<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13094
DIME BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3197414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
589 FIFTH AVENUE, NEW YORK, NEW YORK 10017
(Address of principal executive offices) (Zip Code)
(212) 326-6170
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
The number of shares outstanding of the issuer's common stock, $0.01 par value,
was 113,789,805 as of July 31, 1998.
<PAGE> 2
DIME BANCORP, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of June 30, 1998 and
December 31, 1997 3
Consolidated Statements of Income for the three months and six months ended
June 30, 1998 and 1997 4
Consolidated Statement of Changes in Stockholders' Equity for the six months
ended June 30, 1998 5
Consolidated Statements of Cash Flows for the six months ended June 30, 1998
and 1997 6
Consolidated Statements of Comprehensive Income for the three months and
six months ended June 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 262,630 $ 295,369
Money market investments 12,132 157,158
Securities available for sale 2,919,605 4,992,304
Federal Home Loan Bank of New York stock 324,106 303,287
Loans held for sale 3,022,167 1,841,862
Loans receivable, net:
Residential real estate loans 9,465,261 9,848,593
Commercial real estate loans 2,413,922 2,263,023
Consumer loans 865,546 773,817
Business loans 165,184 99,074
Allowance for loan losses (109,934) (104,718)
------------ ------------
Total loans receivable, net 12,799,979 12,879,789
------------ ------------
Accrued interest receivable 101,711 106,829
Premises and equipment, net 163,550 150,805
Mortgage servicing assets 527,781 341,906
Other assets 780,230 778,691
------------ ------------
Total assets $ 20,913,891 $ 21,848,000
============ ============
LIABILITIES
Deposits $ 14,032,643 $ 13,847,275
Securities sold under agreements to repurchase 1,229,263 2,975,774
Federal Home Loan Bank of New York advances 3,256,615 2,786,751
Senior notes 142,577 142,475
Guaranteed preferred beneficial interests in Holding Company's junior
subordinated deferrable interest debentures 196,149 196,137
Other borrowed funds 271,089 218,175
Other liabilities 455,172 366,555
------------ ------------
Total liabilities 19,583,508 20,533,142
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share (350,000,000 and 200,000,000 shares
authorized at June 30, 1998 and December 31, 1997, respectively; 120,256,459
shares issued at June 30, 1998 and December 31, 1997) 1,203 1,203
Additional paid-in capital 1,161,575 1,158,221
Retained earnings 358,806 261,201
Treasury stock, at cost (6,723,164 and 3,898,132 shares at June 30, 1998 and
December 31, 1997, respectively) (181,637) (95,221)
Accumulated other comprehensive losses, net of taxes (2,028) (9,534)
Unearned compensation (7,536) (1,012)
------------ ------------
Total stockholders' equity 1,330,383 1,314,858
------------ ------------
Total liabilities and stockholders' equity $ 20,913,891 $ 21,848,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME
Residential real estate loans $225,465 $150,915 $446,252 $298,019
Commercial real estate loans 49,406 48,629 98,879 88,463
Consumer loans 17,181 15,270 33,503 31,001
Business loans 2,938 1,105 5,375 2,076
Mortgage-backed securities 50,878 109,307 123,938 216,958
Other securities 9,677 5,696 17,548 11,251
Money market investments 1,566 8,046 4,415 16,071
-------- -------- -------- --------
Total interest income 357,111 338,968 729,910 663,839
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 139,037 138,912 278,065 272,087
Borrowed funds 87,237 80,959 185,097 155,382
-------- -------- -------- --------
Total interest expense 226,274 219,871 463,162 427,469
-------- -------- -------- --------
Net interest income 130,837 119,097 266,748 236,370
Provision for loan losses 8,000 23,000 16,000 33,000
-------- -------- -------- --------
Net interest income after provision for loan losses 122,837 96,097 250,748 203,370
-------- -------- -------- --------
NON-INTEREST INCOME
Loan servicing fees and charges 42,631 12,978 85,081 24,861
Banking service fees 10,168 7,543 19,168 14,466
Securities and insurance brokerage fees 8,957 5,767 16,467 11,818
Net gains on sales activities 63,743 2,799 108,991 4,882
Other 2,491 149 4,817 814
-------- -------- -------- --------
Total non-interest income 127,990 29,236 234,524 56,841
-------- -------- -------- --------
NON-INTEREST EXPENSE
General and administrative expense:
Compensation and employee benefits 69,661 34,474 134,456 69,215
Occupancy and equipment, net 22,467 13,561 44,331 26,896
Other 55,757 25,655 102,332 49,960
-------- -------- -------- --------
Total general and administrative expense 147,885 73,690 281,119 146,071
Amortization of mortgage servicing assets 16,897 5,267 33,832 10,469
Other real estate owned expense, net 359 1,581 446 4,633
-------- -------- -------- --------
Total non-interest expense 165,141 80,538 315,397 161,173
-------- -------- -------- --------
Income before income tax expense 85,686 44,795 169,875 99,038
Income tax expense 27,420 17,023 54,360 38,350
-------- -------- -------- --------
Net income $ 58,266 $ 27,772 $115,515 $ 60,688
======== ======== ======== ========
PER COMMON SHARE
Basic earnings $ 0.51 $ 0.27 $ 1.01 $ 0.58
Diluted earnings 0.50 0.26 0.99 0.57
Dividends declared 0.05 0.04 0.09 0.04
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998
------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
ADDITIONAL TREASURY COMPREHENSIVE TOTAL
COMMON PAID-IN RETAINED STOCK, LOSSES, UNEARNED STOCKHOLDERS'
STOCK CAPITAL EARNINGS AT COST NET OF TAXES COMPENSATION EQUITY
----------- ----------- ----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $ 1,203 $ 1,158,221 $ 261,201 $ (95,221) $ (9,534) $ (1,012) $ 1,314,858
Net income -- -- 115,515 -- -- -- 115,515
Other comprehensive income -- -- -- -- 7,506 -- 7,506
Cash dividends declared on
common stock -- -- (10,295) -- -- -- (10,295)
Common stock issued under
employee benefit plans -- -- (7,615) 26,690 -- (7,748) 11,327
Treasury stock purchased -- -- -- (113,106) -- -- (113,106)
Amortization of unearned
compensation -- -- -- -- -- 1,224 1,224
Tax benefit on stock options
exercised -- 3,354 -- -- -- -- 3,354
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at end of period $ 1,203 $ 1,161,575 $ 358,806 $ (181,637) $ (2,028) $ (7,536) $ 1,330,383
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 115,515 $ 60,688
Adjustments to reconcile net income to net cash (used) provided by
operating activities:
Provisions for loan and other real estate owned losses 16,203 35,014
Depreciation and amortization of premises and equipment 13,492 8,618
Other amortization and accretion, net 60,243 27,481
Provision for deferred income tax expense 44,572 28,991
Net securities gains (16,946) (3,692)
Net increase in loans held for sale (697,194) (113,162)
Other, net (206,762) 18,169
----------- -----------
Net cash (used) provided by operating activities (670,877) 62,107
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (181,736) (1,164,313)
Purchases of securities held to maturity -- (75,935)
Proceeds from sales of securities available for sale 1,489,480 350,044
Proceeds from maturities of securities available for sale and held to maturity 791,041 696,080
Purchases of Federal Home Loan Bank of New York stock (20,819) --
Loans receivable originated and purchased, net of principal payments (453,506) (415,279)
Proceeds from sales of loans receivable 2,257 2,524
Acquisitions, net of cash and cash equivalents acquired -- (86,006)
Proceeds from bulk sales of non-performing assets -- 93,063
Proceeds from sales of other real estate owned 8,732 24,258
Purchases of mortgage servicing rights -- (22,816)
Proceeds from sales of mortgage servicing rights 39,292 --
Purchases of premises and equipment, net (26,164) (12,534)
----------- -----------
Net cash provided (used) by investing activities 1,648,577 (610,914)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 185,212 31,174
Net decrease in borrowings with original maturities of three months or less (990,439) (95,551)
Proceeds from issuance of guaranteed preferred beneficial interests in Holding
Company's junior subordinated deferrable interest debentures -- 196,474
Proceeds from other borrowings -- 727,875
Repayments of other borrowings (238,164) (270,202)
Proceeds from issuance of common and treasury stock 11,327 5,445
Purchases of treasury stock (113,106) (27,482)
Cash dividends paid on common stock (10,295) (4,169)
----------- -----------
Net cash (used) provided by financing activities (1,155,465) 563,564
----------- -----------
Net (decrease) increase in cash and cash equivalents (177,765) 14,757
Cash and cash equivalents at beginning of period 452,527 184,517
----------- -----------
Cash and cash equivalents at end of period $ 274,762 $ 199,274
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 7
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 58,266 $ 27,772 $115,515 $ 60,688
Other comprehensive income 779 8,459 7,506 2,215
-------- -------- -------- --------
Total comprehensive income $ 59,045 $ 36,231 $123,021 $ 62,903
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
In the opinion of management, the unaudited consolidated financial
statements of Dime Bancorp, Inc. (the "Holding Company") and subsidiaries
(collectively, the "Company") included herein reflect all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of the Company's financial condition as of the dates indicated and results of
operations and cash flows for the periods shown. The unaudited consolidated
financial statements presented herein should be read in conjunction with the
consolidated financial statements and notes thereto included in the Holding
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Certain amounts in the prior period consolidated financial statements have been
reclassified to conform with the presentation for the current period. The
results for the three months and six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
NOTE 2 -- EARNINGS PER COMMON SHARE
The following table sets forth the computations of basic and diluted
earnings per common share for the periods indicated.
