[Beach Picture]
Long Island Bancorp, Inc.
1996 ANNUAL REPORT
Long Island Bancorp, Inc.
201 Old Country Road
Melville, New York 11747
Long Island Bancorp, Inc. and Subsidiary
SHAREHOLDER INFORMATION
BRANCH LOCATIONS
Queens
35-01 30th Ave.
Astoria, NY 11103
22-02 31st Street
Astoria, NY 11105
30-27 Steinway Street
Astoria, NY 11103
72-35 Broadway
Jackson Heights, NY 11372
97-33 Queens Blvd.
Rego Park, NY 11374
153-01 10th Ave.
Whitestone, NY 11357
Nassau
1150 Franklin Ave.
Garden City, NY 11530
3105 Hempstead Turnpike
Levittown, NY 11756
1900 Northern Blvd.
Manhasset, NY 11030
1001 Park Blvd.
Massapequa Park, NY 11762
2090 Merrick Road
Merrick, NY 11566
53 North Park Ave.
Rockville Centre, NY 11570
339 Merrick Road
Rockville Centre, NY 11570
3887 Merrick Road
Seaford, NY 11783
50 Jackson Ave.
Syosset, NY 11791
120 South Franklin Ave.
Valley Stream, NY 11580
3366 Park Ave.
Wantagh, NY 11793
Suffolk
180 West Main Street
Babylon, NY 11702
300 East Main Street
Bay Shore, NY 11706
269 Middle Country Road
Coram, NY 11727
180 East Main Street
East Islip, NY 11730
696 Horseblock Road
Farmingville, NY 11738
845 Wheeler Road
Hauppauge, NY 11788
839 New York Ave., Ste. 140
Huntington, NY 11743
1229 East Jericho Turnpike
Huntington, NY 11743
599 Middle Country Road
Middle Island, NY 11953
718 Medford Ave.
Patchogue, NY 11772
1336 Montauk Highway
Oakdale, NY 11769
450 Jefferson Shopping Plaza
Port Jefferson Station, NY 11776
325 Route 25A
Rocky Point, NY 11778
999-25 Montauk Highway
South Port Shopping Center
Shirley, NY 11967
65 Nugent Street
Southampton, NY 11968
1047 North Country Road
Stony Brook, NY 11790
6348 Route 25A
Wading River, NY 11792
71 Sunset Ave.
Westhampton Beach, NY 11978
526 Union Blvd.
West Islip, NY 11795
Mortgage Origination Offices
Whitestone Executive Plaza
30-50 Whitestone Expressway
Flushing, NY 11354
201 Old Country Road
Melville, NY 11747
2780 Middle Country Road
Lake Grove, NY 11755
2 Gannett Drive, Ste. 200
White Plains, NY 10604
Plaza West Office Centers
2001 West Main Street, Ste. 140
Stamford, CT 06902
103 Foulk Road, Ste. 102
Wilmington, DE19803
2000 RiverEdge Pky., Ste. 880
Atlanta, GA 30328
410 Commerce Drive
Peachtree City, GA 30269
10005 Old Columbia Road, Ste. L260
Columbia, MD 21046
6 Montgomery Village Ave., Ste. 220
Gaithersburg, MD 20879
9 Law Drive
Fairfield, NJ 07004
240 Half Mile Road
Red Bank, NJ 07701
4325 Lake Boone Trail, Ste. 102
Raleigh, NC 27607
237 West Chocolate Ave.
Hershey, PA 17033
111 Gibraltar Road
Horsham, PA 19044
54 Quakertown Road
Pennsburg, PA 18073
1100 Berkshire Blvd., Ste. 120
Wyomyssing, PA 19610
303 E. Baltimore Pike,
P.O. Box 127
Media, PA 19063
8321 Old Courthouse Road, Ste. 110
Vienna, VA 22182
155 Creekside Lane
Winchester, VA 22602
220 Middle Street
Franklin, VA 23851
825 Diligence Drive, Ste. 130
Newport News, VA 23606
206 Temple Ave., Ste. C
Colonial Heights, VA 23834
5544 Greenwich Road, Ste. 101
Virginia Beach, VA 23462
7231 Forest Ave., Ste. 303
Richmond, VA 23226
Contents
Company Profile 1
Letter to Shareholders 2
Products and Services 4
A Promise For The Future 8
Financial Review 9
Directors, Officers and
Shareholder Information 66
[Photograph - People walking on beach]
COMPANY PROFILE
Long Island Bancorp, Inc. is the holding company for The Long Island Savings
Bank, FSB, a federally chartered FDIC-insured bank with $5.4 billion in assets.
The Company, headquartered in Melville, New York, has completed its second full
year as a publicly traded institution and, based on market capitalization, ranks
as one of the top three publicly traded thrifts in New York State and one of the
top 15 thrifts nationwide.
Over the past 120 years, The Long Island Savings Bank has earned a reputation
for providing a broad range of financial products and superior service to its
customers. Currently, the Bank operates 36 full service branches located in the
tri-county New York area and a network of 25 mortgage offices in New York, New
Jersey, Connecticut, Pennsylvania, Delaware, Maryland, Virginia, North Carolina,
and Georgia. Outside the New York area, these offices operate under the name
Entrust, Home Financing Division of The Long Island Savings Bank. Through its
automated and telephone banking services, the Bank offers convenient ways to
serve its customers' various banking preferences.
Through an Internet home page, located at the address http://www.lisb.com,
customers, shareholders and other interested parties can learn about the Bank's
latest products, rates and services, view news releases, and explore career
opportunities with the Bank.
Long Island Bancorp, Inc.'s common stock is listed under the trading symbol
"LISB" on the Nasdaq National Market.
Page 1
TO OUR SHAREHOLDERS:
This year was one of strong growth and continued progress for Long Island
Bancorp, Inc. and its subsidiary, The Long Island Savings Bank. The Company
successfully achieved targeted corporate objectives and established a platform
for continued growth.
The Company generated primary and fully diluted earnings per share of $1.33
for the fiscal year ended September 30, 1996. Excluding the effect of a one-time
assessment that significantly reduced the premium disparity that existed between
SAIF-insured and BIF-insured institutions, and the one-time cost related to our
President's retirement, the Company would have reported primary and fully
diluted earnings per share of $1.83 for fiscal 1996. This can be compared with
our fiscal 1995 performance of primary and fully diluted earnings per share of
$1.73 and $1.71, respectively.
We are pleased with the way our stock has been trading since the Company's
April, 1994 initial public offering. Over that time period, "LISB" stock has
provided shareholders with a 151% increase in its market value, rising from
$11.50 per share at the initial public offering to $28.88 at the end of fiscal
1996, outperforming both the Dow Jones Index and the Nasdaq Bank Index by a
considerable margin.
FINANCIAL HIGHLIGHTS
We achieved several major strategic objectives in 1996 which we believe will
position the Company well for future growth. The Company produced a record $2.4
billion in mortgage volume, more than doubling the prior year's volume. This
increase reflects expanded mortgage banking capabilities and an increased
geographic reach into profitable new markets. The mortgage servicing portfolio
increased by 38% over the prior year, contributing substantially to the 11.5%
improvement in fee income.
We continue to leverage our strong capital position of $519 million by growing
the consumer banking deposit franchise and augmenting it with borrowed funds to
support the growth in the mortgage banking business. As a result of our funding
decisions regarding the management of our balance sheet, we minimized the impact
of the compression caused by the interest rate environment on the Company's net
interest rate margin. Our net interest margin declined from 3.44% in 1995 to
3.24% in 1996, an impact which was less severe than that experienced by many of
our peers.
We maintained profitability while enhancing our marketing efforts for our
principal business units, expanding our mortgage origination operations to 25
offices, and increasing our loan origination officers by 63%. By transitioning
to a new technology environment, the Company is positioned to continue the
creation and delivery of new products and services which will support the Bank
of a Lifetime relationship program. As we managed the growth of the Company's
principal businesses during 1996 we positioned ourselves to reverse the trend in
recently escalating costs by making modifications to our ESOP and other employee
benefit plans which will take effect in fiscal 1997. Furthermore, a high
priority for fiscal 1997 is performing a comprehensive review of the core
expenses that support each of our businesses, targeting reductions wherever
possible by converting fixed expenses to variable costs, and eliminating
unnecessary expenditures.
Beyond the growth and strategic initiatives accomplished this year, we have
also improved the quality of our assets. The ratio of non-performing loans to
total loans improved to 1.70% in 1996, down from 2.67% in 1995, while the
actual level of non-performing loans remained stable at $53.2 million at
September 30, 1996. Net charge-offs also continued to improve, reaching a seven
year low of $6.6 million.
STRATEGIC GROWTH
The Bank continues to be a market-driven franchise. We have expanded our
distribution and delivery channels to continually provide the increased
convenience and service that customers demand. We carefully leverage our branch
presence to support the expansion of our consumer lending, financial services,
and mortgage businesses. These efforts have resulted in a 79% increase in
consumer loan production this past year, a 74% increase in the sale of
investment products, and a strong contribution to our mortgage origination
volume, which has increased 125% over the prior year.
During the year, the Bank continued to make acquisitions to complement its
mortgage operations. Seven new mortgage origination offices were added to our
existing franchise. The two acquired from Fleet Mortgage Corp.
of Columbia, South Carolina are located in Horsham, Pennsylvania and Raleigh,
North Carolina. The five additional offices acquired from First Home Mortgage
of Virginia, Inc. have expanded our presence in the state of Virginia.
Page 2
Through technology we provide our customers with easy access to our financial
products and services. We continue to develop our Internet web site located at
http://www.lisb.com, an increasingly important financial services distribution
channel for customers. In June, the Bank formed a strategic alliance with The
Multiple Listing Service of Long Island to jointly create an Internet web site,
located at http://www.mlsli.com. This site provides prospective homebuyers with
a convenient way to quickly search through a database of as many as 25,000 Long
Island homes for sale, and includes a worksheet to calculate how much of a
mortgage the buyer might afford. The Bank has the exclusive right to advertise
financial products and services on this web site.
INDUSTRY OUTLOOK
We are pleased that Congress has passed legislation that significantly reduces
the FDIC premium disparity that existed between SAIF-insured institutions and
BIF-insured institutions. For community banks, such as The Long Island Savings
Bank, the premium disparity was particularly onerous. We look upon the one-time
after-tax special assessment of $0.45 per share as a positive investment, since
the Bank's annual assessment rate is expected to be reduced from the current
rate of 23 basis points to approximately 6.4 basis points, resulting in
significant future savings.
On August 15, 1989, the Bank and its former wholly owned subsidiary, The Long
Island Savings Bank of Centereach, FSB filed suit against the United States
Government seeking damages or other appropriate relief on the grounds, among
others, that the government had breached the terms of the 1983 Assistance
Agreement between the Bank and the Federal Savings and Loan Insurance
Corporation pursuant to which the Bank acquired Centereach. The Assistance
Agreement, among other things, provided for the inclusion of supervisory
goodwill as an asset on Centereach's balance sheet to be amortized over 40 years
for regulatory purposes and to be included in capital.
The suit, which is pending before the United States Court of Federal Claims,
had been stayed pending disposition by the United States Supreme Court of three
related supervisory goodwill cases (the Winstar cases). On July 1, 1996, the
Supreme Court ruled in the Winstar cases and held that the government had
breached its contracts with the Winstar parties and was liable in damages for
those breaches.
The United States Court of Federal Claims is conducting hearings in all of the
related supervisory goodwill cases pending in the Court of Federal Claims to
consider various procedural matters concerning the management of the cases going
forward.
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John J. Conefry, Jr.
Chairman, President and Chief Executive Officer
Over the next few years, we expect the regulatory environment and competitive
atmosphere will continue to be dynamic. Long Island Bancorp, Inc. remains
uniquely positioned for future growth, continued profitability, and success. We
welcome the many challenges and exciting opportunities that lie ahead as we
continue to focus on enhancing shareholder value. We believe our stock to be an
attractive investment and have continued to repurchase shares of "LISB" in the
open market.
We would like to acknowledge the achievements of William E. Viklund, former
President and Chief Operating Officer, and wish him the best in his retirement.
We would like to thank our fellow shareholders for their support and the
directors and employees of The Long Island Savings Bank for their hard work and
continued dedication. We look forward to another successful year.
Sincerely,
John J. Conefry, Jr.
Chairman, President
and Chief Executive Officer
Page 3
UNDERSTANDING CUSTOMER NEEDS
Our approach to understanding the customer reflects the Bank's philosophy that
each customer has a unique set of financial needs and objectives. These
financial needs can often be tied to major life cycle events, such as buying a
house, planning for college, or investing for retirement. By carefully
understanding each customer's individual objectives, The Long Island Savings
Bank provides sound financial advice and personalized attention.
This approach has been a successful one. Marketing research confirms that more
than 90% of our consumer banking customers would recommend us to a friend or
relative.
[Picture of ATM Card]
PROVIDING FINANCIAL PRODUCTS FOR CHANGING NEEDS
Each day, our employees work toward a common goal of providing customers with
easy, simple, direct access to a wide array of products and services. This
comprehensive range of products and services includes Lifetime
Banking-Registered Trademark-, which rewards customers with benefits designed to
fit their distinct lifestyles, including higher rates on savings and lower rates
on mortgages and other loans. Other services include: 24-hour account access,
direct deposit, overdraft protection, automatic mortgage loan payments, and
automatic savings.
Managing money by exploring financial alternatives is part of the Bank's
Lifetime Financial ServicesSM program. Using financial planning and asset
allocation practices, investment representatives guide customers in identifying
personal objectives and implementing a customized financial plan to
meet their specific goals.
The Bank continues to offer a full range of adjustable and fixed rate
mortgages, and low down payment FHA, SONYMA and Community Home Buyers Programs
to help customers finance their dream homes. We understand that buying a home is
a major event and we simplify the mortgage process for our customers every step
of the way by providing competitive rates, home financing guidance, and
quality service.
[Photograph - Water Scene]
By carefully understanding each customer's individual objectives, The Long
Island Savings Bank provides sound financial advice and personalized
attention.
Page 4
The Bank also offers many free seminars to educate prospective customers on
homebuying and other financial services.
Many customers need to borrow to fund a college education, remodel a home or
just to have some extra cash on hand. With a 24-hour turnaround time and
competitive rates, our home equity financing is an attractive solution for many
of our customers. We expect the demand for home equity financing to continue to
be strong for the foreseeable future.
EMPHASIZING CONVENIENCE
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Demanding schedules and the multi-faceted responsibilities of personal and
professional lives are requiring consumers to seek new ways to balance their
daily activities. We understand discretionary time has become a luxury and
customers want to bank when and where it is most convenient for them. At The
Long Island Savings Bank, this includes the use of ATMs, telephone banking,
drive-up tellers, and branch office visits.
As the Internet continues to evolve as an increasingly important distribution
channel for financial services, we continue to enhance our web site at
http://www.lisb.com. Visit our site to learn more about our wide array of
products and services, calculate mortgages, apply for jobs, and view investor
information on-line. In the future, look for the availability of on-line banking
as an added convenience to our customers.
In June, the Bank formed a strategic alliance with The Multiple Listing
Service of Long Island to jointly create an Internet web site, located at
http://www.mlsli.com. This site provides prospective homebuyers a way to quickly
search through a database of as many as 25,000 homes for sale on Long Island.
This search can be conducted based on a homebuyer's specific selection criteria,
and includes a calculator which permits the homebuyer to determine how much of a
mortgage the buyer might afford. Each home is displayed with a full color
photograph and
[Photograph of Man and boy fishing]
Page 5
pertinent information including the price, number of bedrooms and baths, annual
taxes, and property size. After narrowing the search, the buyer can arrange an
appointment with the listing broker and see the selected homes in person. The
Long Island Savings Bank has the exclusive right to advertise financial products
and services on this web site.
[Picture - Computer]
Our full service telephone banking center, strategically located branches, and
mortgage lending centers stand ready to serve customers who prefer personal
service. We are dedicated to providing customers with the financial solutions
they require when, where, and how they want them.
SERVING THE COMMUNITY
During the year, the Bank and its employees actively supported a significant
number of outreach and philanthropic initiatives in the communities we serve.
We believe that today's children are tomorrow's leaders. In addition to many
other important projects, we support two YMCA initiatives, Children's House, St.
Vincent's Services for Children, Big Brothers/Big Sisters, Little Flower
Children's Services, and the "Show You Care With a Bear" program, which makes a
difference in the lives of more than 800 children suffering from disabilities
and illnesses in our community.
The Bank has initiated a Student Savings Program to bring PC based banking
on-site to students at their schools. Students can open an FDIC-insured savings
account in their own name without maintenance fees or minimum balance
requirements. An initial deposit of $1.00 per student is contributed by the
Bank. More than 20 schools throughout Queens, Nassau, and Suffolk counties have
been enrolled in the program this year and more are expected to join.
The Bank supports the Long Island Development Corporation in its small
business assistance efforts. We also provide financial support for the
education, training, and counseling of women and minorities through small
business development and entrepreneurial programs. Additionally, the Bank
established a Scholarship Fund to help women who have decided to return to
college to complete their education and rejoin the workforce after raising their
families.
Many of our employees actively volunteer their time to help others in the
community. Along with these employees, the Bank continues to support the New
York Special Olympics, Wheelchair Charities, Inc., Habitat for Humanity, and a
Thanksgiving Food Drive, which touched the lives of more than 200 needy
families. We also support those less fortunate with our annual fund-raiser,
where the proceeds benefit several agencies dedicated to helping the hungry and
homeless on Long Island including: Interfaith Nutritional Network, Long Island
Cares, and Island Harvest.
The Bank appreciates and is involved in sponsoring artistic and cultural
events in the community. These include the Summer Concert Series throughout Long
Island and "Music of a Lifetime," a concert featuring the Senior POPs Orchestra.
The Bank continually provides strong support for the Long Island Housing
Partnership, its Regional Lending Consortium, the Community Preservation
Corporation, Neighborhood Housing Services, Nassau-Suffolk Coalition for the
Homeless, and many other non-profit organizations in an effort to make
affordable housing available to residents of our community. We are proud that
our regulators continue to rate us as "Outstanding" for our community
reinvestment activities.
[Photograph of Man and Woman]
Page 6
[Photograph of Man and Woman walking on beach]
At The Long Island Savings Bank, we are dedicated to providing customers with
the financial solutions they require when, where, and how they want them.
Page 7
[Photograph of Man and Woman]
The Company manages
its balance sheet with
a careful focus on
profitability and in
conjunction with
long term goals.
A PROMISE FOR THE FUTURE
Long Island Bancorp, Inc. continues to repurchase its own stock as part of
its third stock repurchase program. This program authorizes the Company to
repurchase up to five percent of its outstanding common shares, which represents
1,243,131 shares, by April 14, 1997. The repurchases will be made from time to
time, in open market transactions, at the discretion of management. Including
the shares repurchased in its first two programs, the Company has repurchased a
total of 2,497,554 shares, at an aggregate cost of $59.9 million.
We manage our balance sheet with a careful focus on profitability and in
conjunction with our long term goals. Every strategic decision requires the
evaluation of a range of factors in managing the Company's corporate structure.
In considering whether to deploy capital for additional stock repurchases or to
support growth opportunities, we remain focused on and committed to our goal of
maximizing value for our shareholders.
We will continue to build our franchise by emphasizing our customer focused
marketing strategy. This approach has proven to be a successful competitive
differentiation for the Bank in the marketplace and has earned us a reputation
as a highly professional provider of financial solutions.
We will continue to pursue the expansion of the Bank's mortgage and consumer
loan capabilities, grow the investment services business and the consumer bank
network, and expand alternate delivery channels such as the Internet. We believe
this strategy will result in increased profitability, continued growth, and
value for our shareholders.
[Picture - Internet Advertisement]
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Long Island Bancorp, Inc. and Subsidiary
FINANCIAL REVIEW
TABLE OF CONTENTS
Selected Financial Data .............................. 10
Glossary of Financial Terms .......................... 13
Management's Discussion and Analysis
of Financial Condition and Results of Operations ..... 15
Consolidated Statements of Financial Condition ....... 31
Consolidated Statements of Operations ................ 32
Consolidated Statements of
Changes in Stockholders' Equity ...................... 33
Consolidated Statements of Cash Flows ................ 34
Notes to Consolidated Financial Statements ........... 35
Independent Auditors' Report ......................... 64
Market Price of Common Stock ......................... 65
Directors, Officers and Shareholder Information ...... 66
Page 9
Long Island Bancorp, Inc. and Subsidiary
SELECTED FINANCIAL DATA
At September 30,
- -----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(In thousands)
SELECTED FINANCIAL DATA:
Total assets $5,363,791 $4,901,622 $4,516,137 $3,990,731 $5,628,596
Loans receivable held
for investment, net 3,040,837 1,994,741 1,630,820 1,760,455 2,756,255
Allowance for possible loan losses 33,912 34,358 35,713 33,951 32,157
Mortgage-backed securities, net(1) 1,740,202 2,276,750 2,060,793 1,386,115 1,609,570
Investment in debt and equity
securities, net(2) 180,650 289,247 433,840 351,415 435,262
Loans sold with recourse(3) 289,464 250,423 201,083 223,032 255,987
Loans held for sale, net 57,969 49,372 7,956 148,393 37,892
Total non-performing loans(4) 53,166 55,676 54,036 145,316 195,058
Real estate owned, net 8,155 8,893 7,187 25,812 35,255
Total non-performing assets(5) 61,321 64,569 61,223 171,128 230,313
Total loans delinquent 60-89 days 12,002 11,960 11,925 24,801 59,279
Mortgage servicing rights, net(6) 29,687 11,328 759 957 1,835
Excess of cost over fair value
of net assets acquired(7)(8) -- -- -- -- 441,576
Deposits, net 3,633,010 3,573,529 3,567,815 3,617,600 4,675,413
Borrowed funds 978,023 633,675 325,022 44,500 259,138
Stockholders' equity-partially
restricted(9)(10)(11) 519,094 526,174 493,709 211,630 573,795
(1) Includes $1.7 billion, $938.8 million, $818.3 million and $845.0 million of
mortgage-backed securities available-for-sale carried at market value as of
September 30, 1996, 1995, 1994 and 1993, respectively.
(2) Includes $180.7 million, $233.4 million, $348.2 million and $340.4 million
of debt and equity securities available-for-sale carried at market value as
of September 30, 1996, 1995, 1994 and 1993, respectively.
(3) Loans sold with recourse represent the outstanding principal amount of
residential property loans with the majority of these loans having been
securitized with Federal National Mortgage Association ("FNMA") and Federal
Home Loan Mortgage Corporation ("FHLMC").
(4) Non-performing loans are those loans placed on non-accrual status
(including restructured loans that, in the opinion of Long Island Bancorp,
Inc. and subsidiary ("Company"), have not yet demonstrated a sufficient
payment history to warrant return to performing status).
(5) Non-performing assets include non-performing loans and real estate owned,
net.
(6) Includes mortgage servicing rights purchased, capitalized excess servicing
fees and originated mortgage servicing rights pursuant to the Company's
July 1, 1995 adoption of Statement of Financial Accounting Standards No.
122 ("SFAS 122"), "Accounting for Mortgage Servicing Rights."
(7) At September 30, 1996 and 1995, excess of cost over fair value of assets
acquired totalled $5.3 million and $2.8 million, respectively, reflecting
acquisitions and is included in Prepaid expenses and other assets on the
Consolidated Statements of Financial Condition.
(8) The Company adopted Statement of Financial Accounting Standards No. 72
("SFAS 72"), "Accounting for Certain Acquisitions of Banking or Thrift
Institutions" as of October 1, 1992 which resulted in a reduction in the
excess of cost over fair value of net assets acquired and a cumulative
charge to income of $323.5 million. The Company wrote-off the remaining
balance of the excess of cost over fair value of net assets acquired of
$70.8 million after fiscal 1993 amortization of $47.2 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--1993 Restructuring."
(9) Includes $6.6 million, $6.9 million, $(3.1) million and $19.9 million after
tax from unrealized gains (losses) from debt, equity and mortgage-backed
securities available-for-sale at September 30, 1996, 1995, 1994 and 1993,
respectively, in accordance with Statement of Financial Accounting
Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt
and Equity Securities." SFAS 115 was adopted as of September 30, 1993.
(10) Prior to April 14, 1994, represented Retained income-partially restricted.
(11) The decrease to September 30, 1993 from September 30, 1992 was primarily
due to the restructuring activities that occurred during fiscal 1993. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--1993 Restructuring." The increase to September 30, 1994 from
September 30, 1993 was primarily due to the initial public offering of Long
Island Bancorp, Inc. common stock that occurred April 14, 1994.
Page 10
Long Island Bancorp, Inc. and Subsidiary
SELECTED FINANCIAL DATA
(Continued)
For the Year Ended September 30,
- -----------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(In thousands, except per share data)
SELECTED OPERATING DATA:
Interest income $351,571 $321,215 $272,157 $ 340,629 $420,926
Interest expense 197,176 167,896 130,104 177,193 254,835
-------- -------- -------- ---------- --------
Net interest income 154,395 153,319 142,053 163,436 166,091
Provision for possible loan losses 6,200 6,470 11,955 47,288 19,347
-------- -------- -------- ---------- --------
Net interest income after provision for
possible loan losses 148,195 146,849 130,098 116,148 146,744
Non-interest income:
Fees and other income:
Loan fees and service charges 3,217 2,494 3,025 3,173 3,331
Loan servicing fees 13,863 12,873 8,725 3,794 3,796
Income from insurance and securities commissions 1,608 805 1,215 2,408 3,451
Deposit service fees 5,937 5,917 5,863 6,930 6,468
-------- -------- -------- ---------- --------
Total fee income 24,625 22,089 18,828 16,305 17,046
Other income 3,718 3,903 2,860 2,166 5,480
-------- -------- -------- ---------- --------
Total fees and other income 28,343 25,992 21,688 18,471 22,526
Net gains (losses) on sale activity:
Net gains on loans and
mortgage-backed securities 7,993 3,562 2,623 51,080 3,678
Net gains (losses) on investment in
debt and equity securities 340 (1,924) (703) 36 (2,479)
Net gains related to sale of deposits -- -- -- 6,618 --
-------- -------- -------- ---------- --------
Total net gains on sale activity 8,333 1,638 1,920 57,734 1,199
Net gain (loss) on investment in
real estate and premises 4,118 1,467 (738) 1,281 --
-------- -------- -------- ---------- --------
Total non-interest income 40,794 29,097 22,870 77,486 23,725
-------- -------- -------- ---------- --------
Non-interest expense:
General and administrative expense:
Compensation, payroll taxes and fringe benefits 57,969 51,443 52,117 55,121 51,576
Advertising 5,940 4,691 3,552 3,622 4,715
Office occupancy and equipment 20,631 18,547 17,922 19,998 22,762
Federal insurance premiums 9,055 8,961 10,120 11,413 11,238
Other general and administrative expense 18,612 17,101 16,272 18,778 14,411
-------- -------- -------- ---------- --------
Total general and administrative expense 112,207 100,743 99,983 108,932 104,702
SAIF special assessment 18,657 -- -- -- --
Net loss on real estate owned 2,090 1,790 4,052 13,700 7,754
Amortization of excess of cost over fair
value of net assets acquired(1) -- -- -- 47,222 14,875
Write-off of excess of cost over
fair value of net assets acquired -- -- -- 70,809 --
-------- -------- -------- ---------- --------
Total non-interest expense 132,954 102,533 104,035 240,663 127,331
-------- -------- -------- ---------- --------
Income (loss) before income taxes and
cumulative effect of accounting changes 56,035 73,413 48,933 (47,029) 43,138
Provision for income taxes 23,760 29,897 18,046 11,504 21,813
-------- -------- -------- ---------- --------
Income (loss) before cumulative effect of
accounting changes 32,275 43,516 30,887 (58,533) 21,325
Cumulative effect of changes in accounting(2)(3) -- -- 8,648 (323,545) --
-------- -------- -------- ---------- --------
Net income (loss) $ 32,275 $ 43,516 $ 39,535 $(382,078) $ 21,325
-------- -------- -------- ---------- --------
-------- -------- -------- ---------- --------
Primary earnings per common share(4) $ 1.33 $ 1.73 $ 0.70 N/A N/A
-------- -------- --------
-------- -------- --------
Fully diluted earnings per common share(4) $ 1.33 $ 1.71 $ 0.70 N/A N/A
-------- -------- --------
-------- -------- --------
(1) For the years ended September 30, 1996 and 1995, amortization of excess of
cost over fair value of net assets acquired stemming from acquisitions
totalled $0.3 million and $0.2 million, respectively, and is included in
Other general & administrative expense in the Consolidated Statements of
Operations.
