<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) September 15, 1999
HUDSON UNITED BANCORP
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
New Jersey 1-08660 22-2405746
(State or Other Jurisdiction of (Commission File No.) (I.R.S. Employer Identification No.)
Incorporation)
</TABLE>
1000 MacArthur Boulevard, Mahwah, NJ 07430
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (201) 236-2600
<PAGE> 2
INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 5. OTHER EVENTS.
As previously reported, Hudson United Bancorp ("HUB") has entered into an
Agreement and Plan of Merger with Dime Bancorp, Inc. ("Dime"), an Agreement and
Plan of Merger with JeffBanks, Inc. ("JeffBanks") and an Agreement and Plan of
Merger with Southern Jersey Bancorp of Delaware, Inc. ("Southern Jersey"). In
connection with these transactions, there is included at Item 7 of this Current
Report on Form 8-K certain historical financial information regarding Dime,
JeffBanks and Southern Jersey.
ITEM 7. EXHIBITS.
<TABLE>
<S> <C>
Exhibit 99.1 - Audited Consolidated Financial Statements of Dime as of
December 31, 1998.
Exhibit 99.2 - Unaudited Consolidated Financial Statements of Dime as of
March 31, 1999.
Exhibit 99.3 - Unaudited Consolidated Financial Statements of Dime as of
June 30, 1999.
Exhibit 99.4 - Audited Consolidated Financial Statements of JeffBanks as of
December 31, 1998.
Exhibit 99.5 - Unaudited Consolidated Financial Statements of JeffBanks as of
March 31, 1999.
Exhibit 99.6 - Unaudited Consolidated Financial Statements of JeffBanks as of
June 30, 1999.
Exhibit 99.7 - Audited Consolidated Financial Statements of Southern Jersey
as of December 31, 1998.
Exhibit 99.8 - Unaudited Consolidated Financial Statements of Southern Jersey
as of March 31, 1999.
Exhibit 99.9 - Unaudited Consolidated Financial Statements of Southern Jersey
as of June 30, 1999.
</TABLE>
2
<PAGE> 3
SIGNATURE
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 hereunto duly authorized.
HUDSON UNITED BANCORP
Dated: October 5, 1999 By: /s/ D. LYNN VAN BORKULO-NUZZO
--------------------------------------
D. LYNN VAN BORKULO-NUZZO
Executive Vice-President and Secretary
3
<PAGE> 4
INDEX TO EXHIBITS
<TABLE>
Exhibit No. Description
- -------------- -----------
<S> <C>
Exhibit 99.1 - Audited Consolidated Financial Statements of Dime as of
December 31, 1998.
Exhibit 99.2 - Unaudited Consolidated Financial Statements of Dime as of
March 31, 1999.
Exhibit 99.3 - Unaudited Consolidated Financial Statements of Dime as of
June 30, 1999.
Exhibit 99.4 - Audited Consolidated Financial Statements of JeffBanks as of
December 31, 1998.
Exhibit 99.5 - Unaudited Consolidated Financial Statements of JeffBanks as of
March 31, 1999.
Exhibit 99.6 - Unaudited Consolidated Financial Statements of JeffBanks as of
June 30, 1999.
Exhibit 99.7 - Audited Consolidated Financial Statements of Southern Jersey
as of December 31, 1998.
Exhibit 99.8 - Unaudited Consolidated Financial Statements of Southern Jersey
as of March 31, 1999.
Exhibit 99.9 - Unaudited Consolidated Financial Statements of Southern Jersey
as of June 30, 1999.
</TABLE>
4
<PAGE> 1
EXHIBIT 99.1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Dime Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Dime Bancorp, Inc. and subsidiaries (Dime) as of December 31, 1998
and 1997, and the related consolidated statements of income, changes in
stockholders' equity, cash flows and comprehensive income for each of the years
in the three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of Dime's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dime
Bancorp, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
New York, New York
January 21, 1999
1
<PAGE> 2
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 279,490 $ 295,369
Money market investments.................................... 78,287 157,158
Securities available for sale............................... 3,329,444 4,992,304
Federal Home Loan Bank of New York stock.................... 324,106 303,287
Loans held for sale......................................... 3,884,886 1,841,862
Loans receivable, net:
Residential real estate loans............................. 8,919,817 9,848,593
Commercial real estate loans.............................. 2,567,750 2,263,023
Consumer loans............................................ 973,230 773,817
Business loans............................................ 287,271 99,074
Allowance for loan losses................................. (105,081) (104,718)
----------- -----------
Total loans receivable, net............................ 12,642,987 12,879,789
----------- -----------
Accrued interest receivable................................. 97,124 106,829
Premises and equipment, net................................. 170,879 150,805
Mortgage servicing assets................................... 692,473 341,906
Other assets................................................ 821,174 778,691
----------- -----------
Total assets................................................ $22,320,850 $21,848,000
=========== ===========
LIABILITIES
Deposits.................................................... $13,651,460 $13,847,275
Federal funds purchased and securities sold under agreements
to repurchase............................................. 2,245,218 2,975,774
Federal Home Loan Bank of New York advances................. 4,077,115 2,786,751
Senior notes................................................ 198,906 142,475
Guaranteed preferred beneficial interests in Dime Bancorp,
Inc.'s junior subordinated deferrable interest
debentures................................................ 162,005 196,137
Other borrowed funds........................................ 89,604 218,175
Other liabilities........................................... 510,877 366,555
----------- -----------
Total liabilities...................................... 20,935,185 20,533,142
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share (authorized shares,
350,000,000 in 1998 and 200,000,000 in 1997; shares
issued, 120,252,459 in 1998 and 120,256,459 in 1997)...... 1,203 1,203
Additional paid-in capital.................................. 1,165,251 1,158,221
Retained earnings........................................... 463,907 261,201
Treasury stock, at cost (8,682,858 shares in 1998 and
3,898,132 shares in 1997)................................. (233,965) (95,221)
Accumulated other comprehensive loss........................ (3,285) (9,534)
Unearned compensation....................................... (7,446) (1,012)
----------- -----------
Total stockholders' equity............................. 1,385,665 1,314,858
----------- -----------
Total liabilities and stockholders' equity.................. $22,320,850 $21,848,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Residential real estate loans.......................... $ 874,402 $ 660,505 $ 558,248
Commercial real estate loans........................... 200,015 191,111 159,019
Consumer loans......................................... 71,003 63,222 63,679
Business loans......................................... 13,944 5,052 3,163
Mortgage-backed securities............................. 214,922 406,781 508,342
Other securities....................................... 40,797 23,774 31,910
Money market investments............................... 5,802 32,370 26,337
---------- ---------- ----------
Total interest income............................. 1,420,885 1,382,815 1,350,698
---------- ---------- ----------
INTEREST EXPENSE
Deposits............................................... 545,827 559,359 531,216
Borrowed funds......................................... 347,825 340,394 358,187
---------- ---------- ----------
Total interest expense............................ 893,652 899,753 889,403
---------- ---------- ----------
Net interest income............................... 527,233 483,062 461,295
Provision for loan losses.............................. 32,000 49,000 41,000
---------- ---------- ----------
Net interest income after provision for loan
losses.......................................... 495,233 434,062 420,295
---------- ---------- ----------
NON-INTEREST INCOME
Loan servicing and other fees.......................... 199,504 74,038 47,863
Banking service fees................................... 41,428 31,796 28,056
Securities and insurance brokerage fees................ 32,736 23,737 21,064
Net gains (losses) on sales activities................. 244,451 12,036 (12,716)
Other.................................................. 6,911 3,684 1,711
---------- ---------- ----------
Total non-interest income......................... 525,030 145,291 85,978
---------- ---------- ----------
NON-INTEREST EXPENSE
General and administrative expense:
Compensation and employee benefits................... 270,062 157,851 139,358
Occupancy and equipment.............................. 92,452 63,582 52,662
Other................................................ 209,325 115,689 100,775
---------- ---------- ----------
Total general and administrative expense.......... 571,839 337,122 292,795
Amortization of mortgage servicing assets.............. 92,291 29,751 19,382
Other real estate owned expense, net................... 1,511 4,341 10,072
Savings Association Insurance Fund recapitalization
assessment........................................... -- -- 26,280
Restructuring and related expense...................... -- 9,931 3,504
---------- ---------- ----------
Total non-interest expense........................ 665,641 381,145 352,033
---------- ---------- ----------
Income before income tax expense and extraordinary
items................................................ 354,622 198,208 154,240
Income tax expense..................................... 113,479 75,034 49,984
---------- ---------- ----------
Income before extraordinary items...................... 241,143 123,174 104,256
Extraordinary items -- losses on early extinguishment
of debt, net of tax benefits of $2,993 in 1998 and
$895 in 1997......................................... (4,057) (1,460) --
---------- ---------- ----------
Net income............................................. $ 237,086 $ 121,714 $ 104,256
========== ========== ==========
PER COMMON SHARE
Basic earnings:
Income before extraordinary items.................... $ 2.13 $ 1.15 $ 1.00
Extraordinary items.................................. (0.04) (0.01) --
---------- ---------- ----------
Net income........................................... $ 2.09 $ 1.14 $ 1.00
========== ========== ==========
Diluted earnings:
Income before extraordinary items.................... $ 2.09 $ 1.13 $ 0.96
Extraordinary items.................................. (0.03) (0.01) --
---------- ---------- ----------
Net income........................................... $ 2.06 $ 1.12 $ 0.96
========== ========== ==========
Cash dividends declared................................ $ 0.19 $ 0.12 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year........................... $ 1,203 $ 1,083 $ 997
Common stock issued in connection with acquisition..... -- 120 --
Common stock issued upon exercise of stock warrant..... -- -- 84
Common stock issued under employee benefit plans,
net.................................................. -- -- 2
---------- ---------- ----------
Balance at end of year............................... 1,203 1,203 1,083
---------- ---------- ----------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year........................... 1,158,221 914,386 915,210
Common and treasury stock issued in connection with
acquisition.......................................... -- 220,659 --
Common and treasury stock issued under employee benefit
plans, net........................................... (45) (4,235) 1,089
Fair value adjustment on stock options issued in
connection with acquisition.......................... -- 21,389 --
Other.................................................. 7,075 6,022 (1,913)
---------- ---------- ----------
Balance at end of year............................... 1,165,251 1,158,221 914,386
---------- ---------- ----------
RETAINED EARNINGS
Balance at beginning of year........................... 261,201 158,956 65,981
Net income............................................. 237,086 121,714 104,256
Cash dividends declared on common stock................ (21,550) (12,892) --
Treasury stock issued under employee benefit plans,
net.................................................. (12,830) (6,577) (11,281)
---------- ---------- ----------
Balance at end of year............................... 463,907 261,201 158,956
---------- ---------- ----------
TREASURY STOCK, AT COST
Balance at beginning of year........................... (95,221) (51,498) --
Treasury stock purchased............................... (177,970) (200,354) (70,456)
Treasury stock issued in connection with acquisition... -- 130,326 --
Treasury stock issued under employee benefit plans,
net.................................................. 39,226 26,305 18,958
---------- ---------- ----------
Balance at end of year............................... (233,965) (95,221) (51,498)
---------- ---------- ----------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Balance at beginning of year........................... (9,534) 22 (5,468)
Other comprehensive income (loss)...................... 6,249 (9,556) 5,490
---------- ---------- ----------
Balance at end of year............................... (3,285) (9,534) 22
---------- ---------- ----------
UNEARNED COMPENSATION
Balance at beginning of year........................... (1,012) (612) (190)
Restricted stock activity, net......................... (9,250) (1,126) (545)
Amortization of unearned compensation, net............. 2,816 726 123
---------- ---------- ----------
Balance at end of year............................... (7,446) (1,012) (612)
---------- ---------- ----------
Total stockholders' equity............................. $1,385,665 $1,314,858 $1,022,337
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 237,086 $ 121,714 $ 104,256
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Provisions for loan and other real estate owned losses.... 32,665 50,514 45,799
Depreciation, amortization and accretion, net............. 177,680 85,967 76,577
Provision for deferred income tax expense................. 53,406 64,270 35,666
Net securities (gains) losses............................. (21,855) 17,794 11,265
Losses on early extinguishment of debt.................... 7,050 2,355 --
Gain on sale of deposits.................................. (9,550) -- --
Net (increase) decrease in loans held for sale............ (2,343,136) (760,523) 24,045
Other, net................................................ (384,867) (1,712) (9,316)
----------- ----------- -----------
Net cash (used) provided by operating activities........ (2,251,521) (419,621) 288,292
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale.................. (1,723,719) (1,196,330) (1,722,633)
Purchases of securities held to maturity.................... -- (80,411) (238,674)
Proceeds from sales of securities available for sale........ 1,922,949 1,720,817 2,290,279
Proceeds from repayments of securities available for sale
and held to maturity...................................... 1,491,072 1,505,518 1,842,349
Net (purchases) redemptions of Federal Home Loan Bank of New
York stock................................................ (20,819) (31,111) 52,446
Loans receivable originated and purchased, net of principal
payments.................................................. (264,105) (1,843,796) (1,034,096)
Proceeds from sales of loans................................ 702,253 82,369 13,510
Acquisitions, net of cash and cash equivalents acquired..... -- (41,234) (1,284)
Proceeds from sales of other real estate owned.............. 19,855 58,315 50,681
Net purchases of premises and equipment..................... (48,415) (29,011) (12,775)
----------- ----------- -----------
Net cash provided by investing activities............... 2,079,071 145,126 1,239,803
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits.................................... 11,125 292,887 284,536
Net cash paid upon sale of deposits......................... (197,624) -- --
Net increase (decrease) in borrowings with original
maturities of three months or less........................ 402,623 126,164 (1,382,173)
Proceeds from other borrowings.............................. 799,818 1,492,632 1,111,804
Repayments of other borrowings.............................. (755,823) (1,174,045) (1,529,043)
Proceeds from issuance of common and treasury stock......... 17,101 14,332 8,311
Purchases of treasury stock................................. (177,970) (200,354) (70,456)
Cash dividends paid on common stock......................... (21,550) (12,892) --
Other....................................................... -- 3,781 (1,913)
----------- ----------- -----------
Net cash provided (used) by financing activities........ 77,700 542,505 (1,578,934)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents........ (94,750) 268,010 (50,839)
Cash and cash equivalents at beginning of year.............. 452,527 184,517 235,356
----------- ----------- -----------
Cash and cash equivalents at end of year.................... $ 357,777 $ 452,527 $ 184,517
=========== =========== ===========
Supplemental cash flow information:
Interest payments on deposits and borrowed funds.......... $ 903,619 $ 883,423 $ 891,102
Income tax payments (refunds), net........................ 22,869 (381) (847)
Supplemental non-cash investing information:
Loans receivable transferred to other real estate owned... 18,917 17,996 39,216
Loans held for sale transferred to loans receivable....... 779,719 -- --
Loans receivable transferred to loans held for sale....... 296,608 -- --
Securities held to maturity transferred to securities
available for sale...................................... -- 3,587,063 --
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net income................................................. $237,086 $121,714 $104,256
Other comprehensive income (loss):
Net unrealized gain (loss) on securities available for
sale:
Unrealized holding gain (loss) arising during the
year, net of tax expense (benefit) of $12,699 in
1998, $(12,629) in 1997 and $179 in 1996............ 18,825 (20,600) 141
Reclassification adjustment for net (gains) losses
included in net income, net of tax expense (benefit)
of $9,279 in 1998, $(6,769) in 1997 and $(3,946) in
1996................................................ (12,576) 11,044 5,349
-------- -------- --------
Other comprehensive income (loss)................... 6,249 (9,556) 5,490
-------- -------- --------
Comprehensive income....................................... $243,335 $112,158 $109,746
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Dime Bancorp, Inc. (the "Holding Company") is a unitary savings and loan
holding company organized under the laws of the State of Delaware in 1994. The
principal subsidiary of the Holding Company is The Dime Savings Bank of New
York, FSB (the "Bank"). The accounting policies applied by the Holding Company
and its subsidiaries (collectively, the "Company") conform with generally
accepted accounting principles and prevailing practices within the financial
services industry.
At December 31, 1998, the Company operated 90 banking branches located in
the greater New York City metropolitan area and conducted its mortgage banking
operations nationwide through offices located in 43 states.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
statement of financial condition and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The following is a description of the Company's significant accounting
policies.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Holding Company and its subsidiaries, all of which are wholly-owned, after
the elimination of all significant intercompany balances and transactions.
Certain amounts in prior years have been reclassified to conform with the
current year presentation.
Securities
Securities that the Company has the positive intent and ability to hold to
maturity are classified as held to maturity and are carried at amortized cost.
Securities purchased for the objective of selling them in the near term and
mortgage-backed securities ("MBS") held for sale in connection with mortgage
banking activities are classified as trading securities and are carried at
estimated fair value with unrealized gains and losses recognized in operations.
The Company did not maintain a securities held to maturity portfolio or trading
securities portfolio at December 31, 1998 or 1997. Securities not otherwise
classified as held to maturity or trading are classified as available for sale
and are carried at estimated fair value with unrealized gains and losses, net of
the related income tax effect, reported in a separate component of stockholders'
equity.
The amortization of premiums and accretion of discounts on securities is
recognized in income using the interest method over the lives of the securities,
adjusted, in the case of MBS, for actual prepayments. Gains and losses on sales
of securities are recognized using the specific identification method.
The carrying value of a security is reduced through a write-down charged to
income in the event the Company determines that an other than temporary
impairment in value has occurred.
Loans
Loans held for sale are carried at the lower of cost or market value, as
determined on an aggregate basis. Net unrealized losses are recognized in a
valuation allowance by charges to income. Premiums, discounts and certain
origination fees and costs on loans held for sale are deferred and recognized as
a component of the gain or loss on sale. Gains and losses on sales of loans held
for sale are recognized at the settlement dates and are determined by the
difference between the sales proceeds and the carrying value of the loans.
7
<PAGE> 8
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loans receivable are generally carried at unpaid principal balances
adjusted for unamortized premiums, unearned discounts and deferred loan
origination fees and costs, which are recognized as yield adjustments over the
lives of the loans using the interest method.
Loans are placed on non-accrual status upon becoming 90 days contractually
past due as to principal or interest, or at an earlier date if the full
collectability of principal or interest is doubtful. Interest income previously
accrued but not collected at the date a loan is placed on non-accrual status is
reversed against interest income. Cash receipts on a non-accrual loan are
applied to principal and interest in accordance with its contractual terms
unless full payment of principal is not expected, in which case cash receipts,
whether designated as principal or interest, are applied as a reduction of the
carrying value of the loan. A non-accrual loan is generally returned to accrual
status when principal and interest payments are current, full collectability of
principal and interest is reasonably assured and a consistent record of
performance has been demonstrated.
A loan is deemed a troubled debt restructuring ("TDR") by the Company when
modifications of a concessionary nature are made to the loan's original
contractual terms due to a deterioration in the borrower's financial condition.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan," as amended, the Company
considers a loan falling within its scope impaired when, based upon current
information and events, it is probable that it will be unable to collect all
amounts due, both principal and interest, according to the contractual terms of
the loan agreement. SFAS No. 114 does not apply to loans held for sale or those
large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment. Loans reviewed by the Company for impairment are
limited to residential real estate loans receivable modified in a TDR since
January 1, 1995, business loans receivable, and commercial real estate loans
receivable. Specific factors used in the impaired loan identification process
include, but are not limited to, delinquency status, loan-to-value ratio, the
condition of the underlying collateral, credit history, and debt coverage. At a
minimum, loans reviewed for impairment by the Company are classified as impaired
when delinquent more than six months. Impaired loans are principally measured
using the present value of expected future cash flows discounted at the loan's
effective interest rate or the fair value of the collateral for collateral
dependent loans. For impaired loans on non-accrual status, cash receipts are
applied, and interest income recognized, pursuant to the discussion above for
non-accrual loans. For all other impaired loans, cash receipts are applied to
principal and interest in accordance with the contractual terms of the loan and
interest income is recognized on the accrual basis.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level the Company believes
is sufficient to provide for losses inherent in its loans receivable portfolio.
The allowance for loan losses is increased by loss provisions charged to
operations and decreased by charge-offs (net of recoveries). In determining the
appropriate level of the allowance for loan losses, the Company reviews its
loans receivable portfolio on at least a quarterly basis, taking into account
its impaired loans, the size, composition and risk profile of the portfolio,
delinquency levels, historical loss experience, cure rates on delinquent loans,
economic conditions and other pertinent factors, such as assumptions and
projections of future conditions.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the lesser of the terms of their respective
leases or estimated useful lives.
8
<PAGE> 9
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mortgage Servicing Assets
The Company recognizes, as separate assets, the rights to service mortgage
loans, whether those rights are acquired through loan purchase or loan
origination activities. The initial recognition of originated mortgage servicing
assets is predicated upon an allocation of the total cost of the related loans
between the loans and the loan servicing rights based on their relative
estimated fair values. Purchased mortgage servicing assets are recorded at cost.
Mortgage servicing assets are amortized in proportion to and over the period of
estimated net servicing income.
On a quarterly basis, mortgage servicing assets are assessed for impairment
based upon their estimated fair value. For purposes of such assessments, the
Company stratifies its mortgage servicing assets by underlying loan type (i.e.,
adjustable-rate, fixed-rate and balloon) and interest rate. Impairment of
mortgage servicing assets is recognized through a valuation allowance for each
impaired stratum with the individual allowances adjusted in subsequent periods
to reflect changes in the measurement of impairment. The estimated fair value of
each strata is determined through a discounted cash flow analysis of future cash
flows incorporating numerous assumptions including servicing income, servicing
costs, market discount rates, prepayment speeds, and default rates.
Other Real Estate Owned ("ORE")
ORE, which consists of real estate acquired in satisfaction of loans, is
carried at the lower of cost or estimated fair value less estimated selling
costs. Write-downs required at time of acquisition are charged to the allowance
for loan losses. Subsequent to acquisition, the Company maintains an allowance
for actual and potential future declines in value.
Goodwill
Goodwill is generally amortized using the straight-line method over periods
ranging from 15 to 25 years. Goodwill is reviewed for possible impairment when
events or changes in circumstances indicate that the carrying amount may not be
recoverable.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. If necessary, deferred tax assets are
reduced to the amount that, based on available evidence, will more than likely
be realized.
Earnings Per Common Share
Basic earnings per common share have been computed by dividing net income
by the weighted average number of shares of the Holding Company's common stock
("Common Stock") outstanding during the period. Diluted earnings per common
share have been computed by dividing net income by the sum of the weighted
average number of shares of Common Stock and dilutive Common Stock equivalents
outstanding (using the treasury stock method) during the period.
Consolidated Statements of Cash Flows
For purposes of the Consolidated Statements of Cash Flows, cash and cash
equivalents include cash and due from banks and money market investments.
9
<PAGE> 10
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash flows associated with derivative financial instruments used by the
Company for risk-management purposes are classified in the accompanying
Consolidated Statements of Cash Flows in the same category as the cash flows
from the asset or liability being hedged.
Derivative Financial Instruments
Risk-Management Instruments. The Company uses a variety of derivative
financial instruments as part of its interest rate risk-management strategy and
to manage certain risks associated with its mortgage banking activities.
Derivative financial instruments used for these purposes must be designated as a
hedge at their inception and must remain effective as a hedge throughout their
contractual terms. If the effectiveness of the derivative financial instrument
as a hedge is not maintained, the instrument is accounted for as a trading
instrument. Derivative financial instruments used by the Company for risk-
management purposes principally include interest rate swaps, interest rate caps,
interest rate floors, interest rate futures, forward contracts and options.
For those derivative financial instruments used to modify the interest rate
characteristics of designated interest-earning assets or interest-bearing
liabilities, net amounts payable or receivable on the instruments are accrued as
an adjustment to interest income or interest expense of the designated assets or
liabilities. The estimated fair values of such derivative financial instruments
are not reflected in the Company's consolidated financial statements unless
designated to securities available for sale, in which case the derivative
financial instruments are carried at estimated fair value with unrealized gains
and losses, net of related income taxes, reported in a separate component of
stockholders' equity.
For forward contracts and options used in connection with the Company's
mortgage banking activities, realized gains and losses are recognized in
operations in the period settlement occurs. Unrealized gains and losses on such
derivative financial instruments are included in the computation of the lower of
cost or market valuation of loans held for sale.
Unrealized gains and losses on derivative financial instruments used to
hedge mortgage servicing assets are considered in the determination of the
estimated fair value of such assets.
Premiums paid on derivative financial instruments used for risk-management
purposes are deferred as a component of the carrying value of the designated
assets or liabilities and amortized against income over the terms of the
contracts.
In the event of the early termination of a derivative financial instrument
contract used for risk-management purposes, any resulting gain or loss is
deferred, as an adjustment of the carrying value of the designated assets or
liabilities, and recognized in operations over the shorter of the remaining life
of the designated assets or liabilities or the derivative financial instrument
agreement. If the designated assets or liabilities are subsequently sold or
otherwise disposed of, any remaining deferred gains or losses are recognized in
operations.
If the balance of a hedged asset or liability declines below the notional
value of the related derivative financial instrument, the Company may
redesignate, at fair value, the derivative financial instrument to other assets
or liabilities or discontinue hedge accounting with respect to the portion of
the notional amount that exceeds the balance. When hedge accounting is
discontinued, derivative financial instruments are accounted for as trading
instruments.
Trading Instruments. The Company, to a limited degree, also uses
derivative financial instruments for trading purposes. Realized and unrealized
gains and losses on these instruments are recognized in operations. The fair
value of trading derivative financial instruments in gain positions is reported
in the Consolidated Statements of Financial Condition in "Other assets," whereas
the fair value of such instruments in loss positions is reported in "Other
liabilities."
10
<PAGE> 11
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Comprehensive Income
Effective as of January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income, which includes net income
and other comprehensive income, is defined as the change in equity during a
period from all transactions and other events and circumstances from non-owner
sources.
NOTE 2 -- ACQUISITIONS
On October 15, 1997, prior to its opening for business, North American
Mortgage Company ("NAMC"), a mortgage banking company headquartered in Santa
Rosa, California, was acquired by the Company (the "NAMC Acquisition"). At the
date of acquisition, NAMC serviced approximately $12 billion of loans for others
and operated in 30 states. NAMC, subsequent to the acquisition, is operating
under that name as a subsidiary of the Bank. In connection with the NAMC
Acquisition, each share of NAMC's common stock outstanding immediately prior to
the closing of the NAMC Acquisition was converted into 1.37 shares of Common
Stock (the "NAMC Exchange Ratio"), and each outstanding option issued by NAMC to
acquire NAMC's common stock was converted, after giving effect to the NAMC
Exchange Ratio, into an option to purchase Common Stock. As a result, the
Holding Company issued 19,437,741 shares of Common Stock (of which 7,479,664
were issued from treasury) and options to purchase 1,862,087 shares of Common
Stock at an average exercise price of $14.18 per share. The purchase price of
NAMC was approximately $351 million based on an assigned price per share of the
Common Stock of $18.06. The NAMC Acquisition was accounted for under the
purchase method of accounting. Accordingly, its impact is only reflected in the
Company's consolidated financial statements beginning on October 15, 1997.
Goodwill arising from the NAMC Acquisition is being amortized on a straight-line
basis over 25 years.
The allocation of the purchase price of NAMC included a restructuring
liability of $10.0 million for personnel-related costs, primarily severance
benefits, of which $4.7 million and $5.3 million were paid during 1998 and 1997,
respectively. In addition, the allocation of the purchase price of NAMC included
a restructuring liability for transaction fees and other costs in the amount of
$9.6 million, including a $2.5 million liability recognized during 1998. The
balance in this restructuring liability was $1.1 million at the end of 1998.
Cash payments and non-cash reductions charged to this restructuring liability
amounted to $2.2 million and $1.8 million, respectively, in 1998 and $4.0
million and $0.5 million, respectively, in 1997.
In connection with the NAMC Acquisition, the Company incurred expenses
during 1997 of $9.9 million associated with its employees and operations. Such
expenses are reflected in the accompanying Consolidated Statements of Income
under the caption "Restructuring and related expense."
After the close of business on April 30, 1997, the Company acquired BFS
Bankorp, Inc. and its wholly-owned subsidiary, Bankers Federal Savings FSB
(collectively, the "BFS Acquisition") for $93.3 million in cash. At that time,
BFS Bankorp, Inc. was liquidated and Bankers Federal Savings FSB was merged with
and into the Bank. The purchase price of the BFS Acquisition was funded from the
normal cash flows of the Company. Goodwill arising from the BFS Acquisition is
being amortized over 15 years using the straight-line method. In connection with
the BFS Acquisition, the Company acquired loans receivable, net, of $574.5
million and assumed deposits in five New York City branches of $447.1 million.
As this acquisition was accounted for under the purchase method of accounting,
its impact is only reflected in the Company's consolidated financial statements
beginning on May 1, 1997.
11
<PAGE> 12
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summaries of the NAMC Acquisition and the BFS Acquisition are as follows
(in thousands):
<TABLE>
<CAPTION>
NAMC BFS
ACQUISITION(1) ACQUISITION
-------------- -----------
<S> <C> <C>
Issuance of Common Stock.................................... $ 215,999 $ --
Issuance of treasury stock.................................. 135,106 --
Fair value of stock options issued.......................... 21,389 --
Fair value of assets acquired, excluding cash and cash
equivalents received...................................... 1,498,931 625,543
Cash and cash equivalents received.......................... 45,231 7,796
Cash paid................................................... 11 93,325
Fair value of liabilities assumed........................... 1,360,463 581,595
Goodwill.................................................... 188,806 41,581
</TABLE>
- ---------------
(1) Includes adjustments during 1998 which resulted in a decrease of $0.1
million in the fair value of assets acquired, excluding cash and cash
equivalents received, an increase of $2.8 million in the fair value of
liabilities assumed and an increase of $2.9 million in goodwill.
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. On
a consolidated basis at October 31, 1998, Lakeview had assets of approximately
$573 million and deposits of approximately $454 million. Under the terms of the
agreement, holders of Lakeview's common stock may elect to receive either 0.9 of
a share of 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 Common Stock and the
remaining shares will be exchanged for cash. This transaction, which is expected
to close during the second quarter of 1999, remains subject to regulatory
approvals and the approval of Lakeview's shareholders.
NOTE 3 -- CASH AND CASH EQUIVALENTS
Cash and cash equivalents were comprised of the following at December 31
(in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Cash and due from banks..................................... $279,490 $295,369
Money market investments:
Federal funds sold........................................ 45,000 150,000
Securities purchased under agreements to resell........... -- 2,063
Other..................................................... 33,287 5,095
-------- --------
Total money market investments......................... 78,287 157,158
-------- --------
Total cash and cash equivalents............................. $357,777 $452,527
======== ========
</TABLE>
Federal Reserve Board regulations require the Bank to maintain specified
minimum reserve balances against certain deposits. These reserves, which may
consist of vault cash and non-interest earning deposits at the Federal Reserve
Bank of New York, were $39.1 million and $36.7 million for the calculation
periods including December 31, 1998 and 1997, respectively.
It is the Company's policy to take possession of securities purchased under
agreements to resell. The average balance of securities purchased under
agreements to resell during 1998 and 1997 was $0.5 million
12
<PAGE> 13
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and $34.5 million, respectively. The maximum month-end balance of securities
purchased under agreements to resell was $2.1 million during 1998 and $284.3
million during 1997.
NOTE 4 -- SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities available for
sale, as well as related gross unrealized gains and losses, are summarized as
follows at December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------------------------- -------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED ----------------- ESTIMATED AMORTIZED ----------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
---------- ------- ------- ---------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MBS:
Pass-through
securities:
Privately-issued..... $1,795,369 $ 4,876 $24,981 $1,775,264 $2,875,982 $ 8,617 $33,592 $2,851,007
U. S. government
agencies........... 1,002,850 8,500 2,429 1,008,921 589,571 9,811 671 598,711
Collateralized mortgage
obligations:
Privately-issued..... 179,407 748 671 179,484 1,335,225 2,581 1,116 1,336,690
U. S. government
agencies........... -- -- -- -- 115,212 144 -- 115,356
Interest-only.......... 1,286 -- 658 628 1,555 -- 426 1,129
---------- ------- ------- ---------- ---------- ------- ------- ----------
Total MBS.......... 2,978,912 14,124 28,739 2,964,297 4,917,545 21,153 35,805 4,902,893
---------- ------- ------- ---------- ---------- ------- ------- ----------
Other debt securities:
U. S. government and
agencies............. 3,492 33 -- 3,525 8,552 86 -- 8,638
State and municipal.... 13,036 180 382 12,834 36,997 112 818 36,291
Domestic corporate..... 333,683 11,279 1,867 343,095 34,844 575 60 35,359
Other.................. 500 -- -- 500 500 -- -- 500
---------- ------- ------- ---------- ---------- ------- ------- ----------
Total other debt
securities...... 350,711 11,492 2,249 359,954 80,893 773 878 80,788
---------- ------- ------- ---------- ---------- ------- ------- ----------
Equity securities........ 5,529 219 555 5,193 9,243 133 753 8,623
---------- ------- ------- ---------- ---------- ------- ------- ----------
Total securities
available for sale..... $3,335,152 $25,835 $31,543 $3,329,444 $5,007,681 $22,059 $37,436 $4,992,304
========== ======= ======= ========== ========== ======= ======= ==========
</TABLE>
At December 31, 1998, $2.2 billion of securities available for sale were
pledged as collateral for borrowed funds and other purposes.
During December 1997, the Company, primarily as a result of a reassessment
of its asset/liability management strategy, transferred its entire portfolio of
securities held to maturity to its portfolio of securities available for sale.
At the date of transfer, the securities held to maturity portfolio had an
amortized cost of $3.6 billion and net unrealized pre-tax losses of
approximately $51 million. In connection with a decision made at the time of
transfer to sell $1.4 billion of the transferred securities, the Company, during
December 1997, wrote-down those securities with unrealized losses to estimated
fair value and recognized a pre-tax loss of $25.2 million. Substantially all of
the securities designated for sale were sold during 1998.
13
<PAGE> 14
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information concerning sales of securities available for sale is summarized
below for the year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Proceeds from sales.................................... $1,922,949 $1,720,817 $2,290,279
Gross realized gains................................... 22,981 20,800 8,589
Gross realized losses.................................. 1,010 11,890 15,554
</TABLE>
The following table sets forth, at December 31, 1998, the amortized cost,
estimated fair value and weighted average yield of debt securities available for
sale by period to contractual maturity (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AMORTIZED ESTIMATED AVERAGE
COST FAIR VALUE YIELD(1)
---------- ---------- ---------
<S> <C> <C> <C>
MBS:
Due in one year or less................................ $ 102 $ 102 7.28%
Due after one through five years....................... 7,179 7,322 6.78
Due after five through ten years....................... 74,307 74,331 6.86
Due after ten years.................................... 2,897,324 2,882,542 6.86
---------- ----------
Total MBS........................................... 2,978,912 2,964,297 6.86
---------- ----------
Other debt securities:
Due in one year or less................................ 4,788 4,788 6.04
Due after one through five years....................... 8,089 8,132 7.88
Due after five through ten years....................... 11,242 10,516 7.69
Due after ten years.................................... 326,592 336,518 7.59
---------- ----------
Total other debt securities......................... 350,711 359,954 7.58
---------- ----------
Total debt securities available for sale................. $3,329,623 $3,324,251 6.94
========== ==========
</TABLE>
- ---------------
(1) The weighted average yield is based on amortized cost.
14
<PAGE> 15
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- LOANS RECEIVABLE, NET
A summary of loans receivable, net, is as follows at December 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Residential real estate:
Permanent................................................. $ 8,862,369 $ 9,779,559
Construction (net of loans in process of $360 in 1998 and
$725 in 1997).......................................... 1,647 2,453
Net deferred yield adjustments............................ 55,801 66,581
----------- -----------
Total residential real estate.......................... 8,919,817 9,848,593
----------- -----------
Commercial real estate:
Permanent (net of loans in process of $18,337 in 1998 and
$2,000 in 1997)........................................ 2,487,230 2,214,620
Construction (net of loans in process of $115,219 in 1998
and $65,087 in 1997)................................... 92,937 57,152
Net deferred yield adjustments............................ (12,417) (8,749)
----------- -----------
Total commercial real estate........................... 2,567,750 2,263,023
----------- -----------
Consumer:
Home equity............................................... 837,867 617,041
Secured by deposit accounts............................... 39,900 40,992
Manufactured home......................................... 32,053 44,432
Other..................................................... 42,569 52,698
Net deferred yield adjustments............................ 20,841 18,654
----------- -----------
Total consumer......................................... 973,230 773,817
----------- -----------
Business:
Principal balance......................................... 287,463 99,110
Net deferred yield adjustments............................ (192) (36)
----------- -----------
Total business......................................... 287,271 99,074
----------- -----------
Allowance for loan losses................................... (105,081) (104,718)
----------- -----------
Total loans receivable, net................................. $12,642,987 $12,879,789
=========== ===========
</TABLE>
Loans receivable totaling $6.4 billion were pledged as collateral for
borrowed funds at December 31, 1998.
At December 31, 1998, the Company's residential real estate loans
receivable were principally concentrated in the states of New York (30.3%),
Connecticut (12.4%), New Jersey (6.9%), California (6.6%) and Illinois (6.4%).
At that date, the Company's commercial real estate loans receivable were largely
concentrated in the states of New York (77.0%) and New Jersey (9.2%). Home
equity loans at the end of 1998 were primarily concentrated in the states of New
York (51.7%), California (10.9%) and New Jersey (9.7%). Business loans at
year-end 1998 were largely concentrated in the states of New York (56.6%), New
Jersey (9.9%) and Maryland (6.7%).
15
<PAGE> 16
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity in the allowance for loan losses is summarized as follows for the
year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year............................... $104,718 $106,495 $128,295
Provision for loan losses(1)............................... 32,000 49,000 41,000
Allowance acquired in the BFS Acquisition.................. -- 13,249 --
Loan charge-offs(1)(2)..................................... (40,067) (71,608) (71,296)
Loan recoveries............................................ 8,430 7,582 8,496
-------- -------- --------
Net loan charge-offs..................................... (31,637) (64,026) (62,800)
-------- -------- --------
Balance at end of year..................................... $105,081 $104,718 $106,495
======== ======== ========
</TABLE>
- ---------------
(1) The provision for loan losses and loan charge-offs for 1997 included $14.0
million and $35.8 million, respectively, associated with bulk sales of
approximately $113 million of non-accrual residential real estate loans
receivable in May 1997.
