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, 1999
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 April 30, 1999, the registrant had 111,382,385 shares of common stock,
$0.01 par value, outstanding.
2
DIME BANCORP, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as
of March 31, 1999 and December 31, 1998 3
Consolidated Statements of Income for the Three
Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Changes in
Stockholders' Equity for the Three Months Ended
March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 32
2
3
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,
1999 1998
------------ ------------
ASSETS
Cash and due from banks $ 248,031 $ 279,490
Money market investments 33,420 78,287
Securities available for sale 3,307,889 3,329,444
Federal Home Loan Bank of New York stock 324,106 324,106
Loans held for sale 3,083,213 3,884,886
Loans receivable, net:
Residential real estate loans 8,533,425 8,919,817
Commercial real estate loans 2,695,311 2,567,750
Consumer loans 1,044,422 973,230
Business loans 319,191 287,271
Allowance for loan losses (112,369) (105,081)
------------ ------------
Total loans receivable, net 12,479,980 12,642,987
------------ ------------
Accrued interest receivable 100,081 97,124
Premises and equipment, net 176,219 170,879
Mortgage servicing assets 891,159 692,473
Other assets 906,237 821,174
------------ ------------
Total assets $ 21,550,335 $ 22,320,850
============ ============
LIABILITIES
Deposits $ 13,165,948 $ 13,651,460
Federal funds purchased and securities sold under agreements to repurchase 3,263,446 2,245,218
Federal Home Loan Bank of New York advances 2,722,199 4,077,115
Senior notes 198,759 198,906
Guaranteed preferred beneficial interests in Dime Bancorp, Inc.'s junior
subordinated deferrable interest debentures 152,203 162,005
Other borrowed funds 199,977 89,604
Other liabilities 431,082 510,877
------------ ------------
Total liabilities 20,133,614 20,935,185
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share (350,000,000 shares authorized and
120,252,459 shares issued at March 31, 1999 and December 31, 1998) 1,203 1,203
Additional paid-in capital 1,165,464 1,165,251
Retained earnings 512,522 463,907
Treasury stock, at cost (8,906,165 shares at March 31, 1999 and 8,682,858
shares at December 31, 1998) (239,238) (233,965)
Accumulated other comprehensive loss (16,982) (3,285)
Unearned compensation (6,248) (7,446)
------------ ------------
Total stockholders' equity 1,416,721 1,385,665
------------ ------------
Total liabilities and stockholders' equity $ 21,550,335 $ 22,320,850
============ ============
See accompanying notes to consolidated financial statements.
3
4
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
For the
Three Months Ended
March 31,
-----------------------
1999 1998
--------- ---------
INTEREST INCOME
Residential real estate loans $ 202,816 $ 220,787
Commercial real estate loans 49,754 49,473
Consumer loans 19,654 16,322
Business loans 5,764 2,437
Mortgage-backed securities 48,898 73,060
Other securities 12,221 7,871
Money market investments 506 2,849
--------- ---------
Total interest income 339,613 372,799
--------- ---------
INTEREST EXPENSE
Deposits 119,842 139,028
Borrowed funds 84,273 97,860
--------- ---------
Total interest expense 204,115 236,888
--------- ---------
Net interest income 135,498 135,911
Provision for loan losses 8,000 8,000
--------- ---------
Net interest income after provision for loan losses 127,498 127,911
--------- ---------
NON-INTEREST INCOME
Loan servicing and other fees 61,928 42,450
Banking service fees 11,267 9,000
Securities and insurance brokerage fees 8,604 7,510
Net gains on sales activities 64,307 45,248
Other 3,124 2,326
--------- ---------
Total non-interest income 149,230 106,534
--------- ---------
NON-INTEREST EXPENSE
General and administrative expense:
Compensation and employee benefits 76,473 64,795
Occupancy and equipment 24,786 21,864
Other 48,337 43,783
--------- ---------
Total general and administrative expense 149,596 130,442
Amortization of mortgage servicing assets 30,657 16,935
Amortization of goodwill 2,876 2,879
--------- ---------
Total non-interest expense 183,129 150,256
--------- ---------
Income before income tax expense and extraordinary items 93,599 84,189
Income tax expense 34,631 26,940
--------- ---------
Income before extraordinary items 58,968 57,249
Extraordinary items -- losses on early extinguishment of
debt, net of tax benefits of $3,044 (4,127) --
--------- ---------
Net income $ 54,841 $ 57,249
========= =========
PER COMMON SHARE
Basic earnings:
Income before extraordinary items $ 0.53 $ 0.50
Extraordinary items (0.04) --
--------- ---------
Net income $ 0.49 $ 0.50
========= =========
Diluted earnings:
Income before extraordinary items $ 0.52 $ 0.49
Extraordinary items (0.03) --
--------- ---------
Net income $ 0.49 $ 0.49
========= =========
Dividends declared $ 0.05 $ 0.04
See accompanying notes to consolidated financial statements.
4
5
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
For the Three Months
Ended
March 31,
--------------------------
1999 1998
----------- -----------
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 1,165,251 1,158,221
Tax benefit on stock options exercised 213 3,087
----------- -----------
Balance at end of period 1,165,464 1,161,308
----------- -----------
RETAINED EARNINGS
Balance at beginning of period 463,907 261,201
Net income 54,841 57,249
Cash dividends declared on common stock (5,567) (4,590)
Treasury stock issued under employee benefit plans, net (659) (5,515)
----------- -----------
Balance at end of period 512,522 308,345
----------- -----------
TREASURY STOCK, AT COST
Balance at beginning of period (233,965) (95,221)
Treasury stock purchased (6,154) (87,332)
Treasury stock issued under employee benefit plans, net 881 22,361
----------- -----------
Balance at end of period (239,238) (160,192)
----------- -----------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of period (3,285) (9,534)
Other comprehensive (loss) income (13,697) 6,727
----------- -----------
Balance at end of period (16,982) (2,807)
----------- -----------
UNEARNED COMPENSATION
Balance at beginning of period (7,446) (1,012)
Restricted stock activity, net 292 (7,748)
Amortization of unearned compensation, net 906 538
----------- -----------
Balance at end of period (6,248) (8,222)
----------- -----------
Total stockholders' equity $ 1,416,721 $ 1,299,635
=========== ===========
See accompanying notes to consolidated financial statements.
5
6
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Three Months Ended
March 31,
----------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 54,841 $ 57,249
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Provision for loan losses 8,000 8,000
Depreciation, amortization and accretion, net 50,674 35,890
Provision for deferred income tax expense 27,388 19,273
Net securities losses (gains) 230 (14,116)
Losses on early extinguishment of debt 7,171 --
Net decrease (increase) in loans held for sale 801,673 (1,500,112)
Other, net (207,427) (84,079)
----------- -----------
Net cash provided (used) by operating activities 742,550 (1,477,895)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (767,253) (131,013)
Proceeds from sales of securities available for sale 379,676 1,223,491
Proceeds from maturities of securities available for sale 305,738 387,717
Purchases of Federal Home Loan Bank of New York stock -- (20,819)
Loans receivable originated and purchased, net of principal payments (30,281) (268,737)
Proceeds from sales of loans 45,285 1,723
Proceeds from sales of other real estate owned 5,962 6,027
Net purchases of premises and equipment (12,777) (12,428)
Other (4,858) --
----------- -----------
Net cash (used) provided by investing activities (78,508) 1,185,961
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits (485,541) 143,751
Net (decrease) increase in borrowings with original maturities of
three months or less (217,441) 81,398
Proceeds from other borrowings 198,645 --
Repayments of other borrowings (224,824) (17,542)
Proceeds from issuances of common and treasury stock 514 9,098
Purchases of treasury stock (6,154) (87,332)
Cash dividends paid on common stock (5,567) (4,590)
----------- -----------
Net cash (used) provided by financing activities (740,368) 124,783
----------- -----------
Net decrease in cash and cash equivalents (76,326) (167,151)
Cash and cash equivalents at beginning of period 357,777 452,527
----------- -----------
Cash and cash equivalents at end of period $ 281,451 $ 285,376
=========== ===========
Supplemental cash flow information:
Interest payments on deposits and borrowed funds $ 209,357 $ 325,100
Income tax payments (refunds), net 522 (3,608)
Supplemental non-cash investing information:
Securitization of loans receivable 173,305 --
Loans held for sale transferred to loans receivable -- 296,608
Loans receivable transferred to loans held for sale -- 764,500
See accompanying notes to consolidated financial statements.
