of $15.82. During June 1997, the Holding
Company, in connection with the announcement of the NAMC Acquisition, announced
a program to repurchase up to approximately 6,900,000 shares of Common Stock.
Through September 30, 1997, 1,708,200 shares of Common Stock have been
repurchased under this program at an average cost per share of $19.22. Since the
announcement, in January 1996, of the Holding Company's initial Common Stock
repurchase program, a total of 9,121,200 shares of Common Stock have been
repurchased at an average cost per share of $15.78.
During the first nine months of 1997, the Holding Company declared and paid
cash dividends on the Common Stock of $0.08 per share.
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 sufficient funds exist to
meet deposit withdrawals, loan and investment funding commitments, the repayment
of borrowed funds, and other obligations and expenditures.
The Company's sources of liquidity include principal repayments on loans and
MBS, borrowings through securities sold under agreements to repurchase and the
FHLBNY, deposits, sales of loans in connection with mortgage banking activities,
sales of securities available for sale, 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, has been dividends
from the Bank, whose ability to pay dividends is subject to regulations of the
Office of Thrift Supervision ("OTS"), its primary regulator. During the first
nine months of 1997, the Bank paid dividends of $64.0 million to the Holding
Company.
On May 6, 1997, Dime Capital issued $200.0 million of Series A Capital
Securities, representing preferred beneficial interests in Dime Capital, in an
underwritten public offering and $6.2 million of beneficial interests
represented by its common securities to the Holding Company. In connection
therewith, Dime Capital purchased $206.2 million of Series A Subordinated
Debentures from the Holding Company.
Pursuant to regulations promulgated by the OTS, the Bank is required to
maintain (i) a ratio of average eligible liquid assets for the month to the sum
of average net withdrawable accounts and short-term borrowings during the
preceding month of at least 5.0% and (ii) a ratio of average eligible short-term
liquid assets for the month to the sum of average net withdrawable accounts and
short-term borrowings during the preceding month of at least 1.0%. For the month
of September 1997, the Bank's average liquidity ratio was 5.1% and its average
short-term liquidity ratio was 4.7%.
30
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 total risk-based capital of at least 8.00% of
risk-weighted assets (the "Capital Adequacy Regulations"). As detailed in the
table below, the Bank was in compliance with the Capital Adequacy Regulations at
September 30, 1997.
Under the prompt corrective action regulations adopted by the OTS pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991, an
institution is considered well capitalized, the highest of five categories, if
it has a leverage capital ratio of at least 5.00%, a tier 1 risk-based capital
ratio (leverage capital to risk-weighted assets) of at least 6.00%, and a total
risk-based capital ratio of at least 10.00%, and it is not subject to an order,
written agreement, capital directive, or prompt corrective action directive to
meet and maintain a specific capital level for any capital measure. At September
30, 1997, the Bank met the published standards for a well capitalized
designation under these regulations.
The following table sets forth the regulatory capital ratios of the Bank at
the dates indicated. The declines in the Bank's regulatory capital ratios from
year-end 1996 to September 30, 1997 were attributable to asset growth during the
period, due in part to the BFS Acquisition, coupled with the deduction from
regulatory capital of the goodwill arising from the BFS Acquisition.
- ---------------------------------------------------------------------------------
September 30, June 30, March 31, December 31,
1997 1997 1997 1996
- ---------------------------------------------------------------------------------
Tangible capital 6.03% 5.66% 6.32% 6.06%
Leverage capital 6.03 5.66 6.32 6.06
Tier 1 risk-based capital 11.13 11.05 12.21 11.96
Total risk-based capital 12.10 12.03 13.30 13.08
- ---------------------------------------------------------------------------------
PART II. OTHER INFORMATION
ITEM 1. 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,
Inc. 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
31
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 130 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 Anchor 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 also submitted a filing acknowledging that
it is not aware of any affirmative defenses. Briefing on the motions was
completed on August 1, 1997, but no timetable has been set for disposition of
the Bank's motions and the government cross-motions. In August 1997, the Court
held a hearing on summary judgment motions in four other cases. As part of that
hearing, the Court heard argument on eleven issues that the plaintiffs contend
are common to many of the pending cases, including the Bank's case. The Court
indicated it would issue its order on those common issues in early September
1997; however, no order has yet been issued. If the Court's rulings are
favorable, the Bank expects to avail itself of a procedure to have those
determinations applied in its case as part of the determination of its pending
summary judgment motions. It is not possible to predict whether any of the
Bank's partial summary judgment motions will be granted or, if so, when the
Chief Judge will schedule a trial on damages and any remaining liability issues.
The Court has ordered that certain discovery proceed during the last five
months of 1997. The government is required to produce certain documents relating
to unassisted acquisitions of failing institutions effected by the Bank and five
other plaintiffs. In addition, the Court has directed that full discovery of
facts common to all pending cases be conducted. Such discovery will include
materials concerning the policies and procedures of the Federal Home Loan Bank
Board (the predecessor of the OTS) and the FSLIC during the thrift crisis of the
1980's, when the transactions that are the subject of the litigation occurred.
In addition, the common discovery will include generally applicable information
concerning the operations of the FSLIC that will be relevant under certain
damage theories.
Commencing in January 1998, the oldest 30 of the pending cases (after
excluding certain specific cases) that elect to proceed will be allowed to
commence full discovery as to liability and damages in their cases. The case-
specific discovery will continue for one year, unless extended by the Court. The
second 30 cases will start discovery in 1999, and so on. Discovery of damage
experts will follow the fact discovery in each case. Cases will not be assigned
to trial judges until after the fact discovery is completed. The Bank believes
the date on which it filed its complaint will place it about 36th among the
cases. Consequently, if six or more of the cases filed earlier elect not to
proceed at this time, the Bank will be among the cases to commence full
discovery in January 1998. Since a number of the cases filed prior to the Bank's
claim have not been actively prosecuted, the Bank believes there is a reasonable
possibility that its case will be among the first 30 to start discovery.
There have been no decisions determining damages in any of the Winstar-related
cases. The trial in the first of the Winstar-related cases to proceed to trial
on damages is expected to be concluded by the end of March 1998, and the second
is scheduled to commence in April 1998. It is unlikely that any decision on
damages will be issued before the summer of 1998. It is likely 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, that it is one of the more significant cases before the Court, 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.
32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 -- Financial Data Schedule
(b) REPORTS ON FORM 8-K
On July 25, 1997, the Holding Company filed with the Securities and
Exchange Commission a Current Report on Form 8-K, which reported that, on
July 17, 1997, it issued a press release announcing its preliminary
financial results for the second quarter of 1997.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIME BANCORP, INC.
(Registrant)
Dated: November 13,1997 By: /s/ Lawrence J. Toal
---------------- --------------------
Lawrence J. Toal
Chief Executive Officer, President
and Chief Operating Officer
Dated: November 13, 1997 By: /s/ Anthony R. Burriesci
----------------- ------------------------
Anthony R. Burriesci
Executive Vice President
and Chief Financial Officer
34
EXHIBIT INDEX
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
- ------ -------------------------
27 Financial Data Schedule (filed electronically only)
35