<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
LONG ISLAND BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3198508
- ---------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
201 OLD COUNTRY ROAD, MELVILLE, NEW YORK 11747-2724
- ---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(516) 547-2000
--------------
(Registrant's telephone number, including area code)
0-23526
-------
(Commission File Number)
______________
(Securities registered pursuant to Section 12(b) of the Act)
COMMON STOCK $.01 PAR VALUE
-----------------------------------------
(Securities registered pursuant to Section 12(g) of the Act)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. (X)
---
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.
(1) YES X NO
----- -----
The aggregate market value of voting stock held by non-affiliates of
the registrant as of October 31, 1996: Common Stock par value $.01 per
share, $671,696,140.
This figure is based on the closing price on the Nasdaq National
Market for a share of the registrant's common stock on October 31, 1996,
which was $29.19 as reported in the Wall Street Journal on November 1, 1996.
The number of shares of the registrant's Common Stock outstanding as of
October 31, 1996 was 24,626,961 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on February 18, 1997 and the Annual Report to
Stockholders for fiscal 1996 are incorporated herein by reference - Parts II
and III.
<PAGE>
CROSS REFERENCE INDEX
PART I
PAGE
----
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 43
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 44
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 44
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . 44
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . 44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . 45
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . . . 45
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 45
Item 12. Security Ownership of Certain Beneficial Owners and Management. . 45
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . 45
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
2
<PAGE>
PART 1
ITEM 1. BUSINESS
General
Long Island Bancorp, Inc. ("Holding Company") was incorporated in the State
of Delaware in December 1993 at the direction of the Board of Directors of
The Long Island Savings Bank, FSB ("Bank") for the purpose of becoming a
holding company to own all of the outstanding capital stock of the Bank upon
its conversion from a mutual to a stock form of organization. The
mutual-to-stock conversion was completed on April 14, 1994. In connection
with the conversion the Holding Company issued 26,040,214 shares of common
stock ("Common Stock") at a price of $11.50 per share to the Bank's
depositors and its tax-qualified employee stock benefit plans, and an
additional 776,250 shares to the Bank's Management Recognition and Retention
Plans ("MRP's"). The Holding Company realized net proceeds of $264.2 million
from the sale of its Common Stock and utilized approximately $164.0 million
to purchase 100% of the issued and outstanding shares of the Bank's common
stock.
The primary business of the Holding Company is the operation of its wholly
owned subsidiary, the Bank. In addition to directing, planning and
coordinating the business activities of the Bank, the Holding Company invests
its funds primarily in U.S. government and federal agency securities,
investment grade preferred stock and federal funds. In the future, the
Holding Company may acquire or organize other operating subsidiaries,
including other financial institutions.
The information presented in the financial statements and in this Form 10-K
reflect the financial condition and results of operations of the Holding
Company and the Bank (collectively "Company"), on a consolidated basis. At
September 30, 1996, the Company had total assets of $5.4 billion.
The Bank's principal business has been and continues to be attracting retail
deposits from the general public and investing those deposits, together with
funds generated from operations, primarily in one-to-four family, owner
occupied residential mortgage loans. In addition, from time to time depending
on market conditions, the Bank will invest in mortgage-backed and
asset-backed securities to supplement its lending portfolio. The Bank also
invests, to a lesser extent, in multi-family residential mortgage loans,
commercial loans, consumer loans and other marketable securities. Revenues
are derived principally from interest on real estate and other loans,
mortgage-backed and other debt securities, and dividends on investment
securities. Primary sources of funds are deposits, borrowings under
reverse-repurchase agreements and principal and interest payments on loans
and mortgage-backed securities. Additionally, the Bank issued a funding note
("Funding note") in fiscal 1996 which was collateralized by a pool of
adjustable rate residential mortgage loans. See Note 14 of Notes to
Consolidated Financial Statements.
Market Area and Competition
The Bank historically has operated as a consumer-oriented community
institution primarily engaged in attracting deposits from the general public
and investing such deposits and other available funds in mortgage loans
secured by one-to-four family dwellings and mortgage-backed securities. At
September 30, 1996 the Bank conducted its business through 36 full service
banking offices, 6 of which are located in the New York City borough of
Queens, 11 in Nassau County and 19 in Suffolk County, New York. It also
operates 25 regional lending centers, 7 of which are located in Virginia; 5
in Pennsylvania; 4 in New York; 2 in each of Georgia, New Jersey and
Maryland; and 1 in each of Connecticut, Delaware and North Carolina. Based
on data published by the Federal Deposit Insurance Corporation ("FDIC") as of
June 1995 (the latest available data) the Bank is the fourth largest
institution in terms of deposits in Suffolk County with a 7.2% market share.
In Queens, the Bank is ranked sixth with a 3.5% market share and in Nassau
County, the Bank is ranked tenth with a 3.4% market share. Management
considers the Bank's reputation and quality customer service as its major
competitive advantages in attracting and retaining customers in its market
areas. In this respect, the Bank has performed extensive market research
studies which are designed to identify the specific products and services
required to serve each local community. In order to better serve its
customers, the Bank has installed automated teller machines ("ATMs") in a
majority of its offices and is currently in the process of enhancing its
computer technologies to facilitate, among other things, the integration of
the Bank's efforts to deliver insurance and securities products, traditional
deposit products and all lending products.
3
<PAGE>
When ranked against all Metropolitan Statistical Areas in the nation, based
on FDIC published data as of June 1995, the Queens, Nassau, and Suffolk
market area served by the Bank is the fifth largest banking market in the
United States based on combined bank deposits. This market ranks among the
top 5% in per capita income and has the third highest population density.
The high population density in these areas allows the Bank to serve a large
number of customers with an efficient network of branches. Management
believes that its branch offices generally are located in communities that
can be characterized as stable, consisting of residential neighborhoods of
predominantly one-to-four family residences.
During the last three years, unemployment and real estate values have been
relatively stable in New York, New Jersey and Connecticut ("New York
metropolitan area") which has had a corresponding impact on the Bank's asset
quality. In order to mitigate the Bank's potential exposure to a
concentration of credit risk in the New York metropolitan area, the Bank
expanded its lending operations into Delaware, Georgia, Maryland,
Pennsylvania and Virginia in fiscal 1995. In fiscal 1996, the Bank expanded
into North Carolina as well. The following table sets forth the geographic
distribution of the Company's real estate loan portfolio, excluding home
equity loans, at September 30:
State 1996 1995 1994
- ------------------------------- ------------ ------------ ------------
(IN THOUSANDS)
Connecticut ................... $ 135,704 $ 51,679 $ 26,425
Georgia........................ 120,070 77,820 ---
Maryland....................... 226,599 65,643 30
New Jersey..................... 167,406 93,165 69,402
New York....................... 1,370,521 1,349,780 1,415,869
Pennsylvania................... 65,184 19,968 1,131
Virginia....................... 180,732 80,477 7
Other states................... 693,984 200,381 8,035
------------ ------------ ------------
Total real estate loans...... $ 2,960,200 $ 1,938,913 $ 1,520,899
------------ ------------ ------------
------------ ------------ ------------
The New York metropolitan area has a large number of financial institutions,
many of which are significantly larger and have greater financial resources
than the Bank, and all of which are competitors of the Bank to varying
degrees. The Bank's competition for loans comes principally from savings and
loan associations, savings banks, commercial banks, mortgage banking
companies and insurance companies. The Bank's most direct competition for
deposits has historically come from savings and loan associations, savings
banks and commercial banks. In addition, the Bank faces increasing
competition for deposits from non-bank institutions such as brokerage firms
and insurance companies that offer short-term money market funds, corporate
and government securities funds, mutual funds and annuities.
Lending Activities
LOAN PORTFOLIO COMPOSITION. Gross loans receivable, including loans held for
sale, comprised 58.36% of total assets at September 30, 1996. The Company's
real estate loan portfolio consists primarily of conventional first mortgage
loans secured by owner occupied one-to-four family residences and
co-operative apartment loans and, to a lesser extent, multi-family
residences, second mortgage loans, commercial real estate and construction
and land loans. At September 30, 1996, the Company had total real estate
loans outstanding on one-to-four family properties of $2.9 billion, or 91.57%
of the Company's total gross loans receivable, including $114.6 million, or
3.66%, of co-operative apartment loans, $18.6 million, or 0.59%, of home
equity loans and $5.2 million, or 0.17%, of second mortgages. At that date,
multi-family residential mortgage loans totalled $34.9 million, or 1.12% of
total gross loans receivable. The remainder of the Company's real estate
loans, which totalled $77.3 million, or 2.46% of total gross loans receivable
at September 30, 1996, included $69.6 million of commercial real estate
loans, or 2.22% of total gross loans receivable, and $7.7 million of
construction loans and land loans, or 0.24% of total gross loans receivable.
These amounts include $57.9 million of real estate loans held for sale in the
secondary market. Commercial and other loans, which consisted principally of
secured and unsecured lines of credit and other consumer loans, totalled
$151.7 million, or 4.85% of total gross loans receivable at September 30,
1996. These amounts include $0.1 million of student loans held for sale in
the secondary market.
4
<PAGE>
The following table sets forth at September 30, 1996, the amount of all loans
due after September 30, 1997 and whether such loans have fixed or adjustable
rates.
DUE AFTER SEPTEMBER 30, 1997
-------------------------------------
ADJUSTABLE FIXED
RATE RATE TOTAL
----------- ----------- -----------
(IN THOUSANDS)
Real estate loans:
One-to-four family (1)................. $ 2,357,070 $ 236,713 $ 2,593,783
Co-operative apartments (1)............ 86,191 28,369 114,560
Home equity............................ 7,274 --- 7,274
Multi-family........................... 21,686 12,549 34,235
Commercial real estate................. 51,215 15,233 66,448
Second mortgages....................... 4,978 164 5,142
Construction loans..................... --- --- ---
Land loans............................. 2,049 314 2,363
----------- ----------- -----------
Total real estate loans.............. 2,530,463 293,342 2,823,805
Commercial and other loans (2):
Commercial loans....................... 4,208 2,588 6,796
Property improvement................... --- 11 11
Loans on deposit accounts.............. --- 1,851 1,851
Lines of credit........................ --- --- ---
Other consumer loans (3)............... 11,487 78,896 90,383
----------- ----------- -----------
Total commercial and other loans..... 15,695 83,346 99,041
----------- ----------- -----------
Total gross loans........................ $ 2,546,158 $ 376,688 $ 2,922,846
----------- ----------- -----------
----------- ----------- -----------
(1) Excludes $57.9 million of loans held for sale.
(2) Excludes lines of credit that are payable on demand and are therefore
considered to be due within one year.
(3) Excludes student loans.
5
<PAGE>
The following table sets forth the composition of the Company's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ----------------- ----------------- ----------------- ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans (1):
One-to-four family..............$2,728,199 87.15% $1,687,952 80.94% $1,236,778 73.35% $1,453,790 74.26% $1,920,781 67.31%
Home equity..................... 18,564 0.59 18,115 0.87 21,225 1.26 27,381 1.40 364,988 12.79
Co-operative apartment.......... 114,609 3.66 128,423 6.16 144,814 8.59 157,659 8.05 179,262 6.28
Multi-family.................... 34,883 1.12 35,708 1.71 46,053 2.73 53,846 2.75 63,194 2.21
Commercial real estate.......... 69,625 2.22 72,393 3.47 76,295 4.52 80,047 4.09 94,952 3.33
Second mortgages................ 5,154 0.17 6,563 0.31 7,894 0.47 10,565 0.54 13,971 0.49
Construction.................... 4,509 0.14 3,070 0.15 2,392 0.14 8,153 0.42 10,302 0.36
Land............................ 3,221 0.10 4,804 0.23 6,673 0.40 9,535 0.49 9,477 0.33
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total real estate loans........... 2,978,764 95.15 1,957,028 93.84 1,542,124 91.46 1,800,976 92.00 2,656,927 93.10
Commercial and other loans:
Commercial loans................ 8,206 0.26 9,330 0.45 12,456 0.74 17,013 0.87 36,079 1.27
Property improvement............ 9,028 0.29 11,131 0.53 13,335 0.79 17,104 0.87 21,953 0.77
Student (2)..................... 7,084 0.23 3,324 0.16 15,429 0.92 12,533 0.64 24,611 0.86
Loans on deposit accounts....... 2,475 0.08 2,649 0.13 2,924 0.17 3,393 0.17 8,031 0.28
Lines of credit................. 55,292 1.77 59,746 2.86 63,102 3.74 67,258 3.44 67,560 2.37
Other consumer loans............ 69,575 2.22 42,284 2.03 36,808 2.18 39,376 2.01 38,550 1.35
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total commercial and other loans.. 151,660 4.85 128,464 6.16 144,054 8.54 156,677 8.00 196,784 6.90
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total loans receivable, gross..... 3,130,424 100.00% 2,085,492 100.00% 1,686,178 100.00% 1,957,653 100.00% 2,853,711 100.00%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Purchase accounting discounts,
net........................... (2,727) (4,151) (5,994) (8,167) (21,794)
Unearned premiums, discounts
and deferred loan fees, net... 5,021 (2,870) (5,667) (6,687) (5,613)
---------- ---------- ---------- ---------- ----------
Loans receivable, net............. 3,132,718 2,078,471 1,674,517 1,942,799 2,826,304
Allowance for possible loan
losses ....................... (33,912) (34,358) (35,713) (33,951) (32,157)
Allowance for market valuation
for loans held for sale in the
secondary market.............. --- --- (28) --- ---
---------- ---------- ---------- ---------- ----------
Total loans receivable, net.......$3,098,806 $2,044,113 $1,638,776 $1,908,848 $2,794,147
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
(1) These amounts include $57.9 million, $49.3 million, $8.0 million, $38.4
million and $37.9 million of loans held for sale in the secondary market at
September 30, 1996, 1995, 1994, 1993 and 1992, respectively. At September
30, 1993, this amount includes $110.0 million of non-performing real estate
loans included in the bulk sale of certain loans and real estate owned
("Bulk Sale") of which $102.6 million were one-to-four family loans, $3.8
million were commercial real estate loans, $3.5 million were co-operative
apartment loans and $0.1 million were land loans.
(2) Includes $0.1 million and $30,000 of loans held for sale in the secondary
market at September 30, 1996 and 1995 respectively.
6
<PAGE>
The following table shows the contractual maturity of the Company's loan
portfolio at September 30, 1996. The table does not include prepayments or
scheduled principal amortization.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
---------------------------------------------------------------------------------------------
REAL ESTATE LOANS
---------------------------------------------------------------------------------------------
ONE TO COOP COMMERCIAL
FOUR HOME APT. SECOND MULTI- REAL LAND
FAMILY (1) EQUITY LOANS (1) MORTGAGES FAMILY ESTATE CONSTRUCTION LOANS
----------- -------- --------- ------- -------- -------- ------------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year................... $ 76,604 $ 11,290 $ --- $ 12 $ 648 $ 3,177 $ 4,509 $ 858
After one year:
One to three years.............. 48,926 1,172 117 193 1,753 11,389 --- 2,049
Three to five years............. 7,121 1,551 776 140 4,746 13,623 --- 314
Five to 10 years................ 109,040 4,551 2,701 2,924 13,906 24,315 --- ---
Ten to 20 years................. 388,756 --- 61,915 1,747 9,391 14,896 --- ---
Over 20 years................... 2,039,940 --- 49,051 138 4,439 2,225 --- ---
----------- -------- --------- ------- -------- -------- ------------ -------
Total due after one year...... 2,593,783 7,274 114,560 5,142 34,235 66,448 --- 2,363
----------- -------- --------- ------- -------- -------- ------------ -------
Total amounts due............. $ 2,670,387 $ 18,564 $ 114,560 $ 5,154 $ 34,883 $ 69,625 $ 4,509 $ 3,221
----------- -------- --------- ------- -------- -------- ------------ -------
----------- -------- --------- ------- -------- -------- ------------ -------
Purchase accounting
discounts, net..................
Unearned discounts, premiums
and deferred loan fees, net.....
Allowance for possible loan
losses..........................
Loans receivable, net.............
<CAPTION>
AT SEPTEMBER 30, 1996
------------------------------------
REAL ESTATE LOANS
------------------------------------
TOTAL
COMMERCIAL OTHER LOANS
LOANS LOANS (2) RECEIVABLE
---------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Amounts due:
Within one year................... $1,410 $ 44,125 $ 142,633
After one year:
One to three years.............. 4,908 23,789 94,296
Three to five years............. 636 24,090 52,997
Five to 10 years................ --- 25,600 183,037
Ten to 20 years................. --- 3,478 480,183
Over 20 years................... 1,252 15,288 2,112,333
---------- --------- -----------
Total due after one year...... 6,796 92,245 2,922,846
---------- --------- -----------
Total amounts due............. $8,206 $ 136,370 3,065,479
---------- ---------
---------- ---------
Purchase accounting
discounts, net.................. (2,727)
Unearned discounts, premiums
and deferred loan fees, net..... 5,021
Allowance for possible loan
losses.......................... (33,912)
-----------
Loans receivable, net............. $ 3,033,861
-----------
-----------
</TABLE>
(1) Excludes $57.9 million of real estate loans held for sale.
(2) Excludes $7.1 million of student loans held for investment and sale.
7
<PAGE>
The following table sets forth the Company's loan originations and loan
purchases, sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans, net at beginning of period: $ 1,957,028 $ 1,542,124 $ 1,800,976
Real estate loans originated and purchased:
One-to-four family (1).............................. 1,395,388 640,164 400,712
Co-operative apartment.............................. 3,072 3,143 17,697
Multi-family........................................ 10,106 358 368
Commercial real estate.............................. 9,915 9,528 7,670
Construction........................................ 7,218 2,692 2,605
Land................................................ --- 1,000 232
Purchases (3)....................................... 949,437 397,776 5,795
------------ ------------ ------------
Total real estate loans originated and purchased.. 2,375,136 1,054,661 435,079
Transfers to real estate owned ....................... (10,001) (10,312) (12,699)
Write-offs............................................ (3,869) (4,608) (5,852)
Principal repayments.................................. (331,680) (202,509) (256,391)
Sales of loans........................................ (649,064) (278,649) (418,989)
Securitized loans..................................... (358,786) (143,679) ---
------------ ------------ ------------
At end of period (2).................................. $ 2,978,764 $ 1,957,028 $ 1,542,124
------------ ------------ ------------
------------ ------------ ------------
Commercial and other loans, net:
At beginning of period................................ $ 128,464 $ 144,054 $ 156,677
Commercial and other loans originated................. 89,827 63,540 62,821
Write-offs............................................ (4,330) (5,015) (5,859)
Principal repayments.................................. (59,416) (53,596) (64,887)
Commercial and other loans sold ...................... (2,885) (20,519) (4,698)
------------ ------------ ------------
At end of period...................................... $ 151,660 $ 128,464 $ 144,054
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
(1) Includes home equity loan advances for the fiscal years ended September 30,
1996, 1995, and 1994 in the amounts of $6.6 million, $2.2 million and $2.6
million, respectively.
(2) Includes $57.9 million, $49.3 million, and $8.0 million of loans held for
sale in the secondary market at September 30, 1996, 1995 and 1994,
respectively.
(3) Composed predominantly of one-to-four family loans.
ONE-TO-FOUR FAMILY MORTGAGE LENDING. The Bank offers both fixed rate and
adjustable rate mortgage ("ARM") loans primarily secured by one-to-four
family, owner occupied residences. Prior to 1995, the majority of such loans
were secured by property located in Queens, Nassau and Suffolk counties.
During fiscal 1995, the Bank acquired the lending operations of Entrust
Financial Corporation ("Entrust") and Developer's Mortgage Corporation
("Developer's"). These acquisitions enabled the Bank to expand its retail
production offices into the states of Pennsylvania, Delaware, Maryland,
Virginia and Georgia, while continuing to originate loans through its New
York, New Jersey and Connecticut offices. During fiscal 1996, the Bank
continued to expand its operations outside New York through the acquisition
of two mortgage origination offices located in Pennsylvania and North
Carolina from Fleet Mortgage Corporation and the entire loan production
operations of First Home Mortgage of Virginia, Inc. ("First Home"). The
First Home acquisition added five mortgage origination offices in Virginia.
Loan originations are generally obtained from existing or past customers,
members of local communities, mortgage bankers, mortgage brokers, real estate
agents and attorney referrals. The Bank also operates a national
correspondent lending program to purchase, from mortgage bankers, loans
secured by owner occupied one-to-four family residences for geographic
diversity. The program is designed to expand the Bank's mortgage portfolio
and reduce the risks associated with geographic concentrations. The Bank
also accepts loan application information through its telemarketing
operations. Generally, the Bank's underwriting guidelines conform to Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") guidelines.
8
<PAGE>
The Bank generally originates one-to-four family residential mortgage loans
in amounts up to 80% of the lower of the appraised value or selling price of
the property securing the loan. One-to-four family mortgage loans are also
originated with loan-to-value ratios of up to 100% of the appraised value of
the mortgaged property; however, private mortgage insurance is required
whenever loan-to-value ratios exceed 80% of the appraised value of the
property securing the loan. The majority of the loans originated conform to
FNMA and FHLMC loan limits for one-to-four family residences, however, loans
may be originated for amounts up to $1.5 million.
During the 1986 to 1989 period, the Bank originated a significant number of
one-to-four family mortgage loans without verification of the borrower's
financial condition or employer verification of the borrower's level of
income if the borrower's financial condition and stated income was considered
reasonable for the employment position held ("low documentation loans"). The
Bank has experienced higher delinquency and default rates on such loans, as
compared to fully underwritten one-to-four family loans, and in recognition
thereof, discontinued the origination of low documentation loans in 1990.
From time to time, on a selective basis, the Bank originates loans that
involve limited verification of the borrower's level of income or financial
condition ("limited documentation loans"). All such limited documentation
loans are intended to conform to secondary market investor guidelines.
The Bank offers fixed rate one-to-four family residential, condominium and
co-operative unit loans up to the FNMA and FHLMC limits. In addition, fixed
rate loans in principal amounts above the FNMA and FHLMC limits are offered
in amounts conforming to the limits permitted by various investors to whom
the loans are intended to be sold. Interest rates charged on fixed rate
loans are competitively priced based on market conditions and the Bank's cost
of funds. The terms of these loans are a maximum of 30 years. Origination
fees are generally charged; however, the Bank offers loans with higher or
lower fees depending on the interest rates to be charged.
The Bank originates most fixed rate loans for immediate sale to FNMA, FHLMC
or other investors. There is approximately a one month delay between funding
and the sale of the loans. The total real estate loans held for sale
aggregated $57.9 million at September 30, 1996. The Bank arranges for the
sale of such loans at the time the loan application is received through best
effort and mandatory delivery commitments and, on a regular basis, determines
whether it is best to retain or sell the servicing rights. For the year
ended September 30, 1996, the Bank sold real estate loans totaling $649.1
million, 80.1% of which were sold on a servicing released basis in order to
take advantage of market prices for loan servicing.
The Bank offers a variety of ARM loans with maximum loan terms of up to 40
years, except for co-operative apartment loans which have a maximum loan term
of 30 years. These loans adjust periodically and are indexed to a specific
Treasury Bill rate, plus a margin. These loans typically carry an initial
interest rate below the fully-indexed rate for the loan. The Bank qualifies
borrowers at the second year rate with a minimum qualification interest rate
equal to the then applicable FNMA standard on one year ARM loans. All other
ARM loans are underwritten at the initial start rate. The initial discounted
rate is determined by the Bank in accordance with market and competitive
factors. Generally, the ARM loans adjust by a maximum of 2% for each rate
adjustment period with a lifetime cap of 5% - 6% over the initial rate.
Accordingly, if interest rates and the resulting cost of funds increase in a
rapidly increasing interest rate environment, it is possible for the interest
rate increase to exceed the cap levels on these loans and negatively impact
net interest income. Origination fees and points of up to 3% may be charged
for one-to-four family ARM loans. ARM loans generally pose a risk that as
interest rates rise, the amount of a borrower's monthly loan payment also
rises, thereby increasing the potential for delinquencies and loan losses.
However, this potential risk is lessened by the Bank's policy of originating
ARM loans with annual and lifetime interest rate caps that limits the
increase of a borrower's monthly payment.
The Bank has correspondent loan agreements with select mortgage bankers who
originate loans throughout the United States. The Bank purchased 2,812 loans
amounting to $776.3 million of residential one-to-four family conforming and
jumbo loans through its correspondent mortgage originators in the fiscal year
ended September 30, 1996. Such loans are underwritten to the Bank's
standards. These loans are primarily from outside the Bank's core franchise
area. The strategy of utilizing correspondent mortgage originators is to
develop and maintain multiple distribution channels, to increase geographic
diversity and to improve the stability of interest income.
SECOND MORTGAGE LOANS. As of September 30, 1996, the balance of such loans
is predominantly one-to-four family loans, and was $5.2 million, or 0.17% of
total gross loans. This category has been steadily decreasing since September
30, 1992, when balances of such loans were $14.0 million or 0.49% of total
loans.
HOME EQUITY LOANS. Home equity lines of credit are included in the Bank's
portfolio of one-to-four family loans. These loans are offered as prime rate
indexed loans on which interest only is due for an initial term of ten years
and thereafter
9
<PAGE>
principal and interest payments sufficient to liquidate the loan are required
for the remaining term, not to exceed 15 years. These loans are made on
one-to-four family residential and condominium units, generally
owner-occupied and subject to a 75% combined loan-to-value ratio including
prior liens or up to 90% of private mortgage insurance is obtained. They are
granted in amounts from $50,000 to $300,000 with an aggregate maximum of
$1,000,000. The underwriting standards for home equity loans are generally
the same as those for one-to-four family mortgages. In fiscal 1993, the
Company sold $303.9 million of home equity loans. The remaining balance of
home equity loans at September 30, 1996 was $18.6 million, or 0.59% of total
gross loans.
MULTI-FAMILY LENDING. The Bank originates multi-family loans with
contractual terms of up to 25 years with interim rate adjustments. These
loans are generally secured by apartment or co-operative buildings and
mixed-use (business and residential) properties, located in the Bank's
primary market area and are originated in amounts of up to 75% of the
appraised value of the property. In making such loans, the Bank bases its
underwriting decision primarily on type and location of the property, the net
income generated by the real estate to support the debt service, the
financial resources of the borrower, the borrower's experience in owning or
managing similar property, the marketability of the property and the credit
history of the borrowing entity. The Bank generally requires a debt service
coverage ratio of at least 1.15x and may require personal guarantees from
borrowers depending upon the loan-to-value ratio for the loan and the type of
project. As of September 30, 1996, $34.9 million, or 1.12% of the Company's
total gross loan portfolio, consisted of multi-family residential loans. At
September 30, 1996, the Company's largest multi-family loan had an
outstanding balance of $ 2.5 million and was secured by a 100 unit apartment
complex.
COMMERCIAL REAL ESTATE LENDING. The Bank originates commercial real estate
loans secured by properties such as retail stores, office buildings and
industrial buildings located in the Bank's primary market area. The Bank's
commercial real estate loans are generally made in amounts up to 75% of the
appraised value of the property. The Bank's underwriting standards and
procedures are similar to those applicable to its multi-family loans, whereby
the Bank considers the net operating income of the property and the
borrower's expertise, credit history and profitability. The Bank generally
requires that the properties securing commercial real estate loans have debt
service coverage ratios of not less than 1.15x and may require personal
guarantees from the borrowers or the principals of the borrowing entity. At
September 30, 1996, the Company's commercial real estate loan portfolio
totalled $69.6 million, or 2.22% of the Company's total gross loan portfolio.
At September 30, 1996, the Company's largest commercial real estate loan
relationship had an aggregate outstanding balance of $14.8 million, including
$2.9 million of unsecured commercial debt, and was secured primarily by
various commercial real estate properties which are occupied by retail
establishments.
CONSTRUCTION AND LAND LENDING. The Bank's construction loans primarily have
been made to finance the construction of one-to-four family residential
properties and, to a lesser extent multi-family and commercial properties.
Construction and land development loans may be made in amounts up to 75% of
the value as completed. The Bank generally requires personal guarantees of
the borrowers and an indication that the borrower has sufficient equity in
the project. Construction loans generally are made with adjustable rates
with varying terms. Loan proceeds are disbursed in increments as
construction progresses and as inspections warrant. As of September 30,
1996, the Company had $7.7 million, or 0.24% of its total gross loan
portfolio invested in construction and land loans. At September 30, 1996,
the Company's largest construction and/or land loans relationship had an
aggregate outstanding balance of $2.6 million and was secured by the
underlying land and subsequent improvements.
COMMERCIAL AND OTHER LOANS. The Bank offers a wide variety of other secured
and unsecured loans. As of September 30, 1996 commercial and other loans
totalled $151.7 million or 4.85% of the Company's total gross loan portfolio.
The Bank has de-emphasized its commercial loan portfolio since 1990, which
has resulted in a reduction in the balance of these loans to $8.2 million at
September 30, 1996 from $36.1 million at September 30, 1992. The largest
component of other loans is the Bank's line of credit products, including
unsecured fixed rate and prime rate based revolving credit lines, which are
granted up to a maximum amount of $25,000, a fixed rate overdraft checking
line product, and a junior home equity line of credit product for amounts
from $10,000 to $50,000. The terms for this product are similar to the home
equity product, except that these loans are subject to an 80% combined
loan-to-value ratio. The Bank's tax advantage installment loan product
carries a fixed rate, is available for amounts from $5,000 to $100,000 and is
payable in terms of three to fifteen years. Those loans that exceed $25,000
are subject to an 80% combined loan-to-value ratio. At September 30, 1996,
balances of these credit line products totalled $55.3 million, or 1.77% of
total loans. Property improvement loans are made up to a maximum loan amount
of $10,000 on an unsecured basis. The Bank also purchases and originates new
and used automobile loans, personal loans, passbook savings loans and
government-guaranteed student loans. In addition, the Bank finances new and
used automobile leases on an outsourced basis. The underwriting standards
employed by the Bank for other loans include a determination of the
applicants' payment history on other debts and an assessment of the
10
<PAGE>
borrower's ability to meet payments on all of the borrower's obligations. In
addition to the credit worthiness of the applicant, the underwriting process
also includes a comparison of the value of the security, if any, to the
proposed loan amount. The Bank offers a Visa and Mastercard credit card
program on an agent bank basis to generate fee income. The associated credit
card receivables are assets of the credit card issuing bank. The level of
delinquencies in the Bank's other loan portfolio has generally been within
industry standards; however, there can be no assurance that delinquencies
will not increase in the future.
LOAN APPROVAL PROCEDURES AND AUTHORITY. All one-to-four family ARM loans
under $650,000 may be approved by designated mortgage department personnel.
In certain cases where loan amounts exceed predetermined levels and/or
loan-to-value ratios, loans must be approved by two or more authorized
individuals. Loans over $650,000 require approval by the Loan Committee of
the Board of Directors ("Loan Committee"). When loan approval is required
before the next regularly scheduled Loan Committee meeting ("interim Loan
Committee approval"), approval must be obtained from four predetermined
designated individuals. Loans reported to the Loan Committee will consist of
any loan approved as a result of the interim Loan Committee approval process
plus loans randomly selected by the internal audit department meeting
particular criteria. All one-to-four family fixed rate mortgage loans may be
approved by a designated underwriter up to the loan maximum as set forth by
the investor guidelines. All fixed rate loans are originated with the intent
to sell. However, if a loan is not sold within six months from the date the
loan is closed, the loan must be reported to the Loan Committee.
All ARM loans and fixed rate mortgage loans greater than $350,000 made to
Directors, principal shareholders and related interests must be approved by
the Board of Directors. All loans made to Senior Vice Presidents and above
must be reported to the Board of Directors.
Upon receipt of a completed loan application from a prospective borrower, a
credit report is ordered and certain other information is verified by the
Bank's loan underwriters and, if necessary, additional financial information
is obtained. An appraisal of the real estate intended to secure the proposed
loan, if applicable, is required which currently is performed by either staff
appraisers of the Bank or by independent appraisers designated and approved
by the Bank. The Board of Directors annually approves the independent
appraisers used by the Bank and approves the Bank's appraisal policy. It is
the Bank's policy to require borrowers to obtain title insurance and hazard
insurance on all real estate first mortgage loans prior to closing.
Borrowers generally are required to advance funds on a monthly basis together
with each payment of principal and interest to a mortgage escrow account from
which the Bank makes disbursements for items such as real estate taxes and in
some cases hazard insurance premiums.
The above lending procedures also apply to commercial real estate and
multi-family loans with the exception of certain approval levels. Loans
under $100,000 may be approved by an approved officer and loans between
$100,000 and $300,000 must be approved by two approved officers. Loans over
$300,000 must be reported to the Loan Committee and loans over $350,000 must
be approved by the Loan Committee.
LOAN CONCENTRATIONS. As a result of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA"), the Bank may not extend
credit to a single borrower or related group of borrowers in an amount
greater than 15% of the Bank's unimpaired capital and surplus. An additional
amount of credit may be extended, equal to 10% of unimpaired capital and
surplus, if the loan is secured by readily marketable collateral, which does
not include real estate.
At September 30, 1996, there were no borrowers who had loans, which when
aggregated in accordance with the applicable regulatory requirements,
involved aggregate extensions of credit from the Bank exceeding its FIRREA
loans-to-one borrower limit of $67.6 million.
LOAN SERVICING. As part of its efforts to increase non-interest revenues, the
Company has placed additional emphasis on increasing its loan servicing
portfolio. At September 30, 1996 and 1995 loans aggregating $3.7 billion and
$2.6 billion, respectively, were being serviced for others. Management intends
to continue to emphasize loan servicing to generate revenues and believes that
the growth of the servicing portfolio will increase the level of loan servicing
fee income in future years. In this respect, during 1996 and 1995, the Bank
purchased mortgage servicing rights in the amount of $15.2 million and $10.1
million, respectively.
11
<PAGE>
NON-PERFORMING ASSETS
Loans are considered non-performing if they are in foreclosure and/or are 90
or more days delinquent (excluding those restructured loans that have been
returned to performing status after developing a satisfactory payment
history, generally six months). Loans, other than education loans, accrue
interest until considered doubtful of collection by management, but in no
case beyond 90 days delinquent. Consumer loans (other than education loans)
are generally written off upon becoming 120 days delinquent in the case of
installment loans and 180 days in the case of revolving credit lines.
Delinquent interest on education loans continues to accrue, however, since
these loans are backed by a government agency guarantee and all interest and
principal is ultimately expected to be received. Once management reaches a
decision to place a loan on non-accrual status, all delinquent previously
accrued interest on such loan is reversed against previously recorded income.
The Bank begins collection procedures with respect to mortgage loans by
sending a late notice when the loan is 15 days past due, and by the 17th day
of delinquency the matter is referred to the collection department for
follow-up. During the next 60 days, a series of collection letters are sent
and staff collectors attempt to make phone contact with the borrower. Formal
written demand for the arrears is then made. The Bank usually authorizes
commencement of a foreclosure action between 90 and 120 days after the
default if the loan is not brought current or has not entered into a mutually
satisfactory reinstatement arrangement with the borrower. The same collection
procedures are used for delinquent home equity loans.
The Bank's consumer loan collection procedures call for sending late notices
by the 15th day and then again on the 20th day of delinquency. The loan is
referred to the collection department by the 20th day if not brought current.
Legal action on installment loans is usually commenced if payments are not
received after the loan has been delinquent for 120 days. Delinquent
revolving credit accounts involves similar procedures, except that legal
action is usually commenced after 180 days.
The level of non-performing residential property loans is also affected by
the Bank's loan restructuring activities. Where borrowers have encountered
hardship, but are able to demonstrate to the Bank's satisfaction an ability
and willingness to resume regular monthly payments, the Bank seeks to provide
them with an opportunity to restructure their loans. Where successful, these
restructurings avoid the cost of completing the foreclosure process, as well
as any losses on acquisition of the properties and the costs of maintaining
and disposing of real estate owned.
The Bank returns restructured residential loans that have complied with the
terms of their restructure agreement for a satisfactory period (generally six
months) to performing status. At September 30, 1996, restructured residential
loans included in performing and non-performing loans were $11.8 million and
$11.4 million, respectively.
During December 1993 in an effort to accelerate resolution of certain of its
problem assets, the Company entered into a contract for the bulk sale of
certain loans and real estate owned ("Bulk Sale"). The sale of the loans was
completed by December 31, 1993 and the sale of owned real estate was
completed in the second quarter of fiscal 1994. At September 30, 1993 the
book value of the loans anticipated to be sold was approximately $142.0
million, of which approximately $110.0 million were then non-performing and
approximately $32.0 million were then performing. At that date, the net book
value of the real estate owned anticipated to be sold was approximately $14.0
million.
The following table sets forth information regarding the components of
non-performing assets at September 30 for the years indicated. Restructured
loans that have not yet demonstrated a sufficient payment history to warrant
a return to performing status are included with non-performing loans.
12
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-performing loans (1):
Residential:
One-to-four family ......................... $ 39,573 $ 39,661 $ 33,359 $ 107,441 $ 152,498
Co-operative apartments .................... 602 1,572 1,811 4,208 5,083
Home equity ................................ 3,489 4,915 6,577 13,857 12,455
Second mortgage ............................ 190 226 471 1,002 1,446
Multi-family ............................... 896 1,512 1,123 430 758
--------- --------- --------- ---------- ----------
Total residential ........................ 44,750 47,886 43,341 126,938 172,240
Non-residential:
Commercial real estate ..................... 4,336 4,093 4,459 8,301 6,783
Construction ............................... 453 453 861 5,092 7,008
Land ....................................... 675 836 1,847 2,659 2,937
--------- --------- --------- ---------- ----------
Total real estate loans (2)................... 50,214 53,268 50,508 142,990 188,968
Other loans .................................. 2,952 2,408 3,528 2,326 6,090
--------- --------- --------- ---------- ----------
Total non-performing loans ................... 53,166 55,676 54,036 145,316 195,058
Real estate owned, net ..................... 8,155 8,893 7,187 25,812 35,255
--------- --------- --------- ---------- ----------
Total non-performing assets .................. $ 61,321 $ 64,569 $ 61,223 $ 171,128 (3) $ 230,313
--------- --------- --------- ---------- ----------
--------- --------- --------- ---------- ----------
Total non-performing loans to gross loans..... 1.70% 2.67% 3.20% 7.42%(3) 6.84%
Total non-performing assets to total assets... 1.14 1.32 1.36 4.29 (3) 4.09
</TABLE>
(1) All non-performing loans are in non-accrual status. There are no loans
90 days or more past due and still accruing interest (other than
education loans which are guaranteed).
(2) Includes $11.4 million, $14.8 million, $15.8 million, $25.0 million and
$18.9 million of restructured real estate loans that have not yet
complied with the terms of their restructure agreement for a
satisfactory period (generally six months) as of September 30, 1996,
1995, 1994, 1993 and 1992, respectively.
(3) After giving effect to the consummation of the Bulk Sale, the total
non-performing assets would have been $77.1 million and the Company's
ratio of non-performing loans to total gross loans would have been 3.26%
at September 30, 1993. The ratio of non-performing assets to total
assets would have been 1.93% at September 30, 1993.
Non-performing assets continue to have an adverse effect on the Company.
The principal amount of non-performing real estate loans, excluding
restructured loans, aggregated approximately $38.8 million, $38.5 million and
$34.7 million at September 30, 1996, 1995 and 1994, respectively. Interest
income that would have been recorded if the loans had been performing in
accordance with their original terms aggregated $2.9 million, $2.7 million
and $3.7 million for the fiscal years ended September 30, 1996, 1995 and
1994, respectively. No interest income was recorded for these loans during
the fiscal years ended September 30, 1996, 1995 and 1994. The principal
amount of non-performing commercial loans excluding restructured loans
aggregated approximately $0.8 million, $0.8 million and $1.5 million for the
fiscal years ended September 30, 1996, 1995 and 1994, respectively.
The principal amount of restructured real estate loans that have not
complied with the terms of their restructure agreement for a satisfactory
period (generally six months) aggregated approximately $11.4 million, $14.8
million and $15.8 million at September 30, 1996, 1995 and 1994, respectively.
Interest income that would have been recorded if the loans had been
performing in accordance with their original terms aggregated $0.3 million,
$0.3 million and $0.4 million for the fiscal years ended September 30, 1996,
1995 and 1994, respectively. Interest income recorded for these loans
amounted to $0.1 million, $0.1 million and $0.2 million, for fiscal years
1996, 1995 and 1994. Restructured loans that have complied with the terms of
their restructure agreement for a satisfactory period (generally six months)
and returned to performing status aggregated $11.8 million, $12.1 million and
$12.8 million as of September 30, 1996, 1995, 1994, respectively.
The principal amount of restructured commercial loans aggregated $0.5
million, $0.9 million and $1.8 million at September 30, 1996, 1995 and 1994,
respectively. Interest income that would have been recorded if the loans had
been performing in accordance with their original terms aggregated $43,000,
$49,000 and $125,000 for fiscal years ended September 30, 1996, 1995 and
1994, respectively. Interest income recorded for these loans amounted to
$29,000, $40,000 and $100,000 for the fiscal years ended September 30, 1996,
1995 and 1994, respectively.
13
<PAGE>
Although there are indications that the New York metropolitan real estate
market has stabilized, there can be no assurance that economic conditions
will not decline and therefore lead to an increase in the level of
non-performing assets. Any such developments could further adversely affect
the Company's operations by requiring additional provisions for possible loan
losses, as well as through decreased interest income and increased
non-interest expenses resulting from the allocation of resources to the
management of non-performing assets and from increased real estate owned
expenses.
NON-PERFORMING RESIDENTIAL PROPERTY LOANS
At September 30, 1996, non-performing residential property loans were
$44.8 million (including $8.1 million in loans that have been restructured
and which may be returned to performing status if they develop a satisfactory
payment history). The September 30, 1996 level of non-performing residential
property loans represents a decrease of $3.1 million from September 30, 1995
and an increase of $1.4 million from the level at September 30, 1994. These
levels reflect the movement of non-performing loans through the foreclosure
process, the decrease in the amount of loans that became non-performing and,
to a lesser extent, non-performing loans that were satisfied or reinstated
and the effect of returning restructured loans that have demonstrated a
satisfactory payment history to performing status.
The volume of loans delinquent less than 90 days that are not in
non-performing status may, to some degree, be a leading indicator of future
levels of non-performing loans. Residential property loan delinquencies (net
of those already in non-performing status) were as follows:
AT SEPTEMBER 30,
---------------------------------
1996 1995 1994
----------- ---------- ----------
(IN THOUSANDS)
60-89 Days . . . . . . . . . . . . . . . . . $ 10,030 $ 10,415 $ 10,210
30-59 Days . . . . . . . . . . . . . . . . . 73,225 51,558 59,465
NON-PERFORMING COMMERCIAL REAL ESTATE LOANS
At September 30, 1996 the level of non-performing commercial real estate
loans was $4.3 million, an increase of $0.2 million from the September 30,
1995 level of $4.1 million. This stable level in non-performing commercial
real estate was primarily due to management's strategy to originate
commercial real estate loans on a selective basis. The Company's commercial
real estate loan portfolio, like the residential property loan portfolio,
reflects indications of a stabilizing real estate market in the New York
metropolitan area, however, it is possible that the Company may experience
some future increases in the level of non-performing commercial real estate
loans. The largest non-performing commercial real estate loan had an
outstanding principal balance of $1.8 million at September 30, 1996 and was
secured by a retail shopping center.
The Bank seeks to work with delinquent commercial real estate borrowers in
an attempt, when feasible, to restructure loans to provide for a resumption
of regular monthly payments. These arrangements, which are individually
negotiated based on the borrower's ability to maintain such payments
generally provide for interest rates that are lower than those initially
contracted for, and in some instances include a reduction in the principal
amount of the loan, which reduction must be written off by the Bank. In each
instance the Bank evaluates the costs associated with a particular
restructuring arrangement and may enter into such an agreement if it believes
it is economically beneficial to the Bank.
14
<PAGE>
REAL ESTATE OWNED
At September 30, 1996 and 1995, the balance of real estate owned was $8.2
million and $8.9 million, respectively. The Bank generally obtains
appraisals on properties acquired as real estate owned at the time it obtains
possession of the property and charges-off any declines in value at such
time. The Bank generally reassesses the value of real estate owned every six
months and charges off any amounts carried in excess of the reassessed value.
The following table summarizes the real estate owned portfolio at September
30:
1996 1995
-------- --------
(IN THOUSANDS)
One-to-four family........................... $ 5,835 $ 5,068
Condo/co-op.................................. 1,990 2,464
Multi-family................................. --- 673
Commercial................................... 330 347
Land......................................... --- 341
-------- --------
$ 8,155 $ 8,893
-------- --------
-------- --------
At September 30, 1996, the largest single real estate owned property was a
one-to-four family unit with a book value of $0.3 million.
CLASSIFIED ASSETS
Federal regulations and the Bank's Classification of Assets Policy
provide for the classification of loans and other assets considered to be
lesser quality as "substandard," "doubtful" or "loss" assets. An asset is
considered substandard if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if
any. Substandard assets include those characterized by the "distinct
possibility" that the Bank will sustain "some loss" if the deficiencies are
not corrected. Assets classified as doubtful have all of the weaknesses
inherent in those classified substandard with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis
of currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as loss are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do
not currently expose the Bank to sufficient risk to warrant classification in
one of the aforementioned categories but possess weaknesses are required to
be designated "special mention" by management. An internal loan review
function, which was created to review and rate the quality of loans and other
assets, reports to the Loan Committee on a quarterly basis.
The following table sets forth the Bank's classified assets (other than
"loss" classifications) and assets designated as special mention. Assets
classified "loss" were charged-off.
AT SEPTEMBER 30, 1996
-----------------------------
(DOLLARS IN THOUSANDS)
-----------------------------
PERCENT OF TOTAL
----------------
AMOUNT ASSETS
---------- ----------------
Classified assets:
Substandard, including real estate owned . . . $ 74,900
Doubtful. . . . . . . . . . . . . . . . . . . 2,240
---------
Total classified. . . . . . . . . . . . . . 77,140 1.44%
Special mention. . . . . . . . . . . . . . . . . 15,672
---------
Total. . . . . . . . . . . . . . . . . . . . . . $ 92,812 1.73%
---------
---------
15
<PAGE>
LOANS SOLD WITH RECOURSE
Some residential property loans sold by the Company have been sold with
recourse. The majority of these loans were sold to FNMA and FHLMC. At
September 30, 1996, loans sold with recourse aggregated $289.5 million, but
the maximum exposure under the Company's recourse obligations was $130.1
million. Included in loans sold with recourse at September 30, 1996 were
loans delinquent 90 or more days with an aggregate outstanding balance of
$10.3 million. Although the Company does not believe that its recourse
obligations subject it to risk of material loss in the future, the Company
has established recourse reserves which at September 30, 1996 aggregated
approximately $0.6 million.
Recourse as discussed herein means that the Company is obligated to
remit to the investor the amount of contractual principal and interest due
(less a servicing fee), regardless of whether these payments are actually
received from the borrower. On completion of foreclosure, the entire balance
of the loan must be remitted to the investor, regardless of whether the sale
of the real estate owned property yields that amount. For loans sold to FNMA,
it has been the Bank's practice to repurchase from FNMA any loans sold with
recourse that become more than 90 days delinquent. By repurchasing these
delinquent loans prior to foreclosure, the Bank derives the benefit of
substantial savings between the interest rate that must be paid monthly to
FNMA even if not received and the Bank's own interest cost to fund the
purchase of these loans; additionally, repurchases permit the Bank to provide
eligible borrowers with more flexible workout options. During fiscal 1996,
the Bank repurchased from FNMA residential property loans sold with recourse
totaling $1.7 million.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Company maintains a valuation allowance for possible loan losses.
The allowance for possible loan losses is established and maintained through
a provision for possible loan losses at a level deemed appropriate by
management to provide adequately for known and inherent risks in the
portfolio. The determination of the amount of the allowance for possible loan
losses includes estimates that are susceptible to significant changes due to
changes in appraised values of collateral and general economic conditions. In
connection with the determination of the allowance, management obtains
independent appraisals for significant properties. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary. The Bank's Classification of Assets Committee
oversees the valuation allowance process.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for possible
loan losses. Such agencies may require the Bank to recognize additions to the
allowance.
Management's evaluation of the risk inherent in its loan portfolio and the
general economy includes a review of all loans on which full collectibility
may not be reasonably assured considering, among other matters, the estimated
fair value of the underlying collateral, economic conditions, historical loan
loss experience and other factors that warrant recognition in providing for
an adequate loan loss allowance. Other factors considered by management
include the size and risk exposure of each segment of the loan portfolio,
present indicators such as delinquency rates and the borrowers' current
financial condition and the potential for losses in future periods. In
evaluating the adequacy of the allowance for possible loan losses management
recognizes the risk associated with each type of loan and the current
outstanding balance. The primary risk element considered by management with
respect to each consumer and one-to-four family mortgage loan is any current
delinquency on the loan. The primary risk elements considered with respect
to commercial real estate and multi-family loans are the financial condition
of the borrower, the sufficiency of collateral (including changes in the
appraised values of collateral) and the record of payment. A subjective
review of all substantial non-performing loans, other problem loans and
overall delinquency is made prior to the end of each calendar quarter to
determine the adequacy of the allowance for possible loan losses.
Additionally, current year charge-offs, charge-off trends, new loan
production and current balance by particular loan categories are factored
into the determination of allowance levels.
When real estate loans are foreclosed the loan balance is compared to
the fair value of the property. If the net carrying value of the loan at the
time of foreclosure exceeds the fair value of the property, the difference is
charged to the allowance for possible loan losses and the fair value of the
property becomes the book value of the real estate owned. The real estate
owned is subsequently carried at the lower of book value or fair value with
any further adjustment reflected as a charge against earnings.
16
<PAGE>
The following table sets forth the Company's allowance for possible loan
losses at or for the years ended September 30,:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.............. $ 34,358 $ 35,713 $ 33,951 $ 32,157 $ 26,857
Provision for possible loan losses.......... 6,200 6,470 11,955 47,288 19,347
Charge-offs:
Real estate loans......................... 3,869 4,608 5,852 39,508(1) 9,891
Commercial loans.......................... 562 917 1,551 1,054 974
Other loans............................... 3,768 4,098 4,308 6,236 4,958
-------- -------- -------- -------- --------
Total charge-offs....................... 8,199 9,623 11,711 46,798 15,823
Recoveries:
Real estate loans......................... 691 1,006 482 685 1,644
Commercial loans.......................... 319 141 577 67 195
Other loans............................... 543 651 459 552 437
-------- -------- -------- -------- --------
Total recoveries........................ 1,553 1,798 1,518 1,304 2,276
-------- -------- -------- -------- --------
Net charge-offs............................. 6,646 7,825 10,193 45,494 13,547
Transfers out............................... --- --- --- --- (500)
-------- -------- -------- -------- --------
Balance at end of period.................... $ 33,912 $ 34,358 $ 35,713 $ 33,951 $ 32,157
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratio of net loan charge-offs during the
period to average loans, net out-
standing during the period................ 0.27% 0.42% 0.59% 1.79% 0.48%
Ratio of allowance for possible loan
losses to gross loans receivable at
the end of the period..................... 1.08 1.65 2.12 1.73(2) 1.13
Ratio of allowance for possible loan
losses to non-performing loans at
at the end of the period.................. 63.79 61.71 66.09 23.36(3) 16.49
</TABLE>
__________
(1) Includes $32.0 million in charge-offs related to the Bulk Sale.
(2) Giving effect to the consummation of the Bulk Sale, the ratio of
allowance for possible loan losses to gross loans receivable at
September 30, 1993 would have been 1.84%.
(3) Giving effect to the consummation of the Bulk Sale, the ratio of
allowance for possible loan losses to non-performing loans at September
30, 1993 would have been 56.29%.
The provision for possible loan losses declined to $6.2 million for the
year ended September 30, 1996 from $6.5 million for the year ended September
30, 1995. This reduction reflects the stable level of non-performing loans
and the third consecutive year of lower charge-offs.
17
<PAGE>
The following table sets forth the Company's allocation of its allowance
for possible loan losses to the total amount of loans in each of the
categories listed.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------- ------------------ ------------------ ------------------
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS (1) AMOUNT LOANS (1) AMOUNT LOANS (1) AMOUNT LOANS (1) AMOUNT LOANS (1)
------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans ...... $20,226 95.16% $20,554 93.84% $22,881 91.46% $24,951 92.00% $25,414 93.10%
Commercial loans ....... 3,631 0.26 3,874 0.45 4,250 0.74 3,874 0.87 2,601 1.27
Other loans ............ 10,055 4.58 9,930 5.71 8,582 7.80 5,126 7.13 4,142 5.63
------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ----------
Total allowance
for possible loan
losses ............... $33,912 100.00% $34,358 100.00% $35,713 100.00% $33,951 100.00% $32,157 100.00%
------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ----------
------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ----------
</TABLE>
(1) Gross loans used to calculate percentage.
INVESTMENT ACTIVITIES
INVESTMENT POLICIES. The investment policy of the Company, which is
established by senior management and approved by the Board of Directors, is
based upon its asset/liability management goals and emphasizes high credit
quality and diversified investments while seeking to optimize net interest
income within acceptable limits of liquidity and safety and soundness. The
Company's investment activities are overseen by the Investment Committee of
the Board of Directors, which meets quarterly.
The Company's investment goal has been to invest available funds in
short-term, highly liquid instruments that are adjustable rate or that
generally do not exceed an average life of five years, or that meet specific
requirements of the Company's asset/liability goals. The policy is designed
to provide and maintain liquidity to meet day-to-day, cyclical and long-term
changes in the Company's asset/liability structure, and at September 30,
1996, 91.43% of the individual holdings in the Company's mortgage-backed
security and debt and equity security portfolios mature or reprice in fewer
than five years.
The Company's investment policy permits it to invest in, among other
instruments, U.S. government obligations, securities of various
government-sponsored agencies, including mortgage-backed securities
issued/guaranteed by FNMA, FHLMC and Government National Mortgage Association
("GNMA"), certificates of deposit of insured banks and savings associations,
bankers acceptances, federal funds, asset-backed securities, private issuer
investment grade mortgage-backed securities, investment grade preferred
stock, investment grade corporate debt securities and commercial paper.
The Company's investment policy permits purchases of privately issued
securities only if they are rated in one of the three highest categories by a
nationally recognized rating agency and does not permit purchases of
securities of below investment grade quality. In addition, the Company's
investment policy prohibits investment in certain types of mortgage
derivative securities that management considers high risk. The Company
generally purchases only short-term classes of collateralized mortgage
obligations ("CMOs") and real estate mortgage investment conduits ("REMICs").
At September 30, 1996, the Company held no securities issued by any one
entity with a total carrying value in excess of 10% of the Company's net
worth at that date, except for obligations of the U.S. government and
government-sponsored agencies and certain mortgage-backed securities which
are fully collateralized by mortgages held by single purpose entities.
Thrift Bulletin Number 52 ("TB-52"), the Office of Thrift Supervision
("OTS") Policy Statement on securities portfolio policies and unsuitable
investment practices requires that institutions classify mortgage derivative
products acquired, including certain tranches of REMICs and CMOs, as
"high-risk mortgage securities" if such products exhibit greater price
volatility than a benchmark fixed-rate 30-year mortgage-backed pass-through
security. Institutions may only hold high-risk mortgage securities to reduce
interest-rate risk in accordance with safe and sound practices and must also
follow certain prudential safeguards in the purchase and retention of such
securities.
18
<PAGE>
The Company's investment policy also permits it to invest in certain
derivative financial instruments. These instruments consist of interest rate
caps, floors and collars and are generally used to hedge against interest
rate exposure. See--"Borrowings".
MORTGAGE-BACKED SECURITIES. The Company invests in mortgage-backed
securities and uses such investments to complement its mortgage lending
activities and supplement such activities at times of low mortgage loan
demand. At September 30, 1996, the net carrying value of mortgage-backed
securities totalled approximately $1.7 billion, or 32.44% of total assets,
which equaled their estimated fair value as substantially all mortgage-backed
securities are classified as available-for-sale. Mortgage-backed securities
in the Company's held-to-maturity portfolio are carried at amortized cost.
The mortgage-backed securities portfolio includes REMICs and CMOs, with a net
carrying value at September 30, 1996 of $88.8 million. A CMO is a special
type of pass-through debt in which the stream of principal and interest
payments on the underlying mortgages or mortgage-backed securities is used to
create classes with different maturities and, in some cases, amortization
schedules as well as a residual interest, with each such class possessing
different risk characteristics.
At September 30, 1996, $1.7 billion, or 93.95% of the amortized cost of
the Company's mortgage-backed securities portfolio was directly insured or
guaranteed by FNMA or FHLMC. FNMA and FHLMC provide the certificate holder a
guarantee of timely payments of scheduled principal and interest, whether or
not they have been collected. Those securities not insured or guaranteed by
FNMA or FHLMC are either privately insured or have senior subordinated
structures, and are rated AAA by one of the nationally recognized bond rating
agencies. The Company's mortgage-backed securities portfolio had a weighted
average yield of 6.83% at September 30, 1996. At September 30, 1996, $1.3
billion or 75.96%, of total mortgage-backed securities had adjustable rates
and $0.4 million, or 24.04%, of total mortgage-backed securities had fixed
rates, based on amortized cost.
Mortgage-backed securities generally yield less than the loans that
underlie such securities because of the cost of payment guarantees or credit
enhancements that reduce credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans and may be used
more easily to collateralize obligations of the Bank. In general,
mortgage-backed securities issued or guaranteed by FNMA and FHLMC and certain
AAA-rated mortgage-backed pass-through securities are weighted at no more
than 20% for risk-based capital purposes, compared to the risk weight
assigned to non-securitized whole loans of 50%.
While mortgage-backed securities carry a reduced credit risk as compared
to whole loans, such securities remain subject to the risk that a fluctuating
interest rate environment, along with other factors such as the geographic
distribution of the underlying mortgage loans, may alter the prepayment rate
of such mortgage loans and so affect both the prepayment speed, and value of
such securities. In contrast to mortgage-backed securities in which cash flow
is received (and, hence, prepayment risk is shared) pro rata by all
securities holders, the cash flows from the mortgages or mortgage-backed
securities underlying REMICs or CMOs are segmented and paid in accordance
with a predetermined priority to investors holding various tranches of such
securities or obligations. A particular tranch of a REMIC or CMO may
therefore carry prepayment risk that differs from that of both the underlying
collateral and other tranches.
ASSET-BACKED SECURITIES. The Company invests in asset-backed securities.
At September 30, 1996 the Company's total asset-backed securities portfolio
of $40.4 million, or 0.75% of total assets, was classified as
available-for-sale. These securities are rated AAA by one of the nationally
recognized bond rating agencies, carry a fixed rate, and are primarily
secured by automobile loans.
PREFERRED AND COMMON STOCK. The Company invests in preferred and common
stock. At September 30, 1996, all preferred and common stock was classified
as available-for-sale and totalled $40.0 million, or 0.75% of total assets.
These securities are investment grade and carry an A1P1 commercial paper
rating as determined by one of the nationally recognized bond rating agencies.
19
<PAGE>
SECURITIES PORTFOLIO
The table below sets forth certain information regarding the amortized
cost and market value of the Company's debt and equity securities portfolio
at the dates indicated. Securities held-to-maturity are recorded at
amortized cost. Securities available-for-sale are recorded at estimated fair
value. Securities balances are categorized based upon the Company's adoption
of Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
"Accounting for Certain Investments in Debt and Equity Securities" effective
September 30, 1993. Effective November 1995, the Financial Accounting
Standards Board issued a Special Report on SFAS 115 providing a one-time
reassessment that allowed entities to, concurrent with the initial adoption
of the implementation guidance but no later than December 31, 1995, reassess
the appropriateness of the classifications of all securities held at that
time. The 1996 balances reflect the reassessment of the Company's portfolio
which resulted in debt securities in the amount of $78.6 million previously
classified as held-to-maturity to be classified as available-for-sale.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SECURITIES HELD-TO-MATURITY:
Debt securities:
U.S. government and agency obligations............... $ -- $ -- $ 2,593 $ 2,593 $ 448 $ 434
U.S. government and agency obligations pledged as
collateral.......................................... -- -- 7,393 7,398 9,578 9,351
Asset-backed securities.............................. -- -- 45,853 45,880 75,627 75,265
--------- ---------- --------- ---------- --------- ----------
Total debt securities held-to-maturity................. $ -- $ -- $ 55,839 $ 55,871 $ 85,653 $ 85,050
--------- ---------- --------- ---------- --------- ----------
--------- ---------- --------- ---------- --------- ----------
SECURITIES AVAILABLE-FOR-SALE:
Debt securities:
U.S. government and agency obligations............... $ 13,385 $ 13,382 $ 63,852 $ 63,665 $148,524 $147,324
U.S. government and agency obligations pledged as
collateral.......................................... 88,021 86,105 -- -- -- --
Asset-backed securities.............................. 40,561 40,369 129,391 128,989 203,587 200,117
--------- ---------- --------- ---------- --------- ----------
Total debt securities.............................. 141,967 139,856 193,243 192,654 352,111 347,441
Equity securities:
Preferred and common stock........................... 40,038 40,038 40,038 40,038 89 89
Investment in mutual funds........................... 779 756 729 716 681 657
--------- ---------- --------- ---------- --------- ----------
Total equity securities............................ 40,817 40,794 40,767 40,754 770 746
--------- ---------- --------- ---------- --------- ----------
Total debt and equity securities available-for-sale.... $182,784 $180,650 $234,010 $233,408 $352,881 $348,187
--------- ---------- --------- ---------- --------- ----------
--------- ---------- --------- ---------- --------- ----------
FHLB - New York stock.................................. $ 40,754 $ 40,754 $ 35,132 $ 35,132 $ 30,760 $ 30,760
--------- ---------- --------- ---------- --------- ----------
--------- ---------- --------- ---------- --------- ----------
Federal funds sold..................................... $ 33,480 $ 33,480 $ 10,100 $ 10,100 $125,650 $125,650
--------- ---------- --------- ---------- --------- ----------
--------- ---------- --------- ---------- --------- ----------
</TABLE>
20
<PAGE>
The table below sets forth certain information regarding the amortized cost
and market values of the Company's mortgage-backed securities portfolio at the
dates indicated. Mortgage-backed securities held-to-maturity are recorded at
amortized cost. Mortgage-backed securities available-for-sale are recorded at
estimated fair value. Securities balances are categorized based upon the
Company's adoption of SFAS 115 effective September 30, 1993. The 1996 balances
reflect the reassessment of the Company's portfolio in accordance with the
Special Report on SFAS 115 which resulted in mortgage-backed securities in the
amount of $1.2 billion previously classified as held-to-maturity to be
classified as available-for-sale.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY:
FNMA pass-through certificates........................ $ -- $ -- $ 353,324 $ 356,706 $ 386,475 $ 382,193
FHLMC pass-through certificates....................... -- -- 362,646 362,237 452,874 437,416
Real estate mortgage investment conduit............... 17,017 15,041 17,693 17,693 18,366 18,366
Other pass-through certificates....................... 6,079 6,079 62,082 61,929 6,079 6,079
GNMA, FHLMC and FNMA securities pledged as
collateral........................................... -- -- 540,354 540,449 385,037 368,425
---------- ---------- ---------- ---------- ---------- ----------
Gross mortgage-backed securities...................... 23,096 21,120 1,336,099 1,339,014 1,248,831 1,212,479
Unamortized premiums (unearned discounts), net........ -- -- 1,804 -- (6,339) --
---------- ---------- ---------- ---------- ---------- ----------
Mortgage-backed securities held-to-maturity, net...... $ 23,096 $ 21,120 $1,337,903 $1,339,014 $1,242,492 $1,212,479
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE:
FNMA pass-through certificates........................ $ 483,480 $ 485,696 $ 274,501 $ 279,776 $117,311 $ 115,973
GNMA pass-through certificates........................ 3,582 3,632 -- -- -- --
FHLMC pass-through certificates....................... 367,480 369,337 497,438 506,371 685,279 685,757
Other pass-through certificates....................... 78,101 77,884 9,892 9,620 10,038 9,089
GNMA, FNMA and FHLMC securities pledged as
collateral........................................... 767,263 780,557 140,072 143,080 7,249 7,482
---------- ---------- ---------- ---------- ---------- ----------
Gross mortgage-backed securities...................... 1,699,906 1,717,106 921,903 938,847 819,877 818,301
Unamortized premiums (unearned discounts), net........ 3,270 -- 4,120 -- (900) --
---------- ---------- ---------- ---------- ---------- ----------
Mortgage-backed securities available-for-sale, net.... $1,703,176 $1,717,106 $ 926,023 $ 938,847 $ 818,977 $ 818,301
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
21
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Company's
mortgage-backed and debt and equity securities as of September 30, 1996.
Pursuant to the reassessment permitted by the Special Report on SFAS 115, all
the Company's debt and equity securities are classified as
available-for-sale. Mortgage-backed securities held-to-maturity are recorded
at amortized cost. Securities available-for-sale are recorded at estimated
fair value.
<TABLE>
<CAPTION>
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS
-------------------- -------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD
--------- -------- --------- -------- --------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEBT AND EQUITY SECURITIES
AVAILABLE-FOR-SALE:
U.S. government securities and
obligations........................ $26,584 5.60% $ -- --% $74,822 6.10% $ -- --%
Asset-backed securities.............. -- -- 35,543 5.03 -- -- 5,018 4.90
--------- --- --------- --- --------- --- ---------- ---
Total debt and equity securities
available-for-sale................. $26,584 5.60% $ 35,543 5.03% $74,822 6.10% $ 5,018 4.90%
--------- --- --------- --- --------- --- ---------- ---
--------- --- --------- --- --------- --- ---------- ---
MORTGAGE-BACKED SECURITIES HELD-TO-
MATURITY........................... $ -- --% $ 17,017 8.36% $ -- --% $ 6,079 9.93%
--------- --- --------- --- --------- --- ---------- ---
--------- --- --------- --- --------- --- ---------- ---
MORTGAGE-BACKED SECURITIES
AVAILABLE-FOR-SALE................. $39,315 7.12% $302,215 5.19% $ 8,282 5.95% $1,353,364 7.14%
--------- --- --------- --- --------- --- ---------- ---
--------- --- --------- --- --------- --- ---------- ---
FHLB-New York stock..................
Preferred and common stock...........
Mutual funds.........................
<CAPTION>
TOTAL SECURITIES
-------------------------------------------
WEIGHTED ESTIMATED WEIGHTED
AVERAGE AMORTIZED FAIR AVERAGE
LIFE (1) COST VALUE YIELD
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
DEBT AND EQUITY SECURITIES
AVAILABLE-FOR-SALE:
U.S. government securities and
obligations........................ 56.99 $ 101,406 $ 99,487 5.97%
Asset-backed securities.............. 42.96 40,561 40,369 5.02
-------- ---------- ---------- ---
Total debt and equity securities
available-for-sale................. 52.98 $ 141,967 $ 139,856 5.70%
-------- ---------- ---------- ---
-------- ---------- ---------- ---
MORTGAGE-BACKED SECURITIES HELD-TO-
MATURITY........................... 99.54 $ 23,096 $ 21,120 8.77%
-------- ---------- ---------- ---
-------- ---------- ---------- ---
MORTGAGE-BACKED SECURITIES
AVAILABLE-FOR-SALE................. 294.11 $1,703,176 $1,717,106 6.79%
-------- ---------- ---------- ---
-------- ---------- ---------- ---
FHLB-New York stock.................. $ 40,754 $ 40,754 --%
---------- ---------- ---
---------- ---------- ---
Preferred and common stock........... $ 40,038 $ 40,038 4.29%
---------- ---------- ---
---------- ---------- ---
Mutual funds......................... $ 779 $ 756 7.07%
---------- ---------- ---
---------- ---------- ---
</TABLE>
__________
(1) This calculation is in months.
22
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits, repayments and maturities on loans and
mortgage-backed securities, redemptions of debt and equity securities and, to
a lesser extent, borrowings under reverse repurchase agreements and funding
notes are the primary source of the Company's funds for use in lending,
investing and for other general purposes.
DEPOSITS. The Bank offers a variety of deposit accounts having a range
of interest rates and terms. The Bank's deposits consist of passbook
savings, demand and NOW, money market, statement savings and certificate
accounts. The flow of deposits is influenced significantly by general
economic conditions, changes in money market rates, prevailing interest rates
and competition. The Bank's deposits are obtained primarily from the areas
in which its branch offices are located. The Bank relies on customer service
and long-standing relationships with customers to attract and retain these
deposits. Certificate accounts in excess of $100,000 are not actively
solicited by the Bank. In fiscal 1996, the Bank entered into an agreement
whereby it authorized a broker to sell its certificates of deposit. No sales
have taken place as of September 30, 1996 under this agreement. Since 1990,
when market rates decreased, the Bank has not attempted to retain certificate
accounts by keeping its rates above those offered by competitors. Despite
this strategy, certificate accounts increased to 53.92% of total deposits at
September 30, 1996 from 51.51% of total deposits at September 30, 1995.
Management believes that this increase is attributable to the rise in
interest rates that occurred during fiscal 1996 and 1995 and the return of
funds to certificate accounts that had been temporarily invested in short
term liquid accounts. Management monitors the Bank's certificate accounts
and, based on historical experience, believes it will retain a large portion
of the funds held in such accounts upon maturity.
The following table sets forth the distribution of the Bank's deposit
accounts at the dates indicated and the weighted average nominal interest
rates on each category of deposits presented. Management believes that the
use of year end balances instead of average balances does not result in any
material difference in the information presented.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ------------------------------- -------------------------------
WEIGHTED WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
---------- -------- -------- ---------- -------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts......... $ 669,241 18.42% 2.76% $ 730,060 20.43% 2.76% $ 934,912 26.20% 2.75%
Demand and NOW accounts... 227,747 6.27 1.30 223,232 6.25 1.29 207,967 5.83 2.90
---------- -------- ---------- -------- ---------- --------
Total................. 896,988 24.69 953,292 26.68 1,142,879 32.03
Money market accounts..... 130,442 3.59 2.75 154,938 4.34 2.75 207,952 5.83 2.75
Statement savings
accounts................ 646,789 17.80 3.24 624,707 17.48 3.24 826,970 23.18 2.94
Certificate accounts:
Jumbo within 1 year..... 110,565 3.04 5.41 86,698 2.43 5.62 36,463 1.02 3.75
Other within 1 year..... 1,250,270 34.42 5.41 1,075,725 30.10 5.53 698,880 19.59 3.84
One to three years...... 314,327 8.65 5.68 423,644 11.86 6.13 469,421 13.16 5.44
Three or more years..... 283,629 7.81 6.42 254,525 7.12 6.50 185,250 5.19 5.64
---------- -------- ---------- -------- ---------- --------
Total................... 1,958,791 53.92 1,840,592 51.51 1,390,014 38.96
---------- -------- ---------- -------- ---------- --------
Total deposits............ $3,633,010 100.00% $3,573,529 100.00% $3,567,815 100.00%
---------- -------- ---------- -------- ---------- --------
---------- -------- ---------- -------- ---------- --------
</TABLE>
23
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at September 30, 1996, 1995 and 1994 and the
periods to maturity of the certificate accounts outstanding at September 30,
1996:
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM SEPTEMBER 30, 1996
---------------------------------------------
AT SEPTEMBER 30, ONE TO
---------------------------------- WITHIN THREE
1996 1995 1994 ONE YEAR YEARS THEREAFTER TOTAL
---------- ---------- ---------- ---------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.99% or less.............................. $ 36 $ 11,029 $ 495,426 $ 36 $ -- $ -- $ 36
4.00% - 4.99%.............................. 292,511 149,768 361,917 286,664 5,775 72 292,511
5.00% - 5.99%.............................. 1,160,668 897,341 354,261 835,312 245,574 79,782 1,160,668
6.00% - 6.99%.............................. 393,757 650,183 139,042 222,677 61,140 109,940 393,757
7.00% - 7.99%.............................. 111,739 131,214 37,344 16,144 1,762 93,833 111,739
8.00% or greater........................... 80 1,057 2,024 2 76 2 80
---------- ---------- ---------- ---------- -------- ---------- ----------
$1,958,791 $1,840,592 $1,390,014 $1,360,835 $314,327 $283,629 $1,958,791
---------- ---------- ---------- ---------- -------- ---------- ----------
---------- ---------- ---------- ---------- -------- ---------- ----------
</TABLE>
The following table presents the deposit activity of the Bank for the periods
indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Opening
balance...................................................................................... $3,573,529 $3,567,815 $3,617,600
Net withdrawals.............................................................................. (96,367) (133,966) (170,119)
Interest credited............................................................................ 155,848 139,680 120,334
---------- ---------- ----------
Ending balance............................................................................... $3,633,010 $3,573,529 $3,567,815
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table presents time deposits at September 30, 1996 over $100,000:
<TABLE>
<CAPTION>
MATURITY PERIOD
- --------------- AMOUNT
---------------
(IN THOUSANDS)
<S> <C>
Three months or less.......................................................................................... $ 37,996
Over three through six months................................................................................. 38,384
Over six through 12 months.................................................................................... 34,184
Over 12 months................................................................................................ 50,090
--------
Total..................................................................................................... $ 160,654
--------
--------
</TABLE>
BORROWINGS
Although deposits are the Bank's primary source of funds, the Bank often uses
borrowings as an alternative and sometimes a less costly source of funds. The
Bank's primary source of borrowing is sales of securities under agreements to
repurchase ("reverse-repurchase agreements"), generally from 30 days up to 36
months, with nationally recognized investment banking firms. Reverse-repurchase
agreements are accounted for as borrowings by the Bank and are secured by
designated securities. The proceeds of these transactions are used to meet cash
flow or asset/liability needs of the Bank as well as to take advantage of
investment opportunities that may exist in the market which enable the Bank to
earn a positive interest rate spread. At September 30, 1996, the Bank had
reverse-repurchase agreements outstanding of $0.8 billion. Additionally, the
Company's investment policy enables the Company to enter into certain interest
rate contracts to hedge interest rates on certain assets and liabilities. The
Bank had entered into interest rate cap agreements involving a notional amount
of $90.0 million and $140.0 million as of September 30, 1996 and 1995,
respectively, which serve to hedge against the interest rate risk of borrowed
funds.
In addition, on June 27, 1996, the Bank issued a Funding note in the amount of
$181.4 million which is collateralized by a pool of adjustable rate residential
mortgage loans. Payments of principal and interest on the Funding note are paid
monthly based on the scheduled payments due on the underlying loans. The
interest on the Funding note changes monthly and bears
24
<PAGE>
interest at a rate of 50 basis points over the one month London Interbank
Offered Rate ("LIBOR"). See Note 14 of Notes to Consolidated Financial
Statements.
