<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 SEPTEMBER 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 111,862,937 as of October 30, 1998.
<PAGE> 2
DIME BANCORP, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of September 30, 1998 and
December 31, 1997 3
Consolidated Statements of Income for the three months and nine months ended
September 30, 1998 and 1997 4
Consolidated Statement of Changes in Stockholders' Equity for the nine months
ended September 30, 1998 5
Consolidated Statements of Cash Flows for the nine months ended September 30,
1998 and 1997 6
Consolidated Statements of Comprehensive Income for the three months and
nine months ended September 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 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
</TABLE>
2
<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>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 240,891 $ 295,369
Money market investments 12,351 157,158
Securities available for sale 2,974,885 4,992,304
Federal Home Loan Bank of New York stock 324,106 303,287
Loans held for sale 3,612,110 1,841,862
Loans receivable, net:
Residential real estate loans 9,032,903 9,848,593
Commercial real estate loans 2,420,644 2,263,023
Consumer loans 915,185 773,817
Business loans 198,387 99,074
Allowance for loan losses (111,949) (104,718)
------------ ------------
Total loans receivable, net 12,455,170 12,879,789
------------ ------------
Accrued interest receivable 104,353 106,829
Premises and equipment, net 165,330 150,805
Mortgage servicing assets 589,475 341,906
Other assets 764,162 778,691
------------ ------------
Total assets $ 21,242,833 $ 21,848,000
============ ============
LIABILITIES
Deposits $ 13,546,265 $ 13,847,275
Federal funds purchased and securities sold under agreements to repurchase 1,989,118 2,975,774
Federal Home Loan Bank of New York advances 3,346,819 2,786,751
Senior notes 198,772 142,475
Guaranteed preferred beneficial interests in Holding Company's junior
subordinated deferrable interest debentures 162,000 196,137
Other borrowed funds 162,411 218,175
Other liabilities 497,646 366,555
------------ ------------
Total liabilities 19,903,031 20,533,142
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share (350,000,000 and 200,000,000 shares
authorized at September 30, 1998 and December 31, 1997, respectively;
120,256,459 shares issued at September 30, 1998 and December 31, 1997) 1,203 1,203
Additional paid-in capital 1,164,647 1,158,221
Retained earnings 408,652 261,201
Treasury stock, at cost (8,229,140 and 3,898,132 shares at September 30, 1998
and December 31, 1997, respectively) (222,413) (95,221)
Accumulated other comprehensive loss, net of taxes (4,653) (9,534)
Unearned compensation (7,634) (1,012)
------------ ------------
Total stockholders' equity 1,339,802 1,314,858
------------ ------------
Total liabilities and stockholders' equity $ 21,242,833 $ 21,848,000
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
INTEREST INCOME
<S> <C> <C> <C> <C>
Residential real estate loans $ 215,066 $ 163,297 $ 661,318 $ 461,316
Commercial real estate loans 50,459 52,054 149,338 140,517
Consumer loans 18,549 15,803 52,052 46,804
Business loans 3,764 1,222 9,139 3,298
Mortgage-backed securities 44,645 103,196 168,583 320,154
Other securities 10,524 5,999 28,072 17,250
Money market investments 982 9,299 5,397 25,370
----------- ----------- ----------- -----------
Total interest income 343,989 350,870 1,073,899 1,014,709
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 138,145 143,143 416,210 415,230
Borrowed funds 78,523 87,560 263,620 242,942
----------- ----------- ----------- -----------
Total interest expense 216,668 230,703 679,830 658,172
----------- ----------- ----------- -----------
Net interest income 127,321 120,167 394,069 356,537
Provision for loan losses 8,000 8,000 24,000 41,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 119,321 112,167 370,069 315,537
----------- ----------- ----------- -----------
NON-INTEREST INCOME
Loan servicing and other fees 53,819 12,856 138,900 37,717
Banking service fees 11,088 8,695 30,256 23,161
Securities and insurance brokerage fees 8,704 5,142 25,171 16,960
Net gains on sales activities 71,519 2,845 180,510 7,727
Other 751 742 5,568 1,556
----------- ----------- ----------- -----------
Total non-interest income 145,881 30,280 380,405 87,121
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE
General and administrative expense:
Compensation and employee benefits 66,162 34,109 200,618 103,324
Occupancy and equipment, net 23,186 14,765 67,517 41,661
Other 53,807 24,706 156,139 74,666
----------- ----------- ----------- -----------
Total general and administrative expense 143,155 73,580 424,274 219,651
Amortization of mortgage servicing assets 27,633 5,248 61,465 15,717
Other real estate owned expense, net 373 351 819 4,984
----------- ----------- ----------- -----------
Total non-interest expense 171,161 79,179 486,558 240,352
----------- ----------- ----------- -----------
Income before income tax expense and extraordinary items 94,041 63,268 263,916 162,306
Income tax expense 30,092 23,741 84,452 62,091
----------- ----------- ----------- -----------
Income before extraordinary items 63,949 39,527 179,464 100,215
Extraordinary items -- losses on early extinguishment of
debt, net of tax benefits of $2,993 (4,057) -- (4,057) --
----------- ----------- ----------- -----------
Net income $ 59,892 $ 39,527 $ 175,407 $ 100,215
=========== =========== =========== ===========
PER COMMON SHARE
Basic earnings:
Income before extraordinary items $ 0.57 $ 0.39 $ 1.57 $ 0.97
Extraordinary items (0.04) -- (0.03) --
----------- ----------- ----------- -----------
Net income $ 0.53 $ 0.39 $ 1.54 $ 0.97
=========== =========== =========== ===========
Diluted earnings:
Income before extraordinary items $ 0.56 $ 0.38 $ 1.54 $ 0.95
Extraordinary items (0.04) -- (0.03) --
----------- ----------- ----------- -----------
Net income $ 0.52 $ 0.38 $ 1.51 $ 0.95
=========== =========== =========== ===========
Dividends declared $ 0.05 $ 0.04 $ 0.14 $ 0.08
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
---------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
ADDITIONAL TREASURY COMPREHENSIVE TOTAL
COMMON PAID-IN RETAINED STOCK, LOSS, 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 -- -- 175,407 -- -- -- 175,407
Other comprehensive income -- -- -- -- 4,881 -- 4,881
Cash dividends declared on
common stock -- -- (15,956) -- -- -- (15,956)
Common stock issued under
employee benefit plans -- -- (12,000) 37,079 -- (8,584) 16,495
Treasury stock purchased -- -- -- (164,271) -- -- (164,271)
Amortization of unearned
compensation -- -- -- -- -- 1,962 1,962
Tax benefit on stock options
exercised -- 6,426 -- -- -- -- 6,426
----------- ----------- ----------- ------------ ----------- ----------- -----------
Balance at end of period $ 1,203 $ 1,164,647 $ 408,652 $ (222,413) $ (4,653) $ (7,634) $ 1,339,802
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 175,407 $ 100,215
Adjustments to reconcile net income to net cash used by operating activities:
Provisions for loan and other real estate owned losses 24,529 43,406
Depreciation and amortization of premises and equipment 20,596 13,259
Other amortization and accretion, net 101,654 41,710
Provision for deferred income tax expense 69,168 49,460
Net securities gains (17,202) (7,166)
Losses on early extinguishment of debt 7,050 --
Net increase in loans held for sale (1,287,137) (389,932)
Other, net (233,349) (42,149)
----------- -----------
Net cash used by operating activities (1,139,284) (191,197)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (637,898) (1,164,713)
Purchases of securities held to maturity -- (78,338)
Proceeds from sales of securities available for sale 1,520,522 1,568,011
Proceeds from maturities of securities available for sale and held to maturity 1,155,889 1,113,051
Purchases of Federal Home Loan Bank of New York stock (20,819) --
Loans receivable originated and purchased, net of principal payments (138,580) (980,401)
Proceeds from sales of loans receivable 11,806 6,851
Acquisitions, net of cash and cash equivalents acquired -- (86,454)
Investment in bank-owned life insurance program -- (150,000)
Proceeds from bulk sales of non-performing assets -- 93,063
Proceeds from sales of other real estate owned 11,783 35,046
Purchases of premises and equipment, net (35,080) (19,895)
----------- -----------
Net cash provided by investing activities 1,867,623 336,221
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits (94,036) 88,085
Net cash paid upon sale of deposits (197,662) --
Net decrease in borrowings with original maturities of three months or less (542,836) (1,355,368)
Proceeds from other borrowings 799,780 1,492,632
Repayments of other borrowings (729,138) (283,999)
Proceeds from issuance of common and treasury stock 16,495 7,529
Purchases of treasury stock (164,271) (73,476)
Cash dividends paid on common stock (15,956) (8,248)
----------- -----------
Net cash used by financing activities (927,624) (132,845)
----------- -----------
Net (decrease) increase in cash and cash equivalents (199,285) 12,179
Cash and cash equivalents at beginning of period 452,527 184,517
----------- -----------
