SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______________________ to _____________________
Commission file number 0-12220
THE FIRST OF LONG ISLAND CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 11-2672906
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10 Glen Head Road, Glen Head, New York 11545
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (516) 671-4900
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 4, 2002
----- -------------------------------
Common stock, par value 4,174,506
$.10 per share
THE FIRST OF LONG ISLAND CORPORATION
SEPTEMBER 30, 2002
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2002 And December 31, 2001 1
Consolidated Statements Of Income
Nine And Three Months Ended
September 30, 2002 And 2001 2
Consolidated Statements Of Changes In
Stockholders' Equity
Nine Months Ended September 30, 2002 And 2001 3
Consolidated Statements Of Cash Flows
Nine Months Ended September 30, 2002 And 2001 4
Notes To Consolidated Financial Statements 5
Item 2. Management's Discussion And Analysis Of
Financial Condition And Results Of Operations 6
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Change in Securities and Use of Proceeds N/A
Item 3. Default Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders N/A
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
CERTIFICATIONS 18
ITEM 1. - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
------------- -------------
Assets:
Cash and due from banks ................................... $ 37,114,000 $ 28,209,000
Federal funds sold ........................................ 54,000,000 27,000,000
------------- -------------
Cash and cash equivalents ............................... 91,114,000 55,209,000
------------- -------------
Investment securities:
Held-to-maturity, at amortized cost (fair
value of $269,220,001 and $257,670,000) ......... 259,282,000 252,215,000
Available-for-sale, at fair value (amortized cost
of $171,143,000 and $136,654,000) ............... 178,724,000 138,275,000
------------- -------------
438,006,000 390,490,000
------------- -------------
Loans:
Commercial and industrial .......................... 35,261,000 40,993,000
Secured by real estate ............................. 206,121,000 179,905,000
Consumer ........................................... 6,039,000 6,198,000
Other .............................................. 592,000 593,000
------------- -------------
248,013,000 227,689,000
Unearned income .................................... (1,009,000) (1,001,000)
------------- -------------
247,004,000 226,688,000
Allowance for loan losses .......................... (2,072,000) (2,020,000)
------------- -------------
244,932,000 224,668,000
------------- -------------
Bank premises and equipment, net .......................... 6,442,000 7,156,000
Prepaid income taxes ...................................... -- 1,000
Other assets .............................................. 6,632,000 6,557,000
------------- -------------
$ 787,126,000 $ 684,081,000
============= =============
Liabilities:
Deposits:
Checking ........................................... $ 242,648,000 $ 222,822,000
Savings and money market ........................... 417,026,000 347,430,000
Time, other ........................................ 18,762,000 21,022,000
Time, $100,000 and over ............................ 17,385,000 13,596,000
------------- -------------
695,821,000 604,870,000
Accrued expenses and other liabilities .................... 3,069,000 3,968,000
Current income taxes payable .............................. 272,000 --
Deferred income taxes payable ............................. 2,858,000 497,000
------------- -------------
702,020,000 609,335,000
------------- -------------
Commitments and Contingent Liabilities
Stockholders' Equity:
Common stock, par value $.10 per share:
Authorized, 20,000,000 shares;
Issued and outstanding, 4,176,306 and 2,792,902 shares 418,000 279,000
Surplus ................................................... 346,000 955,000
Retained earnings ......................................... 79,815,000 72,550,000
------------- -------------
80,579,000 73,784,000
Accumulated other comprehensive income net of tax ......... 4,527,000 962,000
------------- -------------
85,106,000 74,746,000
------------- -------------
$ 787,126,000 $ 684,081,000
============= =============
See notes to consolidated financial statements
1
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended September 30, Three Months Ended September 30,
--------------------------------- ---------------------------------
2002 2001 2002 2001
------------ ----------- ----------- ----------
Interest income:
Loans .......................................... $ 12,438,000 $12,657,000 $ 4,229,000 $4,181,000
Investment securities:
Taxable .................................... 10,189,000 9,444,000 3,512,000 3,223,000
Nontaxable ................................. 4,336,000 3,926,000 1,441,000 1,357,000
Federal funds sold ............................. 639,000 2,948,000 278,000 763,000
------------ ----------- ----------- ----------
27,602,000 28,975,000 9,460,000 9,524,000
------------ ----------- ----------- ----------
Interest expense:
Savings and money market deposits .............. 3,313,000 6,647,000 1,191,000 1,957,000
Time deposits .................................. 506,000 1,255,000 156,000 324,000
------------ ----------- ----------- ----------
3,819,000 7,902,000 1,347,000 2,281,000
------------ ----------- ----------- ----------
Net interest income ........................ 23,783,000 21,073,000 8,113,000 7,243,000
Provision for loan losses .......................... 50,000 -- (100,000) --
------------ ----------- ----------- ----------
Net interest income after provision for loan losses 23,733,000 21,073,000 8,213,000 7,243,000
------------ ----------- ----------- ----------
Noninterest income:
Investment Management Division income .......... 841,000 833,000 275,000 254,000
Service charges on deposit accounts ............ 2,809,000 2,624,000 904,000 860,000
Net losses on sales of available-for-sale securities (12,000) -- -- --
Other .......................................... 489,000 489,000 140,000 167,000
------------ ----------- ----------- ----------
4,127,000 3,946,000 1,319,000 1,281,000
