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 March 31, 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, APRIL 30, 1999
$.01 Par Value 12,959,288
<PAGE>
-2-
PAGE
Item 1. Financial Statements
Consolidated Statements of Condition at March 31, 1999
(Unaudited) and June 30, 1998 3
Consolidated Statements of Operations and Comprehensive
Income for the Three Months and Six Months
Ended December 31, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Changes in Stockholders' Equity
for the Nine Months Ended March 31, 1999 (Unaudited) 5
Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 1999 and 1998 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-25
Item 3 Quantitative and Qualitative Disclosure About Market Risk 26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
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 SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT MARCH 31,
1999 AT JUNE 30,
(UNAUDITED) 1998
---------------------------- ---------------
<S> <C> <C>
ASSETS:
Cash and due from banks $15,577 $16,266
Investment securities held to maturity (estimated market value of $38,588
and $78,593 at March 31, 1999 and June 30, 1998, respectively) 38,229 78,091
Investment securities available for sale:
Bonds and notes (amortized cost of $152,361 and $72,715 at March 31,
1999 and June 30, 1998, respectively) 152,498 73,031
Marketable equity securities (historical cost of $13,996 and $10,425 at
March 31, 1999 and June 30, 1998, respectively) 14,768 12,675
Mortgage backed securities held to maturity (estimated market value of
$27,602 and $47,443 at March 31, 1999 and June 30, 1998, respectively) 26,960 46,714
Mortgage backed securities available for sale (amortized cost of $517,462
and $361,372 at March 31, 1999 and June 30, 1998, respectively) 518,972 363,875
Federal funds sold 17,727 9,329
Loans:
Real estate 1,322,454 943,864
Other loans 7,405 5,716
Less: Allowance for loan losses (15,057) (12,075)
------------------- ---------------
Total loans, net 1,314,802 937,505
------------------- ---------------
Loans held for sale 642 541
Premises and fixed assets 15,259 10,742
Federal Home Loan Bank of New York Capital Stock 27,075 10,754
Other real estate owned, net 708 825
Goodwill 65,648 24,028
Receivable for securities sold - 18,008
Other assets 35,877 21,542
------------------- ---------------
TOTAL ASSETS $2,244,742 $1,623,926
=================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Due to depositors $1,253,142 $1,038,342
Escrow and other deposits 25,185 15,395
Securities sold under agreements to repurchase 452,329 256,601
Federal Home Loan Bank of New York advances 260,000 103,505
Payable for securities purchased 21,046 12,062
Accrued postretirement benefit obligation 2,703 2,721
Other liabilities 14,654 8,951
------------------- ---------------
TOTAL LIABILITIES 2,029,059 1,437,577
------------------- ---------------
STOCKHOLDERS' EQUITY:
Preferred stock ($0.01 par, 9,000,000 shares authorized,
none outstanding at March 31, 1999 and June 30, 1998) - -
Common stock ($0.01 par, 45,000,000 shares authorized, 14,583,400 shares
and 14,551,100 shares issued at March 31, 1999 and June 30, 1998,
respectively, and 12,966,788 shares and 12,176,513 shares outstanding
at March 31, 1999 and June 30, 1998, respectively) 145 145
Additional paid-in capital 148,514 143,322
Retained earnings (substantially restricted) 115,265 105,158
Accumulated other comprehensive income 1,271 2,763
LESS:
Unallocated common stock of Employee Stock Ownership Plan (8,302) (9,175)
Unearned common stock of Recognition and Retention Plan (6,522) (6,963)
Common stock held by Benefit Maintenance Plan (831) (431)
Treasury stock, at cost (1,616,612 shares and 2,374,587 shares at
March 31, 1998 and June 30, 1998, respectively) (33,857) (48,470)
------------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 215,683 186,349
------------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,244,742 $1,623,926
=================== ===============
</TABLE>
See notes to consolidated financial statements
<PAGE>
-4-
DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
<S> <C> <C> <C> <C>
1999 1998 1999 1998
-------- --------- -------- ----------
INTEREST INCOME:
Loans secured by real estate $24,764 $17,858 $65,579 $51,186
Other loans 156 122 409 373
INVESTMENT SECURITIES 2,870 2,595 7,727 8,145
MORTGAGE-BACKED SECURITIES 7,621 6,005 21,681 16,911
FEDERAL FUNDS SOLD 406 480 1,079 1,524
-------- -------- -------- --------
TOTAL INTEREST INCOME 35,817 27,060 96,475 78,139
-------- -------- -------- --------
INTEREST EXPENSE:
Deposits and escrow 11,393 10,847 32,735 32,119
Borrowed funds 8,935 3,754 23,165 9,256
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 20,328 14,601 55,900 41,375
NET INTEREST INCOME 15,489 12,459 40,575 36,764
PROVISION FOR LOAN LOSSES 60 525 180 1,575
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 12,429 11,934 40,395 35,189
-------- -------- -------- --------
NON-INTEREST INCOME:
Service charges and other fees 719 492 1,880 1,722
Net gain on sales and redemptions of securities and
other assets 45 221 799 399
Net gain on sales of loans 35 16 62 40
Other 1,107 532 2,826 1,113
-------- -------- -------- --------
TOTAL NON-INTEREST INCOME 1,906 1,261 5,567 3,274
-------- -------- -------- --------
NON-INTEREST EXPENSE:
Salaries and employee benefits 3,281 3,064 9,079 8,309
ESOP and RRP compensation expense 1,108 940 3,398 3,473
Occupancy and equipment 847 773 2,069 2,268
Federal deposit insurance premiums 113 88 287 259
Data processing costs 334 299 955 858
Provision (credit) for losses on Other real estate
owned - 15 (2) 94
Goodwill amortization 1,021 602 2,224 1,804
Core deposit intangible amortization 158 17 158 52
Other 1,310 1,265 3,770 3,552
-------- -------- -------- --------
TOTAL NON-INTEREST EXPENSE 8,172 7,063 21,938 20,669
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 9,163 6,132 24,024 17,794
INCOME TAX EXPENSE 3,614 2,794 9,807 8,731
-------- -------- -------- --------
NET INCOME $5,549 $3,338 $14,217 $9,063
======== ======== ======== ========
EARNINGS PER SHARE:
BASIC $0.49 $0.31 $1.33 $0.82
======== ======== ======== ========
DILUTED $0.45 $0.28 $1.23 $0.75
======== ======== ======== ========
STATEMENTS OF COMPREHENSIVE INCOME:
Net Income $5,549 $3,338 $14,217 $9,063
Change in unrealized gain on securities available
for sale, net of deferred taxes (242) (286) (1,492) 783
Reclassification adjustment for securities sold,
net of tax - (119) (278) (215)
-------- -------- -------- --------
Total comprehensive income $5,307 $2,933 $12,447 $9,631
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
<PAGE>
-5-
DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
FOR THE NINE
MONTHS ENDED
MARCH 31, 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 143,322
Issuance of stock 3,327
Amortization of excess fair value over cost - ESOP stock 1,086
Exercise of stock options and tax benefits of stock options and RRP
shares 780
---------------------------
Balance at end of period 148,515
---------------------------
RETAINED EARNINGS:
Balance at beginning of period 105,158
Net income for the period 14,217
Cash dividends declared and paid (4,110)
---------------------------
Balance at end of period 115,265
---------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET:
Balance at beginning of period 2,763
Change in unrealized gain on securities available for sale
during the period, net of deferred taxes (1,492)
---------------------------
Balance at end of period $1,271
---------------------------
EMPLOYEE STOCK OWNERSHIP PLAN:
Balance at beginning of period (9,175)
Amortization of earned portion of ESOP stock 873
---------------------------
Balance at end of period (8,302)
---------------------------
RECOGNITION AND RETENTION PLAN:
Balance at beginning of period (6,963)
Common stock acquired by RRP (999)
Amortization of earned portion of RRP stock 1,440
---------------------------
Balance at end of period (6,522)
---------------------------
BENEFIT MAINTENANCE PLAN:
Balance at beginning of period (431)
Common stock acquired by Benefit Maintenance Plan (400)
---------------------------
Balance at end of period (831)
---------------------------
TREASURY STOCK:
Balance at beginning of period (48,470)
Re-issuance of shares in acquisition 31,463
Purchase of treasury shares, at cost (16,850)
---------------------------
Balance at end of period (33,857)
---------------------------
