1
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 JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13094
DIME BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3197414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
589 FIFTH AVENUE, NEW YORK, NEW YORK 10017
(Address of principal executive offices) (Zip Code)
(212) 326-6170
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
-------- -------
As of July 31, 2001, the registrant had 117,343,344 shares of common stock,
$0.01 par value, outstanding.
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DIME BANCORP, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of June 30, 2001 3
and December 31, 2000
Consolidated Statements of Income for the Three Months and Six
Months Ended June 30, 2001 and 2000 4
Consolidated Statements of Changes in Stockholders' Equity for the
Six Months Ended June 30, 2001 and 2000 5
Consolidated Statements of Cash Flows for the Six Months Ended June
30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 10
Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 31
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
---- ----
ASSETS
Cash and due from banks $ 390,625 $ 421,685
Money market investments 89,678 13,626
Securities available for sale ($1,572,597
and $1,975,884 pledged as collateral
at June 30, 2001 and December 31, 2000,
respectively) 2,194,005 2,851,043
Federal Home Loan Bank of New York stock 393,021 346,770
Loans held for sale 4,858,396 2,804,767
Loans receivable, net:
Residential real estate loans 7,693,965 7,916,035
Commercial real estate loans 4,326,542 4,152,874
Consumer loans 3,133,702 3,050,377
Business loans 1,085,229 1,167,878
------------ ------------
Total loans receivable 16,239,438 16,287,164
Allowance for loan losses (150,337) (144,362)
------------ ------------
Total loans receivable, net 16,089,101 16,142,802
------------ ------------
Premises and equipment, net 186,079 187,746
Mortgage servicing assets, net 924,802 1,021,861
Goodwill 486,702 503,320
Other assets 1,434,893 1,394,208
------------ ------------
Total assets $ 27,047,302 $ 25,687,828
============ ============
LIABILITIES
Deposits $ 14,631,636 $ 13,976,941
Federal funds purchased and securities
sold under agreements to repurchase 3,233,468 3,082,322
Other short-term borrowings 4,779,902 4,545,199
Guaranteed preferred beneficial interests
in Dime Bancorp, Inc.'s junior
subordinated deferrable interest debentures 152,255 152,243
Other long-term debt 1,740,761 1,722,623
Other liabilities 676,663 483,661
------------ ------------
Total liabilities 25,214,685 23,962,989
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value (40,000,000
shares authorized; none issued) -- --
Common stock, $0.01 par value (350,000,000
shares authorized; 120,252,459 shares
issued at June 30, 2001 and December 31, 2000) 1,203 1,203
Additional paid-in capital 1,163,088 1,153,376
Warrants 46,722 46,722
Retained earnings 762,141 643,838
Treasury stock, at cost (3,801,718 shares at
June 30, 2001 and 3,401,666 shares at
December 31, 2000) (114,674) (87,225)
Accumulated other comprehensive loss (22,240) (30,191)
Unearned compensation (3,623) (2,884)
------------ ------------
Total stockholders' equity 1,832,617 1,724,839
------------ ------------
Total liabilities and stockholders' equity $ 27,047,302 $ 25,687,828
============ ============
See accompanying notes to consolidated financial statements.
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DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2001 2000 2001 2000
---- ---- ---- ----
INTEREST INCOME
Loans held for sale $ 86,749 $ 36,639 $ 147,616 $ 63,596
Residential real estate loans receivable 136,736 147,091 280,314 292,596
Commercial real estate loans receivable 74,377 75,764 153,734 144,925
Consumer loans receivable 56,308 56,696 118,522 109,755
Business loans receivable 20,423 24,012 44,639 46,874
Securities available for sale 40,954 70,750 89,178 138,452
Other interest-earning assets 9,200 8,438 18,216 17,199
--------- --------- --------- ---------
Total interest income 424,747 419,390 852,219 813,397
--------- --------- --------- ---------
INTEREST EXPENSE
Deposits 127,169 132,286 262,217 262,762
Borrowed funds 121,372 130,955 255,429 239,818
--------- --------- --------- ---------
Total interest expense 248,541 263,241 517,646 502,580
--------- --------- --------- ---------
Net interest income 176,206 156,149 334,573 310,817
Provision for loan losses 11,000 7,000 28,000 14,000
--------- --------- --------- ---------
Net interest income after
provision for loan losses 165,206 149,149 306,573 296,817
--------- --------- --------- ---------
NON-INTEREST INCOME
Loan servicing and production fees 88,657 71,265 170,825 138,109
Banking service fees 16,904 16,418 32,758 31,939
Securities and insurance brokerage fees 9,936 11,314 20,643 21,847
Net gains on sales and related activities 73,158 30,519 173,636 67,158
Other 3,280 3,891 7,084 7,535
--------- --------- --------- ---------
Total non-interest income 191,935 133,407 404,946 266,588
--------- --------- --------- ---------
NON-INTEREST EXPENSE
General and administrative expense:
Compensation and employee benefits 88,989 75,831 170,128 151,448
Occupancy and equipment 25,106 27,612 52,787 55,726
Other 36,389 35,643 70,465 73,196
--------- --------- --------- ---------
Total general and administrative expense 150,484 139,086 293,380 280,370
Amortization and valuation adjustments of mortgage
servicing assets and related hedging activities 62,154 31,009 124,800 60,241
Amortization of goodwill 8,308 8,371 16,618 16,717
Special charges 2,101 54,255 2,101 54,255
--------- --------- --------- ---------
Total non-interest expense 223,047 232,721 436,899 411,583
--------- --------- --------- ---------
Income before income tax expense and cumulative
effect of a change in accounting principle 134,094 49,835 274,620 151,822
Income tax expense 46,263 15,392 94,744 52,106
--------- --------- --------- ---------
Income before cumulative effect of a change in
accounting principle 87,831 34,443 179,876 99,716
Cumulative effect of a change in accounting
principle, net of tax benefit of $7,815 -- -- (10,521) --
--------- --------- --------- ---------
Net income $ 87,831 $ 34,443 $ 169,355 $ 99,716
========= ========= ========= =========
PER COMMON SHARE
Basic earnings:
Income before cumulative effect of a change in
accounting principle $ 0.77 $ 0.31 $ 1.56 $ 0.90
Cumulative effect of a change in accounting
principle -- -- (0.09) --
--------- --------- --------- ---------
Net income $ 0.77 $ 0.31 $ 1.47 $ 0.90
========= ========= ========= =========
Diluted earnings:
Income before cumulative effect of a change in
accounting principle $ 0.72 $ 0.31 $ 1.48 $ 0.90
Cumulative effect of a change in accounting
principle -- -- (0.09) --
--------- --------- --------- ---------
Net income $ 0.72 $ 0.31 $ 1.39 $ 0.90
========= ========= ========= =========
Cash dividends declared $ 0.12 $ 0.08 $ 0.22 $ 0.14
See accompanying notes to consolidated financial statements.
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DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------------
2001 2000
---- ----
COMMON STOCK
Balance at beginning of period $ 1,203 $ 1,203
----------- -----------
Balance at end of period 1,203 1,203
----------- -----------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period 1,153,376 1,166,530
Tax benefit associated with stock-based
compensation plans 10,216 1,557
Cost of issuing Litigation Tracking
Warrants(TM) (504) --
----------- -----------
Balance at end of period 1,163,088 1,168,087
----------- -----------
WARRANTS
Balance at beginning of period 46,722 --
----------- -----------
Balance at end of period 46,722 --
----------- -----------
RETAINED EARNINGS
Balance at beginning of period 643,838 670,343
Net income 169,355 99,716
Cash dividends declared on common stock (25,360) (15,592)
Issuance of treasury stock under stock-based
compensation plans (25,692) (3,719)
----------- -----------
Balance at end of period 762,141 750,748
----------- -----------
TREASURY STOCK, AT COST
Balance at beginning of period (87,225) (230,035)
Purchase of treasury stock (115,962) (45,061)
Issuance of treasury stock under stock-based
compensation plans 88,513 15,532
----------- -----------
Balance at end of period (114,674) (259,564)
----------- -----------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of period (30,191) (87,257)
Other comprehensive income (loss) 7,951 (12,994)
----------- -----------
Balance at end of period (22,240) (100,251)
----------- -----------
UNEARNED COMPENSATION
Balance at beginning of period (2,884) (4,679)
Issuance of restricted stock (4,369) (11,109)
Amortization of unearned compensation 3,630 15,788
----------- -----------
Balance at end of period (3,623) --
----------- -----------
Total stockholders' equity $ 1,832,617 $ 1,560,223
=========== ===========
See accompanying notes to consolidated financial statements.
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DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-----------------------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 169,355 $ 99,716
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation, amortization and accretion, net 158,255 115,678
Mortgage servicing assets valuation adjustments 51,626 --
Provision for deferred income tax expense 37,070 17,838
Provision for loan losses 28,000 14,000
Net securities gains (453) (1,472)
Net increase in loans held for sale (2,039,789) (431,483)
Other, net (1,008) (228,828)
----------- -----------
Net cash used by operating activities (1,596,944) (414,551)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities
available for sale 1,285,161 321,811
Proceeds from maturities of securities
available for sale 239,995 304,988
Purchases of securities available for sale (167,653) (589,620)
Purchase of Federal Home Loan Bank
of New York stock (46,251) --
Loans receivable originated and purchased,
net of principal payments (654,248) (888,953)
Proceeds from sales of loans 12,396 39,698
Proceeds from sales of other real estate owned 9,817 13,007
Net purchases of premises and equipment (14,157) (12,659)
----------- -----------
Net cash provided (used) by investing activities 665,060 (811,728)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 656,946 22,834
Net increase in borrowings with original
maturities of three months or less 335,951 1,648,056
Proceeds from other borrowings 450,139 --
Repayments of other borrowings (382,786) (436,619)
Purchases of treasury stock (115,962) (45,061)
Proceeds from issuances of treasury stock 58,452 704
Cash dividends paid (25,360) (15,592)
Other (504) --
----------- -----------
Net cash provided by financing activities 976,876 1,174,322
----------- -----------
Net increase (decrease) in cash and cash equivalents 44,992 (51,957)
Cash and cash equivalents at beginning of period 435,311 432,455
----------- -----------
Cash and cash equivalents at end of period $ 480,303 $ 380,498
=========== ===========
Supplemental cash flow information:
Interest payments on deposits and borrowed funds $ 531,104 $ 501,172
Income tax (refunds) payments, net (6,416) 48,973
Supplemental non-cash investing information:
Securitization of loans receivable 657,629 78,618
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
In the opinion of management, the unaudited consolidated financial
statements of Dime Bancorp, Inc. (the "Holding Company") and subsidiaries
(collectively, the "Company") included herein reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such financial statements as of the dates, or for the periods,
indicated. The unaudited consolidated financial statements presented herein
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Holding Company's Annual Report on Form 10-K for
the year ended December 31, 2000, as amended (the "2000 10-K"). The results for
the three months and six months ended June 30, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001. Certain amounts in prior periods have been reclassified to conform with
the current presentation.