------------ ----------- ----------- ----------
Noninterest expense:
Salaries ....................................... 7,332,000 6,694,000 2,480,000 2,259,000
Employee benefits .............................. 3,277,000 2,640,000 1,104,000 866,000
Occupancy and equipment expense ................ 2,250,000 2,112,000 750,000 692,000
Other operating expenses ....................... 3,315,000 3,161,000 1,092,000 1,059,000
------------ ----------- ----------- ----------
16,174,000 14,607,000 5,426,000 4,876,000
------------ ----------- ----------- ----------
Income before income taxes ................. 11,686,000 10,412,000 4,106,000 3,648,000
Income tax expense ................................. 3,077,000 2,753,000 1,112,000 974,000
------------ ----------- ----------- ----------
Net income ................................. $ 8,609,000 $ 7,659,000 $ 2,994,000 $2,674,000
============ =========== =========== ==========
Weighted average (Note 3):
Common shares .................................. 4,182,053 4,290,420 4,177,494 4,246,800
Dilutive stock options ......................... 50,761 60,576 56,570 58,011
------------ ----------- ----------- ----------
4,232,814 4,350,996 4,234,064 4,304,811
============ =========== =========== ==========
Earnings per share (Note 3):
Basic .......................................... $ 2.06 $ 1.79 $ .72 $ .63
============ =========== =========== ==========
Diluted ........................................ $ 2.03 $ 1.76 $ .71 $ .62
============ =========== =========== ==========
See notes to consolidated financial statements
2
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------
Nine Months Ended Septmeber 30, 2002
------------------------------------------------------------------------------------------
Accumulated
Other
Common Stock Compre- Compre-
--------------------- hensive Retained hensive
Shares Amount Surplus Income Earnings Income Total
--------- --------- --------- ----------- ------------ ----------- ------------
Balance, January 1, 2002 .......... 2,792,902 $ 279,000 $ 955,000 $ 72,550,000 $ 962,000 $ 74,746,000
Net Income ...................... $ 8,609,000 8,609,000 8,609,000
Repurchase and retirement
of common stock ............... (24,103) (2,000) (925,000) (927,000)
Exercise of stock options ....... 15,840 2,000 270,000 272,000
Tax benefit of stock options .... 46,000 46,000
Unrealized gains on available-
for-sale-securities, net of
income taxes ................ 3,565,000 3,565,000 3,565,000
-----------
Comprehensive income ............ $12,174,000
===========
3-for-2 stock split ............. 1,391,667 139,000 (139,000) --
Cash in lieu of fractional shares
on 3-for-2 stock split ........ (8,000) (8,000)
Cash dividends declared -
$.43 per share .................. (1,197,000) (1,197,000)
--------- --------- --------- ------------ ----------- ------------
Balance, September 30, 2002 ....... 4,176,306 $ 418,000 $ 346,000 $ 79,815,000 $ 4,527,000 $ 85,106,000
========= ========= ========= ============ =========== ============
------------------------------------------------------------------------------------------
Nine Months Ended Septmeber 30, 2001
------------------------------------------------------------------------------------------
Accumulated
Other
Common Stock Compre- Compre-
--------------------- hensive Retained hensive
Shares Amount Surplus Income Earnings Income Total
--------- --------- --------- ----------- ------------ ----------- ------------
Balance, January 1, 2001 .......... 2,892,549 $ 289,000 $1,188,000 $ 68,737,000 $ 652,000 $ 70,866,000
Net Income ...................... $ 7,659,000 7,659,000 7,659,000
Repurchase and retirement
of common stock ............... (86,972) (8,000) (3,429,000) (3,437,000)
Exercise of stock options ....... 11,530 1,000 227,000 228,000
Unrealized gains on available-
for-sale-securities, net of
income taxes ................ 1,350,000 1,350,000 1,350,000
-----------
Comprehensive income ............ $ 9,009,000
===========
Cash dividends declared -
$.38 per share .................. (1,082,000) (1,082,000)
Tax benefit of stock options .... 31,000 31,000
Transfer from retained earnings
to surplus ...................... 2,500,000 (2,500,000) --
--------- --------- --------- ------------ ----------- ------------
Balance, September 30, 2001 ....... 2,817,107 $ 282,000 $ 517,000 $ 72,814,000 $ 2,002,000 $ 75,615,000
========= ========= ========= ============ =========== ============
See notes to consolidated financial statements
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
-------------------------------
Increase (Decrease) in Cash and Cash Equivalents 2002 2001
------------ -------------
Cash Flows From Operating Activities:
Net income ................................................................ $ 8,609,000 $ 7,659,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ............................................. 50,000 --
Deferred income tax credit ............................................ (35,000) (164,000)
Depreciation and amortization ......................................... 959,000 877,000
Premium amortization (discount accretion) on investment securities, net 2,094,000 (126,000)
Net loss on sale of available-for-sale securities ..................... 12,000 --
Decrease in prepaid income taxes ...................................... 1,000 --
Increase in other assets .............................................. (75,000) (494,000)
Increase (decrease) in accrued expenses and other liabilities ......... 361,000 (188,000)
Increase in income taxes payable ...................................... 318,000 239,000
------------ -------------
Net cash provided by operating activities ........................... 12,294,000 7,803,000
------------ -------------
Cash Flows From Investing Activities:
Proceeds from sales of available-for-sale securities ...................... 687,000 --
Proceeds from maturities and redemptions of investment securities:
Held-to-maturity ...................................................... 90,797,000 270,270,000
Available-for-sale .................................................... 7,428,000 10,777,000
Purchase of investment securities:
Held-to-maturity ...................................................... (99,051,000) (308,981,000)
