1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) Quarterly Report Pursuant to Section 13 or 15(d) of
[X] the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2004
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 No.: 0-29826
-------
LONG ISLAND FINANCIAL CORP.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-3453684
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Suffolk Square
------------------
1601 Veterans Memorial Highway
------------------------------
Islandia, New York 11749
------------------ -------
(Address of Principal Executive Offices) (Zip Code)
(631) 348-0888
--------------
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Exchange Act): Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock par value $.01, per share. The registrant had 1,507,372 shares of
Common Stock outstanding as of August 6, 2004.
2
FORM 10-Q
LONG ISLAND FINANCIAL CORP.
INDEX
PAGE
PART I - FINANCIAL INFORMATION NUMBER
- ------------------------------ ------
ITEM 1. Consolidated Financial Statements - Unaudited
Consolidated Balance Sheets at June 30, 2004
and December 31, 2003 2
Consolidated Statements of Operations for the Three Months and
Six Months Ended June 30, 2004 and 2003 3
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 2004 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 22
ITEM 4. Controls and Procedures 23
PART II - OTHER INFORMATION
- ----------------------------
ITEM 1. Legal Proceedings 23
ITEM 2. Changes in Securities, Use of Proceeds, and Issuer Purchases
of Equity Securities 23
ITEM 3. Defaults Upon Senior Securities 23
ITEM 4. Submission of Matters to a Vote of Security Holders 24
ITEM 5. Other Information 24
ITEM 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
1
3
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
- ------- ---------------------------------
LONG ISLAND FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2004 2003
---- ----
ASSETS:
Cash and due from banks $ 11,383 $ 21,447
Interest earning deposits 177 98
Federal funds sold - 25,200
------ ------
Total cash and cash equivalents 11,560 46,745
Securities held-to-maturity (fair value $14,438 at December 31, 2003) - 12,474
Securities available-for-sale, at fair value 269,735 216,967
Federal Home Loan Bank stock, at cost 6,800 3,050
Loans, held for sale 1,257 2,360
Loans, net of unearned income and deferred fees 239,150 226,128
Less allowance for loan losses (6,722) (2,290)
----- -----
Loans, net 232,428 223,838
Premises and equipment, net 5,710 5,756
Accrued interest receivable 3,162 2,401
Bank owned life insurance 7,646 8,213
Deferred tax asset 5,423 1,466
Prepaid expenses and other assets 1,802 1,401
----- -----
Total assets $ 545,523 $ 524,671
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Demand deposits $ 97,259 $ 98,693
Savings deposits 106,518 104,231
NOW and money market deposits 77,140 123,732
Other time deposits 73,043 85,515
Time certificates issued in excess of $100,000 11,864 13,272
------ ------
Total deposits 365,824 425,443
Federal funds purchased and securities sold under agreements to repurchase 69,900 -
Other borrowings 76,000 61,000
Subordinated debentures 7,732 7,732
Accrued expenses and other liabilities 3,453 4,078
----- -----
Total liabilities 522,909 498,253
------- -------
Stockholders' equity:
Common stock (par value $.01 per share; 10,000,000 shares authorized;
1,842,850 and 1,825,211 shares issued; 1,505,950 and
1,488,311 shares outstanding, respectively) 18 18
Surplus 21,400 20,973
Accumulated surplus 9,996 10,333
Accumulated other comprehensive loss (4,622) (728)
Treasury stock at cost, (336,900 shares in 2004 and 2003) (4,178) (4,178)
----- -----
Total stockholders' equity 22,614 26,418
------ ------
Total liabilities and stockholders' equity $ 545,523 $ 524,671
------- -------
See accompanying notes to consolidated financial statements.
2
4
LONG ISLAND FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Interest income:
Loans $ 3,871 $ 3,800 $ 7,671 $ 7,593
Securities 2,757 2,094 5,304 4,387
Federal funds sold 2 37 3 48
Earning deposits 1 1 2 2
---- ---- --- ---
Total interest income 6,631 5,932 12,980 12,030
----- ----- ------ ------
Interest expense:
Savings deposits 272 299 563 577
NOW and money market deposits 223 212 459 473
Other time deposits 593 838 1,241 1,732
Time certificates issued in excess of $100,000 60 86 129 162
Borrowed funds 871 720 1,637 1,398
Subordinated debentures 206 205 413 411
--- --- --- ---
Total interest expense 2,225 2,360 4,442 4,753
----- ----- ----- -----
Net interest income 4,406 3,572 8,538 7,277
----- ----- ----- -----
Provision for loan losses 5,000 - 5,500 60
----- ---- ----- --
Net interest income/(expense) after provision for loan losses (594) 3,572 3,038 7,217
--- ----- ----- -----
Other operating income:
Service charges on deposit accounts 618 518 1,270 980
Net gain on sales and calls of securities 2,483 153 2,880 242
Net gain on sale of residential loans 204 170 396 327
Earnings on bank-owned life insurance 100 102 395 204
Other 128 120 263 258
--- --- --- ---
Total other operating income 3,533 1,063 5,204 2,011
----- ----- ----- -----
Other operating expenses:
Salaries and employee benefits 1,870 1,846 4,001 3,615
Occupancy expense 314 235 629 491
Premises and equipment expense 379 326 766 647
Automobile loan expense 798 - 855 -
Other 1,067 1,012 2,160 2,015
----- ----- ----- -----
Total other operating expenses 4,428 3,419 8,411 6,768
----- ----- ----- -----
Income/(loss) before income taxes (1,489) 1,216 (169) 2,460
Income tax/(benefit) (592) 434 (193) 880
--- --- --- ---
Net income/(loss) $ (897) $ 782 $ 24 $ 1,580
--- --- -- -----
Basic earnings/(loss) per share $ (.60) $ .53 $ .02 $ 1.08
--- --- --- ----
Diluted earnings/(loss) per share $ (.56) $ .51 $ .02 $ 1.03
--- --- --- ----
Weighted average shares outstanding 1,503,606 1,471,263 1,501,067 1,460,457
--------- --------- --------- ---------
Diluted weighted average shares outstanding 1,588,510 1,547,694 1,585,710 1,530,485
--------- --------- --------- ---------
See accompanying notes to consolidated financial statements.
3
5
LONG ISLAND FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
OTHER
COMMON ACCUMULATED COMPREHENSIVE TREASURY
STOCK SURPLUS SURPLUS LOSS STOCK TOTAL
----------------------------------------------------------------------
Balance at December 31, 2003 $ 18 20,973 10,333 (728) (4,178) 26,418
Comprehensive income:
Net income - - 24 - - 24
Other comprehensive loss,
net of tax:
Unrealized depreciation in
available-for-sale securities,
net of reclassification adjustment - - - (3,894) - (3,894)
-----
Total comprehensive loss (3,870)
Exercise of stock options and related
tax benefit, issued 15,735 shares - 353 - - - 353
Dividend reinvestment and stock purchase
plan, issued 1,904 shares - 74 - - - 74
Dividends declared on common stock
($.24 per common share) - - (361) - - (361)
---------------------------------------------------------------------
Balance at June 30, 2004 $ 18 21,400 9,996 (4,622) (4,178) 22,614
---------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
-------------------------
2004 2003
---- ----
(IN THOUSANDS)
Net unrealized depreciation
arising during the year, net of tax $ (2,080) $ (522)
Less: Reclassification adjustment for net
gains included in net income, net of tax 1,814 152
--------------------------
Net unrealized loss on securities, net of tax $ (3,894) $ (674)
--------------------------
See accompanying notes to consolidated financial statements.