NOTE 2 -- PENDING MERGER
On June 25, 2001, the Holding Company entered into a definitive Agreement
and Plan of Merger (the "Merger Agreement") with Washington Mutual, Inc.
("Washington Mutual"), headquartered in Seattle, Washington, pursuant to which
the Holding Company will merge with and into Washington Mutual, with Washington
Mutual as the surviving corporation (the "Merger"). The Merger, which is
currently expected to be completed in the first quarter of 2002, is subject
to regulatory approval and the approval of the Holding Company's stockholders.
The value of the merger consideration per share of the Holding Company's
common stock will be determined in accordance with the following formula:
$11.6245, plus 0.7511 times the average of the closing prices for Washington
Mutual's common stock during the ten consecutive full trading days ending on the
tenth business day before the completion of the Merger.
The Holding Company's common stockholders will be entitled to elect to
receive merger consideration in the form of Washington Mutual common stock,
cash, or a combination thereof. In the Merger Agreement, the Holding Company and
Washington Mutual agreed that, in the aggregate, the merger consideration will
consist of $1,428,809,000 in cash and approximately 92.3 million shares of
Washington Mutual common stock; therefore, approximately 71.5% of the
outstanding shares of the Holding Company's common stock will be converted into
shares of Washington Mutual common stock and the remaining 28.5% will be
converted into cash. (However, to the extent that the number of outstanding
shares of the Holding Company's common stock changes, the aggregate number of
shares of Washington Mutual common stock to be issued will change accordingly,
but the aggregate cash consideration to be paid will not change.) The election
to receive cash and/or shares of Washington Mutual common stock will be subject
to proration if either the cash or stock component of the total merger
consideration is oversubscribed.
NOTE 3 -- DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. SFAS No. 133 established accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Under this standard,
the Company recognizes all derivative instruments as either assets or
liabilities in its consolidated statements of financial condition and measures
those instruments at fair value. Changes in the fair values of derivatives are
reported in the Company's results of operations or other comprehensive income or
loss depending on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in those
fair values or cash flows that are attributable to the hedged risk, both at
inception of the hedge and on an ongoing basis.
As required under SFAS No. 133, when the Company elects to apply hedge
accounting, it establishes, at the inception of the hedge, the method it will
use for assessing the effectiveness of the hedging derivative and the
measurement approach for determining the ineffective aspect of the hedge (the
amount by which hedge gains or losses do not entirely offset corresponding
losses or gains on the hedged item). For fair value hedge transactions in
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which the Company is hedging changes in the fair value of assets, liabilities or
firm commitments, changes in the fair values of the derivative instruments are
generally offset in the Company's results of operations by changes in the fair
values of the risks being hedged. For cash flow hedge transactions in which the
Company is hedging the variability of cash flows related to variable rate
assets, liabilities or forecasted transactions, changes in the fair values of
the derivative instruments are reported in other comprehensive income or loss
along with changes in the fair values of the risks being hedged. The gains and
losses on derivative instruments that are reported in other comprehensive income
or loss are reflected in the results of operations in the periods in which the
results of operations are impacted by the variability of the cash flows of the
hedged items. The ineffective portion of all hedges is recognized in current
period results of operations.
Upon adoption of SFAS No. 133, the Company recorded a transition
adjustment, which resulted in an after-tax reduction in net income of $10.5
million. This transition adjustment is reflected in the Company's results of
operations as the cumulative effect of a change in accounting principle.
As further described below, the Company uses a variety of derivative
instruments in connection with its overall interest rate risk management
strategy. The adoption of SFAS No. 133 may cause volatility in the Company's
earnings, comprehensive income and stockholders' equity as compared with prior
periods.
The Company uses various derivative instruments as hedges against the risk
that fluctuations in interest rates will cause unfavorable changes in the fair
value of certain of its securities available for sale, loans receivable,
deposits and borrowed funds. At June 30, 2001, related derivatives accounted for
as fair value hedges included pay fixed/receive variable and pay
variable/receive fixed interest rate swaps (certain of which are forward
starting), zero coupon pay variable interest rate swaps, interest rate caps and
interest rate cap corridors, and related derivatives accounted for as cash flow
hedges included pay fixed/receive variable interest rate swaps. In addition, the
Company hedges the interest rate risk associated with sales of loans into the
secondary market. Adverse market interest rate changes between the time an
interest rate-lock commitment is granted to a customer and the time the loan is
sold to an investor can erode the fair value of that loan. Therefore, the
Company enters into forward sales transactions and purchases options to hedge
its loans held for sale. These hedges are accounted for as fair value hedges.
The interest rate-locked committed pipeline, to the extent projected to be
closed and sold in the secondary market, as well as the related forward loan
sales contracts, are considered derivatives under SFAS No. 133; however, such
derivatives do not qualify for hedge accounting and are recorded at estimated
fair value. For hedges of interest-earning assets and interest-bearing
liabilities, net gains of $0.6 million and $0.2 million were reflected in "Net
gains on sales and related activities" for the three months and six months ended
June 30, 2001, respectively, representing the sum of (i) changes in the fair
value of purchased option-based derivative instruments related to time value
(which are excluded from the assessment of hedge effectiveness) and (ii) the
ineffective portion of the hedges.
The Company also uses various derivative instruments as fair value hedges
in order to protect against the adverse impact on the fair value of the
Company's mortgage servicing assets of declines in long-term interest rates and
the consequent increase in mortgage loan prepayment rates. At June 30, 2001,
these instruments included forward purchases of mortgage-backed securities
("MBS"), pay fixed/receive variable interest rate swaps (which are used to hedge
certain risks in the forward purchases of MBS), interest rate swaptions,
interest rate floors and interest rate flooridors. Included as a component of
"Amortization and valuation adjustments of mortgage servicing assets and related
hedging activities" for the three months and six months ended June 30, 2001 were
net gains of $15.9 million and $37.5 million, respectively, representing the sum
of (i) changes in the fair value of purchased option-based derivative
instruments related to time value (which are excluded from the assessment of
hedge effectiveness) and (ii) the ineffective portion of the hedges.
NOTE 4 -- RESTRUCTURING LIABILITY
In September 2000, the Company announced a series of actions intended to
reduce annual expenses by approximately $50 million (the "Expense Reduction
Initiative"), which included, but were not limited to, a reduction in the
employee complement through both terminations and attrition, the consolidation
of selected operational functions and the consolidation or disposal of certain
facilities. Upon implementation of the Expense Reduction Initiative, the Company
established a restructuring liability of $38.1 million, of which $16.4 million
related to personnel costs, $20.4 million related to facilities costs and $1.3
million represented goodwill impairment. The restructuring liability was reduced
from $18.2 million at December 31, 2000 to $10.5 million at June 30, 2001 as a
result of cash payments of $5.8 million for personnel costs and $1.9 million for
facilities costs.
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NOTE 5 -- EARNINGS PER COMMON SHARE
The following table sets forth information used to calculate basic and
diluted earnings per common share for the periods indicated (in thousands,
except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2001 2000 2001 2000
---- ---- ---- ----
Income before cumulative effect of a change in
accounting principle $ 87,831 $ 34,443 $ 179,876 $ 99,716
Cumulative effect of a change in accounting principle -- -- (10,521) --
--------- --------- --------- ---------
Net income $ 87,831 $ 34,443 $ 169,355 $ 99,716
========= ========= ========= =========
Weighted average basic common shares outstanding 114,525 110,293 115,074 110,415
Effects of dilutive securities:
Common stock options and restricted common stock 2,515 1,146 2,327 919
Warrants to purchase Series C and Series D
preferred stock 5,181 -- 4,408 --
--------- --------- --------- ---------
Weighted average diluted common shares outstanding 122,221 111,439 121,809 111,334
========= ========= ========= =========
Basic earnings per common share:
Income before cumulative effect of a change in
accounting principle $ 0.77 $ 0.31 $ 1.56 $ 0.90
Cumulative effect of a change in accounting
principle -- -- (0.09) --
--------- --------- --------- ---------
Net income $ 0.77 $ 0.31 $ 1.47 $ 0.90
========= ========= ========= =========
Diluted earnings per common share:
Income before cumulative effect of a change in
accounting principle $ 0.72 $ 0.31 $ 1.48 $ 0.90
Cumulative effect of a change in accounting
principle -- -- (0.09) --
--------- --------- --------- ---------
Net income $ 0.72 $ 0.31 $ 1.39 $ 0.90
========= ========= ========= =========
NOTE 6 -- COMPREHENSIVE INCOME
The following table sets forth the Company's comprehensive income for the
periods indicated (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ------------------
JUNE 30, JUNE 30,
2001 2000 2001 2000
---- ---- ---- ----
Net income $87,831 $34,443 $169,355 $99,716
Other comprehensive (loss)
income, net of taxes:
Net unrealized (loss)
gain on securities
available for sale
arising during the
period, net of
reclassification
adjustment (1,453) (10,385) 7,951 (12,994)
------- ------- -------- -------
Comprehensive income $86,378 $24,058 $177,306 $86,722
======= ======= ======== =======
NOTE 7 -- NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 141, "Business Combinations," which addresses financial accounting and
reporting for business combinations. SFAS No. 141 requires that all business
combinations be accounted for using the purchase method, thereby eliminating the
use of the pooling of interests method. The provisions of SFAS No. 141 apply to
all business combinations initiated after June 30, 2001 and to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later. The Company does not expect that the
adoption of SFAS No. 141 will materially impact its financial statements.
