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 MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-13094
DIME BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3197414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
589 FIFTH AVENUE, NEW YORK, NEW YORK 10017
(Address of principal executive offices) (Zip Code)
(212) 326-6170 NOT APPLICABLE
(Registrant's telephone number, (Former name, former address
including area code) and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No _______
--------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common shares, $0.01 par value 98,860,716 shares
- - ------------------------------- --------------------------------
Class Outstanding as of April 30, 1996
1
DIME BANCORP, INC.
MARCH 31, 1996
FORM 10-Q
INDEX
PAGE NO.
--------
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Statements of Financial Condition (unaudited)
as of March 31, 1996 and December 31, 1995 3
Consolidated Statements of Income (unaudited) for the
three months ended March 31, 1996 and 1995 4
Consolidated Statement of Changes in Stockholders'
Equity (unaudited) for the three months ended
March 31, 1996 5
Consolidated Statements of Cash Flows (unaudited) for
the three months ended March 31, 1996 and 1995 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II - Other Information
Item 1 - Legal Proceedings 30
Item 6 - Exhibits and Reports on Form 8-K 30
Signatures 31
2
PART 1.FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
(Unaudited)
March 31, December 31,
1996 1995
- - --------------------------------------------------------------------
ASSETS
Cash and due from banks $ 163,742 $ 216,532
Money market investments 22,198 18,824
Loans held for sale 222,918 139,370
Securities available for sale 3,252,807 4,070,865
Securities held to maturity (estimated
fair value of $4,705,555 and $4,990,564
at March 31, 1996 and December 31,
1995, respectively) 4,809,976 5,085,736
Federal Home Loan Bank of New York stock 318,690 318,690
Loans receivable, net:
First mortgage loans 8,019,562 7,820,680
Cooperative apartment loans 1,219,100 1,217,030
Consumer and business loans 768,971 792,603
Allowance for loan losses (127,193) (128,295)
- - --------------------------------------------------------------------
Total loans receivable, net 9,880,440 9,702,018
- - --------------------------------------------------------------------
Other real estate owned, net 58,658 60,681
Accrued interest receivable 113,146 118,811
Premises and equipment, net 108,011 112,757
Capitalized excess servicing 30,455 32,604
Mortgage servicing rights 64,031 65,583
Deferred tax asset, net 214,614 223,463
Other assets 153,429 160,686
- - --------------------------------------------------------------------
Total assets $19,413,115 $20,326,620
- - --------------------------------------------------------------------
LIABILITIES
Deposits $12,664,315 $12,572,203
Federal Home Loan Bank of New York
advances 3,753,928 4,602,983
Securities sold under agreements to
repurchase 1,497,128 1,632,453
Senior notes 197,432 197,384
Other borrowed funds 175,740 181,732
Other liabilities 138,431 163,335
- - --------------------------------------------------------------------
Total liabilities 18,426,974 19,350,090
- - --------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share
(200,000,000 shares authorized;
99,847,394 and 99,705,731 shares
issued at March 31, 1996 and
December 31, 1995, respectively) 998 997
Additional paid-in capital 916,293 915,210
Retained earnings 93,036 65,981
Treasury stock, at cost (1,000,000
shares at March 31, 1996) (11,560) --
Net unrealized loss on securities
available for sale, net of related
income taxes (12,348) (5,468)
Unearned compensation (278) (190)
- - --------------------------------------------------------------------
Total stockholders' equity 986,141 976,530
- - --------------------------------------------------------------------
Total liabilities and stockholders'
equity $19,413,115 $20,326,620
- - --------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
3
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
For the Three Months Ended
March 31,
---------------------------
1996 1995
- - ---------------------------------------------------------------------
INTEREST INCOME
First mortgage loans $149,572 $134,020
Cooperative apartment loans 24,038 21,708
Consumer and business loans 17,353 17,825
Mortgage-backed securities 137,370 142,314
Investment securities 8,420 8,877
Money market investments 6,775 7,805
- - --------------------------------------------------------------------
Total interest income 343,528 332,549
- - --------------------------------------------------------------------
INTEREST EXPENSE
Deposits 132,797 122,943
Borrowed funds 96,396 102,215
- - --------------------------------------------------------------------
Total interest expense 229,193 225,158
- - --------------------------------------------------------------------
Net interest income 114,335 107,391
Provision for loan losses 10,500 9,950
- - --------------------------------------------------------------------
Net interest income after provision for
loan losses 103,835 97,441
- - --------------------------------------------------------------------
NON-INTEREST INCOME
Loan servicing fees, net 7,663 8,274
Securities and insurance brokerage fees 4,674 3,440
Net gains on sales activities 461 9,675
Banking service fees and other 8,539 8,206
- - --------------------------------------------------------------------
Total non-interest income 21,337 29,595
- - --------------------------------------------------------------------
NON-INTEREST EXPENSE
General and administrative expense:
Compensation and employee benefits 33,976 37,413
Occupancy and equipment, net 12,775 15,410
Federal deposit insurance premiums 2,875 7,705
Other 20,568 18,365
- - --------------------------------------------------------------------
Total general and administrative expense 70,194 78,893
Other real estate owned expense, net 2,493 3,676
Amortization of mortgage servicing
rights 3,194 2,764
Restructuring and merger-related expense 3,504 1,725
- - --------------------------------------------------------------------
Total non-interest expense 79,385 87,058
- - --------------------------------------------------------------------
Income before income tax expense 45,787 39,978
Income tax expense 18,732 17,556
- - --------------------------------------------------------------------
Net income $ 27,055 $ 22,422
- - --------------------------------------------------------------------
Primary and fully diluted earnings per
common share $0.25 $0.20
- - --------------------------------------------------------------------
Primary average common shares
outstanding 110,020 109,510
Fully diluted average common shares
outstanding 110,196 109,590
- - --------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
4
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
For the Three
Months Ended
March 31,
1996
- - -------------------------------------------------------
COMMON STOCK
Balance at beginning of period $ 997
Stock issued upon exercise of stock options 1
- - -------------------------------------------------------
Balance at end of period 998
- - -------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period 915,210
Stock issued upon exercise of stock
options 970
Restricted stock activity, net 113
- - -------------------------------------------------------
Balance at end of period 916,293
- - -------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 65,981
Net income 27,055
- - -------------------------------------------------------
Balance at end of period 93,036
- - -------------------------------------------------------
TREASURY STOCK, AT COST
Balance at beginning of period --
Treasury stock purchased (11,560)
- - -------------------------------------------------------
Balance at end of period (11,560)
- - -------------------------------------------------------
NET UNREALIZED LOSS ON SECURITIES AVAILABLE FOR SALE,
NET OF RELATED INCOME TAXES
Balance at beginning of period (5,468)
Change in net unrealized loss on
securities available for sale, net of
related income taxes (6,880)
- - -------------------------------------------------------
Balance at end of period (12,348)
- - -------------------------------------------------------
UNEARNED COMPENSATION
Balance at beginning of period (190)
Restricted stock activity (115)
Unearned compensation amortized to
expense 27
- - -------------------------------------------------------
Balance at end of period (278)
- - -------------------------------------------------------
Total stockholders' equity $986,141
- - -------------------------------------------------------
See accompanying notes to the consolidated financial statements.
5
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Three Months Ended
March 31,
-----------------------------
1996 1995
- - ---------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 27,055 $ 22,422
Adjustments to reconcile net income to
net cash (used) provided
by operating activities:
Provision for loan and real estate
losses 11,390 11,433
Depreciation and amortization of
premises and equipment 3,815 4,581
Other amortization and accretion,
net 15,371 10,715
Provision for deferred income tax
expense 13,982 12,651
Net (increase) decrease in loans
held for sale (83,548) 1,375
Other, net (8,396) 447
- - ---------------------------------------------------------------------
Net cash (used) provided by operating
activities (20,331) 63,624
- - ---------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans receivable originated and
purchased (563,365) (251,202)
Principal payments received on loans
receivable 377,429 225,943
Purchases of securities available for
sale (540,962) (164)
Purchases of securities held to maturity -- (732,260)
Proceeds from sales of securities
available for sale 1,007,125 12,184
Proceeds from sales of securities held
to maturity -- 187,342
Principal payments received on
mortgage-backed securities 584,959 287,928
Proceeds from maturities and calls of
investment securities 23,566 4,207
Net redemptions of Federal Home Loan
Bank of New York stock -- 51,750
Repurchases of assets sold with recourse (5,873) (9,366)
Proceeds from sales of other real
estate owned 10,194 19,493
Purchases and originations of mortgage
servicing rights (1,571) (872)
Other, net (11,779) ( 1,779)
- - ---------------------------------------------------------------------
Net cash provided (used) by investing
activities 879,723 (206,796)
- - ---------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits,
exclusive of sales 92,112 (3,559)
Net cash paid upon sale of deposits -- (245,022)
Net (decrease) increase in borrowings
with original maturities of
three months or less (1,134,985) 267,906
Proceeds from other borrowings 250,000 100,000
Repayments of other borrowings (105,346) (20,326)
Net proceeds from issuance of common
stock 971 659
Purchases of treasury stock (11,560) --
- - ---------------------------------------------------------------------
Net cash (used) provided by financing
activities (908,808) 99,658
- - ---------------------------------------------------------------------
Net decrease in cash and cash
equivalents (49,416) (43,514)
Cash and cash equivalents at beginning
of period 235,356 207,157
- - ---------------------------------------------------------------------
Cash and cash equivalents at end of
period $ 185,940 $ 163,643
- - ---------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid on deposits and borrowings $ 234,758 $ 203,052
Income tax refunds, net 11,369 14,775
SUPPLEMENTAL NON-CASH FLOW INFORMATION
Net transfers of loans receivable to
other real estate owned $ 13,504 $ 18,498
Transfers of securities from held to
maturity to available for sale -- 12,942
- - ---------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
6
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
- - ------------------------------
The accompanying unaudited consolidated financial statements include the
accounts of Dime Bancorp, Inc. (the "Holding Company") and The Dime Savings Bank
of New York, FSB and its subsidiaries (together with the Holding Company, the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
In the opinion of management, the accompanying unaudited consolidated financial
statements reflect all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the Company's financial condition
as of the dates indicated and results of operations and cash flows for the
periods shown. Certain amounts in the prior period consolidated financial
statements have been reclassified to conform with the presentation for the
current period. In preparing the consolidated financial statements, management
is required to make estimates and assumptions that affect the reported amounts.
Actual results could differ significantly from those estimates. The results for
the three months ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996.
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 1995 Annual Report to Stockholders.
