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, 2001
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)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
As of October 31, 2001, the registrant had 118,384,494 shares of common stock, $0.01 par value, outstanding.
DIME BANCORP, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of
September 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations for the Three Months
and Nine Months Ended September 30, 2001 and 2000 4
Consolidated Statements of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 2001 and 2000 6
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2001 and 2000 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Cash and due from banks $ 395,726 $ 421,685
Money market investments 85,662 13,626
Securities available for sale ($2,003,797 and $1,975,884 pledged as collateral
at September 30, 2001 and December 31, 2000, respectively) 2,270,833 2,851,043
Federal Home Loan Bank of New York stock 404,109 346,770
Loans held for sale 4,350,209 2,804,767
Loans receivable, net:
Residential real estate loans 7,688,742 7,916,035
Commercial real estate loans 4,513,200 4,152,874
Consumer loans 3,281,127 3,050,377
Business loans 1,012,547 1,167,878
------------ ------------
Total loans receivable 16,495,616 16,287,164
Allowance for loan losses (152,652) (144,362)
------------ ------------
Total loans receivable, net 16,342,964 16,142,802
------------ ------------
Premises and equipment, net 183,330 187,746
Mortgage servicing assets, net 887,167 1,021,861
Goodwill 478,394 503,320
Other assets 1,707,126 1,394,208
------------ ------------
Total assets $ 27,105,520 $ 25,687,828
============ ============
LIABILITIES
Deposits $ 14,561,911 $ 13,976,941
Federal funds purchased and securities sold under agreements to repurchase 3,232,896 3,082,322
Other short-term borrowings 4,819,148 4,545,199
Guaranteed preferred beneficial interests in Dime Bancorp, Inc.'s junior
subordinated deferrable interest debentures 152,262 152,243
Other long-term debt 1,401,693 1,722,623
Other liabilities 942,121 483,661
------------ ------------
Total liabilities 25,110,031 23,962,989
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value (40,000,000 shares authorized; none issued) -- --
Common stock, $0.01 par value (350,000,000 shares authorized; 120,252,459
shares issued at September 30, 2001 and December 31, 2000) 1,203 1,203
Additional paid-in capital 1,185,543 1,153,376
Warrants 46,722 46,722
Retained earnings 830,716 643,838
Treasury stock, at cost (2,049,066 shares at September 30, 2001 and 3,401,666
shares at December 31, 2000) (64,263) (87,225)
Accumulated other comprehensive loss (1,170) (30,191)
Unearned compensation (3,262) (2,884)
------------ ------------
Total stockholders' equity 1,995,489 1,724,839
------------ ------------
Total liabilities and stockholders' equity $ 27,105,520 $ 25,687,828
============ ============
|
See accompanying notes to consolidated financial statements.
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
INTEREST INCOME
Loans held for sale $ 83,179 $ 46,956 $ 230,795 $ 110,552
Residential real estate loans receivable 135,178 146,220 415,492 438,816
Commercial real estate loans receivable 68,011 82,569 221,745 227,494
Consumer loans receivable 55,649 61,147 174,171 170,902
Business loans receivable 18,251 25,540 62,890 72,414
Securities available for sale 35,604 73,156 124,782 211,608
Other interest-earning assets 7,603 8,595 25,819 25,794
----------- ----------- ----------- -----------
Total interest income 403,475 444,183 1,255,694 1,257,580
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 114,713 137,729 376,930 400,491
Borrowed funds 99,349 149,684 354,778 389,502
----------- ----------- ----------- -----------
Total interest expense 214,062 287,413 731,708 789,993
----------- ----------- ----------- -----------
Net interest income 189,413 156,770 523,986 467,587
Provision for loan losses 14,000 7,000 42,000 21,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 175,413 149,770 481,986 446,587
----------- ----------- ----------- -----------
NON-INTEREST INCOME
Loan servicing and production fees 87,857 73,227 258,682 211,336
Banking service fees 16,829 16,709 49,587 48,648
Securities and insurance brokerage fees 9,614 10,167 30,257 32,014
Loss upon designation for sale of mortgage-backed securities
available for sale -- (87,441) -- (87,441)
Net gains on sales and related activities 74,631 35,998 248,267 103,156
Other 3,011 3,797 10,095 11,332
----------- ----------- ----------- -----------
Total non-interest income 191,942 52,457 596,888 319,045
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE
General and administrative expense:
Compensation and employee benefits 94,468 77,237 264,596 228,685
Occupancy and equipment 26,185 27,960 78,972 83,686
Other 38,291 36,772 108,756 109,968
----------- ----------- ----------- -----------
Total general and administrative expense 158,944 141,969 452,324 422,339
Amortization and valuation adjustments of mortgage servicing
assets and related hedging activities 52,225 32,631 177,025 92,872
Amortization of goodwill 8,308 8,329 24,926 25,046
Restructuring and other special charges -- 43,537 2,101 97,792
----------- ----------- ----------- -----------
Total non-interest expense 219,477 226,466 656,376 638,049
----------- ----------- ----------- -----------
Income (loss) before income tax expense (benefit) and cumulative
effect of a change in accounting principle 147,878 (24,239) 422,498 127,583
Income tax expense (benefit) 51,018 (7,700) 145,762 44,406
----------- ----------- ----------- -----------
Income (loss) before cumulative effect of a change in
accounting principle 96,860 (16,539) 276,736 83,177
Cumulative effect of a change in accounting principle, net of
tax benefit of $7,815 -- -- (10,521) --
----------- ----------- ----------- -----------
Net income $ 96,860 $ (16,539) $ 266,215 $ 83,177
=========== =========== =========== ===========
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DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS -- CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- -----------------
2001 2000 2001 2000
----- ----- ----- -----
PER COMMON SHARE
Basic earnings (loss):
Income (loss) before cumulative effect of a change in
accounting principle $0.83 $(0.16) $2.39 $0.75
Cumulative effect of a change in accounting principle -- -- (0.09) --
----- ----- ----- -----
Net income (loss) $0.83 $(0.16) $2.30 $0.75
===== ===== ===== =====
Diluted earnings (loss):
Income (loss) before cumulative effect of a change in
accounting principle $0.77 $(0.16) $2.25 $0.74
Cumulative effect of a change in accounting principle -- -- (0.09) --
----- ----- ----- -----
Net income (loss) $0.77 $(0.16) $2.16 $0.74
===== ===== ===== =====
Cash dividends declared $0.12 $0.08 $0.34 $0.22
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See accompanying notes to consolidated financial statements.
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2000
----------- -----------
PREFERRED STOCK
Balance at beginning of period $ -- $ --
Issuance of preferred stock -- 168,931
----------- -----------
Balance at end of period -- 168,931
----------- -----------
COMMON STOCK
Balance at beginning of period 1,203 1,203
----------- -----------
Balance at end of period 1,203 1,203
----------- -----------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period 1,153,376 1,166,530
Tax benefit associated with stock-based compensation plans 32,671 1,484
Cost of issuing Litigation Tracking Warrants (TM) (504) --
Cost of issuing preferred stock and warrants -- (13,187)
----------- -----------
Balance at end of period 1,185,543 1,154,827
----------- -----------
WARRANTS
Balance at beginning of period 46,722 --
Issuance of warrants -- 41,235
----------- -----------
Balance at end of period 46,722 41,235
----------- -----------
RETAINED EARNINGS
Balance at beginning of period 643,838 670,343
Net income 266,215 83,177
Cash dividends declared on preferred stock -- (961)
Cash dividends declared on common stock (39,477) (24,356)
Issuance of treasury stock under stock-based compensation plans (39,860) (4,631)
----------- -----------
Balance at end of period 830,716 723,572
----------- -----------
TREASURY STOCK, AT COST
Balance at beginning of period (87,225) (230,035)
Purchase of treasury stock (115,962) (45,061)
Issuance of treasury stock under stock-based compensation plans 138,924 21,676
----------- -----------
Balance at end of period (64,263) (253,420)
----------- -----------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of period (30,191) (87,257)
Other comprehensive income 29,021 40,524
----------- -----------
Balance at end of period (1,170) (46,733)
----------- -----------
UNEARNED COMPENSATION
Balance at beginning of period (2,884) (4,679)
Issuance of restricted stock (4,369) (15,114)
Amortization of unearned compensation 3,991 16,348
----------- -----------
Balance at end of period (3,262) (3,445)
----------- -----------
Total stockholders' equity $ 1,995,489 $ 1,786,170
=========== ===========
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See accompanying notes to consolidated financial statements.
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 266,215 $ 83,177
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation, amortization and accretion, net 240,434 171,865
Mortgage servicing assets valuation adjustments 93,857 --
Provision for deferred income tax expense 63,219 31,507
Provision for loan losses 42,000 21,000
Net securities (gains) losses (3,653) 84,582
Restructuring charge -- 38,092
Net increase in loans held for sale (1,465,607) (629,885)
Other, net (225,673) (257,452)
----------- -----------
Net cash used by operating activities (989,208) (457,114)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 1,581,328 746,182
Proceeds from maturities of securities available for sale 394,941 441,117
Purchases of securities available for sale (175,444) (751,252)
Purchases of Federal Home Loan Bank of New York stock (57,339) --
Loans receivable originated and purchased, net of principal payments (1,317,959) (1,192,363)
Proceeds from sales of loans 14,105 34,794
Proceeds from sales of other real estate owned 12,925 19,612
Net purchases of premises and equipment (19,294) (16,042)
----------- -----------
Net cash provided (used) by investing activities 433,263 (717,952)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 576,798 (358,288)
Net increase in borrowings with original maturities of three months or less 249,691 1,898,046
Proceeds from other borrowings 624,776 --
Repayments of other borrowings (787,995) (586,873)
Purchases of treasury stock (115,962) (45,061)
Proceeds from issuances of treasury stock 94,695 1,931
Proceeds from issuance of preferred stock and warrants -- 196,979
Cash dividends paid (39,477) (25,317)
Other (504) --
----------- -----------
Net cash provided by financing activities 602,022 1,081,417
----------- -----------
Net increase (decrease) in cash and cash equivalents 46,077 (93,649)
Cash and cash equivalents at beginning of period 435,311 432,455
----------- -----------
Cash and cash equivalents at end of period $ 481,388 $ 338,806
=========== ===========
Supplemental cash flow information:
Interest payments on deposits and borrowed funds $ 741,730 $ 786,010
Income tax (refunds) payments, net (5,305) 49,074
Supplemental non-cash investing information:
Securitization of loans receivable 1,121,593 272,024
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See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
In the opinion of management, the unaudited consolidated financial statements of Dime Bancorp, Inc. (the "Holding Company") and subsidiaries (collectively, the "Company") included herein reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such financial statements as of the dates, or for the periods, indicated. The unaudited consolidated financial statements presented herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Holding Company's Annual Report on Form 10-K for the year ended December 31, 2000, as amended (the "2000 10-K"). The results for the three months and nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. Certain amounts in prior periods have been reclassified to conform with the current presentation.
NOTE 2 -- PENDING MERGER
On June 25, 2001, the Holding Company entered into a definitive Agreement and Plan of Merger (the "Merger Agreement") with Washington Mutual, Inc. ("Washington Mutual"), headquartered in Seattle, Washington, pursuant to which the Holding Company will merge with and into Washington Mutual, with Washington Mutual as the surviving corporation (the "Merger"). The Merger, which is currently expected to be completed in January 2002, is subject to regulatory approvals and the approval of the Holding Company's stockholders. The Special Meeting of the Holding Company's stockholders to vote on the Merger is scheduled for November 27, 2001.
The value of the merger consideration per share of the Holding Company's common stock will be the sum of (i) $11.6245 and (ii) 0.7511 times the average of the closing prices for Washington Mutual's common stock during the ten consecutive full trading days ending on the tenth business day before the completion of the Merger.
The Holding Company's common stockholders will be entitled to elect to receive merger consideration in the form of Washington Mutual common stock, cash, or a combination thereof. However, because the total amount of cash consideration payable in the Merger is fixed at $1,428,809,000 pursuant to the Merger Agreement, each of the Holding Company's stockholders, regardless of their choice, may actually receive a combination of cash and shares of Washington Mutual's common stock for their shares of the Holding Company's common stock.
NOTE 3 -- DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. SFAS No. 133 established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Under this standard, the Company recognizes all derivative instruments as either assets or liabilities in its consolidated statements of financial condition and measures those instruments at fair value. Changes in the fair values of derivatives are reported in the Company's results of operations or other comprehensive income or loss depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in those fair values or cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis.
