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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, 2002
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 this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer.
Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, computed by reference to the price at which
the common equity was last sold on the NASDAQ Stock Market as of the last
business day of the registrant's most recently completed second fiscal quarter,
was $28,418,341.
The number of shares outstanding of the registrant's common stock was 1,446,226
as of March 7, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
1. Portions of the 2002 Annual Report to Stockholders for fiscal year 2002 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 23, 2003 are incorporated herein by
reference - Part III.
LONG ISLAND FINANCIAL CORP.
2002 FORM 10-K
TABLE OF CONTENTS
Page
PART I Number
Item 1. Business......................................................................................... 2
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............................ 16
Item 6. Selected Financial Data.......................................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 16
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............................................... 16
Item 11. Executive Compensation........................................................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters... 17
Item 13. Certain Relationships and Related Transactions................................................... 17
Item 14. Controls and Procedures.......................................................................... 17
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................. 18
Signatures....................................................................................... 19
Certifications................................................................................... 20
1
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. Those 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 financial 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.
2
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, Nassau and Kings 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 executive management has substantial banking
experience, and executive management and the Board of Directors of the Bank have
extensive commercial and personal ties to the communities in Suffolk, Nassau and
Kings 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.
3
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 unsecured loans up to $250,000 and commercial real estate
loans up to $400,000. All other loans are brought before the Loan Committee. The
Loan Committee, which consists Chief Lending Officer Vizzini and 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 applicant, including any guarantor, the ability to repay the loan
within the contemplated term, the applicant's character and financial strength,
the adequacy of any required security and compliance with the Bank's lending
policy.
Loan Portfolio
The following table sets forth the composition of the Bank's loan portfolio at
the dates indicated:
At December 31,
2002 2001 2000 1999 1998
--------------------------------------------------------------
(In thousands)
Commercial and industrial loans $ 54,001 $ 43,972 $ 39,140 $ 34,057 $ 30,853
Commercial real estate loans 130,275 116,646 93,875 84,133 53,990
Automobile loans 34,188 18,300 2,693 1,463 8,262
Consumer loans 2,238 1,312 1,313 1,250 1,396
Residential real estate loans
held-for-sale 1,189 1,472 711 1,019 1,486
----- ----- --- ----- -----
Gross loans 221,891 181,702 137,732 121,922 95,987
Less:
Unearned income 3,396 2,258 395 42 362
Deferred fees, net 764 647 612 569 410
Allowance for loan losses 2,346 2,028 1,872 1,475 1,071
----- ----- ------- ------- -----
Loans, net $ 215,385 $176,769 $ 134,853 $ 119,836 $ 94,144
======= ======= ======= ======= ======
Commercial and Industrial Loans - The Bank offers a variety of commercial loan
services including term loans, construction loans, demand loans and 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 borrower's
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, may not
be apt subjects for appraisal 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, 2002, commercial and industrial loans represented 24.3% 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, 2002, commercial real estate loans represented 58.7% 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 is
designed to diversify the loan portfolio, is expected to continue through 2003.
At December 31, 2002 automobile loans represented 15.4% of the loan portfolio.
4
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. 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 time 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.
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, 2002.
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 $ 36,953 $ 8 $ 4,348 $ 80 $ 1,189 $ 42,578
Due after one but within five years 12,153 2,444 29,812 928 - 45,337
Due after five but within ten years 2,940 24,775 28 1,230 - 28,973
Due after ten years 1,648 103,048 - - - 104,696
----- ------- ------ ----- ----- -------
Total Due after December 31, 2003 16,741 130,267 29,840 2,158 - 179,006
------ ------- ------ ----- ----- -------
Total amount due $ 53,694 $130,275 $ 34,188 $ 2,238 $ 1,189 $ 221,584
------ ------- ------ ----- ----- -------
Rate sensitivity:
Amounts with Fixed Interest Rates $ 4,929 $ 56,975 $ 29,840 $ 1,131 $ - $ 92,875
Amounts with Adjustable Interest Rates 11,812 73,292 - 1,027 - 86,131
------ ------ ------ ----- ----- ------
Total Due after December 31, 2003 $ 16,741 $130,267 $ 29,840 $2,158 $ - $ 179,006
====== ======= ====== ====== ===== =======
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) periodically review the Bank's allowance
for loan losses as an integral part of their examination process. 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.
5
The following table sets forth the activity in the Bank's allowance for loan
losses for the periods indicated:
For the years ended December 31,
2002 2001 2000 1999 1998
-----------------------------------------------------------------------------
(Dollars in thousands)
Balance at beginning of year $ 2,028 $ 1,872 $ 1,475 $ 1,071 $ 1,026
Provision for loan losses 270 150 150 600 420
Charge-offs:
Commercial and industrial loans (20) - (187) (80) (203)
Automobile loans - - (54) (66) (58)
Consumer loans (19) (19) (99) (81) (145)
---- ---- ---- -- -----
Total charge-offs (39) (19) (340) (227) (406)
Recoveries:
Commercial and industrial loans 75 13 547 26 1
Automobile loans - 6 13 4 15
Consumer loans 12 6 27 1 15
-- - -- - --
Total recoveries 87 25 587 31 31
-- -- --- -- --
Net recoveries (charge-offs) 48 6 247 (196) (375)
-- - --- ----- -----
Balance at end of year $ 2,346 $ 2,028 $ 1,872 $ 1,475 $ 1,071
===== ===== ===== ===== =====
Ratio of net charge-offs/average
net loans - % - % - % .19 % .43 %
--- --- --- --- ---
The following table sets forth the allocation of the Bank's allowance for loan
losses at the dates indicated:
At December 31,
2002 2001 2000 1999 1998
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 $ 684 24.3 % $ 651 24.2 % $ 723 28.7 % $ 610 27.9 % $ 589 32.1 %
Commercial real
estate loans 1,317 58.7 1,166 64.2 939 68.2 631 69.0 330 56.2
Automobile loans 307 15.4 160 10.1 27 1.9 13 1.2 48 8.6
Consumer loans 22 1.0 18 .7 26 .7 61 1.0 104 1.5
Residential real
estate loans held- - .6 - .8 - .5 - .9 - 1.6
for-sale
Unallocated $ 16 - $ 33 - $ 157 - $ 160 - $ - -
----- ----- -- ---- --- ---- --- ---- --- ----
Total allowance for
loan losses $2,346 100.0 % $2,028 100.0 % $1,872 100.0 % $1,475 100.0 % $1,071 100.0 %
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
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.
6
At December 31,
2002 2001 2000 1999 1998
----------------------------------------------------------------------
(Dollars in thousands)
Non-accrual loans:
Commercial and industrial loans $ 307 $ 153 $ 384 $ 42 $ 366
Automobile loans - - - 32 37
Consumer loans - 25 32 105 108
--- -- -- --- ---
Total non-accrual loans 307 178 416 179 511
Loans contractually past due 90 days or
more, other than non-accruing (2) - - - - -
--- --- --- --- ---
Total non-performing loans $ 307 $ 178 $ 416 $ 179 $ 511
=== === === === ===
Allowance for loan losses as a
percent of total loans (1) 1.08% 1.13% 1.37% 1.22 % 1.12%
Allowance for loan losses as a
percent of total non-performing loans 764.17% 1,139.33% 450.00% 824.02% 209.59%
Non-performing loans as a percent
of total loans (1) .14% .10% .30% .15% .54%
(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.
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, 2002, the Company had $235.6 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 2002 Annual Report to
Stockholders.
U.S. Government and Agency Obligations - At December 31, 2002, the Bank's U.S.
Government and Agency obligations portfolio of the Bank totaled $130.4 million,
all of which was classified as available-for-sale. Included in that total are
$98.2 million of callable securities, which generally possess higher yields than
securities with similar contractual terms to maturity but without callable
features. The remaining balance of $32.2 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.
Mortgage-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, 2002,
mortgage-backed securities totaled $87.1 million, or 17.7% of total assets, all
of which were classified as available-for-sale. At December 31, 2002, 46.6% of
the mortgage-backed securities carried adjustable rates and 53.4% were fixed
rate. The mortgage-backed securities had coupon rates ranging from 4.50% to
7.50% and had a weighted average yield of 4.80%.
7
Municipal Obligations - At December 31, 2002, the Bank 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 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 preferred securities issued primarily by
financial institutions up to a limit of $15 million dollars. Those 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, such
higher yielding securities must be rated investment grade by at least two of the
national rating agencies. At December 31, 2002, the Company held $14.5 million
of corporate debt securities at an average yield of 8.89%
Equity Securities - At December 31, 2002, the Bank held equity securities valued
at $3.6 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, 2002, the dividend yield on
the FHLB stock was 4.49%.
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,
-------------------------------------------------------------------------------
2002 2001 2000
-------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value Cost Value
-------------------------------------------------------------------------------
Held-to-maturity:
Mortgage-backed securities:
CMO $ - $ - $ - $ - $ 263 $ 254
Corporate debt 12,461 14,027 12,457 12,937 4,491 4,482
------ ------ ------ ------ ----- -----
Total securities
held-to-maturity $ 12,461 $ 14,027 $ 12,457 $ 12,937 $ 4,754 $ 4,736
------ ------ ------ ------ ----- -----
Available-for-sale:
U.S. Government and
Agency obligations $ 129,345 $ 130,422 $ 89,930 $ 89,732 $ 117,364 $ 115,945
Mortgage-backed securities:
GNMA 62,565 63,971 85,171 85,021 36,559 35,963
FHLMC 9,879 10,015 4,402 4,304 969 982
FNMA 12,920 13,122 20,803 20,918 5,279 5,303
Municipal obligations - - - - 1,167 1,149
Corporate debt 2,013 2,060 2,017 1,992 - -
- - - - - -
------- ------- ------- ------- ------- -------
Total securities available-for-sale $ 216,722 $ 219,590 $ 202,323 $ 201,967 $ 161,338 $ 159,342
8
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, 2002.