The following table sets forth certain information regarding borrowed funds
for the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
SEPTEMBER 30,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS
<S> <C> <C> <C>
FHLB-NY note payable:
Average balance outstanding..................... $ 2,461 $ 875 $ 8
Maximum amount outstanding at any month-end
during the year................................ -- 30,000 3,000
Balance outstanding at end of year.............. -- 10,000 --
Weighted average interest rate during the
year........................................... 5.73% 6.32% 5.13%
Weighted average interest rate at end of year... -- 6.63 --
Reverse-repurchase agreements and short-term loans
payable:
Average balance outstanding..................... $675,104 $510,111 $228,360
Maximum amount outstanding at any month-end
during the year................................ 805,942 743,952 325,022
Balance outstanding at end of year.............. 800,000 623,675 325,022
Weighted average interest rate during the
year........................................... 5.69% 5.53% 4.30%
Weighted average interest rate at end of year... 5.52 5.69 4.66
Funding note:
Average balance outstanding..................... $ 46,883 -- --
Maximum amount outstanding at any month-end
during the year................................ 181,370 -- --
Balance outstanding at end of year.............. 178,023 -- --
Weighted average interest rate during the
year........................................... 6.11% -- --
Weighted average interest rate at end of year... 6.00 -- --
Total borrowings:
Average balance outstanding..................... $724,448 $510,986 $228,368
Maximum amount outstanding at any month-end
during the year................................ 981,119 743,952 325,022
Balance outstanding at end of year.............. 978,023 633,675 325,022
Weighted average interest rate during the
year........................................... 5.71% 5.53% 4.30%
Weighted average interest rate at end of year... 5.61 5.70 4.66
</TABLE>
PURCHASE ACCOUNTING
In 1983, with the assistance of the Federal Savings and Loan Insurance
Corporation ("FSLIC") as set forth in an assistance agreement ("Assistance
Agreement"), the Bank acquired, as a wholly-owned subsidiary, The Long Island
Savings Bank of Centereach FSB ("Centereach"). The Bank and Centereach reported
to the Federal Home Loan Bank Board of New York ("FHLB-NY"), forerunner of the
OTS, as two separate entities. In 1986, with FSLIC assistance, the Bank
acquired Flushing Federal Savings and Loan Association ("Flushing Federal") by
merger.
The FSLIC-assisted supervisory acquisitions of Centereach and Flushing
Federal were accounted for using the purchase method of accounting and
resulted in goodwill of $656.8 million. The goodwill constituted an
intangible asset on Centereach's and the Bank's balance sheets, and was
included in determining regulatory capital. As a result of FIRREA, however,
each bank was required to deduct "non-qualifying" goodwill from all measures
of regulatory capital and phase out "qualifying supervisory goodwill" from
core (and therefore also from risk-based) capital by December 31, 1994.
To bring Centereach into capital compliance and avoid possible regulatory
sanctions against Centereach on September 3, 1993, with the OTS's approval,
Centereach and the Bank sold $836.3 million in deposits from ten branch
locations and reduced their asset size by a similar amount. Concurrent with the
sale of these deposits, the Bank was merged into Centereach ("Merger") and
Centereach's name was changed to The Long Island Savings Bank, FSB. The
Company, in connection with the Merger, reviewed its accounting policies and
practices and decided to revise its past practices relating
25
<PAGE>
to the amortization of goodwill. The $625.4 million in goodwill on
Centereach's books, as a result of "pushdown" accounting related to the
Centereach acquisition, was originally to be amortized over 40 years in
accordance with Accounting Principles Board Opinion No. 17 ("APB 17"),
"Intangible Assets." In fiscal 1993 the Company decided to amortize all of
this goodwill at a constant rate over the average lives of acquired long-term
interest-earning assets (after adjustment for estimated prepayments of assets
subject to prepayment), in accordance with Statement of Financial Accounting
Standards No. 72 ("SFAS 72"), "Accounting for Certain Acquisitions of Banking
or Thrift Institutions." The principal effect of the retroactive adoption of
SFAS 72 was to reallocate the amortization of the goodwill so that a greater
proportion of such goodwill was amortized in earlier years. This resulted in
the additional amortization of $323.5 million of goodwill against fiscal 1993
earnings as a cumulative effect of a change in accounting principle effective
October 1, 1992. In addition, the balance of the Centereach unamortized
goodwill, $59.2 million, was written off in September 1993 as a charge to
current earnings.
The unamortized balance of goodwill recorded in connection with the 1986
acquisition of Flushing Federal of $11.6 million was also written off in
September 1993 as a charge to current earnings.
The November 1994 acquisitions of Entrust and Developer's and the August 1996
acquisition of First Home were accounted for using the purchase method of
accounting and resulted in goodwill to be charged to earnings on a straight line
basis over 15 years. As of September 30, 1996 the unamortized balance of
goodwill related to these acquisitions was $5.3 million.
The following table sets forth the net effect on income of purchase
accounting adjustments for the fiscal years ended September 30:
<TABLE>
RECOGNITION OF
DISCOUNT
AMORTIZATION PURCHASE ACCOUNTING (PREMIUM) DUE NET EFFECT
FISCAL YEAR OF GOODWILL DISCOUNTS, NET TO ASSET SALES ON INCOME
- ----------- ------------ ------------------- --------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1994 . . . . . . . . . $ -- $ 1,822 $ -- $ 1,822
1995 . . . . . . . . . (211)(1) 1,492 56 1,337
1996 . . . . . . . . . (284)(2) 1,081 (1,308) (511)
</TABLE>
______________
(1) Represents amortization stemming from the acquisitions of the
operations of Entrust and Developer's and is included in Other general &
administrative expense in the Consolidated Statements of Operations.
(2) Represents amortization stemming from the acquisitions of
operations of Entrust, Developer's and First Home since its acquisition and
is included in Other general and administrative expense in the Consolidated
Statements of Operations.
The following table sets forth the scheduled amortization of remaining
purchase accounting discounts (premiums) for the fiscal years ending September
30:
PURCHASE
ACCOUNTING
FOR THE FISCAL DISCOUNTS/
YEAR ENDING (PREMIUMS)
- -------------- --------------
(IN THOUSANDS)
1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 652
1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224
1999-2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
2004-2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . (299)
2009-2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,065)
2014 and thereafter . . . . . . . . . . . . . . . . . . . . . . (855)
--------------
$(1,170)
--------------
--------------
OTHER FEE BASED PRODUCTS
In 1990, the Bank organized the Long Island Savings Agency ("LISA"), as a
wholly-owned service corporation to offer non-traditional, fee-based products to
its customers. LISA was formed to engage in the business of selling single
premium
26
<PAGE>
deferred annuity products and was expanded in 1993 to offer a broader range
of financial products and services including an expanded line of annuities
and other investment products by marketing a line of mutual funds with a
variety of investment objectives. The insurance products and mutual funds
sold are products of unrelated insurance and securities firms from which LISA
earns commissions. During the fiscal years ended September 30, 1996, 1995 and
1994, LISA generated gross fee income of $1.6 million, $0.8 million and $1.2
million, respectively.
SUBSIDIARY ACTIVITIES
The Bank currently owns 17 subsidiaries, each of which is wholly-owned.
These subsidiaries have been primarily created to (a) take title to
foreclosed properties, (b) take title to land held for investment, (c)
develop or own investment properties, (d) act as holding companies, (e) sell
insurance and securities products and (f) facilitate borrowings.
(a) Foreclosed Property Subsidiaries. Longrich Investors, Inc., Oldfield
Realty, Inc., Syosset N.J. Realty, Inc. and Syosset Connecticut Realty, Inc.
were all formed for the sole purpose of holding title to foreclosed property.
Two subsidiaries take title to properties located in New York and one each in
New Jersey and Connecticut. Such properties are included in Real estate owned
in the Consolidated Statements of Financial Condition.
(b) Subsidiaries Holding Land for Investment. Christa Realty, Inc., Kyle
Development, Inc. and 63 Ocean Realty Corp. were primarily formed to take
title to undeveloped land held for investment purposes. Such properties are
included in Investment in real estate in the Consolidated Statements of
Financial Condition.
(c) Real Estate Development/Rental Subsidiaries. Longpond Investors Inc.
and Longco Investors Inc. were created primarily to serve as joint venture
partners where the joint venture built and now operates rental real estate.
Suffco Development Corp. was formed for the same purpose except that the
projects are sold upon completion. Suffco Development Corp. also serves as
document custodian to facilitate operations with FNMA. 3366 Park Avenue
Corp. owns an office building that contains branch facilities and operates
the property.
(d) Holding Company Subsidiaries. Mortgage Headquarters Inc. was formed
primarily for the purpose of serving as a holding company for lower tier
subsidiary operations. In addition, Mortgage Headquarters Inc. serves as a
joint venture partner where the joint venture originates mortgage loans.
(e) Insurance Products and Mutual Funds Subsidiary. LISA was formed to
market insurance products and mutual funds. The insurance products and
mutual funds sold are products of unrelated insurance and securities firms
from which LISA earns commissions. See -- Other Fee Based Products.
(f) Financing Subsidiary. 201 Old Country Road Inc. was formed to serve
as a special purpose subsidiary which currently holds mortgage loans that
serve as collateral for the Funding note previously described. See
- --Borrowings.
(g) Other Subsidiaries. Great Neck Towers Corp., Syosset Document Corp.
and First Home Mortgage of Virginia, Inc. are inactive subsidiaries. First
Home Mortgage of Virginia, Inc. was acquired by the Company in August 1996.
All former operations and net assets purchased in the acquisition were
transferred to the Bank.
SAVINGS BANK LIFE INSURANCE
As an issuing bank, the Bank offers Savings Bank Life Insurance ("SBLI") to
its customers up to the legal maximum of $50,000 per insured individual and,
as a trustee bank, offers an additional $500,000 in group coverage per
insured under SBLI's Financial Institution Group Life Insurance policy.
During April 1996, approximately 8,800 life insurance policies were
transferred from East River Savings Bank at no cost to the Company. As of
September 30, 1996, the SBLI Department had approximately 17,200 policies in
effect. The SBLI Department's activities are segregated from the Bank and,
while they do not materially affect the Bank's earnings, management believes
that offering SBLI is beneficial to the Bank's relationship with its
depositors and the general public. The SBLI Department pays its own
expenses and reimburses the Bank for expenses incurred on its behalf.
27
<PAGE>
PERSONNEL
As of September 30, 1996, the Bank had 1,355 full-time employees and 123 part-
time employees. The employees are not represented by a collective bargaining
unit, and the Bank considers its relationship with its employees to be good.
TAXATION
FEDERAL TAXATION
GENERAL. The Holding Company and the Bank report their income on a consolidated
basis, using a calendar year and the accrual method of accounting and are
currently subject to federal income taxation in the same manner as other
corporations. Prior to January 1, 1996, the Bank was entitled to establish a
reserve for bad debts under Section 593 ("IRC 593") of the Internal Revenue Code
of 1986, as amended ("Code"). IRC 593 was repealed in August 1996 as part of
the Small Business Job Protection Act of 1996. The following discussion of tax
matters is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Holding Company. The
Bank is currently under exam by both the Internal Revenue Service and New York
State Department of Taxation and Finance, however, no material tax deficiencies
are anticipated.
BAD DEBT DEDUCTION. The Bank is required to use the specific charge-off method
for calculating its bad debt deduction effective the first tax year after
December 31, 1995. The specific charge-off method under the Code Section 166(a)
permits a taxpayer to deduct any debt (or portion thereof) that becomes wholly
(or partially) worthless during the tax year.
As part of the repeal of IRC 593, the Bank is required to recapture (that is,
include in taxable income) its post-1987 additions to its bad debt reserves
whether the additions were computed using a percentage based on the Bank's
actual loss experience ("experience method"), or a percentage equal to 8% of the
Bank's taxable income, computed with certain modifications, without regard to
the Bank's actual loss experience, and reduced by the amount of any addition
permitted to the reserve for non-qualifying loans ("percentage of taxable income
method"). The recapture is to be determined under Code Section 481(a) and will
be added into taxable income ratably over a six year period beginning with the
first tax year after 1995. The amount to be recaptured is approximately $2.7
million and will not have a material impact on the Company. The Bank may
postpone the recapture of the post-1987 excess reserves for up to two years if
the Bank meets certain residential loan requirements. The residential loan
requirements provide for deferral during 1996 and 1997 if the principal amount
of residential loans originated by the Bank during each year is not less than
its base amount. The base amount is defined as the average of the principal
amounts of residential loans originated by the Bank during the six most recent
tax years beginning before January 1, 1996. Residential loans are defined as
loans secured by residential real property, church property and certain mobile
homes, but only to the extent that the loan is made to the owner of the property
to acquire, construct or improve the property. By this definition, mortgage
refinancing and home equity loans are not considered residential loans, except
to the extent that the loan proceeds are used to acquire or improve qualified
residential property.
DISTRIBUTIONS. To the extent that (i) the Bank's reserve for losses on
qualifying real property loans exceeds the amount that would have been allowed
under the experience method and (ii) the Bank makes "non-dividend distributions"
to stockholders that are considered to result in distributions from the excess
tax bad debt reserve or the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Bank's bad debt reserves.
The amount of additional taxable income created from an Excess Distribution is
an amount that when reduced by the tax attributable to the income is equal to
the amount of the distribution. Thus, if certain portions of the Bank's
accumulated bad debt reserve are used for any purpose other than to absorb
qualified bad debt losses, such as for the payment of dividends or other
distributions with respect to the Bank's capital stock (including distributions
upon redemption or liquidation), approximately one and one-half times the amount
so used would be includible in gross income for federal income tax purposes,
assuming a 35% corporate income tax rate (exclusive of state taxes). See "--
Regulation" for limits on the payment of dividends by the Bank. The Bank does
not intend to pay dividends that would result in a recapture of any portion of
its bad debt reserves.
28
<PAGE>
The recapture of the pre-1988 reserves also applies if the taxpayer fails to
qualify as a bank as defined by Code Section 581. A bank is defined as a bank
or trust company incorporated and doing business under the laws of the United
States (including laws relating to the District of Columbia) or any State, a
substantial part of the business of which consists of receiving deposits and
making loans and discounts, or of exercising fiduciary powers similar to those
permitted to national banks under authority of the Comptroller of the Currency,
and which is subject by law to supervision and examinations by State,
Territorial or Federal Authority having supervision over banking institutions.
The Bank intends to continue to qualify as a bank under Code Section 581.
The pre-1988 reserves and supplemental reserves will be treated as tax
attributes to which Code Section 381 applies. In the case of mergers,
acquisitions, spin-offs and other reorganizations of a thrift, the surviving
institution will inherit the pre-1988 reserves and the accumulated earnings and
profits of the former thrift. As stated above, the pre-1988 reserves will be
restored into income in the case of any distribution in redemption of the stock
of the surviving institution or any partial or complete liquidation following a
merger.
CORPORATE ALTERNATIVE MINIMUM TAX. For taxable years beginning after December
31, 1986, the Code imposes a tax on alternative minimum taxable income ("AMTI")
at a rate of 20%. Only 90% of the AMTI can be offset by net operating loss
carryovers. For taxable years beginning after December 31, 1989, the adjustment
to AMTI based on book income will be an amount equal to 75% of the amount by
which a corporation's adjusted current earnings exceeds its AMTI (determined
without regard to this adjustment and prior to reduction for net operating
losses). In addition, for taxable years beginning after December 31, 1986, and
before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI
(with certain modifications) over $2.0 million is imposed on corporations,
including the Company, whether or not an Alternative Minimum Tax ("AMT") is
paid. The Company does not expect to be subject to the AMT. The Company was
subject to an environmental tax liability for the tax year ended December 31,
1995, which was not material.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Holding Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Holding Company will not file a consolidated tax return. The
deduction is increased to 80% if the Holding Company owns more than 20% of the
stock of a corporation distributing a dividend.
STATE AND LOCAL TAXATION
NEW YORK STATE TAXATION. The Company is subject to New York State franchise
taxes on net income (federal taxable income with adjustments) or one of several
alternative bases, whichever results in the highest tax. The Company will file
a combined tax return in the same manner as other corporations with some
exceptions, including the Bank's reserve for bad debts as discussed below.
Generally, the Holding Company would not be required to pay New York State tax
on dividends and interest received from the Bank or on gains realized on the
sale of Bank stock.
New York State passed legislation in August 1996 that incorporated the
provisions of IRC 593 into New York Sate tax law. The impact of this
legislation enabled the Bank to defer the recapture of the New York State tax
bad debt reserves that would have occurred as a result of the federal repeal of
IRC 593. The legislation also enabled the Bank to continue to utilize the
reserve method for computing its bad debt deduction. The following discussion
of the reserve for bad debts is intended only as a summary and does not purport
to be a comprehensive description of the New York State tax rules applicable to
the Bank or the Holding Company.
BAD DEBT DEDUCTION. Savings institutions such as the Bank which meet certain
definition tests primarily relating to their assets and the nature of their
business ("qualifying thrifts") are permitted to establish a reserve for bad
debts and to make annual additions thereto, which additions may, within
specified formula limits, be deducted in arriving at their taxable income. The
Bank will be a qualifying thrift only if, among other requirements, at least 60%
of its assets are assets described in Section 1453(h)(1) of the New York State
Tax Law. These assets generally include cash, obligations of the United States
or an agency or instrumentality thereof, certain obligations of a state or
political subdivision thereof, residential real estate loans and related loans,
loans secured by savings accounts, student loans and property used by the Bank
in the conduct of its business. If the Bank failed to meet the 60% test in any
taxable year or otherwise failed to be a qualifying thrift, the Bank would be
considered a "large bank" (based on its current assets) and as such it would not
be permitted to deduct additions to a bad debt reserve. In addition, the Bank
would be required to recapture all or a portion of its bad debt reserves, which
may be spread over a period of years. The Bank presently satisfies the 60%
test. Although
29
<PAGE>
there can be no assurance that the Bank will satisfy the 60% test in the
future, management believes that this level of qualifying assets can be
maintained by the Bank. The Bank's deduction for additions to its bad debt
reserve with respect to qualifying loans may be computed using the experience
method or a percentage equal to 32% of the Bank's taxable income, computed
with certain modifications, without regard to the Bank's actual loss
experience, and reduced by the amount of any addition permitted to the
reserve for non-qualifying loans ("NYS percentage of taxable income method").
Use of the NYS percentage of taxable income method of calculating the
addition to the bad debt reserve may have the effect of reducing the marginal
rate of tax on the Bank's income derived from qualifying loans to a rate as
low as 7.6%, exclusive of any alternative tax, as compared to the generally
applicable maximum corporate New York State income tax rate of 11.21%. The
Bank's deduction with respect to non-qualifying loans must be computed under
the experience method which is based on the qualifying thrift's actual loss
experience. Under the experience method, the amount of a reasonable
addition, in general, equals the amount necessary to increase the balance of
the bad debt reserve at the close of the taxable year to the greater of (i)
the amount that bears the same ratio to loans outstanding at the close of the
taxable year as the total net bad debts sustained during the current and five
preceding taxable years bears to the sum of the loans outstanding at the
close of those six years, or (ii) the balance of the bad debt reserve at the
close of the base year (assuming that the loans outstanding have not declined
since then). The "base year" for these purposes is the last taxable year
beginning before the NYS percentage of income bad debt deduction was taken.
Any deduction for the addition to the reserve for non-qualifying loans
reduces the taxable addition to the reserve for qualifying real property
loans calculated under the NYS percentage of taxable income method. Each
year the Bank reviews the most favorable way to calculate the deduction
attributable to an addition to the bad debt reserve.
The amount of the addition to the reserve for losses on qualifying real property
loans under the NYS percentage of taxable income method cannot exceed the amount
necessary to increase the balance of the reserve for losses on qualifying real
property loans at the close of the taxable year to 6% of the balance of the
qualifying real property loans outstanding at the end of the taxable year. Also,
if the qualifying thrift uses the NYS percentage of taxable income method, then
the qualifying thrift's aggregate addition to its reserve for losses on
qualifying real property loans cannot, when added to the addition to the reserve
for losses on non-qualifying loans, exceed the amount by which (i) 12% of the
amount that the total deposits or withdrawable accounts of depositors of the
qualifying thrift at the close of the taxable year exceeded (ii) the sum of the
qualifying thrift's surplus, undivided profits and reserves at the beginning of
such year. The Bank's balance of its reserve for losses on qualifying real
property loans, for New York State tax purposes, was approximately $98 million
at December 31, 1995.
NEW YORK CITY AND OTHER STATES. The Company is required to file tax returns in
New York City and ten other states and jurisdictions where it maintains mortgage
lending offices. Unlike New York State, New York City has not enacted
legislation which would prevent the recapture of federal bad debt reserves from
being subject to New York City tax. If New York City does not pass such
legislation, the resulting New York City tax expense would not be material. The
New York City tax rate is 9.0% of the net income allocable to New York City.
The Company's tax rates in the other ten states in which it conducts business
vary from 6.0% to 11.25% on allocable net income for the specific jurisdiction.
In addition, the Holding Company is required to file an annual report with and
pay an annual franchise tax to the State of Delaware.
REGULATION
GENERAL
Set forth below is a brief description of certain laws and regulations which
relate to the regulation of the Bank. The description is not complete and is
qualified in its entirety by reference to applicable laws and regulations.
The Bank is a federally chartered savings bank, the deposits of which are
insured by the Savings Association Insurance Fund ("SAIF"), which is
administered by the FDIC. See "--Insurance of Accounts." Accordingly, the Bank
is subject to broad regulation and oversight by its primary regulators, the OTS
and the FDIC. The Bank is subject to certain limited regulation by the Board of
Governors of the Federal Reserve System ("FRB"). The Company, as a savings and
loan holding company, is required to file certain reports and otherwise comply
with the rules and regulations of the OTS. The Company is also required to
comply with the rules and regulations of the Securities and Exchange Commission
("SEC") under the federal securities laws. As a federal savings bank, the Bank
is subject to extensive regulation and supervision by the OTS. The OTS
periodically examines the Bank for compliance with various regulatory
requirements. The FDIC also has the authority to conduct special examinations
of the Bank. The Bank must file periodic reports with the OTS describing its
30
<PAGE>
activities and financial condition. Certain regulatory requirements applicable
to the Bank are discussed below or elsewhere herein.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
The activities of savings institutions are governed by the Home Owner's Loan
Act, as amended ("HOLA") and, in certain respects, the Federal Deposit Insurance
Act ("FDIA"). The HOLA and the FDIA were amended by FIRREA and the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FDICIA, among
other things, requires that federal banking regulators intervene promptly when a
depository institution experiences financial difficulties. FDICIA also requires
the establishment of a risk-based deposit insurance assessment system and the
imposition of numerous additional safety and soundness operational standards and
restrictions. FIRREA and FDICIA contain provisions affecting numerous aspects
of the operations and regulations of federally-insured savings and loan
associations and empower the OTS and the FDIC, among other agencies, to
promulgate regulations implementing their provisions.
The investment and lending authority of the Bank is restricted by federal laws
and regulations. Savings associations are restricted as to the amount that may
be invested in nonresidential real property loans and may not invest in non-
investment grade debt securities, nor may they generally make equity
investments, other than investments in service corporation subsidiaries.
Transactions between the Bank and its affiliates are limited to certain
percentages of the Bank's capital and certain other restrictions. The OTS may
impose additional restrictions on transactions with affiliates if necessary to
protect the safety and soundness of savings associations and has adopted
regulations against insider abuse.
LOANS-TO-ONE BORROWER LIMITS. Savings associations, such as the Bank, generally
are subject to the same loans-to-one borrower limits that apply to national
banks. With certain exceptions, loans and extensions of credit outstanding at
one time to one borrower (including certain related entities of the borrower)
may not exceed 15% of the unimpaired capital and surplus of the savings
association, plus an additional 10% of unimpaired capital and surplus for loans
fully secured by certain readily marketable collateral. At September 30, 1996,
the maximum amount the Bank could lend to one borrower was approximately $67.6
million, and at that date the Bank had no lending relationships which exceeded
such loans-to-one borrower limitation. See "Business--Lending Activities-Loan
Concentrations."
INSURANCE OF ACCOUNTS. FIRREA established two separate deposit insurance funds
that are not to be commingled. The two funds are the Bank Insurance Fund
("BIF") to insure banks and the SAIF to insure savings associations. The
deposits of the Bank are insured up to $100,000 per depositor (as defined by law
and regulation) by the SAIF, which is administered by the FDIC and backed by the
full faith and credit of the United States government. The FDIC is authorized
to conduct examinations of, and to require reporting by, insured institutions,
such as the Bank. It may prohibit any insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious threat to
the insurance fund. The FDIC also has the authority to initiate enforcement
actions where the OTS has failed or declined to take such action after receiving
a request to do so from the FDIC.
FDICIA eliminated limitations on increases in federal deposit insurance premiums
and authorized the FDIC to increase the assessment rates to the extent necessary
to protect the SAIF and the BIF. FDICIA also directs the FDIC to implement a
risk-based deposit insurance assessment system. Pursuant to this requirement,
the FDIC adopted a risk-based assessment system, effective January 1, 1994,
under which all insured depository institutions are placed into one of nine
categories and assessed insurance premiums, ranging from 0.23% to 0.31% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., those with a core
capital ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted
assets ("Tier 1 risk-based capital") of at least 6% and a total risk-based
capital ratio of at least 10% and considered financially sound with no material
weaknesses) would pay the lowest premium while institutions that are less than
adequately capitalized (i.e., those with core and Tier 1 risk-based capital
ratios of less than 4% or a risk-based capital ratio of less than 8% and
considered of substantial supervisory concern) would pay a higher premium. Risk
classification of all insured institutions is determined by the FDIC
periodically. As of the date of this Report, the FDIC has informed the Bank that
its annual assessment for deposit insurance is 0.23%, the lowest category for
the period from July 1, 1996 to December 31, 1996.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, order or any condition imposed by a written
agreement with the FDIC. It also may suspend deposit insurance temporarily
during the hearing process for the permanent
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termination of insurance, if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the institution at the
time of the termination, less subsequent withdrawals, shall continue to be
insured for a period of six months to two years, as determined by the FDIC.
Management is aware of no existing circumstances pursuant to which the FDIC
would seek to impose sanctions on the Bank or which could result in
termination of the Bank's deposit insurance.
On September 30, 1996, as part of an omnibus appropriations bill, the Deposit
Insurance Funds Act of 1996 ("Act") was enacted. The Act should significantly
reduce and eventually end the premium disparity that has existed between banks
insured by the BIF and thrifts insured by the SAIF. The Act requires i) SAIF
institutions to pay a one-time special assessment, ii) BIF institutions to
include in their deposit insurance premiums beginning January 1, 1997 a portion
of the interest due on the Finance Corporation ("FICO") bonds, and iii) BIF
institutions to pay their full pro rata share of the FICO payments starting the
earlier of January 1, 2000 or the date at which no savings institution continues
to exist. Beginning January 1, 1997, the FDIC has estimated that thrifts will
pay a rate of 6.4 cents per $100 of deposits (a 16.6% reduction from the current
assessment of 23 cents) and banks will pay 1.3 cents per $100 deposits to fund
FICO bond interest payments until the earlier of January 1, 2000 or the date at
which the last savings association continues to exist. At that time the
payments will be shared on a pro-rata basis. Pursuant to these provisions of
the Act, the Bank paid a special SAIF premium assessment totaling $18.7 million
on November 27, 1996. The Bank also anticipates that, commencing on January 1,
1997 and through December 31, 1999, its annual SAIF assessment will drop to $2.4
million and in the year 2000 will drop to approximately $0.5 million. The Bank
paid $8.4 million in SAIF assessments in fiscal 1996.
The Act also includes a provision that requires the U.S. Treasury Department to
conduct a study of all issues relevant to the development of a common charter
for all insured depository institutions and the elimination of separate charters
between thrifts and commercial banks. The Secretary of the Treasury is to
submit a report to Congress on the Treasury's findings and conclusions in
connection with the study on or before March 31, 1997. Another provision in the
Act states that the BIF and SAIF funds will merge on January 1, 1999 if no
insured depository institution is a savings association on that date.
In light of these latter two provisions of the Act, it is possible that the
Bank, on or before January 1, 1999, will be required to convert to a bank
charter and the Holding Company would be required to convert to a bank holding
company. In such an event, the Bank will be regulated by the Office of the
Comptroller of the Currency and the Holding Company would be regulated by the
FRB. It is also possible that Congress could modify the thrift, unitary holding
company, and/or bank charters, and/or create one or more new unified charters.
Management currently does not believe that any such regulatory change to the
charters of the Bank or the Company would have a material, adverse effect on the
Bank or the Company, although there can be no assurance that this would not be
the case.
LIQUIDITY REQUIREMENTS. All savings associations are required to maintain an
average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, specified United States Government, state and federal agency
obligations, shares of certain mutual funds and certain corporate debt
securities and commercial paper) equal to a certain percentage of the sum of its
average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. The liquidity requirement, which is currently 5%,
may be changed from time to time by the OTS (between 4.0% and 10.0%) depending
upon economic conditions and savings flows of all savings associations. Short-
term liquid assets currently must constitute at least 1.0% of a savings
association's average daily balance of net withdrawable deposit accounts and
current borrowings. Monetary penalties may be imposed upon savings associations
for violations of liquidity requirements. The Bank's liquidity and short-term
liquidity ratios for September 30, 1996 were 9.34% and 2.41%, respectively,
which exceeds the applicable requirements.
ACCOUNTING REQUIREMENTS. FIRREA requires the OTS to establish accounting
standards to be applicable to all savings associations except to the extent
otherwise specified in the capital standards. Such standards must incorporate
generally accepted accounting principals ("GAAP") to the same degree as is
prescribed by the Federal banking agencies for banks or may be more stringent
than such requirements.
QUALIFIED THRIFT LENDER TEST. All savings associations, including the Bank, are
required to meet a qualified thrift lender ("QTL") test to avoid certain
restrictions on their operations. Under FDICIA, a savings association has been
required to have at least 65.0% of its portfolio assets (which consist of total
assets less intangibles, properties used to conduct the savings association's
business and liquid assets not exceeding 20.0% of total assets) in "qualified
thrift investments" (primarily residential mortgage loans and related
investments, including certain mortgage-backed and mortgage-related securities)
on a monthly average basis in nine of every 12 months. A savings association
that fails the QTL test must either convert to a bank charter or operate under
certain restrictions. If the savings association does not convert to a bank
charter,
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it generally will be prohibited from: (i) making an investment or engaging in
any new activity not permissible for a national bank, (ii) paying dividends
not permissible under national bank regulations, (iii) obtaining advances
from any Federal Home Loan Bank ("FHLB"), and (iv) establishing any new
branch office in a location not permissible for a national bank in the
association's home state. One year following the association's failure to
meet the QTL test, any holding company parent of the association must
register and be subject to supervision as a bank holding company. In
addition, beginning three years after the association fails the QTL test, the
association would be prohibited from refinancing any investment or engaging
in any activity not permissible for a national bank and would have to repay
any outstanding advances from an FHLB as promptly as possible. On September
30, 1996, as part of the omnibus appropriations bill, Congress enacted the
Economic Growth and Paperwork Reduction Act of 1996 ("Regulatory Paperwork
Reduction Act"), modifying and expanding investment authority under the QTL
test. Prior to the enactment of the Regulatory Paperwork Reduction Act,
commercial, corporate, business, or agricultural loans were limited in the
aggregate to 10% of a thrift's assets and education loans were limited to 5%
of a thrift's assets. Further, in order to qualify for favorable tax
treatment, federal savings associations also had to meet a different asset
test under the Code (the "domestic building and loan association test"). The
amendments permit federal thrifts to invest in, sell, or otherwise deal in
education and credit card loans without limitation and raise from 10 to 20
percent of total assets the aggregate amount of commercial, corporate,
business, or agricultural loans or investments that may be made by a thrift,
subject to a requirement that amounts in excess of 10% of total assets be
used only for small business loans. In addition, the legislation defines
"qualified thrift investment" to include, without limit, education, small
business, and credit card loans; and removes the 10% limit on personal,
family, or household loans for purposes of the QTL test. The legislation
also provides that a thrift meets the QTL test if it qualifies as a domestic
building and loan association under the Code. As of September 30, 1996, the
Bank maintained 99.08% of its "portfolio assets" (which, as defined in the
OTS regulations, exclude liquidity items and office properties) in qualified
thrift investments and met the QTL test. At September 30, 1996, 89.79% of the
Bank's total assets were invested in qualified thrift investments.
TRANSACTIONS WITH RELATED PARTIES. Transactions between savings institutions
and any "affiliate" are governed by Sections 23A and 23B of the Federal Reserve
Act ("FRA"). An affiliate of a savings institution is any company or entity
which controls, is controlled by or is under common control with the savings
institution, including any holding company parent of the association and its
non-savings institution subsidiaries. Generally, Sections 23A and 23B (i) limit
the extent to which the savings institution or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10.0% of
such institution's capital stock and surplus, and contain an aggregate limit on
all such transactions with all affiliates to an amount equal to 20.0% of such
capital stock and surplus, and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. Each loan or extension of
credit to an affiliate by a savings association must be secured by collateral
with a market value ranging from 100% to 130% (depending on the type of
collateral) of the amount of credit extended. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions. In addition to the restrictions imposed by
Sections 23A and 23B, no savings institution may (i) loan or otherwise extend
credit to an affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies under Section 4(c)
of the Bank Holding Company Act, or (ii) purchase or invest in any stocks,
bonds, debentures, notes or similar obligations of any affiliates, except for
affiliates which are subsidiaries of the savings institution.
In addition, loans to directors, executive officers and to greater than 10.0%
stockholders of a savings institution or the company that controls the savings
institution, and certain affiliated interests of such insiders, are governed by
Sections 22(g) and 22(h) of the FRA, and Regulation O promulgated thereunder.
Such loans, together with all other outstanding loans to such person and
affiliated interests, may not exceed the institution's loans-to-one borrower
limit (generally equal to 15.0% of the institution's unimpaired capital and
surplus, plus an additional 10% for loans fully secured by readily marketable
collateral). Loans to directors, executive officers and principal stockholders
must also be made on terms substantially the same as offered in comparable
transactions to other persons, except for extensions of credit made pursuant to
a benefit or compensation program that is widely available to all employees of
the institution and does not give preference to insiders over other employees,
with prior board approval required for certain loans. In addition, the
aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes limitations on all
capital distributions by savings associations, which include cash dividends,
stock redemptions or repurchases, cash-out mergers, interest payments on certain
convertible debt and other distributions charged to the capital account of a
savings association. Generally, the applicable regulation permits specified
levels of capital distributions by associations meeting at least their minimum
capital requirements, so long
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as such associations provide the OTS with at least 30 days advance notice and
receive no objection to the distribution from the OTS.
The regulation establishes three tiers of savings associations, based primarily
on an association's capital level. Generally, Tier 1 associations, which are
savings associations that before and after the proposed distribution meet or
exceed their fully phased-in capital requirements and have not been informed by
the OTS that they are in need of more than normal supervision, may make capital
distributions during any calendar year equal to the higher of (i) 100.0% of net
income for the calendar year-to-date plus 50.0% of its "surplus capital ratio"
at the beginning of the calendar year or (ii) 75.0% of net income over the most
recent four quarter period. The "surplus capital ratio" is defined to mean the
percentage by which the association's ratio of total capital to assets exceeds
the ratio of its fully phased-in capital requirement to assets, and "fully
phased-in capital requirement" is defined to mean an association's capital
requirement under the statutory and regulatory standards applicable on December
31, 1994, as modified to reflect any applicable individual minimum capital
requirements imposed upon an association. Any additional capital distributions
would require prior regulatory approval. In the event the Bank's capital fell
below its fully-phased in requirement or the OTS notified it that it was in need
of more than normal supervision, the Bank's ability to make capital
distributions would be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any association, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. Furthermore, under FDICIA, the Bank
would be prohibited from making any capital distributions if, after the
distribution, the Bank would have: (i) a total risk-based capital ratio of less
than 8.0%, (ii) a Tier 1 risk-based capital ratio of less than 4.0% or (iii) a
leverage ratio of less than 4.0% (3.0% in the event that the Bank is assigned a
MACRO Rating of 1, the highest OTS examination rating for savings institutions).
As of September 30, 1996, the Bank qualified as a Tier 1 institution for
purposes of this regulation.
Tier 2 institutions are those in compliance with their current, but not their
fully phased-in, capital requirements. Tier 2 institutions may make
distributions of up to 75% of their net income for the most recent four-quarter
period. Tier 1 and Tier 2 institutions may seek OTS approval to pay dividends
beyond these amounts.
Tier 3 institutions have capital levels below their current required minimum
levels and may not make any capital distributions without the prior written
approval of the OTS.
In order to make distributions under these safe harbors, Tier 1 and Tier 2
associations must submit 30 days written notice to the OTS prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 association
deemed to be in need of more than normal supervision by the OTS may be treated
as a Tier 2 or Tier 3 association as a result of such a determination.
FEDERAL HOME LOAN BANK ("FHLB") SYSTEM. The Bank is a member of the Federal
Home Loan Bank Board of New York ("FHLB-NY"), which is one of 12 regional FHLB
governed and regulated by the Federal Housing Finance Board. Each FHLB serves as
a source of liquidity for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by its Board of Directors. At September 30,
1996, the Bank had no outstanding advances from the FHLB-NY.
As a member, the Bank is required to purchase and maintain stock in the FHLB-NY
in an amount equal to the greater of 1.0% of its aggregate unpaid residential
mortgage loans, home purchase contracts or similar obligations at the beginning
of each year or 5.0% of total advances. At September 30, 1996, the Bank had
$40.8 million in FHLB stock, which was in compliance with this requirement. For
the fiscal year ended September 30, 1996, dividends received from the FHLB-NY by
the Bank totalled $2.5 million.
ASSESSMENTS. Savings institutions are required by OTS regulations to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed based upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the institution's latest quarterly thrift financial report. The assessments
paid by the Bank in fiscal 1996 totalled $0.7 million.
BRANCHING. OTS rules permit federally chartered savings associations to branch
nationwide to the extent allowed by federal statute. The OTS authority preempts
any state law purporting to regulate branching by federal savings associations.
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COMMUNITY REINVESTMENT. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. An unsatisfactory rating may be used as a basis for denial
of an application for the OTS. The CRA also requires all institutions to make
public disclosure of their CRA ratings. Federal banking agencies, including the
OTS, have recently revised their CRA regulations and their methodology for
determining an institution's compliance with the CRA. The Bank received a CRA
Rating of Outstanding in its most recent CRA examination, which was conducted
prior to the effective date of the amended OTS regulations.
BROKERED DEPOSITS. The FDIC has promulgated regulations implementing the FDICIA
limitations on brokered deposits. Under the regulations, well-capitalized
institutions are not subject to brokered deposit limitations, while adequately
capitalized institutions are able to accept, renew or roll over brokered
deposits only (i) with a waiver from the FDIC and (ii) subject to the limitation
that they do not pay an effective yield on any such deposit which exceeds by
more than (a) 75 basis points the effective yield paid on deposits of comparable
size and maturity in such institution's normal market area for deposits accepted
in its normal market area or (b) 120 basis points for retail deposits and 130
basis points for wholesale deposits accepted outside the institution's normal
market area, respectively, from the current yield on comparable maturity U.S.
Treasury obligations. Undercapitalized institutions are not permitted to accept
brokered deposits and may not solicit deposits by offering an effective yield
that exceeds by more than 75 basis points the prevailing effective yields on
insured deposits of comparable maturity in the institution's normal market area
or in the market area in which such deposits are being solicited. Pursuant to
the regulation, the Bank, as a well-capitalized institution, may accept brokered
deposits. The Bank, however, had no brokered deposits outstanding as of
September 30, 1996.
REGULATORY CAPITAL REQUIREMENTS
GENERAL. Federally insured savings associations, such as the Bank, are required
to maintain minimum levels of regulatory capital. Pursuant to FIRREA, the OTS
established capital standards applicable to all Federal savings associations.
These standards generally must be no less stringent than the capital
requirements applicable to national banks. The OTS also is authorized to impose
capital requirements in excess of these standards on individual associations on
a case-by-case basis.
Any savings association that fails any of the capital requirements is subject to
possible enforcement actions by the OTS or the FDIC. Such actions could include
a capital directive, a cease and desist order, civil monetary penalties, the
establishment of restrictions on an association's operations and the appointment
of a conservator or receiver. The OTS' capital regulation provides that such
actions, through enforcement proceedings or otherwise, may require one or more
of a variety of corrective actions. See "--Prompt Corrective Regulatory Action."
The capital regulations create three capital requirements: a tangible capital
requirement, a leverage or core capital requirement and a risk-based capital
requirement. At September 30, 1996, the Bank was in compliance with all three
capital requirements. These three capital standards are described below.
TANGIBLE CAPITAL REQUIREMENT. Under current OTS regulations, each savings
association must maintain tangible capital equal to at least 1.50% of its
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related earnings plus mortgage
servicing rights up to 50% of the amount of tangible capital as described. At
September 30, 1996, the Bank had recorded mortgage servicing rights of $29.7
million.
In calculating adjusted total assets, adjustments are made to total assets to
give effect to the exclusion of certain assets from capital and to appropriately
account for the investments in and assets of both includible and non-includible
subsidiaries.
CORE CAPITAL REQUIREMENT. Each savings association must maintain core capital
equal to at least 3.0% of its adjusted total assets. Core capital includes
common stockholders' equity (including retained income), non-cumulative
perpetual preferred stock and related surplus, minority interest in the equity
accounts of fully consolidated subsidiaries and a percentage of qualifying
intangible assets. The Bank's core capital was $416.8 million at September 30,
1996.
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RISK-BASED REQUIREMENT. The risk-based capital standard adopted by the OTS
requires savings associations to maintain a minimum ratio of total capital to
risk-weighted assets of 8.0%. Total capital consists of core capital, defined
above, and supplementary capital. Supplementary capital consists of certain
capital instruments that do not qualify as core capital, and general valuation
loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only in
an amount equal to the amount of core capital. In determining the risk-based
capital ratios, total assets, including certain off-balance sheet items, are
multiplied by a risk weight assigned by OTS to certain categories of assets.
The risk weights assigned by the OTS for significant categories of assets are
(i) 0.0% for cash and securities issued by the Federal government or
unconditionally backed by the full faith and credit of the Federal government;
(ii) 20.0% for securities (other than equity securities) issued by Federal
government sponsored agencies and mortgage-backed securities issued by, or fully
guaranteed as to principal and interest by, FNMA or FHLMC, except for those
classes with residual characteristics or stripped mortgage-related securities;
(iii) 50.0% for prudently underwritten permanent one-to-four family first lien
mortgage loans not more than 90 days delinquent and having a loan-to-value ratio
of not more than 80.0% at origination unless insured to such ratio by private
mortgage insurance by an insurer approved by FNMA or FHLMC and certain
qualifying multi-family mortgage loans and (iv) 100.0% for all other loans and
investments, including consumer loans, commercial loans, and one-to-four family
residential real estate loans more than 90 days delinquent, and all repossessed
assets or assets more than 90 days past due.
On August 31, 1993, the OTS issued a final rule incorporating an interest rate
risk ("IRR") component into its risk-based capital rules, but deferred full
implementation of the IRR component until an appeals process for affected
institutions had been adopted. Under the rule, an institution with a greater
than "normal" level of IRR will be subject to a deduction of its IRR component
from total capital for purposes of calculating the risk-based capital
requirement. As a result, such an institution may be required to maintain
additional capital in order to comply with the risk-based capital requirement.
An institution with a greater than "normal" IRR is defined as an institution
that would suffer a loss of net portfolio value exceeding 2.0% of the estimated
market value of its assets in the event of a 200 basis point increase or
decrease (with certain minor exceptions) in interest rates. The IRR component
will be calculated, on a quarterly basis, as one-half of the difference between
an institution's measured IRR and 2.0%, multiplied by the market value of its
assets. The rule also authorizes the director of the OTS, or his designee, to
waive or defer an institution's IRR component on a case-by-case basis. On
August 23, 1995, the OTS issued procedures that will allow eligible thrifts (i)
to request an adjustment to their IRR component, as calculated by OTS, or (ii)
calculate their IRR exposure using their own computer models. At the same time,
the OTS deferred until further notice application of its IRR rule requiring
thrifts with above normal IRR exposure to adjust their regulatory capital
requirements. The OTS continues to monitor the IRR of individual institutions
and retains the right to impose minimum capital on individual institutions.
Based on the Bank's IRR profile and the level of interest rates at September 30,
1996, as well as the Bank's level of risk-based capital at September 30, 1996,
management believes that the Bank does not have a greater than normal level of
IRR as measured under the OTS rule and will not be required to increase its
capital as a result of the rule.
FEDERAL RESERVE SYSTEM. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW and Super
NOW checking accounts) and non-personal time deposits. At September 30, 1996,
the Bank was in compliance with these requirements.
The balances maintained to meet the reserve requirements imposed by the FRB may
be used to satisfy liquidity requirements imposed by the OTS. Because required
reserves must be maintained in the form of vault cash or a non-interest-bearing
account at a FRB, the effect of this reserve requirement is to reduce an
association's earning assets. The amount of funds necessary to satisfy this
requirement has not had a material effect on the Bank's operations.
The Bank is also subject to certain regulations regarding savings account
disclosure contained in FDICIA and funds availability disclosure promulgated by
the FRB to implement the requirements of the Truth in Savings Act and the
Expedited Funds Availability Act, as amended, respectively.
FINANCIAL REPORTING. Depository institutions whose accounts are insured by the
FDIC ("insured institutions") are required to submit independently audited
annual reports to the FDIC and the appropriate agency (and state supervisor when
applicable). These publicly available reports must include (i) annual financial
statements prepared in accordance with GAAP and such other disclosure
requirements as required by the FDIC or the appropriate agency and (ii) a
report, signed by the chief executive officer and the chief financial officer or
chief accounting officer of the institution which contains
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statements about the adequacy of internal controls and compliance with
designated laws and regulations, and an attestation by independent auditors
related to the former.
Insured institutions are required to monitor the above activities through an
independent audit committee which, in the case of institutions with assets over
$500 million, has access to independent legal counsel.
SAFETY AND SOUNDNESS GUIDELINES.
Under FDICIA, as amended by the Riegle Community Development and Regulatory
Improvement Act of 1994 ("CDRI Act"), each federal banking agency is required to
establish safety and soundness standards for institutions under its authority.
On July 10, 1995, the federal banking agencies, including the OTS, jointly
released Interagency Guidelines Establishing Standards For Safety and Soundness
and published a final rule establishing deadlines for submission and review of
safety and soundness compliance plans. The final rule and the guidelines took
effect August 9, 1995. The guidelines, among other things, require savings
associations to maintain internal controls, information systems and internal
audit systems that are appropriate to the size, nature and scope of the
association's business. The guidelines also establish certain standards for
loan documentation, credit underwriting, interest rate exposure, and asset
growth. Savings associations are required to maintain safeguards to prevent the
payment of compensation, fees and benefits that are excessive or that could lead
to material financial loss. The OTS may determine that a savings association is
not in compliance with the safety and soundness guidelines and, upon doing so,
may require the association to submit an acceptable plan to achieve compliance
with the guidelines. A savings association must submit an acceptable compliance
plan to the OTS within 30 days of receipt or request for such a plan. Failure
to submit or implement a compliance plan may subject the association to
regulatory actions. Management believes that the Bank currently meets the
standards adopted in the interagency guidelines and does not believe that
implementation of the regulatory standards will materially affect the Bank's
operations.
Additionally, under FDICIA, as amended by the CDRI Act, federal banking agencies
are required to establish standards relating to asset quality and earnings that
the agencies determine to be appropriate. On August 27, 1996, the federal
banking agencies, including the OTS, adopted guidelines relating to asset
quality and earnings. Under the proposed guidelines, a savings association
would be required to maintain systems, consistent with its size and the nature
and scope of its operations, to identify problem assets and prevent
deterioration in those assets as well as to evaluate and monitor earnings and
insure that earnings are sufficient to maintain adequate capital and reserves.
Management believes that the asset quality and earnings guidelines, as adopted
by the banking agencies, would not have a material effect on the Bank's
operations.
PROMPT CORRECTIVE REGULATORY ACTION. Under Section 38 of the FDIA, as added by
FDICIA, each appropriate agency and the FDIC is required to take prompt
corrective action to resolve the problems of insured depository institutions
that do not meet minimum capital ratios. Such action must be accomplished at
the least possible long-term cost to the appropriate deposit insurance fund.
The federal banking agencies, including the OTS, have adopted substantially
similar regulations to implement Section 38 of the FDIA. Under these
regulations, an institution shall be deemed to be (i) "well capitalized" if it
has total risk-based capital of 10.0% or more, has a Tier 1 risk-based capital
ratio of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and
is not subject to any order or final capital directive to meet and maintain a
specific capital level for any capital measure, (ii) "adequately capitalized" if
it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based
capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized," (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is
less than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances), (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based
capital ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is
less than 3.0%, and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. Section 38
of the FDIA and the regulations promulgated thereunder also specify
circumstances under which a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). At September 30, 1996, the Bank met the criteria
to be considered a "well capitalized" institution.
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HOLDING COMPANY REGULATION
The Company is a unitary savings and loan holding company within the meaning of
the HOLA. As such, the Holding Company is required to register with the OTS and
is subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company
and its non-savings institution subsidiaries. Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the subsidiary savings institution. The Bank must
notify the OTS 30 days before declaring any dividend to the Company.
The HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring another savings institution
or holding company thereof, without prior written approval of the OTS; acquiring
or retaining, with certain exceptions, more than 5% of a non-subsidiary savings
institution, a non-subsidiary holding company, or a non-subsidiary company
engaged in activities other than those permitted by the HOLA; or acquiring or
retaining control of a depository institution that is not federally insured. In
evaluating applications by holding companies to acquire savings institutions,
the OTS must consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community
and competitive factors.
As a unitary savings and loan holding company, the Company generally will not be
restricted under existing laws as to the types of business activities in which
it may engage, provided that the Bank continues to meet the QTL test. See "--
Federal Regulation of Savings Association-Qualified Thrift Lender Test" for a
discussion of the QTL requirements. Upon any non-supervisory acquisition by the
Company of another savings and loan association or savings bank that meets the
QTL test and is deemed to be a savings institution by the OTS, the Company would
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would be subject to extensive limitations
on the types of business activities in which it could engage. The HOLA
generally limits the activities of a multiple savings and loan holding company
and its non-insured institution subsidiaries primarily to activities permissible
for bank holding companies under Section 4(c)(8) of the Bank Holding Company
Act.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. Under
New York law, reciprocal interstate acquisitions are authorized for savings and
loan holding companies and savings institutions. Certain states do not authorize
interstate acquisitions under any circumstances; however, federal law
authorizing acquisitions in supervisory cases preempts such state law.
Federal law generally provides that no "person," acting directly or indirectly
or through or in concert with one or more other persons, may acquire "control,"
as that term is defined in OTS regulations, of a federally-insured savings
institution without giving at least 60 days written notice to the OTS and
providing the OTS an opportunity to disapprove the proposed acquisition. Such
acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person.
In addition, federal regulations governing conversions of mutual savings
institutions to the stock form of organization prohibit the direct or indirect
acquisition without prior OTS approval of more than 10% of any equity security
of a savings institution within three years of the savings institution's
conversion to stock form. This limitation applies to acquisitions of the stock
of the Company. Such acquisition may be disapproved if it is found, among other
things, that the proposed acquisition (i) would frustrate the purposes of the
provisions of the regulations regarding conversions, (ii) would be manipulative
or deceptive, (iii) would subvert the fairness of the conversion, (iv) would be
likely to result in injury to the savings institution, (v) would not be
consistent with economical home financing, (vi) would otherwise violate law or
regulation, or (vii) would not contribute to the prudent deployment of the
savings institution's conversion proceeds.
38
<PAGE>
FEDERAL SECURITIES LAWS
The Holding Company's common stock is registered with the SEC under Section
12(g) of the Securities Exchange Act of 1934, as amended ("Exchange Act").
The Holding Company is subject to the information, proxy, solicitation,
insider trading restrictions and other requirements under the Exchange Act.
ITEM 2. PROPERTIES
As of October 31, 1996, the Bank conducted its business through its office
in Melville, N.Y., 36 full service branch offices, and 25 regional lending
centers (one of which is located within a full service branch location). Six
of the Bank's offices are located in Queens County of New York City, 11 are
located in Nassau County-Long Island, and 19 are located in Suffolk
County-Long Island. Seven of the Bank's regional lending centers are located
in Virginia; 5 in Pennsylvania; 4 in New York; 2 each in Georgia, New Jersey
and Maryland; and 1 each in Connecticut, Delaware and North Carolina. The
Bank believes that the current facilities are adequate to meet the present
and immediately foreseeable needs of the Bank.
LEASE
LOCATION LEASED/OWNED TERMINATION DATE
-------- ------------ ----------------
(1)
---
Executive Office
201 Old Country Road
Melville, NY 11747. . . . . . . . . . . O N/A
BRANCHES:
QUEENS COUNTY:
35-01 30th Avenue
Astoria, NY 11103 . . . . . . . . . . . O N/A
22-02 31st Street
Astoria, NY 11105 . . . . . . . . . . . L 12/2030
30-27 Steinway Street
Astoria, NY 11103 . . . . . . . . . . . L 4/98
72-35 Broadway
Jackson Heights, NY 11372 . . . . . . . O N/A
97-33 Queens Boulevard
Rego Park, NY 11374 . . . . . . . . . . L 12/2011
153-01 10th Avenue
Whitestone, NY 11357. . . . . . . . . . L 3/2000
NASSAU COUNTY:
1150 Franklin Avenue
Garden City, NY 11530 . . . . . . . . . L 2/98
3105 Hempstead Turnpike
Levittown, NY 11756 . . . . . . . . . . O N/A
1900 Northern Boulevard
Manhasset, NY 11030 . . . . . . . . . . L 10/2001
1001 Park Boulevard
Massapequa Park, NY 11762 . . . . . . . L 7/2001
2090 Merrick Road
Merrick, NY 11566 . . . . . . . . . . . O N/A
(Continued)
39
<PAGE>
LEASE
LOCATION LEASED/OWNED TERMINATION DATE
-------- ------------ ----------------
(1)
---
NASSAU COUNTY: (CONTINUED)
53 North Park Avenue
Rockville Centre, NY 11570 . . . . . . L 10/96 (2)
339 Merrick Road
Rockville Centre, NY 11570 . . . . . . O N/A
3887 Merrick Road
Seaford, NY 11783 . . . . . . . . . . . O N/A
50 Jackson Avenue
Syosset, NY 11791
(includes a regional lending center). . L 8/2006
120 South Franklin Avenue
Valley Stream, NY 11580 . . . . . . . . O N/A
3366 Park Avenue
Wantagh, NY 11793 . . . . . . . . . . . O N/A
SUFFOLK COUNTY:
180 West Main Street
Babylon, NY 11702 . . . . . . . . . . . O N/A
300 East Main Street
Bay Shore, NY 11706 . . . . . . . . . . O N/A
269 Middle Country Road
Coram, NY 11727 . . . . . . . . . . . . O N/A
180 East Main Street
East Islip, NY 11730. . . . . . . . . . O N/A
696 Horseblock Road
Farmingville, NY 11738. . . . . . . . . O N/A
845 Wheeler Road
Hauppauge, NY 11788 . . . . . . . . . . O N/A
1229 East Jericho Tpke.
Huntington, NY 11743. . . . . . . . . . O N/A
839-140 New York Avenue
Huntington, NY 11743. . . . . . . . . . L 12/2000
599 Middle Country Road
Middle Island, NY 11953 . . . . . . . . O N/A
718 Medford Ave.
North Patchogue, NY 11772 . . . . . . . O N/A
1336 Montauk Highway
Oakdale, NY 11769 . . . . . . . . . . . O N/A
450 Jefferson Shopping Plaza
Port Jefferson Station, NY 11776. . . . L 9/2000
(Continued)
40
<PAGE>
LEASE
LOCATION LEASED/OWNED TERMINATION DATE
-------- ------------ ----------------
(1)
---
SUFFOLK COUNTY: (CONTINUED)
325 Route 25A
Rocky Point, NY 11778 . . . . . . . . . O N/A
999-25 Montauk Highway
South Port Shopping Center
Shirley, NY 11967 . . . . . . . . . . . L 12/2005
65 Nugent Street
Southampton, NY 11968 . . . . . . . . . O N/A
1047 North Country Road
Stony Brook, NY 11790 . . . . . . . . . O N/A
6348 Route 25A
Wading River, NY 11792. . . . . . . . . O N/A
526 Union Boulevard
West Islip, NY 11795. . . . . . . . . . L 11/98
71 Sunset Avenue
Westhampton Beach, NY 11978 . . . . . . O N/A
OTHER REGIONAL LENDING CENTERS:
Plaza West Office Center
2001 West Main Street Suite 140
Stamford, CT 06902. . . . . . . . . . . L M-M
103 Foulk Rd.
Wilmington, DE 19803 . . . . . . . . . . L 02/99
Suite 880
2000 RiverEdge Parkway
Atlanta, GA 30328. . . . . . . . . . . . L 2/99
410 Commerce Drive
Peachtree City, GA 30269 . . . . . . . . L 10/97
10005 Old Columbia Road, Suite L260
Columbia, MD 21046 . . . . . . . . . . . L 5/2001
6 Montgomery Village Ave.
Gaithersburg, MD 20879 . . . . . . . . . L M-M
4325 Lake Boone Trail
Raleigh, NC 27604. . . . . . . . . . . . L 11/98
9 Law Drive
Fairfield, NJ 07006 . . . . . . . . . . L 3/99
240 Half Mile Road
Red Bank, NJ 07701 . . . . . . . . . . . L 5/97
2 Gannett Dr.
White Plains, NY 10604 . . . . . . . . . L M-M
(Continued)
41
<PAGE>
LEASE
LOCATION LEASED/OWNED TERMINATION DATE
-------- ------------ ----------------
(1)
---
OTHER REGIONAL LENDING CENTERS:
(CONTINUED)
30-50 Whitestone Expressway
Flushing, NY 11354. . . . . . . . . . . L 4/99
2780 Middle Country Road
Lake Grove, NY 11755. . . . . . . . . . L 10/98
237 West Chocolate Ave.
Hershey, PA 17033 . . . . . . . . . . . L 6/97
111 Gibraltar Rd.
Horsham, PA 19044. . . . . . . . . . . . L 2/98
54 Quakertown Rd.
Pennsburg, PA 18073. . . . . . . . . . . L 2/98
303 East Baltimore Pike
PO Box 127
Media, PA 19063 . . . . . . . . . . . . L M-M
1100 Berkshire Blvd.
Reading, PA 19610. . . . . . . . . . . . L 8/99
7231 Forest Ave.
Richmond, VA 23226 . . . . . . . . . . . L 2/97
5544 Greenwich Rd.
Virginia Beach, VA 23462 . . . . . . . . L 6/97
206 Temple Ave.
Colonial Heights, VA 23834 . . . . . . . L 3/97
155 Creekside Village La.
Winchester, VA 22602 . . . . . . . . . . L 4/98
825 Dilegence Dr.
Newport News, VA 23606 . . . . . . . . . L 4/98
Galten Building, Suite 220
Middle St.
Franklin, VA 23851 . . . . . . . . . . . L 12/98
Suite 110
8321 Old Courthouse Road
Vienna, VA 22182 . . . . . . . . . . . . L 5/99
OTHER FACILITIES:
22-04 31st Street
Astoria, NY 11105 . . . . . . . . . . . O N/A
29-16 Ditmars Boulevard
Astoria, NY 11105 . . . . . . . . . . . L 6/99
110 Bi County Blvd.
Farmingdale, NY 11735 . . . . . . . . . L 6/2000
_________________
1. M-M represents a month to month lease.
2. Effective in November 1996, the Bank is a month to month tenant.
42
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
On March 24, 1994, the Bank received notice that it had been named as a
defendant in a class action lawsuit filed in the United States District Court
for the Eastern District of New York against James J. Conway, Jr., former
chairman and chief executive officer of the Bank who resigned from the Bank
in June 1992, his former law firm, certain predecessor firms of that law
firm, certain partners of that law firm and the Bank. The lawsuit is
entitled RONNIE WEIL ALSO KNOWN AS RONNIE MOORE, FOR HERSELF AND ON BEHALF OF
ALL OTHER PERSONS WHO ATTAINED MORTGAGE LOANS FROM THE LONG ISLAND SAVINGS
BANK, FSB DURING THE PERIOD JANUARY 1, 1983 THROUGH DECEMBER 31, 1992 AGAINST
THE LONG ISLAND SAVINGS BANK, FSB. The complaint alleges that the defendants
caused mortgage loan commitments to be issued to mortgage loan borrowers, and
submitted legal invoices to the borrowers at the closing of mortgage loans,
which falsely represented the true legal fees charged for representing the
Bank in connection with the mortgage loans and failed to advise that a part
of the listed legal fee would be paid to Mr. Conway, thereby defrauding the
borrowers. The complaint does not specify the amount of damages sought.
On or about June 9, 1994, the Bank was served with an Amended Summons and
Amended Complaint adding the Bank's directors as individual defendants. On
or about July 29, 1994, the Bank and the individual director defendants
served on plaintiffs a motion to dismiss the Amended Complaint. On or about
August 29, 1994, the plaintiffs served papers in response to the motion. The
remaining schedule on the motion has been held in abeyance pending certain
discovery.
Management believes that the likelihood is remote that this case will have a
material adverse impact on the Company's consolidated financial position.
On August 15, 1989 the Bank and its former wholly owned subsidiary, The Long
Island Savings Bank of Centereach, FSB ("Centereach"), filed suit against the
United States seeking damages and/or other appropriate relief on the grounds,
among others, that the government had breached the terms of the 1983
assistance agreement between the Bank and the Federal Savings and Loan
Insurance Corporation pursuant to which the Bank acquired Centereach
("Assistance Agreement"). The Assistance Agreement, among other things,
provided for the inclusion of supervisory goodwill as an asset on
Centereach's balance sheet to be included in capital and amortized over 40
years for regulatory purposes.
The suit is pending before Chief Judge Loren Smith in the United States Court
of Federal Claims and is entitled THE LONG ISLAND SAVINGS BANK, FSB ET AL. VS
THE UNITED STATES. The case had been stayed pending disposition by the
United States Supreme Court of three related supervisory goodwill cases (the
WINSTAR cases). On July 1, 1996 the Supreme Court ruled in the WINSTAR cases
the government had breached its contracts with the WINSTAR parties and was
liable in damages for those breaches.
On September 18, 1996 Judge Smith issued an Omnibus Management Order ("Case
Management Order") applicable to all WINSTAR-related cases. The Case
Management Order addresses certain timing and procedural matters with respect
to the administration of the WINSTAR-related cases, including organization of
the parties, initial discovery, initial determinations regarding liability,
and the resolution of certain common issues. The Case Management Order
provides that the parties will attempt to agree upon a Master Litigation
Plan, which may be in phases, to govern all further proceedings, including
the resolution of common issues (other than common issues covered by the Case
Management Order), dispositive motions, trials, discovery schedules,
protocols for depositions, document production, expert witnesses, and other
matters.
On November 1, 1996, the Bank filed a motion for summary judgment on
liability. Pursuant to the schedule set forth in the Case Management Order,
within sixty days of the filing of the motion, the government must file a
response with respect to whether a contract exists and whether the government
acted inconsistently with the contract. Within 120 days of filing of the
motion, the government must set forth any defenses it knows or has reason to
know that relate to these two issues.
In its complaint, the Bank did not specify the amount of damages it was
seeking from the United States. There have been no decisions determining
damages in the WINSTAR cases or any of the WINSTAR-related cases. The Bank
is unable to predict the outcome of its claim against the United States and
the amount of damages that may be awarded to the Bank, if any, in the event
that judgment is rendered in the Bank's favor. Consequently, no assurances
can be given as to the results of this claim or the timing of any proceedings
in relation thereto.
43
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Long Island Bancorp, Inc. common stock is traded on the Nasdaq National
Market and quoted under the symbol "LISB".
Information regarding Long Island Bancorp, Inc. common stock and its price
for the 1996 fiscal year appears on page 65 of the 1996 Annual Report under
the caption "Market Price of Common Stock" and its incorporated herein by
this reference.
As of September 30, 1996, Long Island Bancorp, Inc. had approximately 3,981
stockholders of record, not including the number of persons or entities
holding stock in nominee or street name through various brokers and banks.
On December 22, 1994, Long Island Bancorp, Inc. adopted a dividend policy to
pay an annual dividend of forty cents ($0.40) per share of common stock,
payable in equal quarterly installments, should the earnings of the Company
warrant. In accordance with this policy, dividends have been paid in fiscal
1996 to shareholders as follows:
Declaration Date Record Date Payment Date
------------------- -------------------- ---------------------
December 21, 1995 January 16, 1996 February 14, 1996
March 26, 1996 April 15, 1996 May 15, 1996
June 25, 1996 July 17, 1996 August 16, 1996
September 24,1996 October 16, 1996 November 15, 1996
Long Island Bancorp, Inc. initiated its first, second and third stock
repurchase programs on March 9, 1995, September 9, 1995 and April 15, 1996,
respectively, as authorized by the OTS. As of September 30, 1996, Long
Island Bancorp, Inc. repurchased 2,497,554 shares, or 10.13% of the
outstanding common stock, at an aggregate cost of $59.9 million under the
three stock repurchase plans.
ITEM 6. SELECTED FINANCIAL DATA
Information regarding selected financial data appears on page 10 of the 1996
Annual Report and is incorporated herein by this reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information regarding management's discussion and analysis of financial
condition and results of operations appears on pages 15 through 30 of the
1996 Annual Report under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and is incorporated herein by
this reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information regarding the financial statements and the Independent Auditors'
Report appears on pages 31 through 64 of the 1996 Annual Report and is
incorporated herein by this reference.
44
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors and executive officers of the Registrant
appears on pages 6 through 10 of the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held February 18, 1997 under the captions
"Board Nominees, Directors and Executive Officers," "Biographical Information
- -Directors and Board Nominees" and "- Executive Officers Who Are Not
Directors" and is incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation appears on pages 15 through 18 of
the Company's Proxy Statement for the Annual Meeting of Shareholders to be held
February 18, 1997 and is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners appears
on page 3 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held February 18, 1997 under the caption "Stock Ownership
of Certain Beneficial Owners" and is incorporated herein by this reference.
Information regarding security ownership of management appears on pages 4 and
5 of the Company's Proxy Statement for the Annual Meeting of Shareholders to
be held February 18, 1997 under the caption "Stock Ownership of Management"
and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions appears
on pages 11 and 12 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on February 18, 1997 under the caption "Transactions
with Certain Related Persons" and is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following financial statements are included in the Company's Annual
Report to Shareholders for the year ended September 30, 1996 and are
incorporated by this reference:
- Consolidated Statements of Condition at September 30, 1996 and 1995
- Consolidated Statements of Operations for each of the years in the
three year period ended September 30, 1996
- Consolidated Statements of Changes in Stockholders' Equity for
each of the years in the three year period ended September 30, 1996
- Consolidated Statements of Cash Flows for each of the years in the
three year period ended September 30, 1996
- Notes to Consolidated Financial Statements
- Independent Auditors' Report
The remaining information appearing in the Annual Report to Stockholders is
not deemed to be filed as a part of this report, except as expressly provided
herein.
45
<PAGE>
2. FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto.
(b) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF FISCAL 1996
Press release dated July 23, 1996 in connection with the earnings for the
third quarter of fiscal year 1996.
Press release dated August 1, 1996 announcing the acquisition of First Home
Mortgage of Virginia, Inc.
Press release dated September 6, 1996 announcing the retirement of William E.
Viklund from his position as President and Chief Operating Officer.
Press release dated September 24, 1996 announcing the Company's eighth quarterly
dividend of $0.10 per common share.
(c) EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION REGULATION
S-K
Exhibit
Number
-------
3.1 Restated Certificate of Incorporation of Long Island Bancorp,
Inc. (1)
3.2 Restated By-Laws of Long Island Bancorp, Inc. (1)
10.1 Employment Agreements between Long Island Bancorp, Inc. and
Certain Officers
10.2 Employment Agreements or Other Arrangements between The Long
Island Savings Bank, FSB and Certain Officers
10.3 The Long Island Savings Bank, FSB Management Recognition
and Retention Plans for Non-Employee Directors (2)
10.4 The Long Island Savings Bank, FSB Management Recognition and
Retention Plan for Executive Officers (2)
10.5 Long Island Bancorp, Inc. 1994 Stock Incentive Plan (2)
10.6 Long Island Bancorp, Inc. 1994 Non-Employee Directors Stock
Option Program (2)
10.7 Form of The Long Island Savings Bank, FSB Employee Stock
Ownership Plan and Trust (1)
10.8 Long Island Bancorp Inc. Non-Employee Director Retirement
Benefit Plan (3)
10.9 ESOP Loan Documents (1)
10.10 Amendment to The Long Island Savings Bank, FSB 401 (k)
Savings Plan
10.11 Amendments to Retirement Plan of The Long Island Savings
Bank, FSB in Retirement System for Savings Institutions
10.12 Form of The Long Island Savings Bank, FSB Deferred
Compensation Planfor Fees of Directors (3)
10.13 The Long Island Savings Bank, FSB Deferred Pension Plan (1)
10.14 Amendments to the ESOP
10.15 Separation agreement with President of the Bank and Holding
Company
11.0 Statement Re: Computation of Per Share Earnings
13.0 1996 Annual Report to Shareholders
99.0 Proxy Statement for the Annual Meeting of Stockholders to be
held on February 18, 1997
(1) Incorporated by reference to Exhibits filed with the Registration
Statement on Form S-1, Registration No. 33-73694
(2) Incorporated by reference to Exhibits filed with the Proxy Statement
for the Special Meeting of Stockholders held August 3, 1994.
(3) Incorporated by reference to Exhibits filed with Form 10-K for the
fiscal year ended September 30, 1994.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of The Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Long Island Bancorp, Inc. Dated: December 19, 1996
- -------------------------
(Registrant)
/s/ John J. Conefry, Jr.
- ------------------------
John J. Conefry, Jr.
Chairman and Chief Executive Officer
47
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
NAME TITLE DATE
- ---- ----- ----
/s/ John J. Conefry, Jr. December 19, 1996
- ------------------------------- Chairman, Chief -----------------
John J. Conefry, Jr. Executive Officer
and Director
/s/ Mark Fuster December 19, 1996
- ------------------------------- -----------------
Mark Fuster Chief Financial
Officer
/s/ Bruce M. Barnet December 19, 1996
- ------------------------------- -----------------
Bruce M. Barnet Executive Vice
President and
Director
/s/ Clarence M. Buxton December 19, 1996
- ------------------------------- -----------------
Clarence M. Buxton Director
/s/ Edwin M. Canuso December 19, 1996
- ------------------------------- -----------------
Edwin M. Canuso Director
/s/ Richard F. Chapdelaine December 19, 1996
- ------------------------------- -----------------
Richard F. Chapdelaine Director
/s/ Brian Conway December 19, 1996
- ------------------------------- -----------------
Brian Conway Director
/s/ Robert J. Conway December 19, 1996
- ------------------------------- -----------------
Robert J. Conway Director
/s/ Frederick DeMatteis December 19, 1996
- ------------------------------- -----------------
Frederick DeMatteis Director
/s/ George R. Irvin December 19, 1996
- ------------------------------- -----------------
George R. Irwin Director
/s/ Herbert J. McCooey December 19, 1996
- ------------------------------- -----------------
Herbert J. McCooey Director
/s/ Lawrence W. Peters December 19, 1996
- ------------------------------- -----------------
Lawrence W. Peters Director
48
<PAGE>
NAME TITLE DATE
- ---- ----- ----
/s/ Robert S. Swanson, Jr. December 19, 1996
- ------------------------------- -----------------
Robert S. Swanson, Jr. Director
/s/ James B. Tormey December 19, 1996
- ------------------------------- -----------------
James B. Tormey Director
/s/ Leo J. Waters December 19, 1996
- ------------------------------- -----------------
Leo J. Waters Director
/s/ Donald D. Wenk December 19, 1996
- ------------------------------- -----------------
Donald D. Wenk Director
49
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement"), dated as of October 3,
1996, is made by and between Long Island Bancorp, Inc., a Delaware corporation,
having its principal offices at 201 Old Country Road, Melville, New York 11747
(the "Corporation"), and Mr. Bruce M. Barnet, residing at 3 Carteret Place,
Garden City, New York 11530 (the "Executive").
RECITALS
The Corporation desires to employ the Executive as Executive Vice
President of the Corporation, and to enter into an employment agreement
embodying the terms of such relationship.
The Executive is willing to be employed as Executive Vice
President of the Corporation on the terms set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and for other good and valuable consideration, the Corporation
and the Executive hereby agree as follows.
1. DEFINITIONS.
1.1 "AFFILIATE" means any person or entity of any kind effectively
controlling, effectively controlled by or effectively under common control with
the Corporation, including, without limitation, The Long Island Savings Bank,
FSB (the "Bank").
1.2 "BOARD" means the board of directors of the Corporation.
1.3 "CAUSE" means termination due to the Executive's (a) personal
dishonesty, (b) incompetence, (c) willful misconduct, (d) breach of fiduciary
duty involving personal profit, (e) intentional failure to perform stated
duties, (f) willful violation of any law, rule or regulation (other than traffic
violations or similar offenses), or final cease-and-desist order, or (g)
material breach of any provision of this Agreement.
1.4 "CHANGE IN CONTROL" means, after the date of the Agreement, (a) a
change in control of the Corporation and/or the Bank of a nature that would be
required to be reported in response to Item 1 of the current report on Form 8-K,
as in
<PAGE>
2
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); (b) a change
in control of the Bank within the meaning of 12 U.S.C. Section 1817(i), the
Change in Bank Control Act, and 12 C.F.R. Section 574.4 of the Acquisition of
Control of Savings Association regulations of the Office of Thrift Supervision;
(c) individuals who constitute the Board as of the date of this Agreement (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date of
this Agreement whose election was approved by a vote of at least three-quarters
of the directors then comprising the Incumbent Board, or whose nomination for
election by the Corporation's shareholders was approved by the Corporation's
nominating committee then serving under the Board, shall be, for purposes of
this clause (c), considered as though he or she was a member of the Incumbent
Board (but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of either an actual or threatened
election contest (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) or other actual or threatened solicitation
of proxies or consents); (d) approval by the shareholders of the Bank and/or the
Corporation, as the case may be, of a reorganization, merger or consolidation,
or the consummation of any such reorganization, merger or consolidation, other
than a reorganization, merger or consolidation with respect to which all or
substantially all of the individuals and entities who were the beneficial
owners, immediately prior to such reorganization, merger or consolidation, of
the Voting Interest in the Bank and/or the Corporation, as the case may be,
beneficially own, directly or indirectly, immediately after such reorganization,
merger or consolidation more than 80% of the Voting Interest of the corporation
or other entity resulting from such reorganization, merger or consolidation in
substantially the same proportions as their respective ownership, immediately
prior to such reorganization, merger or consolidation, of the Voting Interest in
the Bank and/or the Corporation, as the case may be; (e) approval by the
shareholders of the Bank and/or the Corporation, as the case may be, of (i) a
complete liquidation or dissolution of the Bank and/or the Corporation, or (ii)
the sale or other disposition of all or substantially all of the assets of the
Bank and/or the Corporation or the occurrence of any such liquidation,
dissolution, sale or other disposition, other than, in any case, to a
Subsidiary, directly or indirectly, of the Corporation or any Affiliate; and/or
(f) the solicitation of proxies from shareholders of the Corporation by someone
other than the current management of the Corporation and without the approval of
the Board, seeking shareholder approval of a plan of reorganization, merger or
consolidation of the Bank and/or the Corporation with one or more corporations
as a result of which the shareholders' interests in the Bank and/or the
Corporation, as the case may be, are actually exchanged for or converted into
securities not issued by the Bank or the Corporation, as the case may be. No
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3
failure on the part of the Executive to exercise any rights upon the occurrence
of a Change in Control shall be deemed a waiver of or otherwise impair the
rights of the Executive in respect of any subsequent events or circumstances
constituting a Change in Control
1.5 "CODE" means the Internal Revenue Code of 1986, as amended, and
as in effect from time to time, and/or any successor code thereto.