</TABLE>
See notes to consolidated financial statements
<PAGE>
-6-
DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED MARCH 31,
<S> <C> <C>
1999 1998
-------------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES: (In THOUSANDS)
Net Income $14,217 $9,063
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net gain on investment and mortgage backed securities sold (658) (631)
Net gain on sale of loans held for sale (62) (40)
Net depreciation and amortization 832 550
ESOP and RRP compensation expense 3,398 3,473
Provision for loan losses 180 1,575
Goodwill and core deposit intangible amortization 2,382 1,856
Increase in loans held for sale (39) (176)
Increase in other assets and other real estate owned (4,851) (3,313)
Decrease in receivable for securities sold 18,008 -
Increase in payable for securities purchased 8,984 50,751
Increase in accrued postretirment benefit obligation and other liabilities 3,352 3,764
-------------------- ------------------
Net cash provided by operating activities 45,743 66,872
-------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in Federal funds sold 30,902 (5,706)
Proceeds from maturities of investment securities held to maturity 4,790 5,250
Proceeds from maturities of investment securities available for sale 24,479 40,145
Proceeds from calls of investment securities held to maturity 35,160 37,500
Proceeds from calls of investment securities available for sale 14,018 11,500
Proceeds from sales of investment securities available for sale 9,873 11,531
Proceeds from sales of mortgage backed securities held to maturity - 3,756
Proceeds from sales of mortgage backed securities available for sale - 65,542
Purchases of investment securities held to maturity - (29,082)
Purchases of investment securities available for sale (87,870) (87,003)
Purchases of mortgage backed securities available for sale (228,257) (237,518)
Principal collected on mortgage backed securities held to maturity 19,687 14,692
Principal collected on mortgage backed securities available for sale 110,438 37,234
Net increase in loans (187,596) (134,040)
Cash disbursed in acquisition, net of cash acquired (32,157) -
Purchases of fixed assets (803) (292)
Purchase of Federal Home Loan Bank stock (14,211) (1,971)
-------------------- ------------------
Net cash used in investing activities (301,547) (268,462)
-------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in due to depositors (17,003) 70,219
Net increase in escrow and other deposits 8,501 4,097
Proceeds from Federal Home Loan Bank of New York Advances 156,495 30,295
Increase in securities sold under agreements to repurchase 128,575 104,573
Cash dividends paid (4,110) (1,608)
Exercise of stock options and tax benefits of stock options and RRP 906 23
Purchase of common stock by Benefit Maintenance Plan and RRP (1,399) -
Purchase of treasury stock (16,850) (13,319)
------------------- ------------------
Net cash provided by financing activities 255,115 194,280
------------------- ------------------
DECREASE IN CASH AND DUE FROM BANKS (689) (7,310)
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 16,266 19,198
------------------- ------------------
CASH AND DUE FROM BANKS, END OF PERIOD $15,577 $11,888
=================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes 10,469 8,857
=================== ==================
Cash paid for interest 54,172 39,880
=================== ==================
Transfer of loans to Other real estate owned 48 198
=================== ==================
Change in unrealized gain on available for sale securities, net of deferred taxes (1,492) 783
=================== ==================
</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. ("DCB or 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 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. The Bank and the Company maintain their headquarters in the
Williamsburgh section of the borough of Brooklyn. As of March 31, 1999,
eighteen 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 March 31, 1999, the results of operations for the three-month
and nine-month periods ended March 31, 1999 and 1998, cash flows for the nine
months ended March 31, 1999 and 1998, and changes in stockholders' equity for
the nine months ended March 31, 1999. The results of operations for the three-
month and nine-month periods ended March 31, 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 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 nine months ended March 31, 1999, the Company repurchased 746,729
shares of its common stock into treasury. The average price of the treasury
shares acquired was $22.57 per share, and all shares have been recorded at the
acquisition cost.
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
<PAGE>
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
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.
6. ACQUISITION OF FINANCIAL BANCORP, INC.
On January 21, 1999, (the "Effective Time"), DCB acquired Financial
Bancorp, Inc., ("FIBC"), the holding company for Financial Federal Savings Bank
("FFSB") in exchange for $34.5 million in cash and 1,504,703 shares of DCB
common stock. As part of the acquisition, FFSB merged with and into DSBW, with
DSBW as the resulting financial institution, and FFSB's five former branch
locations became full operating branches of The Dime Savings Bank of
Williamsburgh.
Pursuant to the terms of the FIBC acquisition, each FIBC stockholder who
submitted a valid election for cash received $39.14 in cash and each FIBC
stockholder who submitted a valid election for DCB common stock received 1.8282
shares of DCB common stock, plus cash in lieu of any fractional shares, in
exchange for their shares of FIBC common stock. The remaining shares of FIBC
common stock for which a valid election was not submitted were converted into,
pursuant to the merger agreement, a combination of DCB stock and cash such that
each such shareholder received $31.257 in cash and 0.3682 shares of DCB common
stock for each share of FIBC common stock, except that all stockholders of FIBC
who own less than 50 shares of FIBC common stock received cash. The total
consideration paid to FIBC stockholders, in the form of cash or DCB common
stock, was $66.7 million.
As a result of the consummation of the FIBC acquisition, DCB, as of the
close of business on January 21, 1999, had total assets of $2.22 billion, total
deposits of $1.25 billion, total borrowings of $705.1 million, and total net
loans of $1.29 billion. The FIBC acquisition was accounted for as a purchase
transaction, and resulted in the addition of approximately $43.8 million in
goodwill to be amortized over approximately 20 years, and $5.0 million in core
deposit intangible to be amortized over a six year period.
<PAGE>
-9-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Dime Community Bancshares, Inc. ("DCB" or the "Company") is a Delaware
corporation and parent corporation of The Dime Savings Bank of Williamsburgh
("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 (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.
ACQUISITION OF FINANCIAL BANCORP, INC.
On January 21, 1999, (the "Effective Time"), DCB acquired Financial
Bancorp, Inc., ("FIBC"), the holding company for Financial Federal Savings Bank
("FFSB"), a federally chartered savings bank, in exchange for $34.5 million in
cash and 1,504,703 shares of DCB common stock. As part of the acquisition, FFSB
merged with and into DSBW, with DSBW as the resulting financial institution,
and FFSB's five former branch locations became full operating branches of DSBW.
Pursuant to the terms of the FIBC acquisition, each FIBC stockholder who
submitted a valid election for cash received $39.14 in cash and each FIBC
stockholder who submitted a valid election for DCB common stock received 1.8282
shares of DCB common stock, plus cash in lieu of any fractional shares, in
exchange for their shares of FIBC common stock. The remaining shares of FIBC
common stock for which a valid election was not submitted were converted into,
pursuant to the merger agreement, a combination of DCB stock and cash such that
each such shareholder received $31.257 in cash and 0.3682 shares of DCB common
stock for each share of FIBC common stock, except that all stockholders of FIBC
who own less than 50 shares of FIBC common stock received cash. The total
consideration paid to FIBC stockholders, in the form of cash or DCB common
stock, was $66.7 million.