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In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which addresses financial accounting and reporting for
goodwill and other intangible assets. Under SFAS No. 142, goodwill and other
intangible assets with indefinite lives will no longer be subject to
amortization but rather will be subject to assessment for impairment on at least
an annual basis by application of a fair value-based test. For the Company, the
provisions of SFAS No. 142 are required to be applied effective January 1, 2002.
The Company does not currently expect to recognize impairment upon its initial
adoption of SFAS No. 142.
The following table sets forth the Company's net income excluding the
after-tax effect of amortization of goodwill and related earnings per common
share for the periods indicated (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ --------------------
2001 2000 2001 2000
---- ---- ---- ----
Net income excluding amortization of goodwill $94,092 $40,867 $181,879 $112,536
Net income excluding amortization of goodwill
per common share:
Basic $ 0.82 $ 0.37 $ 1.58 $ 1.02
Diluted 0.77 0.37 1.49 1.01
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements contained in this quarterly report on Form 10-Q are
forward-looking and may be identified by the use of words such as "believe,"
"expect," "anticipate," "should," "planned," "estimated," and "potential." These
forward-looking statements are based on the current expectations of the Company.
A variety of factors could cause the Company's actual results and experience to
differ materially from the anticipated results or other expectations expressed
in such forward-looking statements. The risks and uncertainties that may affect
the operations, performance, development and results of the Company's business
include interest rate movements, competition from both financial and
non-financial institutions, changes in applicable laws and regulations, the
timing and occurrence (or non-occurrence) of transactions and events that may be
subject to circumstances beyond the Company's control and general economic
conditions.
PENDING MERGER
On June 25, 2001, the Holding Company and Washington Mutual entered into
the Merger Agreement, pursuant to which the Holding Company will merge with and
into Washington Mutual, with Washington Mutual as the surviving corporation. The
Merger, which is currently expected to be completed in the first quarter of
2002, is subject to regulatory approval and the approval of the Holding
Company's stockholders.
RESULTS OF OPERATIONS
General
The Company reported net income of $87.8 million for the quarter ended June
30, 2001, as compared with $34.4 million for the quarter ended June 30, 2000,
and $169.4 million for the first six months of 2001, as compared with $99.7
million for the first six months of 2000. Diluted earnings per common share were
$0.72 and $1.39 for the three- and six-month periods ended June 30, 2001,
respectively, up from $0.31 and $0.90 for the three- and six-month periods ended
June 30, 2000, respectively. Net income and diluted earnings per common share
for the six months ended June 30, 2001 were reduced by $10.5 million and $0.09,
respectively, as a result of the cumulative effect of change in accounting
principle resulting from the adoption of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The Company's annualized returns
on average stockholders' equity for the three months and six months ended June
30, 2001 were 20.00% and 19.42%, respectively, as compared with 8.86% and 12.92%
for the three months and six months ended June 30, 2000, respectively. The
Company's annualized returns on average assets for the three months and six
months ended June 30, 2001 were 1.30% and 1.29%, respectively, up from 0.56% and
0.83% for the three months and six months ended June 30, 2000, respectively.
The growth in net income for the 2001 periods, as compared with the prior
year periods, was achieved substantially as a result of strong residential real
estate loan production and related sales activities resulting from the
relatively lower interest rate environment, as well as the impact of the Expense
Reduction Initiative.
Net income before special charges (the "Special Charges") for the second
quarter of 2001 was $89.2 million, up $22.6 million, or 33.9%, from the level in
the second quarter of 2000. (For a discussion of the Special Charges,
10
11
see Results of Operations - Non-Interest Expense.") Net income before Special
Charges for the first six months of 2001 totaled $170.7 million, which was $38.8
million, or 29.5%, higher than the level for the first six months of 2000.
Diluted earnings per common share before Special Charges were $0.73 for the
second quarter of 2001, up 21.7% from $0.60 for the comparable quarter of 2000,
and $1.40 for the first six months of 2001, an increase of 17.6% from $1.19 for
the same period one year ago. Before Special Charges, annualized returns on
average stockholders' equity for the three months and six months ended June 30,
2001 were 20.31% and 19.58%, respectively, as compared with 17.14% and 17.09%
for the three months and six months ended June 30, 2000, respectively.
Annualized returns on average assets before Special Charges for the three months
and six months ended June 30, 2001 were 1.32% and 1.30%, respectively, up from
1.09% and 1.10% for the three months and six months ended June 30, 2000,
respectively.
The Company believes that net income before Special Charges data, when
taken in conjunction with reported results, provides useful information in
evaluating performance on a comparable basis, although not currently a required
basis for reporting financial results under generally accepted accounting
principles.
Net Interest Income
Net interest income on a taxable-equivalent basis amounted to $176.4
million for the quarter ended June 30, 2001, up $19.5 million from the
comparable quarter of 2000. This increase reflects growth in average
interest-earning assets of $1.9 billion, coupled with growth in the net interest
margin to 2.95% for the second quarter of 2001 from 2.88% for the second quarter
of 2000. Net interest income on a taxable-equivalent basis for the first six
months of 2001 was $335.3 million, an increase of $23.5 million from the same
period one year ago. This increase was driven by a rise in average
interest-earning assets of $1.8 billion, the effect of which was partially
offset by a reduction in the net interest margin to 2.87% for the first six
months of 2001 from 2.92% for the comparable period of 2000. The Company's
interest rate spread was 3.07% and 2.98% for the second quarter and first six
months of 2001, respectively, as compared with 2.99% and 3.03% for the second
quarter and first six months of 2000, respectively.
The yield on average interest-earning assets was 7.13% for the second
quarter of 2001, as compared with 7.67% for the second quarter of 2000, and
7.35% for the first six months of 2001, as compared with 7.59% for the first six
months of 2000. The yields for the 2001 periods benefited from the continuation
of the Company's strategy to increase the aggregate percentage of its
non-residential loans receivable (which consist of commercial real estate,
consumer and business loans and generally have higher yields than the Company's
residential real estate loans) to total loans receivable, as well as a
significantly lower level of MBS (which generally yield below that recognized in
the loan portfolio). However, such benefits were more than offset by the effects
of a declining interest rate environment during the 2001 periods. The average
balance of non-residential loans rose $0.9 billion, or 12.2%, for the second
quarter of 2001, as compared with the same year ago quarter, and $1.1 billion,
or 14.6%, for the six months ended June 30, 2001, as compared with the
corresponding 2000 period. Such loans represented 52.1% of total average loans
receivable for the second quarter of 2001, up from 47.8%, for the second quarter
of 2000, and 51.6% for the first six months of 2001, an increase from 47.1% for
the first six months of 2000.
The cost of average interest-bearing liabilities declined to 4.06% for the
second quarter of 2001 from 4.68% for the same period of 2000 and to 4.37% for
the first six months of 2001 from 4.56% for the comparable period of 2000. These
declines reflect the lower interest rate environment in the 2001 periods, the
impact of which was partially offset by significantly higher levels of borrowed
funds, which was necessitated to fund the higher level of residential real
estate loan production, and higher time deposit costs. The cost of average
interest-bearing liabilities in the 2001 periods, versus the 2000 periods,
benefited somewhat by the Company's ongoing strategy to grow its core deposits,
which consist of demand, savings and money market deposits and are generally
less costly than the Company's time deposits and borrowed funds. Average core
deposits for the second quarter of 2001 were $8.3
11
12
billion, or 56.5% of average total deposits, up from $7.7 billion, or 54.3% of
average total deposits, for the second quarter of 2000. Average core deposits
for the first six months of 2001 were $8.1 billion, or 56.2% of average total
deposits, up from $7.7 billion, or 54.1% of average total deposits, for the
first six months of 2000.
12
13
The following tables set forth, for the periods indicated, the Company's
consolidated statement of average financial condition, net interest income,
interest rate spread and net interest margin. The information in the tables is
presented on a tax-equivalent basis assuming a federal income tax rate of 35%
and applicable state and local income tax rates. Non-accrual loans are included
in average balances in the tables below.
THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------------------
2001 2000
---------------------------------- ----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans held for sale $ 4,745,754 $ 86,749 7.33% $ 1,775,859 $ 36,639 8.28%
Loans receivable:
Residential real estate 7,747,362 136,736 7.06 8,219,236 147,091 7.16
Commercial real estate 4,258,760 74,377 6.99 3,716,320 75,764 8.16
Consumer 3,077,687 56,308 7.34 2,711,016 56,696 8.39
Business 1,092,926 20,423 7.49 1,087,281 24,012 8.86
----------- --------- ----------- ---------
Total loans receivable 16,176,735 287,844 7.12 15,733,853 303,563 7.73
----------- --------- ----------- ---------
Securities available for sale:
MBS 1,973,551 33,866 6.86 3,467,037 62,116 7.17
Other 402,997 7,310 7.26 467,485 9,434 8.07
----------- --------- ----------- ---------
Total securities available for sale 2,376,548 41,176 6.93 3,934,522 71,550 7.27
----------- --------- ----------- ---------
Other interest-earning assets 558,509 9,200 6.60 490,233 8,438 6.91
----------- --------- ----------- ---------
Total interest-earning assets 23,857,546 424,969 7.13 21,934,467 420,190 7.67
----------- --------- ----------- ---------
Other assets 3,098,737 2,507,865
----------- -----------
Total assets $26,956,283 $24,442,332
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Core:
Demand $ 2,795,912 2,411 0.35 $ 2,161,225 1,910 0.36
Savings 2,272,274 12,173 2.15 2,352,232 12,506 2.14
Money market 3,184,387 27,293 3.44 3,235,486 32,912 4.09
----------- --------- ----------- ---------
Total core 8,252,573 41,877 2.04 7,748,943 47,328 2.46
Time 6,348,428 85,292 5.39 6,509,594 84,958 5.25
----------- --------- ----------- ---------
Total deposits 14,601,001 127,169 3.49 14,258,537 132,286 3.73
----------- --------- ----------- ---------
Borrowed funds:
Federal funds purchased and securities sold
under agreements to repurchase 3,466,341 38,348 4.44 3,380,967 54,139 6.34
Other short-term borrowings 4,517,919 50,359 4.47 3,509,052 54,258 6.12
Long-term debt 1,925,449 32,665 6.80 1,307,394 22,558 6.86
----------- --------- ----------- ---------
Total borrowed funds 9,909,709 121,372 4.91 8,197,413 130,955 6.33
----------- --------- ----------- ---------
Total interest-bearing liabilities 24,510,710 248,541 4.06 22,455,950 263,241 4.68
----------- --------- ----------- ---------
Other liabilities 688,624 431,520
Stockholders' equity 1,756,949 1,554,862
----------- -----------
Total liabilities and stockholders' equity $26,956,283 $24,442,332
=========== ===========
Net interest income $ 176,428 $ 156,949
========= =========
Interest rate spread 3.07 2.99
Net interest margin 2.95 2.88
13
14
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------
2001 2000
------------------------------------- -------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans held for sale $ 3,965,844 $ 147,616 7.49% $ 1,550,226 $ 63,596 8.24%
Loans receivable:
Residential real estate 7,851,047 280,314 7.14 8,207,686 292,596 7.13
Commercial real estate 4,205,359 153,734 7.33 3,616,297 144,925 8.02
Consumer 3,064,986 118,522 7.78 2,623,975 109,755 8.39
Business 1,113,924 44,639 8.07 1,076,618 46,874 8.73
----------- ----------- ----------- -----------
Total loans receivable 16,235,316 597,209 7.37 15,524,576 594,150 7.66
----------- ----------- ----------- -----------
Securities available for sale:
MBS 2,090,672 74,023 7.08 3,466,785 122,797 7.08
Other 428,972 15,903 7.41 429,579 16,658 7.76
----------- ----------- ----------- -----------
Total securities available for sale 2,519,644 89,926 7.14 3,896,364 139,455 7.16
----------- ----------- ----------- -----------
Other interest-earning assets 527,634 18,216 6.95 502,868 17,199 6.87
----------- ----------- ----------- -----------
Total interest-earning assets 23,248,438 852,967 7.35 21,474,034 814,400 7.59
----------- ----------- ----------- -----------
Other assets 3,020,441 2,485,212
----------- -----------
Total assets $26,268,879 $23,959,246
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Core:
Demand $ 2,618,402 4,501 0.35 $ 2,093,070 3,678 0.35
Savings 2,252,981 24,060 2.15 2,361,679 25,422 2.16
Money market 3,210,261 60,920 3.83 3,244,955 65,852 4.08
----------- ----------- ----------- -----------
Total core 8,081,644 89,481 2.23 7,699,704 94,952 2.48
Time 6,301,133 172,736 5.53 6,545,186 167,810 5.16
----------- ----------- ----------- -----------
Total deposits 14,382,777 262,217 3.68 14,244,890 262,762 3.71
----------- ----------- ----------- -----------
Borrowed funds:
Federal funds purchased and
securities sold under
agreements to repurchase 3,357,334 84,355 5.07 3,368,477 103,020 6.05
Other short-term borrowings 4,102,480 102,085 5.02 3,071,349 91,823 5.91
Long-term debt 2,017,090 68,989 6.87 1,311,439 44,975 6.82
----------- ----------- ----------- -----------
Total borrowed funds 9,476,904 255,429 5.43 7,751,265 239,818 6.13
----------- ----------- ----------- -----------
Total interest-bearing liabilities 23,859,681 517,646 4.37 21,996,155 502,580 4.56
----------- ----------- ----------- -----------
Other liabilities 665,159 419,444
Stockholders' equity 1,744,039 1,543,647
----------- -----------
Total liabilities and stockholders' equity $26,268,879 $23,959,246
=========== ===========
Net interest income $ 335,321 $ 311,820
=========== ===========
Interest rate spread 2.98 3.03
Net interest margin 2.87 2.92
14
15
The following table sets forth the changes in interest income on a
taxable-equivalent basis and interest expense and the amounts attributable to
changes in average balances (volume) and average interest rates (rate). The
changes in interest income and interest expense attributable to changes in both
volume and rate have been allocated proportionately to the changes due to volume
and the changes due to rate.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 VERSUS 2000 JUNE 30, 2001 VERSUS 2000
-------------------------------------- --------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------------------------- --------------------------------------
DUE TO DUE TO DUE TO DUE TO
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
(IN THOUSANDS)
Interest income:
Loans held for sale $ 54,733 $ (4,623) $ 50,110 $ 90,429 $ (6,409) $ 84,020
Loans receivable 8,368 (24,087) (15,719) 26,629 (23,570) 3,059
Securities available
for sale (27,136) (3,238) (30,374) (49,136) (393) (49,529)
Other interest-earning
assets 1,137 (375) 762 854 163 1,017
-------- -------- -------- -------- -------- --------
Total interest income 37,102 (32,323) 4,779 68,776 (30,209) 38,567
-------- -------- -------- -------- -------- --------
Interest expense:
Deposits 3,122 (8,239) (5,117) 2,530 (3,075) (545)
Borrowed funds 24,339 (33,922) (9,583) 49,033 (33,422) 15,611
-------- -------- -------- -------- -------- --------
Total interest expense 27,461 (42,161) (14,700) 51,563 (36,497) 15,066
-------- -------- -------- -------- -------- --------
Net interest income $ 9,641 $ 9,838 $ 19,479 $ 17,213 $ 6,288 $ 23,501
======== ======== ======== ======== ======== ========
Provision for Loan Losses
The provision for loan losses, which is predicated upon the Company's
assessment of the adequacy of its allowance for loan losses (see "Management of
Credit Risk"), amounted to $11.0 million for the second quarter of 2001 and
$28.0 million for the first six months of 2001. In comparison, the provision for
loan losses was $7.0 million and $14.0 million for the three- and six-month
periods ended June 30, 2000, respectively. The increases in the provision for
loan losses were consistent with the Company's intent to migrate its allowance
for loan losses to a level commensurate with its changing loan portfolio mix.
Non-Interest Income
Non-interest income was $191.9 million for the quarter ended June 30, 2001,
up 43.9% from $133.4 million for the same quarter of 2000. For the first six
months of 2001, non-interest income was $404.9 million, a 51.9% increase from
$266.6 million in the comparable prior year period. These increases largely
resulted from the favorable impact on net gains on loan sales and loan
production fees of substantially higher residential real estate loan production
in the 2001 periods as compared with the 2000 periods. Non-interest income
represented 52.1% of total revenue (net interest income plus non-interest
income) for the second quarter of 2001, as compared with 46.1% for the second
quarter of 2000, and 54.8% for the first six months of 2001, as compared with
46.2% for the first six months of 2000.
Loan servicing and production fees amounted to $88.7 million for the second
quarter of 2001, an increase of $17.4 million, or 24.4%, from the comparable
quarter of 2000. Loan servicing and production fees for the first six months of
2001 were $170.8 million, up $32.7 million, or 23.7%, from the same period one
year ago. The higher levels of such fees were largely attributable to growth in
loan production fees to $33.6 million for the second quarter of 2001 from $17.3
million for the second quarter of 2000 and to $59.4 million for the first six
months of 2001 from $30.4 million for the first six months of 2000. Driving the
increases in loan production fees was growth in residential real estate loan
production to $12.4 billion and $21.9 billion for the three and six months ended
June 30, 2001, respectively, from $4.9 billion and $8.2 billion for the three
and six months ended June 30, 2000, respectively, resulting primarily from
significantly higher levels of refinance activity and, to a lesser extent,
higher levels of originations of loans for home purchases.
At June 30, 2001, the Company's portfolio of mortgage loans serviced for
others (excluding loans being subserviced by the Company) amounted to $42.7
billion, up $1.6 billion from December 31, 2000 and up $4.5 billion from June
30, 2000. This portfolio consists substantially of residential real estate
loans, the underlying
15
16
weighted average note rates of which were 7.31%, 7.40% and 7.30% at June 30,
2001, December 31, 2000 and June 30, 2000, respectively. In connection with
sales of mortgage loan servicing rights, the Company was subservicing $6.5
billion of loans at June 30, 2001, as compared with $3.1 billion and $2.9
billion at December 31, 2000 and June 30, 2000, respectively. The Company
receives fees for subservicing loans until the transfer of the servicing
responsibility to the purchasers of the servicing rights. It has been the
Company's recent practice to sell the majority of the mortgage servicing rights
associated with its newly-originated residential real estate loans held for sale
under contractual flow sale arrangements. In light of the expiration in July
2001 of one of its contractual flow sale arrangements, coupled with the pending
Merger, the Company is evaluating what its practice in this area will be going
forward.
Net gains on sales and related activities were $73.2 million for the three
months ended June 30, 2001, up $42.6 million from the same quarter one year ago.
Net gains on sales and related activities for the first six months of 2001 were
$173.6 million, an increase of $106.5 million from the comparable prior year
period. These increases largely reflect growth in loan sales to $11.2 billion
for the second quarter of 2001 from $3.9 billion for the comparable 2000 quarter
and to $17.9 billion for the first six months of 2001 from $7.0 billion for the
same period one year ago. Under SFAS No. 133, gains resulting from the
production and sale of loans into the secondary market are recorded at the time
value is created during the residential mortgage origination process. Under
prior guidelines, the value of loans originated for sale was recognized only
upon actual sale. Approximately $29.5 million of net gains recorded during the
first quarter of 2001 would have been recorded during the fourth quarter of 2000
had SFAS No. 133 been in effect at that time.
Non-Interest Expense
Non-interest expense amounted to $223.0 million and $436.9 million for the
second quarter and first six months of 2001, respectively, as compared with
$232.7 million and $411.6 million for the second quarter and first six months of
2000, respectively. Excluding the Special Charges, non-interest expense was
$220.9 million for the second quarter of 2001, up 23.8% from $178.5 million for
the second quarter of 2000, and $434.8 million for the first six months of 2001,
up 21.7% from $357.3 million for the first six months of 2000. These increases
were largely attributable to higher amortization and valuation adjustments of
mortgage servicing assets and related hedging activities, and, to a lesser
extent, higher levels of mortgage banking-related general and administrative
("G&A") expense.
G&A expense totaled $150.5 million for the second quarter of 2001, an
increase of $11.4 million from the same quarter one year ago. For the first six
months of 2001, G&A expense was $293.4 million, up $13.0 million from the
comparable year-ago period. The higher G&A expense levels were fueled by
increases in variable mortgage-banking related expenses resulting from growth in
residential real estate loan production, which more than offset the favorable
effects of the Expense Reduction Initiative. A substantial portion of the $50
million of expense reductions under the Expense Reduction Initiative were
achieved by December 31, 2000, and the program was completed by June 30, 2001.
