EXHIBIT 13 - REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2003
12
[LOGO] The First of Long Island
The First of Long Island Corporation
2003 Annual Report
[PHOTO OMITTED]
History
Personal Service
Big Bank Alternative
Financial Strength
"A Beacon of Strength in all Economic Climates"
13
[LOGO] The First of Long Island
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-four branch system on Long Island and in
Manhattan.
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 mutual funds and 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.
Table of Contents
Selected Financial Data - 1
Letter to Shareholders - 2
A Beacon of Strength in All Economic Climates - 4
Senior Management - 7
Board of Directors - 8
Management's Discussion and Analysis of Financial Condition and
Results of Operations - 9
Report of Independent Auditors - 25
Consolidated Financial Statements and Notes - 26
Annual Meeting Notice - 50
Business Development Board - IBC
Branch Listings - OBC
14
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.
2003 2002 2001 2000 1999*
------------- ------------- ------------- ------------- -------------
INCOME STATEMENT DATA:
Total Interest Income ......................... $ 36,968,000 $ 36,929,000 $ 37,989,000 $ 38,822,000 $ 33,963,000
Total Interest Expense ........................ 3,878,000 5,111,000 9,451,000 13,106,000 9,513,000
Net Interest Income ........................... 33,090,000 31,818,000 28,538,000 25,716,000 24,450,000
Provision for Loan Losses (Credit) ............ 457,000 100,000 100,000 (75,000) --
Net Income .................................... 11,365,000 11,563,000 10,094,000 9,318,000 9,034,000
PER SHARE DATA:
Basic Earnings ................................ $ 2.78 $ 2.77 $ 2.37 $ 2.13 $ 1.98
Diluted Earnings .............................. 2.72 2.73 2.33 2.10 1.95
Cash Dividends Declared ....................... .70 .63 .54 .48 .43
Stock Splits/Dividends Declared ............... -- 3-for-2 -- -- --
Book Value .................................... $ 21.87 $ 20.53 $ 17.84 $ 16.33 $ 14.45
BALANCE SHEET DATA AT YEAR END:
Total Assets .................................. $ 914,264,000 $ 792,342,000 $ 684,081,000 $ 625,992,000 $ 570,551,000
Total Loans ................................... 321,971,000 261,108,000 226,688,000 192,909,000 182,774,000
Allowance for Loan Losses ..................... 2,452,000 2,085,000 2,020,000 1,943,000 2,033,000
Total Deposits ................................ 777,155,000 699,725,000 604,870,000 550,472,000 503,189,000
Securities Sold Under Repurchase Agreements ... 41,184,000 -- -- -- --
Stockholders' Equity .......................... 89,291,000 85,442,000 74,746,000 70,866,000 64,233,000
AVERAGE BALANCE SHEET DATA:
Total Assets .................................. $ 851,407,000 $ 753,703,000 $ 661,958,000 $ 600,326,000 $ 554,561,000
Total Loans ................................... 281,556,000 242,773,000 205,959,000 186,451,000 176,078,000
Allowance for Loan Losses ..................... 2,246,000 2,101,000 1,941,000 1,961,000 2,835,000
Total Deposits ................................ 742,991,000 668,322,000 584,279,000 530,850,000 486,532,000
Securities Sold Under Repurchase Agreements ... 17,100,000 -- -- -- --
Stockholders' Equity .......................... 86,099,000 80,516,000 73,390,000 66,711,000 65,406,000
FINANCIAL RATIOS:
Return on Average Total Assets (ROA) .......... 1.33% 1.53% 1.52% 1.55% 1.63%
Return on Average Stockholders' Equity (ROE) .. 13.20% 14.36% 13.75% 13.97% 13.81%
Average Equity to Average Assets .............. 10.11% 10.68% 11.09% 11.11% 11.79%
* Net income, earnings per share, ROA, and ROE for 1999 are before a
$945,000 ($.21 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, 2003 and 2002.
2003 2002
-------------------- --------------------
Quarter High Low High Low
- ------- -------- -------- -------- --------
First $ 36.40 $ 32.65 $ 26.67 $ 24.10
Second 40.06 31.60 33.83 25.94
Third 45.49 36.55 36.57 32.25
Fourth 46.78 38.34 36.75 30.50
At December 31, 2003, there were 688 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.
15
Letter To Shareholders
[PHOTO OMITTED]
A good-sized business will be called a "small" business by a mega-bank. Well,
small businesses are "big business" to us. That's why we see ourselves as THE
BIG BANK ALTERNATIVE.
- -Michael N. Vittorio, President & Chief Executive Officer
Dear Shareholders,
I am pleased to report to you on the year 2003, which has been both
exciting and challenging. The excitement had to do with some of our new
initiatives and campaigns; the challenges mostly revolved around the significant
pressure on net interest margin caused by low interest rates and expenses
associated with our growth strategies.
Earnings per share were $2.72 in 2003 as compared to $2.73 in 2002. Our
net income was $11,365,000. As of December 31, 2003, total assets were
$914,264,000. For the twenty-fifth consecutive year, we are pleased to have been
able to increase our dividend. Total dividends declared in 2003 amounted to 70
cents per share, an increase of 11% over the 63 cents declared in 2002. Our
Return on Assets remained high at 1.33%, while Return on Equity was 13.20%.
The most important factors favorably impacting the earnings growth for
2003 were a substantial 15% increase in average checking balances and strategy
changes with respect to the Corporation's securities portfolio. Our growth in
checking balances is significantly attributable to the efforts of our commercial
calling program. For the year, total average checking balances were up
$35,413,000. Strategy changes regarding the securities portfolio included
reducing the size of our short-term portfolio to redeploy funds into
intermediate-term securities and loans outstanding. This allowed us to take
advantage of higher yields. In order for us to take advantage of the higher
yields more quickly, borrowings under repurchase agreements were used to
pre-invest future security and loan cash flows. Our loan growth was most evident
in our average residential mortgage portfolio that was up $28,098,000, or 35%.
[THE FOLLOWING WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
Earnings Per Share
1979 $.08
1980 $.15
1981 $.17
1982 $.21
1983 $.26
1984 $.38
1985 $.58
1986 $.68
1987 $.73
1988 $.83
1989 $.86
1990 $.91
1991 $.86
1992 $1.03
1993 $1.11
1994 $1.21
1995 $1.24
1996 $1.39
1997 $1.55
1998 $1.73
1999 $1.95
2000 $2.10
2001 $2.33
2002 $2.73
2003 $2.72
On a fully diluted basis excluding special credits. Adjusted for stock dividends
and splits.
16
[THE FOLLOWING WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
Return on Average Assets
2000 1.55%
2001 1.52%
2002 1.53%
2003 1.33%
Other important factors favorably impacting earnings were an unusually
large commercial mortgage prepayment fee received in January, net gains on sales
of securities and growth in the average balances of other deposit liability
products.
There is no doubt that the overall decline in interest rates had the most
negative influence on earnings. During midyear 2003, there was a further
reduction in the federal funds rate to a very low 1%. This along with lower
intermediate and longer term rates caused added downward pressure on our net
interest margin.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
Average Checking Balances
In Thousands of Dollars
1997 $133,082
1998 $154,781
1999 $168,791
2000 $186,215
2001 $201,688
2002 $241,683
2003 $277,096
In 2003 the Bank expanded into a new geographical market by opening three
new branches in the borough of Manhattan. Although these openings have initially
created some drag on earnings, we are enthusiastic regarding our prospects in
New York City. To augment our growth and banking model, we fully expect to
continue to open new branches in the future. Through our branches we are
confident we will continue to offer a unique type of service not available from
the larger institutions with which we compete.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
Cash Dividends Declared Per Share
1979 $.01
1980 $.02
1981 $.02
1982 $.03
1983 $.05
1984 $.05
1985 $.08
1986 $.10
1987 $.11
1988 $.13
1989 $.13
1990 $.15
1991 $.17
1992 $.19
1993 $.21
1994 $.23
1995 $.25
1996 $.29
1997 $.33
1998 $.38
1999 $.43
2000 $.48
2001 $.54
2002 $.63
2003 $.70
Adjusted for stock dividends and splits.
17
Additional 2003 initiatives included a Free Checking Campaign that had a
positive influence on the growth of our consumer checking account base. For the
year, the number of consumer checking accounts increased by 11%, and average
balances were up $8.1 million or 16.5%. We also entered into a strategic
partnership with a third party provider to offer fixed and variable annuities
and a select family of high quality mutual funds. Investment representatives are
now available to assist our customers in meeting their growing financial needs.
This is an opportunity to provide "one-stop shopping" and increase fee income
with minimal expense to the Bank.
As we assess the year 2004, interest rates will challenge us like no other
year in recent memory. Other challenging items include increasing benefit costs,
new local competition and an improving stock market that may provide an
alternative to traditional bank deposits.
Despite challenges, we remain enthusiastic about our growth prospects. The
big banks continue to merge, acquire and then downsize their organizations.
Their attention seems to be distracted with national and international market
strategies as opposed to emphasizing the management of local markets. This
provides community minded organizations like The First of Long Island with
market opportunities, as we remain intently focused on our most important
strategy---the solicitation of banking relationships from service conscious
consumers, professionals and privately owned businesses.
As the Bank enters its 78th year serving the community, our most important
goal remains unchanged---to maintain the financial strength of the Bank. We are
gratified to know that Weiss Ratings, the nation's leading provider of ratings
and analyses of financial service companies, continues to rank The First of Long
Island "Excellent" among an elite group of top tier banks and thrifts in the
country. We continue to manage the Corporation based on the long-term viability
of the organization. Every tactic and every decision is based on the effect it
has on you, our stockholders. We look forward to the future with optimism, a
willingness to meet the challenges that lie ahead, and confidence in our ability
to remain a beacon of strength in all economic climates.
/s/ Michael N. Vittorio
Michael N. Vittorio
President & Chief Executive Officer
18
1927.....History.....Independent
[PHOTO OMITTED]
A Beacon of Strength in All Economic Climates
For over seventy-five years The First National Bank of Long Island has had a
reputation for consistently providing the highest level of service tailored to
meet the needs of our customers. We pride ourselves in taking the time to get to
know the individual consumers and businesses that we service. Our twenty-four
branches are professionally staffed and conveniently located on Long Island and,
most recently, in Manhattan. Our staff is made up of seasoned, professional
account officers who look to build relationships. We remain committed to a
personal banking approach, paying attention to the details, and delivering
creative financial solutions.
HISTORY
In 1927, the founders of the Bank believed in order to succeed, everything had
to revolve around the customer. Since our inception, every product introduced,
branch built or solution implemented has been brought about to accomplish this
goal. Our success continues to be measured by the generations of customers who
have grown with us over the years. Our style remains to greet our customers by
name, answer our own phones and make all management and credit decisions
locally.
FINANCIAL STRENGTH
The number one priority of our Bank remains financial strength. Just growing is
not a strategy. Growth must remain consistent with strategic initiatives that
enhance our competitive position. Growth should always be secondary to
profitability in its importance. We are gratified to know that Weiss Ratings,
the nation's leading provider of ratings and analyses of financial services
companies, continues to rank The First of Long Island "EXCELLENT" among an elite
group of the top tier banks and thrifts in the country.
Excellent.....Financial Strength.....A Rating
[PHOTO OMITTED]
Quality.....Personal Service.....Innovations
[PHOTO OMITTED]
PERSONAL SERVICE
Our Bank's philosophy is to distinguish ourselves from the competition through
our deeply rooted commitment to unparalleled personal service. We demonstrate
this commitment in all of our dealings with our customers: privately owned
businesses, professionals, and service conscious consumers. We know customers do
not want to be routed through 800 numbers and endless prompts only to be
connected to a faceless entity or a call center hundreds or even thousands of
miles away. We know customers want to speak to a real person who knows
them . . . by walking into one of our twenty-four branches or calling a local
phone number answered by a familiar and friendly voice. This is our style of
banking . . . a style dedicated to meeting customer needs. A style determined to
deliver overall service quality and personal attention often lacking in banking
today.
BIG BANK ALTERNATIVE
We have been able to deliver on the promise of personal service because that
concept has remained the focus of our entire Bank. With direct access to senior
executives and decision makers, our customers are kept informed on the progress
of lending decisions, receive financial advice and have their problems resolved
quickly and efficiently. It's not about the Bank, it's about the customer.
That's why we are an alternative we think you'll like.
[PHOTO OMITTED]
Professional.....The "Big Bank Alternative".....Unique
[PHOTOS OMITTED]
19
Today banking is experiencing more than its share of mergers, acquisitions and
consolidations. As the big banks get bigger, it is often at the expense of the
consumer, professional and individual commercial business. It's logical to
surmise that "big" will almost inevitably mean bureaucratic and impersonal. A
good-sized business will be called a "small" business by a mega-bank. Well,
small businesses are big business to us. That's why we see ourselves as THE BIG
BANK ALTERNATIVE.
As THE BIG BANK ALTERNATIVE, we strive to live up to and exceed the expectations
of our most important customer - y o u !
History, Financial Strength, Personal Service, The Big Bank Alternative - a
winning combination at The First National Bank of Long Island.
[PHOTOS OMITTED]
20
[PHOTO OMITTED]
left to right: Joseph G. Perri, Donald L. Manfredonia, Richard Kick, Michael N.
Vittorio, J. William Johnson, Brian J. Keeney, Arthur J. Lupinacci Jr., Mark D.
Curtis
The First of Long Island Corporation
Officers
J. William Johnson
Chairman
Michael N. Vittorio
President & 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
Michael N. Vittorio
President & 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
21
[PHOTO OMITTED]
on stairs, left to right: Alexander L. Cover, J. Douglas Maxwell Jr., J. William
Johnson, Michael N. Vittorio front row, left to right: Howard Thomas Hogan Jr.,
Beverly Ann Gehlmeyer, Walter C. Teagle III, Allen E. Busching, Paul T.
Canarick, John R. Miller III
The First of Long Island Corporation
Board of Directors
J. William Johnson
Chairman
Michael N. Vittorio
President & 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)
Alexander L, Cover
(business consultant)
Beverly Ann Gehlmeyer
Tax Manager and Principal
Gehlmeyer & Gehlmeyer, P.C.
(certified public accounting firm)
Howard Thomas Hogan, Jr., Esq.
Hogan & Hogan
(attorney, private practice)
J. Douglas Maxwell, Jr.
Chief Financial Officer
NIRx Medical Technologies LLC
(medical technology)
John R. Miller III
President and Publisher
Equal Opportunity Publications, Inc.
(publishing)
Walter C. Teagle III
President
Teagle Management, Inc.
(private investment consulting firm)
22
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"), and the Bank's wholly-owned subsidiaries, The
First of Long Island Agency, Inc., The First of Long Island REIT, Inc., and FNY
Service Corp., an investment company. The Corporation's primary service area has
historically been Nassau and Suffolk Counties, Long Island. However, the Bank
opened three new commercial banking branches in Manhattan in the second quarter
of this year and may open additional Manhattan branches in the future.
Overview
2003 Versus 2002 Summary. During 2003, the Corporation experienced strong
growth in its core business products. This enabled the Corporation to achieve
relatively stable earnings in 2003 despite the expenses of its growth strategies
and, more importantly, significant downward pressure on net interest margin
caused by low interest rates. The Corporation earned $2.72 per share in 2003 as
compared to $2.73 in 2002. Returns on Average Assets (ROA) and Equity (ROE) were
1.33% and 13.20%, respectively, in 2003 as compared to returns of 1.53% and
14.36%, respectively, in 2002.
