Long Island Bancorp, Inc. and Subsidiary
FINANCIAL REVIEW
partnerships
profitability
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.............................. 29
Consolidated Statements of Operations....................................... 30
Consolidated Statements of
Changes in Stockholders' Equity............................................. 31
Consolidated Statements of Cash Flows....................................... 32
Notes to Consolidated Financial Statements.................................. 33
Independent Auditors' Report................................................ 62
Market Price of Common Stock................................................ 63
Branch Locations............................................................ 64
Mortgage Origination Offices................................................ 65
Directors, Officers and Shareholder Information............................. 66
9
Long Island Bancorp, Inc. and Subsidiary
SELECTED FINANCIAL DATA
At September 30,
- -------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(In thousands)
SELECTED FINANCIAL DATA:
Total assets $5,930,784 $5,363,791 $4,901,622 $4,516,137 $3,990,731
Loans receivable held
for investment, net 3,484,094 3,040,837 1,994,741 1,630,820 1,760,455
Allowance for possible loan losses 33,881 33,912 34,358 35,713 33,951
Mortgage-backed securities, net(1) 1,830,694 1,740,202 2,276,750 2,060,793 1,386,115
Investment in debt and equity
securities, net(2) 138,578 180,650 289,247 433,840 351,415
Loans sold with recourse(3) 487,102 289,464 250,423 201,083 223,032
Loans held for sale, net 157,617 57,969 49,372 7,956 148,393
Total non-performing loans(4) 47,074 53,166 55,676 54,036 145,316
Real estate owned, net 6,643 8,155 8,893 7,187 25,812
Total non-performing assets(5) 53,717 61,321 64,569 61,223 171,128
Total loans delinquent 60-89 days 15,500 12,002 11,960 11,925 24,801
Mortgage servicing rights, net(6) 41,789 29,687 11,328 759 957
Excess of cost over fair value
of net assets acquired 5,069 5,265 2,789 -- --
Deposits 3,730,503 3,633,010 3,573,529 3,567,815 3,617,600
Borrowed funds, net 1,501,456 978,023 633,675 325,022 44,500
Stockholders' equity-partially
restricted(7)(8)(9) 546,375 519,094 526,174 493,709 211,630
(1) Includes $1.8 billion, $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, 1997, 1996, 1995, 1994 and 1993,
respectively.
(2) Includes $138.6 million, $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, 1997, 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 and originated.
(7) Includes $12.9 million, $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, 1997,
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."
(8) Prior to April 14, 1994, represented Retained income-partially restricted.
(9) 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.
10
Long Island Bancorp, Inc. and Subsidiary
SELECTED FINANCIAL DATA
(Continued)
For the Years Ended September 30,
- ----------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- -------- --------- --------- ---------
(In thousands, except per share data)
SELECTED OPERATING DATA:
Interest income $ 399,049 $351,571 $ 321,215 $ 272,157 $ 340,629
Interest expense 239,488 197,176 167,896 130,104 177,193
--------- -------- --------- --------- ---------
Net interest income 159,561 154,395 153,319 142,053 163,436
Provision for possible loan losses 6,000 6,200 6,470 11,955 47,288
--------- -------- --------- --------- ---------
Net interest income after provision for
possible loan losses 153,561 148,195 146,849 130,098 116,148
Non-interest income:
Fees and other income 27,520 28,343 25,992 21,688 18,471
Net gains on sale activity 11,399 8,333 1,638 1,920 57,734
Net (loss) gain on investment in
real estate and premises (1,205) 2,028 (323) (4,790) (12,419)
--------- -------- --------- --------- ---------
Total non-interest income 37,714 38,704 27,307 18,818 63,786
--------- -------- --------- --------- ---------
Non-interest expense:
General and administrative expense 108,084 111,553 100,532 99,972 108,750
SAIF special assessment -- 18,657 -- -- --
Litigation expense--goodwill lawsuit 1,101 370 -- 11 182
Amortization of excess of cost over fair
value of net assets acquired 458 284 211 -- 47,222
Write-off of excess of cost over
fair value of net assets acquired(1) -- -- -- -- 70,809
--------- -------- --------- --------- ---------
Total non-interest expense 109,643 130,864 100,743 99,983 226,963
--------- -------- --------- --------- ---------
Income (loss) before income taxes and
cumulative effect of accounting changes 81,632 56,035 73,413 48,933 (47,029)
Provision for income taxes 32,212 23,760 29,897 18,046 11,504
--------- -------- --------- --------- ---------
Income (loss) before cumulative effect of
accounting changes 49,420 32,275 43,516 30,887 (58,533)
Cumulative effect of changes in accounting(1)(2) -- -- -- 8,648 (323,545)
--------- -------- --------- --------- ---------
Net income (loss) $ 49,420 $ 32,275 $ 43,516 $ 39,535 $(382,078)
========= ======== ========= ========= =========
Primary earnings per common share(3) $ 2.09 $ 1.33 $ 1.73 $ 0.70 N/A
========= ======== ========= =========
Fully diluted earnings per common share(3) $ 2.08 $ 1.33 $ 1.71 $ 0.70 N/A
========= ======== ========= =========
(1) 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 then existing excess of cost over fair value of net assets
acquired of $70.8 million after fiscal 1993 amortization of $47.2 million.
(2) 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.
(3) Primary and fully diluted earnings per common share ("EPS") for the years
ended September 30, 1997, 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.
11
Long Island Bancorp, Inc. and Subsidiary
SELECTED FINANCIAL DATA
(Continued)
At or For the Year Ended September 30,
- ----------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
SELECTED FINANCIAL RATIOS
AND OTHER DATA:
Performance Ratios:
Return on average assets(1) 0.86% 0.64% 0.93% 0.91% (7.57)%
Return on average stockholders' equity(1) 9.33 6.16 8.52 11.41 (147.93)
Average stockholders' equity to average assets(2) 9.22 10.43 10.90 7.93 5.11
Stockholders' equity to total assets(3) 9.21 9.68 10.73 10.93 5.30
Tangible stockholders' equity to total assets(4) 8.94 9.57 10.67 10.93 5.30
Interest rate spread during period 2.57 2.89 3.10 3.30 3.46
Net interest margin 2.91 3.24 3.44 3.47 3.47
Operating expenses to average assets(5) 1.88 2.22 2.15 2.29 2.15
Efficiency ratio(6) 57.78 61.05 56.07 61.05 59.78
Average interest-earning assets to
average interest-bearing liabilities 107.73 108.60 109.25 105.36 100.22
Net interest income to operating expenses(7) 1.48x 1.38x 1.52x 1.42x 1.50x
Asset Quality Ratios:
Non-performing loans to total gross loans(8) 1.28% 1.70% 2.67% 3.20% 7.42%(9)
Non-performing assets to total assets(8) 0.91 1.14 1.32 1.36 4.29(9)
Allowance for possible loan losses to
non-performing loans 71.97 63.79 61.71 66.09 23.36
Other Data:
Loan originations and purchases $2,668,368 $2,464,963 $1,118,201 $ 497,900 $ 545,926
Loans serviced for others $4,548,162 $3,682,399 $2,563,866 $1,687,512 $1,669,787
Average deposits per branch $ 106,503 $ 100,917 $ 99,265 $ 96,427 $ 95,200
Number of deposit accounts 385,336 396,986 391,217 381,606 402,238
Facilities:
Full-service customer service facilities 35 36 36 37 38
Regional lending offices 22 25 16 5 5
(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) Amount is determined by dividing total general and administrative expense
by average assets.
(6) 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.
(7) Amount is determined by dividing net interest income before provision for
possible loan losses by total general and administrative expense.
(8) Non-performing loans excludes loans which have been restructured and are
accruing and performing in accordance with the restructured terms.
Restructured accruing loans totalled $9.1 million, $11.8 million, $12.1
million, $12.8 million and $8.9 million at September 30, 1997, 1996, 1995,
1994 and 1993, respectively.
(9) Includes the effect of $25.0 million and $5.0 million reduction in
carrying value in September 1993 relating to a 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.
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.
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.
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.
13
Long Island Bancorp, Inc. and Subsidiary
GLOSSARY OF FINANCIAL TERMS
(Continued)
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.
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).
14
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General Long Island Bancorp, Inc. ("the Holding Company") was
formed in December 1993 to serve as the holding company
for The Long Island Savings Bank, FSB ("the Bank"). The
Holding Company is headquartered in Melville, New York
and its primary business consists of the operations of
the Bank, its wholly-owned subsidiary. The Holding
Company had no operations prior to April 14, 1994, the
date on which the Bank completed its conversion from a
federally chartered mutual savings bank to a federally
chartered stock savings bank. The results of operations
prior to that date reflect only those of the Bank and
its subsidiaries.
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
residential multi-family, commercial and consumer loans
and other marketable securities. In addition, the Bank
and the Holding Company (collectively "the Company")
invest in U.S. government and federal agency securities,
investment grade preferred stock and Federal Funds.
- --------------------------------------------------------------------------------
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 Savings Association Insurance Fund
("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 relating to Syosset's
acquisition of Centereach 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 US 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 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 ("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. Thereafter, the stay applicable to the
Bank's case and other Winstar-related cases was lifted.
On November 1, 1996, the Bank filed a motion for summary
judgment on liability. On January 27, 1997, the
government filed a response opposing the Bank's motion
and cross-moving for summary judgment. No decision has
been rendered on the Bank's motion or the government's
cross-motion.
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
15
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
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.
- --------------------------------------------------------------------------------
Financial Condition At September 30, 1997 total assets were $5.9 billion, an
increase of $567.0 million since September 30, 1996. The
growth in assets is predominately attributable to an
increase of $542.9 million in total net loans receivable
held for investment and for sale. The growth in total
loans receivable reflects the Company's emphasis on
residential lending. Loan volume for the year ended
September 30, 1997 was $2.7 billion, an increase of
$203.4 million since September 30, 1996.
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 productivity of the loan representatives
in the Company's 22 regional lending centers while
leveraging the existing customer base at each of the
Company's consumer banking branches. The Company has
also expanded its telemarketing efforts to solicit loans
while utilizing the Company's technological capabilities
and the Internet as another origination channel.
Total liabilities increased by $539.7 million to $5.4
billion at September 30, 1997 from $4.8 billion at
September 30, 1996 principally reflecting additional
borrowed funds of $523.4 million and an increase in
deposits of $97.5 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 43.26% at September 30, 1997 from
46.08% at September 30, 1996. Management believes that
this decrease is attributable in part to a flattening of
the yield curve and a shift in customer preference
towards short-term certificate accounts. The Company
continues to emphasize quality customer service to
attract and retain core deposits as opposed to
soliciting time deposit accounts with higher yields.
Stockholders' equity totalled $546.4 million at
September 30, 1997, an increase of $27.3 million from
September 30, 1996. This increase primarily reflects
earnings of $49.4 million, an increase in unrealized
gains on securities classified as available-for-sale,
net of tax, of $6.3 million, and $6.6 million related to
the Company's stock benefit plans. These increases were
partially offset by the purchase of treasury stock, net
of shares issued for the exercise of stock options, of
$21.7 million and the declaration of $13.3 million in
dividends.
- --------------------------------------------------------------------------------
Liquidity, Regulatory GENERAL. The Company's primary sources of funds are
Capital and deposits and proceeds from principal and interest
Capital Resources payments on loans, mortgage-backed securities ("MBS's")
and other securities. 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. In addition, the Company
often uses borrowings as an alternative and sometimes a
less costly source of funds. The Company's primary
sources of borrowings are through the sales of
securities under agreements to repurchase
("reverse-repurchase agreements"), a funding note issued
in fiscal 1996 and a medium-term note issued in fiscal
1997.
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 8.05%, 9.34% and
12.35% at September 30, 1997, 1996 and 1995,
respectively. Currently, the Bank maintains a liquidity
ratio substantially above the regulatory requirements.
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, 1997, cash and cash equivalents and
short-term and intermediate-term investments
available-for-sale totalled $65.5 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, 1997 and
1996, the Bank originated or purchased real estate loans
in the amounts of $2.6 billion and $2.4 billion,
respectively, and commercial and other loans in the
amounts of $102.3 million and $89.8 million,
respectively.
16
Included in the 1997 real estate loan purchases is
$227.5 million, representing 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 $300.1 million and $152.3 million for the
years ended September 30, 1997 and 1996, respectively.
Other investing activities include investing in U.S.
government securities, federal agency obligations and
asset-backed securities.
During fiscal 1997, the Company purchased 732,500 shares
of treasury stock at a cost of $24.0 million. The costs
incurred in the purchase of treasury stock were
partially mitigated by the reissuance of 111,267 shares
and the related tax benefits stemming from the exercise
of stock options which totalled $2.6 million. As of
September 30, 1997, the Company owned 2,793,540 shares
of treasury stock which represents 3,230,034 shares
acquired at an aggregate cost of $83.9 million offset by
the cumulative reissuance of 436,494 shares and the
related tax benefits stemming from the exercise of stock
options which totalled $8.8 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, reverse-repurchase
agreements and additional borrowings of $700.0 million
under the Bank's medium-term note program. In addition,
the Bank may access funds, if necessary, through lines
of credit totaling $150.0 million at September 30, 1997
from an unrelated financial institution.
