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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 September 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
LONG ISLAND FINANCIAL CORP.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-3453684
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Suffolk Square
1601 Veterans Memorial Highway
Islandia, New York 11749
------------------ -----
(Address of Principal Executive Offices) (Zip Code)
(631) 348-0888
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Exchange Act): Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock par value $.01, per share. The registrant had 1,485,908 shares of
Common Stock outstanding as of November 7, 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 September 30, 2003
and December 31, 2002 2
Consolidated Statements of Earnings for the Three Months and
Nine Months Ended September 30, 2003 and 2002 3
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 2003 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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 20
ITEM 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
- ----------
1
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements
- ------- ---------------------------------
LONG ISLAND FINANCIAL CORP.
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)
September 30, December 31,
2003 2002
---- ----
Assets:
Cash and due from banks $ 10,932 $ 20,443
Interest earning deposits 80 47
Federal funds sold - 5,300
---- -----
Total cash and cash equivalents 11,012 25,790
Securities held-to-maturity (fair value of $14,489 and $14,027, respectively) 12,471 12,461
Securities available-for-sale, at fair value 205,532 219,590
Federal Home Loan Bank stock, at cost 4,500 3,588
Loans, net of unearned income and deferred fees 225,194 217,731
Less allowance for loan losses (2,382) (2,346)
----- -----
Loans, net 222,812 215,385
Premises and equipment, net 5,175 3,530
Accrued interest receivable 2,345 2,654
Bank owned life insurance 8,100 7,859
Prepaid expenses and other assets 2,108 1,094
----- -----
Total assets $ 474,055 $ 491,951
======= =======
Liabilities and Stockholders' Equity:
Deposits:
Demand deposits $ 100,497 $ 78,697
Savings deposits 99,453 73,780
NOW and money market deposits 54,381 130,636
Time certificates issued in excess of $100,000 14,198 20,516
Other time deposits 86,118 96,905
------ ------
Total deposits 354,647 400,534
Federal funds purchased and securities sold under agreements to repurchase 18,000 -
Other borrowings 65,000 55,000
Accrued expenses and other liabilities 3,096 3,344
----- -----
Total liabilities 440,743 458,878
------- -------
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;
1,820,622 and 1,783,126 shares issued; 1,483,722 and
1,446,226 shares outstanding, respectively) 18 18
Surplus 20,888 20,281
Accumulated surplus 9,558 7,625
Accumulated other comprehensive (loss) income (474) 1,827
Treasury stock at cost, (336,900 shares in 2003 and 2002) (4,178) (4,178)
----- -----
Total stockholders' equity 25,812 25,573
------ ------
Total liabilities and stockholders' equity $ 474,055 $ 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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ------
Interest income:
Loans $ 3,762 $ 3,688 $ 11,355 $ 10,710
Securities 2,071 2,068 6,458 6,664
Federal funds sold 13 35 61 89
Earning deposits 2 2 4 6
- - - -
Total interest income 5,848 5,793 17,878 17,469
----- ----- ------ ------
Interest expense:
Savings deposits 272 341 849 742
NOW and money market deposits 96 123 569 536
Time certificates issued in excess of $100,000 95 163 257 581
Other time deposits 757 987 2,489 3,049
Borrowed funds 746 665 2,144 1,999
--- --- ----- -----
Total interest expense 1,966 2,279 6,308 6,907
----- ----- ----- -----
Net interest income 3,882 3,514 11,570 10,562
----- ----- ------ ------
Provision for loan losses - 60 60 210
--- -- -- ---
Net interest income after provision
for loan losses 3,882 3,454 11,510 10,352
----- ----- ------ ------
Other operating income:
Service charges on deposit accounts 550 445 1,530 1,287
Net gain on sale of securities 158 - 400 -
Net gain on sale of residential loans 185 189 512 525
Earnings on bank owned life insurance 102 96 306 288
Other 141 116 399 334
--- --- --- ---
Total other operating income 1,136 846 3,147 2,434
----- --- ----- -----
Other operating expenses:
Salaries and employee benefits 1,918 1,632 5,533 4,594
Occupancy expense 296 235 787 664
Premises and equipment expense 346 309 993 891
Capital securities 209 209 620 614
Other 1,015 886 3,030 2,682
----- --- ----- -----
Total other operating expenses 3,784 3,271 10,963 9,445
----- ----- ------ -----
Income before income taxes 1,234 1,029 3,694 3,341
Income taxes 440 353 1,320 1,148
--- --- ----- -----
Net income $ 794 $ 676 $ 2,374 $ 2,193
=== === ===== =====
Basic earnings per share $ .54 $ .47 $ 1.62 $ 1.52
=== === ==== ====
Diluted earnings per share $ .51 $ .45 $ 1.54 $ 1.47
=== === ==== ====
Weighted average shares outstanding 1,481,347 1,446,226 1,467,496 1,444,307
========= ========= ========= =========
Diluted weighted average shares outstanding 1,555,731 1,503,461 1,537,465 1,492,038
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
3
LONG ISLAND FINANCIAL CORP.