(2) The Company adopted SFAS 72 as of October 1, 1992 which resulted in a
reduction in the excess of cost over fair value of net assets acquired and
a cumulative charge to income of $323.5 million. The Company wrote-off the
remaining balance of the excess of cost over fair value of net assets
acquired of $70.8 million after fiscal 1993 amortization of $47.2 million.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--1993 Restructuring."
(3) The Company adopted Statement of Financial Accounting Standards No. 106
("SFAS 106"), "Employers' Accounting for Postretirement Benefits Other Than
Pensions" and Statement of Financial Accounting Standards No. 109 ("SFAS
109"), "Accounting for Income Taxes" as of October 1, 1993, which resulted
in a cumulative charge to income of $10.7 million and a cumulative credit
to income of $19.4 million, respectively.
(4) Primary and fully diluted earnings per common share ("EPS") for the years
ended September 30, 1996 and 1995 are calculated by dividing income by the
sum of the weighted average number of shares of common stock outstanding
and the weighted average number of shares issuable under the Company's
stock benefit plans that have a dilutive effect on EPS. For the year ended
September 30, 1994, EPS is based upon the weighted average number of shares
of common stock outstanding and was determined based upon income earned
during the period April 14, 1994 through September 30, 1994. The weighted
average number of shares issuable under the Company's stock benefit plans
were not materially dilutive and therefore were excluded from the
calculation of EPS.
Page 11
Long Island Bancorp, Inc. and Subsidiary
SELECTED FINANCIAL DATA
(Continued)
At or For the Year Ended September 30,
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in thousands)
SELECTED FINANCIAL RATIOS
AND OTHER DATA:
PERFORMANCE RATIOS:
Return on average assets(1) 0.64% 0.93% 0.91% (7.57)% 0.38%
Return on average stockholders' equity(1) 6.16 8.52 11.41 (147.93) 3.78
Average stockholders' equity to average assets(2) 10.43 10.90 7.93 5.11 10.00
Stockholders' equity to total assets(3) 9.68 10.73 10.93 5.30 10.19
Tangible stockholders' equity to total assets(4) 9.57 10.67 10.93 5.30 2.55
Interest rate spread during period 2.89 3.10 3.30 3.46 3.43
Net interest margin(5) 3.24 3.44 3.47 3.47 3.37
Operating expenses to average assets(6) 2.23 2.15 2.29 2.16 1.86
Efficiency ratio(7) 61.40 56.18 61.06 59.88 55.51
Average interest-earning assets to
average interest-bearing liabilities 108.60 109.25 105.36 100.22 98.95
Net interest income to operating expenses(8) 1.38x 1.52x 1.42x 1.50x 1.59x
ASSET QUALITY RATIOS:
Non-performing loans to total gross loans(9) 1.70% 2.67% 3.20% 7.42%(10) 6.84%
Non-performing assets to total assets(9) 1.14 1.32 1.36 4.29(10) 4.09
Allowance for possible loan losses to
non-performing loans 63.79 61.71 66.09 23.36 16.49
Other Data:
Loan originations and purchases $2,464,963 $1,118,201 $ 497,900 $ 545,926 $ 549,088
Loans serviced for others $3,682,399 $2,563,866 $1,687,512 $1,669,787 $1,073,596
Average deposits per branch $ 100,917 $ 99,265 $ 96,427 $ 95,200 $ 97,404
Number of deposit accounts 396,986 391,217 381,606 402,238 508,729
FACILITIES:
Full-service customer service facilities 36 36 37 38 48
Regional lending offices 25 16 5 5 6
(1) For fiscal 1993 the cumulative charge to income for the adoption of SFAS 72
and the subsequent write-off of the remaining balance of the excess of cost
over fair value of net assets acquired in fiscal 1993 are reflected in net
income and stockholders' equity. For fiscal 1994, the cumulative charge and
credit for the adoption of SFAS 106 and SFAS 109, respectively, are
reflected in net income and stockholders' equity. For fiscal 1996,
exclusive of the one-time SAIF assessment, return on average assets and
return on average stockholders' equity would have been 0.86% and 8.20%,
respectively.
(2) For fiscal 1996, exclusive of the one-time SAIF assessment, average
stockholders' equity to average assets would have been 10.44%.
(3) For fiscal 1996, exclusive of the one-time SAIF assessment, stockholders'
equity to total assets would have been 9.88%.
(4) For purposes of calculating these ratios, stockholders' equity and total
assets have been reduced by the excess of cost over fair value of net
assets acquired.
(5) Net interest margin is determined by dividing net interest income before
provision for possible loan losses by average interest-earning assets.
(6) Amount is determined by dividing total general and administrative expense
by average assets.
(7) Amount is determined by dividing total general and administrative expense
by net interest income before the provision for possible loan losses plus
total fee and other income.
(8) Amount is determined by dividing net interest income before provision for
possible loan losses by total general and administrative expense.
(9) Non-performing loans excludes loans which have been restructured and are
accruing and performing in accordance with the restructured terms.
Restructured accruing loans totaled $11.8 million, $12.1 million, $12.8
million, $8.9 million and $0 at September 30, 1996, 1995, 1994, 1993 and
1992, respectively.
(10) Includes the effect of $25.0 million and $5.0 million reduction in carrying
value in September 1993 relating to the bulk sale of non-performing loans
and other real estate owned, respectively. Excluding the effect of such
reduction in carrying value, the Bank's ratio of non-performing loans to
total gross loans and non-performing assets to total assets would have been
8.56% and 5.01%, respectively.
Page 12
Long Island Bancorp, Inc. and Subsidiary
GLOSSARY OF FINANCIAL TERMS
ALLOWANCE FOR POSSIBLE LOAN LOSSES--A balance sheet account which is an
estimation of possible loan losses. The provision for possible loan losses is
added to the allowance account while charge-offs decrease the account.
Recoveries on loans previously charged off increase the allowance.
BASIS POINT--The smallest measure used in quoting interest rate yields. One
basis point is 0.01%. Thus a yield that moves from 7.00% to 7.50% moves up 50
basis points.
BOOK VALUE PER SHARE--Total stockholders' equity divided by numbers of shares of
common stock outstanding, net of treasury shares.
CAPITALIZED EXCESS SERVICING FEES--The discounted present value of any
difference between (i) the interest rate received and (ii) the interest rate
passed through to the purchaser of a loan, less a normal servicing fee.
CHARGE-OFFS--Loan balances written off against the allowance for possible loan
losses, rather than charged to current earnings, once a loan is deemed to be
uncollectible.
CORE DEPOSITS--Deposits that are traditionally stable, consisting of passbook,
statement savings, NOW and non-interest-bearing demand accounts.
COST OF FUNDS--The interest cost associated with interest-bearing liabilities. A
cost of funds ratio represents the ratio of interest expense to average
interest-bearing liabilities for the period.
EARNING ASSETS--Interest- or dividend-earning assets, including loans and
securities.
EARNINGS PER SHARE (EPS)--Net income divided by weighted average shares of
common stock outstanding and common stock equivalents, for example, stock
options. Primary EPS is calculated by dividing income by the sum of the weighted
average number of shares of common stock outstanding and the average number of
shares issuable under stock benefit plans that have a dilutive effect measured
under the treasury stock method. Fully diluted EPS is calculated by dividing
income by the sum of the weighted average number of shares of common stock
outstanding and the maximum dilutive effect of shares issuable under stock
benefit plans.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)--A type of tax-qualified retirement plan
for employees that maintains individual accounts on behalf of each plan
participant and annually credits individual accounts with contributions which
are invested in company common stock.
FEDERAL FUNDS--Generally one-day loans of excess reserves from one bank to
another. When a bank buys (borrows) federal funds, these funds are called
"federal funds purchased." When it sells (lends) them, they are called "federal
funds sold."
FORECLOSED ASSETS--Property acquired because the borrower defaulted on the loan.
GOODWILL--Excess of cost over fair value of net assets acquired.
INTEREST RATE SENSITIVITY GAP--The difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
time period.
LEVERAGE RATIO--A ratio of equity to assets, defined as period-end Tier 1
capital less goodwill as a percentage of average assets for the most recent
quarter.
LIQUIDITY--The ability of current assets to meet current liabilities when due.
The degree of liquidity of an asset is the period of time anticipated to elapse
until the asset is realized or is otherwise converted into cash. A liquid bank
has less risk of being unable to meet debt obligations than an illiquid one.
Also, a liquid bank generally has more financial flexibility to take on new
investment opportunities.
MORTGAGE SERVICING RIGHTS (MSR'S)--The right to service loans for others
generally obtained by either the sale of loans with servicing retained, the open
market purchase of mortgage servicing rights or the creation of mortgage
servicing rights. MSR's are amortized as a reduction to loan service fee income
on a level-yield basis over the estimated remaining life of the underlying
loans.
NET INTEREST INCOME--The difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities.
NET INTEREST MARGIN--Net interest income as a percentage of average
interest-earning assets for the period.
NET INTEREST SPREAD--The difference between the yield on interest-earning assets
and the cost of interest-bearing liabilities.
Page 13
Long Island Bancorp, Inc. and Subsidiary
GLOSSARY OF FINANCIAL TERMS
(Continued)
NON-PERFORMING ASSETS--Non-performing loans and securities plus foreclosed
assets.
NON-PERFORMING LOANS--Loans upon which interest income is not currently
recognized because of the borrower's financial problems (non-accrual loans) or
certain loans which have been restructured.
REAL ESTATE OWNED (REO)--Real estate which the bank takes or to which it assumes
title in order to sell the property, obtained as the result of a loan default.
PROVISION FOR POSSIBLE LOAN LOSSES--A charge against current period earnings
which reflects an estimation of possible loan losses.
RETURN ON ASSETS--Net income as a percentage of average total assets for the
period. The return on assets measures profitability in terms of how efficiently
assets are being utilized.
RETURN ON EQUITY--Net income as a percentage of average total equity. The return
on equity measures profitability in terms of how efficiently equity or capital
is being invested.
REVERSE-REPURCHASE AGREEMENTS--Refers to a transaction that is accounted for as
a collateralized borrowing in which the seller-borrower sells securities to a
buyer-lender with an agreement to repurchase them at a stated price plus
interest at a specified date or in specified circumstances.
RISK-BASED CAPITAL--The sum of Tier 1 and Tier 2 capital minus other assets
required to be deducted.
STOCK OPTION--Right to purchase or sell a stock at a specified price within a
stated period.
TIER 1 CAPITAL--Common stockholders' equity, qualifying non-cumulative perpetual
preferred stock and minority interest in equity accounts of consolidated
subsidiaries, less goodwill and other disallowed intangibles.
TIER 2 CAPITAL--The allowance for possible loan losses (limited to a certain
percentage of risk-weighted assets), perpetual and long-term preferred stock,
hybrid capital instruments (including perpetual debt and mandatory convertible
securities) and subordinated debt and intermediate-term preferred stock (subject
to certain limitations).
Page 14
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Long Island Bancorp, Inc. ("Holding Company") was formed in December 1993 to
serve as the holding company for The Long Island Savings Bank, FSB ("Bank"). On
April 14, 1994, the Bank completed its Conversion ("Conversion") from a
federally chartered mutual savings bank to a federally chartered stock savings
bank. In connection with the Conversion the Holding Company issued 26,816,464
shares of common stock ("Common Stock") at a price of $11.50 per share and
utilized a portion of the proceeds to acquire all of the issued shares of the
Bank. Prior to this offering, the Holding Company had no assets, liabilities or
operations.
The Holding Company is headquartered in Melville, New York and its primary
business currently consists of the operation of its wholly-owned subsidiary, the
Bank. In addition to directing, planning and coordinating the business
activities of the Bank, the Holding Company invests its funds primarily in U.S.
government and federal agency securities, investment grade preferred stock and
federal funds. In the future, the Holding Company may acquire or organize other
operating subsidiaries, including other financial institutions.
The Bank
The Bank's principal business has been and continues to be attracting retail
deposits from the general public and investing those deposits, together with
funds generated from operations, primarily in one-to-four family, owner occupied
residential mortgage loans. In addition, from time to time depending on market
conditions, the Bank will invest in mortgage-backed and asset-backed securities
to supplement its lending portfolio. The Bank also invests, to a lesser extent,
in multi-family residential mortgage loans, commercial loans, consumer loans and
other marketable securities. Revenues are derived principally from interest on
real estate and other loans, mortgage-backed and other debt securities, and
dividends on equity securities. Primary sources of funds are deposits,
borrowings under reverse-repurchase agreements and principal and interest
payments on loans and mortgage-backed securities. Additionally the Bank issued a
funding note in fiscal 1996 which was collateralized by a pool of adjustable
rate residential mortgage loans.
While the following discussion of financial condition and results of operations
include the collective results of the Holding Company and the Bank (collectively
"Company"), this discussion reflects principally the Bank's activities.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest and dividend income earned
on its loan and securities portfolios and its cost of funds, consisting of the
interest paid on its deposits and borrowings. To a lesser degree, the results of
operations are also dependent on fee income which includes, for example, fees
received for servicing mortgage loans. The Company's operating expenses
principally consist of employee compensation, occupancy, federal deposit
insurance premiums, advertising and other operating expenses. The Company's
results of operations are also affected by its periodic provisions for possible
loan losses, by write-downs of assets, and net gains and losses on sales of
assets. Such results are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities.
Fleet Mortgage Company
Loan Origination Offices
Acquisition
On June 28, 1996, the Company acquired two mortgage origination offices from
Fleet Mortgage Company ("Fleet") of Columbia, South Carolina. The acquisition
was designed to expand the Company's mortgage production capabilities into North
Carolina and enhance its existing presence in Pennsylvania.
First Home Mortgage of
Virginia, Inc. Acquisition
On August 1, 1996, the Company acquired First Home Mortgage of Virginia, Inc.
("First Home") a mortgage banking company with five offices located in Virginia.
The acquisition was designed to expand the Company's mortgage production
capabilities throughout the mid-Atlantic states.
Recapitalization of the
Savings Association
Insurance Fund
On September 30, 1996, as part of an omnibus appropriations bill, Congress
passed and President Clinton signed the Deposit Insurance Funds Act of 1996
("Act"). The Act should significantly reduce and eventually end the premium
disparity that has existed between banks insured by the Bank Insurance Fund
("BIF") and thrifts insured by the Savings Association Insurance Fund ("SAIF").
The Act requires SAIF-insured institutions to pay a special one-time assessment.
The Act also requires BIF-insured institutions to include a portion of the
interest due on Finance Corporation ("FICO") bonds in their deposit insurance
premiums beginning January 1, 1997. Beginning on January 1, 2000 or the date at
which no savings institution continues to exist, BIF-insured institutions are
required to pay their full pro rata share of FICO payments. The one-time special
assessment charged to SAIF-insured institutions will enable the SAIF fund to
reach predetermined capitalization levels and therefore will result in a
reduction in future premiums paid by SAIF-insured institutions. Beginning
January 1, 1997 and continuing through December 31, 1999, the Company expects
its premium rate to be reduced from the current rate of 23 basis points to
approximately 6.4 basis points. Pursuant to these provisions of the Act, the
Bank's one-time SAIF insurance assessment amounted to $18.7 million, which was
accrued at September 30, 1996 and paid in November 1996. The payment of the
special assessment reduced the Bank's capital, net of tax, but did not affect
the Bank's compliance with its regulatory capital requirements. See Note 4 of
Notes to Consolidated Financial Statements.
Page 15
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
Goodwill
The Bank was organized in 1876 as a New York State chartered mutual savings
bank. In December 1982, the Bank converted to a federal mutual savings bank and
changed its name from The Long Island Savings Bank to The Long Island Savings
Bank, FSB ("Syosset"). The Bank's deposits are insured to the maximum allowable
amount by the SAIF which is administered by the Federal Deposit Insurance
Corporation ("FDIC").
In 1983, with the assistance of the Federal Savings and Loan Insurance
Corporation ("FSLIC") as set forth in an assistance agreement ("Assistance
Agreement"), Syosset acquired, as a wholly-owned subsidiary, The Long Island
Savings Bank of Centereach FSB ("Centereach"). Syosset and Centereach reported
to the Federal Home Loan Bank Board of New York ("FHLB-NY"), forerunner of the
Office of Thrift Supervision ("OTS"), as two separate entities. In 1986, with
FSLIC assistance, Syosset acquired Flushing Federal Savings and Loan Association
("Flushing Federal") by merger.
The FSLIC-assisted supervisory acquisitions of Centereach and Flushing Federal
were accounted for using the purchase method of accounting which resulted in
supervisory goodwill (the excess of cost over fair value of net assets
acquired), an intangible asset, of $656.8 million. Of the $656.8 million of
supervisory goodwill, $625.4 million was recorded on Centereach's balance sheet
and $31.4 million on Syosset's balance sheet. Such goodwill was included in each
bank's regulatory capital. The Assistance Agreement related to the acquisition
of Centereach by Syosset provided for the inclusion of goodwill as an asset on
Centereach's balance sheet, to be amortized over 40 years for regulatory
purposes and includible in capital. Pursuant to the regulations adopted by the
OTS to implement the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"), the regulatory capital requirement of each bank increased
and the amount of supervisory goodwill that each bank could include in its
regulatory capital decreased significantly. At September 30, 1989, on a
stand-alone basis, Syosset, excluding supervisory goodwill, exceeded the capital
requirements of FIRREA. At that date, however, Centereach, excluding supervisory
goodwill, did not meet any of the three required FIRREA capital ratios mandated
by the OTS and had negative tangible capital as defined in the OTS regulations.
On August 15, 1989, Syosset and Centereach filed suit against the U.S.
government seeking damages and/or other appropriate relief on the grounds, among
others, that the government had breached the terms of the Assistance Agreement.
The suit currently is pending before Chief Judge Loren Smith in the United
States Court of Federal Claims and is entitled Long Island Savings Bank, FSB. et
al. v. United States. The case had been stayed pending disposition by the United
States Supreme Court of three related supervisory goodwill cases ("Winstar
cases"). On July 1, 1996 the Supreme Court ruled in the Winstar cases the
government had breached its contracts with the Winstar parties and was liable in
damages for those breaches. On September 18, 1996 Judge Smith issued an Omnibus
Management Order ("Case Management Order" ) applicable to all Winstar-related
cases. The Case Management Order addresses certain timing and procedural matters
with respect to the administration of the Winstar-related cases including
organization of the parties, initial discovery, initial determinations regarding
liability and the resolution of certain common issues. The Case Management Order
provides that the parties will attempt to agree upon a Master Litigation Plan,
which may be in phases, to govern all further proceedings, including the
resolution of common issues (other than common issues covered by the Case
Management Order), dispositive motions, trials, discovery schedules, protocols
for depositions, document production, expert witnesses and other matters.
On November 1, 1996, the Bank filed a motion for summary judgment on liability.
Pursuant to the schedule set forth in the Case Management Order, within sixty
days of the filing of the motion, the government must file a response with
respect to whether a contract exists and whether the government acted
inconsistently with the contract. Within 120 days of filing of the motion, the
government must set forth any defenses it knows or has reason to know that
relate to these two issues.
In its complaint, the Bank did not specify the amount of damages it was seeking
from the United States. There have been no decisions determining damages in the
Winstar cases or any of the Winstar-related cases. The Bank is unable to predict
the outcome of its claim against the United States and the amount of damages
that may be awarded to the Bank, if any, in the event that judgment is rendered
in the Bank's favor. Consequently, no assurances can be given as to the results
of this claim or the timing of any proceedings in relation thereto.
1993 Restructuring
To bring Centereach into capital compliance and avoid possible regulatory
sanctions against Centereach, on September 3, 1993, with the OTS's approval,
Centereach and Syosset sold $836.3 million in deposits from ten branch locations
and reduced their asset size by a similar amount ("Deposit Sale Transaction").
Concurrent with the sale of these deposits, Syosset was merged into Centereach
("Merger") and Centereach's name was changed to The Long Island Savings Bank,
FSB.
In connection with the Merger, the Company reviewed its accounting policies and
practices and decided to revise its past accounting practices relating to the
amortization of goodwill. See Note 3 of Notes to Consolidated Financial
Statements. As a result, the Company adopted Statement of Financial Accounting
Standards No. 72 ("SFAS 72") "Accounting for Certain Acquisitions of Banking or
Thrift Institutions" effective October 1, 1992. Accordingly, there
Page 16
was a substantial reduction in the carrying amount of goodwill on Centereach's
books. The cumulative effect of adopting SFAS 72 and the amortization of
goodwill resulted in $323.5 million and $47.2 million, respectively, being
charged to earnings in fiscal 1993.
As a result of the significant restructuring activities which occurred during
fiscal 1993, principally the downsizing of the Company through the branch and
asset sales referred to above, the Merger and the prior year sales of branches
and assets acquired in the acquisitions described above, management determined
that the value of the remaining goodwill was substantially diminished.
Accordingly, the balance of the unamortized portion of the Centereach and
Flushing Federal goodwill, in the amount of $70.8 million, was written off as a
charge to earnings in September 1993.
In an effort to accelerate the resolution of certain of its problem assets, in
December 1993 the Company entered into a contract for the bulk sale of certain
loans and real estate owned ("Bulk Sale"). The sale of these loans was completed
by December 31, 1993 and the sale of the real estate owned was completed in the
second quarter of fiscal 1994. At September 30, 1993 the book value of the loans
anticipated to be sold was approximately $142.0 million, of which approximately
$110.0 million were then non-performing and approximately $32.0 million were
then performing. At that date, the net book value of the real estate owned
anticipated to be sold was approximately $14.0 million.
In anticipation of the Bulk Sale, the loans sold in this transaction were
included on the Company's consolidated statement of financial condition as of
September 30, 1993 as loans held for sale at their fair value, based on the
sales price established in the Bulk Sale contract. In order to adjust the loan
carrying value to reflect fair value, at September 30, 1993, the Company charged
off $32.0 million against the allowance for possible loan losses. In addition,
the carrying value at September 30, 1993 of other real estate owned to be sold
in such transaction was adjusted to reflect the fair value of these assets,
based on the sales price established in the Bulk Sale contract. In order to make
these adjustments, at September 30, 1993 the Company recorded a $9.0 million
provision for possible loan losses and a special provision of $5.0 million for
real estate owned.
As a result of the restructuring activities, including the Deposit Sale
Transaction, the elimination of the goodwill balance and the Bulk Sale, total
assets of the Company declined to $4.0 billion at September 30, 1993 from $5.6
billion at September 30, 1992.
Financial Condition
At September 30, 1996 total assets were $5.4 billion, an increase of $462.2
million from the amount reported at September 30, 1995. The growth in assets is
attributable to an increase of $1.0 billion in total net loans receivable held
for investment, partially offset by a $536.5 million decrease in mortgage-backed
securities ("MBS's"). The growth in total loans receivable reflects the
Company's emphasis on residential lending. Residential loans (including second
mortgages, co-operative apartment loans, home equity loans and certain loans
held for sale in the secondary market) amounted to $2.9 billion, or 91.57%, of
total gross loans at September 30, 1996. The remaining $263.9 million, or 8.43%,
of total gross loans receivable at September 30, 1996 consisted of $69.6 million
of commercial real estate loans, $34.9 million of multi-family loans, $7.7
million of construction loans and land loans, and $151.7 million of commercial
and other loans. For fiscal 1996, the Company originated or purchased real
estate loans in the amount of $2.4 billion of which $353.8 million was acquired
by bulk purchases. Commercial and other loans originated or purchased during
1996 amounted to $89.8 million. The Company remains committed to increasing the
volume of one-to- four family mortgage loans and to improving the efficiency and
lowering the cost of loan originations through increased automation of loan
application and processing procedures. In order to increase the volume of loan
originations, the Company continues to actively manage its origination channels
by increasing the number and productivity of the loan representatives in the
Company's 25 regional lending centers, increasing the number of lending centers,
leveraging the existing customer base at each of the Company's consumer banking
branches and expanding its telemarketing effort to solicit loans. Additionally,
during fiscal 1996 the Company entered into an agreement with Multiple Listing
Services of Long Island to utilize the Company's technological capabilities and
the Internet as another origination channel. The Company continues to monitor
opportunities that may exist to acquire loan origination capabilities similar to
the Company's 1996 acquisitions of First Home and the two lending offices of
Fleet. These and prior acquisitions have also contributed to the Company's
strategy of minimizing geographic risk as 56.54% of total real estate loans
(excluding home equity loans) are located in New York, New Jersey and
Connecticut ("NY metropolitan region") at September 30, 1996 down from 77.09%
and 99.39% at September 30, 1995 and 1994, respectively. The Company believes it
is possible to increase the volume of loan originations while maintaining
current underwriting standards.
MBS's declined to $1.7 billion at September 30, 1996 from $2.3 billion at
September 30, 1995 reflecting the redeployment of funds into real estate loans.
Additionally, effective December 31, 1995, the Company reclassified $1.2 billion
of MBS's previously classified as held-to-maturity into the
available-for-sale category in accordance with
the Special Report on Statement of Financial Accounting Standards No. 115
("SFAS 115") "Accounting for Certain Investments in Debt and Equity Securities"
issued in November 1995.
Page 17
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
Total liabilities increased by $469.2 million, or 10.72%, to $4.8 billion at
September 30, 1996 from $4.4 billion at September 30, 1995 principally
reflecting additional borrowed funds of $344.3 million and an increase in
deposits of $59.5 million. Historically, the Company has relied on its deposit
base as its principal source of funding. The Company places major emphasis on
its core deposit relationships, consisting of passbook accounts, NOW accounts,
statement savings, money market and non-interest-bearing demand accounts, which
typically tend to be more stable than other sources of funding. The Company's
core deposits as a percentage of total deposits decreased to 46.08% at September
30, 1996 from 48.49% at September 30, 1995. Management believes that this
decrease is attributable in part to an increase in interest rates and a shift in
customer preference towards short-term certificate accounts. The Company
continues to place emphasis on providing quality service to its customers to
retain and attract core deposits as opposed to soliciting time deposit accounts
with higher yields.
The Company often uses borrowings as an alternative and sometimes a less costly
source of funds. The Company's primary source of borrowing is through the sales
of securities under agreements to repurchase ("reverse-repurchase agreements")
with nationally recognized investment banking firms. Reverse-repurchase
agreements are accounted for as borrowings by the Company and are secured by
designated securities. At September 30, 1996 and 1995, the Company had
reverse-repurchase agreements outstanding of $800.0 million and $623.7 million,
respectively. In addition to reverse-repurchase agreements, on June 27, 1996 the
Company borrowed funds by issuing a funding note ("Funding note") in the amount
of $181.4 million which was collateralized by a pool of adjustable rate
residential mortgage loans. At September 30, 1996, the outstanding balance of
the Funding note was $178.0 million. See Note 14 of Notes to Consolidated
Financial Statements. The proceeds of borrowing transactions are used to meet
cash flow or asset/liability needs of the Company as well as to take advantage
of investment opportunities that may exist in the market that enable the Company
to earn a positive interest rate spread.
Stockholders' equity totalled $519.1 million at September 30, 1996, a decline of
$7.1 million from September 30, 1995. This decline was primarily due to the
purchase of treasury stock, net of reissuances in the amount of $38.0 million,
the declaration of $9.2 million in dividends and a decline of $0.3 million in
unrealized gains on securities, net of tax, classified as available-for-sale
which was partially offset by net income of $32.3 million and amortization of
$8.1 million related to the Company's Employee Stock Ownership Plan ("ESOP") and
the Bank's Management Recognition and Retention Plans ("MRPs").
Liquidity, Regulatory
Capital and Capital
Resources
General. The Company's primary sources of funds are deposits, principal and
interest payments on loans and MBS's, retained income and borrowings under
reverse-repurchase agreements. In addition, on June 27, 1996 the Bank issued a
Funding note in the amount of $181.4 million which was collateralized by a pool
of adjustable rate residential mortgage loans. Payments of principal and
interest on the Funding note shall be paid monthly based on the scheduled
payments due on the underlying loans. The interest on the Funding note changes
monthly and bears interest at a rate of 50 basis points over the one month
London Interbank Offered Rate ("LIBOR"). See Note 14 of Notes to Consolidated
Financial Statements. Proceeds from the sale of securities and loans are also a
source of funding. While maturities and scheduled amortization of loans and
MBS's are predictable sources of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and
competition.
The Bank is required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which may be varied at the direction of the
OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required ratio is
currently 5.00%. The Bank's liquidity ratios were 9.34%, 12.35% and 14.61% at
September 30, 1996, 1995 and 1994, respectively. Currently, the Bank maintains a
liquidity ratio substantially above the regulatory requirements in accordance
with its investment objective of investing its liquid assets in short-term debt
securities. Future levels may vary.
The Company's most liquid assets are cash and short-term investments. The levels
of these assets are dependent on the Company's operating, financing, lending and
investing activities during any given period. At September 30, 1996, cash and
cash equivalents and short-term and intermediate-term investments
available-for-sale totalled $138.5 million.
