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, 2004
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ______ to _______
Commission File No.: 0-29826
LONG ISLAND FINANCIAL CORP.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-3453684
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 1,511,634 shares of
Common Stock outstanding as of November 5, 2004.
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, 2004
and December 31, 2003 2
Consolidated Statements of Earnings for the Three Months and
Nine Months Ended September 30, 2004 and 2003 3
Consolidated Statement of Changes in Stockholders' Equity
and Other Comprehensive Loss for the Nine Months
Ended September 30, 2004 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 22
ITEM 4. Controls and Procedures 23
PART II - OTHER INFORMATION
- ----------------------------
ITEM 1. Legal Proceedings 24
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
ITEM 3. Defaults Upon Senior Securities 24
ITEM 4. Submission of Matters to a Vote of Security Holders 24
ITEM 5. Other Information 24
ITEM 6. Exhibits 24
SIGNATURES 25
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,
2004 2003
---- ----
Assets:
Cash and due from banks $ 11,547 $ 21,447
Interest earning deposits 45 98
Federal funds sold - 25,200
------ ------
Total cash and cash equivalents 11,592 46,745
Securities held-to-maturity (fair value $14,438 at December 31, 2003) - 12,474
Securities available-for-sale, at fair value 258,821 216,967
Federal Home Loan Bank stock 6,372 3,050
Loans, held for sale 786 2,360
Loans, net of unearned income and deferred fees 244,768 226,128
Less allowance for loan losses (5,794) (2,290)
----- -----
Loans, net 238,974 223,838
Premises and equipment, net 5,504 5,756
Accrued interest receivable 2,957 2,401
Bank owned life insurance 7,712 8,213
Deferred tax asset 2,588 1,466
Prepaid expenses and other assets 2,580 1,401
----- -----
Total assets $ 537,886 $ 524,671
------- -------
Liabilities and Stockholders' Equity:
Deposits:
Demand deposits $ 105,324 $ 98,693
Savings deposits 109,950 104,231
NOW and money market deposits 85,769 123,732
Other time deposits 61,436 85,515
Time certificates issued in excess of $100,000 10,860 13,272
------ ------
Total deposits 373,339 425,443
Federal funds purchased and securities sold under agreements to repurchase 50,430 -
Other borrowings 76,000 61,000
Subordinated debentures 7,732 7,732
Accrued expenses and other liabilities 2,976 4,078
----- -----
Total liabilities 510,477 498,253
------- -------
Stockholders' equity:
Common stock (par value $.01 per share; 10,000,000 shares authorized;
1,846,589 and 1,825,211 shares issued; 1,509,689 and
1,488,311 shares outstanding, respectively) 18 18
Surplus 21,500 20,973
Accumulated surplus 10,967 10,333
Accumulated other comprehensive loss (898) (728)
Treasury stock at cost, (336,900 shares) (4,178) (4,178)
----- -----
Total stockholders' equity 27,409 26,418
------ ------
Total liabilities and stockholders' equity $ 537,886 $ 524,671
------- -------
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,
2004 2003 2004 2003
---- ---- ---- ----
Interest income:
Loans $ 4,091 $ 3,762 $ 11,762 $ 11,355
Securities 2,803 2,071 8,107 6,458
Federal funds sold and earning deposits 1 15 6 65
---- --- --- -----
Total interest income 6,895 5,848 19,875 17,878
----- ----- ------ ------
Interest expense:
Savings deposits 309 272 872 849
NOW and money market deposits 124 96 583 569
Other time deposits 529 757 1,770 2,489
Time certificates issued in excess of $100,000 51 95 180 257
Borrowed funds 1,141 746 2,778 2,144
Subordinated debentures 208 209 621 620
--- --- --- ---
Total interest expense 2,362 2,175 6,804 6,928
----- ----- ----- -----
Net interest income 4,533 3,673 13,071 10,950
----- ----- ------ ------
Provision for loan losses 75 - 5,575 60
-- ---- ----- --
Net interest income after provision for loan losses 4,458 3,673 7,496 10,890
----- ----- ----- ------
Other operating income:
Service charges on deposit accounts 572 550 1,842 1,530
Net (loss)gain on sales and calls of securities (11) 158 2,869 400
Net gain on sale of residential loans 208 185 604 512
Earnings on bank-owned life insurance 85 102 480 306
Other 141 141 404 399
--- --- --- ---
Total other operating income 995 1,136 6,199 3,147
--- ----- ----- -----
Other operating expenses:
Salaries and employee benefits 1,771 1,918 5,772 5,533
Occupancy expense 335 296 964 787
Premises and equipment expense 354 346 1,120 993
Automobile loan expense 206 - 1,061 -
Other 972 1,015 3,132 3,030
--- ----- ----- -----
Total other operating expenses 3,638 3,575 12,049 10,343
----- ----- ------ ------
Income before income taxes 1,815 1,234 1,646 3,694
Income taxes 664 440 471 1,320
--- --- --- -----
Net income $ 1,151 $ 794 $ 1,175 $ 2,374
----- --- ----- -----
Basic earnings per share $ .76 $ .54 $ .78 $ 1.62
--- --- --- ----
Diluted earnings per share $ .73 $ .51 $ .74 $ 1.54
--- --- --- ----
Weighted average shares outstanding 1,508,636 1,481,347 1,503,608 1,467,496
--------- --------- --------- ---------
Diluted weighted average shares outstanding 1,580,404 1,555,731 1,583,682 1,537,465
--------- --------- --------- ---------
See accompanying notes to consolidated financial statements.
3
LONG ISLAND FINANCIAL CORP.
Consolidated Statement of Changes in Stockholders' Equity
and Other Comprehensive Loss
For the Nine Months Ended September 30, 2004
(Unaudited)
(In thousands,except share data)
Accumulated
other
Common Accumulated comprehensive Treasury
stock Surplus surplus loss stock Total
---------------------------------------------------------------------
Balance at December 31, 2003 $ 18 20,973 10,333 (728) (4,178) 26,418
Comprehensive income:
Net income - - 1,175 - - 1,175
Other comprehensive loss,
net of tax:
Unrealized depreciation in
available-for-sale securities,
net of reclassification adjustment - - - (170) - (170)
---
Total comprehensive income 1,005
-----
Exercise of stock options and related
tax benefit, issued 17,835 shares - 389 - - - 389
Dividend reinvestment and stock purchase
plan, issued 3,543 shares - 138 - - - 138
Dividends declared on common stock
($.36 per common share) - - (541) - - (541)
----------------------------------------------------------------------
Balance at September 30, 2004 $ 18 21,500 10,967 (898) (4,178) 27,409
----------------------------------------------------------------------
Nine Months Ended
September 30,
2004
----
(In thousands)
Net unrealized depreciation
arising during the year, net of tax $ (1,977)
Less: Reclassification adjustment for net
gains included in net income, net of tax 1,807
-----
Net unrealized loss on securities, net of tax $ (170)
4
See accompanying notes to consolidated financial statements.
