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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) Annual Report Pursuant to Section 13 or 15(d) of
[X] the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
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.___________
LONG ISLAND FINANCIAL CORP.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-3453684
(State or other jurisdiction of (I.R.S.Employer Identification No.)
incorporation or organization)
One Suffolk Square, Islandia, New York 11722
(Address of Principal Executive Offices) (Zip Code)
(516) 348-0888
(Registrant's telephone number, including area code)
None
(Securities registered pursuant to Section 12(b) of the Act)
Common Stock, $.01 par value
(Securities registered pursuant to Section 12(g) of the Act)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports); Yes ( X ) No ( ); and (2) has been subject to
such filing requirements for the past 90 days; Yes ( ) No ( X )
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 the Form 10-K of any
amendment to this Form 10-K.[ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the last reported sales price of such stock
on the NASDAQ Stock Market was $20,871,831 on March 15, 1999.
The number of shares outstanding of the registrant's common stock was 1,776,326
as of March 15, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the 1998 Annual Report to Stockholders for fiscal year 1998 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 21, 1999 are incorporated herein by reference -
Part III.
LONG ISLAND COMMERCIAL BANK
1998 FORM 10-K
TABLE OF CONTENTS
Page
PART I Number
Item 1. Business............................................ 3
Item 2. Properties ........................................ 13
Item 3. Legal Proceedings................................... 13
Item 4. Submission of Matters to a Vote of Security Holders. 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 14
Item 6. Selected Financial Data ........................... 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 14
Item 7A. Quantitative and Qualitative Disclousre about
Market Risk........................................ 14
Item 8. Financial Statements and Supplementary Data........ 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 14
Item 10. Directors and Executive Officers of the Registrant. 15
PART III
Item 11. Executive Compensation............................. 15
Item 12. Security Ownership of Certain Beneficial Owners
and Management..................................... 15
Item 13. Certain Relationships and Related Transactions..... 16
Item 14. Exhibits, Financial Schedules, and Reports on
Form 8-K........................................... 16-51
Signatures......................................... 17
PART I
ITEM 1. BUSINESS
General Development of Business
At a special meeting on December 8, 1998, the stockholders of Long Island
Commercial Bank (the "Bank") approved a Plan of Acquisition dated as of
September 15, 1998, which subsequently became effective January 28, 1999, and as
a result of which: (i) the Bank became a wholly-owned subsidiary of Long Island
Financial Corp., a Delaware corporation (the "Company"); and (ii) all of the
outstanding shares of the Bank's Common Stock were converted, subject to
dissenter's rights, on a one-for-one basis, into outstanding shares of the
common stock of Long Island Financial Corp. No stockholders asserted dissenter's
rights. This transaction is hereinafter referred to as the "Reorganization." In
addition, the stockholders ratified the Long Island Financial Corp. 1998 Stock
Option Plan.
The Reorganization created a bank holding company structure which provides
greater operating flexibility by allowing the Company to conduct a broader range
of business activities and permits the Board of Directors of the Company to
determine whether to conduct such activities at the Bank or in separate
subsidiaries of the Company. Finally, the reorganization will permit expansion
into a broader range of financial services and other business activities that
are not currently permitted to the Bank as a New York state-chartered commercial
bank. Such activities include, among others, operating non-bank depository
institutions or engaging in financial and investment advisory services,
securities brokerage and management consulting activities. The Company currently
has no plan to engage in these activities.
Narrative Description of the Business
The Bank is a New York state-chartered commercial bank, founded in 1989, which
is engaged in commercial banking in Islandia, New York and the surrounding
communities in Suffolk and Nassau Counties. The Bank offers a broad range of
commercial and consumer banking services, including loans to and deposit
accounts for small and medium-sized businesses, professionals, high net worth
individuals and consumers. The Bank is an independent local bank, emphasizing
personal attention and responsiveness to the needs of its customers. The Bank's
senior management has substantial banking experience, and senior management and
the Board of Directors of the Bank have extensive commercial and personal ties
to the communities in Nassau and Suffolk Counties, New York.
The Bank conducts a 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 funding in federal funds,
mortgage-backed securities, 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
Banks principal expenses are interest paid on deposits, interest paid on
borrowed funds and other operating expenses consisting of salaries and employee
benefits, occupancy, premises and equipment expense, and other expenses. Funding
sources, other than deposits include: secured borrowings, available lines of
credit, sales of securities under agreements to repurchase, and cash flow from
lending and investing activities.
The information presented in the financial statements and in the Form 10-K
reflect the financial condition and results of operations of the Bank as the
Reorganization had not been consummated as of the financial statement reporting
date. Prior to January 28, 1999 the Company had no significant financial
activity. At December 31, 1998, the Bank had total assets of $266.5 million.
Market Area and Competition
The Bank's primary customer base is established and expanding small to
medium-sized businesses, professionals, and high net worth individuals and
consumers. The Bank believes that emphasizing personal attention and
responsiveness to the needs of its customers, including providing state of the
art electronic banking services and expanded service hours, contributes to the
Bank'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.
The Bank has a significant number of financial services entities operating
within its market area. In one or more aspects of its business, the Bank
competes directly with other commercial banks, savings banks, 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 bank holding companies and
Federally insured banks.
Lending Activities
The Bank offers a variety of commercial and consumer loan products to serve the
needs of it's customers. The interest rates charged by the Bank on loans are
affected principally by rates offered by its competitors, the supply of money
available for lending purposes and demand for such loans. General and economic
conditions, monetary policies of the federal government including the Federal
Reserve Board, legislative tax policies and governmental budgetary matters also
affect interest rates charged by the Bank.
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 loans up to $250,000. All other loans are brought before
the Loan Committee. The Loan Committee which consists of Directors Auerbach,
Duryea, Del Duca, Esposito, Kern, Manditch, Neuberger, Roberts, Romito and
Tsunis, meet one day each month; however, additional meetings are held as the
need arises. The Board of Directors receives a monthly report summarizing the
loan portfolio activity, and actions taken by the Loan Committee.
It is the policy of the Bank that all loans satisfy basic lending criteria with
respect to the character of the applicant, including any guarantor, such as the
ability to repay the loan within a completed term, the applicant's 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,
1998 1997 1996 1995 1994
------------------------------------------------------------
(In thousands)
Commercial and industrial loans $ 30,853 $ 30,909 $ 24,952 $ 15,712 $ 13,877
Commercial real estate loans 53,990 31,254 18,566 15,582 9,030
Automobile loans 8,262 17,524 21,800 8,764 -
Consumer loans 1,396 1,726 860 957 1,022
Residential real estate loans held-
for-sale 1,486 - - - -
Gross loans 95,987 81,413 66,178 41,015 23,929
Less:
Unearned income 362 1,322 2,590 1,398 261
Deferred fees, net 410 306 148 141 88
Allowance for possible loan losses 1,071 1,026 780 633 489
Total loans, net $ 94,144 $ 78,759 $ 62,660 $ 38,843 $ 23,091
Commercial and Industrial Loans. The Bank offers a variety of commercial loan
services including term loans, demand loans, revolving credit, and loans
guaranteed in part by the Small Businesses Administration. A broad range of
commercial loans, both collateralized and uncollateralized, are made available
to businesses for working capital (including inventory and receivables),
business expansion, and for the purchase of machinery and equipment. The purpose
of a particular loan generally determines it's structure.
Commercial loans are typically underwritten on the basis of the borrowers
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, cannot be
appraised 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, 1998,
commercial and industrial loans represented 32.1% of the loan portfolio.
Commercial Real Estate Loans. The Bank originates commercial real estate loans
to businesses to finance the acquisition and holding of commercial real estate.
The security for the Bank's commercial real estate loans is generally located in
the Bank's primary market area and is underwritten on the basis of the value of
the underlying real property. Loans secured by commercial real estate generally
involve a greater degree of risk than residential real estate loans. Primary
risks associated with commercial real estate lending include the borrower's
inability to pay the debt due to unsuccessful operation or management of the
property and adverse conditions in the real estate market or economy. At
December 31, 1998, commercial real estate loans represented 56.2% of the loan
portfolio.
Automobile Loans. Until January 1997, the Bank maintained a program of making
non-recourse loans to a local auto leasing company . The Bank received an
assignment of each individual lease and a collateral interest in each
automobile. The program, which had further diversified the loan portfolio, was
curtailed by the auto leasing company effective in January 1997. At December 31,
1998 automobile loans represented 8.6% percent of the loan portfolio.
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. During 1998, the Bank began originating
residential real estate loans primarily in its market area of Nassau and Suffolk
counties. Currently, the Bank sells residential real estate loans together with
the servicing rights to these loans on a non-recourse basis to institutional
investors. The Bank limits its exposure to interest rate fluctuations and credit
risk on these loans by obtaining, at the point 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. Mortgage banking income is generated
from the premiums received on the sale of loans and servicing rights, coupled
with fees charged and interest earned during the period the Bank holds the loans
for sale.
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the approximate contractual maturities and
sensitivities to changes in interest rates of certain loans, exclusive of
non-accrual loans as of December 31, 1998.
Commercial Residential
and .. Commercial Real Estate Total
Industrial Real Estate Automobile Consumer Loans Held- Loans
Loans . Loans Loans Loans For-Sale Receivable
(In thousands)
Maturities:
Due within one year .................. $ 16,800 $ 376 $ 8,225 $ 43 $ 1,486 $ 26,930
Due after one but within five years .. 10,849 2,001 -- 1,245 -- 14,095
Due after five but within ten years .. 2,838 47,027 -- -- -- 49,865
Due after ten years .................. -- 4,586 -- -- -- 4,586
Total Due after December 31, 1999 .... 13,687 53,614 -- 1,245 -- 68,546
Total amount due ..................... $ 30,487 $ 53,990 $ 8,225 $ 1,288 $ 1,486 $ 95,476
Rate sensitivity:
Amounts with Fixed Interest Rates .... $ 8,172 $ 1,611 $ -- $ 1,245 $ -- $ 11,028
Amounts with Adjustable Interest Rates 5,515 52,003 -- -- -- 57,518
Total $ 13,687 $ 53,614 $ -- $ 1,245 $ -- $ 68,546
Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained through provisions for
possible loan losses based on management's on-going evaluation of the risks
inherent in its loan portfolio in consideration of the trends in its loan
portfolio, the national and regional economies and the real estate market in the
Bank's primary lending area. The allowance is maintained at an amount management
considers adequate to cover estimated losses in its loan portfolio which are
deemed probable and estimable based on information currently known to
management. While management believes that, based on information currently
available, the Bank's allowance is sufficient to cover losses inherent in its
loan portfolio at this time, no assurance can be given that the Bank's level of
the allowance will be sufficient to cover future possible loan losses incurred
by the Bank or 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 the New York
State Banking Department ("NYSBD") as an integral part of their
examination process periodically review the bank's allowance for possible loan
losses. Either the FDIC or the NYSBD may require the Bank to make
additional provisions for estimated possible loan losses based upon judgments
that may differ from those of management thereby negatively impacting the Bank's
financial condition and earnings.
The following table sets forth the activity in the Bank's allowance for loan
losses for the periods indicated:
At December 31,
1998 1997 1996 1995 1994
----------------------------------------------------------
(Dollars in thousands)
Balance at beginning of year $ 1,026 $ 780 $ 633 $ 489 $ 378
Provision for possible loan losses 420 240 302 180 180
Charge-offs:
Commercial and industrial loans (203) (23) (209) (36) (105)
Automobile loans (58) (75) - - -
Consumer loans (145) (21) (35) - -
Total charge-offs (406) (119) (244) (36) (105)
Recoveries:
Commercial and industrial loans 1 125 89 - 36
Automobile loans 15 - - - -
Consumer loans 15 - - - -
Total recoveries 31 125 89 - 36
Net (charge-offs) recoveries (375) 6 (155) (36) (69)
Balance at end of year $ 1,071 $ 1,026 $ 780 $ 633 $ 489
Ratio of net charge-offs/average .43% -% .31% .12% .33%
net loans
The following table sets forth the allocation of the Bank's allowance for
possible loan losses at the dates indicated:
At December 31,
1998 1997 1996 1995 1994
------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
Of Loans Of Loans Of Loans Of Loans Of Loans
In Each In Each In Each In Each In Each
Category Category Category Category Category
To Total To Total To Total To Total To Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
(Dollars in thousands)
Commercial and
industrial loans . $ 589 32.1 % $ 489 38.0 % $ 319 37.7 % $ 273 38.3 % $ 347 58.0 %
Commercial real
estate loans ... 330 56.2 313 38.4 186 28.1 156 38.0 90 37.7
Automobile loans ... 48 8.6 186 21.5 218 32.9 88 21.4 -- --
Consumer loans ..... 104 1.5 22 2.1 9 1.3 14 2.3 10 4.3
Residential real
estate loans held-for-sale -- 1.6 -- -- -- -- -- -- -- --
Unallocated ......... -- -- 16 -- 48 -- 102 -- 42 --
Total allowance for
possible loan
losses .......... $ 1,071 100.0 % $ 1,026 100.0 % $ 780 100.0% $ 633 100.0 % $ 489 100.0 %
Non-Accrual Loans. The following table sets forth information regarding
non-accrual loans, 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, such suspension is warranted. 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,
1998 1997 1996 1995 1994
-------------------------------------------------
(In thousands)
Non-accrual loans:
Commercial and industrial loans $ 366 $ 230 $ 231 $ 70 $ 148
Commercial real estate loans - - - - -
Automobile loans 37 165 174 - -
Consumer loans 108 - - 4 -
Residential real estate loans held-for-sale $ - - - - -
Total non-accrual loans 511 395 405 74 148
Loans contractually past due 90 days or
more, other than non-accruing(2) - 8 43 137 -
Total non-performing loans $ 511 $ 403 $ 448 $ 211 $ 148
Allowance for possible loan losses as a percentage
of total loans (1) 1.12% 1.29% 1.23% 1.60% 2.07%
Allowance for possible loan losses as a percentage
of total non-performing loans 209.59 254.59 174.11 300.00 330.41
Non-performing loans as a percentage of total
loans (1) .54 .51 .71 .53 .63
(1) Loans include loans receivable, net before the allowance for possible
loan losses.