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 $ 32,241 1.15 % $ 11,440 4.03 % $61,117 3.96% $24,547 3.49% $129,345 3.18%
Mortgage-backed securities:
GNMA - - - - - - 62,565 4.59 62,565 4.59
FHLMC - - - - - - 9,879 6.22 9,879 6.22
FNMA 261 7.23 - - - - 12,659 4.67 12,920 4.72
Corporate debt - - - - 1,000 7.50 1,013 6.78 2,013 7.14
------ ---- ------ ---- ----- ---- ----- ---- ----- ----
Total securities available-
for-sale 32,502 1.20 11,440 4.03 62,117 4.02 110,663 4.52 216,722 3.85
------ ---- ------ ---- ------ ---- ------- ---- ------- ----
Held-to-maturity:
Mortgage-backed securities:
CMO $ - - % $ - - % $ - -% $ - -% $ - -%
---- ---- ---- ---- ---- ---- ------- ------ ------ ------
Corporate debt $ - - % $ - - % $ 4,513 8.82% $ 7,948 9.37% $ 12,461 9.17%
---- ---- ---- ---- ----- ---- ----- ---- ------ ----
Total securities, held-to-
maturity $ - - % $ - - % $ 4,513 8.82% $ 7,948 9.37% $ 12,461 9.17%
===== ==== ==== ==== ===== ==== ===== ==== ====== ====
FHLB stock, at cost $ 3,588 4.49 $ - - $ - - $ - - $ 3,588 4.49
----- ---- ---- --- ---- ---- ---- ---- ----- ----
Total equity securities $ 3,588 4.49 $ - - $ - - $ - - $ 3,588 4.49
----- ---- ---- ---- ---- ---- ---- ---- ----- ----
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 government 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,
2002 2001 2000
--------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
(dollars in thousands)
Non-interest bearing accounts $ 70,198 -% $ 51,487 -% $40,842 -%
Savings accounts 63,231 1.64 39,221 2.67 31,507 3.71
NOW and money market deposits 58,448 1.13 49,431 1.88 43,865 2.31
Certificates issued in excess of $100,000 30,572 2.29 40,442 4.58 25,576 5.97
Other time deposits 94,557 4.24 88,804 5.82 80,503 6.15
------ ------ ------
Total average deposits $ 317,006 $269,385 $222,293
======= ======= =======
9
At December 31, 2002, the Bank had outstanding approximately $20.5 million in
certificates of deposit accounts in excess of $100,000, maturing as follows:
(In thousands)
3 months or less $ 12,637
Over three through six months 1,457
Over six through 12 months 4,348
Over 12 months 2,073
-------
Total $ 20,516
======
Borrowings
The Bank utilizes borrowings to leverage the capital of the Bank and provide
liquidity when necessary. At December 31, 2002 borrowed funds primarily
consisted of $55 million of advances from the FHLB secured by various callable
U.S. agency securities, mortgage-backed securities and certain qualifying
commercial real estate loans. 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, 2002. At December 31, 2002 the
Bank had available a 12-month commitment for overnight and one month lines of
credit with the FHLB totaling $33.4 million dollars. Both lines of credit are
priced at a spread above the the federal funds rate and reprice daily. At
December 31, 2002, there was no overnight line of credit balance. 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, 2002, there was no balance outstanding under that 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, 2002. The following
table sets forth certain information regarding the Bank's borrowed funds for the
years indicated:
For the years ended December 31,
2002 2001 2000
-------------------------------------------
(Dollars in thousands)
FHLB Advances:
Maximum amount outstanding at any month-end
during the year $ 55,000 $ 55,000 $ 39,000
Average balance outstanding 55,000 43,000 36,760
Balance outstanding at end of year 55,000 55,000 29,000
Weighted average interest rate during the year 4.80% 5.06 % 4.94%
Weighted average interest rate at the end of the year 4.80% 4.80 % 5.02%
Repurchase Agreements:
Maximum amount outstanding at any month-end
during the year $ - $ - $ 29,850
Average balance outstanding - 555 4,719
Balance outstanding at end of year - - -
Weighted average interest rate during the year -% 4.93 % 5.94%
Weighted average interest rate at the end of the year - - -
Federal Funds Purchased:
Maximum amount outstanding at any month-end
during the year $ 12,800 $ 4,500 $ 16,650
Average balance outstanding 2,214 695 5,729
Balance outstanding at end of year - 4,500 -
Weighted average interest rate during the year 1.69% 4.88 % 6.40%
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
Average balance outstanding - - 244
Balance outstanding at end of year - - -
Weighted average interest rate during the year -% - % 9.14%
Weighted average interest rate at the end of the year -% - % -%
10
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.
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 operating results of the Company for the year ended
December 31, 2002.
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 operating results of the
Company for the year ended December 31, 2002.
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, Nassau and Kings 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.
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 Bank's prior year pretax income. The officers and trustees
of the foundation are comprised of certain officers and Board members
of the Company.
Personnel
At December 31, 2002, the Bank employed 104 employees, 5 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 their subsidiaries, (excluding Long Island
Commercial Capital Corporation)report their income on a consolidated basis using
the accrual method of accounting and are subject to federal and state income
taxation in the same manner as other corporations. Long Island Commercial
Capital Corporation is taxable as a Real Estate Investment Trust (REIT). 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.
11
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.
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 Company 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. Distributions recieved by the Bank from
Long Island Commercial Capital Corporation are not eligible for the federal
dividends received deduction. Meanwhile, Long Island Commercial Capital
Corporation, as a REIT, is entitled to a 100% dividends paid deduction for
federal income tax purposes.
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 ) 8.0% 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. 60% of dividend income, and gains and losses from subsidiary
capital are excluded from New York State entire net income. Distributions
received from Long Island Commercial Capital Corporation are eligible for the
New York State dividends received deduction.
In addition, net operating losses cannot be carried back. For tax years
beginning on or after January 1, 2001 a deduction for net operating losses
sustained in 2001 and subsequent years may be carried forward. The deduction may
not exceed the allowable federal net operating loss deduction augmented by the
excess of the New York State bad debt deduction over the federal bad debt
deduction. The losses may be carried forward for the 20 year period allowed
under federal Code Section 172. 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 State
Franchise Tax. The Company, the Bank and their subsidiaries (excluding Long
Island Commercial Capital Corporation) file a combined return.
City of New York Taxation
The Bank is subject to a New York City banking corporation tax in an annual
amount equal to the greater of (a) 9% of entire net income allocable to New York
City, or (b) the applicable alternative tax. The applicable alternative tax is
the greater of (a) .01% of the value of taxable assets allocable to New York
City with certain modifications, (b) 3% of alternative entire net income
allocable to New York City, or (c) $125. Entire net income and alternative net
income are calculated in a manner similar to New York State including the
allowance of a deduction for an addition to the tax bad debt reserve. Net
operating losses are not permitted to be carried back or forward for New York
City purposes. The income is allocated to New York City based upon three
factors: receipts, wages and deposits. The Company, the Bank and their
subsidiaries (excluding Long Island Commercial Capital Corporation) file a
combined return.
Delaware Taxation
The Company, as a Delaware 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.
12
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 to 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
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.
Sarbanes-Oxley Act of 2002 - This recently enacted statute generally prohibits
loans by the Company to its executive officers and directors. However, that act
contains a specific exception for loans by the Bank to its executive officers
and directors in compliance with federal banking laws. Under such laws, the
Bank's authority to extend credit to executive officers, directors and 10%
shareholders ("insiders"), as well as entities such persons control, is limited.
The law limits both the individual and aggregate amount of loans the Bank may
make to insiders based, in part, on the Bank's capital position and requires
certain board approval procedures to be followed. Such loans are required to be
made on terms substantially the same as those offered to unaffiliated
individuals and not involve more than the normal risk of repayment. There is an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees.
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.
14
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.
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 Delaware General Corporation Law.
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 ten branch offices
located in Babylon, Smithtown, Westbury, Jericho, Shirley, Ronkonkoma, Melville,
and Central Islip, Deer Park, and Bay Ridge-Brooklyn. The following table sets
forth information relating to each of the offices of the Bank at December 31,
2002.
Lease Net
Expiration Book Value
Date Including at
Location Leased Lease Acquired Options Dec. 31,2002
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Main Office:
One Suffolk Square, Islandia, LI, New York 11749 Leased 1987 2005 $ 78
Branch Offices:
400 West Main Street, Babylon, LI, NY 11702 Leased 1995 2005 1
50 Route 111, Smithtown, LI, NY 11787 Leased 1997 2012 -
900 Merchants Concourse, Westbury, LI, NY 11590 Leased 1997 2003 3
390 North Broadway, Jericho, LI, NY 11753 Leased 1997 2008 7
861 Montauk Highway, Shirley, LI, NY 11967 Leased 1998 2002 -
950 Montauk Highway, Shirley, LI, NY 11967 Owned 2002 ---- 20
3425 Veterans Memorial Hwy, Ronkonkoma, LI, NY 11779 Leased 2001 2011 145
610 Broadhollow Road, Melville, LI, NY 11747 Leased 2001 2019 124
320 Carlton Avenue, Central Islip, LI, NY 11722 Leased 2001 2019 36
720 Grand Boulevard, Deer Park, LI, NY 11729 Owned 2001 ---- 321
375 86th Street, Brooklyn, NY 11209 Leased 2002 2023 -
---
$ 735
---
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
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 2002 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 5 and 6 of the
2002 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 7 through 16 of the 2002 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.
