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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) Annual Report Pursuant to Section 13 or 15(d) of
[X] the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
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 0-29826
LONG ISLAND FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-3453684
--------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Suffolk Square, Islandia, New York 11722
-------------------------------------- -----------
(Address of Principal Executive Offices) (Zip Code)
(631) 348-0888
-----------------
(Registrant's telephone number, including area code)
None
----------
(Securities registered pursuant to Section 12(b) of the Act)
Common Stock, $.01 par value
-------------------------------
(Securities registered pursuant to Section 12(g) of the Act)
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); Yes ( X ) No ( ); and (2) has been subject to
such filing requirements for the past 90 days; Yes ( X ) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K of any
amendment to this Form 10-K.[ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the last reported sales price of such stock
on the NASDAQ Stock Market was $17,595,109 on March 24, 2000.
The number of shares outstanding of the registrant's common stock was 1,646,326
as of March 24, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
1. Portions of the 1999 Annual Report to Stockholders for fiscal year 1999 are
incorporated herein by reference - Parts II and IV.
2. Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on April 26, 2000 are incorporated herein by
reference - Part III.
LONG ISLAND FINANCIAL CORP.
1999 FORM 10-K
TABLE OF CONTENTS
Page
PART I Number
Item 1. Business................. .................................. 3
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders ........ 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 15
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.. 15
Item 8. Financial Statements and Supplementary Data................. 15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 15
Part III
Item 10. Directors and Executive Officers of the Registrant.......... 16
Item 11. Executive Compensation...................................... 16
Item 12. Security Ownership of Certain Beneficial Owners
and Management.............................................. 16
Item 13. Certain Relationships and Related Transactions.............. 17
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ................................................ 17-54
Signatures.................................................. 18
PART I
ITEM 1. BUSINESS
Long Island Financial Corp. ("the Company") is a registered bank holding
company, incorporated in Delaware in 1998, at the direction of the Directors of
Long Island Commercial Bank (the "Bank") for the purpose of becoming a holding
company to own all the outstanding common stock of the Bank. At a special
meeting on December 8, 1998, the stockholders of Long Island Commercial Bank
approved a Plan of Acquisition dated as of September 15, 1998, which
subsequently became effective January 28, 1999, and as a result of which: (i)
the Bank became a wholly-owned subsidiary of Long Island Financial Corp., a
Delaware corporation, and (ii) all of the outstanding shares of the Bank's
common stock were converted, subject to dissenter's rights, on a one-for-one
basis, into outstanding shares of the common stock of Long Island Financial
Corp. No stockholders asserted dissenter's rights. This transaction is
hereinafter referred to as the "Reorganization." In addition, the stockholders
ratified the Long Island Financial Corp. 1998 Stock Option Plan.
The Reorganization created a bank holding company structure providing
greater operating flexibility by allowing the Company to conduct a broader range
of business activities and permits the Board of Directors of the Company to
determine whether to conduct such activities at the Bank or in separate
subsidiaries of the Company. The reorganization also permits expansion into a
broader range of financial services and other business activities that are not
currently permitted to the Bank as a New York state-chartered commercial bank.
Such activities include, among others, operating non-bank depository
institutions or engaging in financial and investment advisory services,
securities brokerage and management consulting activities.
General
The primary business of the Company is the operation of its wholly-owned
subsidiary, the Bank. The Bank is a New York state-chartered commercial bank,
founded in 1989, which is engaged in commercial banking in Islandia, New York
and the surrounding communities in Suffolk and Nassau Counties. The Bank offers
a broad range of commercial and consumer banking services, including loans to
and deposit accounts for small and medium-sized businesses, professionals, high
net worth individuals and consumers. The Bank is an independent local bank,
emphasizing personal attention and responsiveness to the needs of its customers.
The Bank's senior management has substantial banking experience, and senior
management and the Board of Directors of the Bank have extensive commercial and
personal ties to the communities in Nassau and Suffolk Counties, New York.
The Bank conducts a commercial and consumer banking business, which
primarily consists of attracting deposits from the areas served by its branch
network and using those deposits to originate a variety of commercial, consumer
and real estate loans. During periods in which the demand for loans which meet
the Bank's underwriting and interest rate risk standards is less than the amount
of funds available for investment, the Bank invests excess funding in federal
funds, mortgage-backed securities, securities issued by the U.S. Government and
agencies thereof and municipal obligations. The Bank's revenues are derived
principally from interest income on its loan and securities portfolios. The
Bank's principal expenses are interest paid on deposits, interest paid on
borrowed funds and other operating expenses. Funding sources, other than
deposits include: secured borrowings, available lines of credit, sales of
securities under agreements to repurchase, and cash flow from lending and
investing activities.
The Bank's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its loan and
security portfolios and its cost of funds, consisting of interest paid on
deposits and borrowings. Results of operations are also affected by the Bank's
provision for loan losses and other operating income. The Bank's other operating
expense principally consists of salaries and employee benefits, occupancy,
premises and equipment expense, and other expenses. Results of operations are
also significantly affected by general economic and competitive conditions,
particularly changes in interest rates, government policies and action of
regulatory authorities.
In March 1999, the Bank formed a subsidiary, Long Island Commercial Capital
Corporation, which was formed to qualify as a real estate investment trust. Long
Island Commercial Capital Corporation became an active subsidiary of the Bank on
April 23, 1999.
Market Area and Competition
The Company's primary customer base is established small to medium-sized and
expanding businesses, professionals, and high net worth individuals and
consumers. The Company believes that emphasizing personal attention and
responsiveness to the needs of its customers, including providing state of the
art electronic banking services and expanded service hours, contributes to the
Company's competitiveness as a financial services provider.
The Company faces extensive competition in originating loans and in
attracting deposits. Competition among financial institutions is generally based
upon interest rates offered on deposit accounts, interest rates charged on
loans, fees assessed for services performed, the quality and scope of the
services rendered, and the convenience of banking facilities.
A significant number of financial service entities operate within the Banks
market area. In one or more aspects of its business, the Bank competes directly
with other commercial banks, savings banks, mortgage banking companies, mortgage
brokers, and other providers of financial services. Some of these entities are
significantly larger than the Bank and have substantially greater resources and
lending limits, and may offer certain services the Bank does not provide. In
addition, many non-bank competitors are not subject to the same extensive
Federal regulations that govern bank holding companies and Federally insured
banks.
Lending Activities
The Bank offers a variety of commercial and consumer loan products to serve
the needs of it's customers. The interest rates charged by the Bank on loans are
affected principally by rates offered by its competitors, the supply of money
available for lending purposes and demand for such loans. General and economic
conditions, monetary policies of the federal government including the Federal
Reserve Board, legislative tax policies and governmental budgetary matters also
affect interest rates charged by the Bank.
Loan Approval and Underwriting. In general, the Bank utilizes a committee
process to approve its loans. The President and Chief Lending Officer, are
authorized to approve loans up to $250,000. All other loans are brought before
the Loan Committee. The Loan Committee which consists of Directors Auerbach,
Duryea, Del Duca, Esposito, Kern, Manditch, Neuburger, Roberts, Romito, Tsunis
and Vizzini, meet one day each month; however, additional meetings are held as
the need arises. The Board of Directors receives a monthly report summarizing
the loan portfolio activity, and actions taken by the Loan Committee.
It is the policy of the Bank that all loans satisfy basic lending criteria
with respect to the character of the applicant, including any guarantor, such as
the ability to repay the loan within a completed term, the applicant's financial
strength, the adequacy of any required security and compliance with the Bank's
lending policy.
Loan Portfolio
The following table sets forth the composition of the Bank's loan portfolio
at the dates indicated:
At December 31,
1999 1998 1997 1996 1995
-------------------------------------------------------------
(In thousands)
Commercial and industrial loans $ 34,057 $ 30,853 $ 30,909 $ 24,952 $ 15,712
Commercial real estate loans 84,133 53,990 31,254 18,566 15,582
Automobile loans 1,463 8,262 17,524 21,800 8,764
Consumer loans 1,250 1,396 1,726 860 957
Residential real estate loans
held-for-sale 1,019 1,486 - - -
----- ----- ----- ----- -----
Gross loans 121,922 95,987 81,413 66,178 41,015
Less:
Unearned income 42 362 1,322 2,590 1,398
Deferred fees, net 569 410 306 148 141
Allowance for loan losses 1,475 1,071 1,026 780 633
----- ----- ----- ----- -----
Loans, net $119,836 $ 94,144 $ 78,759 $ 62,660 $ 38,843
======== ======== ======== ======== ========
Commercial and Industrial Loans. The Bank offers a variety of commercial loan
services including term loans, demand loans, revolving credit, and loans
guaranteed in part by the Small Businesses Administration. A broad range of
commercial loans, both collateralized and uncollateralized, are made available
to businesses for working capital (including inventory and receivables),
business expansion, and for the purchase of machinery and equipment. The purpose
of a particular loan generally determines it's structure.
Commercial loans are typically underwritten on the basis of the borrowers
repayment capacity from cash flow and are generally collateralized by business
assets such as, but not limited to, inventory, equipment and accounts
receivable. As a result, the availability of funds for the payment of commercial
loans may be substantially dependent on the success of the business itself.
Further, the collateral underlying the loans may depreciate over time, cannot be
appraised and may fluctuate in value based upon the success of the business.
