UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number 0-27782
DIME COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3297463
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
209 HAVEMEYER STREET, BROOKLYN, NEW YORK 11211
(Address of principal executive offices) (Zip Code)
(718) 782-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all the 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.
(1) 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.
CLASSES OF COMMON STOCK NUMBER OF SHARES OUTSTANDING, OCTOBER 31, 1999
$.01 Par Value 12,637,588
-2-
PAGE
Item 1. Financial Statements
Consolidated Statements of Condition at September 30, 1999
(Unaudited) and June 30, 1999 3
Consolidated Statements of Operations and Comprehensive
Income for the Three Months
Ended June 30, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Changes in Stockholders' Equity
for the Three Months Ended September 30, 1999 (Unaudited) 5
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 1999 and 1998 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-20
Item 3 Quantitative and Qualitative Disclosure About Market Risk 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibits
EXPLANATORY NOTE: This Form 10-Q contains certain "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, and
may be identified by the use of such words as "believe," "expect," anticipate,"
"should," "planned," "estimated" and "potential". Examples of forward looking
statements include, but are not limited to, estimates with respect to the
financial condition, results of operations and business of the Company that are
subject to various factors which could cause actual results to differ
materially from these estimates. These factors include: changes in general,
economic and market conditions, and legislative and regulatory conditions, or
the development of an adverse interest rate environment that adversely affects
the interest rate spread or other income anticipated from the Company's
operations and investments.
As used in this Form 10-Q, "we" and "us" and "our" refer to Dime Community
Bancshares, Inc. and/or its consolidated subsidiaries, depending on the
context.
-3-
DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
AT SEPTEMBER 30,
1999 AT JUNE 30,
(UNAUDITED) 1999
------------------- ---------------
ASSETS:
Cash and due from banks $15,410 $17,801
Investment securities held to maturity (estimated market value of $21,732
and $31,768 at September 30, 1999 and June 30, 1999, respectively) 21,708 31,698
Investment securities available for sale:
Bonds and notes (amortized cost of $140,558 and $133,523 at September
30, 1999 and June 30, 1999, respectively) 138,313 131,490
Marketable equity securities (historical cost of $14,435 and $14,162 at
September 30, 1999 and June 30, 1999, respectively) 15,316 15,142
Mortgage backed securities held to maturity (estimated market value of
$20,458 and $23,192 at September 30, 1999 and June 30, 1999, respectively) 20,196 22,820
Mortgage backed securities available for sale (amortized cost of $491,690
and $507,486 at September 30, 1999 and June 30, 1999, respectively) 486,626 502,847
Federal funds sold 12,985 11,011
Loans:
Real estate 1,478,208 1,375,510
Other loans 7,885 7,831
Less: Allowance for loan losses (15,093) (15,081)
------------------- ---------------
Total loans, net 1,471,000 1,368,260
------------------- ---------------
Loans held for sale 169 -
Premises and fixed assets 15,044 14,975
Federal Home Loan Bank of New York Capital Stock 35,391 28,281
Other real estate owned, net 1,083 866
Goodwill 63,717 64,871
Other assets 39,753 37,553
------------------- ---------------
TOTAL ASSETS $2,336,711 $2,247,615
=================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Due to depositors $1,214,101 $1,247,061
Escrow and other deposits 32,043 36,577
Securities sold under agreements to repurchase 482,339 481,660
Federal Home Loan Bank of New York advances 370,000 250,000
Other liabilities 23,682 20,622
------------------- ---------------
TOTAL LIABILITIES 2,122,165 2,035,920
------------------- ---------------
STOCKHOLDERS' EQUITY:
Preferred stock ($0.01 par, 9,000,000 shares authorized,
none outstanding at September 30, 1999 and June 30, 1999) - -
Common stock ($0.01 par, 45,000,000 shares authorized, 14,583,400 shares
issued at September 30, 1999 and June 30, 1999, respectively, and 12,725,588
shares and 12,775,588 shares outstanding at September 30, 1999 and
June 30, 1999, respectively) 145 145
ADDITIONAL PAID-IN CAPITAL 149,385 148,865
RETAINED EARNINGS (SUBSTANTIALLY RESTRICTED) 122,860 119,100
ACCUMULATED OTHER COMPREHENSIVE LOSS: (3,473) (3,323)
UNALLOCATED COMMON STOCK OF EMPLOYEE STOCK OWNERSHIP PLAN (7,725) (8,016)
UNEARNED COMMON STOCK OF RECOGNITION AND RETENTION PLAN (5,558) (6,040)
COMMON STOCK HELD BY BENEFIT MAINTENANCE PLAN (1,790) (831)
TREASURY STOCK, AT COST (1,857,812 SHARES AND 1,807,812 SHARES AT
SEPTEMBER 30, 1999 AND JUNE 30, 1999, RESPECTIVELY) (39,298) (38,205)
------------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 214,546 211,695
------------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,336,711 $2,247,615
=================== ===============
See notes to consolidated financial statements
-4-
DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
(UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
1999 1998
------------ ------------
INTEREST INCOME:
Loans secured by real estate $27,003 $19,929
Other loans 149 127
Investment securities 2,585 2,399
Mortgage-backed securities 8,099 6,852
Federal funds sold 219 276
------------ ------------
TOTAL INTEREST INCOME 38,055 29,583
------------ ------------
INTEREST EXPENSE:
Deposits and escrow 11,224 10,880
Borrowed funds 10,825 6,103
------------ ------------
TOTAL INTEREST EXPENSE 22,049 16,983
------------ ------------
NET INTEREST INCOME 16,006 12,600
PROVISION FOR LOAN LOSSES 60 60
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,946 12,540
------------ ------------
NON-INTEREST INCOME:
Service charges and other fees 976 543
Net gain on sales and redemptions of securities and
other assets 132 244
Net (loss) gain on sales of loans (9) 18
Other 1,558 449
------------ ------------
TOTAL NON-INTEREST INCOME 2,657 1,254
------------ ------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 3,424 2,796
ESOP and RRP compensation expense 1,129 1,131
Occupancy and equipment 937 560
FEDERAL DEPOSIT INSURANCE PREMIUMS 115 89
DATA PROCESSING COSTS 432 311
(CREDIT) PROVISION FOR LOSSES ON OTHER REAL ESTATE OWNED - (2)
GOODWILL AMORTIZATION 1,154 601
OTHER 1,695 1,206
------------ ------------
TOTAL NON-INTEREST EXPENSE 8,886 6,692
------------ ------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 9,717 7,102
INCOME TAX EXPENSE 4,157 3,119
------------ ------------
NET INCOME 5,560 3,983
============ ============
EARNINGS PER SHARE:
BASIC $0.48 $0.38
============ ============
DILUTED $0.45 $0.35
============ ============
STATEMENT OF COMPREHENSIVE INCOME:
Net Income $5,560 $3,983
Change in unrealized gain on securities available for sale, net of
deferred taxes (150) 1,117
Reclassification adjustment for securities sold, net of tax (63) 70
------------ ------------
Total comprehensive income $5,347 $5,170
============ ============
See notes to consolidated financial statements
-5-
DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS)
FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 1999
---------------------------
COMMON STOCK (PAR VALUE $0.01):
Balance at beginning of period $145
---------------------------
Balance at end of period 145
---------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period 148,865
Tax benefit of RRP shares 164
Amortization of excess fair value over cost - ESOP stock 356
---------------------------
Balance at end of period 149,385
---------------------------
RETAINED EARNINGS:
Balance at beginning of period 119,100
Net income for the period 5,560
Cash dividends declared and paid (1,800)
---------------------------
Balance at end of period 122,860
---------------------------
OTHER COMPREHENSIVE INCOME (LOSS), NET:
Balance at beginning of period (3,323)
Change in unrealized gain on securities available for sale
during the period, net of deferred taxes (150)
---------------------------
Balance at end of period (3,473)
---------------------------
EMPLOYEE STOCK OWNERSHIP PLAN:
Balance at beginning of period (8,016)
Amortization of earned portion of ESOP stock 291
---------------------------
Balance at end of period (7,725)
---------------------------
RECOGNITION AND RETENTION PLAN:
Balance at beginning of period (6,040)
Amortization of earned portion of RRP stock 482
---------------------------
Balance at end of period (5,558)
---------------------------
BENEFIT MAINTENANCE PLAN:
Balance at beginning of period (831)
Common stock acquired by BMP (959)
---------------------------
Balance at end of period (1,790)
---------------------------
TREASURY STOCK:
Balance at beginning of period (38,205)
Purchase of 50,000 shares, at cost (1,093)
---------------------------
Balance at end of period (39,298)
---------------------------
See notes to consolidated financial statements
-6-
DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
1999 1998
-------------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES: (In THOUSANDS)
Net Income $5,560 $3,983
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net gain on investment and mortgage backed securities sold (117) (138)
Net loss (gain) on sale of loans held for sale 9 (18)
Net gain on sale of other assets (15) -
Net depreciation and amortization 495 331
ESOP and RRP compensation expense 1,129 1,131
Provision for loan losses 60 60
Goodwill amortization 1,154 601
(Increase) decrease in loans held for sale (178) 559
Increase in other assets and other real estate owned (1,818) (927)
Decrease in receivable for securities sold - 18,008
Increase in payable for securities purchased - 18,819
Increase in other liabilities 3,060 5,164
-------------------- --------------------
Net cash provided by operating activities 9,339 47,573
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in Federal funds sold (1,974) (15,403)
Proceeds from maturities of investment securities held to maturity - 1,000
Proceeds from maturities of investment securities available for sale 7,527 500
Proceeds from calls of investment securities held to maturity 10,000 12,500
Proceeds from calls of investment securities available for sale 2,400 -
Proceeds from sales of investment securities available for sale 341 7,599
Purchases of investment securities available for sale (17,443) (16,794)
Purchases of mortgage backed securities available for sale (9,799) (81,282)
Principal collected on mortgage backed securities held to maturity 2,624 6,580
Principal collected on mortgage backed securities available for sale 25,357 26,633
Net increase in loans (102,800) (76,213)
Purchases of fixed assets (350) (264)
Purchase of Federal Home Loan Bank stock (7,110) (5,212)
-------------------- --------------------
Net cash used in investing activities (91,227) (140,356)
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in due to depositors (32,960) (13,205)
Net (decrease) increase in escrow and other deposits (4,534) 1,392
Proceeds from Federal Home Loan Bank of New York Advances 120,000 63,995
Increase in securities sold under agreements to repurchase 679 49,841
Cash dividends paid (1,800) (1,126)
Tax benefits of RRP 164 -
Purchase of common stock by Benefit Maintenance Plan and RRP (959) (1,072)
Purchase of treasury stock (1,093) (10,308)
------------------- ----------------
Net cash provided by financing activities 79,497 89,517
------------------- ----------------
DECREASE IN CASH AND DUE FROM BANKS (2,391) (3,266)
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 17,801 16,266
------------------- ----------------
CASH AND DUE FROM BANKS, END OF PERIOD $15,410 $13,000
=================== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes 3,054 682
=================== ================
Cash paid for interest 22,496 16,462
=================== ================
Transfer of loans to Other real estate owned 315 27
=================== ================
Change in unrealized gain (loss) on available for sale securities,
net of deferred taxes (150) 1,117
=================== ================
See Notes to consolidated financial statements
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. NATURE OF OPERATIONS
Dime Community Bancshares, Inc. is a Delaware corporation organized in
December, 1995 at the direction of the Board of Directors of The Dime Savings
Bank of Williamsburgh (referred to as the Bank), a federally chartered savings
bank, for the purpose of acquiring all of the capital stock of the Bank issued
in the Bank's conversion from a federal mutual savings bank to a federal stock
savings bank on June 26, 1996.
The Bank has been, and intends to continue to be, a community-oriented
financial institution providing financial services and loans for housing within
its market areas. We maintain our headquarters in the Williamsburgh section of
the borough of Brooklyn. As of September 30, 1999, the Bank has eighteen
additional offices located in the boroughs of Brooklyn, Queens, and the Bronx,
and in Nassau County.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In our opinion, the accompanying unaudited consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the Company's financial condition as of
September 30, 1999, the results of operations for the three-month periods ended
September 30, 1999 and 1998, cash flows for the three months ended September
30, 1999 and 1998, and changes in stockholders' equity for the three months
ended September 30, 1999. The results of operations for the three-month
periods ended September 30, 1999, are not necessarily indicative of the results
of operations to be expected for the remainder of the year. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles ("GAAP")
have been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. Areas in the accompanying financial statements where estimates
are significant include the allowance for loans losses and the carrying value
of other real estate.
These consolidated financial statements should be read in conjunction with our
audited consolidated financial statements as of and for the year ended June 30,
1999 and notes thereto.
3. TREASURY STOCK
During the three months ended September 30, 1999, we repurchased 50,000 shares
of its common stock into treasury. The average price of the treasury shares
acquired was $21.86 per share, and all shares have been recorded at the
acquisition cost.