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 2002 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 2002 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
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained on pages 3 through 5 of the Proxy Statement for the
Annual Meeting of Stockholders to be held April 23, 2003 under the caption
"Election of Directors" is incorporated herein by reference.
16
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 81 Chairman of the Board
Roy M. Kern, Sr. 69 Vice Chairman of the Board
Douglas C. Manditch 55 President and Chief Executive Officer
Thomas Buonaiuto 37 Vice President and Treasurer
Carmelo C. Vizzini 57 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 8 through 11 of the Proxy Statement for the
Annual Meeting of Stockholders to be held on April 23, 2003 under the captions
"Directors' Compensation" and " Executive Compensation" is incorporated herein
by reference.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained on page 3 through 5 of the Proxy Statement for the
Annual Meeting of Stockholders to be held April 23, 2003 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 13 of the Proxy Statement for the Annual
Meeting of Stockholders to be held April 23, 2003 under the caption
"Transactions with Certain Related Persons" is incorporated herein by reference.
ITEM 14.CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company maintains
controls and procedures designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities Exchange
Commission. Based upon their evaluation of those controls and procedures
performed within 90 days of the filing date of this report, the chief executive
officer and the chief financial officer of the Company concluded that the
Company's disclosure controls and procedures were adequate.
(b) Changes in internal controls. The Company made no significant changes in its
internal controls or in other factors that could significantly affect these
controls susequent to the date of the evaluation of those controls by the chief
executive officer and chief financial officer.
17
PART IV
ITEM 15.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, 2002 and are
incorporated by this reference:
Consolidated Balance Sheets at December 31, 2002 and 2001
Consolidated Statements of Earnings for the Years Ended December 31, 2002,
2001 and 2000
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001 and 2000
Notes to Consolidated Financial Statements
Independent Auditors' Report
The remaining information appearing in the 2002 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 2002.
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 15)
13.0 2002 Annual Report to Stockholders.
21.0 Subsidiary information is incorporated by reference to "Part I -
Subsidiary Activities"
23.0 Consent of KPMG LLP.
99.1 Certification of Chief Executive Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
===============================================================================
* Incorporated herein by reference in this document to the S-4
Registration Statement initially filed on September 22, 1998,
Registration No. 333-63971
** Incorporated herein by reference in this document from the
2001 Long Island Financial Corp.Form 10-K filed on March 29, 2002.
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 26, 2003
-----------------------------
Douglas C. Manditch
President and Chief Executive Officer
By: /s/ Thomas Buonaiuto Date: March 26, 2003
-----------------------------
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 26, 2003 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/ John C. Tsunis, Esq.
----------------------------- ---------------------------
Frank J. Esposito John C. Tsunis, Esq.
Director Director
/s/ Waldemar Fernandez
-----------------------------
Waldemar Fernandez
Director
19
CERTIFICATION
I, Douglas C. Manditch, certify, that:
1. I have reviewed this annual report on Form 10-K of Long Island
Financial Corp.;
2. Based on my knowledge, the annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of the
internal controls which could adversely affect the registrant's
ability to record process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
the internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Douglas C. Manditch
-----------------------
Douglas C. Manditch
President & Chief Executive Officer
20
CERTIFICATION
I, Thomas Buonaiuto, certify, that:
1. I have reviewed this annual report on Form 10-K of Long Island
Financial Corp.;
2. Based on my knowledge, the annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of the
internal controls which could adversely affect the registrant's
ability to record process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
the internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Thomas Buonaiuto
---------------------
Thomas Buonaiuto
Vice President & Treasurer
21
EXHIBIT 13. 2002 ANNUAL REPORT TO STOCKHOLDERS
Selected Financial Data
The following tables set forth selected financial data for the last five years.
At or for the years ended December 31,
2002 2001 2000 1999 1998
------------------------------------------------------------------------
(Dollars in thousands, except share data)
Selected Operating Data:
Interest income $ 23,327 $ 22,945 $ 20,996 $ 18,410 $ 15,285
Interest expense 9,078 11,233 11,143 9,482 8,229
Net interest income 14,249 11,712 9,853 8,928 7,056
Provision for loan losses 270 150 150 600 420
Other operating income 3,254 2,139 1,566 1,706 918
Other operating expenses 12,909 10,716 8,635 7,581 5,799
Income before income taxes 4,324 2,985 2,634 2,453 1,755
Income taxes 1,487 1,023 880 847 630
Net income $ 2,837 $ 1,962 $ 1,754 $ 1,606 $ 1,125
----- ----- ----- ----- -----
Basic earnings per share $ 1.96 $ 1.35 $ 1.10 $ .92 $ .64
---- ---- ---- --- ---
Diluted earnings per share $ 1.90 $ 1.33 $ 1.10 $ .92 $ .64
---- ---- ---- --- ---
Selected Financial Condition Data:
Total assets $ 491,951 $ 438,390 $ 332,934 $ 331,054 $ 266,543
Loans, net 215,385 176,769 134,853 119,836 94,144
Allowance for loan losses 2,346 2,028 1,872 1,475 1,071
Securities 235,639 217,282 169,422 170,149 145,819
Deposits 400,534 345,917 273,189 269,740 217,867
Borrowed funds 55,000 59,500 29,000 39,500 24,000
Stockholders' equity 25,573 21,127 19,261 18,343 21,868
Book value per share $ 17.68 $ 14.67 $ 13.02 $ 11.14 $ 12.35
Stockholders' equity (1) 23,746 21,354 20,428 21,327 21,803
Book value per share (1) $ 16.42 $ 14.83 $ 13.81 $ 12.95 $ 12.31
Shares outstanding 1,446,226 1,439,926 1,479,426 1,646,326 1,771,306
Average Balance Sheet Data:
Loans, net $ 193,194 $ 155,303 $ 131,165 $ 104,512 $ 86,647
Securities 176,306 155,833 145,291 145,881 109,552
Assets 408,955 345,985 293,884 273,736 216,941
Demand deposits 70,198 51,487 40,842 33,791 25,811
Savings deposits 63,231 39,221 31,507 22,747 9,030
NOW and money market deposits 58,448 49,431 43,865 49,413 35,852
Certificates of deposit 125,129 129,246 106,079 103,596 105,741
Stockholders' equity $ 23,409 $ 20,689 $ 18,138 $ 20,470 $ 21,717
22
Selected Financial Data (cont'd)
At or for the years ended December 31,
2002 2001 2000 1999 1998
------------------------------------------------------------------------
(Dollars in thousands)
Performance Ratios:
Return on average assets .69 % .57 % .60 % .59 % .52 %
Return on average equity 12.12 9.48 9.67 7.85 5.18
Average equity to average assets 5.72 5.98 6.17 7.48 10.01
Equity to total assets at end of year 5.20 4.82 5.79 5.54 8.20
Interest rate spread (2) 3.22 2.82 2.69 2.81 2.51
Net interest margin (3) 3.79 3.63 3.55 3.50 3.48
Ratio of average interest-earning assets to
average interest-bearing liabilities 1.24 1.23 1.21 1.19 1.25
Non-interest expense to average assets 3.16 3.10 2.94 2.77 2.67
Efficiency ratio (4) 73.75 77.37 75.62 71.29 72.72
Dividend payout ratio 19.47 24.81 29.09 34.78 50.00
Asset Quality Ratios and Other Data:
Total non-performing loans $ 307 $ 178 $ 416 $ 179 $ 511
Allowance for loan losses 2,346 2,028 1,872 1,475 1,071
Non-performing loans as a percent of
total loans (5) (6) .14 % .10 % .30 % .15 % .54 %
Non-performing loans as a percent of
total assets (5) .06 .04 .12 .05 .19
Allowance for loan losses as a percent of:
Non-performing loans (5) 764.17 1,139.33 450.00 824.02 209.59
Total loans (6) 1.08 % 1.13 % 1.37 % 1.22 % 1.12 %
Full service offices 11 8 6 6 6
(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 ofoperating 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 general policy to cease
accruing interest on all loans 90 days or more past due.
(6) Loans include loans, net of unearned income and deferred fees.
23
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.
Those 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. 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, Nassau and Kings 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
the residential real estate loans it originates together with the servicing
rights to those loans on a non-recourse basis to institutional investors. The
Company limits its exposure to interest rate fluctuations and credit risk on
those loans by obtaining, at the point of origination, a commitment from an
institutional investor to purchase that loan from the Company. Further, 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.
24
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 that plan are to (i) expand the Company's
network of branch offices into existing and new markets, (ii) originate
commercial loans, (iii) develop strong customer relationships that generate
multiple services for individual customers and repeat business, (iv) add high
quality employees and (v) leverage capital with increased deposits from branch
expansion and borrowed funds.
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, that 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.
CRITICAL ACCOUNTING POLICIES
The Company identifies accounting policies critical to the Company's operations
and understanding of the Company's results of operations. Certain accounting
policies are considered to be important to the portrayal of the Company's
financial condition, since they require management to make complex or subjective
judgments, some of which may relate to matters that are inherently uncertain.
The Company has determined that the methodology used in determining the level of
its allowance for loan losses is critical in the presentation and understanding
of the Company's consolidated financial statements. The allowance for loan
losses represents management's estimate of probable losses inherent in the
portfolio. The evaluation process for making provisions for loan losses is
subject to numerous estimates and judgments. Changes in these estimates could
have a direct impact on the provision for loan losses and could result in a
change in the allowance. While management uses available information to
determine losses on loans, future additions to the allowance may be necessary
based on, among other things, unanticipated changes in economic conditions,
particularly in the counties of Suffolk and Nassau.
