UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) Quarterly Report Pursuant to Section 13 or 15(d) of
[X] the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ______ to _______
Commission File No.: 0-29826
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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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Exchange Act): Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock par value $.01, per share. The registrant had 1,482,691 shares of
Common Stock outstanding as of August 11, 2003.
Form 10-Q
LONG ISLAND FINANCIAL CORP.
INDEX
Page
PART I - FINANCIAL INFORMATION Number
- ------------------------------ ------
ITEM 1. Consolidated Financial Statements - Unaudited
Consolidated Balance Sheets at June 30, 2003
and December 31, 2002 2
Consolidated Statements of Earnings for the Three Months and
Six Months Ended June 30, 2003 and 2002 3
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 2003 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 19
ITEM 4. Controls and Procedures 20
PART II - OTHER INFORMATION
- ------- -------------------
ITEM 1. Legal Proceedings 20
ITEM 2. Changes in Securities and Use of Proceeds 20
ITEM 3. Defaults Upon Senior Securities 20
ITEM 4. Submission of Matters to a Vote of Security Holders 20
ITEM 5. Other Information 21
ITEM 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
1
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements
- ------- ---------------------------------
LONG ISLAND FINANCIAL CORP.
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)
June 30, December 31,
2003 2002
---- ----
Assets:
Cash and due from banks $ 17,790 $ 20,443
Interest earning deposits 1,299 47
Federal funds sold 51,000 5,300
------ -----
Total cash and cash equivalents 70,089 25,790
Securities held-to-maturity (fair value of $14,908 and $14,027, respectively) 12,467 12,461
Securities available-for-sale, at fair value 183,707 219,590
Federal Home Loan Bank stock, at cost 3,250 3,588
Loans, net of unearned income and deferred fees 217,383 217,731
Less allowance for loan losses (2,416) (2,346)
------ ------
Loans, net 214,967 215,385
Premises and equipment, net 4,411 3,530
Accrued interest receivable 2,416 2,654
Bank owned life insurance 8,025 7,859
Prepaid expenses and other assets 1,231 1,094
----- -----
Total assets $ 500,563 $ 491,951
========= =========
Liabilities and Stockholders' Equity:
Deposits:
Demand deposits $ 88,882 $ 78,697
Savings deposits 93,060 73,780
NOW and money market deposits 108,960 130,636
Time certificates issued in excess of $100,000 15,156 20,516
Other time deposits 92,241 96,905
------ ------
Total deposits 398,299 400,534
Other borrowings 65,000 55,000
Accrued expenses and other liabilities 3,108 3,344
----- -----
Total liabilities 466,407 458,878
------- -------
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;
1,812,347 and 1,783,126 shares issued; 1,475,447 and
1,446,226 shares outstanding, respectively) 18 18
Surplus 20,751 20,281
Accumulated surplus 8,912 7,625
Accumulated other comprehensive income 1,153 1,827
Treasury stock at cost, (336,900 shares in 2003 and 2002) (4,178) (4,178)
------ ------
Total stockholders' equity 26,656 25,573
------ ------
Total liabilities and stockholders' equity $ 500,563 $ 491,951
========= =========
See accompanying notes to consolidated financial statements.
2
LONG ISLAND FINANCIAL CORP.
Consolidated Statements of Earnings
(Unaudited)
(In thousands, except share data)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
Interest income:
Loans $ 3,800 $ 3,610 $ 7,593 $ 7,022
Securities 2,094 2,267 4,387 4,596
Federal funds sold 37 27 48 54
Earning deposits 1 2 2 4
- - - -
Total interest income 5,932 5,906 12,030 11,676
----- ----- ------ ------
Interest expense:
Savings deposits 299 248 577 401
NOW and money market deposits 212 221 473 413
Time certificates issued in excess of $100,000 86 191 162 418
Other time deposits 838 980 1,732 2,062
Borrowed funds 720 669 1,398 1,334
--- --- ----- -----
Total interest expense 2,155 2,309 4,342 4,628
----- ----- ----- -----
Net interest income 3,777 3,597 7,688 7,048
----- ----- ----- -----
Provision for loan losses - 60 60 150
-- -- -- ---
Net interest income after provision
for loan losses 3,777 3,537 7,628 6,898
----- ----- ----- -----
Other operating income:
Service charges on deposit accounts 518 423 980 842
Net gain on sale of securities 153 - 242 -
Net gain on sale of residential loans 170 173 327 336
Earnings on bank owned life insurance 102 96 204 192
Other 120 99 258 218
--- -- --- ---
Total other operating income 1,063 791 2,011 1,588
----- --- ----- -----
Other operating expenses:
Salaries and employee benefits 1,846 1,513 3,615 2,962
Occupancy expense 235 215 491 429
Premises and equipment expense 326 292 647 582
Capital securities 205 206 411 405
Other 1,012 883 2,015 1,796
----- --- ----- -----
Total other operating expenses 3,624 3,109 7,179 6,174
----- ----- ----- -----
Income before income taxes 1,216 1,219 2,460 2,312
Income taxes 434 420 880 795
--- --- --- ---
Net income $ 782 $ 799 $ 1,580 $ 1,517
======= ======== ========= ========
Basic earnings per share $ .53 $ .55 $ 1.08 $ 1.05
======= ======== ========= ========
Diluted earnings per share $ .51 $ .53 $ 1.03 $ 1.02
======= ======== ========= ========
Weighted average shares outstanding 1,471,263 1,446,226 1,460,457 1,443,332
========= ========= ========= =========
Diluted weighted average shares outstanding 1,547,694 1,497,044 1,530,485 1,486,930
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
3
LONG ISLAND FINANCIAL CORP.