As required under SFAS No. 133, when the Company elects to apply hedge accounting, it establishes, at the inception of the hedge, the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge (the amount by which hedge gains or losses do not entirely offset corresponding losses or gains on the hedged item). For fair value hedge transactions in which the Company is hedging changes in the fair value of assets, liabilities or firm commitments, changes in the fair values of the derivative instruments are generally offset in the Company's results of operations by changes in the fair values of the risks being hedged. For cash flow hedge transactions in which the Company is hedging the variability of cash flows related to variable rate assets, liabilities or forecasted transactions, changes in the fair
values of the derivative instruments are reported in other comprehensive income or loss along with changes in the fair values of the risks being hedged. The gains and losses on derivative instruments that are reported in other comprehensive income or loss are reflected in the results of operations in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged items. The ineffective portion of all hedges is recognized in current period results of operations.
Upon adoption of SFAS No. 133, the Company recorded a transition adjustment, which resulted in an after-tax reduction in net income of $10.5 million. This transition adjustment is reflected in the Company's results of operations as the cumulative effect of a change in accounting principle.
As further described below, the Company uses a variety of derivative instruments in connection with its overall interest rate risk management strategy. The adoption of SFAS No. 133 may cause volatility in the Company's earnings, comprehensive income and stockholders' equity as compared with prior periods.
The Company uses various derivative instruments as hedges against the risk
that fluctuations in interest rates will cause unfavorable changes in the fair
value of certain of its securities available for sale, loans receivable,
deposits and borrowed funds. At September 30, 2001, all such derivatives were
accounted for as fair value hedges and included pay fixed/receive variable and
pay variable/receive fixed interest rate swaps (certain of which are forward
starting), zero coupon pay variable interest rate swaps, interest rate caps and
interest rate cap corridors. In addition, the Company hedges the interest rate
risk associated with sales of loans into the secondary market. Adverse market
interest rate changes between the time an interest rate-lock commitment is
granted to a customer and the time the loan is sold to an investor can erode the
fair value of that loan. Therefore, at September 30, 2001, the Company used
forward sales transactions, which are accounted for as fair value hedges, to
hedge its loans held for sale. The interest rate-locked committed pipeline, to
the extent projected to be closed and sold in the secondary market, as well as
the related forward loan sales contracts, are considered derivatives under SFAS
No. 133; however, such derivatives do not qualify for hedge accounting and are
recorded at estimated fair value. For hedges of interest-earning assets and
interest-bearing liabilities, net gains of $0.9 million and $1.1 million were
reflected in "Net gains on sales and related activities" for the three months
and nine months ended September 30, 2001, respectively, representing the sum of
(i) changes in the fair value of purchased option-based derivative instruments
related to time value (which are excluded from the assessment of hedge
effectiveness) and (ii) the ineffective portion of the hedges.
The Company also uses various derivative instruments as fair value hedges in order to protect against the adverse impact on the fair value of the Company's mortgage servicing assets of declines in long-term interest rates and the consequent increase in mortgage loan prepayment rates. At September 30, 2001, these instruments included forward purchases of mortgage-backed securities ("MBS"), pay fixed/receive variable and pay variable/receive fixed interest rate swaps (the pay fixed/receive variable interest rate swaps are used to hedge certain risks in the forward purchases of MBS), interest rate swaptions, interest rate floors and interest rate flooridors. Included as a component of "Amortization and valuation adjustments of mortgage servicing assets and related hedging activities" for the three months and nine months ended September 30, 2001 were net gains of $44.9 million and $82.4 million, respectively, representing the sum of (i) changes in the fair value of purchased option-based derivative instruments related to time value (which are excluded from the assessment of hedge effectiveness) and (ii) the ineffective portion of the hedges.
NOTE 4 -- EARNINGS (LOSS) PER COMMON SHARE
The following table sets forth information used to calculate basic and diluted earnings (loss) per common share for the periods indicated (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Income (loss) before cumulative effect of a change in
accounting principle $ 96,860 $ (16,539) $ 276,736 $ 83,177
Preferred stock dividends -- (961) -- (961)
--------- --------- --------- ---------
Income (loss) before cumulative effect of a change in
accounting principle applicable to
common stockholders 96,860 (17,500) 276,736 82,216
Cumulative effect of a change in accounting principle -- -- (10,521) --
--------- --------- --------- ---------
Net income (loss) applicable to common stockholders $ 96,860 $ (17,500) $ 266,215 $ 82,216
========= ========= ========= =========
Weighted average basic common shares outstanding 117,379 109,323 115,851 110,048
Effects of dilutive securities:
Common stock options and restricted common stock 1,918 -- 2,189 611
Warrants to purchase Series C and Series D
preferred stock 6,278 -- 5,038 --
--------- --------- --------- ---------
Weighted average diluted common shares outstanding 125,575 109,323 123,078 110,659
========= ========= ========= =========
Basic earnings (loss) per common share:
Income (loss) before cumulative effect of a change in
accounting principle $ 0.83 $ (0.16) $ 2.39 $ 0.75
Cumulative effect of a change in accounting principle -- -- (0.09) --
--------- --------- --------- ---------
Net income (loss) $ 0.83 $ (0.16) $ 2.30 $ 0.75
========= ========= ========= =========
Diluted earnings (loss) per common share:
Income (loss) before cumulative effect of a change in
accounting principle $ 0.77 $ (0.16) $ 2.25 $ 0.74
Cumulative effect of a change in accounting principle -- -- (0.09) --
--------- --------- --------- ---------
Net income (loss) $ 0.77 $ (0.16) $ 2.16 $ 0.74
========= ========= ========= =========
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NOTE 5 -- COMPREHENSIVE INCOME
The following table sets forth the Company's comprehensive income for the periods indicated (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
-------- -------- -------- --------
Net income (loss) $ 96,860 $(16,539) $266,215 $ 83,177
Other comprehensive income, net
of taxes:
Net unrealized gain on
securities available for sale
arising during the period, net
of reclassification adjustment 21,070 53,518 29,021 40,524
-------- -------- -------- --------
Comprehensive income $117,930 $ 36,979 $295,236 $123,701
======== ======== ======== ========
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NOTE 6 -- NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 141, "Business Combinations," which addresses financial accounting and reporting for business combinations. SFAS No. 141 requires that all business combinations be accounted for using the purchase method, thereby eliminating the use of
the pooling of interests method. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001 and to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later.
In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets," which addresses financial accounting and reporting for goodwill and other intangible assets. Under SFAS No. 142, goodwill and other intangible assets with indefinite lives will no longer be subject to amortization but rather will be subject to assessment for impairment on at least an annual basis by application of a fair value-based test. For the Company, the provisions of SFAS No. 142 are required to be applied effective January 1, 2002. The Company does not currently expect to recognize impairment upon its initial adoption of SFAS No. 142. Application of the non-amortization provisions of SFAS No. 142 is expected to result in an increase in net income for the year 2002 of approximately $25 million.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The provisions of SFAS No. 144 are required to be adopted by the Company effective January 1, 2002. The Company does not expect that the adoption of SFAS No. 144 will materially impact its financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements contained in this quarterly report on Form 10-Q are forward-looking and may be identified by the use of words such as "believe," "expect," "anticipate," "should," "planned," "estimated," and "potential." These forward-looking statements are based on the current expectations of the Company. A variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include interest rate movements, competition from both financial and non-financial institutions, changes in applicable laws and regulations, the timing and occurrence (or non-occurrence) of transactions and events that may be subject to circumstances beyond the Company's control and general economic conditions, which may be adversely affected by the September 11th terrorist attacks.
PENDING MERGER
On June 25, 2001, the Holding Company and Washington Mutual entered into the Merger Agreement, pursuant to which the Holding Company will merge with and into Washington Mutual, with Washington Mutual as the surviving corporation. The Merger, which is currently expected to be completed in January 2002, is subject to regulatory approvals and the approval of the Holding Company's stockholders.
RESULTS OF OPERATIONS
General
The Company reported net income of $96.9 million, or $0.77 per diluted common share, for the quarter ended September 30, 2001, as compared with a net loss of $16.5 million, or $0.16 per diluted common share, for the quarter ended September 30, 2000. For the first nine months of 2001, the Company reported net income of $266.2 million, or $2.16 per diluted common share, as compared with net income of $83.2 million, or $0.74 per diluted common share, for the first nine months of 2000. Net income and diluted earnings per common share for the nine months ended September 30, 2001 were reduced by $10.5 million and $0.09, respectively, as a result of the cumulative effect of a change in accounting principle resulting from the adoption, on January 1, 2001, of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
The Company recognized aggregate pre-tax special charges, which consist of amounts reported in the accompanying Consolidated Statements of Operations under the captions "Loss upon designation for sale of
mortgage-backed securities available for sale" and "Restructuring and other special charges," of $2.1 million during the first nine months of 2001, all of which were incurred during the second quarter of 2001, $131.0 million during the third quarter of 2000 and $185.2 million during the first nine months of 2000. (For a further discussion of these charges, see "Non-Interest Income" and "Non-Interest Expense.") On an after-tax basis, these special charges totaled $1.4 million, $85.9 million and $118.1 million for the first nine months of 2001, the third quarter of 2000 and the first nine months of 2000, respectively.
Reported net income for the third quarter of 2001, which did not include any special charges, was up $27.5 million, or 39.6%, from net income before special charges of $69.4 million for the third quarter of 2000. Net income before special charges for the first nine months of 2001 of $267.6 million increased $66.3 million, or 33.0%, from $201.3 million for the first nine months of 2000. Reported diluted earnings per common share for the third quarter of 2001 increased $0.18, or 30.5%, from diluted earnings before special charges per common share of $0.59 for the comparable quarter of 2000. Diluted earnings before special charges per common share were $2.17 for the first nine months of 2001, an increase of $0.40, or 22.6%, from $1.77 for the same period one year ago. These improvements were achieved substantially as a result of strong residential real estate loan production and related sales activities resulting from the relatively lower interest rate environment in the 2001 periods, growth in net interest income and the impact of a plan implemented by the Company in September 2000 to reduce annual expenses by approximately $50 million (the "Expense Reduction Initiative"), the primary components of which included a reduction in the employee complement through both terminations and attrition, the consolidation of selected operational functions and the consolidation or disposal of certain facilities.
The annualized returns on average assets and average stockholders' equity on a reported basis for the third quarter of 2001 were 1.45% and 20.31%, respectively. In comparison, the annualized returns on average assets and average stockholders' equity on a net income before special charges basis for the third quarter of 2000 were 1.10% and 16.09%, respectively. Annualized returns on average assets and average stockholders' equity on a net income before special charges basis for the first nine months of 2001 were 1.35% and 19.83%, respectively, as compared with 1.10% and 16.73%, respectively, for the first nine months of 2000.
The Company believes that net income before special charges data, when taken in conjunction with reported results, provides useful information in evaluating performance on a comparable basis, although not currently a required basis for reporting financial results under generally accepted accounting principles.
Net Interest Income
Net interest income on a taxable-equivalent basis amounted to $189.6 million for the quarter ended September 30, 2001, up $32.2 million from the comparable quarter of 2000, and $524.9 million for the first nine months of 2001, an increase of $55.7 million from the same period one year ago. These increases were driven by a widening of the net interest margin, coupled with growth in average interest-earning assets.
The net interest margin rose to 3.23% for the third quarter of 2001 from 2.84% for the third quarter of 2000 and to 2.99% for the first nine months of 2001 from 2.89% for the comparable period of 2000. The interest rate spread was 3.32% and 3.10% for the third quarter and first nine months of 2001, respectively, as compared with 2.92% and 2.99% for the third quarter and first nine months of 2000, respectively. The improvements in the net interest margin and interest rate spread reflect a steepening of the yield curve, favorable changes in the asset/liability mix and the net favorable effect of lower short-term interest rates. The yield on average interest-earning assets declined 101 basis points for the third quarter of 2001 and 50 basis points for the first nine months of 2001, as compared with the respective prior year periods, while the cost of average interest-bearing liabilities declined 141 basis points for the third quarter of 2001 and 61 basis points for the first nine months of 2001, as compared with the respective prior year periods.
Average interest-earning assets increased $918.5 million for the third quarter of 2001 and $1.5 billion for the first nine months of 2001, as compared with the corresponding periods of 2000. The average balance of loans held for sale increased $2.3 billion for the third quarter of 2001 and $2.4 billion for the first nine months of 2001, as compared with the respective periods one year ago, reflective of the relatively higher loan production levels during the 2001 periods resulting, in large part, from the lower interest rate environment. In addition, the average balances of non-residential loans (which consist of commercial real estate, consumer and business loans) rose
$689.0 million for the third quarter of 2001, as compared with the same year ago quarter, and $940.6 million for the nine months ended September 30, 2001, as compared with the corresponding 2000 period. Non-residential loans represented 52.6% of total average loans receivable for the third quarter of 2001, up from 49.4%, for the third quarter of 2000, and 52.0% for the first nine months of 2001, an increase from 47.9% for the first nine months of 2000. The growth in loans held for sale and non-residential loans was partially offset by declines in average MBS of $1.8 billion, or 49.6%, for the third quarter of 2001, as compared with the third quarter of 2000, and $1.5 billion, or 43.1%, for the first nine months of 2001, as compared with the same period of 2000. The reductions in average MBS were largely due to the effects of sales pursuant to a plan implemented in the third quarter of 2000 as part of a balance sheet repositioning.