In evaluating the portfolio, management takes into consideration numerous
factors such as the Company's loan growth, prior loss experience, present and
potential risks of the loan portfolio, risk ratings assigned by lending
personnel, ratings assigned by the independent loan review function, the present
financial condition of the borrowers, current economic conditions, and other
portfolio risk characteristics. The Company's formalized process for assessing
the adequacy of the allowance for loan losses and the resultant need, if any,
for periodic provisions to the allowance charged to income consists of both
individual loan analyses and loan pool analyses. The individual loan analyses
are periodically performed on individually significant loans or when otherwise
deemed necessary and primarily encompass commercial real estate and commercial
and industrial loans. Management believes that the Company's allowance for loan
losses at December 31, 2002 is adequate to provide for estimated probable losses
inherent in the portfolio.
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 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 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.
25
At December 31, 2002, 54.4% of the Company's gross loans had adjustable interest
rates and its loan portfolio had an average weighted maturity of 8.4 years. At
such date, $45.2 million, or 19.2%, of the Company's securities had adjustable
interest rates, and its securities portfolio had a weighted average maturity of
1.9 years. At December 31, 2002, the Company had $59.1 million of certificates
of deposit with maturities of one year or less and $20.5 million of deposits of
$100,000 or more, which tend to be less stable sources of funding as compared to
core deposits, and represented 21.1% 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, 2002, 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 $ 46 .27 % $ (4,121) (14.70) %
100 272 1.62 (2,998) (10.69)
Static -- -- -- --
(100) (519) (3.09) (4,064) (14.50)
(200) (1,912) (11.40) (5,287) (18.86)
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, 2002, 2001 and 2000, 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.
26
Years Ended December 31,
2002 2001 2000
----------------------------------------------------------------------------------------
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 $ 6,344 $ 106 1.67% $ 11,572 $ 497 4.29% $ 1,366 $ 87 6.37%
Securities, net (1) 176,306 8,694 4.93 154,889 9,455 6.10 144,124 9,118 6.33
Municipal obligations (2) - - - 944 54 5.72 1,167 68 5.83
Loans, net (3) 193,194 14,527 7.52 155,303 12,954 8.34 131,165 11,743 8.95
------- ------ ------- ------ ------- ------
Total interest-earning assets 375,844 23,327 6.21 322,708 22,960 7.11 277,822 21,016 7.56
Non-interest-earning assets 33,111 23,277 16,062
------ ------ ------
Total assets $ 408,955 $ 345,985 $ 293,884
------- ------- -------
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits $ 63,231 $ 1,037 1.64% $ 39,221 $ 1,047 2.67% $ 31,507 $ 1,168 3.71%
NOW and money
market deposits 58,448 661 1.13 49,431 928 1.88 43,865 1,013 2.31
Certificates of deposit 125,129 4,703 3.76 129,246 7,023 5.43 106,079 6,478 6.11
------- ----- ------- ----- ------- -----
Total interest-bearing deposits 246,808 6,401 2.59 217,898 8,998 4.13 181,451 8,659 4.77
Borrowed funds 57,214 2,677 4.68 44,249 2,235 5.05 47,451 2,484 5.23
------ ----- ------ ----- ------ -----
Total interest-bearing liabilities 304,022 9,078 2.99 262,147 11,233 4.29 228,902 11,143 4.87
Other non-interest bearing
liabilities 81,524 63,149 46,844
------ ------ ------
Total liabilities 385,546 325,296 275,746
Stockholders' equity 23,409 20,689 18,138
------ ------ ------
Total liabilities and
stockholders' equity $ 408,955 $ 345,985 $ 293,884
------- ------- -------
Interest income / interest
rate spread (4) $ 14,249 3.22% $11,727 2.82% $ 9,873 2.69%
------ ---- ------ ---- ----- ----
Net interest margin (5) 3.79% 3.63% 3.55%
---- ---- ----
Ratio of interest-earning assets to
interest-bearing liabilities 1.24 1.23 1.21
---- ---- ----
(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 excludes residential real estate loans held-for-sale and allowance
for loan losses, and includes deferred loan fees and 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.
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 volume and the changes
due to rate:
27
Year Ended Year Ended
December 31, 2002 December 31, 2001
Compared to Compared to
Year Ended Year Ended
December 31, 2001 December 31, 2000
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 $ (166) (225) (391) $ 447 (37) 410
Securities, net (1) 1,202 (1,963) (761) 665 (328) 337
Municipal obligations (27) (27) (54) (13) (1) (14)
Loans, net (2) 2,939 (1,366) 1,573 2,053 (842) 1,211
----- ------- ------ ----- ----- ------
Total interest-earning assets 3,948 (3,581) 367 3,152 (1,208) 1,944
----- ------- --- ----- ------- -----
Interest-bearing liabilities:
Deposits:
Savings deposits 489 (499) (10) 249 (370) (121)
NOW and money market deposits 148 (415) (267) 119 (204) (85)
Certificates of deposit (217) (2,103) (2,320) 1,311 (766) 545
----- ------- ------- ----- ----- -----
Total interest-bearing deposits 420 (3,017) (2,597) 1,679 (1,340) 339
Borrowed funds 616 (174) 442 (164) (85) (249)
--- ----- --- ----- ---- -----
Total interest-bearing liabilities $ 1,036 (3,191) (2,155) $ 1,515 (1,425) 90
----- ------- -- ---- ----- ------- --
(1) Securities, net, excludes municipal obligations. Unrealized
appreciation/depreciation on available-for-sale securities are recorded in
non-interest-earning assets.
(2) Amount excludes residential real estate loans held-for-sale and allowance
for loan losses, and includes deferred loan fees and non-performing loans.
Comparison of Financial Condition at December 31, 2002 and 2001
Total assets increased by $53.6 million, or 12.2%, from $438.4 million at
December 31, 2001 to $492.0 million at December 31, 2002. The increase in assets
is attributable to a $38.6 million, or 21.8%, increase in loans, net, which at
December 31, 2001 amounted to $176.8 million compared to $215.4 million at
December 31, 2002. The growth in loans resulted from increases of $10.0 million,
or 22.8%, in the commercial and industrial loan portfolio, $13.6 million, or
11.7%, in the commercial real estate loan portfolio, and $15.9 million in the
automobile loan portfolio. Cash and cash equivalents decreased $4.8 million, or
15.8%, and securities available for sale increased $17.6 million, or 8.7%,
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, 2002 and 2001, seasonal municipal deposits
amounted to $80.5 million and $80.7 million, respectively. Prepaid expenses and
other assets decreased $1.1 million, or 49.5%, from $2.2 million at December 31,
2001, to $1.1 million at December 31, 2002, primarily due to the decrease in the
deferred tax asset which, in turn, was directly related to the decrease in
accumulated other comprehensive loss.
Total deposits increased $54.6 million, or 15.8%, from $345.9 million at
December 31, 2001, to $400.5 million at December 31, 2002. Demand deposits
increased $17.2 million, or 28.0%, from $61.5 million at December 31, 2001 to
$78.7 million at December 31, 2002. In addition, savings deposits increased by
$30.8 million, or 71.5%, from $43.0 million at December 31, 2001, to $73.8
million at December 31, 2002. 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 $19.5 million, or
17.6%, from $111.1 million at December 31, 2001, to $130.6 million at December
31, 2002, which reflects the balance of seasonal municipal deposits at December
31, 2002. Time certificates issued in excess of $100,000 were $20.5 million at
December 31, 2002, a decrease of $15.3 million, or 42.8%, from the prior year.
The Company, at various times when deemed advantageous, utilizes time deposits
issued in excess of $100,000 as an available alternative funding source. Other
time deposits increased $2.4 million, or 2.6%, to $96.9 million at December 31,
2002. Federal Home Loan Bank advances remained unchanged with a balance of $55.0
million at December 31, 2002.
28
Stockholders' equity increased $4.5 million to $25.6 million at December 31,
2002 compared to $21.1 million at December 31, 2001. Increases to stockholders'
equity included net income amounting to $2.8 million for the year ended December
31, 2002, and a decrease in the accumulated other comprehensive loss on
securities available-for-sale of $2.1 million. Those increases were partially
offset by dividends declared of $535,000.
Comparison of Operating Results for the Years Ended December 31, 2002 and 2001
GENERAL
The Company reported net income of $2.8 million for the year ended December 31,
2002, or diluted earnings per share of $1.90, as compared to net income of $2.0
million, or diluted earnings per share of $1.33 for 2001.
INTEREST INCOME
Interest income, on a fully taxable equivalent basis, increased $367,000, or
1.6%, to $23.3 million for the year ended December 31, 2002, from $23.0 million
for the year ended December 31, 2001. The increase was primarily the result of
an increase in the average balance of interest-earning assets of $53.1 million,
or 16.5%, to $375.8 million for the year ended December 31, 2002 from $322.7
million for 2001. The increase in the average balance of interest-earning assets
was offset in part by a 90 basis point decrease in the average yield on
interest-earning assets from 7.11%for the year ended December 31, 2001 to 6.21%
for the comparable 2002 period. The decrease in average yield on
interest-earning assets was attributable to a 117 basis point decrease in yield
on securities, net, (exclusive of municipal obligations) which declined from
6.10% for the year ended December 31, 2001, to 4.93% for the year ended December
31, 2002. The average yield on loans, net, decreased 82 basis points from 8.34%
for the 2001 period to 7.52% for the 2002 period. Partially offsetting the
decline in yield from period to period was the $21.4 million, or 13.8%, increase
in the average balance of securities, net, (exclusive of municipal obligations)
from $154.9 million for the year ended December 31, 2001 to $176.3 million for
the year ended December 31, 2002. The average balance of loans, net, increased
$37.9 million, or 24.4%, from $155.3 million for the year ended December 31,
2001, to $193.2 million, for the year ended December 31, 2002.
