EXHIBIT 13 - REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2001
35
[LOGO] The First of Long Island
The First of Long Island Corporation
[PHOTO OMITTED]
2001 ANNUAL REPORT
36
BUSINESS OF THE CORPORATION
The First of Long Island Corporation ("Corporation") is a one-bank holding
company organized under the laws of the State of New York. Its primary business
is the operation of its sole subsidiary, The First National Bank of Long Island
("Bank").
The Bank was organized in 1927 under national banking laws and became the sole
subsidiary of the Corporation under a plan of reorganization effected April 30,
1984.
The Bank is a full service commercial bank which provides a broad range of
financial services to individual, professional, corporate, institutional and
government customers through its twenty-one branch system on Long Island.
The First of Long Island Agency, Inc. was organized in 1994 under the laws of
the State of New York, as a subsidiary of the Bank to conduct business as a
licensed insurance agency engaged in the sale of insurance, primarily fixed
annuity products.
The Bank is subject to regulation and supervision of the Federal Reserve Board,
the Comptroller of the Currency, and the Federal Deposit Insurance Corporation
which also insures its deposits. The Comptroller of the Currency is the primary
banking agency responsible for regulating the subsidiary Bank. In addition, the
Corporation is subject to the regulations and supervision of the Federal Reserve
Board and the Securities and Exchange Commission.
CONTENTS
Selected Financial Data - 1
Letter to Stockholders - 2
A Journey Through History - 4
Board of Directors - 7
Senior Management - 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations - 9
Management's Responsibility for Financial Reporting - 19
Consolidated Financial Statements and Notes - 20
Report of Independent Public Accountants - 42
Official Staff - 43
Annual Meeting Notice - 44
Business Development Board - IBC
37
SELECTED FINANCIAL DATA
The following is selected consolidated financial data for the past five years.
This data should be read in conjunction with the information contained under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the accompanying consolidated financial statements and
related notes.
2001 2000 1999* 1998 1997
------------- ------------- ------------- ------------- -------------
INCOME STATEMENT DATA:
Total Interest Income .................. $ 37,989,000 $ 38,822,000 $ 33,963,000 $ 32,682,000 $ 30,401,000
Total Interest Expense ................. 9,451,000 13,106,000 9,513,000 9,867,000 9,197,000
Net Interest Income .................... 28,538,000 25,716,000 24,450,000 22,815,000 21,204,000
Provision for Loan Losses (Credit) ..... 100,000 (75,000) -- (100,000) (100,000)
Net Income ............................. 10,094,000 9,318,000 9,034,000 8,236,000 7,415,000
PER SHARE DATA:
Basic Earnings ......................... $3.55 $3.19 $2.97 $2.65 $2.38
Diluted Earnings ....................... 3.50 3.15 2.92 2.60 2.33
Cash Dividends Declared ................ .81 .72 .64 .57 .49
Stock Splits/Dividends Declared ........ -- -- -- -- 3-for-2
Book Value ............................. $26.76 $24.50 $21.68 $20.59 $18.55
BALANCE SHEET DATA AT PERIOD END:
Total Assets ........................... $ 684,081,000 $ 625,992,000 $ 570,551,000 $ 546,127,000 $ 483,316,000
Total Loans ............................ 226,688,000 192,909,000 182,774,000 170,718,000 154,730,000
Allowance for Loan Losses .............. 2,020,000 1,943,000 2,033,000 3,651,000 3,579,000
Total Deposits ......................... 604,870,000 550,472,000 503,189,000 479,231,000 422,759,000
Stockholders' Equity ................... 74,746,000 70,866,000 64,233,000 63,744,000 57,743,000
AVERAGE BALANCE SHEET DATA:
Total Assets ........................... $ 661,958,000 $ 600,326,000 $ 554,561,000 $ 508,982,000 $ 459,391,000
Total Loans ............................ 205,959,000 186,451,000 176,078,000 164,063,000 153,733,000
Allowance for Loan Losses .............. 1,941,000 1,961,000 2,835,000 3,643,000 3,597,000
Total Deposits ......................... 584,279,000 530,850,000 486,532,000 445,266,000 402,392,000
Stockholders' Equity ................... 73,390,000 66,711,000 65,406,000 61,037,000 55,116,000
FINANCIAL RATIOS:
Return on Average Total Assets (ROA) ... 1.52% 1.55% 1.63% 1.62% 1.61%
Return on Average Stockholders'
Equity (ROE) ......................... 13.75% 13.97% 13.81% 13.49% 13.45%
Average Equity to Average Assets ....... 11.09% 11.11% 11.79% 11.99% 12.00%
*Net income, earnings per share, ROA, and ROE for 1999 are before a $945,000
($.31 per share) credit resulting from a transition adjustment to the allowance
for loan losses.
STOCK PRICES
The Corporation's Common Stock trades on The Nasdaq SmallCap Market tier of
The Nasdaq Stock Market under the symbol FLIC. The following table sets forth
high and low sales prices for the years ended December 31, 2001 and 2000.
2001 2000
---------------------- ----------------------
Quarter High Low High Low
- -------------- ---------- ---------- ---------- ----------
First $ 39.06 $ 37.75 $ 33.25 $ 29.38
Second 40.75 38.25 34.31 29.75
Third 40.90 38.65 42.00 33.50
Fourth 40.25 37.80 39.56 37.25
At December 31, 2001, there were 710 stockholders of record of the
Corporation's Common Stock. The number of stockholders of record includes banks
and brokers who act as nominees, each of whom may represent more than one
stockholder.
38
LETTER TO STOCKHOLDERS
[PHOTO OMITTED]
"As we have said so many times in the past, we strongly believe we offer a
unique type of service not available from the very large institutions with which
we compete. ...We have the radical idea that `we'd like you to speak to a real
person if you want!'"
J. William Johnson
Chairman and Chief Executive Officer
Dear Stockholders,
I am pleased to report that 2001 was a strong year for the Bank in almost all
respects. Earnings per share were $3.50 which was a growth of 11% over the $3.15
that was earned in the prior year. As shown in the chart below, The First of
Long Island has enjoyed exceptionally good and steady growth in earnings per
share over many years.
Cash dividends were increased during 2001 for the 23rd consecutive year. The
dividend declared in December, of 43 cents per share, was 13% greater than the
38 cents declared in June. Total dividends declared last year were 81 cents. Our
Return on Assets remained high at 1.52%, while Return on Equity was 13.75%.
Once again the most important reason for the increase in earnings was the growth
in average checking balances. Although not as large an increase as in the prior
few years, balances increased approximately 8%, or $15,500,000 in 2001. Also
favorably impacting earnings per share was the growth in average loans
outstanding, money market type account balances, and service charge income. The
growth in loans was particularly gratifying as there was good production in all
major categories. Production was strong for commercial loans, construction
loans, equity lines of credit, residential mortgages and commercial mortgages.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
Earnings per share
1979 $.12
1980 $.23
1981 $.25
1982 $.31
1983 $.39
1984 $.57
1985 $.87
1986 $1.02
1987 $1.09
1988 $1.25
1989 $1.29
1990 $1.37
1991 $1.29
1992 $1.55
1993 $1.66
1994 $1.82
1995 $1.86
1996 $2.08
1997 $2.33
1998 $2.60
1999 $2.92
2000 $3.15
2001 $3.50
On a fully diluted basis
Interest rates continued to be major news in the U.S. economy throughout 2001.
Rates have been on a roller coaster for a number of years, and to say the least,
managing in the face of those changes is challenging. Despite a decline in rates
during the year, we were able to again effectuate a securities program in which
we took approximately $250,000 in losses from the sale of lower yielding
municipal securities; the total gain in interest income for the securities
purchased will be significantly more than the loss on the securities sold.
39
Interest rates will likely be a continuing challenge in 2002. Short term rates
available to us for investment are so low that it has been difficult to lower
money market savings rates to maintain our normal margin between rates earned
and paid. Furthermore, although at this writing the yield curve (the difference
between short and long term interest rates) is fairly steep, the yields on long
term investments are still relatively low.
We were again active in the technology area last year. As planned, we introduced
several "imaging" based products throughout our item processing systems. We now
provide a statement with clear, legible images of customers' checks, in check
number order, neatly presented on 8 1/2" x 11" pages. Although some customers
were concerned about not receiving their cancelled checks, the overall reaction
has been positive. Our archive retrieval capabilities allow immediate access to
images of deposits, credits/debits, checks and account statements. Soon
customers who use FirstNet Online Banking will also be able to do this from
their home or office computer. In addition, customers can now receive their
monthly statements via e-mail and businesses can receive all of their prior
month's banking activity on one compact CD-ROM.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
Return on Average Assets
1997 1.61%
1998 1.62%
1999 1.63%
2000 1.55%
2001 1.52%
During the year, we continued to work on our most important strategy -
soliciting banking relationships from service conscious consumers, professionals
and privately owned businesses. This year we designated a seasoned professional
to head our lawyer's program. We continue our active solicitation of business
and professional accounts at all our branches and especially our new commercial
banking offices. We closed our Cross Island Plaza office after 15 months of
operation, as the available business opportunities were not what we anticipated.
A number of good account relationships from that office were transferred to
other branches.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
Cash Dividends Declared Per Share
1979 $.01
1980 $.03
1981 $.03
1982 $.05
1983 $.07
1984 $.08
1985 $.12
1986 $.15
1987 $.17
1988 $.19
1989 $.19
1990 $.23
1991 $.25
1992 $.28
1993 $.31
1994 $.34
1995 $.37
1996 $.43
1997 $.49
1998 $.57
1999 $.64
2000 $.72
2001 $.81
Going forward we fully expect to continue opening new branches especially
commercial banking offices. As we have said so many times in the past, we
strongly believe we offer a unique type of service not available from the very
large institutions with which we compete. We offer the latest technological
services, but more importantly have very knowledgeable professionals who provide
the
40
type of personal service that all of us want and deserve. We have the radical
idea that "we'd like you to speak to a real person if you want!"
The year 2002 marks the 75th anniversary of the founding of The First of Long
Island. As we look forward to it and the years to come, we face many challenges
such as lower and fluctuating interest rates and the continuing possibility of
interest being paid on corporate checking. However, we are confident in our
ability to prosper in our marketplace. Long Island and its environs remain an
excellent market, and customers' focus on our type of service probably has never
been greater.
/s/ J. William Johnson
J. William Johnson
Chairman and Chief Executive Officer
41
OUR JOURNEY THROUGH TIME
[PHOTO OMITTED]
1927 - The First National Bank of Glen Head opens for business
Institution capitalized at $50,000
Original Officers G. Thomas Powell, President; Harry Tappan, Vice President; and
Robert S. Miller, Cashier
1930's - Personal Loan Department established, loan limits $50 - $1,000
[PHOTO OMITTED]
1936 - Home Loan Plan introduced
Anthony D. Famighetti becomes third employee of the Bank
1937 - Bank celebrates 10th Anniversary
1939 - Auto Loan Department formed, finance charges 25% lower than competition,
24 month term available
1947 - Bank marks 20th Anniversary
1948 - State-of-the-art teller machines installed; pen and ink entries in
passbooks made obsolete
[PHOTO OMITTED]
1949 - "In our estimation the most important asset of our Bank is one we are
unable to list in this year end report. It is intangible...We speak, of course
of the confidence and cooperation of all the friends we serve." - G. Thomas
Powell, President
[PHOTO OMITTED]
1952 - Glen Cove Echo article acknowledges Bank's 25th Anniversary
[PHOTO OMITTED]
1953 - "It is our aim to work even more closely with our customers in the future
than we have in the past." - G. Thomas Powell, President
[PHOTO OMITTED]
1954 - Robert S. Miller, first employee of the Bank, elected President
1956 -Roslyn opens as a Full Service Office
1957 - Bank observes 30th Anniversary
[PHOTO OMITTED]
1958 - "...500 people visited the Glen Head branch and public response to the
carpeted and enlarged lobby area, new counters and entrance...has been most
enthusiastic." Robert S. Miller, President
1960 - "We do not believe that the expansion of the commercial and savings banks
of New York City into Nassau County will materially affect us nor impede our
progress." - Robert S. Miller, President
[PHOTO OMITTED]
1961 - Passage of the Omnibus Banking Bill has resulted in the establishment of
a number of new branches in Nassau County by the large New York City commercial
and savings banks
1962 - Top-level management meetings instituted
Officer Call Program organized to actively seek out new business
[PHOTO OMITTED]
1963 - Chairman of the Board of Directors and one of the original officers of
the Bank, G. Thomas Powell, passes away
[PHOTO OMITTED]
1964 - Greenvale opens as a Full Service Office
[PHOTO OMITTED]
1965 - Northport opens as 1st Full Service Office in Suffolk County equipped
with town's only drive-up window
Active Public Relations Department in development
42
[PHOTO OMITTED]
1966 - BANK TALK names Anthony D. Famighetti as President and Robert S. Miller
as Chairman of the Board
[PHOTO OMITTED]
1967 - The First celebrates 40 years as the "Bankway to the North Shore".
Board of Directors acknowledges the passing of Robert S. Miller on March 22nd
Glen Head branch gets new drive-up facility
1968 - Security systems updated
Very latest in electronic and photographic security devices are in use
1971 - Trust Department formed
[PHOTO OMITTED]
1972 - FirstLines - Bank employee newsletter debuts
[PHOTO OMITTED]
1974 - New Full Service Office in Old Brookville opens to the public
A dividend check mailer sent to shareholders
1975 - Edward F. "Ned" McAdams elected President
Anthony D. Famighetti elected Chairman and CEO
1976 - First Class Banking package preempts NOW and Free Checking services of
other banks
[PHOTO OMITTED]
1977 - Newspaper clipping announces "The First is Fifty"
Woodbury opens as a Full Service Office
1978 - The First National Bank of Glen Head officially changes name to The First
National Bank of Long Island
[PHOTO OMITTED]
1979 - J. William Johnson joins the Bank as President
Key Customer Call Program introduced
Money Market Certificates offered to consumers
Sign Boards installed in all branches reflecting current interest rates
[PHOTOS OMITTED]
1980 - New bank logo adopted, "Our true nickname - The First of Long Island"
Anthony D. Famighetti retires as CEO - remains Chairman
First edition of Shareholder Newsletter "First Takes Stock" is published
NOW accounts are offered
[PHOTO OMITTED]
1981 - Lake Success opens, as first Commercial Banking Office, catering to
business clientele exclusively
[PHOTO OMITTED]
1982 - Money Market Savings, FirstEquity & Golden Passbook debut
First Class Teller, "One of the first banks on Long Island to introduce 24-Hour
ATM Banking", premieres
Donald L. Manfredonia joins the Bank as Executive Officer, Vice President,
Commercial Lending
The First of Long Island actively promotes Commercial Mortgages
1984 -The First National Bank of Long Island becomes wholly-owned subsidiary of
newly formed First of LI Corporation
Bank's second ATM installed at Northport branch
[PHOTOS OMITTED]
1985 - Construction begins on newest branch in Huntington, to be modeled after
historic house in Bethpage Restoration Village
Arthur J. Lupinacci, Jr. joins the management team as Executive Vice President,
Senior Operating Officer
Newsday article, "The Little Bank That Could" appears
Professional Account Group targeting Physicians is established
43
1986 - First Famighetti Award presented to Bank employee at Annual Meeting
Huntington opens as Full Service Office
1987 - FLIC (NASDAQ(R)) begins trading in January
J. William Johnson elected Chairman of the Board
1988 - Two new Commercial Banking Offices open - Hicksville and Mineola
[PHOTO OMITTED]
1989 - Diamond Passbook introduced
First Business Development Board formed, "The goal is to market to privately
owned businesses and professionals."