Cash and cash equivalents at end of period $ 253,242 $ 196,696
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
----------------------- -----------------------
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- -----------------------
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 59,892 $ 39,527 $ 175,407 $ 100,215
Other comprehensive (loss) income before taxes:
Net unrealized (losses) gains on securities available for sale:
Unrealized holding (losses) gains arising during the period (4,307) 6,868 24,492 14,435
Reclassification adjustment for net gains included in
net income (256) (3,468) (17,202) (7,147)
--------- --------- --------- ---------
Other comprehensive (loss) income before taxes (4,563) 3,400 7,290 7,288
Income tax (benefit) expense related to components of other
comprehensive (loss) income (1,938) 1,460 2,409 3,133
--------- --------- --------- ---------
Other comprehensive (loss) income (2,625) 1,940 4,881 4,155
--------- --------- --------- ---------
Comprehensive income $ 57,267 $ 41,467 $ 180,288 $ 104,370
========= ========= ========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE> 8
NOTES TO UNAUDITED 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 nine months ended September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -----------------------
1998 1997 1998 1997
--------- ------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Numerators:
Income before extraordinary items $ 63,949 $39,527 $ 179,464 $ 100,215
Extraordinary items (4,057) -- (4,057) --
--------- ------- --------- ---------
Net income $ 59,892 $39,527 $ 175,407 $ 100,215
========= ======= ========= =========
Denominators:
Basic shares:
Weighted average number of common shares outstanding 113,253 102,096 114,140 103,823
Diluted shares:
Weighted average number of common shares outstanding 113,253 102,096 114,140 103,823
Common equivalent shares due to stock options and
employee stock purchase rights 1,550 1,880 1,779 1,730
--------- ------- --------- ---------
Weighted average number of diluted shares outstanding 114,803 103,976 115,919 105,553
========= ======= ========= =========
Earnings per common share:
Basic:
Income before extraordinary items $ 0.57 $ 0.39 $ 1.57 $ 0.97
Extraordinary items (0.04) -- (0.03) --
--------- ------- --------- ---------
Net income $ 0.53 $ 0.39 $ 1.54 $ 0.97
========= ======= ========= =========
Diluted:
Income before extraordinary items $ 0.56 $ 0.38 $ 1.54 $ 0.95
Extraordinary items (0.04) -- (0.03) --
--------- ------- --------- ---------
Net income $ 0.52 $ 0.38 $ 1.51 $ 0.95
========= ======= ========= =========
</TABLE>
8
<PAGE> 9
NOTE 3 -- SUPPLEMENTAL DISCLOSURES FOR CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Supplemental cash flow information:
Interest payments on deposits and borrowed funds $695,237 $638,227
Income tax payments, net 5,372 373
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 16,077 13,328
In connection with acquisitions:
Fair value of assets acquired, excluding cash and cash equivalents received -- 625,543
Cash and cash equivalents received -- 7,796
Cash paid -- 93,325
Fair value of liabilities assumed -- 581,595
Goodwill -- 41,581
</TABLE>
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 September 30, 1998 and December 31, 1997, the Company's
balance of accumulated other comprehensive loss consisted solely of a net
unrealized loss 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
9
<PAGE> 10
useful. SFAS No. 132 is effective for fiscal years beginning after December 15,
1997. Restatement of disclosures for earlier periods provided for comparative
purposes is required unless the information is not readily available, in which
case the notes to the financial statements should include all available
information and a description of the information not available.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 requires the capitalization of certain
costs incurred in connection with developing or obtaining computer software for
internal use. Such costs are currently expensed by 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 will adopt SOP 98-1 on January 1, 1999. The Company does not believe
that SOP 98-1, when adopted, will materially impact its financial condition or
results of operations.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements contained in this quarterly report on Form 10-Q are
forward-looking and may be identified by the use of words such as "believe,"
"expect," "anticipate," "should," "planned," "estimated," and "potential." These
forward-looking statements are based on the Company's current expectations. A
variety of factors could cause the Company's actual results and experience to
differ materially from the anticipated results or other expectations expressed
in such forward-looking statements. The risks and uncertainties that may affect
the operations, performance, development, and results of the Company's business
include interest rate movements, competition from both financial and
non-financial institutions, changes in applicable laws and regulations, the
timing and occurrence (or non-occurrence) of transactions and events that may be
subject to circumstances beyond the Company's control, and general economic
conditions.
RESULTS OF OPERATIONS
General
The Company's net income for the third quarter of 1998 was $59.9
million, an increase of 51.5% from $39.5 million for the third quarter of 1997.
Diluted earnings per common share were $0.52 for the quarter ended September 30,
1998, as compared with $0.38 for the corresponding prior year quarter, an
increase of 36.8%. The Company's annualized returns on average stockholders'
equity and average assets for the third quarter of 1998 were 17.86% and 1.16%,
respectively, up from 15.14% and 0.78%, respectively, for the year-earlier
period.
For the first nine months of 1998, the Company's net income was $175.4
million, up 75.0% from $100.2 million for the comparable period in 1997. Diluted
earnings per common share were $1.51 for the first nine months of 1998, a 58.9%
increase from $0.95 for the nine months ended September 30, 1997. The Company's
annualized returns on average stockholders' equity and average assets for the
nine months ended September 30,
10
<PAGE> 11
1998 were 17.73% and 1.09%, respectively, as compared with 12.83% and 0.68%,
respectively, for the year-earlier period.
Net income for the three- and nine-month periods ended September 30,
1998 was reduced by after-tax extraordinary losses on early extinguishment of
debt totaling $4.1 million, which resulted in reductions of diluted earnings per
common share of $0.04 for the third quarter of 1998 and $0.03 for the first nine
months of 1998.
The higher levels of net income during the three- and nine-month
periods ended September 30, 1998 reflected 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; a pre-tax gain of $9.5 million on the sale of the Bank's sole
Florida branch; and growth in fees related to sales of consumer financial
services and products. Also contributing to the increase in net income during
the first nine months of 1998, as compared with the first nine months of 1997,
were pre-tax losses of $14.6 million 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 $127.3 million for the third quarter of
1998, an increase of $7.2 million, or 6.0%, as compared with the third quarter
of 1997. This growth occurred, despite a decline of $509.4 million, or 2.6%, in
average interest-earning assets, because the net interest margin improved to
2.74% from 2.52%. The interest rate spread increased to 2.76% for the third
quarter of 1998 from 2.42% for the third quarter of 1997.
For the first nine months of 1998, net interest income totaled $394.1
million, up $37.5 million, or 10.5%, from the comparable 1997 period, reflective
of a widening of the net interest margin to 2.68% from 2.52%, coupled with an
increase of $762.9 million, or 4.0%, in average interest-earning assets. The
Company's interest rate spread for the first nine months of 1998 was 2.68%, as
compared with 2.41% for the first nine months of 1997.
Contributing significantly to the net interest margin improvement 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 third
quarter and first nine 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 $3.5 billion, or 28.9%, and $4.3 billion, or 37.7%,
respectively, while the average balance of MBS declined $3.7 billion, or 58.5%,
and $3.2 billion, or 49.7%, respectively. Loans represented 82.9% of total
average interest-earning assets for the third quarter of 1998 and 80.2% for the
first nine months of 1998, up from 62.6% for the third quarter of 1997 and 60.6%
for the first nine months of 1997. The net interest margins during the 1998
periods also benefited from, among other factors, reductions in the Company's
cost of deposits, which declined 30 basis points for the third quarter of 1998
and 24 basis points for the first nine months of 1998, as compared with the
respective periods in 1997.
The level of improvement in the net interest margin during each of the
1998 periods was limited by several factors, including: (i) an unfavorable
interest rate yield curve; (ii) lower overall yields on loans; (iii) the
funding of treasury stock purchases; and (iv) 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.)
