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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______________________to_______________________
Commission file number 0-12220
THE FIRST OF LONG ISLAND CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 11-2672906
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
10 Glen Head Road, Glen Head, New York 11545
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (516) 671-4900
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT August 5, 2002
- ----- -----------------------------
Common stock, par value 4,181,439
$.10 per share
THE FIRST OF LONG ISLAND CORPORATION
JUNE 30, 2002
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
ITEM 1. CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001 1
CONSOLIDATED STATEMENTS OF INCOME
SIX AND THREE MONTHS ENDED
JUNE 30, 2002 AND 2001 2
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2002 AND 2001 3
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6
PART II. OTHER INFORMATION 14
SIGNATURES 16
EXHIBITS 17
REVIEW BY INDEPENDENT PUBLIC ACCOUNTANT
Pursuant to the relief granted by the U.S. Securities and Exchange Commission to
former auditing clients of Arthur Andersen LLP, this quarterly report includes
financial statements which have not been reviewed by an independent public
accountant as required by Rule 10-01(d) of Regulation S-X. We expect that our
new independent public accountant, Grant Thornton LLP, will complete the
quarterly review required by Rule 10-01(d) of Regulation S-X. If, upon
completion of the review, there is a change in financial statements contained in
this quarterly report, we will amend this report to present the reviewed
financial statements, and we will discuss in the amended report any material
changes from the unreviewed financial statements contained in this report.
Otherwise, we will state in our first quarterly report following completion of
such review that the unreviewed financial statements contained in this report
have subsequently been reviewed by an accountant other than Arthur Andersen LLP
and that there were no material changes as a result of that review.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
------------- -------------
Assets:
Cash and due from banks ..................................... $ 41,738,000 $ 28,209,000
Federal funds sold .......................................... 51,000,000 27,000,000
------------- -------------
Cash and cash equivalents ................................. 92,738,000 55,209,000
------------- -------------
Investment securities:
Held-to-maturity, at amortized cost (fair
value of $237,774,000 and $257,670,000) ........... 230,002,000 252,215,000
Available-for-sale, at fair value (amortized cost
of $174,447,000 and $136,654,000) ................. 179,545,000 138,275,000
------------- -------------
409,547,000 390,490,000
------------- -------------
Loans:
Commercial and industrial ............................ 37,053,000 40,993,000
Secured by real estate ............................... 202,769,000 179,905,000
Consumer ............................................. 7,223,000 6,198,000
Other ................................................ 272,000 593,000
------------- -------------
247,317,000 227,689,000
Unearned income ...................................... (1,044,000) (1,001,000)
------------- -------------
246,273,000 226,688,000
Allowance for loan losses ............................ (2,179,000) (2,020,000)
------------- -------------
244,094,000 224,668,000
------------- -------------
Bank premises and equipment, net ............................ 6,632,000 7,156,000
Prepaid income taxes ........................................ -- 1,000
Other assets ................................................ 6,740,000 6,557,000
------------- -------------
$ 759,751,000 $ 684,081,000
============= =============
Liabilities:
Deposits:
Checking ............................................. $ 241,371,000 $ 222,822,000
Savings and money market ............................. 395,138,000 347,430,000
Time, other .......................................... 19,121,000 21,022,000
Time, $100,000 and over .............................. 17,738,000 13,596,000
------------- -------------
673,368,000 604,870,000
Accrued expenses and other liabilities ...................... 3,607,000 3,968,000
Current income taxes payable ................................ 225,000 --
Deferred income taxes payable ............................... 1,881,000 497,000
------------- -------------
679,081,000 609,335,000
------------- -------------
Commitments and Contingent Liabilities
Stockholders' Equity:
Common stock, par value $.10 per share:
Authorized, 20,000,000 shares;
Issued and outstanding, 4,175,613 and 2,792,902 shares.. 417,000 279,000
Surplus ..................................................... 380,000 955,000
Retained earnings ........................................... 76,829,000 72,550,000
------------- -------------
77,626,000 73,784,000
Accumulated other comprehensive income net of tax ........... 3,044,000 962,000
------------- -------------
80,670,000 74,746,000
------------- -------------
$ 759,751,000 $ 684,081,000
============= =============
See notes to consolidated financial statements
1
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30, Three Months Ended June 30,
--------------------------- --------------------------
2002 2001 2002 2001
------------ ----------- ----------- ----------
Interest income:
Loans............................................. $ 8,209,000 $ 8,476,000 $ 4,232,000 $4,193,000
Investment securities:
Taxable....................................... 6,677,000 6,221,000 3,455,000 3,163,000
Nontaxable ................................... 2,895,000 2,569,000 1,457,000 1,325,000
Federal funds sold................................ 361,000 2,185,000 194,000 889,000
------------ ----------- ----------- ----------
18,142,000 19,451,000 9,338,000 9,570,000