As a result of the consummation of the FIBC acquisition, DCB, as of the
close of business on January 21, 1999, had total assets of $2.22 billion, total
deposits of $1.25 billion, total borrowings of $705.1 million, and total net
loans of $1.29 billion. The FIBC acquisition was accounted for as a purchase
transaction, and resulted in the addition of approximately $43.8 million in
goodwill to be amortized over approximately 20 years, and $5.0 million in core
deposit intangible to be amortized over a six year period.
<PAGE>
-10-
SELECTED FINANCIAL HIGHLIGHTS (UNAUDITED)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS AT OR FOR THE NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
-------------------------- -------------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
------- ------ ------ -----
PERFORMANCE AND OTHER SELECTED RATIOS:
Return on Average Assets 1.05% 0.90% 1.03% 0.85%
Return on Average Tangible Stockholders' Equity 15.38% 8.57% 12.73% 7.68%
Average Interest Rate Spread <F2> 2.67% 2.91% 2.61% 3.05%
Net Interest Margin <F2> 3.11% 3.51% 3.07% 3.62%
Non-interest Expense to Average Assets <F3> 1.32% 1.73% 1.41% 1.77%
Efficiency Ratio <F3> 40.39% 47.92% 43.19% 47.64%
Effective Tax Rate <F4> 39.44% 45.56% 40.82% 49.07%
Tangible Equity to Total Tangible Assets 6.63% 10.44% 6.63% 10.44%
Loans/Earning Assets 62.54% 58.31% 62.54% 58.31%
Loans/Deposits 106.17% 85.58% 106.17% 85.58%
CASH EARNINGS DATA <F1>:
Cash Earnings $7,413 $4,507 $18,858 $13,209
Cash Return on Average Assets 1.40% 1.21% 1.36% 1.24%
Cash Return on Average Tangible Equity 20.54% 11.57% 16.89% 11.20%
Cash Non-interest Expense to Average Assets <F5> 1.11% 1.48% 1.17% 1.44%
Cash Efficiency Ratio <F5> 33.99% 40.95% 35.68% 38.87%
PER SHARE DATA:
Reported EPS (Diluted) $ 0.45 $ 0.28 $ 1.23 $ 0.75
Cash EPS (Diluted) 0.61 0.38 1.63 1.20
Stated Book Value 16.63 15.22 16.63 15.22
Tangible Book Value 11.10 13.01 11.10 13.01
BALANCE SHEET AVERAGES:
Average Loans $1,271,500 $ 865,339 $1,104,353 $ 820,860
Average Assets 2,113,699 1,490,359 1,846,685 1,421,431
Average Earning Assets 1,992,650 1,419,473 1,760,141 1,353,070
Average Deposits 1,206,200 1,023,955 1,085,879 1,004,174
Average Equity 201,219 184,319 185,101 185,620
Average Tangible Equity 144,352 155,879 148,866 157,247
ASSET QUALITY SUMMARY:
Net charge-offs $17 $22 $ 166 $ 283
Nonperforming Loans 4,738 1,775 4,738 1,775
Nonperforming Assets/Total Assets 0.24% 0.18% 0.24% 0.18%
Allowance for Loan Loss/Total Loans 1.13% 1.36% 1.13% 1.36%
Allowance for Loan Loss/Nonperforming Loans 317.79% 677.07% 317.79% 677.07%
<FN>
<F1> Cash earnings for all periods exclude non-cash expenses related to goodwill
and core deposit intagible amortization and the after-tax effect of
compensation related to stock benefit plans.
<F2> Interest expense for the nine months ended March 31, 1999 includes
$618,000 of prepayment penalties on borrowings. Excluding these penalties,
the net interest rate spread and net interest margin would have been 2.66%
and 3.12%, respectively, for the nine months ended March 31, 1999.
<F3> 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 47.20% and 1.55%,
respectively, for the three months ended March 31, 1999, 52.38% and 1.90%,
respectively, for the three months ended March 31, 1999, 48.45% and 1.58%,
respectively, for the nine months ended March 31, 1999, and 52.20% and
1.94%, respectively, for the nine months ended March 31, 1998.
<F4> Excluding non-recurring income tax benefits of $320,000 and $670,000
during the three months ended March 31, 1999 and nine months ended March 31,
1999, the effective tax rate was 42.9% and 43.6%, respectively, during the
three months and nine months ended March 31, 1999.
<F5> 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.
</TABLE>
<PAGE>
-11-
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings, proceeds
from principal and interest payments on loans, mortgage-backed securities and
investments, 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 nine months ended March 31,
1999, the Bank's loan originations totaled $358.7 million compared to $215.1
million for the nine months ended March 31, 1998. Purchases of mortgage-backed
and other securities totaled $316.1 million for the nine months ended March 31,
1999 compared to $353.6 million for the nine months ended March 31, 1998.
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 $298.6 million during the nine months ended March 31, 1999,
compared to $129.0 million for the nine months ended March 31, 1998. This
increase has resulted from both increased balances of loans and mortgage backed
securities and recent interest rate declines, which have increased the rate of
principal repayments on loans and mortgage backed securities. Maturities and
calls of investment securities totaled $78.4 million and $94.4 million,
respectively, during the nine months ended March 31, 1999 and 1998. Loan and
security sales, which totaled $15.9 million and $83.0 million, respectively,
during the nine months ended March 31, 1999 and 1998, also provided some
additional funding.
Deposits increased $214.8 million during the nine months ended March 31,
1999 compared to an increase of $70.2 million during the nine months ended
March 31, 1998. Excluding the acquisition of FIBC, from which $231.8 million
in deposits were added, deposits have decreased $17.0 million during the nine
months ended March 31, 1999. This decrease in deposits was experienced
primarily in certificate of deposit accounts, which declined due the cessation
of deposit rate promotions that the Company maintained from July, 1997 to June,
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
March 31, 1999 totaled $543.0 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 in the form of FHLBNY advances or repurchase agreements increased
$352.2 million during the nine months ended March 31, 1999, compared to $134.9
million during the nine months ended March 31, 1998. Of the total increase
during the nine months ended March 31, 1999, $42.0 million was acquired from
FIBC and $156.5 million of this growth was 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.
Stockholders' equity increased $29.3 million during the nine months
ended March 31, 1999. The increase resulted from the re-issuance of $31.5
million in treasury stock in the acquisition of FIBC, and an increase of $3.2
million in additional paid-in capital resulting from the FIBC acquisition, of
which $2.5 million resulted from the issuance of DCB stock options to former
FIBC stock option holders. In addition, net income and the amortization of
stock benefit plans contributed $14.2 million and $3.4 million, respectively,
to stockholders' equity during the nine months ended March 31, 1999.
Offsetting these increases, the Company repurchased 746,729 shares of its
common stock into treasury (the "Treasury Repurchases"). The aggregate cost
of the Treasury Repurchases was $16.9 million, at an average price of
<PAGE>
-12-
$22.57 per share. As of March 31, 1999, the Company had both Board and
regulatory approval to repurchase up to 200,966 additional shares of its
common stock under an existing stock repurchase program.
During the nine months ended March 31, 1999, the Company declared and paid
cash dividends totaling $4.1 million, or $0.36 per outstanding common share, on
the respective dates of record. On April 15, 1999, the Company declared a cash
dividend of $0.15 per outstanding common share, payable on May 11, 1999 to all
shareholders of record on April 30, 1999.