Consolidated Statement of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 2003
(Unaudited)
(In thousands, except share data)
Accumulated
other
Common Accumulated comprehensive Treasury
stock Surplus surplus income (loss) stock Total
----- ------- ------- ------------- ----- -----
Balance at December 31, 2002 $ 18 20,281 7,625 1,827 (4,178) 25,573
Comprehensive income:
Net income - - 2,374 - - 2,374
Other comprehensive loss,
net of tax:
Unrealized depreciation in
available-for-sale securities,
net of reclassification adjustment - - - (2,301) - (2,301)
-----
Total comprehensive income 73
Exercise of stock options and related
tax benefit, issued 33,343 shares - 489 - - - 489
Dividend reinvestment and stock purchase
plan, issued 4,153 shares - 118 - - - 118
Dividends declared on common stock
($.30 per common share) - - (441) - - (441)
--------------------------------------------------------------------
Balance at September 30, 2003 $ 18 20,888 9,558 (474) (4,178) 25,812
====================================================================
See accompanying notes to consolidated financial statements.
4
LONG ISLAND FINANCIAL CORP.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
For the Nine Months
Ended September 30,
-------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 2,374 $ 2,193
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 60 210
Depreciation and amortization 727 678
Amortization of premiums, net of discount accretion 1,463 1,074
Net gain on sale of securities (400) -
Loans originated for sale, net of proceeds from sales and gains (1,682) 2
Net deferred loan origination fees 126 49
Earnings on bank owned life insurance (306) (288)
Deferred income taxes - (66)
Change in other assets and liabilities:
Accrued interest receivable 309 (394)
Prepaid expenses and other assets 222 110
Accrued expenses and other liabilities (107) (1,184)
--- -----
Net cash provided by operating activities 2,786 2,384
----- -----
Cash flows from investing activities:
Purchases of securities held-to-maturity, available-for-sale (565,050) (644,846)
Net (purchase) redemption of Federal Home Loan Bank stock (912) 108
Proceeds from the sale of securities available-for-sale 30,607 -
Proceeds from maturities of securities 514,181 667,018
Principal repayments on securities 29,634 33,929
Loan originations, net of principal repayments (5,931) (20,745)
Purchase of premises and equipment (2,372) (1,087)
----- -----
Net cash provided by investing activities 157 34,377
--- ------
Cash flows from financing activities:
Net decrease in demand deposit, savings, NOW,
and money market accounts (28,782) (25,926)
Net decrease in certificates of deposit (17,105) (8,665)
Net increase (decrease) in federal funds purchased and securities sold
under agreements to repurchase 18,000 (4,500)
Net increase in other borrowings 10,000 -
Proceeds from exercise of stock options 489 90
Proceeds from shares issued under the dividend reinvestment
and stock purchase plan 118 -
Payments for cash dividends (441) (391)
--- ---
Net cash used in financing activities (17,721) (39,392)
------ ------
Net decrease in cash and cash equivalents (14,778) (2,631)
Cash and cash equivalents at beginning of period 25,790 30,626
------ ------
Cash and cash equivalents at end of period $ 11,012 $ 27,995
====== ======
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid during the period for:
Interest $ 6,945 $ 7,906
===== =====
Income taxes $ 1,107 $ 1,679
===== =====
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 nine-month period ended
September 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:
September 30, 2003 December 31, 2002
------------------ -----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(In thousands)
Held-to-maturity:
Corporate debt $ 12,471 14,489 $ 12,461 14,027
------ ------ ------ ------
Total held-to-maturity $ 12,471 14,489 $ 12,461 14,027
====== ====== ====== ======
Available-for-sale:
U.S. Government and Agency obligations $ 152,656 151,892 $ 129,345 130,422
Mortgage-backed securities:
GNMA 41,821 41,604 62,565 63,971
FHLMC 6,545 6,603 12,920 13,122
FNMA 3,244 3,302 9,879 10,015
Corporate debt 2,011 2,131 2,013 2,060
----- ----- ----- -----
Total securities available-for-sale $ 206,277 205,532 $ 216,722 219,590
======= ======= ======= =======