4
6
LONG ISLAND FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------
(IN THOUSANDS) 2004 2003
---- ----
Cash flows from operating activities:
Net income $ 24 $ 1,580
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 5,500 60
Depreciation and amortization 549 471
Amortization of premiums, net of discount accretion 137 1,086
Net gain on sales and calls of securities, held-to-maturity (335) -
Net gain on sales and calls of securities, available-for-sale (2,545) (242)
Loans originated for sale, net of proceeds from sales and gains 1,103 573
Net deferred loan origination fees 53 52
Earnings on bank owned life insurance (203) (204)
Bank owned life insurance benefit (192) -
Deferred income taxes (1,653) -
Change in other assets and liabilities:
Accrued interest receivable (761) 238
Prepaid expenses and other assets (362) 145
Accrued expenses and other liabilities (625) (95)
--- --
Net cash provided by operating activities 690 3,664
--- -----
Cash flows from investing activities:
Purchases of securities available-for-sale (577,725) (487,495)
Net (purchase) redemption of Federal Home Loan Bank stock (3,750) 338
Proceeds from sales of securities available-for-sale 58,187 17,958
Proceeds from maturities and calls of securities held-to-maturity 1,347 -
Proceeds from maturities and calls of securities available-for-sale 467,157 482,904
Principal repayments on securities 7,286 20,607
Loan originations, net of principal repayments (14,143) (267)
Redemption of bank owned life insurance 922 -
Purchase of premises and equipment (503) (1,352)
--- -----
Net cash (used in) provided by investing activities (61,222) 32,693
------ ------
Cash flows from financing activities:
Net (decrease) increase in demand deposit, savings, NOW, and money market accounts (45,739) 7,789
Net decrease in certificates of deposit (13,880) (10,024)
Net increase in federal funds purchased and securities sold under agreements to repurchase 69,900 -
Net increase in other borrowings 15,000 10,000
Shares issued under the dividend reinvestment and stock purchase plan 74 61
Exercise of stock options 353 409
Payments for cash dividends (361) (293)
--- ---
Net cash provided by financing activities 25,347 7,942
------ -----
Net (decrease) increase in cash and cash equivalents (35,185) 44,299
Cash and cash equivalents at beginning of period 46,745 25,790
------ ------
Cash and cash equivalents at end of period $ 11,560 $ 70,089
------ ------
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid during the period for:
Interest $ 4,695 $ 4,431
----- -----
Income taxes $ 1,880 $ 991
----- ---
Non-cash investing activities:
- -----------------------------
Fair value of securities transferred from held-to-maturity
to available-for-sale $ 13,454 $ -
------ ----
See accompanying notes to consolidated financial statements.
5
7
LONG ISLAND FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
Statements contained in this Form 10-Q which are not historical facts are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Amounts stated herein could vary as a result of
market and other factors. Such forward-looking statements are subject to risks
and uncertainties which could cause actual results to differ materially from
those currently anticipated due to a number of factors, which include, but are
not limited to, factors discussed in documents filed by Long Island Financial
Corp. (the "Company") with the Securities and Exchange Commission from time to
time. Such forward-looking statements may be identified by the use of such words
as "believe," "expect," "anticipate," "should," "planned," "estimated," "intend"
and "potential." Examples of forward looking statements include, but are not
limited to, estimates with respect to the financial condition, expected or
anticipated revenue, results of operations and business of the Company that are
subject to various factors which could cause actual results to differ materially
from these estimates. The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse effect on the operations of the Company include,
but are not limited to, changes in: interest rates; general economic conditions;
monetary and fiscal policies of the U. S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board; the quality or composition of the
loan or investment portfolios; demand for loan and non-deposit products; deposit
flows; real estate values; the level of defaults, losses and prepayments on
loans held by the Company in its portfolio or sold in the secondary markets;
demand for financial services in the Company's market area; competition;
accounting principles, policies, practices or guidelines; legislation or
regulation; and other economic, competitive, governmental, regulatory, and
technological factors affecting the Company's operations, pricing, products and
services. The forward-looking statements are made as of the date of this Form
10-Q, and, except as required by applicable law, the Company assumes no
obligation to update the forward-looking statements or to update the reasons why
actual results could differ from those projected in the forward-looking
statements. These risks and uncertainties should be considered in evaluating
forward-looking statements, which speak only as of the date of this Form 10-Q,
and undue reliance should not be placed on such statements.
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Long Island Financial Corp. and its wholly-owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements included herein
reflect all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. The results of operations for the six-month period ended June
30, 2004, are not necessarily indicative of the results of operations that may
be expected for the entire fiscal year. Certain information and note disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain reclassifications have been made to prior year
amounts to conform to the current year presentation. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements, and notes thereto, included in the Company's
2003 Annual Report on Form 10-K.
6
8
The Company makes available through its Internet website, WWW.LICB.COM, its
------------
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and all amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Such reports are
free of charge and are available as soon as reasonably practicable after the
Company electronically files such materials with, or furnishes it to, the
Securities and Exchange Commission.
2. SECURITIES
The following table sets forth certain information regarding amortized cost and
estimated fair value of the securities held-to-maturity and available-for-sale
as of the dates indicated:
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---- ----- ---- -----
(IN THOUSANDS)
HELD-TO-MATURITY:
Corporate debt $ - - $ 12,474 14,438
----- ----- ------ ------
Total held-to-maturity $ - - $ 12,474 14,438
----- ----- ------ ------
AVAILABLE-FOR-SALE:
U.S. Government and Agency obligations $ 247,094 240,759 $ 176,141 175,194
Mortgage-backed securities:
GNMA 25,965 24,991 33,669 33,283
FHLMC 2,203 2,150 3,743 3,757
FNMA 1,813 1,835 2,547 2,595
Corporate debt - - 2,010 2,138
---- --- ----- -----
Total securities available-for-sale $ 277,075 269,735 $ 218,110 216,967
------- ------- ------- -------
On March 10, 2004, the Company complied with an issuer's tender offer which
resulted in the redemption of a $1,000,000 par value corporate debt security
classified as "held to maturity" and recognized a gain of $335,155. On March 10,
2004, as a result of that tender offer, the Company transferred the remaining
$12.0 million par value of corporate debt securities with a market value of
$13.5 million from the classification of "held-to-maturity" to
"available-for-sale." On April 1, 2004, the Company sold the entire corporate
debt securities portfolio recognizing a gain of $2.5 million, which is recorded
in other operating income in the caption "net gain on sales and calls of
securities."