------------ ----------- ----------- ----------
Interest expense:
Savings and money market deposits ................ 2,122,000 4,690,000 1,094,000 2,089,000
Time deposits..................................... 350,000 931,000 160,000 405,000
------------ ----------- ----------- ----------
2,472,000 5,621,000 1,254,000 2,494,000
------------ ----------- ----------- ----------
Net interest income .......................... 15,670,000 13,830,000 8,084,000 7,076,000
Provision for loan losses ............................ 150,000 -- 50,000 --
------------ ----------- ----------- ----------
Net interest income after provision for loan losses... 15,520,000 13,830,000 8,034,000 7,076,000
------------ ----------- ----------- ----------
Noninterest income:
Investment Division income........................ 566,000 579,000 282,000 263,000
Service charges on deposit accounts............... 1,905,000 1,764,000 1,010,000 911,000
Net losses on sales of available-for-sale
securities........................................ (12,000) -- (12,000) --
Other ............................................ 349,000 322,000 199,000 211,000
------------ ----------- ----------- ----------
2,808,000 2,665,000 1,479,000 1,385,000
------------ ----------- ----------- ----------
Noninterest expense:
Salaries ......................................... 4,852,000 4,435,000 2,459,000 2,236,000
Employee benefits ................................ 2,173,000 1,774,000 1,121,000 868,000
Occupancy and equipment expense .................. 1,500,000 1,420,000 756,000 672,000
Other operating expenses ......................... 2,223,000 2,102,000 1,111,000 1,060,000
------------ ----------- ----------- ----------
10,748,000 9,731,000 5,447,000 4,836,000
------------ ----------- ----------- ----------
Income before income taxes ................... 7,580,000 6,764,000 4,066,000 3,625,000
Income tax expense.................................... 1,965,000 1,779,000 1,099,000 975,000
------------ ----------- ----------- ----------
Net income ................................... $ 5,615,000 $ 4,985,000 $ 2,967,000 $2,650,000
============ =========== =========== ==========
Weighted average (Note 3):
Common shares..................................... 4,184,331 4,312,232 4,182,222 4,291,923
Dilutive stock options ........................... 47,856 61,859 47,805 59,823
------------ ----------- ----------- ----------
4,232,187 4,374,091 4,230,027 4,351,746
============ =========== =========== ==========
Earnings per share (Note 3):
Basic............................................. $ 1.34 $ 1.16 $ .71 $ .62
============ =========== =========== ==========
Diluted .......................................... $ 1.33 $ 1.14 $ .70 $ .61
============ =========== =========== ==========
See notes to consolidated financial statements
2
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------------------
Six Months Ended June 30, 2002
-------------------------------------------------------------------------------------------
Accumulated
Other
Common Stock Compre- Compre-
--------------------- hensive Retained hensive
Shares Amount Surplus Income Earnings Income Total
--------- -------- ----------- ---------- ----------- ---------- -----------
Balance, January 1, 2002 ........... 2,792,902 $279,000 $ 955,000 $72,550,000 $ 962,000 $74,746,000
Net Income ....................... $5,615,000 5,615,000 5,615,000
Repurchase and retirement
of common stock ................ (18,223) (2,000) (723,000) (725,000)
Exercise of stock options ........ 9,064 1,000 136,000 137,000
Tax benefit of stock options ..... 12,000 12,000
Unrealized gains on available-
for-sale-securities, net of
income taxes ................. 2,082,000 2,082,000 2,082,000
----------
Comprehensive income ............. $7,697,000
==========
3-for-2 stock split .............. 1,391,870 139,000 (139,000) --
Cash dividends declared -
$.43 per share ................... (1,197,000) (1,197,000)
--------- -------- ----------- ----------- ---------- -----------
Balance, June 30, 2002 ............. 4,175,613 $417,000 $ 380,000 $76,829,000 $3,044,000 $80,670,000
========= ======== =========== =========== ========== ===========
-------------------------------------------------------------------------------------------
Six Months Ended June 30, 2001
-------------------------------------------------------------------------------------------
Accumulated
Other
Common Stock Compre- Compre-
--------------------- hensive Retained hensive
Shares Amount Surplus Income Earnings Income Total
--------- -------- ----------- ---------- ----------- ---------- -----------
Balance, January 1, 2001 ........... 2,892,549 $289,000 $ 1,188,000 $68,737,000 $ 652,000 $70,866,000
Net Income ....................... $4,985,000 4,985,000 4,985,000
Repurchase and retirement
of common stock ................ (58,830) (6,000) (2,299,000) (2,305,000)
Exercise of stock options ........ 11,430 1,000 226,000 227,000
Unrealized gains on available-
for-sale-securities, net of
income taxes ................. 411,000 411,000 411,000
----------
Comprehensive income ............. $5,396,000
==========
Cash dividends declared -
$.38 per share ................... (1,082,000) (1,082,000)
Tax benefit of stock options ..... 31,000 31,000
Transfer from retained earnings
to surplus ....................... 1,500,000 (1,500,000) --
--------- -------- ----------- ----------- ---------- -----------
Balance, June 30, 2001 ............. 2,845,149 $284,000 $ 646,000 $71,140,000 $1,063,000 $73,133,000
========= ======== =========== =========== ========== ===========
See notes to consolidated financial statements
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
-----------------------------
Increase (Decrease) in Cash and Cash Equivalents 2002 2001
------------ -------------
Cash Flows From Operating Activities:
Net income .............................................................. $ 5,615,000 $ 4,985,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ............................................... 150,000 --
Deferred income tax credit .............................................. (12,000) (40,000)
Depreciation and amortization ........................................... 639,000 593,000
Premium amortization (discount accretion) on investment securities, net.. 1,274,000 (50,000)
Net loss on sale of available-for-sale securities ....................... 12,000 --
Decrease in prepaid income taxes ........................................ 1,000 --
Increase in other assets ................................................ (183,000) (165,000)
Decrease in accrued expenses and other liabilities ...................... (298,000) (749,000)
Increase in income taxes payable ........................................ 237,000 208,000
------------ -------------
Net cash provided by operating activities ............................... 7,435,000 4,782,000
------------ -------------
Cash Flows From Investing Activities:
Proceeds from sales of available-for-sale securities .................... 687,000 --
Proceeds from maturities and redemptions of investment securities:
Held-to-maturity ...................................................... 71,196,000 178,648,000
Available-for-sale .................................................... 4,431,000 5,777,000
Purchase of investment securities:
Held-to-maturity ...................................................... (49,657,000) (172,667,000)
Available-for-sale .................................................... (43,522,000) (18,049,000)
Net increase in loans to customers ...................................... (19,576,000) (14,449,000)
Purchases of bank premises and equipment ................................ (178,000) (687,000)
Proceeds from sale of equipment ......................................... 3,000 --
------------ -------------
Net cash used in investing activities ................................... (36,616,000) (21,427,000)
------------ -------------
Cash Flows From Financing Activities:
Net increase in total deposits .......................................... 68,498,000 45,192,000
Proceeds from exercise of stock options ................................. 137,000 227,000
Repurchase and retirement of common stock ............................... (725,000) (2,305,000)
Cash dividends paid ..................................................... (1,200,000) (1,099,000)
------------ -------------
Net cash provided by financing activities ............................... 66,710,000 42,015,000
------------ -------------
Net increase in cash and cash equivalents ............................... 37,529,000 25,370,000
Cash and cash equivalents, beginning of year ............................ 55,209,000 111,672,000
------------ -------------
Cash and cash equivalents, end of period ................................ $ 92,738,000 $ 137,042,000
============ =============
Supplemental Schedule of Noncash:
Investing Activities
Unrealized gains on available-for-sale securities ..................... $ 3,478,000 $ 690,000
Writeoff of premises and equipment against reserve .................... 60,000 --
Financing Activities
Cash dividends payable ................................................ 1,197,000 1,082,000
Tax benefit from exercise of employee stock options ................... 12,000 31,000
The Corporation made interest payments of $2,497,000 and $5,733,000 and income
tax payments of $1,738,000 and $1,611,000 in 2002 and 2001, respectively.
See notes to consolidated financial statements
4
THE FIRST OF LONG ISLAND CORPORATION AND SUBSIDIARY
JUNE 30, 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The First of
Long Island Corporation and its wholly-owned subsidiary, The First National Bank
of Long Island (collectively referred to as the "Corporation").
The consolidated financial information included herein as of and for the
periods ended June 30, 2002 and 2001 is unaudited; however, such information
reflects all adjustments which are, in the opinion of management, necessary for
a fair statement of results for the interim periods. The December 31, 2001
consolidated balance sheet was derived from the Company's December 31, 2001
audited consolidated financial statements.
2. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
On January 1, 2002, the Corporation adopted Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS No.
142"). SFAS No. 142 supersedes Accounting Principles Board Opinion No. 17,
"Intangible Assets" ("APB No. 17"). At January 1, 2002, the Corporation had
goodwill of $220,000. No goodwill impairment loss was recorded for the first
half of 2002. In the first half of 2001, and under the provisions of APB No. 17,
the Corporation recorded goodwill amortization of $10,000.
3. STOCK SPLIT
On June 18, 2002, the Corporation declared a 3-for-2 stock split to be
paid by means of a 50% stock dividend on July 24, 2002. The effect of the split
on the equity accounts of the Corporation has been estimated and recorded in the
consolidated financial statements as of and for the six months ended June 30,
2002. In addition, all share and per share amounts included in the consolidated
financial statements and management's discussion and analysis of financial
condition and results of operations of have been adjusted to reflect the effect
of the split.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors that have affected the Corporation's financial condition and
operating results during the periods included in the accompanying consolidated
financial statements, and should be read in conjunction with such financial
statements. The Corporation's financial condition and operating results
principally reflect those of its wholly-owned subsidiary, The First National
Bank of Long Island (the "Bank"). The Corporation's primary service area is
Nassau and Suffolk Counties, Long Island.
