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UNITED STATES
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 September 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________________ to __________________
Commission file 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 Identification No.)
of Incorporation or Organization)
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 OCTOBER 29, 2004
- ----- -------------------------------
Common stock, par value 4,096,539
$.10 per share
THE FIRST OF LONG ISLAND CORPORATION
SEPTEMBER 30, 2004
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)
September 30, 2004 And December 31, 2003 1
Consolidated Statements Of Income (Unaudited)
Three and Nine Months Ended September 30,
2004 And 2003 2
Consolidated Statements Of Changes In
Stockholders' Equity (Unaudited)
Nine Months Ended September 30, 2004 And 2003 3
Consolidated Statements Of Cash Flows (Unaudited)
Nine Months Ended September 30, 2004 And 2003 4
Notes To Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion And Analysis Of
Financial Condition And Results Of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchase
of Equity Securities 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 24
ITEM 1. - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31,
2004 2003
------------- -------------
Assets:
Cash and due from banks ..................................... $ 30,227,000 $ 31,430,000
Federal funds sold .......................................... 24,000,000 30,000,000
------------- -------------
Cash and cash equivalents ................................. 54,227,000 61,430,000
------------- -------------
Investment securities:
Held-to-maturity, at amortized cost (fair
value of $224,235,000 and $242,563,000) ........... 221,428,000 238,289,000
Available-for-sale, at fair value (amortized cost
of $305,192,000 and $275,745,000) ................. 309,701,000 281,138,000
------------- -------------
531,129,000 519,427,000
------------- -------------
Loans:
Commercial and industrial ............................ 50,805,000 47,886,000
Secured by real estate ............................... 290,844,000 268,508,000
Consumer ............................................. 5,817,000 5,730,000
Other ................................................ 398,000 729,000
------------- -------------
347,864,000 322,853,000
Unearned income ...................................... (570,000) (882,000)
------------- -------------
347,294,000 321,971,000
Allowance for loan losses ............................ (2,750,000) (2,452,000)
------------- -------------
344,544,000 319,519,000
------------- -------------
Bank premises and equipment, net ............................ 6,573,000 6,795,000
Other assets ................................................ 8,178,000 7,093,000
------------- -------------
$ 944,651,000 $ 914,264,000
============= =============
Liabilities:
Deposits:
Checking ............................................. $ 299,391,000 $ 297,454,000
Savings and money market ............................. 458,388,000 445,851,000
Time, other .......................................... 18,050,000 17,422,000
Time, $100,000 and over .............................. 33,972,000 16,428,000
------------- -------------
809,801,000 777,155,000
Securities sold under repurchase agreements ................. 33,304,000 41,184,000
Accrued expenses and other liabilities ...................... 3,239,000 4,332,000
Current income taxes payable ................................ 293,000 267,000
Deferred income taxes payable ............................... 1,744,000 2,035,000
------------- -------------
848,381,000 824,973,000
------------- -------------
Stockholders' Equity:
Common stock, par value $.10 per share:
Authorized, 20,000,000 shares;
Issued and outstanding, 4,096,339 and 4,083,733 shares .. 409,000 408,000
Surplus ..................................................... 638,000 781,000
Retained earnings ........................................... 92,516,000 84,864,000
------------- -------------
93,563,000 86,053,000
Accumulated other comprehensive income net of tax ........... 2,707,000 3,238,000
------------- -------------
96,270,000 89,291,000
------------- -------------
$ 944,651,000 $ 914,264,000
============= =============
See notes to unaudited consolidated financial statements
1
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- --------------------------------
2004 2003 2004 2003
----------- ----------- ---------- ----------
Interest income:
Loans .................................................. $13,942,000 $13,391,000 $4,765,000 $4,374,000
Investment securities:
Taxable ............................................ 9,720,000 8,967,000 3,090,000 3,149,000
Nontaxable ......................................... 4,841,000 4,637,000 1,641,000 1,590,000
Federal funds sold ..................................... 192,000 389,000 64,000 79,000
----------- ----------- ---------- ----------
28,695,000 27,384,000 9,560,000 9,192,000
----------- ----------- ---------- ----------
Interest expense:
Savings and money market deposits ...................... 2,076,000 2,542,000 673,000 754,000
Time deposits .......................................... 333,000 340,000 127,000 109,000
Securities sold under repurchase agreements ............ 316,000 43,000 122,000 43,000
----------- ----------- ---------- ----------
2,725,000 2,925,000 922,000 906,000
----------- ----------- ---------- ----------
Net interest income ................................ 25,970,000 24,459,000 8,638,000 8,286,000
Provision for loan losses .................................. 300,000 335,000 100,000 185,000
----------- ----------- ---------- ----------
Net interest income after provision for loan losses ........ 25,670,000 24,124,000 8,538,000 8,101,000
----------- ----------- ---------- ----------
Noninterest income:
Investment Management Division income .................. 1,062,000 932,000 358,000 314,000
Service charges on deposit accounts .................... 2,975,000 2,713,000 1,001,000 918,000
Net gains on sales of available-for-sale securities .... 94,000 444,000 1,000 211,000
Other .................................................. 536,000 564,000 177,000 208,000
----------- ----------- ---------- ----------
4,667,000 4,653,000 1,537,000 1,651,000
----------- ----------- ---------- ----------
Noninterest expense:
Salaries ............................................... 7,940,000 7,734,000 2,607,000 2,606,000
Employee benefits ...................................... 3,654,000 3,389,000 1,239,000 1,027,000
Occupancy and equipment expense ........................ 2,680,000 2,503,000 879,000 875,000
Other operating expenses ............................... 3,795,000 3,830,000 1,204,000 1,391,000
----------- ----------- ---------- ----------
18,069,000 17,456,000 5,929,000 5,899,000
----------- ----------- ---------- ----------
Income before income taxes ......................... 12,268,000 11,321,000 4,146,000 3,853,000
Income tax expense ......................................... 3,141,000 2,834,000 1,055,000 969,000
----------- ----------- ---------- ----------
Net income ......................................... $ 9,127,000 $ 8,487,000 $3,091,000 $2,884,000
=========== =========== ========== ==========
Weighted average:
Common shares .......................................... 4,093,742 4,087,964 4,096,359 4,078,796
Dilutive stock options ................................. 86,974 82,102 76,158 84,236
----------- ----------- ---------- ----------
4,180,716 4,170,066 4,172,517 4,163,032
=========== =========== ========== ==========
Earnings per share:
Basic .................................................. $ 2.23 $ 2.08 $ .75 $ .71
=========== =========== ========== ==========
Diluted ................................................ $ 2.18 $ 2.04 $ .74 $ .70
=========== =========== ========== ==========
See notes to unaudited consolidated financial statements
2
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (UNAUDITED)
-------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2004
-------------------------------------------------------------------------------------------
Accumulated
Other
Common Stock Compre- Compre-
--------------------- hensive Retained hensive
Shares Amount Surplus Income Earnings Income Total