[PHOTOS OMITTED]
1990 - Bank becomes member of NYCE & Cirrus networks
Rockville Centre opens as Commercial Banking Office
Joseph G. Perri joins the Bank as Executive Officer, Senior Vice President
1991 - Richard Kick, Executive Officer, Vice President, is welcomed to the Bank
New Hyde Park opens as Commercial Banking Office
StarEquity Program introduced
[PHOTO OMITTED]
1992 - Bank dedicates 65th year in business to Anthony D. Famighetti and Thomas
J. Andersen, Executive Vice President, both of whom pass away
Fixed Rate Home Mortgage program rolled out
1993 - Locust Valley Branch opens, first full service office since 1977
[PHOTOS OMITTED]
1994 - PrimeLine - Home Equity Line of Credit debuts
FirstLine Automated Telephone Banking premieres
1995 - Valley Stream opens as Commercial Banking Office
1996 - The First of Long Island cable commercial airs
Great Neck opens as Commercial Banking Office
Mark D. Curtis joins as Senior Vice President, Chief Financial Officer
[PHOTO OMITTED]
1997 - The First celebrates 70 years
Marketing Construction Financing to residential builders begins
Bank's new Website, www.firstofli.com, released onto the Internet
First Annual Tree Lighting Ceremony at Old Brookville Office a big hit
1998 - Rockville Centre becomes Full Service Office
June `98 issue US Banker recognizes Bank as 3rd in Nation in terms of overall
financial performance and 1st in terms of capital
Commercial Banking Offices, Hauppauge and Bohemia open
[PHOTO OMITTED]
1999 - US Banker June `99 edition ranks the Bank 2nd in Nation - up a notch from
the prior year
Garden City opens as Commercial Banking Office
[PHOTOS OMITTED]
2000 - Two new Commercial Banking Offices open: New Highway and Allen Boulevard,
both in Farmingdale
FirstNet PC Banking rolled out to business and personal customers
Security measures upgraded - account holder photos and scanned signatures
implemented at branches
Brian J. Keeney joins the Bank as Senior Vice President & Executive Trust
Officer
Huntington becomes the largest branch in terms of checking deposits
44
[PHOTO OMITTED]
2001 - Deer Park opens as Commercial Banking Office
FirstStatement check imaging rolled out to business and personal customers
Celebrate with us in 2002!
45
BOARD OF DIRECTORS
[PHOTO OMITTED]
Rear, l to r: Walter C. Teagle III, Allen E. Bushing, J. William Johnson, Howard
Thomas Hogan, Jr., Paul T. Canarick, J. Douglas Maxwell, Jr. Seated, l to r:
John R. Miller III, Beverly Ann Gehlmeyer
J. William Johnson
Chairman and
Chief Executive Officer
Allen E. Busching
Principal, B&B Capital
(consulting and private investment)
Paul T. Canarick
President and Principal
Paul Todd, Inc.
(construction company)
Beverly Ann Gehlmeyer
Tax Manager and Principal
Gehlmeyer & Gehlmeyer, P.C.
(certified public accounting firm)
Howard Thomas Hogan, Jr.
Hogan & Hogan
(lawyer, private practice)
J. Douglas Maxwell, Jr.
Chairman and Chief Executive Officer
NIRx Medical Technologies LLC
(medical technology)
John R. Miller III
President and Publisher
Equal Opportunity Publications, Inc.
(publishing)
Walter C. Teagle III
Executive Vice President
Lexent Inc.
(infrastructure service provider)
"Our philosophy has remained consistent since our inception - exceptional
personal service and attention to detail."
-J. William Johnson
46
SENIOR MANAGEMENT
[PHOTO OMITTED]
l to r: Richard Kick, Joseph G. Perri, Mark D. Curtis, J. William Johnson,
Donald L. Manfredonia, Arthur J. Lupinacci, Jr., Brian J. Keeney
THE FIRST OF LONG ISLAND CORPORATION
OFFICERS
J. William Johnson
Chairman and
Chief Executive Officer
Arthur J. Lupinacci, Jr.
Executive Vice President and
Chief Administrative Officer
Mark D. Curtis
Senior Vice President and Treasurer
Brian J. Keeney
Senior Vice President
Richard Kick
Senior Vice President
Donald L. Manfredonia
Senior Vice President
Joseph G. Perri
Senior Vice President and Secretary
Wayne B. Drake
Assistant Treasurer
THE FIRST NATIONAL BANK OF LONG ISLAND
EXECUTIVE OFFICERS
J. William Johnson
Chairman and
Chief Executive Officer
Arthur J. Lupinacci, Jr.
Executive Vice President and
Chief Administrative Officer
Donald L. Manfredonia
Executive Vice President
Senior Lending Officer
Joseph G. Perri
Executive Vice President
Senior Commercial Marketing Officer
Mark D. Curtis
Senior Vice President
Chief Financial Officer and Cashier
Brian J. Keeney
Senior Vice President
Executive Trust Officer
Richard Kick
Senior Vice President
Senior Operations and
Senior Retail Loan Officer
47
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
2001 Versus 2000 Summary. The Corporation earned $3.50 per share in 2001 as
compared to $3.15 in 2000, an increase of 11%. Based on 2001 net income of
$10,094,000, the Corporation returned 1.52% on average total assets and 13.75%
on average total equity as compared to returns of 1.55% and 13.97% in 2000.
Total assets and deposits were $684,081,000 and $604,870,000, respectively, at
December 31, 2001, representing increases over prior year-end balances of 9.3%
and 9.9%, respectively. Despite continued purchases under the Corporation's
stock repurchase program, total capital before unrealized gains on
available-for-sale securities grew by $3,570,000 in 2001, or approximately 5%,
and the Corporation's capital ratios continue to substantially exceed the
current regulatory criteria for a well-capitalized bank. In addition, the
Corporation's liquidity continues to be strong.
The most important reason for the earnings increase in 2001 was growth in
average checking balances. Other important factors were growth in average loan
and money market type savings balances and an increase in service charge income.
Average checking balances for 2001 were up approximately $15.5 million, or just
over 8%, average loans outstanding were up approximately $19.5 million, or
10.5%, average money market type savings balances were up approximately $41.3
million, or almost 16%, and service charge income grew by $509,000, or
approximately 17%. Also positively impacting earnings were growth in
stockholders' equity and the Corporation's share repurchase program. An increase
in noninterest expense partially offset the earnings growth brought about by the
aforementioned items.
When comparing year-end balances, the Bank's mortgage loan portfolio grew
by almost 16% in 2001 as compared to 5.2% in 2000 and 11.5% in 1999. The 2001
growth is comprised of an increase in commercial mortgages of 6.8% and an
increase in residential mortgages, including home equity loans and lines, of
25.0%. This compares to increases of 3.2% for commercial mortgages and 7.4% for
residential mortgages in 2000. The increased growth rates for residential and
commercial mortgage loans experienced in 2001 is believed to be partially
attributable to a decrease in mortgage rates and a resulting increase in the
desire of customers to refinance their existing mortgages and favorable
conditions in the Long Island economy. Commercial mortgages continue to be the
Bank's most important loan product.
The Bank's portfolios of tax-exempt and mortgage securities grew during
2001, while the long-term U.S. Treasury portfolio declined. This occurred as a
result of management's efforts to take advantage of the better returns afforded
by municipal and mortgage securities relative to the Treasury sector. Savings
and money market deposits were up 11.8% when comparing year-end 2001 to 2000
primarily because of growth in "Select Savings", nonpersonal money market, and
IOLA (interest on lawyer) accounts. The Select Savings product is a statement
savings account that earns a higher money market rate.
2001 was a successful year from the standpoint of the Corporation's stock
repurchase program in that the Corporation was able to repurchase almost 119,000
shares of common stock, representing approximately 4% of total shares
outstanding at the beginning of the year. This compares to repurchases of
approximately 84,000 and 143,000 shares in 2000 and 1999, respectively. The
stock repurchase program has been used by management to enhance earnings per
share and return on average stockholders' equity (ROE). The stock repurchase
program is estimated to have contributed approximately 7 cents of the 35 cent
increase in earnings per share for 2001.
2000 Versus 1999 Summary. The Corporation earned $3.15 per share in 2000 as
compared to $2.92 in 1999, an increase of 8%. The 1999 earnings are before a
transition adjustment to the allowance for loan losses that added $.31 per
share. Based on 2000 net income of $9,318,000, the Corporation returned 1.55% on
average total assets and 13.97% on average total equity as compared to returns
of 1.63% and 13.81% in 1999. Total assets and deposits were $625,992,000 and
$550,472,000, respectively, at December 31, 2000, representing increases over
prior year-end balances of 9.7% and 9.4%, respectively. Despite continued
purchases under the Corporation's stock repurchase program, total capital before
48
unrealized gains and losses on available-for-sale securities grew by $4,647,000
in 2000, or approximately 7%, and the Corporation's capital ratios continued to
substantially exceed the regulatory criteria for a well-capitalized bank. In
addition, the Corporation's liquidity continued to be strong.
The most important factor in the increase in earnings for 2000 was an
increase in checking account balances. Average checking balances for 2000 were
up approximately $17.4 million, or just over 10%. As in prior years, the Bank
used growth of checking balances as a key strategy in increasing earnings per
share. Also important to the earnings increase was growth in money market
savings type balances, the preferential tax treatment afforded certain of the
Bank's subsidiaries, and the positive impact of the Corporation's share
repurchase program. The earnings enhancement brought about by these items was
partially offset by a decrease in net interest yield and an increase in
personnel expense.
When comparing year-end balances, the Bank's mortgage loan portfolio grew
by 5.2% in 2000 as compared to 11.5% in 1999 and 8.8% in 1998. The 2000 growth
was comprised of an increase in commercial mortgages of 3.2% and an increase in
residential mortgages, including home equity loans and lines, of 7.4%. This
compares to increases of 7.6% for commercial mortgages and 15.9% for residential
mortgages in 1999. The decreased growth rate for residential mortgage loans
experienced in the 2000 year is believed to be partially attributable to an
increase in mortgage rates and a resulting reduction in the desire of customers
to refinance their existing residential mortgages. Commercial mortgages
continued to be the Bank's most important loan product.
The Bank's portfolios of tax-exempt and mortgage securities grew during
2000 while the U.S. Treasury portfolio declined. This occurred as a result of
management's efforts to take advantage of the better returns afforded by
municipal and mortgage securities relative to the Treasury sector. Savings and
money market deposits were up 7.9% when comparing year-end 2000 to 1999
primarily because of growth in "Select Savings". The Select Savings product is a
statement savings account that earns a higher money market rate.
2000 was a successful year from the standpoint of the Corporation's stock
repurchase program in that the Corporation was able to repurchase a bit more
than 84,000 shares of common stock, representing approximately 3% of total
shares outstanding at the beginning of the year. This compares to repurchases of
approximately 143,000 and 34,000 shares in 1999 and 1998, respectively. The
stock repurchase program has been used by management to enhance earnings per
share and return on average stockholders' equity (ROE). The stock repurchase
program is estimated to have contributed approximately 6 cents of the 23 cent
increase in earnings per share for 2000.
49
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.
2001 2000
-------------------------------- --------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- -------- ------- ----------- -------- -------
(dollars in thousands)
Assets:
Federal funds sold .............. $ 82,017 $ 3,291 4.01% $ 80,387 $ 5,044 6.27%
Investment securities:
Taxable ....................... 223,538 12,643 5.66 204,272 12,725 6.23
Nontaxable (1) ................ 114,982 8,038 6.99 96,141 6,832 7.11
Loans (1) (2) ................... 205,959 16,781 8.15 186,451 16,596 8.90
----------- ------- ------- ----------- ------- -------
Total interest-earning assets (1) 626,496 40,753 6.51 567,251 41,197 7.26
------- ------- ------- -------
Allowance for loan losses ....... (1,941) (1,961)
----------- -----------
Net interest-earning assets ..... 624,555 565,290
Cash and due from banks ......... 24,472 22,026
Premises and equipment, net ..... 7,133 6,695
Other assets .................... 5,798 6,315
----------- -----------
$ 661,958 $ 600,326
=========== ===========
Liabilities and
Stockholders' Equity:
Savings and money
market deposits ............... $ 343,389 7,944 2.31 $ 303,530 11,127 3.67
Time deposits ................... 39,202 1,507 3.84 41,105 1,979 4.81
----------- ------- ------- ----------- ------- -------
Total interest-bearing deposits . 382,591 9,451 2.47 344,635 13,106 3.80
----------- ------- ------- ----------- ------- -------
Checking deposits (3) ........... 201,688 186,215
Other liabilities ............... 4,289 2,765
----------- -----------
588,568 533,615
Stockholders' equity ............ 73,390 66,711
----------- -----------
$ 661,958 $ 600,326
=========== ===========
Net interest income (1) ......... $31,302 $28,091
======= =======
Net interest spread (1) ......... 4.04% 3.46%
==== ====
Net interest yield (1) .......... 5.00% 4.95%
==== ====
1999
--------------------------------
Average Average
Balance Interest Rate
----------- -------- -------
Assets:
Federal funds sold .............. $ 69,860 $ 3,439 4.92%
Investment securities:
Taxable ....................... 192,824 11,646 6.04
Nontaxable (1) ................ 84,040 5,705 6.79
Loans (1) (2) ................... 176,078 15,171 8.62
----------- ------- -------
Total interest-earning assets (1) 522,802 35,961 6.88
------- -------
Allowance for loan losses ....... (2,835)
-----------
Net interest-earning assets ..... 519,967
Cash and due from banks ......... 20,954
Premises and equipment, net ..... 6,444
Other assets .................... 7,196
-----------
$ 554,561
===========
Liabilities and
Stockholders' Equity:
Savings and money
market deposits ............... $ 280,124 7,984 2.85
Time deposits ................... 37,617 1,529 4.06
----------- ------- -------
Total interest-bearing deposits . 317,741 9,513 2.99
----------- ------- -------
Checking deposits (3) ........... 168,791
Other liabilities ............... 2,623
-----------
489,155
Stockholders' equity ............ 65,406
-----------
$ 554,561
===========
Net interest income (1) ......... $26,448
=======
Net interest spread (1) ......... 3.89%
====
Net interest yield (1) .......... 5.06%
====
(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
Bank'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 year 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.
50
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.