(2) Loan charge-offs for 1998 included $9.1 million associated with a bulk sale
of approximately $53 million of non-accrual and subperforming loans in
December 1998, substantially all of which were residential real estate
loans.
NOTE 6 -- NON-PERFORMING ASSETS, LOANS MODIFIED IN A TDR, AND IMPAIRED LOANS
Non-performing assets were comprised of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Non-accrual loans:
Residential real estate................................... $37,771 $ 90,998
Commercial real estate.................................... 11,992 21,760
Consumer.................................................. 5,292 5,719
Business.................................................. 56 511
------- --------
Total non-accrual loans................................ 55,111 118,988
------- --------
ORE, net:
Residential real estate................................... 15,170 20,228
Commercial real estate.................................... 14,505 9,255
Allowance for losses...................................... (1,443) (1,722)
------- --------
Total ORE, net......................................... 28,232 27,761
------- --------
Total non-performing assets................................. $83,343 $146,749
======= ========
</TABLE>
16
<PAGE> 17
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity in the allowance for losses on ORE is summarized as follows for
the year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year................................ $ 1,722 $ 3,294 $ 3,070
Provision for losses........................................ 665 1,514 4,799
Charge-offs................................................. (1,252) (4,272) (5,572)
Recoveries.................................................. 308 1,186 997
------- ------- -------
Net charge-offs........................................... (944) (3,086) (4,575)
------- ------- -------
Balance at end of year...................................... $ 1,443 $ 1,722 $ 3,294
======= ======= =======
</TABLE>
The following table sets forth loans that have been modified in a TDR,
excluding those classified as non-accrual loans, at December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Residential real estate..................................... $ 6,159 $37,532
Commercial real estate...................................... 6,039 46,677
------- -------
Total loans modified in a TDR............................... $12,198 $84,209
======= =======
</TABLE>
The amount of interest income that would have been recorded on non-accrual
loans and loans modified in a TDR, if such loans had been current in accordance
with their original terms, was $5.9 million, $18.7 million and $34.1 million for
1998, 1997 and 1996, respectively. The amount of interest income that was
recorded on these loans was $2.9 million, $11.5 million and $18.9 million for
1998, 1997 and 1996, respectively.
The following table sets forth information regarding the Company's impaired
loans at December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------------------------------- -----------------------------------
RELATED RELATED
ALLOWANCE ALLOWANCE
RECORDED FOR LOAN NET RECORDED FOR LOAN NET
INVESTMENT LOSSES INVESTMENT INVESTMENT LOSSES INVESTMENT
---------- --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Residential real estate:
With a related allowance.......... $ 619 $ (39) $ 580 $ 2,403 $ (150) $ 2,253
Without a related allowance....... 3,287 -- 3,287 4,835 -- 4,835
------- ------- ------- ------- ------- -------
Total residential real
estate....................... 3,906 (39) 3,867 7,238 (150) 7,088
------- ------- ------- ------- ------- -------
Commercial real estate:
With a related allowance.......... 13,861 (1,437) 12,424 26,275 (2,739) 23,536
Without a related allowance....... -- -- -- 1,585 -- 1,585
------- ------- ------- ------- ------- -------
Total commercial real estate... 13,861 (1,437) 12,424 27,860 (2,739) 25,121
------- ------- ------- ------- ------- -------
Business:
With a related allowance.......... 56 (45) 11 511 (220) 291
------- ------- ------- ------- ------- -------
Total impaired loans................ $17,823 $(1,521) $16,302 $35,609 $(3,109) $32,500
======= ======= ======= ======= ======= =======
</TABLE>
The Company's average recorded investment in impaired loans for 1998, 1997
and 1996 was $28.1 million, $46.7 million and $76.8 million, respectively.
Interest income recognized on such loans for 1998, 1997 and 1996 amounted to
$1.3 million, $4.2 million and $3.9 million, respectively.
17
<PAGE> 18
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- PREMISES AND EQUIPMENT, NET
Premises and equipment, net, consisted of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Cost:
Land...................................................... $ 12,263 $ 12,368
Buildings................................................. 87,251 84,950
Leasehold improvements.................................... 66,153 54,250
Furniture, fixtures and equipment......................... 143,075 126,489
--------- ---------
Total cost............................................. 308,742 278,057
Accumulated depreciation and amortization................... (137,863) (127,252)
--------- ---------
Total premises and equipment, net........................... $ 170,879 $ 150,805
========= =========
</TABLE>
Depreciation and amortization of premises and equipment charged to expense
amounted to $28.3 million, $20.2 million and $16.7 million for 1998, 1997 and
1996, respectively.
NOTE 8 -- LOAN SERVICING
Mortgage loans serviced by the Company for others are not included in the
accompanying Consolidated Statements of Financial Condition. The balance of such
loans amounted to $34.9 billion, $25.0 billion and $11.0 billion at December 31,
1998, 1997 and 1996, respectively. The balances at December 31, 1998 and 1997
include $7.9 billion and $3.0 billion, respectively, of loans being subserviced
by the Company in connection with sales of loan servicing rights.
A summary of activity in mortgage servicing assets is summarized in the
table below for the year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year.............................. $ 341,906 $127,745 $ 99,145
Originations and purchases................................ 694,789 97,587 47,982
Acquired in the NAMC Acquisition.......................... 2,160 180,897 --
Sales..................................................... (277,871) (56,539) --
Amortization(1)........................................... (92,291) (29,751) (19,382)
Hedging activities, net................................... 23,780 21,967 --
--------- -------- --------
Balance at end of year.................................... $ 692,473 $341,906 $127,745
========= ======== ========
</TABLE>
- ---------------
(1) Includes amortization associated with derivative financial instruments
hedging mortgage servicing assets.
The estimated fair value of the Company's mortgage servicing assets at
December 31, 1998 was $724.4 million.
18
<PAGE> 19
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- DEPOSITS
Deposits were comprised of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Demand...................................................... $ 1,976,122 $ 1,572,797
Savings..................................................... 2,291,782 2,431,812
Money market................................................ 2,634,312 1,971,081
Time(1)..................................................... 6,749,244 7,871,585
----------- -----------
Total deposits.............................................. $13,651,460 $13,847,275
=========== ===========
</TABLE>
- ---------------
(1) Includes brokered deposits of $238.5 million at December 31, 1998 and $193.0
million at December 31, 1997.
Scheduled maturities of time deposits at December 31, 1998 are set forth in
the table which follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
INTEREST
AMOUNT RATE
---------- --------
<S> <C> <C>
Maturing in:
1999...................................................... $5,750,852 5.02%
2000...................................................... 732,823 5.44
2001...................................................... 129,488 5.48
2002...................................................... 48,039 5.28
2003...................................................... 77,004 5.48
Thereafter................................................ 11,038 5.64
----------
Total time deposits......................................... $6,749,244 5.08
==========
</TABLE>
The following table sets forth the scheduled maturities of time deposits
with balances of $100,000 or more at December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Maturing in:
Three months or less...................................... $352,440
Over three through six months............................. 260,137
Over six months through one year.......................... 263,797
Over one year............................................. 96,975
--------
Total....................................................... $973,349
========
</TABLE>
At December 31, 1997, time deposits with balances of $100,000 or more
amounted to $1.0 billion.
In August 1998, the Bank sold its sole remaining Florida branch, which had
deposits of $207.2 million at the time of sale.
19
<PAGE> 20
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE
Information concerning federal funds purchased and securities sold under
agreements to repurchase is summarized in the table below at or for the year
ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Federal funds purchased:
Balance at year end:
Principal balance................................. $ 475,000 $ -- $ --
Deferred hedging-related interest rate
adjustments..................................... (20) -- --
---------- ---------- ----------
Balance at year end.................................. $ 474,980 $ -- $ --
========== ========== ==========
Average balance during the year...................... $ 219,050 $ -- $ 55
Maximum month-end balance during the year............ 805,000 -- --
Weighted average interest rate at year end........... 5.26% --% --%
Weighted average interest rate during the year....... 5.20 -- 5.34
Securities sold under agreements to repurchase:
Balance at year end:
Principal balance................................. $1,770,238 $2,980,781 $3,557,145
Deferred hedging-related interest rate
adjustments..................................... -- (5,007) (6,911)
---------- ---------- ----------
Balance at year end.................................. $1,770,238 $2,975,774 $3,550,234
========== ========== ==========
Average balance during the year...................... $1,584,131 $3,628,681 $2,672,859
Maximum month-end balance during the year............ 2,694,808 4,265,905 3,629,357
Weighted average interest rate at year end........... 5.35% 5.85% 5.64%
Weighted average interest rate during the year....... 5.58 5.70 5.52
MBS pledged as collateral at year end:
Carrying value.................................... $1,870,846 $3,119,359 $3,797,628
Estimated fair value.............................. 1,870,846 3,119,359 3,744,227
</TABLE>
The federal funds purchased and securities sold under agreements to
repurchase outstanding at December 31, 1998 matured in January 1999.
Accrued interest payable on securities sold under agreements to repurchase,
which is included under the caption "Other liabilities" in the accompanying
Consolidated Statements of Financial Condition, amounted to $4.8 million, $21.0
million and $15.2 million at December 31, 1998, 1997 and 1996, respectively.
The MBS pledged as collateral for securities sold under agreements to
repurchase were delivered to the broker-dealers who arranged the transactions.
The broker-dealers may have loaned these MBS to other parties in the normal
course of their operations and agreed to resell to the Company the identical MBS
sold.
20
<PAGE> 21
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- FEDERAL HOME LOAN BANK OF NEW YORK ("FHLBNY") ADVANCES
Information concerning short-term FHLBNY advances is summarized in the
table below at or for the year ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance at year end.................................... $3,647,330 $2,136,675 $ 355,000
Average balance during the year........................ 3,004,269 916,737 2,730,853
Maximum month-end balance during the year.............. 3,899,375 2,187,527 4,512,355
Weighted average interest rate at year end............. 5.80% 5.96% 5.74%
Weighted average interest rate during the year......... 5.67 5.79 5.82
</TABLE>
Of the $3.6 billion of short-term FHLBNY advances outstanding at December
31, 1998, $3.2 billion matures in January 1999, $300.0 million matures in July
1999 and $150.0 million matures in August 1999.
Long-term FHLBNY advances consisted of the following at December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Adjustable-rate advances due 1998 to 2000; stated interest
rates of 5.21% to 5.61% (1998) and 6.16% to 6.30%
(1997).................................................... $200,000 $555,000
Fixed-rate advances due 1998 to 2011; net unamortized
premiums of $105 (1998) and $298 (1997); stated interest
rates of 5.73% to 7.44% (1998) and 5.76% to 7.44% (1997);
effective interest rates of 5.73% to 7.19% (1998) and
5.76% to 7.19% (1997)..................................... 229,785 95,076
-------- --------
Total long-term FHLBNY advances............................. $429,785 $650,076
======== ========
</TABLE>
The weighted average effective interest rate on long-term FHLBNY advances
was 5.85% at December 31, 1998 and 6.30% at December 31, 1997. Scheduled
principal repayments of long-term FHLBNY advances for the five years subsequent
to December 31, 1998 were $125.1 million in 1999, $160.1 million in 2000, $10.2
million in 2001, $20.1 million in 2002, and $10.1 million in 2003.
At December 31, 1998, FHLBNY advances were collateralized by the Bank's
investment in FHLBNY stock and by certain MBS and residential real estate loans
receivable.
NOTE 12 -- SENIOR NOTES
Senior notes, which are unsecured obligations of the Holding Company and
are not subordinated to any other indebtedness of the Holding Company, were
comprised of the following at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Short-term:
Due March 1999; unamortized discount of $71; 6.12% stated
interest rate; 6.49% effective interest rate........... $ 99,929 $ --
Long-term:
Due July 2003; unamortized discount of $776; 8.9375%
stated interest rate; 9.34% effective interest rate.... -- 43,594
Due November 2005; unamortized discount of $1,023 (1998)
and $1,119 (1997); 10.50% stated interest rate; 10.71%
effective interest rate................................ 98,977 98,881
-------- --------
Total senior notes.......................................... $198,906 $142,475
======== ========
</TABLE>
21
<PAGE> 22
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 6.12% senior notes due March 1999 (the "6.12% Senior Notes") were
issued in September 1998 and are not redeemable prior to their maturity.
Interest on the 6.12% Senior Notes is payable at maturity. The average balance
of the 6.12% Senior Notes during 1998 was $30.9 million.
In July 1998, the Holding Company, at its option, redeemed the remaining
$44.4 million of its outstanding 8.9375% senior notes due July 2003 (the
"8.9375% Senior Notes"). In November 1997, the Holding Company had purchased
$55.6 million of such senior notes. In connection with these transactions,
after-tax extraordinary losses of $1.1 million and $1.5 million were recognized
during 1998 and 1997, respectively. The 8.9375% Senior Notes had been issued in
1993 and interest thereon was payable semi-annually.
The 10.50% senior notes due November 2005 (the "10.50% Senior Notes"),
interest on which is payable quarterly, were issued in 1994. Effective November
15, 1998, the 10.50% Senior Notes became redeemable, at the option of the
Holding Company, in whole or in part at specified redemption prices.
NOTE 13 -- GUARANTEED PREFERRED BENEFICIAL INTERESTS IN DIME BANCORP, INC.'S
JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES ("TRUST PREFERRED
SECURITIES")
On May 6, 1997, Dime Capital Trust I ("Dime Capital"), a Delaware statutory
business trust that was formed by the Holding Company, issued $200.0 million
aggregate liquidation amount of 9.33% Capital Securities, Series A (the "Series
A Capital Securities"), representing preferred beneficial interests in Dime
Capital, in an underwritten public offering and $6.2 million aggregate
liquidation amount of common beneficial interests represented by its common
securities to the Holding Company (the "Dime Capital Common Securities," and
together with the Series A Capital Securities, the "Dime Capital Securities").
In connection therewith, Dime Capital purchased $206.2 million aggregate
principal amount of 9.33% Junior Subordinated Deferrable Interest Debentures,
Series A, due May 6, 2027 (the "Series A Subordinated Debentures") issued by the
Holding Company, which amount is equal to the aggregate liquidation amount of
the Dime Capital Securities. Dime Capital is wholly-owned by the Holding Company
and exists for the sole purpose of issuing the Dime Capital Securities and
investing the proceeds thereof in the Series A Subordinated Debentures. The
Series A Subordinated Debentures, which are, and will be, the sole assets of
Dime Capital, are subordinate and junior in right of payment to all present and
future senior indebtedness of the Holding Company. The Holding Company, through:
(i) a guarantee agreement, between the Holding Company and The Chase Manhattan
Bank ("Chase"), as trustee; (ii) a trust agreement, among the Holding Company,
as depositor, Chase, as property trustee, Chase Manhattan Bank Delaware, as
Delaware trustee, certain employees or officers of the Holding Company, as
administrative trustees, and the holders from time to time of the Dime Capital
Securities; (iii) an expense agreement, between the Holding Company and Dime
Capital; (iv) the Series A Subordinated Debentures; and (v) an indenture
regarding the Series A Subordinated Debentures, between the Holding Company and
Chase, as trustee, when taken in the aggregate, has fully and unconditionally
guaranteed all of Dime Capital's obligations under the Series A Capital
Securities. The Series A Capital Securities are subject to mandatory redemption,
in whole or in part, upon the repayment of the Series A Subordinated Debentures
at their stated maturity or earlier redemption. Distributions on the Series A
Capital Securities are payable semi-annually and are reflected in the Company's
Consolidated Statements of Income under the caption "Interest expense on
borrowed funds."
The carrying value and outstanding principal amount of the Trust Preferred
Securities was $162.0 million and $165.2 million, respectively, at December 31,
1998 and $196.1 million and $200.0 million, respectively, at December 31, 1997.
In September 1998, the Holding Company purchased $34.8 million of the
outstanding Series A Capital Securities, which resulted in an after-tax
extraordinary loss of $2.7 million. The Trust Preferred Securities have an
effective interest rate of 9.53%.
22
<PAGE> 23
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- OTHER BORROWED FUNDS
Information concerning short-term Treasury tax and loan notes included in
other borrowed funds is summarized in the table below at or for the year ended
December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------ ------
<S> <C> <C> <C>
Balance at year end......................................... $ 9,474 $3,943 $3,443
Average balance during the year............................. 64,798 2,898 1,357
Maximum month-end balance during the year................... 620,000 6,063 6,173
Interest rate at year end................................... 4.14% 5.25% 5.12%
Weighted average interest rate during the year.............. 5.25 5.35 5.50
</TABLE>
Long-term debt of the Company included in other borrowed funds consisted of
the following at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Medium term notes:
Due 1998; unamortized discount of $18; stated interest
rates of 5.78% to 5.84%; effective interest rates of
5.90%.................................................. $ -- $ 24,982
Due 2000; unamortized premiums of $31 (1998) and $47
(1997); stated interest rates of 6.27% to 6.53%;
effective interest rates of 6.24%...................... 25,031 25,047
Due 2003; unamortized premiums of $952 (1998) and $1,123
(1997); stated interest rates of 7.29% to 7.34%;
effective interest rates of 6.39%...................... 26,952 27,123
------- --------
Total medium term notes................................ 51,983 77,152
------- --------
Bonds, preferred stocks and loans transferred in put
transactions due 1998 to 2016; stated interest rates of
4.08% to 8.40%............................................ 20,182 44,159
Collateralized Real Yield Securities due 2008; unamortized
discount of $561; stated interest rate of 5.17%; effective
interest rate of 5.27%.................................... -- 77,439
Other....................................................... 7,965 15,482
------- --------
Total other long-term debt.................................. $80,130 $214,232
======= ========
</TABLE>
The weighted average effective interest rate on the long-term debt included
in the above table was 6.68% at December 31, 1998 and 6.08% at December 31,
1997. The scheduled principal payments due on the long-term debt included in the
above table for the five years subsequent to December 31, 1998 were $0.6 million
in 1999, $26.4 million in 2000, $0.7 million in 2001, $1.6 million in 2002, and
$26.8 million in 2003.
The medium term notes, all of which were assumed in connection with the
NAMC Acquisition, are unsecured. The terms of these notes provide for
semi-annual fixed-rate interest payments and a single principal payment at
maturity.
From 1983 to 1985, the Bank had entered into various borrowing agreements
under which it transferred certain tax-exempt bonds, preferred stocks and
tax-exempt loans to certain unit investment trusts and others, accompanied by
put options. During the terms of the agreements, the holders are entitled to
return the assets to the Bank under various circumstances at specified prices.
The underlying bonds, preferred stocks and loans transferred in the put
transactions had carrying values of $8.6 million, $3.3 million and $8.4 million,
respectively, at December 31, 1998. At that date, these borrowing agreements
were further collateralized by designated MBS.
23
<PAGE> 24
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Collateralized Real Yield Securities, which were issued in August 1988
and were obligations of the Bank, were repaid, at the option of the holders
thereof, in August 1998. Upon their repayment, a $0.3 million after-tax
extraordinary loss was recognized. Interest on these borrowings was payable
quarterly at a rate reset quarterly based on the sum of 3.00% plus the
percentage change, if any, in the Consumer Price Index for all Urban Consumers
during the preceding twelve-month period.
NOTE 15 -- STOCKHOLDERS' EQUITY
Preferred Stock
At December 31, 1998 and 1997, the Holding Company was authorized to issue,
in one or more series, 40 million shares of preferred stock with a par value of
$0.01 per share (the "Preferred Stock"). The powers, designations, preferences
and relative, participating, optional or other rights, if any, and the
qualifications, limitations or restrictions thereof, including, but not limited
to, the number of shares of any series of Preferred Stock, the dividend rights,
redemption rights, liquidation preferences, voting rights and conversion rights
of any series is determined by the board of directors of the Holding Company
(the "Board"). As of December 31, 1998, no shares of the Preferred Stock have
ever been issued.
Common and Treasury Stock
In April 1998, the stockholders of the Holding Company authorized an
increase in the number of authorized shares of Common Stock to 350 million from
200 million. At December 31, 1998, 13.2 million shares of Common Stock were
reserved for future issuance under the Company's stock-based employee benefit
plans.
The following table sets forth the Holding Company's common share activity
during the years indicated.
<TABLE>
<CAPTION>
COMMON SHARES
----------------------------------------
HELD IN
ISSUED TREASURY OUTSTANDING
----------- ---------- -----------
<S> <C> <C> <C>
Balance at December 31, 1995......................... 99,705,731 -- 99,705,731
Purchased for treasury............................... -- (5,025,900) (5,025,900)
Issued in connection with exercise of stock
warrant............................................ 8,407,500 -- 8,407,500
Issued in connection with employee benefit plans,
net................................................ 148,985 1,507,603 1,656,588
----------- ---------- -----------
Balance at December 31, 1996....................... 108,262,216 (3,518,297) 104,743,919
Purchased for treasury............................... -- (9,287,100) (9,287,100)
Issued in connection with the NAMC Acquisition....... 11,958,077 7,479,664 19,437,741
Issued in connection with employee benefit plans,
net................................................ 36,166 1,427,601 1,463,767
----------- ---------- -----------
Balance at December 31, 1997....................... 120,256,459 (3,898,132) 116,358,327
Purchased for treasury............................... -- (6,371,800) (6,371,800)
Issued in connection with employee benefit plans,
net................................................ (4,000) 1,587,074 1,583,074
----------- ---------- -----------
Balance at December 31, 1998......................... 120,252,459 (8,682,858) 111,569,601
=========== ========== ===========
</TABLE>
In May 1996, the Federal Deposit Insurance Corporation ("FDIC") exercised
its warrant to acquire 8,407,500 shares of Common Stock at $0.01 per share (the
"FDIC Warrant") and sold the underlying shares in a secondary public offering.
This warrant had been issued originally in July 1993 in accordance with the
terms of an agreement between Anchor Bancorp, Inc. ("Anchor Bancorp") and the
FDIC. (On January 13, 1995, Anchor Bancorp and its wholly-owned savings bank
subsidiary, Anchor Savings Bank FSB ( "Anchor Savings" and, together with Anchor
Bancorp, "Anchor") merged with and into the
24
<PAGE> 25
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Holding Company and the Bank, respectively, which were the surviving entities.
These mergers are collectively referred to as the "Anchor Merger.")) Pursuant to
this agreement, Anchor Bancorp exchanged $157.0 million of its Class A
cumulative preferred stock for $71.0 million of its newly-issued 8.9375% Senior
Notes and a warrant to acquire, at an exercise price of $0.01 per share,
4,750,000 shares of Anchor Bancorp's common stock (which was converted to a
warrant to acquire 8,407,500 shares of Common Stock at $0.01 per share upon
consummation of the Anchor Merger). In this exchange, the FDIC also relinquished
its claim to $47.2 million of accumulated but undeclared and unpaid dividends
with respect to the Class A cumulative preferred stock.
At December 31, 1998, the Holding Company had one Common Stock repurchase
program in effect. Under this program, which was announced in September 1998,
the Holding Company is authorized to repurchase up to approximately 5.6 million
shares of its outstanding Common Stock. During 1998, 335,000 shares of Common
Stock were acquired under this program.
Dividend Restrictions
The Holding Company's ability to pay dividends on the Common Stock is
limited by restrictions imposed by Delaware law. In general, dividends may be
paid out of the Holding Company's surplus, as defined by Delaware law, or in the
absence of such surplus, out of its net profits for the current and/or
immediately preceding fiscal year.
The funding of any future dividend payments on the Common Stock by the
Holding Company may be dependent on dividends it receives from the Bank. The
ability of the Bank to pay dividends to the Holding Company is subject to
federal regulations.
Generally, the Bank may not make a capital distribution, which includes
cash dividends, at any time when, after such distribution, its regulatory
capital would be below the regulatory capital requirements of the Office of
Thrift Supervision ("OTS") or below the standards established by the prompt
corrective action ("PCA") provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") for an institution to be deemed
adequately capitalized.
Under OTS regulations, a savings institution that exceeds its fully
phased-in capital requirements, both before and after a proposed distribution,
and that has not been advised by the OTS that it is in need of more than normal
supervision, may, after prior notice to, but without the approval of the OTS,
make capital distributions during a calendar year up to the higher of (i) 100%
of its net income to date during the calendar year plus the amount that would
reduce by one-half its surplus capital ratio (the percentage by which an
institution's ratio of total capital to assets exceeds the ratio of its fully
phased-in capital requirement to assets) at the beginning of the calendar year
or (ii) 75% of its net income over the most recent four-quarter period.
Stockholder Protection Rights Plan
In October 1995, the Board adopted a Stockholder Protection Rights Plan
(the "Rights Plan"). Under the Rights Plan, which expires in November 2005, the
Board declared a dividend of one right on each outstanding share of Common
Stock, which was paid on November 6, 1995 to stockholders of record on that date
(the "Rights"). Until it is announced that a person or group has acquired 20% or
more of the outstanding Common Stock (an "Acquiring Person") or has commenced a
tender offer that could result in their owning 20% or more of Common Stock, the
Rights will be evidenced solely by the Holding Company's common stock
certificates, will automatically trade with the Common Stock and will not be
exercisable. Following any such announcement, separate Rights would be
distributed, with each Right entitling its owner to purchase participating
preferred stock of the Holding Company having economic and voting terms similar
to those of one share of Common Stock for an exercise price of $50.
25
<PAGE> 26
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Upon announcement that any person or group has become an Acquiring Person
and unless the Board acts to redeem the Rights, then ten business days
thereafter (or such earlier or later date, not beyond 30 days, as the Board may
decide) (the "Flip-in Date"), each Right (other than Rights beneficially owned
by any Acquiring Person or transferee thereof, which become void) will entitle
the holder to purchase, for the $50 exercise price, a number of shares of Common
Stock having a market value of $100. In addition, if, after an Acquiring Person
gains control of the Board, the Holding Company is involved in a merger or sells
more than 50% of its assets or assets generating more than 50% of its operating
income or cash flow, or has entered into an agreement to do any of the foregoing
(or an Acquiring Person is to receive different treatment than all other
stockholders), each Right will entitle its holder to purchase, for the $50
exercise price, a number of shares of common stock of the Acquiring Person
having a market value of $100. If any person or group acquires between 20% and
50% of the outstanding Common Stock the Board may, at its option, exchange one
share of such Common Stock for each Right. The Rights may also be redeemed by
the Board for $0.01 per Right prior to the Flip-in Date.
NOTE 16 -- REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Bank's and the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
PCA, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. The Bank's regulatory
capital amounts and classification are also subject to qualitative judgments by
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation by the OTS to ensure
capital adequacy (the "Capital Adequacy Regulations") require the Bank to
maintain, as set forth in the table below, specified minimum amounts of and
ratios of tangible and core ("tier 1") capital to adjusted total assets and of
total risk-based capital to total risk-weighted assets. Management believes
that, as of December 31, 1998, the Bank was in compliance with the Capital
Adequacy Regulations.
Pursuant to FDICIA, the OTS adopted PCA regulations (the "PCA Regulations")
which established five capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To be categorized as well capitalized, the Bank
must maintain the minimum capital ratios set forth in the table below. As of
December 31, 1998, the most recent notification from the OTS categorized the
Bank as well capitalized under the regulatory framework for PCA. There are no
conditions or events since that notification that the Bank believes have changed
its category.
The following table summarizes, at December 31 for the years shown, the
Bank's actual regulatory capital amounts and ratios, as well as its minimum
capital requirements under the Capital Adequacy Regulations and under the PCA
Regulations for it to be deemed well capitalized (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Actual regulatory capital:
Tangible and core capital........................ $1,282,010 5.82% $1,216,417 5.64%
Tier 1 risk-based capital........................ 1,282,010 9.58 1,216,417 10.29
Total risk-based capital......................... 1,387,091 10.37 1,321,135 11.17
</TABLE>
26
<PAGE> 27
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Minimum capital requirements pursuant to the:
Capital Adequacy Regulations:
Tangible capital.............................. 330,622 1.50 323,447 1.50
Core capital.................................. 661,243 3.00 646,893 3.00
Total risk-based capital...................... 1,070,282 8.00 946,114 8.00
PCA Regulations to be deemed well capitalized:
Core capital.................................. 1,102,072 5.00 1,078,155 5.00
Tier 1 risk-based capital..................... 802,711 6.00 709,585 6.00
Total risk-based capital...................... 1,337,852 10.00 1,182,642 10.00
</TABLE>
NOTE 17 -- NET GAINS (LOSSES) ON SALES ACTIVITIES
Net gains (losses) on sales activities were comprised of the following for
the year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net gains (losses) on:
Sales of loans held for sale............................. $217,271 $ 23,219 $ 2,630
Sales, calls and other than temporary impairment in value
of securities available for sale and held to
maturity.............................................. 21,855 (17,794) (11,265)
Sale of deposits......................................... 9,550 -- --
Sales of mortgage servicing rights....................... 1,986 6,888 --
Other.................................................... (6,211) (277) (4,081)
-------- -------- --------
Total net gains (losses) on sales activities............... $244,451 $ 12,036 $(12,716)
======== ======== ========
</TABLE>
NOTE 18 -- EMPLOYEE BENEFIT PLANS
Pension and Postretirement Health Care and Life Insurance Plans
The Company currently maintains a non-contributory, qualified, defined
benefit pension plan (the "Qualified Pension Plan") covering, except as noted,
substantially all salaried employees of the Company who meet certain age and
length of service requirements. The Qualified Pension Plan assets primarily
consist of equity and debt securities. NAMC personnel are generally covered by a
plan maintained by NAMC (see "Other Plans"). The Company also maintains various
non-contributory, non-qualified, defined benefit pension plans (the
"Non-Qualified Pension Plans"). Benefits under these plans have not been
prefunded by the Company.
In addition, the Company currently sponsors unfunded postretirement health
care and life insurance plans covering, except as noted, substantially all
salaried employees of the Company who meet certain age and length of service
requirements. Employees of NAMC, with certain exceptions, are not covered under
these plans. In general, the Company's postretirement health care plan requires
contributions from participants. Benefits under the Company's postretirement
life insurance plan are provided to participants on a non-contributory basis.
Effective January 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and
27
<PAGE> 28
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
eliminates certain disclosures no longer deemed useful. The following
disclosures have been prepared in accordance with SFAS No. 132.
The following table provides details of the changes in the benefit
obligation and fair value of plan assets for the above plans for each of the
years shown and a reconciliation, at the end of each year shown, of the funded
status of the plans with the net amount recognized in the consolidated statement
of financial condition (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
PENSION OTHER PENSION OTHER
BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Change in benefit obligation during the year:
Benefit obligation at beginning of year....... $170,722 $ 52,646 $155,711 $ 47,860
Service cost.................................. 5,989 653 4,785 462
Interest cost................................. 11,392 3,552 11,271 3,630
Plan participants' contributions.............. -- 199 -- 175
Acquisition................................... -- -- 283 780
Actuarial loss................................ 923 341 11,473 2,491
Benefits paid................................. (13,215) (2,690) (12,801) (2,752)
-------- -------- -------- --------
Benefit obligation at end of year.......... 175,811 54,701 170,722 52,646
-------- -------- -------- --------
Change in fair value of plan assets during the
year:
Fair value of plan assets at beginning of
year....................................... 154,117 -- 142,841 --
Actual return on plan assets.................. 16,472 -- 21,193 --
Acquisition................................... -- -- 3,312 --
Employer contributions........................ 1,078 2,491 918 2,577
Plan participants' contributions.............. -- 199 -- 175
Benefits paid................................. (13,215) (2,690) (12,802) (2,752)
Administrative expenses paid.................. (1,216) -- (1,345) --
-------- -------- -------- --------
Fair value of plan assets at end of year... 157,236 -- 154,117 --
-------- -------- -------- --------
Funded status at end of year.................... (18,575) (54,701) (16,605) (52,646)
Unrecognized actuarial loss (gain).............. 11,117 (346) 11,033 (687)
Unrecognized transition (asset) obligation...... (2,220) 26,861 (3,065) 28,771
Unrecognized prior service cost................. 4,420 -- 5,277 --
-------- -------- -------- --------
Net amount recognized at end of year............ $ (5,258) $(28,186) $ (3,360) $(24,562)
======== ======== ======== ========
</TABLE>
The components of the net amounts recognized in the Company's Consolidated
Statements of Financial Condition in connection with its pension plans and
postretirement health care and life insurance plans were as follows at December
31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
PENSION OTHER PENSION OTHER
BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Prepaid benefit cost............................ $ 10,626 $ -- $ 10,154 $ --
Accrued benefit liability....................... (19,452) (28,186) (17,902) (24,562)
Intangible asset................................ 3,568 -- 4,388 --
-------- -------- -------- --------
Net amount recognized........................... $ (5,258) $(28,186) $ (3,360) $(24,562)
======== ======== ======== ========
</TABLE>
28
<PAGE> 29
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Weighted average assumptions used by the Company in accounting for its
pension plans and postretirement health care and life insurance plans were as
follows at December 31:
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
PENSION OTHER PENSION OTHER
BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Discount rate........................................... 7.00% 7.00% 7.00% 7.00%
Rate of compensation increase........................... 4.00 4.00 4.00 4.00
Expected return on plan assets.......................... 10.00 -- 10.00 --
</TABLE>
Net periodic expense associated with the Company's pension plans and
postretirement health care and insurance plans included the following components
for the year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- --------------------
PENSION OTHER PENSION OTHER PENSION OTHER
BENEFITS BENEFITS BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Service cost................... $ 5,989 $ 653 $ 4,785 $ 462 $ 5,905 $1,340
Interest cost.................. 11,392 3,552 11,271 3,630 11,016 3,415
Expected return on plan
assets....................... (14,521) -- (13,968) -- (13,794) --
Amortization of transition
(asset) obligation........... (845) 1,910 (845) 1,910 (845) 1,910
Amortization of prior service
cost......................... 857 -- 910 -- 1,976 --
Recognized actuarial loss
(gain)....................... 104 -- (728) -- 258 --
-------- ------ -------- ------ -------- ------
Net periodic expense........... $ 2,976 $6,115 $ 1,425 $6,002 $ 4,516 $6,665
======== ====== ======== ====== ======== ======
</TABLE>
Pension plans with accumulated benefit obligations in excess of plan assets
at December 31, 1998 and 1997 consisted of the Non-Qualified Pension Plans. The
aggregate projected benefit obligation and accumulated benefit obligation of
these plans amounted to $20.6 million and $19.5 million, respectively, at
December 31, 1998 and $18.3 million and $17.9 million, respectively, at December
31, 1997.
As of December 31, 1998, the average annual rate of increase in the per
capita cost of covered health care benefits for 1999 was assumed to be 9.00% for
participants less than 65 years old and 6.00% for all other participants and was
assumed to decline gradually until a floor of 5.00% was reached in 2003 and
2000, respectively. Increasing the assumed health care cost trend rates by 1.0%
in each year would increase the related accumulated benefit obligation at
December 31, 1998 by $0.9 million and the aggregate of the related service and
interest cost components by $0.1 million. A 1.0% decrease in the assumed health
care cost trend rates in each year would decrease the related accumulated
benefit obligation by $0.8 million and the aggregate of the related service and
interest cost components by $0.1 million.
Other Plans
The Company maintains a savings plan, the Retirement 401(k) Investment
Plan, which covers substantially all employees of the Company, other than those
eligible to participate in a defined contribution benefit plan assumed by the
Company in connection with the NAMC Acquisition. Under the Retirement 401(k)
Investment Plan, participants may contribute up to 15% of their base pay on a
before-or after-tax basis, up to legal limits. The Company currently makes
matching contributions equal to 100% of the first 6% of participant
contributions. Participants vest immediately in their own contributions and over
a period of five years for the Company's contributions. Each member's
contributions and matching
29
<PAGE> 30
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contributions are invested, in accordance with the member's directions, in one
or any combination of available investment options.
In connection with the NAMC Acquisition, the Company assumed NAMC's 401(k)
Savings and Retirement Plan. This plan covers substantially all NAMC personnel,
except those employees of NAMC covered under the Qualified Pension Plan or the
Retirement 401(k) Investment Plan. The provisions of the 401(k) savings
component of this plan provide for contributions by participants of up to 15% of
their total pay on a before-tax basis, up to legal limits, and matching
contributions by the Company of up to 1.5% of a participant's eligible
compensation. Participants vest immediately in their own contributions and over
a period of four years for the Company's contributions. Under the provisions of
the retirement benefit component of the 401(k) Savings and Retirement Plan,
contributions are made by the Company equal to 4% of the participant's eligible
pay. Participants vest in such contributions over a period of seven years.
Contributions to the 401(k) Savings and Retirement Plan are invested, in
accordance with the participant's direction, in one or any combination of
available investment options.
The Company also maintains non-qualified arrangements under which
supplemental amounts in excess of those allocated under the Retirement 401(k)
Investment Plan are allocated with respect to certain employees and upon which
earnings are credited. These amounts include supplemental allocations based upon
the amounts that would otherwise be contributed as matching contributions under
the Retirement 401(k) Investment Plan on base pay that exceeds the amount for
which matching contributions are permitted to be made under the Retirement
401(k) Investment Plan.
The aggregate expense recognized by the Company in connection with the
above plans was $8.7 million, $4.9 million and $4.3 million for 1998, 1997 and
1996, respectively.
NOTE 19 -- STOCK PLANS
Stock Option and Incentive Plans
As further described below, at December 31, 1998, the Company had a total
of four stock option and stock incentive plans in effect under which shares of
Common Stock were available for future grants and a total of four terminated
stock option and stock incentive plans under which stock-based awards remained
outstanding. Awards granted under the terminated plans prior to their
termination remain in effect in accordance with their terms.
During 1997, the Company adopted its Pride Shares Program, a broad-based
stock option plan under which there was a grant in each of May 1997 and March
1998 of an option to each eligible full-time employee and each eligible
part-time employee to purchase 150 shares and 75 shares, respectively, of Common
Stock. During 1999, the Company expects to make a final grant under the Pride
Shares Program of an option to each eligible full-time employee and each
eligible part-time employee to purchase 200 shares and 100 shares, respectively,
of Common Stock. Options awarded under the Pride Shares Program have an exercise
price equal to the grant date market price of the Common Stock and expire 11
years from the grant date. Vesting of options awarded under this plan generally
occurs at the earlier of five years after the date of grant or the date the
Common Stock price reaches a specified target price (as established at the date
of grant) and its closing price stays at, or rises above, that target price for
five consecutive trading days. The options granted under the Pride Shares
Program during 1997, all of which vested during that year, had a target price of
$20.00, whereas the options granted during 1998, which have not vested as of
December 31, 1998, have a target price of $36.00. At December 31, 1998, a total
of 2,000,000 shares of Common Stock had been reserved for issuance under the
Pride Shares Program, of which 860,600 shares were available for future grants.