LONG ISLAND FINANCIAL CORP.
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months
Ended September 30,
(In thousands) 2004 2003
---- ----
Cash flows from operating activities:
Net income $ 1,175 $ 2,374
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 5,575 60
Depreciation and amortization 806 727
Amortization of premiums, net of discount accretion 198 1,463
Net gain on sales and calls of securities, held-to-maturity (335) -
Net gain on sales and calls of securities, available-for-sale (2,534) (400)
Loans originated for sale, net of proceeds from sales and gains 1,574 (1,682)
Net deferred loan origination fees 88 126
Earnings on bank owned life insurance (288) (306)
Bank owned life insurance benefit (192) -
Deferred income taxes (1,009) -
Change in other assets and liabilities:
Accrued interest receivable (556) 309
Prepaid expenses and other assets (1,120) 222
Accrued expenses and other liabilities (1,102) (107)
----- ---
Net cash provided by operating activities 2,280 2,786
----- -----
Cash flows from investing activities:
Purchases of securities available-for-sale (577,925) (565,050)
Net purchase of Federal Home Loan Bank stock (3,322) (912)
Proceeds from sales of securities available-for-sale 67,161 30,607
Proceeds from maturities and calls of securities held-to-maturity 1,347 -
Proceeds from maturities and calls of securities available-for-sale 472,822 514,181
Principal repayments on securities 9,603 29,634
Loan originations, net of principal repayments (20,799) (5,931)
Redemption of bank owned life insurance 922 -
Purchase of premises and equipment (554) (2,372)
--- -----
Net cash (used in) provided by investing activities (50,745) 157
------ ---
Cash flows from financing activities:
Net decrease in demand deposit, savings, NOW, and money market accounts (25,613) (28,782)
Net decrease in certificates of deposit (26,491) (17,105)
Net increase in federal funds purchased and securities sold under agreements to repurchase 50,430 18,000
Net increase in other borrowings 15,000 10,000
Shares issued under the dividend reinvestment and stock purchase plan 138 118
Exercise of stock options 389 489
Payments for cash dividends (541) (441)
--- ---
Net cash provided by (used in) financing activities 13,312 (17,721)
------ -------
Net decrease increase in cash and cash equivalents (35,153) (14,778)
Cash and cash equivalents at beginning of period 46,745 25,790
------ ------
Cash and cash equivalents at end of period $ 11,592 $ 11,012
------ ------
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid during the period for:
Interest $ 7,473 $ 6,945
----- -----
Income taxes $ 2,171 $ 1,107
----- -----
Non-cash investing activities:
- ------------------------------
Fair value of securities transferred from held-to-maturity
to available-for-sale $ 13,454 $ -
------ -----
See accompanying notes to consolidated financial statements.
5
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, 2004, are not necessarily indicative of the results of operations
that may be expected for the entire fiscal year. Certain information and note
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain reclassifications have been made to
prior year amounts to conform to the current year presentation. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements, and notes thereto, included in the Company's
2003 Annual Report on Form 10-K.
6
The Company makes available through its internet website, www.licb.com, its
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and all amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Such reports are
free of charge and are available as soon as reasonably practicable after the
Company electronically files such materials with, or furnishes it to, the
Securities and Exchange Commission.
2. SECURITIES
The following table sets forth certain information regarding amortized cost and
estimated fair value of the securities held-to-maturity and available-for-sale
as of the dates indicated:
September 30, 2004 December 31, 2003
------------------ -----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
(In thousands)
Held-to-maturity:
Corporate debt $ - - $ 12,474 14,438
----- ----- ------ ------
Total securities held-to-maturity $ - - $ 12,474 14,438
----- ----- ------ ------
Available-for-sale:
U.S. Government and Agency obligations $ 232,439 231,213 $ 176,141 175,194
Mortgage-backed securities:
GNMA 23,909 23,683 33,669 33,283
FHLMC 2,089 2,078 3,743 3,757
FNMA 1,611 1,647 2,547 2,595
Municipal obligation 200 200 - -
Corporate debt - - 2,010 2,138
---- --- ----- -----
Total securities available-for-sale $ 260,248 258,821 $ 218,110 216,967
------- ------- ------- -------
On March 10, 2004, the Company complied with an issuer's tender offer which
resulted in the redemption of a $1,000,000 par value corporate debt security
classified as "held to maturity" and recognized a gain of $335,155. On March 10,
2004, as a result of that tender offer, the Company transferred the remaining
$12.0 million par value of corporate debt securities with a market value of
$13.5 million from the classification of "held-to-maturity" to
"available-for-sale." On April 1, 2004, the Company sold the entire corporate
debt securities portfolio recognizing a gain of $2.5 million, which is recorded
in other operating income in the caption "net gain on sales and calls of
securities."
3. LOANS, NET
Loans, net, are summarized as follows:
September 30, 2004 December 31, 2003
------------------ -----------------
(Dollars in thousands)
Loans held-for-sale:
Residential real estate loans $ 786 100.0 % $ 2,360 100.0 %
--- ----- ----- -----
Loans, net:
Commercial and industrial loans $ 45,992 18.6 % $ 42,723 18.5 %
Commercial real estate loans 166,599 67.3 145,084 63.0
Automobile loans 29,892 12.1 41,158 17.9
Residential mortgage loans 3,240 1.3 - 0.0
Consumer loans 1,836 0.7 1,381 0.6
----- --- ----- ---
247,559 100.0 230,346 100.0
Less:
Unearned income 1,813 3,328
Deferred fees, net 978 890
Allowance for loan losses 5,794 2,290
----- -----
Total loans, net $ 238,974 $ 223,838
------- -------
7
Automobile loans
- ----------------
The Company maintained a program of making non-recourse loans to a local
automobile leasing company (the "third party") and received as security an
assignment of each individual lease and a collateral interest in each
automobile. The third party, in addition to providing complete servicing of the
portfolio, was obligated for the repayment of the entire principal balance of
each loan at the time each individual lease terminates. In March 2004, the
Company learned that, due to liquidity issues and financial difficulties, the
third party would not have the ability to fulfill its obligations.
During the third quarter of 2004, the Company continued to monitor the
performance of its automobile loan portfolio. The Company continues to act
collectively with other banks, which have loans outstanding to the third party.
The Company believes that the course of action taken during the second and third
quarter, along with the cooperation of the other banks, has stabilized the
portfolio and will ultimately lead to maximizing the value of disposed
collateral.
