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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) Annual Report Pursuant to Section 13 or 15(d) of
[X] the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
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 0-29826
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, Islandia, New York 11749
-------------------------------------- -------
(Address of principal executive offices) (Zip Code)
(631) 348-0888
(Registrant's telephone number, including area code)
None
(Securities registered pursuant to Section 12(b) of the Act)
Common Stock, $.01 par value
(Securities registered pursuant to Section 12(g) of the Act)
Indicate by check mark 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 the Form 10-K of any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the last reported sales price of such stock
on the NASDAQ Stock Market was $24,190,757 on March 15, 2002.
The number of shares outstanding of the registrant's common stock was 1,439,926
as of March 15, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the 2001 Annual Report to Stockholders for fiscal year 2001 are
incorporated herein by reference - Parts II and IV.
2. Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on April 24, 2002 are incorporated herein by reference -
Part III.
LONG ISLAND FINANCIAL CORP.
2001 FORM 10-K
TABLE OF CONTENTS
Page
PART I Number
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . .15
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . .15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. . .16
Item 8. Financial Statements and Supplementary Data . . . . . . . . 16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . . . 16
PART III
Item 10. Directors and Executive Officers of the Registrant.... . . . . 17
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . .17
Item 12. Security Ownership of Certain Beneficial Owners and Management.17
Item 13. Certain Relationships and Related Transactions . . . . . . . . 17
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K. . . . . . . . . . . . . . . . . . . .. . . . . . . . 18
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . .19
2
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
Statements contained in this Form 10-K, which are not historical facts, are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Amounts 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 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" 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 and its subsidiaries
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 products;
deposit flows; real estate values; the level of defaults; losses and prepayments
on loans held by the Company in portfolio or sold in the secondary markets;
demand for financial services in the Company's market area; 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. The forward-looking statements are made as of the date of this Form
10-K, 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 and undue reliance should not be placed on such statements. Readers
are cautioned not to place undue reliance on forward-looking statements, which
speak only as of the date of this Form 10-K
PART I
ITEM 1. BUSINESS
Long Island Financial Corp. ("the Company") is a registered bank holding
company, incorporated in Delaware in 1998 at the direction of the Directors of
Long Island Commercial Bank (the "Bank") for the purpose of becoming a holding
company to own all the outstanding common stock of the Bank. Pursuant to a Plan
of Acquisition effective January 28, 1999, the Bank became a wholly-owned
subsidiary of Long Island Financial Corp., and all of the common stock of the
Bank was converted, on a one-for-one basis, into the common stock of Long Island
Financial Corp. This transaction is hereinafter referred to as the
"Reorganization."
The Reorganization under a bank holding company structure provides greater
operating flexibility by allowing the Company to conduct a broader range of
business activities and permits the Board of Directors of the Company to
determine whether to conduct such activities at subsidiaries of the Bank or in
separate subsidiaries of the Company. The Reorganization also permits expansion
into a broader range of financial services and other business activities that
are not currently permitted to the Bank as a New York state-chartered commercial
bank. Such activities include, among others, operating non-bank depository
institutions or engaging in financial and investment advisory services,
securities brokerage and management consulting activities.
In November 2000, the Company elected to become a financial holding company as
provided for in the Financial Services Modernization Act of 1999, also known as
the Gramm-Leach-Bliley Act. That Act repealed provisions of the Glass-Steagall
Act and permits a financial holding company to engage in a statutorily provided
list of financial activities, including insurance and securities underwriting
and agency activities, merchant banking and insurance company portfolio
activities. The Act also provides for the approval for a financial holding
company to conduct other activities determined to be financial in nature or
incidental to or complementary to such financial activities.
3
General
The primary business of the Company is the operation of its wholly owned
subsidiary, the Bank. The Bank is a New York state-chartered commercial bank,
founded in 1989, which is engaged in commercial banking in Islandia, New York,
and the surrounding communities in Suffolk and Nassau Counties. 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.
The Bank's senior management has substantial banking experience, and senior
management and the Board of Directors of the Bank have extensive commercial and
personal ties to the communities in Nassau and Suffolk Counties, New York.
The Bank conducts a full service commercial and consumer banking business, which
primarily consists of attracting deposits from the areas served by its branch
network and using those deposits to originate a variety of commercial, consumer
and real estate loans. During periods in which the demand for loans which meet
the Bank's underwriting and interest rate risk standards is less than the amount
of funds available for investment, the Bank invests excess funds in federal
funds, mortgage-backed securities, corporate debt, equity securities and
securities issued by the U.S. Government and agencies thereof and municipal
obligations. The Bank's revenues are derived principally from interest income on
its loan and securities portfolios. The Bank's principal expenses are interest
paid on deposits, interest paid on borrowed funds and other operating expenses.
Funding sources, other than deposits, include: secured and unsecured borrowings,
available lines of credit, sales of securities under agreements to repurchase,
and cash flows from lending and investing activities.
The Bank's results of operations are dependent primarily on net interest income,
which is the difference between the income earned on its loan and security
portfolios and its cost of funds, consisting of interest paid on deposits and
borrowings. Results of operations are also affected by the Bank's provision for
loan losses and other operating income. Other operating expense of the Bank
principally consists of salaries and the expense of employee benefits,
occupancy, premises and equipment expense, and other expenses. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in interest rates, government policies and
action of regulatory authorities.
Market Area and Competition
The Bank's primary customer base is established, small-to medium-sized and
expanding businesses, professionals, and high net worth individuals and
consumers. The Company believes that emphasizing personal attention and
responsiveness to the needs of its customers, including providing state of the
art electronic banking services and expanded service hours, contributes to the
Company's competitiveness as a financial services provider.
The Bank faces extensive competition in originating loans and in attracting
deposits. Competition among financial institutions is generally based upon
interest rates offered on deposit accounts, interest rates charged on loans,
fees assessed for services performed, the quality and scope of the services
rendered, and the convenience of banking facilities.
A significant number of financial service entities operate within the Bank's
market area. In one or more aspects of its business, the Bank competes directly
with other commercial banks, savings and mortgage banking companies, mortgage
brokers, and other providers of financial services. Some of these entities are
significantly larger than the Bank and have substantially greater resources and
lending limits, and may offer certain services the Bank does not provide. In
addition, many non-bank competitors are not subject to the same extensive
Federal regulations that govern financial holding companies and Federally
insured banks.
Lending Activities
The Bank offers a variety of commercial and consumer loan products to serve the
needs of its customers. The interest rates charged by the Bank on loans are
affected principally by rates offered by its competitors, the supply of money
available for lending purposes and demand for such loans. General and economic
conditions, monetary policies of the federal government including the Federal
Reserve Board, legislative tax policies and governmental budgetary matters also
affect interest rates charged by the Bank.
Loan Approval and Underwriting - In general, the Bank utilizes a committee
process to approve its loans. The President and Chief Lending Officer are
authorized to approve loans up to $250,000. All other loans are brought before
the Loan Committee. The Loan Committee which consists of Directors Auerbach,
Duryea, Del Duca, Esposito, Kern, Manditch, Neuburger, Roberts, Romito, and
Tsunis, meet one day each month; however, additional meetings are held as the
need arises. The Board of Directors receives a monthly report summarizing the
loan portfolio activity, and actions taken by the Loan Committee.
It is the policy of the Bank that all loans satisfy basic lending criteria with
respect to the character of the applicant, including any guarantor, the ability
to repay the loan within the contemplated term, the applicant's financial
strength, the adequacy of any required security and compliance with the Bank's
lending policy.
4
Loan Portfolio
The following table sets forth the composition of the Bank's loan portfolio at
the dates indicated:
At December 31,
2001 2000 1999 1998 1997
(In thousands)
Commercial and industrial loans ...................... $ 43,972 $ 39,140 $ 34,057 $30,853 $30,909
Commercial real estate loans ......................... 116,646 93,875 84,133 53,990 31,254
Automobile loans ..................................... 18,300 2,693 1,463 8,262 17,524
Consumer loans ....................................... 1,312 1,313 1,250 1,396 1,726
Residential real estate loans held-for-sale .......... 1,472 711 1,019 1,486 --
-------- -------- -------- ------- -------
Gross loans ....................................... 181,702 137,732 121,922 95,987 81,413
------- ------- ------- ------ ------
Less:
Unearned income ................................... 2,258 395 42 362 1,322
Deferred fees, net ................................ 647 612 569 410 306
Allowance for loan losses ......................... 2,028 1,872 1,475 1,071 1,026
-------- -------- -------- ------- -------
Loans, net ........................................... $176,769 $134,853 $119,836 $94,144 $78,759
======== ======== ======== ======= =======
Commercial and Industrial Loans - The Bank offers a variety of commercial loan
services including term loans, construction loans, demand loans, revolving
credit, and loans guaranteed in part by the Small Businesses Administration. A
broad range of commercial loans, both collateralized and uncollateralized, are
made available to businesses for working capital (including inventory and
receivables), business expansion, and for the purchase of machinery and
equipment. The purpose of a particular loan generally determines its structure.
Commercial loans are typically underwritten on the basis of the borrowers'
repayment capacity from cash flow and are generally collateralized by business
assets such as, but not limited to, inventory, equipment and accounts
receivable. As a result, the availability of funds for the payment of commercial
loans may be substantially dependent on the success of the business itself.
Further, the collateral underlying the loans may depreciate over time, cannot be
appraised and may fluctuate in value based upon the success of the business.
Revolving credit lines are primarily collateralized by short-term assets, while
term loans are primarily collateralized by long-term or fixed assets. Personal
guarantees are normally required for commercial loans. At December 31, 2001,
commercial and industrial loans represented 24.2% of the loan portfolio.
Commercial Real Estate Loans - The Bank originates commercial real estate loans
to businesses to finance the acquisition and holding of commercial real estate.
The security for the Bank's commercial real estate loans is generally located in
the Bank's primary market area and is underwritten on the basis of the value of
the underlying real property. Loans secured by commercial real estate generally
involve a greater degree of risk than residential real estate loans. Primary
risks associated with commercial real estate lending include the borrower's
inability to pay the debt due to unsuccessful operation or management of the
property and adverse conditions in the real estate market or economy. At
December 31, 2001, commercial real estate loans represented 64.2% of the loan
portfolio.
Automobile Loans - The Bank maintains a program of making non-recourse loans to
a local automobile leasing company, receiving an assignment of each individual
lease and a collateral interest in each automobile. The program, which continues
to further diversify the loan portfolio, is expected to continue through 2002.
At December 31, 2001 automobile loans represented 10.1% of the loan portfolio.
Consumer Loans - Consumer loans made by the Bank include loans for new and used
automobiles, personal secured, personal unsecured, and loans secured by deposit
accounts. Consumer loans generally carry higher rates of interest than those
charged on other types of loans and pose additional risks of collectibility when
compared to other types of loans, such as residential real estate loans. In many
instances, the Bank must rely on the borrower's ability to repay, since the
collateral normally is of reduced value at the time of any liquidation.
Accordingly, the initial determination of the borrower's ability to repay is of
primary importance in the underwriting of consumer loans.
Residential Real Estate Loans - The Bank originates residential real estate
loans primarily in its market area of Nassau and Suffolk counties. Currently,
the Bank sells residential real estate loans together with the servicing rights
to these loans on a non-recourse basis to institutional investors. The Bank
limits its exposure to interest rate fluctuations and credit risk on these loans
by obtaining, at the point of origination, a commitment from an institutional
investor to purchase that loan from the Bank. By selling the servicing rights to
the loans, the Bank avoids the associated risks and expenses of managing and
servicing a loan portfolio. Income is generated from the premiums received on
the sale of loans and servicing rights, and fees charged and interest earned
during the period the Bank holds the loans for sale.
5
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the approximate contractual maturities and
sensitivities to changes in interest rates of certain loans, exclusive of
non-accrual loans as of December 31, 2001.
Commercial Residential
and Commercial Real Estate
Industrial Real Estate Automobile Consumer Loans Held- Total
Loans Loans Loans Loans For-Sale Loans
(In thousands)
Maturities:
Due within one year .................................. $27,676 $ 724 $ 214 $ 143 $1,472 $ 30,229
Due after one but within five years .................. 9,691 1,617 18,086 896 -- 30,290
Due after five but within ten years .................. 4,762 19,381 -- 227 -- 24,370
Due after ten years .................................. 1,690 94,924 -- 21 -- 96,635
------- -------- ------- ------ ------ --------
Total Due after December 31, 2001 .................... 16,143 115,922 18,086 1,144 -- 151,295
------- -------- ------- ------ ------ --------
Total amount due ..................................... $43,819 $116,646 $18,300 $1,287 $1,472 $181,524
------- -------- ------- ------ ------ --------
Rate sensitivity:
Amounts with Fixed Interest Rates .................... $ 6,461 $ 34,917 $18,086 $ 896 $ -- $ 60,360
Amounts with Adjustable Interest Rates ............... 9,682 81,005 -- 248 -- 90,935
------- -------- ------- ------ ------ --------
Total Due after December 31, 2001 .................... $16,143 $115,922 $18,086 $1,144 $ -- $151,295
======= ======== ======= ====== ====== ========
Allowance for Loan Losses
The allowance for loan losses is maintained through provisions for loan losses
based on management's on-going evaluation of the risks inherent in its loan
portfolio in consideration of the trends in its loan portfolio, the national and
regional economies and the real estate market in the Bank's primary lending
area. The allowance is maintained at an amount management considers adequate to
cover estimated losses in its loan portfolio which are deemed probable and
estimable based on information currently known to management. While, based on
information currently available, management believes that the allowance of the
Bank is sufficient to cover losses inherent in its loan portfolio at this time,
no assurance can be given that future adjustments to the allowance will not be
necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance. Management may in the future increase its level of loan loss
allowance as a percentage of total loans and non-performing loans as deemed
necessary. In addition, the Federal Deposit Insurance Corporation (FDIC) and New
York State Banking Department (NYSBD) as an integral part of their examination
process periodically review the Bank's allowance for loan losses. Either the
FDIC or the NYSBD may require the Bank to make additional provisions for loan
losses based upon judgments that may differ from those of management thereby
negatively impacting the Bank's financial condition and results of operations.
The following table sets forth the activity in the Bank's allowance for loan
losses for the periods indicated:
At December 31,
2001 2000 1999 1998 1997
(Dollars in thousands)
Balance at beginning of year $ 1,872 $ 1,475 $ 1,071 $ 1,026 $ 780
Provision for loan losses 150 150 600 420 240
Charge-offs:
Commercial and industrial loans - (187) (80) (203) (23)
Automobile loans - (54) (66) (58) (75)
Consumer loans (19) (99) (81) (145) (21)
---- ---- ---- --- ------
Total charge-offs (19) (340) (227) (406) (119)
Recoveries:
Commercial and industrial loans 13 547 26 1 125
Automobile loans 6 13 4 15 -
Consumer loans 6 27 1 15 -
----- ------ ------- ------ ------
Total recoveries 25 587 31 31 125
--- ----- ------ ------ ----
Net recoveries (charge-offs) 6 247 (196) (375) 6
---- --- ----- -------- ----
Balance at end of year $ 2,028 $ 1,872 $ 1,475 $ 1,071 $ 1,026
======= ======= ======= ======= ========
Ratio of net charge-offs/average
net loans -% -% .19% .43% - %
--------- -------- ------- --------- ---------
6
The following table sets forth the allocation of the Bank's allowance for loan
losses at the dates indicated:
At December 31,
2001 2000 1999 1998 1997
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
(Dollars in thousands)
Commercial and
industrial loans $ 651 24.2% $ 723 28.7% $ 610 27.9% $ 589 32.1% $ 489 38.0%
Commercial real
estate loans 1,166 64.2 939 68.2 631 69.0 330 56.2 313 38.4
Automobile loans 160 10.1 27 1.9 13 1.2 48 8.6 186 21.5
Consumer loans 18 .7 26 .7 61 1.0 104 1.5 22 2.1
Residential real
estate loans held- - .8 - .5 - .9 - 1.6 - -
for-sale
Unallocated $ 33 -- $ 157 -- $ 160 -- $ -- -- $ 16 --
------ ---- ------- ---- ------ ---- ------ ---- ------- ----
Total allowance for
loan losses $2,028 100.0% $ 1,872 100.0% $1,475 100.0% $ 1,071 100.0% $ 1,026 100.0%
====== ===== ======= ===== ====== ===== ======= ===== ======= ======
Non-Accrual Loans - 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 Bank's general policy to discontinue
accruing interest on all loans which are past due 90 days or when, in the
opinion of management, it is appropriate to discontinue accruing interest. When
a loan is placed on non-accrual status, the Bank 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 will be fully
collectible and a consistent record of performance has been demonstrated.
At December 31,
2001 2000 1999 1998 1997
(Dollars in thousands)
Non-accrual loans:
Commercial and industrial loans ............................. $153 $384 $ 42 $366 $230
Automobile loans ............................................ -- -- 32 37 165
Consumer loans .............................................. 25 32 105 108 --
---- ---- ---- ---- ----
Total non-accrual loans ...................................... 178 416 179 511 395
Loans contractually past due 90 days or
more, other than non-accruing (2) ............................ -- -- -- -- 8
---- ---- ---- ---- ----
Total non-performing loans ................................... $178 $416 $179 $511 $403
==== ==== ==== ==== ====
Allowance for loan losses as a
percent of total loans (1) .............................. 1.13% 1.37% 1.22% 1.12% 1.29%
Allowance for loan losses as a
percent of total non-performing loans ................... 1139.33% 450.0% 824.02% 209.59% 254.59%
Non-performing loans as a percent
of total loans (1) ...................................... .10% .30% .15% .54% .51%
(1) Loans include loans, net of unearned income and deferred fees.
(2) Excludes $108,000 of loans at December 31, 2001, and $231,000 of loans at
December 31, 1999, which have matured, however, are current with respect to
scheduled periodic principal and/or interest payments. The Bank is in the
process of renewing these obligations and/or awaiting anticipated repayment.