11
<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 SEPTEMBER 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) $12,221,939 $215,066 7.04% $9,030,078 $ 163,297 7.23%
Commercial real estate 2,409,377 50,459 8.38 2,371,102 52,054 8.78
Consumer 886,740 18,549 8.32 721,408 15,803 8.70
Business 178,284 3,764 8.38 52,564 1,222 9.23
------------ ----------- --------------- -----------
Total loans 15,696,340 287,838 7.33 12,175,152 232,376 7.63
------------ ----------- --------------- -----------
MBS 2,593,548 44,645 6.89 6,249,236 103,196 6.61
Other securities 573,848 10,524 7.30 358,062 5,999 6.66
Money market investments 69,015 982 5.58 659,669 9,299 5.52
------------ ----------- --------------- -----------
Total interest-earning assets 18,932,751 343,989 7.26 19,442,119 350,870 7.21
----------- -----------
Other assets 1,800,214 789,004
------------ ---------------
Total assets $20,732,965 $20,231,123
============ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Demand $1,808,794 1,916 0.42 $1,270,050 2,011 0.63
Savings 2,309,353 12,221 2.10 2,496,464 15,626 2.48
Money market 2,167,362 21,921 4.01 1,928,751 18,447 3.79
Time 7,555,038 102,087 5.36 7,632,144 107,059 5.57
------------ ----------- --------------- -----------
Total deposits 13,840,547 138,145 3.96 13,327,409 143,143 4.26
------------ ----------- --------------- -----------
Borrowed funds:
Federal funds purchased and securities
sold under agreements to repurchase 1,322,983 18,922 5.60 3,767,712 54,271 5.64
Federal Home Loan Bank of New
York ("FHLBNY") advances 3,347,795 49,241 5.76 1,394,775 21,203 5.95
Other 498,675 10,360 8.30 542,377 12,086 8.91
------------ ----------- --------------- -----------
Total borrowed funds 5,169,453 78,523 5.96 5,704,864 87,560 6.02
------------ ----------- --------------- -----------
Total interest-bearing liabilities 19,010,000 216,668 4.50 19,032,273 230,703 4.79
----------- -----------
Other liabilities 381,971 154,699
Stockholders' equity 1,340,994 1,044,151
------------ ---------------
Total liabilities and stockholders' equity $20,732,965 $20,231,123
============ ===============
Net interest income $127,321 $120,167
=========== ===========
Interest rate spread 2.76 2.42
Net interest margin 2.74 2.52
----------
</TABLE>
(1) Includes loans receivable and loans held for sale.
12
<PAGE> 13
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 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) $12,505,869 $ 661,318 7.05% $ 8,545,379 $ 461,316 7.20%
Commercial real estate 2,332,378 149,338 8.54 2,171,762 140,517 8.63
Consumer 833,503 52,052 8.34 722,844 46,804 8.66
Business 142,472 9,139 8.58 47,424 3,298 9.30
----------- --------- ----------- ---------
Total loans 15,814,222 871,847 7.35 11,487,409 651,935 7.57
----------- --------- ----------- ---------
MBS 3,259,580 168,583 6.90 6,482,998 320,154 6.58
Other securities 507,751 28,072 7.38 360,075 17,250 6.40
Money market investments 128,135 5,397 5.56 616,290 25,370 5.43
----------- --------- ----------- ---------
Total interest-earning assets 19,709,688 1,073,899 7.27 18,946,772 1,014,709 7.14
--------- ---------
Other assets 1,650,818 779,341
----------- -----------
Total assets $21,360,506 $19,726,113
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Demand $1,782,015 6,832 0.51 $1,212,248 6,052 0.67
Savings 2,345,888 37,583 2.14 2,481,954 46,122 2.48
Money market 2,062,909 59,394 3.85 1,964,345 55,278 3.76
Time 7,704,032 312,401 5.42 7,450,215 307,778 5.52
----------- --------- ----------- ---------
Total deposits 13,894,844 416,210 4.00 13,108,762 415,230 4.24
----------- --------- ----------- ---------
Borrowed funds:
Federal funds purchased and securities
sold under agreements to repurchase 1,644,130 70,116 5.62 3,799,577 161,449 5.60
FHLBNY advances 3,580,203 157,764 5.81 1,168,252 51,707 5.84
Other 592,969 35,740 8.03 449,627 29,786 8.83
----------- --------- ----------- ---------
Total borrowed funds 5,817,302 263,620 5.98 5,417,456 242,942 5.92
----------- --------- ----------- ---------
Total interest-bearing liabilities 19,712,146 679,830 4.59 18,526,218 658,172 4.73
--------- ---------
Other liabilities 329,200 158,059
Stockholders' equity 1,319,160 1,041,836
----------- -----------
Total liabilities and stockholders' equity $21,360,506 $19,726,113
=========== ===========
Net interest income $394,069 $356,537
========= =========
Interest rate spread 2.68 2.41
Net interest margin 2.68 2.52
</TABLE>
----------
(1) Includes loans receivable and loans held for sale.
13
<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 NINE MONTHS ENDED
SEPTEMBER 30, 1998 VERSUS 1997 SEPTEMBER 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) $ 56,276 $ (4,507) $ 51,769 $ 209,618 $ (9,616) $ 200,002
Commercial real estate 830 (2,425) (1,595) 10,297 (1,476) 8,821
Consumer 3,485 (739) 2,746 6,959 (1,711) 5,248
Business 2,664 (122) 2,542 6,116 (275) 5,841
--------- --------- --------- --------- --------- ---------
Total loans 63,255 (7,793) 55,462 232,990 (13,078) 219,912
--------- --------- --------- --------- --------- ---------
MBS (62,755) 4,204 (58,551) (166,059) 14,488 (151,571)
Other securities 3,911 614 4,525 7,867 2,955 10,822
Money market investments (8,403) 86 (8,317) (20,548) 575 (19,973)
--------- --------- --------- --------- --------- ---------
Total interest income (3,992) (2,889) (6,881) 54,250 4,940 59,190
--------- --------- --------- --------- --------- ---------
Interest expense:
Deposits:
Demand 694 (789) (95) 2,403 (1,623) 780
Savings (1,112) (2,293) (3,405) (2,429) (6,110) (8,539)
Money market 2,372 1,102 3,474 2,818 1,298 4,116
Time (1,073) (3,899) (4,972) 10,360 (5,737) 4,623
--------- --------- --------- --------- --------- ---------
Total deposits 881 (5,879) (4,998) 13,152 (12,172) 980
--------- --------- --------- --------- --------- ---------
Borrowed funds:
Federal funds purchased and
securities sold under
agreements to repurchase (34,968) (381) (35,349) (91,920) 587 (91,333)
FHLBNY advances 28,748 (710) 28,038 106,285 (228) 106,057
Other (938) (788) (1,726) 8,828 (2,874) 5,954
--------- --------- --------- --------- --------- ---------
Total borrowed funds (7,158) (1,879) (9,037) 23,193 (2,515) 20,678
--------- --------- --------- --------- --------- ---------
Total interest expense (6,277) (7,758) (14,035) 36,345 (14,687) 21,658
--------- --------- --------- --------- --------- ---------
Net interest income $ 2,285 $ 4,869 $ 7,154 $ 17,905 $ 19,627 $ 37,532
========= ========= ========= ========= ========= =========
</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
third quarter of 1998, unchanged from the third quarter of 1997. The provision
for loan losses declined to $24.0 million for the first nine months of 1998 from
$41.0 million for the comparable prior year period, largely as a result of 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- and nine-month periods
ended September 30, 1998 was $145.9 million and $380.4 million, respectively.
This compares with $30.3 million and $87.1 million for the three- and nine-month
periods ended September 30, 1997, respectively. The higher levels of
non-interest income in the 1998 periods were principally associated with the
Company's expansion of its mortgage banking operations, largely due
14
<PAGE> 15
to the NAMC Acquisition. Non-interest income represented 53.40% of total
revenues for the third quarter of 1998, as compared with 20.13% for the third
quarter of 1997, and 49.12% for the first nine months of 1998, as compared with
19.64% for the first nine months of 1997.
Loan Servicing and Other Fees. Loan servicing and other fees, which
includes revenues earned from servicing loans owned by third parties and loan
production activities, amounted to $53.8 million for the three months ended
September 30, 1998 and $138.9 million for the first nine months of 1998, up
$41.0 million and $101.2 as compared with the respective prior year periods. Of
these increases, approximately $21 million and $61 million, respectively, were
associated with growth in fees from loan production activities as a result of
higher loan production levels (see "Financial Condition -- Loans"). Also
contributing to the growth in loan servicing and other fees in the 1998 periods
was the expansion of the Company's portfolio of loans serviced for others
(excluding loans being subserviced) to $25.4 billion at September 30, 1998 from
$11.0 billion one year earlier.