6
7
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, 1998 (the
"1998 10-K"). Certain amounts in the prior period have been reclassified to
conform with the presentation for the current period. The results for the three
months ended March 31, 1999 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999.
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 (in thousands, except per
share data):
For the
Three Months Ended
March 31,
------------------------
1999 1998
--------- ---------
Basic earnings per common share:
Numerators:
Income before extraordinary items $ 58,968 $ 57,249
Extraordinary items (4,127) --
--------- ---------
Net income $ 54,841 $ 57,249
========= =========
Denominator:
Weighted average number of common shares outstanding 110,976 115,152
Basic earnings per common share:
Income before extraordinary items $ 0.53 $ 0.50
Extraordinary items (0.04) --
--------- ---------
Net income $ 0.49 $ 0.50
========= =========
Diluted earnings per common share:
Numerators:
Income before extraordinary items $ 58,968 $ 57,249
Extraordinary items (4,127) --
--------- ---------
Net income $ 54,841 $ 57,249
========= =========
Denominator:
Weighted average number of common shares outstanding 110,976 115,152
Common equivalent shares due to stock options, restricted stock and
employee stock purchase rights 1,463 1,996
--------- ---------
Weighted average number of diluted shares outstanding 112,439 117,148
========= =========
Diluted earnings per common share:
Income before extraordinary items $ 0.52 $ 0.49
Extraordinary items (0.03) --
--------- ---------
Net income $ 0.49 $ 0.49
========= =========
Note 3 -- Business Segments
For purposes of its disclosures in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company has four reportable business
segments: Retail Banking; Commercial Banking; Mortgage Banking; and Investment
Portfolio.
7
8
The financial information provided below has been derived from the internal
profitability system used by management to monitor and manage the financial
performance of the Company. The Company views its segments' performance on an
operating earnings basis, which represents net income adjusted for the effects
of certain non-recurring or unusual items.
The following table sets forth certain information regarding the Company's
business segments for the periods indicated (in thousands):
Total Total
Retail Commercial Mortgage Investment Reportable Intersegment Operating
Banking Banking Banking Portfolio Segments Eliminations Earnings
------- ------- ------- --------- -------- ------------ --------
For the three months ended
March 31, 1999:
Segment revenues $102,258 $ 23,765 $153,481 $ 9,115 $288,619 $(11,891) $276,728
Segment profit 30,654 10,505 20,288 4,794 66,241 (7,273) 58,968
Percentage of segment profit to total
profit of reportable segments 46.3% 15.9% 30.6% 7.2% 100.0%
For the three months ended
March 31, 1998:
Segment revenues $101,618 $ 21,861 $107,364 $ 13,879 $244,722 $(15,002) $229,720
Segment profit 31,282 10,233 11,730 7,795 61,040 (10,978) 50,062
Percentage of segment profit to total
profit of reportable segments 51.2% 16.8% 19.2% 12.8% 100.0%
For purposes of the above presentation, segment revenues reflect net
interest income, less provision for loan losses, plus non-interest income. The
accounting policies employed for each segment are largely the same as those
described in Note 1, "Summary of Significant Accounting Policies," of the 1998
10-K in all material respects, and as such, numerous intersegment transactions
are recorded to appropriately reflect each segment's performance. The Company
reflects its internal results on interest-earning assets and interest-bearing
liabilities on a matched funded basis and accounts for intersegment revenue and
transfer costs and credits based upon estimated fair market values at the time
of the transaction. Certain indirect or overhead costs are allocated to the
segments based on total assets and other appropriate criteria. The segment
revenues and profit above incorporate certain intersegment transactions that the
Company views as appropriate for purposes of reflecting the performance of
certain segments, which are eliminated in the preparation of the consolidated
financial statements in accordance with generally accepted accounting
principles.
The Company's management views each of its business segments as if they
were stand-alone operations. As such, the results of operations for each segment
reflect entries that would be recorded for an independent enterprise, such as
charges for services rendered on their behalf by other segments or support
units, and entries relating to the allocation of capital and to the purchase or
sale of funds as needed. The capital allocated to the segment generates
intersegment net interest income. Funds sold or purchased are distributed via
the Company's funding center and are provided on a matched maturity basis. These
intersegment entries are subsequently eliminated in consolidation.
The other primary adjustments between the internal management reports and
the consolidated operating earnings relate to the production and servicing of
loans in the Company's portfolio. Loans produced that are placed in the
residential real estate loans receivable portfolio are sold to the Retail
Banking segment with an imputed market gain or loss recognized by the Mortgage
Banking segment. As a result, the impact of these transactions, and resultant
ongoing adjustments from prior periods, must be reversed as an intersegment
elimination. Mortgage Banking also receives revenue for servicing the loan
portfolio and Retail Banking is charged for this function as a reduction of its
net yield. There are no other material intersegment adjustments.
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9
The following table sets forth reconciliations of reportable segment
revenues and profit to the Company's consolidated totals for the periods
indicated (in thousands):
Operating
Operating Earnings Consolidated
Earnings Adjustments Totals
-------- ----------- ------
For the three months ended March 31, 1999:
Segment revenues $276,728 $ -- $276,728
Segment profit 58,968 (4,127) 54,841
For the three months ended March 31, 1998:
Segment revenues 229,720 4,725 234,445
Segment profit 50,062 7,187 57,249
Reconcilements of operating earnings to consolidated net income are
provided in the following table for the periods indicated (in thousands):
For the
Three Months Ended
March 31,
---------------------
1999 1998
-------- --------
Operating earnings $ 58,968 $ 50,062
Items not included in operating earnings:
Net gains related to balance sheet restructuring and risk management initiatives -- 4,725
Income tax effect on above items -- (1,748)
Adjustments to conform internal tax expense to corporate tax expense -- 4,210
Extraordinary losses on early extinguishment of debt, net of tax benefits (4,127) --
-------- --------
Net adjustments after tax (4,127) 7,187
-------- --------
Consolidated net income $ 54,841 $ 57,249
======== ========
For a further discussion of the Company's business segments, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Business Segments."
Note 4 -- Comprehensive Income
The following table sets forth the Company's comprehensive income for the
periods indicated (in thousands):
For the
Three Months Ended
March 31,
---------------------
1999 1998
-------- --------
Net income $ 54,841 $ 57,249
Other comprehensive (loss) income (13,697) 6,727
-------- --------
Comprehensive income $ 41,144 $ 63,976
======== ========
Note 5 -- Acquisitions
On April 19, 1999, the Holding Company announced that its wholly-owned
subsidiary, The Dime Savings Bank of New York, FSB (the "Bank"), had entered
into a definitive agreement to acquire the automobile finance business conducted
by Citibank, N.A. In connection therewith, the Bank will acquire automobile
loans, dealer floor-plan loans and commercial real estate loans, which, in the
aggregate, amounted to approximately $930 million as of the date of the
announcement. As part of this transaction, the Bank will also assume certain
deposit relationships. This acquisition, which is subject to regulatory
approval, is expected to close during the third quarter of 1999.
9
10
On December 16, 1998, the Holding Company announced that it had entered
into a definitive agreement to acquire Lakeview Financial Corp. ("Lakeview"),
headquartered in West Paterson, New Jersey. Lakeview is the holding company for
Lakeview Savings Bank, which operates eleven offices in northern New Jersey.