At September 30, 2004, the automobile loan portfolio consisted of 1,367 loans
with balances aggregating $28.1 million. Automobile loans represented 11.5% of
the Bank's loan portfolio, net of unearned income and deferred fees.
Approximately 83.8% of the automobile loan balances mature through September
2006. Delinquencies at September 30, 2004, consisted of fifteen loans, 30-89
days past due, representing $460,420, or 1.6 % of the portfolio, and five loans,
aggregating $68,974, or .2% of the portfolio, greater than 90 days past due.
Those five loans are classified non-accrual at September 30, 2004. Since the
portfolio was underwritten to lessees of high credit quality, those delinquency
statistics remain favorable and are in line with the Company's expectations.
The Company incurred operating expenses relating to the automobile loan
portfolio of $206,000 for the quarter ended September 30, 2004, and $1.1 million
for the nine months ended September 30, 2004. Those expenses include, but are
not limited to, expenses for legal services, portfolio servicing and
administration, collateral verification and disposition services, and audit and
accounting services. At September 30, 2004, 63.8% of the operating expenses
incurred related to the automobile loan portfolio were attributable to the
satisfaction of certain liabilities of the third party and are not recurring.
While the Company expects to incur future operating expenses related to the
automobile loan portfolio, it expects those expenses to decrease as the
portfolio matures. Recurring operating costs for the automobile loan portfolio
are expensed when incurred and recorded in "automobile loan expense" in the
consolidated statement of earnings.
Allowance for loan losses
- -------------------------
The Company has continued to recognize losses in the automobile loan portfolio
related to the shortfall between the principal balance of loans and the
collateral value realized upon termination of the leases. The extent to which
the Company can recover value will depend to a large extent on future market
conditions for used automobiles combined with the success of the third party's
national remarketing servicer's efforts. Based upon the Company's assessment of
the loan portfolio and a review of recent collateral disposition activity, the
Company made a provision for loan losses of $75,000 for the quarter ended
September 30, 2004. Total provision for loan losses and charge-offs relating to
the automobile portfolio amounted to $5.6 million and $1.9 million,
respectively, for the nine months ended September 30, 2004.
8
4. STOCK BASED COMPENSATION
The Company applies the intrinsic-value based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. That method includes Financial
Accounting Standards Board (FASB) Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion No.
25, issued in March 2000, to account for its fixed-plan stock options. Under
that method, compensation expense is recorded on the date of grant only if the
current market price of the stock exceeds the exercise price. Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based
Compensation, established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123, the Company has elected to continue to apply
the intrinsic-value-based method of accounting described above, and has adopted
only the disclosure requirements of SFAS No. 123. The following table
illustrates the effect on net income if the fair-value-based method had been
applied to all stock options granted or vested in each period:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2004 2003 2004 2003
--------------------------------------------------
(Dollars in thousands, except per share data)
Net income as reported $ 1,151 $ 794 $ 1,175 $ 2,374
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all awards, net of tax 45 53 189 241
-- -- --- ---
Pro forma net income $ 1,106 $ 741 $ 983 $ 2,133
----- --- --- -----
Earnings per share:
Basic As Reported $ .76 $ .54 $ .78 $ 1.62
Pro forma .73 .50 .66 1.45
Diluted As Reported .73 .51 .74 1.54
Pro forma $ .70 $ .48 $ .62 $ 1.39
5. RECENT DEVELOPMENTS
On August 25, 2004, the Board of Directors of the Company declared a quarterly
dividend of $.12 per common share. The dividend was paid October 1, 2004, to
shareholders of record as of September 17, 2004.
6. OTHER COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Bank enters into commitments to purchase
investment securities. At September 30, 2004, the Bank had no outstanding
commitments to purchase investment securities.
9
7. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, FASB issued FASB Interpretation No. 46(R) ("FIN 46(R)"),
"Consolidation of Variable Interest Entities" which clarified certain provisions
of a previously released interpretation. On December 31, 2003, the Company
adopted FIN 46(R). Under the provisions of FIN 46(R), the Company deconsolidated
LIF Statutory Trust I and accounts for its investment in the trust as an asset,
its subordinated debentures as a liability, and the interest paid on those
debentures as interest expense. As a result of the adoption of FIN 46(R), the
Company's prior period presentations have been restated to conform to the
current presentation.
In March 2004, the FASB published an Exposure Draft, "Share-based Payment, an
Amendment of FASB Statements No. 123 and 95." The Exposure Draft proposes
changes in accounting that would replace existing requirements under SFAS 123
and APB Opinion No 25. Under the proposal, all forms of share-based payments to
employees, including employee stock options, would be treated the same as other
forms of compensation by recognizing the related cost in the income statement.
The expense of the award would generally be measured at fair value at the grant
date. Current accounting guidance requires that the expense relating to employee
stock options only be disclosed in the footnotes to the financial statements.
In March 2004, the SEC issued Staff Accounting Bulletin ("SAB") No. 105,
"Application of Accounting Principles to Loan Commitments." SAB No. 105
clarifies certain provisions of SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amended portions of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" and is
effective for periods following September 30, 2004. Together, SAB No. 105 and
SFAS No. 149 provide guidance with regard to accounting for loan commitments.
Under SAB No. 105 and SFAS No. 149, loan commitments relating to the origination
of mortgage loans that will be held for sale shall be accounted for as
derivative instruments by the issuer of the commitment. The adoption of SFAS No.
149 on April 1, 2004, did not have any impact on the Company's consolidated
financial statements, as the Company has determined that the loan commitments
relating to the origination of the mortgage loans held-for-sale outstanding as
of September 30, 2004 do not constitute a derivative instrument and therefore do
not fall under the scope of SFAS 149. Such loans are originated and sold
simultaneously to an institutional investor and therefore do not carry any
inherent interest rate risk.
In March 2004, the FASB ratified Emerging Issues Task Force Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments," ("EITF 03-1"), which provides guidance on recognizing
other-than-temporary impairments on certain investments. EITF 03-1 is effective
for other-than-temporary impairment evaluations for investments accounted for
under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," as well as non-marketable equity securities accounted for under the
cost method for reporting periods beginning after June 15, 2004. On September
30, 2004, the FASB directed the FASB staff to delay the effective date for the
measurement and recognition guidance contained in paragraphs 10-20 of EITF
03-01. This delay will be superseded concurrent with the final issuance of FASB
Staff Position EITF 03-01a. During the period of delay, the Company continues to
apply the relevant "other-than-temporary" guidance under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations Overview
----------------------
The principal business of Long Island Financial Corp. consists of the operation
of a wholly-owned subsidiary, Long Island Commercial Bank. Long Island
Commercial Bank is a New York state-chartered commercial bank, which began
operations in 1990, and is engaged in commercial and consumer banking in
Islandia, New York, and the surrounding communities of Suffolk and Nassau
counties, and in Kings County. The Bank offers a broad range of commercial and
consumer banking services, including loans to and deposit accounts for small and
medium-sized businesses, professionals, high net worth individuals and
consumers. The Bank is an independent local bank, emphasizing personal attention
and responsiveness to the needs of its customers.