-8-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Dime Community Bancshares, Inc. (referred to as DCB or the Company) is a
Delaware corporation and parent corporation of The Dime Savings Bank of
Williamsburgh (referred to as DSBW or the Bank), a federally chartered stock
savings bank.
The Company was organized in December, 1995 at the direction of the Board
of Directors of the Bank for the purpose of acquiring all of the capital stock
of the Bank issued in the conversion of the Bank from a federal mutual savings
bank to a federal stock savings bank.
-9-
SELECTED FINANCIAL HIGHLIGHTS AND OTHER DATA
(Dollars In thousands except per share amounts)
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
1999 <F1> 1998 <F1>
----------- -----------
PERFORMANCE AND OTHER SELECTED RATIOS:
Return on Average Assets 0.98% 0.96%
Return on Average Stockholders' Equity 10.51 8.74
Average Interest Rate Spread 2.68 2.66
Net Interest Margin 3.01 3.15
Non-interest Expense to Average Assets <F2> 1.33 1.47
Efficiency Ratio <F2> 40.59 44.81
Effective Tax Rate 42.78 43.92
Tangible Equity to Total Tangible Assets 6.60 8.90
Loans/Earning Assets 67.05 60.84
Loans/Deposits 122.42 100.05
CASH EARNINGS DATA:
Cash Earnings $8,049 $5,715
Cash Return on Average Assets 1.42% 1.38%
Cash Return on Average Stockholders' Equity 15.21 12.54
Cash Non-interest Expense to Average
Assets <F3> 1.13 1.20
Cash Efficiency Ratio <F3> 34.50 36.49
PER SHARE DATA:
Reported EPS (Diluted) $0.45 $0.35
Cash EPS (Diluted) 0.66 0.50
Stated Book Value 16.86 15.37
Tangible Book Value 11.78 13.04
BALANCE SHEET AVERAGES:
Average Loans $1,423,011 $989,415
Average Assets 2,263,703 1,656,446
Average Earning Assets 2,128,075 1,589,245
Average Deposits 1,234,078 1,030,360
Average Equity 211,632 182,272
Average Tangible Equity 146,428 155,326
ASSET QUALITY SUMMARY:
Net charge-offs $ 48 $ 144
Nonperforming Loans 3,201 1,225
Nonperforming Assets/Total Assets 0.18% 0.10%
Allowance for Loan Loss/Total Loans 1.02 1.17
Allowance for Loan Loss/Nonperforming Loans 471.51 978.86
<FN>
<F1> Cash earnings for all periods exclude non-cash expenses related to goodwill
and core deposit intangible amortization and amortization costs related to
stock benefit plans.
<F2> In calculating these ratios, non-interest expense excludes goodwill and
core deposit intangible amortization. The actual efficiency ratio and ratio
of non-interest expense to average assets were 47.93% and 1.57%,
respectively, for the three months ended September 30, 1999, and 49.23% and
1.62%, respectively, for the three months ended September 30, 1998.
<F3> In calculating these ratios, non-interest expense excludes non-cash
expenses related to goodwill and core deposit intangible amortization and
amortization costs related to stock benefit plans.
-10-
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are deposits, proceeds from principal and
interest payments on loans, mortgage-backed securities and investments,
borrowings, and, to a lesser extent, proceeds from the sale of fixed-rate
mortgage loans to the secondary mortgage market. While maturities and scheduled
amortization of loans and investments are a predictable source of funds,
deposit flows, mortgage prepayments and mortgage loan sales are influenced by
interest rates, economic conditions and competition.
Our primary investing activities are the origination of multi-family and
single-family mortgage loans, and the purchase of mortgage-backed and other
securities. During the three months ended September 30, 1999, our loan
originations totaled $168.0 million compared to $126.0 million for the three
months ended September 30, 1998. Purchases of mortgage-backed and other
securities totaled $27.2 million for the three months ended September 30, 1999
compared to $98.1 million for the three months ended September 30, 1998. The
decline in security purchases resulted from a reduction in securities acquired
in conjunction with the Bank's capital leverage program during the three months
ended September 30, 1999, which can be attributed to a reduction in potential
interest rate spread earned on capital leverage transactions during this period
resulting from increased interest rates on borrowed funds. Funding for loan
originations and security purchases was obtained primarily from principal
repayments on loans and mortgage-backed securities, maturities of investment
securities, and borrowings by means of repurchase agreements and Federal Home
Loan Bank of New York ("FHLBNY") advances. Principal repayments on real estate
loans and mortgage-backed securities totaled $91.1 million during the three
months ended September 30, 1999, compared to $83.4 million for the three months
ended September 30, 1998. Maturities and calls of investment securities
totaled $19.9 million during the three months ended September 30, 1999, and
$14.0 million during the three months ended September 30, 1998. Loan and
security sales, which totaled $1.1 million and $9.0 million, respectively,
during the three months ended September 30, 1999 and 1998, provided some
additional cash flows.
Deposits decreased $33.0 million during the three months ended September 30,
1999, compared to a decrease of $13.2 million during the three months ended
September 30, 1998. The decrease in deposits during the three months ended
September 30, 1999 resulted primarily from runoff of maturing higher cost
certificates of deposits gathered during deposit rate promotions which occurred
and ended during the fiscal year ended June 30, 1998. Deposit flows are
affected by the level of interest rates, the interest rates and products
offered by local competitors, and other factors. Certificates of deposit which
are scheduled to mature in one year or less from September 30, 1999 totaled
$480.8 million. Based upon our current pricing strategy and deposit retention
experience, management believes that a significant portion of such deposits
will remain with us. Net borrowings increased $120.7 million during the three
months ended September 30, 1999, with the majority of this growth experienced
in FHLBNY advances.
On July 9, 1999, we announced that we had entered into a definitive
agreement with The Roslyn Savings Bank (referred to as Roslyn), whereby Roslyn
will acquire all of the deposit liabilities of the Bank's retail branch located
at 1012 Gates Avenue, Brooklyn, which totaled approximately $18.8 million at
September 30, 1999. This transaction, which is subject to regulatory approval,
is expected to close in November, 1999. We intend to utilize additional
borrowings and/or proceeds from maturities of securities to fund this
transaction. Due to the size of the transaction, we do not anticipate that it
will have a material impact on our liquidity.
Stockholders' equity increased $2.9 million during the three months ended
September 30, 1999. This increase resulted primarily from net income of $5.6
million Offsetting this increase were repurchases of common stock into
treasury of $1.1 million, and cash dividends paid of $1.8 million during the
period.