Available-for-sale .................................................... (43,522,000) (20,567,000)
Net increase in loans to customers ........................................ (20,314,000) (18,814,000)
Purchases of bank premises and equipment .................................. (308,000) (1,113,000)
Proceeds from sale of equipment ........................................... 3,000 --
------------ -------------
Net cash used in investing activities ............................... (64,280,000) (68,428,000)
------------ -------------
Cash Flows From Financing Activities:
Net increase in total deposits ............................................ 90,951,000 65,814,000
Proceeds from exercise of stock options ................................... 272,000 228,000
Repurchase and retirement of common stock ................................. (927,000) (3,437,000)
Cash dividends paid ....................................................... (2,397,000) (2,181,000)
Cash in lieu of fractional shrares on 3-for-2 stock split ................. (8,000) --
------------ -------------
Net cash provided by financing activities ........................... 87,891,000 60,424,000
------------ -------------
Net increase (decrease) in cash and cash equivalents ........................ 35,905,000 (201,000)
Cash and cash equivalents, beginning of year ................................ 55,209,000 111,672,000
------------ -------------
Cash and cash equivalents, end of period .................................... $ 91,114,000 $ 111,471,000
============ =============
Supplemental Schedule of Noncash:
Investing Activities
Unrealized gains on available-for-sale securities ......................... $ 5,960,000 $ 2,275,000
Writeoff of premises and equipment against reserve ........................ 60,000 --
Financing Activities
Tax benefit from exercise of employee stock options ....................... 46,000 31,000
The Corporation made interest payments of $3,846,000 and $8,039,000 and income
tax payments of $2,792,000 and $2,677,000 during the nine months ended September
30, 2002 and 2001, respectively.
See notes to consolidated financial statements
4
THE FIRST OF LONG ISLAND CORPORATION AND SUBSIDIARY
SEPTEMBER 30, 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accounting and reporting policies of the Corporation reflect banking
industry practice and conform to generally accepted accounting principles in the
United States. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported asset and
liability balances and revenue and expense amounts and the disclosure of
contingent assets and liabilities. Actual results could differ significantly
from those estimates.
The consolidated financial statements include the accounts of The First of
Long Island Corporation (the "Corporation") and its wholly-owned subsidiary, The
First National Bank of Long Island (the "Bank") (collectively referred to as the
"Corporation"). The Corporation's financial condition and operating results
principally reflect those of the Bank. All intercompany balances and amounts
have been eliminated.
The consolidated financial information included herein as of and for the
periods ended September 30, 2002 and 2001 is unaudited; however, such
information reflects all adjustments which are, in the opinion of management,
necessary for a fair statement of results for the interim periods. The December
31, 2001 consolidated balance sheet was derived from the Company's December 31,
2001 audited consolidated financial statements.
2. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
On January 1, 2002, the Corporation adopted Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS No.
142"). SFAS No. 142 supersedes Accounting Principles Board Opinion No. 17,
"Intangible Assets" ("APB No. 17"). At January 1, 2002, the Corporation had
goodwill of $220,000. No goodwill impairment loss was recorded for the first
nine months of 2002. In the first nine months of 2001, and under the provisions
of APB No. 17, the Corporation recorded goodwill amortization of $14,000.
3. STOCK SPLIT
On June 18, 2002, the Corporation declared a 3-for-2 stock split to be
paid by means of a 50% stock dividend on July 24, 2002. All share and per share
amounts included in the consolidated financial statements and management's
discussion and analysis of financial condition and results of operations of have
been adjusted to reflect the effect of the split.
5
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors that have affected the Corporation's financial condition and
operating results during the periods included in the accompanying consolidated
financial statements, and should be read in conjunction with such financial
statements. The Corporation's financial condition and operating results
principally reflect those of its wholly-owned subsidiary, The First National
Bank of Long Island (the "Bank"). The Corporation's primary service area is
Nassau and Suffolk Counties, Long Island.
Overview
The Corporation earned $2.03 per share for the first nine months of 2002
as compared to $1.76 for the same period last year, an increase of approximately
15%. Based on net income of $8,609,000, the Corporation returned 1.56% on
average total assets and 14.59% on average total equity. This compares to
returns on assets and equity of 1.57% and 14.08%, respectively, for the same
period last year. Total assets and deposits each grew by approximately 13% when
comparing balances at September 30, 2002 to those at September 30, 2001. In
addition, during this same time period and despite cash dividends and continued
purchases under the Corporation's stock repurchase program, total capital before
unrealized gains and losses on available-for-sale securities grew by
approximately 9%. The Corporation's capital ratios continue to substantially
exceed the current regulatory criteria for a well-capitalized bank.
Overwhelmingly, the most important reason for the growth in earnings for
the first nine months of 2002 when compared to the same period last year was
significant growth in checking balances. Other meaningful factors were loan
growth and growth in savings balances. The positive impact of these items was
partially offset by an increase in noninterest expense.
