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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) Annual Report Pursuant to Section 13 or 15(d) of
[X] the Securities Exchange Act of 1934
For the fiscal year ended December 31, 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 Number 0-29826
LONG ISLAND FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Delaware 11-3453684
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1601 Veterans Memorial Highway, Suite 120
Islandia, New York 11749
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(Address of principal executive offices) (Zip Code)
(631) 348-0888
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(Registrant's telephone number, including area code)
None
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(Securities registered pursuant to Section 12(b) of the Act)
Common Stock, $.01 par value
----------------------------
(Securities registered pursuant to Section 12(g) of the Act)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K of any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer. Yes [ ]
No [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, computed by reference to the price at which
the common equity was last sold on the NASDAQ Stock Market as of the last
business day of the registrant's most recently completed second fiscal quarter,
was $38,328,967.
The number of shares outstanding of the registrant's common stock was 1,522,315
as of March 1, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
1. Portions of the 2004 Annual Report to Stockholders for fiscal year 2004 are
incorporated herein by reference - Parts II and IV.
2. Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on April 20, 2005 are incorporated herein by
reference - Part III.
LONG ISLAND FINANCIAL CORP.
2004 FORM 10-K
TABLE OF CONTENTS
Page
PART I Number
Item 1. Business 1
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities 17
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 18
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18
Item 9A. Controls and Procedures 18
Item 9B. Other Information 18
PART III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners and Management And 19
Related Stockholder Matters 19
Item 13. Certain Relationships and Related Transactions 19
Item 14. Principal Accountant Fees and Services 19
PART IV
Item 15. Exhibits and Financial Statement Schedules 20
SIGNATURES 21
CERTIFICATIONS
i
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
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Statements contained in this Form 10-K, which are not historical facts, are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Amounts herein could vary as a result of market
and other factors. Such forward-looking statements are subject to risks and
uncertainties which could cause actual results to differ materially from those
currently anticipated due to a number of factors, which include, but are not
limited to, factors discussed in documents filed by Long Island Financial Corp.
(the "Company") with the Securities Exchange Commission from time to time. Such
forward-looking statements may be identified by the use of such words as
"believe," "expect," "anticipate," "should," "planned," "estimated" and
"potential." Examples of forward-looking statements include, but are not limited
to, estimates with respect to the financial condition, expected or anticipated
revenue, results of operations and business of the Company that are subject to
various factors which could cause actual results to differ materially from these
estimates. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a
material adverse effect on the operations of the Company and its subsidiaries
include, but are not limited to, changes in: interest rates; general economic
conditions; monetary and fiscal policies of the U.S. Government, including
policies of the U.S. Treasury and the Board of Governors of the Federal Reserve
System (FRB); the quality or composition of the loan or investment portfolios;
demand for loan products; deposit flows; real estate values; the level of
defaults; losses and prepayments on loans held by the Company in portfolio or
sold in the secondary markets; demand for financial services in the Company's
market area; changes in accounting principles, policies, or guidelines; changes
in legislation or regulation; and other economic, competitive, governmental,
regulatory, and technological factors affecting the Company's operations,
pricing, products and services. The forward-looking statements are made as of
the date of this Form 10-K, and, except as required by applicable law, the
Company assumes no obligation to update the forward-looking statements or to
update the reasons why actual results could differ from those projected in the
forward-looking statements. Those risks and uncertainties should be considered
in evaluating forward-looking statements and undue reliance should not be placed
on such statements. Readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date of this Form 10-K.
PART I
ITEM 1. BUSINESS
Long Island Financial Corp. ("the Company") is a registered financial holding
company, incorporated in Delaware in 1998 at the direction of the Directors of
Long Island Commercial Bank (the "Bank") for the purpose of becoming a holding
company to own all the outstanding common stock of the Bank. Pursuant to a Plan
of Acquisition effective January 28, 1999, the Bank became a wholly-owned
subsidiary of Long Island Financial Corp., and all of the common stock of the
Bank was converted, on a one-for-one basis, into the common stock of Long Island
Financial Corp. This transaction is hereinafter referred to as the
"Reorganization."
The Reorganization under a bank holding company structure provides greater
operating flexibility by allowing the Company to conduct a broader range of
business activities and permits the Board of Directors of the Company to
determine whether to conduct such activities at subsidiaries of the Bank or in
separate subsidiaries of the Company. The Reorganization also permits expansion
into a broader range of financial services and other business activities that
are not currently permitted to the Bank as a New York state-chartered commercial
bank. Such activities include, among others, operating non-bank depository
institutions, engaging in investment advisory services, and securities brokerage
and management consulting activities.
In November 2000, the Company elected to become a financial holding company as
provided for in the Financial Services Modernization Act of 1999, also known as
the Gramm-Leach-Bliley Act. That Act repealed provisions of the Glass-Steagall
Act and permits a financial holding company to engage in a statutorily provided
list of financial activities, including insurance and securities underwriting
and agency activities, merchant banking and insurance company portfolio
activities. The Act also provides for the approval for a financial holding
company to conduct other activities determined to be financial in nature or
incidental to or complementary to such financial activities. The Company, in
addition to its commercial banking subsidiary, utilizes two subsidiaries which
offer private banking and insurance services to clients of the Company.
1
The primary objective of the Company is to become a preeminent independent
financial services provider by focusing on increasing market share within the
communities served by offering superior personal service combined with a wide
array of state of the art banking products and services to meet the needs of our
commercial and consumer clients.
General
The primary business of the Company is the operation of its wholly-owned
subsidiary, the Bank. The Bank is a New York state-chartered commercial bank,
which began operations in January 1990, and is engaged in commercial and
consumer banking in Islandia, New York, and the surrounding communities in
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. The Bank's
executive management has substantial banking experience, and executive
management and the Board of Directors of the Bank have extensive commercial and
personal ties to the communities in Suffolk and Nassau counties and in Kings
County.
The Bank conducts a full service commercial and consumer banking business, which
primarily consists of attracting deposits from the areas served by its branch
network and using those deposits to originate a variety of commercial, consumer
and real estate loans. During periods in which the demand for loans which meet
the Bank's underwriting and interest rate risk standards is less than the amount
of funds available for investment, the Bank invests excess funds in federal
funds, mortgage-backed securities, corporate debt, securities issued by the U.S.
Government and agencies thereof, and municipal obligations. The Bank's revenues
are derived principally from interest income on its loan and securities
portfolios. The Bank's principal expenses are interest paid on deposits,
interest paid on borrowed funds and other operating expenses. Funding sources,
other than deposits, include: secured and unsecured borrowings, available lines
of credit, sales of securities under agreements to repurchase, and cash flows
from lending and investing activities.
The 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.
Market Area and Competition
The Company's primary customer base is established, small-to medium-sized
businesses, professionals, and high net worth individuals and consumers. The
Company believes that emphasizing personal attention and responsiveness to the
needs of its clients, including providing state of the art electronic banking
services and expanded service hours, contributes to the Company's
competitiveness as a financial services provider.
The Bank faces extensive competition in originating loans and in attracting
deposits. Competition among financial institutions is generally based upon
interest rates offered on deposit accounts, interest rates charged on loans,
fees assessed for services performed, the quality and scope of the services
rendered, and the convenience of banking facilities.
A significant number of financial service entities operate within the Company's
market area. In one or more aspects of its business, the Company competes
directly with other commercial banks, savings and mortgage banking companies,
mortgage brokers, and other providers of financial services. Some of these
entities are significantly larger than the Bank and have substantially greater
resources and lending limits, and may offer certain services the Bank does not
provide. In addition, many non-bank competitors are not subject to the same
extensive Federal regulations that govern financial holding companies and
Federally insured banks.
