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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, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ______ to _______
Commission file Number 0-29826
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 11749
-------------------------------------- -------
(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), 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 this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer.
Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, computed by reference to the price at which
the common equity was last sold on the NASDAQ Stock Market as of the last
business day of the registrant's most recently completed second fiscal quarter,
was $28,418,341.
The number of shares outstanding of the registrant's common stock was 1,446,226
as of March 7, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
1. Portions of the 2002 Annual Report to Stockholders for fiscal year 2002 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 23, 2003 are incorporated herein by
reference - Part III.
LONG ISLAND FINANCIAL CORP.
2002 FORM 10-K
TABLE OF CONTENTS
Page
PART I Number
Item 1. Business......................................................................................... 2
Item 2. Properties....................................................................................... 15
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............................ 16
Item 6. Selected Financial Data.......................................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................... 16
Item 8. Financial Statements and Supplementary Data...................................................... 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 16
PART III
Item 10. Directors and Executive Officers of the Registrant............................................... 16
Item 11. Executive Compensation........................................................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters... 17
Item 13. Certain Relationships and Related Transactions................................................... 17
Item 14. Controls and Procedures.......................................................................... 17
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................. 18
Signatures....................................................................................... 19
Certifications................................................................................... 20
1
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
Statements contained in this Form 10-K, which are not historical facts, are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Amounts herein could vary as a result of market
and other factors. Such forward-looking statements are subject to risks and
uncertainties which could cause actual results to differ materially from those
currently anticipated due to a number of factors, which include, but are not
limited to, factors discussed in documents filed by Long Island Financial Corp.
(the "Company") with the Securities Exchange Commission from time to time. Such
forward-looking statements may be identified by the use of such words as
"believe," "expect," "anticipate," "should," "planned," "estimated" and
"potential." Examples of forward-looking statements include, but are not limited
to, estimates with respect to the financial condition, expected or anticipated
revenue, results of operations and business of the Company that are subject to
various factors which could cause actual results to differ materially from these
estimates. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a
material adverse effect on the operations of the Company and its subsidiaries
include, but are not limited to, changes in: interest rates; general economic
conditions; monetary and fiscal policies of the U.S. Government, including
policies of the U.S. Treasury and the Federal Reserve Board; the quality or
composition of the loan or investment portfolios; demand for loan products;
deposit flows; real estate values; the level of defaults; losses and prepayments
on loans held by the Company in portfolio or sold in the secondary markets;
demand for financial services in the Company's market area; changes in
accounting principles, policies, or guidelines; changes in legislation or
regulation; and other economic, competitive, governmental, regulatory, and
technological factors affecting the Company's operations, pricing, products and
services. The forward-looking statements are made as of the date of this Form
10-K, and, except as required by applicable law, the Company assumes no
obligation to update the forward-looking statements or to update the reasons why
actual results could differ from those projected in the forward-looking
statements. Those risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date of this Form 10-K
PART I
ITEM 1. BUSINESS
Long Island Financial Corp. ("the Company") is a registered financial 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. Pursuant to a Plan
of Acquisition effective January 28, 1999, the Bank became a wholly-owned
subsidiary of Long Island Financial Corp., and all of the common stock of the
Bank was converted, on a one-for-one basis, into the common stock of Long Island
Financial Corp. This transaction is hereinafter referred to as the
"Reorganization."
The Reorganization under a bank holding company structure 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 subsidiaries of 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.
In November 2000, the Company elected to become a financial holding company as
provided for in the Financial Services Modernization Act of 1999, also known as
the Gramm-Leach-Bliley Act. That Act repealed provisions of the Glass-Steagall
Act and permits a financial holding company to engage in a statutorily provided
list of financial activities, including insurance and securities underwriting
and agency activities, merchant banking and insurance company portfolio
activities. The Act also provides for the approval for a financial holding
company to conduct other activities determined to be financial in nature or
incidental to or complementary to such financial activities.
2
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, Nassau and Kings 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 executive management has substantial banking
experience, and executive management and the Board of Directors of the Bank have
extensive commercial and personal ties to the communities in Suffolk, Nassau and
Kings counties, New York.
The Bank conducts a full service 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 funds in federal
funds, mortgage-backed securities, corporate debt, equity securities and
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 and unsecured borrowings,
available lines of credit, sales of securities under agreements to repurchase,
and cash flows 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. Other operating expense of the Bank
principally consists of salaries and the expense of 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.
