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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-13094
DIME BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3197414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
589 Fifth Avenue, New York, New York 10017
(Address of principal executive offices) (Zip Code)
(212) 326-6170
(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 ___
The number of shares outstanding of the issuer's common stock, $0.01 par value,
was 114,221,018 as of April 30, 1998.
2
DIME BANCORP, INC.
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Income for the Three Months
Ended March 31, 1998 and 1997 4
Consolidated Statement of Changes in Stockholders' Equity
for the Three Months Ended March 31, 1998 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997 6
Consolidated Statements of Comprehensive Income for the Three
Months Ended March 31, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 27
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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)
March 31, December 31,
1998 1997
------------ ------------
ASSETS
Cash and due from banks $ 259,974 $ 295,369
Money market investments 25,402 157,158
Securities available for sale 3,535,120 4,992,304
Federal Home Loan Bank of New York stock 324,106 303,287
Loans held for sale 3,809,866 1,841,862
Loans receivable, net:
Residential real estate loans 9,595,121 9,848,593
Commercial real estate loans 2,273,686 2,263,023
Consumer loans 787,691 773,817
Business loans 115,380 99,074
Allowance for loan losses (109,096) (104,718)
------------ ------------
Total loans receivable, net 12,662,782 12,879,789
------------ ------------
Accrued interest receivable 108,550 106,829
Premises and equipment, net 156,606 150,805
Mortgage servicing assets 335,487 341,906
Other assets 806,105 778,691
------------ ------------
Total assets $ 22,023,998 $ 21,848,000
============ ============
LIABILITIES
Deposits $ 13,991,123 $ 13,847,275
Securities sold under agreements to repurchase 1,354,880 2,975,774
Federal Home Loan Bank of New York advances 4,489,841 2,786,751
Senior notes 142,525 142,475
Guaranteed preferred beneficial interests in
Holding Company's junior subordinated
deferrable interest debentures 196,143 196,137
Other borrowed funds 200,253 218,175
Other liabilities 349,598 366,555
------------ ------------
Total liabilities 20,724,363 20,533,142
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share
(200,000,000 shares authorized;
120,256,459 shares issued at March 31, 1998
and December 31, 1997) 1,203 1,203
Additional paid-in capital 1,161,308 1,158,221
Retained earnings 308,345 261,201
Treasury stock, at cost (5,998,748 shares at
March 31, 1998 and 3,898,132 shares at
December 31, 1997) (160,192) (95,221)
Accumulated other comprehensive income,
net of taxes (2,807) (9,534)
Unearned compensation (8,222) (1,012)
------------ ------------
Total stockholders' equity 1,299,635 1,314,858
------------ ------------
Total liabilities and stockholders' equity $ 22,023,998 $ 21,848,000
============ ============
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)
For the Three Months
Ended
March 31,
---------------------
1998 1997
-------- --------
INTEREST INCOME
Residential real estate loans $220,787 $147,104
Commercial real estate loans 49,473 39,834
Consumer loans 16,322 15,731
Business loans 2,437 971
Mortgage-backed securities 73,060 107,651
Other securities 7,871 5,555
Money market investments 2,849 8,025
-------- --------
Total interest income 372,799 324,871
-------- --------
INTEREST EXPENSE
Deposits 139,028 133,175
Borrowed funds 97,860 74,423
-------- --------
Total interest expense 236,888 207,598
-------- --------
Net interest income 135,911 117,273
Provision for loan losses 8,000 10,000
-------- --------
Net interest income after
provision for loan losses 127,911 107,273
-------- --------
NON-INTEREST INCOME
Loan servicing fees and charges 42,450 11,883
Banking service fees 9,000 6,923
Securities and insurance brokerage fees 7,510 6,051
Net gains on sales activities 45,248 2,083
Other 2,326 665
-------- --------
Total non-interest income 106,534 27,605
-------- --------
NON-INTEREST EXPENSE
General and administrative expense:
Compensation and employee benefits 64,795 34,741
Occupancy and equipment, net 21,864 13,335
Other 46,575 24,305
-------- --------
Total general and administrative expense 133,234 72,381
Amortization of mortgage servicing assets 16,935 5,202
Other real estate owned expense, net 87 3,052
-------- --------
Total non-interest expense 150,256 80,635
-------- --------
Income before income tax expense 84,189 54,243
Income tax expense 26,940 21,327
-------- --------
Net income $ 57,249 $ 32,916
======== ========
EARNINGS PER COMMON SHARE
Basic $ 0.50 $ 0.31
Diluted 0.49 0.31
See accompanying notes to consolidated financial statements.
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DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
For the Three Months Ended March 31, 1998
------------------------------------------------------------------------------------------------
Accumulated
Other
Additional Treasury Comprehensive Total
Common Paid-In Retained Stock, Income, Unearned Stockholders'
Stock Capital Earnings At Cost Net of Taxes Compensation Equity
--------- ---------- --------- ---------- --------------- ------------- ------------
Balance at beginning of period $ 1,203 $ 1,158,221 $ 261,201 $ (95,221) $ (9,534) $ (1,012) $ 1,314,858
Net income -- -- 57,249 -- -- -- 57,249
Other comprehensive income, net
of taxes -- unrealized
gains on securities
available for sale, net
of reclassification
adjustment -- -- -- -- 6,727 -- 6,727
Cash dividends declared on
common stock -- -- (4,590) -- -- -- (4,590)
Common stock issued under
employee benefit plans -- -- (5,515) 22,361 -- (7,748) 9,098
Treasury stock purchased -- -- -- (87,332) -- -- (87,332)
Amortization of unearned
compensation -- -- -- -- -- 538 538
Tax benefit on stock options
exercised -- 3,087 -- -- -- -- 3,087
-------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at end of period $ 1,203 $ 1,161,308 $ 308,345 $ (160,192) $ (2,807) $ (8,222) $ 1,299,635
======== =========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
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DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Three Months
Ended
March 31,
--------------------------
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 57,249 $ 32,916
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Provisions for loan and other real estate owned losses 8,020 11,281
Depreciation and amortization of premises and equipment 6,627 4,198
Other amortization and accretion, net 29,263 13,871
Provision for deferred income tax expense 19,273 14,788
Net securities gains (14,116) (2,009)
Net increase in loans held for sale (1,500,112) (8,238)
Other, net (125,442) 3,702
----------- -----------
Net cash (used) provided by operating activities (1,519,238) 70,509
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (131,013) --
Purchases of securities held to maturity -- (25)
Proceeds from sales of securities available for sale 1,223,491 167,758
Proceeds from maturities of securities available for sale
and held to maturity 387,717 347,123
Purchases of Federal Home Loan Bank of New York stock (20,819) --
Loans receivable originated and purchased, net of principal
payments (263,098) (174,548)
Proceeds from sales of loans receivable 1,723 829
Acquisitions -- (251)
Repurchases of assets sold with recourse (5,639) (4,253)
Proceeds from sales of other real estate owned 6,027 13,924
Purchases of mortgage servicing assets -- (17,048)
Proceeds from sales of mortgage servicing rights 41,343 --
Purchases of premises and equipment, net (12,428) (4,265)
----------- -----------
Net cash provided by investing activities 1,227,304 329,244
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 143,751 (6,833)
Net increase (decrease) in borrowings with original
maturities of three months or less 81,398 (160,786)
Repayments of other borrowings (17,542) (259,945)
Proceeds from issuance of common and treasury stock 9,098 4,565
Purchases of treasury stock (87,332) --
Cash dividends paid on common stock (4,590) --
----------- -----------
Net cash provided (used) by financing activities 124,783 (422,999)
----------- -----------
Net decrease in cash and cash equivalents (167,151) (23,246)
Cash and cash equivalents at beginning of period 452,527 184,517
----------- -----------
Cash and cash equivalents at end of period $ 285,376 $ 161,271
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest payments on deposits and borrowed funds $ 325,100 $ 201,494
Income tax refunds, net 3,608 1,502
SUPPLEMENTAL NON-CASH INVESTING INFORMATION
Loans held for sale transferred to loans receivable 296,608 --
Loans receivable transferred to loans held for sale 764,500 --
Loans receivable transferred to other real estate owned 1,981 8,393
See accompanying notes to consolidated financial statements.