The efficiency ratio improved to 40.9% for the second quarter of 2001 from 48.0%
for the same quarter of 2000 and to 39.7% for the first six months of 2001 from
48.6% for the corresponding period of 2000.
Amortization and valuation adjustments of mortgage servicing assets and
related hedging activities amounted to $62.2 million for the second quarter of
2001 and $124.8 million for the first six months of 2001, up from $31.0 million
for the second quarter of 2000 and $60.2 million for the first six months of
2000. These increases occurred largely due to higher amortization resulting from
sharp increases in prepayment activity of the loans underlying the mortgage
servicing assets portfolio in response to the lower mortgage interest rate
environment during the 2001 periods. Included in the second quarter and first
six months of 2001 were charges of $13.7 million and $51.6 million,
respectively, as valuation allowances against the mortgage servicing assets, the
impact of which was more than offset in the second quarter of 2001 and partially
offset in the first six months of 2001 by net gains (including those associated
with net accruals and cash payments) of $16.5 million and $39.6 million,
respectively, associated with related hedging activities.
Special Charges for each of the three months and six months ended June 30,
2001 amounted to $2.1 million and were largely associated with the accelerated
vesting of certain of the Holding Company's restricted common stock as a result
of its entering into the Merger Agreement. Special Charges during each of the
second quarter and first six months of 2000 amounted to $54.3 million and were
related to the defense of a hostile takeover attempt of the
16
17
Holding Company, which ultimately expired by its terms in September 2000, the
accelerated vesting of the Holding Company's restricted common stock triggered
by this hostile takeover attempt and the termination, in April 2000, of a merger
agreement.
Income Tax Expense
Income tax expense amounted to $46.3 million and $94.7 million for the
three- and six month periods ended June 30, 2001, respectively, as compared with
$15.4 million and $52.1 million for the three- and six-month periods ended June
30, 2000, respectively. The increases in the 2001 periods from the 2000 periods
principally reflect growth in pre-tax income. The Company's effective income tax
rates, on both a reported basis and a net income before Special Charges basis,
were 34.5% for each of the second quarter and first six months of 2001. For the
second quarter and first six months of 2000, the Company's effective income tax
rates on a reported basis were 30.9% and 34.3%, respectively, whereas on a net
income before Special Charges basis, the effective income tax rates were 36.0%
for each of the 2000 periods.
BUSINESS SEGMENTS
For purposes of its disclosures in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," the
Company has four reportable segments: Retail Banking; Commercial Banking;
Mortgage Banking; and Investment Portfolio. The Company measures the performance
of each business segment utilizing an internal profitability reporting system.
The performance of the Company's segments will vary from period to period
for a variety of factors. The primary factors are the amount of revenue earned
and direct expenses incurred by each segment. However, other factors may also
play an important role in segment performance. Among the most significant of
these other factors are interest rate movements and general economic conditions,
which influence the Company's transfer pricing, and the level of internal
support expenses, which are fully allocated in the Company's internal
profitability reporting process.
17
18
The following table sets forth certain information regarding the Company's
business segments (dollars in thousands):
TOTAL
RETAIL COMMERCIAL MORTGAGE INVESTMENT REPORTABLE RECONCILING
BANKING BANKING BANKING PORTFOLIO SEGMENTS ITEMS (1) TOTAL
------- ------- ------- --------- -------- --------- -----
THREE MONTHS ENDED
JUNE 30, 2001:
Revenue (2) $ 122,424 $ 37,889 $ 213,088 $ 6,059 $ 379,460 $ (22,319) $ 357,141
Net income before Special
Charges 41,087 16,195 41,099 3,360 101,741 (12,534) 89,207
Segment net income to
total net income of
reportable segments 40.4% 15.9% 40.4% 3.3% 100.0%
THREE MONTHS ENDED
JUNE 30, 2000:
Revenue (2) $ 136,717 $ 34,726 $ 110,899 $ 14,223 $ 296,565 $ (14,009) $ 282,556
Net income before Special
Charges 44,830 14,342 8,945 8,340 76,457 (9,841) 66,616
Segment net income to
total net income of
reportable segments 58.6% 18.8% 11.7% 10.9% 100.0%
SIX MONTHS ENDED
JUNE 30, 2001:
Revenue (2) $ 255,338 $ 73,657 $ 417,777 $ 20,075 $ 766,847 $ (55,328) $ 711,519
Net income before Special
Charges 87,974 30,700 83,822 11,816 214,312 (43,581) 170,731
Segment net income to
total net income of
reportable segments 41.1% 14.3% 39.1% 5.5% 100.0%
SIX MONTHS ENDED
JUNE 30, 2000:
Revenue (2) $ 264,399 $ 70,462 $ 218,589 $ 27,482 $ 580,932 $ (17,527) $ 563,405
Net income before Special
Charges 83,550 29,686 15,214 16,293 144,743 (12,854) 131,889
Segment net income to
total net income of
reportable segments 57.7% 20.5% 10.5% 11.3% 100.0%
ASSETS AT:
June 30, 2001 $10,835,931 $ 5,359,527 $ 7,301,766 $ 2,972,591 $26,469,815 $ 577,487 $27,047,302
June 30, 2000 11,123,713 5,007,947 4,009,457 4,401,428 24,542,545 716,231 25,258,776
- ----------
(1) Reconciling items include intersegment eliminations, the Company's funding
center, and, for the six months ended June 30, 2001, the $10.5 million
after-tax charge for the cumulative effect of a change in accounting
principle.
(2) Revenue reflects net interest income after provision for loan losses plus
non-interest income.
Reconcilements of net income before Special Charges to reported net income
are provided in the following table for the periods indicated (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
Net income before Special
Charges $ 89,207 $ 66,616 $170,731 $131,889
Special Charges (2,101) (54,255) (2,101) (54,255)
Income tax benefits on
Special Charges 725 22,082 725 22,082
------- -------- -------- --------
Reported net income $ 87,831 $ 34,443 $169,355 $ 99,716
======== ======== ======== ========
18
19
The Retail Banking segment, which focuses on individuals, includes deposit
accounts and related services, securities brokerage services, insurance
products, consumer lending activities and a portfolio of residential real estate
loans receivable. For the second quarter of 2001, the Retail Banking segment's
net income was $41.1 million, a decrease of $3.7 million, or 8.3%, as compared
with the same quarter of 2000. This decline mainly reflects the lower market
interest rates in 2001 resulting in reduced management accounting-related
credits on deposits, the effects of which were partially offset by growth in
average consumer loans receivable. The Retail Banking segment's net income for
the first six months of 2001 was $88.0 million, up $4.4 million, or 5.3%, from
the same period one year ago. These increases were principally due to growth in
average consumer loans receivable, coupled with a lower provision for loan
losses associated with residential real estate loans receivable, the effects of
which were partially offset by the impact of lower market rates on deposits
discussed above.
The Commercial Banking segment, which includes commercial real estate
lending and business banking activities, provides both lending and deposit
products and services to business customers. The net income generated by the
Commercial Banking segment was $16.2 million for the second quarter of 2001, up
12.9% from $14.3 million for the comparable prior year quarter, and $30.7
million for the first six months of 2001, up 3.4% from $29.7 million for the
same period one year ago. These increases were primarily due to growth in
average commercial real estate and business loans, the effects of which were
partially offset by higher provisions for loan losses.
The Mortgage Banking segment's activities include the production of
residential real estate loans for sale into the secondary market and, to a far
lesser degree, for the Company's portfolio and servicing loans for the Company
and others. The Mortgage Banking segment had net income of $41.1 million for the
second quarter of 2001, up $32.2 million from the second quarter of 2000, and
$83.8 million for the first six months of 2001, an increase of $68.6 million
from the comparable year-ago period. These increases largely reflect higher loan
production and loan sales activities, the effects of which were partially offset
by higher non-interest expenses.
The Investment Portfolio segment invests in certain debt and equity
securities and money market investments in conjunction with the Company's
overall liquidity and interest rate risk and credit risk management processes.
In addition, this segment includes Federal Home Loan Bank of New York ("FHLBNY")
stock required to be held by The Dime Savings Bank of New York, FSB (the "Bank")
as a member of the FHLBNY. The net income for the Investment Portfolio segment
amounted to $3.4 million for the second quarter of 2001, a decrease of $5.0
million from the comparable quarter of 2000. For the first six months of 2001,
the Investment Portfolio segment's net income was $11.8 million, a decline of
$4.5 million from the comparable period of 2000. These declines were primarily
due to a reduction in MBS.
ASSET/LIABILITY MANAGEMENT
General
The Company's asset/liability management is governed by policies that are
reviewed and approved annually by the Boards of Directors of the Holding Company
and the Bank, which oversee the development and execution of risk management
strategies in furtherance of these policies. The Asset/Liability Management
Committee, which is comprised of members of the Company's senior management,
monitors the Company's interest rate risk position and related strategies.
Market Risk
In general, market risk is the sensitivity of income to variations in
interest rates, foreign currency exchange rates, commodity prices and other
relevant market rates or prices, such as prices of equities. The Company's
market rate sensitive instruments include interest-earning assets, mortgage
servicing assets, interest-bearing liabilities and derivative instruments.
The Company enters into market rate sensitive instruments in connection
with its various business operations, particularly its mortgage banking
activities. Loans originated, and the related commitments to originate loans
that will be sold, represent market risk that is realized in a short period of
time, generally two to three months.
The Company's primary source of market risk exposure arises from changes in
United States interest rates and the effects thereof on loan prepayment and
closing behavior, the relative repricing characteristics of its interest-
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20
earning assets and interest-bearing liabilities, as well as depositors' choices.
Changes in these interest rates will result in changes in the Company's earnings
and the market value of its assets and liabilities. The Company does not have
any exposure to foreign exchange rate risk or commodity price risk. Movements in
equity prices may have an indirect effect on certain of the Company's business
activities or the value of credit sensitive loans and securities.
Interest Rate Risk Management
The Company manages its interest rate risk through strategies designed to
maintain acceptable levels of interest rate exposure throughout a range of
interest rate environments. These strategies are intended not only to protect
the Company from significant long-term declines in net interest income as a
result of certain changes in the interest rate environment but also to mitigate
the negative effect of certain interest rate changes upon the Company's mortgage
banking operating results. The Company seeks to contain its interest rate risk
within a band that it believes is manageable and prudent given its capital and
income generating capacity. As a component of its interest rate risk management
process, the Company employs various derivative instruments.