NOTE 2 - PENDING EXERCISE OF COMMON STOCK WARRANT
- - -------------------------------------------------
On April 11, 1996, the Holding Company filed a registration statement, as
amended on April 26, 1996, with the Securities and Exchange Commission in
connection with the disposition by the Federal Deposit Insurance Corporation
("FDIC") of the 8,407,500 shares of common stock of the Holding Company ("Common
Stock") underlying a warrant held by the FDIC. The warrant provides for an
exercise price of $0.01 per share.
NOTE 3 - COMMON STOCK REPURCHASE PROGRAM
- - ----------------------------------------
In January 1996, the Holding Company announced its intention to repurchase, in
connection with the Company's stock-based employee benefit plans, approximately
2% of the outstanding Common Stock, or approximately 2,000,000 shares, at
prevailing prices in the open market or in privately-negotiated transactions.
During the first quarter of 1996, the Holding Company repurchased 1,000,000
shares of Common Stock at a cost of approximately $11.6 million. No time limit
has been established to complete the repurchase program, and there can be no
assurances that such repurchases will be completed or as to the prices at which
any remaining shares may be repurchased.
NOTE 4 - RECENT ACCOUNTING DEVELOPMENTS
- - ---------------------------------------
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss, measured by the difference between
the carrying amount of the asset and its fair value, must be recognized in the
event the sum of the expected future cash flows (undiscounted and without
interest charges) from the use and eventual disposition of the asset are less
than the carrying value of the asset. In addition, SFAS 121 requires that long-
lived assets and certain
7
identified intangibles intended to be disposed of be reported at the lower of
carrying amount or fair value less selling costs. Since the date of its adoption
by the Company, SFAS 121 has not had a material impact on the Company's
consolidated financial statements.
ACCOUNTING FOR STOCK BASED COMPENSATION
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). SFAS
123 applies to all transactions in which an entity acquires goods or services by
issuing equity instruments or by incurring liabilities where the payment amounts
are based on the entity's common stock price, except for employee stock
ownership plans. SFAS 123 covers transactions with both employees and non-
employees.
SFAS 123 established a fair value based method of accounting for stock based
compensation arrangements with employees (the "SFAS 123 Method"), but permits an
entity to continue utilizing the intrinsic value based method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (the "APB 25 Method"), in accounting for such arrangements. Under the
SFAS 123 Method, compensation cost associated with stock based compensation
arrangements is measured at the grant date based on fair value, whereas, under
the APB 25 Method, compensation cost is measured by the excess, if any, of the
quoted market price of the stock at date of grant, or other measurement date,
over the amount an employee is required to pay to acquire the stock. An entity
electing to continue using the APB 25 Method must disclose pro forma net income
and earnings per share information in the notes to its financial statements as
if the SFAS 123 Method had been adopted. In adopting SFAS 123, the Company has
elected to continue applying the APB 25 Method in preparing its consolidated
financial statements.
The disclosure requirements of SFAS 123 are effective for financial statements
for fiscal years beginning after December 15, 1995. Pro forma disclosures
required for entities that elect to continue to measure compensation cost using
the APB 25 Method must include the effects of all awards granted in fiscal years
that begin after December 15, 1994.
8
DIME BANCORP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
OVERVIEW
Dime Bancorp, Inc. (the "Holding Company") is the holding company for The Dime
Savings Bank of New York, FSB (the "Bank," and, together with the Holding
Company, the "Company"), a federally-chartered savings institution, the deposits
of which are insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC").
The Company reported net income for the first quarter of 1996 of $27.1 million,
or $0.25 per fully diluted common share, as compared with net income of $22.4
million, or $0.20 per fully diluted common share, for the first quarter of 1995.
The increase in net income predominantly reflects an $8.7 million reduction in
general and administrative ("G&A") expense coupled with growth of $6.9 million
in net interest income. Partially offsetting these factors was a decline in net
gains on sales activities from $9.7 million for the first three months of 1995,
which were principally attributable to sales of branches and facilities, to $0.5
million for the first three months of 1996.
The Company's annualized return on average stockholders' equity and average
assets increased to 10.93% and 0.54%, respectively, for the first quarter of
1996 from 9.86% and 0.44%, respectively, for the corresponding prior year
quarter. The Company's efficiency ratio (defined as G&A expense, other than
amortization of goodwill, divided by the sum of net interest income and
recurring non-interest income) improved to 50.99% for the first three months of
1996 from 61.87% for the comparable 1995 period.
The Company's total assets declined to $19.4 billion at March 31, 1996 from
$20.3 billion at year-end 1995, primarily due to the sale of $1.0 billion of
mortgage-backed securities ("MBS") that had been designated for sale at December
31, 1995 in connection with a balance sheet restructuring plan initiated by the
Company during the fourth quarter of 1995 (the "Balance Sheet Restructuring
Plan"). As a result of the decision to sell the MBS, the Company recognized a
pre-tax loss of $23.6 million in the 1995 fourth quarter, reflecting the write-
down of those securities with unrealized losses to estimated fair value. The MBS
sold had been included in the transfer, in accordance with the Balance Sheet
Restructuring Plan, of securities with an amortized cost of $3.6 billion from
the Company's held to maturity portfolio to its available for sale portfolio
during December 1995 in connection with a one-time opportunity provided by the
Financial Accounting Standards Board to reassess security classifications made
pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." In accordance with the
Balance Sheet Restructuring Plan, the proceeds from the MBS sales were utilized
to reduce the Company's outstanding borrowings. In addition to reducing the
Company's reliance on MBS and borrowings, the Balance Sheet Restructuring Plan
has enabled the Company to improve its net interest margin by eliminating from
the MBS portfolio certain lower yielding securities and should provide the
Company with greater flexibility in adjusting to varying interest rate
environments and the opportunity to further reduce its asset size, should that
be deemed appropriate.
The Holding Company repurchased 1,000,000 shares of its outstanding common stock
(the "Common Stock") during the first quarter of 1996 in connection with a
Common Stock repurchase program announced during the quarter (see "Financial
Condition -- Stockholders' Equity").
The Company's total loan production, consisting of both originations and
purchases, amounted to $1.0 billion for the quarter ended March 31, 1996, as
compared with $287.2 million for the corresponding prior year quarter.
Production of one-to-four family first mortgage and cooperative apartment loans
("residential property loans") amounted to $904.9 million during the first
quarter of 1996, or approximately 50% of the comparable loan production for the
full year ended December 31, 1995.
At March 31, 1996, the Bank continued to satisfy the published regulatory
standards for a well capitalized institution.
9
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Company's net interest income of $114.3 million for the three months ended
March 31, 1996 reflects growth of $6.9 million relative to the corresponding
period in 1995. The Company also experienced an increase in its net interest
margin to 2.35% for the first quarter of 1996 from 2.16% for the first quarter
of 1995. These increases largely reflect growth in the gross yield on total
average interest-earning assets of 28 basis points, which has outpaced the rise
in the cost of interest-bearing liabilities of 10 basis points.
The gross yield on total average interest-earning assets increased to 7.06% for
the first quarter of 1996 from 6.78% for the comparable prior year quarter. This
improvement was principally attributable to the sale of low-yielding MBS as part
of the Balance Sheet Restructuring Plan and the upward repricing of adjustable-
rate loans and MBS. For the first quarter of 1996, as compared with the
corresponding prior year quarter, the yield on MBS increased 41 basis points and
the yield on first mortgage loans increased 19 basis points.
The cost of the Company's average interest-bearing liabilities increased from
4.70% in the first quarter of 1995 to 4.80% in the first quarter of 1996 as the
cost of the Company's deposits rose 32 basis points, the impact of which was
mitigated by a decline in the cost of borrowings of 29 basis points. The rise in
the cost of deposits primarily reflects a change in the mix of deposits from
lower costing savings accounts to time deposits, together with the increased
cost of time deposits due to the upward repricing of such deposits throughout
the greater part of 1995. The Company's borrowing costs declined due to the
lower short-term interest rate environment during the 1996 first quarter as
compared with the corresponding 1995 period.
Total average interest-earning assets declined $173.4 million to $19.5 billion
for the first quarter of 1996, as compared with the corresponding 1995 quarter,
while total average interest-bearing liabilities declined $246.6 million to
$19.1 billion. These declines resulted primarily from the MBS sales and
repayments of borrowings in connection with the Balance Sheet Restructuring
Plan. The Company anticipates that average interest-earning assets, as well as
average interest-bearing liabilities, will decline further in the near term as
the full impact of the MBS sales and related reduction in borrowings is
realized.
The Company's net interest income was also affected by its utilization of
certain derivative financial instruments in managing its interest rate risk
exposure. These derivative financial instruments resulted in a reduction of net
interest income of $3.5 million during the first quarter of 1996, as compared
with an increase in net interest income of $7.9 million during the first quarter
of 1995. For a further discussion of the Company's hedging activities, see
"Management of Interest Rate Risk -- Hedging Activities" below.
As compared with the immediately preceding quarter, the Company experienced
growth in its net interest income of $14.2 million, which represented the second
consecutive quarter-to-quarter increase following four consecutive quarter-to-
quarter declines. Additionally, the Company's net interest margin increased 30
basis points as compared with the fourth quarter of 1995, the first increase
since the quarter ended September 30, 1994. These improvements primarily
reflect a more favorable interest rate environment and the impact of the Balance
Sheet Restructuring Plan.
10
The following table sets forth, for the periods indicated, the Company's
consolidated average statement of financial condition, net interest income, the
average yield on interest-earning assets and the average cost of interest-
bearing liabilities. Average balances are computed on a daily basis. Non-accrual
loans are included in average balances in the tables below.
