-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SIIvKwQeBsqHO7bXrAg/4uzK1VlB62h0QqumX9FrMmPPdBbyT8d+126eTakH/z8/ p0LVUA02hhsnFx5fSBZZRg== 0000950123-99-002461.txt : 19990412 0000950123-99-002461.hdr.sgml : 19990412 ACCESSION NUMBER: 0000950123-99-002461 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 30 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASTORIA FINANCIAL CORP CENTRAL INDEX KEY: 0000910322 STANDARD INDUSTRIAL CLASSIFICATION: 6035 IRS NUMBER: 113170868 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-22228 FILM NUMBER: 99571429 BUSINESS ADDRESS: STREET 1: ONE ASTORIA FEDERAL PLAZA CITY: LAKE SUCCESS STATE: NY ZIP: 11042-1085 BUSINESS PHONE: 5163273000 MAIL ADDRESS: STREET 1: ONE ASTORIA FEDERAL PLAZA CITY: LAKE SUCCESS STATE: NY ZIP: 11042-1085 10-K405 1 ASTORIA FINANCIAL CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-22228 ASTORIA FINANCIAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 11-3170868 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) ONE ASTORIA FEDERAL PLAZA, LAKE SUCCESS, NEW YORK 11042 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (516) 327-3000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT): NONE (SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT): COMMON STOCK $.01 PAR VALUE (TITLE OF CLASS) PREFERRED STOCK, PURCHASE RIGHTS (TITLE OF CLASS) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) The aggregate market value of voting stock held by non-affiliates of the registrant as of March 17, 1999: Common stock par value $.01 per share, $2,606,409,394. This figure is based on the closing price by the Nasdaq National Market for a share of the registrant's common stock on March 17, 1999, which was $50.06 as reported in the Wall Street Journal on March 18, 1999. The number of shares of the registrant's Common Stock outstanding as of March 17, 1999 was 55,189,197 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement dated April 9, 1999 in connection with the Annual Meeting of Stockholders to be held on May 19, 1999 and any adjournment thereof and which is expected to be filed with the Securities and Exchange Commission on or about April 9, 1999, are incorporated by reference into Part III. 2 ASTORIA FINANCIAL CORPORATION 1998 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PART I PAGE - - ------ ---- ITEM 1. BUSINESS DESCRIPTION OF BUSINESS............................................................ 1 SUBSIDIARY ACTIVITIES.............................................................. 9 MARKET AREA AND COMPETITION........................................................ 10 REGULATION AND SUPERVISION......................................................... 11 STATISTICAL DATA: SECURITIES PORTFOLIO............................................................... 20 LOAN PORTFOLIO..................................................................... 22 DELINQUENT LOANS AND CLASSIFIED ASSETS............................................. 25 DEPOSITS........................................................................... 26 BORROWINGS......................................................................... 28 ITEM 2. PROPERTIES.......................................................................... 28 ITEM 3. LEGAL PROCEEDINGS................................................................... 29 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................................ 33 PART II - - ------- ITEM 5. MARKET FOR ASTORIA FINANCIAL CORPORATION'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.............................................. 33 ITEM 6. SELECTED FINANCIAL DATA............................................................. 35 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................ 37 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............................................................. 66 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................... 66 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................................................ 66 PART III - - -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ASTORIA FINANCIAL CORPORATION.............................................................. 67 ITEM 11. EXECUTIVE COMPENSATION.............................................................. 67 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................................................... 67 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................... 67 PART IV - - ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K........................................................................... 67 SIGNATURES ................................................................................... 69
3 PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT This Annual Report on Form 10-K contains certain forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated" and "potential." Examples of forward- looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of Astoria Financial Corporation (the "Company") that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company's operations, pricing, products and services. PART I ITEM 1. BUSINESS GENERAL The Company is a Delaware corporation organized on June 14, 1993, and is a unitary savings and loan association holding company for Astoria Federal Savings and Loan Association (the "Association"). At December 31, 1998, the Company had assets of $20.59 billion, deposits of $9.67 billion, and stockholders' equity of $1.46 billion. The primary business of the Company is the operation of its wholly owned subsidiary, the Association. In addition to directing, planning and coordinating the business activities of the Association, the Company invests primarily in U.S. Government and federal agency securities, mortgage-backed securities and other securities. The Company has acquired, and may continue to acquire or organize either directly or indirectly through the Association other operating subsidiaries, including other financial institutions. The Association's principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, principal repayments and borrowings, primarily in one-to-four family residential mortgage loans and mortgage-backed securities and, to a lesser extent, multi-family residential mortgage loans, commercial real estate loans and consumer loans. In addition, the Association invests in U.S. Government and federal agency securities and in other investments permitted by federal laws and regulations. The Association's revenues are derived principally from interest on its mortgage loan and mortgage-backed securities portfolios and interest and dividends on its other securities portfolio. The Association's cost of funds consists of interest expense on deposits and borrowings. MERGERS AND ACQUISITIONS The Company continues to consider mergers and acquisitions of other financial institutions as an integral part of its strategic objective for long-term growth. Since 1995, the Company has completed the acquisitions of Fidelity New York, FSB ("Fidelity"), The Greater New York Savings Bank, FSB ("The Greater") and Long Island Bancorp, Inc. ("LIB"). Following the close of business of September 30, 1998, LIB and its wholly-owned savings bank subsidiary, The Long Island Savings Bank, FSB ("LISB") merged with and into the Company and the Association, respectively, (the "LIB Acquisition"), which were the surviving entities. LIB had $6.58 billion in total assets, $3.58 billion in deposits and $581.0 million of stockholders' equity at September 30, 1998. The LIB Acquisition was accounted for as a pooling-of-interests and accordingly, the Company's financial information for all prior periods has been restated to include LIB's results of operations. See Item 7, "Management's Discussion and Analysis of Financial 1 4 Condition and Results of Operations ("MD&A") and Note 2 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data," for further discussion of the LIB Acquisition. These acquisitions have enabled the Company to expand its operations by increasing deposits and loan originations and providing customers with a broader array of financial products. Acquisition candidates have been selected based on, among other factors, the extent to which the candidates could enhance the Company's retail presence in new or existing markets. The acquisition of The Greater, following the close of business on September 30, 1997, increased the Company's banking offices and provided the Company a substantial market presence in Brooklyn, New York. The acquisitions of Fidelity and LIB strengthened the Company's deposit market share located in Queens, Nassau and Suffolk Counties. LENDING ACTIVITIES GENERAL. The Company's loan portfolio is comprised primarily of mortgage loans, most of which are conventional loans secured by one-to-four family residences and, to a lesser extent, by multi-family residences and commercial real estate. The remainder of the portfolio consists of a variety of consumer and other loans. From December 31, 1994 to December 31, 1998, the Company's total net loan portfolio increased from $3.21 billion, or 35.2% of total assets, to $8.95 billion, or 43.5% of total assets. The amount at December 31, 1998, includes $212.9 million of real estate loans held-for-sale. The increase resulted primarily from the Company's initiation, during 1994, of a third party loan origination program and a broker loan program coupled with a strengthening of the mortgage market, the acquisitions of Fidelity and The Greater, which were accounted for as purchase transactions, and from bulk purchases made during the years ended December 31, 1995 and 1996. The Company originates mortgage loans, either directly from existing or past customers, members of the communities served, real estate agents, attorneys and builders, or indirectly through brokers. The retail loan origination program accounted for approximately $2.59 billion and $1.73 billion of originations during 1998 and 1997, respectively. The broker loan program consists of relationships with mortgage brokers and accounted for approximately $2.41 billion and $1.74 billion of originations during 1998 and 1997, respectively. In 1997, the Company expanded its relationships with mortgage brokers outside its local area, through additional networks located in Connecticut, Delaware, Maryland, Pennsylvania and Virginia. The Company's correspondent loan program (third party originated loans), which includes relationships with other financial institutions, mortgage brokers, and mortgage-bankers, was initiated in 1994 to increase loan volume and, to a lesser degree, reduce the Company's geographical loan concentration in the New York metropolitan area. This program accounted for approximately $187.5 million and $562.4 million of loan originations during 1998 and 1997, respectively. There were no bulk loan purchases in 1998 or 1997. See Loan Portfolio Composition table on page 22 and Loan Maturity, Repricing and Activity tables on page 23 and 24. At December 31, 1998, $221.3 million, or 2.6% of the Company's total loan portfolio consisted of purchased mortgage loans and loan participations, serviced by others, which consisted primarily of one-to-four family residential mortgage loans. Currently, the Company generally only purchases loans which are underwritten in accordance with guidelines that meet or exceed the Company's minimum underwriting guidelines. One-to-Four Family Mortgage Lending. The Company's primary lending emphasis is on the origination and purchase of first mortgage loans secured by one-to-four family residences that serve as the primary residence of the owner. To a much lesser degree, the Company makes loans secured by non-owner occupied one-to-four family properties acquired as an investment by the borrower. The Company also offers, although has originated only a limited number of, second mortgage loans which are underwritten according to the same standards as first mortgage loans. 2 5 At December 31, 1998, $7.86 billion, or 87.4%, of the Company's total loan portfolio consisted of one-to-four family residential loans, of which $5.45 billion, or 69.4%, were adjustable rate mortgage ("ARM") loans. The Company currently offers ARM loans which are fixed for one, three, five, seven and ten years and convert into one-year ARM loans at the end of the initial fixed period. The one-year, three-year, five-year and seven-year ARM loans have terms of up to 40 years, and the ten-year ARM loans have terms of up to 30 years. One-year ARM loans and, to a lesser extent, other ARM loans may carry an initial interest rate which is less than the fully indexed rate for the loan. The initial discounted rate is determined by the Company in accordance with market and competitive factors. All ARM loans offered by the Company have annual and lifetime interest rate ceilings. Generally, ARM loans pose credit risks somewhat greater than the risk posed by fixed-rate loans primarily because, as interest rates rise, the underlying payments of the borrower rise, increasing the potential for default. To recognize the credit risks associated with ARM loans offered at initial discounts below market interest rates, the Company generally underwrites its one-year ARM loans assuming a rate equal to 200 basis points over the initial discounted rate, but not less than 7.0%. For ARM loans with longer adjustment periods, and therefore, less risk due to the longer period for the borrower's income to adjust to anticipated higher future payments, the Company underwrites the loans using the initial rate, which may be a discounted rate. In recent years, the Company has originated a greater volume of one-to-four family residential mortgage loans due to the strengthening of the economy both within the Company's market area as well as through the expansion of its various delivery channels. With the growth of the broker loan program along with the third party loan origination program and bulk loan purchase transactions, which have elevated the volume of loans outside the Company's historical lending area, the Company has been able to increase loan production since 1995. One-to-four family mortgage loan originations and purchases increased $1.09 billion, from $3.85 billion in 1997 to $4.94 billion in 1998. The Company's policy on owner-occupied, one-to-four family residential mortgage loans is to lend up to 80% of the appraised value of the property securing the loan, or over 80% if private mortgage insurance is obtained. In the case of cash-out refinancing for owner occupied one-to-four family residential mortgage loans, the Company allows a maximum of 75% loan-to-appraised value ratio. The Company originates most 30-year fixed-rate loans for immediate sale to Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), the State of New York Mortgage Agency ("SONYMA") or other investors on a servicing released or retained basis. Generally, the sale of such loans is arranged through a master commitment with the agencies on a mandatory or best efforts basis. The sale of loans to other investors are also arranged with specific contractual commitments on a mandatory or best efforts basis. Commercial Real Estate and Multi-Family Lending. As of December 31, 1998, the Company's total loan portfolio contained $454.0 million, or 5.1%, of commercial real estate loans and $452.9 million, or 5.0%, of multi-family loans. During 1998, the Company originated $251.5 million of commercial, multi-family and mixed use loans. Mixed use loans are secured by properties which are intended for both business and residential use and are classified as commercial or multi-family based on the greater number of commercial versus residential units. The commercial real estate and multi-family loans in the Company's portfolio consist of both fixed-rate and adjustable rate loans which were originated at prevailing market rates. Commercial real estate and multi-family loans generally are provided as five to fifteen year term balloon loans amortized over 15 to 25 years. The Company's policy has been to originate commercial real estate or multi-family loans generally in its local market areas. In making such loans, the Company primarily considers the ability of the net operating income generated by the real estate to support the debt service, the financial resources, income level and managerial expertise of the borrower, the marketability of the property, and the Company's lending experience with the borrower. 3 6 Commercial real estate loans typically are secured by properties such as retail stores, office buildings and mixed use (more business than residential units) properties. The single largest commercial real estate loan at December 31, 1998, had an outstanding principal balance of $14.1 million, was current and was secured by a hotel in Garden City, New York. The majority of the multi-family loans in the Company's portfolio are secured by six to forty unit apartment buildings and other mixed use (more residential than business units) properties. The single largest multi-family loan at December 31, 1998 had an outstanding balance of $6.2 million, was current and was secured by an apartment building containing 1,592 residential units and 22 retail outlets located in Manhattan, New York. Loans secured by commercial real estate and multi-family properties generally involve a greater degree of risk than one-to-four family residential loans. The Company provides multi-family and commercial real estate loans, using prudent underwriting standards which include consideration of the demand for such properties and the general economic conditions in its market area. Consumer and Other Loans. At December 31, 1998, $229.4 million, or 2.6%, of the Company's total loan portfolio consisted of consumer loans which were primarily home equity loans. Consumer loans, with the exception of home equity lines of credit, are offered primarily on a fixed-rate, short-term basis. The underwriting standards employed by the Company for consumer loans include a determination of the applicant's payment history on other debts and an assessment of the borrower's ability to make payments on the proposed loan and other indebtedness. In addition to the credit worthiness of the applicant, the underwriting process also includes a review of the value of the security, if any, in relation to the proposed loan amount. The Company's consumer loans tend to have higher interest rates and shorter maturities than one-to-four family residential mortgage loans, but are considered to entail a greater risk of default than such loans. The Company's home equity lines of credit are originated on one-to-four family owner-occupied residential properties. These loans are generally limited to aggregate outstanding indebtedness secured by up to 80% of the appraised value of the property. Such lines of credit are underwritten based upon guidelines established by the Company in order to evaluate the borrower's ability and willingness to repay the debt. Loan Approval Procedures and Authority. Except for loans in excess of $5.0 million, mortgage loan approval authority has been delegated by the Board of Directors to the Company's underwriters and Loan Committee, which consists of certain members of executive management and other Association officers. Upon receipt of a completed application from a prospective borrower, for mortgage loans secured by one-to-four family properties, the Company generally orders a credit report, verifies income and other information and, if necessary, obtains additional financial or credit related information. An appraisal of the real estate used for collateral is also obtained. For mortgage loans secured by commercial and multi-family properties, appraisals are obtained as part of the final underwriting process. All appraisals are performed by licensed or certified appraisers. Most appraisals are currently performed by licensed independent third party appraisers. The Board of Directors annually approves the independent appraisers used by the Company and reviews the Company's appraisal policy. ASSET QUALITY Non-performing Assets. The Company does not accrue interest on loans past due 90 days or more, with the exception of selected mortgage loans delinquent 90 days or more as to their maturity date on which 4 7 the Company has continued to accept monthly interest payments as if the loan had not matured. Such loans are primarily balloon loans consisting of smaller commercial and multi-family loans. In general, 90 days prior to a loan's maturity, the borrower is reminded of the maturity date and is sent an application to refinance the loan. Where the borrower has continued to make monthly payments to the Company and where the Company does not have a reason to believe that any loss will be incurred on the loan, the Company has treated these loans as current and has continued to accrue interest. When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income. Included in the Company's non-performing assets are real estate owned ("REO") and investments in real estate. Total non-performing assets increased $5.1 million, to $120.4 million at December 31, 1998, from $115.3 million at December 31, 1997. Non-performing loans, a component of non-performing assets, increased by $21.2 million to $111.1 million at December 31, 1998, from $89.9 million at December 31, 1997. The percentage of non-performing loans to total loans increased from 1.12% in 1997 to 1.23% in 1998. Despite the increases in non-performing assets, the Company's percentages of non-performing assets to total assets decreased from 0.70% in 1997 to 0.58% in 1998. The allowance for loan losses as a percentage of total non-performing loans was 66.99% at December 31, 1998 compared to 82.23% at December 31, 1997. The allowance for loan losses as a percentage of total non-accrual loans was 70.00% at December 31, 1998, compared to 86.79% at December 31, 1997. For a further discussion of the allowance for loan losses, non-performing assets and loans, see Item 7, "MD&A." Real Estate Owned - The net carrying value of the Company's REO totaled $6.1 million at December 31, 1998. The REO portfolio consists of $5.7 million, or 94%, of residential real estate and $0.4 million of non-residential properties. The REO balance decreased $6.6 million, from $12.7 million at December 31, 1997. Investments in Real Estate - The net carrying value of the Company's investments in real estate at December 31, 1998 totaled $3.3 million, which consisted of three properties. Classified Assets - The Company's Asset Review Department reviews and classifies the Company's assets and independently reports the results of its reviews to the Board of Directors quarterly. The Company's Asset Classification Committee establishes policy relating to the internal classification of loans and also provides input to the Asset Review Department in its review of the Company's classified assets. Federal regulations and Company policy require the classification of loans and other assets, such as debt and equity securities considered to be of lesser quality, as "special mention," "substandard," "doubtful" or "loss" assets. An asset classified as "special mention" has "potential weaknesses," which, if uncorrected, may result in the deterioration of the repayment prospects or in the institution's credit position at some future date. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Those assets classified "substandard," "doubtful," or "loss" are considered adversely classified. See page 25 for additional information on the Company's classified assets. The Company's total impaired loans at December 31, 1998, net of allowance for loan losses of $3.3 million, was $23.6 million, of which $2.3 million are classified as non-performing and $21.3 million are current. The Company's average recorded investment in impaired loans for the year ended December 31, 5 8 1998 was $25.1 million. Interest income recognized on impaired loans, which was not materially different from cash-basis income, amounted to $2.3 million for the year ended December 31, 1998. For further detail on the Company's impaired loans, see Note 5 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." Allowance for Losses on Loans, Investments in Real Estate and Real Estate Owned. The Company's allowance for loan losses is established and maintained through a provision for loan losses based on management's evaluation of the risks inherent in the Company's loan portfolio including the condition of the economy of the area in which the Company's loans are located. Such evaluation, which includes, but is not limited to, a review of loans on which full collectibility is not reasonably assured, considers among other matters, the estimated fair value of the underlying collateral, economic and regulatory conditions, current and historical loss experience and other factors to arrive at an adequate loan loss allowance. Unallocated reserves are established for loss exposure that may exist in the remainder of the loan portfolio but has not yet been identified. In determining the adequacy of the unallocated reserves, management considers changes in the size and composition of the loan portfolio, historical loan loss experience, current and anticipated economic conditions, and the Company's credit administration and asset management philosophies and procedures. During the fourth quarter of 1998, subsequent to the consummation of the LIB Acquisition, the Company recorded an additional $5.6 million of provision for loan losses for unallocated reserves. This provision was recorded to conform LIB's previous accounting practices and asset review methodologies to those of the Company which included more conservative general valuation percentages applied by the Company to its one-to-four family and consumer loan portfolios. Although management believes that the allowance for loan losses has been established and maintained at adequate levels, future adjustments may be necessary if economic and other conditions differ substantially from the conditions used in making the initial determinations. REO is carried net of all allowances for losses at the lower of cost or fair value less estimated selling costs, and investments in real estate are carried at the lower of cost or fair value. Pursuant to the Company's policy, loan losses must be charged-off in the period the loans, or portions thereof, are deemed uncollectible. If a loan is classified, an estimated value of the property securing the loan is determined through an appraisal, where possible. In instances where the Company has not taken possession of the property or does not otherwise have access to the premises and, therefore, cannot obtain an appraisal, a real estate broker's opinion as to the value of the property is obtained based primarily on a drive-by inspection and a comparison of the property securing the loan with similar properties in the area. If the unpaid balance of the loan is greater than such estimated fair value, a specific reserve is established for the difference between the carrying value and the estimated fair value. General valuation allowances are also established and represent loss allowances that have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. In addition to the requirements of Generally Accepted Accounting Principles ("GAAP") related to loss contingencies, a federally chartered savings association's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the Office of Thrift Supervision ("OTS"). The OTS, in conjunction with the other federal banking agencies, provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation allowances. It is required that all institutions have effective systems and controls to identify, monitor and address asset quality problems; analyze all significant factors that affect the collectibility of the portfolio in a reasonable manner; and establish acceptable allowance evaluation processes that meet the objectives of the federal regulatory agencies. A review of the loan portfolio is undertaken as part of the examination of the Company and the Association by the OTS. While the Company believes it has established an adequate allowance for loan losses, there can be no assurance that regulators, as a result of reviewing the Company's loan portfolio, will 6 9 not request the Company to increase its allowance for loan losses, thereby negatively affecting the Company's financial condition and earnings. INVESTMENT ACTIVITIES GENERAL. The investment policy of the Company is designed primarily to enable the Company to manage the interest rate sensitivity of its overall assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement the Company's lending activities and to provide and maintain liquidity primarily through cash flow. In establishing its investment strategies, the Company considers its business and growth plans, the economic environment, its interest rate sensitivity "gap" position, the types of securities to be held and other factors. SECURITIES. The Company generally invests in certain securities available-for-sale, securities held-to-maturity and money market instruments. Such investments are made in conjunction with the Company's overall liquidity, interest rate risk and credit risk management processes and complement the Company's lending activities. In addition, as a member of the Federal Home Loan Bank of New York ("FHLB-NY"), the Association is required to maintain a specified investment in the capital stock of the FHLB-NY. (See "Regulation and Supervision - Federal Home Loan Bank System.") Federally chartered savings associations have authority to invest in various types of assets, including U.S. Treasury obligations, securities of various federal agencies, mortgage-backed securities, including Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs"), certain certificates of deposit of insured banks and federally chartered savings associations, certain bankers acceptances, repurchase agreements, loans of federal funds and, subject to certain limits, corporate securities, commercial paper and mutual funds. CMOs and REMICs are typically issued by a special purpose entity, which may be organized in a variety of legal forms, such as a trust, a corporation or a partnership. The entity aggregates pools of loans or pass-through securities, which are used to collateralize the mortgage-backed securities. Once combined, the cash flows are divided into "tranches," or classes of individual securities, thereby creating more predictable average lives for each security than the underlying collateral. Accordingly, under this security structure, loan principal and interest payments are allocated to a mortgage-backed securities class or classes structured to have priority until it has been paid off. For a further discussion of the Company's securities portfolios, see Item 7, "MD&A" and Note 4 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." FEDERAL FUNDS SOLD AND REPURCHASE AGREEMENTS. The Company invests in a wide range of money market instruments, including overnight and term federal funds and securities purchased under agreements to resell. Money market instruments are used to invest the Company's available funds resulting from deposit-taking operations and normal cash flow and to help satisfy both internal liquidity needs and the Association's regulatory liquidity requirements. (See "Regulation and Supervision - Liquidity.") For a further discussion of the Company's federal funds sold and repurchase agreements, see Note 1 and Note 3 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." The Company's investment policy also permits it to invest in certain derivative financial instruments. These instruments consist of interest rate swaps and options and are generally used to hedge against interest rate risk exposure. See Note 10 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data," for further discussion of such derivative financial instruments. SECURITIES COMPOSITION. At December 31, 1998, the Company had $1.21 billion, or 5.9% of total assets, in mortgage-backed securities, insured or guaranteed by either the FNMA, FHLMC or GNMA. In 7 10 addition, the Company had $7.48 billion in REMICs and CMOs, or 36.4% of total assets, of which 86.6% had fixed rates. The Company's REMICs and CMOs had coupon rates ranging from 4.38% to 10.25% and a weighted average yield of 6.37% at December 31, 1998. Of the REMICs and CMOs portfolio, $5.71 billion, or 76.3%, are insured or guaranteed, either directly or indirectly, by the FNMA, FHLMC or GNMA, as issuer, or through mortgage-backed securities underlying the obligations. Management believes these securities represent attractive and limited risk alternatives to other investments due to the wide variety of maturity and repayment options available. The remaining securities portfolio of $1.61 billion, or 7.8% of total assets, consists of obligations of U.S. Government and agencies, obligations of state and political subdivisions and equity and corporate debt securities. Included in the total securities portfolio are various callable securities, which generally possess higher yields than those securities of similar contractual terms to maturity without callable features. As of December 31, 1998, the amortized cost of such callable securities totaled $1.33 billion. Securities called during the year ended December 31, 1998 totaled $738.5 million. The Company's held-to-maturity portfolio consists primarily of seasoned fixed-rate mortgage-backed securities and U.S. Government and agency securities. At December 31, 1998, the Company's total portfolio of securities available-for-sale and securities held-to- maturity was $8.20 billion and $2.11 billion, respectively. See Securities Portfolio tables on pages 20 and 21. SOURCES OF FUNDS GENERAL. The Company's primary source of funds is the cash flow provided by its investing activities, including principal and interest payments on loans and mortgage-backed and other securities. The Company's other sources of funds are provided by operating activities (primarily net income) and financing activities, including borrowings through the use of reverse repurchase agreements and FHLB-NY advances. DEPOSITS. The Company offers a variety of deposit accounts with a range of interest rates and terms. The Company presently offers passbook and statement savings, NOW, money market accounts and certificates of deposit. Of the total deposit balance, $1.37 billion, or 14.1%, represent Individual Retirement Accounts ("IRAs"). The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates, pricing of deposits and competition. The Company's deposits are primarily obtained from areas surrounding its banking offices. The Company relies primarily on marketing, new products, service and long-standing relationships with customers to attract and retain these deposits. The Company does not use brokers to obtain deposits. The Association's growth in deposits from 1994 to the present was primarily due to mergers and acquisitions. At December 31, 1998, the Company's deposits totaled $9.67 billion. Acquisitions of Fidelity and The Greater during 1995 and 1997, respectively, added $1.05 billion and $1.60 billion of deposits, respectively. When management determines the levels of the Company's deposit rates, consideration is given to local competition, yields of U.S. Treasury securities and the rates charged on other sources of funds. The Company has maintained a high level of core deposits, which has contributed to its low cost-of-funds. Core deposits include savings, money market, money manager and NOW accounts, which, in aggregate, represented 47.8% and 43.4% of total deposits at December 31, 1998 and 1997, respectively. BORROWINGS. The Company enters into reverse repurchase agreements with nationally recognized primary securities dealers and the FHLB-NY. Reverse repurchase agreements are accounted for as borrowings and are secured by the securities sold under agreements to repurchase. The Company also obtains advances from the FHLB-NY which are generally secured by a blanket lien against, among other things, the Association's mortgage portfolio and the Association's investment in the stock of the FHLB-NY. See "Regulation and Supervision - Federal Home Loan Bank System." The maximum amount that the FHLB-NY will advance, for purposes other than for meeting withdrawals, fluctuates from time to time in 8 11 accordance with the policies of the FHLB-NY. As a result of the LIB Acquisition, the Company assumed a funding note, a three year medium-term note and a five year medium-term note. The outstanding balance of these notes was $520.8 million at December 31, 1998. In order to fund its asset growth during 1998, as well as being a part of its interest rate risk management strategy, the Company increased its borrowings by $4.25 billion, or 89.0%, to $9.02 billion at December 31, 1998 from $4.77 billion at December 31, 1997. The increase was primarily in the form of callable reverse repurchase agreements. At December 31, 1998, the Company had $8.63 billion of callable borrowings of which $2.07 billion were callable within one year. These callable borrowings had contractual maturities of primarily three to ten years. At December 31, 1998, the Company had an overnight line of credit with the FHLB-NY available for up to $50.0 million for a twelve month period, priced at the federal funds rate plus 12.5 basis points. See Borrowings table on page 28. For a further discussion of the Company's borrowings, see Note 8 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." SUBSIDIARY ACTIVITIES At December 31, 1998, the following were wholly-owned subsidiaries of the Association: AF Agency, Inc. was formed in 1990 to offer tax-deferred annuities through its licensed agents. During 1995, AF Agency, Inc. began selling Savings Bank Life Insurance as an agent for another issuing New York State chartered thrift. Upon the acquisition of The Greater, AF Agency, Inc. was authorized by the OTS to engage indirectly in the sale of tax-deferred annuities, a variety of mutual funds and the offering of stock brokerage services through an unaffiliated third party vendor. The Association is reimbursed for expenses and administrative services it provides to AF Agency, Inc. Astoria Federal Mortgage Corp. is an operating subsidiary through which the Association engages in lending activities outside the State of New York. Astoria Preferred Funding Corporation ("APFC") and Starline Development Corp. ("Starline") are real estate investment trusts pursuant to the Internal Revenue Code of 1986, as amended. The Association intends to merge Starline with and into APFC. APFC may, among other things, be utilized by the Association to raise capital in the future. Suffco Development Corp. serves as document custodian to facilitate operations with FNMA. 201 Old Country Road Inc. was formed as a special purpose subsidiary which currently holds mortgage loans that serve as collateral for a funding note. Mortgage Headquarters, Inc., was formed primarily for the purpose of serving as a holding company for lower tier subsidiary operations. It is, however, also a partner in a joint venture called Entrust Mortgage Headquarters, a licensed mortgage broker, which originates residential mortgage loans. Dollar Service Corp., Fidata Service Corp., 3 Belmont Corporation and Zythum Realty, Inc. may qualify for special tax treatment under Article 9A of the New York State Tax Law and therefore, although inactive, will be retained by the Association. FNY Service Corp., a subsidiary also established pursuant to Article 9A of the New York State Tax Law was sold on February 26, 1999. Infoserve Corporation provides research information services for the Association and other financial 9 12 institutions. This research provided stems from services Infoserve Corporation offered in the past for check clearing and processing as well as check and money order issuances. Longco Investors, Inc. is part of a joint venture which developed Avery Village, an FHA subsidized senior citizen apartment complex. Longco Investors, Inc. retains an interest in the cash flow from the project. Longpond Investors, Inc. is part of a joint venture which developed The Towers Office Building located in Great Neck, New York. Longrich Investors, Inc., Oldfield Realty, Inc. and Syosset N.J. Realty Inc. were all formed for the sole purpose of holding title to foreclosed property. Currently, the combined net book value of these properties is $2.5 million. 1780 Ocean Avenue Corp. holds title to the Association's banking office located at 1780 Ocean Avenue, Brooklyn, New York. Five subsidiaries acquired from The Greater were formed prior to 1990 to enter into joint venture projects for the development of real estate located on Long Island, New York. Four of these projects were sold in 1998. The remaining project has a carrying value of $4.0 million. S.H.I. Corp., Greater Port Regalle Corp. Greater Lake Pointe Corp., 14th Street Real Property Holding Corp. and AF Cortlandt Corp. are all inactive but have been retained by the Association due to their involvement in various litigation matters. Once the litigation is resolved, the Association intends to dissolve each subsidiary. 1401 Avenue M Associates Ltd. which holds title to the Association's banking office located at 1401 Avenue M, Brooklyn, New York, is also involved in litigation. Once the litigation is resolved, the subsidiary intends to transfer title to the property to the Association and the Association intends to dissolve the subsidiary. The Association has forty additional subsidiaries, all of which are inactive and which the Association intends to dissolve or are in the process of being dissolved. MARKET AREA AND COMPETITION The Association has been, and continues to be, a community-oriented federally chartered savings association offering a variety of financial services to meet the needs of the communities it serves. The Association's deposit gathering sources are primarily concentrated in the communities surrounding the Association's banking offices in Queens, Kings (Brooklyn), Nassau, Suffolk and Westchester counties in the New York City metropolitan area and Chenango and Otsego counties in upstate New York. The Association's loan originations are within the New York City metropolitan area as well as in loan production offices located in New Jersey, Connecticut, Delaware, Maryland, Virginia and Pennsylvania. The New York City metropolitan area has a high density of financial institutions, a number of which are significantly larger and have greater financial resources than the Company. All are competitors of the Company to varying degrees. The Company's competition for loans, both locally and in the aggregate, comes principally from mortgage banking companies, commercial banks, savings banks and savings and loan associations. The Company's most direct competition for deposits comes from commercial banks, savings banks, savings and loan associations and credit unions. The Company also faces intense competition for deposits from money market mutual funds and other corporate and government securities funds as well as from other financial intermediaries such as brokerage firms and insurance companies. 10 13 The New York City metropolitan area economy, during the last three years, has shown increased growth as evidenced by local employment growth statistics. Improvement can also be seen in the local real estate market, as reflected in increased existing home sales during the past few years and an increase in local real estate values. The Company's broker and third party loan origination programs increased its volume of one-to-four family residential loans outside its primary lending market, thereby reducing its geographical loan concentration as well as its potential exposure to a concentration of credit risk. At December 31, 1998, $3.94 billion or 45.0% of the Company's total mortgage loan portfolio was secured by properties located in 45 states other than New York. The Company has a concentration of lending in Connecticut, New Jersey and Maryland, each comprising 5.0% or more of the Company's total mortgage loan portfolio. The Company serves its local market areas with a wide selection of loan products and other retail financial services. Management considers the Company's strong banking office network, together with its reputation for financial strength and customer service, as its major competitive advantage in attracting and retaining customers in its market areas. PERSONNEL As of December 31, 1998, the Association had 1,786 full-time employees and 402 part-time employees. The employees are not represented by a collective bargaining unit and the Association considers its relationship with its employees to be good. REGULATION AND SUPERVISION GENERAL The Association is subject to extensive regulation, examination and supervision by the OTS, as its chartering agency, and by the FDIC, as the deposit insurer. The Company, as a unitary savings and loan holding company, is regulated, examined and supervised by the OTS. The Association is a member of the Federal Home Loan Bank ("FHLB") System, and its deposit accounts are insured up to applicable limits by the FDIC under the Savings Association Insurance Fund ("SAIF") except for those deposits acquired from The Greater, which are insured by the Bank Insurance Fund ("BIF"). The Association and Company must file reports with the OTS concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the OTS and the FDIC to test the Association's compliance with various regulatory requirements. The OTS has primary enforcement responsibility over federally chartered savings associations and has substantial discretion to impose enforcement action on an institution that fails to comply with its regulatory requirements, particularly with respect to its capital requirements. In addition, the FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular federally chartered savings association and, if action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. This regulation and supervision establish a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the OTS, FDIC or Congress, could have a material adverse impact on the Company and the Association and their operations. The Company, as a savings and loan holding company, is required to file certain reports with, and otherwise comply with the rules and regulations of the OTS and of the Securities and Exchange Commission ("SEC") under the federal securities laws. 11 14 The description of statutory provisions and regulations applicable to federally chartered savings associations set forth in this document do not purport to be complete descriptions of such statutes and regulations and their effects on the Association. FEDERALLY CHARTERED SAVINGS ASSOCIATION REGULATION BUSINESS ACTIVITIES. The Association derives its lending and investment powers from the Home Owner's Loan Act, as amended ("HOLA"), and the regulations of the OTS thereunder. Under these laws and regulations, the Association may invest in mortgage loans secured by residential and non-residential real estate, commercial and consumer loans, certain types of debt securities and certain other assets. The Association may also establish service corporations that may engage in activities not otherwise permissible for the Association, including certain real estate equity investments and securities and insurance brokerage activities. These investment powers are subject to various limitations, including (a) a prohibition against the acquisition of any corporate debt security that is not rated in one of the four highest rating categories; (b) a limit of 400% of an association's capital on the aggregate amount of loans secured by non-residential real estate property; (c) a limit of 20% of an association's assets on commercial loans, with the amount of commercial loans in excess of 10% of assets being limited to small business loans; (d) a limit of 35% of an association's assets on the aggregate amount of consumer loans and acquisitions of certain debt securities; (e) a limit of 5% of assets on non-conforming loans (loans in excess of the specific limitations of HOLA); and (f) a limit of the greater of 5% of assets or an association's capital on certain construction loans made for the purpose of financing what is or is expected to become residential property. CAPITAL REQUIREMENTS. The OTS capital regulations require federally chartered savings associations to meet three capital ratios: a 1.5% tangible capital ratio, a 3% leverage (core capital) ratio and an 8% risk-based capital ratio. In assessing an institution's capital adequacy, the OTS takes into consideration not only these numeric factors but also qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where necessary. The Association, as a matter of prudent management, targets as its goal the maintenance of capital ratios which exceed these minimum requirements and that are consistent with the Association's risk profile. Effective April 1, 1999, the OTS and the federal banking regulators have amended their minimum capital regulations to provide that the minimum leverage capital ratio for a depository institution that has been assigned the highest composite rating of 1 under the Uniform Financial Institutions Ratings System will be 3% and that the minimum leverage capital ratio for any other depository institution will be 4%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution. At December 31, 1998, the Association exceeded each of its capital requirements. The Association's tangible, leverage and risk-based capital ratios were 5.34%, 5.34% and 13.53%, respectively at December 31, 1998. The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") requires that the OTS and other federal banking agencies revise their risk-based capital standards, with appropriate transition rules, to ensure that they take into account interest rate risk ("IRR"), concentration of risk and the risks of non-traditional activities. The OTS adopted regulations, effective January 1, 1994, that set forth the methodology for calculating an IRR component to be incorporated into the OTS risk- based capital regulations. The OTS has indefinitely deferred its requirement of the IRR component in the calculation of an institution's risk-based capital calculation. The OTS continues to monitor the IRR of individual institutions and retains the right to impose minimum capital requirements on individual institutions. Based on the Association's IRR profile and the level of interest rates at December 31, 1998, as well as the Association's level of risk-based capital at December 31, 1998, management believes that the Association would not be required to increase its capital as a result of the rule. 12 15 PROMPT CORRECTIVE REGULATORY ACTION. FDICIA established a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the banking regulators are required to take certain supervisory actions against undercapitalized institutions, based upon five categories of capitalization which FDICIA created: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized," the severity of which depends upon the institution's degree of capitalization. Generally, a capital restoration plan must be filed with the OTS within 45 days of the date an association receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." In addition, various mandatory supervisory actions become immediately applicable to the institution, including restrictions on growth of assets and other forms of expansion. Under the OTS regulations, generally, a federally chartered savings association is treated as well capitalized if its total risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or greater, and its leverage ratio is 5% or greater, and it is not subject to any order or directive by the OTS to meet a specific capital level. As of December 31, 1998, the Association was considered "well capitalized" by the OTS. INSURANCE OF DEPOSIT ACCOUNTS. Pursuant to FDICIA, the FDIc established a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. Under the risk-based assessment system, the FDIC assigns an institution to one of three capital categories based on the institution's financial information as of the reporting period ending seven months before the assessment period, consisting of (1) well capitalized, (2) adequately capitalized or (3) undercapitalized. The FDIC also assigns an institution to one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds (which may include, if applicable, information provided by the institution's state supervisor). An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Under the risk-based assessment system, there are nine assessment risk classifications (i.E., Combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. As a result of the recapitalization of the SAIF in 1996 after the enactment of the deposit funds insurance act of 1996, the FDIC reduced the assessment rates for deposit insurance for BIF-assessable and for SAIF-assessable deposits for 1997 to a range of 0 to 27 basis points. The assessment rates for the company's BIF-assessable and SAIF-assessable deposits since 1997 were each 0 basis points. In addition, SAIF-assessable deposits are also subject to assessments for payments on the bonds issued in the late 1980s by the financing corporation (the "FICO") to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. The company's total expense in 1998 for the assessment for deposit insurance and the FICO payments was $5.9 Million. LOANS TO ONE BORROWER. Under the HOLA, savings associations are generally subject to the national bank limits on loans to one borrower. Generally, savings associations may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the institution's unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if such loan is secured by readily-marketable collateral. The Association is in compliance with applicable loans to one borrower limitations. At December 31, 1998, the Association's largest aggregate amount of loan(s) to one borrower totaled $18.7 million. All of the loans for the largest borrower were current and the borrower had no affiliation with the Association. QUALIFIED THRIFT LENDER ("QTL") TEST. The HOLA requires savings associations to meet a QTL test. Under the QTL test, a savings association is required to maintain at least 65% of its "portfolio assets" (total assets less (i) specified liquid assets up to 20% of total assets, (ii) intangibles, including goodwill, and (iii) the value of property used to conduct business) in certain "qualified thrift investments" (primarily 13 16 residential mortgages and related investments, including certain mortgage-backed securities, credit card loans, student loans, and small business loans) on a monthly basis in 9 out of every 12 months. As of December 31, 1998, the Association maintained its portfolio assets in qualified thrift investments in excess of 91% and had more than 65% of its portfolio assets in qualified thrift investments for each of the 12 months ending December 31, 1998. Therefore, the Association qualified under the QTL test. A savings association that fails the QTL test and does not convert to a bank charter generally will be prohibited from: (i) engaging in any new activity not permissible for a national bank, (ii) paying dividends not permissible under national bank regulations, (iii) obtaining advances from any FHLB, and (iv) establishing any new branch office in a location not permissible for a national bank in the association's home state. In addition, beginning three years after the association failed the QTL test, the association would be prohibited from engaging in any activity not permissible for a national bank and would have to repay any outstanding advances from the FHLB as promptly as possible. LIMITATION ON CAPITAL DISTRIBUTIONS. The OTS regulations impose limitations upon certain capital distributions by savings associations, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital. Effective April 1, 1999, the OTS amended its capital distribution regulations to reduce regulatory burdens on savings associations. The prior regulations, which were effective throughout 1998 established three tiers of institutions, which were based primarily on an institution's capital ratios. An institution that exceeded all fully phased-in capital requirements before and after a proposed capital distribution ("Tier 1 Association") and had not been advised by the OTS that it was in need of more than normal supervision, could, after prior notice but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of: (i) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year or (ii) 75% of its net income for the previous four quarters. Any additional capital distributions would require prior regulatory approval. As of December 31, 1998, the Association was a Tier 1 Association. In the event the Association's capital fell below its fully-phased in requirement or the OTS notified the Association that it was in need of more than normal supervision, the Association's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, if the OTS determines that such distribution would constitute an unsafe or unsound practice. A savings association is prohibited from making any capital distributions if, after the distribution, the association would not comply with applicable minimum capital requirements. See "Regulation and Supervision - Capital Requirements." In addition, the Association may not declare or pay cash dividends on or repurchase any of its shares of common stock if the effect thereof would cause stockholders' equity to be reduced below the amounts required for the liquidation accounts which were established as a result of the Association's conversion from mutual to stock form of ownership and the acquisitions of Fidelity and The Greater. For further discussion on the liquidation accounts, see Note 9 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." Under the amended OTS regulations governing capital distributions, certain savings associations will be permitted to pay capital distributions during a calendar year that do not exceed the association's net income for the year plus its retained net income for the prior two years, without notice to, or the approval of, the OTS. However, a savings association subsidiary of a savings and loan holding company, such as the Association, will continue to have to file a notice unless the specific capital distribution requires an application. These new regulations are more restrictive to the Association than regulations being replaced based upon the Association's historical dividend declaration activities. LIQUIDITY. The Association is required to maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances, specified U.S. Government, state or federal agency obligations, shares of certain mutual funds and certain corporate debt securities and commercial paper) equal to a 14 17 monthly average of not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions. The OTS' current minimum required liquidity is 4.0%. Monetary penalties may be imposed for failure to meet liquidity requirements. The Association's liquidity ratio at December 31, 1998 was 11.29%. For additional information on the Association's regulatory liquid assets, see Item 7, "MD&A - Liquidity." ASSESSMENTS. The OTS has adopted amendments to its regulations, effective January 1, 1999, that are intended to assess savings associations on a more equitable basis. The new regulations will base the assessment for an individual savings association on three components: the size of the association, on which the basic assessment would be based; the association's supervisory condition, which would result in an additional assessment based on a percentage of the basic assessment for any savings institution with a composite rating of 3, 4 or 5 in its most recent safety and soundness examination; and the complexity of the association's operations, which would result in an additional assessment based on a percentage of the basic assessment for any savings association that managed over $1.00 billion in trust assets, serviced for others loans aggregating more than $1.00 billion, or had certain off-balance sheet assets aggregating more than $1.00 billion. In order to avoid a disproportionate impact on the smaller savings institutions, which are those whose total assets never exceeded $100.0 million, the new regulations provide that the portion of the assessment based on assets size will be the lesser of the assessment under the amended regulations or the regulations before the amendment. Management believes that any change in its rate of OTS assessments under the amended regulations will not be material to the Company's financial condition or results of operations. BRANCHING. The OTS regulations authorize federally chartered savings associations to branch nationwide to the extent allowed by federal statute. This permits federal savings and loan associations with interstate networks to diversify more easily their loan portfolios and lines of business geographically. OTS authority preempts any state law purporting to regulate branching by federal savings associations. COMMUNITY REINVESTMENT. Under the Community Reinvestment Act (the "CRA"), as implemented by the OTS regulations, a federally chartered savings association has a continuing and affirmative obligation, consistent with its safe and sound operation, to help to meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a federally chartered savings association, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Association has been rated as "outstanding" as of the most recent CRA examination. TRANSACTIONS WITH RELATED PARTIES. The Association is subject to the affiliate and insider transaction rules set forth in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act, as well as additional limitations as may be adopted by the OTS Director. These provisions, among other things, prohibit or limit a savings institution from extending credit to, or entering into certain transactions with, its affiliates (which for the Association would include the Company and the Company's non-federally chartered savings association subsidiaries, if any) and principal stockholders, directors and executive officers of the Association and its affiliates. STANDARDS FOR SAFETY AND SOUNDNESS. Pursuant to the requirements of FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994 ("Community Development Act"), the OTS, together with the other federal bank regulatory agencies, adopted guidelines establishing 15 18 general standards, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, regulations were adopted pursuant to FDICIA to require a savings association that is given notice by the OTS that it is not satisfying any of such safety and soundness standards to submit a compliance plan to the OTS. If, after being so notified, a savings association fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS may issue an order directing corrective and other actions of the types to which a significantly undercapitalized institution is subject under the "prompt corrective action" provisions of FDICIA. If a savings association fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties. FEDERAL HOME LOAN BANK SYSTEM The Association is a member of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Association, as a member of the FHLB-NY, is required to acquire and hold shares of capital stock in FHLB-NY in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, 0.3% of total assets, or 5% of its borrowings from the FHLB-NY, whichever is greater. The Association was in compliance with this requirement with an investment in FHLB-NY stock at December 31, 1998, of $210.3 million. For the years ended December 31, 1998, 1997 and 1996, dividends from the FHLB-NY to the Association amounted to $9.5 million, $5.7 million and $4.5 million, respectively. FEDERAL RESERVE SYSTEM The Federal Reserve Board regulations require federally chartered savings associations to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves of 3% be maintained against aggregate transaction accounts between $4.9 million and $46.5 million (subject to adjustment by the Federal Reserve Board) and a reserve of 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%) against that portion of total transaction accounts in excess of $46.5 million. The first $4.9 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) is exempt from the reserve requirements. The Association is in compliance with the foregoing requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the OTS. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce the Association's interest-earning assets. FHLB System members are also authorized to borrow from the Federal Reserve "discount window," but Federal Reserve Board regulations require institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank. HOLDING COMPANY REGULATION The Company is a unitary savings and loan holding company within the meaning of the HOLA. As such, the Company is registered with the OTS and is subject to the OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and savings association subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. The 16 19 Association must notify the OTS at least 30 days before declaring any dividend to the Company. The Association has given notice to, and received approval from the OTS for each dividend declared in 1998 to the Company. The HOLA prohibits a savings and loan holding company (directly or indirectly) or through one or more subsidiaries from acquiring another savings association or holding company thereof without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings association, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings associations, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. FEDERAL SECURITIES LAWS The Company is subject to the periodic reporting, proxy solicitation, tender offer, insider trading restrictions and other requirements under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). DELAWARE CORPORATION LAW The Company is incorporated under the laws of the State of Delaware. Thus, the Company is subject to regulation by the State of Delaware and the rights of its shareholders are governed by the Delaware General Corporation Law. FEDERAL TAXATION GENERAL. The Company and the Association report their income on a calendar year basis using the accrual method of accounting and are subject to Federal income taxation in the same manner as other corporations. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Association or the Company. CORPORATE ALTERNATIVE MINIMUM TAX. In addition to the regular income tax, corporations (including savings and loan associations) generally are subject to an alternative minimum tax ("AMT") in an amount equal to 20% of alternative minimum taxable income ("AMTI") to the extent the AMT exceeds the corporation's regular tax. AMTI is regular taxable income as modified by certain adjustments and increased by certain tax preference items. AMTI includes an amount equal to three-quarters of the excess of adjusted current earnings over such specially computed AMTI. 90% of AMTI can be offset by net operating loss carryovers. The AMT is available as a credit against future regular income tax. The Company does not expect to be subject to the AMT. TAX BAD DEBT RESERVES. Effective for 1996, federal tax legislation modified the methods by which a thrift computes its bad debt deduction. As a result, "large thrifts," including the association, are required to claim a deduction equal to their actual loss experience, and the "reserve method" is no longer available. Any cumulative reserve additions (i.E., Bad debt deductions) in excess of actual loss experience for tax years 1988 through 1995 are subject to recapture over a six year period. Generally, reserve balances as of December 31, 1987 will only be subject to recapture upon distribution of such reserves to shareholders. In New York State and New York City, legislation was enacted during 1996 and in early 1997, respectively, that allows thrift institutions to continue to use the reserve method of tax accounting for bad debts and to determine a deduction for bad debts in a manner similar to prior law. See the discussion below under "State and Local Taxation." 17 20 DISTRIBUTIONS. To the extent that the association makes "nondividend distributions" to shareholders, such distributions will be considered to result in distributions from the association's "base year reserve," (i.e., Its reserve as of december 1987), to the extent thereof and then from its supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in the association's taxable income. Nondividend distributions include distributions in excess of the association's current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the association's current or accumulated earnings and profits will not constitute nondividend distributions and, therefore, will not be included in the association's income. The amount of additional taxable income created from a nondividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, approximately one and one-half times the nondividend distribution would be includable in gross income for federal income tax purposes, assuming a 35% federal corporate income tax rate. DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude from its income 100% of dividends received from the Association as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Association will not file a consolidated tax return, except that if the Company and the Association own more than 20% of the stock of a corporation distributing a dividend, 80% of any dividends received may be deducted. STATE AND LOCAL TAXATION NEW YORK STATE TAXATION. New York State imposes an annual franchise tax on banking corporations, based on net income allocable to New York State, at a rate of 9%. If, however, the application of an alternative minimum tax (based on taxable assets allocated to New York, "alternative" net income, or a flat minimum fee) results in a greater tax, an alternative minimum tax will be imposed. In addition, New York State imposes a tax surcharge of 17% of the New York State franchise tax allocable to business activities carried on in the Metropolitan Commuter Transportation District. These taxes apply to the Company, the Association and certain of the Association's subsidiaries. Certain subsidiaries of a banking corporation may be subject to a general business corporation tax in lieu of the tax on banking corporations. The rules regarding the determination of income allocated to New York and alternative minimum taxes differ for these subsidiaries. New York State passed legislation that incorporated the former provisions of Internal Revenue Code ("IRC") Section 593 into New York State tax law. The impact of this legislation enabled the Association to defer the recapture of the New York State tax bad debt reserves that would have otherwise occurred as a result of the federal amendment to IRC 593. The legislation also enabled the Association to continue to utilize the reserve method for computing its bad debt deduction. The following discussion of the reserve for bad debts is intended only as a summary and does not purport to be a comprehensive description of the New York State tax rules applicable to the Association or the Company. BAD DEBT DEDUCTION. Federally chartered savings associations such as the Association which meet certain definition tests primarily relating to their assets and the nature of their business ("qualifying thrifts") are permitted to establish a reserve for bad debts and to make annual additions thereto, which additions may, within specified formula limits, be deducted in arriving at their taxable income. The Association will be a qualifying thrift only if, among other requirements, at least 60% of its assets are assets described in Section 1453(h)(1) of the New York State Tax Law (the "60% Test"). The Association presently satisfies the 60% Test. Although there can be no assurance that the Association will satisfy the 60% Test in the future, management believes that this level of qualifying assets can be maintained by the Association. The Association's deduction for additions to its bad debt reserve with 18 21 respect to qualifying loans may be computed using the experience method or a percentage equal to 32% of the Association's taxable income, computed with certain modifications, without regard to the Association's actual loss experience, and reduced by the amount of any addition permitted to the reserve for non-qualifying loans ("NYS Percentage of Taxable Income Method"). The Association's deduction with respect to non-qualifying loans must be computed under the experience method which is based on the qualifying thrift's actual loss experience. Under the experience method, the amount of a reasonable addition, in general, equals the amount necessary to increase the balance of the bad debt reserve at the close of the taxable year to the greater of (i) the amount that bears the same ratio to loans outstanding at the close of the taxable year as the total net bad debts sustained during the current and five preceding taxable years bears to the sum of the loans outstanding at the close of those six years, or (ii) the balance of the bad debt reserve at the close of the base year (assuming that the loans outstanding have not declined since then). The "base year" for these purposes is the last taxable year beginning before the NYS percentage of income bad debt deduction was taken. Any deduction for the addition to the reserve for non-qualifying loans reduces the taxable addition to the reserve for qualifying real property loans calculated under the NYS Percentage of Taxable Income Method. Each year the Association reviews the most favorable way to calculate the deduction attributable to an addition to the bad debt reserve. The amount of the addition to the reserve for losses on qualifying real property loans under the NYS Percentage of Taxable Income Method cannot exceed the amount necessary to increase the balance of the reserve for losses on qualifying real property loans at the close of the taxable year to 6% of the balance of the qualifying real property loans outstanding at the end of the taxable year. Also, if the qualifying thrift uses the NYS Percentage of Taxable Income Method, then the qualifying thrift's aggregate addition to its reserve for losses on qualifying real property loans cannot, when added to the addition to the reserve for losses on non-qualifying loans, exceed the amount by which (i) 12% of the amount that the total deposits or withdrawable accounts of depositors of the qualifying thrift at the close of the taxable year exceeded (ii) the sum of the qualifying thrift's surplus, undivided profits and reserves at the beginning of such year. NEW YORK CITY TAXATION. The Association is also subject to the New York City Financial Corporation Tax calculated, subject to a New York City income and expense allocation, on a similar basis as the New York State Franchise Tax. In this connection, legislation was enacted regarding the use and treatment of tax bad debt reserves that is substantially similar to the New York State legislation described above. A significant portion of the Association's entire net income for New York City purposes is allocated outside the jurisdiction which has the effect of significantly reducing the New York City taxable income of the Association. DELAWARE TAXATION. As a Delaware holding company not earning income in Delaware, the Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. STATISTICAL DATA The detailed statistical data which follows is presented in accordance with Guide 3, prescribed by the SEC. This data should be read in conjunction with Item 8, "Financial Statements and Supplementary Data" and Item 7, "MD&A." Information regarding distribution of assets, liabilities and stockholders' equity; interest rates and interest differential appears under Item 7, "MD&A." Page 48 presents the distribution of assets, liabilities and stockholders' equity under the caption "Analysis of Net Interest Income," and page 49 presents the interest differential under the caption "Rate/Volume Analysis." 19 22 SECURITIES PORTFOLIO The following table sets forth the composition of the Company's available-for-sale (at estimated fair value) and held-to-maturity securities portfolios in dollar amounts and in percentages of the portfolios at the dates indicated:
AT DECEMBER 31, ----------------------------------------------------------------------------------- 1998 1997 1996 ------------------------ ------------------------ ------------------------- PERCENT PERCENT PERCENT (DOLLARS IN THOUSANDS) AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL ------ -------- ------ -------- ------ -------- SECURITIES AVAILABLE-FOR-SALE: Mortgage-backed securities: GNMA pass-through certificates . $ 166,516 2.03% $ 612,310 12.74% $ 292,751 6.98% FHLMC pass-through certificates 342,722 4.18 755,402 15.71 915,812 21.83 FNMA pass-through certificates . 615,794 7.51 1,143,950 23.80 925,670 22.07 REMICs and CMOs: Agency issuance .............. 4,920,500 60.04 1,216,283 25.30 1,184,010 28.24 Non-agency issuance .......... 1,508,302 18.40 781,446 16.26 499,239 11.90 Obligations of U.S. Government and agencies ....................... 467,199 5.71 178,836 3.72 227,089 5.41 FNMA and FHLMC preferred stock ... 128,840 1.57 64,988 1.35 66,449 1.58 Asset-backed securities .......... 15,824 0.19 11,753 0.24 40,369 0.96 Equity and other securities ...... 10,021 0.12 42,337 0.88 43,029 1.03 Corporate debt securities ........ 20,726 0.25 -- -- -- -- ---------- ---- ---------- ----- ---------- ---- Total Securities Available-for-Sale ... $8,196,444 100.00% $4,807,305 100.00% $4,194,418 100.00% ========== ====== ========== ====== ========== ====== SECURITIES HELD-TO-MATURITY: Mortgage-backed securities: GNMA pass-through certificates . $ 53,258 2.52% $ 71,075 2.69% $ 86,457 4.35% FHLMC pass-through certificates 14,726 0.70 21,303 0.81 28,181 1.42 FNMA pass-through certificates . 15,975 0.76 19,445 0.74 22,056 1.11 REMICs and CMOs: Agency issuance .............. 787,255 37.28 929,588 35.25 940,657 47.27 Non-agency issuance .......... 268,270 12.70 346,073 13.12 272,411 13.69 Obligations of U.S. Government and agencies ................... 925,355 43.82 1,190,101 45.12 578,485 29.08 Obligations of states and political subdivisions ......... 46,961 2.22 49,787 1.89 51,206 2.57 Corporate debt securities ........ -- -- 10,048 0.38 10,093 0.51 ---------- ---- ---------- ----- ---------- ---- Total Securities Held-to-Maturity ..... 2,111,800 100.00% 2,637,420 100.00% 1,989,546 100.00% ---------- ====== ---------- ====== ---------- ====== Net discount ........... (2,989) (4,748) (5,435) ---------- ---------- ---------- Net Securities Held-to-Maturity $2,108,811 $2,632,672 $1,984,111 ========== ========== ==========
20 23 The table below sets forth certain information regarding the book value, weighted average yields and contractual maturities of the Company's federal funds sold and repurchase agreements, FHLB stock and mortgage-backed and other securities available-for-sale and held-to-maturity portfolios at December 31, 1998.
ONE YEAR ONE TO FIVE TO MORE THAN OR LESS FIVE YEARS TEN YEARS TEN YEARS ------------------------ --------------------- -------------------- ----------------------- ANNUALIZED ANNUALIZED ANNUALIZED ANNUALIZED WEIGHTED WEIGHTED WEIGHTED WEIGHTED BOOK AVERAGE BOOK AVERAGE BOOK AVERAGE BOOK AVERAGE VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD ----- ----- ----- ----- ----- ----- ----- ----- (DOLLARS IN THOUSANDS) FEDERAL FUNDS SOLD AND REPURCHASE AGREEMENTS......... $266,437 4.96% $ - -% $ - -% $ - -% ======== ======= ======== ========== FHLB STOCK (1)................ $ - -% $ - -% $ - -% $ 210,250 7.00% ======== ======= ======== ========== MORTGAGE-BACKED AND OTHER SECURITIES AVAILABLE-FOR-SALE: GNMA pass-through certificates $ - -% $ - -% $ - -% $ 163,731 6.74% FHLMC pass-through certificates 3,561 5.76 354 7.27 22,222 5.67 316,174 6.33 FNMA pass-through certificates - - 3,118 5.49 14,248 5.47 591,476 6.63 REMICs and CMOs: Agency issuance...... 650 7.13 - - 69,160 5.91 4,891,347 6.29 Non-agency certificates 400 8.45 - - 3,259 6.82 1,505,743 6.56 Obligations of the U.S. Government and agencies.. 11,992 5.23 92,301 6.06 129 5.75 357,880 6.95 Corporate debt.............. - - - - - - 21,048 7.43 Asset-backed securities..... - - - - - - 15,815 6.09 Equity securities (1)....... - - - - - - 127,613 5.38 Other securities............ 9,989 5.55 - - - - 2 9.50 -------- ------- -------- ---------- TOTAL SECURITIES AVAILABLE-FOR-SALE: $ 26,592 5.52% $95,773 6.05% $109,018 5.83% $7,990,829 6.39% ======== ======= ======== ========== MORTGAGE-BACKED AND OTHER SECURITIES HELD-TO-MATURITY: GNMA pass-through certificates $ 10 10.92% $ 2,243 7.36% $ 33,404 7.94% $ 17,798 8.37% FHLMC pass-through certificates - - 836 8.72 4,091 7.86 9,811 8.39 FNMA pass-through certificates - - 19 6.10 3,094 7.38 12,841 6.15 REMICs and CMOs: Agency issuance....... - - - - 136,362 6.44 648,952 6.61 Non-agency issuance .. - - - - 47,175 6.45 220,163 6.08 Obligations of the U.S. Government and agencies.. - - - - 175,110 7.61 749,964 7.38 Obligations of states and political subdivisions... 800 3.25 1,877 3.89 - - 44,261 6.68 -------- ------- -------- ---------- TOTAL SECURITIES HELD-TO-MATURITY: $ 810 3.34% $ 4,975 6.27% $399,236 7.10% $1,703,790 6.91% ======== ======= ======== ==========
TOTAL SECURITIES ------------------------------------------------------- AVERAGE LIFE BY CONTRACTUAL ESTIMATED WEIGHTED MATURITY BOOK FAIR AVERAGE (IN YEARS) VALUE VALUE YIELD ---------- ----- ----- ----- (DOLLARS IN THOUSANDS) FEDERAL FUNDS SOLD AND REPURCHASE AGREEMENTS......... 0.01 $ 266,437 $ 266,437 4.96% ========== ============ FHLB STOCK (1)................ - $ 210,250 $ 210,250 7.00% ========== ============ MORTGAGE-BACKED AND OTHER SECURITIES AVAILABLE-FOR-SALE: GNMA pass-through certificates 21.37 $ 163,731 $ 166,516 6.74% FHLMC pass-through certificates 23.51 342,311 342,722 6.28 FNMA pass-through certificates 30.04 608,842 615,794 6.60 REMICs and CMOs: Agency issuance...... 28.13 4,961,157 4,920,500 6.28 Non-agency certificates 27.22 1,509,402 1,508,302 6.56 Obligations of the U.S. Government and agencies.. 15.13 462,302 467,199 6.73 Corporate debt.............. 28.98 21,048 20,726 7.43 Asset-backed securities..... 16.32 15,815 15,824 6.09 Equity securities (1)....... - 127,613 128,939 5.38 Other securities............ 0.76 9,991 9,922 5.55 ---------- ---------- TOTAL SECURITIES AVAILABLE-FOR-SALE: 26.56 $8,222,212 $8,196,444 6.38% ========== ========== MORTGAGE-BACKED AND OTHER SECURITIES HELD-TO-MATURITY: GNMA pass-through certificates 11.36 $ 53,455 $ 55,577 8.06% FHLMC pass-through certificates 9.84 14,738 15,227 8.26 FNMA pass-through certificates 13.54 15,954 16,089 6.39 REMICs and CMOs: Agency issuance....... 19.43 785,314 787,603 6.58 Non-agency issuance .. 21.90 267,338 266,649 6.15 Obligations of the U.S. Government and agencies.. 14.59 925,074 935,358 7.42 Obligations of states and political subdivisions... 18.49 46,938 46,937 6.51 ---------- ---------- TOTAL SECURITIES HELD-TO-MATURITY: 17.28 $2,108,811 $2,123,440 6.94% ========== ==========
(1) As equity securities have no maturities, they are classified in the more than ten year category. Equity securities include FNMA and FHLMC preferred stock which had a book and market value of $127,515 and $128,840, respectively, at December 31, 1998. 21 24 LOAN PORTFOLIO LOAN PORTFOLIO COMPOSITION The following table sets forth the composition of the Company's loan portfolio in dollar amounts and in percentages of the portfolio at the dates indicated.
AT DECEMBER 31, -------------------------------------------------------------------------------------------- 1998 1997 1996 1995 --------------------- --------------------- --------------------- -------------------- PERCENT PERCENT PERCENT PERCENT OF OF OF OF (DOLLARS IN THOUSANDS) AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL ------ ----- ------ ----- ------ ----- ------ ----- MORTGAGE LOANS (GROSS)(1): One-to-four family .............. $7,857,964 87.37% $6,904,114 86.37% $5,107,371 88.32% $3,571,222 86.13% Multi-family .................... 452,854 5.03 377,292 4.72 201,719 3.49 145,652 3.51 Commercial real estate .......... 453,973 5.05 456,194 5.70 245,584 4.24 221,533 5.34 ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total mortgage loans ..... 8,764,791 97.45 7,737,600 96.79 5,554,674 96.05 3,938,407 94.98 ---------- ----- ---------- ----- ---------- ----- ---------- ----- CONSUMER AND OTHER LOANS (GROSS): Home equity ................. 142,437 1.58 130,665 1.63 105,475 1.82 88,508 2.13 Passbook .................... 6,653 0.07 7,207 0.09 6,497 0.11 5,564 0.13 Home Improvement ............ 5,992 0.07 8,283 0.11 10,133 0.18 12,354 0.30 Student (2) ................. 4,118 0.05 13,212 0.17 9,904 0.17 5,739 0.14 Line of Credit, Overdraft ... 24,846 0.28 37,057 0.46 40,734 0.70 48,288 1.16 Credit card ................. -- -- -- -- 8,431 0.15 8,578 0.21 Other ....................... 39,758 0.44 51,800 0.65 37,333 0.65 27,573 0.67 Commercial .................. 5,573 0.06 8,136 0.10 9,826 0.17 11,649 0.28 ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total other loans ........ 229,377 2.55 256,360 3.21 228,333 3.95 208,253 5.02 ---------- ----- ---------- ----- ---------- ----- ---------- ----- TOTAL LOANS ..................... 8,994,168 100.00% 7,993,960 100.00% 5,783,007 100.00% 4,146,660 100.00% --------- ====== --------- ====== --------- ====== --------- ====== LESS: Unearned discounts, premiums and deferred loan fees, net 32,463 26,638 1,127 (11,051) Allowance for loan losses (74,403) (73,920) (48,001) (47,853) ---------- ---------- ---------- ---------- TOTAL LOANS, NET $8,952,228 $7,946,678 $5,736,133 $4,087,756 ========== ========== ========== ==========
AT DECEMBER 31, ----------------------- 1994 ----------------------- PERCENT OF (DOLLARS IN THOUSANDS) AMOUNT TOTAL ------ ----- MORTGAGE LOANS (GROSS)(1): One-to-four family .............. $2,735,422 83.42% Multi-family .................... 138,559 4.23 Commercial real estate .......... 192,290 5.86 ---------- ------ Total mortgage loans ..... 3,066,271 93.51 ---------- ------ CONSUMER AND OTHER LOANS (GROSS): Home equity ................. 72,798 2.22 Passbook .................... 4,903 0.15 Home Improvement ............ 14,051 0.43 Student (2) ................. 17,753 0.54 Line of Credit, Overdraft ... 52,099 1.59 Credit card ................. 8,635 0.26 Other ....................... 27,861 0.85 Commercial .................. 14,722 0.45 ---------- ------ Total other loans ........ 212,822 6.49 ---------- ------ TOTAL LOANS ..................... 3,279,093 100.00% --------- ====== LESS: Unearned discounts, premiums and deferred loan fees, net (17,643) Allowance for loan losses (47,914) ---------- TOTAL LOANS, NET $3,213,536 ==========
(1) These amounts include $212.9 million, $163.7 million, $58.5 million, $49.9 million and $8.0 million of mortgage loans held-for-sale at December 31, 1998, 1997, 1996, 1995 and 1994, respectively. (2) Includes $252,000, $108,000 and $30,000 of student loans held-for-sale at December 31, 1997, 1996 and 1995, respectively. There were no student loans held-for-sale at December 31, 1998 and 1994. 22 25 LOAN MATURITY, REPRICING AND ACTIVITY The following table shows the maturity of the Company's loans receivable held-for-investment at December 31, 1998. The table does not include the effect of prepayments or scheduled principal amortization.
AT DECEMBER 31, 1998 -------------------------------------------------------------------------------------- TOTAL LOANS ONE-TO CONSUMER RECEIVABLE -FOUR MULTI- COMMERCIAL AND HELD-FOR- (In Thousands) FAMILY FAMILY REAL ESTATE OTHER INVESTMENT ------ ------ ----------- ----- ---------- Amounts due: Within one year..................... $ 7,967 $ 16,583 $111,133 $ 38,294 $ 173,977 After one year: One to three years................ 55,793 23,877 69,856 21,012 170,538 Three to five years............... 165,339 24,011 53,802 52,720 295,872 Five to ten years ................ 463,308 136,752 112,550 27,413 740,023 Ten to twenty years .............. 2,197,592 234,225 91,381 50,610 2,573,808 Over twenty years ................ 4,756,642 17,406 13,665 39,328 4,827,041 ---------- -------- -------- -------- --------- Total due after one year 7,638,674 436,271 341,254 191,083 8,607,282 ---------- -------- -------- -------- --------- Total amounts due...................... $7,646,641 $452,854 $452,387 $229,377 8,781,259 ========== ======== ======== ======== ========= Unearned discounts, premiums and deferred loan fees, net 32,463 Allowance for loan losses (74,403) ---------- Loans receivable held-for-investment, net $8,739,319 ==========
The following table sets forth at December 31, 1998, the dollar amount of all loans receivable held-for-investment due after December 31, 1999, and whether such loans have fixed interest rates or adjustable interest rates.