Consolidated Statement of Changes in Stockholders' Equity
For the Six Months Ended June 30, 2003
(Unaudited)
(In thousands, except share data)
Accumulated
other
Common Accumulated comprehensive Treasury
stock Surplus surplus income stock Total
----- ------- ------- ------ ----- -----
Balance at December 31, 2002 $ 18 20,281 7,625 1,827 (4,178) 25,573
Comprehensive income:
Net income - - 1,580 - - 1,580
Other comprehensive income,
net of tax:
Unrealized depreciation in
available-for-sale securities,
net of reclassification adjustment - - - (674) (674)
----
Total comprehensive income 906
Exercise of stock options and related
tax benefit, issued 27,003 shares - 409 - - - 409
Dividend reinvestment and stock purchase
plan, issued 2,218 shares - 61 - - - 61
Dividends declared on common stock
($.20 per common share) - - (293) - - (293)
-------------------------------------------------------------------------
Balance at June 30, 2003 $ 18 20,751 8,912 1,153 (4,178) 26,656
=========================================================================
See accompanying notes to consolidated financial statements.
4
LONG ISLAND FINANCIAL CORP.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
For the Six Months
Ended June 30,
--------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 1,580 $ 1,517
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 60 150
Depreciation and amortization 471 450
Amortization of premiums, net of discount accretion 1,086 582
Net gain on sale of securities (242) -
Loans originated for sale, net of proceeds
from sales and gains 573 (209)
Net deferred loan origination fees 52 56
Earnings on bank owned life insurance (204) (192)
Deferred income taxes - (66)
Change in other assets and liabilities:
Accrued interest receivable 238 (90)
Prepaid expenses and other assets 145 138
Accrued expenses and other liabilities (95) (629)
--- ----
Net cash provided by operating activities 3,664 1,707
----- -----
Cash flows from investing activities:
Purchases of securities held-to-maturity, available-for-sale (487,495) (623,248)
Net redemption (purchase) of Federal Home Loan Bank stock 338 (727)
Proceeds from the sale of securities available-for-sale 17,958 -
Proceeds from maturities of securities 482,904 651,018
Principal repayments on securities 20,607 22,226
Loan originations net of principal repayments (267) (14,004)
Purchase of premises and equipment (1,352) (556)
------ ----
Net cash provided by investing activities 32,693 34,709
------ ------
Cash flows from financing activities:
Net increase (decrease) in demand deposit, savings, NOW,
and money market accounts 7,789 (9,405)
Net decrease in certificates of deposit (10,024) (8,684)
Net decrease in federal funds purchased and securities sold
under agreements to repurchase - (4,500)
Net increase in other borrowings 10,000 -
Proceeds from exercise of stock options 409 90
Proceeds from shares issued under the dividend reinvestment
and stock purchase plan 61 -
Payments for cash dividends (293) (260)
---- ----
Net cash provided by (used in) financing activities 7,942 (22,759)
----- -------
Net increase in cash and cash equivalents 44,299 13,657
Cash and cash equivalents at beginning of period 25,790 30,626
------ ------
Cash and cash equivalents at end of period $ 70,089 $ 44,283
=========== ===========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 4,431 $ 5,231
=========== ===========
Income taxes $ 991 $ 987
=========== ===========
See accompanying notes to consolidated financial statements.
5
LONG ISLAND FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Private Securities Litigation Reform Act Safe Harbor Statement
Statements contained in this Form 10-Q which are not historical facts are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Amounts stated herein could vary as a result of
market and other factors. Such forward-looking statements are subject to risks
and uncertainties which could cause actual results to differ materially from
those currently anticipated due to a number of factors, which include, but are
not limited to, factors discussed in documents filed by Long Island Financial
Corp. (the "Company") with the Securities and Exchange Commission from time to
time. Such forward-looking statements may be identified by the use of such words
as "believe," "expect," "anticipate," "should," "planned," "estimated," "intend"
and "potential". Examples of forward looking statements include, but are not
limited to, estimates with respect to the financial condition, expected or
anticipated revenue, results of operations and business of the Company that are
subject to various factors which could cause actual results to differ materially
from these estimates. The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse effect on the operations of the Company include,
but are not limited to, changes in: interest rates; general economic conditions;
monetary and fiscal policies of the U. S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board; the quality or composition of the
loan or investment portfolios; demand for loan and non-deposit products; deposit
flows; real estate values; the level of defaults, losses and prepayments on
loans held by the Company in its portfolio or sold in the secondary markets;
demand for financial services in the Company's market area; competition;
accounting principles, policies, practices or guidelines; legislation or
regulation; and other economic, competitive, governmental, regulatory, and
technological factors affecting the Company's operations, pricing, products and
services. The forward-looking statements are made as of the date of this Form
10-Q, and, except as required by applicable law, the Company assumes no
obligation to update the forward-looking statements or to update the reasons why
actual results could differ from those projected in the forward-looking
statements. These risks and uncertainties should be considered in evaluating
forward-looking statements, which speak only as of the date of this Form 10-Q,
and undue reliance should not be placed on such statements.
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Long Island Financial Corp. and its wholly-owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements included herein
reflect all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. The results of operations for the six month period ended June
30, 2003 are not necessarily indicative of the results of operations that may be
expected for the entire fiscal year. Certain information and note disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain reclassifications have been made to prior year
amounts to conform to the current year presentation. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements, and notes thereto, included in the Company's
2002 Annual Report on Form 10-K.
6
The Company makes available through its Internet website, www.licb.com, its
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8K, and all amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Such reports are
free of charge and are available as soon as reasonably practicable after the
Company electronically files such material with, or furnishes it to, the
Securities and Exchange Commission.