3. LOANS, NET
Loans, net, are summarized as follows:
September 30, 2003 December 31, 2002
------------------ -----------------
(Dollars in thousands)
Commercial and industrial loans $ 43,525 19.0 % $ 54,001 24.3 %
Commercial real estate loans 142,788 62.2 130,275 58.7
Automobile loans 39,122 17.1 34,188 15.4
Consumer loans 1,021 .4 2,238 1.0
Residential real estate loans held-for-sale 2,871 1.3 1,189 .6
----- --- ----- --
229,327 100.0 221,891 100.0
Less:
Unearned income 3,243 3,396
Deferred fees, net 890 764
Allowance for loan losses 2,382 2,346
----- -----
$ 222,812 $ 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. 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.
7
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
(Dollars in thousands, except per share data)
Net income as reported $ 794 $ 676 $ 2,374 $ 2,193
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all awards, net of tax 53 33 241 124
-- -- --- ---
Pro forma net income $ 741 $ 643 $ 2,133 $ 2,069
=== === ===== =====
Earnings per share:
Basic As Reported $ .54 $ .47 $ 1.62 $ 1.52
Pro forma .50 .44 1.45 1.43
Diluted As Reported .51 .45 1.54 1.47
Pro forma .48 .43 1.39 1.39
5. RECENT DEVELOPMENTS
On August 27, 2003, the Board of Directors of the Company declared a quarterly
dividend of ten cents per common share. The dividend was paid October 1, 2003,
to shareholders of record as of September 19, 2003.
6. OTHER COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Bank enters into commitments to purchase
investment securities. At September 30, 2003, the Bank had outstanding
commitments of $3 million to purchase investment securities.
7. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity", establishes standards for how an issuer
clarifies, measures and discloses in its financial statements certain financial
instruments with characteristics of both liabilities and equity. SFAS No. 150
requires that an issuer classify financial instruments that are within the scope
of SFAS 150 as liabilities in most circumstances. Such financial instruments
include shares that are mandatorily redeemable such as the $7,500,000 of
guaranteed preferred beneficial interests in junior subordinated debentures. As
of November 13, 2003, the implementation of several provisions of SFAS No. 150,
including the classification of the $7,500,000 of guaranteed preferred
beneficial interests in junior subordinated debentures has been postponed by
FASB for an indefinite period.
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 September 30, 2003, and for hedging relationships
designated after September 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 September 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
September 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.
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 September 15, 2003.
The implementation of FIN 46 has not had an impact on the Company's consolidated
balance sheets or consolidated statements of earnings.
8
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 Nos. 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
provision of the Interpretation is 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 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.
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 September 30, 2003 is adequate to provide for estimated probable
losses inherent in the portfolio.
9
Financial Condition
The Company's total assets were $474.1 million as of September 30, 2003,
compared to $492.0 million at December 31, 2002. The decrease in total assets
was primarily reflected in the decrease in cash and cash equivalents of $14.8
million from $25.8 million at December 31, 2002, to $11.0 million at September
30, 2003, primarily reflecting the decrease of seasonal municipal balances on
deposit at September 30, 2003. In addition to the decrease in cash and cash
equivalents, there was a $14.1 million, or 6.4% decline in the securities
available-for-sale portfolio, 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. Offsetting those decreases,
loans, net of unearned income and deferred fees, increased $7.5 million, from
$217.7 million at December 31, 2002, to $225.2 million at September 30, 2003,
reflecting increases primarily in commercial real estate and automobile loans.