INTEREST EXPENSE
Interest expense for the year ended December 31, 2002 was $9.1 million, compared
to $11.2 million for the year ended December 31, 2001, a decrease of $2.1
million, or 19.2%. The decrease in interest expense was the result of a 130
basis point decrease in the average cost of interest-bearing liabilities from
4.29% for the year ended December 31, 2001 as compared to 2.99% for the year
ended December 31, 2002. The decrease in average cost was offset in part by a
$41.9 million, or 16.0% increase in the average balance of total
interest-bearing liabilities from $262.1 million for the 2001 period to $304.0
million for the 2002 period. The increase in average interest-bearing
liabilities reflects a $28.9 million increase in the average balance of
interest-bearing deposits and a $13.0 million increase in the average balance of
borrowed funds when compared to the prior year period.
Interest expense on interest-bearing deposits for the year ended December 31,
2002 decreased $2.6 million, or 28.9%, to $6.4 million from $9.0 million for the
corresponding 2001 period. This decrease was primarily due to a 154 basis point
decrease in the average rate paid on interest-bearing deposits from 4.13% for
the year ended December 31, 2001 to 2.59% for the corresponding period in 2002.
Offsetting in part the decrease in the average rate paid was a $28.9 million
increase in the average balance of interest-bearing deposits for the year ended
December 31, 2002 from the corresponding period in 2001. The increase in the
average balance of interest-bearing deposits was the result of increases in the
average balance of savings deposits of $24.0 million, or 61.2%, and NOW and
money market deposits of $9.0 million, or 18.2%, from period to period,
partially offset by a $4.1 million decrease in the average balance of
certificates of deposit. The increase in average balances of interest-bearing
deposits is the result of the Company's branch expansion and the development of
competitive deposit products that meet the needs of its commercial and consumer
customers.
Interest expense on borrowed funds for the year ended December 31, 2002
increased $442,000, or 19.8%, to $2.7 million from $2.2 million for 2001. The
increase was primarily due to a $13.0 million, or 29.3%, increase in the average
balance of borrowed funds from $44.2 million for the year ended December 31,
2001 to $57.2 million for the year ended December 31, 2002. Offsetting the
increase in the average balance was a 37 basis point decrease in the average
cost of borrowed funds from 5.05% for the 2001 period, to 4.68% for the 2002
period.
29
NET INTEREST INCOME
Net interest income, on a fully taxable equivalent basis, increased by $2.5
million from $11.7 million for the year ended December 31, 2001, to $14.2
million for the year ended December 31, 2002. The average cost of total
interest-bearing liabilities for the period decreased 130 basis points from
4.29% in 2001 to 2.99% in 2002. The average yield on interest-earning assets for
the year decreased 90 basis points from 7.11% in 2001 period to 6.21% in 2002.
The net interest rate spread increased by 40 basis points from 2.82% in 2001 to
3.22% in 2002.
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses was $270,000 and $150,000 for the years
ended December 31, 2002 and December 31, 2001, respectively. 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, 2002 and December 31, 2001, the allowance for loan losses amounted to $2.3
million and $2.0 million, respectively. The allowance for loan losses as a
percentage of total loans was 1.08% at December 31, 2002 and 1.13% at December
31, 2001.
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 $1.2 million, or 52.1%, to $3.3 million for
the year ended December 31, 2002, compared to $2.1 million for the year ended
December 31, 2001. The increase is primarily attributable to an increase of
$656,000, or 61.9%, 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. In addition, net gain on sale of residential loans increased $275,000,
or 66.1%, as lower market rates and increased refinancing activity resulted in
increased volume. Securities transactions resulted in gains of $37,000 in 2002,
compared to losses of $14,000 for 2001. Contingent upon market conditions, the
Company periodically evaluates securities transactions to improve future net
interest income and earnings per share.
OTHER OPERATING EXPENSES
Other operating expenses increased $2.2 million, or 20.5%, to $12.9 million for
the year ended December 31, 2002, from $10.7 million for the year ended December
31, 2001. Other operating expenses include 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 expenses include $825,000 of expense related to the $7.5 million of
Capital Securities outstanding.
INCOME TAXES
Income taxes increased $464,000, or 45.4%, from $1.0 million for the year ended
December 31, 2001 to $1.4 million for the year ended December 31, 2002 as a
result of increased income before income taxes. The effective tax rate for the
year ended December 31, 2002 was 34.4% compared to 34.3% for the year ended
December 31, 2001.
30
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 $44.9 million,
or 16.2%, to $322.7 million for the year ended December 31, 2001 from $277.8
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 61 basis points from 8.95% for the 2000
period to 8.34% for the year ended December 31, 2001. The average yield on
interest earning assets decreased 45 basis points, from 7.56% for the year ended
December 31, 2000, to 7.11% 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 7.56% in 2000 period to 7.11% in 2001. The net interest rate
spread increased by 13 basis points from 2.69% in 2000 to 2.82% in 2001.
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.
31
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 EXPENSES
Other operating expenses 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 expenses include 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 expenses include $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.
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 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, 2002, the Company's
average minimum liquidity level was 22.9%. 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
enable 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 6.8% of the Company's assets, which enable 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, 2002 and 2001, FHLB advances amounted to $55.0 million.
The primary investing activities of the Company are the purchase of securities
available-for-sale and the origination of loans. During the years ended December
31, 2002 and 2001, the Company's purchases of securities classified as
available-for-sale totaled $734.1 million and $969.6 million, respectively. Loan
originations and principal repayments on loans, net totaled $39.3 million and
$41.3 million, for the years ended December 31, 2002 and 2001, respectively.
Those activities were funded primarily by deposit growth, principal repayments
on loans, borrowings and principal repayments on securities.
32
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, 2002, no repurchases have been made under this program. The plan
for the repurchase program was undertaken because management believed that the
repurchase of shares would enhance shareholder value and provide additional
liquidity for otherwise thinly traded shares. The repurchase program 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,
2002, the Company holds 336,900 shares of treasury stock at an average cost of
$12.40 per share.
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 December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," amending SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS 148 provides two additional
alternative transition methods for recognizing an entity's voluntary decision to
change its method of accounting for stock-based employee compensation to the
fair-value method. In addition, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 so that entities will have to (1) make more-prominent
disclosures regarding the pro forma effects of using the fair-value method of
accounting for stock-based compensation, (2) present those disclosures in a more
accessible format in the footnotes to the annual financial statements, and (3)
include those disclosures in the interim financial statements. Certain of the
disclosure modifications are required for fiscal years ending after December 15,
2002 and are included in the notes to these consolidated financial statements.
There will be no impact on the Company's consolidated balance sheets or
consolidated statements of earnings upon adoption of SFAS No. 148.
In November 2002, FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34." This
Interpretation clarifies the requirements of FASB Statement No. 5, "Accounting
for Contingencies," relating to the guarantor's accounting for and disclosure of
the issuance of certain types of guarantees. The disclosure provision of the
Interpretation are effective for financial statements of interim or annual
reports that end after December 15, 2002. However, the provisions for initial
recognition and measurement are effective on a prospective basis for guarantees
that are issued or modified after December 31, 2002, irrespective of the
guarantor's year-end. The application of this Interpretation is not expected to
have a material impact on the Company's consolidated balance sheets or
consolidated statements of earnings.
In October 2002, FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 amends SFAS No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions," SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," and FASB
Interpretation No. 9, "Applying APB Opinions Nos. 16 and 17, When a Savings and
Loan Association or a Similar Institution is Acquired in a Business Combination
Accounted for by the Purchase Method." That Statement removes acquisitions of
financial institutions, other than transactions between two or more mutual
enterprises, from the scope of SFAS No. 72 and FASB Interpretation No. 9. SFAS
No. 147 also amends SFAS No. 144 to include long-term customer-relationship
intangible assets such as depositor and borrower-relationship intangible assets
and credit cardholder intangible assets. The provisions of SFAS No. 147 are
effective October 1, 2002. There was no impact on the Company's consolidated
statements of financial condition or consolidated statements of income upon
adoption of SFAS No. 147.
33
Consolidated Balance Sheets
(In thousands, except share data) December 31,
2002 2001
------------------------------
Assets:
Cash and due from banks $ 20,443 $ 30,347
Interest earning deposits 47 279
Federal funds sold 5,300 -
----- -----
Total cash and cash equivalents 25,790 30,626
Securities held-to-maturity (fair value of $14,027 and $12,937, respectively) 12,461 12,457
Securities available-for-sale, at fair value 219,590 201,967
Federal Home Loan Bank stock, at cost 3,588 2,858
Loans, net of unearned income and deferred fees 217,731 178,797
Less allowance for loan losses (2,346) (2,028)
------ -------
Loans, net 215,385 176,769
Premises and equipment, net 3,530 2,929
Accrued interest receivable 2,654 2,121
Bank owned life insurance 7,859 6,495
Prepaid expenses and other assets 1,094 2,168
----- -----
Total assets $ 491,951 $ 438,390
======= =======
Liabilities and Stockholders' Equity:
Deposits:
Demand deposits $ 78,697 $ 61,502
Savings deposits 73,780 43,032
NOW and money market deposits 130,636 111,058
Time certificates issued in excess of $100,000 20,516 35,861
Other time deposits 96,905 94,464
------ ------
Total deposits 400,534 345,917
Federal funds purchased and securities sold under agreements
to repurchase - 4,500
Other borrowings 55,000 55,000
Accrued expenses and other liabilities 3,344 4,346
----- -----
Total liabilities 458,878 409,763
------- -------
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;
1,783,126 and 1,776,826 shares issued; 1,446,226 and
1,439,926 shares outstanding in 2002 and 2001, respectively) 18 18
Surplus 20,281 20,191
Accumulated surplus 7,625 5,323
Accumulated other comprehensive income (loss) 1,827 (227)
Treasury stock at cost, (336,900 shares in 2002 and 2001) (4,178) (4,178)
------ ------
Total stockholders' equity 25,573 21,127
------ ------
Total liabilities and stockholders' equity $ 491,951 $ 438,390
======= =======
See accompanying notes to consolidated financial statements.
