UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ______________________ to ______________________
Commission file number 0-12220
THE FIRST OF LONG ISLAND CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 11-2672906
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10 Glen Head Road, Glen Head, New York 11545
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (516) 671-4900
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT JULY 26, 2004
- ----- ----------------------------
Common stock, par value 4,096,630
$.10 per share
THE FIRST OF LONG ISLAND CORPORATION
JUNE 30, 2004
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)
June 30, 2004 And December 31, 2003 1
Consolidated Statements Of Income (Unaudited)
Three and Six Months Ended June 30, 2004 And 2003 2
Consolidated Statements Of Changes In
Stockholders' Equity (Unaudited)
Six Months Ended June 30, 2004 And 2003 3
Consolidated Statements Of Cash Flows (Unaudited)
Six Months Ended June 30, 2004 And 2003 4
Notes To Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion And Analysis Of
Financial Condition And Results Of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchase
of Equity Securities 21
Item 4. Submission of Matters To A Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
ITEM 1. - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31,
2004 2003
------------- -------------
Assets:
Cash and due from banks ......................................... $ 40,569,000 $ 31,430,000
Federal funds sold .............................................. 13,500,000 30,000,000
------------- -------------
Cash and cash equivalents ..................................... 54,069,000 61,430,000
------------- -------------
Investment securities:
Held-to-maturity, at amortized cost (fair
value of $232,661,000 and $242,563,000) ............... 232,864,000 238,289,000
Available-for-sale, at fair value (amortized cost
of $318,723,000 and $275,745,000) ..................... 317,389,000 281,138,000
------------- -------------
550,253,000 519,427,000
------------- -------------
Loans:
Commercial and industrial ................................ 51,795,000 47,886,000
Secured by real estate ................................... 280,739,000 268,508,000
Consumer ................................................. 5,298,000 5,730,000
Other .................................................... 426,000 729,000
------------- -------------
338,258,000 322,853,000
Unearned income .......................................... (646,000) (882,000)
------------- -------------
337,612,000 321,971,000
Allowance for loan losses ................................ (2,651,000) (2,452,000)
------------- -------------
334,961,000 319,519,000
------------- -------------
Bank premises and equipment, net ................................ 6,534,000 6,795,000
Deferred income tax benefits .................................... 655,000 --
Other assets .................................................... 6,790,000 7,093,000
------------- -------------
$ 953,262,000 $ 914,264,000
============= =============
Liabilities:
Deposits:
Checking ................................................. $ 308,068,000 $ 297,454,000
Savings and money market ................................. 463,137,000 445,851,000
Time, other .............................................. 17,969,000 17,422,000
Time, $100,000 and over .................................. 28,489,000 16,428,000
------------- -------------
817,663,000 777,155,000
Securities sold under repurchase agreements ..................... 41,632,000 41,184,000
Accrued expenses and other liabilities .......................... 4,104,000 4,332,000
Current income taxes payable .................................... 194,000 267,000
Deferred income taxes payable ................................... -- 2,035,000
------------- -------------
863,593,000 824,973,000
------------- -------------
Stockholders' Equity:
Common stock, par value $.10 per share:
Authorized, 20,000,000 shares;
Issued and outstanding, 4,095,787 and 4,083,733 shares ...... 409,000 408,000
Surplus ......................................................... 633,000 781,000
Retained earnings ............................................... 89,428,000 84,864,000
------------- -------------
90,470,000 86,053,000
Accumulated other comprehensive income (loss) net of tax ........ (801,000) 3,238,000
------------- -------------
89,669,000 89,291,000
------------- -------------
$ 953,262,000 $ 914,264,000
============= =============
See notes to unaudited consolidated financial statements
1
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended June 30, Three Months Ended June 30,
-------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Interest income:
Loans ................................................... $ 9,177,000 $ 9,017,000 $ 4,633,000 $ 4,214,000
Investment securities:
Taxable ............................................. 6,630,000 5,818,000 3,341,000 2,720,000
Nontaxable .......................................... 3,200,000 3,047,000 1,610,000 1,543,000
Federal funds sold ...................................... 128,000 310,000 63,000 190,000
----------- ----------- ----------- -----------
19,135,000 18,192,000 9,647,000 8,667,000
----------- ----------- ----------- -----------
Interest expense:
Savings and money market deposits ....................... 1,403,000 1,788,000 678,000 849,000
Time deposits ........................................... 206,000 231,000 114,000 117,000
Securities sold under repurchase agreements ............. 194,000 -- 88,000 --
----------- ----------- ----------- -----------
1,803,000 2,019,000 880,000 966,000
----------- ----------- ----------- -----------
Net interest income ................................. 17,332,000 16,173,000 8,767,000 7,701,000
Provision for loan losses ................................... 200,000 150,000 100,000 75,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses ......... 17,132,000 16,023,000 8,667,000 7,626,000
----------- ----------- ----------- -----------
Noninterest income:
Investment Management Division income ................... 704,000 618,000 348,000 298,000
Service charges on deposit accounts ..................... 1,974,000 1,795,000 1,034,000 906,000
Net gains on sales of available-for-sale securities ..... 93,000 233,000 -- 110,000
Other ................................................... 359,000 356,000 189,000 203,000
----------- ----------- ----------- -----------
3,130,000 3,002,000 1,571,000 1,517,000
----------- ----------- ----------- -----------
Noninterest expense:
Salaries ................................................ 5,333,000 5,128,000 2,697,000 2,616,000
Employee benefits ....................................... 2,415,000 2,362,000 1,222,000 1,169,000
Occupancy and equipment expense ......................... 1,801,000 1,628,000 846,000 794,000
Other operating expenses ................................ 2,591,000 2,439,000 1,344,000 1,293,000
----------- ----------- ----------- -----------
12,140,000 11,557,000 6,109,000 5,872,000
----------- ----------- ----------- -----------
Income before income taxes .......................... 8,122,000 7,468,000 4,129,000 3,271,000
Income tax expense .......................................... 2,086,000 1,865,000 1,067,000 761,000
----------- ----------- ----------- -----------
Net income .......................................... $ 6,036,000 $ 5,603,000 $ 3,062,000 $ 2,510,000
=========== =========== =========== ===========
Weighted average:
Common shares ........................................... 4,092,434 4,092,547 4,093,714 4,068,770
Dilutive stock options .................................. 92,381 81,035 84,512 78,927
----------- ----------- ----------- -----------
4,184,815 4,173,582 4,178,226 4,147,697
=========== =========== =========== ===========
Earnings per share:
Basic ................................................... $ 1.47 $ 1.37 $ .74 $ .62
=========== =========== =========== ===========
Diluted ................................................. $ 1.44 $ 1.34 $ .73 $ .60
=========== =========== =========== ===========
See notes to unaudited consolidated financial statements
2
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (UNAUDITED)
----------------------------------------------------------------------------------------------
Six Months Ended June 30, 2004
----------------------------------------------------------------------------------------------
Accumulated
Other
Common Stock Compre- Compre-
---------------------- hensive Retained hensive
Shares Amount Surplus Income Earnings Income (Loss) Total
--------- ---------- ----------- ----------- ------------ ------------- ------------