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DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
For the Three Months
Ended
March 31,
---------------------
1998 1997
-------- --------
Net income $ 57,249 $ 32,916
Other comprehensive income, net of taxes:
Unrealized gains (losses) on securities
available for sale, net of
reclassification adjustment 6,727 (6,244)
======== ========
Total comprehensive income $ 63,976 $ 26,672
======== ========
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 accruals) necessary for a fair presentation
of the Company's financial condition as of the dates indicated and results of
operations and cash flows for the periods shown. 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, 1997.
Certain amounts in the prior period consolidated financial statements have been
reclassified to conform with the presentation for the current period. The
results for the three months ended March 31, 1998 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998.
Note 2 -- Earnings per Common Share
The following table sets forth the computations of basic and diluted
earnings per common share for the periods indicated.
For the
Three Months Ended
March 31,
-------------------
1998 1997
-------- --------
(In thousands,
except per share
data)
Basic earnings per common share:
Net income $ 57,249 $ 32,916
Weighted average number of common shares outstanding 115,152 104,951
Basic earnings per common share $ 0.50 $ 0.31
Diluted earnings per common share:
Net income $ 57,249 $ 32,916
Weighted average number of common shares outstanding 115,152 104,951
Common equivalent shares 1,996 1,701
-------- --------
Weighted average number of diluted shares outstanding 117,148 106,652
======== ========
Diluted earnings per common share $ 0.49 $ 0.31
Note 3 -- Recent Accounting Developments
Effective as of January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
relating to collateral, repurchase agreements, dollar-rolls, securities lending,
and similar transactions that had been deferred until that date by SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125." The Company's adoption of the deferred provisions of SFAS No. 125 did not
have, and is not expected to have, a material impact on the Company's financial
condition, results of operations, liquidity, or capital resources.
Effective as of January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Under the requirements of SFAS No. 130, an enterprise must classify
items of other comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the stockholders' equity
section of a statement of financial position. SFAS No. 130 requires
reclassification of financial statements for earlier periods provided for
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comparative purposes. At March 31, 1998 and December 31, 1997, the Company's
accumulated balance of other comprehensive income consisted solely of net
unrealized losses on securities available for sale, net of related taxes.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements, requires that selected information about operating
segments be reported in interim financial statements issued to stockholders, and
establishes standards for related disclosures about an enterprise's products and
services, geographic areas, and major customers. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. SFAS No. 131
does not require that its provisions be applied to interim financial statements
in the initial year of its application, but comparative information for interim
periods in the initial year of application is to be reported in financial
statements for interim periods in the second year of application.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures no longer deemed useful. SFAS No.
132 is effective for fiscal years beginning after December 15, 1997. Restatement
of disclosures for earlier periods provided for comparative purposes is required
unless the information is not readily available, in which case the notes to the
financial statements should include all available information and a description
of the information not available.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance on accounting for the
costs of computer software developed or obtained for internal use and is
effective for financial statements issued for fiscal years beginning after
December 15, 1998, with earlier application encouraged. The Company does not
believe that SOP 98-1, when adopted, will materially impact its financial
condition, results of operations, liquidity, or capital resources.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained herein are forward-looking and may be
identified by the use of such words as "believe," "expect," "anticipate,"
"should," "planned," "estimated," and "potential." These forward-looking
statements are based on the current expectations of the Company, and the Company
notes that a variety of factors could cause its 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 and
interpretations thereof, 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.
Overview
The Company's net income was $57.2 million for the first quarter of 1998,
an increase of $24.3 million, or 73.9%, from the net income of $32.9 million for
the first quarter of 1997. Diluted earnings per common share were $0.49 for the
quarter ended March 31, 1998, up 58.1% from $0.31 for the comparable quarter of
1997. The Company's annualized returns on average stockholders' equity and
average assets for the first three months of 1998 were 17.63% and 1.04%,
respectively, as compared with 12.66% and 0.69%, respectively, for the first
three months of 1997.
The growth in net income during the first quarter of 1998, as compared
with the first quarter of 1997, was reflective of a variety of factors,
including: the expansion of the Company's mortgage banking operations, largely
as a result of the acquisition of North American Mortgage Company in October
1997 (the "NAMC Acquisition"); balance sheet restructuring and risk management
initiatives; a reduced level of non-performing assets, primarily as
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a result of sales of approximately $126 million of non-performing residential
real estate loan assets during the second quarter of 1997; and tax planning
strategies.
The first quarter of 1998 was also marked by residential real estate loan
production of $6.7 billion and total loan production of $7.1 billion, and the
Holding Company's repurchase of 3 million shares of its common stock.
Results of Operations
Net Interest Income
The Company's net interest income amounted to $135.9 million for the first
quarter of 1998, an increase of $18.6 million, or 15.9%, as compared with $117.3
million for the corresponding quarter of 1997. The higher level of net interest
income was principally attributable to growth in average interest-earning assets
of $2.0 billion, coupled with an increase in the Company's net interest margin
to 2.63% for the three-month period ended March 31, 1998 from 2.51% for the
comparable period of 1997.
Contributing significantly to the improvement in the net interest margin
was the impact of the Company's strategy to emphasize loans and reduce its
reliance on mortgage-backed securities ("MBS"). During the first quarter of
1998, as compared with the first quarter of 1997, the average balance of loans
increased $4.7 billion, or 43.0%, while the average balance of MBS declined $2.3
billion, or 35.6%. Loans represented 76.1% of total average interest-earning
assets for the first quarter of 1998, up from 59.0% for the comparable quarter
of 1997. The net interest margin also benefited from a reduction in
non-performing assets, higher yields on securities, and lower deposit costs. The
net interest margin was unfavorably affected by a reduction in the overall yield
on loans, higher borrowing costs (as well as a higher percentage of funding from
borrowings), the flat interest rate yield curve, and a $150.0 million investment
in a bank-owned life insurance program (the "BOLI Program") during the third
quarter of 1997. (Revenues associated with the BOLI Program are reflected in
non-interest income.) The Company expects that the flat interest rate yield
curve, if sustained, will continue to exert pressure on its net interest income
and net interest margin.
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The following table sets forth, for the periods indicated, the Company's
consolidated average statement of financial condition, net interest income, the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities. Average balances are computed on a daily basis.
Non-accrual loans are included in average balances in the table below.