Overview
The Corporation earned $1.33 per share for the first half of 2002 as
compared to $1.14 for the same period last year, an increase of approximately
17%. Based on net income of $5,615,000, the Corporation returned 1.58% on
average total assets and 14.65% on average total equity. This compares to
returns on assets and equity of 1.58% and 13.94%, respectively, for the same
period last year. Total assets and deposits each grew by approximately 13% when
comparing balances at June 30, 2002 to those at June 30, 2001. In addition,
during this same time period and despite cash dividends and continued purchases
under the Corporation's stock repurchase program, total capital before
unrealized gains and losses on available-for-sale securities grew by
approximately 8%. The Corporation's capital ratios continue to substantially
exceed the current regulatory criteria for a well-capitalized bank.
Overwhelmingly, the most important reason for the growth in earnings for
the first half of 2002 when compared to the same period last year was
significant growth in checking balances. Other meaningful factors were loan
growth and growth in money market type deposit balances. The positive impact of
these items was partially offset by increases in salaries and employee benefits
expense.
Net Interest Income
Average Balance Sheet; Interest Rates and Interest Differential. The
following table sets forth the average daily balances for each major category of
assets, liabilities and stockholders' equity as well as the amounts and average
rates earned or paid on each major category of interest-earning assets and
interest-bearing liabilities.
6
Six Months Ended June 30,
-----------------------------------------------------------------------
2002 2001
---------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
--------- --------- --------- --------- --------- ---------
(dollars in thousands)
Assets
Federal funds sold ....................................... $ 42,601 $ 361 1.71% $ 88,392 $ 2,185 4.98%
Investment Securities:
Taxable ................................................ 273,973 6,677 4.91 204,327 6,221 6.14
Nontaxable (1) ......................................... 125,626 4,386 6.98 110,758 3,892 7.03
Loans (1)(2) ............................................. 234,256 8,218 7.07 197,523 8,495 8.67
--------- --------- --------- --------- --------- ---------
Total interest-earning assets ............................ 676,456 19,642 5.84 601,000 20,793 6.96
--------- --------- --------- ---------
Allowance for loan losses ................................ (2,085) (1,947)
--------- ---------
Net interest-earning assets .............................. 674,371 599,053
Cash and due from banks .................................. 30,670 23,228
Premises and equipment, net .............................. 6,866 7,101
Other assets ............................................. 5,924 5,726
--------- ---------
$ 717,831 $ 635,108
========= =========
Liabilities and
Stockholders' Equity
Savings and money market deposits ........................ $ 371,447 2,122 1.15 $ 325,032 4,690 2.91
Time deposits ............................................ 34,891 350 2.02 42,223 931 4.45
--------- --------- --------- --------- --------- ---------
Total interest-bearing deposits .......................... 406,338 2,472 1.23 367,255 5,621 3.09
--------- --------- --------- --------- --------- ---------
Checking deposits (3) .................................... 230,575 191,967
Other liabilities ........................................ 3,623 3,798
--------- ---------
640,536 563,020
Stockholders' equity ..................................... 77,295 72,088
--------- ---------
$ 717,831 $ 635,108
========= =========
Net interest income (1) .................................. $ 17,170 $ 15,172
========= =========
Net interest spread (1) .................................. 4.61% 3.87%
========= =========
Net interest yield (1) ................................... 5.12% 5.09%
========= =========
(1) Tax-equivalent basis. Interest income on a tax-equivalent basis includes
the additional amount of interest income that would have been earned if
the Corporation's investment in tax-exempt loans and investment securities
had been made in loans and investment securities subject to Federal income
taxes yielding the same after-tax income. The tax-equivalent amount of
$1.00 of nontaxable income was $1.52 in each period presented, based on a
Federal income tax rate of 34%.
(2) For the purpose of these computations, nonaccruing loans are included in
the daily average loan amounts outstanding.
(3) Includes official check and treasury tax and loan balances.
7
Rate/Volume Analysis. The following table sets forth the effect of changes
in volumes, changes in rates, and changes in rate/volume on tax-equivalent
interest income, interest expense and net interest income.
Six Months Ended June 30,
------------------------------------------
2002 Versus 2001
Increase (decrease) due to changes in:
------------------------------------------
Rate/ Net
Volume Rate Volume(2) Change
------- ------- -------- ------
(in thousands)
Interest Income:
Federal funds sold ................ $(1,132) $(1,436) $ 744 $(1,824)
Investment securities:
Taxable ......................... 2,120 (1,241) (423) 456
Nontaxable (1) .................. 523 (25) (4) 494
Loans (1) ......................... 1,580 (1,566) (291) (277)
------- ------- ----- -------
Total interest income ............. 3,091 (4,268) 26 (1,151)
------- ------- ----- -------
Interest Expense:
Savings and money
market deposits ................. 670 (2,833) (405) (2,568)
Time deposits ..................... (162) (507) 88 (581)
------- ------- ----- -------
Total interest expense ............ 508 (3,340) (317) (3,149)
------- ------- ----- -------
Increase (decrease) in net
interest income ................. $ 2,583 $ (928) $ 343 $ 1,998
======= ======= ===== =======
(1) Tax-equivalent basis.