Net Interest Income
Average Balance Sheet; Interest Rates and Interest Differential. The
following table sets forth the average daily balances for each major category of
assets, liabilities and stockholders' equity as well as the amounts and average
rates earned or paid on each major category of interest-earning assets and
interest-bearing liabilities.
6
Nine Months Ended September 30,
--------------------------------------------------------------------------------------
2002 2001
---------------------------------------- ----------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
--------- ---------- ---------- --------- ---------- ----------
(dollars in thousands)
Assets
Federal funds sold .............. $ 50,221 $ 639 1.70% $ 88,154 $ 2,948 4.47%
Investment Securities:
Taxable ....................... 281,887 10,189 4.83 213,587 9,444 5.91
Nontaxable (1) ................ 126,142 6,570 6.94 113,201 5,948 7.01
Loans (1)(2) .................... 238,842 12,451 6.97 201,593 12,683 8.41
--------- ---------- ---------- --------- ---------- ----------
Total interest-earning assets ... 697,092 29,849 5.72 616,535 31,023 6.72
---------- ---------- --------- ---------- ----------
Allowance for loan losses ....... (2,112) (1,944)
--------- ---------
Net interest-earning assets ..... 694,980 614,591
Cash and due from banks ......... 30,879 23,575
Premises and equipment, net ..... 6,752 7,103
Other assets .................... 5,872 5,711
--------- ---------
$ 738,483 $ 650,980
========= =========
Liabilities and
Stockholders' Equity
Savings and money market deposits $ 383,662 3,313 1.15 $ 337,060 6,647 2.64
Time deposits ................... 35,514 506 1.90 40,676 1,255 4.13
--------- ---------- ---------- --------- ---------- ----------
Total interest-bearing deposits . 419,176 3,819 1.22 377,736 7,902 2.80
--------- ---------- ---------- --------- ---------- ----------
Checking deposits (3) ........... 236,022 196,430
Other liabilities ............... 4,387 4,075
--------- ---------
659,585 578,241
Stockholders' equity ............ 78,898 72,739
--------- ---------
$ 738,483 $ 650,980
========= =========
Net interest income (1) ......... $ 26,030 $ 23,121
========== ==========
Net interest spread (1) ......... 4.50% 3.92%
========== ==========
Net interest yield (1) .......... 4.99% 5.01%
========== ==========
(1) Tax-equivalent basis. Interest income on a tax-equivalent basis includes
the additional amount of interest income that would have been earned if
the Corporation's investment in tax-exempt loans and investment securities
had been made in loans and investment securities subject to Federal income
taxes yielding the same after-tax income. The tax-equivalent amount of
$1.00 of nontaxable income was $1.52 in each period presented, based on a
Federal income tax rate of 34%.
(2) For the purpose of these computations, nonaccruing loans are included in
the daily average loan amounts outstanding.
(3) Includes official check and treasury tax and loan balances.
7
Rate/Volume Analysis. The following table sets forth the effect of changes
in volumes, changes in rates, and changes in rate/volume on tax-equivalent
interest income, interest expense and net interest income.
Nine Months Ended September 30,
-------------------------------------------
2002 Versus 2001
Increase (decrease) due to changes in:
-------------------------------------------
Rate/ Net
Volume Rate Volume (2) Change
------ ---- ---------- ------
(in thousands)
Interest Income:
Federal funds sold ........... $(1,269) $(1,826) $ 786 $(2,309)
Investment securities:
Taxable .................... 3,020 (1,724) (551) 745
Nontaxable (1) ............. 680 (52) (6) 622
Loans (1) .................... 2,343 (2,174) (401) (232)
------- ------- ----- -------
Total interest income ........ 4,774 (5,776) (172) (1,174)
------- ------- ----- -------
Interest Expense:
Savings and money
market deposits ............ 919 (3,736) (517) (3,334)
Time deposits ................ (159) (675) 85 (749)
------- ------- ----- -------
Total interest expense ....... 760 (4,411) (432) (4,083)
------- ------- ----- -------
Increase (decrease) in net
interest income ............ $ 4,014 $(1,365) $ 260 $ 2,909
======= ======= ===== =======
(1) Tax-equivalent basis.
(2) Represents the change not solely attributable to change in rate or change
in volume but a combination of these two factors.
Net interest income on a tax-equivalent basis increased by $2,909,000, or
12.6%, from $23,121,000 for the first nine months of 2001 to $26,030,000 for the
same period this year. As can be seen from the above rate/volume analysis, the
increase is largely comprised of a positive volume variance of $4,014,000 and a
negative rate variance of $1,365,000.
The positive volume variance was largely caused by substantial growth in
average checking deposits and the use of such funds to purchase investment
securities and originate loans. When comparing the first nine months of 2002 to
the same period last year, average checking deposits increased by $39,592,000,
or approximately 20%.
Also making a contribution to the positive volume variance was growth in
savings and money market deposit balances and the use of such funds to purchase
investment securities and originate loans. When comparing the first nine months
of 2002 to the same period last year, average savings and money market deposit
balances increased by $46,602,000, or 13.8%. Although the largest components of
this increase were growth in "Select Savings", a statement savings account that
earns a higher money market rate, and nonpersonal money market accounts, the
Bank also experienced nice growth in traditional savings and IOLA (interest on
lawyer) accounts.