(2) Excludes $378,000 and $328,000 of loans at December 31, 1998 and 1997
respectively, which have matured, however, are current with respect to
scheduled periodic principal and/or interest payments. The Bank is in
the process of renewing these obligations and/or awaiting anticipated
repayment.
Investment Activities
The Bank maintains a portfolio of securities with investable funds in such
instruments as U.S. government and agency securities, mortgage-backed
securities, municipal obligations and equity securities. The investment policy
of the Bank, which is approved by the Board of Directors and implemented by the
Bank's Investment Committee as authorized by the Board, is designed primarily to
generate acceptable yields for the Bank without compromising the Bank's business
objectives or incurring undue interest rate or credit risk, and to provide and
maintain liquidity for the Bank.
The accounting treatment of the Bank's securities is addressed in Note 1 of the
Notes to the Financial Statements in the 1998 Annual Report to Stockholders. The
following table sets forth the amortized cost (book value) and fair value of the
Bank's securities portfolio at the dates indicated:
At December 31,
1998 1997 1996
Estimated Estimated Estimated
Amortized fair Amortized fair Amortized fair
(In thousands) cost value cost value cost value
- - - -------------------------------------------------------------------------------------------------------------------
Held-to-maturity, net:
Mortgage-backed securities:
CMO $ 664 665 2,665 2,632 2,737 2,626
Available-for-sale:
U.S. Government and
Agency Obligations 78,994 78,980 58,280 58,696 56,032 56,282
Mortgage-backed securities:
GNMA 39,864 39,771 17,927 18,051 10,727 10,836
FHLMC 2,453 2,487 6,198 6,224 9,361 9,418
FNMA 6,060 6,097 12,107 12,184 11,279 11,300
CMO - - 28 28 72 70
Municipal obligations 12,855 13,002 - - - -
Other debt securities 199 199 380 384 679 675
Total debt securities 140,425 140,536 94,920 95,567 88,150 88,581
Equity securities - FHLB stock 4,619 4,619 999 999 735 735
Total securities
available-for-sale $ 145,044 145,155 95,919 96,566 88,885 89,316
The table below sets forth certain information regarding the amortized cost,
weighted average yields and contractual maturities of the Bank's securities
portfolio as of December 31, 1998.
More Than One More Than Five More
One Year or Less Year to Five Years Years to Ten Years Than Ten Years Total
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Available-for-sale:
Debt securities:
US Government and
Agency obligations $13,491 5.57% $ 8,408 5.99% $57,095 6.10% $ - -% $ 78,994 6.00%
Mortgage-backed securities:
GNMA - - - - - - 39,864 6.02 39,864 6.02
FHLMC 411 5.82 730 7.03 - - 1,312 7.65 2,453 7.16
FNMA 536 7.60 3,313 5.50 - - 2,211 5.83 6,060 5.80
Municipal obligations(1) - - 2,185 6.32 10,670 6.43 - - 12,855 6.41
Other debt securities - - 199 8.44 - - - - 199 8.44
Total debt securities 14,438 5.65 14,835 6.02 67,765 6.15 43,387 6.06 140,425 6.06
Equity securities:
FHLB stock 4,619 7.19 - - - - - - 4,619 7.19
Total equity securities 4,619 7.19 - - - - - - 4,619 7.19
Total debt and equity
securities, available-
for-sale $19,057 6.02% $14,835 6.02% $67,765 6.15% $43,387 6.06% $145,044 6.09%
Held-to-maturity:
Mortgage-backed securities:
CMO $ - -% $ - -% $ - -% $ 664 6.21% $ 664 6.21
Total securities, held-to-
maturity and available-
- - - -for-sale $19,057 6.02% $14,835 6.02% $67,765 6.15% $44,051 6.06% $145,708 6.09%
(1) Yields are presented on a fully-taxable equivalent basis.
Deposits
The Banks offers a variety of deposit accounts with a range of interest rates
and terms. The Bank's deposit accounts consist of checking, savings, NOW
accounts, money market accounts and certificates of deposit. The Bank offers
certificates of deposit with balances in excess of $100,000 at preferential
rates and also offers Individual Retirement Accounts and other qualified plan
accounts. The Bank solicits deposit accounts from small businesses, professional
firms, households, and governmental 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,
1998 1997 1996
-------------------------------------------
(Dollars in thousands)
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
Non-interest bearing accounts $ 25,811 -% $ 18,656 -% $ 15,029 -%
Savings accounts 9,030 3.42 2,784 2.59 2,361 2.63
NOW and money market deposits 35,852 2.38 24,960 2.32 24,965 2.38
Certificates issued in excess of $100,000 24,695 5.31 22,854 5.41 14,327 5.30
Other time deposits 81,046 6.05 76,428 6.12 54,965 6.03
Total average deposits $ 176,434 $ 145,682 $ 111,647
At December 31, 1998, the Bank had outstanding approximately $19.0 million in
certificates of deposit accounts in amounts of $100,000 or more, maturing as
follows:
(In thousands)
3 months or less $ 12,762
Over three through six months 604
Over six through 12 months 3,502
Over 12 months 2,130
Total $ 18,998
Borrowings
The Bank began utilizing borrowings to leverage the Bank's capital, optimize net
interest income and supplement earnings. Borrowed funds at December 31, 1998
consisted of $24 million of convertible advances from the Federal Home Loan Bank
of New York ("FHLB") secured by various callable U.S. agency securities and
mortgage-backed securities. In addition to FHLB advances, at certain times the
Bank will use sales of securities sold under agreements to repurchase as a lower
cost alternative to its other sources of funds. The following table sets forth
certain information regarding the Bank's borrowed funds for the years indicated:
For the Years Ended December 31,
1998 1997 1996
---------------------------------------------
(Dollars in thousands)
FHLB Advances:
Maximum amount outstanding at any month-end
during the year $ 24,000 $ - $ -
Average balance outstanding 14,449 - -
Balance outstanding at end of year 24,000 - -
Weighted average interest rate during the year 5.36% -% -%
Weighted average interest rate at the end of the year 5.04% -% -%
Repurchase Agreements:
Maximum amount outstanding at any month-end
during the year $ 10,238 $ 25,375 $ 2,000
Average balance outstanding 853 10,476 476
Balance outstanding at end of year - - -
Weighted average interest rate during the year 5.46% 5.69% 5.46%
Weighted average interest rate at the end of the year -% -% -%
Federal Funds Purchased:
Maximum amount outstanding at any month-end
during the year $ 5,000 $ 7,400 $ 4,300
Average balance outstanding 545 2,438 555
Balance outstanding at end of year - - -
Weighted average interest rate during the year 5.21% 5.78% 5.41%
Weighted average interest rate at the end of the year -% -% -%
Personnel
At December 31, 1998, the Bank employed 70 employees, two of which are
part-time. No employees are covered by a collective bargaining agreement and the
Bank believes its employee relations are excellent.
Federal and State Taxation
General. The Bank files federal income tax returns and New York State Bank
Franchise Tax returns on a calendar year basis, using the accrual method of
accounting.
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 instruments are generally treated
as ordinary, rather than capital, gains and losses, and a "small bank" (ie., one
with assets having a tax basis of no more than $500 million), such as the Bank,
is permitted to calculate its deductions for bad debts under a reserve method
that is based upon actual charge-offs for the current and preceding five years
or a "grand-fathered" base year reserve, if larger. A bank maintaining a bad
debt reserve may be subject to additional tax if it makes distributions to
shareholders in excess of its current and accumulated earnings and profits, as
calculated for federal income tax purposes, or in redemption of its stock or in
partial or complete liquidation.
State Taxation. The Bank is subject to the New York State Franchise Tax on
Banking Corporations in an amount equal to the greater of 9% of the Bank's
"entire net income" or certain alternative minimum taxes. Entire net income is
similar to federal taxable income subject to certain modifications, including
the fact that the Bank may calculate its deduction for additions to its bad debt
reserve on the basis of a percentage of its taxable income. The Bank is also
subject to the 17% Metropolitan Commuter Transportation District Surcharge on
its New York Sate Franchise Tax. A bank maintaining such a bad debt reserve may
be subject to additional New York tax if its makes certain distributions to its
shareholders.
Regulation
As a registered Bank Holding Company, the Company is subject to examination and
comprehensive regulation by the FRB, and the Bank is subject to examination and
comprehensive regulation by the FDIC and the NYSBD. Each of these agencies
issues regulations and requires the filing of reports describing the activities
and financial condition of the entities under its jurisdiction. Likewise, such
agencies conduct examinations on a recurring basis to evaluate the safety and
soundness of the institution and test compliance with various regulatory
requirements relating to: Consumer Protection, Fair Lending, the Community
Reinvestment Act, sales of non-deposit investments, electronic data processing,
and trust department activities.
Under FRB regulations, the Company may not, without providing prior notice to
the FRB, purchase or redeem its own Common Stock if the gross consideration for
the purchase or redemption, combined with the net consideration paid for all
such purchases or redemptions during the preceding twelve months, is equal to
ten percent or more of the Company's consolidated net worth. Additionally , FRB
policy provides that dividends shall not be paid except out of current earnings
and unless prospective rate of earnings retention by the Company appears
consistent with its capital needs, asset quality, and overall financial
condition.
The Bank is organized under the New York Banking Law ("Banking Law"), and its
deposits are insured by the Bank Insurance Fund (the "BIF") of the FDIC to the
extent permitted by law. As a New York bank, the Bank is subject to regular
examination and supervision by the NYSBD. As a depository institution, the
deposits of which are insured by the FDIC, the Bank also is subject to
regulation and supervision by the FDIC. While the Bank is not a member of the
Federal Reserve System, it is subject to certain regulations of the Federal
Reserve Board. In addition to banking laws, regulations and regulatory agencies,
the Bank is subject to various other laws, regulations and regulatory agencies,
all of which directly or indirectly affect the Bank's operations. The following
discussion summarizes certain aspects of those laws and regulations that affect
the Bank. To the extent that the following information describes statutory or
regulatory provisions, it is qualified entirely by reference to the particular
statutory or regulatory provision. Proposals to change the laws and regulations
governing the banking industry are frequently raised in Congress, in the New
York State legislature and before the various banking regulatory agencies. The
likelihood and timing of any changes and the impact such changes might have on
the Bank are difficult to determine. A change in applicable law or regulation
may have a material effect on the business of the Bank.
The Bank also is affected by the fiscal and monetary policies of the federal
government and its agencies, including the Federal Reserve Board. An important
purpose of these policies is to curb inflation and manage economic growth
through control of the supply of money and credit. The Federal Reserve Board
uses its powers to regulate reserve requirements of both member and non-member
banks, establish the discount rate on bank borrowings and to conduct open market
operations in U.S. government securities so as to exercise control over the
supply of money and credit. These policies may have a direct effect on the
amount of the Bank's loans and deposits and on the interest rates charged on
loans and paid on deposits, with the result that federal policies could have a
material effect on the Bank's earnings. The effect of such policies on the
Bank's future earnings cannot be predicted, nor can be future policies of the
Federal Reserve Board and other authorities, future changes in state and Federal
laws and wage, price and other economic restraints of the Federal government or
the effect of such changes on the earnings of the Bank be predicted.
ITEM 2. PROPERTIES
The Bank conducts its business from its main office located at One Suffolk
Square, Islandia, New York, and five branch offices located in Babylon,
Smithtown, Westbury, Jericho and Shirley, New York. The following table sets
forth information relating to each of the Bank's offices at December 31, 1998.
Lease Net
Expiration Book Value
Date Including at
Location Leased Leased Options Dec. 31, 1998
- - - --------------------------------------------------------------------------------------------------------------
(In Thousands)
Main Office:
One Suffolk Square, Islandia, LI, New York 11722 Leased 1987 2005 $ 120
Branch Offices:
400 West Main Street, Babylon, LI, New York 11702 Leased 1995 2000 36
50 Route 111, Smithtown, LI, New York 11787 Leased 1997 2002 36
900 Merchants Concourse, Westbury, LI, New York 11590 Leased 1997 2003 56
390 North Broadway, Jericho, LI, New York 11753 Leased 1997 2008 65
861 Montauk Highway, Shirley, LI, New York 11967 Leased 1998 2002 81
$ 394
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting of stockholders on December 8, 1998, the following
proposals were considered and voted upon:
1. The approval of a Plan of Acquisition dated as of September 15,1998 (the
"Plan of Acquisition"), as a result of which: (i) the Bank will become a
wholly-owned subsidiary of Long Island Financial Corp., a Delaware corporation;
and (ii) all of the outstanding shares of the Bank's Common Stock will be
converted, subject to dissenter's rights, on a one-for-one basis, into
outstanding shares of the common stock of Long Island Financial Corp.