Three Months Ended March 31,
------------------------------------------------------------------
1996 1995
---------------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
- - --------------------------------------------------------------------------------------------------------
Assets
- - ------
Interest-earning assets:
First mortgage loans $ 8,061,458 $149,572 7.42% $ 7,412,344 $134,020 7.23%
Cooperative apartment loans 1,229,421 24,038 7.82 1,171,698 21,708 7.40
Consumer and business loans 782,052 17,353 8.92 808,672 17,825 8.94
MBS 8,354,010 137,370 6.58 9,231,141 142,314 6.17
Investment securities 537,519 8,420 6.29 482,397 8,877 7.43
Money market investments 506,677 6,775 5.29 538,311 7,805 5.80
- - --------------------------------------------------------------------------------------------------------
Total interest-earning assets 19,471,137 $343,528 7.06% 19,644,563 $332,549 6.78%
Other assets 728,417 733,959
- - --------------------------------------------------------------------------------------------------------
Total assets $20,199,554 $20,378,522
- - --------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- - ------------------------------------
Interest-bearing liabilities:
Deposits:
Demand $ 1,055,336 $ 2,209 0.84% $ 1,048,206 $ 2,894 1.12%
Savings 2,654,009 16,583 2.51 3,336,620 19,454 2.36
Money market 2,139,420 20,517 3.86 2,100,594 22,964 4.43
Time 6,713,750 93,488 5.60 6,191,574 77,631 5.08
- - --------------------------------------------------------------------------------------------------------
Total deposits 12,562,515 132,797 4.25 12,676,994 122,943 3.93
Borrowed funds 6,507,532 96,396 5.87 6,639,702 102,215 6.16
- - --------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 19,070,047 $229,193 4.80% 19,316,696 $225,158 4.70%
Other liabilities 139,094 152,356
Stockholders' equity 990,413 909,470
- - --------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $20,199,554 $20,378,522
- - --------------------------------------------------------------------------------------------------------
Net interest income $114,335 $107,391
- - --------------------------------------------------------------------------------------------------------
Excess of interest-earning assets
over interest-bearing liabilities $ 401,090 $ 327,867
- - --------------------------------------------------------------------------------------------------------
Interest rate spread 2.26% 2.08%
- - --------------------------------------------------------------------------------------------------------
Net interest margin 2.35% 2.16%
- - --------------------------------------------------------------------------------------------------------
11
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
March 31,
----------------------------
1996 versus 1995
----------------------------
Increase (Decrease)
----------------------------
Due to Due to
(In thousands) Volume Rate Total
- - --------------------------------------------------------------
Interest income:
First mortgage loans $ 11,973 $ 3,579 $15,552
Cooperative apartment loans 1,097 1,233 2,330
Consumer and business loans (590) 118 (472)
MBS (14,052) 9,108 (4,944)
Investment securities 949 (1,406) (457)
Money market investments (443) (587) (1,030)
- - --------------------------------------------------------------
Total interest income (1,066) 12,045 10,979
- - --------------------------------------------------------------
Interest expense:
Deposits:
Demand 20 (705) (685)
Savings (4,191) 1,320 (2,871)
Money market 418 (2,865) (2,447)
Time 6,860 8,997 15,857
- - --------------------------------------------------------------
Total deposits 3,107 6,747 9,854
Borrowed funds (2,008) (3,811) (5,819)
- - --------------------------------------------------------------
Total interest expense 1,099 2,936 4,035
- - ------------------------------- ----------------------------
Net interest income $ (2,165) $ 9,109 $ 6,944
- - ------------------------------- ----------------------------
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses was $10.5 million during the three month
period ended March 31, 1996, as compared with $10.0 million during the
corresponding prior year period. The provision for loan losses, as further
discussed in "Management of Credit Risk -- Allowance for Loan Losses" below, is
predicated upon the Company's assessment of the adequacy of its allowance for
loan losses which reflects, among other factors, assumptions with respect to
projected future performance of the Company's loan portfolio in light of
economic conditions and then-current loss experience.
NON-INTEREST INCOME
The following table sets forth the components of non-interest income for the
three months ended March 31, 1996 and 1995.
Three Months
Ended
March 31,
----------------
(In thousands) 1996 1995
- - ----------------------------------------------------------
Loan servicing fees, net $ 7,663 $ 8,274
Securities and insurance brokerage fees 4,674 3,440
Net gains on sales activities 461 9,675
Banking service fees and other 8,539 8,206
- - ----------------------------------------------------------
Total non-interest income $21,337 $29,595
- - ----------------------------------------------------------
Loan servicing fees, net, amounted to $7.7 million for the first quarter of
1996, a decline of $0.6 million as compared with the same quarter one year ago.
This decline was due to a reduction in the average loan servicing fee rate,
together with increases in certain loan servicing expenses, which are reflected
as a component of loan servicing fees, net. The outstanding balance of the loans
serviced for others portfolio amounted to $9.4 billion at March 31, 1996, as
compared with $9.0 billion at March 31, 1995.
12
Securities and insurance brokerage fees amounted to $4.7 million for the first
quarter of 1996, an increase of $1.2 million, or 35.9%, relative to the first
quarter of 1995. The growth primarily reflects an expansion of the Company's
sales force and new sales initiatives.
Net gains on sales activities decreased to $0.5 million for the first three
months of 1996 from $9.7 million for the corresponding period in 1995. The
decline was principally attributable to net gains during the first quarter of
1995 of $18.0 million associated with branch sales, reduced by $6.2 million of
losses during that quarter associated with the write-down of certain operating
facilities. In connection with its mortgage-banking activities, the Company
recognized net gains for the first quarter of 1996 of $1.9 million on sales of
$364.3 million of loans into the secondary market, as compared with net losses
of $0.2 million during the first quarter of 1995 on sales of $44.0 million of
loans into the secondary market. During the first quarter of 1996, the Company
recognized losses of $0.6 million on the sale of $1.0 billion of MBS in
connection with the Balance Sheet Restructuring Plan. The following table
summarizes net gains on sales activities for the three months ended March 31,
1996 and 1995.
Three Months Ended
March 31,
-----------------
(In thousands) 1996 1995
- - -----------------------------------------------------------
Net gains (losses) on sales of loans
held for sale, including securitized
loans $1,895 $ (154)
Net losses on sales and revaluations of
securities (672) (1,909)
Net gains on sales of branches -- 18,039
Other net losses (762) (6,301)
- - -----------------------------------------------------------
Total net gains on sales activities $ 461 $ 9,675
- - -----------------------------------------------------------
Banking service fees and other non-interest income amounted to $8.5 million for
the three months ended March 31, 1996, as compared with $8.2 million for the
same period one year ago. The $0.3 million of growth in such income reflects an
increase in banking service fees of $1.5 million, or 29.5%, the effect of which
was largely offset by reductions in loan-related fee income and certain other
non-interest income.
NON-INTEREST EXPENSE
The following table sets forth the components of non-interest expense for the
three months ended March 31, 1996 and 1995.
Three Months
Ended
March 31,
----------------
(In thousands) 1996 1995
- - ----------------------------------------------------------
G&A expense:
Compensation and employee benefits $33,976 $37,413
Occupancy and equipment, net 12,775 15,410
Federal deposit insurance premiums 2,875 7,705
Other 20,568 18,365
- - ----------------------------------------------------------
Total G&A expense 70,194 78,893
Other real estate owned ("ORE")
expense, net 2,493 3,676
Amortization of mortgage servicing
rights ("MSR") 3,194 2,764
Restructuring and Merger-related expense 3,504 1,725
- - ----------------------------------------------------------
Total non-interest expense $79,385 $87,058
- - ---------------------------------------- ----------------
G&A Expense
G&A expense amounted to $70.2 million for the first three months of 1996, a
decline of $8.7 million, or 11.0%, as compared with the corresponding period in
1995. G&A expense represented 1.39% of total average assets of $20.2 billion in
the first quarter of 1996, as compared with 1.55% of total average assets of
$20.4 billion in the first quarter of 1995. The decline in G&A expense primarily
reflects the realization of cost savings associated with the merger in January
1995 of Anchor Bancorp, Inc. ("Anchor") and its savings bank subsidiary, Anchor
Savings Bank FSB, with and into the Holding Company and the Bank, respectively
(the "Merger"), together with the impact of the reduced assessment rate on the
portion of the Bank's deposits that are insured by the Bank Insurance Fund
("BIF") of the FDIC, which was implemented during the third quarter of 1995.
Mitigating the effect of these factors were
13
the additional expenses associated with the expansion of the Company's
residential property loan origination capabilities, including through the
acquisition, during the fourth quarter of 1995, of the residential property loan
origination businesses of National Mortgage Investments Co., Inc., headquartered
in Griffin, Georgia, and James Madison Mortgage Co., headquartered in Fairfax,
Virginia (the "National and Madison Acquisitions").
Compensation and employee benefits expense amounted to $34.0 million for the
first three months of 1996, a reduction of $3.4 million from the comparable 1995
period. Principal factors contributing to this decrease were staff reductions
associated with the Merger and a decline in pension expense, the effect of which
was partially offset by the additions to the employee complement as a result of
the National and Madison Acquisitions. The Merger-related staff reductions,
which commenced near the end of the first quarter of 1995, were substantially
completed as of March 31, 1996.
Occupancy and equipment expense, net, amounted to $12.8 million for the quarter
ended March 31, 1996, as compared with $15.4 million in the corresponding prior
year quarter. The $2.6 million, or 17.1%, decline was substantially attributable
to Merger-related benefits, including a reduction in the number of the Bank's
branches to 87 at March 31, 1996 from 99 at the date of the Merger, the effect
of which was partially offset by the impact of the National and Madison
Acquisitions.
Federal deposit insurance premiums expense of $2.9 million for the first quarter
of 1996 represents a decline of $4.8 million, or 62.7%, from the first quarter
of 1995. In August 1995, the FDIC adopted a final rule, effective as of June 1,
1995, changing the assessment rates on BIF-insured deposits, which represent
approximately 60% of the Bank's insured deposits, to a range of between 4 to 31
basis points for each $100 of insured deposits from the previous range of
between 23 to 31 basis points. Additionally, in November 1995, the FDIC further
lowered BIF-insured deposit assessment rates for all assessment categories by 4
basis points for each $100 of insured deposits effective for the first semi-
annual assessment period of 1996, subject to a statutory requirement that all
institutions pay at least $2,000 annually. The existing assessment rate schedule
for deposits insured under the Savings Association Insurance Fund ("SAIF") of
the FDIC of between 23 and 31 basis points for each $100 of SAIF-insured
deposits was not affected by either of the above actions. The actual assessment
rate for both BIF- and SAIF-insured deposits continues to depend on an
institution's capital levels and regulatory status. For a discussion of various
legislative proposals regarding the imbalance in deposit insurance premiums that
has resulted from these actions, see "Pending Legislation" below.
Other G&A expense increased to $20.6 million for the three month period ended
March 31, 1996 from $18.4 million in the corresponding 1995 period. This
increase was due in part to a rise in marketing expense of $1.1 million,
primarily as a result of a major television advertising campaign initiated
during the first quarter of 1996 that is expected to continue into the second
quarter of 1996. Other significant factors contributing to the rise in other G&A
expense were increases in consulting and outsourcing expenses.
ORE Expense, Net
ORE expense, net, declined $1.2 million, or 32.2%, for the first quarter of 1996
as compared with the comparable quarter in 1995. The following table presents
the significant components of ORE expense, net, for the three months ended March
31, 1996 and 1995.