For the Three Months Ended March 31,
-----------------------------------------------------------------------------
1998 1997
------------------------------------- ------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- ---------- --------- ----------- ----------- -------
(Dollars in thousands)
Assets
Interest-earning assets:
Loans:
Residential real estate(1) $12,410,306 $ 220,787 7.12% $ 8,224,733 $ 147,104 7.15%
Commercial real estate 2,250,543 49,473 8.79 1,875,187 39,834 8.50
Consumer 782,027 16,322 8.47 736,268 15,731 8.66
Business 109,655 2,437 9.02 41,945 971 9.39
----------- ----------- ----------- -----------
Total loans 15,552,531 289,019 7.44 10,878,133 203,640 7.50
----------- ----------- ----------- -----------
MBS 4,240,274 73,060 6.89 6,584,888 107,651 6.54
Other securities 430,725 7,871 7.38 356,022 5,555 6.31
Money market investments 205,748 2,849 5.54 613,696 8,025 5.23
----------- ----------- ----------- -----------
Total interest-earning assets 20,429,278 372,799 7.31 18,432,739 324,871 7.06
----------- -----------
Other assets 1,535,066 756,793
----------- -----------
Total assets $21,964,344 $19,189,532
=========== ===========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Deposits:
Demand $ 1,590,872 2,471 0.63 $ 1,129,097 1,898 0.68
Savings 2,376,329 13,141 2.24 2,445,400 14,992 2.49
Money market 2,039,913 17,727 3.52 1,998,630 18,507 3.76
Time 7,825,253 105,689 5.48 7,244,013 97,778 5.47
----------- ----------- ----------- -----------
Total deposits 13,832,367 139,028 4.08 12,817,140 133,175 4.21
----------- ----------- ----------- -----------
Borrowed funds:
Securities sold under agreements
to repurchase 2,310,414 32,674 5.66 3,694,714 51,050 5.53
Federal Home Loan Bank of New
York ("FHLBNY") advances 3,670,492 53,639 5.85 1,135,459 16,013 5.64
Other 547,250 11,547 8.44 338,321 7,360 8.70
----------- ----------- ----------- -----------
Total borrowed funds 6,528,156 97,860 6.00 5,168,494 74,423 5.76
----------- ----------- ----------- -----------
Total interest-bearing liabilities 20,360,523 236,888 4.69 17,985,634 207,598 4.66
----------- -----------
Other liabilities 304,581 163,811
Stockholders' equity 1,299,240 1,040,087
----------- -----------
Total liabilities and
stockholders' equity $21,964,344 $19,189,532
=========== ===========
Net interest income $ 135,911 $ 117,273
=========== ===========
Interest rate spread 2.62 2.40
Net interest margin 2.63 2.51
(1) Includes loans receivable and loans held for sale.
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The following table sets forth, for the periods indicated, the changes in
interest income and interest expense for each major component of
interest-earning assets and interest-bearing liabilities and the amounts
attributable to changes in average balances (volume) and average interest rates
(rate). The changes in interest income and interest expense attributable to
changes in both volume and rate have been allocated proportionately to the
changes due to volume and the changes due to rate.
For the Three Months Ended
March 31, 1998 versus 1997
-----------------------------------
Increase (Decrease)
-----------------------------------
Due to Due to
Volume Rate Total
-------- -------- --------
(In thousands)
Interest Income
Loans:
Residential real estate(1) $ 74,468 $ (785) $ 73,683
Commercial real estate 8,210 1,429 9,639
Consumer 961 (370) 591
Business 1,506 (40) 1,466
-------- -------- --------
Total loans 85,145 234 85,379
-------- -------- --------
MBS (40,126) 5,535 (34,591)
Other securities 1,275 1,041 2,316
Money market investments (5,623) 447 (5,176)
-------- -------- --------
Total interest income 40,671 7,257 47,928
-------- -------- --------
Interest Expense
Deposits:
Demand 726 (153) 573
Savings (414) (1,437) (1,851)
Money market 376 (1,156) (780)
Time 7,850 61 7,911
-------- -------- --------
Total deposits 8,538 (2,685) 5,853
-------- -------- --------
Borrowed funds:
Securities sold under agreements
to repurchase (19,550) 1,174 (18,376)
FHLBNY advances 37,025 601 37,626
Other 4,415 (228) 4,187
-------- -------- --------
Total borrowed funds 21,890 1,547 23,437
-------- -------- --------
Total interest expense 30,428 (1,138) 29,290
-------- -------- --------
Net interest income $ 10,243 $ 8,395 $ 18,638
======== ======== ========
(1) Includes loans receivable and loans held for sale.
Provision for Loan Losses
The Company's provision for loan losses amounted to $8.0 million for the
first quarter of 1998, down from $10.0 million for the first quarter of 1997.
Net charge-offs for the quarter ended March 31, 1998 were $3.6 million, as
compared with $13.3 million for the corresponding quarter of 1997. The provision
for loan losses, as further discussed in "Management of Credit Risk -- Allowance
for Loan Losses," is predicated upon the Company's assessment of the adequacy of
its allowance for loan losses.
Non-Interest Income
General. The Company's non-interest income was $106.5 million for the
quarter ended March 31, 1998, up from $27.6 million for the comparable quarter
of 1997. This increase was principally associated with the Company's expansion
of its mortgage banking operations, largely due to the NAMC Acquisition. Also
contributing to the higher level of non-interest income were net gains realized
in connection with balance sheet restructuring
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and risk management initiatives. Non-interest income represented 43.9% of total
revenues for the first quarter of 1998, as compared with 19.1% for the first
quarter of 1997.
Loan Servicing Fees and Charges. Loan servicing fees and charges, which
principally includes revenues earned from servicing loans for third parties and
loan production activities, amounted to $42.5 million for the three-month period
ended March 31, 1998, as compared with $11.9 million for the corresponding
period of 1997. This increase resulted primarily from growth in the portfolio of
loans serviced for others and a higher level of residential real estate loan
production. At March 31, 1998, the Company owned the servicing rights to $19.7
billion of loans owned by others, up from $11.0 billion one year earlier. In
connection with its sales of certain loan servicing rights, the Company was
subservicing, for a fee, loans with principal balances aggregating $7.6 billion
at March 31, 1998. The transfer of the servicing responsibility to the
purchasers of these loan servicing rights is scheduled to occur no later than
August 1998.
Banking Service Fees. Banking service fees for the first quarter of 1998
amounted to $9.0 million, an increase of $2.1 million, or 30.0%, from the
comparable quarter of 1997. This increase principally reflects certain changes
in the Company's fee structure during the second and third quarters of 1997,
together with volume increases in certain underlying transactions.
Securities and Insurance Brokerage Fees. Securities and insurance
brokerage fees totaled $7.5 million for the quarter ended March 31, 1998, up
$1.5 million, or 24.1%, as compared with the first quarter of 1997. This
increase was largely attributable to growth in insurance-related fees,
principally due to the expansion of the Company's insurance product line and the
number of states in which the products are sold as a result of the acquisition
of various insurance subsidiaries in connection with the NAMC Acquisition.
Net Gains on Sales Activities. Net gains on sales activities amounted to
$45.2 million for the three months ended March 31, 1998, as compared with $2.1
million for the first quarter of 1997. The $43.1 million improvement resulted
substantially from growth in net gains on loans held for sale of $25.4 million,
an increase in net gains on securities transactions of $12.1 million, and net
gains during the first quarter of 1998 of $5.4 million in connection with a bulk
sale of loan servicing rights.