Year Ended December 31,
-----------------------------------------------------------------------------------------
2001 versus 2000 2000 versus 1999
Increase (decrease) due to changes in: Increase (decrease) due to changes in:
------------------------------------------- -----------------------------------------
Rate/ Net Rate/ Net
Volume Rate Volume (2) Change Volume Rate Volume (2) Change
------- ------- ------- ------- ------- ------- ------- -------
(in thousands)
Interest Income:
Federal funds sold .................... $ 102 $(1,818) $ (37) $(1,753) $ 518 $ 944 $ 143 $ 1,605
Investment securities:
Taxable ............................. 1,200 (1,172) (110) (82) 691 366 22 1,079
Nontaxable (1) ...................... 1,339 (111) (22) 1,206 821 267 39 1,127
Loans (1) ............................. 1,736 (1,404) (147) 185 894 502 29 1,425
------- ------- ------- ------- ------- ------- ------- -------
Total interest income ................. 4,377 (4,505) (316) (444) 2,924 2,079 233 5,236
------- ------- ------- ------- ------- ------- ------- -------
Interest Expense:
Savings and money
market deposits ..................... 1,461 (4,105) (539) (3,183) 667 2,285 191 3,143
Time deposits ......................... (92) (399) 19 (472) 142 282 26 450
------- ------- ------- ------- ------- ------- ------- -------
Total interest expense ................ 1,369 (4,504) (520) (3,655) 809 2,567 217 3,593
------- ------- ------- ------- ------- ------- ------- -------
Increase (decrease) in net
interest income ..................... $ 3,008 $ (1) $ 204 $ 3,211 $ 2,115 $ (488) $ 16 $ 1,643
======= ======= ======= ======= ======= ======= ======= =======
(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 - 2001 Versus 2000
Net interest income on a tax-equivalent basis increased by $3,211,000, or
11.4%, from $28,091,000 in 2000 to $31,302,000 in 2001. As can be seen from the
above rate/volume analysis, the increase is primarily comprised of a positive
volume variance of $3,008,000 and a positive rate/volume variance of $204,000.
The positive volume variance was largely caused by: (1) growth in average
checking deposits and the use of such funds to purchase investment securities
and originate loans; and (2) growth in money market type deposits and the use of
such funds to increase the Bank's overnight position in federal funds sold and
to purchase securities and originate loans. When comparing 2001 to 2000, average
checking deposits increased by $15,473,000, or 8.3%, average savings and money
market deposits increased by $39,859,000, or 13.1%, average loans increased by
$19,508,000, or 10.5%, and average investment securities increased by
$38,107,000, or 12.7%. The growth in loans was largely comprised of increases in
residential mortgages, including home equity loans, and commercial loans, with
the commercial loan growth having the largest positive impact on net interest
income.
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 2001 to
2000, 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 both checking
and interest-bearing deposits is also believed to be attributable to the Bank's
attention to customer service and local economic conditions.
51
The Bank's net interest spread and yield increased from 3.46% and 4.95%,
respectively, in 2000 to 4.04% and 5.00%, respectively, in 2001. It would appear
that the principal cause of the increase in net interest spread was the
significant decline in short-term interest rates experienced during 2001, and
the principal cause of the increase in net interest margin was a change in the
mix of investments. Federal funds sold, which is the Bank's lowest yielding
investment, became a smaller percentage of total interest-earning assets and
nontaxable securities, a higher yielding investment, became a larger percentage.
During 2001, both the federal funds target rate and the Bank's prime
lending rate decreased by 475 basis points. As more fully discussed in the
Market Risk section of this discussion and analysis of financial condition and
results of operations, a decline in interest rates should initially have a
positive impact on net interest income. However, net interest income in 2001 was
not positively impacted by declining interest rates because the Bank did 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 rate.
Net Interest Income - 2000 Versus 1999
Net interest income on a tax-equivalent basis increased by $1,643,000, or
6.2%, from $26,448,000 in 1999 to $28,091,000 in 2000. As can be seen from the
above rate/volume analysis, the increase is primarily comprised of a positive
volume variance of $2,115,000 and a negative rate variance of $488,000.
The positive volume variance was largely caused by growth in average
checking deposits and the use of such funds to purchase investment securities
and originate loans. When comparing 2000 to 1999, average checking deposits
increased by $17,424,000, or 10.3%. Also making a significant contribution to
the positive volume variance was growth in the overall balance of money market
type products and the use of such funds to purchase investment securities,
originate loans, and increase the Bank's overnight position in federal funds
sold. When comparing 2000 to 1999, the average balance for money market type
products increased by $25,340,000, or 10.7%.
The Bank's new business program is a significant factor that favorably
impacted the growth in average checking balances noted when comparing 2000 to
1999, 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 both checking
and interest-bearing deposits is also believed to be attributable to the Bank's
attention to customer service and local economic conditions.
During the latter half of 1999 and the first half of 2000, there was an
escalation in short-term interest rates as evidenced by a 175 basis point
increase in the federal funds target rate. In addition, despite rising interest
rates, the yield on the Bank's mortgage loan portfolio was substantially
unchanged. This occurred because the origination and repricing of mortgage loans
during the period at current rates did not favorably impact the overall yield on
the portfolio. These factors contributed to the reduction in the Bank's net
interest spread and yield from 3.89% and 5.06%, respectively, in 1999 to 3.46%
and 4.95%, respectively, in 2000.
As more fully discussed in the Market Risk section of this discussion and
analysis of financial condition and results of operations, an increase in
interest rates should initially have a negative impact on net interest income.
However, over the longer term, the impact should be positive.
Noninterest Income, Noninterest Expense, and Income Taxes
Noninterest income includes service charges on deposit accounts, Trust
Department 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. Noninterest income was $4,949,000, $4,525,000,
and $4,966,000 in 2001, 2000, and 1999, respectively. The 9.4% increase in
noninterest income in 2001 is primarily attributable to revisions made to the
Bank's service charge schedule in the third quarter of 2000 and the resulting
impact on overdraft check charges and maintenance/activity charges. The 8.9%
decrease in noninterest income in 2000 is primarily attributable to $229,000 in
losses realized on sales of available-for-sale securities and the loss of
several accounts that incurred large maintenance/activity and overdraft check
charges. The securities losses in 2001 and 2000 resulted from the execution of
loss programs in which the Bank sold municipal securities with an amortized cost
of approximately $5.5 million and $7.7 million, respectively, and then purchased
higher-yielding replacement securities of the same type and slightly longer
duration. The after-tax losses realized in 2001 and 2000 will be more than
offset by the impact of higher future yields.
52
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 was
$19,767,000 and $17,567,000 in 2001 and 2000, respectively, representing
increases over prior year amounts of $2,200,000, or 12.5%, and $1,246,000, or
7.6%. The increase for 2001 is comprised of an increase in salaries of $822,000,
or 10.1%, an increase in employee benefits expense of $413,000, or 12.8%, an
increase in occupancy and equipment expense of $409,000, or 17%, and an increase
in other operating expenses of $556,000, or 14.6%. The increase in salaries is
attributable to normal annual salary adjustments, filling of staff vacancies,
and additions to staff resulting from, among other things, the opening of three
new branch offices in the latter part of 2000 and one new branch office in the
early part of 2001. The increase in employee benefits expense is largely
attributable to the increased number of employees, an increase in retirement
plan expense resulting from decreased interest rates and lower returns on
retirement plan assets, revisions made to the Bank's incentive compensation
program, and an increase in medical insurance premiums. The increase in
occupancy and equipment expense is primarily attributable to increases in
depreciation and rental expense resulting from recent improvements in technology
and new branch openings, respectively. A substantial portion of the increase in
other operating expenses resulted from increases in mortgage recording tax,
appraisal fees, stationery and supplies expense, marketing expense, and charges
associated with the January 2002 closing of the Bank's Cross Island Plaza
branch. The increases in mortgage recording tax and appraisal fees resulted from
increased mortgage origination activity and the increase in stationery and
supplies expense is partially attributable to the new branch openings and form
changes necessitated by the implementation of imaging technology.
The increase in noninterest expense for 2000 is primarily comprised of an
increase in salaries of $450,000, or 5.9%, an increase in employee benefits
expense of $533,000, or almost 20%, and an increase in occupancy and equipment
expense of $222,000, or approximately 10%. The increase in salaries is largely
attributable to normal annual salary increases and new branch openings. The
increase in employee benefits expense is primarily attributable to higher
retirement plan expense caused by, among other things, growth in salaries of
retirement plan participants, the negative impact of changing interest rates on
required employer contributions, and an accrual for directors' retirement
benefits. The increase in occupancy and equipment expense in 2000 is largely
attributable to an increase in depreciation expense resulting from significant
capital expenditures made in 1999 and 2000 and the new branch openings.
Income tax expense as a percentage of book income was 25.9%, 26.9%, and
31.0% in 2001, 2000, and 1999, respectively. The decrease in the percentage for
2001 is primarily attributable to an increase in the amount of tax-exempt income
on municipal securities and increased funding by the Bank of its REIT (real
estate investment trust) and investment subsidiaries. The decrease in the
percentage for 2000 is primarily attributable to an increase in the amount of
tax-exempt income on municipal securities, the establishment and funding by the
Bank of its REIT subsidiary, and the funding by the Bank of its investment
subsidiary.
Allowance and Provision For Loan Losses
The allowance for loan losses was $2,020,000, or .9% of total loans, at
December 31, 2001 as compared to $1,943,000, or 1% of total loans, at December
31, 2000. The change in the allowance during 2001 is due to a $100,000 provision
for loan losses, chargeoffs of $52,000, and recoveries of $29,000.
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, 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
53
approximately 79% of total loans outstanding at December 31, 2001. 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.
Asset Quality
The Corporation has identified certain assets as risk elements. These
assets present more than the normal risk that the Bank will be unable to
eventually collect or realize their full carrying value. The Corporation's risk
elements at December 31, 2001 and 2000 are as follows:
2001 2000
---------- ----------
(dollars in thousands)
Nonaccruing loans ............................................ $ 105 $ --
Foreclosed real estate ....................................... -- --
---------- ----------
Total nonperforming assets ................................. 105 --
Troubled debt restructurings ................................. 10 --
Loans past due 90 days or more as to
principal or interest payments and still accruing .......... 236 173
---------- ----------
Total risk elements ........................................ $ 351 $ 173
========== ==========
Nonaccruing loans as a percentage of total loans ............. .05% .00%
========== ==========
Nonperforming assets as a percentage of total loans
and foreclosed real estate ................................. .05% .00%
========== ==========
Risk elements as a percentage of total loans and
foreclosed real estate ..................................... .15% .09%
========== ==========
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 29.22%, 28.44% and 10.63%, respectively, at December
31, 2001 substantially exceed the requirements for a well-capitalized bank.
During the 2001 year, total stockholders' equity increased by $3,880,000
from $70,866,000 at December 31, 2000 to $74,746,000 at December 31, 2001. The
increase in stockholders' equity is primarily attributable to net income of
$10,094,000 less repurchases of common stock amounting to $4,698,000 and less
cash dividends declared of $2,281,000.
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. The Board of Directors
approved two stock repurchase plans in 2001, each for 50,000 shares. Total
shares purchased in 2001 were 118,951, of which 64,308 were purchased under
plans approved in 2000. As of December 31, 2001, there were 52,210 shares that
could be purchased under the plans approved in 2001.
Cash Flows and Liquidity
Cash Flows. As shown in the consolidated statement of cash flows, cash and
cash equivalents declined by $56,463,000 during 2001 primarily because the cash
provided by deposit growth and operations was less than the cash used to make
loans, purchase securities, pay dividends, and repurchase common stock. During
2001, loan and securities portfolio growth required cash of $33,802,000 and
$80,349,000, respectively. Securities portfolio growth was significantly
impacted by the purchase of "Short-Term" (maturities within two years) U.S.
Treasury securities as an alternative to the overnight sale of federal funds.
The Bank had $96,132,000 in Short-Term U.S. Treasury securities and $27,000,000
in overnight funds sales at December 31, 2001 as compared to $7,495,000 and
$87,800,000, respectively, at December 31, 2000. Purchases and maturities of
short-term commercial paper account for a significant portion of the
54
cash used to purchase held-to-maturity securities and cash proceeds from the
maturity of held-to-maturity securities as shown in the consolidated statement
of cash flows.
As reflected in the accompanying consolidated balance sheet, the
$54,398,000 growth in deposits from year-end 2000 to year-end 2001 is comprised
of an increase in checking deposits of $27,205,000, or 13.9%, and an increase in
total interest-bearing deposits of $27,193,000, or 7.7%. The increase in
interest-bearing deposits is primarily attributable to growth in money market
type savings balances.
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 loan
portfolio; and longer-term investment securities designated as
available-for-sale. At December 31, 2001, the Corporation had $27,000,000 in
federal funds sales, short-term securities not subject to pledge agreements of
$99,096,000, and longer-term available-for-sale securities not subject to pledge
agreements of $71,564,000. The Corporation's liquidity is enhanced by its stable
deposit base which primarily consists of checking, savings and money market
accounts. Such accounts comprised 94.3% of total deposits at December 31, 2001,
while time deposits of $100,000 and over and other time deposits comprised only
2.2% and 3.5%, 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 as a funding source. 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 (defined below) 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. 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 rate, the magnitude of the positive impact will
decline and the positive impact may even be eliminated. 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 eventually be negative
because 39% of the Bank's average interest-earning assets are funded by
noninterest-bearing checking deposits and capital.
The Bank monitors and controls interest rate risk through a variety of
techniques including the use of interest rate sensitivity models and traditional
interest rate sensitivity gap analysis. 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 ("NPV") over a range of interest rate change scenarios. Net
portfolio value is the present value of expected future cash flows from assets
less the present value of expected cash flows from liabilities. Traditional gap
analysis involves arranging the Bank's interest-earning assets and
interest-bearing liabilities by repricing periods and then computing the
difference, or interest-rate sensitivity gap, between the assets and liabilities
which are estimated to reprice during each time period and cumulatively through
the end of each time period.
Both interest rate sensitivity modeling and gap analysis involve a variety
of significant estimates and assumptions and are done at a specific point in
time. Interest rate sensitivity modeling requires, among other things, estimates
of: (1) how
55
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.
Gap analysis requires estimates as to when individual categories of
interest-sensitive assets and liabilities will reprice and assumes that assets
and liabilities assigned to the same repricing period will reprice at the same
time and in the same amount. Like sensitivity modeling, gap analysis does not
fully take into account the fact that the repricing of some assets and
liabilities is discretionary and subject to competitive and other pressures.
Changes in the estimates and assumptions made for interest rate sensitivity
modeling and gap analysis could have a significant impact on projected results
and conclusions. Therefore, these techniques may not accurately reflect the
actual impact of general interest rate movements on the Bank's net interest
income or net portfolio value.
The following table is provided pursuant to the market risk disclosure
rules set forth in Item 305 of Regulation S-K of the Securities and Exchange
Commission. The information provided in the 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 NPV at December 31, 2001
arrived at by discounting estimated future cash flows at current market rates
and (2) an estimate of net interest income for 2002 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
NPV at December 31, 2001 and net interest income for 2002 assuming rate changes
of plus 100 and 200 basis points and minus 100 and 200 basis points. 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 below, 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 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 and the negative
impact may even be eliminated. 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.
Net Portfolio Value (NPV) Net Interest Income
at December 31, 2001 for 2002
-------------------------- -------------------------
Percent Percent
Change Change
From From
Rate Change Scenario Amount Base Case Amount Base Case
- --------------------------------------------- ------- --------- ------- ---------
(dollars in thousands)
+ 200 basis point rate shock ................ $55,393 (32.6)% $26,233 (12.3)%
+ 100 basis point rate shock ................ 68,454 (16.7) 28,074 (6.2)
Base case (no rate change)................ 82,181 -- 29,916 --
- - 100 basis point rate shock ................ 96,666 17.6 31,250 4.5
- - 200 basis point rate shock ................ 111,954 36.2 30,387 1.6
56
The following table summarizes the Corporation's cumulative interest rate
sensitivity gap at December 31, 2001 based upon significant estimates and
assumptions that the Corporation believes to be reasonable.