34
Consolidated Statements of Earnings
For the years ended
(In thousands, except share data) December 31,
2002 2001 2000
---------------------------------
Interest income:
Loans $ 14,527 $ 12,954 $ 11,743
Securities 8,694 9,494 9,166
Federal funds sold 100 485 73
Earning deposits 6 12 14
- -- --
Total interest income 23,327 22,945 20,996
------ ------ ------
Interest expense:
Savings deposits 1,037 1,047 1,168
NOW and money market deposits 661 928 1,013
Time certificates issued in excess of $100,000 699 1853 1,523
Other time deposits 4,004 5,170 4,955
Borrowed funds 2,677 2,235 2,484
----- ----- -----
Total interest expense 9,078 11,233 11,143
----- ------ ------
Net interest income 14,249 11,712 9,853
Provision for loan losses 270 150 150
--- --- ---
Net interest income after provision
for loan losses 13,979 11,562 9,703
------ ------ -----
Other operating income:
Service charges on deposit accounts 1,715 1,059 896
Net gain (loss) on sale of securities 37 (14) (154)
Net gain on sale of residential loans 691 416 253
Earnings on bank owned life insurance 370 357 325
Other 441 321 246
--- --- ---
Total other operating income 3,254 2,139 1,566
----- ----- -----
Other operating expenses:
Salaries and employee benefits 6,415 5,062 4,098
Occupancy expense 894 759 615
Premises and equipment expense 1,186 991 812
Capital securities 825 806 258
Other 3,589 3,098 2,852
----- ----- -----
Total other operating expenses 12,909 10,716 8,635
------ ------ -----
Income before income taxes 4,324 2,985 2,634
Income taxes 1,487 1,023 880
----- ----- ---
Net income $ 2,837 $ 1,962 $ 1,754
----- ----- -----
Basic earnings per share $ 1.96 $ 1.35 $ 1.10
---- ---- ----
Diluted earnings per share $ 1.90 $ 1.33 $ 1.10
---- ---- ----
See accompanying notes to consolidated financial statements
35
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, 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) $21,127
Comprehensive income:
Net income - - 2,837 - - 2,837
Other comprehensive income, net of tax:
Unrealized appreciation in available-for-sale
securities, net of reclassification adjustment (1) - - - 2,054 - 2,054
-----
Total comprehensive income - - - - - 4,891
Exercise of stock options and related tax benefit - 90 - - - 90
Dividends declared on common
stock ($.37 per common share) - - (535) - - (535)
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 18 $ 20,281 $7,625 $ 1,827 $ (4,178) $25,573
(In thousands) Years ended December 31,
---------------------------------------
2002 2001 2000
---------------------------------------
(1) Disclosure of reclassification amount, net of tax:
Net unrealized appreciation arising during
the year, net of tax $ 2,078 $ 949 $ 1,915
Less: Reclassification adjustment for net gains (losses)
included in net income, net of tax 24 (9) (98)
---------------------------------------
Net unrealized gain on securities, net of tax $ 2,054 $ 940 $ 1,817
---------------------------------------
See accompanying notes to consolidated financial statements
36
Consolidated Statements of Cash Flows
(In thousands) For the years ended December 31,
2002 2001 2000
---------------------------------------
Cash flows from operating activities:
Net income $ 2,837 $ 1,962 $ 1,754
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 270 150 150
Depreciation and amortization 901 736 609
Amortization of premiums, net
of discount accretion 1,714 (117) (866)
Net (gain) loss on sale of securities (37) 14 154
Loans originated for sale,
net of proceeds from sales and gains 283 (761) 308
Net deferred loan origination fees 117 35 43
Earnings on bank owned life insurance (370) (357) (325)
Deferred income taxes (388) 189 (49)
Change in other assets and liabilities:
Accrued interest receivable (533) (210) 151
Prepaid expenses and other assets 492 (523) (477)
Accrued expenses and other liabilities (1,143) 362 513
------ --- ---
Net cash provided by operating activities 4,143 1,480 1,965
----- ----- -----
Cash flows from investing activities:
Purchases of securities held-to-maturity, available-for-sale (734,077) (980,071) (401,175)
Net (purchase) redemption of Federal Home Loan Bank stock (730) 2,468 (179)
Proceeds from the sale of securities available-for-sale 1,410 35,244 6,846
Proceeds from maturities of securities 669,183 862,006 392,600
Principal repayments on securities 47,404 34,236 6,456
Loan originations net of principal repayments (39,286) (41,340) (15,518)
Purchase of premises and equipment (1,502) (1,797) (388)
Purchase of bank owned life insurance, net (1,053) - -
------ -- --
Net cash used in investing activities (58,651) (89,254) (11,358)
------ ------ ------
Cash flows from financing activities:
Net increase (decrease) in demand deposit,
savings, NOW, and money market accounts 67,521 55,149 (7,317)
Net (decrease) increase in certificates of deposit (12,904) 17,579 10,766
Net (decrease) increase in borrowed funds (4,500) 30,500 (10,500)
Payments for cash dividends (535) (478) (502)
Purchase of common stock - (564) (2,151)
Capital securities - - 7,500
Proceeds from exercise of stock options 90 6 -
-- - --
Net cash provided by (used in) financing activities 49,672 102,192 (2,204)
------ ------- -----
Net (decrease) increase in cash and cash equivalents (4,836) 14,418 (11,597)
Cash and cash equivalents at beginning of year 30,626 16,208 27,805
------ ------ ------
Cash and cash equivalents at end of year $ 25,790 $ 30,626 $ 16,208
------ ------ ------
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 9,826 $ 11,033 $ 10,794
----- ------ ------
Income taxes $ 2,310 $ 1,014 $ 1,403
----- ----- -----
See accompanying notes to consolidated financial statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(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, Nassau and Kings 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.
38
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.
39
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, net of taxes, as of the balance sheet dates.
l. 401(k) Plan
The Company has 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 2002, 2001 and 2000, the Company's matching contribution was $182,806,
$125,972 and $110,902, respectively.
m. Stock Based Compensation
The Company applies the intrinsic-value based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations including FASB Interpretation No. 44,
Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25, issued in March 2000, to account for its
fixed-plan stock options. Under this method, compensation expense is recorded on
the date of grant only if the current market price of the stock exceeded the
exercise price. SFAS No. 123, Accounting for Stock Based Compensation,
established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and has adopted only
the disclosure requirements of SFAS No. 123. The following table illustrates the
effect on net income if the fair-value-based method had been applied to all
stock options granted in each period.
December 31,
--------------------------------------------
(Dollars in thousands, except per share data) 2002 2001 2000
--------------------------------------------
Net income. as reported $ 2,837 $ 1,962 $ 1,754
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all rewards, net of tax 71 56 35
-- -- --
Pro forma net income 2,766 1,906 1,719
----- ----- -----
Earnings per share:
Basic As Reported 1.96 1.35 1.10
Pro forma 1.91 1.31 1.08
Diluted As Reported 1.90 1.33 1.10
Pro forma $ 1.85 $ 1.29 $ 1.08
The fair value of the options granted was estimated on the date of grant using
the Black-Scholes option-pricing model using the following assumptions in fiscal
2002, 2001 and 2000; dividend yield of 1.82%, 2.11% and 2.71%; expected
volatility of 48.02%, 45.91% and 45.55%; and risk-free interest rates of 4.36%,
5.24% and 6.62%, respectively. The expected option lives were 5 years for 2002
and 7 years for 2001 and 2000.
n. 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.
o. Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
40
(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, 2002
and 2001 are as follows:
December 31, 2002
Gross Gross
Amortized unrealized unrealized Fair
(In thousands) cost gains losses value
-------------------------------------------------------------------------------------------
Held-to-maturity:
Corporate debt $ 12,461 1,566 - 14,027
------ ----- -- ------
Total held-to-maturity $ 12,461 1,566 - 14,027
------ ----- -- ------
Available-for-sale:
U.S. Government and
Agency obligations $ 129,345 1,081 (4) 130,422
Mortgage-backed securities:
GNMA 62,565 1,407 (1) 63,971
FHLMC 12,920 210 (8) 13,122
FNMA 9,879 136 - 10,015
Corporate debt 2,013 50 (3) 2,060
----- -- -- -----
Total securities available-for-sale $ 216,722 2,884 (16) 219,590
------- ----- -- -------
-------------------------------------------------------------------------------------------
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 securities available-for-sale $ 202,323 619 (975) 201,967
------- --- --- -------
-------------------------------------------------------------------------------------------
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,
2002, 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, 2002
Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair
(In thousands) cost value cost value
-----------------------------------------------------------------------------------------
Due in one year or less $ - - 32,502 32,508
Due after one year through five years - - 11,440 11,551
Due after five years through ten years 4,513 4,940 62,117 62,871
Due after ten years 7,948 9,087 110,663 112,660
----- ----- ------- -------
$ 12,461 14,027 216,722 219,590
------ ------ ------- -------
-----------------------------------------------------------------------------------------
41
Proceeds from the sale of securities available-for-sale totaled approximately
$1.4 million, $35.2 million, and $6.8 million during the years ended December
31, 2002, 2001 and 2000, respectively. Gains from the sale of these securities
totaled approximately $37,000 and $50,000 for the years ended December 31, 2002
and 2001, respectively. Losses from the sale of these securities totaled
approximately $64,000, and $154,000, for the years ended December 31, 2001, and
2000 respectively.