The primary investment activity of the Bank is the origination and purchase of
real estate loans and other loans. During the years ended September 30, 1996 and
1995, the Bank originated or purchased real estate loans in the amounts of $2.4
billion and $1.1 billion and commercial and other loans in the amounts of $89.8
million and $63.5 million, respectively. Included in the 1996 real estate loan
purchases is $353.8 million which represents the bulk purchase of loans. The
Bank purchases MBS's to reduce liquidity not otherwise required to meet loan
demand. Purchases of MBS's totalled $0.2 billion and $0.9 billion for the years
ended September 30, 1996 and 1995, respectively. Additionally, the originations
of MBS's totalled $358.8 million in 1996. These activities were funded primarily
by principal repayments on loans and MBS's, borrowings under reverse-repurchase
agreements and the Funding note, and sales of loans and MBS's classified as
available-for-sale. Other investing activities include investing in U.S.
government securities, federal agency obligations and asset-backed securities.
Page 18
During fiscal 1996, the Company purchased 1,611,554 shares of treasury stock at
a cost of $42.0 million. The costs incurred in the purchase of treasury stock
were partially mitigated by the reissuance of 179,225 shares and the related tax
benefits stemming from the exercise of stock options which totalled $4.1
million. As of September 30, 1996, the Company owned 2,172,307 shares of
treasury stock which represents 2,497,554 shares acquired at an aggregate cost
of $59.9 million offset by the cumulative reissuance of 325,247 shares and the
related tax benefits stemming from the exercise of stock options which totalled
$6.2 million.
Liquidity management of the Company is both a daily and long-term component of
management's strategy. Excess funds are generally invested in short-term and
intermediate-term securities. In the event that the Bank should require funds
beyond its ability to generate them internally, additional sources of funds are
available through the use of FHLB advances and reverse-repurchase agreements. In
addition, the Bank may access funds, if necessary, through lines of credit
totaling $75.0 million at September 30, 1996 from unrelated financial
institutions.
At September 30, 1996, the Bank had outstanding commitments to originate or
purchase loans of $439.2 million which includes commitments to extend credit.
The Bank anticipates that it will have sufficient funds available to meet its
current loan commitments. Certificates of deposit which are scheduled to mature
in one year or less from September 30, 1996 totalled $1.4 billion. Management
believes, based on historical experience, that a significant portion of such
deposits will remain with the Bank.
At the time of Conversion, the Bank was required by OTS to establish a
liquidation account which will be reduced to the extent that eligible account
holders reduce their qualifying deposits. The balance of the liquidation account
at September 30, 1996 was $77.8 million. In the unlikely event of a complete
liquidation of the Bank, each eligible account holder will be entitled to
receive a distribution from the liquidation account. The Bank is not permitted
to declare or pay a dividend on or to repurchase any of its capital stock if the
effect would be to cause the Bank's regulatory capital to be reduced below the
amount required for the liquidation account. During 1996, the Bank declared a
cash dividend of $10.5 million. Unlike the Bank, the Holding Company is not
subject to OTS regulatory restrictions on the declaration or payment of
dividends to its stockholders, although the source of such dividends could
depend upon dividend payments from the Bank. The Holding Company is subject,
however, to the requirements of Delaware law, which generally limit dividends to
an amount equal to the excess of its net assets (the amount by which total
assets exceed total liabilities) over its stated capital or, if there is no such
excess, to its net profits for the current and/or immediately preceding fiscal
year. During 1996, the Company declared quarterly cash dividends at an
annualized rate of $0.40 per common share totaling $9.2 million.
Regulatory Capital Position. The Bank had a tangible capital ratio of 7.84%, a
core capital ratio of 7.84%, and a total-risk based capital ratio of 16.48%, as
compared with the required OTS regulatory capital ratios of 1.50%, 3.00% and
8.00%, respectively. At September 30, 1996, the Bank met the criteria to be
considered a "well-capitalized" institution for certain regulatory purposes. See
Note 4 of Notes to Consolidated Financial Statements.
Asset Quality
Asset quality continues to remain stable as non-performing loans decreased to
$53.2 million at September 30, 1996 from $55.7 million at September 30, 1995
reflecting continued improvements in the local economy and the continued
stabilization of real estate market values in the New York metropolitan region,
the Bank's historical primary lending area. At September 30, 1996, 56.54% of the
Bank's real estate loans (excluding home equity loans) were derived from the New
York metropolitan area. Coverage for possible loan losses improved during 1996
as the ratio of the allowance for possible loan losses to non-performing loans
increased to 63.79% at September 30, 1996 from 61.71% at September 30, 1995.
Additionally, the ratio of non-performing loans to total gross loans improved by
97 basis points to 1.70% at September 30, 1996 from 2.67% at September 30, 1995
and the ratio of non-performing assets to total assets improved by 18 basis
points to 1.14% at September 30, 1996 from 1.32% at September 30, 1995. The
improvement in each of these ratios is due to the reduction in non-performing
loans and non-performing assets, coupled with the respective growth in total
gross loans and total assets. Net charge-offs declined to $6.6 million in fiscal
1996, the lowest level in the past seven years.
Management believes that a portion of the Company's non-performing assets is
attributable to the low documentation loans (as defined below) previously
originated by the Company. During the 1986 to 1989 period, the Company
originated a significant number of one-to-four family mortgage loans without
verification of the borrower's financial condition or employer verification of
the borrower's level of income if the borrower's financial condition and stated
income were considered reasonable for the employment position held ("low
documentation loans"). The Company has experienced higher delinquency and
default rates on such loans, as compared to fully underwritten one-to-four
family loans, and in recognition thereof, the Company discontinued the
origination of low documentation loans in 1990. The Company is unable to
determine the aggregate dollar amount of low documentation loans originated
between 1986 and 1989 which still remain outstanding. At September 30, 1996,
however, approximately $536.1 million, or 19.25% of the Company's one-to-four
family residential loan and co- operative apartment loan portfolios consisted of
loans originated
Page 19
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
during the 1986 to 1989 period down from $604.2 million, or 34.19%, at September
30, 1995. To the extent such loans include a significant amount of low
documentation loans, the Company's delinquency and default rates could be
adversely impacted which may result in material losses. From time to time, on a
selective basis, the Company originates loans that involve limited verification
of the borrower's level of income or financial condition ("limited documentation
loans"). All such limited documentation loans are intended to conform to
secondary market investor guidelines.
Managing of
Interest Rate
Risk
One of the Company's primary objectives is managing interest rate risk.
Generally, net interest income is subject to substantial risk due to changes in
interest rates or changes in market yield curves. The Company seeks to reduce
its exposure to interest rate risk through the origination and retention of
adjustable rate mortgage ("ARM") loans, which at September 30, 1996 represented
81.97% of the Company's total gross loans excluding loans held for sale. The
Company also maintains MBS's and mortgage-related securities portfolio which
consists primarily of ARM-backed securities and fixed rate MBS's with remaining
estimated lives of less than five years. In an effort to meet the needs of its
customers, the Company continues to originate fixed rate loans. These loans,
however, are originated for immediate sale in the secondary mortgage market to
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation ("FHLMC") or other investors. The Company sells loans to investors
on both a servicing released and servicing retained basis. At September 30,
1996, the Company's portfolio of loans serviced for investors was approximately
$3.7 billion. During fiscal 1996 as interest rates increased, loan prepayments
slowed and ARM loans have been in greater demand, however, should interest rates
decline this trend may reverse.
In its securities portfolio, the Company has emphasized maintaining adequate
liquidity, particularly through amortizing short-term and intermediate-term
investment instruments. Management believes that its policy of emphasizing
lower-cost core deposits also limits interest rate risk as these deposits are
considered by management to have relatively low volatility.
To a lesser degree, the Company has the ability to manage its interest rate risk
through the use of derivative financial instruments. During fiscal 1996, these
instruments consisted solely of two interest rate cap agreements which are
designed to help protect the Company from rising interest rates while involving
minimal risk. The Company does not expect to significantly increase its
utilization of derivative financial instruments in the future, however, it may
enter into such agreements from time to time to manage its interest rate risk
exposure. See Note 15 of Notes to Consolidated Financial Statements.
Interest Rate
Sensitivity
Analysis
Interest rate sensitivity may be analyzed by examining the extent to which such
assets and liabilities are "interest rate sensitive" and by monitoring an
institution's interest rate sensitivity "gap." An asset or liability is said to
be interest rate sensitive within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest-earning assets maturing or repricing
exceeds the amount of interest-bearing liabilities maturing or repricing within
the same period. A gap is considered negative when the amount of
interest-bearing liabilities maturing or repricing exceeds the amount of
interest-earning assets maturing or repricing within the same period. Generally,
in a rising interest rate environment, an institution with a positive gap would
generally be expected, absent the effects of other factors, to experience a
greater increase in the yield of its assets relative to the cost of its
liabilities and thus increase earnings. Conversely, the cost of funds for an
institution with a positive gap would generally be expected to decline less
quickly than the yield on its assets in a falling interest rate environment.
Changes in interest rates generally have the opposite effect on an institution
with a negative gap.
Page 20
In the current interest rate environment, the Company has been investing
primarily in adjustable rate real estate loans with various maturities. In
addition, the Company also invests in federal agency and MBS's and asset-backed
securities with adjustable rates or, in the case of fixed rate securities,
maturities shorter than five years and has generally refrained from investing in
fixed rate assets with longer term maturities. As a result of this strategy, at
September 30, 1996, the Company's total interest-earning assets maturing or
repricing within one year exceeded its total interest-bearing liabilities
maturing or repricing in the same time by $381.9 million, representing a one
year cumulative positive gap ratio of 7.12% versus $467.3 million and 9.53% at
September 30, 1995. The decrease in the cumulative one year gap is attributable
to higher certificate accounts and borrowings repricing within one year
partially offset by the net growth in real estate loans and MBS's repricing
within one year. The Company closely monitors its interest rate risk as such
risk relates to its operational strategies. At September 30, 1996, the Company
has continued to maintain a positive gap position; however, there can be no
assurance that the Company will be able to maintain its positive gap position or
that its strategies will not result in a negative gap position in the future.
The Company has not attempted to retain short-term certificate of deposit
accounts or increase core deposits by maintaining interest rates above those
offered by its competitors. Instead, the Company has attempted to encourage
long-term depositors to maintain their accounts with the Company through
expanded customer service. To the extent that the Company's core deposits
run-off at a more rapid rate than the Company's assumptions on such deposits,
the Company's current positive gap positions could be negatively impacted. While
the Company has experienced some run-off in its core deposits, there can be no
assurance that such a run-off will not increase in the future if depositors
continue to seek higher yielding investments.
Additionally, the Company's investment policy enables the Company to enter into
certain interest rate contracts, for example, interest rate swaps, caps, floors
and collars. These contracts may be used to hedge interest rates on certain
assets and liabilities. During fiscal 1996, the Bank had two interest rate cap
agreements outstanding for an aggregate unamortized cost of $0.1 million at
September 30, 1996, involving a notional amount totaling $90.0 million. Three
contracts were in effect during fiscal 1995. The amount paid for the interest
rate caps is being amortized into interest expense over the term of the
contracts. For the years ended September 30, 1996 and 1995, amortization
totalled $0.3 million per year. See Note 15 of Notes to Consolidated Financial
Statements.
The Company uses earning simulations, duration, as well as gap analysis to
analyze and project future interest rate risk. Computer generated scenarios are
based on various assumptions including: expected changes in the level of
interest rates and the shape of the yield curve, pricing strategies, portfolio
embedded option impacts and growth, volume and mix alternatives for each
portfolio. Projected statements are evaluated on a rolling 12 month period.
Duration measures the interest rate sensitivity of all financial instruments
based on their weighted average term to maturity of all cash flows. The
Asset/Liability Committee ("ALCO") evaluates decisions in a risk return
trade-off framework to ensure that the level of interest rate risk exposure
incurred does not exceed prudent levels. Specific limits for variation of net
interest income and net portfolio value under various interest rate scenarios
are set annually by ALCO and approved by the Board of Directors.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1996, which are
anticipated by the Company, based on certain assumptions, to reprice or mature
in each of the future time periods shown. Except as stated below, the amounts of
assets and liabilities shown to reprice or mature during a particular period
were determined in accordance with the earlier of term to repricing or the
contractual terms of the asset or liability. Prepayment assumptions ranging from
0% to 15% per year were applied, dependent upon the loan type and coupon.
Run-off rate assumptions for passbook savings, statement savings, NOW and money
market accounts, in the one year or less category are 51%, 51%, 40% and 100%,
respectively, rather than the OTS assumptions which, in the one year or less
period are 17%, 17%, 37% and 79%, respectively. These withdrawal rates and
prepayment assumptions are based on assumptions and analyses prepared internally
and are used in preparing the Regulatory Thrift Bulletin-13 Report and quarterly
management reports. These assumptions were used rather than the assumptions
published by the OTS because management believes they are more indicative of the
actual prepayments and withdrawals experienced by the Company. The assumptions
do not reflect any increases or decreases in interest rates paid on various
categories of deposits (whether by the Company or in general) since September
30, 1996.
Page 21
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
Interest Rate Sensitivity Gap Analysis At September 30, 1996
- ------------------------------------------------------------------------------------------------------------
More than More than More than More than
3 Months 3 Months 6 Months 1 Year 3 Years
or Less to 6 Months to 1 Year to 3 Years to 5 Years
--------- ----------- ---------- ---------- ----------
(Dollars in thousands)
Interest-earning assets:
Real estate loans(1) $ 232,498 $ 429,339 $ 941,563 $ 794,953 $ 236,218
Commercial loans(1) 7,406 -- -- -- 65
Other loans(1) 65,297 3,533 7,158 25,210 18,522
Mortgage-backed
securities(2) 388,815 316,449 527,521 359,081 83,634
Interest-earning cash
equivalents 37,357 -- -- -- --
Debt and equity securities(2) 9,991 3,881 33,028 20,376 2,575
Stock in FHLB-NY -- -- -- -- --
---------- --------- ---------- ---------- ----------
Total interest-
earning assets 741,364 753,202 1,509,270 1,199,620 341,014
Interest-bearing liabilities:
Passbook accounts 124,293 99,501 118,338 108,801 104,267
Statement savings accounts 120,625 96,077 114,254 105,048 100,671
NOW accounts 35,555 4,593 9,186 36,744 35,213
Checking & demand
deposit accounts 2,735 1,172 2,345 -- --
Money market accounts 83,484 15,652 31,306 -- --
Certificate accounts 380,383 459,877 520,575 314,327 257,693
Borrowings 364,023 -- 38,000 576,000 --
---------- --------- ---------- ---------- ----------
Total interest-
bearing liabilities 1,111,098 676,872 834,004 1,140,920 497,844
---------- --------- ---------- ---------- ----------
Interest sensitivity gap
per period $ (369,734) $ 76,330 $ 675,266 $ 58,700 $(156,830)
---------- --------- ---------- ---------- ----------
---------- --------- ---------- ---------- ----------
Cumulative interest
sensitivity gap $ (369,734) $(293,404) $ 381,862 $ 440,562 $ 283,732
---------- --------- ---------- ---------- ----------
---------- --------- ---------- ---------- ----------
Cumulative interest
sensitivity gap as a
percentage of total assets(3) (6.89)% (5.47)% 7.12% 8.21% 5.29%
Cumulative net interest-earning
assets as a percentage of net
interest-bearing liabilities 66.72 83.59 114.56 111.71 106.66
- ------------------------------------
More
than
5 Years Total
------- -----
Interest-earning assets:
Real estate loans(1) $294,360 $2,928,931
Commercial loans(1) -- 7,471
Other loans(1) 23,849 143,569
Mortgage-backed
securities(2) 50,771 1,726,271
Interest-earning cash
equivalents -- 37,357
Debt and equity securities(2) 112,933 182,784
Stock in FHLB-NY 40,754 40,754
-------- ---------
Total interest-
earning assets 522,667 5,067,137
Interest-bearing liabilities:
Passbook accounts 114,041 669,241
Statement savings accounts 110,114 646,789
NOW accounts 1,531 122,822
Checking & demand
deposit accounts -- 6,252
Money market accounts -- 130,442
Certificate accounts 25,936 1,958,791
Borrowings -- 978,023
-------- ---------
Total interest-
bearing liabilities 251,622 4,512,360
-------- ---------
Interest sensitivity gap
per period $271,045 $ 554,777
-------- ---------
-------- ---------
Cumulative interest
sensitivity gap $554,777
--------
--------
Cumulative interest
sensitivity gap as a
percentage of total assets(3) 10.34%
Cumulative net interest-earning
assets as a percentage of net
interest-bearing liabilities 112.29
(1) Excludes non-performing loans and the allowance for possible loan losses.
(2) MBS's and debt and equity securities are shown excluding the market value
appreciation of $11.8 million, before tax, from SFAS 115.
(3) Amounts for fixed rate loans are based on scheduled payment dates and loans
for which there is no amortization schedule, are included as three months
or less.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as ARM loans, have features which
limit changes in interest rates on a short-term basis and over the life of the
asset. Further, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the table. An interest rate increase may impair the ability of
borrowers to service their ARM loans.
Analysis of Net
Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
upon the relative amount of interest-earning assets and interest-bearing
liabilities and the interest rate earned or paid on them.
The following table sets forth certain information relating to the Company's
Consolidated Statements of Financial Condition and the Consolidated Statements
of Operations for the fiscal years ended September 30, 1996, 1995 and 1994 and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and
Page 22
costs are derived by dividing income or expense by the average balance of assets
or liabilities, respectively, for the periods shown. Average balances are
derived from the average daily balances. The yields and costs include fees which
are considered adjustments to yields.
For the Year Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------------
1996 1995
------------------------------- ------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- -------- ------- -------- -------- --------
(Dollars in thousands)
Interest-earning assets:
Interest-earning
cash equivalents $ 32,109 $ 1,708 5.32% $ 47,153 $ 2,560 5.43%
Debt and equity securities
and FHLB-NY stock, net(1) 268,344 15,008 5.59 391,556 22,390 5.72
Mortgage-backed
securities, net(1) 1,952,217 134,064 6.87 2,176,416 140,173 6.44
Real estate loans, net(2) 2,380,633 185,241 7.78 1,724,834 140,268 8.13
Commercial and other
loans, net(2) 125,629 15,550 12.38 117,993 15,824 13.41
---------- --------- ------ ---------- ------- ------
Total interest-earning assets 4,758,932 351,571 7.39 4,457,952 321,215 7.21
Other non-interest-
earning assets 268,355 228,981
---------- --------- ---------- -------
Total assets $5,027,287 $351,571 $4,686,933 $321,215
---------- --------- ---------- -------
---------- --------- ---------- -------
Interest-bearing liabilities:
Deposits:
Time deposits $1,895,594 $108,479 5.72% $1,626,814 $ 87,849 5.40%
Statement savings 639,318 20,755 3.25 684,340 20,946 3.06
Passbooks 711,993 19,264 2.71 820,526 22,336 2.72
Checking and NOW
accounts(3) 268,406 3,419 1.27 255,744 3,488 1.36
Money market 142,192 3,913 2.75 182,147 5,022 2.76
---------- --------- ------ ---------- ------- ------
Total deposits 3,657,503 155,830 4.26 3,569,571 139,641 3.91
Borrowed funds 724,448 41,346 5.71 510,987 28,255 5.53
---------- --------- ------ ---------- ------- ------
Total interest-
bearing liabilities 4,381,951 197,176 4.50 4,080,558 167,896 4.11
Non-interest-
bearing liabilities 120,982 95,689
---------- ----------
Total liabilities 4,502,933 4,176,247
Total stockholders' equity 524,354 510,686
---------- --------- ------ ---------- ------- ------
Total liabilities and
stockholders' equity $5,027,287 197,176 $4,686,933 167,896
---------- --------- ---------- -------
---------- --------- ---------- -------
Net interest income/
spread(4) $154,395 2.89% $153,319 3.10%
--------- ------ ------- ------
--------- ------ ------- ------
Net interest margin as % of
interest-earning assets(5) 3.24% 3.44%
------ ------
------ ------
Ratio of interest-earning
assets to interest-
bearing liabilities 108.60% 109.25%
------ ------
------ ------
------------------------------
1994
-----------------------------
Average
Average Yield/
Balance Interest Cost
-------- -------- -------
Interest-earning assets:
Interest-earning
cash equivalents $ 117,516 $ 4,101 3.49%
Debt and equity securities
and FHLB-NY stock, net(1) 482,198 23,794 4.93
Mortgage-backed
securities, net(1) 1,752,511 101,868 5.81
Real estate loans, net(2) 1,599,057 125,069 7.82
Commercial and other
loans, net(2) 140,677 17,325 12.32
---------- -------- ------
Total interest-earning assets 4,091,959 272,157 6.65
Other non-interest-
earning assets 275,571
---------- --------
Total assets $4,367,530 $272,157
---------- --------
---------- --------
Interest-bearing liabilities:
Deposits:
Time deposits $1,296,402 $ 56,986 4.40%
Statement savings 891,392 26,202 2.94
Passbooks 1,003,287 27,706 2.76
Checking and NOW
accounts(3) 240,733 3,210 1.33
Money market 223,552 6,189 2.77
---------- -------- ------
Total deposits 3,655,366 120,293 3.29
Borrowed funds 228,368 9,811 4.30
---------- -------- ------
Total interest-
bearing liabilities 3,883,734 130,104 3.35
Non-interest-
bearing liabilities 137,309
----------
Total liabilities 4,021,043
Total stockholders' equity 346,487
---------- -------- ------
Total liabilities and
stockholders' equity $4,367,530 130,104
---------- -------- ------
---------- -------- ------
Net interest income/
spread(4) $142,053 3.30%
-------- ------
-------- ------
Net interest margin as % of
interest-earning assets(5) 3.47%
------
------
Ratio of interest-earning
assets to interest-
bearing liabilities 105.36%
------
------
(1) MBS's and debt and equity securities are shown including the market value
appreciation/(depreciation) of $12.7 million, $12.2 million and
$(5.4) million, before tax, from SFAS 115 for the years ended September 30,
1996, 1995 and 1994, respectively.
(2) Net of unearned discounts, premiums, deferred loan fees, purchase
accounting discounts and premiums and allowance for possible loan losses,
and including non-performing loans and loans held for sale.
(3) Includes non-interest-bearing checking accounts.
(4) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
Page 23
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
Rate/Volume
Analysis
The following table presents the impact of changes in interest rates and in the
volume of interest-earning assets and interest-bearing liabilities on the
Company's interest income and expense during the periods indicated. Information
is provided in each category with respect to (i) changes attributable to changes
in volume (changes in volume multiplied by the prior rate), (ii) changes
attributable to changes in rate (changes in rate multiplied by the prior
volume), and (iii) the net change. The changes attributable to the combined
impact of volume and rate have been allocated proportionately to the changes due
to volume and the changes due to rate.
Year Ended September 30, 1996 Year Ended September 30, 1995
Compared to Compared to
Year Ended September 30, 1995 Year Ended September 30, 1994
Increase/(Decrease) Increase/(Decrease)
- ------------------------------------------------------------------------------ --------------------------------
Due to Due to
------------------------------ --------------------------------
Volume Rate Net Volume Rate Net
------- -------- ------- ------- --------- --------
(In thousands)
Interest-earning assets:
Interest-earning cash equivalents(1) $ (801) $ (51) $ (852) $ (1,647) $ 106 $ (1,541)
Debt and equity securities(2)(3) (6,901) (481) (7,382) (4,856) 3,452 (1,404)
Mortgage-backed securities(3) (15,022) 8,913 (6,109) 26,477 11,828 38,305
Real estate loans(4) 51,262 (6,289) 44,973 10,096 5,103 15,199
Commercial loans and other loans(4) 988 (1,262) (274) (2,954) 1,453 (1,501)
------- ------ ------ ------ ------ ------
Total 29,526 830 30,356 27,116 21,942 49,058
------- ------ ------ ------ ------ ------
Interest-bearing liabilities:
Deposits 3,504 12,685 16,189 (2,882) 22,230 19,348
Borrowed funds 12,156 935 13,091 14,973 3,471 18,444
------- ------ ------ ------ ------ ------
Total 15,660 13,620 29,280 12,091 25,701 37,792
------- ------ ------ ------ ------ ------
Net change in interest income $ 13,866 $ (12,790) $ 1,076 $ 15,025 $ (3,759) $ 11,266
------- ------ ------ ------ ------ ------
------- ------ ------ ------ ------ ------
(1) Cash equivalents include amounts due from banks and short-term loans to
commercial banks with original terms to maturity of less than three
months.
(2) Includes FHLB-NY stock.
(3) MBS's and debt and equity securities are shown including the market value
appreciation/(depreciation) of $12.7 million, $12.2 million and $(5.4)
million, before tax, from SFAS 115 for the years ended September 30,
1996, 1995 and 1994, respectively.
(4) In computing the volume and rate components of net interest income for
loans, non-performing loans and loans held for sale have been included.
Comparison of
Operating Results
for the Fiscal Years
Ended September 30,
1996 and 1995
GENERAL. Net income declined by $11.2 million, or 25.83%, to $32.3
million in fiscal 1996 from $43.5 million in fiscal 1995. The decrease was
primarily attributable to a special one-time federal insurance assessment of
$18.7 million and higher general and administrative ("G&A") costs of $11.5
million over the comparable 1995 period. Partially offsetting these additional
costs were increases in non-interest income and net interest income of $11.7
million and $1.1 million, respectively, coupled with a reduction in the
provision for income taxes of $6.1 million.
INTEREST INCOME. Interest income increased by $30.4 million, or 9.45%, to
$351.6 million in fiscal 1996 from $321.2 million in 1995. The improvement is
due to an increase of $301.0 million in average interest-earning assets
coupled with an increase of 18 basis points in the average yield of
interest-earning assets.
Average real estate loans increased by $655.8 million, or 38.02%, to $2.4
billion at September 30, 1996 from $1.7 billion at September 30, 1995. The
increase reflects loan originations and purchases funded by additional
borrowings and the redeployment of funds from principal payments and sales of
MBS's and debt and equity securities classified as available-for-sale into
real estate loans. The redeployment of funds also contributed to an increase
in the overall yield on average interest-earning assets by replacing lower
yielding MBS's and debt and equity securities with higher yielding real
estate loans. Despite the improvement in the overall yield on
interest-earning assets, the yield on average real estate loans declined to
7.78% in 1996 from 8.13% in 1995 principally reflecting the significant
amount of ARM loans originated and retained in the portfolio during the last
two years which are not fully indexed. The net result of the increase in
average real estate loans and the decline in the yield on such loans amounted
to an increase in interest income of $44.9 million, or 32.06%, to $185.2
million in 1996 from $140.3 million in 1995.
Average MBS's declined by $224.2 million, or 10.30%, to $2.0 billion in 1996
from $2.2 billion in 1995 reflecting the redeployment of funds previously
described and the average yield increased by 43 basis points to 6.87% in 1996
from 6.44% in 1995. The net result of the lower average balances and higher
yields was a reduction in interest income from MBS's of $6.1 million, or
4.36%, to $134.1 million in 1996 from $140.2 million in 1995.
Average debt and equity securities declined by $123.3 million, or 31.47%, to
$268.3 million in 1996 from $391.6 million in 1995 due to the redeployment of
funds previously described into real estate loans. In addition, the yield on
average
Page 24
debt and equity securities declined by 13 basis points to 5.59% in 1996 from
5.72% in 1995. The net result of the lower average balances coupled with a
decline in the yield contributed to a reduction in interest income from debt and
equity securities of $7.4 million, or 32.97%, to $15.0 million in 1996 from
$22.4 million in 1995.
INTEREST EXPENSE. Interest expense increased by $29.3 million, or 17.44%, to
$197.2 million in 1996 from $167.9 million in 1995. The increase is principally
the result of an increase in average deposit liabilities of $87.9 million to
$3.7 billion in 1996 from $3.6 billion in 1995 coupled with an increase in the
cost of average deposits of 35 basis points to 4.26% in 1996 from 3.91% in 1995.
The net result of higher average deposit liabilities and the greater cost
associated with such funds resulted in an increase in interest expense from
deposit liabilities of $16.2 million, or 11.59%, to $155.8 million in 1996 from
$139.6 million in 1995. Interest expense on certificate accounts increased by
$20.6 million, or 23.48%, to $108.5 million in 1996 from $87.9 million in 1995
reflecting increased average balances of $268.8 million coupled with an increase
in the average cost of 32 basis points. The effect of this increase is partially
mitigated by declines in interest expense on passbook accounts of $3.1 million,
or 13.76%, to $19.3 million in 1996 and money market accounts of $1.1 million,
or 22.08%, to $3.9 million in 1996 primarily reflecting decreased average
balances of $108.5 million, and $40.0 million, respectively.