Average interest-bearing liabilities increased $1.1 billion in the third quarter of 2001, as compared with the third quarter of 2000, and $1.6 billion for the first nine months of 2001, as compared with the same period one year ago. These increases reflect higher levels of average borrowed funds, resulting, in part, from the funding of the higher levels of residential real estate loan production, as well as higher levels of average core deposits (which consist of demand, savings and money market deposits and are generally less costly than the Company's time deposits and borrowed funds).
The following tables set forth, for the periods indicated, the Company's consolidated statement of average financial condition, net interest income, interest rate spread and net interest margin. The information in the tables is presented on a tax-equivalent basis assuming a federal income tax rate of 35% and applicable state and local income tax rates. Non-accrual loans are included in average balances in the tables below.
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------
2001 2000
---------------------------------- ----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------- ----------- ------- ----------- ----------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans held for sale $ 4,480,140 $ 83,179 7.38% $ 2,176,925 $ 46,956 8.60%
Loans receivable:
Residential real estate 7,736,232 135,178 6.99 8,075,310 146,220 7.24
Commercial real estate 4,344,181 68,011 6.25 3,911,865 82,569 8.43
Consumer 3,209,162 55,649 6.88 2,873,719 61,147 8.49
Business 1,029,321 18,251 7.04 1,108,100 25,540 9.16
----------- ----------- ----------- -----------
Total loans receivable 16,318,896 277,089 6.78 15,968,994 315,476 7.89
----------- ----------- ----------- -----------
Securities available for sale:
MBS 1,779,252 28,887 6.49 3,531,442 64,601 7.32
Other 401,360 6,922 6.90 470,938 9,233 7.84
----------- ----------- ----------- -----------
Total securities available for sale 2,180,612 35,809 6.57 4,002,380 73,834 7.38
----------- ----------- ----------- -----------
Other interest-earning assets 564,686 7,603 5.35 477,530 8,595 7.17
----------- ----------- ----------- -----------
Total interest-earning assets 23,544,334 403,680 6.84 22,625,829 444,861 7.85
----------- ----------- ----------- -----------
Other assets 3,240,004 2,565,758
----------- -----------
Total assets $26,784,338 $25,191,587
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Core:
Demand $ 2,767,818 2,662 0.38 $ 2,198,487 1,898 0.34
Savings 2,323,618 12,660 2.16 2,323,481 12,637 2.16
Money market 3,141,203 23,442 2.96 3,166,359 35,179 4.42
----------- ----------- ----------- -----------
Total core 8,232,639 38,764 1.87 7,688,327 49,714 2.57
Time 6,304,249 75,949 4.78 6,345,445 88,015 5.52
----------- ----------- ----------- -----------
Total deposits 14,536,888 114,713 3.13 14,033,772 137,729 3.90
----------- ----------- ----------- -----------
Borrowed funds:
Federal funds purchased and securities
sold under agreements to repurchase 3,176,905 29,064 3.63 3,900,374 65,463 6.57
Other short-term borrowings 4,748,158 44,354 3.71 3,810,397 61,872 6.35
Long-term debt 1,671,651 25,931 6.18 1,259,018 22,349 7.02
----------- ----------- ----------- -----------
Total borrowed funds 9,596,714 99,349 4.11 8,969,789 149,684 6.54
----------- ----------- ----------- -----------
Total interest-bearing liabilities 24,133,602 214,062 3.52 23,003,561 287,413 4.93
----------- ----------- ----------- -----------
Other liabilities 742,645 463,419
Stockholders' equity 1,908,091 1,724,607
----------- -----------
Total liabilities and stockholders' equity $26,784,338 $25,191,587
=========== ===========
Net interest income $ 189,618 $ 157,448
=========== ===========
Interest rate spread 3.32 2.92
Net interest margin 3.23 2.84
|
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------
2001 2000
---------------------------------- ----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------- ----------- ------- ----------- ----------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans held for sale $ 4,139,159 $ 230,795 7.45% $ 1,760,650 $ 110,552 8.38%
Loans receivable:
Residential real estate 7,812,355 415,492 7.09 8,163,238 438,816 7.17
Commercial real estate 4,252,142 221,745 6.96 3,715,539 227,494 8.17
Consumer 3,113,573 174,171 7.47 2,707,831 170,902 8.42
Business 1,085,413 62,890 7.74 1,087,189 72,414 8.88
----------- ----------- ----------- -----------
Total loans receivable 16,263,483 874,298 7.17 15,673,797 909,626 7.74
----------- ----------- ----------- -----------
Securities available for sale:
MBS 1,985,725 102,910 6.91 3,488,495 187,398 7.16
Other 419,667 22,825 7.25 443,466 25,891 7.78
----------- ----------- ----------- -----------
Total securities available for sale 2,405,392 125,735 6.97 3,931,961 213,289 7.23
----------- ----------- ----------- -----------
Other interest-earning assets 540,120 25,819 6.39 494,360 25,794 6.97
----------- ----------- ----------- -----------
Total interest-earning assets 23,348,154 1,256,647 7.18 21,860,768 1,259,261 7.68
----------- ----------- ----------- -----------
Other assets 3,094,433 2,512,257
----------- -----------
Total assets $26,442,587 $24,373,025
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Core:
Demand $ 2,668,754 7,163 0.36 $ 2,128,466 5,576 0.35
Savings 2,276,786 36,720 2.16 2,348,853 38,059 2.16
Money market 3,186,989 84,362 3.54 3,218,565 101,031 4.19
----------- ----------- ----------- -----------
Total core 8,132,529 128,245 2.11 7,695,884 144,666 2.51
Time 6,302,183 248,685 5.28 6,478,120 255,825 5.28
----------- ----------- ----------- -----------
Total deposits 14,434,712 376,930 3.49 14,174,004 400,491 3.77
----------- ----------- ----------- -----------
Borrowed funds:
Federal funds purchased and securities
sold under agreements to repurchase 3,296,530 113,419 4.60 3,547,070 168,483 6.24
Other short-term borrowings 4,320,071 146,439 4.53 3,319,496 153,695 6.08
Long-term debt 1,900,678 94,920 6.67 1,293,838 67,324 6.89
----------- ----------- ----------- -----------
Total borrowed funds 9,517,279 354,778 4.98 8,160,404 389,502 6.28
----------- ----------- ----------- -----------
Total interest-bearing liabilities 23,951,991 731,708 4.08 22,334,408 789,993 4.69
----------- ----------- ----------- -----------
Other liabilities 691,272 434,209
Stockholders' equity 1,799,324 1,604,408
----------- -----------
Total liabilities and stockholders' equity $26,442,587 $24,373,025
=========== ===========
Net interest income $ 524,939 $ 469,268
=========== ===========
Interest rate spread 3.10 2.99
Net interest margin 2.99 2.89
|
The following table sets forth the changes in interest income on a taxable-equivalent basis and interest expense 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.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 VERSUS 2000 SEPTEMBER 30, 2001 VERSUS 2000
----------------------------------- -----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
----------------------------------- -----------------------------------
DUE TO DUE TO DUE TO DUE TO
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
Interest income:
Loans held for sale $ 43,567 $ (7,344) $ 36,223 $ 133,903 $ (13,660) $ 120,243
Loans receivable 6,781 (45,168) (38,387) 33,370 (68,698) (35,328)
Securities available for sale (30,634) (7,391) (38,025) (80,055) (7,499) (87,554)
Other interest-earning assets 1,403 (2,395) (992) 2,283 (2,258) 25
--------- --------- --------- --------- --------- ---------
Total interest income 21,117 (62,298) (41,181) 89,501 (92,115) (2,614)
--------- --------- --------- --------- --------- ---------
Interest expense:
Deposits 4,788 (27,804) (23,016) 7,257 (30,818) (23,561)
Borrowed funds 9,844 (60,179) (50,335) 58,643 (93,367) (34,724)
--------- --------- --------- --------- --------- ---------
Total interest expense 14,632 (87,983) (73,351) 65,900 (124,185) (58,285)
--------- --------- --------- --------- --------- ---------
Net interest income $ 6,485 $ 25,685 $ 32,170 $ 23,601 $ 32,070 $ 55,671
========= ========= ========= ========= ========= =========
|
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"), amounted to $14.0 million for the third quarter of 2001 and $42.0 million for the first nine months of 2001. In comparison, the provision for loan losses was $7.0 million and $21.0 million for the three- and nine-month periods ended September 30, 2000, respectively. The increases in the provision for loan losses were consistent with the Company's intent to migrate its allowance for loan losses to a level commensurate with its changing loan portfolio mix.
Non-Interest Income
Non-interest income totaled $191.9 million and $596.9 million for the third quarter and first nine months of 2001, respectively, as compared with $52.5 million and $319.0 million for the third quarter and first nine months of 2000, respectively. Non-interest income for each of the 2000 periods was reduced by an $87.4 million other than temporary impairment in value loss recognized upon the designation for sale of $1.8 billion of MBS available for sale as part of a balance sheet repositioning by the Company in the third quarter. Excluding this special charge, non-interest income rose $52.0 million, or 37.2%, for the third quarter of 2001 and $190.4 million, or 46.8%, for the first nine months of 2001, as compared with the corresponding periods in 2000. These increases largely resulted from the favorable impact on net gains on loan sales and loan production fees of substantially higher residential real estate loan production in the 2001 periods as compared with the 2000 periods. Non-interest income represented 50.3% of total revenue (net interest income plus non-interest income) for the third quarter of 2001 and 53.3% of total revenue for the first nine months of 2001. Excluding the special charge associated with the designation for sale of MBS, non-interest income represented 47.2% of total revenue for the third quarter of 2000 and 46.5% of total revenue for the first nine months of 2000.
Loan servicing and production fees amounted to $87.9 million for the third quarter of 2001, an increase of $14.6 million, or 20.0%, from the comparable quarter of 2000. Loan servicing and production fees for the first nine months of 2001 were $258.7 million, up $47.3 million, or 22.4%, from the same period one year ago. The higher levels of such fees were largely attributable to growth in loan production fees to $30.3 million for the third quarter of 2001 from $19.0 million for the third quarter of 2000 and to $89.6 million for the first nine months of 2001 from $49.3 million for the first nine months of 2000. Driving the increases in loan production fees was growth in residential real estate loan production to $11.2 billion and $33.0 billion for the three and nine months ended September 30, 2001, respectively, from $5.6 billion and $13.7 billion for the three and nine months ended
September 30, 2000, respectively, resulting primarily from significantly higher levels of refinance activity and, to a lesser extent, higher levels of originations of loans for home purchases.
At September 30, 2001, the Company's portfolio of mortgage loans serviced for others (excluding loans being subserviced by the Company) amounted to $43.7 billion, up $2.7 billion from December 31, 2000 and up $3.9 billion from September 30, 2000. This portfolio consists substantially of residential real estate loans, the underlying weighted average note rates of which were 7.25%, 7.40% and 7.37% at September 30, 2001, December 31, 2000 and September 30, 2000, respectively. In connection with sales of mortgage loan servicing rights, the Company was subservicing $7.2 billion of loans at September 30, 2001, as compared with $3.1 billion and $2.8 billion at December 31, 2000 and September 30, 2000, respectively. The Company receives fees for subservicing loans until the transfer of the servicing responsibility to the purchasers of the servicing rights. It had been the Company's recent practice to sell the majority of the mortgage servicing rights associated with its newly-originated residential real estate loans held for sale under contractual flow sale arrangements; however, in light of the expiration in July 2001 of one of its contractual flow sale arrangements, coupled with the pending Merger, the Company has significantly reduced its sales of mortgage servicing rights.
Net gains on sales and related activities were $74.6 million for the three months ended September 30, 2001, up $38.6 million from the same quarter one year ago. Net gains on sales and related activities for the first nine months of 2001 were $248.3 million, an increase of $145.1 million from the comparable prior year period. These increases largely reflect growth in loan sales to $10.5 billion for the third quarter of 2001 from $5.0 billion for the comparable 2000 quarter and to $28.5 billion for the first nine months of 2001 from $11.9 billion for the same period one year ago. Under SFAS No. 133, gains resulting from the production and sale of loans into the secondary market are recorded at the time value is created during the residential mortgage origination process. Under prior guidelines, the value of loans originated for sale was recognized only upon actual sale. Approximately $29.5 million of net gains recorded during the first quarter of 2001 would have been recorded during the fourth quarter of 2000 had SFAS No. 133 been in effect at that time.