2
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest-rate risk inherent in
its lending and deposit taking activities. To that end, management actively
monitors and manages its interest-rate risk exposure. The measurement of market
risk associated with financial instruments is meaningful only when all related
and offsetting on-and off-balance-sheet transactions are aggregated, and the
resulting net positions are identified.
The Company's primary objective in managing interest-rate risk is to minimize
the adverse impact of changes in interest rates on the Bank's net interest
income and capital, and to adjust the Company's asset-liability structure to
obtain the maximum yield-cost spread on that structure. The Company relies
primarily on its asset-liability management to control interest-rate risk.
However, a sudden and substantial increase in interest rates may adversely
impact the Company's earnings to the extent that the interest rates borne by
assets and liabilities do not change at the same speed, to the same extent, or
on the same basis. The Company does not engage in trading activities.
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the approximate contractual maturities and
sensitivities to changes in interest rates of loans, net of unearned income and
deferred fees, as of December 31, 2004:
Commercial
and Commercial Residential
Industrial Real Estate Automobile Consumer Real Estate Total
Loans Loans Loans Loans Loans Loans
----- ----- ----- ----- ----- -----
(In thousands)
Maturities:
Due within one year $29,702 $ 1,310 $ 13,504 $ 121 $ - $ 44,637
Due after one but within five years 13,874 8,391 10,623 1,375 - 34,263
Due after five but within ten years 1,456 33,593 - 379 3,240 38,668
Due after ten years 1,382 126,855 - - - 128,237
------ ------- ------ ----- ----- -------
Total Due after December 31, 2005 16,712 168,839 10,623 1,754 3,240 201,168
------ ------- ------ ----- ----- -------
Total amount due $46,414 $ 170,149 $ 24,127 $1,875 $3,240 $245,805
------ ------- ------ ----- ----- -------
Rate sensitivity:
Amounts with Fixed Interest Rates $ 4,382 $ 16,585 $ 10,623 $1,467 $ - $ 33,057
Amounts with Adjustable Interest Rates 12,330 152,254 - 287 3,240 168,111
------ ------- ------ --- ----- -------
Total Due after December 31, 2005 $16,712 $ 168,839 $ 10,623 $1,754 $3,240 $201,168
------ ------- ------ ----- ----- -------
Economic Conditions, Government Policies, Legislation, and Regulation
The Bank's results of operations are dependent primarily on net interest income,
which is the difference between the income earned on its loan and security
portfolios and its cost of funds, consisting of interest paid on deposits and
borrowings. Results of operations are also affected by the Bank's provision for
loan losses and other operating income. Other operating expense of the Bank
principally consists of salaries and the expense of employee benefits,
occupancy, premises and equipment expense, and other expenses. Results of
operations are also significantly affected by economic and competitive
conditions, changes in interest rates, government policies, and action of
regulatory authorities.
The Company's results are highly influenced by the monetary and fiscal policies
of the federal government and the policies of regulatory agencies, particularly
the Board of Governors of the Federal Reserve system (the "Federal Reserve").
3
The Federal Reserve implements national monetary policies (with objectives such
as curbing inflation and combating recession) through its open-market operations
in U.S. Government securities by adjusting the required level of reserves for
depository institutions subject to its reserve requirements, and by varying the
target federal funds and discount rates applicable to borrowings by financial
institutions. The actions of the Federal Reserve in those areas influence the
growth of bank loans, investments, and deposits and also affect interest rates
earned on interest-earning assets and rates paid on interest-bearing
liabilities. The nature and impact on the Company of any future changes in
monetary and fiscal policies cannot be fully predicted.
From time to time, legislation, as well as regulations, are enacted which have
the effect of increasing the cost of doing business, limiting or expanding
permissible activities, or affecting the competitive balance between banks and
other financial services providers. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies, and
other financial institutions and financial services providers are frequently
made in the U.S. Congress, in the state legislatures, and before various
regulatory agencies. This legislation may change banking statutes and the
Company's operating environment in substantial and unpredictable ways. If
enacted, such legislation could increase or decrease the cost of doing business,
limit or expand permissible activities or affect the competitive balance among
banks, savings associations, credit unions, and other financial institutions.
The Company cannot predict whether any of this potential legislation will be
enacted, and if enacted, the effect that it, or any implementing regulations,
would have on the Company's financial condition or results of operations.
Lending Activities
General
The Bank offers a variety of commercial and consumer loan products to serve the
needs of its clients. The interest rates charged by the Bank on loans are
affected principally by rates offered by its competitors, the supply of money
available for lending purposes and demand for such loans.
Automobile Loans
Since 2000, the Bank has 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 terminated. In March, 2004, the Bank
learned that, due to liquidity issues and financial difficulties the third party
would not have the ability to fulfill its obligations and ceased origination of
non-recourse loans to the automobile leasing company.
The Bank continued to closely monitor issues concerning the third party's
performance. The Bank, acting collectively with nine other bank lenders to the
third party, utilized internal resources and consulted with the third party
enabling the third party to engage the services of experienced industry
professionals, to ensure the performance of the servicing of the portfolio, and
obtain the timely and orderly disposition of the collateral. The Bank believes
the course of action taken during 2004, along with the cooperation of the other
nine banks, stabilized the portfolio and will ultimately lead to maximizing the
value of disposed collateral.
At December 31, 2004, the automobile loan portfolio consisted of 1,110 loans
with balances aggregating $22.8 million. Automobile loans represented 9.4% of
the Bank's loan portfolio, net of unearned income and deferred fees.
Approximately 85% of the automobile loan balances mature by December 2006.
Delinquencies at December 31, 2004, consisted of eight loans, 30-89 days past
due, representing $198,712, or .9% of the portfolio, and three loans,
aggregating $89,313, or .4% of the portfolio, greater than 90 days past due.
Those three loans are classified non-accrual at December 31, 2004. Since the
portfolio was underwritten to lessees of high credit quality, those delinquency
statistics remain favorable and are in line with the Bank's expectations.
4
The Bank continues to recognize losses 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 Bank will suffer loss will depend to a large
extent on future market conditions of used automobiles combined with the success
of the third party's national remarketing servicer's efforts. Based upon the
Bank's continued assessment of the portfolio and review of collateral
disposition activity in 2004, the Bank made provisions for loan losses in 2004
of $6.3 million. Total charge-offs, relating to the automobile loan portfolio,
amounted to $2.9 million in 2004, on gross loans of $17.0 million.
The Bank incurred operating expenses relating to the automobile loan portfolio
of $1.4 million for 2004. Those expenses include expenses for legal services,
portfolio servicing and administration, collateral perfection, verification and
disposition, and audit and accounting services. While the Bank expects to incur
future operating expenses related to the automobile loan portfolio, it expects
those expenses to decrease as the portfolio matures. Operating costs for the
automobile loan portfolio are expensed when incurred and recorded in "automobile
loan expense" in the consolidated statements of earnings.
Loan Approval and Underwriting
In general, the Bank utilizes a committee process to approve its loans. The
President and Chief Lending Officer are authorized to approve unsecured loans up
to $250,000 and commercial real estate loans up to $400,000. All other loans are
brought before the Loan Committee. The Loan Committee meets one day each month,
however, additional meetings are held as the need arises. The Board of Directors
receives a monthly report summarizing the loan portfolio activity, and actions
taken by the Loan Committee.
It is the policy of the Bank that all loans satisfy basic lending criteria with
respect to the applicant, including any guarantor, the ability to repay the loan
within the contemplated term, the applicant's character and financial strength,
the adequacy of any required security and compliance with the Bank's lending
policy.