Revolving credit lines are primarily collateralized by short term assets, while
term loans are primarily collateralized by long-term or fixed assets. Personal
guarantees are normally required for commercial loans. At December 31, 1999,
commercial and industrial loans represented 27.9% of the loan portfolio.
Commercial Real Estate Loans. The Bank originates commercial real estate loans
to businesses to finance the acquisition and holding of commercial real estate.
The security for the Bank's commercial real estate loans is generally located in
the Bank's primary market area and is underwritten on the basis of the value of
the underlying real property. Loans secured by commercial real estate generally
involve a greater degree of risk than residential real estate loans. Primary
risks associated with commercial real estate lending include the borrower's
inability to pay the debt due to unsuccessful operation or management of the
property and adverse conditions in the real estate market or economy. At
December 31, 1999, commercial real estate loans represented 69.0% of the loan
portfolio.
Automobile Loans. The Bank formerly maintained a program of making non-recourse
loans to a local automobile leasing company, receiving an assignment of each
individual lease and a collateral interest in each automobile. The program,
which had further diversified the loan portfolio, was curtailed by the auto
leasing company effective in January 1997. At December 31, 1999 automobile loans
represented 1.2% percent of the loan portfolio.
Consumer Loans. Consumer loans made by the Bank include loans for new and used
automobiles, personal secured, personal unsecured, and loans secured by deposit
accounts. Consumer loans generally carry higher rates of interest than those
charged on other types of loans and pose additional risks of collectibility when
compared to other types of loans, such as residential real estate loans. In many
instances, the Bank must rely on the borrower's ability to repay, since the
collateral normally is of reduced value at the time of any liquidation.
Accordingly, the initial determination of the borrower's ability to repay is of
primary importance in the underwriting of consumer loans.
Residential Real Estate Loans. The Bank originates residential real estate loans
primarily in its market area of Nassau and Suffolk counties. Currently, the Bank
sells residential real estate loans together with the servicing rights to these
loans on a non- recourse basis to institutional investors. The Bank limits its
exposure to interest rate fluctuations and credit risk on these loans by
obtaining, at the point of origination, a commitment from an institutional
investor to purchase that loan from the Bank. By selling the servicing rights to
the loans, the Bank avoids the associated risks and expenses of managing and
servicing a loan portfolio. Income is generated from the premiums received on
the sale of loans and servicing rights, and fees charged and interest earned
during the period the Bank holds the loans for sale.
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the approximate contractual maturities and
sensitivities to changes in interest rates of certain loans, exclusive of
non-accrual loans as of December 31, 1999.
Commercial Residential
and Commercial Real Estate
Industrial Real Estate Automobile Consumer Loans Held- Total
Loans Loans Loans Loans For-Sale Loans
---------------------------------------------------------------------------------
(In thousands)
Maturities:
Due within one year $ 18,754 $ 3,651 $ 1,431 $ 54 $ 1,019 $ 24,909
Due after one but within five years 13,060 1,424 - 1,073 - 15,557
Due after five but within ten years 2,201 65,698 - 18 - 67,917
Due after ten years - 13,360 - - - 13,360
------ ------ ------ ----- ----- ------
Total Due after December 31, 2000 15,261 80,482 - 1,091 - 96,834
------ ------ ------ ----- ----- ------
Total amount due $ 34,015 $ 84,133 $ 1,431 $ 1,145 $ 1,019 $ 121,743
====== ====== ===== ===== ===== =======
Rate sensitivity:
Amounts with Fixed Interest Rates $ 7,974 $ 8,953 $ - $ 1,091 $ - $ 18,018
Amounts with Adjustable Interest Rates 7,287 71,529 - - - 78,816
------ ------ ----- ----- ---- ------
Total $ 15,261 $ 80,482 $ - $ 1,091 - $ 96,834
====== ====== ===== ===== ==== ======
Allowance for Loan Losses
The allowance for loan losses is maintained through provisions for loan losses
based on management's on-going evaluation of the risks inherent in its loan
portfolio in consideration of the trends in its loan portfolio, the national and
regional economies and the real estate market in the Bank's primary lending
area. The allowance is maintained at an amount management considers adequate to
cover estimated losses in its loan portfolio which are deemed probable and
estimable based on information currently known to management. While management
believes that, based on information currently available, the Bank's allowance is
sufficient to cover losses inherent in its loan portfolio at this time, no
assurance can be given that the Bank's level of allowance will be sufficient to
cover future loan losses incurred by the Bank or that future adjustments to the
allowance will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance. Management may in the future
increase its level of loan loss allowance as a percentage of total loans and
non-performing loans as deemed necessary. In addition, the Federal Deposit
Insurance Corporation ("FDIC") and New York State Banking Department ("NYSBD")
as an integral part of their examination process periodically review the Bank's
allowance for loan losses. Either the FDIC or the NYSBD may require the Bank to
make additional provisions for estimated loan losses based upon judgments that
may differ from those of management thereby negatively impacting the Bank's
financial condition and earnings.
The following table sets forth the activity in the Bank's allowance for loan
losses for the periods indicated:
At December 31,
1999 1998 1997 1996 1995
------------------------------------------------------------
(Dollars in thousands)
Balance at beginning of year $ 1,071 $ 1,026 $ 780 $ 633 $ 489
Provision for loan losses 600 420 240 302 180
Charge-offs:
Commercial and industrial loans (80) (203) (23) (209) (36)
Automobile loans (66) (58) (75) - -
Consumer loans (81) (145) (21) (35) -
---- ----- ---- ---- ---
Total charge-offs (227) (406) (119) (244) (36)
Recoveries:
Commercial and industrial loans 26 1 125 89 -
Automobile loans 4 15 - - -
Consumer loans 1 15 - - -
--- --- --- --- ---
Total recoveries 31 31 125 89 -
--- --- --- --- ---
Net (charge-offs) recoveries (196) (375) 6 (155) (36)
---- ---- --- ---- ---
Balance at end of year $ 1,475 $ 1,071 $ 1,026 $ 780 $ 633
===== ===== ===== === ===
Ratio of net charge-offs/average net loans .19 % .43 % - % .31 % .12 %
--- --- --- --- ---
The following table sets forth the allocation of the Bank's allowance for loan
losses at the dates indicated:
At December 31,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Percent Percent Percent Percent Percent
Of Loans Of Loans Of Loans Of Loans Of Loans
In Each In Each In Each In Each In Each
Category Category Category Category Category
To Total To Total To Total To Total To Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------------------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial and
industrial loans $ 610 27.9 % $ 589 32.1 % $ 489 38.0 % $ 319 37.7 % $ 273 38.3 %
Commercial real
estate loans 631 69.0 330 56.2 313 38.4 186 28.1 156 38.0
Automobile loans 13 1.2 48 8.6 186 21.5 218 32.9 88 21.4
Consumer loans 61 1.0 104 1.5 22 2.1 9 1.3 14 2.3
Residential real
estate loans held-
for -sale - .9 - 1.6 - - - - - -
Unallocated $ 160 - $ - - $ 16 - $ 48 - $ 102 -
--- --- --- --- --- --- --- --- --- ---
Total allowance for
loan losses $1,475 100.0 % $1,071 100.0 % $1,026 100.0 % $ 780 100.0 % $ 633 100.0 %
===== ===== ===== ===== ===== ===== === ===== === =====
Non-Accrual Loans. The following table sets forth information regarding
non-accrual loans and loans delinquent 90 days or more and still accruing
interest at the dates indicated. It is the Bank's general policy to discontinue
accruing interest on all loans which are past due 90 days or when, in the
opinion of management, it is appropriate to discontinue accruing interest. When
a loan is placed on non-accrual status, the Bank ceases the accrual of interest
owed and previously accrued interest is charged against interest income. Loans
are generally returned to accrual status when principal and interest payments
are current, there is reasonable assurance that the loan will be fully
collectible and a consistent record of performance has been demonstrated.
At December 31,
1999 1998 1997 1996 1995
----------------------------------------------
(Dollars in thousands)
Non-accrual loans:
Commercial and industrial loans $ 42 $ 366 $ 230 $ 231 $ 70
Automobile loans 32 37 165 174 -
Consumer loans 105 108 - - 4
--- --- --- --- ---
Total non-accrual loans 179 511 395 405 74
Loans contractually past due 90 days or
more, other than non-accruing (2) - - 8 43 137
--- --- --- --- ---
Total non-performing loans $ 179 $ 511 $ 403 $ 448 $ 211
=== === === === ===
Allowance for loan losses as a
percent of total loans (1) 1.22% 1.12% 1.29% 1.23% 1.60%
Allowance for loan losses as a
percent of total non-performing loans 824.02 209.59 254.59 174.11 300.00
Non-performing loans as a percent
of total loans (1) .15 .54 .51 .71 .53
(1) Loans include loans, net of unearned income and deferred fees.
(2) Excludes $231,000 and $378,000 of loans at December 31, 1999 and 1998,
respectively, which have matured, however, are current with respect to
scheduled periodic principal and/or interest payments. The Bank is in the
process of renewing these obligations and/or awaiting anticipated
repayment.