The following table sets forth activity in the Company's owned loan
servicing rights portfolio for the periods indicated:
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period $ 25,046,877 $ 21,986,111
Additions 5,940,858 16,519,783
Bulk sales (3,786,269) (8,629,086)
Runoff (1) (1,851,003) (4,526,345)
------------ ------------
Balance at end of period $ 25,350,463 $ 25,350,463
============ ============
</TABLE>
- ------------
(1) Includes scheduled amortization, full and partial prepayments, and
foreclosures.
The annualized run off rate of the loans underlying the owned loan
servicing rights portfolio was approximately 30% for the third quarter of 1998
and 27% for the first nine months of 1998. These comparatively high levels
largely reflect the relatively lower long-term interest rate environment during
those periods. At September 30, 1998, the loans underlying the Company's
portfolio of owned loan servicing rights had a weighted average interest rate of
7.50%, down from 7.91% at year-end 1997.
In connection with its mortgage banking risk management strategies,
the Company has sold loan servicing rights in bulk sales and may, from time to
time, continue to do so, although the level of any such future sales cannot
currently be predicted (see "Amortization of Mortgage Servicing Assets"). Such
sales are based upon the characteristics of the owned loan servicing rights
portfolio and other factors.
In addition to its owned loan servicing rights, the Company, in
connection with a bulk sale of loan servicing rights in the third quarter of
1998, was subservicing, for a fee, loans with principal balances aggregating
$3.8 billion at September 30, 1998. The transfer of the servicing responsibility
to the purchasers of these loan servicing rights is expected to be completed by
February 1999.
Banking Service Fees. Banking service fees for the third quarter of
1998 amounted to $11.1 million, an increase of $2.4 million, or 27.5%, from the
comparable quarter of 1997. Banking service fees for the first nine months of
1998 were $30.3 million, representing growth of $7.1 million, or 30.6%, 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 due, in part, to an
expanded network of automatic teller machines.
Securities and Insurance Brokerage Fees. Securities and insurance
brokerage fees totaled $8.7 million for the quarter ended September 30, 1998, up
$3.6 million, or 69.3%, as compared with the third quarter of 1997. For the
first nine months of 1998, securities and insurance brokerage fees were $25.2
million, an increase of $8.2 million, or 48.4%, from the comparable 1997 period.
These increases largely reflect growth in insurance-related
15
<PAGE> 16
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 also acquired NAMC's insurance
subsidiaries).
Net Gains on Sales Activities. Net gains on sales activities amounted
to $71.5 million and $180.5 million for the three- and nine-month periods ended
September 30, 1998, respectively, up from $2.8 million and $7.7 million for the
corresponding prior year periods. These increases were largely associated with
higher net gains on loans held for sale.
Net gains associated with loans held for sale increased to $66.2
million for the third quarter of 1998 from $0.2 million for the third quarter of
1997 and to $157.8 million for the first nine months of 1998 from $1.9 million
for the first nine months of 1997. Loans sold into the secondary market by the
Company amounted to $6.2 billion for the third quarter of 1998 and $17.8 billion
for the first nine months of 1998, as compared with $0.6 billion and $1.2
billion during the respective prior year periods. Included in loans sold into
the secondary market during the first nine months of 1998 were substantially all
of the $779.7 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 balance sheet restructuring activities.
Net gains on securities transactions declined to $0.3 million for the
third quarter of 1998 from $3.5 million for the third quarter of 1997. Net gains
on securities transactions increased to $17.2 million for the first nine months
of 1998 from $7.2 million for the comparable period in 1997, primarily due to
sales during the first six months of 1998 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 securities held to maturity portfolio to its securities
available for sale portfolio 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 each of the first and third quarters of 1998, the Company
consummated a bulk sale of loan servicing rights (see "Loan servicing and other
fees"). These sales were associated with the Company's mortgage banking risk
management activities and were intended to reduce the impact of a declining
long-term interest rate environment on the value of the Company's mortgage
servicing assets. The Company incurred $4.2 million of net losses on sales of
loan servicing rights in the third quarter of 1998. For the first nine months of
1998, the Company recognized $1.6 million of net gains on sales of loan
servicing rights. (Net gains on sales of loan servicing rights for the three-
and nine-month periods ended September 30, 1997 were not material.)
The net gains on sales activities for the three months and nine months
ended September 30, 1998 also included a gain of $9.5 million associated with
the Bank's sale, in August 1998, of its sole remaining Florida branch. At the
time of sale, this branch had deposits totaling $207.2 million.
Other. Other non-interest income for the three months ended September
30, 1998 amounted to $0.8 million, relatively unchanged from the third quarter
of 1997. Other non-interest income increased to $5.6 million for the first nine
months of 1998 from $1.6 million for the first nine months of 1997,
substantially as a result of the implementation of the BOLI Program 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 $171.2 million for the
quarter ended September 30, 1998, as compared with $79.2 million for the
corresponding quarter of 1997. For the first nine months of 1998, non-interest
expense totaled $486.6 million, up from $240.4 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.
16
<PAGE> 17
General and Administrative ("G&A") Expense. G&A expense, which amounted
to $143.2 million for the third quarter of 1998 and $424.3 million for the first
nine months of 1998, rose $69.6 million and $204.6 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 $66.2 million for
the three-month period ended September 30, 1998 and $200.6 million for the first
nine months of 1998. In comparison, such expense was $34.1 million and $103.3
million for the three- and nine-month periods ended September 30, 1997,
respectively. The Company's full-time equivalent employee complement increased
to 6,780 at September 30, 1998 from 6,000 at year-end 1997 and 3,162 at
September 30, 1997.
Occupancy and equipment expense, net, increased to $23.2 million for
the quarter ended September 30, 1998 from $14.8 million for the corresponding
quarter of 1997. For the first nine months of 1998, occupancy and equipment
expense, net, was $67.5 million, up from $41.7 million for the comparable
year-earlier period.
Other G&A expense amounted to $53.8 million for the third quarter of
1998, an increase of $29.1 million as compared with the third quarter of 1997,
and $156.1 million for the first nine months of 1998, an increase of $81.5
million from the comparable period in 1997. Other G&A expense for the third
quarter and first nine months of 1998 included $4.4 million and $12.0 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 under the
heading "Year 2000 Issue" below and 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 nine months of 1997.)
Amortization of Mortgage Servicing Assets. Amortization of mortgage
servicing assets amounted to $27.6 million for the third quarter of 1998 and
$61.5 million for the first nine months of 1998, up $22.4 million and $45.7
million from the respective periods in 1997. These increases were largely
attributable to growth in mortgage servicing assets but, to a lesser extent,
also reflect the impact of accelerated loan prepayments as a result of the
relatively lower long-term interest rate environment during the 1998 periods. No
provisions for impairment of mortgage servicing assets were recognized during
the three- and nine-month periods ended September 30, 1998 or 1997.
In a declining long-term interest rate environment, actual or expected
prepayments of the loans underlying the Company's mortgage servicing assets
portfolio may increase, which would have an adverse impact on the value of such
assets. In connection therewith, the Company uses certain derivative financial
instruments to hedge its mortgage servicing assets (see "Asset/Liability
Management -- Derivative Financial Instruments"). In addition, in an effort to
reduce the prepayment risk associated with its mortgage servicing assets
portfolio, the Company consummated two bulk sales totaling $8.6 billion of loan
servicing rights during the first nine months of 1998, the underlying loans of
which had a weighted average coupon rate of 7.66%, and a bulk sale of $3.0
billion of loan servicing rights during the fourth quarter of 1997, the
underlying loans of which had a weighted average coupon rate of 7.74%.
Reductions in the carrying value of mortgage servicing assets associated with
the bulk sales of loan servicing rights during the first nine months of 1998 and
the fourth quarter of 1997 amounted to approximately $172 million and $57
million, respectively.
The Company's mortgage servicing assets (including related derivative
financial instruments hedging such assets) had a carrying value of $589.5
million at September 30, 1998, as compared with $341.9 million at December 31,
1997 and $132.5 million at September 30, 1997. The estimated fair value of the
Company's mortgage servicing assets at September 30, 1998 was $646.3 million.