Balance, January 1, 2004 .......... 4,083,733 $ 408,000 $ 781,000 $ 84,864,000 $ 3,238,000 $ 89,291,000
Net Income ...................... $ 6,036,000 6,036,000 6,036,000
Repurchase and retirement
of common stock ............. (16,130) (2,000) (762,000) (764,000)
Exercise of stock options ....... 28,184 3,000 577,000 580,000
Tax benefit of stock options .... 37,000 37,000
Cash dividends declared -
$.36 per share ................ (1,472,000) (1,472,000)
Unrealized losses on available-
for-sale-securities, net of
income taxes ................ (4,039,000) (4,039,000) (4,039,000)
-----------
Comprehensive income ............ $ 1,997,000
--------- ---------- ----------- =========== ------------ ----------- ------------
Balance, June 30, 2004 ............ 4,095,787 $ 409,000 $ 633,000 $ 89,428,000 $ (801,000) $ 89,669,000
========= ========== =========== ============ =========== ============
----------------------------------------------------------------------------------------------
Six Months Ended June 30, 2003
----------------------------------------------------------------------------------------------
Accumulated
Other
Common Stock Compre- Compre-
---------------------- hensive Retained hensive
Shares Amount Surplus Income Earnings Income (Loss) Total
--------- ---------- ----------- ----------- ------------ ------------- ------------
Balance, January 1, 2003 .......... 4,161,173 $ 416,000 $ 724,000 $ 80,354,000 $ 3,948,000 $ 85,442,000
Net Income ...................... $ 5,603,000 5,603,000 5,603,000
Repurchase and retirement
of common stock ............... (122,085) (12,000) (4,352,000) (4,364,000)
Exercise of stock options ....... 35,483 3,000 536,000 539,000
Tax benefit of stock options .... 57,000 57,000
Cash dividends declared -
$.34 per share ................ (1,385,000) (1,385,000)
Unrealized gains on available-
for-sale-securities, net of
income taxes ................ 814,000 814,000 814,000
Transfer from retained
earnings to surplus ........... 4,000,000 (4,000,000) --
-----------
Comprehensive income ............ $ 6,417,000
--------- ---------- ----------- =========== ------------ ----------- ------------
Balance, June 30, 2003 ............ 4,074,571 $ 407,000 $ 965,000 $ 80,572,000 $ 4,762,000 $ 86,706,000
========= ========== =========== ============ =========== ============
See notes to unaudited consolidated financial statements
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30,
-----------------------------
2004 2003
------------ ------------
Cash Flows From Operating Activities:
Net income ................................................................ $ 6,036,000 $ 5,603,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ............................................. 200,000 150,000
Deferred income tax credit ............................................ (2,000) (86,000)
Depreciation and amortization ......................................... 655,000 635,000
Premium amortization on investment securities, net .................... 1,389,000 2,352,000
Gains on sales of available-for-sale securities ....................... (93,000) (233,000)
Increase in prepaid income taxes ...................................... -- (215,000)
Decrease in other assets .............................................. 303,000 9,000
Decrease in accrued expenses and other liabilities .................... (230,000) (693,000)
Decrease in income taxes payable ...................................... (36,000) (232,000)
------------ ------------
Net cash provided by operating activities ........................... 8,222,000 7,290,000
------------ ------------
Cash Flows From Investing Activities:
Proceeds from sales of available-for-sale securities ...................... 95,000 237,000
Proceeds from maturities and redemptions of investment securities:
Held-to-maturity ........................................................ 59,663,000 50,295,000
Available-for-sale ...................................................... 25,404,000 35,006,000
Purchase of investment securities:
Held-to-maturity ........................................................ (54,989,000) (43,946,000)
Available-for-sale ...................................................... (69,022,000) (52,287,000)
Net increase in loans to customers ........................................ (15,642,000) (14,015,000)
Purchases of bank premises and equipment .................................. (394,000) (1,145,000)
------------ ------------
Net cash provided by (used in) investing activities ................... (54,885,000) (25,855,000)
------------ ------------
Cash Flows From Financing Activities:
Net increase in total deposits ............................................ 40,508,000 48,142,000
Net increase in securities sold under repurchase agreements ............... 448,000 --
Proceeds from exercise of stock options ................................... 580,000 539,000
Repurchase and retirement of common stock ................................. (764,000) (4,364,000)
Cash dividends paid ....................................................... (1,470,000) (1,415,000)
------------ ------------
Net cash provided by financing activities ............................. 39,302,000 42,902,000
------------ ------------
Net increase (decrease) in cash and cash equivalents ........................ (7,361,000) 24,337,000
Cash and cash equivalents, beginning of year ................................ 61,430,000 67,229,000
------------ ------------
Cash and cash equivalents, end of period .................................... $ 54,069,000 $ 91,566,000
============ ============
Supplemental Schedule of Noncash:
Investing Activities
Unrealized gains (losses) on available-for-sale securities ................ $ (6,727,000) $ 1,319,000
Financing Activities
Cash dividends payable .................................................... 1,472,000 1,385,000
Tax benefit from exercise of employee stock options ....................... 37,000 57,000
The Corporation made interest payments of $1,767,000 and $2,036,000 and income
tax payments of $2,125,000 and $2,398,000 during the first six months of 2004
and 2003, respectively.
See notes to unaudited consolidated financial statements
4
THE FIRST OF LONG ISLAND CORPORATION AND SUBSIDIARY
JUNE 30, 2004
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accounting and reporting policies of the Corporation reflect banking
industry practice and conform to generally accepted accounting principles in the
United States. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported asset and
liability balances and revenue and expense amounts and the disclosure of
contingent assets and liabilities. Actual results could differ significantly
from those estimates.
The consolidated financial statements include the accounts of The First of
Long Island Corporation and its wholly-owned subsidiary, The First National Bank
of Long Island, and the Bank's wholly-owned subsidiaries, The First of Long
Island Agency, Inc., The First of Long Island REIT, Inc., and FNY Service Corp.,
an investment company. The consolidated entity is referred to as the
"Corporation" and the Bank and its subsidiaries are collectively referred to as
the "Bank." The Corporation's financial condition and operating results
principally reflect those of the Bank. All intercompany balances and amounts
have been eliminated. For further information refer to the consolidated
financial statements and notes thereto included in the Corporation's Annual
Report on Form 10-K for the year ended December 31, 2003.
The consolidated financial information included herein as of and for the
periods ended June 30, 2004 and 2003 is unaudited; however, such information
reflects all adjustments which are, in the opinion of management, necessary for
a fair statement of results for the interim periods. The December 31, 2003
consolidated balance sheet was derived from the Corporation's December 31, 2003
audited consolidated financial statements.
2. Stock-based Compensation
At June 30, 2004, the Corporation had two stock option and appreciation
rights plans. The Corporation accounts for those plans under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations. No
stock-based employee compensation cost is recorded for stock options, as all
options granted have an exercise price equal to the market value of the
underlying common stock on the date of grant. If there had been any stock
appreciation rights outstanding, compensation costs would have been recorded
based on the quoted market price of the Corporation's stock at the end of the
period.
The following table illustrates the effect on net income and earnings per
share of applying the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation"
to stock-based employee compensation.