DUE AFTER DECEMBER 31, 1999 ---------------------------------------------------------------- (In Thousands) FIXED ADJUSTABLE TOTAL ----- ---------- ----- Mortgage Loans: One-to-four family.................................. $2,187,784 $5,450,890 $7,638,674 Multi-family........................................ 139,956 296,315 436,271 Commercial real estate.............................. 152,315 188,939 341,254 Consumer and Other Loans............................... 75,762 115,321 191,083 ---------- ---------- ---------- Total loans receivable held-for-investment.......... $2,555,817 $6,051,465 $8,607,282 ========== ========== ==========
23 26 The following table sets forth the Company's loan originations, purchases, sales and principal repayments for the periods indicated:
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) MORTGAGE LOANS (GROSS): At beginning of year .............. $ 7,737,600 $ 5,554,674 $ 3,938,407 Mortgage loans originated: One-to-four family ........... 4,747,609 3,292,451 1,894,674 Multi-family ................. 158,849 120,874 76,319 Commercial ................... 92,666 61,197 60,841 ----------- ----------- ----------- Total mortgage loans originated 4,999,124 3,474,522 2,031,834 ----------- ----------- ----------- Purchases of mortgage loans: Bulk purchases ............... -- -- 60,228 Third party loan origination program (1) ................ 187,519 562,408 1,205,198 Loans from acquired institutions -- 872,970 -- Sales of mortgage loans ........ (1,428,646) (969,187) (658,804) Transfer of loans to REO ....... (14,350) (15,775) (16,843) Principal repayments ........... (2,349,832) (1,056,003) (638,687) Loans charged off .............. (8,148) (5,120) (7,873) Securitized loans .............. (387,071) (680,889) (358,786) Adjustment to conform fiscal year of LIB to the Company .. 28,595 -- -- ----------- ----------- ----------- At end of year (2) ................ $ 8,764,791 $ 7,737,600 $ 5,554,674 =========== =========== =========== CONSUMER AND OTHER LOANS (GROSS): At beginning of year .............. $ 256,360 $ 228,333 $ 208,253 Other loans originated ......... 114,433 123,176 125,542 Purchases ...................... 6,008 18,190 -- Loans from acquired institutions -- 8,208 -- Sales of other loans ........... (17,618) (14,369) (4,388) Transfer of loans to REO ....... (67) -- (211) Principal repayments ........... (131,707) (102,577) (96,044) Loans charged off .............. (3,809) (4,601) (4,819) Adjustment to conform fiscal year of LIB to the Company .. 5,777 -- -- ----------- ----------- ----------- At end of year (3) ................ $ 229,377 $ 256,360 $ 228,333 =========== =========== ===========
(1) All third party loan originations for the years ended December 31, 1998, 1997 and 1996 were predominantly secured by one-to-four family properties. (2) Includes $212.9 million, $163.7 million and $58.5 million in real estate loans held-for-sale at December 31, 1998, 1997 and 1996, respectively. (3) Includes $0, $252,000 and $108,000 in student loans held-for-sale at December 31, 1998, 1997 and 1996, respectively. 24 27 DELINQUENT LOANS AND CLASSIFIED ASSETS. Information regarding delinquent loans and non-performing assets appears under Item 7, "MD&A - Asset Quality." The following table sets forth at December 31, 1998, the Company's carrying value of the assets, exclusive of general valuation allowances, classified as substandard or doubtful, or categorized as special mention:
SPECIAL MENTION SUBSTANDARD DOUBTFUL (Dollars in Thousands) NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT ------ ------ ------ ------ ------ ------ LOANS: One-to-four family................ 1 $ 166 732 $ 91,695 8 $ 476 Multi-family...................... 9 4,290 21 4,245 - - Commercial ....................... 21 21,291 30 26,970 1 572 Consumer and other loans ......... - - 279 6,010 1 2 -- ------- ----- -------- -- ------ Total.......................... 31 25,747 1,062 128,920 10 1,050 -- ------- ----- -------- -- ------ REAL ESTATE OWNED AND INVESTMENTS IN REAL ESTATE: One-to-four family................ - - 74 6,364 - - Multi-family...................... - - 1 33 - - Commercial........................ - - 3 4,269 - - -- ------- ----- -------- -- ------ Total.......................... - - 78 10,666 - - -- ------- ----- -------- -- ------ TOTAL ................................ 31 $25,747 1,140 $139,586 10 $1,050 == ======= ===== ======== == ======
Note: There were no assets classified as loss at December 31, 1998. 25 28 DEPOSITS The following table presents the deposit activity of the Company for the years indicated:
YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996 ---- ---- ---- Opening balance .............. $ 9,951,421 $ 8,146,103 $ 7,836,950 Net withdrawals .............. (694,666) (167,537) (38,109) Interest credited ............ 399,602 371,543 347,262 Deposits assumed from acquired institution ............... -- 1,601,312 -- Adjustment to conform fiscal year of LIB to the Company 11,929 -- -- ----------- ----------- ----------- Ending balance ............... $ 9,668,286 $ 9,951,421 $ 8,146,103 =========== =========== =========== Net (decrease) increase ...... $ (283,135) $1,805,318$ 309,153 =========== =========== =========== Percentage (decrease) increase (2.85)% 22.16% 3.94%
The following table sets forth the maturity periods of the Company's certificate of deposit accounts in amounts of $100,000 or more at December 31, 1998.
AMOUNT (IN THOUSANDS) MATURITY PERIOD Three months or less................................ $152,158 Over three through six months 133,182 Over six through twelve months 126,668 Over twelve months.................................. 156,724 -------- Total....................................... $568,732 ========
26 29 The following table sets forth the distribution of the Company's average deposit balances for the periods indicated and the weighted average nominal interest rates on each category of deposit presented.
Year Ended December 31, ----------------------------------------------------------------------------- 1998 1997 ------------------------------------ -------------------------------------- (Dollars in Thousands) Weighted Weighted Percent Average Percent Average Average Of Total Nominal Average Of Total Nominal Balance Deposits Rate Balance Deposits Rate ------- -------- ---- ------- -------- ---- Savings .......................... $2,889,510 29.45% 2.47% $2,560,738 29.59% 2.75% NOW .............................. 130,476 1.33 1.29 105,930 1.22 1.51 Money market ..................... 729,106 7.43 4.31 484,599 5.60 4.08 Money manager .................... 366,957 3.74 1.25 312,662 3.61 1.56 Non-interest bearing ............. 399,568 4.07 -- 263,436 3.05 -- ---------- ----- ---------- ----- Total ..................... 4,515,617 46.02 2.42 3,727,365 43.07 2.60 ---------- ----- ---------- ----- - Certificates of Deposit(1): Within one year ............... 2,096,650 21.37 4.52 1,420,788 16.42 4.97 One to three years ............ 1,922,096 19.58 5.65 2,266,128 26.18 5.75 Three to five years ........... 1,085,050 11.06 6.14 1,047,035 12.10 6.16 Five or more years ............ 71,595 0.73 6.20 77,670 0.90 6.05 Jumbo ......................... 121,918 1.24 4.85 114,867 1.33 5.09 ---------- ----- ---------- ----- Total ..................... 5,297,309 53.98 5.40 4,926,488 56.93 5.60 ---------- ----- ---------- ----- Total deposits ........... $9,812,926 100.00% $8,653,853 100.00% ========== ====== ========== ======
1996 ------------------------------------ Weighted Percent Average Average of Total Nominal Balance Deposits Rate ------- -------- ---- Savings .......................... $2,497,554 30.98% 2.76% NOW .............................. 201,847 2.50 2.07 Money market ..................... 379,901 4.71 3.39 Money manager .................... 193,124 2.40 2.02 Non-interest bearing ............. 193,927 2.41 -- ---------- ----- Total ..................... 3,466,353 43.00 2.60 ---------- ----- Certificates of Deposit(1): Within one year ............... 1,445,676 17.93 4.77 One to three years ............ 1,958,650 24.30 5.72 Three to five years ........... 971,659 12.05 6.21 Five or more years ............ 92,179 1.14 6.13 Jumbo ......................... 126,970 1.58 5.09 ---------- ----- Total ..................... 4,595,134 57.00 5.52 ---------- ----- Total deposits ........... $8,061,487 100.00% ========== ======
(1) Terms indicated are original, not term remaining to maturity. The following table presents, by rate categories, the balances of the Company's certificates of deposit outstanding at December 31, 1998, 1997 and 1996, and the remaining periods to maturity of the certificate of deposit accounts outstanding at December 31, 1998:
Period to maturity from December 31, 1998 At December 31, Within One to two Two to three Over three (In Thousands) one year years years years 1998 1997 1996 -------- ----- ----- ----- ---- ---- ---- CERTIFICATES OF DEPOSIT: 3.99% or less............... $ 267,690 $ - $ 78 $ - $ 267,768 $ 270,026 $ 275,110 4.00% to 4.99%.............. 1,376,445 80,699 7,788 15,309 1,480,241 430,877 628,058 5.00% to 5.99%.............. 1,588,729 462,697 103,215 71,744 2,226,385 3,497,581 2,539,356 6.00% to 6.99%.............. 367,505 170,183 215,450 210,415 963,553 1,270,595 1,154,078 7.00% and over ............ 675 104,130 - - 104,805 163,904 136,939 ----------- -------- -------- -------- ---------- ---------- ---------- Total..... $ 3,601,044 $817,709 $326,531 $297,468 $5,042,752 $5,632,983 $4,733,541 =========== ======== ======== ======== ========== ========== ==========
27 30 BORROWINGS The following table sets forth certain information regarding the Company's borrowed funds at or for the years ended on the dates indicated:
AT OR FOR THE YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996 ---- ---- ---- FHLB-NY ADVANCES: Average balance.............................................. $ 360,233 $ 369,374 $ 206,280 Maximum balance outstanding at any month end during the year...................................... 1,210,170 426,932 266,562 Balance outstanding at end of year........................... 1,210,170 423,136 266,514 Weighted average interest rate during the year 5.78% 6.00% 6.25% Weighted average interest rate at end of the year 4.94 6.16 6.13 REVERSE REPURCHASE AGREEMENTS: Average balance ............................................. $5,767,274 $3,334,692 $2,419,934 Maximum balance of outstanding agreements at any month end during the year.................................. 7,491,800 3,896,165 2,645,000 Balance outstanding at end of year........................... 7,291,800 3.896,165 2,645,000 Weighted average interest rate during the year .............. 5.50% 5.73% 5.61% Weighted average interest rate at end of the year ........... 5.27 5.78 5.61 OTHER BORROWINGS: Average balance.............................................. $ 514,945 $ 259,256 $ 46,883 Maximum balance outstanding at any month end during the year....................................... 566,697 462,758 181,370 Balance outstanding at end of year........................... 520,827 454,936 178,023 Weighted average interest rate during the year .............. 6.66% 6.44% 6.11% Weighted average interest rate at end of the year ........... 6.66 6.66 6.00 TOTAL BORROWINGS: Average balance ............................................. $6,642,452 $3,963,322 $2,673,097 Maximum balance outstanding at any month end during the year...................................... 9,022,797 4,774,237 3,089,537 Balance outstanding at end of year........................... 9,022,797 4,774,237 3,089,537 Weighted average interest rate during the year .............. 5.61% 5.77% 5.67% Weighted average interest rate at end of the year ........... 5.31 5.90 5.68
Item 2. PROPERTIES At December 31, 1998, the Company operated 96 full-service banking offices, of which 53 were owned and 43 were leased. During February 1999, the Company closed five of the former LIB's banking offices and opened one additional banking office. At December 31, 1998, the Company owned its principal executive offices and leased the office for its mortgage operations, both located in Lake Success, New York. In February 1999, the Company purchased the office for its mortgage operations. For further information regarding the Company's lease obligations, see Note 11 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." In addition, at December 31, 1998, the Company owned the former main operating headquarters of LIB located in Melville, New York. The Company has abandoned this facility and intends to sell this 28 31 facility by December 31, 1999. Also, at December 31, 1998, the Company leased and sub-leased its previous mortgage operating facility in Mineola, New York and abandoned this facility on February 1, 1999. For additional information on these facilities, see Note 2 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." ITEM 3. LEGAL PROCEEDINGS On February 27, 1998 a class action complaint against LIB and the members of the Board of Directors of LIB was filed in the Chancery Court of Delaware. The lawsuit is entitled Miriam Simon and Stewart Simon vs. Long Island Bancorp, Inc., et al. The complaint (the "Simon Complaint") alleges that on February 25, 1998 it was announced that the Company made an offer to acquire LIB for $55 per share and that LIB made a counteroffer of $60 per share. The complaint alleges that the alleged counterproposal capped the bidding price for LIB's shares and impeded maximization of shareholder value. The complaint further alleges that the directors violated their fiduciary duties because they failed to 1) undertake an adequate evaluation of LIB's worth as a potential merger/acquisition candidate, 2) take adequate steps to enhance LIB's value as a merger/acquisition candidate, or 3) effectively expose LIB to the marketplace to create an active and open auction of LIB. The complaint seeks a judgment 1) enjoining the directors to maximize shareholder value and consider and negotiate all bona fide offers, 2) compensating class members for losses and damages suffered, and 3) awarding plaintiffs costs and attorneys' fees. On March 6, 1998 a class action complaint against LIB and the members of the Board of Directors of LIB was filed in the Chancery Court of Delaware. The lawsuit is entitled Murray Zucker and Deborah Dyckman vs. Long Island Bancorp, Inc., et al. An amended complaint was filed in the action on April 6, 1998. The amended complaint alleges that the transaction encompassed by the merger agreement between LIB and AFC is unfair to LIB's shareholders, does not reflect the intrinsic value of LIB's assets, as allegedly reflected by a competing offer to acquire LIB by North Fork Bancorporation, and is the result of unfair dealing by the individual defendants in an attempt to benefit themselves. The amended complaint alleges further, inter alia, that the transaction breaches the individual defendants' fiduciary duties to take all necessary steps to ensure that the stockholders will receive the maximum value realizable for their shares, including the implementation of a bidding mechanism to foster a fair auction of LIB to the highest bidder or the exploration of strategic alternatives that will return greater or equivalent value to the plaintiffs and the class. The amended complaint seeks injunctive relief and the costs and disbursements of the action, including attorneys' and expert fees. On March 13, 1998 a class action complaint was filed in Delaware Chancery Court against LIB and the Board of Directors of LIB. This complaint is entitled Lawrence Berman vs. John J. Conefry, Jr., et al. The complaint is substantially similar to the Simon Complaint and alleges that the Company made an informal offer of $55 per share for LIB and LIB replied with a counterproposal of $60 per share. The complaint further alleges, inter alia, that defendants breached their fiduciary duties by capping the price of LIB without taking all appropriate steps to initiate a market check or auction and maximize shareholder value. The complaint seeks injunctive relief, damages in an unstated amount, and costs and disbursements, including attorneys' and expert fees. The three cases were consolidated under the Murray Zucker and Deborah Dyckman vs. Long Island Bancorp, Inc., et al. heading and a stipulation was entered extending the defendants' time to answer indefinitely. Following December 31, 1998, the plaintiffs offered to stipulate with the Defendants that the actions be dismissed without payment or compensation. AFC, as successor to LIB, has agreed to such offer. On March 24, 1994, LISB received notice that it had been named as a defendant in a class action lawsuit filed in the United States District Court for the Eastern District of New York against James J. Conway, Jr., former Chairman and Chief Executive Officer of LISB who resigned from LISB in June 1992, his former law firm, certain predecessor firms of that law firm, certain partners of that law firm and LISB. 29 32 The lawsuit is entitled Ronnie Weil Also Known as Ronnie Moore, for Herself and on Behalf of All Other Persons Who Attained Mortgage Loans from The Long Island Savings Bank, FSB during the period January 1, 1983 through December 31, 1992 vs. The Long Island Savings Bank, FSB, et al. The complaint alleges that the defendants caused mortgage loan commitments to be issued to mortgage loan borrowers, and submitted legal invoices to the borrowers at the closing of mortgage loans, which falsely represented the true legal fees charged for representing LISB in connection with the mortgage loans and failed to advise that a part of the listed legal fee would be paid to Mr. Conway, thereby defrauding the borrowers. The complaint does not specify the amount of damages sought. On or about June 9, 1994, the Bank was served with an Amended Summons and Amended Complaint adding LISB's directors as individual defendants. On or about July 29, 1994, LISB and the individual director defendants served on plaintiffs a motion to dismiss the Amended Complaint. On or about August 29, 1994, the plaintiffs served papers in response to the motion. The remaining schedule on the motion was been held in abeyance pending certain discovery. On January 4, 1999, the Company was served with a second amended complaint alleging essentially the same claims and adding as additional defendants, the Company and the Association, as successor to LISB, and certain members of Mr. James J. Conway, Jr.'s family. The second amended complaint seeks damages of at least $11 million trebled. On or about February 22, 1999, the Company, the Association, for themselves and on behalf of LISB, and the individual directors of LISB filed a motion to dismiss the second amended complaint. Management believes that the likelihood is remote that this case will have a material adverse impact on the Company's consolidated financial condition and results of operations. On July 18, 1997, a purported class action (the "Federal Action") was commenced in the United States District Court for the Eastern District of New York entitled Leonard Minzer, et ano. v. Gerard C. Keegan, et al. against The Greater, The Greater's directors and certain of its executive officers, the Company and the Association. The suit alleges, among other things, that The Greater, The Greater's directors and certain of its executive officers solicited proxies in violation of Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9, promulgated thereunder, by failing to disclose certain allegedly material facts in the proxy statement, as amended, that was circulated to The Greater stockholders in connection with The Greater Acquisition, and that The Greater's directors and certain of its executive officers have breached their fiduciary duties by entering into The Greater Acquisition and related arrangements. The suit further alleges, without specification, that the Company and the Association participated in the preparation and distribution of The Greater's proxy materials and/or aided and abetted the alleged breaches of fiduciary duty by The Greater defendants. Plaintiffs sought, among other things, a preliminary and permanent injunction against consummation of The Greater Acquisition and the related transactions, an order directing that the directors and executive officers of The Greater carry-out their fiduciary duties, and unspecified damages and costs. On September 2, 1997, plaintiffs filed an amended complaint and an Application for a preliminary injunction (the "Application"). An evidentiary hearing on plaintiffs' Application was held on September 10, 1997. On September 22, 1997, the Court issued a written decision denying plaintiffs' Application in all respects. Upon stipulation of the parties, all claims against the non-director, executive officers of The Greater, except one, were dismissed. The remaining defendants moved to dismiss the amended complaint. On June 1, 1998 the Court granted defendant's motion to dismiss the amended complaint without prejudice. On or about July 1, 1998, the plaintiffs filed a pleading styled "Second Amended Class Action Complaint," without making a formal motion for leave to amend. The defendants, which include The Greater, the Association, the Company and the directors of The Greater, moved, on or about July 21, 1998, to strike the complaint or in the alternative to deny leave to amend or to dismiss it for failure to state a claim on which relief may be granted. On July 27, 1998, the Court notified the parties that the plaintiffs' letter to the Court dated July 1, 1998 accompanying the amended complaint would be deemed a motion for leave to file an 30 33 amended complaint and that defendants' motions would be treated as opposition to plaintiffs' request for leave. The motion was argued before the Court on October 21, 1998 and after supplemental submissions by the parties, the Court on January 25, 1999 dismissed the second amended complaint in all respects. On or about February 18, 1999, plaintiffs filed a Notice of Appeal to the United States Court of Appeals for the Second Circuit from each and every part of: (1) the lower court's January 25, 1999 decision dismissing the second amended complaint and the corresponding judgment entered pursuant thereto; (2) the lower court's June 1, 1998 decision dismissing the first amended complaint and the corresponding judgment entered pursuant thereto; and (3) such and further orders or decisions for which error may be assigned, including any error of law contained in the lower court's September 22, 1997 decision denying the Application. The Company believes the allegations made in the second amended complaint in the Federal Action are without merit and intends to aggressively defend its interests with respect to such matters. On August 15, 1989 LISB, and its former wholly owned subsidiary, The Long Island Savings Bank of Centereach, FSB ("Centereach"), filed suit against the United States seeking damages and/or other appropriate relief on the grounds, among others, that the government had breached the terms of the 1983 assistance agreement between LISB and the Federal Savings and Loan Insurance Corporation pursuant to which LISB acquired Centereach ("Assistance Agreement"). The Assistance Agreement, among other things, provided for the inclusion of supervisory goodwill as an asset on Centereach's balance sheet to be included in capital and amortized over 40 years for regulatory purposes. The suit is pending before Chief Judge Loren Smith in the United States Court of Federal Claims and is entitled The Long Island Savings Bank, FSB et al. vs. The United States (the "LISB Goodwill Litigation"). Similarly, on July 21, 1995, the Association commenced an action, Astoria Federal Savings and Loan Association vs. United States, (the "Astoria Goodwill Litigation") in the United States Court of Federal Claims against the United States seeking in excess of $250 million in damages arising from the government's breach of an assistance agreement entered into by the Association's predecessor in interest, Fidelity New York, FSB, in connection with its acquisition in October 1984 of Suburbia Federal Savings and Loan Association, and the government's subsequent enactment and implementation of the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") in 1989. In addition to its breach of contract claim, the Association's complaint also asserts claims based on promissory estoppel, failure of consideration and frustration of purpose, and a taking of the Association's property without just compensation in violation of the Fifth Amendment to the United States Constitution. Both the LISB Goodwill Litigation and the Astoria Goodwill Litigation 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 that the government had breached its contracts in the Winstar Cases and was liable in damages for those breaches. On September 18, 1996, Judge Smith issued an Omnibus Management Order ("Case Management Order") applicable to all Winstar-related cases. The Case Management Order addresses certain timing and procedural matters with respect to the administration of the Winstar-related cases, including organization of the parties, initial discovery, initial determinations regarding liability, and the resolution of certain common issues. The Case Management Order provides that the parties will attempt to agree upon a Master Litigation Plan, which may be in phases, to govern all further proceedings, including the resolution of common issues (other than common issues covered by the Case Management Order), dispositive motions, trials, discovery schedules, protocols for depositions, document production, expert witnesses, and other matters. 31 34 On November 1, 1996, LISB filed a motion for partial summary judgment against the government on the issues of whether LISB had a contract with the government and whether the enactment of FIRREA was contrary to the terms of such contract. The government responded in the LISB Goodwill Litigation that if the Court will not consider case specific facts, then it has no defense to LISB's motion. The government further indicated that if the Court will consider case specific facts, then it asserts among other things that there are factual issues in dispute concerning the assistance agreement regarding Centereach which render the granting of partial summary judgment inappropriate. LISB's motion for partial summary judgment remains pending before the Court. The Court has not yet ruled on the motion in the LISB Goodwill Litigation. On November 6, 1996, the Association also moved for partial summary judgment against the government on the issues of whether Fidelity had a contract with the government and whether the enactment of FIRREA was contrary to the terms of such contract. The government contested such motion and cross-moved for summary judgment seeking to dismiss the Association's contract claims. On August 7 and 8, 1997, the United States Court of Federal Claims heard oral arguments on 11 common issues raised by the government in the various partial summary judgment motions filed by the plaintiffs in the goodwill cases. The Court heard argument on these common issues in the context of 4 specific summary judgment motions, not including the LISB Goodwill Litigation or the Astoria Goodwill Litigation. In an opinion filed December 22, 1997, all such common issues were found in favor of the Plaintiffs and the government was ordered to show cause within 60 days why partial summary judgment should not be entered in all cases which have partial summary judgment motions pending, including the LISB Goodwill Litigation and the Astoria Goodwill Litigation. The government has responded in the Astoria Goodwill Litigation that if the Court will not consider case specific facts, then it has no defense to the Association's motion. The government further indicated that if the Court will consider case specific facts, then it asserts that the relevant portion of the Assistance Agreement with Fidelity did not authorize the use of its capital credit as a permanent addition to regulatory capital. In this response, the government did not raise any issues related to the supervisory goodwill portion of the Association's motion. The Association has responded to the government's response indicating in substance that the issue raised by the government was specifically addressed and decided by the United States Supreme Court in the Winstar Cases, that the contractual language in the Fidelity's Assistance Agreement and other operative documents is factually indistinguishable from that ruled upon in the Winstar Cases, and thus, that the Association's motion for partial summary judgment should be granted. The Association's response further requests reimbursement of the Association's attorneys' fees from the government for seeking to relitigate the capital credit issue. By motion dated July 16, 1998, the government moved to stay further proceedings related to the Association's motion which has been granted through April 5, 1999 for partial summary judgment. The Association's motion for partial summary judgment remains pending before the Court. Pursuant to the Case Management Order, the LISB Goodwill Litigation has been designated as one of the "First Thirty Cases". As a result of this designation, discovery is underway. Both sides have exchanged documents and directed interrogatories to each other which have been answered. The Company's attorneys have begun taking depositions of key former government regulators who had supervisory authority over LISB. The government has noticed depositions of 13 former LISB officers and employees which are to be taken in Spring 1999. The Court has indicated that it will issue its first ruling on damages in one of the Winstar Cases on April 9, 1999. The Company is unable to predict the outcome of its claims against the United States and the amount of damages that may be awarded to LISB or the Association, if any, in the event that judgments are rendered in LISB's or the Association's favor. Consequently, no assurances can be given as to the results of this claim or the timing of any proceedings in relation thereto. 32 35 The costs incurred with respect to the LISB Goodwill Litigation and the Astoria Goodwill Litigation to date have not been material to the Company's results of operations. It is expected, however, that as these cases proceed through discovery, trial and possible appeal, the costs associated with them will accelerate significantly. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the quarter ended December 31, 1998 to a vote of security holders of the Company through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR ASTORIA FINANCIAL CORPORATION'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on the Nasdaq National Market tier of the Nasdaq Stock Market under the symbol "ASFC." The table below shows the reported high and low closing price of the common stock during the periods indicated in 1998 and 1997.
1998 1997 High Low High Low ---- --- ---- --- First Quarter $62.50 $46.88 $43.13 $36.00 Second Quarter 62.38 51.56 47.50 34.75 Third Quarter 55.25 35.94 50.31 45.38 Fourth Quarter 48.13 30.13 58.13 50.75
As of March 2, 1999, the Company had 4,724 shareholders of record. As of December 31, 1998, there were 54,655,095 shares of common stock outstanding. The following schedule summarizes the cash dividends paid per common share for 1998 and 1997:
1998 1997 ---- ---- First Quarter $0.20 $0.11 Second Quarter 0.20 0.15 Third Quarter 0.20 0.15 Fourth Quarter 0.20 0.15
On January 20, 1999, the Board of Directors declared a quarterly cash dividend of $0.24 per common share, payable on March 1, 1999, to common stockholders of record at the close of business on February 12, 1999. The Board of Directors intends to review the payment of dividends quarterly and plans to continue to maintain a regular quarterly dividend in the future, dependent upon the Company's earnings, financial condition and other factors. The Company is subject to the laws of the state of Delaware which generally limit dividends to an amount equal to the excess of the net assets of the Company (the amount by which total assets exceed total liabilities) over its statutory capital, or if there is no such excess, to its net profits for the current and/or immediately preceding fiscal year. 33 36 The payment of dividends by the Company could be dependent, in large part, upon receipt of dividends from the Association. The Association is subject to certain restrictions which may limit its ability to pay dividends to the Company. See "Regulation and Supervision" in Item 1 and Note 9 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data" for an explanation of the liquidation accounts and regulatory capital requirements on the Association's ability to pay dividends. See "Regulation and Supervision" in Item 1 and Note 12 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data" concerning the tax effect of paying a portion of the retained earnings for dividends rather than absorbing tax bad debt losses. Following the close of business on September 30, 1997, in connection with The Greater Acquisition, the Company issued 2,000,000 shares of 12% Noncumulative Perpetual Preferred Stock, Series B ("Series B Preferred Stock") in exchange for all of the outstanding 12% Noncumulative Perpetual Preferred Stock, Series B of The Greater. The shares of the Series B Preferred Stock so issued were exempt from registration under the Securities Act pursuant to Section 4(2) of the Securities Act. 34 37 ITEM 6. SELECTED FINANCIAL DATA Set forth below are selected consolidated financial and other data of the Company. This financial data is derived in part from, and should be read in conjunction with, the Company's consolidated financial statements and related notes. Following the close of business on September 30, 1998, Long Island Bancorp, Inc. ("LIB") was merged with and into the Company. The merger has been accounted for as a pooling-of-interests and, accordingly, the financial results for all periods reported have been restated to include LIB. See Note 1 and Note 2 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data."
AT DECEMBER 31, (IN THOUSANDS) 1998 1997 1996 1995 1994 - - ------------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL DATA: Total assets $20,587,741 $16,432,337 $12,586,694 $11,478,912 $9,133,804 Federal funds sold and repurchase agreements 266,437 110,550 89,480 110,100 324,140 Mortgage-backed and other securities available-for-sale 8,196,444 4,807,305 4,194,418 3,688,223 1,222,038 Mortgage-backed and other securities held-to-maturity 2,108,811 2,632,672 1,984,111 3,009,284 3,987,678 Loans held-for-sale 212,909 163,962 58,643 49,901 7,956 Loans receivable held-for-investment, net 8,739,319 7,782,716 5,677,490 4,037,855 3,205,580 Mortgage servicing rights, net 50,237 41,789 29,687 11,328 759 Deposits 9,668,286 9,951,421 8,146,103 7,836,950 6,848,467 Borrowed funds 9,022,797 4,774,237 3,089,537 2,338,366 1,091,871 Stockholders' equity 1,462,384 1,445,799 1,107,923 1,116,859 1,044,284 FOR THE YEAR ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 1995 1994 - - ------------------------------------------------------------------------------------------------------------------------------- SELECTED OPERATING DATA: Interest income $ 1,224,448 $ 978,155 $ 842,469 $ 755,896 $ 573,483 Interest expense 775,465 603,591 501,343 433,294 280,302 - - ------------------------------------------------------------------------------------------------------------------------------- Net interest income 448,983 374,564 341,126 322,602 293,181 Provision for loan losses 15,380 9,061 10,163 8,477 15,688 - - ------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 433,603 365,503 330,963 314,125 277,493 Non-interest income 60,528 61,477 50,674 37,391 29,887 Non-interest expense: General and administrative 234,553 213,671 208,547 191,384 172,821 Real estate operations and provision for real estate losses, net (1,854) 1,863 (6,643) (2,963) 9,281 Amortization of goodwill 19,754 11,722 8,968 8,518 1,788 Acquisition costs and restructuring charges 124,168 - - - - SAIF recapitalization assessment - - 47,202 - - - - ------------------------------------------------------------------------------------------------------------------------------- Total non-interest expense 376,621 227,256 258,074 196,939 183,890 - - ------------------------------------------------------------------------------------------------------------------------------- Income before income taxes, extraordinary item and cumulative effect of accounting changes 117,510 199,724 123,563 154,577 123,490 Income tax expense 61,825 81,840 54,435 65,640 48,926 - - ------------------------------------------------------------------------------------------------------------------------------- Income before extraordinary item and cumulative effect of accounting changes 55,685 117,884 69,128 88,937 74,564 Extraordinary item, net of tax (10,637) - - - - Cumulative effect of accounting changes - - - - 8,648 - - ------------------------------------------------------------------------------------------------------------------------------- Net income 45,048 117,884 69,128 88,937 83,212 Preferred dividends declared 6,000 1,500 - - - - - ------------------------------------------------------------------------------------------------------------------------------- Net income available to common shareholders $ 39,048 $ 116,384 $ 69,128 $ 88,937 $ 83,212 =============================================================================================================================== Basic earnings per common share $ 0.77 $ 2.51 $ 1.49 $ 1.81 $ 1.62 Diluted earnings per common share $ 0.74 $ 2.39 $ 1.44 $ 1.76 $ 1.61
35 38
AT OR FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- SELECTED FINANCIAL RATIOS AND OTHER DATA: Return on average assets 0.25% 0.84% 0.58% 0.82% 0.95% Return on average stockholders' equity 3.02 9.83 6.27 8.25 9.29 Return on average common stockholders' equity 2.71 9.81 6.27 8.25 9.29 Return on average tangible stockholders' equity 3.65 11.16 6.95 9.16 9.35 Average stockholders' equity to average assets 8.13 8.56 9.18 9.89 10.23 Average tangible stockholders' equity to average tangible assets 6.83 7.62 8.36 9.00 10.16 Stockholders' equity to total assets 7.10 8.80 8.80 9.73 11.43 Core deposits to total deposits (1) 47.84 43.40 41.89 43.65 50.34 Net interest spread 2.20 2.38 2.56 2.70 3.10 Net interest margin (2) 2.58 2.78 2.96 3.09 3.48 Operating income to average assets (3) 0.27 0.34 0.36 0.33 0.32 General and administrative expense to average assets 1.28 1.53 1.74 1.76 1.97 Efficiency ratio (4) 47.05 50.68 54.28 53.41 53.81 Average interest-earning assets to average interest-bearing liabilities 1.09x 1.09x 1.09x 1.10x 1.11x Book value per common share $ 25.84 $ 25.93 $ 22.24 $ 21.23 $ 19.02 Tangible book value per common share 21.34 21.04 20.13 19.11 18.93 Cash dividends paid per common share 0.80 0.56 0.43 0.20 - Dividend payout ratio 108.11% 23.43% 29.86% 11.36% - ASSET QUALITY RATIOS: Non-performing loans to total loans (5)(6) 1.23 1.12 1.50 2.42 3.69 Non-performing loans to total assets (5)(6) 0.54 0.55 0.69 0.87 1.32 Non-performing assets to total assets (6)(7) 0.58 0.70 0.87 1.15 1.69 Allowance for loan losses to non-performing loans 66.99 82.23 55.41 47.78 39.58 Allowance for loan losses to non-accrual loans 70.00 86.79 60.58 50.72 43.14 Allowance for loan losses to total loans 0.83 0.93 0.83 1.15 1.46 OTHER DATA: Number of deposit accounts 980,307 1,044,390 858,030 830,898 689,824 Mortgage loans serviced for others (in thousands) $4,944,176 $4,690,746 $3,791,920 $2,687,797 $1,741,669 Number of full service banking offices (8) 96 96 82 82 65 Regional lending offices 12 22 25 16 5 OTHER NON-GAAP DISCLOSURES (9) Return on average assets 0.79% 0.84% 0.81% 0.82% 0.95% Cash return on average assets (10) 1.05 1.09 1.04 1.01 1.07 Return on average stockholders' equity 9.76 9.83 8.76 8.25 9.29 Cash return on average stockholders' equity (10) 12.86 12.77 11.35 10.22 10.51 Return on average common stockholders' equity 9.68 9.81 8.76 8.25 9.29 Cash return on average common stockholders' equity (10) 12.89 12.78 11.35 10.22 10.51 Return on average tangible stockholders' equity 11.78 11.16 9.71 9.16 9.35 Cash return on average tangible stockholders' equity (10) 15.53 14.49 12.57 11.34 10.58 Cash general and administrative expense to average assets (11) 1.18 1.39 1.59 1.64 1.87 Cash efficiency ratio (4)(11) 43.40 46.09 49.67 49.95 50.96
(1) Core deposits are comprised of savings, money market, money manager and NOW accounts. (2) Net interest margin represents net interest income divided by average interest-earning assets. (3) Operating income represents total non-interest income less net gains on sales of securities. Operating income totaled $49.6 million, $47.1 million, $43.1 million, $35.7 million and $28.0 million for 1998, 1997, 1996, 1995 and 1994, respectively. (4) Efficiency ratio represents general and administrative expense divided by the sum of net interest income plus operating income. (5) Non-performing loans consist of all non-accrual loans and all mortgage loans delinquent 90 days or more as to their maturity date but not their interest payments. (6) Non-performing loans and assets exclude loans which have been restructured and are accruing and performing in accordance with the restructured terms. Restructured accruing loans totaled $6.9 million, $9.1 million, $11.8 million, $12.1 million and $12.8 million at December 31, 1998, 1997, 1996, 1995 and 1994, respectively. (7) Non-performing assets consist of all non-performing loans, real estate owned and investments in real estate, net. (8) As of February 28, 1999, the number of banking offices totaled 92. (9) The information presented is not in conformity with GAAP. The following infrequently occurring items have been excluded from the return calculations: For 1998, $89.7 million, after tax, for costs associated with the acquisition of LIB and $10.6 million, after tax, of other infrequently occurring charges. For 1996, $27.6 million, after tax, special assessment for the recapitalization of the SAIF was excluded. This information is being presented since management of the Company considers it a more accurate presentation of the Company's actual results of operations. (10) Excludes non-cash charge for amortization of goodwill and amortization relating to allocation of Employee Stock Ownership Plan ("ESOP") stock and earned portion of the Recognition and Retention Plan ("RRP") stock, and related tax benefit. (11) Excludes non-cash charge for amortization relating to allocation of ESOP stock and earned portion of RRP stock. 36 39 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto presented elsewhere in this report. GENERAL The Company is headquartered in Lake Success, New York and its principal business consists of the operation of its wholly-owned subsidiary, the Association. The Association's primary business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, principal repayments on loans and securities and borrowed funds, primarily in one-to-four family residential mortgage loans, mortgage-backed securities and, to a lesser extent, commercial real estate loans, multi-family mortgage loans and consumer loans. In addition, the Association invests in securities issued by the U.S. Government and federal agencies and other securities. The Company's results of operations are dependent primarily on its net interest income, which is the difference between the interest earned on its assets, primarily its loan and securities portfolios, and its cost of funds, which consists of the interest paid on its deposits and borrowings. The Company's net income is also affected by its provision for loan losses, non-interest income, general and administrative expense, other non-interest expense, and income tax expense. General and administrative expense consists of compensation and benefits, occupancy, equipment and systems expenses, federal deposit insurance premiums, advertising and other operating expenses. Other non-interest expense generally consists of real estate operations and provision for real estate losses and amortization of goodwill. The earnings of the Company are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates and U.S. Treasury yield curves, government policies and actions of regulatory authorities. MERGERS AND ACQUISITIONS The Company continues to consider merger and acquisition activity as an integral part of its strategic objective for its long-term growth. Since its incorporation in 1993, the Company has been successful in expanding its operations through business combinations with other financial institutions as follows: Long Island Bancorp, Inc. Acquisition Following the close of business on September 30, 1998, the Company completed the acquisition of LIB, the holding company of LISB, a federally chartered savings bank, with LIB merging with and into the Company and LISB merging with and into the Association. The transaction was accounted for as a pooling-of-interests. Accordingly, the assets, liabilities and stockholders' equity as reported by LIB immediately prior to consummation, were recorded by the Company. No goodwill was created as a result of the LIB Acquisition. Under the terms of the merger agreement, holders of LIB common stock, par value $.01 per share ("LIB Common Stock"), received 1.15 shares of the Company's common stock, par value $.01 per share ("Common Stock"), for each share of LIB Common Stock resulting in the issuance of 27,876,636 shares of Common Stock. As a result of the completion of the LIB Acquisition, after the close of business on September 30, 1998, the Company had total assets of $19.22 billion, total deposits of $9.68 billion and total stockholders' equity of $1.45 billion. LIB's fiscal year had been as of and for the year ended September 30, whereas the Company utilizes a calendar year basis. LIB's financial results for 1998 have been conformed to the calendar year reporting period of the Company. All prior year consolidated financial results of the Company have been restated and combine the Company with LIB utilizing their respective fiscal reporting periods. As a result, LIB's 37 40 operating results for the three-month period ended December 31, 1997 have been set forth separately as a component of consolidated stockholders' equity and are not included in the Company's consolidated statements of operations. The Greater Acquisition Following the close of business on September 30, 1997, the Company completed the acquisition of The Greater, by merger of The Greater with and into the Association, in a transaction ("The Greater Acquisition"), that was accounted for as a purchase. Pursuant to the terms of The Greater Acquisition, stockholders of The Greater received 0.50 shares of Common Stock per share of The Greater's common stock for 75% of the shares of The Greater's common stock outstanding and $19.00 per share of The Greater's common stock for the remaining 25% of the shares of The Greater's common stock outstanding. In addition, the Company issued 2,000,000 shares of Series B Preferred Stock, in exchange for all of the outstanding 12% Noncumulative Perpetual Preferred Stock, Series B of The Greater. The total consideration paid in The Greater Acquisition was $399.5 million, which included $38.2 million of transaction costs. The addition of The Greater's fourteen banking offices, and two new offices opened shortly after The Greater Acquisition, provided the Company a substantial market presence in Brooklyn, New York. At December 31, 1998, the remaining goodwill balance generated in the transaction was $159.5 million. The Fidelity Acquisition Following the close of business on January 31, 1995, the Company completed the acquisition of Fidelity in a transaction which was accounted for as a purchase. At December 31, 1998, the remaining goodwill balance generated in the transaction was $82.9 million. Liquidity and Capital Resources The Company's primary source of funds is cash provided by investing activities, which includes principal and interest payments on loans, mortgage-backed securities and other securities. During the years ended December 31, 1998 and 1997, principal payments on loans, mortgage-backed securities and proceeds from maturities of other securities totaled $6.05 billion and $2.40 billion, respectively. During the year ended December 31, 1998, the Company received $1.92 billion of funds from the sale of securities available-for-sale, loans and real estate versus $1.59 billion from sales during the year ended December 31, 1997. The Company's other sources of funds are provided by operating and financing activities. Net cash provided from operating activities during the years ended December 31, 1998 and 1997 totaled $302.4 million and $53.9 million, respectively, of which $45.0 million and $117.9 million, respectively, represented net income of the Company. The net increase in borrowings during 1998 totaled $4.12 billion and the net decrease in deposits totaled $294.1 million. The net increase in borrowings and deposits during 1997 totaled $1.19 billion and $203.9 million, respectively. The Company's primary uses of funds in its investing activities are for the purchase and origination of mortgage loans and the purchase of mortgage-backed securities and other securities. During the year ended December 31, 1998, the Company's gross purchases and originations of mortgage loans totaled $5.19 billion, compared to $4.04 billion during the year ended December 31, 1997. The Company's purchases of mortgage-backed securities and other securities during the year ended December 31, 1998 and 1997 totaled $7.85 billion and $1.84 billion, respectively. See "Lending and Investing Activities" for further discussion. Stockholders' equity totaled $1.46 billion at December 31, 1998, compared to $1.45 billion at December 31, 1997. The $16.7 million increase is attributable to $45.0 million of net income, the amortization for the allocated portion of shares held by the Employee Stock Ownership Plan ("ESOP") and the earned 38 41 portion of the shares held by the Recognition and Retention Plans ("RRP") and related tax benefit of $26.5 million and the effect of options exercised and related tax benefit of $24.4 million. In addition, in order to conform LIB's financial results to the calendar year reporting period of the Company, LIB's operating results and other changes in stockholders' equity for the three-month period ended December 31, 1997 totaling $10.9 million, are included as an increase to the Company's total stockholders' equity. These increases were offset by the declaration of dividends of $38.6 million, the change in the unrealized loss on securities, net of taxes, of $34.9 million and Common Stock repurchases in the first quarter of 1998, totaling $16.6 million. The Association is required by the OTS to maintain a minimum liquidity ratio, calculated as an average daily balance of liquid assets as a percentage of net withdrawable deposit accounts plus short-term borrowings, of 4.00%. The Association's liquidity ratios were 11.29% and 5.52% at December 31, 1998 and 1997, respectively. The levels of the Association's liquid assets are dependent on the Association's operating, investing and financing activities during any given period. In the normal course of its business, the Company routinely enters into various commitments, primarily relating to the origination and purchase of loans, the purchase of securities and the leasing of certain office facilities. Total commitments outstanding at December 31, 1998 to originate and purchase loans were $639.3 million. In addition, the Company had outstanding commitments to purchase $785.7 million of mortgage-backed securities at December 31, 1998. Rental payments under non-cancelable lease commitments totaled $91.1 million at December 31, 1998. The Company anticipates that it will have sufficient funds available to meet its current commitments in the normal course of its business. During the years ended December 31, 1998 and 1997, the Company repurchased 339,892 and 2,224,372 shares of Common Stock, respectively, for an aggregate cost of $16.6 million and $85.7 million, respectively. The Company's fifth stock repurchase plan was terminated on April 2, 1998 as a result of the LIB Acquisition. During the years ended December 31, 1998 and 1997, the Company declared cash dividends on its Common Stock totaling $32.6 million and $24.5 million, respectively. On January 20, 1999, the Company declared a quarterly cash dividend of $0.24 per share of Common Stock payable on March 1, 1999 to stockholders of record as of the close of business on February 12, 1999. Beginning October 15, 1997, the Company has paid quarterly cash dividends equal to $0.75 per share on shares of its Series B Preferred Stock, aggregating $1.5 million per quarter. During the years ended December 31, 1998 and 1997, the Company declared cash dividends on its Series B Preferred Stock totaling $6.0 million and $1.5 million, respectively. In 1996, the Company adopted a Stockholder Rights Plan (the "Rights Plan") and declared a dividend of one preferred share purchase right ("Right") for each outstanding share of Common Stock. Each Right entitles stockholders to buy one one-hundredth interest in a share of a new series of preferred stock of the Company, at an exercise price of $100.00 upon the occurrence of certain events described in the Rights Plan. The Rights Plan was not adopted in response to any specific event, but is intended to help ensure that all stockholders of the Company receive fair and equitable treatment in the event of any proposed acquisition of the Company and guards against partial tender offers, squeeze- outs and other tactics that may be used to gain control of the Company without paying all stockholders a fair and full value for their investment in the Company. The Rights Plan will not prevent the Company from being acquired, but rather encourages potential acquirors to negotiate any such proposed transaction with the Board of Directors, who has the responsibility to act in the best interest of all the Company's stockholders. At the time of the conversion from mutual to stock form of ownership, the Association was required to establish a liquidation account in an amount equal to its capital as of June 30, 1993. As part of its acquisitions of Fidelity and The Greater, the Association established similar liquidation accounts equal to 39 42 the remaining liquidation account balances previously maintained by those entities as a result of their conversions from mutual to stock form of ownership. These liquidation accounts will be reduced to the extent that eligible account holders reduce their qualifying deposits. In the unlikely event of a complete liquidation of the Association, each eligible account holder will be entitled to receive a distribution from the liquidation accounts. The Association is not permitted to declare or pay dividends on its capital stock, or repurchase any of its outstanding stock, if the effect thereof would cause its stockholders' equity to be reduced below the amounts required for the liquidation accounts or applicable regulatory capital requirements. At December 31, 1998, the Association exceeded all of its regulatory capital requirements with tangible, leverage, and risk-based capital ratios of 5.34%, 5.34%, and 13.53%, respectively. The respective minimum regulatory requirements were 1.50%, 3.00%, and 8.00%. During 1997, the Association created a new operating subsidiary, intended to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended, which may, among other things, be utilized by the Association to raise capital in the future. LISB also created a similar subsidiary in September 1997, which the Association acquired in connection with the LIB Acquisition. Retained earnings at December 31, 1998 and 1997 include approximately $159.1 million for which no Federal income tax liability has been recognized. These amounts represents the balance of the bad debt reserves created for tax purposes as of December 31, 1987. These amounts are subject to recapture in the unlikely event that the Association (i) makes distributions in excess of earnings and profits, (ii) redeems its stock, or (iii) liquidates. See "Impact of 1996 Legislation -- Recapture of Bad Debt Reserves." Lending and Investing Activities The primary lending and investing activities of the Company include the origination of mortgage, consumer and other loans and the purchase of mortgage loans, mortgage-backed securities and other securities. The Company's lending and investing activities in 1998 reflect the Company's objective to prudently and effectively deploy its capital through asset growth, with continued emphasis on one-to-four family mortgage lending and purchases of mortgage-backed securities. Management of the Company believes that these investment choices generate additional earnings with minimal credit risk and have substantial liquidity. In fulfilling this objective as well as managing excess cash flows resulting from higher than normal prepayments, the Company has experienced record volumes of loan originations and security purchases. These record volumes of originations and purchases reflect the Company's ability to effectively manage its cash flow which has been significantly impacted by the declines in interest rates, causing increased mortgage demand and extremely high levels of prepayments over the past two years. The Company originates loans, either directly or through mortgage brokers who obtain applications and process loans, which are underwritten, committed for and closed by the Company. During the years ended December 31, 1998 and 1997, the Company originated gross mortgage loans totaling $5.00 billion and $3.47 billion, respectively, of which $2.41 billion and $1.74 billion, respectively, were originated through mortgage brokers. In addition, for the years ended December 31, 1998 and 1997, gross mortgage loan purchases totaled $187.5 million and $562.4 million, respectively. The Company sells a significant portion of its mortgage originations, on both a servicing retained and servicing released basis. During the years ended December 31, 1998 and 1997, the Company sold mortgage loans totaling $1.43 billion and $969.2 million, respectively, consisting primarily of FHA/VA and thirty-year conforming conventional loans. As of December 31, 1998, $3.94 billion, or 45.0% of the Company's total mortgage loan portfolio were secured by properties located in 45 states other than New York State. The Company has a concentration of lending in Connecticut, New Jersey and Maryland, each comprising 5.0% or more of the Company's total mortgage loan portfolio. The Company utilizes mortgage-backed and other securities purchases as a complement to its mortgage 40 43 lending activities. Purchases during 1998 primarily consisted of U.S. Government and agency obligations (CMOs, REMICs and debentures) or other AAA- rated issues. For the years ended December 31, 1998 and 1997, purchases of mortgage-backed securities totaled $6.58 billion and $918.3 million, respectively, and purchases of other securities totaled $1.27 billion and $924.3 million, respectively. The substantial increase in the Company's purchases of mortgage-backed securities during the year ended December 31, 1998 reflects the Company's growth in interest-earning assets and interest-bearing liabilities as well as the cash management objectives as discussed above. Agency and AAA-rated mortgage-backed securities provide liquidity, collateral for borrowings and minimal credit risk while providing appropriate returns. Asset growth was primarily funded through increases in borrowed funds. For the years ended December 31, 1998 and 1997, net borrowings increased $4.12 billion and $1.19 billion, respectively. Reverse repurchase agreements increased by $3.22 billion and $912.2 million, during 1998 and 1997, respectively. FHLB-NY advances increased by $820.0 million and $2.1 million during 1998 and 1997, respectively. Management believes that currently, borrowings provide lower all-in cost effectiveness than deposit generation. The low levels of interest rates, a flat U.S. Treasury yield curve and continued attractiveness of the equity markets combined to make significant deposit generation almost unattainable without incurring unacceptable increases in interest expense. Despite the attraction of alternate investment choices by the Company's customers, the Company has been successful in avoiding a relatively significant outflow of its deposit base. More importantly, core deposits have increased to 47.8% of total deposits at December 31, 1998 from 43.4% at December 31, 1997. Interest Rate Sensitivity Analysis The Company's primary component of market risk is interest rate volatility (which is the sensitivity of income to variations in interest rates). The Company's market rate sensitive instruments consist of interest-earning assets and interest-bearing liabilities. Accordingly, the Company's net interest income, the primary component of its net income, is subject to substantial risk due to changes in interest rates or changes in market yield curves, particularly if there is a substantial variation in the timing between the repricing of the Company's assets and the liabilities which fund them. The Company seeks to manage interest rate risk by monitoring and controlling the variation in repricing intervals between its assets and liabilities. To a lesser extent, the Company also monitors its interest rate sensitivity by analyzing the estimated changes in the market value of its assets and liabilities assuming various interest rate scenarios. As discussed more fully below, a variety of factors influence the repricing characteristics and the market value of any given asset or liability. The matching of the repricing characteristics of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice, either by its contractual terms or based upon certain assumptions, including, but not limited to, estimated prepayments, made by management, within that time period. The interest rate sensitivity gap is the difference between the amount of interest-earning assets anticipated to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated to mature or reprice within that same time period. A gap is considered positive when the amount of interest rate sensitive assets maturing or repricing within a specific time frame exceeds the amount of interest rate sensitive liabilities maturing or repricing within that same time frame. Conversely, a gap is considered negative when the amount of interest rate sensitive liabilities maturing or repricing within a specific time frame exceeds the amount of interest rate sensitive assets maturing or repricing within that same time frame. In a rising interest rate environment, an institution with a negative gap would generally be expected, absent the effects of other factors, to experience a greater increase in the costs of its liabilities relative to the yields of its assets and thus a decrease in the institution's net interest income, whereas an institution with a positive gap would generally be expected to experience the opposite results. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income. 41 44 The actual duration of mortgage loans and mortgage-backed securities can be significantly impacted by changes in mortgage prepayment and market interest rates. Mortgage prepayment rates will vary due to a number of factors, including the regional economy in the area where the underlying mortgages were originated, seasonal factors, demographic variables and the assumability of the underlying mortgages. However, the largest determinants of prepayment rates are prevailing interest rates and related mortgage refinancing opportunities, as was the case during 1998. Management monitors interest rate sensitivity so that adjustments in the asset and liability mix, when deemed appropriate, can be made on a timely basis. Purchases of fixed-rate mortgage-backed securities are concentrated on those securities with short-and medium-term average lives and originations of thirty-year fixed rate mortgages are originated and sold in the secondary market. During the fourth quarter of 1998, subsequent to the consummation of the LIB Acquisition, the Company prepaid $1.41 billion of reverse repurchase agreements and FHLB-NY advances with a weighted average maturity of 1.07 years, a weighted average initial call date of 0.27 years, and a weighted average rate of 5.83%. As a result of these prepayments, the Company incurred a prepayment penalty of $10.6 million, net of tax. The Company subsequently borrowed $1.41 billion of new funds having a weighted average maturity date of 4.52 years, a weighted average initial call date of 2.46 years and a weighted average rate of 4.86%. At December 31, 1998, the Company's net interest-earning assets maturing or repricing within one year exceeded interest-bearing liabilities maturing or repricing within the same time period by $1.07 billion, representing a positive cumulative one-year gap of 5.18% of total assets. This compares to a negative cumulative one-year gap of 4.41% of total assets at December 31, 1997 due to interest-bearing liabilities maturing or repricing within one year exceeding net interest-earning assets maturing or repricing within the same time period by $724.1 million. The Company's December 31, 1998 and 1997 cumulative one-year gap positions reflect the classification of available-for-sale securities according to repricing periods based on their estimated prepayments and contractual maturities. If those securities at December 31, 1998 were classified within the one-year maturing or repricing category, net interest-earning assets maturing or repricing within one year would have exceeded interest-bearing liabilities maturing or repricing within the same time period by $6.46 billion, representing a positive cumulative one-year gap of 31.39% of total assets. Using this method at December 31, 1997, net interest-earning assets maturing or repricing within one year would have exceeded interest-bearing liabilities maturing or repricing within the same time period by $1.53 billion, representing a positive cumulative one-year gap of 9.33% of total assets. The available-for-sale securities may or may not be sold, or effectively repriced, since that activity is subject to management's discretion. The following table ("the Gap Table") sets forth the amount of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1998 that are anticipated by the Company, using certain assumptions based on its historical experience and other data available to management, to reprice or mature in each of the future time periods shown. The Gap Table does not necessarily indicate the impact of general interest rate movements on the Company's net interest income because the actual repricing dates of various assets and liabilities are subject to customer discretion and competitive and other pressures. Callable features of certain assets and liabilities, in addition to the foregoing, may cause actual experience to vary from that indicated. Included in this table are $1.33 billion of callable other securities at their amortized cost, classified according to their maturity dates, which are primarily within the more than five years maturity category. Of such securities, $890.3 million are callable within one year. Also included in this table are $8.63 billion of callable borrowings, classified according to their maturity dates, which are primarily within the more than three years to five years maturity category and the more than five years maturity category. Of such borrowings, $2.07 billion are initially callable within one year. 42 45
At December 31, 1998 ----------------------------------------------------------------------------------- More than More than One Year Three Years One Year to to More than (Dollars in Thousands) or Less Three Years Five Years Five Years Total - - -------------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Mortgage loans (1) $2,493,928 $2,198,541 $2,027,472 $1,940,877 $ 8,660,818 Consumer and other loans (1) 179,438 43,713 - - 223,151 Federal funds sold and repurchase agreements 266,437 - - - 266,437 Mortgage-backed securities and other securities available- for-sale (2) 2,801,386 1,405,645 633,791 3,355,622 8,196,444 Mortgage-backed securities and other securities held-to- maturity (2) 437,836 225,273 169,007 1,489,935 2,322,051 - - -------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 6,179,025 3,873,172 2,830,270 6,786,434 19,668,901 Add: Net unamortized purchase premiums and deferred fees (3) 8,201 7,650 7,161 6,461 29,473 - - -------------------------------------------------------------------------------------------------------------------------------- Net interest-earning assets 6,187,226 3,880,822 2,837,431 6,792,895 19,698,374 - - -------------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Savings 281,568 563,136 563,136 1,407,841 2,815,681 NOW 8,784 17,568 17,568 131,720 175,640 Money manager 17,832 35,664 35,664 267,569 356,729 Money market 707,526 29,952 29,952 89,865 857,295 Certificates of deposit 3,601,044 1,144,240 291,580 5,888 5,042,752 Borrowed funds (2) 503,190 649,984 4,379,623 3,490,000 9,022,797 - - -------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 5,119,944 2,440,544 5,317,523 5,392,883 18,270,894 - - -------------------------------------------------------------------------------------------------------------------------------- Interest sensitivity gap 1,067,282 1,440,278 (2,480,092) 1,400,012 $ 1,427,480 - - -------------------------------------------------------------------------------------------------------------------------------- Cumulative interest sensitivity gap $1,067,282 $2,507,560 $ 27,468 $1,427,480 - - -------------------------------------------------------------------------------------------------------------------------------- Cumulative interest sensitivity gap as a percentage of total assets 5.18% 12.18% 0.13% 6.93% Cumulative net interest-earning assets as a percentage of interest-bearing liabilities 120.85% 133.17% 100.21% 107.81%
(1) Mortgage, consumer and other loans exclude non-performing loans, but are not reduced for the allowance for loan losses. (2) Includes $890.3 million of other securities and $2.07 billion of borrowings, which are callable within one year and at various times thereafter, which are classified above according to their contractual maturity dates (primarily in the more than five years category for other securities and the more than three years to five years and the more than five years categories for borrowings). (3) Net unamortized purchase premiums and deferred fees are prorated. Certain shortcomings are inherent in the method of analysis presented in the Gap Table. For example, although certain assets and liabilities may have similar contractual maturities or periods to repricing, they may react in different ways to changes in market interest rates. 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. Additionally, certain assets, such as ARMs, have contractual features which restrict changes in interest rates on a short-term basis and over the life of the asset. Finally, the ability of borrowers to service their ARMs or other loan obligations may decrease in the event of an interest rate increase. The Gap Table reflects the estimates of management as to periods to repricing at a particular point in time. Among the factors considered are current trends and historical repricing experience with respect to similar products. For example, the Company has a number of deposit accounts, including savings, NOW, money market and money manager accounts which, subject to certain regulatory exceptions not relevant here, may be withdrawn at any time. The Company, based upon its historical experience, assumes that while all customers in these account categories could withdraw their funds on any given day, they will not do so even if market interest rates change. As a result, different assumptions may be used at different points in time. The majority of the certificates of deposit projected to mature within the next year have original terms of less than one year. The Company has offered and currently offers 43 46 competitive market rates for products with these terms. Based upon historical experience, as well as current and projected economic conditions, the Company believes it can continue to offer competitive market rates and, therefore, while there is no assurance of renewal, the Company believes a significant amount of the balance of certificates of deposit maturing will be renewed. The Company's interest rate sensitivity is also monitored by management through analysis of the change in the net portfolio value ("NPV"). NPV is defined as the net present value of the expected future cash flows of an entity's assets and liabilities and, therefore, hypothetically represents the market value of an institution's net worth. Increases in the market value of assets will increase the NPV whereas decreases in market value of assets will decrease the NPV. Conversely, increases in the market value of liabilities will decrease NPV whereas decreases in the market value of liabilities will increase the NPV. The changes in market value of assets and liabilities due to changes in interest rates reflect the interest rate sensitivity of those assets and liabilities as their values are derived from the characteristics of the asset or liability (i.e. fixed rate, adjustable rate, caps, floors) relative to the interest rate environment. For example, in a rising interest rate environment the fair market value of a fixed rate asset will decline, whereas the fair market value of an adjustable rate asset, depending on its repricing characteristics, may not decline. 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. This analysis, referred to in the NPV table (the "NPV Table"), initially measures percentage changes from the value of projected NPV in a given rate scenario, and then measures interest rate sensitivity by the change in the NPV ratio, over a range of interest rate change scenarios. The OTS also produces a similar analysis using its own model based upon data submitted on the Association's quarterly Thrift Financial Reports, the results of which may vary from the Company's internal model primarily because of differences in assumptions utilized between the Company'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 and deposit decay rates similar to those used in the Gap Table were used. In addition, the available-for-sale securities were classified according to repricing periods based on contractual maturities and estimated prepayments. The NPV Table is based on simulations which utilize institution specific assumptions with regard to future cash flows, including customer options such as loan prepayments, period and lifetime caps, puts and calls, and deposit withdrawal estimates. The NPV Table uses discount rates derived from various sources including, but not limited to, U.S. Treasury yield curves, thrift retail certificate of deposit curves, national and local secondary mortgage markets, brokerage security pricing services and various alternative funding sources. Specifically, for mortgage loans receivable, the discount rates used were based on market rates for new loans of similar type and purpose, adjusted, when necessary, for factors such as servicing cost, credit risk and term. The discount rates used for certificates of deposit and borrowings were based on rates which approximate those the Company would incur to replace such funding of similar remaining maturities. The NPV Table calculates the NPV at a flat rate scenario by computing the present value of cash flows of interest-earning assets less the present value of interest-bearing liabilities. Certain assets, including fixed assets and real estate held for development, are assumed to remain at book value (net of valuation allowance) regardless of interest rate scenario. Other non-interest-earning assets and non-interest-bearing liabilities such as deferred fees, unamortized premiums, goodwill and accrued expenses and other liabilities are excluded from the NPV calculation. 44 47 The following represents the Company's NPV Table as of December 31, 1998:
Net Portfolio Value ("NPV") Portfolio Value of Assets Rates in ---------------------------------------- -------------------------- Basis Points Dollar Dollar Percentage NPV Sensitivity (Rate Shock) Amount Change Change Ratio Change ------------ ------ ------ ------ ----- ------ (Dollars in Thousands) +200 $1,186,946 $(692,110) (36.83)% 6.15% (3.01)% +100 1,602,635 (276,421) (14.71) 8.03 (1.13) -0- 1,879,056 - - 9.16 - -100 1,697,986 (181,069) (9.64) 8.16 (1.00) -200 1,517,028 (362,028) (19.27) 7.20 (1.95)
As with the Gap Table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling of changes in NPV requires 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 assumes that the composition of the Company'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 immediate and is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. In addition, prepayment estimates and other assumptions within the NPV Table are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. Accordingly, although the NPV measurements in theory may provide an indication of the Company's interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide for a precise forecast of the effect of changes in market interest rates on the Company's NPV and will differ from actual results. The Company, from time to time, in an attempt to further reduce volatility in its earnings caused by changes in interest rates will enter into financial derivative agreements with third parties. See Note 10 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data" for a description of such transactions. Additionally, the Company is not subject to foreign currency exchange or commodity price risk and does not own any trading assets. COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 FINANCIAL CONDITION Total assets increased $4.16 billion or 25.3%, to $20.59 billion at December 31, 1998, from $16.43 billion at December 31, 1997. This increase was primarily due to the Company's short-term objective of effectively deploying capital through asset growth, which resulted in increases in the mortgage-backed securities and mortgage loan portfolios. Mortgage-backed securities increased $2.80 billion to $8.69 billion at December 31, 1998, from $5.89 billion at December 31, 1997. This increase was attributable to $6.58 billion of purchases during 1998, partially offset by $1.64 billion of sales. The Company's objective to deploy capital through asset growth during 1998 was concentrated in the purchases of agency REMICs, which combined with the growth in the Company's loan portfolio, reflected its continued emphasis on residential lending. The Company's net loan portfolio increased $1.00 billion, to $8.95 billion at December 31, 1998, from $7.95 billion at December 31, 1997. During the year ended December 31, 1998, gross mortgage loans originated and purchased totaled $5.19 billion, of which $5.00 billion were originations and $187.5 million were third party purchases. This compares to $3.47 billion and $562.4 million of originations and purchases, respectively, for the year ended December 31, 1997. The increase in mortgage loan originations was partially offset by loan prepayments, as well as normal principal repayments. Loan originations were primarily in seven- and ten-year adjustable rates and fifteen- and 45 48 thirty-year fixed rate products. The Company sells all thirty-year fixed-rate mortgage loans in the secondary market. See "Lending and Investing Activities" for further discussion. In addition to the increases in the mortgaged-backed securities and mortgage loan portfolios, federal funds sold and repurchase agreements increased $155.8 million to $266.4 million at December 31, 1998, from $110.6 million at December 31, 1997. Other securities also increased $67.7 million to $1.61 billion at December 31, 1998, from $1.55 billion at December 31, 1997. The growth in the mortgage-backed securities and mortgage loan portfolios was funded primarily through additional medium-term and long-term callable reverse repurchase agreements and FHLB-NY advances. Reverse repurchase agreements increased $3.39 billion to $7.29 billion at December 31, 1998, from $3.90 billion at December 31, 1997. Federal Home Loan Bank advances increased $787.0 million to $1.21 billion at December 31, 1998, from $423.1 million at December 31, 1997. Deposits, another source of funds, decreased $283.1 million to $9.67 billion at December 31, 1998, from $9.95 billion at December 31, 1997 as competition with equity markets, coupled with a low interest rate environment, creates minimal opportunities for deposit growth. Accrued expenses and other liabilities increased $171.9 million, from $146.3 million at December 31, 1997 to $318.2 million at December 31, 1998. The increase was a result of the Company's accrued acquisition costs and restructuring charges for the LIB Acquisition coupled with accrued interest payable, which increased in direct relation to the increase in borrowed funds. Stockholders' equity increased to $1.46 billion at December 31, 1998, from $1.45 billion at December 31, 1997. The $16.7 million increase in stockholders' equity reflects net income of $45.0 million, the amortization relating to the allocation of ESOP stock and earned portion of RRP stock and related tax benefit of $26.5 million, the effect of stock options exercised and related tax benefit of $24.4 million and the adjustment to conform the fiscal year of LIB to the Company of $10.9 million. These increases were offset by dividends declared of $38.6 million, the change in unrealized losses on securities, net of taxes, of $34.9 million and the repurchases of Common Stock, in the first quarter of 1998, of $16.6 million. RESULTS OF OPERATIONS GENERAL The following comparison of net income, earnings per common share and related returns reflect 1998 results exclusive of infrequently occurring charges related to the LIB Acquisition of $89.7 million, after-tax and penalties related to prepaid borrowings of $10.6 million, after-tax. See Consolidated Schedule of Core Earnings on page 54 for details of these charges. For the year ended December 31, 1998, net income increased $27.5 million, or 23.4%, to $145.4 million, from $117.9 million for the year ended December 31, 1997. Diluted earnings per common share for the year ended December 31, 1998 increased to $2.64 per share, or 10.5%, from $2.39 for the year ended December 31, 1997. The return on average assets for the year ended December 31, 1998 decreased to 0.79%, from 0.84% for the year ended December 31, 1997. The return on average common stockholders' equity for the year ended December 31, 1998 decreased to 9.68%, from 9.81% for the year ended December 31, 1997. The return on average tangible stockholders' equity for the year ended December 31, 1998 increased to 11.78%, from 11.16% for the year ended December 31, 1997. Net income, including the infrequently occurring charges for the 1998 period, decreased $72.9 million to $45.0 million for the year ended December 31, 1998, from $117.9 million for the year ended December 31, 1997. For the year ended December 31, 1998, diluted earnings per common share decreased to $0.74, as compared to $2.39 per share for the year ended December 31, 1997. Return on average assets decreased to 0.25% for the year ended December 31, 1998, from 0.84% for the year ended December 31, 46 49 1997. Return on average common stockholders' equity decreased to 2.71% for the year ended December 31, 1998, from 9.81% for the year ended December 31, 1997. Return on average tangible stockholders' equity decreased to 3.65% for the year ended December 31, 1998, from 11.16% for the year ended December 31, 1997. NET INTEREST INCOME Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned or paid. The Company's net interest income is significantly impacted by changes in interest rates and changes in market yield curves. Over the past two years, interest rates have declined significantly, and the markets for which related financial instruments trade have become increasingly volatile. In addition, the decline in interest rates on long-term instruments has been greater than the decline in rates on short-term instruments, accentuating the flatness of the U.S. Treasury yield curve. As such, the Company has continued to experience compression on its net interest spread and net interest margin. Net interest income increased $74.4 million, or 19.9%, to $449.0 million for the year ended December 31, 1998, from $374.6 million for the year ended December 31, 1997. This change was the result of an increase in total average interest-earning assets of $3.98 billion, offset by an increase in total average interest-bearing liabilities of $3.71 billion. The effect of the growth in average net interest-earning assets was partially offset by the decrease in the Company's net interest rate spread to 2.20% for 1998, from 2.38% for 1997. This decrease in net interest rate spread was the result of the average yield on total interest-earning assets decreasing to 7.03% for 1998 from 7.27% for 1997, partially offset by the average cost of interest-bearing liabilities decreasing to 4.83% for 1998, from 4.89% for 1997. The Company's net interest margin decreased to 2.58% for 1998, from 2.78% for 1997. ANALYSIS OF NET INTEREST INCOME The following table sets forth certain information relating to the Company for the years ended December 31, 1998, 1997 and 1996. Yields and costs are derived by dividing income or expense by the average balance of the related assets or liabilities, respectively, for the periods shown, except where otherwise noted. Average balances are derived from average daily balances. The average balance of loans receivable includes loans on which the Company has discontinued accruing interest. The yields and costs include fees, premiums and discounts which are considered adjustments to interest rates. 47 50
Year Ended December 31, --------------------------------------------------------------------------------- 1998 1997 --------------------------------------------------------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in Thousands) Balance Interest Cost Balance Interest Cost ------- -------- ---- ------- -------- ---- Assets: Interest-earning assets: Mortgage loans (1) $ 8,321,732 $ 612,606 7.36% $ 6,568,162 $503,504 7.67% Consumer and other loans (1) 260,615 24,422 9.37 237,580 23,981 10.09 Mortgage-backed securities (2) 6,662,882 438,934 6.59 5,178,752 352,841 6.81 Other securities (2) 1,885,438 132,414 7.02 1,253,939 85,968 6.86 Federal funds sold and repurchase agreements 296,516 16,072 5.42 213,502 11,861 5.56 ----------- ---------- ----------- -------- Total interest-earning assets 17,427,183 1,224,448 7.03 13,451,935 978,155 7.27 ---------- -------- Non-interest-earning assets 893,388 555,483 ----------- ----------- Total assets $18,320,571 $14,007,418 =========== =========== Liabilities and stockholders' equity: Interest-bearing liabilities: Savings $ 2,889,510 $ 72,243 2.50% $ 2,560,738 $ 70,755 2.76 Certificates of deposit 5,297,309 288,914 5.45 4,926,488 274,042 5.56 NOW 130,476 1,696 1.30 105,930 1,700 1.60 Money market 729,106 32,108 4.40 484,599 20,121 4.15 Money manager 366,957 4,641 1.26 312,662 4,925 1.58 Borrowed funds 6,642,452 375,863 5.66 3,963,322 232,048 5.85 ----------- ---------- ----------- -------- Total interest-bearing liabilities 16,055,810 775,465 4.83 12,353,739 603,591 4.89 ---------- -------- Non-interest-bearing liabilities 774,538 454,903 ----------- ----------- Total liabilities 16,830,348 12,808,642 Stockholders' equity 1,490,223 1,198,776 ----------- ----------- Total liabilities and stockholders' equity $18,320,571 $14,007,418 =========== =========== Net interest income/net interest rate spread (3) $ 448,983 2.20% $374,564 2.38% ========= ==== ======== ==== Net interest-earning assets/ net interest margin (4) $ 1,371,373 2.58% $ 1,098,196 2.78% =========== ==== =========== ==== Ratio of interest-earnings assets to interest-bearing liabilities 1.09x 1.09x
Year Ended December 31, ------------------------------------- 1996 ------------------------------------- Average Average Yield/ (Dollars in Thousands) Balance Interest Cost ------- -------- ---- Assets: Interest-earning assets: Mortgage loans (1) $ 4,700,520 $370,867 7.89% Consumer and other loans (1) 216,504 23,164 10.70 Mortgage-backed securities (2) 5,530,547 380,825 6.89 Other securities (2) 979,359 62,932 6.43 Federal funds sold and repurchase agreements 87,364 4,681 5.36 ----------- -------- Total interest-earning assets 11,514,294 842,469 7.32 -------- Non-interest-earning assets 485,325 ----------- Total assets $11,999,619 =========== Liabilities and stockholders' equity: Interest-bearing liabilities: Savings $ 2,497,554 $ 69,019 2.76 Certificates of deposit 4,595,134 256,814 5.59 NOW 201,847 4,413 2.19 Money market 379,901 13,065 3.44 Money manager 193,124 3,951 2.05 Borrowed funds 2,673,097 154,081 5.76 ----------- -------- Total interest-bearing liabilities 10,540,657 501,343 4.76 -------- Non-interest-bearing liabilities 356,822 ----------- Total liabilities 10,897,479 Stockholders' equity 1,102,140 ----------- Total liabilities and stockholders' equity $11,999,619 =========== Net interest income/net interest rate spread (3) $341,126 2.56% ======== ==== Net interest-earning assets/ net interest margin (4) $ 973,637 2.96% =========== ==== Ratio of interest-earnings assets to interest-bearing liabilities 1.09x
(1) Mortgage and consumer loans include non-performing loans and exclude the allowance for loan losses. (2) Securities available-for-sale are reported at average amortized cost. (3) Net interest rate spread represents the difference between the average yield on average interest-earning assets and the average cost of average interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average interest-earning assets. RATE/VOLUME ANALYSIS The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) the changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) the changes attributed to changes in rate (changes in rate multiplied by 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. 48 51
Year Ended December 31, 1998 Year Ended December 31, 1997 Compared to Compared to Year Ended December 31, 1997 Year Ended December 31, 1996 ------------------------------------- ------------------------------------ Increase (Decrease) Increase (Decrease) ------------------------------------- ------------------------------------ (In Thousands) Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- Interest-earning assets: Mortgage loans $130,125 $(21,023) $109,102 $143,265 $(10,628) $132,637 Consumer and other loans 2,225 (1,784) 441 2,181 (1,364) 817 Mortgage-backed securities 97,849 (11,756) 86,093 (23,665) (4,319) (27,984) Other securities 44,390 2,056 46,446 18,600 4,436 23,036 Federal funds sold and repurchase agreements 4,516 (305) 4,211 6,999 181 7,180 -------- -------- -------- -------- -------- -------- Total 279,105 (32,812) 246,293 147,380 (11,694) 135,686 -------- -------- -------- -------- -------- -------- Interest-bearing liabilities: Savings 8,539 (7,051) 1,488 1,736 - 1,736 Certificates of deposit 20,359 (5,487) 14,872 18,601 (1,373) 17,228 NOW 349 (353) (4) (1,731) (982) (2,713) Money market 10,709 1,278 11,987 4,035 3,021 7,056 Money manager 793 (1,077) (284) 2,036 (1,062) 974 Borrowed funds 151,592 (7,777) 143,815 75,522 2,445 77,967 -------- -------- -------- -------- -------- -------- Total 192,341 (20,467) 171,874 100,199 2,049 102,248 -------- -------- -------- -------- -------- -------- Net change in net interest income $ 86,764 $(12,345) $ 74,419 $ 47,181 $(13,743) $ 33,438 ======== ======== ======== ======== ======== ========
INTEREST INCOME Interest income for the year ended December 31, 1998 increased $246.3 million, or 25.2%, to $1.22 billion, from $978.2 million for the year ended December 31, 1997. This increase was the result of a $3.98 billion increase in average interest-earning assets to $17.43 billion for the year ended December 31, 1998, from $13.45 billion for 1997. This increase was partially offset by a decrease in the average yield of interest-earning assets to 7.03% for 1998 from 7.27% for 1997. The increase in average interest-earning assets was primarily due to increases in mortgage loans and mortgage-backed and other securities. During 1998, the Company continued to emphasize the origination of mortgage loans. Interest income on mortgage loans increased $109.1 million to $612.6 million for 1998, which was the result of an increase in the average balance of $1.75 billion for 1998, partially offset by a decrease in the average yield on mortgage loans to 7.36% for 1998, from 7.67% for 1997. The decrease of the average yield was due to the flattening of the U.S. Treasury yield curve and the significant decline in market rates, which has resulted in increased prepayments and refinancing activity. Interest income on mortgage-backed securities increased $86.1 million to $438.9 million for 1998, from $352.8 million for 1997 reflecting the Company's strategy of effectively deploying its capital through asset growth. This increase was the result of a $1.48 billion increase in the average balance of this portfolio, partially offset by a decrease in the average yield to 6.59% for 1998, from 6.81% for 1997. The decrease in yield on the mortgage-backed portfolio is a result of overall decreases in market rates coupled with accelerated prepayments, resulting in reinvestments at lower rates. Interest income on other securities increased $46.4 million to $132.4 million for 1998, from $86.0 million for 1997. The increase was a result of the combined effect of an increase in the average balance of this portfolio of $631.5 million and 49 52 an increase in the average yield to 7.02% for 1998, from 6.86% for 1997 primarily resulting from the Company's purchases of higher-yielding long-term U.S. government agency securities with call features during the second half of 1997 and first half of 1998. Interest income on federal funds sold and repurchase agreements increased $4.2 million as a result of an increase in the average balance of $83.0 million, partially offset by a decrease in the average yield to 5.42% for 1998, from 5.56% for 1997. INTEREST EXPENSE Interest expense for the year ended December 31, 1998 increased $171.9 million, or 28.5%, to $775.5 million, from $603.6 million for the year ended December 31, 1997. This increase was attributable to an increase in the average balance of interest-bearing liabilities of $3.71 billion, to $16.06 billion for the year ended December 31, 1998 from $12.35 billion for the year ended December 31, 1997, partially offset by a decrease in the average cost of such liabilities to 4.83% for 1998 from 4.89% for 1997. The increase in average interest-bearing liabilities was attributable to increases in the average balances of both borrowings and deposits. The Company significantly increased borrowings with lower interest rates during 1998 which were primarily utilized to fund the asset growth discussed above. Interest expense on borrowed funds increased $143.9 million, or 62.0%, to $375.9 million for the year ended December 31, 1998, from $232.0 million for the year ended December 31, 1997. This increase was attributable to an increase in the average balance of borrowings of $2.68 billion, to $6.64 billion for 1998, from $3.96 billion for 1997, partially offset by a decrease in the average cost of borrowings to 5.66% for 1998, from 5.85% for 1997. The Company continues to utilize medium-term and long-term callable borrowings as a funding source for asset growth, which provide the Company with flexibility and efficiency which cannot be obtained through deposit growth. Interest expense on deposits increased $28.1 million to $399.6 million for 1998, from $371.5 million for 1997, reflecting an increase in the average balance of total interest-bearing deposits of $1.02 billion, offset by a decrease in the average cost of interest-bearing deposits to 4.25% in 1998 from 4.43% in 1997. The increase in the average balance of deposits reflects the addition of deposits from The Greater Acquisition which was completed following the close of business on September 30, 1997. Interest expense on savings accounts increased $1.5 million as a result of an increase in the average balance of $328.8 million, offset by a decrease in the average cost to 2.50% for 1998, from 2.76% for 1997. This decrease in average cost is a result of the Company lowering the rates offered on savings accounts during 1998. Interest expense on certificates of deposit increased $14.9 million to $288.9 million for 1998, from $274.0 million for 1997. This increase was the result of the average balance of these accounts increasing $370.8 million, offset in part by a decrease in the average cost to 5.45% for 1998, from 5.56% for 1997. Interest expense on money market accounts increased $12.0 million to $32.1 million for 1998, from $20.1 million for 1997, due to an increase in both the average cost and average balance of such accounts. The average cost of money market accounts increased to 4.40% for year ended December 31, 1998 from 4.15% for the year ended December 31, 1997. Interest paid on money market accounts is on a tiered basis with over 82.2% of the balance in the highest tier. The yield on this top tier will be at least equal to the discount rate for the three-month U.S. Treasury bill. While interest rates have fallen, the short end of the yield curve, reflecting short-term rates, has been the least affected and has not always moved as quickly as the remaining portion of the yield curve, reflecting long-term rates. Additionally, the Company has not always reduced the interest rate on such accounts with the yield curve, thereby attracting new deposits. Interest expense on money manager accounts decreased $284,000 which was attributable to a decrease in the average cost of these accounts to 1.26% for 1998, from 1.58% for 1997, partially offset by an increase in average balance of $54.3 million. Interest expense on NOW accounts remained unchanged at $1.7 million for 1998 and 1997. This was attributable to the combined effect of the increase in the average balance of $24.5 million, offset by a decrease in the average cost of these accounts to 1.30% for 1998, from 1.60% for 1997. The decrease in the average cost of NOW and money manager accounts is a result of the Company lowering the rates offered on these accounts during 1998. 50 53 PROVISION FOR LOAN LOSSES Provision for loan losses increased $6.3 million, to $15.4 million for the year ended December 31, 1998, from $9.1 million for the year ended December 31, 1997. Of the $6.3 million increase in the provision for loan losses, $5.6 million was recorded for nonspecific loan losses to conform LIB's previous accounting practices and asset review methodologies to those of the Company. Net loan charge-offs for the year ended December 31, 1998 totaled $14.8 million, which included $9.2 million in charge-offs relating to one property, compared to $8.6 million in net loan charge-offs for the year ended December 31, 1997. The net effect of the provision for loan losses and total 1998 net loan charge-offs, in addition to the $146,000 adjustment to conform the fiscal year of LIB to the Company, increased the Company's allowance for loan losses by $483,000, to $74.4 million at December 31, 1998, from $73.9 million at December 31, 1997. Non-performing loans increased to $111.1 million at December 31, 1998, from $89.9 million at December 31, 1997. The allowance for loan losses to non-performing loans and the allowance for loan losses to total loans decreased to 66.99% and 0.83%, respectively, at December 31, 1998, from 82.23% and 0.93%, respectively, at December 31, 1997. The Company's percentage of non-performing loans to total loans increased to 1.23% at December 31, 1998, from 1.12% at December 31, 1997. For further discussion on non-performing loans and allowance for loan losses, see "Asset Quality." NON-INTEREST INCOME Non-interest income for the year ended December 31, 1998, excluding net gain on sales of securities, increased $2.5 million, or 5.3%, to $49.6 million, from $47.1 million for the year ended December 31, 1997. Customer service and other loan fees increased $11.3 million to $34.6 million for 1998 from $23.3 million for 1997 primarily as a result of the additional banking offices acquired from The Greater in the fourth quarter of 1997. The increases in customer service and other loan fees are also due in part to the Company's increasing customer service fees in June 1998, record loan originations and overall growth in the loan portfolio during 1998. Loan servicing fees include all contractual and ancillary servicing revenue received by the Company net of amortization of mortgage servicing rights and valuation allowance adjustments for the impairment in mortgage servicing rights. Loan servicing fees decreased $7.3 million to $5.2 million for 1998, from $12.5 million for 1997. This decrease is primarily attributable to a $5.8 million increase in the amortization of mortgage servicing rights and a $3.1 million impairment provision due to accelerated loan prepayments given the interest rate environment for 1998. Net gain on sales of loans decreased to $2.0 million for the year ended December 31, 1998, from $4.0 million for the year ended December 31, 1997. Included in those gains for 1997 was a $1.0 million gain from the sale of the Company's credit card portfolio and $2.1 million relating to the satisfaction of a former problem loan. Net gains on sales of securities decreased $3.4 million to $11.0 million for the year ended December 31, 1998 from $14.4 million for the year ended December 31, 1997. The decrease was primarily attributable to a $4.0 million loss, recorded in the fourth quarter of 1998, on the sale of mortgage-backed securities held by the former LIB at premiums, where the book values of such securities exceeded their par values. The securities were sold as part of the Company's asset/liability management process which includes certain portfolio restructurings. NON-INTEREST EXPENSE Non-interest expense for the year ended December 31, 1998 was $376.6 million, an increase of $149.3 million, or 65.7%, from $227.3 million for the year ended December 31, 1997. Of this increase, $124.2 million was attributable to acquisition costs and restructuring charges related to the LIB Acquisition. For a detailed description of these acquisition costs and restructuring charges, see Note 2 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." Excluding this infrequently occurring charge, non-interest expense for the year ended December 31, 1998 was $252.4 million, or an increase of $25.1 million over the prior year. The amortization of goodwill increased $8.1 million to $19.8 million for 1998, from $11.7 million for 1997, due to a full year of amortization of 51 54 goodwill generated from The Greater Acquisition incurred during 1998, versus one quarter of amortization incurred during 1997. General and administrative expense also increased $20.9 million, to $234.6 million for 1998, from $213.7 for 1997. The increase in general and administrative expense was primarily the result of increases in occupancy, equipment and systems expense and other expense. Occupancy, equipment and systems expense increased $9.6 million, or 20.0%, to $57.7 million for 1998, from $48.1 million for 1997. This increase was primarily a result of the full year effect of the additional banking offices acquired from The Greater Acquisition in the fourth quarter of 1997. Other non-interest expense increased $12.9 million to $46.9 million for 1998, from $34.0 million for 1997. Of this increase, $8.4 million was attributable to various accruals recorded by the former LIB for expenses incurred during their quarter ended September 30, 1998 and for differences between the former LIB's general ledger and various subsidiary ledgers. These increases were partially offset by a decrease of $4.2 million in advertising expense to $4.8 million for 1998 from $9.0 million for 1997. The Company's percentage of general and administrative expense to average assets improved to 1.28% for the year ended December 31, 1998, from 1.53% for the year ended December 31, 1997. The Company's efficiency ratio also improved to 47.05% for the year ended December 31, 1998 from 50.68% for the year ended December 31, 1997. INCOME TAX EXPENSE For the year ended December 31, 1998, income tax expense was $61.8 million, representing an effective tax rate of 52.6%, as compared to $81.8 million, representing an effective tax rate of 41.0%, for the 1997 period. The increase in the Company's effective tax rate was primarily attributable to the infrequently occurring charges related to the LIB Acquisition which included approximately $24.0 million of charges which are not deductible for income tax purposes. CASH EARNINGS Tangible stockholders' equity (stockholders' equity less goodwill) totaled $1.22 billion at December 31, 1998, compared to $1.18 billion at December 31, 1997. Tangible equity is a critical measure of a company's ability to repurchase shares, pay dividends and continue to grow. The Association is subject to various capital requirements which affect its classification for safety and soundness purposes, as well as for deposit insurance premium purposes. These requirements utilize tangible equity as a base component, not equity as defined by GAAP. Although reported earnings and return on equity are traditional measures of a company's performance, management believes that the increase in tangible equity, or "cash earnings," is also a significant measure of a company's performance. Cash earnings exclude the effects of various non-cash expenses, such as the amortization for the allocation of ESOP and RRP stock and related tax benefit, as well as the amortization of goodwill. In the case of tangible equity, these items have either been previously charged to equity, as in the case of ESOP and RRP charges, through contra-equity accounts, or do not affect tangible equity, such as the market appreciation of allocated ESOP shares, for which the operating charge is offset by a credit to additional paid-in capital, and goodwill amortization for which the related intangible asset has already been deducted in the calculation of tangible equity. Management believes that cash earnings and cash returns on average tangible equity reflect the Company's ability to generate tangible capital that can be leveraged for future growth. The following comparisons exclude acquisition costs and other infrequently occurring charges incurred during 1998. For the year ended December 31, 1998, core cash earnings totaled $191.7 million, or $46.3 million more than core earnings, representing a cash return on average tangible equity of 15.53%. For the year ended December 31, 1997, core cash earnings totaled $153.1 million, or $35.2 million more than reported net income, representing a cash return on average tangible equity of 14.49%. Management believes that various other performance measures should also be analyzed utilizing cash earnings. The cash return on average assets 52 55 was 1.05% and 1.09% for the years ended December 31, 1998 and 1997, respectively. Additionally, the cash general and administrative expense (general and administrative expense, excluding non-cash amortization expense relating to certain employee stock plans) to average assets ratios and cash efficiency ratios decreased to 1.18% and 43.40%, respectively, for the year ended December 31, 1998, from 1.39% and 46.09%, respectively, for the year ended December 31, 1997. For more details on core cash earnings and core earnings, see "Consolidated Schedule of Core Earnings and Core Cash Earnings" on the following page. 53 56 CONSOLIDATED SCHEDULE OF CORE EARNINGS AND CORE CASH EARNINGS (1) (In Thousands, Except Share Data)