7
Investment Activities
General - The Bank maintains a portfolio of securities in such instruments as
U.S. government and agency securities, mortgage-backed securities, municipal
obligations, corporate debt and equity securities. The investment policy of the
Bank, which is approved by the Board of Directors and implemented by the Bank's
Investment Committee (the "Committee") as authorized by the Board, is designed
primarily to generate acceptable yields for the Bank without compromising the
business objectives of the Bank or incurring undue interest rate or credit risk,
and to provide and maintain liquidity for the Bank. In reviewing and
establishing investment strategies the Committee considers the business and
growth plans of the Bank, the economic environment, the current interest rate
sensitivity position of the Bank, the types of securities held and other
factors.
At December 31, 2001, the Company had $217.3 million in investment securities
consisting of U.S. Government and Agency obligations, mortgage-backed
securities, municipal obligations, corporate debt and equity securities. The
accounting treatment of the securities of the Bank is addressed in Note 1 of the
Notes to the Consolidated Financial Statements in the 2001 Annual Report to
Stockholders.
U.S. Government and Agency Obligations - At December 31, 2001, the Bank's U.S.
Government and Agency obligations portfolio of the Bank totaled $89.7 million,
all of which was classified as available-for-sale. Included in this total are
$35.6 million of callable securities, which generally possess higher yields than
those securities of similar contractual terms to maturity without callable
features. The remaining balance of $54.1 million represents U.S. Treasury and
government sponsored agency discount notes, which are primarily used as
collateral for seasonal municipal deposits and other short-term borrowings.
Mortaged-Backed Securities - The Bank purchases mortgage-backed securities in
order to: (a) generate positive interest spreads with minimal administrative
expense; (b) lower its credit risk as a result of the guarantees provided by
FHLMC, FNMA, and GNMA; (c) utilize these securities as collateral for
borrowings; and (d) increase the liquidity of the Bank. At December 31, 2001,
mortgaged-backed securities totaled $110.2 million, or 25.1% of total assets,
all of which were classified as available-for-sale. At December 31, 2001, 34.2%
of the mortgage-backed securities carried adjustable rates and 65.8% were fixed
rate. The mortgage-backed securities had coupon rates ranging from 4.50% to
8.39% and had a weighted average yield of 5.40%.
Municipal Obligations - At December 31, 2001, the Banks had no municipal
obligations in its investment portfolio. The Bank generally considers investment
in municipal obligations when the taxable equivalent yields are greater than
that of other such securities with comparable maturities. All of the municipal
bonds purchased by the Bank are required to be rated "A" or better by at least
one national rating agency.
Corporate Debt - The Bank's investment policy was amended in 2000 to include the
purchase of capital notes/trust preferreds issued primarily by financial
institutions up to a limit of $15 million dollars. These securities represent
secondary capital and rank subordinate and junior in right of payment to all
indebtedness of the issuing company. To be purchased by the Bank, these higher
yielding securities must be rated investment grade by at least two of the
national rating agencies. At December 31, 2001, the Company had $14.5 million of
corporate debt at an average yield of 8.89%
Equity Securities - At December 31, 2001, the Bank held equity securities valued
at $2.9 million. Those equity securities represented the Bank's investment in
Federal Home Loan Bank of New York (FHLB) stock. In order to borrow from the
FHLB, the Bank is required to purchase shares of FHLB non-marketable equity
securities at par. For the year ended December 31, 2001, the dividend yield on
the FHLB stock was 5.71%.
8
The following table sets forth information regarding the amortized cost (book
value) and fair value of the Bank's securities portfolio at the dates indicated:
At December 31,
2001 2000 1999
Amortized Fair Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value Cost Value
Held-to-maturity:
Mortgage-backed securities:
CMO ............................................. $ -- $ -- $ 263 $ 254 $ 341 $ 338
Corporate debt ....................................... 12,457 12,937 4,491 4,482 -- --
-------- -------- -------- -------- -------- --------
Total securities
held-to-maturity ................................ $ 12,457 $ 12,937 $ 4,754 $ 4,736 $ 341 $ 338
======== ======== ======== ======== ======== ========
Available-for-sale:
U.S. Government and
Agency obligations .............................. $ 89,930 $ 89,732 $117,364 $115,945 $122,423 $118,907
Mortgage-backed securities:
GNMA ............................................ 85,171 85,021 36,559 35,963 41,136 39,580
FHLMC ........................................... 4,402 4,304 969 982 1,350 1,369
FNMA ............................................ 20,803 20,918 5,279 5,303 3,599 3,571
Corporate debt ....................................... 2,017 1,992 1,167 1,149 1,166 1,143
Other debt securities ................................ -- -- -- -- 92 91
-------- -------- -------- -------- -------- --------
Total debt securities available-for-sale ............. 202,323 201,967 161,338 159,342 169,766 164,661
------- ------- ------- ------- ------- -------
Equity securities - FHLB stock ....................... 2,858 2,858 5,326 5,326 5,147 5,147
-------- -------- -------- -------- -------- --------
Total securities
available-for-sale ............................. $205,181 $204,825 $166,664 $164,668 $174,913 $169,808
======== ======== ======== ======== ======== ========
The following table sets forth certain information regarding the amortized
cost, weighted average yields and contractual maturities of the Bank's
securities portfolio as of December 31, 2001.
More Than One More Than Five More
One Year or Less Year to Five Years Years to Ten Years Than Ten Years Total
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
(Dollars in thousands)
Available-for-sale:
Debt securities:
US Government and
Agency obligations ......... $ 54,084 1.66% $ -- --% $ 35,846 4.35% $ -- -% $ 89,930 2.73%
Mortgage-backed securities:
GNMA ....................... -- -- -- -- -- -- 85,171 5.44 85,171 5.44
FHLMC ...................... -- -- -- -- -- -- 4,402 6.66 4,402 6.66
FNMA ....................... 274 5.72 529 6.63 -- -- 20,000 4.92 20,803 4.97
Corporate debt ............... -- -- -- -- 1,000 7.50 1,017 6.78 2,017 7.14
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total debt securities ........ 54,358 1.68 529 6.63 36,846 4.43 110,590 5.40 202,323 4.23
------- ---- ------ ---- ------- ---- -------- ---- -------- ----
Equity securities:
FHLB stock ................... 2,858 5.04 -- -- -- -- -- -- 2,858 5.04
------- ---- ------ ---- ------- ---- -------- ---- -------- ----
Total equity securities ...... 2,858 5.04 -- -- -- -- -- -- 2,858 5.04%
------- ---- ------ ---- ------- ---- -------- ---- -------- ----
Total debt and equity
securities, available-for-sale $ 57,216 1.84% $ 529 6.63% $ 36,846 4.43% $110,590 5.40% $ 205,181 4.24%
------- ---- ------ ---- ------- ---- -------- ---- -------- ----
Held-to-maturity:
Mortgage-backed securities:
CMO ........................ $ -- -% $ -- --% $ -- --% $ -- --% $ -- -%
------- ---- ------ ---- ------- ---- -------- ---- -------- ----
Corporate debt ............... $ -- -% $ -- --% $ 4,514 8.82% $ 7,943 9.37% $ 12,457 9.17%
------- ---- ------ ---- ------- ---- -------- ---- -------- ----
Total securities, held-to-
maturity ..................... $ -- -% $ -- --% $ 4,514 8.82% $ 7,943 9.37% $ 12,457 9.17%
======= ==== ====== ==== ======= ==== ======== ==== ======== ====
9
Deposits
The Bank offers a variety of deposit accounts with a range of interest rates
and terms. The deposit accounts of the Bank consist of checking, savings, NOW
accounts, money market accounts and certificates of deposit. The Bank offers
certificates of deposit with balances in excess of $100,000 at premium rates
and also offers Individual Retirement Accounts and other qualified plan
accounts. The Bank solicits deposit accounts from small businesses,
professional firms, households, and governmental institutions located
throughout its market area. The Bank does not use brokers to obtain deposits.
All deposit accounts are insured under the Bank Insurance Fund of the Federal
Deposit Insurance Corporation up to the maximum limits permitted by law.
The following table shows the distribution of the Bank's average deposit
accounts in each category of deposits presented for the periods indicated:
For the years ended December 31,
2001 2000 1999
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
(dollars in thousands)
Non-interest bearing accounts ....................... $ 51,487 -% $ 40,842 -% $ 33,791 -%
Savings accounts .................................... 39,221 2.67 31,507 3.71 22,747 3.42
NOW and money market deposits ....................... 49,431 1.88 43,865 2.31 49,413 1.99
Certificates issued in excess of $100,000 ........... 40,442 4.58 25,576 5.97 24,470 5.06
Other time deposits ................................. 88,804 5.82 80,503 6.15 79,126 5.66
------ ---- ------ ---- ------ ----
Total average deposits .............................. $269,385 $222.293 $209,547
======== ======== ========
At December 31, 2001, the Bank had outstanding approximately $35.9 million in
certificates of deposit accounts in excess of $100,000, maturing as follows:
(In thousands)
3 months or less $ 25,205
Over three through six months 3,855
Over six through 12 months 5,764
Over 12 months 1,037
-------
Total $ 35,861
======
Borrowings
The Bank utilizes borrowings to leverage the capital of the Bank and provide
liquidity when necessary. At December 31, 2001 borrowed funds primarily
consisted of $55 million of advances from the Federal Home Loan Bank of New
York (FHLB) secured by various callable U.S. agency securities and
mortgage-backed securities. At certain times, the Bank will use sales of
securities sold under agreements to repurchase as a lower cost alternative to
its FHLB advances and other sources of funds. There were no securities sold
under agreements to repurchase at December 31, 2001. At December 31, 2001 the
Bank had available a 12-month commitment for overnight and one month lines of
credit with the FHLB totaling $28.3 million dollars. Both lines of credit are
priced at the federal funds rate plus 10 basis points and reprice daily.
Outstanding at December 31, 2001, was a $4.5 million overnight line of credit
balance at a rate of 1.75%. The Company has a $500,000 secured line of credit
with another financial institution permitting the Company to borrow at that
institution's prime rate. At December 31, 2001, there was no balance
outstanding under this line of credit agreement. In addition, the Bank has
available $6.5 million in lines of credit with unaffiliated institutions,
which enable it to borrow funds on an unsecured basis, on which no balance
was outstanding at December 31, 2001. The following table sets forth certain
information regarding the Bank's borrowed funds for the years indicated:
10
For the years ended December 31,
2001 2000 1999
(Dollars in thousands)
FHLB Advances:
Maximum amount outstanding at any month-end
during the year $ 55,000 $ 39,000 $ 39,000
Average balance outstanding 43,000 36,760 38,178
Balance outstanding at end of year 55,000 29,000 39,000
Weighted average interest rate during the year 5.06% 4.94 % 4.90%
Weighted average interest rate at the end of the year 4.80% 5.02 % 4.90%
Repurchase Agreements:
Maximum amount outstanding at any month-end
during the year $ - $ 29,850 $ -
Average balance outstanding 555 4,719 530
Balance outstanding at end of year - - -
Weighted average interest rate during the year 4.93% 5.94 % 5.09%
Weighted average interest rate at the end of the year - - -
Federal Funds Purchased:
Maximum amount outstanding at any month-end
during the year $ 4,500 $ 16,650 $ 6,500
Average balance outstanding 695 5,729 1,810
Balance outstanding at end of year 4,500 - -
Weighted average interest rate during the year 4.88% 6.40 % 5.41%
Weighted average interest rate at the end of the year 1.75% - -
Line of Credit:
Maximum amount outstanding at any month-end
during the year $ - $ 500 $ 500
Average balance outstanding - 244 139
Balance outstanding at end of year - - 500
Weighted average interest rate during the year -% 9.14 % 7.91%
Weighted average interest rate at the end of the year -% - % 8.50%
Subsidiary Activities
The Company has four wholly-owned subsidiaries as follows:
LIF Statutory Trust I. On September 7, 2000, LIF Statutory Trust issued $7.5
million aggregate liquidation amount of 10.60% Capital Securities due September
7, 2030, referred to as Capital Securities. The Company has fully and
unconditionally guaranteed the Capital Securities along with all obligations of
LIF Statutory Trust I under the trust agreement. LIF Statutory Trust I was
formed for the exclusive purpose of issuing the Capital Securities and common
securities and using the proceeds to acquire an aggregate principal amount of
$7.7 million of the Company's 10.60% Junior Subordinated Debentures due
September 7, 2030, referred to as the Company's Junior Subordinated Debentures.
The Junior Subordinated Debentures are pre-payable, in whole or in part, at the
Company's option on or after September 7, 2010 at declining premiums to
maturity. Proceeds totaling approximately $7.2 million are being used for
general corporate purposes, including the repurchase of common stock.
Long Island Financial Client Services Corp. Long Island Financial Client
Services Corp. was formed for the purpose of providing Private Banking Services
to clients of the Company. Private Banking Services provided include, but are
not limited to, professional money management, investment planning, life
insurance, business insurance, charitable planning, estate planning, business
valuation services, business succession planning, and pension design and
administration. The operations of Long Island Financial Client Services Corp.
were not material to the Company's operating results for the year ended December
31, 2001.
Long Island Commercial Services Corp. Long Island Commercial Services Corp. was
formed for the purpose of providing insurance services to clients of the
Company. Insurance services provided include, but are not limited to, group
health insurance, group dental plans, business insurance, life insurance, home,
auto, boat insurance, and long term care planning. The operations of Long Island
Commercial Services Corp. were not material to the Company's operating results
for the year ended December 31, 2001.
11
Long Island Commercial Bank. The Bank is a New York state-chartered commercial
bank, founded in 1989, which is engaged in commercial banking in Islandia, New
York, and the surrounding communities in Suffolk and Nassau Counties. 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.
Long Island Commercial Bank currently has one subsidiary, Long Island Commercial
Capital Corporation. Long Island Commercial Capital Corporation was organized
for the purpose of investing in mortgage related assets as a real estate
investment trust. The Bank transferred $48.3 million in commercial real estate
loans to Long Island Commercial Capital Corporation, which included certain
associated assets and liabilities. In return, the Bank received shares of common
and preferred stock of Long Island Commercial Capital Corporation. This
subsidiary promotes greater retained earnings for the Bank through reduced taxes
and thereby serves to strengthen the Bank's capital position from an operational
standpoint.
In 1999, the Company established the Long Island Commercial Bank Foundation (the
"Foundation"). The purpose of the Foundation is to contribute funds to local
entities that are organized and operated exclusively for charitable,
educational, religious, scientific, and other specified purposes. The foundation
is primarily funded by annual contributions from Long Island Commercial Bank,
which equal 1% of the Company's prior year pretax income. The officers and
trustees of the foundation are comprised of certain officers and Board members
of the Board of the Company.
Personnel
At December 31, 2001, the Bank employed 88 employees, 4 of which are part-time.
No employees are covered by a collective bargaining agreement and the Bank
believes its relations with its employees are good.
Federal and State Taxation
General - The Company, the Bank and its subsidiary report their income using the
accrual method of accounting and are subject to federal and state 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 Company or its
subsidiaries. The Internal Revenue Service has not audited the Company or its
subsidiaries during the last five years.
Federal Income Taxation - In general, banks are subject to federal income tax in
the same manner as other corporations. However, gains and losses realized by
banks from the sale or exchange of portfolio debt instruments are generally
treated as ordinary, rather than capital, gains and losses, and a "small bank"
(i.e. one with assets having a tax basis of no more than $500 million), such as
the Bank, is permitted to calculate its deductions for bad debts under a reserve
method that is based upon actual charge-offs for the current and preceding five
years or a "grand-fathered" base year reserve, if larger. A bank maintaining a
bad debt reserve may be subject to additional tax if it makes distributions to
shareholders in excess of its current and accumulated earnings and profits, as
calculated for federal income tax purposes, or in redemption of its stock or in
partial or complete liquidation.
Corporate Alternative Minimum Tax - In addition to the regular income tax, the
Code imposes an alternative minimum tax (AMT) in an amount equal to 20% of
alternative minimum taxable income (AMTI) to the extent that the AMT exceeds the
regular tax. AMTI is regular taxable income as modified by certain adjustments
and tax preference items. AMTI includes an amount equal to 75% of the excess of
adjusted current earnings over AMTI (determined without regard to this
adjustment and prior to reduction for net operating losses). Only 90% of AMTI
can be offset by net operating loss carry forwards. The AMT is available as a
credit against future regular income tax. The AMT credit can be carried forward
indefinitely. The Bank does not expect to be subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. A 70% dividends received deduction generally
applies with respect to dividends received from corporations that are not
members of such affiliated group, except that an 80% dividends received
deduction applies if the Company and the Bank own more than 20% of the stock of
a corporation distributing a dividend.
New York State Taxation - The Bank is subject to the New York State Franchise
Tax on Banking Corporations in an amount equal to the greater of ( i ) 8.5% of
the Bank's "entire net income" allocable to New York State during the taxable
year, or ( ii ) the applicable alternative minimum tax. The alternative minimum
tax is generally the greatest of (a) .01% of the value of the taxable assets
allocable to New York State (b) 3% of alternative entire net income allocated to
New York or (c) $250. Entire net income is similar to federal taxable income
subject to certain modifications. A bank maintaining such a bad debt reserve may
be subject to additional New York tax if it makes certain distributions to its
shareholders. In addition, net-operating losses cannot be carried back or
carried forward and alternative entire net income is equal to entire net income
without certain adjustments. The Bank is also subject to the 17% Metropolitan
Commuter Transportation District Surcharge on its New York Sate Franchise Tax.
The Company and the Bank file a combined return.
12
Delaware Taxation - The Company, as a Delaware financial holding company not
earning income in Delaware, is exempted from the corporate income tax. However,
the Company is required to file an annual report with and pay an annual
franchise tax based on issued shares and asset size to the State of Delaware.
Supervision and Regulation
General - References in this section to applicable statutes and regulations are
brief summaries only, and do not purport to be complete. The readers should
consult such statutes and regulations themselves for a full understanding of the
details of their operation.
As a consequence of the extensive regulation of commercial banking activities in
the United States, the business of Long Island Financial Corp. and its
subsidiaries are particularly susceptible to federal and state legislation that
may have the effect of increasing or decreasing the cost of doing business,
modifying permissible activities, or enhancing the competitive position of other
financial institutions.