Three Months Ended
March 31,
-----------------
(In thousands) 1996 1995
- - -----------------------------------------------------------
Provision for losses $ 890 $1,483
Net gains on sales (506) (265)
Operating expense, net of rental income 2,109 2,458
- - -----------------------------------------------------------
Total ORE expense, net $2,493 $3,676
- - -----------------------------------------------------------
The Company's provision for losses on ORE includes charges to maintain the
carrying value of ORE at the lower of cost or estimated fair value less selling
expenses and charges for potential future declines in the estimated fair value
of ORE. Further provisions for losses on ORE may be required in the event of
future adverse changes in economic and other conditions that the Company is
unable to predict.
14
Amortization of MSR
Amortization of MSR amounted to $3.2 million for the quarter ended March 31,
1996, an increase of $0.4 million relative to the corresponding quarter in 1995.
This increase was largely attributable to growth in the Company's MSR asset,
which amounted to $64.0 million at March 31, 1996, as compared with $60.6
million at March 31, 1995.
Restructuring and Merger-Related Expense
During the three month period ended March 31, 1996, restructuring expense
associated with the Merger and other Merger-related expense amounted to $3.5
million, as compared with $1.7 million during the corresponding period in 1995.
During the first quarter of 1996, such expense was principally due to staff
reductions, the final phase of the conversion of the Bank's retail banking
computer system, and certain computer data center costs, while the expense for
the first quarter of 1995 consisted primarily of costs associated with
announcing and communicating the Merger to the Company's customers and the
communities it serves. The Company does not currently anticipate the recognition
of any such further expense associated with the Merger.
INCOME TAX EXPENSE
The Company recorded income tax expense of $18.7 million for the first quarter
of 1996, as compared with $17.6 million for the corresponding prior year
quarter. The increase was primarily attributable to a higher level of pre-tax
income in the first quarter of 1996 relative to the first quarter of 1995, the
effect of which was partially offset by certain factors, including a favorable
settlement of local income tax issues during the first quarter of 1996. The
Company's effective income tax rate was 40.9% for the three months ended March
31, 1996, as compared with 43.9% for the comparable 1995 period.
MANAGEMENT OF INTEREST RATE RISK
GENERAL
Interest rate risk is managed by the Company through asset/liability strategies
designed to maintain acceptable levels of interest rate exposure throughout a
range of interest rate environments. These strategies are intended not only to
protect the Company from significant long-term declines in net interest income
as a result of unfavorable changes in the interest rate environment, but also to
mitigate the negative effect of such interest rate changes upon the Company's
mortgage banking operating results. The Company seeks to contain its interest
rate risk within a band that it believes is manageable and prudent given the
Company's capital and income generating capacity.
The Company's sensitivity to interest rates is driven by the mismatch between
the term to maturity or repricing of its interest-earning assets and that of its
interest-bearing liabilities. As is typical of most thrifts, the Company's
interest-bearing liabilities reprice or mature, on average, sooner than its
interest-earning assets. This difference is often referred to as duration gap.
The Company's duration gap can vary under alternative interest rate scenarios
due to changes in consumer preferences as they relate to product mix, incentives
to refinance loans that are directly related to interest rates and other
interest rate-related characteristics of specific assets and liabilities.
The Company is also exposed to interest rate risk arising from the "option risk"
embedded in many of the Company's interest-earning assets. Mortgages and the
mortgages underlying MBS, for example, may contain prepayment options, interim
and lifetime interest rate caps and other such features driven or otherwise
influenced by changes in interest rates. Prepayment option risk affects
mortgage-related assets in both rising and falling interest rates as the
financial incentive to refinance mortgages is directly related to the level of
current mortgage interest rates relative to the existing note rates.
Extension risk on mortgage-related assets is the risk that the duration of such
assets increases as a result of declining prepayments due to rising interest
rates. Certain mortgage-related assets are more sensitive to changes in interest
rates than others, resulting in a higher risk profile. Since the Company's
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
15
may reach interim or lifetime interest rate caps, thereby limiting the amount of
upward adjustment, which effectively lengthens the duration of such assets.
Lower interest rate environments may also present interest rate exposure.
Generally, lower interest rate environments tend to accelerate mortgage
prepayment rates, which both shorten the duration of mortgage and mortgage-
related assets and accelerate the amortization of premiums paid in the
acquisition of these assets. The recognition of premiums over a shorter than
expected term causes yields on the related assets to decline from anticipated
levels.
The Company is also exposed to interest rate risk resulting from the change in
the shape of the yield curve (i.e., flattening, steepening and inversion; also
called "yield curve twist risk") and to differing indices upon which the yield
on the Company's interest-earning assets and the cost of its interest-bearing
liabilities are based ("basis risk"). The relatively flat yield curve in
existence during the greater part of 1995 negatively affected the Company's net
interest income as a result of the compression of the spread between the pricing
of the Company's interest-earning assets (particularly those linked to the one-
year Treasury index and lagging cost of funds indices) and its short-term
borrowings. However, during the first quarter of 1996, the Company's net
interest income benefited from a steepening of the yield curve.
In order to reduce its sensitivity to interest rate risk, the Company's
investment strategy has emphasized adjustable-rate assets and fixed-rate medium-
term assets. Of the Company's total interest-earning assets of $18.6 billion at
March 31, 1996, approximately $12.4 billion, or 67%, were adjustable-rate. Of
such adjustable-rate assets, approximately 50% were linked to U.S. Treasury
instruments and approximately 35% were linked to various cost of funds indices,
which lag changes in market interest rates, including the National Median Cost
of Funds Index and the 11th District Cost of Funds Index. The Company also seeks
to extend the maturity of its short-term or frequently repricing liabilities or,
alternatively, to reduce the maturity or increase the repricing frequency of its
assets, by using derivative financial instruments (see "Hedging Activities"
below).
In evaluating and managing its interest rate risk, the Company employs
simulation models to help assess its interest rate risk exposure and the impact
of alternative interest rate scenarios and the probability of occurrence. The
effect of adjustable-rate loan indices, periodic and lifetime interest rate
adjustment caps, estimated loan prepayments, anticipated deposit retention rates
and other dynamics of the Company's portfolios of interest-earning assets and
interest-bearing liabilities are considered in such projections.
HEDGING ACTIVITIES
The Company utilizes a variety of derivative financial instruments to assist in
managing its interest rate risk exposure, but does not utilize such instruments
for speculative purposes. Derivative financial instruments employed by the
Company at March 31, 1996 and December 31, 1995 were interest rate swaps, caps
and floors, forward contracts, and options. The Company has also utilized
interest rate futures, but had no such instruments outstanding at either of
those dates. With the exception of interest rate floors hedging certain MSR, the
derivative financial instruments utilized by the Company provide protection from
rising interest rates.
16
Total derivative financial instruments utilized by the Company declined to $3.7
billion at March 31, 1996 from $3.9 billion at December 31, 1995. The following
table summarizes, by category of asset or liability hedged, the notional amount
and estimated fair value of the Company's outstanding derivative financial
instruments at March 31, 1996 and December 31, 1995.
March 31, 1996 December 31, 1995
------------------------ ----------------------
Notional Estimated Notional Estimated
(In thousands) Amount Fair Value Amount Fair Value
- - -----------------------------------------------------------------------------------------
Interest rate swaps hedging:
Loans receivable $ 204,204 $ (921) $ 212,747 $(2,195)
Deposits 150,000 301 150,000 533
Borrowings 928,000 759 928,000 (4,837)
- - -----------------------------------------------------------------------------------------
Total interest rate swaps 1,282,204 139 1,290,747 (6,499)
- - -----------------------------------------------------------------------------------------
Interest rate caps hedging:
MBS available for sale 762,252 1,834 877,118 961
MBS held to maturity 317,425 764 366,061 401
- - -----------------------------------------------------------------------------------------
Total interest rate caps 1,079,677 2,598 1,243,179 1,362
- - -----------------------------------------------------------------------------------------
Interest rate floors hedging:
MSR 1,167,259 226 1,219,776 1,026
- - -----------------------------------------------------------------------------------------
Total interest rate floors 1,167,259 226 1,219,776 1,026
- - -----------------------------------------------------------------------------------------
Forward contracts hedging:
Loans held for sale 139,202 1,762 69,676 (709)
- - -----------------------------------------------------------------------------------------
Total forward contracts 139,202 1,762 69,676 (709)
- - -----------------------------------------------------------------------------------------
Options hedging:
Loans held for sale 20,000 3 10,000 22
Borrowings 20,000 165 37,000 70
- - -----------------------------------------------------------------------------------------
Total options 40,000 168 47,000 92
- - -----------------------------------------------------------------------------------------
Total derivative financial
instruments $3,708,342 $4,893 $3,870,378 $(4,728)
- - -----------------------------------------------------------------------------------------
All of the Company's outstanding interest rate swap agreements at March 31, 1996
provide for the Company to be a fixed-rate payer and variable-rate receiver,
with the variable-rate based upon the one- or three-month London Interbank
Offered Rate ("LIBOR"). The following table sets forth the contractual
maturities of the Company's interest rate swap agreements outstanding at March
31, 1996 by category of asset or liability hedged, as well as the related
weighted average interest rates receivable and payable at that date.
Maturing in the Years Ending December 31,
----------------------------------------------------
(Dollars in thousands) 1996 1997 1998 1999 2000 Total
- - ------------------------------------------------------------------------------------------------
Interest rate swaps hedging:
Loans receivable:
Notional amount $114,373 $ 48,131 $ -- $24,700 $17,000 $ 204,204
Variable-rate receivable 5.40% 5.40% --% 5.44% 5.30% 5.40%
Fixed-rate payable 4.58 4.92 -- 8.04 7.38 5.31
Deposits:
Notional amount $150,000 $ -- $ -- $ -- $ -- $ 150,000
Variable-rate receivable 5.44% --% --% --% --% 5.44%
Fixed-rate payable 4.73 -- -- -- -- 4.73
Borrowings:
Notional amount $450,000 $350,000 $98,000 $30,000 $ -- $ 928,000
Variable-rate receivable 5.38% 5.44% 5.39% 5.56% --% 5.41%
Fixed-rate payable 5.97 5.28 6.02 7.06 -- 5.75
- - ------------------------------------------------------------------------------------------------
Total:
Notional amount $714,373 $398,131 $98,000 $54,700 $17,000 $1,282,204
Variable-rate receivable 5.39% 5.43% 5.39% 5.50% 5.30% 5.41%
Fixed-rate payable 5.49 5.24 6.02 7.50 7.38 5.56
- - ------------------------------------------------------------------------------------------------
During 1995, the Company began a program of entering into interest rate cap
agreements to hedge the periodic and lifetime interest rate caps embedded in
certain of its adjustable-rate MBS. Each such agreement provides for the Company
to receive cash payments, in exchange for a premium paid to the issuing
counterparty at inception, when the weekly average yield of the one-year
constant maturity Treasury index ("CMT") rises above a specified interest rate.