1.6 "DATE OF TERMINATION" means the date specified in the Notice of
Termination (as defined in Section 6.8 of this Agreement); PROVIDED, HOWEVER,
that if, within thirty (30) days after any Notice of Termination is given, the
party receiving such Notice of Termination notifies the other party in writing
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction, including all
appeals, unless the time for appeal therefrom has expired and no appeal has been
perfected; PROVIDED, FURTHER, HOWEVER, that the Date of Termination shall (a) in
no case be later than the date on which the Term of Employment expires, and (b)
be extended by a notice of dispute only if such notice is given in good faith
and the party giving such notice pursues the resolution of such dispute with
reasonable diligence.
1.7 "GOOD REASON" means, and shall be deemed to exist if, without the
written consent of the Executive, (a) the Corporation fails to appoint or
reappoint the Executive as Executive Vice President of the Corporation, (b)
there occurs any reduction of Base Salary or material reduction in other
benefits or any material change by the Corporation to the Executive's function,
duties, or responsibilities in effect on the date hereof and/or as set forth in
Section 4.1 of this Agreement, which change would cause the Executive's position
with the Corporation to become one of lesser responsibility, importance, or
scope from the position and attributes thereof in effect on the date hereof
and/or as set forth in Section 4.1 of this Agreement (and any such material
change shall be deemed a continuing breach of this Agreement), (c) there occurs
any material breach of this Agreement by the Corporation, (d) a Change in
Control occurs, or (e) the Corporation, if and after a Suspension for Disability
(as defined in Section 6.2(a)) occurs and after a Change in Control occurs,
fills the Executive's position (in the manner set forth in Section 6.2(b) of
this Agreement).
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4
1.8 "PARENT" means any corporation which has a direct or indirect
legal or beneficial ownership interest in the Corporation, but only if any such
corporation owns or controls, directly or indirectly, securities possessing at
least 50% of the total combined voting power of all classes of securities of the
Corporation.
1.9 "SUBSIDIARY" means any corporation (other than the Corporation)
in which the Corporation or any Parent has a direct or indirect legal or
beneficial ownership interest, but only if the Corporation or the Parent, as the
case may be, owns or controls, directly or indirectly, securities possessing at
least 50% of the total combined voting power of all classes of securities in any
such corporation.
1.10 "RETIREMENT" means the termination of the Executive's employment
with the Corporation for any reason by the Executive at any time after the
Executive attains age 65.
1.11 "VOTING INTEREST" means securities of any class or classes or
other ownership interests having general voting power under ordinary
circumstances to elect members of a board of directors or trustees of any
entity.
2. EMPLOYMENT.
2.1 GENERAL. Subject to the terms and provisions set forth in this
Agreement, the Corporation, during the Term of Employment, agrees to continue to
employ the Executive as Executive Vice President of the Corporation and the
Executive hereby accepts such continued employment.
2.2 OTS SUSPENSION. If the Executive is suspended from office and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit
Insurance Act (12 U.S.C. Sections 1818(e)(3) and (g)(1)), the Corporation's
obligations under this Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Corporation may in its discretion (i) pay the Executive all or
part of the compensation withheld while its contract obligations were suspended,
and (ii) reinstate (in whole or in part) any of its obligations which were
suspended.
3. TERM OF EMPLOYMENT.
3.1 TERM. The term of employment under this Agreement shall commence
as of October 3, 1996 (the "Commencement Date") and, unless extended as provided
below or earlier terminated by the Corporation or the Executive under Section 6
of this Agreement, shall continue until the third anniversary of the
Commencement Date (the "Term of Employment"). The Term of
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5
Employment shall automatically be extended on each anniversary of the
Commencement Date for an additional one year period unless, not later than six
months prior to the next such anniversary, either party to this Agreement shall
give written notice to the other that he or it does not wish to extend or
further extend the Term of Employment beyond its then already automatically
extended term, if any.
3.2 OTS REMOVAL. Notwithstanding anything to the contrary in this
Agreement, if the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
Sections 1818(e)(4) or (g)(1)), all obligations of the Corporation under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the Corporation and/or the Executive, if any, shall not be affected.
4. POSITIONS, RESPONSIBILITIES AND DUTIES.
4.1 POSITIONS AND DUTIES. During the Term of Employment, the
Executive shall be employed and shall serve as Executive Vice President of the
Corporation. In such position(s), the Executive shall have the duties,
responsibilities and authority as determined and designated from time to time by
the Board. The Executive shall serve under the direction and supervision of
the Corporation's chief executive officer and shall report only to such chief
executive officer or his designees. Notwithstanding the above, the Executive
shall not be required to perform any duties and responsibilities (a) which would
result in a non-compliance with or violation of any applicable law, regulation,
regulatory bulletin, and/or any other regulatory requirement or (b) on a regular
basis in any locations outside the counties of Nassau, Suffolk or the City of
New York unless agreed upon by the Executive.
4.2 ATTENTION TO DUTIES AND RESPONSIBILITIES. During the Term of
Employment, the Executive shall, except for periods of absence occasioned by
illness, vacation in accordance with Section 5.6, and reasonable leaves of
absence in accordance with the practices of the Corporation and the Bank as of
the date of this Agreement, devote substantially all of his business time to the
business and affairs of the Corporation and the Bank and the Executive shall use
his best efforts, business skills, ability and fidelity to perform faithfully
and efficiently the duties and responsibilities contemplated by this Agreement;
PROVIDED, HOWEVER, that the Executive shall be allowed, to the extent such
activities do not present a conflict or substantially interfere with the
performance by the Executive of his duties and responsibilities hereunder, (a)
to manage the Executive's personal affairs, and (b)(i) to serve on boards or
committees of civic or charitable organizations or trade associations, and (ii)
after obtaining the consent of the Board, as evidenced by a
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6
written resolution of the Board and under the terms and conditions specified in
any such resolution, to serve on the boards of directors or trustees of
companies or other organizations and associations; PROVIDED, FURTHER, HOWEVER,
that all offices or positions which the Executive currently holds or has held
prior to the date of this Agreement and those set forth on Exhibit "A", annexed
hereto are designated as currently consented to positions.
5. COMPENSATION AND OTHER BENEFITS.
5.1 BASE SALARY. During the Term of Employment, the Executive shall
receive a base salary of $225,000 per annum ("Base Salary") payable in
accordance with the Corporation's normal payroll practices.
5.2 ANNUAL BONUS. During the Term of Employment, the Executive shall
be entitled to participate in an equitable manner with other executive officers
of the Corporation in such discretionary bonus payments or awards as may be
authorized, declared, and paid by the Board to the Corporation's executive
employees; PROVIDED, HOWEVER, that the annual bonus paid to the Executive
following a Change in Control shall not be less than the highest annual bonus
paid during the Term of Employment. No other compensation or additional
benefits provided for in this Agreement shall be deemed a substitute for the
Executive's right, if any, to receive such bonuses if, when and as declared by
the Board.
5.3 INCENTIVE, RETIREMENT, AND SAVINGS PLANS. During the Term of
Employment, the Executive shall participate in all incentive, pension,
retirement, savings and other employee benefit plans and programs, if any,
maintained from time to time by the Corporation and/or the Bank for the benefit
of senior executives and/or other employees of the Corporation and/or the Bank.
5.4 WELFARE BENEFIT PLANS. During the Term of Employment, the
Executive, the Executive's spouse, if any, and their eligible dependents, if
any, shall participate in and be covered by all the welfare benefit plans and
programs, if any, maintained by the Corporation and/or the Bank for the benefit
of senior executives and/or other employees of the Corporation and/or the Bank.
5.5 EXPENSE REIMBURSEMENT. During the Term of Employment, the
Executive shall be entitled to receive prompt reimbursement for all reasonable
expenses, including reasonable business travel expenses, incurred by the
Executive in performing his duties and responsibilities hereunder in accordance
with the policies and procedures of the Corporation as in effect at the time the
expense was incurred, as the same may be changed from time to time.
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7
5.6 VACATION AND FRINGE BENEFITS. During the Term of Employment, the
Executive shall be entitled to five weeks paid vacation each calendar year at
such times which do not materially interfere with the performance of the
Executive's duties hereunder. In addition, during the Term of Employment, the
Executive shall be eligible to benefit from such fringe benefits and
perquisites, if any, in accordance with the policies of the Corporation and as
in effect and provided from time to time to senior executives of the Corporation
and/or the Bank. Notwithstanding the above, the Executive, during the Term of
Employment, shall retain, pursuant to current policy and practice of the
Corporation and/or the Bank, all privileges, if any, including club memberships
and automobile usage to which he is entitled on the date of this Agreement.
6. TERMINATION.
6.1 TERMINATION DUE TO DEATH. In the event of the Executive's death
during the Term of Employment, the Term of Employment shall thereupon end and
his estate or other legal representative, as the case may be, shall, subject to
Sections 2.2, 3.2, 6.11, and 6.12 of this Agreement, only be entitled to:
(a)(i)(A) Base Salary continuation at two-thirds (2/3) of the rate in
effect (as provided in Section 5.1 of this Agreement) on the Date of
Termination for a three-month period commencing on such Date of
Termination, or (B), if the Board so determines in its sole discretion and
in lieu of such three-month salary continuation described above in (A), a
lump sum payment equal in amount to the present value of such Base Salary
continuation (reasonably determined using a discount rate equal to the most
recent quote available for the three-month United States Treasury Bill rate
on the Date of Termination) payable within thirty business days after the
Date of Termination, and (ii) a pro-rata annual bonus for the fiscal year
in which such termination occurs, such pro-rata bonus amount to be
(I) pro-rated based on the number of calendar days transpired during the
fiscal year of the Corporation (prior to the Date of Termination) in which
such termination occurs over 365, (II) determined in good faith by the
Board (but in its sole discretion), and (III) if any such bonus is
payable, paid on or about the same date that the annual bonus amounts
payable in respect of such fiscal year, if any, to the senior executives of
the Corporation and/or the Bank are actually paid to them;
(b) any Base Salary accrued to the Date of Termination or any bonus
actually awarded, but not yet paid as of the Date of Termination;
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8
(c) reimbursement for all expenses (under Section 5.5) incurred as of
the Date of Termination, but not yet paid as of the Date of Termination;
(d) payment of the per diem value of any unused vacation days
accruing during the Term of Employment and the unused, unaccrued portion of
any vacation days available through the end (but not beyond) of the
calendar year of the Corporation in which such termination occurs;
(e) any other compensation and benefits as may be provided in
accordance with the terms and provisions of any applicable plans and
programs, if any, of the Corporation or any Subsidiary; and
(f) any rights to indemnification in accordance with Section 11 of
this Agreement.
6.2 SUSPENSION FOR DISABILITY.
(a) If, during the Term of Employment, the Executive shall have been
absent from his duties hereunder on a full-time basis due to physical or mental
illness for six (6) consecutive months, the Corporation may give thirty (30)
days written notice of potential suspension. If the Executive shall not have
returned to the full-time performance of his duties within such 30-day period,
the Corporation may suspend the Executive's employment for "Disability" (a
"Suspension for Disability").
(b) If a Suspension for Disability occurs during the Term of
Employment, the Corporation will pay the Executive a bi-weekly payment equal to
two-thirds (2/3) of the Executive's bi-weekly rate of Base Salary on the
effective date of the Suspension for Disability. These payments shall commence
on the effective date of the Executive's Suspension for Disability and will end
on the earlier of (i) the date the Executive returns to full-time employment
hereunder; (ii) the Executive's equivalent full-time employment by another
employer; (iii) the Executive's retirement; (iv) the Executive's death; or (v)
the expiration or earlier end of the Term of Employment (the "Term of
Suspension"). After a Suspension for Disability occurs, the Corporation shall
be free to fill the Executive's position(s), but such action by the Corporation,
shall constitute Good Reason if it occurs after a Change in Control. Upon the
Executive being able to return to full-time employment hereunder before the
expiration of the Term of Employment, the Executive shall be offered an
equivalent available position and otherwise be subject to the provisions of this
Agreement. The disability payments hereunder will be in addition to any benefit
payable from any qualified or nonqualified retirement plans or programs
maintained by the Corporation and/or the Bank but will be reduced by payments
received by the Executive on account of such disability under any
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9
long-term disability plan maintained for the Corporation's and/or the Bank's
employees.
(c) During the Term of Suspension, the Corporation will cause to be
continued life and health coverage and such other benefits substantially
identical to the coverage and benefits maintained by the Corporation and/or the
Bank for the Executive prior to the occurrence of any Suspension for Disability.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation (except as otherwise provided in Section 6.2(b) above), accrued
benefits or pension granted or accruing to the Executive during the Term of
Suspension. Nothing in this Section 6.2 shall abrogate or limit other
provisions of this Agreement granting rights to the Executive or the Executive's
spouse or the Executive's estate following death, retirement or termination, if
applicable.
6.3 TERMINATION BY THE BOARD FOR CAUSE. The Board may terminate the
Executive's employment hereunder for Cause, as provided below. If the Board
terminates the Executive's employment hereunder for Cause, the Term of
Employment (if not already expired) shall thereupon end as set forth below and
the Executive shall, subject to Sections 2.2, 3.2, 6.11, and 6.12 of this
Agreement, only be entitled to:
(a) Base Salary up to and including the Date of Termination;
(b) any bonus actually awarded, but not yet paid as of the Date of
Termination;
(c) reimbursement for all expenses (under Section 5.5) incurred as of
the Date of Termination, but not yet paid as of the Date of Termination;
(d) payment of the per diem value of any unused vacation days
accruing during the Term of Employment and, to the extent not prohibited by
applicable law, regulation, regulatory bulletin, and/or any other
regulatory requirement, as the same exists or may hereafter be promulgated
or amended, the unused, unaccrued portion of any vacation days available
through the end (but not beyond) of the calendar year of the Corporation in
which such termination occurs;
(e) to the extent not prohibited by applicable law, regulation,
regulatory bulletin, and/or any other regulatory requirement, as the same
exists or may hereafter be promulgated or amended, any other compensation
and benefits as may be provided in accordance with the terms and
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10
provisions of any applicable plans and programs, if any, of the Corporation
or any Subsidiary; and
(f) any rights to indemnification in accordance with Section 11 of
this Agreement.
In each case, in determining Cause the alleged acts or omissions of the
Executive shall be measured against standards generally prevailing in the
savings institution industry and the ultimate existence of Cause must be
confirmed by not less than 51% of the Incumbent Board (as constituted in
accordance with Section 1.4(c) of this Agreement) at a meeting called for such
purpose prior to any termination therefor; PROVIDED, HOWEVER, that it shall be
the Corporation's burden to prove the alleged facts and omissions and the
prevailing nature of the standards the Corporation shall have alleged are
violated by such acts and/or omissions of the Executive. In the event of such a
confirmation by 51% or more of the Incumbent Board, the Corporation shall notify
the Executive that the Corporation intends to terminate the Executive's
employment for Cause under this Section 6.3 (the "Confirmation Notice"). The
Confirmation Notice shall specify the act, or acts, upon the basis of which the
Incumbent Board has confirmed the existence of Cause and the Confirmation Notice
must be delivered to the Executive within fourteen (14) days after the Incumbent
Board so confirms the existence of Cause. If the Executive notifies the
Corporation in writing (the "Opportunity Notice") within thirty (30) days after
the Executive has received the Confirmation Notice, the Executive (together with
counsel) shall be provided one opportunity to meet with the Incumbent Board (or
a sufficient quorum thereof) to discuss such act or acts. Such opportunity to
meet with the Incumbent Board shall be fixed and shall occur on a date selected
by the Incumbent Board, such date being not less than ten (10) nor more than
thirty (30) days after the Corporation receives the Opportunity Notice from the
Executive; PROVIDED, HOWEVER, that the Corporation may in good faith select a
later date if, and only if, such later date is necessary to convene a sufficient
quorum of the Incumbent Board to act in respect of the Executive's Opportunity
Notice. Such meeting shall take place at the principal offices of the
Corporation or such other location as agreed to by the Executive and the
Corporation. During the period commencing on the date the Corporation receives
the Opportunity Notice and ending on the date next succeeding the date on which
such meeting between the Incumbent Board (or a sufficient quorum thereof) and
the Executive is scheduled to occur, and not withstanding anything to the
contrary in this Agreement, the Executive shall be suspended from employment
with the Corporation (with pay, to the extent not prohibited by applicable law,
regulation, regulatory bulletin, and/or any other regulatory requirement, as the
same exists or may hereafter be promulgated or amended) and the Incumbent Board
may, during such suspension period, reasonably limit the Executive's access to
the principal offices of the Corporation or any of its assets. If the Incumbent
Board properly sets the date
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11
of such meeting and if the Incumbent Board (or a sufficient quorum thereof)
attends such meeting and in good faith does not rescind its confirmation of
Cause at such meeting or if the Executive fails to attend such meeting for any
reason, the Executive's employment by the Corporation shall, immediately upon
the closing of such meeting and the delivery to the Executive of the Notice of
Termination, be terminated for Cause under this Section 6.3. If the Executive
does not respond in writing to the Confirmation Notice in the manner and within
the time period specified in this Section 6.3, the Executive's employment with
the Corporation shall, upon the thirty-first day after the receipt by the
Executive of the Confirmation Notice, be terminated for Cause under this Section
6.3. In the event of any dispute hereunder, the Executive shall be entitled, to
the extent not prohibited by applicable law, regulation, regulatory bulletin,
and/or any other regulatory requirement, as the same exists or may hereafter be
promulgated or amended, until the earlier to occur of (i) the Date of
Termination, (ii) the expiration of the current stated Term of Employment, or
(iii) the resolution of such dispute to (A) be paid bi-weekly his then Base
Salary, and (B) continue to receive all other benefits; and there shall be no
reduction whatsoever of any amounts subsequently paid to the Executive upon
resolution of such dispute as a result of, or in respect to, such interim
payments or coverage. The procedure set forth in this Section 6.3 to determine
the existence of Cause shall at all times be subject to the requirements of
applicable law, regulation, regulatory bulletin or other regulatory
requirements.
6.4 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. The Corporation
may terminate the Executive's employment hereunder at any time without Cause.
The Executive may terminate his employment hereunder for Good Reason at any time
by delivery of written notice to the Corporation within the six-month period
commencing after the occurrence of the Good Reason effective forty-five (45)
days after such written notice is delivered. If the Corporation terminates the
Executive's employment hereunder without Cause (other than due to Retirement,
death, Disability or the normal expiration of the full Term of Employment), or
if the Executive terminates his employment hereunder for Good Reason, the Term
of Employment shall thereupon end (if not already expired) and the Executive
shall, subject to Sections 2.2, 3.2, 6.11, and 6.12 of this Agreement, only be
entitled to:
(a) as liquidated damages, a cash lump sum equal to three (3) times
the Executive's "Highest Annual Compensation" (as herein defined). For
purposes of this Agreement, "Highest Annual Compensation" shall mean the
sum of (i) the highest per annum rate of Base Salary, and (ii) the
aggregate bonus amounts paid to the Executive (or which would have been
paid but for an election to defer payment to a later period), in respect of
any fiscal year of the Corporation at any time during the Term of
Employment;
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(b) any Base Salary accrued to the Date of Termination or any bonus
actually awarded, but not yet paid as of the Date of Termination;
(c) reimbursement for all expenses (under Section 5.5) incurred as of
the Date of Termination, but not yet paid as of the Date of Termination;
(d) payment of the per diem value of any unused vacation days
accruing during the Term of Employment and the unused, unaccrued portion of
any vacation days available through the end (but not beyond) of the
calendar year of the Corporation in which such termination occurs;
(e) continuation of the welfare benefits of the Executive, at the
level in effect (as provided for by Section 5.4 of this Agreement) on, and
at the same out-of-pocket cost to the Executive as of, the Date of
Termination for the three-year period commencing on the Date of Termination
(or, if such continuation is not permitted by applicable law or if the
Board so determines in its sole discretion, the Corporation shall provide
the economic equivalent in lieu thereof);
(f) any other compensation and benefits as may be provided in
accordance with the terms and provisions of any applicable plans or
programs, if any, of the Corporation or any Subsidiary; and
(g) any rights to indemnification in accordance with Section 11 of
this Agreement.
In the event of any dispute hereunder, the Executive shall be entitled until the
earlier to occur of (i) the Date of Termination, (ii) the expiration of the
current stated Term of Employment, or (iii) the resolution of such dispute to
(A) be paid bi-weekly his then Base Salary, and (B) continue to receive all
other benefits; and there shall be no reduction whatsoever of any amounts
subsequently paid to the Executive upon resolution of such dispute as a result
of, or in respect to, such interim payments or coverage.
6.5 VOLUNTARY TERMINATION. During the Term of Employment, the
Executive may effect, upon thirty (30) days prior written notice to the
Corporation, a Voluntary Termination of his employment hereunder and thereupon
the Term of Employment (if not already expired) shall end. A "Voluntary
Termination" shall mean a termination of employment by the Executive on his own
initiative other than (a) a termination due to death or Disability, (b) a
termination for Good Reason, (c) a termination due to Retirement, or (d) a
termination as a result of the normal expiration of the full Term of Employment.
A Voluntary
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Termination shall, subject to Sections 2.2, 3.2, 6.11, and 6.12 of this
Agreement, entitle the Executive only to all of the payments and benefits which
the Executive would be entitled to in the event of a termination of his
employment by the Corporation for Cause.
6.6 TERMINATION DUE TO RETIREMENT. The Executive may terminate the
Executive's employment hereunder due to Retirement upon thirty (30) days prior
written notice to the Corporation. If, during the Term of Employment, the
Executive's employment is so terminated due to Retirement, the Term of
Employment shall thereupon end and the Executive shall, subject to Sections 2.2,
3.2, 6.11, and 6.12 of this Agreement, only be entitled to:
(a) Base Salary up to and including the Date of Termination;
(b) any bonus actually awarded, but not yet paid as of the Date of
Termination;
(c) reimbursement for all expenses (under Section 5.5) incurred as of
the Date of Termination, but not yet paid as of the Date of Termination;
(d)(i) continuation of the Executive's welfare benefits (as described
in Section 5.4 of this Agreement) at the level in effect on the Date of
Termination for the one-year period following the termination of the
Executive's employment due to Retirement (or, if such continuation is not
permitted by applicable law or if the Board so determines in its sole
discretion, the Corporation shall provide the economic equivalent in lieu
thereof), and (ii) any other compensation and benefits as may be provided
in accordance with the terms and provisions of any applicable plans and
programs, if any, of the Corporation or any Subsidiary;
(e) payment of the per diem value of any unused vacation days
accruing during the Term of Employment and the unused, unaccrued portion of
any vacation days available through the end (but not beyond) of the
calendar year of the Corporation in which such termination occurs; and
(f) any rights to indemnification in accordance with Section 11 of
this Agreement.
6.7 NO MITIGATION; NO OFFSET. In the event of any termination of
employment under this Section 6, the Executive shall be under no obligation to
seek other employment or to mitigate damages and there shall be no offset
against any amounts due the Executive under this Agreement for any reason,
including, without limitation, on account of any remuneration attributable to
any subsequent employment that the Executive may obtain. Any amounts due under
this Section 6 are in the nature of severance
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14
payments, or liquidated damages, or both, and are not in the nature of a
penalty.
6.8 NOTICE OF TERMINATION. Any termination of the Executive's
employment under this Section 6 requiring advance written notice shall be
communicated by a notice of termination to the other party hereto given in
accordance with Section 12.3 of this Agreement (the "Notice of Termination").
The Notice of Termination, in the case of a termination by the Corporation for
Cause, or a termination by the Executive for Good Reason, shall (a) indicate the
specific termination provision in this Agreement relied upon, and (b) set forth
in reasonable detail the dates, facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated.
6.9 CERTAIN FURTHER PAYMENTS BY THE CORPORATION.
6.9.1 TAX REIMBURSEMENT PAYMENT. Anything in this Agreement to
the contrary notwithstanding, in the event that any amount of benefit or other
entitlement paid, payable, or to be paid, or distributed, distributable, or to
be distributed to or with respect to the Executive by the Corporation, the Bank,
any Subsidiary, any Parent, any other Affiliate, or any other party or entity
(collectively, the "Covered Payments"), is or becomes, at any time, as a result
of (a) any Internal Revenue Service claims or assertions, or (b) Section 6.9.2
below or otherwise, subject to the excise tax imposed by or under Section 4999
of the Code (or any similar tax that may hereafter be imposed), and/or any
interest or penalties with respect to such excise tax (such excise tax, together
with such interest and penalties, are hereinafter collectively referred to as
the "Excise Tax"), the Corporation shall pay to the Executive at the time
specified in Section 6.9.5 below an additional amount (the "Tax Reimbursement
Payment") such that after payment by the Executive of all taxes (including,
without limitation, any interest or penalties imposed with respect to such
taxes), including, without limitation, any Excise Tax, imposed on or
attributable to the Tax Reimbursement Payment provided by this Agreement, the
Executive retains an amount of the Tax Reimbursement Payment equal to the sum of
(a) the amount of the Excise Tax imposed upon the Covered Payments, and (b) an
amount equal to the product of (i) any deductions disallowed for federal, state
or local income tax purposes because of the inclusion of the Tax Reimbursement
Payment in the Executive's adjusted gross income, and (ii) the highest
applicable marginal rate of federal, state or local income taxation,
respectively, for the calendar year in which the Tax Reimbursement Payment is
made or is to be made.
6.9.2 DETERMINING EXCISE TAX. Except as otherwise provided in
Section 6.9.1(a), for purposes of
<PAGE>
15
determining whether any of the Covered Payments will be subject to the Excise
Tax and the amount of such Excise Tax,
(a) such Covered Payments will be treated as "parachute payments"
(within the meaning of Section 280G(b)(2) of the Code) and such payments in
excess of the Code Section 280G(b)(3) "base amount" shall be treated as
subject to the Excise Tax, unless, and except to the extent that, the
Corporation's independent certified public accountants (the "Accountants")
or legal counsel reasonably acceptable to the Executive, deliver timely,
upon the Executive's request, a written opinion, reasonably satisfactory to
the Executive's legal counsel, to the Executive that the Executive has a
reasonable basis to claim that the Covered Payments (in whole or in part)
(i) do not constitute "parachute payments", (ii) represent reasonable
compensation for services actually rendered (within the meaning of Section
280G(b)(4) of the Code) in excess of the "base amount" allocable to such
reasonable compensation, or (iii) such "parachute payments" are otherwise
not subject to such Excise Tax (with appropriate legal authority, detailed
analysis and explanation provided therein by the Accountants); and
(b) the value of any Covered Payments which are non-cash benefits or
deferred payments or benefits shall be determined by the Accountants in
accordance with the principles of Section 280G of the Code.
6.9.3 APPLICABLE TAX RATES AND DEDUCTIONS. For purposes of
determining the amount of the Tax Reimbursement Payment, the Executive shall be
deemed:
(a) to pay federal, state and/or local income taxes at the highest
applicable marginal rate of income taxation for the calendar year in which
the Tax Reimbursement Payment is made or is to be made, and
(b) to have otherwise allowable deductions for federal, state and
local income tax purposes at least equal to those disallowed due to the
inclusion of the Tax Reimbursement Payment in the Executive's adjusted
gross income.
6.9.4 SUBSEQUENT EVENTS. If, pursuant to a written opinion,
reasonably satisfactory to the Executive, of the Accountants (or legal counsel
reasonably acceptable to the Executive) delivered and addressed to the
Executive, the Excise Tax is subsequently determined on a reasonable basis and
in good faith (other than as a result of a tax contest) to be less than the
amount taken into account hereunder in calculating any Tax Reimbursement Payment
made, the Executive shall repay to the Corporation the portion of any prior Tax
Reimbursement Payment
<PAGE>
16
that would not have been paid if such redetermined Excise Tax had been applied
in calculating such Tax Reimbursement Payment, plus interest on the amount of
such repayment at the mid-term discount rate provided in Section 1274(b)(2)(B)
of the Code. Notwithstanding the immediately foregoing sentence, if any portion
of the Tax Reimbursement Payment to be refunded to the Corporation has been paid
to any federal, state or local tax authority, repayment thereof shall not be
required until an actual refund or credit of such portion has been made to or
obtained by the Executive from such tax authority, and any interest payable to
the Corporation shall not exceed the interest received or credited to the
Executive by any such tax authority. The Executive shall be fully indemnified
by the Corporation for any out-of-pocket costs, expenses or fees attributable to
the filing of any refund or other claim. The Executive and the Corporation
shall mutually agree upon the course of action to be pursued (and the method of
allocating the expenses thereof) if any good faith claim for refund or credit
from such tax authority made by the Executive is denied.
Notwithstanding the immediately preceding paragraph, if, in the
written opinion of the Executive's tax advisors delivered to the Accountants and
the Corporation, the Excise Tax is later determined to exceed the amount taken
into account by the Accountants or legal counsel, as the case may be, hereunder
at the time any Tax Reimbursement Payment is made by reason of (i) manifest
error, (ii) any payment the existence or amount of which could not be or was not
determined or known about at the time of any Tax Reimbursement Payment, or (iii)
any determination, claim or assertion made by any tax authority that the Excise
Tax is or should be greater than the amount of such Excise Tax taken into
account previously by the Accountants or legal counsel, as the case may be, or
as otherwise previously determined, the Corporation shall make an additional Tax
Reimbursement Payment in respect of such excess Excise Tax (which Tax
Reimbursement Payment shall include, without limitation, any interest or
penalties payable with respect to such excess Excise Tax) at the time specified
in Section 6.9.5 below. With respect to this Section 6.9.4, if any such tax
authority makes such a determination, the Executive shall notify the Corporation
of such occurrence. If the Corporation obtains (at the Corporation's sole
expense) an opinion of legal counsel addressed, delivered and reasonably
satisfactory to the Executive that it is more likely than not that the Executive
would succeed in disputing such claim, assertion or determination of such tax
authority, the Executive shall, at the sole expense of the Corporation, make a
good faith effort to contest such claim, assertion or determination of such tax
authority in all relevant administrative proceedings (excluding any appeals
thereof); PROVIDED, HOWEVER, that if the Executive determines in good faith that
the continued contest of any such claim, assertion or determination with such
tax authority would have an adverse impact on his overall tax position (which
good faith
<PAGE>
17
determination shall take into account the magnitude of the amounts involved),
then, upon receipt of notice by the Corporation from the Executive to that
effect, the Executive shall, without foregoing any right to receive any Tax
Reimbursement Payment described in this Section 6.9, have no further obligation
to pursue any such contest with any such tax authority. The Executive may, as a
condition to pursuing or commencing any contest described in this Section 6.9.4
in any proceedings (which proceedings shall be in a forum chosen at the sole
discretion of the Executive), require the Corporation to advance any amount of
tax required to be paid in order to pursue such contest. In conducting any
contest described in this Section 6.9.4, the Executive shall use his best
efforts to keep the Corporation advised and will permit the Corporation to
prepare and suggest appropriate responses and actions that may be reasonably
made or taken by the Executive. Notwithstanding the above, the decisions as to
such responses or actions shall be solely that of the Executive and the
Executive shall have the sole right to control the proceeding. The Corporation
shall bear all expenses of any proceeding relating to any contest described in
this Section 6.9.4, whether incurred by the Corporation or the Executive,
including, without limitation, all fees and disbursements of attorneys,
accountants and expert witnesses and any additional interest or penalties
applicable. Nothing contained in this Agreement shall under any circumstances
give the Corporation any right to examine the tax returns or any other records
of the Executive.
6.9.5 DATE OF PAYMENT. A Tax Reimbursement Payment, as provided
for in this Section 6.9, shall be paid to the Executive not later than 10
business days following the payment of any Covered Payments which are "parachute
payments" under Section 6.9.2 above; PROVIDED, HOWEVER, that any additional Tax
Reimbursement Payment payable to the Executive under Section 6.9.4 of this
Agreement shall be paid to the Executive not later than 15 business days
following the actual receipt by the Accountants and the Corporation of the
written opinion of the Executive's tax advisors, as provided for therein.
6.10 PAYMENT. Except as otherwise provided in this Agreement, any
payments to which the Executive shall be entitled to under this Section 6,
including, without limitation, any economic equivalent of any benefit, shall be
made, to the extent practicable, within five (5) business days following the
Date of Termination.
6.11 CORPORATION REGULATORY LIMITATIONS. Any payments made to the
Executive pursuant to this Agreement, or otherwise, are subject to and
conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any
regulations promulgated thereunder.
<PAGE>
18
6.12 OTHER REQUIRED PROVISIONS.
6.12.1 If the Bank is in default (as defined in Section 3(x)(1)
of the Federal Deposit Insurance Act), all obligations under this Agreement
shall terminate as of the date of default, but this Section 6.12.1 shall not
affect the vested rights of the Corporation and/or the Executive, if any.
6.12.2 All obligations under this Agreement shall be terminated,
except to the extent determined that continuation of this Agreement is necessary
for the continued operation of the Bank, (i) by the director, or his or her
designee, at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
Federal Deposit Insurance Act; or (ii) by the director, or his designee, at the
time the director, or his or her designee, approves a supervisory merger to
resolve problems related to operation of the Bank or when the Bank is determined
by such director to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by any such
actions.
6.13 POST-TERMINATION OBLIGATIONS. During the Term of Employment and
for one (1) full year after the expiration or termination thereof, the Executive
shall, upon reasonable notice, use his reasonable best efforts to cooperate with
the Corporation and/or the Bank by providing such information and assistance to
the Corporation and/or the Bank as may reasonably be required by the Corporation
and/or the Bank at the Corporation's expense in connection with any litigation
not commenced by or involving the Executive in which the Corporation and/or the
Bank or any of their Subsidiaries or Affiliates is, or may become, a party.
7. NON-EXCLUSIVITY OF RIGHTS; NON-EXTENSION SEVERANCE.
7.1 OTHER BENEFITS. Except as is otherwise specifically provided in
this Agreement, the Executive's continuing or future participation in any
benefit, bonus, incentive or other plan or program provided or maintained by the
Corporation and/or the Bank, and for which the Executive may be eligible and
qualify, shall not be prevented or limited, and the Executive's rights under any
future agreements with the Corporation and/or the Bank and/or any Affiliate
thereof, including, without limitation, any stock option agreements shall not be
limited or prejudiced. Subject to Section 7.2 below, this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to the Executive
of a kind elsewhere provided. Except as otherwise specifically provided in this
Agreement, no provision of this Agreement shall be interpreted to mean or result
in the Executive receiving fewer benefits than those available to him without
reference to this Agreement.
<PAGE>
19
7.2 NON-EXTENSION SEVERANCE. If (a)(i) the Executive's employment
hereunder is not terminated or suspended under Sections 6.1, 6.2, 6.3, 6.4, 6.5
or 6.6 of this Agreement prior to the expiration of the Term of Employment, or
(ii) any such termination or suspension of the Executive's employment is not
initiated prior to the expiration of the Term of Employment, (b) the Term of
Employment is not extended by the Corporation, and (c) the Executive's
employment with the Corporation terminates after the expiration of the Term of
Employment (other than for Cause), the Executive shall be entitled to receive,
in lieu of any severance payments or severance benefits under any other plan or
program maintained by the Corporation or any Affiliate, (1) Base Salary
continuation at the rate in effect (as provided in Section 5.1 of this
Agreement) as of the expiration of the Term of Employment, and (2) welfare
benefit continuation, at the level in effect (as provided for by Section 5.4 of
this Agreement) on, and at the same out-of-pocket cost to the Executive as of,
the expiration of the Term of Employment, in each case (1) and (2), for the
period ending six (6) months after the Executive's employment terminates.
Notwithstanding the above, if the Board determines in its sole discretion and in
lieu only of such Base Salary continuation in (1), a lump sum payment, equal to
the present value of such Base Salary continuation (reasonably determined using
the discount rate specified in Section 6.1(a)(1)), shall be paid to the
Executive within thirty (30) days after the date the Executive's employment
terminates. Notwithstanding anything to the contrary in this Section 7.2, if
(x) there occurs a Change in Control during the Term of Employment, (y) the Term
of Employment is not extended by the Corporation up to and/or through the second
anniversary of any such change of control, and (z) the Executive's employment
with the Corporation is subsequently terminated (other than for Cause), the
Executive, in lieu of the Base Salary and welfare benefits continuation under
this Section 7.2, shall be entitled to receive the payments and benefits set
forth in Section 6.4 of this Agreement.
8. RESOLUTION OF DISPUTES.
8.1 With the exception of proceedings for equitable relief brought
pursuant to this Section or Section 9.2 of this Agreement, any dispute or
controversy arising under or in connection with this Agreement may, at the
Executive's option, be settled exclusively by arbitration in Melville, Long
Island in accordance with the rules of the American Arbitration Association then
in effect and at the Corporation's expense. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; PROVIDED, HOWEVER, that the
Executive shall be entitled to seek specific performance in court of his right
to be paid until the Date of Termination during the pendency of any dispute or
controversy arising under or in connection with this
<PAGE>
20
Agreement. If a claim for any payments or benefits under this Agreement or any
other provision of this Agreement is disputed by the Corporation and the
Executive, the Executive shall, to the extent and at such time or times as is
not prohibited by applicable law, regulation, regulatory bulletin, and/or any
other regulatory requirement, as the same exists or may be hereafter promulgated
or amended, be reimbursed for all reasonable attorney's fees and expenses
incurred by the Executive in pursuing such claim.
9. CONFIDENTIAL INFORMATION.
9.1 CONFIDENTIALITY. The Executive will not, during or after the
Term of Employment, disclose any confidential information relating to the
business activities of the Corporation or any Affiliate thereof which has not
been previously disclosed by any person to any person, firm, corporation, bank
or other entity for any reason or purpose whatsoever. Notwithstanding the
foregoing, the Executive may disclose any knowledge or other information
relating to banking, financial and/or economic principles, concepts or ideas
which are based on experience and which are not derived from the business plans
and activities of the Corporation, and may disclose such confidential
information in connection with legal and/or regulatory proceedings (which shall
include, but not limited to, formal or informal exams, investigations or
inquiries conducted by the Office of Thrift Supervision).
9.2 INJUNCTIVE RELIEF. The Executive acknowledges and agrees that
the Corporation will have no adequate remedy at law, and would be irreparably
harmed, if the Executive breaches or threatens to breach any of the provisions
of this Section 9 of this Agreement. The Executive agrees that the Corporation
shall be entitled to equitable and/or injunctive relief to prevent any breach or
threatened breach of this Section 9, and to specific performance of each of the
terms of such Section in addition to any other legal or equitable remedies that
the Corporation may have. The Executive further agrees that he shall not, in
any equity proceeding relating to the enforcement of the terms of this Section
9, raise the defense that the Corporation has an adequate remedy at law.
9.3 SPECIAL SEVERABILITY. The terms and provisions of this Section 9
are intended to be separate and divisible provisions and if, for any reason, any
one or more of them is held to be invalid or unenforceable, neither the validity
nor the enforceability of any other provision of this Agreement shall thereby be
affected.
<PAGE>
21
10. SUCCESSORS.
10.1 THE EXECUTIVE. This Agreement is personal to the Executive
and, without the prior express written consent of the Corporation, shall not
be assignable by the Executive, except that the Executive's rights to receive
any compensation or benefits under this Agreement may be transferred or
disposed of pursuant to testamentary disposition, intestate succession or
pursuant to a qualified domestic relations order. This Agreement shall inure
to the benefit of and be enforceable by the Executive's heirs, beneficiaries
and/or legal representatives.
10.2 THE CORPORATION. This Agreement shall inure to the benefit of
and be binding upon the Corporation and its successors and assigns; PROVIDED,
HOWEVER, that no assignment of this Agreement may be made without the written
consent of the Executive.
11. INDEMNIFICATION.
11.1 The Executive (and his heirs, executors and administrators) shall
be indemnified and held harmless by the Corporation to the fullest extent
permitted by applicable law, regulation, regulatory bulletin, and/or any other
regulatory requirement, as the same exists or may hereafter be promulgated or
amended, against all expense, liability and loss (including, without limitation,
attorneys' fees, judgments, fines, excise taxes or penalties and amounts paid or
to be paid in settlement) reasonably incurred or suffered by the Executive as a
consequence of the Executive being or having been made a party to, or being or
having been involved, in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that the Executive is or was a trustee, director or officer of the
Corporation or is or was serving at the request of the Corporation as a trustee,
director or officer of another corporation (including, but not limited to, a
subsidiary or an Affiliate of the Corporation), and such indemnification shall
continue after the Executive shall cease to be an officer, director or trustee.
The right to indemnification conferred hereby shall be a contract right and
shall also include, to the extent permitted by applicable regulation, the right
to be paid by the Corporation the expenses incurred in defending any such
proceeding in advance of the final disposition upon receipt by the Corporation
of an undertaking by or on behalf of the Executive to repay such amount or a
portion thereof, if it shall ultimately be determined that the Executive is not
entitled to be
<PAGE>
22
indemnified by the Corporation pursuant hereto or as otherwise authorized by law
but such repayment by the Executive shall only be in an amount ultimately
determined to exceed the amount to which the Executive was entitled to be
indemnified.
12. MISCELLANEOUS.
12.1 APPLICABLE LAW. This Agreement shall, to the extent not
superseded by federal law, be governed by and construed in accordance with the
laws of the State of New York, without regard to principles of conflict of laws.
12.2 AMENDMENTS/WAIVER. This Agreement may not be amended, waived, or
modified otherwise than by a written agreement executed by the parties to this
Agreement or their respective successors and legal representatives. No waiver
by any party to this Agreement of any breach of any term, provision or condition
of this Agreement by the other party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same time, or any prior or subsequent
time.
12.3 NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed given when received by hand-delivery to the other
party, by facsimile transmission, by overnight courier, or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive: Mr. Bruce M. Barnet
3 Carteret Place
Garden City, New York 11530
If to the Corporation: Long Island Bancorp. Inc.
201 Old Country Road
Melville, New York 11747
Attn: Corporate Secretary
<PAGE>
23
with a copy to: Mel M. Immergut, Esq.
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notices and communications shall be effective
when actually received by the addressee.
12.4 WITHHOLDING. The Corporation may withhold from any amounts
payable under this Agreement such taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
12.5 SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
12.6 CAPTIONS. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect.
12.7 ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties to this Agreement concerning the subject matter hereof and
supersedes all prior agreements, understandings, discussions, negotiations and
undertakings, whether written or oral, between the parties with respect thereto.
12.8 REPRESENTATION. The Executive represents and warrants that the
performance of the Executive's duties and obligations under this Agreement will
not violate any agreement between the Executive and any other person, firm,
partnership, corporation, or organization.
12.9 SURVIVORSHIP. The respective rights and obligations of the
parties to this Agreement, including, without limitation, any rights of the
Executive and the Corporation under Section 11 of this Agreement, shall survive
any termination of this Agreement or the Executive's employment hereunder for
any reason to the extent necessary to the intended preservation of such rights
and obligations.
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24
12.10 EFFECT OF PAYMENTS UNDER BANK AGREEMENT. Notwithstanding any
provision herein to the contrary, to the extent that payments, entitlements and
benefits are paid to or received by the Executive under the Employment Agreement
dated October 3, 1996, between the Executive and the Bank, the amount of any
such payments, entitlements and benefits actually made by the Bank shall reduce,
to the extent so made, the same payment, entitlement or benefit due to the
Executive under the provisions of this Agreement.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and the Corporation has caused this Agreement to be executed in its name on
its behalf, and its corporate seal to be hereunto affixed and attested by its
Secretary, all as of the day and year first above written.
LONG ISLAND BANCORP, INC.
By: /s/ John J. Conefry, Jr.
----------------------------------
John J. Conefry, Jr.
Chief Executive Officer
/s/ Bruce M. Barnet
----------------------------------
Bruce M. Barnet
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement"), dated as of October 3,
1996, is made by and between The Long Island Savings Bank, FSB, a federal stock
savings bank organized under the laws of the United States, having its principal
offices at 201 Old Country Road, Melville, New York 11747 (the "Bank"), and
Mr. Bruce M. Barnet, residing at 3 Carteret Place, Garden City, New York, 11530
(the "Executive").
RECITALS
1. The Bank desires to employ the Executive as Executive Vice
President of the Bank, and to enter into an employment agreement embodying the
terms of such relationship.
2. The Executive is willing to be employed as Executive Vice
President of the Bank on the terms set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and for other good and valuable consideration, the Bank and
the Executive hereby agree as follows.
1. DEFINITIONS
1.1 "AFFILIATE" means any person or entity of any kind effectively
controlling, effectively controlled by or effectively under common control with
the Bank, including, without limitation, Long Island Bancorp, Inc. (the
"Corporation").
1.2 "BOARD" means the board of directors of the Bank.
1.3 "CAUSE" means termination due to the Executive's (a) personal
dishonesty, (b) incompetence, (c) willful misconduct, (d) breach of fiduciary
duty involving personal profit, (e) intentional failure to perform stated
duties, (f) willful violation of any law, rule or regulation (other than traffic
violations or similar offenses), or final cease-and-desist order, or (g)
material breach of any provision of this Agreement.
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2
1.4 "CHANGE IN CONTROL" means, after the date of this Agreement, (a)
a change in control of the Corporation and/or the Bank of a nature that would be
required to be reported in response to Item 1 of the current report on Form 8-K,
as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); (b) a change
in control of the Bank within the meaning of 12 U.S.C. Section 1817(i), the
Change in Bank Control Act, and 12 C.F.R. Section 574.4 of the Acquisition of
Control of Savings Association regulations of the Office of Thrift Supervision;
(c) individuals who constitute the Board as of the date of this Agreement (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date of
this Agreement whose election was approved by a vote of at least three-quarters
of the directors then comprising the Incumbent Board, or whose nomination for
election by the Bank's shareholders was approved by the Bank's nominating
committee then serving under the Board, shall be, for purposes of this clause
(c), considered as though he or she was a member of the Incumbent Board (but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of either an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or
consents); (d) approval by the shareholders of the Corporation and/or the Bank,
as the case may be, of a reorganization, merger or consolidation, or the
consummation of any such reorganization, merger or consolidation, other than a
reorganization, merger or consolidation with respect to which all or
substantially all of the individuals and entities who were the beneficial
owners, immediately prior to such reorganization, merger or consolidation, of
the Voting Interest in the Corporation and/or the Bank, as the case may be,
beneficially own, directly or indirectly, immediately after such reorganization,
merger or consolidation more than 80% of the Voting Interest of the corporation
or other entity resulting from such reorganization, merger or consolidation in
substantially the same proportions as their respective ownership, immediately
prior to such reorganization, merger or consolidation, of the Voting Interest in
the Corporation and/or the Bank, as the case may be; (e) approval by the
shareholders of the Corporation and/or the Bank, as the case may be, of (i) a
complete liquidation or dissolution of the Corporation and/or the Bank, or (ii)
the sale or other disposition of all or substantially all of the assets of the
Corporation and/or the Bank, or the occurrence of any such liquidation,
dissolution, sale or other disposition, other than, in any case, to a
Subsidiary, directly or indirectly, of the Corporation or any Affiliate; and/or
(f) the solicitation of proxies from shareholders of the Corporation by someone
other than the current management of the Bank and without the approval of the
Board, seeking shareholder approval of a plan of
<PAGE>
3
reorganization, merger or consolidation of the Corporation and/or the Bank with
one or more corporations as a result of which the shareholders' interests in the
Corporation and/or the Bank, as the case may be, are actually exchanged for or
converted into securities not issued by the Corporation and/or the Bank, as the
case may be. No failure on the part of the Executive to exercise any rights
upon the occurrence of a Change in Control shall be deemed a waiver of or
otherwise impair the rights of the Executive in respect of any subsequent events
or circumstances constituting a Change in Control.
1.5 "CODE" means the Internal Revenue Code of 1986, as amended, and
as in effect from time to time, and/or any successor code thereto.
1.6 "DATE OF TERMINATION" means the date specified in the Notice of
Termination (as defined in Section 6.8 of this Agreement); PROVIDED, HOWEVER,
that if, within thirty (30) days after any Notice of Termination is given, the
party receiving such Notice of Termination notifies the other party in writing
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction, including all
appeals, unless the time for appeal therefrom has expired and no appeal has been
perfected; PROVIDED, FURTHER, HOWEVER, that the Date of Termination shall (a) in
no case be later than the date on which the Term of Employment expires, and (b)
be extended by a notice of dispute only if such notice is given in good faith
and the party giving such notice pursues the resolution of such dispute with
reasonable diligence.
1.7 "EXCISE TAX" means any excise tax imposed under Section 4999 of
the Code and/or any successor section thereto.
1.8 "GOOD REASON" means, and shall be deemed to exist if, without the
written consent of the Executive, (a) the Bank fails to appoint or reappoint the
Executive as an Executive Vice President of the Bank, (b) there occurs any
reduction of Base Salary or material reduction in other benefits or any material
change by the Bank to the Executive's function, duties, or responsibilities in
effect on the date hereof and/or as set forth in Section 4.1 of this Agreement,
which change would cause the Executive's position with the Bank to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof in effect on the date hereof and/or as set forth in Section 4.1 of this
Agreement (and any such material change shall be deemed a continuing breach of
this Agreement), (c) there occurs any material breach of this Agreement by the
Bank, (d) a Change in Control occurs, or (e) the Bank, if and after a Suspension
for Disability (as defined in Section 6.2(a))
<PAGE>
4
occurs and after a Change in Control occurs, fills the Executive's position (in
the manner set forth in Section 6.2(b) of this Agreement).
1.9 "PARENT" means any corporation which has a direct or indirect
legal or beneficial ownership interest in the Bank, but only if any such
corporation owns or controls, directly or indirectly, securities possessing at
least 50% of the total combined voting power of all classes of securities of the
Bank.
1.10 "SUBSIDIARY" means any corporation (other than the Bank) in which
the Bank or any Parent has a direct or indirect legal or beneficial ownership
interest, but only if the Bank or the Parent, as the case may be, owns or
controls, directly or indirectly, securities possessing at least 50% of the
total combined voting power of all classes of securities in any such
corporation.
1.11 "RETIREMENT" means the termination of the Executive's employment
with the Bank for any reason by the Executive at any time after the Executive
attains age 65.
1.12 "VOTING INTEREST" means securities of any class or classes or
other ownership interests having general voting power under ordinary
circumstances to elect members of a board of directors or trustees of any
entity.
2. EMPLOYMENT.
2.1 GENERAL. Subject to the terms and provisions set forth in this
Agreement, the Bank, during the Term of Employment, agrees to continue to employ
the Executive as Executive Vice President of the Bank and the Executive hereby
accepts such continued employment.
2.2 OTS SUSPENSION. If the Executive is suspended from office and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit
Insurance Act (12 U.S.C. Sections 1818(e)(3) and (g)(1)), the Bank's obligations
under this Agreement shall be suspended as of the date of service, unless stayed
by appropriate proceedings. If the charges in the notice are dismissed, the
Bank may in its discretion (i) pay the Executive all or part of the compensation
withheld while its contract obligations were suspended, and (ii) reinstate (in
whole or in part) any of its obligations which were suspended.
3. TERM OF EMPLOYMENT
3.1 TERM. The term of employment under this Agreement shall commence
as of October 3, 1996 (the "Commencement Date")
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5
and, unless extended as provided below or earlier terminated by the Bank or the
Executive under Section 6 of this Agreement, shall continue until the third
anniversary of the Commencement Date (the "Term of Employment"). After adequate
and explicit review of the terms of this Agreement and the Executive's
performance of his duties, the Board, in its sole discretion, may approve, as of
each anniversary of the date of this Agreement, a one year extension of the then
Term of Employment.
3.2 OTS REMOVAL. Notwithstanding anything to the contrary in this
Agreement, if the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
Sections 1818(e)(4) or (g)(1)), all obligations of the Bank under this Agreement
shall terminate as of the effective date of the order, but vested rights of the
Bank and/or the Executive, if any, shall not be affected.
4. POSITIONS, RESPONSIBILITIES AND DUTIES.
4.1 POSITIONS AND DUTIES. During the Term of Employment, the
Executive shall be employed and shall serve as Executive Vice President of the
Bank. In such position(s), the Executive shall have the duties,
responsibilities and authority as determined and designated from time to time by
the Board. The Executive shall serve under the direction and supervision of
the Bank's Chief Executive Officer and shall report only to such Chief Executive
Officer or his designees. Notwithstanding the above, the Executive shall not be
required to perform any duties and responsibilities (a) which would result in a
non-compliance with or violation of any applicable law, regulation, regulatory
bulletin, and/or any other regulatory requirement or (b) on a regular basis in
any locations outside the counties of Nassau, Suffolk or the City of New York
unless agreed upon by the Executive.
4.2 ATTENTION TO DUTIES AND RESPONSIBILITIES. During the Term of
Employment, the Executive shall, except for periods of absence occasioned by
illness, vacation in accordance with Section 5.6, and reasonable leaves of
absence in accordance with the practices of the Bank and the Corporation as of
the date of this Agreement, devote substantially all of his business time to the
business and affairs of the Bank and the Corporation and the Executive shall use
his best efforts, business skills, ability and fidelity to perform faithfully
and efficiently the duties and responsibilities contemplated by this Agreement;
PROVIDED, HOWEVER, that the Executive shall be allowed, to the extent such
activities do not present a conflict or substantially interfere with the
performance by the Executive of his duties and responsibilities hereunder, (a)
to manage the Executive's personal affairs, and (b)(i) to serve on boards or
committees of
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6
civic or charitable organizations or trade associations, and (ii) after
obtaining the consent of the Board, as evidenced by a written resolution of the
Board and under the terms and conditions specified in any such resolution, to
serve on the boards of directors or trustees of companies or other organizations
and associations; PROVIDED, FURTHER, HOWEVER, that such offices or positions
which the Executive holds on the date of this Agreement and which are set forth
on Exhibit "A", annexed hereto are designated as currently consented to
positions. Notwithstanding any of the foregoing, it is understood and agreed by
the Executive that he shall not engage in any real estate brokerage or other
real estate-related activities, except to the extent that any such activities
are (A) necessary to manage properties currently or hereafter owned by the
Executive and which are used primarily by the Executive for personal purposes,
or (B) consented to by the Board, as evidenced by a written resolution of the
Board and under the terms and conditions specified in any such resolution (such
consent not to be unreasonably withheld or delayed).
5. COMPENSATION AND OTHER BENEFITS.
5.1 BASE SALARY. During the Term of Employment, the Executive shall
receive a base salary of $225,000 per annum ("Base Salary") payable in
accordance with the Bank's normal payroll practices.
5.2 ANNUAL BONUS. During the Term of Employment, the Executive shall
be entitled to participate in an equitable manner with other executive officers
of the Bank in such discretionary bonus payments or awards as may be authorized,
declared, and paid by the Board to the Bank's executive employees; PROVIDED,
HOWEVER, that, to the extent not prohibited by applicable law, regulation,
regulatory bulletin, and/or any other regulatory requirement, as the same exists
or may hereafter be promulgated or amended, the annual bonus paid to the
Executive following a Change in Control shall not be less than the highest
annual bonus paid to the Executive during the Term of Employment. No other
compensation or additional benefits provided for in this Agreement shall be
deemed a substitute for the Executive's right, if any, to receive such bonuses
if, when and as declared by the Board.
5.3 INCENTIVE, RETIREMENT, AND SAVINGS PLANS. During the Term of
Employment, the Executive shall participate in all incentive, pension,
retirement, savings and other employee benefit plans and programs, if any,
maintained from time to time by the Corporation and/or the Bank for the benefit
of senior executives and/or other employees of the Corporation and/or the Bank.
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7
5.4 WELFARE BENEFIT PLANS. During the Term of Employment, the
Executive, the Executive's spouse, if any, and their eligible dependents, if
any, shall participate in and be covered by all the welfare benefit plans and
programs, if any, maintained by the Corporation and/or the Bank for the benefit
of senior executives and/or other employees of the Corporation and/or the Bank.
5.5 EXPENSE REIMBURSEMENT. During and in respect of the Term of
Employment, the Executive shall be entitled to receive prompt reimbursement for
all reasonable expenses, including reasonable business travel expenses, incurred
by the Executive in performing his duties and responsibilities hereunder in
accordance with the policies and procedures of the Bank as in effect at the time
the expense was incurred, as the same may be changed from time to time.
5.6 VACATION AND FRINGE BENEFITS. During the Term of Employment, the
Executive shall be entitled to five weeks paid vacation each calendar year at
such times which do not materially interfere with the performance of the
Executive's duties hereunder. In addition, during the Term of Employment, the
Executive shall be eligible to benefit from such fringe benefits and
perquisites, if any, in accordance with the policies of the Bank and as in
effect and provided from time to time to senior executives of the Corporation
and/or the Bank. Notwithstanding the above, the Executive, during the Term of
Employment, shall retain, pursuant to current policy and practice of the
Corporation and/or the Bank, all privileges, if any, including club memberships
and automobile usage to which he is entitled on the date of this Agreement.
6. TERMINATION.
6.1 TERMINATION DUE TO DEATH. In the event of the Executive's death
during the Term of Employment, the Term of Employment shall thereupon end and
his estate or other legal representative, as the case may be, shall, subject to
Sections 2.2, 3.2, 6.9, 6.11, and 6.12 of this Agreement, only be entitled to:
(a)(i)(A) Base Salary continuation at two-thirds (2/3) of the rate in
effect (as provided in Section 5.1 of this Agreement) on the Date of
Termination for a three-month period commencing on such Date of
Termination, or (B), if the Board so determines in its sole discretion and
in lieu of such three-month salary continuation described above in (A), a
lump sum payment equal in amount to the present value of such Base Salary
continuation (reasonably determined using a discount rate equal to the most
recent quote available for the three-month United States Treasury Bill
<PAGE>
8
rate on the Date of Termination) payable within thirty business days after
the Date of Termination, and (ii) a pro-rata annual bonus for the fiscal
year in which such termination occurs, such pro-rata bonus amount to be
(I) pro-rated based on the number of calendar days transpired during the
fiscal year of the Bank (prior to the Date of Termination) in which such
termination occurs over 365, (II) determined in good faith by the Board
(but in its sole discretion), and (III) if any such bonus is payable, paid
on or about the same date that the annual bonus amounts payable in respect
of such fiscal year, if any, to the senior executives of the Corporation
and/or the Bank are actually paid to them;
(b) any Base Salary accrued to the Date of Termination or any bonus
actually awarded, but not yet paid as of the Date of Termination;
(c) reimbursement for all expenses (under Section 5.5) incurred as of
the Date of Termination, but not yet paid as of the Date of Termination;
(d) payment of the per diem value of any unused vacation days
accruing during the Term of Employment and the unused, unaccrued portion of
any vacation days available through the end (but not beyond) of the
calendar year of the Bank in which such termination occurs;
(e) any other compensation and benefits as may be provided in
accordance with the terms and provisions of any applicable plans and
programs, if any, of the Bank or any Subsidiary; and
(f) any rights to indemnification in accordance with Section 11 of
this Agreement.
6.2 SUSPENSION FOR DISABILITY.
(a) If, during the Term of Employment, the Executive shall have been
absent from his duties hereunder on a full-time basis due to physical or mental
illness for six (6) consecutive months, the Bank may give thirty (30) days
written notice of potential suspension. If the Executive shall not have
returned to the full-time performance of his duties within such 30-day period,
the Bank may suspend the Executive's employment for "Disability" (a "Suspension
for Disability").
(b) If a Suspension for Disability occurs during the Term of
Employment, the Bank will pay the Executive a bi-weekly payment equal to
two-thirds (2/3) of the Executive's bi-weekly rate of Base Salary on the
effective date of the Suspension for Disability. These payments shall commence
on the effective date
<PAGE>
9
of the Executive's Suspension for Disability and will end on the earlier of (i)
the date the Executive returns to full-time employment hereunder; (ii) the
Executive's equivalent full-time employment by another employer; (iii) the
Executive's retirement; (iv) the Executive's death; or (v) the expiration or
earlier end of the Term of Employment (the "Term of Suspension"). After a
Suspension for Disability occurs, the Bank shall be free to fill the Executive's
position, but such action by the Bank, shall constitute Good Reason if it occurs
after a Change in Control. Upon the Executive being able to return to full-time
employment hereunder before the expiration or end of the Term of Employment, the
Executive shall be offered an equivalent available position and otherwise be
subject to the provisions of this Agreement. The disability payments hereunder
will be in addition to any benefit payable from any qualified or nonqualified
retirement plans or programs maintained by the Corporation and/or the Bank but
will be reduced by payments received by the Executive on account of such
disability under any long-term disability plan maintained for the Corporation's
and/or the Bank's employees.
(c) During the Term of Suspension, the Bank will cause to be
continued life and health coverage and such other benefits substantially
identical to the coverage and benefits maintained by the Bank for the Executive
prior to the occurrence of any Suspension for Disability.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation (except as otherwise provided in Section 6.2(b) above), accrued
benefits or pension granted or accruing to the Executive during the Term of
Suspension. Nothing in this Section 6.2 shall abrogate or limit other
provisions of this Agreement granting rights to the Executive or the Executive's
spouse or the Executive's estate following death, retirement or termination, if
applicable.
6.3 TERMINATION BY THE BOARD FOR CAUSE. The Board may terminate the
Executive's employment hereunder for Cause, as provided below. If the Board
terminates the Executive's employment hereunder for Cause, the Term of
Employment (if not already expired) shall thereupon end as set forth below and
the Executive shall, subject to Sections 2.2, 3.2, 6.9, 6.11, and 6.12 of this
Agreement, only be entitled to:
(a) Base Salary up to and including the Date of Termination;
(b) any bonus actually awarded, but not yet paid as of the Date of
Termination;
(c) reimbursement for all expenses (under Section 5.5) incurred as of
the Date of Termination, but not yet paid as of the Date of Termination;
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10
(d) payment of the per diem value of any unused vacation days
accruing during the Term of Employment and, to the extent not prohibited by
applicable law, regulation, regulatory bulletin, and/or any other
regulatory requirement, as the same exists or may hereafter be promulgated
or amended, the unused, unaccrued portion of any vacation days available
through the end (but not beyond) of the calendar year of the Bank in which
such termination occurs;
(e) to the extent not prohibited by applicable law, regulation,
regulatory bulletin, and/or any other regulatory requirement, as the same
exists or may hereafter be promulgated or amended, any other compensation
and benefits as may be provided in accordance with the terms and provisions
of any applicable plans and programs, if any, of the Bank or any
Subsidiary; and
(f) any rights to indemnification in accordance with Section 11 of
this Agreement.
In each case, in determining Cause the alleged acts or omissions of the
Executive shall be measured against standards generally prevailing in the
savings institution industry and the ultimate existence of Cause must be
confirmed by not less than 51% of the Incumbent Board (as constituted in
accordance with Section 1.4(c) of this Agreement) at a meeting called for such
purpose prior to any termination therefor; PROVIDED, HOWEVER, that it shall be
the Bank's burden to prove the alleged facts and omissions and the prevailing
nature of the standards the Bank shall have alleged are violated by such acts
and/or omissions of the Executive. In the event of such a confirmation by 51%
or more of the Incumbent Board, the Bank shall notify the Executive that the
Bank intends to terminate the Executive's employment for Cause under this
Section 6.3 (the "Confirmation Notice"). The Confirmation Notice shall specify
the act, or acts, upon the basis of which the Incumbent Board has confirmed the
existence of Cause and the Confirmation Notice must be delivered to the
Executive within fourteen (14) days after the Incumbent Board so confirms the
existence of Cause. If the Executive notifies the Bank in writing (the
"Opportunity Notice") within thirty (30) days after the Executive has received
the Confirmation Notice, the Executive (together with counsel) shall be provided
one opportunity to meet with the Incumbent Board (or a sufficient quorum
thereof) to discuss such act or acts. Such opportunity to meet with the
Incumbent Board shall be fixed and shall occur on a date selected by the
Incumbent Board, such date being not less than ten (10) nor more than thirty
(30) days after the Bank receives the Opportunity Notice from the Executive;
PROVIDED, HOWEVER, that the Bank may in good faith select a later date if, and
only if, such later date is necessary to convene a sufficient quorum of
<PAGE>
11
the Incumbent Board to act in respect of the Executive's Opportunity Notice.
Such meeting shall take place at the principal offices of the Bank or such other
location as agreed to by the Executive and the Bank. During the period
commencing on the date the Bank receives the Opportunity Notice and ending on
the date next succeeding the date on which such meeting between the Incumbent
Board (or a sufficient quorum thereof) and the Executive is scheduled to occur,
and not withstanding anything to the contrary in this Agreement, the Executive
shall be suspended from employment with the Bank (with pay, to the extent not
prohibited by applicable law, regulation, regulatory bulletin, and/or any other
regulatory requirement, as the same exists or may hereafter be promulgated or
amended) and the Incumbent Board may, during such suspension period, reasonably
limit the Executive's access to the principal offices of the Bank or any of its
assets. If the Incumbent Board properly sets the date of such meeting and if
the Incumbent Board (or a sufficient quorum thereof) attends such meeting and in
good faith does not rescind its confirmation of Cause at such meeting or if the
Executive fails to attend such meeting for any reason, the Executive's
employment by the Bank shall, immediately upon the closing of such meeting and
the delivery to the Executive of the Notice of Termination, be terminated for
Cause under this Section 6.3. If the Executive does not respond in writing to
the Confirmation Notice in the manner and within the time period specified in
this Section 6.3, the Executive's employment with the Bank shall, upon the
thirty-first day after the receipt by the Executive of the Confirmation Notice,
be terminated for Cause under this Section 6.3. In the event of any dispute
hereunder, the Executive shall be entitled, to the extent not prohibited by
applicable law, regulation, regulatory bulletin, and/or any other regulatory
requirement, as the same exists or may hereafter be promulgated or amended,
until the earlier to occur of (i) the Date of Termination, (ii) the expiration
of the current stated Term of Employment, or (iii) the resolution of such
dispute to (A) be paid bi-weekly his then Base Salary, and (B) continue to
receive all other benefits; and there shall be no reduction whatsoever of any
amounts subsequently paid to the Executive upon resolution of such dispute as a
result of, or in respect to, such interim payments or coverage. The procedure
set forth in this Section 6.3 to determine the existence of Cause shall at all
times be subject to the requirements of applicable law, regulation, regulatory
bulletin or other regulatory requirements.
6.4 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. The Bank may
terminate the Executive's employment hereunder at any time without Cause. The
Executive may terminate his employment hereunder for Good Reason at any time by
delivery of written notice to the Bank within the six-month period commencing
after the occurrence of the Good Reason effective forty-five (45) days
<PAGE>
12
after such written notice is delivered. If the Bank terminates the Executive's
employment hereunder without Cause (other than due to Retirement, death,
Disability or the normal expiration of the full Term of Employment), or if the
Executive terminates his employment hereunder for Good Reason, the Term of
Employment shall thereupon end (if not already expired) and the Executive shall,
subject to Sections 2.2, 3.2, 6.9, 6.11, and 6.12 of this Agreement, only be
entitled to:
(a) as liquidated damages, a cash lump sum equal to three (3) times
the Executive's "Highest Annual Compensation" (as herein defined). For
purposes of this Agreement, "Highest Annual Compensation" shall mean the
sum of (i) the highest per annum rate of Base Salary, and (ii) the
aggregate bonus amounts paid to the Executive (or which would have been
paid but for an election to defer payment to a later period), in respect of
any fiscal year of the Bank at any time during the Term of Employment;
(b) any Base Salary accrued to the Date of Termination or any bonus
actually awarded, but not yet paid as of the Date of Termination;
(c) reimbursement for all expenses (under Section 5.5) incurred as of
the Date of Termination, but not yet paid as of the Date of Termination;
(d) payment of the per diem value of any unused vacation days
accruing during the Term of Employment and the unused, unaccrued portion of
any vacation days available through the end (but not beyond) of the
calendar year of the Bank in which such termination occurs;
(e) continuation of the welfare benefits of the Executive, at the
level in effect (as provided for by Section 5.4 of this Agreement) on, and
at the same out-of-pocket cost to the Executive as of, the Date of
Termination for the three-year period commencing on the Date of Termination
(or, if such continuation is not permitted by applicable law or if the
Board so determines in its sole discretion, the Bank shall provide the
economic equivalent in lieu thereof);
(f) any other compensation and benefits as may be provided in
accordance with the terms and provisions of any applicable plans or
programs, if any, of the Bank or any Subsidiary; and
(g) any rights to indemnification in accordance with Section 11 of
this Agreement.
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13
In the event of any dispute hereunder, the Executive shall be entitled until the
earlier to occur of (i) the Date of Termination, (ii) the expiration of the
current stated Term of Employment, or (iii) the resolution of such dispute to
(A) be paid bi-weekly his then Base Salary, and (B) continue to receive all
other benefits; and there shall be no reduction whatsoever of any amounts
subsequently paid to the Executive upon resolution of such dispute as a result
of, or in respect to, such interim payments or coverage.
6.5 VOLUNTARY TERMINATION. During the Term of Employment, the
Executive may effect, upon thirty (30) days prior written notice to the Bank, a
Voluntary Termination of his employment hereunder and thereupon the Term of
Employment (if not already expired) shall end. A "Voluntary Termination" shall
mean a termination of employment by the Executive on his own initiative other
than (a) a termination due to death or Disability, (b) a termination for Good
Reason, (c) a termination due to Retirement, or (d) a termination as a result of
the normal expiration of the full Term of Employment. A Voluntary Termination
shall, subject to Sections 2.2, 3.2, 6.9, 6.11, and 6.12 of this Agreement,
entitle the Executive only to all of the payments and benefits which the
Executive would be entitled to in the event of a termination of his employment
by the Bank for Cause.
6.6 TERMINATION DUE TO RETIREMENT. The Executive may terminate the
Executive's employment hereunder due to Retirement upon thirty (30) days prior
written notice to the Bank. If, during the Term of Employment, the Executive's
employment is so terminated due to Retirement, the Term of Employment shall
thereupon end and the Executive shall, subject to Sections 2.2, 3.2, 6.9, 6.11,
and 6.12 of this Agreement, only be entitled to:
(a) Base Salary up to and including the Date of Termination;
(b) any bonus actually awarded, but not yet paid as of the Date of
Termination;
(c) reimbursement for all expenses (under Section 5.5) incurred as of
the Date of Termination, but not yet paid as of the Date of Termination;
(d)(i) continuation of the Executive's welfare benefits (as described
in Section 5.4 of this Agreement) at the level in effect on the Date of
Termination for the one-year period following the termination of the
Executive's employment due to Retirement (or, if such continuation is not
permitted by applicable law or if the Board so determines in its sole
discretion, the Bank shall provide the economic equivalent
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14
in lieu thereof), and (ii) any other compensation and benefits as may be
provided in accordance with the terms and provisions of any applicable
plans and programs, if any, of the Bank or any Subsidiary;
(e) payment of the per diem value of any unused vacation days
accruing during the Term of Employment and the unused, unaccrued portion of
any vacation days available through the end (but not beyond) of the
calendar year of the Bank in which such termination occurs; and
(f) any rights to indemnification in accordance with Section 11 of
this Agreement.
6.7 NO MITIGATION; NO OFFSET. In the event of any termination of
employment under this Section 6, the Executive shall be under no obligation to
seek other employment or to mitigate damages and there shall be no offset
against any amounts due the Executive under this Agreement for any reason,
including, without limitation, on account of any remuneration attributable to
any subsequent employment that the Executive may obtain. Any amounts due under
this Section 6 are in the nature of severance payments, or liquidated damages,
or both, and are not in the nature of a penalty.
6.8 NOTICE OF TERMINATION. Any termination of the Executive's
employment under this Section 6 requiring advance written notice shall be
communicated by a notice of termination to the other party hereto given in
accordance with Section 12.3 of this Agreement (the "Notice of Termination").
The Notice of Termination, in the case of a termination by the Bank for Cause,
or a termination by the Executive for Good Reason, shall (a) indicate the
specific termination provision in this Agreement relied upon, and (b) set forth
in reasonable detail the dates, facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated.
6.9 CODE SECTION 280G REDUCTION. Notwithstanding any other
provisions of this Agreement or of any other agreement, contract, understanding,
plan or program entered into or maintained by the Bank, if any payment or
benefit received or to be received by the Executive in connection with a Change
in Control or the termination of the Executive's employment (whether pursuant to
the terms of this Agreement or any other plan, arrangement or agreement with (a)
the Bank or any Affiliate, Parent or Subsidiary of the Bank, (b) any person
whose actions result in a Change in Control, or (c) any person affiliated with
the Bank or any such person) (all such payments and/or benefits, including the
payments and benefits, if any, under this Section 6, being hereinafter referred
to as the "Total Payments") would subject the Executive to an Excise Tax, and if
such Total
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15
Payments less the Excise Tax is less than the maximum amount of Total Payments
which would otherwise be payable to the Executive without imposition of an
Excise Tax, then, to the extent necessary to eliminate the imposition of an
Excise Tax (and after taking into account any reduction in the Total Payments
provided by reason of Section 280G of the Code in such other plan, arrangement
or agreement), (i) the cash and non-cash payments and benefits payable under
this Agreement shall first be reduced (but not below zero), and (ii) all other
cash and non-cash payments and benefits shall next be reduced (but not below
zero); but only if, by reason of any such reduction, the Total Payments with any
such reduction shall exceed the Total Payments without any such reduction. For
purposes of this Section 6.9, (A) no portion of the Total Payments the receipt
or enjoyment of which the Executive shall have effectively waived in writing
prior to the Date of Termination shall be taken into account, (B) no portion of
the Total Payments shall be taken into account which in the opinion of tax
counsel selected in good faith by the Bank does not constitute a "parachute
payment" within the meaning of Section 280G(b)(2) of the Code, including
(without limitation) by reason of Section 280G(b)(4)(A) of the Code, (C) the
payments and/or benefits under this Agreement shall be reduced only to the
extent necessary so that the Total Payments (other than those referred to in
clauses (A) and (B) above) in their entirety constitute reasonable compensation
for services actually rendered within the meaning of Section 280G(b)(4)(B) of
the Code or are otherwise not subject to disallowance as deductions, in the
opinion of the tax counsel referred to above in clause (B), and (D) the value of
any non-cash payment or benefit or any deferred payment or benefit included in
the Total Payments shall be determined by the Bank's independent auditors in
accordance with the principles of Sections 280G(d)(3) and (4) of the Code.