Further contributing to the increase in interest expense was an increase in
average borrowed funds of $213.4 million, or 41.77%, to $724.4 million in 1996
from $511.0 million in 1995 coupled with an increase in the cost of average
borrowed funds of 18 basis points to 5.71% in 1996 from 5.53% in 1995. Although
deposits are the Bank's primary source of funds, the Bank has the ability to use
borrowings as an alternative, and sometimes less costly, source of funds. The
increase in borrowed funds that occurred during 1996 enabled the Bank to meet
cash flow or asset/liability needs as well as to take advantage of investment
opportunities that existed in the market and enabled the Bank to earn a positive
interest rate spread. The greater volume of borrowed funds and the higher cost
of such funds resulted in an increase in interest expense from borrowed funds of
$13.0 million, or 46.33%, to $41.3 million in 1996 from $28.3 million in 1995.
During 1996 and 1995, interest expense also includes the amortization of
premiums paid for interest rate cap agreements in the amount of $0.3 million for
each year. See Note 15 of Notes to Consolidated Financial Statements.
NET INTEREST INCOME. Net interest income was $154.4 million in 1996, an
increase of $1.1 million, or 0.70%, from $153.3 million in 1995. The increase is
primarily attributable to the Company's higher level of real estate loans
partially offset by greater cost of funds. The net interest margin declined by
20 basis points to 3.24% in 1996 from 3.44% in 1995 and the net interest spread
declined by 21 basis points to 2.89% in 1996 from 3.10% in 1995. Contributing to
these declining ratios were rises in short term interest rates during 1996 and,
although adding to higher overall net interest income, the use of higher costing
borrowed funds.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses
decreased by $0.3 million, or 4.17%, to $6.2 million in 1996 from $6.5 million
in 1995. The reduction reflects the stable level of non-performing loans, which
declined by $2.5 million to $53.2 million at September 30, 1996 from $55.7
million at September 30, 1995. Additionally, the ratio of non-performing loans
to total gross loans declined by 97 basis points to 1.70% in 1996 from 2.67% in
1995 and net charge-offs declined to a seven year low of $6.6 million. Coverage
for possible future loan losses, as measured by the ratio of the allowance for
possible loans losses to non-performing loans, improved by 208 basis points to
63.79% at September 30, 1996 from 61.71% at September 30, 1995, although the
level of the allowance for possible loan losses declined to $33.9 million at
September 30, 1996 from $34.4 million at September 30, 1995.
NON-INTEREST INCOME. Non-interest income increased by $11.7 million, or 40.20%,
to $40.8 million in 1996 from $29.1 million in 1995. Contributing to the
improvement were increases in total fees and other income of $2.3 million, net
gains on sale activity of $6.7 million and the net gain on investment in real
estate and premises of $2.7 million. Total fees and other income increased by
$2.3 million, or 9.05%, to $28.3 million in 1996 from $26.0 million in 1995
primarily due to improvements in loan fees and service charges, loan servicing
fees and income from insurance and securities commissions. Loan fees and service
charges increased by $0.7 million, or 28.99%, to $3.2 million in 1996 from $2.5
million in 1995 primarily reflecting greater mortgage late charges and tax
search fees. Loan servicing fee income increased by $1.0 million, or 7.69%, to
$13.9 million in 1996 from $12.9 million in 1995. The growth in loan servicing
fees reflects the Company's strategy of increasing its mortgage servicing
portfolio which grew to $3.7 billion at September 30, 1996 from $2.6 billion at
September 30, 1995. Loan service fee income is reported net of the amortization
of mortgage servicing rights of $2.7 million and $1.4 million in 1996 and 1995,
respectively. See Note 7 of Notes to Consolidated Financial Statements. Income
from insurance and securities commissions increased by $0.8 million,
or 99.75%, to $1.6 million in 1996 from $0.8 million in 1995 reflecting the
Company's expansion of its delivery channels and its change to a new third party
provider of financial products and services during 1995. Net gains on sale
activity increased by $6.7 million to $8.3 million in 1996 from $1.6 million in
1995. The increase in net gains on sale activity reflects the Company's strategy
of periodically realizing profits in the Company's loan, securities available-
for-sale and funding portfolios. As interest rates changed during the year, the
Company realized profits in the
Page 25
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
available-for-sale portfolios which resulted in increased liquidity and improved
the Company's ability to take advantage of higher yielding investments as they
became available. Net gains from sale activity varies from year to year based
on, among other things, the interest rate environment, alternative investment
opportunities and the Company's goals in managing its available-for-sale
portfolios. Further contributing to the improvement in net gains on sale
activity was the write-down during 1995 of $1.8 million stemming from the
Company's investment in Nationar, a failed bank service institution.
Net gain on investment in real estate and premises increased by $2.7 million to
$4.1 million in 1996 from $1.5 million in 1995 primarily reflecting the
disposition of ten non-strategic real estate investment properties. The
properties were not necessary to support the Company's core businesses and were
mostly the result of various business acquisitions.
NON-INTEREST EXPENSE. Non-interest expense increased by $30.5 million, or
29.67%, to $133.0 million in 1996 from $102.5 million in 1995. The primary
factors contributing to the increase were higher federal insurance costs and
greater compensation and benefit costs. Federal insurance costs increased by
$18.8 million during 1996 as compared with 1995 reflecting Congressional action
previously described to resolve disparities that had existed among the deposit
insurance funds. Beginning on January 1, 1997, the Company anticipates a
reduction in its deposit assessment rate from 23 basis points to 6.4 basis
points. Compensation and benefit costs increased by $6.6 million, or 12.69%, to
$58.0 million in 1996 from $51.4 million in 1995. The increase in compensation
and benefit costs primarily reflects the increase in the price of the Common
Stock and its impact on the Company's stock based benefit plans. Stock based
benefit plans costs increased to $7.1 million in 1996 from $4.0 million in 1995.
Beginning on January 1, 1997, the Company anticipates a reduction in its stock
based benefit costs as a result of plan modifications recently adopted. Further
contributing to the rise in compensation and benefit costs were normal salary
increases, retirement costs related to the retirement of the Company's president
and increases resulting from the expansion of our loan production centers.
Office occupancy and equipment costs increased by $2.1 million, or 11.24%, to
$20.6 million in 1996 from $18.5 million in 1995 primarily reflecting the
Company's continued technological investments to improve its information and
communication systems coupled with its recent acquisitions previously described.
Advertising costs increased by $1.2 million, or 26.63%, to $5.9 million in 1996
from $4.7 million in 1995 reflecting the Company's television advertising
campaign.
Other G&A costs increased by $1.5 million, or 8.84%, to $18.6 million in 1996
from $17.1 million in 1995. The increase principally reflects greater costs
stemming from increased loan volume and the expansion of the Company's mortgage
business in the mid-Atlantic states.
PROVISION FOR INCOME TAXES. The provision for income tax expense declined by
$6.1 million, or 20.53%, to $23.8 million in 1996 from $29.9 million in 1995,
primarily reflecting a lower level of taxable income in 1996. The effective tax
rate increased to 42.40% in 1996 from 40.72% in 1995 principally as a result of
the limitations placed on the tax deductibility of ESOP contributions that arise
from increases in the price of the Common Stock.
- --------------------------------------------------------------------------------
Comparison of Operating Results
for the Fiscal Years Ended September 30, 1995 and 1994
GENERAL. The Company realized net income of $43.5 million in fiscal 1995. For
the year ended September 30, 1994, the Company realized net income of $30.9
million prior to the benefit of the changes in accounting principles of
$8.6 million. The 1995 increase was principally attributable to an increase in
net interest income of $11.2 million, a reduction in the provision for possible
loan losses of $5.5 million, an increase in total non-interest income of $6.2
million and a reduction in the loss on real estate owned of $2.3 million, which
were partially offset by increased tax expense of $11.9 million.
INTEREST INCOME. Interest income was $321.2 million in 1995, an increase of
$49.0 million, or 18.03%, from $272.2 million in 1994. The increase is primarily
attributable to the earnings on the net proceeds from the initial public
offering ("IPO") which were invested during the entire 1995 year as compared
with only five and one-half months during 1994, the investment of additional
borrowed funds during 1995 at a positive interest rate spread and the rising
interest rate environment that existed during 1995. The increase in interest
rates resulted in a 56 basis point increase in the average yield on
interest-earning assets to 7.21% in 1995 from 6.65% in 1994. The funds received
from both the IPO and from additional borrowings were invested primarily in real
estate loans and MBS's and, as a result, interest income on real estate loans
and MBS's constituted approximately 87.31% and 83.38% of total interest income
for 1995 and 1994, respectively. Interest income on real estate loans increased
by $15.2 million in 1995 from 1994 as a result of an increase in average real
estate loans outstanding of $125.7 million coupled with an increase of 31 basis
points in the average yield on these loans to 8.13% in 1995 from 7.82% in 1994.
Interest income on MBS's increased by $38.3 million in 1995 from 1994 as a
result of an increase in average MBS's of $423.9 million coupled with an
increase of 63 basis points in the average yield to 6.44% in 1995 from 5.81% in
1994. Interest income on debt and
Page 26
equity securities (including FHLB-NY stock) decreased by $1.4 million, or 5.90%,
to $22.4 million in 1995 from $23.8 million in 1994 reflecting a decrease in the
average balance outstanding of $90.6 million which was partially offset by an
increase of 79 basis points in the average yield to 5.72% in 1995 from 4.93% in
1994. The decline in the average balance reflects the temporary deployment of a
portion of the IPO funds in debt and equity securities at September 30, 1994 and
the redeployment of these funds into real estate loans and mortgage related
investments at September 30, 1995. Interest income on commercial and other loans
decreased by a total of $1.5 million, or 8.66%, to $15.8 million in 1995 from
$17.3 million in 1994. The decrease resulted principally from a $22.7 million,
or 16.12%, decrease in the average balance of these loans partially offset by a
109 basis point increase in the average yield on these loans. Interest income on
cash and cash equivalents decreased by $1.5 million, or 37.58%, to $2.6 million
in 1995 from $4.1 million in 1994 which reflects a decline of $70.3 million in
the average balance partially offset by an increase of 194 basis points in the
average yield. The decline in the average balance reflects the temporary
deployment of a portion of the IPO funds in cash and cash equivalents at
September 30, 1994 and the redeployment of these funds into real estate loans
and mortgage related investments at September 30, 1995.
INTEREST EXPENSE. Interest expense was $167.9 million in 1995, an increase of
$37.8 million, or 29.05%, from $130.1 million in 1994 primarily reflecting an
increase in the average balance of borrowed funds of $282.6 million coupled with
rising interest rates which resulted in a 123 basis point increase in the
average cost of borrowings. Interest expense on deposits increased as the rise
in interest rates contributed to a shift in consumer preference towards
certificate accounts and away from core accounts. Overall, interest expense on
total deposits increased $19.3 million, or 16.08%, to $139.6 million in 1995
from $120.3 million in 1994 and reflects a 62 basis point increase in the
average cost of deposits which was partially offset by an $85.8 million
reduction in average deposits outstanding. Although average deposits declined,
the ending balance increased by $5.7 million at September 30, 1995 as compared
to September 30, 1994 due to deposit inflows that occurred during the last
quarter of fiscal 1995. As interest rates rose during 1995, customer preference
towards short-term certificate accounts became prevalent and resulted in a
decline in the average balance of lower costing core deposits. Interest expense
on time deposits increased $30.8 million, or 54.16%, to $87.8 million in 1995
from $57.0 million in 1994 which reflects an increase in the average balance of
certificate accounts of $330.4 million, or 25.49%, to $1.6 billion in 1995 from
$1.3 billion in 1994. Interest expense on statement savings accounts decreased
by $5.3 million, or 20.06%, to $20.9 million in 1995 from $26.2 million in 1994
reflecting lower average balances of $207.1 million partially offset by a 12
basis point increase in the average cost. Interest expense on passbook accounts
decreased by $5.3 million, or 19.08%, to $22.4 million in 1995 from $27.7
million in 1994 reflecting lower average balances of $180.2 million coupled with
a decrease of 4 basis points in the average cost.
Interest expense on borrowed funds increased by $18.5 million, or 188.00%, to
$28.3 million in 1995 from $9.8 million in 1994. This increase reflects the
growth in the average balance of borrowed funds of $282.6 million, or 123.76%,
to $511.0 million in 1995 from $228.4 million in 1994 coupled with a 123 basis
point increase in the average cost to 5.53% in 1995 from 4.30% in 1994. In 1995,
interest expense also includes the amortization of premiums paid for interest
rate cap agreements in the amount of $0.3 million. No such agreements were in
effect during 1994. See Note 15 of Notes to Consolidated Financial Statements.
NET INTEREST INCOME. Net interest income was $153.3 million in 1995, an
increase of $11.2 million, or 7.93%, from $142.1 million in 1994. The increase
is attributable to an increase in net interest-earning assets of $169.2 million
which was partially offset by a decline in the net interest spread of 20 basis
points to 3.10% in 1995 from 3.30% in 1994. The reduction in the net interest
spread primarily reflects the rise in interest rates that occurred during 1995.
While further contributing to the decline in the net interest spread, the use of
additional borrowed funds enabled the Bank to increase net interest income. The
net interest margin declined slightly to 3.44% in 1995 from 3.47% in 1994 and
the ratio of interest-earning assets to interest-bearing liabilities increased
to 109.25% in 1995 from 105.36% in 1994.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses
decreased by $5.5 million, or 45.88%, to $6.5 million in 1995 from $12.0 million
in 1994. This decrease resulted from management's assessment of the loan
portfolio and the level of the Bank's allowance for possible loan losses. In
establishing the provision, management also considered the overall decrease in
net charge-offs which have declined three consecutive years to $7.8 million in
1995 from $10.2 million and $45.5 million in 1994 and 1993, respectively. In
addition, management assessed the local and regional economic and market
conditions as well as its continued attention to collection and workout efforts
with its borrowers. At September 30, 1995, the allowance for possible loan
losses declined marginally to $34.4 million from $35.7 million at September 30,
1994.
Page 27
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
NON-INTEREST INCOME. Non-interest income is composed of fee income for bank
services, profits from the sale of assets and operating results from investment
in real estate and premises. Total fee income increased by $4.3 million, or
19.85%, to $26.0 million in 1995 from $21.7 million in 1994. The increase in fee
income was primarily due to increased loan servicing fees of $4.2 million as a
result of growth in the Company's loan servicing portfolio coupled with an
increase in the realization of fee income from the September 1993 sale of home
equity loans. Loan service fee income in 1995 and 1994 is reported net of the
amortization of mortgage servicing rights of $1.4 million and $0.6 million,
respectively. See Note 7 of Notes to Consolidated Financial Statements. Other
fee income increased by $1.0 million, or 36.47%, to $3.9 million in 1995 from
$2.9 million in 1994 primarily reflecting the settlement of a $0.9 million claim
that had arisen from a prior acquisition. The increases in loan service fee
income and other fee income were partially offset by reductions in loan fees and
service charges as well as a decline in income from insurance and securities
commissions. Loan fees and service charges declined by $0.5 million, or 17.55%,
to $2.5 million in 1995 from $3.0 million in 1994 reflecting lower prepayment
penalties and origination fees. Income from insurance and securities commissions
declined by $0.4 million, or 33.74%, to $0.8 million in 1995 from $1.2 million
in 1994 reflecting changes in customer preference away from annuities and
securities during the rising interest rate environment that existed during 1995.
Income from insurance and securities commissions was further impacted during
fiscal 1995 as the Company switched to a new third party provider of financial
products and services and realigned the goals of its personnel to further
complement the strategic initiatives of the Company. Net gains on sale activity
decreased by $0.3 million, or 14.69%, to $1.6 million in 1995 from $1.9 million
in 1994. Net gains (losses) from sales activity vary from year to year based on,
among other things, the interest rate environment, alternative investment
opportunities and the Company's goals in managing its available-for-sale
securities portfolio. Included in the net gains (losses) on sale activity during
1995 was a $1.8 million charge-off of the Company's investment in Nationar,
which was partially offset by an increase in net gains on the sale of loans and
MBS's. Net gain (loss) on investment in real estate and premises increased by
$2.2 million to $1.5 million in 1995 from a loss of $0.7 million in 1994. The
variance is primarily due to a $1.8 million write-down recorded in 1994 to
properly reflect the reduced carrying value of certain real estate that was held
for sale.
NON-INTEREST EXPENSE. Non-interest expense was $102.5 million in 1995, a
decrease of $1.5 million, or 1.44%, from $104.0 million in 1994. Contributing to
the overall decline was a reduction in the net loss on real estate owned which
was partially offset by an increase in total G&A expenses. The net loss on real
estate owned decreased by $2.3 million, or 55.82%, to a loss of $1.8 million in
1995 from a loss of $4.1 million in 1994. This decrease is principally
attributable to the completion of the Bulk Sale of real estate owned that was
finalized in the first quarter of fiscal 1994. Total G&A expenses increased by
$0.7 million, or 0.76%, to $100.7 million in 1995 from $100.0 million in 1994.
Contributing to the rise in G&A expenses were increased advertising expenses of
$1.1 million reflecting the expanding marketing efforts in the consumer banking
and mortgage businesses through the introduction of programs designed to
increase the Company's market presence. Further contributing to the rise in
total G&A expenses was an increase in other G&A expenses of $0.8 million, or
5.09%, to $17.1 million in 1995 from $16.3 million in 1994 which primarily
reflects the additional operational costs stemming from the acquisitions of
Entrust Financial Corporation ("Entrust") and Developer's Mortgage Corporation
("Developer's"). Entrust and Developer's also contributed to the rise in office
occupancy and equipment expense which increased by $0.6 million, or 3.49%, to
$18.5 million in 1995 from $17.9 million in 1994. Partially offsetting the
increase in total G&A expenses were reductions in federal insurance premiums and
compensation and benefit costs. Federal insurance premiums declined by $1.1
million, or 11.45%, reflecting the Company's success in reducing its SAIF
assessment rate during 1995. Compensation and benefit costs decreased by $0.7
million, or 1.29%, to $51.4 million in 1995 from $52.1 million in 1994 primarily
reflecting lower pension and insurance expenses of $3.5 million in fiscal 1995
which were partially offset by an increase in ESOP and MRP amortization of $2.6
million and costs associated with Entrust and Developer's of approximately $0.6
million.
PROVISION FOR INCOME TAXES. Income tax expense was $29.9 million in 1995, an
increase of $11.9 million, or 65.67%, from $18.0 million in 1994 primarily
reflecting a higher level of taxable income in 1995. In addition, the effective
tax rate increased to 40.72% in 1995 from 36.88% in 1994 principally as a result
of the partial reversal of the deferred tax valuation allowance in 1995 of $0.5
million as compared to $2.1 million in 1994.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Effective October 1, 1993,
the Company adopted SFAS 109. SFAS 109 requires a change from the deferred
method to the asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred tax assets and liabilities are recorded
to recognize the estimated future tax consequences of the differences between
the tax basis and financial reporting basis of the Company's assets and
liabilities. SFAS 109 requires the Company to take into account the effect of
changes in tax laws and rates on recorded assets and liabilities in the year of
enactment. While SFAS 109 allows for the recognition of deferred tax assets for
future deductible amounts, it also requires the establishment of a valuation
reserve to reduce deferred tax assets if it is "more likely than not" that the
related tax benefits will not be realized. The adoption of SFAS 109 was recorded
as a cumulative effect of change in accounting and resulted in a credit to
earnings of $19.4 million and an offsetting adjustment to the Company's net
deferred tax account.
Page 28
Effective October 1,1993, the Bank adopted SFAS 106. SFAS 106 changes the common
practice of accounting for non-pension postretirement benefits on a cash basis
to the recognition, on an accrual basis, of the expected cost of providing such
benefits to the employee and related beneficiaries and covered dependents during
the years that the employee provides services to the employer. The adoption of
SFAS 106 resulted in a cumulative charge to earnings of $10.7 million.
- ------------------------------------------------------------------------------
Impact of Inflation and
Changing Prices
The consolidated financial statements have been prepared in accordance with
GAAP, which requires the measurement of financial position and operating results
in terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike industrial
companies, nearly all of the assets and liabilities of the Company are monetary
in nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
- ------------------------------------------------------------------------------
Impact of New
Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS 121 is effective for fiscal years beginning after December 15, 1995
and establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. This statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review for
recoverability, the entity should estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows is less than the carrying amount of the asset, an
impairment loss should be recognized. This statement requires that long-lived
assets and certain identifiable intangibles to be disposed of be reported at the
lower of carrying amount or fair value less cost to sell, except for assets that
are covered by Accounting Principle Board Opinion No. 3, "Reporting the Results
of Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
Company does not currently expect SFAS 121 to have a significant effect on its
financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123 applies to
all transactions in which an entity acquires goods or services by issuing equity
instruments or by incurring liabilities where the payment amounts are based on
the entity's common stock price, except for employee stock ownership plans. SFAS
123 covers transactions with employees and non-employees and is applicable to
both public and non-public entities.
SFAS 123 establishes a new method of accounting for stock-based compensation
arrangements with employees. The new method is a fair value based method rather
than the intrinsic value based method that is contained in Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
SFAS 123 does not require an entity to adopt the new fair value based method for
purposes of preparing its basic financial statements. Entities are allowed (i)
to continue to use the APB 25 method or (ii) to adopt the SFAS 123 fair value
based method. SFAS 123 fair value based method is considered by the FASB to be
preferable to the APB 25 method, and thus, once the fair value based method is
adopted, an entity cannot change back to the APB 25 method. Also, the selected
method applies to all of an entity's compensation plans and transactions. For
entities not adopting the SFAS 123 fair value based method, SFAS 123 requires
the entity to display in the footnotes to the financial statements pro forma net
income and earnings per share information as if the fair value based method had
been adopted.
The accounting requirements of SFAS 123 are effective for transactions entered
into in fiscal years that begin after December 15, 1995, though they may be
adopted on issuance. The disclosure requirements are effective for financial
statements for fiscal years beginning after December 15, 1995, or for an earlier
fiscal year for which SFAS 123 is initially adopted for recognizing compensation
cost. Pro forma disclosures required for entities that elect to continue to
measure compensation cost using the APB 25 method must include the effects of
all awards granted in fiscal years that begin after December 15, 1994. Pro forma
disclosures for awards granted in the first fiscal year beginning after December
15, 1994, need not be included in financial statements for that fiscal year but
should be presented subsequently whenever financial statements for that fiscal
year are presented for comparative purposes with financial statements for a
later fiscal year. The Company does not currently expect SFAS 123 to have a
significant effect on its financial statements.
Page 29
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
In June 1996, the FASB issued Statement of Financial Accounting No. 125 ("SFAS
125"), "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. Under this approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes the financial assets when control
has been surrendered, and derecognizes liabilities when extinguished. This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. This
statement supersedes Statement of Financial Accounting Standards No. 76,
"Extinguishment of Debt," and No. 77, "Reporting by Transferors for Transfers of
Receivable with Recourse," and SFAS 122 and amends SFAS 115 and Statement of
Financial Accounting Standards No. 65, "Accounting for Certain Mortgage Banking
Activities."
The provisions of SFAS 125 are effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and is to be applied prospectively. Earlier or retroactive application is
not permitted. The Company is currently in the process of reviewing the effects
of SFAS 125.
- ------------------------------------------------------------------------------
Recent Federal and
New York State Bad
Debt Deduction
Legislation
Under Section 593 of the Internal Revenue Code of 1986 as amended ("Code"),
prior to January 1, 1996 thrift institutions such as the Bank which met certain
definitional tests primarily relating to their assets and the nature of their
business, were permitted to establish a tax reserve for bad debts. Such thrift
institutions were also permitted to make annual additions to the reserve to be
deducted in arriving at their taxable income within specified limitations. The
Bank's deduction was computed using an amount based on the Bank's actual loss
experience ("experience method"), or a percentage equal to 8% of the Bank's
taxable income ("PTI method"). Similar deductions for additions to the Bank's
bad debt reserve were also permitted under the New York State Bank Franchise Tax
and the New York City Banking Corporation Tax; however, for purposes of these
taxes, the effective allowable percentage under the PTI method was 32% rather
than 8%. See Note 17 of Notes to Consolidated Financial Statements.
Under the Small Business Job Protection Act of 1996 ("1996 Act"), signed into
law in August, 1996, Section 593 of the Code was amended. The Bank will be
unable to make additions to the tax bad debt reserves but will be permitted to
deduct bad debts as they occur. Additionally, the 1996 Act required institutions
to recapture (that is, include in taxable income) the excess of the balance of
its bad debt reserves as of December 31, 1995 over the balance of such reserves
as of December 31, 1987 ("base year"). The Bank's tax bad debt reserves at
December 31, 1995 exceeded its base year reserves by $2.7 million which will be
recaptured into taxable income ratably over a six year period. If certain
requirements are met the recapture may be deferred for up to two years. The base
year reserves will be subject to recapture, and the Bank could be required to
recognize a tax liability if (i) the Bank fails to qualify as a "bank" for
Federal income tax purposes; (ii) certain distributions are made with respect to
the stock of the Bank; (iii) the use by the Bank of bad debt reserves for any
purpose other than to absorb bad debt losses; and (iv) there is a change in
Federal tax law. Management is not aware of the occurrence of any such event.
In response to the Federal legislation, New York State tax law has been amended
to prevent the recapture of existing tax bad debt reserves and to allow for the
continued use of the PTI method to determine the bad debt deduction in computing
New York State tax liability. No such amendments have been made to date with
respect to New York City tax law. The Company cannot predict whether such
changes will be made or as to the form of the changes.
- ------------------------------------------------------------------------------
Private Securities
Litigation Reform
Act Safe Harbor
Statement
In addition to historical information, this Annual Report includes certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Bank's loan
and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices. Further description of the risks and uncertainties to the business are
included in detail in Item 1, "Business" of the Company's 1996 Form 10-K.
Page 30
Long Island Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30,
- ----------------------------------------------------------------------------
1996 1995
-------- --------
ASSETS
Cash and cash equivalents (including interest-earning
assets of $37,357 and $10,850, respectively) $ 76,348 $ 67,410
Investment in debt and equity securities, net:
Held-to-maturity, net (estimated fair value of
$0 and $55,871, respectively) -- 55,839
Available-for-sale 180,650 233,408
Mortgage-backed securities, net:
Held-to-maturity (estimated fair value of
$21,120 and $1,339,014, respectively) 23,096 1,337,903
Available-for-sale 1,717,106 938,847
Stock in Federal Home Loan Bank of New York, at cost 40,754 35,132
Loans held for sale, net 57,969 49,372
Loans receivable held for investment, net:
Real estate loans, net 2,921,285 1,900,204
Commercial loans, net 7,810 8,706
Other loans, net 145,654 120,189
---------- ----------
Loans, net 3,074,749 2,029,099
Less allowance for possible loan losses (33,912) (34,358)
---------- ----------
Total loans receivable held for investment, net 3,040,837 1,994,741
Mortgage servicing rights, net 29,687 11,328
Office properties and equipment, net 89,279 86,239
Accrued interest receivable, net 32,962 31,752
Real estate owned 8,155 8,893
Investment in real estate, net 2,525 12,286
Prepaid expenses and other assets 64,423 38,472
---------- ----------
Total assets $5,363,791 $4,901,622
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $3,633,010 $3,573,529
Official checks outstanding 49,860 42,812
Borrowed funds 978,023 633,675
Mortgagors' escrow liabilities 64,232 71,400
Accrued expenses and other liabilities 119,572 54,032
---------- ----------
Total liabilities 4,844,697 4,375,448
Stockholders' equity:
Preferred stock ($0.01 par value, 5,000,000
shares authorized; none issued) -- --
Common stock ($0.01 par value, 45,000,000
shares authorized; 26,816,464 shares issued,
24,644,157 and 26,076,486 outstanding,
respectively) 268 268
Additional paid-in capital 304,027 298,518
Unallocated Employee Stock Ownership Plan (19,230) (21,443)
Unearned Management Recognition & Retention Plan (5,551) (7,071)
Unrealized gain on securities available-for-sale,
net of tax 6,633 6,947
Retained income--partially restricted 285,311 264,105
Treasury stock, at cost (2,172,307 and
739,978 shares, respectively) (52,364) (15,150)
---------- ----------
Total stockholders' equity 519,094 526,174
---------- ----------
Total liabilities and stockholders' equity $5,363,791 $4,901,622
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
Page 31
Long Island Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the Year Ended September 30,
- ------------------------------------------------------------------------------
1996 1995 1994
-------- -------- --------
Interest income:
Real estate loans $185,241 $140,268 $125,069
Commercial loans 705 984 1,117
Other loans 14,845 14,840 16,208
Mortgage-backed securities 134,064 140,173 101,868
Debt and equity securities 16,716 24,950 27,895
-------- -------- --------
Total interest income 351,571 321,215 272,157
-------- -------- --------
Interest expense:
Deposits 155,830 139,641 120,293
Borrowed funds 41,346 28,255 9,811
-------- -------- --------
Total interest expense 197,176 167,896 130,104
-------- -------- --------
Net interest income 154,395 153,319 142,053
Provision for possible loan losses 6,200 6,470 11,955
-------- -------- --------
Net interest income after provision
for possible loan losses 148,195 146,849 130,098
Non-interest income:
Fees and other income:
Loan fees and service charges 3,217 2,494 3,025
Loan servicing fees 13,863 12,873 8,725
Income from insurance and securities
commissions 1,608 805 1,215
Deposit service fees 5,937 5,917 5,863
-------- -------- --------
Total fees income 24,625 22,089 18,828
Other income 3,718 3,903 2,860
-------- -------- --------
Total fees and other income 28,343 25,992 21,688
-------- -------- --------
Net gains (losses) on sale activity:
Net gains on loans and mortgage-backed
securities 7,993 3,562 2,623
Net gains (losses) on investment in
debt and equity securities 340 (1,924) (703)
-------- -------- --------
Total net gains on sale activity 8,333 1,638 1,920
Net gain (loss) on investment in
real estate and premises 4,118 1,467 (738)
-------- -------- --------
Total non-interest income 40,794 29,097 22,870
Non-interest expense:
General and administrative expense:
Compensation, payroll taxes and fringe
benefits 57,969 51,443 52,117
Advertising 5,940 4,691 3,552
Office occupancy and equipment 20,631 18,547 17,922
Federal insurance premiums 9,055 8,961 10,120
Other general and administrative
expense 18,612 17,101 16,272
-------- -------- --------
Total general and administrative
expense 112,207 100,743 99,983
SAIF special assessment 18,657 -- --
Net loss on real estate owned 2,090 1,790 4,052
-------- -------- --------
Total non-interest expense 132,954 102,533 104,035
-------- -------- --------
Income before income taxes and cumulative
effect of accounting changes 56,035 73,413 48,933
Provision for income taxes 23,760 29,897 18,046
-------- -------- --------
Income before cumulative effect of
accounting changes 32,275 43,516 30,887
Cumulative effect of changes in
accounting -- -- 8,648
-------- -------- --------
Net income $ 32,275 $ 43,516 $ 39,535
-------- -------- --------
-------- -------- --------
Primary earnings per common share(1) $ 1.33 $ 1.73 $ 0.70
-------- -------- --------
-------- -------- --------
Fully diluted earnings per common
share(1) $ 1.33 $ 1.71 $ 0.70
-------- -------- --------
-------- -------- --------
(1) For the year ended September 30, 1994, earnings per share was based upon
income earned during the period April 14, 1994 through September 30, 1994.