3. LOANS, NET
Loans, net, are summarized as follows:
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
(DOLLARS IN THOUSANDS)
LOANS HELD-FOR-SALE:
Residential real estate loans 1,257 100.0 % 2,360 100.0 %
----- ----- ----- -----
LOANS, NET:
Commercial and industrial loans $ 46,104 19.0 % $ 42,723 18.5 %
Commercial real estate loans 158,815 65.5 145,084 63.0
Automobile loans 36,243 14.9 41,158 17.9
Consumer loans 1,310 0.6 1,381 0.6
----- --- ----- ---
242,472 100.0 230,346 100.0
Less:
Unearned income 2,379 3,328
Deferred fees, net 943 890
Allowance for loan losses 6,722 2,290
----- -----
Total loans, net $ 232,428 $ 223,838
------- -------
7
9
AUTOMOBILE LOANS
- ----------------
The Company maintained a program of making non-recourse loans to a local
automobile leasing company (the "third party") and received as security an
assignment of each individual lease and a collateral interest in each
automobile. The third party, in addition to providing complete servicing of the
portfolio, was obligated for the repayment of the entire principal balance of
each loan at the time each individual lease terminates. In March 2004, the
Company learned that, due to liquidity issues and financial difficulties, the
third party would not have the ability to fulfill its obligations.
During the second quarter of 2004, the Company closely monitored issues
concerning the third party's performance. The Company, acting collectively with
nine other bank lenders to the third party, utilized internal resources and
consulted with the third party enabling the third party to engage the services
of experienced industry professionals, to ensure the performance of the
servicing of the portfolio, and obtain the timely and orderly disposition of the
collateral. The Company believes the course of action taken during the second
quarter, along with the cooperation of the other nine banks, stabilized the
portfolio and will ultimately lead to maximizing the value of disposed
collateral.
At June 30, 2004, the automobile loan portfolio consisted of approximately 1,695
loans and the balance of the portfolio amounted to $33.9 million. It represented
14.2% of the Bank's loan portfolio, net of unearned income and deferred fees.
Approximately 86.4% of those loans mature through June 2006. Portfolio
delinquencies at June 30, 2004, consisted of ten loans, 30-89 days past due,
representing $151,443, or .4 % of the portfolio. There were no loans greater
than 90 days past due. Since the portfolio was underwritten to lessees of high
credit quality, those delinquency statistics remain favorable and are in line
with the Company's expectations.
The Company incurred operating expenses of $798,000 for the quarter ended June
30, 2004, and $855,000 for the six months ended June 30, 2004, relating to the
automobile loan portfolio. Those expenses include, but are not limited to,
expenses for legal services, portfolio servicing and administration, collateral
verification and disposition services, and audit and accounting services. At
June 30, 2004, approximately 74.3% of the operating expenses incurred related to
the automobile loan portfolio were attributable to the satisfaction of certain
liabilities of the third party and are not recurring. While the Company expects
to incur future operating expenses related to the automobile loan portfolio, it
expects those expenses to decrease as the portfolio matures. Recurring operating
costs for portfolio servicing and collateral disposition are expensed when
incurred and recorded in "automobile loan expense" in the consolidated statement
of operations.
ALLOWANCE FOR LOAN LOSSES
- -------------------------
The Company has continued to recognize losses in the automobile loan portfolio
related to the shortfall between the principal balance of loans and the
collateral value realized upon termination of the leases. The extent to which
the Company can recover value will depend to a large extent on future market
conditions for used automobiles combined with the success of the third party's
national remarketing servicer's efforts. Based upon the Company's assessment of
the portfolio and a review of recent collateral disposition activity, the
Company made a provision for loan losses of $5.0 million for the three months
ended June 30, 2004. Total charge-offs, relating to the automobile portfolio,
amounted to $1.0 million for the six months ended June 30, 2004.
8
10
4. STOCK BASED COMPENSATION
The Company applies the intrinsic-value based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. That method includes Financial
Accounting Standards Board (FASB) Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion No.
25, issued in March 2000, to account for its fixed-plan stock options. Under
that method, compensation expense is recorded on the date of grant only if the
current market price of the stock exceeds the exercise price. Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based
Compensation, established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123, the Company has elected to continue to apply
the intrinsic-value-based method of accounting described above, and has adopted
only the disclosure requirements of SFAS No. 123. The following table
illustrates the effect on net income if the fair-value-based method had been
applied to all stock options granted or vested in each period:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ---------------------
2004 2003 2004 2003
--------------------- ---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income/(loss) as reported $ (897) $ 782 $ 24 $ 1,580
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all awards, net of tax 45 53 144 188
-- -- --- ---
Pro forma net income/(loss) $ (942) $ 729 $ (120) $ 1,392
----- --- ----- -----
Earnings/(loss) per share:
Basic As Reported $ (.60) $ .53 $ .02 $ 1.08
Pro forma (.63) .50 (.08) .95
Diluted As Reported (.56) .51 .02 1.03
Pro forma (.59) .47 (.08) .91
5. RECENT DEVELOPMENTS
On May 26, 2004, the Board of Directors of the Company declared a quarterly
dividend of $.12 per common share. The dividend was paid July 1, 2004, to
shareholders of record as of June 18, 2004.
6. OTHER COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Bank enters into commitments to purchase
investment securities. At June 30, 2004, the Bank had no outstanding commitments
to purchase investment securities.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
requires that an issuer classify financial instruments that are considered a
liability (or an asset in some circumstances) when that financial instrument
embodies an obligation of the issuer.
9
11
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003, and is otherwise effective at the beginning of the first
interim period beginning after June 15, 2003. In November 2003, the FASB also
issued a staff position that indefinitely deferred the effective date of SFAS
No. 150 for certain mandatorily redeemable non-controlling interests. The
Company currently believes that the deferral of the effective date of SFAS No.
150 will not have a material impact on its consolidated balance sheets or
consolidated statements of operations when implemented.
In December 2003, FASB issued FASB Interpretation No. 46(R) ("FIN 46(R)"),
"Consolidation of Variable Interest Entities" which clarified certain provisions
of a previously released interpretation. On December 31, 2003, the Company
adopted FIN 46(R). Under the provisions of FIN 46(R), the Company deconsolidated
LIF Statutory Trust I and accounts for its investment in the trust as an asset,
its subordinated debentures as a liability, and the interest paid on those
debentures as interest expense. As a result of the adoption of FIN 46(R), the
Company's prior period presentations have been restated to conform to the
current presentation.
In March 2004, the FASB published an Exposure Draft, "Share-based Payment, an
Amendment of FASB Statements No. 123 and 95." The Exposure Draft proposes
changes in accounting that would replace existing requirements under SFAS 123
and APB Opinion No 25. Under the proposal, all forms of share-based payments to
employees, including employee stock options, would be treated the same as other
forms of compensation by recognizing the related cost in the income statement.
The expense of the award would generally be measured at fair value at the grant
date. Current accounting guidance requires that the expense relating to employee
stock options only be disclosed in the footnotes to the financial statements.