Repricing Date
--------------------------------------------------------------------------------------------
Over Over Over
Three Six One Year
Three Months Months Total Through Over Non-
Months Through Through Within Five Five interest-
or Less Six Months One Year One Year Years Years Sensitive Total
--------- --------- --------- --------- --------- --------- --------- ---------
(in thousands)
Assets:
Federal funds sold ............... $ 27,000 $ -- $ -- $ 27,000 $ -- $ -- $ -- $ 27,000
Investment securities ............ 43,522 16,782 36,528 96,832 186,999 105,038 1,621 390,490
Loans ............................ 84,220 15,348 30,694 130,262 71,374 24,459 (1,427) 224,668
Other assets ..................... -- -- -- -- -- -- 41,923 41,923
--------- --------- --------- --------- --------- --------- --------- ---------
154,742 32,130 67,222 254,094 258,373 129,497 42,117 684,081
--------- --------- --------- --------- --------- --------- --------- ---------
Liabilities and Stockholders' Equity:
Checking deposits ................ -- -- -- -- -- -- 222,822 222,822
Savings and money market deposits 257,562 7,294 10,632 275,488 29,833 42,109 -- 347,430
Time deposits .................... 22,612 5,971 4,469 33,052 1,534 32 -- 34,618
Other liabilities ................ -- -- -- -- -- -- 4,465 4,465
Stockholders' equity ............. -- -- -- -- -- -- 74,746 74,746
--------- --------- --------- --------- --------- --------- --------- ---------
280,174 13,265 15,101 308,540 31,367 42,141 302,033 684,081
--------- --------- --------- --------- --------- --------- --------- ---------
Interest-rate sensitivity gap ....... $(125,432) $ 18,865 $ 52,121 $ (54,446) $ 227,006 $ 87,356 $(259,916) $ --
========= ========= ========= ========= ========= ========= ========= =========
Cumulative interest-rate
sensitivity gap .................... $(125,432) $(106,567) $ (54,446) $ (54,446) $ 172,560 $ 259,916 $ -- $ --
========= ========= ========= ========= ========= ========= ========= =========
Regulatory Matters
Pending Legislation. Commercial checking deposits currently account for
approximately 27% of the Bank's total deposits. Congress is currently
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.
Examinations. The subsidiary Bank was examined by the Office of the
Comptroller of the Currency in the first quarter of 2001. The examination was a
regularly scheduled safety and soundness examination. Management is not aware,
nor has it been apprised, of any recommendations by regulatory authorities that
would have a material adverse impact on the Corporation's liquidity, capital
resources, or operations.
New Accounting Pronouncements
A discussion of new accounting pronouncements is included in Note A to the
Corporation's consolidated financial statements.
Forward Looking Statements
With respect to financial performance and business matters, Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains various "forward-looking statements" within the meaning of that term as
set forth in Rule 175 of the Securities Act of 1933 and Rule 3b-6 of the
Securities Act of 1934. Such statements are generally contained in sentences
including the words "may" or "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.
57
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of The First of Long Island Corporation is responsible for
the preparation of the consolidated financial statements, related financial data
and other information in this annual report. The consolidated financial
statements are prepared in accordance with generally accepted accounting
principles and include amounts based on management's estimates and judgment
where appropriate. Financial information appearing throughout this annual report
is consistent with the consolidated financial statements.
In meeting its responsibility both for the reliability and integrity of
these statements and information, management depends on its accounting systems
and related internal control structures. These systems and controls have been
designed to provide reasonable assurances that assets are safeguarded and that
transactions are authorized and recorded in accordance with established
procedures and that reliable records are maintained. As an integral part of the
internal control structure, the Corporation maintains a staff of internal
auditors who monitor compliance with and assess the effectiveness of the
internal control structure and coordinate audit coverage with the independent
auditors.
The Corporation's Examining Committee of the Board of Directors, composed
solely of outside directors, meets regularly with the Corporation's internal
auditors, independent auditors and regulatory examiners to review matters
relating to financial reporting, internal control structure and the nature,
extent and results of the audit effort. The independent auditors, internal
auditors and banking regulators have direct access to the Examining Committee
with or without management present.
The consolidated financial statements for each of the three years in the
period ended December 31, 2001 have been audited by Arthur Andersen LLP,
independent public accountants, who render an independent professional opinion
on management's consolidated financial statements. Their appointment was
approved by the Board of Directors. The examinations provide an objective
assessment of the degree to which the Corporation's management meets its
responsibility for financial reporting. Their opinion on the consolidated
financial statements is based on auditing procedures which include reviewing
internal control structures and performing selected tests of transactions and
records as deemed appropriate. These auditing procedures are designed to provide
a reasonable level of assurance that the consolidated financial statements are
fairly presented in all material respects.
58
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------------
2001 2000
------------- -------------
Assets:
Cash and due from banks ................................................. $ 28,209,000 $ 23,872,000
Federal funds sold ...................................................... 27,000,000 87,800,000
------------- -------------
Cash and cash equivalents ............................................. 55,209,000 111,672,000
------------- -------------
Investment securities:
Held-to-maturity, at amortized cost (fair
value of $257,670,000 and $229,045,000) .......................... 252,215,000 226,361,000
Available-for-sale, at fair value (amortized cost
of $136,654,000 and $82,582,000) ................................. 138,275,000 83,680,000
------------- -------------
390,490,000 310,041,000
------------- -------------
Loans:
Commercial and industrial ........................................... 40,993,000 30,514,000
Secured by real estate .............................................. 179,905,000 155,283,000
Consumer ............................................................ 6,198,000 7,504,000
Other ............................................................... 593,000 560,000
------------- -------------
227,689,000 193,861,000
Unearned income ..................................................... (1,001,000) (952,000)
------------- -------------
226,688,000 192,909,000
Allowance for loan losses ........................................... (2,020,000) (1,943,000)
------------- -------------
224,668,000 190,966,000
------------- -------------
Bank premises and equipment, net ........................................ 7,156,000 7,021,000
Prepaid income taxes .................................................... 1,000 --
Other assets ............................................................ 6,557,000 6,292,000
------------- -------------
$ 684,081,000 $ 625,992,000
============= =============
Liabilities:
Deposits:
Checking ............................................................ $ 222,822,000 $ 195,617,000
Savings and money market ............................................ 347,430,000 310,681,000
Time, other ......................................................... 21,022,000 24,255,000
Time, $100,000 and over ............................................. 13,596,000 19,919,000
------------- -------------
604,870,000 550,472,000
Accrued expenses and other liabilities .................................. 3,968,000 4,137,000
Current income taxes payable ............................................ -- 91,000
Deferred income taxes payable ........................................... 497,000 426,000
------------- -------------
609,335,000 555,126,000
------------- -------------
Commitments and Contingent Liabilities (Note G)
Stockholders' Equity:
Common stock, par value $.10 per share:
Authorized, 20,000,000 shares;
Issued and outstanding, 2,792,902 and 2,892,549 shares .............. 279,000 289,000
Surplus ................................................................. 955,000 1,188,000
Retained earnings ....................................................... 72,550,000 68,737,000
------------- -------------
73,784,000 70,214,000
Accumulated other comprehensive income net of tax ....................... 962,000 652,000
------------- -------------
74,746,000 70,866,000
------------- -------------
$ 684,081,000 $ 625,992,000
============= =============
See notes to consolidated financial statements
59
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
--------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Interest income:
Loans .................................................................. $ 16,750,000 $ 16,544,000 $ 15,113,000
Investment securities:
Taxable ............................................................ 12,643,000 12,725,000 11,646,000
Nontaxable ......................................................... 5,305,000 4,509,000 3,765,000
Federal funds sold ..................................................... 3,291,000 5,044,000 3,439,000
------------ ------------ ------------
37,989,000 38,822,000 33,963,000
------------ ------------ ------------
Interest expense:
Savings and money market deposits ...................................... 7,944,000 11,127,000 7,984,000
Time deposits .......................................................... 1,507,000 1,979,000 1,529,000
------------ ------------ ------------
9,451,000 13,106,000 9,513,000
------------ ------------ ------------
Net interest income ................................................ 28,538,000 25,716,000 24,450,000
Provision for loan losses (credit) ......................................... 100,000 (75,000) --
------------ ------------ ------------
Net interest income after provision for loan losses (credit) ............... 28,438,000 25,791,000 24,450,000
------------ ------------ ------------
Noninterest income:
Trust Department income ................................................ 1,081,000 1,131,000 1,153,000
Service charges on deposit accounts .................................... 3,481,000 2,972,000 3,258,000
Net losses on sales of available-for-sale securities ................... (249,000) (229,000) --
Other .................................................................. 636,000 651,000 555,000
------------ ------------ ------------
4,949,000 4,525,000 4,966,000
------------ ------------ ------------
Noninterest expense:
Salaries ............................................................... 8,958,000 8,136,000 7,686,000
Employee benefits ...................................................... 3,628,000 3,215,000 2,682,000
Occupancy and equipment expense ........................................ 2,819,000 2,410,000 2,188,000
Other operating expenses ............................................... 4,362,000 3,806,000 3,765,000
------------ ------------ ------------
19,767,000 17,567,000 16,321,000
------------ ------------ ------------
Income before income taxes and transition
adjustment to allowance for loan losses .......................... 13,620,000 12,749,000 13,095,000
Income tax expense ......................................................... 3,526,000 3,431,000 4,061,000
------------ ------------ ------------
Net income before transition adjustment to
allowance for loan losses ..................................... 10,094,000 9,318,000 9,034,000
Transition adjustment to allowance for loan
losses, net of income taxes of $655,000 .................................. -- -- 945,000
------------ ------------ ------------
Net Income ......................................................... $ 10,094,000 $ 9,318,000 $ 9,979,000
============ ============ ============
Weighted average:
Common shares .......................................................... 2,844,076 2,922,345 3,041,536
Dilutive stock options ................................................. 39,525 39,402 50,137
------------ ------------ ------------
2,883,601 2,961,747 3,091,673
============ ============ ============
Earnings per share before transition
adjustment to allowance for loan losses:
Basic .................................................................. $3.55 $3.19 $2.97
============ ============ ============
Diluted ................................................................ $3.50 $3.15 $2.92
============ ============ ============
Earnings per share:
Basic .................................................................. $3.55 $3.19 $3.28
============ ============ ============
Diluted ................................................................ $3.50 $3.15 $3.23
============ ============ ============
See notes to consolidated financial statements
60
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
Accumulated
Other
Common Stock Compre- Compre-
------------------------ hensive Retained hensive
Shares Amount Surplus Income Earnings Income (Loss) Total
--------- ------------ ----------- ----------- ------------ ------------ ------------
Balance, January 1, 1999 ....... 3,095,971 $ 310,000 $ 4,219,000 $ 57,949,000 $ 1,266,000 $ 63,744,000
Net Income .................... $ 9,979,000 9,979,000 9,979,000
Repurchase and retirement
of common stock .............. (142,797) (15,000) (5,101,000) (5,116,000)
Exercise of stock options ..... 9,629 1,000 136,000 137,000
Unrealized losses on available-
for-sale-securities, net of
tax of $1,803,000 ........... (2,600,000) (2,600,000) (2,600,000)
------------
Comprehensive income .......... $ 7,379,000
============
Cash dividends declared -
$.64 per share ............... (1,915,000) (1,915,000)
Tax benefit of stock options .. 4,000 4,000
Transfer from retained
earnings to surplus .......... 3,000,000 (3,000,000)
--------- ------------ ----------- ------------ ------------ ------------
Balance, December 31, 1999 ..... 2,962,803 296,000 2,258,000 63,013,000 (1,334,000) 64,233,000
Net Income .................... $ 9,318,000 9,318,000 9,318,000
Repurchase and retirement
of common stock .............. (84,435) (8,000) (2,811,000) (2,819,000)
Exercise of stock options ..... 14,181 1,000 222,000 223,000
Unrealized gains on available-
for-sale-securities, net of
tax of $1,372,000 ........... 1,986,000 1,986,000 1,986,000
------------
Comprehensive income .......... $ 11,304,000
============
Cash dividends declared -
$.72 per share ............... (2,094,000) (2,094,000)
Tax benefit of stock options .. 19,000 19,000
Transfer from retained
earnings to surplus .......... 1,500,000 (1,500,000)
--------- ------------ ----------- ------------ ------------ ------------
Balance, December 31, 2000 ..... 2,892,549 289,000 1,188,000 68,737,000 652,000 70,866,000
Net Income .................... $ 10,094,000 10,094,000 10,094,000
Repurchase and retirement
of common stock .............. (118,951) (12,000) (4,686,000) (4,698,000)
Exercise of stock options ..... 19,304 2,000 418,000 420,000
Unrealized gains on available-
for-sale-securities, net of
tax of $213,000 ............. 310,000 310,000 310,000
------------
Comprehensive income .......... $ 10,404,000
============
Cash dividends declared -
$.81 per share ............... (2,281,000) (2,281,000)
Tax benefit of stock options .. 35,000 35,000
Transfer from retained
earnings to surplus .......... 4,000,000 (4,000,000)
--------- ------------ ----------- ------------ ------------ ------------
Balance, December 31, 2001 ..... 2,792,902 $ 279,000 $ 955,000 $ 72,550,000 $ 962,000 $ 74,746,000
========= ============ =========== ============ ============ ============
See notes to consolidated financial statements
61
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------------------------
2001 2000 1999
------------- ------------- -------------
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows From Operating Activities:
Net income ................................................................. $ 10,094,000 $ 9,318,000 $ 9,979,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses (credit) ..................................... 100,000 (75,000) --
Transition adjustment to allowance for loan losses, net of
income taxes .......................................................... -- -- (945,000)
Deferred income tax provision (credit) ................................. (142,000) 252,000 67,000
Depreciation and amortization .......................................... 1,166,000 918,000 801,000
Premium amortization (discount accretion) on investment securities,
net ................................................................... 174,000 (243,000) 868,000
Net losses on sales of available-for-sale securities ................... 249,000 229,000 --
Decrease (increase) in prepaid income taxes ............................ 34,000 194,000 (37,000)
Increase in other assets ............................................... (265,000) (656,000) (147,000)
Increase (decrease) in accrued expenses and other liabilities .......... (270,000) 915,000 (101,000)
Increase (decrease) in income taxes payable ............................ (91,000) 110,000 --
------------- ------------- -------------
Net cash provided by operating activities ............................ 11,049,000 10,962,000 10,485,000
------------- ------------- -------------
Cash Flows From Investing Activities:
Proceeds from sales of available-for-sale securities ....................... 5,270,000 7,423,000 --
Proceeds from maturities and redemptions of investment securities:
Held-to-maturity ........................................................... 391,181,000 229,246,000 67,042,000
Available-for-sale ......................................................... 15,003,000 13,765,000 9,718,000
Purchase of investment securities:
Held-to-maturity ........................................................... (416,922,000) (250,235,000) (69,999,000)
Available-for-sale ......................................................... (74,881,000) (16,005,000) (28,241,000)
Net increase in loans to customers ......................................... (33,802,000) (10,150,000) (12,074,000)
Purchases of bank premises and equipment ................................... (1,301,000) (1,193,000) (1,235,000)
------------- ------------- -------------
Net cash used in investing activities .................................... (115,452,000) (27,149,000) (34,789,000)
------------- ------------- -------------
Cash Flows From Financing Activities:
Net increase in total deposits ............................................. 54,398,000 47,283,000 23,958,000
Proceeds from exercise of stock options .................................... 420,000 223,000 137,000
Repurchase and retirement of common stock .................................. (4,698,000) (2,819,000) (5,116,000)
Cash dividends paid ........................................................ (2,180,000) (2,002,000) (1,837,000)
------------- ------------- -------------
Net cash provided by financing activities ............................ 47,940,000 42,685,000 17,142,000
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ......................... (56,463,000) 26,498,000 (7,162,000)
Cash and cash equivalents, beginning of year ................................. 111,672,000 85,174,000 92,336,000
------------- ------------- -------------
Cash and cash equivalents, end of year ...................................... $ 55,209,000 $ 111,672,000 $ 85,174,000
============= ============= =============
Supplemental Schedule of Noncash:
Investing Activities
Unrealized gains (losses) on available-for-sale securities ............... $ 523,000 $ 3,358,000 $ (4,403,000)
Transfer of available-for-sale securities to held-to-maturity category ... -- 14,836,000 --
Financing Activities
Tax benefit from exercise of employee stock options ...................... 35,000 19,000 4,000
Cash dividends payable ................................................... 1,200,000 1,099,000 1,007,000
The Corporation made interest payments of $9,632,000, $13,016,000, and
$9,523,000 and income tax payments of $3,726,000, $2,875,000, and $4,031,000 in
2001, 2000 and 1999, respectively.
