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, 1998
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, 1998
$.01 Par Value 11,596,508
<PAGE>
-2-
PART I - FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Statements of Condition at September 30, 1998
(Unaudited) and June 30, 1998 3
Consolidated Statements of Operations for the Three months
Ended September 30, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Changes in Stockholders' Equity
for the Three months Ended September 30, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows for the Three months
Ended September 30, 1998 and 1997 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-21
Item 3 Quantitative and Qualitative Disclosure About Market Risk 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
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.
<PAGE>
-3-
DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
<S> <C> <C>
AT SEPTEMBER 30,
1998 AT JUNE 30,
(UNAUDITED) 1998
------------------- ---------------
ASSETS:
Cash and due from banks $13,000 $16,266
Investment securities held to maturity (estimated market value of $65,893
and $78,593 at September 30, 1998 and June 30, 1998, respectively) 65,093 78,091
Investment securities available for sale:
Bonds and notes (amortized cost of $82,530 and $72,715 at September 30,
1998 and June 30, 1998, respectively) 84,067 73,031
Marketable equity securities (historical cost of $8,902 and $10,425 at
September 30, 1998 and June 30, 1998, respectively) 9,654 12,675
Mortgage backed securities held to maturity (estimated market value of
$40,951 and $47,443 at September 30, 1998 and June 30, 1998, respectively) 40,113 46,714
Mortgage backed securities available for sale (amortized cost of $415,947
and $361,372 at September 30, 1998 and June 30, 1998, respectively) 420,539 363,875
Federal funds sold 24,732 9,329
Loans:
Real estate 1,020,002 943,864
Other loans 5,647 5,716
Less: Allowance for loan losses (11,991) (12,075)
------------------- ---------------
Total loans, net 1,013,658 937,505
------------------- ---------------
Loans held for sale - 541
Premises and fixed assets 10,810 10,742
Federal Home Loan Bank of New York Capital Stock 15,966 10,754
Other real estate owned, net 536 825
Goodwill 23,427 24,028
Receivable for securities sold - 18,008
Other assets 22,062 21,542
------------------- ---------------
TOTAL ASSETS $1,743,657 $1,623,926
=================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Due to depositors $1,025,135 $1,038,342
Escrow and other deposits 16,787 15,395
Securities sold under agreements to repurchase 306,442 256,601
Federal Home Loan Bank of New York advances 167,500 103,505
Payable for securities purchased 30,881 12,062
Accrued postretirement benefit obligation 2,738 2,721
Other liabilities 14,100 8,951
------------------- ---------------
TOTAL LIABILITIES 1,563,583 1,437,577
------------------- ---------------
STOCKHOLDERS' EQUITY:
Preferred stock ($0.01 par, 9,000,000 shares authorized,
none outstanding at September 30, 1998 and June 30, 1998) - -
Common stock ($0.01 par, 45,000,000 shares authorized, 14,551,100 shares
issued at September 30, 1998 and June 30, 1998, respectively, and 11,714,008 shares
and 12,176,513 shares outstanding at September 30, 1998 and June 30, 1998,
respectively) 145 145
Additional paid-in capital 143,676 143,322
Retained earnings (substantially restricted) 108,015 105,158
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Unrealized gain on securities availble for sale, net of deferred taxes 3,880 2,763
LESS:
Unallocated common stock of Employee Stock Ownership Plan (8,884) (9,175)
Unearned common stock of Recognition and Retention Plan (7,149) (6,963)
Common stock held by Benefit Maintenance Plan (831) (431)
Treasury stock, at cost (2,837,092 shares and 2,374,587 shares at
September 30, 1998 and June 30, 1998, respewctively) (58,778) (48,470)
------------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 180,074 186,349
------------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,743,657 $1,623,926
=================== ===============
</TABLE>
See notes to consolidated financial statements
<PAGE>
-4-
DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
<S> <C> <C>
1998 1997
------------ ------------
INTEREST INCOME:
Loans secured by real estate $19,929 $16,269
Other loans 127 129
Investment securities 2,399 2,684
Mortgage-backed securities 6,852 5,193
Federal funds sold 276 453
------------ ------------
TOTAL INTEREST INCOME 29,583 24,728
------------ ------------
INTEREST EXPENSE:
Deposits and escrow 10,880 10,332
Borrowed funds 6,103 2,370
------------ ------------
TOTAL INTEREST EXPENSE 16,983 12,702
------------ ------------
NET INTEREST INCOME 12,600 12,026
PROVISION FOR LOAN LOSSES 60 525
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 12,540 11,501
------------ ------------
NON-INTEREST INCOME:
Service charges and other fees 543 634
Net gain on sales and redemptions of securities and
other assets 244 15
Net gain on sales of loans 18 18
Other 449 314
------------ ------------
TOTAL NON-INTEREST INCOME 1,254 981
------------ ------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,796 2,587
ESOP and RRP compensation expense 1,131 1,206
Occupancy and equipment 560 742
FEDERAL DEPOSIT INSURANCE PREMIUMS 89 86
DATA PROCESSING COSTS 311 280
(CREDIT) PROVISION FOR LOSSES ON OTHER REAL ESTATE OWNED (2) 55
GOODWILL AMORTIZATION 601 601
OTHER 1,206 1,189
------------ ------------
TOTAL NON-INTEREST EXPENSE 6,692 6,746
------------ ------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 7,102 5,736
INCOME TAX EXPENSE 3,119 2,898
------------ ------------
NET INCOME 3,983 2,838
============ ============
EARNINGS PER SHARE:
BASIC $0.38 $0.25
============ ============
DILUTED $0.35 $0.23
============ ============
STATEMENT OF COMPREHENSIVE INCOME:
Net Income $3,983 $2,838
Change in unrealized gain on securities available for sale, net of
deferred taxes 1,117 945
------------ ------------
Total comprehensive income $5,100 $3,783
============ ============
</TABLE>
See notes to consolidated financial statements
<PAGE>
-5-
DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 1998
---------------------------
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 143,322
Amortization of excess fair value over cost - ESOP stock 354
---------------------------
Balance at end of period 143,676
---------------------------
RETAINED EARNINGS:
Balance at beginning of period 105,158
Net income for the period 3,983
Cash dividends declared and paid (1,126)
---------------------------
Balance at end of period 108,015
---------------------------