Non-Interest Expense
Non-interest expense amounted to $219.5 million for the third quarter of 2001, down $7.0 million from the third quarter of 2000, and $656.4 million for the first nine months of 2001, an increase of $18.3 million from the comparable period of 2000. Excluding restructuring and other special charges, which amounted to $2.1 million for the first nine months of 2001, $43.5 million for the third quarter of 2000 and $97.8 million for the first nine months of 2000 (there were no such charges during the 2001 third quarter), non-interest expense was up $36.5 million, or 20.0%, for the third quarter of 2001 and up $114.0 million, or 21.1%, for the first nine months of 2001, as compared with the corresponding periods of 2000. These increases were largely attributable to higher amortization and valuation adjustments of mortgage servicing assets and related hedging activities, coupled with higher levels of mortgage banking-related general and administrative ("G&A") expense.
G&A expense totaled $158.9 million for the third quarter of 2001, an increase of $17.0 million from the same quarter one year ago. For the first nine months of 2001, G&A expense was $452.3 million, up $30.0 million from the comparable year-ago period. The higher G&A expense levels were fueled by increases in variable mortgage-banking related expenses resulting from growth in residential real estate loan production, which more than offset the favorable effects of the Expense Reduction Initiative. A substantial portion of the $50 million of expense reductions under the Expense Reduction Initiative was achieved by December 31, 2000, and the program was completed by June 30, 2001. The efficiency ratio improved to 41.7% for the third quarter of 2001 from 47.9% for the same quarter of 2000 and to 40.4% for the first nine months of 2001 from 48.3% for the corresponding period of 2000.
Amortization and valuation adjustments of mortgage servicing assets and related hedging activities amounted to $52.2 million for the third quarter of 2001 and $177.0 million for the first nine months of 2001, up from $32.6 million for the third quarter of 2000 and $92.9 million for the first nine months of 2000. These increases occurred largely due to higher amortization resulting from sharp increases in prepayment activity of the loans underlying the mortgage servicing assets portfolio in response to the lower mortgage interest rate environment during the 2001 periods. Included in the third quarter and first nine months of 2001 were charges of $42.2 million and $93.9 million, respectively, as valuation allowances against the mortgage servicing assets, the impact of which was more
than offset in the third quarter of 2001 and partially offset in the first nine months of 2001 by net gains (including those associated with net accruals and cash payments) of $44.7 million and $84.3 million, respectively, associated with related hedging activities.
Restructuring charges of $38.1 million were incurred during the third quarter and first nine months of 2000 in connection with the Expense Reduction Initiative. There were no restructuring charges incurred during the comparable 2001 periods. Other special charges for the first nine months of 2001 were $2.1 million, all of which were recognized during the second quarter of 2001. These special charges were largely associated with the accelerated vesting of certain of the Holding Company's restricted common stock as a result of its entering into the Merger Agreement. Other special charges incurred during the third quarter and first nine months of 2000 totaled $5.4 million and $59.7 million, respectively, and were associated with the defense of a hostile takeover attempt of the Holding Company, which ultimately expired by its terms in September 2000, the accelerated vesting during the 2000 second quarter of the Holding Company's restricted common stock triggered by this hostile takeover attempt and the termination, in April 2000, of a merger agreement.
Income Tax Expense (Benefit)
Income tax expense (benefit) amounted to $51.0 million and $145.8 million for the three- and nine-month periods ended September 30, 2001, respectively, as compared with $(7.7) million and $44.4 million for the three- and nine-month periods ended September 30, 2000, respectively. The Company's effective income tax rates, on both a reported basis and a net income before special charges basis, were 34.5% for each of the third quarter and first nine months of 2001. For the third quarter and first nine months of 2000, the Company's effective income tax rates on a reported basis were 31.8% and 34.8%, respectively, whereas on a net income before special charges basis the effective income tax rates were 35.0% and 35.7%, respectively.
BUSINESS SEGMENTS
For purposes of its disclosures in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company has four reportable segments: Retail Banking; Commercial Banking; Mortgage Banking; and Investment Portfolio. The Company measures the performance of each business segment utilizing an internal profitability reporting system.
The performance of the Company's segments will vary from period to period for a variety of factors. The primary factors are the amount of revenue earned and direct expenses incurred by each segment. However, other factors may also play an important role in segment performance. Among the most significant of these other factors are interest rate movements and general economic conditions, which influence the Company's transfer pricing, and the level of internal support expenses, which are fully allocated in the Company's internal profitability reporting process.
The following table sets forth certain information regarding the Company's business segments (dollars in thousands):
TOTAL
RETAIL COMMERCIAL MORTGAGE INVESTMENT REPORTABLE RECONCILING
BANKING BANKING BANKING PORTFOLIO SEGMENTS ITEMS (1) TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
THREE MONTHS ENDED
SEPTEMBER 30, 2001:
Revenue (2) (3) $ 121,783 $ 34,234 $ 211,920 $ 6,511 $ 374,448 $ (7,093) $ 367,355
Net income (3) 39,807 13,149 42,693 3,515 99,164 (2,304) 96,860
Segment net income to
total net income of
reportable segments 40.1% 13.3% 43.1% 3.5% 100.0%
THREE MONTHS ENDED
SEPTEMBER 30, 2000:
Revenue (2) (3) $ 134,362 $ 38,063 $ 121,042 $ 15,391 $ 308,858 $ (19,190) $ 289,668
Net income (3) 44,239 16,559 11,937 9,198 81,933 (12,552) 69,381
Segment net income to
total net income of
reportable segments 54.0 % 20.2 % 14.6 % 11.2 % 100.0%
NINE MONTHS ENDED
SEPTEMBER 30, 2001:
Revenue (2) (3) $ 377,121 $ 107,891 $ 629,697 $ 26,586 $ 1,141,295 $ (62,421) $ 1,078,874
Net income (3) 127,781 43,849 126,515 15,331 313,476 (45,885) 267,591
Segment net income to
total net income of
reportable segments 40.8 % 14.0 % 40.3 % 4.9 % 100.0%
NINE MONTHS ENDED
SEPTEMBER 30, 2000:
Revenue (2) (3) $ 398,761 $ 108,525 $ 339,631 $ 42,873 $ 889,790 $ (36,717) $ 853,073
Net income (3) 127,789 46,245 27,151 25,491 226,676 (25,406) 201,270
Segment net income to
total net income of
reportable segments 56.4% 20.4% 12.0% 11.2% 100.0%
ASSETS AT:
September 30, 2001 $10,989,658 $ 5,392,980 $ 6,988,071 $ 3,030,222 $26,400,931 $ 704,589 $27,105,520
September 30, 2000 11,110,249 5,114,592 4,178,006 4,187,871 24,590,718 641,624 25,232,342
|
(2) Revenue reflects net interest income after provision for loan losses plus non-interest income.
(3) Revenue and net income are presented before special charges.
The following table provides reconciliations of total revenue before special charges and net income before special charges as presented in the previous table to the Company's reported totals for the periods indicated (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Total revenue before
special charges $ 367,355 $ 289,668 $1,078,874 $ 853,073
Loss upon designation for sale of
MBS available for sale -- (87,441) -- (87,441)
---------- ---------- ---------- ----------
Total reported revenue $ 367,355 $ 202,227 $1,078,874 $ 765,632
========== ========== ========== ==========
Net income before special $ 96,860 $ 69,381 $ 267,591 $ 201,270
charges
Loss upon designation for sale of
MBS available for sale -- (87,441) -- (87,441)
Restructuring and other
special charges -- (43,537) (2,101) (97,792)
Related income tax benefits -- 45,058 725 67,140
---------- ---------- ---------- ----------
Reported net income (loss) $ 96,860 $ (16,539) $ 266,215 $ 83,177
========== ========== ========== ==========
|
The Retail Banking segment, which focuses on individuals, includes deposit accounts and related services, securities brokerage services, insurance products, consumer lending activities and a portfolio of residential real estate loans receivable. For the third quarter of 2001, the Retail Banking segment's net income was $39.8 million, a decrease of $4.4 million, or 10.0%, as compared with the same quarter of 2000. This decline mainly reflects the lower market interest rates in 2001 resulting in reduced management accounting-related credits on deposits. This was partially offset by growth in average consumer loans receivable, lower management accounting-related charges on the residential loan portfolio and higher gains on securitized residential loan portfolio sales. The Retail Banking segment's net income for the first nine months of 2001 was $127.8 million, virtually flat from the same period one year ago.
The Commercial Banking segment, which includes commercial real estate lending and business banking activities, provides both lending and deposit products and services to business customers. The net income generated by the Commercial Banking segment was $13.1 million for the third quarter of 2001, a decrease of $3.4 million from the third quarter of 2000, and $43.8 million for the first nine months of 2001, a decrease of $2.4 million from the comparable year-ago period. These decreases were primarily due to higher provisions for loan losses, the effects of which were partially offset by growth in average loans and deposit levels.
The Mortgage Banking segment's activities include the production of residential real estate loans for sale into the secondary market and, to a far lesser degree, for the Company's portfolio and servicing loans for the Company and others. The Mortgage Banking segment had net income of $42.7 million for the third quarter of 2001, up $30.8 million from the third quarter of 2000, and $126.5 million for the first nine months of 2001, an increase of $99.4 million from the comparable year-ago period. These increases largely reflect higher loan production and loan sales activities, the effects of which were partially offset by higher non-interest expenses.
The Investment Portfolio segment invests in certain debt and equity securities and money market investments in conjunction with the Company's overall liquidity and interest rate risk and credit risk management processes. In addition, this segment includes Federal Home Loan Bank of New York ("FHLBNY") stock required to be held by the Holding Company's banking subsidiary, The Dime Savings Bank of New York, FSB (the "Bank"), as a member of the FHLBNY. The net income for the Investment Portfolio segment amounted to $3.5 million for the third quarter of 2001, a decrease of $5.7 million from the comparable quarter of 2000. For the first nine months of 2001, the Investment Portfolio segment's net income was $15.3 million, a decline of $10.2 million from the comparable period of 2000. These declines were primarily due to reductions in MBS.
ASSET/LIABILITY MANAGEMENT
General
The Company's asset/liability management is governed by policies that are reviewed and approved annually by the Boards of Directors of the Holding Company and the Bank, which oversee the development and execution of risk management strategies in furtherance of these policies. The Asset/Liability Management Committee, which is comprised of members of the Company's senior management, monitors the Company's interest rate risk position and related strategies.
Market Risk
In general, market risk is the sensitivity of income to variations in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates or prices, such as prices of equities. The Company's market rate sensitive instruments include interest-earning assets, mortgage servicing assets, interest-bearing liabilities and derivative instruments.
The Company enters into market rate sensitive instruments in connection with its various business operations, particularly its mortgage banking activities. Loans originated, and the related commitments to originate loans that will be sold, represent market risk that is realized in a short period of time, generally two to three months.
The Company's primary source of market risk exposure arises from changes in United States interest rates and the effects thereof on loan prepayment and closing behavior, the relative repricing characteristics of its interest-earning assets and interest-bearing liabilities, as well as depositors' choices. 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 exposure to foreign exchange rate risk or commodity price risk. Movements in equity prices may have an indirect effect on certain of the Company's business activities or the value of credit sensitive loans and securities.
Interest Rate Risk Management
The Company manages its interest rate risk through strategies designed to maintain acceptable levels of interest rate exposure throughout a range of interest rate environments. These strategies are intended not only to protect the Company from significant long-term declines in net interest income as a result of certain changes in the interest rate environment but also to mitigate the negative effect of certain interest rate changes upon the Company's mortgage banking operating results. The Company seeks to contain its interest rate risk within a band that it believes is manageable and prudent given its capital and income generating capacity. As a component of its interest rate risk management process, the Company employs various derivative instruments.
The sensitivity of the Company's net interest income to interest rates is driven 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, mortgage loans and the loans 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 lower prepayments due to rising interest rates or decrease as a result of higher prepayments due to falling 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 affected in a complementary fashion, the gap between the duration of the Company's interest-earning assets and interest-bearing liabilities
generally increases as interest rates rise and decreases as interest rates fall. In addition, in a rising interest rate environment, adjustable-rate assets may reach interim or lifetime interest rate caps, thereby limiting the amount of their upward adjustment, which effectively lengthens the duration of such assets.