In March 2004, the SEC issued Staff Accounting Bulletin ("SAB") No. 105,
"Application of Accounting Principles to Loan Commitments." SAB No. 105
clarifies certain provisions of SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amended portions of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" and is
effective for periods following June 30, 2004. Together, SAB No. 105 and SFAS
No. 149 provide guidance with regard to accounting for loan commitments. Under
SAB No. 105 and SFAS No. 149, loan commitments relating to the origination of
mortgage loans that will be held for sale shall be accounted for as derivative
instruments by the issuer of the commitment. The adoption of SFAS No. 149 on
April 1, 2004, did not have any impact on the Company's consolidated financial
statements, as the Company has determined that the loan commitments relating to
the origination of the mortgage loans held-for-sale outstanding as of June 30,
2004 do not constitute a derivative instrument and therefore do not fall under
the scope of SFAS 149. Such loans are originated and sold simultaneously to an
institutional investor and therefore do not carry any inherent interest rate
risk.
10
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
-------------
OVERVIEW
The principal business of Long Island Financial Corp. consists of the operation
of a wholly-owned subsidiary, Long Island Commercial Bank. Long Island
Commercial Bank is a New York state-chartered commercial bank, which began
operations in 1990, and is engaged in commercial and consumer banking in
Islandia, New York and the surrounding communities of Suffolk, and Nassau
counties and in Kings County. The Bank offers a broad range of commercial and
consumer banking services, including loans to and deposit accounts for small and
medium-sized businesses, professionals, high net worth individuals and
consumers. The Bank is an independent local bank, emphasizing personal attention
and responsiveness to the needs of its customers.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company identifies accounting policies critical to the Company's operations
and understanding of the Company's results of operations. Certain accounting
policies are considered to be important to the portrayal of the Company's
financial condition, since they require management to make complex or subjective
judgments, some of which may relate to matters that are inherently uncertain.
ALLOWANCE FOR LOAN LOSSES
The Company has determined that the methodology used in determining the level of
its allowance for loan losses is critical in the presentation and understanding
of the Company's consolidated financial statements. The allowance for loan
losses represents management's estimate of probable losses inherent in the
portfolio. The evaluation process for making provisions for loan losses is
subject to numerous estimates and judgments. Changes in those estimates would
have a direct impact on the provision for loan losses and could result in a
change in the allowance. While management uses available information to
determine losses on loans, future additions to the allowance may be necessary
based on, among other things, unanticipated changes in economic conditions,
particularly in Suffolk and Nassau counties.
In evaluating the portfolio, management takes into consideration numerous
factors such as the Company's loan growth, prior loss experience, present and
potential risks of the loan portfolio, risk ratings assigned by lending
personnel, ratings assigned by the independent loan review function, the present
financial condition of the borrowers, current economic conditions, and other
portfolio risk characteristics. The Company's formalized process for assessing
the adequacy of the allowance for loan losses and the resultant need, if any,
for periodic provisions to the allowance charged to income consists of both
individual loan analyses and loan pool analyses. The individual loan analyses
are periodically performed on individually significant loans or when otherwise
deemed necessary and primarily encompass commercial real estate loans and
commercial and industrial loans. Management believes that the Company's
allowance for loan losses at June 30, 2004 is adequate to provide for estimated
probable losses inherent in the portfolio.
SECURITIES
The fair value of securities classified as held-to-maturity or
available-for-sale is based upon quoted market prices. If quoted market prices
are not available, fair values are extrapolated from the quoted prices of
similar instruments.
11
13
DEFERRED TAX ASSETS
The Company uses estimates of future earnings to support the position that the
benefit of its deferred tax assets will be realized. If future income should
prove non-existent or less than the amount of the deferred tax assets within the
tax years to which they may be applied, the asset may not be realized and our
net income will be reduced.
FINANCIAL CONDITION
Total assets were $545.5 million as of June 30, 2004, an increase of $20.8
million, or 4.0%, from $524.7 million at December 31, 2003. The increase
primarily was due to an increase in the securities available-for-sale portfolio,
offset in part by decreases in cash and due from banks, federal funds sold, and
the securities held-to-maturity portfolio. Securities available-for-sale
increased $52.7 million, or 24.3%, to $269.7 million at June 30, 2004, compared
to $217.0 million at December 31, 2003. The increase in securities
available-for-sale was due to increased purchase activity. The decrease from
period to period in federal funds sold and cash and due from banks, of $25.2
million and $10.1 million, respectively, primarily reflects the decrease of
seasonal municipal funds on deposit at December 31, 2003. Loans, net of unearned
income and deferred fees, increased $13.1 million, from $226.1 million at
December 31, 2003, to $239.2 million at June 30, 2004, reflecting increases
primarily in commercial real estate loans and commercial and industrial loans.
Deferred tax assets increased $4.0 million, or 269.9%, from $1.5 million at
December 31, 2003, to $5.4 million at June 30, 2004 reflecting an increase in
deferred tax assets which, in turn, was directly related to both the $3.9
million increase in accumulated other comprehensive loss at June 30, 2004, and
the $5.5 million provision for loan losses for the six months ended June 30,
2004.
Total liabilities increased $24.6 million, or 4.9%, from $498.3 million at
December 31, 2003, to $522.9 million at June 30, 2004. The increase in total
liabilities was due principally to an increase in federal funds purchased and
other borrowings, partially offset by a decrease in total deposits. The Company
utilizes borrowings, primarily in the form of overnight federal funds purchased,
securities sold under agreements to repurchase, and medium and convertible term
advances from the Federal Home Loan Bank of New York (FHLBNY), as a low cost
funding source to fund asset growth. The decrease in total deposits is primarily
the result of a decrease in NOW and money market deposits of $46.6 million, or
37.7%, from $123.7 million at December 31, 2003 to $77.1 million at June 30,
2004, attributable to the withdrawal of seasonal municipal funds on deposit at
December 31, 2003. Other time deposits decreased $12.5 million, or 14.6%, from
$85.5 million at December 31, 2003, to $73.0 million at June 30, 2004 as the
Bank strives to substitute low cost demand, savings, NOW and money market
deposits for time deposits. There were $69.9 million of federal funds purchased
and securities sold under agreements to repurchase at June 30, 2004. Other
borrowings increased $15.0 million, or 24.6%, to $76.0 million at June 30, 2004.
Stockholders' equity decreased $3.8 million, or 14.4%, from $26.4 million at
December 31, 2003, to $22.6 million at June 30, 2004. The decrease in
stockholders equity was attributable to a $3.9 million increase in accumulated
other comprehensive loss relating to the securities available-for-sale
portfolio, and dividends declared of $361,000. Offsetting in part those
decreases, were $427,000 of stock issued through the exercise of stock options
and the dividend reinvestment and stock purchase plan, and $24,000 of net income
for the six months ended June 30, 2004.
12
14
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
upon both the volume of interest-earning assets and interest-bearing liabilities
and the rates earned or paid on them.
The following tables set forth certain information relating to the Company's
consolidated average balance sheets and its consolidated statements of
operations for the three and six months ended June 30, 2004 and 2003, and
reflect the average yield on interest-earning assets and average cost of
interest-bearing liabilities for the periods indicated. Yields and costs are
derived by dividing annualized income or expense by the average balance of
interest-earning assets or interest-bearing liabilities, respectively. Average
balances are derived from average daily balances. Average loan balances include
non-performing loans although the amount of non-performing loans is not
material.