Net gains on sales activities for the first quarter of 1998 were reduced
by losses of $11.4 million associated with the planned sales of $765 million of
relatively lower-yielding loans in connection with the Company's ongoing balance
sheet restructuring activities.
The higher level of net gains on securities transactions resulted
primarily from sales of $1.2 billion of the $1.4 billion of MBS that had been
designated for sale in connection with the transfer of the Company's entire
portfolio of securities held to maturity to securities available for sale in
December 1997. At that time, the Company recognized a loss of $25.2 million
associated with the write-down to estimated fair value of those MBS designated
for sale with unrealized losses, but subsequent favorable movements in interest
rates resulted in higher than initially anticipated sales prices.
During the first quarter of 1998, the Company, in a bulk sale, sold the
servicing rights to $4.8 billion of loans. (The Company did not have any bulk
sales of loan servicing rights during the first quarter of 1997.) This sale was
associated with the Company's risk management program and was intended to reduce
the impact of a declining long-term interest rate environment on the value of
the Company's mortgage servicing assets. Sales of loan servicing rights are
dependent on a variety of factors, including market conditions and existing
operating strategies; thus, the level of future sales of loan servicing rights,
if any, cannot currently be predicted.
Other. Other non-interest income was $2.3 million for the quarter ended
March 31, 1998, up $1.7 million from the corresponding quarter of 1997. This
increase was due substantially to revenues earned in connection with the BOLI
Program, which was initiated during the third quarter of 1997. In general, under
this program, which is intended to help defray certain costs associated with the
Company's employee benefit plans, the Company purchases, owns, and is the
beneficiary of insurance policies on the lives of certain employees who consent
to being covered under the program.
13
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Non-Interest Expense
General. Non-interest expense amounted to $150.3 million for the quarter
ended March 31, 1998, as compared with $80.6 million for the corresponding
quarter of 1997. The 86.3% increase in non-interest expense substantially
reflects the Company's expansion of its mortgage banking operations, largely as
a result of the NAMC Acquisition.
General and Administrative ("G&A") Expense. Total G&A expense, which
amounted to $133.2 million for the first quarter of 1998, rose $60.9 million, or
84.1%, as compared with the same quarter one year ago. This increase, as noted
above, substantially resulted from the Company's expansion of its mortgage
banking operations.
Compensation and employee benefits expense totaled $64.8 million for the
three-month period ended March 31, 1998, up from $34.7 million for the
comparable period of 1997. The Company's full-time equivalent employee
complement increased to 6,390 at March 31, 1998, from 6,000 at year-end 1997 and
from 2,917 at March 31, 1997. Occupancy and equipment expense, net, increased to
$21.9 million for the quarter ended March 31, 1998 from $13.3 million for the
corresponding quarter of 1997. Other G&A expense amounted to $46.6 million for
the first quarter of 1998, an increase of $22.3 million as compared with the
first quarter of 1997. Other G&A expense for the first quarter of 1998 included
$3.0 million associated with the Company's plan to prepare its computer systems
for the year 2000, which is further described in the Holding Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997. (No such costs
were incurred during the first quarter of 1997.) In connection with this plan,
the Company currently estimates that it will incur total pretax expenses of
approximately $20 million, of which approximately 75% is expected to be incurred
during 1998. The Company has incurred $4.3 million of such expenses through
March 31, 1998.
Amortization of Mortgage Servicing Assets. Amortization of mortgage
servicing assets increased to $16.9 million for the first quarter of 1998 from
$5.2 million for the first quarter of 1997. The $11.7 million increase was
substantially attributable to growth in mortgage servicing assets, which rose to
$335.5 million at March 31, 1998 from $124.9 million one year earlier,
principally as a result of the NAMC Acquisition.
In a declining long-term interest rate environment, actual or expected
prepayments of the loans underlying the Company's mortgage servicing assets
portfolio may increase, which would have an adverse impact on the value of such
assets. In connection therewith, the Company uses certain derivative financial
instruments as a hedge against its mortgage servicing assets (see
"Asset/Liability Management -- Derivative Financial Instruments") and during the
first quarter of 1998 and the fourth quarter of 1997 sold $4.8 billion and $3.0
billion, respectively, in principal amount of loan servicing rights underlying
the mortgage servicing assets portfolio, which resulted in reductions in the
carrying value of that portfolio of approximately $88 million and $57 million,
respectively.
Other real estate owned ("ORE") Expense, Net. ORE expense, net, declined
to $0.1 million for the first quarter of 1998 from $3.1 million for the
comparable quarter of 1997, principally reflective of a reduction in the level
of ORE. ORE, net, which amounted to $24.8 million at March 31, 1998, declined
48.1% from $47.8 million at March 31, 1997.
Income Tax Expense
The Company recorded income tax expense of $26.9 million for the
three-month period ended March 31, 1998, as compared with $21.3 million for the
comparable period of 1997. The higher level of income tax expense reflects
growth in pretax earnings, the impact of which was partially offset by a decline
in the Company's effective income tax rate to 32.0% for the first quarter of
1998 from 39.3% for the corresponding quarter of 1997. The reduction in the
Company's effective income tax rate was primarily attributable to the ongoing
restructuring of the assets within the legal entities that comprise the
Company's affiliated group.
14
15
Asset/Liability Management
General
The goal of asset/liability management is the prudent control of market
risk, liquidity, and capital. 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 polices. The Asset/Liability
Management Committee ("ALMAC"), 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,
interest-bearing liabilities, and derivative financial instruments, such as
futures, forwards, swaps and options.
The Company's primary source of market risk exposure arises from changes
in United States interest rates and the effects thereof on mortgage prepayment
and closing behavior, as well as depositors' choices ("interest rate risk").
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 material exposure to foreign exchange rate risk or commodity price risk.
Movements in equity prices may have an indirect, but limited, effect on certain
of the Company's business activities and/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 financial instruments.
The Company's sensitivity to interest rates is driven primarily by the
mismatch between the term to maturity or repricing of its interest-earning
assets and that of its interest-bearing liabilities. In general, the Company's
interest-bearing liabilities reprice or mature, 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,
mortgages and the mortgages underlying MBS may contain prepayment options,
interim and lifetime interest rate caps and other such features driven or
otherwise influenced by changes in interest rates. Prepayment option risk
affects mortgage-related assets in both rising and falling interest 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 declining prepayments due to rising
interest rates. Certain mortgage-related assets are more sensitive to changes in
interest rates than others, resulting in a higher risk profile. Because the
Company's interest-bearing liabilities are not similarly affected, the Company's
overall duration gap generally increases as interest rates rise. In addition, in
a rising interest rate environment, adjustable-rate assets may reach interim or
lifetime interest rate caps, thereby limiting the amount of upward adjustment,
which effectively lengthens the duration of such assets.
Lower interest rate environments may also present interest rate exposure.
In general, lower interest rate environments tend to accelerate prepayment
rates, which both shorten the duration of mortgage-related assets and
15
16
accelerate the amortization of any premiums paid in the acquisition of these
assets. The recognition of premiums over a shorter than expected term causes
yields on the related assets to decline from anticipated levels. 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. Moreover, in order to reduce its sensitivity to
interest rate risk, the Company's investment strategy has emphasized
adjustable-rate loans and securities and fixed-rate medium-term securities.