5
Six Months Ended
-----------------------
6/30/04 6/30/03
--------- ---------
(in thousands)
Net income, as reported ............................. $ 6,036 $ 5,603
Deduct: Total cost of stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects ................... (182) (160)
--------- ---------
Pro forma net income ................................ $ 5,854 $ 5,443
========= =========
Earnings per share:
Basic - as reported ............................... $ 1.47 $ 1.37
Basic - pro forma ................................. $ 1.43 $ 1.33
Diluted - as reported ............................. $ 1.44 $ 1.34
Diluted - pro forma ............................... $ 1.40 $ 1.31
Three Months Ended
-----------------------
6/30/04 6/30/03
--------- ---------
(in thousands)
Net income, as reported ............................. $ 3,062 $ 2,510
Deduct: Total cost of stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects ................... (96) (76)
--------- ---------
Pro forma net income ................................ $ 2,966 $ 2,434
========= =========
Earnings per share:
Basic - as reported ............................... $ 0.74 $ 0.62
Basic - pro forma ................................. $ 0.72 $ 0.60
Diluted - as reported ............................. $ 0.73 $ 0.60
Diluted - pro forma ............................... $ 0.71 $ 0.59
Options to purchase 33,165 shares of common stock at $47.89 per share were
outstanding at June 30, 2004 and for the quarterly period then ended but were
not included in the computation of diluted earnings per share for the second
quarter because the options' exercise price was greater than the average market
price of the common shares. These options were issued on January 20, 2004 and
expire ten years from the date of grant.
3. Comprehensive Income
As shown in the consolidated statements of changes in stockholders'
equity, comprehensive income was $1,997,000 and $6,417,000 for the six months
ended June 30, 2004 and 2003, respectively. For the quarters ended June 30, 2004
and 2003, comprehensive income (loss) was $(2,088,000) and $3,263,000,
respectively.
4. Stockholders' Equity
The line captioned repurchase and retirement of common stock in the
Consolidated Statement of Changes in Stockholders' Equity includes shares of
common stock tendered upon the exercise of stock options. For the six months
ended June 30, 2004, 5,860 shares of common stock with a value of $288,000 were
tendered and for the same period in 2003, 4,546 shares with a value of $162,000
were tendered.
6
5. Defined Benefit Pension Plan
The following table sets forth the components of net periodic pension
cost for accounting purposes.
Six Months Ended June 30,
-------------------------
2004 2003
-------- --------
(in thousands)
Service cost, net of plan participant contributions ...... $ 336 $ 252
Interest cost ............................................ 314 285
Expected return on plan assets ........................... (352) (272)
Net amortization and deferral ............................ 36 12
-------- --------
Net pension cost ......................................... $ 334 $ 277
======== ========
The Bank makes cash contributions to the pension plan (the "Plan") which
comply with the funding requirements of applicable Federal laws and regulations.
For funding purposes, the laws and regulations set forth both minimum required
and maximum tax deductible contributions. The Bank's cash contributions are
usually made once a year just prior to the Plan's year end of September 30.
The Bank made no cash contributions to the Plan during the six months
ended June 30, 2004 or 2003. The Bank currently expects to make a cash
contribution to the Plan of approximately $1,183,000 on or before September 30,
2004, representing the maximum tax deductible contribution for the Plan year
then ended. In September 2003, the Bank contributed $1,407,929 to the Pension
Plan representing the maximum tax deductible contribution for the Plan year
ended September 30, 2003.
6. Gain Contingency
The Bank negotiated a settlement with the Nassau County attorney whereby
the Bank agreed to discontinue its real estate tax protest proceedings with
respect to one of its branch locations in return for a refund of taxes
previously paid in the approximate amount of $440,000. This settlement is
subject to the approval of the Nassau County legislature and, if approved, the
Bank would be required to pay its legal counsel in these proceedings one-third
of the gross settlement amount.
7
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors that have affected the Corporation's financial condition and
operating results during the periods included in the accompanying consolidated
financial statements, and should be read in conjunction with such financial
statements. The Corporation's financial condition and operating results
principally reflect those of its wholly-owned subsidiary, The First National
Bank of Long Island, and the Bank's wholly-owned subsidiaries, The First of Long
Island Agency, Inc., The First of Long Island REIT, Inc., and FNY Service Corp.,
an investment company. The consolidated entity is referred to as the
"Corporation" and the Bank and its subsidiaries are collectively referred to as
the "Bank." The Bank's primary service area has historically been Nassau and
Suffolk Counties, Long Island. However, the Bank opened three new commercial
banking branches in Manhattan in the second quarter of 2003 and may open
additional Manhattan branches in the future.
Overview
During the first six months of 2004 the Corporation experienced continued
growth in the average balances of several key deposit and loan products. When
compared to the corresponding period last year, average checking balances were
up 14%, or $37.6 million, balances on residential mortgage loans and lines were
up 37%, or $48.8 million, and commercial loan balances were up 38%, or $15.5
million. In addition, money-market-type savings balances grew by 6%, or $18.8
million, and attorney escrow balances grew by 56%, or $6.6 million. Growth in
these key product categories along with the continued impact of strategy changes
made during the latter half of 2003 with respect to the Corporation's securities
portfolio were significant items that positively impacted earnings for the first
half of 2004 and helped to offset the negative influence of low interest rates.
The Corporation's share repurchase program also had a positive impact.
For the first six months of 2004 the Corporation earned $1.44 per share
and returned 1.31% on average total assets ("ROA") and 13.34% on average total
equity ("ROE"). This compares to earnings of $1.34 per share and returns on
assets and equity of 1.40% and 13.26%, respectively, for the same period last
year. Excluding an unusually large commercial mortgage prepayment fee that
contributed 8 cents to earnings per share in the first quarter of 2003, earnings
per share for the six month period are up 18 cents, or 14%. Second quarter
earnings growth was even stronger than that experienced for the six-month period
as earnings per share were up 13 cents, or 22%, from 60 cents in the second
quarter of 2003 to 73 cents for the current quarter. Earnings growth,
particularly for the second quarter, was helped by the fact that reinvestment
rates improved and prepayments on mortgage securities declined. Reduced
prepayments enabled the Bank to amortize premiums on these securities slower.
Despite the six-month and second quarter earnings increases, the low
interest rate environment remains challenging. Net interest margin was 36 basis
points (.36%) lower in the first half of 2004 than the corresponding period in
2003. Even though net interest margin stabilized during the first six months of
2004, it could, as cautioned in the past, decline further regardless of whether
interest rates continue at their present level, move downward, or increase. The
impact of a change in interest rates on net interest margin depends on, among
other things, the amount of the change, whether or not the change impacts both
short and long-term rates at the same time and in the same amount, and the
degree to which rates on the Bank's loans and deposits are subject to
competitive and
8
other pressures.
Net Interest Income
Average Balance Sheet; Interest Rates and Interest Differential. The
following table sets forth the average daily balances for each major category of
assets, liabilities and stockholders' equity as well as the amounts and average
rates earned or paid on each major category of interest-earning assets and
interest-bearing liabilities.