2. SECURITIES
The following table sets forth certain information regarding amortized cost and
estimated fair values of the securities held-to-maturity and available-for-sale
as of the dates indicated:
June 30, 2003 December 31, 2002
------------- -----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(In thousands)
Held-to-maturity:
Corporate debt $ 12,467 14,908 $ 12,461 14,027
------ ------ ------ ------
Total held-to-maturity $ 12,467 14,908 $ 12,461 14,027
========== ====== ========== ======
Available-for-sale:
U.S. Government and Agency obligations $ 111,631 112,356 $ 129,345 130,422
Mortgage-backed securities:
GNMA 51,671 52,429 62,565 63,971
FHLMC 7,978 8,062 12,920 13,122
FNMA 8,605 8,782 9,879 10,015
Corporate debt 2,012 2,078 2,013 2,060
----- ----- ----- -----
Total securities available-for-sale $ 181,897 183,707 $ 216,722 219,590
========== ======= ========== =======
3. LOANS, NET
Loans, net, are summarized as follows:
June 30, 2003 December 31, 2002
------------- -----------------
(Dollars in thousands)
Commercial and industrial loans $ 45,099 20.4 % $ 54,001 24.3 %
Commercial real estate loans 135,952 61.3 130,275 58.7
Automobile loans 37,577 17.0 34,188 15.4
Consumer loans 2,258 1.0 2,238 1.0
Residential real estate loans held-for-sale 616 .3 1,189 .6
--- -- ----- --
221,502 100.0 221,891 100.0
Less:
Unearned income 3,303 3,396
Deferred fees, net 816 764
Allowance for loan losses 2,416 2,346
----- -----
$ 214,967 $ 215,385
=========== ===========
4. STOCK BASED COMPENSATION
The Company applies the intrinsic-value based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations including Financial Accounting Standards
Board (FASB) Interpretation No. 44, Accounting for Certain Transactions
involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in
March 2000, to account for its fixed-plan stock options. Under this method,
compensation expense is recorded on the date of grant only if the current market
price of the stock exceeded the exercise price. Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock Based Compensation,
established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and has adopted only
the disclosure requirements of SFAS No. 123.
7
The following table illustrates the effect on net income if the fair-value-based
method had been applied to all stock options granted or vested in each period.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
(Dollars in thousands, except per share data)
Net income as reported $ 782 $ 789 $ 1,580 $ 1,517
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all awards, net of tax 53 33 188 91
-- -- --- --
Pro forma net income $ 729 $ 756 $ 1,392 $ 1,426
====== ===== ======== =======
Earnings per share:
Basic As Reported $ .53 $ .55 $ 1.08 $ 1.05
Pro forma .50 .52 .95 .99
Diluted As Reported .51 .53 1.03 1.02
Pro forma .47 .50 .91 .96
5. RECENT DEVELOPMENTS
On May 21, 2003, the Board of Directors of the Company declared a quarterly
dividend of ten cents ($0.10) per common share. The dividend was paid on July 1,
2003, to shareholders of record as of June 20, 2003.
6. OTHER COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Bank enters into commitments to purchase
investment securities. At June 30, 2003, the Bank had outstanding commitments of
$5 million to purchase investment securities.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In May, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." Under previous
guidance, issuers could account for certain financial instruments as equity.
SFAS No. 150 addresses the accounting for those instruments and requires that
those instruments be classified as liabilities in the consolidated balance
sheets. SFAS No. 150 is effective for all such financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. The impact on the
Company's consolidated balance sheets upon adoption of SFAS No. 150 will be the
reclassification of the guaranteed preferred beneficial interest in junior
subordinated debentures from in between total liabilities and stockholders'
equity to borrowed funds. The impact on the Company's consolidated statements of
earnings upon adoption of SFAS No. 150 will be to change the classification of
the interest expense related to the guaranteed preferred beneficial interest in
junior subordinated debentures from non-interest expense to interest expense on
borrowed funds.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments (collectively referred to as
derivatives), including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 149 is effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003, and is to be applied prospectively. The provisions of SFAS
No. 149 that relate to Statement 133 Implementation Issues that have been
effective for fiscal quarters that began prior to June 15, 2003, will continue
to be applied in accordance with their respective effective dates. In addition,
certain provisions relating to forward purchases or sales of when-issued
securities or other securities that do not yet exist, will be applied to
existing contracts as well as new contracts entered into after June 30, 2003.
The adoption of SFAS No. 149 did not have an impact on the Company's
consolidated balance sheets or consolidated statements of earnings.
8
In January 2003, FASB issued FASB Interpretation ("FIN") No.46, "Consolidation
of Variable Interest Entities." FIN 46 requires a company to consolidate a
variable interest entity ("VIE") if the company has variable interests that give
it a majority of the expected losses or a majority of the expected residual
returns of the entity. FIN 46 is effective immediately for VIEs created after
January 31, 2003. For VIEs created prior to February 1, 2003, FIN 46 will apply
in the first interim period or fiscal year beginning after June 15, 2003. The
implementation of FIN 46 has not had an impact on the Company's consolidated
balance sheets or consolidated statements of earnings.
In November 2002, FASB issued FIN 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 FIN 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
provisions of the Interpretation are effective for financial statements in
interim or annual reports for periods 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 did not have a material impact on the Company's consolidated
balance sheet or consolidated statement of earnings.
Item 2. Management's Discussion and Analysis
- ------- ------------------------------------
of Financial Condition and Results of Operations
------------------------------------------------
General
The principal business of Long Island Financial Corp. consists of the operation
of a wholly-owned subsidiary, Long Island Commercial Bank. Long Island
Commercial Bank is a New York state-chartered commercial bank, founded in 1989,
which is engaged in commercial banking in Islandia, New York, and the
surrounding communities of 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.
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 those estimates would
have a direct impact on the provision for loan losses and could result in a
change in the allowance. While management uses available information to
determine losses on loans, future additions to the allowance may be necessary
based on, among other things, unanticipated changes in economic conditions,
particularly in the counties of Suffolk and Nassau.
9
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 June 30, 2003 is adequate to provide for estimated probable losses
inherent in the portfolio.
