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
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(Registrant's telephone number, including area code)
0-23526
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(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.
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
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
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
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
The following table sets forth the composition of the Company's loan
portfolio at the dates indicated.
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)
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
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
(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
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.
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)
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.............
AT SEPTEMBER 30, 1996
------------------------------------
REAL ESTATE LOANS
------------------------------------
TOTAL
COMMERCIAL OTHER LOANS
LOANS LOANS (2) RECEIVABLE
---------- --------- -----------
(IN THOUSANDS)
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
-----------
-----------
(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
The following table sets forth the Company's loan originations and loan
purchases, sales and principal repayments for the periods indicated:
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
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
------------ ------------ ------------
------------ ------------ ------------
(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
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
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
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
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
AT SEPTEMBER 30,
--------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
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
(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
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
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
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
The following table sets forth the Company's allowance for possible loan
losses at or for the years ended September 30,:
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
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
__________
(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
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.
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)
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%
------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ----------
------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ----------
(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
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
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.
AT SEPTEMBER 30,
------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ---------- --------- ----------
(IN THOUSANDS)
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
--------- ---------- --------- ---------- --------- ----------
--------- ---------- --------- ---------- --------- ----------
20
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.
AT SEPTEMBER 30,
----------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
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
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
21
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.
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)
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.........................
TOTAL SECURITIES
-------------------------------------------
WEIGHTED ESTIMATED WEIGHTED
AVERAGE AMORTIZED FAIR AVERAGE
LIFE (1) COST VALUE YIELD
-------- ---------- ---------- --------
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%
---------- ---------- ---
---------- ---------- ---
__________
(1) This calculation is in months.
22
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.
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)
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%
---------- -------- ---------- -------- ---------- --------
---------- -------- ---------- -------- ---------- --------
23
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:
PERIOD TO MATURITY FROM SEPTEMBER 30, 1996
---------------------------------------------
AT SEPTEMBER 30, ONE TO
---------------------------------- WITHIN THREE
1996 1995 1994 ONE YEAR YEARS THEREAFTER TOTAL
---------- ---------- ---------- ---------- -------- ---------- ----------
(IN THOUSANDS)
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
---------- ---------- ---------- ---------- -------- ---------- ----------
---------- ---------- ---------- ---------- -------- ---------- ----------
The following table presents the deposit activity of the Bank for the periods
indicated.
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
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
--------- --------- ---------
--------- --------- ---------
The following table presents time deposits at September 30, 1996 over $100,000:
MATURITY PERIOD
- --------------- AMOUNT
---------------
(IN THOUSANDS)
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
--------
--------
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
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:
AT OR FOR THE YEAR ENDED
SEPTEMBER 30,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS
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
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
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:
RECOGNITION OF
DISCOUNT
AMORTIZATION PURCHASE ACCOUNTING (PREMIUM) DUE NET EFFECT
FISCAL YEAR OF GOODWILL DISCOUNTS, NET TO ASSET SALES ON INCOME
- ----------- ------------ ------------------- --------------- ----------
(IN THOUSANDS)
1994 . . . . . . . . . $ -- $ 1,822 $ -- $ 1,822
1995 . . . . . . . . . (211)(1) 1,492 56 1,337
1996 . . . . . . . . . (284)(2) 1,081 (1,308) (511)
______________
(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
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
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
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
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
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
31
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
33
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.
35
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
36
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.
37
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
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
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
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
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
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
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
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
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
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
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
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