Loan Portfolio
The following table sets forth the composition of the Bank's loan portfolio at
the dates indicated:
At December 31,
---------------------------------------------------------
2004 2003 2002 2001 2000
---------------------------------------------------------
(In thousands)
Loans held-for-sale:
Residential real estate loans $ 604 $ 2,360 $ 1,189 $ 1,472 $ 711
--- ----- ----- ----- ---
Loans, net:
Commercial and industrial loans $ 46,414 $ 42,723 $ 54,001 $ 43,972 $ 39,140
Commercial real estate loans 170,149 145,084 130,275 116,646 93,875
Residential real estate loans 3,240 - - - -
Automobile loans 24,127 41,158 34,188 18,300 2,693
Consumer loans 1,875 1,381 2,238 1,312 1,313
----- ----- ----- ----- -----
Total loans 245,805 230,346 220,702 180,230 137,021
Less:
Unearned income (1,342) (3,328) (3,396) (2,258) (395)
Deferred fees, net (986) (890) (764) (647) (612)
--- --- --- --- ---
Total loans, net of unearned income and
deferred fees 243,477 226,128 216,542 177,325 136,014
Allowance for loan losses (5,591) (2,290) (2,346) (2,028) (1,872)
----- ----- ----- ----- -----
Total loans, net $ 237,886 $223,838 $ 214,196 $ 175,297 $ 134,142
------- ------- -------- ------- -------
5
Commercial and Industrial Loans - The Bank offers a variety of commercial loan
services including term loans, construction loans, demand loans, revolving
credit loans, and loans guaranteed in part by the Small Business Administration.
A broad range of commercial loans, both collateralized and uncollateralized, are
made available to businesses for working capital (including inventory and
receivables), business expansion, and for the purchase of machinery and
equipment. The purpose of a particular loan generally determines its structure.
Commercial loans are typically underwritten on the basis of the borrower's
repayment capacity from cash flow and are generally collateralized by business
assets such as, but not limited to, inventory, equipment and accounts
receivable. As a result, the availability of funds for the payment of commercial
loans may be substantially dependent on the success of the business itself.
Further, the collateral underlying the loans may depreciate over time, may not
be apt subjects for appraisal and may fluctuate in value based upon the success
of the business. Revolving credit lines are primarily collateralized by
short-term assets, while term loans are primarily collateralized by long-term or
fixed assets. Personal guarantees are normally required for commercial loans. At
December 31, 2004, commercial and industrial loans represented 18.9% of total
loans.
Commercial Real Estate Loans - The Bank originates commercial real estate loans
to businesses to finance the acquisition and holding of commercial real estate.
The security for the Bank's commercial real estate loans is generally located in
the Bank's primary market area and is underwritten on the basis of the value of
the underlying real property. Loans secured by commercial real estate generally
involve a greater degree of risk than residential real estate loans. Primary
risks associated with commercial real estate lending include the borrower's
inability to pay the debt due to unsuccessful operation or management of the
property and adverse conditions in the real estate market or economy. At
December 31, 2004, commercial real estate loans represented 69.2% of total
loans.
Consumer Loans - Consumer loans made by the Bank include loans for new and used
automobiles, personal secured, personal unsecured, and loans secured by deposit
accounts. Consumer loans generally carry higher rates of interest than those
charged on other types of loans and pose additional risks of collectibility when
compared to other types of loans, such as residential real estate loans. In many
instances, the Bank must rely on the borrower's ability to repay, since the
collateral normally is of reduced value at the time of any liquidation.
Accordingly, the initial determination of the borrower's ability to repay is of
primary importance in the underwriting of consumer loans.
Residential Real Estate Loans - The Bank originates residential real estate
loans primarily in its market area. The majority of residential real estate
loans are sold, together with the servicing rights to those loans, on a
non-recourse basis to institutional investors. The Bank limits its exposure to
interest rate fluctuations and credit risk on those loans by obtaining, at the
time of origination, a commitment from an institutional investor to purchase
that loan from the Bank. By selling the servicing rights to the loans, the Bank
avoids the associated risks and expenses of managing and servicing a loan
portfolio. Income is generated from the premiums received on the sale of loans
and servicing rights, and fees charged and interest earned during the period the
Bank holds the loans for sale.
Allowance for Loan Losses
The allowance for loan losses is based on management's on-going evaluation of
the risks inherent in its loan portfolio, the national and regional economies,
and the real estate market in the Bank's primary lending area. The allowance is
maintained at an amount management considers adequate to cover estimated losses
in its loan portfolio which are deemed probable and estimable based on
information currently known. While, based on information currently available,
management believes that the allowance for loan losses is sufficient to cover
losses inherent in its loan portfolio at this time. No assurance can be given
that future adjustments to the allowance will not be necessary if economic and
other conditions differ substantially from the economic and other conditions
used by management to determine the current level of the allowance. Management
may in the future increase its level of loan loss allowance as a percentage of
total loans and non-performing loans as deemed necessary. In addition, the
Federal Deposit Insurance Corporation (FDIC) and New York State Banking
Department (NYSBD) periodically review the Bank's allowance for loan losses as
an integral part of their examination process. Either the FDIC or the NYSBD may
require the Bank to make additional provisions for loan losses based upon
judgments that may differ from those of management thereby negatively impacting
the Bank's financial condition and results of operations.
6
The following table sets forth the activity in the Bank's allowance for loan
losses for the periods indicated:
For the years ended December 31,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
---------------------------------------------------------------------
(Dollars in thousands)
Balance at beginning of year $ 2,290 $ 2,346 $ 2,028 $ 1,872 $ 1,475
Provision for loan losses 6,325 60 270 150 150
Charge-offs:
Commercial and industrial loans (149) (109) (20) - (187)
Automobile loans (2,891) - - - (54)
Consumer loans - (32) (19) (19) (99)
--- ---- ---- ---- --
Total charge-offs (3,040) (141) (39) (19) (340)
Recoveries:
Commercial and industrial loans 10 20 75 13 547
Automobile loans 5 - - 6 13
Consumer loans 1 5 12 6 27
- - -- - --
Total recoveries 16 25 87 25 587
-- -- -- -- ---
Net recoveries (charge-offs) (3,024) (116) 48 6 247
------- ----- -- - ---
Balance at end of year $ 5,591 $ 2,290 $ 2,346 $ 2,028 $ 1,872
----- ----- ----- ----- -----
Ratio of net charge-offs/average net loans 1.26 % .05 % - % - % - %
---- --- -- -- --
The following table sets forth the allocation of the Bank's allowance for loan
losses at the dates indicated: At December 31,
---------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------------------------------------------------------------------------------------------
(Dollars in thousands)
Loans held for sale:
Residential real
estate loans $ - 100.0% $ - 100.0% $ - 100.0% $ - 100.0% $ - 100.0%
-- -- -- -- --
Loans, net:
Commercial and
industrial loans $ 530 18.9% $ 514 18.5% $ 684 24.5% $ 651 24.4% $ 723 28.6%
Commercial real
estate loans 949 69.2% 960 63.0% 1,317 59.0% 1,166 64.7% 939 68.5%
Residential real
estate loans 16 1.3% - -% - -% - -% - -%
Automobile loans 4,077 9.8% 755 17.9% 307 15.5% 160 10.2% 27 2.0%
Consumer loans 19 .8% 14 .6% 22 1.0% 18 .7% 26 .9%
Unallocated - -% 47 -% 16 -% 33 -% 157 -%
-- -- -- -- -- -- -- -- --- --
Total allowance for
loan losses $5,591 100.0% $ 2,290 100.0% $ 2,346 100.0% $ 2,028 100.0% $ 1,872 100.0%
----- ----- ----- ----- -----
The Company, as deemed necessary, reviews the methodology underlying the
adequacy of the allowance for loan loss calculation and adjusts the allocation
of the allowance based upon past experience and known or inherent risks
identified in the portfolio. Those known or inherent risks take into account,
but are not limited to, the current financial condition of the borrower,
impairment of any collateral value, and any adverse trends occurring in the
marketplace in which the Company operates that may have an effect on the
portfolio.