See accompanying notes to consolidated financial statements.
Page 32
Long Island Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended September 30, 1996, 1995 and 1994
(In thousands, except share data)
Unallocated Unearned Unrealized
Employee Management Gain(Loss) Retained
Additional Stock Recognition on Securities Income--
Common Paid-in Ownership & Retention Available- Partially Treasury
Stock Capital Plan Plan for-Sale Restricted Stock Total
________________________________________________________________________________________________________________________________
Balance at
September 30, 1993 $ -- $ -- $ -- $ -- $19,913 $191,717 $ -- $211,630
Net income 39,535 39,535
Net proceeds from common
stock issued in
stock conversion 268 296,583 296,851
Acquisition of common stock
by ESOP and MRP (23,805) (8,927) (32,732)
Allocation/amortization of
ESOP and MRP stock
and related tax benefits 258 712 421 1,391
Change in unrealized losses
on securities available-
for-sale (net of tax of
$(17,600)) (22,966) (22,966)
---- ------- ------- ------- ------- ------- ------- -------
Balance at
September 30, 1994 268 296,841 (23,093) (8,506) (3,053) 231,252 -- 493,709
Net income 43,516 43,516
Allocation/amortization of ESOP
and MRP stock and related
tax benefits 1,254 1,650 1,435 4,339
Change in unrealized gains on
securities available-for-sale
(net of tax of $7,600) 10,000 10,000
Dividends (9,693) (9,693)
Repurchase of common stock
(886,000 shares) (17,812) (17,812)
Exercise of stock options
(146,022 shares) and related
tax benefits 423 (970) 2,662 2,115
---- ------- ------- ------- ------- ------- ------- -------
Balance at
September 30, 1995 268 298,518 (21,443) (7,071) 6,947 264,105 (15,150) 526,174
Net income 32,275 32,275
Allocation/amortization of ESOP
and MRP stock and related
tax benefits 4,358 2,213 1,520 8,091
Change in unrealized gains on
securities available-for-sale
(net of tax of $5,300) (7,048) (7,048)
Dividends (9,171) (9,171)
Repurchase of common stock
(1,611,554 shares) (42,043) (42,043)
Exercise of stock options
(179,225 shares) and related
tax benefits 1,151 (1,898) 4,829 4,082
Net unrealized gain on securities
reclassified as available-for-sale
(net of tax of $5,103) 6,734 6,734
---- -------- -------- ------- -------- -------- -------- --------
Balance at
September 30, 1996 $268 $304,027 $(19,230) $(5,551) $ 6,633 $285,311 $(52,364) $519,094
---- -------- -------- ------- -------- -------- -------- --------
---- -------- -------- ------- -------- -------- -------- --------
See accompanying notes to consolidated financial statements.
Page 33
Long Island Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Year Ended September 30,
___________________________________________________________________________________________
1996 1995 1994
---------- --------- ----------
Operating activities:
Net income $ 32,275 $ 43,516 $ 39,535
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 6,200 6,470 11,955
Write-off of real estate owned and investment
in real estate 490 581 2,633
Gains on sale of real estate owned, net (334) (484) (584)
Depreciation and amortization 10,988 8,352 6,487
Capitalized mortgage servicing rights, net (5,900) (1,969) --
Amortization of premiums, net of accretion of
discounts-debt, equity and mortgage-backed
securities 1,909 (972) (1,147)
Amortization of premiums, net of accretion of
discounts-purchase accounting 227 (1,550) (1,822)
Employee Stock Ownership Plan/Management
Recognition & Retention Plan expense 7,331 4,130 1,391
Cumulative effect of changes in accounting -- -- (8,648)
Gains on sales of loans and mortgage-backed
securities, net (7,993) (3,562) (2,623)
Originations of loans held-for-sale, net of
proceeds from sales (2,448) (40,054) 143,082
(Gains) losses on sales of debt and equity
securities, net (291) 46 703
Provision for (gain) loss on investment in debt
and equity securities (49) 1,878 --
Increase in accrued interest receivable (1,210) (4,206) (1,254)
Increase in accrued and other liabilities 65,540 10,510 11,766
Increase in official checks outstanding 7,048 17,932 151
Increase in prepaids and other assets (13,974) (2,764) (11,984)
Net (decrease) increase in unearned income (7,927) (1,669) 2,051
---------- --------- ----------
Net cash provided by operating activities 91,882 36,185 191,692
---------- --------- ----------
Investing activities:
Proceeds from sales of debt and equity
securities, available-for-sale 139,099 48,836 117,414
Proceeds from sales of mortgage-backed
securities, available-for-sale 485,195 286,674 696,830
Proceeds from maturities of and principal
payments on debt and equity securities 411,319 972,775 1,828,066
Proceeds from redemption of Federal Home Loan
Bank stock -- -- 11,697
Principal payments on mortgage-backed securities 566,421 360,416 404,860
Purchases of debt and equity securities,
available-for-sale (441,359) (861,877) (1,951,159)
Purchases of debt and equity securities,
held-to-maturity -- (7,128) (78,288)
Purchases of Federal Home Loan Bank stock (5,622) (4,372) --
Purchases of mortgage-backed securities,
available-for-sale (154,185) (341,831) (865,353)
Purchases of mortgage-backed securities,
held-to-maturity -- (365,103) (939,600)
Originations and purchases of loans held-for-
investment, net of principal payments (1,413,321) (521,512) 101,959
Proceeds from sale of real estate owned,
office properties and equipment 12,964 10,439 32,038
Purchases of office properties and equipment (15,023) (12,562) (5,534)
Purchase of mortgage servicing rights (15,159) (10,071) (444)
---------- --------- ----------
Net cash used by investing activities (429,671) (445,316) (647,514)
---------- --------- ----------
Financing activities:
Net decrease in demand deposits, NOW
accounts and savings accounts (58,718) (444,864) (158,968)
Net (decrease) increase in mortgagors' escrow
accounts (7,168) 10,211 673
Net increase in certificates of deposit 118,199 450,578 109,175
Costs to repurchase common stock (42,043) (17,812) --
Proceeds from the exercise of stock options 2,070 1,677 --
Cash dividends paid on common stock (9,961) (7,892) --
Net (decrease) increase in short-term
borrowings (277,461) (60,022) 130,522
Net increase in long-term borrowings 621,809 368,675 150,000
Net funds received for subscription of Long
Island Bancorp Inc. common stock -- -- 264,220
---------- --------- ----------
Net cash provided by financing activities 346,727 300,551 495,622
---------- --------- ----------
Increase (decrease) in cash and cash
equivalents 8,938 (108,580) 39,800
Cash and cash equivalents at the beginning
of the year 67,410 175,990 136,190
---------- --------- ----------
Cash and cash equivalents at the end of the
year $ 76,348 $ 67,410 $ 175,990
---------- --------- ----------
---------- --------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the years for:
Interest on deposits and borrowed funds $ 195,089 $ 164,239 $ 127,772
---------- --------- ----------
---------- --------- ----------
Income taxes $ 27,465 $ 20,245 $ 10,150
---------- --------- ----------
---------- --------- ----------
Non-cash investing activities:
Additions to real estate owned, net $ 10,001 $ 10,312 $ 12,699
---------- --------- ----------
---------- --------- ----------
Securitization of loans $ 358,786 $ 143,679 $ --
---------- --------- ----------
---------- --------- ----------
SFAS 115 Transfer $1,307,472 $ -- $ --
---------- --------- ----------
---------- --------- ----------
See accompanying notes to consolidated financial statements.
Page 34
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(1)
BASIS OF
PRESENTATION AND
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements have been prepared
in conformity with generally accepted accounting principles ("GAAP") and include
the accounts of Long Island Bancorp, Inc. ("Holding Company") and its direct
wholly-owned subsidiary The Long Island Savings Bank, FSB ("Bank"). While the
following footnotes include the collective results of the Holding Company and
the Bank (collectively "Company"), these footnotes primarily reflect the Bank's
activities. All significant intercompany accounts and transactions have been
eliminated.
As more fully described in Note 2, the Bank converted from a federally chartered
mutual savings bank to a federally chartered stock savings bank ("Conversion")
during the fiscal year ended September 30, 1994. The Holding Company was
organized for the purpose of acquiring all of the capital stock of the Bank
pursuant to the Conversion, and is subject to the financial reporting
requirements of the Securities Exchange Act of 1934, as amended.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of each consolidated statement of financial condition
and the related consolidated statement of operations for the year then ended.
Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
CASH AND CASH EQUIVALENTS. For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and short-term loans to
commercial banks with original terms to maturity of less than three months.
DEBT, EQUITY AND MORTGAGE-BACKED SECURITIES. In accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS 115") "Accounting for Certain
Investments in Debt and Equity Securities", the Company is required to classify
and report debt, readily-marketable equity, and mortgage-backed securities
("MBS's") in one of the following categories: (i) "held-to-maturity" (management
has a positive intent and ability to hold to maturity) which are to be reported
at amortized cost, adjusted in the case of debt securities for the amortization
of premiums and accretions of discounts; (ii) "trading" (held for current
resale) which are to be reported at fair value, with unrealized gains and losses
included in earnings; and (iii) "available-for-sale" (all other debt and equity
securities and MBS's) which are to be reported at fair value, with unrealized
gains and losses excluded from earnings and reported net of tax as a separate
component of stockholders' equity.
Effective November 1995, the Financial Accounting Standards Board ("FASB")
issued a Special Report on SFAS 115 providing a one-time reassessment that
allowed entities, concurrent with the initial adoption of the implementation
guidance but no later than December 31, 1995, to reassess the appropriateness of
the classifications of all securities held at that time. The reassessment of the
Company's portfolio resulted in MBS's and debt securities in the amounts of $1.2
billion and $78.6 million, respectively, previously classified as
held-to-maturity, to be classified as available-for-sale, and resulted in an
increase of $6.7 million, net of tax, to stockholders' equity.
Premiums and discounts on debt securities and MBS's are amortized to expense and
accreted to income over the estimated life of the respective security using the
level-yield method. Gains and losses on the sales of securities are recognized
on realization.
REAL ESTATE AND OTHER LOANS. Purchased loans are recorded at cost. Related
premiums or discounts are amortized to expense or accreted to income primarily
using the level-yield method over the estimated life of the loans.
Discounts on other loans are accreted to income over the term of the loans
primarily using the simple-interest method of accounting which calculates
interest income based upon the outstanding loan balance.
Accrual of interest on potential problem loans is excluded from income primarily
after a delinquency of 90 days or when, in the opinion of management, such
suspension is warranted.
Loans held for sale are carried at the aggregate lower of cost or market value.
In May 1993, Statement of Financial Accounting Standards No. 114 ("SFAS 114"),
"Accounting by Creditors for Impairment of a Loan" was issued. The statement is
effective for financial statements for fiscal years beginning after December 15,
1994. According to SFAS 114, impairment is measured based upon the present value
of expected future cash flows or fair value of the loan's collateral. In October
1994, Statement of Financial Accounting Standards No. 118 ("SFAS 118"),
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures" was issued. SFAS 118 is also effective for fiscal years beginning
after December 15, 1994 and amends SFAS 114 to allow a creditor to use existing
methods for recognizing interest income on an impaired loan. This statement also
amends the disclosure requirements of SFAS 114 to require information about the
recorded investment in certain impaired loans and about how a creditor
recognizes interest income related to those impaired loans. The Company's
adoption of SFAS 114 and SFAS 118 on October 1, 1995 did not have a material
impact on its financial condition or results of operations because consumer
residential mortgages and installment loans are generally excluded from the
scope of the statements.
Page 35
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
In May 1995, Statement of Financial Accounting Standards No. 122 ("SFAS 122"),
"Accounting for Mortgage Servicing Rights" was issued. SFAS 122 is effective for
fiscal years beginning after December 15, 1995. The statement amends Statement
of Financial Accounting Standards No. 65 ("SFAS 65"), "Accounting for Certain
Mortgage Banking Activities," to require that a mortgage banking enterprise
recognize as separate assets rights to service mortgage loans for others,
however acquired. For mortgage servicing rights ("MSR's") that are created
through the origination of mortgage loans, and where the loans are subsequently
sold or securitized with servicing rights retained, the statement requires that
the total cost of the mortgage loans should be allocated to the MSR's and the
loans based on their relative fair values. The statement also requires the
assessment of capitalized MSR's for impairment to be based on the current fair
value of those rights and recognized through a valuation allowance. The
Company's adoption of SFAS 122 on July 1, 1995 did not have a material impact on
its financial condition or results of operations.
ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for possible loan losses is
based on a periodic analysis of the loan portfolio and reflects an amount which,
in management's judgment, is adequate to provide for possible loan losses in the
existing portfolio. In evaluating the portfolio, management takes into
consideration numerous factors such as the Company's loan growth, prior loss
experience, present and potential risks of the loan portfolio and current
economic conditions. Provisions for possible losses on loans are charged to
operations. Loans are charged-off against the allowance for possible loan losses
when the collectability of loan principal is unlikely. Recoveries of loans
previously charged-off are credited to the allowance.
COMMITMENT AND LOAN ORIGINATION FEES. Non-refundable commitment fees and other
loan origination fees received for commitments to make or purchase loans are
netted against the costs of originating such loans and the net fee is deferred.
The deferred amount is accreted into income over the life of the loan using the
level-yield method. The direct origination costs subject to deferral are
captured in the form of a standard cost on successful loan originations and
recorded as reductions to the applicable expense categories. These procedures
are in compliance with Statement of Financial Accounting Standards No. 91 ("SFAS
91"), "Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases."
OFFICE PROPERTIES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS. Office properties and
equipment are stated at cost less accumulated depreciation. Depreciation is
computed on a straight-line method over the estimated useful lives of the
assets. Estimated lives vary from 20 to 50 years on buildings and 3 to 25 years
on furniture and fixtures. Leasehold improvements are stated at cost less
accumulated amortization. Amortization is computed on the straight-line method
over the term of the respective lease or the life of the improvement, whichever
is shorter.
REAL ESTATE OWNED. Real estate owned ("REO") represents real estate acquired
through foreclosure or deed in lieu of foreclosure and is recorded at the lower
of cost or market, based on estimated fair value at the time of foreclosure.
Thereafter REO is carried at the lower of the new cost basis or fair value less
estimated costs to sell in accordance with American Institute of Certified
Public Accountants ("AICPA") Statement of Position 92-3 ("SOP 92-3"),
"Accounting for Foreclosed Assets." Cost represents the unpaid loan balance at
the acquisition date plus expenses, when appropriate, incurred to bring the
property to a saleable condition. Subsequent declines in estimated fair value,
certain costs relating to holding the properties, and gains or losses resulting
from the disposition of properties are recognized in the current period's
operations.
IMPACT OF CHANGES IN ACCOUNTING STANDARDS. In June 1996, Statement of Financial
Accounting No. 125 ("SFAS 125"), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" was issued. The Statement
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996 and is to be applied
prospectively. Earlier or retroactive application is not permitted. SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. Under
this approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered and derecognizes
liabilities when extinguished. This statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. This statement supersedes Statement of Financial
Accounting Standards No. 76, "Extinguishment of Debt," and No. 77, "Reporting by
Transferors for Transfers of Receivables with Recourse," and SFAS 122 and amends
SFAS 115 and SFAS 65. The Company is currently in the process of reviewing SFAS
125.
FEDERAL INCOME TAXES. The Holding Company files a consolidated Federal income
tax return with its subsidiary. The Holding Company also files a combined New
York State and New York City tax return with its subsidiary and an annual report
with the State of Delaware. In addition, the Bank files tax returns in those
states that it maintains lending operations.
Page 36
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
The Company adopted Statement of Financial Accounting Standards No. 109 ("SFAS
109"), "Accounting for Income Taxes" effective October 1, 1993. SFAS 109
requires the use of the liability method in accounting for income taxes whereby,
among other effects, deferred taxes are provided for all temporary differences
between financial statement carrying amounts and the tax basis of assets and
liabilities, and the effect of tax rate changes are included in income in the
period of enactment. This statement changed the Company's method of accounting
for income tax expense, since it provided significantly less restrictive
criteria for the recognition of deferred tax assets. Deferred tax assets are to
be recognized for temporary differences that will result in deductible amounts
in future years and for tax loss carryforwards, if, in the opinion of
management, it is "more likely than not" that the deferred tax assets will be
realized. SFAS 109 requires companies to set up a valuation allowance for that
component of net deferred tax assets which does not meet the "more likely than
not" criterion for realization.
EMPLOYEE BENEFITS. Effective April 14, 1994, the date of Conversion, the Company
adopted the provisions of AICPA Statement of Position 93-6 ("SOP 93-6"),
"Employers' Accounting for Employee Stock Ownership Plans." In accordance with
SOP 93-6, compensation expense is recorded at an amount equal to the shares
allocated by an Employee Stock Ownership Plan ("ESOP") multiplied by the average
fair value of the allocated shares during the period. For the years ended
September 30, 1996 and 1995, compensation expense attributable to the ESOP was
$5.0 million and $2.5 million, respectively. For the period April 14, 1994 to
September 30, 1994, compensation expense attributable to the ESOP was $1.0
million.
For earnings per share ("EPS") and other per-share disclosure, ESOP shares that
have been committed to be released are considered to be outstanding. ESOP shares
that have not been committed to be released are excluded from outstanding shares
with respect to calculations of EPS. The Company recognizes compensation expense
ratably over the year for the ESOP shares to be allocated each December 31st.
The Company accrues the associated employee compensation expense for the ESOP
shares on a monthly basis based upon the Company's current estimate of the
number of shares expected to be allocated by the ESOP during each calendar year.
Additionally, as the ESOP shares are accrued for, they are reported at the
average fair value of the shares during the month. The difference between the
fair value and the cost of the shares allocated by the ESOP is treated as an
adjustment to additional paid-in capital.
The Company adopted Statement of Financial Accounting Standards No. 106 ("SFAS
106"), "Employers' Accounting for Postretirement Benefits Other Than Pensions"
effective October 1, 1993. The principal effect of SFAS 106 was to require
accruals during the years employees render service to earn postretirement
benefits such as health care and life insurance for themselves, their
beneficiaries, and covered dependents instead of recognizing an expense when
benefits are paid. Upon adopting SFAS 106, the Company recognized its transition
obligation as a one-time charge against income in the amount of $10.7 million
which is reflected in the fiscal 1994 Consolidated Statements of Operations as a
cumulative effect of a change in accounting principle.
In October 1995, Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation" was issued. SFAS 123 applies to
all transactions in which an entity acquires goods or services by issuing equity
instruments or by incurring liabilities where the payment amounts are based on
the entity's common stock price, except for employee stock ownership plans. SFAS
123 covers transactions with employees and non-employees and is applicable to
both public and non-public entities.
SFAS 123 establishes a new method of accounting for stock-based compensation
arrangements with employees. The new method is a fair value based method rather
than the intrinsic value based method that is contained in Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
SFAS 123 does not require an entity to adopt the new fair value based method for
purposes of preparing its basic financial statements. Entities are allowed (i)
to continue to use the APB 25 method or (ii) to adopt the SFAS 123 fair value
based method. SFAS 123 fair value based method is considered by the FASB to be
preferable to the APB 25 method, and thus, once the fair value based method is
adopted, an entity cannot change back to the APB 25 method. Also, the selected
method applies to all of an entity's compensation plans and transactions. For
entities not adopting the SFAS 123 fair value based method, SFAS 123 requires
the entity to display in the footnotes to the financial statements pro forma net
income and EPS information as if the fair value based method had been adopted.
The accounting requirements of SFAS 123 are effective for transactions entered
into in fiscal years that begin after December 15, 1995, though they may be
adopted on issuance. The disclosure requirements are effective for financial
statements for fiscal years beginning after December 15, 1995, or for an earlier
fiscal year for which SFAS 123 is initially adopted for recognizing compensation
cost. Pro forma disclosures required for entities that elect to continue to
measure compensation cost using the APB 25 method must include the effects of
all awards granted in fiscal years
Page 37
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
that begin after December 15, 1994. Pro forma disclosures for awards granted in
the first fiscal year beginning after December 15, 1994 need not be included in
financial statements for that fiscal year but should be presented subsequently
whenever financial statements for that fiscal year are presented for comparative
purposes with financial statements for a later fiscal year. The Company does not
currently expect SFAS 123 to have a significant effect on its financial
condition and results of operations.
EARNINGS PER SHARE OF COMMON STOCK. Primary EPS is calculated by dividing
income by the sum of the weighted average number of shares of Common Stock of
the Holding Company ("Common Stock") outstanding and the average number of
shares issuable under the Company's stock benefit plans that have a dilutive
effect measured under the treasury stock method. Fully diluted EPS is calculated
by dividing income by the sum of the weighted average number of shares of Common
Stock outstanding and the maximum dilutive effect of shares issuable under the
Company's stock benefit plans. The maximum dilutive effect is computed using the
period end fair market value of the Company's stock, if it is higher than the
average market price during the period used in calculating primary EPS. For the
years ended September 30, 1996 and 1995, the total weighted average number of
shares of Common Stock outstanding and the weighted average number of shares
issuable under the Company's stock benefit plans for the primary EPS
calculations were 24,220,480 and 25,088,089 and for the fully diluted EPS
calculations were 24,277,013 and 25,446,588, respectively. EPS is not presented
for periods prior to the completion of the Conversion (which periods included
the cumulative effect of changes in accounting). For the period April 14 through
September 30, 1994 the weighted average number of shares of Common Stock
considered to be outstanding was 24,390,480 and net income was approximately
$17.1 million. The average number of shares issuable under the Company's stock
benefit plans was not included in the calculation due to its immaterial dilution
of EPS.
INTEREST RATE CAP AGREEMENTS. Premiums paid for interest rate cap agreements
are amortized as additional interest expense over the term of the contract.
Unamortized premiums are included in Prepaid expenses and other assets in the
Consolidated Statements of Financial Condition. Amounts receivable under
interest rate cap agreements are reflected as a reduction to interest expense
(see Note 15).
OTHER OFF-BALANCE SHEET INSTRUMENTS. In the ordinary course of business the
Bank has entered into off-balance sheet financial instruments consisting of
commitments to extend credit, standby letters of credit, and
commitments to buy and sell loans. Such financial instruments are recorded in
the financial statements when they are funded or related fees are incurred or
received.
_______________________________________________________________________________
(2)
CONVERSION TO
STOCK FORM OF
OWNERSHIP
On April 14, 1994, the Holding Company completed the issuance and sale of
26,816,464 shares of Common Stock, at a price of $11.50 per share, through an
Initial Public Offering ("IPO") to the Bank's depositors and the Bank's stock
benefit plans. Approximately $164.0 million was contributed by the Holding
Company to the Bank in exchange for 100% of the shares issued and outstanding of
the Bank's common stock. Of the 26,816,464 shares issued, the Bank's ESOP and
Management Recognition and Retention Plans ("MRP") purchased 2,070,000 and
776,250 shares, respectively, at $11.50 per share. The Holding Company recorded
$296.9 million of net proceeds from this offering and utilized $32.7 million to
purchase shares for the ESOP and MRP. The financial position and results of
operations of the Holding Company only, as of and for the years ended September
30, 1996 and 1995 and the period from the Conversion through September 30, 1994
are presented in Note 25.
The Conversion was accomplished through amendment of the Bank's Federal charter
and the sale of Common Stock in an amount equal to the consolidated pro forma
market value of the Holding Company and the Bank after giving effect to the
Conversion. A subscription offering of the shares of Common Stock was offered
initially to employee benefit plans of the Bank, depositors and to certain other
eligible subscribers.
At the time of Conversion, the Bank was required by the Office of Thrift
Supervision ("OTS") to establish a liquidation account which will be reduced to
the extent that eligible account holders reduce their qualifying deposits. The
balance of the liquidation account at September 30, 1996 and 1995 was $77.8
million and $93.5 million, respectively. In the unlikely event of a complete
liquidation of the Bank, each eligible account holder will be entitled to
receive a distribution from the liquidation account. The Bank is not permitted
to declare or pay a dividend on or to repurchase any of its capital stock if the
effect would be to cause the Bank's regulatory capital to be reduced below the
amount required for the liquidation account. Unlike the Bank, the Holding
Company is not subject to OTS regulatory restrictions on the declaration or
payment of dividends to its stockholders, although the source of such dividends
could depend upon dividend payments from the Bank. The Holding Company is
subject, however, to the requirements of Delaware law, which generally limit
dividends to an amount equal to the excess of its net assets (the amount by
which total assets exceed total liabilities) over its stated capital or, if
there is no such excess, to its net profits for the current and/or immediately
preceding fiscal year.
Page 38
(3)
BUSINESS
COMBINATIONS
FISCAL 1996. In June 1996, the Company acquired two mortgage origination
offices located in Pennsylvania and North Carolina from Fleet Mortgage Company,
and in August 1996 the Company acquired First Home Mortgage of Virginia, Inc.
("First Home"). The acquisitions were completed to continue the expansion of the
Company's mortgage origination activities. The acquisition of First Home, which
did not involve significant tangible assets, was accounted for using the
purchase method of accounting and resulted in goodwill at September 30, 1996 of
$2.7 million which is being amortized on a straight line basis over 15 years
from the date of acquisition. The goodwill is reported as a component of Prepaid
expenses and other assets in the Consolidated Statements of Financial Condition
and the amortization is reported as a component of Other general and
administrative ("G&A") expense in the Consolidated Statements of Operations.
PRIOR TO FISCAL 1996. In November 1994, the Company acquired the $630.0 million
conventional servicing portfolio and eleven lending offices of Entrust Financial
Corporation ("Entrust") and the retail lending office of Developer's Mortgage
Corporation ("Developer's"). The operations of Entrust and Developer's were
merged into the Bank and, at September 30, 1996, the recorded investment in
MSR's stemming from these acquisitions was $6.3 million. The acquisitions were
designed to expand the Company's mortgage production capabilities by extending
its lending area to include Pennsylvania, Delaware, Maryland, Virginia and
Georgia. The acquisitions, which did not involve significant tangible assets,
were accounted for using the purchase method of accounting and resulted in
goodwill at September 30, 1996 and 1995 of $2.6 million and $2.8 million,
respectively, which is being amortized on a straight line basis over 15 years
from the date of acquisition. The goodwill is reported as a component of Prepaid
expenses and other assets in the Consolidated Statements of Financial Condition
and the amortization is reported as a component of Other G&A expense in the
Consolidated Statements of Operations.