At September 30, 1997, the Bank had outstanding
commitments to originate or purchase loans of $482.6
million which includes commitments to extend credit and
$200.2 million outstanding commitments to purchase
investment securities. 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, 1997
totalled $1.4 billion. Management believes, based on
historical experience, that a significant portion of
such deposits will remain with the Bank.
REGULATORY CAPITAL POSITION. Under capital adequacy
guidelines and the regulatory framework for prompt
corrective action ("PCA"), the Bank must meet specific
capital guidelines that involve qualitative measures of
the Bank's assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting
practices.
Quantitative measures established by regulation to
ensure capital adequacy require the Bank to maintain
minimum amounts and ratios of tangible capital, core
capital and total risk-based capital. At September 30,
1997, the Bank had a tangible capital ratio of 7.72%, a
core capital ratio of 7.72%, and a total-risk based
capital ratio of 16.22%, as compared with the required
regulatory capital ratios of 1.50%, 3.00% and 8.00%,
respectively. At September 30, 1997, the Bank met the
criteria to be considered a "well-capitalized"
institution for certain regulatory purposes.
- --------------------------------------------------------------------------------
Asset Quality Asset quality continues to remain stable as
non-performing loans decreased to $47.1 million at
September 30, 1997 from $53.2 million at September 30,
1996, 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. The ratio of the
allowance for possible loan losses to non-performing
loans increased to 71.97% at September 30, 1997 from
63.79% at September 30, 1996. Additionally, the ratio of
non-performing loans to total gross loans improved by 42
basis points to 1.28% at September 30, 1997 from 1.70%
at September 30, 1996 and the ratio of non-performing
assets to total assets improved by 23 basis points to
0.91% at September 30, 1997 from 1.14% at September 30,
1996. 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 $6.0 million in fiscal 1997, the lowest level in the
past eight 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, 1997, however, approximately $472.8
million, or 14.86% of the Company's one-to-four family
residential loan and co-operative
17
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
apartment loan portfolios consisted of loans originated
during the 1986 to 1989 period, down from $536.1
million, or 19.25%, at September 30, 1996. 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 Interest Rate
Risk Interest rate risk is defined as the sensitivity of the
Company's current and future earnings to changes in the
level of market interest rates. It arises in the
ordinary course of the Company's business, as the
repricing characteristics of its mortgage loans do not
necessarily match those of its deposit and borrowed
funds liabilities. 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, 1997 represented 93.08% of the
Company's total gross loans excluding loans held for
sale. The Company also maintains MBS's and a
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, 1997, the
Company's portfolio of loans serviced for investors was
approximately $4.6 billion. During fiscal 1997 as
interest rates decreased, loan prepayments rose and
fixed loans have been in greater demand. However, this
trend may reverse if interest rates increase.
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 1997,
the Company entered into a five year interest rate swap
agreement, with a notional amount of $300.0 million. 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.
- --------------------------------------------------------------------------------
Interest Rate Interest rate sensitivity may be analyzed by examining
Sensitivity Analysis the extent to which 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.
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, estimated maturities
shorter than five years, and has generally refrained
from investing in fixed rate assets with longer
estimated term maturities. As a result of this strategy,
at September 30, 1997, the Company's total
interest-bearing liabilities maturing or repricing
within one year exceeded its total interest-earning
assets maturing or repricing in the same time by $437.9
million, representing a one year cumulative negative gap
ratio of 7.38% ver-
18
sus a positive gap of $381.9 million and 7.12% at
September 30, 1996. The change in the cumulative one
year gap is attributable to higher borrowings repricing
within one year, as adjusted for the effects of the
interest rate swap, coupled with the net reduction in
real estate loans repricing within one year. The Company
closely monitors its interest rate risk as such risk
relates to its operational strategies. The Company's
strategy continues to be to maintain a positive gap
position; however, there can be no assurance that the
Company will be able to return to a positive gap
position or that its strategies will not continue to
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
negative gap position could be further 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.
Interest rate contracts such as interest rate swaps,
caps, floors and collars may be used to hedge interest
rates on certain assets and liabilities. The notional
amounts of these instruments are not reflected in the
Company's balance sheet, but are included in the
interest rate sensitivity table for purposes of
analyzing interest rate risk.
The Company uses earning simulations, duration, and 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, 1997, 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, 1997.
19
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, 1997
- ---------------------------------------------------------------------------------------------------------------------------
More than More than More than More than More
3 Months 3 Months 6 Months 1 Year 3 Years than
or Less to 6 Months to 1 Year to 3 Years to 5 Years 5 Years Total
--------- --------- ----------- ----------- --------- -------- ----------
(Dollars in thousands)
Interest-earning assets(1):
Real estate loans(2) $ 232,194 $ 278,778 $ 553,583 $ 1,251,832 $ 615,451 $514,026 $3,445,864
Commercial loans(2) 112 105 205 3,390 844 1,021 5,677
Other loans(2) 70,938 6,273 13,818 56,555 19,167 10,225 176,976
Mortgage-backed
securities(3) 333,516 297,692 527,194 473,225 145,606 29,989 1,807,222
Interest-earning cash
equivalents 9,735 -- -- -- -- -- 9,735
Debt and equity securities(3) 2,337 2,086 20,479 8,512 497 105,337 139,248
Stock in FHLB-NY -- -- -- -- -- 48,724 48,724
--------- --------- ----------- ----------- --------- -------- ----------
Total interest-
earning assets 648,832 584,934 1,115,279 1,793,514 781,565 709,322 5,633,446
Interest-bearing liabilities:
Passbook accounts 114,019 90,314 107,399 98,747 94,632 103,507 608,618
Statement savings accounts 118,228 94,165 111,978 102,936 98,647 107,914 633,868
NOW accounts 34,955 4,563 9,126 36,504 34,983 1,521 121,652
Checking & demand
deposit accounts 3,240 1,388 2,777 -- -- -- 7,405
Money market accounts 70,319 13,185 26,370 -- -- -- 109,874
Certificate accounts 405,455 412,458 543,509 596,591 148,051 10,755 2,116,819
Borrowings 235,456 -- 88,000 703,000 475,000 -- 1,501,456
--------- --------- ----------- ----------- --------- -------- ----------
Total interest-
bearing liabilities 981,672 616,073 889,159 1,537,778 851,313 223,697 5,099,692
--------- --------- ----------- ----------- --------- -------- ----------
Interest sensitivity gap
per period $(332,840) $ (31,139) $ 226,120 $ 255,736 $ (69,748) $485,625 $ 533,754
Effect of interest rate swap 300,000 -- -- -- (300,000) --
--------- --------- ----------- ----------- --------- -------- ----------
Adjusted interest sensitivity
gap per period $(632,840) $ (31,139) $ 226,120 $ 255,736 $ 230,252 $485,625
========= ========= =========== =========== ========= ========
Cumulative interest
sensitivity gap $(632,840) $(663,979) $ (437,859) $ (182,123) $ 48,129 $533,754
========= ========= =========== =========== ========= ========
Cumulative interest
sensitivity gap as a
percentage of total assets(4) (10.67)% (11.20)% (7.38)% (3.07)% 0.81% 9.00%
Cumulative net interest-earning
assets as a percentage of net
interest-bearing liabilities 66.09% 77.22% 94.46% 102.93% 100.99% 110.47%
(1) Excludes non-performing loans, net of unearned discounts and premiums,
deferred loan fees, purchase accounting discounts and premiums.
(2) For purposes of gap analysis, the allowance for possible loan losses is
excluded.
(3) MBS's and debt and equity securities are shown excluding the market value
appreciation of $22.8 million, before tax, from SFAS 115.
(4) 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.
20
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.
The Bank's interest rate sensitivity is also monitored
by management through the use of a model which
internally generates estimates of the change in the net
portfolio value ("NPV") over a range of interest rate
change scenarios. NPV is the present value of expected
cash flows from assets, liabilities, and off-balance
sheet contracts. The NPV ratio, under any interest rate
scenario, is defined as the NPV in that scenario divided
by the market value of assets in the same scenario. The
OTS also produces a similar analysis using its own
model, based upon data submitted on the Bank's quarterly
Thrift Financial Reports, the results of which may vary
from the Bank's internal model primarily due to
differences in assumptions utilized between the Bank's
internal model and the OTS model, including estimated
loan prepayment rates, reinvestment rates and deposit
decay rates. For purposes of the NPV table, prepayment
speeds similar to those used in the Gap table were used,
reinvestment rates were those in effect for similar
products currently being offered, and rates on core
deposits were modified to reflect recent trends. The
following table sets forth the Bank's NPV as of
September 30, 1997, as calculated by the Bank.
Net Portfolio Value ("NPV") Portfolio Value of Assets
Rates in --------------------------------------- ---------------------------------
Basis Points $ $ % NPV %
(Rate Shock) Amount Change Change Ratio Change(1)
- -------------------------------------------------------------------------- ---------------------------------
(Dollars in thousands)
+200 398,635 159,360 28.56 7.28 13.74
+100 479,952 78,043 13.99 8.15 12.27
0 557,995 9.26
-100 639,317 (81,322) (14.57) 10.37 9.64
-200 722,791 (164,796) (29.53) 11.45 8.73
(1) Based on the portfolio value of the Bank's assets assuming no change in
interest rates.
As in the case with the Gap Table, certain shortcomings
are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV
require the making of certain assumptions which may or
may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In
this regard, the NPV model presented assumes that the
composition of the Bank's interest sensitive assets and
liabilities existing at the beginning of a period
remains constant over the period being measured and also
assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of
the duration to maturity or repricing of specific assets
and liabilities. Accordingly, although the NPV
measurements and net interest income models provide an
indication of the Bank's interest rate risk exposure at
a particular point in time, such measurements are not
intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Bank's
net interest income and will differ from actual results.
- --------------------------------------------------------------------------------
Analysis of Net Net interest income represents the difference between
Interest Income 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,
1997, 1996 and 1995 and reflects the average yield on
assets and average cost of liabilities for the periods
indicated. Such yields and 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.
21
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
For the Year Ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------- ---------------------------------- -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
(Dollars in thousands)
Interest-earning assets:
Interest-earning
cash equivalents $ 72,131 $ 3,963 5.49% $ 32,109 $ 1,708 5.32% $ 47,153 $ 2,560 5.43%
Debt and equity
securities and
FHLB-NY stock, net(1) 203,100 11,712 5.77 268,344 15,008 5.59 391,556 22,390 5.72
Mortgage-backed
securities, net(1) 1,725,781 117,110 6.79 1,952,217 134,064 6.87 2,176,416 140,173 6.44
Real estate loans, net(2) 3,339,541 249,843 7.48 2,380,633 185,241 7.78 1,724,834 140,268 8.13
Commercial and other
loans, net(2) 149,859 16,421 10.96 125,629 15,550 12.38 117,993 15,824 13.41
---------- -------- ------- ---------- -------- ------- ---------- -------- ------
Total interest-
earning assets 5,490,412 399,049 7.27 4,758,932 351,571 7.39 4,457,952 321,215 7.21
------- ------- ------
Other non-interest-
earning assets 251,584 268,355 228,981
---------- ---------- ----------
Total assets $5,741,996 $399,049 $5,027,287 $351,571 $4,686,933 $321,215
========== ======== ========== ======== ========== ========
Interest-bearing liabilities:
Deposits:
Time deposits $2,011,621 $114,602 5.70% $1,895,594 $108,479 5.72% $1,626,814 $ 87,849 5.40%
Statement savings 647,862 20,956 3.23 639,318 20,755 3.25 684,340 20,946 3.06
Passbooks 643,520 17,557 2.73 711,993 19,264 2.71 820,526 22,336 2.72
Checking and NOW(3) 303,348 3,357 1.11 268,406 3,419 1.27 255,744 3,488 1.36
Money market 121,260 3,335 2.75 142,192 3,913 2.75 182,147 5,022 2.76
---------- -------- ------- ---------- -------- ------- ---------- -------- ------
Total deposits 3,727,611 159,807 4.29 3,657,503 155,830 4.26 3,569,571 139,641 3.91
Borrowed funds 1,368,982 79,681 5.82 724,448 41,346 5.71 510,987 28,255 5.53
---------- -------- ------- ---------- -------- ------- ---------- -------- ------
Total interest-
bearing liabilities 5,096,593 239,488 4.70 4,381,951 197,176 4.50 4,080,558 167,896 4.11
Non-interest-
bearing liabilities 115,842 120,982 95,689
---------- ---------- ----------
Total liabilities 5,212,435 4,502,933 4,176,247
Total stockholders' equity 529,561 524,354 510,686
---------- -------- ------- ---------- -------- ------- ---------- -------- ------
Total liabilities and
stockholders' equity $5,741,996 239,488 $5,027,287 197,176 $4,686,933 167,896
========== ======== ========== ======== ========== ========
Net interest income/
spread(4) $159,561 2.57% $154,395 2.89% $153,319 3.10%
======== ====== ======== ====== ======== ======
Net interest margin as % of
interest-earning assets(5) 2.91% 3.24% 3.44%
====== ====== ======
Ratio of interest-earning
assets to interest-
bearing liabilities 107.73% 108.60% 109.25%
====== ====== ======
(1) MBS's and debt and equity securities are shown including the average
market value appreciation of $17.4 million, $12.7 million and $12.2
million, before tax, from SFAS 115 for the years ended September 30, 1997,
1996 and 1995 , 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.