2. The ratification of the Long Island Financial Corp. 1998 Stock Option Plan.
At such special meeting, the stockholders approved the proposals as follows:
Votes Broker
Votes For Against Abstentions Non-Votes
---------------------------------------------------------------
Plan of Acquisition 1,323,502 13,504 16,019 ---
Long Island Financial Corp.
1998 Stock Option Plan 1,185,713 148,292 19,020 ---
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The above captioned information regarding the market for the Company's common
equity and related stockholder matters appears in the 1998 Annual Report to
Stockholders under the caption "Capital Stock" and is incorporated herein by
this reference.
ITEM 6. SELECTED FINANCIAL DATA
Information regarding selected financial data appears on page 2 and 3 of the
1998 Annual Report to Stockholders under the caption "Selected Financial Data"
and is incorporated herein by this reference.
The Bank's dividend pay-out ratio for the years ended December 31, 1998, 1997
and 1996 were 50.00%, 29.81% and 25.42%, repectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information regarding management's discussion and analysis of financial
condition and results of operations appears on pages 6 through 14 of the 1998
Annual Report to Stockholders under the caption "Management's Discussion And
Analysis Of Financial Condition And Results of Operations" and is incorporated
herein by this reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Management of
Interest Rate Risk" in the 1998 Annual Report to Stockholders is incorporated
herein by this reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information regarding the financial statements and the Independent Auditor's
Report appears on pages 15 through 28 of the 1998 Annual Report to Stockholders
and is incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained on pages 3 through 6 of the Proxy Statement for the
Annual Meeting of Stockholders to be held April 21, 1999 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.
Name Age Position(s) Held With the Company
Perry B. Duryea, Jr...............77 Chairman of the Board
Roy M. Kern, Sr...................65 Vice Chairman of the Board
Douglas C. Manditch...............51 President and Chief Executive Officer
Thomas Buonaiuto..................33 Vice President and Treasurer
Carmelo Vizzini...................53 Vice President and Secretary
Biographical Information
Positions held by a director or officer have been held for at least the past
five years unless stated otherwise.
Perry B. Duryea, Jr. serves as Chairman of the Board of the Company and of the
Bank; He is Chairman of Perry B. Duryea & Son, Inc., a seafood business located
in Montauk, New York. Mr. Duryea was Speaker of the New York Assembly and also
served as its Minority Leader.
Roy M. Kern, Sr. serves as Vice Chairman of the Board of the Company and of the
Bank. He was formerly President of Bragg Medical Group, Inc., a firm which
provides billing and financial services to the medical community and is located
in Kings Park, New York.
Douglas C. Manditch is President and Chief Executive Officer of the Company and
of the Bank. He joined Long Island Commercial Bank in 1987, then in formation.
Thomas Buonaiuto serves as the Vice President and Treasurer of the Company and
Executive Vice President and Chief Financial Officer of the Bank. Mr.
Buonaiuto's responsibilities include oversight of all areas of operations of the
Bank excluding lending.
Carmelo Vizzini serves as the Vice President and Secretary of the Company and
Executive Vice President and Chief Lending Officer of the Bank. Mr. Vizzini's
responsibilities include oversight of all areas of lending within the Bank, as
well as loan operations and compliance with CRA.
ITEM 11. EXECUTIVE COMPENSATION
The information contained on pages 6 through 7 of the Proxy Statement for the
Annual Meeting of Stockholders to be held on April 21, 1999 under the captions
"Executive Compensation" and "Directors Compensation" is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on page 4 through 6 of the Proxy Statement for the
Annual Meeting of Stockholders to be held April 21, 1999 under the caption
"Information with Respect to the Nominees, Continuing Directors and Executive
Officers" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained on page 8 of the Proxy Statement for the Annual
Meeting of Stockholders to be held April 21, 1999 under the caption
"Transactions with Certain Related Persons" is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following financial statements are included in the Company's Annual Report
to Stockholders for the year ended December 31, 1998 and are incorporated by
this reference:
o Balance Sheets at December 31, 1998 and 1997
o Statements of Earnings for the Years Ended December 31, 1998, 1997 and 1996
o Statements of Changes in Stockholders' Equity for the Years Ended December 31,
1998, 1997 and 1996
o Statements of Cash Flows for the Years Ended December 31 ,1998, 1997 and 1996
o Notes to Financial Statements
o Independent Auditors' Report
The remaining information appearing in the 1998 Annual Report to Stockholders
is not deemed to be filed as part of this report, except as expressly provided
herein.
(A) 2. FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules have been omitted because they are not applicable
or the required information is shown in the Financial Statements or Notes
thereto.
(B) Reports on Form 8-K Filed During the Last Quarter of 1998.
The Company filed an 8-K on January 29, 1999 to report the exchange of the
common stock of Long Island Financial Corp. for the common stock of Long Island
Commercial Bank. Long Island Financial Corp. became the successor to Long Island
Commercial Bank and Long Island Commercial Bank became a wholly-owned subsidiary
of Long Island Financial Corp.
(C) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit
Number
2.0 Plan of Acquisition between Long Island Financial Corp. and Long Island
Commercial Bank dated as of September 15, 1998.*
3.1 Certificate of Incorporation of Long Island Financial Corp., dated
September 10, 1998.*
3.2 By-Laws of Long Island Financial Corp., effective as of September 10,
1998.*
10.0 Long Island Financial Corp. 1998 Stock Option Plan.*
11.0 Statement re computation of per share earnings
13.0 1998 Annual Report to Stockholders
27.0 Financial Data Schedule
================
* Incorporated herein by reference in this document to the S-4 Registration
Statement initially filed on September 22, 1998, Registration No. 333-63971
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.
/S/ Douglas C. Manditch
By:______________________________
Douglas C. Manditch
President and Chief Executive Officer
Date:
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 25, 1998 by the following persons on behalf of
the Registrant and in the capacities indicated.
/S/ Perry B. Duryeal, Jr. /S/ Walter J. Mack, M.D.
------------------------------- ---------------------------------
Perry B. Duryea, Jr. Walter J. Mack, M.D.
Chairman of the Board Director
/S/ Roy M. Kern, Sr. /S/ Douglas C. Manditch
------------------------------- ---------------------------------
Roy M. Kern, Sr. Douglas C. Manditch
Vice Chairman of the Board Director, President and
Chief Executive Officer
/S/ Harvey Auerbach /S/ Werner S. Neuburger
------------------------------- ---------------------------------
Harvey Auerbach Werner S. Neuburger
Director Director
/S/ John L. Ciarelli, Esq. /S/ Thomas F. Roberts, III
------------------------------- ---------------------------------
John L. Ciarelli, Esq. Thomas F. Roberts, III
Director Director
/S/ Donald Del Duca /S/ Alfred Romito
------------------------------- ---------------------------------
Donald Del Duca Alfred Romito
Director Director
/S/ Frank J. Esposito /S/ Sally Ann Slacke
------------------------------- ---------------------------------
Frank J. Esposito Sally Ann Slacke
Director Director
/S/ Waldemar Fernandez /S/ John C. Tsunis, Esq.
------------------------------- ---------------------------------
Waldemar Fernandez John C. Tsunis, Esq.
Director Director
/S/ Gordon A. Lenz /S/ Thomas Buonaiuto
------------------------------- ---------------------------------
Gordon A. Lenz Thomas Buonaiuto
Director Vice President & Treasurer
EXHIBIT 11. COMPUTATION OF PER SHARE EARNINGS
Long Island Commercial Bank
Statement Re: Computation of Per Share Earnings
(In thousands except per share amounts)
Year Ended
December 31, 1998
Net
income.............................................................. $1,125
Weighted average common shares outstanding........................... 1,766,154
Basic and diluted earnings per common and common share equivalents.. $ .64
EXHIBIT 13. ANNUAL REPORT
CAPITAL STOCK
On January 28, 1999, Long Island Financial Corp. became the holding company
of Long Island Commercial Bank and the common stock began trading on the Nasdaq
Stock Market's National Market under the symbol "LICB". On January 14, 1998, the
common stock of Long Island Commercial Bank began trading on the Nasdaq Stock
Market's National Market under the symbol "LGCB". Prior to that, the common
stock was traded infrequently on the over-the-counter market through the OTC
Electronic Bulletin Board. The following table shows the high and low sales
price of the common stock and the dividends declared during the period
indicated. The common stock began trading on April 11, 1996.
Dividends
High Low Declared (1)
- - - --------------------------------------------------------------------------------------------
1997
1st Quarter $ 12.25 $ 10.75 $ -
2nd Quarter $ 14.50 $ 13.00 $ 0.15
3rd Quarter $ 14.50 $ 13.75 $ 0.08
4th Quarter $ 18.00 $ 14.00 $ 0.08
1998
1st Quarter $ 17.00 $ 15.88 $ 0.08
2nd Quarter $ 17.50 $ 15.50 $ 0.08
3rd Quarter $ 16.63 $ 12.00 $ 0.08
4th Quarter $ 13.63 $ 11.50 $ 0.08
(1) Dividends on the common stock were paid semi-annually. On September 24,
1997, the Board of Directors changed the Bank's dividend policy from semi-
annual to a quarterly dividend.
At December 31, 1998, there were approximately 434 shareholders of record of the
common stock.
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the last five
years.
At or For the Years Ended December 31,
1998 1997 1996 1995 1994
(Dollars in thousands, except share data)
- - - -------------------------------------------------------------------------------------------------------------------
Selected Operating Data:
Interest income $ 15,285 $ 12,726 $ 8,998 $ 5,977 $ 3,217
Interest expense 8,229 7,303 4,786 3,058 1,209
Net interest income 7,056 5,423 4,212 2,919 2,008
Provision for possible loan losses 420 240 302 180 180
Net interest income after provision for
possible loan losses 6,636 5,183 3,910 2,739 1,828
Other operating income 918 378 364 338 296
Other operating expenses 5,799 3,737 2,709 2,217 1,700
Income before provision for
income taxes 1,755 1,824 1,565 860 424
Provision for income taxes 630 760 530 173 44
Net income $ 1,125 $ 1,064 $ 1,035 $ 687 $ 380
Basic and diluted earnings per share $ 0.64 $ 1.04 $ 1.18 $ 1.14 $ 0.63
- - - -------------------------------------------------------------------------------------------------------------------
Selected Financial Condition Data:
Total assets $ 266,543 $ 211,956 $ 190,898 $ 102,507 $ 72,986
Loans receivable, net 94,144 78,759 62,660 38,843 23,091
Securities held-to-maturity and
available-for-sale (1) 145,819 99,231 92,053 $43,060 24,263
Cash and cash equivalents 21,489 29,764 33,120 18,933 24,512
Deposits 217,867 187,626 178,314 94,683 67,425
Borrowed funds 24,000 - - - -
Stockholders' equity 21,868 21,408 9,890 5,845 5,034
Book value per share $ 12.35 $ 12.18 $ 10.60 $ 9.74 $ 8.39
Shares outstanding 1,771,306 1,757,709 933,181 600,000 600,000
Performance Ratios:
Return on average assets 0.52 % 0.62 % 0.84 % 0.85 % 0.76 %
Return on average equity 5.18 9.36 12.00 12.99 7.82
Average equity to average assets 10.01 6.59 7.01 6.58 9.77
Equity to total assets at end of year 8.20 10.10 5.18 5.70 6.90
Average interest rate spread (2) 2.53 2.51 2.79 2.92 3.44
Net interest margin (3) 3.49 3.29 3.60 3.84 4.34
Average interest-earning assets to
average interest-bearing liabilities 124.28 117.67 119.82 122.72 134.39
Non-interest expense to average assets 2.67 2.17 2.20 2.76 3.41
Efficiency ratio (4) 72.72 64.42 59.20 68.07 73.78
Capital Ratios:
Leverage capital 9.60 % 11.65 % 6.77 % 6.23 % 7.91 %
Tier 1 risk-based capital 17.62 20.43 11.32 11.40 16.05
Total risk-based capital 18.48 21.43 12.25 12.69 17.61
Asset Quality Ratios and Other Data:
Total non-performing loans $ 511 $ 403 $ 448 $ 211 $ 148
Allowance for possible loan losses 1,071 1,026 780 633 489
Non-performing loans as a percent of
total loans (5) (6) 0.54 % 0.51 % 0.71 % 0.53 % 0.63 %
Non-performing assets as a percent of
total assets (5) 0.19 0.19 0.23 0.21 0.20
Allowance for loan losses as a percent of:
Non-performing loans (5) 209.59 254.59 174.11 300.00 330.41
Total loans (6) 1.12 1.29 1.23 1.60 2.07
Full service offices 6 4 2 2 1
(1) In November, 1995, the Bank reclassified securities having a market value of
$38.8 million from its held-to-maturity portfolio to its available-for-
sale portfolio.