Twelve Months Ended December 31, -------------------------------------- SCHEDULE OF CORE EARNINGS 1998 1997 ---- ---- Interest income $ 1,224,448 $ 978,155 Interest expense 775,465 603,591 - - ------------------------------------------------------------------------------------------------------------------- Net interest income 448,983 374,564 Provision for loan losses (1) 9,780 9,061 - - ------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 439,203 365,503 - - ------------------------------------------------------------------------------------------------------------------- Total non-interest income (1) 64,483 61,477 Non-interest expense: Total general and administrative 234,553 213,671 Total real estate operations and provision for losses, net (1,854) 1,863 Amortization of goodwill 19,754 11,722 - - ------------------------------------------------------------------------------------------------------------------- Total non-interest expense (1) 252,453 227,256 - - ------------------------------------------------------------------------------------------------------------------- Core earnings before income tax expense (1) 251,233 199,724 Provision for income taxes (1) 105,810 81,840 - - ------------------------------------------------------------------------------------------------------------------- Core earnings 145,423 117,884 - - ------------------------------------------------------------------------------------------------------------------- Preferred dividends declared (6,000) (1,500) - - ------------------------------------------------------------------------------------------------------------------- Core earnings available to common shareholders $ 139,423 $ 116,384 =================================================================================================================== Basic core earnings per common share $ 2.74 $ 2.51 =================================================================================================================== Diluted core earnings per common share $ 2.64 $ 2.39 =================================================================================================================== SCHEDULE OF CORE CASH EARNINGS Core earnings $ 145,423 $ 117,884 Add back: Employee stock plans amortization expense (2) 18,195 19,338 Amortization of goodwill (3) 19,754 11,722 Income tax benefit on amortization expense of earned portion RRP stock (4) 8,302 4,116 - - ------------------------------------------------------------------------------------------------------------------- Core cash earnings 191,674 153,060 - - ------------------------------------------------------------------------------------------------------------------- Preferred dividends declared (6,000) (1,500) - - ------------------------------------------------------------------------------------------------------------------- Core cash earnings available to common shareholders $ 185,674 $ 151,560 =================================================================================================================== Basic core cash earnings per common share $ 3.65 $ 3.27 =================================================================================================================== Diluted core cash earnings per common share $ 3.51 $ 3.11 =================================================================================================================== Basic weighted average common shares 50,801,598 46,362,179 Diluted weighted average common and common equivalent shares 52,886,191 48,765,698
(1) Acquisition, restructuring and other infrequently occurring charges have been excluded for purposes of displaying core earnings. The following details such charges:
Before Tax Tax Effect After Tax ---------- ---------- --------- Acquisition-related costs $124,168 $40,317 $ 83,851 Additional loan loss reserves 5,600 1,960 3,640 Asset/liability management actions: Penalties related to borrowings prepaid 18,547 7,910 10,637 Losses on securities sold 3,955 1,708 2,247 -------------------------------------------- Total $152,270 $51,895 $100,375 --------------------------------------------
(2) Non-cash amortization expenses relating to allocation of ESOP stock and earned portion of RRP stock. (3) Non-cash amortization expense of goodwill. (4) Related tax benefit on non-cash amortization expense of earned portion of RRP stock. 54 57 COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 FINANCIAL CONDITION Total assets increased $3.84 billion or 30.6%, to $16.43 billion at December 31, 1997, from $12.59 billion at December 31, 1996, primarily due to The Greater Acquisition which added $2.37 billion in assets. The asset growth was concentrated in the mortgage loan and securities portfolios. The Company's net loan portfolio increased $2.21 billion, to $7.95 billion at December 31, 1997, from $5.74 billion at December 31, 1996. In addition to the $664.4 million of net loans acquired from The Greater, the growth in the Company's loan portfolio reflects the Company's continued emphasis on residential lending. During the year ended December 31, 1997, gross mortgage loans originated and purchased totaled $4.04 billion, of which $3.47 billion were originations and $562.4 million were third party purchases. This compares to $2.03 billion and $1.27 billion of originations and purchases (of which $60.2 million were bulk purchases), respectively, for the year ended December 31, 1996. See "Lending and Investing Activities" for further discussion. Mortgage-backed securities increased $730.8 million to $5.89 billion at December 31, 1997, from $5.16 billion at December 31, 1996. This increase was primarily attributable to the addition of $1.15 billion of such securities acquired from The Greater and $918.3 million of purchases, partially offset by $1.17 billion of sales during 1997. Other securities increased $530.6 million to $1.55 billion at December 31, 1997, from $1.02 billion at December 31, 1996. This increase was attributable to purchases of $924.3 million and $116.9 million of securities acquired from the Greater, partially offset by maturities of $360.4 million. The growth in the mortgage loan and securities portfolios was funded primarily through medium-term (two to five years) reverse repurchase agreements, which increased $1.25 billion, of which $339.0 million was a result of The Greater Acquisition, to $3.90 billion at December 31, 1997, from $2.65 billion at December 31, 1996. Federal Home Loan Bank advances increased $156.6 million, which included $154.5 million assumed from The Greater. Other borrowings increased $276.9 million from $178.0 million at December 31, 1996 to $454.9 million at December 31, 1997 due to the addition of a $300.0 million medium term note during 1997. Deposits increased $1.80 billion to $9.95 billion at December 31, 1997 from $8.15 billion at December 31, 1996, which was primarily a result of the $1.60 billion of deposits acquired from The Greater. Stockholders' equity increased to $1.45 billion at December 31, 1997, from $1.11 billion at December 31, 1996. The most significant impact on the increase was the issuance of 5,785,375 shares of Common Stock and 2,000,000 shares of Series B Preferred Stock to effect The Greater Acquisition. The stock portion of the consideration to acquire The Greater totaled $285.2 million. The increase in stockholders' equity also reflects net income of $117.9 million, the amortization relating to the allocation of ESOP stock and earned portion of RRP stock and related tax benefit of $23.5 million, the effect of stock options exercised and related tax benefit of $8.9 million and the change in unrealized gains on securities, net of taxes, of $14.1 million. These increases were partially offset by the repurchases of Common Stock of $85.7 million and dividends declared of $26.0 million. RESULTS OF OPERATIONS GENERAL The following comparison of net income, earnings per common share and related returns reflect 1996 results exclusive of the SAIF recapitalization assessment of $27.6 million after-tax. For the year ended December 31, 1997, net income increased $21.2 million, or 21.8%, to $117.9 million, from $96.7 million for the year ended December 31, 1996. Diluted earnings per common share for the year ended December 31, 1997 increased to $2.39 per share, or 19.5%, from $2.00 for the year ended December 31, 1996. The return on average assets for the year ended December 31, 1997 increased to 0.84% from 0.81% for the 55 58 year ended December 31, 1996. The return on average stockholders' equity for the year ended December 31, 1997 increased to 9.83% from 8.76% for the year ended December 31, 1996. The return on average tangible stockholders' equity for the year ended December 31, 1997 increased to 11.16% from 9.71% for the year ended December 31, 1996. Net income, including the SAIF recapitalization assessment for the 1996 period, increased $48.8 million, to $117.9 million for the year ended December 31, 1997, from $69.1 million for the year ended December 31, 1996. For the year ended December 31, 1997, diluted earnings per common share increased to $2.39, as compared to $1.44 per share for the year ended December 31, 1996. Return on average assets increased to 0.84% for the year ended December 31, 1997, from 0.58% for the year ended December 31, 1996. Return on average stockholders' equity increased to 9.83% for the year ended December 31, 1997, from 6.27% for the year ended December 31, 1996. Return on average tangible stockholders' equity increased to 11.16% for the year ended December 31, 1997, from 6.95% for the year ended December 31, 1996. NET INTEREST INCOME Net interest income increased $33.5 million, or 9.8%, to $374.6 million for the year ended December 31, 1997, from $341.1 million for the year ended December 31, 1996. This change was the result of an increase in total average interest-earning assets of $1.94 billion, offset by an increase in total average interest-bearing liabilities of $1.81 billion. In addition, the Company's net interest income for 1997 was significantly impacted by the Company's response to the flattening of the U.S. Treasury yield curve. The Company's net interest spread decreased to 2.38% for 1997, from 2.56% for 1996. This decrease in net interest spread was the result of the average cost of interest-bearing liabilities increasing to 4.89% for 1997, from 4.76% for 1996, while the average yield on total interest-earning assets decreased to 7.27% for 1997, from 7.32% for 1996. During 1997, the decline in the interest rate spread reflects the funding of asset growth through increased borrowings and the flattening of the U.S. Treasury yield curve. The Company's net interest margin decreased to 2.78% for 1997, from 2.96% for 1996 as a result of the decrease in the net interest rate spread. INTEREST INCOME Interest income for the year ended December 31, 1997 increased $135.7 million, or 16.1%, to $978.2 million, from $842.5 million for the year ended December 31, 1996. This increase was the result of a $1.94 billion increase in average interest-earning assets to $13.45 billion for the year ended December 31, 1997, from $11.51 billion for 1996, which was slightly offset by the decrease in average yield on interest-earning assets from 7.32% in 1996 to 7.27% in 1997. The increase in average interest-earning assets was primarily due to The Greater Acquisition, which provided $689.8 million of loans held for investment and $1.29 billion of mortgage-backed securities and other securities available-for-sale. In addition, average interest-earning assets increased due to the increases in the average balances of mortgage loans and other securities, while the average balance of mortgage-backed securities, which provided a lower yield in 1997 than mortgage loans or other securities, declined. These movements in average balances reflect the Company's continued emphasis on residential lending and its response to the steady flattening of the U.S. Treasury yield curve, which included purchases of higher-yielding long-term U.S. Government agency securities with callable features and maturities over three years. These activities in the context of the interest rate environment in 1997 resulted in the decrease in average yield on interest-earning assets. Interest income on mortgage loans increased $132.6 million to $503.5 million for 1997, which was the result of an increase in the average balance of $1.87 billion for 1997, partially offset by a decrease in the average yield on mortgage loans to 7.67% for 1997, from 7.89% for 1996. Interest income on mortgage-backed securities decreased $28.0 million, to $352.8 million for 1997, from $380.8 million for 1996. This decrease was the result of a $351.8 million decrease in the average balance of this portfolio, coupled with a decrease in the average yield to 6.81% for 1997 from 6.89% for 1996. Interest income on other 56 59 securities increased $23.1 million to $86.0 million for 1997, from $62.9 million for 1996. The increase was a result of the combined effect of an increase in the average balance of this portfolio of $274.6 million and an increase in the average yield to 6.86% for 1997, from 6.43% for 1996. Interest income on federal funds sold and repurchase agreements increased $7.2 million as a result of the combined effect of an increase in the average balance of $126.1 million and an increase in the average yield to 5.56% for 1997 from 5.36% for 1996. INTEREST EXPENSE Interest expense for the year ended December 31, 1997 increased $102.3 million, or 20.4%, to $603.6 million, from $501.3 million for the year ended December 31, 1996. This increase was partially attributable to increases in both the average balance of interest-bearing liabilities of $1.81 billion to $12.35 billion for 1997, from $10.54 billion for 1996, and the average cost of such liabilities to 4.89% for 1997, from 4.76% for 1996. The increase in average interest-bearing liabilities was attributable to borrowings and deposits assumed from The Greater of $493.5 million and $1.60 billion, respectively. Additionally, the Company increased borrowings, which have a higher cost of funds than deposits, during 1997 which were primarily utilized to fund the asset growth discussed above. Interest expense on interest-bearing deposits increased $24.2 million to $371.5 million for 1997, from $347.3 million for 1996, reflecting an increase in the average balance of total interest-bearing deposits of $522.9 million, coupled with an increase in the average cost of deposits to 4.43% from 4.41%. Interest expense on savings accounts increased $1.7 million as a result of an increase in the average balance of $63.2 million, while the average cost remained constant at 2.76%. Interest expense on certificates of deposit increased $17.2 million to $274.0 million for 1997, from $256.8 million for 1996. This increase was the result of the average balance of these accounts increasing $331.4 million, offset in part by a decrease in the average cost to 5.56% for 1997, from 5.59% for 1996. During the first quarter of 1996, the Company implemented a program which converted its NOW accounts to a master account consisting of a NOW sub-account and a money market sub-account (money manager account). This resulted in a substantial shift of deposits from NOW accounts to money manager accounts during 1996 and 1997. Interest expense on NOW accounts decreased $2.7 million to $1.7 million for 1997, from $4.4 million for 1996. This decrease was attributable to the combined effect of the decrease in the average balance of $95.9 million and a decrease in the average cost of these accounts to 1.60% for 1997, from 2.19% for 1996. Interest expense on money manager accounts increased $974,000 which was attributable to an increase in average balance of $119.5 million offset by a decrease in the average cost of these accounts to 1.58% for 1997, from 2.05% for 1996. Interest expense on money market accounts increased $7.1 million. The average balance of money market accounts increased $104.7 million from 1996 to 1997 and the average cost of such accounts increased to 4.15% for 1997, from 3.44% for 1996. The increase in the average cost was the result of the Company increasing the rates offered on high balance money market accounts during 1997. Interest expense on borrowed funds increased $77.9 million, or 50.6%, to $232.0 million for the year ended December 31, 1997, from $154.1 million for the year ended December 31, 1996. This increase was attributable to an increase in the average balance of borrowings of $1.29 billion, to $3.96 billion for 1997, from $2.67 billion for 1996, coupled with an increase in the average cost of borrowings to 5.85% for 1997, from 5.76% for 1996. In addition to $323.5 million of borrowings assumed from The Greater (net of $170.0 million repaid), the Company incurred additional medium-term borrowings during 1997 including the issuance of a $300.0 million medium-term note. The Company continues to utilize medium-term borrowings as a funding source for asset growth, since certificates of deposit with similar rates and terms are not readily attainable. 57 60 PROVISION FOR LOAN LOSSES Provision for loan losses decreased $1.1 million, to $9.1 million for the year ended December 31, 1997, from $10.2 million for the year ended December 31, 1996. Non-performing loans increased from $86.6 million at December 31, 1996 to $89.9 million at December 31, 1997 as a result of the growth in the loan portfolio. As a result of The Greater Acquisition, the Company recorded an additional $25.4 million of allowance for loan losses. Despite the increase in non-performing loans, the Company's percentage of non-performing loans to total loans decreased to 1.12% at December 31, 1997 from 1.50% at December 31, 1996. The Company's percentage of non-performing loans to total assets also decreased to 0.55% at December 31, 1997 from 0.69% at December 31, 1996. Total net loan charge-offs for the year ended December 31, 1997 were $8.6 million, compared to $10.0 million for the year ended December 31, 1996. The net effect of the provision for loan losses and total 1997 net loan charge-offs, together with the additional loan loss allowance recorded from The Greater Acquisition, increased the Company's allowance for loan losses by $25.9 million, to $73.9 million at December 31, 1997, from $48.0 million at December 31, 1996. For further discussion of non-performing loans, see "Asset Quality." NON-INTEREST INCOME Non-interest income for the year ended December 31, 1997 was $47.1 million, excluding net gain on sales of securities of $14.4 million, an increase of $4.0 million, or 9.3%, as compared to $43.1 million, excluding net gain on sales of securities of $7.6 million for the year ended December 31, 1996. Customer service and other loan fees increased $3.2 million to $23.3 million for 1997 from $20.1 million for 1996 primarily as a result of the additional banking offices acquired from The Greater. Loan servicing fees decreased $1.8 million, or 12.9%, to $12.5 million for the year ended December 31, 1997 from $14.3 million for the year ended December 31, 1996 primarily due to the runoff 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. The net gain on sales of loans increased $1.7 million to $4.0 million for 1997, from $2.3 million for 1996. Included in net gain on sales of loans, for the year ended December 31, 1997, was a $1.0 million gain from the sale of the Company's credit card portfolio and a $2.1 million gain relating to the satisfaction of a former problem loan. NON-INTEREST EXPENSE Non-interest expense for the year ended December 31, 1997 was $227.3 million, which decreased $30.8 million, or 11.9%, from $258.1 million for the year ended December 31, 1996. Excluding the SAIF recapitalization assessment of $47.2 million and $5.3 million of non-recurring recoveries from gains on dispositions of real estate owned and investments in real estate, non-interest expense for the year ended December 31, 1996 was $216.2 million. Excluding these one-time items in the 1996 total, non-interest expense increased $11.1 million to $227.3 million for 1997 as compared to 1996. The increase was attributable primarily to the addition of The Greater's operations in the fourth quarter of 1997, a $2.8 million increase in the amortization of goodwill created from The Greater Acquisition, and increased ESOP and RRP expense, due to an increase in the Company's Common Stock price. General and administrative expense increased to $213.7 million for the year ended December 31, 1997, from $208.5 million for the comparable 1996 period. This was the result of increases in compensation and benefits and occupancy, equipment and systems expense. Compensation and benefits increased $7.6 million, or 6.9%, to $116.1 million for 1997, from $108.5 million for 1996. This was partially due to a $2.2 million increase in the amortization relating to the allocation of ESOP stock for 1997, as compared to 1996. Occupancy, equipment and systems expense increased $4.6 million, or 10.4%, to $48.1 million for 1997, from $43.5 million for 1996. This increase was attributable to the additional branches acquired from The Greater and the Company's continued technological investments to improve its information and communication systems, coupled with its expanded mortgage business in the mid-Atlantic states. These increases were offset by a decrease of $11.3 million in the Company's federal deposit insurance premium 58 61 to $6.6 million for 1997 from $17.9 million for 1996, as a result of the 1996 legislation to recapitalize the SAIF. The Company's percentage of general and administrative expense to average assets improved to 1.53% for the year ended December 31, 1997, from 1.74% for the year ended December 31, 1996. The Company's efficiency ratio also improved to 50.68% for the year ended December 31, 1997 from 54.28% for the year ended December 31, 1996. INCOME TAX EXPENSE For the year ended December 31, 1997, income tax expense was $81.8 million, representing an effective tax rate of 41.0%, as compared to $54.4 million, representing an effective tax rate of 44.1%, for the 1996 period. The reduction in the Company's effective tax rate was attributable to certain tax benefits associated with the creation of subsidiaries of the Association in 1997 and changes made to the New York State and City tax bad debt regulations. ASSET QUALITY One of the Company's key operating objectives has been and continues to be to maintain a high level of asset quality. Through a variety of strategies, including, but not limited to, borrower workout arrangements and aggressive marketing of foreclosed properties, the Company has been proactive in addressing problem and non-performing assets which, in turn, has helped to build the strength of the Company's financial condition. Such strategies, as well as the Company's concentration on one-to-four family mortgage lending and maintaining sound credit standards for new loan originations, have resulted in a reduction in non-performing assets from December 31, 1994 through the third quarter of 1997. At December 31, 1998, non-performing assets totaled $120.4 million as compared to $115.3 million at December 31, 1997. Total loans delinquent 90 days or more increased $21.2 million from $89.9 million at December 31, 1997 to $111.1 million at December 31, 1998, offset by reductions in REO and investments in real estate of $16.1 million. The increase in non-performing assets of $5.1 million was primarily a result of the LIB Acquisition and differences in non-accrual loan policies between the Company and LIB. LIB's non-accrual loan policy classified loans which are one day less than three months delinquent as 60-89 days delinquent. However, the Company classifies such loans as 90 days or more delinquent, and thus such loans are non-accrual under the Company's more conservative non-accrual policy. As such, total loans delinquent 60-89 days decreased $14.5 million from $19.4 million at December 31, 1997 to $4.9 million at December 31, 1998. The following table sets forth information regarding non-performing assets. In addition to the non-performing loans, the Company had approximately $4.9 million of potential problem loans at December 31, 1998. Such loans are 60-89 days delinquent as shown on page 60. 59 62 NON-PERFORMING ASSETS
AT DECEMBER 31, --------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1998(1) 1997(1) 1996(1) 1995 1994 --------------------------------------------------------------------------- Non-accrual delinquent mortgage loans (2) $100,302 $80,604 $71,630 $85,747 $99,968 Non-accrual delinquent consumer and other loans 5,995 4,563 7,600 8,599 11,025 Mortgage loans delinquent 90 days or more (3) 4,776 4,728 7,396 5,810 9,981 --------------------------------------------------------------------------- Total non-performing loans 111,073 89,895 86,626 100,156 120,974 --------------------------------------------------------------------------- Real estate owned, net (4) 6,071 12,734 15,576 26,570 26,085 Investment in real estate, net (5) 3,266 12,633 7,233 5,654 7,480 --------------------------------------------------------------------------- Total real estate owned and investment in real estate, net 9,337 25,367 22,809 32,224 33,565 --------------------------------------------------------------------------- Total non-performing assets (6) $120,410 $115,262 $109,435 $132,380 $154,539 =========================================================================== Allowance for loan losses to non-performing loans 66.99% 82.23% 55.41% Allowance for loan losses to total loans 0.83% 0.93% 0.83%
(1) If all non-accrual loans had been performing in accordance with their original terms, the Company would have recorded interest income of $6.8 million, $5.2 million and $5.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. This compares to $1.6 million, $1.2 million and $934,000, respectively, of actual payments recorded to interest income. (2) Consists primarily of loans secured by one-to-four family properties. (3) Loans delinquent 90 days or more and still accruing interest consist solely of loans delinquent 90 days or more as to their maturity date but not their interest payments, and are primarily secured by multi-family and commercial properties. (4) Real estate acquired by the Company as a result of foreclosure or by deed in lieu of foreclosure is recorded at the lower of cost or fair value less estimated costs to sell. (5) Investment in real estate is recorded at the lower of cost or fair value. (6) Excluded from non-performing assets are $6.9 million, $9.1 million, $11.8 million, $12.1 million and $12.8 million at December 31, 1998, 1997, 1996, 1995 and 1994, respectively, of restructured loans that have complied with the terms of their restructure agreement for a satisfactory period and have, therefore, been returned to performing status. The following set of tables shows a comparison of delinquent loans at December 31, 1998, 1997 and 1996. Delinquent Loans
At December 31, 1998 60-89 Days 90 Days or More -------------------------------------- Principal Principal Balance Balance (Dollars in Thousands) of Loans of Loans - - ---------------------------------------------------------------------------------- One-to-four family $2,422 $94,078 Multi-family 203 2,224 Commercial real estate 221 8,776 Consumer and other loans 2,058 5,995 --------------------------------- Total delinquent loans $4,904 $111,073 --------------------------------- Delinquent loans to total loans 0.05% 1.23%
60 63
At December 31, 1997 60-89 Days 90 Days or More -------------------------------------- Principal Principal Balance Balance (Dollars in Thousands) of Loans of Loans - - ---------------------------------------------------------------------------------- One-to-four family $17,516 $66,960 Multi-family 578 7,335 Commercial real estate 90 11,037 Consumer and other loan 1,178 4,563 --------------------------------- Total delinquent loans $19,362 $89,895 --------------------------------- Delinquent loans to total loans 0.24% 1.12%
At December 31, 1996 60-89 Days 90 Days or More -------------------------------------- Principal Principal Balance Balance (Dollars in Thousands) of Loans of Loans - - ---------------------------------------------------------------------------------- One-to-four family $13,753 $65,463 Multi-family 1,226 4,547 Commercial real estate 952 9,016 Consumer and other loans 1,294 7,600 --------------------------------- Total delinquent loans $17,225 $86,626 --------------------------------- Delinquent loans to total loans 0.30% 1.50%
The underlying credit quality of the Company's loan portfolio is dependent primarily on each borrower's ability to continue to make required loan payments and, in the event a borrower is unable to continue to do so, the value of the collateral, if any, securing the loan. A borrower's ability to pay typically is dependent primarily on employment and other sources of income, which in turn is impacted by general economic conditions, although other factors, such as unanticipated expenditures or changes in the financial markets may also impact a borrower's ability to pay. Collateral values, particularly real estate values, are also impacted by a variety of factors including general economic conditions, demographics, maintenance and collection or foreclosure delays. Under the provisions of Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"), a loan is normally deemed impaired when it is probable the Company will be unable to collect both principal and interest due according to the contractual terms. Loans that were restructured prior to January 1, 1995 and performing in accordance with their restructured terms are not considered impaired loans under SFAS No. 114. Loans restructured after December 31, 1994 are considered impaired. A valuation allowance is established (with a corresponding charge to the provision for loan losses) when the fair value of the property that collateralizes the impaired loan is less than the recorded investment in the loan. The Company's procedure for identifying impaired loans is conducted in conjunction with the review of the adequacy of the allowance for loan losses. At December 31, 1998, the Company's balance of impaired loans was $26.8 million. For further discussion of impaired loans, see Note 5 of Notes of Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data". The provision for loan losses is based upon management's estimate of the amount necessary to maintain adequate reserves for losses inherent in the Company's loan portfolio. The estimate of inherent losses is developed by management considering a number of factors, including matters pertinent to the underlying quality of the loan portfolio. Management of the Company reviews its loan receivable portfolio on at least a quarterly basis, which includes, but is not limited to, the size, composition and risk profile of the 61 64 portfolio, delinquency levels, historical loss experience, cure rates on delinquent loans, economic conditions and other pertinent factors, such as assumptions and projections of future conditions. The Company determines loan loss provisions by reviewing individual loans as well as an overall assessment of the loan portfolio in view of the state of the regional economies, trends in the real estate market of the Company's primary lending areas and trends in the level of the Company's non-performing loans. The following table sets forth the Company's allowance for losses on loans, investments in real estate and REO at the dates indicated.
AT OR FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ALLOWANCE FOR LOSSES ON LOANS: Balance at beginning of year ..................... $73,920 $48,001 $47,853 $47,886 $50,623 Allowance of acquired institution ............. -- 25,433 -- 3,528 -- Provision charged to operations ............... 15,380 9,061 10,163 8,477 15,688 Charge-offs: One-to-four family ......................... (13,039) (3,971) (5,179) (6,465) (8,566) Multi-family ............................... (769) (2,059) (226) (664) (1,069) Commercial ................................. (1,528) (72) (2,468) (2,031) (4,144) Consumer and other ......................... (3,824) (4,726) (4,819) (5,747) (6,268) -------- -------- -------- -------- -------- Total charge-offs .................... (19,160) (10,828) (12,692) (14,907) (20,047) Recoveries: One-to-four family ......................... 1,616 728 637 1,237 488 Multi-family ............................... 516 -- 37 -- -- Commercial ................................. 1,788 617 1,047 580 -- Consumer and other ......................... 489 908 956 1,052 1,134 -------- -------- -------- -------- -------- Total recoveries ...................... 4,409 2,253 2,677 2,869 1,622 Adjustment to conform fiscal year of LIB to the Company (146) -- -- -- -- -------- -------- -------- -------- -------- Balance at end of year ............................ $74,403 $73,920 $48,001 $47,853 $47,886 ======== ======== ======== ======== ======== Ratio of net charge-offs during the year to average loans outstanding during the year ...... 0.17% 0.13% 0.20% 0.32% 0.56% Ratio of allowance for loan losses to total loans at end of the year .......................... 0.83% 0.93% 0.83% 1.15% 1.46% Ratio of allowance for loan losses to non-performing loans at end of the year ........... 66.99% 82.23% 55.41% 47.78% 39.58% ALLOWANCE FOR LOSSES ON INVESTMENTS IN REAL ESTATE AND REO: Balance at beginning of year ...................... $1,493 $2,045 $3,746 $5,250 $4,741 Allowance of acquired institution ............. -- 94 -- 1,144 -- Provision (recovery) recorded to operations ... 1,108 1,035 (1,257) 813 3,808 Charge-offs ................................... (2,835) (1,726) (2,110) (4,551) (4,535) Recoveries .................................... 241 45 1,666 1,090 1,236 Adjustment to conform fiscal year of LIB to the Company 682 -- -- -- -- -------- -------- -------- -------- -------- Balance at end of year ............................ $689 $1,493 $2,045 $3,746 $5,250 ======== ======== ======== ======== ========
62 65 The following table sets forth the Company's allocation of the allowance for loan losses by loan category and the percent of loans in each category to total loans receivable at the dates indicated. The portion of the allowance for loan losses allocated to each loan category does not represent the total available for future losses which may occur within the loan category since the total loan loss reserve is a valuation reserve applicable to the entire loan portfolio.
AT DECEMBER 31, --------------------------------------------------------------------------------------------- 1998 1997 1996 ------------------------- ------------------------ ------------------------- % OF LOANS % OF LOANS % OF LOANS TO TO TO (DOLLARS IN THOUSANDS) AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS ------ ----------- ------ ----------- ------ ----------- One-to-four family $42,084 87.37% $40,715 86.37% $20,139 88.32% Multi-family ..... 3,426 5.03 5,305 4.72 3,057 3.49 Commercial ....... 10,537 5.05 13,676 5.70 10,364 4.24 Consumer and other 18,356 2.55 14,224 3.21 14,441 3.95 ------- ------ ------- ------ ------- ------ Total allowances . $74,403 100.00% $73,920 100.00% $48,001 100.00% ======= ====== ======= ====== ======= ======
AT DECEMBER 31, ------------------------------------------------------------ 1995 1994 -------------------------- -------------------------- % OF LOANS % OF LOANS TO TO (DOLLARS IN THOUSANDS) AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS ------ ----------- ------ ----------- One-to-four family $18,740 86.13% $15,760 83.42% Multi-family ..... 1,551 3.51 1,469 4.23 Commercial ....... 12,983 5.34 17,173 5.86 Consumer and other 14,579 5.02 13,484 6.49 ------- ------ ------- ------ Total allowances . $47,853 100.00% $47,886 100.00% ======= ====== ======= ======
IMPACT OF 1996 LEGISLATION Deposit Insurance - SAIF Recapitalization. The Deposit Funds Insurance Act of 1996 was enacted on September 30, 1996 and authorized the Federal Deposit Insurance Corporation ("FDIC") to impose a special assessment on all institutions with SAIF-assessable deposits in order to recapitalize the SAIF. This special SAIF assessment for the Company of $47.2 million, or $27.6 million net of taxes, was charged against income in the third quarter of 1996. As a result of the recapitalization of the SAIF in 1996, the FDIC reduced the assessment rates for deposit insurance for SAIF-assessable deposits for 1997 to a range of 0 to 27 basis points. The Company's SAIF assessment rates since 1997 were 0 basis points. In addition, SAIF-assessable deposits are also subject to assessments for payments on the bonds issued in the late 1980s by the Financing Corporation ("FICO") to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. The Company's total expense in 1998, 1997 and 1996 for deposit insurance and the FICO payment assessment was $5.9 million, $6.6 million and $17.9 million, respectively. Recapture of Bad Debt Reserves. Prior to the enactment of the Small Business Job Protection Act of 1996 (the "1996 Act"), for federal income tax purposes, thrift institutions were permitted to establish tax reserves for bad debts and to make annual additions thereto that, within specified limitations, could be deducted in arriving at taxable income. Similar deductions for additions to the Association's bad debt reserve were permitted under the New York State Franchise Tax and the New York City Financial Corporation Tax. Under the 1996 Act, the Association is unable to make additions to its tax bad debt reserve, is permitted to deduct bad debts only as they occur and is required to recapture the excess of the balance of such reserves as of December 31, 1995 over the balance of such reserves as of December 31, 1987. The New York State and New York City tax laws have been amended to prevent a similar recapture of the bad debt reserve, and to permit continued future use of the bad debt reserve method for purposes 63 66 of determining New York State and New York City tax liabilities, so long as the Association continues to satisfy certain New York State and New York City definitional tests. IMPACT OF NEW ACCOUNTING STANDARDS In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The accounting for changes in the fair value of a derivative (that is, unrealized gains and losses) depends on the intended use of the derivative and the resulting designation. SFAS No. 133 is effective for fiscal quarters of fiscal years beginning after June 15, 1999 and does not require restatement of prior periods. Management of the Company believes the implementation of SFAS No. 133 will not have a material impact on the Company's financial condition or results of operations. In October 1998, the FASB issued Statement of Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS No. 134"). SFAS No. 134 conforms the accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the accounting for securities retained after the securitization of other types of assets by a nonmortgage banking enterprise. SFAS No. 134 is effective for the first fiscal quarter beginning after December 15, 1998. Management of the Company believes the implementation of SFAS No. 134 will not have a material impact on the Company's financial condition or results of operations. THE YEAR 2000 PROBLEM The "Year 2000 Problem" centers on the inability of some computer systems to recognize the year 2000. Many existing computer programs and systems were originally programmed with six digit dates that provided only two digits to identify the calendar year in the date field, without considering the upcoming change in the century. With the impending millennium, these programs and computers may recognize "00" as the year 1900 rather than the year 2000. Like most financial service providers, the Company and its operations may be significantly and adversely affected by the Year 2000 Problem due to the nature of financial information. Software, hardware, and equipment both within and outside the Company's direct control and with which the Company electronically or operationally interfaces (e.g. including, but not limited to, third party vendors providing data processing, information system management, maintenance of computer systems, and credit bureau information) are likely to be affected. Furthermore, if computer systems are not adequately changed to identify the year 2000, many computer applications could fail or create erroneous results. As a result, many calculations which rely on the date field information, such as interest, payment or due dates and other operating functions, may generate results which could be significantly misstated, and the Company could experience an inability for a temporary, but unknown duration, to process transactions, send invoices or engage in similar normal business activities. In addition, under certain circumstances, failure to adequately address the Year 2000 Problem could adversely affect the viability of the Company's suppliers and creditors and the creditworthiness of its borrowers. Thus, if not adequately addressed, the Year 2000 Problem could result in a material adverse impact on the Company's products, services and competitive condition and therefore, its results of operations and could be deemed to imperil the safety and soundness of the Association. There has been limited litigation filed against corporations regarding the Year 2000 Problem and their compliance efforts. Nonetheless, the law in this area will likely continue to develop well into the new millennium. Should the Company experience a Year 2000 failure, exposure of the Company could be significant and material, unless there is legislative action to limit such liability. Legislation has been introduced in several jurisdictions regarding the Year 2000 Problem. However, no assurance can be given that legislation will be enacted in jurisdictions where the Company does business that will have the effect of limiting any potential liability. 64 67 The Office of Thrift Supervision ("OTS"), the Company's primary federal bank regulatory agency, along with the other federal bank regulatory agencies has published substantive guidance on the Year 2000 Problem and has included Year 2000 compliance as a substantive area of examination for both regularly scheduled and special examinations. These publications, in addition to providing guidance as to examination criteria, have outlined requirements for creation and implementation of a compliance plan and target dates for testing and implementation of corrective action, as discussed below. As a result of the oversight by and authority vested in the federal bank regulatory agencies, a financial institution that does not become Year 2000 compliant could become subject to administrative remedies similar to those imposed on financial institutions otherwise found not to be operating in a safe and sound manner, including remedies available under prompt corrective action regulations. The Company has developed and is implementing a Year 2000 Project Plan (the "Plan") to address the Year 2000 Problem and its effects on the Company. The Plan includes five components which address issues involving awareness, assessment, renovation, validation and implementation. The Company has completed the awareness, assessment and renovation phases of the Plan. During the awareness, assessment and renovation phases of the Plan, the Company inventoried all material information systems and reviewed them for Year 2000 readiness. Among the systems reviewed were computer hardware and systems software, applications software and communications hardware and software as well as embedded or automated devices. As noted below, this review included both internal systems and those of third party vendors which provide systems such as retail deposit processing, loan origination processing, loan servicing and general ledger and accounting systems and software. Following awareness and assessment, the Company then renovated or replaced the systems that may have posed a Year 2000-related problem. Following renovation, the functionality of new systems were validated. The validation phase is approximately 95% complete and the implementation phase is approximately 70% complete. The Company has complied with federal banking regulatory guidelines, completing testing of its mission critical systems prior to September 1, 1998 and its customer systems prior to September 30, 1998. The Company has met federal banking regulatory guidelines stating that the Association and the Company must substantially complete testing of core mission critical internal systems by December 31, 1998. The Company and the Association are on target for substantially completing testing renovation of both internally and externally supplied systems, by June 30, 1999. The Company has arranged to establish end-to-end Year 2000 tests with its business partners allowing the Company an additional opportunity to test and stress such systems. As part of the Plan, the Company has had formal communications with all of its significant suppliers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 Problem and has been following the progress of those vendors with their Year 2000 compliance status. The Company presently believes that with modifications to existing software and conversions to new software and hardware where necessary, the Year 2000 Problem will be mitigated without causing a material adverse impact on the operations of the Company. At this time, the Company anticipates most of its hardware and software systems to become Year 2000 compliant, tested and operational within the OTS's suggested time frame. However, if such modifications and conversions are not successfully made or are not completed on a timely basis, the Year 2000 Problem could have an adverse impact on the operations of the Company. Despite its best efforts to ensure Year 2000 compliance, it is possible that one or more of the Company's internal or external systems may fail to operate. At this time, while the Company expects to become Year 2000 compliant, the probability of such likelihood cannot be determined. As a result, the Company expects to formulate contingency plans for its mission critical systems where possible. These systems include retail deposit processing, check clearing and wire transfer capabilities, loan origination processing, loan servicing, investment monitoring and accounting, general ledger and accounting systems and payroll processing. The Company maintains a disaster recovery program designed to deal with similar failures on an ongoing basis. All business units have been directed to update and review their existing recovery plans in addition to developing contingency plans prior to March 31, 1999 to address the possible failure 65 68 of one or more mission critical systems. The Company has reviewed its customer base to determine whether they pose significant Year 2000 risks. The Company's customer base consists primarily of individuals who utilize the Company's services for personal, household or consumer uses. Individually such customers are not likely to pose significant year 2000 risks directly. It is not possible at this time to gauge the indirect risks which could be faced if the employers of such customers encounter unresolved Year 2000 issues. Monitoring and managing the Year 2000 Project Plan will result in additional direct and indirect costs to the Company. Direct costs include potential charges by third party software vendors for product enhancements, costs involved in testing for Year 2000 compliance, and costs for developing and implementing contingency plans for critical systems which fail. Indirect costs will principally consist of the time devoted by existing employees in monitoring software vendor progress, testing and developing and implementing any necessary contingency plans. Both direct and indirect costs of addressing the Year 2000 Problem will be charged to earnings as incurred. Such costs have not been material to date. The Company does not believe that such costs will have a material effect on results of operations, although there can be no assurance that such costs would not become material in the future. It is currently estimated that total Year 2000 compliance efforts will cost, excluding reallocation of internal resources, approximately $1,500,000 which includes $750,000 expensed by LISB prior to the LIB Acquisition. Impact of Inflation and Changing Prices The consolidated financial statements and notes thereto presented herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or, to the same extent, as the price of goods and services. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information regarding quantitative and qualitative disclosures about market risk appears under Item 7, "MD&A" on pages 41 through 45 under the caption "Interest Rate Sensitivity Analysis," and pages 59 through 63 under the caption "Asset Quality." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA For the Company's Consolidated Financial Statements, see index on page 71. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 66 69 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ASTORIA FINANCIAL CORPORATION Information regarding directors and executive officers who are not directors of the Registrant, is presented in the tables under the heading "Board Nominees, Directors and Executive Officers" and under the heading "Committees and Meetings of the Board of Directors of Astoria Financial Corporation" in the Company's definitive Proxy Statement to be dated April 9, 1999, for its Annual Meeting of Shareholders to be held on May 19, 1999, which will be filed with the SEC within 120 days from December 31, 1998, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information relating to executive (and director) compensation is included under the headings "Summary Compensation Table", "Fiscal Year End Option/SAR Values", "Pension Plans", "Director Compensation", "Employment Agreements", "Incentive Option Plans," that portion of the "Report of the Compensation Committee on Executive Compensation" entitled "Long-term Incentive Compensation", and "Compensation Committee Interlocks and Insider Participation in Compensation Decisions" in the Company's definitive Proxy Statement to be dated April 9,1999 for its Annual Meeting of Shareholders to be held on May 19, 1999, which will be filed with the SEC within 120 days from December 31, 1998, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information relating to security ownership of certain beneficial owners and management is included under the headings "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" is in the Company's definitive Proxy Statement to be dated April 9, 1999 for its Annual Meeting of Shareholders to be held on May 19, 1999, which will be filed with the SEC within 120 days from December 31, 1998, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is included under the headings "Transactions with Certain Related Persons" and "Compensation Committee Interlocks and Insider Participation in Compensation Decisions" in the Company's definitive Proxy Statement to be dated April 9, 1999 for its Annual Meeting of Shareholders to be held on May 19, 1999, which will be filed with the SEC within 120 days from December 31, 1998, and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS See Index to Consolidated Financial Statements on page 71. 67 70 2. FINANCIAL STATEMENT SCHEDULES Financial Statement Schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto under Item 8, "Financial Statements and Supplementary Data." (b) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF THE REGISTRANT'S FISCAL YEAR ENDED DECEMBER 31, 1998 The following reports on Form 8-K were filed by the Company during the fourth quarter of its fiscal year ended December 31, 1998: (1) Astoria Financial Corporation's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 5, 1998, announcing that as of the close of business on September 30, 1998, the acquisition of LIB by the Company was completed. (2) Astoria Financial Corporation's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 30, 1998 announcing the unaudited financial results, including at least 30 days of post-merger combined results of operations. (3) Astoria Financial Corporation's Amendment No. 1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 5, 1998 on Current Report 8-K/A filed with the Securities and Exchange Commission on December 11, 1998 which included financial statements and pro forma financial information concerning the acquisition of LIB by the Company. (c) EXHIBITS: See Index of Exhibits on page 114. 68 71 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Astoria Financial Corporation /s/ George L. Engelke, Jr. Date: March 17, 1999 ------------------------------------ ------------------- George L. Engelke, Jr. Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
NAME DATE ---- ---- /s/ George L. Engelke, Jr. March 17, 1999 ------------------------------------------------------- George L. Engelke, Jr. Chairman, President and Chief Executive Officer /s/ John J. Conefry, Jr. March 17, 1999 ------------------------------------------------------- John J. Conefry, Jr. Vice Chairman and Director /s/ Gerard C. Keegan March 17, 1999 ------------------------------------------------------- Gerard C. Keegan Vice Chairman, Chief Administrative Officer and Director /s/ Monte N. Redman March 17, 1999 ------------------------------------------------------- Monte N. Redman Executive Vice President and Chief Financial Officer /s/ Robert G. Bolton March 17, 1999 ------------------------------------------------------- Robert G. Bolton Director /s/ Denis J. Connors March 17, 1999 ------------------------------------------------------- Denis J. Connors Director /s/ Robert J. Conway March 17, 1999 ------------------------------------------------------- Robert J. Conway Director /s/ Thomas J. Donahue March 17, 1999 ------------------------------------------------------- Thomas J. Donahue Director
69 72 /s/ William J. Fendt March 17, 1999 ------------------------------------------------------- William J. Fendt Director /s/ Peter C. Haeffner, Jr. March 17, 1999 ------------------------------------------------------- Peter C. Haeffner, Jr. Director /s/ Ralph F. Palleschi March 17, 1999 ------------------------------------------------------- Ralph F. Palleschi Director /s/ Lawrence W. Peters March 17, 1999 ------------------------------------------------------- Lawrence W. Peters Director /s/ Thomas V. Powderly March 17, 1999 ------------------------------------------------------- Thomas V. Powderly Director /s/ Donald D. Wenk March 17, 1999 ------------------------------------------------------- Donald D. Wenk Director
70 73 CONSOLIDATED FINANCIAL STATEMENTS OF ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY INDEX
Page CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1997 AND 1996 Independent Auditors' Report .................................................. 72 Consolidated Statements of Financial Condition as of December 31, 1998 and 1997 73 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 ............................................................... 74 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 ............................................ 75 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 ............................................................... 76 Notes to Consolidated Financial Statements .................................... 78
71 74 I N D E P E N D E N T A U D I T O R S ' R E P O R T To The Board of Directors and Shareholders of Astoria Financial Corporation We have audited the accompanying consolidated statements of financial condition of Astoria Financial Corporation and subsidiary as of December 31, 1998 and 1997, 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 December 31, 1998. 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 Astoria Financial Corporation and subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. KPMG LLP New York, New York January 21, 1999 72 75 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT DECEMBER 31, -------------------------------------- (In Thousands, Except Share Data) 1998 1997 - - ----------------------------------------------------------------------------------------------------------------------------- ASSETS: Cash and due from banks $126,945 $48,645 Federal funds sold and repurchase agreements 266,437 110,550 Mortgage-backed securities available-for-sale 7,553,834 4,509,391 Other securities available-for-sale 642,610 297,914 Mortgage-backed securities held-to-maturity (estimated fair value of $1,141,145 and $1,389,926, respectively) 1,136,799 1,383,627 Other securities held-to-maturity (estimated fair value of $982,295 and $1,255,097, respectively) 972,012 1,249,045 Federal Home Loan Bank of New York stock 210,250 108,774 Loans held-for-sale 212,909 163,962 Loans receivable held-for-investment 8,813,722 7,856,636 Less allowance for loan losses 74,403 73,920 - - ----------------------------------------------------------------------------------------------------------------------------- Loans receivable held-for-investment, net 8,739,319 7,782,716 Mortgage servicing rights, net 50,237 41,789 Accrued interest receivable 102,288 95,652 Premises and equipment, net 161,629 202,193 Goodwill 245,862 263,228 Other assets 166,610 174,851 - - ----------------------------------------------------------------------------------------------------------------------------- Total assets $20,587,741 $16,432,337 ============================================================================================================================= LIABILITIES: Deposits $9,668,286 $9,951,421 Reverse repurchase agreements 7,291,800 3,896,165 Federal Home Loan Bank of New York advances 1,210,170 423,136 Other borrowings 520,827 454,936 Mortgage escrow funds 116,106 114,570 Accrued expenses and other liabilities 318,168 146,310 - - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities 19,125,357 14,986,538 STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value; 5,000,000 shares authorized: Series A (325,000 shares authorized and -0- shares issued and outstanding) - - Series B (2,000,000 shares authorized, issued and outstanding) 2,000 2,000 Common stock, $.01 par value; (200,000,000 and 70,000,000 shares authorized; 54,655,095 and 57,290,186 shares issued and; 54,655,095 and 53,824,131 shares outstanding at December 31, 1998 and 1997, respectively) 547 533 Additional paid-in capital 767,846 806,656 Retained earnings - substantially restricted 742,679 750,305 Treasury stock (3,466,055 shares, at cost) - (87,940) Accumulated other comprehensive income: Net unrealized (loss) gain on securities, net of taxes (14,566) 20,865 Unallocated common stock held by ESOP (35,908) (39,567) Unearned common stock held by RRPs (214) (7,053) - - ----------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 1,462,384 1,445,799 - - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $20,587,741 $16,432,337 =============================================================================================================================
See accompanying Notes to Consolidated Financial Statements. 73 76 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- (In Thousands, Except Share Data) 1998 1997 1996 - - -------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Mortgage loans $612,606 $503,504 $370,867 Consumer and other loans 24,422 23,981 23,164 Mortgage-backed securities 438,934 352,841 380,825 Other securities 132,414 85,968 62,932 Federal funds sold and repurchase agreements 16,072 11,861 4,681 - - -------------------------------------------------------------------------------------------------------------------------------- Total interest income 1,224,448 978,155 842,469 - - -------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits 399,602 371,543 347,262 Borrowed funds 375,863 232,048 154,081 - - -------------------------------------------------------------------------------------------------------------------------------- Total interest expense 775,465 603,591 501,343 - - -------------------------------------------------------------------------------------------------------------------------------- Net interest income 448,983 374,564 341,126 Provision for loan losses 15,380 9,061 10,163 - - -------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 433,603 365,503 330,963 - - -------------------------------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME: Customer service and other loan fees 34,619 23,298 20,097 Loan servicing fees 5,162 12,481 14,337 Net gain on sales of securities 10,976 14,400 7,605 Net gain on sales of loans 1,990 4,044 2,332 Other 7,781 7,254 6,303 - - -------------------------------------------------------------------------------------------------------------------------------- Total non-interest income 60,528 61,477 50,674 - - -------------------------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE: General and administrative: Compensation and benefits 119,240 116,076 108,542 Occupancy, equipment and systems 57,688 48,069 43,545 Federal deposit insurance premiums 5,931 6,589 17,946 Advertising 4,782 8,969 9,319 Other 46,912 33,968 29,195 - - -------------------------------------------------------------------------------------------------------------------------------- Total general and administrative 234,553 213,671 208,547 Real estate operations and provision for real estate losses, net (1,854) 1,863 (6,643) Amortization of goodwill 19,754 11,722 8,968 Acquisition costs and restructuring charges 124,168 - - SAIF recapitalization assessment - - 47,202 - - -------------------------------------------------------------------------------------------------------------------------------- Total non-interest expense 376,621 227,256 258,074 - - -------------------------------------------------------------------------------------------------------------------------------- Income before income tax expense and extraordinary item 117,510 199,724 123,563 Income tax expense 61,825 81,840 54,435 - - -------------------------------------------------------------------------------------------------------------------------------- Income before extraordinary item 55,685 117,884 69,128 Extraordinary item, net of tax (10,637) - - - - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $45,048 $117,884 $69,128 ================================================================================================================================ Basic earnings per common share: Income before extraordinary item $0.98 $2.51 $1.49 Extraordinary item, net of tax (0.21) - - Net earnings per common share $0.77 $2.51 $1.49 ================================================================================================================================ Diluted earnings per common share: Income before extraordinary item $0.94 $2.39 $1.44 Extraordinary item, net of tax (0.20) - - Net earnings per common share $0.74 $2.39 $1.44 ================================================================================================================================ Basic weighted average common shares 50,801,598 46,362,179 46,267,304 Diluted weighted average common and common equivalent shares 52,886,191 48,765,698 48,085,820
See accompanying Notes to Consolidated Financial Statements. 74 77 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
RETAINED ADDITIONAL EARNINGS PREFERRED COMMON PAID-IN SUBSTANTIALLY (In Thousands, Except Share Data) TOTAL STOCK STOCK CAPITAL RESTRICTED - - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 .................... $1,116,859 -- $532 $624,510 $616,028 Comprehensive income: Net income ................................... 69,128 -- -- -- 69,128 Other comprehensive income, net of tax: Net unrealized loss on securities, net of reclassification adjustment ......... (18,018) -- -- -- -- Net unrealized gain on securities reclassified from held-to-maturity to available for sale ....................... 6,734 -- -- -- -- ----------- Comprehensive income ............................ 57,844 ----------- Common stock repurchased (3,058,783 shares) ..... (73,715) -- -- -- -- Dividends on common stock ....................... (17,372) -- -- -- (17,372) Exercise of stock options and related tax benefit 4,560 -- -- 1,151 (2,597) Sale of unearned RRP stock (10,176 shares) ...... 147 -- -- -- -- Amortization relating to allocation of ESOP stock and earned portion of RRP stock and related tax benefit ......................... 19,600 -- -- 8,764 -- -------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 .................... 1,107,923 -- 532 634,425 665,187 Comprehensive income: Net income ................................... 117,884 -- -- -- 117,884 Other comprehensive income, net of tax: Net unrealized loss on securities, net of reclassification adjustment ......... 14,076 -- -- -- -- ----------- Comprehensive income ............................ 131,960 ----------- Issuance of Series B, preferred stock (2,000,000 shares) to effect acquisition of The Greater New York Savings Bank ....... 62,000 2,000 -- 60,000 -- Issuance of common stock (89,548 shares) to effect acquisition of The Greater New York Savings Bank ......................... 84,192 -- 1 84,191 -- Conversion of The Greater New York Savings Bank stock options into Astoria Financial Corporation stock options ....... 8,572 -- -- 8,572 -- Common stock repurchased (2,224,372 shares) ..... (85,735) -- -- -- -- Dividends on common and preferred stock ......... (25,965) -- -- -- (25,965) Issuance of treasury stock (5,695,827 shares) to effect acquisition of The Greater New York Savings Bank .......................... 130,465 -- -- -- -- Exercise of stock options and related tax benefit 8,933 -- -- 4,852 (6,801) Amortization relating to allocation of ESOP stock and earned portion of RRP stock and related tax benefit ......................... 23,454 -- -- 14,616 -- -------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 .................... 1,445,799 2,000 533 806,656 750,305 Comprehensive income: Net income ................................... 45,048 -- -- -- 45,048 Other comprehensive income, net of tax: Net unrealized loss on securities, net of reclassification adjustment ......... (34,928) -- -- -- -- Comprehensive income ............................ 10,120 Adjustments to stockholders' equity to effect the acquisition of Long Island Bancorp, Inc. .. -- -- 11 (69,667) -- Common stock repurchased (339,892 shares) ....... (16,633) -- -- -- -- Dividends on common and preferred stock and amortization of purchase premium ....... (38,631) -- -- (1,304) (37,327) Exercise of stock options and related tax benefit 24,357 -- 3 13,630 (25,113) Amortization relating to allocation of ESOP stock and earned portion of RRP stock and related tax benefit ......................... 26,496 -- -- 17,665 -- Adjustment to conform fiscal year of Long Island Bancorp, Inc. to Astoria Financial Corporation ................................. 10,876 -- -- 866 9,766 -------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 .................... $1,462,384 $2,000 $547 $767,846 $742,679 ==========================================================================
ACCUMULATED UNALLOCATED UNEARNED OTHER COMMON COMMON TREASURY COMPREHENSIVE STOCK HELD STOCK HELD STOCK INCOME BY ESOP BY RRPS --------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 .................... $ (75,843) $18,073 $(48,798) $(17,643) Comprehensive income: Net income ................................... -- -- -- -- Other comprehensive income, net of tax: Net unrealized loss on securities, net of reclassification adjustment ......... -- (18,018) -- -- Net unrealized gain on securities reclassified from held-to-maturity to available for sale ....................... -- 6,734 -- -- Comprehensive income ............................ Common stock repurchased (3,058,783 shares) ..... (73,715) -- -- -- Dividends on common stock ....................... -- Exercise of stock options and related tax benefit 6,006 -- -- -- Sale of unearned RRP stock (10,176 shares) ...... -- -- -- 147 Amortization relating to allocation of ESOP stock and earned portion of RRP stock and related tax benefit ......................... -- -- 5,079 5,757 --------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 .................... (143,552) 6,789 (43,719) (11,739) Comprehensive income: Net income ................................... -- -- -- -- Other comprehensive income, net of tax: Net unrealized loss on securities, net of reclassification adjustment ......... -- 14,076 -- -- Comprehensive income ............................ Issuance of Series B, preferred stock (2,000,000 shares) to effect acquisition of The Greater New York Savings Bank ....... -- -- -- -- Issuance of common stock (89,548 shares) to effect acquisition of The Greater New York Savings Bank ......................... -- -- -- -- Conversion of The Greater New York Savings Bank stock options into Astoria Financial Corporation stock options ....... -- -- -- -- Common stock repurchased (2,224,372 shares) ..... (85,735) -- -- -- Dividends on common and preferred stock ......... -- -- -- -- Issuance of treasury stock (5,695,827 shares) to effect acquisition of The Greater New York Savings Bank .......................... 130,465 -- -- -- Exercise of stock options and related tax benefit 10,882 -- -- -- Amortization relating to allocation of ESOP stock and earned portion of RRP stock and related tax benefit ......................... -- -- 4,152 4,686 --------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 .................... (87,940) 20,865 (39,567) (7,053) Comprehensive income: Net income ................................... -- -- -- -- Other comprehensive income, net of tax: Net unrealized loss on securities, net of reclassification adjustment ......... -- (34,928) -- -- Comprehensive income ............................ Adjustments to stockholders' equity to effect the acquisition of Long Island Bancorp, Inc. .. 68,586 -- -- 1,070 Common stock repurchased (339,892 shares) ....... (16,633) -- -- -- Dividends on common and preferred stock and amortization of purchase premium ....... -- -- -- -- Exercise of stock options and related tax benefit 35,837 -- -- -- Amortization relating to allocation of ESOP stock and earned portion of RRP stock and related tax benefit ......................... -- -- 3,467 5,364 Adjustment to conform fiscal year of Long Island Bancorp, Inc. to Astoria Financial Corporation ................................. 150 (503) 192 405 --------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 .................... -- $(14,566) $(35,908) $ (214) ===============================================================
See accompany Notes to Consolidated Financial Statements. 75 78 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------------------- (In Thousands) 1998 1997 1996 - - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 45,048 $ 117,884 $ 69,128 ------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Net accretion of discounts, premiums and deferred loan fees (25,939) (20,401) (12,522) Provision for loan and real estate losses 16,489 9,886 8,906 Depreciation and amortization 16,959 23,591 16,650 Net gain on sales of securities and loans (12,966) (18,444) (9,937) Originations of loans held-for-sale, net of proceeds from sales (22,175) (105,071) (2,448) Amortization of goodwill 19,754 11,722 8,968 Allocated and earned shares from ESOP and RRPs 18,195 19,663 18,005 Increase in accrued interest receivable (8,671) (5,874) (9,255) Capitalized mortgage servicing rights, net of amortization and valuation allowance (6,061) (8,036) (3,200) Loss on early extinguishment of debt 18,547 -- -- Decrease (increase) in other assets 24,930 62,928 (1,333) Increase (decrease) in accrued expenses and other liabilities 131,236 (33,933) 60,533 Acquisition costs and restructuring charges 87,101 -- -- ------------------------------------------------------- Net cash provided by operating activities 302,447 53,915 143,495 ------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Origination of loans held for investment, net of principal payments (1,260,776) (1,591,419) (759,796) Loan purchases through third parties (195,336) (581,794) (1,266,617) Principal payments on mortgage-backed securities held-to-maturity 319,212 80,635 101,063 Principal payments on mortgage-backed securities available-for-sale 1,964,457 800,946 953,845 Purchases of mortgage-backed securities held-to-maturity (72,651) (119,080) (87,069) Purchases of mortgage-backed securities available-for-sale (6,505,183) (799,257) (403,827) Purchases of other securities held-to-maturity (213,456) (743,799) (415,482) Purchases of other securities available-for-sale (1,061,236) (180,550) (477,718) Proceeds from maturities of other securities available-for-sale 755,248 220,853 431,328 Proceeds from maturities of other securities held-to-maturity 527,527 139,514 50,860 Purchases of FHLB stock, net (101,476) (7,970) (5,622) Proceeds from sales of securities available-for-sale and loans 1,903,658 1,556,073 719,589 Proceeds from sales of real estate owned and investments in real estate, net 20,524 37,303 30,719 Purchases of premises and equipment, net of proceeds from sales (27,677) (18,233) (23,924) Purchase of mortgage servicing rights -- (4,066) (15,159) Acquisitions net of cash and cash equivalents acquired -- (82,202) -- ------------------------------------------------------- Net cash used in investing activities (3,947,165) (1,293,046) (1,167,810) ------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in deposits (294,106) 203,912 308,655 Net increase in reverse repurchase agreements 3,219,488 912,166 537,996 Net increase in FHLB of New York advances 820,000 2,120 35,000 Net increase in other borrowings 77,855 276,913 178,023 Increase (decrease) in mortgage escrow funds 22,720 8,376 (3,233) Costs to repurchase common stock (16,633) (85,735) (73,715) Cash dividends paid to stockholders (42,754) (25,797) (18,162) Cash received for options exercised 15,012 4,960 2,548 Cash received from sale of unallocated RRP stock -- -- 147 ------------------------------------------------------- Net cash provided by financing activities 3,801,582 1,296,915 967,259 ------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 156,864 57,784 (57,056) Adjustment to conform fiscal year of LIB to the Company 77,323 -- -- Cash and cash equivalents at beginning of year 159,195 101,411 158,467 ------------------------------------------------------- Cash and cash equivalents at end of year $ 393,382 $ 159,195 $ 101,411 =======================================================
76 79 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEAR ENDED DECEMBER 31, ------------------------------------------------------- (In Thousands) 1998 1997 1996 - - ---------------------------------------------------------------------------------------------------------------------------------- Supplemental disclosures: Cash paid during the year: Interest $738,271 $593,880 $ 491,644 ======================================================= Income taxes $ 25,078 $ 42,570 $ 53,530 ======================================================= Additions to real estate owned $ 15,955 $ 16,511 $ 18,897 ======================================================= Securitization of loans $387,071 $680,889 $ 358,786 ======================================================= Transfers of securities from held-to-maturity to available- for-sale, net $ -- $ -- $1,307,472 =======================================================
SUPPLEMENTAL INFORMATION TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS RELATING TO THE GREATER ACQUISITION Noncash investing and financing transactions relating to The Greater acquisition that are not reflected in the Consolidated Statement of Cash Flows for the year ended December 31, 1997 are listed below:
(In Thousands) - - ------------------------------------------------------------------------------------ Fair value of assets acquired, excluding cash and cash equivalents acquired $ 2,340,822 Liabilities assumed (2,140,102) Conversion of stock options and common stock previously acquired from acquiree (13,132) Goodwill 169,335 75% stock consideration (274,721) - - ------------------------------------------------------------------------------------ Cash paid for acquiree, net of cash and cash equivalents acquired $ 82,202 ====================================================================================
See accompanying Notes to Consolidated Financial Statements. 77 80 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following significant accounting and reporting policies of Astoria Financial Corporation (the "Company") and subsidiary conform to generally accepted accounting principles ("GAAP") and are used in preparing and presenting these consolidated financial statements. (a) Basis of Presentation The accompanying consolidated financial statements of the Company include the accounts of its wholly-owned subsidiary, Astoria Federal Savings and Loan Association (the "Association") and its subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation. After the close of business on September 30, 1998, Long Island Bancorp, Inc. ("LIB") merged with and into the Company and LIB's subsidiary, The Long Island Savings Bank, FSB ("LISB"), merged with and into the Association (the "LIB Acquisition"). All subsidiaries of LISB became subsidiaries of the Association. The acquisition was accounted for as a pooling-of-interests, and accordingly, all historical financial information for the Company has been restated to include LIB's historical information for the earliest periods presented. The Company reports its financial results on a calendar year basis, whereas LIB had reported its financial results on a fiscal year basis which ended on September 30. The consolidated financial results for years prior to 1998 reflect the combination of the Company at and for the years ended December 31 with LIB at and for the fiscal years ended September 30. The consolidated financial results for 1998 reflect the combination of the Company at and for the year ended December 31, 1998 with LIB at and for the calendar nine months ended September 30, 1998. LIB's operating results for the three-month period ended December 31, 1997 have been included as a separate component of consolidated stockholders' equity and are not included in the Company's consolidated statement of operations for the year ended December 31, 1998. Results of operations of companies acquired and accounted for as purchases are included from the dates of acquisition. When the Company acquires a company through a pooling-of-interests, current and prior-period financial statements are restated to include the accounts of the acquired companies. Previously reported balances of the acquired companies have been reclassified to conform to the Company's presentation and restated to give effect to the combinations. Certain reclassifications have been made to 1997 and 1996 financial statements to conform them to the 1998 presentation. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. (b) Cash Equivalents For the purpose of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold and repurchase agreements with original maturities of three months or less. (c) Securities The Company follows Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company's available-for-sale portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as a separate component of stockholders' equity. The securities which the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and carried at amortized cost. Premiums and discounts are recognized as adjustments to interest income using the interest method over the remaining period to contractual maturity, adjusted for estimated prepayments when applicable. Gains and losses on the sale of all securities are determined using the specific identification method and are reflected in earnings when realized. For the years ending December 31, 1998 and 1997, the Company did not maintain a trading portfolio. Management conducts a periodic review and evaluation of the securities portfolio to determine if the value of any security has declined below its carrying value, and whether such decline is other than temporary. 78 81 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) (d) Loans Held-for-Sale Loans held-for-sale are carried at the lower of cost or estimated fair value, as determined on an aggregate basis. Net unrealized losses are recognized in a valuation allowance by charges to operations. Premiums, discounts and origination fees and costs on loans held-for-sale are deferred and recognized as a component of the gain or loss on sale. Gains and losses on sales of loans held-for-sale are recognized on settlement dates and are determined by the difference between the sale proceeds and the carrying value of the loans. (e) Loans Receivable Held-for-Investment Loans receivable held-for-investment are carried at the unpaid principal balances, net of unamortized discounts and premiums and deferred loan origination fees and costs which are recognized as yield adjustments over the lives of the loans using the interest method. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on the Company's past loan loss experience, trends in portfolio volume, quality, maturity and composition, the status and amount of non-performing and past-due loans, known and inherent risks in the portfolio, adverse situations that may affect a borrower's ability to repay, the estimated fair value of any underlying collateral and current and prospective, as well as specific and general, economic conditions. When loans become ninety days delinquent, with the exception of loans delinquent 90 days or more as to their maturity date but not their interest payment, the Company will discontinue accruing interest, which results in a charge to interest income equal to all interest previously accrued and not collected. While loans are in non-accrual status, interest due is monitored and income is recognized only to the extent cash is received, until a return to accrual status is warranted. The Company will return loans to an accrual status when principal and interest payments are current, full collection of principal and interest is reasonably assured and a consistent record of performance has been demonstrated. Loan origination and commitment fees and certain direct loan origination costs are deferred and amortized to income using the interest method. Discounts and premiums on mortgage loans purchased are also deferred and amortized using the interest method. The Company is generally amortizing these amounts over the contractual life of the related loans, adjusted for prepayments. The Company follows Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114") and Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" ("SFAS No. 118"). Under SFAS No. 114 and SFAS No. 118, a loan is considered impaired when, based upon current information and events, it is probable that a creditor will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement. The Company reviews larger balance loans for individual impairment and groups smaller balance loans based on homogeneous pools. Interest income received on impaired non-accrual loans is recognized on a cash basis. Interest income on other impaired loans is recognized on an accrual basis. (f) Mortgage Servicing Rights ("MSR") The Company recognizes, as separate assets, the rights to service mortgage loans whether those rights are acquired through loan purchase or loan origination activities. MSR are amortized in proportion to and over the estimated period of net servicing income. The Company stratifies its MSR by underlying loan type (primarily fixed and adjustable) and interest rate. The estimated fair value of each MSR stratum is determined through a discounted cash flow analysis of future cash flows, incorporating numerous assumptions including servicing income, servicing costs, market discount rates, prepayment speeds and default rates. The Company assesses impairment of the MSR based on the fair value of those rights on a stratum-by-stratum basis with any impairment recognized through a valuation allowance for each impaired stratum. Individual allowances for each stratum are then adjusted in subsequent periods to reflect changes in the measurement of impairment. 79 82 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) (g) Real Estate Owned and Investments in Real Estate Real estate acquired through foreclosure or the collection process is carried at the lower of cost or estimated fair value at the date of acquisition, and at the lower of the new cost basis or estimated fair value, less estimated selling costs, thereafter. Fair value is estimated through current appraisals. Write-downs required at the time of acquisition are charged to the allowance for loan losses. Thereafter, the Company maintains an allowance for actual and potential future declines in value. Investments in unconsolidated real estate joint ventures are accounted for using the equity method of accounting. Interest and other carrying charges are capitalized on projects in process of development. The recognition of gains on the sale of real estate is dependent upon the terms of sale and various other factors. Valuation allowances for estimated losses are charged to income when the carrying value of real estate held for investment exceeds its estimated fair value. Real estate owned and investments in real estate, which are included in other assets, amounted to $9.3 million and $25.4 million at December 31, 1998 and 1997, respectively. (h) Premises and Equipment Land is carried at cost. Buildings and improvements, leasehold improvements and furniture, fixtures and equipment are carried at cost, less accumulated depreciation and amortization. Buildings and improvements and furniture, fixtures and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the term of the related leases or the estimated useful lives. (i) Excess of Cost Over Estimated Fair Value of Net Assets Acquired ("Goodwill") The portion, if any, of intangible assets generated in acquisitions identified as core deposit intangible is amortized using the interest method over the estimated lives of the related liabilities. The remaining portion is considered goodwill and is amortized using the straight line method over varying periods up to fifteen years. Goodwill is evaluated periodically by the Company for impairment in response to changes in circumstances or events. (j) Reverse Repurchase Agreements (Securities Sold Under Agreements to Repurchase) The Company enters into sales of securities under agreements to repurchase with selected dealers and banks. Such agreements are treated as financings and the obligations to repurchase securities sold are reflected as a liability in the Company's consolidated statements of financial condition. The Company follows Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. Under this approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. (k) Interest Rate Caps/Floors and Interest Rate Swaps As part of its asset/liability management program, the Company from time-to-time utilizes interest rate caps and floors and interest rate swaps to reduce the Company's sensitivity to interest rate fluctuations. Premiums paid for interest rate caps and floors are amortized to interest expense over the terms of the agreements. Net interest income is decreased or increased on an accrual basis by amounts receivable or payable with respect to the rate caps and floors purchased or sold. The net interest differential, resulting from the difference between exchanging variable and fixed rate interest payments as part of an interest rate swap is recorded as a component of net interest income. 80 83 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) (l) Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates, applicable to future years, to differences between the financial statement carrying amounts and tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. (m) Earnings Per Common Share ("EPS") The Company follows Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 simplified the standards for computing EPS previously found in Accounting Principles Board Opinion No. 15, and replaced the presentation of primary EPS and fully diluted EPS with the presentation of basic EPS and diluted EPS, respectively. Upon adoption of SFAS No. 128, the change from primary EPS to basic EPS and from fully diluted EPS to diluted EPS resulted in modest increases in both EPS presentations. (n) Employee Benefits The Company follows the provisions of the AICPA's Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans" ("SOP 93-6"). In accordance with SOP 93-6, compensation expense is recorded at an amount equal to the shares allocated by the Employee Stock Ownership Plan ("ESOP") multiplied by the average fair value of the Company's common stock during the reporting period. For EPS and other per-share disclosure, ESOP shares that have been committed to be released are considered outstanding. ESOP shares that have not been committed to be released (unallocated shares) are excluded from outstanding shares on a weighted average basis for EPS calculations. The difference between the fair value of shares for the period and the cost of the shares allocated by the ESOP is recorded as an adjustment to additional paid-in capital. The Company follows Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS No. 106") for medical and dental coverage provided to select individuals upon retirement. This statement requires that the cost of postretirement benefits, primarily health care benefits, be accrued during an employee's active working career. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") established a fair value-based method of accounting for stock-based compensation arrangements with employees, rather than the intrinsic value-based method that is contained in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). SFAS No. 123 does not require an entity to adopt the new fair value-based method for purposes of preparing its basic financial statements. The Company has chosen to continue to use the APB No. 25 method; however, SFAS No. 123 requires the presentation of pro forma net income and EPS information in the notes to the financial statements as if the fair value- based method had been adopted. See Note 16 for the presentation of this pro forma information. Effective for the year ended December 31, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132 supersedes the disclosure requirements of Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," ("SFAS No. 87") and SFAS No. 106. This standard requires additional information on the changes in the benefit obligations and plan assets and eliminates certain disclosures to facilitate the financial analysis of these plans. This standard is limited to issues of reporting and presentation and does not address recognition or measurement; therefore, its adoption did not affect the Company's financial condition or results of operations. All periods presented have been restated to conform to the new requirements. See Note 15 for the presentation of this information. 81 84 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) (o) Segment Reporting During 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires public companies to report certain financial information about significant revenue-producing segments of the business for which such information is available and utilized by the chief operating decision maker. Specific information to be reported for individual operating segments includes a measure of profit and loss, certain revenue and expense items, and total assets. As a community-oriented financial institution, substantially all of the Company's operations involve the delivery of loan and deposit products to customers. Management makes operating decisions and assesses performance based on an ongoing review of these community banking operations, which constitute the Company's only operating segment for financial reporting purposes under SFAS No. 131. (2) BUSINESS COMBINATIONS LIB Acquisition Following the close of business on September 30, 1998 ("the consummation date"), the Company completed the acquisition of LIB, the holding company of LISB, a federally chartered savings bank, with LIB merging with and into the Company and LISB merging with and into the Association (the "LIB Acquisition"). The transaction was accounted for as a pooling-of-interests. Accordingly, under GAAP, the assets, liabilities and stockholders' equity as reported by LIB immediately prior to consummation, were recorded by the Company. No goodwill was created as a result of the LIB Acquisition. Under the terms of the merger agreement, holders of LIB common stock, par value $.01 per share ("LIB Common Stock"), received 1.15 shares of the Company's common stock, par value $.01 per share ("Common Stock"), for each share of LIB Common Stock. The Company issued 27,876,636 shares of Common Stock to complete the LIB Acquisition. LIB had $6.58 billion in total assets, $3.58 billion in deposits, and $581.0 million in stockholders' equity at September 30, 1998. The results of operations previously reported by the separate entities and the combined amounts presented in the accompanying consolidated financial statements are summarized below.