Market Area and Competition
The Bank'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 Bank 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 Bank's
market area. In one or more aspects of its business, the Bank competes directly
with other commercial banks, savings and 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 financial holding companies and Federally
insured banks.
Lending Activities
The Bank offers a variety of commercial and consumer loan products to serve the
needs of its 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.
3
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 unsecured loans up to $250,000 and commercial real estate
loans up to $400,000. All other loans are brought before the Loan Committee. The
Loan Committee, which consists Chief Lending Officer Vizzini and Directors
Auerbach, Duryea, Del Duca, Esposito, Kern, Manditch, Neuburger, Roberts,
Romito, and Tsunis, 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 applicant, including any guarantor, the ability to repay the loan
within the contemplated term, the applicant's character and 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,
2002 2001 2000 1999 1998
--------------------------------------------------------------
(In thousands)
Commercial and industrial loans $ 54,001 $ 43,972 $ 39,140 $ 34,057 $ 30,853
Commercial real estate loans 130,275 116,646 93,875 84,133 53,990
Automobile loans 34,188 18,300 2,693 1,463 8,262
Consumer loans 2,238 1,312 1,313 1,250 1,396
Residential real estate loans
held-for-sale 1,189 1,472 711 1,019 1,486
----- ----- --- ----- -----
Gross loans 221,891 181,702 137,732 121,922 95,987
Less:
Unearned income 3,396 2,258 395 42 362
Deferred fees, net 764 647 612 569 410
Allowance for loan losses 2,346 2,028 1,872 1,475 1,071
----- ----- ------- ------- -----
Loans, net $ 215,385 $176,769 $ 134,853 $ 119,836 $ 94,144
======= ======= ======= ======= ======
Commercial and Industrial Loans - The Bank offers a variety of commercial loan
services including term loans, construction loans, demand loans and 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 its structure.
Commercial loans are typically underwritten on the basis of the borrower's
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, may not
be apt subjects for appraisal 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, 2002, commercial and industrial loans represented 24.3% 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, 2002, commercial real estate loans represented 58.7% of the loan
portfolio.
Automobile Loans - The Bank maintains 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 is
designed to diversify the loan portfolio, is expected to continue through 2003.
At December 31, 2002 automobile loans represented 15.4% of the loan portfolio.
4
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. 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 time 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, 2002.
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 $ 36,953 $ 8 $ 4,348 $ 80 $ 1,189 $ 42,578
Due after one but within five years 12,153 2,444 29,812 928 - 45,337
Due after five but within ten years 2,940 24,775 28 1,230 - 28,973
Due after ten years 1,648 103,048 - - - 104,696
----- ------- ------ ----- ----- -------
Total Due after December 31, 2003 16,741 130,267 29,840 2,158 - 179,006
------ ------- ------ ----- ----- -------
Total amount due $ 53,694 $130,275 $ 34,188 $ 2,238 $ 1,189 $ 221,584
------ ------- ------ ----- ----- -------
Rate sensitivity:
Amounts with Fixed Interest Rates $ 4,929 $ 56,975 $ 29,840 $ 1,131 $ - $ 92,875
Amounts with Adjustable Interest Rates 11,812 73,292 - 1,027 - 86,131
------ ------ ------ ----- ----- ------
Total Due after December 31, 2003 $ 16,741 $130,267 $ 29,840 $2,158 $ - $ 179,006
====== ======= ====== ====== ===== =======
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, based on
information currently available, management believes that the allowance of the
Bank is sufficient to cover losses inherent in its loan portfolio at this time,
no assurance can be given 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) periodically review the Bank's allowance
for loan losses as an integral part of their examination process. Either the
FDIC or the NYSBD may require the Bank to make additional provisions for loan
losses based upon judgments that may differ from those of management thereby
negatively impacting the Bank's financial condition and results of operations.