Securities classified as available-for-sale of approximately $48.9 million and
$62.1 million were pledged as collateral for FHLB advances at December 31, 2002
and 2001, respectively. In addition, $155.0 million and $137.5 million of
available-for-sale securities were pledged for deposits and other purposes as
required by law at December 31, 2002 and 2001, respectively.
(3) LOANS, NET
Loans, net are summarized as follows:
December 31,
(dollars in thousands) 2002 2001
---------------------------------------------------------------------------------------------
Commercial and
industrial loans $ 54,001 24.3% $ 43,972 24.2%
Commercial real estate loans 130,275 58.7 116,646 64.2
Automobile loans 34,188 15.4 18,300 10.1
Consumer loans 2,238 1.0 1,312 .7
Residential real estate
loans held-for-sale 1,189 .6 1,472 .8
------- -- ----- --
221,891 100.0% 181,702 100.0%
Less:
Unearned income 3,396 2,258
Deferred fees, net 764 647
Allowance for
loan losses 2,346 2,028
----- -----
$ 215,385 $ 176,769
------- -------
---------------------------------------------------------------------------------------------
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 24.3%
and 24.2% of the portfolio at December 31, 2002 and 2001, 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, 2002, 2001, and 2000, there were 2, 7 and 6 loans, respectively,
with a remaining balance of approximately $307,000, $178,000, and $416,000,
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, 2002, 2001, and 2000 is not material.
The Company's recorded investment in loans that are considered impaired total
$544,000, $444,000 and $680,000 at December 31, 2002, 2001 and 2000,
respectively. No corresponding impairment reserve is required. The average
recorded investment in impaired loans was $551,000, $467,000 and $746,500 in
2002, 2001 and 2000, 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, 2002, 2001, and 2000
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:
42
For the years ended December 31,
(In thousands) 2002 2001
------------------------------------------------------------------
Balance at beginning of year $ 4,824 $ 3,044
New loan and
additional disbursements 709 4,290
Repayments (1,431) (2,510)
----- -----
Balance at end of year $ 4,102 $ 4,824
----- -----
------------------------------------------------------------------
(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) 2002 2001 2000
------------------------------------------------------------------------------------
Balance at beginning of year $ 2,028 $ 1,872 $ 1,475
Provision for loan losses 270 150 150
Charge-offs:
Commercial and industrial loans 20 - (187)
Automobile loans - - (54)
Consumer loans (19) (19) (99)
-- -- --
Total charge-offs (39) (19) (340)
-- -- ---
Recoveries:
Commercial and industrial loans 75 13 547
Automobile loans - 6 13
Consumer loans 12 6 27
-- -- --
Total recoveries 87 25 587
-- -- ---
Net recoveries 48 6 247
-- -- ---
Balance at end of year $ 2,346 $ 2,028 $ 1,872
----- ----- -----
------------------------------------------------------------------------------------
(5) PREMISES AND EQUIPMENT
A summary of premises and equipment at cost, less accumulated depreciation and
amortization are as follows:
December 31
(In thousands) 2002 2001
-------------------------------------------------------------
Land $ 864 $ 437
Leasehold improvements 1,064 1,028
Buildings 341 -
Furniture, fixtures
and equipment 4,907 4,209
----- -----
7,176 5,674
Less accumulated depreciation
and amortization (3,646) (2,745)
----- -----
$ 3,530 $ 2,929
----- -----
-------------------------------------------------------------
Depreciation and amortization charged to operations for the years ended December
31, 2002, 2001 and 2000 amounted to approximately $901,000, $736,000, and
$609,000, respectively.
43
(6) DEPOSITS
Included in NOW and money market deposits, at December 31, 2002 and 2001, were
approximately $80.5 million and $80.7 million, respectively, of seasonal
municipal deposits.
(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, 2002 and 2001.
There were no reverse-repurchase agreements in 2002. Reverse-repurchase
agreements averaged approximately $555,000, and $4.7 million, for the years
ended December 31, 2001 and 2000, respectively. There were no reverse repurchase
agreements outstanding at the end of any month during 2001. The maximum amount
outstanding at the end of any month was $29.9 million for the year ended
December 31, 2000.
There were no federal funds purchased at December 31, 2002. There were federal
funds purchased of $4.5 million at December 31, 2001. Federal funds purchased
averaged approximately $2.2 million, $695,000, and $5.7 million for the years
ended December 31, 2002, 2001 and 2000, respectively. The maximum amount
outstanding at the end of any month was $12.8 million, $4.5 million, and $16.7
million, respectively, for the years ended December 31, 2002, 2001 and 2000.
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, 2002, 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, 2002 and 2001, the Bank's primary
borrowings consisted of $55.0 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 securities, callable U.S. agency securities, and certain
qualifying commercial real estate loans. Convertible and medium term advances
outstanding at December 31, 2002 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 1/21/2003 1/21/2009
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
----------
44
(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.
The balance outstanding on the Capital Securities was $7.5 million at December
31, 2002. The costs associated with the Capital Securities issuance have been
capitalized and are being amortized using the interest method over a period of
ten 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) 2002 2001 2000
------------------------------------------------------------
Current
Federal $ 1,633 $ 755 $ 838
State 242 79 91
--- -- --
1,875 834 929
Deferred
Federal (343) 170 (44)
State (45) 19 (5)
-- -- --
(388) 189 (49)
--- --- --
Income tax expense $ 1,487 $ 1,023 $ 880
----- ----- ---
------------------------------------------------------------
The effective income tax rates for the years ended December 31, 2002, 2001 and
2000 were 34.4%, 34.3% and 33.4%, respectively. The reconciliation between the
statutory Federal income tax rate and the effective tax rate is as follows:
For the years ended December 31,
--------------------------------
2002 2001 2000
---------------------------------------------------------------------------
Tax on income at statutory rate 34.0% 34.0% 34.0%
Tax effects of:
State income tax, net of federal
income tax benefit 3.0 2.2 2.0
Bank owned life insurance (2.1) (3.4) (3.4)
Other, net (.5) 1.5 .8
-- --- --
Tax at effective rate 34.4% 34.3% 33.4%
---------------------------------------------------------------------------
At December 31, 2002, management believes it is more likely than not that 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.
45
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) 2002 2001
--------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 656 $ 433
Accrued expenses 191 84
Unrealized depreciation in
available-for-sale securities - 129
Other 170 124
--- ---
Gross deferred tax assets 1,017 770
----- ---
Deferred tax liabilities:
Unrealized appreciation in
available-for-sale securities (1,041) -
Other - (12)
----- --
Gross deferred tax liabilities (1,041) (12)
----- --
Net deferred tax (liability) asset $ (24) $ 758
-- ---
---------------------------------------------------------------------
(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 those 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, 2002,
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, 2002 and
2001, 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, 2002
Actual Regulatory Minimum
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------
Tier 1 Capital (to Average Adjusted Assets)
The Company $ 31,246 7.44 % $ 16,807 4.00 %
The Bank 25,669 6.11 16,791 4.00
Tier 1 Capital (to Risk Weighted Assets)
The Company 31,246 11.15 11,212 4.00
The Bank 25,669 9.17 11,201 4.00
Total Risk Based Capital (to Risk Weighted Assets)
The Company 33,592 11.98 22,424 8.00
The Bank 28,015 10.00 22,402 8.00
46
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
(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, 2002, 2001, and 2000 was approximately $762,000, $677,000, and
$559,000, respectively. Minimum annual rentals, exclusive of taxes and other
charges, under operating leases are summarized as follows:
Years ending December 31, Amount
- --------------------------------------------------------------------------------
(In thousands)
2003 $ 923
2004 911
2005 786
2006 529
2007 446
Thereafter 1,345
-----
Total $ 4,940
-----
- --------------------------------------------------------------------------------
(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:
47
December 31, 2002 December 31, 2001
Carrying Estimated Carrying Estimated
(In thousands) Value Fair Value Value Fair Value
- ----------------------------------------------------------------------------------------------------------
Cash and due from banks $ 20,443 20,443 $ 30,347 30,347
Interest earning deposits 47 47 279 279
Federal funds sold 5,300 5,300 - -
Securities held-to-maturity 12,461 14,027 12,457 12,937
Securities available-for-sale 219,590 219,590 204,825 204,825
Federal Home Loan Bank Stock, at cost 3,588 3,588 2,858 2,858
Loans, net of unearned income
and deferred fees 217,731 221,475 178,797 180,153
Accrued interest receivable 2,654 2,654 2,121 2,121
Bank owned life insurance 7,859 7,859 6,495 6,495
Deposits:
Demand, savings, NOW and
money market deposits 283,113 283,113 215,592 215,592
Time certificates and
other time deposits 117,421 119,062 130,325 128,954
Borrowings 55,000 56,455 59,500 60,722
- ----------------------------------------------------------------------------------------------------------
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.
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, 2002 and 2001 would be offered at
substantially the same rates and under substantially the same terms that would
be offered by the Company at December 31, 2000 and 2001 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 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.