Funding interest-earning asset growth with growth in checking deposits has
a greater impact on net interest income than funding such growth with
interest-bearing deposits because checking deposits, unlike interest-bearing
deposits, have no associated interest
8
cost. This is the primary reason that the growth of checking balances has
historically been one of the Corporation's key strategies for increasing
earnings per share.
The Bank's new business program is a significant factor that favorably
impacted the growth in average checking balances noted when comparing the first
nine months of 2002 to the same period last year, and competitive pricing and
customer demographics are believed to be important factors with respect to the
growth in average interest-bearing deposits noted during the same period. In
addition, the growth in checking and interest-bearing deposits is also believed
to be attributable to the Bank's attention to customer service and both national
and local economic conditions.
A decrease in intermediate term interest rates should over time cause the
Bank's net interest yield to decline because the Bank will be reinvesting
proceeds from the maturity and amortization of loans and securities at yields
below previous portfolio yields. The Bank's net interest yield has declined only
slightly when comparing the first nine months of 2002 to the same period last
year. However, it has been trending downward throughout most of the year which
would appear to be caused by the overall decline in intermediate term interest
rates. Assuming that intermediate term rates remain at their currently low
levels, management expects net interest yield to continue downward, particularly
considering that a substantial portion of the decline in intermediate term rates
occurred in the most recent quarter.
As shown in the table on page 7, the average rate earned on the Bank's
taxable investment securities portfolio decreased from 5.91% in the first nine
months of 2001 to 4.83% for the same period this year. The primary reasons for
this decline was the decrease in intermediate term interest rates and
management's decision to take advantage of the slope of the yield curve by
reducing the Bank's overnight position in federal funds sold and increasing the
size of the Bank's short-term U.S. Treasury and short-term mortgage security
portfolios. Although the yields on these short-term securities are significantly
better than federal funds, they are less than the overall yield currently being
earned on the longer-term securities in the Bank's portfolio and thus
contributed to a decline in the overall taxable portfolio yield.
Allowance and Provision For Loan Losses
The allowance for loan losses grew by $52,000 during the first nine months
of 2002, amounting to $2,072,000 at September 30, 2002 as compared to $2,020,000
at December 31, 2001. The allowance represented approximately .8% and .9% of
total loans at September 30, 2002 and December 31, 2001, respectively. During
the first nine months of 2002, the Bank had loan chargeoffs and recoveries of
$40,000 and $42,000, respectively, and recorded a $50,000 net provision for loan
losses.
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. The process for estimating credit losses and determining the
allowance for loan losses as of any balance sheet date is subjective in nature
and requires material estimates. Actual results could differ significantly from
these estimates.
In determining the allowance for loan losses, there is not an exact amount
but rather a range for what constitutes an appropriate allowance. In estimating
a range for such losses the Bank selectively reviews individual credits in its
portfolio and, for those loans deemed to be impaired, measures impairment losses
based on either the fair value of collateral or the discounted value of expected
future cash flows. Losses for loans that are
9
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. Loans secured by
real estate represent 83% of the Bank's total loans outstanding at September 30,
2002. The majority of these loans were made to borrowers domiciled on Long
Island and are secured by Long Island properties. In recent years, economic
conditions on Long Island have been strong and residential real estate values
have grown to unprecedented highs. Such conditions and values could deteriorate
in the future, and such deterioration could be substantial. If this were to
occur, some of the Bank's borrowers may be unable to make the required
contractual payments on their loans, and the Bank may be unable to realize the
full carrying value of such loans through foreclosure. However, management
believes that the Bank's underwriting policies for residential mortgages are
relatively conservative and, as a result, the Bank might be less affected than
the overall market.
Future provisions and chargeoffs could also be affected by environmental
impairment of properties securing the Bank's mortgage loans. Environmental
audits for commercial mortgages were instituted by the Bank in 1987. Under the
Bank's current policy, an environmental audit is required on practically all
commercial-type properties that are considered for a mortgage loan. At the
present time, the Bank is not aware of any existing loans in the portfolio where
there is environmental pollution originating on the mortgaged properties that
would materially affect the value of the portfolio.
10
Asset Quality
The Corporation has identified certain assets as risk elements. These
assets include nonaccruing loans, foreclosed real estate, loans that are
contractually past due 90 days or more as to principal or interest payments and
still accruing and troubled debt restructurings. These assets present more than
the normal risk that the Corporation will be unable to eventually collect or
realize their full carrying value. The Corporation's risk elements at September
30, 2002 and December 31, 2001 are as follows:
September 30, December 31,
2002 2001
------------- ------------
(dollars in thousands)
Nonaccruing loans ................................. $ 58 $ 105
Foreclosed real estate ............................ -- --
-------- --------
Total nonperforming assets ...................... 58 105
Troubled debt restructurings ...................... -- 10
Loans past due 90 days or more as to
principal or interest payments and still accruing 1 236
-------- --------
Total risk elements ............................. $ 59 $ 351
======== ========
Nonaccruing loans as a percentage of total loans .. .02% .05%
======== ========
Nonperforming assets as a percentage of total loans
and foreclosed real estate ...................... .02% .05%
======== ========
Risk elements as a percentage of total loans and
foreclosed real estate .......................... .02% .15%
======== ========
Noninterest Income, Noninterest Expense, and Income Taxes
Noninterest income includes service charges on deposit accounts,
Investment Management Division income, and all other items of income, other than
interest, resulting from the business activities of the Corporation. When
comparing the first nine months of 2002 to the same period last year, service
charges on deposit accounts increased by 7%. The increase is largely
attributable to a revised service charge schedule which went into effect on
March 1, 2002.