UNREALIZED GAIN ON SECURITIES AVAILABLE FOR SALE, NET:
Balance at beginning of period 2,763
Change in unrealized gain on securities available for sale
during the period, net of deferred taxes 1,117
---------------------------
Balance at end of period $3,880
---------------------------
EMPLOYEE STOCK OWNERSHIP PLAN:
Balance at beginning of period (9,175)
Amortization of earned portion of ESOP stock 291
---------------------------
Balance at end of period (8,884)
---------------------------
RECOGNITION AND RETENTION PLAN:
Balance at beginning of period (6,963)
Common stock acquired by RRP (672)
Amortization of earned portion of RRP stock 486
---------------------------
Balance at end of period (7,149)
---------------------------
BENEFIT MAINTENANCE PLAN:
Balance at beginning of period (6,963)
Common stock acquired by RRP (672)
Amortization of earned portion of RRP stock 486
---------------------------
Balance at end of period (7,149)
---------------------------
TREASURY STOCK:
Balance at beginning of period (48,470)
Purchase of 468,000 shares, at cost (10,308)
---------------------------
Balance at end of period (58,778)
---------------------------
</TABLE>
See notes to consolidated financial statements
<PAGE>
-6-
DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
<S> <C> <C>
1998 1997
-------------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES: (In THOUSANDS)
Net Income $3,983 $2,838
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net (gain) loss on investment and mortgage backed securities sold (138) 11
Net gain on investment and mortgage backed securities called - (9)
Net gain on sale of loans held for sale (18) (18)
Net depreciation and amortization (accretion) 331 260
ESOP and RRP compensation expense 1,131 1,206
Provision for loan losses 60 525
Goodwill amortization 601 601
Decrease (increase) in loans held for sale 559 117
Increase in other assets and other real estate owned (927) (459)
Increase in accrued postretirement benefit obligation 17 43
Decrease in receivable for securities sold 18,008 -
Increase in payable for securities purchased 18,819 -
Increase in other liabilities 5,147 1,653
-------------------- --------------------
Net cash provided by operating activities 47,573 6,768
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in Federal funds sold (15,403) (18,658)
Proceeds from maturities of investment securities held to maturity 1,000 2,215
Proceeds from maturities of investment securities available for sale 500 3,500
Proceeds from calls of investment securities held to maturity 12,500 17,500
Proceeds from calls of investment securities available for sale - 2,000
Proceeds from sales of investment securities available for sale 7,599 5,023
Proceeds from sales of mortgage backed securities available for sale - 12,382
Purchases of investment securities held to maturity - (26,574)
Purchases of investment securities available for sale (16,794) (4,440)
Purchases of mortgage backed securities held to maturity - -
Purchases of mortgage backed securities available for sale (81,282) (30,014)
Principal collected on mortgage backed securities held to maturity 6,580 3,824
Principal collected on mortgage backed securities available for sale 26,633 7,544
Net increase in loans (76,213) (50,357)
Cash disbursed in acquisition of Conestoga Bancorp, net of cash acquired - -
Purchases of fixed assets (264) (87)
Purchase of Federal Home Loan Bank stock (5,212) -
-------------------- --------------------
Net cash used in investing activities (140,356) (76,142)
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in due to depositors (13,205) 34,313
Net increase in escrow and other deposits 1,392 2,278
Proceeds from Federal Home Loan Bank of New York Advances 63,995 12,795
Increase in securities sold under agreements to repurchase 49,841 23,186
Cash dividends paid (1,126) -
Purchase of common stock by the Recognition and Retention Plan - -
Purchase of common stock by Benefit Maintenance Plan and RRP (1,072) -
Purchase of treasury stock (10,308) (8,928)
------------------- ---------------
Net Cash provided by financing activities 89,517 63,644
------------------- ----------------
DECREASE IN CASH AND DUE FROM BANKS (3,266) (5,730)
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 16,266 19,198
------------------- ----------------
CASH AND DUE FROM BANKS, END OF PERIOD $13,000 $13,468
=================== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes 682 1,674
=================== ================
Cash paid for interest 16,462 12,486
=================== =================
Transfer of loans to Other real estate owned 27 338
=================== =================
Change in unrealized gain on available for sale securities, net of deferred taxes 1,117 945
=================== =================
</TABLE>
See Notes to consolidated financial statements
<PAGE>
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. NATURE OF OPERATIONS
Dime Community Bancshares, Inc. (the "Company") is a Delaware corporation
organized in December, 1995 at the direction of the Board of Directors of The
Dime Savings Bank of Williamsburgh (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 form (the "Conversion") on June 26, 1996, in exchange for $76.4
million (54%) of the net proceeds of the offering of 14,547,500 shares of the
Company's common stock (the "Offering"). Presently, the only significant
assets of the Company are the capital stock of the Bank, the Company's loan to
the ESOP, and short-term investment securities.
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. The Bank and the Company maintain their headquarters in the
Williamsburgh section of the borough of Brooklyn. Fourteen additional offices
of the Bank are located in the boroughs of Brooklyn, Queens, and the Bronx, and
in Nassau County.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, 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, 1998, the results of operations for the three-
month periods ended September 30, 1998 and 1997, cash flows for the three
months ended September 30, 1998 and 1997, and changes in stockholders' equity
for the three months ended September 30, 1998. The results of operations for
the three-month periods ended September 30, 1998, 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 the
audited consolidated financial statements as of and for the year ended June 30,
1998 and notes thereto of the Company.
3. TREASURY STOCK
During the three months ended September 30, 1998, the Company repurchased
462,505 shares of its common stock into treasury. The average price of the
treasury shares acquired was $22.29 per share, and all shares have been
recorded at the acquisition cost.