Holding Company Regulation - As a registered financial holding company, the
Company is subject to examination, regulation, and periodic reporting under the
Bank Holding Company Act, as administered by the Board of Governors of the
Federal Reserve System (the FRB). The Company is required to obtain the prior
approval of the FRB to acquire all, or substantially all, of the assets of any
bank or bank holding company or merge with another bank holding company. Prior
FRB approval will also be required for the Company to acquire direct or indirect
ownership or control of any voting securities of any bank or bank holding
company if, after giving effect to such acquisition, the Company would, directly
or indirectly, own or control more than 5% of any class of voting shares of such
bank or bank holding company. In evaluating such transactions, the FRB considers
such matters as the financial and managerial resources of and future prospects
of the companies involved, competitive factors and the convenience and needs of
the communities to be served. Bank holding companies may acquire additional
banks in any state, subject to certain restrictions such as deposit
concentration limits. In addition to the approval of the FRB, before any bank
acquisition can be completed, prior approval may also be required to be obtained
from other agencies having supervisory jurisdiction over banks to be acquired.
The FRB has adopted capital adequacy guidelines for bank holding companies (on a
consolidated basis). The Company's total and Tier 1 capital exceeds the
requirements established by the FRB.
A bank holding company is generally required to give the FRB prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of the Company's consolidated net worth. The FRB
may disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe and unsound practice, or would violate any law,
regulation, FRB order or directive, or any condition imposed by, or written
agreement with, the FRB. There is an exception to this approval requirement for
well-capitalized bank holding companies that meet certain other conditions.
The FRB has issued a policy statement regarding the payment of dividends by bank
holding companies. In general, the FRB's policies provide that dividends should
be paid only out of current earnings and only if the prospective rate of
earnings retention by the bank holding company appears consistent with the
organization's capital needs, asset quality, and overall financial condition.
The FRB's policies also require that a bank holding company serve as a source of
financial strength to its subsidiary bank or banks by standing ready to use
available resources to provide adequate capital funds to those banks during
periods of financial stress or adversity and by maintaining the financial
flexibility and capital-raising capacity to obtain additional resources for
assisting its subsidiary bank or banks where necessary. These regulatory
policies could affect the ability of the Company to pay dividends or otherwise
engage in capital distributions.
Restrictions on Transactions with Affiliates - Section 23A of the Federal
Reserve Act imposes quantitative and qualitative limits on transactions between
a bank and any affiliate, and requires certain levels of collateral for such
transactions. It also limits the amount of advances to third parties which are
collateralized by the securities or obligations of the Company or its
subsidiaries. Section 23B requires that certain transactions between a bank and
its affiliates be on terms substantially the same, or at least as favorable, as
those prevailing at the time for comparable transactions with or involving other
nonaffiliated companies. In the absence of such comparable transactions, any
transactions between a bank and its affiliates must be on terms and under
circumstances, including credit standards, that in good faith would be offered
to or would apply to nonaffiliated companies.
Gramm-Leach-Bliley - On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 (also known as the Financial Services
Modernization Act). The Financial Services Modernization Act repealed provisions
of the Glass-Steagall Act which restricted the affiliation of banks with firms
engaged principally in specified securities activities, and provided for
regulation of a new form of bank holding company, known as a financial holding
company under the Bank Holding Company Act. Financial holding companies, such as
the Company, can engage in a statutorily provided list of financial activities,
including insurance and securities underwriting and agency activities, merchant
banking and insurance company portfolio activities.
The general effect of the Financial Services Modernization Act is to establish a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms and other financial service providers. In addition,
activities that the Federal Reserve, in consultation with the Secretary of the
Treasury, determines to be financial in nature, incidental to such financial
activities, or complementary activities that do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally are authorized.
13
In addition to repealing historical restrictions on, and eliminating federal and
state law barriers to affiliations among banks, securities firms, insurance
companies, and other financial service providers, the Financial Services
Modernization Act provides a uniform framework for the functional regulation of
the activities of banks, savings institutions and their holding companies;
provides an enhanced framework for protecting the privacy of consumer
information; modifies the laws governing the implementation of the Community
Reinvestment Act; and addresses a variety of other legal and regulatory issues
affecting both the day-to-day operations and the long-term activities of
financial institutions.
In order for the Company to take advantage of the ability to affiliate with
other financial services providers without obtaining prior approval, the Company
filed a declaration with the Federal Reserve Board, electing to engage in
activities permissible for financial holding companies and certifying that it is
eligible to do so because the Bank is well-capitalized and well-managed. In
addition, the Federal Reserve determined that the Bank and the Company have at
least a satisfactory CRA rating. The Company met those requirements and
qualifies as a financial holding company.
The Company does not believe that the Financial Services Modernization Act will
have a material adverse effect on its operations in the near-term. However, to
the extent that it permits banks, securities firms, and insurance companies to
affiliate, the financial services industry may experience further consolidation.
The Financial Services Modernization Act is intended to grant to community banks
certain powers as a matter of right that larger institutions have accumulated on
an ad hoc basis. Nevertheless, that Act may have the result of increasing the
amount of competition that the Company and the Bank face from larger
institutions and other types of companies offering financial products, many of
which may have substantially more financial resources than the Company or the
Bank.
From time to time, various federal and state legislation is proposed that could
result in additional regulation of, and restrictions on, the business of the
Company and the Bank. We cannot predict whether any such legislation will be
enacted or, if enacted, how the legislation would affect the business of the
Company and the Bank. As a consequence of the extensive regulation of commercial
banking activities in the United States, the Company's and the Bank's business
is particularly susceptible to being affected by federal legislation and
regulations that may increase the cost of doing business. Except as specifically
described above, management does not believe that the Financial Services
Modernization Act will have a material effect on the liquidity, capital
resources or results of operations of the Company.
Management is not aware of any other current specific recommendations by
regulatory authorities or proposed legislation, which if they were implemented,
would have a material adverse effect upon the liquidity, capital resources, or
results of operations, although the general cost of compliance with numerous and
multiple federal and state laws and regulations does have, and in the future may
have, a negative impact on the corporation's results of operations.
Further, the business of the Corporation is also affected by the state of the
financial services industry in general. As a result of legal and industry
changes, management believes that the industry will continue to experience and
increase in consolidations and mergers as the financial services industry
strives for greater cost efficiencies and market share. Management also expects
increased diversification of financial products and services offered by the Bank
and its competitors. Management believes that such consolidations and mergers,
and diversification of products and services may enhance the Bank's competitive
position.
New York State and FDIC
The Bank is organized under the New York Banking Law ("Banking Law"), and its
deposits are insured by the Bank Insurance Fund (the BIF) of the FDIC to the
extent permitted by law. As a New York bank, the Bank is subject to regular
examination and supervision by the NYSBD. As a depository institution, the
deposits of which are insured by the FDIC, the Bank also is subject to
regulation and supervision by the FDIC. While the Bank is not a member of the
Federal Reserve System, it is subject to certain regulations of the Federal
Reserve Board. In addition to banking laws, regulations and regulatory agencies,
the Bank is subject to various other laws, regulations and regulatory agencies,
all of which directly or indirectly affect the Bank's operations.
Federal Securities Laws
The status of the Company as a registered bank holding company under the BHCA
does not exempt it from certain Federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the Federal securities laws. The Company is subject to the
periodic reporting, proxy solicitation, tender offer, insider trading
restrictions and other requirements under the Securities and Exchange Act of
1934, as amended, or Exchange Act.
Delaware Corporation Law
The Company is incorporated under the laws of the State of Delaware. Thus, we
are subject to the regulation by the State of Delaware and the rights of our
shareholders are governed by the Delaware General Corporation Law.
14
ITEM 2. PROPERTIES
The Bank conducts its business from its main branch office and executive offices
located at One Suffolk Square, Islandia, New York, and eight branch offices
located in Babylon, Smithtown, Westbury, Jericho, Shirley, Ronkonkoma, Melville,
and Central Islip, New York. The Central Islip office opened January 14, 2002.
The Deer Park property was purchased in November 2001 and a banking facility
there is currently under construction. The following table sets forth
information relating to each of the offices of the Bank at December 31, 2001.
Lease Net
Date Expiration Book Value
Leased Including at
Location Leased Acquired Options Dec. 31,2001
(Dollars in thousands)
Main Office:
One Suffolk Square, Islandia, LI, New York 11749 Leased 1987 2005 $ 110
Branch Offices:
400 West Main Street, Babylon, LI, NY 11702 Leased 1995 2005 10
50 Route 111, Smithtown, LI, NY 11787 Leased 1997 2012 4
900 Merchants Concourse, Westbury, LI, NY 11590 Leased 1997 2003 17
390 North Broadway, Jericho, LI, NY 11753 Leased 1997 2008 22
861 Montauk Highway, Shirley, LI, NY 11967 Leased 1998 2002 20
3425 Veterans Memorial Hwy, Ronkonkoma, LI, NY 11779 Leased 2001 2011 163
610 Broadhollow Road, Melville, LI, NY 11747 Leased 2001 2019 140
320 Carlton Avenue, Central Islip, LI, NY 11722 Leased 2001 2019 -
720 Grand Boulevard, Deer Park, LI, NY 11729 Owned 2001 ------ -
------
$ 486
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The above captioned information regarding the market for the Company's common
equity and related stockholder matters appears in the 2001 Annual Report to
Stockholders under the caption "Capital Stock" and is incorporated herein by
this reference.
ITEM 6. SELECTED FINANCIAL DATA
Information regarding selected financial data appears on pages 6 and 7 of the
2001 Annual Report to Stockholders under the caption "Selected Financial Data"
and is incorporated herein by this reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations appears on pages 8 through 16 of the 2001 Annual Report to
Stockholders under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and is incorporated herein by
this reference.
15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Management of
Interest Rate Risk" in the 2001 Annual Report to Stockholders is incorporated
herein by this reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Long Island Financial Corp. and the
Independent Auditors' Report appear on pages 17 through 30 of the 2001 Annual
Report to Stockholders and are incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained on pages 3 through 6 of the Proxy Statement for the
Annual Meeting of Stockholders to be held April 24, 2002 under the caption
"Election of Directors" is incorporated herein by reference.
The following table sets forth certain information regarding the executive
officers of the Company. Officers are re-elected by the Board of Directors
annually.
Name Age Position(s) Held with the Company
Perry B. Duryea 80 Chairman of the Board
Roy M. Kern, Sr. 68 Vice Chairman of the Board
Douglas C. Manditch 54 President and Chief Executive Officer
Thomas Buonaiuto 36 Vice President and Treasurer
Carmelo C. Vizzini 56 Vice President and Secretary
Biographical Information
Positions held by a director or officers have been held for at least the past
five years unless stated otherwise.
Perry B. Duryea serves as Chairman of the Board of the Company and of the Bank;
He is Chairman of Perry B. Duryea & Son, Inc., a seafood business located in
Montauk, New York. Mr. Duryea was Speaker of the New York Assembly and also
served as its Minority Leader.
Roy M. Kern, Sr. serves as Vice Chairman of the Board of the Company and of the
Bank. He was formerly President of Bragg Medical Group, Inc., a firm, which
provides billing and financial services to the medical community and is located
in Kings Park, New York.
Douglas C. Manditch is President and Chief Executive Officer of the Company and
of the Bank. He joined Long Island Commercial Bank in 1987, then in formation.
Thomas Buonaiuto serves as Vice President and Treasurer of the Company and
Executive Vice President and Chief Financial Officer of the Bank. Mr.
Buonaiuto's responsibilities include oversight of all areas of operations of the
Bank excluding lending.
Carmelo C. Vizzini serves as Vice President and Secretary of the Company and
Executive Vice President and Chief Lending Officer of the Bank. Mr. Vizzini's
responsibilities include oversight of all areas of lending within the Bank, as
well as loan operations and compliance with the Community Reinvestment Act
("CRA").
ITEM 11. EXECUTIVE COMPENSATION
The information contained on pages 9 through 12 of the Proxy Statement for the
Annual Meeting of Stockholders to be held on April 24, 2002 under the captions
"Executive Compensation" and "Directors Compensation" is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on page 4 through 6 of the Proxy Statement for the
Annual Meeting of Stockholders to be held April 24, 2002 under the caption
"Information with Respect to the Nominees, Continuing Directors and Executive
Officers" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained on page 17 of the Proxy Statement for the Annual
Meeting of Stockholders to be held April 24, 2002 under the caption
"Transactions with Certain Related Persons" is incorporated herein by reference.
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. Financial Statements
The following financial statements of the Bank are included in the Company's
Annual Report to Stockholders for the year ended December 31, 2001 and are
incorporated by this reference:
Consolidated Balance Sheets at December 31, 2001 and 2000
Consolidated Statements of Earnings for the Years Ended December 31, 2001, 2000
and 1999
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash
Flows for the Years Ended December 31, 2001, 2000 and 1999 Notes to
Consolidated Financial Statements Independent Auditors' Report
The remaining information appearing in the 2001 Annual Report to Stockholders is
not deemed to be filed as part of this report, except as expressly provided
herein.
(A) 2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not applicable
or the required information is shown in the Financial Statements or Notes
thereto.
(B) Reports on Form 8-K Filed During the Last Quarter of 2001.
None
(C) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit Number
2.0 Plan of Acquisition between Long Island Financial Corp. and Long Island
Commercial Bank dated as of September 15, 1998.*
3.1 Certificate of Incorporation of Long Island Financial Corp., dated
September 10, 1998. *
3.2 By-Laws of Long Island Financial Corp., effective as of September 10,
1998.*
10.0 Long Island Financial Corp. 1998 Stock Option Plan. *
10.1 Change of Control Agreement between Long Island Financial Corp. and Douglas
C. Manditch
10.2 Change of Control Agreement between Long Island Financial Corp. and Thomas
Buonaiuto
10.3 Change of Control Agreement between Long Island Financial Corp. and Carmelo
C. Vizzini
11.0 Statement re: Computation of per Share Earnings (incorporated by reference
to Note 13 to Notes to Consolidated Financial Statements - Part IV, Item
14)
13.0 2001 Annual Report to Stockholders
21.0 Subsidiary information is incorporated by reference to "Part I - Subsidiary
Activities"
23.0 Consent of KPMG LLP
* Incorporated herein by reference in this document to the S-4 Registration
Statement initially filed on September 22, 1998, Registration No. 333-63971
18
SIGNATURES
Pursuant to the requirements of Section 13 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.
LONG ISLAND FINANCIAL CORP.
By: /s/ Douglas C. Manditch Date: March 28, 2002
-------------------------------
Douglas C. Manditch
President and Chief Executive Officer
By: /s/ Thomas Buonaiuto Date: March 28, 2002
-----------------------------
Thomas Buonaiuto
Vice President and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 29, 2002 by the following persons on behalf of
the Registrant and in the capacities indicated.
/s/ Perry B. Duryea, Jr. /s/ Gordon A. Lenz
-------------------------------------- ------------------------------------
Perry B. Duryea, Jr. Gordon A. Lenz
Chairman of the Board Director
/s/ Roy M. Kern, Sr. /s/ Douglas C. Manditch
-------------------------------------- --------------------------------
Roy M. Kern, Sr. Douglas C. Manditch
Vice Chairman of the Board Director, President and
Chief Executive Officer
/s/ Harvey Auerbach /s/ Werner S. Neuburger
----------------------------------- -----------------------------------
Harvey Auerbach Werner S. Neuburger
Director Director
/s/ John L. Ciarelli, Esq. /s/ Thomas F. Roberts, III
------------------------------------ --------------------------------
John L. Ciarelli, Esq. Thomas F. Roberts, III
Director Director
/s/ Donald Del Duca /s/ Alfred Romito
----------------------------------- ------------------------------------
Donald Del Duca Alfred Romito
Director Director
/s/ Frank J. Esposito /s/ Sally Ann Slacke
------------------------------------- ------------------------------------
Frank J. Esposito Sally Ann Slacke
Director Director
/s/ Waldemar Fernandez /s/ John C. Tsunis, Esq.
------------------------------- -----------------------------------
Waldemar Fernandez John C. Tsunis, Esq.
Director Director
19
EXHIBIT 10.1
LONG ISLAND COMMERCIAL BANK
CHANGE OF CONTROL AGREEMENT
THIS AGREEMENT is made this 28 day of February, 2001, by and between LONG
ISLAND COMMERCIAL BANK, a New York state-chartered commercial bank located in
Islandia, New York (the "Company") and Douglas C. Manditch (the "Executive").
INTRODUCTION
To encourage the Executive to remain an employee of the Company and to protect
the Executive in the event of a Change of Control, the Company is willing to
provide a change of control benefit to the Executive. The Company will pay the
benefits from its general assets.
AGREEMENT
The Executive and the Company agree as follows:
Article 1
Definitions
Whenever used in this Agreement, the following words and phrases shall
have the meanings specified:
1.1 "Base Salary" means the total annual base salary payable to the Executive at
the rate in effect on the date specified. Base Salary shall not be reduced for
any salary reduction contributions: (i) to cash or deferred arrangements under
Section 401(k) of the Code; (ii) to a cafeteria plan under Section 125 of the
Code; or (iii) to a deferred compensation plan that is not qualified under
Section 401(a) of the Code.
1.2 "Change of Control" means the transfer of shares of the Company's voting
common stock such that one entity or one person acquires (or is deemed to
acquire when applying Section 318 of the Code) more than 50.0 percent of the
Company's outstanding voting common stock followed within twelve (12) months
by the Executive's Termination of Employment for reasons other than death,
Disability or retirement.
1.3 "Code" means the Internal Revenue Code of 1986, as amended.
1.4 "Termination for Cause" means the termination of the Executive's employment
by the Company for any of the following reasons:
(a) Gross negligence or gross neglect of duties;
20
(b) Commission of a felony or of a gross misdemeanor involving moral
turpitude; or
(c) Fraud, disloyalty, dishonesty or willful violation of any law or
significant Company policy committed in connection with the Executive's
employment and resulting in an adverse effect on the Company.