The core business products that experienced the most significant growth in
average balances were checking deposits which were up 15%, money-market-type
savings deposits which were up 9%, attorney escrow-type deposits which were up
28%, and residential mortgages which were up 35%. As in prior years, the growth
in average checking balances was once again among the most significant items
positively affecting earnings. The growth in checking balances is believed to be
attributable to a variety of factors including targeted solicitation efforts by
the Bank's business development officers, the opening of three commercial
branches in Manhattan, the introduction and promotion of a free checking product
for consumers, favorable conditions in the local economy, the high level of
customer service offered by the Bank, and a lack of incentive for the Bank's
customers to invest excess balances as a result of the low interest rate
environment. The Bank's free checking campaign was launched in the first quarter
and resulted in an increase this year of approximately 11% in the number of
personal checking accounts.
The growth in money-market-type savings balances was largely comprised of
growth in "Select Savings", a statement savings account that earns a higher
money market rate, and growth in nonpersonal money market balances. In addition
to the competitive rate offered, the growth in Select Savings balances may be
partially attributable to perceived risk in the equity markets. The growth in
attorney escrow-type accounts is believed to be largely attributable to
solicitation efforts and the high volume of mortgage refinance activity.
Although the Bank has enjoyed strong deposit growth in recent years,
management believes that an increase in interest rates and/or recovery in the
equity markets may put pressure on the Bank's ability to grow its deposit base.
Businesses could become more sensitive regarding balances maintained in
noninterest-bearing deposit accounts and the risk/reward tradeoff offered by
alternatives to bank deposit products may become more attractive.
The growth in residential mortgages resulted from a strong housing market
on Long Island, the low interest rate environment and its impact on the desire
of bank customers to refinance their existing mortgages, and an aggressive
residential mortgage campaign conducted by the Bank during the second half of
2003.
Along with growth in its core business products, particularly checking
balances, strategy changes with respect to the Bank's securities portfolio was
among the most significant items positively impacting 2003 earnings. The changes
involved reducing the size of the short-term securities portfolio, increasing
the intermediate-term securities portfolio and loan portfolio, and borrowing
under repurchase agreements to pre-invest future security and loan cash flows.
The shift from short-term to intermediate-term securities enabled the Bank to
take advantage of the better yields offered by somewhat longer maturities, and
borrowing and pre-investing allowed this to happen faster.
Other important factors also favorably impacting earnings were an
unusually large commercial mortgage prepayment fee of $564,000 received in the
first quarter and net gains on sales of securities of $333,000. The large
prepayment fee added 8 cents to earnings per share.
Overwhelmingly, the most negative influence on 2003 earnings was the
overall decline in interest rates. On a
23
sequential quarter-to-quarter basis, after a modest uptick in the first quarter,
net interest margin continued to decrease. Management expects rates to remain
low during the upcoming year. As cautioned in the past, sustained lower interest
rates should result in continued margin pressure and further negatively impact
the Bank's income. Conversely, if interest rates were to increase this may
initially have a negative impact on net interest margin. However, sustained
higher interest rates should have a positive impact.
Also affecting 2003 earnings were increases in personnel costs and
expenses of the Corporation's growth strategies, particularly the opening of
three New York City commercial branches on June 2, 2003. While it is too soon to
predict their ultimate success, management is optimistic regarding the long-term
results of the New York City branches. On an ongoing basis management will
continue to evaluate potential new branch sites.
2003 was a more active year from the standpoint of the Corporation's stock
repurchase program. During 2003, the Corporation was able to purchase 124,678
shares of common stock for an aggregate consideration of approximately
$4,503,000. This compares to purchases of 49,894 and 168,147 shares in 2002 and
2001, respectively, each of which have been adjusted where applicable for the
3-for-2 stock split paid July 2002. The stock repurchase program has
historically enhanced earnings per share and return on average stockholders'
equity. This year the program contributed approximately 4 cents to per share
earnings. The estimated contribution includes the full-year impact of the shares
purchased in 2002 plus the additional impact of the shares purchased throughout
2003.
Despite the amount spent for share repurchases and continued growth of
cash dividends, total capital before unrealized gains on available-for-sale
securities grew by $4,559,000 in 2003, or approximately 6%, 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.
2002 Versus 2001 Summary. The Corporation earned $2.73 per share in 2002
as compared to $2.33 in 2001, an increase of 17%. Based on 2002 net income of
$11,563,000, the Corporation returned 1.53% on average total assets and 14.36%
on average total equity as compared to returns of 1.52% and 13.75% in 2001.
Total assets and deposits were $792,342,000 and $699,725,000, respectively, at
December 31, 2002, each up by approximately 16% when compared to the prior
year-end balance. Despite continued cash dividends and purchases under the
Corporation's stock repurchase program, total capital before unrealized gains on
available-for-sale securities grew by $7,710,000 in 2002, or approximately 10%,
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.
Overwhelmingly, the most important reason for the earnings increase in
2002 was the significant growth in average checking balances. Average checking
balances for 2002 were up approximately 20%. Except for the impact of the new
branches opened in 2003, the growth in checking balances in 2002 is believed to
be attributable to the same factors previously discussed with respect to the
2003 growth.
Other factors that made a meaningful contribution to earnings growth in
2002 were loan growth and growth in savings and money market balances. Average
loans outstanding grew by almost 18%, with the majority of the growth occurring
in residential mortgages, commercial mortgages, and home equity lines. Growth in
these categories is believed to be partially attributable to favorable
conditions in the Long Island economy as well as a decline in interest rates and
the resulting increase in the desire of bank customers to refinance their
existing mortgages. The growth in savings and money market balances was largely
comprised of growth in Select Savings and growth in nonpersonal money market
balances. The growth in Select Savings balances in 2002 is believed to be
attributable to the same factors previously cited with respect to the 2003
growth. The positive impact on earnings of checking, loan, and savings and money
market growth was partially offset by a downtrend in net interest margin and an
increase in noninterest expense.
The volume of shares purchased during 2002 under the Corporation's stock
repurchase program declined. As adjusted for 3-for-2 stock split paid July 2002,
the Corporation purchased 49,894 shares in 2002 as compared to 168,147 shares in
2001. The stock repurchase program has historically enhanced earnings per share
and return on average stockholders' equity. In 2002, the stock repurchase
program contributed approximately 5 cents of the 40-cent increase in earnings
per share. The estimated contribution to earnings per share includes the
full-year impact of the shares purchased in 2001 plus the additional impact of
the shares purchased throughout 2002.
24
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.
2003 2002 2001
---------------------------- --------------------------- ------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- ------- -------- -------- ------- -------- -------- -------
Assets: (dollars in thousands)
Federal funds sold ............... $ 43,185 $ 473 1.10% $ 50,586 $ 823 1.63% $ 82,017 $ 3,291 4.01%
Investment securities:
Taxable ........................ 330,336 12,426 3.76 290,322 13,669 4.71 223,538 12,643 5.66
Nontaxable(1) .................. 152,997 9,421 6.16 128,337 8,791 6.85 114,982 8,038 6.99
Loans(1)(2) ...................... 281,556 17,861 6.34 242,773 16,651 6.86 205,959 16,781 8.15
-------- ------- ---- -------- ------- ---- -------- -------- ----
Total interest-earning assets(1) . 808,074 40,181 4.97 712,018 39,934 5.61 626,496 40,753 6.51
------- ---- ------- ---- -------- ----
Allowance for loan losses ........ (2,246) (2,101) (1,941)
-------- -------- --------
Net interest-earning assets ...... 805,828 709,917 624,555
Cash and due from banks .......... 33,006 31,284 24,472
Premises and equipment, net ...... 6,608 6,654 7,133
Other assets ..................... 5,965 5,848 5,798
-------- -------- --------
$851,407 $753,703 $661,958
======== ======== ========
Liabilities and
Stockholders' Equity:
Savings and money
market deposits ................ $431,978 3,294 .76 $391,829 4,472 1.14 $343,389 7,944 2.31
Time deposits .................... 33,917 436 1.29 34,810 639 1.84 39,202 1,507 3.84
Securities sold under
repurchase agreements .......... 17,100 148 .86 -- -- -- -- -- --
-------- ------- ---- -------- ------- ---- -------- -------- ----
Total interest-bearing liabilities 482,995 3,878 .80 426,639 5,111 1.20 382,591 9,451 2.47
------- ---- ------- ---- -------- ----
Checking deposits(3) ............. 277,096 241,683 201,688
Other liabilities ................ 5,217 4,865 4,289
-------- -------- --------
765,308 673,187 588,568
Stockholders' equity ............. 86,099 80,516 73,390
-------- -------- --------
$851,407 $753,703 $661,958
======== ======== ========
Net interest income(1) ........... $36,303 $34,823 $ 31,302
======= ======= ========
Net interest spread(1) ........... 4.17% 4.41% 4.04%
==== ==== ====
Net interest margin(1) ........... 4.49% 4.89% 5.00%
==== ==== ====
(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.
25
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,
-----------------------------------------------------------------------------------
2003 versus 2002 2002 versus 2001
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 ........................ $ (120) $ (269) $ 39 $ (350) $(1,261) $(1,957) $ 750 $(2,468)
Investment securities:
Taxable ................................. 1,884 (2,748) (379) (1,243) 3,777 (2,118) (633) 1,026
Nontaxable(1) ........................... 1,689 (888) (171) 630 934 (162) (19) 753
Loans(1) .................................. 2,660 (1,250) (200) 1,210 3,000 (2,655) (475) (130)
------- ------- ------- ------- ------- ------- ------- -------
Total interest income(1) .................. 6,113 (5,155) (711) 247 6,450 (6,892) (377) (819)
------- ------- ------- ------- ------- ------- ------- -------
Interest Expense:
Savings and money
market deposits ......................... 458 (1,484) (152) (1,178) 1,121 (4,025) (568) (3,472)
Time deposits ............................. (16) (192) 5 (203) (169) (787) 88 (868)
Securities sold under repurchase agreements 148 -- -- 148 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total interest expense .................... 590 (1,676) (147) (1,233) 952 (4,812) (480) (4,340)
------- ------- ------- ------- ------- ------- ------- -------
Increase (decrease) in net
interest income(1) ...................... $ 5,523 $(3,479) $ (564) $ 1,480 $ 5,498 $(2,080) $ 103 $ 3,521
======= ======= ======= ======= ======= ======= ======= =======
(1) Tax-equivalent basis.
(2) Represents the change not solely attributable to change in rate or change
in volume but a combination of these two factors. The rate/volume variance
could be allocated between the volume and rate variances shown in the
table based on the absolute value of each to the total for both.
Net Interest Income - 2003 Versus 2002
Net interest income on a tax-equivalent basis increased by $1,480,000, or
4.3%, from $34,823,000 in 2002 to $36,303,000 this year. As can be seen from the
above rate/volume analysis, the increase is primarily comprised of a positive
volume variance of $5,523,000 and a negative rate variance of $3,479,000. It
should be noted that without the large commercial mortgage prepayment fee
previously discussed, net interest income on a tax-equivalent basis would have
been up by $916,000, or 2.6%, rather than $1,480,000, and the negative rate
variance for loans would have been $564,000 higher.
Volume Variance. During 2003, the Bank experienced strong growth in its
core deposit products, with the largest increases occurring in checking,
money-market-type savings balances, and attorney escrow-type balances. In
addition, in response to continued downward pressure on net interest margin
caused by low interest rates, management implemented strategy changes with
respect to the Bank's securities portfolio. These changes involved reducing the
size of the short-term securities portfolio, increasing the size of the
intermediate-term securities portfolio and loan portfolio, and using borrowings
under repurchase agreements to pre-invest future security and loan cash flows.
The aggregate positive impact of these items, which largely comprises the
positive volume variance referred to above, more than offset the negative impact
of the downtrend in net interest margin discussed in the "Rate Variance" section
that follows. The growth in the intermediate-term securities portfolio is
largely comprised of U.S. government agency ten-year pass-through mortgage
securities and U.S. Treasury securities with maturities ranging from three to
five years. Management views the ten-year pass-through mortgage security as an
attractive instrument for the Bank's investment portfolio because of the
incremental income that can be earned when compared to a similar duration U.S.
Treasury security and because these securities have a relatively short average
life and are generally collateralized by low loan-to-value mortgage loans that
have borrowers with high credit scores.
Comparing 2003 to 2002, average checking deposits increased by
$35,413,000, or approximately 15%. Funding interest-earning asset growth with
growth in checking deposits has a greater positive impact on net interest income
than
26
funding such growth with interest-bearing deposits because checking deposits,
unlike interest-bearing deposits, have no associated interest cost. This is the
primary reason that the growth of checking balances has historically been one of
the Corporation's key strategies for increasing earnings per share.
Also when comparing 2003 to 2002, average money-market-type deposit
balances increased by $25,945,000, or approximately 9% and average attorney
escrow-type balances increased by $9,506,000, or approximately 28%. In addition,
average borrowings under repurchase agreements amounted to $17,100,000. With
respect to the growth in money-market-type deposit balances, the largest
components were growth in Select Savings and nonpersonal money market accounts.
The Bank's new business solicitation program is a significant factor that
favorably impacted growth in the average balances of checking accounts,
money-market-type deposit accounts, and attorney escrow-type accounts. The
Bank's attention to customer service, favorable conditions in the local economy,
and a lack of incentive for the Bank's customers to invest excess balances as a
result of the low interest rate environment are also believed to have made a
contribution. Competitive pricing and customer demographics are believed to be
other important factors with respect to growth in the average balance of
money-market-type deposits. Perceived risk in the equity markets may have also
played a role.
As with its core deposit products, the Bank also experienced good growth
in its core loan products, with the most significant growth occurring in
residential mortgages and home equity loans. From year end 2002 to year end
2003, the residential mortgage portfolio increased by over $48 million, or
approximately 53%, and home equity line outstandings increased by approximately
$4.5 million, or 15%. On an average balance basis, residential mortgages are up
by approximately $28 million, or 35%, and home equity line outstandings are up
by approximately $5.5 million, or 20%. At December 31, 2003, loans secured by
residential real estate represent 66% of total loans secured by real estate and
55% of total loans. This compares to 58% of loans secured by real estate and 48%
of total loans, respectively, at December 31, 2002.
The low interest rate environment and a strong housing market on Long
Island are important factors that favorably impacted the growth in both
residential mortgages and home equity line outstandings. Another important
factor was an aggressive residential mortgage campaign mounted during the latter
half of 2003 that focused on ten-year fixed rate mortgages. The ten-year
mortgage like the similar ten-year pass-through mortgage security is viewed by
management to be an attractive instrument for the Bank's portfolio. In addition
to the benefits offered by the ten-year pass-through security, the ten-year
mortgage provides even more interest income and the opportunity to build
franchise value by attracting new customers and doing additional business with
existing customers.
Rate Variance. Interest rates began to decline in early 2001. By the end
of the year, short-term interest-rates had fallen significantly as evidenced by
a reduction of 4.75% in both the federal funds target rate and the Bank's prime
lending rate. During 2002, there were no further reductions in short-term rates
until November when both the federal funds target rate and the Bank's prime
lending rate declined by an additional .50%. Rates on intermediate and
longer-term securities and loans also declined during 2001 and 2002, but by
contrast to short-term rates, the magnitude of the decline was far more
significant in 2002. The largest portion of the decrease occurred in the latter
half of the year. During 2003, longer-term rates were volatile but remained low.
In addition, in late June 2003, the federal funds target rate and the Bank's
prime lending rate were reduced further, by an additional .25%. Although both
short and long-term rates are now at extremely low levels, they could decline
more.