Noninterest expense is comprised of salaries, employee benefits, occupancy
and equipment expense and other operating expenses incurred in supporting the
various business activities of the Corporation. Noninterest expense increased by
$1,567,000, or 10.7%, from $14,607,000 for the first nine months of 2001 to
$16,174,000 for the same period this year. The increase is largely comprised of
an increase in salaries of $638,000, or 9.5%, and an increase in employee
benefits expense of $637,000, or 24.1%.
The increase in salaries is attributable to normal annual salary
adjustments and additions to staff. The increase in employee benefits expense is
largely attributable to increases in the cost of health care insurance, profit
sharing expense, and incentive compensation.
Several of the Bank's significant insurance policies will be renewed in
the fourth quarter of this year or early in 2003. These include the fidelity
bond, directors' and officers' liability, bankers' professional liability, and
group health. Due primarily to current conditions in the insurance marketplace,
the cost of these coverages is expected to increase significantly. Based on
current estimates, management expects the aggregate annual increase to be in the
range of $500,000 to $700,000.
11
Income tax expense as a percentage of book income was 26.3% for the first
nine months of 2002 as compared to 26.4% for the same period last year. These
percentages vary from the statutory Federal income tax rate of 34% primarily
because of state income taxes and tax-exempt interest on municipal securities.
Results of Operations - Three Months Ended September 30, 2002 Versus
September 30, 2001
Net income for the third quarter of 2002 was $2,994,000, or $.71 per
share, as compared to $2,674,000, or $.62 per share, earned for the same quarter
last year. The primary reasons for the 15% increase in earnings per share are
substantially the same as those discussed with respect to the nine-month
periods.
The $100,000 credit provision for loan losses in the third quarter of this
year was primarily due to the resolution of a credit problem to which the Bank
had allocated a significant specific reserve.
Capital
Under current regulatory capital standards, banks are classified as well
capitalized, adequately capitalized or undercapitalized. The Corporation's
capital management policy is designed to build and maintain capital levels that
exceed the minimum requirements for a well-capitalized bank. The following table
sets forth the Corporation's capital ratios at September 30, 2002 and the
minimum ratios necessary to be classified as well capitalized and adequately
capitalized. The Corporation's capital ratios at September 30, 2002
substantially exceed the requirements for a well-capitalized bank.
Regulatory Standards
Corporation's -------------------------
Capital Ratios at Well Adequately
September 30, 2002 Capitalized Capitalized
------------------ ----------- -----------
Total Risk-Based Capital Ratio ..... 30.26% 10.00% 8.00%
Tier 1 Risk-Based Capital Ratio ..... 29.50 6.00 4.00
Tier 1 Leverage Capital Ratio ....... 10.39 5.00 4.00
Total stockholders' equity increased by $10,360,000, or from $74,746,000
at December 31, 2001 to $85,106,000 at September 30, 2002. The increase in
stockholders' equity is primarily attributable to net income of $8,609,000 and
unrealized gains on available-for-sale securities of $3,565,000, less cash
dividends of $1,197,000 and stock repurchases amounting to $927,000.
Stock Repurchase Program. Since 1988, the Corporation has had a stock
repurchase program under which it can purchase, from time to time, shares of its
own common stock in market or private transactions. Under plans approved by the
Board of Directors in 2001, the Corporation purchased 24,103 shares thus far in
2002 and can purchase 46,956 shares in the future.
The stock repurchase program has been used by management to enhance
earnings per share. When comparing the first nine months of 2002 to the same
period last year, earnings per share are up 27 cents. Of the 27-cent increase,
approximately 4 cents is attributable to shares repurchased in 2001 and thus far
this year. On a full-year basis, these repurchases should add approximately 8
cents to earnings per share.
Market Liquidity. Trading in the Corporation's common stock is limited.
The total trading volume for the twelve months ended September 30, 2002 as
reported by Nasdaq and as adjusted for the 3-for-2 stock split declared June 18,
2002 was 678,233 shares, with an average daily volume of 2,691 shares. During
this same twelve month period, the
12
Corporation purchased 81,183 shares under its share repurchase program, 34,500
of which were purchased in market transactions. These market purchases represent
approximately 5% of the total trading volume reported by Nasdaq. Although the
Corporation has had a stock repurchase program since 1988, if the Company
discontinues the program it could adversely affect market liquidity for the
Corporation's common stock, the price of the Corporation's common stock, or
both.
Russell 3000(R) and 2000(R) Indices
Frank Russell Company ("Russell") currently maintains 21 U.S. common stock
indices. The indices are reconstituted each July 1st using objective criteria,
primarily market capitalization, and do not reflect subjective opinions. All
indices are subsets of the Russell 3000(R)Index which represents approximately
98% of the investable U. S. equity market.