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 March 31, 1999, the
Bank's liquidity ratio was 9.9%. 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 March 31, 1999, the Bank had $541.5 million in short
and medium term borrowings outstanding at the FHLBNY, comprised of outstanding
advances of $260.0 million and securities sold under agreement to repurchase of
$281.5 million. In the event that the Bank should require funding beyond its
ability to generate it internally, additional sources are available by
increasing the Bank's $541.5 million borrowing limit at the FHLBNY through the
Bank's purchase of additional FHLBNY capital stock.
The Bank is subject to minimum regulatory capital requirements imposed by
the OTS, which requirements are, as a general matter, based on the amount and
composition of an institution's assets. In addition, insured institutions in
the strongest financial and managerial condition, with a rating of 1 (the
highest examination rating of the OTS under the Uniform Financial Institutions
Rating System) are required to maintain Tier 1 capital of not less than 3.0% of
total assets (the "leverage capital ratio"). For all other banks, the minimum
leverage capital requirement is 4.0%, unless a higher leverage capital ratio is
warranted by the particular circumstances or risk profile of the institution.
The Bank's leverage capital ratio of 5.73% as of March 31, 1999 exceeds this
requirement, and total risk-based capital, at 10.31% of risk weighted assets as
of March 31, 1999, exceeded the 8.0% regulatory minimum. In addition, at March
31, 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 $4.7 million at March 31, 1999, as compared to $884,000 at
June 30, 1998. The increase resulted primarily from $2.1 million in non-
performing loans acquired from FIBC. In addition, one of the Company's multi-
family and underlying cooperative loans with an aggregate principal amount of
$657,000 became 90 days past due during the quarter ended September 30, 1998
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 $1.1
million delinquent 60-89 days at March 31, 1999, as compared to 35 such
delinquent loans totaling $328,000 at June 30, 1998. The increase in 60-89 day
delinquencies resulted from the addition of 11 loans totaling approximately
$1.3 million from the FIBC acquisition and was partially offset by the removal
from delinquency of ten loans totaling less than $100,000 in the aggregate.
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
<PAGE>
-13-
restructurings do not necessarily result in non-accrual loans.
The Company had two loans classified as troubled-debt restructurings at March
31, 1999, totaling $1.3 million, and both are currently performing according to
their restructured terms. 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. Both troubled-debt restructurings as
of March 31, 1999 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. A loan is determined to be impaired when it is
not performing in accordance with its original terms. In the event the
carrying balance of an impaired loan, including all accrued interest, exceeds
the estimate of its fair value, a reserve is required to be established. The
recorded investment in loans deemed impaired was approximately $2.8 million as
of March 31, 1999, compared to $3.1 million at June 30, 1998, and the average
balance of impaired loans was $2.6 million for the nine months ended March 31,
1999 compared to $4.1 million for the nine months ended March 31, 1998. The
impaired portion of these loans is represented by specific reserves totaling
$39,000 allocated within the allowance for loan losses at March 31, 1999.
Generally, the Company considers non-performing loans to be impaired loans.
However, at March 31, 1999, approximately $1.9 million of one-to four-family,
cooperative apartment and consumer loans on nonaccrual status are not deemed
impaired. Each 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. As of March 31, 1999 all impaired loans are on non-
accrual status.
The balance of net other real estate owned has declined from $825,000 at
June 30, 1998 to $708,000 at March 31, 1999, due primarily to total sales of
other real estate owned properties of $479,000 during the nine months ended
March 31, 1999, which was comprised primarily of one property totaling
$185,000 sold in September, 1998, offset by the addition of $302,000 in other
real estate owned through the FIBC acquisition.
<PAGE>
-14-
The following table sets forth information regarding the Company's non-
performing loans, non-performing assets, impaired loans and troubled-debt
restructurings at the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
AT MARCH 31, AT JUNE 30,
1999 1998
------------------- ----------------
(Dollars In Thousands)
NON-PERFORMING LOANS:
One- to four-family $2,251 $471
Multi-family and underlying cooperative 2,257 236
Non-residential - -
Cooperative apartment 208 133
Other loans 22 44
------------------- ----------------
TOTAL NON-PERFORMING LOANS 4,738 884
TOTAL OREO 708 825
------------------- ----------------
TOTAL NON-PERFORMING ASSETS $5,446 $1,709
=================== ================
TROUBLED-DEBT RESTRUCTURINGS $1,290 $3,971
TOTAL NON-PERFORMING ASSETS AND TROUBLED-DEBT
RESTRUCTURINGS 6,736 5,680
IMPAIRED LOANS 2,801 3,136
TOTAL NON-PERFORMING LOANS TO TOTAL LOANS 0.36% 0.09%
TOTAL IMPAIRED LOANS TO TOTAL LOANS 0.21 0.33
TOTAL NON-PERFORMING ASSETS TO TOTAL ASSETS 0.24 0.11
TOTAL NON-PERFORMING ASSETS AND TROUBLED-DEBT
RESTRUCTURINGS TO TOTAL ASSETS 0.30 0.35
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1999 AND JUNE 30, 1998
Assets. The Company's assets totaled $2.245 billion at March 31, 1999, an
increase of $620.8 million from total assets of $1.624 billion at June 30,
1998. The increase in assets included the addition of $337.3 million in
assets, inclusive of goodwill and core deposit intangible, in conjunction with
the FIBC acquisition. The growth in assets was experienced primarily in real
estate loans and mortgage-backed securities available for sale, which increased
$378.6 million and $155.1 million, respectively. The increase in real estate
loans resulted primarily from originations of $358.7 million during the nine
months ended March 31, 1999, of which $337.3 million were multi-family and
underlying cooperative and non-residential loans, and the acquisition of $192.4
million in real estate loans, from FIBC, which were comprised primarily of one-
to four-family loans, and was offset by principal repayments of $168.5 million.
The increase in mortgage backed securities available for sale resulted from
purchases of $228.3 million during the nine months ended March 31, 1999,
reflecting the continuation of the Company's capital leverage strategy
described in more detail below, and the acquisition of $37.6 million in
mortgage-backed securities available for sale from FIBC, offset by principal
repayments of $130.1 million. In addition, the Company experienced growth of
$81.6 million in investment securities available for sale, of which $37.5
million was acquired from FIBC, and the remainder of which was funded primarily
through calls of investment securities held to maturity and principal paydowns
of mortgage backed securities held to maturity.
<PAGE>
-15-
Finally, goodwill increased $41.6 million from June 30, 1998, as the Company
added $43.8 million in additional goodwill from its acquisition of FIBC,
as well as $5.0 million in core deposit intangible.
LIABILITIES. The Company's liabilities increased $591.5 million from June
30, 1998 to March 31, 1999. The largest components of this increase were due
to depositors, FHLBNY advances and securities sold under agreement to
repurchase, which increased $214.8 million, $156.5 million, and $195.7 million,
respectively. The acquisition of FIBC resulted in the addition of $231.8
million in deposits and $42.0 in securities sold under agreement to repurchase.