<PAGE>
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. EARNINGS PER SHARE
The Company recently adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share'' ("SFAS 128"). SFAS 128 establishes new standards for
computing and presenting earnings per share. SFAS 128 is applicable to all
U.S. entities with publicly held common stock or potential common
stock, and requires disclosure of basic earnings per share and diluted earnings
per share, for entities with complex capital structures, on the face of the
income statement, along with a reconciliation of the numerator and denominator
of basic and diluted earnings per share. SFAS 128 replaces APB Opinion No. 15
("APB 15"), issued by the American Institute of Certified Public Accountants in
1971, as the authoritative guidance for calculation and disclosure of earnings
per share, but does not amend the provisions of SOP 93-6 related to the
inclusion of allocated and unallocated Employee Stock Ownership Plan ("ESOP")
shares when calculating average shares outstanding. As a result, consistent
with the calculations of average shares outstanding performed under APB 15,
unallocated ESOP shares are not included in average shares outstanding under
SFAS 128. As required by SFAS 128, all prior periods were restated.
2. COMPREHENSIVE INCOME
The Company recently adopted Statement of Financial Accounting Standards No.
130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires all
items that are components of "comprehensive income" to be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income is defined as "the change in
equity, or net assets, of a business enterprise during a period from which
transactions and other events and circumstances from non-owner sources." It
includes all changes in equity during a period except those resulting from
investments by owners and distribution to owners. The Company adopted the
provisions of SFAS 130 during the quarter ended September 30, 1998, and as such
was required to (a) classify items of other comprehensive income by their
nature in a financial statement; (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial condition, and (c)
reclassify prior periods presented. As the requirements of SFAS 130 are
disclosure only, its implementation had no impact upon the Company's financial
condition or results of operations.
<PAGE>
-9-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Dime Community Bancshares, Inc. (the "Company") is a Delaware corporation
and parent corporation of The Dime Savings Bank of Williamsburgh (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 (the "Conversion"). In connection with
the Conversion, the Company issued 14,547,500 shares (par value $0.01) of
common stock at a price of $10.00 per share. The Company had no operations
prior to June 26, 1996.
PROPOSED ACQUISITION OF FINANCIAL BANCORP, INC.
On July 18, 1998, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Financial Bancorp, Inc. ("Financial Bancorp"),
pursuant to which Financial Bancorp will be merged into the Company. The
Merger Agreement provides that each outstanding share of common stock, par
value $0.01 per share, of Financial Bancorp ("Financial Bancorp Common Stock")
will be converted into the right to receive, at the election of the holder
thereof, either shares of common stock, par value $0.01 per share, of the
Company ("Company Common Stock") or cash subject to the election, allocation
and proration procedures set forth in the Merger Agreement. If the Company's
average closing price for the ten-day period ending ten days prior to the
anticipated closing of the Merger (the "Average Closing Price") is between
$22.95 and $31.05, then the value of the consideration per share to be received
by Financial Bancorp stockholders, whether in the form of stock or cash, will
be $40.50, and 50% of the total consideration to be paid to Financial Bancorp's
stockholders shall consist of Company Common Stock and 50% shall consist of
cash. If the Company's Average Closing Price is greater than $31.05 or less
than $22.95, then the value of the consideration per share to be received by
Financial Bancorp stockholders in the Merger will be adjusted, and the
percentage of the total consideration consisting of the Company's Common Stock
and cash will change, all as set forth in the Merger Agreement. If the Company
Common Stock has a market value during the pricing period of less than or
equal to $20.25, then Financial Bancorp has the right to terminate the Merger
Agreement unless the Company agrees to increase the per share consideration to
Financial Bancorp's stockholders to at least $38.12.
The Financial Acquisition is subject to (i) approval by the stockholders of
Financial Bancorp, (ii) approval of the OTS and (iii) satisfaction or waiver of
certain other conditions. Financial Bancorp is a unitary savings bank holding
company for its wholly owned subsidiary, Financial Federal, a federal savings
bank.
<PAGE>
-10-
SELECTED FINANCIAL HIGHLIGHTS AND OTHER DATA
(Dollars In thousands except per share amounts)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------
<S> <C> <C>
1998 1997
--------------------- -------------------
PERFORMANCE AND OTHER SELECTED RATIOS:
Reported Return on Average Assets 0.96% 0.84%
Reported Return on Average Stockholders' Equity 8.74 6.07
Reported Return on Average Tangible Stockholders' Equity 10.26 7.07
Average Interest Rate Spread 2.66 3.20
Net Interest Margin 3.15 3.76
Non-interest Expense to Average Assets <F1> 1.47 1.83
Efficiency Ratio <F1> 44.81 47.36
Effective Tax Rate 43.92 50.52
Tangible Equity to Total Tangible Assets 8.90 11.65
Loans/Earning Assets 60.84 60.47
Loans/Deposits 100.05 80.26
CASH EARNINGS DATA:
Cash Earnings $5,357 $4,241
Cash Return on Average Assets 1.29% 1.26%
Cash Return on Average Tangible Equity 13.80 10.57
Cash Non-interest Expense to Average Assets <F2> 1.20 1.47
Cash Efficiency Ratio <F2> 36.49 38.07
PER SHARE DATA:
Reported EPS (Diluted) $0.35 $0.23
Cash EPS (Diluted) 0.47 0.35
Stated Book Value 15.37 14.81
Tangible Book Value 13.04 12.52
BALANCE SHEET AVERAGES:
Average Loans $989,415 $778,331
Average Assets 1,656,446 1,344,122
Average Earning Assets 1,589,245 1,278,639
Average Deposits 1,030,360 978,367
AVERAGE EQUITY 182,272 186,945
AVERAGE TANGIBLE EQUITY 155,236 160,528
ASSET QUALITY SUMMARY:
Net charge-offs $144 $101
Nonperforming Loans 1,225 2,501
Nonperforming Assets/Total Assets 0.10% 0.26%
Allowance for Loan Loss/Total Loans 1.17 1.39
Allowance for Loan Loss/Nonperforming Loans 978.86 445.82
REGULATORY CAPITAL RATIOS:
Tangible Capital 7.83% 9.62%
Core capital 7.83 9.62
Risk-based capital 15.84 19.44
<FN>
<F1> In calculating these ratios, non-interest expense excludes goodwill
amortization. The actual efficiency ratio and ratio of non-interest
expense to average assets were 49.23% and 1.62%, respectively, for the
three months ended September 30, 1998, 52.00% and 2.01%, respectively,
for the three months ended September 30, 1997.