7
Non-Accrual Loans - The following table sets forth information regarding
non-accrual loans and loans delinquent 90 days or more and still accruing
interest at the dates indicated. It is the Bank's general policy to discontinue
accruing interest on all loans which are past due 90 days or when, in the
opinion of management, it is appropriate to discontinue accruing interest. When
a loan is placed on non-accrual status, the Bank ceases the accrual of interest
owed and previously accrued interest is charged against interest income. Loans
are generally returned to accrual status when principal and interest payments
are current, there is reasonable assurance that the loan will be fully
collectible and a consistent record of performance has been demonstrated. At
December 31,
-----------------------------------------------------------
2004 2003 2002 2001 2000
-----------------------------------------------------------
(Dollars in thousands)
Non-accrual loans:
Commercial and industrial loans $ - $ - $ 307 $ 153 $ 384
Automobile loans 89 - - - -
Consumer loans - - - 25 32
-- -- --- --- ---
Total non-accrual loans 89 - 307 178 416
Loans contractually past due 90 days or
more, other than non-accruing (2) - - - - -
-- -- --- --- ---
Total non-performing loans $ 89 $ - $ 307 $ 178 $ 416
-- -- --- --- ---
Allowance for loan losses as a
percent of total loans (1) 2.30 % 1.01 % 1.08 % 1.14 % 1.38 %
Allowance for loan losses as a
percent of total non-performing loans 6,282 % - % 764 % 1,139 % 450 %
Non-performing loans as a
percent of total loans (1) .04 % - % .14 % .10 % .31 %
(1) Loans include loans, net of unearned income and deferred fees.
(2) Excludes $108,000 of loans at December 31, 2002, which had matured,
however, were current with respect to scheduled periodic principal and/or
interest payments. The Bank was in the process of renewing those
obligations and/or awaiting anticipated repayment.
Investment Activities
General - The Bank maintains a portfolio of securities in such instruments as
U.S. government and agency securities, mortgage-backed securities, municipal
obligations, and corporate debt securities. The investment policy of the Bank,
which is approved by the Board of Directors and implemented by the Bank's
Investment Committee (the "Committee") as authorized by the Board, is designed
primarily to generate acceptable yields for the Bank without compromising the
business objectives of the Bank or incurring undue interest rate or credit risk,
and to provide and maintain liquidity for the Bank. In reviewing and
establishing investment strategies, the Committee considers the business and
growth plans of the Bank, the economic environment, the current interest rate
sensitivity position of the Bank, the types of securities held, and other
factors.
At December 31, 2004, the Company had $278.8 million in investment securities,
all classified as available-for-sale, consisting of U.S. Government and Agency
obligations, mortgage-backed securities, and municipal obligations. The
accounting treatment of the securities of the Company is addressed in Note 1 of
the Notes to the Consolidated Financial Statements in the 2004 Annual Report to
Stockholders.
U.S. Government and Agency Obligations. At December 31, 2004, the Bank's U.S.
Government and Agency obligations totaled $253.4 million, all of which were
classified as available-for-sale. Substantially all of those securities were
callable securities or structured notes, which generally possess higher yields
than securities with similar contractual terms to maturity but without these
features. These securities range in final maturity from 1.5 to 13 years with an
average yield of 4.05%. At various times during the year, a substantial portion
of this portfolio is used as collateral for seasonal municipal deposits and
other borrowings.
Mortgage-Backed Securities. The Bank purchases mortgage-backed securities in
order to: (a) generate positive interest spreads with minimal administrative
expense; (b) lower its credit risk as a result of the guarantees provided by
FHLMC, FNMA, and GNMA; (c) utilize these securities as collateral for
borrowings; and (d) increase the liquidity of the Bank.
8
At December 31, 2004, mortgage-backed securities totaled $25.2 million, or 4.5%
of total assets, all of which were classified as available-for-sale. At December
31, 2004, 8.5% of the mortgage-backed securities carried adjustable rates and
91.5% were fixed rate. The mortgage-backed securities had coupon rates ranging
from 3.25% to 7.50% and had a weighted average yield of 4.37%.
Municipal Obligations - At December 31, 2004, the Bank had a $199,000 municipal
obligation in its investment portfolio. The Bank generally considers investment
in municipal obligations when the taxable equivalent yields are greater than
that of other securities with comparable maturities. Municipal bonds purchased
by the Bank are generally required to be rated "A" or better by at least one
national rating agency. Purchases of non-rated general obligation bonds are
limited to in-state issues and involve the communities in areas served by the
Bank.
Corporate Debt - The Bank's investment policy was amended in 2000 to include the
purchase of capital notes/trust preferred securities issued primarily by
financial institutions up to a limit of $15 million dollars. Those securities
represent secondary capital and rank subordinate and junior in right of payment
to all indebtedness of the issuing company. To be purchased by the Bank, such
higher yielding securities must be rated investment grade by at least one of the
national rating agencies. At December 31, 2004, the Company had no corporate
debt securities.
At December 31, 2003, the Bank maintained a portfolio of $13.0 million par value
of corporate debt securities, consisting of trust preferred securities, pooled
trust preferred securities, and subordinated debentures of financial
institutions, classified under the provisions of Statement of Financial
Accounting Standards No. 115 (SFAS 115) as "held-to-maturity." On March 10,
2004, the Bank complied with an issuer's tender offer which resulted in the
recognition of a gain of $335,155, from the redemption of a subordinated
debenture with an amortized cost of $1.0 million. On March 10, 2004, as a result
of that tender offer, the Bank transferred the remaining corporate debt
securities, with an amortized cost of $11.5 million and a market value of $13.5
million from the classification of "held-to-maturity" to "available-for-sale".
The Bank's compliance with the issuer's tender offer, and subsequent transfer of
held-to-maturity securities to available-for-sale, was done for risk management
and strategic planning reasons. On April 1, 2004, the Bank sold the entire
corporate debt securities portfolio recognizing a gain of approximately $2.5
million.
Federal Home Loan Bank Stock - At December 31, 2004, the Bank held Federal Home
Loan Bank Stock carried at $4.9 million. Those securities represented the Bank's
investment in Federal Home Loan Bank of New York (FHLB) stock. In order to
borrow from the FHLB, the Bank is required to purchase shares of FHLB
non-marketable equity securities at par. For the year ended December 31, 2004,
the dividend yield on the FHLB stock was 2.35%.
The following table sets forth information regarding the amortized cost (book
value) and fair value of the Bank's securities portfolio at the dates indicated:
At December 31,
-------------------------------------------------------------------------
2004 2003 2002
-------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-------------------------------------------------------------------------
(In thousands)
Held-to-maturity:
Corporate debt $ - $ - $ 12,474 $ 14,438 $ 12,461 $ 14,027
--- --- ------ ------ ------ ------
Total securities held-to-maturity $ - $ - $ 12,474 $ 14,438 $ 12,461 $ 14,027
--- --- ------ ------ ------ ------
Available-for-sale:
U.S. Government and
Agency obligations $ 256,102 $ 253,409 $ 176,141 $ 175,194 $ 129,345 $ 130,422
Mortgage-backed securities:
GNMA 22,128 21,794 33,669 33,283 62,565 63,971
FHLMC 1,982 1,960 3,743 3,757 9,879 10,015
FNMA 1,424 1,452 2,547 2,595 12,920 13,122
Municipal obligations 200 199 2,010 2,138 2,013 2,060
--- --- ----- ----- ----- -----
Total securities available-for-sale $ 281,836 $ 278,814 $ 218,110 $ 216,967 $ 216,722 $ 219,590
------- ------- ------- ------- ------- -------
9
The following table sets forth certain information regarding the amortized cost,
weighted average yields and contractual maturities of the Bank's securities
portfolio as of December 31, 2004.