22
- --------------------------------------------------------------------------------
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, 1997 Year Ended September 30, 1996
Compared to Compared to
Year Ended September 30, 1996 Year Ended September 30, 1995
Increase/(Decrease) Increase/(Decrease)
- -------------------------------------------------------------------------------------------------------
Due to Due to
------------------------------ ------------------------------
Volume Rate Net Volume Rate Net
-------- -------- -------- -------- -------- --------
(In thousands)
Interest-earning assets:
Interest-earning cash equivalents(1) $ 2,197 $ 58 $ 2,255 $ (801) $ (51) $ (852)
Debt and equity securities(2)(3) (3,749) 453 (3,296) (6,901) (481) (7,382)
Mortgage-backed securities(3) (15,383) (1,571) (16,954) (15,022) 8,913 (6,109)
Real estate loans(4) 71,989 (7,387) 64,602 51,262 (6,289) 44,973
Commercial loans and other loans(4) 2,784 (1,913) 871 988 (1,262) (274)
-------- -------- -------- -------- -------- --------
Total 57,838 (10,360) 47,478 29,526 830 30,356
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Deposits 3,003 974 3,977 3,504 12,685 16,189
Borrowed funds 37,498 837 38,335 12,156 935 13,091
-------- -------- -------- -------- -------- --------
Total 40,501 1,811 42,312 15,660 13,620 29,280
-------- -------- -------- -------- -------- --------
Net change in interest income $ 17,337 $(12,171) $ 5,166 $ 13,866 $(12,790) $ 1,076
======== ======== ======== ======== ======== ========
(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 of $17.4 million, $12.7 million and $12.2 million, before
tax, from SFAS 115 for the years ended September 30, 1997, 1996 and 1995,
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 GENERAL. Net income increased by $17.1 million, or
Results for the Fiscal 53.12%, to $49.4 million in fiscal 1997 from $32.3
Years million in fiscal 1996. The increase was primarily
Ended September 30, attributable to a special one-time federal insurance
1997 and 1996 assessment of $18.7 million that occurred in 1996,
greater net interest income of $5.2 million in 1997 and
lower G & A expenses in 1997 of $3.5 million. Partially
offsetting these increases was greater income tax
expense of $8.5 million.
INTEREST INCOME. Interest income increased by $47.5
million, or 13.50%, to $399.0 million in fiscal 1997
from $351.6 million in 1996. The improvement is due to
an increase of $731.5 million in average
interest-earning assets partially offset by a decline of
12 basis points in the average yield of interest-earning
assets.
Average real estate loans increased by $958.9 million,
or 40.28%, to $3.3 billion during the year ended
September 30, 1997 from $2.4 billion during the year
ended September 30, 1996. 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 helped to
mitigate a decrease 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. The yield on average real
estate loans declined to 7.48% in 1997 from 7.78% in
1996 principally reflecting the flattening of the yield
curve. 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 on real
estate loans of $64.6 million, or 34.87%, to $249.8
million in 1997 from $185.2 million in 1996.
23
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Average MBS's declined by $226.4 million, or 11.60%, to
$1.7 billion in 1997 from $2.0 billion in 1996
reflecting the redeployment of funds previously
described and the average yield decreased by 8 basis
points to 6.79% in 1997 from 6.87% in 1996. The net
result of the lower average balances and lower yields
was a reduction in interest income from MBS's of $17.0
million, or 12.65%, to $117.1 million in 1997 from
$134.1 million in 1996.
Average debt and equity securities declined by $65.2
million, or 24.31%, to $203.1 million in 1997 from
$268.3 million in 1996 due to the redeployment of funds
previously described into real estate loans. The yield
on average debt and equity securities increased by 18
basis points to 5.77% in 1997 from 5.59% in 1996. The
net result of the lower average balances and higher
yields contributed to a reduction in interest income
from debt and equity securities of $3.3 million, or
21.96%, to $11.7 million in 1997 from $15.0 million in
1996.
INTEREST EXPENSE. Interest expense increased by $42.3
million, or 21.46%, to $239.5 million in 1997 from
$197.2 million in 1996. The increase is principally the
result of an increase in average borrowed funds of
$644.5 million, or 88.97%, to $1.4 billion in 1997 from
$724.4 million in 1996, coupled with an increase in the
cost of average borrowed funds of 11 basis points to
5.82% in 1997 from 5.71% in 1996. 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 in 1997 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
$38.3 million, or 92.72%, to $79.7 million in 1997 from
$41.3 million in 1996. During 1997 and 1996, interest
expense also includes the amortization of premiums paid
for interest rate cap agreements in the amount of $0.1
million and $0.3 million, respectively. Additionally,
during 1997 interest expense includes the effect of an
interest rate swap agreement which converted a $300.0
million fixed rate borrowing into an adjustable rate
borrowing which reduced the Company's interest cost by
$1.0 million. Further contributing to the increase in
interest expense was an increase in average deposit
liabilities of $70.1 million to $3.7 billion coupled
with an increase in the cost of average deposits of 3
basis points to 4.29% in 1997 from 4.26% in 1996. 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
$4.0 million, or 2.55%, to $159.8 million in 1997 from
$155.8 million in 1996. Interest expense on certificate
accounts increased by $6.1 million, or 5.64%, to $114.6
million in 1997 from $108.5 million in 1996 reflecting
increased average balances of $116.0 million partially
offset by a decrease in the average cost of certificate
accounts of 2 basis points. The effect of this increase
is partially mitigated by a decline in interest expense
on passbook accounts of $1.7 million, or 8.86%, to $17.6
million in 1997.
NET INTEREST INCOME. Net interest income was $159.6
million in 1997, an increase of $5.2 million, or 3.35%,
from $154.4 million in 1996. 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 33 basis points to
2.91% in 1997 from 3.24% in 1996 and the net interest
spread declined by 32 basis points to 2.57% in 1997 from
2.89% in 1996. Contributing to these declining ratios
were the flattening of the yield curve during 1997 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 $0.2 million, or
3.23%, to $6.0 million in 1997 from $6.2 million in
1996. The reduction reflects the stable level of
non-performing loans, which declined by $6.1 million, or
11.46%, to $47.1 million at September 30, 1997 from
$53.2 million at September 30, 1996. Additionally, the
ratio of non-performing loans to total gross loans
declined by 42 basis points to 1.28% at September
30,1997 from 1.70% at September 30, 1996 and net
charge-offs declined to an eight year low of $6.0
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 818
basis points to 71.97% at September 30, 1997 from 63.79%
at September 30, 1996 while the level of the allowance
for possible loan losses remained relatively stable at
$33.9 million.
NON-INTEREST INCOME. Non-interest income decreased by
$1.0 million, or 2.56%, to $37.7 million in 1997 from
$38.7 million in 1996. Contributing to the decline were
reductions in total fees and other income of $0.8
million and the net gain on investment in real estate
and premises of $3.2 million, partially offset by an
increase in net gains on sales activities of $3.1
million. Total fees and other income decreased by $0.8
million, or 2.90%, to $27.5 million in 1997 from $28.3
million in 1996 primarily due to reductions in loan
servicing fees and deposit service fees which were
partially offset by greater loan
24
fees and service charges and income from insurance and
securities commissions. Loan servicing fees declined by
$1.8 million, or 13.21%, to $12.0 million in 1997 from
$13.9 million in 1996 primarily due to the run off of
higher yielding fees from previously securitized home
equity loans and the replacement with lower yielding
fees from one-to-four family loans serviced for others.
Despite this shift, the Company continues its strategy
of increasing its mortgage servicing portfolio which
grew to $4.6 billion at September 30, 1997 from $3.7
billion at September 30, 1996. Loan servicing fee income
is reported net of the amortization of mortgage
servicing rights of $7.4 million and $2.7 million in
1997 and 1996, respectively. Deposit service fees
declined by $0.4 million, or 6.37%, to $5.6 million in
1997 from $5.9 million in 1996. The Company anticipates
deposit service fee growth in the future as it expands
its Lifetime Banking strategic plan. Income from
insurance and securities commissions increased by $0.9
million, or 55.41%, to $2.5 million in 1997 from $1.6
million in 1996 reflecting the Company's expansion of
its delivery channels and products. Net gain on
investment in real estate and premises declined by $3.2
million to a loss of $1.2 million in 1997 from a gain of
$2.0 million in 1996 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. Net gains on sale
activity increased by $3.1 million to $11.4 million in
1997 from $8.3 million in 1996. 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 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.
NON-INTEREST EXPENSE. Non-interest expense decreased by
$21.2 million, or 16.22%, to $109.6 million in 1997 from
$130.9 million in 1996 primarily due to lower federal
insurance costs. Federal insurance costs (including the
one-time special assessment) declined by $23.5 million,
or 84.64%, to $4.2 million in 1997 from $27.7 million in
1996 reflecting Congressional action to resolve
disparities that had existed among the deposit insurance
funds. Advertising costs decreased by $0.9 million, or
15.37%, to $5.0 million in 1997 from $5.9 million in
1996 reflecting the Company's television advertising
campaign that had occurred in 1996. Compensation and
benefit costs decreased by $0.2 million, or 0.42%, to
$57.7 million in 1997 from $58.0 million in 1996. The
decline reflects the outsourcing of computer and check
processing operations and the January 1, 1997
modifications to the Company's stock based benefit
plans, which were partially offset by normal salary
growth, incremental commission costs and the expansion
of the mortgage business in the Mid-Atlantic states.
Office occupancy and equipment costs increased by $1.1
million, or 5.40%, to $21.7 million in 1997 from $20.6
million in 1996 primarily reflecting the Company's
continued technological investments to improve its
information and communication systems coupled with its
expanded mortgage business in the Mid-Atlantic states.
Other general and administrative costs increased by $1.3
million, or 7.62%, to $19.3 million in 1997 from $17.9
million in 1996. The increase principally reflects
greater costs stemming from increased loan volume, the
expansion of the Company's mortgage business in the
Mid-Atlantic states and fees paid to outsource computer
and check processing operations.
LITIGATION EXPENSE--GOODWILL LAWSUIT. Litigation
expenses related to the Bank's breach of contract suit
against the federal government increased by $0.7 million
to $1.1 million in 1997 from $0.4 million in 1996. The
Company expects these costs to increase in fiscal 1998
as the case continues to proceed.
PROVISION FOR INCOME TAXES. The provision for income tax
expense increased by $8.5 million, or 35.57% to $32.2
million in 1997 from $23.8 million in 1996. This is
principally due to a higher level of taxable income in
1997 partially offset by a reduction of 294 basis points
in the effective tax rate to 39.46% in 1997 from 42.40%
in 1996. The decline in the effective tax rate primarily
reflects changes made to the New York State and City tax
bad debt regulations.
Comparison of Operating GENERAL. Net income declined by $11.2 million, or
Results for the Fiscal 25.83%, to $32.3 million in fiscal 1996 from $43.5
Years million in fiscal 1995. The decrease was primarily
Ended September 30, attributable to a special one-time federal insurance
1996 and 1995 assessment of $18.7 million and higher G&A costs of
$11.0 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
25
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
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 was 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 fiscal
1996 and 1995 that 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 43 basis point increase in the average
yield 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 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.
26
Long Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
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. 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. 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. 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 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 to
resolve disparities that had existed among the deposit
insurance funds. 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. 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 its 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
27
Company's television advertising campaign.
Other general and administrative costs increased by $1.1
million, or 6.32%, to $17.9 million in 1996 from $16.9
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 Company's common stock.
- --------------------------------------------------------------------------------
Impact of Inflation The consolidated financial statements have been prepared
in accordance with GAAP, which requires the measurement
of and Changing Prices 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.
Year 2000 The Company has developed preliminary plans to address the possible
exposures related to the impact on its computer systems of the year 2000. Key
financial, information and operational systems are being assessed and plans are
being developed to address system modifications required by December 31, 1999.
The financial impact of making the required systems changes is not expected to
be material to the Company's consolidated financial position, results of
operations or cash flows.
Private Securities In addition to historical information, this Annual Report
includes certain forward looking statements based on current management
Litigation Reform Act expectations. The Company's actual results could differ
materially from those management expectations. Factors that could Safe Harbor
Statement 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 1997 Form 10-K.
- --------------------------------------------------------------------------------
Impact of New For discussion regarding the impact of new accounting
Accounting Standards standards, refer to Note 1 of Notes to Consolidated
Financial Statements.