Critical Accounting Policies and Estimates
The Company identifies accounting policies critical to the Company's operations
and understanding of the Company's results of operations. Certain accounting
policies are considered to be important to the portrayal of the Company's
financial condition, since they require management to make complex or subjective
judgments, some of which may relate to matters that are inherently uncertain.
Allowance for Loan Losses
The Company has determined that the methodology used in determining the level of
its allowance for loan losses is critical in the presentation and understanding
of the Company's consolidated financial statements. The allowance for loan
losses represents management's estimate of probable losses inherent in the
portfolio. The evaluation process for making provisions for loan losses is
subject to numerous estimates and judgments. Changes in those estimates would
have a direct impact on the provision for loan losses and could result in a
change in the allowance. While management uses available information to
determine losses on loans, future additions to the allowance may be necessary
based on, among other things, unanticipated changes in economic conditions,
particularly in Suffolk and Nassau counties.
In evaluating the portfolio, management takes into consideration numerous
factors such as the Company's loan growth, prior loss experience, present and
potential risks of the loan portfolio, risk ratings assigned by lending
personnel, ratings assigned by the independent loan review function, the present
financial condition of the borrowers, current economic conditions, and other
portfolio risk characteristics. The Company's formalized process for assessing
the adequacy of the allowance for loan losses and the resultant need, if any,
for periodic provisions to the allowance charged to income consists of both
individual loan analyses and loan pool analyses. The individual loan analyses
are periodically performed on individually significant loans or when otherwise
deemed necessary and primarily encompass commercial real estate loans and
commercial and industrial loans. Management believes that the Company's
allowance for loan losses at September 30, 2004 is adequate to provide for
estimated probable losses inherent in the portfolio.
Securities
The fair value of securities classified as held-to-maturity or
available-for-sale is based upon quoted market prices. If quoted market prices
are not available, fair values are extrapolated from the quoted prices of
similar instruments.
11
Deferred Tax Assets
The Company uses estimates of future earnings to support the position that the
benefit of its deferred tax assets will be realized. If future income should
prove non-existent or less than the amount of the deferred tax assets within the
tax years to which they may be applied, the asset may not be realized and the
Company's net income will be reduced.
Financial Condition
Total assets were $537.9 million as of September 30, 2004, an increase of $13.2
million, or 2.5%, from $524.7 million at December 31, 2003. The increase
primarily was due to an increase in the securities available-for-sale portfolio,
offset in part by decreases in cash and due from banks, federal funds sold, and
the securities held-to-maturity portfolio. Securities available-for-sale
increased $41.8 million, or 19.3%, to $258.8 million at September 30, 2004,
compared to $217.0 million at December 31, 2003. The increase in securities
available-for-sale was due to increased purchase activity. The decrease from
period to period in federal funds sold and cash and due from banks, of $25.2
million and $9.9 million, respectively, primarily reflects the decrease of
seasonal municipal funds on deposit at December 31, 2003. Loans, net of unearned
income and deferred fees, increased $18.7 million, from $226.1 million at
December 31, 2003, to $244.8 million at September 30, 2004, reflecting increases
primarily in commercial real estate loans and commercial and industrial loans.
Deferred tax assets increased $1.1 million, or 76.5%, from $1.5 million at
December 31, 2003, to $2.6 million at September 30, 2004, which, in turn, was
directly related to both the $170,000 increase in accumulated other
comprehensive loss at September 30, 2004, and the $5.6 million provision for
loan losses for the nine months ended September 30, 2004.
Total liabilities increased $12.2 million, or 2.5%, from $498.3 million at
December 31, 2003, to $510.5 million at September 30, 2004. The increase in
total liabilities was due principally to an increase in borrowings, partially
offset by a decrease in total deposits. The Company utilizes overnight and short
term borrowings, primarily in the form of overnight federal funds purchased and
securities sold under agreements to repurchase, and other borrowings which
primarily consist of medium and convertible term advances from the Federal Home
Loan Bank of New York (FHLBNY), as a low cost funding source to fund asset
growth. There were $50.4 million of federal funds purchased and securities sold
under agreements to repurchase at September 30, 2004. Other borrowings increased
$15.0 million, or 24.6%, to $76.0 million at September 30, 2004. The decrease in
total deposits is primarily the result of a decrease in NOW and money market
deposits of $37.9 million, or 30.7%, from $123.7 million at December 31, 2003 to
$85.8 million at September 30, 2004, attributable to the withdrawal of seasonal
municipal funds on deposit at December 31, 2003. Other time deposits decreased
$24.1 million, or 28.2%, from $85.5 million at December 31, 2003, to $61.4
million at September 30, 2004 as the Bank strives to substitute low cost demand,
savings, NOW and money market deposits for time deposits.
Stockholders' equity increased $1.0 million, or 3.8%, from $26.4 million at
December 31, 2003, to $27.4 million at September 30, 2004. The increase in
stockholders equity was attributable to $1.2 million of net income for the nine
months ended September 30, 2004, and $527,000 of stock issued through the
exercise of stock options and the dividend reinvestment and stock purchase plan.
Offsetting in part those increases, were a $170,000 increase in accumulated
other comprehensive loss relating to the securities available-for-sale
portfolio, and dividends declared of $541,000.
12
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
upon both the volume of interest-earning assets and interest-bearing liabilities
and the rates earned or paid on them.
The following tables set forth certain information relating to the Company's
consolidated average balance sheets and its consolidated statements of earnings
for the three and nine months ended September 30, 2004 and 2003, and reflect the
average yield on interest-earning assets and average cost of interest-bearing
liabilities for the periods indicated. Yields and costs are derived by dividing
annualized income or expense by the average balance of interest-earning assets
or interest-bearing liabilities, respectively. Average balances are derived from
average daily balances. Average loan balances include non-performing loans
although the amount of non-performing loans is not material.