<F2> In calculating these ratios, non-interest expense excludes non-cash
expenses related to goodwill amortization and amortization costs related to
stock benefit plans.
</TABLE>
<PAGE>
-11-
LIQUIDITY AND CAPITAL RESOURCES
The Company's 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.
The primary investing activities of the Company are the origination of
multi-family and one-to-four-family mortgage loans, and the purchase of
mortgage-backed and other securities. During the three months ended September
30, 1998, the Bank's loan originations totaled $126.0 million compared to
$76.1 million for the three months ended September 30, 1997. Purchases of
mortgage-backed and other securities totaled $98.1 million for the three months
ended September 30, 1998 compared to $61.0 million for the three months ended
September 30, 1997. These activities were funded primarily by 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 loans and
mortgage-backed securities totaled $83.4 million during the three months ended
September 30, 1998, compared to $35.4 million for the three months ended
September 30, 1997. Maturities and calls of investment securities totaled
$14.0 million and $25.2 million, respectively, during the three months ended
September 30, 1998 and 1997. Loan and security sales, which totaled $9.0
million and $18.3 million, respectively, during the three months ended
September 30, 1998 and 1997, provided some additional cash flows.
Deposits decreased $13.2 million during the three months ended September 30,
1998, compared to an increase of $34.3 million during the three months ended
September 30, 1997. 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, 1998 totaled $442.3 million. Based upon the Company's
current pricing strategy and deposit retention experience, management believes
that a significant portion of such deposits will remain with the Company. Net
borrowings increased $113.8 million during the three months ended September 30,
1998, with $64.0 million of this growth experienced in FHLBNY advances.
In the normal course of its business, the Company routinely enters into
various commitments, primarily relating to the origination and purchase of
loans and the leasing of certain office facilities. The Company anticipates
that it will have sufficient funds available to meet its current commitments,
including its commitments under the Merger Agreement, in the normal course of
its business. To the extent the Company's cash flows described above exceed the
need for loan originations, the Company expects to use such funds to meet its
commitments with respect to the Merger, including the payment of the cash
component of the merger consideration. FHLBNY advances would be used to fund
the remainder of the commitments pursuant to the Merger Agreement, if any.
Stockholders' equity declined $6.3 million during the three months ended
September 30, 1998. During the three months ended September 30, 1998, the
Company repurchased 462,505 shares of its common stock into treasury (the
"Treasury Repurchases"). The aggregate cost of the Treasury Repurchases was
$10.3 million, at an average price of $22.29 per share. Offsetting the impact
of the Treasury Repurchases was net income of $4.0 million and amortization of
the Company's Employee Stock Ownership Plan ("ESOP") and Recognition and
Retention Plan ("RRP") of $1.1 million during the three months ended September
30, 1998.
During the three months ended September 30, 1998, the Company declared and paid
cash dividends totaling $1.1 million, or $0.10 per outstanding common share on
the respective dates of record. On
<PAGE>
-12-
October 8, 1998, the Company declared a cash dividend of $0.12 per
common share to all shareholders of record on October 23, 1998. This dividend
was paid on November 5, 1998.
The Bank is required to maintain a minimum average daily balance of liquid
assets as defined by Office of Thrift Supervision (the "OTS") regulations. The
minimum required liquidity ratio is currently 4.0%. At September 30, 1998, the
Bank's liquidity ratio was 12.7%. 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.
The Bank monitors its liquidity position on a daily basis. Excess short-term
liquidity is invested in overnight federal funds sales and various money market
investments. At September 30, 1998, the Bank had $319.3 million in short and
medium term borrowings outstanding at the FHLBNY, comprised of outstanding
Advances of $167.5 million and securities sold under agreement to repurchase of
$151.8 million. In the event that the Bank should require funds beyond its
ability to generate them internally, additional sources of funds are available
through the use of the Bank's current $319.3 million borrowing limit at the
FHLBNY which may be increased through the Bank's purchase of additional FHLBNY
capital stock.
At September 30, 1998, the Bank was in compliance with all applicable
regulatory capital requirements. Tangible capital totaled $131.2 million, or
7.83% of total tangible assets, and exceeded the 1.50% regulatory requirement;
core capital, at 7.83% of adjusted assets, exceeded the required 3.0%
regulatory minimum; and total risk-based capital, at 15.84% of risk weighted
assets, exceeded the 8.0% regulatory minimum. In addition, at September 30,
1998, 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 $1.2 million at September 30, 1998, as compared to $884,000
at June 30, 1998. The increase resulted from one multi-family and
underlying cooperative loan with an aggregate principal amount of $657,000 which
became 90 days past due during the quarter and for which the Company recorded
a charge-off of $92,000 during the quarter ended September 30, 1998. In
addition, the Bank had 33 loans totaling $501,000 delinquent 60-89 days at
September 30, 1998, as compared to 33 such delinquent loans totaling $328,000
at June 30, 1998. Other than the one loan discussed above, 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"), the Company is
required to account for certain loan modifications or restructurings as
''troubled-debt restructurings.'' In general, the modification or restructuring
of a debt constitutes a troubled-debt restructuring if the Company, for
economic or legal reasons related to the borrower's financial difficulties,
grants a concession to the borrower that the Company would not otherwise
consider. Debt restructurings or loan modifications for a borrower do not
necessarily always constitute troubled-debt restructurings, however, and
troubled-debt restructurings do not necessarily result in non-accrual loans.
The Company had three loans classified as troubled-debt restructurings at
September 30, 1998, totaling $3.9 million, and all are currently performing
according to their restructured terms. The largest restructured debt, a $2.7
million loan secured by a mortgage on an underlying cooperative apartment
building located in Forest Hills, New York, was originated in 1987. The loan
was first restructured in 1988, and again in 1994. The current regulations of
the OTS require that troubled-debt restructurings remain classified as such
until either the loan is repaid or returns to its original terms. All three
troubled-debt restructurings as of September 30, 1998 are on accrual status as
they have been performing in accordance with the restructuring terms for over
one year.