On April 29, 1986, with the assistance of the Federal Savings and Loan Insurance
Corporation ("FSLIC"), The Long Island Savings Bank, FSB ("Syosset") acquired
Flushing Federal Savings and Loan Association ("Flushing Federal"). Flushing
Federal operated eight branches located in Queens, Nassau and Suffolk Counties.
On August 17, 1983, Syosset acquired all the outstanding stock of The Long
Island Savings Bank of Centereach FSB ("Centereach"), formerly Suffolk County
Federal Savings and Loan Association pursuant to an assistance agreement with
the FSLIC ("Assistance Agreement"). Centereach operated thirty-six branches
located primarily in Nassau and Suffolk Counties.
The aforementioned acquisitions were accounted for as purchases. Under the
purchase method of accounting, all assets and liabilities acquired were adjusted
to their estimated fair value as of the date of acquisition and the resultant
discounts or premiums were being accreted or amortized to income over the
expected economic life of the related asset or liability, using the level-yield
method. The excess of cost over the fair value of net assets acquired for the
transactions totalled approximately $625.4 million and $31.4 million for
Centereach and Flushing Federal, respectively. These amounts were being
amortized in accordance with GAAP over 40 and 25 years, respectively. In
connection with the 1993 merger discussed below the Company reviewed its
accounting policies and procedures. Based on this review and in light of
government action (see Note 4), the Company decided to revise its past
accounting practices relating to the amortization of goodwill to match the
amortization period of Centereach's goodwill with the average life of the
interest-earning assets acquired, in accordance with Statement of Financial
Accounting Standards No. 72 ("SFAS 72"), "Accounting for Certain Acquisitions of
Banking or Thrift Institutions." The principal effect of adopting SFAS 72
effective October 1, 1992 was to reallocate the amortization of Centereach's
goodwill so that a greater portion of such goodwill cost was amortized in
earlier years.
On September 3, 1993, with the approval of its primary regulator, the OTS,
Syosset was merged into Centereach and its name was simultaneously changed to
The Long Island Savings Bank, FSB. This voluntary merger was the result of the
need to achieve compliance with current regulatory capital standards which, as
construed by OTS, do not permit the inclusion of goodwill in calculating
capital. The merger of Syosset and Centereach also involved an approximately
$1.0 billion reduction in asset size from the sale of ten branches ("Deposit
Sale Transaction") with approximately $836.3 million in deposit liabilities and
certain assets. The Deposit Sale Transaction, which closed on September 3, 1993,
resulted in a net gain of approximately $6.6 million. As a result of the
significant restructuring activities which occurred during fiscal 1993,
principally the downsizing of the Company through branch deposit and asset
sales, which included branch deposits and assets acquired in previous business
combinations, the merger of Syosset and Centereach, as well as prior year sales
of branch deposits and assets acquired in the previous business combinations,
management determined that the value of the remaining goodwill was substantially
diminished. Accordingly, in the fourth quarter of fiscal 1993, the remaining
goodwill balance was written-off. The elimination of goodwill from the Company's
financial statements is without prejudice to the Company's lawsuit against the
government (see Note 4).
Page 39
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
_______________________________________________________________________________
(4)
REGULATORY
MATTERS--
THE BANK
The Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") of
1989 imposed more stringent capital requirements upon the Bank than those
previously in effect. These capital regulations contain provisions for capital
standards that require the Bank to have minimum regulatory tangible capital
equal to 1.5% of total assets and a minimum 3% leverage capital ratio. The
ability to include qualifying supervisory goodwill for purposes of the leverage
capital ratio requirement was phased out on January 1, 1995. Additionally, the
Bank is required to meet a risk-based capital requirement. The risk-based
capital rule requires that core capital plus supplementary capital equal 8%. The
capital standards are also required to be no less stringent than standards
applicable to national banks. In that regard, the Federal regulatory agencies
and the OTS periodically propose modifications to applicable capital standards
which, if adopted, could impact the Bank's capital requirements.
At September 30, 1992 the Bank reported to OTS as two separate entities. On a
stand-alone basis, Syosset exceeded the capital requirements of FIRREA at
September 30, 1992. However, Centereach, then a wholly-owned subsidiary of
Syosset, did not meet any of the three required FIRREA capital ratios, as
interpreted by OTS, and had negative tangible capital, as defined in the
regulations, of approximately $109.2 million at September 30, 1992 (unaudited).
Centereach submitted a Capital Plan ("Capital Plan") to the OTS, which the
agency approved, that outlined steps Centereach could take to attain the levels
of regulatory capital required by the government and not withstanding government
action described below. Failure to meet the capital requirements of FIRREA and
the interim capital targets included in its Capital Plan exposed Centereach to
possible regulatory sanctions. In response to the need to comply with capital
standards and to avoid possible regulatory sanctions, the Bank completed the
merger discussed in Note 3. A merger or similar transaction by Centereach was
required by the timetable of, and specifically contemplated in, the Capital
Plan. At September 30, 1993 the newly merged The Long Island Savings Bank, FSB
exceeded the three required FIRREA capital ratios and the OTS terminated the
Capital Plan. There is no supervisory goodwill remaining on the Bank's books.
The mandated exclusion from regulatory capital of supervisory goodwill on the
books of Centereach was the reason for its inability to meet the FIRREA capital
standards. The inclusion of goodwill as an asset to be amortized over forty
years for regulatory purposes was specified in the Assistance Agreement related
to the acquisition. On August 15, 1989, the Bank filed suit against the United
States seeking damages and/or other appropriate relief on the grounds, among
others, that the government had breached the terms of the Assistance Agreement.
The Assistance Agreement, among other things, provided for the inclusion of
supervisory goodwill as an asset on Centereach's balance sheet to be included in
capital and amortized over 40 years for regulatory purposes. The suit is pending
before Chief Judge Loren Smith in the United States Court of Federal Claims and
is entitled The Long Island Savings Bank, FSB et al. vs the United States. The
case had been stayed pending disposition by the United States Supreme Court of
three related supervisory goodwill cases (the Winstar cases). On July 1, 1996
the Supreme Court ruled in the Winstar cases the government had breached its
contracts with the Winstar parties and was liable in damages for those breaches.
On September 18, 1996 Judge Smith issued an Omnibus Management Order ("Case
Management Order") applicable to all Winstar-related cases. The Case Management
Order addresses certain timing and procedural matters with respect to the
administration of the Winstar-related cases, including organization of the
parties, initial discovery, initial determinations regarding liability and the
resolution of certain common issues. The Case Management Order provides that the
parties will attempt to agree upon a Master Litigation Plan, which may be in
phases, to govern all further proceedings, including the resolution of common
issues (other than common issues covered by the Case Management Order),
dispositive motions, trials, discovery schedules, protocols for depositions,
document production, expert witnesses, and other matters.
Subsequent to September 30, 1996 the Bank filed a motion for summary judgment on
liability. Pursuant to the schedule set forth in the Case Management Order,
within sixty days of the filing of the motion, the government must file a
response with respect to whether a contract exists and whether the government
acted inconsistently with the contract. Within 120 days of filing of the motion,
the government must set forth any defenses it knows or has reason to know that
relate to these two issues.
In its complaint, the Bank did not specify the amount of damages it was seeking
from the United States. There have been no decisions determining damages in the
Winstar cases or any of the Winstar-related cases. The Bank is unable
to predict the outcome of its claim against the United States and the amount of
damages that may be awarded to the Bank, if any, in the event that judgment is
rendered in the Bank's favor. Consequently, no assurances can be given as to the
results of this claim or the timing of any proceedings in relation thereto.
The Bank is subject to various regulatory capital requirements administered by
the banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory--and possible additional discretionary--actions by regulators
that, if undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action ("PCA"), the Bank must meet specific
Page 40
capital guidelines that involve qualitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital
to average assets. Management believes that the Bank meets all capital adequacy
requirements to which it is subject as of September 30, 1996.
As of September 30, 1996 the most recent notification from OTS categorized the
Bank as "well-capitalized" under the regulatory framework for PCA. An
institution is deemed "well-capitalized" if (a) its risk-based capital is 10% or
greater, (b) its Tier 1 risk-based capital ratio is 6% or greater, and (c) its
leverage ratio is 5% or greater. There are no conditions or events since the
notification that management believes have changed the institution's category.
Set forth below is a summary of the Bank's compliance with the OTS capital
standards as of September 30, 1996.
Percent of
Amount Assets(1)
____________________________________________________________________________
(Dollars in thousands)
GAAP capital $430,546 8.13%
-------- -----
-------- -----
Tangible capital:
Capital level(2) $416,802 7.84%
Requirement 79,710 1.50
-------- -----
Excess $337,092 6.34%
-------- -----
-------- -----
Core capital:
Capital level(2) $416,802 7.84%
Requirement 159,419 3.00
-------- -----
Excess $257,383 4.84%
-------- -----
-------- -----
Risk-based capital:
Capital level(3) $450,714 16.48%
Requirement 218,808 8.00
-------- -----
Excess $231,906 8.48%
-------- -----
-------- -----
(1) Capital levels are shown as a percentage of the Bank's total adjusted
assets, as computed under GAAP. Tangible and core capital levels are shown
as a percentage of the Bank's total adjusted assets, as computed based on
regulatory guidelines. Risk-based capital levels are shown as a percentage
of risk-weighted assets.
(2) Represents GAAP capital excluding the effect of SFAS 115, goodwill and
MSR's limitations.
(3) The difference between GAAP capital and regulatory risk-based capital
level represents the exclusion of the effect of SFAS 115 and goodwill and
an addition for a portion of the general valuation allowance.
_______________________________________________________________________________
(5)
INVESTMENT IN
DEBT AND EQUITY
SECURITIES
Investment in debt and equity securities available-for-sale at September
30, are as follows:
1996
_____________________________________________________________________________________
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Fair Value
--------- ---------- ---------- ----------
(In thousands)
Available-for-sale:
Debt securities:
U.S. government and agency
obligations $ 13,385 $ - $ 3 $13,382
U.S. government and agency
obligations pledged as collateral 88,021 17 1,933 86,105
Asset-backed securities (automobile
loans and leases) 40,561 140 332 40,369
-------- ---- ------ --------
Total debt securities available-for-sale 141,967 157 2,268 139,856
-------- ---- ------ --------
Equity securities:
Preferred and common stock 40,038 -- -- 40,038
Investment in mutual funds 779 -- 23 756
-------- ---- ------ --------
Total equity securities
available-for-sale 40,817 -- 23 40,794
-------- ---- ------ --------
Total securities available-for-sale $182,784 $157 $2,291 $180,650
-------- ---- ------ --------
-------- ---- ------ --------
Pursuant to the Special Report on SFAS 115, the Company reassessed the
classification of all its securities in December 1995. As a result, the
entire debt and equity security portfolio which was previously classified
as held-to-maturity was reclassified as available-for-sale.
Page 41
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
1995
- ------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Fair Value
---------- ---------- ---------- ----------
(In thousands)
Held-to-maturity:
Debt securities:
U.S. government and agency
obligations $ 2,593 $ -- $ -- $ 2,593
U.S. government and agency
obligations pledged as collateral 7,393 31 26 7,398
Asset-backed securities (automobile
loans and leases) 45,853 134 107 45,880
-------- ---- ------ --------
Total debt securities held-to-maturity $ 55,839 $165 $ 133 $ 55,871
-------- ---- ------ --------
-------- ---- ------ --------
Available-for-sale:
Debt securities:
U.S. government and agency
obligations $ 63,852 $ 5 $ 192 $ 63,665
Asset-backed securities (automobile
loans and leases) 129,391 638 1,040 128,989
-------- ---- ------ --------
Total debt securities available-for-sale 193,243 643 1,232 192,654
-------- ---- ------ --------
Equity securities:
Preferred and common stock 40,038 -- -- 40,038
Investment in mutual funds 729 -- 13 716
-------- ---- ------ --------
Total equity securities available-for-sale 40,767 -- 13 40,754
-------- ---- ------ --------
Total securities available-for-sale $234,010 $643 $1,245 $233,408
-------- ---- ------ --------
-------- ---- ------ --------
Sales of debt and equity securities from the available-for-sale portfolio during
the years ended September 30, are summarized as follows:
1996 1995 1994
- --------------------------------------------------------------------------
(In thousands)
Proceeds from sales
Equity securities $ 20,000 $15,245 $ --
Debt securities 119,099 33,591 117,414
Gross gains
Equity securities -- 230 --
Debt securities 380 250 114
Gross losses
Equity securities -- -- --
Debt securities 89 526 817
During fiscal 1995, the Company wrote-off its investment in Nationar,
a failed bank service institution, in the amount of $1.8 million. In
fiscal 1996, the Company recovered $49,000 on its investment in
Nationar.
Proceeds from the redemption of FHLB stock amounted to $11.7 million
for the fiscal year ended September 30, 1994 and there was no gain or
loss recognized on the redemption.
The maturities of the investments in debt securities at September 30,
are as follows:
1996
- ----------------------------------------------------------------
Available-for-sale
-------------------------
Estimated
Amortized Fair
Cost Value
---------- ---------
(In thousands)
Within 1 year $ 26,584 $ 26,596
After 1 year through 5 years 35,543 35,457
After 5 years through 10 years 74,822 72,891
After 10 years 5,018 4,912
-------- --------
$141,967 $139,856
-------- --------
-------- --------
Page 42
1995
- ------------------------------------------------------------------------------------------
Available-for-sale Held-to-maturity
------------------------ -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- ----------
(In thousands)
Within 1 year $ 34,020 $ 34,025 $ -- $ --
After 1 year through 5 years 139,721 139,255 55,839 55,871
After 5 years through 10 years 12,876 12,923 -- --
After 10 years 6,626 6,451 -- --
-------- -------- ------- -------
$193,243 $192,654 $55,839 $55,871
-------- -------- ------- -------
-------- -------- ------- -------
- ------------------------------------------------------------------------------------------
(6)
MORTGAGE-BACKED
SECURITIES
MBS's at September 30, are as follows:
1996
- ------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Fair Value
--------- ---------- ---------- ----------
(In thousands)
Held-to-maturity:
Real estate mortgage investment
conduit $ 17,017 $ -- $1,976 $ 15,041
Other pass-through certificates 6,079 -- -- 6,079
--------- ------- ------ ----------
Mortgage-backed securities
held-to-maturity $ 23,096 $ -- $1,976 $ 21,120
--------- ------- ------ ----------
--------- ------- ------ ----------
Available-for-sale:
GNMA pass-through certificates $ 3,582 $ 50 $ -- $ 3,632
FHLMC pass-through certificates 367,480 3,651 1,794 369,337
FNMA pass-through certificates 483,480 4,238 2,022 485,696
Other pass-through certificates 78,101 92 309 77,884
GNMA, FHLMC and FNMA securities
pledged as collateral 767,263 14,357 1,063 780,557
--------- ------- ------ ----------
Gross mortgage-backed securities
available-for-sale 1,699,906 22,388 5,188 1,717,106
Unamortized premium, net 3,270 (3,270) -- --
--------- ------- ------ ----------
Mortgage-backed securities
available-for-sale, net $1,703,176 $19,118 $5,188 $1,717,106
--------- ------- ------ ----------
--------- ------- ------ ----------
1995
- ------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Fair Value
---------- ---------- ---------- ----------
(In thousands)
Held-to-maturity:
FHLMC pass-through certificates $ 362,646 $ 2,102 $2,511 $ 362,237
FNMA pass-through certificates 353,324 4,417 1,035 356,706
Real estate mortgage investment conduit 17,693 -- -- 17,693
Other pass-through certificates 62,082 -- 153 61,929
GNMA, FHLMC and FNMA securities
pledged as collateral 540,354 3,215 3,120 540,449
---------- ------- ------ ----------
Gross mortgage-backed securities
held-to-maturity 1,336,099 9,734 6,819 1,339,014
Unamortized premium, net 1,804 (1,804) -- --
---------- ------- ------ ----------
Mortgage-backed securities
held-to-maturity, net $1,337,903 $ 7,930 $6,819 $1,339,014
---------- ------- ------ ----------
---------- ------- ------ ----------
Available-for-sale:
FHLMC pass-through certificates $ 497,438 $ 9,394 $ 461 $ 506,371
FNMA pass-through certificates 274,501 5,360 85 279,776
Other pass-through certificates 9,892 -- 272 9,620
FHLMC and FNMA securities
pledged as collateral 140,072 3,828 820 143,080
---------- ------- ------ ----------
Gross mortgage-backed securities
available-for-sale 921,903 18,582 1,638 938,847
Unamortized premium, net 4,120 (4,120) -- --
---------- ------- ------ ----------
Mortgage-backed securities
available-for-sale, net $ 926,023 $14,462 $1,638 $ 938,847
---------- ------- ------ ----------
---------- ------- ------ ----------
Page 43
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
Sales of MBS's from the available-for-sale portfolio during the years ended
September 30, are summarized as follows:
1996 1995 1994
- ----------------------------------------------------------------------------------------
(In thousands)
Proceeds from sales $485,195 $286,674 $696,830
Gross gains 6,931 2,343 4,012
Gross losses 1,232 35 2,101
- ----------------------------------------------------------------------------------------
(7)
LOANS HELD FOR
SALE AND LOANS RECEIVABLE HELD
FOR INVESTMENT
Loans held for sale as of September 30, are summarized as follows:
1996 1995
- --------------------------------------------------------------------------
(In thousands)
Real estate loans:
One-to-four family loans $57,812 $47,831
Co-operative apartment loans 49 1,511
------- -------
57,861 49,342
Student loans 108 30
------- -------
Total loans held for sale $57,969 $49,372
------- -------
------- -------
The Bank originates most fixed rate loans for immediate sale to FNMA,
FHLMC or other investors. Generally, the sale of such loans is
arranged at the time the loan application is received through best
effort commitments (see Note 15). In addition, student loans are sold
to the Student Loan Mortgage Association generally before repayment
begins during the grace period of the loan.
Loans receivable held for investment as of September 30, are
summarized as follows:
1996 1995
- ----------------------------------------------------------------------------------------
(In thousands)
Real estate loans held for investment, net
One-to-four family loans $2,670,387 $1,640,121
Co-operative apartment loans 114,560 126,912
Home equity loans 18,564 18,115
Second mortgage loans 5,154 6,563
Multi-family loans 34,883 35,708
Commercial real estate loans 69,625 72,393
Construction loans 4,509 3,070
Land loans 3,221 4,804
---------- ----------
2,920,903 1,907,686
Deferred loan costs (fees) 3,159 (3,253)
Purchase accounting discount (2,777) (4,229)
---------- ----------
2,921,285 1,900,204
Allowance for possible loan losses (20,226) (20,554)
---------- ----------
Real estate loans held for investment, net 2,901,059 1,879,650
---------- ----------
Commercial loans receivable, net
Commercial loans 8,206 9,330
Unearned discount (396) (624)
---------- ----------
7,810 8,706
Allowance for possible loan losses (3,631) (3,874)
---------- ----------
Commercial loans receivable, net 4,179 4,832
---------- ----------
Other loans receivable, net
Property improvement 9,028 11,131
Student 6,976 3,294
Loans on deposit accounts 2,475 2,649
Consumer 69,575 42,284
Consumer line of credit 55,292 59,746
---------- ----------
143,346 119,104
Purchase accounting premium 50 78
Deferred costs 2,258 1,007
---------- ----------
145,654 120,189
Allowance for possible loan losses (10,055) (9,930)
---------- ----------
Other loans receivable, net 135,599 110,259
---------- ----------
Total loans receivable held for investment, net $3,040,837 $1,994,741
---------- ----------
---------- ----------
Page 44
Real estate loans included approximately $2.5 billion and $1.7 billion of
adjustable rate mortgage loans at September 30, 1996 and 1995, respectively.
On October 1, 1995, the Company adopted SFAS 114, and SFAS 118, ("Statements").
Under these Statements, a loan is considered impaired when it is probable that
the Company, based on current information, will not collect all amounts due,
including principal and interest, according to the contractual terms of the loan
agreement. Loans exempt from the provisions of these Statements include large
groups of smaller-balance homogenous loans that are collectively evaluated for
impairment such as one-to-four family real estate loans and consumer loans. Such
loans that are modified in a troubled debt restructuring ("TDR"), however, are
subject to the provisions of these Statements. A loan is considered a TDR when
modifications are made to the original contractual terms of the loan due to the
borrower's financial difficulties. Loans that fall within the scope of these
Statements must be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or at the loan's
observable market price or, if the loan is collateral dependent, at the fair
value of the collateral.
The principal amount of non-performing real estate loans excluding restructured
loans aggregated approximately $38.8 million, $38.5 million and $34.7 million at
September 30, 1996, 1995 and 1994, respectively. Interest income that would have
been recorded if the loans had been performing in accordance with their original
terms aggregated $2.9 million, $2.7 million and $3.7 million for the fiscal
years ended September 30, 1996, 1995 and 1994, respectively. No interest income
was recorded for these loans during the fiscal years ended September 30, 1996,
1995 and 1994. The principal amount of non-performing commercial loans excluding
restructured loans aggregated $0.8 million, $0.8 million and $1.5 million at
September 30, 1996, 1995 and 1994, respectively.
The principal amount of restructured real estate loans that have not complied
with the terms of their restructure agreement for a satisfactory period
(generally six months) aggregated approximately $11.4 million, $14.8 million and
$15.8 million at September 30, 1996, 1995 and 1994, respectively. Interest
income that would have been recorded if the loans had been performing in
accordance with their original terms aggregated $0.3 million, $0.3 million and
$0.4 million for the fiscal years ended September 30, 1996, 1995 and 1994,
respectively. Interest income recorded for these loans amounted to $0.1 million,
$0.1 million and $0.2 million for the fiscal years ended September 30, 1996,
1995 and 1994, respectively. Restructured loans that have complied with the
terms of their restructure agreement for a satisfactory period (generally six
months) and have therefore been returned to performing status aggregated $11.8
million, $12.1 million and $12.8 million as of September 30, 1996, 1995 and
1994, respectively.
The principal amount of restructured commercial loans aggregated $0.5 million,
$0.9 million and $1.8 million at September 30, 1996, 1995 and 1994,
respectively. Interest income that would have been recorded if the loans had
been performing in accordance with their original terms aggregated $43,000,
$49,000 and $125,000 for fiscal years ended September 30, 1996, 1995 and 1994,
respectively. Interest income recorded for these loans amounted to $29,000,
$40,000 and $100,000 for the fiscal years ended September 30, 1996, 1995 and
1994, respectively.
LOAN SERVICING. The Company has entered into various agreements to service
loans for others. At September 30, 1996 and 1995, 47,146 loans and 37,848 loans
with a total balance of $3.7 billion and $2.6 billion, respectively, were being
serviced for others. Of this total balance, the Company has retained
participation in loans equal to $10.3 million and $10.2 million at September 30,
1996 and 1995, respectively.
The right to service loans for others is generally obtained by either the sale
of loans with servicing retained, the open market purchase of MSR's or the
creation of MSR's pursuant to SFAS 122.
During the fiscal years ended September 30, 1996, 1995 and 1994, the Company
sold approximately $186.8 million, $100.4 million and $257.6 million,
respectively, of whole loans and MBS's with servicing retained. In addition, the
Company sold $303.9 million of home equity loans with servicing retained during
fiscal 1993.
Effective July 1, 1995, the Company adopted SFAS 122. SFAS 122 standardized the
treatment of the capitalization of MSR's by eliminating the difference between
purchased MSR's and originated MSR's. Prior to SFAS 122, entities were only
allowed to capitalize MSR's that were purchased and were precluded from
capitalizing MSR's that were originated. SFAS 122 provides for the
capitalization of MSR's when mortgage loans are originated and subsequently sold
or securitized where the right to service the loans is retained.
Page 45
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
MSR activity for the years ended September 30, is summarized as follows:
1996 1995 1994
- ----------------------------------------------------------------------------
(In thousands)
Beginning balance $11,328 $ 759 $957
Purchased MSR's 15,159 10,071 444
Capitalized MSR's 5,982 1,969 --
Less:
Amortization of MSR's 2,700 1,471 642
Allowance for MSR's 82 -- --
------- -------- ----
Ending balance $29,687 $11,328 $759
------- -------- ----
------- -------- ----
Purchased mortgage servicing rights include servicing rights related to the
November 1994 acquisitions of the operations of Entrust and Developer's,
which at September 30, 1996 and 1995 totalled $6.3 million and $7.5
million, respectively.
Fees earned for servicing loans are reported as income when the related
mortgage loan payments are collected. MSR's are amortized as a reduction to
loan service fee income on a level-yield basis over the estimated remaining
life of the underlying mortgage loans. MSR's are carried at fair value and
impairment, if any, is recognized through a valuation allowance. At
September 30, 1996 the valuation allowance amounted to $0.1 million. No
valuation allowance was required for 1995 and 1994, respectively. See Note
16 for risk characteristics and assumptions used to estimate fair value.
In connection with the home equity loan sale consummated in 1993, the
Company receives a normal servicing fee to service the loans, which were
sold without recourse to an unaffiliated trust and are being used to
collateralize asset-backed certificates. Excess cash flow in the trust, if
any, after required payments to the certificate holders and insurer, is to
be applied to overissuance and overcollateralization amounts and to absorb
a specified level of losses; remaining excess cash flow, if any, will
ultimately revert to the Company. In connection therewith, the Company
recorded service fee income in the amount of $0.5 million and $2.5 million
resulting from the overcollateralization during fiscal 1996 and 1995,
respectively.
Loan servicing income for the years ended September 30, is summarized as
follows:
1996 1995 1994
- -----------------------------------------------------------------------
(In thousands)
Servicing fees $16,645 $14,344 $9,367
Amortization of MSR's (2,700) (1,471) (642)
Provision for MSR's (82) -- --
------- -------
------
Total servicing income $13,863 $12,873 $8,725
------- -------
------
- -----------------------------------------------------------------------
(8)
ALLOWANCE
FOR POSSIBLE
LOAN LOSSES
Real
Estate Commercial Other
Loans Loans Loans Total
- ------------------------------------------------------------------------------------------
(In thousands)
Balance at September 30, 1993 $24,951 $3,874 $ 5,126 $33,951
Add:
Provision for possible loan losses 3,300 1,350 7,305 11,955
Recoveries of previous charge-offs 482 577 459 1,518
------- ------ ------- -------
28,733 5,801 12,890 47,424
Less charge-offs 5,852 1,551 4,308 11,711
------- ------ ------- -------
Balance at September 30, 1994 22,881 4,250 8,582 35,713
Add:
Provision for possible loan losses 1,275 400 4,795 6,470
Recoveries of previous charge-offs 1,006 141 651 1,798
------- ------ ------- -------
25,162 4,791 14,028 43,981
Less charge-offs 4,608 917 4,098 9,623
------- ------ ------- -------
Balance at September 30, 1995 20,554 3,874 9,930 34,358
Add:
Provision for possible loan losses 2,850 -- 3,350 6,200
Recoveries of previous charge-offs 691 319 543 1,553
------- ------ ------- -------
24,095 4,193 13,823 42,111
Less charge-offs 3,869 562 3,768 8,199
------- ------ ------- -------
Balance at September 30, 1996 $20,226 $3,631 $10,055 $33,912
------- ------ ------- -------
------- ------ ------- -------
Page 46
As of September 30, 1996, $7.7 million in loans were considered impaired within
the scope of SFAS 114, of which $5.6 million were on nonaccrual status. The
application of SFAS 114 measurement principles indicated that approximately $0.7
million of these loans required valuation allowances, totaling $0.3 million,
which are included within the overall allowance for possible loan losses at
September 30, 1996. SFAS 114 does not apply prior to fiscal 1996.
Interest income recognized on impaired loans during the year ended September 30,
1996 amounted to approximately $0.4 million, which is approximately equal to the
actual interest payments received. The average recorded investment in impaired
loans during the current year was $8.9 million. The allowance for possible loan
losses contains additional amounts for impaired loans, as deemed necessary, to
maintain reserves at levels considered adequate by management.
- -------------------------------------------------------------------------------
(9)
REAL ESTATE
OWNED
A summary of REO at September 30, is as follows:
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
------ ------
Real estate owned $8,155 $8,893
------ ------
------ ------
During fiscal 1996, 1995 and 1994, the Company acquired properties
with a net book value of $10.0 million, $10.3 million and $12.7
million, respectively. Declines in market values resulted in
write-downs of $0.5 million, $0.6 million and $0.8 million during
fiscal 1996, 1995 and 1994, respectively, which were charged to other
REO expense. The book value of REO properties sold in fiscal 1996,
1995 and 1994 totalled $10.2 million, $8.1 million and $30.6 million,
respectively.