13
Three Months Ended September 30,
-----------2004----------- -----------2003-----------
Average Average
Average Yield / Average Yield /
Balance Interest Cost Balance Interest Cost
(Dollars in thousands)
Assets:
Interest-earning assets:
Federal funds sold and
interest-earning deposits $ 427 $ 1 .94 % $ 6,613 $ 15 .91 %
Securities, net (1) 280,398 2,803 4.00 202,043 2,071 4.10
Loans, net of unearned income and
deferred fees (2) 245,147 4,091 6.68 217,488 3,762 6.92
------- ----- ---- ------- ----- ----
Total interest-earning assets 525,972 6,895 5.24 426,144 5,848 5.49
Non-interest-earning assets 24,890 33,909
------ ------
Total assets $ 550,862 $ 460,053
------- -------
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits $ 109,212 309 1.13 $ 96,123 272 1.13
NOW and money market deposits 61,171 124 .81 56,515 96 .68
Certificates of deposit 78,642 580 2.95 106,554 852 3.20
------ --- ---- ------- --- ----
Total interest-bearing deposits 249,025 1,013 1.63 259,192 1,220 1.88
Borrowed funds 165,307 1,141 2.76 69,713 746 4.28
Subordinated debentures 7,732 208 10.76 7,732 209 10.81
----- --- ----- ----- --- -----
Total interest-bearing liabilities 422,064 2,362 2.24 336,637 2,175 2.58
Other non-interest-bearing liabilities 104,273 98,058
------- ------
Total liabilities 526,337 434,695
Stockholders' equity 24,525 25,358
------ ------
Total liabilities and
stockholders' equity $ 550,862 $ 460,053
------- -------
Net interest income/
interest rate spread (3) $ 4,533 3.00% $ 3,673 2.91 %
----- ---- ----- ----
Net interest margin (4) 3.45% 3.45 %
---- ----
Ratio of interest-earning assets to
interest-bearing liabilities 1.25x 1.27x
----- -----
(1) Unrealized appreciation / depreciation on available-for-sale securities are
recorded in non-interest earning assets.
(2) Amount excludes allowance for loan losses.
(3) Interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
14
Nine Months Ended September 30,
-----------2004----------- -----------2003-----------
Average Average
Average Yield / Average Yield /
Balance Interest Cost Balance Interest Cost
(Dollars in thousands)
Assets:
Interest-earning assets:
Federal funds sold and
interest-earning deposits $ 872 $ 6 .92 % $ 8,249 $ 65 1.05 %
Securities, net (1) 276,719 8,107 3.91 210,155 6,458 4.10
Loans, net of unearned income and
deferred fees (2) 237,176 11,762 6.61 215,966 11,355 7.01
------- ------ ---- ------- ------ ----
Total interest-earning assets 514,767 19,875 5.15 434,370 17,878 5.49
Non-interest-earning assets 32,667 38,259
------ ------
Total assets $ 547,434 $ 472,629
------- -------
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits $ 105,200 872 1.11 $ 89,109 849 1.27
NOW and money market deposits 98,496 583 .79 84,292 569 .90
Certificates of deposit 88,023 1,950 2.95 107,930 2,746 3.39
------ ----- ---- ------- ----- ----
Total interest-bearing deposits 291,719 3,405 1.56 281,331 4,164 1.97
Borrowed funds 119,645 2,778 3.10 67,601 2,144 4.23
Subordinated debentures 7,732 621 10.71 7,732 620 10.69
----- --- ----- ----- --- -----
Total interest-bearing liabilities 419,096 6,804 2.16 356,664 6,928 2.59
Other non-interest-bearing liabilities 101,539 90,232
------- ------
Total liabilities 520,635 446,896
Stockholders' equity 26,799 25,733
------ ------
Total liabilities and
stockholders' equity $ 547,434 $ 472,629
------- -------
Net interest income/
interest rate spread (3) $ 13,071 2.99 % $ 10,950 2.90 %
------ ---- ------ ----
Net interest margin (4) 3.39% 3.36 %
---- ----
Ratio of interest-earning assets to
interest-bearing liabilities 1.23x 1.22x
----- -----
(1) Unrealized appreciation / depreciation on available-for-sale securities are
recorded in non-interest earning assets.
(2) Amount excludes allowance for loan losses.
(3) Interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
15
Comparison of Operating Results for the Three Months Ended September 30, 2004
and 2003
General
The Company reported net income of $1.2 million, or diluted earnings per share
of $.73 for the three months ended September 30, 2004, compared to $794,000, or
diluted earnings per share of $.51 for the three months ended September 30,
2003.
Interest Income
Interest income increased $1.0 million, or 17.9%, for the three months ended
September 30, 2004, compared to the three months ended September 30, 2003. That
increase was attributable to the $99.9 million, or 23.4%, increase in the
average balance of interest-earning assets from $426.1 million for the three
months ended September 30, 2003, to $526.0 million for the three months ended
September 30, 2004. The increase in income from the increase in the average
balance of interest earning assets was offset in part by a 25 basis point
decrease in the average yield on interest-earning assets from 5.49% for the
three months ended September 30, 2003, to 5.24% for the three months ended
September 30, 2004. The decrease in average yield on interest-earning assets was
attributable to a 10 basis point decrease in yield on securities which declined
from 4.10% for the three months ended September 30, 2003, to 4.00% for the three
months ended September 30, 2004, and a 24 basis point decrease in the average
yield on loans, net, from 6.92% for the three months ended September 30, 2003,
to 6.68% for the the three months ended September 30, 2004. Partially offsetting
the declines in yield from period to period was a $78.4 million, or 38.8%
increase in the average balance of securities from $202.0 million for three
months ended September 30, 2003, to $280.4 million for the three months ended
September 30, 2004, and a $27.6 million, or 12.7% increase in the average
balance of loans, net, from $217.5 million for the three months ended September
30, 2003, to $245.1 million for the three months ended September 30, 2004.
Interest Expense
Interest expense for the three months ended September 30, 2004 was $2.4 million,
compared to $2.2 million for the three months ended September 30, 2003, an
increase of $187,000, or 8.6%. The increase was attributable to an $85.5 million
increase in the average balance of interest-bearing liabilities from $336.6
million for the three months ended September 30, 2003, to $422.1 million for the
three months ended September 30, 2004. The increase in the average balance of
interest bearing liabilities was partially offset by a 34 basis point decrease
in the average cost of interest-bearing liabilities from 2.58% for the three
months ended September 30, 2003 to 2.24% for the three months ended September
30, 2004. The increase in the average interest-bearing liabilities, when
compared to the prior year period, reflects decreases of $10.2 million in the
average balance of interest-bearing deposits and an increase of $95.6 million in
the average balance of borrowed funds. There was no change in the average
balance of subordinated debentures from September 30, 2003, to September 30,
2004.
Interest expense on interest-bearing deposits decreased $207,000, or 17.0%, for
the three months ended September 30, 2004, from $1.2 million for the three
months ended September 30, 2003, to $1.0 million for the three months ended
September 30, 2004. That decrease was due to a decrease of $10.2 million in the
average balance of interest bearing deposits from period to period in
conjunction with a 25 basis point decrease in the average rate paid from 1.88%
for three months ended September 30, 2003 to 1.63% for the three months ended
September 30, 2004. The decrease in the average balance of interest bearing
deposits was the result of a decrease in the average balance of certificates of
deposits.