-11-
On July 15, 1999, we declared a cash dividend of $0.15 per common share to
all shareholders of record on July 30, 1999. This dividend was paid on August
11, 1999. On October 14, 1999, we declared a cash dividend of $0.17 per common
share to all shareholders of record on October 29, 1999. This dividend was paid
on November 9, 1999.
The Bank is required to maintain a minimum average daily balance of liquid
assets as a percentage of net withdrawable deposit accounts plus short-term
borrowings by the Office of Thrift Supervision (referred to as the OTS)
regulations. The minimum required liquidity ratio is currently 4.0%. At
September 30, 1999, the Bank's liquidity ratio was 13.4%. The levels of the
Bank's short-term liquid assets are dependent on the Bank's operating,
financing and investing activities during any given period.
We monitor our liquidity position on a daily basis. Excess short-term
liquidity is invested in overnight federal funds sales and various money market
investments. In the event that we should require funds beyond its ability to
generate them internally, additional sources of funds are available through the
use of our $684.7 million borrowing limit at the FHLBNY. At September 30, 1999,
we had $370.0 million in short- and medium-term advances outstanding at the
FHLBNY, and a remaining borrowing limit of $314.7 million.
The Bank is subject to minimum capital regulatory requirements imposed by
the OTS, which requirements are, as a general matter, based on the amount and
composition of an institution's assets. At September 30, 1999, the Bank was in
compliance with all applicable regulatory capital requirements. Tangible
capital totaled $129.0 million, or 5.82% of total tangible assets, compared to
a 1.50% regulatory requirement; leverage capital, at 5.82% of adjusted assets,
exceeded the 3.0% regulatory minimum, and total risk-based capital, at 11.15%
of risk weighted assets, exceeded the 8.0% regulatory minimum. In addition, at
Sepember 30, 1999, the Bank was considered "well-capitalized" for all
regulatory purposes.
ASSET QUALITY
Non-performing loans (loans past due 90 days or more as to principal or
interest) totaled $3.2 million at September 30, 1999, as compared to $3.0
million at June 30, 1999. In addition, the Bank had 38 loans totaling $1.2
million delinquent 60-89 days at September 30, 1999, as compared to 23 such
delinquent loans totaling $819,000 at June 30, 1999. The majority of the non-
performing loans and loans delinquent 60-89 are represented by FHA/VA mortgage
and consumer loans which possess small outstanding balances.
Under Generally Accepted Accounting Priciples ("GAAP"), we are required to
account for certain loan modifications or restructurings as ''troubled-debt
restructurings.'' In general, our modification or restructuring of a debt
constitutes a troubled-debt restructuring for economic or legal reasons related
to the borrower's financial difficulties, grants a concession to the borrower
that we would not otherwise consider. We had one loan classified as troubled-
debt restructurings at September 30, 1999, totaling $700,000, compared to two
such loans totaling $1.3 million at June 30, 1999. The one troubled-debt
restructuring as of September 30, 1999, is performing in accordance with its
restructured terms. During the three months ended September 30, 1999, one
troubled-debt restructuring with an outstanding principal balance of $590,000,
was paid-in-full.
Under GAAP, we established guidelines for determining and measuring
impairment in loans. In the event the carrying balance of the loan, including
all accrued interest, exceeds the estimate of fair value, the loan is
considered to be impaired and a reserve is established. The recorded
investment in loans deemed impaired was approximately $1.2 million as of
September 30, 1999, compared to $1.6 million at June 30, 1999, and the average
balance of impaired loans was $1.4 million for the three months ended September
30, 1999 compared to $3.4 million for the three months ended September 30,
1998. The
-12-
impaired portion of these loans is represented by specific reserves
totaling $25,000 allocated within the allowance for loan losses at September
30, 1999. At September 30, 1999, reserves have been provided on all impaired
loans. Generally, we consider non-performing loans to be impaired loans.
However, at September 30, 1999, approximately $2.0 million of one-to-four
family, cooperative apartment and consumer loans on nonaccrual status are not
deemed impaired. All of these loans have outstanding balances less than
$227,000, and are considered a homogeneous loan pool which are not required to
be evaluated for impairment.
The balance of other real estate owned ("OREO") was $1.1 million, consisting
of 9 properties, at September 30, 1999 compared to $866,000 million, consisting
of 9 properties, at June 30, 1999. During the three months ended September 30,
1999, one loan was transferred to OREO totaling $315,000. Offsetting this
addition, were OREO disposals of $98,000 during the three months ended
September 30, 1999. The allowance for losses on OREO was $149,000 as of
September 30, 1999.
The following table sets forth information regarding our non-performing
loans, non-performing assets, impaired loans and troubled-debt restructurings
at the dates indicated.
AT SEPTEMBER 30, AT JUNE 30,
1999 1999
------------------- ---------------
(Dollars In Thousands)
NON-PERFORMING LOANS:
One- to four-family $1,709 $1,577
Multi-family and underlying cooperative 1,158 1,248
Non-residential - -
Cooperative apartment 289 133
Other loans 45 43
------------------ ---------------
TOTAL NON-PERFORMING LOANS 3,201 3,001
TOTAL OREO 1,083 866
------------------ ---------------
TOTAL NON-PERFORMING ASSETS $4,284 $3,867
================= ===============
TROUBLED-DEBT RESTRUCTURINGS $700 $1,290
TOTAL NON-PERFORMING ASSETS AND TROUBLED-DEBT
RESTRUCTURINGS 4,984 5,157
IMPAIRED LOANS 1,157 1,563
TOTAL NON-PERFORMING LOANS TO TOTAL LOANS 0.22% 0.22%
TOTAL IMPAIRED LOANS TO TOTAL LOANS 0.08 0.11
TOTAL NON-PERFORMING ASSETS TO TOTAL ASSETS 0.18 0.17
TOTAL NON-PERFORMING ASSETS AND TROUBLED-DEBT
RESTRUCTURINGS TO TOTAL ASSETS 0.21 0.23
Comparison of Financial Condition at September 30, 1999 and June 30, 1999
ASSETS. Our assets totaled $2.34 billion at September 30, 1999, an increase
of $89.1 million from total assets of $2.25 billion at June 30, 1999. The
growth in assets was experienced primarily in
-13-
real estate loans which increased
$102.7 million. The increase in real estate loans resulted primarily from
originations of $168.0 million during the quarter ended September 30, 1999, of
which $163.1 million were multi-family and underlying cooperative loans.
Offsetting the increase in real estate loans was an aggregate decline of
$18.8 million in mortgage-backed securities, of which $16.2 million was
experienced in mortgage-backed securities available-for-sale. See "Capital
Leverage Strategy."