Investment Activities
The Bank maintains a portfolio of securities with investable funds in such
instruments as U.S. government and agency securities, mortgage-backed
securities, municipal obligations and equity securities. The investment policy
of the Bank, which is approved by the Board of Directors and implemented by the
Bank's Investment Committee as authorized by the Board, is designed primarily to
generate acceptable yields for the Bank without compromising the Bank's business
objectives or incurring undue interest rate or credit risk, and to provide and
maintain liquidity for the Bank.
The accounting treatment of the Bank's securities is addressed in Note 1 of the
Notes to the Consolidated Financial Statements in the 1999 Annual Report to
Stockholders. The following table sets forth information regarding the amortized
cost (book value) and fair value of the Bank's securities portfolio at the dates
indicated:
At December 31,
1999 1998 1997
------------------- ------------------- -----------------
Amortized Fair Amortized Fair Amortized Fair
(In thousands) cost value cost value cost value
- -------------------------------------------------------------------------------------------------------------
Held-to-maturity:
Mortgage-backed securities:
CMO $ 341 $ 338 $ 664 $ 665 $ 2,665 $ 2,632
--- --- --- --- ----- -----
Available-for-sale:
U.S. Government and
Agency obligations $ 122,423 $ 118,907 $ 78,994 $ 78,980 $ 58,280 $ 58,696
Mortgage-backed securities:
GNMA 41,136 39,580 39,864 39,771 17,927 18,051
FHLMC 1,350 1,369 2,453 2,487 6,198 6,224
FNMA 3,599 3,571 6,060 6,097 12,107 12,184
CMO - - - - 28 28
Municipal obligations 1,166 1,143 12,855 13,002 - -
Other debt securities 92 91 199 199 380 384
--- --- --- --- --- ---
Total debt securities 169,766 164,661 140,425 140,536 94,920 95,567
Equity securities - FHLB stock 5,147 5,147 4,619 4,619 999 999
----- ----- ----- ----- --- ---
Total securities
available-for-sale $ 174,913 $ 169,808 $ 145,044 $ 145,155 $ 95,919 $ 96,566
------- ------- ------- ------- ------ ------
The table below sets forth certain information regarding the amortized cost,
weighted average yields and contractual maturities of the Bank's securities
portfolio as of December 31, 1999.
More Than One More Than Five More
One Year or Less Year to Five Years Years to Ten Years Than Ten Years Total
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Available-for-sale:
Debt securities:
US Government and
Agency obligations $ 45,397 5.49 % $ 28,518 6.00 % $ 48,508 6.15 % $ - - % $122,423 5.87 %
Mortgage-backed securities:
GNMA - - - - - - 41,136 6.60 41,136 6.60
FHLMC 8 7.45 427 6.84 - - 915 7.16 1,350 7.06
FNMA - - 2,155 6.85 - - 1,444 6.03 3,599 6.52
Municipal obligations(1) - - - - 1,166 5.91 - - 1,166 5.91
Other debt securities - - 92 8.44 - - - - 92 8.44
--- --- --- ---- --- --- --- --- --- ----
Total debt securities 45,405 5.49 31,192 6.08 49,674 6.15 43,495 6.59 169,766 6.07
Equity securities: ------ ---- ------ ---- ------ ---- ------ ---- ------- ----
FHLB stock 5,147 6.80 - - - - - - 5,147 6.80
----- ---- --- --- --- --- --- --- ----- ----
Total equity securities 5,147 6.80 - - - - - - 5,147 6.80 %
Total debt and equity ----- ---- --- --- --- --- --- --- ----- ----
for-sale $ 50,552 5.62 % $ 31,192 6.08 % $ 49,674 6.15 % $ 43,495 6.59 % $174,913 6.09 %
------ ---- ------ ---- ------ ---- ------ ---- ------- ----
Held-to-maturity:
Mortgage-backed securities:
CMO $ - - % $ - - % $ - - % $ 341 6.08 % $ 341 6.08 %
--- --- --- --- --- --- --- ---- --- ----
Total securities, held-to-
maturity and available-
- -for- sale $ 50,552 5.62 % $ 31,192 6.08 % $ 49,674 6.15 % $ 43,836 6.59 % $175,254 6.09 %
====== ==== ====== ==== ====== ==== ====== ==== ======= ====
(1) Yields are presented on a fully-taxable equivalent basis.
Deposits
The Bank offers a variety of deposit accounts with a range of interest rates and
terms. The Bank's deposit accounts consist of checking, savings, NOW accounts,
money market accounts and certificates of deposit. The Bank offers certificates
of deposit with balances in excess of $100,000 at premium rates and also offers
Individual Retirement Accounts and other qualified plan accounts. The Bank
solicits deposit accounts from small businesses, professional firms, households,
and governmental institutions located throughout its market area. The Bank does
not use brokers to obtain deposits. All deposit accounts are insured under the
Bank Insurance Fund of the Federal Deposit Insurance Corporation up to the
maximum limits permitted by law.
The following table shows the distribution of the Bank's average deposit
accounts in each category of deposits presented for the periods indicated:
For the Years Ended December 31,
1999 1998 1997
------------------------------------------------------------------
(Dollars in thousands)
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
Non-interest bearing accounts $ 33,791 - % $ 25,811 - % $ 18,656 - %
Savings accounts 22,747 3.42 9,030 3.42 2,784 2.59
NOW and money market deposits 49,413 1.99 35,852 2.38 24,960 2.32
Certificates issued in excess of $100,000 24,470 5.06 24,695 5.31 22,854 5.41
Other time deposits 79,126 5.66 81,046 6.05 76,428 6.12
------ ---- ------ ---- ------ ----
Total average deposits $209,547 $176,434 $145,682
======= ======= =======
At December 31, 1999, the Bank had outstanding approximately $18.2 million in
certificates of deposit accounts in amounts of $100,000 or more, maturing as
follows:
(In thousands)
3 months or less $ 15,540
Over three through six months 758
Over six through 12 months 1,680
Over 12 months 264
------
Total $ 18,242
======
Borrowings
The Bank utilizes borrowings to leverage the Bank's capital, to optimize net
interest income and supplement earnings. Borrowed funds at December 31, 1999
primarily consisted of $39 million of convertible advances from the Federal Home
Loan Bank of New York ("FHLB") secured by various callable U.S. agency
securities and mortgage-backed securities. In addition to FHLB advances, at
certain times the Bank will use sales of securities sold under agreements to
repurchase as a lower cost alternative to its other sources of funds. The
following table sets forth certain information regarding the Bank's borrowed
funds for the years indicated:
For the Years Ended December 31,
1999 1998 1997
----------------------------------
FHLB Advances:
Maximum amount outstanding at any month-end
during the year $ 39,000 $ 24,000 $ -
Average balance outstanding 38,178 14,449 -
Balance outstanding at end of year 39,000 24,000 -
Weighted average interest rate during the year 4.90 % 5.36 % - %
Weighted average interest rate at the end of the year 4.90 % 5.04 % - %
Repurchase Agreements:
Maximum amount outstanding at any month-end
during the year $ - $ 10,238 $ 25,375
Average balance outstanding 530 853 10,476
Balance outstanding at end of year - - -
Weighted average interest rate during the year 5.09 % 5.46 % 5.69 %
Weighted average interest rate at the end of the year - - -
Federal Funds Purchased:
Maximum amount outstanding at any month-end
during the year $ 6,500 $ 5,000 $ 7,400
Average balance outstanding 1,810 545 2,438
Balance outstanding at end of year - - -
Weighted average interest rate during the year 5.41 % 5.21 % 5.78 %
Weighted average interest rate at the end of the year - % - % - %
Line of Credit:
Maximum amount outstanding at any month-end
during the year $ 500 $ - $ -
Average balance outstanding 139 - -
Balance outstanding at end of year 500 - -
Weighted average interest rate during the year 7.91 % - % - %
Weighted average interest rate at the end of the year 8.50 % - % - %
Personnel
At December 31, 1999, the Bank employed 75 employees, 4 of which are part-time.
No employees are covered by a collective bargaining agreement and the Bank
believes its employee relations are excellent.
Federal and State Taxation
General. The Company, the Bank and its subsidiary report their income on a
consolidated basis, using a calendar year and the accrual method of accounting.
The following discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to the
Company or the Bank. The Company and the Bank have not been audited by the
Internal Revenue Service or New York State during the last five years.
Federal Income Taxation. In general, banks are subject to federal income
tax in the same manner as other corporations. However, gains and losses realized
by banks from the sale or exchange of portfolio instruments are generally
treated as ordinary, rather than capital, gains and losses, and a "small bank"
(ie., one with assets having a tax basis of no more than $500 million), such as
the Bank, is permitted to calculate its deductions for bad debts under a reserve
method that is based upon actual charge-offs for the current and preceding five
years or a "grand- fathered" base year reserve, if larger. A bank maintaining a
bad debt reserve may be subject to additional tax if it makes distributions to
shareholders in excess of its current and accumulated earnings and profits, as
calculated for federal income tax purposes, or in redemption of its stock or in
partial or complete liquidation.
Corporate Alternative Minimum Tax. In addition to the regular income tax,
the Code imposes an alternative minimum tax (AMT) in an amount equal to 20% of
alternative minimum taxable income (AMTI) to the extent that the AMT exceeds the
regular tax. AMTI is regular taxable income as modified by certain adjustments
and tax preference items. AMTI includes an amount equal to 75% of the excess of
adjusted current earnings over AMTI (determined without regard to this
adjustment and prior to reduction for net operating losses). Only 90% of AMTI
can be offset by net operating loss carryforwards. The AMT is available as a
credit against future regular income tax. The AMT credit can be carried forward
indefinitely. The Bank does not expect to be subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. A 70% dividends received deduction generally
applies with respect to dividends received from corporations that are not
members of such affiliated group, except that an 80% dividends received
deduction applies if the Company and the Bank own more than 20% of the stock of
a corporation distributing a dividend.