Except as otherwise provided above, the foregoing calculations and
determinations shall be made in good faith by the Bank and the Executive. If no
agreement on the calculations is reached, then the Executive and the Bank will
agree to the selection of an accounting firm to make the calculations. If no
agreement can be reached regarding the selection of an accounting firm the Bank
will select a prominent national accounting firm which has no current or recent
business relationship with the Bank. The Bank shall pay all costs and expenses
incurred in connection with any such calculations or determinations. Any
calculations or determinations made in accordance with this Section 6.9 shall be
conclusive and binding on all parties.
6.10 PAYMENT. Except as otherwise provided in this Agreement, any
payments to which the Executive shall be entitled to under this Section 6,
including, without limitation, any economic equivalent of any benefit, shall be
made, to the extent practicable, within five (5) business days following the
Date of Termination.
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16
6.11 BANK REGULATORY LIMITATIONS.
6.11.1 Any payments made to the Executive pursuant to this Agreement,
or otherwise, are subject to and conditioned upon their compliance with 12
U.S.C. Section 1828(k) and any regulations promulgated thereunder.
6.11.2 To the extent required by applicable law, regulation,
regulatory bulletin, and/or any other regulatory requirement, the aggregate
amount and/or value of the Compensation paid as a result of any termination of
the Executive's employment with the Bank, regardless of the reason for any such
termination of employment, shall not exceed three (3) times the Executive's
Average Annual Compensation. For purposes of this Section 6.11.2, "Average
Annual Compensation" means the average of the Executive's Compensation for the
five (5) taxable years immediately preceding the taxable year in which occurs
the Date of Termination and "Compensation" shall have the same meaning as is
ascribed to such term in OTS Regulatory Bulletin 27a, dated March 5, 1993, or
any subsequent bulletin that supersedes or revokes OTS RB27a.
6.12 OTHER REQUIRED PROVISIONS.
6.12.1 If the Bank is in default (as defined in Section 3(x)(1) of
the Federal Deposit Insurance Act), all obligations under this Agreement shall
terminate as of the date of default, but this Section 6.12.1 shall not affect
the vested rights of the Bank and/or the Executive, if any.
6.12.2 All obligations under this Agreement shall be terminated,
except to the extent determined that continuation of this Agreement is necessary
for the continued operation of the Bank, (i) by the director, or his or her
designee, at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
Federal Deposit Insurance Act; or (ii) by the director, or his designee, at the
time the director, or his or her designee, approves a supervisory merger to
resolve problems related to operation of the Bank or when the Bank is determined
by such director to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by any such
actions.
6.13 POST-TERMINATION OBLIGATIONS. During the Term of Employment and
for one (1) full year after the expiration or termination thereof, the Executive
shall, upon reasonable notice, use his reasonable best efforts to cooperate with
the Corporation and/or the Bank by providing such information and assistance to
the Corporation and/or the Bank as may reasonably be required by the Corporation
and/or the Bank at the Bank's expense in
<PAGE>
17
connection with any litigation not commenced by or involving the Executive in
which the Corporation and/or the Bank or any of their Subsidiaries or Affiliates
is, or may become, a party.
7. NON-EXCLUSIVITY OF RIGHTS; NON-EXTENSION SEVERANCE.
7.1 OTHER BENEFITS. Except as is otherwise specifically provided in
this Agreement, the Executive's continuing or future participation in any
benefit, bonus, incentive or other plan or program provided or maintained by the
Bank, and for which the Executive may be eligible and qualify, shall not be
prevented or limited, and the Executive's rights under any future agreements
with the Corporation and/or the Bank and/or any Affiliate thereof, including,
without limitation, any stock option agreements shall not be limited or
prejudiced. Subject to Section 7.2 below, this Agreement shall not affect or
operate to reduce any benefit or compensation inuring to the Executive of a kind
elsewhere provided. Except as otherwise specifically provided in this
Agreement, no provision of this Agreement shall be interpreted to mean or result
in the Executive receiving fewer benefits than those available to him without
reference to this Agreement.
7.2 NON-EXTENSION SEVERANCE. If (a)(i) the Executive's employment
hereunder is not terminated or suspended under Sections 6.1, 6.2, 6.3, 6.4, 6.5
or 6.6 of this Agreement prior to the expiration of the Term of Employment, or
(ii) any such termination or suspension of the Executive's employment is not
initiated prior to the expiration of the Term of Employment, (b) the Term of
Employment is not extended by the Bank, and (c) the Executive's employment with
the Bank terminates after the expiration of the Term of Employment (other than
for Cause), the Executive shall be entitled to receive, in lieu of any severance
payments or severance benefits under any other plan or program maintained by the
Bank or any Affiliate, (1) Base Salary continuation at the rate in effect (as
provided in Section 5.1 of this Agreement) as of the expiration of the Term of
Employment, and (2) welfare benefit continuation, at the level in effect (as
provided for by Section 5.4 of this Agreement) on, and at the same out-of-pocket
cost to the Executive as of, the expiration of the Term of Employment, in each
case (1) and (2), for the period ending six (6) months after the Executive's
employment terminates. Notwithstanding the above, if the Board determines in
its sole discretion and in lieu only of such Base Salary continuation in (1), a
lump sum payment, equal to the present value of such Base Salary continuation
(reasonably determined using the discount rate specified in Section 6.1(a)(1)),
shall be paid to the Executive within thirty (30) days after the date the
Executive's employment terminates. Notwithstanding anything to the contrary in
this Section 7.2, if (x) there occurs a Change in Control during the Term of
Employment, (y) the Term of Employment is not extended by the Bank up to and/or
through the second
<PAGE>
18
anniversary of any such Change of Control, and (z) the Executive's employment
with the Bank is subsequently terminated (other than for Cause), the Executive,
in lieu of the Base Salary and welfare benefits continuation under this Section
7.2, shall be entitled to receive the payments and benefits set forth in Section
6.4 of this Agreement.
8. RESOLUTION OF DISPUTES. With the exception of proceedings for
equitable relief brought pursuant to this Section or Section 9.2 of this
Agreement, any dispute or controversy arising under or in connection with this
Agreement may, at the Executive's option, be settled exclusively by arbitration
in Melville, Long Island in accordance with the rules of the American
Arbitration Association then in effect and at the Bank's expense. Judgment may
be entered on the arbitrator's award in any court having jurisdiction; PROVIDED,
HOWEVER, that the Executive shall be entitled to seek specific performance in
court of his right to be paid until the Date of Termination during the pendency
of any dispute or controversy arising under or in connection with this
Agreement. If a claim for any payments or benefits under this Agreement or any
other provision of this Agreement is disputed by the Bank and the Executive, the
Executive shall, to the extent and at such time or times as is not prohibited by
applicable law, regulation, regulatory bulletin, and/or any other regulatory
requirement, as the same exists or may be hereafter promulgated or amended, be
reimbursed for all reasonable attorney's fees and expenses incurred by the
Executive in pursuing such claim.
9. CONFIDENTIAL INFORMATION.
9.1 CONFIDENTIALITY. The Executive will not, during or after the
Term of Employment, disclose any confidential information relating to the
business activities of the Bank or any Affiliate thereof which has not been
previously disclosed by any person to any person, firm, corporation, bank or
other entity for any reason or purpose whatsoever. Notwithstanding the
foregoing, the Executive may disclose any knowledge or other information
relating to banking, financial and/or economic principles, concepts or ideas
which are based on experience and which are not derived from the business plans
and activities of the Bank, and may disclose such confidential information in
connection with legal and/or regulatory proceedings (which shall include, but
not be limited to, formal or informal exams, investigations or inquiries
conducted by the Office of Thrift Supervision).
9.2 INJUNCTIVE RELIEF. The Executive acknowledges and agrees that
the Bank will have no adequate remedy at law, and
<PAGE>
19
would be irreparably harmed, if the Executive breaches or threatens to breach
any of the provisions of this Section 9 of this Agreement. The Executive agrees
that the Bank shall be entitled to equitable and/or injunctive relief to prevent
any breach or threatened breach of this Section 9, and to specific performance
of each of the terms of such Section in addition to any other legal or equitable
remedies that the Bank may have. The Executive further agrees that he shall
not, in any equity proceeding relating to the enforcement of the terms of this
Section 9, raise the defense that the Bank has an adequate remedy at law.
9.3 SPECIAL SEVERABILITY. The terms and provisions of this Section 9
are intended to be separate and divisible provisions and if, for any reason, any
one or more of them is held to be invalid or unenforceable, neither the validity
nor the enforceability of any other provision of this Agreement shall thereby be
affected.
10. SUCCESSORS.
10.1 THE EXECUTIVE. This Agreement is personal to the Executive and,
without the prior express written consent of the Bank, shall not be assignable
by the Executive, except that the Executive's rights to receive any compensation
or benefits under this Agreement may be transferred or disposed of pursuant to
testamentary disposition, intestate succession or pursuant to a qualified
domestic relations order. This Agreement shall inure to the benefit of and be
enforceable by the Executive's heirs, beneficiaries and/or legal
representatives.
10.2 THE BANK. This Agreement shall inure to the benefit of and be
binding upon the Bank and its successors and assigns; PROVIDED, HOWEVER, that no
assignment of this Agreement may be made without the written consent of the
Executive.
11. INDEMNIFICATION. The Executive (and his heirs, executors and
administrators) shall be indemnified and held harmless by the Bank to the
fullest extent permitted by applicable law, regulation, regulatory bulletin,
and/or any other regulatory requirement, as the same exists or may hereafter be
promulgated or amended, against all expense, liability and loss (including,
without limitation, attorneys' fees, judgments, fines, excise taxes or penalties
and amounts paid or to be paid in settlement) reasonably incurred or suffered by
the Executive as a consequence of the Executive being or having been made a
party to, or being or having been involved, in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that the Executive is or was a trustee,
director or officer of the Bank or is or was serving at the request of the Bank
as a trustee, director or officer of another corporation (including,
<PAGE>
20
but not limited to, a subsidiary or an Affiliate of the Bank), and such
indemnification shall continue after the Executive shall cease to be an officer,
director or trustee. The right to indemnification conferred hereby shall be a
contract right and shall also include, to the extent permitted by applicable
regulation, the right to be paid by the Bank the expenses incurred in defending
any such proceeding in advance of the final disposition upon receipt by the Bank
of an undertaking by or on behalf of the Executive to repay such amount or a
portion thereof, if it shall ultimately be determined that the Executive is not
entitled to be indemnified by the Bank pursuant hereto or as otherwise
authorized by law but such repayment by the Executive shall only be in an amount
ultimately determined to exceed the amount to which the Executive was entitled
to be indemnified.
12. MISCELLANEOUS.
12.1 APPLICABLE LAW. This Agreement shall, to the extent not
superseded by federal law, be governed by and construed in accordance with the
laws of the State of New York, without regard to principles of conflict of laws.
12.2 AMENDMENTS/WAIVER. This Agreement may not be amended, waived, or
modified otherwise than by a written agreement executed by the parties to this
Agreement or their respective successors and legal representatives. No waiver
by any party to this Agreement of any breach of any term, provision or condition
of this Agreement by the other party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same time, or any prior or subsequent
time.
12.3 NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed given when received by hand-delivery to the other
party, by facsimile transmission, by overnight courier, or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive: Mr. Bruce M. Barnet
3 Carteret Place
Garden City, New York 11530
If to the Bank: The Long Island Savings Bank, FSB
201 Old Country Road
Melville, New York 11747
Attn: Corporate Secretary
<PAGE>
21
with a copy to: Mel M. Immergut, Esq.
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notices and communications shall be effective
when actually received by the addressee.
12.4 WITHHOLDING. The Bank may withhold from any amounts payable
under this Agreement such taxes as shall be required to be withheld pursuant to
any applicable law or regulation.
12.5 SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
12.6 CAPTIONS. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect.
12.7 ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties to this Agreement concerning the subject matter hereof and
supersedes all prior agreements, understandings, discussions, negotiations and
undertakings, whether written or oral, between the parties with respect thereto.
12.8 REPRESENTATION. The Executive represents and warrants that the
performance of the Executive's duties and obligations under this Agreement will
not violate any agreement between the Executive and any other person, firm,
partnership, corporation, or organization.
12.9 SURVIVORSHIP. The respective rights and obligations of the
parties to this Agreement, including, without limitation, any rights of the
Executive and the Bank under Section 11 of this Agreement, shall survive any
termination of this Agreement or the Executive's employment hereunder for any
reason to the extent necessary to the intended preservation of such rights and
obligations.
12.10 EFFECT OF PAYMENTS UNDER CORPORATION AGREEMENT. Notwithstanding
any provision herein to the contrary, to the extent that payments, entitlements
and benefits are paid to or received by the Executive under the Employment
Agreement dated October 3, 1996, between the Executive and the Corporation, the
amount of any such payments, entitlements and benefits actually
<PAGE>
22
made by the Corporation shall reduce, to the extent so made, the same payment,
entitlement or benefit due to the Executive under the provisions of this
Agreement.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and the Bank has caused this Agreement to be executed in its name on its
behalf, and its corporate seal to be hereunto affixed and attested by its
Secretary, all as of the day and year first above written.
THE LONG ISLAND SAVINGS BANK, FSB
By: /s/ John J. Conefry, Jr.
-----------------------------
John J. Conefry, Jr.
Chief Executive Officer
/s/ Bruce M. Barnet
----------------------------
Bruce M. Barnet
<PAGE>
EXHIBIT 10.10
RESOLVED, that, effective date April 1, 1997, or the date designated in
writing by the Savings Plan Committee, whichever is later (the "Effective
Date"), United States Trust Company of New York be, and hereby is, removed as
trustee of the fund under The Long Island Savings Bank 401(k) Savings Plan (the
"Savings Plan") which holds shares of the common stock of Long Island Bancorp,
Inc. (such fund referred to as the "Common Stock Fund"); and be it further
RESOLVED, that, effective as of the Effective Date, the investment options
available under the Savings Plan immediately prior thereto, other than the
Common Stock Fund, shall be eliminated, and that, in connection with the
elimination of such investment options, effective as of the Effective Date, the
"Group Annuity Contract" issued by AUSA Life Insurance Company, Inc. to The Long
Island Savings Bank, FSB to fund the benefits provided under the Savings Plan
be, and hereby is, terminated; and be it further
RESOLVED, that, effective as of the Effective Date, investment options
selected by the Savings Plan Committee shall be made available under the Savings
Plan for participant-directed investment, which investment options may include
interests in one or more guaranteed investment contracts, regulated investment
companies, insurance company separate accounts or funds managed by an investment
manager or trustee; and be it further
RESOLVED, that, effective as of the Effective Date, C.G. Trust Company be,
and hereby is, appointed as trustee of all the assets of the Savings Plan, and
that the Authorized Officers be, and each hereby is, authorized and directed to
negotiate the terms and conditions of an agreement of trust with respect to the
assets of the Savings Plan to be entered into between the Bank and C.G. Trust
Company, as trustee, and to execute and deliver such agreement on behalf of the
Bank; and be it further
RESOLVED, that the Authorized Officers be, and each hereby is, authorized
and directed to execute and deliver on behalf of the Bank such amendments to the
Savings Plan, to be effective as of the Effective Date, as may be deemed
necessary or desirable to reflect the appointment of C.G. Trust Company as
trustee of the Savings Plan and to effect the change in the investment options
available under the Savings Plan for participant-directed investment,
<PAGE>
including, without limitations, any provisions relating to the transition to
such new investment options; and be it further
RESOLVED, that the designation of the Bank's Chief Financial Officer,
Treasurer and Director of Administrative Services to serve as named fiduciaries
of the Savings Plan be, and hereby is, confirmed, and that such persons
(collectively, the "Savings Plan Committee") shall have all powers relating to
plan administration, the selection of the investment options to be available
under the Savings Plan for participant-directed investment on and after the
Effective Date, the appointment of investment managers and investment advisors
in respect of such investment options, and such other powers necessary or
desirable in this regard to comply with the provisions of ERISA; and be it
further
RESOLVED, that for purposes of this resolution, the Authorized Officers
shall be the Chairman and CEO, President and COO, each Executive Vice President,
each Senior Vice President and each First Vice President.
********************************************************************************
I, ROGER TEURFS, Secretary of The Long Island Savings Bank, FSB, do certify
that the above is a true and correct copy of a resolution adopted at a meeting
of the Board of Directors duly convened and held on August 27, 1996, at which
meeting a quorum was present and voting throughout.
IN WITNESS WHEREOF, I have hereunto set my hand this 28th day of August,
1996.
/s/ Roger Teurfs
----------------
Roger Teurfs, Corporate Secretary
<PAGE>
EXHIBIT 10.11
AMENDMENT NUMBER ONE
(REVISED)
TO
THE RETIREMENT PLAN OF
THE LONG ISLAND SAVINGS BANK, FSB
IN RSI RETIREMENT TRUST
Pursuant to Section 13.1 of The Retirement Plan of The Long Island Savings Bank,
FSB in RSI Retirement Trust ("Plan"), the Plan is amended as follows, effective
as of January 1, 1996, pursuant to a resolution of the Board of Directors of The
Long Island Savings Bank, duly adopted on October 24, 1995:
1. ARTICLE I - Section 1.6 shall be amended by adding the phrase ", prior to
January 1, 1996" immediately after the words "shall mean" in the first line
thereof.
2. ARTICLE I - Section 1.6 shall be further amended by adding the following as
the second paragraph therein, and the former second paragraph shall follow
accordingly:
Commencing January 1, 1996, Average Annual Earnings shall mean the
Participant's average annual Compensation during the sixty (60)
consecutive calendar months within the final one hundred-twenty (120)
consecutive calendar months of the Participant's Credited Service
affording the highest such average. In the event the Participant has
less than sixty (60) months Credited Service, his total Credited
Service and Compensation shall be used to compute such average.
1. ARTICLE VII - Section 7.2 shall be amended in its entirety to read as
follows:
7.2 NORMAL RETIREMENT BENEFIT
A Participant's right to his Accrued Benefit shall be fully vested at
his Normal Retirement Age and, subject to the provisions of Section
9.10, such Participant shall be entitled to the payment of a Normal
Retirement Benefit commencing on his Normal Retirement Date.
For purposes of this Section 7.2, the phrase "Applicable Offset" shall
have the meanings hereafter ascribed to them:
(1) With respect to all Participants other than Participants included in
Sections 7.2(b) and (c) below, the Applicable Offset equals one
percent (1%) of such
<PAGE>
Participant's Primary Social Security Benefit multiplied by the number of
years and any fraction thereof of his Credited Service subsequent to
December 31, 1985, up to a maximum of thirty (30) years.
(2) With respect to Participants who were participants of the Centereach Plan
on December 31, 1985, the Applicable Offset equals one percent (1%) of such
Participant's Primary Social Security Benefit multiplied by the number of
years and any fraction thereof of his Credited Service up to a maximum of
thirty (30) years.
(3) With respect to Participants who were participants of the Flushing Federal
Plan on September 30, 1988, the Applicable Offset equals one percent (1%)
of such Participant's Primary Social Security Benefit multiplied by the
number of years and any fraction thereof of his Credited Service, up to the
Maximum Total Service. The Maximum Total Service shall equal the remainder
of thirty (30) minus the number of years and any fraction thereof of
full-time employment with Flushing Federal Savings and Loan Association,
which remainder shall equal no less than zero (0).
With respect to the following Participants who retire prior to January 1, 1996:
(a) With respect to all Participants other then Participants included in
Sections 7.2(b) and (c) below, the annual Normal Retirement Benefit shall
be equal to two percent (2%) of the Participant's Average Annual Earnings
multiplied by the number of years and any fraction thereof of his Credited
Service, up to a maximum of thirty (30) years, reduced by the Applicable
Offset.
(b) With respect to Participants who were participants of the Centereach Plan
on December 31, 1985, the Normal Retirement Benefit shall be the greater of
(i) or (ii) below:
(i) two percent (2%) of the Participant's Average Annual Earnings
multiplied by the number of years and any fraction thereof of his
Credited Service up to a maximum of thirty (30) years, reduced by the
Applicable Offset.
(ii) The accrued benefit preserved under Section 13.5.
(c) With respect to Participants who were participants of the Flushing Federal
Plan on September 30, 1988, the Normal Retirement Benefit shall be the sum
of (i) and (ii) below:
(i) The accrued benefit under the Flushing Plan on September 30, 1988,
adjusted to a Straight Life Annuity basis from a Period Certain and
<PAGE>
Life Benefit with a period certain of one hundred-twenty (120) months.
(ii) Two percent (2%) of the Participant's Average Annual Earnings
multiplied by the number of years and any fraction thereof of his
Credited Service, up to the Maximum Total Service, reduced by the
Applicable Offset.
With respect to the following Participants who retire on or After January 1,
1996:
(d) (i) With respect to Participants who retire with fewer than thirty (30)
years of Credited Service, and with respect to Participants who were
participants of the Flushing Federal Plan on September 30, 1988, whose
combined Credited Service with the Employer and the number of years
and any fraction thereof of full-time employment with Flushing Federal
Savings and Loan Association is fewer then thirty (30) years, the
annual Normal Retirement Benefit shall be equal to:
(A) with respect to all Participants other than Participants included
in Section 7.2(d)(i)(B) below:
(I) the Accrued Benefit as of December 31, 1995, plus
(II) one and one-half percent (1.5%) of the Participant's Average
Annual Earnings multiplied by the number of years and any
fraction thereof of his Credited Service subsequent to
December 31, 1995, reduced by one percent (1%) of his
Primary Social Security Benefit multiplied by the number of
years and any fraction thereof of his Credited Service
subsequent to December 31, 1995.
(B) with respect to Participants who were participants of the
Flushing Federal Plan on September 30, 1988:
(I) the accrued benefit under the Flushing Plan on September 30,
1988, adjusted to a Straight Life Annuity basis from a
Period Certain and Life Benefit with a period certain of one
hundred-twenty (120) months, plus
(II) (1) two percent (2%) of the Participant's Average Annual
Earnings as of December 31, 1995 multiplied by the
number of years and any fraction thereof of his
Credited
<PAGE>
Service as of December 31, 1995, plus
(2) one and one-half percent (1/5%) of the Participant's
Average Annual Earnings multiplied by the number of
years and any fraction thereof of his Credited Service
subsequent to December 31, 1995, reduced by
(3) the Applicable Offset.
(ii) With respect to Participants who retire with thirty (30) or more years of
Credited Service, the annual Normal Retirement Benefit shall be equal to
the greatest of subsection (d)(ii)(A), (B) or (C):
(A) (I) two percent (2%) of the Participant's Average Annual Earnings as
of December 31, 1995 multiplied by the number of years and any
fraction thereof of his Credited Service as of December 31, 1995,
up to a maximum of thirty (30) years, plus
(II) one and one-half percent (1.5%) of the Participant's Average
Annual Earnings upon his Termination of Service multiplied by the
number of years and any fraction thereof of his Credited Service
subsequent to December 31, 1995, up to a maximum of the remainder
of thirty (30) minus the number of years and any fraction thereof
of his Credited Service as of December 31, 1995, reduced by
(III) the Applicable Offset, or
(B) (I) two percent (2%) of the Participant's Average Annual Earnings as
of December 31, 1995 multiplied by the number of years and any
fraction thereof of his Credited Service as of December 31, 1995,
up to a maximum of the remainder of thirty (30) minus the number
of years and any fraction thereof of his Credited Service
subsequent to December 31, 1995, plus
(II) one and one-half percent (1.5%) of the Participant's Average
Annual Earnings upon his Termination of Service multiplied by the
number of years and any fraction thereof of his Credited Service
subsequent to December 31, 1995, up to a maximum of thirty (30)
years, reduced by
(III) The Applicable Offset, or
<PAGE>
(C) the Accrued Benefit as of December 31, 1995.
Notwithstanding the foregoing, a Participant's Normal Retirement Benefit
shall not be less than the greater of (aa) the greatest Early Retirement
Benefit which the Participant would have been entitled to receive had he
retired at an earlier date, or (bb) the benefit preserved under Section
13.5.
4. ARTICLE VII - Section 7.4(d) shall be amended by adding the following as
the new section 7.4(d)(ii), and the former Section 7.4(d)(ii) and all
cross-references thereto shall be renumbered accordingly:
(ii) if the Participant's Termination of Service with the Employer occurs
on or after (A) January 1, 1996, (B) his attainment of age fifty-five
(55) and (C) the sum of his attained age and Vested Service equals or
exceeds seventy-five (75) years, his Early Retirement Benefit shall be
equal to his Early Retirement Benefit deferred to his Normal
Retirement Date reduced by .125% for each calendar month that the
benefit payments commence prior to his Normal Retirement Date.
5. ARTICLE VII - Section 7.4(d)(iii), as renumbered hereunder, shall be
further amended by adding the phrase "or (ii)" immediately after the phrase
"Section 7.4(d)(i) in the first and second lines thereof.
6. ARTICLE XIII - Section 13.5 shall be amended by adding the following as the
last paragraph therein:
In no event shall an Employee who was a Participant under the Plan as in
effect on December 31, 1995 receive a Retirement Benefit under the Plan
which is less than the Retirement Benefit that would have been payable
assuming (I) the Plan provisions immediately preceding January 1, 1996 had
remained in effect until the Participant's Termination of Service, and (II)
the Participant terminated service on December 31, 1995.
IN WITNESS WHEREOF, pursuant to a resolution of its Board of Directors duly
adopted on October 24, 1995, The Long Island Savings Bank has adopted this
Amendment, effective as of the date first written above.
THE LONG ISLAND SAVINGS BANK
By: /s/ John Tallota
-------------------------
Title: SR VP
---------------------
<PAGE>
RESOLVED, that, effective January 1, 1997, or the date designated in
writing by the Retirement Plan Committee, whichever is later (the "Effective
Date"), The Long Island Savings Bank, FSB ("the Bank") shall, and hereby does,
withdraw its "Plan of Participation" under the RSI Retirement Trust Agreement
and Declaration of Trust (the "RSI Trust") in order to continue, through another
funding agency, the employee benefit plan known, as of the date hereof, as "The
Retirement Plan of the Long Island Savings Bank, FSB in RSI Retirement Trust"
(the "Retirement Plan"), which plan, after such withdrawal, is intended to
continue to be constituted as a plan qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended, and that, effective upon such
withdrawal, the Bank shall, and hereby does, terminate its adoption of the RSI
Trust; and be it further
RESOLVED, that the Authorized Officers be, and each hereby is, authorized
and directed, on behalf of the Bank, to direct the trustees under the RSI Trust
to transfer, effective as of the Effective Date, the "Plan Interest" (as defined
under the RSI Trust) of the Bank's Plan of Participation, and any other assets
of the Retirement Plan held in the RSI Trust, to a trust created pursuant to a
certain trust agreement to be entered into by the Bank and C.G. Trust Company,
as trustee, and to take such other action as may be deemed necessary or
desirable in order to effectuate the withdrawal and termination of the Bank's
Plan of Participation in, and adoption of, the RSI Trust; and be it further
RESOLVED, that the Authorized Officers be, and each hereby is, authorized
and directed to execute and deliver on behalf of the Bank any and all
instruments or other documents, and to take such other action, as may be deemed
necessary or desirable in connection with the retention or the disposition of
the shares of common stock of Retirement System Group Inc. owned by the
Retirement Plan; and be it further
RESOLVED, that, effective as of the Effective Date, the Bank shall continue
to maintain the Retirement Plan, as amended, on a separate and independent basis
from the RSI Trust; and be it further
<PAGE>
RESOLVED, that the Authorized Officers be, and each hereby is, authorized
and directed to execute and deliver on behalf of the Bank such amendments to the
Retirement Plan, to be effective as of the Effective Date, as the same shall
deem as being necessary or desirable to reflect the withdrawal and termination
of the Bank's Plan of Participation in, and adoption of, the RSI Trust, and the
maintenance by the Bank of the Retirement Plan on a separate and independent
basis, including, without limitation, to rename the Retirement Plan as "The
Retirement Plan of the Long Island Savings Bank, FSB", to create a trust to fund
the Retirement Plan and to provide for the administration of the Retirement
Plan; and be it further
RESOLVED, that, effective as of the Effective Date, C.G. Trust Company be,
and hereby is, appointed as trustee of the Retirement Plan; and that the
Authorized Officers be, and each hereby is, authorized and directed to negotiate
the terms and conditions of an agreement of trust with respect to the assets of
the Retirement Plan to be entered into between the Bank and C.G. Trust Company,
as trustee, and to execute and deliver such agreement on behalf of the Bank; and
be it further
RESOLVED, that the designation of the Bank's Chief Financial Officer,
Treasurer and Director of Administrative Services to serve as named fiduciaries
of the Retirement Plan be, and hereby is, confirmed, and that such persons
(collectively, the "Retirement Plan Committee") shall have all powers relating
to plan administration, the establishment of investment guidelines and asset
allocation strategies, the appointment and oversight of the actions of
investment managers and investment advisors in respect of the investment of the
assets of the Retirement Plan, and such other powers necessary or desirable in
this regard to comply with the provisions of ERISA; and be it further
RESOLVED, that for purposes of this resolution, the Authorized Officers
shall be the Chairman and CEO, President and COO, each Executive Vice President,
each Senior Vice President and each First Vice President.
********************************************************************************
I, ROGER TEURFS, Secretary of The Long Island Savings Bank, FSB, do certify
that the above is a true and correct copy of a resolution adopted at a meeting
of the Board of Directors duly convened and held on August 27, 1996, at which
meeting a quorum was present and voting throughout.
IN WITNESS WHEREOF, I have hereunto set my hand this 28th day of August,
1996.
/s/ Roger Teurfs
----------------
Roger Teurfs, Corporate Secretary
<PAGE>
EXHIBIT 10.14
RESOLVED, that effective April 1, 1997, or the date designated in writing
by the ESOP Committee, whichever is later (the "Effective Date"), United States
Trust Company of New York be, and hereby is, removed as trustee of The LISB
Employee Stock Ownership Plan (the "ESOP"); and be it further
RESOLVED, that, effective as of the Effective Date, C.G. Trust Company be,
and hereby is, appointed as trustee of the ESOP, and that the Authorized
Officers be, and each hereby is, authorized and directed to negotiate the terms
and conditions of an agreement of trust with respect to the assets of the ESOP
to be entered into between the Bank and C.G. Trust Company, as trustee, and to
execute and deliver such agreement on behalf of the Bank; and be it further
RESOLVED, that the designation of the Bank's Chief Financial Officer,
Treasurer and Director of Administrative Services to serve as named fiduciaries
of the ESOP be, and hereby is, confirmed, and that such persons (collectively,
the "ESOP Committee") shall have all powers relating to the establishment of
plan administration, the establishment of investment guidelines and asset
allocation strategies, the appointment and oversight of the actions of
investment managers and investment advisors in respect of the investment of the
assets of the ESOP, and such other powers necessary or desirable in this regard
to comply with the provisions of ERISA; and be it further
RESOLVED, that for purposes of this resolution, the Authorized Officers
shall be the Chairman and CEO, President and COO, each Executive Vice President,
each Senior Vice President and each First Vice President.
********************************************************************************
I, ROGER TEURFS, Secretary of The Long Island Savings Bank, FSB, do certify
that the above is a true and correct copy of a resolution adopted at a meeting
of the Board of Directors duly convened and held on August 27, 1996, at which
meeting a quorum was present and voting throughout.
IN WITNESS WHEREOF, I have hereunto set my hand this 28th day of August,
1996.
/s/ Roger Teurfs
----------------
Roger Teurfs, Corporate Secretary
<PAGE>
THE LONG ISLAND SAVINGS BANK, FSB
RESOLVED, that The LISB Employee Stock Ownership Plan (the "ESOP") be, and
hereby is, amended, effective as of January 1, 1997, by an amendment
substantially in the form attached hereto as Exhibit A (the "ESOP Amendment");
and that the Authorized Officers be, and each hereby is, authorized and directed
to execute and deliver, on behalf of this Bank, the ESOP Amendment, with such
changes, additions and modifications therein as any such Authorized Officer
executing the same shall approve as being necessary or desirable to effect the
intent of this Resolution, such approval to be evidenced by such Authorized
Officer's execution and delivery thereof.
RESOLVED, that each Authorized Officer be, and hereby is, authorized and
directed to take or cause to be taken all such other actions as such Authorized
Officer, in his or her discretion, deems necessary, appropriate or convenient to
effectuate the purpose and intent of the foregoing Resolution.
RESOLVED, that for purposes of the foregoing Resolutions, the "Authorized
Officers" are the Chief Executive Officer and all Executive Vice Presidents and
Senior Vice Presidents.
********************************************************************************
<PAGE>
AMENDMENT NO. 1 TO
THE LISB EMPLOYEE STOCK OWNERSHIP PLAN
WHEREAS, The Long Island Savings Bank, FSB (the "Bank") maintains The LISB
Employee Stock Ownership Plan (the "ESOP");
WHEREAS, pursuant to the authority reserved in Section 10.1 of the ESOP,
the Bank may amend the ESOP from time to time; and
WHEREAS, the Bank now wishes to amend the ESOP to modify certain matters
relating to contributions and allocations thereunder;
NOW, THEREFORE, pursuant to Section 10.1 of the ESOP, the ESOP is hereby
amended, effective January 1, 1997, in the following respect:
1. Section 3.5 of the ESOP shall be amended by deleting therefrom the
words "aggregate amount contributed to the Trust Fund" and replacing the same
with the words "the aggregate fair market value, determined by calculating the
average of the closing prices of Employer Stock on the national stock exchange
on which Employer Stock is traded for all trading days during that Plan Year, of
the shares of Employer Stock released from the Suspense Account (as provided in
Section 5.3) in connection with Employer Contributions."
2. Section 5.4 of the ESOP shall be amended by deleting from the first
sentence thereof the words "determined as of the date of purchase of such shares
by the Trustee" and replacing the same with the words "determined by calculating
<PAGE>
the average of the closing prices of Employer Stock on the national stock
exchange on which Employer Stock is traded for all trading days during that Plan
Year."
3. Section 5.4 of the ESOP shall be further amended by deleting the
second sentence thereof.
4. Section 5.6 of the ESOP shall be amended by adding at the end thereof
the following sentence. "Notwithstanding the foregoing provisions of this
Section 5.6, the Trustee, at the Committee's direction, shall distribute any
cash dividends paid on the shares of Employer Stock credited to Participant
Accounts in cash to Participants no later than 90 days after the last day of the
Plan Year during which such dividends are paid."
<PAGE>
EXHIBIT 10.15
SEPARATION AGREEMENT AND GENERAL RELEASE
THIS SEPARATION AGREEMENT AND GENERAL RELEASE is made and entered into
as of this 6th day of September, 1996 by and between William E. Viklund (the
"Executive"), LONG ISLAND BANCORP, INC., a Delaware corporation (the
"Corporation"), and LONG ISLAND SAVINGS BANK, FSB, a federal stock savings bank
organized under the laws of the United States (the "Bank") (the Corporation and
the Bank are sometimes hereinafter referred to separately as a "Company" or
together as the "Companies").
W I T N E S S T H:
WHEREAS, the Executive has been employed by each of the Corporation
and the Bank as its President and Chief Operating Officer and in other
capacities; and
WHEREAS, on September 6, 1996 the Executive ceased to be the President
and Chief Operating Officer of each of the Corporation and the Bank, ceased all
other officer and employee positions with the Companies and their respective
subsidiaries, and has agreed to resign his membership on the Boards of Directors
and all Committees of the Companies and their respective subsidiaries and
affiliates; and
WHEREAS, the Executive and the Companies desire to settle fully and
finally all matters between them to date, including, but in no way limited to,
any issues that might arise out of the Executive's employment or the termination
of his employment;
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto, intending to be legally bound hereby,
agree as follows:
1. EMPLOYMENT AGREEMENTS. The Executive and the Companies agree
that the Executive's termination of employment shall constitute a termination
without "cause" as provided in section 6.4 of the Executive's employment
agreement dated as of September 19, 1994 with each of the Corporation and the
Bank (the "Employment Agreements"), and that each of the Employment Agreements
remains in full force and effect. Except as provided in this Agreement, all
payments or other benefits to the Executive may be or become entitled and all
continuing obligations to which the Executive will be subject on account of his
termination of employment will be determined in accordance with the terms of the
Employment Agreements, except that the
<PAGE>
2
period in section 6.13 of each Employment Agreement shall be a five (5) year
period. The Executive shall be paid a fee equal to $375 per hour for time spent
on litigation matters involving either of the Companies as requested from time
to time by such Company. Such payment shall be made within a reasonable period
of time after the performance of such services by the Executive.
In addition, the Companies, notwithstanding anything to the contrary
in the MRP or the SIP (as these terms are defined below), agree to cause (a) the
accelerated vesting of an additional 4,025 shares of restricted common stock of
the Corporation granted to the Executive under the Bank's Management Recognition
and Retention Plan for Executive Officers (the "MRP"), and (b) the accelerated
exercisability of a portion of the Executive's non-qualified stock option grant
(as awarded to the Executive under the Corporation's 1994 Stock Incentive Plan
(the "SIP")) in respect of 13,455 underlying shares of the Corporation's common
stock. In all other respects, the terms and provisions of the MRP and the SIP
shall govern any restricted stock or stock option awards granted to the
Executive. Except as provided in the next paragraph, the Corporation represents
and agrees that the options that have been granted to the Executive under the
SIP which have vested prior to the date of this Agreement or whose vesting has
been accelerated pursuant to this Agreement are immediately exercisable.
Also, the Companies, notwithstanding anything to the contrary in the
MRP or the SIP, agree to cause the modification of the exercisability schedule
for a portion of the Executive's non-qualified stock option grant (as awarded to
the Executive under the SIP) in respect of 7,000 underlying shares of the
Corporation's common stock to provide for the exercisability of such portion
upon and after March 29, 1998 and an exercise period thereafter terminating at
the close of the Bank's business on September 29, 1999.
Finally, the Bank shall cause the Bank's Deferred Pension Plan (the
"DPP") to provide that, in lieu of any other benefit thereunder, the Executive
shall receive a benefit thereunder per annum for ten years equal to $97,236 per
annum, payable in 40 equal quarterly installments commencing October 1, 1999.
2. ANNOUNCEMENT. The parties agree that any announcement by either
of the Companies with respect to the termination of the Executive's employment
will be reviewed with, and be subject to comment by, the Executive prior to its
issuance or publication and that such announcement shall characterize the
Executive's termination of employment as a retirement to pursue other interests.
Except as otherwise provided in this Agreement, payment of any cash compensation
hereunder relating to the Employment Agreements shall be made within five days
of the date of this Agreement pursuant to Section 6.10 of the Employment
Agreement with the Bank.
3. ADDITIONAL AGREEMENTS OF THE EXECUTIVE AND THE COMPANIES. Unless
otherwise required by a court of competent jurisdiction or pursuant to any
recognized subpoena power or as is reasonably necessary in connection with any
adversarial process between the Executive and a Company, the Executive agrees
and promises that he will not make any oral or written statements or reveal any
information to any person, company, or agency which may be
<PAGE>
3
construed to be negative, disparaging or damaging to the reputation or business
of either of the Companies, its subsidiaries, directors, officers or affiliates,
or which would interfere in any way with the business relations between that
Company or any of its subsidiaries or affiliates and any of their customers or
potential customers. Unless otherwise required by a court of competent
jurisdiction or pursuant to any recognized subpoena power or as is reasonably
necessary in connection with any adversarial process between the Executive and a
Company, the Companies agree and promise that each, respectively, will not make
any oral or written statements or reveal any information to any person, company,
or agency which may be construed to be negative, disparaging or damaging to the
reputation of the Executive.
In addition, the Executive agrees, upon the execution of this
Agreement, to tender his resignation from the board of directors (and any
committees thereof) of the Bank, the Corporation and any subsidiary or affiliate
of the Bank or the Corporation.
4. AGREEMENT CONFIDENTIAL. The Executive represents and agrees
that, unless compelled by legal process or as is reasonably necessary in
connection with any adversarial process between a Company and the Executive, he
will keep the terms of this Agreement completely confidential, and that he will
not hereafter disclose any information concerning this Agreement to anyone
except his financial, legal or tax advisor(s), his accountants, and his
immediate family; provided that these individuals agree to keep said information
confidential and not disclose it to others.
Each Company represents and agrees that, unless compelled by legal
process or applicable legal requirements, or as is reasonably necessary in
connection with any adversarial process between the Company and the Executive,
it will keep the terms of this Agreement completely confidential, and that it
will not hereafter disclose any information concerning this Agreement to anyone
except its financial, legal or tax advisor(s), its accountants, its directors,
and those employees of the Company who have a need to know about its terms;
provided that these individuals agree to keep said information confidential and
not disclose it to others; and provided further that the Executive shall have
the opportunity to review and comment upon any proposed public disclosure
pursuant to applicable legal requirements with respect to any of the terms of
this Agreements.
5. NONCOMPETITION. In consideration of the benefits to the
Executive under this Agreement and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged by the Executive,
the Executive shall not, during the Noncompetition Period (as hereinafter
defined), directly or indirectly, act as a director, officer, employee, manager,
trustee, agent, partner, advisor, joint venturer, representative or consultant
of, with or to, or otherwise engage in any capacity whatsoever, any commercial,
savings and loan, or thrift banking business(es) located in or doing business in
or with respect to New York State, New Jersey and/or Connecticut that actually
compete to a substantial extent with those businesses either Company and its
subsidiaries are engaged in on September 6, 1996 which competition is reasonably
likely to have a material adverse effect on the Company and its subsidiaries
taken as a
<PAGE>
4
whole. For purposes of this Section 5, the "Noncompetition Period" shall mean
the period beginning on September 6, 1996 and ending on December 31, 1996.
6. ADDITIONAL RESTRICTIONS. For a period of two years from the date
of this Agreement (the "Restricted Period"), except as specifically requested in
writing by a Company, the Executive, singly or with any other person or directly
or indirectly, shall not propose, enter into, or agree to enter into, or
encourage any other person to propose, enter into, or agree to enter into (i)
any form of business combination, acquisition or other transaction relating to
the Company or (ii) any form of restructuring, recapitalization or similar
transaction with respect to the Company.
Furthermore, during the Restricted Period, except as specifically
requested in writing by a Company, the Executive shall not, singly or with any
other person or directly or indirectly, (1) acquire, or offer, propose or agree
to acquire, by tender offer, purchase or otherwise, any voting securities of the
Company except through the exercise of Options and except for the purchase of up
to an additional 25,000 shares of voting common stock of the Corporation on the
open market, (2) make, or in any way participate in, any solicitation of proxies
or written consents with respect to voting securities of the Company (it being
understood that the mere execution of a proxy or written consent shall not be
treated as constituting participation in such a solicitation), (3) become a
participant in any election contest with respect to the Company, (4) seek to
influence any person with respect to the voting or disposition of any voting
securities of the Company, (5) demand a copy of the Company's list of
stockholders or its other books and records, (6) participate in or encourage the
formation of any partnership, syndicate or other group that owns or seeks or
offers to acquire beneficial ownership of any voting securities of the Company
or that seeks to affect control of the Company or for the purpose of
circumventing any provision of this Agreement or (7) otherwise act to seek or to
offer to control or influence, in any manner, the management, Board of Directors
or policies of the Company.
During the period beginning on September 6, 1996 and ending on
September 6, 1997, the Executive shall not directly or indirectly (i) solicit
for employment any of the current directors, officers or managers of either
Company or (ii) induce any such directors, officers or managers to terminate his
or her employment with either Company.
7. RELEASES. In consideration of the payments and benefits to the
Executive under this Agreement and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged by the Executive,
the Executive knowingly, voluntarily and unconditionally hereby forever waives,
releases and discharges, and covenants never to sue on, any and all claims,
liabilities, causes of actions, judgments, orders, assessments, penalties,
fines, expenses and costs (including without limitation attorneys' fees) and/or
suits of any kind arising out of any actions, events or circumstances before the
date of execution of this Agreement ("Claims") which the Executive has, ever had
or may have, or which the Executive's heirs, executors, administrators and
assigns, or any of them hereafter can, shall or may have, including, without
limitation, any Claims arising in whole or in part from the Executive's
employment or the termination of the Executive's employment with either Company
or the manner of said
<PAGE>
5
termination; provided, however, that this Section 7 shall not apply to any of
the obligations of the Company specifically provided for in this Agreement.
This Agreement is intended as a full and final settlement and compromise of
each, every and all Claims of every kind and nature, whether known or unknown,
which have been or could be asserted against either Company and/or any of its
subsidiaries, shareholders, officers, directors, agents, and employees, past or
present, and their respective heirs, successors and assigns (collectively, the
"Releasees"), including, without limitation --
(1) any Claims arising out of any employment agreement (other than the
Employment Agreements) or other contract (including, without
limitation, the Employment Agreements), side-letter, resolution,
promise or understanding of any kind, whether written or oral or
express or implied;
(2) any Claims arising under the Age Discrimination in Employment Act of
1967, as amended ("ADEA"), 29 U.S.C. Sections 621 ET SEQ.; and
(3) any Claims arising under any federal, state, or local civil rights,
human rights, anti-discrimination, labor, employment, contract or tort
law, rule, regulation, order or decision, including, without
limitation, the Family and Medical Leave Act, the Employee Retirement
Income Security Act of 1974, the Americans with Disabilities Act of
1990, 42 U.S.C. Sections 12101 ET SEQ., and Title VII of the Civil
Rights Act of 1964, 42 U.S.C. Sections 2000 ET SEQ., and as each of
these laws have been or will be amended,
except that to the extent that any governmental authority or other third party,
I.E., other than one of the Releasees, files a charge or institutes an
investigation, lawsuit or any proceeding against the Executive based on any
event, occurrence or omission during the period of the Executive's employment
with a Company, in which case the Executive will be permitted to implead or
bring a court action against the Company and/or any of the Releasees for
indemnification of any liability or other appropriate remedy, provided such
impleader or court action would be available but for this Agreement.
In consideration of the obligations of the Executive under this
Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the Companies, the Companies
knowingly, voluntarily and unconditionally hereby forever waive, release and
discharge, and covenant never to sue on, any and all Claims which the Companies
have, ever had or may have, including, without limitation, any Claims arising in
whole or in part from the Executive's employment or the termination of the
Executive's employment with either Company or the manner of said termination;
provided, however, that this Section 7 shall not apply to any of the obligations
of the Executive specifically provided for in this Agreement. This Agreement is
intended as a full and final settlement and compromise of each,
<PAGE>
6
every and all Claims of every kind and nature, whether known or unknown, which
have been or could be asserted against the Executive and his respective heirs,
successors and assigns.
Notwithstanding anything to the contrary in this Section 7, (a) the
Executive does not release (i) any claim he may have under any employee benefit
plan subject to the Employee Retirement Income Security Act of 1974, as amended,
in which he was a participant during his employment with either Company for the
payment of a benefit thereunder to which he would be entitled upon his
termination of employment on September 6, 1996 in accordance with the terms of
such plan or (ii) any claim that he may have under this Agreement, (b) the
Companies do not release any claim that either may have under this Agreement,
and (c) this Section 7 shall not apply to any of the obligations of the Company
specifically provided for in the Employment Agreements, the SIP, the MRP, and
the DPP, all as modified by this Agreement.
The Executive understands that this Agreement affects significant
rights and represents and agrees that he has carefully read and fully
understands all of the provisions of this Agreement, that he is voluntarily
entering into this Agreement, and that he has been advised to consult with and
has in fact consulted with legal counsel before entering into this Agreement.
In particular, the Executive acknowledges that he has been given twenty-one (21)
days during which time he has carefully considered and voluntarily approved the
terms of this Agreement. The Executive understands that, pursuant to the
provisions of the ADEA, he shall have a period of seven (7) days from the date
of execution of this Agreement during which he may revoke the release provided
under this Section 7 with respect to any claims under ADEA via hand delivery of
a notice of revocation to the offices of the Corporation. This release shall
not become effective or enforceable with respect to any Claims under ADEA until
the revocation period described above has expired. If the Executive elects to
revoke the portion of this release with respect to Claims under ADEA as provided
above, each of the Companies shall have the right, upon written notice to the
Executive within 30 days after such revocation, to terminate all or any portion
of its obligations under this Agreement.
This Agreement does not constitute any admission of wrongdoing, or
evidence thereof, on the part of any of the parties hereto or the Releasees.
Except as required by court order, or to enforce the terms of this Agreement,
this Agreement may not be used in any court or administrative proceeding.
8. ADDITIONAL PERQUISITES. The Executive shall be entitled to
continued use of his leased company car until December 31, 1996, on the same
terms and conditions as exist on the date hereof; PROVIDED, HOWEVER, that in no
event shall the Executive be responsible for any excess mileage charges due upon
termination of the lease agreement on or about December 31, 1996.
The Corporation shall provide the Executive (at no cost to the
Executive) with outplacement counseling and services at an outplacement firm of
the Corporation's choice, which firm shall arrange for reasonable office and
secretarial services until December 31, 1996 (as approved in advance by the
Corporation).
<PAGE>
7
The Corporation and the Bank agree to provide within a reasonable
period of time the reference letter attached hereto as "Exhibit A", addressing
the Executive's character and performance for the Bank, to be signed by the
Chief Executive Officer of the Bank on the date hereof, whenever a formal
inquiry is made of the Corporation or the Bank by an party seeking to affiliate
with the Executive or have the Executive affiliate with it.
The Executive shall be permitted, for the purpose of removing his
personal property and effects and for the period commencing on the date of this
Agreement and ending on September 30, 1996, access to his current office space
at the Bank's principal corporate offices after 5:30 p.m. during weekdays and
between 9:00 a.m. and 9:00 p.m. on week-ends.
The Companies confirm that the Executive is entitled to the welfare
benefit continuation provided for in the resolution of the Bank's Board of
Trustees, dated April 27, 1993.
The Executive shall be entitled to receive an assignment or transfer
of the life insurance policy relating to the Executive under the Companies
current "split-dollar" life insurance program without consideration; PROVIDED,
HOWEVER, that the Executive shall be responsible for any premium payments due
and payable after the date of this Agreement.
9. SCOPE OF AGREEMENT; ENFORCEABILITY. This Agreement constitutes
the entire understanding and agreement between the Companies and the Executive
with regard to all matters herein and supersedes all prior oral and written
agreements and understandings of the parties with respect to such matters,
whether express or implied, other than the Employment Agreements.
This Agreement shall inure to the benefit of and be enforceable by the
Executive's heirs, beneficiaries and/or legal representatives. This Agreement
shall inure to the benefit of and be binding upon the Companies and their
respective successors and assigns.
If any term or provision of this Agreement, or the application thereof
to any person or circumstances, will to any extent be invalid or unenforceable,
the remainder of this Agreement, or the application of such terms to persons or
circumstances other than those as to which it is invalid or unenforceable, will
not be affected thereby, and each term of this Agreement will be valid and
enforceable to the fullest extent permitted by law.
10. AMENDMENTS/WAIVER. This Agreement may not be amended, waived, or
modified otherwise than by a written agreement executed by the parties to this
Agreement or their respective successors and legal representatives. No waiver
by any party to this Agreement of any breach of any term, provision or condition
of this Agreement by the other party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same time, or any prior or subsequent
time.
<PAGE>
8
11. NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed given when received by hand-delivery to the other
party, by facsimile transmission, by overnight courier, or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive: Mr. William E. Viklund
110 Grist Mill Lane
Plandome Manor, New York 11030
with a copy to: Gerald P. Wolf, Esq.
Meltzer, Lippe, Goldstein, Wolf
& Schlissel, P.C.
190 Willis Avenue
Mineola, New York 11501
If to the Corporation: Long Island Bancorp, Inc.
201 Old Country Road
Melville, New York 11747
Attn: Corporate Secretary
with a copy to: Mel M. Immergut, Esq.
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notices and communications shall be effective
when actually received by the addressee.
12. NEW YORK LAW. This Agreement shall be construed and enforced
in accordance with the laws of the State of New York without reference to its
choice of law provisions and shall be binding upon the parties and their
respective heirs, executors, successors and assigns.
13. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Companies and the Executive have caused this
Agreement to be executed as of the date first above written.
LONG ISLAND BANCORP, INC.
By:__________________________
<PAGE>
9
Name:
Title:
LONG ISLAND SAVINGS BANK, FSB
By:__________________________
Name:
Title:
_____________________________
William E. Viklund
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
YEAR ENDED
SEPTEMBER 30,
-------------------------------------
1996 1995
------------------ -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Income . . . . . . . . . . . . . . . . . $32,275 $43,516
Weighted average common shares
outstanding . . . . . . . . . . . . . . . 23,116 24,389
Common stock equivalents due to
dilutive effect of stock option . . . . . 1,104 699
Total weighted average common shares
and equivalents outstanding . . . . . . . 24,220 25,088
Earnings per common and common share
equivalents . . . . . . . . . . . . . . . $1.33 $1.73
Total weighted average common shares
and equivalents outstanding . . . . . . . 24,220 25,088
Additional dilutive shares using ending
period market value versus average
market value for the period when
utilizing the treasury stock method
regarding stock options . . . . . . . . . 57 358
Total shares for fully dilutive
earnings per share . . . . . . . . . . . 24,277 25,446
Fully diluted earnings per common and
common share equivalents . . . . . . . . $1.33 $1.71
<PAGE>
[Beach Picture]
Long Island Bancorp, Inc.
1996 ANNUAL REPORT
<PAGE>
Long Island Bancorp, Inc.
201 Old Country Road
Melville, New York 11747
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
SHAREHOLDER INFORMATION
BRANCH LOCATIONS
Queens
35-01 30th Ave.
Astoria, NY 11103
22-02 31st Street
Astoria, NY 11105
30-27 Steinway Street
Astoria, NY 11103
72-35 Broadway
Jackson Heights, NY 11372
97-33 Queens Blvd.
Rego Park, NY 11374
153-01 10th Ave.
Whitestone, NY 11357
Nassau
1150 Franklin Ave.
Garden City, NY 11530
3105 Hempstead Turnpike
Levittown, NY 11756
1900 Northern Blvd.
Manhasset, NY 11030
1001 Park Blvd.
Massapequa Park, NY 11762
2090 Merrick Road
Merrick, NY 11566
53 North Park Ave.
Rockville Centre, NY 11570
339 Merrick Road
Rockville Centre, NY 11570
3887 Merrick Road
Seaford, NY 11783
50 Jackson Ave.
Syosset, NY 11791
120 South Franklin Ave.
Valley Stream, NY 11580
3366 Park Ave.
Wantagh, NY 11793
Suffolk
180 West Main Street
Babylon, NY 11702
300 East Main Street
Bay Shore, NY 11706
269 Middle Country Road
Coram, NY 11727
180 East Main Street
East Islip, NY 11730
696 Horseblock Road
Farmingville, NY 11738
845 Wheeler Road
Hauppauge, NY 11788
839 New York Ave., Ste. 140
Huntington, NY 11743
1229 East Jericho Turnpike
Huntington, NY 11743
599 Middle Country Road
Middle Island, NY 11953
718 Medford Ave.
Patchogue, NY 11772
1336 Montauk Highway
Oakdale, NY 11769
450 Jefferson Shopping Plaza
Port Jefferson Station, NY 11776
325 Route 25A
Rocky Point, NY 11778
999-25 Montauk Highway
South Port Shopping Center
Shirley, NY 11967
65 Nugent Street
Southampton, NY 11968
1047 North Country Road
Stony Brook, NY 11790
6348 Route 25A
Wading River, NY 11792
71 Sunset Ave.
Westhampton Beach, NY 11978
526 Union Blvd.
West Islip, NY 11795
Mortgage Origination Offices
Whitestone Executive Plaza
30-50 Whitestone Expressway
Flushing, NY 11354
201 Old Country Road
Melville, NY 11747
2780 Middle Country Road
Lake Grove, NY 11755
2 Gannett Drive, Ste. 200
White Plains, NY 10604
Plaza West Office Centers
2001 West Main Street, Ste. 140
Stamford, CT 06902
103 Foulk Road, Ste. 102
Wilmington, DE19803
2000 RiverEdge Pky., Ste. 880
Atlanta, GA 30328
410 Commerce Drive
Peachtree City, GA 30269
10005 Old Columbia Road, Ste. L260
Columbia, MD 21046
6 Montgomery Village Ave., Ste. 220
Gaithersburg, MD 20879
9 Law Drive
Fairfield, NJ 07004
240 Half Mile Road
Red Bank, NJ 07701
4325 Lake Boone Trail, Ste. 102
Raleigh, NC 27607
237 West Chocolate Ave.
Hershey, PA 17033
111 Gibraltar Road
Horsham, PA 19044
54 Quakertown Road
Pennsburg, PA 18073
1100 Berkshire Blvd., Ste. 120
Wyomyssing, PA 19610
303 E. Baltimore Pike,
P.O. Box 127
Media, PA 19063
8321 Old Courthouse Road, Ste. 110
Vienna, VA 22182
155 Creekside Lane
Winchester, VA 22602
220 Middle Street
Franklin, VA 23851
825 Diligence Drive, Ste. 130
Newport News, VA 23606
206 Temple Ave., Ste. C
Colonial Heights, VA 23834
5544 Greenwich Road, Ste. 101
Virginia Beach, VA 23462
7231 Forest Ave., Ste. 303
Richmond, VA 23226
<PAGE>
Contents
Company Profile 1
Letter to Shareholders 2
Products and Services 4
A Promise For The Future 8
Financial Review 9
Directors, Officers and
Shareholder Information 66
<PAGE>
[Photograph - People walking on beach]
COMPANY PROFILE
Long Island Bancorp, Inc. is the holding company for The Long Island Savings
Bank, FSB, a federally chartered FDIC-insured bank with $5.4 billion in assets.
The Company, headquartered in Melville, New York, has completed its second full
year as a publicly traded institution and, based on market capitalization, ranks
as one of the top three publicly traded thrifts in New York State and one of the
top 15 thrifts nationwide.
Over the past 120 years, The Long Island Savings Bank has earned a reputation
for providing a broad range of financial products and superior service to its
customers. Currently, the Bank operates 36 full service branches located in the
tri-county New York area and a network of 25 mortgage offices in New York, New
Jersey, Connecticut, Pennsylvania, Delaware, Maryland, Virginia, North Carolina,
and Georgia. Outside the New York area, these offices operate under the name
Entrust, Home Financing Division of The Long Island Savings Bank. Through its
automated and telephone banking services, the Bank offers convenient ways to
serve its customers' various banking preferences.
Through an Internet home page, located at the address http://www.lisb.com,
customers, shareholders and other interested parties can learn about the Bank's
latest products, rates and services, view news releases, and explore career
opportunities with the Bank.
Long Island Bancorp, Inc.'s common stock is listed under the trading symbol
"LISB" on the Nasdaq National Market.
Page 1
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TO OUR SHAREHOLDERS:
This year was one of strong growth and continued progress for Long Island
Bancorp, Inc. and its subsidiary, The Long Island Savings Bank. The Company
successfully achieved targeted corporate objectives and established a platform
for continued growth.
The Company generated primary and fully diluted earnings per share of $1.33
for the fiscal year ended September 30, 1996. Excluding the effect of a one-time
assessment that significantly reduced the premium disparity that existed between
SAIF-insured and BIF-insured institutions, and the one-time cost related to our
President's retirement, the Company would have reported primary and fully
diluted earnings per share of $1.83 for fiscal 1996. This can be compared with
our fiscal 1995 performance of primary and fully diluted earnings per share of
$1.73 and $1.71, respectively.
We are pleased with the way our stock has been trading since the Company's
April, 1994 initial public offering. Over that time period, "LISB" stock has
provided shareholders with a 151% increase in its market value, rising from
$11.50 per share at the initial public offering to $28.88 at the end of fiscal
1996, outperforming both the Dow Jones Index and the Nasdaq Bank Index by a
considerable margin.
FINANCIAL HIGHLIGHTS
We achieved several major strategic objectives in 1996 which we believe will
position the Company well for future growth. The Company produced a record $2.4
billion in mortgage volume, more than doubling the prior year's volume. This
increase reflects expanded mortgage banking capabilities and an increased
geographic reach into profitable new markets. The mortgage servicing portfolio
increased by 38% over the prior year, contributing substantially to the 11.5%
improvement in fee income.
We continue to leverage our strong capital position of $519 million by growing
the consumer banking deposit franchise and augmenting it with borrowed funds to
support the growth in the mortgage banking business. As a result of our funding
decisions regarding the management of our balance sheet, we minimized the impact
of the compression caused by the interest rate environment on the Company's net
interest rate margin. Our net interest margin declined from 3.44% in 1995 to
3.24% in 1996, an impact which was less severe than that experienced by many of
our peers.
We maintained profitability while enhancing our marketing efforts for our
principal business units, expanding our mortgage origination operations to 25
offices, and increasing our loan origination officers by 63%. By transitioning
to a new technology environment, the Company is positioned to continue the
creation and delivery of new products and services which will support the Bank
of a Lifetime relationship program. As we managed the growth of the Company's
principal businesses during 1996 we positioned ourselves to reverse the trend in
recently escalating costs by making modifications to our ESOP and other employee
benefit plans which will take effect in fiscal 1997. Furthermore, a high
priority for fiscal 1997 is performing a comprehensive review of the core
expenses that support each of our businesses, targeting reductions wherever
possible by converting fixed expenses to variable costs, and eliminating
unnecessary expenditures.
Beyond the growth and strategic initiatives accomplished this year, we have
also improved the quality of our assets. The ratio of non-performing loans to
total loans improved to 1.70% in 1996, down from 2.67% in 1995, while the
actual level of non-performing loans remained stable at $53.2 million at
September 30, 1996. Net charge-offs also continued to improve, reaching a seven
year low of $6.6 million.
STRATEGIC GROWTH
The Bank continues to be a market-driven franchise. We have expanded our
distribution and delivery channels to continually provide the increased
convenience and service that customers demand. We carefully leverage our branch
presence to support the expansion of our consumer lending, financial services,
and mortgage businesses. These efforts have resulted in a 79% increase in
consumer loan production this past year, a 74% increase in the sale of
investment products, and a strong contribution to our mortgage origination
volume, which has increased 125% over the prior year.
During the year, the Bank continued to make acquisitions to complement its
mortgage operations. Seven new mortgage origination offices were added to our
existing franchise. The two acquired from Fleet Mortgage Corp.
of Columbia, South Carolina are located in Horsham, Pennsylvania and Raleigh,
North Carolina. The five additional offices acquired from First Home Mortgage
of Virginia, Inc. have expanded our presence in the state of Virginia.
Page 2
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Through technology we provide our customers with easy access to our financial
products and services. We continue to develop our Internet web site located at
http://www.lisb.com, an increasingly important financial services distribution
channel for customers. In June, the Bank formed a strategic alliance with The
Multiple Listing Service of Long Island to jointly create an Internet web site,
located at http://www.mlsli.com. This site provides prospective homebuyers with
a convenient way to quickly search through a database of as many as 25,000 Long
Island homes for sale, and includes a worksheet to calculate how much of a
mortgage the buyer might afford. The Bank has the exclusive right to advertise
financial products and services on this web site.
INDUSTRY OUTLOOK
We are pleased that Congress has passed legislation that significantly reduces
the FDIC premium disparity that existed between SAIF-insured institutions and
BIF-insured institutions. For community banks, such as The Long Island Savings
Bank, the premium disparity was particularly onerous. We look upon the one-time
after-tax special assessment of $0.45 per share as a positive investment, since
the Bank's annual assessment rate is expected to be reduced from the current
rate of 23 basis points to approximately 6.4 basis points, resulting in
significant future savings.
On August 15, 1989, the Bank and its former wholly owned subsidiary, The Long
Island Savings Bank of Centereach, FSB filed suit against the United States
Government seeking damages or other appropriate relief on the grounds, among
others, that the government had breached the terms of the 1983 Assistance
Agreement between the Bank and the Federal Savings and Loan Insurance
Corporation pursuant to which the Bank acquired Centereach. The Assistance
Agreement, among other things, provided for the inclusion of supervisory
goodwill as an asset on Centereach's balance sheet to be amortized over 40 years
for regulatory purposes and to be included in capital.
The suit, which is pending before the United States Court of Federal Claims,
had been stayed pending disposition by the United States Supreme Court of three
related supervisory goodwill cases (the Winstar cases). On July 1, 1996, the
Supreme Court ruled in the Winstar cases and held that the government had
breached its contracts with the Winstar parties and was liable in damages for
those breaches.
The United States Court of Federal Claims is conducting hearings in all of the
related supervisory goodwill cases pending in the Court of Federal Claims to
consider various procedural matters concerning the management of the cases going
forward.
[Picture]
John J. Conefry, Jr.
Chairman, President and Chief Executive Officer
Over the next few years, we expect the regulatory environment and competitive
atmosphere will continue to be dynamic. Long Island Bancorp, Inc. remains
uniquely positioned for future growth, continued profitability, and success. We
welcome the many challenges and exciting opportunities that lie ahead as we
continue to focus on enhancing shareholder value. We believe our stock to be an
attractive investment and have continued to repurchase shares of "LISB" in the
open market.
We would like to acknowledge the achievements of William E. Viklund, former
President and Chief Operating Officer, and wish him the best in his retirement.
We would like to thank our fellow shareholders for their support and the
directors and employees of The Long Island Savings Bank for their hard work and
continued dedication. We look forward to another successful year.
Sincerely,
John J. Conefry, Jr.
Chairman, President
and Chief Executive Officer
Page 3
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UNDERSTANDING CUSTOMER NEEDS
Our approach to understanding the customer reflects the Bank's philosophy that
each customer has a unique set of financial needs and objectives. These
financial needs can often be tied to major life cycle events, such as buying a
house, planning for college, or investing for retirement. By carefully
understanding each customer's individual objectives, The Long Island Savings
Bank provides sound financial advice and personalized attention.
This approach has been a successful one. Marketing research confirms that more
than 90% of our consumer banking customers would recommend us to a friend or
relative.
[Picture of ATM Card]
PROVIDING FINANCIAL PRODUCTS FOR CHANGING NEEDS
Each day, our employees work toward a common goal of providing customers with
easy, simple, direct access to a wide array of products and services. This
comprehensive range of products and services includes Lifetime
Banking-Registered Trademark-, which rewards customers with benefits designed to
fit their distinct lifestyles, including higher rates on savings and lower rates
on mortgages and other loans. Other services include: 24-hour account access,
direct deposit, overdraft protection, automatic mortgage loan payments, and
automatic savings.
Managing money by exploring financial alternatives is part of the Bank's
Lifetime Financial ServicesSM program. Using financial planning and asset
allocation practices, investment representatives guide customers in identifying
personal objectives and implementing a customized financial plan to
meet their specific goals.
The Bank continues to offer a full range of adjustable and fixed rate
mortgages, and low down payment FHA, SONYMA and Community Home Buyers Programs
to help customers finance their dream homes. We understand that buying a home is
a major event and we simplify the mortgage process for our customers every step
of the way by providing competitive rates, home financing guidance, and
quality service.
[Photograph - Water Scene]
By carefully understanding each customer's individual objectives, The Long
Island Savings Bank provides sound financial advice and personalized
attention.
Page 4
<PAGE>
The Bank also offers many free seminars to educate prospective customers on
homebuying and other financial services.
Many customers need to borrow to fund a college education, remodel a home or
just to have some extra cash on hand. With a 24-hour turnaround time and
competitive rates, our home equity financing is an attractive solution for many
of our customers. We expect the demand for home equity financing to continue to
be strong for the foreseeable future.
EMPHASIZING CONVENIENCE
[Picture - SIGN]
Demanding schedules and the multi-faceted responsibilities of personal and
professional lives are requiring consumers to seek new ways to balance their
daily activities. We understand discretionary time has become a luxury and
customers want to bank when and where it is most convenient for them. At The
Long Island Savings Bank, this includes the use of ATMs, telephone banking,
drive-up tellers, and branch office visits.
As the Internet continues to evolve as an increasingly important distribution
channel for financial services, we continue to enhance our web site at
http://www.lisb.com. Visit our site to learn more about our wide array of
products and services, calculate mortgages, apply for jobs, and view investor
information on-line. In the future, look for the availability of on-line banking
as an added convenience to our customers.
In June, the Bank formed a strategic alliance with The Multiple Listing
Service of Long Island to jointly create an Internet web site, located at
http://www.mlsli.com. This site provides prospective homebuyers a way to quickly
search through a database of as many as 25,000 homes for sale on Long Island.
This search can be conducted based on a homebuyer's specific selection criteria,
and includes a calculator which permits the homebuyer to determine how much of a
mortgage the buyer might afford. Each home is displayed with a full color
photograph and
[Photograph of Man and boy fishing]
Page 5
<PAGE>
pertinent information including the price, number of bedrooms and baths, annual
taxes, and property size. After narrowing the search, the buyer can arrange an
appointment with the listing broker and see the selected homes in person. The
Long Island Savings Bank has the exclusive right to advertise financial products
and services on this web site.
[Picture - Computer]
Our full service telephone banking center, strategically located branches, and
mortgage lending centers stand ready to serve customers who prefer personal
service. We are dedicated to providing customers with the financial solutions
they require when, where, and how they want them.
SERVING THE COMMUNITY
During the year, the Bank and its employees actively supported a significant
number of outreach and philanthropic initiatives in the communities we serve.
We believe that today's children are tomorrow's leaders. In addition to many
other important projects, we support two YMCA initiatives, Children's House, St.
Vincent's Services for Children, Big Brothers/Big Sisters, Little Flower
Children's Services, and the "Show You Care With a Bear" program, which makes a
difference in the lives of more than 800 children suffering from disabilities
and illnesses in our community.
The Bank has initiated a Student Savings Program to bring PC based banking
on-site to students at their schools. Students can open an FDIC-insured savings
account in their own name without maintenance fees or minimum balance
requirements. An initial deposit of $1.00 per student is contributed by the
Bank. More than 20 schools throughout Queens, Nassau, and Suffolk counties have
been enrolled in the program this year and more are expected to join.
The Bank supports the Long Island Development Corporation in its small
business assistance efforts. We also provide financial support for the
education, training, and counseling of women and minorities through small
business development and entrepreneurial programs. Additionally, the Bank
established a Scholarship Fund to help women who have decided to return to
college to complete their education and rejoin the workforce after raising their
families.
Many of our employees actively volunteer their time to help others in the
community. Along with these employees, the Bank continues to support the New
York Special Olympics, Wheelchair Charities, Inc., Habitat for Humanity, and a
Thanksgiving Food Drive, which touched the lives of more than 200 needy
families. We also support those less fortunate with our annual fund-raiser,
where the proceeds benefit several agencies dedicated to helping the hungry and
homeless on Long Island including: Interfaith Nutritional Network, Long Island
Cares, and Island Harvest.
The Bank appreciates and is involved in sponsoring artistic and cultural
events in the community. These include the Summer Concert Series throughout Long
Island and "Music of a Lifetime," a concert featuring the Senior POPs Orchestra.
The Bank continually provides strong support for the Long Island Housing
Partnership, its Regional Lending Consortium, the Community Preservation
Corporation, Neighborhood Housing Services, Nassau-Suffolk Coalition for the
Homeless, and many other non-profit organizations in an effort to make
affordable housing available to residents of our community. We are proud that
our regulators continue to rate us as "Outstanding" for our community
reinvestment activities.
[Photograph of Man and Woman]
Page 6
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[Photograph of Man and Woman walking on beach]
At The Long Island Savings Bank, we are dedicated to providing customers with
the financial solutions they require when, where, and how they want them.
Page 7
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[Photograph of Man and Woman]
The Company manages
its balance sheet with
a careful focus on
profitability and in
conjunction with
long term goals.
A PROMISE FOR THE FUTURE
Long Island Bancorp, Inc. continues to repurchase its own stock as part of
its third stock repurchase program. This program authorizes the Company to
repurchase up to five percent of its outstanding common shares, which represents
1,243,131 shares, by April 14, 1997. The repurchases will be made from time to
time, in open market transactions, at the discretion of management. Including
the shares repurchased in its first two programs, the Company has repurchased a
total of 2,497,554 shares, at an aggregate cost of $59.9 million.
We manage our balance sheet with a careful focus on profitability and in
conjunction with our long term goals. Every strategic decision requires the
evaluation of a range of factors in managing the Company's corporate structure.
In considering whether to deploy capital for additional stock repurchases or to
support growth opportunities, we remain focused on and committed to our goal of
maximizing value for our shareholders.
We will continue to build our franchise by emphasizing our customer focused
marketing strategy. This approach has proven to be a successful competitive
differentiation for the Bank in the marketplace and has earned us a reputation
as a highly professional provider of financial solutions.
We will continue to pursue the expansion of the Bank's mortgage and consumer
loan capabilities, grow the investment services business and the consumer bank
network, and expand alternate delivery channels such as the Internet. We believe
this strategy will result in increased profitability, continued growth, and
value for our shareholders.
[Picture - Internet Advertisement]
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Long Island Bancorp, Inc. and Subsidiary
FINANCIAL REVIEW
TABLE OF CONTENTS
Selected Financial Data .............................. 10
Glossary of Financial Terms .......................... 13
Management's Discussion and Analysis
of Financial Condition and Results of Operations ..... 15
Consolidated Statements of Financial Condition ....... 31
Consolidated Statements of Operations ................ 32
Consolidated Statements of
Changes in Stockholders' Equity ...................... 33
Consolidated Statements of Cash Flows ................ 34
Notes to Consolidated Financial Statements ........... 35
Independent Auditors' Report ......................... 64
Market Price of Common Stock ......................... 65
Directors, Officers and Shareholder Information ...... 66
Page 9
Long Island Bancorp, Inc. and Subsidiary
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
At September 30,
- -----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets $5,363,791 $4,901,622 $4,516,137 $3,990,731 $5,628,596
Loans receivable held
for investment, net 3,040,837 1,994,741 1,630,820 1,760,455 2,756,255
Allowance for possible loan losses 33,912 34,358 35,713 33,951 32,157
Mortgage-backed securities, net(1) 1,740,202 2,276,750 2,060,793 1,386,115 1,609,570
Investment in debt and equity
securities, net(2) 180,650 289,247 433,840 351,415 435,262
Loans sold with recourse(3) 289,464 250,423 201,083 223,032 255,987
Loans held for sale, net 57,969 49,372 7,956 148,393 37,892
Total non-performing loans(4) 53,166 55,676 54,036 145,316 195,058
Real estate owned, net 8,155 8,893 7,187 25,812 35,255
Total non-performing assets(5) 61,321 64,569 61,223 171,128 230,313
Total loans delinquent 60-89 days 12,002 11,960 11,925 24,801 59,279
Mortgage servicing rights, net(6) 29,687 11,328 759 957 1,835
Excess of cost over fair value
of net assets acquired(7)(8) -- -- -- -- 441,576
Deposits, net 3,633,010 3,573,529 3,567,815 3,617,600 4,675,413
Borrowed funds 978,023 633,675 325,022 44,500 259,138
Stockholders' equity-partially
restricted(9)(10)(11) 519,094 526,174 493,709 211,630 573,795
</TABLE>
(1) Includes $1.7 billion, $938.8 million, $818.3 million and $845.0 million of
mortgage-backed securities available-for-sale carried at market value as of
September 30, 1996, 1995, 1994 and 1993, respectively.