13
15
THREE MONTHS ENDED JUNE 30,
---------------------------
-----------2004----------- -----------2003-----------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Federal funds sold and
interest-earning deposits $ 1,267 $ 3 .95 % $ 13,820 $ 38 1.10 %
Securities, net (1) 280,786 2,757 3.93 208,676 2,094 4.01
Loans, net of unearned income and
deferred fees (2) 236,426 3,871 6.55 215,375 3,800 7.06
------- ----- ---- ------- ----- ----
Total interest-earning assets 518,479 6,631 5.12 437,871 5,932 5.42
Non-interest-earning assets 34,633 39,239
------ ------
Total assets $ 553,112 $ 477,110
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings deposits $ 101,239 272 1.07 $ 88,159 299 1.36
NOW and money market deposits 116,854 223 .76 89,544 212 .95
Certificates of deposit 89,628 653 2.91 106,366 924 3.47
------ --- ---- ------- --- ----
Total interest-bearing deposits 307,721 1,148 1.49 284,069 1,435 2.02
Borrowed funds 108,970 871 3.20 69,884 720 4.12
Subordinated debentures 7,732 206 10.66 7,732 205 10.61
----- --- ----- ----- ---
Total interest-bearing liabilities 424,423 2,225 2.10 361,685 2,360 2.61
Other non-interest bearing liabilities 100,459 89,224
------- ------
Total liabilities 524,882 450,909
Stockholders' equity 28,230 26,201
------ ------
Total liabilities and
stockholders' equity $ 553,112 $ 477,110
------- -------
Net interest income/
interest rate spread (3) $ 4,406 3.02% $ 3,572 2.81 %
----- ---- ----- ----
Net interest margin (4) 3.40% 3.26 %
---- ----
Ratio of interest-earning assets to
interest-bearing liabilities 1.22x 1.21x
----- -----
(1) Unrealized appreciation / depreciation on available-for-sale securities are recorded in non-interest earning assets.
(2) Amount excludes allowance for loan losses.
(3) Interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing
liabilities.
(4) Net interest margin represents net interest income divided by average interest-earning assets.
14
16
SIX MONTHS ENDED JUNE 30,
-------------------------
-----------2004----------- -----------2003-----------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Federal funds sold and
interest-earning deposits $ 1,096 $ 5 .91 % $ 9,081 $ 50 1.10 %
Securities, net (1) 274,860 5,304 3.86 214,279 4,387 4.09
Loans, net of unearned income and
deferred fees (2) 233,146 7,671 6.58 215,192 7,593 7.06
------- ----- ---- ------- ----- ----
Total interest-earning assets 509,102 12,980 5.10 438,552 12,030 5.49
Non-interest-earning assets 36,599 40,469
------ ------
Total assets $ 545,701 $ 479,021
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings deposits $ 103,172 563 1.09 $ 85,543 577 1.35
NOW and money market deposits 117,364 459 .78 98,411 473 .96
Certificates of deposit 92,764 1,370 2.95 108,629 1,894 3.49
------ ----- ---- ------- ----- ----
Total interest-bearing deposits 313,300 2,392 1.53 292,583 2,944 2.01
Borrowed funds 96,563 1,637 3.39 66,528 1,398 4.20
Subordinated debentures 7,732 413 10.68 7,732 411 10.63
----- --- ----- ----- --- -----
Total interest-bearing liabilities 417,595 4,442 2.13 366,843 4,753 2.59
Other non-interest bearing liabilities 100,157 86,254
------- ------
Total liabilities 517,752 453,097
Stockholders' equity 27,949 25,924
------ ------
Total liabilities and
stockholders' equity $ 545,701 $ 479,021
------- -------
Net interest income/
interest rate spread (3) $ 8,538 2.97 % $ 7,277 2.90 %
----- ---- ----- ----
Net interest margin (4) 3.35% 3.32 %
---- ----
Ratio of interest-earning assets to
interest-bearing liabilities 1.22x 1.20x
----- -----
(1) Unrealized appreciation / depreciation on available-for-sale securities are recorded in non-interest earning assets.
(2) Amount excludes allowance for loan losses.
(3) Interest rate spread represents the difference between the yield on interest-earning assets and the cost of
interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average interest-earning assets.
15
17
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2004
AND 2003
GENERAL
The Company reported a net loss of $897,000, or a basic loss per share of $.60
for the three months ended June 30, 2004, compared to net income of $782,000, or
basic earnings per share of $.53, for the three months ended June 30, 2003. The
loss recognized for the quarter ended June 30, 2004, is attributable to an
increase in the Company's provision for loan losses relating to its automobile
loan portfolio.
INTEREST INCOME
Interest income increased $699,000, or 11.8%, for the three months ended June
30, 2004, compared to the three months ended June 30, 2003. That increase was
attributable to the $80.6 million, or 18.4%, increase in the average balance of
interest-earning assets from $437.9 million for the three months ended June 30,
2003, to $518.5 million for the three months ended June 30, 2004. The increase
in income from the increase in the average balance of interest earning assets
was offset in part by a 30 basis point decrease in the average yield on
interest-earning assets from 5.42% for the three months ended June 30, 2003, to
5.12% for the comparable 2004 period. The decrease in average yield on
interest-earning assets was attributable to an 8 basis point decrease in yield
on securities which declined from 4.01% for the three months ended June 30,
2003, to 3.93% for the three months ended June 30, 2004, and a 51 basis point
decrease in the average yield on loans, net, from 7.06% for the three months
ended June 30, 2003, to 6.55% for the comparable 2004 period. Partially
offsetting the declines in yield from period to period was a $72.1 million, or
34.6% increase in the average balance of securities from $208.7 million for
three months ended June 30, 2003, to $280.8 million for the three months ended
June 30, 2004, and a $21.0 million, or 9.8% increase in the average balance of
loans, net, from $215.4 million for the three months ended June 30, 2003, to
$236.4 million for the comparable 2004 period.
INTEREST EXPENSE
Interest expense for the three months ended June 30, 2004 was $2.2 million,
compared to $2.4 million for the three months ended June 30, 2003, a decrease of
$135,000, or 5.7%. The decrease was attributable to a 51 basis point decrease in
the average cost of interest-bearing liabilities from 2.61% for the three months
ended June 30, 2003 to 2.10% for the three months ended June 30, 2004. The
decrease in average cost was partially offset by a $62.7 million, or 17.4%,
increase in the average balance of total interest-bearing liabilities from
$361.7 million for the three months ended June 30, 2003 to $424.4 million for
the three months ended June 30, 2004. The increase in average interest-bearing
liabilities, when compared to the prior year period, reflects increases of $23.7
million in the average balance of interest-bearing deposits and $39.1 million in
the average balance of borrowed funds. There was no change in the average
balance of subordinated debentures from June 30, 2003, to June 30, 2004.
Interest expense on interest-bearing deposits decreased $287,000, or 20.0%, for
the three months ended June 30, 2004, from $1.4 million for the corresponding
2003 period to $1.1 million for the current period. That decrease was primarily
due to a 53 basis point decrease in the average rate paid on interest-bearing
deposits from 2.02% for three months ended June 30, 2003 to 1.49% for the
corresponding period in 2004. Offsetting, in part, the decrease in the average
rate paid was an increase in the average balance of interest-bearing deposits of
$23.7 million for the three months ended June 30, 2004 from the corresponding
period in 2003. The increase in the average balance of interest-bearing deposits
was the result of increases in the average balance of savings deposits of $13.1
million, or 14.8%, and in the average balances of NOW and money market deposits
of $27.3 million, or 30.5% from period to period.