New York State Taxation. The Bank is subject to the New York State
Franchise Tax on Banking Corporations in an amount equal to the greater of ( i )
9% of the Bank's "entire net income" allocable to New York State during the
taxable year, or ( ii ) the applicable alternative minimum tax. The alternative
minimum tax is generally the greatest of (a) .01% of the value of the taxable
assets allocable to New York State (b) 3% of alternative entire net income
allocated to New York or (c) $250. Entire net income is similar to federal
taxable income subject to certain modifications. A bank maintaining such a bad
debt reserve may be subject to additional New York tax if its makes certain
distributions to its shareholders. In addition, net operating losses can not be
carried back or carried forward and alternative entire net income is equal to
entire net income without certain adjustments. The Bank is also subject to the
17% Metropolitan Commuter Transportation District Surcharge on its New York Sate
Franchise Tax. The Company and the Bank file a combined return.
Delaware Taxation. The Company, as a Delaware holding company not earning
income in Delaware, is exempted from the corporate income tax. However, the
Company is required to pay an annual franchise tax based on authorized shares
to the State of Delaware.
Regulation
Holding Company Regulation. As a registered bank holding company, the
Company is subject to examination, regulation, and periodic reporting under the
Bank Holding Company Act, as administered by the Board of Governors of the
Federal Reserve System (the "FRB").
The Company is required to obtain the prior approval of the FRB to acquire
all, or substantially all, of the assets of any bank or bank holding company or
merge with another bank holding company. Prior FRB approval will also be
required for the Company to acquire direct or indirect ownership or control of
any voting securities of any bank or bank holding company if, after giving
effect to such acquisition, the Company would, directly or indirectly, own or
control more than 5% of any class of voting shares of such bank or bank holding
company. In evaluating such transactions, the FRB considers such matters as the
financial and managerial resources of and future prospects of the companies
involved, competitive factors and the convenience and needs of the communities
to be served. Bank holding companies may acquire additional banks in any state,
subject to certain restrictions such as deposit concentration limits. In
addition to the approval of the FRB, before any bank acquisition can be
completed, prior approval may also be required to be obtained from other
agencies having supervisory jurisdiction over banks to be acquired.
A bank holding company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting securities of
any company engaged in, non-banking activities. One of the principal exceptions
to this prohibition is for activities found by the FRB to be so closely related
to banking or managing or controlling banks to be a proper incident thereto.
Some of the principal activities that the FRB has determined by regulation to be
closely related to banking are: (i) making or servicing loans; (ii) performing
certain data processing services; (iii) providing discount brokerage services;
(iv) acting as fiduciary, investment or financial advisor; (v) finance leasing
personal or real property; (vi) making investments in corporations or projects
designed primarily to promote community welfare; and (vii) acquiring a savings
association, provided that the savings association only engages in activities
permitted bank holding companies. The FRB has adopted capital adequacy
guidelines for bank holding companies (on a consolidated basis). The Company's
total and Tier 1 capital exceeds the requirements established by the FRB.
A bank holding company is generally required to give the FRB prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of the Company's consolidated net worth. The FRB
may disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe and unsound practice, or would violate any law,
regulation, FRB order or directive, or any condition imposed by, or written
agreement with, the FRB. There is an exception to this approval requirement for
well-capitalized bank holding companies that meet certain other conditions.
The FRB has issued a policy statement regarding the payment of dividends by
bank holding companies. In general, the FRB's policies provide that dividends
should be paid only out of current earnings and only if the prospective rate of
earnings retention by the bank holding company appears consistent with the
organization's capital needs, asset quality, and overall financial condition.
The FRB's policies also require that a bank holding company serve as a source of
financial strength to its subsidiary bank or banks by standing ready to use
available resources to provide adequate capital funds to those banks during
periods of financial stress or adversity and by maintaining the financial
flexibility and capital-raising capacity to obtain additional resources for
assisting its subsidiary bank or banks where necessary. These regulatory
policies could affect the ability of the Company to pay dividends or otherwise
engage in capital distributions.
The status of the Company as a registered bank holding company under the
BHCA does not exempt it from certain Federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the Federal securities laws.
Under the FDI Act, depository institutions are potentially liable to the
FDIC for losses suffered or anticipated by the FDIC in connection with the
default of a commonly controlled depository institution or any assistance
provided by the FDIC to such an institution in danger of default. This applies
to depository institutions controlled by the same bank holding company.
The Company and its subsidiary are affected by the monetary and fiscal
policies of various agencies of the United States Government, including the FRB.
In view of changing conditions in the national economy and in the money markets,
it is impossible for the management of the Company to accurately predict future
changes in monetary policy or the effect of such changes on the business or
financial condition of the Company or the Bank.
The Bank is organized under the New York Banking Law ("Banking Law"), and
its deposits are insured by the Bank Insurance Fund (the "BIF") of the FDIC to
the extent permitted by law. As a New York bank, the Bank is subject to regular
examination and supervision by the NYSBD. As a depository institution, the
deposits of which are insured by the FDIC, the Bank also is subject to
regulation and supervision by the FDIC. While the Bank is not a member of the
Federal Reserve System, it is subject to certain regulations of the Federal
Reserve Board. In addition to banking laws, regulations and regulatory agencies,
the Bank is subject to various other laws, regulations and regulatory agencies,
all of which directly or indirectly affect the Bank's operations.
Recent Legislation. The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding
company that meets specified conditions, including being "well capitalized" and
"well managed," to opt to become a "financial holding company" and thereby
engage in a broader array of financial activities than previously permitted.
Such activities can include insurance underwriting and investment banking. The
Gramm-Leach-Bliley Act also authorizes banks to engage through "financial
subsidiaries" in certain of the activities permitted for financial holding
companies. Financial subsidiaries are generally treated as affiliates for
purposes of restrictions on a bank's transactions with affiliates.
The Bank conducts its business from its main office located at One Suffolk
Square, Islandia, New York, and five branch offices located in Babylon,
Smithtown, Westbury, Jericho and Shirley, New York. The following table sets
forth information relating to each of the Bank's offices at December 31, 1999.
Lease Net
Expiration Book Value
Date Including at
Location Leased Leased Options Dec. 31, 1999
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Main Office:
One Suffolk Square, Islandia, LI, New York 11722 Leased 1987 2005 $ 153
Branch Offices:
400 West Main Street, Babylon, LI, New York 11702 Leased 1995 2000 26
50 Route 111, Smithtown, LI, New York 11787 Leased 1997 2002 25
900 Merchants Concourse, Westbury, LI, New York 11590 Leased 1997 2003 42
390 North Broadway, Jericho, LI, New York 11753 Leased 1997 2008 63
861 Montauk Highway, Shirley, LI, New York 11967 Leased 1998 2002 59
---
$ 368
===
At present, management of the Company believes the physical facilities are
suitable and adequate, and are being fully utilized.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The above captioned information regarding the market for the Company's
common equity and related stockholder matters appears in the 1999 Annual Report
to Stockholders under the caption "Capital Stock" and is incorporated herein by
this reference.
ITEM 6. SELECTED FINANCIAL DATA
Information regarding selected financial data appears on pages 4 and 5 of
the 1999 Annual Report to Stockholders under the caption "Selected Financial
Data" and is incorporated herein by this reference.
The Bank's dividend pay-out ratios for the years ended December 31, 1999,
1998 and 1997 were 34.78 %, 50.00% and 29.81%, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations appears on pages 8 through 16 of the 1999 Annual Report to
Stockholders under the caption "Management's Discussion and Analysis Of
Financial Condition and Results of Operations" and is incorporated herein by
this reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Management of
Interest Rate Risk" in the 1999 Annual Report to Stockholders is incorporated
herein by this reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Long Island Financial Corp.
and the Independent Auditors' Report appear on pages 17 through 30 of the 1999
Annual Report to Stockholders and are incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained on pages 3 through 6 of the Proxy Statement
for the Annual Meeting of Stockholders to be held April 26, 2000 under the
caption "Election of Directors" is incorporated herein by reference.
The following table sets forth certain information regarding the executive
officers of the Company. Officers are re-elected by the Board of Directors
annually.
Name Age Position(s) Held With the Company
- --------------------------------------------------------------------------
Perry B. Duryea, Jr. 78 Chairman of the Board
Roy M. Kern, Sr. 66 Vice Chairman of the Board
Douglas C. Manditch 52 President and Chief Executive Officer
Thomas Buonaiuto 34 Vice President and Treasurer
Carmelo C. Vizzini 54 Vice President and Secretary
Biographical Information
Positions held by a director or officer have been held for at least the past
five years unless stated otherwise.
Perry B. Duryea, Jr. serves as Chairman of the Board of the Company and of the
Bank; He is Chairman of Perry B. Duryea & Son, Inc., a seafood business located
in Montauk, New York. Mr. Duryea was Speaker of the New York Assembly and also
served as its Minority Leader.