Total deposits decreased $45.9 million, or 11.5%, from $400.5 million at
December 31, 2002 to $354.6 million at September 30, 2003, primarily reflecting
a decrease in NOW and money market deposits. The decrease in NOW and money
market deposits of $76.2 million, or 58.4%, from $130.6 million at December 31,
2002 to $54.4 million at September 30, 2003, is attributable to the withdrawal
of seasonal municipal deposits. Time certificates in excess of $100,000
decreased $6.3 million, or 30.8%, from $20.5 million at December 31, 2002, to
$14.2 million at September 30, 2003. Other time deposits decreased $10.8
million, or 11.1%, from $96.9 million at December 31, 2002, to $86.1 million at
September 30, 2003. The effects of those declines were offset in part by a $25.7
million, or 34.8%, increase in savings deposits and a $21.8 million, or 27.7%,
increase in demand deposits. There were $18.0 million of federal funds purchased
at September 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
September 30, 2003.
Stockholders' equity increased $239,000, or 1.0%, to $25.8 million at September
30, 2003 compared to $25.6 million at December 31, 2002. The increase to
stockholders equity included $2.4 million of net income for the nine months
ending September 30, 2003, and a decrease in the accumulated other comprehensive
income on securities available-for-sale of $2.3 million.
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 nine months ended September 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
the amount of non-accrual loans is not material.
10
Three Months Ended September 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 $ 6,613 $ 15 .91 % $ 8,632 $ 37 1.71 %
Securities (1) 202,043 2,071 4.10 161,492 2,068 5.12
Loans, net (2) 217,488 3,762 6.92 194,286 3,688 7.59
------- ----- ------- -----
Total interest-earning assets 426,144 5,848 5.49 364,410 5,793 6.36
Non-interest-earning assets 33,677 32,418
------ ------
Total assets $ 459,821 $ 396,828
======= =======
Interest-bearing liabilities:
Savings deposits $ 96,123 272 1.13 $ 70,118 341 1.95
NOW and money market deposits 56,515 96 .68 39,789 123 1.24
Certificates of deposit 106,554 852 3.20 124,437 1,150 3.70
------- --- ------- -----
Total interest-bearing deposits 259,192 1,220 1.88 234,344 1,614 2.75
Borrowed funds 69,713 746 4.28 55,000 665 4.84
------ --- ------ ---
Total interest-bearing liabilities 328,905 1,966 2.39 289,344 2,279 3.15
Other non-interest bearing liabilities 105,558 83,312
------- ------
Total liabilities 434,463 372,656
Stockholders' equity 25,358 24,172
------ ------
Total liabilities and
stockholders' equity $ 459,821 $ 396,828
======= =======
Net interest income/
interest rate spread (3) $ 3,882 3.10 % $ 3,514 3.21 %
===== ==== ===== ====
Net interest margin (4) 3.64 % 3.86 %
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities 1.30x 1.26x
===== =====
(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-accrual 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
Nine Months Ended September 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 $ 8,249 $ 65 1.05 % $ 7,524 $ 95 1.68 %
Securities (1) 210,155 6,458 4.10 177,267 6,664 5.01
Loans, net (2) 215,966 11,355 7.01 188,521 10,710 7.57
------- ------ -------- ------
Total interest-earning assets 434,370 17,878 5.49 373,312 17,469 6.24
Non-interest-earning assets 38,027 31,862
------ ------
Total assets $ 472,397 $ 405,174
======= =======
Interest-bearing liabilities:
Savings deposits $ 89,109 849 1.27 $ 58,921 742 1.68
NOW and money market deposits 84,292 569 .90 61,764 536 1.16
Certificates of deposit 107,930 2,746 3.39 126,578 3,630 3.82
------- ----- ------- -----
Total interest-bearing deposits 281,331 4,164 1.97 247,263 4,908 2.65
Borrowed funds 67,601 2,144 4.23 56,757 1,999 4.70
------ ----- ------ -----
Total interest-bearing liabilities 348,932 6,308 2.41 304,020 6,907 3.03
Other non-interest bearing liabilities 97,732 78,213
------ ------
Total liabilities 446,664 382,233
Stockholders' equity 25,733 22,941
------ ------
Total liabilities and
stockholders' equity $ 472,397 $ 405,174
======= =======
Net interest income/
interest rate spread (3) $ 11,570 3.08 % $ 10,562 3.21 %
====== ==== ====== ====
Net interest margin (4) 3.55 % 3.77 %
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities 1.24x 1.23x
===== =====
(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-accrual 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 September 30, 2003
and 2002
General
The Company reported net income of $794,000, or basic earnings per share of $.54
and diluted earnings per share of $.51 for the quarter ended September 30, 2003,
compared to $676,000, or basic earnings per share of $.47 and diluted earnings
per share of $.45 for the prior year period. The increase in net income was
attributable primarily to a $428,000, or 12.4% increase in net interest income
after provision for loan losses and an increase in other operating income of
$290,000, or 34.3%. Offsetting those increases was a $513,000, or 15.7% increase
in other operating expenses.