LIABILITIES. Deposits decreased $33.0 million to $1.21 billion at September
30, 1999 from $1.25 billion at June 30, 1999 due primarily to the cessation of
a deposit rate promotion that we maintained from July, 1997 to June, 1998.
FHLBNY advances increased $120.0 million during the quarter, and these funds
were utilized primarily to replace deposit outflows and fund loan originations.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $2.9 million during the
three months ended September 30, 1999. The increase was primarily attributable
to net income of $5.6 million and amortization of the our Stock Plans of $1.1
million, which were offset by treasury stock repurchases of $1.1 million,
payment of cash dividends of $1.8 million, and purchases of $1.0 million of our
common stock on the open market by the Benefit Maintenance Plan.
CAPITAL LEVERAGE STRATEGY. As a result of the initial public offering in
June, 1996, the Bank's capital level significantly exceeded all regulatory
requirements. A portion of the "excess" capital generated by the initial
public offering has been deployed through the use of a capital leverage
strategy whereby we invest in high quality mortgage-backed securities (referred
to as leverage assets) funded by short term borrowings from various third party
lenders under securities sold under agreement to repurchase transactions. The
capital leverage strategy generates additional earnings for us by virtue of a
positive interest rate spread between the yield on the leverage assets and the
cost of the borrowings. Since the average term to maturity of the leverage
assets exceeds that of the borrowings used to fund their purchase, the net
interest income earned on the leverage strategy would be expected to decline in
a rising interest rate environment. See "Market Risk." To date, the capital
leverage strategy has been undertaken in accordance with limits established by
our Board of Directors, aimed at enhancing profitability under moderate levels
of interest rate exposure. During the quarter ended September 30, 1999, we
undertook little new activity related to the capital leverage strategy due to
both unfavorable interest rate spreads on new transactions occurring during the
quarter, and the reduced need to leverage the Bank's capital, as its overall
capital percentage continues to decline. As a result of the reduced activity
in the capital leverage strategy during the three months ended September 30,
1999, our balance of mortgage-backed securities declined $18.8 million during
this period as paydowns on these securities exceeded new purchases.
COMPARISON OF THE OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1999 AND 1998
GENERAL. Net income increased $1.6 million, to $5.6 million for the three
months ended September 30, 1999, compared to $4.0 million for the three months
ended September 30, 1998. The increase in net income resulted from increases
of $3.4 million in net interest income and $1.4 million in non-interest income,
which increases were offset by increases of $2.2 million in non-interest
expense and $1.0 million in income tax expense.
NET INTEREST INCOME. The discussion of net interest income for the three
months ended September 30, 1999 and 1998, presented below, should be read in
conjunction with the following table, which sets forth certain information
relating to our consolidated statements of operations for the three months
ended September 30, 1999 and 1998, and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs
are derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown. Average balances are derived
from average daily balances. The yields and costs include fees which are
considered adjustments to yields.
-14-
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------
1999 1998
-------------------------------------------- ----------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
--------------- ------------- ------------- ------------- ----------- ------------
Assets: (DOLLARS IN THOUSANDS)
Interest-earning assets:
Real Estate Loans <F1> $1,415,416 $27,003 7.63% $983,880 $19,929 8.10%
Other loans 7,595 149 7.85 5,535 127 9.18
MORTGAGE-BACKED SECURITIES<F2> 515,380 8,099 6.29 420,136 6,852 6.52
INVESTMENT SECURITIES <F2> 172,254 2,585 6.00 158,944 2,399 6.04
FEDERAL FUNDS SOLD 17,430 219 5.03 20,750 276 5.32
--------------- ------- ------------- -------
TOTAL INTEREST-EARNING ASSETS 2,128,075 $38,055 7.15% 1,589,245 $29,583 7.45%
--------------- ======= ------------- =======
NON-INTEREST EARNING ASSETS 135,628 67,201
--------------- -------------
TOTAL ASSETS $2,263,703 $1,656,446
=============== =============
LIABILITIES AND STOCKHOLDERS'
EQUITY:
INTEREST-BEARING LIABILITIES:
NOW, SUPER NOW AND
MONEY MARKET ACCOUNTS $83,440 $590 2.81% $49,801 $292 2.33%
SAVINGS ACCOUNTS 408,335 2,098 2.04 342,884 1,945 2.25
CERTIFICATES OF DEPOSIT 675,906 8,536 5.01 604,628 8,643 5.67
BORROWED FUNDS 788,579 10,825 5.45 411,770 6,103 5.88
--------------- ------- ------------- -------
TOTAL INTEREST-BEARING
LIABILITIES 1,956,260 $22,049 4.47% 1,409,083 $16,983 4.79%
--------------- ======= ------------- =======
CHECKING ACCOUNTS 69,372 37,838
OTHER NON-INTEREST-BEARING
LIABILITIES 26,439 27,253
--------------- -------------
TOTAL LIABILITIES 2,052,071 1,474,174
STOCKHOLDERS' EQUITY 211,632 182,272
--------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $2,263,703 $1,656,446
=============== =============
NET INTEREST INCOME/ INTEREST RATE $16,006 2.68% $12,600 2.66%
SPREAD(3) ======= =======
NET INTEREST-EARNING ASSETS/NET
INTEREST MARGIN (4) $171,815 3.01% $180,162 3.15%
=============== =============
RATIO OF INTEREST-EARNING ASSETS
TO INTEREST-BEARING LIABILITIES 108.78% 112.79%
<FN>
<F1> In computing the average balance of loans, non-accrual loans
have been included.
<F3> Includes securities classified "available for sale.
<F3> Net interest rate spread represents the difference between the
average rate on interest-earning assets and the average cost of
interest-bearing liabilities.
<F4> Net interest margin represents net interest income as a
percentage of average interest-earning assets.
-15-
RATE/VOLUME ANALYSIS
THREE MONTHS ENDED
SEPTEMBER 30, 1999
COMPARED TO
THREE MONTHS ENDED
SEPTEMBER 30, 1998
INCREASE/(DECREASE)
DUE TO
VOLUME RATE TOTAL
-------------- ------------ -------------
Interest-earning assets: (DOLLARS IN THOUSANDS)
Real Estate Loans $8,487 $(1,413) $7,074
Other loans 44 (22) 22
Mortgage-backed securities 1,521 (274) 1,247
Investment securities 202 (16) 186
Federal funds sold (43) (14) (57)
-------------- ------------ ------------
Total $10,211 $(1,739) $8,472
============== ============ =======
Interest-bearing liabilities:
NOW, Super Now and money market accounts $217 $81 $298
Savings accounts 353 (200) 153
Certificates of deposit 959 (1,066) (107)
Borrowed funds 5,377 (655) 4,722
-------------- ------------ ------------
Total 6,906 (1,840) 5,066
-------------- ------------ ------------
Net change in net interest income $3,305 $101 $3,406
============== ============ =======
NET INTEREST INCOME. Net interest income for the
three months ended September 30, 1999 increased $3.4
million to $16.0 million from $12.6 million during the
three months ended September 30, 1998. The increase was
attributable primarily to an increase of $538.8 million
in average interest-earning assets, coupled with an
increase of 2 basis points in average net interest
spread. Despite the increase in interest rate spread,
the net interest margin declined 14 basis points from
3.15% for the three months ended September 30, 1998 to
3.01% for the three months ended September 30, 1999.