The one-year CMT was 5.41% at March 31, 1996 and the specified interest rates at
that date were 7.50% and 8.50% and averaged 8.00%.
In connection with the Company's interest rate floor agreements, which have been
transacted for the purpose of reducing the impact of the potential loss of net
future servicing revenues associated with a
17
portion of its MSR that may result from an increase in loan prepayments, the
Company, in return for a premium paid to the issuing counterparty at initiation
of the agreement, receives cash payments from the counterparty when either the
five- or ten-year CMT, which were 6.10% and 6.34%, respectively, at March 31,
1996, declines below a designated interest rate. The designated interest rates
at March 31, 1996 ranged from 5.30% to 5.65% and averaged 5.50%.
Unamortized net deferred losses on closed derivative financial instrument
contracts amounted to $32.1 million at March 31, 1996, as compared with $35.4
million at year-end 1995, and are being amortized to operations over the
duration of the related asset or liability being hedged. Unamortized premiums on
open derivative financial instrument contracts amounted to $7.1 million and $7.8
million at March 31, 1996 and December 31, 1995, respectively. Such premiums are
amortized to operations over the terms of the related derivative financial
instruments.
While the hedging activities engaged in by the Company have served to mitigate
the effects of unfavorable interest rate changes, the Company continues to be
susceptible to a significant level of interest rate risk. In addition, the
protection afforded by the Company's hedging activities is limited to the
remaining terms of the related derivative financial instruments.
The derivative financial instruments used by the Company, though chosen to
remedy specific risk conditions, may, under certain circumstances, behave in a
manner that is inconsistent with their intended purpose. Thus, such instruments
possess market risk in their own right. The Company has established internal
policies that define the extent of historical correlation between a proposed
hedge and the item to be hedged prior to the use of a derivative financial
instrument as a hedge. The potential exists, however, that this relationship or
"basis" may change due to extraordinary circumstances. The Company, also by
policy, monitors these relationships at regular intervals to ensure that such
correlation is maintained. The Company cannot guarantee that such relationships,
as have been historically observed, will continue.
For a discussion of the credit risk associated with the Company's derivative
financial instruments, see "Management of Credit Risk--Derivative Financial
Instruments" below.
ASSET/LIABILITY REPRICING
The measurement of differences (or "gaps") between the Company's interest-
earning assets and interest-bearing liabilities that mature or reprice within a
period of time is an indication of the Company's sensitivity to changes in
interest rates. A negative gap generally indicates that, in a period of rising
interest rates, deposit and borrowing costs will increase more rapidly than the
yield on loans and securities and, therefore, reduce net interest income. The
opposite effect will generally occur in a declining interest rate environment.
Positive or low negative gap ratios generally indicate that an institution is
less sensitive to the impact of changing interest rates. Although the Company
has a large portfolio of adjustable-rate assets, the protection afforded by such
assets in the event of substantial rises in interest rates for extended time
periods is limited due to interest rate reset delays, periodic and lifetime
interest rate caps, payment caps and the fact that indices used to reprice a
portion of the Company's adjustable-rate assets lag changes in market rates.
Moreover, in declining interest rate environments, or certain shifts in the
shape of the yield curve, these assets may prepay at significantly faster rates
than otherwise anticipated. It should also be noted that the Company's gap
measurement reflects broad judgmental assumptions with regard to repricing
intervals for certain assets and liabilities.
At March 31, 1996, the Company had a one-year negative gap, including the effect
of hedging activities, of $2.6 billion, or 13.71% of total interest-earning
assets, as compared with a negative gap of $2.1 billion, or 10.58% of total
interest-earning assets, at December 31, 1995. The following table reflects the
repricing of the Company's interest-earning assets and interest-bearing
liabilities at March 31, 1996. The amount of each asset or liability is included
in the table at the earlier of the next repricing date or maturity. Loan and MBS
prepayment assumptions utilized in preparing the table are based upon industry
standards as well as the Company's historical experience and estimates. Non-
performing loans have been included in the "More Than One Through Three Years"
category. Savings accounts, despite the recent increase in their sensitivity to
changes in market interest rates, have been spread ratably over a 20-year period
based on the assumption that such accounts are essentially core deposits and in
the aggregate have not been generally sensitive historically to fluctuations in
market interest rates. If
18
all savings accounts were included in the "One Year or Less" category, the
Company would have had a one-year negative gap at March 31, 1996 of $5.1
billion, or 27.17% of total interest-earning assets.
March 31, 1996
--------------------------------------------------
More Than
One Year One Through More Than
(Dollars in millions) or Less Three Years Three Years Total
- - --------------------------------------------------------------------------------------
Interest-earning assets:
Loans $ 5,219 $2,185 $2,827 $10,231
MBS 5,934 1,054 842 7,830
Other 24 136 413 573
- - --------------------------------------------------------------------------------------
Total interest-earning assets 11,177 3,375 4,082 18,634
- - --------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 9,082 1,054 2,528 12,664
Borrowed funds 5,183 24 417 5,624
- - --------------------------------------------------------------------------------------
Total interest-bearing liabilities 14,265 1,078 2,945 18,288
- - --------------------------------------------------------------------------------------
Impact of hedging activities (534) 469 65 -
- - --------------------------------------------------------------------------------------
Gap (repricing difference) $(2,554) $1,828 $1,072 $ 346
- - --------------------------------------------------------------------------------------
Cumulative gap $(2,554) $ (726) $ 346
- - --------------------------------------------------------------------------------------
Cumulative ratio of gap to total
interest-earning assets (13.71%) (3.90%) 1.86%
- - --------------------------------------------------------------------------------------
MANAGEMENT OF CREDIT RISK
GENERAL
The Company's major exposure to credit risk results from the possibility that it
will not recover amounts due from borrowers or issuers of securities. The
Company is also subject to credit risk in connection with its utilization of
derivative financial instruments. The Company has a system of credit risk
controls and management processes by which it monitors and manages its level of
credit risk.
NON-PERFORMING ASSETS AND LOANS MODIFIED IN A TROUBLED DEBT RESTRUCTURING
("TDR")
Non-performing assets are comprised of non-accrual loans and ORE, net. Non-
accrual loans are all loans 90 days or more delinquent, as well as loans less
than 90 days past due for which there are concerns about the full collectability
of contractual principal and interest payments.
Non-performing assets amounted to $313.4 million at March 31, 1996, as compared
with $315.8 million at December 31, 1995. At March 31, 1996, non-performing
assets represented 1.61% of total assets, up from 1.55% at December 31, 1995 due
to the reduction in asset size in connection with the Balance Sheet
Restructuring Plan.
The following table presents the components of non-performing assets at March
31, 1996 and December 31, 1995. Loans modified in a TDR that have demonstrated a
sufficient payment history to warrant return to performing status, generally six
months, are not included within non-accrual loans (see below).
March 31, December 31,
(In thousands) 1996 1995
- - ------------------------------------------------------------------
Non-accrual loans:
Residential property loans $208,961 $206,230
Commercial and multifamily first
mortgage loans 31,963 34,618
Construction loans 5,267 5,267
Consumer and business loans 8,530 9,004
- - ------------------------------------------------------------------
Total non-accrual loans 254,721 255,119
- - ------------------------------------------------------------------
ORE, net:
Residential property 36,254 38,799
Commercial and multifamily property 25,521 24,952
Allowance for losses (3,117) (3,070)
- - ------------------------------------------------------------------
Total ORE, net 58,658 60,681
- - ------------------------------------------------------------------
Total non-performing assets $313,379 $315,800
- - ------------------------------------------------------------------
19
The balance of non-performing assets is affected by the length of the
foreclosure process as loans entering non-performing status often remain in such
status for an extended period of time due to contested foreclosure actions and
other circumstances. Furthermore, with regard to loans secured by properties in
certain New England states, the Company, starting in 1994, implemented
agreements that set forth, among other things, procedures for borrowers in those
states to seek opportunities to "workout" or restructure their loans. The Bank
also, at times, has voluntarily delayed or limited certain foreclosure
proceedings in order to address consumer and other concerns in these states.
Although these actions have delayed somewhat the exit of the affected loans from
non-performing status, the impact of such actions has not been material.
However, the Company currently anticipates that it will experience increased
levels of ORE, as well as related ORE expense, which are not currently expected
to be material, as the delays and limitations that the Company currently has in
place lapse or otherwise are terminated.
The level of loans delinquent for less than 90 days, other than those on non-
accrual status, may, to some degree, be a leading indicator of future levels of
non-performing assets. Such delinquent loans were as follows at March 31, 1996.
Delinquency Period
--------------------
30 - 59 60 - 89
(In thousands) Days Days Total
- - ----------------------------------------------------------------------
Residential property loans $ 39,148 $ 18,480 $ 57,628
Commercial and multifamily first
mortgage loans 37,106 7,786 44,892
Consumer and business loans 6,146 2,116 8,262
- - ----------------------------------------------------------------------
Total $ 82,400 $ 28,382 $110,782
- - ----------------------------------------------------------------------
When borrowers encounter financial hardship but are able to demonstrate to the
Company's satisfaction an ability and willingness to resume regular monthly
payments, the Company often seeks to provide them with an opportunity to
restructure the terms of their loans. These arrangements, which are negotiated
individually, generally provide for interest rates that are lower than those
initially contracted for, but which may be higher or lower than current market
interest rates, and may in some instances include a reduction in the principal
amount of the loan. The Company evaluates the costs associated with any
particular restructuring arrangement and may enter into such an arrangement if
it believes it is economically beneficial for the Company to do so. The
following table sets forth the Company's loans that have been modified in a TDR,
excluding those classified as non-accrual loans, at March 31, 1996 and December
31, 1995.
March 31, December 31,
(In thousands) 1996 1995
- - -----------------------------------------------------------------
Residential property loans $ 43,556 $ 43,090
Commercial and multifamily first
mortgage loans 162,441 159,097
- - -----------------------------------------------------------------
Total $205,997 $202,187
- - -----------------------------------------------------------------
IMPAIRED LOANS
In accordance with Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), the Company
considers a loan impaired when, based upon current information and events, it is
probable that it will be unable to collect all amounts due, both principal and
interest, according to the contractual terms of the loan agreement. SFAS 114
does not apply to those large groups of smaller-balance homogeneous loans that
are collectively evaluated for impairment, which, for the Company, include
residential property loans and consumer loans, other than those modified in a
TDR. Except as noted below, loans reviewed for impairment by the Company are
limited to loans modified in a TDR, commercial and multifamily first mortgage
loans and business loans. The Company does not generally review for impairment
commercial and multifamily first mortgage loans and business loans that have
insignificant carrying values. In addition, loans otherwise qualifying for
impaired status are generally not so classified by the Company when the delay in
the timing of payments or the shortfall in the amount of payments is deemed by
the Company to be insignificant. At a minimum, loans reviewed for impairment are
classified as impaired by the Company when delinquent more than six months.