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Basic earnings per common share:
Net income $ 58,266 $ 27,772 $115,515 $ 60,688
Weighted average number of common shares outstanding 114,016 104,422 114,584 104,687
Basic earnings per common share $ 0.51 $ 0.27 $ 1.01 $ 0.58
Diluted earnings per common share:
Net income $ 58,266 $ 27,772 $115,515 $ 60,688
Weighted average number of common shares outstanding 114,016 104,422 114,584 104,687
Common equivalent shares 1,790 1,609 1,893 1,655
-------- -------- -------- --------
Weighted average number of diluted shares outstanding 115,806 106,031 116,477 106,342
======== ======== ======== ========
Diluted earnings per common share $ 0.50 $ 0.26 $ 0.99 $ 0.57
</TABLE>
NOTE 3 -- SUPPLEMENTAL DISCLOSURES FOR CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Supplemental cash flow information:
Interest payments on deposits and borrowed funds $ 474,602 $ 401,890
Income tax refunds (payments), net 3,500 (339)
Supplemental non-cash investing information:
Loans held for sale transferred to loans receivable 296,608 --
Loans receivable transferred to loans held for sale 779,719 --
Loans receivable transferred to other real estate owned 13,308 9,425
In connection with acquisitions:
Fair value of assets acquired, excluding cash and cash equivalents received -- 628,967
Cash and cash equivalents received -- 7,796
Cash paid -- 93,802
Fair value of liabilities assumed -- 582,739
Goodwill -- 39,778
</TABLE>
<PAGE> 9
NOTE 4 -- RECENT ACCOUNTING DEVELOPMENTS
Effective as of January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
relating to collateral, repurchase agreements, dollar-rolls, securities lending,
and similar transactions that had been deferred until that date by SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125." The Company's adoption of the deferred provisions of SFAS No. 125 did not
have a material impact on the Company's financial condition or results of
operations.
Effective as of January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Under the requirements of SFAS No. 130, an enterprise must classify
items of other comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the stockholders' equity
section of a statement of financial position. SFAS No. 130 requires
reclassification of financial statements for earlier periods provided for
comparative purposes. At June 30, 1998 and December 31, 1997, the Company's
accumulated balance of other comprehensive income consisted solely of net
unrealized losses on securities available for sale, net of related taxes.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements, requires that selected information about operating
segments be reported in interim financial statements issued to stockholders, and
establishes standards for related disclosures about an enterprise's products and
services, geographic areas, and major customers. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. SFAS No. 131
does not require that its provisions be applied to interim financial statements
in the initial year of its application, but comparative information for interim
periods in the initial year of application is to be reported in financial
statements for interim periods in the second year of application.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures no longer deemed useful. SFAS No.
132 is effective for fiscal years beginning after December 15, 1997. Restatement
of disclosures for earlier periods provided for comparative purposes is required
unless the information is not readily available, in which case the notes to the
financial statements should include all available information and a description
of the information not available.
In June 1998, the 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 has not yet determined when it will adopt SFAS No. 133. 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.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 requires the capitalization of certain
costs incurred in connection with developing or obtaining computer software for
internal use. Such costs are currently expensed by
<PAGE> 10
the Company as incurred. Amortization of capitalized computer software costs is
to be recognized on a straight-line basis (unless another systematic and
rational basis is more representative of the software's use) over the estimated
useful life of the software. SOP 98-1 is effective for financial statements
issued for years beginning after December 15, 1998, with earlier application
encouraged. The Company does not believe that SOP 98-1, when adopted, will
materially impact its financial condition or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements contained in this quarterly report on Form 10-Q are
forward-looking and may be identified by the use of such words as "believe,"
"expect," "anticipate," "should," "planned," "estimated," and "potential." These
forward-looking statements are based on the current expectations of the Company,
and the Company notes that a variety of factors could cause its actual results
and experience to differ materially from the anticipated results or other
expectations expressed in such forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development, and
results of the Company's business include interest rate movements, competition
from both financial and non-financial institutions, changes in applicable laws
and regulations and interpretations thereof, the timing and occurrence (or
non-occurrence) of transactions and events that may be subject to circumstances
beyond the Company's control, and general economic conditions.
RESULTS OF OPERATIONS
General
The Company's net income for the second quarter of 1998 was $58.3
million, an increase of 109.8% from $27.8 million for the same period in 1997.
Net income for the first six months of 1998 was $115.5 million, up 90.3% from
$60.7 million for the comparable period in 1997. Diluted earnings per common
share were $0.50 for the quarter ended June 30, 1998 and $0.99 for the first six
months of 1998, as compared with $0.26 and $0.57 for the three months and six
months ended June 30, 1997, respectively.
The Company's annualized return on average stockholders' equity for the
three- and six-month periods ended June 30, 1998 was 17.70% and 17.66%,
respectively, up from 10.67% and 11.66% for the three- and six-month periods
ended June 30, 1997, respectively. The Company's annualized return on average
assets was 1.09% for the second quarter of 1998, as compared with 0.56% for the
second quarter of 1997, and 1.07% for the first six months of 1998, as compared
with 0.62% for the corresponding period in 1997.
The higher levels of net income during the three- and six-month periods
ended June 30, 1998 reflect a variety of factors, including: the expansion of
the Company's mortgage banking operations, largely as a result of the
acquisition of North American Mortgage Company ("NAMC") in October 1997 (the
"NAMC Acquisition"); balance sheet restructuring initiatives; tax planning
strategies; growth in fees related to sales of consumer financial services and
products; and after-tax losses of $9.1 million ($14.6 million on a pretax
basis) recognized during the second quarter of 1997 in connection with bulk
sales of approximately $126 million of non-performing residential real estate
loan assets in May 1997 (the "NPA Sales").
Net Interest Income
Net interest income amounted to $130.8 million for the second quarter of
1998, an increase of $11.7 million, or 9.9%, as compared with the second quarter
of 1997. For the first six months of 1998, net interest income totaled $266.7
million, up $30.4 million, or 12.9%, from the comparable 1997 period. The
increases in net interest income reflect growth in the net interest margin and
average interest-earning assets.
The net interest margin increased to 2.66% and 2.64% for the three- and
six-month periods ended June 30, 1998, respectively, from 2.52% for each of the
comparable periods one year ago. The Company's interest rate spread was 2.65%
for the second quarter of 1998, as compared with 2.42% for the second quarter of
1997, and 2.64% for the first six months of 1998, as compared with 2.40% for the
first six months of 1997.
<PAGE> 11
Contributing significantly to the net interest margin improvements in
the 1998 periods was the impact of the Company's strategy to emphasize loans and
reduce its reliance on mortgage-backed securities ("MBS"). During the second
quarter and first six months of 1998, as compared with the corresponding 1997
periods, the average balance of loans (including both loans receivable and loans
held for sale) increased $4.8 billion, or 42.1%, and $4.7 billion, or 42.5%,
respectively, while the average balance of MBS declined $3.7 billion, or 55.2%,
and $3.0 billion, or 45.5%, respectively. Loans represented 81.8% of total
average interest-earning assets for the second quarter of 1998 and 79.0% for the
first six months of 1998, up from 60.1% for the second quarter of 1997 and 59.6%
for the first six months of 1997. The net interest margins during the 1998
periods also benefited from lower overall funding costs, primarily due to
reduced deposit costs, and higher yields on securities. The net interest margins
were unfavorably affected during the 1998 periods by lower overall yields on
loans, a flat interest rate yield curve, the funding of treasury stock
purchases, and a $150.0 million investment made in a bank-owned life insurance
program (the "BOLI Program") during the third quarter of 1997. (Revenues
associated with the BOLI Program are reflected in non-interest income.) The
Company expects that the flat interest rate yield curve, if sustained, will
continue to exert pressure on its net interest income and net interest margin.
<PAGE> 12
The following tables set forth, for the periods indicated, the Company's
consolidated average statement of financial condition, net interest income, the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities. Average balances are computed on a daily basis.
Non-accrual loans are included in average balances in the tables below.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------- ----------- ------- ----------- ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans:
Residential real estate (1) $12,887,433 $ 225,465 7.00% $ 8,372,476 $ 150,915 7.21%
Commercial real estate 2,335,467 49,406 8.46 2,263,548 48,629 8.59
Consumer 830,590 17,181 8.30 711,018 15,270 8.61
Business 138,723 2,938 8.49 47,647 1,105 9.30
----------- ----------- ----------- -----------
Total loans 16,192,213 294,990 7.29 11,394,689 215,919 7.58
----------- ----------- ----------- -----------
MBS 2,963,013 50,878 6.87 6,618,557 109,307 6.61
Other securities 517,107 9,677 7.50 366,117 5,696 6.24
Money market investments 111,146 1,566 5.59 575,002 8,046 5.54
----------- ----------- ----------- -----------
Total interest-earning assets 19,783,479 357,111 7.22 18,954,365 338,968 7.15
----------- -----------
Other assets 1,614,262 791,871
----------- -----------
Total assets $21,397,741 $19,746,236
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Demand $ 1,889,293 2,445 0.52 $ 1,236,047 2,143 0.70
Savings 2,352,718 12,221 2.08 2,503,437 15,504 2.48
Money market 2,034,744 19,746 3.89 1,966,423 18,324 3.74
Time 7,734,774 104,625 5.43 7,470,223 102,941 5.53
----------- ----------- ----------- -----------
Total deposits 14,011,529 139,037 3.98 13,176,130 138,912 4.23
----------- ----------- ----------- -----------
Borrowed funds:
Securities sold under agreements
to repurchase 1,304,436 18,442 5.59 3,935,503 56,128 5.64
Federal Home Loan Bank of New
York ("FHLBNY") advances 3,725,867 54,884 5.83 971,673 14,491 5.90
Other 738,924 13,911 7.53 465,939 10,340 8.87
----------- ----------- ----------- -----------
Total borrowed funds 5,769,227 87,237 5.99 5,373,115 80,959 5.97
----------- ----------- ----------- -----------
Total interest-bearing liabilities 19,780,756 226,274 4.57 18,549,245 219,871 4.73
----------- -----------
Other liabilities 300,197 155,765
Stockholders' equity 1,316,788 1,041,226
----------- -----------
Total liabilities and stockholders' equity $21,397,741 $19,746,236
=========== ===========
Net interest income $ 130,837 $ 119,097
=========== ===========
Interest rate spread 2.65 2.42
Net interest margin 2.66 2.52
</TABLE>
(1) Includes loans receivable and loans held for sale.