The increase in interest rate spread resulted
primarily from a 31 basis point reduction in the
average cost of interest bearing liabilities, resulting
primarily from reduced rates on certificates of
deposit, due to the cessation of interest rate
promotions on certificate accounts offered during the
fiscal year ended June 30, 1998. In addition, the
increase in interest rate spread reflects the shift in
the overall percentage of interest earning assets from
investment and mortgage-backed securities into real
estate loans. Despite their recent declines in average
yield, real estate loans still earn a higher average
yield than either investment or mortgage-backed
securities. The narrowing of the interest rate margin
reflects the reduction in the ratio of interest earning
assets to interest bearing liabilities, resulting from
a reduced percentage of non-interest bearing
liabilities and equity to total liabilities and equity
from 112.79% to 108.78%. The narrowing interest rate
margin also reflects, in part, our continued capital
leverage strategy activities over the past twelve
months, as the interest rate differential between
assets and underlying liabilities under the capital
leverage strategy are significantly less than the
interest rate differential between our other interest-
earning assets and interest-bearing liabilities.
-16-
INTEREST INCOME. Interest income for the three
months ended September 30, 1999, was $38.1 million, an
increase of $8.5 million from $29.6 million during the
three months ended September 30, 1998. The increase in
interest income was primarily attributable to increased
interest income on real estate loans of $7.1 million
and on mortgage-backed securities of $1.2 million. The
increase in interest income on real estate loans was
attributable primarily to an increase of $431.5 million
in the average balance of real estate loans, resulting
from both $513.0 million of real estate loans
originated during the twelve-month period ended
September 30, 1999, and $192.3 million of real estate
loans acquired in connection with the acquisition of
Financial Bancorp, Inc., and its wholly-owned
subsidiary, Financial Federal Savings Bank, referred to
as the FIBC acquisition. The FIBC acquisition was
completed on January 21, 1999. The increase in interest
income on mortgage-backed securities was also
attributable primarily to an increase in the average
balance of $95.2 million, resulting from mortgage-
backed securities purchased in accordance with our
capital leverage strategy during the twelve months
ended September 30, 1999, and $37.8 million added in
the FIBC acquisition. Overall, the yield on interest-
earning assets decreased 30 basis points from 7.45%
during the three months ended September 30, 1998 to
7.15% during the three months ended September 30, 1999.
The decline was attributable primarily to a decrease of
47 basis points in the average yield on real estate
loans resulting primarily from continued competition in
the real estate lending market and the continued flat
yield curve environment during much of the past twelve
months. The decline also reflects declines in the
average yield on mortgage-backed securities of 23 basis
points and investment securities of 4 basis points due
to declines in overall interest rates which occurred
subsequent to September 30, 1998, but prior to July 1,
1999. While overall interest rates recently have
increased, their effect upon our results of operations
for the quarter ended September 30, 1999, was minimal.
Such effects will be recognized in upcoming quarters.
INTEREST EXPENSE. Interest expense increased $5.1
million, to $22.1 million during the three months ended
September 30, 1999, from $17.0 million during the three
months ended September 30, 1998. This increase resulted
primarily from increased interest expense of $4.7
million on borrowed funds, which resulted from an
increase in the average balance of $376.8 million
during the three months ended September 30, 1999
compared to the three months ended September 30, 1998.
The increase in the average balance of borrowed funds
resulted primarily from $175.9 million of borrowed
funds added during the twelve-month period ended
September 30, 1999, under the capital leverage
strategy. The increase in the average balance of
borrowed funds also reflects the growth of $202.5
million in FHLBNY advances during the period October 1,
1998 to September 30, 1999. The FHLBNY advances are
generally medium-term interest-bearing liabilities,
which are utilized to fund loan originations and
replace deposit outflows. In addition, the average cost
of interest-bearing liabilities decreased 32 basis
points to 4.47% during the three months ended September
30, 1999, from 4.79% during the three months ended
September 30, 1998, reflecting the decline in the
average cost of certificates of deposit and borrowed
funds of 66 basis points and 43 basis points,
respectively. The decline in the average cost of
borrowed funds resulted from reductions in overall
interest rates during the period January, 1999 through
March, 1999, while the reduction in the average cost of
certificates of deposit resulted from both lower
overall interest rates and the cessation of deposit
rate promotions that we maintained from July 1997 to
June 1998. While the decline in the average cost of
certificates of deposits and borrowed funds helped
reduce the average cost of interest-bearing liabilities
during the three months ended September 30, 1999, their
respective average balance increases of $71.3 million
and $376.8 million contributed to the increase in the
average cost of interest-bearing liabilities.
PROVISION FOR LOAN LOSSES. The provision for loan
losses was $60,000 during both the three months ended
September 30, 1999 and 1998, reflecting the continued
stability of non-performing loans and charge-offs. The
allowance for loan losses remained relatively constant
during the three months ended September 30, 1999, as
the provision of $60,000 during the period was offset
by net charge-offs of $48,000.
NON-INTEREST INCOME. Non-interest income increased
$1.4 million to $2.7 million during the three months
ended September 30, 1999, from $1.3 million during the
three months ended September 30, 1998.
-17-
Service charges
and fees increased $433,000 due primarily to increased
service fees and charges on deposits of $321,000,
resulting primarily from adjustments in our deposit fee
and service charges and the addition of the five
branches acquired from FIBC. Other income increased
$1.1 million due primarily to increased loan prepayment
penalties of $703,000, which resulted from increased
interest rate competition on new loans, and increased
income on FHLBNY capital stock of $322,000, due to an
increase in the balance of FHLBNY capital stock from
$16.0 million at September 30, 1998 to $35.4 million at
September 30, 1999. The increase in the average balance
of FHLBNY capital stock resulted from our increased
borrowings with the FHLBNY during this period.