Other Real Estate Owned ("ORE") Expense, Net. ORE expense, net, was
$0.4 million for the third quarter of 1998, unchanged from the year-earlier
quarter. ORE expense, net, declined to $0.8 million for the first nine months of
1998 from $5.0 million for the first nine months of 1997, primarily reflecting a
lower average balance of ORE, higher net gains on sales, and a reduced provision
for loss due, in part, to a $0.6 million provision during the second quarter of
1997 in connection with the NPA Sales.
17
<PAGE> 18
Income Tax Expense
The Company recorded income tax expense of $30.1 million and $84.5
million for the three- and nine-month periods ended September 30, 1998,
respectively, as compared with $23.7 million and $62.1 million for the
respective prior year periods. The increased levels of income tax expense
reflect growth in pre-tax 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 third quarter and first nine months of 1998, down from 37.5%
and 38.3% for the third quarter and first nine months of 1997, respectively. The
reductions in the Company's effective income tax rates for the 1998 periods were
primarily attributable to benefits arising from the restructuring of the assets
within the legal entities that comprise the Company's affiliated group.
Extraordinary Items
During the third quarter of 1998, the Company recognized $4.1 million
of extraordinary losses on the early extinguishment of debt, net of tax benefits
of $3.0 million. For a further discussion thereof, see "Financial Condition --
Borrowed Funds."
YEAR 2000 ISSUE
In accordance with guidelines established by the Federal Financial
Institutions Examinations Council and the Office of Thrift Supervision ("OTS"),
the Company has completed both the assessment and analysis phase and the
remediation phase of its Year 2000 Plan with respect to its mission critical
systems. The Company has completed unit testing of its mission critical
systems, is in the process of performing user acceptance tests of substantially
all such systems and has commenced internal integrated testing with respect to
certain of them. The Company currently anticipates that it will have
substantially completed the testing phase of the Year 2000 Plan with respect to
its internal mission critical systems by December 31, 1998 and that its
external interface testing with material third parties will be substantially
completed by March 31, 1999. Further, the Company has established remediation
contingency plans, and is in the process of developing business resumption
contingency plans, for its mission critical systems. The Company currently
estimates that it will have substantially completed the development of its
contingency plans no later than December 31, 1998.
The estimated total pre-tax cost of the Year 2000 Plan is
approximately $20 million, of which $13.3 million has been incurred through
September 30, 1998. The estimated total cost substantially reflects consulting
fees associated with software modification, project management and programming,
as well as ancillary items, but does not include such items as the cost of
Company personnel involved in the Year 2000 Plan or capital expenditures that
would have been made to systems regardless of the issues associated with the
impending year 2000.
The preceding discussion includes forward-looking statements that
involve inherent risks and uncertainties. A number of factors could cause the
actual impact of the year 2000 issue to differ materially from Company
estimates. Those factors include, but are not limited to, uncertainties in the
cost of remediation of hardware and software, inaccurate or incomplete testing
results, and the ineffective remediation of computer codes of internal mission
critical systems or external system interfaces. The Company cannot guarantee
that its efforts will be accomplished in a timely manner or that the failure
thereof will not have a material adverse effect on the Company. Failure of the
Company or its significant third party contractors to effectively remedy year
2000 issues could cause disruption of the Company's operations resulting in
increased operating costs and other adverse effects. In addition, to the extent
significant customers' financial positions are weakened as a result of year 2000
issues, credit quality could be adversely impacted.
ASSET/LIABILITY MANAGEMENT
General
The Company's asset/liability management is governed by policies that
are reviewed and approved annually by the Boards of Directors of the Holding
Company and the Bank, which oversee the development and execution of
18
<PAGE> 19
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.
The Company's primary source of market risk exposure arises from
changes in United States interest rates and the effects thereof on mortgage
prepayment and closing behavior, as well as depositors' choices ("interest rate
risk"). Changes in these interest rates will result in changes in the Company's
earnings and the market value of its assets and liabilities. The Company does
not have any material exposure to foreign exchange rate risk or commodity price
risk. Movements in equity prices may have an indirect, but limited, effect on
certain of the Company's business activities and/or the value of credit
sensitive loans and securities.
Interest Rate Risk Management
The Company manages its interest rate risk through strategies designed
to maintain acceptable levels of interest rate exposure throughout a range of
interest rate environments. These strategies are intended not only to protect
the Company from significant long-term declines in net interest income as a
result of certain changes in the interest rate environment, but also to mitigate
the negative effect of certain interest rate changes upon the Company's mortgage
banking operating results. The Company seeks to contain its interest rate risk
within a band that it believes is manageable and prudent given its capital and
income generating capacity. As a component of its interest rate risk management
process, the Company employs various derivative financial instruments.
The Company's sensitivity to interest rates is driven primarily by the
mismatch between the term to maturity or repricing of its interest-earning
assets and that of its interest-bearing liabilities. Historically, the Company's
interest-bearing liabilities have repriced or matured, on average, sooner than
its interest-earning assets.
The Company is also exposed to interest rate risk arising from the
"option risk" embedded in many of the Company's interest-earning assets. For
example, mortgages and the mortgages underlying MBS may contain prepayment
options, interim and lifetime interest rate caps and other such features
affected by changes in interest rates. Prepayment option risk affects
mortgage-related assets in both rising and falling interest rate environments as
the financial incentive to refinance a mortgage loan is directly related to the
level of the existing interest rate on the loan relative to current market
interest rates.
Extension risk on mortgage-related assets is the risk that the duration
of such assets may increase as a result of declining prepayments due to rising
interest rates. Certain mortgage-related assets are more sensitive to changes in
interest rates than others, resulting in a higher risk profile. Because the
Company's interest-bearing liabilities are not similarly affected, the gap
between the duration of the Company's interest-earning assets and
interest-bearing liabilities generally increases as interest rates rise. In
addition, in a rising interest rate environment, adjustable-rate assets may
reach interim or lifetime interest rate caps, thereby limiting the amount of
their upward adjustment, which effectively lengthens the duration of such
assets.
Lower interest rate environments may also present interest rate risk
exposure. In general, lower interest rate environments tend to accelerate loan
prepayment rates, thus reducing the duration of mortgage-related assets and
accelerating the amortization of any premiums paid in the acquisition of these
assets. The amortization of any premiums over a shorter than expected term
causes yields on the related assets to decline from anticipated levels. In
addition, unanticipated accelerated prepayment rates increase the likelihood of
potential losses of net future servicing revenues associated with the Company's
mortgage servicing assets.
The Company is also exposed to interest rate risk resulting from
certain changes in the shape of the yield curve (particularly a flattening or
inversion -- also called "yield curve twist risk" -- of the yield curve) and to
19
<PAGE> 20
differing indices upon which the yield on the Company's interest-earning assets
and the cost of its interest-bearing liabilities are based ("basis risk").
In evaluating and managing its interest rate risk, the Company employs
simulation models to help assess its interest rate risk exposure and the impact
of alternate interest rate scenarios, which consider the effects of
adjustable-rate loan indices, periodic and lifetime interest rate adjustment
caps, estimated loan prepayments, anticipated deposit retention rates, and other
dynamics of the Company's portfolios of interest-earning assets and
interest-bearing liabilities.
Derivative 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. While the Company's use of derivative
financial instruments in managing its interest rate exposures has served to
mitigate the unfavorable effects that changes in interest rates may have on its
results of operations, the Company continues to be subject to interest rate
risk.
Interest Rate Risk Management Instruments. The Company's assets have
historically repriced or matured at a longer term than the liabilities used to
fund those assets. Consequently, the Company uses derivative financial
instruments in its efforts to reduce the repricing risk.
At September 30, 1998, the Company used four major classes of
derivative financial instruments to manage interest rate risk: (i) interest rate
swaps, where the Company pays a fixed rate and receives a floating rate; (ii)
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); (iii) 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; and (iv) interest rate futures
in money market instruments.
Interest rate swaps are used to modify specific fixed-rate assets and
adjustable-rate borrowings 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. Interest rate futures are used to hedge the repricing
risk of certain short-term borrowed funds.