(2) Represents the change not solely attributable to change in rate or change
in volume but a combination of these two factors.
Net interest income on a tax-equivalent basis increased by $1,998,000, or
13.2%, from $15,172,000 for the first half of 2001 to $17,170,000 for the same
period this year. As can be seen from the above rate/volume analysis, the
increase is largely comprised of a positive volume variance of $2,583,000 and a
negative rate variance of $928,000.
The positive volume variance was largely caused by substantial growth in
average checking deposits and the use of such funds to purchase investment
securities and originate loans. When comparing the first half of 2002 to the
same period last year, average checking deposits increased by $38,608,000, or
approximately 20%.
Also making a contribution to the positive volume variance was growth in
money market type deposits and the use of such funds to purchase investment
securities. When comparing the first half of 2002 to the same period last year,
average money market type deposits increased by $34,685,000, or 14.4%. The
largest components of this increase were growth in "Select Savings", a statement
savings account that earns a higher money market rate, and nonpersonal money
market accounts.
Funding interest-earning asset growth with growth in checking deposits has
a greater impact on net interest income than funding such growth with
interest-bearing deposits because checking deposits, unlike interest-bearing
deposits, have no associated interest cost. This is the primary reason that the
growth of checking balances has historically been one of the Corporation's key
strategies for increasing earnings per share.
The Bank's new business program is a significant factor that favorably
impacted the growth in average checking balances noted when comparing the first
half of 2002 to the
8
same period last year, and competitive pricing and customer demographics are
believed to be important factors with respect to the growth in average
interest-bearing deposits noted during the same period. In addition, the growth
in checking and interest-bearing deposits is also believed to be attributable to
the Bank's attention to customer service and both national and local economic
conditions.
The Bank's net interest spread and yield increased from 3.87% and 5.09%,
respectively, for the first half of 2001 to 4.61% and 5.12%, respectively, for
the same period this year. It would appear that the principal causes of the
increases in net interest spread and net interest yield were the significant
decline in short-term interest rates experienced during 2001 and the change in
the mix of interest-earning assets.
The mix change was primarily caused by strong loan demand as well as
management's decision to take advantage of the steep slope of the current yield
curve by reducing the Bank's overnight position in federal funds sold and
increasing the size of the Bank's short-term U.S. Treasury portfolio. The yield
on the short term U.S. Treasury portfolio is less than the yield on the
longer-term securities in the Bank's taxable portfolio and is the primary reason
that the average rate earned on the taxable investment securities portfolio
decreased from 6.14% in the first half of 2001 to 4.91% for the same period this
year.
Allowance and Provision For Loan Losses
The allowance for loan losses grew by $159,000 during the first six months
of 2002, amounting to $2,179,000 at June 30, 2002 as compared to $2,020,000 at
December 31, 2001. The allowance represented approximately .9% of total loans at
each date. During the first half of 2002, the Bank had loan chargeoffs and
recoveries of $28,000 and $37,000, respectively, and recorded a $150,000
provision for loan losses. The provision was necessary principally because of
growth in the portfolio and the resulting impact on required pool reserves.
The allowance for loan losses is an amount that management currently
believes will be adequate to absorb estimated inherent losses in the Bank's loan
portfolio. Because the process for estimating credit losses and determining the
allowance for loan losses as of any balance sheet date is subjective in nature
and requires material estimates, there is not an exact amount but rather a range
for what constitutes an appropriate allowance. In estimating a range for such
losses the Bank selectively reviews individual credits in its portfolio and, for
those loans deemed to be impaired, measures impairment losses based on either
the fair value of collateral or the discounted value of expected future cash
flows. Losses for loans that are not specifically reviewed are determined on a
pooled basis taking into account a variety of factors including historical
losses; levels of and trends in delinquencies and nonaccruing loans; trends in
volume and terms of loans; changes in lending policies and procedures;
experience, ability and depth of lending staff; national and local economic
conditions; concentrations of credit; and environmental risks. Management also
considers relevant loan loss statistics for the Bank's peer group.
The amount of future chargeoffs and provisions for loan losses will be
affected by, among other things, economic conditions on Long Island. Such
conditions affect the financial strength of the Bank's borrowers and the value
of real estate collateral securing the Bank's mortgage loans. In addition,
future provisions and chargeoffs could be affected by environmental impairment
of properties securing the Bank's mortgage loans. Loans secured by real estate
represent approximately 82% of total loans outstanding at June 30, 2002.