Nine Months Ended Year Ended December 31, (In Thousands) September 30, 1998 1997 1996 -------------------------------------------------------------------------------- Net Interest Income: The Company $213,006 $215,051 $186,693 LIB 120,117 159,561 154,395 -------- -------- -------- Combined (1) $333,123 $374,612 $341,088 ======== ======== ======== Net Income: The Company $ 71,335 $ 68,464 $ 36,853 LIB 29,254 49,420 32,275 -------- -------- -------- Combined $100,589 $117,884 $ 69,128 ======== ======== ========
(1) Certain reclassifications were made to conform LIB's reporting presentation to the Company's. As a result, combined net interest income as presented in the accompanying consolidated statements of operations totals $333.2 million, $374.6 million and $341.1 million for the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996, respectively. LIB's reporting period had been as of and for the fiscal year ended September 30, whereas the Company utilizes a calendar year reporting period. LIB's financial results for 1998 have been conformed to the calendar year reporting period of the Company. All prior year consolidated financial results combine the Company with LIB utilizing their respective reporting periods. As a result, LIB's operating results for the three-month period ended December 31, 1997 have been set forth separately in the Company's consolidated statement of changes in stockholders' equity and are not included in the Company's consolidated statements of operations. 82 85 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) The following is a summary of LIB's results of operations and cash flows for the three months ended December 31, 1997.
(In Thousands) Statement of Operations Data: Interest income $ 104,517 Interest expense 65,550 --------- Net interest income 38,967 Provision for loan losses 1,500 --------- Net interest income after provision for loan losses 37,467 Non-interest income 10,293 Non-interest expense 26,179 Income tax expense 8,399 --------- Net income 13,182 ========= Statement of Cash Flows Data: Cash provided by operating activities $ 16,195 Cash used in investing activities (38,596) Cash provided by financing activities 99,724 --------- Net increase in cash and cash equivalents $ 77,323 =========
Acquisition Costs and Restructuring Charges From the period between initiation of the LIB Acquisition and the consummation date, the Company developed formal plans to integrate the businesses of LIB and the Company. Such plans included, among other things, the termination of employees, disposal of duplicate facilities, consolidation and relocation of equipment and facilities, integration of information systems and cancellation of lease contracts and other executory contracts. The Company has recognized as liabilities only those items that qualify for recognition under the consensus reached on Issue No. 94-3 by the Emerging Issues Task Force ("EITF"), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit An Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). The Company has recorded all direct costs related to the LIB Acquisition as liabilities as of the consummation date, and the total pre-tax charge of $124.2 million has been classified as acquisition costs and restructuring charges in the Company's consolidated statement of operations for the year ended December 31, 1998. Such costs relate to restructuring plans and/or exit plans formally adopted by the Company. Four general plans were adopted by the Company as follows: 1. Plan of termination for former LIB employees. 2. Plan to close "duplicate" banking office facilities including review of lease contracts. 3. Plan to consolidate main operating facilities which included the headquarters of LIB and the relocation of the Company's mortgage operation facilities including review of lease contracts. 4. Plan to integrate information systems including review of lease contracts and other executory contracts. 83 86 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) The following table sets forth, in detail, the components of the Company's acquisition costs and restructuring charges:
PROVISION CHARGED CASH PAYMENTS/ ACCRUED TO OPERATIONS WRITE-OFFS IN BALANCE AT (IN THOUSANDS) OCTOBER 1, 1998 4TH QUARTER 1998 DECEMBER 31, 1998 - - --------------------------------------------------------------------------------------------------------------- EMPLOYEE TERMINATION COSTS: a) Executive employment contracts $10,592 $10,592 $ -- b) Severance & retention bonuses and salaries 11,107 6,309 4,798 c) Termination benefits 6,001 5,359 642 d) Voluntary early retirement charges 4,886 -- 4,886 e) Vested RRPs 3,439 3,439 -- -------- ------- ------- Subtotal 36,025 25,699 10,326 -------- ------- ------- FACILITIES, EQUIPMENT AND SYSTEMS COSTS: f) Asset write-offs/write-downs 51,679 51,679 - g) Lease/contract terminations and facilities restructuring 14,482 3,203 11,279 h) Conversion of information systems 2,917 1,768 1,149 -------- ------- ------- Subtotal 69,078 56,650 12,428 -------- ------- ------- i) TRANSACTION FEES & OTHER COSTS: Investment banking fees 13,363 6,827 6,536 Legal fees 3,071 1,897 1,174 Other professional fees 1,199 795 404 Printing/filing fees 937 904 33 Other 495 85 410 -------- ------- ------- Subtotal 19,065 10,508 8,557 -------- ------- ------- Total $124,168 $92,857 $31,311 ======== ======= =======
All of the aforementioned costs result from plans to exit activities that will have no future economic benefit. The following represent general descriptions of these costs: a) Executive employment contracts were primarily severance, bonus and benefit payments made to the top eight former senior executives of LIB, pursuant to the merger agreement. Such payments were made by LIB prior to the consummation date. b) Severance and retention bonuses represent amounts for 444 involuntarily terminated LIB employees (excluding executive officers). Individual amounts were based on years of service, base salary, and period of time to be retained. The Company retained 282 former LIB employees from the consummation date, primarily to engage in transition and exit activities. Such employees will not be retained as permanent employees of the Company. The majority of these individuals were retained through January 31, 1999. The remaining accrued balance is expected to be paid by the end of the second quarter of 1999. Retention salaries represent amounts for these same 282 terminated LIB employees. Although these salaries were for future services to be rendered by terminated employees subsequent to the consummation date, these employees were engaged in exit activities. As such, these costs were recorded as liabilities as of the consummation date. 84 87 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) c) Termination benefits represent amounts for vacation pay and life insurance benefits for involuntarily and voluntarily terminated LIB employees, including the top eight senior executive officers. Such benefits were based on years of service and were primarily paid by LIB prior to the consummation date. Additional benefits accrued by the Company as of the consummation date, included benefits for those involuntarily terminated LIB employees who were engaged in exit activities and were being retained by the Company for a specific period. These benefits included medical, dental and disability coverage. d) Voluntary early retirement charge represents pension and postretirement benefits for 61 former LIB employees. These accelerated employee benefits and reduction in force charges for these former LIB employees totaled $3.0 million for pension benefits and $1.9 million for postretirement benefits. The incremental voluntary pension benefits were recognized in accordance with Statement of Financial Accounting Standards No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." Such benefits will remain as accrued pension and postretirement benefit costs to the Company until all such benefits are paid during these former LIB employees' lifetimes. e) All restricted stock awarded under LIB's Management Recognition and Retention Plan for Executive Officers and LIB Management Recognition and Retention Plan for Non-Employee Directors became fully vested upon approval of the acquisition. This amount was paid by LIB prior to the consummation date. f) Asset write-offs/write-downs represent: $26.7 million for the write-down of LIB's main operating headquarters to its estimated fair value; $17.5 million for complete write-offs for unusable data processing equipment; $2.0 million for write-offs of LIB's book value of unusable furnitures, fixtures, and equipment; $3.1 million for write-offs for unusable furnitures, fixtures, equipment and construction in progress for the Company's abandoned mortgage facility; and $1.6 million for goodwill previously recorded by LIB for Loan Processing Offices ("LPOs") purchased by LIB and closed by the Company. The Company has the intent to sell LIB's main operating headquarters by December 31, 1999 and the current estimated fair value of this facility, which is vacant, is included in the balance of premises and equipment in the Company's statement of financial condition as of December 31, 1998. As of the consummation date, the Company suspended depreciation of this building, as it is held-for-sale, and began to aggressively market this facility. g) Lease/contract terminations and facilities restructurings primarily represent those costs incurred as a result of exit plans for closing offices and consolidating facilities. The Company initiated plans to close 5 banking office facilities, 5 LPOs and eliminate LIB's main operating headquarters. In addition, due to significant growth in the Company's mortgage operations as a result of the LIB acquisition, the Company was required to relocate its entire mortgage operating facility. Approximately $1.8 million represented lease buyout costs for 4 of the 5 banking office closings and all the LPO closings. These lease obligations existed prior to the consummation date and resulted in penalties for the Company to cancel such obligations. Approximately $1.1 million represented overhead costs for the continued maintenance of LIB's main operating headquarters. This facility has been completely abandoned, effective February 1, 1999. As such, the Company has included its future overhead costs to maintain this facility as part of restructuring charges as no future economic benefit will be obtained from this facility. Approximately $6.8 million represented the present value of net operating costs for the Company's former mortgage operating facility. This operating facility was also abandoned, effective February 1, 1999 as a result of significant growth in volume and resources needed to support such volume in the Company's mortgage loan originations, secondary marketing and mortgage servicing departments. Approximately $2.5 million represented other lease/contract termination costs for various data processing equipment and banking office facility equipment and insurance adjustments. These leases/contracts existed prior to the consummation date. Approximately $1.7 million of the remaining total costs were accrued for clean-up or demolition costs for these closed facilities. h) Information systems conversion costs primarily represent outside vendor charges for integration of LIB's retail, mortgage, and financial systems to the Company's systems. i) Transaction fees and other costs primarily represent investment banking and legal fees. The Company has paid 85 88 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) the remaining investment banking fees in January 1999 and expects to pay substantially all legal and other professional fees and other costs by December 31, 1999. The Greater Acquisition Following the close of business on September 30, 1997, the Company completed the acquisition of The Greater New York Savings Bank ("The Greater"), with The Greater merging with and into the Association in a transaction which was accounted for as a purchase ("The Greater Acquisition"). Accordingly, the assets and liabilities of The Greater were recorded on the books of the Company at their fair market values of $2.37 billion and $2.14 billion, respectively. The cost of The Greater Acquisition was $399.5 million, including approximately $38.2 million of acquisition-related costs. The balance of goodwill generated by The Greater Acquisition at December 31, 1998 was $159.5 million. The Company's consolidated results of operations include The Greater's results of operations commencing October 1, 1997. Fidelity Acquisition Following the close of business on January 31, 1995, the Company acquired Fidelity New York, FSB ("Fidelity") in a transaction which was accounted for as a purchase ("Fidelity Acquisition"). The balance of goodwill generated by the Fidelity Acquisition at December 31, 1998 was $82.9 million. (3) REPURCHASE AGREEMENTS The Company and the Association purchase securities under agreements to resell (repurchase agreements). These agreements represent short-term loans and are reflected as an asset in the consolidated statements of financial condition. The Company may sell, loan or otherwise dispose of such securities to other parties in the normal course of operations. Substantially the same securities are to be resold at maturity of the repurchase agreements. As of December 31, 1998 and 1997, one repurchase agreement for $66.4 million and $1.6 million, respectively, was outstanding. Repurchase agreements averaged $29.5 million during the year ended December 31, 1998 and $11.5 million during the year ended December 31, 1997. The maximum amounts of such agreements outstanding at any month end, during the years ended December 31, 1998 and 1997, were $100.8 million and $26.5 million, respectively. (4) SECURITIES The amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at December 31, 1998 and 1997 are as follows: 86 89 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
At December 31, 1998 --------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (In Thousands) Cost Gains Losses Value - - ------------------------------------------------------------------------------------------------------------------------ Available-for-sale: Mortgage-backed securities: GNMA pass-through certificates $ 163,731 $ 2,795 $ (10) $ 166,516 FHLMC pass-through certificates 342,311 2,079 (1,668) 342,722 FNMA pass-through certificates 608,842 8,513 (1,561) 615,794 REMICs and CMOs: Agency issuance 4,961,157 1,363 (42,020) 4,920,500 Non agency issuance 1,509,402 3,689 (4,789) 1,508,302 - - ------------------------------------------------------------------------------------------------------------------------ Total mortgage-backed securities 7,585,443 18,439 (50,048) 7,553,834 - - ------------------------------------------------------------------------------------------------------------------------ Other securities: Obligations of the U.S. Government and agencies 462,302 4,910 (13) 467,199 Corporate debt securities 21,048 -- (322) 20,726 FNMA and FHLMC preferred stock 127,515 1,325 -- 128,840 Asset-backed securities 15,815 41 (32) 15,824 Equity and other securities 10,089 -- (68) 10,021 - - ------------------------------------------------------------------------------------------------------------------------ Total other securities 636,769 6,276 (435) 642,610 - - ------------------------------------------------------------------------------------------------------------------------ Total available-for-sale $8,222,212 $24,715 $(50,483) $8,196,444 ======================================================================================================================= Held-to-maturity: Mortgage-backed securities: GNMA pass-through certificates $ 53,455 $ 2,122 $ -- $ 55,577 FHLMC pass-through certificates 14,738 493 (4) 15,227 FNMA pass-through certificates 15,954 135 -- 16,089 REMICs and CMOs: Agency issuance 785,314 3,427 (1,138) 787,603 Non agency issuance 267,338 1,404 (2,093) 266,649 - - ------------------------------------------------------------------------------------------------------------------------ Total mortgage-backed securities 1,136,799 7,581 (3,235) 1,141,145 - - ------------------------------------------------------------------------------------------------------------------------ Other securities: Obligations of the U.S. Government and agencies 925,074 10,412 (128) 935,358 Obligations of states and political subdivisions 46,938 -- (1) 46,937 - - ------------------------------------------------------------------------------------------------------------------------ Total other securities 972,012 10,412 (129) 982,295 - - ------------------------------------------------------------------------------------------------------------------------ Total held-to-maturity $2,108,811 $17,993 $ (3,364) $2,123,440 =======================================================================================================================
87 90 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
At December 31, 1997 -------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (In Thousands) Cost Gains Losses Value - - ------------------------------------------------------------------------------------------------------------------------------------ Available-for-sale: Mortgage-backed securities: GNMA pass-through certificates $ 609,864 $ 3,238 $ (792) $ 612,310 FHLMC pass-through certificates 747,572 9,214 (1,384) 755,402 FNMA pass-through certificates 1,125,553 19,276 (879) 1,143,950 REMICs and CMOs: Agency issuance 1,219,231 2,989 (5,937) 1,216,283 Non agency issuance 775,101 9,784 (3,439) 781,446 - - ------------------------------------------------------------------------------------------------------------------------------------ Total mortgage-backed securities 4,477,321 44,501 (12,431) 4,509,391 - - ------------------------------------------------------------------------------------------------------------------------------------ Other securities: Obligations of the U.S. Government and agencies 179,716 41 (921) 178,836 FNMA and FHLMC preferred stock 61,915 3,086 (13) 64,988 Asset-backed securities 11,797 33 (77) 11,753 Equity and other securities 39,821 2,539 (23) 42,337 - - ------------------------------------------------------------------------------------------------------------------------------------ Total other securities 293,249 5,699 (1,034) 297,914 - - ------------------------------------------------------------------------------------------------------------------------------------ Total available-for-sale $4,770,570 $50,200 $(13,465) $4,807,305 ==================================================================================================================================== Held-to-maturity: Mortgage-backed securities: GNMA pass-through certificates $ 71,321 $ 4,171 $ -- $ 75,492 FHLMC pass-through certificates 21,308 969 (4) 22,273 FNMA pass-through certificates 19,425 104 (130) 19,399 REMICs and CMOs: Agency issuance 926,779 6,597 (2,404) 930,972 Non agency issuance 344,794 594 (3,598) 341,790 - - ------------------------------------------------------------------------------------------------------------------------------------ Total mortgage-backed securities 1,383,627 12,435 (6,136) 1,389,926 - - ------------------------------------------------------------------------------------------------------------------------------------ Other securities: Obligations of the U.S. Government and agencies 1,189,300 7,282 (1,223) 1,195,359 Obligations of states and political subdivisions 49,725 -- (34) 49,691 Corporate debt securities 10,020 28 (1) 10,047 - - ------------------------------------------------------------------------------------------------------------------------------------ Total other securities 1,249,045 7,310 (1,258) 1,255,097 - - ------------------------------------------------------------------------------------------------------------------------------------ Total held-to-maturity $2,632,672 $19,745 $ (7,394) $2,645,023 ====================================================================================================================================
Sales of securities from the available-for-sale portfolio during the years ended December 31, are summarized as follows:
(In Thousands) 1998 1997 1996 - - ------------------------------------------------------------------------------ Proceeds from sale $1,811,686 $1,327,250 $708,367 Gross gains 16,353 16,504 8,926 Gross losses 5,377 2,104 1,321
The amortized cost and estimated fair value of debt securities at December 31, 1998, by contractual maturity, excluding mortgage-backed securities, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. As of December 31, 1998, the amortized cost of such callable securities totaled $1.33 billion of which $890.3 million are callable within a year and $442.6 million are callable in one to three years. Securities called during the years ended December 31, 1998 and 1997 totaled $738.5 million and $138.1 million, respectively. 88 91 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
At December 31, 1998 -------------------------------- Estimated Amortized Fair (In Thousands) Cost Value - - ------------------------------------------------------------------------------------- Available-for-sale: Due in one year or less $ 21,981 $ 21,949 Due after one year through five years 92,302 93,274 Due after five years through ten years 129 137 Due after ten years 394,745 398,312 - - ------------------------------------------------------------------------------------- Total available-for-sale $509,157 $513,672 - - ------------------------------------------------------------------------------------- Held-to-maturity: Due in one year or less $ 800 $ 800 Due after one year through five years 1,877 1,876 Due after five years through ten years 175,110 176,425 Due after ten years 794,225 803,194 - - ------------------------------------------------------------------------------------- Total held-to-maturity $972,012 $982,295 =====================================================================================
The balance of accrued interest receivable for mortgage-backed securities totaled $48.0 million and $36.0 million at December 31, 1998 and 1997, respectively. The balance of accrued interest receivable for other securities totaled $10.6 million and $16.9 million at December 31, 1998 and 1997, respectively. (5) LOANS RECEIVABLE HELD-FOR-INVESTMENT, LOANS HELD-FOR-SALE AND MORTGAGE LOAN SERVICING Loans receivable held-for-investment, net, are summarized as follows:
At December 31, --------------------------------- (In Thousands) 1998 1997 - - --------------------------------------------------------------------------------------------------- Mortgage loans: Secured by one-to-four family residences $ 7,646,641 $ 6,745,039 Secured by multi-family properties 452,854 377,292 Secured by commercial properties 452,387 451,559 - - --------------------------------------------------------------------------------------------------- 8,551,882 7,573,890 Net deferred loan origination (fees) costs (5,049) 838 Net unamortized premium 36,522 23,661 - - --------------------------------------------------------------------------------------------------- Total mortgage loans 8,583,355 7,598,389 =================================================================================================== Consumer and other loans: Home equity 142,437 130,665 Passbook 6,653 7,207 Other 80,287 118,236 - - --------------------------------------------------------------------------------------------------- 229,377 256,108 Net deferred loan origination costs 1,921 2,495 Net unamortized discount (931) (356) - - --------------------------------------------------------------------------------------------------- Total consumer and other loans 230,367 258,247 - - --------------------------------------------------------------------------------------------------- Total loans 8,813,722 7,856,636 Allowance for loan losses (74,403) (73,920) - - --------------------------------------------------------------------------------------------------- Loans receivable held-for-investment, net $ 8,739,319 $ 7,782,716 ===================================================================================================
Accrued interest receivable on all loans receivable totaled $43.7 million and $42.8 million at December 31, 1998 and 1997, respectively. As of December 31, 1998 and 1997, the Company had loans in non-accrual status, included in loans receivable held-for-investment, of approximately $106.3 million and $73.0 million, respectively. If all non-accrual loans had been performing in accordance with their original terms, the Company would have recorded interest income, with respect to such loans, of $6.8 million, $5.2 million and $5.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. This compares to $1.6 million, $1.2 million and $934,000, respectively, of actual payments recorded as 89 92 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) interest income with respect to such loans. Loans individually reviewed for impairment by the Company are limited to multi-family mortgage loans, commercial loans, loans modified in a troubled debt restructuring and selected large one-to-four family residential mortgage loans. Examples of measurement techniques utilized by the Company in determining the book value of an impaired loan include the market price of the loan, if one exists, the estimated fair value of the collateral and present value of expected future cash flows. The following table summarizes information regarding the Company's impaired mortgage loans:
At December 31, 1998 ----------------------------------------------------- Allowance Recorded for Loan Net (In Thousands) Investment Losses Investment - - ------------------------------------------------------------------------------------------------------ One-to-four family: With a related allowance $ 1,993 $ (378) $ 1,615 Without a related allowance 3,376 -- 3,376 - - ------------------------------------------------------------------------------------------------------ Total one-to-four family 5,369 (378) 4,991 - - ------------------------------------------------------------------------------------------------------ Commercial and multi-family: With a related allowance 21,385 (2,901) 18,484 Without a related allowance 94 -- 94 - - ------------------------------------------------------------------------------------------------------ Total commercial and multi-family 21,479 (2,901) 18,578 - - ------------------------------------------------------------------------------------------------------ Total impaired mortgage loans $26,848 $(3,279) $23,569 =====================================================================================================
At December 31, 1997 ------------------------------------------------------- Allowance Recorded for Loan Net (In Thousands) Investment Losses Investment - - ------------------------------------------------------------------------------------------------------ One-to-four family: With a related allowance $ 890 $ (178) $ 712 Without a related allowance 10,932 -- 10,932 - - ------------------------------------------------------------------------------------------------------ Total one-to-four family 11,822 (178) 11,644 - - ------------------------------------------------------------------------------------------------------ Commercial and multi-family: With a related allowance 15,735 (3,023) 12,712 Without a related allowance 3,894 -- 3,894 - - ------------------------------------------------------------------------------------------------------ Total commercial and multi-family 19,629 (3,023) 16,606 - - ------------------------------------------------------------------------------------------------------ Total impaired mortgage loans $31,451 $(3,201) $28,250 ======================================================================================================
The Company's average recorded investment in impaired loans for the years ended December 31, 1998 and 1997 was $25.1 million and $19.0 million, respectively. Interest income recognized on impaired loans, which was not materially different from cash-basis interest income, amounted to $2.3 million, $1.7 million and $1.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. Mortgage Loan Servicing The Company services mortgage loans for investors with unpaid principal balances of approximately $4.94 billion and $4.68 billion at December 31, 1998 and 1997, respectively, which are not reflected in the accompanying consolidated statements of financial condition. The right to service loans for others is generally obtained by either the sale of loans with servicing retained or the open market purchase of MSR. 90 93 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) MSR activity is summarized as follows:
Year Ended December 31, ------------------------------------------------------ (In Thousands) 1998 1997 1996 - - -------------------------------------------------------------------------------------------------------------- Balance at beginning of year $ 41,839 $ 29,769 $ 11,328 Purchased MSR -- 4,066 15,159 Capitalized MSR 22,217 15,385 5,982 Amortization of MSR (13,218) (7,381) (2,700) Adjustment to conform fiscal year of LIB to the Company 2,500 -- -- - - -------------------------------------------------------------------------------------------------------------- 53,338 41,839 29,769 Less: Valuation allowance for MSR 3,101 50 82 - - -------------------------------------------------------------------------------------------------------------- Balance at end of year $ 50,237 $ 41,789 $ 29,687 ==============================================================================================================
Fees earned for servicing loans are reported as income when the related mortgage loan payments are collected. MSR 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 are carried at fair value and impairment, if any, is recognized through a valuation allowance. Loan servicing income is summarized as follows:
Year Ended December 31, ------------------------------------------------------- (In Thousands) 1998 1997 1996 - - -------------------------------------------------------------------------------------------------------------- Servicing fees $ 21,431 $ 19,830 $ 17,119 Amortization of MSR (13,218) (7,381) (2,700) (Provision for) recovery of valuation allowance for MSR (3,051) 32 (82) - - -------------------------------------------------------------------------------------------------------------- Total servicing income $ 5,162 $ 12,481 $ 14,337 ==============================================================================================================
Loans Held-for-Sale The Company originates most 30-year fixed rate loans for immediate sale to Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), the State of New York Mortgage Agency ("SONYMA") or other investors on a servicing released or retained basis. Generally, the sale of such loans is arranged through a master commitment with the agencies on a mandatory or best efforts basis. The sale of loans to other investors are also arranged with specific contractual commitments on a mandatory or best efforts basis. In addition, student loans are sold to the Student Loan Marketing Association generally before repayment begins during the grace period of the loan. The Company's balance of loans held-for-sale was $212.9 million and $164.0 million at December 31, 1998 and 1997, respectively. (6) ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses is summarized as follows:
Year Ended December 31, ------------------------------------------------------ (In Thousands) 1998 1997 1996 - - -------------------------------------------------------------------------------------------------------------- Balance at beginning of year $ 73,920 $ 48,001 $ 47,853 Allowance of acquired institution -- 25,433 Provision charged to operations 15,380 9,061 10,163 Charge-offs (net of recoveries of $4,409, $2,253 and $2,677, respectively) (14,751) (8,575) (10,015) Adjustment to conform fiscal year of LIB to the Company (146) -- -- - - -------------------------------------------------------------------------------------------------------------- Balance at end of year $ 74,403 $ 73,920 $ 48,001 ==============================================================================================================
91 94 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) The $15.4 million provision charged to operations during the year ended December 31, 1998 included $4.0 million recorded by LIB prior to consummation of the acquisition, primarily for increased consumer loan delinquencies. In addition, $5.6 million was provided by the Company in the 1998 fourth quarter, primarily to conform LIB's credit administration, asset management philosophies and accounting methodologies to those of the Company. (7) DEPOSITS Deposits are summarized as follows:
At December 31, ----------------------------------------------------------------------------------------- 1998 1997 ----------------------------------------------------------------------------------------- Weighted Weighted Average Average (Dollars in Thousands) Rate Balance Percent Rate Balance Percent - - ----------------------------------------------------------------------------------------------------------------------------- Core deposits: Savings 2.00% $2,815,681 29.12% 2.72% $2,960,270 29.75% Money market 4.17 857,295 8.87 4.38 600,160 6.03 Money manager 1.00 356,729 3.69 1.52 352,618 3.55 Now 1.00 175,640 1.82 1.44 113,807 1.14 Non-interest bearing NOW and money manager -- 420,189 4.34 -- 291,583 2.93 ---------- ------ ---------- ------ Total core deposits 4,625,534 47.84 4,318,438 43.40 Certificates of deposit 5.31 5,042,752 52.16 5.61 5,632,983 56.60 ---------- ------ ---------- ------ Total deposits $9,668,286 100.00% $9,951,421 100.00% ========== ====== ========== ======
The aggregate amount of certificates of deposit with balances equal to or greater than $100,000 was $568.7 million and $565.2 million at December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, scheduled maturities of certificates of deposit are as follows:
At December 31, ----------------------------------------------------------------------------------------- 1998 1997 ----------------------------------------------------------------------------------------- Weighted Weighted Average Average (Dollars in Thousands) Rate Balance Percent Rate Balance Percent - - ----------------------------------------------------------------------------------------------------------------------------- One year or less 5.10% $3,601,044 71.41% 5.32% $3,415,679 60.64% Greater than one year through three years 5.85 1,144,240 22.69 6.03 1,652,643 29.34 Greater than three years 5.88 297,468 5.90 6.14 564,661 10.02 ---------- ------ ---------- ------ Total certificates of deposit $5,042,752 100.00% $5,632,983 100.00% ========== ====== ========== ======
Interest expense on deposits for the years ended December 31, 1998, 1997 and 1996 is summarized as follows:
Year Ended December 31, ------------------------------------------------- (In Thousands) 1998 1997 1996 - - ----------------------------------------------------------------------------------------------- Savings $ 72,243 $ 70,755 $ 69,019 Money market 32,108 20,121 13,065 Money manager 4,641 4,925 3,951 NOW 1,696 1,700 4,413 Certificates of deposit 288,914 274,042 256,814 - - ----------------------------------------------------------------------------------------------- Total interest expense on deposits $399,602 $371,543 $347,262 ===============================================================================================
92 95 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) (8) BORROWED FUNDS Borrowed funds are summarized as follows:
At December 31, ----------------------------------------------------------------------- 1998 1997 ----------------------------------------------------------------------- Weighted Weighted Average Average (Dollars in Thousands) Amount Rate Amount Rate - - ----------------------------------------------------------------------------------------------------------------- Reverse repurchase agreements $7,291,800 5.27% $3,896,165 5.78% Advances from the FHLB-NY, net 1,210,170 4.94 423,136 6.16 Other borrowings, net 520,827 6.66 454,936 6.66 - - ----------------------------------------------------------------------------------------------------------------- Total borrowed funds, net $9,022,797 5.31 $4,774,237 5.90 =================================================================================================================
The Company enters into sales of securities under agreements to repurchase (reverse repurchase agreements). These agreements are recorded as financing transactions, and the obligations to repurchase are reflected as a liability in the consolidated statements of financial condition. The securities underlying the agreements are delivered to the dealer with whom each transaction is executed. The dealers, who may sell, loan or otherwise dispose of such securities to other parties in the normal course of their operations, agree to resell to the Company substantially the same securities at the maturities of the agreements. The Company retains the right of substitution of collateral throughout the terms of the agreements. At December 31, 1998 and 1997, all of the outstanding reverse repurchase agreements had original contractual maturities between one and ten years, with the exception of one agreement outstanding at December 31, 1997 for $12.8 million with a contractual maturity of seven days. All of the outstanding agreements were secured by U.S. Treasury securities, U.S. Government agency securities or mortgage-backed securities. The following is a summary of information relating to these agreements:
At or for the Year Ended December 31, ------------------------------- (Dollars in Thousands) 1998 1997 - - ----------------------------------------------------------------------------------------------------- Book value of collateral (including accrued interest): U.S. Treasury securities $ 33,266 $ 39,340 U. S. Government agency securities 1,191,916 1,001,347 Mortgage-backed securities 6,557,070 3,097,729 Estimated fair value of collateral: U.S. Treasury securities 33,550 38,880 U.S. Government agency securities 1,195,696 995,038 Mortgage-backed securities 6,501,087 3,097,638 Average balance of outstanding agreements during the year 5,767,274 3,334,692 Maximum balance of outstanding agreements at any month end during the year 7,491,800 3,896,165 Average interest rate for the year 5.50 % 5.73%
Reverse repurchase agreements at December 31, 1998 have contractual maturities as follows: 1999: $65.0 million, 2000: $100.0 million, 2001: $100.0 million, 2002: $1.68 billion, 2003: $1.50 billion, 2004: $405.0 million, 2007: 50.0 million and 2008: $3.39 billion. At December 31, 1998, $2.07 billion, $2.52 billion, $2.53 billion and $155.0 million of such agreements were initially callable during various months in 1999, 2000, 2001 and 2002, respectively. Pursuant to a blanket collateral agreement with the Federal Home Loan Bank of New York ("FHLB-NY"), advances are secured by all of the Company's stock in the FHLB-NY, certain qualifying mortgage loans, mortgage-backed securities and other securities not otherwise pledged in an amount at least equal to 110% of the advances outstanding. Advances at December 31, 1998 mature as follows: 2000: $150.0 million, 2001: $150.0 million, 2003: $900.0 million and 2004: $10.0 million. At December 31, 1998, $200.0 million, $450.0 million and $250.0 million of such advances were initially callable during various months in 2000, 2001 and 2002, respectively. At December 31, 1998, the Company had available an overnight line of credit with the FHLB-NY for $50.0 million for a term of 12 months, to be priced at the federal funds rate plus 12.5 basis points. 93 96 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) As part of the Company's interest rate risk management and subsequent to the consummation of the LIB Acquisition, $1.41 billion of reverse repurchase agreements and FHLB-NY advances were restructured during the fourth quarter of 1998. As a result, the Company prepaid $1.41 billion of borrowed funds with a weighted average maturity of 1.07 years, a weighted average initial call date of 0.27 years and a weighted average rate of 5.83%. The Company then borrowed new funds having a weighted average maturity date of 4.52 years, a weighted average initial call date of 2.46 years and a weighted average rate of 4.86%. The prepayment penalty incurred in connection therewith totaled $18.5 million ($10.6 million net of taxes), and is reflected as an extraordinary item in the Company's consolidated statement of operations for the year ended December 31, 1998. A funding note was issued during the year ended December 31, 1996 in the amount of $181.4 million and is collateralized by a pool of adjustable rate residential mortgage loans. The interest on the funding note changes monthly and is subject to a maximum rate of 11% through June 2001. Thereafter, the interest on the funding note is subject to further adjustments. The Company 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 $13.5 million. At December 31, 1998, the outstanding principal balance of the funding note collateral pool was $159.9 million. The outstanding balance of the funding note was $71.4 million and $155.5 million at December 31, 1998 and 1997, respectively. During the year ended December 31, 1998, the Company issued a three year medium-term note in the amount of $150.0 million. During the year ended December 31, 1997, the Company issued a five year medium-term note in the amount of $300.0 million. The medium-term notes are part of a $1.00 billion medium-term note program the Company established in 1997 in which 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 December 31, 1998, the Company has available $550.0 million under this borrowing program. The outstanding balance of the net medium-term notes was $449.4 and $299.4 at December 31, 1998 and 1997, respectively. Interest expense on borrowed funds is summarized as follows:
Year Ended December 31, ------------------------------------------------ (In Thousands) 1998 1997 1996 - - ---------------------------------------------------------------------------------------------------- Reverse repurchase agreements $322,647 $193,419 $138,131 Advances from the FHLB-NY 21,820 22,794 13,073 Other borrowings 31,396 15,835 2,877 - - ---------------------------------------------------------------------------------------------------- Total interest expense on borrowed funds $375,863 $232,048 $154,081 ====================================================================================================
(9) STOCKHOLDERS' EQUITY At the time of its conversion from a federally-chartered mutual savings and loan association to a federally-chartered capital stock savings and loan association, the Association established a liquidation account with a balance equal to the retained earnings reflected in its June 30, 1993 statement of financial condition. As part of its acquisitions of Fidelity and The Greater, (see Note 2), the Association established liquidation accounts equal to the account balances previously maintained by these acquired institutions for eligible account holders. These liquidation accounts will be reduced annually to the extent that eligible account holders reduce their qualifying deposits as of each anniversary date. In the event of a complete liquidation, each eligible account holder will be entitled to receive a distribution from the liquidation accounts in an amount proportionate to the current adjusted qualifying balances for accounts then held. At December 31, 1998, the Company is authorized to issue 200,000,000 shares of Common Stock, an increase from 70,000,000 shares of Common Stock the Company was authorized to issue at December 31, 1997. At December 31, 1998, the Company had 54,655,095 shares of Common Stock issued and outstanding. In connection with the LIB Acquisition, the Company issued, 27,876,636 shares of Common Stock in exchange for all of the outstanding LIB Common Stock using an exchange rate of 1.15 shares of Common Stock for each share of LIB Common Stock. In connection with The Greater Acquisition, the Company issued 5,785,375 shares of Common Stock, of which 5,695,827 were treasury shares. In addition, the Company issued 2,000,000 shares of 12% Noncumulative Perpetual Preferred Stock, Series B (the "Series B Preferred Stock") in exchange for all of the outstanding 12% Noncumulative 94 97 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) Preferred Stock, Series B of The Greater. The Series B Preferred Stock, which has a par value of $1.00 per share and a liquidation preference of $25.00 per share, may be redeemed at the option of the Company, in whole or in part, on or after October 1, 2003, at an initial price of $27.25 per share and declining ratably to $25.00 per share on October 1, 2013. Dividends on the Series B Preferred Stock are not cumulative but, if declared by the Company, are payable quarterly. Common stock repurchases may be used to, among other things, satisfy obligations arising from the Company's stock option plans. During 1997, these repurchases were primarily used as consideration for The Greater Acquisition. The Company's fifth stock repurchase plan was terminated in April 1998 in connection with the LIB Acquisition. As a result of the LIB Acquisition, the Company retired LIB's previously held treasury shares totaling 2,482,667 which had a cost of $68.6 million. The Company has a dividend reinvestment and stock purchase plan (the "Plan"). The Plan which became effective on December 1, 1995, required no additional shares to be issued out of authorized and unissued shares, although 300,000 shares of authorized and unissued shares were reserved for use by the Plan, should the need arise. In 1996, the Company adopted a Stockholders Rights Plan (the "Rights Plan") and declared a dividend of one preferred share purchase right ("Right") for each outstanding share of Common Stock. Each Right, initially, will entitle stockholders to buy a one one-hundredth interest in a share of a new series of preferred stock of the Company at an exercise price of $100.00 upon the occurrence of certain events described in the Rights Plan. The Company reserved 325,000 shares of its available preferred stock for such series. The Rights Plan is intended to help ensure that all stockholders of the Company receive fair and equitable treatment in the event of any proposed acquisition of the Company and guards against partial tender offers, squeeze-outs and other tactics that may be used to gain control of the Company without paying all stockholders a fair and full value for their investment in the Company. The Rights Plan will not prevent the Company from being acquired, but rather encourages potential acquirors to negotiate any such proposed transaction with the Board of Directors, who has the responsibility to act in the best interest of all the Company's stockholders. (10) INTEREST RATE CAPS/FLOORS AND INTEREST RATE SWAPS Interest Rate Caps/Floors At December 31, 1998 and 1997, the Company had $60.0 million (based upon contractual notional principal) of interest rate floor agreements outstanding, resulting from The Greater Acquisition. The agreements had a weighted-average floor rate of 6.08%, and expire in February 2000. The carrying amount (unamortized premium) of interest rate floor agreements in the consolidated statements of financial condition at December 31, 1998 and 1997 aggregated $147,000 and $275,000, respectively. The estimated fair value of these instruments aggregated $769,000 and $593,000 at December 31, 1998 and 1997, respectively. The estimated fair value represents the approximate amount the Company would have received upon termination of the agreements at December 31, 1998 and 1997, considering the then current levels of interest rates. The amortization of premium paid for the agreements, net of contractual amounts received, increased net interest income by $172,000 and $31,000 for the years ended December 31, 1998 and 1997, respectively. Interest Rate Swaps During the year ended December 31, 1998, the Company entered into three interest rate swap agreements aggregating $450.0 million (contractual notional principal). The swap agreements converted the three medium-term fixed rate borrowings into floating rate borrowings. The interest rate swaps of $300.0 million, $75.0 million and $75.0 million require the Company to pay a floating interest rate tied to the three month LIBOR minus 3 basis points, 18 basis points and 38 basis points, respectively, and receive a fixed rate of interest of 7.00%, 6.20% and 6.20%, respectively. The swaps mature on January 16, 2008, April 2, 2003 and April 2, 2005, respectively. Interest expense on borrowed funds decreased $4.1 million for the year ended December 31, 1998 as a result of these swaps. As of December 31, 1998, the interest rate swaps had a gross positive market value of $7.1 million. During the year ended December 31, 1997, the Company entered into a five year interest rate swap agreement, with a 95 98 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) notional amount of $300.0 million. The swap agreement converted the medium-term note issued in 1997 from a fixed rate obligation of 7.00% into a variable rate of LIBOR minus 3 basis points. As of December 31, 1997, the interest rate swap had a gross positive market value of $1.7 million. During the year ended December 31, 1998, this interest rate swap agreement was terminated. Interest expense on borrowed funds was reduced by $137,000 and $1.9 million for the years ended December 31, 1998 and 1997, respectively, as a result of this interest rate swap. (11) COMMITMENTS AND CONTINGENCIES Lease Commitments At December 31, 1998, the Company was obligated under several non-cancelable operating leases on buildings and land used for office space and banking purposes through 2043. These operating leases contain escalation clauses which provide for increased rental expense based primarily on increases in real estate taxes and cost-of living indices. Rent expense under these operating leases was approximately $9.1 million, $6.8 million and $5.1 million for the years ended December 31, 1998, 1997 and 1996, respectively. Included in the minimum rental payments below are amounts obligated under an operating lease for the Company's mortgage operating facility which the Company has abandoned effective February 1, 1999. The Company does not have the intent to utilize this facility for any continuing operations. As such, the present value of the net expenses for this facility including rent expense, totaling $5.5 million has been included in acquisition costs and restructuring charges. However, the Company was still obligated under this lease agreement at December 31, 1998. The minimum rental payments under the terms of the non-cancelable operating leases as of December 31, 1998, are summarized below:
Years Ending December 31, Amount ----------------------------------------------------- (In Thousands) 1999 $7,773 2000 7,698 2001 7,385 2002 6,586 2003 6,520 Thereafter 55,119 ----------------------------------------------------- $91,081 =====================================================
Outstanding Commitments The Company had outstanding commitments as follows:
At December 31, ---------------------------- (In Thousands) 1998 1997 - - ----------------------------------------------------------------------------------------------- Mortgage loans - commitments to extend credit $563,818 $556,479 Commitments to purchase mortgage loans 75,481 32,212 Home equity loans - unused lines of credit 58,729 67,085 Consumer and commercial loans - unused lines of credit 95,086 113,388 Commitments to sell loans 229,598 231,277 Commitments to purchase securities 785,720 316,539
The Company uses the same credit policies and underwriting standards in making loan commitments and extending lines of credit (off balance sheet financial instruments) as it does for on balance sheet financial instruments. The Company's maximum exposure to credit risk is represented by the contractual amount of the instruments. 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 96 99 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) 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 Company evaluates each customer's creditworthiness on a case-by-case basis. Assets Sold with Recourse The Company is obligated under various recourse provisions associated with certain first mortgage loans sold in past years. The principal balance of loans sold with recourse amounted to $1.07 billion and $511.8 million at December 31, 1998 and 1997, respectively. Although the Company does not believe that its recourse obligations subject it to risk of material loss in the future, the Company has established recourse reserves totaling $1.2 million and $560,000 at December 31, 1998 and 1997, respectively. The Company has two collateralized repurchase obligations due to the sale of certain long-term fixed-rate municipal revenue bonds and FHA project loans to investment trust funds for proceeds that approximated par value. The trust funds have put options that require the Company to repurchase the securities or loans for specified amounts prior to maturity under certain specified circumstances, as defined in the agreements. As of December 31, 1998 and 1997 the outstanding option balance on the two agreements totaled $58.5 million and $60.1 million, respectively, and various securities have been pledged as collateral. Litigation Certain other claims, suits, complaints and investigations involving the Company arising in the ordinary course of business, have been filed or are pending. In the opinion of management, after consultation with legal counsel, the financial position, operating results and liquidity of the Company will not be materially affected by the outcome of such legal proceedings. (12) INCOME TAXES The Company files a consolidated federal income tax return on a calendar-year basis. Prior to the enactment of the Small Business Job Protection Act of 1996 (the "1996 Act"), thrift institutions such as the Association which met certain definitional tests primarily relating to their assets and the nature of their business, for Federal income tax purposes, were permitted to establish tax reserves for bad debts. Such thrift institutions were also permitted to make annual additions to the reserve, to be deducted in arriving at its taxable income within specified limitations. Similar deductions for additions to the Association's bad debt reserve were permitted under the New York State Franchise Tax and the New York City Financial Corporation Tax regulations. Under the 1996 Act, the Association is unable to make additions to the tax bad debt reserve but is permitted to deduct bad debts as they occur. Additionally, the 1996 Act required institutions to recapture over a six-year period, beginning with the Association's taxable year commencing January 1, 1996, the excess if any, 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"). However, under the 1996 Act, such recapture requirements will be suspended for each of the two successive taxable years beginning January 1, 1996 in which the Association originates a minimum amount of certain residential loans during such years that are not less than the average of the principal amounts of such loans made by the Association during its six taxable years preceding January 1, 1996. The Association's tax bad debt reserves at December 31, 1995 exceeded its base year reserves. The remaining balance at December 31, 1998, to be recaptured into taxable income is $1.8 million. In response to the Federal legislation, the New York State and New York City tax laws have been amended to prevent a similar recapture of the Association's bad debt reserve. The amendment permitted the continued future use of the bad debt reserve method for purposes of determining the Association's New York State and New York City tax liabilities, so long as the Association continues to satisfy certain New York State and New York City definitional tests. Retained earnings at December 31, 1998 and 1997 included base year bad debt reserves, which amounted to approximately $159.1 million, for which no Federal income tax liability has been recognized. This represents the 97 100 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) balance of the bad debt reserves created for tax purposes as of December 31, 1987. These amounts are subject to recapture in the unlikely event that the Association (i) makes distributions in excess of earnings and profits, (ii) redeems its stock, or (iii) liquidates. Income tax expense attributable to income before extraordinary item for the years ended December 31, 1998, 1997 and 1996 is summarized as follows:
Year Ended December 31, ------------------------------------------------ (In Thousands) 1998 1997 1996 - - ----------------------------------------------------------------------------------------------------------- Current Federal $ 56,011 $36,592 $35,192 State and local 10,042 8,829 13,667 - - ----------------------------------------------------------------------------------------------------------- 66,053 45,421 48,859 - - ----------------------------------------------------------------------------------------------------------- Deferred Federal (2,342) 30,422 4,208 State and local (1,886) 5,997 1,368 - - ----------------------------------------------------------------------------------------------------------- (4,228) 36,419 5,576 - - ----------------------------------------------------------------------------------------------------------- Total income tax expense attributable to income before extraordinary item $ 61,825 $81,840 $54,435 ===========================================================================================================
The total income tax expense differed from the amounts computed by applying the Federal income tax rate to income before extraordinary item, for the years ended December 31, 1998, 1997 and 1996, as a result of the following:
Year Ended December 31, ------------------------------------------------ (In Thousands) 1998 1997 1996 - - ----------------------------------------------------------------------------------------------------------- Expected income tax expense at statutory Federal rate $ 41,128 $ 69,903 $ 43,247 State and local taxes, net of Federal tax benefit 5,301 9,636 9,773 Amortization of goodwill 6,677 3,737 2,797 Acquisition costs 8,400 -- -- Non-deductible expense of ESOP 3,645 2,795 1,250 Tax exempt income (1,090) (2,099) (1,153) Reversal of deferred tax valuation allowance (592) -- (2,328) Other, net (1,644) (2,132) 849 - - ----------------------------------------------------------------------------------------------------------- Total income tax expense attributable to income before extraordinary item $ 61,825 $ 81,840 $ 54,435 ===========================================================================================================
98 101 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are as follows:
At December 31, ------------------------------- (In Thousands) 1998 1997 - - ------------------------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforward $ 40,226 $ 47,846 Allowances and tax reserves 44,938 43,313 Deferred losses on securities sold 6,218 10,918 Compensation and benefits 20,942 18,993 Tax credits 3,129 3,129 Mark-to-market recognition on securities under IRC Section 475 2,782 4,429 Unrealized loss on securities available-for-sale 11,202 -- Accrued acquisition related expenses 16,064 -- Other 3,001 3,903 - - ------------------------------------------------------------------------------------------------- Total gross deferred tax assets 148,502 132,531 Valuation allowance (11,014) (11,606) - - ------------------------------------------------------------------------------------------------- Deferred tax assets 137,488 120,925 - - ------------------------------------------------------------------------------------------------- Deferred tax liabilities: Book premiums in excess of tax (7,707) (8,657) Unrealized gains on securities available-for-sale -- (5,973) Mortgage loans (6,023) (9,230) Premises and equipment (11,343) (7,505) Basis difference in home equity investment (1,500) (1,592) Mortgage servicing rights (6,742) (106) Other (2,570) (1,417) - - ------------------------------------------------------------------------------------------------- Total gross deferred tax liabilities (35,885) (34,480) - - ------------------------------------------------------------------------------------------------- Net deferred tax assets $ 101,603 $ 86,445 =================================================================================================
The valuation allowance for deferred tax assets, of $11.0 million at December 31, 1998, relates primarily to the portion of the tax reserves which may not be realized for New York State and New York City tax purposes, as they do not provide for net operating loss carryforwards or carrybacks. At December 31, 1998, the Company had alternative minimum tax credit carryforwards, for Federal tax purposes, of approximately $3.1 million. Federal income tax net operating loss carryforwards of approximately $114.9 million will expire in the year 2012. (13) EARNINGS PER COMMON SHARE Basic EPS is computed by dividing income before extraordinary item less preferred dividends by the weighted-average common shares outstanding during the year. The weighted-average common shares outstanding includes the average number of shares of common stock outstanding adjusted for the weighted average number of unallocated shares held by the Company's and LIB's ESOP and the Recognition and Retention Plans ("RRPs"). Diluted EPS is computed by dividing income before extraordinary item less preferred dividends by the weighted-average common shares and common equivalent shares outstanding during the year. For the diluted EPS calculation, the weighted average common shares and common equivalent shares outstanding include the average number of shares of common stock outstanding adjusted for the weighted average number of unallocated shares held by the ESOPs and the RRPs and the dilutive effect of unexercised stock options using the treasury stock method. When applying the treasury stock method, the Company's average stock price is utilized, and the Company adds to the proceeds, the tax benefit that would have been credited to additional paid-in capital assuming exercise of non-qualified stock options. 99 102 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) The following table is a reconciliation of basic and diluted EPS as required under SFAS No. 128:
For the Year Ended December 31, --------------------------------------------------------------------------------------- 1998 1997 --------------------------------------------------------------------------------------- (In Thousands, Average Per-share Average Per-share Except Share Data) Income Shares Amount Income Shares Amount - - -------------------------------------------------------------------------------------------------------------------------- Income before extra- ordinary item (1) $ 55,685 $117,884 Less: preferred stock dividends 6,000 1,500 ---------- -------- Basic EPS: Income available to common stockholders 49,685 50,801,598 $ 0.98 116,384 46,362,179 $ 2.51 ============= ============= Effect of dilutive securities: Options 2,084,593 2,403,519 ---------- ---------- Diluted EPS: Income available to common stockholders plus assumed conversions $ 49,685 52,886,191 $ 0.94 $116,384 48,765,698 $ 2.39 ========== =========== ============= ======== ========== =============
For the Year Ended December 31, ------------------------------------------- 1996 ------------------------------------------- (In Thousands, Average Per-share Except Share Data) Income Shares Amount - - ---------------------------------------------------------------------------- Income before extra- ordinary item (1) $69,128 Less: preferred stock dividends -- ------- Basic EPS: Income available to common stockholders 69,128 46,267,304 $ 1.49 ============= Effect of dilutive securities: Options 1,818,516 ---------- Diluted EPS: Income available to common stockholders plus assumed conversions $69,128 48,085,820 $ 1.44 ======= ========== =============
(1) Extraordinary item applies to the year ended December 31, 1998 only. (14) COMPREHENSIVE INCOME On January 1, 1998, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") became effective. SFAS No. 130 requires that all items that are 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 "the change in equity [net assets] of a business enterprise during a period from transactions and other events and circumstances from nonowner sources." It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company adopted the provisions of SFAS No. 130 during the first quarter of 1998 and, as such, was required to: (a) classify items of other comprehensive income by their nature in a financial statement; (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section in the statement of financial condition; and (c) reclassify prior periods presented. As the requirements of SFAS No. 130 are disclosure-related, its implementation had no impact on the Company's financial condition or results of operations. The components of comprehensive income, other than net income, are as follows:
Year Ended December 31, 1998 ---------------------------------------------- Before-Tax Tax Net-of-Tax (In Thousands) Amount Benefit Amount - - --------------------------------------------------------------------------------------------------- Unrealized losses arising during period $(50,640) $21,916 $(28,724) Less: reclassification adjustment for gains included in net income (10,976) 4,772 (6,204) -------- ------- -------- Net unrealized losses on securities $(61,616) $26,688 $(34,928) ======== ======= ========
Year Ended December 31, 1997 ---------------------------------------------- Before-Tax Tax (Expense) Net-of-Tax (In Thousands) Amount Benefit Amount - - --------------------------------------------------------------------------------------------------- Unrealized gains arising during period $ 38,988 $(16,733) $ 22,255 Less: reclassification adjustment for gains included in net income (14,400) 6,221 (8,179) -------- -------- -------- Net unrealized gains on securities $ 24,588 $(10,512) $ 14,076 ======== ======== ========
100 103 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
Year Ended December 31, 1996 ---------------------------------------------- Tax Before-Tax Benefit Net-of-Tax (In Thousands) Amount (Expense) Amount - - --------------------------------------------------------------------------------------------------- Unrealized losses arising during period $(21,896) $ 8,128 $(13,768) Less: reclassification adjustment for gains included in net income (7,605) 3,355 (4,250) Add: net unrealized gain on securities reclassified as available-for-sale 9,704 (2,970) 6,734 -------- ------- -------- Net unrealized losses on securities $(19,797) $ 8,513 $(11,284) ======== ======= ========
(15) BENEFIT PLANS Pension Plans and Other Postretirement Benefits The Association has a qualified, non-contributory defined benefit pension plan ("the Pension Plan"), covering substantially all of its eligible employees. The Association's policy is to fund pension costs in accordance with the minimum funding requirement. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. As a result of The Greater Acquisition, the pension plan for employees of The Greater was merged into the Pension Plan in the first quarter of 1998 and plan assets of $48.6 million were transferred to the Pension Plan. In addition, the retirement plan of The Greater for non-employee directors was merged into the Association's retirement plan for its non-employee directors during the fourth quarter of 1997. As a result of the LIB Acquisition, the pension plan for employees of LIB was merged into the Pension Plan as of December 31, 1998 and plan assets of $71.8 million were transferred to the Pension Plan. In addition, the Association has non-qualified, unfunded and supplemental retirement plans covering certain officers and directors. Pursuant to the LIB Acquisition, the Company assumed a non-qualified unfunded retirement plan for former directors of LIB. The Company also sponsors a defined health care plan that provides postretirement medical and dental coverage to select individuals. In accordance with SFAS No. 106, costs of postretirement benefits are accrued during an employee's active working career. The Company also continues to provide health care and life insurance benefits for former LIB retirees and their eligible dependents. Also pursuant to the LIB Acquisition, former LIB employees were granted an early retirement window which accelerated their pension and postretirement benefits. As a result, costs for these accelerated pension benefits and postretirement benefits totaled $3.0 million and $1.9 million, respectively. The Company charged these costs as acquisition expenses and restructuring charges for the year ended December 31, 1998. 101 104 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) In accordance with SFAS No. 132, the following tables set forth the Company's and LIB's defined benefit pension plans' and postretirement plans' benefit obligations, fair values of plan assets and funded status as of December 31, 1998 and 1997:
AT DECEMBER 31, ------------------------------------------------------------------- OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS --------------------------- ----------------------------- (IN THOUSANDS) 1998 1997 1998 1997 - - ------------------------------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 81,298 $ 70,979 $ 8,783 $ 7,351 Service cost 2,637 1,963 434 311 Interest cost 7,550 5,235 1,094 535 Actuarial (gain) loss 10,425 3,627 (1,010) 1,105 The Greater Acquisition 27,654 3,737 6,971 -- Curtailments 706 -- 1,577 -- Special termination benefits 4,903 -- 1,994 -- Benefits paid (7,285) (4,243) (1,258) (519) --------- -------- -------- -------- Benefit obligation at end of year $ 127,888 $ 81,298 $ 18,585 $ 8,783 ========= ======== ======== ======== CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $ 97,227 $ 84,882 -- -- Actual return on plan assets 20,505 16,495 -- -- The Greater Acquisition 48,401 -- -- -- Employer contribution 1,835 93 1,258 519 Benefits paid (7,285) (4,243) (1,258) (519) --------- -------- -------- -------- Fair value of plan assets at end of year $ 160,683 $ 97,227 $ -- $ -- ========= ======== ======== ======== Funded status $ 32,795 $ 15,929 $(18,585) $ (8,783) Unrecognized net actuarial gain (12,844) (16,187) (2,148) (4,335) Unrecognized prior service (cost) benefit (1,670) (4,854) 55 (71) Unrecognized transition asset (555) (659) -- -- --------- -------- -------- -------- Net amount recognized $ 17,726 $ (5,771) $(20,678) $(13,189) ========= ======== ======== ======== Amounts recognized in the consolidated statements of financial condition consist of: Prepaid benefit cost $ 25,878 $ 2,726 $ -- $ -- Accrued benefit liability (8,228) (8,641) (20,678) (13,189) Intangible asset 76 144 -- -- --------- -------- -------- -------- Net amount recognized $ 17,726 $ (5,771) $(20,678) $(13,189) ========= ======== ======== ========
EXPECTED RETURN RATE OF DISCOUNT RATE ON PLAN ASSETS COMPENSATION INCREASE WEIGHTED-AVERAGE ASSUMPTIONS -------------------- -------------------- ---------------------- ON PENSION BENEFIT PLANS: 1998 1997 1998 1997 1998 1997 ---- ---- ---- ---- ---- ---- The Association Employees' Pension Plan 6.75% 7.00% 8.00% 8.00% 5.00% 5.00% The Association Excess Benefit and Supplemental Benefit Plans 6.00% 6.00% N/A N/A 8.00% 8.00% The Association Directors' Retirement Plan 6.00% 6.00% N/A N/A 4.00% 4.00% Retirement Plan of The Greater for Non-employee Directors 6.00% 6.00% N/A -- N/A -- The Retirement Plan of LIB 6.50% 7.50% 8.00% 8.00% 5.50% 5.50%
DISCOUNT RATE WEIGHTED-AVERAGE ASSUMPTIONS ON --------------------------- OTHER POSTRETIREMENT BENEFIT PLANS: 1998 1997 ------- ------- The Association Retiree Health Care Plan 6.75% 7.00% LIB Postretirement Benefit Plan 6.50% 7.50%
102 105 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) For measurement purposes for the Association's Retiree Health Care Plan, an 11% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1997. The rate was assumed to decrease gradually to 6% for 2002 and remain at that level thereafter. For measurement purposes for the LIB Postretirement Benefit Plan, an 8.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1997. The rate was assumed to decrease gradually to 4.5% for 2009 and remain at that level thereafter. The components of net periodic benefit costs are as follows:
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- OTHER POST RETIREMENT PENSION BENEFITS BENEFITS ----------------------------------- -------------------------------- (IN THOUSANDS) 1998 1997 1996 1998 1997 1996 - - ----------------------------------------------------------------------------------------------------------------------------------- Service cost $ 2,637 $ 1,963 $ 2,035 $ 434 $ 311 $ 298 Interest cost 7,550 5,235 5,008 1,094 535 537 Expected return on plan assets (11,399) (6,620) (6,049) -- -- -- Amortization of prior service (cost) benefit (691) (717) (724) 10 10 10 Recognized net actuarial (gain)/loss (732) (350) 98 (171) (307) (294) Amortization of transition (asset)/obligation (104) (412) (501) -- -- -- -------- ------- ------- ------- ----- ----- Net periodic (benefit) cost (2,739) (901) (133) 1,367 549 551 -------- ------- ------- ------- ----- ----- Curtailment (gain) loss (1,875) -- -- (136) -- -- Special termination benefit cost 4,903 -- -- 1,994 -- -- -------- ------- ------- ------- ----- ----- Total cost $ 289 $ (901) $ (133) $ 3,225 $ 549 $ 551 ======== ======= ======= ======= ===== =====
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plan with accumulated benefit obligations in excess of plan assets were $9.3 million, $6.7 million, and $0, respectively, as of December 31, 1998, and $9.3 million, $6.8 million, $0, respectively, as of December 31, 1997. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point change in assumed health care cost trend rates would have the following effects:
1-Percentage Point 1-Percentage Point (In Thousands) Increase Decrease - - ----------------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components $ 147 $ (125) Effect on the post retirement benefit obligation $1,366 $(1,207)
Incentive Savings Plan The Association maintains a 401(K) incentive savings plan which provides for contributions to trust funds by both the Association and its participating employees. Under the plan, participants may contribute up to 10% of their pre-tax base salary, not to exceed $10,000 for the calendar year ending December 31, 1998. Matching contributions, if any, will be made at the discretion of the Association. No such contributions were made for 1998, 1997 and 1996. Participants vest immediately in their own contributions and after a period of five years for Association contributions. During 1993, an employer stock fund was established as an investment alternative for participants in connection with the conversion of the Association to stock form of ownership. As of December 31, 1998 and 1997, the fund held 297,941 and 272,019 shares, respectively, of Common Stock valued at $45.75 and $55.75, respectively, on behalf of participants. Shares held by the fund are voted by the fund trustee as directed by the participants for whose accounts the shares are held. Pursuant to the LIB Acquisition, the Company assumed sponsorship of the 401(K) plan for former LIB employees. This participant-directed, individual account plan was frozen effective December 31, 1998, and eligible employees were enrolled in the Company's 401(K) incentive savings plan. As of December 31, 1998, the LIB 401(K) plan held 292,446 shares of Common Stock, valued at $45.75, on behalf of participants. Shares held on behalf of participants are voted by the plan trustee as directed by the participants for whose accounts the shares are held. 103 106 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) Employee Stock Ownership Plan and Trust The Association established the ESOP for eligible employees of the Company or the Association. To fund the purchase of 2,642,354 shares of Common Stock issued in the conversion, the ESOP borrowed funds from the Company. The loan to the ESOP is being repaid principally from the Association's contributions to the ESOP over a period of 12 years and the collateral for the loan is the Common Stock purchased by the ESOP. The Association's contributions are reduced by any investment earnings realized and any dividends paid on unallocated shares. Prior to June 1, 1998, dividends on allocated shares were used to make voluntary prepayments of additional principal, resulting in the allocation of additional shares to participants' accounts. Effective June 1, 1998, dividends paid on allocated shares are no longer being utilized to make additional loan principal payments. During the years ended December 31, 1998 and 1997, a total of $172,000 and $358,000, respectively, in dividends were paid on allocated shares, which increased total shares allocated in those years, and $1.4 million and $1.1 million, respectively, in dividends were paid on unallocated shares which reduced the Association's contribution to the ESOP. At December 31, 1998 and 1997, the loan from the Company had an outstanding balance of $21.3 million and $23.9 million, respectively, and an interest rate of 6.00%. Shares purchased by the ESOP are held by a trustee for allocation among participants as the loan is repaid. The number of shares released annually is based upon the ratio that the current principal and interest payment bears to the current and all remaining scheduled future principal and interest payments. For the years ended December 31, 1998, 1997 and 1996, 230,514 shares, 240,086 shares and 229,250 shares, respectively, were allocated to participants. As of December 31, 1998, 1,490,057 shares remain unallocated. Pursuant to the LIB merger agreement, the Company maintains a separate ESOP for former employees of LIB. The ESOP previously established by LIB ("the LIB ESOP") borrowed $23.8 million from LIB and used the funds to purchase 2,070,000 shares of the then LIB Common Stock. All unallocated and allocated shares from the LIB ESOP were converted to shares of Common Stock at the exchange ratio of 1.15. The loan has a scheduled maturity date of 15 years from its origination date and has an amortization schedule that is tied to the aggregate payroll for its covered employees. Participants continue to vest in the shares allocated to their respective accounts over a period not to exceed 5 years. The trustee for the LIB ESOP must vote all allocated shares held in the LIB ESOP trust in accordance with the instructions of the participants. Unallocated shares held by the LIB ESOP trust are voted by the trustee in a manner calculated to most accurately reflect the results of the allocated LIB ESOP shares voted, subject to the requirements of the Employee Retirement Income Security Act of 1974, as amended. As of December 31, 1998, the LIB ESOP loan had an outstanding balance of $19.7 million and an interest rate of 6.15% and 551,170 shares have been allocated to participants of the LIB ESOP. In accordance with SOP 93-6, for the years ended December 31, 1998, 1997 and 1996, the Company recorded compensation expense relating to the Association's ESOP, of $11.6 million, $11.0 million and $6.4 million, respectively, which was equal to the shares allocated by the ESOP multiplied by the average estimated fair value of the Common Stock during the year of allocation. For the years ended December 31, 1998, 1997 and 1996, the average quoted price of a share of Common Stock was $50.30, $45.76 and $28.08, respectively. In addition, included in the Company's total compensation and benefits expense for the years ended December 31, 1998, 1997 and 1996 was $2.0 million, $2.4 million and $4.8 million of compensation expense related to the LIB ESOP. (16) STOCK OPTION PLANS The Incentive Stock Option Plan ("1993 Employee Option Plan"), the Stock Option Plan for Outside Directors ("1993 Directors' Option Plan") and the Recognition and Retention Plan for Outside Directors and Recognition and Retention Plan for Officers and Employees ("RRPs") were adopted and implemented in 1993 upon the conversion of the Association from a mutual to stock form of ownership. In 1995, pursuant to the Fidelity merger agreement, certain options were granted to former officers and directors of Fidelity. In 1996, the Company adopted the 1996 Stock Option Plan for Officers and Employees ("1996 Employee Option Plan") and the 1996 Stock Option Plan for Outside Directors ("1996 Directors' Option Plan"). In 1997, pursuant to The Greater Acquisition, certain options were granted to former officers and directors of The Greater. In 1998, pursuant to the LIB merger agreement, options outstanding as of the close of business on September 30, 1998 for various executive officers, employees and directors of LIB were converted into options on the Common Stock and certain options were granted to former officers and directors of LIB. 104 107 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) Pursuant to the terms of the 1993 and 1996 Employee Option Plans, the number of shares reserved for issuance were 2,068,058 and 950,000, respectively. Under both plans, the exercise price of each option granted was equal to the market price of the Common Stock on the grant date. All options granted immediately vest and are exercisable in the event the optionee terminates his/her employment due to death, disability retirement, or in the event of a change of control of the Association or the Company. As a result, all options outstanding pursuant to the 1996 Employee Option Plan became immediately vested and exercisable as a result of the LIB Acquisition. All options granted under the 1993 and 1996 Employee Option Plans were granted in tandem with limited stock appreciation rights exercisable only in the event of a change of control of the Association or the Company as defined by the plans. As a result, all rights became immediately vested and exercisable as a result of the LIB Acquisition. The 1993 Directors' Option Plan provided for the fixed granting of non-statutory options to purchase up to 574,906 shares of Common Stock. Contemporaneously, with the Association's conversion to stock form of ownership, outside directors received fixed grants of options to purchase 534,198 shares. The 1996 Directors' Option Plan provides for the fixed granting of non-statutory options to purchase up to 120,000 shares of Common Stock. Under both plans, the exercise price of each option equals the market price of the Common Stock on the grant date. All options granted under the 1993 Directors' Option Plan vested and became exercisable in three equal annual installments and expire upon the earlier of ten years following their grant or one year following the date the optionee ceases to be a director. All options granted under the 1996 Directors' Option Plan are exercisable immediately on their grant date. All options granted under the 1993 and 1996 Directors' Option Plans were granted in tandem with limited stock appreciation rights exercisable in the event of a change of control of the Association or the Company, as defined by the plans. Upon consummation of the acquisitions of Fidelity and The Greater, the Company granted certain executive officers of Fidelity and The Greater, options to purchase 276,036 shares and 241,840, shares, respectively, of Common Stock. Such options represented the conversion of options previously granted, are non-qualified stock options and have a weighted average exercise price of $8.15 per share and $14.93 per share for the Fidelity grants and The Greater grants, respectively. Additionally, the Company also granted to Fidelity's and The Greater's former Board of Directors, options to acquire 40,000 shares and 32,000 shares, respectively of Common Stock at exercise prices of $13.93 per share and $50.31 per share, respectively. As a result of the conversion of the stock options outstanding under the LIB stock option plans, 1,609,329 options were converted to options on Common Stock at an average exercise price of $13.98 based on the LIB Acquisition exchange ratio of 1.15. Such options became 100% exercisable upon the consummation of the acquisition by the Company. All options expire no later than ten years following the date of grant with the exception of terminated employees, whose options expire one year after their termination dates. Also pursuant to the LIB merger agreement, the Company granted to former members of LIB's Board of Directors, options to acquire 40,000 shares Common Stock at an exercise price of $42.13 per share. For all options granted to former Board of Directors and certain executive officers of Fidelity, The Greater and LIB, the maximum term of the options granted is ten years and the options were immediately exercisable at the grant date. Activity in the Company's option plans is summarized as follows:
Year Ended December 31, -------------------------------------------------------------------------------------- 1998 1997 1996 -------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - - ----------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year: 5,305,763 $ 16.08 5,145,154 $ 12.72 5,279,807 $ 11.62 Granted 515,648 45.20 713,386 35.17 223,840 33.90 Canceled (19,805) (19.24) (92,622) (12.81) (80,384) (10.23) Exercised (1,287,685) (13.26) (460,155) (11.92) (278,109) (9.61) Adjustment to conform fiscal year of LIB to the Company 126,816 38.37 -- -- -- -- --------- --------- --------- Outstanding at end of year 4,640,737 20.70 5,305,763 16.08 5,145,154 12.72 --------- --------- --------- Options exercisable at end of year 3,726,720 2,768,885 1,796,762
Options to purchase 109,248 shares, 691,907 shares, and 1,038,831 shares were available for future grants under the Employee Option Plans at December 31, 1998, 1997 and 1996, respectively. 105 108 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) The following table summarizes information about the stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ---------------------------------------------------------- ------------------------------------ Number Weighted Weighted Number Weighted of Options Average Remaining Average of Options Average Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price - - --------------------------------------------------------------------------------------------------------------------------------- $ 3.06 to $11.50 1,429,869 5.0 years $ 9.63 1,429,869 $9.63 12.50 to 23.81 1,970,755 5.2 years 13.85 1,443,238 14.35 26.13 to 36.00 306,025 8.0 years 32.98 306,025 32.98 36.75 to 59.75 934,088 8.5 years 48.06 547,588 50.18 --------- --------- 3.06 to 59.75 4,640,737 6.0 years 20.70 3,726,720 19.31 ========= =========
Pro Forma Net Income and Earnings Per Share - SFAS No. 123 The Company applies APB No. 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for these stock-based compensation plans been determined consistent with SFAS No. 123, the Company's net income and earnings per common share would have been reduced to the pro forma amounts indicated below:
Year Ended December 31, --------------------------------------------------------- (In Thousands, Except Per Share Data) 1998 1997 1996 - - ------------------------------------------------------------------------------------------------------ Net income: As reported $ 45,048 $ 117,884 $ 69,128 Pro forma $ 38,019 $ 111,543 $ 68,863 Basic earnings per common share: As reported $ 0.77 $ 2.51 $ 1.49 Pro forma $ 0.63 $ 2.37 $ 1.49 Diluted earnings per common share: As reported $ 0.74 $ 2.39 $ 1.44 Pro forma $ 0.61 $ 2.26 $ 1.43
The fair value of the option grants, excluding options from LIB for prior years, was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively: - - - Dividend yield of 1.25% for all three years. - - - Expected stock price volatility of 24.35%, 18.80% and 17.65%. - - - Risk-free interest rates based upon equivalent-term U.S. Treasury rates of 4.75%, 5.98%, and 5.59%. - - - Expected option lives of 5.78 years, 4.97 years, and 5.91 years. The fair value of LIB's stock options for prior years was estimated on the date of grant using the Black-Scholes option pricing model based upon the following assumptions: dividend yield of 1.35%; expected stock price volatility of 24.07%; risk free interest rates of 6.04% and 6.03% for fiscal 1997 and 1996, respectively; and expected option lives of 6.90 years and 8.60 years for fiscal 1997 and 1996, respectively. The following table summarizes the weighted average fair value of the stock options granted:
Year Ended December 31, ----------------------------------------------------------------------------------------- 1998 1997 1996 ----------------------------------------------------------------------------------------- Weighted Weighted Weighted Options Average Options Average Options Average Granted Fair Value Granted Fair Value Granted Fair Value ------- ---------- ------- ---------- ------- ---------- Employees 437,691 413,589 197,287 Outside directors 37,957 25,957 26,553 Other 40,000 273,840 - ------- ------- ------- 515,648 $15.06 713,386 $23.10 223,840 $11.23 ======= ====== ======= ====== ======= ======
106 109 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) The weighted-average fair value of options was calculated using the above assumptions, based on management's judgments regarding future option exercise experience and market conditions. These assumptions are subjective in nature, involve uncertainties and therefore cannot be determined with precision. The Black-Scholes option pricing model also contains certain inherent limitations when applied to options which are not immediately exercisable and are not traded on public markets. Recognition and Retention Plans The Association established the RRPs as a method of providing officers, employees and non-employee directors of the Company and the Association with a proprietary interest in the Company in a manner designed to encourage such persons to remain with the Company and the Association. The Association contributed funds to the RRPs to enable the trusts to acquire 1,322,500 shares of Common Stock in the conversion and in open market transactions following the conversion. This contribution represents deferred compensation which is initially recorded as a reduction of stockholders' equity and ratably charged to compensation expense over the vesting period of the actual stock awards. The RRPs acquired the shares at an average price of $14.44 per share. During 1993, all of the shares were awarded under the RRP for Officers and Employees (1,035,042 shares), while 267,106 shares of the 287,458 shares available under the RRP for Outside Directors were awarded. In 1995, 10,176 additional shares were awarded under the terms of the RRP for Outside Directors. In 1996, the Company amended the RRP for Outside Directors so that no future awards would be made and the RRP Trustee sold, in the open market, the remaining 10,176 of unallocated shares in such plan. Prior to January 1, 1996, a total of 25,946 shares were forfeited under the RRP for Officers and Employees. In 1997 and 1998, 15,000 and 10,000 additional shares, respectively, were awarded under the terms of the RRP for Officers and Employees, and as of December 31, 1998, 946 shares remain unallocated under the RRP for Officers and Employees. Awards to outside directors vested and were distributed in three equal annual installments. For the years ended December 31, 1998, 1997 and 1996, the RRP distributions to outside directors totaled 3,392 shares, 79,712 shares and 105,152 shares , respectively. Initial awards to executive officers vested in five equal annual installments commencing January 1995. Distributions to executive officers totaled 128,894 shares during the year ended December 31, 1998 and 123,894 shares for each year in the years ended December 31, 1997 and 1996. Initial awards to other officers and employees vest in three equal annual installments commencing January 1997. During the years ended December 31, 1998 and 1997, 129,896 shares and 129,834 shares, respectively, were distributed to other officers and employees. Awards will be 100% vested upon termination of employment due to death, disability or retirement of the participant or following a change in the control of the Association or the Company. LIB had also maintained similar RRPs which enabled its plans to acquire 776,250 shares of LIB Common Stock at their then average price of $11.50 per share. Pursuant to the LIB Acquisition, 91,763 shares of LIB Common Stock representing unallocated RRPs were canceled. For the years ended December 31, 1998, 1997 and 1996, the Company recorded $4.6 million, $5.5 million and $6.0 million, respectively, of compensation expense relating to the RRPs. (17) REGULATORY MATTERS Federal law requires that savings associations, such as the Association, maintain minimum capital requirements. These capital standards are required to be no less stringent than standards applicable to national banks. At December 31, 1998, the Association was in compliance with all regulatory capital requirements. The following table sets forth the regulatory capital calculations for the Association:
At December 31, 1998 -------------------------------------------------------------------------------- Capital Actual Excess (Dollars in Thousands) Requirement % Capital % Capital % - - ------------------------------------------------------------------------------------------------------------- Tangible $303,854 1.5% $1,080,837 5.34% $776,983 3.84% Leverage 607,709 3.0 1,080,837 5.34 473,128 2.34 Risk-based 683,458 8.0 1,155,836 13.53 472,378 5.53
107 110 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
At December 31, 1997 -------------------------------------------------------------------------------- Capital Actual Excess (Dollars in Thousands) Requirement % Capital % Capital % - - ------------------------------------------------------------------------------------------------------------- Tangible $240,922 1.5% $1,004,296 6.25% $763,374 4.75% Leverage 481,844 3.0 1,004,296 6.25 522,452 3.25 Risk-based 553,850 8.0 1,078,216 15.57 524,366 7.57
At December 31, 1998 and 1997, the Association's Tier 1 risked-based capital ratios were 12.65% and 14.51%, respectively. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. The regulators adopted rules which require them to take action against undercapitalized institutions, based upon the five categories of capitalization which the FDICIA created: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." The rules adopted generally provide that an insured institution whose total risk-based capital ratio is 10% or greater, Tier 1 risk-based capital ratio is 6% or greater, leverage ratio is 5% or greater and is not subject to any written agreement, order, capital directive or prompt corrective action directive issued by the FDIC shall be considered a "well capitalized" institution. As of December 31, 1998 and 1997, the Association was a "well capitalized" institution. (18) FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS No. 107"), requires disclosure of estimated fair value information for the Company's financial instruments. Fair values are most commonly derived from quoted market prices available in the formal trading marketplaces. In many cases, the Company's financial instruments are not bought or sold in formal trading marketplaces. Accordingly, in cases where quoted market prices are not available, fair values are derived or estimated based on a variety of valuation techniques. These techniques are sensitive to the various assumptions and estimates used and the resulting fair value estimates may be materially affected by minor variations in those assumptions or estimates. In that regard, it is likely that amounts different from the fair value estimates would be realized by the Company in an immediate settlement of the financial instruments. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any possible tax ramifications, estimated transaction costs, or any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a certain portion of the Company's financial instruments, fair value estimates are based on judgments regarding future loss experience, current economic conditions, risk characteristics, and other such factors. These estimates are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. For these reasons, the estimated fair value disclosures presented herein do not represent the entire underlying value of the Company. The following table summarizes the carrying values and estimated fair values of the Company's on and off balance sheet financial instruments at December 31, 1998 and 1997: 108 111 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
At December 31, ------------------------------------------------------------------ 1998 1997 ------------------------------------------------------------------ Carrying Estimated Carrying Estimated (In Thousands) Amount Fair Value Amount Fair Value - - --------------------------------------------------------------------------------------------------------------------- ON BALANCE SHEET: Financial assets: Federal funds sold and repurchase agreements $ 266,437 $ 266,437 $ 110,550 $ 110,550 Securities available-for-sale 8,196,444 8,196,444 4,807,305 4,807,305 Securities held-to-maturity 2,108,811 2,123,440 2,632,672 2,645,023 Loans held-for-sale 212,909 213,316 163,962 164,681 Loans receivable held-for-investment, net 8,739,319 8,917,560 7,782,716 8,126,062 Mortgage servicing rights 50,237 63,140 41,789 45,673 Financial Liabilities: Deposits 9,668,286 9,697,799 9,951,421 9,961,991 Borrowed funds 9,022,797 9,047,953 4,774,237 4,769,620 OFF BALANCE SHEET: Outstanding commitments to originate or purchase loans 639,299 639,299 588,691 588,691 Outstanding commitments to sell loans 229,598 229,598 231,277 231,277 Outstanding commitments to purchase investment securities 785,720 785,720 316,539 316,539 Commitment to fund unused lines of credit 153,815 153,815 180,473 180,473 Interest rate swaps (a) -- 7,125 -- 1,741 Interest rate caps and floors (a) 147 769 315 595
(a) See Note 10 Methods and assumptions used to estimate fair values are stated below: Federal Funds Sold and Repurchase Agreements The carrying amounts of federal funds sold and repurchase agreements approximate fair values since all mature in six months or less. Securities Available-for-Sale and Held-to-Maturity Fair values for all securities are based on published or securities dealers' market values. Loans Held-for-Sale The fair value of loans held-for-sale was determined by outstanding investor commitments, or in the absence of such commitments, current investor yield requirements. Loans Receivable Held-for-Investment, Net Fair values are calculated by discounting the expected future cash flows of pools of loans with similar characteristics. The loans are first segregated by type, such as one-to-four family residential, other residential, commercial and consumer and other, and then further segregated into fixed and adjustable rate and seasoned and nonseasoned categories. Expected future cash flows are then projected based on contractual cash flows, adjusted for prepayments. Prepayment estimates are based on a variety of factors including the Company's experience with respect to each loan category, the effect of current economic and lending conditions and regional statistics for each loan category, if available. The discount rates used are based on market rates for new loans of similar type and purpose, adjusted, when necessary, for factors such as servicing cost, credit risk and term. As mentioned previously, this technique of estimating fair value is extremely sensitive to the assumptions and estimates used. While management has attempted to use assumptions and estimates which are the most reflective of the loan portfolio and the current market, a greater degree of subjectivity is inherent in these values than those determined in 109 112 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) formal trading marketplaces. As such, readers are again cautioned in using this information for purposes of evaluating the financial condition and/or value of the Company in and of itself or in comparison with any other company. Mortgage Servicing Rights The fair value of mortgage servicing rights is estimated using projected cash flows, adjusted for the effects of anticipated prepayments, using a market discount rate. Deposits SFAS No. 107 stipulates that the fair values of deposits with no stated maturity, such as savings accounts, NOW accounts, money manager accounts and money market accounts, are equal to the amount payable on demand. The related insensitivity of the majority of these deposits to interest rate changes creates a significant inherent value which is not reflected in the fair value reported. The fair values of certificates of deposit are based on discounted contractual cash flows using rates which approximate the rates offered by the Company for deposits of similar remaining maturities. Borrowed Funds Fair value estimates are based on discounted contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities. Outstanding Commitments Fair value of commitments outstanding are estimated based on the rates that would be charged for similar agreements, considering the remaining term of the agreement, the rate offered and the creditworthiness of the parties. Interest Rate Caps/Floors and Interest Rate Swaps Fair values for interest rate caps/floors and interest rate swaps are based on securities dealers' estimated market values. (19) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS The following condensed statements of financial condition as of December 31, 1998 and 1997 and condensed statements of operations and cash flows for the years ended December 31, 1998, 1997 and 1996, for the Company (parent company only) reflect the Company's investment in its wholly-owned subsidiary, the Association, using the equity method of accounting: 110 113 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) ASTORIA FINANCIAL CORPORATION CONDENSED STATEMENTS OF FINANCIAL CONDITION
At December 31, ---------------------------------- (In Thousands) 1998 1997 - - ----------------------------------------------------------------------------------------------- Assets: Cash $ 645 $ 6,508 Federal funds sold and repurchase agreements 66,437 1,550 Mortgage-backed securities available-for-sale 4,207 29,053 Other securities available-for-sale 647 47,299 ESOP loan receivable 40,980 43,715 Accrued interest receivable 49 164 Amounts due from the Association 629 -- Deferred tax asset 215 -- Other assets 3,169 3,242 Investment in the Association 1,348,829 1,336,124 - - ----------------------------------------------------------------------------------------------- Total assets $1,465,807 $1,467,655 - - ----------------------------------------------------------------------------------------------- Liabilities and stockholders' equity: Reverse repurchase agreements $ -- $ 12,765 Other liabilities 1,423 5,982 Dividends payable 2,000 2,000 Amounts due to the Association -- 457 Deferred tax liability -- 652 Stockholders' equity 1,462,384 1,445,799 - - ----------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,465,807 $1,467,655 ===============================================================================================
ASTORIA FINANCIAL CORPORATION CONDENSED STATEMENTS OF OPERATIONS
Year Ended December ------------------------------------------------ (In Thousands) 1998 1997 1996 - - ----------------------------------------------------------------------------------------------------------------------- Interest Income: Mortgage-backed and other securities $ 4,560 $ 5,141 $ 5,860 ESOP loan receivable 2,661 2,834 3,045 - - ----------------------------------------------------------------------------------------------------------------------- Total interest income 7,221 7,975 8,905 Interest expense on borrowed funds 131 108 318 - - ----------------------------------------------------------------------------------------------------------------------- Net interest income 7,090 7,867 8,587 - - ----------------------------------------------------------------------------------------------------------------------- Non-interest income 3,879 -- -- Cash dividends from the Association 50,000 65,562 59,862 - - ----------------------------------------------------------------------------------------------------------------------- Non-interest expense: Acquisition costs and restructuring charges 10,745 -- -- Compensation and benefits 1,066 1,359 1,213 Other 1,646 1,697 1,488 - - ----------------------------------------------------------------------------------------------------------------------- Total non-interest expense 13,457 3,056 2,701 - - ----------------------------------------------------------------------------------------------------------------------- Income before income taxes and equity in (overdistributed) undistributed earnings of the Association 47,512 70,373 65,748 Income tax (benefit) expense (1,080) 1,960 2,136 - - ----------------------------------------------------------------------------------------------------------------------- Income before equity in (overdistributed) undistributed earnings of the Association 48,592 68,413 63,612 Equity in (overdistributed) undistributed earnings of the Association (1) (3,544) 49,471 5,516 - - ----------------------------------------------------------------------------------------------------------------------- Net income $ 45,048 $117,884 $69,128 =======================================================================================================================
(1) The equity in overdistributed earnings of the Association for the year ended December 31, 1998 represents dividends paid to the Company in excess of the Association's current year's earnings. 111 114 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) ASTORIA FINANCIAL CORPORATION CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31, ---------------------------------------------- (In Thousands) 1998 1997 1996 - - -------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 45,048 $ 117,884 $ 69,128 Adjustments to reconcile net income to cash provided by operating activities: Equity in overdistributed (undistributed) earnings of the Association 3,544 (49,471) (5,516) Decrease (increase) in accrued interest receivable 175 184 (8) Accretion of discount net of amortization of premium on securities (8) (641) (1,035) Net gain on sales of securities (3,848) -- -- (Decrease) Increase in other assets, other liabilities and amounts due the Association (3,921) 3,992 (4,567) - - -------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 40,990 71,948 58,002 - - -------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Increase in repurchase agreements (64,887) (1,550) -- Purchases of securities available-for-sale (526,938) (144,695) (271,710) Proceeds from maturities and principal payments on securities available-for-sale 536,336 139,933 286,883 Proceeds from sale of securities available-for-sale 66,606 25,000 15,485 Redemption of acquiree stock -- 4,560 -- Principal payments on ESOP loan receivable 2,735 2,660 3,999 - - -------------------------------------------------------------------------------------------------------------------- Net cash provided by investing activities 13,852 25,908 34,657 - - -------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: (Decrease) increase in reverse repurchase agreements (12,765) 12,765 (8,329) Repurchase of Company common stock (16,633) (85,735) (73,715) Cash received for options exercised 15,012 4,960 2,548 Cash dividends paid to stockholders (42,754) (27,287) (17,886) - - -------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (57,140) (95,297) (97,382) - - -------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (2,298) 2,559 (4,723) Adjustment to conform fiscal year of LIB to the Company (3,565) -- -- Cash and cash equivalents at the beginning of the year 6,508 3,949 8,672 - - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at the end of the year $ 645 $ 6,508 $ 3,949 ====================================================================================================================
112 115 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) Quarterly Results of Operations (Unaudited)
Year Ended December 31, 1998 ---------------------------------------------------------------- First Second Third Fourth (In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter - - ------------------------------------------------------------------------------------------------------------------------------------ Interest income $ 289,847 $ 299,121 $ 313,042 $ 322,438 Interest expense 179,622 188,457 200,772 206,614 - - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 110,225 110,664 112,270 115,824 Provision for loan losses 1,800 1,814 5,166 6,600 - - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 108,425 108,850 107,104 109,224 Non-interest income 17,252 20,883 8,279 14,114 - - ----------------------------------------------------------------------------------------------------------------------------------- Total income 125,677 129,733 115,383 123,338 - - ----------------------------------------------------------------------------------------------------------------------------------- General and administrative expense 59,010 57,767 67,388 50,388 Real estate operations and provision for (recovery of) real estate losses 237 (1,290) (646) (155) Amortization of goodwill 4,885 4,962 4,962 4,945 Acquisition costs and restructuring charges - - - 124,168 - - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income tax expense (benefit) and extraordinary item 61,545 68,294 43,679 (56,008) Income tax expense (benefit) 25,339 28,775 18,815 (11,104) - - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before extraordinary item 36,206 39,519 24,864 (44,904) Extraordinary item, net of tax - - - 10,637 - - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 36,206 $ 39,519 $ 24,864 $ (55,541) =================================================================================================================================== Basic earnings (loss) per common share: Income (loss) before extraordinary item $ 0.69 $ 0.75 $ 0.46 $ (0.90) Extraordinary item, net of tax - - - (0.21) Net earnings (loss) per common share $ 0.69 $ 0.75 $ 0.46 $ (1.11) Diluted earnings (loss) per common share: Income (loss) before extraordinary item $ 0.66 $ 0.72 $ 0.44 $ (0.90) Extraordinary item, net of tax - - - (0.21) Net earnings (loss) per common share $ 0.66 $ 0.72 $ 0.44 $ (1.11)
Year Ended December 31, 1997 ---------------------------------------------------------------- First Second Third Fourth (In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter (1) - - ----------------------------------------------------------------------------------------------------------------------------------- Interest income $ 224,995 $ 234,621 $ 237,294 $ 281,245 Interest expense 135,249 145,050 147,194 176,098 - - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 89,746 89,571 90,100 105,147 Provision for loan losses 2,000 2,914 2,395 1,752 - - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 87,746 86,657 87,705 103,395 Non-interest income 12,877 13,980 15,959 18,661 - - ----------------------------------------------------------------------------------------------------------------------------------- Total income 100,623 100,637 103,664 122,056 - - ----------------------------------------------------------------------------------------------------------------------------------- General and administrative expense 51,188 51,180 52,222 59,081 Real estate operations and provision for (recovery of) real estate losses 651 812 (627) 1,027 Amortization of goodwill 2,220 2,219 2,235 5,048 - - ----------------------------------------------------------------------------------------------------------------------------------- Income before income tax expense 46,564 46,426 49,834 56,900 Income tax expense 19,196 19,102 20,516 23,026 - - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 27,368 $ 27,324 $ 29,318 $ 33,874 =================================================================================================================================== Basic earnings per common share $ 0.60 $ 0.61 $ 0.66 $ 0.64 Diluted earnings per common share $ 0.57 $ 0.58 $ 0.62 $ 0.61
(1)Results of operations for the fourth quarter of 1997 reflect The Greater Acquisition. 113 116 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY INDEX OF EXHIBITS
EXHIBIT IDENTIFICATION OF EXHIBIT ------- ------------------------- 2.1 Amended and Restated Agreement and Plan of Merger, dated as of July 12, 1994, by and among Astoria Financial Corporation, Astoria Federal Savings and Loan Association and Fidelity New York F.S.B. (10) 2.2 Amendment No. 1 to the Amended and Restated Agreement and Plan of Merger, dated as of January 27, 1995, by and among Astoria Financial Corporation, Astoria Federal Savings and Loan Association and Fidelity New York F.S.B. (10) 2.3 Agreement and Plan of Merger Dated as of the 29th day of March, 1997, as amended, by and among Astoria Financial Corporation, Astoria Federal Savings and Loan Association and The Greater New York Savings Bank. (6) 2.4 Agreement and Plan of Merger dated as of the 2nd day of April, 1998 by and between Astoria Financial Corporation and Long Island Bancorp, Inc., as amended. (11) 3.1 Certificate of Incorporation of Astoria Financial Corporation, as amended effective as of June 3, 1998. (1) 3.2 Bylaws of Astoria Financial Corporation. (*) 4.1 Astoria Financial Corporation Specimen Stock Certificate. (2) 4.2 Federal Stock Charter of Astoria Federal Savings and Loan Association. (3) 4.3 Bylaws of Astoria Federal Savings and Loan Association. (4) 4.4 Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock. (5) 4.5 Rights Agreement between Astoria Financial Corporation and Chase Mellon Shareholder Services, L.L.C., as Rights Agent, dated as of July 17, 1996, as amended. (5) 4.6 Amendment No. 1 to Rights Agreement, dated as of April 2, 1998 by and between Astoria Financial Corporation and Chase Mellon Shareholder Services L.L.C. (11) 4.7 Form of Rights Certificate. (5) 4.8 Certificate of Designations, Preferences and Rights of 12% Noncumulative, Perpetual Preferred Stock, Series B. (6) 4.9 Astoria Financial Corporation Specimen 12% Noncumulative, Perpetual Preferred Stock, Series B Certificate. (7) 4.10 Astoria Financial Corporation Automatic Dividend Reinvestment and Stock Purchase Plan. (8) 10.1 Astoria Federal Savings and Loan Association Employee Stock Ownership Trust Loan and Security Agreement. (*)
114 117
EXHIBIT IDENTIFICATION OF EXHIBIT ------- ------------------------- 10.2 Amendment to Astoria Federal Savings and Loan Association Employee Stock OwnershipTrust Loan and Security Agreement, Promissory Note, and Security Agreement Re Instruments of Negotiable Documents to be Deposited. (*) 10.3 Loan Agreement among Long Island Bancorp, Inc., The Long Island Savings Bank, FSB and United States Trust Company of New York, solely as trustee of The LISB Employee Stock Ownership Plan. (*) 10.4 Amendment No. 1 to Loan Agreement among Long Island Bancorp, Inc., The Long Island Savings Bank, FSB and United States Trust Company of New York, solely as trustee of The LISB Employee Stock Ownership Plan. (*) 10.5 Astoria Federal Savings and Loan Association and Astoria Financial Corporation Directors' Retirement Plan, as amended and restated effective February 21, 1996. This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (9) 10.6 The Long Island Bancorp, Inc., Non-Employee Director Retirement Benefit Plan, as amended. This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (*) 10.7 Astoria Financial Corporation Death Benefit Plan for Outside Directors - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (9) 10.8 Deferred Compensation Plan for Directors of Astoria Financial Corporation - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (9) 10.9 1996 Stock Option Plan for Officers and Employees of Astoria Financial Corporation, as amended - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (7) 10.10 1996 Stock Option Plan for Outside Directors of Astoria Financial Corporation, as amended - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (7) 10.11 Astoria Federal Savings and Loan Association Recognition and Retention Plan for Outside Directors as amended March 1, 1996 - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (9) 10.12 Astoria Federal Savings and Loan Association Annual Incentive Plan for Select Executives - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (*)
115 118
EXHIBIT IDENTIFICATION OF EXHIBIT ------- ------------------------- 10.13 Astoria Financial Corporation Employment Agreement with George L. Engelke, Jr. - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (9) 10.14 Astoria Federal Savings and Loan Association Employment Agreement with George L. Engelke, Jr. - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (9) 10.15 Astoria Financial Corporation Employment Agreement with Gerard C. Keegan - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (7) 10.16 Astoria Federal Savings and Loan Association Employment Agreement with Gerard C. Keegan - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (7) 10.17 Amendment No. 1 to the Astoria Federal Savings and Loan Association Employment Agreement with Gerard C. Keegan - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (7) 10.18 Astoria Financial Corporation Employment Agreement with John J. Conefry, Jr. This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of the report. (*) 10.19 Astoria Financial Corporation Employment Agreement with Arnold K. Greenberg - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (9) 10.20 Astoria Federal Savings and Loan Association Employment Agreement with Arnold K. Greenberg - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (9) 10.21 Astoria Financial Corporation Employment Agreement with Thomas W. Drennan - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (9) 10.22 Astoria Federal Savings and Loan Association Employment Agreement with Thomas W. Drennan - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (9) 10.23 Astoria Financial Corporation Employment Agreement with Monte N. Redman - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (9)
116 119
EXHIBIT IDENTIFICATION OF EXHIBIT ------- ------------------------- 10.24 Astoria Federal Savings and Loan Association Employment Agreement with Monte N. Redman - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (9) 10.25 Astoria Financial Corporation Employment Agreement with William K. Sheerin - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (9) 10.26 Astoria Federal Savings and Loan Association Employment Agreement with William K. Sheerin - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (9) 10.27 Astoria Financial Corporation Employment Agreement with Alan P. Eggleston - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (9) 10.28 Astoria Federal Savings and Loan Association Employment Agreement with Alan P. Eggleston - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (9) 10.29 Retirement Medical and Dental Benefit Policy for Senior Officers - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (7) 10.30 Form of Option Conversion Agreement by and between Astoria Financial Corporation and each of Mr. Thomas V. Powderly. (10) 10.31 Form of Option Conversion Agreement by and between Astoria Financial Corporation and Former Officer or Director of Long Island Bancorp, Inc. dated September 30, 1998. (12) 10.32 Option Conversion Certificates of John J. Conefry, Robert J. Conway, Lawrence W. Peters, Leo J. Waters and Donald D. Wenk. (*) 10.33 Trust Agreement, dated as of January 31, 1995 between Astoria Financial Corporation and State Street Bank and Trust Company. (10) 10.34 Astoria Financial Corporation 1993 Incentive Stock Option Plan, as amended - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (7) 10.35 Astoria Financial Corporation 1993 Stock Option Plan For Outside Directors, as amended - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (7)
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EXHIBIT IDENTIFICATION OF EXHIBIT ------- ------------------------- 10.36 Astoria Federal Savings and Loan Association Recognition and Retention Plan for Officers and Employees - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (*) 10.37 Option Conversion Agreement by and between Astoria Financial Corporation and Mr. Gerard C. Keegan - This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (7) 10.38 Astoria Financial Corporation Litigation Advisory Committee Consulting Agreement with John J. Conefry, Jr. (*) 10.39 Consulting Agreement by and between Astoria Financial Corporation and Lawrence W. Peters. (*) 10.40 Letter Agreement dated April 2, 1998 by and between John J. Conefry, Jr. and Astoria Financial Corporation. (*) 10.41 Letter Agreement dated April 2, 1998 by and between Lawrence W. Peters and Astoria Financial Corporation. (*) 11.1 Statement regarding computation of earnings per share. (*) 21.1 Subsidiaries of Astoria Financial Corporation. (*) 23 Consent of Independent Auditors. (*) 27 Financial Data Schedule. (*) 27.1 Restated Financial Data Schedule - Nine Months Ended September 30, 1998. (*) 27.2 Restated Financial Data Schedule - Six Months Ended June 30, 1998. (*) 27.3 Restated Financial Data Schedule - Three Months Ended March 31, 1998. (*) 27.4 Restated Financial Data Schedule - Year Ended December 31, 1997. (*) 27.5 Restated Financial Data Schedule - Nine Months Ended September 30, 1997. (*) 27.6 Restated Financial Data Schedule - Six Months Ended June 30, 1997. (*) 27.7 Restated Financial Data Schedule - Three Months Ended March 31, 1997. (*) 27.8 Restated Financial Data Schedule -Year Ended December 31, 1996. (*) 27.9 Restated Financial Data Schedule -Nine Months Ended September 30, 1996. (*) 27.10 Restated Financial Data Schedule - Six Months Ended June 30, 1996. (*)
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EXHIBIT IDENTIFICATION OF EXHIBIT ------- ------------------------- 27.11 Restated Financial Data Schedule - Three Months Ended March 31, 1996. (*) 99.1 Proxy Statement for the Annual Meeting of Shareholders to be held on May 6, 1998, which will be filed with the SEC within 120 days from December 31, 1997, is incorporated herein by reference. * Filed herewith (1) Incorporated by reference to Astoria Financial Corporation's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1998, and filed with the Securities and Exchange Commission on September 10, 1998. (2) Incorporated by reference to Astoria Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, filed with the Securities and Exchange Commission on March 28, 1997. (3) Incorporated by reference to Astoria Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, filed with the Securities and Exchange Commission on March 15, 1995. (4) Incorporated by reference to Astoria Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, and filed with the Securities and Exchange Commission on November 13, 1998. (5) Incorporated by reference to Astoria Financial Corporation's Registration Statement on Form 8-K/A dated July 17, 1996 and filed with the Securities and Exchange Commission in August 1996. (6) Incorporated by reference to Form S-4 Registration Statement as filed with the Securities and Exchange Commission on June 24, 1997. (7) Incorporated by reference to Astoria Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1997,filed with the Securities and Exchange Commission on March 25, 1998. (8) Incorporated by reference to Form S-3 Registration Statement as filed with the Securities and Exchange Commission on October 23, 1995. (9) Incorporated by reference to Astoria Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 filed with the Securities and Exchange Commission on March 29, 1996. (10) Incorporated by reference to Astoria Financial Corporation's Current Report on Form 8-K, dated January 31, 1995 and filed with the Securities and Exchange Commission on February 9, 1995.
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EXHIBIT IDENTIFICATION OF EXHIBIT ------- ------------------------- (11) Incorporated by reference to Astoria Financial Corporation's Current Report on Form 8-K/A, dated April 2, 1998, and filed with the Securities And Exchange Commission on April 10, 1998, as amended by the First Amendment, incorporated by reference to the Registrant's Current Report on Form 8-K, dated May 29, 1998 and the Second Amendment, incorporated by reference to the Registrant's Current Report on Form 8-K, dated July 10, 1998. (12) Incorporated by reference to Astoria Financial Corporation's Registration Statement On Form S-8, dated September 30, 1998, and filed with the Securities and Exchange Commission on September 30, 1998.
120 EX-3.2 2 BYLAWS OF ASTORIA FINANCIAL CORP. 1 ASTORIA FINANCIAL CORPORATION BYLAWS ARTICLE I - STOCKHOLDERS Section 1. Annual Meeting. An annual meeting of the stockholders, for the election of Directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place, on such date, and at such time as the Board of Directors shall each year fix, which date shall be within thirteen (13) months subsequent to the later of the date of incorporation or the last annual meeting of stockholders. Section 2. Special Meetings. Subject to the rights of the holders of any class or series of preferred stock of the Corporation, special meetings of stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the total number of Directors which the Corporation would have if there were no vacancies on the Board of Directors (hereinafter the "Whole Board"). Section 3. Notice of Meetings. Written notice of the place, date, and time of all meetings of the stockholders shall be given, not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation of the Corporation). 1 2 When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. Section 4. Quorum. At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy (after giving effect to the provisions of Article FOURTH of the Corporation's Certificate of Incorporation), shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law. Where a separate vote by a class or classes is required, a majority of the shares of such class or classes present in person or represented by proxy (after giving effect to the provisions of Article FOURTH of the Corporation's Certificate of Incorporation) shall constitute a quorum entitled to take action with respect to that vote on that matter. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present in person or by proxy constituting a quorum, then except as otherwise required by law, those present in person or by 2 3 proxy at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting. Section 5. Organization. Such person as the Board of Directors may have designated or, in the absence of such a person, the Chairman of the Board of the Corporation or, in his or her absence, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the Secretary of the Corporation, the secretary of the meeting shall be such person as the chairman appoints. Section 6. Conduct of Business. (a) The chairman of any meeting of stockholders shall determine the order of business and the procedures at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. (b) At any annual meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who is entitled to vote with respect thereto and who complies with the notice procedures set forth in this Section 6(b). For business to be properly brought before an annual meeting by a stockholder, the business must relate to a proper subject matter for stockholder action and the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered or 3 4 mailed to and received at the principal executive offices of the Corporation not less than ninety (90) days prior to the date of the annual meeting; provided, however, that in the event that less than one hundred (100) days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter such stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the Corporation's capital stock that are beneficially owned by such stockholder and (iv) any material interest of such stockholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be brought before or conducted at an annual meeting except in accordance with the provisions of this Section 6(b). The Officer of the Corporation or other person presiding over the annual meeting shall, if the facts so warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 6(b) and, if he should so determine, he shall so declare to the meeting and any such business so determined to be not properly brought before the meeting shall not be transacted. At any special meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting by or at the direction of the Board of Directors. 4 5 (c) Only persons who are nominated in accordance with the procedures set forth in these Bylaws shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders at which directors are to be elected only (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation entitled to vote for the election of Directors at the meeting who complies with the notice procedures set forth in this Section 6(c). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made by timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered or mailed to and received at the principal executive offices of the Corporation not less than ninety (90) days prior to the date of the meeting; provided, however, that in the event that less than one hundred (100) days' notice or prior disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (i) as to each person whom such stockholder proposes to nominate for election or re-election as a Director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (ii) as to the stockholder giving the notice (a) the name and address, as they appear on the Corporation's books, of such stockholder and (b) the class and number of shares of the Corporation's capital stock that are beneficially owned by such stockholder. At the request of the Board of Directors 5 6 any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the Corporation unless nominated in accordance with the provisions of this Section 6(c). The Officer of the Corporation or other person presiding at the meeting shall, if the facts so warrant, determine that a nomination was not made in accordance with such provisions and, if he or she shall so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. Section 7. Proxies and Voting. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing filed in accordance with the procedure established for the meeting. Any facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this paragraph may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. All voting, including on the election of Directors but excepting where otherwise required by law or by the governing documents of the Corporation, may be made by a voice vote; provided, however, that upon demand therefor by a stockholder entitled to vote or his or her proxy, a stock vote shall be taken. Every stock vote shall be taken by ballot, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedures established for the meeting. The Corporation shall, in advance of any 6 7 meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law or the Certificate of Incorporation, all other matters shall be determined by a majority of the votes cast. Section 8. Stock List. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in his or her name, shall be open to the examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any such stockholder who is present. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. 7 8 Section 9. Consent of Stockholders in Lieu of Meeting. Subject to the rights of the holders of any class of series of preferred stock of the Corporation, any action required or permitted to be taken by the stockholders of the Corporation must be effected at an annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. ARTICLE II - BOARD OF DIRECTORS Section 1. General Powers, Number and Term of Office. The business and affairs of the Corporation shall be under the direction of its Board of Directors. The number of Directors who shall constitute the Whole Board shall be such number as the Board of Directors shall from time to time have designated except in the absence of such designation shall be eight. The Board of Directors shall annually elect a Chairman of the Board from among its members who shall, when present, preside at its meetings. The Directors, other than those who may be elected by the holders of any class or series of Preferred Stock, shall be divided, with respect to the time for which they severally hold office, into three classes, with the term of office of the first class to expire at the first annual meeting of stockholders, the term of office of the second class to expire at the annual meeting of stockholders one year thereafter and the term of office of the third class to expire at the annual meeting of stockholders two years thereafter, with each Director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders, Directors elected to succeed those Directors whose terms then expire shall be elected for a term of office to expire 8 9 at the third succeeding annual meeting of stockholders after their election, with each Director to hold office until his or her successor shall have been duly elected and qualified. Section 2. Vacancies and Newly Created Directorships. Subject to the rights of the holders of any class or series of Preferred Stock, and unless the Board of Directors otherwise determines, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the Directors then in office, though less than a quorum, and Directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such Director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Board shall shorten the term of any incumbent Director. Section 3. Regular Meetings. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all Directors. A notice of each regular meeting shall not be required. Section 4. Special Meetings. Special meetings of the Board of Directors may be called by one-third (1/3) of the Directors then in office (rounded up to the nearest whole number), by the Chairman of the Board or the President and shall be held at such place, on such date, and at such time as they, or he or she, shall fix. Notice of the place, date, and time of each such special meeting shall be given each Director by whom it is not waived by mailing written notice not less than five (5) days before the 9 10 meeting or by telegraphing or telexing or by facsimile transmission of the same not less than twenty-four (24) hours before the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. Section 5. Quorum. At any meeting of the Board of Directors, a majority of the Whole Board shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof. Section 6. Participation in Meetings By Conference Telephone. Members of the Board of Directors, or of any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. Section 7. Conduct of Business. At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time to time determine, and all matters shall be determined by the vote of a majority of the Directors present, except as otherwise provided herein or required by law. Action may be taken by the Board of Directors without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors. Section 8. Powers. 10 11 The Board of Directors may, except as otherwise required by law, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, including, without limiting the generality of the foregoing, the unqualified power: (1) To declare dividends from time to time in accordance with law; (2) To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine; (3) To authorize the creation, making and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, and to do all things necessary in connection therewith; (4) To remove any Officer of the Corporation with or without cause, and from time to time to devolve the powers and duties of any Officer upon any other person for the time being; (5) To confer upon any Officer of the Corporation the power to appoint, remove and suspend subordinate Officers, employees and agents; (6) To adopt from time to time such stock, option, stock purchase, bonus or other compensation plans for Directors, Officers, employees and agents of the Corporation and its subsidiaries as it may determine; (7) To adopt from time to time such insurance, retirement, and other benefit plans for Directors, Officers, employees and agents of the Corporation and its subsidiaries as it may determine; and, (8) To adopt from time to time regulations, not inconsistent with these Bylaws, for the management of the Corporation's business and affairs. Section 9. Compensation of Directors. 11 12 Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as Directors, including, without limitation, their services as members of committees of the Board of Directors. Section 10. Age Limitation of Directors. No person 75 or above years of age shall be eligible for election, reelection, appointment, or reappointment to the board of directors of the Corporation. No director shall serve as such beyond the regular meeting of the Corporation which immediately precedes the director becoming 75 years of age. ARTICLE III - COMMITTEES Section 1. Committees of the Board of Directors. The Board of Directors, by a vote of a majority of the Board of Directors, may from time to time designate committees of the Board, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board and shall, for these committees and any others provided for herein, elect a Director or Directors to serve as the member or members, designating, if it desires, other Directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. Any committee so designated may exercise the power and authority of the Board of Directors to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the Delaware General Corporation Law if the resolution which designates the committee or a supplemental resolution of the Board of Directors shall so provide. In the absence or disqualification of any 12 13 member of any committee and any alternate member in his or her place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Section 2. Conduct of Business. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; one-third (1/3) of the members shall constitute a quorum unless the committee shall consist of one (1) or two (2) members, in which event one (1) member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of such committee. Section 3. Nominating Committee The Board of Directors shall appoint a Nominating Committee of the Board, consisting of not less than three (3) members. The Nominating Committee shall have authority (a) to review any nominations for election to the Board of Directors made by a stockholder of the Corporation pursuant to Section 6(c)(ii) of Article I of these By-laws in order to determine compliance with such By-law and (b) to recommend to the Whole Board nominees for election to the Board of Directors to replace those Directors whose terms expire at the annual meeting of stockholders next ensuing. 13 14 ARTICLE IV - OFFICERS Section 1. Generally. (a) The Board of Directors as soon as may be practicable after the annual meeting of stockholders shall choose a Chairman of the Board, a Chief Executive Officer and President, one or more Vice Presidents, a Secretary and a Treasurer and from time to time may choose such other officers as it may deem proper. The Chairman of the Board shall be chosen from among the Directors. Any number of offices may be held by the same person. (b) The term of office of all Officers shall be until the next annual election of Officers and until their respective successors are chosen but any Officer may be removed from office at any time by the affirmative vote of a majority of the authorized number of Directors then constituting the Board of Directors. (c) All Officers chosen by the Board of Directors shall have such powers and duties as generally pertain to their respective Offices, subject to the specific provisions of this ARTICLE IV. Such officers shall also have such powers and duties as from time to time may be conferred by the Board of Directors or by any committee thereof. Section 2. Chairman of the Board of Directors. The Chairman of the Board shall, subject to the provisions of these Bylaws and to the direction of the Board of Directors, perform all duties and have all powers which are commonly incident to the office of Chairman of the Board or which are delegated to him or her by the Board of Directors. He or she shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized. 14 15 Section 3. President and Chief Executive Officer. The President and Chief Executive Officer (the "President") shall have general responsibility for the management and control of the business and affairs of the Corporation and shall perform all duties and have all powers which are commonly incident to the offices of President and Chief Executive Officer or which are delegated to him or her by the Board of Directors. Subject to the direction of the Board of Directors, the President shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized and shall have general supervision of all of the other Officers (other than the Chairman of the Board), employees and agents of the Corporation. Section 4. Vice President. The Vice President or Vice Presidents shall perform the duties of the President in his absence or during his disability to act. In addition, the Vice Presidents shall perform the duties and exercise the powers usually incident to their respective offices and/or such other duties and powers as may be properly assigned to them by the Board of Directors, the Chairman of the Board or the President. A Vice President or Vice Presidents may be designated as Executive Vice President or Senior Vice President. Section 5. Secretary. The Secretary or Assistant Secretary shall issue notices of meetings, shall keep their minutes, shall have charge of the seal and the corporate books, shall perform such other duties and exercise such other powers as are usually incident to such office and/or such other duties and powers as are properly assigned thereto by the Board of Directors, the Chairman of the Board or 15 16 the President. Subject to the direction of the Board of Directors, the Secretary shall have the power to sign all stock certificates. Section 6. Treasurer. The Treasurer shall be the Chief Financial Officer of the Corporation and shall have the responsibility for maintaining the financial records of the Corporation. He or she shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions and of the financial condition of the Corporation. The Treasurer shall also perform such other duties as the Board of Directors may from time to time prescribe. Section 7. Assistant Secretaries and Other Officers. The Board of Directors may appoint one or more Assistant Secretaries and such other Officers who shall have such powers and shall perform such duties as are provided in these Bylaws or as may be assigned to them by the Board of Directors, the Chairman of the Board or the President. Section 8. Assign with Respect to Securities of Other Corporations. Unless otherwise directed by the Board of Directors, the President or any Officer of the Corporation authorized by the President shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation. ARTICLE V - STOCK 16 17 Section 1. Certificates of Stock. Each stockholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the Chairman of the Board or the President, and by the Secretary certifying the number of shares owned by him or her. Any or all of the signatures on the certificate may be by facsimile. Section 2. Transfers of Stock. Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 4 of Article V of these Bylaws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor. Section 3. Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders, or to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for such other action as hereinbefore described; provided, however, that if no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice 17 18 of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the next day preceding the day on which the meeting is held, and, for determining stockholders entitled to receive payment of any dividend or other distribution or allotment or rights or to exercise any rights of change, conversion or exchange of stock or for any other purpose, the record date shall be at the close of business on the day on which the Board of Directors adopts a resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 4. Lost, Stolen or Destroyed Certificates. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. Section 5. Regulations. The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. ARTICLE VI - NOTICES Section 1. Notices. 18 19 Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, Director, Officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails, postage paid, or by sending such notice by prepaid telegram or mailgram or other courier. Any such notice shall be addressed to such stockholder, Director, Officer, employee or agent at his or her last known address as the same appears on the books of the Corporation. The time when such notice is received, if hand delivered, or dispatched, if delivered through the mails or by telegram or mailgram or other courier, shall be the time of the giving of the notice. Section 2. Waivers. A written waiver of any notice, signed by a stockholder, Director, Officer, employee or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, Director, Officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver. ARTICLE VII - MISCELLANEOUS Section 1. Facsimile Signatures. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. Section 2. Corporate Seal. 19 20 The Board of Directors may provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary. If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by the Treasurer or by an Assistant Secretary or an assistant to the Treasurer. Section 3. Reliance Upon Books, Reports and Records. Each Director, each member of any committee designated by the Board of Directors, and each Officer of the Corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its Officers or employees, or committees of the Board of Directors so designated, or by any other person as to matters which such Director or committee member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. Section 4. Fiscal Year. The fiscal year of the Corporation shall be as fixed by the Board of Directors. Section 5. Time Periods. In applying any provision of these Bylaws which requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included. ARTICLE VIII - AMENDMENTS 20 21 The Board of Directors may amend, alter or repeal these Bylaws at any meeting of the Board, provided notice of the proposed change was given not less than two days prior to the meeting. The stockholders shall also have power to amend, alter or repeal these Bylaws at any meeting of stockholders provided notice of the proposed change was given in the notice of the meeting; provided, however, that, notwithstanding any other provisions of the Bylaws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the voting stock required by law, the Certificate of Incorporation, any Preferred Stock Designation or these Bylaws, the affirmative votes of the holders of at least 80% of the voting power of all the then-outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal any provisions of these Bylaws. The above Bylaws are effective as of June 16, 1993, the date of incorporation of Astoria Financial Corporation. 21 EX-10.1 3 AFS EMPLOYEE STOCK OWNERSHIP AGREEMENT 1 ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION EMPLOYEE STOCK OWNERSHIP TRUST LOAN AND SECURITY AGREEMENT Astoria Financial Corporation Lake Success, New York November 18, 1993 Gentlemen: The undersigned, Nationar, not individually but solely as Trustee under the Astoria Federal Savings and Loan Association Employee Stock Ownership Trust (the "Trust") effective November 18, 1993 (the "Borrower"), applies to you for your commitment, subject to all of the terms and conditions hereof and on the basis of the representations hereinafter set forth, to make a loan available to the Borrower as hereinafter set forth. Astoria Financial Corporation is hereinafter referred to as the "Lender". The term "Company" as used herein refers to Astoria Federal Savings and Loan Association, as the sponsoring employer of the Astoria Federal Savings and Loan Association Employee Stock Ownership Plan (the "ESOP"). SECTION ONE. THE TERM LOAN. 1.1 Amount and Terms. By its acceptance hereof the Lender agrees, subject to all of the terms and conditions hereof and on the basis of the representations hereinafter set forth, to make a loan (the "Loan") of up to thirty-three million, twenty-nine thousand, four hundred and twenty-five dollars ($33,029,425) (the "Commitment"), such proceeds to be used by the Borrower entirely to acquire shares (the "Shares") of the common stock, par value $.01 of Astoria Financial Corporation, a Delaware corporation. The Loan is intended to be an "exempt loan" as described in Section 4975(d) of the Internal Revenue Code of 1986 (the "Code"), as defined in Section 54.4975-7(b) of the Treasury Regulations (the "Regulations"), as described in Section 408(b)(3) of the Employee Retirement Income Security Act of 1974, as amended, ("ERISA") and as described in Department of Labor Regulations Section 2550.408b-3 (collectively, the "Exempt Loan Rules"). 1.2 The Note. The disbursement of the Loan pursuant to Section 1.1 hereof shall be made against and evidenced by a promissory note of the Borrower in the form annexed hereto as Exhibit A (the "Note"), such Note to bear interest as hereinafter provided, and to mature in consecutive annual principal installments commencing on December 31, 1994 and on the last day of each December each year thereafter, each such installment to be in an amount equal to 1/12th of the outstanding principal amount of the Loan made under Section 1.1 hereof, except that the final installment in the amount of all principal and interest not sooner paid shall be due on December 31, 2005, the final maturity thereof. 2 Without regard to the principal amount of the Note stated on its face, the actual principal amount at any time outstanding and owed by the Borrower on account of the Note shall be the amount of the disbursement of the Loan made by the Lender under Section 1.1 hereof less all payments of principal actually received by the Lender. The amount of such disbursement made by the Lender and any repayments of principal thereof shall be recorded by the Lender on its books or records or, at its option, endorsed on the reverse side of the Note by the Lender and the unpaid principal balance at any time so recorded or endorsed by the Lender shall be prima facie evidence in any court or other proceedings brought to enforce the Note of the principal amount remaining unpaid thereon. 1.3 Notwithstanding anything to the contrary contained in this Agreement or in the Note, the Borrower shall be obligated to make repayments of the Loan only to the extent that such repayments when added to the repayments theretofore made during the applicable plan year would not exceed an amount which would cause the limitations of Section 415 of the Code to be exceeded for any ESOP participant. Except as set forth in the next succeeding sentence and to the extent permitted by applicable law, including, without limitation, the Exempt Loan Rules, the principal amount of the Loan and any interest thereon shall be payable solely from contributions (other than contributions of employer securities) made to the Trust in accordance with the ESOP, and cash dividends received on the Shares, to enable the Borrower to pay its obligations under the Loan and from earnings attributable to the Shares and the investment of such contributions and dividends. The Lender acknowledges and agrees that it shall have no other recourse against the Borrower for repayment of the Loan and that it shall have no recourse against assets of the ESOP included in the Trust other than pursuant to Sections 3 and 8 hereof. SECTION TWO. INTEREST AND FEES. 2.1 Interest Rate. The Loan shall bear interest (which the Borrower hereby promises to pay) prior to maturity (whether by lapse of time, acceleration otherwise) at a rate per annum equal at all times to 6.0%. 2.2 Basis and Payment Dates. All interest accruing on the Note prior to maturity shall be due and payable on an annual basis and on the last day of each December in each year (commencing December 31, 1994) and at maturity (unless prepaid in whole prior to such date, then on the date of such prepayment in whole) and interest accruing after maturity shall be due and payable upon demand. All interest on the Note shall be computed on the basis of a year of 360 days for the actual number of days elapsed. 2 3 SECTION THREE. COLLATERAL. 3.1 Grant of Security Interest-Pledged Shares. The Borrower hereby grants, pledges and assigns to the Lender 1,321,177 shares of the issued and outstanding common stock, par value $.01 per share all of which were either (i) purchased by the Borrower from the proceeds of the disbursement of the Loan; (ii) acquired by the Borrower with the proceeds of a prior exempt loan within the meaning of Section 54.4975-7(b) of the Treasury Regulations, and pledged as collateral for such prior exempt loan, where the balance of such prior exempt loan has been repaid with the proceeds of the disbursement of the Loan (the "Pledged Shares" being hereinafter referred to as the "Collateral"). The Pledged Shares shall be evidenced by a stock certificate. The assignment and pledge herein granted and provided for is made and given to secure and shall secure the prompt payment of principal of and interest on the Note as and when the same becomes due and payable and the payment, observance and performance of any and all obligations and liabilities arising under or provided for in this Loan and Security Agreement (the "Agreement") or the Note or any of them in each instance as the same may be amended modified and whether now existing hereafter arising. 3.2 Further Assurances. The Borrower covenants and agrees that it will at any time and from time to time as requested by the Lender execute and deliver such further instruments and do and perform such other acts as the Lender may reasonably deem necessary or desirable to provide for or perfect the lien of the Lender in the Collateral hereunder. 3.3 Voting. Upon the occurrence of a Default or an Event of Default hereunder, the Lender sh all have the right to transfer the Collateral or any part thereof into its name or into the name of its nominee. The Lender shall not be entitled to vote the Pledged Shares unless and until an Event of Default has occurred and so long as the same shall not have been waived by the Lender. 3.4 Partial Releases. The Lender agrees, provided always that no Default or Event of Default shall have occurred and be continuing, as promptly as is practicable after December 31 in each year (the period commencing the date hereof and ending December 31, 1994 and each subsequent 12-month period ending on December 31 being hereinafter referred to as a "Plan Year"), to release that number of Pledged Shares then being held to secure the Loan which is equal to the number of such Pledged Shares held as of the last day of the Plan Year multiplied by a fraction, the numerator of which is the aggregate amount of all principal payments made on the Note during the Plan Year and the denominator of which is the sum of the numerator plus the principal to be paid for all future years under the Note. 3 4 SECTION FOUR. PAYMENTS. 4.1 Place and Application. All payments of principal, interest, fees and all other amounts payable hereunder shall be made to the Lender at One Astoria Federal Plaza, Lake Success, New York 11042-1085 for the account of the Lender ( or at such other place for the account of the Lender as the Lender may from time to time in writing specify to the Borrower) in immediately available and freely transferable funds at the place of payment. All payments shall be paid in full without setoff or counterclaim and without reduction for and free from any and all taxes, levies, duties, fees, charges, deductions, withholdings, restrictions or conditions of any nature imposed by any government or any political subdivision or taxing authority thereof. 4.2 Prepayments. The Borrower shall have the privilege of prepaying in whole or in part the Note at any time upon giving five (5) Business Days' prior notice to the Lender, each such prepayment to be made by the payment of the principal amount to be prepaid and accrued interest thereon to the date fixed for prepayment. All such prepayments shall be made without premium or penalty. SECTION FIVE. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to the Lender as follows: 5.1 The Trust is a duly organized, validly existing employee stock ownership trust. 5.2 The proceeds of the disbursement of the Loan shall be applied in their entirety to the payment of the purchase price for the Pledged Shares. 5.3 The Borrower has full right, power and authority to enter into this Agreement, to make the borrowings hereunder provided for, to issue the Note in evidence thereof and to perform each and all of the matters and things herein and therein provided for and this Agreement does not, and the Note when issued will not, nor will the performance or observance by the Borrower of any of the matters or things herein or therein provided, contravene any provision of law or the Trust or any other covenant or agreement affecting the Trust or any of its assets. As of the date of the disbursement of the Loan, the Pledged Shares will be fully paid and non-assessable and the Pledged Shares will be owned by the Borrower free and clear of all liens, charges and encumbrances whatsoever, except for any lien of Lender provided for herein. 5.4 Except as disclosed to the Lender in writing, there is no litigation or governmental proceeding pending, nor to the knowledge of the Borrower threatened, against the ESOP and Trust. 5.5 The ESOP and Trust have no material liabilities, whether absolute or contingent, except for those heretofore disclosed to the Lender. 4 5 SECTION SIX. REPRESENTATIONS AND WARRANTIES OF THE LENDER The Lender represents and warrants that: 6.1 The Lender is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has full power and authority and legal right to make and perform this Agreement. 6.2 The execution, delivery and performance by the Lender of this Agreement have been duly authorized by all necessary action by the Lender and is not and will not violate any provisions of law applicable to the Lender, any rules, regulations or orders applicable to the Lender or any judgments or decrees binding upon the Lender. This Agreement is a valid and legally binding obligation of the Lender enforceable against the Lender in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, motorium and similar laws affecting credits' rights generally and the general principles of equity (regardless of whether considered in a proceeding at law or in equity). 6.3 No authorizations, approvals or consents of, and no filings or registrations with, any governmental regulatory authority or agency are required for the execution, delivery performance by the Lender of this Agreement, or any transaction contemplated hereby, or for the validity or enforceability against the Lender hereof except as have already been received or accomplished. 6.4 The execution, delivery and performance of the Agreement and the consummation of the transactions contemplated hereby will not violate, conflict with or constitute a default under (i) any of the provisions of the Company's Certificate of Incorporation or Bylaws, (ii) any provision of any agreement, instrument, order, arbitration award, judgment or decree to which the Company is a party or by which it is or its assets are bound, (iii) any statute, rule or regulation of any federal, state or local government or agency applicable to the Company, except in any such case (i), (ii) or (iii) above, for any such conflicts, violations or defaults which either individually or in the aggregate do not have a material adverse effect on the business properties of the Company and its subsidiaries, taken as a whole. 6.5 The Company has taken such actions as are required by applicable law to be taken by it to establish the ESOP and the Trust. 6.6 There is no action, suit, investigation or proceeding pending, or to the best knowledge of the Company, threatened against or affecting the ESOP or the Trust before any court or governmental department, agency or instrumentality. 6.7 The Loan will be an "exempt loan" as that term is defined under Regulation Section 54.4975-7(b)(1)(iii), provided the Borrower determines that the interest rate is not more than reasonable; and the transactions contemplated by this Agreement are not "prohibited transactions" within the meaning of Section 4975 of Code Section 406(a) of ERISA. 5 6 6.8 Except as otherwise provided in this Agreement, the Shares are not subject to any restriction on transfer under applicable Federal securities law and may be freely traded over-the-counter. SECTION SEVEN. CONDITIONS PRECEDENT. The obligation of the Lender to make the Loan shall be subject to satisfaction of the following conditions precedent: 7.1 The Lender shall have received executed originals of this Agreement and the Note duly signed and properly completed. 7.2 The Lender shall have received either (i) the certificate evidencing all the Pledged Shares together with duly executed blank stock power therefore or (ii) if such Pledged Shares are not yet available, a duly executed agreement to pledge such stock in the form attached hereto as Exhibit B (in which event such certificate and stock power will be delivered within 10 days of the date of the Lender makes the Loan). 7.3 The Lender shall have received copies (executed or certified, as may be appropriate) of all legal documents or proceedings taken in connection with the execution and delivery of this Agreement and the Note. SECTION EIGHT. COVENANTS. The Borrower covenants and agrees that so long as any amount remains unpaid on the Note or the Commitment is outstanding, except to the extent compliance in any case or cases is waived in writing by the Lender: 8.1 Compliance. The Borrower will comply with all requirements of the Code, ERISA and any other law, rule or regulation applicable to it as such laws, rules or regulations affect the Plan or the Trust. 