16
18
Interest expense on borrowed funds increased $151,000, or 21.0%, from $720,000
for the three months ended June 30, 2003, to $871,000 for the three months ended
June 30, 2004. The increase was primarily due to the average balance of borrowed
funds, which increased from $69.9 million for the three months ended June 30,
2003 to $109.0 million for the three months ended June 30, 2004. Offsetting in
part the cost from the increase in the average balance was a 92 basis point
decrease in the average cost of borrowed funds from 4.12% for the 2003 period,
to 3.20% for the 2004 period.
NET INTEREST INCOME
Net interest income increased by $834,000, or 23.4%, from $3.6 million for the
three months ended June 30, 2003, to $4.4 million for the three months ended
June 30, 2004. The average cost of total interest-bearing liabilities for the
period decreased 51 basis points from 2.61% in the 2003 period to 2.10% in the
2004 period. The average yield on total interest-earning assets for the period
decreased 30 basis points from 5.42% in the 2003 period to 5.12% in the 2004
period. The net interest rate spread increased 21 basis points, from 2.81% for
the three months ended June 30, 2003, to 3.02% for the three months ended June
30, 2004.
PROVISION FOR LOAN LOSSES
The Company made a $5,000,000 provision for loan losses for the three months
ended June 30, 2004, compared to no provision for loan losses made for the three
months ended June 30, 2003. The determination to increase the provision for loan
losses for the three months ended June 30, 2004 reflects management's
qualitative and quantitative assessment of the loan portfolio, net charge-offs
and collection of delinquent loans. The allowance for loan losses amounted to
$6.7 million and $2.3 million at June 30, 2004 and December 31, 2003,
respectively. The allowance for loan losses as a percentage of loans was 2.81%
and 1.01% at June 30, 2004 and December 31, 2003, respectively.
The following table sets forth information regarding non-accrual loans and loans
delinquent 90 days or more and still accruing interest at the dates indicated.
It is the Company's general policy to discontinue accruing interest on all
loans, which are past-due more than 90 days or when, in the opinion of
management, such suspension is warranted. When a loan is placed on non-accrual
status, the Company ceases the accrual of interest owed and previously accrued
interest is charged against interest income. Loans are generally returned to
accrual status when principal and interest payments are current, there is
reasonable assurance that the loan is fully collectible and a consistent record
of performance has been demonstrated.
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
(DOLLARS IN THOUSANDS)
NON-ACCRUAL LOANS:
Commercial and industrial loans $ - $ -
Commercial real estate loans - -
Automobile loans - -
--- ---
Total non-accrual loans - -
--- ---
LOANS ACCRUING - OVER 90 DAYS:
Commercial and industrial loans 56 -
-- ---
Total loans accruing-over 90 days 56 -
-- ---
Total non-performing loans $ 56 $ -
-- ---
Allowance for loan losses as a percentage of loans (1) 2.81 % 1.01 %
Allowance for loan losses as a percentage
of total non-performing loans 12,003.57 -
Non-performing loans as a percentage of loans (1) .02 % - %
(1) Loans include loans, net of unearned income and deferred fees.
17
19
OTHER OPERATING INCOME
Other operating income increased $2.4 million, to $3.5 million for the three
months ended June 30, 2004, as compared to the three months ended June 30, 2003.
That increase was primarily attributable to an increase in net gain on sales and
calls of securities of $2.3 million, and a $100,000, or 19.3%, increase in
service charges on deposit accounts reflecting an increased fee structure and
overall growth in the depositor base.
OTHER OPERATING EXPENSES
Other operating expenses increased $1.0 million, or 29.5%, from $3.4 million for
the three months ended June 30, 2003, to $4.4 million for the three months ended
June 30, 2004. The increase in operating expenses stemmed from expenses
associated with the automobile loan portfolio of $798,000.
INCOME TAXES
For the three months ended June 30, 2004, an income tax benefit of $592,000 was
recorded for the three months ended June 30, 2004, compared to income tax
expense of $434,000 for the three months ended June 30, 2003. For the three
months ended June 30, 2004, the Company recorded a loss before income taxes of
$1.4 million, compared to income before income taxes of $1.2 million for the
three months ended June 30, 2003.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
GENERAL
The Company reported net income of $24,000, or diluted earnings per share of
$.02 for the six months ended June 30, 2004, compared to $782,000, or diluted
earnings per share of $1.03 for the six months ended June 30, 2003.
INTEREST INCOME
Interest income increased $950,000, or 7.9%, for the six months ended June 30,
2004, compared to the six months ended June 30, 2003. That increase was
attributable to the $70.6 million, or 16.1%, increase in the average balance of
interest-earning assets from $438.6 million for the six months ended June 30,
2003, to $509.1 million for the six months ended June 30, 2004. The increase in
income from the increase in the average balance of interest earning assets was
offset in part by a 39 basis point decrease in the average yield on
interest-earning assets from 5.49% for the six months ended June 30, 2003, to
5.10% for the comparable 2004 period. The decrease in average yield on
interest-earning assets was attributable to a 23 basis point decrease in yield
on securities which declined from 4.09% for the six months ended June 30, 2003,
to 3.86% for the six months ended June 30, 2004, and a 48 basis point decrease
in the average yield on loans, net, from 7.06% for the six months ended June 30,
2003, to 6.58% for the comparable 2004 period. Partially offsetting the declines
in yield from period to period was a $60.6 million, or 28.3% increase in the
average balance of securities from $214.3 million for the six months ended June
30, 2003, to $274.9 million for the six months ended June 30, 2004, and a $17.9
million, or 8.3% increase in the average balance of loans, net of unearned
income and deferred fees, from $215.2 million for the six months ended June 30,
2003, to $233.1 million for the comparable 2004 period.
18
20
INTEREST EXPENSE
Interest expense for the six months ended June 30, 2004 was $4.4 million,
compared to $4.8 million for the three months ended June 30, 2003, a decrease of
$311,000, or 6.5%. The decrease was attributable to a 46 basis point decrease in
the average cost of interest-bearing liabilities from 2.59% for the six months
ended June 30, 2003 to 2.13% for the six months ended June 30, 2004. The
decrease in average cost was partially offset by a $50.8 million, or 13.8%,
increase in the average balance of total interest-bearing liabilities from
$366.8 million for the six months ended June 30, 2003 to $417.6 million for the
six months ended June 30, 2004. The increase in average interest-bearing
liabilities, when compared to the prior year period, reflects increases of $20.7
million in the average balance of interest-bearing deposits and $30.0 million in
the average balance of borrowed funds. There was no change in the average
balance of subordinated debentures from June 30, 2003, to June 30, 2004.