(2) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the
weighted average cost of average interest-bearing liabilities.
(3) The net interest margin represents net interest income as a percent
of average interest-earning assets.
(4) The efficiency ratio represents the ratio for operating expenses
divided by the sum of net interest income and non-interest income.
(5) Non-performing loans consist of all non-accrual loans and all other
loans 90 days or more past due. It is the Bank's policy to generally
cease accruing interest on all loans 90 days or more past due.
(6) Loans include loans receivable, net, before allowance for possible loan
losses.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
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 possible loan losses and other operating income. The Bank's other
operating expense principally consists of salaries and employee benefits,
occupancy, premises and equipment expense, and other expenses. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in interest rates, government policies and
action of regulatory authorities.
During 1998, the Bank began originating residential real estate loans
primarily in its market area of Nassau and Suffolk counties. Currently, the Bank
sells residential real estate loans together with the servicing rights to these
loans on a non-recourse basis to institutional investors. The Bank limits its
exposure to interest rate fluctuations and credit risk on these loans by
obtaining, at the point of origination, a commitment from an institutional
investor to purchase that loan from the Bank. Furthermore, by selling the
servicing rights to the loans, the Bank avoids the associated risks and expenses
of managing and servicing a loan portfolio. Mortgage banking income is generated
from the premiums received on the sale of loans and servicing rights, coupled
with fees charged and interest earned during the period the Bank holds the loans
for sale.
Management Strategy
Since the Bank began operations in January, 1990, it has sought to expand
its customer base and grow its balance sheet. The Bank has set in place an
aggressive expansion plan which began in the second half of 1994, which the Bank
intends to continue. The key components of this plan are to (i) expand the
Bank's network of branch offices, (ii) originate commercial loans, (iii) develop
strong customer relationships that generate multiple services for individual
customer relationships and repeat business, (iv) add high quality employees and
(v) leverage capital with increased deposits from branch expansion and borrowed
funds.
At a special meeting on December 8, 1998, the stockholders of Long Island
Commercial Bank approved a Plan of Acquisition dated as of September 15, 1998,
as a result of which: (i) the Bank will become a wholly-owned subsidiary of Long
Island Financial Corp., a Delaware corporation (the Company); and (ii) all of
the outstanding shares of the Bank's Common Stock will be converted, subject to
dissenter's rights, on a one-for-one basis, into outstanding shares of the
common stock of Long Island Financial Corp. This transaction is hereinafter
referred to as the "Reorganization". In addition, the stockholders ratified the
Long Island Financial Corp. 1998 Stock Option Plan.
The Reorganization will create a bank holding company structure which will
provide greater operating flexibility by allowing the Company to conduct a
broader range of business activities and permit the Board of Directors of the
Company to determine whether to conduct such activities at the Bank or in
separate subsidiaries of the Company. Finally, the reorganization will permit
expansion into a broader range of financial services and other business
activities that are not currently permitted to the Bank as a New York
state-chartered commercial bank. Such activities include, among others,
operating non-bank depository institutions or engaging in financial and
investment advisory services, securities brokerage and management consulting
activities. The Company currently has no plan to engage in these activities.
Subsequently, on January 28, 1999, all necessary required approvals and
consents were obtained thereby consummating the Reorganization. Long Island
Financial Corp. will now be subject to the financial reporting requirements of
the Securities and Exchange Commission.
Management of Interest Rate Risk
The principal objective of the Bank's interest rate risk management is to
evaluate the interest rate risk inherent in certain balance sheet accounts,
determine the level of risk appropriate given the Bank's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors approved
guidelines. Through such management, the Bank seeks to reduce the vulnerability
of its operations to changes in interest rates. The Board appoints the
Investment Committee to review the Bank's interest rate risk position on a
quarterly basis.
Funds management is the process by which the Bank 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 Bank's management and decision-making process.
Accordingly, the Bank's results of operations and financial condition are
largely dependent on movements in market interest rates and its ability to
manage its assets and liabilities in response to such movements.
At December 31, 1998, 75.9% of the Bank's gross loans had adjustable
interest rates and its loan portfolio had an average weighted maturity of 6.5
years. At such date, $32.8 million, or 22.5%, of the Bank's securities had
adjustable interest rates, and its securities portfolio had a weighted average
maturity of 4.2 years. At December 31, 1998, the Bank had $68.9 million of
certificates of deposit with maturities of one year or less and $19.0 million of
deposits over $100,000, which tend to be less stable sources of funding as
compared to core deposits and represented 42.8% of the Bank's interest-bearing
liabilities. Due to the Bank's level of shorter term certificates of deposit,
the Bank'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. Accordingly, in a rising
interest rate environment, the Bank's interest-bearing liabilities may adjust
upwardly more rapidly than the yield on its adjustable-rate loans, adversely
affecting the Bank's net interest rate spread, net interest income and net
income.
The Bank'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 quarter period
and (ii) the potential change in the fair market value of equity of the Bank
("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 December 31, 1998, the effects of instantaneous and sustained interest
rate changes on the Bank's net interest income and Net Economic Value of Equity
are as follows:
Change in
Interest Rates Potential Change in Potential Change in
in Basis Points Net Interest Income Net Economic Value of Equity
- - - -------------------------------------------------------------------------------------------------------------------
$ Change % Change $ Change % Change
- - - -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
200 $ 231 2.7 % $ (5,623) (24.0) %
100 137 1.6 (2,553) (10.9)
Static - - - -
(100) (475) (5.5) 1,851 7.9
(200) (909) (10.5) 3,325 14.2
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
The following table sets forth certain information relating to the Bank's
average balance sheets and its statements of earnings for the years ended
December 31, 1998, 1997 and 1996, and reflects the average yield on
interest-earning assets and average cost of interest-bearing liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense, annualized, by the average balance of interest-earning assets or
interest-bearing liabilities, respectively. Average balances are derived from
average daily balances. Average balances and yields include non-accrual loans.
Years Ended December 31,
- - - -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- - - -------------------------------------------------------------------------------------------------------------------
Average Average Average
Average Yield / Average Yield / Average Yield /
Balance Interest Cost Balance Interest Cost Balance Interest Cost
- - - -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Assets:
Interest-earning assets:
Federal funds sold and
interest-earning deposits .. $ 11,181 $ 598 5.35% $ 3,194 $ 168 5.26% $ 7,296 $ 388 5.32%
Securities held-to-maturity and
available-for-sale, net(5) . 101,296 6,571 6.49 94,509 6,407 6.78 60,470 4,098 6.78
Municipal obligations (4) ..... 7,757 497 6.41 -- -- -- -- -- --
Loans receivable, net (1) ..... 86,647 7,780 8.98 66,961 6,151 9.19 49,233 4,512 9.16
Total interest-earning assets . 206,881 15,446 7.47 164,664 12,726 7.73 116,999 8,998 7.69%
Non-interest-earning assets ...... 10,060 7,919 5,971
Total assets ..................... $216,941 $172,583 $122,970
Liabilities and Stockholders'
Equity Interest-bearing liabilities:
Savings deposits $ 9,030 $ 309 3.42% $ 2,784 $ 72 2.59% $ 2,361 $ 62 2.63%
NOW and money
market deposits 35,852 854 2.38 24,960 579 2.32 24,965 594 2.38
Certificates of deposit 105,741 6,216 5.88 99,282 5,915 5.96 69,292 4,074 5.88
Total interest-bearing deposits 150,623 7,379 4.90 127,026 6,566 5.17 96,618 4,730 4.90
Borrowed funds 15,847 850 5.36 12,914 737 5.71 1,031 56 5.43
Total interest-bearing liabilities 166,470 8,229 4.94 139,940 7,303 5.22 97,649 4,786 4.90
Other non-interest bearing
liabilities 28,754 21,275 16,703
Total liabilities 195,224 161,215 114,352
Stockholders' Equity 21,717 11,368 8,618
Total liabilities and
stockholders' equity $216,941 $172,583 $122,970
Net interest income / interest
rate spread (2) $ 7,217 2.53% $ 5,423 2.51% $4,212 2.79%
Net interest margin (3) 3.49% 3.29% 3.60%
Ratio of interest-earning assets to
interest-bearing liabilities 124.28% 117.67% 119.82%
(1) Amount is net of deferred loan fees and allowance for possible loan losses
and includes non-performing loans.
(2) Net interest rate spread represents the
difference between the yield on interest-earning assets and the cost
of interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
(4) Interest income and yields are presented on a fully-taxable equivalent
basis using the Federal Statutory income tax rate of 34%.
(5) Securities held-to-maturity and available-for-sale, net exclude
municipal obligations.
The following table represents the extent to which changes in interest
rates and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated. Information is provided in each category with respect to
(i) changes attributable to changes in volume (change in volume multiplied by
prior rate), (ii) changes attributable to changes in rate (change in rate
multiplied by prior volume) and (iii) the net change. Changes attributable to
the combined impact of volume and rate have been allocated proportionately to
separately reflect the changes due to the volume and the changes due to rate:
Year Ended Year Ended
December 31, 1998 December 31, 1997
Compared to Compared to
Year Ended Year Ended
December 31, 1997 December 31, 1996
Increase/(Decrease) Due to Increase/(Decrease) Due to
- - - -------------------------------------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
- - - -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-Earning Assets:
Federal funds sold and interest
earning deposits $ 426 $ 4 $ 430 $ (216) $ (4) $ (220)
Securities held-to-maturity and
available for sale, net (2) 448 (284) 164 2,308 1 2,309
Municipal obligations 497 - 497 - - -
Loans receivable, net (1) 1,770 (141) 1,629 1,628 11 1,639
Total interest-earning assets 3,141 (421) 2,720 3,720 8 3,728
Interest-Bearing Liabilities:
Deposits:
Savings deposits 208 29 237 11 (1) 10
NOW and money market deposits 259 16 275 - (15) (15)
Certificates of deposit 381 (80) 301 1,786 55 1,841
Total deposits 848 (35) 813 1,797 39 1,836
Borrowed funds 159 (46) 113 678 3 681
Total interest-bearing liabilities $ 1,007 $ (81) $ 926 $ 2,475 $ 42 $ 2,517
(1) Amount is net of deferred loan fees and allowance for possible loan losses
and includes non-performing loans.
(2) Securities held-to-maturity and available-for-sale, net exclude
municipal obligations.
Comparison of Financial Condition at December 31, 1998 and 1997
Total assets increased by $54.5 million, or 25.8%, from $212.0 million at
December 31, 1997 to $266.5 million at December 31, 1998. The increase in assets
is primarily attributable to a $48.6 million, or 50.3%, increase in debt and
equity securities available for sale, which at December 31, 1997 were $96.6
million compared to $145.2 million at December 31, 1998. In addition, loans
receivable, net increased $15.4 million, or 19.5%, to $94.1 million at December
31, 1998. The decline in cash and due from banks of $8.3 million reflects the
timing of seasonal municipal deposits and investment of those deposits in short
term debt and equity securities prior to the year end. At December 31, 1998 and
1997, seasonal municipal deposits amounted to $44.8 million and $33.0 million,
respectively.
Total deposits increased $30.3 million, or 16.1%, from $187.6 million at
December 31, 1997 to $217.9 million at December 31, 1998, primarily reflected in
an increase in NOW and money market deposits. The increase in NOW and money
market deposits of $16.8 million, or 30.5%, from $54.9 million at December 31,
1997 to $71.7 million at December 31, 1998 is attributable to the increase in
seasonal municipal deposits at December 31, 1998. In addition, demand deposits
increased $10.1 million, or 37.9%, from $26.5 million at December 31, 1997 to
$36.6 million at December 31, 1998. This increase is attributable to the Bank's
branch expansion in 1998. Savings deposits also increased by $9.5 million, or
321.8%, from $3.0 million at December 31, 1997 to $12.5 million at December 31,
1998. This reflects the introduction of new savings deposit products in 1998.
Offsetting these increases in lower cost deposits was a decrease in both time
certificates issued in excess of $100,000 and other time deposits. Time
certificates issued in excess of $100,000 were $19.0 million at December 31,
1998, a decrease of $3.4 million, or 15.3%, from the prior year. Other time
deposits decreased $2.7 million, or 3.3%, to $78.1 million at December 31, 1998.
Stockholders' equity was $21.9 million at December 31, 1998 compared to
$21.4 million at December 31, 1997. Net income amounted to $1.1 million for the
year ended December 31, 1998, and the net unrealized gain on the Bank's
available-for-sale securities portfolio, net of taxes, as required by SFAS No.
115, decreased by $314,000.
Comparison of Operating Results for the Year Ended December 31, 1998 and 1997
General
Net income for the year ended December 31, 1998 increased by $61,000, or
5.7%, from $1,064,000 for the year ended December 31, 1997 to $1,125,000 for
1998. The increase was primarily due to an increase in net interest income after
the provision for possible loan losses of $1,453,000, or 28.0%, and other
operating income of $540,000, or 142.9%, which was offset by a $2,062,000, or
55.2% increase in other operating expenses.