Six Months Ended June 30,
------------------------------------------------------------------------
2004 2003
---------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
--------- --------- --------- --------- --------- ---------
(dollars in thousands)
Assets
Federal funds sold ..................... $ 26,651 $ 128 .97% $ 52,725 $ 310 1.19%
Investment Securities:
Taxable .............................. 372,183 6,630 3.58 292,519 5,818 4.01
Nontaxable (1) ....................... 151,950 4,848 6.38 149,999 4,617 6.16
Loans (1)(2) ........................... 328,762 9,181 5.62 266,223 9,023 6.83
--------- --------- --------- --------- --------- ---------
Total interest-earning assets .......... 879,546 20,787 4.75 761,466 19,768 5.22
--------- --------- --------- ---------
Allowance for loan losses .............. (2,552) (2,136)
--------- ---------
Net interest-earning assets ............ 876,994 759,330
Cash and due from banks ................ 35,898 33,341
Premises and equipment, net ............ 6,567 6,394
Other assets ........................... 6,580 5,413
--------- ---------
$ 926,039 $ 804,478
========= =========
Liabilities and
Stockholders' Equity
Savings and money market deposits ...... $ 448,808 1,403 .63 $ 418,414 1,788 .86
Time deposits .......................... 38,926 206 1.06 33,220 231 1.40
Securities sold under
repurchase agreements ................ 43,094 194 .91 -- -- --
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities ..... 530,828 1,803 .68 451,634 2,019 .90
--------- --------- --------- ---------
Checking deposits (3) .................. 299,438 261,838
Other liabilities ...................... 4,814 5,788
--------- ---------
835,080 719,260
Stockholders' equity ................... 90,959 85,218
--------- ---------
$ 926,039 $ 804,478
========= =========
Net interest income (1) ................ $ 18,984 $ 17,749
========= =========
Net interest spread (1) ................ 4.07% 4.32%
========= =========
Net interest margin (1) ................ 4.34% 4.70%
========= =========
(1) Tax-equivalent basis. Interest income on a tax-equivalent basis includes
the additional amount of interest income that would have been earned if
the Corporation's investment in tax-exempt loans and investment securities
had been made in loans and investment securities subject to Federal income
taxes yielding the same after-tax income. The tax-equivalent amount of
$1.00 of nontaxable income was $1.52 in each period presented, based on a
Federal income tax rate of 34%.
(2) For the purpose of these computations, nonaccruing loans are included in
the daily average loan amounts outstanding.
(3) Includes official check and treasury tax and loan balances.
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.
9
Six Months Ended June 30,
2004 Versus 2003
-----------------------------------------------
Increase (decrease) due to changes in:
-----------------------------------------------
Rate/ Net
Volume Rate Volume (2) Change
-------- -------- ---------- --------
(in thousands)
Interest Income:
Federal funds sold ............................. $ (154) $ (58) $ 30 $ (182)
Investment securities:
Taxable ...................................... 1,589 (623) (154) 812
Nontaxable (1) ............................... 60 169 2 231
Loans (1) ...................................... 2,125 (1,614) (353) 158
-------- -------- -------- --------
Total interest income .......................... 3,620 (2,126) (475) 1,019
-------- -------- -------- --------
Interest Expense:
Savings and money market deposits .............. 130 (485) (30) (385)
Time deposits .................................. 40 (56) (9) (25)
Securities sold under repurchase agreements .... 194 -- -- 194
-------- -------- -------- --------
Total interest expense ......................... 364 (541) (39) (216)
-------- -------- -------- --------
Increase (decrease) in net
interest income .............................. $ 3,256 $ (1,585) $ (436) $ 1,235
======== ======== ======== ========
(1) Tax-equivalent basis.
(2) Represents the change not solely attributable to change in rate or change
in volume but a combination of these two factors. The rate/volume variance
could be allocated between the volume and rate variances shown in the
table based on the absolute value of each to the total for both.
Net interest income on a tax-equivalent basis increased by $1,235,000, or
7.0%, from $17,749,000 for the first half of 2003 to $18,984,000 for same period
this year. As can be seen from the above rate/volume analysis, the increase is
primarily comprised of a positive volume variance of $3,256,000 and a negative
rate variance of $1,585,000. It should be noted that without the large
commercial mortgage prepayment fee in the first quarter of 2003, net interest
income on a tax-equivalent basis would have been up by $1,799,000, or 10.5%, and
the negative rate variance for loans would have been $564,000 lower.
Volume Variance. When comparing the first half of 2004 to the same period
last year, the Bank experienced continued growth in its core deposit products,
with the largest increases occurring in checking, money-market-type savings
balances, and attorney escrow balances. Core loan products also continued to
grow, with the most significant growth occurring in residential mortgages,
commercial loans and home equity lines. In addition, in response to continued
downward pressure on net interest margin caused by low interest rates,
management implemented strategy changes with respect to the Bank's securities
portfolio in the latter half of 2003 which are continuing to positively impact
earnings. These changes, which increased the volatility of the Bank's earnings,
involved reducing the size of the short-term securities portfolio, increasing
the size of the intermediate-term securities portfolio and loan portfolio, and
using borrowings under repurchase agreements to pre-invest future security and
loan cash flows. The aggregate positive impact of the core deposit and loan
growth and the strategy changes made with respect to the Bank's securities
portfolio largely comprise the positive volume variance of $3,256,000 and more
than offset the negative impact of the reduction in net interest margin
discussed in the "Rate Variance" section that follows.
When comparing the first half of 2004 to the same period last year,
average checking deposits increased by $37.6 million, or 14.4%. A portion of the
increase is attributable to
10
the Bank's establishment of three Manhattan branches in June 2003 and the
introduction by the Bank of a free consumer checking product in the first
quarter of 2003. Funding interest-earning asset growth with growth in checking
deposits has a greater positive impact on net interest income than funding such
growth with interest-bearing deposits because checking deposits, unlike
interest-bearing deposits, have no associated interest cost. This is the primary
reason that the growth of checking balances has historically been one of the
Corporation's key strategies for increasing earnings per share.
Also when comparing first half of 2004 to the same period last year,
average money-market-type deposit balances increased by $18.8 million, or 6.1%,
and attorney escrow balances increased by $6.6 million, or 55.6%. In addition,
average borrowings under repurchase agreements amounted to $43.1 million. With
respect to the growth in money-market-type deposit balances, the largest
components were growth in Select Savings, a statement savings account that earns
a higher money market rate, and nonpersonal money market accounts.
The Bank's new business solicitation program is a significant factor that
favorably impacted growth in the average balances of checking accounts,
money-market-type deposit accounts, and attorney escrow accounts. The Bank's
attention to customer service, favorable conditions in the local economy, and
the low interest rate environment are also believed to have made a contribution.
Competitive pricing and customer demographics are believed to be other important
factors with respect to growth in the average balance of money-market-type
deposits.
The average balance of residential mortgage loans grew by $45.3 million,
or 46.7%, from $97.0 million in the first half of 2003 to $142.3 million for the
same period this year. Average outstandings on home equity loans and lines of
credit grew by $3.5 million, or 10.4%, from $33.8 million in the first half of
2003 to $37.3 million for the same period this year. The low interest rate
environment along with a strong housing market and stable unemployment rates on
Long Island are important factors that favorably impacted the growth in both
residential mortgages and home equity loans and lines. Another important factor
was an aggressive promotion of 10-year fixed-rate mortgages executed in the
latter half of 2003 and the continued promotion of 10-year fixed rate mortgages
during 2004.
Rate Variance. The persistence of low interest rates and the resulting
negative impact on net interest margin, along with the fact that the first half
of 2003 included the unusually large commercial mortgage prepayment fee of
$564,000, are the primary reasons for the negative rate variance of $1,585,000.
The large prepayment fee added 15 basis points to net interest margin and net
interest spread and 43 basis points to loan yield.