In accordance with SFAS 114, a loan modified in a TDR subsequent to its adoption
is considered impaired and measured for impairment throughout the term of the
20
loan in accordance therewith. However, as provided for in SFAS 114, such loans
are not included in the Company's impaired loan statistics in years following
the restructuring if the restructuring agreement specifies an interest rate
equal to or greater than the rate the Company was willing to accept at the
restructuring date for a new loan with comparable risk and the loan is not
impaired based on the terms of the restructuring agreement.
The Company's impaired loan identification and measurement processes are
conducted in conjunction with the review of the adequacy of its allowance for
loan losses (see "Allowance for Loan Losses" below). Specific factors utilized
in the impaired loan identification process include, but are not limited to,
delinquency status, loan-to-value ratio, the condition of the underlying
collateral, credit history, and debt coverage.
The following table summarizes information regarding the Company's impaired
loans at March 31, 1996 and December 31, 1995.
March 31, December 31,
(In thousands) 1996 1995
- - ------------------------------------------------------------------
Residential property loans (1):
Recorded investment:
Without a related allowance $ 11,200 $10,650
With a related allowance 1,916 3,170
Related allowance for loan losses (120) (198)
- - ------------------------------------------------------------------
Total residential property loans 12,996 13,622
- - ------------------------------------------------------------------
Commercial and multifamily first
mortgage loans (1):
Recorded investment:
Without a related allowance 8,886 7,575
With a related allowance 66,731 66,648
Related allowance for loan losses (10,072) (9,909)
- - ------------------------------------------------------------------
Total commercial and multifamily first
mortgage loans 65,545 64,314
- - ------------------------------------------------------------------
Business loans (2):
Recorded investment:
With a related allowance 760 741
Related allowance for loan losses (660) (660)
- - ------------------------------------------------------------------
Total business loans 100 81
- - ------------------------------------------------------------------
Total impaired loans, net $ 78,641 $78,017
- - ------------------------------------------------------------------
(1) The measurement value is based upon the estimated fair value of the
underlying collateral.
(2) The measurement value is based upon the present value of expected future
cash flows.
The Company's average recorded investment in impaired loans for the three month
periods ended March 31, 1996 and 1995 was $88.7 million and $78.4 million,
respectively. Interest income recognized on impaired loans, which was not
materially different from cash-basis interest income, amounted to $1.1 million
and $1.2 million for the three month periods ended March 31, 1996 and 1995,
respectively.
LOANS SOLD WITH RECOURSE
The Company, in the past, sold certain residential and multifamily property
loans with limited recourse, with the majority of these loans having been
securitized with the Federal National Mortgage Association ("FNMA"). At March
31, 1996, the balance of loans sold with recourse amounted to $875.2 million,
down from $900.4 million at December 31, 1995. The Company's related maximum
potential recourse exposure was approximately $216 million at March 31, 1996, as
compared with approximately $223 million at December 31, 1995. Of the loans sold
with recourse, $14.7 million were delinquent 90 days or more at March 31, 1996.
During the first three months of 1996, the Company repurchased loans sold with
limited recourse totaling $5.7 million, virtually all of which were repurchased
from FNMA.
Generally, it has been the Company's practice to repurchase from FNMA any loans
sold with recourse that become 90 days delinquent. By repurchasing these loans
prior to foreclosure, the Company derives the benefit of the savings between the
interest rate that must be paid monthly to FNMA, even if not received, and the
Company's own interest cost to fund the purchase of these loans. Additionally,
repurchases permit the Company to provide eligible borrowers with more flexible
loan workout options.
21
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 a monthly basis, taking into
account the size, composition and risk profile of the portfolio, including
delinquency levels, historical loss experience, cure rates on delinquent loans,
economic conditions and other pertinent factors, such as assumptions and
projections of future conditions. While the Company believes that the allowance
for loan losses is adequate, additions to the allowance for loan losses may be
necessary in the event of future adverse changes in economic and other
conditions that the Company is unable to predict.
The Company's allowance for loan losses declined to $127.2 million at March 31,
1996 from $164.7 million at March 31, 1995, reflecting in large part a
reduction in the Company's non-accrual loans during this period. The allowance
for loan losses represented 49.93% of non-accrual loans at March 31, 1996, as
compared with 50.56% one year earlier. As a percentage of total loans
receivable, the allowance for loan losses declined to 1.27% at March 31, 1996
from 1.76% at March 31, 1995. Net charge-offs were $11.6 million for the first
quarter of 1996, a reduction of $4.1 million, or 25.9%, from the comparable 1995
quarter.
The following table sets forth the activity in the Company's allowance for loan
losses for the three months ended March 31, 1996 and 1995.
Three Months Ended
March 31,
-------------------
(In thousands) 1996 1995
- - -------------------------------------------------------------
Balance at beginning of period $128,295 $170,383
Provision charged to operations 10,500 9,950
Charge-offs:
Residential property loans (9,868) (9,912)
Commercial and multifamily first
mortgage loans (2,504) (6,378)
Consumer and business loans (1,453) (1,683)
- - -------------------------------------------------------------
Total charge-offs (13,825) (17,973)
- - -------------------------------------------------------------
Recoveries:
Residential property loans 1,171 1,293
Commercial and multifamily first
mortgage loans 312 50
Consumer and business loans 740 966
- - -------------------------------------------------------------
Total recoveries 2,223 2,309
- - -------------------------------------------------------------
Net charge-offs (11,602) (15,664)
- - -------------------------------------------------------------
Balance at end of period $127,193 $164,669
- - -------------------------------------------------------------
MBS
In general, the Company's MBS carry a significantly lower credit risk than its
loans receivable. Of the aggregate carrying value of the Company's MBS held to
maturity and available for sale at March 31, 1996 of $7.8 billion, approximately
21%, in total, were issued by the Federal Home Loan Mortgage Corporation
("FHLMC"), the Government National Mortgage Association ("GNMA") and FNMA. MBS
issued by entities other than FHLMC, GNMA and FNMA ("Privately-Issued MBS") have
generally been underwritten by large investment banking firms, with the timely
payment of principal and interest on these securities supported ("credit
enhanced") in varying degrees by either insurance issued by a financial
guarantee insurer, letters of credit or subordination techniques. Substantially
all of the $6.2 billion portfolio of Privately-Issued MBS held by the Company at
March 31, 1996 were rated "AA" or better by one or more of the nationally
recognized securities rating agencies. The Privately-Issued MBS are subject to
certain credit-related risks normally not associated with MBS issued by FHLMC,
GNMA and FNMA, including the limited loss protection generally provided by the
various forms of credit enhancements, as losses in excess of certain levels are
not protected. Furthermore, the credit enhancement itself is subject to the
creditworthiness of the provider. Thus, in the event that a provider of a credit
enhancement does not fulfill its obligations, the MBS holder could be subject to
risk of loss similar to a purchaser of a whole loan pool.
During the year ended December 31, 1995, the Company recognized a $3.3 million
loss associated with an other than temporary impairment in value of certain
Privately-Issued MBS. This loss was necessitated by the erosion in the
underlying credit enhancements associated with these securities, coupled with
the
22
Company's projections of estimated future losses on defaults of the loans
underlying the securities. At March 31, 1996, these securities, all of which are
classified as available for sale, had an estimated fair value of $57.2 million,
an amortized cost of $66.6 million and an aggregate of $0.8 million in related
credit enhancements. No assurance can be given that future losses on these
securities will not be incurred. Additionally, the Company cannot predict
whether losses will or will not be recognized on any other Privately-Issued MBS
currently held by the Company.
DERIVATIVE FINANCIAL INSTRUMENTS
The credit risk from the Company's derivative financial instruments arises from
the possible default by a counterparty on its contractual obligations. The level
of credit risk associated with derivative financial instruments depends on a
variety of factors, including the estimated fair value of the instrument, the
collateral maintained, the utilization of master netting arrangements, and the
ability of the counterparty to comply with its contractual obligations. The
Company has established policies and procedures limiting its credit exposure to
counterparties of derivative financial instrument agreements, which include
consideration of credit ratings on a continuous basis, collateral requirements,
and exposure to any one counterparty, among other issues. In addition, as deemed
necessary, the Company may enter into master netting agreements, under which it
may offset payable and receivable positions, to the extent they exist, with the
same counterparty in the event of default. There were no past due amounts
related to the Company's derivative financial instruments at March 31, 1996 or
December 31, 1995.
In connection with its utilization of interest rate swaps, to the extent a
counterparty defaults, the Company would be subject to an economic loss that
corresponds to the cost to replace the agreement. An added element of credit
risk is introduced when there exists a mismatch in the frequency of payment
exchanges (i.e., the Company makes a payment on a quarterly basis but receives a
payment on a different payment frequency). A counterparty default would expose
the Company to an economic loss equal to the lost payment. Forward contracts
create credit risk in a manner similar to that of interest rate swaps.
Counterparty credit risk relating to exchange-traded interest rate futures
contracts and options on such contracts is mitigated in three ways: (i) there
is mark-to-market of the contract value on a daily basis, and any change in
value is settled in cash at the end of each day; (ii) there is a margin
requirement with the broker that adjusts based on the change in value of the
futures contracts (if accumulated losses cause the margin account to fall beyond
a specified level, then additional margin will be required or the account is
closed out); and (iii) an exchange clearinghouse is the counterparty in futures
transactions. The interest rate futures contracts utilized by the Company are
traded on nationally recognized exchanges.
For interest rate floors, interest rate caps and over-the-counter option
agreements, the Company is subject to credit risk to the extent contractual
payments required under the agreements are not received.
FINANCIAL CONDITION
The Company's total assets amounted to $19.4 billion at March 31, 1996, a $0.9
billion, or 4.5%, decline from the level at December 31, 1995. This decline
primarily reflects a reduction in securities available for sale, as a result of
MBS sales in connection with the Balance Sheet Restructuring Plan, and
securities held to maturity, the impact of which was partially offset by growth
in loans receivable and loans held for sale.