16
From time to time, the Company employs various funding strategies to minimize
its overall costs of funds. Offsetting, in part, the decrease in the average
balance of certificates of deposit, was an increase in the average balance of
savings deposits of $13.1 million, or 13.6%, and in the average balance of NOW
and money market deposits of $4.7 million, or 8.2% from period to period.
Interest expense on borrowed funds increased $395,000, or 52.9%, from $746,000
for the three months ended September 30, 2003, to $1.1 million for the three
months ended September 30, 2004. The increase was primarily due to the average
balance of borrowed funds, which increased from $69.7 million for the three
months ended September 30, 2003 to $165.3 million for the three months ended
September 30, 2004. Offsetting in part the cost resulting from the increase in
the average balance was a 152 basis point decrease in the average cost of
borrowed funds from 4.28% for the 2003 period, to 2.76% for the 2004 period.
Net Interest Income
Net interest income increased by $860,000, or 23.4%, from $3.7 million for the
three months ended September 30, 2003, to $4.5 million for the three months
ended September 30, 2004. The average cost of interest-bearing liabilities
decreased 34 basis points from 2.58% for the three months ended September 30,
2003, to 2.24% for the three months ended September 30, 2004. The average yield
on interest-earning assets decreased 25 basis points from 5.49% for the three
months ended September 30, 2003 to 5.24% for the three months ended September
30, 2004. The net interest rate spread increased 9 basis points, from 2.91% for
the three months ended September 30, 2003, to 3.00% for the three months ended
September 30, 2004.
Provision for Loan Losses
The Company made a $75,000 provision for loan losses for the three months ended
September 30, 2004. No provision for loan losses was made for the three months
ended September 30, 2003. The determination to make the provision for loan
losses for the three months ended September 30, 2004 reflects management's
qualitative and quantitative assessment of the loan portfolio, net charge-offs
and collection of delinquent loans. The allowance for loan losses amounted to
$5.8 million at September 30, 2004 and $2.3 million at December 31, 2003. The
allowance for loan losses as a percentage of loans was 2.37% at September 30,
2004, and 1.01% at December 31, 2003.
The following table sets forth information regarding non-accrual loans and loans
delinquent 90 days or more and still accruing interest at the dates indicated.
It is the Company's general policy to discontinue accruing interest on all
loans, which are past-due more than 90 days or when, in the opinion of
management, such suspension is warranted. When a loan is placed on non-accrual
status, the Company ceases the accrual of interest owed and previously accrued
interest is charged against interest income. Loans are generally returned to
accrual status when principal and interest payments are current, there is
reasonable assurance that the loan is fully collectible and a consistent record
of performance has been demonstrated.
17
September 30, 2004 December 31, 2003
(Dollars in thousands)
Non-accrual loans:
Commercial and industrial loans $ - $ -
Commercial real estate loans - -
Automobile loans 69 -
--- ---
Total non-accrual loans 69 -
--- ---
Loans accruing - over 90 days:
Commercial and industrial loans - -
- ---
Total loans accruing-over 90 days - -
- ---
Total non-performing loans $ 69 $ -
-- ---
Allowance for loan losses as a percentage of loans (1) 2.37 % 1.01 %
Allowance for loan losses as a percentage
of total non-performing loans 8,397.10 -
Non-performing loans as a percentage of loans (1) .03 % - %
(1) Loans include loans, net of unearned income and deferred fees.
Other Operating Income
Other operating income decreased $141,000, to $1.0 million for the three months
ended September 30, 2004, as compared to the three months ended September 30,
2003. That decrease was primarily attributable to a net gain on sales and calls
of securities of $158,000 for the three months ended September 30, 2003,
compared to an $11,000 loss for the three months ended September 30, 2004.
Offsetting that decrease, in part, was a $22,000, or 4.0%, increase in service
charges on deposit accounts reflecting an increased fee structure and overall
growth in the depositor base and a $23,000, or 12.4% increase in net gain on
sale of residential loans.
Other Operating Expenses
Other operating expenses increased $63,000 or 1.8%, to $3.6 million for the
three months ended September 30, 2004. The increase in operating expenses
stemmed from expenses associated with the automobile loan portfolio for the
three months ended September 30, 2004 of $206,000. Offsetting this increase, in
part, were reductions in salaries and employee benefits and other expenses as
the Company implemented certain cost controls and modified its branch expansion
plan.
Income Taxes
Income taxes increased $224,000, or 50.9%, from $440,000 for the three months
ended September 30, 2003, to $664,000 for the three months ended September 30,
2004, as a result of the increase in income before income taxes. The effective
tax rates for each of the three months ended September 30, 2004, and September
30, 2003, were 36.6% and 35.7%, respectively.
Comparison of Operating Results for the Nine Months Ended September 30, 2004 and
2003
General
The Company reported net income of $1.2 million, or diluted earnings per share
of $.74 for the nine months ended September 30, 2004, compared to $2.4 million,
or diluted earnings per share of $1.54 for the nine months ended September 30,
2003. The decrease in net income for the nine months ended September 30, 2004 as
compared to the prior year period is attributable primarily to a $5.5 million
increase in the Company's provision for loan losses and operating expenses
relating to its automobile loan portfolio.
18
Interest Income
Interest income increased $2.0 million, or 11.2%, for the nine months ended
September 30, 2004, compared to the nine months ended September 30, 2003. That
increase was attributable to the $80.4 million, or 18.5%, increase in the
average balance of interest-earning assets from $434.4 million for the nine
months ended September 30, 2003, to $514.8 million for the nine months ended
September 30, 2004. The increase in income from the increase in the average
balance of interest earning assets was offset in part by a 34 basis point
decrease in the average yield on interest-earning assets from 5.49% for the nine
months ended September 30, 2003, to 5.15% for the nine months ended September
30, 2004 . The decrease in average yield on interest-earning assets was
attributable to a 19 basis point decrease in yield on securities which declined
from 4.10% for the nine months ended September 30, 2003, to 3.91% for the nine
months ended September 30, 2004, and a 40 basis point decrease in the average
yield on loans, net, from 7.01% for the nine months ended September 30, 2003, to
6.61% for the nine months ended September 30, 2004. Partially offsetting the
declines in yield from period to period was a $66.5 million, or 31.7% increase
in the average balance of securities from $210.2 million for the nine months
ended September 30, 2003, to $276.7 million for the nine months ended September
30, 2004, and a $21.2 million, or 9.8% increase in the average balance of loans,
net of unearned income and deferred fees, from $216.0 million for the nine
months ended September 30, 2003, to $237.2 million for the nine months ended
September 30, 2004.