Also in 1997, the Company adopted a broad-based stock incentive plan (the
"1997 Stock Incentive Plan"), under which all employees, excluding certain
officers, are eligible to receive options to purchase
30
<PAGE> 31
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock at an exercise price equal to the market price of the Common Stock
at the date of grant. An aggregate of 600,000 shares of Common Stock have been
reserved for issuance under this plan (including 300,000 shares during 1998), of
which 30,105 shares remained available for future grants as of December 31,
1998. The 1997 Stock Incentive Plan does not have an established termination
date, but may be terminated at any time by the Board. The options to purchase
Common Stock that have been awarded under the 1997 Stock Incentive Plan
generally vest in three equal annual installments beginning one year from the
date of grant and may be exercised over a period not in excess of eleven years.
A stock incentive plan for outside directors ("the 1997 Stock Incentive
Plan for Outside Directors") was approved by the Holding Company's stockholders
during 1997, replacing a predecessor plan that had been adopted in 1987 (the
"1987 Stock Incentive Plan for Outside Directors") and that terminated by its
terms during 1996. Under the 1997 Stock Incentive Plan for Outside Directors,
which terminates in May 2007, 350,000 shares of Common Stock have been reserved
for future issuance. As amended during 1998, this plan provides for
discretionary grants by the Board to outside directors of the Holding Company
and its eligible direct and indirect subsidiaries of stock options, stock
appreciation rights ("SARs"), restricted Common Stock, and deferred Common
Stock. The terms of such grants are established by the Board. Options that have
been awarded under the 1997 Stock Incentive Plan for Outside Directors have a
term of 11 years, an exercise price equal to the market price of the Common
Stock on the date granted and generally vest in three equal annual installments
beginning one year from the date of grant. At year-end 1998, 308,500 shares of
Common Stock remained available to be awarded under the 1997 Stock Incentive
Plan for Outside Directors.
The 1987 Stock Incentive Plan for Outside Directors, prior to its
termination, provided for a one-time only grant to each outside director of the
Holding Company of an option to purchase 3,000 shares of Common Stock, a tandem
SAR, which only become exercisable upon a change in control of the Company, and
the right to purchase 1,000 shares of restricted Common Stock at $1.00 per
share. This plan also provided for similar discretionary stock-based awards to
directors of eligible direct and indirect subsidiaries of the Holding Company.
Stock options and SARs granted under the 1987 Stock Incentive Plan for Outside
Directors have an exercise price equal to the market price of the Common Stock
at the date of grant, generally vested in three equal annual installments
beginning one year from the date of grant and may be exercised over a period not
in excess of eleven years.
The Company also adopted stock incentive plans in 1986 and 1991 (the "1986
Stock Incentive Plan" and the "1991 Stock Incentive Plan," respectively). The
1986 Stock Incentive Plan, which terminated by its terms during 1996, provided
for grants to key employees of Common Stock-based awards, including stock
options, SARs, and restricted Common Stock. The 1991 Stock Incentive Plan
provides for grants to all employees of Common Stock-based awards including
stock options, SARs, restricted Common Stock, deferred Common Stock, certain
loans, and tax offset payments. The 1991 Stock Incentive Plan was amended during
1998 to, among other things, extend its termination date to March 2008 from
February 2004, increase the number of shares of Common Stock reserved for future
issuance by 5,000,000 and provide that the exercise price of options granted on
or after the date of amendment will not be less than the market price of the
Common Stock at the date of grant. At December 31, 1998, 5,123,955 shares of
Common Stock remained available to be awarded under the 1991 Stock Incentive
Plan. All SARs granted under the 1986 and 1991 Stock Incentive Plans have been
awarded in tandem with stock options and become exercisable upon a change in
control of the Company. Stock options and SARs that have been granted under
these plans have an exercise price equal to the market price of the Common Stock
at the date of grant, generally vest in three equal annual installments
beginning one year from the date of grant and may be exercised over a period not
in excess of eleven years.
In connection with the Anchor Merger, the Holding Company assumed stock
option plans that had previously been adopted by Anchor Bancorp in 1990 and 1992
(the "1990 Stock Option Plan" and the
31
<PAGE> 32
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"1992 Stock Option Plan," respectively). Upon consummation of the Anchor Merger,
the number of outstanding options under these plans was multiplied by, and the
per share exercise price divided by, 1.77, which was the ratio at which each
share of Common Stock was exchanged for each share of Anchor Bancorp common
stock outstanding at the date of the Anchor Merger (the "Anchor Exchange
Ratio"). The 1990 Stock Option Plan, which terminated by its terms during 1996,
provided for options to key employees, while the 1992 Stock Option Plan, which
was terminated by the Board during 1998, provided for options to all employees
to purchase shares of Common Stock over a period not in excess of ten years, or
in certain circumstances, ten years and one day, with vesting generally
occurring in three equal annual installments beginning one year from the date of
grant. All options granted under these plans have, as applicable, an exercise
price equal to the market price of the Common Stock at the date of grant or the
market price of Anchor Bancorp's common stock at the date of grant as adjusted
for the Anchor Exchange Ratio.
The following table provides a summary of the Company's stock option
activity for the years ended December 31, 1998, 1997 and 1996 and stock options
exercisable at the end of each of those years (number of options in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year............ 5,554 $12.53 3,934 $ 8.96 4,698 $ 6.86
Exchanged in connection with the NAMC
Acquisition............................... -- -- 1,862 14.18 -- --
Granted(1).................................. 2,082 29.08 1,257 18.92 950 12.76
Exercised................................... (1,166) 13.31 (1,331) 10.16 (1,614) 5.04
Forfeited................................... (263) 27.55 (168) 13.64 (100) 9.64
------ ------ ------
Outstanding at end of year.................. 6,207 17.30 5,554 12.53 3,934 8.96
====== ====== ======
Exercisable at end of year.................. 3,655 11.18 4,335 11.27 2,754 7.74
</TABLE>
- ---------------
(1) The weighted average grant-date fair value was $11.54 in 1998, $7.09 in 1997
and $6.02 in 1996.
The following table summarizes information about stock options outstanding
at December 31, 1998 (number of options in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- --------------------------
NUMBER WEIGHTED AVERAGE NUMBER
OF WEIGHTED AVERAGE REMAINING OF WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OPTIONS EXERCISE PRICE CONTRACTUAL LIFE OPTIONS EXERCISE PRICE
- ------------------------ ------- ---------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.13 -- $ 4.91.................. 512 $ 2.54 3.4 years 512 $ 2.54
5.61 -- 9.75.................. 1,254 8.12 5.4 1,254 8.12
10.09 -- 14.50.................. 994 12.03 7.2 849 12.01
15.13 -- 18.89.................. 1,206 17.15 8.0 898 17.50
20.02 -- 24.38.................. 117 22.82 9.0 41 21.37
25.25 -- 29.94.................. 1,335 27.07 10.1 95 25.35
30.13 -- 31.06.................. 789 31.01 10.2 6 31.06
----- -----
1.13 -- 31.06.................. 6,207 17.30 7.7 3,655 11.18
===== =====
</TABLE>
During 1998, 1997 and 1996, shares of restricted Common Stock issued
amounted to 341,500, 95,640 and 40,000, respectively. The weighted average grant
price and weighted average grant-date fair value of
32
<PAGE> 33
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
these shares was $0.84 and $28.05, respectively, in 1998, $1.00 and $16.76,
respectively, in 1997, and $1.00 and $11.66, respectively, in 1996. At December
31, 1998, there were 430,668 outstanding shares of non-vested restricted Common
Stock. Restrictions generally lapse in installments over the restriction period,
which is generally three to five years. Compensation expense recognized in
operations in connection with restricted Common Stock awards was $2.8 million in
1998, $0.7 million in 1997 and $0.2 million in 1996.
Employee Stock Purchase Plan
In 1993, the Company adopted an employee stock purchase plan (the "Employee
Stock Purchase Plan"), reserving 1,000,000 shares of Common Stock for purchase
by eligible employees of the Company. This plan permits a per share purchase
price of between 85% and 100%, as established by the Compensation Committee of
the Board (the "Compensation Committee"), of the market price of the Common
Stock on the first date of the relevant purchase period. The Compensation
Committee also establishes the purchase period and number of shares made
available to each eligible participant during a specified purchase period.
During 1998 and 1997, 79,812 and 60,602 shares, respectively, of Common Stock
were purchased by employees under the Employee Stock Purchase Plan at a per
share price of $15.38 and $12.13, respectively, which, in both cases, was equal
to the Common Stock market price on the first date of the purchase period. No
shares of Common Stock were purchased during 1996 under the Employee Stock
Purchase Plan. During 1998, shares of Common Stock were made available for
purchase in March 1999 under the Employee Stock Purchase Plan at a per share
price of $30.13, which was equal to the Common Stock market price on the first
date of the purchase period. The number of such shares subscribed to amounted to
366,431 at December 31, 1998. Shares of Common Stock available for future
purchase under the Employee Stock Purchase Plan amounted to 635,441 at December
31, 1998. The grant-date fair value of each purchase right granted in 1998, 1997
and 1996 under the Employee Stock Purchase Plan was $4.34, $2.16 and $1.51,
respectively.
Pro Forma Data
The Company, as permitted under SFAS No. 123, "Accounting for Stock-Based
Compensation," accounts for its stock-based compensation awards using the
intrinsic value-based method prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Under this method,
compensation cost is measured by the excess, if any, of the quoted market price
of the Common Stock at date of grant, or other measurement date, over the amount
an employee is required to pay to acquire the Common Stock. Had compensation
expense for the Company's stock-based compensation plans been recognized
consistent with the fair value-based method of SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below for the year ended December 31 (in thousands, except per share
data):
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income......................... $237,086 $230,522 $121,714 $117,914 $104,256 $102,510
Basic earnings per share........... 2.09 2.03 1.14 1.11 1.00 0.99
Diluted earnings per share......... 2.06 2.00 1.12 1.09 0.96 0.94
</TABLE>
In preparing the pro forma information, the grant-date fair value of each
stock option granted under the Company's stock option and stock incentive plans
and each purchase right granted under the Employee Stock Purchase Plan was
estimated on the date of grant using the Black-Scholes option-pricing model. For
stock options, the following weighted-average assumptions were used for the
years ended December 31, 1998, 1997 and 1996, respectively: risk-free interest
rates of 5.16%, 6.30% and 5.97%; expected life of 5.6 years, 5.4 years and 6.0
years; volatility of 37%, 32% and 45%; and dividend yields of
33
<PAGE> 34
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
0.69%, 0.83% and 0.00%. For the Employee Stock Purchase Plan, the following
assumptions were used for the years ended December 31, 1998, 1997 and 1996,
respectively: risk-free interest rates of 5.54%, 6.12% and 5.44%; expected life
of one year for each year; volatility of 31%, 30% and 25%; and dividend yields
of 0.66%, 1.04% and 0.00%.
NOTE 20 -- OTHER GENERAL AND ADMINISTRATIVE EXPENSE
The following table provides details of other general and administrative
expense for the year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Data processing and communications.......................... $ 43,782 $ 27,292 $ 20,344
Professional services....................................... 22,107 13,179 14,770
Marketing and promotional................................... 20,785 15,831 14,202
Postage and messenger services.............................. 16,846 8,781 7,013
Year 2000 consulting........................................ 16,197 1,286 --
Stationery, printing and supplies........................... 13,366 7,881 6,927
Amortization of goodwill.................................... 11,487 4,501 1,177
FDIC deposit insurance premiums and assessments............. 4,075 3,943 8,625
Other....................................................... 60,680 32,995 27,717
-------- -------- --------
Total other general and administrative expense.............. $209,325 $115,689 $100,775
======== ======== ========
</TABLE>
NOTE 21 -- INCOME TAXES
Income tax expense attributable to income before extraordinary items
consisted of the following for the year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Current:
Federal................................................... $ 26,804 $ 4,432 $ 3,286
State and local........................................... 33,269 6,332 11,032
-------- ------- -------
Total current.......................................... 60,073 10,764 14,318
-------- ------- -------
Deferred:
Federal................................................... 54,687 62,494 27,605
State and local........................................... (1,281) 1,776 8,061
-------- ------- -------
Total deferred......................................... 53,406 64,270 35,666
-------- ------- -------
Total income tax expense attributable to income
before extraordinary items................................ $113,479 $75,034 $49,984
======== ======= =======
</TABLE>
Excluded from the preceding table were income tax benefits of $3.0 million
in 1998 and $0.9 million in 1997 associated with the recognition of
extraordinary losses on the early extinguishment of debt. The preceding table
also excludes the tax effects recorded directly to stockholders' equity in
connection with unrealized gains and losses on securities available for sale and
certain tax benefits associated with the Company's stock option and stock
incentive plans. In the aggregate, these tax effects increased (decreased)
stockholders' equity by $3.7 million, $8.1 million and $(4.1) million in 1998,
1997 and 1996, respectively.
34
<PAGE> 35
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of federal income tax expense
attributable to income before extraordinary items computed at the statutory rate
of 35.0% to the actual income tax expense attributable to income before
extraordinary items for the year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Statutory federal income tax expense........................ $124,119 $69,373 $ 53,984
State and local income taxes, net of federal income tax
benefit................................................... 20,793 5,270 12,410
Restructuring of assets within corporate entities........... (32,129) -- --
Non-deductible amortization of goodwill..................... 3,751 1,334 178
Adjustment of federal deferred taxes upon resolution
of tax filing positions................................... -- -- (17,602)
Other, net.................................................. (3,055) (943) 1,014
-------- ------- --------
Total income tax expense attributable to income
before extraordinary items................................ $113,479 $75,034 $ 49,984
======== ======= ========
</TABLE>
The Company's effective income tax rate on income before extraordinary
items was 32.0% for 1998, 37.9% for 1997 and 32.4% for 1996.
The combined federal, state and local income tax effects of temporary
differences that gave rise to significant portions of the Company's deferred tax
assets and deferred tax liabilities were as follows at December 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward.......................... $ 22,751 $ 73,093 $109,611
Excess tax basis and potential bad debt deductions
relating to non-performing assets..................... 47,737 54,029 54,138
Securities............................................... 9,419 18,192 --
Financial statement reserves not yet realized for tax
purposes.............................................. 20,753 12,311 9,968
Postretirement benefits other than pensions.............. 11,170 10,336 9,536
Federal alternative minimum tax and general business tax
credit carryforwards.................................. 11,810 9,855 5,976
Premises and equipment................................... 2,969 2,706 5,395
Other, net............................................... -- 12,478 7,871
-------- -------- --------
Total deferred tax assets............................. 126,609 193,000 202,495
-------- -------- --------
Deferred tax liabilities:
Mortgage servicing assets................................ 55,397 67,079 9,104
Loans receivable......................................... 13,148 23,790 9,491
Securities............................................... -- -- 228
Other, net............................................... 6,278 -- --
-------- -------- --------
Total deferred tax liabilities........................ 74,823 90,869 18,823
-------- -------- --------
Net deferred tax assets.................................... $ 51,786 $102,131 $183,672
======== ======== ========
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of $65.0 million, substantially all of which are
available to reduce future federal income taxes through the year 2009. In
addition, at that date, the Company had general business tax credit
carryforwards of $7.7 million which are available to reduce future federal
income taxes, of which $1.0 million expire in 2009, $1.5 million expire in 2010,
$1.6 million expire in 2011, $1.8 million expire in 2012,
35
<PAGE> 36
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and $1.8 million expire in 2013. The Company, at December 31, 1998, also had
federal alternative minimum tax credit carryforwards of $4.1 million, which are
available to reduce future federal income taxes without expiration. As a result
of the issuance of Common Stock in connection with the NAMC Acquisition, the
Holding Company underwent an "ownership change," as defined in section 382 of
the Internal Revenue Code of 1986, as amended, which limits the Company's
utilization of its net operating loss carryforwards and equivalent tax credit
carryforwards to no more than $143 million per calendar year.
During 1996, federal legislation was enacted that generally eliminates the
potential recapture of federal income tax deductions arising from commonly used
methods of calculating bad debt reserves for periods prior to 1988 if an
institution with a thrift charter (such as the Bank) were to change to a
commercial bank charter. In addition, this legislation repealed the reserve
method of tax accounting for bad debts used by the Bank and other "large" thrift
institutions, effective for taxable years beginning after 1995. The legislation
also contains provisions that require the recapture in future periods of tax
reserves for periods after 1987, but such provisions have not and are not
expected to have a material impact on the Company's consolidated financial
statements. Further, New York State legislation was enacted during 1996, and New
York City legislation was enacted in March 1997, allowing thrift institutions to
continue to use the reserve method of tax accounting for bad debts and to
determine a deduction for bad debts in a manner similar to prior law.
At December 31, 1998, the Bank had approximately $209 million of bad debt
reserves for New York income tax purposes for which no provision for income tax
had been made, of which approximately $98 million are subject to recapture upon
distribution to the Holding Company of these tax reserves. Any charge to a bad
debt reserve for other than bad debts on loans would create income for tax
purposes only, which would be subject to the then current corporate tax rate.
For federal tax purposes, approximately $176 million of the Bank's previously
accumulated bad debt deductions are subject to recapture upon its distribution
to the Holding Company. It is not the Bank's intention to make any distributions
to the Holding Company, or use the reserve in any manner, that would create
income tax liabilities for the Bank.
In order for the Bank to be permitted to maintain a New York tax bad debt
reserve for thrifts, certain thrift definitional tests must be met, including
maintaining at least 60% of its assets in qualifying assets, as defined for tax
purposes, and maintaining a thrift charter. If the Bank failed to meet these
definitional tests, the transition to the reserve method permitted commercial
banks would result in an increase in the New York tax provision because a
deferred tax liability would be established to reflect the eventual recapture of
some or all of the New York bad debt reserve. The Bank's percentage of
qualifying assets at December 31, 1998 was in excess of the minimum threshold.
The Bank does not anticipate failing the thrift definitional tests for New York
tax purposes.
36
<PAGE> 37
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 22 -- EARNINGS PER COMMON SHARE
The following table sets forth the computations of basic and diluted
earnings per common share for the year ended December 31 (in thousands, except
per share data):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Basic earnings per common share:
Numerators:
Income before extraordinary items..................... $241,143 $123,174 $104,256
Extraordinary items................................... (4,057) (1,460) --
-------- -------- --------
Net income............................................ $237,086 $121,714 $104,256
======== ======== ========
Denominator:
Weighted average number of common shares
outstanding......................................... 113,452 106,585 103,742
Basic earnings per common share:
Income before extraordinary items..................... $ 2.13 $ 1.15 $ 1.00
Extraordinary items................................... (0.04) (0.01) --
-------- -------- --------
Net income............................................ $ 2.09 $ 1.14 $ 1.00
======== ======== ========
Diluted earnings per common share:
Numerators:
Income before extraordinary items..................... $241,143 $123,174 $104,256
Extraordinary items................................... (4,057) (1,460) --
-------- -------- --------
Net income............................................ $237,086 $121,714 $104,256
======== ======== ========
Denominator:
Weighted average number of common shares
outstanding......................................... 113,452 106,585 103,742
Common equivalent shares due to:
Stock options, restricted stock and employee stock
purchase rights.................................. 1,701 2,028 2,078
FDIC Warrant........................................ -- -- 3,277
-------- -------- --------
Weighted average number of diluted common shares...... 115,153 108,613 109,097
======== ======== ========
Diluted earnings per common share:
Income before extraordinary items..................... $ 2.09 $ 1.13 $ 0.96
Extraordinary items................................... (0.03) (0.01) --
-------- -------- --------
Net income............................................ $ 2.06 $ 1.12 $ 0.96
======== ======== ========
</TABLE>
NOTE 23 -- DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses various derivative financial instruments as part of its
overall interest rate risk-management strategy, to manage certain risks
associated with its mortgage banking activities and, to a limited extent, for
trading purposes.
The Company's exposure to credit risk in connection with its use of
derivative financial instruments is represented by the positive fair value of
the instruments. For a further discussion of the credit risk associated with the
Company's derivative financial instruments, reference is made to Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Management of Credit Risk -- Derivative Financial Instruments."
37
<PAGE> 38
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain of the Company's derivative financial instruments at December 31,
1998 require that the Company or its counterparty, to the extent that the market
value of the position for that party is negative, maintain collateral, subject
to a minimum call, with the other party. If the Company is subject to an initial
collateral requirement, the amount of the initial collateral modifies the
collateral maintenance level.
Interest Rate Risk-Management Derivative Financial Instruments
The following table summarizes the notional amounts and estimated fair
values of derivative financial instruments used by the Company for interest rate
risk-management purposes at December 31 (in thousands):
<TABLE>
<CAPTION>
POSITIVE NEGATIVE ESTIMATED
NOTIONAL FAIR FAIR FAIR
AMOUNT VALUE VALUE VALUE
---------- -------- -------- ---------
<S> <C> <C> <C> <C>
1998:
Interest rate swaps hedging:
Securities available for sale.................. $ 239,370 $ -- $ 2,416 $ (2,416)
Loans receivable............................... 1,475,418 -- 53,469 (53,469)
Borrowed funds................................. 250,000 -- 1,222 (1,222)
---------- ------ ------- --------
Total interest rate swaps................... 1,964,788 -- 57,107 (57,107)
---------- ------ ------- --------
Interest rate caps hedging:
Securities available for sale.................. 107,422 -- -- --
Loans receivable............................... 101,570 -- -- --
---------- ------ ------- --------
Total interest rate caps.................... 208,992 -- -- --
---------- ------ ------- --------
Interest rate swaptions hedging loans
receivable..................................... 40,000 -- -- --
Interest rate futures hedging borrowed funds..... 300,000 -- -- --
---------- ------ ------- --------
Total interest rate risk-management
instruments.................................... $2,513,780 $ -- $57,107 $(57,107)
========== ====== ======= ========
1997:
Interest rate swaps hedging:
Securities available for sale.................. $ 52,483 $ -- $ 247 $ (247)
Loans receivable............................... 1,399,872 -- 21,825 (21,825)
Borrowed funds................................. 60,000 1 591 (590)
---------- ------ ------- --------
Total interest rate swaps................... 1,512,355 1 22,663 (22,662)
---------- ------ ------- --------
Interest rate caps hedging:
Securities available for sale.................. 333,273 7 -- 7
Loans receivable............................... 315,118 6 -- 6
Borrowed funds................................. 361,000 1,172 -- 1,172
---------- ------ ------- --------
Total interest rate caps.................... 1,009,391 1,185 -- 1,185
---------- ------ ------- --------
Interest rate swaptions hedging loans
receivable..................................... 40,000 119 -- 119
---------- ------ ------- --------
Total interest rate risk-management
instruments.................................... $2,561,746 $1,305 $22,663 $(21,358)
========== ====== ======= ========
</TABLE>
38
<PAGE> 39
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity in derivative financial instruments used for interest rate
risk-management purposes is summarized in the following table for the years
shown (in thousands):
<TABLE>
<CAPTION>
INTEREST RATE INTEREST RATE INTEREST RATE INTEREST RATE SHORT
SWAPS CAPS SWAPTIONS FUTURES SALES TOTAL
------------- ------------- ------------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.... $1,290,747 $1,243,179 $ 37,000 $ -- $ -- $ 2,570,926
Additions....................... 584,722 361,000 -- 82,900 -- 1,028,622
Amortization and maturities..... (757,345) (369,755) (37,000) -- -- (1,164,100)
Terminations.................... (7,908) -- -- (82,900) -- (90,808)
---------- ---------- -------- --------- -------- -----------
Balance at December 31,
1996....................... 1,110,216 1,234,424 -- -- -- 2,344,640
Additions....................... 904,837 -- 40,000 275,400 -- 1,220,237
Amortization and maturities..... (502,698) (225,033) -- -- -- (727,731)
Terminations.................... -- -- -- (275,400) -- (275,400)
---------- ---------- -------- --------- -------- -----------
Balance at December 31,
1997....................... 1,512,355 1,009,391 40,000 -- -- 2,561,746
Additions....................... 993,937 -- -- 704,100 85,000 1,783,037
Amortization and maturities..... (297,649) (439,399) -- (250,000) -- (987,048)
Terminations.................... (243,855) -- -- (154,100) (85,000) (482,955)
Reclassification to trading
assets........................ -- (361,000) -- -- -- (361,000)
---------- ---------- -------- --------- -------- -----------
Balance at December 31, 1998.... $1,964,788 $ 208,992 $ 40,000 $ 300,000 $ -- $ 2,513,780
========== ========== ======== ========= ======== ===========
</TABLE>
The interest rate swap agreements used by the Company at December 31, 1998
for purposes of interest rate risk management are in the form where, based on an
agreed-upon notional amount, the Company agrees to make periodic fixed-rate
payments, while the counterparty agrees to make periodic variable-rate payments.
The use of these derivative financial instruments allows the Company to achieve
interest income or expense similar to what would exist if it had changed the
interest rate of the hedged assets from a fixed-rate to a variable-rate and had
changed the interest rate of the hedged liabilities from a variable-rate to a
fixed-rate.
The following table sets forth the contractual maturities of interest rate
swap agreements used for interest rate risk-management purposes at December 31,
1998, as well as the related weighted average interest rates payable and
receivable at that date (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
---------------------------
NOTIONAL FIXED-RATE VARIABLE-RATE
AMOUNT PAYABLE RECEIVABLE(1)
---------- ---------- -------------
<S> <C> <C> <C>
Maturing in:
1999................................................. $ 86,562 6.77% 5.50%
2000................................................. 460,400 5.49 5.56
2001................................................. 266,418 6.25 5.58
2002................................................. 161,201 6.76 5.56
2003................................................. 39,200 6.74 5.62
Thereafter........................................... 951,007 6.21 5.61
----------
Total.................................................. $1,964,788 6.13 5.58
==========
</TABLE>
- ---------------
(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 December 31, 1998; however, actual repricings of the interest rate
swaps will be based on the applicable interest rates in effect at the actual
repricing dates.
39
<PAGE> 40
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest rate caps purchased by the Company represent agreements where, in
return for a premium paid to the counterparty at inception, the counterparty
agrees to pay the Company the excess, if any, of a designated floating market
interest rate over a specified strike interest rate (the "Cap Strike Rate"), as
applied to the notional amount. The interest rate cap agreements used by the
Company for interest rate risk-management purposes at December 31, 1998, all of
which mature in 2000, had a weighted average Cap Strike Rate of 8.00%. The
designated floating market interest rates specified in these agreements were
tied to the weekly average yield of the one-year constant maturity Treasury
index ("CMT").
Under the Company's outstanding interest rate swaptions at December 31,
1998, the Company, in exchange for the payment of a premium to the counterparty,
has the right to enter into interest rate swaps at a future date. These interest
rate swaptions, all of which are used to hedge the repricing risk on certain
loans receivable with high prepayment risk, mature during 1999 and have a
weighted average strike rate of 6.75%.
At December 31, 1998, the Company used interest rate futures to hedge the
repricing risk of certain short-term borrowed funds. During 1998, the Company
used short sales of generic MBS to hedge its exposure to changes in the value of
non-generic MBS that it had decided to sell.
Mortgage Banking Risk-Management Derivative Financial Instruments
The following table summarizes the notional amounts and estimated fair
values of derivative financial instruments used by the Company for mortgage
banking risk-management purposes at December 31 (in thousands):
<TABLE>
<CAPTION>
POSITIVE NEGATIVE ESTIMATED
NOTIONAL FAIR FAIR FAIR
AMOUNT VALUE VALUE VALUE
---------- -------- -------- ---------
<S> <C> <C> <C> <C>
1998:
Forward contracts hedging loans held for sale..... $4,426,940 $ 8 $9,984 $(9,976)
Put options on MBS forward contracts hedging loans
held for sale................................... 143,000 211 -- 211
Interest rate floors hedging mortgage servicing
assets.......................................... 2,402,768 49,054 -- 49,054
Interest rate caps hedging mortgage servicing
assets.......................................... 400,000 16,411 -- 16,411
Interest rate swaps hedging mortgage servicing
assets.......................................... 800,000 32,577 -- 32,577
---------- ------- ------ -------
Total mortgage banking risk-management
instruments..................................... $8,172,708 $98,261 $9,984 $88,277
========== ======= ====== =======
1997:
Forward contracts hedging loans held for sale..... $1,725,910 $ -- $4,760 $(4,760)
Put options on interest rate futures hedging loans
held for sale................................... 40,000 25 -- 25
Put options on MBS forward contracts hedging loans
held for sale................................... 67,000 180 -- 180
Interest rate floors hedging mortgage servicing
assets.......................................... 2,384,514 30,377 -- 30,377
Interest rate swaps hedging mortgage servicing
assets.......................................... 400,000 2,829 -- 2,829
---------- ------- ------ -------
Total mortgage banking risk-management
instruments..................................... $4,617,424 $33,411 $4,760 $28,651
========== ======= ====== =======
</TABLE>
The Company uses forward contracts to hedge its exposure to interest rate
risk associated with loans held for sale origination activities. These contracts
represent firm commitments to deliver MBS or loans at a specified price at a
specified future date. The Company must deliver the MBS or loans in accordance
with the requirements of the contracts or, if it cannot fulfill its contractual
obligations, pair-off the commitments and recognize the gain or loss based on
the change in the price of the underlying contract
40
<PAGE> 41
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(i.e., the specified price minus the repurchase price multiplied by the notional
amount). The outstanding forward contracts at year-end 1998 mature at various
dates through March 1999.
The Company's outstanding put options at December 31, 1998 give it the
right, but not the obligation, to sell to the counterparty a designated
financial instrument at a specified price during an agreed upon period of time
or on a specific date. The Company pays a premium for this right. Under these
put options, the Company generally benefits if the price of the underlying
financial instrument declines. The outstanding put options at December 31, 1998
mature at various dates through June 1999.
At December 31, 1998, the Company used interest rate floors, interest rate
caps and interest rate swaps in order to minimize the impact of the potential
loss of net future servicing revenues associated with certain of the Company's
mortgage servicing assets as a result of an increase in loan prepayments, which
is generally triggered by declining interest rates.
Interest rate floors purchased by the Company for the purpose of hedging
its mortgage servicing assets represent agreements where, in return for a
premium paid to the counterparty at inception, the counterparty agrees to pay
the Company the amount, if any, by which a designated market interest rate
(primarily CMT or swap indices) is less than a specified strike interest rate
(the "Floor Strike Rate"), as applied to the notional amount. The weighted
average Floor Strike Rate on the outstanding agreements at December 31, 1998 was
5.27%. The expected maturities of the notional amounts of the Company's
outstanding interest rate floor agreements at December 31, 1998 were $0.4
billion in 1999, $1.7 billion in 2003, and $0.3 billion in 2005.
The interest rate cap agreements used by the Company to hedge mortgage
servicing assets at December 31, 1998, all of which mature in 2008, had a
weighted average Cap Strike Rate of 6.09%. The designated floating market
interest rates specified in these agreements were tied to one-month LIBOR.
The following table sets forth, at December 31, 1998, the contractual
maturities of interest rate swap agreements (excluding those agreements that are
forward starting) hedging mortgage servicing assets, as well as the related
weighted average interest rates payable and receivable at that date (dollars in
thousands):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE RATE
NOTIONAL ---------------------
AMOUNT PAYABLE RECEIVABLE
-------- ------- ----------
<S> <C> <C> <C>
Maturing in:
2002:
Pay fixed rate/receive fixed rate(1)................... $200,000 5.92% 6.08%
After 2003:
Pay fixed rate/receive fixed rate(1)................... 100,000 5.97 6.32
Pay variable rate/receive fixed rate(2)................ 400,000 5.55 5.92
--------
Total....................................................... $700,000 5.71 6.02
========
</TABLE>
- ---------------
(1) 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.
Thereafter, the Company will begin making variable-rate payments tied to
one-month LIBOR.
(2) Variable rates, all of which are tied to one-month LIBOR, are presented on
the basis of rates in effect at December 31, 1998; however, actual
repricings of the interest rate swaps will be based on the applicable
interest rates in effect at the actual repricing dates.
At December 31, 1998, the Company had an interest rate swap hedging
mortgage servicing assets for which the accrual of interest does not begin until
November 1999. This forward starting interest rate swap
41
<PAGE> 42
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
matures in 2007 and has a notional amount of $100.0 million, a fixed-rate
receivable of 6.38% and a variable-rate payable tied to one-month LIBOR.
Activity in derivative financial instruments used to hedge mortgage
servicing assets is summarized in the following table for the years shown (in
thousands):
<TABLE>
<CAPTION>
INTEREST RATE INTEREST RATE INTEREST RATE
FLOORS CAPS SWAPS TOTAL
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995............ $ 1,219,776 $ -- $ -- $ 1,219,776
Amortization............................ (223,278) -- -- (223,278)
----------- -------- -------- -----------
Balance at December 31, 1996.......... 996,498 -- -- 996,498
Additions............................... 1,585,000 -- 400,000 1,985,000
Amortization............................ (196,984) -- -- (196,984)
----------- -------- -------- -----------
Balance at December 31, 1997.......... 2,384,514 -- 400,000 2,784,514
Additions............................... 2,025,000 400,000 400,000 2,825,000
Amortization............................ (421,746) -- -- (421,746)
Terminations............................ (1,585,000) -- -- (1,585,000)
----------- -------- -------- -----------
Balance at December 31, 1998............ $ 2,402,768 $400,000 $800,000 $ 3,602,768
=========== ======== ======== ===========
</TABLE>
Trading Derivative Financial Instruments
At December 31, 1998, 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 year-end 1998 was not material. The derivative financial instruments used for
trading purposes during 1998 had an average positive estimated fair value of
$0.1 million during the year. The Company did not use derivative financial
instruments for trading purposes during 1997 or 1996.
The interest rate cap agreements used by the Company at December 31, 1998
for trading purposes mature in 1999. These instruments had a weighted average
Cap Strike Rate of 6.91% at year-end 1998. The designated floating market
interest rates specified in these agreements were tied to one-month LIBOR.
NOTE 24 -- COMMITMENTS AND CONTINGENT LIABILITIES
The Company has entered into non-cancelable lease agreements with respect
to Company premises and equipment that expire at various dates through the year
2013. Certain leases contain escalation clauses, which correspond with increased
real estate taxes and other operating expenses, and renewal options calling for
increased rents. Net rent expense was $39.2 million, $23.7 million, and $17.7
million for 1998, 1997 and 1996, respectively. At December 31, 1998, the
projected minimum future rental payments required under the terms of
non-cancelable leases were $32.2 million in 1999, $29.2 million in 2000, $26.2
million in 2001, $23.4 million in 2002, $19.9 million in 2003, and $71.1 million
in years thereafter. The projected minimum future rental payments have not been
reduced by projected sublease rentals of $3.2 million.
42
<PAGE> 43
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company had the following commitments to extend credit and purchase
loans at December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Commitments to extend credit:
Residential real estate loans............................. $1,289,734 $ 632,098
Commercial real estate loans.............................. 223,486 115,560
Consumer loans............................................ 505,263 481,871
Business loans............................................ 159,115 73,247
---------- ----------
Total commitments to extend credit..................... 2,177,598 1,302,776
Commitments to purchase residential real estate loans....... 1,488,493 708,131
---------- ----------
Total commitments to extend credit and purchase loans....... $3,666,091 $2,010,907
========== ==========
</TABLE>
Commitments to extend credit are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Such
commitments generally have fixed expiration dates or termination clauses and may
require payment of a fee. Since certain of the commitments are expected to
expire without being drawn upon, the total commitment amounts may not represent
future cash requirements. The Company evaluates the creditworthiness of these
transactions through its lending policies. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on the
Company's credit evaluation of the borrower. The Company's maximum exposure to
credit loss for commitments to extend credit as a result of non-performance by
the counterparty is the contractual notional amount.
The Company had letters of credit outstanding at December 31, 1998 and 1997
of $62.0 million and $23.7 million, respectively. Letters of credit represent
agreements whereby the Company guarantees the performance of a customer to a
third party. The Company requires collateral to support such agreements based on
the Company's evaluation of the creditworthiness of the customer. The credit
risk associated with letters of credit is similar to that incurred by the
Company in its lending activities.
The Company is obligated under various limited recourse provisions
associated with certain residential and commercial real estate loans sold in
past years. The principal balance of loans sold with limited recourse amounted
to approximately $523 million and $648 million at December 31, 1998 and 1997,
respectively. The Company's exposure to credit loss on loans sold with recourse
is similar to the credit risk associated with the Company's on-balance sheet
loans receivable.
Certain claims, suits, complaints and investigations involving the Company,
arising in the ordinary course of business, have been filed or are pending. The
Company is of the opinion, after discussion with legal counsel representing the
Company in these proceedings, that the aggregate liability or loss, if any,
arising from the ultimate disposition of these matters would not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
NOTE 25 -- BUSINESS SEGMENTS
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements, requires that selected
information about operating segments be reported in interim financial statements
issued to stockholders, and establishes standards for related disclosures about
an enterprise's products and services, geographic areas, and major customers.
43
<PAGE> 44
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company manages its operations in a manner to focus on two strategic
goals: fulfilling its role as a banking institution for both individuals and
businesses and as a national provider of residential mortgage products and
services. Accordingly, the Company aligns its various business objectives in
support of these goals. For purposes of disclosures in accordance with SFAS No.
131, the Company has four reportable business segments: Retail Banking;
Commercial Banking; Mortgage Banking; and Investment Portfolio.