The sensitivity of the Company's net interest income to interest rates is
driven by the mismatch between the term to maturity or repricing of its
interest-earning assets and that of its interest-bearing liabilities.
Historically, the Company's interest-bearing liabilities have repriced or
matured, on average, sooner than its interest-earning assets.
The Company is also exposed to interest rate risk arising from the "option
risk" embedded in many of the Company's interest-earning assets. For example,
mortgage loans and the loans underlying MBS may contain prepayment options,
interim and lifetime interest rate caps and other such features affected by
changes in interest rates. Prepayment option risk affects mortgage-related
assets in both rising and falling interest rate environments as the financial
incentive to refinance a mortgage loan is directly related to the level of the
existing interest rate on the loan relative to current market interest rates.
Extension risk on mortgage-related assets is the risk that the duration of
such assets may increase as a result of lower prepayments due to rising interest
rates or decrease as a result of higher prepayments due to falling interest
rates. Certain mortgage-related assets are more sensitive to changes in interest
rates than others, resulting in a higher risk profile. Because the Company's
interest-bearing liabilities are not affected in a complementary fashion, the
gap between the duration of the Company's interest-earning assets and
interest-bearing liabilities generally increases as interest rates rise and
decreases as interest rates fall. In addition, in a rising interest rate
environment, adjustable-rate assets may reach interim or lifetime interest rate
caps, thereby limiting the amount of their upward adjustment, which effectively
lengthens the duration of such assets.
Lower interest rate environments may also present interest rate risk
exposure. In general, lower interest rate environments tend to accelerate loan
prepayment rates, thus reducing the duration of mortgage-related assets and
accelerating the amortization of any premiums paid in the acquisition of these
assets. The amortization of any premiums over a shorter than expected term
causes yields on the related assets to decline from anticipated levels. In
addition, unanticipated accelerated prepayment rates increase the likelihood of
potential losses of net future servicing revenues associated with the Company's
mortgage servicing assets.
The Company is also exposed to interest rate risk resulting from certain
changes in the shape of the yield curve (particularly a flattening or inversion
- -- also called "yield curve twist risk" -- of the yield curve) and to
differing indices upon which the yield on the Company's interest-earning assets
and the cost of its interest-bearing liabilities are based ("basis risk").
In evaluating and managing its interest rate risk, the Company employs
simulation models to help assess its interest rate risk exposure and the impact
of alternate interest rate scenarios, which consider the effects of
adjustable-rate loan indices, periodic and lifetime interest rate adjustment
caps, estimated loan prepayments, anticipated deposit retention rates and other
dynamics of the Company's portfolios of interest-earning assets and
interest-bearing liabilities.
Derivative Instruments
The Company currently uses a variety of derivative instruments to assist in
managing the interest rate risk exposures in its net interest income, mortgage
servicing assets, and loans held for sale and related loan commitment
20
21
pipeline. While the Company's use of derivative instruments in managing its
interest rate exposures has served to mitigate the unfavorable effects that
changes in interest rates may have on its results of operations, the Company
continues to be subject to interest rate risk.
The Company's assets have historically repriced or matured at a longer term
than the liabilities used to fund those assets. At June 30, 2001, the Company
used the following derivative instruments in its efforts to reduce the effects
on net interest income of its repricing risk associated with certain of its
securities available for sale, loans receivable and borrowed funds: (i) interest
rate swaps where, based on the specified notional amount, the Company either
makes fixed-rate payments and receives variable-rate payments or makes
variable-rate payments and receives fixed-rate payments, with the variable rates
tied to the one- or three-month London Interbank Offered Rate ("LIBOR"); (ii)
interest rate caps, where, in exchange for the payment of a premium to the
counterparty, the Company receives the excess of a designated market interest
rate (substantially one-month LIBOR) over a specified strike rate, as applied to
the specified notional amount; and (iii) interest rate cap corridors, where, in
exchange for the payment of a premium to the counterparty, the Company receives
the amount by which one-month LIBOR exceeds a specified strike rate up to a
maximum rate, as applied to the specified notional amount. In addition, the
Company, in connection with its issuance of time deposits, including zero coupon
time deposits, with various call features, has entered into: (i) interest rate
swaps (certain of which are forward starting) where the Company pays a variable
rate based on one- or three-month LIBOR less a specified margin and receives a
fixed interest rate; and (ii) zero coupon interest rate swaps, where the Company
pays a variable rate based on three-month LIBOR less a margin with the notional
amount increasing to par value over its life. These interest rate swaps and zero
coupon interest rate swaps have call features that match the hedged time
deposits and, when considered together with the related time deposits, that
result in short-term repricing liabilities. The Company uses these time deposits
to replace short-term repricing wholesale funds.
At June 30, 2001, the Company used the following derivative instruments to
protect against the adverse impact on the value of the Company's mortgage
servicing assets of declines in long-term interest rates and the consequent
increase in mortgage loan prepayment rates: (i) forward contracts to purchase
MBS; (ii) interest rate swaps (which are used to hedge certain risks in the
forward contracts to purchase MBS), where the Company pays a fixed rate and
receives a variable rate, with the variable rates tied to one- or three-month
LIBOR; (iii) interest rate swaptions, where, in exchange for the payment of a
premium to the counterparty, the Company has the right, but not the obligation,
to enter into pay fixed/receive variable interest rate swap agreements at a
future date; (iv) interest rate floors, where, in exchange for the payment of a
premium to the counterparty, the Company receives the excess of a specified
strike rate over the constant maturity swap index, as applied to the specified
notional amount; and (v) interest rate flooridors, where, in exchange for the
payment of a premium to the counterparty, the Company receives the amount by
which a swap rate is below a specified strike rate up to a minimum rate, as
applied to the specified notional amount.
In addition, the Company hedges the interest rate risk associated with
sales of loans into the secondary market. Adverse market interest rate changes
between the time an interest rate-lock commitment is granted to a customer and
the time the loan is sold to an investor can erode the fair value of that loan.
Therefore, the Company enters into forward sales transactions and purchases
options to hedge its loans held for sale and to manage the interest rate risk on
the related interest rate-locked commitment pipeline.
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The following table sets forth the derivative instruments used by the
Company at June 30, 2001 for interest rate risk-management purposes (dollars in
thousands):
WEIGHTED AVERAGE
ESTIMATED ----------------
NOTIONAL FAIR PAY RECEIVE
AMOUNT VALUE RATE RATE
------ ----- ---- ----
Net interest income risk-management instruments:
Pay fixed/receive variable interest rate
swap hedging:
Securities available for sale(1) $ 405,091 $ (17,077) 6.86% 4.08%
Loans receivable(1) 1,597,903 (28,926) 6.28 3.89
Borrowed funds(1) 100,000 (224) 6.06 4.06
Pay variable/receive fixed interest rate
swaps hedging:
Time deposits(1) 223,000 (4,508) 3.96 6.51
Borrowed funds(1) 500,000 472 3.98 5.08
Forward starting pay variable/receive
fixed interest rate swaps hedging time deposits 10,000 (266) -- --
Zero coupon pay variable interest rate swaps
hedging time deposits(1) 7,120 (347) 3.93 --
Interest rate caps hedging loans receivable(3) 87,846 5 -- --
Interest rate cap corridors hedging:
Securities available for sale(4) 14,000 187 -- --
Loans receivable(4) 64,527 600 -- --
----------- -----------
Total net interest income
risk-management instruments 3,009,487 (50,084)
----------- -----------
Mortgage servicing assets risk-management
instruments:
Pay fixed/receive variable interest
rate swaps(1) 680,000 584 5.24 3.87
Interest rate swaptions(5) 2,265,000 42,252 -- --
Interest rate floors(6) 3,540,000 46,484 -- --
Interest rate flooridors(7) 900,000 3,811 -- --
Forward contracts 3,505,000 (17,999) -- --
----------- -----------
Total mortgage servicing assets risk-
management instruments 10,890,000 75,132
----------- -----------
Loans held for sale and related loan commitment
pipeline risk-management instruments:
Forward contracts 6,574,548 15,125 -- --
Put options purchased 120,000 403 -- --
----------- -----------
Total loans held for sale and related
loan commitment pipeline
risk-management instruments 6,694,548 15,528
----------- -----------
Total interest rate risk-management instruments $20,594,035 $ 40,576
=========== ===========
- ----------
(1) Variable rates are presented on the basis of rates in effect at June 30,
2001.
(2) The accrual of interest begins July 20, 2001. The variable-rate payable
will be tied to three-month LIBOR and the fixed-rate receivable will be
7.00%.
(3) The weighted average strike rate was 6.97%.
(4) The weighted average strike rate was 5.94% and the weighted average maximum
rate was 7.44%.
(5) The weighted average strike rate was 5.90%.
(6) The weighted average strike rate was 6.24%.
(7) The weighted average strike rate was 5.68% and the weighted average minimum
rate was 4.68%.
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Asset/Liability Repricing
The measurement of differences (or "gaps") between the Company's
interest-earning assets and interest-bearing liabilities that mature or reprice
within a period of time is one indication of the Company's sensitivity to
changes in interest rates. A negative gap generally indicates that, in a period
of rising interest rates, deposit and borrowing costs will increase more rapidly
than the yield on loans and securities and, therefore, reduce the Company's net
interest margin and net interest income. The opposite effect will generally
occur in a declining interest rate environment. Although the Company has a large
portfolio of adjustable-rate assets, the protection afforded by such assets in
the event of substantial rises in interest rates for extended time periods is
limited due to interest rate reset delays, periodic and lifetime interest rate
caps, payment caps and the fact that indices used to reprice a portion of the
Company's adjustable-rate assets lag changes in market rates. Moreover, in
declining interest rate environments or certain shifts in the shape of the yield
curve, these assets may prepay at significantly faster rates than otherwise
anticipated. It should also be noted that the Company's gap measurement reflects
broad judgmental assumptions with regard to repricing intervals for certain
assets and liabilities.