--------- -------- ----------- ---------- ----------- ----------- -----------
Balance, January 1, 2004 ............ 4,083,733 $408,000 $ 781,000 $84,864,000 $3,238,000 $89,291,000
Net Income ....................... $9,127,000 9,127,000 9,127,000
Repurchase and retirement
of common stock ............... (16,521) (2,000) (779,000) (781,000)
Exercise of stock options ........ 29,127 3,000 588,000 591,000
Tax benefit of stock options ..... 48,000 48,000
Cash dividends declared -
$.36 per share ................ (1,475,000) (1,475,000)
Unrealized losses on available-
for-sale-securities, net of
income taxes ............... (531,000) (531,000) (531,000)
----------
Comprehensive income ............. $8,596,000
--------- -------- ----------- ========== ----------- ---------- -----------
Balance, September 30, 2004 ......... 4,096,339 $409,000 $ 638,000 $92,516,000 $2,707,000 $96,270,000
========= ======== =========== =========== ========== ===========
-------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2003
-------------------------------------------------------------------------------------------
Accumulated
Other
Common Stock Compre- Compre-
--------------------- hensive Retained hensive
Shares Amount Surplus Income Earnings Income Total
--------- -------- ----------- ---------- ----------- ----------- -----------
Balance, January 1, 2003 ............ 4,161,173 $416,000 $ 724,000 $80,354,000 $3,948,000 $85,442,000
Net Income ....................... $8,487,000 8,487,000 8,487,000
Repurchase and retirement
of common stock ............... (131,808) (13,000) (4,758,000) (4,771,000)
Exercise of stock options ........ 53,097 5,000 875,000 880,000
Tax benefit of stock options ..... 105,000 105,000
Cash dividends declared -
$.34 per share ................ (1,386,000) (1,386,000)
Unrealized losses on available-
for-sale-securities, net of
income taxes ............... (386,000) (386,000) (386,000)
Transfer from retained
earnings to surplus ........... 4,000,000 (4,000,000)
----------
Comprehensive income ............. $8,101,000
--------- -------- ----------- ========== ----------- ---------- -----------
Balance, September 30, 2003 ......... 4,082,462 $408,000 $ 946,000 $83,455,000 $3,562,000 $88,371,000
========= ======== =========== =========== ========== ===========
See notes to unaudited consolidated financial statements
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
--------------------------------
2004 2003
------------- -------------
Cash Flows From Operating Activities:
Net income ............................................................... $ 9,127,000 $ 8,487,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ............................................. 300,000 335,000
Deferred income tax provision (credit) ................................ 62,000 (174,000)
Depreciation and amortization ......................................... 983,000 965,000
Premium amortization on investment securities, net .................... 1,998,000 3,624,000
Gains on sales of available-for-sale securities ....................... (94,000) (444,000)
Increase in other assets .............................................. (1,085,000) (2,057,000)
Increase (decrease) in accrued expenses and other liabilities ......... 377,000 (247,000)
Increase in income taxes payable ...................................... 74,000 49,000
------------- -------------
Net cash provided by operating activities .......................... 11,742,000 10,538,000
------------- -------------
Cash Flows From Investing Activities:
Proceeds from sales of available-for-sale securities ..................... 81,146,000 10,903,000
Proceeds from maturities and redemptions of investment securities:
Held-to-maturity ...................................................... 70,881,000 81,838,000
Available-for-sale .................................................... 39,358,000 69,306,000
Purchase of investment securities:
Held-to-maturity ...................................................... (55,016,000) (69,114,000)
Available-for-sale .................................................... (150,859,000) (175,233,000)
Net increase in loans to customers ....................................... (25,325,000) (35,243,000)
Purchases of bank premises and equipment ................................. (761,000) (1,380,000)
------------- -------------
Net cash used in investing activities .............................. (40,576,000) (118,923,000)
------------- -------------
Cash Flows From Financing Activities:
Net increase in total deposits ........................................... 32,646,000 78,720,000
Net increase (decrease) in securities sold under repurchase agreements ... (7,880,000) 41,697,000
Proceeds from exercise of stock options .................................. 591,000 880,000
Repurchase and retirement of common stock ................................ (781,000) (4,771,000)
Cash dividends paid ...................................................... (2,945,000) (2,801,000)
------------- -------------
Net cash provided by financing activities .......................... 21,631,000 113,725,000
------------- -------------
Net increase (decrease) in cash and cash equivalents ........................ (7,203,000) 5,340,000
Cash and cash equivalents, beginning of year ................................ 61,430,000 67,229,000
------------- -------------
Cash and cash equivalents, end of period .................................... $ 54,227,000 $ 72,569,000
============= =============
Supplemental Schedule of Noncash:
Investing Activities
Unrealized losses on available-for-sale securities ....................... $ (884,000) $ (679,000)
Financing Activities
Tax benefit from exercise of employee stock options ...................... 48,000 105,000
The Corporation made interest payments of $2,727,000 and $2,924,000 and income
tax payments of $3,006,000 and $2,961,000 during the first nine months of 2004
and 2003, respectively.
See notes to unaudited consolidated financial statements
4
THE FIRST OF LONG ISLAND CORPORATION AND SUBSIDIARY
SEPTEMBER 30, 2004
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accounting and reporting policies of the Corporation reflect banking
industry practice and conform to generally accepted accounting principles in the
United States. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported asset and
liability balances and revenue and expense amounts and the disclosure of
contingent assets and liabilities. Actual results could differ significantly
from those estimates.
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, and the Bank's wholly-owned subsidiaries, The First of Long
Island Agency, Inc., The First of Long Island REIT, Inc., and FNY Service Corp.,
an investment company. The consolidated entity is referred to as the
"Corporation" and the Bank and its subsidiaries are collectively referred to as
the "Bank." The Corporation's financial condition and operating results
principally reflect those of the Bank. All intercompany balances and amounts
have been eliminated. For further information refer to the consolidated
financial statements and notes thereto included in the Corporation's Annual
Report on Form 10-K for the year ended December 31, 2003.
The consolidated financial information included herein as of and for the
periods ended September 30, 2004 and 2003 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, 2003 consolidated balance sheet was derived from the Corporation's December
31, 2003 audited consolidated financial statements.
2. Stock-based Compensation
At September 30, 2004, the Corporation had two stock option and
appreciation rights plans. The Corporation accounts for those plans under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", and related Interpretations.
No stock-based employee compensation cost is recorded for stock options, as all
options granted have an exercise price equal to the market value of the
underlying common stock on the date of grant. If there had been any stock
appreciation rights outstanding, compensation costs would have been recorded
based on the quoted market price of the Corporation's stock at the end of the
period.
The following table illustrates the effect on net income and earnings per
share of applying the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation"
to stock-based employee compensation.