The broad market Russell 3000(R) Index includes the largest 3,000
companies in terms of market capitalization and the small cap Russell 2000(R)
Index is comprised of the smallest 2,000 companies in the Russell 3000(R) Index.
The Corporation's capitalization, as computed by Russell, would place it at the
low end of the range for both the Russell 3000(R) and 2000(R) Indices.
Effective July 1, 2002, and for the first time in its history, the
Corporation's common stock was included in the Russell 3000(R) and 2000(R)
Indices. The Corporation believes that inclusion in the Russell indices has
positively impacted the price of its common stock. Conversely, if the
Corporation's market capitalization falls below the minimum necessary to be
included in the indices at any future reconstitution date, the Corporation
believes that this could adversely affect the price of its common stock.
Cash Flows and Liquidity
Cash Flows. During the first nine months of 2002, cash and cash
equivalents increased by $35,905,000. This occurred primarily because the cash
provided by checking growth, money market type deposit growth, and operations
exceeded the cash used for loan and securities portfolio growth.
Liquidity. The Corporation's primary sources of liquidity are its
overnight position in federal funds sold; its short-term investment securities
portfolio which generally consists of securities purchased to mature within two
years and securities with average lives of approximately two years; maturities
and monthly payments on the balance of the investment securities portfolio and
the loan portfolio; and longer-term investment securities designated as
available-for-sale. At September 30, 2002, the Corporation had $54,000,000 in
federal funds sales, a short-term securities portfolio not subject to pledge
agreements of $136,082,000, and longer-term available-for-sale securities not
subject to pledge agreements of $89,280,000. The Corporation's liquidity is
enhanced by its stable deposit base which primarily consists of checking,
savings, and money market accounts. Such accounts comprised 94.8% of total
deposits at September 30, 2002, while time deposits of $100,000 and over and
other time deposits comprised only 2.5% and 2.7%, 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
13
deposits. In addition, the Bank has not historically relied on purchased or
borrowed funds as sources of liquidity.
Legislation
Commercial checking deposits currently account for approximately 27% of
the Bank's total deposits. Congress is considering legislation that would allow
customers to cover checks by sweeping funds from interest-bearing deposit
accounts each business day and repeal the prohibition of the payment of interest
on corporate checking deposits in the future. Although management currently
believes that the Bank's earnings could be more severely impacted by permitting
the payment of interest on corporate checking deposits than the daily sweeping
of funds from interest-bearing accounts to cover checks, either could have a
material adverse impact on the Bank's future results of operations.
Forward Looking Statements
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" contains various forward-looking statements with respect to
financial performance and business matters. Such statements are generally
contained in sentences including the words "expect" or "could" or "should" or
"would". The Corporation cautions that these forward-looking statements are
subject to numerous assumptions, risks and uncertainties, and therefore actual
results could differ materially from those contemplated by the forward-looking
statements. In addition, the Corporation assumes no duty to update
forward-looking statements.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank invests in interest-earning assets which are funded by
interest-bearing deposits, noninterest-bearing deposits, and capital. The Bank's
results of operations are subject to risk resulting from interest rate
fluctuations generally and having assets and liabilities that have different
maturity, repricing, and prepayment/withdrawal characteristics. The Bank defines
interest rate risk as the risk that the Bank's earnings and/or net portfolio
value will change when interest rates change. The principal objective of the
Bank's asset/liability management activities is to maximize net interest income
while at the same time maintaining acceptable levels of interest rate and
liquidity risk and facilitating the funding needs of the Bank.
During 2001, there was a significant decrease in short-term interest rates
as evidenced by a 475 basis point reduction in both the federal funds target
rate and the Bank's prime lending rate. In addition, rates on intermediate term
securities and loans also decreased but by much lesser amounts. During the first
nine months of 2002, there were no further changes in the federal funds target
rate or the Bank's prime lending rate. However, yields on two to ten year
instruments softened significantly as evidenced by decreases of 145, 177, and
144 basis points, respectively, in two, five and ten year U.S. Treasury yields.
Most of this softening in these yields occurred in the most recent quarter. If
available yields remain at their currently low levels or decrease further and,
as a result, the Bank reinvests proceeds from maturing and amortizing loans and
securities at yields significantly below current portfolio yields, the Bank's
net interest yield could continue on its downward trend and the downward trend
could become more severe.
Because the Bank's loans and investment securities generally reprice
slower than its interest-bearing deposit accounts, a decrease in interest rates
uniformly across the yield curve should initially have a positive impact on the
Bank's net interest income.
14
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. In addition, rates may decrease to the point that
the Bank can not reduce its money market rates any further.
If interest rates decline and are sustained at the lower levels and, as a
result, the Bank purchases securities and originates loans at yields lower than
those maturing, the impact on net interest income should be negative because 40%
of the Bank's average interest-earning assets are funded by noninterest-bearing
checking deposits and capital.
Conversely, an immediate increase in interest rates uniformly across the
yield curve should initially have a negative effect on net interest income.
However, if the Bank does not increase the rates paid on its money market type
deposit accounts as quickly or in the same amount as market increases in the
overnight federal funds rate or the prime lending rate, the magnitude of the
negative impact will decline. Over a longer period of time, and assuming that
interest rates remain stable after the initial rate increase and the Bank
purchases securities and originates loans at yields higher than those maturing
and reprices loans at higher yields, the impact of an increase in interest rates
should be positive. This occurs primarily because with the passage of time more
loans and investment securities will reprice at the higher rates and there will
be no offsetting increase in interest expense for those loans and investment
securities funded by noninterest-bearing checking deposits and capital.