<PAGE> 13
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------------------
1998 1997
----------------------------------- --------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------- ----------- ------- ----------- ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans:
Residential real estate (1) $12,650,188 $ 446,252 7.06% $ 8,299,013 $ 298,019 7.18%
Commercial real estate 2,293,239 98,879 8.62 2,070,440 88,463 8.55
Consumer 806,443 33,503 8.38 723,574 31,001 8.63
Business 124,269 5,375 8.72 44,811 2,076 9.34
----------- ----------- ----------- -----------
Total loans 15,874,139 584,009 7.36 11,137,838 419,559 7.54
----------- ----------- ----------- -----------
MBS 3,598,115 123,938 6.89 6,601,816 216,958 6.57
Other securities 474,155 17,548 7.44 361,098 11,251 6.27
Money market investments 158,185 4,415 5.56 594,241 16,071 5.38
----------- ----------- ----------- -----------
Total interest-earning assets 20,104,594 729,910 7.27 18,694,993 663,839 7.10
----------- -----------
Other assets 1,574,883 774,429
----------- -----------
Total assets $21,679,477 $19,469,422
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Demand $ 1,768,403 4,916 0.56 $ 1,182,868 4,041 0.69
Savings 2,364,458 25,362 2.16 2,474,579 30,496 2.49
Money market 2,009,818 37,473 3.76 1,982,437 36,831 3.75
Time 7,779,764 210,314 5.45 7,357,743 200,719 5.50
----------- ----------- ----------- -----------
Total deposits 13,922,443 278,065 4.03 12,997,627 272,087 4.22
----------- ----------- ----------- -----------
Borrowed funds:
Securities sold under agreements
to repurchase 1,804,646 51,116 5.63 3,815,774 107,178 5.59
FHLBNY advances 3,698,333 108,523 5.84 1,053,113 30,504 5.76
Other 643,616 25,458 7.91 402,482 17,700 8.79
----------- ----------- ----------- -----------
Total borrowed funds 6,146,595 185,097 5.99 5,271,369 155,382 5.87
----------- ----------- ----------- -----------
Total interest-bearing liabilities 20,069,038 463,162 4.63 18,268,996 427,469 4.70
Other liabilities 302,377 ----------- 159,766 -----------
Stockholders' equity 1,308,062 1,040,660
----------- -----------
Total liabilities and stockholders' equity $21,679,477 $19,469,422
=========== ===========
Net interest income $ 266,748 $ 236,370
=========== ===========
Interest rate spread 2.64 2.40
Net interest margin 2.64 2.52
</TABLE>
(1) Includes loans receivable and loans held for sale.
<PAGE> 14
The following table sets forth, for the periods indicated, the changes
in interest income and interest expense for each major component of
interest-earning assets and interest-bearing liabilities and the amounts
attributable to changes in average balances (volume) and average interest rates
(rate). The changes in interest income and interest expense attributable to
changes in both volume and rate have been allocated proportionately to the
changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 1998 VERSUS 1997 JUNE 30, 1998 VERSUS 1997
------------------------------------- -------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
------------------------------------- -------------------------------------
DUE TO DUE TO DUE TO DUE TO
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans:
Residential real estate (1) $ 79,113 $ (4,563) $ 74,550 $ 153,583 $ (5,350) $ 148,233
Commercial real estate 1,529 (752) 777 9,600 816 10,416
Consumer 2,490 (579) 1,911 3,465 (963) 2,502
Business 1,937 (104) 1,833 3,446 (147) 3,299
--------- --------- --------- --------- --------- ---------
Total loans 85,069 (5,998) 79,071 170,094 (5,644) 164,450
--------- --------- --------- --------- --------- ---------
MBS (62,609) 4,180 (58,429) (103,009) 9.989 (93,020)
Other securities 2,668 1,313 3,981 3,936 2,361 6,297
Money market investments (6,535) 55 (6,480) (12,155) 499 (11,656)
--------- --------- --------- --------- --------- ---------
Total interest income 18,593 (450) 18,143 58,866 7,205 66,071
--------- --------- --------- --------- --------- ---------
Interest expense:
Deposits:
Demand 938 (636) 302 1,730 (855) 875
Savings (892) (2,391) (3,283) (1,312) (3,822) (5,134)
Money market 649 773 1,422 510 132 642
Time 3,601 (1,917) 1,684 11,423 (1,828) 9,595
--------- --------- --------- --------- --------- ---------
Total deposits 4,296 (4,171) 125 12,351 (6,373) 5,978
--------- --------- --------- --------- --------- ---------
Borrowed funds:
Securities sold under
agreements to repurchase (37,202) (484) (37,686) (56,957) 895 (56,062)
FHLBNY advances 40,573 (180) 40,393 77,616 403 78,019
Other 5,328 (1,757) 3,571 9,691 (1,933) 7,758
--------- --------- --------- --------- --------- ---------
Total borrowed funds 8,699 (2,421) 6,278 30,350 (635) 29,715
--------- --------- --------- --------- --------- ---------
Total interest expense 12,995 (6,592) 6,403 42,701 (7,008) 35,693
--------- --------- --------- --------- --------- ---------
Net interest income $ 5,598 $ 6,142 $ 11,740 $ 16,165 $ 14,213 $ 30,378
========= ========= ========= ========= ========= =========
</TABLE>
(1) Includes loans receivable and loans held for sale.
Provision for Loan Losses
The provision for loan losses, which is predicated upon the Company's
assessment of the adequacy of its allowance for loan losses (see "Management of
Credit Risk -- Allowance for Loan Losses"), amounted to $8.0 million for the
second quarter of 1998 and $16.0 million for the first six months of 1998. In
comparison, the provision for loan losses was $23.0 million and $33.0 million
for the three- and six-month periods ended June 30, 1997, respectively. The
decreases in the 1998 periods were substantially attributable to a $14.0 million
special provision for loan losses recognized during the second quarter of 1997
in connection with the NPA Sales.
Non-Interest Income
General. Non-interest income for the three months and six months ended
June 30, 1998 was $128.0 million and $234.5 million, respectively. This compares
with $29.2 million and $56.8 million for the three months and six months ended
June 30, 1997, respectively. The increased levels of non-interest income in the
1998 periods were principally associated with the Company's expansion of its
mortgage banking operations, largely due to the NAMC Acquisition. Non-interest
income represented 49.5% of total revenues for the second quarter of 1998, as
compared
<PAGE> 15
with 19.7% for the second quarter of 1997, and 46.8% for the first six months of
1998, as compared with 19.4% for the first six months of 1997.
Loan Servicing Fees and Charges. Loan servicing fees and charges, which
includes revenues earned from servicing loans for third parties and loan
production activities, amounted to $42.6 million for the three months ended June
30, 1998 and $85.1 million for the first six months of 1998, up $29.7 million
and $60.2 million as compared with the respective prior year periods. Of the
increases for the three- and six-month periods ended June 30, 1998,
approximately $19 million and $40 million, respectively, were associated with
growth in loan production fees as a result of expanded loan production levels
(see "Financial Condition -- Loans"). Also contributing to the increases in loan
servicing fees and charges in the 1998 periods was the expansion of the
Company's portfolio of loans serviced for others. At June 30, 1998, the Company
owned the servicing rights to $25.0 billion of loans owned by others, up from
$10.8 billion one year earlier. In connection with the bulk sales of certain
loan servicing rights, the Company was subservicing, for a fee, loans with
principal balances aggregating $6.9 billion at June 30, 1998. The transfer of
the servicing responsibility to the purchasers of these loan servicing rights
was completed in early August 1998.
Banking Service Fees. Banking service fees for the second quarter of
1998 amounted to $10.2 million, an increase of $2.6 million, or 34.8%, from the
comparable quarter of 1997. Banking service fees for the first six months of
1998 were $19.2 million, reflecting growth of $4.7 million, or 32.5%, from the
corresponding period in 1997. The higher levels of banking service fees were
principally attributable to changes in the Company's fee structure, together
with volume increases in certain underlying transactions.
Securities and Insurance Brokerage Fees. Securities and insurance
brokerage fees totaled $9.0 million for the quarter ended June 30, 1998, up $3.2
million, or 55.3%, as compared with the second quarter of 1997. For the first
six months of 1998, securities and insurance brokerage fees were $16.5 million,
an increase of $4.6 million, or 39.3%, from the comparable 1997 period. These
increases largely reflect growth in insurance-related fees, principally due to
the expansion of the Company's insurance product line and the number of states
in which the products are sold as a result of the NAMC Acquisition (pursuant to
which the Company acquired NAMC's insurance subsidiaries).
Net Gains on Sales Activities. Net gains on sales activities increased
to $63.7 million and $109.0 million for the three- and six-month periods ended
June 30, 1998, respectively, from $2.8 million and $4.9 million for the three-
and six-month periods ended June 30, 1997, respectively. These increases were
largely associated with net gains on loans held for sale, which rose $64.5
million for the second quarter of 1998 and $89.9 million for the first six
months of 1998, as compared with the respective prior year periods. The net
gains on loan sales for the six months ended June 30, 1998 were reduced by net
losses of $11.0 million (substantially all of which were incurred during the
first quarter of the year) associated with $780 million of relatively
lower-yielding loans receivable that were transferred to loans held for sale
during the first six months of 1998 in connection with the Company's ongoing
balance sheet restructuring activities. Loans sold into the secondary market by
the Company amounted to $7.3 billion for the second quarter of 1998 and $11.6
billion for the first six months of 1998, as compared with $0.4 billion during
the second quarter of 1997 and $0.6 billion during the first six months of 1997.
Also contributing to the growth in net gains on sales activities for the
first six months of 1998, as compared with the comparable 1997 period, was a
$13.3 million increase in net gains on securities transactions and net gains of
$5.8 million recognized in connection with a bulk sale of loan servicing rights
during the first quarter of 1998.
The growth in net gains on securities transactions for the first six
months of 1998, as compared with the first six months of 1997, resulted
primarily from sales of substantially all of the $1.4 billion of MBS that had
been designated for sale in connection with the transfer of the Company's entire
portfolio of securities held to maturity to securities available for sale in
December 1997. At that time, the Company recognized a loss of $25.2 million
associated with the write-down to estimated fair value of those MBS designated
for sale with unrealized losses, but subsequent favorable movements in interest
rates resulted in higher than initially anticipated sales prices.
During the first quarter of 1998, the Company, in a bulk sale, sold the
servicing rights to $4.8 billion of loans. (The Company did not have any bulk
sales of loan servicing rights during the second quarter of 1998 or during the
first six months of 1997.) This sale was associated with the Company's risk
management program and
<PAGE> 16
was intended to reduce the impact of a declining long-term interest rate
environment on the value of the Company's mortgage servicing assets. Bulk sales
of loan servicing rights are dependent on a variety of factors, including market
conditions and existing operating strategies; thus, the level of future bulk
sales of loan servicing rights, if any, cannot currently be predicted.