REO operating results for the years ended September 30, were as
follows:
1996 1995 1994
- -----------------------------------------------------------------------------------------
(In thousands)
Income
Rental income $ 77 $ 65 $ 135
Gains on sales 559 628 764
Other income 24 17 76
------- ------- -------
Total income 660 710 975
------- ------- -------
Expenses
Acquisition expenses 799 766 1,513
Operating expenses 1,236 1,073 2,543
Losses on sales 225 107 180
Write-downs 490 554 791
------- ------- -------
Total expenses 2,750 2,500 5,027
------- ------- -------
Net loss on real estate owned $(2,090) $(1,790) $(4,052)
------- ------- -------
------- ------- -------
- ---------------------------------------------------------------------------------------
(10)
INVESTMENT IN
REAL ESTATE
At September 30, 1996, and 1995 Investment in real estate consists of two
parcels of vacant land located in Suffolk County, New York which had a carrying
value of $2.5 million at both dates. These parcels are recorded at the lower of
cost or net realizable value. In addition, at September 30, 1995, Investment in
real estate also included eight rental office buildings with a carrying value of
$9.8 million of which $1.5 million represented purchase accounting premiums.
During fiscal 1996, the eight rental office buildings were sold. In addition,
two other properties previously utilized for Company operations and reflected in
Office properties and equipment in the Consolidated Statements of Financial
Condition were sold during 1996. The net profit from the sale of these ten
properties was $1.4 million which is reflected in Net gain (loss) on investment
in real estate and premises.
Page 47
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
Investment in real estate and premises operating results for the years
ended September 30, were as follows:
1996 1995 1994
- -----------------------------------------------------------------------------------------
(In thousands)
Income
Rental income $1,917 $2,986 $ 3,121
Net profits on sales of real estate and premises 1,419 -- 20
Net profits, equity in joint venture 1,243 1,109 675
Miscellaneous income 503 1 11
------ ------ -------
Total income 5,082 4,096 3,827
------ ------ -------
Expenses
Depreciation 312 509 528
Operating expenses 652 2,061 2,195
Net losses on sales -- 32 --
Write-downs -- 27 1,842
------ ------ -------
Total expenses 964 2,629 4,565
------ ------ -------
Net gain (loss) on investment in real estate
and premises $4,118 $1,467 $ (738)
------ ------ -------
------ ------ -------
- -----------------------------------------------------------------------------------------
(11)
OFFICE PROPERTIES
AND EQUIPMENT
A summary of office properties and equipment at cost, net of accumulated
depreciation and amortization, and land at cost at September 30, is as follows:
1996 1995
- -----------------------------------------------------------------------------------------
(In thousands)
Land, office buildings and improvements $53,265 $58,073
Leasehold improvements 1,922 2,259
Furniture, fixtures and equipment 30,193 21,851
Purchase accounting premium 3,899 4,056
------- -------
Total office properties and equipment, net $89,279 $86,239
------- -------
------- ------
During 1996, two office buildings were sold with a carrying value of $2.0
million at the time of sale. The net profit on the sale of these buildings
amounted to $1.9 million and is reflected in Net gain (loss) on investment in
real estate and premises in the Consolidated Statements of Operations.
- --------------------------------------------------------------------------------
(12)
ACCRUED INTEREST
RECEIVABLE, NET
As of September 30, accrued interest receivable, net of the reserve for
uncollected interest, consisted of the following:
1996 1995
- ----------------------------------------------------------------------------------------
(In thousands)
Debt and equity securities $ 1,225 $ 1,558
Mortgage-backed securities 12,965 16,599
Real estate loans, net 17,595 12,543
Commercial loans, net 79 60
Other loans, net 1,098 992
------- -------
Total accrued interest receivable, net $32,962 $31,752
------- -------
------- -------
Page 48
(13)
DEPOSITS
Certificate accounts and other deposit accounts at September 30, are
summarized as follows:
1996
Stated
Rate 1996 1995
- ---------------------------------------------------------------------------------------
(In thousands)
Passbook accounts 2.76% $ 669,241 $ 730,060
Demand and NOW accounts 2.18 227,747 223,232
Money market accounts 2.18 -- 2.76 130,442 154,938
Statement savings accounts 2.86 -- 3.44 646,789 624,707
--------- ---------
1,674,219 1,732,937
--------- ---------
Certificate accounts (balance
by interest rate) 4.99 or less 292,547 160,797
5.00 -- 5.99 1,160,668 897,341
6.00 -- 6.99 393,757 650,183
7.00 -- 7.99 111,739 131,214
8.00 or greater 80 1,057
1,958,791 1,840,592
--------- ---------
Total deposits $3,633,010 $3,573,529
--------- ---------
--------- ---------
Contractual maturity of certificates:
Within twelve months $1,360,835 $1,162,423
Over one to three years 314,327 423,644
Over three years 283,629 254,525
--------- ---------
$1,958,791 $1,840,592
--------- ---------
--------- ---------
Certificate accounts in excess of $100,000 $ 160,654 $ 135,234
--------- ---------
--------- ---------
Included in demand and NOW accounts, at September 30, 1996 and 1995, were
approximately $98.7 million and $86.6 million, respectively, of
non-interest-bearing deposits.
Interest expense by deposit category for the years ended September 30, is
summarized as follows:
1996 1995 1994
- ----------------------------------------------------------------------------------------
(In thousands)
Passbook accounts $ 19,264 $ 22,336 $ 27,706
NOW accounts 3,105 3,181 2,881
Money market accounts 3,913 5,022 6,189
Statement savings accounts 20,755 20,946 26,202
Certificate accounts 108,479 87,849 56,986
Escrow accounts 314 307 329
-------- -------- --------
Total interest expense on deposits $155,830 $139,641 $120,293
-------- -------- --------
-------- -------- --------
The deposits of the Bank are insured up to $100,000 per depositor (as defined
by law and regulation) by the Savings Association Insurance Fund ("SAIF")
which is administered by the FDIC. Certain other financial institutions are
insured by the Bank Insurance Fund ("BIF"). On September 30, 1996, as part of
the omnibus appropriations bill, Congress passed and President Clinton signed
the Deposit Insurance Funds Act of 1996 ("Act"). The Act should significantly
reduce and eventually end the premium disparity that has existed between
banks insured by BIF and thrifts insured by the SAIF. The Act requires
SAIF-insured institutions to pay a special one-time assessment and
BIF-insured institutions to include a portion of the interest due on Finance
Corporation ("FICO") bonds in their deposit premiums beginning January 1,
1997. Beginning on January 1, 2000 or the date at which no savings
institution continues to exist, BIF-insured institutions are required to pay
their full pro rata share of FICO payments. The one-time assessment charged
to SAIF-insured institutions will enable the SAIF fund to reach predetermined
capitalization levels and therefore will result in a reduction in future
premiums paid by SAIF-insured institutions. Pursuant to these provisions of
the Act, the Bank's special one-time insurance assessment amounted to $18.7
million which was accrued at September 30, 1996 and paid in November 1996.
Page 49
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
- --------------------------------------------------------------------------------
(14)
BORROWED
FUNDS
At September 30, the Company was obligated for borrowings as follows:
1996 1995
- -----------------------------------------------------------------------------------------
Range of Range of
Interest Balance Interest Balance
Rates Rates
--------- --------- ---------- --------
(Dollars in thousands)
Securities sold under agreements to
repurchase 4.43 - 6.53% $800,000 4.43 - 5.69% $623,675
Advance--Federal Home Loan
Bank of New York -- -- 6.63% 10,000
Funding note 6.00 - 6.11% 178,023 -- --
-------- --------
$978,023 $633,675
-------- --------
-------- --------
The Company enters into sales of securities under agreements to repurchase
(reverse-repurchase agreements). These are fixed coupon agreements which are
treated as financing transactions, and the obligations to repurchase are
reflected as a liability in the Consolidated Statements of Financial
Condition. The dollar amount of securities underlying the agreements remains
in the asset account. During the period, the securities were delivered to
either a third-party, or directly to the broker, who holds the collateral
until maturity of the agreement. Outstanding reverse-repurchase agreements
were secured by MBS's as of September 30, 1996 and 1995 (see Note 6). The
outstanding agreements had weighted average interest rates of 5.52% and 5.69%
at September 30, 1996 and 1995, respectively. All the outstanding agreements
at September 30, 1996 mature within 35 months from that date. At September
30, 1996, $265.0 million of the agreements outstanding were concentrated with
one party. A summary of other information relating to these agreements
follows:
At or for the Year Ended
September 30,
- --------------------------------------------------------------------------------
1996 1995
------ ------
(In thousands)
Reverse-repurchase agreements:
Amortized cost of collateral
(including accrued interest) $824,278 $649,233
-------- --------
-------- --------
Estimated market value of collateral $832,599 $645,955
-------- --------
-------- --------
Average amount of outstanding agreements
during fiscal year $675,104 $510,111
-------- --------
-------- --------
Maximum amount of outstanding agreements
at a month end during fiscal year $805,942 $743,952
-------- --------
-------- --------
In addition, on June 27, 1996 the Bank issued a funding note in the amount of
$181.4 million which is collateralized by a pool of adjustable rate
residential mortgage loans (collateral pool) initially totalling $269.9
million ("Funding note"). Payments of principal and interest on the Funding
note shall be paid monthly based on the scheduled payments due on the
underlying loans. The interest on the Funding note changes monthly and bears
interest at a rate of 50 basis points over the one month London Interbank
Offered Rate ("LIBOR"), subject to a maximum rate of 11% through June 2001.
Thereafter, the interest on the Funding note is subject to further
adjustments. The Bank has the option to redeem the Funding note in whole on
or after June 2001 or when the principal balance of the collateral pool is
less than 5% of the principal balance of the collateral pool at the time the
Funding note was issued. The Funding note was issued to a special purpose
financing entity of an investment banking firm for the purpose of
securitizing mortgage pass-through certificates. At September 30, 1996, the
outstanding principal balance of the Funding note collateral pool was $265.6
million.
Interest expense on borrowed funds for the years ended September 30, is
summarized as follows:
1996 1995 1994
- -------------------------------------------------------------------------------
(In thousands)
Reverse-repurchase agreements $37,998 $27,870 $9,811
Advance--Federal Home Loan Bank of New York 141 55 --
Funding note 2,877 -- --
Amortization of interest rate cap agreements 330 330 --
------- ------- ------
Total interest expense on borrowed funds $41,346 $28,255 $9,811
------- ------- ------
------- ------- ------
At September 30, 1996, the Bank had available and unused lines of credit
aggregating $75.0 million. In addition, the Bank has the ability to obtain
additional funds in the form of FHLB advances, in an amount which is based
upon its stock ownership in the Federal Home Loan Bank of New York.
Page 50
- -------------------------------------------------------------------------------
(15)
FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK
SFAS 105 requires disclosures about financial instruments with off-balance sheet
risk and credit risk concentrations (See Note 24). Credit risk, as defined by
SFAS 105, is the possibility that loss may occur from the failure of
counterparties to perform according to the terms of the contract.
The Bank has entered into transactions as of September 30, 1996, that involve
financial instruments with off-balance sheet risks, in the normal course of
business in order to meet the financing and servicing needs of its customers and
to reduce the Bank's exposure to fluctuations in interest rates. The instruments
include commitments to extend credit, letters of credit, commitments to sell
loans and recourse liability on loans sold. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the Consolidated Statements of Financial Condition. The
contract amounts of these instruments reflect the extent of involvement the Bank
has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, commitments
to sell loans and standby letters of credit is generally represented by the
contractual amount of those instruments. The Bank uses the same credit policies
in making commitments and conditional obligations as it does for on-balance
sheet instruments. Unless otherwise noted, the Bank does not require collateral
or other security to support financial instruments with credit risk.
COMMITMENTS TO EXTEND CREDIT AND FINANCIAL GUARANTEES. Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since some of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
COMMITMENTS TO SELL LOANS. Commitments to sell loans are contracts for delayed
delivery of loans in which the Bank agrees to make delivery at a specified
future date of a specified instrument, at a specific price or yield. Generally,
risks arise from the possible inability to meet the terms of the contracts and
from movements in interest rates, however, since the Bank's commitments are
substantially made on a "best-efforts" basis, the Bank does not expect any
adverse financial impact.
The notional amount of the Company's financial instruments with off-balance
sheet risk at September 30, are summarized as follows:
1996 1995
- -------------------------------------------------------------------------------
(In thousands)
Commitments to originate or purchase:
Real estate loans $311,967 $101,000
Home equity loans--unused lines of credit 9,554 5,710
Commercial loans--unused lines of credit 2,576 2,393
Consumer loans--unused lines of credit 115,126 98,054
Commitments to sell loans 75,413 44,422
-------- --------
Total commitments $514,636 $251,579
-------- --------
-------- --------
Real estate loan commitments included approximately $104.8 million and $27.6
million relating to adjustable rate loans at September 30,1996 and 1995
respectively. In addition, the Bank has entered into adjustable rate stand-by
letters of credit related to commercial loan transactions amounting to $0.3
million per year at September 30, 1996
and 1995, respectively.
DERIVATIVES. SFAS 119 requires disclosures about derivative contracts--swap,
forward, futures, option-related contracts and other financial instruments with
similar characteristics--distinguished between derivative contracts held for
trading and those used for purposes other than trading (i.e. asset/liability
management).
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. They are used to manage interest
rate risk.
Page 51
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
INTEREST RATE CAP AGREEMENTS. Interest rate cap agreements are used to manage
interest rate exposure by hedging against certain assets and liabilities.
Normally interest rate caps do not represent exposure to credit loss. Purchased
caps involve the risk of dealing with counterparties and their ability to meet
the terms of the contracts forward commitments. The premium paid for the cap
represents the loss the Bank would incur if the counterparty to the contract
failed completely to perform according to the terms of the contract. No payments
were received from counterparties during the years ended September 30, 1996 and
1995 and there were no contracts in effect during fiscal 1994. For the years
ended September 30, 1996 and 1995, premiums paid for interest rate cap
agreements were amortized into interest expense in the amount of $0.3 million
per year and are included in interest expense on borrowed funds in the
Consolidated Statements of Operations.
At September 30, 1996, the Company was party to the interest rate cap agreements
presented below. The agreements entitle the Company to receive from
counterparties the amounts, if any, by which the Company's interest payments on
its floating-rate reverse-repurchase agreements exceed the cap rate specified in
the agreement.
Original Cap Cost Notional Amount Original Term Cap Rate Maturity Date
- -------------------------------------------------------------------------------
$288,000 $40,000,000 24 months 7.50% 10/15/96
345,000 50,000,000 24 months 7.40 3/17/97
-------- -----------
$633,000 $90,000,000
-------- -----------
-------- -----------
- -------------------------------------------------------------------------------
(16)
FAIR VALUE
OF FINANCIAL INSTRUMENTS
SFAS 107 requires the Company to disclose fair value information about financial
instruments for which it is practicable to estimate the value, whether or not
such financial instruments are recognized on the balance sheet. Fair value is
the amount at which a financial instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or liquidation,
and is best evidenced by a quoted market price, if one exists.
Quoted market prices are not available for a significant portion of the
Company's financial instruments. As a result, the fair values presented are
estimates derived using present value or other valuation techniques and may not
be indicative of the net realizable or liquidation value. In addition, the
calculation of estimated fair value is based on market conditions at a specific
point in time and may not be reflective of current or future fair values.
Certain financial instruments and all non-financial instruments are excluded
from the scope of SFAS 107. Accordingly, the fair value disclosures required by
SFAS 107 provide only a partial estimate of the fair value of the Company; for
example, the values associated with the Company's long-term relationships with
its customers through its deposit base and the value of a portion of its
portfolio of MSR's are excluded. In the aggregate, these items add value to the
Company but their fair value is not disclosed in this Note.
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments required to be
valued pursuant to SFAS 107.
FINANCIAL ASSETS
MORTGAGE-BACKED AND DEBT AND EQUITY SECURITIES. Fair values are determined by
published market prices or securities dealers' estimated prices.
LOANS HELD FOR SALE. Fair value is estimated based on current prices established
in the secondary market or,
for those loans committed to be sold, based upon the price established in the
commitment.
LOANS RECEIVABLE HELD FOR INVESTMENT. Fair values are estimated for portfolios
of loans with similar financial characteristics. Loans are segregated by type,
such as one-to-four family residential, multi-family residential, commercial
real estate, various consumer loans and commercial loans. Each loan category is
further segmented into fixed and adjustable rate, and by performing and
non-performing categories. The pricing methodology for fiscal 1996 and 1995
assumes FNMA or FHLMC securitization of mortgage loans with conforming loan
balances and secondary market whole loan standards for co-op residential loans
and larger balance mortgage loans.
OTHER LOANS. Due to the small number, student loans and loans on deposits are
valued at approximately par. The remaining consumer loans are priced at a spread
off of securitized consumer debt.
COMMERCIAL LOANS. Commercial loans were valued at a discount or premium based
upon the origination of new commercial loans in the current market.
Page 52
MORTGAGE SERVICING RIGHTS. MSR's are valued based upon the Company's
stratification of the mortgage servicing portfolio. Stratification is based
upon the predominate risk characteristics of the underlying loans,
including but not limited to, interest rates, loan type, the frequency of
interest rate adjustments in the case of adjustable rate mortgage loans,
etc. Each strata is then discounted to reflect the present value of the
expected future cash flows utilizing current market assumptions regarding
discount rates, prepayment speeds, delinquency rates, etc.
FINANCIAL LIABILITIES
DEPOSITS. SFAS 107 requires that the fair value disclosed for deposit
liabilities with no stated maturity (i.e., demand, savings and certain
money market deposits) be equal to their carrying value. The fair value of
certificate accounts is estimated by discounting the future cash flows
using the Treasury yield curve plus additional basis points as the discount
rate.
BORROWED FUNDS. The fair value of borrowed funds is estimated by
discounting the future cash flows using the Treasury yield curve plus
additional basis points as the discount rate.
DERIVATIVES. The fair value of interest rate cap agreements is based on
securities dealers' estimated market values.
COMMITMENTS. The fair value of commitments to originate or purchase loans
is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counterparties. For fixed rate loan
commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The commitments existing
at September 30, 1996 and 1995 would be offered at substantially the same
rates and terms had they been issued using the same criteria as used for
commitments issued on September 30, 1996 and 1995, respectively.
Accordingly, the estimated fair value of such commitments is deemed to be
equivalent to their stated aggregate issuance value as of September 30,
1996 and 1995, respectively. The fair value of commitments to sell loans
and unused lines of credit is valued at par as of September 30, 1996 and
1995, respectively.
The estimated fair value of the Company's financial instruments were as
follows:
At September 30,
- ---------------------------------------------------------------------------------------
1996 1995
------------------------- ---------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
(In thousands)
Financial Assets:
Debt & equity securities:
Held-to-maturity $ -- $ -- $ 55,839 $ 55,871
Available-for-sale 180,650 180,650 233,408 233,408
Mortgage-backed securities:
Held-to-maturity 23,096 21,120 1,337,903 1,339,014
Available-for-sale 1,717,106 1,717,106 938,847 938,847
Loans receivable held for
investment:
Real estate loans 2,901,059 2,926,757 1,879,650 1,933,840
Other loans 135,599 142,307 110,259 118,302
Commercial loans 4,179 8,122 4,832 9,046
Loans held-for-sale 57,969 58,029 49,372 49,943
Mortgage servicing rights 29,687 29,687 11,328 11,384
Financial liabilities:
Deposits 3,633,010 3,619,110 3,573,529 3,572,435
Borrowings 978,023 969,680 633,675 632,864
Related derivative assets
(liabilities) 89 -- 421 21
Commitments to:
Originate or purchase:
Loans 311,967 311,967 101,000 101,000
Sell loans 75,413 75,413 44,422 44,422
Fund unused lines of credit 127,256 127,256 106,157 106,157
Page 53
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
- ------------------------------------------------------------------------------
(17)
INCOME TAXES
Income tax expense for the years ended September 30, is summarized as follows:
1996 1995 1994
- ------------------------------------------------------------------------------
(In thousands)
Current:
Federal $ 24,316 $23,691 $ 1,465
State and local 9,875 9,273 377
--------- ------- -------
34,191 32,964 1,842
--------- ------- -------
Deferred:
Federal (7,700) (2,333) 11,767
State and local (2,731) (734) 4,437
--------- ------- -------
$(10,431) (3,067) 16,204
--------- ------- -------
Total income tax expense $ 23,760 $29,897 $18,046
--------- ------- -------
--------- ------- -------
The following schedule illustrates the components of the net deferred tax
asset which is included in Prepaid expenses and other assets in the
Consolidated Statements of Financial Condition at September 30:
1996 1995
- ----------------------------------------------------------------------------
(In thousands)
Deferred tax assets:
Financial statement loan loss reserve $14,619 $14,812
BIF-SAIF Assessment 8,043 --
Accrual for post-employment benefits 4,859 4,788
Basis difference in investment in real estate 707 470
Mark-to-market recognition on securities under
Internal Revenue Code Section 475 7,442 --
Deferred pension expense 3,626 4,185
Deferred origination fees 605 796
Non-accrual interest 615 641
Other 1,677 485
Deferred income tax valuation allowance -- (2,328)
------- -------
Total deferred tax assets 42,193 23,849
------- -------
Deferred tax liabilities:
Tax reserve in excess of base year reserve 437 404
Basis difference in properties and equipment 4,527 6,244
Deferred origination costs 1,291 --
Mark-to-market recognition on securities under
Internal Revenue Code Section 475 -- 4,625
Recognition of taxes payable under Internal Revenue
Code Section 481 for unrealized gains 1,840 1,582
Basis difference in home equity investment 1,674 1,511
Other 1,217 684
------- -------
Total deferred tax liabilities 10,986 15,050
------- -------
Net deferred tax asset $31,207 $ 8,799
------- -------
------- -------
The cumulative effect of the change in accounting upon the October 1, 1993
adoption of SFAS 109 was a credit to income of $19.4 million. Management,
in accordance with SFAS 109 "more likely than not" criteria, set up a
valuation allowance at the implementation date. The valuation allowance has
been reduced to zero during fiscal 1996 due to the Company's current and
projected earnings trend.
Page 54
The effective tax rates differ from the statutory
Federal income tax rate of 35 percent. The reasons for
the differences as applied to income (loss) before
income taxes and the cumulative effect of accounting
changes are as follows:
For the Years Ended September 30,
- --------------------------------------------------------------------------------------------------------
1996 1995 1994
------------------- ------------------ ------------------
% of % of % of
Pre-tax Pre-tax Pre-tax
Amount Earnings Amount Earnings Amount Earnings
------- -------- ------- -------- ------- --------
(Dollars in thousands)
Statutory rate $19,612 35.0% $25,695 35.0% $17,127 35.0%
State and local income taxes, net of
Federal income tax benefit 4,644 8.3 5,550 7.6 3,129 7.8
Tax adjustment for prior year 370 0.7 (814) (1.1) (315) (1.8)
Reversal of deferred tax valuation
allowance (2,328) (4.2) (532) (0.7) (2,140) (4.3)
Other 1,462 2.6 (2) (0.1) 245 0.1
------- ---- ------- ---- ------- -----
Income tax expense $23,760 42.4% $29,897 40.7% $18,046 36.8%
------- ---- ------- ---- ------- -----
------- ---- ------- ---- ------- -----
Under Section 593 of the Internal Revenue Code of 1986 as amended ("Code"),
prior to January 1, 1996 thrift institutions such as the Bank which met
certain definitional tests primarily relating to their assets and the nature
of their business, were permitted to establish a tax reserve for bad debts.
Such thrift institutions were also permitted to make annual additions to the
reserve, to be deducted in arriving at their taxable income within specified
limitations. The Bank's deduction was computed using an amount based on the
Bank's actual loss experience ("experience method"), or a percentage equal to
8% of the Bank's taxable income ("PTI method"). Similar deductions for
additions to the Bank's bad debt reserve were also permitted under the New
York State Bank Franchise Tax and the New York City Banking Corporation Tax;
however, for purposes of these taxes, the effective allowable percentage
under the PTI method was 32% rather than 8%.
Under the Small Business Job Protection Act of 1996 ("1996 Act"), signed into
law in August 1996, Section 593 of the Code was amended. The Bank will be
unable to make additions to the tax bad debt reserves but will be permitted
to deduct bad debts as they occur. Additionally, the 1996 Act required
institutions to recapture (that is, include in taxable income) the excess of
the balance of its bad debt reserves as of December 31, 1995 over the balance
of such reserves as of December 31, 1987 ("base year"). The Bank's tax bad
debt reserves at December 31, 1995 exceeded its base year reserves by $2.7
million which will be recaptured into taxable income ratably over a six year
period. If certain requirements are met the recapture may be deferred for up
to two years. The base year reserves will be subject to recapture, and the
Bank could be required to recognize a tax liability if (i) the Bank fails to
qualify as a "bank" for Federal income tax purposes; (ii) certain
distributions are made with respect to the stock of the Bank; (iii) the Bank
uses the bad debt reserves for any purpose other than to absorb bad debt
losses; and (iv) there is a change in Federal tax law. Management is not
aware of the occurrence of any such event.
In response to the Federal legislation, the New York State tax law has been
amended to prevent the recapture of existing tax bad debt reserves and to
allow for the continued use of the PTI method to determine the bad debt
deduction in computing New York State tax liability. No such amendments have
been made to date with respect to the New York City tax law. The Company
cannot predict whether such changes will be made or as to the form of the
changes.
- --------------------------------------------------------------------------------
(18)
RETAINED INCOME--
PARTIALLY RESTRICTED
Retained income at September 30, 1996 and 1995 includes approximately $60.1
million, each year, for which no provision for Federal income tax has been
made. This amount represents allocations of income to bad debt deductions for
tax purposes only, as discussed above.
- --------------------------------------------------------------------------------
(19)
POSTRETIREMENT
HEALTH CARE AND
LIFE INSURANCE
BENEFITS
The Bank currently provides health care and life insurance benefits for
retirees and their eligible dependents. The coverage provided depends upon
the date they retired as well as the bank from which they retired.
For employees who retired prior to June 1, 1984, major medical and life
insurance coverage is provided. Major medical insurance continues until the
retiree reaches age 65. Upon attainment of age 65, senior care is provided as
a supplement to Medicare and continues for the lifetime of the retirees and
their spouses. Life insurance coverage is provided in the amount in force at
the employee's date of retirement. This amount is reduced to 50% (but not to
less than $5,000) at age 70. For retirees of the former Suffolk County
Federal Savings and Loan Association, life insurance coverage is provided at
50% of the amount in effect at retirement and is reduced by 10% each year
(but not to less than $5,000) thereafter.
Page 55
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
Employees who retire subsequent to June 1, 1984 are not entitled to any medical
benefits unless they qualify under the special early retirement Rule of 85. The
Rule of 85 became effective as of January 1, 1986, and entitles employees who
are at least age 55 at retirement, with a combination of age plus service
greater than or equal to 85, to medical coverage for themselves and their
eligible dependents until the retiree reaches the age of 65. At age 65, the
retiree is eligible for Medicare. Medical coverage includes major medical and
dental for both retirees and their eligible dependents; vision coverage is
provided to retirees only. Life insurance of $2,500 will be provided for the
lifetime of the retired employee who retires on or after age 65 and for
employees who retire under the Rule of 85.
For employees who retired from Flushing Federal prior to April 29, 1986, major
medical insurance continues until age 65. Retirees age 65 and over are provided
with senior care as a supplement to Medicare for the lifetime of the retirees
and their eligible spouses. Life insurance coverage is equal to the amount in
force at retirement, reduced to 50% at age 70.
Effective October 1, 1993, the Bank adopted the provisions of SFAS 106. This
statement requires employers to accrue the cost of postretirement benefits, such
as health care and life insurance, during the years employees render service. In
prior years, these costs were expensed as paid. The Bank recorded the discounted
value of expected future benefits (accumulated postretirement benefit obligation
("APBO")) as a cumulative effect of a change in accounting principle in the
amount of $10.7 million ($6.0 million net of taxes) at October 1, 1993.
The following table sets forth the APBO for the years ended September 30:
1996 1995
- -----------------------------------------------------------------------------
(In thousands)
Retirees $3,727 $3,810
Active eligible 270 19
Other active 1,259 1,710
------ ------
Total $5,256 $5,539
------ ------
------ ------
The following is a reconciliation of the funded status and the accrued benefit
cost at September 30:
1996 1995
- -----------------------------------------------------------------------------
(In thousands)
APBO $ 5,256 $ 5,539
Unrecognized prior service cost 130 1,223
Unrecognized net actuarial gain 5,886 4,345
------- -------
Accrued postretirement benefit cost $11,272 $11,107
------- -------
------- -------
The assumed medical cost trend used in computing the accumulated postretirement
benefit obligation was 8.5% in 1996 and was assumed to decrease gradually to
4.5% in 2009 and to remain at that level thereafter. Increasing the assumed
medical care cost trend rates by 1% point in each year would increase the APBO
and the net periodic postretirement benefit cost as of October 1, 1996 by $0.4
million and $0.1 million, respectively.