5
Nine Months Ended Three Months Ended
------------------------ ------------------------
9/30/04 9/30/03 9/30/04 9/30/03
--------- --------- --------- ---------
(in thousands)
Net income, as reported ........................ $ 9,127 $ 8,487 $ 3,091 $ 2,884
Deduct: Total cost of stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects ............ (276) (250) (94) (90)
--------- --------- --------- ---------
Pro forma net income ........................... $ 8,851 $ 8,237 $ 2,997 $ 2,794
========= ========= ========= =========
Earnings per share:
Basic - as reported ......................... $ 2.23 $ 2.08 $ .75 $ .71
Basic - pro forma ........................... $ 2.16 $ 2.01 $ .73 $ .69
Diluted - as reported ....................... $ 2.18 $ 2.04 $ .74 $ .70
Diluted - pro forma ......................... $ 2.12 $ 1.98 $ .72 $ .67
Options to purchase 33,165 shares of common stock at $47.89 per share were
outstanding at June 30, 2004 and September 30, 2004 and for the quarterly
periods then ended but were not included in the computation of diluted earnings
per share for the second and third quarters because the options' exercise price
was greater than the average market price of the common shares. These options
were issued on January 20, 2004 and expire ten years from the date of grant.
3. Comprehensive Income
As shown in the consolidated statements of changes in stockholders'
equity, comprehensive income was $8,596,000 and $8,101,000 for the nine months
ended September 30, 2004 and 2003, respectively. For the quarters ended
September 30, 2004 and 2003, comprehensive income was $6,599,000 and $1,684,000,
respectively.
4. Stockholders' Equity
The line captioned repurchase and retirement of common stock in the
Consolidated Statement of Changes in Stockholders' Equity includes shares of
common stock tendered upon the exercise of stock options. For the nine months
ended September 30, 2004, 5,860 shares of common stock with a value of $288,000
were tendered and for the same period in 2003, 11,689 shares with a value of
$463,000 were tendered.
5. Defined Benefit Pension Plan
The following table sets forth the components of net periodic pension cost
for accounting purposes.
Nine Months Ended Three Months Ended
September 30, September 30,
----------------- ------------------
2004 2003 2004 2003
----- ----- ----- -----
(in thousands)
Service cost, net of plan participant contributions ...... $ 504 $ 378 $ 168 $ 126
Interest cost ............................................ 470 428 157 143
Expected return on plan assets ........................... (527) (407) (176) (136)
Net amortization and deferral ............................ 54 17 18 6
----- ----- ----- -----
Net pension cost ......................................... $ 501 $ 416 $ 167 $ 139
===== ===== ===== =====
The Bank makes cash contributions to the pension plan (the "Plan") which
comply with the funding requirements of applicable Federal laws and regulations.
For funding
6
purposes, the laws and regulations set forth both minimum required and maximum
tax deductible contributions. The Bank's cash contributions are usually made
once a year just prior to the Plan's year end of September 30.
In September 2004 and 2003, the Bank contributed $1,182,755 and
$1,407,929, respectively, to the Pension Plan representing the maximum tax
deductible contribution for the Plan years ended September 30, 2004 and 2003
6. Gain Contingency
The Bank negotiated a settlement with the Nassau County attorney whereby
the Bank agreed to discontinue its real estate tax protest proceedings with
respect to one of its branch locations in return for a refund of taxes
previously paid in the approximate amount of $440,000. This settlement is
subject to the approval of the Nassau County legislature and, if approved, the
Bank would be required to pay its legal counsel in these proceedings one-third
of the gross settlement amount.
7
ITEM 2. - 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, and the Bank's wholly-owned subsidiaries, The First of Long
Island Agency, Inc., The First of Long Island REIT, Inc., and FNY Service Corp.,
an investment company. The consolidated entity is referred to as the
"Corporation" and the Bank and its subsidiaries are collectively referred to as
the "Bank." The Bank's primary service area has historically been Nassau and
Suffolk Counties, Long Island. However, the Bank opened three new commercial
banking branches in Manhattan in the second quarter of 2003 and may open
additional Manhattan branches in the future.
Overview
For the first nine months of 2004 the Corporation earned $2.18 per share
and returned 1.31% on average total assets ("ROA") and 13.34% on average total
equity ("ROE"). This compares to earnings of $2.04 per share and returns on
assets and equity of 1.37% and 13.32%, respectively, for the same period last
year. Earnings for the 2003 period included an unusually large commercial
mortgage prepayment fee that accounted for 8 cents per share and gains on sales
of available-for-sale securities that accounted for 6 cents. Excluding the large
prepayment fee and securities gains, earnings per share for the nine-month
period are up 27 cents, or 14%. Third quarter earnings per share were up 4
cents, or 6%. Excluding securities gains, earnings per share for the third
quarter were up 7 cents, or 10%.
Earnings growth for the nine and three month periods ended September 30,
2004 was largely attributable to growth in several key deposit and loan
products, the continued impact of strategy changes made during the latter half
of 2003 with respect to the Corporation's securities portfolio, and a reduction
in prepayments on mortgage securities. Also contributing to earnings growth, but
to a much lesser extent, was the Corporation's share repurchase program. These
items more than offset the significant negative impact of low interest rates.
With respect to growth in key deposit and loan products, as compared to the same
nine month period last year average checking balances were up 11%, or $30.5
million, and balances on residential mortgage loans, including home equity
loans, were up 36%, or $48.7 million. Earnings growth for the third quarter was
more modest than that experienced for the nine-month period partially because of
a slowdown in deposit growth during the quarter. Management believes that it is
too early to tell whether or not the slowdown represents a trend that will
continue and negatively impact future earnings.
Despite the nine-month and third quarter earnings increases, the low
interest rate environment remains challenging. Net interest margin was 28 basis
points (.28%) lower in the first nine months of 2004 than the corresponding
period in 2003. Even though net interest margin substantially stabilized during
the first nine months of 2004, it could, as cautioned in the past, decline
further regardless of whether interest rates continue at their present level,
move downward, or increase. However, over the longer term, sustained higher
interest rates will provide the Bank with the best earning opportunities. The
impact of a change in interest rates on net interest margin depends on, among
other
8
things, the amount of the change, whether or not the change impacts both short
and long-term rates at the same time and in the same amount, and the degree to
which rates on the Bank's loans and deposits are subject to competitive and
other pressures.
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.
Nine Months Ended September 30,
-----------------------------------------------------------------------------
2004 2003
------------------------------------ ------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
--------- --------- --------- --------- --------- ---------
(dollars in thousands)
Assets
Federal funds sold .................. $ 23,824 $ 192 1.08% $ 45,945 $ 389 1.13%
Investment Securities:
Taxable ........................... 374,587 9,720 3.47 315,462 8,967 3.80
Nontaxable (1) .................... 154,037 7,335 6.35 152,809 7,026 6.13
Loans (1)(2) ........................ 333,846 13,948 5.58 271,062 13,395 6.61
--------- --------- --------- --------- --------- ---------
Total interest-earning assets ....... 886,294 31,195 4.70 785,278 29,777 5.07
--------- --------- --------- ---------
Allowance for loan losses ........... (2,602) (2,180)
--------- ---------
Net interest-earning assets ......... 883,692 783,098
Cash and due from banks ............. 36,055 32,859
Premises and equipment, net ......... 6,560 6,553
Other assets ........................ 6,545 5,628
--------- ---------
$ 932,852 $ 828,138
========= =========
Liabilities and
Stockholders' Equity
Savings and money market deposits ... $ 452,059 2,076 .61 $ 426,830 2,542 .80
Time deposits ....................... 41,757 333 1.07 34,212 340 1.33
Securities sold under
repurchase agreements ............. 42,860 316 .98 6,963 43 .83
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities .. 536,676 2,725 .68 468,005 2,925 .84
--------- --------- --------- ---------
Checking deposits (3) ............... 300,154 269,614
Other liabilities ................... 4,633 5,312
--------- ---------
841,463 742,931
Stockholders' equity ................ 91,389 85,207
--------- ---------
$ 932,852 $ 828,138
========= =========
Net interest income (1) ............. $ 28,470 $ 26,852
========= =========
Net interest spread (1) ............. 4.02% 4.23%
========= =========
Net interest margin (1) ............. 4.29% 4.57%
========= =========
(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.