8.2 Reports. (a) The Borrower will maintain a system of accounting for the Plan and the Trust in accordance with sound accounting practice and will, from time to time, furnish to the Lender and its duly authorized representatives, such information and data with respect to the financial condition of the Plan and the Trust as the Lender may reasonably request. (b) Without any request the Borrower will furnish to the Lender promptly after knowledge thereof shall have come to the attention of the Borrower, written notice of the occurrence of any 6 7 Default or Event of Default hereunder or of any threatened or pending litigation or governmental proceeding against the Plan or the Trust. 8.3 Determination Letter. The Company shall apply for a determination letter from the Internal Revenue Service that the Plan and the Trust, taken together, qualify as an employee stock ownership plan for purposes of Section 4975(e)(7) of the Code and the rules and regulations thereunder. SECTION NINE. EVENTS OF DEFAULT AND REMEDIES. 9.1 Any one or more of the following shall constitute an Event of Default hereunder: (a) The Borrower shall default in the payment of principal interest in respect of the Note or any other amounts payable under this Agreement when due; (b) Any representation, warranty or statement made by the Borrower herein or in connection with the making of the Loan proves to be incorrect in any material respect as of the date of the issuance or making thereof, (c) The Borrower shall default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in subparts (a) and (b), inclusive, of this Section 9.1) contained in this Agreement and such default shall continue unremedied for a period of 30 days after notice to the Borrower by the Lender or any other holder of the Note; 9.2 When any Event of Default described in subsections (a) to (c), of Section 9.1 has occurred and is continuing, the Lender or the holder of the Note shall have no rights to assets of the Trust other than (i) contributions (other than contributions of employer securities) that are made by the Lender to enable the Borrower to meet its obligations pursuant to the Loan, cash dividends received by the Borrower on the Shares and earnings attributable to the investment of such contributions and dividends and (ii) the Pledged Stock; provided further, however, that the value of Trust assets transferred to the Lender as a result of an Event of Default shall not exceed the amount of the repayment then in default, and, provided further, that so long as the Lender is a "party in interest" within the meaning of ERISA Section 3(14) and a "disqualified person" within the meaning of Section 4975(e)(2) of the Code, a transfer of Trust assets upon default shall be made only if, and to the extent of, the Borrower's failure to meet the loan's payment schedule. 9.3 When any Event of Default has occurred and is continuing the Lender may, in addition to such other rights or remedies as it may have, then or at any time or times thereafter exercise with respect to the Collateral any and all of the rights, options and remedies of a secured party under the Uniform Commercial Code of New York (the "UCC") including without limitation the sale of all or any part of the Collateral at any brokers' board any public or private 7 8 sale, provided, however that the Lender shall only be able to exercise such rights and remedies to the extent of all interest and principal payments which are due and payable as of the date of the Event of Default and provided further that prior to such exercise the Lender shall release from the Collateral so much thereof as it would have been required to release under Section 3.4 hereof if the period from the previous December 31 to the date of such release constituted a Plan Year and no Event of Default had occurred. The net proceeds of any such sale, after deducting all costs and expenses incurred in the collection, protection, sale and delivery of the Collateral (which expenses the Borrower promises to pay) shall be applied first to the payment of any costs and expenses incurred by the Lender in selling or otherwise disposing of the Collateral; second, to the payment of the principal of and the interest on the Note; and, third, ratably as among any other items of the indebtedness hereby secured. Any surplus remaining after the full payment and satisfaction of the foregoing shall be returned to the Borrower or to whomsoever a court of competent jurisdiction shall determine to be entitled thereto. Any requirement of said UCC as to reasonable notice shall be met by the Lender personally delivering mailing notice (by certified mail - return receipt requested) to the Borrower at its address as provided in Section 11.6 hereof at least ten (10) days prior to the event giving rise to the requirement of such notice. In connection with any offer, solicitation or sale of the Collateral, the Lender may restrict bidders and otherwise proceed in whatever manner it reasonably believes appropriate in order to comply or assure compliance with applicable legal requirements pertaining to the offer and sale of securities of the same type as the Collateral. 9.4 The number of shares of Pledged Stock as to which the Lender may exercise the rights set forth in this Section 9 may not exceed that number of shares (then remaining subject to pledge hereunder) which is then equal in current value to the amount in default under the Note. The remedies set forth in this Section 8 may only be exercised to the extent consistent with the restrictions on remedies set forth in Section 408(b)(3) of ERISA and the regulations thereunder and Section 4975(d)(3) of the Code and the regulations thereunder. SECTION TEN. DEFINITIONS. 10.1 The term "Business Day" shall mean any day on which the banks are generally open for business in New York other than a Saturday or Sunday. 10.2 The term "Event of Default" shall mean any event or condition specified as such in Section 9.1 hereof and the term "Default" shall mean any event or condition which, with the lapse of time, the giving of notice, or both would constitute an Event of Default. Capitalized terms defined elsewhere in this Agreement shall have the meanings as defined in all provisions hereof. 8 9 SECTION ELEVEN. MISCELLANEOUS 11.1 Holidays. If any principal of the Note shall fall due on Saturday, Sunday or on another day which is a legal holiday for banks in the State of New York, interest at the rate the Note bears for the period prior to maturity shall continue to accrue on such principal from the stated due date thereof to and including the next succeeding Business Day on which the same is payable. 11.2 No Waiver, Cumulative Remedies. No delay failure on the part of the Lender on the part of the holder of the Note in the exercise of any power or right shall preclude any other or further exercise thereof, or the exercise of any other power or right, and the rights and remedies hereunder of the Lender and of any holder of the Note are cumulative to, and not exclusive of, any rights or remedies which any of them would otherwise have. 11.3 Amendments, Etc. No amendment, modification, termination or waiver of any provision of this Agreement or of the Note nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such consent, modification or waiver shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other further notice or demand in similar or other circumstances. 11.4. Survival of Representations. All representations and warranties made herein in certificates given in connection with the Loan shall survive the execution and delivery of this Agreement and of the Note, and shall continue in full force and effect with respect to the date as of which they were made as long as any credit is in use or available hereunder. 11.5 Payments. So long as the Lender is the holder of the Note, the Borrower will promptly and punctually pay the principal of and interest on the Note without presentment of the Note and without any notation of any such payment being made on the Note. 11.6 Addresses for Notices. All communications provided for herein shall be in writing and shall be deemed to have been given or made when served personally when deposited in the United States mail addressed if to the Borrower to Donna Holmes, Pryor, Cashman, Sherman & Flynn, 410 Park Avenue, New York, New York 10022-4441; if to the Lender at One Astoria Federal Plaza, Lake Success, New York 11042-1085, Attention: Monte N. Redman, at such other address as shall be designated by any party hereto in a written notice to each other party pursuant to this Section 11.6. 11.7 Headings. Article and Section headings used in this Agreement are for convenience or reference only and are not a part of this Agreement for any other purpose. 9 10 11.8 Severability of Provisions. Any provision of this Agreement which is unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such unenforceability without impairing the enforceability of the remaining provisions hereof affecting the enforceability of such provision in any other jurisdiction. 11.9 Counterparts. This Agreement may be executed in any number of counterparts, and by different parties hereto on separate counterparts, and all such counterparts taken together shall be deemed to constitute one and the same instrument. 11.10 Binding Nature, Governing Law, Etc. This Agreement shall be binding upon the Borrower and its success and assigns and shall inure to the benefit of the Lender and the benefit of its successes and assigns, including any subsequent holder of the Note. To the extent not preempted by Federal law, this Agreement and the rights and duties of the parties hereto shall be construed and determined in accordance with the laws of the State of New York without regard to principles of conflicts of laws. This Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof and any prior agreements, whether written or oral, with respect thereto are superseded hereby. 11.11 Concerning the Borrower. The term "Borrower" as used herein shall mean and include the undersigned as trustee of the Trust and their successes in trust not individually but solely as Trustee under that certain Astoria Federal Savings and Loan Association Employee Stock Ownership Trust effective November 18, 1993, by and between the undersigned and Astoria Federal Savings and Loan Association and this Agreement shall be binding upon the undersigned and its successes and assigns and upon the trust estate. The undersigned assumes no personal or individual liability or responsibility for payment of the indebtedness evidenced by the Note or for observance or performance of the covenants and agreements herein contained or for the truthfulness of the representations and warranties herein contained, the undersigned having executed this Agreement and the Note solely in its capacity as trustee as aforesaid to bind the undersigned, its successes in trust and the trust estates. 11.12 Limited Liability. Anything contained herein or in the Note to the contrary notwithstanding, the sole and only recourse of the Lender and any other holder of the Note for payment of the obligations hereunder and under the Note , as against the Borrower for the payment of the obligations hereunder and under the Note shall be to (i) the Collateral, (ii) contributions, other than employer securities not constituting Collateral hereunder, made to the Plan and the Trust by sponsoring employers to enable the Borrower to meet its obligations hereunder and under the Note, and (iii) earnings attributable to the Pledged Shares and to the investment of such employer contributions, but only to the extent of the failure of the Borrower to meet the payment schedule of the Loan provided for herein. 11.13 Lender's Duty of Care. It is agreed and understood that the Lender's duty with respect to the Collateral shall be solely to use reasonable care in the custody and preservation of the Collateral in the Lender's possession, which shall not include any steps necessary to preserve 10 11 rights against prior parties. 11 12 All provisions in this Agreement shall be construed so as to maintain (i) the ESOP as a qualified leveraged employee stock ownership plan under Sections 401 (a) and 4975(e)(7) of the Code, (ii) the Trust as exempt from taxation under Section 501(a) of the Code, and (iii) the Loan as an "exempt loan" under the Exempt Loan Rules. Upon your acceptance hereof in the manner hereinafter set forth, this Agreement shall constitute a contract between us for the uses and purposes hereinabove set forth. Dated as of this 18 day of November 1993. Nationar, and its successes in trust, as trustee under that certain Astoria Federal Savings and Loan Association Employee Stock Ownership Trust effective Nov 18, 1993 by and between the undersigned and Astoria Federal Savings and Loan Association. By__________________ Accepted and agreed to at Lake Success, New York as of the date last above written Astoria Financial Corporation By /S/ George L. Engelke, Jr. George L. Engelke, Jr. President, Chief Executive Officer and Director 12 13 All provisions in this Agreement shall be construed so as to maintain (i) the ESOP as a qualified leveraged employee stock ownership plan under Sections 401 (a) and 4975(e)(7) of the Code, (ii) the Trust as exempt from taxation under Section 501(a) of the Code, and (iii) the Loan as an "exempt loan" under the Exempt Loan Rules. Upon your acceptance hereof in the manner hereinafter set forth, this Agreement shall constitute a contract between us for the uses and purposes hereinabove set forth. Dated as of this 18 day of November 1993. Nationar, and its successes in trust, as trustee under that certain Astoria Federal Savings and Loan Association Employee Stock Ownership Trust effective Nov 18, 1993 by and between the undersigned and Astoria Federal Savings and Loan Association. By /S/ John J. McCabe By: /S/ Alan S. Colodner John J. McCabe Alan S. Colodner Senior Vice President Vice President Accepted and agreed to at Lake Success, New York as of the date last above written Astoria Financial Corporation By_____________________ George L. Engelke, Jr. President, Chief Executive Officer and Director 12 14 EXHIBIT A PROMISSORY NOTE $33,029,425 Lake Success, New York November 18, 1993 For VALUE RECEIVED, the undersigned, Nationar, not individually but solely as trustee under that certain Astoria Federal Savings and Loan Association Employee Stock Ownership Trust effective November 18, 1993 by and between the undersigned and Astoria Federal Savings and Loan Association (the "Borrower") promises to pay to the order of Astoria Financial Corporation, a Delaware Corporation (the "Lender") at its office at One Astoria Federal Plaza, Lake Success, New York 11042-1085, the principal sum of thirty-three million, twenty-nine thousand, four hundred and twenty-five dollars ($33,029,425), if less, the aggregate principal amount of the Loan made to the Borrower under Section 1.1 of the Loan and Security Agreement hereinafter referred to in consecutive annual principal installments each in an amount equal to 1/12th of the original principal amount of such Loan, together with all accrued interest on the unpaid principal sum, payable commencing on December 31, 1994, and on the last day of each December in each year thereafter, except that the final installment in the amount of all principal and interest not sooner paid shall be due on December 31, 2005, the final maturity hereof. The Borrower promises to pay interest (computed on the basis of a year of 360 days for the actual number of days elapsed) at said office on the balance of principal from time to time remaining outstanding and unpaid hereon at the rate per annum equal at all times to 6.0% annually on the last day of each December, commencing December 31, 1994, and in each year thereafter and on the final maturity date of this Note. On demand, the Borrower promises to pay interest on any overdue principal hereof (whether by lapse of time, acceleration otherwise) until paid at the stated rate. This Note is issued under the terms and provisions of that certain Astoria Federal Savings and Loan Association Employee Stock Ownership Trust Loan and Security Agreement bearing even date herewith by and between the Borrower and the Lender (the "Loan and Security Agreement") and this Note and the holder hereof are entitled to all the benefits and security provided for thereby referred to therein to which Loan and Security Agreement reference is hereby made for a statement thereof. This Note may be declared due prior to its express maturity and voluntary prepayments may be made hereon, all in the events, on the terms and in the manner as provided in such Loan and Security Agreement. 13 15 Recourse for the payment of this Note has been limited by the provisions of the Loan and Security Agreement and this Note is expressly made subject to such provisions. This Note shall be governed by and construed in accordance with the laws of New York without regard to principles of conflicts of laws. The Borrower hereby waives presentment for payment and demand. Upon the occurrence of an Event of Default as such term is defined in the Loan and Security Agreement at the option of the Lender, all amounts payable by the Borrower to the Lender under the terms of this Note may immediately become due and payable by the Borrower to the Lender pursuant to the provisions of Section 9.2 of the Loan and Security Agreement, and the Lender shall have all of the rights, powers, and remedies available under the terms of this Note, any of the other documents evidencing and securing this Loan and all applicable laws. The Borrower and all endorsers, guarantors, and other parties who may now in the future be primarily secondarily liable for the payment of the indebtedness evidenced by this Note hereby severally waive presentment, protest and demand, notice of protest, notice of demand and of dishonor and non-payment of this Note and expressly agree that this Note any payment hereunder may be extended from time to time without in any way affecting the liability of the Borrower, guarantors and endorsers. Nationar, and its successes in trust, as trustee under that certain Astoria Federal Savings and Loan Association Employee Stock Ownership Trust effective November 18, 1993 by and between the undersigned and Astoria Federal Savings and Loan Association. By /S/ John J. McCabe For Nationar, the Trustee for Astoria Federal Savings and Loan Association Employee Stock Ownership Trust John J. McCabe Senior Vice President By: /S/ Alan S. Colodner Alan S. Colodner Vice President 14 16 EXHIBIT B SECURITY AGREEMENT RE INSTRUMENTS OR NEGOTIABLE DOCUMENTS TO BE DEPOSITED For new value contemporaneously given by Astoria Financial Corporation, the undersigned ("debt"), the receipt whereof is hereby acknowledged, the debt does hereby grant a security interest to said Lender in the instruments or negotiable documents hereafter described ("Collateral"), in all of which Collateral the debt warrants that the debt has good, valid and effective rights to the ownership and possession thereof and to the grant of the security interest hereby made: 1,321,172 shares of the common stock, par value $.01 per share, of Astoria Financial Corporation, a Delaware corporation. Debt agrees to deliver said collateral to said Lender not later than the close of business on Nov 26, 1993, said date being within 10 days from the date hereof. Said security interest secures the payment of all indebtedness and liabilities, now existing or hereafter arising, and the Lender has all the rights with respect to said Collateral and said security interest as more fully set forth in the form of secured note or notes executed and delivered by the undersigned to said Lender prior hereto or contemporaneously herewith. [Remainder of this page intentionally left blank] 15 17 This agreement, including matters of interpretation and construction, and the rights of the Lender and the duties and obligations of the debt hereunder are to be determined in accordance with the laws of the State of New York, particularly the Uniform Commercial Code, except where preempted by federal law. Dated at Lake Success, New York, November 18, 1993. Nationar and its successes in trust, as trustee under that certain Astoria Federal Savings and Loan Association Employee Stock Ownership Trust effective November 18, 1993 by and between the undersigned and Astoria Federal Savings and Loan Association By /S/ John J. McCabe For Nationar, the Trustee for Astoria Federal Savings and Loan Association Employee Stock Ownership Trust John J. McCabe Senior Vice President By: /S/ Alan S. Colodner Alan S. Colodner Vice President 16 18 PROMISSORY NOTE $33,029,425 Lake Success, New York November 18, 1993 For VALUE RECEIVED, the undersigned, Nationar, not individually but solely as trustee under that certain Astoria Federal Savings and Loan Association Employee Stock Ownership Trust effective November 18, 1993 by and between the undersigned and Astoria Federal Savings and Loan Association (the "Borrower") promises to pay to the order of Astoria Financial Corporation, a Delaware Corporation (the "Lender") at its office at One Astoria Federal Plaza, Lake Success, New York 11042-1085, the principal sum of thirty-three million, twenty-nine thousand, four hundred and twenty-five dollars ($33,029,425), if less, the aggregate principal amount of the Loan made to the Borrower under Section 1.1 of the Loan and Security Agreement hereinafter referred to in consecutive annual principal installments each in an amount equal to 1/12th of the original principal amount of such Loan, together with all accrued interest on the unpaid principal sum, payable commencing on December 31, 1994, and on the last day of each December in each year thereafter, except that the final installment in the amount of all principal and interest not sooner paid shall be due on December 31, 2005, the final maturity hereof. The Borrower promises to pay interest (computed on the basis of a year of 360 days for the actual number of days elapsed) at said office on the balance of principal from time to time remaining outstanding and unpaid hereon at the rate per annum equal at all times to 6.0% annually on the last day of each December, commencing December 31, 1994, and in each year thereafter and on the final maturity date of this Note. On demand, the Borrower promises to pay interest on any overdue principal hereof (whether by lapse of time, acceleration otherwise) until paid at the stated rate. This Note is issued under the terms and provisions of that certain Astoria Federal Savings and Loan Association Employee Stock Ownership Trust Loan and Security Agreement bearing even date herewith by and between the Borrower and the Lender (the "Loan and Security Agreement") and this Note and the holder hereof are entitled to all the benefits and security provided for thereby referred to therein to which Loan and Security Agreement reference is hereby made for a statement thereof. This Note may be declared due prior to its express maturity and voluntary prepayments may be made hereon, all in the events, on the terms and in the manner as provided in such Loan and Security Agreement. Recourse for the payment of this Note has been limited by the provisions of the Loan and Security Agreement and this Note is expressly made subject to such provisions. This Note shall be governed by and construed in accordance with the laws of New York without regard to 17 19 principles of conflicts of laws. The Borrower hereby waives presentment for payment and demand. Upon the occurrence of an Event of Default as such term is defined in the Loan and Security Agreement at the option of the Lender, all amounts payable by the Borrower to the Lender under the terms of this Note may immediately become due and payable by the Borrower to the Lender pursuant to the provisions of Section 9.2 of the Loan and Security Agreement, and the Lender shall have all of the rights, powers, and remedies available under the terms of this Note, any of the other documents evidencing and securing this Loan and all applicable laws. The Borrower and all endorsers, guarantors, and other parties who may now in the future be primarily secondarily liable for the payment of the indebtedness evidenced by this Note hereby severally waive presentment, protest and demand, notice of protest, notice of demand and of dishonor and non-payment of this Note and expressly agree that this Note any payment hereunder may be extended from time to time without in any way affecting the liability of the Borrower, guarantors and endorsers. Nationar, and its successes in trust, as trustee under that certain Astoria Federal Savings and Loan Association Employee Stock Ownership Trust effective November 18, 1993 by and between the undersigned and Astoria Federal Savings and Loan Association. By /S/ John J. McCabe For Nationar, theTrustee for Astoria Federal Savings and Loan Association Employee Stock Ownership Trust John J. McCabe Senior Vice President By: /S/ Alan S. Colodner Alan S. Colodner Vice President 18 20 SECURITY AGREEMENT RE INSTRUMENTS OR NEGOTIABLE DOCUMENTS TO BE DEPOSITED For new value contemporaneously given by Astoria Financial Corporation, the undersigned ("debt"), the receipt whereof is hereby acknowledged, the debt does hereby grant a security interest to said Lender in the instruments or negotiable documents hereafter described ("Collateral"), in all of which Collateral the debt warrants that the debt has good, valid and effective rights to the ownership and possession thereof and to the grant of the security interest hereby made: 1,321,172 shares of the common stock, par value $.0l per share, of Astoria Financial Corporation, a Delaware corporation. Debt agrees to deliver said collateral to said Lender not later than the close of business on Nov 26, 1993, said date being within 10 days from the date hereof. Said security interest secures the payment of all indebtedness and liabilities, now existing or hereafter arising, and the Lender has all the rights with respect to said Collateral and said security interest as more fully set forth in the form of secured note or notes executed and delivered by the undersigned to said Lender prior hereto or contemporaneously herewith. [Remainder of this page intentionally left blank] 19 21 This agreement, including matters of interpretation and construction, and the rights of the Lender and the duties and obligations of the debt hereunder are to be determined in accordance with the laws of the State of New York, particularly the Uniform Commercial Code, except where preempted by federal law. Dated at Lake Success, New York, November 18, 1993. Nationar and its successes in trust, as trustee under that certain Astoria Federal Savings and Loan Association Employee Stock Ownership Trust effective November 18, 1993 by and between the undersigned and Astoria Federal Savings and Loan Association By /S/ John J. McCabe For Nationar, the Trustee for Astoria Federal Savings and Loan Association Employee Stock Ownership Trust John J. McCabe Senior Vice President By: /S/ Alan S. Colodner Alan S. Colodner Vice President 20 EX-10.2 4 AMENDMENT TO AFS ESOP 1 Amendment to Astoria Federal Savings and Loan Association Employee Stock Ownership Trust Loan and Security Agreement, Promissory Note, and Security Agreement Re Instruments or Negotiable Document to be Deposited Whereas Nationar, not individually, but solely as Trustee under the Astoria Federal Savings and Loan Association Employee stock Ownership Trust (the "Trust") effective November 18, 1993 (the "Borrower") on or about November 18, 1993 entered into certain agreements entitled the Astoria Federal Savings and Loan Association Employee Stock Ownership Trust Loan and Security Agreement, Promissory Note, and Security Agreement Re Instruments or Negotiable Documents to be Deposited (the Loan Documents) by and between Borrower and/or for the benefit of Astoria Financial Corporation (the "Lender") and, Whereas the Borrower and Lender wish to amend the Loan Documents to conform to the terms and provisions of the Astoria Federal Savings and Loan Association Employee Stock Ownership Plan (the "ESOP"), to correct certain errors and to conform the Loan Documents to the intention of the Borrower and Lender. Now therefore in consideration of one dollar ($1.00) each to the other in hand paid, the mutual covenants contained herein and other good and valuable consideration, the Borrower and Lender agree as follows: A) Section 1.2 of the Astoria Federal Savings and Loan Association Employee Stock Ownership Trust Loan and Security Agreement is hereby amended in its entirety to state as follows: 1.2 The Note. The disbursement of the Loan pursuant to Section 1. 1 hereof shall be made against and evidenced by a promissory note of the Borrower in the form annexed hereto as Exhibit A (the"Note"), such note to bear interest on the unpaid balance thereof to be computed from the date of such disbursement as hereinafter provided and which note shall also provide for annual payments of principal and interest as determined by a schedule annexed hereto as Schedule C at the time of the execution of such note commencing however, no later than December 31, 1994 and continuing as provided in such Schedule C, except that the final installment in the amount of all principal and interest then remaining unpaid shall be due and payable in full on December 31, 2005, the final maturity thereof. B) Section 3.4 of the Astoria Federal Savings and Loan Association Employee Stock Ownership Trust Loan and Security Agreement is amended in its entirety to state as follows: 1 2 3.4 Partial Releases. The Lender agrees, provided that no Default or Event of Default shall have occurred and be continuing, as promptly as is practicable after December 31 in each year (the period commencing the date hereof and ending December 31, 1994 and each subsequent 12-month period ending on December 31 being hereinafter referred to as a "Plan Year"), to release as of the last day of such Plan Year that number of pledged shares then being held to secure the loan which is equal to that certain number of shares of the Stock acquired with the Stock Obligation which is then held in the Unallocated Stock Fund determined pursuant to Section 4.2 of the ESOP, the terms Stock, Stock Obligation and Unallocated Stock Fund for purposes of this paragraph having the meanings respectively, as set forth in the ESOP. C) The first full paragraph of Exhibit A of the Astoria Federal Savings and Loan Association Employee Stock Ownership Trust Loan and Security Agreement and the first full paragraph of the Promissory Note are each amended in their entirely to each state as follows. FOR VALUE RECEIVED, the undersigned, Nationar, not individually, but solely as trustee under that certain Astoria Federal Savings and Loan Association Employee Stock Ownership Trust effective November 18, 1993, by and between the undersigned and Astoria Federal Savings and Loan Association ("Borrower"), promises to pay to the order of Astoria Financial Corporation, a Delaware Corporation (the "Lender") at its office at One Astoria Federal Plaza, Lake Success, New York 11042-1085, the principal sum of thirty-three million, twenty-nine thousand, four hundred and twenty-five dollars ($33,029,425) or, if less, the aggregate principal amount of the loan made to the Borrower under Section 1.1 of the Loan and Security Agreement hereinafter referred to, in consecutive annual installments of principal and interest, each in the amount set forth in Schedule C to the Loan and Security Agreement for such year, payable commencing on December 31, 1994 and continuing on the last day of each December and in each year thereafter, except that the final installment in the amount of all principal and interest then outstanding and not sooner paid shall be due and payable on December 31, 2005, the final maturity hereof. D) Exhibit B of the Astoria Federal Savings and Loan Association Employee Stock Ownership Trust Loan and Security Agreement and the Security Agreement Re Instruments or Negotiable Documents To Be Deposited are each amended in their entirely to each state as follows: SECURITY AGREEMENT RE INSTRUMENTS OR NEGOTIABLE DOCUMENTS TO BE DEPOSITED For new value contemporaneously given by Astoria Financial Corporation ( "Lender"), the receipt whereof is hereby acknowledged, Nationar, not individually, but solely as Trustee under the Astoria Federal Savings and Loan Association Employee Stock Ownership Trust effective 2 3 November 18, 1993 ("Debtor"), does hereby grant a security interest to said Lender in the instruments or negotiable documents hereafter described ("Collateral"), in all of which Collateral the Debtor warrants that the Debtor has good, valid and effective rights to the ownership and possession thereof and to the grant of the security interest hereby made: 1,321,177 shares of the common stock, par value $.0l per share, of Astoria Financial Corporation, a Delaware corporation. Debtor agrees to deliver said collateral to said Lender not later than the close of business on November 26, 1993, said date being within 10 days from the the date hereof. Said Security interest secures the payment of all indebtedness and liabilities, now existing or hereafter arising, and the Lender has all the rights with respect to said Collateral and said security interest as more fully set forth in the form of secured note or notes executed and delivered by the undersigned to said Lender prior hereto or contemporaneously herewith. This agreement, including matters of interpretation and construction, and the rights of the Lender and the duties and obligations of the Debtor hereunder are to be determined in accordance with the laws of the State of New York, particularly the Uniform Commercial Code, except where preempted by federal law. Dated at Lake Success, New York _________________ 1993. Nationar and its successes in trust, as trustee under that certain Astoria Federal Savings and Loan Association Employee Stock Ownership Trust effective November 18, 1993 by and between the undersigned and Astoria Federal Savings and Loan Association. By /S/ John J. McCabe For Nationar, the Trustee for Astoria Federal Savings and Loan Association Employee Stock Owner Trust John J. McCabe Senior Vice President By /S/ Alan S. Colodner Alan S. Colodner Vice President E) Schedule C is hereby annexed and affixed to the Astoria Federal Savings and Loan Association Employee Stock Ownership Trust Loan and Security Agreement, which said Schedule C shall state in its entirely as follows: Schedule C Payment schedule for Astoria Federal Savings and Loan Association Employee Stock 3 4 Ownership Trust Loan and Security Agreement. Original Principal Balance: $33,029,425.00 Annual Interest Rate: 6.00% Commencement Date: 11/18/93 Payment Interest Total Date Principal Payment Payment Principal and Interest Payment Dec 31, 1994 $1,957,886.20 $2,218,476.38 $4,176,362.58 Dec 31, 1995 $2,075,359.37 $1,864,292.33 $3,939,651.70 Dec 31, 1996 $2,199,880.93 $1,739,770.77 $3,939,651.70 Dec 31, 1997 $2,331,873.79 $1,607,777.91 $3,939,651.70 Dec 31, 1998 $2,471,786.21 $1,467,865.49 $3,939,651.70 Dec 31, 1999 $2,620,093.39 $1,319,558.31 $3,939,651.70 Dec 31, 2000 $2,777,298.99 $1,162,352.71 $3,939,651.70 Dec 31, 2001 $2,943,936.93 $ 995,714.77 $3,939,651.70 Dec 31, 2002 $3,120,573.14 $ 819,078.56 $3,939,651.70 Dec 31, 2003 $3,307,807.53 $ 631,844.17 $3,939,651.70 Dec 31, 2004 $3,506,275.98 $ 433,375.72 $3,939,651.70 Dec 31, 2005 $3,716,652.54 $ 222,999.16 $3,939,651.70 In witness whereof, the undersigned agree to the amendments set forth herein as if the Loan Documents as originally executed had set forth such amendments in full and the Loan Documents, except as specifically amended hereby, are in all other respects confirmed and ratified. This Amendment is effective as of November 18, 1993 and shall be binding upon the respective successors and assigns of the undersigned. This amendment shall be construed under the laws of the State of New York except where preempted by federal law. Nationar, and its successors in trust, as trustee under that certain Astoria Federal Savings and Loan Association Employee Stock Ownership Trust effective November 18, 1993 by and between the undersigned and Astoria Federal Savings and Loan Association. By /S/ John J. McCabe /S/ Alan S. Colodner Alan S. Colodner Vice President Astoria Financial Corporation By /S/ George L. Engelke, Jr. George L. Engelke, Jr. President & Chief Executive Officer 4 EX-10.3 5 LOAN AGREEMENT AMONG LIB AND US TRUST 1 Loan Agreement among Long Island Bancorp, Inc., The Long Island Savings Bank, FSB and United States Trust Company Of New York, solely as trustee Of The LISB Employee Stock Ownership Plan WHEREAS, in connection with the conversion of The Long Island Savings Bank, FSB (the "Bank") from a federal mutual savings bank to a federal stock savings bank in accordance with the Plan of Conversion for the Bank dated November 16, 1993, as amended as of February 7, 1994 (the "Conversion"), the Bank has established The LISB Employee Stock ownership Plan for the benefit of all employees eligible to participate therein (such plan, as amended from time to time, hereinafter referred to as the "ESOP"); WHEREAS, the ESOP is intended to constitute a qualified plan under section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and an "employee stock ownership plan" within the meaning of section 4975(e)(7) of the Code; WHEREAS, the agreement of trust, dated as of March 31, 1994 (as amended from time to time, hereinafter referred to as the "Trust Agreement"), between the Bank and United States Trust Company of New York, as trustee (together with its successors in such capacity, the "Trustee"), provides that the assets of the trust created thereunder (the "Trust") shall be primarily invested in shares of the outstanding common stock, par value $0.01 per share of Long Island Bancorp, Inc. (the "Common Stock"); WHEREAS, the Bank has determined it to be in the best interests of the participants in the ESOP and their beneficiaries to borrow funds from Long Island Bancorp, Inc. pursuant to this Agreement and to purchase shares of Common Stock with the proceeds of such borrowing, and the Trustee has further determined that the execution, delivery and performance of this Agreement and such purchase of shares of Common Stock are not inconsistent with its fiduciary responsibilities under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); and WHEREAS, Long Island Bancorp, Inc. wishes to loan funds to the Trust pursuant to this Agreement. 2 - 2 - NOW, THEREFORE, in consideration of these premises and the mutual promises contained herein, the parties hereto agree as follows: Section 1. The Loan and Related Matters. 1.1. The Loan. Subject to the terms and conditions of this Agreement, Long Island Bancorp, Inc. agrees to make a loan to the Trust in a principal equal to $23,784,300.00 (the "Loan"). The Loan shall be made and maintained at the principal office of Long Island Bancorp, Inc. in Melville, New York. 1.2. The Borrowing. Amounts borrowed under this Section 1 shall be made available to the Trust by remitting the same to the Trustee in the manner the Trustee shall direct. 1.3. The Note. The Loan shall be evidenced by a single promissory note of the Trust (as modified and supplemented and in effect from time to time, the "Note") in substantially the form of Exhibit A attached hereto, dated the date of the delivery of the Note to Long Island Bancorp, Inc., payable to Long Island Bancorp, Inc. in equal quarterly installments, on March 31, June 30, September 30 and December 31, during the period from, and including, the date of the Note to, but excluding, the tenth anniversary of such date, subject to any prepayment made pursuant to Section 1.6 hereof. Without regard to the principal amount of the Note stated on its face, the actual principal amount at any time outstanding and owed by the Trust on account of the Note shall be the amount of the disbursement of the Loan made by Long Island Bancorp, Inc. under Section 1.1 hereof less all payments of principal actually received by Long Island Bancorp, Inc. 1.4. Use of Proceeds. The proceeds of the Loan shall be applied by the Trustee, within a reasonable period of time after the receipt thereof, to purchase shares of Common Stock. 1.5. Exempt Loan. The obligation of Long Island Bancorp, Inc. to make a loan under Section 1.1 hereof and the Trust's obligation to borrow under Section 1.2 hereof are conditioned, in either case, upon the Loan satisfying the requirements of an "exempt loan" within the meaning of section 54.4975-7(b)(1)(iii) of the Department of Treasury regulations. 1.6. Prepayments. The Trust shall have the right to prepay the Loan in whole or in part at any time or from 3 - 3 - time to time without premium or penalty; provided, however, that (i) unless waived by Long Island Bancorp, Inc., the Trustee shall give Long Island Bancorp Inc. notice (which notice shall be irrevocable) of each prepayment not later than 10:00 a.m., Eastern Standard Time, at least three business days prior to the date of such prepayment, specifying the amount of the Loan to be prepaid and the date of such prepayment (which shall be a business day) and (ii) upon prepayment of any principal amount of the Loan, the Trust shall pay any accrued interest on the amount so prepaid. 1.7. Interest. The Trust shall pay to Long Island Bancorp, Inc. interest on the unpaid principal amount of the Loan for the period from, and including, the date of the Note (as provided in Section 1.3 hereof) to, but excluding, the date such borrowing shall be paid in full at the rate of 6.15% per annum, payable quarterly on March 31, June 30, September 30 and December 31, and computed on the basis of a 360-day year and actual days elapsed. To the extent the Trust fails to make any interest payment on the due date for such payment hereunder, the Trust's obligation to make such payment shall continue until such interest is paid in full. 1.8. Form of Payment. All payments of principal, interest and other amounts to be made by the Trust under this Section 1 and the Note shall be made in lawful currency of the United States of America, in immediately available funds, without deduction, set-off or counterclaim to Long Island Bancorp, Inc. at its principal office in Melville, New York, no later than 1:00 p.m., Eastern Standard Time, on the date on which such payment shall become due (each such payment made after such time on the due date to be deemed to have been made on the next succeeding business day). If the due date of any payment under this Section 1 or the Note would otherwise fall on a day that is not a business day such due date shall be deemed to be the next preceding business day. 1.9. Limited Recourse. Long Island Bancorp, Inc. will have no recourse against (i) the Trustee, in its individual capacity, (ii) the assets of the Trust or (iii) any other assets related to the ESOP, except that, to the extent not prohibited by ERISA or the Code, Long Island Bancorp, Inc. shall have recourse against any unallocated shares of Common Stock held in the ESOP suspense account (as described in Paragraph 2.2(d) hereof) that were acquired with the proceeds of the Loan and any earnings thereon. Section 2. Representations and Warranties. 2.1. Representations and Warranties of Long Island Bancorp, Inc. Long Island Bancorp, Inc. hereby represents, warrants and covenants to the Trust as follows: 4 - 4 - (a) Organization and Corporate Power. Long Island Bancorp, Inc. has been duly incorporated and is validly existing in good standing under the laws of the State of Delaware; Long Island Bancorp, Inc. has the corporate power and authority to own and lease its property and to conduct its business as it is currently being conducted and to perform this Agreement, the Pledge Agreement by and between the Trustee and Long Island Bancorp, Inc. dated the date hereof (the "Pledge Agreement") and the Stock Order and Acknowledgment Form, as amended, by and between the Trustee and Long Island Bancorp, Inc. (the "Stock Order Form"). The Bank, as of the date hereof, is duly organized and in existence under the laws of the United States of America as a federally chartered savings bank of stock form, with its charter in full force and effect; the Office of Thrift Supervision has not appointed a conservator or receiver for the Bank; and the Bank has the corporate power and authority to own and lease its property and to conduct its business as it is currently being conducted and to perform this Agreement and the Trust Agreement. (This Agreement, the Pledge Agreement, the Stock Order Form and the Trust Agreement are hereinafter collectively referred to as the "ESOP Documents.") (b) Authorization and Enforceability. The ESOP Documents have been duly authorized, executed and delivered by Long Island Bancorp, Inc. and the Bank, as applicable, and constitute valid and binding agreements enforceable against Long Island Bancorp, Inc. and the Bank, as applicable, in accordance with their terms and conditions, except that (i) the enforceability of the ESOP Documents may be limited by bankruptcy, reorganization, insolvency, moratorium or other similar laws of general applicability affecting the enforcement of creditors' rights generally and general principles of equity regardless of whether considered in a proceeding at law or in equity and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. (c) Governmental Consents. No consent, approval, authorization or order of, or notification to or filing with, any court or governmental agency or body is required to be obtained or made by the Trust, Long Island Bancorp, Inc. and the Bank, as applicable, in connection with the execution, delivery and performance by Long Island Bancorp, Inc. and the Bank, as applicable, of the ESOP Documents or the consummation of any transaction contemplated by the ESOP Documents, except such as have been, or prior to the date of the consummation of the Conversion will have been, obtained or made, as required. 5 - 5 - (d) Conflicting Agreements, etc. None of the execution, delivery and performance of the ESOP Documents or the consummation of any transaction contemplated by the ESOP Documents, or the fulfillment of the terms of the ESOP Documents will (i) conflict with, result in a breach of, or constitute a default under, the charter or by-laws of Long Island Bancorp, Inc. and the Bank, as applicable, or the terms of any indenture or other agreement or instrument to which Long Island Bancorp, Inc. or the Bank, as applicable, is a party or by which either is bound or any statute, rule, approval, order or regulation applicable to Long Island Bancorp, Inc. and the Bank, as applicable, of any court, regulatory body, or arbitrator having jurisdiction over Long Island Bancorp, Inc. and the Bank, as applicable, or any state or federal statute applicable to Long Island Bancorp, Inc. and the Bank, as applicable, or (ii) require the consent of any shareholder of Long Island Bancorp, Inc. and the Bank, as applicable, or other person (except as provided in Paragraph 2.1(c) hereof). (e) Litigation. Except as may be disclosed in information made available to the public by Long Island Bancorp, Inc. as reflected in filings and disclosures required by Federal, state or local statutes, rules, orders or regulations or as otherwise made available to the public, there is no pending or, to the best knowledge of Long Island Bancorp, Inc. threatened action, suit or proceeding before any court or government agency, authority or body or any arbitrator involving Long Island Bancorp, Inc. or the Bank that can be reasonably expected to result, either individually or in the aggregate, in any material adverse change in the financial position, stockholders' equity or results of operations of Long Island Bancorp, Inc. (f) Underwriters Not Fiduciaries. No underwriter with respect to the subscription and community offering of the Common Stock is a fiduciary with respect to the ESOP. (g) No Commissions. No commissions (within the meaning of section 408(e) of ERISA) is payable by the Trust in connection with its acquisition of Common Stock with the proceeds of the Loan. (h) Exempt Loan. The Loan will be an "exempt loan" as the term is defined under section 54.4975-7(b)(1)(iii) of the Department of Treasury regulations, 6 - 6 - provided the Trustee determines that the Interest rate is not more than a reasonable rate of interest (within the meaning of section 54.4975-7(b)(7) of the Department of Treasury regulations); and the transactions contemplated by this Agreement are not "prohibited transactions" with the meaning of section 4975 of the Code or section 406(a) of ERISA. (i) No Restrictions on Transfer of Common Stock. The Common Stock is not subject to any restriction on transfer by the Trustee under applicable Federal securities law. 2.2. Representations and Warranties of the Trustee. The Trustee, solely in its capacity as Trustee and not individually, hereby represents, warrants and covenants to Long Island Bancorp, Inc. as follows: (a) Purchase of Common Stock. Within a reasonable period of time after the receipt of the proceeds of the Loan, the Trust will apply such proceeds to the purchase of shares of Common Stock. (b) Investment. The Trust is acquiring the shares of Common Stock solely for investment purposes and not with a view to any distribution thereof or sale in connection therewith; provided, however, that the acquisition, holding, transfer and distribution of shares of Common Stock is governed by, and subject to, the terms of the Trust Agreement, the ESOP, ERISA and the Code. (c) Trust Administration. The Trustee, solely within the responsibilities allocated to it pursuant to the Trust Agreement, will administer the Trust according to the terms of the Trust Agreement, unless to do so would contravene applicable law. (d) Suspense Account. Until payment in full of the principal amount of the Loan, all interest thereon and all other amounts payable by the Trust under Section 1 hereof, all shares of Common Stock purchased by the Trust with the proceeds of the Loan shall be added to and maintained in a suspense account and will be withdrawn therefrom only as provided under the applicable provisions of the ESOP and the Trust Agreement. (e) ESOP Matters. The Trustee, to the extent within the responsibilities allocated to it pursuant to the Trust Agreement , (i) will cause (A) the ESOP to be operated and administered as a qualified plan under section 401(a) of the Code and as an "employee stock ownership plan" under section 4975(e)(7) of the Code and (B) the Trust to be exempt from federal income taxation under section 501(a) of the Code 7 - 7 - and, in connection with each of the foregoing, will comply and will cause the ESOP and the Trust to comply, in all material respects, with the requirements of the Code and ERISA applicable to the Trustee, the ESOP and the Trust and (ii) will not take or fail to take any action that, in either case, would adversely affect the status of (A) the ESOP as a qualified plan under section 401(a) of the Code or as an "employee stock ownership plan" within the meaning of section 4975(e)(7) of the Code, (B) the Trust as tax-exempt under section 501(a) of the Code or (C) the Loan as an "exempt loan" within the meaning of section 54.4975-7(b)(1)(iii) of the Department of Treasury regulations. Section 3. Representations and Warranties of United States Trust Company of New York ("U.S. Trust"), in its individual capacity. U.S. Trust, not as Trustee, but solely in its individual capacity, represents and warrants to Long Island Bancorp, Inc. that: 3.1. U.S. Trust has full power, authority and legal right to make and perform the Trust Agreement and (with respect to this Section 3) this Agreement. 3.2. The execution, delivery and performance by (i) U.S. Trust of the Trust Agreement and (with respect to this Section 3) this Agreement and (ii) U.S. Trust, as trustee under the Trust Agreement, of this Agreement and the Note, do not violate any provision of law, any rules, regulations or orders applicable to U.S. Trust; provided, however, that U.S. Trust makes no representation or warranty in this Section 3.2 as to whether its execution, delivery or performance of this Agreement (other than this Section 3) or the Note complies with or violates any provision of ERISA or the Code or the Securities Act of 1933 and the rules and regulations thereunder or any Federal or state statute or regulation applicable to Long island Bancorp, Inc. or the Bank. 3.3. No authorization, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency are necessary for the execution, delivery or performance by (i) U.S. Trust of the Trust Agreement or (with respect to this Section 3) this Agreement or (ii) U.S. Trust, as trustee under the Trust Agreement, this Agreement and the Note, or any transaction contemplated hereby or thereby, or for the validity or enforceability against U.S. Trust hereof or thereof, except for filings with the Internal Revenue Service, the Department of Labor or the Securities and Exchange Commission that may from time to time be required by ERISA, the code or other applicable law. 8 - 8 - 3.4. The Trust Agreement and (with respect to this Section 3) this Agreement have each been duly authorized, executed and delivered by U.S. Trust and each constitutes a valid and binding agreement, in each case, enforceable against U.S. Trust, in accordance with its terms and conditions, except as enforceability may be limited by bankruptcy, reorganization, insolvency, fraudulent conveyance, moratorium or other similar laws relating to creditors' rights or general principals of equity now or hereafter in effect (regardless of whether enforcement is sought in a proceeding at law or in equity). Section 4. Conditions Precedent. The obligations of the Trust to borrow pursuant to Section 1.2 hereof shall be subject to the satisfaction of the following conditions precedent: 4.1. The Trustee shall have received from outside counsel for Long Island Bancorp, Inc. an opinion satisfactory in form and substance to the Trustee, bearing even date herewith, to the effect that: (a) as of the effective date of the ESOP, the ESOP is qualified under sections 401(a) of the Code and constitutes an "employee stock ownership plan" (within the meaning of section 4975(e)(7) of the Code and section 407(d)(6) of ERISA), provided that in rendering such opinion such counsel may rely on certain representations of the Bank; (b) the Common stock to be purchased by the Trustee on behalf of the Trust constitutes "employer securities" (within the meaning of section 409(1) of the Code and section 407(d)(1) Of ERISA) and "qualifying employer securities" (within the meaning of section 407(d)(5) of of ERISA); (c) the Loan constitutes an "exempt loan" (within the meaning of section 54.4975-7(b)(1)(iii) of the Department of Treasury regulations), provided that in rendering such opinion such counsel may rely on certain representations of the Bank and provided further, that such counsel may assume the Trustee has determined that (I) the interest rate payable on the Loan is not in excess of a reasonable rate of interest (within the meaning of section 54.4975-7(b)(7) of the Department of Treasury regulations) and (ii) the other terms of the Loan, taken as a whole, are at least as favorable to the Trust as could reasonably be expected to result from an arm's length negotiation between independent parties; and 9 - 9 - (d) no portion of the amount paid by the Trust in connection with its acquisition of Common Stock constitutes a commission (within the meaning of section 408(e) of ERISA). 4.2. The Borrower shall have received from counsel for Long Island Bancorp, Inc. a favorable opinion satisfactory in form and substance to the Trustee, bearing even date herewith to the effect that: (a) Long Island Bancorp, Inc. has been duly incorporated and is validly existing in good standing under the laws Of the State of Delaware; Long Island Bancorp, Inc. has the corporate power and authority to own and lease its property and to conduct its business as it is currently being conducted; Long Island Bancorp, Inc. is duly qualified as a foreign corporation to transact business and is in good standing in the State of New York; Long Island Bancorp, Inc. has the corporate power and authority to issue and deliver the Common Stock to the ESOP; and the issuance and delivery of the Common Stock to the ESOP has been duly authorized by all requisite corporate action; (b) the Bank, as of the date hereof, is duly organized and in existence under the laws of the United States of America as a federally chartered savings bank of stock form, with its charter in full force and effect; the Office of Thrift Supervision has not appointed a receiver or conservator for the Bank; the Bank has the corporate power and authority to own and lease its property and to conduct its business as it is currently being conducted; (c) each of Long island Bancorp, Inc. and the Bank has the corporate power and authority to enter into and perform each of the ESOP Documents to which it is a party and to carry out the transactions contemplated by the ESOP Documents, including the establishment of the ESOP; (d) the execution and delivery by each of Long Island Bancorp, Inc. and the Bank of the ESOP Documents to which it is a party, and the performance by it of its obligations under the ESOP Documents, have been duly authorized by all requisite corporate action on its part; (e) each of Long Island Bancorp, Inc. and the Bank has duly executed and delivered each of the ESOP Documents to which it is a party; and (f) each of the ESOP Documents to which Long Island Bancorp, Inc. or the Bank is a party constitutes the legal, valid and binding obligation of Long Island Bancorp, Inc. or the Bank, as the case may be, enforceable against Long Island Bancorp, Inc. or the Bank, as the 10 - 10 - case may be, in accordance with its respective terms. The opinions of counsel for Long Island Bancorp, Inc. described above as to the enforceability in accordance with their respective terms of any of the ESOP Documents may be subject to the exceptions that (i) such enforceability may be limited by (A) bankruptcy, insolvency reorganization, moratorium or other similar laws of general applicability affecting the enforcement of creditors' rights generally and (B) general principles of equity regardless of whether considered in a proceeding in equity or at law and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 4.3. The Trustee shall have received from a financial advisor selected by it an opinion satisfactory in form and substance to the Trustee, bearing even date herewith, to the effect that the price to be paid for the Common Stock to be purchased by the Trustee on behalf of the Trust using the proceeds of the Loan is not in excess of "adequate consideration" (within the meaning of section 3(18) of ERISA). The Trustee shall use its best efforts to obtain such an opinion. 4.4. The Trustee shall have determined that the interest rate payable on the Loan is not in excess of a reasonable rate Of interest (within the meaning of section 54.4975-7(b)(7) of the Department of Treasury regulations). 4.5. The Bank shall have provided the Trustee with copies of all legal documents and proceedings the Trustee has requested in connection with the execution and delivery of this Agreement and the Note. 4.6 The Trustee shall have received payment of the expenses incurred by it to the date of the closing of the Loan including, but not limited to, its reasonable legal fees and fees incurred in connection with the valuation of the Common Stock and the determination of the fairness of the terms of the Loan. Section 5. Covenants of the Bank. The Bank agrees that for as long as the Trust holds any shares of Common Stock purchased with the proceeds of the Loan (unless the Trustee shall otherwise consent in writing): 5.1. ESOP Matters. The Bank (i) will cause (A) the ESOP to be operated and administered as a qualified plan 11 - 11 - under section 401(a) of the Code and as an "employee stock ownership plan" under section 4975(e)(7) of the Code and (B) the Trust to be exempt from federal income taxation under section 501(a) of the Code and, in connection with each of the foregoing, will comply and will cause the ESOP and the Trust to comply with any changes in sections 401(a), 501(a) or 4975(e)(7) or any other applicable sections of the Code or ERISA, (ii) will make all necessary filings with respect to the ESOP and the Trust, including, without limitation, the filings required to be made with the Internal Revenue Service and the Department of Labor, (iii) will file on a timely basis with the Internal Revenue Service for a determination letter that (A) the ESOP, as of the date of such letter, meets the requirements for qualification under section 401(a) of the Code and constitutes an "employee stock ownership plan" within the meaning of section 4975(e)(7) of the Code and (B) the Trust is exempt from federal income taxation under section 501(a) of the Code and, in the event that the Internal Revenue Service imposes conditions for the issuance of such a letter, will comply with all such conditions, including, without limitation amending or otherwise modifying the ESOP and (iv) will not take or fail to take any action that, in either case, would adversely affect the status of (A) the ESOP as a qualified plan under section 401(a) of the Code or as an "employee stock ownership plan" within the meaning of section 4975(e)(7) of the Code, (B) the Trust as tax-exempt under section 501(a) of the Code or (C) the Loan as an "exempt loan" within the meaning of section 54.4975-7(b)(1)(iii) of the Department of Treasury regulations. 5.2. ESOP Compliance. The Bank shall furnish to the Trustee (i) copies of each annual report or return relating to the ESOP, as well as all schedules and attachments thereto, within thirty days after the filing thereof and (ii) such additional information concerning the ESOP as the Trustee may reasonably request. Section 6. Covenant of Long Island Bancorp, Inc. So long as any amount remains unpaid on the Note, to the extent the Bank has not made contributions to the Trust in amounts and at times sufficient to enable the Trustee to make payments required under the terms of this Agreement and the Note and such payments have not otherwise been made, Long Island Bancorp, Inc. shall cause the Bank to make such contributions. Section 7. Remedies Upon Default. If (i) at any time during the term of the Loan the ESOP is terminated or (ii) the Trust shall default in the 12 - 12 - payment of the principal amount of the Loan when due as provided in Section 1.3 hereof and in the Note and such default shall have continued for two business days and shall be continuing, then, in either case, the entire amount of any unpaid principal and interest in respect of the Loan shall immediately become due and payable. If such unpaid amounts are not immediately paid by the Trust to Long island Bancorp, Inc., then Long island Bancorp, Inc. may exercise any or all of the rights and remedies available to it under any applicable law; provided, however, that the number of shares of Common Stock held in the Trust as to which Long Island Bancorp, Inc. may exercise any such rights and remedies may not exceed the number of shares held in the ESOP suspense account (as described in Paragraph 2.2(d) hereof) which is then equal in current value to the amount of the default under the Note. Remedies may only be exercised to the extent consistent with the restrictions on remedies set forth in section 408(b)(3) Of ERISA and the regulations thereunder and section 4975(d)(3) of the Code and the regulations thereunder. Section 8. Miscellaneous. 8.1 Expenses. Except as otherwise provided in this Agreement, Long Island Bancorp, Inc. shall pay all of its own expenses incurred in connection with this Agreement. To the extent not paid from the Trust, the Bank shall pay directly, or make contributions to the Trust in an amount sufficient to enable the Trust to pay, all of the expenses of the Trust in connection with the negotiation, authorization, preparation, execution, delivery and performance of this Agreement, including, without limitation, the fees and expenses reasonably incurred by the agents, representatives, counsel, financial advisors and consultants of the Trust and the Trustee. 8.2. Representations and Warranties. The representations, warranties, covenants and agreements made in this Agreement shall survive the date hereof and the date amounts are remitted to the Trust in accordance with Section 1.2 hereof. 8.3. Trust Agreement. Unless the context otherwise requires, the terms and provisions of the Trust Agreement relating to the nature of the responsibilities of the Trustee are incorporated herein by reference and made applicable to this Agreement. To the extent that any of the provisions of this Agreement are inconsistent with the provisions of the Trust Agreement, the provisions of the Trust Agreement shall control. 13 - 13 - 8.4. Applicable Law. This Agreement and the Note shall be governed by and construed in accordance with the laws of the State of New York (without regard to conflicts of law), to the extent not preempted by applicable Federal law. 8.5. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Trust may not assign its rights or obligations hereunder or under the Note without the prior written consent of Long Island Bancorp, Inc. 8.6. Enforceability. In the event that any provision of this Agreement shall be declared unenforceable by a court of competent jurisdiction, the provision shall be stricken herefrom and the remainder of this Agreement shall remain binding on the parties hereto. In the event any provision of this Agreement shall be so declared unenforceable due to its scope or breadth, then the provision shall be narrowed to the scope or breadth permitted by law. 8.7. Recapitalizations, Exchanges, Etc. Affecting Common Stock. All of the provisions of this Agreement shall apply, to the full extent set forth herein with respect to the shares of Common Stock purchased by the Trustee on behalf of the Trust from Long Island Bancorp, Inc. using the proceeds of the Loan, to any and all shares of capital stock of Long Island Bancorp, Inc. or any successor or assign of Long Island Bancorp, Inc. (whether by merger, consolidation, sale of assets or otherwise) that may be issued in respect of, in exchange for, or in substitution of, such shares of Common Stock, by reason of any stock dividend, split, reverse split, combination, recapitalization, reclassification, merger, consolidation or otherwise. 8.8. The Code and ERISA Compliance. It is hereby intended by the parties that the transactions contemplated by this Agreement will comply with sections 409(.1) and 4975 of the Code and section 406 of ERISA. The parties hereto hereby agree that the provisions of this Agreement will be interpreted so as to ensure such compliance. 8.9. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 8.10. Amendments. This Agreement may not be modified, amended, supplemented or waived with respect to the obligations of a party hereto, except by an instrument in writing signed by that party. 14 - 14 - 8.11. Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to a party hereto upon any breach or default under this Agreement of the other party hereto shall impair any such right, power or remedy of the non-breaching or non-defaulting party nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach of default be deemed a waiver of any other breach or default theretofore or thereafter occurring. 8.12. Descriptive Headings. The descriptive headings of the several sections and paragraphs of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 8.13. Notices. All communications hereunder shall be in writing and effective only upon receipt and, if sent to Long Island Bancorp, Inc., shall be mailed, telecopied, delivered or telegraphed and confirmed to it at 201 Old Country Road, Melville, New York 11747; Attention: Mark Fuster, Executive Vice President & Treasurer, and Thomas E. Lavery, First Vice President-Legal, or if sent to the Trust, shall be mailed, telecopied, delivered or telegraphed and confirmed to it at 114 West 47th street, New York, New York 10036-1532; Attention: Schuyler V. Grant, Senior Vice President. 8.14. Further Assurances. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use all reasonable efforts to take or cause to be taken all action and to do or cause to be done all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement. 8.15. Certain Limitations. Except with respect to Section 3 hereof, U.S. Trust is executing and delivering this Agreement and the Note solely as trustee under the Trust Agreement and not in its individual capacity and in no case whatsoever shall U.S. Trust (or any person or entity acting as successor trustee under the Trustee Agreement) be personally liable for the obligations of the Trust hereunder or under the Note. 8.16. Rescission. The parties hereto agree that the purpose of this Agreement is to provide for the making of an "exempt loan" (within the meaning of section 54.4975 7(b)(1)(iii) of the Department of Treasury regulations) to the Trust to enable the Trustee to purchase shares of Common Stock on behalf of the Trust. If: 15 - 15 - (a) the Bank shall notify the Trustee that, in the Bank's determination, it is not possible practicable or desirable to revise the ESOP or the Trust Agreement in a manner that will enable the Bank to obtain a favorable determination letter from the Internal Revenue Service that the ESOP, as of the date of such letter, meets the requirements for qualification under section 401(a) of the Code and constitutes an "employee stock ownership plan" within the meaning of section 4975(e)(7) of the Code; or (b) the purchase of shares of Common Stock with the proceeds of the Loan is rescinded pursuant to any governmental requirement, prohibition or decree of any court order, writ or judgment, then this Agreement shall be considered null and void abinitio and, if the Loan shall have been made, the Trustee shall transfer to Long Island Bancorp, Inc. all shares of Common Stock purchased with the proceeds of the Loan and the Trust shall have no further obligations under this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of this 14th day of April, 1994. LONG ISLAND BANCORP, INC. By /S/ Mark Fuster Mark Fuster Treasurer THE LONG ISLAND SAVINGS BANK, FSB By /S/ Mark Fuster Mark Fuster EVP & Treasurer UNITED STATES TRUST COMPANY OF NEW YORK, solely as trustee under the trust agreement referred to above By /S/ Schuyler V. Grant Schuyler V. Grant Senior Vice President 16 - 16 - UNITED STATES TRUST COMPANY OF NEW YORK, in its individual capacity By: /S/ Schuyler V. Grant Schuyler V. Grant Senior Vice President EX-10.4 6 AMENDMENT NO. 1 TO LOAN AGREEMENT 1 Amendment No. 1 to Loan Agreement among Long Island Bancorp, Inc., The Long Island Savings Bank, FSB and United States Trust Company of New York, solely as trustee of The LISB Employee Stock Ownership Plan WHEREAS, the parties hereto have entered into a loan agreement, dated as of April 14, 1994 (the "Loan Agreement"), pursuant to which Long Island Bancorp, Inc. loaned funds to the trust created under The LISB Employee Stock Ownership Plan (the "ESOP") for the purpose of purchasing shares of the outstanding common stock, par value, $0.01 per share of Long Island Bancorp, Inc.; WHEREAS, pursuant to Section 8.10 of the Loan Agreement, the Loan Agreement may be amended by a written instrument; and NOW, THEREFORE, the parties hereto agree to amend the Loan Agreement, effective as of April 14, 1994, as follows: The first sentence of Section 1.3 shall be deleted in its entirety and replaced with the following: The Loan shall be evidenced by a single promissory note of the Trust (as modified and supplemented and in effect from time to time, the "Note") in substantially the form of Exhibit A attached hereto, dated the date of the delivery of the Note to Long Island Bancorp, Inc., payable to Long Island Bancorp, Inc. in installments, on March 31, June 30, September 30 and December 31, during the period from, and including, the date of the Note to, but excluding, the fifteenth anniversary of such date, subject to any prepayment made pursuant to Section 1.6 hereof. The amount of each such installment shall be based upon an estimate of the total (dividing such total into substantially equal parts of a number equal to the number of installments payable for the applicable calendar year) of the contribution described in Section 3.2 of the ESOP, as in effect as of the date hereof, for the Plan Year (as defined in Section 1 of the ESOP) during which such installment is payable, without regard to any reduction provided under 2 - 2 - Section 3.5 of the ESOP for contributions made pursuant to Section 3.3 of the ESOP but taking into account the reduction provided under Section 3.5 of the ESOP for forfeitures under Section 8.5 of the ESOP; provided, however, that the total amount of any installments payable in any calendar year shall be at least equal to the amount of such contribution. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of this 28 day of June, 1994. LONG ISLAND BANCORP, INC. By /S/ Mark Fuster Mark Fuster Treasurer THE LONG ISLAND SAVINGS BANK, FSB By /S/ Mark Fuster Mark Fuster EVP & Treasurer UNITED STATES TRUST COMPANY OF NEW YORK, solely as trustee under the trust agreement referred to above By /S/ Schuyler V. Grant Schuyler V. Grant Senior Vice President UNITED STATES TRUST COMPANY OF NEW YORK, in its individual capacity By /S/ Schuyler V. Grant Schuyler V. Grant Senior Vice President 3 EXHIBIT A PROMISSORY NOTE $23,784,300.00 April 14, 1994 --------------- FOR VALUE RECEIVED, the undersigned (the "Borrower") and its successors in trust, not individually but solely as trustee under the agreement of trust between such trustee and The Long Island Savings Bank, FSB (the "Bank"), dated as of March 31, 1994, as amended from time to time, hereby promises to pay to Long Island Bancorp, Inc. at the principal office of Long Island Bancorp, Inc. in Melville, New York, the unpaid principal amount of the loan made by Long Island Bancorp, Inc. to the Borrower under the loan agreement referred to below (the "Loan Agreement"), in lawful money of the United States of America and in immediately available funds, on such dates as required by Section 1.3 of the Loan Agreement, and to pay interest on the unpaid principal amount from time to time outstanding on such loan, at such office, in like money and funds, for the period commencing on the date such loan is made until such loan is paid in full, at the rate and on the dates as provided in Section 1.7 of the Loan Agreement. This Note is the Note referred to in, and is subject to the terms and conditions of, the loan agreement (as modified and supplemented and in effect from time to time) dated as of April 14, 1994 among Long island Bancorp, Inc., The Long Island Savings Bank, FSB, the Borrower and United States Trust Company of New York, in its individual capacity, and evidences the loan made by Long Island Bancorp, Inc. to the Borrower thereunder. The Loan Agreement and this Note are each binding on the parties thereto and hereto. UNITED STATES TRUST COMPANY OF NEW YORK, solely as trustee under the Trust agreement referred to above By /S/ EX-10.6 7 LIB DIRECTORS RETIREMENT PLAN 1 LONG ISLAND BANCORP, INC. - - -------------------------------------------------------------------------------- Non-Employee Directors Retirement Benefit Plan - - -------------------------------------------------------------------------------- October 21, 1994 As amended June 24, 1997 2 LONG ISLAND BANCORP, INC. - - -------------------------------------------------------------------------------- Non-Employee Directors Retirement Benefit Plan - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- Topic Page Purpose..........................................1 Definitions .....................................1 Retirement Benefits .............................3 Plan Administration .............................4 General Provisions ..............................5 3 -1- LONG ISLAND BANCORP, INC. Non-Employee Directors Retirement Benefit Plan * * * * * 1. Purpose. The purpose of the Non-Employee Directors Retirement Benefit Plan (the "Plan") is to strengthen the ability of Long Island Bancorp, Inc. (the "Company") to attract and retain the services of experienced and knowledgeable non-employee directors through the provision of reasonable and competitive benefits upon the retirement of such directors from the Company's Board of Directors (the "Board"). 2. Definitions. For purposes of the Plan, the following terms shall have the meanings set forth below: 2.1 "Bank" means The Long Island Savings Bank, FSB. 2.2 "Beneficiary" means the person or persons designated by the Eligible Director to receive benefits under this Plan in the event of the Eligible Director's death. 2.3 "Board" means the Board of Directors of the Company, as constituted from time to time. 2.4 "Change of Control" means (a) a change in control of the Bank or the Company of a nature that would be required to be reported in response to Item 1 of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Exchange Act, other than any change in control directly related to or in connection with the conversion of the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank; (b) a change in control of the Bank or the Company within the meaning of 12 U.S.C. ss. 1817(i), the Change in Bank Control Act, and 12 C.F.R. ss. 574.4 of the Acquisition of Control of Savings Association regulations of the office of Control of Savings Association regulations of the Office of Thrift Supervision, other than any change in control directly related to or in connection with the conversion of the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank; (c) individuals who constitute the Board as of the effective date of the Plan (the "Incumbent. Board") cease for any reason, including in connection with the conversion of the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank, to constitute at least a majority thereof, provided that any person becoming a director subsequent to the effective date of the Plan whose election was approved by a vote of at least three-quarters of the directors then comprising the Incumbent Board, or whose nomination for election by the Company's shareholders, as the case may be, was approved by the Company's nominating committee then serving under the Board, shall be, for purposes of this clause (c), considered as though he or she was a member of the Incumbent Board (but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either 4 -2- an actual or threatened election contest (as such terms are used in Rule 14a-l1I of Regulation 14A promulgated under the Exchange Act) or other actual threatened solicitation of proxies or consents); (d) approval by the shareholders of the Bank or the Company, as the case may be, of a reorganization, merger or consolidation, or the consummation of any such reorganization, merger or consolidation, other than, in any case (i) any such transaction occurring in connection with or directly related to the conversion of the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank, or (ii) a reorganization, merger or consolidation with respect to which all or substantially all of the individuals and entities who were the beneficial owners, immediately prior to such reorganization, merger or consolidation, of the Voting Interest in the Company beneficially own, directly or indirectly, immediately after such reorganization, merger or consolidation more than eighty percent (80%) of the Voting Interest of the corporation or other entity resulting from such reorganization, merger or consolidation in substantially the same proportions as their respective ownership, immediately prior to such reorganization, merger or consolidation, of the Voting Interest in the Company; (e) approval by the shareholders of the Bank or the Company, as the case may be, of (i) a complete liquidation or dissolution of the Bank or the Company, or (ii) the sale or other disposition of all or substantially all of the assets of the Company, or the occurrence of any such liquidation, dissolution, sale or other disposition, other than, in any case, to a Subsidiary, directly or indirectly, of the Company, or any Affiliate, or in connection with or directly related to any conversion of the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank; and/or (f) the solicitation of proxies from shareholders of the Company, by someone other than the current management of the Company and without the approval of the Board, seeking shareholder approval of a plan of reorganization, merger or consolidation of the Bank and/or the Company with one or more corporations as a result of which the shareholders' interests in the Bank and/or the Company are actually exchanged for or converted into securities not issued by the Bank and/or the Company. 2.5 "Company" means Long Island Bancorp, Inc., a Delaware corporation, or any successor corporation. 2.6 "Credited Service" means the number of years (rounded up to the next whole number) which represents an Eligible Director's years of service as a director of the Bank or the Company (including partial years of service and service as a trustee or director of the Bank or the Company prior to the implementation of this Plan). 