SECURITIES
Securities available for sale, which declined from $4.1 billion at December 31,
1995 to $3.3 billion at March 31, 1996, are carried at estimated fair value,
with unrealized gains and losses recorded in a valuation allowance that is
included, net of related income taxes, as a separate component of stockholders'
equity. At March 31, 1996, the Company's net unrealized loss on its securities
available for sale portfolio, net of related income taxes, was $12.3 million
($21.6 million on a pre-tax basis), as compared with $5.5 million ($9.6 million
on a pre-tax basis) at December 31, 1995. During the first quarter of 1996, the
Company sold MBS available for sale with an amortized cost of $1.0 billion in
connection with the Balance Sheet Restructuring Plan. Purchases of MBS and
investment securities available for sale amounted to $424.5 million and $116.5
million, respectively, during the first three months of 1996.
23
The following table summarizes the amortized cost and estimated fair value of
securities available for sale at March 31, 1996 and December 31,1995.
March 31, 1996 December 31, 1995
------------------------ ----------------------
Amortized Estimated Amortized Estimated
(In thousands) Cost Fair Value Cost Fair Value
- - ----------------------------------------------------------------------------------------
MBS:
Pass-through securities:
Privately-issued $1,568,099 $1,548,982 $2,731,267 $2,715,097
FNMA 976,720 981,414 736,614 747,189
FHLMC 424,048 420,565 448,260 448,356
GNMA 71,070 71,288 22,625 22,525
Interest-only 2,094 1,775 2,187 1,679
- - ----------------------------------------------------------------------------------------
Total MBS 3,042,031 3,024,024 3,940,953 3,934,846
- - ----------------------------------------------------------------------------------------
Investment securities:
Debt securities:
U. S. government and federal agency 127,446 125,178 28,048 28,045
State and municipal 76,506 75,225 80,763 78,053
Domestic corporate 16,022 15,884 17,274 17,249
Equity securities 12,390 12,496 13,403 12,672
- - ----------------------------------------------------------------------------------------
Total investment securities 232,364 228,783 139,488 136,019
- - ----------------------------------------------------------------------------------------
Total securities available for sale $3,274,395 $3,252,807 $4,080,441 $4,070,865
- - ----------------------------------------------------------------------------------------
Securities held to maturity amounted to $4.8 billion at March 31, 1996, a
decline of $275.8 million from December 31, 1995. A summary of the amortized
cost and estimated fair value of securities held to maturity at March 31, 1996
and December 31, 1995 is presented in the table below.
March 31, 1996 December 31, 1995
------------------------ ----------------------
Amortized Estimated Amortized Estimated
(In thousands) Cost Fair Value Cost Fair Value
- - ----------------------------------------------------------------------------------------
MBS:
Pass-through securities:
Privately-issued $2,923,844 $2,854,369 $3,364,399 $3,279,784
Collateralized mortgage obligations:
Privately-issued 1,741,022 1,709,412 1,574,085 1,564,823
FNMA 94,444 92,893 94,636 94,492
FHLMC 46,901 46,358 49,330 49,098
- - ----------------------------------------------------------------------------------------
Total MBS 4,806,211 4,703,032 5,082,450 4,988,197
- - ----------------------------------------------------------------------------------------
Investment securities:
Debt securities:
Foreign governmental 500 500 505 505
Equity securities 3,265 2,023 2,781 1,862
- - ----------------------------------------------------------------------------------------
Total investment securities 3,765 2,523 3,286 2,367
- - ----------------------------------------------------------------------------------------
Total securities held to maturity $4,809,976 $4,705,555 $5,085,736 $4,990,564
- - ----------------------------------------------------------------------------------------
At March 31, 1996, approximately $5.5 billion, or 70%, of the aggregate MBS
available for sale and held to maturity portfolios consisted of adjustable-rate
securities. Of these adjustable-rate securities, $2.7 billion were tied to
U.S. Treasury instruments, primarily the one-year U.S. Treasury instrument, and
$2.8 billion were tied to various cost of funds indices, including $1.5 billion
that reprice on a monthly basis and $1.1 billion that reprice on a semi-annual
basis.
LOANS
Total loans receivable, exclusive of the allowance for loan losses, amounted to
$10.0 billion at March 31, 1996, an increase of $177.3 million from December 31,
1995. This increase was primarily attributable to growth in the first mortgage
loans receivable portfolio to $8.0 billion at March 31, 1996 from $7.8 billion
at year-end 1995. At March 31, 1996, as compared with December 31, 1995, the
cooperative apartment loans receivable portfolio increased $2.1 million, while
the consumer and business loans receivable portfolio declined $23.6 million.
The consumer and business loan portfolio decline occurred despite originations
of $77.4 million, which represents an increase of $3.3 million as compared with
the first three months of 1995, due to portfolio runoff.
24
At March 31, 1996, approximately 65% and 85% of first mortgage loans receivable
and cooperative apartment loans receivable, respectively, consisted of
adjustable-rate loans, as compared with approximately 61% and 88%, respectively,
at the end of 1995.
The following table presents a summary of loans receivable at March 31, 1996 and
December 31, 1995.
March 31, December 31,
(In thousands) 1996 1995
- - --------------------------------------------------------------------
First mortgage loans:
Principal balances:
Residential $ 6,123,480 $5,925,050
Commercial and multifamily 1,825,606 1,813,344
Construction 52,088 68,901
- - --------------------------------------------------------------------
Total principal balances 8,001,174 7,807,295
Undisbursed funds on loans in process (22,599) (24,369)
Net deferred yield adjustments 40,987 37,754
- - --------------------------------------------------------------------
Total first mortgage loans 8,019,562 7,820,680
- - --------------------------------------------------------------------
Cooperative apartment loans:
Principal balances 1,216,612 1,214,812
Net deferred yield adjustments 2,488 2,218
- - --------------------------------------------------------------------
Total cooperative apartment loans 1,219,100 1,217,030
- - --------------------------------------------------------------------
Consumer and business loans:
Principal balances:
Home equity 480,095 494,528
Manufactured home 74,090 78,319
Automobile 51,552 53,947
Loans secured by deposit accounts 39,016 40,578
Other consumer 83,160 85,915
Business 32,890 35,189
- - --------------------------------------------------------------------
Total principal balances 760,803 788,476
Net deferred yield adjustments 8,168 4,127
- - --------------------------------------------------------------------
Total consumer and business loans 768,971 792,603
- - --------------------------------------------------------------------
Total loans receivable $10,007,633 $9,830,313
- - --------------------------------------------------------------------
The Company's total loan production increased to $1.0 billion for the first
three months of 1996 from $287.2 million for the comparable prior year period,
principally due to increased production of residential property loans. The
growth in residential property loan production of $724.8 million was
attributable to, among other factors, the expansion of the Company's loan
production capabilities during the 1995 fourth quarter as a result of the
National and Madison Acquisitions.
The following table summarizes the Company's loan production, both for portfolio
and for sale in the secondary market, for the three months ended March 31, 1996
and 1995.
Three Months Ended
March 31,
--------------------
(In thousands) 1996 1995
- - --------------------------------------------------------------
Residential property loan production:
First mortgage loans originated $ 716,798 $ 92,628
First mortgage loans purchased 131,116 55,227
Cooperative apartment loans originated 56,994 32,244
- - --------------------------------------------------------------
Total residential property loan
production 904,908 180,099
- - --------------------------------------------------------------
Commercial and multifamily first
mortgage loans originated 30,987 33,027
Consumer and business loans originated:
Home equity loans originated 33,753 28,016
Other consumer loans originated 39,586 37,914
Business loans originated 4,031 8,176
- - --------------------------------------------------------------
Total consumer and business loans
originated 77,370 74,106
- - --------------------------------------------------------------
Total loan production $1,013,265 $287,232
- - --------------------------------------------------------------
Residential property loan production for sale in the secondary market included
in the above table amounted to approximately $450 million and $43 million for
the three months ended March 31, 1996 and
25
1995, respectively. At March 31, 1996, total residential property loans held for
sale amounted to $222.9 million, up from $139.4 million at December 31, 1995.
DEPOSITS
At March 31, 1996, the Bank operated 87 branches, comprised of 86 branches in
the greater New York metropolitan area and one branch in Florida. During the
first quarter of 1996, the Bank opened one new branch in Bronx, New York.
During the second quarter of 1996, the Bank consolidated two of its branches
located in Brooklyn, New York, so that it currently operates 85 branches in the
greater New York metropolitan area.
The following table sets forth a summarized composition of the deposit portfolio
at March 31, 1996 and December 31, 1995.
March 31, 1996 December 31, 1995
------------------------- ------------------------
Percentage Percentage
(Dollars in thousands) Amount of Total Amount of Total
- - ---------------------------------------------------------------------------
Deposits:
Demand $ 1,097,566 8.7% $ 1,084,966 8.6%
Savings 2,640,685 20.8 2,689,343 21.4
Money market 2,116,492 16.7 2,160,161 17.2
Time 6,809,572 53.8 6,637,733 52.8
- - ---------------------------------------------------------------------------
Total deposits $12,664,315 100.0% $12,572,203 100.0%
- - ---------------------------------------------------------------------------
BORROWINGS
The Company's total borrowed funds amounted to $5.6 billion at March 31, 1996,
down from $6.6 billion at December 31, 1995. The $1.0 billion, or 15.0%, decline
was attributable principally to the Balance Sheet Restructuring Plan.
Federal Home Loan Bank of New York ("FHLBNY") advances are the Company's primary
source of borrowed funds and represented 66.7% and 69.6% of total borrowed funds
at March 31, 1996 and December 31, 1995, respectively. The Company's outstanding
FHLBNY advances are summarized, by contractual maturity, in the table below at
March 31, 1996 and December 31, 1995.
March 31, December 31,
(In thousands) 1996 1995
- - --------------------------------------------------------------
Maturing in:
One month or less $1,738,000 $2,722,000
Over one through three months 1,534,700 474,700
Over three through six months 205,000 1,175,000
Over six months through one year 270,000 215,000
Over one through two years 5,000 15,000
Over two years 88 88
Unamortized premiums 1,140 1,195
- - --------------------------------------------------------------
Total FHLBNY advances $3,753,928 $4,602,983
- - --------------------------------------------------------------
The Company's second largest source of borrowed funds is securities sold under
agreements to repurchase. Such borrowings declined to $1.5 billion at March 31,
1996 from $1.6 billion at December 31, 1995.
ACCRUED MERGER-RELATED RESTRUCTURING EXPENSE
At March 31, 1996, the Company's accrual for Merger-related restructuring
charges amounted to $7.7 million, as compared with $16.7 million at December 31,
1995.