Environmental audits for commercial mortgages were instituted by the
9
Bank in 1987. Under the Bank's current policy, an environmental audit is
required on practically all commercial-type properties that are considered for a
mortgage loan. At the present time, the Bank is not aware of any existing loans
in the portfolio where there is environmental pollution originating on the
mortgaged properties that would materially affect the value of the portfolio.
Asset Quality
The Corporation has identified certain assets as risk elements. These
assets include nonaccruing loans, foreclosed real estate, loans that are
contractually past due 90 days or more as to principal or interest payments and
still accruing and troubled debt restructurings. These assets present more than
the normal risk that the Corporation will be unable to eventually collect or
realize their full carrying value. The Corporation's risk elements at June 30,
2002 and December 31, 2001 are as follows:
June 30, December 31,
2002 2001
-------- ------------
(dollars in thousands)
Nonaccruing loans ..................................... $ 42 $ 105
Foreclosed real estate ................................ -- --
-------- --------
Total nonperforming assets .......................... 42 105
Troubled debt restructurings .......................... -- 10
Loans past due 90 days or more as to
principal or interest payments and still accruing ... 249 236
-------- --------
Total risk elements ................................. $ 291 $ 351
======== ========
Nonaccruing loans as a percentage of total loans ...... .02% .05%
======== ========
Nonperforming assets as a percentage of total loans
and foreclosed real estate .......................... .02% .05%
======== ========
Risk elements as a percentage of total loans and
foreclosed real estate .............................. .12% .15%
======== ========
Noninterest Income, Noninterest Expense, and Income Taxes
Noninterest income includes service charges on deposit accounts,
Investment Division income, and all other items of income, other than interest,
resulting from the business activities of the Corporation. When comparing the
first half of 2002 to the same period last year, service charges on deposit
accounts increased by 8%. The increase is largely attributable to a revised
service charge schedule which went into effect on March 1, 2002.
Noninterest expense is comprised of salaries, employee benefits, occupancy
and equipment expense and other operating expenses incurred in supporting the
various business activities of the Corporation. Noninterest expense increased by
$1,017,000, or 10.5%, from $9,731,000 for the first half of 2001 to $10,748,000
for the same period this year. The increase is primarily comprised of an
increase in salaries of $417,000, or 9.4%, and an increase in employee benefits
expense of $399,000, or 22.5%.
The increase in salaries is attributable to normal annual salary
adjustments and additions to staff. The increase in employee benefits expense is
largely attributable to increases in the cost of health care insurance, profit
sharing expense, and incentive compensation.
10
Income tax expense as a percentage of book income was 25.9% for the first
half of 2002 as compared to 26.3% for the same period last year. These
percentages vary from the statutory Federal income tax rate of 34% primarily
because of state income taxes and tax-exempt interest on municipal securities.
The decrease in the percentage for 2002 is primarily attributable to an increase
in the amount of tax-exempt income on municipal securities.
Results of Operations - Three Months Ended June 30, 2002 Versus June 30, 2001
Net income for the second quarter of 2002 was $2,967,000, or $.70 per
share, as compared to $2,650,000, or $.61 per share, earned for the same quarter
last year. The primary reasons for the 15% increase in earnings per share are
substantially the same as those discussed with respect to the six-month periods.
Capital
Under current regulatory capital standards, banks are classified as well
capitalized, adequately capitalized or undercapitalized. The Corporation's
capital management policy is designed to build and maintain capital levels that
exceed the minimum requirements for a well-capitalized bank. The following table
sets forth the Corporation's capital ratios at June 30, 2002 and the minimum
ratios necessary to be classified as well capitalized and adequately
capitalized. The Corporation's capital ratios at June 30, 2002 substantially
exceed the requirements for a well-capitalized bank.
Regulatory Standards
Corporation's ---------------------------
Capital Ratios at Well Adequately
June 30, 2002 Capitalized Capitalized
----------------- ----------- -----------
Total Risk-Based Capital Ratio ... 29.10% 10.00% 8.00%
Tier 1 Risk-Based Capital Ratio ... 28.31 6.00 4.00
Tier 1 Leverage Capital Ratio ..... 10.60 5.00 4.00
Total stockholders' equity increased by $5,924,000, or from $74,746,000 at
December 31, 2001 to $80,670,000 at June 30, 2002. The increase in stockholders'
equity is primarily attributable to net income of $5,615,000 and unrealized
gains on available-for-sale securities of $2,082,000, less cash dividends of
$1,197,000 and stock repurchases amounting to $725,000.
Stock Repurchase Program. Since 1988, the Corporation has had a stock
repurchase program under which it can purchase, from time to time, shares of its
own common stock in market or private transactions. Under plans approved by the
Board of Directors in 2001, the Corporation purchased 18,223 shares thus far in
2002 and can purchase 52,836 shares in the future.