This acquisition is expected to close during the second quarter of 1999. On a
consolidated basis at January 31, 1999, Lakeview had assets of approximately
$573 million and deposits of approximately $462 million. Under the terms of the
agreement, holders of Lakeview's common stock were entitled to elect to receive
either 0.9 of a share of the Holding Company's common stock or $24.26 in cash
for each outstanding share of Lakeview common stock, subject to a requirement
that, in the aggregate, 65% of Lakeview's outstanding shares of common stock
will be exchanged for the Holding Company's common stock and the remaining
shares will be exchanged for cash.
Note 6 -- Recent Accounting Developments
Effective January 1, 1999, the Company adopted SFAS No. 134, "Accounting
for Mortgage-Backed Securities Retained After the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 which amends
SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," requires
that, after the securitization of a mortgage loan held for sale, any retained
mortgage-backed security ("MBS") should be classified in accordance with the
provisions of SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities." However, SFAS No. 134 requires that a mortgage banking enterprise
classify as trading any retained MBS that it commits to sell before or during
the securitization process. The adoption of SFAS No. 134 did not materially
impact the Company's financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires that an entity recognize all
derivative instruments as either assets or liabilities in statements of
financial position and measure those instruments at fair value. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. Earlier adoption of
SFAS No. 133 is encouraged, but is permitted only as of the beginning of any
fiscal quarter that begins after its issuance. SFAS No. 133 may not be applied
retroactively to financial statements of prior periods. The Company intends to
adopt SFAS No. 133 on January 1, 2000. The Company has not completed its
evaluation of the effect that the adoption of SFAS No. 133 will have upon its
financial condition and results of operations.
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.
Results of Operations
General
The Company's net income for the quarter ended March 31, 1999 was $54.8
million, as compared with $57.2 million for the first quarter of 1998. Diluted
earnings per common share were $0.49 for the first quarter of 1999, unchanged
from the level in the same quarter one year ago. Net income and diluted earnings
per common share for the first quarter of 1999 were reduced by $4.1 million and
$0.03, respectively, as a result of after-tax extraordinary losses on the early
extinguishment of debt.
10
11
The 1999 first quarter's results, as compared with the first quarter of 1998,
were favorably affected by an increase in the net interest margin of 12 basis
points, which virtually offset the impact of a lower level of average
interest-earning assets, and growth in non-interest income of $42.7 million,
the effect of which was partially offset by a $32.9 million increase in
non-interest expense. The improvement in the net interest margin was driven by
a sharp reduction in the Company's cost of funds, coupled with favorable
changes in the Company's interest-earning asset mix. The higher levels of
non-interest income and non-interest expense were largely associated with the
Company's mortgage banking operations. Other factors affecting the comparison
of the two periods included pre-tax net gains of $4.7 million recognized in the
1998 first quarter in connection with certain balance sheet restructuring and
risk management initiatives, the after-tax extraordinary losses associated with
debt extinguishments recognized during the first quarter of 1999 and an
increase in the Company's effective income tax rate from 32% in the first
quarter of 1998, which reflected the benefits of certain tax planning
strategies during 1998, to 37% in the first quarter of 1999.
The Company's annualized returns on average stockholders' equity and
average assets for the first three months of 1999 were 15.66% and 1.01%,
respectively, as compared with 17.63% and 1.04%, respectively, for the first
three months of 1998.
Net Interest Income
Net interest income amounted to $135.5 million for the quarter ended March
31, 1999, as compared with $135.9 million for the comparable quarter of 1998.
Net interest income was down only slightly, despite a reduction in average
interest-earning assets of $833.0 million, as the net interest margin increased
to 2.75% for the first quarter of 1999 from 2.63% for the first quarter of 1998.
The interest rate spread for the first quarter of 1999 was 2.80%, up 18 basis
points from the comparable quarter of 1998.
The growth in the net interest margin for the first quarter of 1999, as
compared with the first quarter of 1998, was driven by a reduction in the cost
of average interest-bearing liabilities of 54 basis points, reflective of the
relatively lower interest rate environment and the effects of the Company's
strategy to increase the percentage of core deposits (consisting of demand,
savings and money market deposits) to total deposits. Average core deposits for
the first quarter of 1999 were $6.8 billion, or 51.0% of average total deposits,
up from $6.0 billion, or 43.4% of average total deposits, for the first quarter
of 1998.
The beneficial effect on the net interest margin of the lower funding costs
was partially offset by a decrease in the yield on average interest-earning
assets of 36 basis points. This decline was also reflective primarily of the
relatively lower interest rate environment, the impact of which was offset, in
part, by favorable changes in the interest-earning asset mix, due largely to the
effect of the Company's strategies in this area. Such favorable changes included
growth in the aggregate average balance of commercial real estate, consumer and
business loans of $776.6 million, or 24.7%, and a reduction in the average
balance of MBS of $1.3 billion, or 30.7%.
11
12
The following table sets forth, for the periods indicated, the Company's
consolidated average statement of financial condition, net interest income,
interest rate spread and net interest margin. 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,
-----------------------------------------------------------------------------
1999 1998
------------------------------------- ------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- -------- ---- ----------- -------- ----
(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans:
Residential real estate (1) $12,011,918 $202,816 6.77% $12,410,306 $220,787 7.12%
Commercial real estate 2,623,270 49,754 7.59 2,250,543 49,473 8.79
Consumer 1,004,238 19,654 7.89 782,027 16,322 8.47
Business 291,365 5,764 8.02 109,655 2,437 9.02
----------- -------- ----------- --------
Total loans 15,930,791 277,988 7.00 15,552,531 289,019 7.44
----------- -------- ----------- --------
Securities:
MBS 2,937,414 48,898 6.66 4,240,274 73,060 6.89
Other securities 689,449 12,221 7.13 430,725 7,871 7.38
----------- -------- ----------- --------
Total securities 3,626,863 61,119 6.75 4,670,999 80,931 6.94
----------- -------- ----------- --------
Money market investments 38,645 506 5.30 205,748 2,849 5.54
----------- -------- ----------- --------
Total interest-earning assets 19,596,299 339,613 6.95 20,429,278 372,799 7.31
-------- --------
Other assets 2,023,137 1,535,066
----------- -----------
Total assets $21,619,436 $21,964,344
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Demand $1,831,802 1,647 0.36 $1,646,170 2,471 0.61
Savings 2,279,426 12,186 2.17 2,376,329 13,141 2.24
Money market 2,710,909 25,182 3.77 1,984,615 17,727 3.62
Time 6,548,795 80,827 5.01 7,825,253 105,689 5.48
----------- -------- ----------- --------
Total deposits 13,370,932 119,842 3.63 13,832,367 139,028 4.08
----------- -------- ----------- --------
Borrowed funds:
Federal funds purchased and securities sold
under agreements to repurchase 3,066,662 37,336 4.87 2,312,470 32,703 5.66
Federal Home Loan Bank of New
York ("FHLBNY") advances 2,871,617 37,283 5.19 3,670,492 53,639 5.85
Other 504,673 9,654 7.65 545,194 11,518 8.45
----------- -------- ----------- --------
Total borrowed funds 6,442,952 84,273 5.23 6,528,156 97,860 6.00
----------- -------- ----------- --------
Total interest-bearing liabilities 19,813,884 204,115 4.15 20,360,523 236,888 4.69
-------- --------
Other liabilities 404,989 304,581
Stockholders' equity 1,400,563 1,299,240
----------- -----------
Total liabilities and stockholders' equity $21,619,436 $21,964,344
=========== ===========
Net interest income $135,498 $135,911
======== ========
Interest rate spread 2.80 2.62
Net interest margin 2.75 2.63
- ----------
(1) Includes 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, 1999 versus 1998
----------------------------------
Increase (Decrease)
----------------------------------
Due to Due to
Volume Rate Total
-------- -------- --------
(In thousands)
Interest income:
Total loans (1) $ 6,907 $(17,938) $(11,031)
Total securities (17,650) (2,162) (19,812)
Money market investments (2,196) (147) (2,343)
-------- -------- --------
Total interest income (12,939) (20,247) (33,186)
-------- -------- --------
Interest expense:
Total deposits (4,520) (14,666) (19,186)
Total borrowed funds (1,262) (12,325) (13,587)
-------- -------- --------
Total interest expense (5,782) (26,991) (32,773)
-------- -------- --------
Net interest income $ (7,157) $ 6,744 $ (413)
======== ======== ========
----------
(1) Includes loans held for sale.