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 accounting policies employed for each unit are
largely the same as those described in Note 1, "Summary of Significant
Accounting Policies," 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 Company views its segments' performance on an operating earnings
basis, which represent 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 years ended December 31 (in thousands):
<TABLE>
<CAPTION>
TOTAL TOTAL
RETAIL COMMERCIAL MORTGAGE INVESTMENT REPORTABLE INTERSEGMENT OPERATING
BANKING BANKING BANKING PORTFOLIO SEGMENTS ELIMINATIONS EARNINGS
----------- ---------- ---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1998:
Segment revenues...... $ 413,110 $ 85,322 $ 531,996 $ 37,602 $ 1,068,030 $(57,854) $ 1,010,176
Segment profit........ 120,220 37,373 79,417 19,238 256,248 (39,191) 217,057
Percentage of segment
profit to total
profit of reportable
segments............ 46.9% 14.6% 31.0% 7.5% 100.0%
Segment assets at
year-end............ $ 9,833,981 $2,852,929 $5,464,037 $3,790,691 $21,941,638 $379,212 $22,320,850
1997:
Segment revenues...... $ 371,341 $ 74,504 $ 172,941 $ 39,389 $ 658,175 $(34,061) $ 624,114
Segment profit........ 106,968 32,973 17,854 19,849 177,644 (20,561) 157,083
Percentage of segment
profit to total
profit of reportable
segments............ 60.2% 18.6% 10.0% 11.2% 100.0%
Segment assets at
year-end............ $10,478,447 $2,330,137 $2,619,872 $5,946,568 $21,375,024 $472,976 $21,848,000
1996:
Segment revenues...... $ 338,442 $ 54,467 $ 98,183 $ 30,714 $ 521,806 $ (7,419) $ 514,387
Segment profit........ 89,707 21,380 240 13,923 125,250 (4,540) 120,710
Percentage of segment
profit to total
profit of reportable
segments............ 71.6% 17.1% 0.2% 11.1% 100.0%
Segment assets at
year-end............ $ 8,987,292 $1,905,798 $ 236,067 $7,447,326 $18,576,483 $293,625 $18,870,108
</TABLE>
For purposes of this presentation, segment revenues reflect net interest
income, less provision for loan losses, plus non-interest income. Segment profit
reflects tax-effected operating results. 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. To the extent
practicable, the results for 1997 and 1996 have been restated to be comparable
with management's preparation of the 1998 results.
44
<PAGE> 45
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The following table sets forth reconciliations of reportable segment
revenues and profit to the Company's consolidated totals for the year ended
December 31 (in thousands):
<TABLE>
<CAPTION>
OPERATING
OPERATING EARNINGS REPORTED
EARNINGS ADJUSTMENTS TOTALS
---------- ----------- ----------
<S> <C> <C> <C>
1998:
Segment revenues....................................... $1,010,176 $ 10,087 $1,020,263
Segment profit......................................... 217,057 20,029 237,086
1997:
Segment revenues....................................... 624,114 (44,761) 579,353
Segment profit......................................... 157,083 (35,369) 121,714
1996:
Segment revenues....................................... 514,387 (8,114) 506,273
Segment profit......................................... 120,710 (16,454) 104,256
Reconcilements of operating earnings to consolidated net income is provided below for the
year ended December 31 (in thousands):
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Operating earnings......................................... $217,057 $157,083 $120,710
Items not included in operating earnings:
Net losses related to balance sheet restructurings....... (635) (25,247) (8,114)
Net charges and adjustments related to acquisitions...... -- (21,431) (7,769)
Savings Association Insurance Fund recapitalization
assessment............................................ -- -- (26,280)
Gain on sale of deposits................................. 9,550 -- --
Other, net............................................... 1,172 (8,014) (5,583)
Income tax effect on above items......................... (3,731) 20,783 20,292
Adjustments to conform internal tax expense to corporate
tax expense........................................... 17,730 -- 11,000
Extraordinary losses on early extinguishment of debt, net
of tax benefits....................................... (4,057) (1,460) --
-------- -------- --------
Net adjustments after tax............................. 20,029 (35,369) (16,454)
-------- -------- --------
Consolidated net income.................................... $237,086 $121,714 $104,256
======== ======== ========
</TABLE>
45
<PAGE> 46
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additional information regarding the Company's business segments, including
a description of the products and services from which each business segment
derives its revenues, is disclosed in Item 1, "Business" and Item 8,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
NOTE 26 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires the disclosure, where practicable, of the fair value of on- and
off-balance sheet financial instruments. The fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any possible tax ramifications, estimated transaction
costs, or any premium or discount that could result from offering for sale at
any one time the Company's entire holdings of a particular financial instrument.
Because no active market exists for a certain portion of the Company's financial
instruments, the fair value estimates for such financial instruments are based
on judgments regarding, among other factors, future cash flows, future loss
experience, current economic conditions and risk characteristics. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect these estimates. The Company
has not included certain material items in its disclosure as such items, which
the Company believes have significant value, are not considered financial
instruments under SFAS No. 107.
The following table sets forth the carrying values and estimated fair
values of the Company's on-balance sheet financial instruments at December 31
(in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents........... $ 357,777 $ 357,777 $ 452,527 $ 452,527
Securities available for sale....... 3,329,444 3,329,444 4,992,304 4,992,304
FHLBNY stock........................ 324,106 324,106 303,287 303,287
Loans held for sale................. 3,884,886 3,893,985 1,841,862 1,851,657
Loans receivable, net(1)............ 12,580,325 12,917,676 12,879,789 13,002,929
Accrued interest receivable......... 97,124 97,124 106,829 106,829
Trading derivative financial
instruments...................... 3 3 -- --
Financial liabilities:
Deposits............................ 13,651,460 13,653,013 13,847,275 13,866,022
Federal funds purchased and
securities sold under agreements
to repurchase.................... 2,245,218 2,245,238 2,975,774 2,980,781
FHLBNY advances..................... 4,077,115 4,080,299 2,786,751 2,789,042
Senior notes........................ 198,906 203,855 142,475 153,410
Trust Preferred Securities.......... 162,005 176,423 196,137 230,937
Other borrowed funds................ 89,604 88,512 218,175 213,017
Accrued interest payable............ 41,014 41,014 50,981 50,981
</TABLE>
- ---------------
(1) Excludes the net book value of business lease financing receivables which
are not considered financial instruments under SFAS No. 107.
46
<PAGE> 47
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the carrying values and estimated fair
values of the derivative financial instruments used by the Company for
risk-management purposes at December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Interest rate swaps............................... $ 3,034 $(24,530) $(4,256) $(19,833)
Interest rate caps................................ 16,585 16,411 6,133 1,185
Interest rate floors.............................. 23,500 49,054 21,287 30,377
Interest rate swaptions........................... 46 -- 232 119
Interest rate futures............................. 331 -- 104 --
Forward contracts................................. 5,273 (9,976) 10,029 (4,760)
Put options on MBS forward contracts.............. 1,007 211 521 180
Put options on interest rate futures.............. -- -- 235 25
</TABLE>
The methodologies and assumptions used by the Company in estimating the
fair values of its financial instruments are described below.
The carrying value of cash and cash equivalents was deemed to be a
reasonable estimate of their fair value due to the short-term nature of these
items and because they do not present significant credit concerns.
The estimated fair value of securities available for sale was determined by
use of quoted market prices or dealer quotes.
The fair value of FHLBNY stock was estimated to be its carrying value,
which is indicative of its redemption price.
The estimated fair value of loans held for sale was estimated using the
quoted market prices for securities backed by similar types of loans and current
dealer commitments to purchase loans.
The estimated fair value of certain loans receivable was deemed to be equal
to their carrying value due to the repricing characteristics of the loans. For
other loans receivable, the Company grouped performing loans with similar
characteristics and applied prices available in the secondary market as a
reference and adjusted for differences in servicing and credit quality. When a
secondary market rate was not available, and for non-performing loans, fair
value was estimated using a discounted cash flow analysis that utilized a
discount rate commensurate with the credit and interest rate risk inherent in
the loans.
The estimated fair values of accrued interest receivable and payable have
been determined to equal their carrying amounts as these amounts are generally
due or payable within 90 days.
The estimated fair value of deposits without a specified maturity, which
includes demand, savings and money market deposits, was the amount payable on
the valuation date. For fixed-maturity time deposits, fair value was estimated
based on the discounted value of contractual cash flows using current market
interest rates offered for deposits with similar remaining maturities.
The estimated fair values of borrowed funds maturing within 90 days were
deemed to be equal to their carrying values. The estimated fair values of all
other borrowed funds were based on quoted market prices or on the discounted
value of contractual cash flows using current market interest rates for
borrowings with similar terms and remaining maturities.
The estimated fair values of the Company's derivative financial instruments
were based upon quoted market prices, dealer quotes or pricing models. The
estimated fair value of off-balance sheet financial
47
<PAGE> 48
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
instruments has not been considered in determining the estimated fair value of
on-balance sheet financial instruments.
The Company has reviewed its outstanding commitments to extend credit,
commitments to purchase loans, letters of credit and loans sold with recourse at
December 31, 1998 and 1997 and has determined that their estimated fair values
were not material.
NOTE 27 -- FINANCIAL STATEMENTS OF THE HOLDING COMPANY
STATEMENTS OF FINANCIAL CONDITION (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents:
Cash and due from banks................................ $ 537 $ 2,701
Interest-earning deposits in the Bank.................. 84,573 54,330
---------- ----------
Total cash and cash equivalents...................... 85,110 57,031
---------- ----------
Securities available for sale............................. 60,012 29,317
Receivables from the Bank................................. 81,941 102,475
Investment in the Bank.................................... 1,535,304 1,445,766
Investment in Dime Capital................................ 6,274 6,274
Other assets.............................................. 44,049 24,954
---------- ----------
Total assets................................................ $1,812,690 $1,665,817
========== ==========
Liabilities and stockholders' equity:
Liabilities:
Securities sold to the Bank under agreements to
repurchase............................................ $ 17,370 $ --
Senior notes........................................... 198,906 142,475
Series A Subordinated Debentures....................... 202,348 202,323
Other liabilities...................................... 6,245 6,161
---------- ----------
Total liabilities.................................... 424,869 350,959
---------- ----------
Stockholders' equity...................................... 1,387,821 1,314,858
---------- ----------
Total liabilities and stockholders' equity.................. $1,812,690 $1,665,817
========== ==========
</TABLE>
48
<PAGE> 49
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF INCOME (IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income:
Dividends from the Bank................................ $185,000 $159,000 $ 88,000
Dividends from Dime Capital............................ 577 289 --
Interest income........................................ 6,546 6,987 87
Other.................................................. 230 23 --
-------- -------- --------
Total income...................................... 192,353 166,299 88,087
-------- -------- --------
Expense:
Interest on borrowed funds............................. 34,148 31,758 19,638
Other.................................................. 3,508 3,348 3,071
-------- -------- --------
Total expense..................................... 37,656 35,106 22,709
-------- -------- --------
Income before income tax benefit, equity in undistributed
(overdistributed) net income of subsidiaries and
extraordinary items.................................... 154,697 131,193 65,378
Income tax benefit....................................... 13,474 10,736 10,283
-------- -------- --------
Income before equity in undistributed (overdistributed)
net income of subsidiaries and extraordinary items..... 168,171 141,929 75,661
Equity in undistributed (overdistributed) net income of
subsidiaries........................................... 72,636 (18,755) 28,595
-------- -------- --------
Income before extraordinary items........................ 240,807 123,174 104,256
Extraordinary items -- losses on early extinguishment of
debt, net of tax benefits of $785 (1998) and $895
(1997)................................................. (1,065) (1,460) --
-------- -------- --------
Net income............................................... $239,742 $121,714 $104,256
======== ======== ========
</TABLE>
49
<PAGE> 50
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS (IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 239,742 $ 121,714 $ 104,256
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in (undistributed) overdistributed net
income of subsidiaries........................... (72,637) 18,755 (28,595)
Gains on sales of securities....................... (213) (23) --
Losses on early extinguishment of debt............. 1,850 2,355 --
Other, net......................................... 2,315 (5,808) (9,700)
--------- --------- ---------
Net cash provided by operating activities........ 171,057 136,993 65,961
--------- --------- ---------
Cash flows from investing activities:
Purchases of securities available for sale............ (103,111) (29,497) --
Proceeds from sales of securities available for
sale............................................... 70,573 1,597 --
Proceeds from maturities of securities available for
sale
and held to maturity............................... 292 181 1,630
Investments in subsidiaries........................... -- (6,186) --
--------- --------- ---------
Net cash (used) provided by investing
activities.................................... (32,246) (33,905) 1,630
--------- --------- ---------
Cash flows from financing activities:
Net increase in securities sold to the Bank under
agreements to repurchase........................... 17,370 -- --
Proceeds from issuance of senior notes................ 99,818 -- --
Repayments of senior notes............................ (45,501) (57,681) --
Proceeds from issuance of the Series A Subordinated
Debentures......................................... -- 202,308 --
Proceeds from issuance of Common Stock and treasury
stock.............................................. 17,101 14,332 8,311
Purchases of treasury stock........................... (177,970) (200,354) (70,456)
Cash dividends paid on Common Stock................... (21,550) (12,892) --
Other................................................. -- 3,781 (1,913)
--------- --------- ---------
Net cash used by financing activities............ (110,732) (50,506) (64,058)
--------- --------- ---------
Net increase in cash and cash equivalents............... 28,079 52,582 3,533
Cash and cash equivalents at beginning of year.......... 57,031 4,449 916
--------- --------- ---------
Cash and cash equivalents at end of year................ $ 85,110 $ 57,031 $ 4,449
========= ========= =========
Supplemental non-cash flow investing information:
Securities held to maturity transferred to securities
available for sale................................. $ -- $ 840 $ --
</TABLE>
50
<PAGE> 51
DIME BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 28 -- CONDENSED QUARTERLY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------------------------------------- -----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income........... $346,986 $343,989 $357,111 $372,799 $368,106 $350,870 $338,968 $324,871
Interest expense.......... 213,822 216,668 226,274 236,888 241,581 230,703 219,871 207,598
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income..... 133,164 127,321 130,837 135,911 126,525 120,167 119,097 117,273
Provision for loan
losses.................. 8,000 8,000 8,000 8,000 8,000 8,000 23,000 10,000
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income
after provision for
loan losses........... 125,164 119,321 122,837 127,911 118,525 112,167 96,097 107,273
Non-interest income:
Loan servicing and other
fees.................. 60,604 53,819 42,631 42,450 36,321 12,856 12,978 11,883
Banking service fees.... 11,172 11,088 10,168 9,000 8,635 8,695 7,543 6,923
Securities and insurance
brokerage fees........ 7,565 8,704 8,957 7,510 6,777 5,142 5,767 6,051
Net gains on sales
activities............ 63,941 71,519 63,743 45,248 4,309 2,845 2,799 2,083
Other................... 1,343 751 2,491 2,326 2,128 742 149 665
-------- -------- -------- -------- -------- -------- -------- --------
Total non-interest
income........... 144,625 145,881 127,990 106,534 58,170 30,280 29,236 27,605
-------- -------- -------- -------- -------- -------- -------- --------
Non-interest expense:
General and
administrative
expense............... 147,565 143,155 147,885 133,234 117,471 73,580 73,690 72,381
Amortization of mortgage
servicing assets...... 30,826 27,633 16,897 16,935 14,034 5,248 5,267 5,202
ORE expense (income),
net................... 692 373 359 87 (643) 351 1,581 3,052
Restructuring and
related expense....... -- -- -- -- 9,931 -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total non-interest
expense.......... 179,083 171,161 165,141 150,256 140,793 79,179 80,538 80,635
-------- -------- -------- -------- -------- -------- -------- --------
Income before income tax
expense and
extraordinary items..... 90,706 94,041 85,686 84,189 35,902 63,268 44,795 54,243
Income tax expense........ 29,027 30,092 27,420 26,940 12,943 23,741 17,023 21,327
-------- -------- -------- -------- -------- -------- -------- --------
Income before
extraordinary items..... 61,679 63,949 58,266 57,249 22,959 39,527 27,772 32,916
Extraordinary
items -- losses on early
extinguishment of debt,
net of tax benefits..... -- (4,057) -- -- (1,460) -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income................ $ 61,679 $ 59,892 $ 58,266 $ 57,249 $ 21,499 $ 39,527 $ 27,772 $ 32,916
======== ======== ======== ======== ======== ======== ======== ========
Per common share:
Basic earnings:
Income before
extraordinary
items............... $ 0.55 $ 0.57 $ 0.51 $ 0.50 $ 0.20 $ 0.39 $ 0.27 $ 0.31
Net income............ 0.55 0.53 0.51 0.50 0.19 0.39 0.27 0.31
Diluted earnings:
Income before
extraordinary
items............... 0.55 0.56 0.50 0.49 0.19 0.38 0.26 0.31
Net income............ 0.55 0.52 0.50 0.49 0.18 0.38 0.26 0.31
Cash dividends
declared.............. 0.05 0.05 0.05 0.04 0.04 0.04 0.04 --
</TABLE>
51
<PAGE> 1
Exhibit 99.2
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 2
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the
Three Months Ended
March 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
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
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended
March 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
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
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
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):
<TABLE>
<CAPTION>
For the
Three Months Ended
March 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
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.
5
<PAGE> 6
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):
<TABLE>
<CAPTION>
Total Total
Retail Commercial Mortgage Investment Reportable Intersegment Operating
Banking Banking Banking Portfolio Segments Eliminations Earnings
------- ------- ------- --------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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.
6
<PAGE> 7
The following table sets forth reconciliations of reportable segment
revenues and profit to the Company's consolidated totals for the periods
indicated (in thousands):
<TABLE>
<CAPTION>
Operating
Operating Earnings Consolidated
Earnings Adjustments Totals
-------- ----------- ------
<S> <C> <C> <C>
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
</TABLE>
Reconcilements of operating earnings to consolidated net income are
provided in the following table for the periods indicated (in thousands):
<TABLE>
<CAPTION>
For the
Three Months Ended
March 31,
---------------------
1999 1998
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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):
<TABLE>
<CAPTION>
For the
Three Months Ended
March 31,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Net income $ 54,841 $ 57,249
Other comprehensive (loss) income (13,697) 6,727
-------- --------
Comprehensive income $ 41,144 $ 63,976
======== ========
</TABLE>
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.
7
<PAGE> 8
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.
8
<PAGE> 1
EXHIBIT 99.3
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 300,543 $ 279,490
Money market investments 12,588 78,287
Securities available for sale 3,498,006 3,329,444
Federal Home Loan Bank of New York stock 328,732 324,106
Loans held for sale 2,512,648 3,884,886
Loans receivable, net:
Residential real estate loans 8,088,718 8,919,817
Commercial real estate loans 3,005,934 2,567,750
Consumer loans 1,266,334 973,230
Business loans 350,196 287,271
Allowance for loan losses (121,381) (105,081)
------------ ------------
Total loans receivable, net 12,589,801 12,642,987
------------ ------------
Accrued interest receivable 99,205 97,124
Premises and equipment, net 186,113 170,879
Mortgage servicing assets 882,800 692,473
Other assets 1,019,347 821,174
------------ ------------
Total assets $ 21,429,783 $ 22,320,850
============ ============
LIABILITIES
Deposits $ 13,414,798 $ 13,651,460
Federal funds purchased and securities sold under agreements to repurchase 1,925,528 2,245,218
Other short-term borrowings 3,042,579 3,756,733
Long-term debt 1,000,232 608,892
Guaranteed preferred beneficial interests in Dime Bancorp, Inc.'s junior
subordinated deferrable interest debentures 152,208 162,005
Other liabilities 400,995 510,877
------------ ------------
Total liabilities 19,936,340 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 June 30, 1999 and December 31, 1998) 1,203 1,203
Additional paid-in capital 1,165,759 1,165,251
Retained earnings 561,428 463,907
Treasury stock, at cost (6,713,450 shares at June 30, 1999 and 8,682,858
shares at December 31, 1998) (180,480) (233,965)
Accumulated other comprehensive loss (48,642) (3,285)
Unearned compensation (5,825) (7,446)
------------ ------------
Total stockholders' equity 1,493,443 1,385,665
------------ ------------
Total liabilities and stockholders' equity $ 21,429,783 $ 22,320,850
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 2
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Residential real estate loans $ 187,254 $ 225,465 $ 390,070 $ 446,252
Commercial real estate loans 53,921 49,406 103,675 98,879
Consumer loans 22,042 17,181 41,696 33,503
Business loans 6,290 2,938 12,054 5,375
Mortgage-backed securities 52,545 50,878 101,443 123,938
Other securities 12,696 9,677 24,917 17,548
Money market investments 270 1,566 776 4,415
--------- --------- --------- ---------
Total interest income 335,018 357,111 674,631 729,910
--------- --------- --------- ---------
INTEREST EXPENSE
Deposits 116,511 139,037 236,353 278,065
Borrowed funds 78,617 87,237 162,890 185,097
--------- --------- --------- ---------
Total interest expense 195,128 226,274 399,243 463,162
--------- --------- --------- ---------
Net interest income 139,890 130,837 275,388 266,748
Provision for loan losses 7,500 8,000 15,500 16,000
--------- --------- --------- ---------
Net interest income after provision for loan losses 132,390 122,837 259,888 250,748
--------- --------- --------- ---------
NON-INTEREST INCOME
Loan servicing and production fees 69,716 42,631 131,644 85,081
Banking service fees 12,587 10,168 23,854 19,168
Securities and insurance brokerage fees 10,052 8,957 18,656 16,467
Net gains on sales activities 57,696 63,743 122,003 108,991
Other 2,452 2,491 5,576 4,817
--------- --------- --------- ---------
Total non-interest income 152,503 127,990 301,733 234,524
--------- --------- --------- ---------
NON-INTEREST EXPENSE
General and administrative expense:
Compensation and employee benefits 75,201 69,661 151,674 134,456
Occupancy and equipment 25,901 22,467 50,687 44,331
Other 48,559 53,280 96,896 97,063
--------- --------- --------- ---------
Total general and administrative expense 149,661 145,408 299,257 275,850
Amortization of mortgage servicing assets 35,200 16,897 65,857 33,832
Amortization of goodwill 3,497 2,836 6,373 5,715
--------- --------- --------- ---------
Total non-interest expense 188,358 165,141 371,487 315,397
--------- --------- --------- ---------
Income before income tax expense and extraordinary items 96,535 85,686 190,134 169,875
Income tax expense 35,718 27,420 70,349 54,360
--------- --------- --------- ---------
Income before extraordinary items 60,817 58,266 119,785 115,515
Extraordinary items -- losses on early extinguishment of
debt, net of tax benefits of $3,044 -- -- (4,127) --
--------- --------- --------- ---------
Net income $ 60,817 $ 58,266 $ 115,658 $ 115,515
========= ========= ========= =========
PER COMMON SHARE
Basic earnings:
Income before extraordinary items $ 0.54 $ 0.51 $ 1.08 $ 1.01
Extraordinary items -- -- (0.04) --
--------- --------- --------- ---------
Net income $ 0.54 $ 0.51 $ 1.04 $ 1.01
========= ========= ========= =========
Diluted earnings:
Income before extraordinary items $ 0.54 $ 0.50 $ 1.06 $ 0.99
Extraordinary items -- -- (0.03) --
--------- --------- --------- ---------
Net income $ 0.54 $ 0.50 $ 1.03 $ 0.99
========= ========= ========= =========
Dividends declared $ 0.06 $ 0.05 $ 0.11 $ 0.09
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
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 508 3,354
----------- -----------
Balance at end of period 1,165,759 1,161,575
----------- -----------
RETAINED EARNINGS
Balance at beginning of period 463,907 261,201
Net income 115,658 115,515
Cash dividends declared on common stock (12,224) (10,295)
Treasury stock issued in connection with acquisition (4,256) --
Treasury stock issued under employee benefit plans, net (1,657) (7,615)
----------- -----------
Balance at end of period 561,428 358,806
----------- -----------
TREASURY STOCK, AT COST
Balance at beginning of period (233,965) (95,221)
Treasury stock purchased (22,626) (113,106)
Treasury stock issued in connection with acquisition 73,444 --
Treasury stock issued under employee benefit plans, net 2,667 26,690
----------- -----------
Balance at end of period (180,480) (181,637)
----------- -----------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of period (3,285) (9,534)
Other comprehensive (loss) income (45,357) 7,506
----------- -----------
Balance at end of period (48,642) (2,028)
----------- -----------
UNEARNED COMPENSATION
Balance at beginning of period (7,446) (1,012)
Restricted stock activity, net 7 (7,748)
Amortization of unearned compensation, net 1,614 1,224
----------- -----------
Balance at end of period (5,825) (7,536)
----------- -----------
Total stockholders' equity $ 1,493,443 $ 1,330,383
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 115,658 $ 115,515
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Provision for loan losses 15,500 16,000
Depreciation, amortization and accretion, net 103,054 73,735
Provision for deferred income tax expense 55,708 44,572
Net securities losses (gains) 47 (16,946)
Losses on early extinguishment of debt 7,171 --
Net decrease (increase) in loans held for sale 1,372,238 (697,194)
Other, net (302,952) (167,267)
----------- -----------
Net cash provided (used) by operating activities 1,366,424 (631,585)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (1,193,058) (181,736)
Proceeds from sales of securities available for sale 867,663 1,489,480
Proceeds from maturities of securities available for sale 524,838 791,041
Purchases of Federal Home Loan Bank of New York stock -- (20,819)
Loans receivable originated and purchased, net of principal payments (195,018) (453,506)
Proceeds from sales of loans 48,979 2,257
Acquisitions, net of cash and cash equivalents acquired (16,578) --
Proceeds from sales of other real estate owned 11,284 8,732
Net purchases of premises and equipment (23,166) (26,164)
----------- -----------
Net cash provided by investing activities 24,944 1,609,285
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits (698,609) 185,212
Net decrease in borrowings with original maturities of three months or less (558,974) (990,439)
Proceeds from other borrowings 100,645 --
Repayments of other borrowings (245,243) (238,164)
Proceeds from issuances of common and treasury stock 1,017 11,327
Purchases of treasury stock (22,626) (113,106)
Cash dividends paid on common stock (12,224) (10,295)
----------- -----------
Net cash used by financing activities (1,436,014) (1,155,465)
----------- -----------
Net decrease in cash and cash equivalents (44,646) (177,765)
Cash and cash equivalents at beginning of period 357,777 452,527
----------- -----------
Cash and cash equivalents at end of period $ 313,131 $ 274,762
=========== ===========
Supplemental cash flow information:
Interest payments on deposits and borrowed funds $ 395,940 $ 474,602
Income tax payments (refunds), net 3,499 (3,500)
Supplemental non-cash investing information:
Securitization of loans receivable 491,761 --
Loans held for sale transferred to loans receivable -- 296,608
Loans receivable transferred to loans held for sale -- 779,719
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
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 such financial statements as of the dates, or for the periods, indicated. The
unaudited consolidated financial statements presented herein should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Holding Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (the "1998 10-K"). Certain amounts in the prior periods have
been reclassified to conform with the presentation for the current period. The
results for the three months and six months ended June 30, 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):
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic earnings per common share:
Numerators:
Income before extraordinary items $ 60,817 $ 58,266 $ 119,785 $ 115,515
Extraordinary items -- -- (4,127) --
--------- --------- --------- ---------
Net income $ 60,817 $ 58,266 $ 115,658 $ 115,515
========= ========= ========= =========
Denominator:
Weighted average number of common shares outstanding 111,958 114,016 111,470 114,584
Basic earnings per common share:
Income before extraordinary items $ 0.54 $ 0.51 $ 1.08 $ 1.01
Extraordinary items -- -- (0.04) --
--------- --------- --------- ---------
Net income $ 0.54 $ 0.51 $ 1.04 $ 1.01
========= ========= ========= =========
Diluted earnings per common share:
Numerators:
Income before extraordinary items $ 60,817 $ 58,266 $ 119,785 $ 115,515
Extraordinary items -- -- (4,127) --
--------- --------- --------- ---------
Net income $ 60,817 $ 58,266 $ 115,658 $ 115,515
========= ========= ========= =========
Denominator:
Weighted average number of common shares outstanding 111,958 114,016 111,470 114,584
Common equivalent shares due to stock options, restricted
stock and employee stock purchase rights 1,281 1,790 1,371 1,893
--------- --------- --------- ---------
Weighted average number of diluted shares outstanding 113,239 115,806 112,841 116,477
========= ========= ========= =========
Diluted earnings per common share:
Income before extraordinary items $ 0.54 $ 0.50 $ 1.06 $ 0.99
Extraordinary items -- -- (0.03) --
--------- --------- --------- ---------
Net income $ 0.54 $ 0.50 $ 1.03 $ 0.99
========= ========= ========= =========
</TABLE>
5
<PAGE> 6
NOTE 3 -- COMPREHENSIVE INCOME
The following table sets forth the Company's comprehensive income for
the periods indicated (in thousands):
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 60,817 $ 58,266 $ 115,658 $ 115,515
Other comprehensive (loss) income (31,660) 779 (45,357) 7,506
--------- --------- --------- ---------
Comprehensive income $ 29,157 $ 59,045 $ 70,301 $ 123,021
========= ========= ========= =========
</TABLE>
NOTE 4 -- ACQUISITIONS
After the close of business on May 21, 1999, the Company acquired
Lakeview Financial Corp ("Lakeview") in a transaction accounted for under the
purchase method (the "Lakeview Acquisition"). Lakeview was the holding company
for Lakeview Savings Bank, which, at the date of acquisition, operated 11
branches in northern New Jersey. At the date of acquisition, Lakeview had
consolidated assets of $560.6 million, including loans receivable, net, of
$282.0 million, and consolidated liabilities of $515.9 million, including
deposits of $461.9 million. Under the terms of the agreement, holders of
Lakeview's common stock received 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. In connection therewith, the Holding Company issued 2,851,938 shares of
its common stock from treasury at an aggregate assigned cost of $69.2 million
and paid a total of $41.4 million in cash. Goodwill arising from the Lakeview
Acquisition amounted to $75.5 million as of June 30, 1999.
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. ("Citibank"). This acquisition was consummated effective as of
August 1, 1999 and was accounted for under the purchase method (the "Citibank
Automobile Finance Business Acquisition"). In connection therewith, the Bank
acquired loans receivable of approximately $950 million, consisting largely of
consumer and business loans. As part of this transaction, the Bank also assumed
deposits of approximately $50 million.
On May 27, 1999, the Holding Company announced that the Bank had
entered into a definitive agreement to acquire all of KeyBank N.A.'s ("KeyBank")
28 banking branches located in New York's Nassau and Suffolk Counties (the
"Pending KeyBank Branch Acquisition"). At the date of the announcement, these
branches had approximately $1.3 billion of deposits. As part of this
transaction, the Bank will also acquire business and consumer loans associated
with these branches, the total of which amounted to approximately $415 million
as of the announcement date. This acquisition, which is subject to regulatory
approval, is currently expected to close in October 1999 and will be accounted
for using the purchase method.
NOTE 5 -- RECENT ACCOUNTING DEVELOPMENTS
Effective January 1, 1999, the Company adopted Statement of Financial
Accounting Standards ("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
6
<PAGE> 7
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, as amended in July
1999 by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," is
effective for fiscal years beginning after June 15, 2000. The Company intends to
adopt SFAS No. 133 on January 1, 2001. 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.
7
<PAGE> 1
EXHIBIT 99.4
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
JeffBanks, Inc.
We have audited the accompanying consolidated balance sheets of JeffBanks,
Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in shareholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of JeffBanks,
Inc. and Subsidiaries as of December 31, 1998 and 1997, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Grant Thornton LLP
- ----------------------------
Philadelphia, Pennsylvania
January 19, 1999
1
<PAGE> 2
JeffBanks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
------------ -------------
(in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks .................................................... $ 54,599 $ 52,601
Federal funds sold ......................................................... -- 95,236
---------- ----------
54,599 147,837
Investment securities available for sale ...................................... 301,366 364,501
Investment securities held to maturity ........................................ 677 682
Mortgages held for sale ....................................................... 14,600 4,327
Loans, net .................................................................... 1,202,932 987,681
Premises and equipment, net ................................................... 24,085 19,518
Accrued interest receivable ................................................... 15,929 9,094
Other real estate owned ....................................................... 3,114 2,265
Goodwill ...................................................................... 4,059 4,435
Other assets .................................................................. 15,745 20,670
---------- ----------
Total assets .............................................................. $1,637,106 $1,561,010
========== ==========
LIABILITIES
Deposits
Demand (non-interest bearing) .............................................. $ 207,881 $ 156,167
Savings and money market ................................................... 465,984 421,321
Time deposits .............................................................. 477,057 398,476
Time deposits, $100,000 and over ........................................... 125,358 109,663
---------- ----------
1,276,280 1,085,627
Securities sold under repurchase agreements ................................... 39,635 70,911
FHLB advances - short term .................................................... 55,000 148,000
FHLB advances - long term ..................................................... 54,182 55,511
Subordinated notes and debentures ............................................. 32,000 34,750
Guaranteed preferred beneficial interest in the Company's subordinated debt ... 25,300 25,300
Accrued interest payable ...................................................... 15,444 15,734
Other liabilities ............................................................. 7,587 3,371
---------- ----------
Total liabilities ......................................................... 1,505,428 1,439,204
SHAREHOLDERS' EQUITY
Common stock - authorized, 20,000,000 shares of $1.00 par value; issued and
outstanding, 10,486,620 and 6,094,000 shares, respectively ................... 10,487 6,094
Additional paid-in capital .................................................... 97,308 95,150
Retained earnings ............................................................. 21,933 19,308
Accumulated other comprehensive income ........................................ 1,950 1,254
---------- ----------
Total shareholders' equity ................................................ 131,678 121,806
---------- ----------
Total liabilities and shareholders' equity ................................ $1,637,106 $1,561,010
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 3
JeffBanks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1998 1997 1996
------------ ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C>
Interest income
Loans, including fees ........................................... $ 99,924 $ 87,794 $ 86,145
Investment securities ........................................... 21,025 18,895 18,548
Federal funds sold .............................................. 2,544 3,931 2,407
--------- -------- --------
123,493 110,620 107,100
--------- -------- --------
Interest expense
Time deposits, $100,000 and over ................................ 6,560 5,482 5,362
Other deposits .................................................. 42,298 35,294 34,886
FHLB advances ................................................... 7,303 6,586 6,238
Subordinated notes and debentures ............................... 3,026 3,095 2,621
Preferred securities ............................................ 2,341 2,119 --
Securities sold under repurchase agreements ..................... 2,192 3,076 2,834
--------- -------- --------
63,720 55,652 51,941
--------- -------- --------
Net interest income ........................................... 59,773 54,968 55,159
Provision for credit losses ...................................... 5,963 3,700 10,115
--------- -------- --------
Net interest income after provision for credit losses ......... 53,810 51,268 45,044
--------- -------- --------
Non-interest income
Service fees on deposit accounts ................................ 3,568 3,497 3,284
Mortgage servicing fees ......................................... 1,211 1,103 1,262
Gain on sales of residential mortgages and capitalized mortgage
servicing rights .............................................. 3,388 3,105 2,646
Gain on sales of investment securities .......................... 1,152 515 245
Merchant credit card deposit fees ............................... 2,420 1,968 1,593
Credit card fee income .......................................... 797 432 145
Other ........................................................... 2,679 2,583 1,321
--------- -------- --------
15,215 13,203 10,496
--------- -------- --------
Non-interest expense
Salaries and employee benefits .................................. 24,210 21,693 20,765
Occupancy expense ............................................... 4,623 4,187 4,205
Depreciation .................................................... 2,451 2,070 2,023
FDIC expense .................................................... 124 496 87
Data processing expense ......................................... 1,240 979 1,447
Legal ........................................................... 1,907 2,234 1,477
Stationery, printing and supplies ............................... 1,303 957 941
Shares tax ...................................................... 1,010 951 904
Advertising ..................................................... 1,445 1,227 1,225
Other real estate owned maintenance expense ..................... 345 201 230
Loss on sale and write-downs of other real estate owned ......... 170 454 500
Amortization of intangibles ..................................... 919 1,360 1,371
Merchant credit card deposit expense ............................ 1,954 1,597 1,218
Credit card origination expense ................................. 838 490 235
Credit card processing expense .................................. 874 577 318
IPF servicing ................................................... -- 567 2,323
Other ........................................................... 10,180 6,530 6,953
--------- -------- --------
53,593 46,570 46,222
--------- -------- --------
Income before income taxes .................................... 15,432 17,901 9,318
Income taxes ..................................................... 4,000 4,570 4,238
--------- -------- --------
Net income .................................................... 11,432 13,331 5,080
Preferred stock dividends ........................................ -- (467) (142)
--------- -------- --------
Net income available to common shareholders ................... $ 11,432 $ 12,864 $ 4,938
========= ======== ========
Per share data
Net income per common share - basic ............................. $ 1.11 $ 1.33 $ 0.56
Net income per common share - diluted ........................... $ 1.04 $ 1.25 $ 0.53
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
JeffBanks, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
<TABLE>
<CAPTION>
Additional
Common Preferred paid-in
stock stock capital
------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C>
Balance at January 1, 1996 .................... $ 5,011 $ 177 $ 76,726
Net income .................................... -- -- --
Conversion of preferred stock ................. 25 (25) --
Issuance of common stock for 401(k)
plan ......................................... 10 -- 255
Issuance of common stock ...................... 45 -- 955
Costs to establish a dividend reinvestment
plan ......................................... -- -- (26)
Issuance of common stock for dividend
reinvestment plan ............................ 7 -- 166
Issuance of preferred stock as dividends ...... -- 14 383
Cash dividends on common stock ................ -- -- --
Warrants exercised ............................ 50 -- 826
Other comprehensive income, net of
reclassification adjustments and taxes ....... -- -- --
-------- ------- --------
Comprehensive income .......................... -- -- --
Balance at December 31, 1996 .................. 5,148 166 79,285
Net income .................................... -- -- --
Issuance of common stock for 401(k)
plan ......................................... 19 -- 493
Issuance of preferred stock ................... -- 5 101
Issuance of preferred stock as dividends ...... -- 13 454
Issuance of common stock for dividend
reinvestment plan ............................ 7 -- 220
Warrants and stock options exercised .......... 22 -- 357
Conversion of preferred stock ................. 179 (179) --
Redemption of preferred stock ................. 1 (5) (139)
Stock issued to acquire minority interest ..... 481 -- 8,273
Cash dividends on common stock ................ -- -- --
5% stock dividend ............................. 237 -- 6,106
Other comprehensive income, net of
reclassification adjustments and taxes ....... -- -- --
-------- ------- --------
Comprehensive income .......................... -- -- --
Balance at December 31, 1997 .................. 6,094 -- 95,150
Net income .................................... -- -- --
Issuance of common stock for dividend
reinvestment plan ............................ 5 -- 165
Warrants and stock options exercised .......... 257 -- 2,318
Cash dividends on common stock ................ -- -- --
Stock split ................................... 4,147 -- --
Purchase of common stock for benefit
plan ......................................... (16) -- (325)
Other comprehensive income, net of
reclassification adjustments and taxes ....... -- -- --
-------- ------- --------
Comprehensive income .......................... -- -- --
Balance at December 31, 1998 .................. $ 10,487 $ -- $ 97,308
======== ======= ========
</TABLE>
4
<PAGE> 5
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Accumulated
other
Retained comprehensive Comprehensive
earnings income income Total
------------ --------------- -------------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Balance at January 1, 1996 .................... $ 13,821 $ 336 -- $ 96,071
Net income .................................... 5,080 -- $ 5,080 5,080
Conversion of preferred stock ................. -- -- -- --
Issuance of common stock for 401(k)
plan ......................................... -- -- -- 265
Issuance of common stock ...................... -- -- -- 1,000
Costs to establish a dividend reinvestment
plan ......................................... -- -- -- (26)
Issuance of common stock for dividend
reinvestment plan ............................ -- -- -- 173
Issuance of preferred stock as dividends ...... (397) -- -- --
Cash dividends on common stock ................ (2,332) -- -- (2,332)
Warrants exercised ............................ -- -- -- 876
Other comprehensive income, net of
reclassification adjustments and taxes ....... -- (830) (830) (830)
-------- ------- ------- --------
Comprehensive income .......................... -- -- $ 4,250 --
=======
Balance at December 31, 1996 .................. 16,172 (494) -- 100,277
Net income .................................... 13,331 -- 13,331 13,331
Issuance of common stock for 401(k)
plan ......................................... -- -- -- 512
Issuance of preferred stock ................... -- -- -- 106
Issuance of preferred stock as dividends ...... (467) -- -- --
Issuance of common stock for dividend
reinvestment plan ............................ -- -- -- 227
Warrants and stock options exercised .......... -- --- -- 379
Conversion of preferred stock ................. -- -- -- --
Redemption of preferred stock ................. -- -- -- (143)
Stock issued to acquire minority interest ..... -- -- -- 8,754
Cash dividends on common stock ................ (3,385) -- -- (3,385)
5% stock dividend ............................. (6,343) -- -- --
Other comprehensive income, net of
reclassification adjustments and taxes ....... -- 1,748 1,748 1,748
-------- ------- ------- --------
Comprehensive income .......................... -- -- $15,079 --
=======
Balance at December 31, 1997 .................. 19,308 1,254 -- 121,806
Net income .................................... 11,432 -- 11,432 11,432
Issuance of common stock for dividend
reinvestment plan ............................ -- -- -- 170
Warrants and stock options exercised .......... -- -- -- 2,575
Cash dividends on common stock ................ (4,660) -- -- (4,660)
Stock split ................................... (4,147) -- -- --
Purchase of common stock for benefit
plan ......................................... -- -- -- (341)
Other comprehensive income, net of
reclassification adjustments and taxes ....... -- 696 696 696
-------- ------- ------- --------
Comprehensive income .......................... -- -- $12,128 --
=======
Balance at December 31, 1998 .................. $ 21,933 $ 1,950 $131,678
======== ======= ========
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE> 6
JeffBanks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
Operating activities
Net income ..................................................... $ 11,432 $ 13,331 $ 5,080
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization ................................ 4,174 4,568 5,733
Provision for credit losses .................................. 5,963 3,700 10,115
Gain on sales of investment securities ....................... (1,152) (515) (245)
Mortgage loans originated for sale ........................... (203,172) (118,022) (159,027)
Mortgage loan sales .......................................... 192,899 113,945 173,864
Increase in interest receivable .............................. (6,835) (133) (111)
(Decrease) increase in interest payable ...................... (290) 2,858 118
Decrease (increase) in other assets .......................... 4,009 (4,444) (5,495)
Increase in other liabilities ................................ 4,216 1,158 986
---------- ---------- ----------
Net cash provided by operating activities ................... 11,244 16,446 31,018
---------- ---------- ----------
Investing activities
Proceeds from sales of investment securities available for sale 157,486 128,628 31,189
Proceeds from maturities of investment securities available
for sale ..................................................... 101,221 65,285 80,548
Proceeds from maturities of investment securities held to
maturity ..................................................... -- 11,287 18,815
Purchases of investment securities available for sale .......... (194,150) (288,709) (112,256)
Proceeds from sales of other real estate owned ................. 1,629 2,390 3,147
Net increase in loans .......................................... (223,692) (93,591) (52,060)
Purchases of premises and equipment ............................ (7,018) (5,311) (3,773)
---------- ---------- ----------
Net cash used in investing activities ....................... (164,524) (180,021) (34,390)
---------- ---------- ----------
Financing activities
Net increase (decrease) in deposits ............................ 190,653 113,414 (64,385)
Net (decrease) increase in repurchase agreements ............... (31,276) (2,853) 27,215
Net proceeds from issuance of common stock ..................... 2,745 9,872 2,287
Net proceeds from issuance of preferred stock .................. -- (37) --
Purchase of common stock for benefit plan ...................... (341) -- --
(Decrease) increase in FHLB advances ........................... (94,329) 71,625 5,832
(Redemption) issuance of subordinated notes .................... (2,750) -- 23,000
Proceeds from issuance of preferred securities ................. -- 25,300 --
Dividends paid on common stock ................................. (4,660) (3,385) (2,441)
---------- ---------- ----------
Net cash provided by (used in) financing activities ......... 60,042 213,936 (8,492)
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents ............ (93,238) 50,361 (11,864)
Cash and cash equivalents at beginning of year .................. 147,837 97,476 109,340
---------- ---------- ----------
Cash and cash equivalents at end of year ........................ $ 54,599 $ 147,837 $ 97,476
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
The accounting policies followed by JeffBanks, Inc. (the Company), and its
wholly-owned subsidiaries, Jefferson Bank (JBPA) and Jefferson Bank of New
Jersey (JBNJ) (collectively referred to as the Banks), conform to generally
accepted accounting principles and predominant practices within the banking
industry. The Company is registered under the Bank Holding Company Act of 1956.