Under GAAP, the Company 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
<PAGE>
-13-
value, the loan is considered to be impaired and a reserve is
established. The recorded investment in loans deemed impaired was
approximately $3.6 million as of September 30, 1998, compared to $3.1 million
at June 30, 1998, and the average balance of impaired loans was $3.4 million
for the three months ended September30, 1998 compared to $4.2 million for
the three months ended September 30, 1997. The impaired portion of these
loans is represented by specific reserves totaling $52,000 allocated within
the allowance for loan losses at September 30, 1998. At September 30, 1998,
one loan totaling $2.7 million, was deemed impaired for which no reserves
have been provided. This loan, which is included in troubled-debt
restructurings at September 30, 1998, has performed in accordance with the
provisions of the restructuring agreement signed in October, 1995. The loan
has been retained on accrual status at September 30, 1998. Generally, the
Company considers non-performing loans to be impaired loans. However,
at September 30, 1998, approximately $332,000 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 following table sets forth information regarding the Bank's non-
performing loans, non-performing assets, impaired loans and troubled-debt
restructurings at the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
AT SEPTEMBER 30, AT JUNE 30,
1998 1998
NON-PERFORMING LOANS: ------------------- ----------------
(Dollars In Thousands)
One- to four-family $258 $471
Multi-family and underlying cooperative 893 236
Non-residential - -
Cooperative apartment 52 133
Other loans 22 44
------------------ ---------------
TOTAL NON-PERFORMING LOANS 1,225 884
TOTAL OREO 536 825
----------------- --------------
TOTAL NON-PERFORMING ASSETS $1,761 $1,709
================= ==============
TROUBLED-DEBT RESTRUCTURINGS $3,971 $3,971
TOTAL NON-PERFORMING ASSETS AND TROUBLED-DEBT 5,732 5,680
RESTRUCTURINGS
IMPAIRED LOANS 3,574 3,136
TOTAL NON-PERFORMING LOANS TO TOTAL LOANS 0.12% 0.09%
TOTAL IMPAIRED LOANS TO TOTAL LOANS 0.35 0.33
TOTAL NON-PERFORMING ASSETS TO TOTAL ASSETS 0.10 0.11
TOTAL NON-PERFORMING ASSETS AND TROUBLED-DEBT
RESTRUCTURINGS TO TOTAL ASSETS 0.33 0.35
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND JUNE 30, 1998
ASSETS. The Company's assets totaled $1.7 billion at September 30, 1998, an
increase of $119.7 million from total assets of $1.6 billion at June 30, 1998.
The growth in assets was experienced primarily
<PAGE>
-14-
in real estate loans and mortgage-backed securities available for sale,
which increased $76.2 million and $56.7 million, respectively. The increase in
real estate loans resulted primarily from originations of $126.0 million
during the quarter ended September 30, 1998, of which $122.1 million were
multi-family and underlying cooperative and non-residential loans. The increase
in mortgage backed securities available for sale resulted from purchases of
$81.2 million during the quarter, reflecting the continuation of the
Company's capital leverage strategy described in more detail below, offset by
principal repayments of $26.6 million. As of September 30, 1998, the total
purchases of mortgage-backed securities reflects $30.9 million of transactions
that had not been settled by September 30, 1998, but which settled in October,
1998.
Offsetting the increase in real estate loans and mortgage-backed securities
available for sale was the decline of $18.0 million in receivable for
securities sold, reflecting the settlement in July, 1998, of unsettled
securities sales transactions as of June 30, 1998.
LIABILITIES. Funding for the growth in real estate loans was obtained
primarily from increased FHLBNY advances of $64.0 million during the quarter.
Funding for the increase in mortgage-backed securities available for sale was
obtained primarily from increased securities sold under agreement to repurchase
transactions of $49.8 million. Deposits decreased $13.2 million to $1.025
billion at September 30, 1998 from $1.038 billion at June 30, 1998 due
primarily to the cessation of a deposit rate promotion that the Company
maintained from July, 1997 to June, 1998.
STOCKHOLDERS' EQUITY. Stockholders' equity declined $6.3 million during the
three months ended September 30, 1998. The decline was primarily attributable
to Treasury Repurchases of $10.3 million during the three months ended
September 30, 1998. Additionally, stockholders' equity was reduced during the
three months ended September 30, 1998 as a result of the Company's payment of
cash dividends of $1.1 million and purchases of the Company's common stock on
the open market by the Benefit Maintenance Plan and RRP of $1.1 million.
Offsetting these declines in stockholders' equity, was net income of $4.0
million, amortization of the Company's Stock Plans of $1.1 million, and an
increase of $1.1 million of the unrealized gain on investment and mortgage-
backed securities available for sale.
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 the Bank invests in high quality mortgage-backed securities
("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 the Company 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 the Board of Directors, aimed at enhancing profitability under
moderate levels of interest rate exposure.
COMPARISON OF THE OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997
GENERAL. Net income for the three months ended September 30, 1998, totaled
$4.0 million compared to $2.8 million during the three months ended September
30, 1997. The increase in net income resulted from an increase of $574,000 in
net interest income, a decline of $465,000 in the provision for loan losses, an
increase of $273,000 in non-interest income, and a decline in the Company's
effective tax rate from 50.5% for the three months ended September 30, 1997 to
43.9% for the three months ended September 30, 1998.
NET INTEREST INCOME. The discussion of net interest income for the three
months ended September 30, 1998 and 1997, presented below, should be read in
conjunction with the following table, which sets forth certain information
relating to the Company's consolidated statements of operations for the three
months
<PAGE>
-15-
ended September 30, 1998 and 1997, 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.