Offsetting these increases was a decline in the gains
on sales and redemptions of securities and other assets
of $112,000, due primarily to a non-recurring gain of
$114,000 on the sale of an OREO property during the
three months ended September 30, 1998.
NON-INTEREST EXPENSE. Non-interest expense increased
$2.2 million, from $6.7 million during the three months
ended September 30, 1998, to $8.9 million during the
three months ended September 30, 1999. The increase in
non-interest expense reflects increases of $626,000
related to salaries and benefits expense, $377,000
related to occupancy and equipment expense, $121,000
related to data processing costs, $553,000 related to
goodwill amortization, and $489,000 related to other
expenses.
A significant portion of the increase in salaries
and benefits, and occupancy and equipment expenses
resulted from the addition of new employees, property
and equipment in the FIBC acquisition. The remaining
salary and benefit expense increase reflects base
salary and staff increases over the past twelve months.
The remaining increase in occupancy and equipment
expense reflects non-recurring real estate tax refunds
of $144,000 on branch properties which were recorded as
a reduction of occupancy and equipment expense during
the quarter ended September 30, 1998.
Increased data processing costs of $121,000 resulted
from additional systems activity related to growth in
both loan activity due to originations over the past
twelve months and deposit activity related to the
acquisition of the five branches from FIBC.
The increase in goodwill expense of $553,000
resulted from additional goodwill of $44.2 million due
to the FIBC acquisition. The increase in other
expenses resulted primarily from $206,000 in core
deposit premium amortization added in the FIBC
acquisition, increased supplies, postage and telephone
expenses associated with operations of the branches
acquired from FIBC, and increased advertising expenses
associated with recent customer promotions.
INCOME TAX EXPENSE. Income tax expense increased $1.0
million, or 33%, during the quarter ended September 30, 1999
compared to the quarter ended September 30, 1998, due
primarily to the increase of $2.6 million, or 37%, in pre-tax
income during the same period. Our effective tax rate
declined slightly from 43.9% to 42.8% during this period due
to additional tax benefits associated with activities of
subsidiary companies.
THE YEAR 2000 PROBLEM
The "Year 2000 Problem" centers upon the inability
of computer systems to recognize the year 2000. Many
existing computer programs and systems were originally
programmed with six digit dates that provided only two
digits to identify the calendar year in the date field,
without considering the upcoming change in the century.
With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather
than the year 2000. Like most financial providers, we
may be significantly affected by the Year 2000 Problem
due to the nature of financial information. Software,
hardware and equipment both within and outside our
direct control and with whom we electronically or
operationally interfaces (e.g., third party vendors
providing data processing, information system
management, maintenance of computer systems, and credit
bureau information) are likely to be affected.
Furthermore, if computer systems are not adequately
changed to identify the year 2000, many computer applications
-18-
could fail or create erroneous results. As
a result, many calculations which rely upon the date
field information, such as interest, payment or due
dates and other operating functions, will generate
results which could be significantly misstated, and we
could experience a temporary inability to process
transactions, send invoices or engage in similar normal
business activities. In addition, under certain
circumstances, failure to adequately address the Year
2000 Problem could adversely affect the viability of
our suppliers and creditors and the creditworthiness of
our borrowers. Thus, if not adequately addressed, the
Year 2000 Problem could result in a significant adverse
impact upon our products, services and competitive
condition and therefore, its results of operations and
could be deemed to imperil our safety and soundness.
There have been a small, but increasing, number of
lawsuits filed against corporations regarding the Year
2000 Problem and their compliance efforts, many of
which remain unresolved, have been dismissed or settled
out of court without a final court determination as to
the substantive issues.
The OTS, our primary federal bank regulatory agency,
along with the other federal bank regulatory agencies
has published substantive guidance on the Year 2000
Problem and has included year 2000 compliance as a
substantive area of examination for both regularly
scheduled and special bank examinations. These
publications, in addition to providing guidance as to
examination criteria, have outlined requirements for
creation and implementation of a compliance plan and
target dates for testing and implementing corrective
action, as discussed below. As a result of the
oversight by and authority vested in the federal bank
regulatory agencies, a financial institution that does
not become year 2000 compliant could become subject to
administrative remedies similar to those imposed on
financial institutions otherwise found not to be
operating in a safe and sound manner, including
remedies available under prompt correction active
regulations.
We have developed and have implemented a Year 2000
Project Plan (the "Plan") to address the Year 2000
Problem and its effects on us. The Plan includes five
components which address issues involving awareness,
assessment, renovation, validation and implementation.
We have completed all phases of the Plan. During the
awareness and assessment phases of the Plan, we
inventoried all material information systems and
reviewed them for year 2000 compliance. Among the
systems reviewed were computer hardware and systems
software, applications software and communications
hardware and software as well as embedded or automated
devices. As noted below, this review included both
internal systems and those of third party vendors which
provide systems such as retail deposit processing, loan
origination processing, loan servicing and general
ledger and accounting systems and software. We have
completed testing of core mission critical internal
systems, both internally and externally supplied
systems and have completed all renovation consistent
with regulatory requirements. We have additionally
completed testing of its mission critical systems, and
its customer systems. We will continue to test,
renovate and validate all such systems. We agreed to
use its facilities as a test site for its major retail
deposit processor allowing us additional opportunity to
test and stress such system.
As part of the Plan, we have had formal
communications with all of our significant suppliers to
determine the extent to which we are vulnerable to
those third parties' failure to remediate their own
Year 2000 Problem and has been following the progress
of those vendors with their year 2000 compliance
status. We presently believe that, modifications to
existing software and conversions to new software and
hardware where necessary have mitigated the Year 2000
Problem without causing a material adverse impact on
our operations. At this time, we believe most of our
hardware and software systems to be year 2000
compliant, tested and operational. However, if such
modifications and conversions were not made or
completed accurately, the Year 2000 Problem could have
an adverse impact on our operations.
Despite our best efforts to ensure year 2000
compliance, it is possible that one or more of our
internal or external systems may fail to operate. In
the event that system failures occur related to the
Year 2000
-19-
Problem, we have revised contingency plans,
which involve, among other actions, utilization of an
alternate service provider or alternate products
available through the current vendor. We are currently
revising our contingency plan to specifically address
other potential business continuance issues related to
the Year 2000 Problem such as general utility failures.
The revised contingency was approved by our Board of
Directors on October 14, 1999.