2.7 "Eligible Director" means any non-employee Director of the Company (i) who is not and has never been an employee of the Company or the Bank; (ii) who is or becomes a member of the Board and whose subsequent retirement from the Board is in accordance with the requirements and provisions of this Plan; and (iii) who has not accrued and is not eligible to receive retirement benefits under any other qualified or non-qualified pension ' or retirement benefit plan of the Bank or the Company; provided, that anything in this paragraph to the contrary notwithstanding, the term "Eligible Director" shall include any person serving as Director Emeritus of the Company or the Bank as of the Effective Date of the Plan. Upon a Change of Control, any director of the Company with five (5) or more years of Board service shall be deemed an Eligible 5 -3- Director. 2.8 "Exchange Act" means the Securities Exchange Act of 1934, as in effect and as amended from time to time, or any successor statute thereto, together with any rules, regulations and interpretations promulgated thereunder or with respect thereto, as the same may be in effect from time to time. 2.9 "Meeting Fee" means the fee paid to an Eligible Director for attendance at any regular meeting of the Board in effect at the time of such Eligible Director's retirement. 2.10 "Payment Date" means the date of the Company's monthly board of directors meetings, or such other date in the month as may be determined by the Company. 2.11 "Plan" means the Long Island Bancorp, Inc. Non-Employee Directors Retirement Benefit Plan, as set forth herein. 2.12 "Retainer" means the annual retainer fee paid to each non-employee Director in effect at the time of an Eligible Director's retirement. 2.13 "Retirement" means the voluntary or involuntary termination of an Eligible Director from active service on the Board on or after the attainment of age 65, except in the event of a Change of Control in which case any termination of an Eligible Director shall be deemed a Retirement. 3. Retirement Benefits. 3.1 The full retirement benefit (the "full benefit") payable under the Plan shall be equal to the sum of (a) the annual retainer in effect on the date of the Eligible Director's retirement from the Board and (b) the product of the Board meeting fee in effect on that date multiplied by the number of regular Board meetings then scheduled within a calendar year. Such retirement benefit shall be payable on each Payment Date beginning with the Payment Date immediately following the Eligible Director's retirement and ending with the 120th payment. 3.2 No Eligible Director shall receive the full benefit under this Plan until such Eligible Director completes fifteen years of Credited Service on the Board. In the case of any breaks in service, all periods of service shall be aggregated to determine the length of Credited Service. Upon the Eligible Director's retirement after completion of the required period of Credited Service, the Eligible Director's full benefit shall be deemed to have been earned and is thereafter payable in accordance with Paragraph 3.1 and the other provisions of the Plan. 3.3 In the event that an Eligible Director retires from the Board with a minimum of five but less than fifteen years of Credited Service, such Eligible Director shall receive a reduced annual retirement benefit (the "reduced benefit") equal to the product of (a) the full annual 6 -4- retirement benefit as determined in Paragraph 3.1 and (b) a fraction, the numerator of which is the Eligible Director's number of years of Credited Service and the denominator of which is fifteen. Such reduced benefit shall be paid in the manner described in Paragraph 3.1 and in accordance with the other provisions of the Plan. 3.4 In the event of the death of the Eligible Director after payments have commenced under this Plan, any remaining unpaid retirement benefit payments shall be paid to the beneficiary or beneficiaries most recently designated by the Eligible Director prior to his or her death, or in the absence of such designation, to the Eligible Director's estate. The remaining payments shall be made to the designated beneficiary in the same amount(s) and at the same time(s) that such payments would have been made to the Eligible Director. In the event of the death of an Eligible Director while still serving on the Board, such Eligible Director will be deemed to have retired from Board service for purposes of this Plan and any payment(s) that would have inured to the benefit of such Eligible Director under Paragraphs 3.1 and 3.2 and the other provisions of the Plan, will be paid to such Eligible Director's beneficiaries or estate as set forth above. 3.5 In the event that an Eligible Director who is receiving retirement benefits under the Plan returns to serve as an active Director, payments under the Plan shall be suspended until the Payment Date immediately following the termination of such additional Board service. Upon the termination of such additional Board service, the retirement benefit shall be adjusted (if necessary) to reflect the Board retainer and meeting fees in effect at the time of such termination, and the duration of the retirement benefit shall be extended (if necessary) to reflect the period of suspension. In the event that an Eligible Director becomes an employee of the Bank or the Company, retirement benefit payments hereunder shall cease and the Eligible Director shall have no further rights to such benefits under the Plan. 4. Plan Administration. 4.1 The Plan shall be administered by the Board of Directors of the Company. The Board shall have full power and authority to interpret, construe and administer the Plan and to review each director's eligibility for benefits under the Plan, and the Board's interpretations and constructions of the Plan and actions thereunder shall be binding and conclusive on all persons and for all purposes. 4.2 The Board shall establish and maintain Plan records and may arrange for the engagement of consultants or legal counsel, and make use of such agents and other Company personnel, as it requires or deems advisable for purposes of the Plan. The Board may rely upon the written opinion of such consultants and counsel and may delegate to any agent, member of the Board or employee of the Company, its authority to perform any act hereunder, including without limitation, those matters involving the exercise of discretion, provided that such delegation shall be subject to revocation at any time. 7 -5- 5. General Provisions. 5.1 Amendment and Termination. The Plan may be amended, suspended or terminated, in whole or in part, by the Board, but no such action shall retroactively impair or otherwise adversely affect the rights of any person to receive benefits under the Plan which have accrued prior to the date of such action. Upon a Change of Control, this plan may not be amended or terminated. 5.2 Assignment. No right to any amount payable at any time under the Plan may be assigned, transferred, pledged, or encumbered, either voluntarily or by operation of law, except as provided expressly herein. This Plan shall be binding upon and inure to the benefit of the Company and its successors and assigns, and the Participant, his or her Beneficiary and estate. 5.3 Beneficiary Designation. Each Eligible Director may designate a beneficiary or beneficiaries to receive any payments which under the terms of the Plan may be or may become payable on or after the Eligible Director's death. At any time, and from time to time, such designation may be changed or canceled by the Eligible Director without the consent of any such beneficiary. Any such designation, change or cancellation must be on a form provided for that purpose by the Company and shall not be effective until actually received by the Company. If no beneficiary has been properly designated by a deceased Eligible Director, the beneficiary shall be the Eligible Director's estate. 5.4 Consulting Arrangements. An Eligible Director who enters into a consulting arrangement with the Bank or the Company subsequent to his or her retirement from the Board, and who would otherwise be eligible to receive benefits under this Plan, shall continue to be eligible to receive such benefits provided, however, that such consulting arrangement does not constitute employment by the Bank or the Company. 5.5 Governing Law. The Plan and all actions taken thereunder shall be governed by and construed in accordance within the laws of the State of New York, without reference to the principles of conflict of laws thereof. Any titles and headings herein are for reference purposes only, and shall in no way limit, define or otherwise affect the meaning, construction or interpretation of any provisions of the Plan. 5.6 Source of Payments. All payments provided for under the Plan shall be paid from the general assets of the Company. Nothing contained in this Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind between the Company and any Eligible Director or Beneficiary. To the extent that any Eligible Director or Beneficiary acquires a right to receive payment(s) from the Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company. 5.7 Withholding. The Company may withhold from any benefits payable under this Plan all Federal, state, city or other taxes as shall be required pursuant to any applicable law or 8 -6- Governmental regulation or ruling. 5.8 Effective Date. The Plan shall be effective upon the date of its adoption by the Board, which date shall be recorded in the Board's minutes. EX-10.12 8 AFS INCENTIVE PLAN 1 ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION ANNUAL INCENTIVE PLAN FOR SELECT EXECUTIVES (ADOPTED BY BOARD OF DIRECTORS 12-21-88) (AMENDED 7-18-90) 1. Purpose. The purpose of this Plan is to provide incentive to key executives who contribute to the successful financial performance of the Association by making them participants in that success. 2. Definitions. The following terms shall have the meanings set forth below when used in this Plan: (a) "Plan" shall mean the Annual Incentive Plan for Select Executives of Astoria Federal Savings and Loan Association. (b) "Committee" shall mean the Compensation Committee of the Board of Directors. (c) "Association" shall mean Astoria Federal Savings and Loan Association. (d) "Performance Target(s)" shall mean financial objectives for the Association developed at the beginning of each calendar year by management and approved by the Committee. The Performance Target(s) shall stipulate the planned levels of Association performance, expressed in terms of specific performance measures, such as return on assets, operating earnings, return on net worth, etc., or other appropriate financial objectives that shall be measured for incentive award purposes during each calendar year. 3. Administration. The Committee, appointed by the Board of Directors, shall have full power and authority to interpret and administer the Plan and any rules and regulations relating to it. 4. Eligibility and Selection. Eligibility for incentive payments under the Plan shall be limited to select executives of the Association approved by the Committee at the beginning of a calendar year from among those who, in the opinion of the Committee, are in a position to materially improve the financial performance of the Association. Any employee -1- 2 who is a participant in one year may be excluded from participation in any other year. The Committee may, in its discretion, also make an award to any other employee who has made an unusual contribution outside the ordinary course of his/her duties. 5. Determination of Annual Incentive Target Awards. At the beginning of the calendar year each participant shall be assigned a Target Award, expressed as a percentage of base salary, based on his/her duties and responsibilities, subject to the approval of the Committee. The Target Award represents the amount which shall be paid when: (i) the Association's actual financial results meet the Performance Target(s) set for a given calendar year; and (ii) the participant's individual performance meets expectation. 6. Annual Incentive Pool Funding. The size of the Annual Incentive Pool shall be based on the Association's actual financial performance for the year compared to the Performance Target(s). Association performance shall be measured in accordance with generally accepted accounting principles for any calendar year excluding, however, such unusual terms of income or loss which, in the discretion of the Committee, shall not be included in the current year's results for such purposes. No Incentive Pool shall be created if the Association is not in full compliance with regulatory capital requirements or higher standards as approved by the Compensation Committee. At the beginning of the calendar year the Committee shall approve a performance scale which shall specify the relationship between actual Association performance, the Performance Target(s) and size of the Annual Incentive Pool which shall be available. The Performance Target(s) and the performance scale shall be communicated to Plan participants as soon as practical after the Committee's approval is secured. In general, when Performance Target(s) are met, the size of the Annual Incentive Pool available shall be equal to the sum of the Target Awards -2- 3 of all participants in the Plan. In a year when actual results are less than the Performance Target(s), the Annual Incentive Pool shall be correspondingly decreased as specified in the performance scale approved for that year. In a year when actual results exceed Performance Target(s), the Annual Incentive Pool will be increased at the Board's discretion up to a maximum level specified in the pre-determined performance scale approved for that year. The performance scale shall also specify a minimal level of financial performance below which the Committee may elect not to pay Annual Incentive Awards, but may make special recognition awards to any participant whose performance warrants. 7. Annual Incentive Award Determination. The Committee shall determine participant's Annual Incentive Awards as soon as practicable after the size of the Annual Incentive Pool is determined. The size of the actual Annual Incentive Awards shall depend on the level of performance which is achieved for the year. The Association performance portion of each participant's Awards shall be paid to the degree that the Performance Target(s) are met. The remaining portion of the Award shall be paid based on the achievement of individual goals. 8. Annual Incentive Award Payments. Payment of Awards shall be made in cash. Payment of the Annual Incentive Award to each recipient shall typically be made within ninety (90) days following the end of the calendar year for which the Award was made. The Committee may, in its discretion, award all or any part of the amount in respect of a calendar year which otherwise would have been awarded to a participant in the Plan but for the fact that his employment with the Association terminated prior to the end of such calendar year by reason of retirement, total and permanent disability, death, resignation, or for any other reason other than dismissal for cause. In case of death, all amounts awarded to an executive not previously paid shall be payable in one sum to the beneficiary whom the executive -3- 4 designated under the Association's Life Insurance Plan. If an executive fails effectively to designate a beneficiary, then his estate shall be deemed to be the beneficiary. Notwithstanding the foregoing, an executive terminated for cause at any time shall forfeit all amounts allocated to him and not previously paid. 9. Withholding of Taxes. There shall be deducted from each Award the amount of any tax required by any governmental authority to be withheld. 10. Expenses of the Plan. All expenses incurred in the administration of the Plan shall be borne by the Association and not charged against the Annual Incentive Pool. 11. Amendments. The Board of Directors shall have the power to amend the Plan or to suspend or terminate the Plan in whole or in part. 12. Effective Date. The Plan shall become effective for the calendar year beginning January 1, 1989. 13. Miscellaneous Provisions. In administering the Plan neither the Committee, the Board of Directors of the Association, any member thereof, the Association, nor any officers or employees thereof, shall be liable for any acts of omission or commission, except for his or its own individual, willful and intentional malfeasance or misfeasance. The Association, its officers and directors and any member of the Committee shall be entitled to rely conclusively on all valuations, certifications, opinions and reports which shall be furnished by any counsel, public accountant, or other expert who shall be employed or engaged by the Association or the Committee. No benefit which shall be payable under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge. The Plan shall not be deemed to constitute a contract of employment between the Association and any executive; all executives shall remain subject to discharge to the same extent as if the Plan had not been put into effect. This Plan shall be construed and its provisions enforced and administered in accordance with the laws of the State of New York. -4- EX-10.18 9 AFC EMPLOYMENT CONTRACT WITH J. CONEFRY, JR. 1 ASTORIA FINANCIAL CORPORATION EMPLOYMENT AGREEMENT WITH JOHN J. CONEFRY, JR. This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of April 2, 1998 by and between ASTORIA FINANCIAL CORPORATION, a business corporation organized and operating under the laws of the State of Delaware and having an office at One Astoria Federal Plaza, Lake Success, New York 11042-1085 ("Company") and JOHN J. CONEFRY, JR., an individual residing at 5 Butler Place, Garden City, New York 11530 ("Executive"). WITNESSETH: WHEREAS, upon the effective date set forth in section 30 of this Agreement, Long Island Bancorp, Inc. ("Seller") will merge with and into the Company and The Long Island Savings Bank, FSB, a wholly owned subsidiary of the Seller ("Seller Bank"), will merge with and into the Company's wholly owned subsidiary, Astoria Federal Savings and Loan Association ("Association"), all pursuant to or as contemplated by an Agreement and Plan of Merger between the Company and Seller dated April 2, 1998 ("Agreement and Plan of Merger"); and WHEREAS, the Executive has served as Chairman and Chief Executive Officer of the Seller and the Seller Bank and possesses valuable knowledge and experience concerning their respective assets, businesses and operations; and WHEREAS, in the course of his employment with the Seller and the Seller Bank, the Executive was instrumental in conceiving, planning and implementing the strategic expansion of the Seller Bank's businesses both on a regional and nationwide basis; and WHEREAS, the terms of the Executive's employment contracts with the Seller and the Seller Bank give the Executive a financial incentive to terminate his employment with the Seller and the Seller Bank upon the closing of the transactions contemplated by the Agreement and Plan of Merger; and WHEREAS, the Company desires to assure for itself the continued availability of the Executive's services and the ability of the Executive to perform such services with a minimum of personal distraction in the event of a pending or threatened Change of Control (as hereinafter defined); and WHEREAS, the Executive is willing to continue to serve the Company on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions hereinafter set forth, the Company and the Executive hereby agree as follows: Page 1 of 20 2 Section 1. Employment. The Company agrees to employ the Executive, and the Executive hereby agrees to such employment, during the period and upon the terms and conditions set forth in this Agreement. Section 2. Employment Period, Remaining Unexpired Employment Period. (a) The terms and conditions of this Agreement shall be and remain in effect during the period of employment established under this section 2 ("Employment Period"). The Employment Period shall be for an initial term of three years beginning on the Effective Date (as defined in section 30 of this Agreement) and ending on the day before the third anniversary date of the Effective Date, plus such extensions, if any, as are provided by the Board of Directors of the Company ("Board") pursuant to section 2(b). (b) Beginning on the Effective Date (as defined in section 30 of this Agreement), the Employment Period shall automatically be extended for one (1) additional day each day until ninety (90) days after the second anniversary of the Effective Date (as defined in section 30 of this Agreement), unless either the Company or the Executive makes an earlier election not to extend the Agreement further by giving written notice to the other party. The Employment Period shall end automatically and without further act on the part of the Executive or the Company on the earlier of (i) the third anniversary of the earliest date on which any such written notice is given or (ii) ninety (90) days after the fifth anniversary of the Effective Date (as defined in section 30 of this Agreement). For all purposes of this Agreement, the term "Remaining Unexpired Employment Period" as of any date shall mean the period beginning on such date and ending on: (i) if a notice of non-extension has been given in accordance with this section 2(b), the third anniversary of the date on which such notice is given; and (ii) in all other cases, (A) if the date of determination is before ninety (90) days after the second anniversary of the Effective Date (as defined in section 30 of this Agreement), the third anniversary of the date as of which the Remaining Unexpired Employment Period is being determined and (B) if the date of determination is on or after ninety (90) days after the second anniversary of the Effective Date (as defined in section 30 of this Agreement), ninety (90) days after the fifth anniversary of the Effective Date (as defined in section 30 of this Agreement). Upon termination of the Executive's employment with the Company for any reason whatsoever, any daily extensions provided pursuant to this section 2(b), if not therefore discontinued, shall automatically cease. (c) Nothing in this Agreement shall be deemed to prohibit the Company from terminating the Executive's employment at any time during the Employment Period with or without notice for any reason; provided, however, that the relative rights and obligations of the Company and the Executive in the event of any such termination shall be determined under this Agreement. Page 2 of 20 3 Section 3. Duties. The Executive shall serve as a Vice Chairman of the Company and the Chairman of the Litigation Advisory Committee, having such power, authority and responsibility and performing such duties as are prescribed by or under the By-Laws of the Company and as are customarily associated with such positions. The Executive's functional responsibilities shall include, but may not be limited to, assisting the Company in the conversion of the Seller Bank's business to that of the Association including, but not limited to, assisting in the conversion of the Seller Bank's data processing system to the Association's data processing system; assisting in the conversion of the Seller Bank's branch offices to branch offices of the Association; assisting in the integration of the Seller Bank's employees with those of the Association; preserving the Seller Bank's franchise by promoting the Association and its products and services in communities previously served by the Seller Bank; promoting the recognition and acceptance of the Association as the Seller Bank's successor among the Seller Bank's customers; advising the Association with respect to the management of the loan and investment portfolios and the development and expansion of the Seller Bank's mortgage origination enterprise for the benefit of the Company and assisting the Company in identifying, evaluating and implementing other business expansion strategies and other strategic initiatives. The Executive shall devote his full business time and attention (other than during weekends, holidays, approved vacation periods, and periods of illness or approved leaves of absence) to the business and affairs of the Company and shall use his best efforts to advance the interests of the Company. The Executive shall report directly to the chief executive officer of the Company. Section 4. Cash Compensation. (a) In consideration for the services to be rendered by the Executive during the Employment Period, the Company shall pay to him a salary at an initial annual rate of SEVEN HUNDRED THOUSAND DOLLARS ($700,000), payable in approximately equal installments in accordance with the Company's customary payroll practices for senior officers. At least annually during the Employment Period, the Board shall review the Executive's annual rate of salary and may, in its discretion, approve an increase therein; provided, however, that at all times during the Employment Period, the Executive's annual rate of salary shall not be less than SEVEN HUNDRED THOUSAND DOLLARS ($700,000) and shall be at least eighty percent (80%) of the rate of base salary then payable by the Company to its Chief Executive Officer. (b) The Executive shall participate in the Company's annual bonus plan as the same may be in effect from time to time on such terms and conditions as may be prescribed by or pursuant to the provisions of such plan; provided, however, that for each bonus period the Executive shall receive a bonus in an amount not less than eighty percent (80%) of the amount paid as a bonus to the Company's Chief Executive Officer for the corresponding bonus period. The bonus amount shall be pro-rated for the fiscal year of the Company that includes the Effective Date of this Agreement as defined in section 30 and for any short or stub years commencing after 1998. Page 3 of 20 4 (c) In addition to salary, the Executive may receive other cash compensation from the Company for services hereunder at such times, in such amounts and on such terms and conditions as the Board may determine from time to time. (d) In addition to the above, the Executive shall be entitled to receive, on the Effective Date (as defined in section 30 of this Agreement), an option to acquire 25,000 shares of the Company's common stock granted under the Company's 1996 Stock Option Plan for Officers and Employees of Astoria Financial Corporation, with an exercise price per share equal to the closing bid quotation of the Company's common stock on such date and having a ten year option period; provided, however, that during each fiscal year during the Employment Period the Executive shall receive an additional option grant or grants to acquire a number of shares of the common stock of the Company such that the Executive receives, in respect of each fiscal year during the Employment Period, options to acquire a number of shares of the Company's common stock equal to at least 80% of the number of shares which the Chief Executive Officer may acquire under stock options granted to the Chief Executive Officer during any such fiscal year, such options having terms and provisions substantially similar to those contained in the Chief Executive Officer's option grants. All such options shall vest upon the third anniversary of the date of grant and shall thereafter be exercisable; provided, however, that in the event of the termination of the Executive's employment for any reason (other than for cause or due to the Executive's voluntary resignation for reasons other than those specified in Section 9(a) or 11 (b)), all such options shall immediately become 100% vested and exercisable. Such vested and exercisable options shall remain exercisable for one year after any such termination. (e) In addition to the above, the Executive shall be entitled to receive, on the Effective Date (as defined in section 30 of this Agreement), a grant of 10,000 shares of restricted Common Stock of the Company. 5,000 of such shares shall vest on January 10, 1999 and the remaining 5,000 shares shall vest on January 10, 2000. Section 5. Employee Benefit Plans and Programs. During the Employment Period, the Executive shall be treated as an employee of the Company and shall be entitled to participate in and receive benefits under any and all qualified or non-qualified retirement, pension, savings, profit-sharing or stock bonus plans, any and all group life, health (including, but not limited to, hospitalization, medical and major medical), dental, accident and long term disability insurance plans, and any other employee benefit and compensation plans (including, but not limited to, any incentive compensation plans or programs, stock option and appreciation rights plans and restricted stock plans) as may from time to time be maintained by, or cover employees of, the Company, in accordance with the terms and conditions of such employee benefit plans and programs and compensation plans and programs and consistent with the Company's customary practices. Section 6. Indemnification and Insurance. (a) During the Employment Period and for a period of six (6) years Page 4 of 20 5 thereafter,the Company shall cause the Executive to be covered by and named as an insured under any policy or contract of insurance obtained by it to insure its directors and officers against personal liability for acts or omissions in connection with service as an officer or director of the Company or service in other capacities at the request of the Company. The coverage provided to the Executive pursuant to this section 6 shall be of the same scope and on the same terms and conditions as the coverage (if any) provided to other officers or directors of the Company. (b) To the maximum extent permitted under applicable law, during the Employment Period and for a period of six (6) years thereafter, the Company shall indemnify the Executive against, and hold him harmless from any costs, liabilities, losses and exposures to the fullest extent and on the most favorable terms and conditions that similar indemnification is offered to any director or officer of the Company or any subsidiary or affiliate thereof. Section 7. Other Activities. (a) The Executive may serve as a member of the boards of directors of such business, community and charitable organizations disclosed in the attached Schedule 7(a) and other such organizations as he may disclose to and as may be approved by the Board (which approval shall not be unreasonably withheld or delayed); provided, however, that such service shall not materially interfere with the performance of his duties under this Agreement. The Executive may also engage in personal business and investment activities which do not materially interfere with the performance of his duties hereunder; provided, however, that such activities are not prohibited under any code of conduct or investment or securities trading policy established by the Company and generally applicable to all similarly situated executives. (b) The Executive may also serve as an officer or director of the Association on such terms and conditions as the Company and the Association may mutually agree upon, and such service shall not be deemed to materially interfere with the Executive's performance of his duties hereunder or otherwise result in a material breach of this Agreement. If the Executive is discharged or suspended, or is subject to any regulatory prohibition or restriction with respect to participation in the affairs of the Association, he shall (subject to the Company's powers of termination hereunder) continue to perform services for the Company in accordance with this Agreement but shall not directly or indirectly provide services to or participate in the affairs of the Association in a manner inconsistent with the terms of such discharge or suspension or any applicable regulatory order. Section 8. Working Facilities and Expenses. The Executive's principal place of employment shall be at the Company's executive offices at the address first above written, or at such other location within Queens County or Nassau County, New York at which the Company shall maintain its principal executive offices, or at such other location as the Company and the Executive may mutually agree upon. The Company shall provide the Executive at his principal place of employment with a private office, secretarial services and other support services and facilities suitable to his position with the Company and Page 5 of 20 6 necessary or appropriate in connection with the performance of his assigned duties under this Agreement. The Company shall provide to the Executive for his exclusive use an automobile owned or leased by the Company and appropriate to his position, to be used in the performance of his duties hereunder, including commuting to and from his personal residence. The Company shall reimburse the Executive for his ordinary and necessary business expenses, including, without limitation, all expenses associated with his business use of the aforementioned automobile, fees for memberships in such clubs and organizations as the Executive and the Company shall mutually agree are necessary and appropriate for business purposes, and his travel and entertainment expenses incurred in connection with the performance of his duties under this Agreement, in each case upon presentation to the Company of an itemized account of such expenses in such form as the Company may reasonably require. Section 9. Termination of Employment with Severance Benefits. (a) The Executive shall be entitled to the severance benefits described herein in the event that his employment with the Company terminates during the Employment Period under any of the following circumstances: (i) the Executive's voluntary resignation from employment with the Company within ninety (90) days following: (A) the failure of the Board to appoint or re-appoint or elect or re-elect the Executive to the office of Vice Chairman (or a more senior office) of the Company; (B) the failure of the stockholders of the Company to elect or re-elect the Executive to the Board or the failure of the Board (or the nominating committee thereof) to nominate the Executive for such election or re-election if the Executive is a member of the Board on the date of this Agreement or thereafter becomes a member of the Board; (C) the expiration of a thirty (30) day period following the date on which the Executive gives written notice to the Company of its material failure, whether by amendment of the Company's Organization Certificate or By-laws, action of the Board or the Company's stockholders or otherwise, to vest in the Executive the functions, duties, or responsibilities prescribed in section 3 of this Agreement as of the date hereof, unless, during such thirty (30) day period, the Company cures such failure in a manner determined by the Executive, in his sole discretion, to be satisfactory; (D) the expiration of a thirty (30) day period following the date on which the Executive gives written notice to the Company of its material breach of any term, condition or covenant contained in this Agreement Page 6 of 20 7 (including, without limitation, any reduction of the Executive's rate of base salary in effect from time to time and any change in the terms and conditions of any compensation or benefit program in which the Executive participates which, either individually or together with other changes, has a material adverse effect on the aggregate value of his total compensation package), unless, during such thirty (30) day period, the Company cures such failure in a manner determined by the Executive, in his sole discretion, to be satisfactory; or (E) the relocation of the Executive's principal place of employment, without his written consent, to a location outside of Nassau County and Queens County, New York; (ii) the termination of the Executive's employment with the Company for any other reason not described in section 10(a). In such event, the Company shall provide the benefits and pay to the Executive the amounts described in section 9(b). (b) Upon the termination of the Executive's employment with the Company under circumstances described in section 9(a) of this Agreement, the Company shall pay and provide to the Executive (or, in the event of his death, to his estate): (i) his earned but unpaid compensation (including, without limitation, all items which constitute wages under section 190.1 of the New York Labor Law and the payment of which is not otherwise provided for under this section 9(b)) as of the date of the termination of his employment with the Company, such payment to be made at the time and in the manner prescribed by law applicable to the payment of wages but in no event later than thirty (30) days after termination of employment; (ii) the benefits, if any, to which he is entitled as a former employee under the employee benefit plans and programs and compensation plans and programs maintained for the benefit of the Company's officers and employees, as modified, where applicable, by this Agreement and Plan of Merger; (iii) continued group life, health (including without limitation hospitalization, medical and major medical), dental, accident and long term disability insurance benefits, in addition to that provided pursuant to section 9(b)(ii), and after taking into account the coverage provided by any subsequent employer, if and to the extent necessary to provide for the Executive, for the Remaining Unexpired Employment Period, coverage equivalent to the coverage to which he would have been entitled under such plans (as in effect on the date of his termination of employment, or, if his termination of employment occurs after a Page 7 of 20 8 Change of Control, on the date of such Change of Control, whichever benefits are greater), if he had continued working for the Company during the Remaining Unexpired Employment Period at the highest annual rate of compensation achieved during that portion of the Employment Period which is prior to the Executive's termination of employment with the Company; (iv) within thirty (30) days following his termination of employment with the Company, a lump sum payment in an amount equal to the present value of the salary that the Executive would have earned as if he had continued working for the Company during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during that portion of the Employment Period which is prior to the Executive's termination of employment with the Company, where such present value is to be determined using a discount rate equal to the applicable short-term federal rate prescribed under section 1274(d) of the Internal Revenue Code of 1986 ("Code"), compounded using the compounding period corresponding to the Company's regular payroll periods for its officers, such lump sum to be paid in lieu of all other payments of salary provided for under this Agreement in respect of the period following any such termination; (v) within thirty (30) days following his termination of employment with the Company, a lump sum payment in an amount equal to the excess, if any, of: (A) the present value of the aggregate benefits to which he would be entitled under any and all qualified and non-qualified defined benefit pension plans maintained by, or covering employees of, the Company, as if he were 100% vested thereunder and had continued working for the Company during the Remaining Unexpired Employment Period, such benefits to be determined as of the date of termination of employment by adding to the service actually recognized under such plans an additional period equal to the Remaining Unexpired Employment Period and by adding to the compensation recognized under such plans for the most recent year recognized all amounts payable under sections 9(b)(i), (iv), (vii), (viii) and (ix); over (B) the present value of the benefits to which he is actually entitled under such defined benefit pension plans as of the date of his termination; where such present values are to be determined using the mortality tables prescribed under section 415(b)(2)(E)(v) of the Code and a discount rate, compounded monthly, equal to the annualized rate of interest prescribed by the Pension Benefit Guaranty Corporation for the valuation of immediate annuities payable under terminating single-employer defined benefit plans for the month in which the Executive's termination of employment occurs ("Applicable PBGCRate"); Page 8 of 20 9 (vi) within thirty (30) days following his termination of employment with the Company, a lump sum payment in an amount equal to the present value of the additional employer contributions (or if greater in the case of a leveraged employee stock ownership plan or similar arrangement, the additional assets allocable to him through debt service, based on the fair market value of such assets at termination of employment) to which he would have been entitled under any and all qualified and non-qualified defined contribution plans maintained by, or covering employees of, the Company, as if he were 100% vested thereunder and had continued working for the Company during the Remaining Unexpired Employment Period at the highest annual rate of compensation achieved during that portion of the Employment Period which is prior to the Executive's termination of employment with the Company, and making the maximum amount of employee contributions, if any, required under such plan or plans, such present value to be determined on the basis of a discount rate, compounded using the compounding period that corresponds to the frequency with which employer contributions are made to the relevant plan, equal to the Applicable PBGC Rate; (vii) within thirty (30) days following his termination of employment with the Company, a lump sum payment in an amount equal to the present value of the payments that would have been made to the Executive under any cash bonus or long-term or short-term cash incentive compensation plan maintained by, or covering employees of, the Company as if he had continued working for the Company during the Remaining Unexpired Employment Period and had earned the maximum bonus or incentive award in each calendar year that ends during the Remaining Unexpired Employment Period, such payments to be equal to the product of: (A) the maximum percentage rate of annual salary at which an award was ever available to the Executive under such incentive compensation plan; multiplied by (B) the salary that would have been paid to the Executive during each such calendar year at the highest annual rate of salary achieved during that portion of the Employment Period which is prior to the Executive's termination of employment with the Company where such present value is to be determined using a discount rate equal to the applicable short-term federal rate prescribed under section 1274(d) of the Code, compounded annually; (viii) at the election of the Company made within thirty (30) days following his termination of employment with the Company (with the written consent of the Executive in the case of options or appreciation rights resulting from Page 9 of 20 10 the conversion of options granted by Seller pursuant to the Agreement and Plan of Merger), upon the surrender of options or appreciation rights issued to the Executive under any stock option and appreciation rights plan or program maintained by, or covering employees of, the Company, a lump sum payment in an amount equal to the product of: (A) the excess of (I) the fair market value of a share of stock of the same class as the stock subject to the option or appreciation right, determined as of the date of termination of employment, over (II) the exer cise price per share for such option or appreciation right, as specified in or under the relevant plan or program; multiplied by (B) the number of shares with respect to which options or appreciation rights are being surrendered. For purposes of this section 9(b)(viii) and for purposes of determining the Executive's right following his termination of employment with the Company to exercise any options or appreciation rights not surrendered pursuant hereto, the Executive shall be deemed fully vested in all options and appreciation rights under any stock option or appreciation rights plan or program maintained by, or covering employees of, the Company, even if he is not otherwise vested under such plan or program; (ix) at the election of the Company made within thirty (30) days following the Executive's termination of employment with the Company, upon the surrender of any unvested shares awarded to the Executive under any restricted stock plan maintained by, or covering employees of, the Company, a lump sum payment in an amount equal to the product of: (A) the fair market value of a share of stock of the same class of stock granted under such plan, determined as of the date of the Executive's termination of employment; multiplied by (B) the number of shares which are being surrendered. For purposes of this section 9(b)(ix) and for purposes of determining the Executive's right following his termination of employment with the Company to any stock not surrendered pursuant hereto, the Executive shall be deemed fully vested in all shares awarded under any restricted stock plan maintained by, or covering employees of, the Company, even if he is not otherwise vested under such plan. The Company and the Executive hereby stipulate that the damages which may be incurred by the Executive following any such termination of employment are not capable of accurate measurement as of the date first above written and that the payments and benefits contemplated by this section Page 10 of 20 11 9(b) constitute reasonable damages under the circumstances and shall be payable without any requirement of proof of actual damage and without regard to the Executive's efforts, if any, to mitigate damages. The Company and the Executive further agree that the Company may condition the payments and benefits (if any) due under sections 9(b)(iii), (iv), (v), (vi) and (vii) on the receipt of the Executive's resignation from any and all positions from which he has not been terminated and which he holds as an officer, director or committee member with respect to the Company, the Association or any subsidiary or affiliate of either of them; provided, however, that the foregoing shall not preclude the Executive from performing services and receiving compensation and any other benefits under the Astoria Financial Corporation Litigation Committee Consulting Agreement by and between the Executive and the Company dated April 2, 1998. Section 10. Termination without Additional Company Liability. (a) In the event that the Executive's employment with the Company shall terminate during the Employment Period on account of: (i) the discharge of the Executive for "cause," which, for purposes of this Agreement shall mean: (A) the Executive intentionally engages in dishonest conduct in connection with his performance of services for the Company resulting in his conviction of a felony; (B) the Executive is convicted of, or pleads guilty or nolo contendere to, a felony or any crime involving moral turpitude; (C) the Executive willfully fails or refuses to perform his duties under this Agreement and fails to cure such breach within sixty (60) days following written notice thereof from the Company; (D) the Executive breaches his fiduciary duties to the Company for personal profit; or (E) the Executive's willful breach or violation of any law, rule or regulation (other than traffic violations or similar offenses), or final cease and desist order in connection with his performance of services for the Company. (ii) the Executive's voluntary resignation from employment with the Company for reasons other than those specified in section 9(a) or 11 (b); (iii) the Executive's death; (iv) a determination that the Executive is eligible for long-term disability benefits under the Company's long-term disability insurance program or, if there is no such program, under the federal Social Security Act; or (v) the Executive's termination of employment for any reason at or after attainment of mandatory retirement age under the Company's mandatory retirement policy for executive officers in effect as of the date of this Agreement; then the Company shall have no further obligations under this Agreement, other than the payment to the Executive (or, in the event of his death, to his estate) of his earned but unpaid compensation as of the date of the termination of his employment, and the provision of such other benefits, if Page 11 of 20 12 any, to which he is entitled as a former employee under the employee benefit plans and programs and compensation plans and programs maintained by, or covering employees of, the Company. (b) For purposes of section 10(a)(i), no act or failure to act, on the part of the Executive, shall be considered "intentional" or "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the written advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for "cause" within the meaning of section 10(a)(i) unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of three-fourths of the members of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in section 10(a)(i) above, and specifying the particulars thereof in detail. Section 11. Termination Upon or Following a Change Of Control. (a) A Change of Control of the Company ("Change of Control") shall be deemed to have occurred upon the happening of any of the following events: (i) approval by the stockholders of the Company of a transaction that would result in the reorganization, merger or consolidation of the Company with one or more other persons, other than a transaction following which: (A) at least 51 % of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51 % of the outstanding equity ownership interests in the Company; and (B) at least 51 % of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51 % of the securities entitled to vote generally in the election of directors of the Company; Page 12 of 20 13 (ii) the acquisition of all or substantially all of the assets of the Company or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the outstanding securities of the Company entitled to vote generally in the election of directors by any person or by any persons acting in concert, or approval by the stockholders of the Company of any transaction which would result in such an acquisition; (iii) a complete liquidation or dissolution of the Company, or approval by the stockholders of the Company of a plan for such liquidation or dissolution; (iv) the occurrence of any event if, immediately following such event, at least 50% of the members of the board of directors of the Company do not belong to any of the following groups: (A) individuals who were members of the Board of the Company on the date of this Agreement; or (B) individuals who first became members of the Board of the Company after the date of this Agreement either: (I) upon election to serve as a member of the Board of directors of the Company by affirmative vote of three-quarters of the members of such Board, or of a nominating committee thereof, in office at the time of such first election; or (II) upon election by the stockholders of the Company to serve as a member of the Board of the Company, but only if nominated for election by affirmative vote of three-quarters of the members of the board of directors of the Company, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a- 11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the Board of the Company; or (v) any event which would be described in section 1 l(a)(i), (ii), (iii) or (iv) if the term "Association" were substituted for the term "Company" therein. In no event, however, shall a Change of Control be deemed to have occurred as a result of any acquisition of securities or assets of the Company, the Association, or a subsidiary of either of Page 13 of 20 14 them, by the Company, the Association, or a subsidiary of either of them, or by any employee benefit plan maintained by any of them. For purposes of this section 11 (a), the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. (b) In the event of a Change of Control, the Executive shall be entitled to the payments and benefits contemplated by section 9(b) in the event of his termination of employment with the Company under any of the circumstances described in section 9(a) of this Agreement or under any of the following circumstances: (i) resignation, voluntary or otherwise, by the Executive at any time during the Employment Period following his demotion, loss of title, office or significant authority or responsibility, or following any reduction in any element of his package of compensation and benefits; (ii) resignation, voluntary or otherwise, by the Executive at any time during the Employment Period following any relocation of his principal place of employment or any change in working conditions at such principal place of employment which the Executive, in his reasonable discretion, determines to be embarrassing, derogatory or otherwise adverse; (iii) resignation, voluntary or otherwise, by the Executive at any time during the Employment Period following the failure of any successor to the Company in the Change of Control to include the Executive in any compensation or benefit program maintained by it or covering any of its executive officers, unless the Executive is already covered by a substantially similar plan of the Company which is at least as favorable to him; or (iv) resignation, voluntary or otherwise, for any reason whatsoever following the effective date of the Change of Control. Section 12. Tax Indemnification. (a) This section 12 shall apply if the Executive's employment is terminated upon or following (i) a Change of Control (as defined in section 11 of this Agreement); or (ii) a change "in the ownership or effective control" of the Company or the Association or "in the ownership of a substantial portion of the assets" of the Company or the Association within the meaning of section 28OG of the Code. If this section 12 applies, then, if for any taxable year, the Executive shall be liable for the payment of an excise tax under section 4999 of the Code with respect to any payment in the nature of compensation made by the Company, the Association or any direct or indirect subsidiary or affiliate of the Company or the Association to (or for the benefit of) the Executive, the Company shall pay to the Executive an amount equal to X determined under the Page 14 of 20 15 following formula: X = E x P ____________________________________ 1 - [(FI x (1 - SLI)) + SLI + E + M] where E = the rate at which the excise tax is assessed under section 4999 of the Code; P = the amount with respect to which such excise tax is assessed, determined without regard to this section 12; FI = the highest marginal rate of income tax applicable to the Executive under the Code for the taxable year in question; SLI = the sum of the highest marginal rates of income tax applicable to the Executive under all applicable state and local laws for the taxable year in question; and M = the highest marginal rate of Medicare tax applicable to the Executive under the Code for the taxable year in question. With respect to any payment in the nature of compensation that is made to (or for the benefit of) the Executive under the terms of this Agreement, or otherwise, and on which an excise tax under section 4999 of the Code will be assessed, the payment determined under this section 12(a) shall be made to the Executive on the earlier of (i) the date the Company, the Association or any direct or indirect subsidiary or affiliate of the Company or the Association is required to withhold such tax, or (ii) the date the tax is required to be paid by the Executive. (b) Notwithstanding anything in this section 12 to the contrary, in the event that the Executive's liability for the excise tax under section 4999 of the Code for a taxable year is subsequently determined to be different than the amount determined by the formula (X + P) x E, where X, P and E have the meanings provided in section 12(a), the Executive or the Company, as the case may be, shall pay to the other party at the time that the amount of such excise tax is finally determined, an appropriate amount, plus interest, such that the payment made under section 12(a), when increased by the amount of the payment made to the Executive under this section 12(b) by the Company, or when reduced by the amount of the payment made to the Company under this section 12(b) by the Executive, equals the amount that should have properly been paid to the Executive under section 12(a). The interest paid under this section 12(b) shall be determined at the rate provided under section 1274(b)(2)(B) of the Code. To confirm that the proper amount, if any, was paid to the Executive under this section 12, the Executive shall furnish to the Company a copy of each tax return which reflects a liability for an excise tax payment made by the Company, at least 20 days before the date on which such return is required to be filed with the Internal Revenue Service. Page 15 of 20 16 (c) The provisions of this section 12 are designed to reflect the provisions of applicable federal, state and local tax laws in effect on the date of this Agreement. If, after the date hereof, there shall be any change in any such laws, this section 12 shall be modified in such manner as the Executive and the Company may mutually agree upon if and to the extent necessary to assure that the Executive is fully indemnified against the economic effects of the tax imposed under section 4999 of the Code or any similar federal, state or local tax. Section 13. Covenant Not To Compete. The Executive hereby covenants and agrees that, for a period of one (1) year following the date of his termination of employment with the Company, he shall not, without the written consent of the Company, become an officer, employee, consultant, director or trustee of any savings bank, savings and loan association, savings and loan holding company, bank or bank holding company, or any direct or indirect subsidiary or affiliate of any such entity, that entails working in any city, town or county in which the Association or the Company has an office or has filed an application for regulatory approval to establish an office, determined as of the effective date of the Executive's termination of employment; provided, however, that this section 13 shall not apply if the Executive's employment is terminated for the reasons set forth in section 9(a); and provided, further, that if the Executive's employment shall be terminated on account of disability as provided in section 10(a)(iv) of this Agreement, this section 13 shall not prevent the Executive from accepting any position or performing any services if (a) he first offers, by written notice, to accept a similar position with, or perform similar services for, the Company on substantially the same terms and conditions and (b) the Company declines to accept such offer within ten (10) days after such notice is given. Section 14. Confidentiality. Unless he obtains the prior written consent of the Company, the Executive shall keep confidential and shall refrain from using for the benefit of himself, or any person or entity other than the Company or any entity which is a subsidiary of the Company or of which the Company is a subsidiary, any material document or information obtained from the Company, or from its parent or subsidiaries, in the course of his employment with any of them concerning their properties, operations or business (unless such document or information is readily ascertainable from public or published information or trade sources or has otherwise been made available to the public through no fault of his own) until the same ceases to be material (or becomes so ascertainable or available); provided, however, that nothing in this section 14 shall prevent the Executive, with or without the Company's consent, from participating in or disclosing documents or information in connection with any judicial or administrative investigation, inquiry or proceed ing to the extent that such participation or disclosure is required under applicable law. Section 15. Solicitation. The Executive hereby covenants and agrees that, for a period of one (1) year following the date of his termination of employment with the Company, he shall not, without the Page 16 of 20 17 written consent of the Company, either directly or indirectly: (a) solicit, offer employment to, or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Company, the Association or any affiliate, as of the date of this Agreement, of either of them, to terminate his or her employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits and making loans, doing business in any city, town or county in which the Association or the Company has an office or has filed an application for regulatory approval to establish an office, determined as of the date of this Agreement; (b) provide any information, advice or recommendation with respect to any such officer or employee to any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits and making loans, doing business in any city, town or county in which the Association or the Company has an office or has filed an application for regulatory approval to establish an office, determined as of the date of this Agreement, that is intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Company, the Association, or any affiliate, as of the date of this Agreement, of either of them, to terminate his or her employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any such savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits and making loans; or (c) solicit, provide any information, advice or recommendation or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any customer of the Company to terminate an existing business or commercial relationship with the Company. Section 16. No Effect on Employee Benefit Plans or Programs. The termination of the Executive's employment during the term of this Agreement or thereafter, whether by the Company or by the Executive, shall have no effect on the rights and obligations of the parties hereto under the Company's qualified or non-qualified retirement, pension, savings, thrift, profit-sharing or stock bonus plans, group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans or such other employee benefit plans or programs, or compensation plans or programs, as may be maintained by, or cover employees of, the Company from time to time. Page 17 of 20 18 Section 17. Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the Executive, his legal representatives and testate or intestate distributees, and the Company and its successors and assigns, including any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the assets and business of the Company may be sold or otherwise transferred. Failure of the Company to obtain from any successor its express written assumption of the Company's obligations hereunder at least sixty (60) days in advance of the scheduled effective date of any such succession shall be deemed a material breach of this Agreement. Section 18. Notices. Any communication required or permitted to be given under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: If to the Executive: John J. Conefry, Jr. 5 Butler Place Garden City, New York 11530 with a copy to: Milbank, Tweed, Hadley & McCloy 1 Chase Manhattan Plaza New York, New York 10005 Attention: Mel M. Immergut, Esq. If to the Company: Astoria Financial Corporation One Astoria Federal Plaza Lake Success, New York 11042-1085 Attention: General Counsel Page 18 of 20 19 with a copy to: Thacher Proffitt & Wood Two World Trade Center New York, New York 10048 Attention: W. Edward Bright, Esq. Section 19. Indemnification for Attorneys' Fees. The Company shall indemnify, hold harmless and defend the Executive against reasonable costs, including without limitation legal fees, incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved, as a result of his efforts, in good faith, to defend or enforce the terms of this Agreement; provided, however, that the Executive shall have substantially prevailed on the merits pursuant to a judgment, decree or order of a court of competent jurisdiction or of an arbitrator in an arbitration proceeding, or in a settlement. For purposes of this Agreement, any settlement agreement which provides for payment of any amounts in settlement of the Company's obligations hereunder shall be conclusive evidence of the Executive's entitlement to indemnification hereunder, and any such indemnification payments shall be in addition to amounts payable pursuant to such settlement agreement, unless such settlement agreement expressly provides otherwise. Section 20. Severability. A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. Section 21. Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. Section 22. Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. Section 23. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the federal laws of the United States and, to the extent that federal law is inapplicable, in accordance with the laws of the State of New York applicable to contracts entered into and to be Page 19 of 20 20 performed entirely within the State of New York. Section 24. Headings and Construction. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. Section 25. Entire Agreement; Modifications. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof, other than the Employment Agreements, each dated September 19, 1994, by and between Executive and Seller Bank and Seller, respectively (the "Employment Agreements"); the Astoria Financial Corporation Litigation Committee Consulting Agreement between the Company and the Executive dated as of April 2, 1998; and the Letter Agreement dated April 2, 1998 between the Executive, the Company and the Association pursuant to section 4.16(b) of the Agreement and Plan of Merger. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. Section 26. Non-duplication. In the event that the Executive shall perform services for the Association or any other direct or indirect subsidiary of the Company, any compensation or benefits provided to the Executive by such other employer shall be applied to offset the obligations of the Company hereunder, it being intended that this Agreement set forth the aggregate compensation and benefits payable to the Executive for all services to the Company and all of its direct or indirect subsidiaries. Section 27. Survival. The provisions of sections 6, 9, 11, 12, 13, 14, 15, 18, 20, and 28 shall survive the expiration of the Employment Period or termination of this Agreement. Section 28. Equitable Remedies. The Company and the Executive hereby stipulate that money damages are an inadequate remedy for violations of sections 6(a), 13, 14 or 15 of this Agreement and agree that equitable remedies, including, without limitations, the remedies of specific performance and injunctive relief, shall be available with respect to the enforcement of such provisions. Section 29. Required Regulatory Provisions. Notwithstanding anything herein contained to the contrary, any payments to the Executive by the Company, whether pursuant to this Agreement or otherwise, are subject to and Page 20 of 20 21 conditioned upon their compliance with section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. ss.1828(k), and any regulations promulgated thereunder. Section 30. Effective Date. The effective date of this Agreement shall be the date of closing of the merger of the Seller with and into the Company as contemplated by the Agreement and Plan of Merger dated April 2, 1998 ("Effective Date"). In the event that the merger contemplated by the Agreement and Plan of Merger is not consummated, this Agreement shall have no force or effect. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and the Executive has hereunto set his hand, all as of the day and year first above written. ATTEST: ASTORIA FINANCIAL CORPORATION By /S/ William K. Sheerin By /S/ George L. Engelke, Jr. Name: George L. Engelke, Jr. Title: Chairman of the Board, President and Chief Executive Officer [Seal] /S/ John J. Conefry, Jr. JOHN J. CONEFRY, JR. Page 21 of 20 22 SCHEDULE 7A JOHN J. CONEFRY, JR.-BOARD MEMBERSHIPS - - ------------------------------------------------------------------------------- NYC and National MS Societies Board of directors 1979 - Present New York Foundling Hospital Advisory Board - 1989 - Present Wheelchair Charities Advisory Board 1994 - Present Telicare Board of Trustees 1995 - Present St. Vincent's Services Board of Directors 1995 - Present Hofstra University Board of Trustees 1996 - Present Help for the Poor Board Member January 1998 - Present Page 22 of 20 EX-10.32 10 OPTION CONVERSION CERTIFICATES 1 EXHIBIT 10.32 ASTORIA FINANCIAL CORPORATION STOCK OPTIONS ASSUMED PURSUANT TO SECTION 1.04 OF THE AGREEMENT AND PLAN OF MERGER DATED APRIL 2, 1998 (AS AMENDED) BETWEEN ASTORIA FINANCIAL CORPORATION AND LONG ISLAND BANCORP, INC. OPTION CONVERSION CERTIFICATE JOHN CONEFRY JR ###-##-#### Name of Option Holder Social Security Number 5 BUTLER PLACE Street Address GARDEN CITY NY 11530 City State ZIP Code This Option Conversion Certificate sets forth the terms and conditions on which options to purchase common stock of Long Island Bancorp, Inc. ("LISB Options") granted to the Option Holder named above by Long Island Bancorp, Inc. ("LISB") and outstanding at the Effective Time of the merger of LISB into Astoria Financial Corporation ("AFC") have been converted into options to purchase common stock of AFC ("Converted Options") pursuant to section 1.04 of the Agreement and Plan of Merger dated as of April 2, 1998, as amended, by and between AFC and LISB (the "Merger Agreement"). Below are specific terms and conditions applicable to this Converted Option. Attached as Exhibit A are its general terms and conditions.
(A) (B) (C) (D) (E) -------- -------- -------- -------- ------- LISB OPTION Grant Date: 12/19/96 03/29/94 03/29/94 03/29/94 N/A Class of Optioned Shares Common Common Common Common Common No. of Shares 30,000 8,695 34,780 230,800 N/A Exercise Price Per Share $33.6250 $11.5000 $11.5000 $11.5000 N/A Option Type (ISO or NQSO) NQ NQ ISO NQ N/A Plan (Employee or Director) Employee Employee Employee Employee Employee Option Expiration Date 12/19/06 03/29/04 03/29/04 03/29/04 N/A CONVERTED OPTION Class of Optioned Shares* Common Common Common Common Common No. of Shares* 34,500 10,000 39,997 265,420 N/A Exercise Price Per Share* $29.24 $10.00 $10.00 $10.00 N/A Option Type (ISO or NQSO) NQ NQ ISO NQ N/A Option Expiration Date* 12/19/06 03/29/04 03/29/04 03/29/04 N/A
*Subject to adjustment as provided in the General Terms and Conditions. By signing where indicated below, AFC grants this Converted Option upon the specified terms and conditions, and the Option Holder (1) acknowledges receipt of this Option Conversion Certificate, including Exhibit A and Appendices A and B thereto, and agrees to observe and be bound by the terms and conditions set forth herein,(2) acknowledges receipt of the Prospectus dated September 30, 1998 pursuant to which shares of common stock of AFC which may be acquired upon exercise of Converted Options are being offered and (3) agrees that this Option Conversion Certificate and the attached Exhibit A (and Appendices A and B attached thereto) supersedes, in their entirety, any and all prior terms and conditions, agreements, understandings and arrangements, whether or not in writing, with respect to his or her LISB Options. ASTORIA FINANCIAL CORPORATION OPTION HOLDER By /S/ Alan P. Eggleston /S/ John J. Conefry, Jr. --------------------------------- ------------------------ Name: Alan P. Eggleston JOHN CONEFRY JR Title: Executive Vice President 2 ASTORIA FINANCIAL CORPORATION STOCK OPTIONS ASSUMED PURSUANT TO SECTION 1.04 OF THE AGREEMENT AND PLAN OF MERGER DATED APRIL 2, 1998 (AS AMENDED) BETWEEN ASTORIA FINANCIAL CORPORATION AND LONG ISLAND BANCORP, INC. OPTION CONVERSION CERTIFICATE ROBERT CONWAY ###-##-#### Name of Option Holder Social Security Number P.O. BOX 245 Street Address REHOBOTH BEACH DE 19971 City State ZIP Code This Option Conversion Certificate sets forth the terms and conditions on which options to purchase common stock of Long Island Bancorp, Inc. ("LISB Options") granted to the Option Holder named above by Long Island Bancorp, Inc. ("LISB") and outstanding at the Effective Time of the merger of LISB into Astoria Financial Corporation ("AFC") have been converted into options to purchase common stock of AFC ("Converted Options") pursuant to section 1.04 of the Agreement and Plan of Merger dated as of April 2, 1998, as amended, by and between AFC and LISB (the "Merger Agreement"). Below are specific terms and conditions applicable to this Converted Option. Attached as Exhibit A are its general terms and conditions.
(A) (B) (C) (D) (E) -------- -------- -------- -------- -------- LISB OPTION Grant Date: 03/29/98 03/29/97 03/29/96 03/29/95 03/29/94 Class of Optioned Shares Common Common Common Common Common No. of Shares 518 518 518 518 52,785 Exercise Price Per Share $65.3800 $34.8000 $27.3800 $17.9000 $11.5000 Option Type (ISO or NQSO) NQ NQ NQ NQ NQ Plan (Employee or Director) Director Director Director Director Director Option Expiration Date 03/29/08 03/29/07 03/29/06 03/29/05 03/29/04 CONVERTED OPTION Class of Optioned Shares* Common Common Common Common Common No. of Shares* 596 596 596 596 60,703 Exercise Price Per Share* $56.85 $30.26 $23.81 $15.57 $10.00 Option Type (ISO or NQSO) NQ NQ NQ NQ NQ Option Expiration Date* 03/29/08 03/29/07 03/29/06 03/29/05 03/29/04
*Subject to adjustment as provided in the General Terms and Conditions. By signing where indicated below, AFC grants this Converted Option upon the specified terms and conditions, and the Option Holder (1) acknowledges receipt of this Option Conversion Certificate, including Exhibit A and Appendices A and B thereto, and agrees to observe and be bound by the terms and conditions set forth herein,(2) acknowledges receipt of the Prospectus dated September 30, 1998 pursuant to which shares of common stock of AFC which may be acquired upon exercise of Converted Options are being offered and (3) agrees that this Option Conversion Certificate and the attached Exhibit A (and Appendices A and B attached thereto) supersedes, in their entirety, any and all prior terms and conditions, agreements, understandings and arrangements, whether or not in writing, with respect to his or her LISB Options. ASTORIA FINANCIAL CORPORATION OPTION HOLDER By /S/ Alan P. Eggleston /S/ Robert Conway --------------------------------- ----------------- Name: Alan P. Eggleston ROBERT CONWAY Title: Executive Vice President 3 ASTORIA FINANCIAL CORPORATION STOCK OPTIONS ASSUMED PURSUANT TO SECTION 1.04 OF THE AGREEMENT AND PLAN OF MERGER DATED APRIL 2, 1998 (AS AMENDED) BETWEEN ASTORIA FINANCIAL CORPORATION AND LONG ISLAND BANCORP, INC. OPTION CONVERSION CERTIFICATE LAWRENCE PETERS ###-##-#### Name of Option Holder Social Security Number 143 CABOT ROAD Street Address MASSAPEQUA NY 11758 City State ZIP Code This Option Conversion Certificate sets forth the terms and conditions on which options to purchase common stock of Long Island Bancorp, Inc. ("LISB Options") granted to the Option Holder named above by Long Island Bancorp, Inc. ("LISB") and outstanding at the Effective Time of the merger of LISB into Astoria Financial Corporation ("AFC") have been converted into options to purchase common stock of AFC ("Converted Options") pursuant to section 1.04 of the Agreement and Plan of Merger dated as of April 2, 1998, as amended, by and between AFC and LISB (the "Merger Agreement"). Below are specific terms and conditions applicable to this Converted Option. Attached as Exhibit A are its general terms and conditions.
(A) (B) (C) (D) (E) -------- -------- -------- -------- -------- LISB OPTION Grant Date: 11/25/97 11/25/97 N/A N/A N/A Class of Optioned Shares Common Common Common Common Common No. of Shares 2,266 17,734 N/A N/A N/A Exercise Price Per Share $44.1250 $44.1250 N/A N/A N/A Option Type (ISO or NQSO) ISO NQ N/A N/A N/A Plan (Employee or Director) Employee Employee Employee Employee Employee Option Expiration Date 11/25/07 11/25/07 N/A N/A N/A CONVERTED OPTION Class of Optioned Shares* Common Common Common Common Common No. of Shares* 2,606 20,395 N/A N/A N/A Exercise Price Per Share* $38.37 $38.37 N/A N/A N/A Option Type (ISO or NQSO) ISO NQ N/A N/A N/A Option Expiration Date* 11/25/07 11/25/07 N/A N/A N/A
*Subject to adjustment as provided in the General Terms and Conditions. By signing where indicated below, AFC grants this Converted Option upon the specified terms and conditions, and the Option Holder (1) acknowledges receipt of this Option Conversion Certificate, including Exhibit A and Appendices A and B thereto, and agrees to observe and be bound by the terms and conditions set forth herein,(2) acknowledges receipt of the Prospectus dated September 30, 1998 pursuant to which shares of common stock of AFC which may be acquired upon exercise of Converted Options are being offered and (3) agrees that this Option Conversion Certificate and the attached Exhibit A (and Appendices A and B attached thereto) supersedes, in their entirety, any and all prior terms and conditions, agreements, understandings and arrangements, whether or not in writing, with respect to his or her LISB Options. ASTORIA FINANCIAL CORPORATION OPTION HOLDER By /S/ Alan P. Eggleston /S/ Lawrence Peters --------------------------------- ------------------- Name: Alan P. Eggleston LAWRENCE PETERS Title: Executive Vice President 4 ASTORIA FINANCIAL CORPORATION STOCK OPTIONS ASSUMED PURSUANT TO SECTION 1.04 OF THE AGREEMENT AND PLAN OF MERGER DATED APRIL 2, 1998 (AS AMENDED) BETWEEN ASTORIA FINANCIAL CORPORATION AND LONG ISLAND BANCORP, INC. OPTION CONVERSION CERTIFICATE LEO WATERS ###-##-#### Name of Option Holder Social Security Number 29 NOTAMSEIT ROAD Street Address WESTHAMPTON BEACH NY 11978 City State ZIP Code This Option Conversion Certificate sets forth the terms and conditions on which options to purchase common stock of Long Island Bancorp, Inc. ("LISB Options") granted to the Option Holder named above by Long Island Bancorp, Inc. ("LISB") and outstanding at the Effective Time of the merger of LISB into Astoria Financial Corporation ("AFC") have been converted into options to purchase common stock of AFC ("Converted Options") pursuant to section 1.04 of the Agreement and Plan of Merger dated as of April 2, 1998, as amended, by and between AFC and LISB (the "Merger Agreement"). Below are specific terms and conditions applicable to this Converted Option. Attached as Exhibit A are its general terms and conditions.
(A) (B) (C) (D) (E) -------- -------- -------- -------- -------- LISB OPTION Grant Date: 03/29/98 03/29/97 03/29/96 03/29/95 03/29/94 Class of Optioned Shares Common Common Common Common Common No. of Shares 518 518 518 518 27,324 Exercise Price Per Share $65.3800 $34.8000 $27.3800 $17.9000 $11.5000 Option Type (ISO or NQSO) NQ NQ NQ NQ NQ Plan (Employee or Director) Director Director Director Director Director Option Expiration Date 03/29/08 03/29/07 03/29/06 03/29/05 03/29/04 CONVERTED OPTION Class of Optioned Shares* Common Common Common Common Common No. of Shares* 596 596 596 596 31,423 Exercise Price Per Share* $56.85 $30.26 $23.81 $15.57 $10.00 Option Type (ISO or NQSO) NQ NQ NQ NQ NQ Option Expiration Date* 03/29/08 03/29/07 03/29/06 03/29/05 03/29/04
*Subject to adjustment as provided in the General Terms and Conditions. By signing where indicated below, AFC grants this Converted Option upon the specified terms and conditions, and the Option Holder (1) acknowledges receipt of this Option Conversion Certificate, including Exhibit A and Appendices A and B thereto, and agrees to observe and be bound by the terms and conditions set forth herein,(2) acknowledges receipt of the Prospectus dated September 30, 1998 pursuant to which shares of common stock of AFC which may be acquired upon exercise of Converted Options are being offered and (3) agrees that this Option Conversion Certificate and the attached Exhibit A (and Appendices A and B attached thereto) supersedes, in their entirety, any and all prior terms and conditions, agreements, understandings and arrangements, whether or not in writing, with respect to his or her LISB Options. ASTORIA FINANCIAL CORPORATION OPTION HOLDER By /S/ Alan P. Eggleston /S/ Leo Waters --------------------------------- -------------- Name: Alan P. Eggleston LEO WATERS Title: Executive Vice President 5 ASTORIA FINANCIAL CORPORATION STOCK OPTIONS ASSUMED PURSUANT TO SECTION 1.04 OF THE AGREEMENT AND PLAN OF MERGER DATED APRIL 2, 1998 (AS AMENDED) BETWEEN ASTORIA FINANCIAL CORPORATION AND LONG ISLAND BANCORP, INC. OPTION CONVERSION CERTIFICATE DONALD WENK ###-##-#### Name of Option Holder Social Security Number AMERICAN CASTING AND MANUFACTURING CORP. 51 COMMERCIAL STREET Street Address PLAINVIEW NY 11803 City State ZIP Code This Option Conversion Certificate sets forth the terms and conditions on which options to purchase common stock of Long Island Bancorp, Inc. ("LISB Options") granted to the Option Holder named above by Long Island Bancorp, Inc. ("LISB") and outstanding at the Effective Time of the merger of LISB into Astoria Financial Corporation ("AFC") have been converted into options to purchase common stock of AFC ("Converted Options") pursuant to section 1.04 of the Agreement and Plan of Merger dated as of April 2, 1998, as amended, by and between AFC and LISB (the "Merger Agreement"). Below are specific terms and conditions applicable to this Converted Option. Attached as Exhibit A are its general terms and conditions.