<PAGE>
-16-
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------
1998 1997
------------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
--------------- ----------- ------------- ------------- ---------- ----------
Assets: (DOLLARS IN THOUSANDS)
Interest-earning assets:
Real Estate Loans <F1> $983,880 $19,929 8.10% $772,837 $16,269 8.42%
Other loans 5,535 127 9.18 5,494 129 9.39
Mortgage-backed Securities <F2> 420,136 6,852 6.52 303,872 5,193 6.84
Investment securities <F2> 158,944 2,399 6.04 162,602 2,684 6.60
Federal funds sold 20,750 276 5.32 33,834 453 5.36
--------------- ----------- -------------- ----------
TOTAL INTEREST-EARNING ASSETS 1,589,245 $29,583 7.45% 1,278,639 $24,728 7.74%
--------------- =========== -------------- ==========
NON-INTEREST EARNING ASSETS 67,201 65,483
--------------- --------------
TOTAL ASSETS $1,656,446 $1,344,122
=============== ==============
LIABILITIES AND STOCKHOLDERS'
EQUITY:
INTEREST-BEARING LIABILITIES:
Now, Super Now and
Money Market Accounts $49,801 $292 2.33% $49,138 $291 2.35%
Savings accounts 338,093 1,921 2.25 340,604 1,981 2.31
Certificates of deposit 604,628 8,643 5.67 561,090 8,042 5.69
Mortgagors' escrow 4,791 24 1.99 3,664 18 1.95
Borrowed funds 411,770 6,103 5.88 156,568 2,370 6.01
--------------- ----------- -------------- ----------
TOTAL INTEREST-BEARING
LIABILITIES 1,409,083 $16,983 4.78% 1,111,064 $12,702 4.54%
--------------- =========== -------------- ==========
Checking accounts 37,838 27,535
OTHER NON-INTEREST-BEARING
LIABILITIES 27,253 18,578
--------------- --------------
TOTAL LIABILITIES 1,474,174 1,157,177
STOCKHOLDERS' EQUITY 182,272 186,945
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,656,446 $1,344,122
=============== ==============
NET INTEREST INCOME/ INTEREST RATE
SPREAD <F3> $12,600 2.66% $12,026 3.20%
=========== ==========
NET INTEREST-EARNING ASSETS/NET
INTEREST MARGIN <F4> $180,162 3.15% $167,575 3.76%
========= ==============
RATIO OF INTEREST-EARNING ASSETS
TO INTEREST-BEARING LIABILITIES 112.79% 115.08%
<FN>
<F1> In computing the average balance of loans, non-accrual loans have been included.
<F2> 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.
</TABLE>
<PAGE>
-17-
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1998
COMPARED TO
THREE MONTHS ENDED
SEPTEMBER 30, 1997
INCREASE/(DECREASE)
DUE TO
<S> <C> <C> <C>
VOLUME RATE TOTAL
-------------- ------------ -------------
Interest-earning assets: (DOLLARS IN THOUSANDS)
Real Estate Loans $4,361 $(701) $3,660
Other loans 1 (3) (2)
Mortgage-backed securities 1,945 (286) 1,659
Investment securities (59) (226) (285)
Federal funds sold (174) (3) (177)
-------------- ------------ ------------
Total $6,074 $(1,219) $4,855
============== ============ ============
Interest-bearing liabilities:
NOW, Super Now and money market accounts $4 $(3) $1
Savings accounts (12) (48) (60)
Certificates of deposit 627 (26) 601
Mortgagors' escrow 6 - 6
Borrowed funds 3,824 (91) 3,733
-------------- ------------ ------------
Total 4,449 (168) 4,281
-------------- ------------ ------------
Net change in net interest income $1,625 $(1,051) $574
============== ============ =============
</TABLE>
Net interest income for the three months ended September 30, 1998
increased $574,000 to $12.6 million from $12.0 million during the three
months ended September 30, 1997. The increase was attributable primarily
to an increase of $310.6 million in average interest earning assets, offset by
a decline in the net interest rate spread of 54 basis points. The net
interest margin declined 61 basis points from 3.76% for the three months ended
September 30, 1997 to 3.15% for the three months ended September 30, 1998.
The narrowing in spread and margin reflects in part the Company's exposure to
interest rate risk resulting from certain changes in the shape of the
yield curve (particularly a flattening or inversion of the yield curve) and
to differing indices upon which the yield on the Company's interest-earnings
assets and the cost of its interest-bearing liabilities are based. For example,
over the past two years the market has experienced a more significant
reduction in interest rates on long-term instruments as compared to the
reduction in interest rates on short-term instruments resulting in rates on
long-term instruments approximating (and in some cases, going below) the
rates on short-term instruments. More importantly, the spreads earned on the
rate differential between assets and the liabilities funding such assets have
narrowed more with respect to long-term assets as compared to short-term
assets. Since a larger percentage of the Company's assets are longer term,
the Company has experienced a continuous narrowing of spreads as well as a
negative impact on net interest income that has been more than offset by
the Company's growth in interest-earning assets. The narrowing of the
spread and margin also reflects the increase in borrowings under the capital
leverage program.
<PAGE>
-18-
INTEREST INCOME. Interest income for the three months ended September 30,
1998, was $29.6 million, an nrease of $4.9 million from $24.7 million during
the three months ended September 30, 1997. The increase in interest income was
attributable to increased interest income on real estate loans and
mortgage-backed securities of $3.7 million and $1.7 million, respectively.
The increase in interest income on real-estate loans was attributable primarily
to an increase of $211.0 million in the average balance of real estate loans,
resulting primarily from $371.9 million of real estate loans originated during
the period October 1, 1997 through September 30, 1998. The increases in
interest income on mortgage-backed securities were also attributable primarily
to an increase in average balances of $116.3 million, resulting from
$341.8 million in mortgage-backed securities purchased in accordance with
the Company's capital leverage program during the period October 1, 1997 to
September 30, 1998. Offsetting these increases to interest income was a
decrease in interest income on investment securities and federal funds
sold of $285,000 and $177,000, respectively, resulting from a decline in
the average balances of investment securities and federal funds sold of $3.7
million and $13.1 million, respectively. The decline in these average
balances resulted from the Company utilizing funds from matured investment
securities and federal funds sold to fund loan originations. Overall,
the yield on interest earning assets decreased 29 basis points from 7.74%
during the three months ended September 30, 1997 to 7.45% during the three
months ended September 30, 1998. The decline was attributable primarily to the
decrease of 32 basis points in average yield on real estate loans,
resulting from increased competition in the real estate lending market, and the
flattening of the yield curve. The decline also reflects declines in the
average yield on mortgage-backed securities and investment securities of 32
basis points and 56 basis points, respectively, also due to the flattening of
the yield curve.