9
Rate/Volume Analysis. The following table sets forth the effect of changes
in volumes, rates, and rate/volume on tax-equivalent interest income, interest
expense and net interest income.
Nine Months Ended September 30,
2004 Versus 2003
----------------------------------------------
Increase (decrease) due to changes in:
----------------------------------------------
Rate/ Net
Volume Rate Volume (2) Change
------- ------- ---------- -------
(in thousands)
Interest Income:
Federal funds sold ............................ $ (187) $ (19) $ 9 $ (197)
Investment securities:
Taxable ..................................... 1,682 (789) (140) 753
Nontaxable (1) .............................. 56 250 3 309
Loans (1) ..................................... 3,105 (2,083) (469) 553
------- ------- ------- -------
Total interest income ......................... 4,656 (2,641) (597) 1,418
------- ------- ------- -------
Interest Expense:
Savings and money market deposits ............. 150 (584) (32) (466)
Time deposits ................................. 75 (67) (15) (7)
Securities sold under repurchase agreements ... 222 8 43 273
------- ------- ------- -------
Total interest expense ........................ 447 (643) (4) (200)
------- ------- ------- -------
Increase (decrease) in net
interest income ............................. $ 4,209 $(1,998) $ (593) $ 1,618
======= ======= ======= =======
(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. The rate/volume variance
could be allocated between the volume and rate variances shown in the
table based on the absolute value of each to the total for both.
Net interest income on a tax-equivalent basis increased by $1,618,000, or
6.0%, from $26,852,000 for the first nine months of 2003 to $28,470,000 for same
period this year. As can be seen from the above rate/volume analysis, the
increase is primarily comprised of a positive volume variance of $4,209,000 and
a negative rate variance of $1,998,000. It should be noted that without the
large commercial mortgage prepayment fee in the first quarter of 2003, net
interest income on a tax-equivalent basis would have been up by $2,182,000, or
8.3%, and the negative rate variance for loans would have been $564,000 lower.
Volume Variance. When comparing the first nine months of 2004 to the same
period last year, the Bank experienced growth in the average balances of its
core deposit products, with the largest increases occurring in checking,
money-market-type savings balances, and attorney escrow balances. Core loan
products also continued to grow, with the most significant growth occurring in
residential mortgages, commercial loans and home equity lines. In addition, in
response to continued downward pressure on net interest margin caused by low
interest rates, management implemented strategy changes with respect to the
Bank's securities portfolio in the latter half of 2003 which continued to
positively impact earnings in 2004. These changes, which increased the
volatility of the Bank's earnings, involved reducing the size of the short-term
securities portfolio, increasing the size of the intermediate-term securities
portfolio and loan portfolio, and using borrowings under repurchase agreements
to pre-invest future security and loan cash flows. The aggregate positive impact
of the core deposit and loan growth and the strategy changes made with respect
to the Bank's securities portfolio largely comprise the positive
10
volume variance of $4,209,000 and more than offset the negative impact of the
reduction in net interest margin discussed in the "Rate Variance" section that
follows.
It should be noted that in the third quarter of this year management took
steps to reduce the Bank's exposure to rising interest rates. The most
significant step involved the sale of U.S. Treasury securities with a face value
of $60 million and maturities ranging from approximately two to four years and
replacement of such securities with U.S. Treasury securities maturing within one
year.
With respect to the growth of core deposit products, average checking
deposits increased by $30.5 million, or 11.3%, when comparing the first nine
months of 2004 to the same period last year. A portion of the increase is
attributable to the Bank's establishment of three Manhattan branches in June
2003 and the introduction by the Bank of a free consumer checking product in the
first quarter of 2003. Funding interest-earning asset growth with growth in
checking deposits has a greater positive 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.
Also when comparing first nine months of 2004 to the same period last
year, average money-market-type deposit balances increased by $14.8 million, or
4.7%, and attorney escrow balances increased by $6.6 million, or 55.2%. In
addition, average borrowings under repurchase agreements increased by $35.9
million. The largest components of the growth in money market type deposit
products were growth in Select Savings, a statement savings account that earns a
higher money market rate, and nonpersonal money market accounts.
The Bank's new business solicitation program is a significant factor that
favorably impacted growth in the average balances of checking accounts,
money-market-type deposit accounts, and attorney escrow accounts. The Bank's
attention to customer service, favorable conditions in the local economy, and
the low interest rate environment are also believed to have made a contribution.
Competitive pricing and customer demographics are believed to be other important
factors with respect to growth in the average balance of money-market-type
deposits.
With respect to the growth of core loan products, the average balance of
residential mortgage loans grew by $45.1 million, or 44.8%, from $100.6 million
in the first nine months of 2003 to $145.7 million for the same period this
year. Average outstandings on home equity lines of credit grew by $4.1 million,
or 12.9%, from $31.9 million in the first nine months of 2003 to $36.0 million
for the same period this year. The robust growth in residential mortgage loans
noted when comparing the nine month periods was largely caused by a campaign
promoting 10-year fixed rate mortgages executed in the latter half of 2003 when
interest rates were very low. Although the Bank continued the promotion of its
10-year fixed rate product during 2004, the resulting loan production has been
much less than that experienced in 2003 due to, among other things, an increase
in mortgage rates and a resulting reduction in demand for residential mortgages.
A strong housing market and stable unemployment rates on Long Island also
contributed to the growth in residential mortgages noted when comparing the nine
month periods.
Rate Variance. Intermediate and longer-term rates have persisted at low
levels. These low rates, along with the fact that the first nine months of 2003
included the
11
unusually large commercial mortgage prepayment fee of $564,000, are the primary
reasons for the negative rate variance of $1,998,000.
It should be noted that while intermediate and longer-term rates have
persisted at low levels, short-term interest rates have begun to increase as
evidenced by a 75 basis point increase in the federal funds target rate during
the most recent quarter. An increase in short-term interest rates should
initially have a negative impact on the Bank's net interest income because the
Bank has more interest-bearing deposits and other liabilities than
interest-earning assets that are subject to contractual or discretionary
repricing in the near term. However, thus far the increase in short-term
interest rates has helped the Bank's earnings because the Bank has not increased
its money market type deposit rates or its savings rates. If short-term interest
rates were to increase further, the Bank may need to increase its savings and
money market deposit rates in response to competitive pressures and thus
negatively impact net interest income.