Financial Condition
The Company's total assets were $500.6 million as of June 30, 2003, compared to
$492.0 million at December 31, 2002. The increase in total assets was primarily
reflected in the increase in federal funds sold of $45.7 million from $5.3
million at December 31, 2002, to $51.0 million at June 30, 2003, relating to the
overnight investment of seasonal municipal balances on deposit at June 30, 2003.
Offsetting the increase in cash and cash equivalents was a decline in the
securities available-for-sale portfolio, which decreased $35.9 million, or
16.3%, as the proceeds of maturing short-term U.S. Government and agency
obligations purchased in December 2002 were used to pay a portion of maturing
seasonal municipal deposits. In addition, loans, net of unearned income and
deferred fees, decreased $348,000, from $217.7 million at December 31, 2002, to
$217.4 million at June 30, 2003, reflecting a decrease primarily in commercial
and industrial loans.
Total deposits decreased $2.2 million, or .6%, from $400.5 million at December
31, 2002 to $398.3 million at June 30, 2003, primarily reflecting a decrease in
NOW and money market deposits. The decrease in NOW and money market deposits of
$21.6 million, or 16.6%, from $130.6 million at December 31, 2002 to $109.0
million at June 30, 2003, is attributable to the withdrawal of a portion of
seasonal municipal deposits. Time certificates in excess of $100,000 decreased
$5.3 million, or 26.1%, from $20.5 million at December 31, 2002 to $15.2 million
at June 30, 2003. The effects of those declines were offset in part by a $19.3
million, or 26.1%, increase in savings deposits and a $10.2 million, or 12.9%,
increase in demand deposits. There were no federal funds purchased or securities
sold under agreements to repurchase at June 30, 2003. Other borrowings, which
consist of Federal Home Loan Bank of New York advances, increased $10.0 million,
or 18.2%, to $65.0 million at June 30, 2003.
Stockholders' equity increased $1.1 million, or 4.2%, to $26.7 million at June
30, 2003 compared to $25.6 million at December 31, 2002. The increase to
stockholders equity included $1.6 million of net income for the six months ended
June 30, 2003. Offsetting that increase in part were dividends declared of
$293,000.
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 the volume of interest-earning assets and interest-bearing liabilities and
the interest rates earned or paid on them.
The following tables set forth certain information relating to the Company's
consolidated average balance sheets and its consolidated statements of earnings
for the three and six months ended June 30, 2003 and 2002, and reflect the
average yield on interest-earning assets and average cost of interest-bearing
liabilities for the periods indicated. Yields and costs are derived by dividing
annualized income or expense by the average balance of interest-earning assets
or interest-bearing liabilities, respectively. Average balances are derived from
average daily balances. Average loan balances include non-accrual loans although
they are not material.
10
Three Months Ended June 30,
---------------------------
-----------2003----------- -----------2002-----------
Average Average
Average Yield / Average Yield /
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
Interest-earning assets: (Dollars in thousands)
Federal funds sold and
interest-earning deposits $ 13,820 $ 38 1.10 % $ 6,843 $ 29 1.70 %
Securities, net (1) 208,676 2,094 4.01 183,725 2,267 4.94
Loans, net (2) 215,375 3,800 7.06 189,990 3,610 7.60
-- ------- ----- ---- ------- ----- ----
Total interest-earning assets 437,871 5,932 5.42 380,558 5,906 6.21
Non-interest-earning assets 39,007 32,080
------ ------
Total assets $ 476,878 $ 412,638
============ ===========
Interest-bearing liabilities:
Savings deposits $ 88,159 299 1.36 $ 60,169 248 1.65
NOW and money market deposits 89,544 212 .95 72,460 221 1.22
Certificates of deposit 106,366 924 3.47 123,300 1,171 3.80
------- --- ---- ------- ----- ----
Total interest-bearing deposits 284,069 1,435 2.02 255,929 1,640 2.56
Borrowed funds 69,884 720 4.12 57,349 669 4.67
------ --- ---- ------ --- ----
Total interest-bearing liabilities 353,953 2,155 2.44 313,278 2,309 2.95
Other non-interest bearing liabilities 96,724 76,739
------ ------
Total liabilities 450,677 390,017
Stockholders' equity 26,201 22,621
------ ------
Total liabilities and
stockholders' equity $ 476,878 $ 412,638
============ ============
Net interest income/
interest rate spread (3) $ 3,777 2.98 % $ 3,597 3.26 %
== ========= ==== ========== ====
Net interest margin (4) 3.45 % 3.78 %
== ==== ====
Ratio of interest-earning assets to
interest-bearing liabilities 1.24x 1.21x
==== ====
(1) 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.
(3) Interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
11
Six Months Ended June 30,
-------------------------
-----------2003----------- -----------2002-----------
Average Average
Average Yield / Average Yield /
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
Interest-earning assets: (Dollars in thousands)
Federal funds sold and
interest-earning deposits $ 9,081 $ 50 1.10 % $ 6,960 $ 58 1.67 %
Securities, net (1) 214,279 4,387 4.09 185,285 4,596 4.96
Loans, net (2) 215,192 7,593 7.06 185,591 7,022 7.57
-- ------- ----- ---- ------- ----- ----
Total interest-earning assets 438,552 12,030 5.49 377,836 11,676 6.18
Non-interest-earning assets 40,237 31,579
------ ------
Total assets $ 478,789 $ 409,415
============ ============
Interest-bearing liabilities:
Savings deposits $ 85,543 577 1.35 $ 53,230 401 1.51
NOW and money market deposits 98,411 473 .96 72,933 413 1.13
Certificates of deposit 108,629 1,894 3.49 127,666 2,480 3.89
------- ----- ---- ------- ----- ----
Total interest-bearing deposits 292,583 2,944 2.01 253,829 3,294 2.60
Borrowed funds 66,528 1,398 4.20 57,650 1,334 4.63
------ ----- ---- ------ ----- ----
Total interest-bearing liabilities 359,111 4,342 2.42 311,479 4,628 2.97
Other non-interest bearing liabilities 93,754 75,621
------ ------
Total liabilities 452,865 387,100
Stockholders' equity 25,924 22,315
------ ------
Total liabilities and
stockholders' equity $ 478,789 $ 409,415
============ ===========
Net interest income/
interest rate spread (3) $ 7,688 3.07 % $ 7,048 3.21 %
== ========= ==== ========= ====
Net interest margin (4) 3.51 % 3.73 %
== ==== ====
Ratio of interest-earning assets to
interest-bearing liabilities 1.22x 1.21x
==== ====
(1) Unrealized appreciation / depreciation on available-for-sale securities are
recorded in non-interest earning assets.