(2) Includes $180.7 million, $233.4 million, $348.2 million and $340.4 million
of debt and equity securities available-for-sale carried at market value as
of September 30, 1996, 1995, 1994 and 1993, respectively.
(3) Loans sold with recourse represent the outstanding principal amount of
residential property loans with the majority of these loans having been
securitized with Federal National Mortgage Association ("FNMA") and Federal
Home Loan Mortgage Corporation ("FHLMC").
(4) Non-performing loans are those loans placed on non-accrual status
(including restructured loans that, in the opinion of Long Island Bancorp,
Inc. and subsidiary ("Company"), have not yet demonstrated a sufficient
payment history to warrant return to performing status).
(5) Non-performing assets include non-performing loans and real estate owned,
net.
(6) Includes mortgage servicing rights purchased, capitalized excess servicing
fees and originated mortgage servicing rights pursuant to the Company's
July 1, 1995 adoption of Statement of Financial Accounting Standards No.
122 ("SFAS 122"), "Accounting for Mortgage Servicing Rights."
(7) At September 30, 1996 and 1995, excess of cost over fair value of assets
acquired totalled $5.3 million and $2.8 million, respectively, reflecting
acquisitions and is included in Prepaid expenses and other assets on the
Consolidated Statements of Financial Condition.
(8) The Company adopted Statement of Financial Accounting Standards No. 72
("SFAS 72"), "Accounting for Certain Acquisitions of Banking or Thrift
Institutions" as of October 1, 1992 which resulted in a reduction in the
excess of cost over fair value of net assets acquired and a cumulative
charge to income of $323.5 million. The Company wrote-off the remaining
balance of the excess of cost over fair value of net assets acquired of
$70.8 million after fiscal 1993 amortization of $47.2 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--1993 Restructuring."
(9) Includes $6.6 million, $6.9 million, $(3.1) million and $19.9 million after
tax from unrealized gains (losses) from debt, equity and mortgage-backed
securities available-for-sale at September 30, 1996, 1995, 1994 and 1993,
respectively, in accordance with Statement of Financial Accounting
Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt
and Equity Securities." SFAS 115 was adopted as of September 30, 1993.
(10) Prior to April 14, 1994, represented Retained income-partially restricted.
(11) The decrease to September 30, 1993 from September 30, 1992 was primarily
due to the restructuring activities that occurred during fiscal 1993. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--1993 Restructuring." The increase to September 30, 1994 from
September 30, 1993 was primarily due to the initial public offering of Long
Island Bancorp, Inc. common stock that occurred April 14, 1994.
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Long Island Bancorp, Inc. and Subsidiary
SELECTED FINANCIAL DATA
(Continued)
<TABLE>
<CAPTION>
For the Year Ended September 30,
- -----------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income $351,571 $321,215 $272,157 $ 340,629 $420,926
Interest expense 197,176 167,896 130,104 177,193 254,835
-------- -------- -------- ---------- --------
Net interest income 154,395 153,319 142,053 163,436 166,091
Provision for possible loan losses 6,200 6,470 11,955 47,288 19,347
-------- -------- -------- ---------- --------
Net interest income after provision for
possible loan losses 148,195 146,849 130,098 116,148 146,744
Non-interest income:
Fees and other income:
Loan fees and service charges 3,217 2,494 3,025 3,173 3,331
Loan servicing fees 13,863 12,873 8,725 3,794 3,796
Income from insurance and securities commissions 1,608 805 1,215 2,408 3,451
Deposit service fees 5,937 5,917 5,863 6,930 6,468
-------- -------- -------- ---------- --------
Total fee income 24,625 22,089 18,828 16,305 17,046
Other income 3,718 3,903 2,860 2,166 5,480
-------- -------- -------- ---------- --------
Total fees and other income 28,343 25,992 21,688 18,471 22,526
Net gains (losses) on sale activity:
Net gains on loans and
mortgage-backed securities 7,993 3,562 2,623 51,080 3,678
Net gains (losses) on investment in
debt and equity securities 340 (1,924) (703) 36 (2,479)
Net gains related to sale of deposits -- -- -- 6,618 --
-------- -------- -------- ---------- --------
Total net gains on sale activity 8,333 1,638 1,920 57,734 1,199
Net gain (loss) on investment in
real estate and premises 4,118 1,467 (738) 1,281 --
-------- -------- -------- ---------- --------
Total non-interest income 40,794 29,097 22,870 77,486 23,725
-------- -------- -------- ---------- --------
Non-interest expense:
General and administrative expense:
Compensation, payroll taxes and fringe benefits 57,969 51,443 52,117 55,121 51,576
Advertising 5,940 4,691 3,552 3,622 4,715
Office occupancy and equipment 20,631 18,547 17,922 19,998 22,762
Federal insurance premiums 9,055 8,961 10,120 11,413 11,238
Other general and administrative expense 18,612 17,101 16,272 18,778 14,411
-------- -------- -------- ---------- --------
Total general and administrative expense 112,207 100,743 99,983 108,932 104,702
SAIF special assessment 18,657 -- -- -- --
Net loss on real estate owned 2,090 1,790 4,052 13,700 7,754
Amortization of excess of cost over fair
value of net assets acquired(1) -- -- -- 47,222 14,875
Write-off of excess of cost over
fair value of net assets acquired -- -- -- 70,809 --
-------- -------- -------- ---------- --------
Total non-interest expense 132,954 102,533 104,035 240,663 127,331
-------- -------- -------- ---------- --------
Income (loss) before income taxes and
cumulative effect of accounting changes 56,035 73,413 48,933 (47,029) 43,138
Provision for income taxes 23,760 29,897 18,046 11,504 21,813
-------- -------- -------- ---------- --------
Income (loss) before cumulative effect of
accounting changes 32,275 43,516 30,887 (58,533) 21,325
Cumulative effect of changes in accounting(2)(3) -- -- 8,648 (323,545) --
-------- -------- -------- ---------- --------
Net income (loss) $ 32,275 $ 43,516 $ 39,535 $(382,078) $ 21,325
-------- -------- -------- ---------- --------
-------- -------- -------- ---------- --------
Primary earnings per common share(4) $ 1.33 $ 1.73 $ 0.70 N/A N/A
-------- -------- --------
-------- -------- --------
Fully diluted earnings per common share(4) $ 1.33 $ 1.71 $ 0.70 N/A N/A
-------- -------- --------
-------- -------- --------
</TABLE>
(1) For the years ended September 30, 1996 and 1995, amortization of excess of
cost over fair value of net assets acquired stemming from acquisitions
totalled $0.3 million and $0.2 million, respectively, and is included in
Other general & administrative expense in the Consolidated Statements of
Operations.
(2) The Company adopted SFAS 72 as of October 1, 1992 which resulted in a
reduction in the excess of cost over fair value of net assets acquired and
a cumulative charge to income of $323.5 million. The Company wrote-off the
remaining balance of the excess of cost over fair value of net assets
acquired of $70.8 million after fiscal 1993 amortization of $47.2 million.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--1993 Restructuring."
(3) The Company adopted Statement of Financial Accounting Standards No. 106
("SFAS 106"), "Employers' Accounting for Postretirement Benefits Other Than
Pensions" and Statement of Financial Accounting Standards No. 109 ("SFAS
109"), "Accounting for Income Taxes" as of October 1, 1993, which resulted
in a cumulative charge to income of $10.7 million and a cumulative credit
to income of $19.4 million, respectively.
(4) Primary and fully diluted earnings per common share ("EPS") for the years
ended September 30, 1996 and 1995 are calculated by dividing income by the
sum of the weighted average number of shares of common stock outstanding
and the weighted average number of shares issuable under the Company's
stock benefit plans that have a dilutive effect on EPS. For the year ended
September 30, 1994, EPS is based upon the weighted average number of shares
of common stock outstanding and was determined based upon income earned
during the period April 14, 1994 through September 30, 1994. The weighted
average number of shares issuable under the Company's stock benefit plans
were not materially dilutive and therefore were excluded from the
calculation of EPS.
Page 11
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Long Island Bancorp, Inc. and Subsidiary
SELECTED FINANCIAL DATA
(Continued)
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS
AND OTHER DATA:
PERFORMANCE RATIOS:
Return on average assets(1) 0.64% 0.93% 0.91% (7.57)% 0.38%
Return on average stockholders' equity(1) 6.16 8.52 11.41 (147.93) 3.78
Average stockholders' equity to average assets(2) 10.43 10.90 7.93 5.11 10.00
Stockholders' equity to total assets(3) 9.68 10.73 10.93 5.30 10.19
Tangible stockholders' equity to total assets(4) 9.57 10.67 10.93 5.30 2.55
Interest rate spread during period 2.89 3.10 3.30 3.46 3.43
Net interest margin(5) 3.24 3.44 3.47 3.47 3.37
Operating expenses to average assets(6) 2.23 2.15 2.29 2.16 1.86
Efficiency ratio(7) 61.40 56.18 61.06 59.88 55.51
Average interest-earning assets to
average interest-bearing liabilities 108.60 109.25 105.36 100.22 98.95
Net interest income to operating expenses(8) 1.38x 1.52x 1.42x 1.50x 1.59x
ASSET QUALITY RATIOS:
Non-performing loans to total gross loans(9) 1.70% 2.67% 3.20% 7.42%(10) 6.84%
Non-performing assets to total assets(9) 1.14 1.32 1.36 4.29(10) 4.09
Allowance for possible loan losses to
non-performing loans 63.79 61.71 66.09 23.36 16.49
Other Data:
Loan originations and purchases $2,464,963 $1,118,201 $ 497,900 $ 545,926 $ 549,088
Loans serviced for others $3,682,399 $2,563,866 $1,687,512 $1,669,787 $1,073,596
Average deposits per branch $ 100,917 $ 99,265 $ 96,427 $ 95,200 $ 97,404
Number of deposit accounts 396,986 391,217 381,606 402,238 508,729
FACILITIES:
Full-service customer service facilities 36 36 37 38 48
Regional lending offices 25 16 5 5 6
</TABLE>
(1) For fiscal 1993 the cumulative charge to income for the adoption of SFAS 72
and the subsequent write-off of the remaining balance of the excess of cost
over fair value of net assets acquired in fiscal 1993 are reflected in net
income and stockholders' equity. For fiscal 1994, the cumulative charge and
credit for the adoption of SFAS 106 and SFAS 109, respectively, are
reflected in net income and stockholders' equity. For fiscal 1996,
exclusive of the one-time SAIF assessment, return on average assets and
return on average stockholders' equity would have been 0.86% and 8.20%,
respectively.
(2) For fiscal 1996, exclusive of the one-time SAIF assessment, average
stockholders' equity to average assets would have been 10.44%.
(3) For fiscal 1996, exclusive of the one-time SAIF assessment, stockholders'
equity to total assets would have been 9.88%.
(4) For purposes of calculating these ratios, stockholders' equity and total
assets have been reduced by the excess of cost over fair value of net
assets acquired.
(5) Net interest margin is determined by dividing net interest income before
provision for possible loan losses by average interest-earning assets.
(6) Amount is determined by dividing total general and administrative expense
by average assets.
(7) Amount is determined by dividing total general and administrative expense
by net interest income before the provision for possible loan losses plus
total fee and other income.
(8) Amount is determined by dividing net interest income before provision for
possible loan losses by total general and administrative expense.
(9) Non-performing loans excludes loans which have been restructured and are
accruing and performing in accordance with the restructured terms.
Restructured accruing loans totaled $11.8 million, $12.1 million, $12.8
million, $8.9 million and $0 at September 30, 1996, 1995, 1994, 1993 and
1992, respectively.
(10) Includes the effect of $25.0 million and $5.0 million reduction in carrying
value in September 1993 relating to the bulk sale of non-performing loans
and other real estate owned, respectively. Excluding the effect of such
reduction in carrying value, the Bank's ratio of non-performing loans to
total gross loans and non-performing assets to total assets would have been
8.56% and 5.01%, respectively.
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Long Island Bancorp, Inc. and Subsidiary
GLOSSARY OF FINANCIAL TERMS
ALLOWANCE FOR POSSIBLE LOAN LOSSES--A balance sheet account which is an
estimation of possible loan losses. The provision for possible loan losses is
added to the allowance account while charge-offs decrease the account.
Recoveries on loans previously charged off increase the allowance.
BASIS POINT--The smallest measure used in quoting interest rate yields. One
basis point is 0.01%. Thus a yield that moves from 7.00% to 7.50% moves up 50
basis points.
BOOK VALUE PER SHARE--Total stockholders' equity divided by numbers of shares of
common stock outstanding, net of treasury shares.
CAPITALIZED EXCESS SERVICING FEES--The discounted present value of any
difference between (i) the interest rate received and (ii) the interest rate
passed through to the purchaser of a loan, less a normal servicing fee.
CHARGE-OFFS--Loan balances written off against the allowance for possible loan
losses, rather than charged to current earnings, once a loan is deemed to be
uncollectible.
CORE DEPOSITS--Deposits that are traditionally stable, consisting of passbook,
statement savings, NOW and non-interest-bearing demand accounts.
COST OF FUNDS--The interest cost associated with interest-bearing liabilities. A
cost of funds ratio represents the ratio of interest expense to average
interest-bearing liabilities for the period.
EARNING ASSETS--Interest- or dividend-earning assets, including loans and
securities.
EARNINGS PER SHARE (EPS)--Net income divided by weighted average shares of
common stock outstanding and common stock equivalents, for example, stock
options. Primary EPS is calculated by dividing income by the sum of the weighted
average number of shares of common stock outstanding and the average number of
shares issuable under stock benefit plans that have a dilutive effect measured
under the treasury stock method. Fully diluted EPS is calculated by dividing
income by the sum of the weighted average number of shares of common stock
outstanding and the maximum dilutive effect of shares issuable under stock
benefit plans.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)--A type of tax-qualified retirement plan
for employees that maintains individual accounts on behalf of each plan
participant and annually credits individual accounts with contributions which
are invested in company common stock.
FEDERAL FUNDS--Generally one-day loans of excess reserves from one bank to
another. When a bank buys (borrows) federal funds, these funds are called
"federal funds purchased." When it sells (lends) them, they are called "federal
funds sold."
FORECLOSED ASSETS--Property acquired because the borrower defaulted on the loan.
GOODWILL--Excess of cost over fair value of net assets acquired.
INTEREST RATE SENSITIVITY GAP--The difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
time period.
LEVERAGE RATIO--A ratio of equity to assets, defined as period-end Tier 1
capital less goodwill as a percentage of average assets for the most recent
quarter.
LIQUIDITY--The ability of current assets to meet current liabilities when due.
The degree of liquidity of an asset is the period of time anticipated to elapse
until the asset is realized or is otherwise converted into cash. A liquid bank
has less risk of being unable to meet debt obligations than an illiquid one.
Also, a liquid bank generally has more financial flexibility to take on new
investment opportunities.
MORTGAGE SERVICING RIGHTS (MSR'S)--The right to service loans for others
generally obtained by either the sale of loans with servicing retained, the open
market purchase of mortgage servicing rights or the creation of mortgage
servicing rights. MSR's are amortized as a reduction to loan service fee income
on a level-yield basis over the estimated remaining life of the underlying
loans.
NET INTEREST INCOME--The difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities.
NET INTEREST MARGIN--Net interest income as a percentage of average
interest-earning assets for the period.
NET INTEREST SPREAD--The difference between the yield on interest-earning assets
and the cost of interest-bearing liabilities.
Page 13
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Long Island Bancorp, Inc. and Subsidiary
GLOSSARY OF FINANCIAL TERMS
(Continued)
NON-PERFORMING ASSETS--Non-performing loans and securities plus foreclosed
assets.
NON-PERFORMING LOANS--Loans upon which interest income is not currently
recognized because of the borrower's financial problems (non-accrual loans) or
certain loans which have been restructured.
REAL ESTATE OWNED (REO)--Real estate which the bank takes or to which it assumes
title in order to sell the property, obtained as the result of a loan default.
PROVISION FOR POSSIBLE LOAN LOSSES--A charge against current period earnings
which reflects an estimation of possible loan losses.
RETURN ON ASSETS--Net income as a percentage of average total assets for the
period. The return on assets measures profitability in terms of how efficiently
assets are being utilized.
RETURN ON EQUITY--Net income as a percentage of average total equity. The return
on equity measures profitability in terms of how efficiently equity or capital
is being invested.
REVERSE-REPURCHASE AGREEMENTS--Refers to a transaction that is accounted for as
a collateralized borrowing in which the seller-borrower sells securities to a
buyer-lender with an agreement to repurchase them at a stated price plus
interest at a specified date or in specified circumstances.
RISK-BASED CAPITAL--The sum of Tier 1 and Tier 2 capital minus other assets
required to be deducted.
STOCK OPTION--Right to purchase or sell a stock at a specified price within a
stated period.
TIER 1 CAPITAL--Common stockholders' equity, qualifying non-cumulative perpetual
preferred stock and minority interest in equity accounts of consolidated
subsidiaries, less goodwill and other disallowed intangibles.
TIER 2 CAPITAL--The allowance for possible loan losses (limited to a certain
percentage of risk-weighted assets), perpetual and long-term preferred stock,
hybrid capital instruments (including perpetual debt and mandatory convertible
securities) and subordinated debt and intermediate-term preferred stock (subject
to certain limitations).
Page 14
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Long Island Bancorp, Inc. ("Holding Company") was formed in December 1993 to
serve as the holding company for The Long Island Savings Bank, FSB ("Bank"). On
April 14, 1994, the Bank completed its Conversion ("Conversion") from a
federally chartered mutual savings bank to a federally chartered stock savings
bank. In connection with the Conversion the Holding Company issued 26,816,464
shares of common stock ("Common Stock") at a price of $11.50 per share and
utilized a portion of the proceeds to acquire all of the issued shares of the
Bank. Prior to this offering, the Holding Company had no assets, liabilities or
operations.
The Holding Company is headquartered in Melville, New York and its primary
business currently consists of the operation of its wholly-owned subsidiary, the
Bank. In addition to directing, planning and coordinating the business
activities of the Bank, the Holding Company invests its funds primarily in U.S.
government and federal agency securities, investment grade preferred stock and
federal funds. In the future, the Holding Company may acquire or organize other
operating subsidiaries, including other financial institutions.
The Bank
The Bank's principal business has been and continues to be attracting retail
deposits from the general public and investing those deposits, together with
funds generated from operations, primarily in one-to-four family, owner occupied
residential mortgage loans. In addition, from time to time depending on market
conditions, the Bank will invest in mortgage-backed and asset-backed securities
to supplement its lending portfolio. The Bank also invests, to a lesser extent,
in multi-family residential mortgage loans, commercial loans, consumer loans and
other marketable securities. Revenues are derived principally from interest on
real estate and other loans, mortgage-backed and other debt securities, and
dividends on equity securities. Primary sources of funds are deposits,
borrowings under reverse-repurchase agreements and principal and interest
payments on loans and mortgage-backed securities. Additionally the Bank issued a
funding note in fiscal 1996 which was collateralized by a pool of adjustable
rate residential mortgage loans.
While the following discussion of financial condition and results of operations
include the collective results of the Holding Company and the Bank (collectively
"Company"), this discussion reflects principally the Bank's activities.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest and dividend income earned
on its loan and securities portfolios and its cost of funds, consisting of the
interest paid on its deposits and borrowings. To a lesser degree, the results of
operations are also dependent on fee income which includes, for example, fees
received for servicing mortgage loans. The Company's operating expenses
principally consist of employee compensation, occupancy, federal deposit
insurance premiums, advertising and other operating expenses. The Company's
results of operations are also affected by its periodic provisions for possible
loan losses, by write-downs of assets, and net gains and losses on sales of
assets. Such results are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities.
Fleet Mortgage Company
Loan Origination Offices
Acquisition
On June 28, 1996, the Company acquired two mortgage origination offices from
Fleet Mortgage Company ("Fleet") of Columbia, South Carolina. The acquisition
was designed to expand the Company's mortgage production capabilities into North
Carolina and enhance its existing presence in Pennsylvania.
First Home Mortgage of
Virginia, Inc. Acquisition
On August 1, 1996, the Company acquired First Home Mortgage of Virginia, Inc.
("First Home") a mortgage banking company with five offices located in Virginia.
The acquisition was designed to expand the Company's mortgage production
capabilities throughout the mid-Atlantic states.
Recapitalization of the
Savings Association
Insurance Fund
On September 30, 1996, as part of an omnibus appropriations bill, Congress
passed and President Clinton signed the Deposit Insurance Funds Act of 1996
("Act"). The Act should significantly reduce and eventually end the premium
disparity that has existed between banks insured by the Bank Insurance Fund
("BIF") and thrifts insured by the Savings Association Insurance Fund ("SAIF").
The Act requires SAIF-insured institutions to pay a special one-time assessment.
The Act also requires BIF-insured institutions to include a portion of the
interest due on Finance Corporation ("FICO") bonds in their deposit insurance
premiums beginning January 1, 1997. Beginning on January 1, 2000 or the date at
which no savings institution continues to exist, BIF-insured institutions are
required to pay their full pro rata share of FICO payments. The one-time special
assessment charged to SAIF-insured institutions will enable the SAIF fund to
reach predetermined capitalization levels and therefore will result in a
reduction in future premiums paid by SAIF-insured institutions. Beginning
January 1, 1997 and continuing through December 31, 1999, the Company expects
its premium rate to be reduced from the current rate of 23 basis points to
approximately 6.4 basis points. Pursuant to these provisions of the Act, the
Bank's one-time SAIF insurance assessment amounted to $18.7 million, which was
accrued at September 30, 1996 and paid in November 1996. The payment of the
special assessment reduced the Bank's capital, net of tax, but did not affect
the Bank's compliance with its regulatory capital requirements. See Note 4 of
Notes to Consolidated Financial Statements.
Page 15
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Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
Goodwill
The Bank was organized in 1876 as a New York State chartered mutual savings
bank. In December 1982, the Bank converted to a federal mutual savings bank and
changed its name from The Long Island Savings Bank to The Long Island Savings
Bank, FSB ("Syosset"). The Bank's deposits are insured to the maximum allowable
amount by the SAIF which is administered by the Federal Deposit Insurance
Corporation ("FDIC").
In 1983, with the assistance of the Federal Savings and Loan Insurance
Corporation ("FSLIC") as set forth in an assistance agreement ("Assistance
Agreement"), Syosset acquired, as a wholly-owned subsidiary, The Long Island
Savings Bank of Centereach FSB ("Centereach"). Syosset and Centereach reported
to the Federal Home Loan Bank Board of New York ("FHLB-NY"), forerunner of the
Office of Thrift Supervision ("OTS"), as two separate entities. In 1986, with
FSLIC assistance, Syosset acquired Flushing Federal Savings and Loan Association
("Flushing Federal") by merger.
The FSLIC-assisted supervisory acquisitions of Centereach and Flushing Federal
were accounted for using the purchase method of accounting which resulted in
supervisory goodwill (the excess of cost over fair value of net assets
acquired), an intangible asset, of $656.8 million. Of the $656.8 million of
supervisory goodwill, $625.4 million was recorded on Centereach's balance sheet
and $31.4 million on Syosset's balance sheet. Such goodwill was included in each
bank's regulatory capital. The Assistance Agreement related to the acquisition
of Centereach by Syosset provided for the inclusion of goodwill as an asset on
Centereach's balance sheet, to be amortized over 40 years for regulatory
purposes and includible in capital. Pursuant to the regulations adopted by the
OTS to implement the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"), the regulatory capital requirement of each bank increased
and the amount of supervisory goodwill that each bank could include in its
regulatory capital decreased significantly. At September 30, 1989, on a
stand-alone basis, Syosset, excluding supervisory goodwill, exceeded the capital
requirements of FIRREA. At that date, however, Centereach, excluding supervisory
goodwill, did not meet any of the three required FIRREA capital ratios mandated
by the OTS and had negative tangible capital as defined in the OTS regulations.
On August 15, 1989, Syosset and Centereach filed suit against the U.S.
government seeking damages and/or other appropriate relief on the grounds, among
others, that the government had breached the terms of the Assistance Agreement.
The suit currently is pending before Chief Judge Loren Smith in the United
States Court of Federal Claims and is entitled Long Island Savings Bank, FSB. et
al. v. United States. The case had been stayed pending disposition by the United
States Supreme Court of three related supervisory goodwill cases ("Winstar
cases"). On July 1, 1996 the Supreme Court ruled in the Winstar cases the
government had breached its contracts with the Winstar parties and was liable in
damages for those breaches. On September 18, 1996 Judge Smith issued an Omnibus
Management Order ("Case Management Order" ) applicable to all Winstar-related
cases. The Case Management Order addresses certain timing and procedural matters
with respect to the administration of the Winstar-related cases including
organization of the parties, initial discovery, initial determinations regarding
liability and the resolution of certain common issues. The Case Management Order
provides that the parties will attempt to agree upon a Master Litigation Plan,
which may be in phases, to govern all further proceedings, including the
resolution of common issues (other than common issues covered by the Case
Management Order), dispositive motions, trials, discovery schedules, protocols
for depositions, document production, expert witnesses and other matters.
On November 1, 1996, the Bank filed a motion for summary judgment on liability.
Pursuant to the schedule set forth in the Case Management Order, within sixty
days of the filing of the motion, the government must file a response with
respect to whether a contract exists and whether the government acted
inconsistently with the contract. Within 120 days of filing of the motion, the
government must set forth any defenses it knows or has reason to know that
relate to these two issues.
In its complaint, the Bank did not specify the amount of damages it was seeking
from the United States. There have been no decisions determining damages in the
Winstar cases or any of the Winstar-related cases. The Bank is unable to predict
the outcome of its claim against the United States and the amount of damages
that may be awarded to the Bank, if any, in the event that judgment is rendered
in the Bank's favor. Consequently, no assurances can be given as to the results
of this claim or the timing of any proceedings in relation thereto.
1993 Restructuring
To bring Centereach into capital compliance and avoid possible regulatory
sanctions against Centereach, on September 3, 1993, with the OTS's approval,
Centereach and Syosset sold $836.3 million in deposits from ten branch locations
and reduced their asset size by a similar amount ("Deposit Sale Transaction").
Concurrent with the sale of these deposits, Syosset was merged into Centereach
("Merger") and Centereach's name was changed to The Long Island Savings Bank,
FSB.
In connection with the Merger, the Company reviewed its accounting policies and
practices and decided to revise its past accounting practices relating to the
amortization of goodwill. See Note 3 of Notes to Consolidated Financial
Statements. As a result, the Company adopted Statement of Financial Accounting
Standards No. 72 ("SFAS 72") "Accounting for Certain Acquisitions of Banking or
Thrift Institutions" effective October 1, 1992. Accordingly, there
Page 16
<PAGE>
was a substantial reduction in the carrying amount of goodwill on Centereach's
books. The cumulative effect of adopting SFAS 72 and the amortization of
goodwill resulted in $323.5 million and $47.2 million, respectively, being
charged to earnings in fiscal 1993.
As a result of the significant restructuring activities which occurred during
fiscal 1993, principally the downsizing of the Company through the branch and
asset sales referred to above, the Merger and the prior year sales of branches
and assets acquired in the acquisitions described above, management determined
that the value of the remaining goodwill was substantially diminished.
Accordingly, the balance of the unamortized portion of the Centereach and
Flushing Federal goodwill, in the amount of $70.8 million, was written off as a
charge to earnings in September 1993.
In an effort to accelerate the resolution of certain of its problem assets, in
December 1993 the Company entered into a contract for the bulk sale of certain
loans and real estate owned ("Bulk Sale"). The sale of these loans was completed
by December 31, 1993 and the sale of the real estate owned was completed in the
second quarter of fiscal 1994. At September 30, 1993 the book value of the loans
anticipated to be sold was approximately $142.0 million, of which approximately
$110.0 million were then non-performing and approximately $32.0 million were
then performing. At that date, the net book value of the real estate owned
anticipated to be sold was approximately $14.0 million.
In anticipation of the Bulk Sale, the loans sold in this transaction were
included on the Company's consolidated statement of financial condition as of
September 30, 1993 as loans held for sale at their fair value, based on the
sales price established in the Bulk Sale contract. In order to adjust the loan
carrying value to reflect fair value, at September 30, 1993, the Company charged
off $32.0 million against the allowance for possible loan losses. In addition,
the carrying value at September 30, 1993 of other real estate owned to be sold
in such transaction was adjusted to reflect the fair value of these assets,
based on the sales price established in the Bulk Sale contract. In order to make
these adjustments, at September 30, 1993 the Company recorded a $9.0 million
provision for possible loan losses and a special provision of $5.0 million for
real estate owned.
As a result of the restructuring activities, including the Deposit Sale
Transaction, the elimination of the goodwill balance and the Bulk Sale, total
assets of the Company declined to $4.0 billion at September 30, 1993 from $5.6
billion at September 30, 1992.
Financial Condition
At September 30, 1996 total assets were $5.4 billion, an increase of $462.2
million from the amount reported at September 30, 1995. The growth in assets is
attributable to an increase of $1.0 billion in total net loans receivable held
for investment, partially offset by a $536.5 million decrease in mortgage-backed
securities ("MBS's"). The growth in total loans receivable reflects the
Company's emphasis on residential lending. Residential loans (including second
mortgages, co-operative apartment loans, home equity loans and certain loans
held for sale in the secondary market) amounted to $2.9 billion, or 91.57%, of
total gross loans at September 30, 1996. The remaining $263.9 million, or 8.43%,
of total gross loans receivable at September 30, 1996 consisted of $69.6 million
of commercial real estate loans, $34.9 million of multi-family loans, $7.7
million of construction loans and land loans, and $151.7 million of commercial
and other loans. For fiscal 1996, the Company originated or purchased real
estate loans in the amount of $2.4 billion of which $353.8 million was acquired
by bulk purchases. Commercial and other loans originated or purchased during
1996 amounted to $89.8 million. The Company remains committed to increasing the
volume of one-to- four family mortgage loans and to improving the efficiency and
lowering the cost of loan originations through increased automation of loan
application and processing procedures. In order to increase the volume of loan
originations, the Company continues to actively manage its origination channels
by increasing the number and productivity of the loan representatives in the
Company's 25 regional lending centers, increasing the number of lending centers,
leveraging the existing customer base at each of the Company's consumer banking
branches and expanding its telemarketing effort to solicit loans. Additionally,
during fiscal 1996 the Company entered into an agreement with Multiple Listing
Services of Long Island to utilize the Company's technological capabilities and
the Internet as another origination channel. The Company continues to monitor
opportunities that may exist to acquire loan origination capabilities similar to
the Company's 1996 acquisitions of First Home and the two lending offices of
Fleet. These and prior acquisitions have also contributed to the Company's
strategy of minimizing geographic risk as 56.54% of total real estate loans
(excluding home equity loans) are located in New York, New Jersey and
Connecticut ("NY metropolitan region") at September 30, 1996 down from 77.09%
and 99.39% at September 30, 1995 and 1994, respectively. The Company believes it
is possible to increase the volume of loan originations while maintaining
current underwriting standards.
MBS's declined to $1.7 billion at September 30, 1996 from $2.3 billion at
September 30, 1995 reflecting the redeployment of funds into real estate loans.
Additionally, effective December 31, 1995, the Company reclassified $1.2 billion
of MBS's previously classified as held-to-maturity into the
available-for-sale category in accordance with
the Special Report on Statement of Financial Accounting Standards No. 115
("SFAS 115") "Accounting for Certain Investments in Debt and Equity Securities"
issued in November 1995.
Page 17
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
Total liabilities increased by $469.2 million, or 10.72%, to $4.8 billion at
September 30, 1996 from $4.4 billion at September 30, 1995 principally
reflecting additional borrowed funds of $344.3 million and an increase in
deposits of $59.5 million. Historically, the Company has relied on its deposit
base as its principal source of funding. The Company places major emphasis on
its core deposit relationships, consisting of passbook accounts, NOW accounts,
statement savings, money market and non-interest-bearing demand accounts, which
typically tend to be more stable than other sources of funding. The Company's
core deposits as a percentage of total deposits decreased to 46.08% at September
30, 1996 from 48.49% at September 30, 1995. Management believes that this
decrease is attributable in part to an increase in interest rates and a shift in
customer preference towards short-term certificate accounts. The Company
continues to place emphasis on providing quality service to its customers to
retain and attract core deposits as opposed to soliciting time deposit accounts
with higher yields.
The Company often uses borrowings as an alternative and sometimes a less costly
source of funds. The Company's primary source of borrowing is through the sales
of securities under agreements to repurchase ("reverse-repurchase agreements")
with nationally recognized investment banking firms. Reverse-repurchase
agreements are accounted for as borrowings by the Company and are secured by
designated securities. At September 30, 1996 and 1995, the Company had
reverse-repurchase agreements outstanding of $800.0 million and $623.7 million,
respectively. In addition to reverse-repurchase agreements, on June 27, 1996 the
Company borrowed funds by issuing a funding note ("Funding note") in the amount
of $181.4 million which was collateralized by a pool of adjustable rate
residential mortgage loans. At September 30, 1996, the outstanding balance of
the Funding note was $178.0 million. See Note 14 of Notes to Consolidated
Financial Statements. The proceeds of borrowing transactions are used to meet
cash flow or asset/liability needs of the Company as well as to take advantage
of investment opportunities that may exist in the market that enable the Company
to earn a positive interest rate spread.
Stockholders' equity totalled $519.1 million at September 30, 1996, a decline of
$7.1 million from September 30, 1995. This decline was primarily due to the
purchase of treasury stock, net of reissuances in the amount of $38.0 million,
the declaration of $9.2 million in dividends and a decline of $0.3 million in
unrealized gains on securities, net of tax, classified as available-for-sale
which was partially offset by net income of $32.3 million and amortization of
$8.1 million related to the Company's Employee Stock Ownership Plan ("ESOP") and
the Bank's Management Recognition and Retention Plans ("MRPs").
Liquidity, Regulatory
Capital and Capital
Resources
General. The Company's primary sources of funds are deposits, principal and
interest payments on loans and MBS's, retained income and borrowings under
reverse-repurchase agreements. In addition, on June 27, 1996 the Bank issued a
Funding note in the amount of $181.4 million which was collateralized by a pool
of adjustable rate residential mortgage loans. Payments of principal and
interest on the Funding note shall be paid monthly based on the scheduled
payments due on the underlying loans. The interest on the Funding note changes
monthly and bears interest at a rate of 50 basis points over the one month
London Interbank Offered Rate ("LIBOR"). See Note 14 of Notes to Consolidated
Financial Statements. Proceeds from the sale of securities and loans are also a
source of funding. While maturities and scheduled amortization of loans and
MBS's are predictable sources of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and
competition.
The Bank is required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which may be varied at the direction of the
OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required ratio is
currently 5.00%. The Bank's liquidity ratios were 9.34%, 12.35% and 14.61% at
September 30, 1996, 1995 and 1994, respectively. Currently, the Bank maintains a
liquidity ratio substantially above the regulatory requirements in accordance
with its investment objective of investing its liquid assets in short-term debt
securities. Future levels may vary.
The Company's most liquid assets are cash and short-term investments. The levels
of these assets are dependent on the Company's operating, financing, lending and
investing activities during any given period. At September 30, 1996, cash and
cash equivalents and short-term and intermediate-term investments
available-for-sale totalled $138.5 million.
The primary investment activity of the Bank is the origination and purchase of
real estate loans and other loans. During the years ended September 30, 1996 and
1995, the Bank originated or purchased real estate loans in the amounts of $2.4
billion and $1.1 billion and commercial and other loans in the amounts of $89.8
million and $63.5 million, respectively. Included in the 1996 real estate loan
purchases is $353.8 million which represents the bulk purchase of loans. The
Bank purchases MBS's to reduce liquidity not otherwise required to meet loan
demand. Purchases of MBS's totalled $0.2 billion and $0.9 billion for the years
ended September 30, 1996 and 1995, respectively. Additionally, the originations
of MBS's totalled $358.8 million in 1996. These activities were funded primarily
by principal repayments on loans and MBS's, borrowings under reverse-repurchase
agreements and the Funding note, and sales of loans and MBS's classified as
available-for-sale. Other investing activities include investing in U.S.
government securities, federal agency obligations and asset-backed securities.
Page 18
<PAGE>
During fiscal 1996, the Company purchased 1,611,554 shares of treasury stock at
a cost of $42.0 million. The costs incurred in the purchase of treasury stock
were partially mitigated by the reissuance of 179,225 shares and the related tax
benefits stemming from the exercise of stock options which totalled $4.1
million. As of September 30, 1996, the Company owned 2,172,307 shares of
treasury stock which represents 2,497,554 shares acquired at an aggregate cost
of $59.9 million offset by the cumulative reissuance of 325,247 shares and the
related tax benefits stemming from the exercise of stock options which totalled
$6.2 million.
Liquidity management of the Company is both a daily and long-term component of
management's strategy. Excess funds are generally invested in short-term and
intermediate-term securities. In the event that the Bank should require funds
beyond its ability to generate them internally, additional sources of funds are
available through the use of FHLB advances and reverse-repurchase agreements. In
addition, the Bank may access funds, if necessary, through lines of credit
totaling $75.0 million at September 30, 1996 from unrelated financial
institutions.
At September 30, 1996, the Bank had outstanding commitments to originate or
purchase loans of $439.2 million which includes commitments to extend credit.
The Bank anticipates that it will have sufficient funds available to meet its
current loan commitments. Certificates of deposit which are scheduled to mature
in one year or less from September 30, 1996 totalled $1.4 billion. Management
believes, based on historical experience, that a significant portion of such
deposits will remain with the Bank.
At the time of Conversion, the Bank was required by OTS to establish a
liquidation account which will be reduced to the extent that eligible account
holders reduce their qualifying deposits. The balance of the liquidation account
at September 30, 1996 was $77.8 million. In the unlikely event of a complete
liquidation of the Bank, each eligible account holder will be entitled to
receive a distribution from the liquidation account. The Bank is not permitted
to declare or pay a dividend on or to repurchase any of its capital stock if the
effect would be to cause the Bank's regulatory capital to be reduced below the
amount required for the liquidation account. During 1996, the Bank declared a
cash dividend of $10.5 million. Unlike the Bank, the Holding Company is not
subject to OTS regulatory restrictions on the declaration or payment of
dividends to its stockholders, although the source of such dividends could
depend upon dividend payments from the Bank. The Holding Company is subject,
however, to the requirements of Delaware law, which generally limit dividends to
an amount equal to the excess of its net assets (the amount by which total
assets exceed total liabilities) over its stated capital or, if there is no such
excess, to its net profits for the current and/or immediately preceding fiscal
year. During 1996, the Company declared quarterly cash dividends at an
annualized rate of $0.40 per common share totaling $9.2 million.
Regulatory Capital Position. The Bank had a tangible capital ratio of 7.84%, a
core capital ratio of 7.84%, and a total-risk based capital ratio of 16.48%, as
compared with the required OTS regulatory capital ratios of 1.50%, 3.00% and
8.00%, respectively. At September 30, 1996, the Bank met the criteria to be
considered a "well-capitalized" institution for certain regulatory purposes. See
Note 4 of Notes to Consolidated Financial Statements.
Asset Quality
Asset quality continues to remain stable as non-performing loans decreased to
$53.2 million at September 30, 1996 from $55.7 million at September 30, 1995
reflecting continued improvements in the local economy and the continued
stabilization of real estate market values in the New York metropolitan region,
the Bank's historical primary lending area. At September 30, 1996, 56.54% of the
Bank's real estate loans (excluding home equity loans) were derived from the New
York metropolitan area. Coverage for possible loan losses improved during 1996
as the ratio of the allowance for possible loan losses to non-performing loans
increased to 63.79% at September 30, 1996 from 61.71% at September 30, 1995.
Additionally, the ratio of non-performing loans to total gross loans improved by
97 basis points to 1.70% at September 30, 1996 from 2.67% at September 30, 1995
and the ratio of non-performing assets to total assets improved by 18 basis
points to 1.14% at September 30, 1996 from 1.32% at September 30, 1995. The
improvement in each of these ratios is due to the reduction in non-performing
loans and non-performing assets, coupled with the respective growth in total
gross loans and total assets. Net charge-offs declined to $6.6 million in fiscal
1996, the lowest level in the past seven years.
Management believes that a portion of the Company's non-performing assets is
attributable to the low documentation loans (as defined below) previously
originated by the Company. During the 1986 to 1989 period, the Company
originated a significant number of one-to-four family mortgage loans without
verification of the borrower's financial condition or employer verification of
the borrower's level of income if the borrower's financial condition and stated
income were considered reasonable for the employment position held ("low
documentation loans"). The Company has experienced higher delinquency and
default rates on such loans, as compared to fully underwritten one-to-four
family loans, and in recognition thereof, the Company discontinued the
origination of low documentation loans in 1990. The Company is unable to
determine the aggregate dollar amount of low documentation loans originated
between 1986 and 1989 which still remain outstanding. At September 30, 1996,
however, approximately $536.1 million, or 19.25% of the Company's one-to-four
family residential loan and co- operative apartment loan portfolios consisted of
loans originated
Page 19
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
during the 1986 to 1989 period down from $604.2 million, or 34.19%, at September
30, 1995. To the extent such loans include a significant amount of low
documentation loans, the Company's delinquency and default rates could be
adversely impacted which may result in material losses. From time to time, on a
selective basis, the Company originates loans that involve limited verification
of the borrower's level of income or financial condition ("limited documentation
loans"). All such limited documentation loans are intended to conform to
secondary market investor guidelines.
Managing of
Interest Rate
Risk
One of the Company's primary objectives is managing interest rate risk.
Generally, net interest income is subject to substantial risk due to changes in
interest rates or changes in market yield curves. The Company seeks to reduce
its exposure to interest rate risk through the origination and retention of
adjustable rate mortgage ("ARM") loans, which at September 30, 1996 represented
81.97% of the Company's total gross loans excluding loans held for sale. The
Company also maintains MBS's and mortgage-related securities portfolio which
consists primarily of ARM-backed securities and fixed rate MBS's with remaining
estimated lives of less than five years. In an effort to meet the needs of its
customers, the Company continues to originate fixed rate loans. These loans,
however, are originated for immediate sale in the secondary mortgage market to
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation ("FHLMC") or other investors. The Company sells loans to investors
on both a servicing released and servicing retained basis. At September 30,
1996, the Company's portfolio of loans serviced for investors was approximately
$3.7 billion. During fiscal 1996 as interest rates increased, loan prepayments
slowed and ARM loans have been in greater demand, however, should interest rates
decline this trend may reverse.
In its securities portfolio, the Company has emphasized maintaining adequate
liquidity, particularly through amortizing short-term and intermediate-term
investment instruments. Management believes that its policy of emphasizing
lower-cost core deposits also limits interest rate risk as these deposits are
considered by management to have relatively low volatility.
To a lesser degree, the Company has the ability to manage its interest rate risk
through the use of derivative financial instruments. During fiscal 1996, these
instruments consisted solely of two interest rate cap agreements which are
designed to help protect the Company from rising interest rates while involving
minimal risk. The Company does not expect to significantly increase its
utilization of derivative financial instruments in the future, however, it may
enter into such agreements from time to time to manage its interest rate risk
exposure. See Note 15 of Notes to Consolidated Financial Statements.
Interest Rate
Sensitivity
Analysis
Interest rate sensitivity may be analyzed by examining the extent to which such
assets and liabilities are "interest rate sensitive" and by monitoring an
institution's interest rate sensitivity "gap." An asset or liability is said to
be interest rate sensitive within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest-earning assets maturing or repricing
exceeds the amount of interest-bearing liabilities maturing or repricing within
the same period. A gap is considered negative when the amount of
interest-bearing liabilities maturing or repricing exceeds the amount of
interest-earning assets maturing or repricing within the same period. Generally,
in a rising interest rate environment, an institution with a positive gap would
generally be expected, absent the effects of other factors, to experience a
greater increase in the yield of its assets relative to the cost of its
liabilities and thus increase earnings. Conversely, the cost of funds for an
institution with a positive gap would generally be expected to decline less
quickly than the yield on its assets in a falling interest rate environment.
Changes in interest rates generally have the opposite effect on an institution
with a negative gap.
Page 20
<PAGE>
In the current interest rate environment, the Company has been investing
primarily in adjustable rate real estate loans with various maturities. In
addition, the Company also invests in federal agency and MBS's and asset-backed
securities with adjustable rates or, in the case of fixed rate securities,
maturities shorter than five years and has generally refrained from investing in
fixed rate assets with longer term maturities. As a result of this strategy, at
September 30, 1996, the Company's total interest-earning assets maturing or
repricing within one year exceeded its total interest-bearing liabilities
maturing or repricing in the same time by $381.9 million, representing a one
year cumulative positive gap ratio of 7.12% versus $467.3 million and 9.53% at
September 30, 1995. The decrease in the cumulative one year gap is attributable
to higher certificate accounts and borrowings repricing within one year
partially offset by the net growth in real estate loans and MBS's repricing
within one year. The Company closely monitors its interest rate risk as such
risk relates to its operational strategies. At September 30, 1996, the Company
has continued to maintain a positive gap position; however, there can be no
assurance that the Company will be able to maintain its positive gap position or
that its strategies will not result in a negative gap position in the future.
The Company has not attempted to retain short-term certificate of deposit
accounts or increase core deposits by maintaining interest rates above those
offered by its competitors. Instead, the Company has attempted to encourage
long-term depositors to maintain their accounts with the Company through
expanded customer service. To the extent that the Company's core deposits
run-off at a more rapid rate than the Company's assumptions on such deposits,
the Company's current positive gap positions could be negatively impacted. While
the Company has experienced some run-off in its core deposits, there can be no
assurance that such a run-off will not increase in the future if depositors
continue to seek higher yielding investments.
Additionally, the Company's investment policy enables the Company to enter into
certain interest rate contracts, for example, interest rate swaps, caps, floors
and collars. These contracts may be used to hedge interest rates on certain
assets and liabilities. During fiscal 1996, the Bank had two interest rate cap
agreements outstanding for an aggregate unamortized cost of $0.1 million at
September 30, 1996, involving a notional amount totaling $90.0 million. Three
contracts were in effect during fiscal 1995. The amount paid for the interest
rate caps is being amortized into interest expense over the term of the
contracts. For the years ended September 30, 1996 and 1995, amortization
totalled $0.3 million per year. See Note 15 of Notes to Consolidated Financial
Statements.
The Company uses earning simulations, duration, as well as gap analysis to
analyze and project future interest rate risk. Computer generated scenarios are
based on various assumptions including: expected changes in the level of
interest rates and the shape of the yield curve, pricing strategies, portfolio
embedded option impacts and growth, volume and mix alternatives for each
portfolio. Projected statements are evaluated on a rolling 12 month period.
Duration measures the interest rate sensitivity of all financial instruments
based on their weighted average term to maturity of all cash flows. The
Asset/Liability Committee ("ALCO") evaluates decisions in a risk return
trade-off framework to ensure that the level of interest rate risk exposure
incurred does not exceed prudent levels. Specific limits for variation of net
interest income and net portfolio value under various interest rate scenarios
are set annually by ALCO and approved by the Board of Directors.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1996, which are
anticipated by the Company, based on certain assumptions, to reprice or mature
in each of the future time periods shown. Except as stated below, the amounts of
assets and liabilities shown to reprice or mature during a particular period
were determined in accordance with the earlier of term to repricing or the
contractual terms of the asset or liability. Prepayment assumptions ranging from
0% to 15% per year were applied, dependent upon the loan type and coupon.
Run-off rate assumptions for passbook savings, statement savings, NOW and money
market accounts, in the one year or less category are 51%, 51%, 40% and 100%,
respectively, rather than the OTS assumptions which, in the one year or less
period are 17%, 17%, 37% and 79%, respectively. These withdrawal rates and
prepayment assumptions are based on assumptions and analyses prepared internally
and are used in preparing the Regulatory Thrift Bulletin-13 Report and quarterly
management reports. These assumptions were used rather than the assumptions
published by the OTS because management believes they are more indicative of the
actual prepayments and withdrawals experienced by the Company. The assumptions
do not reflect any increases or decreases in interest rates paid on various
categories of deposits (whether by the Company or in general) since September
30, 1996.
Page 21
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
<TABLE>
<CAPTION>
Interest Rate Sensitivity Gap Analysis At September 30, 1996
- ------------------------------------------------------------------------------------------------------------
More than More than More than More than
3 Months 3 Months 6 Months 1 Year 3 Years
or Less to 6 Months to 1 Year to 3 Years to 5 Years
--------- ----------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans(1) $ 232,498 $ 429,339 $ 941,563 $ 794,953 $ 236,218
Commercial loans(1) 7,406 -- -- -- 65
Other loans(1) 65,297 3,533 7,158 25,210 18,522
Mortgage-backed
securities(2) 388,815 316,449 527,521 359,081 83,634
Interest-earning cash
equivalents 37,357 -- -- -- --
Debt and equity securities(2) 9,991 3,881 33,028 20,376 2,575
Stock in FHLB-NY -- -- -- -- --
---------- --------- ---------- ---------- ----------
Total interest-
earning assets 741,364 753,202 1,509,270 1,199,620 341,014
Interest-bearing liabilities:
Passbook accounts 124,293 99,501 118,338 108,801 104,267
Statement savings accounts 120,625 96,077 114,254 105,048 100,671
NOW accounts 35,555 4,593 9,186 36,744 35,213
Checking & demand
deposit accounts 2,735 1,172 2,345 -- --
Money market accounts 83,484 15,652 31,306 -- --
Certificate accounts 380,383 459,877 520,575 314,327 257,693
Borrowings 364,023 -- 38,000 576,000 --
---------- --------- ---------- ---------- ----------
Total interest-
bearing liabilities 1,111,098 676,872 834,004 1,140,920 497,844
---------- --------- ---------- ---------- ----------
Interest sensitivity gap
per period $ (369,734) $ 76,330 $ 675,266 $ 58,700 $(156,830)
---------- --------- ---------- ---------- ----------
---------- --------- ---------- ---------- ----------
Cumulative interest
sensitivity gap $ (369,734) $(293,404) $ 381,862 $ 440,562 $ 283,732
---------- --------- ---------- ---------- ----------
---------- --------- ---------- ---------- ----------
Cumulative interest
sensitivity gap as a
percentage of total assets(3) (6.89)% (5.47)% 7.12% 8.21% 5.29%
Cumulative net interest-earning
assets as a percentage of net
interest-bearing liabilities 66.72 83.59 114.56 111.71 106.66
<CAPTION>
- ------------------------------------
More
than
5 Years Total
------- -----
<S> <C> <C>
Interest-earning assets:
Real estate loans(1) $294,360 $2,928,931
Commercial loans(1) -- 7,471
Other loans(1) 23,849 143,569
Mortgage-backed
securities(2) 50,771 1,726,271
Interest-earning cash
equivalents -- 37,357
Debt and equity securities(2) 112,933 182,784
Stock in FHLB-NY 40,754 40,754
-------- ---------
Total interest-
earning assets 522,667 5,067,137
Interest-bearing liabilities:
Passbook accounts 114,041 669,241
Statement savings accounts 110,114 646,789
NOW accounts 1,531 122,822
Checking & demand
deposit accounts -- 6,252
Money market accounts -- 130,442
Certificate accounts 25,936 1,958,791
Borrowings -- 978,023
-------- ---------
Total interest-
bearing liabilities 251,622 4,512,360
-------- ---------
Interest sensitivity gap
per period $271,045 $ 554,777
-------- ---------
-------- ---------
Cumulative interest
sensitivity gap $554,777
--------
--------
Cumulative interest
sensitivity gap as a
percentage of total assets(3) 10.34%
Cumulative net interest-earning
assets as a percentage of net
interest-bearing liabilities 112.29
</TABLE>
(1) Excludes non-performing loans and the allowance for possible loan losses.
(2) MBS's and debt and equity securities are shown excluding the market value
appreciation of $11.8 million, before tax, from SFAS 115.
(3) Amounts for fixed rate loans are based on scheduled payment dates and loans
for which there is no amortization schedule, are included as three months
or less.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as ARM loans, have features which
limit changes in interest rates on a short-term basis and over the life of the
asset. Further, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the table. An interest rate increase may impair the ability of
borrowers to service their ARM loans.
Analysis of Net
Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
upon the relative amount of interest-earning assets and interest-bearing
liabilities and the interest rate earned or paid on them.
The following table sets forth certain information relating to the Company's
Consolidated Statements of Financial Condition and the Consolidated Statements
of Operations for the fiscal years ended September 30, 1996, 1995 and 1994 and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and
Page 22
<PAGE>
costs are derived by dividing income or expense by the average balance of assets
or liabilities, respectively, for the periods shown. Average balances are
derived from the average daily balances. The yields and costs include fees which
are considered adjustments to yields.
<TABLE>
<CAPTION>
For the Year Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------------
1996 1995
------------------------------- ------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- -------- ------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning
cash equivalents $ 32,109 $ 1,708 5.32% $ 47,153 $ 2,560 5.43%
Debt and equity securities
and FHLB-NY stock, net(1) 268,344 15,008 5.59 391,556 22,390 5.72
Mortgage-backed
securities, net(1) 1,952,217 134,064 6.87 2,176,416 140,173 6.44
Real estate loans, net(2) 2,380,633 185,241 7.78 1,724,834 140,268 8.13
Commercial and other
loans, net(2) 125,629 15,550 12.38 117,993 15,824 13.41
---------- --------- ------ ---------- ------- ------
Total interest-earning assets 4,758,932 351,571 7.39 4,457,952 321,215 7.21
Other non-interest-
earning assets 268,355 228,981
---------- --------- ---------- -------
Total assets $5,027,287 $351,571 $4,686,933 $321,215
---------- --------- ---------- -------
---------- --------- ---------- -------
Interest-bearing liabilities:
Deposits:
Time deposits $1,895,594 $108,479 5.72% $1,626,814 $ 87,849 5.40%
Statement savings 639,318 20,755 3.25 684,340 20,946 3.06
Passbooks 711,993 19,264 2.71 820,526 22,336 2.72
Checking and NOW
accounts(3) 268,406 3,419 1.27 255,744 3,488 1.36
Money market 142,192 3,913 2.75 182,147 5,022 2.76
---------- --------- ------ ---------- ------- ------
Total deposits 3,657,503 155,830 4.26 3,569,571 139,641 3.91
Borrowed funds 724,448 41,346 5.71 510,987 28,255 5.53
---------- --------- ------ ---------- ------- ------
Total interest-
bearing liabilities 4,381,951 197,176 4.50 4,080,558 167,896 4.11
Non-interest-
bearing liabilities 120,982 95,689
---------- ----------
Total liabilities 4,502,933 4,176,247
Total stockholders' equity 524,354 510,686
---------- --------- ------ ---------- ------- ------
Total liabilities and
stockholders' equity $5,027,287 197,176 $4,686,933 167,896
---------- --------- ---------- -------
---------- --------- ---------- -------
Net interest income/
spread(4) $154,395 2.89% $153,319 3.10%
--------- ------ ------- ------
--------- ------ ------- ------
Net interest margin as % of
interest-earning assets(5) 3.24% 3.44%
------ ------
------ ------
Ratio of interest-earning
assets to interest-
bearing liabilities 108.60% 109.25%
------ ------
------ ------
<CAPTION>
------------------------------
1994
-----------------------------
Average
Average Yield/
Balance Interest Cost
-------- -------- -------
<S> <C> <C> <C>
Interest-earning assets:
Interest-earning
cash equivalents $ 117,516 $ 4,101 3.49%
Debt and equity securities
and FHLB-NY stock, net(1) 482,198 23,794 4.93
Mortgage-backed
securities, net(1) 1,752,511 101,868 5.81
Real estate loans, net(2) 1,599,057 125,069 7.82
Commercial and other
loans, net(2) 140,677 17,325 12.32
---------- -------- ------
Total interest-earning assets 4,091,959 272,157 6.65
Other non-interest-
earning assets 275,571
---------- --------
Total assets $4,367,530 $272,157
---------- --------
---------- --------
Interest-bearing liabilities:
Deposits:
Time deposits $1,296,402 $ 56,986 4.40%
Statement savings 891,392 26,202 2.94
Passbooks 1,003,287 27,706 2.76
Checking and NOW
accounts(3) 240,733 3,210 1.33
Money market 223,552 6,189 2.77
---------- -------- ------
Total deposits 3,655,366 120,293 3.29
Borrowed funds 228,368 9,811 4.30
---------- -------- ------
Total interest-
bearing liabilities 3,883,734 130,104 3.35
Non-interest-
bearing liabilities 137,309
----------
Total liabilities 4,021,043
Total stockholders' equity 346,487
---------- -------- ------
Total liabilities and
stockholders' equity $4,367,530 130,104
---------- -------- ------
---------- -------- ------
Net interest income/
spread(4) $142,053 3.30%
-------- ------
-------- ------
Net interest margin as % of
interest-earning assets(5) 3.47%
------
------
Ratio of interest-earning
assets to interest-
bearing liabilities 105.36%
------
------
</TABLE>
(1) MBS's and debt and equity securities are shown including the market value
appreciation/(depreciation) of $12.7 million, $12.2 million and
$(5.4) million, before tax, from SFAS 115 for the years ended September 30,
1996, 1995 and 1994, respectively.
(2) Net of unearned discounts, premiums, deferred loan fees, purchase
accounting discounts and premiums and allowance for possible loan losses,
and including non-performing loans and loans held for sale.
(3) Includes non-interest-bearing checking accounts.
(4) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
Page 23
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
Rate/Volume
Analysis
The following table presents the impact of changes in interest rates and in the
volume of interest-earning assets and interest-bearing liabilities on the
Company's interest income and expense during the periods indicated. Information
is provided in each category with respect to (i) changes attributable to changes
in volume (changes in volume multiplied by the prior rate), (ii) changes
attributable to changes in rate (changes in rate multiplied by the prior
volume), and (iii) the net change. The changes attributable to the combined
impact of volume and rate have been allocated proportionately to the changes due
to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year Ended September 30, 1996 Year Ended September 30, 1995
Compared to Compared to
Year Ended September 30, 1995 Year Ended September 30, 1994
Increase/(Decrease) Increase/(Decrease)
- ------------------------------------------------------------------------------ --------------------------------
Due to Due to
------------------------------ --------------------------------
Volume Rate Net Volume Rate Net
------- -------- ------- ------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning cash equivalents(1) $ (801) $ (51) $ (852) $ (1,647) $ 106 $ (1,541)
Debt and equity securities(2)(3) (6,901) (481) (7,382) (4,856) 3,452 (1,404)
Mortgage-backed securities(3) (15,022) 8,913 (6,109) 26,477 11,828 38,305
Real estate loans(4) 51,262 (6,289) 44,973 10,096 5,103 15,199
Commercial loans and other loans(4) 988 (1,262) (274) (2,954) 1,453 (1,501)
------- ------ ------ ------ ------ ------
Total 29,526 830 30,356 27,116 21,942 49,058
------- ------ ------ ------ ------ ------
Interest-bearing liabilities:
Deposits 3,504 12,685 16,189 (2,882) 22,230 19,348
Borrowed funds 12,156 935 13,091 14,973 3,471 18,444
------- ------ ------ ------ ------ ------
Total 15,660 13,620 29,280 12,091 25,701 37,792
------- ------ ------ ------ ------ ------
Net change in interest income $ 13,866 $ (12,790) $ 1,076 $ 15,025 $ (3,759) $ 11,266
------- ------ ------ ------ ------ ------
------- ------ ------ ------ ------ ------
</TABLE>
(1) Cash equivalents include amounts due from banks and short-term loans to
commercial banks with original terms to maturity of less than three
months.
(2) Includes FHLB-NY stock.
(3) MBS's and debt and equity securities are shown including the market value
appreciation/(depreciation) of $12.7 million, $12.2 million and $(5.4)
million, before tax, from SFAS 115 for the years ended September 30,
1996, 1995 and 1994, respectively.
(4) In computing the volume and rate components of net interest income for
loans, non-performing loans and loans held for sale have been included.
Comparison of
Operating Results
for the Fiscal Years
Ended September 30,
1996 and 1995
GENERAL. Net income declined by $11.2 million, or 25.83%, to $32.3
million in fiscal 1996 from $43.5 million in fiscal 1995. The decrease was
primarily attributable to a special one-time federal insurance assessment of
$18.7 million and higher general and administrative ("G&A") costs of $11.5
million over the comparable 1995 period. Partially offsetting these additional
costs were increases in non-interest income and net interest income of $11.7
million and $1.1 million, respectively, coupled with a reduction in the
provision for income taxes of $6.1 million.
INTEREST INCOME. Interest income increased by $30.4 million, or 9.45%, to
$351.6 million in fiscal 1996 from $321.2 million in 1995. The improvement is
due to an increase of $301.0 million in average interest-earning assets
coupled with an increase of 18 basis points in the average yield of
interest-earning assets.
Average real estate loans increased by $655.8 million, or 38.02%, to $2.4
billion at September 30, 1996 from $1.7 billion at September 30, 1995. The
increase reflects loan originations and purchases funded by additional
borrowings and the redeployment of funds from principal payments and sales of
MBS's and debt and equity securities classified as available-for-sale into
real estate loans. The redeployment of funds also contributed to an increase
in the overall yield on average interest-earning assets by replacing lower
yielding MBS's and debt and equity securities with higher yielding real
estate loans. Despite the improvement in the overall yield on
interest-earning assets, the yield on average real estate loans declined to
7.78% in 1996 from 8.13% in 1995 principally reflecting the significant
amount of ARM loans originated and retained in the portfolio during the last
two years which are not fully indexed. The net result of the increase in
average real estate loans and the decline in the yield on such loans amounted
to an increase in interest income of $44.9 million, or 32.06%, to $185.2
million in 1996 from $140.3 million in 1995.
Average MBS's declined by $224.2 million, or 10.30%, to $2.0 billion in 1996
from $2.2 billion in 1995 reflecting the redeployment of funds previously
described and the average yield increased by 43 basis points to 6.87% in 1996
from 6.44% in 1995. The net result of the lower average balances and higher
yields was a reduction in interest income from MBS's of $6.1 million, or
4.36%, to $134.1 million in 1996 from $140.2 million in 1995.
Average debt and equity securities declined by $123.3 million, or 31.47%, to
$268.3 million in 1996 from $391.6 million in 1995 due to the redeployment of
funds previously described into real estate loans. In addition, the yield on
average
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<PAGE>
debt and equity securities declined by 13 basis points to 5.59% in 1996 from
5.72% in 1995. The net result of the lower average balances coupled with a
decline in the yield contributed to a reduction in interest income from debt and
equity securities of $7.4 million, or 32.97%, to $15.0 million in 1996 from
$22.4 million in 1995.
INTEREST EXPENSE. Interest expense increased by $29.3 million, or 17.44%, to
$197.2 million in 1996 from $167.9 million in 1995. The increase is principally
the result of an increase in average deposit liabilities of $87.9 million to
$3.7 billion in 1996 from $3.6 billion in 1995 coupled with an increase in the
cost of average deposits of 35 basis points to 4.26% in 1996 from 3.91% in 1995.
The net result of higher average deposit liabilities and the greater cost
associated with such funds resulted in an increase in interest expense from
deposit liabilities of $16.2 million, or 11.59%, to $155.8 million in 1996 from
$139.6 million in 1995. Interest expense on certificate accounts increased by
$20.6 million, or 23.48%, to $108.5 million in 1996 from $87.9 million in 1995
reflecting increased average balances of $268.8 million coupled with an increase
in the average cost of 32 basis points. The effect of this increase is partially
mitigated by declines in interest expense on passbook accounts of $3.1 million,
or 13.76%, to $19.3 million in 1996 and money market accounts of $1.1 million,
or 22.08%, to $3.9 million in 1996 primarily reflecting decreased average
balances of $108.5 million, and $40.0 million, respectively.
Further contributing to the increase in interest expense was an increase in
average borrowed funds of $213.4 million, or 41.77%, to $724.4 million in 1996
from $511.0 million in 1995 coupled with an increase in the cost of average
borrowed funds of 18 basis points to 5.71% in 1996 from 5.53% in 1995. Although
deposits are the Bank's primary source of funds, the Bank has the ability to use
borrowings as an alternative, and sometimes less costly, source of funds. The
increase in borrowed funds that occurred during 1996 enabled the Bank to meet
cash flow or asset/liability needs as well as to take advantage of investment
opportunities that existed in the market and enabled the Bank to earn a positive
interest rate spread. The greater volume of borrowed funds and the higher cost
of such funds resulted in an increase in interest expense from borrowed funds of
$13.0 million, or 46.33%, to $41.3 million in 1996 from $28.3 million in 1995.
During 1996 and 1995, interest expense also includes the amortization of
premiums paid for interest rate cap agreements in the amount of $0.3 million for
each year. See Note 15 of Notes to Consolidated Financial Statements.
NET INTEREST INCOME. Net interest income was $154.4 million in 1996, an
increase of $1.1 million, or 0.70%, from $153.3 million in 1995. The increase is
primarily attributable to the Company's higher level of real estate loans
partially offset by greater cost of funds. The net interest margin declined by
20 basis points to 3.24% in 1996 from 3.44% in 1995 and the net interest spread
declined by 21 basis points to 2.89% in 1996 from 3.10% in 1995. Contributing to
these declining ratios were rises in short term interest rates during 1996 and,
although adding to higher overall net interest income, the use of higher costing
borrowed funds.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses
decreased by $0.3 million, or 4.17%, to $6.2 million in 1996 from $6.5 million
in 1995. The reduction reflects the stable level of non-performing loans, which
declined by $2.5 million to $53.2 million at September 30, 1996 from $55.7
million at September 30, 1995. Additionally, the ratio of non-performing loans
to total gross loans declined by 97 basis points to 1.70% in 1996 from 2.67% in
1995 and net charge-offs declined to a seven year low of $6.6 million. Coverage
for possible future loan losses, as measured by the ratio of the allowance for
possible loans losses to non-performing loans, improved by 208 basis points to
63.79% at September 30, 1996 from 61.71% at September 30, 1995, although the
level of the allowance for possible loan losses declined to $33.9 million at
September 30, 1996 from $34.4 million at September 30, 1995.
NON-INTEREST INCOME. Non-interest income increased by $11.7 million, or 40.20%,
to $40.8 million in 1996 from $29.1 million in 1995. Contributing to the
improvement were increases in total fees and other income of $2.3 million, net
gains on sale activity of $6.7 million and the net gain on investment in real
estate and premises of $2.7 million. Total fees and other income increased by
$2.3 million, or 9.05%, to $28.3 million in 1996 from $26.0 million in 1995
primarily due to improvements in loan fees and service charges, loan servicing
fees and income from insurance and securities commissions. Loan fees and service
charges increased by $0.7 million, or 28.99%, to $3.2 million in 1996 from $2.5
million in 1995 primarily reflecting greater mortgage late charges and tax
search fees. Loan servicing fee income increased by $1.0 million, or 7.69%, to
$13.9 million in 1996 from $12.9 million in 1995. The growth in loan servicing
fees reflects the Company's strategy of increasing its mortgage servicing
portfolio which grew to $3.7 billion at September 30, 1996 from $2.6 billion at
September 30, 1995. Loan service fee income is reported net of the amortization
of mortgage servicing rights of $2.7 million and $1.4 million in 1996 and 1995,
respectively. See Note 7 of Notes to Consolidated Financial Statements. Income
from insurance and securities commissions increased by $0.8 million,
or 99.75%, to $1.6 million in 1996 from $0.8 million in 1995 reflecting the
Company's expansion of its delivery channels and its change to a new third party
provider of financial products and services during 1995. Net gains on sale
activity increased by $6.7 million to $8.3 million in 1996 from $1.6 million in
1995. The increase in net gains on sale activity reflects the Company's strategy
of periodically realizing profits in the Company's loan, securities available-
for-sale and funding portfolios. As interest rates changed during the year, the
Company realized profits in the
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Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
available-for-sale portfolios which resulted in increased liquidity and improved
the Company's ability to take advantage of higher yielding investments as they
became available. Net gains from sale activity varies from year to year based
on, among other things, the interest rate environment, alternative investment
opportunities and the Company's goals in managing its available-for-sale
portfolios. Further contributing to the improvement in net gains on sale
activity was the write-down during 1995 of $1.8 million stemming from the
Company's investment in Nationar, a failed bank service institution.
Net gain on investment in real estate and premises increased by $2.7 million to
$4.1 million in 1996 from $1.5 million in 1995 primarily reflecting the
disposition of ten non-strategic real estate investment properties. The
properties were not necessary to support the Company's core businesses and were
mostly the result of various business acquisitions.
NON-INTEREST EXPENSE. Non-interest expense increased by $30.5 million, or
29.67%, to $133.0 million in 1996 from $102.5 million in 1995. The primary
factors contributing to the increase were higher federal insurance costs and
greater compensation and benefit costs. Federal insurance costs increased by
$18.8 million during 1996 as compared with 1995 reflecting Congressional action
previously described to resolve disparities that had existed among the deposit
insurance funds. Beginning on January 1, 1997, the Company anticipates a
reduction in its deposit assessment rate from 23 basis points to 6.4 basis
points. Compensation and benefit costs increased by $6.6 million, or 12.69%, to
$58.0 million in 1996 from $51.4 million in 1995. The increase in compensation
and benefit costs primarily reflects the increase in the price of the Common
Stock and its impact on the Company's stock based benefit plans. Stock based
benefit plans costs increased to $7.1 million in 1996 from $4.0 million in 1995.
Beginning on January 1, 1997, the Company anticipates a reduction in its stock
based benefit costs as a result of plan modifications recently adopted. Further
contributing to the rise in compensation and benefit costs were normal salary
increases, retirement costs related to the retirement of the Company's president
and increases resulting from the expansion of our loan production centers.
Office occupancy and equipment costs increased by $2.1 million, or 11.24%, to
$20.6 million in 1996 from $18.5 million in 1995 primarily reflecting the
Company's continued technological investments to improve its information and
communication systems coupled with its recent acquisitions previously described.
Advertising costs increased by $1.2 million, or 26.63%, to $5.9 million in 1996
from $4.7 million in 1995 reflecting the Company's television advertising
campaign.
Other G&A costs increased by $1.5 million, or 8.84%, to $18.6 million in 1996
from $17.1 million in 1995. The increase principally reflects greater costs
stemming from increased loan volume and the expansion of the Company's mortgage
business in the mid-Atlantic states.
PROVISION FOR INCOME TAXES. The provision for income tax expense declined by
$6.1 million, or 20.53%, to $23.8 million in 1996 from $29.9 million in 1995,
primarily reflecting a lower level of taxable income in 1996. The effective tax
rate increased to 42.40% in 1996 from 40.72% in 1995 principally as a result of
the limitations placed on the tax deductibility of ESOP contributions that arise
from increases in the price of the Common Stock.
- --------------------------------------------------------------------------------
Comparison of Operating Results
for the Fiscal Years Ended September 30, 1995 and 1994
GENERAL. The Company realized net income of $43.5 million in fiscal 1995. For
the year ended September 30, 1994, the Company realized net income of $30.9
million prior to the benefit of the changes in accounting principles of
$8.6 million. The 1995 increase was principally attributable to an increase in
net interest income of $11.2 million, a reduction in the provision for possible
loan losses of $5.5 million, an increase in total non-interest income of $6.2
million and a reduction in the loss on real estate owned of $2.3 million, which
were partially offset by increased tax expense of $11.9 million.
INTEREST INCOME. Interest income was $321.2 million in 1995, an increase of
$49.0 million, or 18.03%, from $272.2 million in 1994. The increase is primarily
attributable to the earnings on the net proceeds from the initial public
offering ("IPO") which were invested during the entire 1995 year as compared
with only five and one-half months during 1994, the investment of additional
borrowed funds during 1995 at a positive interest rate spread and the rising
interest rate environment that existed during 1995. The increase in interest
rates resulted in a 56 basis point increase in the average yield on
interest-earning assets to 7.21% in 1995 from 6.65% in 1994. The funds received
from both the IPO and from additional borrowings were invested primarily in real
estate loans and MBS's and, as a result, interest income on real estate loans
and MBS's constituted approximately 87.31% and 83.38% of total interest income
for 1995 and 1994, respectively. Interest income on real estate loans increased
by $15.2 million in 1995 from 1994 as a result of an increase in average real
estate loans outstanding of $125.7 million coupled with an increase of 31 basis
points in the average yield on these loans to 8.13% in 1995 from 7.82% in 1994.
Interest income on MBS's increased by $38.3 million in 1995 from 1994 as a
result of an increase in average MBS's of $423.9 million coupled with an
increase of 63 basis points in the average yield to 6.44% in 1995 from 5.81% in
1994. Interest income on debt and
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<PAGE>
equity securities (including FHLB-NY stock) decreased by $1.4 million, or 5.90%,
to $22.4 million in 1995 from $23.8 million in 1994 reflecting a decrease in the
average balance outstanding of $90.6 million which was partially offset by an
increase of 79 basis points in the average yield to 5.72% in 1995 from 4.93% in
1994. The decline in the average balance reflects the temporary deployment of a
portion of the IPO funds in debt and equity securities at September 30, 1994 and
the redeployment of these funds into real estate loans and mortgage related
investments at September 30, 1995. Interest income on commercial and other loans
decreased by a total of $1.5 million, or 8.66%, to $15.8 million in 1995 from
$17.3 million in 1994. The decrease resulted principally from a $22.7 million,
or 16.12%, decrease in the average balance of these loans partially offset by a
109 basis point increase in the average yield on these loans. Interest income on
cash and cash equivalents decreased by $1.5 million, or 37.58%, to $2.6 million
in 1995 from $4.1 million in 1994 which reflects a decline of $70.3 million in
the average balance partially offset by an increase of 194 basis points in the
average yield. The decline in the average balance reflects the temporary
deployment of a portion of the IPO funds in cash and cash equivalents at
September 30, 1994 and the redeployment of these funds into real estate loans
and mortgage related investments at September 30, 1995.