Interest expense on interest-bearing deposits decreased $552,000, or 18.8%, for
the six months ended June 30, 2004, from $2.9 million for the corresponding 2003
period to $2.4 million for the current period. That decrease was primarily due
to a 48 basis point decrease in the average rate paid on interest-bearing
deposits from 2.01% for six months ended June 30, 2003 to 1.53% for the
corresponding period in 2004. Offsetting, in part, the decrease in the average
rate paid was an increase in the average balance of interest-bearing deposits of
$20.7 million for the six months ended June 30, 2004 from the corresponding
period in 2003. The increase in the average balance of interest-bearing deposits
was the result of increases in the average balance of savings deposits of $17.6
million, or 20.6%, and in the average balances of NOW and money market deposits
of $19.0 million, or 19.3% from period to period.
Interest expense on borrowed funds increased $239,000, or 17.1%, from $1.4
million for the six months ended June 30, 2003, to $1.6 million for the six
months ended June 30, 2004. The increase was primarily due to the average
balance of borrowed funds, which increased from $66.5 million for the six months
ended June 30, 2003 to $96.6 million for the six months ended June 30, 2004.
Offsetting in part the cost from the increase in the average balance was an 81
basis point decrease in the average cost of borrowed funds from 4.20% for the
2003 period, to 3.39% for the 2004 period.
NET INTEREST INCOME
Net interest income increased by $1.2 million, or 17.3%, from $7.3 million for
the six months ended June 30, 2003, to $8.5 million for the three months ended
June 30, 2004. The average cost of total interest-bearing liabilities for the
period decreased 46 basis points from 2.59% in the 2003 period to 2.13% in the
2004 period. The average yield on total interest-earning assets for the period
decreased 39 basis points from 5.49% in the 2003 period to 5.10% in the 2004
period. The net interest rate spread increased 7 basis points, from 2.90% for
the six months ended June 30, 2003, to 2.97% for the period ended June 30, 2004.
PROVISION FOR LOAN LOSSES
The Company made a $5,500,000 provision for loan losses for the six months ended
June 30, 2004, compared to a $60,000 provision for loan losses made for the six
months ended June 30, 2003. The determination to increase the provision for loan
losses for the three months ended June 30, 2004 reflects management's
qualitative and quantitative assessment of the loan portfolio, net charge-offs
and collection of delinquent loans. The allowance for loan losses amounted to
$6.7 million and $2.3 million at June 30, 2004 and December 31, 2003,
respectively. The allowance for loan losses as a percentage of loans was 2.81%
and 1.01% at June 30, 2004 and December 31, 2003, respectively.
19
21
OTHER OPERATING INCOME
Other operating income increased $3.2 million, to $5.2 million for the six
months ended June 30, 2004, as compared to the six months ended June 30, 2003.
That increase was primarily attributable to an increase in net gain on sales and
calls of securities of $2.6 million, an increase in income relating to earnings
on bank owned life insurance which resulted in proceeds of $192,000 received in
conjunction with the death of the Company's Chairman, and an increase from
service charges on deposit accounts. The latter increased $290,000, or 29.6%,
reflecting an increased fee structure and overall growth in the depositor base.
OTHER OPERATING EXPENSES
Other operating expenses increased $1.6 million, or 24.3%, from $6.8 million for
the six months ended June 30, 2003, to $8.4 million for the six months ended
June 30, 2004. The increase in operating expenses stemmed from expenses
associated with the automobile loan portfolio of $855,000 and the Bank's
continued planned branch expansion.
INCOME TAXES
For the six months ended June 30, 2004, an income tax benefit of $193,000 was
recorded for the six months ended June 30, 2004, compared to income tax expense
of $880,000 for the six months ended June 30, 2003. For the six months ended
June 30, 2004, the Company recorded a loss before income taxes of $169,000,
compared to income before income taxes of $2.5 million for the six months ended
June 30, 2003.
LIQUIDITY
Liquidity management for the Company requires that funds be available to pay all
deposit withdrawal and maturing financial obligations and meet credit funding
requirements promptly and fully in accordance with their terms. For most banks,
including the Bank, maturing assets provide only a limited portion of the funds
required to pay maturing liabilities over a short time frame. The balance of the
funds required is provided by liquid assets and the acquisition of additional
liabilities, making liability management integral to liquidity management in the
short term.
The Company maintains levels of liquidity that it considers adequate to meet its
current needs. The Company's principal sources of cash include incoming
deposits, the repayment of loans and sales of investment securities. When cash
requirements increase faster than cash is generated, either through increased
loan demand or withdrawal of deposited funds, the Company can arrange for the
sale of loans or liquidate available-for-sale securities. It can also access its
lines of credit, totaling $9.5 million, with unaffiliated financial
institutions, which enable it to borrow federal funds on an unsecured basis. In
addition, the Company has available lines of credit with the Federal Home Loan
Bank of New York equal to 12.8% of the Company's assets at June 30, 2004, which
enable it to borrow funds on a secured basis. The Company could also engage in
other forms of borrowings, including repurchase agreements.
20
22
At June 30, 2004, the Company's other borrowings consisted of convertible and
medium term advances from the FHLB. The convertible feature of these advances
allows the FHLB, at a specified call date and quarterly thereafter, to convert
those advances into replacement funding for the same or a lesser principal
amount, based on any advance then offered by the FHLB, at then current market
rates. If the FHLB elects to convert those advances, the Bank may repay any
portion of the advances without penalty. The convertible advances are secured by
various mortgage-backed, callable U.S. agency securities, and certain other
qualifying commercial real-estate collateral.
At June 30, 2004, convertible and medium term advances outstanding were as
follows:
CALL CONTRACTUAL
AMOUNT RATE DATE MATURITY
------ ---- ---- --------
Convertible advance $ 14,000,000 5.49% 8/19/2004 2/19/2008
Convertible advance 15,000,000 4.59% 7/21/2004 1/21/2009
Convertible advance 5,000,000 2.24% 2/03/2006 2/3/2009
Convertible advance 14,000,000 4.97% 7/19/2004 1/19/2011
Convertible advance 3,000,000 4.11% 12/11/2005 12/12/2011
Convertible advance 10,000,000 2.64% 5/28/2008 5/28/2013
Medium term advance 5,000,000 3.99% - 12/13/2004
Medium term advance 10,000,000 2.37% - 4/14/2006
----------
$ 76,000,000
The primary investing activities of the Company are the purchase of securities
available-for-sale and the origination of loans. During the six months ended
June 30, 2004, and 2003, the Company's purchases of securities that were
classified available-for-sale totaled $577.7 million and $487.5 million,
respectively. Loan originations, net of principal repayments on loans, totaled
$14.4 million and $.3 million for the six months ended June 30, 2004, and 2003,
respectively. Borrowings, principal repayments and maturities of securities were
used primarily to fund those activities.
CAPITAL RESOURCES
The Bank is subject to the risk based capital guidelines administered by the
banking regulatory agencies. The guidelines currently require all banks to
maintain a minimum ratio of total risk based capital to total risk weighted
assets of 8%, including a minimum ratio of Tier 1 capital to total risk weighted
assets of 4% and a Tier 1 capital to average adjusted assets of 4%. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by the FDIC, the Bank's primary federal
regulator that, if undertaken, could have a direct material effect on the Bank's
financial statements. As of December 31, 2003, the most recent notification from
the FDIC categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action.