Derivative Financial Instruments
The Company uses a variety of derivative financial instruments to assist
in managing its interest rate risk exposures. Derivative financial instruments
employed by the Company at March 31, 1998 were interest rate swaps, interest
rate swaptions, interest rate floors, interest rate caps, forward contracts to
purchase or sell loans or securities, and options to purchase or sell certain of
these and other instruments. While the Company's use of derivative financial
instruments 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.
Interest Rate Risk Management Instruments. The Company's assets generally
reprice or mature at a longer term than the liabilities used to fund those
assets. Consequently, the Company uses derivative financial instruments in its
efforts to reduce the repricing risk.
The Company uses three major classes of derivative financial instruments
to manage interest rate risk: interest rate swaps, where the Company pays a
fixed rate and receives a floating rate; interest rate caps, where the Company
receives the excess, if any, of a designated floating rate (usually London
Interbank Offered Rates ("LIBOR")) over a specified rate (the cap level); and
interest rate swaptions, where, in exchange for the payment of a premium, the
Company has the right to enter into pay-fixed interest rate swaps at a future
date.
The pay-fixed interest rate swaps are used to modify specific
variable-rate liabilities and thereby improve the stability of the Company's net
interest margin. Interest rate caps are used to hedge the periodic and lifetime
rate caps embedded in specific adjustable-rate loans and securities and to limit
the effect of increases in the cost of short-term funds above certain specified
maximum levels. Interest rate swaptions are used to hedge the repricing risk on
certain assets with high prepayment risk.
16
17
The following table sets forth the characteristics of derivative financial
instruments used by the Company at March 31, 1998 for interest rate risk
management purposes, segregated by the activities that they hedge.
Weighted Average
Estimated Rate
Notional Fair ------------------
Amount Value Receive Pay
----------- ---------- ------- -------
(Dollars in thousands)
Interest rate swaps (pay fixed/receive
variable) hedging:
Loans receivable $1,446,333 $ (19,699) 5.69% 6.47%
Securities available for sale 52,483 (186) 5.69 6.42
Short-term borrowed funds 55,000 (506) 5.65 6.73
Interest rate caps hedging:
Loans receivable 295,935 2 -- (1) -- (1)
Securities available for sale 312,984 2 -- (2) -- (2)
Short-term borrowed funds 361,000 795 -- (3) -- (3)
Interest rate swaptions hedging loans
receivable 40,000 65 -- (4) -- (4)
---------- ----------
Total $2,563,735 $ (19,527)
========== ==========
(1) The weighted average strike rate was 8.00%.
(2) The weighted average strike rate was 8.00%.
(3) The weighted average strike rate was 7.04%.
(4) The weighted average strike rate was 6.75%.
The use of derivative financial instruments for interest rate risk
management purposes resulted in reductions in net interest income during the
three months ended March 31, 1998 and 1997 of $5.5 million and $4.9 million,
respectively.
Mortgage Banking Risk Management Instruments. The Company uses two major
classes of derivative financial instruments to protect against the impact of
substantial declines in long-term interest rates and the consequent increase in
mortgage prepayment rates: interest rate swaps, where the Company receives a
fixed rate and pays a floating rate; and interest rate floors, where the Company
receives the difference, if any, between a designated average long-term interest
rate (usually the ten-year constant maturity Treasury index) and a specified
strike rate.
The Company uses three major classes of derivative financial instruments
to hedge the risk in its loans held for sale and related commitment pipeline. To
the extent that the Company estimates that it will have loans to sell, the
Company sells loans into the forward MBS market. Such short sales are similar in
composition as to term and coupon with the loans held in, or expected to be
funded into, the loans held for sale portfolio. In addition, because the amount
of loans that the Company will fund, as compared with the total amount of loans
that it has committed to fund, is uncertain, the Company purchases various
options, including puts and calls on both the forward MBS market and the
interest rate futures market. The following table sets forth the characteristics
of derivative financial instruments used by the Company at March 31, 1998 in
connection with its mortgage banking activities, segregated by the activities
that they hedge.
Weighted Average
Notional Estimated Rate
Fair ------------------
Amount Value Receive Pay
----------- ---------- ------- -------
(Dollars in thousands)
Interest rate swaps (pay variable/receive fixed) hedging
mortgage servicing assets $ 400,000 $ 3,639 6.22% 5.95%
Interest rate floors hedging mortgage servicing assets 1,440,095 15,569 -- (1) -- (1)
Forward contracts hedging loans held for sale originations 4,164,147 4,352 -- --
Put options (vs. United States Treasury-based futures)
hedging loans held for sale originations 150,000 363 -- --
Call options on MBS forward contracts hedging
loans held for sale originations 116,000 649 -- --
---------- ----------
Total $6,270,242 $ 24,572
========== ==========
(1) The weighted average strike rate was 5.73%.
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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
financial instruments at March 31, 1998. The amount of each asset, liability, or
derivative financial 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.
Over One
Through Over
One Year Three Three
or Less Years Years Total
---------- --------- -------- --------
(Dollars in millions)
Interest-earning assets:
Loans $ 9,187 $ 4,253 $ 3,142 $ 16,582
MBS 2,967 333 50 3,350
Other 47 3 484 534
-------- -------- -------- --------
Total interest-earning assets 12,201 4,589 3,676 20,466
-------- -------- -------- --------
Interest-bearing liabilities:
Deposits 7,725 2,974 3,292 13,991
Borrowed funds 6,018 66 300 6,384
-------- -------- -------- --------
Total interest-bearing
liabilities 13,743 3,040 3,592 20,375
-------- -------- -------- --------
Impact of hedging activities 859 (436) (423) --
-------- -------- -------- --------
Gap (repricing difference) $ (683) $ 1,113 $ (339) $ 91
======== ======== ======== ========
Cumulative gap $ (683) $ 430 $ 91
======== ======== ========
Cumulative ratio of gap to total assets (3.1)% 2.0% 0.4%
Management of Credit Risk
Non-Performing Assets
The Company's non-performing assets consist of non-accrual loans and ORE,
net. Non-accrual loans are all loans 90 days or more delinquent, as well as
loans less than 90 days past due for which the full collectability of
contractual principal or interest payments is doubtful. Loans modified in a
troubled debt restructuring ("TDR") that have demonstrated a sufficient payment
history to warrant return to performing status are not included within
non-accrual loans (see "Loans Modified in a TDR").
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The following table presents the components of the Company's
non-performing assets at the dates indicated.
March 31, December 31,
1998 1997
--------- ---------
(Dollars in thousands)
Non-accrual loans:
Residential real estate $ 89,907 $ 90,998
Commercial real estate 26,618 21,760
Consumer 5,670 5,719
Business 382 511
--------- ---------
Total non-accrual loans 122,577 118,988
--------- ---------
ORE, net:
Residential real estate 19,209 20,228
Commercial real estate 7,302 9,255
Allowance for losses (1,682) (1,722)
--------- ---------
Total ORE, net 24,829 27,761
--------- ---------
Total non-performing assets $ 147,406 $ 146,749
========= =========
Non-performing assets to total assets 0.67% 0.67%
Non-accrual loans to loans receivable 0.96 0.92
The $4.9 million increase in non-accrual commercial real estate loans
during the first quarter of 1998 was largely attributable to the transfer of a
$4.3 million loan to non-accrual status during that quarter.