Roy M. Kern, Sr. serves as Vice Chairman of the Board of the Company and of the
Bank. He was formerly President of Bragg Medical Group, Inc., a firm which
provides billing and financial services to the medical community and is located
in Kings Park, New York.
Douglas C. Manditch is President and Chief Executive Officer of the Company and
of the Bank. He joined Long Island Commercial Bank in 1987, then in formation.
Thomas Buonaiuto serves as Vice President and Treasurer of the Company and
Executive Vice President and Chief Financial Officer of the Bank. Mr.
Buonaiuto's responsibilities include oversight of all areas of operations of the
Bank excluding lending.
Carmelo C. Vizzini serves as Vice President and Secretary of the Company and
Executive Vice President and Chief Lending Officer of the Bank. Mr. Vizzini's
responsibilities include oversight of all areas of lending within the Bank, as
well as loan operations and compliance with the Community Reinvestment Act
("CRA").
ITEM 11. EXECUTIVE COMPENSATION
The information contained on pages 7 through 12 of the Proxy Statement for the
Annual Meeting of Stockholders to be held on April 26, 2000 under the captions
"Executive Compensation" and "Directors Compensation" is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on page 4 through 6 of the Proxy Statement for the
Annual Meeting of Stockholders to be held April 26, 2000 under the caption
"Information with Respect to the Nominees, Continuing Directors and Executive
Officers" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained on page 13 of the Proxy Statement for the Annual
Meeting of Stockholders to be held April 26, 2000 under the caption
"Transactions with Certain Related Persons" is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. Financial Statements
The following financial statements of the Bank are included in the
Company's Annual Report to Stockholders for the year ended December 31, 1999 and
are incorporated by this reference:
* Consolidated Balance Sheets at December 31, 1999 and 1998
* Consolidated Statements of Earnings for the Years Ended December 31, 1999,
1998 and 1997
* Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997
* Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
* Notes to Consolidated Financial Statements
* Independent Auditors' Report
The remaining information appearing in the 1999 Annual Report to Stockholders is
not deemed to be filed as part of this report, except as expressly provided
herein.
(A) 2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not applicable
or the required information is shown in the Financial Statements or Notes
thereto.
(B) Reports on Form 8-K Filed During the Last Quarter of 1999.
None
( C) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit Number
2.0 Plan of Acquisition between Long Island Financial Corp. and Long Island
Commercial Bank dated as of September 15, 1998. *
3.1 Certificate of Incorporation of Long Island Financial Corp., dated
September 10, 1998. *
3.2 By-Laws of Long Island Financial Corp., effective as of September 10,
1998.*
10.0 Long Island Financial Corp. 1998 Stock Option Plan. *
11.0 Statement re computation of per share earnings
13.0 1999 Annual Report to Stockholders
23.0 Consent of experts and counsel
27.0 Financial Data Schedule
================
* Incorporated herein by reference in this document to the S-4 Registration
Statement initially filed on September 22, 1998, Registration No. 333-63971
SIGNATURES
Pursuant to the requirements of Section 13 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.
LONG ISLAND FINANCIAL CORP.
By: /s/ Douglas C. Manditch
-------------------------------------
Douglas C. Manditch
President and Chief Executive Officer
Date: March 30, 2000
By: /s/ Thomas Buonaiuto
------------------------------------
Thomas Buonaiuto
Vice President and Treasurer
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 30, 2000 by the following persons on behalf of
the Registrant and in the capacities indicated.
/s/ Perry B. Duryea Jr. /s/ Walter J. Mack, M.D.
------------------------------- ---------------------------------
Perry B. Duryea, Jr. Walter J. Mack, M.D.
Chairman of the Board Director
/s/ Roy M. Kern, Sr. /s/ Douglas C. Manditch
------------------------------- ---------------------------------
Roy M. Kern, Sr. Douglas C. Manditch
Vice Chairman of the Board Director, President and
Chief Executive Officer
/s/ Harvey Auerbach /s/ Werner S. Neuburger
------------------------------- ---------------------------------
Harvey Auerbach Werner S. Neuburger
Director Director
/s/ John L. Ciarelli, Esq. /s/ Thomas F. Roberts, III
------------------------------- ---------------------------------
John L. Ciarelli, Esq. Thomas F. Roberts, III
Director Director
/s/ Donald Del Duca /s/ Alfred Romito
------------------------------- --------------------------------
Donald Del Duca Alfred Romito
Director Director
/s/ Frank J. Esposito /s/ Sally Ann Slacke
------------------------------- --------------------------------
Frank J. Esposito Sally Ann Slacke
Director Director
/s/ Waldemar Fernandez /s/ John C. Tsunis, Esq
------------------------------- ---------------------------------
Waldemar Fernandez John C. Tsunis, Esq.
Director Director
/s/ Gordon A. Lenz
-------------------------------
Gordon A. Lenz
Director
EXHIBIT 11. COMPUTATION OF PER SHARE EARNINGS
Long Island Financial Corp.
Statement Re: Computation of Per Share Earnings
(In thousands, except per share amounts)
Year Ended
December 31, 1999
Net income................................................. $ 1,606
Weighted average common shares outstanding................. 1,751,407
Basic and diluted earnings per common and common share equivalents $ .92
EXHIBIT 13. ANNUAL REPORT
CAPITAL STOCK
On January 28, 1999, Long Island Financial Corp. became the holding company
of Long Island Commercial Bank and the common stock began trading on the Nasdaq
National Market under the symbol "LICB". The common stock of Long Island
Commercial Bank had traded on the Nasdaq National Market under the symbol "LGCB"
since January 14, 1998. Prior to that, the common stock of the Bank was traded
infrequently on the over-the-counter market through the OTC Electronic Bulletin
Board. The following table shows the high and low sales price of the common
stock and the dividends declared during the period indicated.
Dividends
High Low Declared (1)
----------------------------------------------------
1999
1st Quarter $ 12.50 $ 11.63 $ 0.08
2nd Quarter $ 12.13 $ 11.00 $ 0.08
3rd Quarter $ 12.50 $ 11.38 $ 0.08
4th Quarter $ 12.50 $ 10.00 $ 0.08
1998
1st Quarter $ 17.00 $ 15.88 $ 0.08
2nd Quarter $ 17.50 $ 15.50 $ 0.08
3rd Quarter $ 16.63 $ 12.00 $ 0.08
4th Quarter $ 13.63 $ 11.50 $ 0.08
At December 31, 1999, there were approximately 441 shareholders of record of the
common stock.
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the last five
years.
At or For the Years Ended December 31,
1999 1998 1997 1996 1995
(Dollars in thousands, except share data)
-----------------------------------------------------------------
Selected Operating Data:
Interest income $ 18,410 $ 15,285 $ 12,726 $ 8,998 $ 5,977
Interest expense 9,482 8,229 7,303 4,786 3,058
Net interest income 8,928 7,056 5,423 4,212 2,919
Provision for loan losses 600 420 240 302 180
Other operating income 1,706 918 378 364 338
Other operating expenses 7,581 5,799 3,737 2,709 2,217
Income before income taxes 2,453 1,755 1,824 1,565 860
Income taxes 847 630 760 530 173
Net income $ 1,606 $ 1,125 $ 1,064 $ 1,035 $ 687
----- ----- ----- ----- ---
Basic and diluted earnings per share $ 0.92 $ 0.64 $ 1.04 $ 1.18 $ 1.14
---- ---- ---- ---- ----
Selected Financial Condition Data:
Total assets $ 331,054 $ 266,543 $ 211,956 $ 190,898 $102,507
Loans, net 119,836 94,144 78,759 62,660 38,843
Allowance for loan losses 1,475 1,071 1,026 780 633
Securities 170,149 145,819 99,231 92,053 $43,060
Deposits 269,740 217,867 187,626 178,314 94,683
Borrowed funds 39,500 24,000 - - -
Stockholders' equity 18,343 21,868 21,408 9,890 5,845
Book value per share $ 11.14 $ 12.35 $ 12.18 $ 10.60 $ 9.74
Stockholders' equity (1) 21,327 21,803 21,029 9,638 5,598
Book value per share (1) $ 12.95 $ 12.31 $ 11.96 $ 10.33 $ 9.33
Shares outstanding 1,776,326 1,771,306 1,757,709 933,181 600,000
------------------------------------------------------------------
Average Balance Sheet Data:
Loans, net $ 104,512 $ 86,647 $ 66,961 $ 49,233 $ 29,917
Securities 139,072 101,296 94,509 60,470 34,565
Assets 273,736 216,941 172,583 122,970 80,438
Demand deposits 33,791 25,811 18,657 15,003 11,704
Savings deposits 22,747 9,030 2,784 2,361 1,983
NOW and money market deposits 49,413 35,852 24,960 24,965 20,304
Certificates of deposit 103,596 105,741 99,282 69,292 39,644
Stockholders' equity $ 20,470 $ 21,717 $ 11,368 $ 8,618 $ 5,288
------------------------------------------------------------------
Performance Ratios:
Return on average assets .59 % 0.52 % 0.62 % 0.84% 0.85 %
Return on average equity 7.85 5.18 9.36 12.00 12.99
Average equity to average assets 7.48 10.01 6.59 7.01 6.58
Equity to total assets at end of year 5.54 8.20 10.10 5.18 5.70
Interest rate spread (2) 2.88 2.53 2.51 2.79 2.92
Net interest margin (3) 3.53 3.49 3.29 3.60 3.84
Ratio of interest-earning assets to
interest-bearing liabilities 1.18 1.24 1.18 1.20 1.23
Non-interest expense to average assets 2.77 2.67 2.17 2.20 2.76
Efficiency ratio (4) 71.29 72.72 64.42 59.20 68.07
------------------------------------------------------------------
Asset Quality Ratios and Other Data:
Total non-performing loans $ 179 $ 511 $ 403 $ 448 $ 211
Allowance for loan losses 1,475 1,071 1,026 780 633
Non-performing loans as a percent of
total loans (5) (6) 0.15 % 0.54 % 0.51 % 0.71 % 0.53 %
Non-performing loans as a percent of
total assets (5) 0.05 0.19 0.19 0.23 0.21
Allowance for loan losses as a percent of:
Non-performing loans (5) 824.02 209.59 254.59 174.11 300.00
Total loans (6) 1.22 % 1.12 % 1.29 % 1.23 % 1.60 %
Full service offices 6 6 4 2 2
------------------------------------------------------------------
(1) Excludes the unrealized appreciation (depreciation) in available-for-sale
securities.