Lower interest rate environments may also present interest rate risk exposure. In general, lower interest rate environments tend to accelerate loan prepayment rates, thus reducing the duration of mortgage-related assets and accelerating the amortization of any premiums paid in the acquisition of these assets. The amortization of any premiums over a shorter than expected term causes yields on the related assets to decline from anticipated levels. In addition, unanticipated accelerated prepayment rates increase the likelihood of potential losses of net future servicing revenues associated with the Company's mortgage servicing assets.
The Company is also exposed to interest rate risk resulting from certain changes in the shape of the yield curve (particularly a flattening or inversion -- also called "yield curve twist risk" -- of the yield curve) and to differing indices upon which the yield on the Company's interest-earning assets and the cost of its interest-bearing liabilities are based ("basis risk").
In evaluating and managing its interest rate risk, the Company employs simulation models to help assess its interest rate risk exposure and the impact of alternate interest rate scenarios, which consider the effects of adjustable-rate loan indices, periodic and lifetime interest rate adjustment caps, estimated loan prepayments, anticipated deposit retention rates and other dynamics of the Company's portfolios of interest-earning assets and interest-bearing liabilities.
Derivative Instruments
The Company currently uses a variety of derivative instruments to assist in managing the interest rate risk exposures in its net interest income, mortgage servicing assets, and loans held for sale and related loan commitment pipeline. While the Company's use of derivative 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.
The Company's assets have historically repriced or matured at a longer
term than the liabilities used to fund those assets. At September 30, 2001, the
Company used the following derivative instruments in its efforts to reduce the
effects on net interest income of its repricing risk associated with certain of
its securities available for sale, loans receivable and borrowed funds: (i)
interest rate swaps (certain of which are forward starting) where, based on the
specified notional amount, the Company either makes fixed-rate payments and
receives variable-rate payments or makes variable-rate payments and receives
fixed-rate payments, with the variable rates tied to the one- or three-month
London Interbank Offered Rate ("LIBOR"); (ii) interest rate caps, where, in
exchange for the payment of a premium to the counterparty, the Company receives
the excess of a designated market interest rate (substantially one-month LIBOR)
over a specified strike rate, as applied to the specified notional amount; and
(iii) interest rate cap corridors, where, in exchange for the payment of a
premium to the counterparty, the Company receives the amount by which one-month
LIBOR exceeds a specified strike rate up to a maximum rate, as applied to the
specified notional amount. In addition, the Company, in connection with its
issuance of time deposits, including zero coupon time deposits, with various
call features, has entered into: (i) interest rate swaps (certain of which are
forward starting) where the Company pays a variable rate based on one- or
three-month LIBOR less a specified margin and receives a fixed interest rate;
and (ii) zero coupon interest rate swaps, where the Company pays a variable rate
based on three-month LIBOR less a margin with the notional amount increasing to
par value over its life. These interest rate swaps and zero coupon interest rate
swaps have call features that match the hedged time deposits and, when
considered together with the related time deposits, that result in short-term
repricing liabilities. The Company uses these time deposits to replace
short-term repricing wholesale funds.
At September 30, 2001, the Company used the following derivative instruments to protect against the adverse impact on the value of the Company's mortgage servicing assets of declines in long-term interest rates and the consequent increase in mortgage loan prepayment rates: (i) forward contracts to purchase MBS; (ii) interest rate swaps, as described in the previous paragraph (pay fixed/receive variable interest rate swaps are used to hedge certain risks in the forward contracts to purchase MBS); (iii) interest rate swaptions, where, in exchange for the payment of a premium to the counterparty, the Company has the right, but not the obligation, to enter into pay
fixed/receive variable interest rate swap agreements at a future date; (iv) interest rate floors, where, in exchange for the payment of a premium to the counterparty, the Company receives the excess of a specified strike rate over the constant maturity swap index, as applied to the specified notional amount; and (v) interest rate flooridors, where, in exchange for the payment of a premium to the counterparty, the Company receives the amount by which a swap rate is below a specified strike rate up to a minimum rate, as applied to the specified notional amount.
In addition, the Company hedges the interest rate risk associated with sales of loans into the secondary market. Adverse market interest rate changes between the time an interest rate-lock commitment is granted to a customer and the time the loan is sold to an investor can erode the fair value of that loan. Therefore, at September 30, 2001, the Company used forward sales transactions to hedge its loans held for sale and to manage the interest rate risk on the related interest rate-locked commitment pipeline.
The following table sets forth the derivative instruments used by the Company at September 30, 2001 for interest rate risk-management purposes (dollars in thousands):
WEIGHTED AVERAGE
ESTIMATED ----------------
NOTIONAL FAIR PAY RECEIVE
AMOUNT VALUE RATE RATE
----------- ----------- ------- -------
Net interest income risk-management instruments:
Pay fixed/receive variable interest rate swaps
hedging:
Securities available for sale (1) $ 366,036 $ (33,685) 6.84% 3.29%
Loans receivable (1) 1,511,648 (115,993) 6.28 3.12
Forward starting pay fixed/receive variable interest
rate swaps hedging loans receivable (2) 35,576 68 -- --
Pay variable/receive fixed interest rate swaps hedging:
Time deposits (1) 275,500 4,268 3.27 6.50
Borrowed funds (1) 500,000 16,468 3.50 5.08
Forward starting pay variable/receive fixed interest
rate swaps hedging time deposits (3) 35,000 38 -- --
Zero coupon pay variable interest rate swaps
hedging time deposits (1) 16,738 (189) 2.90 --
Interest rate caps hedging loans receivable (4) 87,846 -- -- --
Interest rate cap corridors hedging:
Securities available for sale (5) 14,000 76 -- --
Loans receivable (5) 64,527 199 -- --
----------- -----------
Total net interest income risk-management
instruments 2,906,871 (128,750)
----------- -----------
Mortgage servicing assets risk-management instruments:
Pay fixed/receive variable interest rate swaps (1) 400,000 (11,441) 4.93 2.59
Pay variable/receive fixed interest rate swaps (1) 150,000 7,270 3.66 5.86
Interest rate swaptions (6) 1,500,000 21,451 -- --
Interest rate floors (7) 3,540,000 89,301 -- --
Interest rate flooridors (8) 900,000 10,825 -- --
Forward contracts 3,125,000 21,383 -- --
----------- -----------
Total mortgage servicing assets risk-
management instruments 9,615,000 138,789
----------- -----------
Loans held for sale and related loan commitment
pipeline risk-management instruments:
Forward contracts 6,746,351 (91,627) -- --
----------- -----------
Total interest rate risk-management instruments $19,268,222 $ (81,588)
=========== ===========
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(2) The accrual of interest begins in October 2001. The weighted average fixed-rate payable will be 5.11% and the variable-rate receivable will be tied to three-month LIBOR.
(3) The accrual of interest begins in October 2001. The variable-rate payable will be tied to three-month LIBOR and the weighted average fixed-rate receivable will be 6.18%.
(4) The weighted average strike rate was 6.97%.
(5) The weighted average strike rate was 5.94% and the weighted average maximum rate was 7.44%.
(6) The weighted average strike rate was 6.43%.
(7) The weighted average strike rate was 6.24%.
(8) The weighted average strike rate was 5.68% and the weighted average minimum rate was 4.68%.
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 instruments at September 30, 2001. The amount of each asset, liability or derivative instrument is included in the table at the earlier of the next repricing date or maturity. Prepayment assumptions for loans and MBS used in preparing the table are based upon industry standards as well as the Company's experience and estimates. Non-accrual loans have been included in the "Over One Through Three Years" category. Demand deposits, money market deposits and savings accounts are allocated to the various repricing intervals in the table based on the Company's experience and estimates.
PROJECTED REPRICING
---------------------------------
OVER ONE
THROUGH OVER
ONE YEAR THREE THREE
OR LESS YEARS YEARS TOTAL
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
Interest-earning assets $ 14,200 $ 5,173 $ 4,366 $ 23,739
Interest-bearing liabilities 17,335 3,599 3,234 24,168
-------- -------- -------- --------
Periodic gap before impact of derivative instruments (3,135) 1,574 1,132 (429)
Impact of derivative instruments 1,630 156 (1,786) --
-------- -------- -------- --------
Periodic gap $ (1,505) $ 1,730 $ (654) $ (429)
======== ======== ======== ========
Cumulative gap $ (1,505) $ 225 $ (429)
======== ======== ========
Cumulative gap as a percentage of total assets (5.6)% 0.8% (1.6)%
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MANAGEMENT OF CREDIT RISK
The Company's credit risk arises from the possibility that borrowers, issuers, or counterparties will not perform in accordance with contractual terms. The Company has a process of credit risk controls and management procedures by which it monitors and manages its level of credit risk.
The Company's non-performing assets consist of non-accrual loans and other real estate owned, net. Non-accrual loans are all loans 90 days or more delinquent, as well as loans less than 90 days past due for which the full collectibility of contractual principal or interest payments is doubtful.
The following table presents the components of the Company's non-performing assets at the dates indicated (dollars in thousands):
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2001 2000 2000
------------- ------------ -------------
Non-accrual loans:
Residential real estate $36,287 $41,071 $44,537
Commercial real estate 4,799 2,348 3,484
Consumer 6,895 8,392 9,924
Business 14,228 15,352 16,013
------------- ------------ -------------
Total non-accrual loans 62,209 67,163 73,958
------------- ------------ -------------
Other real estate owned, net:
Residential real estate 8,594 19,549 16,089
Commercial real estate 932 823 1,242
------------- ------------ -------------
Total other real estate owned, net 9,526 20,372 17,331
------------- ------------ -------------
Total non-performing assets $71,735 $87,535 $91,289
============= ============ =============
Non-performing assets to total assets 0.26% 0.34% 0.36%
Non-accrual loans to loans receivable 0.38 0.41 0.46
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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, 2001, such delinquent loans of the Company, net of those already in non-performing status (in thousands):
DELINQUENCY PERIOD
------------------
30 - 59 60 - 89
DAYS DAYS TOTAL
------- ------- -------
Residential real estate $37,276 $16,589 $53,865
Commercial real estate 3,700 -- 3,700
Consumer 18,432 4,841 23,273
Business 7,598 952 8,550
------- ------- -------
Total $67,006 $22,382 $89,388
======= ======= =======
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The following table sets forth the activity in the Company's allowance for loan losses for the periods indicated (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Balance at beginning of period $ 150,337 $ 143,432 $ 144,362 $ 140,296
Provision for loan losses 14,000 7,000 42,000 21,000
Loan charge-offs:
Residential real estate (2,033) (1,858) (5,847) (9,956)
Commercial real estate (247) (143) (539) (175)
Consumer (3,303) (2,363) (10,446) (8,147)
Business (7,198) (848) (21,126) (973)
--------- --------- --------- ---------
Total loan charge-offs (12,781) (5,212) (37,958) (19,251)
--------- --------- --------- ---------
Loan recoveries:
Residential real estate 112 356 636 1,135
Commercial real estate 56 200 174 821
Consumer 900 877 3,238 2,640
Business 28 2 200 14
--------- --------- --------- ---------
Total loan recoveries 1,096 1,435 4,248 4,610
--------- --------- --------- ---------
Net loan charge-offs (11,685) (3,777) (33,710) (14,641)
--------- --------- --------- ---------
Balance at end of period $ 152,652 $ 146,655 $ 152,652 $ 146,655
========= ========= ========= =========
|
Included in the $21.1 million of business loan charge-offs for the first nine months of 2001 were charge-offs of two individual loans of approximately $9 million each.
The following table sets forth the Company's allowance for loan losses coverage ratios at the dates indicated:
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2001 2000 2000
------------- ------------ -------------
Allowance for loan losses to:
Loans receivable 0.93% 0.89% 0.91%
Non-accrual loans 245.39 214.94 198.29
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The Company is exposed to credit risk in the event of non-performance by counterparties to derivative instruments. The level of credit risk associated with derivative 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 set-off rights and the ability of the counterparty to comply with its contractual obligations. In the event of default by a counterparty, the Company would be subject to an economic loss that corresponds to the cost to replace the agreement. The Company manages the credit risk associated with its derivative instruments through credit approvals, limits and monitoring procedures, dealing only with counterparties with high credit ratings, obtaining collateral when deemed necessary and including master netting and set-off provisions in its agreements when possible. The Company's credit risk associated with its use of derivative instruments amounted to approximately $41 million at September 30, 2001. There were no past due amounts related to the Company's derivative instruments at September 30, 2001.
FINANCIAL CONDITION
General
The Company's total assets amounted to $27.1 billion at September 30, 2001, up 5.5% from $25.7 billion at the end of 2000. This increase was driven by growth in loans held for sale of $1.5 billion, the impact of which was partially offset by a reduction in securities available for sale.