The Company continues to expand its lending activities and product mix.
The Company intends to continue to monitor closely the effects of these efforts
on the overall risk profile of its loan portfolio, which the Company expects
will continue to change over time.
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 March 31, 1998, such delinquent loans of the Company, net of those
already in non-performing status.
Delinquency Period
---------------------------------
30-59 60-89
Days Days Total
------- ------- -------
(In thousands)
Residential real estate loans $51,081 $19,927 $71,008
Commercial real estate loans 5,054 3,732 8,786
Consumer loans 2,751 1,121 3,872
Business loans 152 500 652
------- ------- -------
Total $59,038 $25,280 $84,318
======= ======= =======
Loans Modified in a TDR
When borrowers encounter financial hardship but are able to demonstrate to
the Company's satisfaction an ability and willingness to resume regular monthly
payments, the Company may provide them with an opportunity to restructure the
terms of their loans. These arrangements, which are negotiated individually,
generally provide for interest rates that are lower than those initially
contracted for, but which may be higher or lower than current market interest
rates for loans with comparable risk, and may, in some instances, include a
reduction in the principal amount of the loan.
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The following table sets forth, at the dates indicated, the Company's
loans that have been modified in a TDR, excluding those classified as
non-accrual loans.
March 31, December 31,
1998 1997
------- -------
(In thousands)
Residential real estate loans $35,065 $37,532
Commercial real estate loans 44,403 46,677
------- -------
Total loans modified in a TDR $79,468 $84,209
======= =======
Allowance for Loan Losses
The Company's allowance for loan losses is intended to be maintained at a
level sufficient to absorb all estimable and probable losses inherent in the
loans receivable portfolio. While the Company believes that the allowance for
loan losses is adequate, additions to the allowance for loan losses may be
necessary in the event of future adverse changes in economic and other
conditions that the Company is unable to predict.
The following table sets forth the activity in the Company's allowance for
loan losses for the periods indicated.
For the
Three Months Ended
March 31,
---------------------------
1998 1997
--------- ---------
(In thousands)
Balance at beginning of period $ 104,718 $ 106,495
Provision charged to operations 8,000 10,000
Charge-offs:
Residential real estate loans (6,231) (11,708)
Commercial real estate loans (193) (2,418)
Consumer loans (702) (1,081)
--------- ---------
Total charge-offs (7,126) (15,207)
--------- ---------
Recoveries:
Residential real estate loans 1,111 1,247
Commercial real estate loans 1,903 154
Consumer loans 483 480
Business loans 7 54
--------- ---------
Total recoveries 3,504 1,935
--------- ---------
Net charge-offs (3,622) (13,272)
--------- ---------
Balance at end of period $ 109,096 $ 103,223
========= =========
The following table sets forth the Company's allowance for loan losses
coverage ratios at the dates indicated.
March 31, December 31, March 31,
1998 1997 1997
------- ------- -------
Allowance for loan losses to:
Loans receivable 0.85% 0.81% 0.95%
Non-accrual loans 89.00 88.01 56.52
MBS
Of the $3.4 billion carrying value of the Company's MBS portfolio at March
31, 1998, $2.8 billion were issued by entities other than the Federal Home Loan
Mortgage Corporation ("FHLMC"), the Government National Mortgage Association
("GNMA"), and the Federal National Mortgage Association ("FNMA"). These
privately-
20
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issued MBS, which have generally been underwritten by large investment banking
firms, are subject to certain credit-related risks normally not associated with
MBS issued by FHLMC, GNMA and FNMA. While substantially all of the
privately-issued MBS held by the Company at March 31, 1998 were rated "AA" or
better by one or more of the nationally recognized securities rating agencies,
no assurance can be given that such ratings will be maintained.
Derivative Financial Instruments
The level of credit risk associated with derivative financial instruments
depends on a variety of factors, including the estimated fair value of the
instrument, the collateral maintained, the use of master netting arrangements,
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. There were
no past due amounts related to the Company's derivative financial instruments at
March 31, 1998 or December 31, 1997.
Financial Condition
General
The Company's total assets amounted to $22.0 billion at March 31, 1998. In
comparison, total assets were $21.8 billion at December 31, 1997.
Securities Available for Sale
At March 31, 1998, the Company's securities available for sale portfolio
amounted to $3.5 billion, or 17.3% of total interest-earning assets, as compared
with $5.0 billion, or 24.6% of total interest-earning assets, at the end of
1997. The decline of $1.5 billion, or 29.2%, in securities available for sale
during the first three months of 1998 was principally associated with sales of
$1.2 billion of MBS that had been designated for sale in connection with a
balance sheet restructuring initiative implemented during December 1997. At
March 31, 1998, the carrying value and amortized cost of MBS designated for sale
by the Company were approximately $180 million and $179 million, respectively.
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The following table summarizes the amortized cost and estimated fair value
of securities available for sale at the dates indicated.
March 31, 1998 December 31, 1997
------------------------- -------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
----------- ----------- ---------- ----------
(In thousands)
MBS:
Pass-through securities:
Privately-issued $2,282,009 $2,267,642 $2,875,982 $2,851,007
FNMA 372,013 378,770 395,756 402,096
FHLMC 161,230 163,503 178,538 181,098
GNMA 13,977 14,195 15,277 15,517
Collateralized mortgage obligations:
Privately-issued 524,457 525,135 1,335,225 1,336,690
FNMA -- -- 91,349 91,436
FHLMC -- -- 23,863 23,920
Interest-only 1,488 994 1,555 1,129
---------- ---------- ---------- ----------
Total MBS 3,355,174 3,350,239 4,917,545 4,902,893
---------- ---------- ---------- ----------
Other debt securities:
United States government and federal agency 7,457 7,529 8,552 8,638
State and municipal 19,350 19,048 36,997 36,291
Domestic corporate 148,189 148,487 34,844 35,359
Other 500 500 500 500
---------- ---------- ---------- ----------
Total debt securities 175,496 175,564 80,893 80,788
---------- ---------- ---------- ----------
Equity securities 9,759 9,317 9,243 8,623
---------- ---------- ---------- ----------
Total securities available for sale $3,540,429 $3,535,120 $5,007,681 $4,992,304
========== ========== ========== ==========
Loans
The Company's loans receivable (exclusive of the allowance for loan
losses) and loans held for sale amounted to $12.8 billion and $3.8 billion,
respectively, at March 31, 1998, as compared with $13.0 billion and $1.8
billion, respectively, at December 31, 1997. In the aggregate, loans receivable
and loans held for sale represented 81.0% of total interest-earning assets at
March 31, 1998, as compared with 73.1% at December 31, 1997.
The principal segment of the Company's loans receivable is residential
real estate loans. Such loans amounted to $9.6 billion at the end of the first
quarter of 1998, a decrease of $253.5 million, or 2.6%, from the end of 1997.
Although the Company produced approximately $1.0 billion of residential real
estate loans for portfolio during the first quarter of 1998, the impact of such
production, as well as other factors, was more than offset by principal
payments, coupled with the transfer, in connection with the Company's ongoing
balance sheet restructuring activities, of approximately $765 million of
relatively lower-yielding loans from loans receivable to loans held for sale.
These transferred loans are expected to be sold during the second quarter of
1998.