---------------------------------------------------------------------------------------------------------
More Than One More Than Five More
One Year or Less Year to Five Years Years to Ten Years Than Ten Years Total
---------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Total Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Available-for-sale:
Debt securities:
US Government and
Agency obligations $ - - % $ 109,772 4.00 % $ 139,187 4.10 % $ 7,143 3.86 % $ 256,102 4.05 %
Mortgage-backed securities:
GNMA - - - - - - 22,128 4.40 22,128 4.40
FHLMC - - - - - - 1,982 4.04 1,982 4.04
FNMA - - - - - - 1,424 4.46 1,424 4.46
Municipal obligations 200 1.65 - - - - - - 200 1.65
--- --- --- ---- ---
Total securities,
available-for-sale $ 200 1.65 % $ 109,772 4.00 % $ 139,187 4.10 % $ 32,677 4.26% $ 281,836 4.08 %
--- ------- ------- ------ -------
Federal Home Loan Bank Stock:
FHLB stock, at cost $ 4,925 2.35 % $ - - % $ - - % $ - -% $ 4,925 2.35 %
----- --- --- --- -----
Sources of Funds
Repayments and maturities of securities available-for-sale, loan repayments,
deposits and cash flows generated from operations are the primary sources of the
Bank's funds for use in lending, investing and for other general purposes.
Deposits
The Bank offers a variety of savings, NOW accounts, money market accounts and
certificates of deposit. The Bank offers certificates of deposit, with balances
of $100,000 or more, at competitive rates and also offers Individual Retirement
Accounts and other qualified plan accounts. The Bank solicits deposit accounts
from small businesses, professional firms, households, and government
institutions located throughout its market area. The Bank does not use brokers
to obtain deposits. All deposit accounts are insured under the Bank Insurance
Fund of the Federal Deposit Insurance Corporation up to the maximum limits
permitted by law.
The following table shows the distribution of the Bank's average deposit
accounts in each category of deposits presented for the periods indicated: For
the years ended December 31,
----------------------------------------------------------------------
2004 2003 2002
----------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
----------------------------------------------------------------------
(dollars in thousands)
Non-interest bearing accounts $ 99,172 - % $ 90,793 - % $ 70,198 - %
Savings accounts 107,488 1.16 % 92,565 1.23 % 63,231 1.64
NOW and money market deposits 94,313 0.89 % 77,500 0.87 % 58,448 1.13
Time deposits, $100,000 or more 11,102 2.08 % 14,830 2.25 % 30,572 2.29
Other time deposits 72,695 3.11 % 90,978 3.49 % 94,557 4.24
------ ------ ------
Total average deposits $ 384,770 $ 366,666 $ 317,006
------- ------- -------
10
At December 31, 2004, the Bank had outstanding approximately $9.9 million in
time deposits, $100,000 or more, maturing as follows:
(In thousands)
--------------
3 months or less $3,296
Over three through six months 813
Over six through 12 months 3,436
Over 12 months 2,318
-----
Total $9,863
-----
Borrowings
The Bank utilizes borrowings to leverage the capital of the Bank and provide
liquidity when necessary. At December 31, 2004, other borrowings primarily
consisted of $71 million of advances from the FHLB secured by various callable
U.S. agency securities, mortgage-backed securities and certain qualifying
commercial real estate loans. At certain times, the Bank will use federal funds
purchased and sales of securities sold under agreements to repurchase as a lower
cost alternative to other borrowings or other sources of funds. Included in
federal funds purchased, at December 31, 2004, the Bank has available a 6-month
commitment for overnight and one month secured lines of credit with the FHLB
totaling $63.5 million. There was $27.5 million outstanding on the overnight
line at December 31, 2004. There were no securities sold under agreements to
repurchase at December 31, 2004. Federal funds purchased and overnight and one
month lines of credit are generally priced at a spread above the federal funds
rate and reprice daily. In addition, the Bank has available $6.0 million in
lines of credit with unaffiliated institutions, which enable it to borrow
federal funds on an unsecured basis, on which no balance was outstanding at
December 31, 2004.
The following table sets forth certain information regarding the Bank's borrowed
funds for the years indicated:
For the years ended December 31,
-------------------------------------
2004 2003 2002
-------------------------------------
(Dollars in thousands)
FHLB Advances:
- --------------
Maximum amount outstanding at any month-end
during the year $ 76,000 $ 65,000 $ 55,000
Average balance outstanding 72,448 60,742 55,000
Balance outstanding at end of year 71,000 61,000 55,000
Weighted average interest rate during the year 4.20 % 4.60 % 4.80 %
Weighted average interest rate at the end of the year 4.12 4.54 4.80
Repurchase Agreements:
- ----------------------
Maximum amount outstanding at any month-end
during the year $ 49,226 $ - $ -
Average balance outstanding 17,030 178 -
Balance outstanding at end of year - - -
Weighted average interest rate during the year 1.69 % 1.07 % - %
Weighted average interest rate at the end of the year - - -
Federal Funds Purchased:
- ------------------------
Maximum amount outstanding at any month-end
during the year $ 63,300 $ 25,000 $ 12,800
Average balance outstanding 34,690 12,002 2,214
Balance outstanding at end of year 27,500 - -
Weighted average interest rate during the year 1.61 % 1.21 % 1.69 %
Weighted average interest rate at the end of the year 2.36 - -
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
The Company is a party to financial instruments with off-balance-sheet risk and
various contractual obligations in the normal course of business. Those
financial instruments include commitments to extend credit, unused lines of
credit, and standby letters of credit. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amounts recognized in the
consolidated balance sheets.
11
The following is a summary of the Company's financial instruments and
contractual obligations, including certain on-balance sheet obligations, at
December 31, 2004:
Payments Due by Period
----------------------
(in thousands)
Less More
Than 1 1-3 3-5 Than 5
Contractual Obligations Total Year Years Years Years
- ----------------------- ----- ---- ----- ----- -----
Time deposit maturities $ 68,768 $ 43,339 $ 21,999 $ 3,430 $ -
Other borrowings - assumed final maturity 71,000 - 10,000 34,000 27,000
Subordinated debentures - assumed final maturity 7,732 - - - 7,732
Lease commitments 11,556 1,122 2,126 1,736 6,572
Commitments to extend credit 7,638 7,638 - - -
Unused lines of credit 43,017 36,799 4,957 116 1,145
Standby letters of credit 973 973 - - -
---- --- --- --- ---
Total $ 210,684 $ 89,871 $ 39,082 $ 39,282 $ 42,449
------- ------ ------ ------ ------
Subsidiary Activities
The Company has three wholly-owned subsidiaries as follows:
Long Island Financial Client Services Corp. Long Island Financial Client
Services Corp. was formed for the purpose of providing Private Banking Services
to clients of the Company. Private Banking Services provided include, but are
not limited to, professional money management, investment planning, life
insurance, business insurance, charitable planning, estate planning, business
valuation services, business succession planning, and pension design and
administration. The operations of Long Island Financial Client Services Corp.
were not material to the operating results of the Company for the year ended
December 31, 2004.