Other. Other non-interest income for the three- and six-month periods
ended June 30, 1998 amounted to $2.5 million and $4.8 million, respectively, up
from $0.1 million and $0.8 million for the second quarter and first six months
of 1997, respectively. These increases were due substantially to revenues earned
in connection with the BOLI Program, which was initiated during the third
quarter of 1997. In general, under this program, which is intended to help
defray certain costs associated with the Company's employee benefit plans, the
Company purchases, owns, and is the beneficiary of insurance policies on the
lives of certain employees who consent to being covered under the program.
Non-Interest Expense
General. Non-interest expense amounted to $165.1 million for the quarter
ended June 30, 1998, as compared with $80.5 million for the corresponding
quarter of 1997. For the first six months of 1998, non-interest expense totaled
$315.4 million, up from $161.2 million for the comparable 1997 period. The
higher levels of non-interest expense substantially reflect the Company's
expansion of its mortgage banking operations, largely as a result of the NAMC
Acquisition.
General and Administrative ("G&A") Expense. G&A expense, which amounted
to $147.9 million for the second quarter of 1998 and $281.1 million for the
first six months of 1998, rose $74.2 million and $135.0 million as compared with
the respective periods one year ago. Such increases, as noted above,
substantially resulted from the Company's expansion of its mortgage banking
operations.
Compensation and employee benefits expense totaled $69.7 million for the
three-month period ended June 30, 1998 and $134.5 million for the first six
months of 1998. In comparison, such expense was $34.5 million and $69.2 million
for the three- and six-month periods ended June 30, 1997, respectively. The
Company's full-time equivalent employee complement increased to 6,718 at June
30, 1998 from 6,000 at year-end 1997 and from 3,011 at June 30, 1997.
Occupancy and equipment expense, net, increased to $22.5 million for the
quarter ended June 30, 1998 from $13.6 million for the corresponding quarter of
1997. For the first six months of 1998, occupancy and equipment expense, net,
was $44.3 million, up from $26.9 million for the comparable year-earlier period.
Other G&A expense amounted to $55.8 million for the second quarter of
1998, an increase of $30.1 million as compared with the second quarter of 1997,
and $102.3 million for the first six months of 1998, an increase of $52.4
million from the comparable period in 1997. Other G&A expense for the second
quarter and first six months of 1998 included $4.6 million and $7.6 million,
respectively, associated with the Company's plan to prepare its computer systems
for the year 2000 (the "Year 2000 Plan"), which is further described in the
Holding Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997. (No such costs were incurred during the first six months of 1997.)
In connection with the implementation of its Year 2000 Plan, the
Company has completed the assessment and analysis of its systems, substantially
completed the remediation of its business critical systems, and commenced the
testing of such critical systems. Additionally, the Company is in the process of
establishing testing procedures to confirm the readiness of its business
critical systems interfaces with third parties. Further, the Company has
established contingency plans with respect to any business critical system that
may not satisfactorily perform during the testing phase in an attempt to
mitigate potential material adverse effects on the Company. However, the Company
cannot guarantee that these efforts will be accomplished in a timely manner or
that the failure thereof will not have a material adverse effect on the Company.
In connection with the Year 2000 Plan, the Company currently estimates that it
will incur total pretax expenses of approximately $20 million, of which
approximately 75% is expected to be incurred during 1998. The Company has
incurred $8.9 million of such expenses through June 30, 1998.
<PAGE> 17
Amortization of Mortgage Servicing Assets. Amortization of mortgage
servicing assets increased to $16.9 million for the second quarter of 1998 from
$5.3 million for the second quarter of 1997 and to $33.8 million for the first
six months of 1998 from $10.5 million for the first six months of 1997. These
increases were substantially attributable to growth in mortgage servicing
assets, which rose to $527.8 million at June 30, 1998 from $122.1 million one
year earlier.
In a declining long-term interest rate environment, actual or expected
prepayments of the loans underlying the Company's mortgage servicing assets
portfolio may increase, which would have an adverse impact on the value of such
assets. In connection therewith, the Company uses certain derivative financial
instruments as a hedge against its mortgage servicing assets (see
"Asset/Liability Management -- Derivative Financial Instruments") and, during
the first quarter of 1998 and the fourth quarter of 1997, sold $4.8 billion and
$3.0 billion, respectively, in principal amount of loan servicing rights, which
resulted in reductions in the carrying value of mortgage servicing assets of
approximately $88 million and $57 million, respectively.
Other Real Estate Owned ("ORE") Expense, Net. ORE expense, net, declined
to $0.4 million for the second quarter of 1998 from $1.6 million for the
comparable quarter of 1997, which included a $0.6 million charge associated with
the NPA Sales. For the first six months of 1998, ORE expense, net, was $0.4
million, down from $4.6 million for the first six months of 1997, primarily
reflecting a lower average balance of ORE.
Income Tax Expense
The Company recorded income tax expense of $27.4 million and $54.4
million for the three- and six-month periods ended June 30, 1998, respectively,
as compared with $17.0 million and $38.4 million for the respective prior year
periods. The increased levels of income tax expense reflect growth in pretax
earnings, the impact of which was partially offset by lower effective income tax
rates. The Company's effective income tax rate was 32.0% for both the second
quarter and first six months of 1998, down from 38.0% and 38.7% for the second
quarter and first six months of 1997, respectively. The reductions in the
Company's effective income tax rate were primarily attributable to the ongoing
restructuring of the assets within the legal entities that comprise the
Company's affiliated group.
ASSET/LIABILITY MANAGEMENT
General
The Company's asset/liability management is governed by policies that
are reviewed and approved annually by the Boards of Directors of the Holding
Company and the Bank, which oversee the development and execution of risk
management strategies in furtherance of these polices. The Asset/Liability
Management Committee, which is comprised of members of the Company's senior
management, monitors the Company's interest rate risk position and related
strategies.
Market Risk
In general, market risk is the sensitivity of income to variations in
interest rates, foreign currency exchange rates, commodity prices, and other
relevant market rates or prices, such as prices of equities. The Company's
market rate sensitive instruments include interest-earning assets,
interest-bearing liabilities, and derivative financial instruments, such as
futures, forwards, swaps and options.
The Company's primary source of market risk exposure arises from changes
in United States interest rates and the effects thereof on mortgage prepayment
and closing behavior, as well as depositors' choices ("interest rate risk").
Changes in these interest rates will result in changes in the Company's earnings
and the market value of its assets and liabilities. The Company does not have
any material exposure to foreign exchange rate risk or commodity price risk.
Movements in equity prices may have an indirect, but limited, effect on certain
of the Company's business activities and/or the value of credit sensitive loans
and securities.
<PAGE> 18
Interest Rate Risk Management
The Company manages its interest rate risk through strategies designed
to maintain acceptable levels of interest rate exposure throughout a range of
interest rate environments. These strategies are intended not only to protect
the Company from significant long-term declines in net interest income as a
result of certain changes in the interest rate environment, but also to mitigate
the negative effect of certain interest rate changes upon the Company's mortgage
banking operating results. The Company seeks to contain its interest rate risk
within a band that it believes is manageable and prudent given its capital and
income generating capacity. As a component of its interest rate risk management
process, the Company employs various derivative financial instruments.
The Company's sensitivity to interest rates is driven primarily by the
mismatch between the term to maturity or repricing of its interest-earning
assets and that of its interest-bearing liabilities. Historically, the Company's
interest-bearing liabilities have repriced or matured, on average, sooner than
its interest-earning assets.
The Company is also exposed to interest rate risk arising from the
"option risk" embedded in many of the Company's interest-earning assets. For
example, mortgages and the mortgages underlying MBS may contain prepayment
options, interim and lifetime interest rate caps and other such features
affected by changes in interest rates. Prepayment option risk affects
mortgage-related assets in both rising and falling interest rate environments as
the financial incentive to refinance a mortgage loan is directly related to the
level of the existing interest rate on the loan relative to current market
interest rates.
Extension risk on mortgage-related assets is the risk that the duration
of such assets may increase as a result of declining prepayments due to rising
interest rates. Certain mortgage-related assets are more sensitive to changes in
interest rates than others, resulting in a higher risk profile. Because the
Company's interest-bearing liabilities are not similarly affected, the gap
between the duration of the Company's interest-earning assets and
interest-bearing liabilities generally increases as interest rates rise. In
addition, in a rising interest rate environment, adjustable-rate assets may
reach interim or lifetime interest rate caps, thereby limiting the amount of
their upward adjustment, which effectively lengthens the duration of such
assets.
Lower interest rate environments may also present interest rate risk
exposure. In general, lower interest rate environments tend to accelerate
prepayment rates, thus reducing the duration of mortgage-related assets and
accelerating the amortization of any premiums paid in the acquisition of these
assets. The amortization of any premiums over a shorter than expected term
causes yields on the related assets to decline from anticipated levels. In
addition, unanticipated accelerated prepayment rates increase the likelihood of
potential losses of net future servicing revenues associated with the Company's
mortgage servicing assets.
The Company is also exposed to interest rate risk resulting from certain
changes in the shape of the yield curve (particularly a flattening or inversion
- -- also called "yield curve twist risk" -- of the yield curve) and to differing
indices upon which the yield on the Company's interest-earning assets and the
cost of its interest-bearing liabilities are based ("basis risk").
In evaluating and managing its interest rate risk, the Company employs
simulation models to help assess its interest rate risk exposure and the impact
of alternate interest rate scenarios, which consider the effects of
adjustable-rate loan indices, periodic and lifetime interest rate adjustment
caps, estimated loan prepayments, anticipated deposit retention rates, and other
dynamics of the Company's portfolios of interest-earning assets and
interest-bearing liabilities. Moreover, in order to reduce its sensitivity to
interest rate risk, the Company's investment strategy has emphasized
adjustable-rate loans and securities and fixed-rate medium-term securities.