The Company's commercial real estate loans receivable amounted to $2.3
billion at March 31, 1998, up slightly from December 31, 1997. At the end of the
first quarter of 1998, commercial real estate loans receivable primarily
consisted of multifamily properties (60%), shopping centers (17%), and office
buildings (12%).
At March 31, 1998, the Company's consumer loans receivable totaled $787.7
million, an increase of $13.9 million from the level at year-end 1997. This
increase was largely attributable to growth in home equity loans, the Company's
primary focus in this lending area, of $16.8 million. Home equity loans
represented approximately 82% of the consumer loan portfolio at March 31, 1998
and December 31, 1997.
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23
The Company's business loans receivable amounted to $115.4 million at
March 31, 1998. This represents an increase of $16.3 million, or 16.5%, since
the end of 1997.
The following table summarizes the Company's loan production, both for
portfolio and for sale in the secondary market, for the periods indicated.
For the Three Months
Ended
March 31,
------------------------
1998 1997
---------- ----------
(In thousands)
Residential real estate loan production:
Originated $5,718,897 $ 531,080
Purchased 982,480 106,565
---------- ----------
Total residential real estate loan production 6,701,377 637,645
---------- ----------
Commercial real estate loans originated 199,301 76,334
Consumer loans originated:
Home equity loans 106,611 60,620
Other consumer loans 42,920 39,557
---------- ----------
Total consumer loans originated 149,531 100,177
---------- ----------
Business loans originated 42,390 12,639
---------- ----------
Total loan production $7,092,599 $ 826,795
========== ==========
Deposits
The Company's total deposits amounted to $14.0 billion at the end of the
first quarter of 1998, up $143.8 million from the end of 1997. At March 31,
1998, the Bank operated 91 branches, comprised of 90 branches in the greater New
York City metropolitan area and one branch in Florida. During the first quarter
of 1998, the Company entered into an agreement to sell its Florida branch,
which, at March 31, 1998, had deposits of approximately $203 million. This sale
is currently expected to be consummated during the third quarter of 1998.
The following table sets forth a summary of the Company's deposits at the
dates indicated.
March 31, 1998 December 31, 1997
----------------------- -----------------------
Percentage Percentage
Amount of Total Amount of Total
----------- ---------- ----------- ----------
(Dollars in thousands)
Demand $ 1,810,426 12.9% $ 1,572,797 11.4%
Savings 2,355,922 16.8 2,431,812 17.6
Money market 2,080,613 14.9 1,971,081 14.2
Time 7,744,162 55.4 7,871,585 56.8
----------- ----- ----------- -----
Total deposits $13,991,123 100.0% $13,847,275 100.0%
=========== ===== =========== =====
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Borrowed Funds
The following table sets forth a summary of the Company's borrowed funds
at the dates indicated.
March 31, 1998 December 31, 1997
---------------------- ----------------------
Percentage Percentage
Amount of Total Amount of Total
---------- ---------- ---------- ---------
(Dollars in thousands)
Securities sold under agreements
to repurchase $1,354,880 21.2% $2,975,774 47.1%
FHLBNY advances 4,489,841 70.3 2,786,751 44.1
Senior notes 142,525 2.2 142,475 2.3
Guaranteed preferred beneficial
interests in Holding Company's
junior subordinated deferrable
interest debentures 196,143 3.1 196,137 3.1
Other 200,253 3.2 218,175 3.4
---------- ----- ---------- -----
Total borrowed funds $6,383,642 100.0% $6,319,312 100.0%
========== ===== ========== =====
Stockholders' Equity
Stockholders' equity amounted to $1.3 billion at March 31, 1998,
relatively unchanged from the end of 1997. At the end of the first quarter of
1998, stockholders' equity represented 5.90% of total assets, as compared with
6.02% at the end of 1997. Book value per common share was $11.37 at March 31,
1998, up from $11.30 at December 31, 1997.
During the first quarter of 1998, the Holding Company repurchased 3
million shares of its common stock at a cost of $87.3 million, completing a
program announced during December 1997. Cash dividends paid on the Holding
Company's common stock amounted to $4.6 million, or $0.04 per common share, for
the first quarter of 1998.
During April 1998, the Holding Company declared a cash dividend on its
common stock of $0.05 per share to be paid on June 3, 1998 to stockholders of
record as of the close of business on May 22, 1998, increased the number of
authorized shares of its common stock from 200 million to 350 million, and
announced a new program to repurchase up to 3 million shares of its common
stock. No time limit has been established to complete this repurchase program.
Liquidity
The Company's liquidity management process focuses on ensuring that
sufficient funds exist to meet withdrawals from deposit accounts, loan funding
commitments, the repayment of borrowed funds, and other financial obligations
and expenditures, as well as ensuring the Bank's compliance with regulatory
liquidity requirements. The liquidity position of the Company, which is
monitored on a daily basis, is managed pursuant to established policies and
guidelines.
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 net cash
provided by operations. Additionally, the Company has access to the capital
markets for issuing debt or equity securities, as well as access to the discount
window of the Federal Reserve Bank of New York, if necessary, for the purpose of
borrowing to meet temporary liquidity needs, although it has not utilized this
funding source in the past.
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 ("OTS"), its primary regulator.
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Under OTS regulations, the Bank must maintain average eligible liquid
assets for each calendar quarter of not less than 4.00% of its liquidity base.
The Bank was in compliance with these regulations for the first quarter of 1998.
Regulatory Capital
Pursuant to OTS regulations, the Bank is required to maintain tangible
capital of at least 1.50% of adjusted total assets, leverage capital of at least
3.00% of adjusted total assets, and risk-based capital of at least 8.00% of
risk-weighted assets. The Bank exceeded these capital requirements at March 31,
1998.
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
it has a leverage capital ratio of at least 5.00%, a tier 1 risk-based capital
ratio (leverage capital to risk-weighted assets) of at least 6.00%, and a total
risk-based capital ratio of at least 10.00%, and it is not subject to an order,
written agreement, capital directive, or prompt corrective action directive to
meet and maintain a specific capital level for any capital measure. At March 31,
1998, 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.
March 31, 1998 December 31, 1997
-------------------- --------------------
Amount Ratio Amount Ratio
----------- ------- ---------- ------
(Dollars in thousands)
Tangible capital $1,272,280 5.86% $1,216,417 5.64%
Leverage capital 1,272,280 5.86 1,216,417 5.64
Tier 1 risk-based capital 1,272,280 10.22 1,216,417 10.29
Total risk-based capital 1,381,376 11.10 1,321,135 11.17
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."
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 13, 1995, Anchor Savings Bank FSB ("Anchor Savings") filed suit
in the United States Court of Federal Claims against the United States for
breach of contract and taking of property without compensation in contravention
of the Fifth Amendment to the United States Constitution. The action arose
because the passage of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the regulations adopted by the OTS
pursuant to FIRREA deprived Anchor Savings of the ability to include supervisory
goodwill and certain other assets for purposes of computing its regulatory
capital as the Federal Savings and Loan Insurance Corporation ("FSLIC") had
agreed it could. The direct effect was to cause Anchor Savings to go from an
institution that substantially exceeded its regulatory capital requirements to
one that was critically undercapitalized upon the effectiveness of the
FIRREA-mandated capital requirements.