As a result of the sharp and sustained decrease in interest rates, net
interest margin trended downward during the latter half of 2002 as
interest-earning assets repriced at lower yields and proceeds from the maturity,
amortization and prepayment of such assets were reinvested at lower yields
without an equal and offsetting reduction in the cost of funds. Excluding the
effect of the large prepayment fee, there was a modest uptick in net interest
margin for the first quarter of 2003 followed by a continuation of the downward
trend for the rest of the year. It should be noted that a portion of the decline
in the Bank's net interest margin was caused by an acceleration of prepayments
on mortgage securities and the resulting need to amortize premiums on these
securities faster. Although prepayments slowed in the last few months of 2003,
future prepayments and their impact on premium amortization will be very much
dependent on interest rate movements.
Management believes that available yields will remain low in the upcoming
year. If this were to occur and as a result assets continue to reprice and be
reinvested at lower yields, the Bank's net interest margin will continue
downward. In addition, the rate variance as depicted in the preceding table
should become more negative. This obviously exerts a good deal of pressure on
earnings. Conversely, while an increase in interest rates may initially have a
negative impact on net interest margin, sustained higher interest rates should
have a positive impact.
27
Net Interest Income - 2002 Versus 2001
Net interest income on a tax-equivalent basis increased by $3,521,000, or
11.2%, from $31,302,000 in 2001 to $34,823,000 in 2002. As can be seen from the
preceding rate/volume analysis, the increase is primarily comprised of a
positive volume variance of $5,498,000 and a negative rate variance of
$2,080,000.
Volume Variance. 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 2002 to 2001,
average checking deposits increased by $39,995,000, 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 2002 to 2001, average savings and
money market deposit balances increased by $48,440,000, or 14.1%. Although the
largest components of this increase were growth in Select Savings and
nonpersonal money market accounts, the Bank also experienced good growth in
traditional savings and IOLA (interest on lawyer) accounts. The reasons for the
increases in checking and money market deposits are the same as those previously
discussed with respect to the 2003 year.
Rate Variance. As previously discussed, short-term interest rates
decreased during 2002 and 2001, with the most pronounced decrease occurring in
the 2001 year. Despite these decreases, the Bank was able to preserve its spread
on short-term interest-earning assets and liabilities by extending the average
maturity of its short-term securities portfolio and thereby taking advantage of
the slope of the yield curve.
Rates on intermediate and longer-term securities and loans also declined
during 2001 and 2002, but by contrast to short-term rates, the magnitude of the
decline was far more significant in 2002. During 2002, yields on two, five, and
ten-year U.S. Treasury securities decreased by 142, 157, and 124 basis points,
respectively, with most of the decrease occurring in the last half of the year.
As a result, net interest margin trended downward throughout 2002 as
interest-earning assets repriced at lower yields and proceeds from the maturity
and amortization of such assets were reinvested at lower yields.
Noninterest Income, Noninterest Expense, and Income Taxes
Noninterest income includes service charges on deposit accounts,
Investment Management Division income, gains or losses on sales of
available-for-sale securities, and all other items of income, other than
interest, resulting from the business activities of the Corporation. Noninterest
income was $5,998,000, $5,488,000, and $4,949,000 in 2003, 2002, and 2001,
respectively. The 9.3% increase in noninterest income in 2003 is largely
comprised of net gains on sales of available-for-sale securities of $333,000 and
an increase of $155,000 in Investment Management Division income. The positive
earnings impact of these items was partially offset by a decrease in service
charges on deposit accounts of $162,000. Net gains on sales of
available-for-sale securities includes $408,000 in gains which resulted from the
sale of an equity security that the Bank was once required to acquire and hold
as part of a government sponsored loan program. The increase in Investment
Management Division income is largely attributable to market appreciation in
assets under management and new business. The decrease in service charges is
believed to be attributable to customers maintaining higher balances in the low
interest rate environment.
The 10.9% increase in noninterest income in 2002 is primarily attributable
to a revised service charge schedule which went into effect on March 1, 2002 and
the fact that losses on sales of available-for-sale securities decreased by
$237,000.
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
$23,475,000 and $21,488,000 in 2003 and 2002, respectively, representing
increases over prior year amounts of $1,987,000, or 9.2%, and $1,721,000, or
8.7%. The increase for 2003 is largely comprised of an increase in salaries of
$602,000, or 6.1%, an increase in occupancy and equipment expense of $446,000,
or 15.2%, and an increase in other operating expenses of $750,000, or 17.2%. The
increase in salaries is attributable to normal annual salary adjustments and
additions to staff resulting primarily from the opening of three New York City
branches. The increase in occupancy and equipment expense is largely
attributable to increases in rent expense, maintenance costs, and equipment
depreciation, a significant portion of which resulted from the opening of the
New York City branches. The largest components of the increase in other
operating expenses are an increase in general insurance expense, due primarily
to conditions in the insurance marketplace and increased levels of liability
coverage, and an increase in marketing expense, a substantial portion of which
is attributable to the Bank's free checking campaign and the New York City
branches.
28
The increase in noninterest expense for 2002 is primarily comprised of an
increase in salaries of $871,000, or 9.7%, and an increase in employee benefits
expense of $731,000, or 20.1%. 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. The
strong growth in earnings per share for 2002 was the primary reason for the
increase in profit sharing expense. Earnings per share growth, goals being
exceeded, and a further move toward performance based compensation are the
primary reasons for the increase in incentive compensation.
Income tax expense as a percentage of book income was 25.0%, 26.4%, and
25.9% in 2003, 2002, and 2001, respectively. The decrease in the percentage for
2003 is primarily attributable to the fact tax-exempt interest income became a
larger component of income before income taxes. The reverse was true for 2002
and therefore income tax expense as a percentage of book income increased over
2001.
Application of Critical Accounting Policies
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported asset and liability
balances and revenue and expense amounts. Our determination of the allowance for
loan losses is a critical accounting estimate because it is based on our
subjective evaluation of a variety of factors at a specific point in time and
involves difficult and complex judgments about matters that are inherently
uncertain. In the event that management's estimate needs to be adjusted based
on, among other things, additional information that comes to light after the
estimate is made or changes in circumstances, such adjustment could result in
the need for a significantly different allowance for loan losses and thereby
materially impact, either positive or negative, the Bank's results of
operations.
The Bank's Reserve Committee, which is chaired by the Senior Lending
Officer, meets on a quarterly basis and is responsible for determining the
allowance for loan losses after considering, among other things, the results of
credit reviews performed by the Bank's loan review officer. In addition, and in
conjunction with the Bank's Chief Financial Officer, the Reserve Committee is
responsible for implementing and maintaining policies and procedures surrounding
the calculation of the required allowance. The Bank's allowance for loan losses
is subject to periodic examination by the Office of the Comptroller of the
Currency, the Bank's primary federal banking regulator, whose safety and
soundness examination includes a determination as to its adequacy to absorb
probable losses.
The first step in determining the allowance for loan losses is to identify
loans in the Bank's portfolio that are individually deemed to be impaired. In
doing so, subjective judgments need to be made regarding whether or not it is
probable that a borrower will be unable to pay all principal and interest due
according to contractual terms. Once a loan is identified as being impaired,
management uses either the fair value of the underlying collateral or the
discounted value of expected future cash flows to determine the amount of the
impairment loss, if any, that needs to be included in the overall allowance for
loan losses. Although appraisals are used as a starting point in estimating the
fair value of real estate collateral, management also makes qualitative
judgments based on knowledge of the local real estate market, analysis of
current economic conditions, and expectations with regard to conditions that may
prevail in the future. Estimating the fair value of collateral other than real
estate is also subjective in nature and sometimes requires difficult and complex
judgments. Determining expected future cash flows can be more subjective than
determining fair values. Expected future cash flows could differ significantly,
both in timing and amount, from the cash flows actually received over the loan's
remaining life.
In addition to estimating losses for loans individually deemed to be
impaired, management also estimates collective impairment losses for pools of
loans that are not specifically reviewed. Statistical information regarding the
Bank's historical loss experience over a period of time believed to be relevant
is weighted very heavily in management's estimate of such losses. However,
future losses could vary significantly from those experienced in the past. In
addition, management also considers a variety of general qualitative factors and
then subjectively determines the amount of weight to assign to each in
estimating losses. The factors include, among others, national and local
economic conditions, environmental risks, trends in volume and terms of loans,
concentrations of credit, changes in lending policies and procedures, and
experience, ability, and depth of the Bank's lending staff. Because of the
nature of the factors and the difficulty in assessing their impact, management's
resulting estimate of losses may not accurately reflect actual losses in the
portfolio.
Although the allowance for loan losses has two separate components, one
for impairment losses on individual loans and one for collective impairment
losses on pools of loans, the entire allowance for loan losses is available to
absorb realized losses as they occur whether they relate to individual loans or
pools of loans.
29
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. Information about the
Corporation's risk elements is as follows:
December 31,
------------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ -----
(dollars in thousands)
Nonaccruing loans ............................................................ $ 97 $ -- $ 105 $ -- $ 28
Loans past due 90 days or more as to
principal or interest payments and still accruing .......................... 348 2 236 173 5
Foreclosed real estate ....................................................... -- -- -- -- --
------ ------ ------ ------ -----
Total nonperforming assets ................................................. 445 2 341 173 33
Troubled debt restructurings ................................................. 5 -- 10 -- --
------ ------ ------ ------ -----
Total risk elements ........................................................ $ 450 $ 2 $ 351 $ 173 $ 33
====== ====== ====== ====== =====
Nonaccruing loans as a percentage of total loans ............................. .03% .00% .05% .00% .02%
====== ====== ====== ====== =====
Nonperforming assets as a percentage of total loans
and foreclosed real estate ................................................. .14% .00% .15% .09% .02%
====== ====== ====== ====== =====
Risk elements as a percentage of total loans and
foreclosed real estate ..................................................... .14% .00% .15% .09% .02%
====== ====== ====== ====== =====
Year Ended December 31,
------------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ -----
(in thousands)
Gross interest income that would have been
recorded during the year under original terms:
Nonaccrual loans ........................................................... $ 5 $ -- $ 8 $ -- $ 4
Restructured loans ......................................................... -- -- -- -- --
Gross interest income recorded during the year:
Nonaccrual loans ........................................................... 2 -- 4 -- 3
Restructured loans ......................................................... -- -- -- -- --
Commitments for additional funds - Nonaccrual, restructed, past due loans .... None None 150 150 None
Allowance and Provision For Loan Losses
The allowance for loan losses was $2,452,000 and $2,085,000 at December
31, 2003 and 2002, respectively, representing .8% of total loans at each date.
The change in the allowance during 2003 is due to a $457,000 provision for loan
losses, chargeoffs of $110,000, and recoveries of $20,000. As compared to 2002,
the provision for loan losses increased by $357,000 in 2003 primarily because of
growth in the portfolio and the resulting impact on calculated pool reserves.
The allowance for loan losses is an amount that management currently
believes will be adequate to absorb estimated probable losses inherent in the
Bank's loan portfolio. In determining the allowance for loan losses, there is
not an exact amount but rather a range for what constitutes an appropriate
allowance. As more fully discussed in the "Application of Critical Accounting
Policies" section of this discussion and analysis of financial condition and
results of operations, the process for estimating credit losses and determining
the allowance for loan losses as of any balance sheet date is subjective in
nature and requires material estimates. Actual results could differ
significantly from these estimates.
30
The following table sets forth the allocation of the Bank's total
allowance for loan losses by loan type.
December 31,
--------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------------- ---------------- ---------------- ----------------- ----------------
% 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 .......................... $ 605 14.9% $ 438 14.3% $ 667 18.1% $ 566 15.8% $ 397 16.5%
Real-estate secured ................. 1,763 83.4 1,469 83.4 1,252 79.4 1,160 80.5 1,304 80.8
Consumer and other .................. 84 1.7 94 2.3 94 2.5 129 3.7 137 2.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total allocated .................. 2,452 100.0 2,001 100.0 2,013 100.0 1,855 100.0 1,838 100.0
Unallocated ......................... -- -- 84 -- 7 -- 88 -- 195 --
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
$2,452 100.0% $2,085 100.0% $2,020 100.0% $1,943 100.0% $2,033 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
The amount of future chargeoffs and provisions for loan losses will be
affected by, among other things, economic conditions on Long Island. Such
conditions could affect the financial strength of the Bank's borrowers and do
effect the value of real estate collateral securing the Bank's mortgage loans.
Loans secured by real estate represent approximately 83% of the Bank's total
loans outstanding at December 31, 2003. Most 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 good and residential
real estate values have grown to unprecedented highs. Such conditions and values
could deteriorate in the future, and such deterioration could be substantial. If
this were to occur, some of the Bank's borrowers may be unable to make the
required contractual payments on their loans, and the Bank may be unable to
realize the full carrying value of such loans through foreclosure. However,
management believes that the Bank's underwriting policies for residential
mortgages are relatively conservative and, as a result, the Bank should be less
affected than the overall market.
Future provisions and chargeoffs could also be affected by environmental
impairment of properties securing the Bank's mortgage loans. Environmental
audits for commercial mortgages were instituted by the Bank in 1987. Under the
Bank's current policy, an environmental audit is required on practically all
commercial-type properties that are considered for a mortgage loan. At the
present time, the Bank is not aware of any existing loans in the portfolio where
there is environmental pollution originating on the mortgaged properties that
would materially affect the value of the portfolio.
Cash Flows and Liquidity
Cash Flows. As shown in the Consolidated Statement of Cash Flows, the
Corporation's primary sources of cash are deposit growth, maturities and
amortization of investment securities, operations, and borrowings under
repurchase agreements. The Corporation uses cash from these and other sources to
first fund loan growth. Any remaining cash is used primarily to purchase a
combination of short, intermediate, and longer-term investment securities, pay
cash dividends, and repurchase common stock under the Corporation's share
repurchase program. During 2003, the Corporation reduced its cash and cash
equivalent position by $5,799,000 in an attempt to take advantage of the higher
yields offered by investment securities.
Liquidity. The Corporation has both internal and external sources of
near-term liquidity that can be used to fund loan growth and accommodate deposit
outflows. The primary internal sources of liquidity are its overnight position
in federal funds sold; its short-term investment securities portfolio which
generally consists of securities purchased to mature within two years and
securities with average lives of approximately two years; maturities and monthly
payments on the balance of the investment securities portfolio and the loan
portfolio; and intermediate and longer-term investment securities designated as
available-for-sale. At December 31, 2003, the Corporation had $30,000,000 in
federal funds sold, a short-term securities portfolio not subject to pledge
agreements of $74,676,000, and intermediate and longer-term available-for-sale
securities not subject to pledge agreements of $207,432,000. While maturities of
shorter-term securities in the Corporation's portfolio provide a significant
source of near term liquidity, the intermediate and longer-term securities
provide higher current returns and their maturities will provide a significant
source of liquidity in the future.
31
The Corporation's primary external sources of liquidity are customer
deposits and borrowings from brokerage firms, other commercial banks, and the
Federal Reserve Bank of New York. The Bank's deposit base consists largely of
core deposits from businesses and consumers in its local market area and does
not include any brokered deposits. The Bank has the ability to borrow on a
secured basis from brokerage firms under repurchase agreements. Although the
Bank currently has repurchase agreements in place with three brokerage firms,
these agreements do not represent legal commitments on the part of the brokerage
firms to extend credit to the Bank. The amount that the Bank can potentially
borrow under these agreements is believed to be currently in excess of $100
million and depends on, among other things, the amount and quality of the Bank's
eligible collateral and the financial condition of the Bank. Recently the Bank
began utilizing short-term borrowings under repurchase agreements to pre-invest
cash flows from the securities and loan portfolios.
The Bank can also borrow overnight federal funds on an unsecured basis
under lines with other commercial banks. These lines in the aggregate amount of
$30 million do not represent legal commitments to extend credit on the part of
the other banks.