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 -- Allowance for Loan Losses"), amounted to $8.0 million for the
first quarter of 1999, unchanged from the comparable prior year quarter. Net
loan charge-offs for the quarter ended March 31, 1999 were $0.7 million, down
80.3% from $3.6 million for the first quarter of 1998. Contributing to the
reduction in net charge-offs was the effect of a bulk sale in December 1998 of
approximately $53 million of non-accrual and subperforming loans, substantially
all of which were residential real estate loans (the "1998 NPA Sale").
Non-Interest Income
General. The Company's non-interest income was $149.2 million for the
quarter ended March 31, 1999, up 40.1% from $106.5 million for the comparable
quarter of 1998. This increase was principally driven by growth in net gains on
sales of loans held for sale and a higher level of fees generated by the
Company's mortgage banking operations. Non-interest income for the first quarter
of 1998 included net gains of $4.7 million associated with certain balance sheet
restructuring and risk management initiatives. For the first quarter of 1999,
non-interest income represented 52.4% of total revenues (net interest income
plus non-interest income), as compared with 43.9% for the first quarter of 1998.
Loan Servicing and Other Fees. Loan servicing and other fees, which
includes fees earned from loan servicing, loan production and certain other
loan-related activities, amounted to $61.9 million for the three-month period
ended March 31, 1999, an increase of $19.5 million, or 45.9%, from the
corresponding period of 1998. This increase was largely attributable to a $16.9
million rise in loan servicing fees, primarily reflecting growth, and changes in
the characteristics, of the loan servicing portfolio.
At March 31, 1999, the Company's portfolio of mortgage loans serviced for
others (excluding loans being subserviced by the Company) amounted to $32.5
billion, up $5.4 billion, or 20.1%, from December 31, 1998 and $12.7 billion, or
64.6%, from one year earlier. Excluding loans being subserviced, the weighted
average interest rate of the loans underlying the mortgage loans serviced for
others portfolio was 7.24% at the end of the 1999 first quarter, as compared
with 7.37% at December 31, 1998 and 7.79% at March 31, 1998. Based on principal
13
14
balances, approximately 53% of the mortgage loans serviced for others at March
31, 1999 had coupon rates of 7.00% or less, as compared with approximately 47%
at December 31, 1998 and approximately 9% at March 31, 1998.
The following table sets forth activity in the Company's portfolio of
mortgage loans serviced for others for the periods indicated (in thousands):
For the Three Months Ended
March 31,
-----------------------------
1999 1998
------------ ------------
Balance at beginning of period $ 27,009,693 $ 21,986,111
Additions 7,096,183 3,963,124
Sales (408,503) (4,842,817)
Runoff (1) (1,246,687) (1,396,025)
------------ ------------
Balance at end of period $ 32,450,686 $ 19,710,393
============ ============
----------
(1) Includes scheduled amortization, full and partial prepayments and
other reductions.
In connection with sales of mortgage loan servicing rights, the Company was
subservicing $0.5 billion of loans at March 31, 1999, as compared with $7.9
billion and $7.6 billion at December 31, 1998 and March 31, 1998, respectively.
The Company receives fees for subservicing loans until the transfer of the
servicing responsibility to the purchasers of the servicing rights.
Banking Service Fees. Banking service fees for the first quarter of 1999
amounted to $11.3 million, as compared with $9.0 million for the first quarter
of 1998. The 25.2% increase reflects higher transaction volumes, changes in the
Company's fee structure and the introduction of certain fee-based services.
Securities and Insurance Brokerage Fees. Securities and insurance brokerage
fees totaled $8.6 million for the quarter ended March 31, 1999, up $1.1 million
from the comparable prior year quarter. This increase was substantially
attributable to growth in fees from insurance activities to $3.6 million for the
first quarter of 1999 from $2.5 million for the first quarter of 1998,
reflecting, among other factors, synergies arising from the Company's mortgage
banking operations as well as the Company's heightened focus in this area.
Net Gains on Sales Activities. Net gains on sales activities amounted to
$64.3 million for the three months ended March 31, 1999, up $19.1 million, or
42.1%, from $45.2 million for the first quarter of 1998, which included net
gains of $4.7 million associated with certain balance sheet restructuring and
risk management initiatives.
Net gains associated with loans held for sale increased to $64.4 million
for the first quarter of 1999 from $26.2 million for the first quarter of 1998.
The net gains during the first quarter of 1998 were reduced by losses of $11.4
million associated with the transfer of certain relatively lower-yielding loans
from loans receivable to loans held for sale in connection with the Company's
balance sheet restructuring activities. (The sales of these loans were
consummated during the second and third quarters of 1998.) In total, the Company
sold $7.3 billion of residential real estate loans into the secondary market
during the first quarter of 1999, up from $4.3 billion during the comparable
prior year quarter.
The Company recognized securities-related net losses of $0.2 million during
the first quarter of 1999, as compared with securities-related net gains of
$14.1 million during the comparable quarter of 1998. The net gains during the
first quarter of 1998 resulted primarily from sales of $1.2 billion of the $1.4
billion of MBS that, in December 1997, had been designated for sale in
connection with a balance sheet restructuring initiative.
Net gains on sales of mortgage servicing rights amounted to $0.5 million
for the first quarter of 1999, down from $5.4 million during the comparable
quarter of 1998. The net gains in the first quarter of 1998 were principally
associated with a bulk sale of $4.8 billion of servicing rights in connection
with the Company's risk
14
15
management program. This bulk sale was intended to reduce the impact of a
declining long-term interest rate environment on the value of the Company's
mortgage servicing assets.
Other. Other non-interest income was $3.1 million for the quarter ended
March 31, 1999, up $0.8 million from the corresponding quarter of 1998. This
increase was substantially associated with higher revenues earned from the
Company's Bank-Owned Life Insurance Program.
Non-Interest Expense
General. Non-interest expense amounted to $183.1 million for the quarter
ended March 31, 1999, up $32.9 million, or 21.9%, from the comparable quarter of
1998. This increase was largely attributable to growth in general and
administrative ("G&A") expense, primarily as a result of the Company's increased
mortgage banking activities, coupled with a higher level of amortization of
mortgage servicing assets coincident with growth in the mortgage servicing
assets portfolio.
G&A Expense. G&A expense increased to $149.6 million for the first quarter
of 1999 from $130.4 million during the same quarter one year ago. Compensation
and employee benefits expense, which totaled $76.5 million for the first quarter
of 1999, increased $11.7 million, or 18.0%, as compared with the first quarter
of 1998, principally as a result of growth in the Company's full-time equivalent
employee complement. The number of full-time equivalent employees rose to 7,241
at March 31, 1999 from 6,390 one year earlier, primarily reflecting the
Company's increased mortgage banking activities, particularly in the area of
loan originations. Occupancy and equipment expense increased to $24.8 million
for the quarter ended March 31, 1999 from $21.9 million for the comparable
quarter of 1998. Other G&A expense, which amounted to $48.3 million for the
first quarter of 1999, increased $4.6 million as compared with the first quarter
of 1998.