Derivative Financial Instruments
The Company currently uses a variety of derivative financial instruments
to assist in managing its interest rate risk exposures and, on a limited basis,
for trading purposes. Derivative financial instruments employed by the Company
at June 30, 1998 were interest rate swaps, interest rate swaptions, interest
rate floors, interest rate caps, forward contracts to purchase or sell loans or
securities, and options to purchase or sell certain of these and other
instruments. While the Company's use of derivative financial instruments has
served to mitigate the unfavorable
<PAGE> 19
effects that changes in interest rates may have on its results of operations,
the Company continues to be subject to interest rate risk.
Interest Rate Risk Management Instruments. The Company's assets have
historically repriced or matured at a longer term than the liabilities used to
fund those assets. Consequently, the Company uses derivative financial
instruments in its efforts to reduce the repricing risk.
The Company uses three major classes of derivative financial instruments
to manage interest rate risk: interest rate swaps, where the Company pays a
fixed rate and receives a floating rate; interest rate caps, where the Company
receives the excess, if any, of a designated floating rate (usually London
Interbank Offered Rates ("LIBOR")) over a specified rate (the cap level); and
interest rate swaptions, where, in exchange for the payment of a premium, the
Company has the right to enter into pay-fixed interest rate swaps at a future
date.
The pay-fixed interest rate swaps are used to modify specific fixed-rate
assets and variable-rate liabilities and thereby improve the stability of the
Company's net interest margin. Interest rate caps are used to hedge the periodic
and lifetime rate caps embedded in specific adjustable-rate loans and
securities. Interest rate swaptions are used to hedge the repricing risk on
certain assets with high prepayment risk.
The following table sets forth the characteristics of derivative
financial instruments used by the Company at June 30, 1998 for interest rate
risk management purposes, segregated by the activities that they hedge.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
ESTIMATED RATE
NOTIONAL FAIR ----------------------
AMOUNT VALUE RECEIVE PAY
---------- --------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest rate swaps (pay fixed/receive variable) hedging:
Loans receivable $1,500,793 $(24,252) 5.66% 6.40%
Securities available for sale 54,960 (340) 5.66 6.27
Short-term borrowed funds 25,000 (23) 5.65 6.33
Interest rate caps hedging loans receivable 273,956 -- -- (1) -- (1)
Interest rate caps hedging securities available for sale 289,739 -- -- (2) -- (2)
Interest rate swaptions hedging loans receivable 40,000 24 -- (3) -- (3)
---------- --------
Total $2,184,448 $(24,591)
========== ========
</TABLE>
(1) The weighted average strike rate was 8.00%.
(2) The weighted average strike rate was 8.00%.
(3) The weighted average strike rate was 6.75%.
The use of derivative financial instruments for interest rate risk
management purposes resulted in reductions in net interest income during the
three months and six months ended June 30, 1998 of $5.2 million and $10.7
million, respectively, as compared with reductions in net interest income during
the three months and six months ended June 30, 1997 of $4.6 million and $9.5
million, respectively.
Mortgage Banking Risk Management Instruments. The Company uses three
major classes of derivative financial instruments to protect against the impact
of substantial declines in long-term interest rates and the consequent increase
in mortgage prepayment rates: interest rate swaps, where the Company receives a
fixed rate and pays a floating rate; interest rate floors, where the Company
receives the difference, if any, between a designated average long-term interest
rate (usually the ten-year constant maturity Treasury index) and a specified
strike rate; and interest rate caps, where the Company receives the excess, if
any, of a designated floating rate (usually LIBOR) over a specified rate.
The Company uses three major classes of derivative financial instruments
to hedge the risk in its loans held for sale and related commitment pipeline. To
the extent that the Company estimates that it will have loans to sell, the
Company sells loans into the forward MBS market. Such short sales are similar in
composition as to term and coupon with the loans held in, or expected to be
funded into, the loans held for sale portfolio. In addition, because the amount
of loans that the Company will fund, as compared with the total amount of loans
that it has committed to fund, is uncertain, the Company purchases various
options, including puts and calls on both the forward MBS market and the
interest rate futures market.
<PAGE> 20
The following table sets forth the characteristics of derivative
financial instruments used by the Company at June 30, 1998 in connection with
its mortgage banking activities, segregated by the activities that they hedge.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
ESTIMATED RATE
NOTIONAL FAIR ----------------------
AMOUNT VALUE RECEIVE PAY
----------- --------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest rate swaps (pay variable/receive fixed) hedging mortgage
servicing assets $ 800,000 $ 7,047 6.07% 5.76%
Interest rate floors hedging mortgage servicing assets 1,915,195 28,393 -- (1) -- (1)
Interest rate caps hedging mortgage servicing assets 400,000 16,274 -- (2) -- (2)
Forward contracts hedging loans held for sale 3,450,009 (5,390) -- --
Put options (vs. United States Treasury-based futures) hedging loans
held for sale 20,000 294 -- --
Put options on MBS forward contracts hedging loans held for sale 36,500 19 -- --
----------- --------
Total $ 6,621,704 $ 46,637
=========== ========
</TABLE>
(1) The weighted average strike rate was 5.69%.
(2) The weighted average strike rate was 6.09%.
Trading Instruments. At June 30, 1998, the derivative financial
instruments used by the Company for trading purposes consisted of interest rate
caps with a notional amount of $361.0 million. The estimated fair value of such
instruments at that date was $0.5 million. These interest rate caps had a
weighted average strike rate of 7.04% at the end of the second quarter of 1998.
Asset/Liability Repricing
The measurement of differences (or "gaps") between the Company's
interest-earning assets and interest-bearing liabilities that mature or reprice
within a period of time is one indication of the Company's sensitivity to
changes in interest rates. A negative gap generally indicates that, in a period
of rising interest rates, deposit and borrowing costs will increase more rapidly
than the yield on loans and securities and, therefore, reduce the Company's net
interest margin and net interest income. The opposite effect will generally
occur in a declining interest rate environment. Although the Company has a large
portfolio of adjustable-rate assets, the protection afforded by such assets in
the event of substantial rises in interest rates for extended time periods is
limited due to interest rate reset delays, periodic and lifetime interest rate
caps, payment caps and the fact that indices used to reprice a portion of the
Company's adjustable-rate assets lag changes in market rates. Moreover, in
declining interest rate environments or certain shifts in the shape of the yield
curve, these assets may prepay at significantly faster rates than otherwise
anticipated. It should also be noted that the Company's gap measurement reflects
broad judgmental assumptions with regard to repricing intervals for certain
assets and liabilities.
<PAGE> 21
The following table reflects the repricing of the Company's
interest-earning assets, interest-bearing liabilities, and related derivative
financial instruments at June 30, 1998. The amount of each asset, liability, or
derivative financial instrument is included in the table at the earlier of the
next repricing date or maturity. Prepayment assumptions for loans and MBS used
in preparing the table are based upon industry standards as well as the
Company's experience and estimates. Non-accrual loans have been included in the
"Over One Through Three Years" category. Demand deposits, money market deposits
and savings accounts are allocated to the various repricing intervals in the
table based on the Company's experience and estimates.
<TABLE>
<CAPTION>
OVER ONE
THROUGH OVER
ONE YEAR THREE THREE
OR LESS YEARS YEARS TOTAL
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 8,812 $ 4,225 $ 2,895 $ 15,932
MBS 2,453 226 45 2,724
Other 33 4 495 532
-------- -------- -------- --------
Total interest-earning assets 11,298 4,455 3,435 19,188
-------- -------- -------- --------
Interest-bearing liabilities:
Deposits 7,600 3,106 3,326 14,032
Borrowed funds 4,834 51 211 5,096
-------- -------- -------- --------
Total interest-bearing liabilities 12,434 3,157 3,537 19,128
-------- -------- -------- --------
Periodic gap before impact of derivative financial instruments (1,136) 1,298 (102) 60
Impact of derivative financial instruments 1,297 (372) (925) --
-------- -------- -------- --------
Periodic gap $ 161 $ 926 $ (1,027) $ 60
======== ======== ======== ========
Cumulative gap $ 161 $ 1,087 $ 60
======== ======== ========
Cumulative gap as a percentage of total assets 0.8% 5.2% 0.3%
</TABLE>
MANAGEMENT OF CREDIT RISK
Non-Performing Assets
The Company's non-performing assets consist of non-accrual loans and
ORE, net. Non-accrual loans are all loans 90 days or more delinquent, as well as
loans less than 90 days past due for which the full collectability of
contractual principal or interest payments is doubtful. Loans modified in a
troubled debt restructuring that have demonstrated a sufficient payment history
to warrant return to performing status are not included within non-accrual
loans.
<PAGE> 22
The following table presents the components of the Company's
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual loans:
Residential real estate $ 83,713 $ 90,998
Commercial real estate 16,696 21,760
Consumer 4,878 5,719
Business 291 511
--------- ---------
Total non-accrual loans 105,578 118,988
--------- ---------
ORE, net:
Residential real estate 20,634 20,228
Commercial real estate 14,812 9,255
Allowance for losses (1,534) (1,722)
--------- ---------
Total ORE, net 33,912 27,761
--------- ---------
Total non-performing assets $ 139,490 $ 146,749
========= =========
Non-performing assets to total assets 0.67% 0.67%
Non-accrual loans to loans receivable 0.82 0.92
</TABLE>
The Company continues to expand its lending activities and product mix.
The Company intends to continue to monitor closely the effects of these efforts
on the overall risk profile of its loan portfolio, which the Company expects
will continue to change over time.
The level of loans delinquent less than 90 days may, to some degree, be
an indicator of future levels of non-performing assets. The following table sets
forth, at June 30, 1998, such delinquent loans of the Company, net of those
already in non-performing status.
<TABLE>
<CAPTION>
DELINQUENCY PERIOD
-----------------------------
30 - 59 60 - 89
DAYS DAYS TOTAL
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Residential real estate loans $45,843 $18,024 $63,867
Commercial real estate loans 416 844 1,260
Consumer loans 4,350 1,388 5,738
Business loans 588 73 661
------- ------- -------
Total $51,197 $20,329 $71,526
======= ======= =======
</TABLE>
Allowance for Loan Losses
The Company's allowance for loan losses is intended to be maintained at
a level sufficient to absorb all estimable and probable losses inherent in the
loans receivable portfolio. While the Company believes that the allowance for
loan losses is adequate, additions to the allowance for loan losses may be
necessary in the event of future adverse changes in economic and other
conditions that the Company is unable to predict.
<PAGE> 23
The following table sets forth the activity in the Company's allowance
for loan losses for the periods indicated.