As a backup to borrowing from brokerage firms and other commercial banks,
the Bank is eligible to borrow on a secured basis at the Federal Reserve Bank
("FRB") discount window under the primary credit program. Primary credit is
normally granted on a "no questions asked" basis at a rate 100 basis points
above the federal funds target rate. Primary credit is generally extended on a
very short-term basis, typically overnight, and is viewed by the FRB as a backup
source of short-term funds for sound depository institutions like the Bank. The
amount that the Bank can borrow under the primary credit program depends on,
among other things, the amount of available eligible collateral.
Off-Balance Sheet Arrangements and Contractual Obligations
The Corporation's off-balance sheet arrangements and contractual
obligations at December 31, 2003 are summarized in the table that follows. The
amounts shown for commitments to extend credit and letters of credit are
contingent obligations, some of which are expected to expire without being drawn
upon. As a result, the amounts shown for these items do not necessarily
represent future cash requirements. The Corporation believes that its current
sources of liquidity are more than sufficient to fulfill the obligations it has
as of December 31, 2003 pursuant to off-balance sheet arrangements and
contractual obligations.
Amount of Commitment Expiration Per Period
-----------------------------------------------------
Over Over
Total One One Year Three Years Over
Amounts Year Through Through Five
Committed or Less Three Years Five Years Years
--------- -------- ------------ ----------- --------
(in thousands)
Commitments to extend credit .................. $ 58,700 $ 29,549 $ 9,703 $ 19,394 $ 54
Standby letters of credit ..................... 2,778 2,778 -- -- --
Commercial letters of credit .................. 90 90 -- -- --
Operating lease obligations ................... 4,602 692 1,177 938 1,795
Purchase obligations .......................... 948 296 622 30 --
-------- -------- -------- -------- --------
$ 67,118 $ 33,405 $ 11,502 $ 20,362 $ 1,849
======== ======== ======== ======== ========
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 to extend credit and generally uses the same
credit policies for letters of credit as it does for on-balance-sheet
instruments.
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. Unused home equity lines, which comprise a substantial portion of
these commitments, generally expire five years from their date of origination.
Other loan commitments generally expire in 45 days. The amount of collateral
obtained, if any, by the Bank upon extension of credit is based on management's
credit
32
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 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.
Commercial letters of credit are conditional commitments issued by the
Bank to assure the payment by a customer to a supplier. The Bank generally
obtains personal guarantees supporting these commitments. The purchase
obligations are pursuant to contracts that the Bank has with providers of data
processing and custodial services.
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, as defined,
equal to or greater than 10%, a Tier 1 risk-based capital ratio, as defined,
equal to or greater than 6%, and a Tier 1 leverage capital ratio, as defined,
equal to or greater than 5%. The Corporation's total risk-based capital, Tier 1
risk-based capital and Tier 1 leverage capital ratios of 27.16%, 26.41% and
9.36%, respectively, at December 31, 2003 substantially exceed the requirements
for a well-capitalized bank.
Total stockholders' equity increased by $3,849,000 during 2003, or from
$85,442,000 at December 31, 2002 to $89,291,000 at December 31, 2003. Net income
was the largest contributor to the growth in stockholders' equity. However,
amounts expended for share repurchases and cash dividends largely offset the
contribution made by net income.
Stock Repurchase Program. Since 1988, the Corporation has had a stock
repurchase program under which it is authorized to purchase, from time to time,
shares of its own common stock in market or private transactions. Under plans
approved by the Board of Directors in 2003 and 2001, the Corporation purchased
124,678 shares in 2003 and can purchase 53,743 shares in the future. The details
of the Corporation's purchases under the stock repurchase program during the
fourth quarter of 2003 are set forth in the table that follows.
Total Number of
Shares Purchased as Maximum Number of
Total Average Part of Publicly of Shares that May Yet
Number of Price Paid Announced Plans Be Purchased Under the
Period Shares Per Share or Programs(1) Plans or Programs (1)
- -------------------------------------------------- --------- ---------- ------------------- ----------------------
October 1, 2003 to October 31, 2003 ............. -- -- -- 58,302
November 1, 2003 to November 30, 2003 ............ 4,060 $42.59 4,060 54,242
December 1, 2003 to December 31, 2003 ............ 499 $44.35 499 53,743
(1) All shares purchased by the Corporation under its stock repurchase
program in the fourth quarter of 2003 were purchased under a 100,000
share plan approved by the Corporation's board of directors on
January 21, 2003 and publicly announced on January 24, 2003. In
addition, the Corporation publicly announced a 50,000 share program
on April 24, 2003 under which no shares have yet been purchased. The
Corporation's share repurchase plans do not have fixed expiration
dates.
The stock repurchase program has historically enhanced earnings per share
and return on average stockholders' equity. This year the program contributed
approximately 4 cents to per share earnings. The estimated contribution includes
the full-year impact of the shares purchased in 2002 plus the additional impact
of the shares purchased throughout 2003.
Market Liquidity. Trading in the Corporation's common stock is limited.
The total trading volumes for 2003 and 2002 as reported by Nasdaq were 1,151,590
and 743,903 shares, respectively, with average daily trading volumes of 4,570
and 2,952 shares, respectively. During 2003, the Corporation purchased 124,678
shares, 116,400 of which were purchased in market transactions, and in 2002
purchased 49,894 shares, 12,000 of which were purchased in market transactions.
These market purchases represent approximately 10% and 2% of the total trading
volumes for the Corporation's common stock as reported by Nasdaq for 2003 and
2002, respectively. 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.
33
Russell 3000(R) and 2000(R) Indices. Frank Russell Company ("Russell")
currently maintains 21 U.S. common stock indices. The indices are reconstituted
each July 1st using objective criteria, primarily market capitalization, and do
not reflect subjective opinions. All indices are subsets of the Russell 3000(R)
Index which represents most of the investable U. S. equity market.
The broad market Russell 3000(R) Index includes the largest 3,000
companies in terms of market capitalization and the small cap Russell 2000(R)
Index is comprised of the smallest 2,000 companies in the Russell 3000(R) Index.
The Corporation's 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.
The Corporation's common stock is included in the Russell 3000(R) and
2000(R) Indices. The Corporation believes that inclusion in the Russell Indices
positively impacts the price of its common stock and increases the stock's
trading volume and liquidity. Conversely, if the Corporation's market
capitalization falls below the minimum necessary to be included in the Indices
at any future annual reconstitution date, the Corporation believes that this
could adversely affect the price, volume and liquidity of its common stock.
Market Risk
The Bank invests in interest-earning assets which are funded by
interest-bearing deposits and borrowings, noninterest-bearing deposits, and
capital. The Bank's results of operations are subject to risk resulting from
interest rate fluctuations generally and having assets and liabilities that have
different maturity, repricing, and prepayment/withdrawal characteristics. The
Bank defines interest rate risk as the risk that the Bank's earnings and/or net
portfolio value (present value of expected future cash flows from assets less
the present value of expected future cash flows from liabilities) will change
when interest rates change. The principal objective of the Bank's
asset/liability management activities is to maximize net interest income while
at the same time maintaining acceptable levels of interest rate and liquidity
risk and facilitating the funding needs of the Bank.
Because the Bank's loans and investment securities generally reprice
slower than its interest-bearing deposit accounts, a decrease in interest rates
uniformly across the yield curve should initially have a positive impact on the
Bank's net interest income. However, if the Bank does not 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 at lower yields and loans are originated
or repriced at lower yields, 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, the prime lending rate, and other short-term
market rates, 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.
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 over a range of interest rate change scenarios.
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)
34
how much and when yields and costs on individual categories of interest-earning
assets and interest-bearing liabilities will adjust because of projected changes
in market interest rates; (2) future cash flows; and (3) discount rates.
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 changes in the interest rate environment
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 net portfolio value at December
31, 2003 arrived at by discounting estimated future cash flows at current market
rates and (2) an estimate of net interest income for the year ending December
31, 2004 assuming that maturing assets or liabilities are replaced with new
balances of the same type, in the same amount, and at current rate levels and
repricing balances are adjusted to current rate levels. The rate change
information in the table shows estimates of net portfolio value at December 31,
2003 and net interest income for the year ending December 31, 2004 assuming rate
changes of plus 100 and 200 basis points and minus 100 and 200 basis points. The
changes in net portfolio value from the base case have not been tax effected. In
addition, rate changes are assumed to be shock or immediate changes and occur
uniformly across the yield curve regardless of the duration to maturity or
repricing of specific assets and liabilities. In projecting future net interest
income under the indicated rate change scenarios, activity is simulated by
replacing maturing balances with new balances of the same type, in the same
amount, but at the assumed rate level and adjusting repricing balances to the
assumed rate level.
Based on the foregoing assumptions and as depicted in the table that
follows, an immediate increase in interest rates of 100 or 200 basis points
would have a negative effect on net interest income over a one-year time period.
This is principally because the Bank's interest-bearing deposit accounts reprice
faster than its loans and investment securities. However, if the Bank does not
increase the rates paid on its 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. Generally, the reverse should
be true of an immediate decrease in interest rates of 100 or 200 basis points.
However, deposit rates are currently very low as indicated by the Bank's overall
cost of deposits of 80 basis points in 2003. Therefore, while rates on many of
the Bank's interest earning assets could drop by 100 or 200 basis points,
deposit rates could not. It is for this reason that in rates down 100 basis
points the projected increase in net interest income as compared to the base
case is less than the projected decrease in rates up 100 basis points. In
addition, as shown in the table, in rates down 200 basis points net income is
actually less rather than more than the base case.
Net Portfolio Value (NPV) Net Interest Income
at December 31, 2003 for 2004
-------------------------- ---------------------
Percent Percent
Change Change
From From
Rate Change Scenario Amount Base Case Amount Base Case
-------------------------------------------- -------- --------- -------- ---------
(dollars in thousands)
+ 200 basis point rate shock ............... $ 54,666 (44.1)% $ 27,742 (17.2)%
+ 100 basis point rate shock ............... 75,702 (22.6) 30,618 (8.6)
Base case (no rate change) ............... 97,832 -- 33,495 --
- 100 basis point rate shock ............... 121,170 23.9 34,896 4.2
- 200 basis point rate shock ............... 145,998 49.2 33,220 (0.8)
35
The table that follows summarizes the Corporation's cumulative interest
rate sensitivity gap at December 31, 2003 based upon significant estimates and
assumptions that the Corporation believes to be reasonable. As shown in the
table, the Bank has a significant volume of money market deposit accounts that
are subject to repricing as short-term interest rates change. Since the amount
of these deposits outweighs the assets held by the Bank whose pricing is tied to
short-term interest rates, an increase in short-term interest rates should
negatively impact the Bank's net interest income in the near term. However, the
Bank can reduce the magnitude of the negative impact by not increasing the rates
paid on its money market deposit accounts as quickly or in the same amount as
market increases in the overnight funds rate, the prime lending rate, or other
short-term rates. Conversely, a decrease in short-term interest rates should
positively impact the Bank's net interest income in the near term. However, if
short-term rates decline to the point that the Bank can not, due to competitive
pressures and/or the absolute level of rates, decrease its money market rates in
the same amount as market decreases in the federal funds target rate, the prime
lending rate, and other short-term rates, the magnitude of the positive impact
will decline.
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 ............... $ 30,000 $ -- $ -- $ 30,000 $ -- $ -- $ -- $ 30,000
Investment securities ............ 38,802 24,319 40,394 103,515 259,623 150,777 5,512 519,427
Loans ............................ 105,033 16,594 33,186 154,813 115,039 51,390 (1,723) 319,519
Other assets ..................... -- -- -- -- -- -- 45,318 45,318
--------- --------- --------- --------- --------- --------- --------- ---------
173,835 40,913 73,580 288,328 374,662 202,167 49,107 914,264
--------- --------- --------- --------- --------- --------- --------- ---------
Liabilities and Stockholders' Equity:
Checking deposits ................ -- -- -- -- -- -- 297,454 297,454
Savings and money market deposits 330,008 9,347 13,315 352,670 93,181 -- -- 445,851
Time deposits, other ............. 7,240 4,695 3,368 15,303 2,035 84 -- 17,422
Time deposits, $100,000 and over . 13,592 526 2,202 16,320 108 -- -- 16,428
Securities sold under repurchase
agreements ..................... 41,184 -- -- 41,184 -- -- -- 41,184
Other liabilities ................ -- -- -- -- -- -- 6,634 6,634
Stockholders' equity ............. -- -- -- -- -- -- 89,291 89,291
--------- --------- --------- --------- --------- --------- --------- ---------
392,024 14,568 18,885 425,477 95,324 84 393,379 914,264
--------- --------- --------- --------- --------- --------- --------- ---------
Interest-rate sensitivity gap ....... $(218,189) $ 26,345 $ 54,695 $(137,149) $ 279,338 $ 202,083 $(344,272) $ --
========= ========= ========= ========= ========= ========= ========= =========
Cumulative interest-rate
sensitivity gap .................... $(218,189) $(191,844) $(137,149) $(137,149) $ 142,189 $ 344,272 $ -- $ --
========= ========= ========= ========= ========= ========= ========= =========
Regulatory Matters
Pending Legislation. Commercial checking deposits currently account for
approximately 29% 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 Bank was examined by the Office of the Comptroller of
the Currency as of September 30, 2003. 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.
36
New Accounting Pronouncements
A discussion of new accounting pronouncements is included in Note A to the
Corporation's consolidated financial statements.
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" or "believe". The Corporation cautions that these forward-looking
statements are subject to numerous assumptions, risks and uncertainties, and
therefore actual results could differ materially from those contemplated by the
forward-looking statements. In addition, the Corporation assumes no duty to
update forward-looking statements.