Long Island Commercial Services Corp. Long Island Commercial Services Corp. was
formed for the purpose of providing insurance services to clients of the
Company. Insurance services provided include, but are not limited to, group
health insurance, group dental plans, business insurance, life insurance, home,
auto, boat insurance, and long term care planning. The operations of Long Island
Commercial Services Corp. were not material to the operating results of the
Company for the year ended December 31, 2004.
Long Island Commercial Bank. The 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 in Suffolk and
Nassau 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.
Long Island Commercial Bank currently has one subsidiary, Long Island Commercial
Capital Corporation. Long Island Commercial Capital Corporation was organized
for the purpose of investing in mortgage related assets as a real estate
investment trust. The Bank transferred commercial real estate loans to Long
Island Commercial Capital Corporation, which included certain associated assets
and liabilities. In return, the Bank received shares of common and preferred
stock of Long Island Commercial Capital Corporation.
In 1999, the Company established the Long Island Commercial Bank Foundation (the
"Foundation"). The purpose of the Foundation is to contribute funds to local
entities that are organized and operated exclusively for charitable,
educational, religious, scientific, and other specified purposes. The foundation
is primarily funded by annual contributions from Long Island Commercial Bank,
which equal 1% of the Bank's prior year pretax income. The officers and trustees
of the foundation are comprised of certain officers and Board members of the
Company.
In addition to the wholly-owned subsidiaries described above, the Company has
the following investment in an unconsolidated subsidiary:
12
LIF Statutory Trust I. On September 7, 2000, the Company issued $7,732,000 of
subordinated debentures to LIF Statutory Trust I, a Connecticut grantor business
trust. Those subordinated debentures bear an interest rate of 10.60% and are due
September 7, 2030. The Company has fully and unconditionally guaranteed the
subordinated debentures. LIF Statutory Trust I was formed for the exclusive
purpose of purchasing the subordinated debentures from the Company and has
received a common stock investment from the Company of $232,000. The
Subordinated Debentures are pre-payable, in whole or in part, at the Company's
option on or after September 7, 2010 at declining premiums to maturity. Proceeds
totaling approximately $7.2 million are being used for general corporate
purposes.
Personnel
At December 31, 2004, the Bank employed 115 employees, 9 of which are part-time.
No employees are covered by a collective bargaining agreement and the Bank
believes its relations with its employees are good.
Federal and State Taxation
General
The Company, the Bank and its subsidiary report their income using the accrual
method of accounting and are subject to federal and state income taxation in the
same manner as other corporations. The following discussion of tax matters is
intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Company or its subsidiaries. The
Internal Revenue Service has not audited the Company or its subsidiaries during
the last five years.
Federal Income Taxation
In general, banks are subject to federal income tax in the same manner as other
corporations. However, gains and losses realized by banks from the sale or
exchange of portfolio debt instruments are generally treated as ordinary income,
rather than capital, gains and losses, and a "small bank" (i.e. one with assets
having a tax basis of no more than $500 million), such as the Bank prior to
January 1, 2004, is permitted to calculate its deductions for bad debts under a
reserve method that is based upon actual charge-offs for the current and
preceding five years or a "grand-fathered" base year reserve, if larger. As of
January 1, 2004, the Bank had exceeded the threshold of $500 million in average
assets and is required to recapture, for federal tax purposes, its bad debt
reserve. The Bank is recapturing the bad debt reserve over a four-year recapture
period and has previously provided for the taxes relating to this recapture.
Subsequent to January 1, 2004, the Bank is on a specific charge-off method for
federal tax purposes.
Corporate Alternative Minimum Tax. In addition to the regular income tax, the
Internal Revenue Code of 1986, as amended (the "Code") imposes an alternative
minimum tax ("AMT") in an amount equal to 20% of alternative minimum taxable
income ("AMTI") to the extent that the AMT exceeds the regular tax. AMTI is
regular taxable income as modified by certain adjustments and tax preference
items. AMTI includes an amount equal to 75% of the excess of adjusted current
earnings over AMTI (determined without regard to this adjustment and prior to
reduction for net operating losses). Only 90% of AMTI can be offset by net
operating loss carry forwards. The AMT is available as a credit against future
regular income tax. The AMT credit can be carried forward indefinitely. The
Company does not expect to be subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. A 70% dividends received deduction generally
applies with respect to dividends received from corporations that are not
members of such affiliated group, except that an 80% dividends received
deduction applies if the Company and the Bank own more than 20% of the stock of
a corporation distributing a dividend. Distributions received by the Bank from
Long Island Commercial Capital Corporation are not eligible for the federal
dividends received deduction. Long Island Commercial Capital Corporation, as a
REIT, is entitled to a 100% dividends paid deduction for federal income tax
purposes.
13
New York State Taxation
The Bank is subject to the New York State Franchise Tax on Banking Corporations
in an amount equal to the greater of (i) 7.5% of the Bank's "entire net income"
allocable to New York State during the taxable year, or (ii) the applicable
alternative minimum tax. The alternative minimum tax is generally the greatest
of (a) .01% of the value of the taxable assets allocable to New York State (b)
3% of alternative entire net income allocated to New York or (c) $250. Entire
net income is similar to federal taxable income subject to certain
modifications. 60% of dividend income and gains and losses from subsidiary
capital are excluded from New York State entire net income. Distributions
received from Long Island Commercial Capital Corporation are eligible for the
New York State dividends received deduction.
In January 2005, the Governor of the State of New York proposed legislation that
would eliminate the dividends received deduction with respect to dividends
received from certain subsidiary real estate investment trusts. This proposed
change in state tax law would be effective January 1, 2005. Accordingly, if the
legislation is passed, all distributions received from Long Island Commercial
Capital Corp. to the Bank will be subject to taxation. Elimination of the
deduction would result in an increase in the Company's effective tax rate.
In addition, net operating losses cannot be carried back. For tax years
beginning on or after January 1, 2002 a deduction for net operating losses
sustained in 2002 and subsequent years may be carried forward. The deduction may
not exceed the allowable federal net operating loss deduction augmented by the
excess of the New York State bad debt deduction over the federal bad debt
deduction. The losses may be carried forward for the 20 year period allowed
under federal Code Section 172. Alternative entire net income is equal to entire
net income without certain adjustments. The Bank is also subject to the 17%
Metropolitan Commuter Transportation District Surcharge on its New York Sate
Franchise Tax. The Company, the Bank, and their subsidiaries (excluding Long
Island Commercial Capital Corporation) file a combined return. For New York
State tax purposes, the Bank is not required to recapture its bad debt reserve
and will continue to use the reserve method.
City of New York Taxation
The Bank is subject to a New York City banking corporation tax in an annual
amount equal to the greater of (a) 9% of entire net income allocable to New York
City, or (b) the applicable alternative tax. The applicable alternative tax is
the greater of (a) .01% of the value of taxable assets allocable to New York
City with certain modifications, (b) 3% of alternative entire net income
allocable to New York City, or (c) $125. Entire net income and alternative net
income are calculated in a manner similar to New York State including the
allowance of a deduction for an addition to the tax bad debt reserve. Net
operating losses are not permitted to be carried back or forward for New York
City purposes. The income is allocated to New York City based upon three
factors: receipts, wages and deposits. The Company, the Bank and their
subsidiaries (excluding Long Island Commercial Capital Corporation) file a
combined return. For New York City tax purposes, the Bank is not required to
recapture its bad debt reserve and will continue to use the reserve method.
New York City may also propose similar legislation to New York State on the
elimination of the dividends received deduction.