Interest Income
Interest income increased $55,000, or .9%, for the three months ended September
30, 2003, compared to the three months ended September 30, 2002. That increase
was attributable to the $61.7 million, or 16.9%, increase in the average balance
of interest-earning assets from $364.4 million for the three months ended
September 30, 2002, to $426.1 million for the three months ended September 30,
2003. That increase in the income from the increase in the average balance of
interest earning assets was offset in part by a 87 basis point decrease in the
average yield on interest-earning assets from 6.36% for the three months ended
September 30, 2002, to 5.49% for the comparable 2003 period. The decrease in
average yield on interest-earning assets was attributable to a 102 basis point
decrease in yield on securities which declined from 5.12% for the three months
ended September 30, 2002, to 4.10% for the three months ended September 30,
2003. The average yield on loans, net, decreased 67 basis points from 7.59% for
the three months ended September 30, 2002, to 6.92% for the comparable 2003
period. Partially offsetting the decline in yield from period to period was a
$40.5 million, or 25.1% increase in the average balance of securities from
$161.5 million for three months ended September 30, 2002, to $202.0 million for
the three months ended September 30, 2003. The average balance of loans, net,
increased $23.2 million, or 11.9% from $194.3 million for the three months ended
September 30, 2002, to $217.5 million for the comparable 2003 period.
Interest Expense
Interest expense for the three months ended September 30, 2003 was $2.0 million,
compared to $2.3 million for the three months ended September 30, 2002, a
decrease of $313,000, or 13.7%. The decrease was attributable to a 76 basis
point decrease in the average cost of interest-bearing liabilities from 3.15%
for the three months ended September 30, 2002 to 2.39% for the three months
ended September 30, 2003. The decrease in average cost was partially offset by a
$39.6 million, or 13.7%, increase in the average balance of total
interest-bearing liabilities from $289.3 million for the three months ended
September 30, 2002 to $328.9 million for the three months ended September 30,
2003. The increase in average interest-bearing liabilities, when compared to the
prior year period, reflects increases of $24.8 million in the average balance of
interest-bearing deposits and $14.7 million in the average balance of borrowed
funds.
Interest expense on interest-bearing deposits decreased $394,000, or 24.4%, for
the three months ended September 30, 2003, from $1.6 million for the
corresponding 2002 period to $1.2 million for the current period. That decrease
was primarily due to a 87 basis point decrease in the average rate paid on
interest-bearing deposits from 2.75% for three months ended September 30, 2002
to 1.88% 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 $24.8 million for the three months ended September
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 $26.0 million, or 37.1%, and in the average
balances of NOW and money market deposits of $16.7 million, or 42.0% from period
to period.
13
Interest expense on borrowed funds increased $81,000, or 12.2%, from $665,000
for the three months ended September 30, 2002, to $746,000 for the three months
ended September 30, 2003. The increase was primarily due to the average balance
of borrowed funds, which increased $14.7 million, or 26.8%, from $55.0 million
for the three months ended September 30, 2002 to $69.7 million for the three
months ended September 30, 2003. Offsetting in part the cost from the increase
in the average balance was a 56 basis point decrease in the average cost of
borrowed funds from 4.84% for the 2002 period, to 4.28% for the 2003 period.