The Banks are state-chartered banks regulated by the Pennsylvania Department of
Banking and the New Jersey Department of Banking, respectively, and the Federal
Deposit Insurance Corporation.
The Banks operate as commercial banks offering a wide variety of
commercial loans and, to a lesser degree, consumer credits, primarily indirect
automobile loans. Their primary future strategic aim is to establish a
reputation and market presence as the "small and middle market business bank"
in their principal markets. The Company funds its loans primarily by offering
time, savings and money market, and demand deposit accounts to both commercial
enterprises and individuals. Additionally, the Company originates and, in
limited amounts, purchases residential mortgage loans, and services such loans
which are owned by other investors. Also, the Company serves as a processor of
merchant credit card deposits. However, these activities are peripheral to the
Company's core business of commercial and consumer lending, and represent less
significant aspects of its operations, as determined by their net contributions
to net income. Principal markets consist of Philadelphia and contiguous
Pennsylvania and southern New Jersey counties.
The Company and the Banks are subject to regulations of certain state and
federal agencies and, accordingly, they are periodically examined by those
regulatory authorities. As a consequence of the extensive regulation of
commercial banking activities, the Banks' business is particularly susceptible
to being affected by state and federal legislation and regulations.
Basis of financial statement presentation
The accounting and reporting policies of the Company and the Banks conform
with generally accepted accounting principles and predominant practices within
the banking industry. All intercompany balances and transactions have been
eliminated. As described in note 2, the Company's acquisitions of Regent
National Bank in 1998 and United Valley Bank in 1997 were accounted for under
the pooling of interests method of accounting. Accordingly, all prior period
amounts have been restated to reflect the acquisitions.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. These estimates and assumptions also affect reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Significant estimates implicit in these
financial statements are as follows.
The principal estimates that are particularly susceptible to significant
change in the near term relate to the allowance for credit losses; certain
intangible assets, such as goodwill, core deposits, and mortgage servicing
rights; and other real estate owned.
The evaluation of the adequacy of the allowance for credit losses
includes, among other factors, an analysis of historical loss rates, by
category, applied to current loan totals. However, actual losses may be higher
or lower than historical trends, which vary. Actual losses on specified problem
loans, which also are provided for in the evaluation, may vary from estimated
loss percentages, which are established based upon a limited number of
potential loss classifications.
Substantially all outstanding goodwill resulted from the acquisition of
Constitution Bank in 1996, a central Philadelphia institution which had
developed a compelling, if not predominant, market position of being the small
business bank in Philadelphia. As the result of Constitution Bank's market
penetration, JBPA had formulated its own strategy to create such a market role.
Accordingly, implicit in the purchase of the Constitution Bank franchise was
the acquisition of that role. However, if such benefits, including new
business, are not derived or JBPA changes its business plan, estimated
amortization may increase and/or a charge for impairment may be recognized.
Core deposit intangibles are amortized over estimated lives of deposit
accounts. However, decreases in deposit lives may result in increased
amortization and/or a charge for impairment may be recognized.
Mortgage servicing rights are amortized consistent with prepayment
estimates. However, if prepayments differ from those estimates, or if market
values decline in excess of amortization recognized, future amortization may
increase and/or a charge for impairment may be recognized.
Other real estate owned is written down to market based both upon
estimates derived through appraisals and other resources. However, realization
of sales proceeds may ultimately be higher or lower than those estimates.
7
<PAGE> 8
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES -- (Continued)
Direct origination costs for credit cards are capitalized and amortized
over card terms to match related expense with future growth in balances and
resulting income. However, if such growth in balances and income does not
occur, estimated amortization may increase and/or a charge for impairment may
be recognized.
The Company's securities and loan portfolios include interest on
investments which is exempt from federal and state income tax under current tax
laws. Should tax rates be reduced or tax laws be changed to reduce exemptions,
after tax yields would be reduced.
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," which is effective for years beginning after December 15, 1997. This
new standard requires entities presenting a complete set of financial
statements to include details of comprehensive income. Comprehensive income
consists of net income or loss for the current period and income, expenses,
gains, and losses that bypass the income statement and are reported directly in
a separate component of equity. The adoption of SFAS No. 130 has not had a
material effect on the presentation of the Company's financial position or
results of operations.
The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," which is effective for all periods beginning after
December 15, 1997. SFAS No. 131 requires that public business enterprises
report certain information about operating segments in complete sets of
financial statements of the enterprise and in condensed financial statements of
interim periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. Management
has determined that under current conditions, the Company will report one
business segment.
Investment securities
The Company accounts for its investment securities in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
This standard requires investments in securities to be classified in one of
three categories: held to maturity, trading, or available for sale. Investments
in debt and equity securities, for which management has both the ability and
intent to hold to maturity, are carried at cost, adjusted for the amortization
of premiums and accretion of discounts computed by the interest method.
Investments in debt and equity securities, which management believes may be
sold prior to maturity due to changes in interest rates, prepayment risk and
equity, liquidity requirements, or other factors, are classified as available
for sale. Net unrealized gains and losses for such securities, net of tax
effect, are reported in other comprehensive income and excluded from the
determination of net income. The Company does not engage in security trading.
Gains or losses on disposition of investment securities are based on the net
proceeds and the adjusted carrying amount of the securities sold using the
specific identification method.
Loans and allowance for credit losses
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at the amount of
unpaid principal and are net of unearned discount, unearned loan fees and an
allowance for credit losses. The allowance for credit losses is established
through a provision for credit losses charged to expense. Loan principal
considered to be uncollectible by management is charged against the allowance
for credit losses. The allowance is an amount that management believes will be
adequate to absorb possible losses on existing loans that may become
uncollectible based upon an evaluation of known and inherent risks in the loan
portfolio. The evaluation takes into consideration such factors as changes in
the nature and size of the loan portfolio, overall portfolio quality, specific
problem loans, and current and future economic conditions which may affect the
borrowers' ability to pay. The evaluation also details historical losses by
loan category, the resulting loss rates for which are projected at current loan
total amounts.
Interest income is accrued as earned on a simple interest basis. Accrual
of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of interest is doubtful.
When a loan is placed on such non-accrual status, all accumulated accrued
interest receivable applicable to periods prior to the current year is charged
off to the allowance for credit losses. Interest which had accrued in the
current year is reversed out of current period income. Loans 90 days or more
past due and still accruing interest must have both principal and accruing
interest adequately secured and must be in the process of collection.
8
<PAGE> 9
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES -- (Continued)
The Company accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures". This standard requires that a creditor measure impairment based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price, or the fair value
of the collateral if the loan is collateral-dependent. Regardless of the
measurement method, a creditor must measure impairment based on the fair value
of the collateral when the creditor determines that foreclosure is probable.
Bank premises and equipment
Bank premises and equipment, including leasehold improvements, are stated
at cost less accumulated depreciation. Depreciation expense is computed on the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are depreciated over the shorter of the estimated useful lives of
the improvements or the terms of the related leases.
Other real estate owned
Other real estate owned, representing property acquired through
foreclosure, is carried at the lower of the principal balance of the secured
loan or fair value less estimated disposal costs of the acquired property.
Costs relating to holding the assets are charged to expense. Loans in the
amount of $-0- and $511,000 in 1998 and 1997, respectively, were made on
competitive terms and in conformity with normal underwriting standards to
facilitate the sale of other real estate owned.
Goodwill and core deposit intangibles
Substantially all outstanding goodwill resulted from the acquisition of
Constitution Bank in 1996 and is being amortized on a straight-line basis over
approximately 15 years. The unamortized balance at December 31, 1998 and 1997
was $3,637,000 and $3,958,000, respectively. In connection with management's
evaluation of the realizability of its deferred tax assets associated with
recent acquisitions, it was determined that the deferred tax asset was more
realizable than not. Accordingly, at December 31, 1997, the deferred tax
valuation account and goodwill were reduced by $3,668,000.
Additionally, as a result of the Constitution Bank acquisition, the
Company recognized approximately $2,300,000 of core deposit intangibles which
is being amortized on a straight-line basis over approximately seven years. The
unamortized balance at December 31, 1998 and 1997 was $1,231,000 and
$1,560,000, respectively.
Other assets
Deferred financing fees of $1,153,000, related to the issuance of trust
preferred securities are being amortized over the remainder of the 30-year term
of the underlying obligations. The unamortized balance at December 31, 1998 and
1997 was $1,082,000 and $1,121,000, respectively.
Deferred financing fees of $1,368,000, related to the issuance of
subordinated notes and debentures, are being amortized over the remainder of
the original 10-year term of the instruments and are included in other assets.
The unamortized balances at December 31, 1998 and 1997 were $916,000 and
$1,061,000, respectively.
Certain direct origination costs for credit cards are capitalized and are
being amortized over a two-year or four-year period depending on the term of
the credit card. At December 31, 1998 and 1997, the unamortized balance was
$1,563,000 and $2,276,000, respectively.
Mortgage servicing
The Company performs various servicing functions on loans owned by others.
A fee, usually based on a percentage of the outstanding principal balance of
the loan, is received for these services. At December 31, 1998 and 1997, the
Company was servicing approximately $363,350,000 and $363,805,000,
respectively, of loans for others.
During 1998, 1997 and 1996, the Banks purchased $77,000, $18,000, and
$22,000, respectively, of mortgage servicing rights. The servicing rights are
amortized in proportion to and over the period of estimated net servicing
income. Additional amortization is recognized when prepayments exceed expected
amounts. Unamortized purchased mortgage servicing rights are included in other
assets and amounted to $513,000 and $640,000 at December 31, 1998 and 1997,
respectively. Amortization expense amounted to $204,000, $178,000 and $207,000
in 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, JBPA
maintained $560,000 and $466,000, respectively, of escrow balances associated
with the servicing portfolio.
9
<PAGE> 10
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES -- (Continued)
On January 1, 1997, the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," as amended by SFAS No. 127, "Deferral of the Effective Date of
Certain Provision of SFAS No. 125," which provides accounting guidance on
transfers of financial assets, servicing of financial assets and
extinguishments of liabilities. The Company originates mortgages under a
definitive plan to sell or securitize those loans and service the loans owned
by the investor. Upon the transfer of the mortgage loans in a sale or a
securitization, the Company records the servicing assets retained in accordance
with SFAS No. 125. The Company recorded mortgage servicing rights of $1,599,000
and $666,000 in 1998 and 1997, respectively, resulting from the respective sales
of $192,899,000 and $113,945,000 of mortgages in those years. Amortization of
these mortgage servicing rights is recognized in accordance with policies for
purchased mortgages, as previously discussed. The unamortized balance of
mortgage servicing rights retained at December 31, 1998 and 1997 was $2,363,000
and $945,000, respectively.
Long-lived assets
The Company accounts for long-lived assets in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." SFAS No. 121 provides guidance on when to recognize and how
to measure impairment losses of long-lived assets and certain identifiable
intangibles and how to value long-lived assets to be disposed of.
Mortgages held for sale
Mortgages held for sale are recorded at cost, which approximates market.
These mortgages are typically sold within three months of origination without
recourse to the Banks.
Restrictions on cash and due from banks
The Banks are required to maintain reserves against customer demand
deposits by keeping cash on hand or balances with the Federal Reserve Bank in a
non-interest bearing account. The amounts of those reserves and cash balances
at December 31, 1998 and 1997 were approximately $13,697,000 and $9,273,000,
respectively.
Earnings per common share
The Company follows the provisions of SFAS No. 128, "Earnings Per Share,"
which eliminated primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share in conjunction with the
disclosure of the methodology used in computing such earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average common shares
outstanding during the period. Diluted earnings per share takes into account
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised and converted into common stock. Earnings per
share calculations for 1996 have been restated to reflect the adoption of SFAS
No. 128.
Advertising costs
The Company expenses advertising costs as incurred.
Employee benefit plans
The Banks have certain employee benefit plans covering substantially all
employees. The Banks accrue such costs as incurred.
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," on January 1, 1996, which contains a fair value-based method for
valuing stock-based compensation that entities may use, which measures
compensation cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which is usually the
vesting period. Alternatively, the standard permits entities to continue
accounting for employee stock options and similar equity instruments under
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined in
SFAS No. 123 had been applied. The Company's stock option plans are accounted
for under APB Opinion No. 25.
10
<PAGE> 11
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES -- (Continued)
Statement of cash flows
Cash and cash equivalents are defined as cash on hand, cash items in the
process of collection, amounts due from banks and federal funds sold with an
original maturity of three months or less. Cash paid for income taxes was
$4,517,000, $3,172,000 and $3,275,000 in 1998, 1997 and 1996, respectively.
Cash paid for interest was $64,011,000, $52,819,000 and $52,178,000 in 1998,
1997 and 1996, respectively. Loans transferred to other real estate owned were
$2,867,000, $2,095,000 and $4,888,000 in 1998, 1997 and 1996, respectively.
Comprehensive income
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------
Tax Net of
Before tax (expense) tax
amount benefit amount
------------ ----------- ----------
<S> <C> <C> <C>
Unrealized gains (losses) on securities
Unrealized holding gains arising during the period ......... $ 2,235 $ (790) $ 1,445
Less reclassification adjustment for gains
(losses) realized in net income .......................... 1,152 (403) 749
------- ------- -------
Other comprehensive income, net ............................. $ 1,083 $ (387) $ 696
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------
Tax Net of
Before tax (expense) tax
amount benefit amount
------------ ----------- ----------
<S> <C> <C> <C>
Unrealized gains (losses) on securities ........................
Unrealized holding gains arising during the period ............ $ 3,207 $ (1,124) $ 2,083
Less reclassification adjustment for gains (losses) realized in
net income .................................................. 515 (180) 335
------- -------- -------
Other comprehensive income, net ................................ $ 2,692 $ (944) $ 1,748
======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------
Tax Net of
Before tax (expense) tax
amount benefit amount
------------ ----------- -----------
<S> <C> <C> <C>
Unrealized gains (losses) on securities
Unrealized holding losses arising during the period ......... $ (1,027) $ 356 $ (671)
Less reclassification adjustment for gains
(losses) realized in net income ........................... 245 (86) 159
--------- ----- -------
Other comprehensive income, net .............................. $ (1,272) $ 442 $ (830)
========= ===== =======
</TABLE>
11
<PAGE> 12
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES -- (Continued)
Other information
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activity. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge. The accounting for changes in the fair
value of derivative (gains and losses) depends on the intended use of the
derivative and resulting designation. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Earlier application is
permitted only as of the beginning of any fiscal quarter. Management is
currently reviewing the provisions of SFAS No. 133.
Reclassifications
Certain reclassifications have been made to the prior period financial
statements to conform to the 1998 presentation.
NOTE 2 -- ACQUISITIONS AND MERGERS
In July 1998, the Company through JBPA, completed a merger with Regent
National Bank. Under the terms of the Merger, each share of Regent National
Bank common stock was converted into .505 of a share of the Company's common
stock, as adjusted for the stock split, resulting in the issuance of 1,721,960
shares of the Company's common stock. In addition, outstanding options to
purchase the acquired institution's common stock were converted into options to
purchase 184,830 shares of the Company's common stock at an average exercise
price of $15.76 per share. This transaction was accounted for under the pooling
of interests method of accounting.
The results of operations of previous separate companies follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1998
-------------------------
Net
Revenue income
----------- -----------
(in thousands)
<S> <C> <C>
JeffBanks, Inc. .................................. $114,057 $ 14,371
Regent National Bank as of July 31, 1998 ......... 9,436 (2,939)
-------- --------
$123,493 $ 11,432
======== ========
</TABLE>
In January 1997, the Company, through JBPA, completed a merger with United
Valley Bank. Under the terms of the merger, each share of United Valley Bank
common stock was converted into .593 of a share of the Company's common stock,
resulting in the issuance of 1,311,236 shares of the Company's common stock. In
addition, outstanding warrants to purchase the acquired institution's common
stock were converted into warrants to purchase 446,916 shares of the Company's
common stock, with an exercise price of $6.74 per share. This transaction was
accounted for under the pooling of interests method of accounting.
12
<PAGE> 13
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 3 -- INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and the estimated
fair value of the Company's available for sale and held to maturity securities
are as follows:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------- ------------ ------------ ----------
(in thousands)
<S> <C> <C> <C> <C>
Available for sale
U.S. Treasury securities ................ $ 7,358 $ 110 $ -- $ 7,468
Federal agency obligations .............. 19,251 126 (1) 19,376
Mortgage-backed securities .............. 199,685 1,339 (650) 200,374
State and municipal obligations ......... 46,730 2,120 (112) 48,738
Other securities ........................ 25,417 1 (8) 25,410
-------- ------- --------- --------
Total available-for-sale ................. $298,441 $ 3,696 $ (771) $301,366
======== ======= ======== ========
Held to maturity
State and municipal obligations ......... $ 677 $ 22 $ -- $ 699
======== ======= ======== ========
Total held to maturity ................... $ 677 $ 22 $ -- $ 699
======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------- ------------ -------------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Available for sale
U.S. Treasury securities ................ $ 42,489 $ 125 $ (2) $ 42,612
Federal agency obligations .............. 38,032 109 -- 38,141
Mortgage-backed securities .............. 204,788 705 (1,078) 204,415
State and municipal obligations ......... 51,215 1,939 (1) 53,153
Other securities ........................ 26,112 68 -- 26,180
-------- ------- ---------- --------
Total available-for-sale ................. $362,636 $ 2,946 $ (1,081) $364,501
======== ======= ========== ========
Held to maturity
State and municipal obligations ......... $ 682 $ 17 $ -- $ 699
======== ======= ========== ========
Total held to maturity ................... $ 682 $ 17 $ -- $ 699
======== ======= ========== ========
</TABLE>
13
<PAGE> 14
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 3 -- INVESTMENT SECURITIES -- (Continued)
The following table lists maturities of debt and equity securities at
December 31, 1998 classified as available for sale and held to maturity:
<TABLE>
<CAPTION>
Available for sale Held to maturity
------------------------- ----------------------
Amortized Fair Amortized Fair
cost value cost value
----------- ----------- ----------- --------
(in thousands)
<S> <C> <C> <C> <C>
Due in one year or less ........................ $ 17,253 $ 17,325 $ -- $ --
Due after one year through five years .......... 9,604 9,712 452 464
Due after five years through ten years ......... 1,029 1,078 225 235
Due after ten years ............................ 46,965 48,972 -- --
-------- -------- ----- -----
74,851 77,087 677 699
Mortgage-backed securities ..................... 199,685 200,374 -- --
FHLB of Pittsburgh stock ....................... 23,905 23,905 -- --
-------- -------- ----- -----
$298,441 $301,366 $ 677 $ 699
======== ======== ===== =====
</TABLE>
Proceeds on sales of securities classified as available for sale were
$157,486,000, $128,628,000 and $31,189,000 in 1998, 1997 and 1996,
respectively. Realized gains and losses on sales of investment securities were
$1,203,000 and $51,000, $515,000 and $-0-, and $245,000 and $-0- in 1998, 1997
and 1996, respectively.
Tax-exempt interest income on state and municipal obligations classified
as investment securities was $2,859,000, $2,227,000, and $471,000 in 1998, 1997
and 1996, respectively.
Investment securities with an aggregate carrying value of approximately
$47,281,000 and $151,188,000 at December 31, 1998 and 1997, respectively, were
pledged to secure public deposits and for other purposes required or permitted
by law.
NOTE 4 -- LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
--------------- ------------
(in thousands)
<S> <C> <C>
Commercial ........................... $ 426,375 $ 299,956
Commercial mortgage .................. 231,231 246,986
Construction ......................... 87,782 86,309
Direct financing leases, net ......... 22,574 18,649
Consumer loans ....................... 348,702 249,219
Credit card .......................... 22,817 21,669
Residential mortgage ................. 73,023 75,288
Overdrafts ........................... 2,835 3,741
----------- ----------
1,215,339 1,001,817
Allowance for credit losses .......... (12,407) (14,136)
----------- ----------
$ 1,202,932 $ 987,681
=========== ==========
</TABLE>
14
<PAGE> 15
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 4 -- LOANS -- (Continued)
Changes in the allowance for credit losses are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Balance at beginning of year ............ $ 14,136 $ 16,794 $ 21,492
Provision charged to operations ......... 5,963 3,700 10,115
Loans charged off ....................... (8,838) (8,705) (17,356)
Recoveries .............................. 1,146 2,347 2,543
-------- -------- ---------
Balance at end of year .................. $ 12,407 $ 14,136 $ 16,794
======== ======== =========
</TABLE>
The balance of impaired loans was $12,369,000 and $9,857,000 at December
31, 1998 and 1997, respectively. The Banks have identified a loan as impaired
when it is probable that interest and principal will not be collected according
to the contractual terms of the loan agreements. The allowance for credit loss
associated with impaired loans was $2,842,000 and $2,324,000 at December 31,
1998 and 1997, respectively. The average recorded investment on impaired loans
was $11,638,000 and $10,759,000 during 1998 and 1997, respectively, and the
income recognized on impaired loans was $-0- for all periods. Total cash
collected on impaired loans during 1998 and 1997 was $2,834,000 and $3,217,000,
respectively, all of which was credited to the principal balance outstanding on
such loans. Interest which would have been accrued on impaired loans during
1998, 1997 and 1996 was $985,000, $1,142,000 and $989,000, respectively. The
Banks' policy for interest income recognition on impaired loans is to recognize
income on restructured loans under the accrual method. The Banks recognize
income on non-accrual loans under the cash basis when the loans are both
current and the collateral on the loan is sufficient to cover the outstanding
obligation to the Banks; if these factors do not exist, the Banks will not
recognize income.
Loans past due 90 days or more as to interest or principal payments still
accruing interest at December 31, 1998 and 1997 were $7,107,000 and $5,460,000,
respectively. At December 31, 1998 and 1997, there were no commitments to lend
additional funds to borrowers whose loans were classified as non-accrual.
Loans totalling $137,000,000 and $188,000,000 at December 31, 1998 and
1997, respectively, were pledged as collateral to secure advances from the
Federal Home Loan Bank (FHLB).
Tax exempt interest on loans was $3,437,000, $232,000 and $256,000 in
1998, 1997 and 1996, respectively.
NOTE 5 -- PREMISES AND EQUIPMENT
Premises and equipment are as follows:
<TABLE>
<CAPTION>
December 31,
Estimated ----------------------------
useful lives 1998 1997
--------------- ------------ ------------
(in thousands)
<S> <C> <C> <C>
Land ...................................... -- $ 2,795 $ 2,795
Building .................................. 3 to 40 years 5,277 4,573
Furniture, fixtures and equipment ......... 3 to 12 years 24,558 19,868
Leasehold improvements .................... 4 to 35 years 10,055 8,757
--------- ---------
42,685 35,993
Accumulated depreciation .................. (18,600) (16,475)
--------- ---------
$ 24,085 $ 19,518
========= =========
</TABLE>
15
<PAGE> 16
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 6 -- DEPOSITS
The aggregate amount of jumbo certificates of deposit, each with a minimum
denomination of $100,000, was $125,358,000 and $109,663,000 in 1998 and 1997,
respectively.
At December 31, 1998, the scheduled maturities of certificates of deposit
are as follows (in thousands):
<TABLE>
<S> <C>
1999 ........................ $536,706
2000 ........................ 53,167
2001 ........................ 6,856
2002 ........................ 2,493
2003 and thereafter ......... 3,193
--------
$602,415
========
</TABLE>
NOTE 7 -- DEBT
FHLB advances -- short term
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
------------- -------------
(in thousands
except percentages)
<S> <C> <C>
Balance outstanding ........................... $ 55,000 $ 148,000
Average during the year ....................... 70,471 94,107
Maximum month-end balance ..................... 150,000 127,750
Weighted average rate during the year ......... 5.71% 5.66%
Weighted average rate at December 31 .......... 4.96% 5.65%
</TABLE>
FHLB advances - long term
At December 31, 1998, JBPA had $54,182,000 in long-term advances from the
FHLB. These advances had a weighted average rate of 5.34%. Outstanding
borrowings mature as follows (in thousands):
<TABLE>
<S> <C>
1999 - 2001 .............. $ --
2002 ..................... 29,000
2003 ..................... 15,000
Thereafter ............... 10,182
--------
$ 54,182
========
</TABLE>
Unused advances from the FHLB were $190,127,000 and $27,006,000 at
December 31, 1998 and 1997, respectively.
Subordinated notes and debentures
The Company issued $23,000,000 of 8.75% subordinated notes due April 1,
2006. These notes are redeemable at the option of the Company, in whole or in
part, at any time on or after April 1, 2001, at their stated principal amount
plus accrued interest, if any. Interest is payable semi-annually on April 1 and
October 1.
JBPA issued $9,000,000 of 9.5% subordinated debentures due February 15,
2003. These debentures are redeemable at the option of JBPA, in whole or in
part, at any time on or after February 15, 2000, at their stated principal
amount plus accrued interest, if any. Interest is payable semi-annually on
February 15 and August 15. The note agreement restricts the payment of cash
dividends and any other distributions to (i) 50% of the cumulative net income
of JBPA since JBPA's inception plus (ii) $500,000 without the consent of a
majority of the holders of the subordinated debentures. JBPA shall also not
redeem or repurchase any of its preferred or common stock subject to the above
limitation.
As a result of the Regent acquisition, there were $2,750,000 of 7.75%
subordinated debentures due September 30, 1998. These debentures were redeemed
on September 30, 1998.
16
<PAGE> 17
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 7 -- DEBT -- (Continued)
Guaranteed preferred beneficial interest in the Company's subordinated
debt
On February 5, 1997, the Company issued $25,300,000 principal amount of
9.25% junior subordinated deferrable interest debentures due March 31, 2027
(the debentures) to JBI Capital Trust I (the Trust), a Delaware business trust,
in which the Company owns all the common equity. The debentures are the sole
asset of the Trust. The Trust issued $25,000,000 of Trust preferred securities
to investors. The Company's obligations under the debentures and related
documents, taken together, constitute a full and unconditional guarantee by the
Company of the Trust's obligations under the Trust preferred securities.
Although the subordinated debentures will be treated as debt of the Company,
they currently qualify for Tier 1 capital treatment, subject to certain
limitations. The Trust preferred securities are callable by the Company on or
after March 31, 2002, or earlier in the event the deduction of related interest
for federal income taxes is prohibited, treatment as Tier 1 capital is no
longer permitted or certain other contingencies arise. The Trust preferred
securities must be redeemed upon maturity of the debentures in 2027.
NOTE 8 -- SHAREHOLDERS' EQUITY
On July 10, 1998, the Company declared a 5-for-3 stock split, payable
August 20, 1998.
On April 1, 1997, the Company declared a 5% common stock dividend, payable
May 13, 1997. On January 17, 1996, the Company declared a 5% common stock
dividend, payable March 15, 1996, in addition to its regular quarterly cash
dividend. Quarterly cash dividends per common share totalled $.43 in 1998, $.34
in 1997 and $.24 in 1996.
NOTE 9 -- EARNINGS PER SHARE
The Company's calculation of earnings per share in accordance with SFAS
No. 128 is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year ended December 31, 1998
------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
------------- --------------- ----------
<S> <C> <C> <C>
Basic earnings per share
Net income available to common shareholders ......................... $ 11,432 10,301 $ 1.11
Effect of dilutive securities
Stock options ....................................................... -- 655 ( .07)
-------- ------ --------
Diluted earnings per share
Net income available to common shareholders plus assumed conversions $ 11,432 10,956 $ 1.04
======== ====== ========
</TABLE>
Options to purchase 244,000 shares of common stock at an average price of
$29.90 per share were outstanding during the year. They were not included in
the computation of diluted earnings per share because the option exercise price
was greater than the average market price.
17
<PAGE> 18
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 9 -- EARNINGS PER SHARE -- (Continued)
<TABLE>
<CAPTION>
Year ended December 31, 1997
--------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
------------- --------------- ----------
<S> <C> <C> <C>
Basic earnings per share
Net income available to common shareholders ............ $ 12,864 9,660 $ 1.33
Effect of dilutive securities
Stock options .......................................... -- 657 ( .08)
-------- ----- --------
Diluted earnings per share
Net income available to common shareholders plus assumed
conversions ............................................ $ 12,864 10,317 $ 1.25
======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1996
--------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
------------- --------------- ----------
<S> <C> <C> <C>
Basic earnings per share
Net income available to common shareholders ............ $ 4,938 8,775 $ .56
Effect of dilutive securities
Stock options .......................................... -- 472 ( .03)
------- ----- -------
Diluted earnings per share
Net income available to common shareholders plus assumed
conversions ............................................ $ 4,938 9,247 $ .53
======= ===== =======
</TABLE>
NOTE 10 -- INCOME TAXES
An analysis of current and deferred income taxes is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Current ................................................. $ 2,183 $ 4,067 $ 2,182
Deferred ................................................ 1,817 503 2,056
------- ------- -------
Total ................................................ $ 4,000 $ 4,570 $ 4,238
======= ======= =======
</TABLE>
The income tax provision reconciled to the tax computed at the statutory
federal rate was as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Tax at statutory rate .......................... $ 5,248 $ 6,086 $ 3,168
Increase (decrease) in taxes resulting from
Tax-exempt loan and investment income ......... (1,975) (791) (210)
Non-deductible amortization ................... 554 389 397
Other, net .................................... 173 (1,114) 883
-------- -------- -------
Applicable income tax .................... $ 4,000 $ 4,570 $ 4,238
======== ======== =======
</TABLE>
18
<PAGE> 19
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 10 -- INCOME TAXES -- (Continued)
The net deferred asset consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
---------- -------------
(in thousands)
<S> <C> <C>
Allowance for credit losses .................................. $ 3,556 $ 3,881
Allowance for real estate owned .............................. 877 655
Purchased net operating loss carryforwards ................... 4,221 4,571
Other ........................................................ 55 26
-------- --------
Total deferred tax assets ................................. 8,709 9,133
Deferred asset valuation allowance ........................... (2,748) (2,748)
-------- --------
Net deferred tax asset .................................... 5,961 6,385
-------- --------
Accumulated depreciation ..................................... (3,206) (2,098)
Net unrealized gain on securities available for sale ......... (975) (611)
Deferred loan costs .......................................... (507) (462)
Other ........................................................ (244) (4)
-------- ----------
Total deferred tax liabilities ............................ (4,932) (3,175)
-------- ---------
Deferred tax asset, net of deferred tax liabilities .......... $ 1,029 $ 3,210
======== =========
</TABLE>
NOTE 11 -- EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) plan covering substantially all employees.
The Company matches $.25 for each dollar contributed by participants up to an
annual maximum of $2,000 per participant. The Company's matching contributions
were $135,000, $111,000 and $95,000 in 1998, 1997 and 1996, respectively.
The Company maintains an Employee Stock Ownership Plan for employees of
the Banks. Contributions to this plan are made by the Company in amounts
determined by the Board of Directors. Contributions by the Company amounted to
$-0-, $225,000 and $215,000 in 1998, 1997 and 1996, respectively. Contributions
are distributed to the Banks in proportion to their respective employee
salaries.
NOTE 12 -- STOCK OPTIONS
The Company maintains a Key Employee Stock Option Plan (the Plan). Under
the Plan, options to purchase a maximum of 1,000,000 shares of the Company's
common stock may be issued to executive officers and other key employees of the
Company who occupy responsible managerial or professional positions and who
have the capability of making a substantial contribution to the success of the
Company, as selected by the Plan committee. Directors and independent
contractors who, in the judgment of the Plan committee, have contributed to the
success of the Company are also eligible to participate subject to certain
limitations. Options granted under the Plan may be either qualified or
non-qualified. Option prices must be 100% of fair market value of the shares on
the date of grant and the exercise period may not exceed 10 years, except that,
in the case of qualified options granted to persons holding 10% or more of the
combined voting power of the Company, the option exercise price may not be less
than 110% of the fair market value of the shares on the date of grant and the
exercise period for any option may not exceed five years. Vesting of options
granted under the Plan is determined by the Plan committee. The Plan committee
has the right, in its discretion, to permit an optionee to be paid the
difference between the option exercise price and the fair market value of the
option shares on the date of option exercise. At December 31, 1998, options to
purchase 38,300 shares under the Plan were authorized to be issued, but had not
been granted.