1.6 "Termination of Employment" means that the Executive ceasing to be employed
by the Company for any reason whatsoever, voluntary or involuntary, other
than by reason of an approved leave of absence.
Article 2
Change of Control Benefits
2.1 Change of Control Benefit. If the Executive's employment should voluntarily
or involuntarily terminate for any reason, other than a Termination for
Cause, the Company shall pay to the Executive a Change of Control benefit
as described in this Section 2.1.
2.1.1Amount of Benefit. The Change of Control benefit shall be three times
Base Salary grossed up for excise taxes.
2.1.2Payment of Benefit. The Company shall pay the Change of Control
benefit provided herein in a lump sum to the Executive within 60 days
of the Executive's Termination of Employment.
Article 3
General Limitations
3.1 Termination for Cause. Notwithstanding any provision of this Agreement to
the contrary, the Company shall not pay any benefit under this Agreement if
the Executive's employment is a Termination for Cause by the Company.
Article 4
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement signed
by the Company and the Executive.
Article 5
Miscellaneous
5.1 Binding Effect. This Agreement shall bind the Executive and the Company,
and their beneficiaries, survivors, executors, successors, administrators
and transferees.
21
5.2 No Guarantee of Employment. This Agreement is not an employment policy or
contract. It does not give the Executive the right to remain an employee of
the Company, nor does it interfere with the Company's right to discharge
the Executive. It also does not require the Executive to remain an employee
nor interfere with the Executive's right to terminate employment at any
time.
5.3 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
5.4 Tax Withholding. The Company shall withhold any taxes that are required to
be withheld from the benefits provided under this Agreement.
5.5 Applicable Law. The Agreement and all rights hereunder shall be governed by
the laws of the State of New York, except to the extent preempted by the
laws of the United States of America.
5.6 Unfunded Arrangement. The Executive is a general unsecured creditor of the
Company for the payment of benefits under this Agreement. The benefits
represent the mere promise by the Company to pay such benefits. The rights
to benefits are not subject in any manner to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment
by creditors.
5.7 Entire Agreement. This Agreement constitutes the entire agreement between
the Company and the Executive as to the subject matter hereof. No rights
are granted to the Executive by virtue of this Agreement other than those
specifically set forth herein.
5.8 Administration. The Company shall have powers which are necessary to
administer this Agreement, including but not limited to establishing rules
and prescribing any forms necessary or desirable to administer this
Agreement.
IN WITNESS WHEREOF, the Executive and the Company have signed this Agreement.
EXECUTIVE: LONG ISLAND COMMERCIAL BANK
/s/ Douglas C. Manditch By /s/ Perry B. Duryea, Jr.
-------------------------- ------------------------
Douglas C. Manditch Perry B. Duryea, Jr.
Chairman of the Board
22
EXHIBIT 10.2
LONG ISLAND COMMERCIAL BANK
CHANGE OF CONTROL AGREEMENT
THIS AGREEMENT is made this 28 day of February, 2001, by and between LONG
ISLAND COMMERCIAL BANK, a New York state-chartered commercial bank located in
Islandia, New York (the "Company") and Thomas Buonaiuto (the "Executive").
INTRODUCTION
To encourage the Executive to remain an employee of the Company and to protect
the Executive in the event of a Change of Control, the Company is willing to
provide a change of control benefit to the Executive. The Company will pay the
benefits from its general assets.
AGREEMENT
The Executive and the Company agree as follows:
Article 1
Definitions
Whenever used in this Agreement, the following words and phrases shall
have the meanings specified:
1.1 "Base Salary" means the total annual base salary payable to the Executive
at the rate in effect on the date specified. Base Salary shall not be
reduced for any salary reduction contributions: (i) to cash or deferred
arrangements under Section 401(k) of the Code; (ii) to a cafeteria plan
under Section 125 of the Code; or (iii) to a deferred compensation plan
that is not qualified under Section 401(a) of the Code.
1.2 "Change of Control" means the transfer of shares of the Company's voting
common stock such that one entity or one person acquires (or is deemed to
acquire when applying Section 318 of the Code) more than 50.0 percent of
the Company's outstanding voting common stock followed within twelve (12)
months by the Executive's Termination of Employment for reasons other than
death, Disability or retirement.
1.3 "Code" means the Internal Revenue Code of 1986, as amended.
1.4 "Termination for Cause" means the termination of the Executive's employment
by the Company for any of the following reasons:
(a) Gross negligence or gross neglect of duties;
23
(b) Commission of a felony or of a gross misdemeanor involving moral
turpitude; or
(c) Fraud, disloyalty, dishonesty or willful violation of any law or
significant Company policy committed in connection with the
Executive's employment and resulting in an adverse effect on the
Company.
1.6 "Termination of Employment" means that the Executive ceasing to be employed
by the Company for any reason whatsoever, voluntary or involuntary, other
than by reason of an approved leave of absence.
Article 2
Change of Control Benefits
2.1 Change of Control Benefit. If the Executive's employment should voluntarily
or involuntarily terminate for any reason, other than a Termination for
Cause, the Company shall pay to the Executive a Change of Control benefit
as described in this Section 2.1.
2.1.1Amount of Benefit. The Change of Control benefit shall be two and one
half times Base Salary grossed up for excise taxes.
2.1.2Payment of Benefit. The Company shall pay the Change of Control
benefit provided herein in a lump sum to the Executive within 60 days
of the Executive's Termination of Employment.
Article 3
General Limitations
3.1 Termination for Cause. Notwithstanding any provision of this Agreement to
the contrary, the Company shall not pay any benefit under this Agreement if
the Executive's employment is a Termination for Cause by the Company.
Article 4
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement signed
by the Company and the Executive.
Article 5
Miscellaneous
5.1 Binding Effect. This Agreement shall bind the Executive and the Company,
and their beneficiaries, survivors, executors, successors, administrators
and transferees.
24
5.2 No Guarantee of Employment. This Agreement is not an employment policy or
contract. It does not give the Executive the right to remain an employee of
the Company, nor does it interfere with the Company's right to discharge
the Executive. It also does not require the Executive to remain an employee
nor interfere with the Executive's right to terminate employment at any
time.
5.3 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
5.4 Tax Withholding. The Company shall withhold any taxes that are required to
be withheld from the benefits provided under this Agreement.
5.5 Applicable Law. The Agreement and all rights hereunder shall be governed by
the laws of the State of New York, except to the extent preempted by the
laws of the United States of America.
5.6 Unfunded Arrangement. The Executive is a general unsecured creditor of the
Company for the payment of benefits under this Agreement. The benefits
represent the mere promise by the Company to pay such benefits. The rights
to benefits are not subject in any manner to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment
by creditors.
5.7 Entire Agreement. This Agreement constitutes the entire agreement between
the Company and the Executive as to the subject matter hereof. No rights
are granted to the Executive by virtue of this Agreement other than those
specifically set forth herein.
5.8 Administration. The Company shall have powers which are necessary to
administer this Agreement, including but not limited to establishing rules
and prescribing any forms necessary or desirable to administer this
Agreement.
IN WITNESS WHEREOF, the Executive and the Company have signed this Agreement.
EXECUTIVE: LONG ISLAND COMMERCIAL BANK
/s/ Thomas Buonaiuto By /s/ Perry B. Duryea, Jr.
-------------------------- ------------------------
Thomas Buonaiuto Perry B. Duryea, Jr.
Chairman of the Board
25
EXHIBIT 10.3
LONG ISLAND COMMERCIAL BANK
CHANGE OF CONTROL AGREEMENT
THIS AGREEMENT is made this 28 day of February, 2001, by and between LONG
ISLAND COMMERCIAL BANK, a New York state-chartered commercial bank located in
Islandia, New York (the "Company") and Carmelo C. Vizzini (the "Executive").
INTRODUCTION
To encourage the Executive to remain an employee of the Company and to protect
the Executive in the event of a Change of Control, the Company is willing to
provide a change of control benefit to the Executive. The Company will pay the
benefits from its general assets.
AGREEMENT
The Executive and the Company agree as follows:
Article 1
Definitions
Whenever used in this Agreement, the following words and phrases shall
have the meanings specified:
1.1 "Base Salary" means the total annual base salary payable to the Executive
at the rate in effect on the date specified. Base Salary shall not be
reduced for any salary reduction contributions: (i) to cash or deferred
arrangements under Section 401(k) of the Code; (ii) to a cafeteria plan
under Section 125 of the Code; or (iii) to a deferred compensation plan
that is not qualified under Section 401(a) of the Code.
1.2 "Change of Control" means the transfer of shares of the Company's
voting common stock such that one entity or one person acquires (or is
deemed to acquire when applying Section 318 of the Code) more than 50.0
percent of the Company's outstanding voting common stock followed within
twelve (12) months by the Executive's Termination of Employment for reasons
other than death, Disability or retirement.
1.3 "Code" means the Internal Revenue Code of 1986, as amended.
1.4 "Termination for Cause" means the termination of the Executive's employment
by the Company for any of the following reasons:
(a) Gross negligence or gross neglect of duties;
26
(b) Commission of a felony or of a gross misdemeanor involving moral
turpitude; or
(c) Fraud, disloyalty, dishonesty or willful violation of any law or
significant Company policy committed in connection with the
Executive's employment and resulting in an adverse effect on the
Company.
1.6 "Termination of Employment" means that the Executive ceasing to be employed
by the Company for any reason whatsoever, voluntary or involuntary, other
than by reason of an approved leave of absence.
Article 2
Change of Control Benefits
2.1 Change of Control Benefit. If the Executive's employment should voluntarily
or involuntarily terminate for any reason, other than a Termination for
Cause, the Company shall pay to the Executive a Change of Control benefit
as described in this Section 2.1.
2.1.1Amount of Benefit. The Change of Control benefit shall be two and one
half times Base Salary grossed up for excise taxes.
2.1.2Payment of Benefit. The Company shall pay the Change of Control
benefit provided herein in a lump sum to the Executive within 60 days
of the Executive's Termination of Employment.
Article 3
General Limitations
3.1 Termination for Cause. Notwithstanding any provision of this Agreement to
the contrary, the Company shall not pay any benefit under this Agreement if
the Executive's employment is a Termination for Cause by the Company.
Article 4
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement signed
by the Company and the Executive.
Article 5
Miscellaneous
5.1 Binding Effect. This Agreement shall bind the Executive and the Company,
and their beneficiaries, survivors, executors, successors, administrators
and transferees.
27
5.2 No Guarantee of Employment. This Agreement is not an employment policy or
contract. It does not give the Executive the right to remain an employee of
the Company, nor does it interfere with the Company's right to discharge
the Executive. It also does not require the Executive to remain an employee
nor interfere with the Executive's right to terminate employment at any
time.
5.3 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
5.4 Tax Withholding. The Company shall withhold any taxes that are required to
be withheld from the benefits provided under this Agreement.
5.5 Applicable Law. The Agreement and all rights hereunder shall be governed by
the laws of the State of New York, except to the extent preempted by the
laws of the United States of America.
5.6 Unfunded Arrangement. The Executive is a general unsecured creditor of the
Company for the payment of benefits under this Agreement. The benefits
represent the mere promise by the Company to pay such benefits. The rights
to benefits are not subject in any manner to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment
by creditors.
5.7 Entire Agreement. This Agreement constitutes the entire agreement between
the Company and the Executive as to the subject matter hereof. No rights
are granted to the Executive by virtue of this Agreement other than those
specifically set forth herein.
5.8 Administration. The Company shall have powers which are necessary to
administer this Agreement, including but not limited to establishing rules
and prescribing any forms necessary or desirable to administer this
Agreement.
IN WITNESS WHEREOF, the Executive and the Company have signed this Agreement.
EXECUTIVE: LONG ISLAND COMMERCIAL BANK
/s/ Carmelo C. Vizzini By /s/ Perry B. Duryea, Jr.
------------------------ -------------------------
Carmelo C.Vizzini Perry B. Duryea, Jr.
Chairman of the Board
28
EXHIBIT 13. 2001 ANNUAL REPORT TO STOCKHOLDERS
Selected Financial Data
The following table sets forth selected financial data for the last five years.
At or for the years ended December 31,
2001 2000 1999 1998 1997
(Dollars in thousands)
Selected Operating Data:
Interest income $ 22,945 $ 20,996 $ 18,410 $ 15,285 $ 12,726
Interest expense 11,233 11,143 9,482 8,229 7,303
Net interest income 11,712 9,853 8,928 7,056 5,423
Provision for loan losses 150 150 600 420 240
Other operating income 2,139 1,566 1,706 918 378
Other operating expenses 10,716 8,635 7,581 5,799 3,737
Income before income taxes 2,985 2,634 2,453 1,755 1,824
Income taxes 1,023 880 847 630 760
Net income $ 1,962 $ 1,754 $ 1,606 $ 1,125 $ 1,064
----- ----- ----- ----- -----
Diluted earnings per share $ 1.33 $ 1.10 $ .92 $ .64 $ 1.04
---- ---- --- --- ----
Selected Financial Condition Data:
Total assets $ 438,390 $ 332,934 $ 331,054 $ 266,543 $ 211,956
Loans, net 176,769 134,853 119,836 94,144 78,759
Allowance for loan losses 2,028 1,872 1,475 1,071 1,026
Securities 217,282 169,422 170,149 145,819 99,231
Deposits 345,917 273,189 269,740 217,867 187,626
Borrowed funds 59,500 29,000 39,500 24,000 -
Stockholders' equity 21,127 19,261 18,343 21,868 21,408
Book value per share $ 14.67 $ 13.02 $ 11.14 $ 12.35 $ 12.18
Stockholders' equity (1) 21,354 20,428 21,327 21,803 21,029
Book value per share (1) $ 14.83 $ 13.81 $ 12.95 $ 12.31 $ 11.96
Shares outstanding 1,439,926 1,479,426 1,646,326 1,771,306 1,757,709
Average Balance Sheet Data:
Loans, net $ 153,403 $ 129,393 $ 104,512 $ 86,647 $ 66,961
Securities 155,833 145,291 145,881 109,552 94,509
Assets 345,985 293,884 273,736 216,941 172,583
Demand deposits 51,487 40,842 33,791 25,811 18,657
Savings deposits 39,221 31,507 22,747 9,030 2,784
NOW and money market deposits 49,431 43,865 49,413 35,852 24,960
Certificates of deposit 129,246 106,079 103,596 105,741 99,282
Stockholders' equity $ 20,689 $ 18,138 $ 20,470 $ 21,717 $ 11,368
29
Selected Financial Data (cont'd)
At or for the years ended December 31,
2001 2000 1999 1998 1997
(Dollars in thousands, except share data)
Performance Ratios:
Return on average assets .57% .60% .59% .52% .62%
Return on average equity 9.48 9.67 7.85 5.18 9.36
Average equity to average assets 5.98 6.17 7.48 10.01 6.59
Equity to total assets at end of year 4.82 5.79 5.54 8.20 10.10
Interest rate spread (2) 2.87 2.74 2.81 2.51 2.51
Net interest margin (3) 3.66 3.58 3.50 3.48 3.29
Ratio of interest-earning assets to
average interest-bearing liabilities 1.22 1.21 1.19 1.25 1.18
Non-interest expense to average assets 3.10 2.94 2.77 2.67 2.17
Efficiency ratio (4) 77.37 75.62 71.29 72.72 64.42
Dividend payout ratio 24.81 29.09 34.78 50.00 29.81
Asset Quality Ratios and Other Data:
Total non-performing loans $ 178 $ 416 $ 179 $ 511 $ 403
Allowance for loan losses 2,028 1,872 1,475 1,071 1,026
Non-performing loans as a percent of
Total loans (5) (6) .10% .30% .15% .54% .51%
Non-performing loans as a percent of
total assets (5) .04 .12 .05 .19 .19
Allowance for loan losses as a percent of:
Non-performing loans (5) 1139.33 450.00 824.02 209.59 254.59
Total loans (6) 1.13% 1.37% 1.22% 1.12% 1.29%
Full service offices 8 6 6 6 4
(1) Excludes the unrealized appreciation (depreciation) in available-for-sale
securities.
(2) Interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(3) The net interest margin represents net interest income divided by average
interest-earning assets.
(4) The efficiency ratio represents the ratio of operating expenses divided by
the sum of net interest income and other operating income.
(5) Non-performing loans consist of all non-accrual loans and all other loans
90 days or more past due. It is the Company's policy to generally cease
accruing interest on all loans 90 days or more past due.
(6) Loans include loans, net, before allowance for loan losses.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
Statements contained in this Annual Report, which are not historical facts, are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Amounts 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 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" 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 and its subsidiaries
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 products;
deposit flows; real estate values; the level of defaults; losses and prepayments
on loans held by the Company in portfolio or sold in the secondary markets;
demand for financial services in the Company's market area; 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. The forward-looking statements are made as of the date of this Annual
Report, 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 and undue reliance should not be placed on such statements. Readers
are cautioned not to place undue reliance on forward-looking statements, which
speak only as of the date of this Annual Report.
GENERAL
Long Island Financial Corp. ("the Company") is a registered Delaware
financial holding company, organized in 1999, and the parent company of Long
Island Commercial Bank ("the Bank"). The Bank, founded in 1989, is a New York
state-chartered commercial bank, which is engaged in commercial banking in
Islandia, New York and the surrounding communities in Suffolk and Nassau
Counties. The Company's results of operations are dependent primarily on net
interest income, which is the difference between the income earned on its loan
and securities portfolios and its cost of funds, consisting of interest paid on
deposits and borrowings. Results of operations are also affected by the
Company's provision for loan losses and other operating income. The Company's
other operating expense consists principally of salaries and employee benefits,
occupancy, premises and equipment expense, and other expenses. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in interest rates, government policies and
action of regulatory authorities.
In 1998, the Company began originating residential real estate loans
primarily in its market area of Nassau and Suffolk Counties. Currently, the
Company sells residential real estate loans together with the servicing rights
to these loans on a non-recourse basis to institutional investors. The Company
limits its exposure to interest rate fluctuations and credit risk on these loans
by obtaining, at the point of origination, a commitment from an institutional
investor to purchase that loan from the Company. Furthermore, by selling the
servicing rights to the loans, the Company avoids the associated risks and
expenses of managing and servicing a loan portfolio. Income is generated from
the premiums received on the sale of loans with servicing rights and on the fees
charged and interest earned during the period the Company holds the loans for
sale.