Net Interest Income
Net interest income increased by $368,000, or 10.5%, from $3.5 million for the
three months ended September 30, 2002, to $3.9 million for the three months
ended September 30, 2003. The average cost of total interest-bearing liabilities
for the period decreased 76 basis points from 3.15% in the 2002 period to 2.39%
in the 2003 period. The average yield on total interest-earning assets for the
period decreased 87 basis points from 6.36% in the 2002 period to 5.49% in the
2003 period. The net interest rate spread decreased 11 basis points, from 3.21%
for the three months ended September 30, 2002, to 3.10% for the three months
ended September 30, 2003.
Provision for Loan Losses
The Company made no provision for loan losses for the three months ended
September 30, 2003, compared to a $60,000 provision for loan losses made for the
three months ended September 30, 2002. The determination not to make a provision
for loan losses for the three months ended September 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 September 30, 2003 and December 31,
2002, respectively. The allowance for loan losses as a percentage of loans was
1.06% and 1.08% at September 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 is fully collectable and a consistent record
of performance has been demonstrated.
September 30, 2003 December 31, 2002
------------------ -----------------
(Dollars in thousands)
Non-accrual loans:
Commercial and industrial loans $ 84 $ 307
-- ---
Total non-accrual loans 84 307
-- ---
Allowance for loan losses as a percentage
of loans (1) 1.06 % 1.08 %
Allowance for loan losses as a percentage
of total non-accrual loans 2,835.71 % 764.17 %
Non-accrual loans as a percentage of loans (1) .04 % .14 %
(1) Loans include loans, net, excluding the allowance for loan losses.
14
Other Operating Income
Other operating income increased $290,000, or 34.3%, to $1.1 million for the
three months ended September 30, 2003, as compared to the three months ended
September 30, 2002. That increase was made up primarily from service charges on
deposit accounts, which increased $105,000, or 23.6%, 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 $158,000
for the three months ended September 30, 2003. There was no comparable gain on
sale in the three months ended September 30, 2002.
Other Operating Expenses
Other operating expenses increased $513,000, or 15.7%, from $3.3 million for the
three months ended September 30, 2002, to $3.8 million for the three months
ended September 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 $87,000, or 24.6%, from $353,000 for the three months
ended September 30, 2002, to $440,000 for the three months ended September 30,
2003, as a result of an increase in income before income taxes. The effective
tax rates for the three months ended September 30, 2003 and those ended
September 30, 2002 were 35.7% and 34.3%, respectively.
Comparison of Operating Results for the Nine Months Ended September 30, 2003 and
2002
General
The Company reported net income of $2.4 million, or basic earnings per share of
$1.62 and diluted earnings per share of $1.54 for the nine months ended
September 30, 2003, compared to $2.2 million, or basic earnings per share of
$1.52 and diluted earnings per share of $1.47, for the prior year period. The
increase in net income was attributable primarily to a $1.2 million, or 11.2%
increase in net interest income after provision for loan losses and an increase
in other operating income of $713,000, or 29.3%. Offsetting those increases, in
part, was a $1.5 million, or 16.1% increase in other operating expenses.
Interest Income
Interest income increased $409,000, or 2.3%, for the nine months ended September
30, 2003, compared to the nine months ended September 30, 2002. This increase
was attributable to the increase in the average balance of interest-earning
assets of $61.1 million, or 16.4%, from $373.3 million for the nine months ended
September 30, 2002, to $434.4 million for the nine months ended September 30,
2003. The increase in the average balance of interest earning assets was offset
in part by a 75 basis point decrease in the average yield on interest-earning
assets from 6.24% for the nine months ended September 30, 2002, to 5.49% for the
comparable 2003 period. The decrease in average yield on interest-earning assets
was attributable to a 91 basis point decrease in yield on securities which
declined from 5.01% for the nine months ended September 30, 2002, to 4.10% for
the nine months ended September 30, 2003, and the decrease of 56 basis points in
the average yield on loans, net, from 7.57% for the nine months ended September
30, 2002, to 7.01% for the comparable 2003 period. Partially offsetting the
decline in yield from period to period was a $32.9 million, or 18.6% increase in
the average balance of securities from $177.3 million for the nine months ended
September 30, 2002, to $210.2 million for the nine months ended September 30,
2003. The average balance of loans, net, increased $27.5 million, or 14.6% from
$188.5 million for the nine months ended September 30, 2002, to $216.0 million
for the current nine-month period.