(2) Interest rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing
liabilities.
(3) The net interest margin represents net interest income divided by average
interest-earning assets.
(4) The efficiency ratio represents the ratio for operating expenses divided by
the sum of net interest income and other operating income.
(5) Non-performing loans consist of all non-accrual loans and all other
loans 90 days or more past due. It is the Company's policy to
generally cease accruing interest on all loans 90 days or more past
due.
(6) Loans include loans receivable, net, before allowance for possible
loan losses.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Long Island Financial Corp. ("the Company") is a registered Delaware bank
holding company, organized in 1999, and the parent company of Long Island
Commercial Bank ("the Bank"). The Bank, founded in 1989, is a New York
state-chartered commercial bank which is engaged in commercial banking in
Islandia, New York and the surrounding communities in Suffolk and Nassau
counties. The Company's results of operations are dependent primarily on net
interest income, which is the difference between the income earned on its loan
and security portfolios and its cost of funds, consisting of interest paid on
deposits and borrowings. Results of operations are also affected by the
Company's provision for loan losses and other operating income. The Company's
other operating expense consists principally of salaries and employee benefits,
occupancy, premises and equipment expense, and other expenses. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in interest rates, government policies and
action of regulatory authorities.
In 1998, the Company began originating residential real estate loans
primarily in its market area of Nassau and Suffolk counties. Currently, the
Company sells residential real estate loans together with the servicing rights
to these loans on a non-recourse basis to institutional investors. The Company
limits its exposure to interest rate fluctuations and credit risk on these loans
by obtaining, at the point of origination, a commitment from an institutional
investor to purchase that loan from the Company. Furthermore, by selling the
servicing rights to the loans, the Company avoids the associated risks and
expenses of managing and servicing a loan portfolio. Income is generated from
the premiums received on the sale of loans with servicing rights, and fees
charged and interest earned during the period the Company holds the loans for
sale.
Management Strategy
The Company offers a broad range of commercial and consumer banking
services, including loans to and deposit accounts for small and medium-sized
businesses, professionals, high net worth individuals and consumers. The Bank is
an independent local bank, emphasizing personal attention and responsiveness to
the needs of its customers. The Company has set in place an aggressive expansion
plan which began in the second half of 1994, which the Company intends to
continue. The key components of this plan are to (i) expand the Company's
network of branch offices, (ii) originate commercial loans, (iii) develop strong
customer relationships that generate multiple services for individual customer
relationships and repeat business, (iv) add high quality employees and (v)
leverage capital with increased deposits from branch expansion and borrowed
funds.
The establishment of the bank holding company structure in 1999 provides
greater operating flexibility by allowing the Company to conduct a broader range
of business activities and permits the Board of Directors of the Company to
determine whether to conduct such activities at the Company or in separate
subsidiaries of the Company. Finally, the new structure will permit expansion
into a broader range of financial services and other business activities that
are not currently permitted to the Company as a New York state-chartered
commercial bank. Such activities include, among others, operating non-bank
depository institutions or engaging in financial and investment advisory
services, securities brokerage and management consulting activities.
Management of Interest Rate Risk
The principal objective of the Company's interest rate risk management is to
evaluate the interest rate risk inherent in certain balance sheet accounts,
determine the level of risk appropriate given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors approved
guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Investment
Committee reviews the Company's interest rate risk position on a quarterly
basis.
Funds management is the process by which the Company seeks to maximize the
profit potential which is derived from the spread between the rates earned on
interest-earning assets and the rates paid on interest-bearing liabilities
through the management of various balance sheet components. It involves
virtually every aspect of the Company's management and decision-making process.
Accordingly, the Company's results of operations and financial condition are
largely dependent on movements in market interest rates and its ability to
manage its assets and liabilities in response to such movements.
At December 31, 1999, 79.1% of the Company's gross loans had adjustable
interest rates and its loan portfolio had an average weighted maturity of 7.7
years. At such date, $12.2 million, or 7.2%, of the Company's securities had
adjustable interest rates, and its securities portfolio had a weighted average
maturity of 4.9 years. At December 31, 1999, the Company had $64.3 million of
certificates of deposit with maturities of one year or less and $18.2 million of
deposits over $100,000, which tend to be less stable sources of funding as
compared to core deposits and represented 30.2% of the Company's
interest-bearing liabilities. Due to the Company's level of shorter term
certificates of deposit, the Company's cost of funds may increase at a greater
rate in a rising rate environment than if it had a greater amount of core
deposits which, in turn, may adversely affect net interest income and net
income. Accordingly, in a rising interest rate environment, the Company's
interest-bearing liabilities may adjust upwardly more rapidly than the yield on
its adjustable-rate loans, adversely affecting the Company's net interest rate
spread, net interest income and net income.
The Company's interest rate sensitivity is monitored by management through
the use of a quarterly interest rate risk analysis model which evaluates (i) the
potential change in net interest income over the succeeding four quarter period
and (ii) the potential change in the fair market value of equity of the Company
("Net Economic Value of Equity"), which would result from an instantaneous and
sustained interest rate change of zero and plus or minus 200 basis points, in
100 basis point increments.
At December 31, 1999, the effects of instantaneous and sustained interest
rate changes on the Company's Net Interest Income and Net Economic Value of
Equity are as follows:
Change in
Interest Rates Potential Change in Potential Change in
in Basis Points Net Interest Income Net Economic Value of Equity
- ----------------------------------------------------------------------------------------------------
$ Change % Change $ Change % Change
- ----------------------------------------------------------------------------------------------------
(Dollars in thousands)
200 $ 84 .80 % $ (3,310) (15.41) %
100 51 .49 78 .36
Static - - - -
(100) (205) (1.96) 5,372 25.01
(200) (752) (7.20) 7,367 34.30
- ----------------------------------------------------------------------------------------------------
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends upon both the volume of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
The following table sets forth certain information relating to the Company's
average balance sheets and its statements of earnings for the years ended
December 31, 1999, 1998 and 1997, and reflects the average yield on
interest-earning assets and average cost of interest-bearing liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense, annualized, by the average balance of interest-earning assets or
interest-bearing liabilities, respectively. Average balances are derived from
average daily balances.
Years Ended December 31,
------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------------
Average Average Average
Average Yield / Average Yield / Average Yield /
Balance Interest Cost Balance Interest Cost Balance Interest Cost
(Dollars in thousands)
Assets:
Interest-earning assets:
Federal funds sold and
interest-earning deposits $ 6,695 $ 317 4.73 % $ 11,181 $ 598 5.35 % $ 3,194 $ 168 5.26 %
Securities, net(1) 139,072 8,769 6.31 101,296 6,571 6.49 94,509 6,407 6.78
Municipal obligations (2) 4,400 260 5.91 7,757 497 6.41 - - -
Loans, net (3) 104,512 9,134 8.74 86,647 7,780 8.98 66,961 6,151 9.19
------- ----- ------ ----- ------ -----
Total interest-earning assets 254,679 18,480 7.26 206,881 15,446 7.47 164,664 12,726 7.73
Non-interest-earning assets 19,057 10,060 7,919
------ ------ -----
Total assets $273,736 $216,941 $172,583
======= ======= =======
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Savings deposits 22,747 777 3.42 % $ 9,030 $ 309 3.42 % $ 2,784 $ 72 2.59 %
NOW and money
market deposits 49,413 985 1.99 35,852 854 2.38 24,960 579 2.32
Certificates of deposit 103,596 5,715 5.52 105,741 6,216 5.88 99,282 5,915 5.96
------- ----- ------- ----- ------ -----
Total interest-bearing deposit 175,756 7,477 4.25 150,623 7,379 4.90 127,026 6,566 5.17
Borrowed funds 40,657 2,005 4.93 15,847 850 5.36 12,914 737 5.71
------ ----- ------ --- ------ ---
Total interest-bearing liabilities 216,413 9,482 4.38 166,470 8,229 4.94 139,940 7,303 5.22
Other non-interest bearing
liabilities 36,853 28,754 21,275
------ ------ ------
Total liabilities 253,266 195,224 161,215
Stockholders' equity 20,470 21,717 11,368
------ ------ ------
Total liabilities and
stockholders' equity $273,736 $216,941 $172,583
======= ======= =======
Net interest income / interest
rate spread (4) $8,998 2.88 % $ 7,217 2.53 % $ 5,423 2.51 %
----- ---- ----- ---- ----- ----
Net interest margin (5) 3.53 % 3.49 % 3.29 %
Ratio of interest-earning assets to ---- ---- ----
interest-bearing liabilities 1.18 % 1.24 % 1.18 %
---- ---- ----
(1) Securities, net, excludes municipal obligations.