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 109,096 $ 103,223 $ 104,718 $ 106,495
Provision charged to operations (1) 8,000 23,000 16,000 33,000
Allowance acquired in acquisition -- 13,249 -- 13,249
Charge-offs:
Residential real estate loans (2) (7,280) (39,520) (13,511) (51,228)
Commercial real estate loans (645) (237) (838) (2,655)
Consumer loans (810) (1,131) (1,512) (2,212)
--------- --------- --------- ---------
Total charge-offs (8,735) (40,888) (15,861) (56,095)
--------- --------- --------- ---------
Recoveries:
Residential real estate loans 755 861 1,866 2,108
Commercial real estate loans 267 1,039 2,170 1,193
Consumer loans 546 525 1,029 1,005
Business loans 5 17 12 71
--------- --------- --------- ---------
Total recoveries 1,573 2,442 5,077 4,377
--------- --------- --------- ---------
Net charge-offs (7,162) (38,446) (10,784) (51,718)
--------- --------- --------- ---------
Balance at end of period $ 109,934 $ 101,026 $ 109,934 $ 101,026
========= ========= ========= =========
</TABLE>
(1) The three- and six-month periods ended June 30, 1997 include a provision of
$14.0 million associated with the NPA Sales.
(2) The three- and six-month periods ended June 30, 1997 include charge-offs of
$35.8 million associated with the NPA Sales.
The following table sets forth the Company's allowance for loan losses
coverage ratios at the dates indicated.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
1998 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
Allowance for loan losses to:
Loans receivable 0.85% 0.81% 0.87%
Non-accrual loans 104.13 88.01 97.95
</TABLE>
MBS
Of the $2.7 billion carrying value of the Company's MBS portfolio at
June 30, 1998, $2.3 billion were issued by entities other than the Federal Home
Loan Mortgage Corporation ("FHLMC"), the Government National Mortgage
Association ("GNMA"), and the Federal National Mortgage Association ("FNMA").
These privately-issued MBS, which have generally been underwritten by large
investment banking firms, are subject to certain credit-related risks normally
not associated with MBS issued by FHLMC, GNMA and FNMA. While substantially all
of the privately-issued MBS held by the Company at June 30, 1998 were rated "AA"
or better by one or more of the nationally recognized securities rating
agencies, no assurance can be given that such ratings will be maintained.
Derivative Financial Instruments
The level of credit risk associated with derivative financial
instruments depends on a variety of factors, including the estimated fair value
of the instrument, the collateral maintained, the use of master netting
arrangements, and the ability of the counterparty to comply with its contractual
obligations. In the event of default by a counterparty, the Company would be
subject to an economic loss that corresponds to the cost to replace the
agreement. There were no past due amounts related to the Company's derivative
financial instruments at June 30, 1998 or December 31, 1997.
<PAGE> 24
FINANCIAL CONDITION
General
The Company's total assets amounted to $20.9 billion at June 30, 1998.
In comparison, total assets were $21.8 billion at December 31, 1997.
Securities Available for Sale
At June 30, 1998, the Company's securities available for sale portfolio
amounted to $2.9 billion, or 15.2% of total interest-earning assets, as compared
with $5.0 billion, or 24.6% of total interest-earning assets, at the end of
1997. Of the $2.1 billion, or 41.5%, decline in securities available for sale
during the first six months of 1998, $1.5 billion was associated with sales of
MBS, which consisted primarily of MBS that had been designated for sale in
connection with a balance sheet restructuring initiative implemented during
December 1997. The amortized cost and carrying value of MBS designated for sale
by the Company at June 30, 1998 was $19.0 million and $18.8 million,
respectively.
The following table summarizes the amortized cost and estimated fair
value of securities available for sale at the dates indicated.
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------------------ ------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
MBS:
Pass-through securities:
Privately-issued $1,918,385 $1,901,112 $2,875,982 $2,851,007
FNMA 329,829 337,443 395,756 402,096
FHLMC 117,022 118,664 178,538 181,098
GNMA 12,459 12,716 15,277 15,517
Collateralized mortgage obligations:
Privately-issued 352,153 352,663 1,335,225 1,336,690
FNMA -- -- 91,349 91,436
FHLMC -- -- 23,863 23,920
Interest-only 1,422 851 1,555 1,129
---------- ---------- ---------- ----------
Total MBS 2,731,270 2,723,449 4,917,545 4,902,893
---------- ---------- ---------- ----------
Other debt securities:
United States government and federal agency 5,462 5,528 8,552 8,638
State and municipal 15,030 14,889 36,997 36,291
Domestic corporate 164,039 168,615 34,844 35,359
Other 500 500 500 500
---------- ---------- ---------- ----------
Total other debt securities 185,031 189,532 80,893 80,788
---------- ---------- ---------- ----------
Equity securities 6,828 6,624 9,243 8,623
---------- ---------- ---------- ----------
Total securities available for sale $2,923,129 $2,919,605 $5,007,681 $4,992,304
========== ========== ========== ==========
</TABLE>
Loans
The Company's loans receivable (exclusive of the allowance for loan
losses) and loans held for sale amounted to $12.9 billion and $3.0 billion,
respectively, at June 30, 1998, as compared with $13.0 billion and $1.8 billion,
respectively, at December 31, 1997. In the aggregate, loans receivable and loans
held for sale represented 83.0% of total interest-earning assets at June 30,
1998, up from 73.1% at December 31, 1997.
The principal segment of the Company's loans receivable is residential
real estate loans. Such loans amounted to $9.5 billion at the end of the second
quarter of 1998, down from $9.8 billion at the end of 1997. Although the Company
produced approximately $1.5 billion of residential real estate loans for
portfolio during the
<PAGE> 25
first six months of 1998, the impact of such production, as well as other
factors, was more than offset by principal payments, coupled with the transfer,
in connection with the Company's ongoing balance sheet restructuring activities,
of approximately $780 million of relatively lower-yielding loans from loans
receivable to loans held for sale. At June 30, 1998, approximately $288 million
of the transferred loans remained in loans held for sale. These loans are
expected to be sold during the third quarter of 1998.
The Company's commercial real estate loans receivable amounted to $2.4
billion at June 30, 1998, up $150.9 million from December 31, 1997. At the end
of the second quarter of 1998, commercial real estate loans receivable primarily
consisted of multifamily properties (61%), shopping centers (16%), and office
buildings (11%).
At June 30, 1998, the Company's consumer loans receivable totaled $865.5
million, an increase of $91.7 million, or 11.9%, from the level at year-end
1997. This increase was largely attributable to growth in home equity loans of
$98.0 million. Home equity loans represented approximately 83% of the consumer
loan portfolio at June 30, 1998, relatively unchanged from the level at December
31, 1997.
The Company's business loans receivable amounted to $165.2 million at
June 30, 1998. This represents an increase of $66.1 million, or 66.7%, since the
end of 1997. Contributing to this increase was the Company's expansion into
lease financing during the second quarter of 1998. At June 30, 1998, lease
financing amounted to $30.8 million.
The following table summarizes the Company's loan production, both for
portfolio and for sale in the secondary market, for the periods indicated.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Residential real estate loan production:
Originated $ 5,942,915 $ 765,236 $11,661,812 $ 1,296,316
Purchased 1,128,091 232,102 2,110,571 338,667
----------- ----------- ----------- -----------
Total residential real estate loan production 7,071,006 997,338 13,772,383 1,634,983
----------- ----------- ----------- -----------
Commercial real estate loans originated 351,832 114,723 551,133 191,057
Consumer loans originated:
Home equity loans 156,927 84,138 263,538 144,758
Other consumer loans 38,650 36,867 81,570 76,424
----------- ----------- ----------- -----------
Total consumer loans originated 195,577 121,005 345,108 221,182
----------- ----------- ----------- -----------
Business loans originated 89,629 15,108 132,019 27,747
----------- ----------- ----------- -----------
Total loan production $ 7,708,044 $ 1,248,174 $14,800,643 $ 2,074,969
=========== =========== =========== ===========
</TABLE>
Deposits
The Company's total deposits amounted to $14.0 billion at the end of the
second quarter of 1998, up $185.4 million from the end of 1997. At June 30,
1998, the Bank operated 90 branches in the greater New York City metropolitan
area, including one branch that was opened during the second quarter of 1998. In
addition, at June 30, 1998, the Bank operated one branch in Florida, which had
deposits of $210.0 million at that date. The Florida branch was sold on August
13, 1998, which will result in a pretax gain of approximately $10 million in
the third quarter of 1998.
<PAGE> 26
The following table sets forth a summary of the Company's deposits at
the dates indicated.
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------------------- -------------------------
PERCENTAGE PERCENTAGE
AMOUNT OF TOTAL AMOUNT OF TOTAL
----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Demand $ 1,845,540 13.1% $ 1,572,797 11.4%
Savings 2,346,119 16.7 2,431,812 17.6
Money market 2,072,000 14.8 1,971,081 14.2
Time 7,768,984 55.4 7,871,585 56.8
----------- ----- ----------- ----
Total deposits $14,032,643 100.0% $13,847,275 100.0%
=========== ===== =========== ====
</TABLE>
Borrowed Funds
The following table sets forth a summary of the Company's borrowed funds
at the dates indicated.
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------------------- -------------------------
PERCENTAGE PERCENTAGE
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities sold under agreements
to repurchase $1,229,263 24.1% $2,975,774 47.1%
FHLBNY advances 3,256,615 63.9 2,786,751 44.1
Senior notes 142,577 2.8 142,475 2.3
Guaranteed preferred beneficial
interests in Holding Company's
junior subordinated deferrable
interest debentures 196,149 3.9 196,137 3.1
Other 271,089 5.3 218,175 3.4
---------- ----- ---------- -----
Total borrowed funds $5,095,693 100.0% $6,319,312 100.0%
========== ===== ========== =====
</TABLE>
On July 9, 1998, the Holding Company redeemed the remaining $44.4
million of principal amount of its outstanding 8.9375% senior notes due July
2003, which will result in a pretax extraordinary loss of $1.9 million in the
third quarter of 1998. In addition, all of the Bank's outstanding Collateralized
Real Yield Securities (the "Reals") will be repaid, at the option of the holders
thereof, on August 17, 1998. Upon repayment of the outstanding Reals, which
totaled $78.0 million at June 30, 1998 and are included in "Other" in the above
table, a pretax extraordinary loss of $0.5 million will be recognized.