(2) Amount excludes residential real estate loans held-for-sale and allowance
for loan losses, and includes deferred loan fees and non-performing loans.
(3) Interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
12
Comparison of Operating Results for the Three Months Ended June 30, 2003 and
2002
General
The Company reported net income of $782,000, or basic earnings per share of $.53
and diluted earnings per share of $.51 for the quarter ended June 30, 2003,
compared to $799,000, or basic earnings per share of $.55 and diluted earnings
per share of $.53, for the prior year period. The decrease in net income
occurred as increased operating expenses exceeded improvements in net interest
income after provision for loan losses and other operating income.
Interest Income
Interest income increased $26,000, or .4%, for the three months ended June 30,
2003, compared to the three months ended June 30, 2002. That increase was
attributable to the $57.3 million, or 15.1%, increase in the average balance of
interest-earning assets from $380.6 million for the three months ended June 30,
2002, to $437.9 million for the three months ended June 30, 2003. The increase
in the average balance of interest earning assets was offset in part by a 79
basis point decrease in the average yield on interest-earning assets from 6.21%
for the three months ended June 30, 2002, to 5.42% for the comparable 2003
period. The decrease in average yield on interest-earning assets was
attributable to a 93 basis point decrease in yield on securities, net, which
declined from 4.94% for the three months ended June 30, 2002, to 4.01% for the
three months ended June 30, 2003. The average yield on loans, net, decreased 54
basis points from 7.60% for the three months ended June 30, 2002, to 7.06% for
the comparable 2003 period. Partially offsetting the decline in yield from
period to period was a $25.0 million, or 13.6% increase in the average balance
of securities, net, from $183.7 million for three months ended June 30, 2002, to
$208.7 million for the three months ended June 30, 2003. The average balance of
loans, net, increased $25.4 million, or 13.4% from $190.0 million for the three
months ended June 30, 2002, to $215.4 million for the comparable 2003 period.
Interest Expense
Interest expense for the three months ended June 30, 2003 was $2.2 million,
compared to $2.3 million for the three months ended June 30, 2002, a decrease of
$154,000, or 6.7%. The decrease was attributable to a 51 basis point decrease in
the average cost of interest-bearing liabilities from 2.95% for the three months
ended June 30, 2002 to 2.44% for the three months ended June 30, 2003. The
decrease in average cost was partially offset by a $40.7 million, or 13.0%,
increase in the average balance of total interest-bearing liabilities from
$313.3 million for the three months ended June 30, 2002 to $354.0 million for
the three months ended June 30, 2003. The increase in average interest-bearing
liabilities, when compared to the prior year period, reflects increases of $28.1
million in the average balance of interest-bearing deposits and $12.6 million in
the average balance of borrowed funds.
Interest expense on interest-bearing deposits decreased $205,000, or 12.5%, for
the three months ended June 30, 2003, from $1.6 million for the corresponding
2002 period to $1.4 million for the current period. That decrease was primarily
due to a 54 basis point decrease in the average rate paid on interest-bearing
deposits from 2.56% for three months ended June 30, 2002 to 2.02% for the
corresponding period in 2003. Offsetting, in part, the decrease in the average
rate paid was an increase in the average balance of interest-bearing deposits of
$28.1 million for the three months ended June 30, 2003 from the corresponding
period in 2002. The increase in the average balance of interest-bearing deposits
was the result of increases in the average balance of savings deposits of $28.0
million, or 46.5%, and in the average balances of NOW and money market deposits
of $17.1 million, or 23.6% from period to period. 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.
13
Interest expense on borrowed funds increased $51,000, or 7.6%, from $669,000 for
the three months ended June 30, 2002, to $720,000 for the three months ended
June 30, 2003. The increase was primarily due to an increase in the average
balance of borrowed funds of $12.6 million, or 21.9%, from $57.3 million for the
three months ended June 30, 2002 to $69.9 million for the three months ended
June 30, 2003. Offsetting the increase in the average balance was a 55 basis
point decrease in the average cost of borrowed funds from 4.67% for the 2002
period, to 4.12% for the 2003 period.
Net Interest Income
Net interest income increased by $180,000, or 5.0%, from $3.6 million for the
three months ended June 30, 2002, to $3.8 million for the three months ended
June 30, 2003. The average cost of total interest-bearing liabilities for the
period decreased 51 basis points from 2.95% in the 2002 period to 2.44% in the
2003 period. The average yield on total interest-earning assets for the period
decreased 79 basis points from 6.21% in the 2002 period to 5.42% in the 2003
period. The net interest rate spread decreased 28 basis points, from 3.26% for
the three months ended June 30, 2002, to 2.98% for the three months ended June
30, 2003.
Provision for Loan Losses
The Company made no provision for loan losses for the three months ended June
30, 2003, compared to a $60,000 provision for loan losses made for the three
months ended June 30, 2002. The determination not to make a provision for loan
losses for the three months ended June 30, 2003 reflects management's
qualitative and quantitative assessment of the loan portfolio, net charge-offs
and collection of delinquent loans. The allowance for loan losses amounted to
$2.4 million and $2.3 million at June 30, 2003 and December 31, 2002,
respectively. The allowance for loan losses as a percentage of loans was 1.11%
and 1.08% at June 30, 2003 and December 31, 2002, respectively.