INTEREST EXPENSE. Interest expense increased $4.2 million, to $16.9 million
during the three months ended September 30, 1998, from $12.7 million during the
three months ended September 30, 1997. This increase resulted primarily
from increased interest expense of $601,000 and $3.7 million on certificate
of deposit accounts and borrowed funds, respectively, which resulted
from increased average balances of $43.5 million and $255.2 million,
respectively during the three months ended September 30, 1998 compared to
the three months ended September 30, 1997. The increase in the average balance
on certificates of deposit resulted primarily from increased deposit flows
during the period July 1, 1997 to June 30, 1998, resulting from rate
promotions at slightly above market rates. The increase in the average
balance of borrowed funds resulted primarily from $206.9 million of
borrowed funds added during the period October 1, 1997 to September 30,
1998 under the capital leverage program. The increase in the average balance
of borrowed funds also reflects the Company's shift to FHLBNY advances, which
generally are medium term interest-bearing liabilities, to fund the
Company's loan originations. In addition to the growth in average
balances, the average cost of interest bearing liabilities increased 24 basis
points to 4.78% during the quarter ended September 30, 1998, from 4.54%
during the quarter ended eptember 30, 1997. The increase in the average cost
of interest bearing liabilities resulted from the increases in the average
balances of certificate of deposit accounts and borrowed funds,
which generally have higheraverage costs than other deposits, the
average balances of which remained relatively stable. The increase in
the average cost of interest bearing liabilities also reflects an increase
of 4 basis points in the average cost on certificate of deposit accounts
resulting from the rate promotions offered during the period July, 1997 to
June, 1998.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased $465,000
to $60,000 for the three months ended September 30, 1998, from $525,000 for
the three months ended September 30, 1997. The decline in the provision for
loan losses reflects the reduced levels of non-performing loans, which
have declined from $2.5 million at September 30, 1997, to $1.2 million
at September 30, 1998, although non-performing loans increased to $1.2 million
during the three months ended September 30, 1998, from $884,000 million at June
30, 1998(primarily relating to one loan). The allowance for loan losses
decreased slightly to $12.0 million at September 30, 1998, from $12.1 million
at June 30, 1998, as net charge-offs of $144,000 (primarily due to the same
loan that comprised the increase in non-performing loans) during the period
exceeded the loan loss provision of $60,000. See "Asset Quality."
<PAGE>
-19-
NON-INTEREST INCOME. Non-interest income increased $273,000 to $1.3 million
during the quarter ended September 30, 1998, from $981,000 during the
quarter ended September 30, 1997, due primarily to increased gains on sales
and redemptions of securities and other assets (primarily other real estate
owned) of $229,000. Service charges and other fees declined $91,000, due
primarily to a decline in expired loan commitment fees, which totaled $161,000
during the quarter ended September 30, 1997 compared to $4,000 during the
quarter ended September 30, 1998, as the Company has experienced a higher rate
of acceptance on its commitment offers. Offsetting this decline, were
increases of $54,000 in service fees and customer charges related to
deposit accounts. The increase in other income resulted primarily from
increased income on FHLBNY capital stock of $91,000.
NON-INTEREST EXPENSE. Non-interest expenses declined $54,000, from $6.8
million during the quarter ended September 30, 1997, to $6.7 million during
the quarter ended September 30, 1998. Salaries and employee benefit
expense increased $209,000 due to staffing and salary increases during the past
twelve months. This increase was partially offset by a decline of $75,000 in
compensation expense related to the Company's ESOP and RRP, resulting from both
a reduction in allocated RRP shares resulting from retirees under the Company's
recent early retirement window, and the reduction in the overall ESOP
compensation expense resulting from the decline in the average market price of
the Company's common stock during the quarter ended September 30, 1998.
During the quarter ended September 30, 1998, the Company received refunds
of $144,000 related to real estate taxes on branch properties.
These non-recurring refunds were recorded as a reduction of occupancy and
equipment expense. In addition, during the quarter ended September 30, 1998,
the Company began to fully realize cost savings associated with the sale of
its Roslyn premise in May, 1998, which also contributed to the reduction in
occupancy and equipment expense of $182,000 compared to the prior year.
Data processing costs increased $31,000 during the quarter ended September 30,
1998, compared to the quarter ended September 30, 1997, due primarily to
increased loan and deposit activity and Year 2000 compliance costs.
See "The Year 2000 Problem" Offsetting the increase in data processing
costs was a decline of $57,000 the in provision for losses on other real estate
owned, which resulted primarily from a reduction in other real estate
owned balance from $1.1 million at September 30, 1997, to $536,000 at
September 30, 1998.
Other expenses increased $17,000 due primarily to increased advertising
expenses related to promotion offers and increased loan servicing expenses
resulting from growth in the loan portfolio.
INCOME TAX EXPENSE. Income tax expense totaled $3.1 million for the three months
ended September 30, 1998, compared to $2.9 million for the three months ended
September 30, 1997, an increase of $221,000. The increase of $221,000 in
income taxes was primarily attributable to an increase of $1.4 million in
pre-tax income, offset by a reduction in the effective tax rate from 50.5%
during the quarter ended September 30, 1997, to 43.9% during the quarter ended
September 30, 1998. The decline in the effective tax rate was primarily
attributable to certain tax benefits associated with the formation and funding
of subsidiaries of the Bank in April, 1998.
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, the Company and its operations may be
significantly affected by the Year 2000 Problem due to the nature of
financial information. Software, hardware and equipment both within
and outside the Company's direct control and with whom
<PAGE>
-20-
the Company 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 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 the Company 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 the
Company's suppliers and creditors and the creditworthiness of its borrowers.