5
The following table sets forth the activity in the Bank's allowance for loan
losses for the periods indicated:
For the years ended December 31,
2002 2001 2000 1999 1998
-----------------------------------------------------------------------------
(Dollars in thousands)
Balance at beginning of year $ 2,028 $ 1,872 $ 1,475 $ 1,071 $ 1,026
Provision for loan losses 270 150 150 600 420
Charge-offs:
Commercial and industrial loans (20) - (187) (80) (203)
Automobile loans - - (54) (66) (58)
Consumer loans (19) (19) (99) (81) (145)
---- ---- ---- -- -----
Total charge-offs (39) (19) (340) (227) (406)
Recoveries:
Commercial and industrial loans 75 13 547 26 1
Automobile loans - 6 13 4 15
Consumer loans 12 6 27 1 15
-- - -- - --
Total recoveries 87 25 587 31 31
-- -- --- -- --
Net recoveries (charge-offs) 48 6 247 (196) (375)
-- - --- ----- -----
Balance at end of year $ 2,346 $ 2,028 $ 1,872 $ 1,475 $ 1,071
===== ===== ===== ===== =====
Ratio of net charge-offs/average
net loans - % - % - % .19 % .43 %
--- --- --- --- ---
The following table sets forth the allocation of the Bank's allowance for loan
losses at the dates indicated:
At December 31,
2002 2001 2000 1999 1998
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 $ 684 24.3 % $ 651 24.2 % $ 723 28.7 % $ 610 27.9 % $ 589 32.1 %
Commercial real
estate loans 1,317 58.7 1,166 64.2 939 68.2 631 69.0 330 56.2
Automobile loans 307 15.4 160 10.1 27 1.9 13 1.2 48 8.6
Consumer loans 22 1.0 18 .7 26 .7 61 1.0 104 1.5
Residential real
estate loans held- - .6 - .8 - .5 - .9 - 1.6
for-sale
Unallocated $ 16 - $ 33 - $ 157 - $ 160 - $ - -
----- ----- -- ---- --- ---- --- ---- --- ----
Total allowance for
loan losses $2,346 100.0 % $2,028 100.0 % $1,872 100.0 % $1,475 100.0 % $1,071 100.0 %
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
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.
6
At December 31,
2002 2001 2000 1999 1998
----------------------------------------------------------------------
(Dollars in thousands)
Non-accrual loans:
Commercial and industrial loans $ 307 $ 153 $ 384 $ 42 $ 366
Automobile loans - - - 32 37
Consumer loans - 25 32 105 108
--- -- -- --- ---
Total non-accrual loans 307 178 416 179 511
Loans contractually past due 90 days or
more, other than non-accruing (2) - - - - -
--- --- --- --- ---
Total non-performing loans $ 307 $ 178 $ 416 $ 179 $ 511
=== === === === ===
Allowance for loan losses as a
percent of total loans (1) 1.08% 1.13% 1.37% 1.22 % 1.12%
Allowance for loan losses as a
percent of total non-performing loans 764.17% 1,139.33% 450.00% 824.02% 209.59%
Non-performing loans as a percent
of total loans (1) .14% .10% .30% .15% .54%
(1) Loans include loans, net of unearned income and deferred fees.
(2) Excludes $108,000 of loans at December 31, 2001, and $231,000 of loans at
December 31, 1999, 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
General - The Bank maintains a portfolio of securities in such instruments as
U.S. government and agency securities, mortgage-backed securities, municipal
obligations, corporate debt 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 (the "Committee") as authorized by the Board, is designed
primarily to generate acceptable yields for the Bank without compromising the
business objectives of the Bank or incurring undue interest rate or credit risk,
and to provide and maintain liquidity for the Bank. In reviewing and
establishing investment strategies, the Committee considers the business and
growth plans of the Bank, the economic environment, the current interest rate
sensitivity position of the Bank, the types of securities held and other
factors.
At December 31, 2002, the Company had $235.6 million in investment securities
consisting of U.S. Government and Agency obligations, mortgage-backed
securities, municipal obligations, corporate debt and equity securities. The
accounting treatment of the securities of the Bank is addressed in Note 1 of the
Notes to the Consolidated Financial Statements in the 2002 Annual Report to
Stockholders.
U.S. Government and Agency Obligations - At December 31, 2002, the Bank's U.S.
Government and Agency obligations portfolio of the Bank totaled $130.4 million,
all of which was classified as available-for-sale. Included in that total are
$98.2 million of callable securities, which generally possess higher yields than
securities with similar contractual terms to maturity but without callable
features. The remaining balance of $32.2 million represents U.S. Treasury and
government sponsored agency discount notes, which are primarily used as
collateral for seasonal municipal deposits and other short-term borrowings.
Mortgage-Backed Securities - The Bank purchases mortgage-backed securities in
order to: (a) generate positive interest spreads with minimal administrative
expense; (b) lower its credit risk as a result of the guarantees provided by
FHLMC, FNMA, and GNMA; (c) utilize these securities as collateral for
borrowings; and (d) increase the liquidity of the Bank. At December 31, 2002,
mortgage-backed securities totaled $87.1 million, or 17.7% of total assets, all
of which were classified as available-for-sale. At December 31, 2002, 46.6% of
the mortgage-backed securities carried adjustable rates and 53.4% were fixed
rate. The mortgage-backed securities had coupon rates ranging from 4.50% to
7.50% and had a weighted average yield of 4.80%.