28
Long Island Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30,
- ---------------------------------------------------------------------------------------------------------
1997 1996
----------- -----------
ASSETS
Cash and cash equivalents (including interest-earning
assets of $9,735 and $37,357, respectively) $ 43,705 $ 76,348
Investment in debt and equity securities, net:
Available-for-sale 138,578 180,650
Mortgage-backed securities, net:
Held-to-maturity (estimated fair value of
$20,188 and $21,120, respectively) 22,223 23,096
Available-for-sale 1,808,471 1,717,106
Stock in Federal Home Loan Bank of New York, at cost 48,724 40,754
Loans held for sale 157,617 57,969
Loans receivable held for investment, net:
Real estate loans, net 3,333,185 2,921,285
Commercial loans, net 6,465 7,810
Other loans, net 178,325 145,654
Loans, net 3,517,975 3,074,749
----------- -----------
Less allowance for possible loan losses (33,881) (33,912)
----------- -----------
Total loans receivable held for investment, net 3,484,094 3,040,837
Mortgage servicing rights, net 41,789 29,687
Office properties and equipment, net 88,466 89,279
Accrued interest receivable, net 35,334 32,962
Investment in real estate and premises, net 9,103 10,680
Deferred taxes 16,547 31,207
Excess of cost over fair value of net assets acquired 5,069 5,265
Prepaid expenses and other assets 31,064 27,951
----------- -----------
Total assets $ 5,930,784 $ 5,363,791
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 3,730,503 $ 3,633,010
Official checks outstanding 26,840 49,860
Borrowed funds, net 1,501,456 978,023
Mortgagors' escrow payments 69,353 64,232
Accrued expenses and other liabilities 56,257 119,572
----------- -----------
Total liabilities 5,384,409 4,844,697
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 issued, 24,022,924 and 24,644,157 outstanding,
respectively) 268 268
Additional paid-in capital 309,372 304,027
Unallocated Employee Stock Ownership Plan (18,079) (19,230)
Unearned Management Recognition & Retention Plan (3,816) (5,551)
Unrealized gain on securities available-for-sale, net of tax 12,947 6,633
Retained income--partially restricted 319,756 285,311
Treasury stock, at cost (2,793,540 and 2,172,307 shares, respectively) (74,073) (52,364)
----------- -----------
Total stockholders' equity 546,375 519,094
----------- -----------
Total liabilities and stockholders' equity $ 5,930,784 $ 5,363,791
=========== ===========
See accompanying notes to consolidated financial statements.
29
Long Island Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the Years Ended September 30,
--------------------------------------------------------------------------------------------------------
1997 1996 1995
--------- -------- ---------
Interest income:
Real estate loans $ 249,843 $185,241 $ 140,268
Commercial loans 604 705 984
Other loans 15,817 14,845 14,840
Mortgage-backed securities 117,110 134,064 140,173
Debt and equity securities 15,675 16,716 24,950
--------- -------- ---------
Total interest income 399,049 351,571 321,215
--------- -------- ---------
Interest expense:
Deposits 159,807 155,830 139,641
Borrowed funds 79,681 41,346 28,255
--------- -------- ---------
Total interest expense 239,488 197,176 167,896
--------- -------- ---------
Net interest income 159,561 154,395 153,319
Provision for possible loan losses 6,000 6,200 6,470
--------- -------- ---------
Net interest income after provision for possible loan losses 153,561 148,195 146,849
Non-interest income:
Fees and other income:
Loan fees and service charges 3,721 3,217 2,494
Loan servicing fees 12,031 13,863 12,873
Income from insurance and securities commissions 2,499 1,608 805
Deposit service fees 5,559 5,937 5,917
--------- -------- ---------
Total fee income 23,810 24,625 22,089
Other income 3,710 3,718 3,903
--------- -------- ---------
Total fees and other income 27,520 28,343 25,992
--------- -------- ---------
Net gains (losses) on sale activity:
Net gains on loans and mortgage-backed securities 11,064 7,993 3,562
Net gains (losses) on investment in debt and equity securities 335 340 (1,924)
Total net gains on sale activity 11,399 8,333 1,638
Net (loss) gain on investment in real estate and premises (1,205) 2,028 (323)
--------- -------- ---------
Total non-interest income 37,714 38,704 27,307
Non-interest expense:
General and administrative expense
Compensation, payroll taxes and fringe benefits 57,728 57,969 51,443
Advertising 5,027 5,940 4,691
Office occupancy and equipment 21,746 20,631 18,547
Federal insurance premiums 4,256 9,055 8,961
Other general and administrative expense 19,327 17,958 16,890
--------- -------- ---------
Total general and administrative expense 108,084 111,553 100,532
SAIF special assessment -- 18,657 --
Litigation expense--goodwill lawsuit 1,101 370 --
Amortization of excess of cost over fair value of net assets acquired 458 284 211
--------- -------- ---------
Total non-interest expense 109,643 130,864 100,743
--------- -------- ---------
Income before income taxes 81,632 56,035 73,413
Provision for income taxes 32,212 23,760 29,897
--------- -------- ---------
Net income $ 49,420 $ 32,275 $ 43,516
========= ======== =========
Primary earnings per common share $ 2.09 $ 1.33 $ 1.73
========= ======== =========
Fully diluted earnings per common share $ 2.08 $ 1.33 $ 1.71
========= ======== =========
See accompanying notes to consolidated financial statements.
30
Long Island Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years ended September
30, 1997, 1996 and 1995 (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, 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
Net income 49,420 49,420
Allocation/amortization of ESOP
and MRP stock and related
tax benefits 3,447 1,151 1,735 6,333
Change in unrealized gains on
securities available-for-sale
(net of tax of $10,124) 6,314 6,314
Dividends (13,378) (13,378)
Repurchase of common stock
(732,500 shares) (24,017) (24,017)
Exercise of stock options
(111,267 shares) and related
tax benefits 1,898 (1,597) 2,308 2,609
---- -------- -------- ------- ------- -------- -------- --------
Balance at
September 30, 1997 $268 $309,372 $(18,079) $(3,816) $12,947 $319,756 $(74,073) $546,375
==== ======== ======== ======= ======= ======== ======== ========
See accompanying notes to consolidated financial statements.
31
Long Island Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Operating activities:
Net income $ 49,420 $ 32,275 $ 43,516
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for possible loan losses 6,000 6,200 6,470
Write-off of real estate owned and investment in real estate 466 490 581
Gains on sale of real estate owned and investment in real estate, net (296) (334) (484)
Depreciation and amortization 16,756 10,988 8,352
Amortization of premiums, net of discount accretion-debt,
equity and mortgage-backed securities (291) 1,909 (972)
Accretion of discounts, net of amortization of premiums-purchase
accounting & goodwill amortization 652 227 (1,550)
Employee Stock Ownership Plan/Management Recognition & Retention Plan expense 5,726 7,331 4,130
Gains on sales of loans and mortgage-backed securities, net (11,064) (7,993) (3,562)
Originations of loans held-for-sale, net of proceeds from sales (105,071) (2,448) (40,054)
(Gains) losses on sales of debt and equity securities, net (335) (340) 1,924
Increase in accrued interest receivable (2,372) (1,210) (4,206)
(Decrease) increase in accrued and other liabilities (64,454) 65,540 10,510
(Decrease) increase in official checks outstanding (23,020) 7,048 17,932
Increase (decrease) in prepaid expenses, deferred taxes and other assets 11,547 (19,874) (4,733)
Net decrease in unearned income (9,919) (7,927) (1,669)
----------- ----------- ---------
Net cash (used) provided by operating activities (126,255) 91,882 36,185
----------- ----------- ---------
Investing activities:
Proceeds from sales of debt and equity securities, available-for-sale 26,144 139,099 48,836
Proceeds from sales of mortgage-backed securities, available-for-sale 567,718 485,195 286,674
Proceeds from maturities of and principal payments on debt and equity securities 175,852 411,319 972,775
Principal payments on mortgage-backed securities 339,549 566,421 360,416
Purchases of debt and equity securities, available-for-sale (156,856) (441,359) (861,877)
Purchases of debt and equity securities, held-to-maturity -- -- (7,128)
Purchases of Federal Home Loan Bank stock (7,970) (5,622) (4,372)
Purchases of mortgage-backed securities, available-for-sale (302,571) (154,185) (341,831)
Purchases of mortgage-backed securities, held-to-maturity -- -- (365,103)
Originations and purchases of loans held-for-investment, net of principal payments (1,137,051) (1,413,321) (521,512)
Proceeds from sale of real estate owned, office properties and equipment 11,022 12,964 10,439
Purchases of office properties and equipment (8,569) (15,023) (12,562)
Purchase of mortgage servicing rights (4,066) (15,159) (10,071)
----------- ----------- ---------
Net cash used by investing activities (496,798) (429,671) (445,316)
----------- ----------- ---------
Financing activities:
Net decrease in demand deposits, NOW accounts and savings accounts (60,535) (58,718) (444,864)
Net increase (decrease) in mortgagors' escrow accounts 5,121 (7,168) 10,211
Net increase in certificates of deposit 158,028 118,199 450,578
Costs to repurchase common stock (24,017) (42,043) (17,812)
Proceeds from the exercise of stock options 1,590 2,070 1,677
Cash dividends paid on common stock (13,210) (9,961) (7,892)
Net decrease in short-term borrowings (242,480) (277,461) (60,022)
Net increase in long-term borrowings 765,913 621,809 368,675
----------- ----------- ---------
Net cash provided by financing activities 590,410 346,727 300,551
----------- ----------- ---------
(Decrease) increase in cash and cash equivalents (32,643) 8,938 (108,580)
Cash and cash equivalents at the beginning of the year 76,348 67,410 175,990
----------- ----------- ---------
Cash and cash equivalents at the end of the year $ 43,705 $ 76,348 $ 67,410
=========== =========== =========
Supplemental disclosures of cash flow information:
Cash paid during the years for:
Interest on deposits and borrowed funds $ 235,617 $ 195,089 $ 164,239
=========== =========== =========
Income taxes $ 31,567 $ 27,465 $ 20,245
=========== =========== =========
Non-cash investing activities:
Additions to real estate owned, net $ 9,599 $ 10,001 $ 10,312
=========== =========== =========
Securitization of loans $ 680,889 $ 358,786 $ 143,679
=========== =========== =========
SFAS 115 Transfer $ -- $ 1,307,472 $ --
=========== =========== =========
See accompanying notes to consolidated financial statements.
32
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
(1) The accounting and reporting policies of Long Island
Basis of Presentation Bancorp, Inc. and subsidiary ("the Company") conform to
and Summary of generally accepted accounting principles ("GAAP"). The
Significant following are the significant accounting and reporting
Accounting Policies policies that the Company follows in preparing its
consolidated financial statements.
BASIS OF PRESENTATION. The consolidated financial
statements include the accounts of Long Island Bancorp,
Inc. ("Holding Company") and its direct wholly-owned
subsidiary The Long Island Savings Bank, FSB ("Bank"),
after eliminating intercompany balances and
transactions. When necessary, certain reclassifications
have been made to prior year amounts to conform to the
current year presentation.
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.
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. Securities
that may be sold in response to or in anticipation of
changes in interest rates and resulting prepayment risk,
or other factors, are classified as available-for-sale
and are carried at fair value. Unrealized gains and
losses on these securities are reported, net of
applicable taxes, as a separate component of
stockholders' equity. Securities that the Company has
the positive intent and ability to hold to maturity are
classified as held-to-maturity and are carried at
amortized cost.
Securities that are held for current resale, if any, are
classified as trading securities and reported at fair
value, with unrealized gains and losses included in
earnings.
Amortization of premiums and accretion of discounts are
reported in interest income, using a method which
results in a level yield over the projected holding
period of the security. Gains and losses on the sale of
securities are recognized on realization.
REAL ESTATE AND OTHER LOANS. Loans held for investment
are generally reported at the principal amount
outstanding, net of the allowance for loan losses,
unearned income and net deferred loan fees, if any.
Loans held for sale are carried at the aggregate lower
of cost or market value. 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.
Loan fees and certain direct loan origination costs are
deferred. Net deferred fees and costs are amortized into
interest income over the life of the loan using the
level-yield method.
Interest income on loans receivable is recognized on an
accrual basis except when a loan has been placed on
nonaccrual status. Loans are placed on nonaccrual status
when principal or interest is past due 90 days or more
or when, in the opinion of management, principal and
interest is not likely to be paid in accordance with the
terms of the loan agreement. Thereafter, interest income
on nonaccrual loans is recorded only when cash is
received.
On October 1, 1995, the Company adopted Statement of
Financial Accounting Standards No. 114 ("SFAS 114"),
"Accounting by Creditors for Impairment of a Loan" and
Statement of Financial Accounting Standards No. 118
("SFAS 118"), "Accounting by Creditors for Impairment of
a Loan--Income Recognition and Disclosures." Under SFAS
114 and SFAS 118 ("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
33
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
(Continued)
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.
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 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.
OFFICE PROPERTIES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS.
Office properties and equipment, including leasehold
improvements are stated at cost less accumulated
depreciation and amortization. Office properties and
equipment are depreciated over their estimated useful
lives using the straight-line method. Estimated lives
vary from 20 to 50 years on buildings and 3 to 25 years
on furniture and fixtures. Leasehold improvements are
amortized using the straight-line method over the term
of the respective lease or the life of the improvement,
whichever is shorter.
INVESTMENT IN REAL ESTATE AND PREMISES. Investment in
real estate and premises consists of real estate owned
("REO") and direct investments in real estate.
REO consists of real estate acquired through foreclosure
or deed in lieu of foreclosure. REO is recorded at the
lower of cost or estimated fair value less estimated
selling costs at the time of foreclosure. Subsequent
declines in estimated fair value, net operating results,
and gains or losses resulting from the disposition of
properties are recognized in the current period's
operations.
Direct investment in real estate consists of real estate
the Company has acquired through acquisitions or
purchases. Direct investment in real estate is recorded
at the lower of cost or net realizable value.
DERIVATIVE FINANCIAL INSTRUMENTS. The Company has
limited involvement in derivative financial instruments,
using interest rate swaps and interest rate cap
agreements to manage interest rate exposure. The
Company's interest-rate swap and cap agreements are
considered derivative financial instruments held for
purposes other than trading and are accounted for under
the accrual method. Interest income (expense) resulting
from the derivatives are accrued and reported as an
adjustment to interest income (expense) of the related
asset or liability.