37
[LOGO] The First of Long Island
A BEACON OF STRENGTH IN ALL ECONOMIC CLIMATES
38
[LOGO] CROWE
Crowe Chizek and Company LLC
Member Horwath International
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
The First of Long Island Corporation
Glen Head, New York
We have audited the accompanying consolidated balance sheet of The First of Long
Island Corporation as of December 31, 2003 and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
year ended December 31, 2003. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements of The
First of Long Island Corporation as of and for the year ended December 31, 2002
were audited by other auditors who issued an unqualified opinion on those
financial statements in their report dated January 24, 2003. The financial
statements of The First of Long Island Corporation as of and for the year ended
December 31, 2001 were audited by other auditors who have ceased operations and
who expressed an unqualified opinion on those financial statements in their
report dated January 22, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2003 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The First of
Long Island Corporation as of December 31, 2003, and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Crowe Chizek and Company LLC
Crowe Chizek and Company LLC
Morristown, New Jersey
January 16, 2004
39
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------------
2003 2002
------------- -------------
Assets:
Cash and due from banks ..................................................... $ 31,430,000 $ 33,229,000
Federal funds sold .......................................................... 30,000,000 34,000,000
------------- -------------
Cash and cash equivalents ................................................. 61,430,000 67,229,000
------------- -------------
Investment securities:
Held-to-maturity, at amortized cost (fair
value of $242,563,000 and $282,438,000) .......................... 238,289,000 273,102,000
Available-for-sale, at fair value (amortized cost
of $275,745,000 and $173,794,000) ................................. 281,138,000 180,406,000
------------- -------------
519,427,000 453,508,000
------------- -------------
Loans:
Commercial and industrial ............................................ 47,886,000 37,329,000
Secured by real estate ............................................... 268,508,000 217,730,000
Consumer ............................................................. 5,730,000 6,414,000
Other ................................................................ 729,000 628,000
------------- -------------
322,853,000 262,101,000
Unearned income ...................................................... (882,000) (993,000)
------------- -------------
321,971,000 261,108,000
Allowance for loan losses ............................................ (2,452,000) (2,085,000)
------------- -------------
319,519,000 259,023,000
------------- -------------
Bank premises and equipment, net ............................................ 6,795,000 6,398,000
Other assets ................................................................ 7,093,000 6,184,000
------------- -------------
$ 914,264,000 $ 792,342,000
============= =============
Liabilities:
Deposits:
Checking ............................................................. $ 297,454,000 $ 256,444,000
Savings and money market ............................................. 445,851,000 412,815,000
Time, other .......................................................... 17,422,000 17,359,000
Time, $100,000 and over .............................................. 16,428,000 13,107,000
------------- -------------
777,155,000 699,725,000
Securities sold under repurchase agreements ................................. 41,184,000 --
Accrued expenses and other liabilities ...................................... 4,332,000 4,492,000
Current income taxes payable ................................................ 267,000 289,000
Deferred income taxes payable ............................................... 2,035,000 2,394,000
------------- -------------
824,973,000 706,900,000
------------- -------------
Stockholders' Equity:
Common stock, par value $.10 per share:
Authorized, 20,000,000 shares;
Issued and outstanding, 4,083,733 and 4,161,173 shares .................. 408,000 416,000
Surplus ..................................................................... 781,000 724,000
Retained earnings ........................................................... 84,864,000 80,354,000
------------- -------------
86,053,000 81,494,000
Accumulated other comprehensive income net of tax ........................... 3,238,000 3,948,000
------------- -------------
89,291,000 85,442,000
------------- -------------
$ 914,264,000 $ 792,342,000
============= =============
See notes to consolidated financial statements
40
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
---------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Interest income:
Loans ............................................................... $ 17,851,000 $ 16,635,000 $ 16,750,000
Investment securities:
Taxable ......................................................... 12,426,000 13,669,000 12,643,000
Nontaxable ...................................................... 6,218,000 5,802,000 5,305,000
Federal funds sold .................................................. 473,000 823,000 3,291,000
------------ ------------ ------------
36,968,000 36,929,000 37,989,000
------------ ------------ ------------
Interest expense:
Savings and money market deposits ................................... 3,294,000 4,472,000 7,944,000
Time deposits ....................................................... 436,000 639,000 1,507,000
Securities sold under repurchase agreements ......................... 148,000 -- --
------------ ------------ ------------
3,878,000 5,111,000 9,451,000
------------ ------------ ------------
Net interest income ............................................. 33,090,000 31,818,000 28,538,000
Provision for loan losses ............................................... 457,000 100,000 100,000
------------ ------------ ------------
Net interest income after provision for loan losses ..................... 32,633,000 31,718,000 28,438,000
------------ ------------ ------------
Noninterest income:
Investment Management Division income ............................... 1,288,000 1,133,000 1,081,000
Service charges on deposit accounts ................................. 3,585,000 3,747,000 3,481,000
Net gains (losses) on sales of available-for-sale securities ........ 333,000 (12,000) (249,000)
Other ............................................................... 792,000 620,000 636,000
------------ ------------ ------------
5,998,000 5,488,000 4,949,000
------------ ------------ ------------
Noninterest expense:
Salaries ............................................................ 10,431,000 9,829,000 8,958,000
Employee benefits ................................................... 4,548,000 4,359,000 3,628,000
Occupancy and equipment expense ..................................... 3,383,000 2,937,000 2,819,000
Other operating expenses ............................................ 5,113,000 4,363,000 4,362,000
------------ ------------ ------------
23,475,000 21,488,000 19,767,000
------------ ------------ ------------
Income before income taxes ...................................... 15,156,000 15,718,000 13,620,000
Income tax expense ...................................................... 3,791,000 4,155,000 3,526,000
------------ ------------ ------------
Net Income ...................................................... $ 11,365,000 $ 11,563,000 $ 10,094,000
============ ============ ============
Weighted average:
Common shares ....................................................... 4,086,650 4,180,029 4,266,114
Dilutive stock options .............................................. 85,974 63,221 59,288
------------ ------------ ------------
4,172,624 4,243,250 4,325,402
============ ============ ============
Earnings per share:
Basic ............................................................... $ 2.78 $ 2.77 $ 2.37
============ ============ ============
Diluted ............................................................. $ 2.72 $ 2.73 $ 2.33
============ ============ ============
See notes to consolidated financial statements
41
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
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 .................... $ 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 -
$.54 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
Net Income .................... $ 11,563,000 11,563,000 11,563,000
Repurchase and retirement
of common stock ............. (43,736) (4,000) (1,588,000) (1,592,000)
Exercise of stock options ..... 20,340 2,000 311,000 313,000
Unrealized gains on available-
for-sale-securities, net of
tax of $2,005,000 ......... 2,986,000 2,986,000 2,986,000
------------
Comprehensive income .......... $ 14,549,000
============
3-for-2 stock split ........... 1,391,667 139,000 (139,000)
Cash in lieu of fractional
shares on 3-for-2 stock split (7,000) (7,000)
Cash dividends declared -
$.63 per share .............. (2,613,000) (2,613,000)
Tax benefit of stock options .. 46,000 46,000
Transfer from retained
earnings to surplus ......... 1,000,000 (1,000,000)
--------- --------- ------------ ------------ ---------- ------------
Balance, December 31, 2002 ...... 4,161,173 416,000 724,000 80,354,000 3,948,000 85,442,000
Net Income .................... $ 11,365,000 11,365,000 11,365,000
Repurchase and retirement
of common stock ............. (140,121) (14,000) (5,115,000) (5,129,000)
Exercise of stock options ..... 62,681 6,000 1,063,000 1,069,000
Unrealized losses on available-
for-sale-securities, net of
tax of $510,000 ........... (710,000) (710,000) (710,000)
------------
Comprehensive income .......... $ 10,655,000
============
Cash dividends declared -
$.70 per share .............. (2,855,000) (2,855,000)
Tax benefit of stock options .. 109,000 109,000
Transfer from retained
earnings to surplus ......... 4,000,000 (4,000,000)
--------- --------- ------------ ------------ ---------- ------------
Balance, December 31, 2003 ...... 4,083,733 $ 408,000 $ 781,000 $ 84,864,000 $3,238,000 $ 89,291,000
========= ========= ============ ============ ========== ============
See notes to consolidated financial statements
42
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------------------
2003 2002 2001
------------- ------------- -------------
Cash Flows From Operating Activities:
Net income .............................................................. $ 11,365,000 $ 11,563,000 $ 10,094,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ............................................ 457,000 100,000 100,000
Deferred income tax provision (credit) ............................... 151,000 (109,000) (142,000)
Depreciation and amortization ........................................ 1,286,000 1,173,000 1,166,000
Premium amortization on investment securities, net ................... 4,477,000 2,908,000 174,000
Losses (gains) on sales of available-for-sale securities ............. (333,000) 12,000 249,000
Decrease in prepaid income taxes ..................................... -- 1,000 34,000
Decrease (increase) in other assets .................................. (909,000) 373,000 (265,000)
Increase (decrease) in accrued expenses and other liabilities ........ (215,000) 372,000 (270,000)
Increase (decrease) in income taxes payable .......................... 87,000 335,000 (91,000)
------------- ------------- -------------
Net cash provided by operating activities .......................... 16,366,000 16,728,000 11,049,000
------------- ------------- -------------
Cash Flows From Investing Activities:
Proceeds from sales of available-for-sale securities .................... 16,452,000 687,000 5,270,000
Proceeds from maturities and redemptions of investment securities:
Held-to-maturity ..................................................... 117,718,000 114,971,000 391,181,000
Available-for-sale ................................................... 90,687,000 11,131,000 15,003,000
Purchase of investment securities:
Held-to-maturity ..................................................... (86,202,000) (137,562,000) (416,922,000)
Available-for-sale ................................................... (209,938,000) (50,174,000) (74,881,000)
Net increase in loans to customers ...................................... (60,953,000) (34,455,000) (33,802,000)
Purchases of bank premises and equipment ................................ (1,683,000) (480,000) (1,301,000)
Proceeds from sale of equipment ......................................... -- 3,000 --
------------- ------------- -------------
Net cash used in investing activities .............................. (133,919,000) (95,879,000) (115,452,000)
------------- ------------- -------------
Cash Flows From Financing Activities:
Net increase in total deposits .......................................... 77,430,000 94,855,000 54,398,000
Net increase in securities sold under repurchase agreements ............. 41,184,000 -- --
Proceeds from exercise of stock options ................................. 1,069,000 313,000 420,000
Repurchase and retirement of common stock ............................... (5,129,000) (1,592,000) (4,698,000)
Cash dividends paid ..................................................... (2,800,000) (2,398,000) (2,180,000)
Cash in lieu of fractional shares on 3-for-2 stock split ................ -- (7,000) --
------------- ------------- -------------
Net cash provided by financing activities .......................... 111,754,000 91,171,000 47,940,000
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ...................... (5,799,000) 12,020,000 (56,463,000)
Cash and cash equivalents, beginning of year .............................. 67,229,000 55,209,000 111,672,000
------------- ------------- -------------
Cash and cash equivalents, end of year .................................... $ 61,430,000 $ 67,229,000 $ 55,209,000
============= ============= =============
Supplemental Schedule of Noncash:
Investing Activities
Unrealized gains (losses) on available-for-sale securities .............. $ (1,220,000) $ 4,991,000 $ 523,000
Writeoff of premises and equipment against reserve ...................... -- 62,000 --
Financing Activities
Tax benefit from exercise of employee stock options ..................... 109,000 46,000 35,000
Cash dividends payable .................................................. 1,470,000 1,415,000 1,200,000
The Corporation made interest payments of $3,873,000, $5,145,000, and $9,632,000
and income tax payments of $3,552,000, $3,927,000, and $3,726,000 in 2003, 2002
and 2001, respectively.
See notes to consolidated financial statements
43
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"), and the Bank's wholly-owned
subsidiaries, The First of Long Island Agency, Inc., The First of Long Island
REIT, Inc., and FNY Service Corp., an investment company. The Corporation's
financial condition and operating results principally reflect those of the Bank
and its subsidiaries. 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.
The Bank evaluates declines in fair value below the amortized cost basis
for individual securities classified as either available-for-sale or
held-to-maturity. If a decline in fair value is judged to be other than
temporary, the cost basis of the individual security is written down to fair
value as a new cost basis and the amount of the write-down is included in
earnings as a realized loss. The new cost basis is not changed for subsequent
recoveries, if any, in fair value. Subsequent increases in the fair value of
available-for-sale securities are included in other comprehensive income and
subsequent decreases in fair value, if not an other-than-temporary impairment,
are also included in other comprehensive income.
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 and any accrued
but unpaid interest is generally 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") as amended. 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 probable losses inherent 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
losses the Bank 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. Estimated
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
44
lending staff; national and local economic conditions; concentrations of credit;
and environmental risks. The allowance for loan losses is comprised of
impairment losses on the loans specifically reviewed plus estimated losses on
the pools of loans that are not specifically reviewed.
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 five and ten years. Furniture, fixtures, and
equipment are depreciated over their estimated useful lives which range between
three and seven 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.
Goodwill
Goodwill for the Corporation resulted from the acquisition of a
corporation with favorable tax attributes and represents the excess of the
purchase price of the corporation over the fair value of acquired tangible and
intangible assets less liabilities assumed. Upon adopting new accounting
guidance in 2002, the Corporation ceased amortizing goodwill. Goodwill, which
amounted to $220,000 at December 31, 2003 and 2002, is assessed at least
annually for impairment. No impairment was recognized in 2003 or 2002.
Long-Term Assets
Premises and equipment and intangible assets, if any, and other long-term
assets, if any, are reviewed for impairment when events indicate their carrying
amount may not be recoverable from future undiscounted cash flows. If impaired,
the assets are recorded at fair value.
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.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the likelihood of
loss is probable and an amount or range of loss can be reasonably estimated.
Management is not currently aware of any loss contingencies that will have a
material effect on the Corporation's consolidated financial statements.
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 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. There were no antidilutive
stock options at December 31, 2003. Other than the stock options described in
Note J and the Rights described in Note I, 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.
45
Stock Split. On June 18, 2002, the Corporation declared a 3-for-2 stock
split which was paid on July 24, 2002 by means of a 50% stock dividend. Where
applicable, all comparative share and per share amounts included in the
consolidated financial statements and notes thereto have been adjusted to
reflect the effect of the split.
Stock Repurchase Program. Since 1988, the Corporation has had a stock
repurchase program under which it is authorized to purchase shares of its own
common stock in market or private transactions. As of December 31, 2003, and in
accordance with prior approval by its Board of Directors, the Corporation was
authorized to purchase 53,743 shares of stock. Share repurchases are financed
through available corporate cash.
Shares Tendered Upon The Exercise of Stock Options. The line captioned
repurchase and retirement of common stock in the Consolidated Statement of
Changes in Stockholders' Equity includes common stock tendered upon the exercise
of stock options of 15,443 shares in 2003 with a value of $626,000, 2,335 shares
in 2002 with a value of $83,000, and 6,853 shares in 2001 with a value of
$269,000.
Stock-Based Compensation
At December 31, 2003, the Corporation had two stock option and
appreciation plans, which are described more fully in Note J. The Corporation
accounts for those plans under the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations. No stock-based employee compensation
cost is reflected in net income for stock options, as all options granted under
those plans have an exercise price equal to the market value of the underlying
common stock on the date of grant. If there were any stock appreciation rights
outstanding, compensation costs would be recorded annually based on the quoted
market price of the Corporation's stock at the end of the period.
The following table illustrates the effect on net income and earnings per
share of applying the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation"
to stock-based employee compensation.
2003 2002 2001
---------- ---------- ----------
(in thousands)
Net income, as reported .......................... $ 11,365 $ 11,563 $ 10,094
Deduct: Total cost of stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects ................ (341) (228) (64)
---------- ---------- ----------
Pro forma net income ............................. $ 11,024 $ 11,335 $ 10,030
========== ========== ==========
Earnings per share:
Basic - as reported ............................ $ 2.78 $ 2.77 $ 2.37
Basic - pro forma .............................. $ 2.70 $ 2.71 $ 2.35
Diluted - as reported .......................... $ 2.72 $ 2.73 $ 2.33
Diluted - pro forma ............................ $ 2.65 $ 2.68 $ 2.33
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.
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. Fair values are based on quoted market prices.
46
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.
Securities sold under repurchase agreements. For these short-term
instruments, the recorded book value is a reasonable estimate of fair value.
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.
Operating Segments
While senior management monitors the revenue streams of the various
products and services, the identifiable segments are not material and operations
are managed and financial performance is evaluated on a Company-wide basis.
Accordingly, all of the financial operations are considered by senior management
to be aggregated in one reportable operating segment.
Investment Management 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.
Adoption of New Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." The Corporation adopted the disclosure provisions of FIN No. 45 in the
fourth quarter of 2002 and, for guarantees issued or modified after December 31,
2002, adopted the initial recognition and measurement provisions on January 1,
2003.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN No.
46"). FIN No. 46, which is an interpretation of Accounting Research Bulletin No.
51, "Consolidated Financial Statements", addresses the accounting and reporting
for variable interest entities, as defined. FIN No. 46 was later revised in
December 2003. The provisions of FIN No. 46, as revised, do not impact the
Corporation's financial condition, results of operations, or disclosures.
In April 2003, the Financial Accounting Standards Board issued SFAS No.
149 "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities". SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. All provisions of this Statement shall be applied prospectively. Based
on the Corporation's current business operations, the provisions of SFAS No. 149
do not impact the Corporation's financial condition, results of operations, or
disclosures.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 is generally effective for financial instruments entered
into or modified after May 31, 2003, and otherwise effective at the beginning of
the first interim period beginning after June 15, 2003. Based on the
Corporation's current business operations, the provisions of SFAS No. 150 do not
impact the Corporation's financial condition, results of operations, or
disclosures.
47
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, 2003 and 2002.