Net interest margin decreased by 36 basis points when comparing the first
half of 2004 to the same period last year. When applied to average total
interest-earning assets of approximately $880 million for the first half of
2004, the decline in net interest margin results in a decrease in net interest
income of approximately $1.6 million for the six month period. The decrease in
net interest margin occurred primarily because with the passage of time in the
low interest rate environment more variable rate loans had adjusted to lower
rates and proceeds from the maturity, amortization and prepayment of loans and
securities continued to be reinvested at lower rates. To the extent that these
loans and securities were funded by noninterest-bearing checking deposits and
capital, there was no offsetting cost reduction. To the extent that they were
funded by interest-bearing
11
deposits, there was a reduction in the cost of such deposits but such reduction
was not totally offsetting.
If it were not for the fact that reinvestment rates improved and
prepayments on mortgage securities slowed during the first half of 2004,
particularly during the second quarter, the decrease in net interest margin
would have been more severe. The decrease in prepayments enabled the Bank to
amortize premiums on mortgage securities slower.
Management believes that available yields will remain relatively low for
the balance of 2004. If this were to occur, more of the Bank's loans and
securities will be repriced or reinvested at low yields. Despite the fact that
the Bank's net interest margin stabilized during the first six months of 2004,
this could exert further pressure on net interest margin and cause net interest
margin to move downward from its present level. In addition, the rate variance
as depicted in the preceding table could become more negative. Furthermore,
while an upward movement in interest rates could also have a negative impact on
net interest margin, sustained higher interest rates should eventually have a
positive impact. Item 3 of this Form 10-Q includes a more complete discussion of
the impact of interest rate movements on the Bank's net interest income.
Application of Critical Accounting Policies
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported asset and liability
balances and revenue and expense amounts. Our determination of the allowance for
loan losses is a critical accounting estimate because it is based on our
subjective evaluation of a variety of factors at a specific point in time and
involves difficult and complex judgments about matters that are inherently
uncertain. In the event that management's estimate needs to be adjusted based
on, among other things, additional information that comes to light after the
estimate is made or changes in circumstances, such adjustment could result in
the need for a significantly different allowance for loan losses and thereby
materially impact, either positively or negatively, the Bank's results of
operations.
The Bank's Reserve Committee, which is chaired by the Senior Lending
Officer, meets on a quarterly basis and is responsible for determining the
allowance for loan losses after considering, among other things, the results of
credit reviews performed by the Bank's loan review officer. In addition, and in
consultation with the Bank's Chief Financial Officer, the Reserve Committee is
responsible for implementing and maintaining policies and procedures surrounding
the calculation of the required allowance. The Bank's allowance for loan losses
is subject to periodic examination by the Office of the Comptroller of the
Currency, the Bank's primary federal banking regulator, whose safety and
soundness examination includes a determination as to its adequacy to absorb
probable losses.
The first step in determining the allowance for loan losses is to identify
loans in the Bank's portfolio that are individually deemed to be impaired. In
doing so, subjective judgments need to be made regarding whether or not it is
probable that a borrower will be unable to pay all principal and interest due
according to contractual terms. Once a loan is identified as being impaired,
management uses the fair value of the underlying collateral and/or the
discounted value of expected future cash flows to determine the amount of the
impairment loss, if any, that needs to be included in the overall allowance for
loan losses. In estimating the fair value of real estate collateral management
makes qualitative judgments based on its knowledge of the local real estate
market, analyses of current economic conditions, and expectations with regard to
conditions that may prevail in the
12
future. Estimating the fair value of collateral other than real estate is also
subjective in nature and sometimes requires difficult and complex judgments.
Determining expected future cash flows can be more subjective than determining
fair values. Expected future cash flows could differ significantly, both in
timing and amount, from the cash flows actually received over the loan's
remaining life.
In addition to estimating losses for loans individually deemed to be
impaired, management also estimates collective impairment losses for pools of
loans that are not specifically reviewed. Statistical information regarding the
Bank's historical loss experience over a period of time is considered in making
such estimates. However, future losses could vary significantly from those
experienced in the past. In addition, management also considers a variety of
general qualitative factors and then subjectively determines the weight to
assign to each in estimating losses. The factors include, among others, national
and local economic conditions, environmental risks, trends in volume and terms
of loans, concentrations of credit, changes in lending policies and procedures,
and experience, ability, and depth of the Bank's lending staff. Because of the
nature of the factors and the difficulty in assessing their impact, management's
resulting estimate of losses may not accurately reflect actual losses in the
portfolio.
Although the allowance for loan losses has two separate components, one
for impairment losses on individual loans and one for collective impairment
losses on pools of loans, the entire allowance for loan losses is available to
absorb realized losses as they occur whether they relate to individual loans or
pools of loans.
Asset Quality
The Corporation has identified certain assets as risk elements. These
assets include nonaccruing loans, foreclosed real estate, loans that are
contractually past due 90 days or more as to principal or interest payments and
still accruing and troubled debt restructurings. These assets present more than
the normal risk that the Corporation will be unable to eventually collect or
realize their full carrying value. The Corporation's risk elements at June 30,
2004 and December 31, 2003 are as follows:
June 30, December 31,
2004 2003
---------- ------------
(dollars in thousands)
Nonaccruing loans ....................................... $ 17 $ 97
Loans past due 90 days or more as to
principal or interest payments and still accruing ..... -- 348
Foreclosed real estate .................................. -- --
---------- ----------
Total nonperforming assets ............................ 17 445
Troubled debt restructurings ............................ 2 5
---------- ----------
Total risk elements ................................... $ 19 $ 450
========== ==========
Nonaccruing loans as a percentage of total loans ........ .01% .03%
========== ==========
Nonperforming assets as a percentage of total loans
and foreclosed real estate ............................ .01% .14%
========== ==========
Risk elements as a percentage of total loans and
foreclosed real estate ................................ .01% .14%
========== ==========
Allowance and Provision For Loan Losses
The allowance for loan losses grew by $199,000 during the first half of
2004, amounting to $2,651,000 at June 30, 2004 as compared to $2,452,000 at
December 31, 2003. The allowance represented approximately .8% of total loans at
each date. During
13
the first half of 2004, the Bank had loan chargeoffs and recoveries of $16,000
and $15,000, respectively, and recorded a $200,000 provision for loan losses.
The allowance for loan losses is an amount that management currently
believes will be adequate to absorb estimated probable losses in the Bank's loan
portfolio. In determining the allowance for loan losses, there is not an exact
amount but rather a range for what constitutes an appropriate allowance. As more
fully discussed in the "Application of Critical Accounting Policies" section of
this discussion and analysis of financial condition and results of operations,
the process for estimating credit losses and determining the allowance for loan
losses as of any balance sheet date is subjective in nature and requires
material estimates. Actual results could differ significantly from these
estimates.
The amount of future chargeoffs and provisions for loan losses will be
affected by, among other things, economic conditions on Long Island. Such
conditions could affect the financial strength of the Bank's borrowers and do
affect the value of real estate collateral securing the Bank's mortgage loans.
Loans secured by real estate represent approximately 83% of the Bank's total
loans outstanding at June 30, 2004. 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 are relatively
conservative and, as a result, the Bank should be less affected than the overall
market.