Delaware Taxation
The Company, as a Delaware holding company not earning income in Delaware, is
exempted from the corporate income tax. However, the Company is required to file
an annual report with and pay an annual franchise tax based on issued shares and
asset size to the State of Delaware.
Supervision and Regulation
General - References in this section to applicable statutes and regulations are
brief summaries, only, and do not purport to be complete. The readers should
consult such statutes and regulations themselves for a full understanding of the
details of their operation.
As a consequence of the extensive regulation of commercial banking activities in
the United States, the business of Long Island Financial Corp. and its
subsidiaries are particularly susceptible to federal and state legislation that
14
may have the effect of increasing or decreasing the cost of doing business,
modifying permissible activities, or enhancing the competitive position of other
financial institutions.
Holding Company Regulation - As a registered financial holding company, the
Company is subject to examination, regulation, and periodic reporting under the
Bank Holding Company Act, as administered by the FRB. The Company is required to
obtain the prior approval of the FRB to acquire all, or substantially all, of
the assets of any bank or bank holding company or to merge with another bank
holding company. Prior FRB approval will also be required for the Company to
acquire direct or indirect ownership or control of any voting securities of any
bank or bank holding company if, after giving effect to such acquisition, the
Company would, directly or indirectly, own or control more than 5% of any class
of voting shares of such bank or bank holding company. In evaluating such
transactions, the FRB considers such matters as the financial and managerial
resources of and future prospects of the companies involved, competitive factors
and the convenience and needs of the communities to be served. Bank holding
companies may acquire additional banks in any state, subject to certain
restrictions such as deposit concentration limits. In addition to the approval
of the FRB, before any bank acquisition can be completed, prior approval may
also be required to be obtained from other agencies having supervisory
jurisdiction over banks to be acquired. The FRB has adopted capital adequacy
guidelines for bank holding companies (on a consolidated basis). The Company's
total and Tier 1 capital exceeds the requirements established by the FRB.
A bank holding company is generally required to give the FRB prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of the Company's consolidated net worth. The FRB
may disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe and unsound practice, or would violate any law,
regulation, FRB order or directive, or any condition imposed by, or written
agreement with, the FRB. There is an exception to this approval requirement for
well-capitalized bank holding companies that meet certain other conditions.
The FRB has issued a policy statement regarding the payment of dividends by bank
holding companies. In general, the FRB's policies provide that dividends should
be paid only out of current earnings and only if the prospective rate of
earnings retention by the bank holding company appears consistent with the
organization's capital needs, asset quality, and overall financial condition.
The FRB's policies also require that a bank holding company serve as a source of
financial strength to its subsidiary bank or banks by standing ready to use
available resources to provide adequate capital funds to those banks during
periods of financial stress or adversity and by maintaining the financial
flexibility and capital-raising capacity to obtain additional resources for
assisting its subsidiary bank or banks where necessary. These regulatory
policies could affect the ability of the Company to pay dividends or otherwise
engage in capital distributions.
Restrictions on Transactions with Affiliates - Section 23A of the Federal
Reserve Act imposes quantitative and qualitative limits on transactions between
a bank and any affiliate, and requires certain levels of collateral for such
transactions. It also limits the amount of advances to third parties which are
collateralized by the securities or obligations of the Company or its
subsidiaries. Section 23B requires that certain transactions between a bank and
its affiliates be on terms substantially the same, or at least as favorable, as
those prevailing at the time for comparable transactions with or involving
other, nonaffiliated companies. In the absence of such comparable transactions,
any transactions between a bank and its affiliates must be on terms and under
circumstances, including credit standards that in good faith would be offered to
or would apply to nonaffiliated companies.
Sarbanes-Oxley Act of 2002 - This enacted statute generally prohibits loans by
the Company to its executive officers and directors. However, that act contains
a specific exception for loans by the Bank to its executive officers and
directors in compliance with federal banking laws. Under such laws, the Bank's
authority to extend credit to executive officers, directors and 10% shareholders
("insiders"), as well as entities such persons control, is limited. The law
limits both the individual and aggregate amount of loans the Bank may make to
insiders based, in part, on the Bank's capital position and requires certain
board approval procedures to be followed. Such loans are required to be made on
terms substantially the same as those offered to unaffiliated individuals and
not involve more than the normal risk of repayment. There is an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees.
15
The USA Patriot Act - The USA Patriot Act of 2001, as amended (the "Patriot
Act"), has imposed substantial new record-keeping and due diligence obligations
on banks and other financial institutions, with a particular focus on detecting
and reporting money-laundering transactions involving domestic and international
customers. The U.S. Treasury Department has issued and will continue to issue
regulations clarifying the Patriot Act's requirements. The Patriot Act requires
all "financial institutions," as defined, to establish certain anti-money
laundering compliance and due diligence programs.
Gramm-Leach-Bliley - On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 (also known as the Financial Services
Modernization Act). The Financial Services Modernization Act repealed provisions
of the Glass-Steagall Act which restricted the affiliation of banks with firms
engaged principally in specified securities activities, and provided for
regulation of a new form of bank holding company, known as a financial holding
company under the Bank Holding Company Act. Financial holding companies, such as
the Company, can engage in a statutorily provided list of financial activities,
including insurance and securities underwriting and agency activities, merchant
banking and insurance company portfolio activities.
New York State and FDIC
The Bank is organized under the New York Banking Law ("Banking Law"), and its
deposits are insured by the Bank Insurance Fund (the BIF) of the FDIC to the
extent permitted by law. As a New York bank, the Bank is subject to regular
examination and supervision by the NYSBD. As a depository institution, the
deposits of which are insured by the FDIC, the Bank also is subject to
regulation and supervision by the FDIC. While the Bank is not a member of the
Federal Reserve System, it is subject to certain regulations of the FRB. In
addition to banking laws, regulations and regulatory agencies, the Bank is
subject to various other laws, regulations and regulatory agencies, all of which
directly or indirectly affect the Bank's operations.
Federal Securities Laws
The status of the Company as a registered bank holding company under the BHCA
does not exempt it from certain Federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the Federal securities laws. The Company is subject to the
periodic reporting, proxy solicitation, tender offer, insider trading
restrictions and other requirements under the Securities and Exchange Act of
1934, as amended.
Delaware Corporation Law
The Company is incorporated under the laws of the State of Delaware. Thus, we
are subject to the regulation by the State of Delaware and the rights of our
shareholders are governed by Delaware General Corporation Law.
ITEM 2. PROPERTIES
The Bank conducts its business from its main branch office and executive offices
located at 1601 Veterans Memorial Highway, Suite 120, Islandia, New York, and
eleven branch offices located in Babylon, Smithtown, Westbury, Jericho, Shirley,
Ronkonkoma, Melville, Central Islip, Deer Park, Hauppauge, and Bay
Ridge-Brooklyn. The following table sets forth information relating to each of
the offices of the Bank at December 31, 2004:
Lease Net
Date of Expiration Book Value
Leased or Lease or Including at
Location Owned Acquisition Options Dec.31,2004
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Main Office:
1601 Veterans Memorial Highway, Suite 120
Islandia, New York 11749 Leased 1987 2020 $ 533
Branch Offices:
400 West Main Street, Babylon, NY 11702 Leased 1995 2005 -
50 Route 111, Smithtown, NY 11787 Leased 1997 2012 -
900 Merchants Concourse, Westbury, NY 11590 Leased 1997 2008 -
16
390 North Broadway, Jericho, NY 11753 Leased 1997 2008 -
950 Montauk Highway, Shirley, NY 11967 Owned 2002 ---- 1,245
3425 Veterans Memorial Hwy, Ronkonkoma, NY 11779 Leased 2001 2020 110
610 Broadhollow Road, Melville, NY 11747 Leased 2001 2019 96
320 Carlton Avenue, Central Islip, NY 11722 Leased 2001 2007 28
720 Grand Boulevard, Deer Park, NY 11729 Owned 2001 ---- 973
375 86th Street, Brooklyn, NY 11209 Leased 2002 2022 127
350 Motor Parkway, Hauppauge, NY 11788 Leased 2003 2018 59
--
$ 3,171
-----
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The above captioned information regarding the market for the Company's common
equity and related stockholder matters appears in the 2004 Annual Report to
Stockholders under the caption "Capital Stock" and is incorporated herein by
this reference.