Interest Income
Total interest income increased $2.7 million, or 21.3%, to $15.4 million
for the year ended December 31, 1998, from $12.7 million for the corresponding
period in 1997. The increase was primarily the result of an increase in the
average balance of interest-earning assets of 25.6%, from $164.7 million during
the year ended December 31, 1997, to $206.9 million during the year ended
December 31, 1998. The average balance of securities held-to-maturity and
available-for- sale, net (exclusive of municipal obligations), increased by $6.8
million, or 7.2%, to $101.3 million in the 1998 period, from $94.5 million in
the 1997 period, reflecting management's decision to resume leveraging the
balance sheet to increase the earnings of the Bank. The average balance of loans
receivable, net increased by $19.6 million, or 29.3%, to $86.6 million in the
1998 period from $67.0 million in the 1997 period. The average yield on interest
earning assets decreased 26 basis points, reflecting a 21 basis point decrease
in the average yield on loans receivable, and a 29 basis point decrease in the
average yield on securities held-to-maturity and available-for-sale, net
(exclusive of municipal obligations). The decrease in the average yield on
interest-earning assets is, in part, reflective of the Federal Reserve Bank's
three interest rate cuts in 1998 totaling 75 basis points. The Bank began
purchasing municipal securities in the second quarter of 1998, because the
taxable equivalent yields on these securities were attractive. For the 1998
period, the average balance of municipal securities was $7.8 million with a
taxable equivalent yield of 6.41%.
Interest Expense
Total interest expense increased $926,000, or 12.7%, for the year ended
December 31, 1998, to $8.2 million compared to $7.3 million for the year ended
December 31, 1997. The increase reflects both an increase in the average balance
of interest bearing liabilities of $26.5 million, or 19.0%, and a decrease in
the average rate paid on interest bearing liabilities of 28 basis points.
Although the average balance of borrowed funds increased $2.9 million, or 22.7%,
from 1997 to 1998, the average rate paid on borrowed funds decreased 35 basis
points to 5.36%. This method of funding has been used in conjunction with the
Bank's leveraging of the balance sheet. The average balance of savings deposits
has increased by $6.2 million, or 224.4%, along with an increase in the average
rate paid of 83 basis points, reflecting the introduction of tiered savings
products in 1998. These products, while increasing the cost of traditional
savings products, remain significantly below the cost of time deposit funding,
which also require more maintenance in the branches. The increase in the average
balance of NOW and money market deposits of $10.9 million, or 43.6%, reflects
the Bank's increased sales emphasis within the expanded branch network. The cost
of these deposits increased slightly from 2.32% in 1997 to 2.38% in 1998. The
increase in the average balance of certificates of deposits of $6.5 million, or
6.5%, from 1997 to 1998, reflects the Bank's branch expansion. The average cost
of certificates of deposits decreased slightly from 1998 to 1997 by 8 basis
points.
Net Interest Income
Net interest income for the year ended December 31, 1998 was $7.2 million
(on a taxable equivalent basis) compared to $5.4 million for the year ended
December 31, 1997. This increase resulted from an overall increase of 25.6% in
the average balance of interest-earning assets from $164.7 million during the
year ended December 31, 1997, to $206.9 million during the year ended December
31, 1998. Despite the interest rate decreases by the Federal Reserve Bank in
1998 totaling 75 basis points, the Bank's average interest rate spread on a tax
equivalent basis remained relatively unchanged from 2.51% for the 1997 period to
2.53% for the 1998 period.
Provision for Possible Loan Losses
The Bank's provision for possible loan losses increased by $180,000, or
75.0%, from $240,000 for the year ended December 31, 1997 to $420,000 for the
year ended December 31, 1998. Management of the Bank assesses the adequacy of
the allowance for possible loan losses based on evaluating known and inherent
risks in the loan portfolio and upon continuing analysis of the factors
underlying the quality of the loan portfolio. While management believes that,
based on information currently available, the Bank's allowance for possible loan
losses is sufficient to cover losses inherent in its loan portfolio at this
time, no assurances can be given that the Bank's level of allowance for possible
loan losses will be sufficient to cover future possible loan losses incurred by
the Bank or that future adjustments to the allowance for possible loan losses
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 for possible loan losses. Management may in the future
increase its level of allowance for possible loan losses as a percentage of
total loans and non-performing loans in the event it increases the level of
commercial real estate, commercial, construction or consumer lending as a
percentage of its total loan portfolio. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for possible loan losses.
Other Operating Income
Other operating income increased by $540,000, or 142.9%, to $918,000 for the
year ended December 31, 1998, compared to $378,000 for the year ended December
31, 1997. The increase is primarily attributable to the establishment of the
Bank's residential mortgage department in May 1998 and fee income associated
with the origination and sale of residential mortgages which amounted to
$274,000 for the year ended December 31, 1998. In addition, service charges on
deposit accounts increased by $156,000, or 59.8 %, reflecting the growth in the
Bank's depositor base and an overall increase in the Bank's fee schedule.
Other Operating Expense
Other operating expense increased $2.1 million, or 55.2%, to $5.8 million
for the year ended December 31, 1998, compared to $3.7 million for the year
ended December 31, 1997. This increase was primarily attributable to an increase
in salaries and benefits expense of $1.0 million, or 56.6%, from $1.8 million in
1997 to $2.8 million in 1998, reflecting a substantial increase in staff in
connection with both the Bank's branch expansion, establishment of the
residential mortgage department and continued internal growth. The number of
full time equivalent employees increased from 43 at December 31, 1997 to 69 at
December 31, 1998. The branch expansion also contributed significantly to the
growth in expenses in the other categories of other operating expenses.
Although, on a year to year comparison, the number of full service offices
increased from 4 at December 31, 1997 to 6 at December 31, 1998, the Westbury
office did not open until November 1997, whereby the expense effect had minimal
impact on other operating expense in 1997.
Income Taxes
Total income tax expense was $630,000 for the year ended December 31, 1998
compared to $760,000 for the same period in 1997, a decrease of $130,000, or
17.1%. The decrease is attributable to a decrease in income before provision for
income taxes of $69,000, or 3.8%, combined with approximately $12.9 million of
tax exempt municipal obligations purchased in 1998.
Comparison of Operating Results for the Year Ended December 31, 1997 and 1996
General
Net income for the year ended December 31, 1997 increased by $29,000, or
2.8%, from $1,035,000 for the year ended December 31, 1996 to $1,064,000 for the
same period in 1997. The increase was primarily due to an increase in net
interest income of $1,211,000, or 28.8%, which was partially offset by a
$1,028,000, or 37.9% increase in other operating expenses.
Interest Income
Total interest income increased $3.7 million, or 41.1%, to $12.7 million for
the year ended December 31, 1997, from $9.0 million for the corresponding period
in 1996. The increase was primarily the result of an increase in the average
balance of interest-earning assets of 40.8%, from $117.0 million during the year
ended December 31, 1996, to $164.7 million during the year ended December 31,
1997. The average balance of securities held-to-maturity and available-for-
sale, net increased by $34.0 million, or 56.2%, to $94.5 million in the 1997
period, from $60.5 million in the 1996 period, reflecting management's decision
to leverage the balance sheet to increase the earnings of the Bank. The average
balance of loans receivable, net increased by $17.8 million, or 36.2%, to $67.0
million in the 1997 period from $49.2 million in the 1996 period. While the
average yield on interest-earning assets increased 4 basis points, it reflects a
3 basis point increase in the average yield on loans receivable, a 6 basis point
decrease in the average yield on federal funds sold and interest-earning
deposits, and an unchanged yield on securities held-to-maturity and
available-for-sale, net.
Interest Expense
Total interest expense increased $2.5 million, or 52.1%, for the year ended
December 31, 1997, to $7.3 million compared to $4.8 million for the year ended
December 31, 1996. This increase reflects both an increase in the average
balance of certificates of deposit to $99.3 million in the 1997 period, from
$69.3 million in the 1996 period, a $30.0 million increase, or 43.3%, and an
increase in the average balance of borrowed funds to $12.9 million in 1997, from
$1.0 million in 1996, a $11.9 million increase. The increase in borrowed funds
in the 1997 period reflects management's decision to leverage the balance sheet
to increase the earnings of the Bank, and the increase in time certificates
reflects the Bank's certificate of deposit campaigns. The increase in interest
expense also reflects an increase in the rates paid on certificates of deposit
and borrowed funds of 8 basis points and 28 basis points, respectively.
Net Interest Income
Net interest income for the year ended December 31, 1997 was $5.4 million
compared to $4.2 million for the year ended December 31, 1996. This increase
resulted from an overall increase of 40.8% in the average balance of
interest-earning assets from $117.0 million during the year ended December 31,
1996, to $164.7 million during the year ended December 31, 1997. The increase
was partially offset by a 28 basis point decrease in the average interest rate
spread to 2.51% for the 1997 period from 2.79% for the 1996 period. The spread
decline reflects a 32 basis point increase in the average cost of
interest-bearing liabilities which occurred when the average yield on
interest-earning assets increased by 4 basis points from period to period.
Provision for Possible Loan Losses
The Bank's provision for possible loan losses decreased by $62,000, or
20.5%, from $302,000 for the year ended December 31, 1996 to $240,000 for the
year ended December 31, 1997. The provision for possible loan losses for the
year ended December 31, 1997 reflects management's qualitative assessment of the
loan portfolio. The decrease resulted from management's assessment of the loan
portfolio, the level of the Bank's allowance for possible loan losses and its
assessment of the local economy and market conditions. At December 31, 1997 and
1996, the allowance for the loan losses as a percent of total loans was 1.29%
and 1.23%, respectively.
Other Operating Income
Other operating income was $378,000 for the year ended December 31, 1997,
compared to $364,000 for the year ended December 31, 1996, an increase of
$14,000, or 3.8%. The increase was attributable to an increase in service
charges on deposit accounts due to the Bank's overall deposit growth, despite a
decrease in fees associated with construction loans.
Other Operating Expense
Other operating expense increased $1.0 million, or 37.0%, to $3.7 million
for the year ended December 31, 1997, compared to $2.7 million for the year
ended December 31, 1996. This increase was primarily attributable to an increase
in salaries and benefits expense of $518,000, or 40.0%, from $1.3 million in
1996 to $1.8 million in 1997, reflecting a substantial increase in staff in
connection with both the Bank's branch expansion and continued internal growth.
The number of full time equivalent employees increased from 31 at December 31,
1996 to 43 at December 31, 1997. The branch expansion also contributed
significantly to the growth in expenses in the other categories of other
operating expense.
Income Taxes
Total income tax expense was $760,000 for the year ended December 31, 1997
compared to $530,000 for the same period in 1996, an increase of $230,000, or
43.4%. The increase is related to the growth in pre-tax income combined with the
elimination in 1996 of the Bank's valuation allowance for its deferred tax
asset.
Liquidity
Liquidity management for the Bank 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. Over a
very short time frame, for most banks, including the Bank, maturing assets
provide only a limited portion of the funds required to pay maturing
liabilities. The balance of the funds required is provided by liquid assets and
the acquisition of additional liabilities, making liability management integral
to liquidity management in the short term.
The primary investing activities of the Bank are the purchase of securities
available-for-sale and held-to-maturity and the originations of loans. During
the years ended December 31, 1998 and 1997, the Bank's purchases of securities
were all classified available-for-sale and totaled $274.1 million and $78.1
million, respectively. Loan originations and principal repayments on loans, net
totaled $14.4 million and $16.5 million, for the years ended December 31, 1998
and 1997, respectively. These activities were funded primarily by deposit
growth, principal repayments on loans, proceeds from stock offerings, borrowings
and principal repayments on securities.
The Bank maintains levels of liquidity that it considers adequate to meet
its current needs. The Bank's principal sources of cash include incoming
deposits, the repayment of loans and conversion of investment securities. When
cash requirements increase faster than cash is generated, either through
increased loan demand or withdrawal of deposited funds, the Bank can arrange for
the sale of loans and liquidate available-for-sale securities and access its
lines of credit, totaling $3.5 million, with unaffiliated financial institutions
which enables it to borrow federal funds on an unsecured basis. In addition, the
Bank has available lines of credit with the Federal Home Loan Bank of New York
("FHLB") equal to 6.5% of the Bank's assets, which enables it to borrow funds on
a secured basis. In addition, the Bank could engage in other borrowings,
including FHLB advances and reverse repurchase agreements on a secured basis. At
December 31, 1998 such borrowings amounted to $24.0 million. There were no Bank
borrowings at December 31, 1997.
Management of the Bank has set minimum liquidity level of 10% as a target.
The Bank's average liquid assets (cash and due from banks, federal funds sold,
interest-earning deposits with other financial institutions and investment
securities available-for-sale, less securities pledged as collateral) as a
percentage of average assets of the Bank during the year ended December 31, 1998
was 17.0%. The Bank's strategic plan is to build its core business by generating
and maintaining banking relationships with small and medium-sized privately
owned businesses, professional firms and high net worth individuals within its
market area.
Year 2000
The Bank has initiated a program, consistent with guidelines issued by the
Federal Financial Institutions Examination Council (FFIEC), to prepare the
Bank's computer systems and software applications for the year 2000. As of
December 31, 1998, phases one and two of the FFIEC guidelines have been
completed on schedule. The Bank uses purchased software products for all of its
internal transaction processing applications; therefore, no significant internal
programming is necessary to prepare these systems to handle transactions in the
year 2000. The majority of the Bank's efforts in preparation for year 2000
processing relate to testing purchased and outsourced processing systems, as
well as updating databases.