2003
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
Held-to-Maturity Securities: (in thousands)
U.S. Treasury .................................................. $ 15,203 $ 342 $ -- $ 15,545
U.S. government agencies ....................................... 2,997 143 -- 3,140
Corporates ..................................................... 1,991 144 -- 2,135
State and municipals ........................................... 57,312 3,728 (188) 60,852
Pass-through mortgage securities ............................... 52,772 856 (462) 53,166
Collateralized mortgage obligations ............................ 108,014 880 (1,169) 107,725
----------- ----------- ----------- -----------
$ 238,289 $ 6,093 $ (1,819) $ 242,563
=========== =========== =========== ===========
Available-for-Sale Securities:
U.S. Treasury .................................................. $ 116,206 $ 970 $ (23) $ 117,153
Corporates ..................................................... 4,987 372 -- 5,359
State and municipals ........................................... 86,793 5,311 (93) 92,011
Pass-through mortgage securities ............................... 67,639 -- (1,330) 66,309
Equity ......................................................... 120 186 -- 306
----------- ----------- ----------- -----------
$ 275,745 $ 6,839 $ (1,446) $ 281,138
=========== =========== =========== ===========
2002
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
Held-to-Maturity Securities: (in thousands)
U.S. Treasury .................................................. $ 27,770 $ 1,045 $ -- $ 28,815
U.S. government agencies ....................................... 3,995 304 -- 4,299
Corporates ..................................................... 2,979 222 -- 3,201
State and municipals ........................................... 63,899 3,389 (39) 67,249
Pass-through mortgage securities ............................... 30,660 1,210 (22) 31,848
Collateralized mortgage obligations ............................ 143,799 3,255 (28) 147,026
----------- ----------- ----------- -----------
$ 273,102 $ 9,425 $ (89) $ 282,438
=========== =========== =========== ===========
Available-for-Sale Securities:
U.S. Treasury .................................................. $ 93,616 $ 1,712 $ -- $ 95,328
Corporates ..................................................... 5,964 477 -- 6,441
State and municipals ........................................... 74,087 3,912 (27) 77,972
Equity ......................................................... 127 538 -- 665
----------- ----------- ----------- -----------
$ 173,794 $ 6,639 $ (27) $ 180,406
=========== =========== =========== ===========
The pass-through mortgage securities shown in the preceding table were
issued by the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage
Corporation ("FHLMC"). Each issuer's pass-through securities are backed by
mortgages conforming to its underwriting guidelines and each issuer guarantees
the timely payment of principal and interest on its securities. The
collateralized mortgage obligations ("CMOs") shown in the table were also issued
by GNMA, FNMA, or FHLMC and all such securities, regardless of the issuer, are
backed by GNMA pass-through mortgage securities. Each issuer guarantees the
timely payment of principal and interest on its CMOs and GNMA guarantees the
timely payment of principal and interest on the underlying pass-through mortgage
securities. Obligations of GNMA represent full faith and credit obligations of
the U.S. government (the "Government"), while obligations of FNMA, which is a
corporate instrumentality of the Government, and FHLMC, which is a Government
sponsored corporation, do not.
At December 31, 2003 and 2002, investment securities with a carrying value
of $110,996,000 and $59,944,000, respectively, were pledged as collateral to
secure public deposits and borrowings under repurchase agreements.
48
Securities With Unrealized Losses. The following table sets forth
securities with unrealized losses at December 31, 2003 presented by length of
time the securities have been in an unrealized loss position.
Less than 12 Months
12 Months or More Total
----------------------- ----------------------- ------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
--------- ---------- --------- ---------- --------- ----------
(in thousands)
U.S. Treasury ......................... $ 4,992 $ (23) $ -- $ -- $ 4,992 $ (23)
State and municipals .................. 14,473 (268) 827 (13) 15,300 (281)
Pass-through mortgage securities ...... 96,489 (1,785) 431 (7) 96,920 (1,792)
Collateralized mortgage obligations ... 44,756 (1,169) -- -- 44,756 (1,169)
--------- --------- --------- --------- --------- ---------
Total temporarily impaired ............ $ 160,710 $ (3,245) $ 1,258 $ (20) $ 161,968 $ (3,265)
========= ========= ========= ========= ========= =========
Unrealized losses reflected in the preceding table have not been included
in results of operations because the affected securities are of high credit
quality, management has the intent and ability to hold these securities for the
foreseeable future, and the decline in fair value is largely due to an increase
in interest rates since the time the securities were purchased. The losses on
these securities are expected to dissipate as they approach their maturity dates
and/or interest rates decline.
Sales of Available-for-Sale Securities. Sales of available-for-sale
securities were as follows:
2003 2002 2001
-------- -------- --------
(in thousands)
Proceeds .................. $ 16,452 $ 687 $ 5,270
======== ======== ========
Gross gains ............... 464 -- --
Gross losses .............. (131) (12) (249)
-------- -------- --------
Net gains (losses) ........ $ 333 $ (12) $ (249)
======== ======== ========
49
Maturities and Average Yields. The following table sets forth the
maturities and weighted average yields of the Bank's investment securities at
December 31, 2003.
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 (Amortized Cost)
U.S. Treasury .......................... $ 11,725 5.76% $ 3,478 3.18% $ -- --% $ -- --%
U.S. government agencies ............... 1,000 5.32 1,997 7.22 -- -- -- --
Corporates ............................. 999 7.56 -- -- -- -- 992 7.15
State and municipals(2) ................ 4,171 6.69 15,754 7.10 24,322 7.49 13,065 6.40
Pass-through mortgage securities ....... 5 7.84 1,383 6.26 41,617 3.95 9,767 5.18
Collateralized mortgage obligations .... -- -- 1,108 6.42 4,426 4.37 102,480 3.67
-------- ---- -------- ---- -------- ---- -------- ----
$ 17,900 6.05% $ 23,720 6.46% $ 70,365 5.20% $126,304 4.10%
======== ==== ======== ==== ======== ==== ======== ====
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 (Fair Value)
U.S. Treasury .......................... $ 12,018 5.76% $ 3,527 3.18% $ -- --% $ -- --%
U.S. government agencies ............... 1,014 5.32 2,126 7.22 -- -- -- --
Corporates ............................. 1,001 7.56 -- -- -- -- 1,134 7.15
State and municipals(2) ................ 4,241 6.69 16,795 7.10 26,744 7.49 13,072 6.40
Pass-through mortgage securities ....... 5 7.84 1,463 6.26 41,500 3.95 10,198 5.18
Collateralized mortgage obligations .... -- -- 1,154 6.42 4,520 4.37 102,051 3.67
-------- ---- -------- ---- -------- ---- -------- ----
$ 18,279 6.05% $ 25,065 6.46% $ 72,764 5.20% $126,455 4.10%
======== ==== ======== ==== ======== ==== ======== ====
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 (Fair Value)
U.S. Treasury .......................... $ 29,886 4.04% $ 87,267 3.06% $ -- --% $ -- --%
Corporates ............................. -- -- 5,359 6.00 -- -- -- --
State and municipals (2) ............... 2,839 5.21 26,731 5.72 45,636 6.94 16,805 6.91
Pass-through mortgage securities ....... -- -- -- -- 47,366 2.94 18,943 2.86
-------- ---- -------- ---- -------- ---- -------- ----
Total debt securities ............. 32,725 4.14 119,357 3.79 93,002 4.90 35,748 4.77
Equity ................................. -- -- -- -- -- -- 306 3.37
-------- ---- -------- ---- -------- ---- -------- ----
$ 32,725 4.14% $119,357 3.79% $ 93,002 4.90% $ 36,054 4.75%
======== ==== ======== ==== ======== ==== ======== ====
(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
pass-through mortgage securities 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 state and municipal securities have been computed on
a tax-equivalent basis.
50
NOTE C - LOANS
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,
---------------------------------------------------------------------------
2003 2002 2001 2000* 1999*
------- ------- ------- ------- -------
(dollars in thousands)
Balance, beginning of year .................... $ 2,085 $ 2,020 $ 1,943 $ 2,033 $ 3,651
------- ------- ------- ------- -------
Loans charged off:
Commercial and industrial ................... 41 68 17 28 32
Secured by real estate ...................... -- -- -- -- --
Consumer and other .......................... 69 16 35 28 28
------- ------- ------- ------- -------
110 84 52 56 60
------- ------- ------- ------- -------
Recoveries of loans charged off:
Commercial and industrial ................... -- 13 -- -- --
Secured by real estate ...................... 12 16 16 17 16
Consumer and other .......................... 8 20 13 24 26
------- ------- ------- ------- -------
20 49 29 41 42
------- ------- ------- ------- -------
Net chargeoffs ................................ (90) (35) (23) (15) (18)
Provision for loan losses (credit) ............ 457 100 100 (75) --
Transition adjustment ......................... -- -- -- -- (1,600)
------- ------- ------- ------- -------
Balance, end of year .......................... $ 2,452 $ 2,085 $ 2,020 $ 1,943 $ 2,033
======= ======= ======= ======= =======
Ratio of net chargeoffs to
average loans outstanding ................... .03% .01% .01% .01% .01%
======= ======= ======= ======= =======
* Unaudited
The Corporation's loan portfolio at December 31, 2003 and 2002 included
$1,152,000 and $923,000, respectively, of loans considered to be impaired under
SFAS No. 114. Of the Corporation's total impaired loans at December 31, 2003,
$727,000 had a related allowance for loan losses of $88,000 and the balance had
no related allowance for loan losses. The average recorded investment during
2003 in loans considered to be impaired as of December 31, 2003 was $1,288,000.
Interest income recognized during 2003 on loans considered to be impaired as of
December 31, 2003 and during the period in 2003 that such loans were impaired
amounted to $45,000. Of the Corporation's total impaired loans at December 31,
2002, $546,000 had a related allowance for loan losses of $39,000 and the
balance had no related allowance for loan losses. The average recorded
investment during 2002 in loans considered to be impaired as of December 31,
2002 was $944,000. Interest income recognized during 2002 on loans considered to
be impaired as of December 31, 2002 and during the period in 2002 that such
loans were impaired amounted to $24,000. 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. All interest income recorded by the Corporation during
2003, 2002, and 2001 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 2003 and 2002. Such loans are permitted under Regulation O of
the Board of Governors of The Federal Reserve System. The aggregate amount of
these loans was approximately $1,762,000 and $2,108,000 at December 31, 2003 and
2002, respectively. During 2003, $298,000 of new loans to such persons were made
and repayments totaled $644,000. There were no loans to directors or executive
officers which were nonaccruing at December 31, 2003 or 2002.
51
NOTE D - PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following:
December 31,
----------------------
2003 2002
-------- --------
(in thousands)
Land ............................................ $ 1,274 $ 1,274
Buildings ....................................... 4,954 4,820
Leasehold improvements .......................... 2,412 1,888
Furniture and equipment ......................... 8,994 7,969
-------- --------
17,634 15,951
Accumulated depreciation and amortization ....... (10,839) (9,553)
-------- --------
$ 6,795 $ 6,398
======== ========
A building occupied by one of the Bank's branch offices is leased from a
director of the Corporation and the Bank. Although the lease expires on October
31, 2007, the Bank may, on ninety (90) days written notice, elect to extend the
lease for an additional five (5) year period. The lease provides for annual base
rent of $30,184 for the year ending October 31, 2004. In addition to base rent,
the Bank is responsible for its proportionate share of the real estate taxes on
the building in which the leased premises are located.
NOTE E - DEPOSITS
The following table sets forth the remaining maturities of the Bank's time
deposits.
Amount
-------------------------------------
Less than $100,000 or
Year $100,000 More Total
----------------- --------- ----------- -------
(in thousands)
2004 ............ $15,303 $16,320 $31,623
2005 ............ 1,559 108 1,667
2006 ............ 273 -- 273
2007 ............ 125 -- 125
2008 ............ 78 -- 78
Thereafter ...... 84 -- 84
------- ------- -------
$17,422 $16,428 $33,850
======= ======= =======
NOTE F - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements at December 31, 2003 are
short-term collateralized financing arrangements that mature within sixty days.
At maturity, the securities underlying the agreements will be returned to the
Bank. The following table sets forth information concerning securities sold
under repurchase agreements during 2003. There were no securities sold under
repurchase agreements during 2002.
2003
---------
(dollars in thousands)
Average daily balance during the year ............ $ 17,100
Average interest rate during the year ............ .86%
Maximum month-end balance during the year ........ $ 51,155
Weighted average interest rate at year-end ....... .91%
52
NOTE G - INCOME TAXES
The Corporation and its subsidiary file a consolidated federal income tax
return. Income taxes charged to earnings in 2003, 2002, and 2001 had effective
tax rates of 25.0%, 26.4%, and 25.9%, 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,
--------------------------------------
2003 2002 2001
------- ------- --------
Statutory federal income tax rate .................................................... 34.0% 34.0% 34.0%
State and local income taxes, net of federal income tax benefit ...................... 4.3 4.4 4.2
Tax-exempt interest on securities and loans, net of
disallowed cost of funding ......................................................... (13.7) (12.2) (12.6)
Other ................................................................................ .4 .2 .3
------- ------- --------
25.0% 26.4% 25.9%
======= ======= ========
Provision For Income Taxes. The following table sets forth the components
of the provision for income taxes.
Year Ended December 31,
--------------------------------------
2003 2002 2001
------- ------- --------
(in thousands)
Current:
Federal ............................................................................ $ 2,757 $ 3,258 $ 2,840
State and local .................................................................... 883 1,006 828
------- ------- --------
3,640 4,264 3,668
------- ------- --------
Deferred:
Federal ............................................................................ 56 (148) (175)
State and local .................................................................... 95 39 33
------- ------- --------
151 (109) (142)
------- ------- --------
$ 3,791 $ 4,155 $ 3,526
======= ======= ========
Net Deferred Tax Liability. The following table sets forth the components
of the Bank's net deferred tax liability.
December 31,
----------------------
2003 2002
------- -------
Deferred tax assets: (in thousands)
Allowance for loan losses .......................................................... $ 539 $ 387
Supplemental executive retirement expense .......................................... 93 84
Directors' retirement expense ...................................................... 70 66
Other retirement expense ........................................................... 77 42
Accrued professional fees .......................................................... 12 12
Other .............................................................................. 4 4
------- -------
795 595
Valuation allowance .................................................................. -- --
------- -------
795 595
------- -------
Deferred tax liabilities:
Pension expense .................................................................... 421 105
Depreciation ....................................................................... 68 78
Accumulated earnings of Bank subsidiaries .......................................... 186 142
Unrealized gains on available-for-sale securities .................................. 2,155 2,664
------- -------
2,830 2,989
------- -------
Net deferred tax liability ........................................................... $ 2,035 $ 2,394
======= =======
53
NOTE H - REGULATORY MATTERS
Capital. The Corporation is subject to various regulatory capital
requirements administered by 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.
The following table sets forth the Corporation's capital ratios at
December 31, 2003 and 2002 and the minimum ratios necessary for a bank to be
classified as well capitalized and adequately capitalized. The capital ratios of
the Corporation's subsidiary bank at December 31, 2003 and 2002 are not
significantly different than those shown in the table below and substantially
exceed the requirements for a well-capitalized bank.