Stockholders' Equity
Stockholders' equity amounted to $1.3 billion at June 30, 1998,
relatively unchanged from the end of 1997. At the end of the second quarter of
1998, stockholders' equity represented 6.36% of total assets, as compared with
6.02% at the end of 1997. Book value per common share was $11.72 at June 30,
1998, up from $11.30 at December 31, 1997.
During the first quarter of 1998, the Holding Company repurchased
3,000,000 shares of its common stock ("Common Stock"), completing a program
announced during December 1997. In connection with a program announced in April
1998 to repurchase up to 3,000,000 shares of Common Stock, the Holding Company
repurchased an additional 903,800 shares of Common Stock during the second
quarter of 1998. The total cost of the shares of Common Stock repurchased during
the first six months of 1998 was $113.1 million. No time limit was established
to complete the repurchase program announced in April 1998.
Cash dividends paid on the Common Stock amounted to $10.3 million, or
$0.09 per share, for the first six months of 1998. In July 1998, the Holding
Company declared a cash dividend on the Common Stock of $0.05 per share to be
paid on September 2, 1998 to stockholders of record as of the close of business
on August 21, 1998.
<PAGE> 27
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.
LIQUIDITY
The Company's liquidity management process focuses on ensuring that
sufficient funds exist to meet withdrawals from deposit accounts, loan funding
commitments, the repayment of borrowed funds, and other financial obligations
and expenditures, as well as ensuring the Bank's compliance with regulatory
liquidity requirements. The liquidity position of the Company, which is
monitored on a daily basis, is managed pursuant to established policies and
guidelines.
The Company's sources of liquidity include principal repayments on loans
receivable and MBS, borrowings, deposits, sales of loans in connection with
mortgage banking activities, sales of securities available for sale, and net
cash provided by operations. Additionally, the Company has access to the capital
markets for issuing debt or equity securities, as well as access to the discount
window of the Federal Reserve Bank of New York, if necessary, for the purpose of
borrowing to meet temporary liquidity needs, although it has not utilized this
funding source in the past.
Excluding funds raised through the capital markets, the primary source
of funds of the Holding Company, on an unconsolidated basis, has been dividends
from the Bank, whose ability to pay dividends is subject to regulations of the
Office of Thrift Supervision ("OTS"), its primary regulator.
Under OTS regulations, the Bank must maintain average eligible liquid
assets for each calendar quarter of not less than 4.00% of its liquidity base.
The Bank was in compliance with these regulations for the first and second
quarters of 1998.
REGULATORY CAPITAL
Pursuant to OTS regulations, the Bank is required to maintain tangible
capital of at least 1.50% of adjusted total assets, leverage capital of at least
3.00% of adjusted total assets, and risk-based capital of at least 8.00% of
risk-weighted assets. The Bank exceeded these capital requirements at June 30,
1998.
Under the prompt corrective action regulations adopted by the OTS
pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991,
an institution is considered well capitalized, the highest of five categories,
if it has a leverage capital ratio of at least 5.00%, a tier 1 risk-based
capital ratio (leverage capital to risk-weighted assets) of at least 6.00%, and
a total risk-based capital ratio of at least 10.00%, and it is not subject to an
order, written agreement, capital directive, or prompt corrective action
directive to meet and maintain a specific capital level for any capital measure.
At June 30, 1998, the Bank met the published standards for a well capitalized
designation under these regulations.
The following table sets forth the regulatory capital position of the
Bank at the dates indicated.
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Tangible and leverage capital $1,287,274 6.24% $1,216,417 5.64%
Tier 1 risk-based capital 1,287,274 10.44 1,216,417 10.29
Total risk-based capital 1,397,208 11.33 1,321,135 11.17
</TABLE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is contained in Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset/Liability Management," incorporated herein by reference.
<PAGE> 28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 13, 1995, Anchor Savings Bank FSB ("Anchor Savings") filed
suit in the United States Court of Federal Claims against the United States for
breach of contract and taking of property without compensation in contravention
of the Fifth Amendment to the United States Constitution. The action arose
because the passage of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA") and the regulations adopted by the OTS
pursuant to FIRREA deprived Anchor Savings of the ability to include supervisory
goodwill and certain other assets for purposes of computing its regulatory
capital as the Federal Savings and Loan Insurance Corporation ("FSLIC") had
agreed it could. The direct effect was to cause Anchor Savings to go from an
institution that substantially exceeded its regulatory capital requirements to
one that was critically undercapitalized upon the effectiveness of the
FIRREA-mandated capital requirements.
From 1982 to 1985, Anchor Savings had acquired eight FSLIC-insured
institutions that were in danger of failing and causing a loss to the FSLIC.
Four institutions were acquired with some financial assistance from the FSLIC
and four were unassisted "supervisory" cases. In acquiring the institutions,
Anchor Savings assumed liabilities determined to exceed the assets it acquired
by over $650 million at the dates of the respective acquisitions. The difference
between the fair values of the assets acquired and the liabilities assumed in
the transactions were recorded on Anchor Savings' books as goodwill. At the time
of these acquisitions, the FSLIC had agreed that this supervisory goodwill was
to be amortized over periods of up to 40 years. Without that agreement, Anchor
Savings would not have made the acquisitions. When the capital regulations
imposed under FIRREA became effective, Anchor Savings still had over $518
million of supervisory goodwill on its books and approximately 20 years
remaining to amortize it under the agreements with FSLIC. The FIRREA-mandated
capital requirements excluded all but approximately $124 million of Anchor
Savings' supervisory goodwill, over $42 million attributable to the FSLIC
contribution in one acquisition, and, until the formation of Anchor Bancorp,
Inc., the holding company for Anchor Savings ("Anchor Bancorp"), in 1991, $157
million associated with preferred stock issued to the FSLIC as a result of one
of the acquisitions. FIRREA also required the remaining supervisory goodwill to
be eliminated by December 31, 1994 for regulatory capital purposes. The
elimination of the supervisory goodwill resulted in severe limitations on Anchor
Savings' activities and required the disposition of valuable assets under
liquidation-like circumstances, as a result of which Anchor Savings was damaged.
The complaint asks that the Government make Anchor Savings whole for the effects
of the loss, which are estimated to exceed substantially the goodwill remaining
at the time FIRREA was enacted.
There are approximately 130 cases involving similar issues pending in
the United States Court of Federal Claims, which has entered summary judgment
for the plaintiffs as to liability, but not damages, in a small number of the
cases. The first three of those cases, referred to as the Winstar cases, were
appealed to the United States Supreme Court, which, on July 1, 1996, affirmed
the decision that the Government was liable for breach of contract.
All of the Winstar-related cases, including Anchor Savings' lawsuit
(which was assumed by the Bank upon consummation of the merger of Anchor Bancorp
and Anchor Savings with and into the Holding Company and the Bank,
respectively), have been assigned to the Chief Judge of the Court of Federal
Claims. The Chief Judge has issued an Omnibus Case Management Order ("OCMO")
that controls the proceedings in all these cases. The OCMO imposes procedures
and schedules different from most cases in the Court of Federal Claims. Under
the OCMO, the Bank has moved for partial summary judgment as to the existence of
a contract and the inconsistency of the Government's actions with that contract
in each of the related transactions. The Government has disputed the existence
of a contract in each case and cross-moved for summary judgment. The Government
also submitted a filing acknowledging that it is not aware of any affirmative
defenses. Briefing on the motions was completed on August 1, 1997. In August
1997, the Court held a hearing on summary judgment motions in four other cases.
As part of that hearing, the Court heard argument on eleven issues that the
plaintiffs contend are common to many of the pending cases, including the Bank's
case. The Court issued its order on December 22, 1997, ruling in favor of the
plaintiffs on all eleven "common" issues. The Court's order directed the
Government to submit a "show cause" filing by February 20, 1998 asserting why
judgment for the plaintiff should not be entered on each of the common issues
with respect to each pending summary judgment motion. The Government submitted a
filing in response to the "show cause" order, but asserted that it might need
further discovery as to certain issues. At a status conference
<PAGE> 29
on March 11, 1998, the Court directed each of the plaintiffs to submit a
proposed form of order for entry of judgment as to liability on the Winstar
contract issues and an accompanying brief by March 31, 1998 and directed the
Government to respond by April 30, 1998 with a filing asserting any basis for
not entering the order proposed by the plaintiff. On March 31, 1998, the Bank,
as directed by the Court, submitted a proposed order imposing liability on the
Government as to each of the Bank's claims. On April 30, 1998, the Government
served its opposition to the entry of the order and sought discovery on several
issues affecting summary judgment. The Bank intends to vigorously oppose the
Government's special discovery request. Final submissions were made on May 15,
1998 by the Bank and May 22, 1998 by the Government. No date has been set for
argument on the Bank's request to enter judgment. It is not possible to predict
whether the Court will grant any of the Bank's motions for partial summary
judgment or, if so, when the Chief Judge will schedule a trial on damages and
any remaining liability issues.
The Court also ordered that certain common discovery proceed. The
Government was required to produce certain documents relating to unassisted
acquisitions of failing institutions effected by the Bank and five other
plaintiffs. In addition, the Court directed that full discovery of facts common
to all pending cases be conducted. Such discovery has included materials
concerning the policies and procedures of the Federal Home Loan Bank Board (the
predecessor of the OTS) and the FSLIC during the thrift crisis of the 1980's,
when the transactions that are the subject of the litigation occurred. In
addition, the common discovery has included generally applicable information
concerning the operations of the FSLIC that will be relevant under certain
damage theories. Because of delays by the Government in complying with document
requests, this discovery is continuing.
Commencing in April 1998, the oldest 30 of the pending cases (after
excluding certain specific cases) that elected to proceed were allowed to
commence full discovery as to liability and damages in their cases. The
case-specific discovery will continue for one year, unless extended by the
Court. The second 30 cases will start discovery in 1999, and so on. Discovery of
damage experts will follow the fact discovery in each case. Cases will not be
assigned to trial judges until after the fact discovery is completed. The Bank
is among the first 30 plaintiffs and commenced full case-specific discovery on
April 1, 1998.