Amortization of Mortgage Servicing Assets. Amortization of mortgage
servicing assets amounted to $30.7 million for the first quarter of 1999, as
compared with $16.9 million for the first quarter of 1998. The increase of $13.7
million, or 81.0%, was substantially reflective of growth in mortgage servicing
assets.
At March 31, 1999, the Company's mortgage servicing assets (including
related derivative financial instruments hedging such assets) had a carrying
value of $891.2 million and an estimated fair value of approximately $920
million. These amounts included $79.6 million and $76.4 million, respectively,
associated with derivative financial instruments. At December 31, 1998 and March
31, 1998, the carrying value of mortgage servicing assets amounted to $692.5
million and $335.5 million, respectively.
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 to hedge its mortgage servicing assets (see "Asset/Liability
Management -- Derivative Financial Instruments").
Amortization of Goodwill. Amortization of goodwill amounted to $2.9 million
for the three-month period ended March 31, 1999. This amount was virtually
unchanged from the comparable period of 1998.
Income Tax Expense
Income tax expense increased to $34.6 million for the first quarter of 1999
from $26.9 million for the first quarter of 1998, reflecting a higher effective
income tax rate coupled with growth in pre-tax income. The Company's effective
income tax rate was 37.0% for the three-month period ended March 31, 1999, as
compared with 32.0% for the comparable period of 1998. The effective tax rate in
the 1998 period was favorably affected by a restructuring of assets within
corporate entities.
Extraordinary Items
During the first quarter of 1999, the Company recognized after-tax
extraordinary losses of $4.1 million on the early extinguishment of $110.0
million of long-term debt (see "Financial Condition -- Borrowed Funds").
15
16
Business Segments
For internal management purposes, the Company has four business segments:
Retail Banking; Commercial Banking; Mortgage Banking; and Investment Portfolio.
The Company views it segments' performance on an operating earnings basis, which
represents net income adjusted for the effects of certain non-recurring or
unusual items. The performance of each business segment is measured by the
Company 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 reported 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.
16
17
The following table summarizes, for the periods indicated, operating
earnings results for the Company's business segments, as well as the percentage
of segment profit to total profit of reportable segments (dollars in thousands):
For the Three Months Ended March 31,
-----------------------------------------
1999 1998
-------------------- --------------------
Percentage Percentage
of Total of Total
Reportable Reportable
Amount Segments Amount Segments
------ -------- ------ --------
Retail Banking $ 30,654 46.3% $ 31,282 51.2%
Commercial Banking 10,505 15.9 10,233 16.8
Mortgage Banking 20,288 30.6 11,730 19.2
Investment Portfolio 4,794 7.2 7,795 12.8
-------- ----- -------- -----
Total reportable segments 66,241 100.0% 61,040 100.0%
===== =====
Intersegment eliminations (1) (7,273) (10,978)
-------- --------
Total operating earnings $ 58,968 $ 50,062
======== ========
----------
(1) Intersegment transactions have been eliminated in consolidation.
In addition, this line includes the Company's funding center,
which reflects the effects of intersegment match-funding of all
assets and liabilities, and transacts external borrowings on
behalf of the Company.
The Retail Banking segment, which focuses on individuals, includes deposit
accounts and related services, securities brokerage services, insurance
products, consumer lending activities and maintenance of a portfolio of
residential real estate loans receivable. Retail Banking's profit for the first
quarter of 1999 was $30.7 million, a decline of $0.6 million from the same
period in 1998. The impact of lower levels of residential real estate loans
receivable and retail time deposits were virtually offset by growth in consumer
loans receivable and core deposits and higher fee income from both banking
services and insurance activities.
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. This segment's profit was $10.5
million in the first quarter of 1999, $0.3 million greater than that in the
comparable prior year quarter. This increase was generally reflective of growth
in business banking loans and deposits.
The Mortgage Banking segment's activities, which are conducted principally
through the Bank's wholly-owned subsidiary, North American Mortgage Company,
include the production of residential real estate loans either for the Company's
portfolio or for sale into the secondary market and servicing loans for the
Company and others. Mortgage Banking generated profits of $20.3 million in the
1999 first quarter, up from $11.7 million in the 1998 first quarter. This growth
principally reflects increased gains on sales of loans as well as higher loan
servicing and production fee income, the effects of which were partially offset
by increases in the expense base related to this growth.
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.
For the first quarter of 1999, the Investment Portfolio segment had profits of
$4.8 million, down from $7.8 million for the same period in 1998. The
recognition of certain gains on sales of securities in the 1998 period, coupled
with reductions in the level of the securities portfolio, were the principal
components of the period-to-period decline.
For additional financial information on the Company's business segments,
see Note 3 of Notes to Consolidated Financial Statements.
Year 2000 Issue
The Company acknowledges the challenges posed worldwide due to the current
inability of certain computer systems to properly recognize the date change from
December 31, 1999 to January 1, 2000. Failure to adequately meet these
challenges could have a material adverse effect on the operations of a financial
institution, such as the Company. The Company has adopted a plan to prepare its
computer systems, software, applications, hardware and facility systems to
properly process dates beyond December 31, 1999 (the "Year 2000 Plan").
In accordance with guidelines established by the Federal Financial
Institutions Examinations Council and the Office of Thrift Supervision ("OTS"),
the Company has completed both the assessment and analysis phase and the
remediation phase of its Year 2000 Plan with respect to its mission-critical
systems. The Company has substantially completed the testing phase of the Year
2000 Plan, including user acceptance, unit, and interface testing, with respect
to its internal mission-critical systems. The Company has successfully completed
the conversion of substantially all of its internal mission-critical systems,
and as a result, substantially all of these systems are now year 2000 capable.
The Company is in the process of conducting external interface testing with
mission-critical and other material third parties and currently anticipates that
such testing will be substantially completed by June 30, 1999.
Further, the Company has established remediation contingency plans and
business resumption contingency plans for its mission-critical systems. The
Company's remediation contingency plans focus on mitigating the risks associated
with the failure to remediate its mission-critical systems prior to the year
2000 and the business resumption contingency plans focus on mitigating the
operational risks to the Company and its customers should the Company's core
business processes fail, regardless of whether its mission-critical systems are
remediated by the year 2000.
The Company's primary efforts are currently focused on additional testing
of its converted mission-critical systems, completion of year 2000-related
efforts with respect to its remaining systems and the testing and validation of
its contingency plans.
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18
The Company has developed a campaign designed to educate and reassure its
customers regarding the impact of the year 2000 issue and the readiness of the
Company to face the challenges posed by the approach of the year 2000. As part
of this process, the Company has begun a training program to provide employees
with comprehensive information about the Company's efforts so that they can
answer questions posed by individual customers and others.
In addition, the Company is involved in ongoing communications with its
significant third-party contractors, such as vendors and service providers, for
the purpose of evaluating their readiness to meet the challenges of the year
2000 and the extent to which the Company may be affected by the remediation
efforts connected with their systems, software, and applications. The Company
cannot guarantee that the computer systems of such third parties will be
remediated on a timely basis or that the failure of any such party to remediate,
or a remediation that is incompatible with the Company's systems, would not have
a material adverse effect on the Company.
Finally, the Company has implemented a process of ongoing credit risk
assessment and monitoring of its significant commercial real estate and business
lending customers in an effort to prepare for any year 2000-related risk that
may result from their failure to adequately address the year 2000 issue.
Cumulatively, since commencing its year 2000 efforts in 1997, the Company
has incurred approximately $21 million of pre-tax expense in connection with the
Year 2000 Plan. The Company currently anticipates that it will not incur
significant additional expense in completing the implementation of the Year 2000
Plan. The total expense substantially reflects consulting fees associated with
software modification, project management and programming, as well as ancillary
items, but does not include such items as the cost of Company personnel involved
in the Year 2000 Plan or capital expenditures that would have been made to
systems regardless of the issues associated with the impending year 2000.