Corporation's Capital Ratios
at December 31:
----------------------------- Well Adequately
2003 2002 Capitalized Capitalized
----- ----- ----------- ------------
Total Risk-Based Capital Ratio ................. 27.16% 30.28% 10.00% 8.00%
Tier 1 Risk-Based Capital Ratio ................. 26.41 29.52 6.00 4.00
Tier 1 Leverage Capital Ratio ................... 9.36 10.25 5.00 4.00
For purposes of computing the capital ratios in the preceding table, the
Corporation had total capital, as defined, of $88,285,000 and $83,359,000 at
December 31, 2003 and 2002, respectively, and Tier 1 capital, as defined, of
$85,833,000 and $81,274,000, respectively. The minimum capital needed to be
classified as well capitalized at December 31, 2003 for total risk-based, Tier 1
risk-based, and Tier 1 leverage capital purposes is $32,506,000, $19,503,000 and
$45,846,000, respectively. The minimum capital needed to be classified as
adequately capitalized at December 31, 2003 for total risk-based, Tier 1
risk-based, and Tier 1 leverage capital purposes is $26,005,000, $13,002,000 and
$36,676,000, respectively. The minimum capital needed to be classified as well
capitalized at December 31, 2002 for total risk-based, Tier 1 risk-based, and
Tier 1 leverage capital purposes is $27,533,000, $16,520,000 and $39,632,000,
respectively. The minimum capital needed to be classified as adequately
capitalized at December 31, 2002 for total risk-based, Tier 1 risk-based, and
Tier 1 leverage capital purposes is $22,026,000, $11,013,000 and $31,706,000,
respectively.
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, 2003, the Bank had retained net income for the current
and two preceding calendar years of $16,006,000.
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 2003 was approximately $8,386,000.
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, 2003, the maximum
amount available for transfer from the Bank to the Corporation in the form of
loans approximated $13,219,000.
NOTE I - 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 $56 (the "Exercise Price"). However,
in the event that the Corporation has announced that any person has acquired
54
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 J - 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 540,000 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. As of December 31, 2003, there were 278,152 options available for grant
under the 1996 Plan, 234,639 options outstanding, and 46,003 options currently
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,
2003, options to purchase 19,007 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.
Stock Option Activity. The following table sets forth stock option
activity and the weighted average fair value of options granted.
2003 2002 2001
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
Outstanding, beginning of year ................... 261,920 $ 21.95 214,391 $ 19.77 177,884 $ 16.81
Granted .......................................... 62,010 33.11 76,891 25.17 68,532 25.51
Exercised ........................................ (62,681) 17.06 (24,870) 12.59 (28,956) 14.51
Forfeited ........................................ (7,603) 27.30 (4,492) 24.97 (3,069) 26.11
-------- -------- -------- -------- -------- --------
Outstanding, end of year ......................... 253,646 $ 25.73 261,920 $ 21.95 214,391 $ 19.77
======== ======== ======== ======== ======== ========
Exercisable, end of year ......................... 65,010 $ 19.68 124,646 $ 18.21 148,102 $ 17.19
======== ======== ======== ======== ======== ========
Weighted average fair value of options granted ... $ 6.47 $ 4.92 $ 5.51
======== ======== ========
55
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 3.64%, 3.69%, and 4.85% for
options granted in 2003, 2002, and 2001, respectively; volatility of 17.00%,
16.70%, and 15.30% for options granted in 2003, 2002, and 2001, respectively;
and expected dividend yield of 2.0% and expected life of 7 years for the options
granted in each of the three years in the period ended December 31, 2003.
Stock Options Outstanding. The following table sets forth information
about outstanding and exercisable stock options at December 31, 2003.
Outstanding Stock Options Exercisable Stock Options
------------------------------------------- ---------------------------
Weighted Average
--------------------------- Weighted
Remaining Average
Contractual Exercise Exercise
Range of Exercise Prices Number Life (yrs.) Price Number Price
- ----------------------------------------------- ------- ----------- --------- --------- ---------
$10.59 to $13.26 .............................. 19,007 1.39 $12.27 19,007 $12.27
$16.22 to $19.98 .............................. 25,378 4.93 18.57 25,378 18.57
$24.68 to $33.11 .............................. 209,261 7.74 27.82 20,625 27.86
------- ------ ------ ------- ------
253,646 6.98 $25.73 65,010 $19.68
======= ====== ====== ======= ======
NOTE K - RETIREMENT PLANS
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. In
determining an appropriate profit sharing contribution percentage for any given
year, the Compensation Committee of the Board of Directors considers the Bank's
actual performance against targeted earnings goals. 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 $149,000, $142,000, and $130,000 for 2003, 2002, and 2001,
respectively, and profit sharing contributions were $492,000, $743,000, and
$587,000, 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 $205,000, $250,000, and $389,000 in 2003, 2002, and 2001,
respectively. The fluctuations in SERP expense during the three year period
ended December 31, 2003 are primarily attributable to the impact on required
employer contributions of changing interest rates and stock market performance,
increases in executive compensation levels, and, for 2002, an increase under the
Internal Revenue Code of the amount of compensation that can be covered by the
Bank's qualified pension plan.
The Bank has a defined benefit pension plan (the "Pension Plan" or the
"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. The Retirement System
is overseen by a Board of Trustees (the "Trustees") who meet quarterly and,
among other things, set the investment policy guidelines. 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, the major categories of which
are set forth in the table that follows. The Pension Plan has a September 30
year end and therefore the Company uses September 30 as the measurement date for
this Plan.
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-
56
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).
Major Categories of Plan Assets. The following table sets forth the major
categories of Plan assets as of the last two Plan year ends and the percentage
of the total value of Plan assets accounted for by each.
Percentage of Fair Value
of Total Plan Assets at:
--------------------------
9/30/03 9/30/02
--------- ---------
Equity Securities............ 59.7% 55.3%
Debt Securities.............. 34.5 36.3
Real Estate.................. -- --
All Other Assets............. 5.8 8.4
----- -----
100.0% 100.0%
===== =====
The Retirement System uses two investment managers. The mix of equity and
long-term fixed income securities are determined from time to time by the
Trustees based on a review of the Retirement System's requirements.
The current target allocation percentage for equity securities is 60% and
for debt securities is 40%. However, the target percentage for equities may vary
from 50% to 70% and the target percentage for debt securities may vary from 30%
to 50% based on the investment managers' discretion. The equity portfolio
includes, among other things, equities in a commingled large cap equity fund.
Although there are no specific restrictions on either the quality rating or the
type of equities to be purchased, an equity investment in a single company is
limited to 5% of the cost of the portfolio.
Fixed income investments include various debt securities included in a
fixed income portfolio and a commingled fixed income fund. The fixed income
portfolio must maintain an average quality rating of "AA"/"Aa3" or above by
Standard & Poor's/Moody's. A quality rating by Moody's and/or Standard and
Poor's of "A" or better is generally required for new purchases. In addition, up
to 15% of the purchases of debt securities may be corporate bonds rated "BBB".
If a security is not rated and is considered by the investment managers to be of
"A" quality or higher, it may be purchased. With the exception of securities
issued by the United States government, an individual issuer may not exceed 10%
of the fixed income portfolio at the time of purchase. Structured notes and
mortgage backed derivatives that have inverse floating coupons or that are
interest only securities are not permitted.
The commingled fixed income fund must maintain an average quality rating
of "AA" or above by Moody's, Standard & Poor's, or Fitch. A maximum of 20% of
the fund may be invested in securities rated below "A3" or equivalent. All rated
securities must be investment grade ("Baa3" or equivalent) or higher by at least
one rating agency at the time of purchase. Non-rated securities may be purchased
in the fund if they are deemed to be investment grade equivalent by the
Trustees.
Net Pension Cost. The following table sets forth the components of net
periodic pension cost.
2003 2002 2001
-------- -------- --------
(in thousands)
Service cost, net of plan participant contributions ...... $ 504 $ 482 $ 410
Interest cost ............................................ 570 517 462
Expected return on plan assets ........................... (543) (594) (598)
Net amortization and deferral ............................ 23 (21) (44)
-------- -------- --------
Net pension cost ......................................... $ 554 $ 384 $ 230
======== ======== ========
57
Significant Actuarial Assumptions. The following tables set forth the
significant actuarial assumptions used to determine the benefit obligation as of
September 30, 2003, 2002, and 2001 and the benefit cost for each of the Plan
years then ended.
Weighted average assumptions used to determine the
benefit obligation at September 30 2003 2002 2001
------- ------- -------
Discount rate ....................................................... 6.00% 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 .................... 7.00% 7.50% 7.50%
Weighted average assumptions used to determine
pension cost for the year ended September 30 2003 2002 2001
------- ------- -------
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% 7.50% 7.00%
The expected long-term rate-of-return on plan assets reflects long-term
earnings expectations on the total assets currently in the Retirement System and
contributions expected to be received by the Retirement System during the
current plan year. In estimating the rate, appropriate consideration is given to
historical returns earned by the Retirement System assets and the rates of
return expected to be available for reinvestment. Average rates of return over
the past 10, 15, and 20 year periods were determined and subsequently adjusted
to reflect current capital market assumptions and changes in investment
allocations.
Funded Status of The Plan. The following table sets forth the change in
the projected benefit obligation and Plan assets for each Plan year and, as of
the end of each Plan year, the funded status of the Plan, prepaid benefit cost,
and accumulated benefit obligation.
Year Ended September 30,
-------------------------------------------
2003 2002 2001
-------- -------- --------
Change in projected benefit obligation (in thousands)
Projected benefit obligation at beginning of year ................... $ 8,608 $ 7,796 $ 6,969
Service cost ........................................................ 659 625 520
Plan participants' contributions .................................... (155) (143) (110)
Expenses ............................................................ (59) (59) (55)
Interest cost ....................................................... 570 517 462
Benefits paid ....................................................... (374) (324) (260)
Additional prior service cost at valuation date ..................... -- -- 302
Assumption changes and other ........................................ 1,368 196 (32)
-------- -------- --------
Projected benefit obligation at end of year ......................... 10,617 8,608 7,796
-------- -------- --------
Change in plan assets
Fair value of plan assets at beginning of year ...................... 7,329 7,990 8,580
Actual return on plan assets ........................................ 1,309 (421) (712)
Employer contributions .............................................. 1,773 -- 327
Plan participants' contributions .................................... 155 143 110
Benefits paid ....................................................... (374) (324) (260)
Expenses ............................................................ (59) (59) (55)
-------- -------- --------
Fair value of plan assets at end of year ............................ 10,133 7,329 7,990
-------- -------- --------
Funded status ....................................................... (484) (1,279) 194
Unrecognized net actuarial loss ..................................... 1,857 1,453 385
Unrecognized prior service cost ..................................... 235 255 275
Unrecognized transition asset ....................................... (6) (46) (87)
-------- -------- --------
Prepaid benefit cost ................................................ $ 1,602 $ 383 $ 767
======== ======== ========
Accumulated Benefit Obligation ...................................... $ 8,406 $ 6,988 $ 6,169
======== ======== ========
The Bank currently expects to contribute approximately $1,183,000 to the
Pension Plan on or before September 30, 2004, representing the maximum tax
deductible contribution for the Plan year then ended.
58
NOTE L - OTHER OPERATING EXPENSES
Expenses included in other operating expenses which exceed one percent of
the aggregate of total interest income and noninterest income in 2003, 2002, and
2001 are as follows:
2003 2002 2001
---- ---- ----
(in thousands)
Computer services ......... $712 $556 $543
Insurance ................. 726 545 481
Marketing ................. 619 416 465
NOTE M - 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 to extend credit and generally uses the same
credit policies for letters of credit as it does for on-balance-sheet
instruments. At December 31, financial instruments whose contract amounts
represent credit risk are as follows:
2003 2002
------------------- --------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
------- -------- ------- --------
(in thousands)
Commitments to extend credit .......... $ 8,391 $50,309 $12,007 $46,955
Standby letters of credit ............. 2,778 -- 1,077 --
Commercial letters of credit .......... 90 -- -- --
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. Since some of these commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Unused home equity lines, which comprise a substantial
portion of these commitments, generally expire five years from their date of
origination. Other loan commitments generally expire in 45 days. The fixed rate
loan commitments shown in the table are to make loans with interest rates
ranging from 4.00% to 6.00% and maturities ranging from 9 years to 20 years. 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 2004;
however, most are effectively automatically renewable. 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, 2003 varied from 0% to 100%, and averaged
81%. Standby letters of credit are considered financial guarantees in accordance
with FIN No. 45, and are recorded at fair value.
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 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.
59
Lease Commitments. At December 31, 2003, minimum annual rental commitments
under noncancelable operating leases are as follows:
Year Amount
---------------------------------- -----------
(in thousands)
2004 ............................. $ 692
2005 ............................. 642
2006 ............................. 535
2007 ............................. 514
2008 ............................. 424
Thereafter ....................... 1,795
-----------
$ 4,602
===========
The Bank has various renewal options on the above leases. Rent expense was
$620,000, $461,000, and $457,000 in 2003, 2002, and 2001, respectively.
Employment Contracts and Severance Agreements. Five of the Bank's
executive officers have employment contracts with the Corporation under which
they are entitled to severance compensation in the event of an involuntary
termination of employment or resignation of employment following a change in
control. The terms of these contracts range from eighteen months to three years
and are automatically extended at the expiration of each year for an additional
period of one year, thus resulting in new terms of between eighteen months and
three years. The current aggregate annual salaries provided for in these
contracts is approximately $1,118,000. Three other executive officers have
severance agreements with the Corporation which apply in the event of a change
in control. The current aggregate annual salaries provided for in these
severance agreements is approximately $517,000.
NOTE N - 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, 2003 and 2002.
2003 2002
----------------------- ------------------------
Carrying/ Carrying/
Contract Contract
Amount Fair Value Amount Fair Value
--------- ---------- --------- ----------
(in thousands)
Financial Assets:
Cash and due from banks ............................. $ 31,430 $ 31,430 $ 33,229 $ 33,229
Federal funds sold .................................. 30,000 30,000 34,000 34,000
Held-to-maturity securities ......................... 238,289 242,563 273,102 282,438
Available-for-sale securities ....................... 281,138 281,138 180,406 180,406
Loans ............................................... 319,519 323,746 259,023 264,500
Accrued interest receivable ......................... 4,903 4,903 5,353 5,353
Financial Liabilities:
Checking deposits ................................... 297,454 297,454 256,444 256,444
Savings and money market deposits ................... 445,851 445,851 412,815 412,815
Time deposits ....................................... 33,850 33,810 30,466 30,521
Securities sold under repurchase agreements 41,184 41,184 -- --
Accrued interest payable ............................ 65 65 61 61
Off-Balance-Sheet Liabilities:
Commitments to extend credit ........................ 58,700 -- 58,962 --
60
NOTE O - 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,
---------------------------
2003 2002
--------- ---------
Assets: (in thousands)
Checking and money market accounts with subsidiary ......................... $ 2,499 $ 2,653
Investment in subsidiary bank, at equity ................................... 88,128 84,138
Other assets ............................................................... 134 66
--------- ---------
$ 90,761 $ 86,857
========= =========
Liabilities:
Cash dividends payable ..................................................... $ 1,470 $ 1,415
--------- ---------
Stockholders' equity:
Common stock ............................................................... 408 416
Surplus .................................................................... 781 724
Retained earnings .......................................................... 84,864 80,354
--------- ---------
86,053 81,494
Accumulated other comprehensive income, net of tax ......................... 3,238 3,948
--------- ---------
89,291 85,442
--------- ---------
$ 90,761 $ 86,857
========= =========
CONDENSED STATEMENTS OF INCOME Year ended December 31,
---------------------------------------------
2003 2002 2001
--------- --------- ---------
Income: (in thousands)
Dividends from subsidiary bank ............................................. $ 6,700 $ 2,700 $ 7,700
Interest on deposits with subsidiary bank .................................. 17 24 33
--------- --------- ---------
6,717 2,724 7,733
--------- --------- ---------
Expenses:
Other operating expenses ................................................... 76 79 59
--------- --------- ---------
Income before income taxes ................................................. 6,641 2,645 7,674
Income tax benefit ........................................................... (23) (22) (11)
--------- --------- ---------
Income before undistributed earnings of
subsidiary bank .......................................................... 6,664 2,667 7,685
Equity in undistributed earnings ............................................. 4,701 8,896 2,409
--------- --------- ---------
Net income ................................................................. $ 11,365 $ 11,563 $ 10,094
========= ========= =========
61
CONDENSED STATEMENTS OF CASH FLOWS Year ended December 31,
---------------------------------------
2003 2002 2001
--------- --------- ---------
(in thousands)
Cash Flows From Operating Activities:
Net income .................................................................... $ 11,365 $ 11,563 $ 10,094
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of subsidiary bank ................................. (4,701) (8,896) (2,409)
Decrease in other assets .................................................. 42 24 2
--------- --------- ---------
Net cash provided by operating activities ................................... 6,706 2,691 7,687
--------- --------- ---------
Cash Flows From Financing Activities:
Repurchase and retirement of common stock ..................................... (5,129) (1,592) (4,698)
Proceeds from exercise of stock options ....................................... 1,069 313 420
Cash dividends paid ........................................................... (2,800) (2,398) (2,180)
Cash in lieu of fractional shares on 3-for-2 stock split ...................... -- (7) --
--------- --------- ---------
Net cash used in financing activities ....................................... (6,860) (3,684) (6,458)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents* ........................... (154) (993) 1,229
Cash and cash equivalents, beginning of year .................................... 2,653 3,646 2,417
--------- --------- ---------
Cash and cash equivalents, end of year .......................................... $ 2,499 $ 2,653 $ 3,646
========= ========= =========
Supplemental Schedule of Noncash Financing Activities:
Tax benefit from exercise of employee stock options ........................... $ 109 $ 46 $ 35
Cash dividends payable ........................................................ 1,470 1,415 1,200
*Cash and cash equivalents include the checking and money market accounts with
the Corporation's wholly-owned bank subsidiary.