Net interest margin decreased by 28 basis points when comparing the first
nine months of 2004 to the same period last year. When applied to average total
interest-earning assets of approximately $886 million for the first nine months
of 2004, the decline in net interest margin results in a decrease in net
interest income of approximately $1.9 million for the nine-month period. Other
than the fact that the first nine months of 2003 included the large prepayment
fee that added ten basis points to net interest margin, the decrease in net
interest margin occurred primarily because with the passage of time in the low
interest rate environment more variable rate loans had adjusted to lower rates
and proceeds from the maturity, amortization and prepayment of loans and
securities continued to be reinvested at lower rates. To the extent that these
loans and securities were funded by noninterest-bearing checking deposits and
capital, there was no offsetting cost reduction. To the extent that they were
funded by interest-bearing deposits, there was a reduction in the cost of such
deposits but such reduction was not totally offsetting.
If it were not for the fact that prepayments on mortgage securities slowed
during the first nine months of 2004, the decrease in net interest margin would
have been more severe. The decrease in prepayments enabled the Bank to amortize
premiums on mortgage securities slower.
Management believes that available yields on intermediate and longer-term
loans and securities will remain relatively low for the balance of 2004. If this
were to occur, more of the Bank's loans and securities could be repriced or
reinvested at low yields. In addition, short-term interest rates may continue to
increase and this may cause the Bank to increase the rates paid on its money
market-type deposit and savings accounts. Despite the fact that the Bank's net
interest margin stabilized during the first nine months of 2004, this could
exert pressure on net interest margin and cause net interest margin to move
downward from its present level. In addition, the rate variance as depicted in
the preceding table could become more negative. Furthermore, while an upward
movement in general interest rates could also have a negative impact on net
interest margin, sustained higher interest rates should eventually have a
positive impact. Item 3 of this Form 10-Q includes a more complete discussion of
the impact of interest rate movements on the Bank's net interest income.
Application of Critical Accounting Policies
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported asset and liability
balances and revenue and expense amounts. Our determination of the allowance for
loan losses is a critical
12
accounting estimate because it is based on our subjective evaluation of a
variety of factors at a specific point in time and involves difficult and
complex judgments about matters that are inherently uncertain. In the event that
management's estimate needs to be adjusted based on, among other things,
additional information that comes to light after the estimate is made or changes
in circumstances, such adjustment could result in the need for a significantly
different allowance for loan losses and thereby materially impact, either
positively or negatively, the Bank's results of operations.
The Bank's Reserve Committee, which is chaired by the Senior Lending
Officer, meets on a quarterly basis and is responsible for determining the
allowance for loan losses after considering, among other things, the results of
credit reviews performed by the Bank's loan review officer. In addition, and in
consultation with the Bank's Chief Financial Officer, the Reserve Committee is
responsible for implementing and maintaining policies and procedures surrounding
the calculation of the required allowance. The Bank's allowance for loan losses
is subject to periodic examination by the Office of the Comptroller of the
Currency, the Bank's primary federal banking regulator, whose safety and
soundness examination includes a determination as to its adequacy to absorb
probable losses.
The first step in determining the allowance for loan losses is to identify
loans in the Bank's portfolio that are individually deemed to be impaired. In
doing so, subjective judgments need to be made regarding whether or not it is
probable that a borrower will be unable to pay all principal and interest due
according to contractual terms. Once a loan is identified as being impaired,
management uses the fair value of the underlying collateral and/or the
discounted value of expected future cash flows to determine the amount of the
impairment loss, if any, that needs to be included in the overall allowance for
loan losses. In estimating the fair value of real estate collateral management
makes qualitative judgments based on its knowledge of the local real estate
market, analyses of current economic conditions, and expectations with regard to
conditions that may prevail in the future. Estimating the fair value of
collateral other than real estate is also subjective in nature and sometimes
requires difficult and complex judgments. Determining expected future cash flows
can be more subjective than determining fair values. Expected future cash flows
could differ significantly, both in timing and amount, from the cash flows
actually received over the loan's remaining life.
In addition to estimating losses for loans individually deemed to be
impaired, management also estimates collective impairment losses for pools of
loans that are not specifically reviewed. Statistical information regarding the
Bank's historical loss experience over a period of time is considered in making
such estimates. However, future losses could vary significantly from those
experienced in the past. In addition, management also considers a variety of
general qualitative factors and then subjectively determines the weight to
assign to each in estimating losses. The factors include, among others, national
and local economic conditions, environmental risks, trends in volume and terms
of loans, concentrations of credit, changes in lending policies and procedures,
and experience, ability, and depth of the Bank's lending staff. Because of the
nature of the factors and the difficulty in assessing their impact, management's
resulting estimate of losses may not accurately reflect actual losses in the
portfolio.
Although the allowance for loan losses has two separate components, one
for impairment losses on individual loans and one for collective impairment
losses on pools of loans, the entire allowance for loan losses is available to
absorb realized losses as they occur whether they relate to individual loans or
pools of loans.
13
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 September
30, 2004 and December 31, 2003 are as follows:
September 30, December 31,
2004 2003
------------- ------------
(dollars in thousands)
Nonaccruing loans ......................................... $ 17 $ 97
Loans past due 90 days or more as to
principal or interest payments and still accruing ....... 8 348
Foreclosed real estate .................................... -- --
-------- --------
Total nonperforming assets .............................. 25 445
Troubled debt restructurings .............................. 1 5
-------- --------
Total risk elements ..................................... $ 26 $ 450
======== ========
Nonaccruing loans as a percentage of total loans .......... .00% .03%
======== ========
Nonperforming assets as a percentage of total loans
and foreclosed real estate .............................. .01% .14%
======== ========
Risk elements as a percentage of total loans and
foreclosed real estate .................................. .01% .14%
======== ========
Allowance and Provision For Loan Losses
The allowance for loan losses grew by $298,000 during the first nine
months of 2004, amounting to $2,750,000 at September 30, 2004 as compared to
$2,452,000 at December 31, 2003. The allowance represented approximately .8% of
total loans at each date. During the first nine months of 2004, the Bank had
loan chargeoffs and recoveries of $20,000 and $18,000, respectively, and
recorded a $300,000 provision for loan losses. The provision for loan losses
decreased by $35,000 when comparing the first nine months of 2004 to the
comparable period last year, and decreased by $85,000 when comparing the third
quarter periods. The third quarter decrease occurred largely because loans grew
less during the third quarter of 2004 than the comparable period in 2003.
The allowance for loan losses is an amount that management currently
believes will be adequate to absorb estimated probable losses in the Bank's loan
portfolio. In determining the allowance for loan losses, there is not an exact
amount but rather a range for what constitutes an appropriate allowance. As more
fully discussed in the "Application of Critical Accounting Policies" section of
this discussion and analysis of financial condition and results of operations,
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. Actual results could differ significantly from these
estimates.