The Bank's primary application, which handles processing of loans, deposits,
and general ledger, has been certified as year 2000 compliant by the vendor. As
of December 31, 1998, the Bank has completed extensive testing of all critical
internal applications and the test results have not indicated any year 2000
related issues. As part of our ongoing efforts to assess and minimize potential
risks associated with the year 2000, management has completed an evaluation of
its customer base and is presently initiating contact with such customers to
discuss the status of their year 2000 readiness.
In addition, management will have completed and tested by June 30, 1999, a
business resumption plan which considers the potential impact of disruptions in
all critical and non-critical applications from within and from third-party
business partners and infrastructure providers, despite the Bank having
completed reasonable testing and certification of its internal computer systems.
Monitoring and managing the year 2000 project results in additional direct
and indirect costs to the Bank. Direct costs include potential charges by
third-party software vendors for product enhancements and costs involved in
testing software products for the year 2000 compliance. Indirect costs
principally consist of the time devoted by existing employees in monitoring
software vendor progress, testing enhanced software products and the development
of the business resumption plan. The Bank does not believe that such costs will
have a material effect on results of operations. Both direct and indirect costs
of addressing the year 2000 issue will be charged to earnings as incurred.
Capital Resources
See Note 9 to Notes to Financial Statements.
Impact of Inflation and Changing Prices
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results in terms of historical dollar amounts without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Bank's operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Bank are monetary in nature. As a result, interest rates have
a greater impact on the Bank's performance than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
Impact of New Accounting Standards
See Note 13 to Notes to Financial Statements.
BALANCE SHEETS
(In thousands, except share data) December 31,
1998 1997
- - - -------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 13,170 $ 10,588
Interest earning deposits 269 276
Federal funds sold 8,050 18,900
Total cash and cash equivalents 21,489 29,764
Securities held-to-maturity, net
(estimated fair value of $665 and $2,632, respectively) 664 2,665
Securities available-for-sale 145,155 96,566
Loans receivable, net 94,144 78,759
Premises and equipment, net 1,975 1,139
Accrued interest receivable 1,614 1,650
Prepaid expenses and other assets 1,502 1,413
Total assets $ 266,543 211,956
Liabilities and Stockholders' Equity:
Deposits:
Demand deposits $ 36,605 26,543
Savings deposits 12,476 2,958
NOW and money market deposits 71,689 54,949
Time certificates issued in excess of $100,000 18,998 22,420
Other time deposits 78,099 80,756
Total deposits 217,867 187,626
Borrowed funds 24,000 -
Accrued expenses and other liabilities 2,808 2,922
Total liabilities $ 244,675 $ 190,548
Stockholders' equity:
Common stock (par value $3 per share, authorized
3,000,000 shares, issued
and outstanding 1,771,306
and 1,757,709 shares, respectively) $ 5,314 $ 5,274
Surplus 14,830 14,656
Accumulated surplus 1,659 1,099
Accumulated other comprehensive income:
Net unrealized appreciation in available-for-sale
securities, net of tax 65 379
Total stockholders' equity 21,868 21,408
Total liabilities and stockholders' equity $ 266,543 $ 211,956
STATEMENTS OF EARNINGS
For the years
(In thousands, except share data) ended December 31,
1998 1997 1996
- - - -------------------------------------------------------------------------------------------------------------------
Interest income:
Interest earning deposits .................... $ 20 $ 10 $ 4
Federal funds sold ........................... 578 158 384
Securities ................................... 6,907 6,407 4,098
Interest and fees on loans ................... 7,780 6,151 4,512
Total interest income .............. 15,285 12,726 8,998
Interest expense:
Savings deposits ............................. 309 72 62
NOW and money market deposits ................ 854 579 594
Time certificates issued in excess of $100,000 1,310 1,234 759
Other time deposits .......................... 4,906 4,681 3,315
Borrowed funds ............................... 850 737 56
Total interest expense ............. 8,229 7,303 4,786
Net interest income ................ 7,056 5,423 4,212
Provision for possible loan losses ............... 420 240 302
Net interest income after provision
for possible loan losses ......... 6,636 5,183 3,910
Other operating income:
Service charges on deposit accounts .......... 417 261 185
Net gain on sale of securities ............... 13 2 6
Mortgage banking operations .................. 274 -- --
Other ........................................ 214 115 173
Total other operating income ....... 918 378 364
Other operating expenses:
Salaries and employee benefits ............... 2,838 1,812 1,294
Occupancy expense ............................ 456 281 194
Premises and equipment expense ............... 524 301 246
Other ........................................ 1,981 1,343 975
Total other operating expenses ..... 5,799 3,737 2,709
Income before provision for income taxes ......... 1,755 1,824 1,565
Provision for income taxes ....................... 630 760 530
Net income ......................... $ 1,125 1,064 1,035
Basic and diluted earnings per share $ .64 1.04 1.18
Weighted average shares outstanding .......... $1,766,154 $1,024,532 $877,238
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three years ended December 31, 1998
Accumulated
Common Accumulated other
stock surplus/ comprehensive
(In thousands, except share data) $3 par value Surplus (deficit) income Total
- - - -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ 1,800 $ 4,161 $ (363) $ 247 $ 5,845
Comprehensive income:
Net income for the year - - 1,035 - 1,035
Other comprehensive income,
net of tax:
Unrealized appreciation in
available for sale securities,
net of reclassification adjustment(1) - - - 5 5
Comprehensive income - - - - 1,040
Stock offering,
issued 329,700 shares 989 2,259 - - 3,248
Dividend reinvestment and stock
purchase plan, issued 3,481 shares 11 26 - - 37
Dividends declared on common
stock ($.30 per common share) - - (280) - (280)
- - - -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 2,800 $ 6,446 $ 392 $ 252 $ 9,890
Comprehensive income:
Net income for the year - - 1,064 - 1,064
Other comprehensive income,
net of tax:
Unrealized appreciation in
available for sale securities,
net of reclassification adjustment(1) - - - 127 127
Comprehensive income - - - - 1,191
Stock offering,
issued 807,018 shares 2,421 8,035 - - 10,456
Dividend reinvestment and stock
purchase plan, issued 17,510 shares 53 175 - - 228
Dividends declared on common
stock ($.31 per common share) - - (357) - (357)
- - - -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 5,274 $ 14,656 $ 1,099 $ 379 $ 21,408
Comprehensive income:
Net income for the year - - 1,125 - 1,125
Other comprehensive income,
net of tax:
Unrealized depreciation in
available for sale securities,
net of reclassification adjustment(1) - - - (314) (314)
Comprehensive income - - - - 811
Dividend reinvestment and stock
purchase plan, issued 13,597 shares 40 174 - - 214
Dividends declared on common
stock ($.32 per common share) - - (565) - (565)
- - - -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 5,314 $ 14,830 $ 1,659 $ 65 $ 21,868
===================================================================================================================
December 31, 1998 December 31, 1997 December 31, 1996
(1) Disclosure of reclassification amount:
Comprehensive income items, net of tax
Unrealized (loss) gain in available for sale
securities, arising during the period $ (322) $ 128 $ 9
Less: Reclassification adjustment for gains
included in income $ 8 $ 1 $ 4
- - - -------------------------------------------------------------------------------------------------------------------
Net unrealized (depreciation) appreciation $ (314) $ 127 $ 5
STATEMENTS OF CASH FLOWS
For the years
(In thousands) ended December 31,
1998 1997 1996
- - - -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,125 1,064 $ 1,035
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 420 240 302
Depreciation and amortization 406 222 188
Amortization of premiums, net
of discount accretion 176 132 (26)
Gain on sale of securities (13) (2) (6)
Loans originated for sale,
net of proceeds from sales and gains (1,486) - -
Net deferred loan origination fees 104 158 8
Deferred income taxes 118 (62) (367)
Changes in asset and liability accounts:
Accrued interest receivable 36 362) (631)
Prepaid expenses and other assets (89) (294) (723)
Accrued expenses and other liabilities (10) 200 1,082
Net cash provided by operating activities 787 1,296 862
Cash flows from investing activities:
Purchases of securities available-for-sale (274,109) (78,122) (83,503)
Proceeds from the sale of securities
available-for-sale 4,773 4,185 2,041
Proceeds from maturities of securities 199,350 57,621 27,150
Principal repayments on securities 22,699 9,224 5,299
Loan originations net of principal
repayments (14,423) 16,497) (24,118)
Purchase of premises and equipment (1,242) (703) (230)
Net cash used in investing activities (62,952) (24,292) (73,361)
Cash flows from financing activities:
Net increase (decrease) in demand deposit,
savings, NOW, and
money market accounts 36,320 (5,993) 43,658
Net (decrease) increase in certificates of deposit (6,079) 15,305 39,973
Net increase in borrowed funds 24,000 - -
Payments for cash dividends (565) (356) (230)
Proceeds from stock offering, net - 10,456 3,248
Proceeds from shares issued under the
dividend reinvestment and stock purchase plan 214 228 37
Net cash provided by financing activities 53,890 19,640 86,686
Net (decrease) increase in cash
and cash equivalents (8,275) (3,356) 14,187
Cash and cash equivalents at beginning of year 29,764 33,120 18,933
Cash and cash equivalents at end of year $ 21,489 $ 29,764 $ 33,120
For the years
(In thousands) ended December 31,
1998 1997 1996
- - - -------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 8,085 $ 6,578 $ 3,952
Income taxes $ 744 786 $ 1,025
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
The following is a description of the Bank's significant accounting and
reporting policies:
(a) Basis of Financial Presentation
The accounting and reporting policies of Long Island Commercial Bank (the
"Bank") conform with generally accepted accounting principles and prevailing
practices within the banking industry. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the financial statements and the reported
amounts of revenues and expenses for the period. Actual results could differ
from those estimates. Certain reclassifications have been made to prior years
amounts to conform to the current year presentation.
The Bank provides a full range of banking services to individuals and
corporate customers through its offices in Suffolk and Nassau Counties and is
subject to competition from other financial institutions. The Bank is subject to
the regulations of certain federal and state agencies and undergoes periodic
examinations by those regulatory authorities.
(b) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash, Federal funds sold and other short-term investments, all of which have
initial maturities of less than ninety days.
(c) Securities
The Bank follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Under SFAS No. 115, the Bank is required to report debt
(including mortgage-backed) and equity securities in one of the following
categories: (i) "held-to-maturity" (management has a positive intent and ability
to hold to maturity) which are to be reported at amortized cost; (ii) "trading"
(held for current resale) which are to be reported at fair value, with
unrealized gains and losses included in earnings; and (iii) "available-for-sale"
(all other debt, readily marketable equity and mortgage-backed securities) which
are to be reported at fair value, with unrealized gains and losses excluded from
earnings and reported, net of tax, as accumulated other comprehensive income, a
separate component of stockholders' equity. Under SFAS No. 115, at the time of
new securities purchases, a determination is made as to the appropriate
classification.
Premiums and discounts on debt and mortgage-backed securities are amortized
to expense and accreted to income using a method which approximates the
level-yield method over the remaining period to contract maturity, adjusted for
anticipated prepayments. Gains and losses on the sales of securities are
recognized on realization.
(d) Loans Receivable, Net
Loans are carried at the principal amount outstanding net of unearned income
and fees. Residential real estate loans held-for-sale are carried at the
aggregate lower of cost or market value as determined by outstanding commitments
from investors. Interest on loans is recognized on the accrual basis. The
accrual of income on loans is discontinued when, in management's judgment,
collection of principal or interest is uncertain or payments of principal or
interest become contractually ninety days past due. Loans on which the accrual
of income has been discontinued are designated as non-accrual loans and income
is recognized subsequently only in the period collected. Any accrued but
uncollected interest previously recorded on such loans is reversed against
interest income of the current period.
In accordance with the provisions of SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures," the Bank measures and
records all impaired loans, as defined in SFAS No. 114, based upon the lower of
costs or fair value of the underlying collateral minus estimated selling cost,
if liquidation of the collateral is expected in order to collect the loan.
Restructured loans, as defined in SFAS No. 114, are measured and recorded at the
present value of the expected future cash flows discounted at the loan's
original effective interest rate.
Loan origination fees, less certain direct origination costs, are deferred
and recognized as an adjustment of the loan's yield over the life of the loan by
the interest method, which results in a constant rate of return.
The determination of the amount of the allowance for possible loan losses is
based on an analysis of the loan portfolio and reflects an amount which, in
management's judgment, is adequate to provide for probable loan losses in the
existing portfolio. This analysis considers, among other things, present and
known and inherent risks in the portfolio, adverse situations which may affect
the borrower's ability to repay, overall portfolio quality, and current and
prospective economic conditions. While management uses available information to
provide for possible loan losses, future additions to the allowance may be
necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of the examination process,
periodically review the Bank's allowance for possible loan losses. Such agencies
may require the Bank to recognize additions to the allowance based on their
judgment of information available to them at the time of their examination.
(e) Premises and Equipment, Net
Premises and equipment are stated at cost, less accumulated depreciation
computed using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the estimated useful lives of
the improvements or terms of the related lease, whichever is shorter.