The following table sets forth information regarding non-accrual loans and loans
delinquent 90 days or more and still accruing interest at the dates indicated.
It is the Company's general policy to discontinue accruing interest on all
loans, which are past-due more than 90 days or when, in the opinion of
management, such suspension is warranted. When a loan is placed on non-accrual
status, the Company ceases the accrual of interest owed and previously accrued
interest is charged against interest income. Loans are generally returned to
accrual status when principal and interest payments are current, there is
reasonable assurance that the loan will be fully collectable and a consistent
record of performance has been demonstrated.
June 30, 2003 December 31, 2002
------------- -----------------
(Dollars in thousands)
Non-accrual loans:
Commercial and industrial loans $ 205 $ 307
Automobile loans 15 -
-- --
Total non-accrual and non-performing loans 220 307
--- ---
Allowance for loan losses as a percentage
of loans (1) 1.11 % 1.08 %
Allowance for loan losses as a percentage
of total non-performing loans 1,098.18 % 764.17 %
Non-performing loans as a percentage of loans (1) .10 % .14 %
(1) Loans include loans, net, excluding the allowance for loan losses.
14
Other Operating Income
Other operating income increased $272,000, or 34.4%, to $1.1 million for the
three months ended June 30, 2003. Service charges on deposit accounts increased
$95,000, or 22.5%, reflecting overall growth in the depositor base, and the
introduction of new electronic banking services. In addition, the Company
realized a gain on the sale of securities of $153,000 for the three months ended
June 30, 2003.
Other Operating Expenses
Other operating expenses increased $515,000, or 16.6%, from $3.1million for the
three months ended June 30, 2002, to $3.6 million for the three months ended
June 30, 2003. The increase over the prior period resulted primarily from
increases in salaries and employee benefits, premises and equipment expense, and
other expense attributable to the Bank's branch expansion.
Income Taxes
Income taxes increased $14,000, or 3.3%, from $420,000 for the three months
ended June 30, 2002, to $434,000 for the three months ended June 30, 2003, as a
result of an increase in income before income taxes. The effective tax rates for
the three months ended June 30, 2003 and those ended June 30, 2002 were 35.7%
and 34.5%, respectively.
Comparison of Operating Results for the Six Months Ended June 30, 2003 and 2002
General
The Company reported net income of $1.6 million, or basic earnings per share of
$1.08 and diluted earnings per share of $1.03 for the six months ended June 30,
2003, compared to $1.5 million, or basic earnings per share of $1.05 and diluted
earnings per share of $1.02, for the prior year period. The increase in net
income was attributable primarily to a $730,000, or 10.6% increase in net
interest income after provision for loan losses and an increase in other
operating income of $423,000, or 26.6%. Offsetting those increases, in part, was
a $1.0 million, or 16.3% increase in other operating expenses.
Interest Income
Interest income increased $354,000, or 3.0%, for the six months ended June 30,
2003, compared to the six months ended June 30, 2002. This increase was
attributable to the increase in the average balance of interest-earning assets
of $60.8 million, or 16.1%, from $377.8 million for the six months ended June
30, 2002, to $438.6 million for the six months ended June 30, 2003. The increase
in the average balance of interest earning assets was offset in part by a 69
basis point decrease in the average yield on interest-earning assets from 6.18%
for the six months ended June 30, 2002, to 5.49% for the comparable 2003 period.
The decrease in average yield on interest-earning assets was attributable to an
87 basis point decrease in yield on securities, net, which declined from 4.96%
for the six months ended June 30, 2002, to 4.09% for the six months ended June
30, 2003. The average yield on loans, net, decreased 51 basis points from 7.57%
for the six months ended June 30, 2002, to 7.06% for the comparable 2003 period.
Partially offsetting the decline in yield from period to period was a $29.0
million, or 15.6% increase in the average balance of securities, net, from
$185.3 million for six months ended June 30, 2002, to $214.3 million for the six
months ended June 30, 2003. The average balance of loans, net, increased $29.6
million, or 15.9% from $185.6 million for the six months ended June 30, 2002, to
$215.2 million for the comparable 2003 period.
15
Interest Expense
Interest expense for the six months ended June 30, 2003 was $4.3 million,
compared to $4.6 million for the six months ended June 30, 2002, a decrease of
$286,000, or 6.2%. The decrease was attributable to a 55 basis point decrease in
the average cost of interest-bearing liabilities from 2.97% for the six months
ended June 30, 2002 to 2.42% for the six months ended June 30, 2003. The
decrease in average cost was partially offset by a $47.6 million, or 15.3%,
increase in the average balance of total interest-bearing liabilities from
$311.5 million for the six months ended June 30, 2002 to $359.1 million for the
six months ended June 30, 2003. The increase in average interest-bearing
liabilities reflects increases of $38.8 million in the average balance of
interest-bearing deposits and $8.8 million in the average balance of borrowed
funds when compared to the prior year period.
Interest expense on interest-bearing deposits for the six months ended June 30,
2003 decreased $350,000, or 10.6%, to $2.9 million from $3.3 million for the
corresponding 2002 period. This decrease was primarily due to a 59 basis point
decrease in the average rate paid on interest-bearing deposits from 2.60% for
six months ended June 30, 2002 to 2.01% for the corresponding period in 2003.
Offsetting the decrease in the average rate paid was an increase in the average
balance of interest-bearing deposits of $38.8 million for the six months ended
June 30, 2003 from the corresponding period in 2002. The increase in the average
balance of interest-bearing deposits was the result of increases in the average
balance of savings deposits of $32.3 million, or 60.7%, and in the average
balances of NOW and money market deposits of $25.5 million, or 34.9% from period
to period.