INTEREST EXPENSE. Interest expense was $167.9 million in 1995, an increase of
$37.8 million, or 29.05%, from $130.1 million in 1994 primarily reflecting an
increase in the average balance of borrowed funds of $282.6 million coupled with
rising interest rates which resulted in a 123 basis point increase in the
average cost of borrowings. Interest expense on deposits increased as the rise
in interest rates contributed to a shift in consumer preference towards
certificate accounts and away from core accounts. Overall, interest expense on
total deposits increased $19.3 million, or 16.08%, to $139.6 million in 1995
from $120.3 million in 1994 and reflects a 62 basis point increase in the
average cost of deposits which was partially offset by an $85.8 million
reduction in average deposits outstanding. Although average deposits declined,
the ending balance increased by $5.7 million at September 30, 1995 as compared
to September 30, 1994 due to deposit inflows that occurred during the last
quarter of fiscal 1995. As interest rates rose during 1995, customer preference
towards short-term certificate accounts became prevalent and resulted in a
decline in the average balance of lower costing core deposits. Interest expense
on time deposits increased $30.8 million, or 54.16%, to $87.8 million in 1995
from $57.0 million in 1994 which reflects an increase in the average balance of
certificate accounts of $330.4 million, or 25.49%, to $1.6 billion in 1995 from
$1.3 billion in 1994. Interest expense on statement savings accounts decreased
by $5.3 million, or 20.06%, to $20.9 million in 1995 from $26.2 million in 1994
reflecting lower average balances of $207.1 million partially offset by a 12
basis point increase in the average cost. Interest expense on passbook accounts
decreased by $5.3 million, or 19.08%, to $22.4 million in 1995 from $27.7
million in 1994 reflecting lower average balances of $180.2 million coupled with
a decrease of 4 basis points in the average cost.
Interest expense on borrowed funds increased by $18.5 million, or 188.00%, to
$28.3 million in 1995 from $9.8 million in 1994. This increase reflects the
growth in the average balance of borrowed funds of $282.6 million, or 123.76%,
to $511.0 million in 1995 from $228.4 million in 1994 coupled with a 123 basis
point increase in the average cost to 5.53% in 1995 from 4.30% in 1994. In 1995,
interest expense also includes the amortization of premiums paid for interest
rate cap agreements in the amount of $0.3 million. No such agreements were in
effect during 1994. See Note 15 of Notes to Consolidated Financial Statements.
NET INTEREST INCOME. Net interest income was $153.3 million in 1995, an
increase of $11.2 million, or 7.93%, from $142.1 million in 1994. The increase
is attributable to an increase in net interest-earning assets of $169.2 million
which was partially offset by a decline in the net interest spread of 20 basis
points to 3.10% in 1995 from 3.30% in 1994. The reduction in the net interest
spread primarily reflects the rise in interest rates that occurred during 1995.
While further contributing to the decline in the net interest spread, the use of
additional borrowed funds enabled the Bank to increase net interest income. The
net interest margin declined slightly to 3.44% in 1995 from 3.47% in 1994 and
the ratio of interest-earning assets to interest-bearing liabilities increased
to 109.25% in 1995 from 105.36% in 1994.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses
decreased by $5.5 million, or 45.88%, to $6.5 million in 1995 from $12.0 million
in 1994. This decrease resulted from management's assessment of the loan
portfolio and the level of the Bank's allowance for possible loan losses. In
establishing the provision, management also considered the overall decrease in
net charge-offs which have declined three consecutive years to $7.8 million in
1995 from $10.2 million and $45.5 million in 1994 and 1993, respectively. In
addition, management assessed the local and regional economic and market
conditions as well as its continued attention to collection and workout efforts
with its borrowers. At September 30, 1995, the allowance for possible loan
losses declined marginally to $34.4 million from $35.7 million at September 30,
1994.
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Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
NON-INTEREST INCOME. Non-interest income is composed of fee income for bank
services, profits from the sale of assets and operating results from investment
in real estate and premises. Total fee income increased by $4.3 million, or
19.85%, to $26.0 million in 1995 from $21.7 million in 1994. The increase in fee
income was primarily due to increased loan servicing fees of $4.2 million as a
result of growth in the Company's loan servicing portfolio coupled with an
increase in the realization of fee income from the September 1993 sale of home
equity loans. Loan service fee income in 1995 and 1994 is reported net of the
amortization of mortgage servicing rights of $1.4 million and $0.6 million,
respectively. See Note 7 of Notes to Consolidated Financial Statements. Other
fee income increased by $1.0 million, or 36.47%, to $3.9 million in 1995 from
$2.9 million in 1994 primarily reflecting the settlement of a $0.9 million claim
that had arisen from a prior acquisition. The increases in loan service fee
income and other fee income were partially offset by reductions in loan fees and
service charges as well as a decline in income from insurance and securities
commissions. Loan fees and service charges declined by $0.5 million, or 17.55%,
to $2.5 million in 1995 from $3.0 million in 1994 reflecting lower prepayment
penalties and origination fees. Income from insurance and securities commissions
declined by $0.4 million, or 33.74%, to $0.8 million in 1995 from $1.2 million
in 1994 reflecting changes in customer preference away from annuities and
securities during the rising interest rate environment that existed during 1995.
Income from insurance and securities commissions was further impacted during
fiscal 1995 as the Company switched to a new third party provider of financial
products and services and realigned the goals of its personnel to further
complement the strategic initiatives of the Company. Net gains on sale activity
decreased by $0.3 million, or 14.69%, to $1.6 million in 1995 from $1.9 million
in 1994. Net gains (losses) from sales activity vary from year to year based on,
among other things, the interest rate environment, alternative investment
opportunities and the Company's goals in managing its available-for-sale
securities portfolio. Included in the net gains (losses) on sale activity during
1995 was a $1.8 million charge-off of the Company's investment in Nationar,
which was partially offset by an increase in net gains on the sale of loans and
MBS's. Net gain (loss) on investment in real estate and premises increased by
$2.2 million to $1.5 million in 1995 from a loss of $0.7 million in 1994. The
variance is primarily due to a $1.8 million write-down recorded in 1994 to
properly reflect the reduced carrying value of certain real estate that was held
for sale.
NON-INTEREST EXPENSE. Non-interest expense was $102.5 million in 1995, a
decrease of $1.5 million, or 1.44%, from $104.0 million in 1994. Contributing to
the overall decline was a reduction in the net loss on real estate owned which
was partially offset by an increase in total G&A expenses. The net loss on real
estate owned decreased by $2.3 million, or 55.82%, to a loss of $1.8 million in
1995 from a loss of $4.1 million in 1994. This decrease is principally
attributable to the completion of the Bulk Sale of real estate owned that was
finalized in the first quarter of fiscal 1994. Total G&A expenses increased by
$0.7 million, or 0.76%, to $100.7 million in 1995 from $100.0 million in 1994.
Contributing to the rise in G&A expenses were increased advertising expenses of
$1.1 million reflecting the expanding marketing efforts in the consumer banking
and mortgage businesses through the introduction of programs designed to
increase the Company's market presence. Further contributing to the rise in
total G&A expenses was an increase in other G&A expenses of $0.8 million, or
5.09%, to $17.1 million in 1995 from $16.3 million in 1994 which primarily
reflects the additional operational costs stemming from the acquisitions of
Entrust Financial Corporation ("Entrust") and Developer's Mortgage Corporation
("Developer's"). Entrust and Developer's also contributed to the rise in office
occupancy and equipment expense which increased by $0.6 million, or 3.49%, to
$18.5 million in 1995 from $17.9 million in 1994. Partially offsetting the
increase in total G&A expenses were reductions in federal insurance premiums and
compensation and benefit costs. Federal insurance premiums declined by $1.1
million, or 11.45%, reflecting the Company's success in reducing its SAIF
assessment rate during 1995. Compensation and benefit costs decreased by $0.7
million, or 1.29%, to $51.4 million in 1995 from $52.1 million in 1994 primarily
reflecting lower pension and insurance expenses of $3.5 million in fiscal 1995
which were partially offset by an increase in ESOP and MRP amortization of $2.6
million and costs associated with Entrust and Developer's of approximately $0.6
million.
PROVISION FOR INCOME TAXES. Income tax expense was $29.9 million in 1995, an
increase of $11.9 million, or 65.67%, from $18.0 million in 1994 primarily
reflecting a higher level of taxable income in 1995. In addition, the effective
tax rate increased to 40.72% in 1995 from 36.88% in 1994 principally as a result
of the partial reversal of the deferred tax valuation allowance in 1995 of $0.5
million as compared to $2.1 million in 1994.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Effective October 1, 1993,
the Company adopted SFAS 109. SFAS 109 requires a change from the deferred
method to the asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred tax assets and liabilities are recorded
to recognize the estimated future tax consequences of the differences between
the tax basis and financial reporting basis of the Company's assets and
liabilities. SFAS 109 requires the Company to take into account the effect of
changes in tax laws and rates on recorded assets and liabilities in the year of
enactment. While SFAS 109 allows for the recognition of deferred tax assets for
future deductible amounts, it also requires the establishment of a valuation
reserve to reduce deferred tax assets if it is "more likely than not" that the
related tax benefits will not be realized. The adoption of SFAS 109 was recorded
as a cumulative effect of change in accounting and resulted in a credit to
earnings of $19.4 million and an offsetting adjustment to the Company's net
deferred tax account.
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Effective October 1,1993, the Bank adopted SFAS 106. SFAS 106 changes the common
practice of accounting for non-pension postretirement benefits on a cash basis
to the recognition, on an accrual basis, of the expected cost of providing such
benefits to the employee and related beneficiaries and covered dependents during
the years that the employee provides services to the employer. The adoption of
SFAS 106 resulted in a cumulative charge to earnings of $10.7 million.
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Impact of Inflation and
Changing Prices
The consolidated financial statements have been prepared in accordance with
GAAP, which requires the measurement of financial position and operating results
in terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike industrial
companies, nearly all of the assets and liabilities of the Company are monetary
in nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
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Impact of New
Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS 121 is effective for fiscal years beginning after December 15, 1995
and establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. This statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review for
recoverability, the entity should estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows is less than the carrying amount of the asset, an
impairment loss should be recognized. This statement requires that long-lived
assets and certain identifiable intangibles to be disposed of be reported at the
lower of carrying amount or fair value less cost to sell, except for assets that
are covered by Accounting Principle Board Opinion No. 3, "Reporting the Results
of Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
Company does not currently expect SFAS 121 to have a significant effect on its
financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123 applies to
all transactions in which an entity acquires goods or services by issuing equity
instruments or by incurring liabilities where the payment amounts are based on
the entity's common stock price, except for employee stock ownership plans. SFAS
123 covers transactions with employees and non-employees and is applicable to
both public and non-public entities.
SFAS 123 establishes a new method of accounting for stock-based compensation
arrangements with employees. The new method is a fair value based method rather
than the intrinsic value based method that is contained in Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
SFAS 123 does not require an entity to adopt the new fair value based method for
purposes of preparing its basic financial statements. Entities are allowed (i)
to continue to use the APB 25 method or (ii) to adopt the SFAS 123 fair value
based method. SFAS 123 fair value based method is considered by the FASB to be
preferable to the APB 25 method, and thus, once the fair value based method is
adopted, an entity cannot change back to the APB 25 method. Also, the selected
method applies to all of an entity's compensation plans and transactions. For
entities not adopting the SFAS 123 fair value based method, SFAS 123 requires
the entity to display in the footnotes to the financial statements pro forma net
income and earnings per share information as if the fair value based method had
been adopted.
The accounting requirements of SFAS 123 are effective for transactions entered
into in fiscal years that begin after December 15, 1995, though they may be
adopted on issuance. The disclosure requirements are effective for financial
statements for fiscal years beginning after December 15, 1995, or for an earlier
fiscal year for which SFAS 123 is initially adopted for recognizing compensation
cost. Pro forma disclosures required for entities that elect to continue to
measure compensation cost using the APB 25 method must include the effects of
all awards granted in fiscal years that begin after December 15, 1994. Pro forma
disclosures for awards granted in the first fiscal year beginning after December
15, 1994, need not be included in financial statements for that fiscal year but
should be presented subsequently whenever financial statements for that fiscal
year are presented for comparative purposes with financial statements for a
later fiscal year. The Company does not currently expect SFAS 123 to have a
significant effect on its financial statements.
Page 29
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
In June 1996, the FASB issued Statement of Financial Accounting No. 125 ("SFAS
125"), "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. Under this approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes the financial assets when control
has been surrendered, and derecognizes liabilities when extinguished. This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. This
statement supersedes Statement of Financial Accounting Standards No. 76,
"Extinguishment of Debt," and No. 77, "Reporting by Transferors for Transfers of
Receivable with Recourse," and SFAS 122 and amends SFAS 115 and Statement of
Financial Accounting Standards No. 65, "Accounting for Certain Mortgage Banking
Activities."
The provisions of SFAS 125 are effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and is to be applied prospectively. Earlier or retroactive application is
not permitted. The Company is currently in the process of reviewing the effects
of SFAS 125.
- ------------------------------------------------------------------------------
Recent Federal and
New York State Bad
Debt Deduction
Legislation
Under Section 593 of the Internal Revenue Code of 1986 as amended ("Code"),
prior to January 1, 1996 thrift institutions such as the Bank which met certain
definitional tests primarily relating to their assets and the nature of their
business, were permitted to establish a tax reserve for bad debts. Such thrift
institutions were also permitted to make annual additions to the reserve to be
deducted in arriving at their taxable income within specified limitations. The
Bank's deduction was computed using an amount based on the Bank's actual loss
experience ("experience method"), or a percentage equal to 8% of the Bank's
taxable income ("PTI method"). Similar deductions for additions to the Bank's
bad debt reserve were also permitted under the New York State Bank Franchise Tax
and the New York City Banking Corporation Tax; however, for purposes of these
taxes, the effective allowable percentage under the PTI method was 32% rather
than 8%. See Note 17 of Notes to Consolidated Financial Statements.
Under the Small Business Job Protection Act of 1996 ("1996 Act"), signed into
law in August, 1996, Section 593 of the Code was amended. The Bank will be
unable to make additions to the tax bad debt reserves but will be permitted to
deduct bad debts as they occur. Additionally, the 1996 Act required institutions
to recapture (that is, include in taxable income) the excess of the balance of
its bad debt reserves as of December 31, 1995 over the balance of such reserves
as of December 31, 1987 ("base year"). The Bank's tax bad debt reserves at
December 31, 1995 exceeded its base year reserves by $2.7 million which will be
recaptured into taxable income ratably over a six year period. If certain
requirements are met the recapture may be deferred for up to two years. The base
year reserves will be subject to recapture, and the Bank could be required to
recognize a tax liability if (i) the Bank fails to qualify as a "bank" for
Federal income tax purposes; (ii) certain distributions are made with respect to
the stock of the Bank; (iii) the use by the Bank of bad debt reserves for any
purpose other than to absorb bad debt losses; and (iv) there is a change in
Federal tax law. Management is not aware of the occurrence of any such event.
In response to the Federal legislation, New York State tax law has been amended
to prevent the recapture of existing tax bad debt reserves and to allow for the
continued use of the PTI method to determine the bad debt deduction in computing
New York State tax liability. No such amendments have been made to date with
respect to New York City tax law. The Company cannot predict whether such
changes will be made or as to the form of the changes.
- ------------------------------------------------------------------------------
Private Securities
Litigation Reform
Act Safe Harbor
Statement
In addition to historical information, this Annual Report includes certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Bank's loan
and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices. Further description of the risks and uncertainties to the business are
included in detail in Item 1, "Business" of the Company's 1996 Form 10-K.
Page 30
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30,
- ----------------------------------------------------------------------------
1996 1995
-------- --------
ASSETS
Cash and cash equivalents (including interest-earning
assets of $37,357 and $10,850, respectively) $ 76,348 $ 67,410
Investment in debt and equity securities, net:
Held-to-maturity, net (estimated fair value of
$0 and $55,871, respectively) -- 55,839
Available-for-sale 180,650 233,408
Mortgage-backed securities, net:
Held-to-maturity (estimated fair value of
$21,120 and $1,339,014, respectively) 23,096 1,337,903
Available-for-sale 1,717,106 938,847
Stock in Federal Home Loan Bank of New York, at cost 40,754 35,132
Loans held for sale, net 57,969 49,372
Loans receivable held for investment, net:
Real estate loans, net 2,921,285 1,900,204
Commercial loans, net 7,810 8,706
Other loans, net 145,654 120,189
---------- ----------
Loans, net 3,074,749 2,029,099
Less allowance for possible loan losses (33,912) (34,358)
---------- ----------
Total loans receivable held for investment, net 3,040,837 1,994,741
Mortgage servicing rights, net 29,687 11,328
Office properties and equipment, net 89,279 86,239
Accrued interest receivable, net 32,962 31,752
Real estate owned 8,155 8,893
Investment in real estate, net 2,525 12,286
Prepaid expenses and other assets 64,423 38,472
---------- ----------
Total assets $5,363,791 $4,901,622
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $3,633,010 $3,573,529
Official checks outstanding 49,860 42,812
Borrowed funds 978,023 633,675
Mortgagors' escrow liabilities 64,232 71,400
Accrued expenses and other liabilities 119,572 54,032
---------- ----------
Total liabilities 4,844,697 4,375,448
Stockholders' equity:
Preferred stock ($0.01 par value, 5,000,000
shares authorized; none issued) -- --
Common stock ($0.01 par value, 45,000,000
shares authorized; 26,816,464 shares issued,
24,644,157 and 26,076,486 outstanding,
respectively) 268 268
Additional paid-in capital 304,027 298,518
Unallocated Employee Stock Ownership Plan (19,230) (21,443)
Unearned Management Recognition & Retention Plan (5,551) (7,071)
Unrealized gain on securities available-for-sale,
net of tax 6,633 6,947
Retained income--partially restricted 285,311 264,105
Treasury stock, at cost (2,172,307 and
739,978 shares, respectively) (52,364) (15,150)
---------- ----------
Total stockholders' equity 519,094 526,174
---------- ----------
Total liabilities and stockholders' equity $5,363,791 $4,901,622
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
Page 31
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the Year Ended September 30,
- ------------------------------------------------------------------------------
1996 1995 1994
-------- -------- --------
Interest income:
Real estate loans $185,241 $140,268 $125,069
Commercial loans 705 984 1,117
Other loans 14,845 14,840 16,208
Mortgage-backed securities 134,064 140,173 101,868
Debt and equity securities 16,716 24,950 27,895
-------- -------- --------
Total interest income 351,571 321,215 272,157
-------- -------- --------
Interest expense:
Deposits 155,830 139,641 120,293
Borrowed funds 41,346 28,255 9,811
-------- -------- --------
Total interest expense 197,176 167,896 130,104
-------- -------- --------
Net interest income 154,395 153,319 142,053
Provision for possible loan losses 6,200 6,470 11,955
-------- -------- --------
Net interest income after provision
for possible loan losses 148,195 146,849 130,098
Non-interest income:
Fees and other income:
Loan fees and service charges 3,217 2,494 3,025
Loan servicing fees 13,863 12,873 8,725
Income from insurance and securities
commissions 1,608 805 1,215
Deposit service fees 5,937 5,917 5,863
-------- -------- --------
Total fees income 24,625 22,089 18,828
Other income 3,718 3,903 2,860
-------- -------- --------
Total fees and other income 28,343 25,992 21,688
-------- -------- --------
Net gains (losses) on sale activity:
Net gains on loans and mortgage-backed
securities 7,993 3,562 2,623
Net gains (losses) on investment in
debt and equity securities 340 (1,924) (703)
-------- -------- --------
Total net gains on sale activity 8,333 1,638 1,920
Net gain (loss) on investment in
real estate and premises 4,118 1,467 (738)
-------- -------- --------
Total non-interest income 40,794 29,097 22,870
Non-interest expense:
General and administrative expense:
Compensation, payroll taxes and fringe
benefits 57,969 51,443 52,117
Advertising 5,940 4,691 3,552
Office occupancy and equipment 20,631 18,547 17,922
Federal insurance premiums 9,055 8,961 10,120
Other general and administrative
expense 18,612 17,101 16,272
-------- -------- --------
Total general and administrative
expense 112,207 100,743 99,983
SAIF special assessment 18,657 -- --
Net loss on real estate owned 2,090 1,790 4,052
-------- -------- --------
Total non-interest expense 132,954 102,533 104,035
-------- -------- --------
Income before income taxes and cumulative
effect of accounting changes 56,035 73,413 48,933
Provision for income taxes 23,760 29,897 18,046
-------- -------- --------
Income before cumulative effect of
accounting changes 32,275 43,516 30,887
Cumulative effect of changes in
accounting -- -- 8,648
-------- -------- --------
Net income $ 32,275 $ 43,516 $ 39,535
-------- -------- --------
-------- -------- --------
Primary earnings per common share(1) $ 1.33 $ 1.73 $ 0.70
-------- -------- --------
-------- -------- --------
Fully diluted earnings per common
share(1) $ 1.33 $ 1.71 $ 0.70
-------- -------- --------
-------- -------- --------
(1) For the year ended September 30, 1994, earnings per share was based upon
income earned during the period April 14, 1994 through September 30, 1994.
See accompanying notes to consolidated financial statements.
Page 32
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended September 30, 1996, 1995 and 1994
(In thousands, except share data)
<TABLE>
<CAPTION>
Unallocated Unearned Unrealized
Employee Management Gain(Loss) Retained
Additional Stock Recognition on Securities Income--
Common Paid-in Ownership & Retention Available- Partially Treasury
Stock Capital Plan Plan for-Sale Restricted Stock Total
________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1993 $ -- $ -- $ -- $ -- $19,913 $191,717 $ -- $211,630
Net income 39,535 39,535
Net proceeds from common
stock issued in
stock conversion 268 296,583 296,851
Acquisition of common stock
by ESOP and MRP (23,805) (8,927) (32,732)
Allocation/amortization of
ESOP and MRP stock
and related tax benefits 258 712 421 1,391
Change in unrealized losses
on securities available-
for-sale (net of tax of
$(17,600)) (22,966) (22,966)
---- ------- ------- ------- ------- ------- ------- -------
Balance at
September 30, 1994 268 296,841 (23,093) (8,506) (3,053) 231,252 -- 493,709
Net income 43,516 43,516
Allocation/amortization of ESOP
and MRP stock and related
tax benefits 1,254 1,650 1,435 4,339
Change in unrealized gains on
securities available-for-sale
(net of tax of $7,600) 10,000 10,000
Dividends (9,693) (9,693)
Repurchase of common stock
(886,000 shares) (17,812) (17,812)
Exercise of stock options
(146,022 shares) and related
tax benefits 423 (970) 2,662 2,115
---- ------- ------- ------- ------- ------- ------- -------
Balance at
September 30, 1995 268 298,518 (21,443) (7,071) 6,947 264,105 (15,150) 526,174
Net income 32,275 32,275
Allocation/amortization of ESOP
and MRP stock and related
tax benefits 4,358 2,213 1,520 8,091
Change in unrealized gains on
securities available-for-sale
(net of tax of $5,300) (7,048) (7,048)
Dividends (9,171) (9,171)
Repurchase of common stock
(1,611,554 shares) (42,043) (42,043)
Exercise of stock options
(179,225 shares) and related
tax benefits 1,151 (1,898) 4,829 4,082
Net unrealized gain on securities
reclassified as available-for-sale
(net of tax of $5,103) 6,734 6,734
---- -------- -------- ------- -------- -------- -------- --------
Balance at
September 30, 1996 $268 $304,027 $(19,230) $(5,551) $ 6,633 $285,311 $(52,364) $519,094
---- -------- -------- ------- -------- -------- -------- --------
---- -------- -------- ------- -------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 33
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Year Ended September 30,
___________________________________________________________________________________________
1996 1995 1994
---------- --------- ----------
<S> <C> <C> <C>
Operating activities:
Net income $ 32,275 $ 43,516 $ 39,535
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 6,200 6,470 11,955
Write-off of real estate owned and investment
in real estate 490 581 2,633
Gains on sale of real estate owned, net (334) (484) (584)
Depreciation and amortization 10,988 8,352 6,487
Capitalized mortgage servicing rights, net (5,900) (1,969) --
Amortization of premiums, net of accretion of
discounts-debt, equity and mortgage-backed
securities 1,909 (972) (1,147)
Amortization of premiums, net of accretion of
discounts-purchase accounting 227 (1,550) (1,822)
Employee Stock Ownership Plan/Management
Recognition & Retention Plan expense 7,331 4,130 1,391
Cumulative effect of changes in accounting -- -- (8,648)
Gains on sales of loans and mortgage-backed
securities, net (7,993) (3,562) (2,623)
Originations of loans held-for-sale, net of
proceeds from sales (2,448) (40,054) 143,082
(Gains) losses on sales of debt and equity
securities, net (291) 46 703
Provision for (gain) loss on investment in debt
and equity securities (49) 1,878 --
Increase in accrued interest receivable (1,210) (4,206) (1,254)
Increase in accrued and other liabilities 65,540 10,510 11,766
Increase in official checks outstanding 7,048 17,932 151
Increase in prepaids and other assets (13,974) (2,764) (11,984)
Net (decrease) increase in unearned income (7,927) (1,669) 2,051
---------- --------- ----------
Net cash provided by operating activities 91,882 36,185 191,692
---------- --------- ----------
Investing activities:
Proceeds from sales of debt and equity
securities, available-for-sale 139,099 48,836 117,414
Proceeds from sales of mortgage-backed
securities, available-for-sale 485,195 286,674 696,830
Proceeds from maturities of and principal
payments on debt and equity securities 411,319 972,775 1,828,066
Proceeds from redemption of Federal Home Loan
Bank stock -- -- 11,697
Principal payments on mortgage-backed securities 566,421 360,416 404,860
Purchases of debt and equity securities,
available-for-sale (441,359) (861,877) (1,951,159)
Purchases of debt and equity securities,
held-to-maturity -- (7,128) (78,288)
Purchases of Federal Home Loan Bank stock (5,622) (4,372) --
Purchases of mortgage-backed securities,
available-for-sale (154,185) (341,831) (865,353)
Purchases of mortgage-backed securities,
held-to-maturity -- (365,103) (939,600)
Originations and purchases of loans held-for-
investment, net of principal payments (1,413,321) (521,512) 101,959
Proceeds from sale of real estate owned,
office properties and equipment 12,964 10,439 32,038
Purchases of office properties and equipment (15,023) (12,562) (5,534)
Purchase of mortgage servicing rights (15,159) (10,071) (444)
---------- --------- ----------
Net cash used by investing activities (429,671) (445,316) (647,514)
---------- --------- ----------
Financing activities:
Net decrease in demand deposits, NOW
accounts and savings accounts (58,718) (444,864) (158,968)
Net (decrease) increase in mortgagors' escrow
accounts (7,168) 10,211 673
Net increase in certificates of deposit 118,199 450,578 109,175
Costs to repurchase common stock (42,043) (17,812) --
Proceeds from the exercise of stock options 2,070 1,677 --
Cash dividends paid on common stock (9,961) (7,892) --
Net (decrease) increase in short-term
borrowings (277,461) (60,022) 130,522
Net increase in long-term borrowings 621,809 368,675 150,000
Net funds received for subscription of Long
Island Bancorp Inc. common stock -- -- 264,220
---------- --------- ----------
Net cash provided by financing activities 346,727 300,551 495,622
---------- --------- ----------
Increase (decrease) in cash and cash
equivalents 8,938 (108,580) 39,800
Cash and cash equivalents at the beginning
of the year 67,410 175,990 136,190
---------- --------- ----------
Cash and cash equivalents at the end of the
year $ 76,348 $ 67,410 $ 175,990
---------- --------- ----------
---------- --------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the years for:
Interest on deposits and borrowed funds $ 195,089 $ 164,239 $ 127,772
---------- --------- ----------
---------- --------- ----------
Income taxes $ 27,465 $ 20,245 $ 10,150
---------- --------- ----------
---------- --------- ----------
Non-cash investing activities:
Additions to real estate owned, net $ 10,001 $ 10,312 $ 12,699
---------- --------- ----------
---------- --------- ----------
Securitization of loans $ 358,786 $ 143,679 $ --
---------- --------- ----------
---------- --------- ----------
SFAS 115 Transfer $1,307,472 $ -- $ --
---------- --------- ----------
---------- --------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 34
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(1)
BASIS OF
PRESENTATION AND
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements have been prepared
in conformity with generally accepted accounting principles ("GAAP") and include
the accounts of Long Island Bancorp, Inc. ("Holding Company") and its direct
wholly-owned subsidiary The Long Island Savings Bank, FSB ("Bank"). While the
following footnotes include the collective results of the Holding Company and
the Bank (collectively "Company"), these footnotes primarily reflect the Bank's
activities. All significant intercompany accounts and transactions have been
eliminated.
As more fully described in Note 2, the Bank converted from a federally chartered
mutual savings bank to a federally chartered stock savings bank ("Conversion")
during the fiscal year ended September 30, 1994. The Holding Company was
organized for the purpose of acquiring all of the capital stock of the Bank
pursuant to the Conversion, and is subject to the financial reporting
requirements of the Securities Exchange Act of 1934, as amended.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of each consolidated statement of financial condition
and the related consolidated statement of operations for the year then ended.
Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
CASH AND CASH EQUIVALENTS. For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and short-term loans to
commercial banks with original terms to maturity of less than three months.
DEBT, EQUITY AND MORTGAGE-BACKED SECURITIES. In accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS 115") "Accounting for Certain
Investments in Debt and Equity Securities", the Company is required to classify
and report debt, readily-marketable equity, and mortgage-backed securities
("MBS's") in one of the following categories: (i) "held-to-maturity" (management
has a positive intent and ability to hold to maturity) which are to be reported
at amortized cost, adjusted in the case of debt securities for the amortization
of premiums and accretions of discounts; (ii) "trading" (held for current
resale) which are to be reported at fair value, with unrealized gains and losses
included in earnings; and (iii) "available-for-sale" (all other debt and equity
securities and MBS's) which are to be reported at fair value, with unrealized
gains and losses excluded from earnings and reported net of tax as a separate
component of stockholders' equity.
Effective November 1995, the Financial Accounting Standards Board ("FASB")
issued a Special Report on SFAS 115 providing a one-time reassessment that
allowed entities, concurrent with the initial adoption of the implementation
guidance but no later than December 31, 1995, to reassess the appropriateness of
the classifications of all securities held at that time. The reassessment of the
Company's portfolio resulted in MBS's and debt securities in the amounts of $1.2
billion and $78.6 million, respectively, previously classified as
held-to-maturity, to be classified as available-for-sale, and resulted in an
increase of $6.7 million, net of tax, to stockholders' equity.
Premiums and discounts on debt securities and MBS's are amortized to expense and
accreted to income over the estimated life of the respective security using the
level-yield method. Gains and losses on the sales of securities are recognized
on realization.
REAL ESTATE AND OTHER LOANS. Purchased loans are recorded at cost. Related
premiums or discounts are amortized to expense or accreted to income primarily
using the level-yield method over the estimated life of the loans.
Discounts on other loans are accreted to income over the term of the loans
primarily using the simple-interest method of accounting which calculates
interest income based upon the outstanding loan balance.
Accrual of interest on potential problem loans is excluded from income primarily
after a delinquency of 90 days or when, in the opinion of management, such
suspension is warranted.
Loans held for sale are carried at the aggregate lower of cost or market value.
In May 1993, Statement of Financial Accounting Standards No. 114 ("SFAS 114"),
"Accounting by Creditors for Impairment of a Loan" was issued. The statement is
effective for financial statements for fiscal years beginning after December 15,
1994. According to SFAS 114, impairment is measured based upon the present value
of expected future cash flows or fair value of the loan's collateral. In October
1994, Statement of Financial Accounting Standards No. 118 ("SFAS 118"),
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures" was issued. SFAS 118 is also effective for fiscal years beginning
after December 15, 1994 and amends SFAS 114 to allow a creditor to use existing
methods for recognizing interest income on an impaired loan. This statement also
amends the disclosure requirements of SFAS 114 to require information about the
recorded investment in certain impaired loans and about how a creditor
recognizes interest income related to those impaired loans. The Company's
adoption of SFAS 114 and SFAS 118 on October 1, 1995 did not have a material
impact on its financial condition or results of operations because consumer
residential mortgages and installment loans are generally excluded from the
scope of the statements.
Page 35
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
In May 1995, Statement of Financial Accounting Standards No. 122 ("SFAS 122"),
"Accounting for Mortgage Servicing Rights" was issued. SFAS 122 is effective for
fiscal years beginning after December 15, 1995. The statement amends Statement
of Financial Accounting Standards No. 65 ("SFAS 65"), "Accounting for Certain
Mortgage Banking Activities," to require that a mortgage banking enterprise
recognize as separate assets rights to service mortgage loans for others,
however acquired. For mortgage servicing rights ("MSR's") that are created
through the origination of mortgage loans, and where the loans are subsequently
sold or securitized with servicing rights retained, the statement requires that
the total cost of the mortgage loans should be allocated to the MSR's and the
loans based on their relative fair values. The statement also requires the
assessment of capitalized MSR's for impairment to be based on the current fair
value of those rights and recognized through a valuation allowance. The
Company's adoption of SFAS 122 on July 1, 1995 did not have a material impact on
its financial condition or results of operations.
ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for possible loan losses is
based on a periodic analysis of the loan portfolio and reflects an amount which,
in management's judgment, is adequate to provide for possible loan losses in the
existing portfolio. In evaluating the portfolio, management takes into
consideration numerous factors such as the Company's loan growth, prior loss
experience, present and potential risks of the loan portfolio and current
economic conditions. Provisions for possible losses on loans are charged to
operations. Loans are charged-off against the allowance for possible loan losses
when the collectability of loan principal is unlikely. Recoveries of loans
previously charged-off are credited to the allowance.
COMMITMENT AND LOAN ORIGINATION FEES. Non-refundable commitment fees and other
loan origination fees received for commitments to make or purchase loans are
netted against the costs of originating such loans and the net fee is deferred.
The deferred amount is accreted into income over the life of the loan using the
level-yield method. The direct origination costs subject to deferral are
captured in the form of a standard cost on successful loan originations and
recorded as reductions to the applicable expense categories. These procedures
are in compliance with Statement of Financial Accounting Standards No. 91 ("SFAS
91"), "Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases."
OFFICE PROPERTIES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS. Office properties and
equipment are stated at cost less accumulated depreciation. Depreciation is
computed on a straight-line method over the estimated useful lives of the
assets. Estimated lives vary from 20 to 50 years on buildings and 3 to 25 years
on furniture and fixtures. Leasehold improvements are stated at cost less
accumulated amortization. Amortization is computed on the straight-line method
over the term of the respective lease or the life of the improvement, whichever
is shorter.
REAL ESTATE OWNED. Real estate owned ("REO") represents real estate acquired
through foreclosure or deed in lieu of foreclosure and is recorded at the lower
of cost or market, based on estimated fair value at the time of foreclosure.
Thereafter REO is carried at the lower of the new cost basis or fair value less
estimated costs to sell in accordance with American Institute of Certified
Public Accountants ("AICPA") Statement of Position 92-3 ("SOP 92-3"),
"Accounting for Foreclosed Assets." Cost represents the unpaid loan balance at
the acquisition date plus expenses, when appropriate, incurred to bring the
property to a saleable condition. Subsequent declines in estimated fair value,
certain costs relating to holding the properties, and gains or losses resulting
from the disposition of properties are recognized in the current period's
operations.
IMPACT OF CHANGES IN ACCOUNTING STANDARDS. In June 1996, Statement of Financial
Accounting No. 125 ("SFAS 125"), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" was issued. The Statement
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996 and is to be applied
prospectively. Earlier or retroactive application is not permitted. SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. Under
this approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered and derecognizes
liabilities when extinguished. This statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. This statement supersedes Statement of Financial
Accounting Standards No. 76, "Extinguishment of Debt," and No. 77, "Reporting by
Transferors for Transfers of Receivables with Recourse," and SFAS 122 and amends
SFAS 115 and SFAS 65. The Company is currently in the process of reviewing SFAS
125.
FEDERAL INCOME TAXES. The Holding Company files a consolidated Federal income
tax return with its subsidiary. The Holding Company also files a combined New
York State and New York City tax return with its subsidiary and an annual report
with the State of Delaware. In addition, the Bank files tax returns in those
states that it maintains lending operations.
Page 36
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
The Company adopted Statement of Financial Accounting Standards No. 109 ("SFAS
109"), "Accounting for Income Taxes" effective October 1, 1993. SFAS 109
requires the use of the liability method in accounting for income taxes whereby,
among other effects, deferred taxes are provided for all temporary differences
between financial statement carrying amounts and the tax basis of assets and
liabilities, and the effect of tax rate changes are included in income in the
period of enactment. This statement changed the Company's method of accounting
for income tax expense, since it provided significantly less restrictive
criteria for the recognition of deferred tax assets. Deferred tax assets are to
be recognized for temporary differences that will result in deductible amounts
in future years and for tax loss carryforwards, if, in the opinion of
management, it is "more likely than not" that the deferred tax assets will be
realized. SFAS 109 requires companies to set up a valuation allowance for that
component of net deferred tax assets which does not meet the "more likely than
not" criterion for realization.
EMPLOYEE BENEFITS. Effective April 14, 1994, the date of Conversion, the Company
adopted the provisions of AICPA Statement of Position 93-6 ("SOP 93-6"),
"Employers' Accounting for Employee Stock Ownership Plans." In accordance with
SOP 93-6, compensation expense is recorded at an amount equal to the shares
allocated by an Employee Stock Ownership Plan ("ESOP") multiplied by the average
fair value of the allocated shares during the period. For the years ended
September 30, 1996 and 1995, compensation expense attributable to the ESOP was
$5.0 million and $2.5 million, respectively. For the period April 14, 1994 to
September 30, 1994, compensation expense attributable to the ESOP was $1.0
million.
For earnings per share ("EPS") and other per-share disclosure, ESOP shares that
have been committed to be released are considered to be outstanding. ESOP shares
that have not been committed to be released are excluded from outstanding shares
with respect to calculations of EPS. The Company recognizes compensation expense
ratably over the year for the ESOP shares to be allocated each December 31st.
The Company accrues the associated employee compensation expense for the ESOP
shares on a monthly basis based upon the Company's current estimate of the
number of shares expected to be allocated by the ESOP during each calendar year.
Additionally, as the ESOP shares are accrued for, they are reported at the
average fair value of the shares during the month. The difference between the
fair value and the cost of the shares allocated by the ESOP is treated as an
adjustment to additional paid-in capital.
The Company adopted Statement of Financial Accounting Standards No. 106 ("SFAS
106"), "Employers' Accounting for Postretirement Benefits Other Than Pensions"
effective October 1, 1993. The principal effect of SFAS 106 was to require
accruals during the years employees render service to earn postretirement
benefits such as health care and life insurance for themselves, their
beneficiaries, and covered dependents instead of recognizing an expense when
benefits are paid. Upon adopting SFAS 106, the Company recognized its transition
obligation as a one-time charge against income in the amount of $10.7 million
which is reflected in the fiscal 1994 Consolidated Statements of Operations as a
cumulative effect of a change in accounting principle.
In October 1995, Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation" was issued. SFAS 123 applies to
all transactions in which an entity acquires goods or services by issuing equity
instruments or by incurring liabilities where the payment amounts are based on
the entity's common stock price, except for employee stock ownership plans. SFAS
123 covers transactions with employees and non-employees and is applicable to
both public and non-public entities.
SFAS 123 establishes a new method of accounting for stock-based compensation
arrangements with employees. The new method is a fair value based method rather
than the intrinsic value based method that is contained in Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
SFAS 123 does not require an entity to adopt the new fair value based method for
purposes of preparing its basic financial statements. Entities are allowed (i)
to continue to use the APB 25 method or (ii) to adopt the SFAS 123 fair value
based method. SFAS 123 fair value based method is considered by the FASB to be
preferable to the APB 25 method, and thus, once the fair value based method is
adopted, an entity cannot change back to the APB 25 method. Also, the selected
method applies to all of an entity's compensation plans and transactions. For
entities not adopting the SFAS 123 fair value based method, SFAS 123 requires
the entity to display in the footnotes to the financial statements pro forma net
income and EPS information as if the fair value based method had been adopted.
The accounting requirements of SFAS 123 are effective for transactions entered
into in fiscal years that begin after December 15, 1995, though they may be
adopted on issuance. The disclosure requirements are effective for financial
statements for fiscal years beginning after December 15, 1995, or for an earlier
fiscal year for which SFAS 123 is initially adopted for recognizing compensation
cost. Pro forma disclosures required for entities that elect to continue to
measure compensation cost using the APB 25 method must include the effects of
all awards granted in fiscal years
Page 37
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
that begin after December 15, 1994. Pro forma disclosures for awards granted in
the first fiscal year beginning after December 15, 1994 need not be included in
financial statements for that fiscal year but should be presented subsequently
whenever financial statements for that fiscal year are presented for comparative
purposes with financial statements for a later fiscal year. The Company does not
currently expect SFAS 123 to have a significant effect on its financial
condition and results of operations.
EARNINGS PER SHARE OF COMMON STOCK. Primary EPS is calculated by dividing
income by the sum of the weighted average number of shares of Common Stock of
the Holding Company ("Common Stock") outstanding and the average number of
shares issuable under the Company's stock benefit plans that have a dilutive
effect measured under the treasury stock method. Fully diluted EPS is calculated
by dividing income by the sum of the weighted average number of shares of Common
Stock outstanding and the maximum dilutive effect of shares issuable under the
Company's stock benefit plans. The maximum dilutive effect is computed using the
period end fair market value of the Company's stock, if it is higher than the
average market price during the period used in calculating primary EPS. For the
years ended September 30, 1996 and 1995, the total weighted average number of
shares of Common Stock outstanding and the weighted average number of shares
issuable under the Company's stock benefit plans for the primary EPS
calculations were 24,220,480 and 25,088,089 and for the fully diluted EPS
calculations were 24,277,013 and 25,446,588, respectively. EPS is not presented
for periods prior to the completion of the Conversion (which periods included
the cumulative effect of changes in accounting). For the period April 14 through
September 30, 1994 the weighted average number of shares of Common Stock
considered to be outstanding was 24,390,480 and net income was approximately
$17.1 million. The average number of shares issuable under the Company's stock
benefit plans was not included in the calculation due to its immaterial dilution
of EPS.
INTEREST RATE CAP AGREEMENTS. Premiums paid for interest rate cap agreements
are amortized as additional interest expense over the term of the contract.
Unamortized premiums are included in Prepaid expenses and other assets in the
Consolidated Statements of Financial Condition. Amounts receivable under
interest rate cap agreements are reflected as a reduction to interest expense
(see Note 15).
OTHER OFF-BALANCE SHEET INSTRUMENTS. In the ordinary course of business the
Bank has entered into off-balance sheet financial instruments consisting of
commitments to extend credit, standby letters of credit, and
commitments to buy and sell loans. Such financial instruments are recorded in
the financial statements when they are funded or related fees are incurred or
received.
_______________________________________________________________________________
(2)
CONVERSION TO
STOCK FORM OF
OWNERSHIP
On April 14, 1994, the Holding Company completed the issuance and sale of
26,816,464 shares of Common Stock, at a price of $11.50 per share, through an
Initial Public Offering ("IPO") to the Bank's depositors and the Bank's stock
benefit plans. Approximately $164.0 million was contributed by the Holding
Company to the Bank in exchange for 100% of the shares issued and outstanding of
the Bank's common stock. Of the 26,816,464 shares issued, the Bank's ESOP and
Management Recognition and Retention Plans ("MRP") purchased 2,070,000 and
776,250 shares, respectively, at $11.50 per share. The Holding Company recorded
$296.9 million of net proceeds from this offering and utilized $32.7 million to
purchase shares for the ESOP and MRP. The financial position and results of
operations of the Holding Company only, as of and for the years ended September
30, 1996 and 1995 and the period from the Conversion through September 30, 1994
are presented in Note 25.
The Conversion was accomplished through amendment of the Bank's Federal charter
and the sale of Common Stock in an amount equal to the consolidated pro forma
market value of the Holding Company and the Bank after giving effect to the
Conversion. A subscription offering of the shares of Common Stock was offered
initially to employee benefit plans of the Bank, depositors and to certain other
eligible subscribers.
At the time of Conversion, the Bank was required by the Office of Thrift
Supervision ("OTS") to establish a liquidation account which will be reduced to
the extent that eligible account holders reduce their qualifying deposits. The
balance of the liquidation account at September 30, 1996 and 1995 was $77.8
million and $93.5 million, respectively. In the unlikely event of a complete
liquidation of the Bank, each eligible account holder will be entitled to
receive a distribution from the liquidation account. The Bank is not permitted
to declare or pay a dividend on or to repurchase any of its capital stock if the
effect would be to cause the Bank's regulatory capital to be reduced below the
amount required for the liquidation account. Unlike the Bank, the Holding
Company is not subject to OTS regulatory restrictions on the declaration or
payment of dividends to its stockholders, although the source of such dividends
could depend upon dividend payments from the Bank. The Holding Company is
subject, however, to the requirements of Delaware law, which generally limit
dividends to an amount equal to the excess of its net assets (the amount by
which total assets exceed total liabilities) over its stated capital or, if
there is no such excess, to its net profits for the current and/or immediately
preceding fiscal year.
Page 38
<PAGE>
(3)
BUSINESS
COMBINATIONS
FISCAL 1996. In June 1996, the Company acquired two mortgage origination
offices located in Pennsylvania and North Carolina from Fleet Mortgage Company,
and in August 1996 the Company acquired First Home Mortgage of Virginia, Inc.
("First Home"). The acquisitions were completed to continue the expansion of the
Company's mortgage origination activities. The acquisition of First Home, which
did not involve significant tangible assets, was accounted for using the
purchase method of accounting and resulted in goodwill at September 30, 1996 of
$2.7 million which is being amortized on a straight line basis over 15 years
from the date of acquisition. The goodwill is reported as a component of Prepaid
expenses and other assets in the Consolidated Statements of Financial Condition
and the amortization is reported as a component of Other general and
administrative ("G&A") expense in the Consolidated Statements of Operations.
PRIOR TO FISCAL 1996. In November 1994, the Company acquired the $630.0 million
conventional servicing portfolio and eleven lending offices of Entrust Financial
Corporation ("Entrust") and the retail lending office of Developer's Mortgage
Corporation ("Developer's"). The operations of Entrust and Developer's were
merged into the Bank and, at September 30, 1996, the recorded investment in
MSR's stemming from these acquisitions was $6.3 million. The acquisitions were
designed to expand the Company's mortgage production capabilities by extending
its lending area to include Pennsylvania, Delaware, Maryland, Virginia and
Georgia. The acquisitions, which did not involve significant tangible assets,
were accounted for using the purchase method of accounting and resulted in
goodwill at September 30, 1996 and 1995 of $2.6 million and $2.8 million,
respectively, which is being amortized on a straight line basis over 15 years
from the date of acquisition. The goodwill is reported as a component of Prepaid
expenses and other assets in the Consolidated Statements of Financial Condition
and the amortization is reported as a component of Other G&A expense in the
Consolidated Statements of Operations.
On April 29, 1986, with the assistance of the Federal Savings and Loan Insurance
Corporation ("FSLIC"), The Long Island Savings Bank, FSB ("Syosset") acquired
Flushing Federal Savings and Loan Association ("Flushing Federal"). Flushing
Federal operated eight branches located in Queens, Nassau and Suffolk Counties.
On August 17, 1983, Syosset acquired all the outstanding stock of The Long
Island Savings Bank of Centereach FSB ("Centereach"), formerly Suffolk County
Federal Savings and Loan Association pursuant to an assistance agreement with
the FSLIC ("Assistance Agreement"). Centereach operated thirty-six branches
located primarily in Nassau and Suffolk Counties.
The aforementioned acquisitions were accounted for as purchases. Under the
purchase method of accounting, all assets and liabilities acquired were adjusted
to their estimated fair value as of the date of acquisition and the resultant
discounts or premiums were being accreted or amortized to income over the
expected economic life of the related asset or liability, using the level-yield
method. The excess of cost over the fair value of net assets acquired for the
transactions totalled approximately $625.4 million and $31.4 million for
Centereach and Flushing Federal, respectively. These amounts were being
amortized in accordance with GAAP over 40 and 25 years, respectively. In
connection with the 1993 merger discussed below the Company reviewed its
accounting policies and procedures. Based on this review and in light of
government action (see Note 4), the Company decided to revise its past
accounting practices relating to the amortization of goodwill to match the
amortization period of Centereach's goodwill with the average life of the
interest-earning assets acquired, in accordance with Statement of Financial
Accounting Standards No. 72 ("SFAS 72"), "Accounting for Certain Acquisitions of
Banking or Thrift Institutions." The principal effect of adopting SFAS 72
effective October 1, 1992 was to reallocate the amortization of Centereach's
goodwill so that a greater portion of such goodwill cost was amortized in
earlier years.
On September 3, 1993, with the approval of its primary regulator, the OTS,
Syosset was merged into Centereach and its name was simultaneously changed to
The Long Island Savings Bank, FSB. This voluntary merger was the result of the
need to achieve compliance with current regulatory capital standards which, as
construed by OTS, do not permit the inclusion of goodwill in calculating
capital. The merger of Syosset and Centereach also involved an approximately
$1.0 billion reduction in asset size from the sale of ten branches ("Deposit
Sale Transaction") with approximately $836.3 million in deposit liabilities and
certain assets. The Deposit Sale Transaction, which closed on September 3, 1993,
resulted in a net gain of approximately $6.6 million. As a result of the
significant restructuring activities which occurred during fiscal 1993,
principally the downsizing of the Company through branch deposit and asset
sales, which included branch deposits and assets acquired in previous business
combinations, the merger of Syosset and Centereach, as well as prior year sales
of branch deposits and assets acquired in the previous business combinations,
management determined that the value of the remaining goodwill was substantially
diminished. Accordingly, in the fourth quarter of fiscal 1993, the remaining
goodwill balance was written-off. The elimination of goodwill from the Company's
financial statements is without prejudice to the Company's lawsuit against the
government (see Note 4).
Page 39
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
_______________________________________________________________________________
(4)
REGULATORY
MATTERS--
THE BANK
The Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") of
1989 imposed more stringent capital requirements upon the Bank than those
previously in effect. These capital regulations contain provisions for capital
standards that require the Bank to have minimum regulatory tangible capital
equal to 1.5% of total assets and a minimum 3% leverage capital ratio. The
ability to include qualifying supervisory goodwill for purposes of the leverage
capital ratio requirement was phased out on January 1, 1995. Additionally, the
Bank is required to meet a risk-based capital requirement. The risk-based
capital rule requires that core capital plus supplementary capital equal 8%. The
capital standards are also required to be no less stringent than standards
applicable to national banks. In that regard, the Federal regulatory agencies
and the OTS periodically propose modifications to applicable capital standards
which, if adopted, could impact the Bank's capital requirements.
At September 30, 1992 the Bank reported to OTS as two separate entities. On a
stand-alone basis, Syosset exceeded the capital requirements of FIRREA at
September 30, 1992. However, Centereach, then a wholly-owned subsidiary of
Syosset, did not meet any of the three required FIRREA capital ratios, as
interpreted by OTS, and had negative tangible capital, as defined in the
regulations, of approximately $109.2 million at September 30, 1992 (unaudited).
Centereach submitted a Capital Plan ("Capital Plan") to the OTS, which the
agency approved, that outlined steps Centereach could take to attain the levels
of regulatory capital required by the government and not withstanding government
action described below. Failure to meet the capital requirements of FIRREA and
the interim capital targets included in its Capital Plan exposed Centereach to
possible regulatory sanctions. In response to the need to comply with capital
standards and to avoid possible regulatory sanctions, the Bank completed the
merger discussed in Note 3. A merger or similar transaction by Centereach was
required by the timetable of, and specifically contemplated in, the Capital
Plan. At September 30, 1993 the newly merged The Long Island Savings Bank, FSB
exceeded the three required FIRREA capital ratios and the OTS terminated the
Capital Plan. There is no supervisory goodwill remaining on the Bank's books.
The mandated exclusion from regulatory capital of supervisory goodwill on the
books of Centereach was the reason for its inability to meet the FIRREA capital
standards. The inclusion of goodwill as an asset to be amortized over forty
years for regulatory purposes was specified in the Assistance Agreement related
to the acquisition. On August 15, 1989, the Bank filed suit against the United
States seeking damages and/or other appropriate relief on the grounds, among
others, that the government had breached the terms of the Assistance Agreement.
The Assistance Agreement, among other things, provided for the inclusion of
supervisory goodwill as an asset on Centereach's balance sheet to be included in
capital and amortized over 40 years for regulatory purposes. The suit is pending
before Chief Judge Loren Smith in the United States Court of Federal Claims and
is entitled The Long Island Savings Bank, FSB et al. vs the United States. The
case had been stayed pending disposition by the United States Supreme Court of
three related supervisory goodwill cases (the Winstar cases). On July 1, 1996
the Supreme Court ruled in the Winstar cases the government had breached its
contracts with the Winstar parties and was liable in damages for those breaches.
On September 18, 1996 Judge Smith issued an Omnibus Management Order ("Case
Management Order") applicable to all Winstar-related cases. The Case Management
Order addresses certain timing and procedural matters with respect to the
administration of the Winstar-related cases, including organization of the
parties, initial discovery, initial determinations regarding liability and the
resolution of certain common issues. The Case Management Order provides that the
parties will attempt to agree upon a Master Litigation Plan, which may be in
phases, to govern all further proceedings, including the resolution of common
issues (other than common issues covered by the Case Management Order),
dispositive motions, trials, discovery schedules, protocols for depositions,
document production, expert witnesses, and other matters.
Subsequent to September 30, 1996 the Bank filed a motion for summary judgment on
liability. Pursuant to the schedule set forth in the Case Management Order,
within sixty days of the filing of the motion, the government must file a
response with respect to whether a contract exists and whether the government
acted inconsistently with the contract. Within 120 days of filing of the motion,
the government must set forth any defenses it knows or has reason to know that
relate to these two issues.
In its complaint, the Bank did not specify the amount of damages it was seeking
from the United States. There have been no decisions determining damages in the
Winstar cases or any of the Winstar-related cases. The Bank is unable
to predict the outcome of its claim against the United States and the amount of
damages that may be awarded to the Bank, if any, in the event that judgment is
rendered in the Bank's favor. Consequently, no assurances can be given as to the
results of this claim or the timing of any proceedings in relation thereto.
The Bank is subject to various regulatory capital requirements administered by
the banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory--and possible additional discretionary--actions by regulators
that, if undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action ("PCA"), the Bank must meet specific
Page 40
<PAGE>
capital guidelines that involve qualitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital
to average assets. Management believes that the Bank meets all capital adequacy
requirements to which it is subject as of September 30, 1996.
As of September 30, 1996 the most recent notification from OTS categorized the
Bank as "well-capitalized" under the regulatory framework for PCA. An
institution is deemed "well-capitalized" if (a) its risk-based capital is 10% or
greater, (b) its Tier 1 risk-based capital ratio is 6% or greater, and (c) its
leverage ratio is 5% or greater. There are no conditions or events since the
notification that management believes have changed the institution's category.
Set forth below is a summary of the Bank's compliance with the OTS capital
standards as of September 30, 1996.
Percent of
Amount Assets(1)
____________________________________________________________________________
(Dollars in thousands)
GAAP capital $430,546 8.13%
-------- -----
-------- -----
Tangible capital:
Capital level(2) $416,802 7.84%
Requirement 79,710 1.50
-------- -----
Excess $337,092 6.34%
-------- -----
-------- -----
Core capital:
Capital level(2) $416,802 7.84%
Requirement 159,419 3.00
-------- -----
Excess $257,383 4.84%
-------- -----
-------- -----
Risk-based capital:
Capital level(3) $450,714 16.48%
Requirement 218,808 8.00
-------- -----
Excess $231,906 8.48%
-------- -----
-------- -----
(1) Capital levels are shown as a percentage of the Bank's total adjusted
assets, as computed under GAAP. Tangible and core capital levels are shown
as a percentage of the Bank's total adjusted assets, as computed based on
regulatory guidelines. Risk-based capital levels are shown as a percentage
of risk-weighted assets.
(2) Represents GAAP capital excluding the effect of SFAS 115, goodwill and
MSR's limitations.
(3) The difference between GAAP capital and regulatory risk-based capital
level represents the exclusion of the effect of SFAS 115 and goodwill and
an addition for a portion of the general valuation allowance.
_______________________________________________________________________________
(5)
INVESTMENT IN
DEBT AND EQUITY
SECURITIES
Investment in debt and equity securities available-for-sale at September
30, are as follows:
<TABLE>
<CAPTION>
1996
_____________________________________________________________________________________
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Fair Value
--------- ---------- ---------- ----------
(In thousands)
Available-for-sale:
Debt securities:
<S> <C> <C> <C> <C>
U.S. government and agency
obligations $ 13,385 $ - $ 3 $13,382
U.S. government and agency
obligations pledged as collateral 88,021 17 1,933 86,105
Asset-backed securities (automobile
loans and leases) 40,561 140 332 40,369
-------- ---- ------ --------
Total debt securities available-for-sale 141,967 157 2,268 139,856
-------- ---- ------ --------
Equity securities:
Preferred and common stock 40,038 -- -- 40,038
Investment in mutual funds 779 -- 23 756
-------- ---- ------ --------
Total equity securities
available-for-sale 40,817 -- 23 40,794
-------- ---- ------ --------
Total securities available-for-sale $182,784 $157 $2,291 $180,650
-------- ---- ------ --------
-------- ---- ------ --------
</TABLE>
Pursuant to the Special Report on SFAS 115, the Company reassessed the
classification of all its securities in December 1995. As a result, the
entire debt and equity security portfolio which was previously classified
as held-to-maturity was reclassified as available-for-sale.
Page 41
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
<TABLE>
<CAPTION>
1995
- ------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Fair Value
---------- ---------- ---------- ----------
(In thousands)
Held-to-maturity:
Debt securities:
<S> <C> <C> <C> <C>
U.S. government and agency
obligations $ 2,593 $ -- $ -- $ 2,593
U.S. government and agency
obligations pledged as collateral 7,393 31 26 7,398
Asset-backed securities (automobile
loans and leases) 45,853 134 107 45,880
-------- ---- ------ --------
Total debt securities held-to-maturity $ 55,839 $165 $ 133 $ 55,871
-------- ---- ------ --------
-------- ---- ------ --------
Available-for-sale:
Debt securities:
U.S. government and agency
obligations $ 63,852 $ 5 $ 192 $ 63,665
Asset-backed securities (automobile
loans and leases) 129,391 638 1,040 128,989
-------- ---- ------ --------
Total debt securities available-for-sale 193,243 643 1,232 192,654
-------- ---- ------ --------
Equity securities:
Preferred and common stock 40,038 -- -- 40,038
Investment in mutual funds 729 -- 13 716
-------- ---- ------ --------
Total equity securities available-for-sale 40,767 -- 13 40,754
-------- ---- ------ --------
Total securities available-for-sale $234,010 $643 $1,245 $233,408
-------- ---- ------ --------
-------- ---- ------ --------
</TABLE>
Sales of debt and equity securities from the available-for-sale portfolio during
the years ended September 30, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------
(In thousands)
Proceeds from sales
<S> <C> <C> <C>
Equity securities $ 20,000 $15,245 $ --
Debt securities 119,099 33,591 117,414
Gross gains
Equity securities -- 230 --
Debt securities 380 250 114
Gross losses
Equity securities -- -- --
Debt securities 89 526 817
</TABLE>
During fiscal 1995, the Company wrote-off its investment in Nationar,
a failed bank service institution, in the amount of $1.8 million. In
fiscal 1996, the Company recovered $49,000 on its investment in
Nationar.
Proceeds from the redemption of FHLB stock amounted to $11.7 million
for the fiscal year ended September 30, 1994 and there was no gain or
loss recognized on the redemption.
The maturities of the investments in debt securities at September 30,
are as follows:
<TABLE>
<CAPTION>
1996
- ----------------------------------------------------------------
Available-for-sale
-------------------------
Estimated
Amortized Fair
Cost Value
---------- ---------
(In thousands)
<S> <C> <C>
Within 1 year $ 26,584 $ 26,596
After 1 year through 5 years 35,543 35,457
After 5 years through 10 years 74,822 72,891
After 10 years 5,018 4,912
-------- --------
$141,967 $139,856
-------- --------
-------- --------
</TABLE>
Page 42
<PAGE>
<TABLE>
<CAPTION>
1995
- ------------------------------------------------------------------------------------------
Available-for-sale Held-to-maturity
------------------------ -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Within 1 year $ 34,020 $ 34,025 $ -- $ --
After 1 year through 5 years 139,721 139,255 55,839 55,871
After 5 years through 10 years 12,876 12,923 -- --
After 10 years 6,626 6,451 -- --
-------- -------- ------- -------
$193,243 $192,654 $55,839 $55,871
-------- -------- ------- -------
-------- -------- ------- -------
- ------------------------------------------------------------------------------------------
</TABLE>
(6)
MORTGAGE-BACKED
SECURITIES
MBS's at September 30, are as follows:
<TABLE>
<CAPTION>
1996
- ------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Fair Value
--------- ---------- ---------- ----------
(In thousands)
Held-to-maturity:
<S> <C> <C> <C> <C>
Real estate mortgage investment
conduit $ 17,017 $ -- $1,976 $ 15,041
Other pass-through certificates 6,079 -- -- 6,079
--------- ------- ------ ----------
Mortgage-backed securities
held-to-maturity $ 23,096 $ -- $1,976 $ 21,120
--------- ------- ------ ----------
--------- ------- ------ ----------
Available-for-sale:
GNMA pass-through certificates $ 3,582 $ 50 $ -- $ 3,632
FHLMC pass-through certificates 367,480 3,651 1,794 369,337
FNMA pass-through certificates 483,480 4,238 2,022 485,696
Other pass-through certificates 78,101 92 309 77,884
GNMA, FHLMC and FNMA securities
pledged as collateral 767,263 14,357 1,063 780,557
--------- ------- ------ ----------
Gross mortgage-backed securities
available-for-sale 1,699,906 22,388 5,188 1,717,106
Unamortized premium, net 3,270 (3,270) -- --
--------- ------- ------ ----------
Mortgage-backed securities
available-for-sale, net $1,703,176 $19,118 $5,188 $1,717,106
--------- ------- ------ ----------
--------- ------- ------ ----------
<CAPTION>
1995
- ------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Fair Value
---------- ---------- ---------- ----------
(In thousands)
Held-to-maturity:
<S> <C> <C> <C> <C>
FHLMC pass-through certificates $ 362,646 $ 2,102 $2,511 $ 362,237
FNMA pass-through certificates 353,324 4,417 1,035 356,706
Real estate mortgage investment conduit 17,693 -- -- 17,693
Other pass-through certificates 62,082 -- 153 61,929
GNMA, FHLMC and FNMA securities
pledged as collateral 540,354 3,215 3,120 540,449
---------- ------- ------ ----------
Gross mortgage-backed securities
held-to-maturity 1,336,099 9,734 6,819 1,339,014
Unamortized premium, net 1,804 (1,804) -- --
---------- ------- ------ ----------
Mortgage-backed securities
held-to-maturity, net $1,337,903 $ 7,930 $6,819 $1,339,014
---------- ------- ------ ----------
---------- ------- ------ ----------
Available-for-sale:
FHLMC pass-through certificates $ 497,438 $ 9,394 $ 461 $ 506,371
FNMA pass-through certificates 274,501 5,360 85 279,776
Other pass-through certificates 9,892 -- 272 9,620
FHLMC and FNMA securities
pledged as collateral 140,072 3,828 820 143,080
---------- ------- ------ ----------
Gross mortgage-backed securities
available-for-sale 921,903 18,582 1,638 938,847
Unamortized premium, net 4,120 (4,120) -- --
---------- ------- ------ ----------
Mortgage-backed securities
available-for-sale, net $ 926,023 $14,462 $1,638 $ 938,847
---------- ------- ------ ----------
---------- ------- ------ ----------
</TABLE>
Page 43
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
Sales of MBS's from the available-for-sale portfolio during the years ended
September 30, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Proceeds from sales $485,195 $286,674 $696,830
Gross gains 6,931 2,343 4,012
Gross losses 1,232 35 2,101
- ----------------------------------------------------------------------------------------
</TABLE>
(7)
LOANS HELD FOR
SALE AND LOANS RECEIVABLE HELD
FOR INVESTMENT
Loans held for sale as of September 30, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------
(In thousands)
Real estate loans:
<S> <C> <C>
One-to-four family loans $57,812 $47,831
Co-operative apartment loans 49 1,511
------- -------
57,861 49,342
Student loans 108 30
------- -------
Total loans held for sale $57,969 $49,372
------- -------
------- -------
</TABLE>
The Bank originates most fixed rate loans for immediate sale to FNMA,
FHLMC or other investors. Generally, the sale of such loans is
arranged at the time the loan application is received through best
effort commitments (see Note 15). In addition, student loans are sold
to the Student Loan Mortgage Association generally before repayment
begins during the grace period of the loan.
Loans receivable held for investment as of September 30, are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------------------
(In thousands)
Real estate loans held for investment, net
<S> <C> <C>
One-to-four family loans $2,670,387 $1,640,121
Co-operative apartment loans 114,560 126,912
Home equity loans 18,564 18,115
Second mortgage loans 5,154 6,563
Multi-family loans 34,883 35,708
Commercial real estate loans 69,625 72,393
Construction loans 4,509 3,070
Land loans 3,221 4,804
---------- ----------
2,920,903 1,907,686
Deferred loan costs (fees) 3,159 (3,253)
Purchase accounting discount (2,777) (4,229)
---------- ----------
2,921,285 1,900,204
Allowance for possible loan losses (20,226) (20,554)
---------- ----------
Real estate loans held for investment, net 2,901,059 1,879,650
---------- ----------
Commercial loans receivable, net
Commercial loans 8,206 9,330
Unearned discount (396) (624)
---------- ----------
7,810 8,706
Allowance for possible loan losses (3,631) (3,874)
---------- ----------
Commercial loans receivable, net 4,179 4,832
---------- ----------
Other loans receivable, net
Property improvement 9,028 11,131
Student 6,976 3,294
Loans on deposit accounts 2,475 2,649
Consumer 69,575 42,284
Consumer line of credit 55,292 59,746
---------- ----------
143,346 119,104
Purchase accounting premium 50 78
Deferred costs 2,258 1,007
---------- ----------
145,654 120,189
Allowance for possible loan losses (10,055) (9,930)
---------- ----------
Other loans receivable, net 135,599 110,259
---------- ----------
Total loans receivable held for investment, net $3,040,837 $1,994,741
---------- ----------
---------- ----------
</TABLE>
Page 44
<PAGE>
Real estate loans included approximately $2.5 billion and $1.7 billion of
adjustable rate mortgage loans at September 30, 1996 and 1995, respectively.
On October 1, 1995, the Company adopted SFAS 114, and SFAS 118, ("Statements").
Under these Statements, a loan is considered impaired when it is probable that
the Company, based on current information, will not collect all amounts due,
including principal and interest, according to the contractual terms of the loan
agreement. Loans exempt from the provisions of these Statements include large
groups of smaller-balance homogenous loans that are collectively evaluated for
impairment such as one-to-four family real estate loans and consumer loans. Such
loans that are modified in a troubled debt restructuring ("TDR"), however, are
subject to the provisions of these Statements. A loan is considered a TDR when
modifications are made to the original contractual terms of the loan due to the
borrower's financial difficulties. Loans that fall within the scope of these
Statements must be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or at the loan's
observable market price or, if the loan is collateral dependent, at the fair
value of the collateral.
The principal amount of non-performing real estate loans excluding restructured
loans aggregated approximately $38.8 million, $38.5 million and $34.7 million at
September 30, 1996, 1995 and 1994, respectively. Interest income that would have
been recorded if the loans had been performing in accordance with their original
terms aggregated $2.9 million, $2.7 million and $3.7 million for the fiscal
years ended September 30, 1996, 1995 and 1994, respectively. No interest income
was recorded for these loans during the fiscal years ended September 30, 1996,
1995 and 1994. The principal amount of non-performing commercial loans excluding
restructured loans aggregated $0.8 million, $0.8 million and $1.5 million at
September 30, 1996, 1995 and 1994, respectively.
The principal amount of restructured real estate loans that have not complied
with the terms of their restructure agreement for a satisfactory period
(generally six months) aggregated approximately $11.4 million, $14.8 million and
$15.8 million at September 30, 1996, 1995 and 1994, respectively. Interest
income that would have been recorded if the loans had been performing in
accordance with their original terms aggregated $0.3 million, $0.3 million and
$0.4 million for the fiscal years ended September 30, 1996, 1995 and 1994,
respectively. Interest income recorded for these loans amounted to $0.1 million,
$0.1 million and $0.2 million for the fiscal years ended September 30, 1996,
1995 and 1994, respectively. Restructured loans that have complied with the
terms of their restructure agreement for a satisfactory period (generally six
months) and have therefore been returned to performing status aggregated $11.8
million, $12.1 million and $12.8 million as of September 30, 1996, 1995 and
1994, respectively.
The principal amount of restructured commercial loans aggregated $0.5 million,
$0.9 million and $1.8 million at September 30, 1996, 1995 and 1994,
respectively. Interest income that would have been recorded if the loans had
been performing in accordance with their original terms aggregated $43,000,
$49,000 and $125,000 for fiscal years ended September 30, 1996, 1995 and 1994,
respectively. Interest income recorded for these loans amounted to $29,000,
$40,000 and $100,000 for the fiscal years ended September 30, 1996, 1995 and
1994, respectively.
LOAN SERVICING. The Company has entered into various agreements to service
loans for others. At September 30, 1996 and 1995, 47,146 loans and 37,848 loans
with a total balance of $3.7 billion and $2.6 billion, respectively, were being
serviced for others. Of this total balance, the Company has retained
participation in loans equal to $10.3 million and $10.2 million at September 30,
1996 and 1995, respectively.
The right to service loans for others is generally obtained by either the sale
of loans with servicing retained, the open market purchase of MSR's or the
creation of MSR's pursuant to SFAS 122.
During the fiscal years ended September 30, 1996, 1995 and 1994, the Company
sold approximately $186.8 million, $100.4 million and $257.6 million,
respectively, of whole loans and MBS's with servicing retained. In addition, the
Company sold $303.9 million of home equity loans with servicing retained during
fiscal 1993.
Effective July 1, 1995, the Company adopted SFAS 122. SFAS 122 standardized the
treatment of the capitalization of MSR's by eliminating the difference between
purchased MSR's and originated MSR's. Prior to SFAS 122, entities were only
allowed to capitalize MSR's that were purchased and were precluded from
capitalizing MSR's that were originated. SFAS 122 provides for the
capitalization of MSR's when mortgage loans are originated and subsequently sold
or securitized where the right to service the loans is retained.
Page 45
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
MSR activity for the years ended September 30, is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Beginning balance $11,328 $ 759 $957
Purchased MSR's 15,159 10,071 444
Capitalized MSR's 5,982 1,969 --
Less:
Amortization of MSR's 2,700 1,471 642
Allowance for MSR's 82 -- --
------- -------- ----
Ending balance $29,687 $11,328 $759
------- -------- ----
------- -------- ----
</TABLE>
Purchased mortgage servicing rights include servicing rights related to the
November 1994 acquisitions of the operations of Entrust and Developer's,
which at September 30, 1996 and 1995 totalled $6.3 million and $7.5
million, respectively.
Fees earned for servicing loans are reported as income when the related
mortgage loan payments are collected. MSR's are amortized as a reduction to
loan service fee income on a level-yield basis over the estimated remaining
life of the underlying mortgage loans. MSR's are carried at fair value and
impairment, if any, is recognized through a valuation allowance. At
September 30, 1996 the valuation allowance amounted to $0.1 million. No
valuation allowance was required for 1995 and 1994, respectively. See Note
16 for risk characteristics and assumptions used to estimate fair value.
In connection with the home equity loan sale consummated in 1993, the
Company receives a normal servicing fee to service the loans, which were
sold without recourse to an unaffiliated trust and are being used to
collateralize asset-backed certificates. Excess cash flow in the trust, if
any, after required payments to the certificate holders and insurer, is to
be applied to overissuance and overcollateralization amounts and to absorb
a specified level of losses; remaining excess cash flow, if any, will
ultimately revert to the Company. In connection therewith, the Company
recorded service fee income in the amount of $0.5 million and $2.5 million
resulting from the overcollateralization during fiscal 1996 and 1995,
respectively.
Loan servicing income for the years ended September 30, is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Servicing fees $16,645 $14,344 $9,367
Amortization of MSR's (2,700) (1,471) (642)
Provision for MSR's (82) -- --
------- -------
------
Total servicing income $13,863 $12,873 $8,725
------- -------
------
</TABLE>
- -----------------------------------------------------------------------
(8)
ALLOWANCE
FOR POSSIBLE
LOAN LOSSES
<TABLE>
<CAPTION>
Real
Estate Commercial Other
Loans Loans Loans Total
- ------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Balance at September 30, 1993 $24,951 $3,874 $ 5,126 $33,951
Add:
Provision for possible loan losses 3,300 1,350 7,305 11,955
Recoveries of previous charge-offs 482 577 459 1,518
------- ------ ------- -------
28,733 5,801 12,890 47,424
Less charge-offs 5,852 1,551 4,308 11,711
------- ------ ------- -------
Balance at September 30, 1994 22,881 4,250 8,582 35,713
Add:
Provision for possible loan losses 1,275 400 4,795 6,470
Recoveries of previous charge-offs 1,006 141 651 1,798
------- ------ ------- -------
25,162 4,791 14,028 43,981
Less charge-offs 4,608 917 4,098 9,623
------- ------ ------- -------
Balance at September 30, 1995 20,554 3,874 9,930 34,358
Add:
Provision for possible loan losses 2,850 -- 3,350 6,200
Recoveries of previous charge-offs 691 319 543 1,553
------- ------ ------- -------
24,095 4,193 13,823 42,111
Less charge-offs 3,869 562 3,768 8,199
------- ------ ------- -------
Balance at September 30, 1996 $20,226 $3,631 $10,055 $33,912
------- ------ ------- -------
------- ------ ------- -------
</TABLE>
Page 46
<PAGE>
As of September 30, 1996, $7.7 million in loans were considered impaired within
the scope of SFAS 114, of which $5.6 million were on nonaccrual status. The
application of SFAS 114 measurement principles indicated that approximately $0.7
million of these loans required valuation allowances, totaling $0.3 million,
which are included within the overall allowance for possible loan losses at
September 30, 1996. SFAS 114 does not apply prior to fiscal 1996.
Interest income recognized on impaired loans during the year ended September 30,
1996 amounted to approximately $0.4 million, which is approximately equal to the
actual interest payments received. The average recorded investment in impaired
loans during the current year was $8.9 million. The allowance for possible loan
losses contains additional amounts for impaired loans, as deemed necessary, to
maintain reserves at levels considered adequate by management.
- -------------------------------------------------------------------------------
(9)
REAL ESTATE
OWNED
A summary of REO at September 30, is as follows:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
One-to-four family $5,835 $5,068
Condo/co-op 1,990 2,464
Multi-family -- 673
Commercial 330 347
Land -- 341
------ ------
Real estate owned $8,155 $8,893
------ ------
------ ------
</TABLE>
During fiscal 1996, 1995 and 1994, the Company acquired properties
with a net book value of $10.0 million, $10.3 million and $12.7
million, respectively. Declines in market values resulted in
write-downs of $0.5 million, $0.6 million and $0.8 million during
fiscal 1996, 1995 and 1994, respectively, which were charged to other
REO expense. The book value of REO properties sold in fiscal 1996,
1995 and 1994 totalled $10.2 million, $8.1 million and $30.6 million,
respectively.