The preceding discussion includes forward-looking statements that involve
inherent risks and uncertainties. A number of factors could cause the actual
impact of the year 2000 issue to differ materially from Company estimates. Those
factors include, but are not limited to, uncertainties in the cost of
remediation of hardware and software, inaccurate or incomplete testing results,
and the ineffective remediation of computer codes of internal mission-critical
systems or external system interfaces. The Company cannot guarantee that its
efforts will be accomplished in a timely manner or that the failure thereof will
not have a material adverse effect on the Company. Failure of the Company or its
significant third-party contractors to effectively remedy year 2000 issues could
cause disruption of the Company's operations resulting in increased operating
costs and other adverse effects. In addition, to the extent significant
customers' financial positions are weakened as a result of year 2000 issues,
credit quality could be adversely impacted.
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,
interest-bearing liabilities and derivative financial 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
18
19
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 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 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. 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,
mortgages and the mortgages 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 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 gap
between the duration of the Company's interest-earning assets and
interest-bearing liabilities 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
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.
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20
Derivative Financial Instruments
The Company currently uses a variety of derivative financial instruments to
assist in managing its interest rate risk exposures and, on a very limited
basis, for trading purposes. While the Company's use of derivative financial
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.
Interest Rate Risk-Management Instruments. The Company's assets have
historically repriced or matured at a longer term than the liabilities used to
fund those assets. At March 31, 1999, the Company used three major classes of
derivative financial instruments in its efforts to reduce its repricing risk:
(i) interest rate swaps, where the Company pays a fixed rate and receives a
floating rate; (ii) interest rate caps, where, in exchange for the payment of a
premium, the Company receives the excess of a designated market interest rate
over a specified strike interest rate, as applied to the notional amount of the
related agreement; and (iii) interest rate swaptions, where, in exchange for the
payment of a premium, the Company, at a future date, has the right to enter into
interest rate swap agreements that provide for it to pay a fixed rate and
receive a floating rate.
The following table sets forth certain information on the derivative
financial instruments used by the Company at March 31, 1999 for interest rate
risk-management purposes, segregated by the activities that they hedge (dollars
in thousands):
Weighted Average
Estimated --------------------------
Notional Fair Fixed-Rate Variable-Rate
Amount Value Payable Receivable (1)
-------- --------- ---------- --------------
Interest rate swaps hedging:
Securities available for sale $ 239,370 $ (862) 5.64% 4.94%
Loans receivable 1,471,691 (25,786) 6.33 4.95
Borrowed funds 250,000 (249) 5.38 4.97
Interest rate caps hedging:
Securities available for sale (2) 55,896 -- -- --
Loans receivable (2) 52,851 -- -- --
Interest rate swaptions hedging loans receivable (3) 20,000 -- -- --
---------- ----------
Total $2,089,808 $ (26,897)
========== ==========
- ----------
(1) Variable rates, substantially all of which are tied to the one-month London
Interbank Offered Rate ("LIBOR"), are presented on the basis of rates in
effect at March 31, 1999; however, actual repricings of the interest rate
swaps will be based on the applicable interest rates in effect at the
actual repricing dates.
(2) The weighted average strike rate was 8.00%. The designated market interest
rates were all tied to the weekly average yield of the one-year constant
maturity Treasury index.
(3) 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, 1999 and 1998 of $6.1 million and $5.5 million,
respectively.
Mortgage Banking Risk-Management Instruments. At March 31, 1999, the
Company used five 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: (i) interest rate swaps, where
the Company receives a fixed rate and pays a floating rate, although, in certain
cases, the Company pays a fixed rate for a pre-determined period of time; (ii)
interest rate floors, where, in exchange for the payment of a premium, the
Company receives the excess of a specified strike interest rate over a
designated market interest rate, as applied to the notional amount of the
related agreement; (iii) interest rate caps, where, in exchange for the payment
of a premium, the Company receives the excess of a designated market interest
rate over a specified strike rate, as applied to the notional amount of the
related agreement; (iv) interest rate swaptions, where, in exchange for the
20
21
payment of a premium, the Company, at a future date, has the right to enter into
interest rate swap agreements that provide for it to pay a fixed rate and
receive a variable rate; and (v) forward contracts to purchase MBS.
Two major classes of derivative financial instruments were used by the
Company at March 31, 1999 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 purchased put options on MBS and interest rate futures.
The following table sets forth certain information on the derivative
financial instruments used by the Company at March 31, 1999 in connection with
its mortgage banking operations, segregated by the activities that they hedge
(dollars in thousands):
Weighted Average
Estimated Rate
Notional Fair ----------------------------
Amount Value Payable Receivable
-------- --------- ---------- --------------
Interest rate swaps hedging mortgage servicing assets
Pay variable rate/receive fixed rate (1) $ 587,000 $ (2,490) 4.94% 5.88%
Pay fixed rate/receive fixed rate (2) 300,000 4,621 5.93 6.16
Forward starting interest rate swap hedging mortgage servicing
assets (3) 100,000 2,496 -- --
Interest rate swaptions hedging mortgage servicing assets (4) 1,085,000 14,784 -- --
Interest rate floors hedging mortgage servicing assets (5) 3,741,079 39,724 -- --
Interest rate caps hedging mortgage servicing assets (6) 400,000 20,266 -- --
Forward contracts hedging mortgage servicing assets 610,000 (3,051) -- --
Forward contracts hedging loans held for sale 3,847,112 6,200 -- --
Put options purchased hedging loans held for sale 50,000 211 -- --
----------- --------
Total $10,720,191 $ 82,761
=========== ========
- ----------
(1) Variable rates payable, all of which are tied to one-month LIBOR, are
presented on the basis of rates in effect at March 31, 1999; however,
actual repricings of the interest rate swaps will be based on the
applicable interest rates in effect at the actual repricing dates.
(2) These interest rate swaps are structured so that the Company both receives
and makes fixed-rate payments for the initial two years of the agreements.
During the fourth quarter of 1999, the Company will begin making
variable-rate payments on these interest rate swaps that are tied to
one-month LIBOR.
(3) The accrual of interest does not begin until November 1999. The
variable-rate payable will be tied to one-month LIBOR. The fixed-rate
receivable will be 6.38%.
(4) The weighted average strike rate was 6.09%.
(5) The weighted average strike rate was 5.28%. The designated market interest
rates were generally tied to constant maturity Treasury or swap indices.
(6) The weighted average strike rate was 6.09%. The designated market interest
rates were all tied to one-month LIBOR.
Trading Instruments. At March 31, 1999, the derivative financial
instruments used by the Company for trading purposes consisted of interest rate
caps with a notional amount of $165.0 million. The estimated fair value of these
interest rate caps at that date was not material.
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
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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, 1999. 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)
Total interest-earning assets $ 10,369 $ 3,987 $ 5,237 $ 19,593
Total interest-bearing liabilities 12,616 3,243 3,844 19,703
-------- -------- -------- --------
Periodic gap before impact of derivative financial instruments (2,247) 744 1,393 (110)
Impact of derivative financial instruments 1,668 (818) (850) --
-------- -------- -------- --------
Periodic gap $ (579) $ (74) $ 543 $ (110)
======== ======== ======== ========
Cumulative gap $ (579) $ (653) $ (110)
======== ======== ========
Cumulative gap as a percentage of total assets (2.7)% (3.0)% (0.5)%
Management of Credit Risk
General
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.