Securities Available for Sale
Securities available for sale amounted to $2.3 billion at the end of the 2001 third quarter, down $580.2 million from year-end 2000. Contributing significantly to this decline was a reduction in MBS of $534.0 million.
The following table summarizes the amortized cost and estimated fair value of securities available for sale at the dates indicated (in thousands):
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------------ ------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
---------- ---------- ---------- ----------
MBS:
Pass-through securities:
Privately-issued $ 683,090 $ 686,763 $1,357,832 $1,344,297
U. S. government agencies 738,914 757,879 562,207 560,162
Collateralized mortgage obligations:
Privately-issued 447,563 448,794 493,590 509,982
U. S. government agencies -- -- 13,271 12,819
Interest-only 341 244 436 374
---------- ---------- ---------- ----------
Total MBS 1,869,908 1,893,680 2,427,336 2,427,634
---------- ---------- ---------- ----------
Other debt securities 384,710 358,929
381,709 329,576
Equity securities 18,213 18,224 93,712 93,833
---------- ---------- ---------- ----------
Total securities available for sale $2,272,831 $2,270,833 $2,902,757 $2,851,043
========== ========== ========== ==========
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Loans Receivable
Loans receivable (exclusive of the allowance for loan losses) amounted to $16.5 billion at September 30, 2001, an increase of $208.5 million from the level at December 31, 2000. At September 30, 2001, non-residential loans represented 53.4% of total loans receivable, up from 51.4% at December 31, 2000, reflective of the Company's ongoing strategy to increase the percentage of non-residential loans receivable to total loans receivable.
The following table sets forth a summary of the Company's loans receivable at the dates indicated (dollars in thousands):
SEPTEMBER 30, 2001 DECEMBER 31, 2000 INCREASE
--------------------- --------------------- (DECREASE)
AMOUNT PERCENT AMOUNT PERCENT IN AMOUNT
----------- ------- ----------- ------- -----------
Residential real estate $ 7,688,742 46.6% $ 7,916,035 48.6% $ (227,293)
Commercial real estate:
Multi-family 2,050,959 12.5 1,846,582 11.3 204,377
Other 2,462,241 14.9 2,306,292 14.2 155,949
----------- ------- ----------- ------- -----------
Total commercial real estate 4,513,200 27.4 4,152,874 25.5 360,326
----------- ------- ----------- ------- -----------
Consumer:
Home equity 2,326,333 14.1 2,063,558 12.7 262,775
Automobile 859,736 5.2 878,600 5.4 (18,864)
Other 95,058 0.6 108,219 0.6 (13,161)
----------- ------- ----------- ------- -----------
Total consumer 3,281,127 19.9 3,050,377 18.7 230,750
----------- ------- ----------- ------- -----------
Business 1,012,547 6.1 1,167,878 7.2 (155,331)
----------- ------- ----------- ------- -----------
Total loans receivable $16,495,616 100.0% $16,287,164 100.0% $ 208,452
=========== ======= =========== ======= ===========
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Deposits
At September 30, 2001, deposits amounted to $14.6 billion, up from $14.0 billion at the end of 2000. This increase was largely attributable to growth in core deposits (primarily demand deposits) of $548.4 million, or 7.1%.
The following table sets forth a summary of the Company's deposits at the dates indicated (dollars in thousands):
SEPTEMBER 30, 2001 DECEMBER 31, 2000 INCREASE
--------------------- --------------------- (DECREASE)
AMOUNT PERCENT AMOUNT PERCENT IN AMOUNT
----------- ------- ----------- ------- -----------
Core:
Demand $ 2,755,098 18.9% $ 2,240,124 16.0% $ 514,974
Savings 2,357,466 16.2 2,239,541 16.0 117,925
Money market 3,143,359 21.6 3,227,871 23.1 (84,512)
----------- ------- ----------- ------- -----------
Total core 8,255,923 56.7 7,707,536 55.1 548,387
Time 6,305,988 43.3 6,269,405 44.9 36,583
----------- ------- ----------- ------- -----------
Total deposits $14,561,911 100.0% $13,976,941 100.0% $ 584,970
=========== ======= =========== ======= ===========
|
Borrowed Funds
Presented in the table below is the composition of the Company's borrowed funds at the dates indicated (in thousands):
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Short-term borrowings:
Federal funds purchased $2,233,000 $1,635,000
Securities sold under agreements to repurchase 999,896 1,447,322
FHLBNY advances 4,600,000 4,487,102
Other 219,148 58,097
------------- ------------
Total short-term borrowings 8,052,044 7,627,521
------------- ------------
Long-term debt:
Guaranteed preferred beneficial interests in Dime Bancorp, Inc.'s
junior subordinated deferrable interest debentures 152,262 152,243
FHLBNY advances 1,120,784 1,091,485
Senior notes of the Holding Company 249,180 592,470
Other 31,729 38,668
------------- ------------
Total long-term debt 1,553,955 1,874,866
------------- ------------
Total borrowed funds $9,605,999 $9,502,387
============= ============
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Stockholders' Equity
Stockholders' equity was $2.0 billion at September 30, 2001, up $270.7 million, or 15.7%, from December 31, 2000. The increase was primarily due to net income of $266.2 million.
While the Holding Company did not repurchase any shares of its common stock during the third quarter of 2001, the Holding Company repurchased 3,848,000 shares of its common stock during the first six months of 2001 at a cost of $116.0 million. These repurchases were made in connection with a program announced in October 2000 under which the Holding Company is authorized to repurchase up to 13,607,664 shares of its common stock. In total, the Holding Company has repurchased 10,690,500 shares of its common stock under this program. Under the terms of the Merger Agreement, without the prior consent of Washington Mutual, the Holding Company is prohibited from repurchasing any of its common stock. The Holding Company does not currently expect to seek such consent from Washington Mutual, although there can be no assurances that the Holding Company will not do so.
Cash dividends declared and paid per share of the Holding Company's common stock were $0.12 for the third quarter of 2001 and $0.34 for the first nine months of 2001, up from $0.08 for the third quarter of 2000 and $0.22 for the first nine months of 2000. On October 26, 2001, the Holding Company announced the declaration of a cash dividend of $0.12 per share on its common stock. This dividend will be paid on December 4, 2001 to the Holding Company's common stockholders of record as of the close of business on November 20, 2001. Under the terms of the Merger Agreement, the Holding Company, without the prior consent of Washington Mutual, is prohibited from declaring or paying any dividends or distributions on any shares of its stock, except for regular quarterly cash dividends on its common stock at a rate of $0.12 per share, as long as the Holding Company does not need to borrow money to pay that dividend. The Holding Company does not currently expect to seek such consent from Washington Mutual, although there can be no assurances that the Holding Company will not do so.
LIQUIDITY
The Company's liquidity management process focuses on ensuring that sufficient funds exist to meet withdrawals by depositors, loan funding commitments, debt service requirements and other financial obligations and expenditures. The liquidity position of the Company, which is monitored on a daily basis, is managed pursuant to established policies and guidelines.
The Company's sources of liquidity include principal repayments on loans and MBS, borrowings, deposits, sales of loans in connection with mortgage banking activities, sales of securities available for sale and cash provided by operations. The Company has access to the capital markets for issuing debt or equity securities, and the Bank has 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.
Excluding funds raised through the capital markets, the primary source of funds of the Holding Company, on an unconsolidated basis, has been dividends from the Bank, whose ability to pay dividends is subject to regulations of the Office of Thrift Supervision (the "OTS"). At September 30, 2001, the Holding Company had available for issuance an aggregate of $250.0 million of debentures, notes or other unsecured evidences of indebtedness under an effective shelf registration with the Securities and Exchange Commission (the "Commission"). The debt securities issuable under this shelf registration, which may be unsubordinated or subordinated to certain other obligations of the Holding Company, may be offered separately or together in one or more series.
REGULATORY CAPITAL
Pursuant to OTS regulations, the Bank is required to maintain tangible capital of at least 1.5% of adjusted total assets, core ("tier 1") capital of at least 3.0% of adjusted total assets and total risk-based capital of at least 8.0% of risk-weighted assets. The Bank exceeded these capital requirements at September 30, 2001.
Under the prompt corrective action regulations adopted by the OTS pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991, an institution is considered well capitalized, the highest of five categories, if its ratio of total risk-based capital to risk-weighted assets is 10.0% or more, its ratio of tier 1 capital to risk-weighted assets is 6.0% or more, its ratio of core capital to adjusted total assets is 5.0% or greater, and it is not subject to any order or directive by the OTS to meet a specific capital level. At September 30, 2001, the Bank met the published standards for a well capitalized designation under these regulations.
The following table sets forth the regulatory capital position of the Bank at the dates indicated (dollars in thousands):
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------- -------------------
AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- -----
Tangible and core capital $1,765,657 6.66% $1,463,350 5.83%
Tier 1 risk-based capital 1,765,657 9.89 1,463,350 8.54
Total risk-based capital 2,043,309 11.44 1,732,712 10.11
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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
There have not been any material developments regarding the status of the Bank's goodwill lawsuit against the United States government since the filing of the 2000 10-K.
Certain claims, suits, complaints and investigations involving the Company, arising in the ordinary course of business, have been filed or are pending. The Company is of the opinion, after discussion with legal counsel representing the Company in these proceedings, that the aggregate liability or loss, if any, arising from the ultimate disposition of these matters would not have a material adverse effect on the Company's consolidated financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3(ii) Amended and Restated Bylaws of the Holding Company.
(b) REPORTS ON FORM 8-K
During the three-month period ended September 30, 2001, the Holding Company filed with the Commission the following Current Reports on Form 8-K:
-- Dated June 25, 2001 and filed on July 6, 2001, detailing certain information regarding the Merger, including the calculation of the exchange ratio for shares of the Holding Company's common stock, under Item 5 and filing a copy of the Merger Agreement under Item 7.
-- Dated and filed on July 19, 2001, reporting the issuance of a press release announcing its financial results for the second quarter of 2001 under Item 5 and filing a copy of the press release under Item 7.
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, 2001 By: /s/ Lawrence J. Toal
--------------------
Lawrence J. Toal
Chief Executive Officer, President
and Chief Operating Officer
Dated: November 13, 2001 By: /s/ Anthony R. Burriesci
------------------------
Anthony R. Burriesci
Executive Vice President and
Chief Financial Officer
Dated: November 13, 2001 By: /s/ John F. Kennedy
-------------------
John F. Kennedy
Controller and Chief Accounting Officer
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Exhibit 3(ii)
AMENDED AND RESTATED
BYLAWS
OF
ARTICLE I
OFFICES
SECTION 1. Registered office. The registered office of the Company in the State of Delaware shall be in the City of Wilmington, County of New Castle or such other place within the State of Delaware as may be designated in the Certificate of Incorporation.
SECTION 2. Additional offices. The Company may also have offices and places of business at such other places, within and outside the State of Delaware, as the Board of Directors ("Board") may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. Place of meetings. All annual and special meetings of stockholders shall be held at such place, within or outside the State of Delaware, as shall be designated from time to time by the Board and stated in the notice of the meeting.
SECTION 2. Annual meetings. All regular meetings of the stockholders of the Company for the election of Directors or for any other purpose shall be held annually (i) on the fourth Friday in April if not a legal holiday (and if a legal holiday, then on the first day following that is not a legal holiday) at 10:00 a.m.; or (ii) at such other date and time as the Board may determine.
SECTION 3. Special meetings. Special meetings of the stockholders of the Company for any purpose or purposes may be called by the Chairman of the Board of Directors (or, if there is no such Chairman, by the Chief Executive Officer of the Company) or by the Secretary of the Company at the written request of a majority of the Directors then in office.
SECTION 4. Conduct of meetings. The Chief Executive Officer of the Company or, in his or her absence, the President of the Company or, in his or her absence, such person as the Board may have designated shall call to order any meeting of the stockholders and act as chairman of the meeting. Subject to Sections 13 and 14 of this Article II, annual and special meetings of the stockholders shall be conducted in
accordance with practices and procedures as determined by the chairman of the meeting.
SECTION 5. Notice of meetings. Written notice of every meeting of the stockholders, stating the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given not less than 10 nor more than 60 days before the date of the meeting, either personally or by mail, by or at the direction of the Chief Executive Officer, the President or the Secretary, or the Directors calling the meeting, to each stockholder entitled to vote at such meeting or entitled to notice of such meeting, except as otherwise provided herein, in the Certificate of Incorporation, in a certificate of designation with respect to any series of preferred stock or by law. If mailed, such notice shall be deemed to be delivered when deposited in the mail, postage prepaid, addressed to the stockholder at his or her address as it appears on the stock transfer books or records of the Company as of the record date prescribed in Section 6 of this Article II. When any stockholders' meeting, either annual or special, is adjourned for 30 days or more or if a new record date is fixed, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for less than 30 days or the business to be transacted at such adjourned meeting, other than an announcement at the meeting at which such adjournment is taken.