See notes to consolidated financial statements
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of The First of
Long Island Corporation (the "Corporation") and its wholly-owned subsidiary, The
First National Bank of Long Island (the "Bank"). The Corporation's financial
condition and operating results principally reflect those of the Bank. All
intercompany balances and amounts have been eliminated. 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. Actual results could differ significantly from those
estimates.
The accounting and reporting policies of the Corporation reflect banking
industry practice and conform to generally accepted accounting principles. The
following is a summary of the significant accounting policies.
Investment Securities
Current accounting standards require that investment securities be
classified as held-to-maturity, trading, or available-for-sale. The trading
category is not applicable to any securities in the Bank's portfolio because the
Bank does not buy or hold debt or equity securities principally for the purpose
of selling in the near term. Held-to-maturity securities are those debt
securities which the Bank has the intent and expected ability to hold to
maturity, and are reported at amortized cost. Available-for-sale securities are
those debt and equity securities which are neither held-to-maturity securities
nor trading securities and are reported at fair value, with unrealized gains and
losses, net of the related income tax effect, included in accumulated other
comprehensive income. Realized gains and losses on the sale of
available-for-sale securities are determined using the specific identification
method.
Loans and Allowance For Loan Losses
Loans are reported at their outstanding principal balance less any
chargeoffs, the allowance for loan losses, and any unearned income. Interest on
loans is credited to income based on the principal amount outstanding. Unearned
discounts are recognized as income over the terms of the loans by the interest
method. Nonrefundable loan origination fees are deferred and amortized as yield
adjustments over the lives of the related loans.
The accrual of interest income is generally discontinued when a loan
becomes 90 days past due as to principal or interest payments. In addition, any
accrued but unpaid interest is reversed against current period income. The Bank
considers nonaccruing loans to be impaired under Statement of Financial
Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan"
("SFAS No. 114"). The valuation allowance for nonaccrual and other impaired
loans is reported within the overall allowance for loan losses.
The allowance for loan losses is established through provisions for loan
losses charged against income. Amounts deemed to be uncollectible are charged
against the allowance for loan losses, and subsequent recoveries, if any, are
credited to the allowance.
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, 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.
Bank Premises and Equipment
Bank premises and equipment are carried at cost, less accumulated
depreciation and amortization. Buildings are depreciated using the straight-line
method over their estimated useful lives which range between thirty-one and
forty years. Building improvements are depreciated using the straight-line
method over the then remaining lives of the buildings. Leasehold improvements
are amortized using the straight-line method over the remaining lives of the
leases or their estimated useful lives, whichever is shorter. The lives of the
respective leases range between seven and ten years. Furniture, fixtures, and
equipment are depreciated over their estimated useful lives which range between
three and seven
63
years. The straight-line method of depreciation is used for furniture, fixtures,
and equipment acquired after 1997 and the 150% declining balance method is used
for all other assets.
Checking Deposits
Each of the Bank's commercial checking accounts has a related
noninterest-bearing sweep account. The sole purpose of the sweep accounts is to
reduce the noninterest-bearing reserve balances that the Bank is required to
maintain with the Federal Reserve Bank, and thereby increase funds available for
investment. Although the sweep accounts are classified as savings accounts for
regulatory purposes, they are included in checking deposits in the accompanying
consolidated balance sheets.
Income Taxes
A current tax liability or asset is recognized for the estimated taxes
payable or refundable on tax returns for the current year. A deferred tax
liability or asset is recognized for the estimated future tax effects
attributable to temporary differences and carryforwards. The measurement of
deferred tax assets is reduced, if necessary, by the amount of any tax benefits
that, based on available evidence, are not expected to be realized. The
measurement of current and deferred tax liabilities and assets is based on
provisions of the enacted tax law. The effects of future changes in tax laws or
rates are not considered.
Fair Values of Financial Instruments
The following methods and assumptions are used by the Corporation in
estimating fair values of financial instruments as disclosed herein.
Cash and cash equivalents. The recorded book value of cash and cash
equivalents is their fair value.
Investment securities. For investment securities other than commercial
paper, fair values are based on quoted market prices. All of the commercial
paper in the Bank's investment portfolio as of December 31, 2001 and 2000 had a
remaining maturity of less than thirty days. For these short-term instruments,
the recorded book value is deemed to be a reasonable estimate of fair value.
Loans. Fair values are estimated for portfolios of loans with similar
financial characteristics. The total loan portfolio is first divided into
adjustable and fixed rate interest terms. For adjustable rate loans that are
subject to immediate repricing, the recorded book value less the related
allowance for loan losses is a reasonable estimate of fair value. For adjustable
rate loans that are subject to repricing over time and fixed rate loans, fair
value is calculated by discounting anticipated future repricing amounts or cash
flows using discount rates equivalent to the rates at which the Bank would
currently make loans which are similar with regard to collateral, maturity, and
the type of borrower. The discounted value of the repricing amounts and cash
flows is reduced by the related allowance for loan losses to arrive at an
estimate of fair value.
Deposit liabilities. The fair value of deposits with no stated maturity,
such as noninterest-bearing demand deposits, money market accounts, and savings
accounts, is equal to their recorded book value at December 31 of each year. The
fair value of time deposits is based on the discounted value of contractual cash
flows. The discount rate is equivalent to the rate currently offered by the Bank
for deposits of similar size, type and maturity.
Accrued interest receivable and payable. For these short-term instruments,
the recorded book value is a reasonable estimate of fair value.
Off-balance-sheet assets and liabilities. The fair value of
off-balance-sheet commitments to extend credit and letters of credit is
estimated using fees currently charged to enter into similar agreements.
Stockholders' Equity
Earnings Per Share. Basic earnings per share excludes dilution and is
computed by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted earnings per share, which reflects the
potential dilution that could occur if outstanding and exercisable stock options
were exercised and resulted in the issuance of common stock that then shared in
the earnings of the Corporation, is computed by dividing net income by the
weighted average number of common shares and dilutive stock options. Other than
stock options and the Rights described in Note H, the Corporation has no
securities that could be converted into common stock nor does the Corporation
have any contracts that could result in the issuance of common stock.
Stock Repurchase Program. Since 1988, the Corporation has had a stock
repurchase program under which it can purchase shares of its own common stock in
market or private transactions. As of December 31, 2001, and in accordance
64
with prior approval by its Board of Directors, the Corporation could purchase
52,210 shares of stock under the latest stock repurchase plans.
Comprehensive Income
Comprehensive income includes net income and all other changes in equity
during a period except those resulting from investments by owners and
distributions to owners. Other comprehensive income includes revenues, expenses,
gains, and losses that under generally accepted accounting principles are
included in comprehensive income but excluded from net income. Comprehensive
income and accumulated other comprehensive income are reported net of related
income taxes. Accumulated other comprehensive income for the Corporation
consists solely of unrealized holding gains or losses on available-for-sale
securities.
Stock-Based Compensation
The Corporation accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB No. 25") and related
Interpretations. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Corporation's stock at the
date of grant over the amount an employee must pay to acquire the stock.
Compensation costs for stock appreciation rights, if any, are recorded annually
based on the quoted market price of the Corporation's stock at the end of the
period.
Trust and Investment Services Division
Assets held in a fiduciary capacity are not assets of the Corporation and,
accordingly, are not included in the accompanying financial statements. Trust
fees are recorded on the accrual basis.
Report of Independent Public Accountants
The notes to consolidated financial statements include selected information
as of December 31, 1999, 1998 and 1997 and for the years ended December 31, 1998
and 1997 that is not covered by the Report of Independent Public Accountants.
This information has been presented in order to comply with the Form 10-K
reporting requirements.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
("SFAS No. 142"). This Statement addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in
financial statements upon their acquisition. This Statement also addresses how
goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. The provisions of this
Statement are required to be applied starting with fiscal years beginning after
December 15, 2001. The adoption of SFAS No. 142 and its application to amounts
currently included in the Corporation's balance sheet will not have a material
impact on the Corporation's accounting and disclosures.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143 "Accounting For Asset Retirement
Obligations" ("SFAS No. 143") and in August 2001 issued Statement of Financial
Accounting Standards No. 144 "Accounting For The Impairment and Disposal of
Long-Lived Assets" ("SFAS No. 144"). SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS No. 144, which
supersedes and amends certain existing accounting and reporting pronouncements,
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002 and SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001.
Neither of these pronouncements is currently applicable to the Corporation.
65
NOTE B - INVESTMENT SECURITIES
The following table sets forth the amortized cost and estimated fair values
of the Bank's investment securities at December 31, 2001, 2000 and 1999.
2001
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
(in thousands)
Held-to-Maturity Securities:
U.S. Treasury ...................................... $ 84,579 $ 1,526 $ -- $ 86,105
U.S. government agencies ........................... 30,430 586 (125) 30,891
Commercial paper ................................... 7,994 -- -- 7,994
Corporates ......................................... 2,970 194 -- 3,164
State and municipals ............................... 55,511 1,789 (97) 57,203
Collateralized mortgage obligations ................ 70,731 1,761 (179) 72,313
--------- --------- --------- ---------
$ 252,215 $ 5,856 $ (401) $ 257,670
========= ========= ========= =========
Available-for-Sale Securities:
U.S. Treasury ...................................... $ 67,223 $ 891 $ (10) $ 68,104
Corporates ......................................... 5,951 187 -- 6,138
State and municipals ............................... 63,353 837 (284) 63,906
Equity ............................................. 127 -- -- 127
--------- --------- --------- ---------
$ 136,654 $ 1,915 $ (294) $ 138,275
========= ========= ========= =========
2000
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
(in thousands)
Held-to-Maturity Securities:
U.S. Treasury ...................................... $ 56,172 $ 645 $ -- $ 56,817
U.S. government agencies ........................... 20,862 228 (125) 20,965
Commercial paper ................................... 22,962 -- -- 22,962
Corporates ......................................... 2,961 87 -- 3,048
State and municipals ............................... 57,747 1,510 (28) 59,229
Collateralized mortgage obligations ................ 65,657 640 (273) 66,024
--------- --------- --------- ---------
$ 226,361 $ 3,110 $ (426) $ 229,045
========= ========= ========= =========
Available-for-Sale Securities:
U.S. Treasury ...................................... $ 35,380 $ 358 $ -- $ 35,738
Corporates ......................................... 2,922 48 -- 2,970
State and municipals ............................... 44,153 722 (30) 44,845
Equity ............................................. 127 -- -- 127
--------- --------- --------- ---------
$ 82,582 $ 1,128 $ (30) $ 83,680
========= ========= ========= =========
1999
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
(in thousands)
Held-to-Maturity Securities:
U.S. Treasury ...................................... $ 62,288 $ 59 $ (353) $ 61,994
U.S. government agencies ........................... 20,998 52 (630) 20,420
Commercial paper ................................... 12,467 -- -- 12,467
State and municipals ............................... 35,107 200 (167) 35,140
Collateralized mortgage obligations ................ 59,138 17 (1,918) 57,237
--------- --------- --------- ---------
$ 189,998 $ 328 $ (3,068) $ 187,258
========= ========= ========= =========
Available-for-Sale Securities:
U.S. Treasury ...................................... $ 46,561 $ 67 $ (352) $ 46,276
State and municipals ............................... 56,437 41 (2,016) 54,462
Equity ............................................. 127 -- -- 127
--------- --------- --------- ---------
$ 103,125 $ 108 $ (2,368) $ 100,865
========= ========= ========= =========
At December 31, 2001 and 2000, investment securities with a carrying value
of $37,793,000 and $35,904,000, respectively, were pledged as collateral to
secure public deposits and for other purposes.
66
Maturities and Average Yields. The following table sets forth the
maturities and weighted average yields of the Bank's investment securities at
December 31, 2001.
Principal Maturing (1)
------------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
--------------- ----------------- ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(dollars in thousands)
Held-to-Maturity Securities:
U.S. Treasury ................................ $57,419 3.61% $27,160 5.11% $ -- --% $ -- --%
U.S. government agencies ..................... 185 6.22 4,594 6.47 8,140 6.31 17,511 5.93
Commercial paper ............................. 7,994 1.98 -- -- -- -- -- --
Corporates ................................... -- -- 1,983 7.44 -- -- 987 7.15
State and municipals (2) ..................... 5,397 7.38 19,220 7.26 23,056 7.43 7,838 7.49
Collateralized mortgage obligations .......... -- -- 1,434 6.15 8,416 6.35 60,881 6.28
------- ---- ------- ---- ------- ---- ------- ----
$70,995 3.72% $54,391 6.10% $39,612 6.97% $87,217 6.33%
======= ==== ======= ==== ======= ==== ======= ====
Principal Maturing (1)
------------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
--------------- ----------------- ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(dollars in thousands)
Available-for-Sale Securities:
U.S. Treasury ................................ $ 9,208 5.13% $58,896 3.52% $ -- --% $ -- --%
Corporates ................................... -- -- 6,138 6.17 -- -- -- --
State and municipals (2) ..................... 1,217 7.67 8,112 6.98 36,226 6.97 18,351 7.11
------- ---- ------- ---- ------- ---- ------- ----
Total debt securities .......................... 10,425 5.43 73,146 4.12 36,226 6.97 18,351 7.11
Equity ....................................... -- -- -- -- -- -- 127 8.45
------- ---- ------- ---- ------- ---- ------- ----
$10,425 5.43% $73,146 4.12% $36,226 6.97% $18,478 7.12%
======= ==== ======= ==== ======= ==== ======= ====
(1) Maturities shown are stated maturities, except in the case of municipal
securities which are shown at the earlier of their stated maturity or
pre-refunded dates. Securities backed by mortgages, which include the U.S.
government agencies and collateralized mortgage obligations shown above,
are expected to have substantial periodic repayments resulting in weighted
average lives considerably shorter than would be surmised from the above
table.
(2) Yields on tax-exempt obligations have been computed on a tax-equivalent
basis.
NOTE C - LOANS
The following table sets forth major classifications of loans.