There have been no court decisions determining damages in any of the
Winstar-related cases. The trial in the first of the Winstar-related cases to
proceed to trial on damages was concluded in April 1998, with closing arguments
set for September 1998, and the second trial commenced in early May 1998. It is
unlikely that any court decision on damages will be issued much before the end
of 1998. It is likely that any determination of damages by the Court of Federal
Claims will be appealed. It is impossible to predict the measure of damages that
will be upheld in cases in which liability is found.
Recently, there have been settlements in four of the Winstar-related
cases in which the Government agreed to make payments to the plaintiffs. The
Bank believes that the circumstances of the four settled cases were materially
different from the Bank's case, and the Bank does not believe that these
settlements will affect the final outcome of its case. The Company continues to
believe that its claim is meritorious, that it is one of the more significant
cases before the Court, and that it is entitled to damages, which, as noted, are
estimated to exceed substantially the goodwill remaining on Anchor Savings'
books at the time FIRREA was enacted.
<PAGE> 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Holding Company's Annual Meeting of Stockholders was held on April
30, 1998 (the "Annual Meeting"). The following matters received the number of
affirmative votes, negative votes, withheld votes, abstentions, and broker
non-votes set forth below.
(a) Election of six directors:
The following individuals were duly elected as directors of the Holding
Company for three-year terms:
<TABLE>
<CAPTION>
Affirmative Withheld
Votes Votes
------------ -----------
<S> <C> <C>
Frederick C. Chen 83,977,122 9,073,904
James M. Large, Jr. 84,829,518 8,221,508
John Morning 83,951,033 9,099,993
Dr. Paul A. Qualben 83,897,761 9,153,265
Eugene G. Schulz, Jr. 84,007,550 9,043,476
Dr. Norman R. Smith 83,966,901 9,084,125
</TABLE>
(b) A proposal regarding certain amendments to the Holding Company's 1991
Stock Incentive Plan was ratified after receiving 75,141,963
affirmative votes, which was more than a majority of the shares of
Common Stock represented, in person or by proxy, at the Annual Meeting.
This proposal also received 17,172,957 negative votes and 0 withheld
votes, with 736,106 abstentions and 0 broker non-votes.
(c) A proposal regarding certain amendments to the Holding Company's 1997
Stock Incentive Plan for Outside Directors was ratified after receiving
75,013,228 affirmative votes, which was more than a majority of the
shares of Common Stock represented, in person or by proxy, at the
Annual Meeting. This proposal also received 17,078,427 negative votes
and 0 withheld votes, with 959,371 abstentions and 0 broker non-votes.
(d) The approval of the Dime Bancorp, Inc. Senior Officer Incentive Plan
was ratified after receiving 80,854,924 affirmative votes, which was
more than a majority of the shares of Common Stock represented, in
person or by proxy, at the Annual Meeting. This proposal also received
11,095,490 negative votes and 0 withheld votes, with 1,100,612
abstentions and 0 broker non-votes.
(e) A proposal regarding an amendment to the Holding Company's Amended and
Restated Certificate of Incorporation to increase the number of
authorized shares of Common Stock to 350 million from 200 million was
ratified after receiving 80,454,007 affirmative votes, which was more
than a majority of the outstanding shares of Common Stock. This
proposal also received 11,702,720 negative votes and 0 withheld votes,
with 894,299 abstentions and 0 broker non-votes.
(f) A proposal to appoint KPMG Peat Marwick LLP as independent public
accountants for the fiscal year ended December 31, 1998 was ratified
after receiving 92,324,524 affirmative votes, which was more than a
majority of the shares of Common Stock represented, in person or by
proxy, at the Annual Meeting. This proposal also received 332,938
negative votes and 0 withheld votes, with 393,564 abstentions and 0
broker non-votes.
<PAGE> 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 -- Financial Data Schedule.
Exhibit 27.1 -- Restated Financial Data Schedule.
Exhibit 27.2 -- Restated Financial Data Schedule.
(b) REPORTS ON FORM 8-K
None
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIME BANCORP, INC.
(Registrant)
Dated: August 13, 1998 By: /s/ Lawrence J. Toal
--------------- --------------------
Lawrence J. Toal
Chairman of the Board, Chief Executive
Officer, President, and Chief Operating
Officer
Dated: August 13, 1998 By: /s/ Anthony R. Burriesci
--------------- ------------------------
Anthony R. Burriesci
Executive Vice President
and Chief Financial Officer
<PAGE> 33
EXHIBIT INDEX
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
27 Financial Data Schedule (filed electronically only).
27.1 Restated Financial Data Schedule (filed electronically only).
27.2 Restated Financial Data Schedule (filed electronically only).
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DIME
BANCORP, INC.'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 262,630
<INT-BEARING-DEPOSITS> 11,933
<FED-FUNDS-SOLD> 199
<TRADING-ASSETS> 458
<INVESTMENTS-HELD-FOR-SALE> 2,919,605
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 15,932,080
<ALLOWANCE> 109,934
<TOTAL-ASSETS> 20,913,891
<DEPOSITS> 14,032,643
<SHORT-TERM> 4,085,826
<LIABILITIES-OTHER> 455,172
<LONG-TERM> 1,009,867
0
0
<COMMON> 1,203
<OTHER-SE> 1,329,180
<TOTAL-LIABILITIES-AND-EQUITY> 20,913,891
<INTEREST-LOAN> 584,009
<INTEREST-INVEST> 141,486
<INTEREST-OTHER> 4,415
<INTEREST-TOTAL> 729,910
<INTEREST-DEPOSIT> 278,065
<INTEREST-EXPENSE> 463,162
<INTEREST-INCOME-NET> 266,748
<LOAN-LOSSES> 16,000
<SECURITIES-GAINS> 16,946
<EXPENSE-OTHER> 315,397
<INCOME-PRETAX> 169,875
<INCOME-PRE-EXTRAORDINARY> 169,875
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 115,515
<EPS-PRIMARY> 1.01<F1>
<EPS-DILUTED> 0.99
<YIELD-ACTUAL> 2.64
<LOANS-NON> 105,578
<LOANS-PAST> 0
<LOANS-TROUBLED> 76,702
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 104,718
<CHARGE-OFFS> 15,861
<RECOVERIES> 5,077
<ALLOWANCE-CLOSE> 109,934
<ALLOWANCE-DOMESTIC> 104,934
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,000
<FN>
<F1>REPRESENTS EPS-BASIC
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DIME
BANCORP, INC.'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 163,450
<INT-BEARING-DEPOSITS> 4,837
<FED-FUNDS-SOLD> 30,987
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,166,733
<INVESTMENTS-CARRYING> 4,015,006
<INVESTMENTS-MARKET> 3,939,578
<LOANS> 11,822,610
<ALLOWANCE> 101,026
<TOTAL-ASSETS> 20,087,176
<DEPOSITS> 13,335,199
<SHORT-TERM> 4,309,923
<LIABILITIES-OTHER> 192,405
<LONG-TERM> 1,190,361
0
0
<COMMON> 1,083
<OTHER-SE> 1,058,205
<TOTAL-LIABILITIES-AND-EQUITY> 20,087,176
<INTEREST-LOAN> 419,559
<INTEREST-INVEST> 228,209
<INTEREST-OTHER> 16,071
<INTEREST-TOTAL> 663,839
<INTEREST-DEPOSIT> 272,087
<INTEREST-EXPENSE> 427,469
<INTEREST-INCOME-NET> 236,370
<LOAN-LOSSES> 33,000
<SECURITIES-GAINS> 3,692
<EXPENSE-OTHER> 161,173
<INCOME-PRETAX> 99,038
<INCOME-PRE-EXTRAORDINARY> 99,038
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60,688
<EPS-PRIMARY> 0.58<F1><F2>
<EPS-DILUTED> 0.57<F2>
<YIELD-ACTUAL> 2.52
<LOANS-NON> 103,141
<LOANS-PAST> 0
<LOANS-TROUBLED> 188,783
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 106,495
<CHARGE-OFFS> 56,095
<RECOVERIES> 4,377
<ALLOWANCE-CLOSE> 101,026
<ALLOWANCE-DOMESTIC> 101,026
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>REPRESENTS EPS-BASIC.
<F2>RESTATED TO REFLECT THE COMPANY'S ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO.128, "EARNINGS PER SHARE."
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DIME
BANCORP, INC.'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERNCE TO SUCH FORM 10-Q.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 172,879
<INT-BEARING-DEPOSITS> 4,932
<FED-FUNDS-SOLD> 18,885
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,787,279
<INVESTMENTS-CARRYING> 3,765,766
<INVESTMENTS-MARKET> 3,709,365
<LOANS> 12,643,266
<ALLOWANCE> 102,061
<TOTAL-ASSETS> 19,413,597
<DEPOSITS> 13,392,320
<SHORT-TERM> 3,534,354
<LIABILITIES-OTHER> 172,724
<LONG-TERM> 1,261,195
0
0
<COMMON> 1,083
<OTHER-SE> 1,051,921
<TOTAL-LIABILITIES-AND-EQUITY> 19,413,597
<INTEREST-LOAN> 651,935
<INTEREST-INVEST> 337,404
<INTEREST-OTHER> 25,370
<INTEREST-TOTAL> 1,014,709
<INTEREST-DEPOSIT> 415,230
<INTEREST-EXPENSE> 658,172
<INTEREST-INCOME-NET> 356,537
<LOAN-LOSSES> 41,000
<SECURITIES-GAINS> 7,166
<EXPENSE-OTHER> 240,352
<INCOME-PRETAX> 162,306
<INCOME-PRE-EXTRAORDINARY> 162,306
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100,215
<EPS-PRIMARY> 0.97<F1><F2>
<EPS-DILUTED> 0.95<F2>
<YIELD-ACTUAL> 2.52
<LOANS-NON> 95,171
<LOANS-PAST> 0
<LOANS-TROUBLED> 85,384
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 106,495
<CHARGE-OFFS> 65,102
<RECOVERIES> 6,419
<ALLOWANCE-CLOSE> 102,061
<ALLOWANCE-DOMESTIC> 102,061
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>REPRESENTS EPS-BASIC.
<F2>RESTATED TO REFLECT THE COMPANY'S ADOPTION OF STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO.128, "EARNINGS PER SHARE."
</FN>
</TABLE>