MANAGEMENT STRATEGY
The Company 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. The Company continues to implement an aggressive
expansion plan. The key components of this plan are to (i) expand the Company's
network of branch offices, (ii) originate commercial loans, (iii) develop strong
customer relationships that generate multiple services for individual customer
relationships and repeat business, (iv) add high quality employees and (v)
leverage capital with increased deposits from branch expansion and borrowed
funds.
31
The establishment of the financial holding company structure in 1999
provides greater operating flexibility by allowing the Company to conduct a
broader range of business activities and permits the Board of Directors of the
Company to determine whether to conduct such activities at the Bank or in
separate subsidiaries of the Company. Finally, the new structure will permit
expansion into a broader range of financial services and other business
activities that are not currently permitted to the Bank as a New York
state-chartered commercial bank. Such activities include, among others,
operating non-bank depository institutions or engaging in financial and
investment advisory services, securities brokerage and management consulting
activities.
MANAGEMENT OF INTEREST RATE RISK
The principal objective of the Company's interest rate risk 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,
its operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors approved
guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Investment
Committee reviews the Company's interest rate risk position of the Company 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
of the Company. Accordingly, the Company's results of operations and financial
condition are largely dependent on movements in market interest rates and its
ability to manage its assets and liabilities in response to such movements.
At December 31, 2001, 64.4% of the Company's gross loans had adjustable
interest rates and its loan portfolio had an average weighted maturity of 9.4
years. At such date, $38.8 million, or 17.8%, of the Company's securities had
adjustable interest rates, and its securities portfolio had a weighted average
maturity of 3.3 years. At December 31, 2001, the Company had $63.5 million of
certificates of deposit with maturities of one year or less and $35.9 million of
deposits $100,000 or more, which tend to be less stable sources of funding as
compared to core deposits and represented 28.9% of the Company's
interest-bearing liabilities. Due to the Company's level of shorter term
certificates of deposit, the cost of funds of the Company 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 interest rate sensitivity of the Company is monitored by management
through the use of a quarterly interest rate risk analysis model which evaluates
(i) the potential change in net interest income over the succeeding four quarter
periods 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 from a static position to plus
or minus 200 basis points, in 100 basis point increments.
At December 31, 2001, the effects of instantaneous and sustained interest
rate changes on the Company's Net Interest Income and Net Economic Value of
Equity would be 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 $ 284 1.91% $ (2,126) (9.03)%
100 184 1.24 (970) (4.12)
Static - - - -
(100) (350) (2.36) 443 1.88
(200) (1,569) (10.56) 777 3.30
32
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 interest rates earned or paid on them.
The following table sets forth certain information relating to the average
balance sheets of the Company and its statements of earnings for the years ended
December 31, 2001, 2000 and 1999, and reflects the average yield on
interest-earning assets and average cost of interest-bearing liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense, by the average balance of interest-earning assets or interest-bearing
liabilities, respectively. Average balances are derived from average daily
balances.
Years Ended December 31,
2001 2000 1999
Average Average Average
Average Yield / Average Yield / Average Yield /
Balance Interest Cost Balance Interest Cost Balance Interest Cost
(Dollars in thousands)
Assets:
Interest-earning assets:
Federal funds sold and
interest-earning deposits $ 11,572 $ 497 4.29% $ 1,366 $ 87 6.37% $ 6,695 $ 317 4.73%
Securities, net (1) 154,889 9,455 6.10 144,124 9,118 6.33 141,481 8,769 6.20
Municipal obligations (2) 944 54 5.72 1,167 68 5.83 4,400 260 5.91
Loans, net (3) 153,403 12,954 8.44 129,393 11,743 9.08 104,512 9,134 8.74
------- ------ ------- ------ ------- -----
Total interest-earning assets 320,808 22,960 7.16 276,050 21,016 7.61 257,088 18,480 7.19
Non-interest-earning assets 25,177 17,834 16,648
-------------------------------------------------------------------
Total assets $ 345,985 $ 293,884 $ 273,736
---------------------------- ----------------------------- ---------
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits $ 39,221 $ 1,047 2.67% $ 31,507 $ 1,168 3.71% $ 22,747 $ 777 3.42%
NOW and money
market deposits 49,431 928 1.88 43,865 1,013 2.31 49,413 985 1.99
Certificates of deposit 129,246 7,023 5.43 106,079 6,478 6.11 103,596 5,715 5.52
------- ----- ------- ----- ------- -----
Total interest-bearing deposits 217,898 8,998 4.13 181,451 8,659 4.77 175,756 7,477 4.25
Borrowed funds 44,249 2,235 5.05 47,451 2,484 5.23 40,657 2,005 4.93
------ ----- ------ ----- ------ -----
Total interest-bearing liabilities 262,147 11,233 4.29 228,902 11,143 4.87 216,413 9,482 4.38
Other non-interest bearing
liabilities 63,149 46,844 36,853
-------------------------------------------------------------------
Total liabilities 325,296 275,746 253,266
Stockholders' equity 20,689 18,138 20,470
-------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 345,985 $ 293,884 $ 273,736
------------------------------ ----------------------------- ---------
Interest income / interest
rate spread (4) $ 11,727 2.87% $ 9,873 2.74% $ 8,998 2.81%
------ ---- ----- ---- ----- ----
Net interest margin (5) 3.66% 3.58% 3.50%
---- ---- ----
Ratio of interest-earning assets to
interest-bearing liabilities 1.22 1.21 1.19
---- ---- ----
(1) Securities, net, excludes municipal obligations. Unrealized
appreciation/depreciation on available-for-sale securities are recorded in
non-interest-earning assets.
(2) Interest income and yields are presented on a fully taxable equivalent
basis.
(3) Amount is net of residential real estate loans held-for-sale, deferred loan
fees and allowance for loan losses but includes non-performing loans.
(4) Interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
33
The following table represents the extent to which changes in interest
rates and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the interest income and interest expense of the
Company during the periods indicated. Information is provided in each category
with respect to (i) changes attributable to changes in volume (change in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (change
in rate multiplied by prior volume) and (iii) the net change. Changes
attributable to the combined impact of volume and rate have been allocated
proportionately to separately reflect the changes due to the volume and the
changes due to rate:
Year Ended Year Ended
December 31, 2001 December 31, 2000
Compared to Compared to
Year Ended Year Ended
December 31, 2000 December 31, 1999
Increase/(Decrease) Due to Increase/(Decrease) Due to
Volume Rate Net Volume Rate Net
(Dollars in thousands)
Interest-Earning Assets:
Federal funds sold and interest
earning deposits ............................... $ 447 (37) 410 $ (313) $ 83 $ (230)
Securities, net (1) .................................. 665 (328) 337 165 184 349
Municipal obligations ................................ (13) (1) (14) (188) (4) (192)
Loans, net (2) ....................................... 2,069 (858) 1,211 2,246 363 2,609
----- ---- ----- ----- --- -----
Total interest-earning assets .................. 3,168 (1,224) 1,944 1,910 626 2,536
Interest-Bearing Liabilities:
Deposits:
Savings deposits ................................ 249 (370) (121) 320 71 391
NOW and money market deposits ................... 119 (204) (85) (118) 146 28
Certificates of deposit ......................... 1,311 (766) 545 140 623 763
----- ---- --- --- --- ---
Total deposits .................................. 1,679 (1,340) 339 342 840 1,182
Borrowed funds ....................................... (164) (85) (249) 350 129 479
---- --- ---- --- --- ---
Total interest-bearing liabilities ............. $ 1,515 $(1,425) $ 90 $ 692 $ 969 $ 1,661
(1) Securities, net, excludes municipal obligations.
(2) Amount is net of residential real estate loans held-for-sale, deferred loan
fees and allowance for loan losses but includes non-performing loans.
Comparison of Financial Condition at December 31, 2001 and 2000
Total assets increased by $105.5 million, or 31.7%, from $332.9 million at
December 31, 2000 to $438.4 million at December 31, 2001. The increase in assets
is attributable to a $41.9 million, or 31.1%, increase in loans, net, which at
December 31, 2000 amounted to $134.9 million compared to $176.8 million at
December 31, 2001. The growth in loans resulted from increases of $4.8 million,
or 12.3%, in the commercial and industrial loan portfolio, $22.8 million, or
24.3%, in the commercial real estate loan portfolio, and $15.6 million in the
automobile loan portfolio. Cash and cash equivalents increased $14.4 million, or
89.0%, and securities available for sale, $40.2 million, or 24.4%, reflecting
the timing of seasonal municipal deposits and the investment of those deposits
in short-term available-for-sale securities or federal funds sold prior to
year-end. At December 31, 2001 and 2000, seasonal municipal deposits, amounted
to $80.7 million and $51.2 million, respectively. Prepaid expenses and other
assets decreased $307,000, or 12.4%, from $2.5 million at December 31, 2000, to
$2.2 million at December 31, 2001, primarily due to the decrease in the deferred
tax asset which, in turn, was directly related to the decrease in accumulated
other comprehensive loss.
34
Total deposits increased $72.7 million, or 26.6%, from $273.2 million at
December 31, 2000, to $345.9 million at December 31, 2001. Demand deposits
increased $15.9 million, or 34.9%, from $45.6 million at December 31, 2000 to
$61.5 million at December 31, 2001. In addition, savings deposits increased by
$10.2 million, or 31.0%, from $32.8 million at December 31, 2000, to $43.0
million at December 31, 2001. The growth in demand and savings deposits reflect
the Company's focus on the generation of core deposits. In addition to those
deposit increases, NOW and money market deposits increased $29.1 million, or
35.4%, from $82.0 million at December 31, 2000, to $111.1 million at December
31, 2001, which reflects the increase in seasonal municipal deposits at December
31, 2001. Time certificates issued in excess of $100,000 were $35.9 million at
December 31, 2001, an increase of $633,000, or 1.8%, from the prior year. The
Company, at various times, utilizes time deposits issued in excess of $100,000
as an available alternative funding source. Other time deposits increased $16.9
million, or 21.9%, to $94.5 million at December 31, 2001. Federal Home Loan Bank
advances and other borrowings increased $30.5 million dollars to $59.5 million
at December 31, 2001.
Stockholders' equity increased $1.8 million to $21.1 million at December
31, 2001 compared to $19.3 million at December 31, 2000. Increases to
stockholders' equity included net income amounting to $2.0 million for the year
ended December 31, 2001, and a decrease in the accumulated other comprehensive
loss on securities available-for-sale of $940,000. These increases were
partially offset by dividends declared of $478,000, and by $564,000 employed to
repurchase 40,000 shares of common stock.
Comparison of Operating Results for the Years Ended December 31, 2001 and 2000
GENERAL
The Company reported net income of $2.0 million for the year ended December
31, 2001, or diluted earnings per share of $1.33, as compared to net income of
$1.8 million, or diluted earnings per share of $1.10 for 2000. The results of
operations for the year ended December 31, 2001 included a loss of $14,000, from
the sale of investment securities available-for-sale compared to a loss of
$154,000, from the sale of such securities in 2000.
INTEREST INCOME
Interest income, on a fully-taxable equivalent basis, increased $2.0
million, or 9.3%, to $23.0 million for the year ended December 31, 2001, from
$21.0 million for the year ended December 31, 2000. The increase was primarily
the result of an increase in the average balance of interest-earning assets of
$44.7 million, or 16.2%, to $320.8 million for the year ended December 31, 2001
from $276.1 million for 2000. The average balance of securities, net, (exclusive
of municipal obligations) increased by $10.8 million, or 7.5%, but returned a 23
basis point decrease in average yield to 6.10% for the year ended December 31,
2001, compared to 6.33% for 2000. The $223,000 decline in the average balance of
municipal obligations for the year ended December 31, 2001, from $1.2 million
for the year ended December 31, 2000, resulted from the sale of approximately
$1.2 million in municipal obligations during the fourth quarter of 2001. The
average yield on loans, net, decreased 64 basis points from 9.08% for the 2000
period to 8.44% for the year ended December 31, 2001. The average yield on
interest earning assets decreased 45 basis points, from 7.61% for the year ended
December 31, 2000, to 7.16% for the year ended December 31, 2001, as a result of
decreasing interest rates available in the market.
INTEREST EXPENSE
Total interest expense increased $90,000, or .8%, for the year ended
December 31, 2001, to $11.2 million compared to $11.1 million for the year ended
December 31, 2000. The decrease reflects an increase in the average balance of
interest-bearing liabilities of $33.2 million, or 14.5%, and a 58 basis point
decrease in the average rate paid on interest-bearing liabilities. The average
balance of savings deposits increased by $7.7 million, or 24.5%, and the average
balance of NOW and money market deposits increased $5.6 million, or 12.7%, from
year to year. The average balance of certificates of deposit increased $23.2
million, or 21.8%, to $129.2 million at December 31, 2001, notwithstanding a
decrease of 68 basis points in the average rate paid on certificates reflecting
a decrease in market interest rates. In addition, the lower interest rate
environment decreased the average cost of borrowed funds 18 basis points from
5.23% for the 2000 period, to 5.05% for the year ended December 31, 2001.
NET INTEREST INCOME
Net interest income, on a fully-taxable equivalent basis, increased by $1.8
million from $9.9 million for the year ended December 31, 2000, to $11.7 million
for the year ended December 31, 2001. The average cost of total interest-bearing
liabilities for the period decreased 58 basis points from 4.87% in 2000 to 4.29%
in 2001. The average yield on interest-earning assets for the year decreased 45
basis points from 7.61% in 2000 period to 7.16% in 2001. The net interest rate
spread increased by 13 basis points from 2.74% in 2000 to 2.87% in 2001.
35
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses was $150,000 for the years ended
December 31, 2001 and December 31, 2000. The provision for loan losses reflects
management's qualitative and quantitative assessment of the loan portfolio, net
charge-offs and collection of delinquent loans. At December 31, 2001 and
December 31, 2000, the allowance for loan losses amounted to $2.0 million and
$1.9 million, respectively. The allowance for loan losses as a percentage of
total loans was 1.13% at December 31, 2001 and 1.37% at December 31, 2000.
The determination of the amount of the allowance for loan losses is based
on an analysis of the loan portfolio and reflects an amount, which, in
management's judgment is adequate to provide for probable loan losses in the
existing portfolio. This analysis considers, among other things, present and
known inherent risks in the portfolio, adverse situations, which may affect the
borrower's ability to repay, overall portfolio quality, and current and
prospective economic conditions. While management uses available information to
provide for loan losses, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of the examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
to recognize additions to the allowance based upon their judgment of information
available to them at the time of their examination.
OTHER OPERATING INCOME
Other operating income increased by $573,000, or 36.6%, to $2.1 million for
the year ended December 31, 2001, compared to $1.6 million for the year ended
December 31, 2000. The increase is primarily attributable to an increase of
$163,000, or 64.4%, in net gain on sale of residential loans, which experienced
increased volume due to lower market rates and increased refinancing activity.
In addition, service charges on deposit accounts increased $163,000, or 18.2%,
reflecting the growth in the Company's depositor base and an overall increase in
the Company's fee schedule. Offsetting these positive events, the Company
engaged in securities transactions, which resulted in losses of $14,000 and
$154,000 for the years ending December 31, 2001, and 2000, respectively.
Contingent upon market conditions, the Company periodically evaluates securities
transactions to improve future net interest income and earnings per share.
OTHER OPERATING EXPENSE
Other operating expense increased $2.1 million, or 24.1%, to $10.7 million
for the year ended December 31, 2001, compared to $8.6 million for the year
ended December 31, 2000. Other operating expense includes salaries and employee
benefits, occupancy expense, premises and equipment expense, and the increases
are attributable to the Company's planned branch expansion. In addition, other
operating expense includes $806,000 of expense related to the $7.5 million of
Capital Securities outstanding.
INCOME TAXES
Income taxes increased $143,000, or 16.3%, from $880,000 for the year ended
December 31, 2000 to $1.0 million for the year ended December 31, 2001 as a
result of increased income before income taxes. The effective tax rate for the
year ended December 31, 2001 was 34.3% compared to 33.4% for the year ended
December 31, 2000.
Comparison of Operating Results for the Years Ended December 31, 2000 and 1999
GENERAL
The Company reported net income of $1.8 million for the year ended December
31, 2000, or basic and diluted earnings per share of $1.10, as compared to net
income of $1.6 million, or basic and diluted earnings per share of $.92 for
1999. The results of operations for the year ended December 31, 2000 included a
loss of $154,000, from the sale of investment securities available-for-sale
compared to a gain of $88,000, from the sale of such securities in 1999.
36
INTEREST INCOME
Interest income, on a fully-taxable equivalent basis, increased $2.5
million, or 13.7%, to $21.0 million for the year ended December 31, 2000, from
$18.5 million for the year ended December 31, 1999. The increase was primarily
the result of an increase in the average balance of interest-earning assets of
$19.0 million, or 7.4%, to $276.1 million for the year ended December 31, 2000
from $257.1 million for 1999. The average balance of securities, net, (exclusive
of municipal obligations) increased by $2.6 million, or 1.9%, and returned a 13
basis point increase in average yield to 6.33% for the year ended December 31,
2000, compared to 6.20% for 1999. The $3.2 million decline in the average
balance of municipal obligations for the year ended December 31, 2000, from $4.4
million for the prior year resulted from the sale of approximately $11.8 million
in municipal obligations during the second quarter of 1999. The proceeds from
that sale were reinvested in higher earning assets, primarily bank owned life
insurance and available for sale securities. The average yield on loans, net,
increased 34 basis points from 8.74% for the 1999 period to 9.08% for the year
ended December 31, 2000. The average yield on interest-earning assets increased
42 basis points, from 7.19% for the year ended December 31, 1999, to 7.61% for
the year ended December 31, 2000, as a result of increased interest rates
available in the market.