December 31,
----------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(in thousands)
Commercial and industrial ................ $ 40,993 $ 30,514 $ 30,296 $ 28,748 $ 25,686
Secured by real estate ................... 179,905 155,283 147,598 132,357 121,620
Consumer ................................. 6,198 7,504 5,284 6,366 7,152
Other .................................... 593 560 549 4,119 1,101
--------- --------- --------- --------- ---------
227,689 193,861 183,727 171,590 155,559
Unearned income .......................... (1,001) (952) (953) (872) (829)
--------- --------- --------- --------- ---------
226,688 192,909 182,774 170,718 154,730
Allowance for loan losses ................ (2,020) (1,943) (2,033) (3,651) (3,579)
--------- --------- --------- --------- ---------
$ 224,668 $ 190,966 $ 180,741 $ 167,067 $ 151,151
========= ========= ========= ========= =========
67
Allowance For Loan Losses. In the second quarter of 1999, the Bank made a
transition adjustment to reduce its allowance for loan losses by $1,600,000. The
transition adjustment was made in response to guidance issued by staff members
of the Financial Accounting Standards Board in April 1999 and further guidance
issued by staff members of the Securities and Exchange Commission.
The following table sets forth changes in the Bank's allowance for loan
losses.
Year ended December 31,
--------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(dollars in thousands)
Balance, beginning of year ......................... $ 1,943 $ 2,033 $ 3,651 $ 3,579 $ 3,600
--------- --------- --------- --------- ---------
Loans charged off:
Commercial and industrial ........................ (17) (28) (32) (50) --
Secured by real estate ........................... -- -- -- -- --
Consumer and other ............................... (35) (28) (28) (49) (59)
--------- --------- --------- --------- ---------
(52) (56) (60) (99) (59)
--------- --------- --------- --------- ---------
Recoveries of loans charged off:
Commercial and industrial ........................ -- -- -- -- --
Secured by real estate ........................... 16 17 16 257 120
Consumer and other ............................... 13 24 26 14 18
--------- --------- --------- --------- ---------
29 41 42 271 138
--------- --------- --------- --------- ---------
Net (chargeoffs) recoveries ........................ (23) (15) (18) 172 79
Provision for loan losses (credit) ................. 100 (75) -- (100) (100)
Transition adjustment .............................. -- -- (1,600) -- --
--------- --------- --------- --------- ---------
Balance, end of year ............................... $ 2,020 $ 1,943 $ 2,033 $ 3,651 $ 3,579
========= ========= ========= ========= =========
Ratio of net (chargeoffs) recoveries to
average loans outstanding ........................ (.01)% (.01)% (.01)% .10% .05%
========= ========= ========= ========= =========
Allocation of Allowance For Loan Losses. The following table sets forth the
allocation of the Bank's total allowance for loan losses by loan type.
December 31,
-------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------- --------------- --------------- --------------- ---------------
% of % of % of % of % of
Loans Loans Loans Loans Loans
To Total To Total To Total To Total To Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(dollars in thousands)
Commercial ......................... $ 667 18.1% $ 566 15.8% $ 397 16.5% $ 730 16.9% $ 564 16.6%
Real-estate secured ................ 1,252 79.4 1,160 80.5 1,304 80.8 2,325 77.5 2,099 78.6
Consumer and other ................. 94 2.5 129 3.7 137 2.7 249 5.6 211 4.8
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total allocated ................. 2,013 100.0 1,855 100.0 1,838 100.0 3,304 100.0 2,874 100.0
Unallocated ........................ 7 -- 88 -- 195 -- 347 -- 705 --
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
$2,020 100.0% $1,943 100.0% $2,033 100.0% $3,651 100.0% $3,579 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
68
Selected Loan Maturity Information. The following table sets forth maturity
and rate information for the Bank's commercial and industrial loans at December
31, 2001.
Maturity
---------------------------------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
(in thousands)
Commercial and industrial loans:
Fixed rate .......................................... $ 9,422 $ 2,458 $ -- $11,880
Variable rate ....................................... 13,342 10,795 4,976 29,113
------- ------- ------- -------
$22,764 $13,253 $ 4,976 $40,993
======= ======= ======= =======
Past Due, Nonaccrual, and Restructured Loans. The following table sets
forth selected information about the Bank's nonaccrual, past due, and
restructured loans.
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
At December 31: (in thousands)
Loans past due 90 days or more as to principal or
interest payments and still accruing ............................. $236 $173 $ 5 $ -- $ 49
Nonaccrual loans .................................................... 105 -- 28 22 382
Restructured loans .................................................. 10 -- -- -- 6
Year Ended December 31:
Gross interest income that would have been
recorded during the year under original terms:
Nonaccrual loans ................................................. 8 -- 4 2 55
Restructured loans ............................................... -- -- -- -- 1
Gross interest income recorded during the year:
Nonaccrual loans ................................................. 4 -- 3 2 32
Restructured loans ............................................... -- -- -- -- 1
Commitments for additional funds .................................... 150 150 None None None
In addition to the past due and nonaccrual loans noted above, as of
December 31, 2001 and 2000 the Corporation's portfolio of performing loans
included $1,163,000 and $2,865,000, respectively, of loans considered to be
impaired under SFAS No. 114. Of the Corporation's total impaired loans at
December 31, 2001, $688,000 had a related allowance for loan losses of $347,000
and the balance had no related allowance for loan losses. The average recorded
investment during 2001 in loans considered to be impaired as of December 31,
2001 was $1,611,000. Interest income recognized during 2001 on loans considered
to be impaired as of December 31, 2001 and during the period in 2001 that such
loans were impaired amounted to $122,000. Of the Corporation's total impaired
loans at December 31, 2000, $2,647,000 had a related allowance for loan losses
of $419,000 and the balance had no related allowance for loan losses. The
average recorded investment during 2000 in loans considered to be impaired as of
December 31, 2000 was $3,210,000. Interest income recognized during 2000 on
loans considered to be impaired as of December 31, 2000 and during the period in
2000 that such loans were impaired amounted to $287,000. All interest income
recorded by the Corporation during 2001 and 2000 on loans considered to be
impaired was recognized using the accrual method of accounting.
Certain directors, including their immediate families and companies in
which they are principal owners, and executive officers were loan customers of
the Bank during 2001 and 2000. Such loans are made in the ordinary course of
business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and do not involve more than the normal risk of collectibility or
present other unfavorable features. The aggregate amount of these loans was
approximately $2,239,000 and $2,082,000 at December 31, 2001 and 2000,
respectively. During 2001, $839,000 of new loans to such persons were made and
repayments totaled $682,000. There were no loans to directors or executive
officers which were nonaccruing at December 31, 2001 or 2000.
69
NOTE D - PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following:
December 31,
-----------------------
2001 2000
-------- --------
(in thousands)
Land ............................................. $ 1,274 $ 1,274
Buildings ........................................ 4,771 4,755
Leasehold improvements ........................... 1,953 1,713
Furniture and equipment .......................... 11,284 10,236
-------- --------
19,282 17,978
Accumulated depreciation and amortization ........ (12,126) (10,957)
-------- --------
$ 7,156 $ 7,021
======== ========
A building occupied by one of the Bank's branch offices is leased from a
director of the Corporation and the Bank. The lease, which has a term of 10
years and expires on October 30, 2002, currently provides for annual base
rentals of $28,206 plus certain charges for real estate taxes and common area
maintenance. The Bank may cancel this lease at any time by giving the director
ninety days written notice. The Bank believes that the terms of this lease are
comparable to those that could have been obtained from other persons.
NOTE E - DEPOSITS
The following table sets forth major classifications of average deposits.
Year ended December 31,
-----------------------------------------------------------------------------------
2001 2000 1999
------------------------ ----------------------- -----------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- --------- ------- --------- ------- ---------
(dollars in thousands)
Checking .......................... $201,688 --% $186,215 --% $168,791 --%
Savings and money market .......... 343,389 2.31 303,530 3.67 280,124 2.85
Time deposits ..................... 39,202 3.84 41,105 4.81 37,617 4.06
-------- ---- -------- ---- -------- ----
$584,279 1.62% $530,850 2.47% $486,532 1.95%
======== ==== ======== ==== ======== ====
Time Deposits of $100,000 and Over. The following table sets forth the
remaining maturities of the Bank's time deposits in amounts of $100,000 or more.
Remaining Maturity Amount
----------------------------------- --------------
(in thousands)
3 months or less .................. $10,295
Over 3 through 6 months ........... 2,075
Over 6 through 12 months .......... 1,123
Over 12 months .................... 103
-------
$13,596
=======
70
NOTE F - INCOME TAXES
The Corporation and its subsidiary file a consolidated federal income tax
return. Income taxes charged to earnings in 2001, 2000, and 1999 had effective
tax rates of 25.9%, 26.9%, and 31.0%, respectively. The following table sets
forth a reconciliation of the statutory Federal income tax rate to the
Corporation's effective tax rate.
Year Ended December 31,
----------------------------
2001 2000 1999
------ ------ ------
Statutory federal income tax rate ............................. 34.0% 34.0% 34.0%
State and local income taxes, net of federal income tax benefit 4.2 4.1 6.0
Tax-exempt interest on securities and loans, net of
disallowed cost of funding ................................. (12.6) (11.1) (9.3)
Other ......................................................... .3 (.1) .3
------ ------ ------
25.9% 26.9% 31.0%
====== ====== ======
Provision For Income Taxes. The following table sets forth the components
of the provision for income taxes.
Year Ended December 31,
--------------------------------------
2001 2000 1999
------- ------- -------
(in thousands)
Currently payable:
Federal ........................ $ 2,840 $ 2,506 $ 2,818
State and local ................ 828 673 1,176
------- ------- -------
3,668 3,179 3,994
------- ------- -------
Deferred:
Federal ........................ (175) 141 49
State and local ................ 33 111 18
------- ------- -------
(142) 252 67
------- ------- -------
$ 3,526 $ 3,431 $ 4,061
======= ======= =======
In addition to the provision shown in the table above, in 1999 the
Corporation provided deferred federal and state income taxes of $487,000 and
$168,000, respectively, on the $1,600,000 transition adjustment to the allowance
for loan losses.
Net Deferred Tax Asset/Liability. The following table sets forth the
components of the Bank's net deferred tax asset/liability.
December 31,
-------------------
2001 2000
------- -------
Deferred tax assets: (in thousands)
Allowance for loan losses ............................. $ 366 $ 341
Supplemental executive retirement expense ............. 54 83
Directors' retirement expense ......................... 62 --
Postretirement benefits expense ....................... 41 38
Writeoff of bank premises and equipment ............... 32 --
Accrued professional fees ............................. 12 12
Other ................................................. 1 --
------- -------
568 474
Valuation allowance ...................................... -- --
------- -------
568 474
------- -------
Deferred tax liabilities:
Pension expense ....................................... 117 226
Depreciation .......................................... 197 191
Accumulated earnings of Bank subsidiaries ............. 93 38
Unrealized gains on available-for-sale securities ..... 658 445
------- -------
1,065 900
------- -------
Net deferred tax asset (liability) ....................... $ (497) $ (426)
======= =======
71
NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES
Financial Instruments With Off-Balance-Sheet Risk. The Bank is a party to
financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit, standby letters of credit, and
commercial letters of credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the consolidated
balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to financial instruments for commitments to extend credit, standby
letters of credit, and commercial letters of credit is represented by the
contractual notional amount of these instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments. At December 31, financial instruments whose
contract amounts represent credit risk are as follows:
2001 2000
------- -------
(in thousands)
Commitments to extend credit ......... $53,513 $36,937
Standby letters of credit ............ 999 705
Commercial letters of credit ......... 38 312
Commitments to extend credit are legally binding agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if any, by the Bank upon extension of credit is based on management's
credit evaluation of the borrower. Collateral held varies but may include
security interests in business assets, mortgages on commercial and residential
real estate, deposit accounts with the Bank or other financial institutions, and
securities.
Standby letters of credit are conditional commitments issued by the Bank to
assure the performance or financial obligations of a customer to a third party.
The Bank's standby letters of credit extend through December 2002. The credit
risk involved in issuing standby letters of credit is essentially the same as
that involved in extending loans to customers. The Bank generally holds
collateral and/or obtains personal guarantees supporting these commitments. The
extent of collateral held for these commitments at December 31, 2001 varied from
0% to 100%, and averaged 46%.
Commercial letters of credit are conditional commitments issued by the Bank
to assure the payment by a customer to a supplier. All of the Bank's commercial
letters of credit extend for less than one year. The credit risk involved in
issuing commercial letters of credit is the same as that discussed in the
preceding paragraph for standby letters of credit. The Bank generally obtains
personal guarantees supporting these commitments.
Concentrations of Credit Risk. Most of the Bank's loans, personal and
commercial, are to borrowers who are domiciled on Long Island. As a result, the
income of many of the Bank's borrowers is dependent on the Long Island economy.
In addition, most of the Bank's real estate loans involve mortgages on Long
Island properties. Thus, the Bank's loan portfolio is susceptible to the economy
of Long Island.
Lease Commitments. At December 31, 2001, minimum annual rental commitments
under noncancelable operating leases are as follows:
Year Amount
--------------------------------------------------------------
(in thousands)
2002 ........................................ $ 420
2003 ........................................ 375
2004 ........................................ 341
2005 ........................................ 225
2006 ........................................ 120
Thereafter .................................. 155
------
$1,636
======
In addition, the Bank has various renewal options on the above leases. Rent
expense was $457,000, $384,000, and $352,000 in 2001, 2000, and 1999,
respectively.
72
NOTE H - SHAREHOLDER PROTECTION RIGHTS PLAN
On July 16, 1996, the Board of Directors of the Corporation (the "Board")
adopted a Shareholder Protection Rights Plan and declared a dividend of one
right ("Right") on each outstanding share of the Corporation's common stock (the
"Common Stock"). The dividend was paid on July 31, 1996 to shareholders of
record as of the same date.
In the absence of an event of the type described below, the Rights will be
evidenced by and trade with the Common Stock and will not be exercisable.
However, the Rights will separate from the Common Stock and become exercisable
following the earlier of (1) the tenth business day, or such later date as the
Board may decide, after any person or persons (collectively referred to as
"person") commences a tender offer that would result in such person holding a
total of 20% or more of the outstanding Common Stock, or (2) ten business days
after, or such earlier or later date as the Board may decide, the announcement
by the Corporation that any person has acquired 20% or more of the outstanding
Common Stock.
When separated from the Common Stock, each Right will entitle the holder to
purchase one share of Common Stock for $83 (the "Exercise Price"). However, in
the event that the Corporation has announced that any person has acquired 20% or
more of the outstanding Common Stock, the Rights owned by that person will be
automatically void and each other Right will automatically become a right to
buy, for the Exercise Price, that number of shares of Common Stock having a
market value of twice the Exercise Price. Also, if any person acquires 20% or
more of the outstanding Common Stock, the Board can require that, in lieu of
exercise, each outstanding Right be exchanged for one share of Common Stock.
The Rights may be redeemed by action of the Board at a price of $.01 per
Right at any time prior to announcement by the Corporation that any person has
acquired 20% or more of the outstanding Common Stock. The Exercise Price and the
number of Rights outstanding are subject to adjustment to prevent dilution. The
Rights expire ten years from the date of their issuance.