The growth in FHLBNY advances of $156.5 million during the nine months ended
March 31, 1999, was utilized to fund both loan originations and a significant
portion of the cash consideration related to the FIBC acquisition. The
increase in securities sold under agreement to repurchase of $153.7 million,
exclusive of the FIBC acquisition, was utilized primarily to fund purchases of
mortgage-backed securities available for sale. Deposits, excluding the effects
of the FIBC acquisition, have decreased $17.0 million during the nine months
ended March 31, 1999, due primarily to the cessation of a deposit rate
promotion that the Company maintained from July, 1997 to June, 1998.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $29.3 million during
the nine months ended March 31, 1999. The increase resulted from the re-
issuance of $31.5 million in treasury stock in the acquisition of FIBC, and an
increase of $3.2 million in additional paid-in capital resulting from the FIBC
acquisition, which included the issuance of common stock as part of the merger
consideration and the issuance of DCB stock options to former FIBC stock option
holders. In addition, net income and the amortization of stock benefit plans
contributed $14.2 million and $3.4 million, respectively, to stockholders'
equity during the nine months ended March 31, 1999. Offsetting these increases
were stock repurchases into treasury totaling $16.9 million, and cash dividends
totaling $4.1 million during the nine months ended March 31, 1999.
Capital Leverage Strategy. The Company continues to deploy its excess
capital through the use of a capital leverage strategy whereby the Company
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. 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 "Quantitative and Qualitative Disclosure About 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 MARCH 31, 1999
AND 1998
GENERAL. Net income for the three months ended March 31, 1999, totaled $5.5
million compared to $3.3 million for the three months ended March 31, 1998.
The increase in net income resulted from an increase of $3.0 million in net
interest income, a decline of $465,000 in the provision for loan losses, an
increase of $645,000 in non-interest income, and income tax benefits of
$320,000 during the three months ended March 31, 1999.
NET INTEREST INCOME. The discussion of net interest income for the three
months ended March 31, 1999 and 1998, 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 ended March 31, 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.
<PAGE>
-16-
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------- --------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS)
Assets:
Interest-earning assets:
Real Estate Loans <F1> $1,264,552 $24,764 7.83% $859,910 $17,858 8.31%
Other loans 6,984 156 8.98 5,429 122 8.99
MORTGAGE-BACKED SECURITIES <F2> 490,907 7,621 6.21 355,764 6,005 6.75
INVESTMENT SECURITIES <F2> 194,252 2,870 5.91 161,691 2,595 6.42
FEDERAL FUNDS SOLD 35,991 406 4.51 36,679 480 5.23
----------- --------- --------- --------
TOTAL INTEREST-EARNING ASSETS 1,992,650 $35,817 7.19% 1,419,473 $27,060 7.63%
----------- ========= --------- ========
NON-INTEREST EARNING ASSETS 121,049 70,886
----------- ---------
TOTAL ASSETS $2,113,699 $1,490,359
=========== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
INTEREST-BEARING LIABILITIES:
NOW, SUPER NOW AND
MONEY MARKET ACCOUNTS $71,935 $425 2.40% $47,725 $271 2.30%
SAVINGS ACCOUNTS 389,348 1,930 2.01 335,745 1,870 2.26
CERTIFICATES OF DEPOSIT 688,252 9,013 5.31 610,854 8,671 5.76
MORTGAGORS' ESCROW 5,069 25 2.00 7,105 35 2.00
BORROWED FUNDS 670,340 8,935 5.41 254,459 3,754 5.98
----------- --------- --------- --------
TOTAL INTEREST-BEARING
LIABILITIES 1,824,944 $20,328 4.52% 1,255,888 $14,601 4.72%
----------- ========= --------- ========
CHECKING ACCOUNTS 56,665 29,631
OTHER NON-INTEREST-BEARING
LIABILITIES 30,871 20,521
----------- ---------
TOTAL LIABILITIES 1,912,480 1,306,040
STOCKHOLDERS' EQUITY 201,219 184,319
----------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $2,113,699 $1,490,359
=========== =========
NET INTEREST INCOME/ INTEREST RATE
SPREAD<F3> $15,489 2.67% $12,459 2.91%
======= ========
NET INTEREST-EARNING ASSETS/NET
INTEREST MARGIN <F4> $167,706 3.11% $163,585 3.51%
========= =========
RATIO OF INTEREST-EARNING ASSETS
TO INTEREST-BEARING LIABILITIES 109.19% 113.03%
<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
MARCH 31, 1999
COMPARED TO
THREE MONTHS ENDED
MARCH 31, 1998
INCREASE/ (DECREASE)
DUE TO
VOLUME RATE TOTAL
<S> <C> <C> <C>
-------------- ------------ -------------
Interest-earning assets: (DOLLARS IN THOUSANDS)
Real Estate Loans $8,171 $(1,265) $6,906
Other loans 34 - 34
Mortgage-backed securities 2,189 (573) 1,616
Investment securities 502 (227) 275
Federal funds sold (8) (66) (74)
-------------- ------------ -------------
Total 10,888 (2,131) 8,757
-------------- ------------ -------------
Interest-bearing liabilities:
NOW, Super Now and money market accounts $139 $15 $154
Savings accounts 283 (223) 60
Certificates of deposit 1,060 (718) 342
Mortgagors' escrow (10) - (10)
Borrowed funds 5,837 (656) 5,181
-------------- ------------ ------------
Total 7,309 (1,582) 5,727
-------------- ------------ ------------
Net change in net interest income $3,579 $(549) $3,030
============== ============ ============
</TABLE>
Net interest income for the three months ended March 31, 1999 increased
$3.0 million to $15.5 million from $12.5 million during the three months ended
March 31, 1998. The increase was attributable primarily to an increase of
$573.2 million in average interest earning assets, offset by a decline in the
net interest rate spread of 24 basis points. The net interest margin declined
40 basis points from 3.51% for the three months ended March 31, 1998 to 3.11%
for the three months ended March 31, 1999.
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 continued activities of the capital leverage program, as the
interest rate spread between assets and underlying liabilities under the
capital leverage program are significantly less than the interest rate spread
between the Company's other interest earning assets and interest bearing
liabilities.
<PAGE>
-18-
INTEREST INCOME. Interest income for the three months ended March 31,
1999, was $35.8 million, an increase of $8.7 million from $27.1 million during
the three months ended March 31, 1998. The increase in interest income was
attributable to increased interest income on real estate loans and mortgage-
backed securities of $6.9 million and $1.6 million, respectively. The increase
in interest income on real estate loans was attributable primarily to an
increase of $404.6 million in the average balance of real estate loans,
resulting from both $463.5 million of real estate loans originated during the
period April 1, 1998 through March 31, 1999, and $192.4 million of real estate
loans acquired from FIBC. The increase in interest income on mortgage-backed
securities was also attributable primarily to an increase in the average
balance of $135.1 million, resulting from $207.8 million in mortgage-backed
securities purchased in accordance with the Company's capital leverage program
during the period April 1, 1998 to March 31, 1999, and $37.8 million added in
the FIBC acquisition. Overall, the yield on interest earning assets decreased
44 basis points from 7.63% during the three months ended March 31, 1998 to
7.19% during the three months ended March 31, 1999. The decline was
attributable primarily to a decrease of 48 basis points in the average yield on
real estate loans resulting primarily from increased competition in the real
estate lending market. The decline also reflects declines in the average yield
on mortgage backed securities and investment securities of 54 basis points and
51 basis points, respectively, due to recent declines in overall interest
rates.
INTEREST EXPENSE. Interest expense increased $5.7 million, to $20.3
million during the three months ended March 31, 1999, from $14.6 million during
the three months ended March 31, 1998. This increase resulted primarily from
increased interest expense of $5.1 million on borrowed funds, which resulted
from an increase in the average balance of $415.9 million during the three
months ended March 31, 1999 compared to the three months ended March 31, 1998.