Interest Expense
Interest expense for the nine months ended September 30, 2004 was $6.8 million,
compared to $6.9 million for the nine months ended September 30, 2003, a
decrease of $124,000, or 1.8%. The decrease was attributable to a 43 basis point
decrease in the average cost of interest-bearing liabilities from 2.59% for the
nine months ended September 30, 2003 to 2.16% for the nine months ended
September 30, 2004. The decrease in the average cost was partially offset by a
$62.4 million, or 17.5%, increase in the average balance of interest-bearing
liabilities from $356.7 million for the nine months ended September 30, 2003, to
$419.1 million for the nine months ended September 30, 2004. The increase in
average interest-bearing liabilities, when compared to the nine months ended
September 30, 2003, reflects increases of $10.4 million in the average balance
of interest-bearing deposits and $52.0 million in the average balance of
borrowed funds. There was no change in the average balance of subordinated
debentures from September 30, 2003, to September 30, 2004.
Interest expense on interest-bearing deposits decreased $759,000, or 18.2%, for
the nine months ended September 30, 2004, from $4.2 million for the nine months
ended September 30, 2003 to $3.4 million for the nine months ended September 30,
2004. That decrease was primarily due to a 41 basis point decrease in the
average rate paid on interest-bearing deposits from 1.97% for nine months ended
September 30, 2003 to 1.56% for the nine months ended September 30, 2004.
Offsetting, in part, the decrease in the average rate paid was an increase in
the average balance of interest-bearing deposits of $10.4 million for the nine
months ended September 30, 2004 from the nine months ended September 30, 2003.
The increase in the average balance of interest-bearing deposits was the result
of increases in the average balance of savings deposits of $16.1 million, or
18.1%, and in the average balances of NOW and money market deposits of $14.2
million, or 16.9% from period to period.
19
Interest expense on borrowed funds increased $634,000, or 29.6%, from $2.1
million for the nine months ended September 30, 2003, to $2.8 million for the
nine months ended September 30, 2004. The increase was primarily due to the
average balance of borrowed funds, which increased from $67.6 million for the
nine months ended September 30, 2003 to $119.6 million for the nine months ended
September 30, 2004. Offsetting in part the cost from the increase in the average
balance was a 113 basis point decrease in the average cost of borrowed funds
from 4.23% for the nine months ended September 30, 2003, to 3.10% for nine
months ended September 30, 2004.
Net Interest Income
Net interest income increased by $2.1 million, or 19.4%, from $11.0 million for
the nine months ended September 30, 2003, to $13.1 million for the nine months
ended September 30, 2004. The average cost of total interest-bearing liabilities
for the period decreased 43 basis points from 2.59% in the 2003 period to 2.16%
in the 2004 period. The average yield on total interest-earning assets for the
period decreased 34 basis points from 5.49% in the 2003 period to 5.15% in the
2004 period. The net interest rate spread increased 9 basis points, from 2.90%
for the nine months ended September 30, 2003, to 2.99% for the nine months ended
September 30, 2004.
Provision for Loan Losses
The Company made a $5.6 million provision for loan losses for the nine months
ended September 30, 2004, compared to a $60,000 provision for loan losses made
for the nine months ended September 30, 2003. The determination to increase the
provision for loan losses for the nine months ended September 30, 2004 reflects
management's qualitative and quantitative assessment of the loan portfolio, net
charge-offs and collection of delinquent loans. The allowance for loan losses
amounted to $5.8 million at September 30, 2004, and $2.3 million at December 31,
2003. The allowance for loan losses as a percentage of loans was 2.37% at
September 30, 2004, and 1.01% at December 31, 2003.
Other Operating Income
Other operating income increased $3.1 million, to $6.2 million for the nine
months ended September 30, 2004, as compared to the nine months ended September
30, 2003. That increase was primarily attributable to an increase in net gain on
sales and calls of securities of $2.5 million, an increase in income relating to
earnings on bank owned life insurance which resulted in proceeds of $192,000
received in conjunction with the death of the Company's Chairman, and an
increase from service charges on deposit accounts. The latter increased
$312,000, or 20.4%, reflecting an increased fee structure and overall growth in
the depositor base.
Other Operating Expenses
Other operating expenses increased $1.7 million, or 16.5%, from $10.3 million
for the nine months ended September 30, 2003, to $12.0 million for the nine
months ended September 30, 2004. The increase in operating expenses stemmed
primarily from expenses associated with the automobile loan portfolio of $1.1
million.
Income Taxes
For the nine months ended September 30, 2004, income tax expense of $471,000 was
recorded for the nine months ended September 30, 2004, compared to income tax
expense of $1.3 million for the nine months ended September 30, 2003.
20
For the nine months ended September 30, 2004, the Company recorded income before
income taxes of $1.6 million, inclusive of a nontaxable death benefit received
in conjunction with the death of the Company's Chairman, compared to income
before income taxes of $3.7 million for the nine months ended September 30,
2003. The effective tax rates for each of the nine months ended September 30,
2004, and September 30, 2003, were 28.6% and 35.7%, 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 maintains levels of liquidity that it considers adequate to meet its
current needs. The Company's principal sources of cash include sales of
investment securities, repayment of loans and incoming deposits. When cash
requirements increase faster than cash is generated, either through increased
loan demand or withdrawal of deposited funds, the Company can arrange for the
sale of loans or liquidate available-for-sale securities. It can also access its
lines of credit, totaling $9.5 million, with unaffiliated financial
institutions, which enable it to borrow federal funds on an unsecured basis. In
addition, the Company has available lines of credit with the Federal Home Loan
Bank of New York equal to 11.8% of the Company's assets at September 30, 2004,
which enable it to borrow funds on a secured basis. The Company could also
engage in other forms of borrowings, including repurchase agreements.
At September 30, 2004, the Company's other borrowings consisted of convertible
and medium term advances from the FHLB. The convertible feature of these
advances allows the FHLB, at a specified call date and quarterly thereafter, to
convert those advances into replacement funding for the same or a lesser
principal amount, based on any advance then offered by the FHLB, at then current
market rates. If the FHLB elects to convert those advances, the Bank may repay
any portion of the advances without penalty. The convertible advances are
secured by various mortgage-backed, callable U.S. agency securities, and certain
other qualifying commercial real-estate collateral.