SECTION 6. Fixing of record date. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or in order to make a determination of stockholders for any other purpose, the Board shall fix in advance a date as the record date for any such determination of stockholders. Such date in any case shall be not more than 60 days and, in case of a meeting of stockholders, not less than 10 days prior to, the date on which the particular action requiring such determination of stockholders is to be taken. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this Section 5, such determination shall also apply to any adjournment of such meeting unless the Board, at its discretion, fixes a new record date for the adjourned meeting.
SECTION 7. Voting lists.
(a) At least 10 days before each meeting of the stockholders, the officer or agent having charge of the stock transfer books for shares of the Company shall make a complete list of the stockholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order with the address and the number of shares held by each. This list of stockholders shall be open to inspection by any stockholder, for any lawful purpose germane to such meeting, at any time during usual business hours for a period of 10 days prior to such meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder during the entire time of the meeting.
The original stock transfer book shall constitute prima facie evidence as to who are the stockholders entitled to examine such list or transfer books or to vote at any meeting of stockholders.
(b) The Company may require any stockholder making a request for inspection of the list of stockholders entitled to vote at a meeting to provide a written representation as to the purpose for such request in order that the Company may determine whether such purpose is lawful and germane to such meeting. Such written representation shall also state that the list of stockholders shall not be used for any purpose other than the purpose set forth therein.
(c) No stockholder who inspects the Company's list of stockholders pursuant to this Section 7 or otherwise shall have the right to make copies or prepare extracts of such list (unless and only to the extent that the Company is required by applicable law to allow the making of such copies or the preparation of such extracts).
SECTION 8. Quorum. A majority of the outstanding shares of the Company entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. If less than a majority of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without notice other than announcement at the meeting. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted that might have been transacted at the meeting as originally notified. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum.
SECTION 9. Proxies. At all meetings of stockholders, a stockholder may vote by proxy in accordance with Section 212 of the Delaware General Corporation Law.
SECTION 10. Voting. The vote upon any question brought before a meeting of the stockholders may be a voice vote, unless the holders of a majority of the outstanding shares of all classes of stock entitled to vote thereon present in person or by proxy at such meeting shall otherwise determine. When a quorum is present at any meeting, the vote of the holders of a majority of the stock that has voting power present in person or represented by proxy (for this purpose, shares abstaining and "broker non-votes" shall be deemed to be present at such meeting) shall decide any question properly brought before such meeting, unless the question is the election of directors or one upon which, under applicable law, the Certificate of Incorporation, a certificate of designation of any series of preferred stock or these By-laws a different vote (including the manner of calculating such vote) is required, in which case such provision shall govern and control the decision of such question.
SECTION 11. Voting of shares in the name of two or more persons. When share ownership stands in the name of two or more persons, in the absence of written directions to the Company to the contrary from all of such owners, at any meeting of the stockholders of the Company any one or more of such stockholders may cast, in
person or by proxy, all votes to which such ownership is entitled. If an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such shares and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree.
SECTION 12. Voting of shares by certain holders.
(a) Shares standing in the name of a corporation may be voted by any officer, agent or proxy as the Bylaws of such corporation may prescribe or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian or conservator may be voted by him or her, either in person or by proxy, without a transfer of such shares into his or her name. Shares standing in the name of a trustee may be voted by him or her, either in person or by proxy, but no trustee shall be entitled to vote shares held by him or her without a transfer of such shares into his or her name. Shares standing in the name of a receiver may be voted by such receiver without the transfer of such shares into his or her name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed.
(b) Treasury shares of the Company's stock held by the Company shall not be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting.
SECTION 13. Nominations.
(a) No nominations for Directors except those made by the Board shall be voted upon at the annual meeting other than nominations made by any stockholder entitled to vote in the election of Directors who gives written notice of such stockholder's intent to make such nomination or nominations, either by personal delivery or by United States mail, postage prepaid, to the secretary of the Company:
(1) with respect to an election to be held at an annual meeting of stockholders, not less than 60 days nor more than 90 days in advance of the anniversary of the date of the notice of meeting mailed to stockholders in connection with the previous year's annual meeting of stockholders; and
(2) with respect to an election to be held at a special meeting of stockholders for the election of Directors, not later than the close of business on the seventh day following the day on which notice of such meeting is first given to stockholders.
(b) Each such notice of a stockholder's intent to make such nomination or nominations shall set forth:
(1) the name and address of the stockholder who intends to make the nomination or nominations and of the person or persons to be nominated;
(2) a representation that the stockholder is a holder of record of stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, and a statement of the number of shares owned by such stockholder, beneficially and of record;
(3) a description of any arrangement or understanding (written or verbal, express or implied) (i) between such stockholder and each nominee, (ii) between such stockholder and any other person or persons (such notice to include the names of such other person or persons) and (iii) to the extent known by such stockholder, between each nominee and any other person or persons (such notice to include the names of such other person or persons), pursuant to which the nomination or nominations is or are to be made by the stockholder or relating to such nomination (for purposes of this Section 13 the term "stockholder" shall be deemed to include any person on whose behalf the stockholder is acting);
(4) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated or intended to be nominated by the board of Directors;
(5) the written consent of each nominee to serve as a Director of the Company if elected; and
(6) the written certification of each nominee (with other
documents or information supporting such certification) that
the nominee is qualified to be a Director of the Company
pursuant to the qualification requirements of Article III,
Section 12 of these Bylaws.
The presiding officer of any meeting of the stockholders may refuse to acknowledge the nomination of any person if not made in compliance with these Bylaws. Ballots bearing the names of all the persons so nominated by the Board and by stockholders shall be provided for use at the annual meeting.
(c) No stockholder nomination for director shall be acknowledged at a meeting of stockholders unless the stockholder who gave written notice of his or her intent to make such nomination is present in person or by proxy at such meeting and makes the nomination.
SECTION 14. New business.
(a) The Board or any stockholder may make a proposal to be acted upon at an annual meeting of stockholders, provided that any such proposal by a stockholder is made in writing and delivered either by personal delivery or by United States mail, postage prepaid, to the secretary of the Company not less than 60 days nor more than 90 days in advance of the anniversary of the date of the notice of meeting mailed to stockholders in connection with the previous year's annual meeting of stockholders.
Each such stockholder proposal must set forth:
(1) the name and address of the stockholder making the proposal;
(2) a representation that the stockholder is a holder of record of stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to move such proposal;
(3) a brief description of the proposal to be made; and
(4) a description of any material interest (other than proportionally as a stockholder) of such stockholder in such proposal.
(b) Any such proposal may be deemed out of order and need not be discussed, considered, acted or voted upon or laid over for action at any meeting of stockholders if the Chief Executive Officer (or such other officer of the Company who shall preside at the relevant meeting of stockholders) determines that such proposal was not delivered in compliance with these Bylaws or that such proposal deals or relates to:
(1) any action or matter that, if taken or effectuated by the Company, would be in violation of, or contrary to, any applicable law or regulation or would result in a breach or violation by the Company of any contractual obligation;
(2) any action or matter that is impossible or beyond the Company's power to take or effectuate;
(3) any action or matter that is not a proper subject for action by the stockholders of the Company;
(4) any action or matter involving or relating to the conduct of the ordinary business of the Company;
(5) any action or matter that is substantially duplicative of, or counter to, any business or proposal that is to be considered at such meeting of stockholders;
(6) any action or matter that has been rendered moot; or
(7) the redress of a personal claim or grievance against the Company or any other person or entity, or any action or matter that is designated to result in a benefit to the stockholder or to further a personal interest, which benefit or interest is not shared with the other stockholders of the Company at large.
(c) No more than two proposals from any stockholder or group of stockholders acting as such may be discussed, considered, acted or voted upon or laid over for action at any annual or other meeting of stockholders.
(d) No proposal from a stockholder shall be discussed, considered, acted or voted upon or laid over for action at an annual or other meeting of stockholders unless such stockholder is present in person or by proxy at such annual or other meeting of stockholders.
(e) Proposals to be acted upon at a special meeting of the stockholders may only be made by the Board or by the person calling such meeting pursuant to Section 3 of this Article II.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. General powers. The business and affairs of the Company shall be under the direction of its Board of Directors which may exercise all such powers of the Company and do all such lawful acts and things as are not by law or by the Certificate of Incorporation directed or required to be exercised or done by the stockholders. The Board shall annually elect a Chairman of the Board (who shall not be an officer of the Company, unless the Board determines otherwise) and a Chief Executive Officer and a President (each of whom shall be officers of the Company) from among its members. The Board shall designate the Chairman of the Board and, in his or her absence, the Chief Executive Officer and, in his or her absence, the President to preside at its meetings in such manner as shall be determined by the Board. Any number of such positions may be held by the same person.
SECTION 2. Number and term.
(a) The Board of Directors shall consist of not less than seven nor more than 24 members, such number of Directors to be determined from time to time by resolution adopted by a vote of a majority of the Directors then in office.
(b) Except as may be otherwise provided in the Certificate of Incorporation or a certificate of designation with respect to any series of preferred stock, the Board shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years
and until their successors are elected and qualified. One class shall be elected by ballot at each annual meeting of the stockholders.
(c) Anything to the contrary in these Bylaws or any resolution adopted by the Board of Directors regarding the age to which Directors may serve notwithstanding, a Director who was or became a Director upon the merger of Anchor Bancorp, Inc. with the Company (or a subsidiary thereof) shall be eligible to serve as a Director until the annual meeting of stockholders next to occur after his or her 75th birthday (or any subsequent birthday specified in the Certificate of Incorporation, these Bylaws or such a resolution).
SECTION 3. Regular meetings. Regular meetings of the Board of Directors may be held at such times and places as the Board shall from time to time determine and no further notice shall be required to be given. By action of the Board at any meeting, or with the written consent of the majority of the Directors at the time in office, any regular meeting may be omitted.
SECTION 4. Special meetings. Special meetings may be called by the Chief Executive Officer or the President on at least 24 hours' notice to each Director, either personally or by facsimile telecommunication, mail or other appropriate means. Special meetings shall be called by the Chief Executive Officer, the President or the Secretary in like manner and on like notice within 20 days after receipt of the written request of one-third of the Directors then in office.
Any Director may waive notice of any meeting by a writing filed with the Secretary. The attendance of a Director at a meeting shall constitute a waiver of notice of such meeting, except where a Director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the Board need be specified in the notice or waiver of notice of such meeting.
The persons authorized to call special meetings of the Board may fix any place as the place for holding any special meeting of the Board.
SECTION 5. Quorum.
(a) A majority of the Directors then in office shall constitute a quorum for the transaction of business at any meeting of the Board, but if less than such majority is present at a meeting, a majority of the Directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the manner prescribed by Section 4 of this Article III.
(b) Members of the Board or of any committee may participate in any meeting of the Board or such committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other.
SECTION 6. Manner of acting.
(a) The act of the majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board, unless a greater number is prescribed by law, the Certificate of Incorporation or these Bylaws.
(b) In taking action, including, without limitation, action which may involve or relate to a change or potential change in the control of the Company or its subsidiaries, a Director shall be entitled to consider, without limitation, (i) both the long-term and the short-term interests of the Company and its stockholders and (ii) the effects that the Company's actions may have in the short-term or in the long-term upon any of the following:
(1) the prospects for potential growth, development, productivity and profitability of the Company and its subsidiaries;
(2) the Company's current employees;
(3) the Company's retired employees and other beneficiaries receiving or entitled to receive retirement, welfare or similar benefits from or pursuant to any plan sponsored, or agreement entered into, by the Company;
(4) the Company's customers and creditors; and
(5) the ability of the Company to provide, as a going concern, products, services, employment opportunities and employment benefits and otherwise to contribute to the communities in which it does business.
Nothing in this paragraph shall create any duties owed by any Director to any person or entity to consider or afford any particular weight to any of the foregoing or abrogate any duty of the Directors, whether statutory or recognized by common law or court decisions.
SECTION 7. Action without a meeting. Any action required or permitted to be taken by the Board or any committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all the members of the Board or of such committee.
SECTION 8. Resignation. Any Director may resign from the Board or any committee at any time by sending a written notice of such resignation to the Company addressed to the Chairman of the Board, the Chief Executive Officer or the President. Unless otherwise specified, such resignations shall take effect upon receipt.