The following table reflects the repricing of the Company's
interest-earning assets, interest-bearing liabilities and related derivative
instruments at June 30, 2001. The amount of each asset, liability or derivative
instrument is included in the table at the earlier of the next repricing date or
maturity. Prepayment assumptions for loans and MBS used in preparing the table
are based upon industry standards as well as the Company's experience and
estimates. Non-accrual loans have been included in the "Over One Through Three
Years" category. Demand deposits, money market deposits and savings accounts are
allocated to the various repricing intervals in the table based on the Company's
experience and estimates.
PROJECTED REPRICING
--------------------------------------
OVER ONE
THROUGH OVER
ONE YEAR THREE THREE
OR LESS YEARS YEARS TOTAL
------- ----- ----- -----
(DOLLARS IN MILLIONS)
Interest-earning assets $ 13,221 $ 4,681 $ 6,016 $ 23,918
Interest-bearing liabilities 17,511 3,841 3,186 24,538
-------- -------- -------- --------
Periodic gap before impact of derivative
instruments (4,290) 840 2,830 (620)
Impact of derivative instruments 1,695 100 (1,795) --
-------- -------- -------- --------
Periodic gap $ (2,595) $ 940 $ 1,035 $ (620)
======== ======== ======== ========
Cumulative gap $ (2,595) $ (1,655) $ (620)
======== ======== ========
Cumulative gap as a percentage of total
assets (9.6)% (6.1)% (2.3)%
MANAGEMENT OF CREDIT RISK
The Company's credit risk arises from the possibility that borrowers,
issuers, or counterparties will not perform in accordance with contractual
terms. The Company has a process of credit risk controls and management
procedures by which it monitors and manages its level of credit risk.
The Company's non-performing assets consist of non-accrual loans and other
real estate owned, net. Non-accrual loans are all loans 90 days or more
delinquent, as well as loans less than 90 days past due for which the full
collectibility of contractual principal or interest payments is doubtful.
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The following table presents the components of the Company's non-performing
assets at the dates indicated (dollars in thousands):
JUNE 30, DECEMBER 31, JUNE 30,
2001 2000 2000
---- ---- ----
Non-accrual loans:
Residential real estate $36,634 $41,071 $35,897
Commercial real estate 4,963 2,348 4,645
Consumer 6,741 8,392 8,957
Business 13,710 15,352 16,330
------- ------- -------
Total non-accrual loans 62,048 67,163 65,829
------- ------- -------
Other real estate owned, net:
Residential real estate 9,647 19,549 15,116
Commercial real estate 747 823 3,156
------- ------- -------
Total other real estate
owned, net 10,394 20,372 18,272
------- ------- -------
Total non-performing assets $72,442 $87,535 $84,101
======= ======= =======
Non-performing assets to total 0.27% 0.34% 0.33%
assets
Non-accrual loans to loans 0.38 0.41 0.41
receivable
The level of loans delinquent less than 90 days may, to some degree, be an
indicator of future levels of non-performing assets. The following table sets
forth, at June 30, 2001, such delinquent loans of the Company, net of those
already in non-performing status (in thousands):
DELINQUENCY PERIOD
-------------------
30 - 59 60 - 89
DAYS DAYS TOTAL
---- ---- -----
Residential real estate $27,713 $11,280 $38,993
Commercial real estate 749 -- 749
Consumer 17,461 4,366 21,827
Business 3,385 3,556 6,941
------- ------- -------
Total $49,308 $19,202 $68,510
======= ======= =======
The following table sets forth the activity in the Company's allowance for
loan losses for the periods indicated (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2001 2000 2001 2000
---- ---- ---- ----
Balance at beginning of
period $147,210 $142,485 $144,362 $140,296
Provision for loan losses 11,000 7,000 28,000 14,000
Loan charge-offs:
Residential real estate (1,867) (4,644) (3,814) (8,098)
Commercial real estate (224) (18) (292) (32)
Consumer (2,836) (3,048) (7,143) (5,784)
Business (4,709) (120) (13,928) (125)
-------- -------- -------- --------
Total loan
charge-offs (9,636) (7,830) (25,177) (14,039)
-------- -------- -------- --------
Loan recoveries:
Residential real estate 291 221 524 779
Commercial real estate 97 593 118 621
Consumer 1,274 960 2,338 1,763
Business 101 3 172 12
-------- -------- -------- --------
Total loan
recoveries 1,763 1,777 3,152 3,175
-------- -------- -------- --------
Net loan charge-offs (7,873) (6,053) (22,025) (10,864)
-------- -------- -------- --------
Balance at end of period $150,337 $143,432 $150,337 $143,432
======== ======== ======== ========
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The increase in net loan charge-offs for the first six months of 2001 from
the comparable period of 2000 was largely attributable to a $9.0 million
write-down of a single business loan during the first quarter of 2001.
The following table sets forth the Company's allowance for loan losses
coverage ratios at the dates indicated:
JUNE 30, DECEMBER 31, JUNE 30,
2001 2000 2000
---- ---- ----
Allowance for loan losses to:
Loans receivable 0.93% 0.89% 0.90%
Non-accrual loans 242.29 214.94 217.89
The Company is exposed to credit risk in the event of non-performance by
counterparties to derivative instruments. The level of credit risk associated
with derivative instruments depends on a variety of factors, including the
estimated fair value of the instrument, the collateral maintained, the use of
master netting arrangements and set-off rights and the ability of the
counterparty to comply with its contractual obligations. In the event of default
by a counterparty, the Company would be subject to an economic loss that
corresponds to the cost to replace the agreement. The Company manages the credit
risk associated with its derivative instruments through credit approvals, limits
and monitoring procedures, dealing only with counterparties with high credit
ratings, obtaining collateral when deemed necessary and including master netting
and set-off provisions in its agreements when possible. The Company's credit
risk associated with its use of derivative instruments amounted to approximately
$92 million at June 30, 2001. There were no past due amounts related to the
Company's derivative instruments at June 30, 2001.
FINANCIAL CONDITION
General
The Company's total assets amounted to $27.0 billion at June 30, 2001, up
5.3% from $25.7 billion at the end of 2000. This increase was driven by growth
in loans held for sale of $2.1 billion, the impact of which was partially offset
by a reduction in securities available for sale.
Securities Available for Sale
Securities available for sale amounted to $2.2 billion at the end of the
2001 second quarter, down from $2.9 billion at year-end 2000. Contributing
significantly to this decline was a reduction in MBS of $603.6 million, or
24.9%, largely due to sales.
The following table summarizes the amortized cost and estimated fair value
of securities available for sale at the dates indicated (in thousands):
JUNE 30, 2001 DECEMBER 31, 2000
------------------------- -------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
---- ---------- ---- ----------
MBS:
Pass-through securities:
Privately-issued $ 784,328 $ 774,048 $1,357,832 $1,344,297
U. S. government agencies 612,811 615,185 562,207 560,162
Collateralized mortgage obligations:
Privately-issued 433,410 434,594 493,590 509,982
U. S. government agencies -- -- 13,271 12,819
Interest-only 383 242 436 374
---------- ---------- ---------- ----------
Total MBS 1,830,932 1,824,069 2,427,336 2,427,634
---------- ---------- ---------- ----------
Domestic corporate debt securities 357,378 326,007 356,821 305,003
Other debt securities 25,201 25,435 24,888 24,573
Equity securities 18,483 18,494 93,712 93,833
---------- ---------- ---------- ----------
Total securities available for sale $2,231,994 $2,194,005 $2,902,757 $2,851,043
========== ========== ========== ==========
Loans Receivable
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26
Loans receivable (exclusive of the allowance for loan losses) amounted to
$16.2 billion at June 30, 2001, relatively unchanged from the level at December
31, 2000. At June 30, 2001, non-residential loans represented 52.6% of total
loans receivable, up from 51.4% at December 31, 2000.
The following table sets forth a summary of the Company's loans receivable
at the dates indicated (dollars in thousands):
JUNE 30, 2001 DECEMBER 31, 2000 INCREASE
--------------------- --------------------- (DECREASE)
AMOUNT PERCENT AMOUNT PERCENT IN AMOUNT
------ ------- ------ ------- ---------
Residential real estate $ 7,693,965 47.4% $ 7,916,035 48.6% $ (222,070)
Commercial real estate:
Multi-family 1,936,442 11.9 1,846,582 11.3 89,860
Other 2,390,100 14.7 2,306,292 14.2 83,808
----------- ----- ----------- ----- -----------
Total commercial real estate 4,326,542 26.6 4,152,874 25.5 173,668
----------- ----- ----------- ----- -----------
Consumer:
Home equity 2,178,459 13.4 2,063,558 12.7 114,901
Automobile 856,401 5.3 878,600 5.4 (22,199)
Other 98,842 0.6 108,219 0.6 (9,377)
----------- ----- ----------- ----- -----------
Total consumer 3,133,702 19.3 3,050,377 18.7 83,325
----------- ----- ----------- ----- -----------
Business 1,085,229 6.7 1,167,878 7.2 (82,649)
----------- ----- ----------- ----- -----------
Total loans receivable $16,239,438 100.0% $16,287,164 100.0% $ (47,726)
=========== ===== =========== ===== ===========
Deposits
At June 30, 2001, deposits amounted to $14.6 billion, up from $14.0 billion
at the end of 2000. This increase was largely attributable to growth in core
deposits (primarily demand deposits) of $511.3 million, or 6.6%.
The following table sets forth a summary of the Company's deposits at the
dates indicated (dollars in thousands):
JUNE 30, 2001 DECEMBER 31, 2000 INCREASE
------------- ----------------- (DECREASE)
AMOUNT PERCENT AMOUNT PERCENT IN AMOUNT
------ ------- ------ ------- ---------
Core:
Demand $ 2,790,817 19.1% $ 2,240,124 16.0% $ 550,693
Savings 2,300,477 15.7 2,239,541 16.0 60,936
Money market 3,127,573 21.4 3,227,871 23.1 (100,298)
----------- ----- ----------- ----- -----------
Total core 8,218,867 56.2 7,707,536 55.1 511,331
Time 6,412,769 43.8 6,269,405 44.9 143,364
----------- ----- ----------- ----- -----------
Total deposits $14,631,636 100.0% $13,976,941 100.0% $ 654,695
=========== ===== =========== ===== ===========
Borrowed Funds
Borrowed funds totaled $9.9 billion at the end of the 2001 first quarter,
as compared with $9.5 billion at the end of 2000.