Thus, if not adequately addressed, the Year 2000 Problem could result
in a significant adverse impact upon the Company's products, services and
competitive condition and therefore, its results of operations and could be
deemed to imperil the safety and soundness of the Company.
There has been limited litigation filed against corporations regarding the
Year 2000 Problem and their compliance efforts.
The OTS, the Company's 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
implementation of 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 because 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.
The Company has developed and is implementing a Year 2000 Project Plan (the
"Plan") to address the Year 2000 Problem and its effects on the Company.
The Plan includes five components which address issues involving awareness,
assessment, renovation, validation and implementation. The Company
has completed the awareness and assessment phases of the Plan. During
the awareness and assessment phases of the Plan, the Company 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. The Company is now
actively involved in the renovation, validation and implementation phase,
which is 20% complete. Under regulatory guidelines issued by the federal
banking regulators, the Bank and the Company must substantially complete
testing of core mission critical internal systems by December 31, 1998
with testing of both internally and externally supplied systems complete
and all renovation substantially complete by June 30, 1999. In accordance
with those guidelines, the Company completed testing of its mission
critical systems prior to September 1, 1998, and its customer systems prior
to September 30, 1998. The Company has agreed to use its facilities as a
test site for its major retail deposit processor allowing the Company
additional opportunity to test and stress such system. The Company expects
to meet the deadlines noted above.
As part of the Plan, the Company has had formal communications with all of
its significant suppliers to determine the extent to which the Company is
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. The Company presently believes that, with
modifications to existing software and conversions to new software and
hardware where necessary, the Year 2000 Problem will be mitigated
without causing a material adverse impact on the operations of the
Company. At this time, the
<PAGE>
-21-
Company anticipates most of its hardware and software systems to become
Year 2000 compliant, tested and operational with the OTS' suggested
time frame. However, if such modifications and conversions are not made
or are not complete on a timely basis, the Year 2000 Problem could
have an adverse impact on the operations of the Company.
Despite its best efforts to ensure Year 2000 compliance, it is
possible that one or more of the Company's internal or external systems
may fail to operate. At this time, while the Company expects become
Year 2000 compliant, the probability of such likelihood cannot be
determined. In the event that system failures occur related to the Year 2000
Problem, the Company has developed contingency plans, which involve,
among other actions, utilization of an alternate service provider or
alternate products available through the current vendor.
The Company has reviewed its customer base to determine whether they
pose significant Year 2000 risks. The Company's customer base consists
primarily of individuals who utilize the Company's services for personal,
household or consumer uses. Individually, such customers are not likely to
pose significant Year 2000 risks directly. It is not possible at this time
to gauge the indirect risks which could be faced if the employers of such
customers encounter unresolved Year 2000 issues.
Monitoring and managing the Year 2000 project will result in additional
direct and indirect costs to the Company. 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 will
principally consist of the time devoted by existing employees in monitoring
software vendor progress, testing enhanced software products and
implementing any necessary contingency plans. The Company estimates that
total costs related to the Year 2000 Problem 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, over one-half of the total estimated
costs associated with the Year 2000 Problem have already been expensed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
Quantitative and qualitative disclosure about market risk is presented at
June 30, 1998 in Exhibit 13.1 to the Company's Annual Report on Form 10-K,
filed with the Securities and Exchange Commission on September 28, 1998.
There have been no material changes in the Company's market risk at
September 30, 1998 compared to June 30, 1998. The following is an update
of the discussion provided therein:
GENERAL. The Company's largest component of market risk continues to be
interest rate risk. Virtually all 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, 1998, neither the Company nor
the Bank owned any trading assets, nor did they 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, 1998 to September 30, 1998.
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, 1998 utilizing the same assumptions as at June 30, 1998.
INTEREST RATE RISK COMPLIANCE. The Bank continues to monitor the impact of
interest rate volatility upon net interest income and net portfolio value in
the same manner as at June 30, 1998. There have been no changes in the board
approved limits of acceptable variance in net interest income and net
portfolio
<PAGE>
-22-
value at September 30, 1998 compared to June 30, 1998, and the
projected changes continue to fall within the board approved limits at
all levels of potential interest rate volatility.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various other legal
actions arising in the ordinary course of its business which, in the
aggregate, involve amounts which are believed to be immaterial to the
financial condition and results of operations of the Company.
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
(d) 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
On July 20, 1998, the Company filed a Current Report on Form
8-K, as amended by the Current Report on Form 8-K filed on July
27, 1998, relating to the definitive Agreement and Plan of Merger
dated as of July 18, 1998, between the Company and Financial
Bancorp, Inc.
<PAGE>
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 13, 1998 By: /S/ VINCENT F. PALAGIANO
-----------------------------------
Vincent F. Palagiano
Chairman of the Board and Chief
Executive Officer
Dated: November 13, 1998 By: /S/ KENNETH J. MAHON
-----------------------------------
Kenneth J. Mahon
Executive Vice President and
Chief Financial Officer
EXHIBITS
========
EXHIBIT NUMBER 11
DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
<S> <C> <C>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
--------------------- -------------------
Net income $3,983 $2,898
======= =======
Weighted average common shares outstanding
for basic earnings per share 10,564 11,267
======= =======
Basic Earnings Per Share $0.38 $0.25
======= =======
Weighted average common shares outstanding
for basic earnings per share 10,564 11,267
Unvested shares of Recognition and Retention
Plan 417 566
Common stock equivalents due to dilutive
effect of stock options 481 351
------- -------
Total weighted average common shares and
common share equivalents for diluted
earnings per share 11,462 12,184
======= =======
Diluted earnings per common share and common
share equivalents $0.35 $0.23
======= =======
</TABLE>
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<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 13,000
<INT-BEARING-DEPOSITS> 0
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<TOTAL-ASSETS> 1,743,657
<DEPOSITS> 1,025,135
<SHORT-TERM> 180,387
<LIABILITIES-OTHER> 64,506
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0
0
<COMMON> 145
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