Future provisions and chargeoffs could also be affected by environmental
impairment of properties securing the Bank's mortgage loans. Environmental
audits for commercial mortgages were instituted by the Bank in 1987. Under the
Bank's current policy, an environmental audit is required on practically all
commercial-type properties that are considered for a mortgage loan. At the
present time, the Bank is not aware of any existing loans in the portfolio where
there is environmental pollution originating on the mortgaged properties that
would materially affect the value of the portfolio.
Noninterest Income, Noninterest Expense, and Income Taxes
Noninterest income includes service charges on deposit accounts,
Investment Management Division income, gains or losses on sales of
available-for-sale securities, and all other items of income, other than
interest, resulting from the business activities of the Corporation. When
comparing the first half of 2004 to the same period last year, noninterest
income increased by $128,000, or 4.3%. The increase is primarily comprised of
the net effect of an increase in service charge income of $179,000, an increase
in Investment Management Division income of $86,000, and a decrease in net gains
on sales of available-for-sale securities of $140,000. The increase in service
charge income is due to a revision of the Bank's service charge schedule
effective January 1, 2004 and a reduction in service charge waivers and
reversals.
Noninterest expense is comprised of salaries, employee benefits, occupancy
and equipment expense and other operating expenses incurred in supporting the
various business activities of the Corporation. Noninterest expense increased by
$583,000, or 5.0%, from $11,557,000 for the first half of 2003 to $12,140,000
for the same period this
14
year. The increase is primarily comprised of an increase in salaries of
$205,000, or 4.0%, an increase in occupancy and equipment expense of $173,000,
or 10.6%, and an increase in other operating expenses of $152,000, or 6.2%.
The increase in salaries is primarily attributable to normal annual salary
increases. The largest component of the increase in occupancy and equipment
expense was an increase in rent expense resulting from the opening of the three
New York City branches in June 2003. 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 coverages, an increase in consulting expense, and an increase in
external audit expense. The documenting and testing of internal controls in
compliance with Section 404 of the Sarbanes-Oxley Act of 2002 accounts for a
portion of the increase in both consulting and external audit expense.
Income tax expense as a percentage of book income ("effective tax rate")
was 25.7% for the first six months of 2004 as compared to 25.0% for the
corresponding period last year. The benefit of tax-exempt interest on municipal
securities results in an effective tax rate that is considerably lower than the
statutory Federal income tax rate of 34% despite state income taxes. The
increase in the Bank's effective tax rate is largely attributable to the fact
that income on tax-exempt securities became a smaller component of the Bank's
income.
Results of Operations - Three Months Ended June 30, 2004 Versus June 30, 2003
Net income for the second quarter of 2004 was $3,062,000, or $.73 per
share, as compared to $2,510,000, or $.60 per share, for the same quarter last
year. The increase in net income is largely comprised of an increase in net
interest income of $1,066,000, as partially offset by an increase in noninterest
expense of $237,000.
The reasons for the increase in net interest income are the same as those
discussed with respect to the six month period. However, the improvement in
reinvestment rates and the slowing of prepayments on mortgage securities had
greater positive impact when comparing the second quarter of 2004 to the same
quarter last year than when comparing the first quarter periods.
The reasons for the increase in noninterest expense are the same as those
discussed with respect to the six month period. However, the Manhattan branches
had greater impact when comparing the first quarter of 2004 to the same quarter
last year than when comparing the second quarter periods.
Capital
The Corporation's capital management policy is designed to build and
maintain capital levels that exceed regulatory standards. Under current
regulatory capital standards, banks are classified as well capitalized,
adequately capitalized or undercapitalized. Under such standards, a well
capitalized bank is one that has a total risk-based capital ratio equal to or
greater than 10%, a Tier 1 risk-based capital ratio equal to or greater than 6%,
and a Tier 1 leverage capital ratio equal to or greater than 5%. The
Corporation's total risk-based capital, Tier 1 risk-based capital and Tier 1
leverage capital ratios of 27.84%, 27.05% and 9.66%, respectively, at June 30,
2004 substantially exceed the requirements for a well-capitalized bank.
Total stockholders' equity increased by $378,000, or from $89,291,000 at
December 31, 2003 to $89,669,000 at June 30, 2004. The increase is primarily
attributable to net
15
income of $6,036,000, as largely offset by unrealized losses on
available-for-sale securities of $4,039,000 and cash dividends declared of
$1,472,000.
Stock Repurchase Program. Since 1988, the Corporation has had a stock
repurchase program under which it can purchase, from time to time, shares of its
own common stock in market or private transactions. During the first six months
of 2004 the Corporation purchased 10,270 shares under plans previously approved
by the Board of Directors and, as of June 30, 2004, is still authorized to
purchase 43,473 shares.
The stock repurchase program has historically enhanced earnings per share
and return on average stockholders' equity. The program is estimated to have
contributed two cents of the ten cents increase in earnings per share for the
first half of 2004. The contribution to earnings per share is impacted by the
volume of shares purchased, the price paid per share, and current interest
rates.
Market Liquidity. Trading in the Corporation's common stock is limited.
The total trading volume for the twelve months ended June 30, 2004 as reported
by Nasdaq was 786,953 shares, with an average daily volume of 3,123 shares.
During this same twelve-month period, the Corporation purchased 17,409 shares
under its share repurchase program, 7,980 of which were purchased in open market
transactions. Although the Corporation has had a stock repurchase program since
1988, if the Company reduces or discontinues the program it may negatively
affect market liquidity for the Corporation's common stock, the price of the
Corporation's common stock, or both.
Russell 3000(R) and 2000(R) Indices. Frank Russell Company ("Russell")
currently maintains 21 U.S. common stock indices. The indices are reconstituted
each July 1st using objective criteria, primarily market capitalization, and do
not reflect subjective opinions. All indices are subsets of the Russell 3000(R)
Index which represents most of the investable U. S. equity market.
The broad market Russell 3000(R) Index includes the largest 3,000
companies in terms of market capitalization and the small cap Russell 2000(R)
Index is comprised of the smallest 2,000 companies in the Russell 3000(R) Index.
The Corporation's common stock is included in the Russell 3000(R) and
2000(R) Indices. The Corporation believes that inclusion in the Russell indices
positively impacts the price of its common stock and increases the stock's
trading volume and liquidity. Conversely, if the Corporation's market
capitalization falls below the minimum necessary to be included in the Indices
at any future annual reconstitution date, the Corporation believes that this
could adversely affect the price, volume and liquidity of its common stock.
Cash Flows and Liquidity
Cash Flows. The Corporation's primary sources of cash are deposit growth,
maturities and amortization of loans and investment securities, operations, and
borrowings under repurchase agreements. The Corporation uses cash from these and
other sources to first fund loan growth. Any remaining cash is used primarily to
purchase a combination of short, intermediate, and longer-term investment
securities, pay cash dividends, and repurchase common stock under the
Corporation's share repurchase program. During the first half of 2004, the
Corporation's cash and cash equivalent position decreased by $7,361,000.
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
16
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 June 30, 2004, the Corporation had $13,500,000 in federal
funds sold, a short-term securities portfolio not subject to pledge agreements
of $71,195,000, and intermediate and longer-term available-for-sale securities
not subject to pledge agreements of $220,343,000. While maturities of
shorter-term securities in the Corporation's portfolio provide a significant
source of near term liquidity, the intermediate and longer-term securities
provide higher current returns and their maturities will provide a significant
source of liquidity in the future.