We have reviewed our customer base to determine
whether they pose significant year 2000 risks. A
portion of our customer base is comprised of
individuals who utilize our services for personal,
household or consumer uses. Individually, such
customers are not likely to pose significant year 2000
risks directly. The remaining portion of our customer
base are landlords who manage apartment buildings
throughout our principal lending area. We have
maintained formal communications with landlords who
possess significant outstanding borrowings in order to
determine the extent to which we are vulnerable to
failure, by these landlords, to remediate their own
Year 2000 Problem. We have been monitoring the
progress of these borrowers with their year 2000
compliance status and is comfortable that many of its
large borrowers are addressing the Year 2000 Problem.
Should a significant number of borrowers encounter
failures related to the year 2000, such failures could
result in a material adverse impact upon the our
earnings. We will continue to monitor the status of
year 2000 Compliance amongst these borrowers in order
to ensure that any adverse impact which may occur from
potential year 2000 failures is minimized. It is not
possible at this time to gauge the indirect risks which
could be faced if employers, or other business entities
from which these significant borrowers derive a
substantial portion of their cash flows, encounter
unresolved Year 2000 issues.
Additionally, public concerns over the Year 2000
Problem could adversely impact our deposit flows near
the end of 1999. Although we have made every effort to
inform its deposit customers of the efforts taken in
order to ensure that our deposit computer systems will
not be adversely effected by the Year 2000 Problem,
there still exists a likelihood that some customers
will remove their deposit funds as a precautionary
measure. While we believe that deposit outflows related
solely to the Year 2000 Problem will likely be both
minimal and short-term in nature, we have planned for
potential alternative funding sources in the event that
such deposit outflows occur.
Monitoring and managing the year 2000 project has
resulted in additional direct and indirect costs to us.
Direct costs include potential charges by third party
software vendors for product enhancements, costs
involved in testing software products for year 2000
compliance, and any resulting costs for developing and
implementing contingency plans for critical software
products which are not enhanced. Indirect costs
principally consist of the time devoted by existing
employees in monitoring software vendor progress,
testing enhanced software products and implementing any
necessary contingency plans. We estimate that total
costs related to the Year 2000 Problem from start to
completion will not exceed $100,000. Both direct and
indirect costs of addressing the Year 2000 Problem will
be charged to earnings as incurred. To date, virtually
all of the total estimated costs associated with the
Year 2000 Problem have already been expensed.
IMPACT OF PROPOSED LEGISLATION
The U.S. Congress recently passed legislation
intended to modernize the financial services industry
by establishing a comprehensive framework to permit
affiliations among commercial banks, insurance
companies and other financial service providers. The
legislation is being forwarded to the President for his
approval. Generally, the legislation would (i) repeal
the historical restrictions and eliminate many federal
and state law barriers to affiliations among banks and
securities firms , insurance companies and other
financial service providers, (ii) provide a uniform
framework for the activities of banks, savings
institutions and their holding companies, (iii) broaden
the activities that may be conducted by national banks
and banking subsidiaries of bank holding companies,
(iv) provide an enhanced framework for protecting the
privacy of consumer's information, (v) adopt a number of
-20-
provisions related to the capitalization,
membership, corporate governance and other measures
designed to modernize the Federal Home Loan Bank
system, (vi) modify the laws governing the
implementation of the Community Reinvestment Act and
(vii) address a variety of other legal and regulatory
issues affecting both day-to-day operations and long-
term activities of financial institutions, including
the functional regulation of bank securities
activities.
In particular, the pending legislation would
restrict certain of the powers that unitary savings and
loan association holding companies currently have.
Unitary savings and loan holding companies that are
"grandfathered," I.E., became a unitary savings and
loan holding company pursuant to an application filed
with the OTS before May 4, 1999, would retain their
authority under current law. All other savings and
loan holding companies would be limited to financially
related activities permissible for bank holding
companies, as defined under the new law. The proposed
legislation would also prohibit non-financial companies
from acquiring savings and loan association holding
companies.
Bank holding companies would be permitted to
engage in a wider variety of financial activities than
permitted under current law, particularly with respect
to insurance and securities activities. In addition, in
a change from current law, bank holding companies will
be in a position to be owned, controlled or acquired by
any company engaged in financially related activities.
We do not believe that the proposed legislation,
as publicly reported, would have a material adverse
affect upon our operations in the near term. However,
to the extent the legislation permits banks, securities
firms and insurance companies to affiliate, the
financial services industry may experience further
consolidation. This could result in a growing number
of larger financial institutions that offer a wider
variety of financial services than we currently offer
and that can aggressively compete in the markets we
currently serve.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
Quantitative and qualitative disclosure about market
risk is presented at June 30, 1999 in Exhibit 13.1 to
our Annual Report on Form 10-K, filed with the
Securities and Exchange Commission on September 28,
1999. There have been no material changes in our
market risk at September 30, 1999 compared to June 30,
1999. The following is an update of the discussion
provided therein:
GENERAL. Our largest component of market risk
continues to be interest rate risk. Virtually all of
this risk continues to reside at the Bank level. The
Bank still is not subject to foreign currency exchange
or commodity price risk. At September 30, 1999, we
owned no trading assets, nor did we utilize hedging
transactions such as interest rate swaps and caps.
ASSETS, DEPOSIT LIABILITIES AND WHOLESALE FUNDS.
There has been no material change in the composition of
assets, deposit liabilities or wholesale funds from
June 30, 1999 to September 30, 1999.
GAP ANALYSIS. The one-year and five-year cumulative
interest sensitivity gap as a percentage of total
assets still fall within 2% of their levels at June 30,
1999 utilizing the same assumptions as at June 30,
1999.
INTEREST RATE RISK COMPLIANCE. We continue to
monitor the impact of interest rate volatility upon net
interest income and net portfolio value in the same
manner as at June 30, 1999. There have been no changes
in our board approved limits of acceptable variance in
net interest income and net portfolio value at
September 30, 1999 compared to June 30, 1999, and the
projected changes continue to fall within the board
approved limits at all levels of potential interest
rate volatility.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various legal actions arising in the
ordinary course of its business which, in the
aggregate, involve amounts which are believed to be
immaterial to our financial condition and results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(e) EXHIBITS
Exhibit 11. Statement Re: Computation of
Per Share Earnings
Exhibit 27. Financial Data Schedule
(included only with EDGAR
filing).
(B) REPORTS ON FORM 8-K
None.
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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 Community Bancshares, Inc.
Dated: November 12, 1999 /s/ VINCENT F. PALAGIANO
By: ----------------------------------------
Vincent F. Palagiano
Chairman of the Board and Chief Executive
Officer
/s/ KENNETH J. MAHON
Dated: November 12, 1999 By: ----------------------------------------
Kenneth J. Mahon
Executive Vice President and Chief
Financial Officer