Non-Performing Assets
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
collectability 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):
March 31, December 31, March 31,
1999 1998 1998
--------- --------- ---------
Non-accrual loans:
Residential real estate $ 44,877 $ 37,771 $ 89,907
Commercial real estate 10,753 11,992 26,618
Consumer 4,950 5,292 5,670
Business 24 56 382
--------- --------- ---------
Total non-accrual loans 60,604 55,111 122,577
--------- --------- ---------
Other real estate owned, net:
Residential real estate 11,582 15,170 19,209
Commercial real estate 13,516 14,505 7,302
Allowance for losses (1,196) (1,443) (1,682)
--------- --------- ---------
Total other real estate owned, net 23,902 28,232 24,829
--------- --------- ---------
Total non-performing assets $ 84,506 $ 83,343 $ 147,406
========= ========= =========
Non-performing assets to total assets 0.39% 0.37% 0.67%
Non-accrual loans to loans receivable 0.48 0.43 0.96
Contributing to the decline of $62.9 million, or 42.7%, in non-performing
assets from March 31, 1998 to March 31, 1999 was the impact of the 1998 NPA
Sale.
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 loans receivable 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, 1999, 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 $49,559 $18,484 $68,043
Commercial real estate 1,710 -- 1,710
Consumer 2,858 2,156 5,014
Business 228 92 320
------- ------- -------
Total $54,355 $20,732 $75,087
======= ======= =======
Allowance for Loan Losses
The Company's allowance for loan losses, which amounted to $112.4 million
at March 31, 1999, 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.
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The following table sets forth the activity in the Company's allowance for
loan losses for the periods indicated (in thousands):
For the
Three Months Ended
March 31,
------------------------
1999 1998
--------- ---------
Balance at beginning of period $ 105,081 $ 104,718
Provision for loan losses 8,000 8,000
Loan charge-offs:
Residential real estate (2,750) (6,231)
Commercial real estate (306) (193)
Consumer (682) (702)
Business (27) --
--------- ---------
Total loan charge-offs (3,765) (7,126)
--------- ---------
Loan recoveries:
Residential real estate 1,022 1,111
Commercial real estate 1,595 1,903
Consumer 436 483
Business -- 7
--------- ---------
Total loan recoveries 3,053 3,504
--------- ---------
Net loan charge-offs (712) (3,622)
--------- ---------
Balance at end of period $ 112,369 $ 109,096
========= =========
The following table sets forth the Company's allowance for loan losses
coverage ratios at the dates indicated:
March 31, December 31, March 31,
1999 1998 1998
---- ---- ----
Allowance for loan losses to:
Loans receivable 0.89% 0.82% 0.85%
Non-accrual loans 185.42 190.67 89.00
MBS
Of the $2.9 billion carrying value of the Company's MBS available for sale
portfolio at March 31, 1999, $1.9 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-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,
1999 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, 1999 or December 31, 1998.
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Financial Condition
General
The Company's total assets amounted to $21.6 billion at March 31, 1999,
down $770.5 million from December 31, 1998. Contributing significantly to the
reduction in total assets was a lower level of loans held for sale.
Securities Available for Sale
The following table summarizes the amortized cost and estimated fair value
of securities available for sale at the dates indicated (in thousands):
March 31, 1999 December 31, 1998
------------------------- -------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---------- ---------- ---------- ----------
MBS:
Pass-through securities:
Privately-issued $1,805,551 $1,788,308 $1,795,369 $1,775,264
U.S. government agencies 1,061,806 1,058,804 1,002,850 1,008,921
Collateralized mortgage obligations-- privately-issued 99,878 100,007 179,407 179,484
Interest-only 1,220 553 1,286 628
---------- ---------- ---------- ----------
Total MBS 2,968,455 2,947,672 2,978,912 2,964,297
---------- ---------- ---------- ----------
Other debt securities:
U. S. government and federal agencies 2,009 2,011 3,492 3,525
State and municipal 10,080 9,864 13,036 12,834
Domestic corporate 351,290 343,084 333,683 343,095
Other 500 500 500 500
---------- ---------- ---------- ----------
Total other debt securities 363,879 355,459 350,711 359,954
---------- ---------- ---------- ----------
Equity securities 5,066 4,758 5,529 5,193
---------- ---------- ---------- ----------
Total securities available for sale $3,337,400 $3,307,889 $3,335,152 $3,329,444
========== ========== ========== ==========
Loans
Loans held for sale into the secondary market in connection with the
Company's mortgage banking activities amounted to $3.1 billion at March 31,
1999. This represents a decline of $801.7 million from the level at the end of
1998.
Loans receivable (exclusive of the allowance for loan losses) amounted to
$12.6 billion at March 31, 1999, down $155.7 million from year-end 1998. This
decline was attributable to a reduction in residential real estate loans
receivable of $386.4 million, or 4.3%, the effect of which was partially offset
by aggregate growth in commercial real estate, consumer and business loans in
the amount of $230.7 million, or 6.0%.
A key component of the Company's strategy with respect to its loans
receivable is to continue to increase the aggregate percentage of its commercial
real estate, consumer and business loans receivable to total loans receivable.
At March 31, 1999, these loans comprised 32.2% of total loans receivable, up
from 30.0% at December 31, 1998 and 24.9% at March 31, 1998. In connection with
this strategy, on April 19, 1999, the Company announced that it had entered into
an agreement to acquire the automobile finance business conducted by Citibank,
N.A. This transaction, which remains subject to regulatory approval, is expected
to close during the third quarter of 1999. The loan portfolio to be acquired in
connection with this acquisition, which is comprised of automobile loans, dealer
floor-plan loans and commercial real estate loans, amounted to approximately
$930 million as of the announcement date.
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The following table sets forth a summary of the Company's loans receivable
at the dates indicated (dollars in thousands):
March 31, 1999 December 31, 1998
----------------------- --------------------------
Percentage Percentage
Amount of Total Amount of Total
----------- ---------- ----------- ----------
Residential real estate $ 8,533,425 67.8% $ 8,919,817 70.0%
Commercial real estate 2,695,311 21.4 2,567,750 20.1
Consumer 1,044,422 8.3 973,230 7.6
Business 319,191 2.5 287,271 2.3
----------- ----- ----------- -----
Total loans receivable $12,592,349 100.0% $12,748,068 100.0%
=========== ===== =========== =====
Loan production, which includes originations and purchases for the loans
receivable portfolio and for sale into the secondary market, amounted to $7.6
billion for the three-month period ended March 31, 1999, up $550.2 million from
the comparable period in 1998. This increase reflects growth in residential real
estate loan production of $385.4 million, or 5.8%, commercial real estate loan
production of $48.0 million, or 24.1%, consumer loan production of $61.8
million, or 41.3%, and business loan production of $55.1 million, or 129.9%.
The following table summarizes the Company's loan production for the
periods indicated (in thousands):
For the Three Months
Ended
March 31,
-------------------------
1999 1998
---------- ----------
Residential real estate:
For sale into the secondary market $6,625,719 $5,731,387
For portfolio 461,039 969,990
---------- ----------
Total residential real estate 7,086,758 6,701,377
---------- ----------
Commercial real estate 247,282 199,301
Consumer 211,355 149,531
Business 97,442 42,390
---------- ----------
Total loan production $7,642,837 $7,092,599
========== ==========
Deposits
Total deposits, which amounted to $13.2 billion at March 31, 1999,
decreased $485.5 million from year-end 1998, primarily due to a reduction of
$372.0 million, or 5.5%, in time deposits. Part of the Company's strategy with
respect to its deposits is to increase the percentage of core deposits to total
deposits. At the end of the first quarter of 1999, core deposits represented
51.6% of total deposits, up from 50.6% at year-end 1998 and 44.6% at March 31,
1998.