Interest expense on borrowed funds increased $64,000, or 4.8%, from $1.3 million
for the six months ended June 30, 2002, to $1.4 million for the six months ended
June 30, 2003. The increase was primarily due to an increase in the average
balance of borrowed funds of $8.8 million, or 15.4%, from $57.7 million for the
six months ended June 30, 2002 to $66.5 million for the six months ended June
30, 2003. Offsetting the increase in the average balance was a 43 basis point
decrease in the average cost of borrowed funds from 4.63% for the 2002 period,
to 4.20% for the 2003 period.
Net Interest Income
Net interest income increased by $640,000, or 9.1%, from $7.0 million for the
six months ended June 30, 2002, to $7.7 million for the six months ended June
30, 2003. The average cost of total interest-bearing liabilities for the period
decreased 55 basis points from 2.97% in the 2002 period to 2.42% in the 2003
period. The average yield on total interest-earning assets for the period
decreased 69 basis points from 6.18% in the 2002 period to 5.49% in the 2003
period. The net interest rate spread decreased 14 basis points, from 3.21% for
the six months ended June 30, 2002, to 3.07% for the six months ended June 30,
2003.
Provision for Loan Losses
The Company made a $60,000 provision for loan losses for the six months ended
June 30, 2003, compared to a $150,000 provision for loan losses for the six
months ended June 30, 2002. The provision for loan losses is based on 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.
Other Operating Income
Other operating income increased $423,000, or 26.6%, to $2.0 million for the six
months ended June 30, 2003. The Company realized gains on the sale of securities
of $242,000 for the six months ended June 30, 2003. In addition, service charges
on deposit accounts increased $138,000, or 16.4%, reflecting overall growth in
the depositor base, and the introduction of new electronic banking services.
16
Other Operating Expenses
Other operating expenses increased $1.0 million, or 16.3%, from $6.2 million for
the six months ended June 30, 2002, to $7.2 million for the six months ended
June 30, 2003. The increase resulted primarily from increases in salaries and
employee benefits, premises and equipment expense, and other expense for the six
months ended June 30, 2003 attributable to the Bank's branch expansion.
Income Taxes
Income taxes increased $85,000, or 10.7%, from $795,000 for the six months ended
June 30, 2002, to $880,000 for the six months ended June 30, 2003, as a result
of the increase in income before income taxes. The effective tax rates for the
six months ended June 30, 2003 and those ended June 30, 2002 were 35.8% and
34.4%, respectively.
Liquidity
Liquidity management for the Company requires that funds be available to pay all
deposit withdrawal and maturing financial obligations and meet credit funding
requirements promptly and fully in accordance with their terms. For most banks,
including the Bank, maturing assets provide only a limited portion of the funds
required to pay maturing liabilities over a short time frame. The balance of the
funds required is provided by liquid assets and the acquisition of additional
liabilities, making liability management integral to liquidity management in the
short term.
The Company'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%. Average balances are derived from average daily
balances. During the six months ended June 30, 2003, the Company's average
minimum liquidity level was 23.0%.
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 investment securities. When
cash requirements increase faster than cash is generated, either through
increased loan demand or withdrawal of deposited funds, the Company can arrange
for the sale of loans or liquidate available-for-sale securities. It can also
access its lines of credit, totaling $6.5 million, with unaffiliated financial
institutions, which enable it to borrow federal funds on an unsecured basis. In
addition, the Company has available lines of credit with the Federal Home Loan
Bank of New York (FHLB) equal to 10.0% of the Company's assets at June 30, 2003,
which enable it to borrow funds on a secured basis. The Company could also
engage in other forms of borrowings, including reverse repurchase agreements.
At June 30, 2003, the Company's borrowings consisted of convertible and medium
term advances from the FHLB. The convertible feature of these advances allows
the FHLB, at a specified call date and quarterly thereafter, to convert those
advances into replacement funding for the same or a lesser principal amount,
based on any advance then offered by the FHLB, at then current market rates. If
the FHLB elects to convert those advances, the Bank may repay any portion of the
advances without penalty. The convertible advances are secured by various
mortgage-backed and callable U.S. agency securities.
17
At June 30, 2003, convertible and medium term advances outstanding were as follows:
Call Contractual
Amount Rate Date Maturity
------ ---- ---- --------
Convertible advance $ 14,000,000 5.49 % 8/19/2003 2/19/2008
Convertible advance 15,000,000 4.59 7/21/2003 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
Convertible advance 10,000,000 2.64 5/28/2008 5/28/2013
Medium term advance 4,000,000 3.31 12/11/2003 12/11/2003
Medium term advance 5,000,000 3.99 12/13/2004 12/13/2004
---------
Total $ 65,000,000
The primary investing activities of the Company are the purchase of securities
available-for-sale and the origination of loans. During each of the three months
ended June 30, 2003, and 2002, the Company's purchases of securities that were
classified available-for-sale totaled $487.5 million and $623.2 million,
respectively. Loan originations, net of principal repayments on loans, totaled
$.3 million and $14.0 million for the six months ended June 30, 2003, and 2002,
respectively. Borrowings, principal repayments and maturities of securities were
used primarily to fund those activities.
Capital Resources
The Bank is subject to the risk based capital guidelines administered by the
banking regulatory agencies. The guidelines currently require all banks to
maintain a minimum ratio of total risk based capital to total risk weighted
assets of 8%, including a minimum ratio of Tier 1 capital to total risk weighted
assets of 4% and a Tier 1 capital to average adjusted assets of 4%. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Bank's financial statements. As of December 31,
2002, the most recent notification from the federal banking regulators
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action.
In accordance with the requirements of the FDIC and the New York State Banking
Department, the Bank must meet certain measures of capital adequacy with respect
to leverage and risk-based capital. As of June 30, 2003, the Bank exceeded those
requirements with a leverage capital ratio, risk-based capital ratio and
total-risk based capital ratio of 5.78%, 9.66%, and 10.51%, respectively.