INTEREST EXPENSE
Total interest expense increased $1.6 million, or 17.5%, for the year ended
December 31, 2000, to $11.1 million compared to $9.5 million for the year ended
December 31, 1999. The increase reflects both an increase in the average balance
of interest-bearing liabilities of $12.5 million, or 5.8%, and an increase in
the average rate paid on interest-bearing liabilities of 49 basis points. The
average balance of savings deposits increased by $8.8 million, or 38.5%, and the
average balance of NOW and money market deposits decreased $5.5 million, or
11.2%, from year to year. The average balance of certificates of deposit
increased $2.5 million, or 2.4%, to $106.1 million at December 31, 2000 coupled
with an increase of 59 basis points in the average rate paid reflecting
increased market interest rates. In addition, the higher interest rate
environment increased the average cost of borrowed funds 30 basis points from
4.93% for the 1999 period, to 5.23% for the year ended December 31, 2000.
NET INTEREST INCOME
Net interest income, on a fully-taxable equivalent basis, increased by
$875,000 from $9.0 million for the year ended December 31, 1999, to $9.9 million
for the year ended December 31, 2000. The average cost of total interest-bearing
liabilities for the period increased 49 basis points from 4.38% in 1999 to 4.87%
in 2000. The average yield on interest-earning assets for the year increased 42
basis points from 7.19% in 1999 period to 7.61% in 2000. The net interest rate
spread decreased by 7 basis points from 2.81% in 1999 to 2.74% in 2000.
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses for the year ended December 31,
2000 decreased $450,000, or 75.0%, from $600,000 for the year ended December 31,
1999, to $150,000 for the year ended December 31, 2000. The decreased provision
for loan losses reflects management's qualitative and quantitative assessment of
the loan portfolio, net charge-offs and collection of delinquent loans. At
December 31, 2000 and December 31, 1999, the allowance for loan losses amounted
to $1.9 million and $1.5 million, respectively. The reduced provision in the
allowance for loan losses for the year ended December 31, 2000 was primarily
attributable to the Company recovering $397,000 on a commercial and industrial
loan previously charged off. The allowance for loan losses as a percentage of
total loans was 1.37% at December 31, 2000 and 1.22% at December 31, 1999.
OTHER OPERATING INCOME
Other operating income decreased by $140,000, or 8.2%, to $1.6 million for
the year ended December 31, 2000, compared to $1.7 million for the year ended
December 31, 1999. The decrease is primarily attributable to a decrease of
$277,000, or 52.3%, in net gain on sale of residential loans as a result of
rising market interest rates throughout 2000. In addition, the Company engaged
in a securities transaction, which resulted in a loss of $154,000. Offsetting
these events, in part were, increases of $247,000, or 38.1%, in service charges
on deposit accounts reflecting the growth in the Company's depositor base and an
overall increase in the Company's fee schedule. Other operating income also
increased as the Company recognized a full year of dividends earned on bank
owned life insurance.
37
OTHER OPERATING EXPENSE
Other operating expense increased $1.1 million, or 13.9%, to $8.6 million
for the year ended December 31, 2000, compared to $7.6 million for the year
ended December 31, 1999. Other operating expense includes salaries and employee
benefits, occupancy expense, premises and equipment expense, and the increases
are attributable to the Company's overall growth. In addition, other operating
expense includes $258,000 of expense related to the issuance of $7.5 million of
Capital Securities.
INCOME TAXES
Income taxes increased $33,000, or 3.9%, from $847,000 for the year ended
December 31, 1999 to $880,000 for the year ended December 31, 2000 as a result
of the increase in income before income taxes. The effective tax rate for the
year ended December 31, 2000 was 33.4% compared to 34.5% for the year ended
December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity management for the Company requires that funds be available to
pay all deposit withdrawals and maturing financial obligations and to meet
credit-funding requirements promptly and fully in accordance with their terms.
Over a very short time frame, maturing assets provide only a limited portion of
the funds required to pay maturing liabilities. 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 primary investing activities of the Company are the purchase of
securities available-for-sale and the originations of loans. During the years
ended December 31, 2001 and 2000, the Company's purchases of securities
classified available-for-sale totaled $969.6 million and $396.9 million,
respectively. Loan originations and principal repayments on loans, net totaled
$41.3 million and $15.5 million, for the years ended December 31, 2001 and 2000,
respectively. These activities were funded primarily by deposit growth,
principal repayments on loans, borrowings and principal repayments on
securities.
The Company's liquid assets consist of cash and due from banks, federal
funds sold, interest-earning deposits with other financial institutions and
securities classified as available-for-sale, less securities pledged as
collateral. The Company has established a minimum liquidity level, average
liquid assets to average assets, at 10%. During the year ended December 31,
2001, the Company's average minimum liquidity level was 21.6%. Average balances
are derived from average daily balances.
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 conversion of 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 and liquidate available-for-sale securities and access its lines
of credit, totaling $6.5 million, with unaffiliated financial institutions which
enables it to borrow funds on an unsecured basis. In addition, the Company has
available lines of credit with the Federal Home Loan Bank of New York ("FHLB")
equal to 6.5% of the Company's assets, which enables it to borrow funds on a
secured basis. In addition, the Company could engage in other borrowings,
including FHLB advances and reverse repurchase agreements on a secured basis. At
December 31, 2001 and 2000, FHLB advances amounted to $55.0 million and $29.0
million, respectively.
On May 24, 2001, the Company announced a stock repurchase program to
acquire an additional 75,000 shares of the outstanding common stock of the
Company. As of December 31, 2001, no repurchases have been made under this
program. The repurchase program was undertaken because management believed the
repurchase would enhance shareholder value and provide additional liquidity for
otherwise thinly traded shares. The repurchase program, which is continuing,
generally will be conducted through open market purchases, although unsolicited
negotiated transactions or other types of repurchases may be considered.
Management does not believe the stock repurchase will adversely affect the
strong liquidity or capital positions of the Company, its designation as
well-capitalized or its compliance with established regulatory capital
requirements. At December 31, 2001, the Company holds 336,900 shares of treasury
stock at an average cost of $12.40 per share.
38
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"), which require the measurement of financial
position and operating results in terms of historical dollar amounts without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Company's operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 2000, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" - an amendment of FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement amends and supersedes certain paragraphs of SFAS No.
133. The effective date for SFAS No. 138 is for fiscal years beginning after
June 15, 2000. SFAS Nos. 138 and 133 apply to quarterly and annual financial
statements. There was no material impact on the Company's financial condition or
results of operations upon adoption of SFAS Nos. 138 and 133.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement replaces SFAS No. 125. SFAS No. 140 was effective for transfers
occurring after March 31, 2001 and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000,
which disclosures have been incorporated into our consolidated financial
statements. There was no material impact on the Company's financial condition or
results of operations upon adoption of SFAS No. 140. The implementation of the
remaining provisions subsequent to December 31, 2001 is not expected to have a
material impact on the Company's financial condition or results of operations.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets
acquired in a purchase method business combination must meet to be recognized
and reported apart from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provision of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values. The amortizing intangible assets will
also be reviewed for impairment at least annually. SFAS No. 142 is applicable to
fiscal years beginning after December 15, 2001 and is required to be applied at
the beginning of the entities fiscal year. There was no material impact on the
Company's financial condition or results of operations upon adoption of SFAS No.
141 on July 1, 2001. The Company does not believe that there will be a material
impact on the Company's financial condition or results of operations upon
adoption of SFAS No. 142 on January 1, 2002.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," that replaces SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001 and, generally, are to be applied
prospectively. The Company does not believe that there will be a material impact
on the Company's financial condition or results of operations upon adoption of
SFAS No. 144.
39
Consolidated Balance Sheets
(In thousands, except share data) December 31,
2001 2000
Assets:
Cash and due from banks $ 30,347 $ 14,652
Interest earning deposits 279 56
Federal funds sold - 1,500
------ ------
Total cash and cash equivalents 30,626 16,208
------ ------
Securities held-to-maturity
(fair value of $12,937 and $4,736, respectively) 12,457 4,754
Securities available-for-sale, at fair value 204,825 164,668
Loans, net of unearned income and deferred fees 178,797 136,725
Less allowance for loan losses 2,028 1,872
----- -----
Loans, net 176,769 134,853
Premises and equipment, net 2,929 1,868
Accrued interest receivable 2,121 1,911
Bank owned life insurance 6,495 6,197
Prepaid expenses and other assets 2,168 2,475
----- -----
Total assets $ 438,390 $ 332,934
========= =========
Liabilities and Stockholders' Equity:
Deposits:
Demand deposits $ 61,502 $ 45,592
Savings deposits 43,032 32,849
NOW and money market deposits 111,058 82,003
Time certificates issued in excess of $100,000 35,861 35,228
Other time deposits 94,464 77,517
------ ------
Total deposits 345,917 273,189
Borrowed funds 59,500 29,000
Accrued expenses and other liabilities 4,346 3,984
----- -----
Total liabilities 409,763 306,173
------- -------
Guaranteed preferred beneficial interest
in junior subordinated debentures 7,500 7,500
Stockholders' equity:
Common stock (par value $.01 per share; 10,000,000 shares, authorized;
1,776,826 shares issued; 1,439,926
and 1,479,426 outstanding in 2001 and 2000, respectively) 18 18
Surplus 20,191 20,185
Accumulated surplus 5,323 3,839
Accumulated other comprehensive loss (227) (1,167)
Treasury stock at cost, (336,900 shares in 2001;
296,900 shares in 2000) (4,178) (3,614)
------ ------
Total stockholders' equity 21,127 19,261
------ ------
Total liabilities and stockholders' equity $ 438,390 $ 332,934
========= ==========
See accompanying notes to consolidated financial statements
40
Consolidated Statements of Earnings
For the years ended
(In thousands, except share data) December 31,
2001 2000 1999
Interest income:
Loans $ 12,954 11,743 9,134
Securities 9,494 9,166 8,959
Federal funds sold 485 73 304
Earning deposits 12 14 13
-- -- --
Total interest income 22,945 20,996 18,410
------ ------ ------
Interest expense:
Savings deposits 1,047 1,168 777
NOW and money market deposits 928 1,013 985
Time certificates issued in excess of $100,000 1,853 1,523 1,239
Other time deposits 5,170 4,955 4,476
Borrowed funds 2,235 2,484 2,005
----- ----- -----
Total interest expense 11,233 11,143 9,482
------ ------ -----
Net interest income 11,712 9,853 8,928
------ ----- -----
Provision for loan losses 150 150 600
--- --- ---
Net interest income after provision
for loan losses 11,562 9,703 8,328
------ ----- -----
Other operating income:
Service charges on deposit accounts 1,059 896 649
Net (loss) gain on sale of securities (14) (154) 88
Net gain on sale of residential loans 416 253 530
Earnings on bank owned life insurance 357 325 244
Other 321 246 195
--- --- ---
Total other operating income 2,139 1,566 1,706
----- ----- -----
Other operating expenses:
Salaries and employee benefits 5,062 4,098 3,910
Occupancy expense 759 615 534
Premises and equipment expense 991 812 735
Capital securities 806 258 -
Other 3,098 2,852 2,402
----- ----- -----
Total other operating expenses 10,716 8,635 7,581
------ ----- -----
Income before income taxes 2,985 2,634 2,453
----- ----- -----
Income taxes 1,023 880 847
----- --- ---
Net income $ 1,962 1,754 1,606
----- ----- -----
Basic earnings per share $ 1.35 1.10 .92
---- ---- ---
Diluted earnings per share $ 1.33 1.10 .92
---- ---- ---
See accompanying notes to consolidated financial statements
41
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
other
Common Accumulated comprehensive Treasury
(In thousands, except share data) stock Surplus surplus income (loss) Stock Total
Balance at December 31, 1998 ................................. $ 18 $ 20,126 $ 1,659 $ 65 $ -- $ 21,868
Comprehensive income:
Net income .............................................. -- -- 1,606 -- -- 1,606
Other comprehensive income,
net of tax:
Unrealized depreciation in
available-for-sale securities,
net of reclassification adjustment (1) .............. -- -- -- (3,049) -- (3,049)
------
Total comprehensive loss ..................................... -- -- -- -- -- (1,443)
Reorganization costs ......................................... -- -- (115) -- -- (115)
Dividend reinvestment and stock
purchase plan, issued 5,020 shares ...................... -- 59 -- -- -- 59
Dividends declared on common
stock ($.32 per common share) ........................... -- -- (563) -- -- (563)
Common stock repurchased (130,000 shares) .................... -- -- -- -- (1,463) (1,463)
Balance at December 31, 1999 ................................. $ 18 $ 20,185 $ 2,587 $ (2,984) $ (1,463) $ 18,343
-------- -------- -------- -------- -------- --------
Comprehensive income:
Net income .............................................. -- -- 1,754 -- -- 1,754
Other comprehensive income,
net of tax:
Unrealized appreciation in
available-for-sale securities,
net of reclassification adjustment (1) .............. -- -- -- 1,817 -- 1,817
------
Total comprehensive income ................................... -- -- -- -- -- 3,571
Dividends declared on common
stock ($.32 per common share) ........................... -- -- (502) -- -- (502)
Common stock repurchased (166,900 shares) .................... -- -- -- -- (2,151) (2,151)
Balance at December 31, 2000 ................................. $ 18 $ 20,185 $ 3,839 $ (1,167) $ (3,614) $ 19,261
-------- -------- -------- -------- -------- --------
Comprehensive income:
Net income .............................................. -- -- 1,962 -- -- 1,962
Other comprehensive income,
net of tax:
Unrealized appreciation in
available-for-sale securities,
net of reclassification adjustment (1) .............. -- -- -- 940 -- 940
------
Total comprehensive income ................................... -- -- -- -- -- 2,902
Exercise of stock options and related tax benefit ............ -- 6 -- -- -- 6
Dividends declared on common
stock ($.33 per common share) ........................... -- -- (478) -- -- (478)
Common stock repurchased (40,000 shares) ..................... -- -- -- -- (564) (564)
Balance at December 31, 2001 ................................. $ 18 $ 20,191 $ 5,323 $ (227) $ (4,178) $ 21,127
-------- -------- -------- -------- -------- --------
(cont'd)
42
(In thousands) Years ended December 31,
(1) Disclosure of reclassification amount, net of tax,
for the years ended: 2001 2000 1999
Net unrealized appreciation (depreciation) arising during
the year, net of tax .................................................. $ 949 $ 1,915 $(3,105)
Less: Reclassification adjustment for net (losses) gains
included in net income, net of tax .................................... (9) (98) 56
Net unrealized gain (loss) on securities, net of tax ......................... 940 1,817 (3,049)
See accompanying notes to consolidated financial statements
43
Consolidated Statements of Cash Flows
(In thousands) For the years ended December 31,
2001 2000 1999
Cash flows from operating activities:
Net income .................................................................... $ 1,962 1,754 1,606
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ................................................. 150 150 600
Depreciation and amortization ............................................. 736 609 579
Amortization of premiums, net
of discount accretion ................................................ (117) (866) (50)
Net loss (gain) on sale of securities ..................................... 14 154 (88)
Loans originated for sale,
net of proceeds from sales and gains .................................... (761) 308 467
Net deferred loan origination fees ........................................ 35 43 159
Earnings on bank owned life insurance ..................................... (357) (325) (244)
Deferred income taxes ..................................................... (189) (49) (36)
Change in other assets and liabilities:
Accrued interest receivable .......................................... (210) 151 (448)
Prepaid expenses and other assets .................................... (523) (477) 505
Accrued expenses and other liabilities ............................... 362 513 709
--- --- ---
Net cash provided by operating activities ............................ 1,480 1,965 3,759
----- ----- -----
Cash flows from investing activities:
Purchases of securities held-to-maturity, available-for-sale .............. (977,603) (401,354) (276,104)
Proceeds from the sale of securities available-for-sale ................... 35,244 6,846 12,777
Proceeds from maturities of securities .................................... 862,006 392,600 220,195
Principal repayments on securities ........................................ 34,236 6,456 13,724
Loan originations net of principal
repayments ........................................................... (41,340) (15,518) (26,918)
Purchase of premises and equipment ........................................ (1,797) (388) (693)
Purchase of bank owned life insurance ..................................... -- -- (5,715)
------ -------- ------
Net cash used in investing activities ................................ (89,254) (11,358) (62,734)
------- ------- -------
Cash flows from financing activities:
Net increase (decrease) in demand deposit,
savings, NOW, and money market accounts .............................. 55,149 (7,317) 46,991
Net increase in certificates of deposit ................................... 17,579 10,766 4,882
Net increase (decrease) in borrowed funds ................................. 30,500 (10,500) 15,500
Payments for cash dividends ............................................... (478) (502) (563)
Reorganization costs ...................................................... -- -- (115)
Purchase of common stock .................................................. (564) (2,151) (1,463)
Capital securities ........................................................ -- 7,500 --
Proceeds from shares issued under the
dividend reinvestment and stock purchase plan ........................ -- -- 59
------ ------ ------
Proceeds from exercise of stock options ................................... 6 -- --
------ ------ ------
Net cash provided by (used in) financing activities .................. 102,192 (2,204) 65,291
------- ------ ------
Net increase (decrease) in cash
and cash equivalents ............................................... 14,418 (11,597) 6,316
Cash and cash equivalents at beginning of year ..................................... 16,208 27,805 21,489
------ ------ ------
Cash and cash equivalents at end of year ........................................... $ 30,626 16,208 27,805
--------- ------ ------
Supplemental disclosure of cash flow information Cash paid during the period
for:
Interest ...................................................................... $ 11,033 10,794 9,527
--------- ------ -----
Income taxes .................................................................. $ 1,014 1,403 467
--------- ----- ---
See accompanying notes to consolidated financial statements.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Long Island Financial Corp. ("the Company") is a registered Delaware
financial holding company, organized in 1999 (see Note 16), and the parent
company of Long Island Commercial Bank ("the Bank"). The Bank, founded in 1989,
is a New York state-chartered bank, which is engaged in commercial banking in
Islandia, New York and the surrounding communities in Suffolk and Nassau
Counties.