The weighted average discount rate used in determining the APBO was 7.75%.
The net periodic postretirement benefit cost included in compensation, payroll
taxes and fringe benefits in the accompanying Consolidated Statements of
Operations for the years ended September 30, is comprised of the following
components:
1996 1995
- --------------------------------------------------------------------------
(In thousands)
Service cost $ 161 $ 127
Interest cost 398 503
Net amortization of prior service cost (85) (85)
Net amortization of unrecognized gain (236) (177)
------ ------
Net periodic postretirement benefit cost $ 238 $ 368
------ ------
------ ------
Page 56
- -------------------------------------------------------------------------------
(20)
PENSION PLANS
DEFINED BENEFIT PENSION PLAN. The Bank sponsors a non-contributory defined
benefit pension plan ("Retirement Plan") covering substantially all employees
twenty-one years of age or older. The Retirement Plan is administered by the
Retirement System Group Inc. ("RSG"). Prior to January 1, 1996, the benefit
multiplier to determine the normal annual retirement benefit was 2% of the
pensioner's final average salary. Final average salary was
the average annual salary attributable to the highest 36 consecutive calendar
months of base compensation that fell within the last 10 years of credited
service. Effective January 1, 1996, the benefit multiplier was reduced to 1.5%
of the pensioner's final average salary and the base compensation factor was
increased to the highest sixty consecutive calendar months.
The following table depicts the components of pension expense for the years
ended September 30, projected by RSG in accordance with Statement of Financial
Accounting Standards No. 87 (SFAS 87), Employers' Accounting for Pensions:
1996 1995 1994
- -------------------------------------------------------------------------------
(In thousands)
Service cost $ 1,199 $ 1,417 $ 1,838
Interest cost 3,240 3,572 3,267
Expected return on assets (7,581) (9,714) (20)
Amortization of unrecognized transition
asset (429) (430) (429)
Amortization of unrecognized past
service liability (794) (165) (152)
Deferred investment gain (loss) 3,329 6,006 (3,904)
-------- -------- --------
Pension (benefit) expense $ (1,036) $ 686 $ 600
-------- -------- --------
-------- -------- --------
The following table sets forth the Retirement Plan's funded status as projected
by RSG and amounts recognized in the Bank's consolidated statements of financial
condition at September 30:
1996 1995
- -------------------------------------------------------------------------------
(In thousands)
Actuarial present value of accumulated plan benefits:
Vested $42,915 $41,771
Non-vested 1,893 2,118
------- -------
Total accumulated plan benefits $44,808 $43,889
------- -------
Fair value of plan net assets $59,276 $54,609
Project benefit obligations 44,911 43,942
------- -------
Fair value of plan net assets in excess of
projected benefit obligation 14,365 10,667
Unrecognized gain (9,094) (4,785)
Unrecognized past service liability (6,155) (7,373)
Unrecognized transition asset (326) (755)
------- -------
Accrued pension expense $(1,210) $(2,246)
------- -------
------- -------
Assumed rate of return on assets 8.00% 8.00%
------- -------
------- -------
Assumed rate of compensation increase 5.50% 5.50%
------- -------
------- -------
Assumed discount rate 7.75% 7.50%
------- -------
------- -------
NON-EMPLOYEE DIRECTOR RETIREMENT BENEFIT PLAN. In fiscal 1994, the Company
adopted a non-qualified retirement benefit plan for directors who are not
employees of the Bank or the Holding Company. Upon retirement from the Board of
Directors at age 65 or older, with a minimum of 15 years of service, the
retirement benefits provide continuation of the annual retainers and Board
meeting fees received by such directors from the Bank and the Holding Company at
the then current rate for a period of ten years following retirement.
Accordingly, the Company recorded a charge to earnings in fiscal 1994
representing the discounted value of accumulated plan benefits in the amount of
$2.4 million. Additional accumulated plan benefits resulted in a charge
to earnings in fiscal 1996 and 1995 of $0.2 million per year. The retirement
benefit plan is an unfunded plan and is estimated based upon an assumed discount
rate of 7.75% and 7.5% for fiscal years ended September 30, 1996 and 1995,
respectively, and an assumed rate of increase in director fees of 6.0% in both
years, each compounded annually.
Page 57
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
- -------------------------------------------------------------------------------
(21)
SAVINGS
INCENTIVE
PLAN
The Bank sponsors a Savings Incentive Plan ("SIP") available to all full-time
employees after completion of one year of employment. Prior to April 18, 1994,
the Bank matched 50% of every dollar contributed by employees to a maximum of 6%
of an employee's salary for the first three years of participation; the Bank
matched 100% thereafter to a maximum of 6% of an employee's salary. Effective
April 18, 1994 through December 31, 1995, the Bank reduced its matching
contribution from 100% to 50% of the first 6% of the participant's base salary
contributed to the plan regardless of length of participation. As of January 1,
1996, the Bank began to phase out this matching contribution to 30% of the first
6% of the participant's base salary contributed to the plan. During 1997, it
will further decrease its matching contribution to 15% of the first 6% of the
participant's base salary. For 1998 and thereafter, the Bank will no longer make
matching contributions. SIP expense was $0.4 million, $0.5 million and $0.8
million for the years ended September 30, 1996, 1995 and 1994, respectively.
- -------------------------------------------------------------------------------
(22)
STOCK
BENEFIT
PLANS
EMPLOYEE STOCK OWNERSHIP PLAN. In connection with the Conversion, the Bank
established an ESOP for eligible employees. The ESOP borrowed $23.8 million from
the Holding Company and used the funds to purchase 2,070,000 shares of Common
Stock issued in the Conversion. The loan to the ESOP will be repaid primarily
from the Bank's contributions to the ESOP over a period not to exceed 15 years.
At September 30, 1996 the loan had an outstanding balance of $19.8 million and
an interest rate of 6.15%.
Shares purchased with the loan proceeds are held in a suspense account by the
trustee of the plan for future allocation among participants as the loan is
repaid. Contributions to the ESOP and shares released from the suspense account
are allocated among participants on the basis of compensation as described in
the plan. Effective April 18, 1994 through December 31, 1996, the number of
shares released to participants was determined based upon the cost of the Common
Stock to the ESOP trustee. As of January 1, 1997, the number of shares released
to participants will be determined based upon the average of the closing price
of the Common Stock for all the trading days in the plan year. Participants will
vest in the shares allocated to their respective accounts over a period not to
exceed 5 years. Any forfeited shares are allocated to the then remaining
participants in the same proportion as contributions. At December 31, 1995,
approximately 243,000 shares have been allocated to participants. At September
30, 1996, the Bank has accrued for the release of approximately 142,000
additional shares which represents the 1996 allocations earned from January 1,
1996 through the end of the fiscal year.
The trustee for the ESOP must vote all allocated shares held in the ESOP trust
in accordance with the instructions of the participants. Unallocated shares held
by the ESOP trust are voted by the trustee in a manner calculated to most
accurately reflect the results of the allocated ESOP shares voted, subject to
the requirements of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
STOCK OPTION PLANS. In connection with the Conversion and the initial public
offering, the Company adopted, and its shareholders later ratified, two stock
option plans: the Long Island Bancorp, Inc. 1994 Stock Incentive Plan ("Stock
Option Plan") and the Long Island Bancorp, Inc. 1994 Non-Employee Directors
Stock Option Program ("Directors Stock Option Plan").
Page 58
THE STOCK OPTION PLAN. Under the Stock Option Plan, 1,811,250 stock options have
been reserved for executive officers, employees and consultants. Options under
this plan are either non-statutory stock options or incentive stock options.
Each option entitles the holder to purchase one share of the Common Stock at an
exercise price equal to the fair market value on the date of grant. Options are
exercisable ratably over five years measured from the date of grant. Each
option, however, will become 100% exercisable upon the occurrence of a change in
control of the Holding Company or the Bank, or upon death, disability or
retirement of the optionee. All options expire no later than ten years following
the date of grant. Option transactions for the years ended September 30 are
shown below:
Weighted
Average
Number of Exercise
Shares Price
- -------------------------------------------------------------------------------
Options outstanding at September 30, 1993 -- $ --
Granted 1,353,780 11.50
Forfeited 32,130 11.50
--------- ------
Options outstanding at September 30, 1994 1,321,650 11.50
Granted 184,279 17.35
Forfeited 17,964 11.50
Exercised 78,540 11.50
--------- ------
Options outstanding at September 30, 1995 1,409,425 12.23
Granted 1,554 27.38
Forfeited 69,899 11.77
Exercised 123,303 11.57
--------- ------
Options outstanding at September 30, 1996 1,217,777 $12.34
--------- ------
--------- ------
Options exercisable at September 30, 1996 432,603 $11.94
--------- ------
--------- ------
DIRECTORS STOCK OPTION PLAN. Under the Directors Stock Option Plan, 776,250
stock options have been reserved for non-employee directors. Options granted
under this plan are non-statutory options. Each option entitles the holder to
purchase one share of the Common Stock at an exercise price equal to the fair
market value on the date of grant. Options are exercisable ratably over five
years measured from the date of grant. Each option, however, will become 100%
exercisable upon the occurrence of a change in control of the Holding Company or
the Bank, or upon death, disability or retirement of the optionee. All options
expire no later than ten years following the date of grant. Option transactions
for the years ended September 30 are shown below:
Weighted
Average
Number of Exercise
Shares Price
- -------------------------------------------------------------------------------
Options outstanding at September 30, 1993 -- $ --
Granted 694,485 11.50
Forfeited -- --
-------- ------
Options outstanding at September 30, 1994 694,485 11.50
Granted 5,698 17.38
Forfeited -- --
Exercised 67,482 11.50
-------- ------
Options outstanding at September 30, 1995 632,701 11.56
Granted 5,698 27.38
Forfeited -- --
Exercised 55,922 11.50
-------- ------
Options outstanding at September 30, 1996 582,477 $11.72
-------- ------
-------- ------
Options exercisable at September 30, 1996 182,847 $11.54
-------- ------
-------- ------
Page 59
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
MANAGEMENT RECOGNITION AND RETENTION PLANS. In connection with the Conversion
and the IPO, the Company adopted, and its shareholders later ratified, two
recognition and retention plans: The Long Island Savings Bank Management
Recognition and Retention Plan for Executive Officers ("Officers MRP Plan") and
The Long Island Savings Bank Management Recognition and Retention Plan for
Non-Employee Directors ("Directors MRP Plan"). The purpose of these plans
(collectively the "MRPs") is to provide officers and non-employee directors of
the Bank with a proprietary interest in the Holding Company in a manner designed
to encourage their retention with the Bank. Upon completion of the IPO, the Bank
contributed $8.9 million to the MRPs to enable the MRPs to purchase an aggregate
of 776,250 shares of Common Stock at $11.50 per share. This contribution
represents deferred compensation which is initially recorded as a reduction to
stockholders' equity and ratably charged to compensation expense over the
vesting period of the stock awards granted.
OFFICERS MRP PLAN. Under the Officers MRP Plan, 543,375 shares were purchased
for the benefit of executive officers and consultants. During the years ended
September 30, 1995 and 1994, 156,931 and 185,522 shares, respectively, were
granted. These awards vest ratably over five years measured from the date of
grant. During the year ended September 30, 1996, 106,545 additional grants were
awarded to employees based upon their length of service with the Bank and their
officer status. The length of service awards vest over one year and the officer
awards vest ratably over two years. At September 30, 1996, 128,167 shares are
available for future grants. Immediate vesting of awards is deemed to occur upon
change in control of the Holding Company or Bank, or upon death, disability or
retirement of the participant. For the years ended September 30, 1996, 1995, and
1994 compensation expense in the accompanying Consolidated Statements of
Operations includes $1.8 million, $1.4 million and $0.2 million, respectively,
of expense relating to the awards under this plan.
DIRECTORS MRP PLAN. Under the Directors MRP Plan, 232,875 shares were purchased
for the benefit of non-employee directors and 214,956 shares were granted at the
date of Conversion. No additional shares were granted during the years ended
September 30, 1996 and 1995. At September 30, 1996, 35,832 shares are available
for future grants. Awards vest ratably over the life of the grant, however,
immediate vesting is deemed to occur upon change in control of the Holding
Company or Bank, or upon death, disability or retirement of the participant. For
the years ended September 30, 1996, 1995 and 1994, compensation expense in the
accompanying Consolidated Statements of Operations includes $0.5 million, $0.7
million and $0.2 million, respectively, of expense relating to the awards under
this plan.
- -------------------------------------------------------------------------------
(23)
COMMITMENTS AND
CONTINGENCIES
LEASES. The Bank is obligated under several non-cancelable operating lease
agreements as of September 30, 1996. The future minimum rental payments required
under these operating leases are as follows:
Year Ending September 30, Amount
- -------------------------------------------------------------------------------
(In thousands)
1997 $ 2,719
1998 2,478
1999 1,951
2000 1,307
2001 932
Thereafter 5,085
-------
$14,472
-------
-------
PENDING LITIGATION. The Company is involved in various legal actions arising in
the ordinary course of business, in addition to a class action lawsuit involving
certain mortgage borrowers, which, in the aggregate, are believed by
management to be immaterial to the financial position of the Company.
LOANS SOLD WITH RECOURSE. The Bank has sold loans with recourse obligations and
has retained servicing on these loans which have outstanding principal balances
of $289.5 million at September 30, 1996. At this time, the maximum exposure
under the Bank's recourse obligations is $130.1 million. In general, recourse
means that the Bank is obligated to remit to the investor the amount of
contractual principal and interest due (less a servicing fee), regardless of
whether these payments are actually received from the borrower. On completion of
foreclosure, the entire balance of the loan must be remitted to the investor,
regardless of whether the sale of the REO yields that amount. Although the Bank
does not believe that its recourse obligations subject it to risk of material
loss in the future, the Bank has established recourse reserves which at
September 30, 1996 aggregated approximately $0.6 million. In addition, various
securities have been pledged as collateral in order to secure performance of the
Bank's obligations under certain mortgage pool purchase contracts.
Page 60
- -------------------------------------------------------------------------------
(24)
SIGNIFICANT
CREDIT RISK
CONCENTRATION
The Bank may be exposed to a concentration of credit risk from a regional
economic standpoint since prior to fiscal 1995 loans were made primarily in the
Metropolitan New York area. In an effort to help minimize this risk, the Bank
began to originate or acquire loans on a nationwide basis in fiscal 1995. At
September 30, 1996, approximately 43.46% of the Bank's real estate loans
(excluding home equity loans) were derived from outside of New York, New Jersey
and Connecticut.
- -------------------------------------------------------------------------------
(25)
PARENT-ONLY
FINANCIAL
INFORMATION
Long Island Bancorp, Inc. operates a wholly-owned subsidiary, The Long Island
Savings Bank, FSB. The earnings of the Bank are recognized by the Holding
Company using the equity method of accounting. Accordingly, undistributed
earnings of the Bank are recorded as increases in the Holding Company's
investment in the Bank. The following are the condensed financial statements of
Long Island Bancorp, Inc. (parent company only) as of September 30. The Holding
Company had no results of operations prior to the Conversion on April 14, 1994.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
September 30,
- --------------------------------------------------------------------------
1996 1995
-------- --------
(In thousands)
Assets
Cash and cash equivalents (including interest-earning
assets of $3,073 and $8,623, respectively) $ 3,871 $ 8,628
Investment in debt securities, net:
Held-to-maturity, net (estimated market value
of $0 and $6,844) -- 6,858
Available-for-sale 52,811 73,890
Investment in mortgage-backed securities, net:
Held-to-maturity, net (estimated market value
of $0 and $6,892) -- 6,873
Available-for-sale 12,997 9,238
Accrued interest receivable, net 232 204
Investment in subsidiary 430,546 403,424
ESOP loan receivable 19,789 21,422
Receivable from subsidiary 140 --
Other assets 2,468 399
-------- --------
Total assets $522,854 $530,936
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Liabilities, net $ 3,760 $ 4,762
Total stockholders' equity 519,094 526,174
-------- --------
Total liabilities and stockholders' equity $522,854 $530,936
-------- --------
-------- --------
CONDENSED STATEMENTS OF OPERATIONS
The condensed statements of operations for the years ended September 30, 1996
and 1995 and the period April 14, 1994 (date of Conversion) to September 30,
1994 are as follows:
1996 1995 1994
- ------------------------------------------------------------------------------
(In thousands)
Interest income--securities $ 4,239 $ 6,377 $ 2,266
Interest income--ESOP loan receivable 1,284 1,380 674
Dividends received from subsidiary 10,500 10,800 --
Expenses (793) (734) (1,066)
------- ------- -------
Income before income taxes and equity
in undistributed earnings of
subsidiary 15,230 17,823 1,874
Provision for income taxes (1,553) (2,738) (889)
------- ------- -------
Income before equity in undistributed
earnings of subsidiary 13,677 15,085 985
Equity in undistributed earnings of
subsidiary 18,598 28,431 16,129
------- ------- -------
Net income $32,275 $43,516 $17,114
------- ------- -------
------- ------- -------
Page 61
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
The condensed statements of cash flows for the years ended September 30, 1996
and 1995 and the period April 14, 1994 (date of Conversion) to September 30,
1994 is as follows:
1996 1995 1994
- -----------------------------------------------------------------------------
(In thousands)
Operating activities:
Net income $ 32,275 $ 43,516 $ 17,114
Adjustments to reconcile net
income to net cash
provided (used) by operating
activities:
Equity in the undistributed
earnings of subsidiary (18,598) (28,431) (16,129)
Increase in other assets (2,069) (71) (328)
Accretion of discounts net of
amortization of premium on
debt securities and
mortgage-backed securities (1,023) (3,155) (1,515)
Increase in accrued interest receivable (28) (81) (123)
(Decrease)/increase in other
liabilities (1,002) 3,668 1,094
-------- --------- --------
Net cash provided by operating
activities 9,555 15,446 113
-------- --------- --------
Investing activities:
Purchases of debt securities (265,351) (704,074) (388,812)
Proceeds from maturities of and
principal payments on debt
securities 279,602 682,897 311,702
Proceeds from sale of debt
securities 15,485 19,989 --
Purchases of mortgage-backed
securities -- -- (19,122)
Principal payments on
mortgage-backed securities 2,956 2,286 720
Advances/investment (to)
from subsidiary (140) 9,760 (173,759)
Principal payment on ESOP
loan receivable 1,633 1,650 712
-------- --------- --------
Net cash provided (used) by
investing activities 34,185 12,508 (268,559)
-------- --------- --------
Financing activities:
Net proceeds from the issuance
of common stock -- -- 273,147
Cost to repurchase common stock (42,043) (17,812) --
Cash dividends paid on common stock (8,524) (7,892) --
Proceeds from the exercise of
stock options 2,070 1,677 --
-------- --------- --------
Net cash (used) provided by
financing activities (48,497) (24,027) 273,147
-------- --------- --------
(Decrease)/increase in cash
and cash equivalents (4,757) 3,927 4,701
Cash and cash equivalents at
beginning of period 8,628 4,701 --
-------- --------- --------
Cash and cash equivalents at
end of period $ 3,871 $ 8,628 $ 4,701
-------- --------- --------
-------- --------- --------
Page 62
- ------------------------------------------------------------------------------
(26)
SELECTED QUARTERLY
FINANCIAL DATA
(UNAUDITED)
The following table is a summary of operations by quarter for the years ended
September 30, 1996 and 1995:
For the Quarter Ended
- ------------------------------------------------------------------------------------------------------------------
9/30/96 6/30/96 3/31/96 12/31/95 9/30/95 6/30/95 3/31/95 12/31/94
------- ------- ------- -------- ------- ------- ------- --------
(In thousands, except per share data)
Interest income $91,420 $87,862 $85,562 $86,727 $86,762 $82,709 $77,781 $73,963
Interest expense 52,694 48,723 47,443 48,316 48,614 44,049 38,886 36,347
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 38,726 39,139 38,119 38,411 38,148 38,660 38,895 37,616
Provision for possible loan losses 1,500 1,600 1,500 1,600 1,500 1,500 1,355 2,115
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for possible loan losses 37,226 37,539 36,619 36,811 36,648 37,160 37,540 35,501
Non-interest income:
Fee income:
Loan fees and service charges 944 837 736 700 748 635 532 579
Loan servicing fees 4,648 3,058 3,100 3,057 3,989 3,303 3,125 2,456
Income from insurance and
securities commissions 368 442 471 327 215 253 152 185
Deposit service fees 1,518 1,463 1,496 1,460 1,446 1,449 1,520 1,502
------- ------- ------- ------- ------- ------- ------- -------
Total fee income 7,478 5,800 5,803 5,544 6,398 5,640 5,329 4,722
Other income 1,050 968 1,039 661 1,623 849 683 748
------- ------- ------- ------- ------- ------- ------- -------
Total fee and other income 8,528 6,768 6,842 6,205 8,021 6,489 6,012 5,470
Net gains (losses) on sale activity:
Net gains on loans and
mortgage-backed securities 2,676 2,195 2,497 625 616 924 993 1,029
Net (losses)gains on investment
in debt and equity securities (88) 169 -- 259 1 (349) (1,050) (526)
------- ------- ------- ------- ------- ------- ------- -------
Total net gains (losses) on
sale activity 2,588 2,364 2,497 884 617 575 (57) 503
Net (loss) gain on investment
in real estate and premises (276) 1,735 (14) 2,673 (95) 1,081 105 376
------- ------- ------- ------- ------- ------- ------- -------
Total non-interest income 10,840 10,867 9,325 9,762 8,543 8,145 6,060 6,349
Non-interest expense:
General and administrative expense:
Compensation, payroll taxes and
fringe benefits 16,812 14,255 13,625 13,277 11,544 13,632 14,175 12,092
Advertising 1,673 1,836 1,216 1,215 2,313 801 590 987
Office occupancy and equipment 5,679 5,223 4,795 4,934 5,250 4,558 4,651 4,088
Federal insurance premiums 2,287 2,292 2,259 2,217 2,206 2,226 2,227 2,302
Other general and administrative
expense 5,327 4,951 4,127 4,207 4,562 4,411 4,756 3,372
------- ------- ------- ------- ------- ------- ------- -------
Total general and
administrative expense 31,778 28,557 26,022 25,850 25,875 25,628 26,399 22,841
SAIF special assessment 18,657 -- -- -- -- -- -- --
Net loss on real estate owned 559 637 389 505 522 533 288 447
------- ------- ------- ------- ------- ------- ------- -------
Total non-interest expense 50,994 29,194 26,411 26,355 26,397 26,161 26,687 23,288
------- ------- ------- ------- ------- ------- ------- -------
(Loss) income before income taxes (2,928) 19,212 19,533 20,218 18,794 19,144 16,913 18,562
Provision for income tax
(benefit) expense (1,026) 7,918 8,271 8,597 6,868 8,134 6,878 8,017
------- ------- ------- ------- ------- ------- ------- -------
Net (loss) income $(1,902) $11,294 $11,262 $11,621 $11,926 $11,010 $10,035 $10,545
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Primary (loss) earnings
per common share $ (0.08) $ 0.47 $ 0.46 $ 0.47 $ 0.47 $ 0.45 $ 0.41 $ 0.43
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Fully diluted (loss) earnings
per common share $ (0.08) $ 0.47 $ 0.46 $ 0.47 $ 0.47 $ 0.45 $ 0.41 $ 0.43
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Page 63
Long Island Bancorp, Inc. and Subsidiary
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Long Island Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of Long Island Bancorp, Inc. and subsidiary ("Company") as of September 30, 1996
and 1995 and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three year
period ended September 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
September 30, 1996 and 1995 and the results of their operations and their cash
flows for each of the years in the three year period ended September 30, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statements of Financial Accounting Standards (SFAS)
Nos. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" and 109, "Accounting for Income Taxes," effective October 1, 1993.
/s/KPMG PEAT MARWICK LLP
Jericho, New York
October 22, 1996
Page 64
Long Island Bancorp, Inc. and Subsidiary
MARKET PRICE OF COMMON STOCK
Long Island Bancorp, Inc. common stock is traded on the NASDAQ national market
under the symbol "LISB". The following table shows the high, low and closing
sales price of the Common Stock during the periods indicated. The Common Stock
began trading April 14, 1994.
1995 High Low Closing
- ------------------------------------------------------------------------------
First Quarter $15.875 $12.125 $14.625
Second Quarter 17.500 14.000 17.500
Third Quarter 20.250 17.125 19.000
Fourth Quarter 28.625 18.625 24.500
1996
- ----
First Quarter $26.750 $22.375 $26.375
Second Quarter 29.625 24.375 28.125
Third Quarter 31.000 26.875 30.563
Fourth Quarter 33.250 27.500 28.875
As of September 30, 1996, the Company had approximately 3,981 shareholders of
record, not including the number of persons or entities holding stock in nominee
or street name through various brokers and banks. There were 24,644,157 shares
of Common Stock shares outstanding at September 30, 1996. Dividends of ten cents
per Common Share have been paid to shareholders as follows:
Declaration Date Record Date Payment Date
- -------------------------------------------------------------------------------
December 21, 1995 January 16, 1996 February 14, 1996
March 26, 1996 April 15, 1996 May 15, 1996
June 25, 1996 July 17, 1996 August 16, 1996
September 24, 1996 October 16, 1996 November 15, 1996
Page 65
Long Island Bancorp, Inc. and Subsidiary
SHAREHOLDER INFORMATION
BOARD OF DIRECTORS CORPORATE OFFICES STOCK LISTING
John J. Conefry, Jr., Long Island Bancorp, Inc. Long Island Bancorp Inc.'s
Chairman 201 Old Country Road common stock is traded on the
Melville, NY 11747 Nasdaq National Market under
the symbol "LISB". Stock
Bruce M. Barnet Quotes are included in
Clarence M. Buxton the Nasdaq National Market
Edwin M. Canuso ANNUAL MEETING stock tables published in
Richard F. Chapdelaine leading dailies and other
Brian J. Conway The Annual Meeting of business publications.
Robert J. Conway Shareholders In The Wall Street Journal
Frederick DeMatteis will be held Tuesday, we are listed as "LI Bncp".
George R. Irvin February 18, 1997 at In The New York Times
Herbert J. McCooey 9:30 AM at the Huntington we are listed as "LI Bcp".
Lawrence W. Peters Hilton located on Route 110 at In Newsday we are listed
Robert S. Swanson, Jr. 598 Broadhollow Road, as "LI Bancrp".
Dr. James B. Tormey Melville, NY. Notice of the
Leo J. Waters meeting, a proxy statement and ANNUAL REPORT ON
Donald D. Wenk proxy form are included with FORM 10-K
Troy J. Baydala this mailing to shareholders
(Director Emeritus) of record as of December A copy of the Company's 1996 annual
23, 1996. report on Form 10-K (without
exhibits), which has been filed
with the Securities and Exchange
EXECUTIVE OFFICERS Commission and the annual report
John J. Conefry, Jr., INDEPENDENT AUDITORS pursuant to Section 112 of the
Chairman, President and FDIC Improvement Act of 1991 will
Chief Executive Officer KPMG Peat Marwick LLP be furnished to shareholders
Jericho, New York without charge, upon written
Bruce M. Barnet, request to:
Executive Vice President SHAREHOLDER AND
Department Investor Relations
and Director of Real Estate GENERAL INQUIRIES Long Island Bancorp, Inc.
and Development 201 Old Country Road
Melville, NY 11747
Joseph P. Bryant, Shareholders, analysts and others
Executive Vice President interested in additional WORLD WIDE WEB SITE:
and Chief Mortgage Officer information may contact
Mary M. Feder, http://www.lisb.com
Mark Fuster, Vice President,
Executive Vice President Investor Relations CUSTOMER SERVICE:
and Chief Financial Officer at (516) 547-2607.
1-800-THE-LISB
W. Douglas Singer, STOCK TRANSFER AGENT
Executive Vice President AND REGISTRAR BANK BY PHONE:
and Treasurer
Inquiries regarding stock 694-9010
Robert T. Volk, transfer, lost certificates, From the 516, 212, 718 and
914 area codes
Executive Vice President and or changes in
Director of Consumer Banking name and/or address should be
directed to the stock transfer Available 8:00 AM - 8:00
PM Monday-Friday and
SENIOR VICE PRESIDENTS OF agent and registrar: 8:00 AM - 3:00 PM Saturday
THE LONG ISLAND SAVINGS
Saturday
BANK, FSB ChaseMellon Shareholder
Services, L.L.C.
Roberta E. Cashwell Customer Service Department
Karen M. Cullen P.O. Box 590
Louis A. Iannaccone Ridgefield Park, NJ 07660
Arthur D. McDermott (800) 465-7038
Anthony J. Morris
John B. Pettit
William A. Purschke
John Talotta
Roger Teurfs
Page 66