The following table sets forth the characteristics of derivative
financial instruments used by the Company at September 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 PAY RECEIVE
------ ----- --- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest rate swaps (pay fixed/receive variable) hedging:
Securities available for sale $254,960 $(4,055) 5.69% 5.62%
Loans receivable 1,639,871 (71,579) 6.35 5.53
Borrowed funds 250,000 (2,693) 5.38 5.63
Interest rate caps hedging:
Securities available for sale 182,663 -- -- (1) -- (1)
Loans receivable 172,713 -- -- (1) -- (1)
Interest rate swaptions hedging loans receivable 40,000 -- -- (2) -- (2)
Interest rate futures hedging borrowed funds 250,000 (18) -- --
-------------- ------------
Total $2,790,207 $(78,345)
============== ============
</TABLE>
- ----------
(1) The weighted average strike rate was 8.00%.
(2) 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 nine months ended September 30, 1998 of $3.9 million and $14.6
million, respectively, as compared with reductions in net interest income during
the three months and nine months ended September 30, 1997 of $4.2 million and
$13.7 million, respectively.
20
<PAGE> 21
Mortgage Banking Risk Management Instruments. At September 30, 1998,
the Company used 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: (i) interest rate
swaps, where the Company receives a fixed rate and pays a floating rate; (ii)
interest rate floors, where the Company receives the difference, if any, between
a designated average long-term interest rate (usually the constant maturity
Treasury or swap indices) and a specified strike rate; and (iii) interest rate
caps, where the Company receives the excess, if any, of a designated floating
rate (usually LIBOR) over a specified rate.
Two major classes of derivative financial instruments were used by the
Company at September 30, 1998 to hedge the risk in its loans held for sale and
related commitment pipeline. To the extent that the Company estimates that it
will have loans to sell, the Company sells loans into the forward MBS market.
Such short sales are similar in composition as to term and coupon with the loans
held in, or expected to be funded into, the loans held for sale portfolio. In
addition, because the amount of loans that the Company will fund, as compared
with the total amount of loans that it has committed to fund, is uncertain, the
Company purchased put options on the forward MBS market.
The following table sets forth the characteristics of derivative
financial instruments used by the Company at September 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 PAY RECEIVE
------ ----- --- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest rate swaps (pay variable/receive fixed) hedging mortgage
servicing assets $ 800,000 $43,624 5.69% 6.07%
Interest rate floors hedging mortgage servicing assets 2,231,684 48,057 -- (1) -- (1)
Interest rate caps hedging mortgage servicing assets 400,000 10,185 -- (2) -- (2)
Forward contracts hedging loans held for sale 4,214,751 (50,737) -- --
Put options on MBS forward contracts hedging loans held for sale 22,000 5 -- --
-------------- ------------
Total $7,668,435 $51,134
============== ============
- ----------
</TABLE>
(1) The weighted average strike rate was 5.44%.
(2) The weighted average strike rate was 6.09%.
Trading Instruments. At September 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 and an estimated fair value of
$0.1 million. At that date, these interest rate caps had a weighted average
strike rate of 7.04%.
Asset/Liability Repricing
The measurement of differences (or "gaps") between the Company's
interest-earning assets and interest-bearing liabilities that mature or reprice
within a period of time is one indication of the Company's sensitivity to
changes in interest rates. A negative gap generally indicates that, in a period
of rising interest rates, deposit and borrowing costs will increase more rapidly
than the yield on loans and securities and, therefore, reduce the Company's net
interest margin and net interest income. The opposite effect will generally
occur in a declining interest rate environment. Although the Company has a large
portfolio of adjustable-rate assets, the protection afforded by such assets in
the event of substantial rises in interest rates for extended time periods is
limited due to interest rate reset delays, periodic and lifetime interest rate
caps, payment caps and the fact that indices used to reprice a portion of the
Company's adjustable-rate assets lag changes in market rates. Moreover, in
declining interest rate environments or certain shifts in the shape of the yield
curve, these assets may prepay at significantly faster rates than otherwise
anticipated. It should also be noted that the Company's gap measurement reflects
broad judgmental assumptions with regard to repricing intervals for certain
assets and liabilities.
The following table reflects the repricing of the Company's
interest-earning assets, interest-bearing liabilities, and related derivative
financial instruments at September 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.
21
<PAGE> 22
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 held for sale ...................................... $ 3,612 $ -- $ -- $ 3,612
Loans receivable ......................................... 5,733 3,709 3,125 12,567
MBS available for sale ................................... 2,228 170 224 2,622
Other .................................................... 87 6 660 753
-------- -------- -------- --------
Total interest-earning assets ........................ 11,660 3,885 4,009 19,554
-------- -------- -------- --------
Interest-bearing liabilities:
Deposits ................................................. 7,259 3,011 3,276 13,546
Borrowed funds ........................................... 5,314 199 346 5,859
-------- -------- -------- --------
Total interest-bearing liabilities ................... 12,573 3,210 3,622 19,405
-------- -------- -------- --------
Periodic gap before impact of derivative financial instruments (913) 675 387 149
Impact of derivative financial instruments ................... 1,754 (795) (959) --
-------- -------- -------- --------
Periodic gap ................................................. $ 841 $ (120) $ (572) $ 149
======== ======== ======== ========
Cumulative gap ............................................... $ 841 $ 721 $ 149
======== ======== ========
Cumulative gap as a percentage of total assets ............... 4.0% 3.4% 0.7%
</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.
22
<PAGE> 23
The following table presents the components of the Company's
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual loans:
Residential real estate ......... $ 79,038 $ 90,998
Commercial real estate .......... 13,792 21,760
Consumer ........................ 5,350 5,719
Business ........................ 93 511
--------- ---------
Total non-accrual loans . 98,273 118,988
--------- ---------
ORE, net:
Residential real estate ......... 20,731 20,228
Commercial real estate .......... 13,909 9,255
Allowance for losses ............ (1,539) (1,722)
--------- ---------
Total ORE, net .......... 33,101 27,761
--------- ---------
Total non-performing assets ......... $ 131,374 $ 146,749
========= =========
Non-performing assets to total assets 0.62% 0.67%
Non-accrual loans to loans receivable 0.78 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 September 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 $45,851 $21,656 $67,507
Commercial real estate loans 5,816 2,260 8,076
Consumer loans .............. 3,705 938 4,643
Business loans .............. 1,080 308 1,388
------- ------- -------
Total ....................... $56,452 $25,162 $81,614
======= ======= =======
</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.
23
<PAGE> 24
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period ...... $ 109,934 $ 101,026 $ 104,718 $ 106,495
Provision charged to operations (1) . 8,000 8,000 24,000 41,000
Allowance acquired in acquisition ... -- -- -- 13,249
Charge-offs:
Residential real estate loans (2) (6,604) (6,056) (20,115) (57,284)
Commercial real estate loans .... (621) (1,803) (1,459) (4,458)
Consumer loans .................. (659) (1,148) (2,171) (3,360)
Business loans .................. (15) -- (15) --
--------- --------- --------- ---------
Total charge-offs ....... (7,899) (9,007) (23,760) (65,102)
--------- --------- --------- ---------
Recoveries:
Residential real estate loans ... 736 909 2,602 3,017
Commercial real estate loans .... 806 719 2,976 1,912
Consumer loans .................. 342 405 1,371 1,410
Business loans .................. 30 9 42 80
--------- --------- --------- ---------
Total recoveries ........ 1,914 2,042 6,991 6,419
--------- --------- --------- ---------
Net charge-offs ..... (5,985) (6,965) (16,769) (58,683)
--------- --------- --------- ---------
Balance at end of period ............ $ 111,949 $ 102,061 $ 111,949 $ 102,061
========= ========= ========= =========
</TABLE>
- ----------
(1) The nine-month period ended September 30, 1997 includes a provision of $14.0
million associated with the NPA Sales.
(2) The nine-month period ended September 30, 1997 includes 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>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Allowance for loan losses to:
Loans receivable 0.89% 0.81% 0.84%
Non-accrual loans 113.92 88.01 107.24
</TABLE>
MBS
Of the $2.6 billion carrying value of the Company's MBS available for
sale portfolio at September 30, 1998, $1.9 billion were issued by entities other
than the Federal Home Loan Mortgage Corporation ("FHLMC"), the Government
National Mortgage Association ("GNMA"), and the Federal National Mortgage
Association ("FNMA"). These privately-issued MBS, which have generally been
underwritten by large investment banking firms, are subject to certain
credit-related risks normally not associated with MBS issued by FHLMC, GNMA and
FNMA. While substantially all of the privately-issued MBS held by the Company at
September 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 a default by a counterparty, the Company would be
subject to an economic loss that corresponds to the cost to replace
24
<PAGE> 25
the agreement. There were no past due amounts related to the Company's
derivative financial instruments at September 30, 1998 or December 31, 1997.