ITEM 4. - CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer, J. William Johnson, and Chief
Financial Officer, Mark D. Curtis, have reviewed the Corporation's disclosure
controls and procedures within 90 days prior to the filing of this report. Based
upon this review, these officers believe that the Corporation's disclosure
controls and procedures are effective in ensuring that material information
related to the Corporation is made known to them by others within the
Corporation.
(b) Changes in Internal Controls
There were no significant changes in the Corporation's internal controls
or in other factors that could significantly affect these controls during the
quarter covered by this report or from the end of the reporting period to the
date of this Form 10-Q.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Corporation and the Bank may be involved in
litigation that arises in the normal course of business. As of the date of this
Form 10-Q, neither the Corporation nor the Bank is a party to any litigation
that management believes could reasonably be expected to have a material adverse
effect on the Corporation's or the Bank's financial position or results of
operations.
Item 5. Other Information
a) Stock Repurchase Program And Market Liquidity
Trading in the Corporation's common stock is limited. The total trading
volume for the twelve months ended September 30, 2002 as reported by Nasdaq and
as adjusted for the 3-for-2 stock split declared June 18, 2002 was 678,233
shares, with an average daily volume of 2,691 shares. During this same twelve
month period, the Corporation purchased 81,183 shares under its share repurchase
program, 34,500 of which were purchased in market transactions. These market
purchases represent approximately 5% of the total trading volume reported by
Nasdaq. Although the Corporation has had a stock repurchase program since 1988,
if the Company discontinues the program it could adversely affect market
liquidity for the Corporation's common stock, the price of the Corporation's
common stock, or both.
For a further discussion of the Corporation's share repurchase program,
including its impact on earnings per share, please see the "Capital" section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
b) Russell 3000(R) and 2000(R) Indices
Frank Russell Company ("Russell") currently maintains 21 U.S. common stock
indices. The indices are reconstituted each July 1st using objective criteria,
primarily market capitalization, and do not reflect subjective opinions. All
indices are subsets of the Russell 3000(R) Index which represents approximately
98% of the investable U. S. equity market.
The broad market Russell 3000(R) Index includes the largest 3,000
companies in terms of market capitalization and the small cap Russell 2000(R)
Index is comprised of the smallest 2,000 companies in the Russell 3000(R) Index.
The Corporation's capitalization, as computed by Russell, would place it at the
low end of the range for both the Russell 3000(R) and 2000(R) Indices.
Effective July 1, 2002, and for the first time in its history, the
Corporation's common stock was included in the Russell 3000(R) and 2000(R)
Indices. The Corporation believes that inclusion in the Russell indices has
positively impacted the price of its common stock. Conversely, if the
Corporation's market capitalization falls below the minimum necessary to be
included in the indices at any future reconstitution date, the Corporation
believes that this could adversely impact the price of its common stock.
c) Changes In Registrant's Certifying Accountants
On June 27, 2002, based on a recommendation by the Audit Committee of the
Board of Directors, the Board of Directors of The First of Long Island
Corporation approved the dismissal of the Company's independent public
accountant, Arthur Andersen LLP, and selected and engaged Grant Thornton LLP as
16
its independent public accountant. Grant Thornton LLP will audit the Company's
financial statements for the fiscal year ended December 31, 2002.
Item 6. Exhibits and Reports on Form 8-K
a) The following exhibit is submitted herewith.
Exhibit No. Name
- ----------- ----
99.1 Certification by Chief Executive Officer and
Chief Financial Officer
b) Reports on Form 8-K - None
17
SIGNATURES
Pursuant To The Requirements Of The Securities Exchange Act Of 1934, The
Registrant Has Duly Caused This Report To Be Signed On Its Behalf By The
Undersigned Thereunto Duly Authorized.
THE FIRST OF LONG ISLAND CORPORATION
(Registrant)
Date: November 4, 2002 By /s/ J. WILLIAM JOHNSON
-------------------------
J. WILLIAM JOHNSON, CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
(principal executive officer)
By /s/ MARK D. CURTIS
---------------------
MARK D. CURTIS
SENIOR VICE PRESIDENT AND TREASURER
(principal financial and accounting officer)
CERTIFICATIONS
1. I, J. William Johnson, have reviewed the quarterly report on Form 10-Q of
The First of Long Island Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
18
6. The registrant's other signing officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 4, 2002
By /s/ J. WILLIAM JOHNSON
- -------------------------
J. WILLIAM JOHNSON
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
(principal executive officer)
1. I, Mark D. Curtis, have reviewed the quarterly report on Form 10-Q of The
First of Long Island Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other signing officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 4, 2002
By /s/ MARK D. CURTIS
- ---------------------
MARK D. CURTIS
SENIOR VICE PRESIDENT & TREASURER
(principal financial and accounting officer)
19
EXHIBIT INDEX
EXHIBIT BEGINS
ON SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NO.
- ------- ----------- --------------
99.1 Certification by Chief Executive Officer and
Chief Financial Officer 21
20