REO operating results for the years ended September 30, were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Income
Rental income $ 77 $ 65 $ 135
Gains on sales 559 628 764
Other income 24 17 76
------- ------- -------
Total income 660 710 975
------- ------- -------
Expenses
Acquisition expenses 799 766 1,513
Operating expenses 1,236 1,073 2,543
Losses on sales 225 107 180
Write-downs 490 554 791
------- ------- -------
Total expenses 2,750 2,500 5,027
------- ------- -------
Net loss on real estate owned $(2,090) $(1,790) $(4,052)
------- ------- -------
------- ------- -------
- ---------------------------------------------------------------------------------------
</TABLE>
(10)
INVESTMENT IN
REAL ESTATE
At September 30, 1996, and 1995 Investment in real estate consists of two
parcels of vacant land located in Suffolk County, New York which had a carrying
value of $2.5 million at both dates. These parcels are recorded at the lower of
cost or net realizable value. In addition, at September 30, 1995, Investment in
real estate also included eight rental office buildings with a carrying value of
$9.8 million of which $1.5 million represented purchase accounting premiums.
During fiscal 1996, the eight rental office buildings were sold. In addition,
two other properties previously utilized for Company operations and reflected in
Office properties and equipment in the Consolidated Statements of Financial
Condition were sold during 1996. The net profit from the sale of these ten
properties was $1.4 million which is reflected in Net gain (loss) on investment
in real estate and premises.
Page 47
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
Investment in real estate and premises operating results for the years
ended September 30, were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Income
Rental income $1,917 $2,986 $ 3,121
Net profits on sales of real estate and premises 1,419 -- 20
Net profits, equity in joint venture 1,243 1,109 675
Miscellaneous income 503 1 11
------ ------ -------
Total income 5,082 4,096 3,827
------ ------ -------
Expenses
Depreciation 312 509 528
Operating expenses 652 2,061 2,195
Net losses on sales -- 32 --
Write-downs -- 27 1,842
------ ------ -------
Total expenses 964 2,629 4,565
------ ------ -------
Net gain (loss) on investment in real estate
and premises $4,118 $1,467 $ (738)
------ ------ -------
------ ------ -------
- -----------------------------------------------------------------------------------------
</TABLE>
(11)
OFFICE PROPERTIES
AND EQUIPMENT
A summary of office properties and equipment at cost, net of accumulated
depreciation and amortization, and land at cost at September 30, is as follows:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Land, office buildings and improvements $53,265 $58,073
Leasehold improvements 1,922 2,259
Furniture, fixtures and equipment 30,193 21,851
Purchase accounting premium 3,899 4,056
------- -------
Total office properties and equipment, net $89,279 $86,239
------- -------
------- ------
</TABLE>
During 1996, two office buildings were sold with a carrying value of $2.0
million at the time of sale. The net profit on the sale of these buildings
amounted to $1.9 million and is reflected in Net gain (loss) on investment in
real estate and premises in the Consolidated Statements of Operations.
- --------------------------------------------------------------------------------
(12)
ACCRUED INTEREST
RECEIVABLE, NET
As of September 30, accrued interest receivable, net of the reserve for
uncollected interest, consisted of the following:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Debt and equity securities $ 1,225 $ 1,558
Mortgage-backed securities 12,965 16,599
Real estate loans, net 17,595 12,543
Commercial loans, net 79 60
Other loans, net 1,098 992
------- -------
Total accrued interest receivable, net $32,962 $31,752
------- -------
------- -------
</TABLE>
Page 48
<PAGE>
(13)
DEPOSITS
Certificate accounts and other deposit accounts at September 30, are
summarized as follows:
<TABLE>
<CAPTION>
1996
Stated
Rate 1996 1995
- ---------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Passbook accounts 2.76% $ 669,241 $ 730,060
Demand and NOW accounts 2.18 227,747 223,232
Money market accounts 2.18 -- 2.76 130,442 154,938
Statement savings accounts 2.86 -- 3.44 646,789 624,707
--------- ---------
1,674,219 1,732,937
--------- ---------
Certificate accounts (balance
by interest rate) 4.99 or less 292,547 160,797
5.00 -- 5.99 1,160,668 897,341
6.00 -- 6.99 393,757 650,183
7.00 -- 7.99 111,739 131,214
8.00 or greater 80 1,057
1,958,791 1,840,592
--------- ---------
Total deposits $3,633,010 $3,573,529
--------- ---------
--------- ---------
Contractual maturity of certificates:
Within twelve months $1,360,835 $1,162,423
Over one to three years 314,327 423,644
Over three years 283,629 254,525
--------- ---------
$1,958,791 $1,840,592
--------- ---------
--------- ---------
Certificate accounts in excess of $100,000 $ 160,654 $ 135,234
--------- ---------
--------- ---------
</TABLE>
Included in demand and NOW accounts, at September 30, 1996 and 1995, were
approximately $98.7 million and $86.6 million, respectively, of
non-interest-bearing deposits.
Interest expense by deposit category for the years ended September 30, is
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Passbook accounts $ 19,264 $ 22,336 $ 27,706
NOW accounts 3,105 3,181 2,881
Money market accounts 3,913 5,022 6,189
Statement savings accounts 20,755 20,946 26,202
Certificate accounts 108,479 87,849 56,986
Escrow accounts 314 307 329
-------- -------- --------
Total interest expense on deposits $155,830 $139,641 $120,293
-------- -------- --------
-------- -------- --------
</TABLE>
The deposits of the Bank are insured up to $100,000 per depositor (as defined
by law and regulation) by the Savings Association Insurance Fund ("SAIF")
which is administered by the FDIC. Certain other financial institutions are
insured by the Bank Insurance Fund ("BIF"). On September 30, 1996, as part of
the omnibus appropriations bill, Congress passed and President Clinton signed
the Deposit Insurance Funds Act of 1996 ("Act"). The Act should significantly
reduce and eventually end the premium disparity that has existed between
banks insured by BIF and thrifts insured by the SAIF. The Act requires
SAIF-insured institutions to pay a special one-time assessment and
BIF-insured institutions to include a portion of the interest due on Finance
Corporation ("FICO") bonds in their deposit premiums beginning January 1,
1997. Beginning on January 1, 2000 or the date at which no savings
institution continues to exist, BIF-insured institutions are required to pay
their full pro rata share of FICO payments. The one-time assessment charged
to SAIF-insured institutions will enable the SAIF fund to reach predetermined
capitalization levels and therefore will result in a reduction in future
premiums paid by SAIF-insured institutions. Pursuant to these provisions of
the Act, the Bank's special one-time insurance assessment amounted to $18.7
million which was accrued at September 30, 1996 and paid in November 1996.
Page 49
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
- --------------------------------------------------------------------------------
(14)
BORROWED
FUNDS
At September 30, the Company was obligated for borrowings as follows:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------
Range of Range of
Interest Balance Interest Balance
Rates Rates
--------- --------- ---------- --------
(Dollars in thousands)
Securities sold under agreements to
<S> <C> <C> <C> <C>
repurchase 4.43 - 6.53% $800,000 4.43 - 5.69% $623,675
Advance--Federal Home Loan
Bank of New York -- -- 6.63% 10,000
Funding note 6.00 - 6.11% 178,023 -- --
-------- --------
$978,023 $633,675
-------- --------
-------- --------
</TABLE>
The Company enters into sales of securities under agreements to repurchase
(reverse-repurchase agreements). These are fixed coupon agreements which are
treated as financing transactions, and the obligations to repurchase are
reflected as a liability in the Consolidated Statements of Financial
Condition. The dollar amount of securities underlying the agreements remains
in the asset account. During the period, the securities were delivered to
either a third-party, or directly to the broker, who holds the collateral
until maturity of the agreement. Outstanding reverse-repurchase agreements
were secured by MBS's as of September 30, 1996 and 1995 (see Note 6). The
outstanding agreements had weighted average interest rates of 5.52% and 5.69%
at September 30, 1996 and 1995, respectively. All the outstanding agreements
at September 30, 1996 mature within 35 months from that date. At September
30, 1996, $265.0 million of the agreements outstanding were concentrated with
one party. A summary of other information relating to these agreements
follows:
<TABLE>
<CAPTION>
At or for the Year Ended
September 30,
- --------------------------------------------------------------------------------
1996 1995
------ ------
(In thousands)
Reverse-repurchase agreements:
Amortized cost of collateral
<S> <C> <C>
(including accrued interest) $824,278 $649,233
-------- --------
-------- --------
Estimated market value of collateral $832,599 $645,955
-------- --------
-------- --------
Average amount of outstanding agreements
during fiscal year $675,104 $510,111
-------- --------
-------- --------
Maximum amount of outstanding agreements
at a month end during fiscal year $805,942 $743,952
-------- --------
-------- --------
</TABLE>
In addition, on June 27, 1996 the Bank issued a funding note in the amount of
$181.4 million which is collateralized by a pool of adjustable rate
residential mortgage loans (collateral pool) initially totalling $269.9
million ("Funding note"). Payments of principal and interest on the Funding
note shall be paid monthly based on the scheduled payments due on the
underlying loans. The interest on the Funding note changes monthly and bears
interest at a rate of 50 basis points over the one month London Interbank
Offered Rate ("LIBOR"), subject to a maximum rate of 11% through June 2001.
Thereafter, the interest on the Funding note is subject to further
adjustments. The Bank has the option to redeem the Funding note in whole on
or after June 2001 or when the principal balance of the collateral pool is
less than 5% of the principal balance of the collateral pool at the time the
Funding note was issued. The Funding note was issued to a special purpose
financing entity of an investment banking firm for the purpose of
securitizing mortgage pass-through certificates. At September 30, 1996, the
outstanding principal balance of the Funding note collateral pool was $265.6
million.
Interest expense on borrowed funds for the years ended September 30, is
summarized as follows:
1996 1995 1994
- -------------------------------------------------------------------------------
(In thousands)
Reverse-repurchase agreements $37,998 $27,870 $9,811
Advance--Federal Home Loan Bank of New York 141 55 --
Funding note 2,877 -- --
Amortization of interest rate cap agreements 330 330 --
------- ------- ------
Total interest expense on borrowed funds $41,346 $28,255 $9,811
------- ------- ------
------- ------- ------
At September 30, 1996, the Bank had available and unused lines of credit
aggregating $75.0 million. In addition, the Bank has the ability to obtain
additional funds in the form of FHLB advances, in an amount which is based
upon its stock ownership in the Federal Home Loan Bank of New York.
Page 50
<PAGE>
- -------------------------------------------------------------------------------
(15)
FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK
SFAS 105 requires disclosures about financial instruments with off-balance sheet
risk and credit risk concentrations (See Note 24). Credit risk, as defined by
SFAS 105, is the possibility that loss may occur from the failure of
counterparties to perform according to the terms of the contract.
The Bank has entered into transactions as of September 30, 1996, that involve
financial instruments with off-balance sheet risks, in the normal course of
business in order to meet the financing and servicing needs of its customers and
to reduce the Bank's exposure to fluctuations in interest rates. The instruments
include commitments to extend credit, letters of credit, commitments to sell
loans and recourse liability on loans sold. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the Consolidated Statements of Financial Condition. The
contract amounts of these instruments reflect the extent of involvement the Bank
has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, commitments
to sell loans and standby letters of credit is generally represented by the
contractual amount of those instruments. The Bank uses the same credit policies
in making commitments and conditional obligations as it does for on-balance
sheet instruments. Unless otherwise noted, the Bank does not require collateral
or other security to support financial instruments with credit risk.
COMMITMENTS TO EXTEND CREDIT AND FINANCIAL GUARANTEES. Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since some of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
COMMITMENTS TO SELL LOANS. Commitments to sell loans are contracts for delayed
delivery of loans in which the Bank agrees to make delivery at a specified
future date of a specified instrument, at a specific price or yield. Generally,
risks arise from the possible inability to meet the terms of the contracts and
from movements in interest rates, however, since the Bank's commitments are
substantially made on a "best-efforts" basis, the Bank does not expect any
adverse financial impact.
The notional amount of the Company's financial instruments with off-balance
sheet risk at September 30, are summarized as follows:
1996 1995
- -------------------------------------------------------------------------------
(In thousands)
Commitments to originate or purchase:
Real estate loans $311,967 $101,000
Home equity loans--unused lines of credit 9,554 5,710
Commercial loans--unused lines of credit 2,576 2,393
Consumer loans--unused lines of credit 115,126 98,054
Commitments to sell loans 75,413 44,422
-------- --------
Total commitments $514,636 $251,579
-------- --------
-------- --------
Real estate loan commitments included approximately $104.8 million and $27.6
million relating to adjustable rate loans at September 30,1996 and 1995
respectively. In addition, the Bank has entered into adjustable rate stand-by
letters of credit related to commercial loan transactions amounting to $0.3
million per year at September 30, 1996
and 1995, respectively.
DERIVATIVES. SFAS 119 requires disclosures about derivative contracts--swap,
forward, futures, option-related contracts and other financial instruments with
similar characteristics--distinguished between derivative contracts held for
trading and those used for purposes other than trading (i.e. asset/liability
management).
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. They are used to manage interest
rate risk.
Page 51
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
INTEREST RATE CAP AGREEMENTS. Interest rate cap agreements are used to manage
interest rate exposure by hedging against certain assets and liabilities.
Normally interest rate caps do not represent exposure to credit loss. Purchased
caps involve the risk of dealing with counterparties and their ability to meet
the terms of the contracts forward commitments. The premium paid for the cap
represents the loss the Bank would incur if the counterparty to the contract
failed completely to perform according to the terms of the contract. No payments
were received from counterparties during the years ended September 30, 1996 and
1995 and there were no contracts in effect during fiscal 1994. For the years
ended September 30, 1996 and 1995, premiums paid for interest rate cap
agreements were amortized into interest expense in the amount of $0.3 million
per year and are included in interest expense on borrowed funds in the
Consolidated Statements of Operations.
At September 30, 1996, the Company was party to the interest rate cap agreements
presented below. The agreements entitle the Company to receive from
counterparties the amounts, if any, by which the Company's interest payments on
its floating-rate reverse-repurchase agreements exceed the cap rate specified in
the agreement.
Original Cap Cost Notional Amount Original Term Cap Rate Maturity Date
- -------------------------------------------------------------------------------
$288,000 $40,000,000 24 months 7.50% 10/15/96
345,000 50,000,000 24 months 7.40 3/17/97
-------- -----------
$633,000 $90,000,000
-------- -----------
-------- -----------
- -------------------------------------------------------------------------------
(16)
FAIR VALUE
OF FINANCIAL INSTRUMENTS
SFAS 107 requires the Company to disclose fair value information about financial
instruments for which it is practicable to estimate the value, whether or not
such financial instruments are recognized on the balance sheet. Fair value is
the amount at which a financial instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or liquidation,
and is best evidenced by a quoted market price, if one exists.
Quoted market prices are not available for a significant portion of the
Company's financial instruments. As a result, the fair values presented are
estimates derived using present value or other valuation techniques and may not
be indicative of the net realizable or liquidation value. In addition, the
calculation of estimated fair value is based on market conditions at a specific
point in time and may not be reflective of current or future fair values.
Certain financial instruments and all non-financial instruments are excluded
from the scope of SFAS 107. Accordingly, the fair value disclosures required by
SFAS 107 provide only a partial estimate of the fair value of the Company; for
example, the values associated with the Company's long-term relationships with
its customers through its deposit base and the value of a portion of its
portfolio of MSR's are excluded. In the aggregate, these items add value to the
Company but their fair value is not disclosed in this Note.
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments required to be
valued pursuant to SFAS 107.
FINANCIAL ASSETS
MORTGAGE-BACKED AND DEBT AND EQUITY SECURITIES. Fair values are determined by
published market prices or securities dealers' estimated prices.
LOANS HELD FOR SALE. Fair value is estimated based on current prices established
in the secondary market or,
for those loans committed to be sold, based upon the price established in the
commitment.
LOANS RECEIVABLE HELD FOR INVESTMENT. Fair values are estimated for portfolios
of loans with similar financial characteristics. Loans are segregated by type,
such as one-to-four family residential, multi-family residential, commercial
real estate, various consumer loans and commercial loans. Each loan category is
further segmented into fixed and adjustable rate, and by performing and
non-performing categories. The pricing methodology for fiscal 1996 and 1995
assumes FNMA or FHLMC securitization of mortgage loans with conforming loan
balances and secondary market whole loan standards for co-op residential loans
and larger balance mortgage loans.
OTHER LOANS. Due to the small number, student loans and loans on deposits are
valued at approximately par. The remaining consumer loans are priced at a spread
off of securitized consumer debt.
COMMERCIAL LOANS. Commercial loans were valued at a discount or premium based
upon the origination of new commercial loans in the current market.
Page 52
<PAGE>
MORTGAGE SERVICING RIGHTS. MSR's are valued based upon the Company's
stratification of the mortgage servicing portfolio. Stratification is based
upon the predominate risk characteristics of the underlying loans,
including but not limited to, interest rates, loan type, the frequency of
interest rate adjustments in the case of adjustable rate mortgage loans,
etc. Each strata is then discounted to reflect the present value of the
expected future cash flows utilizing current market assumptions regarding
discount rates, prepayment speeds, delinquency rates, etc.
FINANCIAL LIABILITIES
DEPOSITS. SFAS 107 requires that the fair value disclosed for deposit
liabilities with no stated maturity (i.e., demand, savings and certain
money market deposits) be equal to their carrying value. The fair value of
certificate accounts is estimated by discounting the future cash flows
using the Treasury yield curve plus additional basis points as the discount
rate.
BORROWED FUNDS. The fair value of borrowed funds is estimated by
discounting the future cash flows using the Treasury yield curve plus
additional basis points as the discount rate.
DERIVATIVES. The fair value of interest rate cap agreements is based on
securities dealers' estimated market values.
COMMITMENTS. The fair value of commitments to originate or purchase loans
is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counterparties. For fixed rate loan
commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The commitments existing
at September 30, 1996 and 1995 would be offered at substantially the same
rates and terms had they been issued using the same criteria as used for
commitments issued on September 30, 1996 and 1995, respectively.
Accordingly, the estimated fair value of such commitments is deemed to be
equivalent to their stated aggregate issuance value as of September 30,
1996 and 1995, respectively. The fair value of commitments to sell loans
and unused lines of credit is valued at par as of September 30, 1996 and
1995, respectively.
The estimated fair value of the Company's financial instruments were as
follows:
<TABLE>
<CAPTION>
At September 30,
- ---------------------------------------------------------------------------------------
1996 1995
------------------------- ---------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
(In thousands)
Financial Assets:
Debt & equity securities:
<S> <C> <C> <C> <C>
Held-to-maturity $ -- $ -- $ 55,839 $ 55,871
Available-for-sale 180,650 180,650 233,408 233,408
Mortgage-backed securities:
Held-to-maturity 23,096 21,120 1,337,903 1,339,014
Available-for-sale 1,717,106 1,717,106 938,847 938,847
Loans receivable held for
investment:
Real estate loans 2,901,059 2,926,757 1,879,650 1,933,840
Other loans 135,599 142,307 110,259 118,302
Commercial loans 4,179 8,122 4,832 9,046
Loans held-for-sale 57,969 58,029 49,372 49,943
Mortgage servicing rights 29,687 29,687 11,328 11,384
Financial liabilities:
Deposits 3,633,010 3,619,110 3,573,529 3,572,435
Borrowings 978,023 969,680 633,675 632,864
Related derivative assets
(liabilities) 89 -- 421 21
Commitments to:
Originate or purchase:
Loans 311,967 311,967 101,000 101,000
Sell loans 75,413 75,413 44,422 44,422
Fund unused lines of credit 127,256 127,256 106,157 106,157
</TABLE>
Page 53
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
- ------------------------------------------------------------------------------
(17)
INCOME TAXES
Income tax expense for the years ended September 30, is summarized as follows:
1996 1995 1994
- ------------------------------------------------------------------------------
(In thousands)
Current:
Federal $ 24,316 $23,691 $ 1,465
State and local 9,875 9,273 377
--------- ------- -------
34,191 32,964 1,842
--------- ------- -------
Deferred:
Federal (7,700) (2,333) 11,767
State and local (2,731) (734) 4,437
--------- ------- -------
$(10,431) (3,067) 16,204
--------- ------- -------
Total income tax expense $ 23,760 $29,897 $18,046
--------- ------- -------
--------- ------- -------
The following schedule illustrates the components of the net deferred tax
asset which is included in Prepaid expenses and other assets in the
Consolidated Statements of Financial Condition at September 30:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------
(In thousands)
Deferred tax assets:
<S> <C> <C>
Financial statement loan loss reserve $14,619 $14,812
BIF-SAIF Assessment 8,043 --
Accrual for post-employment benefits 4,859 4,788
Basis difference in investment in real estate 707 470
Mark-to-market recognition on securities under
Internal Revenue Code Section 475 7,442 --
Deferred pension expense 3,626 4,185
Deferred origination fees 605 796
Non-accrual interest 615 641
Other 1,677 485
Deferred income tax valuation allowance -- (2,328)
------- -------
Total deferred tax assets 42,193 23,849
------- -------
Deferred tax liabilities:
Tax reserve in excess of base year reserve 437 404
Basis difference in properties and equipment 4,527 6,244
Deferred origination costs 1,291 --
Mark-to-market recognition on securities under
Internal Revenue Code Section 475 -- 4,625
Recognition of taxes payable under Internal Revenue
Code Section 481 for unrealized gains 1,840 1,582
Basis difference in home equity investment 1,674 1,511
Other 1,217 684
------- -------
Total deferred tax liabilities 10,986 15,050
------- -------
Net deferred tax asset $31,207 $ 8,799
------- -------
------- -------
</TABLE>
The cumulative effect of the change in accounting upon the October 1, 1993
adoption of SFAS 109 was a credit to income of $19.4 million. Management,
in accordance with SFAS 109 "more likely than not" criteria, set up a
valuation allowance at the implementation date. The valuation allowance has
been reduced to zero during fiscal 1996 due to the Company's current and
projected earnings trend.
Page 54
<PAGE>
The effective tax rates differ from the statutory
Federal income tax rate of 35 percent. The reasons for
the differences as applied to income (loss) before
income taxes and the cumulative effect of accounting
changes are as follows:
<TABLE>
<CAPTION>
For the Years Ended September 30,
- --------------------------------------------------------------------------------------------------------
1996 1995 1994
------------------- ------------------ ------------------
% of % of % of
Pre-tax Pre-tax Pre-tax
Amount Earnings Amount Earnings Amount Earnings
------- -------- ------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statutory rate $19,612 35.0% $25,695 35.0% $17,127 35.0%
State and local income taxes, net of
Federal income tax benefit 4,644 8.3 5,550 7.6 3,129 7.8
Tax adjustment for prior year 370 0.7 (814) (1.1) (315) (1.8)
Reversal of deferred tax valuation
allowance (2,328) (4.2) (532) (0.7) (2,140) (4.3)
Other 1,462 2.6 (2) (0.1) 245 0.1
------- ---- ------- ---- ------- -----
Income tax expense $23,760 42.4% $29,897 40.7% $18,046 36.8%
------- ---- ------- ---- ------- -----
------- ---- ------- ---- ------- -----
</TABLE>
Under Section 593 of the Internal Revenue Code of 1986 as amended ("Code"),
prior to January 1, 1996 thrift institutions such as the Bank which met
certain definitional tests primarily relating to their assets and the nature
of their business, were permitted to establish a tax reserve for bad debts.
Such thrift institutions were also permitted to make annual additions to the
reserve, to be deducted in arriving at their taxable income within specified
limitations. The Bank's deduction was computed using an amount based on the
Bank's actual loss experience ("experience method"), or a percentage equal to
8% of the Bank's taxable income ("PTI method"). Similar deductions for
additions to the Bank's bad debt reserve were also permitted under the New
York State Bank Franchise Tax and the New York City Banking Corporation Tax;
however, for purposes of these taxes, the effective allowable percentage
under the PTI method was 32% rather than 8%.
Under the Small Business Job Protection Act of 1996 ("1996 Act"), signed into
law in August 1996, Section 593 of the Code was amended. The Bank will be
unable to make additions to the tax bad debt reserves but will be permitted
to deduct bad debts as they occur. Additionally, the 1996 Act required
institutions to recapture (that is, include in taxable income) the excess of
the balance of its bad debt reserves as of December 31, 1995 over the balance
of such reserves as of December 31, 1987 ("base year"). The Bank's tax bad
debt reserves at December 31, 1995 exceeded its base year reserves by $2.7
million which will be recaptured into taxable income ratably over a six year
period. If certain requirements are met the recapture may be deferred for up
to two years. The base year reserves will be subject to recapture, and the
Bank could be required to recognize a tax liability if (i) the Bank fails to
qualify as a "bank" for Federal income tax purposes; (ii) certain
distributions are made with respect to the stock of the Bank; (iii) the Bank
uses the bad debt reserves for any purpose other than to absorb bad debt
losses; and (iv) there is a change in Federal tax law. Management is not
aware of the occurrence of any such event.
In response to the Federal legislation, the New York State tax law has been
amended to prevent the recapture of existing tax bad debt reserves and to
allow for the continued use of the PTI method to determine the bad debt
deduction in computing New York State tax liability. No such amendments have
been made to date with respect to the New York City tax law. The Company
cannot predict whether such changes will be made or as to the form of the
changes.
- --------------------------------------------------------------------------------
(18)
RETAINED INCOME--
PARTIALLY RESTRICTED
Retained income at September 30, 1996 and 1995 includes approximately $60.1
million, each year, for which no provision for Federal income tax has been
made. This amount represents allocations of income to bad debt deductions for
tax purposes only, as discussed above.
- --------------------------------------------------------------------------------
(19)
POSTRETIREMENT
HEALTH CARE AND
LIFE INSURANCE
BENEFITS
The Bank currently provides health care and life insurance benefits for
retirees and their eligible dependents. The coverage provided depends upon
the date they retired as well as the bank from which they retired.
For employees who retired prior to June 1, 1984, major medical and life
insurance coverage is provided. Major medical insurance continues until the
retiree reaches age 65. Upon attainment of age 65, senior care is provided as
a supplement to Medicare and continues for the lifetime of the retirees and
their spouses. Life insurance coverage is provided in the amount in force at
the employee's date of retirement. This amount is reduced to 50% (but not to
less than $5,000) at age 70. For retirees of the former Suffolk County
Federal Savings and Loan Association, life insurance coverage is provided at
50% of the amount in effect at retirement and is reduced by 10% each year
(but not to less than $5,000) thereafter.
Page 55
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
Employees who retire subsequent to June 1, 1984 are not entitled to any medical
benefits unless they qualify under the special early retirement Rule of 85. The
Rule of 85 became effective as of January 1, 1986, and entitles employees who
are at least age 55 at retirement, with a combination of age plus service
greater than or equal to 85, to medical coverage for themselves and their
eligible dependents until the retiree reaches the age of 65. At age 65, the
retiree is eligible for Medicare. Medical coverage includes major medical and
dental for both retirees and their eligible dependents; vision coverage is
provided to retirees only. Life insurance of $2,500 will be provided for the
lifetime of the retired employee who retires on or after age 65 and for
employees who retire under the Rule of 85.
For employees who retired from Flushing Federal prior to April 29, 1986, major
medical insurance continues until age 65. Retirees age 65 and over are provided
with senior care as a supplement to Medicare for the lifetime of the retirees
and their eligible spouses. Life insurance coverage is equal to the amount in
force at retirement, reduced to 50% at age 70.
Effective October 1, 1993, the Bank adopted the provisions of SFAS 106. This
statement requires employers to accrue the cost of postretirement benefits, such
as health care and life insurance, during the years employees render service. In
prior years, these costs were expensed as paid. The Bank recorded the discounted
value of expected future benefits (accumulated postretirement benefit obligation
("APBO")) as a cumulative effect of a change in accounting principle in the
amount of $10.7 million ($6.0 million net of taxes) at October 1, 1993.
The following table sets forth the APBO for the years ended September 30:
1996 1995
- -----------------------------------------------------------------------------
(In thousands)
Retirees $3,727 $3,810
Active eligible 270 19
Other active 1,259 1,710
------ ------
Total $5,256 $5,539
------ ------
------ ------
The following is a reconciliation of the funded status and the accrued benefit
cost at September 30:
1996 1995
- -----------------------------------------------------------------------------
(In thousands)
APBO $ 5,256 $ 5,539
Unrecognized prior service cost 130 1,223
Unrecognized net actuarial gain 5,886 4,345
------- -------
Accrued postretirement benefit cost $11,272 $11,107
------- -------
------- -------
The assumed medical cost trend used in computing the accumulated postretirement
benefit obligation was 8.5% in 1996 and was assumed to decrease gradually to
4.5% in 2009 and to remain at that level thereafter. Increasing the assumed
medical care cost trend rates by 1% point in each year would increase the APBO
and the net periodic postretirement benefit cost as of October 1, 1996 by $0.4
million and $0.1 million, respectively.
The weighted average discount rate used in determining the APBO was 7.75%.
The net periodic postretirement benefit cost included in compensation, payroll
taxes and fringe benefits in the accompanying Consolidated Statements of
Operations for the years ended September 30, is comprised of the following
components:
1996 1995
- --------------------------------------------------------------------------
(In thousands)
Service cost $ 161 $ 127
Interest cost 398 503
Net amortization of prior service cost (85) (85)
Net amortization of unrecognized gain (236) (177)
------ ------
Net periodic postretirement benefit cost $ 238 $ 368
------ ------
------ ------
Page 56
<PAGE>
- -------------------------------------------------------------------------------
(20)
PENSION PLANS
DEFINED BENEFIT PENSION PLAN. The Bank sponsors a non-contributory defined
benefit pension plan ("Retirement Plan") covering substantially all employees
twenty-one years of age or older. The Retirement Plan is administered by the
Retirement System Group Inc. ("RSG"). Prior to January 1, 1996, the benefit
multiplier to determine the normal annual retirement benefit was 2% of the
pensioner's final average salary. Final average salary was
the average annual salary attributable to the highest 36 consecutive calendar
months of base compensation that fell within the last 10 years of credited
service. Effective January 1, 1996, the benefit multiplier was reduced to 1.5%
of the pensioner's final average salary and the base compensation factor was
increased to the highest sixty consecutive calendar months.
The following table depicts the components of pension expense for the years
ended September 30, projected by RSG in accordance with Statement of Financial
Accounting Standards No. 87 (SFAS 87), Employers' Accounting for Pensions:
1996 1995 1994
- -------------------------------------------------------------------------------
(In thousands)
Service cost $ 1,199 $ 1,417 $ 1,838
Interest cost 3,240 3,572 3,267
Expected return on assets (7,581) (9,714) (20)
Amortization of unrecognized transition
asset (429) (430) (429)
Amortization of unrecognized past
service liability (794) (165) (152)
Deferred investment gain (loss) 3,329 6,006 (3,904)
-------- -------- --------
Pension (benefit) expense $ (1,036) $ 686 $ 600
-------- -------- --------
-------- -------- --------
The following table sets forth the Retirement Plan's funded status as projected
by RSG and amounts recognized in the Bank's consolidated statements of financial
condition at September 30:
1996 1995
- -------------------------------------------------------------------------------
(In thousands)
Actuarial present value of accumulated plan benefits:
Vested $42,915 $41,771
Non-vested 1,893 2,118
------- -------
Total accumulated plan benefits $44,808 $43,889
------- -------
Fair value of plan net assets $59,276 $54,609
Project benefit obligations 44,911 43,942
------- -------
Fair value of plan net assets in excess of
projected benefit obligation 14,365 10,667
Unrecognized gain (9,094) (4,785)
Unrecognized past service liability (6,155) (7,373)
Unrecognized transition asset (326) (755)
------- -------
Accrued pension expense $(1,210) $(2,246)
------- -------
------- -------
Assumed rate of return on assets 8.00% 8.00%
------- -------
------- -------
Assumed rate of compensation increase 5.50% 5.50%
------- -------
------- -------
Assumed discount rate 7.75% 7.50%
------- -------
------- -------
NON-EMPLOYEE DIRECTOR RETIREMENT BENEFIT PLAN. In fiscal 1994, the Company
adopted a non-qualified retirement benefit plan for directors who are not
employees of the Bank or the Holding Company. Upon retirement from the Board of
Directors at age 65 or older, with a minimum of 15 years of service, the
retirement benefits provide continuation of the annual retainers and Board
meeting fees received by such directors from the Bank and the Holding Company at
the then current rate for a period of ten years following retirement.
Accordingly, the Company recorded a charge to earnings in fiscal 1994
representing the discounted value of accumulated plan benefits in the amount of
$2.4 million. Additional accumulated plan benefits resulted in a charge
to earnings in fiscal 1996 and 1995 of $0.2 million per year. The retirement
benefit plan is an unfunded plan and is estimated based upon an assumed discount
rate of 7.75% and 7.5% for fiscal years ended September 30, 1996 and 1995,
respectively, and an assumed rate of increase in director fees of 6.0% in both
years, each compounded annually.
Page 57
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
- -------------------------------------------------------------------------------
(21)
SAVINGS
INCENTIVE
PLAN
The Bank sponsors a Savings Incentive Plan ("SIP") available to all full-time
employees after completion of one year of employment. Prior to April 18, 1994,
the Bank matched 50% of every dollar contributed by employees to a maximum of 6%
of an employee's salary for the first three years of participation; the Bank
matched 100% thereafter to a maximum of 6% of an employee's salary. Effective
April 18, 1994 through December 31, 1995, the Bank reduced its matching
contribution from 100% to 50% of the first 6% of the participant's base salary
contributed to the plan regardless of length of participation. As of January 1,
1996, the Bank began to phase out this matching contribution to 30% of the first
6% of the participant's base salary contributed to the plan. During 1997, it
will further decrease its matching contribution to 15% of the first 6% of the
participant's base salary. For 1998 and thereafter, the Bank will no longer make
matching contributions. SIP expense was $0.4 million, $0.5 million and $0.8
million for the years ended September 30, 1996, 1995 and 1994, respectively.
- -------------------------------------------------------------------------------
(22)
STOCK
BENEFIT
PLANS
EMPLOYEE STOCK OWNERSHIP PLAN. In connection with the Conversion, the Bank
established an ESOP for eligible employees. The ESOP borrowed $23.8 million from
the Holding Company and used the funds to purchase 2,070,000 shares of Common
Stock issued in the Conversion. The loan to the ESOP will be repaid primarily
from the Bank's contributions to the ESOP over a period not to exceed 15 years.
At September 30, 1996 the loan had an outstanding balance of $19.8 million and
an interest rate of 6.15%.
Shares purchased with the loan proceeds are held in a suspense account by the
trustee of the plan for future allocation among participants as the loan is
repaid. Contributions to the ESOP and shares released from the suspense account
are allocated among participants on the basis of compensation as described in
the plan. Effective April 18, 1994 through December 31, 1996, the number of
shares released to participants was determined based upon the cost of the Common
Stock to the ESOP trustee. As of January 1, 1997, the number of shares released
to participants will be determined based upon the average of the closing price
of the Common Stock for all the trading days in the plan year. Participants will
vest in the shares allocated to their respective accounts over a period not to
exceed 5 years. Any forfeited shares are allocated to the then remaining
participants in the same proportion as contributions. At December 31, 1995,
approximately 243,000 shares have been allocated to participants. At September
30, 1996, the Bank has accrued for the release of approximately 142,000
additional shares which represents the 1996 allocations earned from January 1,
1996 through the end of the fiscal year.
The trustee for the ESOP must vote all allocated shares held in the ESOP trust
in accordance with the instructions of the participants. Unallocated shares held
by the ESOP trust are voted by the trustee in a manner calculated to most
accurately reflect the results of the allocated ESOP shares voted, subject to
the requirements of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
STOCK OPTION PLANS. In connection with the Conversion and the initial public
offering, the Company adopted, and its shareholders later ratified, two stock
option plans: the Long Island Bancorp, Inc. 1994 Stock Incentive Plan ("Stock
Option Plan") and the Long Island Bancorp, Inc. 1994 Non-Employee Directors
Stock Option Program ("Directors Stock Option Plan").
Page 58
<PAGE>
THE STOCK OPTION PLAN. Under the Stock Option Plan, 1,811,250 stock options have
been reserved for executive officers, employees and consultants. Options under
this plan are either non-statutory stock options or incentive stock options.
Each option entitles the holder to purchase one share of the Common Stock at an
exercise price equal to the fair market value on the date of grant. Options are
exercisable ratably over five years measured from the date of grant. Each
option, however, will become 100% exercisable upon the occurrence of a change in
control of the Holding Company or the Bank, or upon death, disability or
retirement of the optionee. All options expire no later than ten years following
the date of grant. Option transactions for the years ended September 30 are
shown below:
Weighted
Average
Number of Exercise
Shares Price
- -------------------------------------------------------------------------------
Options outstanding at September 30, 1993 -- $ --
Granted 1,353,780 11.50
Forfeited 32,130 11.50
--------- ------
Options outstanding at September 30, 1994 1,321,650 11.50
Granted 184,279 17.35
Forfeited 17,964 11.50
Exercised 78,540 11.50
--------- ------
Options outstanding at September 30, 1995 1,409,425 12.23
Granted 1,554 27.38
Forfeited 69,899 11.77
Exercised 123,303 11.57
--------- ------
Options outstanding at September 30, 1996 1,217,777 $12.34
--------- ------
--------- ------
Options exercisable at September 30, 1996 432,603 $11.94
--------- ------
--------- ------
DIRECTORS STOCK OPTION PLAN. Under the Directors Stock Option Plan, 776,250
stock options have been reserved for non-employee directors. Options granted
under this plan are non-statutory options. Each option entitles the holder to
purchase one share of the Common Stock at an exercise price equal to the fair
market value on the date of grant. Options are exercisable ratably over five
years measured from the date of grant. Each option, however, will become 100%
exercisable upon the occurrence of a change in control of the Holding Company or
the Bank, or upon death, disability or retirement of the optionee. All options
expire no later than ten years following the date of grant. Option transactions
for the years ended September 30 are shown below:
Weighted
Average
Number of Exercise
Shares Price
- -------------------------------------------------------------------------------
Options outstanding at September 30, 1993 -- $ --
Granted 694,485 11.50
Forfeited -- --
-------- ------
Options outstanding at September 30, 1994 694,485 11.50
Granted 5,698 17.38
Forfeited -- --
Exercised 67,482 11.50
-------- ------
Options outstanding at September 30, 1995 632,701 11.56
Granted 5,698 27.38
Forfeited -- --
Exercised 55,922 11.50
-------- ------
Options outstanding at September 30, 1996 582,477 $11.72
-------- ------
-------- ------
Options exercisable at September 30, 1996 182,847 $11.54
-------- ------
-------- ------
Page 59
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
MANAGEMENT RECOGNITION AND RETENTION PLANS. In connection with the Conversion
and the IPO, the Company adopted, and its shareholders later ratified, two
recognition and retention plans: The Long Island Savings Bank Management
Recognition and Retention Plan for Executive Officers ("Officers MRP Plan") and
The Long Island Savings Bank Management Recognition and Retention Plan for
Non-Employee Directors ("Directors MRP Plan"). The purpose of these plans
(collectively the "MRPs") is to provide officers and non-employee directors of
the Bank with a proprietary interest in the Holding Company in a manner designed
to encourage their retention with the Bank. Upon completion of the IPO, the Bank
contributed $8.9 million to the MRPs to enable the MRPs to purchase an aggregate
of 776,250 shares of Common Stock at $11.50 per share. This contribution
represents deferred compensation which is initially recorded as a reduction to
stockholders' equity and ratably charged to compensation expense over the
vesting period of the stock awards granted.
OFFICERS MRP PLAN. Under the Officers MRP Plan, 543,375 shares were purchased
for the benefit of executive officers and consultants. During the years ended
September 30, 1995 and 1994, 156,931 and 185,522 shares, respectively, were
granted. These awards vest ratably over five years measured from the date of
grant. During the year ended September 30, 1996, 106,545 additional grants were
awarded to employees based upon their length of service with the Bank and their
officer status. The length of service awards vest over one year and the officer
awards vest ratably over two years. At September 30, 1996, 128,167 shares are
available for future grants. Immediate vesting of awards is deemed to occur upon
change in control of the Holding Company or Bank, or upon death, disability or
retirement of the participant. For the years ended September 30, 1996, 1995, and
1994 compensation expense in the accompanying Consolidated Statements of
Operations includes $1.8 million, $1.4 million and $0.2 million, respectively,
of expense relating to the awards under this plan.
DIRECTORS MRP PLAN. Under the Directors MRP Plan, 232,875 shares were purchased
for the benefit of non-employee directors and 214,956 shares were granted at the
date of Conversion. No additional shares were granted during the years ended
September 30, 1996 and 1995. At September 30, 1996, 35,832 shares are available
for future grants. Awards vest ratably over the life of the grant, however,
immediate vesting is deemed to occur upon change in control of the Holding
Company or Bank, or upon death, disability or retirement of the participant. For
the years ended September 30, 1996, 1995 and 1994, compensation expense in the
accompanying Consolidated Statements of Operations includes $0.5 million, $0.7
million and $0.2 million, respectively, of expense relating to the awards under
this plan.
- -------------------------------------------------------------------------------
(23)
COMMITMENTS AND
CONTINGENCIES
LEASES. The Bank is obligated under several non-cancelable operating lease
agreements as of September 30, 1996. The future minimum rental payments required
under these operating leases are as follows:
Year Ending September 30, Amount
- -------------------------------------------------------------------------------
(In thousands)
1997 $ 2,719
1998 2,478
1999 1,951
2000 1,307
2001 932
Thereafter 5,085
-------
$14,472
-------
-------
PENDING LITIGATION. The Company is involved in various legal actions arising in
the ordinary course of business, in addition to a class action lawsuit involving
certain mortgage borrowers, which, in the aggregate, are believed by
management to be immaterial to the financial position of the Company.
LOANS SOLD WITH RECOURSE. The Bank has sold loans with recourse obligations and
has retained servicing on these loans which have outstanding principal balances
of $289.5 million at September 30, 1996. At this time, the maximum exposure
under the Bank's recourse obligations is $130.1 million. In general, recourse
means that the Bank is obligated to remit to the investor the amount of
contractual principal and interest due (less a servicing fee), regardless of
whether these payments are actually received from the borrower. On completion of
foreclosure, the entire balance of the loan must be remitted to the investor,
regardless of whether the sale of the REO yields that amount. Although the Bank
does not believe that its recourse obligations subject it to risk of material
loss in the future, the Bank has established recourse reserves which at
September 30, 1996 aggregated approximately $0.6 million. In addition, various
securities have been pledged as collateral in order to secure performance of the
Bank's obligations under certain mortgage pool purchase contracts.
Page 60
<PAGE>
- -------------------------------------------------------------------------------
(24)
SIGNIFICANT
CREDIT RISK
CONCENTRATION
The Bank may be exposed to a concentration of credit risk from a regional
economic standpoint since prior to fiscal 1995 loans were made primarily in the
Metropolitan New York area. In an effort to help minimize this risk, the Bank
began to originate or acquire loans on a nationwide basis in fiscal 1995. At
September 30, 1996, approximately 43.46% of the Bank's real estate loans
(excluding home equity loans) were derived from outside of New York, New Jersey
and Connecticut.
- -------------------------------------------------------------------------------
(25)
PARENT-ONLY
FINANCIAL
INFORMATION
Long Island Bancorp, Inc. operates a wholly-owned subsidiary, The Long Island
Savings Bank, FSB. The earnings of the Bank are recognized by the Holding
Company using the equity method of accounting. Accordingly, undistributed
earnings of the Bank are recorded as increases in the Holding Company's
investment in the Bank. The following are the condensed financial statements of
Long Island Bancorp, Inc. (parent company only) as of September 30. The Holding
Company had no results of operations prior to the Conversion on April 14, 1994.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
September 30,
- --------------------------------------------------------------------------
1996 1995
-------- --------
(In thousands)
Assets
Cash and cash equivalents (including interest-earning
assets of $3,073 and $8,623, respectively) $ 3,871 $ 8,628
Investment in debt securities, net:
Held-to-maturity, net (estimated market value
of $0 and $6,844) -- 6,858
Available-for-sale 52,811 73,890
Investment in mortgage-backed securities, net:
Held-to-maturity, net (estimated market value
of $0 and $6,892) -- 6,873
Available-for-sale 12,997 9,238
Accrued interest receivable, net 232 204
Investment in subsidiary 430,546 403,424
ESOP loan receivable 19,789 21,422
Receivable from subsidiary 140 --
Other assets 2,468 399
-------- --------
Total assets $522,854 $530,936
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Liabilities, net $ 3,760 $ 4,762
Total stockholders' equity 519,094 526,174
-------- --------
Total liabilities and stockholders' equity $522,854 $530,936
-------- --------
-------- --------
CONDENSED STATEMENTS OF OPERATIONS
The condensed statements of operations for the years ended September 30, 1996
and 1995 and the period April 14, 1994 (date of Conversion) to September 30,
1994 are as follows:
1996 1995 1994
- ------------------------------------------------------------------------------
(In thousands)
Interest income--securities $ 4,239 $ 6,377 $ 2,266
Interest income--ESOP loan receivable 1,284 1,380 674
Dividends received from subsidiary 10,500 10,800 --
Expenses (793) (734) (1,066)
------- ------- -------
Income before income taxes and equity
in undistributed earnings of
subsidiary 15,230 17,823 1,874
Provision for income taxes (1,553) (2,738) (889)
------- ------- -------
Income before equity in undistributed
earnings of subsidiary 13,677 15,085 985
Equity in undistributed earnings of
subsidiary 18,598 28,431 16,129
------- ------- -------
Net income $32,275 $43,516 $17,114
------- ------- -------
------- ------- -------
Page 61
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
The condensed statements of cash flows for the years ended September 30, 1996
and 1995 and the period April 14, 1994 (date of Conversion) to September 30,
1994 is as follows:
1996 1995 1994
- -----------------------------------------------------------------------------
(In thousands)
Operating activities:
Net income $ 32,275 $ 43,516 $ 17,114
Adjustments to reconcile net
income to net cash
provided (used) by operating
activities:
Equity in the undistributed
earnings of subsidiary (18,598) (28,431) (16,129)
Increase in other assets (2,069) (71) (328)
Accretion of discounts net of
amortization of premium on
debt securities and
mortgage-backed securities (1,023) (3,155) (1,515)
Increase in accrued interest receivable (28) (81) (123)
(Decrease)/increase in other
liabilities (1,002) 3,668 1,094
-------- --------- --------
Net cash provided by operating
activities 9,555 15,446 113
-------- --------- --------
Investing activities:
Purchases of debt securities (265,351) (704,074) (388,812)
Proceeds from maturities of and
principal payments on debt
securities 279,602 682,897 311,702
Proceeds from sale of debt
securities 15,485 19,989 --
Purchases of mortgage-backed
securities -- -- (19,122)
Principal payments on
mortgage-backed securities 2,956 2,286 720
Advances/investment (to)
from subsidiary (140) 9,760 (173,759)
Principal payment on ESOP
loan receivable 1,633 1,650 712
-------- --------- --------
Net cash provided (used) by
investing activities 34,185 12,508 (268,559)
-------- --------- --------
Financing activities:
Net proceeds from the issuance
of common stock -- -- 273,147
Cost to repurchase common stock (42,043) (17,812) --
Cash dividends paid on common stock (8,524) (7,892) --
Proceeds from the exercise of
stock options 2,070 1,677 --
-------- --------- --------
Net cash (used) provided by
financing activities (48,497) (24,027) 273,147
-------- --------- --------
(Decrease)/increase in cash
and cash equivalents (4,757) 3,927 4,701
Cash and cash equivalents at
beginning of period 8,628 4,701 --
-------- --------- --------
Cash and cash equivalents at
end of period $ 3,871 $ 8,628 $ 4,701
-------- --------- --------
-------- --------- --------
Page 62
<PAGE>
- ------------------------------------------------------------------------------
(26)
SELECTED QUARTERLY
FINANCIAL DATA
(UNAUDITED)
The following table is a summary of operations by quarter for the years ended
September 30, 1996 and 1995:
<TABLE>
<CAPTION>
For the Quarter Ended
- ------------------------------------------------------------------------------------------------------------------
9/30/96 6/30/96 3/31/96 12/31/95 9/30/95 6/30/95 3/31/95 12/31/94
------- ------- ------- -------- ------- ------- ------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $91,420 $87,862 $85,562 $86,727 $86,762 $82,709 $77,781 $73,963
Interest expense 52,694 48,723 47,443 48,316 48,614 44,049 38,886 36,347
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 38,726 39,139 38,119 38,411 38,148 38,660 38,895 37,616
Provision for possible loan losses 1,500 1,600 1,500 1,600 1,500 1,500 1,355 2,115
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for possible loan losses 37,226 37,539 36,619 36,811 36,648 37,160 37,540 35,501
Non-interest income:
Fee income:
Loan fees and service charges 944 837 736 700 748 635 532 579
Loan servicing fees 4,648 3,058 3,100 3,057 3,989 3,303 3,125 2,456
Income from insurance and
securities commissions 368 442 471 327 215 253 152 185
Deposit service fees 1,518 1,463 1,496 1,460 1,446 1,449 1,520 1,502
------- ------- ------- ------- ------- ------- ------- -------
Total fee income 7,478 5,800 5,803 5,544 6,398 5,640 5,329 4,722
Other income 1,050 968 1,039 661 1,623 849 683 748
------- ------- ------- ------- ------- ------- ------- -------
Total fee and other income 8,528 6,768 6,842 6,205 8,021 6,489 6,012 5,470
Net gains (losses) on sale activity:
Net gains on loans and
mortgage-backed securities 2,676 2,195 2,497 625 616 924 993 1,029
Net (losses)gains on investment
in debt and equity securities (88) 169 -- 259 1 (349) (1,050) (526)
------- ------- ------- ------- ------- ------- ------- -------
Total net gains (losses) on
sale activity 2,588 2,364 2,497 884 617 575 (57) 503
Net (loss) gain on investment
in real estate and premises (276) 1,735 (14) 2,673 (95) 1,081 105 376
------- ------- ------- ------- ------- ------- ------- -------
Total non-interest income 10,840 10,867 9,325 9,762 8,543 8,145 6,060 6,349
Non-interest expense:
General and administrative expense:
Compensation, payroll taxes and
fringe benefits 16,812 14,255 13,625 13,277 11,544 13,632 14,175 12,092
Advertising 1,673 1,836 1,216 1,215 2,313 801 590 987
Office occupancy and equipment 5,679 5,223 4,795 4,934 5,250 4,558 4,651 4,088
Federal insurance premiums 2,287 2,292 2,259 2,217 2,206 2,226 2,227 2,302
Other general and administrative
expense 5,327 4,951 4,127 4,207 4,562 4,411 4,756 3,372
------- ------- ------- ------- ------- ------- ------- -------
Total general and
administrative expense 31,778 28,557 26,022 25,850 25,875 25,628 26,399 22,841
SAIF special assessment 18,657 -- -- -- -- -- -- --
Net loss on real estate owned 559 637 389 505 522 533 288 447
------- ------- ------- ------- ------- ------- ------- -------
Total non-interest expense 50,994 29,194 26,411 26,355 26,397 26,161 26,687 23,288
------- ------- ------- ------- ------- ------- ------- -------
(Loss) income before income taxes (2,928) 19,212 19,533 20,218 18,794 19,144 16,913 18,562
Provision for income tax
(benefit) expense (1,026) 7,918 8,271 8,597 6,868 8,134 6,878 8,017
------- ------- ------- ------- ------- ------- ------- -------
Net (loss) income $(1,902) $11,294 $11,262 $11,621 $11,926 $11,010 $10,035 $10,545
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Primary (loss) earnings
per common share $ (0.08) $ 0.47 $ 0.46 $ 0.47 $ 0.47 $ 0.45 $ 0.41 $ 0.43
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Fully diluted (loss) earnings
per common share $ (0.08) $ 0.47 $ 0.46 $ 0.47 $ 0.47 $ 0.45 $ 0.41 $ 0.43
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
Page 63
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Long Island Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of Long Island Bancorp, Inc. and subsidiary ("Company") as of September 30, 1996
and 1995 and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three year
period ended September 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
September 30, 1996 and 1995 and the results of their operations and their cash
flows for each of the years in the three year period ended September 30, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statements of Financial Accounting Standards (SFAS)
Nos. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" and 109, "Accounting for Income Taxes," effective October 1, 1993.
/s/KPMG PEAT MARWICK LLP
Jericho, New York
October 22, 1996
Page 64
<PAGE>
Long Island Bancorp, Inc. and Subsidiary
MARKET PRICE OF COMMON STOCK
Long Island Bancorp, Inc. common stock is traded on the NASDAQ national market
under the symbol "LISB". The following table shows the high, low and closing
sales price of the Common Stock during the periods indicated. The Common Stock
began trading April 14, 1994.
1995 High Low Closing
- ------------------------------------------------------------------------------
First Quarter $15.875 $12.125 $14.625
Second Quarter 17.500 14.000 17.500
Third Quarter 20.250 17.125 19.000
Fourth Quarter 28.625 18.625 24.500
1996
- ----
First Quarter $26.750 $22.375 $26.375
Second Quarter 29.625 24.375 28.125
Third Quarter 31.000 26.875 30.563
Fourth Quarter 33.250 27.500 28.875
As of September 30, 1996, the Company had approximately 3,981 shareholders of
record, not including the number of persons or entities holding stock in nominee
or street name through various brokers and banks. There were 24,644,157 shares
of Common Stock shares outstanding at September 30, 1996. Dividends of ten cents
per Common Share have been paid to shareholders as follows:
Declaration Date Record Date Payment Date
- -------------------------------------------------------------------------------
December 21, 1995 January 16, 1996 February 14, 1996
March 26, 1996 April 15, 1996 May 15, 1996
June 25, 1996 July 17, 1996 August 16, 1996
September 24, 1996 October 16, 1996 November 15, 1996
Page 65
<PAGE>
<TABLE>
<CAPTION>
Long Island Bancorp, Inc. and Subsidiary
SHAREHOLDER INFORMATION
<S> <C> <C>
BOARD OF DIRECTORS CORPORATE OFFICES STOCK LISTING
John J. Conefry, Jr., Long Island Bancorp, Inc. Long Island Bancorp Inc.'s
Chairman 201 Old Country Road common stock is traded on the
Melville, NY 11747 Nasdaq National Market under
the symbol "LISB". Stock
Bruce M. Barnet Quotes are included in
Clarence M. Buxton the Nasdaq National Market
Edwin M. Canuso ANNUAL MEETING stock tables published in
Richard F. Chapdelaine leading dailies and other
Brian J. Conway The Annual Meeting of business publications.
Robert J. Conway Shareholders In The Wall Street Journal
Frederick DeMatteis will be held Tuesday, we are listed as "LI Bncp".
George R. Irvin February 18, 1997 at In The New York Times
Herbert J. McCooey 9:30 AM at the Huntington we are listed as "LI Bcp".
Lawrence W. Peters Hilton located on Route 110 at In Newsday we are listed
Robert S. Swanson, Jr. 598 Broadhollow Road, as "LI Bancrp".
Dr. James B. Tormey Melville, NY. Notice of the
Leo J. Waters meeting, a proxy statement and ANNUAL REPORT ON
Donald D. Wenk proxy form are included with FORM 10-K
Troy J. Baydala this mailing to shareholders
(Director Emeritus) of record as of December A copy of the Company's 1996 annual
23, 1996. report on Form 10-K (without
exhibits), which has been filed
with the Securities and Exchange
EXECUTIVE OFFICERS Commission and the annual report
John J. Conefry, Jr., INDEPENDENT AUDITORS pursuant to Section 112 of the
Chairman, President and FDIC Improvement Act of 1991 will
Chief Executive Officer KPMG Peat Marwick LLP be furnished to shareholders
Jericho, New York without charge, upon written
Bruce M. Barnet, request to:
Executive Vice President SHAREHOLDER AND
Department Investor Relations
and Director of Real Estate GENERAL INQUIRIES Long Island Bancorp, Inc.
and Development 201 Old Country Road
Melville, NY 11747
Joseph P. Bryant, Shareholders, analysts and others
Executive Vice President interested in additional WORLD WIDE WEB SITE:
and Chief Mortgage Officer information may contact
Mary M. Feder, http://www.lisb.com
Mark Fuster, Vice President,
Executive Vice President Investor Relations CUSTOMER SERVICE:
and Chief Financial Officer at (516) 547-2607.
1-800-THE-LISB
W. Douglas Singer, STOCK TRANSFER AGENT
Executive Vice President AND REGISTRAR BANK BY PHONE:
and Treasurer
Inquiries regarding stock 694-9010
Robert T. Volk, transfer, lost certificates, From the 516, 212, 718 and
914 area codes
Executive Vice President and or changes in
Director of Consumer Banking name and/or address should be
directed to the stock transfer Available 8:00 AM - 8:00
PM Monday-Friday and
SENIOR VICE PRESIDENTS OF agent and registrar: 8:00 AM - 3:00 PM Saturday
THE LONG ISLAND SAVINGS
Saturday
BANK, FSB ChaseMellon Shareholder
Services, L.L.C.
Roberta E. Cashwell Customer Service Department
Karen M. Cullen P.O. Box 590
Louis A. Iannaccone Ridgefield Park, NJ 07660
Arthur D. McDermott (800) 465-7038
Anthony J. Morris
John B. Pettit
William A. Purschke
John Talotta
Roger Teurfs
</TABLE>
Page 66
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 38991
<INT-BEARING-DEPOSITS> 37357
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1897756
<INVESTMENTS-CARRYING> 23096
<INVESTMENTS-MARKET> 21120
<LOANS> 3132718
<ALLOWANCE> 33912
<TOTAL-ASSETS> 5363791
<DEPOSITS> 3633010
<SHORT-TERM> 186000
<LIABILITIES-OTHER> 233664
<LONG-TERM> 792023
0
0
<COMMON> 268
<OTHER-SE> 518826
<TOTAL-LIABILITIES-AND-EQUITY> 5363791
<INTEREST-LOAN> 200791
<INTEREST-INVEST> 150780
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 351571
<INTEREST-DEPOSIT> 155830
<INTEREST-EXPENSE> 197176
<INTEREST-INCOME-NET> 154395
<LOAN-LOSSES> 6200
<SECURITIES-GAINS> 8333
<EXPENSE-OTHER> 0
<INCOME-PRETAX> 56035
<INCOME-PRE-EXTRAORDINARY> 56035
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32275
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.33
<YIELD-ACTUAL> 3.24
<LOANS-NON> 53166
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 34358
<CHARGE-OFFS> 8199
<RECOVERIES> 1553
<ALLOWANCE-CLOSE> 33912
<ALLOWANCE-DOMESTIC> 33912
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
EXHIBIT 99.0
[Company Logo and Address]
January 6, 1997
Dear Stockholder:
You are cordially invited to attend the third annual meeting of
stockholders of Long Island Bancorp, Inc. (the "Company") which will be held on
February 18, 1997, at 9:30 a.m., at the Huntington Hilton, 598 Broadhollow Road,
Melville, New York (the "Annual Meeting"). The attached Notice of Annual
Meeting and Proxy Statement describe the business to be transacted at the Annual
Meeting.
The major business to be transacted at the Annual Meeting will be the
election of directors and the ratification of KPMG Peat Marwick LLP as our
auditors. Officers of the Company as well as representatives of KPMG Peat
Marwick LLP will be present at the Annual Meeting to respond to any questions
that our stockholders may have regarding the business to be transacted.
The Board of Directors of the Company has determined that the matters
to be considered at the Annual Meeting are in the best interests of the Company
and its stockholders. For the reasons set forth in the Proxy Statement, the
Board unanimously recommends a vote "FOR" each matter to be considered.
It is important that your shares be represented at the Annual Meeting
whether or not you are present. Please be sure to sign, date and mail the
enclosed Proxy Card in the postage-paid envelope provided, even if you plan to
attend in person.
If you attend the Annual Meeting, you may vote in person even if you
have already mailed in your Proxy.
On behalf of the Board of Directors and all the employees of the
Company and The Long Island Savings Bank, FSB, I thank you for your continued
support.
Sincerely,
/s/ John J. Conefry, Jr.
John J. Conefry, Jr.
Chairman of the Board, President and
Chief Executive Officer
<PAGE>
[Company Logo and Address]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 18, 1997
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Long
Island Bancorp, Inc. (the "Company") will be held on February 18, 1997, at 9:30
a.m., at the Huntington Hilton, 598 Broadhollow Road, Melville, New York (the
"Annual Meeting").
A Proxy Statement and Proxy Card for the Annual Meeting are enclosed.
The Annual Meeting is for the purpose of considering and voting upon
the following matters:
1. The election of five directors of the Company for terms of three
years each;
2. The ratification of the appointment of KPMG Peat Marwick LLP as
the Company's independent auditors for the fiscal year ending
September 30, 1997; and
3. Such other business as may properly come before the Annual
Meeting or any adjournment thereof.
Note: The Board of Directors of the Company is not aware of any other business
to come before the Annual Meeting.
Any action may be taken on any one of the foregoing proposals at the
Annual Meeting on the date specified above or on any date or dates to which, by
original or later adjournment, the Annual Meeting may be adjourned.
Stockholders of record at the close of business on December 23, 1996, are the
stockholders entitled to notice of and to vote at the Annual Meeting and any
adjournment thereof. A complete list of stockholders entitled to vote at the
Annual Meeting will be open for examination by any stockholder for any purpose
germane to the Annual Meeting during ordinary business hours at the Company's
principal office located at 201 Old Country Road, Melville, New York for a
period of ten days prior to the Annual Meeting and will also be available at the
Annual Meeting.
<PAGE>
You are requested to fill in, sign and date the enclosed proxy which
is solicited by the Board of Directors and to return it promptly by mail in the
enclosed envelope. The proxy will not be used if you attend and vote in person
at the Annual Meeting.
By Order of the Board of Directors,
/s/ Roger Teurfs
Roger Teurfs
Secretary
Melville, New York
January 6, 1997
________________________________________________________________________________
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE YOUR COMPANY THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES IN ORDER TO INSURE A QUORUM. A SELF-ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN
THE UNITED STATES.
________________________________________________________________________________
<PAGE>
________________________________________________________________________________
LONG ISLAND BANCORP, INC.
201 Old Country Road
Melville, New York 11747
(516) 547-2000
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
February 18, 1997
________________________________________________________________________________
________________________________________________________________________________
GENERAL
________________________________________________________________________________
This Proxy Statement is furnished to stockholders of Long Island
Bancorp, Inc. (the "Company") in connection with the solicitation by the Board
of Directors of the Company (the "Board of Directors") of proxies to be used at
the Annual Meeting of Stockholders to be held on February 18, 1997, at 9:30
a.m., at the Huntington Hilton, 598 Broadhollow Road, Melville, New York (the
"Annual Meeting"), and at any adjournment thereof. Only holders of record of
the Company's issued and outstanding common stock, par value $0.01 per share
(the "Common Stock"), as of the close of business on December 23, 1996 (the
"Record Date") are entitled to vote at the Annual Meeting and any adjournments
thereof. The accompanying Notice of Annual Meeting and form of proxy, the 1996
Annual Report to Stockholders, including the consolidated financial statements
for the fiscal year ended September 30, 1996, and this Proxy Statement are being
first mailed on or about January 6, 1997 to all stockholders entitled to vote at
the Annual Meeting.
________________________________________________________________________________
VOTING AND REVOCABILITY OF PROXIES
________________________________________________________________________________
A majority of the holders of the Common Stock must be represented,
either in person or by proxy, to constitute a quorum for the conduct of
business. In order to insure a quorum, stockholders are requested to vote by
completing the enclosed Proxy Card and returning it signed and dated in the
enclosed postage-paid envelope. Stockholders are urged to indicate their vote
in the spaces provided on the Proxy Card. PROXIES SOLICITED BY THE BOARD OF
DIRECTORS WILL BE VOTED IN ACCORDANCE WITH THE DIRECTIONS GIVEN THEREIN. WHERE
NO INSTRUCTIONS ARE INDICATED, PROXIES WILL BE VOTED FOR THE SPECIFIC PROPOSALS
PRESENTED IN THIS PROXY STATEMENT. Proxies marked as abstentions will not be
counted as votes cast. In addition, shares held in street name which have been
designated by brokers on Proxy Cards as not voted will not be counted as votes
cast. Proxies marked as abstentions or as broker non-votes, however, will be
treated as shares present for purposes of determining whether a quorum is
present. In the event that there are not sufficient votes for a quorum or to
approve or ratify any proposal at the time of the Annual Meeting, the Annual
Meeting may be adjourned in order to permit the further solicitation of proxies.
<PAGE>
The election of directors shall be by a plurality of votes cast by the
holders present in person or by proxy of shares entitled to vote thereon. The
holders of Common Stock may not vote their shares cumulatively for election of
directors.
As to the ratification of KPMG Peat Marwick LLP as independent
auditors of the Company and all other matters that may properly come before the
Annual Meeting, by checking the appropriate box, a shareholder may: (i) vote
"FOR" the item; (ii) vote "AGAINST" the item; or (iii) "ABSTAIN" from voting on
such item. Under the Company's Restated Bylaws (the "Bylaws"), unless otherwise
required by law, the Company's Restated Certificate of Incorporation (the
"Certificate of Incorporation") or the Bylaws, all matters submitted to
stockholders at any meeting, other than the election of directors, shall be
decided by the affirmative vote of a majority of the shares present in person or
represented by proxy at such meeting and entitled to vote on such matters.
The Board of Directors knows of no additional matters that will be
presented for consideration at the Annual Meeting. Execution of a proxy,
however, confers on the designated proxyholders discretionary authority to vote
the shares in accordance with their best judgment with respect to the election
of any person as a director where the nominee is unable to serve or for good
cause will not serve, matters incident to the conduct of the Annual Meeting, and
such other business, if any, that may properly come before the Annual Meeting or
any adjournments thereof.
A proxy may be revoked at any time prior to its exercise by the filing
of a written notice of revocation with the Secretary of the Company, by
delivering a duly executed proxy bearing a later date to the Secretary of the
Company at the address listed above, or by attending the Annual Meeting and
voting in person.
The cost of solicitation of proxies in the form enclosed herewith will
be borne by the Company. In addition to the solicitation of proxies by mail,
D.F. King & Co., Inc., a proxy soliciting firm, will assist the Company in
soliciting proxies for the Annual Meeting and will be paid a fee of $6,000, plus
reimbursement for out-of-pocket expenses. Proxies also may be solicited
personally or by telephone or telegraph by directors, officers and regular
employees of the Company and The Long Island Savings Bank, FSB (the "Bank"),
without additional compensation therefor. The Company will also request
persons, firms and corporations holding shares in their names, or in the name of
their nominees, which are beneficially owned by others, to send proxy materials
to and obtain proxies from such beneficial owners, and will reimburse such
holders for reasonable expenses incurred in connection therewith.
________________________________________________________________________________
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
________________________________________________________________________________
GENERAL
Stockholders of record as of the close of business on the Record Date
are entitled to one vote for each share of Common Stock then held except as
described below. As of the Record Date, there were 24,558,346 shares of Common
Stock outstanding.
As provided in the Certificate of Incorporation, record holders of
Common Stock who, directly or indirectly, beneficially own in excess of 10% of
the outstanding shares of Common Stock (the "Limit") are not entitled to any
vote in respect of the shares held in excess of the Limit. A person or entity
is deemed to beneficially own shares owned by an affiliate of, as well as
persons acting in concert with, such person or entity. The Certificate of
Incorporation authorizes the Board of Directors (i) to make all determinations
necessary to implement and apply the Limit, including determining whether
persons or entities are acting in concert, and (ii) to
-2-
<PAGE>
demand that any person who is reasonably believed to beneficially own Common
Stock in excess of the Limit supply information to the Company to enable the
Board of Directors to implement and apply the Limit.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Persons and groups owning in excess of 5% of the Common Stock are
required to file certain reports regarding such ownership pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon
such reports, the following table sets forth, as of December 1, 1996, certain
information as to the Common Stock beneficially owned by persons owning in
excess of 5% of the outstanding shares of Common Stock. Management knows of no
person, except as listed below, who owned more than 5% of the Company's
outstanding shares of Common Stock as of December 1, 1996.
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent of Class
---------------- -------------------- ----------------
The LISB Employee Stock 2,056,795 shares(1) 8.30 %
Ownership Trust
114 W. 47th Street
New York, New York 10036
Wellington Management Company 1,366,140 shares(2) 5.51 %
75 State Street
Boston, Massachusetts 02109
____________________
(1) The Employee Stock Ownership Plan ("ESOP") is administered by a committee
consisting of three employees of the Bank who were appointed by the Board
of Directors of the Bank. The ESOP's assets are held in trust (the "ESOP
Trust"), for which United States Trust Company of New York serves as
trustee (the "ESOP Trustee"). The terms of the ESOP provide that, subject
to the ESOP Trustee's fiduciary responsibilities under the Employee
Retirement Income Security Act of 1974, as amended, the ESOP Trustee will
vote, tender or exchange shares of Common Stock held in the ESOP Trust in
accordance with the following rules. The ESOP Trustee will vote, tender or
exchange shares of Common Stock allocated to participants' accounts in
accordance with instructions received from the participants. The ESOP
Trustee will vote allocated shares as to which no instructions are received
and any shares in the "suspense account" or that otherwise have not been
allocated to participants' accounts in the same proportion as allocated
shares with respect to which the ESOP Trustee receives instructions are
voted. The ESOP Trustee will tender or exchange any shares in the suspense
account or that otherwise have not been allocated to participants' accounts
in the same proportion as allocated shares with respect to which the ESOP
Trustee receives instructions are tendered or exchanged. With respect to
allocated shares as to which no instructions are received, the ESOP Trustee
will be deemed to have received instructions not to tender or exchange such
shares.
(2) According to its filing on Schedule 13G with the Securities and Exchange
Commission dated August 15, 1996, Wellington Management Company acquired
such interest through its subsidiary Wellington Trust Company, N.A. and
claims sole voting power over 428,320 shares of Common Stock, shared voting
power with respect to 195,150 shares of Common Stock and shared dispositive
power as to 1,366,140 shares of Common Stock. Shares of Common Stock
beneficially owned by Wellington Management Company are owned by a variety
of investment advisory clients of Wellington Management Company. No such
client is known to have an interest in more than 5% of the Common Stock.
-3-
<PAGE>
STOCK OWNERSHIP OF MANAGEMENT
The table below presents the shares of Common Stock and the percentage
of Common Stock beneficially owned as of September 30, 1996 by (i) the Company's
directors, (ii) the executive officers named in the "Summary Compensation Table"
below (see "Executive Compensation") and (iii) the Company's directors and
executive officers, as a group.
<TABLE>
<CAPTION>
Shares of Common Stock Percent
Position(s) Beneficially Owned of Class
Name with the Company (1) (2) (3) (4) (5)
- ---- ---------------- ---------------------- --------
<S> <C> <C> <C>
John J. Conefry, Jr. Chairman of the Board,
President and CEO 265,685 1.08%
William E. Viklund (6) Retired President and
Director 22,390 .09%
Lawrence W. Peters Director 25,909 .11%
Bruce M. Barnet (7) Executive Vice President,
Director 35,012 .14%
Clarence M. Buxton Director 75,948 .31%
Edwin M. Canuso Director 66,466 .27%
Richard F. Chapdelaine Director 77,966 .32%
Brian J. Conway Director 76,167 .31%
Robert J. Conway (8) Director 64,511 .26%
Frederick DeMatteis Director 91,071 .37%
George R. Irvin (9) Director 73,240 .30%
Herbert J. McCooey Director 58,484 .24%
Robert S. Swanson, Jr. Director 63,230 .26%
James B. Tormey,M.D.(10) Director 48,932 .20%
Leo J. Waters Director 38,294 .16%
Donald D. Wenk (11) Director 102,600 .42%
Troy J. Baydala Director Emeritus 40,319 .16%
Joseph P. Bryant Executive Vice President 42,515 .17%
W. Douglas Singer Executive Vice President 63,005 .26%
Mark Fuster Executive Vice President 62,258 .25%
Robert T. Volk Executive Vice President 56,852 .23%
All directors and
executive officers as a
group (21 persons) 1,450,854 5.89%
</TABLE>
-4-
<PAGE>
(1) Unless otherwise indicated, each person effectively exercises sole voting
and dispositive power as to the shares reported.
(2) Includes options granted under the Long Island Bancorp, Inc. 1994 Stock
Incentive Plan (the "Stock Incentive Plan") or the Long Island Bancorp,
Inc. 1994 Non-Employee Directors Stock Option Program (the "Director Stock
Option Program") which are currently exercisable. Excludes remaining
options granted in 1994 which are exercisable in two equal installments
beginning on March 29, 1998, options granted in 1995 which are exercisable
in three equal installments beginning on March 29, 1998, and options
granted in 1996 which are exercisable in four equal installments beginning
on March 29, 1998.
(3) Includes shares awarded under The Long Island Savings Bank Management
Recognition and Retention Plan for Executive Officers (the "Executive
Officer MRP") and The Long Island Savings Bank Management Recognition and
Retention Plan for Non-Employee Directors (the "Director MRP" and,
together with the Executive Officer MRP, the "MRPs"). Under the MRPs,
awards are granted in the form of shares of Common Stock held by the MRPs.
Directors and executive officers earn shares of Common Stock covered by
the award at a rate of 20% per year commencing one year from the date of
the award. Shares awarded in 1996 primarily vest 50% on March 29, 1997
and 50% on March 29, 1998.
(4) Includes 1,726, 0, 1,105, 1,498, 1,498, and 1,438 shares allocated under
the ESOP to the accounts of Messrs. Conefry, Viklund, Bryant, Singer,
Fuster, and Volk, respectively.
(5) The total number of shares of Common Stock outstanding on September 30,
1996 was 24,644,157. For purposes of this table, 581,460 shares of Common
Stock subject to stock options granted, in the aggregate, to all directors
and executive officers are not considered outstanding as such options are
not exercisable prior to March 29, 1998.
(6) Mr. Viklund resigned his Board and management positions with the Company
and Bank, effective September 6, 1996.
(7) Mr. Barnet was elected Executive Vice President, Director of Real Estate
and Development for both the Company and the Bank on October 3, 1996
(8) Of the 64,511 shares of Common Stock beneficially owned, Mr. Robert J.
Conway has sole voting and investment power with respect to 56,511 shares
of Common Stock and has shared voting and investment power with respect to
8,000 shares of Common Stock.
(9) Of the 73,240 shares of Common Stock beneficially owned, Mr. Irvin has
sole voting and investment power with respect to 10,749 shares of Common
Stock and has shared voting and investment power with respect to 62,491
shares of Common Stock.
(10) Of the 48,932 shares of Common Stock beneficially owned, Dr. Tormey has
sole voting and investment power with respect to 46,932 shares of Common
Stock and has shared voting and investment power with respect to 2,000
shares of Common Stock.