FINANCIAL CONDITION
General
The Company's total assets amounted to $21.2 billion at September 30,
1998. In comparison, total assets were $21.8 billion at December 31, 1997.
Securities Available for Sale
At September 30, 1998, the Company's securities available for sale
portfolio amounted to $3.0 billion, down $2.0 billion, or 40.4%, from the level
at the end of 1997. This decline was largely associated with sales of $1.5
billion of securities, which consisted primarily of MBS that had been designated
for sale in connection with a balance sheet restructuring initiative implemented
during December 1997. At September 30, 1998, MBS designated for sale by the
Company had both an amortized cost and carrying value of $9.0 million.
The following table summarizes the amortized cost and estimated fair
value of securities available for sale at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 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 ........................ $1,686,038 $1,664,783 $2,875,982 $2,851,007
FNMA .................................... 494,268 503,153 395,756 402,096
FHLMC ................................... 101,669 102,991 178,538 181,098
GNMA .................................... 85,452 87,281 15,277 15,517
Collateralized mortgage obligations:
Privately-issued ........................ 262,807 263,502 1,335,225 1,336,690
FNMA .................................... -- -- 91,349 91,436
FHLMC ................................... -- -- 23,863 23,920
Interest-only ............................... 1,353 668 1,555 1,129
---------- ---------- ---------- ----------
Total MBS ........................... 2,631,587 2,622,378 4,917,545 4,902,893
---------- ---------- ---------- ----------
Other debt securities:
United States government and federal agencies 3,490 3,536 8,552 8,638
State and municipal ......................... 15,030 14,864 36,997 36,291
Domestic corporate .......................... 321,197 322,628 34,844 35,359
Other ....................................... 500 500 500 500
---------- ---------- ---------- ----------
Total other debt securities ......... 340,217 341,528 80,893 80,788
---------- ---------- ---------- ----------
Equity securities ............................... 11,168 10,979 9,243 8,623
---------- ---------- ---------- ----------
Total securities available for sale ............. $2,982,972 $2,974,885 $5,007,681 $4,992,304
========== ========== ========== ==========
</TABLE>
Loans
The Company's loans receivable (exclusive of the allowance for loan
losses) amounted to $12.6 billion at September 30, 1998, down 3.2% from $13.0
billion at December 31, 1997. This decline was attributable to a reduction in
residential real estate loans receivable, the effect of which was partially
offset by growth in the Company's relatively higher-yielding portfolios of
commercial real estate, consumer and business loans receivable.
25
<PAGE> 26
The following table sets forth the composition of loans receivable at
the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
PERCENTAGE PERCENTAGE
AMOUNT OF TOTAL AMOUNT OF TOTAL
----------- ---------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Residential real estate loans $9,032,903 71.9% $9,848,593 75.8%
Commercial real estate loans 2,420,644 19.2 2,263,023 17.4
Consumer loans 915,185 7.3 773,817 6.0
Business loans 198,387 1.6 99,074 0.8
----------- ----- ----------- -----
Total loans receivable $12,567,119 100.0% $12,984,507 100.0%
=========== ===== =========== =====
</TABLE>
Residential real estate loans receivable declined $815.7 million, or
8.3%, during the first nine months of 1998. Although the Company produced
approximately $1.8 billion of loans for this portfolio during the first nine
months of 1998, the impact of this production, as well as other factors, was
more than offset by principal payments, coupled with the transfer, in connection
with the Company's balance sheet restructuring activities of approximately $780
million of relatively lower-yielding loans from loans receivable to loans held
for sale.
The Company's commercial real estate loans receivable increased $157.6
million, or 7.0%, from December 31, 1997 to September 30, 1998. At the end of
the third quarter of 1998, commercial real estate loans receivable primarily
consisted of multifamily properties (60%), shopping centers (16%), and office
buildings (11%).
During the first nine months of 1998, the Company's consumer loans
receivable increased 18.3% to $915.2 million, largely attributable to growth in
home equity loans of $163.3 million, or 25.8%. Home equity loans represented
86.9% of the consumer loans receivable portfolio at September 30, 1998, as
compared with 81.7% at December 31, 1997.
The Company's business loans receivable grew $99.3 million, or 100.2%,
from December 31, 1997 to September 30, 1998. Contributing to this increase was
the Company's expansion into lease financing during the second quarter of 1998.
At September 30, 1998, lease financing amounted to $31.1 million.
In addition to its portfolio of loans receivable, the Company maintains
a portfolio of loans held for sale into the secondary market. Loans held for
sale amounted to $3.6 billion at September 30, 1998, up from $1.8 billion at the
end of 1997.
Total loan production increased to $7.5 billion and $22.3 billion for
the three months and nine months ended September 30, 1998, respectively, from
$2.2 billion and $4.3 billion for the comparable prior year periods. These
increases were substantially due to higher levels of residential real estate
loan production, but also reflect growth in the production of commercial real
estate loans, consumer loans and business loans.
Residential real estate loan production amounted to $7.1 billion for
the third quarter of 1998 and $20.8 billion for the first nine months of 1998,
up $5.2 billion and $17.3 billion from the corresponding periods in 1997,
largely due to the NAMC Acquisition. These increases were also attributable to
high levels of loan refinancings, which resulted principally from the lower
long-term interest rate environment during the 1998 periods as compared with the
1997 periods. Of the total residential real estate loan production during the
third quarter and first nine months of 1998, approximately 48% and 53%,
respectively, were refinanced loans. The relatively lower long-term interest
rate environment during the 1998 periods also resulted in significant production
of fixed-rate loans, substantially all of which are sold by the Company into the
secondary market. Fixed-rate residential real estate loan production represented
approximately 96% and 90% of total residential real loan production during the
third quarter and first nine months of 1998, respectively.
26
<PAGE> 27
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Residential real estate loan production:
Originated ...................................... $ 5,824,572 $ 1,246,639 $17,486,384 $ 2,542,955
Purchased ....................................... 1,243,932 640,656 3,354,503 979,323
----------- ----------- ----------- -----------
Total residential real estate loan production 7,068,504 1,887,295 20,840,887 3,522,278
----------- ----------- ----------- -----------
Commercial real estate loans originated ............. 204,997 131,244 756,130 322,301
Consumer loans originated:
Home equity loans ............................... 148,812 89,754 412,350 234,512
Other consumer loans ............................ 40,531 41,685 122,101 118,109
----------- ----------- ----------- -----------
Total consumer loans originated ............. 189,343 131,439 534,451 352,621
----------- ----------- ----------- -----------
Business loans originated ........................... 79,404 31,203 211,423 58,950
----------- ----------- ----------- -----------
Total loan production ............................... $ 7,542,248 $ 2,181,181 $22,342,891 $ 4,256,150
=========== =========== =========== ===========
</TABLE>
Deposits
The Company's total deposits amounted to $13.5 billion at the end of
the third quarter of 1998, down $301.0 million from the end of 1997.
Contributing significantly to this decline was the Bank's sale in August 1998 of
its remaining Florida branch, which, at the time of sale, had deposits of $207.2
million. At September 30, 1998, the Bank operated 90 branches in the greater New
York City metropolitan area.
The following table sets forth a summary of the Company's deposits at
the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
PERCENTAGE PERCENTAGE
AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Demand.................................. $1,715,406 12.7% $1,572,797 11.4%
Savings................................. 2,267,488 16.7 2,431,812 17.6
Money market............................ 2,275,391 16.8 1,971,081 14.2
Time.................................... 7,287,980 53.8 7,871,585 56.8
----------- ----- ----------- -----
Total deposits.......................... $13,546,265 100.0% $13,847,275 100.0%
=========== ===== =========== =====
</TABLE>
27
<PAGE> 28
Borrowed Funds
The following table sets forth a summary of the Company's borrowed
funds at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
-------------------- ---------------------
PERCENTAGE PERCENTAGE
AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Federal funds purchased and
securities sold under agreements
to repurchase .................. $1,989,118 33.9% $2,975,774 47.1%
FHLBNY advances .................... 3,346,819 57.1 2,786,751 44.1
Senior notes ....................... 198,772 3.4 142,475 2.3
Guaranteed preferred beneficial
interests in Holding Company's
junior subordinated deferrable
interest debentures ............ 162,000 2.8 196,137 3.1
Other .............................. 162,411 2.8 218,175 3.4
---------- ----- ---------- -----
Total borrowed funds ............... $5,859,120 100.0% $6,319,312 100.0%
========== ===== ========== =====
</TABLE>
In July 1998, the Holding Company redeemed the remaining $44.4 million
of its outstanding 8.9375% senior notes due July 2003, which resulted in a
pre-tax extraordinary loss of $1.9 million. In addition, all of the Bank's $78.0
million of Collateralized Real Yield Securities were repaid, at the option of
the holders thereof, in August 1998, which resulted in a pre-tax extraordinary
loss of $0.6 million. Further, in September 1998, the Holding Company purchased
$34.8 million of the then-outstanding $200.0 million of guaranteed preferred
beneficial interests in its 9.33% junior subordinated deferrable interest
debentures, which resulted in a pre-tax extraordinary loss of $4.6 million.