(f) Income Taxes
Provisions for income taxes are based upon results reported for financial
statement purposes.
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and tax bases of
existing assets and liabilities. A valuation allowance is provided to reduce the
deferred tax asset if it is "more likely than not" that all or some portion of
the deferred tax asset will not be realized.
(g) Earnings Per Share
Pursuant to SFAS No. 128, "Earnings Per Share", basic earnings per share
(EPS) is computed by dividing net income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
EPS, if applicable, reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
to common stock.
(2) Securities
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of the securities held-to-maturity and available-for-sale
at December 31, 1998 and 1997 are as follows:
December 31, 1998
Gross Gross Estimated
Amortized unrealized unrealized fair
(In thousands) cost gains losses value
- - - -------------------------------------------------------------------------------------------------------------------
Held-to-maturity, net:
Mortgage-backed securities:
CMO $ 664 $ 1 $ - $ 665
Available-for-sale:
U.S. Government and
Agency Obligations 78,994 277 (291) 78,980
Mortgage-backed securities:
GNMA 39,864 79 (172) 39,771
FHLMC 2,453 38 (4) 2,487
FNMA 6,060 50 (13) 6,097
Municipal obligations 12,855 171 (24) 13,002
Other debt securities 199 - - 199
Total debt securities 140,425 615 (504) 140,536
Equity securities - FHLB stock 4,619 - - 4,619
Total securities
available-for-sale $ 145,044 615 (504) 145,155
December 31, 1997
Gross Gross Estimated
Amortized unrealized unrealized fair
(In thousands) cost gains losses value
- - - -------------------------------------------------------------------------------------------------------------------
Held-to-maturity, net:
Mortgage-backed securities:
CMO $ 2,665 $ - $ (33) $ 2,632
Available-for-sale:
U.S. Government and
Agency Obligations $ 58,280 417 (1) 58,696
Mortgage-backed securities:
GNMA 17,927 157 (33) 18,051
FHLMC 6,198 58 (32) 6,224
FNMA 12,107 106 (29) 12,184
CMO 28 - - 28
Other debt securities 380 4 - 384
Total debt securities 94,920 742 (95) 95,567
Equity securities - FHLB stock 999 - - 999
Total securities
available-for-sale $ 95,919 $ 742 $ (95) $96,566
=============================================================================
In connection with the Bank's ability to borrow from the Federal Home Loan
Bank of New York ("FHLB"), the Bank is required to purchase shares of FHLB
non-marketable equity securities at par.
The amortized cost and estimated fair value of debt securities at December
31, 1998, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
December 31, 1998
Held-to-Maturity, net Available-for-Sale
- - - -------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Amortized fair Amortized fair
(In thousands) cost value cost value
- - - -------------------------------------------------------------------------------------------------------------------
Due in one year or less $ - $ - $ 14,439 $ 14,511
Due after one year through
five years - - 14,835 14,896
Due after five years through
ten years - - 67,765 67,806
Due after ten years 664 665 43,386 43,323
$ 664 $ 665 $140,425 $140,536
Proceeds from the sale of securities available-for-sale totaled
approximately $4.8 million, $4.2 million, and $2.0 million during the years
ended December 31, 1998, 1997 and 1996, respectively. Net gains from the sale of
these securities totaled approximately $13,000, $2,000, and $6,000,
respectively, for the years ended December 31, 1998, 1997 and 1996.
At December 31, 1998 and 1997, securities classified as available-for-sale
of approximately $129.0 million and $83.2 million, respectively, were pledged
for various purposes as required by law.
(3) Loans Receivable, Net
Loans receivable, net are summarized as follows:
December 31,
(dollars in thousands) 1998 1997
- - - -------------------------------------------------------------------------------------------------------------------
Commercial and
industrial loans $ 30,853 32.1% $ 30,909 38.0%
Commercial real estate loans 53,990 56.2 31,254 38.4
Automobile loans 8,262 8.6 17,524 21.5
Consumer loans 1,396 1.5 1,726 2.1
Residential real estate
loan held-for-sale 1,486 1.6 - -
95,987 100.0% $ 81,413 100.0%
Less:
Unearned income $ 362 $ 1,322
Deferred fees, net 410 306
Allowance for
possible loan losses 1,071 1,026
$ 94,144 $ 78,759
The Bank grants commercial and industrial loans as well as commercial
mortgages and consumer loans in Nassau and Suffolk County, New York. A portion
of the Bank's loan portfolio is concentrated in commercial loans and business
revolving lines of credit which are secured or partially secured by accounts
receivable, inventory and other assets. These loans comprise approximately 32.1%
and 38.0% of the portfolio at December 31, 1998 and 1997, respectively. The
Bank's commercial loan borrowers are generally small local businesses whose cash
flow and ability to service debt are susceptible to changes in economic
conditions. Accordingly, the deterioration of local economic conditions could
increase the credit risk associated with this segment of the portfolio.
The Bank maintained a program of making non-recourse loans to a local auto
leasing company. The Bank received an assignment of each individual lease and a
collateral interest in each automobile. This program, which had further
diversified the loan portfolio, was curtailed by the auto leasing company
effective in January 1997. These loans comprise approximately 8.6% and 21.5% of
the portfolio at December 31, 1998 and 1997, respectively.
At December 31, 1998, there were 20 loans with a remaining balance of
approximately $511,000 on which the accrual of interest had been discontinued.
Interest income for the year ended December 31, 1998 would have been higher by
approximately $52,000 had there been no loans on non-accrual status. At December
31, 1997, there were 10 loans with a remaining balance of approximately $395,000
on which the accrual of interest had been discontinued. Interest income for the
year ended December 31, 1997 would have been higher by approximately $37,000 had
there been no loans on non-accrual status. At December 31, 1996, there were 11
loans with a remaining balance of approximately $405,000 on which the accrual of
interest had been discontinued. Interest income for 1996 would have been higher
by approximately $19,000 had there been no loans on non-accrual status.
At December 31, 1998, 1997 and 1996, loans aggregating approximately
$1,175,000, $47,000 and $91,000, respectively, had been restructured to allow
for concessions on original loan terms. At December 31, 1998 and 1997, there
were no restructured loans guaranteed by the U.S. Small Business Administration.
At December 31, 1996, approximately $31,000 of restructured loans were
guaranteed by the U.S. Small Business Administration. Interest on all
restructured loans remains current under the extended terms. The impact of such
restructuring on the Bank's interest income for years ended December 31, 1998,
1997 and 1996 is not material.
At December 31, 1998, and 1997, the Bank did not have any loans considered
impaired pursuant to SFAS No. 114.
Loans to related parties include loans to directors of the Bank and their
related companies. Such loans are made in the ordinary course of business on
substantially the same terms as loans to other individuals and businesses of
comparable risks. The following analysis shows the activity of related party
loans:
For the year ended December 31,
(In thousands) 1998 1997
- - - ----------------------------------------------------------------
Balance at beginning of year $ 236 $ 905
New loan and
additional disbursements 2,142 99
Repayments (193) (768)
Balance at end of year $ 2,185 $ 236
(4) Allowance for Possible Loan Losses
An analysis of the changes in the allowance for possible loan losses account
is as follows:
For the year ended December 31,
(In thousands) 1998 1997 1996
- - - -------------------------------------------------------------------------
..............................
Balance at beginning of year ..... $ 1,026 $ 780 $ 633
Provision for possible loan losses 420 240 302
Charge-offs:
Commercial and industrial loans (203) (23) (209)
Automobile loans ............... (58) (75) --
Consumer loans ................. (145) (21) (35)
Total charge-offs ............ (406) (119) (244)
Recoveries:
Commercial and industrial loans 1 125 89
Automobile loans ............... 15 -- --
Consumer loans ................. 15 -- --
Total recoveries ............. 31 125 89
Net (charge-offs) recoveries ..... (375) 6 (155)
Balance at end of year ........... $ 1,071 $ 1,026 $ 780
(5) Premises and Equipment
A summary of premises and equipment at cost, less accumulated depreciation
and amortization are as follows:
December 31
(In thousands) 1998 1997
- - - -------------------------------------------------------------
Leasehold improvements $ 703 $ 452
Furniture, fixtures
and equipment 2,566 1,575
3,269 2,027
Less accumulated depreciation
and amortization 1,294 888
$ 1,975 $ 1,139
Depreciation and amortization charged to operations for the years ended
December 31, 1998, 1997 and 1996 amounted to approximately $406,000, $222,000
and $188,000, respectively.
(6) Deposits
Included in NOW and money market deposits, at December 31, 1998 and 1997,
were approximately $44.8 million and $33.0 million, respectively, of seasonal
municipal deposits.
(7) Borrowed funds
The Bank enters into sales of securities under agreements to repurchase
(reverse-repurchase agreements). These are fixed coupon agreements which are
treated as financing transactions, and the obligations to repurchase are
reflected as a liability in the balance sheet. The dollar amount of securities
underlying the agreements remains in the asset account. During the period of the
agreement, the securities are delivered to either a third-party, or directly to
the broker, who holds the collateral until maturity. There were no outstanding
reverse-repurchase agreements at December 31, 1998 and 1997.
Reverse-repurchase agreements averaged approximately $.9 million, $10.5
million and $.5 million, respectively, for the years ended December 31, 1998,
1997 and 1996. The maximum amount outstanding at the end of any month was $10.2
million, $25.3 million and $2.0 million, respectively, for the years ended
December 31, 1998, 1997 and 1996.
There were no federal funds purchased at December 31, 1998 and 1997. Federal
funds purchased averaged approximately $.5 million, $2.4 million and $.6
million, respectively, for the years ended December 31, 1998, 1997 and 1996. The
maximum amount outstanding at the end of any month was $5.0 million, $7.4
million and $4.3 million, respectively, for the years ended December 31, 1998,
1997 and 1996.
The Bank has available lines of credit with the FHLB which enable it to
borrow funds on a secured basis.
At December 31, 1998, the Bank's borrowings consisted of $14.0 million and
$10.0 million of convertible advances from the FHLB. These 10 year advances,
bear interest at 5.49% and 4.24% respectively, and have contractual maturity
dates of February 19, and October 8, 2008, respectively. The convertible feature
of these advances allow the FHLB, as of February 19, 2003 and October 8, 2000,
respectively, and quarterly thereafter, to convert these advances into
replacement funding for the same or lesser principal amount, based on any
advance then offered by the FHLB, at then current market rates. If the FHLB
elects to convert these advances, the Bank may repay any portion of the advances
without penalty. These convertible advances are secured by various
mortgage-backed and callable agency securities.
(8) Income Taxes
Income tax expenses are summarized as follows:
For the year ended December 31,
(In thousands) 1998 1997 1996
- - - ----------------------------------------------------------------
Current
Federal $ 369 $ 625 $ 678
State 143 197 219
512 822 897
Deferred
Federal 90 (45) (271)
State 28 (17) (96)
118 (62) (367)
Income tax expense $ 630 $ 760 $ 530
The effective income tax rates for the years ended December 31, 1998, 1997
and 1996 were 36%, 42% and 34%, respectively. The reconciliation between the
statutory Federal income tax rate and the effective tax rate is as follows:
For the year ended December 31,
1998 1997 1996
- - - ----------------------------------------------------------------------
Tax on income at statutory rate 34 % 34 % 34 %
Tax effects of:
State income tax, net of federal
income tax benefit 7 7 6
Reduction in deferred tax asset
valuation allowance - - (10)
Tax exempt income (6) - -
Other, net 1 1 4
Tax at effective rate 36 % 42 % 34 %
The Bank is required to establish deferred tax assets and liabilities for
the temporary differences between the financial reporting and tax bases of its
assets and liabilities. A valuation allowance is established to reduce the
deferred tax asset if it is "more likely than not" that some or all of the net
deferred tax asset will not be realized. As a result of its operating history,
the Bank had established a valuation allowance which approximated unrealized
potential future tax benefits due to operating loss carryforwards and net
deductible temporary differences. Based upon the Bank's current level of taxable
income, the valuation allowance was eliminated in the latter half of 1996.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
December 31,
(In thousands) 1998 1997
- - - ---------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 335 $ 351
Accrued expenses 149 248
Other 2 5
Gross deferred tax assets 486 604
Deferred tax liabilities:
Tax effect of unrealized
appreciation in
available-for-sale securities (46) (268)
Gross deferred tax liabilities (46) (268)
Net deferred tax asset $ 440 $ 336
(9) Regulatory Matters
The Bank is subject to the risk based capital guidelines administered by the
banking regulatory agencies. The risk based capital guidelines are designed to
make regulatory capital requirements more sensitive to differences in risk
profiles among banks to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Under these guidelines, assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk weighted assets and off-balance sheet items. The
guidelines currently require all banks to maintain a minimum ratio of total risk
based capital to total risk weighted assets of 8%, including a minimum ratio of
Tier 1 capital to total risk weighted assets of 4% and a Tier 1 capital to
average adjusted assets of 4%. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators, that, if undertaken, could have a direct material effect on the
Bank's financial statements. As of December 31, 1998, the most recent
notification from the federal banking regulators categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. Under
the capital adequacy guidelines, a well capitalized institution must maintain a
minimum total risk based capital to total risk weighted assets ratio of at least
10%, a minimum Tier 1 capital to total risk weighted assets ratio of at least
6%, a minimum leverage ratio of at least 5% and is not subject to any written
order, agreement or directive. There are no conditions or events since such
notification that management believes have changed this classification.