The portion of the accrual related to severance and personnel costs declined
from $4.9 million at December 31, 1995 to $2.7 million at March 31, 1996,
reflecting cash payments of $3.0 million and a provision of $0.8 million charged
to operations. As of March 31, 1996, substantially all of the approximately 600
positions identified for elimination in connection with the Merger were
implemented. The Company currently anticipates that the payment of related
severance benefits will be largely completed by the end of 1996.
26
The portion of the Merger-related restructuring accrual associated with
facilities, premises and equipment and lease obligations declined to $5.0
million at March 31, 1996 from $11.8 million at year-end 1995 as a result of
cash payments of $0.9 million and write-offs of $5.9 million. The remaining
accrual balance represents the net present value of future lease obligations
associated with facilities that are no longer being utilized in the Company's
operations. Such lease obligations extend through the year 2008.
STOCKHOLDERS' EQUITY
The Company's stockholders' equity increased to $986.1 million, or 5.1% of total
assets, at March 31, 1996, from $976.5 million, or 4.8% of total assets, at
December 31, 1995. While the Company recorded net income of $27.1 million for
the first three months of 1996, the growth in stockholders' equity was limited
by the $11.6 million cost of repurchasing 1,000,000 shares of the Common Stock
during the quarter (see below) and a $6.9 million increase in the net unrealized
loss on securities available for sale, net of related income taxes. Due to the
Company's significant balance of securities available for sale, its
stockholders' equity is subject to volatility.
In January 1996, the Holding Company announced its intention to repurchase, in
connection with the Company's stock-based employee benefit plans, approximately
2% of the outstanding Common Stock, or approximately 2,000,000 shares, at
prevailing prices in the open market or in privately-negotiated transactions. No
time limit has been established to complete the repurchase program, and there
can be no assurances that such repurchases will be completed or as to the prices
at which any remaining shares may be repurchased.
In July 1993, in accordance with the terms of an agreement entered into with the
FDIC, Anchor exchanged $157.0 million of its Class A cumulative preferred stock
for $71.0 million of its newly issued 8.9375% senior notes and a warrant to
acquire, at an exercise price of $0.01 per share, 4,750,000 shares of its common
stock (the "FDIC Warrant"). In this exchange, the FDIC also relinquished its
claim to $47.2 million of accumulated but undeclared and unpaid dividends with
respect to the Class A cumulative preferred stock. The FDIC Warrant was, upon
consummation of the Merger, converted to a warrant to acquire 8,407,500 shares
of the Common Stock at $0.01 per share. On April 11, 1996, the Holding Company
filed a registration statement, as amended on April 26, 1996, with the
Securities and Exchange Commission (the "Commission") in connection with the
disposition by the FDIC of the Common Stock underlying the FDIC Warrant. While
the exercise of the FDIC Warrant by the FDIC will result in an increase in the
outstanding shares of the Common Stock, it will not affect earnings per share
calculations because the FDIC Warrant is considered a common stock equivalent
and, as such, has been included in earnings per share calculations since its
issuance.
LIQUIDITY
The Company manages its liquidity position in conjunction with its overall asset
and liability program in order to meet regulatory requirements and to ensure
that funds are available to meet deposit withdrawals, loan and investment
funding commitments, the repayment of borrowings and other obligations and
expenditures.
The Company's primary sources of funds are principal payments on loans and MBS,
deposits, short-term borrowings from the FHLBNY and others, sales of interest-
earning assets, and net cash provided by operations. Additionally, the Company
has access to the capital markets for issuing debt or equity securities, as well
as access to the discount window of the Federal Reserve Bank of New York, if
necessary, for the purpose of borrowing to meet temporary liquidity needs,
although it has not utilized this funding source in the past. The Company, in
connection with the Balance Sheet Restructuring Plan and its overall operating
strategies, is seeking, in the near term, to reduce its reliance on borrowings
as a funding source.
Excluding funds raised through the capital markets, the primary source of funds
of the Holding Company, on an unconsolidated basis, is dividends from the Bank,
whose ability to pay dividends is subject to regulations of the Office of Thrift
Supervision (the "OTS"), the Bank's primary regulator.
Pursuant to regulations promulgated by the OTS, the Bank is required to maintain
(i) a ratio of average eligible liquid assets for the month to the sum of
average net withdrawable accounts and short-term borrowings during the preceding
month of at least 5.0% and (ii) a ratio of average eligible short-term
27
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 March 1996, the Bank's average liquidity ratio was 5.33% and its average
short-term liquidity ratio was 3.33%.
The following discussion pertains to the Company's Consolidated Statements of
Cash Flows.
The Company's cash and cash equivalents amounted to $185.9 million at March 31,
1996, down from $235.4 million at December 31, 1995. For the first quarter of
1996, net cash provided by investing activities amounted to $879.7 million,
while net cash used by financing activities and operating activities amounted to
$908.8 million and $20.3 million, respectively. The Company's cash flows from
both investing activities and financing activities were significantly affected
by the Balance Sheet Restructuring Plan. In connection therewith, the Company
sold $1.0 billion of MBS and utilized the proceeds to reduce its outstanding
borrowings.
During the first quarter of 1996, the Company generated aggregate cash flows
from loan and MBS principal repayments of $962.4 million. While principal
amortization on these assets is a relatively predictable source of liquidity,
principal prepayments on the Company's loan and MBS portfolios have been, and
will continue to be, significantly affected by the interest rate environment.
Principal uses of funds by the Company for the three months ended March 31, 1996
were the origination or purchase of loans and the purchase of securities,
primarily MBS (see "Financial Condition -- Loans" and "Financial Condition --
Securities," respectively). Currently, the Company anticipates that its primary
focus will be the origination of loans, but it also expects to continue
utilizing excess available funds to purchase loans and securities.
REGULATORY CAPITAL
The following table illustrates the regulatory capital position of the Bank at
March 31, 1996 pursuant to OTS requirements promulgated under the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"). The
information contained in the table has been based upon the Bank's understanding
of the laws, regulations, rulings, interpretations and decisions that are now in
effect, all of which are subject to change and to subsequent interpretation,
which may differ from such understanding. Any such change or subsequent
interpretation could affect the information set forth in the table below.
Capital Requirement Bank Capital Capital in
----------------------------------------- --------------------------------------- Excess of
(Dollars in thousands) Amount Percentage (1) Amount Percentage (1) Requirement
- - ------------------------------------------------------------------------------------------------------------------------------------
Tangible $289,701 1.50% $1,080,885 5.60% $791,184
Leverage 579,401 3.00 1,080,885 5.60 501,484
Risk-based 765,215 8.00 1,200,544 12.55 435,329
- - ------------------------------------------------------------------------------------------------------------------------------------
(1) For tangible and leverage capital, the percentage is to adjusted total
assets of $19.3 billion. For risk-based capital, the percentage is to total
risk-weighted assets of $9.6 billion.
Under the prompt corrective action regulations adopted by the OTS pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), an
institution is considered well capitalized, the highest of five categories, if
it has a leverage capital ratio of at least 5.0%, a tier 1 risk-based capital
ratio (leverage capital to risk-weighted assets) of at least 6.0%, and a total
risk-based capital ratio of at least 10.0%, and it is not subject to an order,
written agreement, capital directive, or prompt corrective action directive to
meet and maintain a specific capital level for any capital measure. At March 31,
1996, the Bank met the published standards for a well capitalized designation
under these regulations with a leverage capital ratio of 5.60%, a tier 1 risk-
based capital ratio of 11.30% and a total risk-based capital ratio of 12.55%.
PENDING LEGISLATION
The Department of the Treasury, the federal banking regulatory agencies and
members of Congress have offered various proposals to address the imbalance with
respect to insurance premiums on SAIF-insured deposits that has resulted because
of certain actions by the FDIC to reduce deposit insurance premiums on BIF-
insured deposits, which represent approximately 60% of the Bank's deposits (see
"Results of Operations -- Non-Interest Expense -- G&A Expense" above). These
proposals have variously called for one or more of the following: a one-time
special assessment to recapitalize the SAIF; the merger of the BIF and the SAIF;
the elimination of the OTS; and the elimination of the federal
28
thrift charter. Certain of these proposals also would address to some extent the
federal income tax consequences of the elimination of the federal thrift
charter.
The Administration and certain members of Congress advocate the adoption of
legislation to address this imbalance, but the Company is unable to predict
whether or when any of the proposals will be finally enacted or, because they
are still subject to change, the ultimate effect on the Company's operations of
any of the proposals that may be adopted.
29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
On May 1, 1996, the Holding Company issued a press release announcing that it
had been advised that the Bank is no longer the target of an investigation being
conducted by the United States Attorney's Office for the District of New
Hampshire and the New England Bank Fraud Task Force of the United States
Department of Justice (the "New Hampshire Investigation") and that they would
not seek to bring any criminal or civil charges against the Bank relative to the
limited documentation loan program offered by the Bank during the period from
1987 to 1989. The press release, a copy of which is attached hereto as Exhibit
99, is incorporated by reference herein.
On May 10, 1996, the action entitled Robert and Jennifer Grunbeck v. The Dime
----------------------------------------
Savings Bank of N.Y., FSB, was dismissed, with prejudice, pursuant to a
- - -------------------------
settlement in which the Grunbecks received a minor modification of their
post-foreclosure loan obligations as contemplated by the Bank's March 1996
agreement with a New Hampshire borrower group. As a result of the settlement,
the Bank was authorized to complete its foreclosure auction sale of the
Grunbecks' home. A class had not been certified at the time of settlement.
ITEM 5. OTHER INFORMATION
-----------------
John V. Brull, during the second quarter of 1996, announced his retirement as
the Principal Financial Executive of the Company. He also announced that he will
continue with the Company in a consulting capacity. A successor to Mr. Brull has
not yet been named.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
Exhibit 27 -- Financial Data Schedule
Exhibit 99 -- Press release dated May 1, 1996 issued by the Holding
Company regarding the termination of the New Hampshire Investigation.
(b) Reports on Form 8-K
On April 26, 1996, the Holding Company filed with the Commission a
Current Report on Form 8-K, which reported that, on April 25, 1996, it
issued a press release announcing its preliminary financial results for
the first quarter of 1996.
30
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: May 13, 1996 By: /s/ James M. Large, Jr.
------------ -----------------------
James M. Large, Jr.
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
Dated: May 13, 1996 By: /s/ Harold E. Reynolds
------------ ----------------------
Harold E. Reynolds
Senior Vice President
and Controller
(Principal Financial and
Accounting Officer)
31
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER IDENTIFICATION OF EXHIBIT PAGE
- - -------------- ------------------------------------------------------------------- ----
27 Financial Data Schedule* 33
99 The press release, dated May 1, 1996, issued by the Holding Company
regarding the termination of the New Hampshire Investigation. 34
* Filed electronically with the Commission.
32