(2) Interest income and yields are presented on a fully-taxable equivalent
basis using the Federal Statutory income tax rate of 34%.
(3) Amount is net of deferred loan fees and allowance for possible loan
losses and includes non-performingloans.
(4) Interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
The following table represents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (change in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (change
in rate multiplied by prior volume) and (iii) the net change. Changes
attributable to the combined impact of volume and rate have been allocated
proportionately to separately reflect the changes due to the volume and the
changes due to rate:
Year Ended Year Ended
December 31, 1999 December 31, 1998
Compared to Compared to
Year Ended Year Ended
December 31, 1998 December 31, 1997
Increase/(Decrease) Due to Increase/(Decrease) Due to
------------------------------------------------------------------
Volume Rate Net Volume Rate Net
------------------------------------------------------------------
(Dollars in thousands)
Interest-Earning Assets:
Federal funds sold and interest
earning deposits $ (219) $ (62) $(281) $ 426 $ 4 $ 430
Securities held-to-maturity and
available for sale, net (2) 2,387 (189) 2,198 448 (284) 164
Municipal obligations (201) (36) (237) 497 - 497
Loans receivable, net (1) 1,566 (212) 1,354 1,770 (141) 1,629
----- ----- ----- ----- ----- -----
Total interest-earning assets 3,533 (499) 3,034 3,141 (421) 2,720
Interest-Bearing Liabilities:
Deposits:
Savings deposits 469 (1) 468 208 29 237
NOW and money market deposits 286 (155) 131 259 16 275
Certificates of deposit (124) (377) (501) 381 (80) 301
Total deposits 631 (533) 98 848 (35) 813
Borrowed funds 1,229 (74) 1,155 159 (46) 113
----- ---- ----- --- ---- ---
Total interest-bearing liabilities $ 1,860 $ (607) $1,253 $ 1,007 $ (81) $ 926
(1) Securities, net exclude municipal obligations.
(2) Amount is net of residential real estate loans held-for-sale, deferred
loan fees and allowance for possible loan losses and includes
non-performing loans.
Comparison of Financial Condition at December 31, 1999 and 1998
Total assets increased by $64.6 million, or 24.2%, from $266.5 million at
December 31, 1998 to $331.1 million at December 31, 1999. The increase in assets
is primarily attributable to a $25.7 million, or 27.3%, increase in loans, net,
which at December 31, 1998 were $94.1 million compared to $119.8 million at
December 31, 1999. In addition, securities, net increased by $24.7 million, or
17.0%, to $169.8 million at December 31, 1999, from $145.2 million at December
31, 1998. The increase in cash and cash equivalents of $6.3 million reflects the
timing of seasonal municipal deposits and investment of those deposits in short
term debt and equity securities prior to the year end. At December 31, 1999 and
1998, seasonal municipal deposits amounted to $75.0 million and $44.8 million,
respectively. In March 1999, the Company purchased $5.7 million of bank owned
life insurance, covering the directors and executive officers of the Company.
The purchase of this insurance provides benefits to both the Company and the
covered directors and employees.
Total deposits increased $51.9 million, or 23.8%, from $217.9 million at
December 31, 1998 to $269.7 million at December 31, 1999, primarily reflecting
in an increase in NOW and money market deposits. The increase in NOW and money
market deposits of $31.4 million, or 43.9%, from $71.7 million at December 31,
1998 to $103.1 million at December 31, 1999 is attributable to the increase in
seasonal municipal deposits at December 31, 1999. In addition, savings deposits
increased by $16.0 million, or 128.0%, from $12.5 million at December 31, 1998
to $28.4 million at December 31, 1999. Although at December 31, 1999, demand
deposits decreased $414,000, or 1.1%, from $36.6 million at December 31, 1998,
the average balance of demand deposits increased by $8.0 million, or 31.0%, from
$25.8 million in 1998 to $33.8 million in 1999. This increase is attributable to
the Company's branch expansion in 1998 and the introduction of new savings
deposit products. Time certificates issued in excess of $100,000 were $18.2
million at December 31, 1999, a decrease of $756,000, or 4.0%, from the prior
year. Other time deposits increased $5.6 million, or 7.2%, to $83.7 million at
December 31, 1999.
Stockholder's equity was $18.3 million at December 31, 1999 compared to
$21.9 million at December 31, 1998. Net income amounted to $1.6 million for the
year ended December 31, 1999, and the net unrealized depreciation on the
Company's available-for- sale securities portfolio, net of taxes, increased by
$3.0 million. In addition, the Company commenced a stock repurchase program in
April 1999. During the year ended December 31, 1999, the Company repurchased
$1.5 million of common stock.
Comparison of Operating Results for the Years ended December 31, 1999 and 1998
General
Net income for the year ended December 31, 1999 increased by $481,000, or
42.8%, from $1,125,000 for the year ended December 31, 1998 to $1,606,000 for
1999. The increase was primarily due to an increase in net interest income after
the provision for possible loan losses of $1,692,000, or 25.5%, and other
operating income of $788,000, or 85.8%, which was offset by a $1,782,000, or
30.7% increase in other operating expenses.
Interest Income
Total interest income, on a fully-taxable equivalent basis, increased $3.0
million, or 19.6%, to $18.5 million for the year ended December 31, 1999, from
$15.4 million for the corresponding period in 1998. The increase was primarily
the result of an increase in the average balance of interest-earning assets of
23.1%, from $206.9 million during the year ended December 31, 1998, to $254.7
million during the year ended December 31, 1999. The average balance of
securities, net (exclusive of municipal obligations), increased by $37.8
million, or 37.3%, to $139.1 million in the 1999 period, from $101.3 million in
the 1998 period, with a decrease in the average yield from 6.49% in 1998 to
6.31% in 1999. The average balance of loans, net increased by $17.9 million, or
20.6%, to $104.5 million in the 1999 period from $86.6 million in the 1998
period. The average yield on loans, net decreased 24 basis points to 8.74% in
1999 from 8.98% for the comparable period in 1998. That decrease reflects lower
market interest rates resulting from increasingly competitive pricing in 1999 in
commercial real estate lending.
Interest Expense
Total interest expense increased $1.3 million, or 15.2%, for the year ended
December 31, 1999, to $9.5 million compared to $8.2 million for the year ended
December 31, 1998. The increase reflects both an increase in the average balance
of interest bearing liabilities of $49.9 million, or 30.0%, which was offset in
part by a decrease of 56 basis points in the average rate paid on interest
bearing liabilities. Although the average balance of borrowed funds increased
$24.8 million, or 156.6%, from 1998 to 1999, the average rate paid on borrowed
funds decreased 43 basis points to 4.93% in 1999. This method of funding has
been used in conjunction with the Company's leveraging of the balance sheet. The
average balance of savings deposits increased by $13.7 million, or 151.9%, with
no change in the average rate paid. The average balance of NOW and money market
deposits increased $13.6 million, or 37.8%, with a decrease of 39 basis points
in the average rate paid. The increases in the average balances of savings, NOW
and money market deposits reflects the Company's branch network expansion and
successful implementation of a sales focus throughout the Company. The $2.1
million, or 2.0%, decrease in the average balance of certificates of deposits
from 1998 to 1999, reflects the Company's emphasis on lower cost core deposits.
In 1999, the average cost of certificates of deposits decreased by 36 basis
points to 5.52%.
Net Interest Income
Net interest income for the year ended December 31, 1999 was $9.0 million
(on a taxable equivalent basis) compared to $7.2 million for the year ended
December 31, 1998. This increase resulted from an increase of 23.1% in the
average balance of interest-earning assets from $206.9 million during the year
ended December 31, 1998, to $254.7 million during the year ended December 31,
1999. Despite the interest rate increases by the Federal Reserve Bank totaling
75 basis points in 1999, the Company's average interest rate spread on a tax
equivalent basis increased 35 basis points from 2.53% for the 1998 period to
2.88% for the 1999 period.
Provision for Loan Losses
The Company's increased provision for loan losses increased by $180,000, or
42.9%, from $420,000 for the year ended December 31, 1998 to $600,000 for the
year ended December 31, 1999. The increased provision was made to reflect the
growth within the loan portfolio, the average balance of which increased by
$17.9 million, or 20.6%, to $104.5 million for the year ended December 31, 1999.
Management of the Company assesses the adequacy of the allowance for loan losses
based on evaluating known and inherent risks in the loan portfolio and upon
continuing analysis of the factors underlying the quality of the loan portfolio.
While management believes that, based on information currently available, the
Company's allowance for loan losses is sufficient to cover losses inherent in
its loan portfolio at this time, no assurances can be given that the Company's
level of allowance for loan losses will be sufficient to cover future loan
losses incurred by the Company or that future adjustments to the allowance for
loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses. Management may in
the future increase its level of allowance for loan losses as a percentage of
total loans in the event it increases the level of commercial real estate,
commercial, construction or consumer lending as a percentage of its total loan
portfolio. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses.