The following tables set forth the Bank's regulatory capital at December 31,
1998 and 1997, under the rules applicable at such date. At such dates,
management believes that the Bank meets all capital adequacy requirements to
which it is subject.
December 31, 1998
Actual Regulatory Minimum
(Dollars in thousands) Amount Ratio Amount Ratio
- - - -----------------------------------------------------------------------------
Tier 1 Capital
(to Average Adjusted Assets) $ 21,803 9.60% $ 9,080 4.00%
Tier 1 Capital
(to Risk Weighted Assets) $ 21,803 17.62% 4,951 4.00%
Total Risk Based Capital
(to Risk Weighted Assets) $ 22,874 18.48% $ 9,901 8.00%
December 31, 1997
Actual Regulatory Minimum
(Dollars in thousands) Amount Ratio Amount Ratio
- - - ------------------------------------------------------------------------------
Tier 1 Capital
(to Average Adjusted Assets) $ 21,029 11.65% $ 7,220 4.00%
Tier 1 Capital
(to Risk Weighted Assets) $ 21,029 20.43% 4,116 4.00%
Total Risk Based Capital
(to Risk Weighted Assets) $ 22,055 21.43% $ 8,232 8.00%
(10) Lease Commitments
The Bank has obligations under a number of non-cancellable leases on
properties used for banking purposes. Rental expense for the years ended
December 31, 1998, 1997 and 1996 was approximately $416,000, $255,000 and
$181,000, respectively. Minimum annual rentals, exclusive of taxes and other
charges, under operating leases are summarized as follows:
(In thousands) Minimum rentals
- - - ----------------------------------------------------------
Years ending December 31,
1999 $ 499
2000 504
2001 464
2002 421
2003 394
Thereafter 992
Total $3,274
(11) Disclosures About Fair Value of Financial Instruments
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments,"
requires that the Bank disclose estimated fair values for its financial
instruments. Fair value estimates, methods, and assumptions are set forth below.
December 31,1998 December 31, 1997
Carrying Estimated Carrying Estimated
(In thousands) Value Fair Value Value Fair Value
- - - -----------------------------------------------------------------------------------------------------
Cash and due from banks $ 13,170 $ 13,170 $ 10,588 $ 10,588
Interest earning deposits 269 269 276 276
Federal funds sold 8,050 8,050 18,900 18,900
Securities held-to-maturity * 664 665 2,665 2,632
Securities available-for-sale * 145,155 145,155 96,566 96,566
Loans receivable, net of
unearned income
and deferred fees 95,215 95,843 79,785 79,569
Deposits:
Demand, savings, NOW and
money market deposits $ 120,770 $ 120,770 $ 84,450 $ 84,450
Time certificates and
other time deposits 97,097 97,781 103,176 103,441
Borrowings $ 24,000 $ 24,079 $ - $ -
*See Note 2 for more detailed information regarding fair values by type of
security.
Cash and Due from Banks, Federal Funds Sold, and Securities:
The carrying amounts for cash and due from banks approximate fair value as
they mature in 90 days or less and do not present unanticipated credit concerns.
Interest earning deposits are subject to rate changes at any time and therefore
are considered to be carried at their estimated fair value. The fair values of
federal funds sold, held-to-maturity securities and available-for-sale
securities are estimated based on bid quotations received from securities
dealers or from prices obtained from firms specializing in providing securities
pricing services.
Loans Receivable:
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit risks. For potential problem loans, which include non-performing
loans, the present value result is separately discounted consistent with
management's assumptions in evaluating the adequacy of the allowance for loan
losses.
Deposits:
All deposits, except certificates of deposit, are subject to rate changes at
any time, and therefore are considered to be carried at estimated fair value.
The fair value of certificates of deposit was estimated by computing the present
value of contractual future cash flows for each certificate. The present value
rate utilized was the rate offered by the Bank at the date of estimation on
certificates with an initial maturity equal to the remaining term to maturity of
the existing certificates.
Borrowings:
The estimated fair values of borrowings are valued using estimated
discounted cash flow analysis based on the current incremental borrowing rates
for similar types of borrowing arrangements.
Commitments:
The fair value of commitments is estimated using the fees charged at the
date of estimation to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counter parties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
The commitments existing at December 31, 1998 and 1997 would be offered at
substantially the same rates and under substantially the same terms that would
be offered by the Bank at December 31, 1998 and 1997 to the counter parties,
therefore, the carrying value of existing commitments is considered to be
equivalent to the estimated fair value.
Limitations:
SFAS No. 107 requires disclosures of the estimated fair value of financial
instruments. Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Bank's entire holdings of a particular financial instrument nor the
resultant tax ramifications or transaction costs. Because no market exists for a
significant portion of the Bank's financial instruments, fair value estimates
are based on judgments regarding current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and-off balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets of the Bank that are not
considered financial assets include premises and equipment and deferred tax
assets. In addition, the tax ramifications related to the unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered.
(12) Other Commitments and Contingent Liabilities
(A) Off-Balance Sheet Risks
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and unused
lines of credit. Such financial instruments are reflected in the Bank's
financial statements when and if proceeds associated with the commitments are
disbursed.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
unused lines of credit is represented by the contractual notional amount of
those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet financial
instruments.
Contract or notional amounts
(In thousands) December 31, 1998 December 31, 1997
- - - -------------------------------------------------------------------------------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 14,020 $ 12,380
Unused lines of credit 10,204 9,721
Standby letters of credit 349 512
$ 24,573 $ 22,613
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation of the counter party. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
At December 31, 1998, the Bank had outstanding commitments to purchase $10
million of mortgage-backed securities at a rate of 7.00%, settling in January
1999.
In December 1998, the bank entered into a convertible advance borrowing
agreement with the FHLB in the amount of $15 million for settlement on January
21, 1999. This advance bears interest at rate of 4.59% and has a contractual
maturity date of January 21, 2009. The convertible feature of this advance
allows the FHLB as of January 21, 2002 and quarterly thereafter, to convert this
advance into replacement funding for the same or lesser principal amount based
on an advance then offered by the FHLB, at then current market rates.
(b) Other Matters
The Bank is required to maintain balances with the Federal Reserve Bank of
New York for reserve and clearing requirements. During the years ended December
31, 1998, 1997 and 1996, these balances averaged $3.0 million, $3.6 million and
$2.6 million, respectively.
The Bank is subject to certain pending and threatened legal actions which
arise out of the normal course of business. Management believes that the
resolution of any pending or threatened litigation will not have a material
effect on the Bank's financial statements.
(13) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 130. "Reporting Comprehensive
Income". SFAS No. 130 requires that all items that are components of
"comprehensive income" be reported in a financial statement that is displayed
with the same prominence as other financial statements. Comprehensive income is
defined as "the change in equity [net assets] of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources." It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. The Bank has
adopted the provisions of SFAS No. 130 during the first quarter of 1998 and as
such was required to (a) classify items of other comprehensive income by their
nature in a financial statement; (b) display the accumulated balance of other
comprehensive income separately from surplus and accumulated surplus in the
equity section in its balance sheet and (c) reclassify prior periods presented.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires that
enterprises report certain financial and descriptive information about operating
segments in complete sets of financial statements of the Bank and in condensed
financial statements of interim periods issued to stockholders. SFAS No. 131
also requires that enterprises report certain information about their products
and services, geographic areas in which they operate and their major customers.
SFAS No. 131 is effective for the fiscal years beginning after December 15, 1997
but does not have to be applied to interim financial statements in the initial
year of application. In adopting SFAS No. 131, the Bank determined that it had
only one operating segment.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-retirement Benefits". SFAS No. 132 revises
employers' disclosures about pension and other post-retirement benefit plans,
but does not change the measurement or recognition of those plans. SFAS No. 132
standardizes the disclosure requirements for pensions and other post-retirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are not considered
useful. SFAS No. 132 is effective for fiscal years beginning after December 15,
1997 and requires restatement of prior periods presented. The Bank does not
currently offer the benefits disclosable under SFAS No. 132.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999 and does not require restatement of prior
periods. Management is still assessing the impact of SFAS No. 133 on its
financial condition and results of operations.
In October 1998, the FASB issued Statement of Financial Accounting Standards
No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
("SFAS No, 134"). SFAS No. 134 conforms the accounting for securities retained
after the securitization of mortgage loans by a mortgage banking enterprise with
the accounting for securities retained after the securitization of other types
of assets by a non-mortgage banking enterprise. SFAS No. 134 is effective for
the first fiscal quarter beginning after December 15, 1998. Management of the
Bank believes the implementation of SFAS No. 134 will not have a material impact
on the Bank's financial condition or results of operations.
(14) Stock Offering
On February 29, 1996, the Bank closed its secondary private-placement stock
offering, issuing 329,700 shares of common stock at a price of $10 per share.
Net proceeds from the offering were $3,248,452.
On November 25, 1997, the Bank completed a public offering of additional
common stock, issuing an aggregate of 807,018 shares at a price of $14.25 per
share resulting in net proceeds of approximately $10,456,000.
(15) 401(K) Plan
On January 1, 1996, the Bank adopted a 401(k) Profit Sharing Plan ("401(k)
Plan") for all qualified employees. The terms of the 401(k) Plan provide for
employee contributions on a pre-tax basis up to the maximum dollar limit set by
law in a taxable year. A discretionary matching contribution will be determined
each year by the Bank. During 1998, 1997 and 1996, the Bank's matching
contribution was, $59,533, $23,133 and $7,592, respectively.
(16) Dividend Reinvestment and Stock Purchase Plan
At its Board of Directors meeting held on December 22, 1995, the Board of
Directors of the Bank adopted the Long Island Commercial Bank Dividend
Reinvestment and Stock Purchase Plan ("Plan"). The Plan provides shareholders of
Common Stock with a means of automatically reinvesting cash dividends in Shares
of Common Stock. The Plan also provides certain investors with a systematic and
convenient method to purchase Shares of Common Stock through optional cash
payments. Since the Bank's Common Stock is currently listed on the NASDAQ
National Market, the purchase price on each Investment Date will be equal to the
average price of all Shares of Common Stock purchased on the Investment Date by
the Plan Administrator on behalf of the Plan, including the cost of brokerage
commissions, if any.
(17) REORGANIZATION (UNAUDITED)
At a special meeting on December 8, 1998, the stockholders approved a
reorganization whereby the Bank would become a wholly-owned subsidiary of a
newly formed holding company, Long Island Financial Corp. (the "Company"), and
Bank common stock outstanding would be exchanged for Company common stock. The
stockholders also ratified the Long Island Financial Corp. 1998 Stock Option
Plan (the Stock Option Plan). The Stock Option Plan authorizes the granting of
options to purchase 175,000 shares of common stock of the Company. All officers
and other employees of the Company and directors who are not also serving as
employees of the Company are eligible to receive awards under the Stock Option
Plan. Options under this plan are either non-statutory stock options or
incentive stock options. Each option entitles the holder to purchase one share
of the Common Stock at an exercise price equal to the fair market value on the
date of grant. On January 28, 1999, the reorganization was consummated, and
113,750 options were granted at an exercise price of $12.50. Of the options
granted, 110,250 are exercisable immediately with the remainder vesting over a 5
year period.
18) Quarterly Financial Data (Unaudited)
The following table is a summary of financial data by quarter end for the
years ended December 31, 1998 and 1997:
1998 1997
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
(In thousands, except share data)
- - - ----------------------------------------------------------------------------------------------------------------------------
Selected Operating Data:
Interest income $ 3,835 $ 3,911 $ 3,696 $ 3,843 $ 2,921 $ 3,215 $3,182 $ 3,408
Interest expense 2,066 2,148 1,961 2,054 1,648 1,868 1,881 1,906
Net interest income 1,769 1,763 1,735 1,789 1,273 1,347 1,301 1,502
Provision for
possible loan losses 90 90 120 120 60 60 60 60
Net interest income
after provision for
possible loan losses 1,679 1,673 1,615 1,669 1,213 1,287 1,241 1,442
Other operating income 112 183 246 377 81 90 93 114
Other operating expenses 1,187 1,370 1,518 1,724 835 905 975 1,022
Income before provision for
income taxes 604 486 343 322 459 472 359 534
Provision for income taxes 242 190 108 90 189 196 149 226
Net income $ 362 $ 296 $ 235 $ 232 $ 270 $ 276 $ 210 $ 308
Basic and diluted
earnings per share $ 0.21 $ 0.17 $ 0.13 $ 0.13 $ 0.29 $ 0.29 $ 0.22 $ 0.24
Weighted average
shares outstanding 1,760,432 1,764,571 1,768,166 1,771,306 935,976 938,277 947,114 1,273,899
Independent Auditors' Report
To The Stockholders And Board of Directors of Long Island Commercial Bank:
We have audited the accompanying balance sheets of Long Island Commercial
Bank (the "Bank") as of December 31, 1998 and 1997, and the related statements
of earnings, changes in stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1998. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Bank as of December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Melville, New York
January 22, 1999