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27
Presented in the table below is the composition of the Company's borrowed
funds at the dates indicated (in thousands):
JUNE 30, DECEMBER 31,
2001 2000
---- ----
Short-term borrowings:
Federal funds purchased $2,316,000 $1,635,000
Securities sold under agreements
to repurchase 917,468 1,447,322
FHLBNY advances 4,700,000 4,487,102
Other 79,902 58,097
---------- ----------
Total short-term borrowings 8,013,370 7,627,521
---------- ----------
Long-term debt:
Guaranteed preferred beneficial
interests in Dime Bancorp, Inc.'s
junior subordinated deferrable
interest debentures 152,255 152,243
FHLBNY advances 1,309,592 1,091,485
Senior notes of the Holding Company 399,231 592,470
Other 31,938 38,668
---------- ----------
Total long-term debt 1,893,016 1,874,866
---------- ----------
Total borrowed funds $9,906,386 $9,502,387
========== ==========
Stockholders' Equity
Stockholders' equity was $1.8 billion at June 30, 2001, up $107.8 million,
or 6.2%, from December 31, 2000. The increase was primarily due to net income of
$169.4 million.
During the first six months of 2001, the Holding Company repurchased
3,848,000 shares of its common stock at a cost of $116.0 million in connection
with a program announced in October 2000 under which the Holding Company is
authorized to repurchase up to 13,607,664 shares of its common stock. Through
the end of the 2001 second quarter, the Holding Company repurchased 10,690,500
shares of its common stock under this program. Under the terms of the Merger
Agreement, without the prior consent of Washington Mutual, the Holding Company
is prohibited from repurchasing any of its common stock. The Holding Company
does not currently expect to seek such consent from Washington Mutual, although
there can be no assurances that the Holding Company will not do so.
Cash dividends declared and paid per share of the Holding Company's common
stock were $0.12 for the second quarter of 2001 and $0.22 for the first six
months of 2001. In comparison, during the three months and six months ended June
30, 2000, cash dividends declared and paid per share of the Holding Company's
common stock were $0.08 and $0.14, respectively. On July 24, 2001, the Holding
Company announced the declaration of a cash dividend of $0.12 per share on its
common stock. This dividend will be paid on September 4, 2001 to the Holding
Company's common stockholders of record as of the close of business on August
15, 2001. The Holding Company's common stock dividend payout ratios for the
second quarter and first six months of 2001 were 16.67% and 15.83%,
respectively, as compared with 25.81% and 15.56% for the second quarter and
first six months of 2000, respectively. Under the terms of the Merger Agreement,
the Holding Company, without the prior consent of Washington Mutual, is
prohibited from declaring or paying any dividends or distributions on any shares
of its stock, except for regular quarterly cash dividends on its common stock at
rate of $0.12 per share, as long as the Holding Company does not need to borrow
money to pay that dividend. The Holding Company does not currently expect to
seek such consent from Washington Mutual, although there can be no assurances
that the Holding Company will not do so.
LIQUIDITY
The Company's liquidity management process focuses on ensuring that
sufficient funds exist to meet withdrawals by depositors, loan funding
commitments, debt service requirements and other financial obligations and
expenditures. The liquidity position of the Company, which is monitored on a
daily basis, is managed pursuant to established policies and guidelines.
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28
The Company's sources of liquidity include principal repayments on loans
and MBS, borrowings, deposits, sales of loans in connection with mortgage
banking activities, sales of securities available for sale and cash provided by
operations. The Company has access to the capital markets for issuing debt or
equity securities, and the Bank has access to the discount window of the Federal
Reserve Bank of New York, if necessary, for the purpose of borrowing to meet
temporary liquidity needs.
Excluding funds raised through the capital markets, the primary source of
funds of the Holding Company, on an unconsolidated basis, has been dividends
from the Bank, whose ability to pay dividends is subject to regulations of the
Office of Thrift Supervision (the "OTS"). At June 30, 2001, the Holding Company
had available for issuance an aggregate of $250.0 million of debentures, notes
or other unsecured evidences of indebtedness under an effective shelf
registration with the Securities and Exchange Commission (the "Commission"). The
debt securities issuable under this shelf registration, which may be
unsubordinated or subordinated to certain other obligations of the Holding
Company, may be offered separately or together in one or more series.
REGULATORY CAPITAL
Pursuant to OTS regulations, the Bank is required to maintain tangible
capital of at least 1.5% of adjusted total assets, core ("tier 1") capital of at
least 3.0% of adjusted total assets and total risk-based capital of at least
8.0% of risk-weighted assets. The Bank exceeded these capital requirements at
June 30, 2001.
Under the prompt corrective action regulations adopted by the OTS pursuant
to the Federal Deposit Insurance Corporation Improvement Act of 1991, an
institution is considered well capitalized, the highest of five categories, if
its ratio of total risk-based capital to risk-weighted assets is 10.0% or more,
its ratio of tier 1 capital to risk-weighted assets is 6.0% or more, its ratio
of core capital to adjusted total assets is 5.0% or greater, and it is not
subject to any order or directive by the OTS to meet a specific capital level.
At June 30, 2001, the Bank met the published standards for a well capitalized
designation under these regulations.
The following table sets forth the regulatory capital position of the Bank
at the dates indicated (dollars in thousands):
JUNE 30, 2001 DECEMBER 31, 2000
------------------- ------------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
Tangible and core capital $1,601,127 6.04% $1,463,350 5.83%
Tier 1 risk-based capital 1,601,127 8.96 1,463,350 8.54
Total risk-based capital 1,876,463 10.51 1,732,712 10.11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is contained in Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset/Liability Management," incorporated herein by reference.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have not been any material developments regarding the status of the
Bank's goodwill lawsuit against the United States government since the filing of
the 2000 10-K.
The Company remains a named defendant in two of the seven
previously-disclosed purported class action lawsuits concerning the issue of
whether certain payments -- known as "yield spread premiums" -- to mortgage
brokers in connection with the making of residential real estate loans violated
federal law: McDuffie (formerly Bailey) v. North American Mortgage Company,
filed in the United States District Court for the Middle District of Alabama in
October 1997, and Brigham v. North American Mortgage Company, filed in the
United States District Court for the Middle District of Georgia in January 1998.
Neither case has been certified as a class action. The other five cases have
been dismissed.
In a lawsuit not involving the Company, Culpepper v. Inland Mortgage Corp.
("Culpepper"), the United States Court of Appeals for the Eleventh Circuit
(covering, in part, Alabama and Georgia) ruled on June 15, 2001 that the
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lower court in that case did not abuse its discretion in certifying a class
action to determine the propriety of yield spread premium payments in connection
with the making of the residential real estate loan at issue in that case.
Culpepper was one of four cases involving broker compensation argued before the
Eleventh Circuit, and the only one of the four cases in which the Circuit has to
date rendered a decision. The defendant in Culpepper has filed for a rehearing
before the full bench of the Eleventh Circuit.
The Company continues to believe that its compensation programs for
mortgage brokers comply with applicable laws and with accepted mortgage banking
industry practices and that it has meritorious defenses to each of these
actions. The Company intends to continue to oppose each of these actions
vigorously.
Certain claims, suits, complaints and investigations involving the Company,
arising in the ordinary course of business, have been filed or are pending. The
Company is of the opinion, after discussion with legal counsel representing the
Company in these proceedings, that the aggregate liability or loss, if any,
arising from the ultimate disposition of these matters would not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Holding Company's Annual Meeting of Stockholders was held on June 13,
2001 (the "Annual Meeting"). Set forth below is a brief description of each
matter voted upon at the Annual Meeting, and the number of votes cast for,
against or withheld, as well as the number of abstentions as to each such
matter.
(a) Election of directors:
The following individuals were duly elected as directors of the Holding
Company:
TERM
NOMINEE FOR WITHHELD EXPIRATION
------- --- -------- ----------
Frederick C. Chen 100,205,689 4,963,826 2004
J. Barclay Collins II 100,314,422 4,855,093 2003
James F. Fulton 100,213,114 4,956,401 2003
Virginia M. Kopp 100,201,922 4,967,593 2003
James M. Large, Jr. 100,279,924 4,889,591 2004
John Morning 100,287,772 4,881,743 2004
Sally Hernandez-Pinero 100,297,964 4,871,551 2003
Eugene G. Schulz, Jr. 100,213,675 4,955,840 2004
Norman R. Smith 100,372,736 4,796,779 2004
Lawrence J. Toal 100,143,383 5,026,132 2003
Anthony P. Terracciano 103,780,138 1,389,377 2004
The following directors of the Board, whose terms did not expire at the
Annual Meeting, continued to serve as directors of the Board following the
Annual Meeting: Derrick D. Cephas; Richard W. Dalrymple; Fred B. Koons; Margaret
Osmer-McQuade; Howard H. Newman; Howard Smith; and Ira T. Wender.
(b) A proposal regarding certain amendments to the Holding Company's 1991
Stock Incentive Plan was approved with 92,539,130 votes cast for,
11,938,294 votes cast against and 692,091 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
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(b) REPORTS ON FORM 8-K
During the three-month period ended June 30, 2001, the Holding Company
filed with the Commission the following Current Reports on Form 8-K:
-- Dated April 19, 2001 and filed on April 20, 2001, reporting the
issuance of (i) a press release announcing its financial results for
the first quarter of 2001 and (ii) a press release announcing a cash
dividend to be paid to common stockholders under Item 5 and filing
copies of the press releases under Item 7.
-- Dated June 25, 2001 and filed on June 26, 2001, reporting the
announcement of the Merger Agreement under Item 5 and filing copies of
the announcing press release and investor presentation materials under
Item 7.
-- Dated June 26, 2001 and filed on June 27, 2001, reporting the
announcement of the Merger Agreement under Item 5 and filing copies of
the Merger Agreement and other pertinent agreements under Item 7.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIME BANCORP, INC.
(Registrant)
Dated: August 13, 2001 By: /s/ Lawrence J. Toal
---------------------------------------
Lawrence J. Toal
Chief Executive Officer, President
and Chief Operating Officer
Dated: August 13, 2001 By: /s/ Anthony R. Burriesci
---------------------------------------
Anthony R. Burriesci
Executive Vice President and
Chief Financial Officer
Dated: August 13, 2001 By: /s/ John F. Kennedy
---------------------------------------
John F. Kennedy
Controller and Chief Accounting Officer
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