The Corporation's primary external sources of liquidity are customer
deposits and borrowings from brokerage firms, other commercial banks, and the
Federal Reserve Bank of New York. The Bank's deposit base primarily consists of
core deposits from businesses and consumers in its local market area and does
not include any brokered deposits. The Bank has the ability to borrow on a
secured basis from brokerage firms under repurchase agreements. Although the
Bank currently has repurchase agreements in place with four 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. In 2003 the Bank
began utilizing short-term borrowings under repurchase agreements to pre-invest
cash flows from its securities and loan portfolios.
The Bank can also borrow overnight federal funds on an unsecured basis
under lines with other commercial banks. These lines in the aggregate amount of
$30 million do not represent legal commitments to extend credit on the part of
the other banks.
As a backup to borrowing from brokerage firms and other commercial banks,
the Bank is eligible to borrow on a secured basis at the Federal Reserve Bank
("FRB") discount window under the primary credit program. Primary credit, which
is normally extended on a very short-term basis, typically overnight, at a rate
100 basis points above the federal funds target rate, is viewed by the FRB as a
backup source of short-term funds for sound depository institutions like the
Bank. The amount that the Bank can borrow under the primary credit program
depends on, among other things, the amount of available eligible collateral.
Legislation
Commercial checking deposits currently account for approximately 28% of
the Bank's total deposits. Congress is considering legislation that would allow
corporate customers to cover checks by sweeping funds from interest-bearing
deposit accounts each business day and repeal the prohibition of the payment of
interest on corporate checking deposits in the future. Although management
currently believes that the Bank's earnings could be more severely impacted by
permitting the payment of interest on corporate checking deposits than the daily
sweeping of funds from interest-bearing accounts to cover checks, either could
have a material adverse impact on the Bank's future results of operations.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank invests in interest-earning assets which are funded by
interest-bearing deposits and borrowings, noninterest-bearing deposits, and
capital. The Bank's results of operations are subject to risk resulting from
interest rate fluctuations generally and having assets and liabilities that have
different maturity, repricing, and prepayment/withdrawal characteristics. The
Bank defines interest rate risk as the risk that the Bank's earnings and/or net
portfolio value (present value of expected future cash flows from assets less
the present value of expected future cash flows from liabilities) will change
when interest rates change. The principal objective of the Bank's
asset/liability management activities is to maximize net interest income while
at the same time maintaining acceptable levels of interest rate and liquidity
risk and facilitating the funding needs of the Bank.
Because the Bank's loans and investment securities generally reprice
slower than its interest-bearing deposit accounts, a decrease in interest rates
uniformly across the yield curve should initially have a positive impact on the
Bank's net interest income. However, if the Bank does not decrease the rates
paid on its savings and money market accounts as quickly or in the same amount
as market decreases in the overnight federal funds rate or the prime lending
rate, the magnitude of the positive impact will decline. In addition, rates may
decrease to the point that the Bank cannot reduce its savings and money market
rates any further.
If interest rates decline, or have declined, and are sustained at the
lower levels and, as a result, the Bank purchases securities at lower yields and
loans are originated or repriced at lower yields, the impact on net interest
income should be negative because 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 savings and money
market accounts as quickly or in the same amount as market increases in the
overnight federal funds rate, the prime lending rate, and other short-term
market rates, the magnitude of the negative impact will decline. Over a longer
period of time, and assuming that interest rates remain stable after the initial
rate increase and the Bank purchases securities and originates loans at yields
higher than those maturing and reprices loans at higher yields, the impact of an
increase in interest rates should be positive. This occurs primarily because
with the passage of time more loans and investment securities will reprice at
the higher rates and there will be no offsetting increase in interest expense
for those loans and investment securities funded by noninterest-bearing checking
deposits and capital.
The Bank monitors and controls interest rate risk through a variety of
techniques including, among others, the use of interest rate sensitivity models.
Through use of the models, the Bank projects future net interest income and then
estimates the effect on projected net interest income of various changes in
interest rates and balance sheet growth rates. The Bank also uses the models to
calculate the change in net portfolio value over a range of interest rate change
scenarios.
Interest rate sensitivity modeling involves a variety of significant
estimates and assumptions and is done at a specific point in time. Interest rate
sensitivity modeling requires, among other things, estimates of: (1) how much
and when yields and costs on individual categories of interest-earning assets
and interest-bearing liabilities will adjust
18
because of projected changes in market interest rates; (2) future cash flows;
and (3) discount rates.
Changes in the estimates and assumptions made for interest rate
sensitivity modeling could have a significant impact on projected results and
conclusions. Therefore, interest rate sensitivity modeling may not accurately
reflect the actual impact of changes in the interest rate environment on the
Bank's net interest income or net portfolio value.
The information provided in the following table is based on significant
estimates and assumptions and constitutes, like certain other statements
included herein, a forward-looking statement. The base case information in the
table shows (1) an estimate of the Corporation's net portfolio value at June 30,
2004 arrived at by discounting estimated future cash flows at current market
rates and (2) an estimate of net interest income for the year ending June 30,
2005 assuming that maturing assets or liabilities are replaced with new balances
of the same type, in the same amount, and at current rate levels and repricing
balances are adjusted to current rate levels. The rate change information in the
table shows estimates of net portfolio value at June 30, 2004 and net interest
income for the year ending June 30, 2005 assuming rate changes of plus 100 and
200 basis points and minus 100 and 200 basis points. The changes in net
portfolio value from the base case have not been tax affected. In addition, rate
changes are assumed to be shock or immediate changes and occur uniformly across
the yield curve regardless of the duration to maturity or repricing of specific
assets and liabilities. In projecting future net interest income under the
indicated rate change scenarios, activity is simulated by replacing maturing
balances with new balances of the same type, in the same amount, but at the
assumed rate level and adjusting repricing balances to the assumed rate level.
Based on the foregoing assumptions and as depicted in the table that
follows, an immediate increase in interest rates of 100 or 200 basis points
would have a negative effect on net interest income over a one-year time period.
This is principally because the Bank's interest-bearing deposit accounts reprice
faster than its loans and investment securities. However, if the Bank does not
increase the rates paid on its savings and money market accounts as quickly or
in the same amount as market increases in the overnight federal funds rate or
the prime lending rate, the magnitude of the negative impact will decline. Over
a longer period of time, and assuming that interest rates remain stable after
the initial rate increase and the Bank purchases securities and originates loans
at yields higher than those maturing and reprices loans at higher yields, the
impact of an increase in interest rates should be positive. This occurs
primarily because with the passage of time more loans and investment securities
will reprice at the higher rates and there will be no offsetting increase in
interest expense for those loans and investment securities funded by
noninterest-bearing checking deposits and capital. Generally, the reverse should
be true of an immediate decrease in interest rates of 100 or 200 basis points.
However, deposit rates are currently very low as indicated by the Bank's overall
cost of deposits of 68 basis points for the first half of 2004. Therefore, while
rates on many of the Bank's interest earning assets could drop by 100 or 200
basis points, deposit rates could not. It is for this reason that in rates down
100 and 200 basis points the projected increases in net interest income as
compared to the base case are less than the projected decreases in rates up 100
and 200 basis points. In addition, as shown in the table, in rates down 200
basis points net interest income is less than in rates down 100 basis points.