NOTE I - STOCK-BASED COMPENSATION
The Corporation has two stock option and appreciation rights plans (the
"Plans"). The 1996 Plan was approved by the Corporation's Board of Directors on
January 16, 1996 and subsequently approved by its stockholders. Under the 1996
Plan, as amended, options to purchase up to 360,000 shares of common stock were
made available for grant to key employees and to non-employee directors of the
Corporation and its subsidiaries through January 15, 2006. The number of stock
options and stock appreciation rights that can be granted to any one person in
any one fiscal year is limited to 25,000. Each option granted under the 1996
Plan is granted at a price equal to the fair market value of one share of the
Corporation's stock on the date of grant. Options granted on or before December
31, 2000 are exercisable in whole or in part commencing six months from the date
of grant and ending ten years after the date of grant. Options granted after
December 31, 2000 are exercisable in whole or in part commencing three years
from the date of grant and ending ten years after the date of grant. The date on
which options first become exercisable is subject to acceleration in the event
of a change in control, retirement, death, disability, and certain other limited
circumstances.
Each option granted to an employee under the 1996 Plan may be granted with
or without a stock appreciation right ("SAR") attached. The 1996 Plan also
provides for the granting of stand-alone SARs to employees. Non-employee
directors are not eligible for SAR grants, whether stand-alone or attached to
options. At December 31, 2001, options to purchase 95,279 shares of Common Stock
were outstanding with respect to the 1996 Plan, of which 51,087 were
exercisable. No stock appreciation rights have been granted under the 1996 Plan,
either attached to options or on a stand-alone basis.
The 1986 Plan was approved by the Corporation's Board of Directors on
January 21, 1986 and subsequently approved by its stockholders. Under the 1986
Plan, as later amended, options to purchase up to 387,675 shares of common stock
were available to be granted to key employees of the Corporation and its
subsidiaries through January 21, 1996. The terms of the 1986 Plan are
substantially the same as those of the 1996 Plan except that the 1986 Plan did
not provide for the granting of stock options to non-employee directors and did
not limit to 25,000 the number of stock options and stock appreciation rights
that could be granted to any one person in any one fiscal year. At December 31,
2001, options to purchase 47,648 shares of Common Stock were outstanding and
exercisable under the 1986 Plan and there were no outstanding stock appreciation
rights.
The Corporation has chosen to account for stock-based compensation using
the intrinsic value method prescribed in APB No. 25. Since each option is
granted at a price equal to the fair market value of one share of the
Corporation's stock on the date of grant, no compensation cost has been
recognized.
73
The following table compares reported net income and earnings per share to
net income and earnings per share on a pro forma basis assuming that the
Corporation accounted for stock-based compensation under SFAS No. 123
"Accounting For Stock Based Compensation."
2001 2000 1999
---------- ---------- ----------
(in thousands, except per share data)
Net Income Before Transition Adjustment
To Allowance For Loan Losses:
As Reported ............................... $10,094 $9,318 $9,034
Pro Forma ................................. 9,717 9,156 8,846
Net Income:
As Reported ............................... $10,094 $9,318 $9,979
Pro Forma ................................. 9,717 9,156 9,791
Earnings Per Share Before Transition
Adjustment To Allowance For Loan Losses:
As Reported:
Basic ................................... $3.55 $3.19 $2.97
Diluted ................................. 3.50 3.15 2.92
Pro Forma:
Basic ................................... $3.42 $3.13 $2.91
Diluted ................................. 3.37 3.09 2.86
Earnings Per Share:
As Reported:
Basic ................................... $3.55 $3.19 $3.28
Diluted ................................. 3.50 3.15 3.23
Pro Forma:
Basic ................................... $3.42 $3.13 $3.22
Diluted ................................. 3.37 3.09 3.17
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. Future awards are anticipated under the 1996 Plan.
Stock Option Activity. The following table sets forth stock option activity
and the weighted average fair value of options granted.
Year Ended December 31,
------------------------------------------------------------------------
2001 2000 1999
-------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- ------- --------- -------- ------- -----------
Outstanding, beginning of year ...................... 118,589 $25.21 111,020 $23.19 113,599 $20.48
Granted ............................................. 45,688 38.27 23,100 30.09 15,100 41.56
Exercised ........................................... (19,304) 21.76 (14,181) 15.74 (9,629) 14.26
Forfeited ........................................... (2,046) 39.16 (1,350) 41.92 (8,050) 30.10
-------- ------ -------- ------ -------- ------
Outstanding, end of year ............................ 142,927 $29.65 118,589 $25.21 111,020 $23.19
======== ====== ======== ====== ======== ======
Exercisable, end of year ............................ 98,735 $25.79 118,589 $25.21 111,020 $23.19
======== ====== ======== ====== ======== ======
Weighted average fair value of options granted ...... $ 8.26 $ 7.00 $ 12.43
======== ========= ========
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model using the following weighted average
assumptions: risk-free interest rates of 4.85%, 5.14%, and 6.81% for options
granted in 2001, 2000, and 1999, respectively; volatility of 15.30%, 15.80%, and
15.00% for options granted in 2001, 2000, and 1999, respectively; expected
dividend yield of 2.0%, 1.9%, and 1.5% for options granted in 2001, 2000, and
1999, respectively; and expected lives of 7 years for options granted in 2001,
2000 and 1999.
74
Stock Options Outstanding. The following table sets forth information about
outstanding and exercisable stock options at December 31, 2001.
Outstanding Stock Options Exercisable Stock Options
---------------------------------------------- ---------------------------
Weighted Average
-------------------------- Weighted
Remaining Average
Contractual Exercise Exercise
Range of Exercise Prices Number Life (yrs.) Price Number Price
- ---------------------------------------- ------ ------------ ----- ------ -----
$9.01 to $15.00 ........................ 12,161 .72 $12.19 12,161 $12.19
$15.01 to $25.00 ....................... 46,024 3.61 19.55 46,024 19.55
$25.01 to $45.00 ....................... 84,742 8.19 37.65 40,550 36.96
------- ------ ------ ------- ------
142,927 6.08 $29.65 98,735 $25.79
======= ====== ====== ======= ======
NOTE J - RETIREMENT PLANS
The Bank has a defined benefit pension plan (the "Pension Plan") covering
eligible employees. The provisions of the Pension Plan are governed by the rules
and regulations contained in the Prototype Plan of the New York State Bankers
Retirement System (the "Retirement System") and the Retirement System Adoption
Agreement executed by the Bank. For investment purposes, the Pension Plan's
contributions are pooled with the contributions of the other participants in the
Retirement System. Assets of the Pension Plan are invested in various debt and
equity securities.
Employees are eligible to participate in the Pension Plan after attaining
21 years of age and completing 12 full months of service. Pension benefits are
generally based on a percentage of average annual compensation during the period
of creditable service. The Bank makes annual contributions to the Pension Plan
in an amount sufficient to fund these benefits and participants contribute 2% of
their compensation. The Bank's funding policy, the entry age normal cost-frozen
initial liability method, is consistent with the funding requirements of federal
law and regulations. Employees become fully vested after four years of
participation in the Pension Plan (no vesting occurs during the four-year
period).
Net Pension Cost. The following table sets forth the components of net
periodic pension cost.
2001 2000 1999
----- ----- -----
(in thousands)
Service cost .......................... $ 410 $ 397 $ 341
Interest cost ......................... 462 428 364
Expected return on plan assets ........ (598) (540) (509)
Net amortization and deferral ......... (44) (44) (44)
----- ----- -----
Net pension cost ...................... $ 230 $ 241 $ 152
===== ===== =====
Significant Actuarial Assumptions. The following table sets forth the
significant actuarial assumptions as of the end of each plan year.
2001 2000 1999
------ ------ ------
Discount rate ..................................... 6.75% 6.75% 6.75%
Rate of increase in compensation levels ........... 5.00% 5.00% 5.00%
Expected long-term rate of return on plan assets .. 7.50% 7.00% 7.00%
75
Funded Status of The Plan. The following table sets forth the change in the
benefit obligation and plan assets for each Plan year and, as of the end of each
Plan year, the funded status of the Plan and prepaid benefit cost.
Year Ended September 30,
------------------------------------------------
2001 2000 1999
------- ------- -------
(in thousands)
Change in projected benefit obligation
Projected benefit obligation at beginning of year ...................... $ 6,969 $ 6,457 $ 6,180
Service cost ........................................................... 520 519 473
Plan participants' contributions ....................................... (110) (122) (132)
Expenses ............................................................... (55) (63) (60)
Interest cost .......................................................... 462 428 364
Benefits paid .......................................................... (260) (312) (265)
Additional prior service cost at valuation date ........................ 302 -- --
Assumption changes and other ........................................... (32) 62 (103)
------- ------- -------
Projected benefit obligation at end of year ............................ 7,796 6,969 6,457
------- ------- -------
Change in plan assets
Fair value of plan assets at beginning of year ......................... 8,580 7,751 6,884
Actual return on plan assets ........................................... (712) 796 1,057
Employer contribution .................................................. 327 286 3
Plan participants' contributions ....................................... 110 122 132
Benefits paid .......................................................... (260) (312) (265)
Expenses ............................................................... (55) (63) (60)
------- ------- -------
Fair value of plan assets at end of year ............................... 7,990 8,580 7,751
------- ------- -------
Funded status .......................................................... 194 1,611 1,294
Unrecognized net actuarial loss (gain) ................................. 385 (784) (468)
Unrecognized prior service cost ........................................ 275 (31) (35)
Unrecognized transition asset .......................................... (87) (127) (167)
------- ------- -------
Prepaid benefit cost ................................................... $ 767 $ 669 $ 624
======= ======= =======
The Bank has a combined profit sharing/401(k) plan (the "Profit Sharing
Plan"). Employees are eligible to participate provided they are at least 21
years of age and have completed one year of service in which they worked 1,000
hours if full-time and 700 hours if part-time. Participants may elect to
contribute, on a tax-deferred basis, up to 25% of gross compensation, as
defined, subject to the limitations of Section 401(k) of the Internal Revenue
Code. The Bank may, at its sole discretion, make "Additional" contributions to
each participant's account based on the amount of the participant's tax deferred
contributions and make profit sharing contributions to each participant's
account equal to a percentage of the participant's compensation, as defined.
Participants are fully vested in their elective contributions and, after five
years of participation in the Profit Sharing Plan, are fully vested (20% vesting
per year) in the Additional and profit sharing contributions made by the Bank.
Additional contributions were $130,000, $113,000, and $103,000 for 2001, 2000,
and 1999, respectively, and profit sharing contributions were $587,000,
$446,000, and $430,000, respectively.
On August 3, 1995, the Bank adopted The First National Bank of Long Island
Supplemental Executive Retirement Program ("SERP"). The SERP provides benefits
to certain employees, designated by the Compensation Committee of the Board of
Directors, whose benefits under the Pension Plan and Profit Sharing Plan are
limited by the applicable provisions of the Internal Revenue Code. The benefit
under the SERP is equal to the additional amount the employee would be entitled
to under the Pension and Profit Sharing Plans in the absence of such Internal
Revenue Code limitations. The effective date of the SERP, which superseded the
Bank's previous supplemental retirement benefit plan, was January 1, 1994. SERP
expense was $389,000, $190,000 and $49,000 in 2001, 2000 and 1999, respectively.
The fluctuations in SERP expense during the three year period ended December 31,
2001 are primarily attributable to the impact of changing interest rates and
stock market performance on required employer contributions.
76
NOTE K - OTHER OPERATING EXPENSES
Expenses included in other operating expenses which exceed one percent of
the aggregate of total interest income and noninterest income in 2001, 2000, and
1999 are as follows:
2001 2000 1999
---- ---- ----
(in thousands)
Computer services ........... $543 $490 $487
Insurance ................... 481 440 407
Marketing ................... 465 393 397
NOTE L - REGULATORY MATTERS
Capital. The Corporation is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation must meet specific capital guidelines that involve
quantitative measures of the Corporation's assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices. The
Corporation's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Under current regulations, banks are classified as well capitalized,
adequately capitalized or undercapitalized. The following table sets forth the
Corporation's capital ratios at December 31, 2001 and 2000 and the minimum
ratios necessary to be classified as well capitalized and adequately
capitalized. The capital ratios of the Corporation's subsidiary bank at December
31, 2001 and 2000 are not significantly different than those shown in the table
below, both of which substantially exceed the requirements for a
well-capitalized bank.
Corporation's Capital Ratios
at December 31:
---------------------------- Well Adequately
2001 2000 Capitalized Capitalized
------ ----- ------------ -----------
Total Risk-Based Capital Ratio ......... 29.22% 28.42% 10.00% 8.00%
Tier 1 Risk-Based Capital Ratio ......... 28.44 27.65 6.00 4.00
Tier 1 Leverage Capital Ratio ........... 10.63 11.19 5.00 4.00
Other Matters. The amount of dividends paid by the Bank to the Corporation
is subject to restrictions under Federal Reserve Board Regulation H. Under
Regulation H, the Bank is required to obtain regulatory approval for the payment
of dividends during any one calendar year that exceed the Bank's net income for
the calendar year plus the retained net income for the two preceding calendar
years. At December 31, 2001, the Bank had retained net income for the current
and two preceding calendar years of $10,349,000.
Regulation D of the Board of Governors of The Federal Reserve System
requires banks to maintain reserves against certain deposit balances. The Bank's
average reserve requirement for 2001 was approximately $5,183,000.
Under national banking laws and related statutes, the Bank is limited as to
the amount it may loan to the Corporation, unless such loans are collateralized
by specified obligations. At December 31, 2001, the maximum amount available for
transfer from the Bank to the Corporation in the form of loans approximated
$10,838,000.
77
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time and are based on
existing on and off-balance-sheet financial instruments. Such estimates are
generally subjective in nature and dependent upon a number of significant
assumptions associated with each financial instrument or group of similar
financial instruments, including estimates of discount rates, risks associated
with specific financial instruments, estimates of future cash flows, and
relevant available market information. Changes in assumptions could
significantly affect the estimates. In addition, fair value estimates do not
reflect the value of anticipated future business, premiums or discounts that
could result from offering for sale at one time the Corporation's entire
holdings of a particular financial instrument, or the tax consequences of
realizing gains or losses on the sale of financial instruments.
The following table sets forth the carrying/contract amounts and estimated
fair values of the Corporation's financial instruments at December 31, 2001 and
2000.