15
Interest Expense
Interest expense for the nine months ended September 30, 2003 was $6.3 million,
compared to $6.9 million for the nine months ended September 30, 2002, a
decrease of $599,000, or 8.7%. The decrease was attributable to a 62 basis point
decrease in the average cost of interest-bearing liabilities from 3.03% for the
nine months ended September 30, 2002 to 2.41% for the nine months ended
September 30, 2003. The decrease in average cost was partially offset by the
cost of a $44.9 million, or 14.8%, increase in the average balance of total
interest-bearing liabilities from $304.0 million for the nine months ended
September 30, 2002 to $348.9 million for the nine months ended September 30,
2003. The increase in average interest-bearing liabilities reflects increases of
$34.1 million in the average balance of interest-bearing deposits and $10.8
million in the average balance of borrowed funds when compared to the prior year
period.
Interest expense on interest-bearing deposits for the nine months ended
September 30, 2003 decreased $744,000, or 15.2%, to $4.2 million from $4.9
million for the corresponding 2002 period. That decrease was primarily due to a
68 basis point decrease in the average rate paid on interest-bearing deposits
from 2.65% for nine months ended September 30, 2002 to 1.97% for the
corresponding period in 2003. Offsetting the decrease in the average rate paid
was the cost from an increase in the average balance of interest-bearing
deposits of $34.1 million for the nine months ended September 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 $30.2 million, or 51.2%, and in the average balances of NOW
and money market deposits of $22.5 million, or 36.5% from period to period.
Interest expense on borrowed funds increased $145,000, or 7.3%, from $2.0
million for the nine months ended September 30, 2002, to $2.1 million for the
nine months ended September 30, 2003. The increase was primarily due to the
average balance of borrowed funds, which increased $10.8 million, or 19.1%, from
$56.8 million for the nine months ended September 30, 2002 to $67.6 million for
the nine months ended September 30, 2003. Offsetting the cost from the increase
in the average balance was a 47 basis point decrease in the average cost of
borrowed funds from 4.70% for the 2002 period, to 4.23% for the 2003 period.
Net Interest Income
Net interest income increased by $1.0 million, or 9.5%, from $10.6 million for
the nine months ended September 30, 2002, to $11.6 million for the nine months
ended September 30, 2003. The average cost of total interest-bearing liabilities
for the period decreased 62 basis points from 3.03% in the 2002 period to 2.41%
in the 2003 period. The average yield on total interest-earning assets for the
period decreased 75 basis points from 6.24% in the 2002 period to 5.49% in the
2003 period. The net interest rate spread decreased 13 basis points, from 3.21%
for the nine months ended September 30, 2002, to 3.08% for the nine months ended
September 30, 2003.
Provision for Loan Losses
The Company made a $60,000 provision for loan losses for the nine months ended
September 30, 2003, compared to a $210,000 provision for loan losses for the
nine months ended September 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 $713,000, or 29.3%, to $3.1 million for the
nine months ended September 30, 2003. The Company realized gains on the sale of
securities of $400,000 for the nine months ended September 30, 2003. There had
been no comparable gain in the year earlier period. In addition, service charges
on deposit accounts increased $243,000, or 18.9%, reflecting overall growth in
the depositor base, and the introduction of new electronic banking services.
16
Other Operating Expenses
Other operating expenses increased $1.5 million, or 16.1%, from $9.4 million for
the nine months ended September 30, 2002, to $10.9 million for the nine months
ended September 30, 2003. The increase resulted primarily from increases in
salaries and employee benefits, premises and equipment expense, and other
expense for the nine months ended September 30, 2003 attributable to the Bank's
branch expansion.