The Company achieves what it considers "capital adequacy" through the continuous
monitoring of its financial performance and plans for expansion. Sources of the
Company's capital are generated primarily through current period earnings and
the issuance of common stock via the dividend reinvestment plan or the exercise
of stock options. Uses of capital currently result from the payment of dividends
on common stock or the repurchase of common stock through a stock repurchase
program. In February 2003, the Board of Directors, suspended the current stock
repurchase program that had enabled the Company to repurchase 75,000 shares of
its outstanding common stock. There have been no repurchases made under that
stock purchase program since its announcement in May, 2001. In determining the
extent and timing of stock repurchase programs, the Company considers, in
addition to capital adequacy, the effect on the Company's financial condition,
average daily trading volume, and listing requirements applicable to the NASDAQ
National Market System. At June 30, 2003, the Company held 336,900 shares of
treasury stock at an average cost of $12.40 per share.
18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
The principal objective of the Company's interest rate management is to evaluate
the interest rate risk inherent in certain balance sheet accounts, determine the
level of risk appropriate given the Company's business strategy, operating
environment, capital and liquidity requirements and performance objectives, and
manage the risk consistent with guidelines approved by the Board of Directors.
Through such management, the Company seeks to reduce the vulnerability of it's
operations to changes in interest rates. The Board has directed the Investment
Committee to review the Company's interest rate risk position on a quarterly
basis.
Funds management is the process by which the Company seeks to maximize the
profit potential which is derived from the spread between the rates earned on
interest-earning assets and the rates paid on interest-bearing liabilities
through the management of various balance sheet components. It involves
virtually every aspect of the Company's management and decision-making process.
Accordingly, the Company's results of operations and financial condition are
largely dependent on the movements in market interest rates and the Company's
ability to manage its assets and liabilities in response to such movements.
At June 30, 2003, 76.9% of the Company's gross loans had adjustable interest
rates and its loan portfolio had an average weighted maturity of 8.8 years. At
that date, $56.6 million, or 28.4%, of the Company's securities had adjustable
interest rates, and its securities portfolio had a weighted average maturity of
1.7 years. At June 30, 2003, the Company had $73.8 million of certificates of
deposit with maturities of one year or less and $15.2 million of deposits over
$100,000, which tend to be less stable sources of funding when compared to core
deposits, and which represented 23.7% of the Company's interest-bearing
liabilities. In a rising interest rate environment the Company's
interest-bearing liabilities may adjust upwardly more rapidly than the yield on
its adjustable-rate assets. Thus, due to the Company's level of shorter term
certificates of deposit, the Company's cost of funds may increase at a greater
rate in a rising rate environment than if it had a greater amount of core
deposits which, in turn, may adversely affect net interest income and net
income.
The Company's interest rate sensitivity is monitored by management through the
use of a quarterly interest rate risk analysis model which evaluates (i) the
potential change in the net interest income over the succeeding four quarter
period and (ii) the potential change in the fair market value of equity, of the
Company ("Net Economic Value of Equity"), which would result from an
instantaneous and sustained interest rate change of zero and plus or minus 200
basis points in 100 basis point increments.
At June 30, 2003, the effect of instantaneous and sustained interest rate
changes on the Company's Net Interest Income and Net Economic Value of Equity
are as follows:
Change in Potential Change in Potential Change in
Interest Rates Net Interest Income Net Economic Value of Equity
in Basis Points $ Change % Change $ Change % Change
--------------- -------- -------- -------- --------
(Dollars in thousands)
200 $ 1,146 6.85 % $ (6,594) (22.90) %
100 1,381 8.25 (4,169) (14.48)
Static -- -- -- --
(100) (570) (3.41) (2,417) (8.40)
(200) (1,747) (10.44) (2,378) (8.26)
19
Item 4. Controls and Procedures
- ------- -----------------------
1 Evaluation of disclosure controls and procedures. The Company maintains
controls and procedures designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures required by paragraph (b) of Section 240.13a-15 or
Section 240.15d-15 of this chapter, as of the end of the period covered by
the report, the Chief Executive and Chief Financial officers of the Company
concluded that the Company's disclosure controls and procedures were
adequate.
2 Changes in internal controls. The Company made no significant changes in
its internal controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation of those controls
by the Chief Executive and Chief Financial officers.
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- ------- -----------------
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
- ------- -----------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
- ------- -------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
The Company's Annual Meeting of Stockholders was held on April
23, 2003, and the following individuals were elected as Directors
for a term of three years each:
Vote Votes Broker
For Withheld Abstentions Non-Votes
--- -------- ----------- ---------
John L. Ciarelli, Esq. 1,123,950 4,304 - -
Waldemar Fernandez 1,123,950 4,304 - -
Werner S. Neuberger 1,123,950 4,304 - -
John C. Tsunis, Esq 1,121,550 6,704 - -
The term of the following Directors continued after the Annual
Meeting: Harvey Auerbach, Donald Del Duca, Perry B. Duryea, Frank J.
Esposito, Roy M. Kern, Sr., Gordon A. Lenz, Douglas C. Manditch,
Thomas F. Roberts III, Alfred Romito.
20
Item 5. Other Information
- ------- -----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
a. Exhibits
--------
11.0 Statement Re: Computation of Per Share Earnings
31.1 Certification of Chief Executive Officer pursuant to Section
302 of Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section
906 of Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section
906 of Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K
-------------------
On April 21, 2003 the Company filed a Form 8-K to disclose that
the Company has issued a press release to announce the Company's
first quarter earnings and declaration of a dividend.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the undersigned
thereunto duly authorized.
LONG ISLAND FINANCIAL CORP.
(Registrant)
Date: August 14, 2003 By: /s/ Douglas C. Manditch
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Douglas C. Manditch
President and Chief Executive Officer
Date: August 14, 2003 By: /s/ Thomas Buonaiuto
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Thomas Buonaiuto
Vice President and Treasurer
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