Realized gains and losses from the settlement or
termination of derivative contracts are deferred on the
statement of financial condition and are amortized to
interest income or interest expense over the life of the
hedged item. Amortization commences when the contract is
settled or terminated. If the related assets or
liabilities are sold or otherwise disposed, then the
deferred gains or losses on the derivative contract are
recognized as an adjustment to the gain or loss on
disposition of the related asset or liability.
Premiums paid for interest rate cap agreements are
amortized as additional interest expense over the term
of the contract. Amounts receivable under interest rate
cap agreements are reflected as a reduction to interest
expense.
INCOME TAXES. The Holding Company and its subsidiary
file consolidated tax returns with the Federal taxing
authorities and a combined return with New York State.
In addition, the Bank files tax returns in those states
and localities in which
34
it maintains operations.
The Company recognizes both the current and deferred tax
consequences of all transactions that have been
recognized in the financial statements. Calculations are
based on the provisions of enacted tax laws and the tax
rates in effect for current and future years. Deferred
tax assets and liabilities are recognized for the future
tax consequences attributable to the differences between
the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases
(temporary differences). The deferred tax liability
(asset) is determined based on enacted tax rates which
will be in effect when the underlying items of income
and expense are expected to be reported to the taxing
authorities. Net deferred tax assets, whose realization
is dependent on taxable earnings of future years, are
recognized when a more-likely-than-not criterion is met.
Annual deferred tax expense (benefit) is equal to the
change in the deferred tax liability (asset) account
from the beginning to the end of the year. A current tax
liability (asset) is recognized for the estimated taxes
payable or refundable for the current year.
STOCK-BASED COMPENSATION PLANS. In accordance with
Statement of Financial Accounting Standards No.123
("SFAS 123"), "Accounting for Stock-Based Compensation,"
the Company continues to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") in
accounting for its stock-based compensation plans and
discloses in the footnotes to the financial statements
pro forma net income and EPS information as if the fair
value based method had been adopted.
Deferred compensation for stock award plans is recorded
as a reduction of stockholders' equity and is calculated
as the cost of the shares purchased by the Bank and
contributed to the plan. Compensation expense is
recognized over the vesting period of actual stock
awards based upon the fair value of the shares at the
award date.
Compensation expense for the Employee Stock Ownership
Plan ("ESOP") is recorded at an amount equal to the
shares allocated by the ESOP multiplied by the average
fair market value of the shares during the period. The
Company recognizes compensation expense ratably over the
year for the ESOP shares to be allocated each December
31st, 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, the difference between the
average fair market value and the cost of the shares
allocated by the ESOP is treated as an adjustment to
additional paid-in capital.
EARNINGS PER SHARE OF COMMON STOCK. Primary earnings per
share ("EPS") is calculated by dividing net income by
the sum of the outstanding weighted average number of
shares of common stock of the Holding Company ("Common
Stock") 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 net income by the
sum of the outstanding weighted average number of shares
of Common Stock 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, 1997, 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 23,595,529, 24,220,480 and 25,088,089
and for the fully diluted EPS calculations were
23,755,249, 24,277,013 and 25,446,558, respectively.
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, and commitments to buy and sell loans and
securities. Such financial instruments are recorded in
the financial statements when they are funded or related
fees are incurred or received.
IMPACT OF NEW ACCOUNTING STANDARDS. Effective January 1,
1997, the Company adopted SFAS 125, "Accounting for
Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," except for those
transactions that are governed by SFAS 127, "Deferral of
the Effective Date of Certain Provisions of FASB
Statement No. 125." SFAS 127 was issued in December 1996
to extend the effective date of the provisions of SFAS
125 as they relate to secured borrowings, collateral and
repurchase agreements, dollar rolls, securities lending
and similar transactions for one year. SFAS 125 provides
accounting and reporting standards for transfers and
servicing of financial assets and extinguish ments of
liabilities occurring after December 31, 1996 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 SFAS 76,
"Extinguishment of Debt," and SFAS 77, "Reporting
35
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
(Continued)
by Transferors for Transfers of Receivable with
Recourse," and SFAS 122, "Accounting for Mortgage
Servicing Rights," and amends SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities," and
SFAS 65, "Accounting for Certain Mortgage Banking
Activities." The Company does not expect SFAS 125, as
amended by SFAS 127, to have a material effect on the
financial statements.
In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings Per Share."
SFAS 128 is effective for periods ending after December
15, 1997 and establishes standards for computing and
presenting EPS for entities with publicly held common
stock and common stock equivalents. The statement
simplifies the computations of EPS that were previously
found in APB Opinion No. 15 "Earnings Per Share" and
replaces primary EPS with basic EPS and fully diluted
EPS with diluted EPS. Basic EPS is computed by dividing
income available to common stockholders by the weighted
average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that
could occur if all common stock equivalents were
converted. This statement requires a reconciliation of
the numerator and denominator of the two EPS
calculations and the restatement of all prior period EPS
data presented after adoption. The Company has not yet
determined the impact of SFAS 128 on its financial
statements.
In February 1997, the FASB issued Statement of Financial
Accounting Standards No. 129 ("SFAS 129"), "Disclosure
of Information about Capital Structure." SFAS 129 is
effective for periods ending after December 15, 1997.
The statement consolidates the disclosure requirements
related to an entity's capital structure that were
previously contained in APB Opinions No. 10, "Omnibus
Opinion-1996," and No. 15 "Earnings Per Share," and
Statement of Financial Accounting Standards No. 47,
"Disclosure of Long Term Obligations." There is no
change in disclosure requirements for entities, such as
the Company, that were previously subject to these
pronouncements.
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income." SFAS 130 is effective for years
beginning after December 15, 1997 and requires
reclassification of financial statements for earlier
periods provided for comparative purposes. The statement
establishes standards for reporting and display of
comprehensive income and its components. This statement
requires that all items that are required to be
recognized as components of comprehensive income be
reported in a financial statement that is displayed with
the same prominence as other financial statements.
Comprehensive income is defined as all changes in equity
during a period except those resulting from investments
by owners and distributions to owners. The Company has
not yet determined the impact of SFAS 130 on its
financial statements.
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131 ("SFAS 131"), "Disclosures
about Segments of an Enterprise and Related
Information." SFAS 131 is effective for financial
statements for periods beginning after December 15,
1997. In the initial year of application, comparative
information for earlier years is to be restated. The
statement requires that a public business enterprise
report financial and descriptive information about its
reportable operating segments. The Company has not yet
determined the impact of SFAS 131 on its financial
statements.
- --------------------------------------------------------------------------------
(2) On April 14, 1994, the Holding Company completed the
Conversion to issuance and sale of 26,816,464 shares of Common Stock,
Stock Form of at a price of $11.50 per share, through an Initial
Ownership 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. The Holding Company recorded
$296.9 million of net proceeds from this offering and
utilized $32.7 million to purchase 2,070,000 and 776,250
shares, respectively, for the ESOP and Management
Recognition and Retention Plans ("MRP").
In accordance with the requirements of the Office of
Thrift Supervision ("OTS") the Bank established a
liquidation account in the amount equal to its capital
as of the date of the latest consolidated statement of
condition appearing in the final IPO prospectus. The
liquidation account is maintained for the benefit of
eligible pre-conversion depositors who continue to
maintain their account at the Bank after the conversion.
The liquidation account is reduced annually to the
extent that eligible account holders reduce their
qualifying deposits. The balance of the liquidation
account at September 30, 1997 was $63.6 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.
36
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.
- --------------------------------------------------------------------------------
(3) During fiscal 1996, the Company acquired First Home
Business Mortgage of Virginia, Inc. ("First Home") and two
Combinations mortgage origination offices located in Pennsylvania and
North Carolina from Fleet Mortgage Company. 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
of approximately $2.8 million which is being amortized
on a straight line basis over 15 years from the date of
acquisition.
During fiscal 1995, 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
the recorded investment in mortgage servicing rights
("MSR's") stemming from these acquisitions approximated
$7.5 million at September 30, 1995. 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, 1995 of approximately $2.8
million, which is being amortized on a straight line
basis over 15 years from the date of acquisition.
During 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. During
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 1983 and 1986 acquisitions were accounted for using
the purchase method of accounting, resulting in goodwill
of $625.4 million and $31.4 million, respectively, which
was amortized in accordance with GAAP and subsequently
written-off as described below.
On September 3, 1993, with the approval of 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 approximate
$1.0 billion reduction in asset size from the sale of
ten branches with approximately $836.3 million in
deposit liabilities and certain assets. 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, and 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.
- --------------------------------------------------------------------------------
(4) The Financial Institutions Reform, Recovery and
Regulatory Matters-- 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
37
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
(Continued)
The Bank 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 the 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 the
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. 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. Thereafter, the stay applicable to the Bank's
case and other Winstar-related cases was lifted.
On November 1, 1996, the Bank filed a motion for summary
judgment on liability. On January 27, 1997, the
government filed a response opposing the Bank's motion
and cross-moving for summary judgment. No decision has
been rendered on the Bank's motion or the government's
cross-motion.
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 OTS. 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
capital guidelines that involve qualitative mea-
38
sures 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. The Bank
meets all capital adequacy requirements to which it is
subject as of September 30, 1997.
As of September 30, 1997 the most recent notification
from the 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 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,
1997 1996
- --------------------------------------------------------------------------------
Percent of Percent of
Amount Assets(1) Amount Assets(1)
-------------------------------------------
(Dollars in thousands)
GAAP capital $472,525 8.00% $430,546 8.13%
===========================================
Tangible capital:
Capital level(2) $453,516 7.72% $416,802 7.84%
Requirement 88,169 1.50 79,710 1.50
-------------------------------------------
Excess $365,347 6.22% $337,092 6.34%
===========================================
Core capital:
Capital level(2) $453,516 7.72% $416,802 7.84%
Requirement 176,338 3.00 159,419 3.00
-------------------------------------------
Excess $277,178 4.72% $257,383 4.84%
===========================================
Risk-based capital:
Capital level(3) $487,397 16.22% $450,714 16.48%
Requirement 240,393 8.00 218,808 8.00
-------------------------------------------
Excess $247,004 8.22% $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 loan valuation allowance.
- --------------------------------------------------------------------------------
(5)
Investment in Debt and At September 30, 1997 and 1996, all of the Company's
Equity Securities investments in debt and equity securities were
classified available-for-sale. The amortized cost and
estimated fair values of debt and equity securities
available-for-sale at September 30, are summarized
below:
1997
- --------------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Fair Value
--------------------------------------------
(In thousands)
Available-for-sale:
Debt securities:
U.S. government and agency obligations $ 14,007 $ 9 $ -- $ 14,016
U.S. government and agency obligations pledged as collateral 82,686 -- 623 82,063
Commercial Paper 700 -- -- 700
Asset-backed securities (automobile loans and leases) 11,797 33 77 11,753
--------------------------------------------
Total debt securities available-for-sale 109,190 42 700 108,532
--------------------------------------------
Equity securities:
Preferred and common stock 30,058 1 13 30,046
--------------------------------------------
39
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
(Continued)
Total equity securities available-for-sale 30,058 1 13 30,046
--------------------------------------------
Total securities available-for-sale $139,248 $43 $713 $138,578
============================================
40
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
============================================
Sales of debt and equity securities from the
available-for-sale portfolio during the years ended
September 30, are summarized as follows:
1997 1996 1995
- -------------------------------------------------------------------------------
(In thousands)
Proceeds from sales $26,144 $139,099 $48,836
Gross gains -- 380 480
Gross losses 37 89 526
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 1997 and 1996, the
Company recovered $372,000 and $49,000, respectively on
its investment in Nationar.
The maturities of the investments in debt securities at
September 30, are as follows:
1997 1996
- --------------------------------------------------------------------------------
Available-for-sale Available-for sale
-----------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
-----------------------------------------------
(In thousands)
Within 1 year $ 19,039 $ 19,048 $ 26,584 $ 26,596
After 1 year through 5 years 11,513 11,512 35,543 35,457
After 5 years through 10 years 74,872 74,250 74,822 72,891
After 10 years 3,766 3,722 5,018 4,912
-----------------------------------------------
$109,190 $108,532 $141,967 $139,856
-----------------------------------------------
41
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
(Continued)
- --------------------------------------------------------------------------------
(6) The amortized cost and estimated fair values of
Mortgage-Backed Mortgage-Backed Securities (" MBS's") at September 30,
Securities are summarized below:
1997
- --------------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Fair Value
--------------------------------------------
(In thousands)
Held-to-maturity:
Real estate mortgage investment conduit $ 16,144 $ -- $2,035 $ 14,109
Other pass-through certificates 6,079 -- -- 6,079
--------------------------------------------
Mortgage-backed securities held-to-maturity $ 22,223 $ -- $2,035 $ 20,188
============================================
Available-for-sale:
GNMA pass-through certificates $ 251,362 $ 2,215 $ -- $ 253,577
FHLMC pass-through certificates 189,565 1,213 331 190,447
FNMA pass-through certificates 297,087 4,397 177 301,307
Other pass-through certificates 49,736 58 286 49,508
GNMA, FHLMC and FNMA securities pledged as collateral 994,012 19,994 374 1,013,632
--------------------------------------------
Gross mortgage-backed securities available-for-sale 1,781,762 27,877 1,168 1,808,471
Unamortized premium, net 3,238 (3,238) -- --
--------------------------------------------
Mortgage-backed securities available-for-sale, net $1,785,000 $24,639 $1,168 $1,808,471
============================================
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
============================================
Sales of MBS's from the available-for-sale portfolio
during the years ended September 30, are summarized as
follows:
1997 1996 1995
- --------------------------------------------------------------------------------
(In thousands)
Proceeds from sales $567,718 $485,195 $286,674
Gross gains 10,352 6,931 2,343
Gross losses 80 1,232 35
42
- --------------------------------------------------------------------------------
(7) Loans held-for-sale as of September 30, are summarized
Loans Held for Sale as follows:
and Loans Receivable
Held for Investment
1997 1996
- --------------------------------------------------------------------------------
(In thousands)
Real estate loans:
One-to-four family $ 157,203 $ 57,812
Co-operative apartment 162 49
--------------------------
157,365 57,861
Student loans 252 108
--------------------------
Total loans held-for-sale $ 157,617 $ 57,969
==========================
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.