During September 1998, the Holding Company issued $100.0 million of
senior notes. These senior notes, which are unsecured, have a stated interest
rate of 6.12% and mature in March 1999.
Stockholders' Equity
Stockholders' equity amounted to $1.3 billion at September 30, 1998, up
$24.9 million from the end of 1997. At the end of the third quarter of 1998,
stockholders' equity represented 6.31% of total assets, as compared with 6.02%
at the end of 1997. Book value per common share was $11.96 at September 30,
1998, up from $11.30 at December 31, 1997.
During the first nine months of 1998, the Holding Company repurchased
5.8 million shares of its common stock ("Common Stock") at a cost of $164.3
million in connection with programs announced during December 1997 and April
1998. The Holding Company currently has one Common Stock repurchase program in
effect. Under this program, which was announced in September 1998, the Holding
Company is authorized to repurchase up to approximately 5.6 million shares of
its outstanding Common Stock. No repurchases were made under this program during
September 1998 and no time limit was established to complete this repurchase
program.
Cash dividends paid on the Common Stock for the first nine months of
1998 amounted to $16.0 million, or $0.14 per share. In October 1998, the Holding
Company declared a cash dividend on the Common Stock of $0.05 per share to be
paid on December 2, 1998 to stockholders of record as of the close of business
on November 20, 1998.
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
28
<PAGE> 29
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
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, second and
third 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 September
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 September 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>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ ------------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
----------------------
<S> <C> <C> <C> <C>
Tangible and leverage capital $1,381,763 6.60% $1,216,417 5.64%
Tier 1 risk-based capital ... 1,381,763 10.97 1,216,417 10.29
Total risk-based capital .... 1,493,712 11.86 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.
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
29
<PAGE> 30
and certain other assets for purposes of computing its regulatory capital as the
Federal Savings and Loan Insurance Corporation ("FSLIC") had agreed. The direct
effect was to cause Anchor Savings to go from an institution that substantially
exceeded its regulatory capital requirements to one that was critically
undercapitalized upon the effectiveness of the FIRREA-mandated capital
requirements.
From 1982 to 1985, Anchor Savings had acquired eight FSLIC-insured
institutions that were in danger of failing and causing a loss to the FSLIC.
Four institutions were acquired with some financial assistance from the FSLIC
and four were unassisted "supervisory" cases. In acquiring the institutions,
Anchor Savings assumed liabilities determined to exceed the assets it acquired
by over $650 million at the dates of the respective acquisitions. The difference
between the fair values of the assets acquired and the liabilities assumed in
the transactions were recorded on Anchor Savings' books as goodwill. At the time
of these acquisitions, the FSLIC had agreed that this supervisory goodwill was
to be amortized over periods of up to 40 years. Without that agreement, Anchor
Savings would not have made the acquisitions. When the capital regulations
imposed under FIRREA became effective, Anchor Savings still had over $518
million of supervisory goodwill on its books and 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), were assigned to the Chief Judge of the Court of Federal Claims.
The Chief Judge has issued an Omnibus Case Management Order ("OCMO") that
controls the proceedings in all these cases. The OCMO imposes procedures and
schedules different from most cases in the Court of Federal Claims. Under the
OCMO, the Bank has moved for partial summary judgment as to the existence of a
contract and the inconsistency of the Government's actions with that contract in
each of the related transactions. The Government has disputed the existence of a
contract in each case and cross-moved for summary judgment. The Government also
submitted a filing acknowledging that it is not aware of any affirmative
defenses. Briefing on the motions was completed on August 1, 1997. In August
1997, the Court held a hearing on summary judgment motions in four other cases.
As part of that hearing, the Court heard argument on eleven issues that the
plaintiffs contend are common to many of the pending cases, including the Bank's
case. The Court issued its order on December 22, 1997, ruling in favor of the
plaintiffs on all eleven "common" issues. The Court's order directed the
Government to submit a "show cause" filing by February 20, 1998 asserting why
judgment for the plaintiff should not be entered on each of the common issues
with respect to each pending summary judgment motion. The Government submitted a
filing in response to the "show cause" order, but asserted that it might need
further discovery as to certain issues. At a status conference on March 11,
1998, the Court directed each of the plaintiffs to submit a proposed form of
order for entry of judgment as to liability on the Winstar contract issues and
an accompanying brief by March 31, 1998 and directed the Government to respond
by April 30, 1998 with a filing asserting any basis for not entering the order
proposed by 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
30
<PAGE> 31
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. 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.
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
held in September 1998. A second trial commenced in early May 1998, but settled
before the conclusion of the trial. It is unlikely that any court decision on
damages will be issued much before the end of 1998. It also 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.
During the summer, there were settlements in a total of four of the
Winstar-related cases in which the Government agreed to make payments to the
plaintiffs. The Bank believes that the circumstances of the four settled cases
were materially different from the Bank's case, and the Bank does not believe
that these settlements will affect the final outcome of its case. The Company
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 -- Financial Data Schedule.
(b) REPORTS ON FORM 8-K
None
31
<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: November 13, 1998 By: /s/ Lawrence J. Toal
----------------- --------------------
Lawrence J. Toal
Chairman of the Board, Chief Executive Officer,
President, and Chief Operating Officer
Dated: November 13, 1998 By: /s/ Anthony R. Burriesci
----------------- ------------------------
Anthony R. Burriesci
Executive Vice President
and Chief Financial Officer
Dated: November 13, 1998 By: /s/ John F. Kennedy
----------------- ---------------------
John F. Kennedy
Controller and Chief Accounting Officer
32
<PAGE> 33
EXHIBIT INDEX
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
27 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 SEPTEMBER 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 240,891
<INT-BEARING-DEPOSITS> 12,236
<FED-FUNDS-SOLD> 115
<TRADING-ASSETS> 63,929
<INVESTMENTS-HELD-FOR-SALE> 2,974,885
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 16,179,229
<ALLOWANCE> 111,949
<TOTAL-ASSETS> 21,242,833
<DEPOSITS> 13,546,265
<SHORT-TERM> 5,056,383
<LIABILITIES-OTHER> 497,646
<LONG-TERM> 802,737
0
0
<COMMON> 1,203
<OTHER-SE> 1,338,599
<TOTAL-LIABILITIES-AND-EQUITY> 21,242,833
<INTEREST-LOAN> 871,847
<INTEREST-INVEST> 196,655
<INTEREST-OTHER> 5,397
<INTEREST-TOTAL> 1,073,899
<INTEREST-DEPOSIT> 416,210
<INTEREST-EXPENSE> 679,830
<INTEREST-INCOME-NET> 394,069
<LOAN-LOSSES> 24,000
<SECURITIES-GAINS> 17,202
<EXPENSE-OTHER> 486,558
<INCOME-PRETAX> 263,916
<INCOME-PRE-EXTRAORDINARY> 179,464
<EXTRAORDINARY> (4,057)
<CHANGES> 0
<NET-INCOME> 175,407
<EPS-PRIMARY> 1.54<F1>
<EPS-DILUTED> 1.51
<YIELD-ACTUAL> 2.68
<LOANS-NON> 98,273
<LOANS-PAST> 0
<LOANS-TROUBLED> 74,062
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 104,718
<CHARGE-OFFS> 23,760
<RECOVERIES> 6,991
<ALLOWANCE-CLOSE> 111,949
<ALLOWANCE-DOMESTIC> 105,949
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,000
<FN>
<F1>REPRESENTS EPS-BASIC
</FN>
</TABLE>