The following table sets forth a summary of the Company's deposits at the
dates indicated (dollars in thousands):
March 31, 1999 December 31, 1998
----------------------- ------------------------
Percentage Percentage
Amount of Total Amount of Total
----------- ---------- ----------- ----------
Core:
Demand $ 1,714,125 13.0% $ 1,976,122 14.5%
Savings 2,263,369 17.2 2,291,782 16.8
Money market 2,811,232 21.4 2,634,312 19.3
----------- ----- ----------- -----
Total core 6,788,726 51.6 6,902,216 50.6
----------- ----- ----------- -----
Time 6,377,222 48.4 6,749,244 49.4
----------- ----- ----------- -----
Total deposits $13,165,948 100.0% $13,651,460 100.0%
=========== ===== =========== =====
At March 31, 1999, the Bank operated 89 branches in the greater New
York City metropolitan area. Once completed, the acquisition of Lakeview
will add eleven branches,
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all of which are located in northern New Jersey, to the Bank's network. At
January 31, 1999, Lakeview had deposits totaling approximately $462 million.
Borrowed Funds
The following table sets forth a summary of the Company's borrowed funds
at the dates indicated (dollars in thousands):
March 31, 1999 December 31, 1998
---------------------------------------- ----------------------------------------
Short-Term Long-Term Total Short-Term Long-Term Total
---------- ---------- ---------- ---------- ---------- ----------
Federal funds purchased and securities
sold under agreements to repurchase $3,263,446 $ -- $3,263,446 $2,245,218 $ -- $2,245,218
FHLBNY advances 2,292,544 429,655 2,722,199 3,647,330 429,785 4,077,115
Senior notes -- 198,759 198,759 99,929 98,977 198,906
Guaranteed preferred beneficial interests
in Dime Bancorp, Inc.'s junior
subordinated deferrable interest
debentures -- 152,203 152,203 -- 162,005 162,005
Other 128,727 71,250 199,977 9,474 80,130 89,604
---------- ---------- ---------- ---------- ---------- ----------
Total borrowed funds $5,684,717 $ 851,867 $6,536,584 $6,001,951 $ 770,897 $6,772,848
========== ========== ========== ========== ========== ==========
During January 1999, the Holding Company, at its option, redeemed all
$100.0 million of its outstanding 10.50% senior notes due November 2005 and
purchased $10.0 million of the outstanding guaranteed preferred beneficial
interests in its 9.33% junior subordinated deferrable interest debentures. These
transactions resulted in pre-tax extraordinary losses of $6.0 million and $1.2
million, respectively.
In connection with an effective shelf registration, the Holding Company, in
January 1999, issued $200.0 million of unsecured 6.375% senior notes due January
2001 (the "6.375% Senior Notes"). At March 31, 1999, the remaining amount of
debentures, notes or other unsecured evidences of indebtedness that could be
issued under this shelf registration was $100.0 million. These debt securities,
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.
Stockholders' Equity
Stockholders' equity amounted to $1.4 billion at March 31, 1999, up $31.1
million from year-end 1998. The growth in stockholders' equity was limited
principally by the effects of a $13.7 million increase in the Company's
accumulated other comprehensive loss, treasury stock purchases totaling $6.2
million, and cash dividends aggregating $5.6 million paid by the Holding Company
on its common stock.
At the end of the first quarter of 1999, stockholders' equity represented
6.57% of total assets, as compared with 6.21% at December 31, 1998. Book value
per common share and tangible book value per common share increased to $12.72
and $10.65, respectively, at March 31, 1999 from $12.42 and $10.35,
respectively, at the end of 1998.
During the first quarter of 1999, the Holding Company repurchased 259,000
shares of its common stock. These repurchases were made pursuant to a program
announced in September 1998 and under which the Holding Company is authorized to
repurchase up to approximately 5.6 million shares of its outstanding common
stock. Through March 31, 1999, the Holding Company repurchased a total of
594,000 shares of its common stock in connection with this program. No time
limit was established to complete this program.
Cash dividends declared and paid by the Holding Company on its common stock
were $0.05 per share in the first quarter of 1999, up from $0.04 per share in
the first quarter of 1998. The Holding Company's common stock dividend payout
ratio increased to 10.20% for the first quarter of 1999 from 8.16% for the first
quarter of 1998.
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On April 23, 1999, the Holding Company announced the declaration of a cash
dividend of $0.06 per share on its common stock. This dividend will be paid on
June 2, 1999 to stockholders of record as of the close of business on May 21,
1999.
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
OTS, its primary regulator.
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 1999.
Regulatory Capital
Pursuant to OTS regulations, the Bank is required to maintain tangible
capital of at least 1.50% of adjusted total assets, core capital of at least
3.00% of adjusted total assets, and total risk-based capital of at least 8.00%
of risk-weighted assets. The Bank exceeded these capital requirements at March
31, 1999.
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% or more,
its ratio of Tier 1 ("core") capital to risk-weighted assets is 6% or more, its
ratio of core capital to adjusted total assets is 5% or greater, and it is not
subject to any order or directive by the OTS to meet a specific capital level.
At March 31, 1999, 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):
March 31, 1999 December 31, 1998
-------------------- --------------------
Amount Ratio Amount Ratio
---------- ----- ---------- -----
Tangible and core capital $1,326,971 6.25% $1,282,010 5.82%
Tier 1 risk-based capital 1,326,971 10.18 1,282,010 9.58
Total risk-based capital 1,439,340 11.04 1,387,091 10.37
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.
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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. 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 in excess of 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 in those cases.
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,
were 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. The OCMO 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 then
submitted a filing in
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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 the plaintiff. 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. Final submissions were made on May 15,
1998 by the Bank and May 22, 1998 by the Government. 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.
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 through July 1999, unless further extended
by the Court. The second 30 cases will start discovery 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 two court decisions determining damages in 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
held in September 1998. A decision was handed down in that case on April 9,
1999, and it ordered the Government to pay $909 million in restitution and
non-overlapping reliance damages to the plaintiff, Glendale Federal Bank, FSB. A
second decision was issued on April 16, 1999 in the California Federal Bank
case, and the Government was ordered to pay damages of $33 million on a cost of
replacement capital theory. Based on the facts of each case, neither court
entered judgment for lost profits (otherwise known as expectancy damages). A
trial in one other case also recently ended, and a decision is expected shortly.
It also is likely that the determinations of damages by the Court of Federal
Claims in at least the Glendale and California Federal Bank cases will be
appealed. It is impossible, therefore, to predict the measure of damages that
will be upheld in cases in which liability is found.
During the summer of 1998, there were settlements in a total of four of the
Winstar-related cases in which the Government agreed to make payments to the
plaintiffs. The Bank believes that the circumstances of the four settled cases
were materially different from the Bank's case, and the Bank does not believe
that these settlements will affect the final outcome of its case. The Company is
unaware of any other pending settlements in this litigation.
The Company continues to believe 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. The Company
also believes that it is entitled to damages under each of the primary damage
theories considered by the courts in the Glendale and California Federal Bank
cases, including: restitution; reliance; cost of replacement capital; and
expectancy.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 12 -- Ratio of Earnings to Fixed Charges
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
During the three-month period ended March 31, 1999, the Holding Company
filed with the Securities and Exchange Commission the following Current Reports
on Form 8-K:
-- Form 8-K, filed on January 21, 1999, containing the press release that
announced the Company's consolidated financial results for the quarter and year
ended December 31, 1998.
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-- Form 8-K, filed on January 28, 1999, announcing the Holding Company's
issuance, on January 27, 1999, of the 6.375% Senior Notes.
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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: May 14, 1999 By: /s/ Lawrence J. Toal
---------------------------
Lawrence J. Toal
Chairman of the Board, Chief Executive Officer,
President and Chief Operating Officer
Dated: May 14, 1999 By: /s/ Anthony R. Burriesci
---------------------------
Anthony R. Burriesci
Executive Vice President and
Chief Financial Officer
Dated: May 14, 1999 By: /s/ John F. Kennedy
---------------------------
John F. Kennedy
Controller and Chief Accounting Officer
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EXHIBIT INDEX
Exhibit
Number Identification of Exhibit
- ------ -------------------------
12 Ratio of Earnings to Fixed Charges
27 Financial Data Schedule (filed electronically)
33