The consolidated financial information included herein combines the results
of operations, the assets, liabilities and stockholders' equity of the Company
and its wholly owned subsidiaries for all periods presented. All significant
inter-company balances and transactions are eliminated in consolidation. A
description of significant accounting policies is presented below.
a. Basis of Financial Presentation
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses for the period.
Actual results could differ from those estimates.
b. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash, Federal funds sold and other short-term investments, all of which have
initial maturities of less than ninety days.
c. Securities
Management determines the appropriate classification of debt and equity
securities at the time of purchase. Securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at amortized
cost. Debt securities not classified as held-to-maturity and marketable equity
securities are classified as available-for-sale. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses, net of tax,
excluded from earnings and reported as a separate component of accumulated other
comprehensive income, in stockholders' equity.
Premiums and discounts on debt and mortgage-backed securities are amortized
to expense and accreted to income using a method which approximates the
level-yield method over the remaining period to contract maturity, adjusted for
anticipated prepayments. Dividend and interest income are recognized when
earned. Realized gains and losses on the sale of securities are included in net
gain on sale of securities. The cost of securities sold is based on the specific
identification method.
d. Loans, Net
Loans are carried at the principal amount outstanding net of unearned
income and fees. Residential real estate loans held-for-sale are carried at the
aggregate lower of cost or market value as determined by outstanding commitments
from investors. Interest on loans is recognized on the accrual basis. The
accrual of income on loans is discontinued when, in management's judgment,
collection of principal or interest is uncertain or payments of principal or
interest become contractually ninety days past due. Loans on which the accrual
of income has been discontinued are designated as non-accrual loans and income
is recognized subsequently only in the period collected. Any accrued but
uncollected interest previously recorded on such loans is reversed against
interest income of the current period.
Loan origination fees, less certain direct origination costs, are deferred
and recognized as an adjustment of the loan yield over the life of the loan by
the interest method, which results in a constant rate of return.
45
e. Allowance For Loan Losses
The determination of the amount of the allowance for loan losses is based
on an analysis of the loan portfolio and reflects an amount, which, in
management's judgment, is adequate to provide for probable loan losses in the
existing portfolio. This analysis considers, among other things, present and
known and inherent risks in the portfolio, adverse situations, which may affect
the borrower's ability to repay, overall portfolio quality, and current and
prospective economic conditions. While management uses available information to
provide for loan losses, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of the examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
to recognize additions to the allowance based on their judgment of information
available to them at the time of their examination.
Management considers a loan to be impaired if, based on current
information, it is probable that the Company will be unable to collect all
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. When a loan is considered to be
impaired, the amount of the impairment is measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of collateral if the loan is collateral dependent. Management excludes
large groups of smaller balance homogeneous loans, which are collectively
evaluated. Impairment losses are included in the allowance for loan losses
through a charge to the provision for loan losses.
f. Premises and Equipment, Net
Premises and equipment are stated at cost, less accumulated depreciation
computed using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the estimated useful lives of
the improvements or terms of the related lease, whichever is shorter.
g. Income Taxes
Income taxes are based upon results reported for financial statement
purposes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
h. Earnings Per Share
Basic earnings per share are calculated by dividing net income available to
common stockholders by the weighted average number of shares outstanding during
the year. Diluted earnings per share is calculated by dividing net income
available to common stockholders by the weighted average number of shares
outstanding during the year plus the maximum dilutive effect of stock issuable
upon conversion of stock options.
i. Treasury Stock
The cost of treasury stock is shown on the consolidated balance sheet as a
separate component of stockholders' equity and is a reduction to total
stockholders' equity.
j. Segment Reporting
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.
k. Comprehensive Income
Comprehensive income represents net income plus the net change in
unrealized gains or losses on securities available-for-sale for the period and
is presented in the consolidated statements of changes in stockholders' equity.
Accumulated other comprehensive income (loss) represents the net unrealized
gains or losses on securities available-for-sale as of the balance sheet dates.
46
l. 401(k) Plan
The Company adopted a 401(k) Profit Sharing Plan ("401(k) Plan") for all
qualified employees. The terms of the 401(k) Plan provide for employee
contributions on a pre-tax basis up to the maximum dollar limit set by law in a
taxable year. A discretionary matching contribution will be determined each year
by the Company. During 2001, 2000 and 1999, the Company's matching contribution
was $125,972, $110,902 and $81,671, respectively.
m. Dividend Reinvestment and Stock Purchase Plan
The Company has a dividend reinvestment and stock purchase plan ("Plan").
The Plan provides shareholders of common stock with a means of automatically
reinvesting cash dividends in shares of common stock. The Plan also provides
certain investors with a systematic and convenient method to purchase shares of
common stock through optional cash payments. Since the Company's common stock is
currently listed on the NASDAQ National Market, the purchase price on each
investment date will be equal to the average price of all shares of common stock
purchased on the investment date by the Plan Administrator on behalf of the
Plan, including the cost of brokerage commissions, if any.
n. Reclassifications
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
(2) SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
fair value of securities held-to-maturity and available-for-sale at December 31,
2001 and 2000 are as follows:
December 31, 2001
Gross Gross
Amortized unrealized unrealized Fair
(In thousands) cost gains losses value
Held-to-maturity:
Corporate debt ................... $ 12,457 510 (30) 12,937
-------- --- --- ------
Total held-to-maturity ....... 12,457 510 (30) 12,937
Available-for-sale:
U.S. Government and
Agency obligations ........... 89,930 192 (390) 89,732
Mortgage-backed securities:
GNMA ......................... 85,171 240 (390) 85,021
FHLMC ........................ 4,402 3 (101) 4,304
FNMA ......................... 20,803 184 (69) 20,918
Corporate debt ................... 2,017 -- (25) 1,992
-------- -------- -------- --------
Total debt securities ........ 202,323 619 (975) 201,967
Equity securities - FHLB stock ... 2,858 -- -- 2,858
-------- -------- -------- --------
Total securities
available-for-sale ........... $205,181 619 (975) 204,825
-------- --- ---- -------
47
December 31, 2000
Gross Gross
Amortized unrealized unrealized Fair
(In thousands) cost gains losses value
Held-to-maturity:
Mortgage-backed securities:
CMO ........................... $ 263 -- (9) 254
Corporate debt ................ 4,491 19 (28) 4,482
----- -- --- -----
Total held-to-maturity ........ 4,754 19 (37) 4,736
Available-for-sale:
U.S. Government and
Agency obligations ............ $117,364 1 (1,420) 115,945
Mortgage-backed securities:
GNMA .......................... 36,559 19 (615) 35,963
FHLMC ......................... 969 16 (3) 982
FNMA .......................... 5,279 31 (7) 5,303
Municipal obligations ............. 1,167 -- (18) 1,149
-------- -------- -------- --------
Total debt securities ......... 161,338 67 (2,063) 159,342
Equity securities - FHLB stock .... 5,326 -- -- 5,326
-------- -------- -------- --------
Total securities
available-for-sale ............ $166,664 67 (2,063) 164,668
-------- -------- -------- --------
In connection with the Company's ability to borrow from the Federal Home
Loan Bank of New York ("FHLB"), the Company is required to purchase shares of
FHLB non-marketable equity securities at par.
The amortized cost and estimated fair value of debt securities at December
31, 2001, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
December 31, 2001
Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair
(In thousands) cost value cost value
Due in one year or less ................ $ -- -- 57,216 57,223
Due after one year through five years .. -- -- 529 536
Due after five years through ten years . 4,514 4,573 36,847 36,630
Due after ten years .................... 7,943 8,364 110,589 110,436
----- ----- ------- -------
$12,457 12,937 205,181 204,825
------- ------ ------- -------
Proceeds from the sale of securities available-for-sale totaled
approximately $35.2 million, $6.8 million, and $12.8 million during the years
ended December 31, 2001, 2000 and 1999, respectively. Gains from the sale of
these securities totaled approximately $50,000 and $104,000 for the years ended
December 31, 2001 and 1999, respectively. Losses from the sale of these
securities totaled approximately $64,000, $154,000, and $16,000 for the years
ended December 31, 2001, 2000, and 1999 respectively.
Securities classified as available-for-sale of approximately $62.1 million
and $31.1 million were pledged as collateral for FHLB advances at December 31,
2001 and 2000, respectively. In addition, $137.5 million and $122.2 million of
available-for-sale securities were pledged for deposits and other purposes as
required by law at December 31, 2001 and 2000, respectively.
48
(3) LOANS, NET
Loans, net are summarized as follows:
December 31,
(dollars in thousands) 2001 2000
Commercial and
industrial loans ....... $ 43,972 24.2% $ 39,140 28.4%
Commercial real estate loans 116,646 64.2 93,875 68.2
Automobile loans ........... 18,300 10.1 2,693 1.9
Consumer loans ............. 1,312 .7 1,313 1.0
Residential real estate
loans held-for-sale .... 1,472 .8 711 .5
----- -- --- --
181,702 100.0% 137,732 100.0%
Less:
Unearned income ........ 2,258 395
Deferred fees, net ..... 647 612
Allowance for
loan losses ........ 2,028 1,872
----- -----
$176,769 $ 134,853
-------- ----------
The Company grants commercial and industrial loans as well as commercial
mortgages and consumer loans in Nassau and Suffolk County, New York. A portion
of the Company's loan portfolio is concentrated in commercial loans and business
revolving lines of credit, which are secured or partially secured by accounts
receivable, inventory and other assets. These loans comprise approximately 24.2%
and 28.4% of the portfolio at December 31, 2001 and 2000, respectively. The
Company's commercial loan borrowers are generally small local businesses whose
cash flow and ability to service debt are susceptible to changes in economic
conditions. Accordingly, the deterioration of local economic conditions could
increase the credit risk associated with this segment of the portfolio.
At December 31, 2001, 2000, and 1999, there were 7, 6 and 15 loans,
respectively, with a remaining balance of approximately $178,000, $416,000, and
$179,000, respectively, on which the accrual of interest had been discontinued.
The impact of such non-accrual loans on the Company's interest income for years
ended December 31, 2001, 2000, and 1999 is not material.
The Company's recorded investment in loans that are considered impaired
total $444,000, $680,000 and $764,000 at December 31, 2001, 2000 and 1999,
respectively. No corresponding impairment reserve is required. The average
recorded investment in impaired loans was $467,000, $746,000 and $939,500 in
2001, 2000 and 1999, respectively. Interest on all impaired loans remains
current under the extended terms. The impact of such impaired loans on the
Company's interest income for the years ended December 31, 2001, 2000, and 1999
is not material.
Loans to related parties include loans to directors of the Company and
their related companies. Such loans are made in the ordinary course of business
on substantially the same terms as loans to other individuals and businesses of
comparable risks. The following analysis shows the activity of related party
loans:
For the years ended December 31,
(In thousands) 2001 2000
Balance at beginning of year $ 3,044 $ 3,037
New loan and
additional disbursements 4,290 3,495
Repayments ( 2,510) (3,488)
----- ------
Balance at end of year $ 4,824 $ 3,044
-------- -------
49
(4) ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses account is as
follows:
For the years ended December 31,
(In thousands) 2001 2000 1999
Balance at beginning of year ............ $ 1,872 $ 1,475 $ 1,071
Provision for loan losses ............... 150 150 600
Charge-offs:
Commercial and industrial loans ..... -- (187) (80)
Automobile loans .................... -- (54) (66)
Consumer loans ...................... (19) (99) (81)
--- --- ---
Total charge-offs .............. (19) (340) (227)
--- ---- ----
Recoveries:
Commercial and industrial loans ..... 13 547 26
Automobile loans .................... 6 13 4
Consumer loans ...................... 6 27 1
- -- -
Total recoveries ............... 25 587 31
-- --- --
Net recoveries (charge-offs) ............ 6 247 (196)
- --- ----
Balance at end of year .................. $ 2,028 $ 1,872 $ 1,475
------- ------- -------
(5) PREMISES AND EQUIPMENT
A summary of premises and equipment at cost, less accumulated depreciation and
amortization are as follows:
December 31,
(In thousands) 2001 2000
Land$ ........................................ 437 $ --
Leasehold improvements ....................... 1,028 703
Furniture, fixtures
and equipment ............................ 4,209 3,647
----- -----
5,674 4,350
Less accumulated depreciation
and amortization ......................... (2,745) (2,482)
------ ------
$ 2,929 $ 1,868
------- -------
Depreciation and amortization charged to operations for the years ended
December 31, 2001, 2000 and 1999 amounted to approximately $736,000, $609,000,
and $579,000, respectively.
(6) DEPOSITS
Included in NOW and money market deposits, at December 31, 2001 and 2000,
were approximately $80.7 million and $51.2 million, respectively, of seasonal
municipal deposits.
50
(7) BORROWED FUNDS
The Company enters into sales of securities under agreements to repurchase
(reverse-repurchase agreements). These are fixed coupon agreements, which are
treated as financing transactions, and the obligations to repurchase are
reflected as a liability in the balance sheet. The dollar amount of securities
underlying the agreements remains in the asset account. During the period of the
agreement, the securities are delivered to either a third-party, or directly to
the broker, who holds the collateral until maturity. There were no outstanding
reverse-repurchase agreements at December 31, 2001 and 2000.
Reverse-repurchase agreements averaged approximately $555,000, $4.7
million, and $530,000 for the years ended December 31, 2001, 2000 and 1999,
respectively. The maximum amount outstanding at the end of any month was $29.9
million for the year ended December 31, 2000. There were no reverse repurchase
agreements outstanding at the end of any month during 2001.
There were federal funds purchased of $4.5 million at December 31, 2001.
Federal funds purchased averaged approximately $695,000, $5.7 million, and $1.8
million for the years ended December 31, 2001, 2000 and 1999, respectively. The
maximum amount outstanding at the end of any month was $4.5 million, $16.7
million, and $6.5 million, respectively, for the years ended December 31, 2001,
2000 and 1999
The Company has a $500,000 line of credit agreement with another financial
institution permitting borrowing at that institution's prime rate. At December
31, 2001, there was no balance outstanding under this line of credit agreement.
The Bank has available lines of credit with the FHLB, which enable it to
borrow funds on a secured basis. At December 31, 2001 and 2000, the Bank's
borrowings consisted of $55.0 million and $29.0 million of convertible and
medium term advances from the FHLB. The convertible feature of these advances
allow the FHLB to convert these advances into replacement funding on a specified
date and then quarterly thereafter, for the same or lesser principal amount,
based on any advance offered by the FHLB, at current market rates. If the FHLB
elects to convert these advances, the Bank may repay any portion of the advances
without penalty. These convertible and medium term advances are secured by
various mortgage-backed and callable U.S. agency securities. Convertible and
medium term advances outstanding at December 31, 2001 are as follows:
Principal Rate Call Date Maturity Date
Convertible advance ........ $14,000,000 5.49% 2/19/2003 2/19/2008
Convertible advance ........ 15,000,000 4.59 1/21/2002 2/21/2009
Convertible advance ........ 14,000,000 4.97 1/19/2004 1/19/2011
Convertible advance ........ 3,000,000 4.11 12/11/2005 12/12/2011
Medium term advance ........ 4,000,000 3.31 -- 12/11/2003
Medium term advance ........ 5,000,000 3.99 -- 12/13/2004
---------
Total .................. $55,000,000
(8) GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED DEBENTURES
On September 7, 2000, LIF Statutory Trust I, a wholly-owned finance
subsidiary of the Company, issued $7.5 million aggregate liquidation amount of
10.60% Capital Securities due September 7, 2030, referred to as Capital
Securities. The Company has fully and unconditionally guaranteed the Capital
Securities along with all obligations of LIF Statutory Trust I under the trust
agreement. LIF Statutory Trust I was formed for the exclusive purpose of issuing
the Capital Securities and common securities and using the proceeds to acquire
an aggregate principal amount of $7.7 million of the Company's 10.60% Junior
Subordinated Debentures due September 7, 2030, referred to as the Company's
Junior Subordinated Debentures. The Junior Subordinated Debentures are
prepayable, in whole or in part, at the Company's option on or after September
7, 2010 at declining premiums to maturity. Proceeds totaling approximately $7.2
million are being used for general corporate purposes, including the repurchase
of common stock.
51
The balance outstanding on the Capital Securities was $7.5 million at
December 31, 2001. The costs associated with the Capital Securities issuance
have been capitalized and are being amortized using the interest method over a
period of thirty years. Distributions on the Capital Securities are payable
semi-annually beginning March 7, 2001 and are reflected in the consolidated
statements of earnings as a component of non-interest expense under the caption
"Capital securities."
(9) INCOME TAXES
Income tax expenses are summarized as follows:
For the years ended December 31,
(In thousands) 2001 2000 1999
Current
Federal ................... $ 755 $ 838 $ 618
State ..................... 79 91 265
-- -- ---
834 929 883
Deferred
Federal ................... 170 (44) (25)
State ..................... 19 (5) (11)
-- -- ---
189 (49) (36)
--- --- ---
Income tax expense ............. $ 1,023 $ 880 $ 847
------- ------- -------
The effective income tax rates for the years ended December 31, 2001, 2000
and 1999 were 34%, 33% and 35%, respectively. The reconciliation between the
statutory Federal income tax rate and the effective tax rate is as follows:
For the years ended December 31,
2001 2000 1999
Tax on income at statutory rate ............ 34 % 34 % 34 %
Tax effects of:
State income tax, net of federal
income tax benefit ................ 2 2 7
Tax exempt income ..................... -- -- (5)
Bank owned life insurance ............. (4) (4) (3)
Other, net ............................ 2 1 2
- - -
Tax at effective rate ...................... 34 % 33 % 35 %
At December 31, 2001, management believes it is more likely than not the
consolidated results of future operations of the Company will generate
sufficient taxable income to realize the deferred tax assets of the Company,
therefore a valuation allowance against the gross deferred tax assets is not
considered necessary.