The increase in the average balance of borrowed funds resulted primarily from
$201.2 million of borrowed funds added during the period April 1, 1998 to March
31, 1999 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. Offsetting the growth in average balances, the
average cost of interest bearing liabilities declined 20 basis points to 4.52%
during the quarter ended March 31, 1999, from 4.72% during the quarter ended
March 31, 1998. The decline in the average cost of interest bearing
liabilities resulted from declines of 57 basis points and 45 basis points,
respectively, in the average cost of borrowed funds and certificates of
deposits, the Company's two largest components of interest expense. The decline
in the average cost of borrowed funds resulted from recent reductions in
overall interest rates, while the reduction in average cost of certificates of
deposit resulted from both lower overall interest rates and the cessation of
deposit rate promotions that the Company maintained from July, 1997 to June,
1998. Despite the decrease in the average cost of borrowed funds, since
borrowed funds have a higher average cost than other interest bearing
liabilities, the increase in the average balance of borrowed funds also
contributed to the increase in interest expense.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased $465,000
to $60,000 for the three months ended March 31, 1999, from $525,000 for the
three months ended March 31, 1998. The allowance for loan losses has increased
$3.0 million from December 31, 1998 to March 31, 1999, due exclusively to the
addition of $3.0 million in loan loss reserves from FIBC. The Company's
evaluation of the adequacy of the allowance for loan losses was not effected
nor did it change its loan loss provision due to the FIBC acquisition, since,
as of the date of the consummation of the FIBC acquisition, the Company
determined that the allowance for loan losses acquired from FIBC was adequate
to cover potential losses on the loans acquired from FIBC. The $3.0 million in
loan loss reserves acquired from FIBC included $1.3 million of reserves which,
at the Company's request, were recorded by FIBC immediately prior to the
consummation of the merger in order to conform FIBC's reserve levels to that of
the Company. The reduction in the Company's loan loss provision from the prior
fiscal year resulted from the low level of charge-offs incurred over recent
quarters. Net charge-offs totaled $17,000 during the quarter ended March 31,
1999. See "Asset Quality."
<PAGE>
-19-
NON-INTEREST INCOME. Non-interest income increased $645,000 to $1.9
million during the quarter ended March 31, 1999, from $1.3 million during the
quarter ended March 31, 1998, due to an increase in service fees and other
charges of $227,000, resulting primarily from increased service fees and
charges on deposits of $189,000, resulting from adjustments in the Company's
deposit fee and service charges. The increase in other income of $575,000
resulted primarily from: (1) increased prepayment penalties of $193,000,
which resulted from increased interest rate competition on new loans, and (2)
increased income on FHLBNY capital stock of $244,000, due to an increase
in the balance of FHLBNY capital stock from $10.3 million at March 31, 1998 to
$27.1 million at March 31, 1999. The increase in the average balance of
FHLBNY capital stock resulted from the Company's desire to increase its
overall borrowing level with the FHLBNY during this period. See "Liquidity
and Capital Resources." Offsetting these increases, was a decline in the
gain on sales and redemptions of securities and other assets of $176,000.
NON-INTEREST EXPENSE. Non-interest expenses increased $1.1 million, from
$7.1 million during the quarter ended March 31, 1998, to $8.2 million during
the quarter ended March 31, 1999. Salaries and employee benefit expense
increased $217,000 due to staffing and salary increases during the past twelve
months, and $208,000 in additional salary expense resulting from the FIBC
acquisition. Compensation expense related to the Company's ESOP and RRP
increased $168,000 compared to the quarter ended March 31, 1998 as the ESOP
expense recorded during the three months ended March 31, 1998 was reduced by
approximately $360,000 due to a modification in the amortization term on the
ESOP from eight to ten years.
Occupancy and equipment expense increased $74,000 due to $171,000 in
occupancy expenses related to five former FFSB branch offices, and was
partially offset by branch real estate tax refunds of $45,000, which were
recorded as a reduction of occupancy and equipment expense and cost savings
associated with the sale of the Company's Roslyn branch office in May, 1998.
Data processing costs increased $35,000 due primarily to increased activity
resulting from the FIBC acquisition.
Goodwill expense increased $419,000 due to the increased goodwill of $43.8
million associated with the FIBC acquisition, and the core deposit amortization
expense increased $141,000 due primarily to $158,000 in amortization related to
the FIBC acquisition.
INCOME TAX EXPENSE. Income tax expense totaled $3.6 million for the three
months ended March 31, 1999, compared to $2.8 million for the three months
ended March 31, 1998, an increase of $820,000. During the three months ended
March 31, 1999, the Company recorded an income tax benefit of $320,000 related
to adjustments from the filing of its June, 1998 tax returns. Excluding this
income tax benefit, the Company's income tax expense would have increased $1.1
million, reflecting an increase of $3.0 million in pre-tax income, offset by a
reduction in the effective tax rate from 45.6% during the quarter ended March
31, 1998, to 43.0% during the quarter ended March 31, 1999. 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.
COMPARISON OF THE OPERATING RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 1999
AND 1998
GENERAL. Net income for the nine months ended March 31, 1999, totaled $14.2
million compared to $9.1 million for the nine months ended March 31, 1998. The
increase in net income resulted from an increase of $3.8 million in net
interest income, a decline of $1.4 million in the provision for loan losses, an
increase of $2.3 million in non-interest income, and income tax benefits if
$670,000 recorded during the nine months ended March 31, 1999.
NET INTEREST INCOME. The discussion of net interest income for the nine
months ended March 31, 1999 and 1998, 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 nine
months ended March 31, 1999 and 1998, and reflects the average yield on assets
and average cost of liabilities for the
<PAGE>
-20-
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.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------------------------
<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> $1,098,246 $65,579 7.96% $815,408 $51,186 8.37%
Other loans 6,107 409 8.93 5,452 373 9.12
MORTGAGE-BACKED SECURITIES <F2> 456,061 21,681 6.34 330,603 16,911 6.82
INVESTMENT SECURITIES <F2> 169,617 7,727 6.07 163,711 8,145 6.63
FEDERAL FUNDS SOLD 30,110 1,079 4.78 37,896 1,524 5.36
------------ ---------- ---------- --------
TOTAL INTEREST-EARNING ASSETS 1,760,141 $96,475 7.31% 1,353,070 $78,139 7.70%
------------ ========== ---------- ========
NON-INTEREST EARNING ASSETS 86,544 68,361
------------ ----------
TOTAL ASSETS $1,846,685 $1,421,431
============ ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
INTEREST-BEARING LIABILITIES:
NOW, SUPER NOW AND
MONEY MARKET ACCOUNTS $57,097 $1,014 2.37% $48,542 $850 2.33%
SAVINGS ACCOUNTS 354,197 5,638 2.12 337,505 5,718 2.26
CERTIFICATES OF DEPOSIT 629,493 26,008 5.50 589,614 25,463 5.75
MORTGAGORS' ESCROW 4,995 75 2.00 5,817 87 1.99
BORROWED FUNDS <F3> 537,550 23,165 5.70 204,637 9,256 6.03
------------ ---------- ---------- --------
TOTAL INTEREST-BEARING
LIABILITIES 1,583,332 $55,900 4.70% 1,186,115 $41,374 4.65%
------------ ========== ---------- ========
CHECKING ACCOUNTS 45,092 28,513
OTHER NON-INTEREST-BEARING
LIABILITIES 33,160 21,183
------------ ----------
TOTAL LIABILITIES 1,661,584 1,235,811
STOCKHOLDERS' EQUITY 185,101 185,620
------------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,846,685 $1,421,431
============ ==========
NET INTEREST INCOME/ INTEREST RATE
SPREAD <F4> $40,575 2.61% $36,765 3.05%
========== ========
NET INTEREST-EARNING ASSETS/NET
INTEREST MARGIN <F5> $176,809 3.07% $166,955 3.62%
============ ==========
RATIO OF INTEREST-EARNING ASSETS
TO INTEREST-BEARING LIABILITIES 111.17% 114.08%
<FN>
<F1> In computing the average balance of loans, non-accrual loans have been
included.