The stock repurchase program has been used by management to enhance
earnings per share. When comparing the first half of 2002 to the same period
last year, earnings per share are up 19 cents. Of the 19-cent increase,
approximately 3 cents is attributable to shares repurchased in 2001 and thus far
this year. On a full-year basis, these repurchases should add approximately 8
cents to earnings per share.
Market Liquidity. Trading in the Corporation's common stock is limited.
The total trading volume for the twelve months ended June 30, 2002 as reported
by Nasdaq and as adjusted for the 3-for-2 stock split declared June 18, 2002 was
520,000 shares, with an average daily volume of 2,106 shares. During this same
twelve month period, the Corporation purchased 117,516 shares under its share
repurchase program, 57,750 of which were purchased in market transactions. These
market purchases represent
11
approximately 11% of the total trading volume reported by Nasdaq. Although the
Corporation has had a stock repurchase program since 1988, if the Company
discontinues the program it could adversely affect market liquidity for the
Corporation's common stock, the price of the Corporation's common stock, or
both.
Cash Flows and Liquidity
Cash Flows. During the first half of 2002, cash and cash equivalents
increased by $37,529,000. This occurred primarily because the cash provided by
checking growth, money market type deposit growth, and operations exceeded the
cash used for loan and securities portfolio growth.
Liquidity. The Corporation's primary sources of liquidity are its
overnight position in federal funds sold; its short-term investment securities
portfolio which generally consists of securities purchased to mature within two
years and securities with average lives of two years or less; maturities and
monthly payments on the balance of the investment securities portfolio and the
loan portfolio; and longer-term investment securities designated as
available-for-sale. At June 30, 2002, the Corporation had $51,000,000 in federal
funds sales, a short-term securities portfolio not subject to pledge agreements
of $112,874,000, and longer-term available-for-sale securities not subject to
pledge agreements of $91,559,000. The Corporation's liquidity is enhanced by its
stable deposit base which primarily consists of checking, savings, and money
market accounts. Such accounts comprised 94.5% of total deposits at June 30,
2002, while time deposits of $100,000 and over and other time deposits comprised
only 2.7% and 2.8%, respectively.
The Bank attracts all of its deposits through its banking offices
primarily from the communities in which those banking offices are located and
does not rely on brokered deposits. In addition, the Bank has not historically
relied on purchased or borrowed funds as sources of liquidity.
Market Risk
The Bank invests in interest-earning assets which are funded by
interest-bearing deposits, noninterest-bearing deposits, and capital. The Bank's
results of operations are subject to risk resulting from interest rate
fluctuations generally and having assets and liabilities that have different
maturity, repricing, and prepayment/withdrawal characteristics. The Bank defines
interest rate risk as the risk that the Bank's earnings and/or net portfolio
value will change when interest rates change. The principal objective of the
Bank's asset/liability management activities is to maximize net interest income
while at the same time maintaining acceptable levels of interest rate and
liquidity risk and facilitating the funding needs of the Bank.
During 2001, there was a significant decrease in short-term interest rates
as evidenced by a 475 basis point reduction in both the federal funds target
rate and the Bank's prime lending rate. In addition, rates on intermediate term
securities and loans also decreased but by much lesser amounts. During the first
half of 2002, there were no further changes in the federal funds target rate or
the Bank's prime lending rate, but intermediate-term rates softened somewhat as
evidenced by decreases of 27 basis points and 25 basis points in five and ten
year U.S. Treasury yields, respectively.
Because the Bank's loans and investment securities generally reprice
slower than its interest-bearing deposit accounts, a decrease in interest rates
should initially have a positive impact on the Bank's net interest income.
However, if the Bank does not decrease the rates paid on its money market type
deposit accounts as quickly or in the same amount as market decreases in the
overnight federal funds rate or the prime lending
12
rate, the magnitude of the positive impact will decline. In addition, rates may
decrease to the point that the Bank can not reduce its money market rates any
further.
If interest rates decline and are sustained at the lower levels and, as a
result, the Bank purchases securities and originates loans at yields lower than
those maturing, the impact on net interest income should be negative because 40%
of the Bank's average interest-earning assets are funded by noninterest-bearing
checking deposits and capital.
Conversely, an immediate increase in interest rates should initially have
a negative effect on net interest income. However, if the Bank does not increase
the rates paid on its money market type deposit accounts as quickly or in the
same amount as market increases in the overnight federal funds rate or the prime
lending rate, the magnitude of the negative impact will decline. Over a longer
period of time, and assuming that interest rates remain stable after the initial
rate increase and the Bank purchases securities and originates loans at yields
higher than those maturing and reprices loans at higher yields, the impact of an
increase in interest rates should be positive. This occurs primarily because
with the passage of time more loans and investment securities will reprice at
the higher rates and there will be no offsetting increase in interest expense
for those loans and investment securities funded by noninterest-bearing checking
deposits and capital.
It is believed that the Corporation's exposure to interest rate risk has
not changed materially since December 31, 2001.