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:
1997 1996
- -------------------------------------------------------------------------------
(In thousands)
Real estate loans held-for-investment
One-to-four family $ 3,075,653 $ 2,670,387
Co-operative apartment 105,437 114,560
Home equity 20,171 18,564
Second mortgage 3,986 5,154
Multi-family 45,324 34,883
Commercial real estate 66,266 69,625
Construction and Land 11,370 7,730
--------------------------
3,328,207 2,920,903
Deferred loan costs 6,849 3,159
Purchase accounting discount (1,871) (2,777)
--------------------------
3,333,185 2,921,285
Allowance for possible loan losses (20,510) (20,226)
--------------------------
Real estate loans held-for-investment, net 3,312,675 2,901,059
--------------------------
Commercial loans receivable
Commercial 6,850 8,206
Unearned discount (385) (396)
--------------------------
6,465 7,810
Allowance for possible loan losses (3,894) (3,631)
--------------------------
Commercial loans receivable, net 2,571 4,179
--------------------------
Other loans receivable
Consumer 100,882 69,575
Consumer line of credit 57,350 55,292
Property improvement 7,087 9,028
Student 8,231 6,976
Loans on deposit accounts 2,251 2,475
--------------------------
175,801 143,346
Purchase accounting premium 29 50
Deferred loan costs 2,495 2,258
--------------------------
43
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
(Continued)
178,325 145,654
Allowance for possible loan losses (9,477) (10,055)
--------------------------
Other loans receivable, net 168,848 135,599
--------------------------
Total loans receivable held-for-investment, net $ 3,484,094 $ 3,040,837
==========================
44
SIGNIFICANT CREDIT RISK CONCENTRATIONS. 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 minimize this risk, the Bank began
to originate or acquire loans on a nationwide basis in
fiscal 1995. At September 30, 1997, 48.16% of the Bank's
real estate loans (excluding home equity loans) were
derived from outside of New York, New Jersey and
Connecticut.
NON-ACCRUAL LOANS. The principal amount of
non-performing real estate loans excluding restructured
loans aggregated approximately $33.8 million, $38.8
million and $38.5 million at September 30, 1997, 1996
and 1995, respectively. Interest income that would have
been recorded if the loans had been performing in
accordance with their original terms aggregated $2.1
million, $2.9 million and $2.7 million for the fiscal
years ended September 30, 1997, 1996 and 1995,
respectively. No interest income was recorded for these
loans during the fiscal years ended September 30, 1997,
1996 and 1995. The principal amount of non-performing
commercial loans excluding restructured loans aggregated
$1.2 million, $0.8 million and $0.8 million at September
30, 1997, 1996 and 1995, respectively.
RESTRUCTURED REAL ESTATE LOANS. 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 $10.9 million, $11.4 million and $14.8
million at September 30, 1997, 1996 and 1995,
respectively. Interest income that would have been
recorded if the loans had been performing in accordance
with their original terms aggregated $140,000, $300,000
and $300,000 for the fiscal years ended September 30,
1997, 1996 and 1995, respectively. Interest income
recorded for these loans amounted to $50,000, $100,000
and $100,000 for the fiscal years ended September 30,
1997, 1996 and 1995, 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 $9.1 million, $11.8 million and $12.1
million as of September 30, 1997, 1996 and 1995,
respectively.
The principal amount of restructured commercial loans
aggregated $0.3 million, $0.5 million and $0.9 million
at September 30, 1997, 1996 and 1995, respectively.
Interest income that would have been recorded if the
loans had been performing in accordance with their
original terms aggregated $40,000, $43,000 and $49,000
for fiscal years ended September 30, 1997, 1996 and
1995, respectively. Interest income recorded for these
loans amounted to $26,000, $29,000 and $40,000 for the
fiscal years ended September 30, 1997, 1996 and 1995,
respectively.
IMPAIRED LOANS. As of September 30, 1997 and 1996, $6.4
million and $7.7 million, respectively, in loans were
considered impaired within the scope of SFAS 114, of
which $4.6 million and $5.6 million, respectively, were
on nonaccrual status. The application of SFAS 114
measurement indicated that approximately $0.9 million
and $0.7 million, respectively, of these loans required
valuation allowances, totaling $0.3 million, which are
included within the overall allowance for possible loan
losses at each of September 30, 1997 and 1996. SFAS 114
does not apply to periods prior to fiscal 1996.
Interest income recognized on impaired loans during the
year ended September 30, 1997 and 1996 amounted to
approximately $0.5 million and $0.4 million,
respectively, which is approximately equal to the actual
interest payments received. The average recorded
investment in impaired loans during the year ended
September 30, 1997 and 1996 was $7.3 million and $8.9
million, respectively. The allowance for possible loan
losses contains additional amounts for impaired loans,
as deemed necessary, to maintain reserves at levels
considered adequate by management.
LOAN SERVICING. The Company has entered into various
agreements to service loans for others. At September 30,
1997 and 1996, 53,574 loans and 47,146 loans with a
total balance of $4.5 billion and $3.7 billion,
respectively, were being serviced for others. Of this
total balance, the Company has retained participation in
loans equal to $9.9 million and $10.3 million at
September 30, 1997 and 1996, respectively.
The right to service loans for others is generally
obtained by either the sale of loans with servicing
retained, the open market purchase or creation of MSR's.
During the fiscal years ended September 30, 1997, 1996
and 1995, the Company sold approximately $834.6 million,
$186.8 million and $100.4 million, respectively, of
whole loans and MBS's with servicing retained.
MSR activity for the years ended September 30, is
summarized as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
(In thousands)
45
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
(Continued)
Beginning balance $ 29,769 $ 11,328 $ 759
Purchased MSR's 4,066 15,159 10,071
Capitalized MSR's 15,385 5,982 1,969
Amortization (7,381) (2,700) (1,471)
------------------------------------
41,839 29,769 11,328
Less: Allowance for MSR's 50 82 --
------------------------------------
Ending balance $ 41,789 $ 29,687 $ 11,328
====================================
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, 1997 and 1996 the valuation allowance amounted to
$50,000 and $82,000, respectively. No valuation
allowance was required for 1995.
Loan servicing income for the years ended September 30,
is summarized as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
(In thousands)
Servicing fees $ 19,380 $ 16,645 $ 14,344
Amortization of MSR's (7,381) (2,700) (1,471)
Recovery of allowance (provision) for MSR's 32 (82) --
------------------------------
Total servicing income $ 12,031 $ 13,863 $ 12,873
==============================
- --------------------------------------------------------------------------------
(8) Real
Allowance for Estate Commercial Other
Possible Loan Losses Loans Loans Loans Total
- --------------------------------------------------------------------------------
(In thousands)
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
Add:
Provision for possible loan losses 3,000 -- 3,000 6,000
Recoveries of previous charge-offs 161 263 461 885
--------------------------------------
23,387 3,894 13,516 40,797
Less charge-offs 2,877 -- 4,039 6,916
--------------------------------------
Balance at September 30, 1997 $20,510 $ 3,894 $ 9,477 $33,881
======================================
- --------------------------------------------------------------------------------
(9) The following is a summary of investment in real estate
and premises owned by the Company at September 30:
46
Investment in Real Estate
and Premises
1997 1996
- --------------------------------------------------------------------------------
(In thousands)
REO:
One-to-four family $4,294 $ 5,835
Condo/co-op 1,955 1,990
Commercial 394 330
-------------------
6,643 8,155
Direct Investment:
Land 2,460 2,525
-------------------
Investment in real estate and premises $9,103 $10,680
===================
Investment in real estate and premises operating results
for the years ended September 30, were as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
(In thousands)
Income
Rental income $ 82 $1,994 $ 3,051
Gains on sales 540 1,978(1) 628
Net profits, equity in joint venture 1,209 1,243 1,109
Other income 68 527 18
--------------------------------
Total income 1,899 5,742 4,806
--------------------------------
Expenses
Acquisition expenses 777 799 766
Operating expenses 1,407 1,888 3,134
Losses on sales 244 225 139
Depreciation -- 312 509
Write-downs 676 490 581
--------------------------------
Total expenses 3,104 3,714 5,129
--------------------------------
Net (loss) gain on investment in real
estate and premises $(1,205) $2,028 $ (323)
================================
(1) Includes net profit of $1.4 million from the sale of eight rental office
buildings previously held as direct investments and two other properties
previously utilized for Company operations.
- --------------------------------------------------------------------------------
(10) Certificate accounts and other deposit accounts at
Deposits September 30, are summarized as follows:
1997 1996
- --------------------------------------------------------------------------------
(In thousands)
Account type:
Passbook $608,618 $669,241
Demand and NOW 261,324 227,747
Money market 109,874 130,442
47
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
(Continued)
Statement savings 633,868 646,789
Certificate accounts 2,116,819 1,958,791
------------------------
Total deposits $3,730,503 $3,633,010
========================
Contractual maturity of certificates:
Within twelve months $1,361,427 $1,360,835
Over one to three years 596,603 314,327
Over three years 158,789 283,629
------------------------
$2,116,819 $1,958,791
========================
Certificate accounts in excess of $100,000 $ 197,747 $ 160,654
========================
Included in Demand and NOW accounts at September 30,
1997 and 1996, were approximately $132.3 million and
$98.7 million, respectively, of non-interest-bearing
deposits.
Interest expense on deposits for the years ended
September 30, is summarized as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
(In thousands)
Account type:
Passbook $ 17,557 $ 19,264 $ 22,336
NOW 3,109 3,105 3,181
Money market 3,335 3,913 5,022
Statement savings 20,956 20,755 20,946
Certificate accounts 114,603 108,479 87,849
Escrow accounts 247 314 307
--------------------------------
Total interest expense on deposits $159,807 $155,830 $139,641
================================
- --------------------------------------------------------------------------------
(11) Borrowed funds at September 30, are summarized as
Borrowed Funds follows:
1997 1996
- ------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Balance Rate Balance Rate
------------------------------------------
(Dollars in thousands)
Securities sold under agreements to repurchase $ 1,013,400 5.73% $ 800,000 5.69%
Advance--Federal Home Loan Bank
of New York ("FHLB") 33,120 6.63 -- --
Funding Note 155,540 6.00 178,023 6.11
Medium-term note 300,000 7.00 -- --
------------------------------------------
1,502,060 978,023
Unamortized Discount on Medium-term note (604) --
------------------------------------------
Borrowed Funds, net $ 1,501,456 $ 978,023
==========================================
At September 30, 1997, securities sold under agreements
to repurchase (reverse-repurchase agreements) were
collateralized by MBS's having an estimated fair value
of $1.1 billion. The maximum amount of agreements
outstanding at a month end during fiscal 1997 and 1996
were $1.1 billion and $805.9 million, respectively. The
average amounts of these agreements outstanding during
fiscal 1997 and 1996 were $1.0 billion and $675.1
million, respectively. All outstanding agreements at
September 30, 1997 mature within 54 months from that
date.
48
FHLB advances are secured under assignment arrangements
of eligible collateral, primarily mortgage loans in an
amount equal to 110% of outstanding advances. The Bank
maintains various lines of credit from the FHLB totaling
$150.0 million at September 30, 1997. At September 30,
1997, the Bank had available and unused lines of credit
aggregating $116.9 million. In addition, the Bank has
the ability to obtain additional funds in the form of
FHLB advances in an amount based upon its stock
ownership in the FHLB of New York.
The Funding note was issued during fiscal 1996 in the
amount of $181.4 million which is collateralized by a
pool of adjustable rate residential mortgage 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 $269.9 million, 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, 1997 and 1996, the
outstanding principal balance of the Funding note
collateral pool was $240.9 million and $265.6 million,
respectively.
During fiscal 1997, the Bank issued a five year
medium-term note in the amount of $300.0 million. The
medium-term note is part of a $1.0 billion medium-term
note program the Bank established in 1997 in which the
medium-term notes can be issued bearing interest at
either a fixed or floating rate and have maturities
ranging from nine months to 30 years from their
respective issue dates. At September 30, 1997, the Bank
has available $700.0 million under this borrowing
program.
Interest expense on borrowed funds for the years ended
September 30, is summarized as follows:
1997 1996 1995
- -------------------------------------------------------------------------------------
(In thousands)
Reverse-repurchase agreements $58,706 $37,998 $27,870
Funding note 10,371 2,877 --
Advance--FHLB of NY 5,051 141 55
Medium-term note 5,464 -- --
Amortization of interest rate cap agreements (See Note 12) 89 330 330
-------------------------
Total interest expense on borrowed funds $79,681 $41,346 $28,255
=========================
- --------------------------------------------------------------------------------
(12) The Bank has entered into transactions as of September
Financial Instruments 30, 1997, that involve financial instruments with
with Off-Balance off-balance sheet risks, in the normal course of
Sheet Risk 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, recourse liability on loans
sold and derivative financial instruments. 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.