<F2> Includes securities classified "available for sale.
<F3> In calculating the average cost of borrowed funds for the nine months
ended March 31, 1999, a prepayment penalty of $618,000, which was
included in interest expense on borrowed funds during the period, was not
annualized.
<F4> Net interest rate spread represents the difference between the average
rate on interest-earning assets and the average cost of interest-bearing
liabilities.
<F5> Net interest margin represents net interest income as a percentage of
average interest-earning assets.
</TABLE>
<PAGE>
-21-
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, 1999
COMPARED TO
NINE MONTHS ENDED
MARCH 31, 1998
INCREASE/ (DECREASE)
DUE TO
<S> <C> <C> <C>
VOLUME RATE TOTAL
-------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Real Estate Loans $17,328 $(2,935) $14,393
Other loans 45 (9) 36
Mortgage-backed securities 6,189 (1,419) 4,770
Investment securities 282 (700) (418)
Federal funds sold (296) (149) (445)
-------------- ------------ ------------
Total 23,548 (5,212) 18,336
-------------- ------------ ------------
Interest-bearing liabilities:
NOW, Super Now and money market accounts 149 15 164
Savings accounts 279 (359) (80)
Certificates of deposit 1,687 (1,142) 545
Mortgagors' escrow (12) - (12)
Borrowed funds 14,706 (797) 13,909
-------------- ------------ ------------
Total 16,809 (2,283) 14,526
-------------- ------------ ------------
Net change in net interest income $6,739 $(2,929) $3,810
============== ============ ============
</TABLE>
Net interest income for the nine months ended March 31, 1999 increased
$3.8 million to $40.6 million from $36.8 million during the nine months ended
March 31, 1998. The increase was attributable primarily to an increase of
$407.1 million in average interest earning assets, offset by a decline in the
net interest rate spread of 44 basis points. The net interest margin declined
55 basis points from 3.62% for the nine months ended March 31, 1998 to 3.07%
for the nine months ended March 31, 1999.
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 continued activities of the capital leverage program, as the
interest rate spread between assets and underlying liabilities under the
capital leverage program are significantly less than the interest rate spread
between the Company's other interest earning assets and interest bearing
liabilities.
<PAGE>
-22-
INTEREST INCOME. Interest income for the nine months ended March 31, 1999,
was $96.5 million, an increase of $18.4 million from $78.1 million during the
nine months ended March 31, 1998. The increase in interest income was
attributable to increased interest income on real estate loans and mortgage-
backed securities of $14.4 million and $4.8 million, respectively. The
increase in interest income on real estate loans was attributable primarily to
an increase of $282.8 million in the average balance of real estate loans,
resulting from both $463.5 million of real estate loans originated during the
period April 1, 1998 through March 31, 1999, and $192.4 million of real estate
loans acquired from FIBC. The increase in interest income on mortgage-backed
securities was also attributable primarily to an increase in the average
balance of $125.5 million, resulting from $207.8 million in mortgage-backed
securities purchased in accordance with the Company's capital leverage program
during the period April 1, 1998 to March 31, 1999, and $37.8 million added in
the FIBC acquisition. Overall, the yield on interest earning assets decreased
39 basis points from 7.70% during the nine months ended March 31, 1998 to 7.31%
during the nine months ended March 31, 1999. The decline was attributable
primarily to a decrease of 41 basis points in the average yield on real estate
loans resulting primarily from increased competition in the real estate lending
market. The decline also reflects declines in the average yield on mortgage
backed securities and investment securities of 48 basis points and 56 basis
points, respectively, due to recent declines in overall interest rates.
INTEREST EXPENSE. Interest expense increased $14.5 million, to $55.9
million during the nine months ended March 31, 1999, from $41.4 million during
the nine months ended March 31, 1998. This increase resulted primarily from
increased interest expense of $13.9 million on borrowed funds, which resulted
from an increase in the average balance of $332.9 million during the nine
months ended March 31, 1999 compared to the nine months ended March 31, 1998.
The increase in the average balance of borrowed funds resulted primarily from
$201.2 million of borrowed funds added during the period April 1, 1998 to March
31, 1999 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, the average cost of interest bearing
liabilities increased 5 basis points to 4.70% during the nine months ended
March 31, 1999, from 4.65% during the nine months ended March 31, 1998,
reflecting growth in the average balance of both borrowed funds and
certificates of deposit, which posses the highest average cost of the Company's
interest-bearing liabilities. While the average balance of borrowed funds and
certificates of deposit increased during this period, their average cost
declined by 29 basis points and 25 basis points, respectively. The decline in
the average cost of borrowed funds resulted from recent reductions in overall
interest rates, while the reduction in average cost of certificates of deposit
resulted from both lower overall interest rates and the cessation of deposit
rate promotions that the Company maintained from July, 1997 to June, 1998.
Despite the decrease in the average cost of borrowed funds, since borrowed
funds have a higher average cost than other interest bearing liabilities, the
increase in the average balance of borrowed funds also contributed to the
increase in interest expense.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased $1.4
million to $180,000 for the nine months ended March 31, 1999, from $1.6 million
for the nine months ended March 31, 1998. The allowance for loan losses has
increased $3.0 million from June 30, 1998 to March 31, 1999, due exclusively to
the addition of $3.0 million in loan loss reserves from FIBC. The Company's
evaluation of the adequacy of the allowance for loan losses was not effected
nor did it change its loan loss provision due to the FIBC acquisition, since,
as of the date of the consummation of the FIBC acquisition, the Company
determined that the allowance for loan losses acquired from FIBC was adequate
to cover potential losses on the loans acquired from FIBC. The $3.0 million in
loan loss reserves acquired from FIBC included $1.3 million of reserves which,
at the Company's request, were recorded by FIBC immediately prior to the
consummation of the merger in order to conform FIBC's reserve levels to that of
the Company. The reduction in the Company's loan loss provision from the prior
fiscal year resulted from the low level of charge-offs incurred over recent
quarters. Net charge-offs, which have totaled $166,000 during the nine months
ended March 31, 1999, compared to $288,000 during the nine months ended March
31, 1998. See "Asset Quality."
<PAGE>
-23-
NON-INTEREST INCOME. Non-interest income increased $2.3 million to $5.6
million during the nine months ended March 31, 1999, from $3.3 million during
the nine months ended March 31, 1998, due to an increase in service fees and
other charges of $158,000, resulting primarily from increased service fees and
charges on deposits of $345,000, resulting from adjustments in the Company's
deposit fee and service charges. The increase in other income of $1.7 million
resulted primarily from: (1) increased prepayment penalties of $1.0 million,
which resulted from increased interest rate competition on new loans, and (2)
increased income on FHLBNY capital stock of $532,000, due to an increase in the
balance of FHLBNY capital stock from $10.3 million at March 31, 1998 to $27.1
million at March 31, 1999. The increase in the average balance of FHLBNY
capital stock resulted from the Company's desire to increase its overall
borrowing level with the FHLBNY during this period. See "Liquidity and Capital
Resources." Finally, the Company experienced increased gains on sales and
redemptions of securities and other assets of $400,000, due primarily to sales
of equity securities during the first six months of the current fiscal year.
NON-INTEREST EXPENSE. Non-interest expense increased $1.3 million, from
$20.7 million during the nine months ended March 31, 1998, to $21.9 million
during the nine months ended March 31, 1999. Salaries and employee benefit
expense increased $770,000 due to staffing and salary increases during the past
twelve months, and $208,000 in additional salary expense resulting from the
FIBC acquisition. Compensation expense related to the Company's ESOP and RRP
decreased slightly due to the reduction in the Company's average stock price.