19
Net Interest Income
Net Portfolio Value (NPV) Year Ended
at June 30, 2004 June 30, 2005
------------------------- -------------------------
Percent Percent
Change Change
From From
Rate Change Scenario Amount Base Case Amount Base Case
- ------------------------------------ ---------- ----------- ---------- -----------
(dollars in thousands)
+ 200 basis point rate shock ....... $ 43,555 (51.8)% $ 29,029 (19.1)%
+ 100 basis point rate shock ....... 66,382 (26.6) 32,453 (9.5)
Base case (no rate change) ...... 90,429 -- 35,877 --
- - 100 basis point rate shock ....... 115,815 28.1 37,487 4.5
- - 200 basis point rate shock ....... 142,915 58.0 35,971 .3
Forward Looking Statements
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Quantitative and Qualitative Disclosures About Market Risk"
contain various forward-looking statements with respect to financial performance
and business matters. Such statements are generally contained in sentences
including the words "expect" or "could" or "should" or "would" or "believe". The
Corporation cautions that these forward-looking statements are subject to
numerous assumptions, risks and uncertainties, and therefore actual results
could differ materially from those contemplated by the forward-looking
statements. In addition, the Corporation assumes no duty to update
forward-looking statements.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer, Michael N. Vittorio, and Chief
Financial Officer, Mark D. Curtis, have evaluated the Corporation's disclosure
controls and procedures as of the end of the period covered by this report.
Based upon that evaluation, they have concluded that the Corporation's
disclosure controls and procedures are effective in ensuring that material
information related to the Corporation is made known to them by others within
the Corporation.
(b) Changes in Internal Control Over Financial Reporting
There have been no significant changes in internal control over financial
reporting that occurred during the fiscal quarter covered by this report that
have materially affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Corporation and the Bank may be involved in
litigation that arises in the normal course of business. As of the date of this
Form 10-Q, neither the Corporation nor the Bank is a party to any litigation
that management believes could reasonably be expected to have a material adverse
effect on the Corporation's or the Bank's financial position or results of
operations for an annual period.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchase of Equity
Securities
Since 1988, the Corporation has had a stock repurchase program under which
it is authorized to purchase, from time to time, shares of its own common stock
in market or private transactions. The details of the Corporation's purchases
under the stock repurchase program during the second quarter of 2004 are set
forth in the table that follows.
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of
Shares Purchased as Maximum Number of
Total Average Part of Publicly of Shares that May Yet
Number of Price Paid Announced Plans Be Purchased Under the
Period Shares Per Share or Programs (1) Plans or Programs (1)
- -------------------------------------- ------------- -------------- --------------------- ------------------------
April 1, 2004 to April 30, 2004 ...... -- -- -- 52,083
May 1, 2004 to May 31, 2004 .......... 8,610 $ 45.90 8,610 43,473
June 1, 2004 to June 30, 2004 ........ -- -- -- 43,473
(1) Of the total shares purchased by the Corporation under its stock
repurchase program in the second quarter of 2004, 2,083 shares 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 and 6,527 shares were purchased under a 50,000 share plan approved by
the Corporation's board of directors on April 15, 2003 and publicly
announced on April 24, 2003. The Corporation's share repurchase plans do
not have fixed expiration dates.
Item 4. Submission Of Matters To A Vote Of Security Holders
The Annual Meeting of Stockholders of The First of Long Island Corporation (the
"Corporation") held April 20, 2004 was called to elect five directors to serve
for two-year terms or until their successors have been elected and qualified.
For the election of directors, each share is entitled to as many votes as
there are directors to be elected, and such votes may be cumulated and voted for
one nominee or divided among as many different nominees as is desired. If
authority to vote for any nominee or nominees is withheld on any proxy, the
votes are spread among the remaining nominees. The following table lists the
Class II directors elected at the annual meeting and, for each director elected,
the number of votes cast for and the number of votes withheld. No other persons
were nominated and no other persons received any votes.
21
- ---------------------------------------------------------
Number of Votes
-----------------------------
Directors Elected At
Annual Meeting Cast For Withheld
- ---------------------------------------------------------
Allen E. Busching 3,195,679 12,219
Paul T. Canarick 3,197,697 10,201
Alexander L. Cover 3,185,969 21,929
Beverly Ann Gehlmeyer 3,192,947 14,951
J. William Johnson 3,193,284 14,614
- ---------------------------------------------------------
The name of each Class I director whose term of office as a director
continued after the annual meeting is as follows:
Term as Director
Name Expires
- ---- ----------------
Howard Thomas Hogan, Jr. 2005
J. Douglas Maxwell, Jr. 2005
John R. Miller III 2005
Walter C. Teagle III 2005
Michael N. Vittorio 2005
Item 6. Exhibits and Reports on Form 8-K
a) The following exhibits are included herein.
Exhibit No. Name
- ----------- ----
31 Certifications pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act)
32 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. Section 1350)
b) Reports on Form 8-K
During the quarter ended June 30, 2004 (and thereafter to the date hereof)
the Corporation filed the following reports on Form 8-K with the Securities and
Exchange Commission:
1) The Corporation filed a Form 8-K dated April 27, 2004 to report that it
had: (1) issued a press release disclosing material non-public information
regarding the Corporation's financial condition and results of operations
as of and for the three month period ended March 31, 2004, and (2) mailed
a quarterly report to shareholders disclosing substantially similar
non-public information regarding the Corporation's financial condition and
results of operations. The press release was furnished as Exhibit 99.1 to
the Form 8-K filing and the quarterly report to shareholders was furnished
as Exhibit 99.2 to the Form 8-K filing.
2) The Corporation filed a Form 8-K dated July 28, 2004 to report that it
had: (1) issued a press release disclosing material non-public information
regarding the Corporation's financial condition as of June 30, 2004 and
results of operations for the three and six month periods then ended, and
(2) mailed a quarterly report to shareholders disclosing substantially
similar non-public information regarding the Corporation's financial
condition and results of operations. The press release was furnished as
Exhibit 99.1 to the Form 8-K filing and the quarterly report to
shareholders was furnished as Exhibit 99.2 to the Form 8-K filing.
22
SIGNATURES
Pursuant To The Requirements Of The Securities Exchange Act Of 1934, The
Registrant Has Duly Caused This Report To Be Signed On Its Behalf By The
Undersigned Thereunto Duly Authorized.
THE FIRST OF LONG ISLAND CORPORATION
(Registrant)
Date: July 30, 2004 By /s/ MICHAEL N. VITTORIO
--------------------------
MICHAEL N. VITTORIO, PRESIDENT & CHIEF
EXECUTIVE OFFICER
(principal executive officer)
By /s/ MARK D. CURTIS
---------------------
MARK D. CURTIS
SENIOR VICE PRESIDENT & TREASURER
(principal financial and accounting officer)
23
EXHIBIT INDEX
EXHIBIT BEGINS
EXHIBIT DESCRIPTION ON PAGE NO.
- ------- ----------- -----------
31 Certification by Chief Executive Officer and 25
Chief Financial Officer In Accordance With Section
302 Of The Sarbanes-Oxley Act of 2002
32 Certification by Chief Executive Officer and 27
Chief Financial Officer In Accordance With Section
906 Of The Sarbanes-Oxley Act of 2002
24