As a result of the Regent National Bank and United Valley Bank mergers,
there are 179,787 and 239,083 respective options outstanding which are
reflected in the tables in this footnote.
Under former plans of the Company and JBPA, there were exercisable options
outstanding to purchase 53,738 shares of the Company's common stock at $7.91
per share at December 31, 1998. At December 31, 1997 and 1996, there were
exercisable options to purchase 110,250 shares at $8.16 and 54,738 shares at
7.91, respectively. No options were granted or expired during 1998, 1997 and
1996 under these former plans, and 110,250 shares were exercised at $8.16 in
1998.
19
<PAGE> 20
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 12 -- STOCK OPTIONS -- (Continued)
Had compensation cost for the plans been determined based on the fair
value of the options at the grant dates consistent with SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1998 1997 1996
------------ ------------ ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net income As reported $ 11,432 $ 13,331 $5,080
Pro forma 9,704 11,720 4,995
Net income per common share - basic As reported 1.11 1.33 .56
Pro forma .94 1.21 .54
Net income per common share - diluted As reported 1.04 1.25 .53
Pro forma .89 1.14 .51
</TABLE>
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants before 1995.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions used for grants in 1998, 1997 and 1996, respectively:
dividend yield of 2.59% in 1998, 2.0% in 1997 and 2.5% in 1996; expected
volatility of 22% in 1998, 15% in 1997 and 10% in 1996; risk-free interest rates
of 5.37%, 6.42% and 6.19% in 1998, 1997 and 1996, respectively; and expected
lives of 10 years for all three years.
A summary of the status of the Company's option plans as of December 31,
1998, 1997 and 1996 and the changes during the years ending on those dates is
represented below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- -------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------------- ---------- ------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year .......... 1,497,425 $ 11.09 1,104,318 $ 8.75 1,159,495 $ 8.53
Granted ................................. 356,446 28.09 437,677 16.64 27,125 13.22
Exercised ............................... (362,750) 9.66 (39,015) 6.74 (82,302) 6.74
Forfeited ............................... (17,504) 20.57 (5,555) 13.54 -- --
--------- --------- ---------
Outstanding, end of year ................ 1,473,617 15.46 1,497,425 11.09 1,104,318 8.75
--------- --------- ---------
Options exercisable at year-end ......... 1,364,117 1,497,425 1,104,318
========= ========= =========
Weighted average fair value of options
granted during the year ................ $ 11.01 $ 9.84 $ 5.61
======== ======= ======
</TABLE>
20
<PAGE> 21
The following table summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
- ---------------------------------------------------------------------- ----------------------------
Weighted
Number average Weighted Number Weighted
outstanding at remaining average outstanding at average
Range of December 31, contractual exercise December 31, exercise
exercise prices 1998 life (years) price 1998 price
- --------------------- ---------------- -------------- ---------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$ 6.74 -- $ 9.93 519,571 3.57 $ 8.25 519,571 $ 8.25
12.11 -- 18.15 526,148 7.83 14.27 526,148 14.27
22.77 -- 32.25 427,898 9.42 27.48 318,398 28.64
------- -------
1,473,617 1,364,117
========= =========
</TABLE>
21
<PAGE> 22
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 13 -- RELATED PARTY TRANSACTIONS
At December 31, 1998 and 1997, loans outstanding to certain officers and
directors of the Company and their subsidiaries and companies in which they
have material ownership amounted to $13,425,000 and $19,486,000, respectively.
An analysis of activity in loans to related parties at December 31, 1998
resulted in new loans of $3,954,000; reductions of $10,063,000, representing
payments; and additions of $48,000, representing changes in the composition of
related parties. Deposits of these individuals and their affiliated companies
at December 31, 1998 and 1997 were $60,829,000 and $45,154,000, respectively.
The majority of the related party deposits at December 31, 1998 were short-term
in nature.
The Banks lease premises from several limited partnerships whose partners
are persons related to the Company. Rental expense under these leases was
$633,000, $355,000 and $355,000 in 1998, 1997 and 1996, respectively.
NOTE 14 -- COMMITMENTS AND CONTINGENCIES
Operating leases
The Company leases certain of its operating facilities under
non-cancellable operating leases expiring in 1999 through 2018. The leases
require payment by the Company of the real estate taxes and insurance on the
leased properties. Approximate future minimum annual rental payments are as
follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31
-------------------------
<S> <C>
1999 .................. $ 2,580
2000 .................. 2,261
2001 .................. 2,173
2002 .................. 1,986
2003 .................. 1,826
Thereafter ............ 4,857
-------
$15,683
=======
</TABLE>
Rental expense amounted to $2,755,000, $2,207,000 and $1,927,000 in 1998,
1997 and 1996, respectively.
Other
In the normal course of business, the Banks have been named as defendants
in several lawsuits. Although the ultimate outcome of these suits cannot be
ascertained at this time, it is the opinion of management that the resolution
of such suits will not have a material adverse effect on the financial position
or results of operations of the Company.
NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an
entity's assets and liabilities considered to be financial instruments. For the
Company, as for most financial institutions, the majority of its assets and
liabilities are considered financial instruments as defined in SFAS No. 107.
However, many such instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange
transaction. Also, it is the Company's general practice and intent to hold its
financial instruments to maturity and not to engage in trading or sales
activities, except for certain loans. Therefore, the Company had to use
significant estimations and present value calculations to prepare this
disclosure.
Changes in the assumptions or methodologies used to estimate fair values
may materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the wide
range of permitted assumptions and methodologies in the absence of active
markets. This lack of uniformity gives rise to a high degree of subjectivity in
estimating financial instrument fair values.
Estimated fair values have been determined by the Company using the best
available data and an estimation methodology suitable for each category of
financial instruments. The estimation methodologies used, the estimated fair
values, and recorded book balances at December 31, 1998 and 1997 are outlined
below.
22
<PAGE> 23
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- (Continued)
For cash and cash equivalents, the recorded book values of $54,599,000 and
$147,837,000 at December 31, 1998 and 1997, respectively, approximate fair
values. The estimated fair values of investment securities are based on quoted
market prices, if available. Estimated fair values are based on quoted market
prices of comparable instruments if quoted market prices are not available.
<TABLE>
<CAPTION>
1998 1997
--------------------------- -------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------------ ------------ ---------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Investment securities ............................ $ 302,043 $ 302,065 $365,183 $ 365,200
Loans, including mortgages held for sale ......... 1,217,532 1,224,244 992,008 1,008,045
</TABLE>
The net loan portfolio at December 31, 1998 and 1997 has been valued using
a present value discounted cash flow where market prices were not available.
The discount rate used in these calculations is the estimated current market
rate adjusted for credit risk. The carrying value of accrued interest
approximates fair value.
The estimated fair values of demand deposits (i.e. interest (checking) and
non-interest bearing demand accounts, savings and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e. their carrying amounts). The carrying amounts of variable
rate accounts and certificates of deposit approximate their fair values at the
reporting date. The carrying amount of accrued interest payable approximates
its fair value.
The majority of all time deposits with stated maturities totalling
$602,415,000 and $508,139,000 mature or reprice within one year of December 31,
1998 and 1997, respectively; therefore, the recorded book value of such
deposits approximates its fair value.
The recorded book balance of subordinated debentures of $32,000,000 and
$34,750,000 at December 31, 1998 and 1997, respectively, had an approximate
fair value of $32,062,000 and $33,625,000, respectively.
The recorded book balance of the guaranteed beneficial interest in the
Company's Trust preferred debt of $25,300,000 at December 31, 1998 and 1997 had
an approximate fair value of $25,416,000 and $23,782,000, respectively.
The fair values of the FHLB advances totalling $109,182,000 and
$203,511,000 are estimated to approximate their recorded book balances at
December 31, 1998 and 1997, respectively.
There was no material difference between the notional amount and the
estimated fair value of off-balance-sheet items which totalled approximately
$398,409,000 and $364,434,000 at December 31, 1998 and 1997, respectively, and
primarily comprise unfunded loan commitments which are generally priced at
market at the time of funding.
23
<PAGE> 24
NOTE 16 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
The Banks are parties to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of their
customers. These financial instruments include commitments to extend credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. The contract or notional
amounts of those instruments reflect the extent of involvement the Banks have
in particular classes of financial instruments.
The Banks' exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual or notional amount
of those instruments. The Banks use the same credit policies in making
commitments and conditional obligations as they do for on-balance-sheet
instruments.
Unless noted otherwise, the Banks do not require collateral or other
security to support financial instruments with credit risk. The approximate
contract amounts are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(in thousands)
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit ...................................... $370,514 $351,810
Standby letters of credit and financial guarantees written ........ 27,895 12,624
</TABLE>
24
<PAGE> 25
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 16 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK -- (Continued)
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Banks evaluate each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Banks upon extension of credit, is based
on management's credit evaluation.
Standby letters of credit are conditional commitments issued by the Banks
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Banks hold residential
or commercial real estate, accounts receivable, inventory and equipment as
collateral supporting those commitments for which collateral is deemed
necessary. The extent of collateral held for those commitments at December 31,
1998 and 1997 varies up to 100%.
The Banks grant loans primarily to customers in Philadelphia and its
immediately adjacent suburban Pennsylvania counties which include Chester,
Delaware and Montgomery and southern New Jersey which includes Camden and
Burlington counties. Although the Banks have diversified loan portfolios, a
large portion of their loans are secured by commercial or residential real
property. The Banks do not generally engage in non-recourse lending and
typically will require the principals of any commercial borrower to obligate
themselves personally on the loan. Although the Banks have diversified loan
portfolios, a substantial portion of their debtors' ability to honor their
contracts is dependent upon the economic sector. Commercial and standby letters
of credit were granted primarily to commercial borrowers.
NOTE 17 -- REGULATORY MATTERS
The Bank Holding Company Act of 1956 restricts the amount of dividends the
Company can pay. Accordingly, dividends should generally only be paid out of
current earnings, as defined.
The Pennsylvania Banking Code of 1965 restricts the amount of dividends
JBPA can pay. Accordingly, dividends may be declared and paid only out of net
earnings, as defined. Where surplus, as defined, is less than 50% of the amount
of JBPA's capital, no dividend may be paid or declared without the prior
approval of the Pennsylvania Department of Banking (the Department) until the
surplus, as defined, is equal to 50% of the total amount of capital. Where
surplus, as defined, is less than 100% of capital, until such time as surplus
equals capital, JBPA must transfer at least 10% of its net earnings to surplus,
as defined, prior to the declaration of a dividend. The Department has the
power to issue orders prohibiting the payment of dividends where such payment
is deemed to be an unsafe or unsound banking practice.
The New Jersey Banking Act of 1948 restricts the amount of dividends paid
on JBNJ capital stock. Accordingly, no dividends shall be paid by JBNJ on its
capital stock unless, following the payment of such dividends, the capital
stock of JBNJ will be unimpaired, and (1) JBNJ will have a surplus, as defined,
of not less than 50% of its capital, or, if not, (2) the payment of such
dividend will not reduce the surplus, as defined, of JBNJ.
The Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possible additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Banks' consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the Banks' assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Banks' capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulations to ensure capital
adequacy require the Banks to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 1998, that the Banks meet all capital adequacy
requirements to which they are subject.
25
<PAGE> 26
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 17 -- REGULATORY MATTERS -- (Continued)
As of December 31, 1998, the Banks met all regulatory requirements for
classification as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Banks must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
As of December 31, 1998 and 1997, the Company and the Banks had the
following capital ratios:
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------------- ------------------------ -------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total capital
(to risk-weighted assets)
Company ................. $191,903 15.24% $100,708 8.00% $125,885 N/A
JBPA .................... 152,864 13.03 93,832 8.00 117,290 10.00%
JBNJ .................... 11,928 13.21 7,223 8.00 9,029 10.00
Tier I capital
(to risk-weighted assets)
Company ................. 149,296 11.86 50,354 4.00 75,531 N/A
JBPA .................... 113,784 9.70 46,916 4.00 70,374 6.00
JBNJ .................... 8,401 9.30 3,612 4.00 5,417 6.00
Tier I capital
(to average assets)
Company ................. 149,296 9.11 65,531 4.00 81,914 N/A
JBPA .................... 113,784 7.53 60,424 4.00 75,530 5.00
JBNJ .................... 8,401 6.58 5,107 4.00 6,384 5.00
</TABLE>
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------------- ----------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total capital
(to risk-weighted assets)
Company ................. $182,012 17.12% $85,061 8.00% $106,326 N/A
JBPA .................... 143,596 14.87 77,244 8.00 96,555 10.00%
JBNJ .................... 10,754 13.57 6,338 8.00 7,922 10.00
Tier I capital
(to risk-weighted assets)
Company ................. 136,864 12.87 42,530 4.00 63,796 N/A
JBPA .................... 102,565 10.62 38,622 4.00 57,933 6.00
JBNJ .................... 7,311 9.23 3,169 4.00 4,753 6.00
Tier I capital
(to average assets)
Company ................. 136,864 9.41 58,203 4.00 72,754 N/A
JBPA .................... 102,565 7.59 54,052 4.00 67,565 5.00
JBNJ .................... 7,311 7.04 4,151 4.00 5,189 5.00
</TABLE>
26
<PAGE> 27
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 18 -- CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY
The condensed financial information for JeffBanks, Inc. (parent company
only) is as follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Assets
Cash .................................................................... $ 873 $ 920
Equity investment in subsidiaries ....................................... 155,625 148,116
Investment in Banks' subordinated notes ................................. 23,000 23,000
Investment in securities available for sale ............................. 600 904
Accrued interest receivable ............................................. 485 510
Premises and equipment, net ............................................. 85 129
Other assets ............................................................ -- 34
-------- --------
$180,668 $173,613
======== ========
Liabilities and shareholders' equity
Subordinated notes ...................................................... $ 23,000 $ 25,750
Minority interest in consolidated subsidiary ............................ 25,300 25,300
Accrued interest payable ................................................ 485 503
Other liabilities ....................................................... 205 254
-------- --------
48,990 51,807
-------- --------
Shareholders' equity
Common stock ............................................................ 10,487 6,094
Additional paid-in capital .............................................. 97,308 95,150
Retained earnings ....................................................... 21,933 19,308
Net unrealized gain on investment securities available for sale ......... 1,950 1,254
-------- --------
131,678 121,806
-------- --------
$180,668 $173,613
======== ========
</TABLE>
27
<PAGE> 28
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 18 -- CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY
-- (Continued)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- ---------
(in thousands)
<S> <C> <C> <C>
Income
Dividends from the Banks ................................................ $ 4,553 $ 3,602 $2,356
Dividends from Non-banks ................................................ 2,119 2,119 --
Interest income from the Banks .......................................... 2,234 2,013 1,542
Interest income from investment securities .............................. 12 40 9
Gain on sales of investment securities .................................. 67 -- --
Management service fees from the Banks .................................. 2,953 2,752 3,061
------- ------- ------
Total income ............................................................ 11,938 10,526 6,968
------- ------- ------
Expenses
Interest on subordinated notes .......................................... 2,340 2,227 1,762
Interest on preferred securities ........................................ 2,119 2,119 --
Salaries and employee benefits .......................................... 1,133 1,053 1,189
Occupancy expense ....................................................... 143 57 55
Depreciation ............................................................ 42 48 49
Data processing expense ................................................. 779 691 930
Advertising ............................................................. 324 326 453
Insurance ............................................................... 410 316 345
Other ................................................................... 227 63 86
------- ------- ------
Total expenses .......................................................... 7,517 6,900 4,869
------- ------- ------
Income before income taxes and equity in undistributed net income ....... 4,421 3,626 2,099
Provision for income taxes ............................................... (45) 79 --
Equity in undistributed net income ...................................... 6,966 9,784 2,981
------- ------- ------
Income before dividend on preferred stocks ............................ 11,432 13,331 5,080
Preferred stock dividend ................................................. -- (467) (142)
------- ------- ------
Net income ............................................................ $11,432 $12,864 $4,938
======= ======= ======
</TABLE>
28
<PAGE> 29
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 18 -- CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY
-- (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1998 1997 1996
---------- ------------ -----------
(in thousands)
<S> <C> <C> <C>
Operating activities
Net income .............................................................. $ 11,432 $ 13,331 $ 5,080
Adjustments to reconcile net income to net cash provided by
operating activities ..................................................
Depreciation and amortization ......................................... 42 48 49
Gain on sales of investment securities ................................ (67) -- ---
Equity in undistributed net income .................................... (6,966) (9,784) (2,981)
Increase in other liabilities ......................................... 87 (81) 169
Decrease in other assets .............................................. 59 18 62
-------- --------- ---------
Net cash provided by operating activities .......................... 4,587 3,532 2,379
-------- --------- ---------
Investing activities
Proceeds from the sale of investment securities available for sale ...... 872 -- --
Investments in subsidiaries ............................................. -- (25,300) (23,000)
Purchases of investment securities available for sale ................... (500) (699) 96
-------- --------- ---------
Net cash provided by (used in) investing activities ................ 372 (25,999) (22,904)
-------- --------- ---------
Financing activities
Proceeds from issuance of preferred stock ............................... -- 106 --
Redemption of preferred stock ........................................... -- (143) --
(Redemption) issuance of subordinated debentures ........................ (2,750) -- 23,000
Purchase of common stock for benefit plans .............................. (341) -- --
Proceeds from issuance of preferred securities .......................... -- 25,300 --
Dividends paid on common stock .......................................... (4,660) (3,383) (2,441)
Proceeds from issuance of common stock .................................. 2,745 794 438
-------- --------- ---------
Net cash used in financing activities .............................. (5,006) 22,674 20,997
-------- --------- ---------
Net (decrease) increase in cash .......................................... (47) 207 472
Cash at beginning of year ................................................ 920 713 241
-------- --------- ---------
Cash at end of year ...................................................... $ 873 $ 920 $ 713
======== ========= =========
</TABLE>
29
<PAGE> 30
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 19 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the
Company which, in the opinion of management, reflects all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's results of operations.
<TABLE>
<CAPTION>
Three months ended
------------------------------------------------------------
December 31 September 30 June 30 March 31
------------- -------------- ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1998
- ----
Interest income ................................. $ 31,028 $ 32,776 $ 30,154 $ 29,535
Interest expense ................................ 16,198 16,969 15,551 15,002
Net interest income ............................. 14,830 15,807 14,603 14,533
Provision for credit losses ..................... 1,310 1,140 2,547 966
Gain on sale of securities ...................... 583 262 64 243
Other operating income .......................... 3,806 3,189 3,967 3,101
Other operating expenses ........................ 12,699 13,330 15,600 11,964
Income before income taxes ...................... 5,210 4,788 487 4,947
Net income ...................................... 4,119 3,678 386 3,249
Per share data ..................................
Net income per common share - basic ........... $ 0.39 $ 0.36 $ 0.04 $ 0.32
Net income per common share - diluted ......... $ 0.39 $ 0.33 $ 0.03 $ 0.29
1997
- ----
Interest income ................................. 28,943 28,536 26,882 26,259
Interest expense ................................ 14,820 14,531 13,419 12,882
Net interest income ............................. 14,123 14,005 13,463 13,377
Provision for credit losses ..................... 960 945 1,170 625
Gain on sale of securities ...................... 185 183 147 --
Other operating income .......................... 3,369 3,105 2,907 3,307
Other operating expenses ........................ 11,179 11,351 11,831 12,209
Income before income taxes ...................... 5,538 4,997 3,516 3,850
Net income ...................................... 4,182 3,353 2,920 2,409
Per share data ..................................
Net income per common share - basic ........... $ 0.42 $ 0.34 $ 0.30 $ 0.27
Net income per common share - diluted ......... $ 0.39 $ 0.32 $ 0.28 $ 0.26
</TABLE>
30
<PAGE> 1
EXHIBIT 99.5
JeffBanks, Inc.
Consolidated Balance Sheet
UNAUDITED
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(in thousands)
<S> <C> <C>
Assets:
Cash and cash equivalents:
Cash and due from banks ....................................... $ 59,662 $ 54,599
Federal funds sold ............................................ 23,000 --
---------- ----------
82,662 54,599
Investment securities available for sale .......................... 285,892 301,366
Investment securities held to maturity ............................ 676 677
Mortgages held for sale ........................................... 16,226 14,600
Loans, net ........................................................ 1,236,605 1,202,932
Premises and equipment, net ....................................... 24,031 24,085
Accrued interest receivable ....................................... 10,844 15,929
Other real estate owned ........................................... 2,741 3,114
Goodwill .......................................................... 3,964 4,059
Other assets ...................................................... 20,826 15,745
---------- ----------
Total assets .................................................. $1,684,467 $1,637,106
========== ==========
Liabilities and shareholders' equity:
Deposits:
Demand (non-interest bearing) ................................. $ 205,528 $ 207,881
Savings and money market ...................................... 440,628 465,984
Time deposits ................................................. 471,679 477,057
Time deposits, $100,000 and over .............................. 126,777 125,358
---------- ----------
1,244,612 1,276,280
Securities sold under repurchase agreements ....................... 61,473 39,635
FHLB advances - short term ........................................ 113,000 55,000
FHLB advances - long term ......................................... 54,175 54,182
Subordinated notes and debentures ................................. 31,920 32,000
Company-obligated mandatorily redeemable preferred securities of
the Company's subsidiary trust, holding solely $25.3 million
aggregate principal amount of 9.25% junior subordinated
deferrable interest debentures due 2027 of the Company .......... 25,300 25,300
Accrued interest payable .......................................... 15,973 15,444
Other liabilities ................................................. 5,025 7,587
---------- ----------
Total liabilities ............................................. 1,551,478 1,505,428
---------- ----------
Shareholders' equity:
Common Stock - authorized, 20,000,000 shares of $1 par value;
issued and outstanding 10,511,935 and 10,486,620 shares,
respectively ................................................ 10,512 10,487
Additional paid-in capital .................................... 97,563 97,308
Retained earnings ............................................. 24,359 21,933
Accumulated other comprehensive income ........................ 555 1,950
---------- ----------
Total shareholders' equity .................................... 132,989 131,678
---------- ----------
Total liabilities and shareholders' equity .................... $1,684,467 $1,637,106
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 2
JeffBanks, Inc.
Consolidated Statements of Income
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(in thousands, except per share data)
<S> <C> <C>
Interest income:
Loans including fees ...................... $ 25,655 $ 23,110
Investment securities ..................... 4,425 5,758
Federal funds sold ........................ 238 667
-------- --------
30,318 29,535
-------- --------
Interest expense:
Time deposits, $100,000 and over .......... 1,524 1,475
Other deposits ............................ 9,952 9,072
FHLB advances ............................. 1,899 2,388
Subordinated notes and debentures ......... 717 770
Trust preferred securities ................ 585 585
Securities sold under repurchase agreements 565 712
-------- --------
15,242 15,002
-------- --------
Net interest income ................... 15,076 14,533
Provision for credit losses .................... 1,455 966
-------- --------
Net interest income after provision
for credit losses .................... 13,621 13,567
-------- --------
Non-interest income:
Service fees on deposit accounts .......... 936 878
Gain on sales of residential mortgages and
capitalized mortgage servicing rights ... 701 736
Gain on sales of investment securities .... 712 243
Mortgage servicing fees ................... 313 296
Merchant credit card deposit fees ......... 695 487
Credit card fee income .................... 155 157
Other ..................................... 582 547
-------- --------
4,094 3,344
-------- --------
Non-interest expense:
Salaries and employee benefits ............ 6,173 5,853
Occupancy expense ......................... 1,133 1,127
Depreciation .............................. 665 577
FDIC expense .............................. 35 33
Data processing expense ................... 386 285
Legal ..................................... 303 327
Stationery, printing and supplies ......... 296 307
Shares tax ................................ 295 228
Advertising ............................... 242 366
Other real estate owned maintenance expense 93 11
Loss on sale and write-downs of other
real estate owned ........................ (1) 31
Amortization of intangibles ............... 310 273
Credit card origination expense ........... 140 201
Credit card processing expense ............ 232 197
Merchant card expense ..................... 604 390
Other ..................................... 1,918 1,758
-------- --------
12,824 11,964
-------- --------
Income before income taxes ..................... 4,891 4,947
Income taxes ................................... 997 1,698
-------- --------
Net income ............................ $ 3,894 $ 3,249
======== ========
Per share data:
Average number of common shares (basic) ........ 10,482 10,195
Average number of common shares (diluted) ...... 10,953 11,040
Net income per common share (basic) ............ $ 0.37 $ 0.32
Net income per common share (diluted) .......... $ 0.36 $ 0.29
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
JeffBanks, Inc.
Consolidated Statement of Changes in Shareholders' Equity
UNAUDITED
<TABLE>
<CAPTION>
Accumulated
other
Common Additional Retained comprehensive Comprehensive
Stock paid-in-capital earnings income income Total
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 .......... $ 10,487 $ 97,308 $ 21,933 $ 1,950 -- $ 131,678
Net income ............................ -- -- 3,894 -- $ 3,894 3,894
Issuance of common stock for
dividend reinvestment plan ........... 7 148 -- -- -- 155
Warrants exercised .................... 18 107 -- -- -- 125
Cash dividends on common stock ........ -- -- (1,468) -- -- (1,468)
Other comprehensive income, net of
reclassification adjustments and taxes -- -- -- (1,395) (1,395) (1,395)
--------- --------- --------- --------- --------- ---------
Comprehensive income .................. -- -- -- -- $ 2,499 --
=========
Balance at March 31, 1999 ............. $ 10,512 $ 97,563 $ 24,359 $ 555 $ 132,989
========= ========= ========= ========= =========
Disclosure of reclassification amount, net of taxes:
Unrealized holding losses arising during period .................. $ (932)
Less: reclassification adjustment for gains included in net income 463
-------
Net unrealized losses on securities .............................. $(1,395)
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
JeffBanks, Inc.
Consolidated Statement of Changes in Shareholders' Equity
UNAUDITED
<TABLE>
<CAPTION>
Accumulated
other
Common Additional Retained comprehensive Comprehensive
Stock paid-in-capital earnings income income Total
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 .......... $ 6,094 $ 95,150 $ 19,308 $ 1,254 $ 121,806
Net income ............................ -- -- 3,249 -- $ 3,249 3,249
Issuance of common stock for
dividend reinvestment plan ........... 2 77 -- -- 79
Warrants exercised .................... 54 608 662
Cash dividends on common stock ........ -- -- (951) -- (951)
Other comprehensive income, net of
reclassification adjustments and taxes -- -- -- (419) (419) (419)
--------- --------- --------- --------- --------- ---------
Comprehensive income .................. -- -- -- -- $ 2,830 --
=========
Balance at March 31, 1998 ............. $ 6,150 $ 95,835 $ 21,606 $ 835 $ 124,426
========= ========= ========= ========= =========
Disclosure of reclassification amount, net of taxes:
Unrealized holding losses arising during period .................. $(261)
Less: reclassification adjustment for gains included in net income 158
-----
Net unrealized losses on securities .............................. $(419)
=====
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
JeffBanks, Inc.
Consolidated Statements of Cash Flows
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(in thousands)
<S> <C> <C>
Operating activities:
Net income ......................................................... $ 3,894 $ 3,249
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization ...................................... 1,495 1,092
Provision for credit losses ........................................ 1,455 966
Gain on sales of investment securities ............................. (712) (243)
Gain on sales of assets ............................................ -- (22)
Mortgage loans originated for sale ................................. (62,090) (46,893)
Mortgage loan sales ................................................ 60,464 33,902
Decrease (increase) in interest receivable ......................... 5,085 (61)
Increase (decrease) in interest payable ............................ 529 (3,214)
(Increase) decrease in other assets ................................ (4,545) 1,385
(Decrease) increase in other liabilities ........................... (2,562) 1,836
--------- ---------
Net cash provided by (used in) operating activities ............. 3,013 (8,003)
--------- ---------
Investing activities:
Proceeds from sales of investment securities available for sale .... 19,271 117,505
Proceeds from maturities of investment securities available for sale 28,614 14,756
Purchase of investment securities available for sale ............... (34,364) (140,863)
Proceeds from sales of other real estate owned ..................... 830 90
Net increase in loans .............................................. (35,585) (11,119)
Purchase of premises and equipment ................................. (611) (2,012)
--------- ---------
Net cash used in investing activities ........................... (21,845) (21,643)
--------- ---------
Financing activities:
Net decrease in deposits ........................................... (31,668) (22,208)
Net increase (decrease) in repurchase agreements ................... 21,838 (4,611)
Net proceeds from issuance of common stock ......................... 280 741
Net increase in FHLB advances ...................................... 57,993 15,301
Net decrease in subordinated notes and debentures .................. (80) --
Dividends paid on common stock ..................................... (1,468) (951)
--------- ---------
Net cash provided by (used in) financing activities ............. 46,895 (11,728)
--------- ---------
Net increase (decrease) in cash and cash equivalents .................... 28,063 (41,374)
Cash and cash equivalents at beginning of year .......................... 54,599 147,945
--------- ---------
Cash and cash equivalents at end of period .............................. $ 82,662 $ 106,571
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
Note 1 - Allowance for Credit Losses:
Three months ended March 31,
1999 1998
(in thousands)
Balance, beginning of period .. $ 12,407 $ 14,136
Provision charged to operations 1,455 966
Loans charged off ............. (2,295) (1,620)
Recoveries .................... 363 160
-------- --------
Balance, end of period ........ $ 11,930 $ 13,642
======== ========
The balances of impaired loans were $11,376,000 and $11,287,000
respectively, at March 31, 1999 and 1998. The allowance for credit losses
associated with impaired loans was $2,847,000 and $2,206,000 respectively, at
those dates. Total cash collected on impaired loans during the first three
months of 1999 and 1998, respectively, was $686,000 and $109,000 all of which
was credited to the principal balance outstanding on such loans. Interest which
would have been accrued on impaired loans during those respective periods was
$226,000 and $232,000. No related interest income was recognized during the
period.
Note 2 - Investment Securities:
The carrying value and approximate market value of investment securities at
March 31, 1999, were as follows:
Gross Gross
Amortized unrealized unrealized Approximate
cost gains losses fair value
(in thousands)
Available for Sale:
U.S. treasury securities ...... $ 6,349 $ 65 $ -- $ 6,414
Federal agency obligations .... 22,318 175 44 22,449
Mortgage backed securities .... 158,006 765 703 158,068
State and municipal obligations 58,991 1,318 687 59,622
Other securities .............. 39,375 38 74 39,339
-------- -------- -------- --------
Total ......................... $285,039 $ 2,361 $ 1,508 $285,892
======== ======== ======== ========
Held to Maturity:
State and municipal obligations 676 17 -- 693
-------- -------- -------- --------
Total ......................... $ 676 $ 17 $ -- $ 693
======== ======== ======== ========
Note 3:
The unaudited interim financial statements furnished reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature, except as discussed in these notes.
Note 4:
Certain amounts in the financial statements presented for prior periods
have been reclassified to conform with the current period presentation.
Note 5:
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activity." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments imbedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge. The accounting for changes in the fair value of a
derivative (gains and losses) depends on the intended use of the derivative and
resulting designation. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Earlier application is permitted
only as of the beginning of any fiscal quarter. The Company is currently
reviewing the provisions of SFAS No. 133.
Note 6:
On July 31, 1998, the Company completed a merger with Regent Bancshares
Corp. and Regent National Bank ("Regent") accounted for as a
pooling of interests, which accordingly required restatement of financial
statements. Under terms of the merger, each share of common stock was as of
that date converted to .505 shares of the Company's common stock,
resulting in the issuance of 1,721,960 shares of the Company's common
stock. Each option to acquire Regent common stock would be converted into an
option to acquire .505 of a share of the Company's common stock, resulting in
the issuance of up to 184,830 shares of the Company's common stock if all
outstanding Regent options are converted.
Note 7:
On August 14, 1998, the Company completed a merger with Pioneer Mortgage,
Inc. ("Pioneer") accounted for as a pooling of interests, which accordingly
required restatement of financial statements. The changes reflecting such
restatement were not material. Pioneer is a mortgage company which operates
within the Company's southern New Jersey market with seven mortgage loan
originators.
6
<PAGE> 1
EXHIBIT 99.6
JeffBanks, Inc.
Consolidated Balance Sheet
UNAUDITED
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(in thousands)
<S> <C> <C>
Assets:
Cash and cash equivalents:
Cash and due from banks ..................................... $ 52,207 $ 54,599
Federal funds sold .......................................... 79,100 --
----------- -----------
131,307 54,599
Investment securities available for sale ........................ 313,281 301,366
Investment securities held to maturity .......................... 675 677
Mortgages held for sale ......................................... 19,951 14,600
Loans, net ...................................................... 1,326,746 1,202,932
Premises and equipment, net ..................................... 24,114 24,085
Accrued interest receivable ..................................... 15,043 15,929
Other real estate owned ......................................... 2,343 3,114
Goodwill ........................................................ 3,870 4,059
Other assets .................................................... 20,054 15,745
----------- -----------
Total assets ................................................ $ 1,857,384 $ 1,637,106
=========== ===========
Liabilities and shareholders' equity:
Deposits:
Demand (non-interest bearing) ............................... $ 222,976 $ 207,881
Savings and money market .................................... 492,007 465,984
Time deposits ............................................... 516,323 477,057
Time deposits, $100,000 and over ............................ 153,117 125,358
----------- -----------
1,384,423 1,276,280
Securities sold under repurchase agreements ..................... 57,064 39,635
FHLB advances - short term ...................................... 148,000 55,000
FHLB advances - long term ....................................... 54,175 54,182
Subordinated notes and debentures ............................... 31,920 32,000
Company-obligated mandatorily redeemable preferred securities of
the Company's subsidiary trust, holding solely $25.3 million
aggregate principal amount of 9.25% junior subordinated
deferrable interest debentures due 2027 of the Company ........ 25,300 25,300
Accrued interest payable ........................................ 17,687 15,444
Other liabilities ............................................... 6,893 7,587
----------- -----------
Total liabilities ........................................... 1,725,462 1,505,428
----------- -----------
Shareholders' equity:
Common Stock - authorized, 20,000,000 shares of $1 par value;
issued and outstanding 10,583,209 and 10,486,620 shares,
respectively .............................................. 10,583 10,487
Additional paid-in capital .................................. 98,177 97,308
Retained earnings ........................................... 26,961 21,933
Accumulated other comprehensive income ...................... (3,799) 1,950
----------- -----------
Total shareholders' equity .................................. 131,922 131,678
----------- -----------
Total liabilities and shareholders' equity .................. $ 1,857,384 $ 1,637,106
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 2
JeffBanks, Inc.
Consolidated Statements of Income
UNAUDITED
<TABLE>
<CAPTION>
Six Months Three Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans including fees ...................... $ 52,816 $ 47,155 $ 27,161 $ 24,045
Investment securities ..................... 9,095 11,225 4,670 5,467
Federal funds sold ........................ 544 1,310 306 643
-------- -------- -------- --------
62,455 59,690 32,137 30,155
-------- -------- -------- --------
Interest expense:
Time deposits, $100,000 and over .......... 3,307 3,006 1,783 1,531
Other deposits ............................ 19,906 18,826 9,954 9,754
FHLB advances ............................. 4,114 4,669 2,215 2,281
Subordinated notes and debentures ......... 1,431 1,540 714 770
Trust preferred securities ................ 1,170 1,170 585 585
Securities sold under repurchase agreements 1,159 1,342 594 630
-------- -------- -------- --------
31,087 30,553 15,845 15,551
-------- -------- -------- --------
Net interest income .................... 31,368 29,137 16,292 14,604
Provision for credit losses .................... 2,985 3,513 1,530 2,547
-------- -------- -------- --------
Net interest income after provision
for credit losses ..................... 28,383 25,624 14,762 12,057
-------- -------- -------- --------
Non-interest income:
Service fees on deposit accounts .......... 2,062 1,697 1,126 819
Gain on sales of residential mortgages and
capitalized mortgage servicing rights ... 1,575 1,689 874 953
Gain on sale of mortgage servicing ........ 625 625
Gain on sales of investment securities .... 712 306 63
Mortgage servicing fees ................... 594 582 281 286
Merchant credit card deposit fees ......... 1,570 1,062 875 575
Credit card fee income .................... 287 311 132 154
Other ..................................... 1,284 1,102 702 555
-------- -------- -------- --------
8,084 7,374 3,990 4,030
-------- -------- -------- --------
Non-interest expense:
Salaries and employee benefits ............ 12,411 12,666 6,238 6,813
Occupancy expense ......................... 2,258 2,222 1,125 1,095
Depreciation .............................. 1,415 1,236 750 659
FDIC expense .............................. 71 68 36 35
Data processing expense ................... 694 602 308 317
Legal ..................................... 519 1,121 216 794
Stationery, printing and supplies ......... 590 599 294 292
Shares tax ................................ 560 583 265 355
Advertising ............................... 571 783 329 417
Other real estate owned maintenance expense 130 29 37 18
Loss on sale and write-downs of other
real estate owned ........................ 5 29 6 (2)
Amortization of intangibles ............... 659 433 349 160
Credit card origination expense ........... 276 425 136 224
Credit card processing expense ............ 452 425 220 228
Merchant card expense ..................... 1,399 834 795 444
Other ..................................... 4,174 5,512 2,256 3,754
-------- -------- -------- --------
26,184 27,567 13,360 15,603
-------- -------- -------- --------
Income before income taxes ..................... 10,283 5,431 5,392 484
Income taxes ................................... 2,152 1,798 1,155 100
-------- -------- -------- --------
Net income ............................. $ 8,131 $ 3,633 $ 4,237 $ 384
======== ======== ======== ========
Per share data:
Average number of common shares (basic) ........ 10,517 10,232 10,540 10,269
Average number of common shares (diluted) ...... 11,010 11,095 11,091 11,157
Net income per common share (basic) ............ $ 0.77 $ 0.36 $ 0.40 $ 0.04
Net income per common share (diluted) .......... $ 0.74 $ 0.33 $ 0.38 $ 0.03
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
JeffBanks, Inc.