2001 2000
--------------------------- ---------------------------
Carrying/ Carrying/
Contract Contract
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(in thousands)
Financial Assets:
Cash and due from banks ................................ $ 28,209 $ 28,209 $ 23,872 $ 23,872
Federal funds sold ..................................... 27,000 27,000 87,800 87,800
Held-to-maturity securities ............................ 252,215 257,670 226,361 229,045
Available-for-sale securities .......................... 138,275 138,275 83,680 83,680
Loans .................................................. 224,668 226,675 190,966 191,067
Accrued interest receivable ............................ 5,047 5,047 4,450 4,450
Financial Liabilities:
Checking deposits ...................................... 222,822 222,822 195,617 195,617
Savings and money market deposits ...................... 347,430 347,430 310,681 310,681
Time deposits .......................................... 34,618 34,645 44,174 44,257
Accrued interest payable ............................... 95 95 275 275
Off-Balance-Sheet Liabilities:
Commitments to extend credit ........................... 53,513 -- 36,937 --
Standby and commercial letters of credit ............... 1,037 10 1,017 7
NOTE N - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for The First of Long Island Corporation
(parent company only) is as follows:
CONDENSED BALANCE SHEETS December 31,
-----------------------------
Assets: (in thousands)
2001 2000
------- -------
Checking and money market accounts with subsidiary ...................... $ 3,646 $ 2,417
Investment in subsidiary bank, at equity ................................ 72,255 69,536
Other assets ............................................................ 45 12
------- -------
$75,946 $71,965
======= =======
Liabilities:
Cash dividends payable .................................................. $ 1,200 $ 1,099
------- -------
Stockholders' equity:
Common stock ............................................................ 279 289
Surplus ................................................................. 955 1,188
Retained earnings ....................................................... 72,550 68,737
------- -------
73,784 70,214
Accumulated other comprehensive income, net of tax ...................... 962 652
------- -------
74,746 70,866
------- -------
$75,946 $71,965
======= =======
78
CONDENSED STATEMENTS OF INCOME Year ended December 31,
-------------------------------------------------
2001 2000 1999
-------- -------- --------
Income: (in thousands)
Dividends from subsidiary bank .................................... $ 7,700 $ 4,500 $ 6,850
Interest on deposits with subsidiary bank ......................... 33 73 53
-------- -------- --------
7,733 4,573 6,903
-------- -------- --------
Expenses:
Other operating expenses .......................................... 59 58 56
-------- -------- --------
Income before income taxes ........................................ 7,674 4,515 6,847
Income tax expense (credit) .......................................... (11) 6 (1)
-------- -------- --------
Income before undistributed earnings of
subsidiary bank ................................................ 7,685 4,509 6,848
Equity in undistributed earnings ..................................... 2,409 4,809 3,131
-------- -------- --------
Net income ........................................................ $ 10,094 $ 9,318 $ 9,979
======== ======== ========
CONDENSED STATEMENTS OF CASH FLOWS Year ended December 31,
----------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents* 2001 2000 1999
-------- -------- --------
(in thousands)
Cash Flows From Operating Activities:
Net income ............................................................. $ 10,094 $ 9,318 $ 9,979
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of subsidiary bank ........................ (2,409) (4,809) (3,131)
Decrease in other assets ......................................... 2 13 86
-------- -------- --------
Net cash provided by operating activities ........................... 7,687 4,522 6,934
-------- -------- --------
Cash Flows From Financing Activities:
Repurchase and retirement of common stock .............................. (4,698) (2,819) (5,116)
Proceeds from exercise of stock options ................................ 420 223 137
Cash dividends paid .................................................... (2,180) (2,002) (1,837)
-------- -------- --------
Net cash used in financing activities ............................... (6,458) (4,598) (6,816)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ...................... 1,229 (76) 118
Cash and cash equivalents, beginning of year .............................. 2,417 2,493 2,375
-------- -------- --------
Cash and cash equivalents, end of year .................................... $ 3,646 $ 2,417 $ 2,493
======== ======== ========
Supplemental Schedule of Noncash Financing Activities:
Tax benefit from exercise of employee stock options .................... $ 35 $ 19 $ 4
Cash dividends payable ................................................. 1,200 1,099 1,007
*Cash and cash equivalents include the checking and money market accounts with
the Corporation's wholly-owned bank subsidiary.
79
NOTE O - QUARTERLY FINANCIAL DATA (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
2001 (in thousands, except per share data)
Interest income .................................. $ 9,881 $ 9,570 $ 9,524 $ 9,014 $ 37,989
Interest expense ................................. 3,127 2,494 2,281 1,549 9,451
Net interest income .............................. 6,754 7,076 7,243 7,465 28,538
Provision for loan losses (credit) ............... -- -- -- 100 100
Noninterest income ............................... 1,280 1,385 1,281 1,003 4,949
Noninterest expense .............................. 4,895 4,836 4,876 5,160 19,767
Income before income taxes ....................... 3,139 3,625 3,648 3,208 13,620
Income taxes ..................................... 804 975 974 773 3,526
Net income ....................................... 2,335 2,650 2,674 2,435 10,094
Earnings per share:
Basic .......................................... .81 .93 .94 .87 3.55
Diluted ........................................ .80 .91 .93 .86 3.50
Comprehensive income ............................. 2,938 2,458 3,613 1,395 10,404
2000
Interest income .................................. $ 8,964 $ 9,484 $ 10,065 $ 10,309 $ 38,822
Interest expense ................................. 2,830 3,157 3,510 3,609 13,106
Net interest income .............................. 6,134 6,327 6,555 6,700 25,716
Provision for loan losses (credit) ............... (75) -- -- -- (75)
Noninterest income ............................... 1,110 1,104 1,247 1,064 4,525
Noninterest expense .............................. 4,312 4,408 4,357 4,490 17,567
Income before income taxes ....................... 3,007 3,023 3,445 3,274 12,749
Income taxes ..................................... 834 815 908 874 3,431
Net income ....................................... 2,173 2,208 2,537 2,400 9,318
Earnings per share:
Basic .......................................... .74 .75 .87 .83 3.19
Diluted ........................................ .73 .74 .86 .82 3.15
Comprehensive income ............................. 2,155 2,543 3,059 3,547 11,304
80
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Stockholders and Board of Directors of
The First of Long Island Corporation:
We have audited the accompanying consolidated balance sheets of The First
of Long Island Corporation and subsidiary as of December 31, 2001 and 2000 and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2001. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The First of Long Island
Corporation and subsidiary as of December 31, 2001 and 2000 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
New York, New York
January 22, 2002
81
OFFICIAL STAFF
FULL SERVICE OFFICES
Glen Head
10 Glen Head Road
Glen Head, NY 11545
(516) 671-4900
John J. Mulder, Jr.
Vice President and Branch Manager
Elaine Ballinger
Assistant Manager
Daphne Johnson
Administrative Assistant
Greenvale
7 Glen Cove Road
Greenvale, NY 11548
(516) 621-8811
Philip R. Thompson
Vice President and Branch Manager
Patricia Ovalle-Wood
Assistant Manager
Huntington
253 New York Avenue
Huntington, NY 11743
(631) 427-4143
William Pyszczymuka
Vice President and Branch Manager
Jenny Malandruccolo
Assistant Vice President
Marie McManus
Assistant Cashier
Margaret Hanrahan
Administrative Assistant
Locust Valley
108 Forest Avenue
Locust Valley, NY 11560
(516) 671-2299
John T. Noonan
Vice President and Branch Manager
Mary Lou Martin
Assistant Vice President
Carol Luzynski
Administrative Assistant
Northport
711 Fort Salonga Road
Northport, NY 11768
(631) 261-4000
Henry C. Suhr
Vice President and Branch Manager
David Lippa
Assistant Vice President
82
Janet Kittle
Administrative Assistant
Old Brookville
209 Glen Head Road
Old Brookville, NY 11545
(516) 759-9002
Frank Plesche
Vice President and Branch Manager
Carolyn McIntyre
Assistant Vice President
Rockville Centre
310 Merrick Road
Rockville Centre, NY 11570
(516) 763-5533
Raffaella Marciari
Vice President and Branch Manager
Kathryn M. Sachs
Assistant Manager
Theresa Crawford
Administrative Assistant
Roslyn Heights
130 Mineola Avenue
Roslyn Heights, NY 11577
(516) 621-1900
Archie J. Arrington
Vice President and Branch Manager
Carole Ann Snayd
Assistant Vice President
Lucile Pelliccione
Administrative Assistant
Woodbury
800 Woodbury Road
Woodbury, NY 11797
(516) 364-3434
George P. Knott
Vice President and Branch Manager
June Pipito
Assistant Vice President
COMMERCIAL BANKING OFFICES
Allen Boulevard
22 Allen Boulevard
Farmingdale, NY 11735
(631) 753-8888
Patricia M. Gramble
Assistant Vice President and Branch Manager
83
Bohemia
30 Orville Drive
Bohemia, NY 11716
(631) 218-2500
Robert F. Covino
Vice President and Branch Manager
Deer Park
60 E. Industry Court
Deer Park, NY 11729
(631) 243-2600
Albert M. Nordt, Jr.
Assistant Vice President and Branch Manager
Garden City
1050 Franklin Avenue
Garden City, NY 11530
(516) 742-6262
Elizabeth A. Materia
Assistant Vice President and Branch Manager
Great Neck
536 Northern Boulevard
Great Neck, NY 11021
(516) 482-6666
Janice B. Manditch
Assistant Vice President and Branch Manager
Hauppauge
330 Motor Parkway
Hauppauge, NY 11788
(631) 952-2900
Mark A. Ryan
Assistant Vice President and Branch Manager
Hicksville
106 Old Country Road
Hicksville, NY 11801
(516) 932-7150
Joyce C. Graber
Assistant Vice President and Branch Manager
Arlyne H. Kramer
Assistant Cashier
Lake Success
3000 Marcus Avenue
Lake Success, NY 11042
(516) 775-3133
Lucy Ortiz
Assistant Vice President and Branch Manager
Patricia Scrudato
Assistant Manger
84
Mineola
194 First Street
Mineola, NY 11501
(516) 742-1144
Herta Tscherne
Assistant Vice President and Branch Manager
Rosemary Kerrane
Assistant Manager
New Highway
2091 New Highway
Farmingdale, NY 11735
(631) 454-2022
Barbara Cavalier
Assistant Vice President and Branch Manager
New Hyde Park
200 Jericho Turnpike
New Hyde Park, NY 11040
(516) 328-3100
Linda A. Cutter
Assistant Vice President and Branch Manager
Kathleen Martin
Administrative Assistant
Valley Stream
133 E. Merrick Road
Valley Stream, NY 11580
(516) 825-0202
Peter J. Arebalo
Assistant Vice President and Branch Manager
Investment Division
800 Woodbury Road
Woodbury, NY 11797
(516) 364-3436
Brian J. Keeney
Senior Vice President
Robert M. Heyssel, Jr.
Vice President
Sharon E. Pazienza
Vice President
Joanne Buckley
Assistant Vice President
Quyen T. Pham
Operations Manager
Dawn LoBraico
Administrative Assistant
Francis V. Liantonio
Vice President
Administration
J. William Johnson
Chairman and Chief Executive Officer
Arthur J. Lupinacci, Jr.
Executive Vice President
85
Lorraine Fogarty
Executive Assistant
Constance Miller
Executive Assistant
Auditing
Kitty W. Craig
Vice President
Margaret M. DeBonis
Assistant Vice President
Cathy Balsiero
Assistant Auditor
Mathew Wallis
Administrative Assistant
Branch Administration
James Clavell
Vice President
Monica Baker
Assistant Vice President
Ronald Pimental
Assistant Vice President
JoAnn Diamond
Assistant Cashier
Leonora Mintz
Assistant Manager
Susan Sciacca
Assistant Manager
Sara Melamed
Administrative Assistant
Commercial Banking
Donald L. Manfredonia
Executive Vice President
Joseph G. Perri
Executive Vice President
Albert Arena
Vice President
Paul J. Daley
Vice President
Stephen Durso
Vice President
Richard K. Dzwlewicz
Vice President
James P. Johnis
Vice President
Henry A. Kramer
Vice President
Edward V. Mirabella
Vice President
William W. Riley
Vice President
John P. Solensky
Vice President
86
Margaret M. Curran
Assistant Vice President
Gretchen B. Nesky
Assistant Vice President
Frank Pelliccione
Assistant Vice President
Andrew W. Malone
Commercial Mortgage Originator
Maureen Cannarsa
Administrative Assistant
Diane Mucci
Executive Assistant
Compliance and Procedures
Wayne M. Sturges
Vice President
Computer Services
Conrad A. Lissade
Computer Services Manager
Data Center
Jose Diaz
Assistant Vice President
Christina Alexander
Administrative Assistant
Deposit Operations
Carmela Lalonde
Assistant Manager
Donna Long
Assistant Manager
Neil Dastas
Administrative Assistant
Finance
Mark D. Curtis
Senior Vice President
Aldo Columbano
Vice President
Wayne B. Drake
Vice President
Matthew J. Mankowski
Assistant Vice President
Catherine Irvin
Assistant Manager
Cheryl Romanski
Assistant Manager
Diane Pascucci
Administrative Assistant
General Services
Frederick G. Ruff
Assistant Vice President
Alexandria Spearman
Administrative Assistant
87
Human Resources
Donna M. Kelly
Vice President
Takako Endo
Assistant Vice President
Susan J. Hempton
Assistant Vice President
Loan Center
Robert Jacobs
Assistant Vice President
John F. Darcy
Senior Mortgage Advisor
Frederick T. Hughes
Mortgage Originator
Ann J. Cristodero
Assistant Manager
Eveline Ratte
Assistant Manager
Anna S. Fleming
Administrative Assistant
Veronica Gajkowski
Administrative Assistant
Barbara Johnson
Administrative Assistant
Patricia Lacorazza
Administrative Assistant
Marketing
Cathy M. Poturny
Assistant Vice President
Anne Urtnowski
Assistant Manager
Operations Administration
Richard Kick
Senior Vice President
Betsy Gustafson
Vice President
Counsel
Schupbach, Williams & Pavone LLP
Independent Auditors
Arthur Andersen LLP
FORM 10-K REPORT
A copy of the Corporation's annual report on Form 10-K for 2001, filed with the
Securities and Exchange Commission, may be obtained without charge upon written
request to Mark D. Curtis, Senior Vice President and Treasurer, The First of
Long Island Corporation, 10 Glen Head Road, PO Box 67, Glen Head, New York
11545-0067.
88
Executive Office
The First of Long Island Corporation
10 Glen Head Road
Glen Head, New York 11545
(516) 671-4900
www.firstofli.com
Transfer Agent and Registrar
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
(800) 368-5948
www.rtco.com
Annual Meeting Notice
The Annual Meeting of Stockholders will be held at the Old Brookville
office of The First National Bank of Long Island, 209 Glen Head Road, Glen Head,
New York 11545 on Tuesday, April 16, 2002 at 3:30 P.M.
BUSINESS DEVELOPMENT BOARD
David Black, CPA
Robert Bogardt, CPA
Bogardt & Company, LLP
Christopher S. Byczek, Esq.
Partner
Cronin & Byczek, LLP
Emil V. Cianciulli, Esq.
Partner
Cianciulli & Meng, P.C.
Thomas N. Dufek
Chief Financial Officer
The Tyree Organization
William L. Edwards
Real Estate Investor
C. J. Erickson, Esq.
Hodgson Russ LLP
Bernard Esquenet
Chief Executive Officer
The Ruhof Corp.
Leonard Gleicher
Partner
Goldberg Bros. Realtors
Kenneth R. Going
President
GOING SIGN CO. Inc.
Herbert Haber, CPA
89
Kevin J. Harding, Esq.
Partner
Harding and Harding
Alan B. Katcher
Chief Executive Officer
Terry Alan Adv. Co., Inc.
Kevin T. Kelly
Executive Administrator
Ophthalmic Consultants of Long Island
Herbert Kotler, Esq.
Kenneth R. Latham
Chairman of the Board
Latham Bros. Lumber Co., Inc.
Zachary Levy, Esq.
James J. Lynch, Esq.
Susan Hirschfeld Mohr
President
J. W. Hirschfeld Agency, Inc.
Richard E. Nussbaum, CPA
Managing Partner
Nussbaum Yates & Wolpow, P.C.
Douglas Pierce
President
Pierce Country Day School & Camp Inc.
Quentin Sammis
President
Coldwell Banker Sammis
Arthur C. Schupbach, Esq.
Partner
Schupbach, Williams & Pavone LLP
Lawrence F. Steiner
President
Universal Unlimited, Inc.
H. Craig Treiber
Chairman/CEO
The Treiber Insurance Group
Arthur Ventura
President
Badge Agency
Mark Wurzel
President
Calico Cottage, Inc.
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[LOGO] The First of Long Island
The First of Long Island Corporation
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