49
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
(Continued)
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. 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:
1997 1996
- --------------------------------------------------------------------------------
(In thousands)
Commitments to originate or purchase:
Real estate loans $338,106 $311,967
Home equity loans--unused lines of credit 15,160 9,554
Commercial loans--unused lines of credit 2.477 2,576
Consumer loans--unused lines of credit 126,878 115,126
Commitments to sell loans 231,277 75,413
Commitments to purchase investment securities 200,180 --
---------------------
Total commitments $914,078 $514,636
=====================
Real estate loan commitments included approximately
$147.3 million and $104.8 million relating to adjustable
rate loans at September 30, 1997 and 1996, respectively.
In addition, the Bank has entered into adjustable rate
standby letters of credit related to commercial loan
transactions amounting to $3.5 million and $0.3 million
at September 30, 1997 and 1996, respectively.
DERIVATIVES. 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. During fiscal 1997, the Company
entered into a five year interest rate swap agreement,
with a notional amount of $300.0 million. The swap
agreement converted the medium-term note issued in 1997
from a fixed rate obligation of 7.0% into a variable
rate of LIBOR minus 3 basis points. As of September 30,
1997, LIBOR minus 3 basis points was 5.69% and the
interest rate swap had a gross positive market value of
$1.7 million.
During fiscal 1996, the Company was party to $90.0
million notional amount of interest rate cap agreements.
The agreements entitled 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. There were no contracts in
effect at September 30, 1997.
- --------------------------------------------------------------------------------
(13) The Company discloses fair value information about
Fair Value of financial instruments for which it is practicable to
Financial Instruments 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.
The fair value disclosures 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.
FINANCIAL ASSETS
Mortgage-backed and Debt and Equity Securities. Fair
values are determined by published market prices or
securities dealers' estimated prices.
50
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 1997 and 1996 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.
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. Deposit liabilities with no stated maturity
(i.e., demand, savings and certain money market
deposits) are 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 swap
agreements and interest rate cap agreements are based on
securities dealers' estimated market values. The fair
value of interest rate swaps reflects the estimated
amounts the Company would receive or pay to terminate
the contract at the reporting date, thereby taking into
account the current unrealized gains and losses of open
contracts.
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, 1997 and 1996 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, 1997 and 1996, respectively.
Accordingly, the estimated fair value of such
commitments is deemed to be equivalent to their stated
aggregate issuance value as of September 30, 1997 and
1996, respectively. The fair value of commitments to
purchase investment securities is based on securities
dealers' estimated market values. The fair value of
commitments to sell loans and unused lines of credit is
valued at par as of September 30, 1997 and 1996,
respectively.
The estimated fair value of the Company's financial
instruments were as follows:
At September 30,
- ------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
- ------------------------------------------------------------------------------------------------------------
(In thousands)
Financial Assets:
Debt and equity securities:
Available-for-sale $ 138,578 $ 138,578 $ 180,650 $ 180,650
Mortgage-backed securities:
Held-to-maturity 22,223 20,188 23,096 21,120
51
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
(Continued)
Available-for-sale 1,808,471 1,808,471 1,717,106 1,717,106
Loans receivable held-for-investment:
Real estate loans 3,312,675 3,566,012 2,901,059 2,926,757
Other loans 168,848 174,974 135,599 142,307
Commercial loans 2,571 6,315 4,179 8,122
Loans held-for-sale 157,617 158,336 57,969 58,029
Mortgage servicing rights 41,789 45,673 29,687 29,687
Financial liabilities:
Deposits 3,730,503 3,727,170 3,633,010 3,619,110
Borrowings, net 1,501,456 1,509,919 978,023 969,680
Off-balance sheet:
Commitments to originate or purchase loans 338,106 338,106 311,967 311,967
Commitments to sell loans 231,277 231,277 75,413 75,413
Commitments to purchase investment securities 200,180 200,180 -- --
Fund unused lines of credit 144,515 144,515 127,256 127,256
Interest rate swap -- 1,741 -- --
Interest rate cap -- -- 89 --
- --------------------------------------------------------------------------------
(14) Income tax expense for the years ended September 30, is
Income Taxes summarized as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
(In thousands)
Current:
Federal $ 10,348 $ 24,316 $ 23,691
State and local 2,926 9,875 9,273
------------------------------------
13,274 34,191 32,964
------------------------------------
Deferred:
Federal 15,225 (7,700) (2,333)
State and local 3,713 (2,731) (734)
------------------------------------
18,938 (10,431) (3,067)
------------------------------------
Total income tax expense $ 32,212 $ 23,760 $ 29,897
====================================
52
The following schedule illustrates the components of the
net deferred tax asset at September 30:
1997 1996
- --------------------------------------------------------------------------------
(In thousands)
Deferred tax assets:
Financial statement loan loss reserve $14,500 $14,619
BIF-SAIF Assessment -- 8,043
Accrual for post-employment benefits 4,777 4,859
Basis difference in investment in real estate 673 707
Mark-to-market recognition on securities under
Internal Revenue Code Section 475 4,663 7,442
Deferred pension expense 2,876 3,626
Deferred origination fees 408 605
Non-accrual interest 802 615
Other 82 1,677
------------------
Total deferred tax assets 28,781 42,193
------------------
Deferred tax liabilities:
Tax reserve in excess of base year reserve 1,182 437
Basis difference in properties and equipment 3,332 4,527
Deferred origination costs 4,922 1,291
Recognition of taxes payable under Internal Revenue
Code Section 481 for unrealized gains 234 1,840
Basis difference in home equity investment 1,592 1,674
Other 972 1,217
------------------
Total deferred tax liabilities 12,234 10,986
------------------
Net deferred tax asset $16,547 $31,207
==================
The effective tax rates differ from the statutory
Federal income tax rate of 35 percent. The reasons for
the differences as applied to income before income taxes
are as follows:
For the Years Ended September 30,
- ----------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------
% of % of % of
Pre-tax Pre-tax Pre-tax
Amount Earnings Amount Earnings Amount Earnings
-------------------------------------------------------------
(Dollars in thousands)
Statutory rate $ 28,571 35.0% $ 19,612 35.0% $ 25,695 35.0%
State and local income taxes, net of
Federal income tax benefit 4,315 5.3 4,644 8.3 5,550 7.6
Tax adjustment for prior year (458) (0.5) 370 0.7 (814) (1.1)
Reversal of deferred tax valuation
allowance -- -- (2,328) (4.2) (532) (0.7)
Other (216) (0.3) 1,462 2.6 (2) (0.1)
-------------------------------------------------------------
Income tax expense $ 32,212 39.5% $ 23,760 42.4% $ 29,897 40.7%
=============================================================
53
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
(Continued)
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.
Effective January 1, 1996 under the Small Business Job
Protection Act of 1996 ("1996 Act"), the Bank is unable
to make additions to the tax bad debt reserves but is
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. For
calendar 1996, recapture was deferred and if certain
requirements are met for calendar 1997, the recapture
may be deferred again. The base year reserves, which
amounted to approximately $60.1 million at September 30,
1997 and 1996, 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 "thrift" 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; or (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 and New York City tax law has been amended to
prevent the recapture of existing tax bad debt reserves
and to allow for the continued use of a percentage equal
to 32% of the Bank's taxable income ("PTI method") to
determine the bad debt deduction in computing New York
State and New York City tax liability.
- --------------------------------------------------------------------------------
(15) The Bank currently provides health care and life
Postretirement Health insurance benefits for retirees and their eligible
Care and Life dependents. The coverage provided depends upon the date
Insurance Benefits they retired as well as the bank from which they
retired. The Bank accrues the cost of postretirement
benefits during the years employees render service.
The following table sets forth the accumulated
postretirement benefit obligation ("APBO") for the years
ended September 30:
1997 1996
- --------------------------------------------------------------------------------
(In thousands)
Retirees $ 4,226 $ 3,727
Active eligible 389 270
Other active 1,762 1,259
-----------------
Total $ 6,377 $ 5,256
=================
The following is a reconciliation of the accrued benefit
cost at September 30:
1997 1996
- --------------------------------------------------------------------------------
(In thousands)
APBO $ 6,377 $ 5,256
Unrecognized prior service cost 133 130
Unrecognized net actuarial gain 4,769 5,886
-----------------
Accrued postretirement benefit cost $11,279 $11,272
=================
The assumed medical cost trend used in computing the
accumulated postretirement benefit obligation was 8.50%
in 1997 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, 1997 by
$0.5 million and $0.1 million, respectively.
The weighted average discount rate used in determining
the APBO was 7.75% at September 30, 1997 and 1996.
54
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:
1997 1996 1995
- --------------------------------------------------------------------------------
(In thousands)
Service cost $ 174 $ 161 $ 127
Interest cost 388 398 503
Net amortization of prior service cost (85) (85) (85)
Net amortization of unrecognized gain (239) (236) (177)
-------------------------
Net periodic postretirement benefit cost $ 238 $ 238 $ 368
=========================
- --------------------------------------------------------------------------------
(16) DEFINED BENEFIT PENSION PLAN. The Bank sponsors a
Pension Plans non-contributory defined benefit pension plan
("Retirement Plan") covering substantially all employees
twenty-one years of age or older. Prior to January 1,
1996, the benefit multiplier to determine the normal
annual retirement benefit was 2% of the pensioner's
final average salary multiplied by the number of service
years credited. 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 funding of the
Retirement Plan is actuarially determined on an annual
basis.
The following table depicts the components of pension
expense for the years ended September 30:
1997 1996 1995
- --------------------------------------------------------------------------------
(In thousands)
Service cost $ 1,090 $ 1,199 $ 1,417
Interest cost 3,316 3,240 3,572
Actual return on assets (11,443) (7,581) (9,714)
Amortization of unrecognized transition asset (326) (429) (430)
Amortization of unrecognized past service liability (794) (794) (165)
Net amortization and deferral 6,480 3,329 6,006
---------------------------
Pension (benefit) expense $ (1,677) $(1,036) $ 686
===========================
The following table sets forth the Retirement Plan's
funded status and amounts recognized in the Bank's
consolidated statements of financial condition at
September 30:
1997 1996
- ---------------------------------------------------------------------------------------------
(In thousands)
Actuarial present value of accumulated plan benefits:
Vested $ 45,179 $ 42,915
Non-vested 1,191 1,893
--------------------
Total accumulated plan benefits $ 46,370 $ 44,808
====================
Fair value of plan net assets $ 67,626 $ 59,276
Project benefit obligations 47,119 44,911
--------------------
Fair value of plan net assets in excess of projected benefit obligation 20,507 14,365
Unrecognized gain (14,679) (9,094)
Unrecognized past service liability (5,361) (6,155)
Unrecognized transition asset -- (326)
--------------------
Prepaid (accrued) pension expense $ 467 $ (1,210)
====================
Assumed rate of return on assets 8.00% 8.00%
====================
Assumed rate of compensation increase 5.50% 5.50%
====================
Assumed discount rate 7.75% 7.75%
====================
55
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
(Continued)
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 1997, 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% for fiscal years ended September
30, 1997 and 1996, and an assumed rate of increase in
director fees of 6.0% in both years, each compounded
annually.
- --------------------------------------------------------------------------------
(17) The Bank sponsors a Savings Incentive Plan ("SIP")
Savings Incentive Plan 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 calendar 1997, the Bank will continue to
further decrease its matching contribution to 15% of the
first 6% of the participant's base salary. For calendar
1998 and thereafter, the Bank will no longer make
matching contributions. SIP expense was $0.4 million,
$0.4 million and $0.5 million for the years ended
September 30, 1997, 1996 and 1995, respectively.
- --------------------------------------------------------------------------------
(18) EMPLOYEE STOCK OWNERSHIP PLAN. In connection with the
Stock Benefit Plans 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, 1997 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, 1996, approximately 417,000 shares have
been allocated to participants. At September 30, 1997,
the Bank has accrued for the release of approximately
65,000 additional shares which represents the 1997
allocations earned from January 1, 1997 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").
56
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").
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,
unless otherwise authorized, 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, 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
Granted 135,295 28.65
Forfeited 49,800 16.51
Exercised 101,267 14.56
--------------------
Options outstanding at September 30, 1997 1,202,005 15.04
====================
Options exercisable at September 30, 1997 631,965 $13.27
====================
The range of exercise prices on options outstanding for
the years ending September 30, 1997, 1996 and 1995 were
$11.50 to $34.80, $11.50 to $27.38 and $11.50 to $18.75,
respectively. The weighted average remaining contractual
life for options outstanding at September 30, 1997 is
7.01 years.
57
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
(Continued)
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, 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
Granted 5,180 34.80
Forfeited 30,741 11.85
Exercised 10,000 11.50
-------------------
Options outstanding at September 30, 1997 546,916 $11.93
===================
Options exercisable at September 30, 1997 294,760 $11.60
===================
The range of exercise prices on options outstanding for
the years ending September 30, 1997, 1996 and 1995 were
$11.50 to $34.80, $11.50 to $27.38 and $11.50 to $17.90,
respectively. The weighted average remaining contractual
life for options outstanding at September 30, 1997 is
6.56 years.