Consolidated Statement of Changes in Shareholders' Equity
UNAUDITED
<TABLE>
<CAPTION>
Accumulated
other
Common Additional Retained comprehensive Comprehensive
Stock paid-in-capital earnings income income Total
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 .......... $ 10,487 $ 97,308 $ 21,933 $ 1,950 $ 131,678
Net income ............................ -- -- 8,131 -- $ 8,131 8,131
Issuance of common stock for
dividend reinvestment plan ........... 10 216 -- -- -- 226
Warrants exercised .................... 86 653 -- -- -- 739
Cash dividends on common stock ........ -- -- (3,103) -- -- (3,103)
Other comprehensive income, net of
reclassification adjustments and taxes -- -- -- (5,749) (5,749) (5,749)
--------- --------- --------- --------- --------- ---------
Comprehensive income .................. -- -- -- -- $ 2,382 --
=========
Balance at June 30, 1999 .............. $ 10,583 $ 98,177 $ 26,961 $ (3,799) $ 131,922
========= ========= ========= ========== =========
Disclosure of reclassification amount:
Unrealized holding losses arising during period .................. $(5,286)
Less: reclassification adjustment for gains included in net income 463
-------
Net unrealized losses on securities .............................. $(5,749)
</TABLE>
<TABLE>
<CAPTION>
Accumulated
other
Common Additional Retained comprehensive Comprehensive
Stock paid-in-capital earnings income income Total
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1999 ............. $ 10,512 $ 97,563 $ 24,359 $ 555 $ 132,989
Net income ............................ -- -- 4,237 -- $ 4,237 4,237
Issuance of common stock for
dividend reinvestment plan ........... 3 68 -- -- -- 71
Warrants exercised .................... 68 546 -- -- -- 614
Cash dividends on common stock ........ -- -- (1,635) -- -- (1,635)
Other comprehensive income, net of
reclassification adjustments and taxes -- -- -- (4,354) (4,354) (4,354)
---------
Comprehensive income .................. -- -- -- -- $ (117)
--------- --------- --------- --------- ========= ---------
Balance at June 30, 1999 .............. $ 10,583 $ 98,177 $ 26,961 $ (3,799) $ 131,922
========= ========= ========= ========= =========
Disclosure of reclassification amount:
Unrealized holding losses arising during period .................. $(4,354)
Less: reclassification adjustment for gains included in net income --
-------
Net unrealized loss on securities ................................ $(4,354)
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
JeffBanks, Inc.
Consolidated Statement of Changes in Shareholders' Equity
UNAUDITED
<TABLE>
<CAPTION>
Accumulated
other
Common Additional Retained comprehensive Comprehensive
Stock paid-in-capital earnings income income Total
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 .......... $ 6,094 $ 95,150 $ 19,308 $ 1,254 $ 121,806
Net income ............................ -- -- 3,633 -- $ 3,633 3,633
Issuance of common stock for
dividend reinvestment plan ........... 2 77 -- -- -- 79
Warrants exercised .................... 74 1,121 -- -- -- 1,195
Cash dividends on common stock ........ -- -- (1,897) -- -- (1,897)
Stock split ........................... 4,147 -- (4,147) -- -- --
Other comprehensive income, net of
reclassification adjustments and taxes -- -- -- (419) (419) (419)
--------- --------- --------- --------- --------- ---------
Comprehensive income .................. -- -- -- -- $ 3,214 --
=========
Balance at June 30, 1998 .............. $ 10,317 $ 96,348 $ 16,897 $ 835 $ 124,397
========= ========= ========= ========= =========
Disclosure of reclassification amount:
Unrealized holding losses arising during period .................. $(221)
Less: reclassification adjustment for gains included in net income 198
-----
Net unrealized losses on securities .............................. $(419)
=====
</TABLE>
<TABLE>
<CAPTION>
Accumulated
other
Common Additional Retained comprehensive Comprehensive
Stock paid-in-capital earnings income income Total
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1998 ............. $ 6,150 $ 95,835 $ 21,606 $ 835 $ 124,426
Net income ............................ -- -- 384 -- $ 384 384
Issuance of common stock for
dividend reinvestment plan ........... -- -- -- -- -- --
Warrants exercised .................... 20 513 -- -- -- 533
Cash dividends on common stock ........ -- -- (946) -- -- (946)
Stock split ........................... 4,147 -- (4,147) -- -- --
Other comprehensive income, net of
reclassification adjustments and taxes -- -- -- -- -- --
---------
Comprehensive income .................. -- -- -- -- $ 384
--------- --------- --------- --------- ========= ---------
Balance at June 30, 1998 .............. $ 10,317 $ 96,348 $ 16,897 $ 835 $ 124,397
========= ========= ========= ========= =========
Disclosure of reclassification amount:
Unrealized holding gains arising during period ................... $ 41
Less: reclassification adjustment for gains included in net income 41
----
Net unrealized loss on securities ................................ $--
====
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
JeffBanks, Inc.
Consolidated Statements of Cash Flows
UNAUDITED
Six Months Ended June 30,
1999 1998
(in thousands)
<S> <C> <C>
Operating activities:
Net income ......................................................... $ 8,131 $ 3,633
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization ...................................... 2,732 1,905
Provision for credit losses ........................................ 2,985 3,513
Gain on sales of investment securities ............................. (712) (306)
Gain on sales of assets ............................................ -- (22)
Mortgage loans originated for sale ................................. (107,119) (102,903)
Mortgage loan sales ................................................ 101,768 96,915
Increase in interest receivable .................................... 886 (777)
(Decrease) increase in interest payable ............................ 2,243 (2,303)
(Increase) decrease in other assets ................................ (1,684) 726
(Decrease) increase in other liabilities ........................... (694) 1,529
--------- ---------
Net cash provided by operating activities ....................... 8,536 1,910
--------- ---------
Investing activities:
Proceeds from sales of investment securities available for sale .... 19,271 146,852
Proceeds from maturities of investment securities available for sale 41,722 54,637
Purchase of investment securities available for sale ............... (81,696) (176,307)
Proceeds from sales of other real estate owned ..................... 1,690 948
Net increase in loans .............................................. (127,718) (133,652)
Purchase of premises and equipment ................................. (1,444) (3,657)
--------- ---------
Net cash used in investing activities ........................... (148,175) (111,179)
--------- ---------
Financing activities:
Net increase in deposits ........................................... 108,143 204,364
Net increase (decrease) in repurchase agreements ................... 17,429 (27,731)
Net proceeds from issuance of common stock ......................... 965 1,275
Net increase (decrease) in FHLB advances ........................... 92,993 (41,866)
Net decrease in subordinated notes and debentures .................. (80) --
Dividends paid on common stock ..................................... (3,103) (1,897)
--------- ---------
Net cash provided by financing activities ....................... 216,347 134,145
--------- ---------
Net increase in cash and cash equivalents ............................... 76,708 24,876
Cash and cash equivalents at beginning of year .......................... 54,599 147,945
--------- ---------
Cash and cash equivalents at end of period .............................. $ 131,307 $ 172,821
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
Note 1 - Allowance for Credit Losses:
<TABLE>
<CAPTION>
Six months ended June 30,
1999 1998
(in thousands)
<S> <C> <C>
Balance, beginning of period .. $ 12,407 $ 14,136
Provision charged to operations 2,985 3,513
Loans charged off ............. (3,875) (4,292)
Recoveries .................... 686 694
-------- --------
Balance, end of period ........ $ 12,203 $ 14,051
======== ========
</TABLE>
The balances of impaired loans were $10,469,000 and $11,250,000
respectively, at June 30, 1999 and 1998. The allowance for credit losses
associated with impaired loans was $2,735,000 and $1,867,000 respectively, at
those dates. Total cash collected on impaired loans during the first six months
of 1999 and 1998, respectively, was $1,561,000 and $1,575,000 all of which was
credited to the principal balance outstanding on such loans. Interest which
would have been accrued on impaired loans during those respective periods was
$409,000 and $440,000. No related interest income was recognized during the
period.
Note 2 - Investment Securities:
The carrying value and approximate market value of investment securities
were as follows:
<TABLE>
<CAPTION>
June 30, 1999
Gross Gross
Amortized unrealized unrealized Approximate
cost gains losses fair value
(in thousands)
<S> <C> <C> <C> <C>
Available for Sale:
U.S. treasury securities ...... $ 6,339 $ 23 $ -- $ 6,362
Federal agency obligations .... 19,078 32 224 18,886
Mortgage backed securities .... 188,009 41 3,902 184,148
State and municipal obligations 62,138 478 2,174 60,442
Other securities .............. 43,561 75 193 43,443
-------- -------- -------- --------
Total ......................... $319,125 $ 649 $ 6,493 $313,281
======== ======== ======== ========
Held to Maturity:
State and municipal obligations 675 12 -- 687
-------- -------- -------- --------
Total ......................... $ 675 $ 12 $ -- $ 687
======== ======== ======== ========
<CAPTION>
December 31, 1998
Gross Gross
Amortized unrealized unrealized Approximate
cost gains losses fair value
(in thousands)
<S> <C> <C> <C> <C>
Available for Sale:
U.S. treasury securities ...... $ 7,358 $ 110 $ -- $ 7,468
Federal agency obligations .... 19,251 126 1 19,376
Mortgage backed securities .... 199,685 1,339 650 200,374
State and municipal obligations 46,730 2,120 112 48,738
Other securities .............. 25,417 1 8 25,410
-------- -------- -------- --------
Total ......................... $298,441 $ 3,696 $ 771 $301,366
======== ======== ======== ========
Held to Maturity:
State and municipal obligations 677 22 -- 699
-------- -------- -------- --------
Total ......................... $ 677 $ 22 $ -- $ 699
======== ======== ======== ========
</TABLE>
Note 3:
The unaudited interim financial statements furnished reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature, except as discussed in these notes.
Note 4:
Certain amounts in the financial statements presented for prior periods
have been reclassified to conform with the current period presentation.
Note 5:
Subsequent to SFAS No. 133, the FASB issued SFAS No. 137, which amended the
effective date of SFAS No. 133 to be all fiscal quarters of all fiscal years
beginning after June 15, 2000. Based on the Company's minimal use of derivatives
at the current time, management does not anticipate the adoption of SFAS No. 133
to have a significant impact on the earnings or financial position of the
Company. However, the impact of adopting SFAS No. 133 will depend on the nature
and purpose of the derivative instruments in use by the Company at that time.
Note 6:
On June 29, 1999, the Company announced that it had entered into a merger
agreement with Hudson United Bancorp. ("Hudson"), pursuant to which it would be
acquired by that institution. Consummation of the merger is conditional upon
required regulatory and shareholder approvals. Under terms of the pending
merger, each share of the Company's common stock would be converted into .95 of
a share of Hudson's common stock.
On August 14, 1998, the Company completed a merger with Pioneer Mortgage,
Inc. ("Pioneer") accounted for as a pooling of interests, which accordingly
required restatement of financial statements. The changes reflecting such
restatement were not material. Pioneer was a mortgage company which operates
within the Company's southern New Jersey market with seven mortgage loan
originators.
On July 31, 1998, the Company completed a merger with Regent Bancshares
Corp. and Regent National Bank ("Regent") accounted for as a
pooling of interests, which accordingly required restatement of financial
statements. Under terms of the merger, each share of common stock was as of
that date converted to .505 shares of the Company's common stock,
resulting in the issuance of 1,721,960 shares of the Company's common
stock. Each option to acquire Regent common stock would be converted into an
option to acquire .505 of a share of the Company's common stock, which would
result in the issuance of up to 184,830 shares of the Company's common
stock if all outstanding Regent options are converted.
6
<PAGE> 1
EXHIBIT 99.7
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors
Southern Jersey Bancorp of Delaware, Inc.
We have audited the accompanying consolidated balance sheets of Southern Jersey
Bancorp of Delaware, Inc., and its subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of F&M
Investment Company, a wholly-owned subsidiary, which statements reflect total
assets of $102,565,000 and $92,210,000 as of December 31, 1998 and 1997,
respectively, and net interest income revenues of $5,891,000, $5,672,000 and
$6,738,000 for each of the three years in the period ended December 31, 1998, of
the related consolidated totals. Those statements were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it relates
to the amounts included for the F&M Investment Company, is based solely upon the
reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the over all financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly in all
material respects the consolidated financial position of Southern Jersey Bancorp
of Delaware, Inc., and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and cash flows for each of the
1
<PAGE> 2
years in the three year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Bridgeton, New Jersey
January 22, 1999
Southern Jersey Bancorp of Delaware, Inc. And Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-----------
(dollars in thousands, except share and per share data)
1998 1997
---- ----
<S> <C> <C>
Assets
Cash and due from banks $ 18,879 $ 18,565
Interest bearing deposits with banks 2,450 4,000
Federal funds sold 67,700 40,950
Securities available for sale 98,974 37,278
Securities held to maturity 0 55,415
Loans receivable, net of allowance
for loan losses of
$10,137 in 1998 and
$5,236 in 1997 258,757 300,320
Accrued interest receivable 4,076 3,625
Premises and equipment - net 6,994 6,353
Other real estate owned 1,310 1,820
Cash value of life insurance 10,831 8,164
Other assets 12,694 6,864
Total assets $482,665 $483,354
Liabilities
Deposits:
Demand deposits $ 65,387 $ 61,100
Savings and NOW deposits 129,124 122,076
Money market deposits 37,750 39,081
Other time deposits 213,305 216,207
Total deposits 445,566 438,464
Other liabilities 5,010 5,331
Total liabilities 450,576 443,795
Commitments and contingencies (Notes 11 and 14)
Shareholders' Equity
Shareholders' Equity
Preferred stock, no par value;
shares authorized - 500,000; no shares issued
Common stock, par value $1.67 per share;
shares authorized - 5,000,000;
shares issued - 1,307,683 2,184 2,129
Additional paid-in-capital 3,259 2,260
Retained earnings 29,549 38,767
Accumulated other
comprehensive income 936 159
Treasury stock at cost -
180,202 shares in 1998
and 183,927 shares in 1997 (3,839) (3,756)
Total shareholders' equity 32,089 39,559
Total liabilities and
shareholders' equity $482,665 $483,354
</TABLE>
2
<PAGE> 3
Southern Jersey Bancorp of Delaware, Inc. And Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
(dollars in thousands, except per share data)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest Income
Loans receivable $ 24,624 $ 25,834 $ 22,441
Investment securities 5,983 6,123 6,802
Federal funds sold 2,480 1,830 1,147
Deposits with banks 196 13 0
Total interest income 33,283 33,800 30,390
Interest Expense
Deposits 18,400 17,159 14,870
Net interest income 14,883 16,641 15,520
Provision for loan losses 15,270 7,967 1,805
Net interest income
(loss) after provision
for loan losses (387) 8,674 13,715
Noninterest Income
Service charges on
deposit accounts 1,707 1,693 1,677
Income from
fiduciary activities 834 745 694
Income on cash value
of life insurance 587 228 0
Other service charges and fees 378 372 460
Net realized gains on
sales of securities 3 5 415
Total noninterest income 3,509 3,043 3,246
Noninterest Expense
Salaries and employee benefits 6,575 6,254 5,598
Loss on foreclosed real estate 903 260 259
Loss on other assets 1,733 0 0
Occupancy expense 2,196 1,973 1,777
Examinations and FDIC assessments 250 143 98
Postage, stationery and supplies 603 499 469
Professional fees 1,020 977 647
Repossession expenses
for other assets 821 0 0
Other operating expenses 1,741 1,484 1,509
Total noninterest expenses 15,842 11,590 10,357
Income(loss) before income taxes (12,720) 127 6,604
Provision(benefit) for
income taxes (4,888) (710) 1,276
Net income(loss) $ (7,832) $ 837 $ 5,328
Net income(loss) per common
and common equivalent share:
Basic $ (6.95) $ .75 $ 4.77
Diluted $ (6.95) $ .73 $ 4.67
Average common and common
equivalent shares outstanding:
Basic 1,127 1,120 1,118
Diluted 1,127 1,148 1,141
Cash dividends declared, per
share of common stock $ .29 $ 1.16 $ 1.07
</TABLE>
3
<PAGE> 4
Southern Jersey Bancorp of Delaware, Inc. And Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For The Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Treasury Shareholders'
Stock Capital Earnings Income Stock Equity
----- ------- -------- ------ ----- ------
(dollars in thousands, except share and per share data)
Balances at January 1, 1996
<S> <C> <C> <C> <C> <C> <C>
$ 2,129 $ 2,260 $ 35,103 $ 929 $ (3,778) $ 36,643
Comprehensive income:
Net income for 1996 5,328
Net change in unrealized
gains(losses) on
available-for-sale
investment securities,
net of taxes $ (467) (907)
Comprehensive income 4,421
Cash dividends declared
($1.07 per share) (1,195) (1,195)
Addition of 10,137 shares
to the Treasury (404) (404)
Issuance of 10,134 shares
from the Treasury 286 286
Balances at
December 31, 1996
2,129 2,260 39,236 22 (3,896) 39,751
Comprehensive income:
Net income for 1997 837
Net change in unrealized
gains(losses) on
available-for-sale
investment securities,
net of taxes $ 71 137
Comprehensive income 974
Cash dividends declared
($1.16 per share) (1,306) (1,306)
Addition of 3,520 shares
to the Treasury (166) (166)
Issuance of 9,789 shares
from the Treasury 306 306
Balances at
December 31, 1997
2,129 2,260 38,767 159 (3,756) 39,559
Comprehensive income:
Net loss for 1998 (7,832)
Reclassification adjustment-
Unrealized gain on
available-for-sale
securities
transferred from
held-to-maturity
securities,
net of taxes $396 769
Net change in unrealized
gains (losses) on
available-for-sale
investment securities,
net of taxes $ 4 8
Comprehensive loss (7,055)
Payment for fractional
shares of stock
dividends declared (4) (4)
3% common stock dividend
distributable,
32,683 shares 55 999 (1,054) 0
Cash dividends
($.30 per share) (328) (328)
Addition of 4,363
shares to the
Treasury (258) (258)
Issuance of 8,088 shares
from the Treasury 175 175
Balances at
December 31, 1998
$2,184 $3,259 $29,549 $ 936 $(3,839) $32,089
</TABLE>
4
<PAGE> 5
Southern Jersey Bancorp of Delaware, Inc. And Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
Operating Activities
<S> <C> <C> <C>
Net income(loss) $ (7,832) $ 837 $ 5,328
Adjustments to reconcile net income(loss) to net
cash provided by(used in) operating activities:
Depreciation of premises and equipment 624 556 482
Provision for loan losses 15,270 7,967 1,805
Deferred income tax benefit (2,851) (457) (842)
Gains on sales of investment securities (3) (5) (415)
Increase in accrued interest receivable (451) (342) (98)
Increase in cash value of life insurance (2,667) (8,164) 0
Increase in other assets (5,830) (3,172) (114)
Increase(decrease) in other liabilities (321) 155 1,025
Provision for losses on other real estate 536 68 78
Amortization of premium on investment securities 216 160 237
Accretion of discount on investment securities (112) (36) (73)
(Gain)loss on disposal of bank premises and equipment (1) 2 0
(Gain)Loss on disposal of other real estate owned 143 (78) (20)
Net cash provided by(used in) operating activities (3,279) (2,509) 7,393
Investing Activities
Net (increase)decrease in interest bearing deposits with banks 1,500 (4,000) 0
Net (increase)decrease in federal funds sold (26,750) (28,050) 14,900
Purchase of available-for-sale investment securities (47,666) (16,490) (15,923)
Sales and maturities of available-for-sale investment securities 44,227 12,465 14,858
Purchase of held-to-maturity investment securities (13,870) (9,306) (1,986)
Maturities and calls of held-to-maturity investment securities 12,088 17,277 19,538
Net (increase)decrease in loans made to customers 28,142 (21,046) (60,829)
Purchase of bank premises and equipment (1,276) (1,293) (883)
Proceeds from the sale of other real estate owned 495 661 1,660
Proceeds from sales of premises and equipment 12 595 0
Net cash used in investing activities
(carried forward) $ (3,098) $(49,187) $(28,665)
Net cash used in investing activities
(brought forward) $ (3,098) $(49,187) $(28,665)
Financing Activities
Net increase(decrease)in demand deposits 4,287 5,757 (21,973)
Net increase in savings and NOW deposits 7,048 3,857 17,362
Net increase(decrease) in money market deposits (1,331) 3,086 (8,217)
Net increase(decrease) in other time deposits (2,902) 40,380 34,779
Cash dividends (328) (1,306) (1,195)
Purchase of treasury stock (258) (166) (404)
Sale of treasury stock 175 306 286
Net cash provided by financing activities 6,691 51,914 20,638
Net increase(decrease) in cash and due from banks 314 218 (634)
Cash and due from banks at January 1 18,565 18,347 18,981
Cash and due from banks at December 31 $ 18,879 $ 18,565 $ 18,347
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 17,169 $ 17,089 $ 14,282
Income taxes $ 0 $ 1,615 $ 1,775
OTHER NON-CASH ACTIVITIES:
Transfer of loans, net of charge-offs to
other real estate owned $ 188 $ 455 $ 2,789
Increase(decrease) in unrealized gain on
available-for-sale investment securities $ 8 $ 137 $ (907)
Reclassification adjustment -
unrealized gain on securities available-for-sale
transferred from securities held-to-maturity $ 769 $ 0 $ 0
</TABLE>
5
<PAGE> 6
Southern Jersey Bancorp of Delaware, Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting principles followed and the methods of applying those principles
conform to generally accepted accounting principles and to general practices in
the banking industry. The significant policies are summarized as follows:
(a) Nature of Operations
Southern Jersey Bancorp of Delaware, Inc. (the Company) is a bank holding
company whose principal activity is the ownership and management of its
wholly-owned subsidiary, The Farmers and Merchants National Bank of Bridgeton
(the Bank). The Bank generates commercial (including agricultural), mortgage and
consumer loans and receives deposits from customers located primarily in
Southern New Jersey and the surrounding areas.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Southern Jersey
Bancorp of Delaware, Inc. and its wholly-owned subsidiaries, The Farmers and
Merchants National Bank of Bridgeton and AMFDCM, Inc., and the Bank's
wholly-owned subsidiaries, F&M Investment Company and Woulf Asset Holdings,
Inc., after elimination of all material intercompany transactions and balances.
(c) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant changes
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
While management uses available information to recognize losses on loans and
foreclosed real estate, future adjustments to the allowance may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize adjustments to the allowance based on their
judgments about information available to them at the time of their
6
<PAGE> 7
examination. Because of these factors, it is reasonably possible that the
allowances for losses on loans and foreclosed real estate may change in the near
term.
(d) Cash Equivalents
For the purpose of presentation in the consolidated statements of cash flows,
cash and cash equivalents are defined as those amounts included in the balance
sheet caption "cash and due from banks".
(e) Investment Securities
Debt securities that the Bank has the intent and ability to hold until maturity
are classified as "held-to-maturity" and are carried at historical cost,
adjusted for any amortization of premiums or accretion of discounts. Trading
securities are those held principally for the purpose of selling in the near
future and are carried at fair value, with unrealized gains and losses included
in earnings. Marketable equity securities and debt securities that are not
classified as held-to-maturity or trading are classified as
"available-for-sale" and are carried at fair value, with the unrealized gains
and losses, net of tax, reported as a separate component of stockholders' equity
as accumulated other comprehensive income. As of December 31, 1998, the Bank has
no trading securities or held-to-maturity securities.
Realized gains and losses and declines in value judged to be other than
temporary are included in earnings. The specific identification method is
utilized in determining the cost of a security that has been sold.
Premiums and discounts are amortized and accreted, respectively, as an
adjustment of the securities yield using the interest method, adjusted for the
effects of prepayment on the underlying collateral.
(f) Loans
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay off are reported at their outstanding principal
adjusted for any charge-offs, the allowance for loan losses, and unearned
income.
The interest method is used to amortize unearned income on installment loans and
interest on all other loans is recognized based on the principal balance
outstanding.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received.
(g) Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered by management
to be adequate to provide for potential loan losses. The allowance is increased
by provisions charged to operations and reduced by net charge-offs. Management's
periodic evaluation of the adequacy of the allowance is based on the Company's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay,
7
<PAGE> 8
the estimated value of any underlying collateral, and current economic
conditions.
(h) Premises and Equipment
Premises and equipment are carried at cost, less accumulated depreciation and
amortization computed on the straight-line method over the estimated useful
lives of the assets.
Property under capital lease is recorded at the present value of the minimum
lease payments and is amortized using the straight-line method over the term of
the lease.
(i) Other Real Estate Owned
Real estate acquired in satisfaction of a loan is recorded at the lower of cost
or fair value less disposition costs. Properties acquired by foreclosure or deed
in lieu of foreclosure are transferred to other real estate owned and recorded
at the lower of cost or fair value less disposition cost based on their
appraised value at the date actually or constructively received. Losses arising
from the acquisition of such property are charged against the allowance for loan
losses. Subsequent adjustments to the carrying values of other real estate
owned are charged to operating expenses.
(j) Income Taxes
Income taxes are provided for the tax effects of the transactions reported in
the consolidated financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of the
allowance for loan losses, net operating loss and accumulated depreciation. The
deferred tax assets and liabilities represent the future tax return consequences
of those differences which will either be taxable or deductible when the assets
and liabilities are recovered or settled . Deferred tax assets and liabilities
are reflected at income tax rates applicable to the period in which the deferred
tax assets or liabilities are expected to be realized or settled. As changes in
tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes. The Company files consolidated income
tax returns with its subsidiaries.
(k) Financial Instruments
Other off-balance-sheet instruments. In the ordinary course of business, the
Bank has entered into off-balance-sheet financial instruments consisting of
commitments to extend credit, commitments under credit-card arrangements, and
standby letters of credit. Such financial instruments are recorded in the
consolidated financial statements when they are funded or related fees are
incurred or received.
(l) Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair values of financial instruments as disclosed herein:
Cash and short-term instruments - The carrying amounts of cash and short-term
instruments approximate their fair value.
Available-for-sale and held-to-maturity securities - Fair values for securities,
excluding restricted equity securities, are based on quoted market
8
<PAGE> 9
prices. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments. The carrying values of
restricted equity securities approximate fair values.
Loans - Fair values are estimated for portfolios of loans with similar financial
characteristics. The fair value of loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loan. The
estimate of maturity is based on the Bank's historical experience with
repayments for each loan classification, modified, as required, by an estimate
of the effect of current economic and lending conditions. Fair values for
impaired loans are estimated using discounted cash flow analyses or underlying
collateral values, where applicable.
Deposit liabilities - The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date. The
carrying amounts of variable-rate, fixed-term money-market accounts and
certificates of deposit (CDs) approximate their fair values at the reporting
date. Fair values for fixed-rate CDs are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on time deposits.
Off-balance-sheet instruments - Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standings.
(m) Earnings per Share
Basic earnings per share are computed by dividing earnings available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflect per share amounts that would have
resulted if dilutive potential common stock had been converted to common stock.
Both basic and diluted earnings per share computations give retroactive effect
to stock dividends.
(n) Stock Dividend
On December 10, 1998, the Company's Board of Directors declared 3% stock
dividends which were paid on January 1, 1999 to shareholders of record at
December 21, 1998. Payment of the stock dividend resulted in the issuance of
32,683 additional common shares and cash of $4,000 in lieu of fractional shares.
(o) Trust Fees
Trust fees are recorded on the accrual basis.
(p) Recent Accounting Standards
As of January 1, 1998, the Company adopted Financial Accounting Standards Board
(FASB) Statement No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130
establishes new standards for reporting comprehensive income, which includes net
income as well as certain other items which result in a change to equity during
the period. Prior period financial statements have been reclassified to conform
to the requirements of FAS 130. The adoption of FAS 130 had no impact on the
Company's financial position or results of operations.
9
<PAGE> 10
As of January 1, 1998, the Companey adopted Financial Accounting Standards Board
(FASB) Statement No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits". FAS 132 standardizes the disclosure requirements for
pensions and other postretirement benefits.
As of October 1, 1998, the Company adopted FASB issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS
133 requires the Company to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure these instruments
at fair value. In connection with the adoption of FAS 133, the Company
reclassified all held-to-maturity securities to available-for-sale securities
without any effect on earnings or the financial posit ion of the Company.
(q) Reclassifications
Certain reclassifications have been made to the 1997 and 1996 amounts in order
to conform with 1998 presentation.
NOTE 2 - CASH AND DUE FROM BANKS
The Bank maintains various deposits in other banks. The withdrawal or usage
restrictions on these balances do not have a significant impact on the
consolidated operations of the Company. Aggregate reserves of $7,161,000 and
$7,195,000 were maintained at the Federal Reserve Bank of Philadelphia as of
December 31, 1998 and 1997, respectively, to satisfy federal regulatory
requirements.
NOTE 3 - INVESTMENT SECURITIES
Investment securities have been classified in the Consolidated Balance Sheets
according to management's intent at the time of purchase. The carrying amounts
of securities and their approximate fair values at December 31, 1998 and 1997
were as follows (In Thousands):
At December 31, 1998
<TABLE>
<CAPTION>
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities $ 16,148 $ 247 $ 0 $ 16,395
U.S. Government agencies 37,002 267 (58) 37,211
State and municipal 29,183 827 (1) 30,009
Other securities 15,223 146 (10) 15,359
Securities available-for-sale $ 97,556 $ 1,487 $ (69) $ 98,974
Securities held-to-maturity $ 0 $ 0 $ 0 $ 0
At December 31, 1997
Available-for-sale:
U.S. Treasury securities $ 4,003 $ 140 $ 0 $ 4,143
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government agencies 32,908 133 (34) 33,007
Other securities 128 0 0 128
Securities available-for-sale $ 37,039 $ 273 $ (34) $ 37,278
Held-to-maturity:
U.S. Treasury securities $ 8,508 $ 0 $ (22) $ 8,486
U.S. Government agencies 3,500 0 (35) 3,465
State and municipal 30,537 588 (1) 31,124
Other securities 12,870 48 (37) 12,881
Securities held-to-maturity $ 55,415 $ 636 $ (95) $ 55,956
</TABLE>
The scheduled maturities of securities held to maturity and securities
available-for-sale at December 31, 1998 were as follows (In Thousands):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Securities available-for-sale:
Within one year $ 7,330 $ 7,367
After one year but within five years 36,160 36,849
After five years but within ten years 53,869 54,546
After ten years 197 212
97,556 98,974
Securities held-to-maturity 0 0
Total debt securities $97,556 $98,974
</TABLE>
The gross realized gains and gross realized losses on investment securities
transactions for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
------------------ ----------------
(dollars in thousands)
<S> <C> <C>
December 31, 1998
Gross gains $ 0 $ 3
Gross losses 0 0
Net $ 0 $ 3
December 31, 1997
Gross gains $ 13 $ 2
Gross losses (9) (1)
Net $ 4 $ 1
December 31, 1996
Gross gains $ 424 $ 6
Gross losses 0 (15)
Net $ 424 $ (9)
</TABLE>
Gross realized gains and gross realized losses on held-to-maturity investment
securities are a result of calls prior to maturity.
Investment securities with a fair value of $34,603,000 and $36,464,000 were
pledged at December 31, 1998 and 1997, respectively, to secure public funds,
customer deposits, and for other purposes required by law.
11
<PAGE> 12
NOTE 4 - LOANS RECEIVABLE
The components of loans in the Consolidated Balance Sheets were as follows (In
Thousands):
<TABLE>
<CAPTION>
December 31
1998 1997
<S> <C> <C>
Commercial and agriculture $ 63,917 $ 74,021
Real estate mortgages 138,315 143,867
Installment and consumer credit 66,967 88,138
Subtotal 269,199 306,026
Unearned discount (305) (470)
Allowance for loan losses (10,137) (5,236)
Loans receivable - net
$ 258,757 $ 300,320
</TABLE>
As of December 31, 1998 and 1997, the Bank had related party loans to officers,
directors, significant shareholders and their affiliated interests. The terms
of these loans are substantially the same as those prevailing at the time for
comparable unrelated transactions. A summary of the related party loans
outstanding as of December 31, 1998 and 1997 is as follows (In Thousands):
<TABLE>
<CAPTION>
December 31
1998 1997
<S> <C> <C>
Balance, January 1, $4,340 $4,468
New loans 3,117 4,041
Loan payments (4,313) (4,169)
Balance, December 31, $3,144 $4,340
</TABLE>
An analysis of the change in the allowance for loan losses is as follows (In
Thousands):
<TABLE>
<CAPTION>
December 31
1998 1997 1996
<S> <C> <C> <C>
Balances at beginning of year $ 5,236 $ 3,190 $ 2,413
Provision charged to operating expense 15,270 7,967 1,805
Recoveries of loans previously charged off 2,112 1,918 183
Loan charge-offs (12,481) (7,839) (1,211)
Balances at end of year $ 10,137 $ 5,236 $ 3,190
</TABLE>
A significant portion of the additional provision for loan losses and loan
charge-offs were in the fourth quarter of 1998.
Non-performing assets include non-performing loans and other real estate owned.
The non-performing loan category includes loans on which accrual of interest
has been discontinued with subsequent interest payments credited to principal
or income as received and loans 90 days past due or greater on which interest
is still accruing. Other real estate owned consists of properties acquired
through foreclosure.
Non-performing loans as a percentage of total loans was 6.3% and 2.1% as of
December 31, 1998 and 1997, respectively.
12
<PAGE> 13
A summary of non-performing assets as of December 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
December 31
1998 1997
<S> <C> <C>
Non-accruing loans:
Commercial and agriculture $ 1,449 $ 1,384
Commercial and Real estate mortgages 13,294 2,123
Installment and consumer credit 1,437 464
Total non-accruing loans 16,180 3,971
Past due 90 days or more accruing loans:
Commercial and agriculture 465 379
Commercial and Real estate mortgages 154 969
Installment and consumer credit 52 1,099
Total past due 90 days or more accruing loans 671 2,447
Total non-performing loans 16,851 6,418
Other real estate owned 1,310 1,820
Total non-performing assets $18,161 $ 8,238
</TABLE>
As of December 31, 1998 and 1997, the recorded investment in loans considered
to be impaired under SFAS Statement No. 114, "Accounting by Creditors for
Impairment of a Loan", as amended by FASB Statement No. 118, totaled
$21,027,000 and $2,462,000, respectively. As permitted, all homogenous smaller
balance consumer and residential mortgage loans were excluded from individual
review for impairment. The majority of impaired loans were measured using the
fair value of collateral. The total allowance for loan losses related to these
loans was $6,611,000 and $812,000 on December 31, 1998 and 1997, respectively.
During 1998 and 1997, impaired loans averaged approximately $11,745,000 and
$1,814,000, respectively. Actual interest income recorded on these loans
amounted to $420,000, $38,000 and $17,000 during 1998, 1997 and 1996,
respectively.
The Bank is not committed to lending additional funds to debtors whose loans
have been considered impaired.
NOTE 5 - PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31, 1998 and 1997, is as
follows (In Thousands):
<TABLE>
<CAPTION>
December 31
Estimated Lives 1998 1997
<S> <C> <C> <C>
Land $ 463 $ 463
Buildings and improvements 10-80 years 5,191 5,172
Leasehold improvements 5-31 years 521 511
Furniture, fixtures and equipment 5-10 years 5,934 5,809
</TABLE>
13
<PAGE> 14
<TABLE>
<S> <C> <C> <C>
Equipment under capital lease 7 years 369 324
12,478 12,279
Less: Accumulated depreciation and
Amortization 5,484 5,926
Net Bank Premises and Equipment $ 6,994 $ 6,353
</TABLE>
Depreciation charged to operating expenses amounted to $624,000 in 1998,
$556,000 in 1997,and $482,000 in 1996.
NOTE 6 - DEPOSITS
The aggregate amount of short-term time deposits, each with a minimum
denomination of $100,000, was approximately $42,811,000 and $41,206,000 in 1998
and 1997, respectively.
As of December 31, 1998, the scheduled maturities of time deposits are as
follows (In Thousands):
<TABLE>
<S> <C>
1999 $130,971
2000 20,424
2001 18,493
2002 43,417
2003 and Thereafter 0
$213,305
</TABLE>
NOTE 7 - SHAREHOLDERS' EQUITY
(a) Common Stock
The Company has 5,000,000 shares of $1.67 par value common stock authorized
with 1,307,683 shares issued and 1,127,411 shares outstanding at December 31,
1998, and 5,000,000 shares of $1.67 par value common stock authorized with
1,307,683 shares issued and 1,123,756 shares outstanding at December 31, 1997.
Treasury stock totaled 180,202 shares and 183,927 shares at December 31, 1998
and 1997, respectively, and was accounted for under the cost method.
(b) Earnings per Share
The following reconciles amounts reported in the financial statements (In
Thousands except per share data):
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
Loss Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Loss available to common stock-
holders--basic earnings per share $(7,832) 1,127 $(6.95)
Effect of dilutive securities
Options 0 0
Loss available to common stock-
holders--diluted earnings per share $(7,832) 1,127 $(6.95)
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
Income Shares Per-share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Income available to common stock-
holders--basic earnings per share $ 837 1,088 $.77
Effect of dilutive securities
Options 0 30
Income available to common stock-
holders--diluted earnings per share $ 837 1,118 $.75
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
Income Shares Per-share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Income available to common stock-
holders--basic earnings per share $5,328 1,085 $4.91
Effect of dilutive securities
Options 0 25
Income available to common stock-
holders--diluted earnings per share $5,328 1,110 $4.80
</TABLE>
(c) Preferred Stock
The Company has 500,000 shares of no par value preferred stock authorized,
of which none are issued or outstanding.
(d) Stock Rights
Pursuant to a shareholder rights plan adopted by the Company on November 30,
1989, the Company distributed common stock purchase rights to the shareholders
of record on November 30, 1989. Each Right entitles the registered holder
thereof to purchase from the Company following the Distribution Date, one one-
hundredth of a share of Series A Preferred Stock, no par value, at a Purchase
Price of $70.00 per one one-hundredth share, subject to adjustment, or, upon
the occurrence of certain events, Common Stock of the Company or common stock
of an entity that acquires the Company.
A Distribution Date will occur upon the earlier of 10 days following a public
announcement that a Person or group of affiliated or associated Persons has
acquired, or obtained the right to acquire, beneficial ownership of 20% or more
of the outstanding shares of Common Stock; or 10 days following the
commencement of a tender offer or exchange offer that would result in a Person
or group beneficially owning 30% or more of such outstanding shares of Common
Stock.
The Rights are not exercisable until the Distribution Date and will expire at
the close of business on November 30, 1999, unless redeemed earlier by the
Company.