At September 30, 2004, convertible and medium term advances outstanding were as
follows:
Call Contractual
Amount Rate Date Maturity
------ ---- ---- --------
Convertible advance $ 14,000,000 5.49% 11/19/2004 2/19/2008
Convertible advance 15,000,000 4.59% 10/21/2004 1/21/2009
Convertible advance 5,000,000 2.24% 2/3/2006 2/3/2009
Convertible advance 14,000,000 4.97% 10/19/2004 1/19/2011
Convertible advance 3,000,000 4.11% 12/12/2005 12/12/2011
Convertible advance 10,000,000 2.64% 5/28/2008 5/28/2013
Medium term advance 5,000,000 3.99% - 12/13/2004
Medium term advance 10,000,000 2.37% - 4/14/2006
----------
$ 76,000,000
The primary investing activities of the Company are the purchase of securities
available-for-sale and the origination of loans. During the nine months ended
September 30, 2004, and 2003, the Company's purchases of securities that were
classified available-for-sale totaled $577.9 million and $565.1 million,
respectively. Loan originations, net of principal repayments on loans, totaled
$20.8 million and $5.9 million for the nine months ended September 30, 2004, and
2003, respectively. Borrowings, principal repayments and maturities of
securities were used primarily to fund those activities.
21
Capital Resources
The Bank is subject to the risk based capital guidelines administered by the
banking regulatory agencies. The guidelines currently require all banks to
maintain a minimum ratio of total risk based capital to total risk weighted
assets of 8%, including a minimum ratio of Tier 1 capital to total risk weighted
assets of 4% and a Tier 1 capital to average adjusted assets of 4%. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by the FDIC, the Bank's primary federal
regulator that, if undertaken, could have a direct material effect on the Bank's
financial statements. As of December 31, 2003, the most recent notification from
the FDIC categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action.
In accordance with the requirements of the FDIC and the New York State Banking
Department, the Bank must meet certain measures of capital adequacy with respect
to leverage and risk-based capital. As of September 30, 2004, the Bank exceeded
those requirements with a leverage capital ratio, risk-based capital ratio and
total-risk based capital ratio of 5.66%, 10.02%, and 11.27%, 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 2004, the Board of Directors, approved a 5% stock
repurchase program that would enable the Company to repurchase approximately
74,000 shares of its outstanding common stock. There have been no repurchases
made under that stock purchase program since its announcement. In determining
the extent and timing of stock repurchase programs, in addition to capital
adequacy, the Company considers, the effect on the Company's financial
condition, average daily trading volume, and listing requirements applicable to
the NASDAQ National Market System. At September 30, 2004, the Company held
336,900 shares of treasury stock at an average cost of $12.40 per share.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
The principal objective of the Company's interest rate management is to evaluate
the interest rate risk inherent in certain balance sheet accounts, determine the
level of risk appropriate given the Company's business strategy, operating
environment, capital and liquidity requirements and performance objectives, and
manage the risk consistent with guidelines approved by the Board of Directors.
Through such management, the Company seeks to reduce the vulnerability of its
operations to changes in interest rates. The Board has directed the Investment
Committee to review the Company's interest rate risk position on a quarterly
basis.
Funds management is the process by which the Company seeks to maximize the
profit potential which is derived from the spread between the rates earned on
interest-earning assets and the rates paid on interest-bearing liabilities
through the management of various balance sheet components. It involves
virtually every aspect of the Company's management and decision-making process.
Accordingly, the Company's results of operations and financial condition are
largely dependent on the movements in market interest rates and the Company's
ability to manage its assets and liabilities in response to such movements.
22
At September 30, 2004, 79.3% of the Company's gross loans had adjustable
interest rates and its loan portfolio had an average weighted maturity of 10.4
years. At that date, $42.0 million, or 15.9%, of the Company's securities had
adjustable interest rates, and its securities portfolio had a weighted average
contractual maturity of 7.8 years. At September 30, 2004, the Company had $37.2
million of certificates of deposit with maturities of one year or less and $10.9
million of deposits over $100,000, which tend to be less stable sources of
funding when compared to core deposits, and which represented 12.0% of the
Company's interest-bearing liabilities. In a rising interest rate environment
the Company's interest-bearing liabilities may adjust upwardly more rapidly than
the yield on its adjustable-rate assets. Thus, due to the Company's level of
shorter term certificates of deposit, federal funds purchased and securities
sold under agreements to repurchase, the Company's cost of funds may increase at
a greater rate in a rising rate environment than if it had a greater amount of
core deposits which, in turn, may adversely affect net interest income and net
income.
The Company's interest rate sensitivity is monitored by management through the
use of a quarterly interest rate risk analysis model which evaluates (i) the
potential change in net interest income over the succeeding four quarters and
(ii) the potential change in the fair market value of the 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, 2004, the effect of instantaneous and sustained interest rate
changes on the Company's Net Interest Income and Net Economic Value of Equity
are as follows:
Change in Potential Change in Potential Change in
Interest Rates Net Interest Income Net Economic Value of Equity
in Basis Points $ Change % Change $ Change % Change
--------------- -------- -------- --------- --------
(Dollars in thousands)
200 $(2,036) (10.87) % $ (6,164) (19.05) %
100 (956) (5.11) (2,453) (7.58)
Static -- -- -- --
(100) (891) (4.76) (1,320) (4.08)
(200) (2,329) (12.44) (4,477) (13.83)
Item 4. Controls and Procedures
- -------------------------------
1. Evaluation of disclosure controls and procedures. The Company
maintains controls and procedures designed to ensure that information
required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission.
Based upon their evaluation of those controls and procedures as of the
end of the period covered by the report required by paragraph (b) of
Section 240.13a-15 or Section 240.15d-15 of this chapter, the Chief
Executive and Chief Financial officers of the Company concluded that
the Company's disclosure controls and procedures were adequate.
2. Changes in internal controls. The Company made no significant changes
in its internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation of
those controls by the Chief Executive and Chief Financial officers.
23
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- ------- -----------------
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
- ------- -----------------------------------------------------------
None.
Item 3. Defaults Upon Senior Securities
- ------- -------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
None.
Item 5. Other Information
- ------- -----------------
None.
Item 6. Exhibits
- ------- --------
a. Exhibits
--------
11.0 Statement Re: Computation of Per Share Earnings
31.1 Certification of Chief Executive Officer pursuant to Section
302 of Sarbanes-Oxley Act of 2003
31.2 Certification of Chief Financial Officer pursuant to Section
302 of Sarbanes-Oxley Act of 2003
32.1 Certification of Chief Executive Officer pursuant to Section
906 of Sarbanes-Oxley Act of 2003
32.2 Certification of Chief Financial Officer pursuant to Section
906 of Sarbanes-Oxley Act of 2003
24
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 15, 2004 By: /s/ Douglas C. Manditch
-----------------------
Douglas C. Manditch
President and Chief Executive Officer
Date: November 15, 2004 By: /s/ Thomas Buonaiuto
--------------------
Thomas Buonaiuto
Vice President and Treasurer
25