52
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities are as follows:
December 31,
(In thousands) 2001 2000
Deferred tax assets:
Allowance for loan losses ................... $ 433 $ 680
Accrued expenses ............................ 84 60
Unrealized depreciation in
available-for-sale securities ........... 129 725
Other ....................................... 124 80
--- --
Gross deferred tax assets ............... 770 1,545
--- -----
Deferred tax liabilities:
Other ....................................... (12) (2)
--- --
Gross deferred tax liabilities .......... (12) (2)
--- --
Net deferred tax asset ..................... $ 758 $ 1,543
------- -------
(10) REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements by Federal banking agencies. The risk based capital guidelines are
designed to make regulatory capital requirements more sensitive to differences
in risk profiles to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Under these guidelines, assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk weighted assets and off-balance sheet items. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by regulators, that, if undertaken, could have
a direct material effect on the Company's financial statements. As of December
31, 2001, the most recent notification from the federal banking regulators
categorized the Company as well capitalized under the regulatory framework for
prompt corrective action. Under the capital adequacy guidelines, a well
capitalized institution must maintain a minimum total risk based capital to
total risk weighted assets ratio of at least 10%, a minimum Tier 1 capital to
total risk weighted assets ratio of at least 6%, a minimum leverage ratio of at
least 5% and is not subject to any written order, agreement or directive. There
are no conditions or events since such notification that management believes
have changed this classification.
The following tables set forth the regulatory capital at December 31, 2001
and 2000, under the rules applicable at such dates. At such dates, management
believes that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
December 31, 2001
Actual Regulatory Minimum
(Dollars in thousands) Amount Ratio Amount Ratio
Tier 1 Capital (to Average Adjusted Assets)
The Company ....................................... $28,472 8.12% $14,022 4.00%
The Bank .......................................... 25,257 7.21 14,009 4.00
Tier 1 Capital (to Risk Weighted Assets)
The Company ....................................... 28,472 12.37 9,208 4.00
The Bank .......................................... 25,257 10.99 9,196 4.00
Total Risk Based Capital (to Risk Weighted Assets)
The Company ....................................... 30,882 13.41 18,417 8.00
The Bank .......................................... 27,285 11.87 18,393 8.00
53
December 31, 2000
Actual Regulatory Minimum
(Dollars in thousands) Amount Ratio Amount Ratio
Tier 1 Capital (to Average Adjusted Assets)
The Company ....................................... $27,237 9.56% $11,394 4.00%
The Bank .......................................... 22,549 7.92 11,382 4.00
Tier 1 Capital (to Risk Weighted Assets)
The Company ....................................... 27,237 14.97 7,277 4.00
The Bank .......................................... 22,549 12.42 7,265 4.00
Total Risk Based Capital (to Risk Weighted Assets)
The Company ....................................... 29,800 16.38 14,554 8.00
The Bank .......................................... 29,421 13.45 14,530 8.00
(11) LEASE COMMITMENTS
The Company has obligations under a number of non-cancelable leases on
properties used for banking purposes. Rental expense for the years ended
December 31, 2001, 2000, and 1999 was approximately $677,000, $559,000, and
$468,000, respectively. Minimum annual rentals, exclusive of taxes and other
charges, under operating leases are summarized as follows:
Years ending December 31, Amount
(In thousands)
2002 $ 731
2003 768
2004 771
2005 769
2006 510
Thereafter 776
---
Total $ 4,325
-------
54
(12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments,"
requires that the Company disclose estimated fair values for its financial
instruments. Fair value estimates, methods, and assumptions are set forth as
follows:
December 31, 2001 December 31, 2000
Carrying Estimated Carrying Estimated
(In thousands) Value Fair Value Value Fair Value
Cash and due from banks $ 30,347 30,347 $ 14,652 14,652
Interest earning deposits 279 279 56 56
Federal funds sold - - 1,500 1,500
Securities held-to-maturity 12,457 12,937 4,754 4,736
Securities available-for-sale 204,825 204,825 164,668 164,668
Loans, net of
unearned income
and deferred fees 178,797 180,153 136,725 137,160
Accrued interest receivable 2,121 2,121 1,911 1,911
Bank owned life insurance 6,495 6,495 6,197 6,197
Deposits:
Demand, savings, NOW and
money market deposits 215,592 215,592 160,444 160,444
Time certificates and
other time deposits 130,325 128,954 112,745 112,962
Borrowings $ 59,500 60,722 $ 29,000 28,367
Cash and Due from Banks, Interest Earning Deposits, Federal Funds Sold, and
Securities
The carrying amounts for cash and due from banks approximate fair value as
they mature in 90 days or less and do not present unanticipated credit concerns.
Interest earning deposits are subject to rate changes at any time and therefore
are considered to be carried at their estimated fair value. The fair values of
federal funds sold, held-to-maturity securities and available-for-sale
securities are estimated based on bid quotations received from securities
dealers or from prices obtained from firms specializing in providing securities
pricing services.
Loans
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit risks. For potential problem loans, which include non-performing
loans, the present value result is separately discounted consistent with
management's assumptions in evaluating the adequacy of the allowance for loan
losses.
Deposits
All deposits, except certificates of deposit, are subject to rate changes
at any time, and therefore are considered to be carried at estimated fair value.
The fair value of certificates of deposit was estimated by computing the present
value of contractual future cash flows for each certificate. The present value
rate utilized was the rate offered by the Company at the date of estimation on
certificates with an initial maturity equal to the term of the existing
certificates.
55
Borrowings
The estimated fair values of borrowings are valued using estimated
discounted cash flow analysis based on the current incremental borrowing rates
for similar types of borrowing arrangements.
Commitments
The fair value of commitments is estimated using the fees charged at the
date of estimation to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counter parties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
The commitments existing at December 31, 2001 and 2000 would be offered at
substantially the same rates and under substantially the same terms that would
be offered by the Company at December 31, 2001 and 2000 to the counter parties,
therefore, the carrying value of existing commitments is considered to be
equivalent to the estimated fair value.
Limitations
SFAS No. 107 requires disclosures of the estimated fair value of 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 premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular financial instrument nor
the resultant tax ramifications or transaction costs. Because no market exists
for a significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and-off balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets of the Company that are not
considered financial assets include premises and equipment and deferred tax
assets. In addition, the tax ramifications related to the unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered.
(13) EARNINGS PER SHARE RECONCILIATON
The following table is the reconciliation of basic and diluted EPS as required
under SFAS 128 for the years ended December 31, 2001, 2000 and 1999:
(In thousands, except share and per share amounts)
2001 2000 1999
Net income available to common shareholders$ ........................ 1,962 $ 1,754 $ 1,606
Total weighted average common shares outstanding .................... 1,452,889 1,596,377 1,751,407
Basic earnings per common share ..................................... $ 1.35 $ 1.10 $ .92
========== ========== ==========
Total weighted average common shares outstanding .................... 1,452,889 1,596,377 1,751,407
Effect of dilutive securities: Options .............................. 25,133 1,239 --
---------- ---------- ----------
Total average common and common equivalent shares ................... 1,478,022 1,597,616 1,751,407
Diluted earnings per common share ................................... $ 1.33 $ 1.10 $ .92
========== ========== ==========
56
(14) OTHER COMMITMENTS AND CONTINGENT LIABILITIES
a. Off-Balance Sheet Risks
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and unused
lines of credit. Such financial instruments are reflected in the Company's
financial statements when and if proceeds associated with the commitments are
disbursed.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
unused lines of credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
financial instruments.
Contract or notional amounts
December 31, 2001 December 31, 2000
(in thousands) Fixed Variable Fixed Variable
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit ........................... $ -- $ 7,813 $ -- 10,948
Unused lines of credit ................................. -- 18,834 -- 14,835
Standby letters of credit .............................. 1,164 -- 1,945 --
----- ------ ----- ------
$ 1,164 $26,647 $ 1,945 $25,783
------- ------- ------- -------
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many 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. The amount of collateral obtained if
deemed necessary by the Company upon extension of credit is based on
management's credit evaluation of the counter party. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
At December 31, 2001, the Bank had an outstanding commitment to purchase
$5.0 million of mortgage-backed securities at a rate of 4.50% settling in
January of 2002.
b. Other Matters
The Company is required to maintain balances with the Federal Reserve Bank
of New York for reserve and clearing requirements. During the years ended
December 31, 2001, 2000 and 1999, these balances averaged $6.9 million, $6.0
million and $4.5 million, respectively.
The Company is subject to certain pending and threatened legal actions,
which arise out of the normal course of business. Management believes that the
resolution of any pending or threatened litigation will not have a material
effect on the Company's financial statements.
57
(15) STOCK OPTION & EMPLOYEE BENEFIT PLANS
The stockholders in 1998 ratified the Long Island Financial Corp. 1998
Stock Option Plan (the Stock Option Plan.) The Stock Option Plan currently
authorizes the granting of options to purchase 225,000 shares of common stock of
the Company. All officers and other employees of the Company and directors who
are not also serving as employees of the Company are eligible to receive awards
under the Stock Option Plan. Options under this plan are either non-statutory
stock options or incentive stock options. Each option entitles the holder to
purchase one share of the Common Stock at an exercise price equal to the fair
market value on the date of grant. Option transactions for the years ended
December 31, 2001, 2000 and 1999 are as follows:
Number of Shares of
Non Weighted
Incentive Qualified Average
Stock Option to Exercise
Options Directors Price
Balance outstanding at
December 31, 1998 .............. -- -- $ --
Granted ................... 40,250 73,500 12.50
Forfeited ................. 500 12.50 --
Exercised ................. -- -- --
------- ------- ---------
Balance outstanding at
December 31, 1999 .............. 39,750 73,500 $ 12.50
Granted ................... 9,000 10,500 10.88
Forfeited ................. 1,000 -- 11.69
Exercised ................. -- -- --
------- ------- ---------
Balance outstanding at
December 31, 2000 ........... 47,750 84,000 12.27
Granted ................... 10,750 10,500 13.50
Forfeited ................. 1,000 -- 12.41
Exercised ................. 500 -- 12.05
------- ------- ---------
Balance Outstanding at
December 31, 2001 ......... 57,000 94,500 12.27
Options exercisable at
December 31, 2001 ........... 43,900 79,800 $ 12.43
The Company applies APB Opinion No. 25 in accounting for stock based
compensation, and accordingly, no compensation cost has been recognized for
stock options in the accompanying consolidated financial statements. Had the
Company determined compensation cost based on the fair value of its stock
options at the date of grant under SFAS No. 123, the Company's net income and
earnings per share would have been reduced to proforma amounts indicated in the
following table:
December 31,
(Dollars in thousands, except per share data) 2001 2000 1999
Net Income As Reported $ 1,962 $ 1,754 $ 1,606
Pro forma 1,809 1,659 1,014
Net Income per Common Share:
Basic As Reported 1.35 1.10 .92
Pro forma 1.25 1.04 .58
Diluted As Reported 1.33 1.10 .92
Pro forma $ 1.22 $ 1.04 $ .58
58
The fair value of the share grants were estimated on the date of grant
using the Black-Scholes option-pricing model using the following assumptions in
fiscal 2001, 2000 and 1999; dividend yield of 2.11%, 2.71% and 2.73%; expected
volatility of 45.91%, 45.55% and 45.11%; and risk-free interest rates of 5.24%,
6.62% and 4.73%, respectively. The expected option lives were 7 years.
Life insurance benefits are provided to certain executive officers and
Directors of the Company. In connection with these benefits, the Company
purchased $5.7 million in bank owned life insurance in 1999, which is carried at
its cash surrender value as an asset in the consolidated balance sheets.
Increases in the cash surrender value of the insurance are reflected as other
operating income, and the related mortality expense is recognized as salaries
and employee benefits in the consolidated statements of earnings.
(16) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The earnings of the Bank are recognized by the Company using the equity
method of accounting. Accordingly, undistributed earnings of the Bank are
recorded as increases in the Company's investment in the Bank. The following are
the condensed financial statements of the Company as of and for the year ended
December 31, 2001 and 2000.
Condensed Balance Sheets
(in thousands) December 31,
2001 2000
Assets:
Cash and cash equivalents .......................... $ 3,498 $ 5,452
Investment in subsidiaries ......................... 25,124 21,539
Other assets ....................................... 644 394
------- -------
Total assets ................................ $29,266 $27,385
Liabilities and Stockholders' Equity:
Other liabilities .................................. 407 392
Junior subordinated debentures ..................... 7,732 7,732
Stockholders' equity ............................... 21,127 19,261
------- -------
Total liabilities and stockholders' equity ......... $29,266 $27,385
Condensed Statements of earnings
(in thousands) For the years ended December 31,
2001 2000
Dividends received from subsidiaries ................................. $ 24 $ 1,322
Interest income ...................................................... 143 85
--- --
Total income ................................................ 167 1,407
Interest expense - line of credit .................................... -- 22
Junior subordinated debt ............................................. 830 266
Other operating expense .............................................. 80 41
-- --
Total expense ............................................... 910 329
Income (loss) before income tax benefit and equity in
undistributed earnings of subsidiaries ........... (743) 1,078
Income tax benefit ................................................... 260 82
--- ---
Income (loss) before equity in undistributed earnings of the Bank (483) 1,160
Equity in undistributed earnings of Bank ............................. 2,445 594
----- ---
Net income .................................................. $ 1,962 $ 1,754
------- -------
59
Condensed Statements of cash flows
(in thousands) For the years ended December 31,
2001 2000
Cash Flows From Operating Activities:
Net income ....................................................... $ 1,962 $ 1,754
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Equity in the undistributed earnings of subsidiaries .......... (2,445) (594)
Change in other assets and liabilities
Increase in other assets ................................ (250) (393)
Increase in other liabilities ........................... 15 54
-- --
Net cash (used in) provided by operating activities .. (718) 821
Cash Flows From Investing Activities:
Investment in subsidiaries .................................... (200) (232)
---- ----
Net cash used in investing activities ................ (200) (232)
Cash Flows From Financing Activities:
Net decrease in borrowed funds ................................ -- (500)
Payments for cash dividends ................................... (478) (502)
Issuance of junior subordinated debt .......................... -- 7,732
Proceeds from exercise of stock options ....................... 6
Purchase of common stock ...................................... (564) (2,151)
---- ------
Net cash (used in) provided by financing activities .. (1,036) 4,579
Net (decrease) increase in cash and cash equivalents . (1,954) 5,168
Cash and cash equivalents at beginning of year ................ 5,452 284
----- ----
Cash and cash equivalents at the end of the year .............. $ 3,498 $ 5,452
------- -------
60
Quarterly Financial Data (Unaudited)
The following is a summary of financial data by quarter end for the years ended December 31, 2001 and 2000:
2001 2000
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
(In thousands, except share data)
Selected Operating Data:
Interest income ............ $ 6038 $ 5,907 $ 5,565 $ 5,435 $ 5,430 $ 5,251 $ 5,109 $ 5,203
Interest expense ........... 3,145 3,039 2,638 2,411 2,955 2,736 2,715 2,737
----- ----- ----- ----- ----- ----- ----- -----
Net interest income ........ 2,893 2,868 2,927 3,024 2,475 2,515 2,394 2,466
Provision for loan losses .. -- -- 75 75 150 -- -- --
--- --- --- --- --- --- --- ---
Net interest income
after provision for
loan losses ........... 2,893 2,868 2,852 2,949 2,325 2,515 2,394 2,466
Other operating income ..... 430 506 570 633 379 428 443 316
Other operating expenses ... 2,495 2,608 2,761 2,852 2,029 2,112 2,125 2,366
----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes . 828 766 661 730 675 831 712 416
Income taxes ............... 283 264 226 250 223 282 237 138
--- --- --- --- --- --- --- ---
Net income ................. $ 545 $ 502 $ 435 $ 480 $ 452 $ 549 $ 475 $ 278
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Basic earnings per share ... $ .37 $ .35 $ .30 $ .33 $ .27 $ .33 $ .30 $ .18
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Diluted earnings per share . $ .37 $ .34 $ .29 $ .33 $ .27 $ .33 $ .30 $ .18
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Basic weighted average
common shares
outstanding ........... 1,478,537 1,453,986 1,439,676 1,439,926 1,646,326 1,639,293 1,596,201 1,504,698
Diluted weighted average
common shares
outstanding ........... 1,492,107 1,468,786 1,480,125 1,470,975 1,646,326 1,639,293 1,599,020 1,510,382
61
Independent Auditors' Report
To The Stockholders And Board of Directors of Long Island Financial Corp.:
We have audited the accompanying consolidated balance sheets of Long Island
Financial Corp. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of earnings, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
2001. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the 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 Long Island
Financial Corp. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Melville, New York
January 25, 2002
62
Capital Stock
The common stock of Long Island Financial Corp. trades on the Nasdaq
National Market under the symbol "LICB". The following table shows the high and
low sales price of the common stock and the dividends declared during the period
indicated in 2001 and 2000.
Dividends
High Low Declared
2001
1st Quarter $ 15.25 $ 13.00 $ 0.08
2nd Quarter $ 18.55 $ 13.00 $ 0.08
3rd Quarter $ 20.00 $ 15.50 $ 0.08
4th Quarter $ 18.25 $ 15.01 $ 0.09
2000
1st Quarter $ 11.63 $ 10.13 $ 0.08
2nd Quarter $ 11.75 $ 10.13 $ 0.08
3rd Quarter $ 14.63 $ 11.13 $ 0.08
4th Quarter $ 13.63 $ 12.44 $ 0.08
At December 31, 2001, there were approximately 329 shareholders of record not
including the number of persons or entities holding stock in nominee or street
name though various brokers and banks. There were 1,439,926 shares of common
stock outstanding at December 31, 2001.
63
EXHIBIT 23. CONSENT OF EXPERTS AND COUNSEL
Independent Auditors' Consent
The Board of Directors
Long Island Financial Corp.:
We consent to incorporation by reference in the Registration Statements (Nos.
333-86111 and 333-83758) on Form S-8 and Registration Statements (Nos.
333-63971) on Form S-4 of Long Island Financial Corp. of our report dated
January 25, 2002, relating to the consolidated balance sheets of Long Island
Financial Corp. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of earnings, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
2000, which report is incorporated by reference in the December 31, 2001 Annual
Report on Form 10-K of Long Island Financial Corp.
/s/ KPMG LLP
KPMG, LLP
Melville, New York
March 28, 2002
64