SECTION 9. Vacancies. Any vacancy occurring on the Board or any newly created position on the Board resulting from an increase in the number of Directors pursuant to Section 2 of this Article III shall be filled (a) by the affirmative vote of a majority of the Directors then in office, although less than a quorum, or (b) by the sole remaining Director if there is only one such Director, or (c) in the event (and only in
the event) of the failure of the directors or sole remaining Director so to act, by the stockholders at the next annual meeting of stockholders. Each Director so chosen shall hold office for the remainder of the full term expiring at the annual meeting of stockholders at which the term expires of the class of Directors to which he or she has been elected and until such Director's successor has been elected and has qualified. If the number of Directors is changed, any increase or decrease shall be apportioned among the three classes of Directors so as to make all classes as nearly equal in number as possible. Subject to the preceding sentence, the increase or decrease may be allocated to any class or classes the majority of the Directors then in office selects in its discretion. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director.
SECTION 10. Compensation. Directors, as such, may receive a stated salary for their services and/or a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for actual attendance at each regular or special meeting of the Board or any standing or special committee. No such salary or payment shall preclude any Director from serving the Company in any other capacity and receiving compensation for his or her services.
SECTION 11. Removal of Directors.
(a) At an annual meeting of stockholders or a special meeting of stockholders called expressly for that purpose, any Director may be removed for cause by a vote of the holders of 66 2/3 percent of the shares then entitled to vote at an election of Directors. Cause for removal shall be deemed to exist only if the Director whose removal is proposed has been convicted of a felony by a court of competent jurisdiction or has been adjudged by a court of competent jurisdiction to be liable for gross negligence or misconduct in the performance of such Director's duty to the Company and such adjudication is no longer subject to direct appeal.
(b) The Board, by resolution adopted by a vote of a majority of the Directors then in office, may remove any Director who has been removed by the appropriate federal banking agency.
SECTION 12. Qualifications of Directors. No person shall be qualified to be elected or appointed or to continue to serve as a Director of the Company if:
(a) he or she (1) is a director (including advisory or honorary director), senior executive officer or branch manager of, or (2) has an obligation, in the form of an agreement (express or implied) to act, with respect to management responsibilities, on behalf of, a Competing Institution;
(b) his or her service, taking into consideration the other Directors to serve concurrently with him or her, would cause any depository institution subsidiary of the Company to become potentially liable, pursuant to Section 5(e) of the Federal Deposit Insurance Act, with
respect to deposits ("cross-guaranty liability") of any depository institution that is not a subsidiary of the Company (the "cross-guaranty institution"), provided that if such person, together with the other actual or potential Directors who create such potential cross-guaranty liability, represent a majority of the Directors of the Company, this provision shall not apply if prior to the date that such persons would be up for election at a stockholder meeting or would otherwise be appointed, the holding company for the cross-guaranty institution has
(1) (A) filed and obtained effectiveness of a registration statement under the Securities Act of 1933 or a proxy statement under the Securities Exchange Act of 1934, as applicable, and (B) filed with the appropriate banking regulators applications or notices, as applicable, with respect to a proposal to acquire control of the Company and containing a proposed agreement (in form and substance customary for such agreements in the banking industry in the United States) to merge or otherwise combine with the holding company of such other institution, and
(2) provided to the Company an express, legally binding, written undertaking to cause such merger or combination to occur as promptly as practicable, subject to legally required approvals of the Board of Directors and stockholders of the Company as well as the satisfaction of other legally required conditions to consummation; or
(c) he or she (1) is under indictment for, or has ever been convicted of, a criminal offense involving dishonesty or breach of trust and the penalty for such offense could be imprisonment for more than one year, or (2) is a person against whom a banking agency has, within the past ten years, issued a cease and desist order for conduct involving dishonesty or breach of trust and that order is final and not subject to appeal, or (3) has been found either by a regulatory agency whose decision is final and not subject to appeal or by a court to have (i) breached a fiduciary duty involving personal profit or (ii) committed a willful violation of any law, rule or regulation governing banking, securities, commodities or insurance, or any final cease and desist order issued by a banking, securities, commodities or insurance regulatory agency.
For purposes of this Section 12, a "Competing Institution" means (1) (a) any "other depository institution or depository holding company" (other than the Company or an affiliate of the Company) described in Section 203 of the Depository Institution Management Interlocks Act, 12 U.S.C. Section 3202, or (b) one of the ten largest mortgage companies in the United States (based on assets or revenues as of the most recently completed calendar quarter) or (2) any affiliate
of a depository institution, depository holding company or other company described in clause (1)(a) or (1)(b).
Should any person fail to qualify to continue to serve as a Director under the qualifications set forth in this Section 12, such person shall immediately cease to be a Director of the Company and shall be deemed to have resigned. The Board of Directors of the Company shall resolve all disputes and ambiguities regarding interpretation and application of this Section 12.
ARTICLE IV
COMMITTEES OF THE BOARD
SECTION 1. Executive Committee. The standing committee of the Board
of Directors shall be an Executive Committee. The Executive Committee shall
consist of the Chairman, the Chief Executive Officer, the President, and the
chairman of each other standing committee of the Board established pursuant to
Section 2 of Article IV of the Bylaws. The Executive Committee shall have and
may exercise, between meetings of the Board of Directors, all the powers and
authority of the Board in the management of the business and affairs of the
Company, including without limitation, the power and authority to declare a
dividend, to authorize the issuance of stock, to adopt a certificate of
ownership and merger and to indemnify directors, and may authorize the seal of
the Company to be affixed to all papers which may require it, except that the
Executive Committee shall not have such power or authority to fill vacancies on
the Board or on any committee of the Board, including the Executive Committee.
SECTION 2. Other Committees. The Board may, by resolution passed by a majority of the entire Board, designate one or more other standing or other committees. The other standing committees of the Board shall be an Audit Committee, a Compensation Committee, a Community Reinvestment Act Committee, a Strategic Planning Committee, a Governance and Nominating Committee, and an Investment Committee. Each committee shall consist of one or more of the Directors of the Company as shall be designated by a majority of the whole Board and shall have such lawfully delegable powers and duties as the Board may confer. Each committee shall serve at the pleasure of the Board of Directors. Except as may otherwise be determined by the Board, the Chief Executive Officer will have the authority to recommend for the approval of the Board a chairman of each committee from among the members of such committee. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Except as otherwise provided by law, any committee, to the extent provided by resolution of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Company (including the power to take any action or exercise any authority granted to the Board under these Bylaws), and may authorize the seal of the Company to be affixed to all papers which may require it. Any committee or committees so designated by the Board shall have such name or names as may be determined from time to time by resolution adopted by the Board. Unless otherwise prescribed by the Board, a majority of the members of the committee shall constitute a quorum for the transaction of business, and
the act of a majority of the members present at a meeting at which there is a quorum shall be the act of such committee. Each committee may prescribe its own rules for calling and holding meetings and its method of procedure, subject to any rules prescribed by the Board, and shall keep a written record of all actions taken by it.
ARTICLE V
WAIVERS OF NOTICE
Whenever any notice is required to be given by law or under the provisions of the Certificate of Incorporation or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to such notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.
ARTICLE VI
OFFICERS
SECTION 1. Positions. The officers of the Company shall be a Chief Executive Officer, a President, a Secretary and a Treasurer, each of whom shall be elected by the Board. The Board may also elect one or more Vice Chairmen and/or Vice Presidents and such other officers as the business of the Company may require. The officers shall have such authority and perform such duties as the Board may from time to time authorize or determine. In the absence of action by the Board, the officers shall have such powers or duties as generally pertain to their respective offices. Any number of offices may be held by the same person.
SECTION 2. Election and term of office. The officers of the Company shall be elected by the Board. Each officer shall hold office until a successor shall have been duly elected and qualified or until the officer's death, resignation or removal in the manner provided in these Bylaws.
SECTION 3. Removal. Any officer may be removed by the Board whenever, in its judgment, the best interests of the Company will be served thereby, but such removal, other than for cause, shall be without prejudice to the contract rights, if any, of the person so removed.
SECTION 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or otherwise may be filled by the Board.
SECTION 5. Remuneration. The remuneration of officers shall be fixed from time to time by the Board.
SECTION 6. Duties of officers.
(a) Chief Executive Officer. The Chief Executive Officer of the Company shall be responsible for the active management, direction and supervision of the Company, its operations, securities and obligations, subject to the control of the Board, and shall have all the powers and perform all the duties incidental to such office. The Chief Executive Officer shall preside at all meetings of the stockholders. Unless otherwise determined by the Board, the Chief Executive Officer shall have the power to vote all shares of stock and other securities owned by the Company.
(b) President. The President shall be the Chief Operating Officer of the Company if so designated by the Board. The President shall also perform such other duties as may, from time to time, be assigned to him or her by the Board, or the Chief Executive Officer. In the absence or disability of the Chief Executive Officer, he or she shall perform the duties of and exercise the powers of the Chief Executive Officer.
(c) Secretary. The Secretary shall attend all meetings of the Board and the stockholders as he or she may be requested by the Board to attend, and record (or cause to be recorded) all votes and the minutes of all proceedings in books to be kept for that purpose, and shall perform like duties for the committees when required. He or she shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board, and shall perform such other duties as may be prescribed by the Board, the Chief Executive Officer, the President or such other officer under whose supervision he or she shall act. He or she shall keep in safe custody the seal of the Company and, when authorized by the Board, affix the seal to any instrument requiring it and, when so affixed, it shall be attested by his or her signature or by the signature of the Treasurer or any Assistant Secretary or Assistant Treasurer. He or she shall keep the minutes of such meetings, and shall have such powers and perform such duties as usually pertain to the office of Secretary. He or she shall also perform such other duties as may from time to time be assigned to him or her by the Board or the Chief Executive Officer.
(d) Treasurer. The Treasurer, subject to the approval of the Board and the Chief Executive Officer, shall have the management of the cash and securities of the Company and shall perform all acts incident to the position of Treasurer and such other duties as may from time to time be assigned to him or her by the Board or the Chief Executive Officer.
(e) Other Officers. All other officers shall have such powers and perform such duties as may be assigned to them by the Board or the Chief Executive Officer.
ARTICLE VII
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. Contracts. To the extent permitted by law, and except as otherwise prescribed by these Bylaws with respect to certificates for shares, the Board may authorize any officer, employee or agent of the Company to enter into any contract or loan, or execute and deliver any instrument in the name of and on behalf of the Company. Such authority may be general or confined to specific instances.
SECTION 2. Checks, Drafts, Etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Company shall be signed by one or more officers, employees or agents of the Company in such manner as shall from time to time be determined by the Board.
SECTION 3. Deposits. All funds of the Company not otherwise employed shall be deposited from time to time to the credit of the Company in any of its duly authorized depositories as the Board may select.
ARTICLE VIII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. Certificates for shares. Certificates representing shares of capital stock of the Company shall be in such form as shall be determined by the Board. Such certificates shall be signed by the Chairman, the President or by any other officer of the Company authorized by the Board, attested by the Secretary or an Assistant Secretary and may, but need not, bear the seal of the Company. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar other than the Company itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Company. All certificates surrendered to the Company for transfer shall be cancelled and no new certificates shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in case of a lost or destroyed certificate, a new certificate may be issued therefor upon such terms and indemnity to the Company as the Board may prescribe.
SECTION 2. Transfer of shares. Transfer of shares of capital stock of the Company shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record or by his or her legal representative, who shall furnish proper evidence of such authority, or by his or her authorized attorney by power of attorney duly executed and filed with the Company. Such transfer shall be made only on surrender for cancellation of the certificate for such shares and only upon compliance with provisions, if any, restricting the transfer of such shares.
SECTION 3. Registered stockholders. The person in whose name shares of capital stock stand on the books of the Company shall be deemed by the Company to be the owner of such shares for all purposes.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Company shall end on December 31 of each year.
ARTICLE X
DIVIDENDS AND RESERVE
SECTION 1. Dividends. Subject to applicable law and the terms of the Certificate of Incorporation and any certificate of designation with respect to a series of preferred shares, the Board may, from time to time, declare, and the Company may pay, dividends on its outstanding shares of capital stock. Such dividends may be paid in cash, in property, or in shares of the capital stock of the Company.
SECTION 2. Reserves. Before payment of any dividend, there may be set aside out of any funds of the Company available for dividends such sum or sums as the Board from time to time, in its absolute discretion, believes proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Company, or for such other purpose as the Board shall think conducive to the interest of the Company, and the Board may modify or abolish any such reserve in the manner in which it was created.
ARTICLE XI
CORPORATE SEAL
The Board of Directors shall adopt a corporate seal and use the same by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced.
ARTICLE XII
AMENDMENTS
These Bylaws may be amended or repealed from time to time by the affirmative vote of the holders of at least 66-2/3 percent of the total votes eligible to be cast at a meeting for the election of Directors at a meeting of stockholders held for such purpose, or by a resolution adopted by a majority of the Directors then in office.
Dated as of June 22, 2001