Income Taxes
Income taxes increased $172,000, or 15.0%, from $1.1 million for the nine months
ended September 30, 2002, to $1.3 million for the nine months ended September
30, 2003, as a result of the increase in income before income taxes. The
effective tax rates for the nine months ended September 30, 2003 and for the
nine months ended September 30, 2002 were 35.7% 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 nine months ended September 30, 2003, the Company's average
minimum liquidity level was 22.9%.
The Company maintains levels of liquidity that it considers adequate to meet its
current needs. The Company's principal sources of cash include incoming
deposits, the repayment of loans and sales of investment securities. When cash
requirements increase faster than cash is generated, either through increased
loan demand or withdrawal of deposited funds, the Company can arrange for the
sale of loans or liquidate available-for-sale securities. It can also access its
lines of credit, totaling $7.5 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 10.6% of the Company's assets at September 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 September 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, callable U.S. agency securities, and certain qualifying
commercial real estate loans.
17
At September 30, 2003, convertible and medium term advances outstanding were as
follows:
Call Contractual
Amount Rate Date Maturity
------ ---- ---- --------
Convertible advance $ 14,000,000 5.49 % 11/19/2003 2/19/2008
Convertible advance 15,000,000 4.59 10/21/2003 1/21/2009
Convertible advance 14,000,000 4.97 1/20/2004 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 nine months
ended September 30, 2003, and 2002, the Company's purchases of securities that
were classified available-for-sale totaled $565.1 million and $644.8 million,
respectively. Loan originations, net of principal repayments on loans, totaled
$5.9 million and $20.7 million for the nine months ended September 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 the FDIC, the Bank's primary federal
regulator that, if undertaken, could have a direct material effect on the Bank's
financial statements. As of December 31, 2002, the most recent notification from
the FDIC categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action.
In accordance with the requirements of the FDIC and the New York State Banking
Department, the Bank must meet certain measures of capital adequacy with respect
to leverage and risk-based capital. As of September 30, 2003, the Bank exceeded
those requirements with a leverage capital ratio, risk-based capital ratio and
total-risk based capital ratio of 6.21%, 9.88%, and 10.70%, 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 September 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 its
operations to changes in interest rates. The Board has directed the Investment
Committee to review the Company's interest rate risk position on a quarterly
basis.
Funds management is the process by which the Company seeks to maximize the
profit potential which is derived from the spread between the rates earned on
interest-earning assets and the rates paid on interest-bearing liabilities
through the management of various balance sheet components. It involves
virtually every aspect of the Company's management and decision-making process.
Accordingly, the Company's results of operations and financial condition are
largely dependent on the movements in market interest rates and the Company's
ability to manage its assets and liabilities in response to such movements.
At September 30, 2003, 74.3% 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, $53.0 million, or 23.8%, of the Company's securities had
adjustable interest rates, and its securities portfolio had a weighted average
maturity of 1.9 years. At September 30, 2003, the Company had $59.2 million of
certificates of deposit with maturities of one year or less and $14.2 million of
deposits over $100,000, which tend to be less stable sources of funding when
compared to core deposits, and which represented 21.8% 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 September 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 $ (134) (.77) % $ (6,131) (22.90) %
100 291 1.68 (3,053) (14.48)
Static -- -- -- --
(100) (944) (5.46) 50 .17
(200) (2,450) (14.17) 714 2.47
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 as of the
end of the period covered by the report, based on the evaluation of
these controls and procedures required by paragraph (b) of Section
240.13a-15 or Section 240.15d-15 of this chapter, the Chief Executive
and Chief Financial officers of the Company concluded that the
Company's disclosure controls and procedures were adequate.
2. Changes in internal controls. The Company made no significant changes
in its internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation of
those controls by the Chief Executive and Chief Financial officers.
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- ------- -----------------
Not applicable.
Item 2. Changes in Securities 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
- ------- ---------------------------------------------------
Not applicable.
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 July 16, 2003 the Company filed a Form 8-K to disclose that
the Company has issued a press release to announce the Company's
second quarter earnings and payment of a dividend.
20
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: November 14, 2003 By: /s/ Douglas C. Manditch
-----------------------
Douglas C. Manditch
President and Chief Executive Officer
Date: November 14, 2003 By: /s/ Thomas Buonaiuto
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Thomas Buonaiuto
Vice President and Treasurer
21