48
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, 2002, 2001 and 2000:
(In thousands, except share and per share amounts)
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $2,837 $1,962 $1,754
Total weighted average common shares outstanding 1,444,791 1,452,889 1,596,377
Basic earnings per common share $ 1.96 $ 1.35 $ 1.10
==== ==== ====
Total weighted average common shares outstanding 1,444,791 1,452,889 1,596,377
Effect of dilutive securities: Options 50,849 25,133 1,239
------ ------ -----
Total average common and common equivalent shares 1,495,640 1,478,022 1,597,616
Diluted earnings per common share $ 1.90 $ 1.33 $ 1.10
==== ==== ====
(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, 2002 December 31, 2001
- -------------------------------------------------------------------------------------------------------
(in thousands) Fixed Variable Fixed Variable
- -------------------------------------------------------------------------------------------------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ - $ 13,695 $ - $ 7,813
Unused lines of credit - 22,091 - 18,834
Standby letters of credit 381 - 1,164 -
--- ------ ----- ---
$ 381 $ 35,786 $ 1,164 $ 26,647
--- ------ ----- ------
- -------------------------------------------------------------------------------------------------------
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.
As of December 31, 2002, the Company has issued guarantees, in the form of
standby letters of credit, aggregating $381,000. Standby letters of credit are
conditional commitments issued by the Company to guarantee the performance of a
customer to a third party. The guarantees are generally extended for a term of
one year, and are secured in a manner similar to existing extensions of credit.
For each guarantee issued, if the customer defaults on a payment, the company
would have to perform under the guarantee. No amount has been accrued for the
Company's obligation under its guaranty arrangements. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers.
49
At December 31, 2002, the Bank had no outstanding commitments to purchase
investment securities.
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, 2002, 2001 and 2000, these balances averaged $4.9 million, $3.4 million and
$7.1 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.
(15) STOCK OPTION & EMPLOYEE BENEFIT PLANS
The Long Island Financial Corp. 1998 Stock Option Plan (the Stock Option Plan)
currently authorizes the granting of options to purchase 330,000 shares of
common stock of the Company. All officers and other employees of the Company and
directors 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. At December 31, 2002, 152,700 options to purchase shares of
common stock are available for future grants. Option transactions for the years
ended December 31, 2002, 2001 and 2000 are as follows:
Number of Shares of
Non Weighted
Incentive Qualified Average
Stock Options to Exercise
Options Directors Price
- --------------------------------------------------------------------------------------------------------
Balance outstanding at December 31, 1999 39,750 73,500 $ 12.50
Granted 9,000 10,500 10.88
Forfeited 1,000 - 11.69
----- --- -----
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
Granted 15,500 9,800 16.95
Exercised - 6,300 12.43
--- ----- -----
Balance Outstanding at December 31, 2002 72,500 98,000 12.54
Options exercisable at December 31, 2002 49,950 80,360 $ 12.60
- --------------------------------------------------------------------------------------------------------
Life insurance benefits are provided to certain executive officers and Directors
of the Company. In connection with those benefits, the Company purchased, net,
an additional $1.1 million in bank owned life insurance in 2002, 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.
50
(16) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The earnings or losses of subsidiaries are recognized by the Company using the
equity method of accounting. Accordingly, undistributed earnings or losses of
the subsidiaries are recorded as increases or decreases in the Company's
investment in the subsidiaries. The following are the condensed financial
statements of the Company as of and for the years ended December 31, 2002 and
2001.
Condensed Balance Sheets
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands) December 31,
2002 2001
-----------------------------
Assets:
Cash and cash equivalents $ 5,262 $ 3,498
Investment in subsidiaries 27,540 25,124
Other assets 950 644
--- ---
Total assets 33,752 29,266
Liabilities and Stockholders' Equity:
Other liabilities 447 407
Junior subordinated debentures 7,732 7,732
Stockholders' equity 25,573 21,127
------ ------
Total liabilities and stockholders' equity $ 33,752 $ 29,266
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Condensed Statements of Earnings
(in thousands) For the years ended December 31,
2002 2001
-----------------------
Dividends received from subsidiaries $ 3,025 $ 24
Interest income 57 143
-- ---
Total income 3,082 167
Junior subordinated debt 849 830
Other operating expense 84 80
-- --
Total expense 933 910
Income (loss) before income tax benefit and equity in
undistributed earnings of subsidiaries 2,149 (743)
Income tax benefit 326 260
--- ---
Income (loss) before equity in undistributed earnings of the subsidiaries 2,475 (483)
Equity in undistributed earnings of subsidiaries 362 2,445
--- -----
Net income $ 2,837 $ 1,962
----- -----
- -------------------------------------------------------------------------------------------------------------------------------
51
Condensed Statements of Cash Flows
(in thousands) For the years ended December 31,
--------------------------------
2002 2001
--------------------------------
Cash flows from operating activities:
Net income $ 2,837 $ 1,962
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in the undistributed earnings of subsidiaries (362) (2,445)
Change in other assets and liabilities
Increase in other assets (306) (250)
Increase in other liabilities 40 15
-- --
Net cash provided by (used in) operating activities 2,209 (718)
Cash flows from investing activities:
Investment in subsidiaries - (200)
-- ---
Cash flows from financing activities:
Payments for cash dividends (535) (478)
Proceeds from exercise of stock options 90 6
Purchase of common stock - (564)
-- ---
Net cash used in financing activities (445) (1,036)
Net increase (decrease) in cash and cash equivalents 1,764 (1,954)
Cash and cash equivalents at beginning of year 3,498 5,452
----- -----
Cash and cash equivalents at the end of the year $ 5,262 $ 3,498
----- -----
- ---------------------------------------------------------------------------------------------------------------
52
Quarterly Financial Data (Unaudited)
The following is a summary of financial data by quarter end for the years ended
December 31, 2002 and 2001:
2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
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 $ 5,770 $ 5,906 $ 5,793 $ 5,858 $ 6,038 $ 5,907 $ 5,565 $ 5,435
Interest expense 2,319 2,309 2,279 2,171 3,145 3,039 2,638 2,411
----- ----- ----- ----- ----- ----- ----- -----
Net interest income 3,451 3,597 3,514 3,687 2,893 2,868 2,927 3,024
Provision for loan losses 90 60 60 60 - - 75 75
-- -- -- -- -- -- -- --
Net interest income
after provision for
loan losses 3,361 3,537 3,454 3,627 2,893 2,868 2,852 2,949
Other operating income 797 791 846 820 430 506 570 633
Other operating expenses 3,065 3,109 3,271 3,464 2,495 2,608 2,761 2,852
----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes 1,093 1,219 1,029 983 828 766 661 730
Income taxes 375 420 353 339 283 264 226 250
--- --- --- --- --- --- --- ---
Net income $ 718 $ 799 $ 676 $ 644 $ 545 $ 502 $ 435 $ 480
--- --- --- --- --- --- --- ---
Basic earnings per share $ .50 $ .55 $ .47 $ .45 $ .37 $ .35 $ .30 $ .33
-- -- -- -- -- -- -- --
Diluted earnings per share $ .49 $ .53 $ .45 $ .43 $ .37 $ .34 $ .29 $ .33
-- -- -- -- -- -- -- --
Basic weighted average
common shares
outstanding 1,440,405 1,446,226 1,446,226 1,446,226 1,478,537 1,453,986 1,439,676 1,439,926
Diluted weighted average
common shares
outstanding 1,472,264 1,497,044 1,503,461 1,507,172 1,492,107 1,468,786 1,480,125 1,470,975
- ------------------------------------------------------------------------------------------------------------------------------
53
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, 2002 and 2001, 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,
2002. 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, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
New York, New York
January 31, 2003
54
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 2002 and 2001.
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
2002
1st Quarter $ 18.30 $ 16.00 $ 0.09
2nd Quarter $ 22.49 $ 18.35 $ 0.09
3rd Quarter $ 23.42 $ 20.00 $ 0.09
4th Quarter $ 23.50 $ 20.90 $ 0.10
At December 31, 2002, there were approximately 327 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 1,446,226 shares of common
stock outstanding at December 31, 2002.
55
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, 333-83758 and 333-89870) on Form S-8 of Long Island Financial Corp.
of our report dated January 31, 2003,relating to the consolidated balance sheets
of Long Island Financial Corp. and subsidiaries as of December 31, 2002 and
2001, 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, 2002, which report is incorporated by reference in the
December 31, 2002 Annual Report on Form 10-K of Long Island Financial Corp.
/s/ KPMG LLP
New York, New York
March 26, 2003
56
Exhibit 99.1 Certification of Chief Executive Officer pursuant to Section 906
of Sarbanes- Oxley Act of 2002
In connection with the Annual Report of Long Island Financial Corp., (the
Company) on Form 10-K for the period ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the Report), I, Douglas
C. Manditch, President & Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15 (d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Douglas C. Manditch
-----------------------------------
President & Chief Executive Officer
March 26, 2003
A signed original of this written statement required by Section 906 has been
provided to Long Island Financial Corp. and will be retained by Long Island
Financial Corp.and furnished to the securities and Exchange Commission or its
staff upon request.
Exhibit 99.2 Certification of Chief Financial Officer pursuant to Section 906
of Sarbanes- Oxley Act of 2002
In connection with the Annual Report of Long Island Financial Corp., (the
Company) on Form 10-K for the period ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the Report), I, Thomas
Buonaiuto, Vice President & Treasurer of the Company, certify, pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15 (d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Thomas Buonaiuto
--------------------------
Vice President & Treasurer
March 26, 2003
A signed original of this written statement required by Section 906 has been
provided to Long Island Financial Corp. and will be retained by Long Island
Financial Corp.and furnished to the securities and Exchange Commission or its
staff upon request.
57