Other Operating Income
Other operating income increased by $788,000, or 85.8%, to $1,706,000 for
the year ended December 31, 1999, compared to $918,000 for the year ended
December 31, 1998. The increase is primarily attributable to the net gain of
$530,000 associated with the origination and sale of residential mortgages for
the year ended December 31, 1999 following the establishment of the Company's
residential mortgage department in May 1998. In addition, service charges on
deposit accounts increased by $232,000, or 55.6 %, reflecting the growth in the
Company's depositor base and an overall increase in the Company's fee schedule.
Other operating income increased $225,000, or 105.1%, primarily as a result of
dividends earned on bank owned life insurance and certain loan prepayment fees.
Other Operating Expense
Other operating expense increased $1.8 million, or 30.7%, to $7.6 million
for the year ended December 31, 1999, compared to $5.8 million incurred for the
year ended December 31, 1998. This increase was primarily attributable to an
increase in salaries and benefits expense of $1.1 million, or 37.8%, from $2.8
million in 1998 to $3.9 million in 1999, reflecting a moderate increase in staff
in connection with both the Company's branch expansion, establishment of the
residential mortgage department and continued internal growth. Although the
number of full time equivalent employees increased from 69 at December 31, 1998
to 73 at December 31, 1999, 38% of the full time equivalent employee growth in
1998 occurred in the second half of 1998. The branch expansion also contributed
significantly to the growth in expenses in the other categories of other
operating expenses.
Income Taxes
Income taxes provides for Federal and New York State income taxes. The 1999
income tax expense was $847,000, compared to $630,000 in 1998. The income tax
expense increase is primarily attributable to increased levels of taxable
income. The effective tax rate for 1999 was 34.5% compared to 35.9% in 1998.
Comparison of Operating Results for the Years ended December 31, 1998 and 1997
General
Net income for the year ended December 31, 1998 increased by $61,000, or
5.7%, from $1,064,000 for the year ended December 31, 1997 to $1,125,000 for
1998. The increase was primarily due to an increase in net interest income after
the provision for loan losses of $1,453,000, or 28.0%, and other operating
income of $540,000, or 142.9%, which was offset by a $2,062,000, or 55.2%
increase in other operating expenses.
Interest Income
Total interest income increased $2.7 million, or 21.3%, to $15.4 million
for the year ended December 31, 1998, from $12.7 million for the corresponding
period in 1997. The increase was primarily the result of an increase in the
average balance of interest-earning assets of 25.6%, from $164.7 million during
the year ended December 31, 1997, to $206.9 million during the year ended
December 31, 1998. The average balance of securities, net (exclusive of
municipal obligations), increased by $6.8 million, or 7.2%, to $101.3 million in
the 1998 period, from $94.5 million in the 1997 period, reflecting management's
decision to resume leveraging the balance sheet to increase the earnings of the
Company. The average balance of loans, net increased by $19.6 million, or 29.3%,
to $86.6 million in the 1998 period from $67.0 million in the 1997 period. The
average yield on interest earning assets decreased 26 basis points, reflecting a
21 basis point decrease in the average yield on loans, and a 29 basis point
decrease in the average yield on securities, net (exclusive of municipal
obligations). The decrease in the average yield on interest-earning assets is,
in part, reflective of the Federal Reserve Bank's three interest rate cuts in
1998 totaling 75 basis points. The Company began purchasing municipal securities
in the second quarter of 1998, because the taxable equivalent yields on these
securities were attractive. For the 1998 period, the average balance of
municipal securities was $7.8 million with a taxable equivalent yield of 6.41%.
Interest Expense
Total interest expense increased $926,000, or 12.7%, for the year ended
December 31, 1998, to $8.2 million compared to $7.3 million for the year ended
December 31, 1997. The increase reflects both an increase in the average balance
of interest bearing liabilities of $26.5 million, or 19.0%, and a decrease in
the average rate paid on interest bearing liabilities of 28 basis points.
Although the average balance of borrowed funds increased $2.9 million, or 22.7%,
from 1997 to 1998, the average rate paid on borrowed funds decreased 35 basis
points to 5.36%. This method of funding has been used in conjunction with the
Company's leveraging of the balance sheet. The average balance of savings
deposits has increased by $6.2 million, or 224.4%, along with an increase in the
average rate paid of 83 basis points, reflecting the introduction of tiered
savings products in 1998. These products, while increasing the cost of
traditional savings products, remain significantly below the cost of time
deposit funding, which also require more maintenance in the branches. The
increase in the average balance of NOW and money market deposits of $10.9
million, or 43.6%, reflects the Company's increased sales emphasis within the
expanded branch network. The cost of these deposits increased slightly from
2.32% in 1997 to 2.38% in 1998. The increase in the average balance of
certificates of deposits of $6.5 million, or 6.5%, from 1997 to 1998, reflects
the Company's branch expansion. The average cost of certificates of deposits
decreased slightly from 1998 to 1997 by 8 basis points.
Net Interest Income
Net interest income for the year ended December 31, 1998 was $7.2 million
(on a taxable equivalent basis) compared to $5.4 million for the year ended
December 31, 1997. This increase resulted from an overall increase of 25.6% in
the average balance of interest- earning assets from $164.7 million during the
year ended December 31, 1997, to $206.9 million during the year ended December
31, 1998. Despite the interest rate decreases by the Federal Reserve Bank in
1998 totaling 75 basis points, the Company's average interest rate spread on a
tax equivalent basis remained relatively unchanged from 2.51% for the 1997
period to 2.53% for the 1998 period.
Provision for Possible Loan Losses
The Company's provision for loan losses increased by $180,000, or 75.0%,
from $240,000 for the year ended December 31, 1997 to $420,000 for the year
ended December 31, 1998. The provision for loan losses for the year ended
December 31, 1998 reflects management's qualitative assessment of the loan
portfolio. The increase resulted from management's assessment of the loan
portfolio, the level of the Company's allowance for loan losses and its
assessment of the local economy and market conditions. At December 31, 1998 and
1997, the allowance for the loan losses as a percent of total loans was 1.12%
and 1.29%, respectively.
Other Operating Income
Other operating income increased by $540,000, or 142.9%, to $918,000 for
the year ended December 31, 1998, compared to $378,000 for the year ended
December 31, 1997. The increase is primarily attributable to the establishment
of the Company's residential mortgage department in May 1998 and the net gain
associated with the origination and sale of residential mortgages which amounted
to $274,000 for the year ended December 31, 1998. In addition, service charges
on deposit accounts increased by $156,000 or 59.8%, reflecting the growth in the
Company's depositor base and an overall increase in the Company's fee schedule.
Other Operating Expense
Other operating expense increased $2.1 million, or 55.2%, to $5.8 million
for the year ended December 31 , 1998, compared to $3.7 million for the year
ended December 31, 1997. This increase was primarily attributable to an increase
in salaries and benefits expense of $1.0 million, or 56.6%, from $1.8 million in
1997 to $2.8 million in 1998, reflecting a substantial increase in staff in
connection with both the Company's branch expansion, establishment of the
residential mortgage department and continued internal growth. The number of
full time equivalent employees increased from 43 at December 31, 1997 to 69 at
December 31, 1998. The branch expansion also contributed significantly to the
growth in expenses in the other categories of other operating expenses.
Although, on a year to year comparison, the number of full service offices
increased from four at December 31, 1997 to six at December 31, 1998, the
Westbury office did not open until November 1997, whereby the expense effect had
minimal impact on other operating expense in 1997.
Income Taxes
Total income tax expense was $630,000 for the year ended December 31, 1998
compared to $760,000 for the same period in 1997, a decrease of $130,000, or
17.1%. The decrease is attributable to a decrease in income before income taxes
of $69,000, or 3.8%, combined with approximately $12.9 million of tax exempt
municipal obligations purchased in 1998.
Liquidity and Capital Resources
Liquidity management for the Company requires that funds be available to pay
all deposit withdrawal and maturing financial obligations and to meet credit
funding requirements promptly and fully in accordance with their terms. Over a
very short time frame, maturing assets provide only a limited portion of the
funds required to pay maturing liabilities. The balance of the funds required is
provided by liquid assets and the acquisition of additional liabilities, making
liability management integral to liquidity management in the short term.
The primary investing activities of the Company are the purchase of
securities available-for-sale and the originations of loans. During the years
ended December 31, 1999 and 1998, the Company's purchases of securities were all
classified available-for-sale and totaled $276.1 million and $274.1 million,
respectively. Loan originations and principal repayments on loans, net totaled
$26.9 million and $14.4 million, for the years ended December 31, 1999 and 1998,
respectively. These activities were funded primarily by deposit growth,
principal repayments on loans, borrowings and principal repayments on
securities.
The Company maintains levels of liquidity that it considers adequate to meet
its current needs. The Company's principal sources of cash include incoming
deposits, the repayment of loans and conversion of investment securities. When
cash requirements increase faster than cash is generated, either through
increased loan demand or withdrawal of deposited funds, the Company can arrange
for the sale of loans and liquidate available-for-sale securities and access its
lines of credit, totaling $6.0 million, with unaffiliated financial institutions
which enables it to borrow funds on an unsecured basis. In addition, the Company
has available lines of credit with the Fed