Occupancy and equipment expense declined $199,000 due primarily to refunds
of $190,000 related to real estate taxes on branch properties, which were
recorded as a reduction of occupancy and equipment expense during the nine
months ended March 31, 1999, and cost savings associated with the sale of the
Company's Roslyn office in May, 1998, which were offset by increased expenses
of $171,000 associated with the five former FFSB branch offices obtained in the
FIBC acquisition. Data processing costs increased $97,000 during the nine
months ended March 31, 1999, compared to the nine months ended March 31, 1998,
due primarily to increased loan activity resulting from the FIBC acquisition
and Year 2000 compliance costs. See "The Year 2000 Problem."
The provision for losses on net other real estate owned declined $96,000
due to a reduction in the net other real estate owned balance from $1.1
million at March 31, 1998, to $708,000 at March 31, 1999.
Goodwill expense increased $420,000 due to the increased goodwill of $43.8
million associated with the FIBC acquisition. The core deposit amortization
expense increased $106,000 due primarily to $158,000 in amortization related to
the FIBC acquisition.
Other expenses increased $218,000 due to payments of $78,000 received
during the nine months ended March 31, 1998 related to outstanding claims
against Nationar, a failed check processing agent, which were recorded as a
reduction in non-interest expense. The increase in other expenses also
reflects increased audit and accounting expenses.
INCOME TAX EXPENSE. Income tax expense totaled $9.8 million for the nine
months ended March 31, 1999, compared to $8.7 million for the nine months ended
March 31, 1998, an increase of $1.1 million. During the nine months ended
March 31, 1999, the Company recorded income tax expense benefits totaling
$670,000 related to recoveries of previously recorded deferred taxes and
adjustments from the filing of its June, 1998 tax returns. Excluding these
income tax benefits, the Company's income tax expense would have increased $1.8
million, reflecting an increase of $6.2 million in pre-tax income, offset by a
reduction in the effective tax rate from 49.1% during the nine months ended
March 31, 1998, to 43.6% during the nine months ended March 31, 1999. 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.
<PAGE>
-24-
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 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 have been a small, but increasing, number of lawsuits filed against
corporations regarding the Year 2000 Problem and their compliance efforts, many
of which have been dismissed or settled out of court without a final court
determination as to the substantive issues.
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 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.
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 90% 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
<PAGE>
-25-
systems prior to December 31, 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
Company anticipates most of its hardware and software systems to become Year
2000 compliant, tested and operational within 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 to 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 is currently revising its contingency plan to specifically
address other potential business continuance issues related to the Year 2000
Problem such as general utility failures. The revised contingency plan is
expected to be approved by the Company's Board of Directors prior to June 30,
1999.
The Company has reviewed its customer base to determine whether they pose
significant Year 2000 risks. A portion of the Company's customer base is
comprised 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. The remaining portion of the
Company's customer base are landlords who manage apartment buildings throughout
the Company's principal lending area. The Company has maintained formal
communications with landlords whom possess significant outstanding borrowings
in order to determine the extent to which the Company is vulnerable to failure,
by these landlords, to remediate their own Year 2000 Problem. The Company has
been monitoring the progress of these borrowers with their Year 2000 compliance
status. Should a significant number of borrowers encounter failures related
to Year 2000, such failures could result in a material adverse impact upon the
Company's earnings. The Company will continue to monitor the status of Year
2000 Compliance amongst these borrowers in order to ensure that any adverse
impact which may 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 the Company's deposit flows near the end of 1999. Although the Company
has made every effort to inform its deposit customers of the efforts taken in
order to ensure that its 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
the Company believes that deposit outflows related solely to the Year 2000
Problem will likely be both minimal and short-term in nature, it is currently
planning for potential alternative funding sources in the event that such
deposit outflows occur.
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
<PAGE>
-26-
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 seventy-five percent 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 March 31, 1999
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 of this risk continues to reside at the Bank
level. The Bank is not subject to foreign currency exchange or commodity price
risk. At March 31, 1999, 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 March 31, 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, 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
value at March 31, 1999 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 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.
<PAGE>
-27-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(h) 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 January 4, 1999, the Company filed a Current Report on Form 8-K,
relating to the receipt of approval from the Office of Thrift Supervision for
its acquisition of Financial Bancorp, Inc.
On January 8, 1999, the Company filed a Current Report on Form 8-K,
relating to the conclusion of the ten-day pricing period and the scheduled
closing date of January 21, 1999, relating to its acquisition of Financial
Bancorp, Inc.
On February 5, 1999, the Company filed a Current Report on Form 8-K,
as amended on April 6, 1999, relating to the completion of its acquisition of
Financial Bancorp, Inc.
<PAGE>
-28-
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: May 14, 1999 /s/ VINCENT F. PALAGIANO
By: ----------------------------------------
Vincent F. Palagiano
Chairman of the Board and Chief Executive
Officer
/s/ KENNETH J. MAHON
Dated: May 14, 1999 By: ----------------------------------------
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>
For the Three Months For the Nine Months
Ended March 31, Ended March 31,
--------------------- --------------------
Amounts in thousands
<S> <C> <C> <C> <C>
1999 1998 1999 1998
------- ------- ------- -------
Net income $5,549 $3,338 $14,217 $9,063
Weighted average common shares
outstanding 11,343 10,915 10,700 11,043
Basic earnings per common shares $0.49 $0.31 $1.33 $0.82
======= ======= ======= =======
Total weighted average common shares
outstanding 11,343 10,915 10,700 11,043
Unvested shares of Recognition and
Retention Plan and common stock
equivalents due to dilutive
effect of stock options 878 999 901 1,002
------- ------- ------- -------
Total weighted average common shares and
common share equivalents utilized for
diluted earnings per share 12,221 11,914 11,601 12,045
======= ======= ======= =======
Diluted earnings per common share and
common share equivalents $0.45 $0.28 $1.23 $0.75
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001005409
<NAME> DIME COMMUNITY BANCSHARES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 15577
<INT-BEARING-DEPOSITS> 1192401
<FED-FUNDS-SOLD> 17727
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 686238
<INVESTMENTS-CARRYING> 65189
<INVESTMENTS-MARKET> 66190
<LOANS> 1330501
<ALLOWANCE> 15057
<TOTAL-ASSETS> 2244742
<DEPOSITS> 1253142
<SHORT-TERM> 246547
<LIABILITIES-OTHER> 63588
<LONG-TERM> 463032
0
0
<COMMON> 145
<OTHER-SE> 215538
<TOTAL-LIABILITIES-AND-EQUITY> 2244742
<INTEREST-LOAN> 65988
<INTEREST-INVEST> 29408
<INTEREST-OTHER> 1079
<INTEREST-TOTAL> 96475
<INTEREST-DEPOSIT> 32735
<INTEREST-EXPENSE> 55900
<INTEREST-INCOME-NET> 40575
<LOAN-LOSSES> 180
<SECURITIES-GAINS> 658
<EXPENSE-OTHER> 21938
<INCOME-PRETAX> 24024
<INCOME-PRE-EXTRAORDINARY> 14217
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14217
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.23
<YIELD-ACTUAL> 7.31
<LOANS-NON> 4738
<LOANS-PAST> 0
<LOANS-TROUBLED> 1290
<LOANS-PROBLEM> 3763
<ALLOWANCE-OPEN> 12075
<CHARGE-OFFS> 171
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 15057
<ALLOWANCE-DOMESTIC> 15057
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