In accordance with the requirements of the FDIC and the New York State Banking
Department, the Bank must meet certain measures of capital adequacy with respect
to leverage and risk-based capital. As of June 30, 2004, the Bank exceeded those
requirements with a leverage capital ratio, risk-based capital ratio and
total-risk based capital ratio of 5.40%, 9.57%, and 10.83%, respectively.
The Company achieves what it considers "capital adequacy" through the continuous
monitoring of its financial performance and plans for expansion. Sources of the
Company's capital are generated primarily through current period earnings and
the issuance of common stock via the dividend reinvestment plan or the exercise
of stock options. Uses of capital currently result from the payment of
21
23
dividends on common stock or the repurchase of common stock through a stock
repurchase program. In February 2004, the Board of Directors, approved a 5%
stock repurchase program that would enable the Company to repurchase
approximately 74,000 shares of its outstanding common stock. There have been no
repurchases made under that stock purchase program since its announcement. In
determining the extent and timing of stock repurchase programs, in addition to
capital adequacy, the Company considers, the effect on the Company's financial
condition, average daily trading volume, and listing requirements applicable to
the NASDAQ National Market System. At June 30, 2004, the Company held 336,900
shares of treasury stock at an average cost of $12.40 per share.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
The principal objective of the Company's interest rate management is to evaluate
the interest rate risk inherent in certain balance sheet accounts, determine the
level of risk appropriate given the Company's business strategy, operating
environment, capital and liquidity requirements and performance objectives, and
manage the risk consistent with guidelines approved by the Board of Directors.
Through such management, the Company seeks to reduce the vulnerability of its
operations to changes in interest rates. The Board has directed the Investment
Committee to review the Company's interest rate risk position on a quarterly
basis.
Funds management is the process by which the Company seeks to maximize the
profit potential which is derived from the spread between the rates earned on
interest-earning assets and the rates paid on interest-bearing liabilities
through the management of various balance sheet components. It involves
virtually every aspect of the Company's management and decision-making process.
Accordingly, the Company's results of operations and financial condition are
largely dependent on the movements in market interest rates and the Company's
ability to manage its assets and liabilities in response to such movements.
At June 30, 2004, 78.5% of the Company's gross loans had adjustable interest
rates and its loan portfolio had an average weighted maturity of 9.2 years. At
that date, $52.0 million, or 18.8%, of the Company's securities had adjustable
interest rates, and its securities portfolio had a weighted average contractual
maturity of 8.3 years. At June 30, 2004, the Company had $50.3 million of
certificates of deposit with maturities of one year or less and $11.9 million of
deposits over $100,000, which tend to be less stable sources of funding when
compared to core deposits, and which represented 14.7% of the Company's
interest-bearing liabilities. In a rising interest rate environment the
Company's interest-bearing liabilities may adjust upwardly more rapidly than the
yield on its adjustable-rate assets. Thus, due to the Company's level of shorter
term certificates of deposit, federal funds purchased and securities sold under
agreements to repurchase, the Company's cost of funds may increase at a greater
rate in a rising rate environment than if it had a greater amount of core
deposits which, in turn, may adversely affect net interest income and net
income.
The Company's interest rate sensitivity is monitored by management through the
use of a quarterly interest rate risk analysis model which evaluates (i) the
potential change in the net interest income over the succeeding four quarter
period and (ii) the potential change in the fair market value of equity, of the
Company ("Net Economic Value of Equity"), which would result from an
instantaneous and sustained interest rate change of zero and plus or minus 200
basis points in 100 basis point increments.
22
24
At June 30, 2004, the effect of instantaneous and sustained interest rate
changes on the Company's Net Interest Income and Net Economic Value of Equity
are as follows:
CHANGE IN POTENTIAL CHANGE IN POTENTIAL CHANGE IN
INTEREST RATES NET INTEREST INCOME NET ECONOMIC VALUE OF EQUITY
IN BASIS POINTS $ CHANGE % CHANGE $ CHANGE % CHANGE
--------------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
200 $(2,761) (13.94)% $ (7,458) (29.67) %
100 (1,374) (6.94) (3,224) (12.83)
Static -- -- -- --
(100) (2) (.01) 1,341 5.34
(200) (934) (4.71) (1,535) (6.11)
ITEM 4. CONTROLS AND PROCEDURES
- ------- -----------------------
1. Evaluation of disclosure controls and procedures. The Company maintains
------------------------------------------------
controls and procedures designed to ensure that information required to
be disclosed in the reports that the Company files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures as of the end of the period covered by the report
required by paragraph (b) of Section 240.13a-15 or Section 240.15d-15 of
this chapter, the Chief Executive and Chief Financial officers of the
Company concluded that the Company's disclosure controls and procedures
were adequate.
2. Changes in internal controls. The Company made no significant changes in
----------------------------
its internal controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation of those controls
by the Chief Executive and Chief Financial officers.
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
Not applicable.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF
- ------- ---------------------------------------------------------------
EQUITY SECURITIES
-----------------
In February 2004, the Board of Directors approved a 5% stock
repurchase program that would enable the Company to repurchase
approximately 74,000 shares of its outstanding common stock. There
have been no repurchases made under that stock purchase program since
its announcement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ------- -------------------------------
Not applicable.
23
25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
The Company's Annual Meeting of Stockholders was held on April 28,
2004, and the following individuals were elected as Directors for a
term of three years each:
Vote Votes Broker
For Withheld Abstentions Non-Votes
--- -------- ----------- ---------
Donald Del Duca 1,265,448 4,909 - -
Frank DiFazio 1,265,448 4,909 - -
Gordon A. Lenz 1,263,948 6,409 - -
Thomas F. Roberts, III 1,264,148 6,209 - -
Alfred Romito 1,265,648 4,709 - -
The term of the following Directors continued after the Annual Meeting: Harvey
Auerbach, John L. Ciarelli, Esq., Frank J. Esposito, Waldemar Fernandez, Douglas C.
Manditch, John R. McAteer, Werner S. Neuburger, John C. Tsunis, Esq.
ITEM 5. OTHER INFORMATION
- ------- -----------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
a. EXHIBITS
--------
11.0 Statement Re: Computation of Per Share Earnings
31.1 Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-
Oxley Act of 2003
31.2 Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-
Oxley Act of 2003
32.1 Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-
Oxley Act of 2003
32.2 Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-
Oxley Act of 2003
b. REPORTS ON FORM 8-K
-------------------
On April 27, 2004 the Company filed a Form 8-K to disclose that
the Company had issued a press release to announce the Company's
financial results for the three months ended March 31, 2004.
On July 26, 2004 the Company filed a Form 8-K to disclose that
the Company had issued a press release to announce the Company's
financial results for the three and six months ended June 30,
2004.
24
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the undersigned
thereunto duly authorized.
LONG ISLAND FINANCIAL CORP.
(REGISTRANT)
Date: August 16, 2004 By: /s/ Douglas C. Manditch
-----------------------
Douglas C. Manditch
President and Chief Executive Officer
Date: August 16, 2004 By: /s/ Thomas Buonaiuto
--------------------
Thomas Buonaiuto
Vice President and Treasurer
25