In the event that, at any time following the Distribution Date, the Company is
the surviving corporation in a merger with an Acquiring person and the
Company's Common Stock is not changed or exchanged; a Person becomes the
beneficial owner of more than 30% of the then outstanding shares of Common
Stock (except pursuant to an offer for all outstanding shares of Common Stock
15
<PAGE> 16
that the Continuing Directors determine to be fair to and otherwise in the best
interests of the Company and its stockholders); an Acquiring Person engages in
one or more "self-dealing" transactions; or during such time as there is an
Acquiring Person, an event occurs that results in such Acquiring Person's
ownership interest being increased by more than one percentage point, each
holder of a Right will thereafter have the right to receive, upon exercise
thereof and in lieu of Preferred Stock, Common Stock (or, in certain
circumstances, cash, property, or other securities of the Company) having a
value equal to twice the Purchase Price of the Right.
In the event that, at any time following the Stock Acquisition Date, the
Company is acquired in a merger or other business combination transaction in
which the Company is not the surviving corporation; or 50% or more of the
Company's assets or earning power is sold or transferred to any Person other
than a subsidiary of the Company, each holder of a Right shall thereafter have
the right to receive, upon exercise thereof and in lieu of Preferred Stock,
common stock of the acquiring Person having a value equal to twice the Purchase
Price of the Right.
At any time prior to the earlier of November 30, 1999, or 10 days following the
Stock Acquisition Date, the Company may redeem the Rights in whole, but not in
part, at a price of $0.01 per Right (payable in cash, Common Stock, or other
consideration deemed appropriate by the Board of Directors).
Until a Right is exercised, the holder will have no rights as a shareholder of
the Company, including, without limitation, the right to vote or to receive
dividends.
On April 11, 1996, the Stockholders Rights Agreement dated November 30, 1989
was amended to, among other things, extend the expiration date of the Rights
subject to the Agreement to April 11, 2006, and to increase the purchase price
of one one-hundredth of a share of Series A Preferred Stock, no par value, from
$70 to $90.
(e) Stock Option and Stock Appreciation Rights Plan
On August 7, 1988, the Company initiated a stock option and stock appreciation
rights plan (Plan #1) for sale or award to key employees as incentive stock
options, non-qualified stock options or stock appreciation rights, and may not
be exercised later than ten years from the date of the grant. The options
exercise price is $18.00 per share. On August 7, 1998, all outstanding stock
appreciation rights under (Plan #1) expired.
On March 25, 1993, the Company initiated a second stock option and stock
appreciation rights plan (Plan #2) with the same terms and conditions as the
first plan with the options exercise price at $20.00 per share.
On December 8, 1994, the Company initiated a third stock option and stock
appreciation rights plan (Plan #3) with the same terms and conditions as the
previous two plans with the options exercise price at $31.00 per share.
The Company accounts for the stock option plans under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, no compensation expense has been recognized for
the stock options. All options were granted prior to the adoption date of SFAS
Statement No. 123, "Accounting for Stock-Based Compensation." Therefore, the
16
<PAGE> 17
Company is not required to adopt the fair value provisions or present pro forma
financial information.
The stock options were satisfied with reissuance of treasury stock.
The following table summarizes the options activity:
<TABLE>
<CAPTION>
Weighted Average
Number Option Price
Of Shares Per Share
<S> <C> <C>
Options outstanding at
January 1, 1996 96,233 $27.62
Options exercised (Plan #1) (3,095) $18.00
Options exercised (Plan #2) (2,250) $20.00
Options outstanding at
December 31, 1996 90,888 $28.14
Options exercised (Plan #1) (3,305) $18.00
Options exercised (Plan #2) (1,500) $20.00
Options cancelled (Plan #2) (400) $20.00
Options outstanding at
December 31, 1997 85,683 $28.71
Options exercised (Plan #1) (7,403) $18.00
Options expired (Plan #1) (1,800) $18.00
Options cancelled (Plan #2) (1,000) $20.00
Options outstanding at
December 31, 1998 75,480 $30.13
Options exercisable at
December 31, 1998 75,480 $30.13
</TABLE>
At December 31, 1998, the Company had reserved 75,480 shares of
common stock to cover grants under the plans.
NOTE 8 - RETIREMENT PLANS
(a) 401(K) Profit Sharing Plan
The Bank has a profit sharing retirement plan under which eligible employees
may defer a portion of their annual compensation, pursuant to Section 401(K) of
the Internal Revenue Code. The Bank matches employee contributions at a
designated rate times elective contribution. All employees with at least one
year of service and who have attained the age of 21 are eligible to
participate. The Bank's contributions to the 401(K) plan were $93,000, $82,000
and $72,000 for the years ended December 31, 1998, 1997 and 1996.
(b) Defined Benefit Pension Plan
The Bank has a non-contributory defined benefit pension plan which covers
substantially all salaried employees. Benefits under this plan are based on
the employees' highest consecutive five years' compensation in the last ten
years prior to retirement. The Bank's policy has been to fund the pension plan
on a current basis to the extent deductible under existing tax regulations.
Pension expense in the amount of $34,000, $112,000 and $129,000 was recognized
for the years ended 1998, 1997 and 1996, respectively. The following table sets
17
<PAGE> 18
forth the plan's funded status and amounts recognized in the consolidated
financial statements (In Thousands):
<TABLE>
<CAPTION>
Pension Benefit
1998 1997 1996
<S> <C> <C> <C>
Change in benefit obligation:
Obligation at January 1 $3,958 $ 3,657 $3,526
Service cost 221 208 219
Interest cost 289 265 251
Benefits payments (190) (228) (325)
Actuarial (gain)loss (201) 56 (14)
Obligation at December 31 $4,077 $ 3,958 $3,657
Change in plan assets:
Fair value of plan assets at
January 1 $5,067 $ 4,083 $3,892
Actual return on plan assets 207 1,212 517
Benefit payments (190) (228) (326)
Fair value of plan assets at
December 31 $5,084 $ 5,067 $4,083
Funded status:
Funded status at December 31 $1,006 $ 1,109 $426
Unrecognized transition
(asset) obligation (78) (122) (166)
Unrecognized (gain)loss (979) (1,004) (164)
Net amount recognized $ (51) $ (17) $ 96
Amounts recognized in the statement of financial position consist of:
Prepaid benefit cost $ (51) $ (17) $ 96
Net amount recognized $ (51) $ (17) $ 96
Components of net periodic benefit cost:
Service cost $ 221 $ 208 $ 219
Interest cost 289 265 251
Expected return on plan assets (397) (317) (297)
Amortization of transition
(asset) obligation (44) (44) (44)
Amortization of net (gain)loss (35) 0 0
Net periodic benefit cost $ 34 $ 112 $ 129
</TABLE>
The assumptions used in the measurement of the Company's benefit
obligation are as follows:
<TABLE>
<CAPTION>
Weighted-average assumptions December 31
1998 1997 1996
<S> <C> <C> <C>
Annual discount rate 7.5% 7.5% 7.5%
Annual rate of increase in compensation levels 5.0% 5.0% 5.0%
Annual expected long-term rate of return on assets 8.0% 8.0% 8.0%
</TABLE>
18
<PAGE> 19
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plan with accumulated benefit obligations
in excess of plan assets were $4,077,000, $3,220,000, and $5,084,000,
respectively, as of December 31, 1998, and $3,958,000, $2,945,000, and
$5,067,000, respectively, as of December 31 1997, and $3,657,000, $2,729,000,
and $4,083,000, respectively, as of December 31, 1996.
No amounts were included in other comprehensive income arising from a change in
the additional minimum pension liability at December 31, 1998 and December 31,
1997.
The prior-service costs are amortized on a straight-line basis over the average
remaining service period of active participants. Gains and losses in excess of
10% of the greater of the benefit obligation and the market-related value of
assets are amortized over the average remaining service period of active
participants.
Plan assets are invested in common stocks, treasury securities and corporate
obligations, with the balance in cash and short-term investments. Investment
in the Company's stock as of December 31, 1998 and 1997, was 20,544 shares
valued at $555,000 and $1,243,000, respectively.
NOTE 9 - DEFERRED COMPENSATION
The Bank has a deferred compensation plan for the benefit of key employees.
Under the plan, upon retirement after age 65, the employee shall receive a
minimum of fifty percent of his then monthly salary for one hundred twenty
months. This amount will be reduced by one-half of one percent for each month
that retirement is prior to age 65 with the minimum age for retirement at age
60. If a covered employee dies while employed by the Bank, a death benefit of
fifty percent of the employee's then annual salary is payable to the employee's
beneficiary over ten years. The expense charged to operations for future
obligations was $27,000, $15,000 and $11,000 in 1998, 1997 and 1996,
respectively.
NOTE 10 - CASH SURRENDER VALUE OF LIFE INSURANCE
Commencing in 1997, the Bank maintains life insurance policies on several
officers. The policies are of three types: officer supplemental life
insurance/split-dollar plan, group term replacement/split-dollar plan, and
salary continuation plan. Under the officer supplemental life insurance/split-
dollar plan and the group term replacement/split-dollar plan, the Bank pays the
premium and receives, upon termination of the policy or the death of the
insured, the cash surrender value of the policy, and the insured or a
designated beneficiary receives the balance of benefits paid. The salary
continuation plan is a deferred compensation for key employees (Note 9). The
Bank is the owner and beneficiary of the policy. The insurance purchased is
designed to offset the Bank's contractual obligations under deferred
compensation agreements.
NOTE 11 - FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, commitments under credit-card
arrangements to extend credit, standby letters of credit and financial
guarantees. Those instruments involve, to varying degrees, elements of credit
19
<PAGE> 20
and interest-rate risk in excess of the amount recognized in the Consolidated
Balance Sheets. The contract or notional amounts of those instruments reflect
the extent of the Bank's involvement in particular classes of financial
instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, commitments
under credit-card arrangements to extend credit, standby letters of credit, and
financial guarantees written is represented by the contractual notional amount
of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to Extend Credit and Financial Guarantees - Commitments to extend
credit are agreements to lend to a customer as long as there is to violation of
any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
The Bank's experience has been that approximately 97 percent of loan commitments
are drawn upon by customers. While approximately 20 percent of performance
letters of credit are utilized, a significant portion of such utilization is on
an immediate payment basis. The Bank evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if it is deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held varies but may include accounts
receivable; inventory, property, plant, and equipment; and income-producing
commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond financing, and
similar transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The percentage of collateral held for those commitments was
approximately 19%.
During 1998, the Bank had 5 letters of credit drawn upon. The Bank had not
been required to perform on any financial guarantees during 1997 and 1996, and
had not incurred any losses on its commitments in 1998, 1997 or 1996.
The estimated fair values of the Company's financial instruments were as
follows (In Thousands):
<TABLE>
<CAPTION>
December 31
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 18,879 $ 18,879 $ 18,565 $ 18,565
Interest bearing deposits
with banks 2,450 2,450 4,000 4,000
Federal funds sold 67,700 67,700 40,950 40,950
Investment securities
available-for-sale 98,974 98,974 37,278 37,278
Investment securities
held-to-maturity 0 0 55,415 55,956
Loans receivable - net 258,757 257,763 300,320 299,407
Accrued interest receivable 4,076 3,625 3,625 3,625
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C> <C> <C> <C>
Financial Liabilities:
Deposits $445,566 $438,127 $438,464 $439,938
Other Liabilities 5,010 5,010 5,331 5,331
</TABLE>
A summary of the notional amounts of the Bank's financial instruments with off-
balance sheet risk at December 31, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
Notional Amount
1998 1997
<S> <C> <C>
Commitments to extend credit $16,296,000 $17,332,000
Credit card arrangements $ 3,995,000 $ 2,175,000
Standby letters of credit $ 6,904,000 $ 5,960,000
</TABLE>
NOTE 12 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located within the
Bank's geographical area. The Bank is mandated by the Community Reinvestment
Act and other regulations to conduct most of its lending activities within the
geographical area where it is located. As a result, the Bank and its borrowers
may be vulnerable to the consequences of changes in the local economy.
Investments in state and municipal securities involve governmental entities
within the Bank's geographical area.
The distribution of commitments to extend credit approximates the distribution
of loans outstanding. Commercial and standby letters of credit were granted
primarily to commercial borrowers.
The contractual amounts of credit-related financial instruments, such as
commitments to extend credit, credit-card arrangements, and letters of credit,
represent the amounts of potential accounting loss should the contract be fully
drawn upon, the customer default and the value of any existing collateral
become worthless.
NOTE 13 - INCOME TAXES
Significant components of the Bank's deferred tax assets and liabilities were
as follows (In Thousands):
<TABLE>
<CAPTION>
December 31
1998 1997
<S> <C> <C>
Deferred Tax Assets:
Allowance for loan losses $2,343 $1,012
Deferred compensation 275 283
Accrued pension cost 0 18
Non-accrual loan interest 190 63
Federal operating loss 1,626 94
Total deferred tax assets 4,434 1,470
Deferred Tax Liabilities:
Accumulated depreciation 376 263
Net unrealized appreciation on
investment securities 482 82
Total deferred tax liabilities 858 345
Net deferred tax assets $3,576 $1,125
</TABLE>
21
<PAGE> 22
The significant components of the consolidated provision (benefit) for income
taxes were as follows (In Thousands):
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
<S> <C> <C> <C>
Current tax provision(benefit):
Federal $(2,037) $ (253) $ 2,118
Deferred income tax (benefit)expense (2,851) (457) (842)
Provision(benefit) for income taxes $(4,888) $ (710) $ 1,276
</TABLE>
A reconciliation of the provision for income taxes, as reported, with the
federal income tax at the statutory rate of 34 percent for the years ended
December 31, is as follows (In Thousands):
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
<S> <C> <C> <C>
Income taxes at the statutory rate $(4,325) $ 43 $ 2,245
Increase(decrease) in federal
tax expense resulting from:
Tax-exempt income (716) (538) (566)
Other 153 (215) (403)
Provision(benefit) for income tax $(4,888) $ (710) $ 1,276
</TABLE>
As of December 31, 1998, a net operating loss in the amount of $4,781,000 is
available for carryforward to offset future taxable income, and if not
utilized, will expire on December 31, 2013.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Bank has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Bank is a
defendant in certain claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
adverse effect on the consolidated financial condition of the Bank.
The Bank provides self-funded comprehensive health care coverage to
substantially all of its employees. The plan is covered by an umbrella policy
for catastrophic illnesses. The Bank's maximum liability is $35,000 per
participant for 1998 and 1997, with an overall maximum liability of $523,000
for 1998 and $476,000 for 1997.
NOTE 15 - DIVIDEND RESTRICTION AND REGULATORY MATTERS
Permission from the Comptroller of the Currency is required if the total of
dividends declared in a calendar year exceeds the total of its net profits, as
defined by the Comptroller, for that year, combined with its retained net
profits of the two preceding years. There are no retained net profits of the
Company available for dividends as of December 31, 1998.
22
<PAGE> 23
The Company and its bank subsidiary (the Companies) are subject to various
regulatory capital requirements administered by federal banking agencies.
Failure to meet the minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's consolidated
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Companies must meet specific
capital guidelines that involve quantitative measures of assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. Capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Companies to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital(as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1998,
that the Companies meet all the capital adequacy requirements to which they are
subject.
As of December 31, 1998, the most recent notifications from applicable
regulatory agencies indicate that the Companies were categorized as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, an entity must maintain a minimum total risk-
based, Tier I risk-based, and Tier I leverage ratios as set forth in the table
below. There are no conditions or events since the most recent notification
that management believes have changed the institution's category.
The Companies' actual capital amounts and ratios are presented in the following
table (In Thousands):
<TABLE>
<CAPTION>
Per Regulatory Guidelines
Actual Minimum Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital to
Risk-Weighted Assets:
Southern Jersey Bancorp
of Delaware, Inc. $32,744 10.1% $25,919 8.0% $32,399 10.0%
Farmers and Merchants
National Bank 30,356 9.5% 25,628 8.0% 32,037 10.0%
Tier I Capital to
Risk-Weighted Assets:
Southern Jersey Bancorp
of Delaware, Inc. 28,619 8.8% 12,960 4.0% 19,440 6.0%
Farmers and Merchants
National Bank 26,379 8.2% 12,814 4.0% 19,221 6.0%
Tier I Capital to
Average Assets:
Southern Jersey Bancorp
of Delaware, Inc. 28,619 5.9% 19,293 4.0% 24,116 5.0%
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Farmers and Merchants
National Bank 26,379 5.5% 19,191 4.0% 23,989 5.0%
As of December 31, 1997:
Total Capital to
Risk-Weighted Assets:
Southern Jersey Bancorp
of Delaware, Inc. $43,775 12.5% $27,929 8.0% $34,911 10.0%
Farmers and Merchants
National Bank 40,365 11.7% 27,689 8.0% 34,612 10.0%
Tier I Capital to
Risk-Weighted Assets:
Southern Jersey Bancorp
of Delaware, Inc. 39,400 11.3% 13,964 4.0% 20,946 6.0%
Farmers and Merchants
National Bank 36,030 10.4% 13,844 4.0% 20,767 6.0%
Tier I Capital to
Average Assets:
Southern Jersey Bancorp
of Delaware, Inc. 39,400 8.2% 19,318 4.0% 24,148 5.0%
Farmers and Merchants
National Bank 36,030 7.5% 19,318 4.0% 24,148 5.0%
</TABLE>
NOTE 16 - YEAR 2000 (unaudited)
The Company began the process of preparing its computer systems and
applications for the Year 2000 in 1997. The process includes directing its
external service providers to take the appropriate action to ensure Year 2000
compliance, as well as replacing its hardware and software in the third quarter
of 1998. Management believes their new computer systems are a comprehensive
solution to the Year 2000 issues.
NOTE 17 - SOUTHERN JERSEY BANCORP OF DELAWARE, INC.
(PARENT COMPANY ONLY) - CONDENSED FINANCIAL
INFORMATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
(dollars in thousands except share and per share data)
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 163 $ 685
Investment in subsidiaries 31,930 39,189
Other assets 0 340
Total Assets $32,093 $40,214
LIABILITIES
Dividends Payable $ 4 $ 655
Total Liabilities 4 655
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C> <C>
SHAREHOLDERS' EQUITY
Preferred stock, no par value;
shares authorized - 500,000;
no shares issued
Common stock, par value $1.67 per share;
shares authorized - 5,000,000;
shares issued - 1,307,683 2,184 2,129
Additional paid-in-capital 3,259 2,260
Retained earnings 29,549 38,767
Accumulated other comprehensive income 936 159
35,928 43,315
Less: Treasury stock at cost -
180,202 shares in 1998 and
183,927 shares in 1997 3,839 3,756
Total Shareholders' Equity 32,089 39,559
Total Liabilities and
Shareholders' Equity $32,093 $40,214
</TABLE>
SOUTHERN JERSEY BANCORP OF DELAWARE, INC. (Parent Company Only) - CONDENSED
FINANCIAL INFORMATION
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
(dollars in thousands)
1998 1997 1996
<S> <C> <C> <C>
Income:
Cash dividends from subsidiary $ 328 $ 4,306 $ 1,595
Expenses:
Operating Expenses 123 330 88
Income before equity in
undistributed net income(loss)
of subsidiaries 205 3,976 1,507
Equity in undistributed net income(loss)
of subsidiaries (8,037) (3,139) 3,821
NET INCOME(LOSS) $(7,832) $ 837 $ 5,328
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
(dollars in thousand) 1998 1997 1996
<S> <C> <C> <C>
Operating activities:
Net income(loss) $(7,832) $ 837 $ 5,328
Adjustments to reconcile income from
continuing operations to net cash
provided by operating activities:
Equity in (net income)loss of subsidiary 8,037 3,139 (3,821)
(Increase)decrease in other assets 340 150 (240)
Increase(decrease) in liabilities (656) 58 46
</TABLE>
25
<PAGE> 26
<TABLE>
<S> <C> <C> <C>
Net cash provided by operating activities (111) 4,184 1,313
Investing activities:
Investment in subsidiary 0 (3,000) 0
Net cash used in investing activities 0 (3,000) 0
Financing activities:
Cash dividends (328) (1,306) (1,195)
Purchase of Treasury stock (258) (166) (404)
Sale of Treasury stock 175 306 286
Net cash used for financing activities (411) (1,166) (1,313)
Net increase(decrease) in cash and due from banks (522) 18 0
Cash and due from banks at beginning of year 685 667 667
Cash and due from banks at end of year $ 163 $ 685 $ 667
</TABLE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data derived from the
consolidated financial statements of Southern Jersey Bancorp of Delaware, Inc.
and Subsidiaries audited by Athey & Company, Certified Public Accountants,
P.A., for the five years ended December 31, 1998. This information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in the Company's Annual Reports
on Form 10-K and the financial statements and related notes thereto. (Per share
data give retroactive effect to stock dividend.)
<TABLE>
<CAPTION>
(dollars in thousands except per share data)
Year Ended December 31
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Interest income $ 33,283 $ 33,800 $ 30,390 $ 28,212 $ 24,616
Interest expense 18,400 17,159 14,870 13,114 10,731
Net interest income 14,883 16,641 15,520 15,098 13,885
Provision for loan losses 15,270 7,967 1,805 1,266 725
Other income 3,509 3,043 3,246 2,743 2,308
Other expenses 15,842 11,590 10,357 10,023 9,580
Income(loss) before income taxes (12,720) 127 6,604 6,552 5,888
Provision(benefit) for income taxes (4,888) (710) 1,276 1,700 1,411
Net Income(Loss) (7,832) 837 5,328 4,852 4,477
Cash dividends declared on common stock 332 1,306 1,195 1,093 1,054
Dividend payout ratio N/A 156.0% 22.4% 22.5% 23.5%
Per Common Share Amounts
Basic earnings(loss) per share $ (6.95) $ .75 $ 4.77 $ 4.30 $ 3.97
Diluted earnings(loss) per share $ (6.95) $ .73 $ 4.67 $ 4.26 $ 3.95
</TABLE>
26
<PAGE> 27
<TABLE>
<S> <C> <C> <C> <C> <C>
Cash dividends declared on common stock $ .29 $ 1.16 $ 1.07 $ .97 $ .93
Year-End Balances
Total assets $ 482,665 $ 483,354 $ 430,324 $ 404,240 $ 372,896
Investment securities 98,974 92,693 996,66 114,320 138,144
Loans, net of unearned income 268,894 305,556 290,885 232,113 192,518
Deposits 445,566 438,464 385,384 363,433 337,223
Shareholders' equity 32,089 39,559 39,751 36,643 32,555
Selected Share Data
Common shares outstanding 1,127 1,124 1,118 1,118 1,132
Weighted average common shares
outstanding 1,127 1,120 1,118 1,128 1,129
At December 31:
Book value per common share $ 28.46 $ 35.20 $ 35.58 $ 32.79 $ 28.76
</TABLE>
The common stock is inactively traded, and the range of sales prices known to
Management for each quarter during the two most recent years were as follows:
<TABLE>
<CAPTION>
1998 1997
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $61.50 $59.50 $41.25 $40.00
Second Quarter $60.00 $49.50 $45.00 $41.25
Third Quarter $49.50 $41.00 $45.50 $45.00
Fourth Quarter $41.00 $26.00 $60.50 $45.50
</TABLE>
27
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
F & M Investment Company
We have audited the balance sheets of F & M Investment Company, (a wholly-owned
subsidiary of Farmers & Merchants National Bank) as of December 31, 1998 and
1997, and the related statements of stockholders' equity, income and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of F & M Investment Company, as
of December 31, 1998 and 1997, and the results of its operations and cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
As discussed in Note I to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" effective in 1998.
s/Belfint, Lyons & Shuman, P.A.
___________________________________
March 3, 1999
Wilmington, Delaware
28
<PAGE> 1
EXHIBIT 99.8
This is the consolidated balance sheet for Southern Jersey Bancorp. All dollar
amounts are in thousands.
<TABLE>
<CAPTION>
3/31/99 3/31/98 12/31/98
<S> <C> <C> <C>
ASSET
Cash and due from banks 17,558 21,673 18,879
Interest Bearing Deposits 450 4,000 2,450
Investment Securities Held to Maturity 0 58,105 0
Investment Securities Available for Sale 106,140 35,237 98,974
Fair Value: Securities Held-to-Maturity
3/31/99 0
3/31/98 58,568
12/31/98 0
Loan: Net of Unearned Income 240,782 295,517 268,894
Less: Allowance for loan losses 9,327 6,055 10,137
------- ------- -------
Net Loans 231,455 289,462 258,757
------- ------- -------
Federal Funds Sold 75,350 38,800 67,700
Bank Premises and Equipment - Net 7,071 6,505 6,994
Other Assets 27,422 23,824 28,911
------- ------- -------
Total Assets 465,446 477,606 482,665
======= ======= =======
LIABILITIES 3/31/99 3/31/98 12/31/98
Deposits - Interest Bearing 368,878 375,382 380,179
Non-Interest Bearing Deposits 60,551 57,052 65,387
------- ------- -------
Total Deposits 429,429 432,434 445,566
Funds Purchased 0 0 0
Other Liabilities 5,032 5,703 5,010
------- ------- -------
Total Liabilities 434,461 438,137 450,576
Shareholder's Equity
Common Stock Par Value $1.67 per share
Authorized 5,000,000 shares;
Issued 1,307,683 shares 2,184 2,129 2,184
Surplus 3,259 2,260 3,259
Undivided Profits 29,805 38,789 29,549
------- ------- -------
35,248 43,178 34,992
Less: Treasury Stock at cost
180,202 Common Shares 3-31-99
181,195 Common Shares 3-31-98
180,202 Common Shares 12-31-98
3,839 3,820 3,839
------- ------- -------
31,409 39,358 31,153
Allowance for unrealized gain/losses
on Available for Sale Securities (424) 111 936
------- ------- -------
Total Shareholder's Equity 30,985 39,469 32,089
------- ------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 465,446 477,606 482,665
======= ======= =======
</TABLE>
1
<PAGE> 2
This is the consolidated balance sheet for Southern Jersey Bancorp of Delaware,
Inc. All dollar amounts are shown in thousands except for the per share data.
<TABLE>
<CAPTION>
Three Months First Quarter
<S> <C> <C> <C> <C>
INTEREST INCOME
Int. on Securities:
Taxable int. income 1,512 1,089 1,512 1,089
Tax-Exempt int. inc 2 352 2 352
Interest and Fees on Loans 4,857 6,429 4,857 6,429
Interest on Interest Bearing Deposits 26 0 26 0
Federal Funds Sold 941 527 941 527
Lease Income 0 0 0 0
----- ----- ----- -----
Total Int. Income 7,338 8,397 7,338 8,397
INTEREST EXPENSE
Interest on Deposit Savings 1,257 1,378 1,257 1,378
Certificates of Deposit $100,000 and over 668 1,057 668 1,057
Federal Funds Purchased 0 0 0 0
Other Time Deposits 2,266 2,118 2,266 2,118
----- ----- ----- -----
Total Int. Expense 4,191 4,553 4,191 4,553
NET INTEREST INCOME 3,147 3,844 3,147 3,844
Provision for Loan Losses 566 1,200 566 1,200
----- ----- ----- -----
Net Interest Income after Provision for Loan Loss 2,581 2,644 2,581 2,644
OTHER OPERATING INCOME
Service charges on deposit accounts 433 411 433 411
Trust Department Income 223 190 223 190
Comm., collection
Charges and fees 217 254 217 254
Investment Security gains/(losses) 553 0 553 0
Other Non-Interest Income 0 0 0 0
----- ----- ----- -----
Total Other Operating Income 1,426 855 1,426 855
OTHER OPERATING EXPENSES
Salaries and Wages 1,484 1,094 1,484 1,094
Pension and other benefits 310 328 310 328
Occupancy and Equipment 479 450 479 450
FDIC Assessment 60 40 60 40
Postage, stationary and supplies 75 151 75 151
Professional Fees 327 342 327 342
Other Oper. Expen 917 1,062 917 1,062
----- ----- ----- -----
Total Other Oper. Expenses 3,652 3,467 3,652 3,467
Income Before Income Taxes 355 32 355 32
Applicable Income Taxes 99 10 99 10
----- ----- ----- -----
NET INCOME 256 22 256 22
===== ===== ===== =====
Earnings Per Common Share 0.23 0.02 0.23 0.02
</TABLE>
2
<PAGE> 3
SOUTHERN JERSEY BANCORP OF DELAWARE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities
Net Income 256 22
Adjustments to reconcile net income to
net cash provided by operating activities
Amortization of Organization Expenses 0 0
Depreciation of Premises and Equipment 157 132
Net Loan Charge-Offs (1,377) (381)
Provision for Loan Losses 566 1,200
Premium Amortization net of discount accretion 0 0
Gain or (Loss) on Sale of Securities 553 0
Gain on Other Real Estate 0 (8)
Gain on Sale of Bank Premises & Equipment 0 0
(Increase)/decrease in Other Assets 1,489 (3,360)
Increase/(decrease) in Other Liabilities 22 372
Increase/(decrease) in Borrowed Funds 0 0
------- -------
Net Cash Provided by Operating Activities 1,666 (2,023)
Cash Flows from Investing Activities
Net (increase)/decrease in Int Bearing deposits 2,000 0
Net (increase)/decrease in federal funds sold (7,650) 2,150
Purchase of Investment Securities (46,988) (15,457)
Proceeds from Sale of Invest Securities 29,302 0
Proceeds from Maturities of Invest. Securities 8,608 14,622
(Increase)/Decrease in Loans 28,112 10,039
Bank Premises and Equipment (234) (284)
Proceeds from Sale of Bank Premises and Equipment 0 0
Proceeds from Sale of Other Real Estate 0 155
------- -------
Net Cash Used for Investing Activities 13,150 11,225
Cash Flows from Financing Activities
(Decrease)/Increase in Total Deposits (16,137) (6,030)
Cash Dividends 0 0
Purchase of Treasury Stock 0 (201)
Sale of Treasury Stock 0 137
------- -------
Net Cash Provided Financing Activities (16,137) (6,094)
Net Increase/(Decrease) in Cash and Cash Equivalents (1,321) 3,108
Cash and Equivalents at the Beginning of the Year 18,879 18,565
------- -------
Cash & Equivalents at End of the Quarter 17,558 21,673
======= =======
Supplementary Schedule of Non-Cash
Investing and Financing Activities Loans, Net
of Charge-Offs transferred to Other Real Estate Owned: 0 149
</TABLE>
3
<PAGE> 4
SOUTHERN JERSEY BANCORP OF DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999
1. Principals of Consolidation: The consolidated financial statements reflect
the account of Southern Jersey Bancorp of Delaware, Inc. and its subsidiary The
Farmers and Merchants National Bank of Bridgeton, after the elimination of all
inter-company balances and transactions.
2. There have been no significant changes in the accounting policies of the
Registrant the date the most recent annual report to security holders, nor have
there occurred events, which have material impact on the disclosures herein.
3. The interim financial statements contained herein reflect all adjustments
which are, in the opinion of management, necessary to a fair statement of the
results for the interim period presented.
4. In accordance with Rule 10-01(b)(8), the unaudited interim financial
statements filed under cover of Form 10-Q for March 31, 1999, reflect
adjustments that are of a normal recurring nature which are, in the opinion of
Management, necessary to a fair statement of the results for the interim periods
presented.
4
<PAGE> 1
EXHIBIT 99.9
This is the consolidated balance sheet for Southern Jersey Bancorp.
All dollar amounts are in thousands.
<TABLE>
<CAPTION>
6/30/99 6/30/98 12/31/98
<S> <C> <C> <C>
ASSET
Cash and due from banks 20,625 19,642 18,879
Interest Bearing Deposits 450 4,000 2,450
Investment Securities Held to Maturity 0 59,362 0
Investment Securities Available for Sale 114,148 40,393 98,974
Fair Value: Securities Held-to-Maturity
6/30/99 0
6/30/98 59,870
12/31/98 0
Loan: Net of Unearned Income 242,194 289,582 268,894
Less: Allowance for loan losses 9,182 7,054 10,137
Net Loans 233,012 282,528 258,757
Federal Funds Sold 49,600 46,100 67,700
Bank Premises and Equipment - Net 6,969 6,450 6,994
Other Assets 27,613 23,860 28,911
Total Assets 452,417 482,335 482,665
LIABILITIES 6/30/99 6/30/98 12/31/98
Deposits - Interest Bearing 357,001 377,500 380,179
Non-Interest Bearing Deposits 62,108 61,456 65,387
Total Deposits 419,109 438,956 445,566
Funds Purchased -- -- --
Other Liabilities 5,151 5,059 5,010
Total Liabilities 424,260 444,015 450,576
Shareholder's Equity
Common Stock Par Value $1.67 per share
Authorized 5,000,000 shares;
Issued 1,307,683 shares 2,184 2,129 2,184
Surplus 3,259 2,260 3,259
Undivided Profits 29,095 37,588 29,549
34,538 41,977 34,992
Less: Treasury Stock at cost
179,602 Common Shares 6-30-99
179,525 Common Shares 6-30-98
180,202 Common Shares 12-31-98
3,824 3,806 3,839
30,714 38,171 31,153
Allowance for unrealized gain/losses
on Available for Sale Securities (2,557) 149 936
Total Shareholder's Equity 28,157 38,320 32,089
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 452,417 482,335 482,665
</TABLE>
1
<PAGE> 2
This is the consolidated balance sheet for Southern Jersey Bancorp of Delaware,
Inc. All dollar amounts are shown in thousands except for the per share data.
<TABLE>
<CAPTION>
Six Months Second Quarter
<S> <C> <C> <C> <C>
INTEREST INCOME
Int. on Securities:
Taxable int. income 3,251 2,111 1,739 1,022
Tax-Exempt int. inc 1 710 (1) 358
Interest and Fees on Loans 9,463 13,126 4,606 6,697
Interest on Interest Bearing Deposits 32 114 6 114
Federal Funds Sold 1,752 1,184 811 657
Lease Income 0 0 0 0
Total Int. Income 14,499 17,245 7,161 8,848
INTEREST EXPENSE
Interest on Deposit Savings 2,548 2,757 1,291 1,379
Certificates of Deposit $100,000 and over 1,261 2,163 593 1,106
Federal Funds Purchased -- -- -- --
Other Time Deposits 4,626 4,235 2,360 2,117
Total Int. Expense 8,435 9,155 4,244 4,602
NET INTEREST INCOME 6,064 8,090 2,917 4,246
Provision for Loan Losses 1,060 2,900 494 1,700
Net Interest Income After Provision for Loan Loss 5,004 5,190 2,423 2,546
OTHER OPERATING INCOME
Service charges on deposit accounts 865 834 432 423
Trust Department Income 453 399 230 209
Comm., collection
Charges and fees 403 524 186 270
Investment Security gains/(losses) 553 0 0 0
Other Non-Interest Income 0 0 0 0
Total Other Operating Income 2,274 1,757 848 902
OTHER OPERATING EXPENSES
Salaries and Wages 2,836 2,457 1,352 1,363
Pension and other benefits 656 697 346 369
Occupancy and Equipment 1,002 969 523 519
FDIC Assessment 89 94 29 54
Postage, stationary and supplies 245 265 170 114
Professional Fees 936 737 609 395
Other Oper. Expen 1,968 2,580 1,051 1,518
Total Other Oper. Expenses 7,732 7,799 4,080 4,332
Income Before Income Taxes (454) (852) (809) (884)
Applicable Income Taxes 0 0 (99) (10)
NET INCOME (454) (852) (710) (874)
Earnings Per Common Share (0.40) (0.76) (0.63) (0.72)
</TABLE>
2
<PAGE> 3
SOUTHERN JERSEY BANCORP OF DELAWARE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities
Net Income (454) (852)
Adjustments to reconcile net income to
net cash provided by oper. activities
Amortization of Organization Expenses 0 0
Depreciation of Premises and Equip. 392 264
Net Loan Charge-Offs (2,016) (1,082)
Provision for Loan Losses 1,060 2,900
Premium Amortization net of discount accretion 0 0
Gain or (Loss) on Sale of Securities 553 0
Gain on Other Real Estate 0 (3)
Gain on Sale of Bank Premises & Equipment 0 0
(Increase)/decrease in Other Assets 1,298 (3,405)
Increase/(decrease) in Other Liabilities 141 (272)
Increase/(decrease) in Borrowed Funds 0 0
Net Cash Provided by Operating Activities 974 (2,450)
Cash Flows from Investing Activities
Net (increase)/decrease in Int Bearing deposits 2,000 114
Net (increase)/decrease in federal funds sold 18,100 (5,150)
Purchase of Investment Securities (65,988) (32,390)
Proceeds from Sale of Invest. Secur 0 0
Proceeds from Maturities of Invest. Securities 56,697 24,971
(Increase)/Decrease in Loans 26,700 15,974
Bank Premises and Equipment (315) (361)
Proceeds from Sale of Bank Premises and Equipment 0 0
Proceeds from Sale of Other Real Estate 20 155
Net Cash Used for Investing Activities 37,214 3,313
Cash Flows from Financing Activities
(Decrease)/Increase in Total Deposits (36,457) 492
Cash Dividends 0 (329)
Purchase of Treasury Stock 0 (174)
Sale of Treasury Stock 15 225
Net Cash Provided by Financing Activities (36,442) 214
Net Increase/(Decrease) in Cash and Cash Equivalents 1,746 1,077
Cash and Equivalents at the Beginning of the Year 18,879 18,565
Cash and Equivalents at End of the Quarter 20,625 19,642
Supplementary Schedule of Non-Cash Investing
and Financing Activities Loans,
Net of Charge-Offs transferred to Other Real
Estate Owned: 1,026 399
</TABLE>
3
<PAGE> 4
SOUTHERN JERSEY BANCORP OF DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
1. Principals of Consolidation: The consolidated financial statements reflect
the account of Southern Jersey Bancorp of Delaware, Inc. and its subsidiary The
Farmers and Merchants National Bank of Bridgeton, after the elimination of all
inter-company balances and transactions.
2. There have been no significant changes in the accounting policies of the
Registrant the date the most recent annual report to security holders, nor have
there occurred events which have material impact on the disclosures herein.
3. The interim financial statements contained herein reflect all adjustments
which are, in the opinion of management, necessary to a fair statement of the
results for the interim period presented.
4. In accordance with Rule 10-01(b)(8), the unaudited interim financial
statements filed under cover of Form 10-Q for June 30, 1999, reflect adjustments
that are of a normal recurring nature which are, in the opinion of Management,
necessary to a fair statement of the results for the interim periods presented.
4