From 1982 to 1985, Anchor Savings had acquired eight FSLIC-insured
institutions that were in danger of failing and causing a loss to the FSLIC.
Four institutions were acquired with some financial assistance from the FSLIC
and four were unassisted "supervisory" cases. In acquiring the institutions,
Anchor Savings assumed liabilities determined to exceed the assets it acquired
by over $650 million at the dates of the respective acquisitions. The difference
between the fair values of the assets acquired and the liabilities assumed in
the transactions were recorded on Anchor Savings' books as goodwill. At the time
of these acquisitions, the FSLIC had agreed that this supervisory goodwill was
to be amortized over periods of up to 40 years. Without that agreement, Anchor
Savings would not have made the acquisitions. When the capital regulations
imposed under FIRREA became effective, Anchor Savings still had over $518
million of supervisory goodwill on its books and
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approximately 20 years remaining to amortize it under the agreements with FSLIC.
The FIRREA-mandated capital requirements excluded all but approximately $124
million of Anchor Savings' supervisory goodwill, over $42 million attributable
to the FSLIC contribution in one acquisition, and, until the formation of Anchor
Bancorp, Inc., the holding company for Anchor Savings ("Anchor Bancorp"), in
1991, $157 million associated with preferred stock issued to the FSLIC as a
result of one of the acquisitions. FIRREA also required the remaining
supervisory goodwill to be eliminated by December 31, 1994 for regulatory
capital purposes. The elimination of the supervisory goodwill resulted in severe
limitations on Anchor Savings' activities and required the disposition of
valuable assets under liquidation-like circumstances, as a result of which
Anchor Savings was damaged. The complaint asks that the Government make Anchor
Savings whole for the effects of the loss, which are estimated to exceed
substantially the goodwill remaining at the time FIRREA was enacted.
There are approximately 130 cases involving similar issues pending in the
United States Court of Federal Claims, which has entered summary judgment for
the plaintiffs as to liability, but not damages, in a small number of the cases.
The first three of those cases, referred to as the Winstar cases, were appealed
to the United States Supreme Court, which, on July 1, 1996, affirmed the
decision that the Government was liable for breach of contract.
All of the Winstar-related cases, including Anchor Savings' lawsuit (which
was assumed by the Bank upon consummation of the merger of Anchor Bancorp and
Anchor Savings with and into the Holding Company and the Bank, respectively),
have been assigned to the Chief Judge of the Court of Federal Claims. The Chief
Judge has issued an Omnibus Case Management Order ("OCMO") that controls the
proceedings in all these cases, which imposes procedures and schedules different
from most cases in the Court of Federal Claims. Under the OCMO, the Bank has
moved for partial summary judgment as to the existence of a contract and the
inconsistency of the Government's actions with that contract in each of the
related transactions. The Government has disputed the existence of a contract in
each case and cross-moved for summary judgment. The Government also submitted a
filing acknowledging that it is not aware of any affirmative defenses. Briefing
on the motions was completed on August 1, 1997. In August 1997, the Court held a
hearing on summary judgment motions in four other cases. As part of that
hearing, the Court heard argument on eleven issues that the plaintiffs contend
are common to many of the pending cases, including the Bank's case. The Court
issued its order on December 22, 1997, ruling in favor of the plaintiffs on all
eleven "common" issues. The Court's order directed the Government to submit a
"show cause" filing by February 20, 1998 asserting why judgment for the
plaintiff should not be entered on each of the common issues with respect to
each pending summary judgment motion. The Government submitted a filing in
response to the "show cause" order, but asserted that it might need further
discovery as to certain issues. At a status conference on March 11, 1998, the
Court directed each of the plaintiffs to submit a proposed form of order for
entry of judgment as to liability on the Winstar contract issues and an
accompanying brief by March 31, 1998 and directed the Government to respond by
April 30, 1998 with a filing asserting any basis for not entering the order
proposed by each of the plaintiffs. On March 31, 1998, the Bank, as directed by
the Court, submitted a proposed order imposing liability on the Government as to
each of the Bank's claims. On April 30, 1998, the Government served its
opposition to the entry of the order and sought discovery on several issues. The
Bank intends to vigorously oppose the Government's discovery request. The
Government will have until May 22, 1998 to make its final submission. No date
has been set for argument on the Bank's request to enter judgment. It is not
possible to predict whether the Court will grant any of the Bank's motions for
partial summary judgment or, if so, when the Chief Judge will schedule a trial
on damages and any remaining liability issues.
The Court also ordered that certain common discovery proceed. The
Government was required to produce certain documents relating to unassisted
acquisitions of failing institutions effected by the Bank and five other
plaintiffs. In addition, the Court directed that full discovery of facts common
to all pending cases be conducted. Such discovery will include materials
concerning the policies and procedures of the Federal Home Loan Bank Board (the
predecessor of the OTS) and the FSLIC during the thrift crisis of the 1980's,
when the transactions that are the subject of the litigation occurred. In
addition, the common discovery has included generally applicable information
concerning the operations of the FSLIC that will be relevant under certain
damage theories. Because of delays by the Government in complying with document
requests, this discovery is continuing.
Commencing in April 1998, the oldest 30 of the pending cases (after
excluding certain specific cases) that elected to proceed were allowed to
commence full discovery as to liability and damages in their cases. The
case-specific discovery will continue for one year, unless extended by the
Court. The second 30 cases will start discovery
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in 1999, and so on. Discovery of damage experts will follow the fact discovery
in each case. Cases will not be assigned to trial judges until after the fact
discovery is completed. The Bank is among the first 30 plaintiffs and commenced
full case-specific discovery on April 1, 1998.
There have been no decisions determining damages in any of the
Winstar-related cases. The trial in the first of the Winstar-related cases to
proceed to trial on damages was concluded in April 1998, with closing arguments
set for July 2, 1998, and the second commenced in early May 1998. It is unlikely
that any decision on damages will be issued before the fall of 1998. It is
likely that any determination of damages by the Court of Federal Claims will be
appealed. It is impossible to predict the measure of damages that will be upheld
in cases in which liability is found. The Company, nevertheless, believes that
its claim is meritorious, that it is one of the more significant cases before
the Court, and that it is entitled to damages, which, as noted, are estimated to
exceed substantially the goodwill remaining on Anchor Savings' books at the time
FIRREA was enacted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 3(i) -- Amended and Restated Certificate of Incorporation of the
Holding Company
Exhibit 27 -- Financial Data Schedule for the three months ended March 31,
1998
Exhibit 27.1 -- Restated Financial Data Schedule for the three months
ended March 31, 1997
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIME BANCORP, INC.
(Registrant)
Dated: May 13, 1998 By: /s/ Lawrence J. Toal
------------ -------------------------------------
Lawrence J. Toal
Chairman of the Board, Chief Executive
Officer, President, and Chief
Operating Officer
Dated: May 13, 1998 By: /s/ Anthony R. Burriesci
------------ -------------------------------------
Anthony R. Burriesci
Executive Vice President
and Chief Financial Officer
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EXHIBIT INDEX
Exhibit
Number Identification of Exhibit
- ------ -------------------------
3(i) Amended and Restated Certificate of Incorporation of the
Holding Company
27 Financial Data Schedule for the three months ended March 31,
1998 (filed electronically only)
27.1 Restated Financial Data Schedule for the three months ended
March 31, 1997 (filed electronically only)
28