There were no repurchases of shares of the common stock of the Company during
the three month period ended December 31, 2004
The following table discloses the equity compensation plans approved by security
holders for the years ended December 31, 2004. The Company does not have any
equity compensation plans not approved by securities holders.
Number of securities Number of securities
to be issued upon exercise Weighted average remaining available for
of outstanding options, exercise price of further issuance under
warrants and rights outstanding options equity compensation pla
Equity compensation plans
approved by security holders 209,009 $ 20.17 58,858
ITEM 6. SELECTED FINANCIAL DATA
Information regarding selected financial data appears on pages 5 and 6 of the
2004 Annual Report to Stockholders under the caption "Selected Financial Data"
and is incorporated herein by this reference.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Management's discussion and analysis of financial condition and results of
operation appears on pages 7 through 16 of the 2004 Annual Report to
Stockholders under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and is incorporated herein by
this reference.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Management of
Interest Rate Risk" in the 2004 Annual Report to Stockholders is incorporated
herein by this reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Long Island Financial Corp. and the
Report of Independent Registered Public Accounting Firm appear on pages 18
through 38 of the 2004 Annual Report to Stockholders and are incorporated herein
by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A.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-14 or Section 240.15d-14 of this chapter, the Chief Executive
and Chief Financial officers of the Company concluded that the
Company's disclosure controls and procedures were effective.
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.
ITEM 9B.OTHER INFORMATION
None
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained on pages 5 through 7 of the Proxy Statement for the
Annual Meeting of Stockholders to be held April 20, 2005 under the caption
"Election of Directors" is incorporated herein by reference. The following table
sets forth certain information regarding the executive officers of the Company.
Officers are re-elected by the Board of Directors annually.
18
Name Age Position(s) Held with the Company
---- --- ---------------------------------
Douglas C. Manditch 57 President and Chief Executive Officer
Thomas Buonaiuto 39 Vice President and Secretary-Treasurer
Biographical Information
Positions held by a director or officers have been held for at least the past
five years unless stated otherwise.
Douglas C. Manditch is President and Chief Executive Officer of the Company and
of the Bank. He joined Long Island Commercial Bank in 1987, then in formation.
Thomas Buonaiuto serves as Vice President and Secretary-Treasurer of the Company
and Executive Vice President and Chief Financial Officer of the Bank. Mr.
Buonaiuto's responsibilities include oversight of all areas of operations of the
Bank excluding lending.
ITEM 11.EXECUTIVE COMPENSATION
The information contained on pages 11 through 14 of the Proxy Statement for the
Annual Meeting of Stockholders to be held on April 20, 2005 under the captions
"Directors' Compensation" and " Executive Compensation" is incorporated herein
by reference.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained on page 3 and pages 5 through 7 of the Proxy Statement
for the Annual Meeting of Stockholders to be held April 20, 2005 under the
captions "Security Ownership Of Certain Beneficial Owners" and "Information with
Respect to the Nominees, Continuing Directors and Executive Officers" is
incorporated herein by reference.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained on page 17 of the Proxy Statement for the Annual
Meeting of Stockholders to be held April 20, 2005 under the caption
"Transactions with Certain Related Persons" is incorporated herein by reference.
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
The information contained on pages 18 through 19 of the Proxy Statement for the
Annual Meeting of Stockholders to be held April 20, 2005 under the caption
"Independent Auditors" is incorporated herein by reference.
19
PART IV
ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) 1. Financial Statements
The following financial statements of the Bank are included in the Company's
Annual Report to Stockholders for the year ended December 31, 2004 and are
incorporated by this reference:
Consolidated Balance Sheets at December 31, 2004 and 2003
Consolidated Statements of Earnings for the Years Ended December 31,
2004, 2003 and 2002
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31,2004, 2003 and 2002
Consolidated Statements of Cash Flows for the Years Ended December 31,
2004, 2003 and 2002
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
The remaining information appearing in the 2004 Annual Report to Stockholders is
not deemed to be filed as part of this report, except as expressly provided
herein.
2. Financial Statement Schedules Financial Statement Schedules have been
omitted because they are not applicable or the required information is
shown in the Financial Statements or Notes thereto.
(B) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit Number
- --------------
2.0 Plan of Acquisition between Long Island Financial Corp. and Long Island
Commercial Bank dated as of September 15, 1998*
3.1 Certificate of Incorporation of Long Island Financial Corp., dated
September 10, 1998 *
3.2 By-Laws of Long Island Financial Corp., effective as of September 10, 1998*
10.0 Long Island Financial Corp. 1998 Stock Option Plan *
10.1 Change of Control Agreement between Long Island Financial Corp. and Douglas
C. Manditch **
10.2 Change of Control Agreement between Long Island Financial Corp. and Thomas
Buonaiuto **
11.0 Statement re: Computation of Per Share Earnings (Filed herewith)
13.0 2004 Annual Report to Stockholders (Filed herewith)
21.0 Subsidiary information is incorporated by reference to "Part I - Subsidiary
Activities"
23.0 Consent of KPMG LLP
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
99.0 Proxy Statement for Annual Meeting (to be filed)
===========================================================================
* Incorporated herein by reference in this document to the S-4 Registration
Statement initially filed on September 22, 1998, Registration No. 333-63971
** Incorporated herein by reference in this document from the 2002 Long Island
Financial Corp. Form 10-K filed on March 29, 2003.
20
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
LONG ISLAND FINANCIAL CORP.
By: /s/ Douglas C. Manditch Date: March 14, 2005
-----------------------
Douglas C. Manditch
President and Chief Executive Officer
By: /s/ Thomas Buonaiuto Date: March 14, 2005
--------------------
Thomas Buonaiuto
Vice President and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 14, 2005, by the following persons on behalf of
the Registrant and in the capacities indicated.
/s/ Harvey Auerbach /s/ Douglas C. Manditch
------------------------- --------------------------
Harvey Auerbach Douglas C. Manditch
Chairman of the Board Director, President and
Chief Executive Officer
/s/ John L. Ciarelli, Esq. /s/ John R, McAteer
------------------------------- ----------------------
John L. Ciarelli, Esq. John R. McAteer
Director Director
/s/ Donald Del Duca /s/ Werner S. Neuburger
------------------------ --------------------------
Donald Del Duca Werner S. Neuburger
Director Director
/s/ Frank J. Esposito /s/ Thomas F. Roberts, III
--------------------------- -----------------------------
Frank J. Esposito Thomas F. Roberts, III
Vice Chairman Director
/s/ Waldemar Fernandez /s/ Alfred Romito
Waldemar Fernandez Alfred Romito
Director Director
/s/ Frank DiFazio /s/ John C. Tsunis, Esq.
---------------------- ----------------------------
Frank DiFazio John C. Tsunis, Esq.
Director Vice Chairman
/s/ Gordon A. Lenz
-----------------------
Gordon A. Lenz
Director
21