62
NOTE P - QUARTERLY FINANCIAL DATA (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
(in thousands, except per share data)
2003
Interest income .............................. $ 9,525 $ 8,667 $ 9,192 $ 9,584 $36,968
Interest expense ............................. 1,053 966 906 953 3,878
Net interest income .......................... 8,472 7,701 8,286 8,631 33,090
Provision for loan losses .................... 75 75 185 122 457
Noninterest income ........................... 1,485 1,517 1,651 1,345 5,998
Noninterest expense .......................... 5,685 5,872 5,899 6,019 23,475
Income before income taxes ................... 4,197 3,271 3,853 3,835 15,156
Income taxes ................................. 1,104 761 969 957 3,791
Net income ................................... 3,093 2,510 2,884 2,878 11,365
Earnings per share:
Basic ...................................... .75 .62 .71 .70 2.78
Diluted .................................... .74 .60 .70 .68 2.72
Comprehensive income ......................... 3,154 3,263 1,684 2,554 10,655
2002
Interest income .............................. $ 8,804 $ 9,338 $ 9,460 $ 9,327 $36,929
Interest expense ............................. 1,218 1,254 1,347 1,292 5,111
Net interest income .......................... 7,586 8,084 8,113 8,035 31,818
Provision for loan losses (credit) ........... 100 50 (100) 50 100
Noninterest income ........................... 1,329 1,479 1,319 1,361 5,488
Noninterest expense .......................... 5,301 5,447 5,426 5,314 21,488
Income before income taxes ................... 3,514 4,066 4,106 4,032 15,718
Income taxes ................................. 866 1,099 1,112 1,078 4,155
Net income ................................... 2,648 2,967 2,994 2,954 11,563
Earnings per share:
Basic ...................................... .63 .71 .72 .71 2.77
Diluted .................................... .62 .70 .71 .70 2.73
Comprehensive income ......................... 2,264 5,433 4,477 2,375 14,549
63
Official Staff
Administration
J. William Johnson
Chairman
Michael N. Vittorio
President & Chief Executive Officer
Arthur J. Lupinacci, Jr.
Executive Vice President
Lorraine Fogarty
Executive Assistant
Constance Miller
Executive Assistant
Auditing
Kitty W. Craig
Vice President
Margaret M. DeBonis
Assistant Vice President
Matthew Wallis
Administrative Assistant
Branch Administration
James Clavell
Vice President
Monica T. Baker
Assistant Vice President
JoAnn Diamond
Assistant Vice President
Carole Ann Snayd
Assistant Vice President
Leonora Mintz
Assistant Manager
Patricia Ovalle Wood
Assistant Manager
Sara Melamed
Assistant Manager
Patrice Gonclaves
Administrative Assistant
Commercial Banking
Donald L. Manfredonia
Executive Vice President
Joseph G. Perri
Executive Vice President
Paul J. Daley
Senior Vice President
James P. Johnis
Senior Vice President
Albert Arena
Vice President
Sergei A. Boboshko
Vice President
Deborah A. Cassidy
Vice President
64
Stephen Durso
Vice President
Albert Ghelarducci
Vice President
Edward V. Mirabella
Vice President
Peter C. Puccio
Vice President
William W. Riley
Vice President
John P. Solensky
Vice President
Margaret M. Curran
Assistant Vice President
Gretchen B. Nesky
Assistant Vice President
Maureen Cannarsa
Administrative Assistant
Diane Mucci
Executive Assistant
Compliance and Procedures
John Vivona
Assistant Vice President
Sandra Dato
Administrative Assistant
Computer Services
Conrad A. Lissade
Computer Services Manager
Data Center
Jose Diaz
Vice President
Margaret Hanrahan
Administrative Assistant
Kristen Mucci
Administrative Assistant
Linda Sue Rudloff
Administrative Assistant
Deposit Operations
Carmela Lalonde
Assistant Manager
Donna Long
Assistant Manager
Linda Bannen
Administrative Assistant
Neil Dastas
Administrative Assistant
Finance
Mark D. Curtis
Senior Vice President
Wayne B. Drake
Vice President
65
Howard Hoeberlein
Vice President
Matthew J. Mankowski
Assistant Vice President
Cheryl Romanski
Assistant Cashier
Catherine Irvin
Assistant Manager
Diane Pascucci
Administrative Assistant
General Services
Daniel Sapanara
General Services Officer
Carol Daley
Administrative Assistant
Human Resources
Mary E. Casey
Vice President
Takako Endo
Assistant Vice President
Susan J. Hempton
Assistant Vice President
Rita Quinn
Administrative Assistant
Loan Center
Robert Jacobs
Vice President
John F. Darcy
Senior Mortgage Consultant
Carmine D'Ambrosio
Mortgage Originator
Frederick T. Hughes
Mortgage Originator
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
Donna A. Blacharski
Administrative Assistant
66
Operations Administration
Richard Kick
Senior Vice President
Betsy Gustafson
Vice President
Counsel
Schupbach, Williams & Pavone LLP
Independent Auditors
Crowe Chizek and Company LLC
Form 10-K Report
A copy of the Corporation's annual report on Form 10-K for 2003, 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.
Executive Office
The First of Long Island Corporation
10 Glen Head Road
Glen Head, New York 11545
(516) 671-4900
www.fnbli.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 American Legion Hall, 190
Glen Head Road, Glen Head, New York 11545 on Tuesday, April 20, 2004 at 3:30
P.M.
67
Business Development Board
[PHOTO OMITTED]
Howard P. Annenberg
President & CEO
Shannen Promotions, Inc.
[PHOTO OMITTED]
Nicola Arena
President
Mediterranean Shipping Co. (USA) Inc.
[PHOTO OMITTED]
Richard Arote, Sr.
President
Air Distribution Enterprises, Inc.
[PHOTO OMITTED]
Beverly J. Bell, Esq.
Humes & Wagner, LLP
[PHOTO OMITTED]
Robert J. Bogardt, CPA
Bogardt & Company, LLP
[PHOTO OMITTED]
Thomas Burke
Chief Executive Officer
Ophthalmic Consultants of Long Island
[PHOTO OMITTED]
Christopher S. Byczek, Esq.
Partner
Cronin & Byczek, LLP
[PHOTO OMITTED]
Louis Campanelli
Member of the Board of Directors
SCORE Foundation
[PHOTO OMITTED]
Emil V. Cianciulli, Esq.
Partner
Cianciulli, Meng & Panos, P.C.
[PHOTO OMITTED]
Phillip M. Damashek, Esq.
Schneider, Kleinick, Weitz & Damashek
[PHOTO OMITTED]
Thomas N. Dufek, CPA
Dufek & Associates
[PHOTO OMITTED]
William L. Edwards
Real Estate Investor
[PHOTO OMITTED]
C. J. Erickson, Esq.
Hodgson Russ LLP
68
[PHOTO OMITTED]
Bernard Esquenet
Chief Executive Officer
The Ruhof Corp.
[PHOTO OMITTED]
Robert Giambalvo, CPA
President
Giambalvo, Kilgannon & Giammarese, CPAs, PC
[PHOTO OMITTED]
Leonard Gleicher
Partner
Goldberg Bros. Realtors
[PHOTO OMITTED]
Stephen R. Greenwald
President
Metropolitan College of New York
[PHOTO OMITTED]
Herbert Haber, CPA
[PHOTO OMITTED]
Kevin J. Harding, Esq.
Partner
Harding and Harding
[PHOTO OMITTED]
Alan B. Katcher
Chief Executive Officer
Terry Alan Adv. Co., Inc.
[PHOTO OMITTED]
Kevin T. Kelly
Management Consultant
[PHOTO OMITTED]
Herbert Kotler, Esq.
[PHOTO OMITTED]
Kenneth R. Latham
[PHOTO OMITTED]
Melvin F. Lazar, CPA
Founder
Lazar, Levine & Felix, LLP
[PHOTO OMITTED]
James J. Lynch, Esq.
[PHOTO OMITTED]
John I. Martinelli
Principal/Partner
Owen Petersen & Co., LLP
Petersen Accounting Consulting LLP
[PHOTO OMITTED]
Bruce McNaughton
Trustee
Frank Melville Park Foundation
69
[PHOTO OMITTED]
Susan Hirschfeld Mohr
President
J. W. Hirschfeld Agency, Inc.
[PHOTO OMITTED]
Richard E. Nussbaum, CPA
Managing Partner
Nussbaum Yates & Wolpow, P.C.
[PHOTO OMITTED]
James Panos, Esq.
Partner
Cianciulli, Meng & Panos, P.C.
[PHOTO OMITTED]
Robert J. Pape, Jr., Esq.
[PHOTO OMITTED]
Douglas Pierce
President
Pierce Country Day School & Camp Inc.
[PHOTO OMITTED]
Quentin Sammis
Chairman
Coldwell Banker Residential Brokerage
[PHOTO OMITTED]
Melvin Schreiber, CPA
Moses and Schreiber LLP
[PHOTO OMITTED]
Arthur C. Schupbach, Esq.
Partner
Schupbach, Williams & Pavone LLP
[PHOTO OMITTED]
Shaw Shahery
President & CEO
Convermat Corporation
[PHOTO OMITTED]
Marino Sorbara
President
Sorbara Construction Corp.
[PHOTO OMITTED]
H. Craig Treiber
Chairman/CEO
The Treiber Insurance Group
[PHOTO OMITTED]
Sal J. Turano
President
Abstracts Incorporated
[PHOTO OMITTED]
Arthur Ventura
President
Badge Agency, Inc.
70
[PHOTO OMITTED]
George J. Walsh, Esq.
Thompson Hine LLP
[PHOTO OMITTED]
Robert A. Wilkie, Esq.
Wilkie & Wilkie
[PHOTO OMITTED]
Mark Wurzel
President
Calico Cottage, Inc.
Photos not available: David Black, CPA; Zachary Levy, Esq.; Lawrence F. Steiner
71
[LOGO] The First of Long Island
(516) 671-4900
www.fnbli.com
(212) 566-1500
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 Cashier
Vincent Bartilucci
Administrative Assistant
Greenvale
7 Glen Cove Road
Greenvale, NY 11548
(516) 621-8811
Philip R. Thompson
Vice President and Branch Manager
Daphne Johnson
Assistant Manager
Huntington
253 New York Avenue
Huntington, NY 11743
(631) 427-4143
Rick Perro
Vice President and Branch Manager
Jenny Malandruccolo
Assistant Vice President
Marco Leon
Administrative Assistant
Carol Luzynski
Administrative Assistant
Giuseppe Sparacino
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
James McGlynn
Administrative Assistant
72
Northport
711 Fort Salonga Road
Northport, NY 11768
(631) 261-4000
Henry C. Suhr
Vice President and Branch Manager
David Lippa
Assistant Vice President
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
Melissa Grella
Administrative Assistant
Rockville Centre
310 Merrick Road
Rockville Centre, NY 11570
(516) 763-5533
Lucy Ortiz
Vice President and Branch Manager
Patricia Scrudato
Assistant Manager
Theresa Crawford
Administrative Assistant
Roslyn Heights
130 Mineola Avenue
Roslyn Heights, NY 11577
(516) 621-1900
Frieda O'Mara
Vice President and Branch Manager
Susan Sciacca
Assistant Cashier
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
73
Commercial Banking Offices
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.
Vice President and Branch Manager
Farmingdale
22 Allen Boulevard
Farmingdale, NY 11735
(631) 753-8888
Patricia M. Gramble
Vice President and Branch Manager
2091 New Highway
Farmingdale, NY 11735
(631) 454-2022
Barbara Cavalier
Vice President and Branch Manager
Garden City
1050 Franklin Avenue
Garden City, NY 11530
(516) 742-6262
Elizabeth A. Materia
Vice President and Branch Manager
Great Neck
536 Northern Boulevard
Great Neck, NY 11021
(516) 482-6666
Jane B. Manditch
Vice President and Branch Manager
Joanne Bosco
Administrative Assistant
Hauppauge
330 Motor Parkway
Hauppauge, NY 11788
(631) 952-2900
Mark A. Ryan
Vice President and Branch Manager
74
Hicksville
106 Old Country Road
Hicksville, NY 11801
(516) 932-7150
Joyce C. Graber
Vice President and Branch Manager
Arlyne H. Kramer
Assistant Cashier
Lake Success
3000 Marcus Avenue
Lake Success, NY 11042
(516) 775-3133
Allison Stansfield
Vice President and Branch Manager
Susan Costabile
Assistant Manager
Mineola
194 First Street
Mineola, NY 11501
(516) 742-1144
Herta Tscherne
Vice President and Branch Manager
Rosemary Kerrane
Assistant Manager
New Hyde Park
200 Jericho Turnpike
New Hyde Park, NY 11040
(516) 328-3100
Linda A. Cutter
Vice President and Branch Manager
Kathleen Martin
Assistant Manager
Valley Stream
133 E. Merrick Road
Valley Stream, NY 11580
(516) 825-0202
Peter J. Arebalo
Vice President and Branch Manager
Susan Pickrodt
Assistant Manager
Manhattan
232 Madison Avenue
New York, NY 10016
(212) 213-8111
Judy Ferdinand
Vice President and Branch Manager
Augustus W. Imor
Assistant Manager
75
225 Broadway, Suite 703
New York, NY 10007
(212) 693-1515
Bruce Knepple
Vice President and Branch Manager
Paula Phillips
Administrative Assistant
1501 Broadway, Suite 301
New York, NY 10036
(212) 278-0707
Robert Oehler
Vice President and Branch Manager
Investment Management Division
800 Woodbury Road
Woodbury, NY 11797
(516) 364-3436
Brian J. Keeney
Senior Vice President
Alexander B. Young
Vice President
Francis V. Liantonio
Vice President
Sharon E. Pazienza
Vice President
Joanne Buckley
Assistant Vice President
Quyen T. Pham
Operations Manager
Dawn LoBraico
Administrative Assistant
76