The amount of future chargeoffs and provisions for loan losses will be
affected by, among other things, economic conditions on Long Island. Such
conditions could affect the financial strength of the Bank's borrowers and do
affect the value of real estate collateral securing the Bank's mortgage loans.
Loans secured by real estate represent approximately 84% of the Bank's total
loans outstanding at September 30, 2004. Most of these loans were made to
borrowers domiciled on Long Island and are secured by Long
14
Island properties. In recent years, economic conditions on Long Island have been
good and residential real estate values have grown to unprecedented highs. Such
conditions and values could deteriorate in the future, and such deterioration
could be substantial. If this were to occur, some of the Bank's borrowers may be
unable to make the required contractual payments on their loans, and the Bank
may be unable to realize the full carrying value of such loans through
foreclosure. However, management believes that the Bank's underwriting policies
are relatively conservative and, as a result, the Bank should be less affected
than the overall market.
Future provisions and chargeoffs could also be affected by environmental
impairment of properties securing the Bank's mortgage loans. Environmental
audits for commercial mortgages were instituted by the 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.
Noninterest Income, Noninterest Expense, and Income Taxes
Noninterest income includes service charges on deposit accounts,
Investment Management Division income, gains or losses on sales of
available-for-sale securities, and all other items of income, other than
interest, resulting from the business activities of the Corporation. Excluding
net gains on sales of available-for-sale securities, noninterest income
increased by $364,000, or 8.6%, when comparing the first nine months of 2004 to
the same period last year. The increase is primarily comprised of an increase in
service charge income of $262,000 and an increase in Investment Management
Division income of $130,000. The increase in service charge income is largely
due to a revision of the Bank's service charge schedule effective January 1,
2004 and a reduction in service charge waivers and reversals.
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
$613,000, or 3.5%, from $17,456,000 for the first nine months of 2003 to
$18,069,000 for the same period this year. The increase is primarily comprised
of an increase in salaries of $206,000, or 2.7%, an increase in employee
benefits expense of $265,000, or 7.8%, and an increase in occupancy and
equipment expense of $177,000, or 7.1%.
The increase in salaries is primarily attributable to normal annual salary
increases, as partially offset by savings resulting from staff vacancies. The
increase in employee benefits expense is primarily attributable to increases in
retirement and profit sharing plan expense. Profit sharing expense is up because
management is expecting that the Bank's performance against incentive goals will
be better in 2004 than 2003. The largest component of the increase in occupancy
and equipment expense was an increase in rent expense resulting from the opening
of three New York City branches in June 2003. Although total other operating
expenses were relatively flat when comparing the nine-month periods, consulting
expense was up by $160,000, audit and examination expense was up $90,000,
marketing expense was down by $78,000 and mortgage tax and appraisal fees were
down by $119,000. The documenting and testing of internal controls in compliance
with Section 404 of the Sarbanes-Oxley Act of 2002 accounts for a portion of the
increase in both consulting and audit and examination expense. The decrease in
marketing expense was largely due to a lack of branch openings in 2004 and a
reduction in the
15
amount spent on free checking campaigns. A decrease in the level of residential
mortgage refinance activity contributed to the decrease in mortgage tax and
appraisal fees.
Income tax expense as a percentage of book income ("effective tax rate")
was 25.6% for the first nine months of 2004 as compared to 25.0% for the
corresponding period last year. The benefit of tax-exempt interest on municipal
securities results in an effective tax rate that is considerably lower than the
statutory Federal income tax rate of 34% despite state income taxes.
Results of Operations - Third Quarter 2004 Versus Third Quarter 2003
Net income for the third quarter of 2004 was $3,091,000, or $.74 per
share, as compared to $2,884,000, or $.70 per share, for the same quarter last
year. The increase in net income is largely comprised of an increase in net
interest income of $352,000.
The reasons for the increase in net interest income are the same as those
discussed with respect to the nine-month period. However, third quarter net
interest income, unlike the first two quarters of this year, was negatively
impacted by a slowing of deposit growth. In addition, when comparing the first
three quarters of this year to the comparable quarters last year, the second
quarter was more favorably impacted by a slowing of prepayments on mortgage
securities than the first or third quarters.
Capital
The Corporation's capital management policy is designed to build and
maintain capital levels that exceed regulatory standards. Under current
regulatory capital standards, banks are classified as well capitalized,
adequately capitalized or undercapitalized. Under such standards, a well
capitalized bank is one that has a total risk-based capital ratio equal to or
greater than 10%, a Tier 1 risk-based capital ratio equal to or greater than 6%,
and a Tier 1 leverage capital ratio equal to or greater than 5%. The
Corporation's total risk-based capital, Tier 1 risk-based capital and Tier 1
leverage capital ratios of 27.75%, 26.95% and 9.88%, respectively, at September
30, 2004 substantially exceed the requirements for a well-capitalized bank.
Total stockholders' equity increased by $6,979,000, or from $89,291,000 at
December 31, 2003 to $96,270,000 at September 30, 2004. The increase is
primarily attributable to net income of $9,127,000, as partially offset by cash
dividends declared of $1,475,000.
Stock Repurchase Program and Market Liquidity. Since 1988, the Corporation
has had a stock repurchase program under which it has purchased, from time to
time, shares of its own common stock in market or private transactions. The
stock repurchase program has historically enhanced earnings per share and return
on average stockholders' equity. The program is estimated to have contributed
two cents of the fourteen cents increase in earnings per share for the first
nine months of 2004. In estimating the contribution to the increase in earnings
per share, management considered the volume and timing of shares purchased in
2003 and thus far in 2004, the price paid per share, and current interest rates.
Generally the Corporation has not actively solicited market makers,
brokers, institutional investors, or individual stockholders to repurchase
shares of its own common stock, but rather has purchased shares when offered for
sale to the Corporation by these parties. In an attempt to increase the volume
of purchases and thereby further enhance earnings per share, the Corporation may
begin placing daily orders with brokers to purchase its common stock within the
constraints of the broker-dealer, time, price, and
16
volume conditions set forth in SEC Rule 10b-18. Under the safe harbor set forth
in Rule 10b-18, the purchases effected on any single day cannot exceed 25
percent of the average daily trading volume reported for the Corporation's stock
during the four calendar weeks preceding the week in which the Rule 10b-18
purchase will be effected. In addition, once each week, in lieu of purchasing up
to 25% of the average daily trading volume, the Corporation can effect one block
purchase. A block means a quantity of stock that either (i) has a purchase price
of $200,000 or more; or (ii) is at least 5,000 shares and has a purchase price
of at least $50,000; or (iii) is at least 2,000 shares and totals 150 percent or
more of the trading volume.
There is limited trading in the Corporation's common stock. During the
nine months ended September 30, 2004, there was total trading volume of 532,245
shares, and an average daily trading volume of 2,831 shares. During the nine
months ended September 30, 2004, the Corporation purchased 10,661 shares, 7,980
of which were purchased in market transactions. As of September 30, 2004, the
Corporation is still authorized to purchase 118,082 shares under plans
previously approved by the Board of Directors.