Legislation
Commercial checking deposits currently account for approximately 27% of
the Bank's total deposits. Congress is considering legislation that would allow
customers to cover checks by sweeping funds from interest-bearing deposit
accounts each business day and repeal the prohibition of the payment of interest
on corporate checking deposits in the future. Although management currently
believes that the Bank's earnings could be more severely impacted by permitting
the payment of interest on corporate checking deposits than the daily sweeping
of funds from interest-bearing accounts to cover checks, either could have a
material adverse impact on the Bank's future results of operations.
Forward Looking Statements
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" contains various forward-looking statements with respect to
financial performance and business matters. Such statements are generally
contained in sentences including the words "expect" or "could" or "should" or
"would". The Corporation cautions that these forward-looking statements are
subject to numerous assumptions, risks and uncertainties, and therefore actual
results could differ materially from those contemplated by the forward-looking
statements. In addition, the Corporation assumes no duty to update
forward-looking statements.
13
PART II. OTHER INFORMATION
ITEM 1. NONE
ITEM 2. NONE
ITEM 3. NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of The First of Long Island Corporation
(the "Corporation") held April 16, 2002 was called to elect four directors to
serve for two-year terms and until their successors have been elected and
qualified.
For the election of directors, each share is entitled to as many votes as
there are directors to be elected, and such votes may be cumulated and voted for
one nominee or divided among as many different nominees as is desired. If
authority to vote for any nominee or nominees is withheld on any proxy, the
votes are spread among the remaining nominees. The following table lists the
directors elected at the annual meeting and, for each director elected, the
number of votes cast for and the number of votes withheld. No other persons were
nominated and no other persons received any votes.
- -----------------------------------------------------------------------------
Number of Votes
----------------------------------------
Directors Elected At
Annual Meeting Cast For Withheld
- -----------------------------------------------------------------------------
Allen E. Busching 2,211,844 12,395
Paul T. Canarick 2,216,927 7,312
Beverly Ann Gehlmeyer 2,213,976 10,263
J. William Johnson 2,221,844 2,395
- -----------------------------------------------------------------------------
The name of each other director whose term of office as a director
continued after the annual meeting is as follows:
Term as Director
Name Expires
- ---- ----------------
Howard Thomas Hogan, Jr. 2003
J. Douglas Maxwell, Jr. 2003
John R. Miller III 2003
Walter C. Teagle III 2003
ITEM 5. OTHER INFORMATION
a) Stock Repurchase Program And Market Liquidity
Trading in the Corporation's common stock is limited. The total trading
volume for the twelve months ended June 30, 2002 as reported by Nasdaq and as
adjusted for the 3-for-2 stock split declared June 18, 2002 was 520,000 shares,
with an average daily volume of 2,106 shares. During this same twelve month
period, the Corporation purchased 117,516 shares under its share repurchase
program, 57,750 of which were purchased in market transactions. These market
purchases represent approximately 11% of the total trading volume reported by
Nasdaq. Although the Corporation has had a stock repurchase program since 1988,
if the Company discontinues the program it could adversely affect market
liquidity for the Corporation's common stock, the price of the Corporation's
common stock, or both.
14
For a further discussion of the Corporation's share repurchase program,
including its impact on earnings per share, please see the "Capital" section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
b) Changes In Registrant's Certifying Accountants
On June 27, 2002, based on a recommendation by the Audit Committee of the
Board of Directors, the Board of Directors of The First of Long Island
Corporation approved the dismissal of the Company's independent public
accountant, Arthur Andersen LLP, and selected and engaged Grant Thornton LLP as
its independent public accountant. Grant Thornton LLP will audit the Company's
financial statements for the fiscal year ended December 31, 2002.
ITEM 6. (a) Exhibits
The following exhibits are submitted herewith.
Exhibit No. Name
- ----------- ----
10.1 Employment Agreement between Registrant and
Michael N. Vittorio dated June 22, 2002
99.1 Certification by Chief Executive Officer and
Chief Financial Officer
(b) Reports on Form 8-K - None
15
SIGNATURES
PURSUANT TO THE REQUIREMENTS 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.
THE FIRST OF LONG ISLAND CORPORATION
--------------------------------------------
(Registrant)
DATE: August 8, 2002 By /s/ J. WILLIAM JOHNSON
-------------------------
J. WILLIAM JOHNSON, CHAIRMAN AND CHIEF
EXECUTIVE OFFICER
(principal executive officer)
By /s/ MARK D. CURTIS
--------------------------------------------
MARK D. CURTIS
SENIOR VICE PRESIDENT AND TREASURER
(principal financial and accounting officer)
16
EXHIBIT INDEX
EXHIBIT BEGINS
ON SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NO.
- ------- ----------- --------------
10.1 Employment Agreement between Registrant and 18
Michael N. Vittorio dated June 22, 2002
99.1 Certification by Chief Executive Officer and
Chief Financial Officer 24
17