(A) (B) (C) (D) (E) -------- -------- -------- -------- -------- LISB OPTION Grant Date: 06/24/97 07/09/96 04/19/95 03/29/94 N/A Class of Optioned Shares Common Common Common Common Common No. of Shares 518 518 518 93,150 N/A Exercise Price Per Share $34.8000 $27.3800 $17.9000 $11.5000 N/A Option Type (ISO or NQSO) NQ NQ NQ NQ N/A Plan (Employee or Director) Director Director Director Director Director Option Expiration Date 06/24/07 07/09/06 04/19/05 03/29/04 N/A CONVERTED OPTION Class of Optioned Shares* Common Common Common Common Common No. of Shares* 596 596 596 107,123 N/A Exercise Price Per Share* $30.26 $23.81 $15.57 $10.00 N/A Option Type (ISO or NQSO) NQ NQ NQ NQ N/A Option Expiration Date* 06/24/07 07/09/06 04/19/05 03/29/04 N/A
*Subject to adjustment as provided in the General Terms and Conditions. By signing where indicated below, AFC grants this Converted Option upon the specified terms and conditions, and the Option Holder (1) acknowledges receipt of this Option Conversion Certificate, including Exhibit A and Appendices A and B thereto, and agrees to observe and be bound by the terms and conditions set forth herein,(2) acknowledges receipt of the Prospectus dated September 30, 1998 pursuant to which shares of common stock of AFC which may be acquired upon exercise of Converted Options are being offered and (3) agrees that this Option Conversion Certificate and the attached Exhibit A (and Appendices A and B attached thereto) supersedes, in their entirety, any and all prior terms and conditions, agreements, understandings and arrangements, whether or not in writing, with respect to his or her LISB Options. ASTORIA FINANCIAL CORPORATION OPTION HOLDER By /S/ Alan P. Eggleston /S/ Donald Wenk --------------------------------- --------------- Name: Alan P. Eggleston DONALD WENK Title: Executive Vice President EX-10.36 11 AFS RECOGNITION & RETENTION PLAN 1 ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION RECOGNITION AND RETENTION PLAN FOR OFFICERS AND EMPLOYEES ARTICLE I ESTABLISHMENT OF THE PLAN 1.01 Astoria Federal Savings and Loan Association hereby establishes the Recognition and Retention Plan for Officers and Employees (the "Plan") upon the terms and conditions hereinafter stated in this Recognition and Retention Plan. ARTICLE II PURPOSE OF THE PLAN 2.01 The purpose of the Plan is to retain Executive Officers and Employees of experience and ability by providing such persons with a proprietary interest in the Company as compensation for their contributions to the Association and its Affiliates and as an incentive to make such contributions and to promote the Association's growth and profitability in the future. ARTICLE III DEFINITIONS The following words and phrases when used in this Plan with an initial capital letter, unless the context clearly indicates otherwise, shall have the meanings set forth below. Wherever appropriate, the masculine pronoun shall include the feminine pronoun and the singular shall include the plural. 3.01 "Affiliate" means (i) a member of a controlled group of corporations of which the holding Company is a member or (ii) an unincorporated trade or business which is under common control with the Holding Company as determined in accordance with Section 414(c) of the Internal Revenue Code of 1986, as amended, (the "Code") and the regulations issued thereunder. For purposes hereof, a "controlled group of corporations" shall mean a controlled group of corporations as defined in Section 1563(a) of the Code determined without regard to Section 1563(a)(4) and (e)(3)(C). 3.02 "Association" means Astoria Federal Savings and Loan Association. 1 2 3.03 "Beneficiary" means the person or persons designated by a Recipient to receive any benefits payable under the Plan in the event of such Recipient's death. Such person or persons shall be designated in writing on forms provided for this purpose by the Committee and may be changed from time to time by similar written notice to the Committee. In the absence of a written designation, the Beneficiary shall be the Recipient's surviving spouse, if any or if none, his estate. 3.04 "Board" means the Board of Directors of the Association. 3.05 "Committee" means the Committee of the Board administering this Plan, which shall be comprised of those members of the Compensation Committee of the Board of the Association who are non-employee directors and "disinterested directors" as that term is defined under Rule 16b-3 under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") promulgated by the Securities and Exchange Commission. 3.06 "Common Stock" means shares of the common stock, $.01 par value per share, of the Company. 3.07 "Company" shall mean Astoria Financial Corporation. 3.08 "Conversion" means the conversion of the Association from the mutual to the stock form of organization and the acquisition of the Association by the Company. 3.09 "Disability" means the permanent and total inability by reason of mental or physical infirmity, or both, of a Recipient to perform the work customarily assigned to him. Additionally, a medical doctor selected or approved by the Board of Directors must advise the Committee that it is either not possible to determine when such Disability will terminate or that it appears probable that such Disability will be permanent during the remainder of said participant's lifetime. 3.10 "Employee" means any person who is currently employed by the Association or an Affiliate, including officers, but such term shall not include Executive Officers. 3.11 "Executive Officer" means those employees of the Association or the Company designated as Executive Officers by the Board. 3.12 "Plan Share Award" means a right granted under this Plan to earn Plan Shares. 3.13 "Plan Shares" means shares of Common Stock held in the Trust and issued or issuable to a Recipient pursuant to the Plan. 3.14 "Plan Share Reserve" means the shares of Common Stock held by the Trustee pursuant to Sections 5.03 and 5.04. 2 3 3.15 "Recipient" means an Executive Officer or an Employee who receives a Plan Share Award under the Plan. 3.16 "Retirement" with respect to a Recipient means termination of employment which constitutes retirement under any tax qualified plan maintained by the Association or by reaching age 65. 3.17 "Trust" means a trust established by the Board in connection with this Plan to hold Plan assets for the purposes set forth herein. 3.18 "Trustee" means that person or persons and entity or entities approved by the Board pursuant to Sections 4.01 and 4.02 to hold legal title to any of the Plan assets for the purposes set forth herein. ARTICLE IV ADMINISTRATION OF THE PLAN 4.01 Role of the Committee. The Plan shall be administered and interpreted by the Committee, which shall have all of the powers allocated to it in this and other Sections of the Plan. The interpretation and construction by the Committee of any provisions of the Plan or of any Plan Share Award granted hereunder shall be final and binding. The Committee shall act by vote or written consent of a majority of its members. Subject to the express provisions and limitations of the Plan, the Committee may adopt such rules, regulations and procedures as it deems appropriate for the conduct of its affairs. The Committee shall report its actions and decisions with respect to the Plan to the Board at appropriate times, but in no event less than one time per calendar year. The Committee shall recommend to the Board one or more person(s) or entity to act as Trustee(s) in accordance with the provisions of this Plan and the terms of any trust agreement. 4.02 Role of the Board. The members of the Committee shall be appointed or approved by, and will serve at the pleasure of, the Board. The Board may in its discretion from time to time remove members from, or add members to, the Committee, and may remove, replace or add any Trustees. The Board shall have all of the powers allocated to it in this and other Sections of the Plan. 4.03 Limitation on Liability. No member of the Board or the Committee shall be liable for any determination made in good faith with respect to the Plan or any Plan Shares or Plan Share Awards granted under it. If a member of the Board or the Committee is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of anything done or not done by him in such capacity under or with respect to the Plan, the Association shall indemnify such member against expense (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or 3 4 proceeding if he acted in good faith and in a manner he reasonably believed to be in the best interests of the Association and its Affiliates and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. ARTICLE V CONTRIBUTIONS; PLAN SHARE RESERVE 5.01 Amount and Timing of Contributions. The Association shall contribute to the Trust an amount sufficient to purchase up to 517,521 shares of Common Stock. No contributions by Employees shall be permitted. The Trustee may hold and commingle contributions to the Plan and earnings thereon with the assets of any other Recognition and Retention Plan maintained by the Association. 5.02 Initial Investment. Any amounts held by the Trust prior to the conversion of the Association from a mutual to a stock savings Association shall be invested by the Trustee in such interest-bearing account or accounts at the Association as the Trustee shall determine to be appropriate. 5.03 Investment of Trust Assets Upon the Conversion, Creation of Plan Share Reserve. Upon the Conversion, the Trustee shall invest all of the Trust's assets exclusively in Common Stock except as otherwise provided below; provided, however, that the Trust shall not invest in more than 517,521 shares of Common Stock which shall constitute the "Plan Share Reserve." In the event that all or a portion of the designated number of the shares of Common Stock are not available for purchase by the Trust in the Conversion, the Trustee in accordance with applicable rules and regulations shall purchase shares of Common Stock in the open market or, in the alternative, shall purchase authorized but unissued shares of the Common Stock from the Company sufficient to fund the Plan Share Reserve. Any earnings received with respect to Common Stock held in the Reserve shall be held in an interest bearing account. Any earnings received with respect to Common Stock subject to a Plan Share Award shall be held in an interest bearing account on behalf of the individual Recipient. 5.04 Effect of Allocations and Forfeitures Upon Plan Share Reserves. Upon the allocation of Plan Share Awards under Section 6.02, or the decision of the Committee to sell Plan Shares and return the proceeds to the Association, the Plan Share Reserve shall be reduced by the number of Shares subject to the Awards so allocated or sold. Any Shares subject to an Award which may not be earned because of a forfeiture by the Recipient pursuant to Section 7.01 shall be returned (added) to the Plan Share Reserve. 4 5 ARTICLE VI ELIGIBILITY; ALLOCATIONS 6.01 Eligibility. Executive Officers and Employees of the Association and its Affiliates are eligible to receive Plan Share Awards. 6.02 Allocations. (a) The Committee may determine which of the Executive Officers and Employees referenced in Section 6.01 above shall be granted Plan Share Awards, the number of shares covered by each Award and the manner in which Plan shares shall be earned (vested) under each award. (b) Notwithstanding anything contained herein to the contrary, the number of Shares covered by Awards may not exceed the number of Shares in the Plan Share Reserve immediately prior to the grant of such Awards, and provided further, that in no event shall any Awards be made which will violate the Charter, Bylaws or Plan of Conversion of the Association or any applicable federal or state law or regulation. In the event Plan Shares are forfeited for any reason, such shares shall remain in the Plan Share Reserve until used to satisfy subsequent Awards or until the termination of the Plan. At that time any remaining Plan Shares shall be sold by the Trustee and the proceeds of such sale shall be returned to the Association. 6.03 Form of Allocation. As promptly as practicable after a determination is made pursuant to Section 6.02 that a Plan Share Award has been granted, the recipient shall be notified in writing of the grant of a Plan Share Award. Such notice shall include the number of Plan Shares covered by the Award, and the terms upon which the Plan Shares subject to the Award may be earned. The date on which the Committee so notifies the Recipient shall be considered the date of grant of the Plan Share Award. The Committee shall maintain records as to all grants of Plan Share Awards under the Plan. 6.04 Allocations Not Required. Notwithstanding anything to the contrary in Sections 6.01 and 6.02, no Employee shall have any right or entitlement to receive a Plan Share Award hereunder, such Awards being at the total discretion of the Committee, nor shall the Executive Officers or the salaried Employees as a group have such a right. The Committee may, with the approval of the Board (or, if so directed by the Board, may) direct the Trustee to sell all Common Stock in the Plan Share Reserve and return the proceeds from such sale to the Association at any time. The Company shall have the right of first refusal upon the sale of any Common Stock by the Trustee. ARTICLE VII EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS 7.01 Earning Plan Shares; Forfeitures. (a) General Rules. Unless the Committee shall specifically state to the contrary at the time a Plan Share Award is granted, 5 6 Plan Shares subject to an Award shall be earned annually by the Executive Officers at the rate of twenty percent (20%) of the aggregate number of Shares covered by the Award on the tenth business day of January 1995 and thereafter at the rate of twenty percent (20%) on the tenth business day of each January thereafter during which the Executive Officer is an employee of the Association or an Affiliate. Plan Shares granted to other Employees pursuant to a Plan Share Award shall be earned at the rate of thirty-three and one-third percent (33 1/3%) of the aggregate number of Shares covered by the Award on the tenth business day of January 1997 and thereafter at the rate of thirty-three and one-third percent (33 1/3%) on the tenth business day of each January thereafter during which the Employee is an employee of the Association or an Affiliate. Notwithstanding the foregoing, the Committee may provide for a less or more rapid earnings rate than that set forth herein. If the employment of a Recipient is terminated prior to the time the Plan Share Award is completely earned for any reason (except as specifically provided in Subsections (b) and (c) below), the Recipient shall forfeit the right to earn any Shares subject to the Award which have not theretofore been earned. In determining the number of Plan Shares which are earned, fractional shares shall be rounded down to the nearest whole number, provided that such fractional shares shall be aggregated and earned, on the last anniversary in which the Plan Share Award vests. (b) Exception for Terminations Due to Death, Disability and Retirement. Notwithstanding the general rule contained in Section 7.01(a) above, all Plan Shares subject to a Plan Share Award held by a Recipient whose employment with the Association or an Affiliate terminates due to death, Disability or Retirement, shall be deemed earned as of the Recipient's last day of employment with the Association or an Affiliate. Provided, however, that if the Recipients' last day of employment terminates due to Retirement or Disability within one year of the date of Conversion, the shares earned by the Recipient may not be disposed of by the Recipient during the one-year period following the Conversion. (c) Exception for Terminations After a Change in Control. Notwithstanding the general rule contained in Section 7.01(a) above, all Plan Shares subject to a Plan Share Award held by a Recipient whose employment with the Association or an Affiliate terminates following a change in control of the Association or Company, shall be deemed earned as of the Recipient's last day of employment with the Association or an Affiliate. For purposes of this Plan, a "Change in Control" of the Association or Company shall mean an event of a nature that; (i) would be required to be reported in response to Item I of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); or (ii) results in a Change in Control of the Association or the Company within the meaning of the Home Owners' Loan Act of 1933, as amended, and the Rules and Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the date hereof (provided, that in applying the definition of change in control as set forth under the rules and regulations of the OTS, the Board shall substitute its judgment for that of the OTS); or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) 6 7 and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Association or the Company representing 20% or more of the Association's or the Company's outstanding securities except for any securities of the Association purchased by the Company in connection with the conversion of the Association to the stock form and any securities purchased by any tax-qualified employee benefit plan of the Association; or (B) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board; or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Association or the Company or similar transaction occurs in which the Association or Company is not the resulting entity; or (D) a proxy statement soliciting proxies from shareholders of the Company, by someone other than the current management of the Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company or Association or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan or transaction are exchanged for or converted into cash or property or securities not issued by the Association or the Company shall be distributed; or (E) a tender offer is made for 20% or more of the voting securities of the Association or the Company. (d) Revocation for Misconduct. Notwithstanding anything herein to the contrary, the Committee may by resolution immediately revoke, rescind and terminate any Plan Share Award, or portion thereof, previously awarded under this Plan, to the extent Plan Shares have not been delivered thereunder to the Recipient, whether or not yet earned, in the case of an Employee who is discharged from the Association or an Affiliate for cause (as hereinafter defined), or who is discovered after termination of employment or service to have engaged in conduct that would have justified termination for cause. "Cause" is defined as personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, or the willful violation of any law, rule or regulation (other than traffic violations or similar offenses) which results in a material loss to the Association or final cease and desist order. 7.02 Accrual of Dividends. Whenever Plan Shares are paid to a Recipient or Beneficiary under Section 7.03, such Recipient or Beneficiary shall also be entitled to receive, with respect to each Plan Share paid, an amount attributable to any cash dividends and a number of shares of Common Stock equal to any stock dividends declared and paid with respect to a share of Common Stock between the date the relevant Plan Share Award was granted and the date the Plan Shares are being distributed. There shall also be distributed an appropriate amount of net earnings, if any, of the Trust with respect to any dividends so paid out. 7.03 Distribution of Plan Shares. 7 8 (a) Timing of Distributions: General Rule. Plan Shares shall be distributed to the Recipient or his Beneficiary, as the case may be, as soon as practicable after they have been earned. (b) Form of Distribution. All Plan Shares, together with any shares representing stock dividends, shall be distributed in the form of Common Stock. One share of Common Stock shall be given for each Plan Share earned and payable. Payments representing accumulated dividends (and earnings thereon, if any) shall be made in cash or Common Stock. (c) Withholding. The Trustee shall withhold from any payment or distribution made under this Plan sufficient amounts of cash or shares of Common Stock to cover any applicable withholding and employment taxes, and if the amount of such payment is insufficient, the Trustee may require the Recipient or Beneficiary to pay to the Trustee the amount required to be withheld as a condition of delivering the Plan Shares. The Trustee shall pay over to the Association or Affiliate which employs or employed such Recipient any such amount withheld from or paid by the Recipient or Beneficiary. If this Plan is qualified under 17 C.F.R. ss.240.16b-3 of the Exchange Act Rules, then any withholding shall comply with 17 C.F.R. ss.240.16b-3(e). 7.03 Voting of Plan Shares. After a Plan Share Award has been granted, the Recipient shall be entitled to direct the Trustee as to the voting of the Plan Shares which are covered by the Plan Share Award and which have not yet been earned and distributed to him pursuant to Section 7.03, subject to rules and procedures adopted by the Committee for this purpose. All shares of Common Stock held by the Trust as to which Recipients are not entitled to direct, or have not directed, the voting, shall be voted by the Trustee in the same proportion as Plan Shares which have been awarded and voted. ARTICLE VIII MISCELLANEOUS 8.01 Adjustments for Capital Changes. In the event of any change in the outstanding shares of Common Stock of the Company by reason of any stock dividend or split, recapitalization, merger, consolidation, spin-off, reorganization, combination or exchange of shares, or other similar corporate change, or other increase or decrease in such shares effected without receipt or payment of consideration by the Company, the Committee shall adjust the aggregate number of Plan Shares available for issuance pursuant to the Plan and shall adjust the number of shares to which any Plan Share Award relates to prevent dilution or enlargement of the rights granted to the Recipient under the Plan. 8.02 Amendment and Termination of Plan. The Board may, by resolution, at any time amend or terminate the Plan . Except as otherwise provided, rights and obligations under any Plan Share Award granted before an amendment shall not be altered or impaired by such amendment without the written consent of the Recipient. If the Plan becomes qualified under 17 C.F.R. ss.16b-3 of the rules and regulations promulgated under the Exchange Act and an 8 9 amendment would require shareholder approval under such Rule 16b-3 to retain the Plan's qualification, then such amendment shall be presented to shareholders for ratification, provided, however, that the failure to obtain shareholder ratification shall not affect the validity of the Plan as so amended and the Plan Share Awards granted thereunder. The power to amend or terminate shall include the power to direct the Trustee to return to the Association all or any part of the assets of the Trust, including proceeds from the sale of shares of Common Stock held in the Plan Share Reserve, as well as shares of Common Stock and other assets subject to Plan Share Awards but not yet earned by the Recipients to whom they are awarded. However, the termination of the Trust shall not affect a Recipient's right to earn Plan Share Awards and to the distribution of Common Stock relating thereto, including earnings thereon, in accordance with the terms of this Plan and the grant by the Committee or Board. 8.03 Nontransferable. Plan Share Awards and rights to Plan Shares shall not be transferable by a Recipient, and during the lifetime of the Recipient, Plan Shares may only be earned by and paid to the Recipient who was notified in writing of the Award by the Committee pursuant to Section 6.03. 8.04 Employment Rights. Neither the Plan nor any grant of a Plan Share Award or Plan Shares hereunder nor any action taken by the Trustee, the Committee or the Board in connection with the Plan shall create any right on the part of any Executive Officer or Employee to continue in the employ of the Association or an Affiliate thereof, or the Company. 8.05 Voting and Dividend Rights. No Recipient shall have any voting or dividend rights or other rights of a shareholder in respect of any Plan Shares covered by a Plan Share Award, except as expressly provided in Sections 7.02 and 7.04 above, prior to the time said Plan Shares are actually distributed to him or her. 8.06 Governing Law. The Plan and Trust shall be governed by the laws of the State of New York to the extent not preempted by the laws of the United States. 8.07 Effective Date. This Plan is effective as of the effective date of the Conversion. Following Conversion, the Plan shall be presented to shareholders of the Company for ratification for purposes of (i) obtaining favorable treatment under Section 16(b) of the Exchange Act; and (ii) maintaining listing on the National Association of Securities Dealers Automated Quotation ("NASDAQ") National Market System; provided, however, that the failure to obtain shareholder ratification will not affect the validity of the Plan and the Plan Share Awards thereunder. 8.08 Term of Plan. This Plan shall remain in effect until the earlier of (1) 21 years from the Effective Date, (2) termination by the Board, or (3) the distribution of all assets of the Trust. Termination of the Plan shall not affect any Plan Share Awards previously granted, and such Awards shall remain valid and in effect until they have been earned and paid, or by their terms expire or are forfeited. 9 10 9.01 Compliance with Section 16. If this Plan is qualified under 17 C.F.R. ss.240.16b-3 of the Exchange Act Rules, with respect to persons subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provision of the Plan fails to so comply, it shall be deemed null and void, to the extent permitted by law. IN WITNESS WHEREOF, the Association has established this Plan to be executed by its duly authorized executive officer and the corporate seal to be affixed and duly attested, effective as of the 18th day of November, 1993. By:__________________________ George L. Engelke, Jr. Attest: - - -------------------------------- William K. Sheerin 10 EX-10.38 12 AFC CONSULTING AGREEMENT WITH J. CONEFRY 1 ASTORIA FINANCIAL CORPORATION LITIGATION ADVISORY COMMITTEE CONSULTING AGREEMENT This CONSULTING AGREEMENT ("Agreement") is made and entered into as of April 2, 1998 by and between ASTORIA FINANCIAL CORPORATION, a business corporation organized and operating under the laws of the State of Delaware and having an office at One Astoria Federal Plaza, Lake Success, New York 11042-1085 ("Company") and JOHN J. CONEFRY, JR., an individual residing at 5 Butler Place, Garden City, New York 11530 ("Consultant"). WITNESETH: WHEREAS, pursuant to an Agreement and Plan of Merger by and between the Company and Long Island Bancorp, Inc. ("Seller") dated April 2, 1998 ("Agreement and Plan of Merger"), the Company and Seller have agreed to a merger of the Seller with the Company, effective as of the closing date specified in the Agreement and Plan of Merger ("Closing Date"); and WHEREAS, the Consultant is the Chief Executive Officer of the Seller and is familiar with its business, operations and properties; and WHEREAS, The Long Island Savings Bank, FSB ("Seller Bank") is the plaintiff in the case resulting from a complaint filed by the Seller Bank in the United States Court of Federal Claims entitled The Long Island Savings Bank FSB v. The United States (the "Case"); and WHEREAS, if successful on the merits, the Case could result in a substantial recovery to Astoria Federal Savings and Loan Association, as successor by merger to Seller Bank ("Association"); and WHEREAS, pursuant to section 4.13(d) of the Agreement and Plan of Merger, the Corporation has established a Litigation Advisory Committee to preserve the knowledge and experience of certain officers of the Seller in connection with the Case and to assist the Company in evaluating and managing the progress thereof (hereinafter referred to as the "Litigation Advisory Committee"); and WHEREAS, the Consultant possesses specialized knowledge and experience as the chief executive officer of the Seller and the Seller Bank and as a result of his involvement with the Case; and WHEREAS, the Company desires to assure the availability of the Consultant's services in furthering the objectives of the Litigation Advisory Committee; and WHEREAS, the Consultant is willing to serve the Company on the terms and conditions hereinafter set forth; 2 NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions hereinafter set forth, the Company and the Consultant hereby agree as follows: Section 1. Service. The Company agrees to engage the Consultant's services as a member and the Chairman of the Litigation Advisory Committee, and the Consultant hereby agrees to hold himself available and to provide such services, during the period and upon the terms and conditions set forth in this Agreement. Section 2. Consulting Period. The terms and conditions of this Agreement shall be and remain in effect during the period of service established under this section 2 ("Consulting Period"). The Consulting Period shall be for a term beginning on the day after the Consultant's termination of employment with the Company for any reason other than death, disability or "cause", in each case as defined in the Employment Agreement between the Consultant and the Company dated April 2, 1998 ("Employment Agreement"), and ending on the third anniversary of the Closing Date, extended as hereinafter provided. On the third anniversary of the Closing Date, the Consulting Period shall automatically be extended for one (1) additional year, unless either the Company or the Consultant elects not to extend this Agreement further by giving prior written notice to the other party at least ninety (90) days in advance of the then-applicable expiration date, in which case the Consulting Period shall end on the third anniversary of the Closing Date. If the Consulting Period is extended as aforesaid, on the fourth anniversary of the Closing Date, the Consulting Period shall be extended for one (1) additional year unless either the Company or the Consultant elects not to extend this Agreement further by giving prior written notice to the other party at least ninety (90) days in advance of the then-applicable expiration date, in which case the Consulting Period shall end on the fourth anniversary of the Closing Date. Notwithstanding anything contained herein to the contrary, in all cases the Consulting Period shall end no later than the earliest of (i) the fifth anniversary of the Closing Date; (ii) the date of a final, unappealable judgment in the Case or any final settlement of the Case; or (iii) termination of this Agreement pursuant to section 7. If the Consultant terminates employment with the Company under the Employment Agreement due to death, disability or "cause" under the Employment Agreement or the expiration of the Consulting Period, this Agreement shall cease. Section 3. Extent of Services. (a) The Consultant shall serve as a member and the Chairman of the Litigation Advisory Committee, having such power, authority and responsibility and performing such duties as are prescribed by the Company in order to provide advisory services to the Company regarding the Case. These duties shall include, but not be limited to, advising Seller and the Company exclusively on the prosecution and settlement of the Case, including but not limited to testimony as a witness, the evaluation of any settlement proposals, the making of and responses to motions to dismiss, proposals to terminate or cease prosecuting the Case, and the pursuit or abandonment of 2 3 any appeals. The Consultant shall use his best efforts to advance the interests of the Company in every aspect of the Case. As Chairman of the Litigation Advisory Committee, the Consultant shall also manage the activities of the Litigation Advisory Committee in a manner consistent with section 4.13(d) of the Agreement and Plan of Merger and with the purpose of assisting the Company and the Association in achieving an early and favorable resolution to the Case and shall report directly to the Company's Chief Executive Officer or a designee of the Company's Chief Executive Officer. (b) Subject to the requirements of the Company consistent with the efficient management of the Case, in the performance of any services required of him hereunder, the Consultant shall have exclusive control over the manner of performance of such services, including without limitation: the selection, supervision and compensation of personnel, if any, in addition to the Consultant to be involved in the performance of such services; the selection of methods, procedures, strategies and equipment to be employed in the performance of such services; and determination of the time, places and dates at which such services will be performed. (c) The Consultant may engage in business activities and may perform services as an employee or independent contractor (other than for the Company) to the extent that such business activities and/or the performance of such services does not impair the Consultant's availability to perform services for the Company as contemplated by this Agreement or contravene the provisions of section 6. Section 4. Cash Compensation. In consideration for his availability to perform services hereunder, as well as the services actually rendered by the Consultant hereunder, the Company shall pay to him during the Consulting Period a retainer fee at an annual rate of FOUR HUNDRED THOUSAND DOLLARS ($400,000), payable in advance in monthly installments commencing on the first day of the Consulting Period; provided, however, that this retainer fee shall only be paid for the portion of the Consulting Period during which the Consultant is not an officer or employee of the Company or Association. If the Consultant performs services for the Company with respect to the Case after the expiration of the Consulting Period, the Company shall pay him an hourly fee in the amount of TWO HUNDRED DOLLARS ($200) per hour, payable monthly in arrears upon presentation of time records in such form and manner as the Company may reasonably require, and shall continue to observe the provisions of section 5 with respect to the Consultant. Section 5. Facilities and Expenses. (a) The Company shall provide the Consultant with office facilities and secretarial and other support services on its premises to the extent required to perform the services contemplated in section 3 of this Agreement, as determined by the Company in its discretion. (b) If, in connection with the performance of service hereunder at the request of the Company, the Consultant incurs out-of-pocket costs for travel, meals, lodging and other 3 4 reasonable expenses of a type for which other providers of professional services to the Company would be reimbursed by the Company, he shall be entitled to reimbursement therefor by the Company in accordance with the reasonable standards and procedures established by the Company and communicated to the Consultant. Section 6. Confidentiality; Nonsolicitation. (a) During the Consulting Period and at all times thereafter, the Consultant, except as previously authorized by the Company in writing, shall keep confidential and shall refrain from using or disclosing for the benefit of any person or entity other than the Company or the Association any document or information obtained in the course of performing services under this Agreement or as an officer, employee, or director of Seller or Seller Bank prior to the Closing Date. The preceding sentence shall not apply to the use or disclosure of any such document or information: (i) on or following the date on which such information or document is first readily ascertainable from public or published information or trade sources; or (ii) in connection with any judicial or administrative investigation, inquiry or proceeding to the extent compelled pursuant to applicable law and as to which, unless expressly prohibited by applicable law, the Consultant has given notice to the Company as soon as reasonably practicable after such compulsion. (b) The Consultant acknowledges that during the course of his performance of service for the Seller, Seller Bank, Company, or Association he may develop or otherwise acquire papers, files or other records involving or relating to confidential or secret plans, design information of any kind, devices, material, research, new product development, customers or customer lists. All such papers, files and other records identified by the Company as confidential shall be the exclusive property of the Company and shall, together with any and all copies thereof, be returned to the Company (or the Executive shall certify to the Company that any such materials not returned have been destroyed) upon the earliest to occur of the termination of this Agreement, the expiration of the Consulting Period, and a request in writing by the Company for the return thereof. (c) The Consultant hereby covenants and agrees that, during the Consulting Period, and for a period of six months thereafter, he shall not, without the written consent of the Company, either directly or indirectly: (i) solicit, offer employment to, or take any other action intended to cause, any officer or employee of the Company or any affiliate to terminate his or her employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any entity that directly or indirectly competes with this Company in any market area in which it is then active; (ii) provide any information, advice or recommendation with respect to any such officer or employee of any entity engaged or to be engaged in the same or a competing business with the Company or any affiliate that is intended to cause any officer or employee of the Company or any affiliate to terminate his or her 4 5 employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any entity that directly or indirectly competes with the Company or any affiliate in any market area in which it is then active; (iii) solicit, provide any information, advice or recommendation or take any other action intended to have the effect of causing any customer of the Company or any affiliate to terminate an existing business or commercial relationship with the Company or any affiliate. (v) take any action intended to impair or otherwise impose a detriment upon relations between the Company and its affiliates and their customers or others or upon the business of the Company and its affiliates as then conducted. (d) The duties and obligations imposed on the Consultant under this section 6 are intended to be in addition to, and not in limitation or exclusion of, any duties and obligations which the Consultant may owe to the Company or its affiliates under applicable law. This section 6 shall be construed and enforced so as to give effect to this intent. The Consultant hereby stipulates that the Company has a legitimate business interest in restricting the Consultant's activities in the manner provided herein, and that the compensation paid to him hereunder is adequate compensation to him for the imposition and observance of such restrictions. Section 7. Termination of Agreement. This Agreement and the Consulting Period established hereunder shall terminate immediately upon the occurrence of any of the following events: (i) the Consultant's death; (ii) a determination by the Company, on the basis of a report from a competent medical doctor (to which the Consultant should have reasonable access), that the Consultant is mentally or physically unable to perform the services which may be required of him hereunder for a period of at least 180 consecutive days; (iii) the Consultant's material breach of his obligations under sections 3 or 6 hereof and a subsequent failure to substantially cure such breach after receiving notice thereof from the Company; (iv) the Consultant has been convicted of a felony; or (v) the Consultant's voluntary termination, upon 30 days written notice to the Company, of this Agreement. Following the termination of this Agreement, the Company shall have no further obligations hereunder, but the Consultant shall continue to be bound by the provisions of sections 6, 8 and 17. Section 8. No Employment Relationship Created. The relationship between the Company and the Consultant shall be that of client and independent contractor. The Company shall not assume, and specifically disclaims, any obligations of an employer to an employee which may exist under applicable law. The Consultant shall not have any of the rights of an employee with respect to the Company, and specifically waives any and all such rights. The Consultant hereby agrees to take any and all such actions as the Company may reasonably request in order to establish that no employment relationship exists 5 6 between the parties. The Consultant shall be treated as an independent contractor for all purposes of federal, state and local income taxes and payroll taxes. Section 9. Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the Consultant, his legal representatives and testate or intestate distributees, and the Company, and their respective successors and assigns, including, in the case of the Company, any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the respective assets and business of the Company may be sold or otherwise transferred. Notwithstanding the foregoing, the availability of the personal services of the Consultant is an integral part of this Agreement. The Consultant's duty of performance hereunder shall not be subject to assignment, and the rights, if any, of the Consultant hereunder shall inure to the benefit of his legal representatives and testate or intestate distributees only to the extent that such rights shall have accrued prior to the date of the Consultant's death or legal incapacity. Section 10. Notices. Any communication required or permitted to be given under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: If to the Consultant: John J. Conefry, Jr. 5 Butler Place Garden City, New York 11530 With a copy to: Milbank Tweed Hadley & McCloy 1 Chase Manhattan Plaza New York, New York 10005 Attention: Mel M. Immergut, Esq. If to the Company: Astoria Financial Corporation One Astoria Federal Plaza Lake Success, New York 11042-1085 6 7 Attention: General Counsel with a copy to: Thacher Proffitt & Wood Two World Trade Center New York, New York 10048 Attention: W. Edward Bright, Esq. Section 11. Severability. A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. Section 12. Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. Section 13. Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. Section 14. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to contracts entered into and to be performed entirely within the State of New York. Notwithstanding anything herein contained to the contrary, any payments to the Consultant by the Company, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. ss.1828(k), and any regulations promulgated thereunder. Section 15. Headings and Construction. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. 7 8 Section 16. Entire Agreement; Modifications. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof. This Agreement does not supercede the Letter Agreement dated April 2, 1998 between the Consultant, the Company and the Association pursuant to section 4.16(b) of the Agreement and Plan of Merger. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. Section 17. Dispute Resolution. Any controversy or claim arising out of or relating to this Agreement, or the breach hereof, shall be settled by arbitration in accordance with the Commercial Rules of the American Arbitration Association and judgment upon the award rendered by the arbitral tribunal may be entered in any court having jurisdiction thereof. The arbitration shall be held in Nassau County, New York, or at such other place as may be selected by mutual agreement. The arbitration shall be conducted before a panel of three neutral arbitrators, all of whom shall be members of the Bar of the State of New York, actively engaged in the practice of law for at least ten (10) years. Within fifteen (15) days after the commencement of the arbitration, each party shall select one person to act as arbitrator, and the two selected shall select a third arbitrator within ten (10) days after their appointment; if the arbitrators selected by the parties hereto are unable or fail to agree upon the third arbitrator, the third arbitrator shall be selected by the President of the American Arbitration Association or his designee. Either party may, without inconsistency with this Agreement, seek from a court any interim or provisional relief that may be necessary to protect the rights or property of that party pending the arbitral tribunal's determination of the merits of the controversy. Neither party nor the arbitrators may disclose the existence, content, or results of any arbitration hereunder without the prior written consent of both parties. The prevailing party shall be entitled to an award of reasonable attorneys' fees. Section 18. Survival. The provisions of sections 4, 6, 8-17, 19 and 20 shall survive the expiration of the Consulting Period or termination of this Agreement. Section 19. Equitable Remedies. The Company and the Consultant hereby stipulate that money damages are an inadequate remedy for violations of section 3, 6, 7, 8 and 17 of this Agreement and agree that equitable remedies, including, without limitations, the remedies of specific performance and injunctive relief, shall be available with respect to the enforcement of such provisions. Section 20. Indemnification. To the maximum extent permitted under applicable law, during 8 9 the period beginning on the first day of the Consulting Period and ending six (6) years after the later of (a) the last day of the Consulting Period or (b) the last day on which the Consultant performs services for which an hourly fee is payable under section 4 hereof, the Company shall indemnify the Consultant against, and hold him harmless from any costs, liabilities, losses and exposures to the fullest extent and on the most favorable terms and conditions that similar indemnification is offered to any director or officer of the Company or any subsidiary or affiliate thereof. Section 21. Effective Date. The Effective Date of this Agreement shall be the Closing Date. In the event that the merger contemplated by the Agreement and Plan of Merger is not consummated, this Agreement shall have no force or effect. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and the Consultant has hereunto set his hand, all as of the day and year first above written. ATTEST: ASTORIA FINANCIAL CORPORATION By /S/ William K. Sheerin By /S/ George L. Engelke, Jr. Name: George L. Engelke, Jr. Title: Chairman, President and Chief Executive Officer [Seal] 9 EX-10.39 13 AFC CONSULTING AGREEMENT WITH L. PETERS 1 CONSULTING AGREEMENT This CONSULTING AGREEMENT ("Agreement") is made and entered into as of April 2, 1998 by and between ASTORIA FINANCIAL CORPORATION, a corporation organized and existing under the laws of the State of Delaware and having its executive offices at One Astoria Federal Plaza, Lake Success, New York 11042-1085 ("Corporation") and LAWRENCE W. PETERS, residing at 143 CABOT ROAD, MASSAPEQUA, NEW YORK 11758 ("Consultant"). WITNESSETH: WHEREAS, pursuant to an Agreement and Plan of Merger by and between the Corporation and Long Island Bancorp, Inc. ('Seller") dated April 2, 1998 ("Agreement and Plan of Merger"), the Corporation and the Seller have agreed to a merger of the Seller with the Corporation, effective as of the closing date specified in the Agreement and Plan of Merger ("Closing Date"); and WHEREAS, the Consultant is a senior executive officer of the Seller and is familiar with its business, operations and properties; and WHEREAS, the Consultant is a party to Employment Agreements with the Seller and The Long Island Savings Bank, FSB ('Seller Bank") which provide a financial incentive for him to resign from employment with the Seller and the Seller Bank or their successors upon consummation of a transaction of the nature contemplated by the Agreement and Plan of Merger; and WHEREAS, for purposes of facilitating a smooth transition in ownership and control, and an effective consolidation of the Seller's operations with those of the Corporation, the Corporation wishes to secure for itself and its wholly owned subsidiary, Astoria Federal Savings and Loan Association ("Association"), the services of the Consultant for a period of one year following the Closing Date; and WHEREAS, the Consultant is willing to make his services available to the Corporation on the terms and conditions hereinafter set forth; NOW, THEREFORE, the Corporation and the Consultant hereby agree as follows: Section 1. Engagement; Period of Engagement. (a) The Corporation offers to engage the Consultant, and the Consultant hereby accepts such engagement, to provide services to the Corporation as a consultant for the period established under this section 1 ("Period of Engagement"). The Period of Engagement shall be for one year beginning on the Closing Date and ending on the first anniversary date of 2 the Closing Date. (b) Notwithstanding anything herein to the contrary, the Period of Engagement shall end upon any termination of this Agreement pursuant to section 6. Section 2. Extent of Services. (a) During the Period of Engagement, the Consultant shall hold himself available during regular business hours to perform such services in connection with the transition of the ownership and operation of the businesses and assets acquired by the Corporation pursuant to the Agreement and Plan of Merger and the other businesses of the Corporation and its affiliates as the Corporation may reasonably request; provided, however, that the Corporation shall have no obligation to avail itself of the Consultant's services. The services which may be required of the Consultant hereunder may include, but are not limited to, preserving the Seller Bank's franchise by promoting the Association and its products and services in communities previously served by the Seller Bank; promoting the recognition and acceptance of the Association as the Seller Bank's successor among the Seller Bank's customers; and otherwise facilitating the transition of ownership and control and an effective consolidation of the Seller's operations with those of the Corporation. The Corporation may, in its sole and absolute discretion, engage other employees or independent contractors to perform any or all of the services for which the Consultant is available under this section 2(a). The Consultant may engage in business activities and perform services as an employee or independent contractor (other than for the Corporation) to the extent that such business activities and/or the performance of such services does not impair the Consultant's availability to perform services for the Corporation as contemplated by this Agreement or contravene the provisions of section 5 of this Agreement. (b) In the performance of any services required of him hereunder, the Consultant shall have exclusive control over the manner of performance of such services, including, without limitation: the selection, supervision and compensation of personnel, if any, in addition to the Consultant to be involved in the performance of such services; the selection of methods, procedures, strategies and equipment to be employed in the performance of such services; and determination of the times, places and dates at which such services will be performed. The Consultant shall provide his consulting services under this Agreement to the Chairman of the Corporation or a designee of the Chairman of the Corporation. Section 3. Compensation. In consideration for the availability of the Consultant's services hereunder, as well as for any services to be provided under section 2(a), the Corporation shall pay to the Consultant a retainer at the annual rate of FIVE HUNDRED THOUSAND DOLLARS ($500,000), payable in advance in monthly installments, the first such installment to be paid on the first business day of the first calendar month following the Closing Date; provided, however, that no payment shall be made for any month after the month in which this Agreement terminates as provided in section 6 hereof. 3 Section 4. Expenses. (a) The Corporation shall provide the Consultant with office facilities and secretarial and other support services on its premises to the extent required to perform the consulting services contemplated herein, as determined by the Corporation in its discretion. (b) If, in connection with the performance of service hereunder at the request of the Corporation, the Consultant incurs out-of-pocket costs for expenses for travel, meals and lodging or other reasonable expenses of a type for which other providers of professional services to the Corporation would be reimbursed by the Corporation, he shall be entitled to reimbursement therefor by the Corporation in accordance with the reasonable standards and procedures established by the Corporation and communicated to the Consultant. Section 5. Confidentiality; Nonsolicitation. (a) During the Period of Engagement and at all times thereafter, the Consultant, except as previously authorized by the Corporation in writing, shall keep confidential and shall refrain from using or disclosing for the benefit of any person or entity other than the Corporation or the Association any document or information obtained in the course of performing services under this Agreement or as an officer, employee, or director of Seller or Seller Bank prior to the Closing Date. The preceding sentence shall not apply to the use or disclosure of any such document or information: (i) on or following the date on which such information or document is first readily ascertainable from public or published information or trade sources; or (ii) in connection with any judicial or administrative investigation, inquiry or proceeding to the extent compelled pursuant to applicable law and as to which, unless expressly prohibited by applicable law, the Consultant has given notice to the Corporation as soon as reasonably practicable after such compulsion. (b) The Consultant acknowledges that during the course of his employment with the Seller or Seller Bank and performance of service for the Corporation he may develop or otherwise acquire papers, files or other records involving or relating to confidential or secret plans, design information of any kind, devices, material, research, new product development, customers or customer lists. All such papers, files and other records identified as confidential by the Corporation shall be the exclusive property of the Corporation and shall, together with any and all copies thereof, be returned to the Corporation (or the Consultant shall certify to the Company that any such materials not returned have been destroyed) upon the earliest to occur of the termination of this Agreement, the expiration of the Period of Engagement, and a request by the Corporation for the return thereof. (c) The Consultant hereby covenants and agrees that, during the Period of Engagement and for six months thereafter, he shall not, without the written consent of the Corporation, either directly or indirectly: (i) solicit, offer employment to, or take any other action intended to cause any officer or employee of the Corporation or any affiliate to terminate his 4 or her employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any entity that directly or indirectly competes with this Corporation in any market area in which it is then active; (ii) provide any information, advice or recommendation with respect to any such officer or employee of any entity engaged or to be engaged in the same or a competing business with the Corporation or any affiliate that is intended to cause any officer or employee of the Corporation or any affiliate to terminate his or her employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any entity that directly or indirectly competes with the Corporation or any affiliate in any market area in which it is then active; (iii) solicit, provide any information, advice or recommendation or take any other action intended, or to cause any customer of the Corporation or any affiliate to terminate an existing business or commercial relationship with the Corporation or any affiliate; or (iv) take any action as a result of which the relations between the Corporation and its affiliates and their customers or others are impaired or which is otherwise detrimental to the business of the Corporation and its affiliates as then conducted. (d) The duties and obligations imposed on the Consultant under this section 5 are intended to be in addition to, and not in limitation or exclusion of, any duties and obligations which the Consultant may owe to the Corporation or its affiliates under applicable law. This section 5 shall be construed and enforced so as to give effect to this intent. The Consultant hereby stipulates that the Corporation has a legitimate business interest in restricting the Consultant's activities in the manner provided herein, and that the compensation paid to him hereunder is adequate compensation to him for the imposition and observance of such restrictions. Section 6. Termination of Agreement. This Agreement and the Period of Engagement established hereunder shall terminate immediately upon the occurrence of any of the following events: (i) the Consultant's death; (ii) a determination by the Corporation, on the basis of a report from a competent medical doctor (to which the Consultant shall have access), that the Consultant is mentally or physically unable to perform the services which may be required of him hereunder for a period of at least 180 consecutive days; (iii) the Consultant's material breach of his obligations under sections 2 or 5 hereof and subsequent failure to substantially cure such breach after notice of such breach; (iv) the Consultant has been convicted of a felony; or (v) the Consultant's voluntary termination, upon 30 days notice to the Corporation, of this Agreement. Following the termination of this Agreement, the Corporation shall have no further obligations hereunder, but the Consultant shall continue to be bound by the provisions of sections 5, 7 and 17. 5 Section 7. No Employment Relationship Created. The relationship between the Corporation and the Consultant shall be that of client and independent contractor. The Corporation shall not assume, and specifically disclaims, any obligations of an employer to an employee which may exist under applicable law. The Consultant shall not have any of the rights of an employee with respect to the Corporation, and specifically waives any and all such rights. The Consultant hereby agrees to take any and all such actions as the Corporation may reasonably request in order to establish that no employment relationship exists between the parties. The Consultant shall be treated as an independent contractor for all purposes of federal, state and local income taxes and payroll taxes. Section 8. Right to Specific Performance. The Consultant hereby agrees that any breach of his covenants and agreements under sections 5, 7 or 17 of this Agreement will cause irreparable injury to the Corporation for which the Corporation has no adequate remedy at law. Therefore, the Consultant agrees that each and every covenant and agreement set forth in section 5, 7 and 17 shall, in addition to and not by way of limitation of any other remedy (including money damages) which may be available, be specifically enforceable against him by any party entitled to enforcement thereof. Section 9. Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the Consultant, his legal representatives and testate or intestate distributees, and the Corporation, and their respective successors and assigns, including, in the case of the Corporation, any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the respective assets and business of the Corporation may be sold or otherwise transferred. Notwithstanding the foregoing, the availability of the personal services of the Consultant is an integral part of this Agreement. The Consultant's duty of performance hereunder shall not be subject to assignment, and the rights, if any, of the Consultant hereunder shall inure to the benefit of his legal representatives and testate or intestate distributees only to the extent that such rights shall have accrued prior to the date of the Consultant's death or legal incapacity. Section 10. Notices. Any communication required or permitted to be given under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: 6 If to the Consultant: Lawrence W. Peters 143 Cabot Road Massapequa, New York 11758 with a copy to: Milbank, Tweed, Hadley & McCloy 1 Chase Manhattan Plaza New York, New York 10005 Attention: Frederick C. Kneip, Esq. If to the Corporation: Astoria Financial Corporation One Astoria Federal Plaza Lake Success, New York 11042-1085 Attention: General Counsel with a copy to: Thacher Proffitt & Wood Two World Trade Center New York, New York 10048 Attention: W. Edward Bright, Esq. Section 11. Severability. A determination that any provision of this Agreement, in whole or in part, is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof or of any part of the provision in question not determined to be unenforceable. Section 12. Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. Section 13. Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, and all of which shall 7 constitute one and the same Agreement. Section 14. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without giving effect to the conflict of law principles of such laws. Notwithstanding anything herein contained to the contrary, any payments to the Consultant by the Corporation, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. ss.1828(k), and any regulations promulgated thereunder. Section 15. Headings and Construction. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. Section 16. Entire Agreement; Modifications. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof. This Agreement does not supercede the Letter Agreement dated April 2, 1998 between the Consultant, the Corporation and the Association pursuant to section 4.16(b) of the Agreement and Plan of Merger. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. Section 1 7. Dispute Resolution. Any controversy or claim arising out of or relating to this Agreement, or the breach hereof, shall be settled by arbitration in accordance with the Commercial Rules of the American Arbitration Association and judgment upon the award rendered by the arbitral tribunal may be entered in any court having jurisdiction thereof. The arbitration shall be held in Nassau County, New York, or at such other place as may be selected by mutual agreement. The arbitration shall be conducted before a panel of three neutral arbitrators, all of whom shall be members of the Bar of the State of New York, actively engaged in the practice of law for at least ten (10) years. Within fifteen (15) days after the commencement of the arbitration, each party shall select one person to act as arbitrator, and the two selected shall select a third arbitrator within ten (10) days after their appointment; if the arbitrators selected by the parties hereto are unable or fail to agree upon the third arbitrator, the third arbitrator shall be selected by the President of the American Arbitration Association or his designee. Either party may, without inconsistency with this Agreement, seek from a court any interim or provisional relief that may be necessary to protect the rights or property of that party pending the arbitral tribunal's determination of the merits of the controversy. Neither party nor the arbitrators may disclose the existence, content, or results of any arbitration hereunder without the prior written consent of both parties. The prevailing party shall be entitled to an award of reasonable attorneys' fees. 8 Section 18. Indemnification. To the maximum extent permitted under applicable law, during the Period of Engagement and for a period of six (6) years thereafter, the Corporation shall indemnify the Consultant against, and hold him harmless from any costs, liabilities, losses and exposures to the fullest extent and on the most favorable terms and conditions that similar indemnification is offered to any director, officer or former director or officers of the Corporation or any subsidiary or affiliate thereof. Section 19. Survival. The provisions of sections 5, 7, 8, 9, 10, 17, and 18 of this Agreement shall survive the termination of this Agreement or the expiration of the Period of Engagement. Section 20. Effective Date. The effective date of this Agreement shall be the Closing Date. In the event that the merger contemplated by the Agreement and Plan of Merger is not consummated, this Agreement shall have no force or effect. IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed and the Consultant has hereunto set his hand, all as of the day and year first above written. /S/ Lawrence W. Peters LAWRENCE W. PETERS ASTORIA FINANCIAL CORPORATION By: /S/ George L. Engelke, Jr. Title: Chairman, President and Chief Executive Officer ATTEST: By /S/ William K. Sheerin Secretary EX-10.40 14 AGREEMENT BETWEEN J. CONEFRY AND AFC 1 John J. Conefry, Jr. 5 Butler Place Garden City, New York 11530 April 2, 1998 Astoria Financial Corporation One Astoria Federal Plaza Lake Success, New York Gentlemen: The purpose of this letter is to set forth the agreement that we have reached concerning the settlement of certain obligations of Long Island Bancorp, Inc. ("LISB") and The Long Island Savings Bank FSB ("LISB Bank") to me in connection with the merger of LISB with and into Astoria Financial Corporation ("AFC") and LISB Bank with and into Astoria Federal Savings and Loan Association ("AFSL") pursuant to the Agreement and Plan of Merger dated as of April 2, 1998 by and between AFC and LISB (the "Merger Agreement"). 1. My Agreement. Section 2.03(o) of the Merger Agreement provides for a schedule showing a good faith estimate of the present value as of September 30, 1998 of the monetary amounts (including tax indemnification payments in respect of income and/or excise taxes) and identifying the in-kind benefits due to me under, and in accordance with the terms and provisions of, all employment agreements, change in control agreements, severance agreements, termination agreements, severance plans, pension, retirement or deferred compensation plans for non-employee directors, supplemental executive retirement programs, tax indemnification agreements, outplacement programs, cash bonus programs, stock appreciation rights, phantom stock or stock unit plans, and health, life, disability and other insurance or welfare plans or other arrangements, but excluding any tax-qualified pension, profit-sharing or employee stock ownership plans and any stock option or restricted stock plan (the "Specified Compensation and Benefit Programs"), in the event of my discharge other than for cause or in the event of my resignation for good reason at or following the date of the closing of the transactions contemplated by the Merger Agreement (the "Closing Date"). The Specified Compensation and Benefit Programs shall include but not be limited to the employment agreement between LISB and myself and the employment agreement between LISB Bank and myself (collectively the "Employment Agreement"), the LISB Bank Severance Benefits Plan ("Severance Benefits Plan"), the LISB Bank Deferred Income Plan ("Deferred Pension Plan") and the LISB Non-Employee Directors Retirement Benefit Plan ("Retirement Plan for Non-Employee Directors"). I hereby acknowledge and agree (A) that the Specified Compensation and Benefit Programs listed on Schedules A and B attached are the only Specified Compensation and Benefit Programs under which I am entitled in connection with the transactions contemplated by the Merger Agreement to receive any compensation payments or benefits and that the amounts actually paid to or in respect of me, in the aggregate, shall not exceed 111 % of the aggregate amount shown on such Schedule A and (B) to deliver in exchange for such compensation and benefits a written release, in the form attached hereto as Exhibit A (the "Release"), of any further claim in respect of compensatory monetary amounts and in-kind benefits under the Specified Compensation and Benefit Programs. These good faith estimates are based upon the provisions of the Specified Compensation and Benefits Programs as of April 2, 1998 and my compensation as of April 2, 1998, adjusted for anticipated increases in base salary. 2. AFC's Agreement. AFC acknowledges that the consummation of the transactions contemplated by the Merger Agreement shall, upon consummation, constitute a "change of control" and "good reason" event under the existing terms of the Specified Compensation and Benefit Programs and that, if I am an employee of LISB and/or LISB Bank as of the Closing Date, AFC will provide, subject to the aggregate limitations imposed Page 1 of 2 2 by paragraph 1 hereof, to me all of the payments and benefits for which estimates and/or descriptions are provided under paragraph 1 hereof as if I resigned for good reason on the Closing Date, whether or not I continue to provide services to AFC or AFSL after the Closing Date. All cash payments shall be made to me (or, if payable in installments, shall begin) within 5 days after the Closing Date and all in-kind or other benefits shall be provided to me in accordance with the terms and provisions of the Specified Compensation and Benefits Programs. It is understood and agreed that whether a Section 28OG Gross-up payment will be paid by AFC will be determined by KPMG Peat Marwick LLP or by legal counsel reasonably acceptable to me (which determination, if I so request, shall be in the form of a written opinion reasonably satisfactory to my legal counsel), and that the calculation of the amount of any such Section 28OG Gross-up payment will be made as of the Closing Date by KPMG Peat Marwick LLP, subject to review by the parties hereto. All other estimates provided under paragraph I hereof shall be adjusted only to the extent necessary to correct any manifest error(s). Notwithstanding anything in this letter agreement to the contrary, the determination of whether a Section 28OG Gross up Payment is payable to me, and the amount of any such payment (including, but not limited to, additional payments by AFC or refunds of overpayments to AFC), shall be subject to change after the Closing Date, to the extent and in the manner provided in Sections 6.9.1, 6.9.3 and 6.9.4 of the Employment Agreement, with any additional payments or refunds to be paid at the time provided in such Section 6.9.4 or in Section 6. 10 of the Employment Agreement, as applicable. 3. Other Matters. This letter agreement, when signed by me and countersigned by AFC and AFSL below, will constitute the entire agreement between the parties with regard to the subject matter hereof and will supersede, to the extent payments and benefits are paid or provided hereunder, in their entirety any and all prior agreements, understandings and undertakings, whether or not in writing, with regard to the subject matter hereof. This letter agreement will be construed and enforced in accordance with the laws of the State of New York applicable to contracts between parties all of whom are citizens and residents of New York and which are to be performed wholly within the boundaries of the State of New York. This letter agreement may be executed to two or more counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. Very truly yours, /S/ John J. Conefry, Jr. John J. Conefry, Jr. ACCEPTED AND AGREED TO: ASTORIA FINANCIAL CORPORATION By /S/ George L. Engelke, Jr. Dated: July 8. 1998 ----------------------------------------------- ------------ Name: George L. Engelke, Jr. Title: Chairman, President and Chief Executive Officer ACCEPTED AND AGREED TO: ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION By /S/ George L. Engelke, Jr. Dated: July 8. 1998 ------------------------------------------------ ------------ Name: George L. Engelke, Jr. Title: Chairman, President and Chief Executive Officer Page 2 of 2 3 Exhibit A FORM OF RELEASE 1. In consideration of the payment by Astoria Financial Corporation ("AFC") of $ ______________ the receipt of which is hereby acknowledged, I, ______________ for myself and my heirs, executors, administrators, successors and assigns, hereby irrevocably and unconditionally release and forever discharge AFC, Astoria Federal Savings and Loan Association ("Association"), Long Island Bancorp, Inc. ("LISB") and The Long Island Savings Bank, FSB ("LISB Bank"), the stockholders, subsidiaries, affiliates, officers, directors, employees and agents of either of them, and their respective heirs, executors, administrators, successors and assigns (collectively, the "Releasee") of and from all actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims, and demands whatsoever, in law, admiralty or equity, which against the Releasee, I or my heirs, executors, administrators, successors or assigns ever had, now have or hereafter can, shall or may, have by reason of any matter, cause or thing whatsoever for payment of any amount owed pursuant to the Specified Compensation and Benefit Programs (as defined in the Agreement and Plan of Merger, dated April 2, 1998, by and between AFC and LISB), except for any continuing obligations of AFC or the Association under (i) the Employment Agreement dated ____________, 199__ among LISB and me, (ii) the Employment Agreement dated ________________, 199__ among LISB Bank and me (collectively the "Employment Agreements") the obligations of which have been assumed by AFC and the Association (as more particularly described in paragraph 2 below), (iii) any Employment Agreement and/or Consulting Agreement among AFC, the Association and me, and (iv) any additional benefits set forth on Schedule A to the letter agreement among AFC and me, dated April 2, 1998, pursuant to section 4.16(b) of the Agreement and Plan of Merger (the "Letter Agreement"). 2. 1 acknowledge that such payment will constitute, and agree to accept it as, full settlement of any and all rights which I may have pursuant to the Specified Compensation and Benefits Programs, except for any continuing obligations of AFC or the Association under the Employment Agreements dated __________ , 199__ among LISB, LISB Bank and me, the obligations of which have been assumed by AFC and the Association, which shall be: (a) continued welfare benefits in accordance with section 6.4(e) of the Employment Agreements, as amended, between LISB, LISB Bank and me; (b) a tax reimbursement payment (including without limitation any subsequent adjustments) in accordance with section 6.9 of the Employment Agreements; (c) indemnification for legal fees, expenses, liabilities and losses relating to or in connection with my employment with LISB and LISB Bank in accordance with section 11 of the Employment Agreements; (d) reimbursement for all reasonable fees and expenses in accordance with Section 8 of the Employment Agreements; (e) any rights under Section 6.7 of the Employment Agreements; (f) quarterly payments of Vested Deferred Income pursuant to The Long Island Savings Bank, FSB Deferred Pension Plan; (g) welfare benefits under any "Rule of 75" retiree provisions; and (h) any additional benefits set forth on Schedule A to the Letter Agreement. 3. This instrument may not be changed orally. IN WITNESS WHEREOF, I have executed this Instrument this_________ day of 1998. _______________________________________________ [Settling Party] STATE OF NEW YORK ) : ss. COUNTY OF NEW YORK ) On _______________, 1998, before me personally came_______________ to me known, and known to me to be the person named in the above instrument, who did depose and say that he is the person referred to as the undersigned in the above instrument and that he signed his name thereto as his free act and deed. ____________________________ Notary Public 4 Conefry - - ------------------------------------------------------------------ SCHEDULE A ------------------ Contract Pay-out 3 times highest Salary $2,100,000 3 times highest Bonus $1,200,000 3 years of Welfare Benefits $37,480 28OG Gross-Up $2,082,343 Prior Year Bonus $400,000 Severance $350,000 Vacation (# of Weeks X Salary) $80,769 Split Dollar $345,000 Deferred Pension Payout -- Computer $7,000 Car (estimate) $40,000 Outplacement Services $50,000 Waiver of Non-Compete -- Maintain Life Insurance -- Maintain Health for Spouse -- Retire Under Rule of 75 -- (open window) *** Schedule A does not include ( i ) stock options and/or shares received under the LISB Stock Option Plan or the LISB Management Retention and Recognition Plan for Executive Officers and ( ii ) benefits under the other LISB plans that are specifically excluded from the definition of " Specified Compensation and Benefits Programs" contained in Section 2.03 ( o ) of the Agreement and the Plan of Merger. 5 Schedule B CONEFRY Co. Cost Participates Paid By Medical $8,388 Yes Shared Dental $565 Yes Shared Long Term Disability $540 Yes LISB Life Insurance $2,640 Yes LISB Accidental Death & $360 Yes LISB Dismemberment _________ $12,493.3 Agreement Coverage 3 __________ $37,479.96 __________ The company costs set forth above reflect LISB's out of pocket premium, not including employee contributions, for welfare benefits, and does not reflect the full costs for benefits coverage. 6/12/98 EX-10.41 15 AGREEMENT BETWEEN L. PETERS AND AFC 1 Lawrence W. Peters 143 Cabot Road Massapequa, New York 11758 April 2, 1998 Astoria Financial Corporation One Astoria Federal Plaza Lake Success, New York Gentlemen: The purpose of this letter is to set forth the agreement that we have reached concerning the settlement of certain obligations of Long Island Bancorp, Inc. ("LISB") and The Long Island Savings Bank FSB ("LISB Bank") to me in connection with the merger of LISB with and into Astoria Financial Corporation ("AFC") and LISB Bank with and into Astoria Federal Savings and Loan Association ("AFSL") pursuant to the Agreement and Plan of Merger dated as of April 2, 1998 by and between AFC and LISB (the "Merger Agreement"). 1. My Agreement. Section 2.03(o) of the Merger Agreement provides for a schedule showing a good faith estimate of the present value as of September 30, 1998 of the monetary amounts (including tax indemnification payments in respect of income and/or excise taxes) and identifying the in-kind benefits due to me under, and in accordance with the terms and provisions of, all employment agreements, change in control agreements, severance agreements, termination agreements, severance plans, pension, retirement or deferred compensation plans for non-employee directors, supplemental executive retirement programs, tax indemnification agreements, outplacement programs, cash bonus programs, stock appreciation rights, phantom stock or stock unit plans, and health, life, disability and other insurance or welfare plans or other arrangements, but excluding any tax-qualified pension, profit-sharing or employee stock ownership plans and any stock option or restricted stock plan (the "Specified Compensation and Benefit Programs"), in the event of my discharge other than for cause or in the event of my resignation for good reason at or following the date of the closing of the transactions contemplated by the Merger Agreement (the "Closing Date"). The Specified Compensation and Benefit Programs shall include but not be limited to the employment agreement between LISB and myself and the employment agreement between LISB Bank and myself (collectively the "Employment Agreement"), the LISB Bank Severance Benefits Plan ("Severance Benefits Plan"), the LISB Bank Deferred Income Plan ("Deferred Pension Plan") and the LISB Non-Employee Directors Retirement Benefit Plan ("Retirement Plan for Non-Employee Directors"). I hereby acknowledge and agree (A) that the Specified Compensation and Benefit Programs listed on Schedules A and B attached are the only Specified Compensation and Benefit Programs under which I am entitled in connection with the transactions contemplated by the Merger Agreement to receive any compensation payments or benefits and that the amounts actually paid to or in respect of me, in the aggregate, shall not exceed 111 % of the aggregate amount shown on such Schedule A and (B) to deliver in exchange for such compensation and benefits a written release, in the form attached hereto as Exhibit A (the "Release"), of any further claim in respect of compensatory monetary amounts and in-kind benefits under the Specified Compensation and Benefit Programs. These good faith estimates are based upon the provisions of the Specified Compensation and Benefits Programs as of April 2, 1998 and my compensation as of April 2, 1998, adjusted for anticipated increases in base salary. 2. AFC's Agreement. AFC acknowledges that the consummation of the transactions contemplated by the Merger Agreement shall, upon consummation, constitute a "change of control" and "good reason" event under the existing terms of the Specified Compensation and Benefit Programs and that, if I am an employee of LISB and/or LISB Bank as of the Closing Date, AFC will, subject to the aggregate limitations imposed under Page 1 of 2 2 paragraph 1 hereof, provide to me all of the payments and benefits for which estimates and/or descriptions are provided under paragraph 1 hereof as if I resigned for good reason on the Closing Date, whether or not I continue to provide services to AFC or AFSL after the Closing Date. All cash payments shall be made to me (or, if payable in installments, shall begin) within 5 days after the Closing Date and all in-kind or other benefits shall be provided to me in accordance with the terms and provisions of the Specified Compensation and Benefits Programs. It is understood and agreed that whether a Section 28OG Gross-up payment will be paid by AFC will be determined by KPMG Peat Marwick LLP or by legal counsel reasonably acceptable to me (which determination, if I so request, shall be in the form of a written opinion reasonably satisfactory to my legal counsel), and that the calculation of the amount of any such Section 28OG Gross-up payment will be made as of the Closing Date by KPMG Peat Marwick LLP, subject to review by the parties hereto. All other estimates provided under paragraph I hereof shall be adjusted only to the extent necessary to correct any manifest error(s). Notwithstanding anything in this letter agreement to the contrary, the determination of whether a Section 28OG Gross up Payment is payable to me, and the amount of any such payment (including, but not limited to, additional payments by AFC or refunds of overpayments to AFC), shall be subject to change after the Closing Date, to the extent and in the manner provided in Sections 6.8.1, 6.8.3 and 6.8.4 of the Employment Agreement, with any additional payments or refunds to be paid at the time provided in such Section 6.8.4 or in Section 6.9 of the Employment Agreement, as applicable. 3. Other Matters. This letter agreement, when signed by me and countersigned by AFC and AFSL below, will constitute the entire agreement between the parties with regard to the subject matter hereof and will supersede, to the extent payments and benefits are paid or provided hereunder, in their entirety any and all prior agreements, understandings and undertakings, whether or not in writing, with regard to the subject matter hereof. This letter agreement will be construed and enforced in accordance with the laws of the State of New York applicable to contracts between parties all of whom are citizens and residents of New York and which are to be performed wholly within the boundaries of the State of New York. This letter agreement may be executed to two or more counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. Very truly yours, /S/ Lawrence W. Peters Lawrence W. Peters ACCEPTED AND AGREED TO: ASTORIA FINANCIAL CORPORATION By /S/ George L. Engelke, Jr. Dated: July 8. 1998 --------------------------------------------------- ------------ Name: George L. Engelke, Jr. Title: Chairman, President and Chief Executive Officer ACCEPTED AND AGREED TO: ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION By /S/ George L. Engelke, Jr. Dated: July 8. 1998 --------------------------------------------------- ------------ Name: George L. Engelke, Jr. Title: Chairman, President and Chief Executive Officer Page 2 of 2 3 Exhibit A FORM OF RELEASE 1. In consideration of the payment by Astoria Financial Corporation ("AFC") of $ ______________ the receipt of which is hereby acknowledged, I, _________________ for myself and my heirs, executors, administrators, successors and assigns, hereby irrevocably and unconditionally release and forever discharge AFC, Astoria Federal Savings and Loan Association ("Association"), Long Island Bancorp, Inc. ("LISB") and The Long Island Savings Bank, FSB ("LISB Bank"), the stockholders, subsidiaries, affiliates, officers, directors, employees and agents of either of them, and their respective heirs, executors, administrators, successors and assigns (collectively, the "Releasee") of and from all actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims, and demands whatsoever, in law, admiralty or equity, which against the Releasee, I or my heirs, executors, administrators, successors or assigns ever had, now have or hereafter can, shall or may, have by reason of any matter, cause or thing whatsoever for payment of any amount owed pursuant to the Specified Compensation and Benefit Programs (as defined in the Agreement and Plan of Merger, dated April 2, 1998, by and between AFC and LISB), except for any continuing obligations of AFC or the Association under (i) the Employment Agreement dated ________, 199__ among LISB and me, (ii) the Employment Agreement dated _________, 199__ among LISB Bank and me (collectively the "Employment Agreements") the obligations of which have been assumed by AFC and the Association (as more particularly described in paragraph 2 below), (iii) any Employment Agreement and/or Consulting Agreement among AFC, the Association and me, and (iv) any additional benefits set forth on Schedule A to the letter agreement among AFC and me, dated April 2, 1998, pursuant to section 4.16(b) of the Agreement and Plan of Merger (the "Letter Agreement"). 2. 1 acknowledge that such payment will constitute, and agree to accept it as, full settlement of any and all rights which I may have pursuant to the Specified Compensation and Benefits Programs, except for any continuing obligations of AFC or the Association under the Employment Agreements dated ________, 199__ among LISB, LISB Bank and me, the obligations of which have been assumed by AFC and the Association, which shall be: (a) continued welfare benefits in accordance with section 6.4(e) of the Employment Agreements, as amended, between LISB, LISB Bank and me; (b) a tax reimbursement payment (including without limitation any subsequent adjustments) in accordance with section 6.9 of the Employment Agreements; (c) indemnification for legal fees, expenses, liabilities and losses relating to or in connection with my employment with LISB and LISB Bank in accordance with section 11 of the Employment Agreements; (d) reimbursement for all reasonable fees and expenses in accordance with Section 8 of the Employment Agreements; (e) any rights under Section 6.7 of the Employment Agreements; (f) quarterly payments of Vested Deferred Income pursuant to The Long Island Savings Bank, FSB Deferred Pension Plan; (g) welfare benefits under any "Rule of 75" retiree provisions; and (h) any additional benefits set forth on Schedule A to the Letter Agreement. 3. This instrument may not be changed orally. IN WITNESS WHEREOF, I have executed this Instrument this day of 1998. _________________________________________ [Settling Party] STATE OF NEW YORK ) : ss. COUNTY OF NEW YORK ) On ____________ , 1998, before me personally came _______________ to me known, and known to me to be the person named in the above instrument, who did depose and say that he is the person referred to as the undersigned in the above instrument and that he signed his name thereto as his free act and deed. ______________________________________ Notary Public 4 Peters - - ------------------------------------------------------------------ SCHEDULE A ------------------ Contract Pay-out 3 times highest Salary $750,000 3 times highest Bonus $400,000 3 years of Welfare Benefits $13,343 28OG Gross-Up $1,213,130 Prior Year Bonus $200,000 Severance $250,000 Vacation (# of Weeks X Salary) $36,060 Split Dollar -- Deferred Pension Payout $525,000 Computer $7,000 Car (estimate) $40,000 Outplacement Services -- Waiver of Non-Compete YES** Maintain Life Insurance $33,000 per year - Board approved Maintain Health for Spouse Included above until age 65 - currently 62 Retirement plan for non employee (PV) $264,963 Deferred Stock Unit Plan $55,110 ** A waiver by AFC, LIB, The Long Island Savings Bank, FSB and Astoria Federal Savings and Loan Association of the "non-compete" provision contained in Section 4.03(b) of The Long Island Savings Bank, FSB Deferred Pension Plan. *** Schedule A does not include ( i ) stock options and/or shares received under the LISB Stock Option Plan or the LISB Management Retention and Recognition Plan for Executive Officers and ( ii ) benefits under the other LISB plans that are specifically excluded from the definition of " Specified Compensation and Benefits Programs" contained in Section 2.03 ( o ) of the Agreement and the Plan of Merger. 5 Schedule B LARRY PETERS Co. Cost Participates Paid By Medical $0 No Dental $0 No Long Term Disability $375 Yes LISB Life Insurance $858 Yes LISB Accidental Death & $117 Yes LISB Dismemberment SELMA PETERS Medical $2,533 Yes Shared Dental $565 Yes Shared Long Term Disability $0 No Life Insurance $0 No Accidental Death & $0 No Dismemberment __________ $8,447.8 Agreement Coverage __________3 $13,343.40 __________ The company costs set forth above reflect LISB's out of pocket premium, not including employee contributions, for welfare benefits, and does not reflect the full costs for benefits coverage. 6/12/98 EX-11.1 16 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 1 STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE FOR THE YEAR ENDED DECEMBER 31, 1998 BASIC Diluted EPS EPS ------- --------- Weighted average shares of Common Stock outstanding 54,177,609 54,177,609 ESOP: - - ----------- Total ESOP shares available 5,022,854 Shares committed to be released 1,655,268 ----------- (3,367,586) (3,367,586) RRPs - - ----------- Shares purchased, but not yet allocated .......... (8,425) (8,425) ------------ ----------- Total weighted average shares outstanding ........ 50,801,598 50,801,598 Dilutive effect of Stock Options: Incremental shares under treasury stock method: .. -- 2,084,593 ----------- ----------- Total average common and common stock equivalents 50,801,598 52,886,191 Net Income ....................................... 45,047,610 45,047,610 Less: Preferred Stock dividends declared ......... (6,000,000) (6,000,000) ----------- ----------- 39,047,610 39,047,610 ----------- ----------- EARNINGS PER SHARE ............................... $ 0.77 $ 0.74 ----------- ----------- EX-21.1 17 SUBSIDIARIES OF AFC 1 Exhibit 21.1 Subsidiaries of Astoria Financial Corporation - The following are the significant subsidiaries of Astoria Financial Corporation: Name: Astoria Federal Savings and Loan Association Jurisdiction of incorporation: United States of America Names under which it does business: (a) Astoria Federal Savings and Loan Association, and (b) Astoria Federal Savings Subsidiaries of Astoria Federal Savings and Loan Association - The following are the significant subsidiaries of Astoria Federal Savings and Loan Association: Name: Astoria Preferred Funding Corporation Jurisdiction of incorporation: Delaware Names under which it does business: (a) Astoria Preferred Funding Corporation Name: Starline Development Corp. Jurisdiction of incorporation: New York Names under which it does business: (a) Starline Development Corp. Name: 201 Old Country Road Inc. Jurisdiction of incorporation: New York Names under which it does business: (a) 201 Old Country Road Inc. Name: Astoria Federal Mortgage Corp. Jurisdiction of incorporation: New York Names under which it does business: (a) Astoria Federal Mortgage Corp. The remaining subsidiaries, which are all direct or indirect subsidiaries of Astoria Federal Savings and Loan Association would not, when considered in the aggregate as a single subsidiary, constitute a significant subsidiary as defined in 17 C.F.R. 210.1-02 (w) Rule 1- 02(w) of Regulation S-X as of December 31, 1998. For a description of the Registrant's subsidiaries, see Item 1 of "Business" of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. EX-23 18 CONSENT OF INDEPENDENT AUDITORS 1 KPMG LLP Letterhead 345 Park Avenue New York, NY 10154 Independent Auditors' Consent Board of Directors of Astoria Financial Corporation: We consent to incorporation by reference in the Registration Statements (Nos. 33-86248, 33-86250, 33-98500, 333-36807 and 333-64895) on Form S-8 and (No. 33-98532) on Form S-3 of Astoria Financial Corporation of our report dated January 21, 1999, relating to the consolidated statements of financial condition of Astoria Financial Corporation and subsidiary as of December 31, 1998 and 1997, 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 December 31, 1998, which report appears in the December 31, 1998 Annual Report on Form 10-K of Astoria Financial Corporation. /s/ KPMG LLP New York, New York March 24, 1999 EX-27 19 FDS -- YEAR ENDED DEC-31-1998
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF DECEMBER 31, 1998 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 126,945 0 266,437 0 8,196,444 2,108,811 2,123,440 9,026,631 74,403 20,587,741 9,668,286 65,000 434,274 8,957,797 0 2,000 547 1,459,837 20,587,741 637,028 587,420 0 1,224,448 399,602 775,465 448,983 15,380 10,976 46,912 117,510 55,685 (10,637) 0 45,048 0.77 0.74 2.58 106,297 4,776 0 4,904 73,920 19,160 4,409 74,403 74,403 0 0
EX-27.1 20 RESTATED FDS - 9 MOS. ENDED 9/30/98
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 1998 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 110,122 0 339,956 0 6,994,102 2,280,464 2,300,838 8,783,840 76,421 19,321,130 9,676,488 628,000 222,019 7,118,839 0 2,000 534 1,539,431 19,321,130 476,555 425,455 0 902,010 306,134 568,851 333,159 8,780 15,253 39,767 173,518 100,589 0 0 100,589 1.90 1.82 2.62 83,426 2,637 0 2,280 73,920 7,782 1,649 76,421 76,421 0 0
EX-27.2 21 RESTATED FDS - 6 MOS. ENDED 6/30/98
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF JUNE 30, 1998 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 111,399 0 275,529 0 5,724,728 2,500,941 2,517,646 8,660,977 72,138 18,094,136 9,770,908 271,000 370,608 6,161,648 0 2,000 533 1,517,439 18,094,136 314,539 274,428 0 588,968 205,604 368,079 220,889 3,614 11,789 20,227 129,839 75,725 0 0 75,725 1.44 1.38 2.67 82,502 8,856 0 5,512 73,920 6,123 701 72,138 72,138 0 0
EX-27.3 22 RESTATED FDS - 3 MOS ENDED 3/31/98
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF MARCH 31, 1998 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 102,781 0 191,703 0 5,099,583 2,610,526 2,618,754 8,401,774 73,749 17,221,576 9,967,758 554,318 342,192 4,876,715 0 2,000 533 1,478,060 17,221,576 154,531 135,316 0 289,847 103,482 179,622 110,225 1,800 5,176 9,861 61,545 36,206 0 0 36,206 0.69 0.66 2.73 83,493 6,019 0 5,345 73,920 2,279 454 73,749 73,749 0 0
EX-27.4 23 RESTATED FDS - YEAR ENDED 12/31/97
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF DECEMBER 31, 1997 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 Year DEC-31-1997 JAN-01-1997 DEC-31-1997 48,645 0 110,550 0 4,807,305 2,632,672 2,645,023 8,020,598 73,920 16,432,337 9,951,421 1,120,821 260,880 3,653,416 0 2,000 533 1,443,266 16,432,337 527,485 450,670 0 978,155 371,543 603,591 374,564 9,061 14,400 33,968 199,724 117,884 0 0 117,884 2.51 2.39 2.78 85,167 4,728 0 19,362 48,001 10,828 2,253 73,920 73,920 0 0
EX-27.5 24 RESTATED FDS - 9 MOS ENDED 9/30/97
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 1997 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 130,494 129,513 67,000 0 3,702,982 2,280,497 2,286,212 7,009,900 48,087 13,813,100 8,265,952 577,731 254,712 3,573,540 0 0 532 1,140,633 13,813,100 372,845 324,065 0 696,910 264,302 427,493 269,417 7,309 12,354 161,264 142,824 84,010 0 0 84,010 1.87 1.77 2.81 74,738 5,159 0 5,894 48,001 9,023 1,800 48,087 48,087 0 0
EX-27.6 25 RESTATED FDS - 6 MOS ENDED 6/30/97
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF JUNE 30, 1997 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 52,885 93,841 162,586 0 3,787,968 2,190,127 2,178,742 6,674,059 48,881 13,478,791 8,212,425 750,577 251,496 3,140,673 0 0 532 1,123,088 13,478,791 241,292 218,324 0 459,616 174,634 280,299 179,317 4,914 5,852 106,807 92,990 54,692 0 0 54,692 1.21 1.15 2.83 75,259 4,980 0 4,683 48,001 5,390 1,356 48,881 48,881 0 0
EX-27.7 26 RESTATED FDS - 3 MOS ENDED 3/31/97
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF MARCH 31, 1997 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 79,067 110,429 81,518 0 4,313,884 2,103,673 2,061,279 6,233,819 47,512 13,448,749 8,155,355 630,006 241,888 3,311,421 0 0 532 1,109,547 13,448,749 117,241 107,754 0 224,995 86,915 135,249 89,746 2,000 2,541 53,408 46,564 27,368 0 0 27,368 0.60 0.57 2.91 75,714 5,208 0 5,115 48,001 3,228 739 47,512 47,512 0 0
EX-27.8 27 RESTATED FDS - YEAR ENDED 12/31/96
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF DECEMBER 31, 1996 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 11,931 0 89,480 0 4,194,418 1,984,111 1,967,465 5,784,134 48,001 12,586,694 8,146,103 562,000 243,131 2,527,537 0 0 532 1,107,391 12,586,694 394,031 448,438 0 842,469 347,262 501,343 341,126 10,163 7,605 29,195 123,563 69,128 0 0 69,128 1.49 1.44 2.96 79,230 7,396 0 17,225 47,853 12,692 2,677 48,001 48,001 0 0
EX-27.9 28 RESTATED FDS - 9 MOS ENDED 9/30/96
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 1996 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 102,459 0 44,000 0 4,339,624 2,001,701 1,970,132 5,481,510 48,129 12,487,204 8,152,305 687,847 242,716 2,316,381 0 0 532 1,087,423 12,487,204 283,325 340,618 0 623,943 259,244 369,112 254,831 8,222 7,076 187,959 101,717 57,383 0 0 57,383 1.24 1.20 3.00 79,128 5,874 0 3,854 47,853 9,698 1,752 48,129 48,129 0 0
EX-27.10 29 RESTATED FDS - 6 MOS ENDED 06/30/96
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF JUNE 30, 1996 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 169,446 0 22,200 0 4,548,584 1,872,153 1,833,695 4,776,307 47,684 11,912,788 8,098,109 781,349 108,089 1,215,541 0 0 532 1,078,005 11,912,788 179,218 230,147 0 409,365 171,487 241,277 168,088 5,664 4,661 105,815 87,047 49,311 0 0 49,311 1.07 1.03 3.01 86,903 6,619 0 8,095 47,853 5,901 68 47,684 47,684 0 0
EX-27.11 30 RESTATED FDS - 3 MOS ENDED 3/31/96
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF MARCH 31, 1996 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 133,083 0 25,000 0 4,915,896 1,720,019 1,704,589 4,360,324 47,697 11,643,066 7,925,623 541,000 104,305 1,230,508 0 0 400 1,106,251 11,643,066 87,578 114,983 0 202,561 85,462 119,416 83,145 2,122 1,646 51,948 46,542 26,339 0 0 26,339 0.57 0.55 3.02 89,165 5,402 0 8,526 47,853 2,299 21 47,697 47,697 0 0
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