The Corporation believes that if it begins to systematically make open
market purchases of its own common stock within the constraints set forth in SEC
Rule 10b-18, the volume of shares purchased might increase and, by comparison to
the shares purchased thus far this year, the increase could be significant. A
significant increase in shares repurchased could positively affect market
liquidity for the Corporation's common stock, the price of the Corporation's
common stock, or both. A reduction or discontinuance of the program could have
the opposite effect.
Russell 3000(R) and 2000(R) Indices. Frank Russell Company ("Russell")
currently maintains 21 U.S. common stock indices. The indices are reconstituted
each July 1st using objective criteria, primarily market capitalization, and do
not reflect subjective opinions. All indices are subsets of the Russell 3000(R)
Index which represents most of the investable U. S. equity market.
The broad market Russell 3000(R) Index includes the largest 3,000
companies in terms of market capitalization and the small cap Russell 2000(R)
Index is comprised of the smallest 2,000 companies in the Russell 3000(R) Index.
The Corporation's common stock is included in the Russell 3000(R) and
2000(R) Indices. The Corporation believes that inclusion in the Russell indices
positively impacts the price of its common stock and increases the stock's
trading volume and liquidity. Conversely, if the Corporation's market
capitalization falls below the minimum necessary to be included in the Indices
at any future annual reconstitution date, the Corporation believes that this
could adversely affect the price, volume and liquidity of its common stock.
Cash Flows and Liquidity
Cash Flows. The Corporation's primary sources of cash are deposit growth,
maturities and amortization of loans and investment securities, operations, and
borrowings under repurchase agreements. The Corporation uses cash from these and
other sources to first fund loan growth. Any remaining cash is used primarily to
purchase a combination of short, intermediate, and longer-term investment
securities, pay cash dividends, and repurchase common stock under the
Corporation's share repurchase program. During the first nine months of 2004,
the Corporation's cash and cash equivalent position decreased by $7,203,000.
17
Liquidity. The Corporation has both internal and external sources of
near-term liquidity that can be used to fund loan growth and accommodate deposit
outflows. The primary internal 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 approximately two years; maturities and monthly
payments on the balance of the investment securities portfolio and the loan
portfolio; and intermediate and longer-term investment securities designated as
available-for-sale. At September 30, 2004, the Corporation had $24,000,000 in
federal funds sold, a short-term securities portfolio not subject to pledge
agreements of $95,875,000, and intermediate and longer-term available-for-sale
securities not subject to pledge agreements of $185,922,000. While maturities of
shorter-term securities in the Corporation's portfolio provide a significant
source of near term liquidity, the intermediate and longer-term securities
provide higher current returns and their maturities will provide a significant
source of liquidity in the future.
The Corporation's primary external sources of liquidity are customer
deposits and borrowings from brokerage firms, the Federal Home Loan Bank of New
York ("FHLB"), and other commercial banks. The Bank's deposit base primarily
consists of core deposits from businesses and consumers in its local market area
and does not include any brokered deposits. The Bank has the ability to borrow
on a secured basis from the FHLB under a variety of borrowing arrangements and
from brokerage firms under repurchase agreements. Although the Bank is currently
a member of the FHLB and has repurchase agreements in place with four brokerage
firms, the membership and agreements do not represent legal commitments on the
part of the FHLB or the brokerage firms to extend credit to the Bank. The amount
that the Bank can potentially borrow from the FHLB and brokerage firms is
believed to be well in excess of $100 million and depends on, among other
things, the amount and quality of the Bank's eligible collateral and the
financial condition of the Bank. In 2003 the Bank began utilizing short-term
borrowings under repurchase agreements to pre-invest cash flows from its
securities and loan portfolios.
The Bank can also borrow overnight federal funds on an unsecured basis
under lines with other commercial banks. These lines in the aggregate amount of
$30 million do not represent legal commitments to extend credit on the part of
the other banks.
As a backup to borrowing from the FHLB, brokerage firms and other
commercial banks, the Bank is eligible to borrow on a secured basis at the
Federal Reserve Bank ("FRB") discount window under the primary credit program.
Primary credit, which is normally extended on a very short-term basis, typically
overnight, at a rate 100 basis points above the federal funds target rate, is
viewed by the FRB as a backup source of short-term funds for sound depository
institutions like the Bank. The amount that the Bank can borrow under the
primary credit program depends on, among other things, the amount of available
eligible collateral.
Legislation
Commercial checking deposits currently account for approximately 28% of
the Bank's total deposits. Congress is considering legislation that would allow
corporate 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
18
cover checks, either could have a material adverse impact on the Bank's future
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank invests in interest-earning assets which are funded by
interest-bearing deposits and borrowings, 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 (present value of expected future cash flows from assets less
the present value of expected future cash flows from liabilities) 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.
Because the Bank's loans and investment securities generally reprice
slower than its interest-bearing deposit accounts, a decrease in interest rates
uniformly across the yield curve should initially have a positive impact on the
Bank's net interest income. However, if the Bank does not or cannot decrease the
rates paid on its savings and money market accounts as quickly or in the same
amount as market decreases in the overnight federal funds rate or the prime
lending rate, the magnitude of the positive impact will decline. If the Bank
does not decrease its savings and money market rates at all, the impact should
be negative.
If interest rates decline, or have declined, and are sustained at the
lower levels and, as a result, the Bank purchases securities at lower yields and
loans are originated or repriced at lower yields, the impact on net interest
income should be negative because 39% of the Bank's average interest-earning
assets are funded by noninterest-bearing checking deposits and capital.
Conversely, an immediate increase in interest rates uniformly across the
yield curve should initially have a negative effect on net interest income.
However, if the Bank does not increase the rates paid on its savings and money
market accounts as quickly or in the same amount as market increases in the
overnight federal funds rate, the prime lending rate, and other short-term
market rates, the magnitude of the negative impact will decline. If the Bank
does not increase its savings and money market rates at all, the impact should
be positive. 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.
The Bank monitors and controls interest rate risk through a variety of
techniques including, among others, the use of interest rate sensitivity models.
Through use of the models, the Bank projects future net interest income and then
estimates the effect on projected net interest income of various changes in
interest rates and balance sheet growth rates. The Bank also uses the models to
calculate the change in net portfolio value over a range of interest rate change
scenarios.
19
Interest rate sensitivity modeling involves a variety of significant
estimates and assumptions and is done at a specific point in time. Interest rate
sensitivity modeling requires, among other things, estimates of: (1) how much
and when yields and costs on individual categories of interest-earning assets
and interest-bearing liabilities will adjust because of projected changes in
market interest rates; (2) future cash flows; and (3) discount rates.
Changes in the estimates and assumptions made for interest rate
sensitivity modeling could have a significant impact on projected results and
conclusions. Therefore, interest rate sensitivity modeling may not accurately
reflect the actual impact of changes in the interest rate environment on the
Bank's net interest income or net portfolio value.