(11) Of the 102,600 shares of Common Stock beneficially owned, Mr. Wenk has
sole voting and investment power with respect to 95,600 shares of Common
Stock and has shared voting and investment power with respect to 7,000
shares of Common Stock.
-5-
<PAGE>
________________________________________________________________________________
PROPOSAL NO. 1
ELECTION OF DIRECTORS
________________________________________________________________________________
The Board of Directors of the Company consists of fifteen directors
divided into three classes, Class I, Class II and Class III directors, and one
director emeritus. Upon election by the stockholders, the directors of each
class serve for a term of three years, with the directors of one class elected
each year. The Class I directors, consisting of Messrs. Conefry, Chapdelaine,
Irvin and Tormey, were elected to terms of office expiring at the 1998 annual
meeting of stockholders. The Class II directors, consisting of Messrs.
DeMatteis, McCooey, Swanson, Canuso, Barnet and Peters were granted terms of
office expiring at the 1999 annual meeting of stockholders of the Company. The
Class III directors, consisting of Messrs. Buxton, Conway (Brian J.), Conway
(Robert J.), Waters and Wenk, were granted terms of office expiring at the 1997
annual meeting of stockholders. In all cases, directors serve until their
respective successors are duly elected and qualified.
The directors whose terms expire at the Annual Meeting are Messrs.
Buxton, Conway (Brian J.), Conway (Robert J.), Waters and Wenk. Each of these
directors (each a "Board Nominee") has been nominated by the Board to stand for
reelection, and, if elected, to serve for a term expiring at the annual meeting
of stockholders to be held in 2000. Each Board Nominee has consented to being
named in this Proxy Statement and to serve if elected.
UNLESS OTHERWISE INSTRUCTED, IT IS THE INTENTION OF THE PROXY HOLDERS
TO VOTE THE PROXIES RECEIVED BY THEM IN RESPONSE TO THIS SOLICITATION FOR THE
ELECTION OF THE BOARD NOMINEES AS DIRECTORS. IF ANY BOARD NOMINEE SHOULD REFUSE
OR BE UNABLE TO SERVE, THE PROXIES WILL BE VOTED FOR SUCH PERSON AS SHALL BE
DESIGNATED BY THE BOARD TO REPLACE ANY SUCH NOMINEE. THE BOARD PRESENTLY HAS NO
KNOWLEDGE THAT ANY OF THE BOARD NOMINEES WILL REFUSE OR BE UNABLE TO SERVE.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR EACH OF THE BOARD NOMINEES.
BOARD NOMINEES, DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Board
Nominees and the other members of the Board of Directors of the Company.
POSITION(S) HELD WITH DIRECTOR TERM
NAME AGE(1) THE COMPANY SINCE(2) EXPIRES
- ---- ------ --------------------- --------- -------
John J. Conefry, Jr. 52 Chairman of the Board,
President and CEO 01/15/80 1998
Lawrence W. Peters 66 Director 04/25/89 1999
Bruce M. Barnet(3) 44 Executive Vice President,
Director 06/24/86 1999
Clarence M. Buxton 69 Director 01/15/74 1997
Edwin M. Canuso 71 Director 05/19/70 1999
Richard F. Chapdelaine(4) 71 Director 11/22/88 1998
Brian J. Conway(5) 38 Director 03/28/89 1997
Robert J. Conway(5) 61 Director 08/17/83 1997
-6-
<PAGE>
POSITION(S) HELD WITH DIRECTOR TERM
NAME AGE(1) THE COMPANY SINCE(2) EXPIRES
- ---- ------ --------------------- --------- -------
Frederick DeMatteis 73 Director 04/20/65 1999
George R. Irvin(3) 69 Director 09/21/76 1998
Herbert J. McCooey 70 Director 07/21/64 1999
Robert S. Swanson, Jr. 71 Director 08/20/68 1999
Dr. James B. Tormey 67 Director 01/19/82 1998
Leo J. Waters 61 Director 03/27/90 1997
Donald D. Wenk 66 Director 01/15/74 1997
Troy J. Baydala 78 Director Emeritus 08/15/72 -
____________________
(1) As of November 1, 1996.
(2) All directors commenced service as directors of the Company on December 20,
1993, the date of the Company's incorporation. The dates set forth above
are the dates the individuals commenced service as directors of the Bank.
(3) Bruce M. Barnet is the son-in-law of George R. Irvin.
(4) Mr. Chapdelaine served on the Board of Directors of the Bank from August
1968 to March 1986, at which time he left the Board. He was reappointed to
the Board of Directors of the Bank in November 1988.
(5) Brian J. Conway is the nephew of Robert J. Conway.
The following table sets forth certain information regarding the
executive officers who are not directors of the Company.
POSITION(S) HELD WITH
NAME AGE(1) THE COMPANY
- ---- ------ ---------------------
William E. Viklund 56 Former President
Joseph P. Bryant 49 Executive Vice President
W. Douglas Singer 46 Executive Vice President
Mark Fuster 49 Executive Vice President/Treasurer
Robert T. Volk 44 Executive Vice President
____________________
(1) As of November 1, 1996.
Mr. Fuster has served as an executive officer of the Company since
December 21, 1993, the first meeting of the Board of Directors of the Company.
Messrs. Bryant, Singer and Volk have served as executive officers of the Company
since July 26, 1994, March 29, 1994 and July 26, 1994, respectively. All
executive officers of the Company are elected annually and serve at the will of
the Board of Directors, until their respective successors have been elected and
qualified.
-7-
<PAGE>
BIOGRAPHICAL INFORMATION
Set forth below is certain information with respect to the directors,
Board Nominees and executive officers of the Company. Unless otherwise
indicated, the principal occupation listed for each person below has been his
principal occupation for the past five years.
DIRECTORS AND BOARD NOMINEES
JOHN J. CONEFRY, JR. has served as the Chairman of the Board of Directors
and Chief Executive Officer of the Company since December 21, 1993, the first
meeting of the Board of Directors of the Company, and as Chairman of the Board
of Directors of the Bank since January 25, 1994. He joined the Bank as an
employee on September 6, 1993 as Vice Chairman. On November 23, 1993, he was
elected Chief Executive Officer of the Bank. Mr. Conefry has been a Director of
the Bank since January 15, 1980. On September 7, 1996 he assumed the Presidency
of the Company and of the Bank. Mr. Conefry previously was employed by Merrill
Lynch, Pierce, Fenner & Smith, Inc., where he had been a Senior Vice President
since 1981. Prior to that, he had been a partner in the public accounting firm
of Deloitte, Haskins & Sells. Mr. Conefry also serves on a number of boards of
not-for-profit organizations.
WILLIAM E. VIKLUND was a director and President of the Company from its
formation in 1993 to September 6, 1996. Mr. Viklund resigned his management and
board positions with the Company and Bank on September 6, 1996.
LAWRENCE W. PETERS has been a director of the Company since its formation
in 1993. He joined the Bank on April 13, 1989 as a Senior Executive Vice
President and Chief Lending Officer. Mr. Peters retired from his management
position on May 23, 1995. Prior to joining the Bank, Mr. Peters was employed by
Dime Savings Bank of New York as Vice Chairman and Director, and was in charge
of all lending functions.
BRUCE M. BARNET has been a director of the Company since its formation in
1993. He became a director of the Bank on June 24, 1986. As the President of
Sunset Developers, Inc., a real estate brokerage firm, he was active in the
development, sale and management of residential and commercial real estate in
the New York area since 1985. On October 3, 1996, Mr. Barnet was appointed
Executive Vice President, Director of Real Estate and Development, of the
Company and the Bank.
CLARENCE M. BUXTON has been a director of the Company since its formation
in 1993. He became a director of the Bank on January 15, 1974. Mr. Buxton is a
partner in Buxton, Davidson Associates, an employee benefit and estate planning
firm.
EDWIN M. CANUSO has been a director of the Company since its formation in
1993. He became a director of the Bank on May 19, 1970. He served the Bank
for 16 years as the Senior Executive Vice President in charge of real estate
management, development, construction and joint ventures. Mr. Canuso retired
from the Bank on January 1, 1993. He currently serves in a consulting capacity
to the Bank.
RICHARD F. CHAPDELAINE has been a director of the Company since its
formation in 1993. He became a director of the Bank on August 20, 1968. He is
the Chairman of the Board of Chapdelaine Corporate Securities & Co. and
Chapdelaine & Co., Inc., both firms dealing in financial services. He serves on
the Boards of St. Francis Hospital, Niagara University Emeritus, and Golden Bear
International.
BRIAN J. CONWAY has been a director of the Company since its formation in
1993. He became a director of the Bank on March 28, 1989. He is a Managing
Director of TA Associates, Inc., a private equity investment firm.
-8-
<PAGE>
ROBERT J. CONWAY has been a director of the Company since its formation in
1993. He became a director of the Bank on August 17, 1983. Mr. Conway was
employed by AMF for 29 years. His last position with AMF was Corporate Vice
President and Group Executive of the Worldwide Bowling Products Group. He has
worked as a professional equities trader and currently is a private real estate
investor.
FREDERICK DEMATTEIS has been a director of the Company since its formation
in 1993. He became a director of the Bank on April 20, 1965. Mr. DeMatteis is
the Chairman of the Board and CEO of Leon D. DeMatteis Corporation, a real
estate development and construction firm. He is the Chairman of the Board for
St. Vincents Services and the Chairman of the Board of DM Airport Developers,
Inc. He serves on the Boards of St. Francis Hospital, Building Future Council,
Chairman of RY Management Co., Inc., and the Signet Hotel Corporation.
GEORGE R. IRVIN has been a director of the Company since its formation in
1993. He became a director of the Bank on September 21, 1976. As President of
Realty Syndicates Co., Mr. Irvin is an active developer of residential and
commercial real estate on Long Island.
HERBERT J. MCCOOEY has been a director of the Company since its formation
in 1993. He became a director of the Bank on July 21, 1964. Mr. McCooey is
retired. Prior to his retirement he served as Executive Vice President of Robb,
Peck, McCooey & Co., Inc., a specialist firm on the New York Stock Exchange. He
was also a Senior Floor Governor of the New York Stock Exchange.
ROBERT S. SWANSON, JR. has been a director of the Company since its
formation in 1993. He became a director of the Bank on August 20, 1968. Mr.
Swanson served as Chairman of the Board of S.B. Thomas Inc., a specialty baking
company. He retired in 1976.
JAMES B. TORMEY, M.D. has been a director of the Company since its
formation in 1993. He became a director of the Bank on January 19, 1982. Since
January 1, 1995 he has been retired from the active practice of medicine. Dr.
Tormey has served as a member of the Medical Ethics Committee of the Catholic
Diocese of Rockville Centre. He is a limited partner in the Rockville Centre
Medical Realty Association.
LEO J. WATERS has been a director of the Company since its formation in
1993. He became a director of the Bank on March 27, 1990. He is the President
of a private investment consulting firm.
DONALD D. WENK has been a director of the Company since its formation in
1993. He became a director of the Bank on January 15, 1974. From June 23,
1992 until January 25, 1994, Mr. Wenk served as Chairman of the Board of
Directors of the Bank. From January 25, 1994 until January 23, 1996, Mr. Wenk
served as Chairman of the Executive Committee of the Board of Directors of the
Bank. He is the Chairman of the Board of American Casting & Manufacturing
Corporation, and he also serves on the Board of St. Francis Hospital.
TROY J. BAYDALA has been a director emeritus of the Company since soon
after its formation in 1993. He became a director of the Bank on August 15,
1972 and retired from the Board of the Bank on December 8, 1992 upon reaching
the mandatory retirement age of 75. Mr. Baydala retired in 1983 from his
position as Executive Vice President and Secretary of the Bank. He previously
served as a Senior Vice President of Franklin National Bank, where he worked for
23 years. Mr. Baydala was the President of the New York chapter of the American
Institute of Real Estate Appraisers (MAI).
-9-
<PAGE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
JOSEPH P. BRYANT has been an Executive Vice President of the Company since
July 26, 1994. He is Executive Vice President and Chief Mortgage Officer of the
Bank. Mr. Bryant joined the Bank on November 1, 1993. He formerly served as
President of Prudential Real Estate Financial Services Inc., a real estate
financing institution.
W. DOUGLAS SINGER has been an Executive Vice President of the Company since
March 29, 1994. He is Executive Vice President and Treasurer of the Bank. He
joined the Bank in 1988 from Goldman Sachs & Co. where he was a Vice President
in its Mortgage Backed Securities Department.
MARK FUSTER has been the Treasurer of the Company since December 21, 1993
and Executive Vice President and Treasurer of the Company since January 23,
1996. He is Executive Vice President and Chief Financial Officer of the Bank.
Mr. Fuster joined the Bank in 1981. Prior to joining the Bank Mr. Fuster served
as Vice President and Controller for the real estate and mortgage loan
department at another financial institution. Mr. Fuster had previously served
as a supervisor at the accounting firm of Peat Marwick Mitchell & Co.
ROBERT T. VOLK has been an Executive Vice President of the Company since
July 26, 1994. He is Executive Vice President and Director of Consumer Banking
at the Bank. Mr. Volk joined the Bank in 1989. He formerly served as Vice
President, Community Banking Group Administration at National Westminster Bank
USA.
________________________________________________________________________________
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
OF THE COMPANY AND OF THE BANK
________________________________________________________________________________
The Board of Directors meets on a monthly basis and may have
additional special meetings upon the request of the Chairman of the Board or a
majority of the Board of Directors. During the fiscal year ended September 30,
1996, the Board of Directors met twelve times. All directors attended at least
75% of the aggregate number of meetings of the Board of Directors and committee
meetings, for those committees on which such director served, during this
period. The Board of Directors has established the following committees among
others:
The Compensation Committee consists of Chairman Chapdelaine and
Messrs. DeMatteis and Swanson. The function of the Compensation Committee is to
review the performance and compensation of the officers of the Company, make
recommendations to the Board of Directors with respect thereto and administer
the Executive Officer MRP, including the granting of restricted shares of Common
Stock pursuant thereto, and the Stock Incentive Plan, including the granting of
options pursuant thereto. This committee meets on an as-needed basis and met
seven times during fiscal 1996.
The Audit Committee consists of Chairman Waters and Messrs. Conway
(Brian J.), McCooey, Swanson, Tormey and Peters. The purpose of this Committee
is to review the progress of all internal audits, all independent audits and all
periodic reports of such audits submitted to the Audit Committee and to
supervise and coordinate with persons conducting such audits. This committee
generally meets, at a minimum, on a quarterly basis and met 12 times during
fiscal 1996.
In addition to the Committees described above, the Board of Directors
has established an Executive Committee and a Planning and Development Committee.
The Board of Directors of the Bank (the "Bank Board") and the Board of
Directors are identically constituted. During fiscal 1996, the Bank Board met
twelve times. No director attended
-10-
<PAGE>
fewer than 75% of the aggregate of Bank Board and committee meetings, for those
committees on which such director served during the time he served, held during
this period.
The Bank Board also maintains executive, compensation and audit
committees, the membership of which is the same as the comparable committees of
the Board of Directors. The Committees of the Bank Board serve substantially
the same functions at the Bank level as those of the Company. The Compensation
and Audit Committees of the Bank Board met seven times and twelve times,
respectively, during such period.
In addition to the Committees described above, the Bank Board has
established the Loan, Investment and Community Reinvestment Act ("CRA")
Committees.
There are no arrangements or understandings between the Company or any
person(s) pursuant to which any person is or was selected as a director or
nominee. There is no family relationship between any director, any Board
Nominee, any executive officer or any significant employee of the Company,
except that Brian J. Conway is the nephew of Robert J. Conway and Bruce M.
Barnet is the son-in-law of George R. Irvin.
No director, Board Nominee, officer, or affiliate of the Company, or
any owner of record or beneficially of more than five percent (5%) of the Common
Stock or any associate of such parties is, or has been involved in any legal
proceedings as a party adverse to the Company or its subsidiaries or has a
material interest adverse to the Company or its subsidiaries. During the past
five years no director, Board Nominee, executive officer, promoter or control
person is or has been involved in any proceeding of a nature requiring
disclosure herein which is material to an evaluation of the ability or integrity
of such director, Board Nominee or executive officer or to the stockholders'
voting or investment decision.
________________________________________________________________________________
TRANSACTIONS WITH CERTAIN RELATED PERSONS
________________________________________________________________________________
Savings associations such as the Bank are subject to the restrictions
contained in Section 22(h) of the Federal Reserve Act (as implemented by
provisions of the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA")) and the Federal Reserve Board's Regulation O thereunder on
loans to executive officers, directors and principal stockholders. Under
Section 22(h), loans to a director, executive officer and to a greater than
10.0% stockholder of a savings association and certain affiliated interests of
such persons may not exceed, together with all other outstanding loans to such
person and affiliated interests, the institution's loans-to-one-borrower limit
(generally equal to 15.0% of the institution's unimpaired capital and surplus).
Section 22(h) also generally prohibits the making of loans above amounts
prescribed by the appropriate federal banking agency to directors, executive
officers and greater than 10.0% stockholders of a savings association and their
respective affiliates, unless such loan is approved in advance by a majority of
the board of directors of the institution with any "interested" director not
participating in the voting. Regulation O prescribes the loan amount (which
includes all other outstanding loans to such person) as to which such prior
board of director approval is required as being the greater of $25,000 or 5.0%
of the association's unimpaired capital and unimpaired surplus (up to $500,000).
Further, Section 22(h) requires that loans to directors, executive officers and
principal stockholders be made on terms substantially the same as, and following
credit-underwriting procedures that are not less stringent than, those offered
in comparable transactions to other persons and that do not involve more than
normal risk of repayment or present other unfavorable features, except that
extensions of credit to directors, executive officers, and principal
shareholders are permitted as long as the extension of credit is made pursuant
to a pension or benefit program that is widely available to employees and does
not give preference to directors, executive officers, and principal
shareholders. Section 22(h) also generally prohibits a depository institution
from paying the overdrafts of any of its executive officers or directors, unless
the payment of funds is made in accordance with a written, pre-
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<PAGE>
authorized interest-bearing extension of credit plan that specifies a method of
payment or a written, pre-authorized transfer of funds from another account of
the account holder at the institution.
Savings associations also are subject to the requirements and
restrictions of Section 22(g) of the Federal Reserve Act (as implemented by
FDICIA) and Regulation O on loans to executive officers. Under Section 22 (g),
the Bank is prohibited from extending credit, unless secured by a perfected
security interest in qualifying United States or United States agency
obligations or a deposit account in the lending bank, to its executive officers,
except to finance the purchase, construction, maintenance or improvement of the
executive's residence or the education of the executive's children or if for any
other purpose the aggregate loans do not exceed at any one time the higher of
$25,000 or 2.5% of the institution's unimpaired capital and unimpaired surplus
but in no event more than $100,000. Under OTS regulations in effect prior to
the FIRREA and FDICIA amendments, similar restrictions applied; however, a
savings association could make loans such as residential mortgage loans and
consumer loans to officers and directors (and other employees) at favorable
interest rates and loan fees if certain procedures were followed.
Although the Company does not, the Bank may from time to time make
loans to the directors and executive officers of the Company or the Bank or
members of their families, as well as to members of the public. In keeping with
earlier applicable OTS regulations, the loans were made by the Bank in the past
in the ordinary course of business and on substantially the same terms and
conditions, except for reduced interest rates and loan fees, as those of
comparable transactions prevailing at the time, and did not involve more than
the normal risk of repayment or present other unfavorable features. The Bank's
policy during fiscal 1996 complied in all respects with Sections 22(g) and 22(h)
of the Federal Reserve Act and Regulation O and provided, among other things,
that all loans made by the Bank to its directors and executive officers which,
when aggregated with all other extensions of credit to that director or
executive officer, exceeded $350,000 were required to be approved by the Bank
Board, be made in the ordinary course of business, on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons, and not involve more than the
normal risk of collectability or present other unfavorable features.
Mr. Barnet is the sole shareholder and President of Sunset Developers,
Inc. which until October 3, 1996 served as a real estate advisor and rendered
real estate services to the Bank and to subsidiaries of the Bank, pursuant to an
advisory agreement dated April 1, 1996 (1996 Advisory Agreement), covering 11
separate Bank owned properties. The 1996 Advisory Agreement consolidated four
separate Advisory Agreements previously existing between the Bank and Sunset
Developers. In connection with the 1996 Advisory Agreement, Sunset Developers
was entitled to an hourly fee for services rendered for each property covered
under the 1996 Advisory Agreement and result-based additional compensation for
10 of the properties covered under the 1996 Advisory Agreement. Sunset
Developers, Inc. received a total of $304,939 in fees from the Bank during the
fiscal year ended September 30, 1996. In connection with Mr. Barnet's joining
the Bank and Company on October 3, 1996 as Executive Vice President, Director of
Real Estate and Development, the 1996 Advisory Agreement was terminated pursuant
to a Termination Agreement dated October 3, 1996. Pursuant to the terms of the
Termination Agreement, all amounts due and owing to Sunset Developers were paid
by the Bank, and Sunset Developers released the Bank from any claims for
additional compensation and payment. The Company believes that the terms and
conditions of its relationship with Sunset Developers, Inc. were as favorable as
those that could be obtained from arms length negotiations with unassociated
third parties.
Mr. Buxton is an agent for certain large insurance companies. In such
capacity, he has acted as the agent for certain life and health insurance
policies provided by the Bank to its executive officers and other employees.
During fiscal 1996, the Bank paid $701,000 in premiums to these insurance
companies in connection with such policies and Mr. Buxton received compensation
from such insurance companies in connection therewith.
-12-
<PAGE>
________________________________________________________________________________
BENEFICIAL OWNERSHIP REPORT
________________________________________________________________________________
Section 16(a) of the Exchange Act and regulations promulgated
thereunder require the Company's directors and executive officers, and persons
who own more than 10% of a registered class of the Company's equity securities,
to file with the Securities and Exchange Commission (the "SEC") and the NASDAQ
reports of ownership and changes in ownership of common stock and other equity
securities of the Company. Officers, directors and greater than 10%
shareholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on review of the copies of such reports furnished to the
Company or written representations that no other reports were required, the
Company believes that, during the fiscal year ended September 30, 1996 all
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.
________________________________________________________________________________
DIRECTOR'S COMPENSATION
________________________________________________________________________________
DIRECTOR FEES. Non-employee members of the Board of Directors receive
an annual retainer of $6,000 and non-employee members of the Bank Board receive
an annual retainer of $18,000. In addition, each such member receives a fee of
$1,000 per meeting for attendance at Board meetings and a fee of $500 per
meeting for attendance at Committee meetings. For Board meetings of the Company
and the Bank held on the same day, only one fee is paid to cover both meetings.
For Committee meetings of the same Committee of the Company and the Bank held on
the same day, only one fee is paid for both meetings. Mr. Waters, Chairman of
the Audit Committee, and Mr. Chapdelaine, Chairman of the Compensation
Committee, each receive one Committee retainer fee of $12,000 per annum for
serving as Chairman of his Committee of the Company and the Bank, in addition to
any other compensation that they receive as members of the Board of Directors or
the Bank Board. Committee Chairmen who receive such a retainer receive no
additional compensation (e.g., Committee meeting fees) for serving in that
capacity regardless of the number of meetings held. Directors who are employees
of the Bank receive no fees or retainers. In addition, Mr. Canuso, Mr. Wenk,
Dr. Tormey and Mr. Baydala provide consulting services to the Bank. For these
services, Mr. Canuso receives a consulting fee of $30,000 per annum, Mr. Wenk
receives a consulting fee of $1,000 per month, and Dr. Tormey receives a
consulting fee of $1,000 per month. Mr. Baydala receives a consulting fee of
$500 per Loan Committee meeting attended and $500 per day that he performs loan
inspections and appraisals; such fees are expected to approximate between
$26,000 and $29,000 per annum.
The Bank maintains a deferred fee plan for directors whereby directors
may elect to defer any or all fees earned for their services as a director. Mr.
Robert J. Conway is the only director whose fees are currently being deferred
pursuant to this plan.
OPTION PROGRAM FOR NON-EMPLOYEE DIRECTORS. The Company maintains a
non-employee director stock option program. The program automatically grants to
directors of the Company who are not employees of or consultants to the Bank or
the Company non-statutory options to acquire a fixed number of shares of Common
Stock. Under the program, each outside director received, in connection with
the consummation of the Bank's conversion from mutual to stock form, the
concurrent issuance of the Bank's capital stock to the Company and the sale of
the Company's Common Stock to the public (the "Conversion"), an option to
acquire a number of shares of the Common Stock equal to (a) 41,400 shares, plus
(b) 1,035 shares for each full and partial year of service by any such outside
director on the Bank Board (a "Conversion Grant"). Each new outside director
will receive an option to acquire 2,588 shares of the Common Stock, as of the
date of appointment or election to the Board of Directors (an "Initial Grant").
On each anniversary of any Conversion Grant and Initial Grant each continuing
outside director shall automatically receive an option to acquire 518 shares of
the Common Stock. These additional options will be granted subject to the
availability of options within the program. Outside
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<PAGE>
directors have to date received fixed option awards, depending upon length of
service on the Bank Board, covering an aggregate 705,881 shares of Common Stock,
including an aggregate of 5,698 shares of Common Stock covering the 1996
automatic grant of options. 70,369 shares currently remain available for
future fixed option awards, as described above, to new outside directors and
current outside directors who continue to serve on the Board of Directors. The
exercise price per share of each option equals the fair market value of the
underlying shares of Common Stock on the date of grant of such option. All
options granted under the program become exercisable as to one-fifth of the
underlying shares on each of the first five anniversaries of the date of grant.
All option grants expire upon the earlier of ten years following the date of
grant, or, in the event of an involuntary termination, as defined in the
program, one year following the date the optionee ceases to be a director of the
Company. In the event of an involuntary termination, or upon the occurrence of
a change in control, as defined in the program, all options granted to an
outside director become 100% exercisable. In the event of a voluntary
termination, as defined in the program, the outstanding options will
automatically expire on the date of any such termination.
MANAGEMENT RECOGNITION AND RETENTION PLAN FOR NON-EMPLOYEE DIRECTORS.
The Bank maintains a management recognition and retention plan for directors of
the Bank and the Company who are not employees of or consultants to the Bank or
the Company. The plan provides for the automatic fixed grant of 17,913 shares
of restricted Common Stock to those individuals (a) who were directors of the
Company and the Bank on the date of the Conversion and (b) who are subsequently
elected or appointed as a director of both the Company and the Bank. To date,
outside directors as a group have received, in the aggregate, awards of 197,043
shares of restricted Common Stock under the plan. 35,832 shares of restricted
Common Stock remain available for future grants under the plan. All grants of
shares of restricted Common Stock vest at a rate of one-fifth on each of the
first five anniversaries of the date of grant. In the event of a termination of
board membership, other than a termination due to retirement after age 75,
death, or disability (as defined in the plan), all unvested shares of restricted
Common Stock will be forfeited by the former director. In the event of any such
retirement, death, or disability, or any change in control, as defined in the
plan, of the Company or the Bank, all shares of restricted Common Stock become
fully vested as of the date of any such termination or change in control.
HEALTH CARE COVERAGE. The Bank has made available a plan of health
care coverage to directors who are not employees of the Bank or the Company and
who wish to participate in the plan. Such directors may choose to receive
health care coverage under one of two plans. The first plan provides medical
coverage within the Bank's Flexible Benefits Program, under which each director
may choose from one of three plan options, each of which has a different level
of reimbursement and a different monthly premium. The second plan is a health
maintenance organization.
RETIREMENT BENEFIT PLAN. The Bank has adopted a non-qualified
Retirement Benefit Plan for directors who are not employees of the Bank or the
Company ("Eligible Directors"). Upon retirement from the Board of Directors at
age 65 or older, with a minimum of 15 years of service, the retirement benefits
provide continuation of the annual retainers received by Eligible Directors from
the Bank and the Company and Board meeting fees at the then current rate for a
period of ten years following retirement. In the event that an Eligible
Director retires from the Board of Directors with a minimum of five but less
than 15 years of service, such Eligible Director shall receive pro-rated
retirement benefits based on the years of service. Mr. Baydala is currently
receiving annual benefits of $36,000 under the Retirement Benefit Plan.
-14-
<PAGE>
________________________________________________________________________________
EXECUTIVE COMPENSATION
________________________________________________________________________________
THE REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION AND
THE STOCK PERFORMANCE GRAPH SHALL NOT BE DEEMED INCORPORATED BY REFERENCE BY ANY
GENERAL STATEMENT INCORPORATING BY REFERENCE THIS PROXY STATEMENT INTO ANY
FILING UNDER THE SECURITIES ACT OF 1933 OR THE EXCHANGE ACT, EXCEPT AS TO THE
EXTENT THAT THE COMPANY SPECIFICALLY INCORPORATES THIS INFORMATION BY REFERENCE,
AND SHALL NOT OTHERWISE BE DEEMED FILED UNDER SUCH ACTS.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committees of the Bank and the Company (together,
the "Committee") are identically constituted and, at the direction of the Board
of Directors, have jointly prepared the following report for inclusion in this
Proxy Statement. The Committee is comprised of Messrs. Chapdelaine, DeMatteis
and Swanson, three non-employee directors who are "disinterested persons" within
the meaning of Rule 16b-3 of the Exchange Act. The Committee has the
responsibility for all compensation matters concerning the Company's and the
Bank's executive officers.
COMPENSATION PHILOSOPHY. The executive compensation program links
management pay with the Company's annual and long-term performance. The program
is intended to attract and retain highly-qualified senior managers by providing
compensation opportunities that are consistent with the Company's performance.
The program provides for base salaries that reflect such factors as level of
responsibility, individual performance, internal fairness, and external
competitiveness, annual incentive bonus awards that are payable in cash for the
achievement of strategic acquisitions and/or divestitures, loan production,
improvement in asset quality, increased fee income, introduction of innovative
products and services, and the achievement of other significant annual financial
and operational objectives. The program also provides long-term incentive
opportunities in the form of stock options and restricted shares that strengthen
the mutuality of interest between management and the Company's stockholders and
encourage management continuity. From time to time, the Committee utilizes the
services of a recognized, external consulting firm to assess marketplace
compensation values and practices, and to assess the reasonableness of the
overall compensation program.
The Company strives to provide motivational compensation opportunities
that effectively and appropriately reward management for the achievement of
critical performance objectives. The Committee supports a pay-for-performance
policy that determines executive compensation amounts based on both corporate
and individual performance. Salaries and annual bonuses for senior corporate
executives are therefore based on the overall performance of the Company and on
their personal contributions to that performance. In addition, the program
provides stock incentive opportunities designed to align the interests of
executives and other key employees with other stockholders through the ownership
of Common Stock.
Effective January 1, 1994, Internal Revenue Code (the "Code") Section
162(m) places a limitation of $1 million per officer on the deductibility of
certain elements of compensation paid to the Named Executive Officers (as
defined below) of the Company and the Bank. As stated above, the Committee
designs its compensation arrangements to achieve various objectives. Because of
the importance placed by the Committee on establishing appropriate compensation
arrangements that will achieve these objectives, the Committee has not taken
into account the impact of Section 162(m) of the Code and does not believe that
the tax law should dictate compensation policies or have a significant effect in
determining compensation policies and practices for the Company's executive
officers. The Committee will study whether it is possible or desirable to cause
compensation arrangements in the future to be exempt from the limitation imposed
under Section 162(m) of the Code. To the extent that the Committee's
compensation objectives can be achieved in a manner that maximizes the
deductibility of compensation paid by the Company, it will seek to do so.
-15-
<PAGE>
The following is a discussion of each of the elements of the Company's
executive compensation program, including a description of the decisions and
actions taken by the Committee with respect to fiscal 1996 compensation for the
Chief Executive Officer (the "CEO") and all executive officers as a group.
MANAGEMENT COMPENSATION PROGRAM. Compensation paid to the Company's
executive officers in the fiscal year ended September 30, 1996 (as reflected in
the tables that follow with respect to the Named Executive Officers) consisted
of the following elements: base salary, annual incentive bonus, restricted
shares under the Executive Officer MRP and stock options under the Stock
Incentive Plan. Total annual cash compensation for each executive officer
varies each year based on the Company's achievement of its annual objectives and
the individual's performance.
With respect to determining the base salary of executive officers, the
Committee takes into consideration a variety of factors, including the
executive's level of responsibility and individual performance, the salaries of
similar positions in the Company, comparable companies in our industry and the
financial and operational performance of the Company in relation to its
competition in the industry. The Company participates in and reviews various
industry salary surveys. In addition, the Committee may, from time to time,
utilize the services of independent consultants to assess comparable external
salaries.
The Company's annual incentive bonus to its executive officers
(including the Named Executive Officers) is based on the achievement of
objective, financial, and operational performance targets and the discretion of
the Committee. These targets may include net operating income, completion of
certain strategic business transactions, attainment of certain critical
financial ratios, and other performance objectives as may be determined
annually. In determining individual incentive bonus awards, accountability of
executive officers and individual contributions towards the attainment of these
objectives are considered. In determining specific awards for the fiscal year
ended September 30, 1995, which were paid during fiscal 1996, the Committee
placed considerable emphasis on the integration of strategic acquisitions, loan
production, financial performance as reflected by net income, and the
introduction of innovative relationship banking products in determining annual
incentive bonus for the Company's executive officers. The calculation of the
Company's financial performance with respect to the determination of these
incentive bonus awards is made as soon as is practicable after the completion of
the Company's fiscal year.
One long-term retention element of the management compensation program
is in the form of restricted share grants. These restricted shares are granted
and administered by the Committee under the Executive Officer MRP. The
Committee and the Board of Directors believe that providing executive officers
with stock ownership opportunities significantly aligns the interests of the
executives with stockholders and encourages the executives' long-term retention.
Restricted share grants under the Executive Officer MRP also recognize the past
contributions of these employees and provide an additional incentive for
shareholder value creation. On March 29, 1994 (the "Grant Date") immediately
prior to the public offering of the Common Stock, the Committee granted to
certain officers and key employees (including the Named Executive Officers),
restricted shares that will vest (with respect to the lapse of restrictions) at
the rate of 20% per year from the Grant Date. On April 19, 1995, the Committee
granted certain officers and key employees (including the Named Executive
Officers), restricted shares that will vest (with respect to the lapse of
restrictions) at the rate of 20% per year from March 29, 1996. On March 26,
1996, the Committee granted certain officers and key employees (including the
Named Executive Officers) restricted shares that will vest (with respect to the
lapse of restriction) at the rate 50% on March 29, 1997 and 50% on March 29,
1998.
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<PAGE>
The other long-term incentive element of the Company's management
compensation program is in the form of stock option grants. These stock options
are granted and administered by the Committee under the Company's Stock
Incentive Plan (the "Plan"). The Plan is intended to create an opportunity for
executive officers and other key employees of the Company to acquire a
proprietary interest in the Company and thereby enhance their efforts in the
service of the Company and its stockholders.
On the Grant Date, the Committee granted to certain executive officers
(including the Named Executive Officers) and certain other key employees of the
Company, stock options with an exercise price of $11.50 per share that was the
initial offering price (and then current fair market value) of the Common Stock.
Of the stock options granted to each executive officer and key employee, 20%
become exercisable on each succeeding anniversary of the Grant Date. In 1995
stock options with an exercise price of $17.81 per share (the current fair
market value at grant date) were granted to an executive officer and certain key
employees. These options became exercisable in 20% annual installments
beginning on March 29, 1996. The Committee believes that by rationing the
exercisability of these stock options over a five-year period, the executive
retention impact of the Plan will be strengthened and management's motivation to
enhance the value of the Common Stock will be positively influenced.
CHIEF EXECUTIVE OFFICER COMPENSATION. Mr. John J. Conefry, Jr.,
Chairman, President and Chief Executive Officer of the Company, joined the Bank
on September 6, 1993 as Vice Chairman of the Bank Board. On November 23, 1993,
he was elected Chief Executive Officer of the Bank and on January 25, 1994 he
was elected Chairman of the Bank Board. On September 7, 1996, he was elected to
the additional position of President. Mr. Conefry has served as the Chairman of
the Board of Directors and Chief Executive Officer of the Company since December
21, 1993. In consideration of Mr. Conefry's assumption of these
responsibilities the Company entered into an employment agreement with Mr.
Conefry that provided for a base salary of $600,000 per year through December
31, 1995 and $700,000 per year beginning January 1, 1996. This amount was
determined based on an assessment of the degree of accountability of the
Chairman and Chief Executive Officer position during this critical period in the
Bank's and the Company's history, as well as an assessment of competitive
marketplace compensation for positions of comparable responsibility among
similar financial institutions. This employment agreement provides that the
base salary amount may be reviewed annually and adjusted at the sole discretion
of the Board of Directors. Similar agreements were entered into with other
executive officers of the Company in order to maintain a stable and competent
management group through and after the Conversion.
Mr. Conefry was awarded a bonus of $350,000 in December 1995 for the
year ended September 30, 1995 in recognition of his accountability for adding
shareholder equity value and for his contributions to the Company's meeting its
targeted performance objectives for the year, the leadership demonstrated in the
successful integration of two mortgage banking operations, and the introduction
of products and services designed to fulfill the corporate objective of becoming
the BANK OF A LIFETIME. With respect to the long-term retention and incentive
elements of Mr. Conefry's compensation, grants of restricted shares (as
identified in the tables below) were made during fiscal 1996 and were based on
the practices of comparable companies in our industry as well as in recognition
of Mr. Conefry's leadership and his level of responsibility and seniority.
SUBMITTED BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Richard F. Chapdelaine, Frederick DeMatteis Robert S. Swanson, Jr.
Chairman
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
One of the responsibilities of the Compensation Committee is to
determine the level of compensation for executive officers of the Company. The
Compensation Committee for 1996 consisted of directors Chapdelaine, DeMatteis
and Swanson, none of whom are officers or employees of or consultants to the
Company, the Bank or any of their subsidiaries.
Although the Company does not, the Bank may, from time to time, make
loans to the Company's and the Bank's directors, executive officers, or members
of their families, subject to certain regulatory restrictions applicable
thereto. All loans outstanding to members of the Compensation Committees of the
Company or the Bank or to members of the Boards of Directors of the Company or
the Bank were made in the ordinary course of business of the Bank, were made on
substantially the same terms, including interest rate and collateral, as those
prevailing at the times the loans were made for comparable transactions with
other persons (except for reduced interest rates and loan fees for certain loans
made prior to August 9, 1989 under the applicable OTS regulations), and do not
involve more than the normal risk of collectability or present other unfavorable
features.
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph shows a comparison of cumulative total stockholder
return on the Common Stock since April 14, 1994 (the date of the consummation of
the Conversion) with the cumulative total returns of both a broad equity market
index and a published industry index. The broad equity market index chosen was
the Nasdaq National Composite Index and the published industry index chosen was
the NASDAQ Bank Composite Index. The Common Stock began trading on April 14,
1994. As a result, the graph may not be indicative of possible future
performance of the Common Stock.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
THE COMMON STOCK, NASDAQ NATIONAL COMPOSITE INDEX
AND NASDAQ BANK COMPOSITE INDEX (1)
[GRAPH]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
4/14/94 6/30/94 9/30/94 12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
LISB Common Stock 100.00 132.58 133.63 123.11 147.31 159.93 206.23 222.01 236.74 257.26 243.06
NASDAQ Bank Composite
Index 100.00 111.26 113.40 102.40 113.06 124.86 142.30 148.29 154.63 157.82 168.85
NASDAQ National
Composite Index 100.00 97.18 105.49 104.07 113.32 129.65 144.96 146.26 152.98 164.76 171.26
</TABLE>
____________________
(1) Assumes $100 invested on April 14, 1994 and all dividends reinvested
through the end of the Company's fiscal year ended September 30, 1996. The
price of the Common Stock issued at the Conversion was $11.50 per share.
The performance graph above is based upon closing prices on the trading day
specified. The Common Stock closed on April 14, 1994, its first day of
trading activity, at $11.875 per share.
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<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company or
any of its subsidiaries for services during the three fiscal years ended
September 30, 1996 to the Chief Executive Officer and the four highest paid
executive officers of the Company or its subsidiaries who each received total
salary and bonus in excess of $100,000 (the "Named Executive Officers"). In
addition, one executive officer of the Company who retired during the year is
included in the table.
<TABLE>
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------- ----------------------
RESTRICTED SECURITIES
NAME AND FISCAL SALARY BONUS OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITIONS YEAR ($) ($) COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
- ------------------- ---- --- --- ($)(1) ($)(2) (#)(3) ($)(4) ($)(5)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
------ ------ ------ ------ ------
John J.Conefry, Jr.(6) 1996 673,076 350,000 0 112,169 0 0 56,420(7)
Chairman, President,
Chief Executive
Officer and Director 1995 600,000 250,000 0 712,500 0 0 98,728
1994 496,154 0 0 446,350 274,275 0 133,404
William E. Viklund(8) 1996 496,153 150,000 0 0 0 0 2,007,115(9)
Former President,
Chief Operating
Officer and Director 1995 500,000 100,000 0 356,250 0 0 40,146
1994 500,000 140,000 0 232,875 134,550 0 25,565
Joseph P. Bryant 1996 248,076 125,000 0 28,356 0 0 31,680(10)
Executive Vice
President
1995 225,000 50,000 0 151,406 31,050 0 67,891
1994 203,365 0 0 9,706 31,050 0 103,066
W. Douglas Singer 1996 180,000 70,000 0 29,334 0 0 20,141(11)
Executive Vice
President and
Treasurer 1995 160,000 50,000 0 151,406 0 0 15,938
1994 160,000 60,000 0 80,857 62,100 0 8,779
Mark Fuster
Executive Vice 1996 180,000 60,000 0 30,731 0 0 19,955(12)
President and
Chief Financial
Officer
1995 160,000 65,000 0 151,406 0 0 15,598
1994 160,000 80,000 0 80,857 62,100 0 9,458
Robert T. Volk 1996 160,000 80,000 0 29,334 0 0 18,746(13)
Executive Vice President
1995 155,962 50,000 0 151,406 0 0 18,334
1994 145,000 60,000 0 80,857 62,100 0 9,477
</TABLE>
-20-
<PAGE>
(1) For fiscal 1996, there were no (a) perquisites with an aggregate value over
the lesser of $50,000 or 10% of the individual's total salary and bonus for
the year; (b) payments of above-market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long-term incentive
plans prior to settlement or maturation; or (d) preferential discounts on
stock.
(2) In fiscal 1994, 1995, and 1996 restricted stock awards were granted under
the Bank's Executive Officer MRP. The 1996 awards were 4,015, 0, 1,015,
1,050, 1,100, and 1,050 shares of Common Stock to Messrs. Conefry, Viklund,
Bryant, Singer, Fuster, and Volk respectively. The dollar value of such
1996 awards set forth in the above table is based upon $27.94 per share,
which was the fair value of the Common Stock on the date of the award of
such grants. The dollar value of all unvested awards based upon the
closing price of the Common Stock of $28.88 per share as reported on the
NASDAQ system on September 30, 1996 is $115,933, $0, $29,308, $30,319,
$31,762, and $30,319, respectively. The 1996 awards will vest for Messrs.
Conefry, Bryant, Singer, Fuster and Volk on March 29, 1997, in the amounts
of 2,015, 515, 550, 600 and 550 shares respectively. The balance of the
1996 awards will vest on March 29, 1998.
(3) Reflects options granted under the Company's 1994 Stock Incentive Plan.
For a discussion of the terms of the grant and the vesting of options, see
"Option Grants in Last Fiscal Year" and the corresponding tables.
(4) For fiscal 1994, 1995 and 1996 the Bank had no long-term incentive plans.
Consequently, there were no payouts or awards under any long-term incentive
plan.
(5) Amounts include contributions to the 401(k) Savings Plan and ESOP, and the
imputed income on the value of split dollar life insurance and premiums
paid for group term life insurance policy and one whole life insurance
policy. The whole life insurance policy is owned by the individual. The
split dollar life insurance policies are also owned by the individuals but
any cash surrender value proceeds received on termination of a policy will
be first used to refund the premiums paid by the Company with respect to
such policy.
(6) John J. Conefry, Jr. joined the Bank on September 6, 1993 as Vice Chairman.
On November 23, 1993 he was elected Chief Executive Officer of the Bank.
On January 25, 1994, he was elected Chairman of the Bank Board. On
September 7, 1996, Mr. Conefry was elected to the Presidency of the Company
and the Bank. As of January 25, 1994, Mr. Conefry's annual salary was
increased to $600,000. As of January 1, 1996 his annual salary was
increased to $700,000.
(7) Includes (i) imputed income on the value of split dollar life insurance in
the amount of $4,099, (ii) premium for group term life insurance in the
amount of $4,807, (iii) personal use of a company-provided automobile in
the amount of $9,250, (iv) 401(k) Savings Plan contribution in the amount
of $2,443, (v) ESOP contributions in the amount of $9,750, and (vi)
dividends on unvested restricted stock awards of $26,071.
(8) Mr. William E. Viklund resigned his management and Board positions with
both the Company and the Bank on September 6, 1996.
(9) Includes (i) severance payments in the amount of $1,920,000, (ii) premiums
for group term life insurance, income on the value of the split dollar life
insurance, and whole life insurance, in the amounts of $4,293, $842 and
$1,753 respectively, (iii) personal use of a company provided automobile in
the amount of $13,629, (iv) ESOP contributions in the amount of $9,750, (v)
dividends on unvested restricted stock awards of $13,300, and (vi)
distribution of the split dollar cash surrender value of $43,548.
-21-
<PAGE>
(10) Includes (i) premiums for group term life insurance and split dollar life
insurance in the amounts of $1,061 and $1,189, respectively, (ii) personal
use of company-provided automobile in the amount of $5,795, (iii) a moving
expense allowance in the amount of $10,386, (iv) ESOP contributions in the
amount of $9,750 and (v) dividends on unvested restricted stock awards of
$3,499.
(11) Includes (i) premiums for group term life insurance and split dollar life
insurance in the amounts of $827 and $919, respectively, (ii) 401(k)
Savings Plan contribution in the amount of $3,407, (iii) ESOP
contributions in the amount of $9,750, and (iv) dividends on unvested
restricted stock awards of $5,238.
(12) Includes (i) premiums for group term life insurance and split dollar life
insurance in the amounts of $696 and $904, respectively, (ii) 401(k)
Savings Plan contribution in the amount of $3,357, (iii) ESOP contributions
in the amount of $9,750, and (iv) dividends on unvested restricted stock
awards of $5,248.
(13) Includes (1) premiums for group term life insurance and split dollar life
insurance in the amounts of $432 and $770, respectively, (ii) 401(k)
Savings Plan contributions in the amount of $2,556, (iii) ESOP
contributions in the amount of $9,750, and (iv) dividends on unvested
restricted stock awards of $5,238.
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted under the Company's 1994 Stock Incentive Plan
to the Named Executive Officers in fiscal 1996.
The following table sets forth information with respect to (i) the
number of shares of Common Stock underlying unexercised stock options held by
the Named Executive Officers and (ii) the value of such unexercised in-the-money
options, both as of September 30, 1996.
<TABLE>
<CAPTION>
__________________________________________________________________________________________________
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
__________________________________________________________________________________________________
NUMBER OF SECURITIES
SHARES VALUE UNDERLYING VALUE OF UNEXERCISED
ACQUIRED REALIZED UNEXERCISED OPTIONS IN-THE MONEY OPTIONS
NAME ON EXERCISE ($) AT FISCAL YEAR-END AT FISCAL YEAR-END
(#) (#) ($) (1)
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
<S> <C> <C> <C> <C>
John J. Conefry, Jr.... - - 109,710/164,565 $1,906,211/$2,859,317
William E. Viklund... 49,885 $855,499 17,390/7,000 $302,151/$121,625
Joseph P. Bryant. 12,630/43,470 $180,261/$598,550
W. Douglas Singer.... - - 24,840/37,260 $431,595/$647,392
Mark Fuster............ - - 24,840/37,260 $431,595/$647,392
Robert T. Volk........ 24,840/37,260 $431,595/$647,392
</TABLE>
____________________
(1) Based upon the difference between $28.875, the closing price of the Common
Stock as reported on the NASDAQ system on September 30, 1996, and the
$11.50 exercise price of the options granted in 1994 and in the case of Mr.
Bryant, the $17.81 exercise price of options granted in 1995.
-22-
<PAGE>
EMPLOYMENT AND OTHER AGREEMENTS
The Bank has entered into employment agreements with Messrs. Conefry,
Viklund, Bryant, Singer, Fuster, and Volk (the "Bank Agreements"). Messrs.
Conefry, Viklund, Bryant, Singer, Fuster and Volk have also entered into
employment agreements with the Company (the "Company Agreements"). To ensure
that no duplicate payments or benefits are received by Messrs. Conefry, Viklund,
Bryant, Singer, Fuster and Volk, any amounts paid or benefits provided by the
Company under the Company Agreements to such officers will reduce commensurately
any obligation of the Bank to pay such amounts under the Bank Agreements, and
vice versa. The term of employment under Mr. Viklund's employment agreement
with the Bank and Company terminated on September 6, 1996 pursuant to a
separation agreement between Mr. Viklund and the Bank and Mr. Viklund and the
Company dated September 6, 1996.
The Bank Agreements and the Company Agreements establish the
respective duties and compensation of these officers and were intended to ensure
that the Bank and the Company would be able to maintain stable and competent
management. The Company Agreements provide for a three-year term of employment
for each officer as do their employment agreements with the Bank. Upon the
satisfactory completion of an annual performance review, the Bank Board, in its
sole discretion, may approve, as of each anniversary of the date of each of the
Bank Agreements, a one year extension of the officer's term of employment
thereunder. The term of employment under the Company Agreements will be
automatically extended on each anniversary of the date thereof for an additional
one year period unless, six months prior to any such anniversary, the relevant
officer or the Company elects not to extend (or further extend) the term of
employment thereunder. The annual base salary amounts for Messrs. Conefry,
Bryant, Singer, Fuster and Volk under their employment agreements are $700,000,
$250,000, $180,000, $180,000 and $160,000 respectively. Mr. Barnet was
appointed Executive Vice President, Director of Real Estate and Development on
October 3, 1996 at an annual salary of $225,000. At that time Mr. Barnet
entered into employment agreements with the Bank and the Company. The
employment agreements are identical in terms to those of the other Executive
Officers. The Bank Agreements and the Company Agreements also provide that the
base salary of the officers will be reviewed annually for increase in the sole
discretion of the Board of Directors or the Bank Board, as the case may be. In
addition to such base salary, the Bank Agreements and the Company Agreements
also provide for, among other things, annual bonus payments (in the sole
discretion of the Board of Directors or the Bank Board, as the case may be),
disability pay, entitlement to participate in incentive, retirement, savings and
welfare benefit plans, business expense reimbursement, vacation and other
benefits.
The Bank Agreements and the Company Agreements provide for termination
by the Bank or the Company, as the case may be, with or without "cause" (as
defined in the relevant employment agreements) at any time. In the event that
the Bank or the Company chooses to terminate the officer's employment without
cause or if the officer resigns from the Bank or the Company for "good reason"
(as defined in the relevant employment agreements), including, without
limitation, (i) failure of the Bank Board or the Board of Directors, as the case
may be, to appoint or reappoint the officer to his stated offices, (ii) a
material change in any officer's functions, duties or responsibilities causing
their position with the Bank or the Company to become one of lesser
responsibility, importance, or scope, (iii) any reduction in base salary or a
material reduction in other benefits, or (iv) a "change in control" (as defined
in the relevant employment agreements) of the Bank or the Company, the officer
will be entitled to a lump sum severance payment equal to three times such
officer's highest annual base salary and bonus payment. The Bank or the
Company, as the case may be, will also be required to continue the officer's
life, health, accident, dental and disability coverage for up to three years.
The officer would also be entitled to base salary through the date of
termination, any annual bonus previously awarded but not yet paid, reimbursement
for business expenses incurred prior to termination but not yet paid, payment
for unused vacation days, any other compensation or benefits under the Bank's or
the Company's benefit plans to which the officer is otherwise entitled (the
"Standard Entitlements"), and certain indemnification rights (to the extent
permitted by the Office of Thrift Supervision). In the event of death, the
officer's beneficiary will be entitled to continuation of two-thirds of the
officer's base salary for three months or the same payable in one lump sum at
the Bank's or the Company's discretion, as the case may be, a prorated annual
bonus for the year of death, and the Standard Entitlements. In the event of
termination upon retirement, the agreements require continuation of life and
health
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<PAGE>
insurance coverage for one year that is substantially identical to the coverage
maintained for such individual prior to retirement and the Standard
Entitlements. In the event of a termination for cause, the officer will only be
entitled to the Standard Entitlements and to certain indemnification rights (in
both cases, where applicable, only to the extent permitted by the Office of
Thrift Supervision). In the event of a "voluntary termination" (as defined in
the relevant employment agreements), the officer will only be entitled to such
payments or benefits as he would be if terminated for cause. In the event an
officer is disabled he may be suspended and shall be entitled to receive
two-thirds of base salary for the period of time specified in the Bank
Agreements or the Company Agreements. In addition, a disabled officer shall be
entitled to continued coverage under life, health and other welfare benefit
plans while such officer is disabled.
If an officer's term of employment under the Bank Agreements or the
Company Agreements is not extended and such officer's employment with the Bank
and the Company has not previously been terminated thereunder (x) with or
without cause, (y) voluntarily or for good reason by the officer, or (z) due to
death, disability or retirement, the officer shall be entitled to receive, upon
termination of employment (other than for cause) and in lieu of any other
severance payments, base salary continuation for the period commencing on the
date of termination and ending six months thereafter. The present value of this
base salary continuation may be paid to any relevant officer in one lump sum.
Notwithstanding the above, if (a) there occurs a change in control during the
officer's term of employment under the Bank Agreements or Company Agreements,
(b) such officer's term of employment under the Bank Agreements or the Company
Agreements is not extended through the second anniversary of any such change in
control, and (c) the employment of any such officer is subsequently terminated
(other than for cause), such officer, in lieu of the special severance and
welfare benefit continuation described in the first sentence of this paragraph,
shall be entitled to receive the severance and benefits to which he would have
been entitled had his employment been terminated without cause.
If any amounts payable in connection with any change in control are
determined to be "excess parachute payments" under Section 280G of the Code
resulting in the imposition of the 20% excise tax on such payments under Section
4999 of the Code, each officer will receive from the Company an additional
amount such that the effect of the imposition of that excise tax is effectively
eliminated.
To provide additional employment incentive to certain executives, the
Bank, in accordance with the terms of the Deferred Pension Plan (the "Deferred
Plan"), will provide a specified benefit, payable in 40 equal quarterly
installments to each participant upon reaching age 65. Generally, a participant
becomes vested in his benefit under the Deferred Plan at the rate of 10% on each
anniversary of the participant's participation in the Deferred Plan. Mr. Fuster
will not be subject to the Deferred Plan's non-competition forfeiture provisions
unless he voluntarily terminates his employment with the Bank. The Deferred
Plan is a non-qualified plan and was adopted effective January 1, 1987. The
benefit payable under the Deferred Plan to Mr. Fuster is $250,000. Under the
terms of the separation agreement dated September 6, 1996, Mr. Viklund shall
receive a Deferred Pension Plan benefit for ten years equal to $97,236 per
annum, payable in 40 equal quarterly installments commencing October 1, 1999.
Messrs. Conefry, Bryant, Singer and Volk are not participants in the Deferred
Plan.
The Federal Deposit Insurance Corporation ("FDIC") has adopted
regulations that limit the payment by banking institutions experiencing
financial difficulties of "golden parachutes" and certain other benefits. The
golden parachute regulations prohibit any insured depository institution
(including its holding company, subsidiaries or affiliates) which is insolvent,
for which a conservator or receiver has been appointed, as to which a
determination that such insured depository institution is troubled has been
made, which has been assigned a composite OTS MACRO rating of 4 or 5, or as to
which a proceeding to terminate deposit insurance has been instituted, from
making any payments that are contingent on or payable on or after termination of
employment, unless such payment falls within certain specific exceptions,
including payments under tax-qualified pension or retirement plans, bona fide
deferred compensation plans, non-discriminatory severance pay plans and payments
on account of death or disability. With certain exceptions, the regulations
also generally prohibit all insured depository institutions, their subsidiaries
and affiliated holding companies, regardless of their financial health, from
making certain indemnification payments for civil money penalties or other
enforcement action. If the Bank's or the Company's financial position at the
time of a change in control (or other termination other than
-24-
<PAGE>
for cause) is such that it is subject to the regulations, termination payments
under the Bank Agreements and the Company Agreements may be limited.
Under the Bank Agreements and the Company Agreements, the Bank and the
Company have agreed to indemnify the officers and hold them harmless, to the
fullest extent permitted by law and the OTS, against all expense, liability and
loss reasonably incurred by such officers as a consequence of being involved in
a legal action by reason of the fact that the officer was an executive or
director of the Bank or the Company. Such indemnification shall continue after
the officer shall cease to be an executive or director of the Bank or the
Company.
OTHER BENEFITS
RETIREMENT PLAN. The Bank has maintained a non-contributory,
tax-qualified defined benefit pension plan (the "Retirement Plan") for eligible
employees since 1940. All employees at least age 21 who have been employed for
a twelve-month period and are salaried employees, and are not paid on a
commission basis, are eligible to participate in the Retirement Plan. The
Retirement Plan provides for a benefit for each participant, including the
executive officers named in the executive compensation table above, equal to the
sum of (i) a participant's benefit accrued under the Retirement Plan as of
December 31, 1995 (as described below), plus (ii) 1.5% of the participant's
5-year average annual compensation (i.e., average compensation during the
highest 60 consecutive months of the participant's final 120 months of
employment) multiplied by the participant's years (and any fraction thereof) of
full-time employment after December 31, 1995, reduced by 1% of the participant's
primary social security benefit multiplied by the participant's years (and any
fraction thereof) of full-time employment after December 31, 1995. A
participant's benefit accrued under the Retirement Plan as of December 31, 1995
is equal to 2% of the participant's 3-year average annual compensation (i.e.,
average compensation during the highest 36 consecutive months of the
participant's final 120 months of employment) multiplied by the participant's
years (and any fraction thereof) of full-time employment before January 1, 1996,
reduced by 1% of the participant's primary social security benefit multiplied by
the participant's years (and any fraction thereof) of full-time employment from
January 1, 1986 to December 31, 1995. In no event can a participant receive
credit for more than 30 years of service. Compensation, as defined in the
Retirement Plan, excludes overtime payments, bonuses, other special payments or
awards, such as awards under the Executive Officer MRP and the 1994 Stock
Incentive Plan, and deferred compensation arrangements. A participant is fully
vested in his or her benefit under the Retirement Plan after five years of
service. For the 1994, 1995 and 1996 plan years, the Bank was not required to
make a contribution to the Retirement Plan.
-25-
<PAGE>
The following table illustrates annual pension benefits at age 65
under the current Retirement Plan provisions available at various levels of
compensation and years of service:
PENSION PLAN TABLE
YEARS OF SERVICE
REMUNERATION(1), (2) 15 20 25 30 35
- -------------------- -- -- -- -- --
$125,000 $ 28,125 $ 37,500 $ 46,875 $ 56,250 $ 65,625
150,000 33,750 45,000 56,250 67,500 78,750
175,000 39,375 52,500 65,625 78,750 91,875
200,000 45,000 60,000 75,000 90,000 105,000
225,000 50,625 67,500 84,375 101,250 118,125
250,000 56,250 75,000 93,750 112,500 120,000(3)
300,000 67,500 90,000 112,500 120,000(3) 120,000(3)
400,000 90,000 120,000(3) 120,000(3) 120,000(3) 120,000(3)
450,000 101,250 120,000(3) 120,000(3) 120,000(3) 120,000(3)
500,000 112,500 120,000(3) 120,000(3) 120,000(3) 120,000(3)
(1) The annual retirement benefits shown in the table do not reflect a
deduction for Social Security benefits, and there are no other offsets to
benefits. The amounts shown in the table do not include additional
benefits payable to Messrs. Viklund and Fuster under the Deferred Pension
Plan. See discussion on Deferred Pension Plan under "Employment and other
Agreements".
(2) For the plan year beginning in 1996, the average final compensation for
computing benefits under the Retirement Plan cannot exceed $150,000 (as
adjusted for subsequent years pursuant to Code provisions).
(3) For 1996, applicable law limits the annual benefit payable under the
Retirement Plan to $120,000. For subsequent years, this limit is indexed
for inflation.
The following table sets forth the years of credited service under the
Retirement Plan as of September 30, 1996, as to the date of their retirement,
for each of the individuals named in the Executive Compensation Table.
Period of Credited Service
--------------------------
Years Months
----- ------
John J. Conefry, Jr.................................... 3 0
William E. Viklund(1).................................. 20 11
Joseph P. Bryant....................................... 2 11
W. Douglas Singer...................................... 8 8
Mark Fuster............................................ 15 8
Robert T. Volk......................................... 7 1
1) Actual at his retirement on September 6, 1996.
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<PAGE>
EMPLOYEE STOCK OWNERSHIP PLAN. The Bank maintains an Employee Stock
Ownership Plan which became effective upon the Conversion, for the benefit of
eligible employees of the Bank and its affiliates that are participating
employers in the ESOP. On May 18, 1995, the Bank received a determination from
the Internal Revenue Service that the ESOP qualifies under Sections 401(a) and
4975(e)(7) of the Code and that the trust established to implement the ESOP is
tax-exempt under Section 501(a) of the Code.
Generally, each salaried employee, who has completed one year of
service with a participating employer, is eligible to participate in the ESOP.
An employee automatically becomes a participant in the ESOP after becoming an
eligible employee. Each of the Named Executive Officers is a participant in the
ESOP.
Using proceeds of a loan from the Company (the "ESOP Loan") and a
minimal cash contribution from the Bank, the ESOP Trust purchased 7.72% of the
Common Stock issued in the Conversion. The loan principal amount totaled
$19,800,000 at September 30, 1996 and is payable by the ESOP Trust in quarterly
installments of principal plus interest at a rate of 6.15% per annum.
The shares of Common Stock purchased by the ESOP Trust were placed in
a "suspense account" where the shares are held subject to the encumbrance of the
ESOP Loan. As the ESOP Loan is repaid, generally with periodic contributions to
the ESOP Trust by the participating employers and cash dividends, if any, paid
on the shares of Common Stock purchased by the ESOP Trust with the ESOP Loan
proceeds, shares of Common Stock will be released from the suspense account and
allocated to participants' accounts at least annually. For each calendar year,
a participating employer will contribute to the ESOP, on behalf of each
participant who either is employed by a participating employer as of the end of
that year or who was employed during that year but who retired, became disabled
or died prior to the last day of that year, an amount equal to 6.5% of the
participant's compensation (defined as in the Retirement Plan) for that year
subject to certain limitations, including a limitation for the plan year
beginning in 1994 of $150,000 (as adjusted for subsequent years pursuant to Code
provisions) on the amount of a participant's compensation that may be taken into
account in determining contributions under the ESOP. To date, approximately
243,000 shares have been allocated to participants' ESOP accounts.
A participant's account balance in the ESOP generally will become
vested and nonforfeitable at a rate of 20% as of each anniversary of the
participant's commencement of service. A participant's ESOP account generally
will be distributable in full in shares of Common Stock or cash, at the
participant's election, after termination of service.
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<PAGE>
________________________________________________________________________________
PROPOSAL 2
RATIFICATION OF APPOINTMENT OF AUDITORS
________________________________________________________________________________
The Board of Directors has appointed KPMG Peat Marwick LLP to perform
the audit of the Company's financial statements for the year ending September
30, 1997, subject to ratification by the Company's stockholders at the Annual
Meeting. KPMG Peat Marwick LLP served as the independent auditors of the
Company for the year ended September 30, 1996. Representatives from KPMG Peat
Marwick LLP will be present at the Annual Meeting and will be given the
opportunity to make a statement if they so desire, and will be available to
respond to appropriate questions from stockholders.
Unless marked to the contrary, the shares represented by the enclosed
proxy card, if executed and returned, will be voted FOR ratification of the
appointment of KPMG Peat Marwick LLP as the independent auditors of the Company
for the fiscal year ending September 30, 1997. The appointment of KPMG Peat
Marwick LLP as the Company's independent auditors must be approved by a majority
of the votes present in person or represented by proxy at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE
APPOINTMENT OF KPMG PEAT MARWICK LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR
THE FISCAL YEAR ENDING SEPTEMBER 30, 1997.
________________________________________________________________________________
OTHER MATTERS MAY PROPERLY COME BEFORE THE MEETING
________________________________________________________________________________
The Board of Directors knows of no business that will be presented for
consideration at the Annual Meeting other than as stated in the Notice of Annual
Meeting of Stockholders. If, however, other matters are properly brought before
the Annual Meeting, it is the intention of the persons named in the accompanying
proxy to vote the shares represented thereby on such matters in accordance with
their best judgment.
Whether or not you intend to be present at the Annual Meeting, you are
urged to return your signed and dated proxy promptly. If you are present at the
Annual Meeting and wish to vote your shares, your proxy may be revoked by voting
at the Annual Meeting.
________________________________________________________________________________
NOTICE OF BUSINESS TO BE CONDUCTED AT AN ANNUAL MEETING
________________________________________________________________________________
The Restated Bylaws of the Company provide an advance notice procedure
for a stockholder to properly bring business before an annual meeting. The
stockholder must give written advance notice to the Secretary of the Company not
less than seventy (70) days nor more than ninety (90) days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is advanced by more than twenty
days, or delayed by more than seventy days, from such anniversary date, notice
by the stockholder to be timely must be so delivered not earlier than the
ninetieth day prior to such annual meeting and not later than the close of
business on the later of the seventieth day prior to such annual meeting or the
tenth day following the day on which public announcement of the date of such
meeting is first made.
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<PAGE>
The advance notice by shareholders must include the stockholder's name
and address, as they appear on the Company's record of stockholders, a brief
description of the proposed business, the reason for conducting such business at
the annual meeting, the class and number of shares of the Company's capital
stock that are owned beneficially and of record by such stockholder, and any
material interest of such stockholder in the proposed business. In the case of
nominations for election to the Board of Directors, certain information
regarding the nominee must be provided. Nothing in this paragraph shall be
deemed to require the Company to include in its proxy statement and proxy
relating to an annual meeting any stockholder proposal which does not meet all
of the requirements for inclusion established by the SEC in effect at the time
such proposal is received.
________________________________________________________________________________
STOCKHOLDER PROPOSALS
________________________________________________________________________________
In order to be eligible for inclusion in the proxy materials of the
Company for the Annual Meeting of Stockholders for the fiscal year ended
September 30, 1997, any stockholder proposal to take action at such meeting must
be received at the Company's executive offices at 201 Old Country Road,
Melville, New York 11747 no later than September 2, 1997. Any such proposals
shall be subject to the requirements of the proxy rules adopted under the
Exchange Act.
MISCELLANEOUS
________________________________________________________________________________
A copy of the Company's Annual Report on Form 10-K (without exhibits)
for the year ended September 30, 1996, as filed with the SEC, will be furnished
without charge to stockholders of record upon written request to Long Island
Bancorp, Inc., 201 Old Country Road, Melville, New York 11747, Attention: Mary
M. Feder, Vice President, Investor Relations.
By Order of the Board of Directors,
/s/ Roger Teurfs
Roger Teurfs
Secretary
Melville, New York
January 6, 1997
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN PERSON.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE REQUESTED TO SIGN,
DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
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<PAGE>
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
LONG ISLAND BANCORP, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
February 18, 1997
The undersigned hereby appoints Richard F. Chapdelaine, Frederick
DeMatteis, Herbert J. McCooey, and Dr. James B. Tormey, and each of them,
proxies for the undersigned, with full power of substitution, to vote all
shares of Long Island Bancorp, Inc. Common Stock which the undersigned may be
entitled to vote at the Annual Meeting of Stockholders of Long Island
Bancorp, Inc., Melville, New York, on Tuesday, February 18, 1997, at 9:30
A.M., or at any adjournment thereof, upon the matters set forth on the
reverse side and described in the accompanying Proxy Statement and upon such
other business as may properly come before the meeting or any adjournment
thereof.
Please mark this proxy as indicated on the reverse side to vote any
item. If you wish to vote in accordance with the Board of Directors'
recommendations, please sign the reverse side; no boxes need to be checked.
ADDRESS CHANGE: PLEASE MARK ADDRESS CHANGE BOX ON REVERSE SIDE
(Continued and to be signed on other side)
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/X/ PLEASE MARK
YOUR VOTE
AS THIS
The Board of Directors recommends a vote FOR Items I and II.
Item I - ELECTION OF DIRECTORS WITHHELD
Nominees: Clarence M. Buxton, FOR FOR ALL
Brian J. Conway, Robert J. Conway, / / / /
Leo J. Waters, and Donald D. Wenk
WITHHELD FOR: (Write that nominee's name in the space
provided below).
- -------------------------------------------------------
FOR AGAINST ABSTAIN
Item II - Approvals of Auditors / / / / / /
I PLAN TO ATTEND MEETING / /
ADDRESS CHANGE
Please mark this box if you have / /
written address change information
on the reverse side.
Receipt is hereby acknowledged of the Long Island Bancorp, Inc. Notice of
Meeting and Proxy Statement.
Signature(s) Date
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Note: Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.
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VOTING INSTRUCTIONS TO UNITED STATES TRUST COMPANY OF NEW YORK AS TRUSTEE
UNDER THE LONG ISLAND SAVINGS BANK 401(k) SAVINGS PLAN
AND THE LISB EMPLOYEE STOCK OWNERSHIP PLAN
I hereby direct that at the annual meeting of stockholders of Long Island
Bancorp, Inc. on February 18, 1997, and at any adjournments thereof, the voting
rights pertaining to the shares of Long Island Bancorp, Inc. Common Stock
credited to my account under The Long Island Savings Bank 401(k) Saving Plan
and/or allocated to my account under The LISB Employee Stock Ownership Plan
shall be exercised as checked on this card, or if not checked, shall be voted in
the discretion of the Trustee.
ADDRESS CHANGE: PLEASE MARK ADDRESS CHANGE BOX ON REVERSE SIDE
(Continued and to be signed on other side)
See Reverse Side
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/X/ PLEASE MARK
YOUR VOTES
AS THIS
The Board of Directors recommends a vote FOR
Items I and II.
Item I - ELECTION OF DIRECTORS FOR WITHHELD
Nominees: Clarence M. Buxton, / / / /
Brian J. Conway, Robert J. Conway,
Leo J. Waters, and Donald D. Wenk
WITHHELD FOR: (Write that nominee's name in the space
provided below).
- ------------------------------------------------------
FOR AGAINST ABSTAIN
Item II - Approvals of Auditors / / / / / /
ADDRESS CHANGE
Please mark this box if you have / /
written address change information
on the reverse side.
Receipt is hereby acknowledged of the Long Island Bancorp, Inc. Notice of
Meeting and Proxy Statement.
Signature Date
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Note: Please sign as name appears hereon.
<PAGE>
NOTICE TO PARTICIPANTS IN
THE LONG ISLAND SAVINGS BANK 401(k) SAVINGS PLAN
AND THE LISB EMPLOYEE STOCK OWNERSHIP PLAN
Dear Plan Participant:
Enclosed with this notice is a Proxy Statement of Long Island Bancorp,
Inc. (the "Company"), describing the Annual Meeting of Stockholders to be
held on February 18, 1997 (the "Annual Meeting"). The Annual Meeting will be
for the purpose of electing five directors and ratifying the appointment of
KPMG Peat Marwick LLP as the Company's independent auditors. Directors and
officers of the Company will be present at the Annual Meeting to respond to
any questions that stockholders may have regarding the business to be
transacted. The Proxy Statement has been prepared by the Board of Directors
of the Company, in connection with the business to be transacted at the
Annual Meeting. THE ITEMS TO BE PRESENTED AT THE ANNUAL MEETING ARE IMPORTANT
AND ARE DESCRIBED IN THE PROXY MATERIALS BEING ENCLOSED WITH THIS NOTICE.
DIRECTIONS TO THE TRUSTEE
Only United States Trust Company of New York, as trustee (the
"Trustee") of The Long Island Savings Bank 401(k) Savings Plan (the "401(k)")
and The LISB Employee Stock Ownership Plan (the "ESOP") (referred to
collectively as "the Plans"), can vote the shares of the Company stock
("Shares") held by the Plans. However, under the terms of the Plans, you, as
a participant in the Plans, are entitled to instruct the Trustee how to vote
Shares credited to your 401(k) account and/or allocated to your account under
the ESOP. The Shares held by the ESOP that are not allocated to any
participant's account will be voted by the Trustee in proportion to the
voting instructions received by the Trustee from all ESOP participants.
Enclosed with this notice is a confidential voting instruction card
which is provided to you for the purpose of instructing the Trustee how to
vote concerning the election of directors and the ratification of the
appointment of KPMG Peat Marwick LLP as the Company's independent auditors.
Your interest in this matter is very important. Please take the time to
complete the instruction card and return it to the Trustee. You may instruct
the Trustee to vote for, against, or to withhold consent with respect to
these matters. If you do not provide instructions to the Trustee, your Shares
will be voted in the discretion of the Trustee.
The Trustee will vote all Shares held by the Plans in accordance with the
instructions set forth on the voting instruction cards which are received by
the Trustee on a timely basis, unless the Trustee determines such instructions
are contrary to the requirements of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA").
CONFIDENTIALITY AND INSTRUCTIONS
How you vote will not be revealed, directly or indirectly, to any
officer, to any other employee, or any director of the Company or to anyone
else, except as otherwise required by law. You should, therefore, feel
completely free to instruct the Trustee to vote in the manner you think
best. The Trustee will monitor the mailing of all materials relating to the
Annual Meeting to the Plans' participants.
VOTING DEADLINE
Because of the time required to tabulate voting instructions from
participants before the Annual Meeting, the Trustee must establish a cut-off
date for receiving your instruction card. The cut-off date established by the
Trustee is 5:00 P.M. Eastern Time February 11, 1997. The Trustee cannot
insure that instruction cards received after the cut-off date will be
tabulated. Therefore, it is important that you act promptly and return your
instruction card on or before February 11, 1997, in the envelope provided for
your convenience. If the Trustee does not receive timely instructions from
you, the Trustee will vote your Shares in its discretion.
If you are a direct stockholder of Long Island Bancorp, Inc. you will
receive under separate cover proxy solicitation materials, including a proxy
card. The enclosed card can only be used to direct the voting of Shares held
by the Plans.
FURTHER INFORMATION
If you have questions regarding the information provided to you, you may
contact the Trustee at 1-800-535-3093 between 11:00 A.M. and 8:00 P.M.
Eastern Time, Monday through Friday.
Your ability to instruct the Trustee how to vote Shares held by the
Plans is an important part of your rights as a Plan participant. Please
consider the enclosed material carefully and then furnish your voting
instructions promptly.
Dated January 6, 1997
United States Trust Company of New York, as Trustee of
THE LONG ISLAND SAVINGS BANK 401(k) SAVINGS PLAN
AND THE LISB EMPLOYEE STOCK OWNERSHIP PLAN