In accordance with SFAS No. 123, the Company used the
Black-Scholes option-pricing model with the following
weighted-average assumptions to value options granted:
1997 1996
- --------------------------------------------------------------------------------
Dividend yield 1.35% 1.35%
Expected volatility 24.07% 24.07%
Risk-free interest rate 6.04% 6.03%
Expected option lives 6.90 years 8.60 years
58
On a pro forma basis, had compensation expense for the
Company's stock-based compensation plans been determined
based on the fair value at the grant dates for awards
made under those plans, consistent with the method of
SFAS No.123, the Company's net income and earnings per
share for the years ended September 30 would have been
reduced as follows:
1997 1996
- --------------------------------------------------------------------------------
(In thousands, except
per share amounts)
Net Income As reported $49,420 $32,275
Pro forma 49,148 32,258
Primary Earnings per share As reported 2.09 1.33
Pro forma 2.07 1.33
Fully Diluted Earnings per share As reported 2.08 1.33
Pro forma 2.07 1.33
The effects of applying SFAS No. 123 for providing pro
forma disclosures are not indicative of the effects on
reported net income for future years because SFAS No.
123 has not been applied to all outstanding, non-vested
awards (does not apply to awards prior to October 1,
1995).
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, 1997, 1996 and 1995, 21,800, 106,545 and
156,931 shares, respectively, were granted. These awards
vest ratably over five years, unless otherwise
authorized, measured from the date of grant, except for
the 1996 grants that were awarded to employees based
upon their length of service with the Bank and their
officer status. The employee awards vest over one year
and the officer awards vest ratably over two years. At
September 30, 1997, 120,205 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, 1997,
1996, and 1995, compensation expense relating to the
awards under this plan totalled $2.5 million, $1.8
million and $1.4 million, respectively.
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, 1997, 1996
and 1995. At September 30, 1997, 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,
1997, 1996 and 1995, compensation expense relating to
the awards under this plan, totalled $0.4 million, $0.5
million and $0.7 million, respectively.
59
Long Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
(Continued)
- --------------------------------------------------------------------------------
(19) LEASES. The Bank is obligated under several
Commitments and non-cancelable operating lease agreements as of
Contingencies September 30, 1997. The future minimum rental payments
required under these operating leases are as follows:
Year ending September 30, Amount
- --------------------------------------------------------------------------------
(In thousands)
1998 $ 3,261
1999 2,809
2000 2,036
2001 1,526
2002 844
Thereafter 5,551
-------
$16,027
=======
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
$487.1 million at September 30, 1997. At this time, the
maximum exposure under the Bank's recourse obligations
is $134.1 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,
1997 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.
60
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table is a summary of operations by
quarter for the years ended September 30, 1997 and 1996:
For the Quarter Ended
- --------------------------------------------------------------------------------------------------------------------------
9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96 3/31/96 12/31/95
--------- -------- -------- -------- -------- ------- -------- -------
(In thousands, except per share data)
Interest income $ 103,396 $100,416 $ 99,267 $ 95,970 $ 91,420 $87,862 $ 85,562 $86,727
Interest expense 64,270 60,367 59,137 55,714 52,694 48,723 47,443 48,316
--------- -------- -------- -------- -------- ------- -------- -------
Net interest income 39,126 40,049 40,130 40,256 38,726 39,139 38,119 38,411
Provision for possible loan losses 1,500 1,500 1,500 1,500 1,500 1,600 1,500 1,600
--------- -------- -------- -------- -------- ------- -------- -------
Net interest income after provision
for possible loan losses 37,626 38,549 38,630 38,756 37,226 37,539 36,619 36,811
Non-interest income:
Fee income:
Loan fees and service charges 1,061 764 890 1,006 944 837 736 700
Loan servicing fees 3,124 2,417 3,108 3,382 4,648 3,058 3,100 3,057
Income from insurance and
securities commissions 747 655 590 507 368 442 471 327
Deposit service fees 1,343 1,275 1,413 1,528 1,518 1,463 1,496 1,460
--------- -------- -------- -------- -------- ------- -------- -------
Total fee income 6,275 5,111 6,001 6,423 7,478 5,800 5,803 5,544
Other income 1,153 699 997 861 1,050 968 1,039 661
--------- -------- -------- -------- -------- ------- -------- -------
Total fee and other income 7,428 5,810 6,998 7,284 8,528 6,768 6,842 6,205
Net gains (losses) on sale activity:
Net gains on loans and
mortgage-backed securities 3,739 3,087 2,263 1,975 2,676 2,195 2,497 625
Net gains (losses) on
investment in debt
and equity securities -- 236 -- 99 (88) 169 -- 259
--------- -------- -------- -------- -------- ------- -------- -------
Total net gains (losses)
on sale activity 3,739 3,323 2,263 2,074 2,588 2,364 2,497 884
Net (loss) gain on
investment in real
estate and premises (913) 765 (542) (515) (835) 1,098 (403) 2,168
--------- -------- -------- -------- -------- ------- -------- -------
Total non-interest income 10,254 9,898 8,719 8,843 10,281 10,230 8,936 9,257
Non-interest expense:
General and administrative expense:
Compensation, payroll taxes
and fringe benefits 13,741 15,000 14,859 14,128 16,812 14,255 13,625 13,277
Advertising 1,465 1,218 1,089 1,255 1,673 1,836 1,216 1,215
Office occupancy
and equipment 5,021 5,761 5,567 5,397 5,679 5,223 4,795 4,934
Federal insurance premiums 783 792 778 1,903 2,287 2,292 2,259 2,217
Other general and
administrative expense 5,733 4,817 4,512 4,265 5,083 4,719 4,060 4,096
--------- -------- -------- -------- -------- ------- -------- -------
Total general and
administrative expense 26,743 27,588 26,805 26,948 31,534 28,325 25,955 25,739
Litigation expense--
goodwill lawsuit 139 444 159 359 150 169 4 47
SAIF special assessment -- -- -- -- 18,657 -- -- --
Amortization of excess of cost
over fair value of assets acquired 114 125 109 110 94 63 63 64
--------- -------- -------- -------- -------- ------- -------- -------
Total non-interest expense 26,996 28,157 27,073 27,417 50,435 28,557 26,022 25,850
--------- -------- -------- -------- -------- ------- -------- -------
Income (loss) before income taxes 20,884 20,290 20,276 20,182 (2,928) 19,212 19,533 20,218
Provision for income tax
expense (benefit) 7,941 7,864 8,159 8,248 (1,026) 7,918 8,271 8,597
--------- -------- -------- -------- -------- ------- -------- -------
Net income (loss) $ 12,943 $ 12,426 $ 12,117 $ 11,934 $ (1,902) $11,294 $ 11,262 $11,621
========= ======== ======== ======== ======== ======= ======== =======
Primary earnings (loss)
per common share $ 0.55 $ 0.53 $ 0.51 $ 0.50 $ (0.08) $ 0.47 $ 0.46 $ 0.47
========= ======== ======== ======== ======== ======= ======== =======
Fully diluted earnings (loss)
per common share $ 0.55 $ 0.53 $ 0.51 $ 0.50 $ (0.08) $ 0.47 $ 0.46 $ 0.47
==================================================================================
61
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, 1997 and 1996
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, 1997. 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, 1997 and 1996 and the results of their
operations and their cash flows for each of the years in
the three year period ended September 30, 1997 in
conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Jericho, New York
October 21, 1997
62
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.
1996 High Low Closing
--------------------------------------------------------
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
1997
----
First Quarter $35.125 $33.750 $35.000
Second Quarter 39.750 32.875 33.062
Third Quarter 36.875 32.875 36.312
Fourth Quarter 48.750 34.875 47.000
As of September 30, 1997, the Company had approximately
3,180 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 24,022,924 shares of Common Stock shares
outstanding at September 30, 1997. Dividends of fifteen
cents per Common Share have been paid to shareholders as
follows:
Declaration Date Record Date Payment Date
--------------------------------------------------------
December 19, 1996 January 15, 1997 February 14, 1997
March 25, 1997 April 14, 1997 May 14, 1997
June 24, 1997 July 16, 1997 August 14, 1997
September 23, 1997 October 15, 1997 November 14, 1997
63
Long Island Bancorp, Inc. and Subsidiary
BRANCH LOCATIONS
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
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
1149 Wantagh 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.-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
64
Long Island Bancorp, Inc. and Subsidiary
MORTGAGE ORIGINATION OFFICES
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
750 Broad Street
Shrewsbury, NJ 07702
111 Gibraltar Road
Horsham, PA 19044
10005 Old Columbia Road
Ste. L260
Columbia, MD 21046
6 Montgomery Village Ave., Ste. 220
Gaithersburg, MD 20879
658 Kenilworth Drive, Ste. 205
Townson, MD 21204
5301 Buckeystown Pike, Ste. 200
Frederick, MD 21704
7825 Tuckerman Lane, Ste. 210
Potomac, MD 20854
8321 Old Courthouse Road
Ste. 110
Vienna, VA 22182
220 Middle Street
Franklin, VA 23851
206 Temple Ave., Ste. C
Colonial Heights, VA 23834
5041 Corporate Woods Drive
Ste. 100
Virginia Beach, VA 23462
7231 Forest Ave., Ste. 303
Richmond, VA 23226
1001 Boulders Parkway, Ste. 110
Richmond, VA 23225
6845 Fairview Road, Ste. 100
Charlotte, NC 28210
4325 Lake Boone Trail, Ste. 102
Raleigh, NC 27607
222 West Coleman Blvd., Ste. 104
Mount Pleasant, SC 29464
410 Commerce Drive
Peachtree City, GA 30269
2000 RiverEdge Pky., Ste. 880
Atlanta, GA 30328
255 Corporate Center Drive, Ste. C
Stockbridge, GA 30281
65
Long Island Bancorp, Inc. and Subsidiary
DIRECTORS, OFFICERS AND SHAREHOLDER INFORMATION
BOARD OF DIRECTORS
John J. Conefry, Jr.,
Chairman
Bruce M. Barnet
Clarence M. Buxton
Edwin M. Canuso
Richard F. Chapdelaine
Brian J. Conway
Robert J. Conway
Frederick DeMatteis
George R. Irvin
Herbert J. McCooey
Lawrence W. Peters
Robert S. Swanson, Jr.
Dr. James B. Tormey
Leo J. Waters
Donald D. Wenk
Troy J. Baydala
(Director Emeritus)
EXECUTIVE OFFICERS
John J. Conefry, Jr.,
Chairman of the Board and
Chief Executive Officer
Lawrence W. Peters,
President and
Chief Operating Officer
Bruce M. Barnet,
Executive Vice President
and Director of Real Estate
and Development
Karen M. Cullen,
Executive Vice President
and General Counsel
Mark Fuster,
Executive Vice President
and Chief Financial Officer
W. Douglas Singer,
Executive Vice President
and Treasurer
Robert T. Volk,
Executive Vice President and Director of Consumer
Banking
SENIOR VICE PRESIDENTS OF THE LONG ISLAND SAVINGS
BANK, FSB
Roberta E. Cashwell
Louis A. Iannaccone
Dena L. Kwaschyn
James A. Lacchini
Arthur D. McDermott
Anthony J. Morris
John B. Pettit
William A. Purschke
John Talotta
Roger Teurfs
CORPORATE OFFICE
Long Island Bancorp, Inc.
201 Old Country Road
Melville, NY 11747
ANNUAL MEETING
The Annual Meeting of shareholders will be held Tuesday,
February 17, 1998 at 9:30 AM at the Huntington Hilton
located on Route 110 at 598 Broadhollow Road, Melville,
NY. Notice of the meeting, a proxy statement and proxy
form are included with this mailing to shareholders of
record as of December 22, 1997.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Jericho, New York
SHAREHOLDER INQUIRIES
Shareholders, analysts and others interested in
additional information may contact: Mary M. Feder Vice
President, Investor Relations (516) 547-2607.
STOCK TRANSFER AGENT
AND REGISTRAR
Inquiries regarding stock transfer, lost certificates,
or changes in name and/or address should be directed to
the stock transfer agent and registrar:
ChaseMellon Shareholder
Services, L.L.C.
Customer Service Department
P.O. Box 590
Ridgefield Park, NJ 07660
(800) 465-7038
STOCK LISTING
Long Island Bancorp Inc.'s common stock is traded on the
Nasdaq National Market under the symbol "LISB". Stock
quotes are included in the Nasdaq National Market stock
tables published in leading dailies and other business
publications. In The Wall Street Journal we are listed
as "LI Bncp". In The New York Times we are listed as "LI
Bcp". In Newsday we are listed as "LI Bancrp".
ANNUAL REPORT ON
FORM 10-K
A copy of the Company's 1997 annual report on Form 10-K
(without exhibits), which has been filed with the
Securities and Exchange Commission and the annual report
pursuant to Section 112 of the FDIC Improvement Act of
1991 will be furnished to shareholders without charge,
upon written request to:
Investor Relations Department
Long Island Bancorp, Inc.
201 Old Country Road
Melville, NY 11747
WORLD WIDE WEB SITES:
www.lisb.com
www.entrustmortgage.com
SALES AND
CUSTOMER SERVICE:
1-800-THE-LISB
BANK BY PHONE:
694-9010
From the 516, 212, 718 and
914 area codes
Available 8:00 AM - 8:00 PM
Monday-Friday and
8:00 AM - 3:00 PM Saturday
66