The information provided in the following table is based on significant
estimates and assumptions and constitutes, like certain other statements
included herein, a forward-looking statement. The base case information in the
table shows (1) an estimate of the Corporation's net portfolio value at
September 30, 2004 arrived at by discounting estimated future cash flows at
current market rates and (2) an estimate of net interest income for the year
ending September 30, 2005 assuming that maturing assets or liabilities are
replaced with new balances of the same type, in the same amount, and at current
rate levels and repricing balances are adjusted to current rate levels. The rate
change information in the table shows estimates of net portfolio value at
September 30, 2004 and net interest income for the year ending September 30,
2005 assuming rate changes of plus 100 and 200 basis points and minus 100 and
200 basis points. The changes in net portfolio value from the base case have not
been tax effected. In addition, rate changes are assumed to be shock or
immediate changes and occur uniformly across the yield curve regardless of the
duration to maturity or repricing of specific assets and liabilities. In
projecting future net interest income under the indicated rate change scenarios,
activity is simulated by replacing maturing balances with new balances of the
same type, in the same amount, but at the assumed rate level and adjusting
repricing balances to the assumed rate level.
Based on the foregoing assumptions and as depicted in the table that
follows, an immediate increase in interest rates of 100 or 200 basis points
would have a negative effect on net interest income over a one-year time period.
This is principally because the Bank's interest-bearing deposit accounts reprice
faster than its loans and investment securities. However, if the Bank does not
increase the rates paid on its savings and money market 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. If
the Bank does not increase its savings and money market rates at all, the impact
should be positive. 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.
Generally, the reverse should be true of an immediate decrease in interest rates
of 100 or 200 basis points. However, deposit rates are currently very low as
indicated by the Bank's overall cost of deposits of 68 basis points for the
first nine months of 2004. Therefore, while rates on many of the Bank's interest
earning assets could drop by 100 or 200 basis points, deposit rates could not.
It is for this reason that in
20
rates down 100 basis points the projected increase in net interest income as
compared to the base case is less than the projected decrease in rates up 100
basis points. In addition, as shown in the table that follows, in rates down 200
basis points net interest income is less than in rates down 100 basis points.
Net Interest Income
Net Portfolio Value (NPV) Year Ended
at September 30, 2004 September 30, 2005
-------------------------- --------------------------
Percent Percent
Change Change
From From
Rate Change Scenario Amount Base Case Amount Base Case
- -------------------------------------- -------- --------- -------- ---------
(dollars in thousands)
+ 200 basis point rate shock ......... $ 58,482 (41.8)% $ 28,184 (18.0)%
+ 100 basis point rate shock ......... 78,954 (21.4) 31,284 (9.0)
Base case (no rate change) ......... 100,494 -- 34,382 --
- - 100 basis point rate shock ......... 123,185 22.6 35,690 3.8
- - 200 basis point rate shock ......... 147,367 46.6 34,049 (1.0)
Forward Looking Statements
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Quantitative and Qualitative Disclosures About Market Risk"
contain 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" or "believe". 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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer, Michael N. Vittorio, and Chief
Financial Officer, Mark D. Curtis, have evaluated the Corporation's disclosure
controls and procedures as of the end of the period covered by this report.
Based upon that evaluation, they have concluded that the Corporation's
disclosure controls and procedures are effective in ensuring that material
information related to the Corporation is made known to them by others within
the Corporation.
(b) Changes in Internal Control Over Financial Reporting
There have been no significant changes in internal control over financial
reporting that occurred during the fiscal quarter covered by this report that
have materially affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Corporation and the Bank may be involved in
litigation that arises in the normal course of business. As of the date of this
Form 10-Q, neither the Corporation nor the Bank is a party to any litigation
that management believes could reasonably be expected to have a material adverse
effect on the Corporation's or the Bank's financial position or results of
operations for an annual period.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchase of Equity
Securities
Since 1988, the Corporation has had a stock repurchase program under which
it is authorized to purchase, from time to time, shares of its own common stock
in market or private transactions. The details of the Corporation's purchases
under the stock repurchase program during the third quarter of 2004 are set
forth in the table that follows.
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of
Shares Purchased as Maximum Number of
Total Average Part of Publicly of Shares that May Yet
Number of Price Paid Announced Plans Be Purchased Under the
Period Shares Per Share or Programs (1) Plans or Programs (1)
- --------------------------------------------- --------- ---------- ------------------- ----------------------
July 1, 2004 to July 31, 2004 ............... -- -- -- 43,473
August 1, 2004 to August 31, 2004 ........... 391 $43.21 391 118,082
September 1, 2004 to September 30, 2004 ..... -- -- -- 118,082
(1) The shares purchased by the Corporation under its stock repurchase program
in the third quarter of 2004 were purchased under a 50,000 share plan
approved by the Corporation's board of directors on April 15, 2003 and
publicly announced on April 24, 2003. In addition, the Corporation
publicly announced a 75,000 share program on August 24, 2004 under which
no shares have yet been purchased. The Corporation's share repurchase
plans do not have fixed expiration dates.
Item 6. Exhibits and Reports on Form 8-K
a) The following exhibits are included herein.
Exhibit No. Name
- ----------- ----
31 Certifications pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act)
32 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. Section 1350)
b) Reports on Form 8-K
During the quarter ended September 30, 2004 (and thereafter to the date
hereof) the Corporation filed the following reports on Form 8-K with the
Securities and Exchange Commission:
1) The Corporation filed a Form 8-K dated July 28, 2004 to report that
it had: (1) issued a press release disclosing material non-public
information regarding the Corporation's financial condition as of
June 30, 2004 and results of operations for the three and six month
periods then ended, and (2) mailed a quarterly report to
shareholders disclosing substantially similar non-
22
public information regarding the Corporation's financial condition
and results of operations. The press release was furnished as
Exhibit 99.1 to the Form 8-K filing and the quarterly report to
shareholders was furnished as Exhibit 99.2 to the Form 8-K filing.
2) The Corporation filed a Form 8-K dated November 1, 2004 to report
that it had: (1) issued a press release disclosing material
non-public information regarding the Corporation's financial
condition as of September 30, 2004 and results of operations for the
three and nine month periods then ended, and (2) mailed a quarterly
report to shareholders disclosing substantially similar non-public
information regarding the Corporation's financial condition and
results of operations. The press release was furnished as Exhibit
99.1 to the Form 8-K filing and the quarterly report to shareholders
was furnished as Exhibit 99.2 to the Form 8-K filing.
23
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: October 29, 2004 By /s/ MICHAEL N. VITTORIO
---------------------------
MICHAEL N. VITTORIO, PRESIDENT & CHIEF
EXECUTIVE OFFICER
(principal executive officer)
By /s/ MARK D. CURTIS
---------------------------
MARK D. CURTIS
SENIOR VICE PRESIDENT & TREASURER
(principal financial and accounting
officer)
24
EXHIBIT INDEX
EXHIBIT BEGINS
EXHIBIT DESCRIPTION ON PAGE NO.
- ------- ----------- --------------
31 Certification by Chief Executive Officer and 26
Chief Financial Officer In Accordance With Section
302 Of The Sarbanes-Oxley Act of 2002
32 Certification by Chief Executive Officer and 28
Chief Financial Officer In Accordance With Section
906 Of The Sarbanes-Oxley Act of 2002
25