7
Municipal Obligations - At December 31, 2002, the Bank had no municipal
obligations in its investment portfolio. The Bank generally considers investment
in municipal obligations when the taxable equivalent yields are greater than
that of other securities with comparable maturities. All of the municipal bonds
purchased by the Bank are required to be rated "A" or better by at least one
national rating agency.
Corporate Debt - The Bank's investment policy was amended in 2000 to include the
purchase of capital notes/trust preferred securities issued primarily by
financial institutions up to a limit of $15 million dollars. Those securities
represent secondary capital and rank subordinate and junior in right of payment
to all indebtedness of the issuing company. To be purchased by the Bank, such
higher yielding securities must be rated investment grade by at least two of the
national rating agencies. At December 31, 2002, the Company held $14.5 million
of corporate debt securities at an average yield of 8.89%
Equity Securities - At December 31, 2002, the Bank held equity securities valued
at $3.6 million. Those equity securities represented the Bank's investment in
Federal Home Loan Bank of New York (FHLB) stock. In order to borrow from the
FHLB, the Bank is required to purchase shares of FHLB non-marketable equity
securities at par. For the year ended December 31, 2002, the dividend yield on
the FHLB stock was 4.49%.
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,
-------------------------------------------------------------------------------
2002 2001 2000
-------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value Cost Value
-------------------------------------------------------------------------------
Held-to-maturity:
Mortgage-backed securities:
CMO $ - $ - $ - $ - $ 263 $ 254
Corporate debt 12,461 14,027 12,457 12,937 4,491 4,482
------ ------ ------ ------ ----- -----
Total securities
held-to-maturity $ 12,461 $ 14,027 $ 12,457 $ 12,937 $ 4,754 $ 4,736
------ ------ ------ ------ ----- -----
Available-for-sale:
U.S. Government and
Agency obligations $ 129,345 $ 130,422 $ 89,930 $ 89,732 $ 117,364 $ 115,945
Mortgage-backed securities:
GNMA 62,565 63,971 85,171 85,021 36,559 35,963
FHLMC 9,879 10,015 4,402 4,304 969 982
FNMA 12,920 13,122 20,803 20,918 5,279 5,303
Municipal obligations - - - - 1,167 1,149
Corporate debt 2,013 2,060 2,017 1,992 - -
- - - - - -
------- ------- ------- ------- ------- -------
Total securities available-for-sale $ 216,722 $ 219,590 $ 202,323 $ 201,967 $ 161,338 $ 159,342
8
The following table sets forth certain information regarding the amortized
cost, weighted average yields and contractual maturities of the Bank's
securities portfolio as of December 31, 2002.
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 $ 32,241 1.15 % $ 11,440 4.03 % $61,117 3.96% $24,547 3.49% $129,345 3.18%
Mortgage-backed securities:
GNMA - - - - - - 62,565 4.59 62,565 4.59
FHLMC - - - - - - 9,879 6.22 9,879 6.22
FNMA 261 7.23 - - - - 12,659 4.67 12,920 4.72
Corporate debt - - - - 1,000 7.50 1,013 6.78 2,013 7.14
------ ---- ------ ---- ----- ---- ----- ---- ----- ----
Total securities available-
for-sale 32,502 1.20 11,440 4.03 62,117 4.02 110,663 4.52 216,722 3.85
------ ---- ------ ---- ------ ---- ------- ---- ------- ----
Held-to-maturity:
Mortgage-backed securities:
CMO $ - - % $ - - % $ - -% $ - -% $ - -%
---- ---- ---- ---- ---- ---- ------- ------ ------ ------
Corporate debt $ - - % $ - - % $ 4,513 8.82% $ 7,948 9.37% $ 12,461 9.17%
---- ---- ---- ---- ----- ---- ----- ---- ------ ----
Total securities, held-to-
maturity $ - - % $ - - % $ 4,513 8.82% $ 7,948 9.37% $ 12,461 9.17%
===== ==== ==== ==== ===== ==== ===== ==== ====== ====
FHLB stock, at cost $ 3,588 4.49 $ - - $ - - $ - - $ 3,588 4.49
----- ---- ---- --- ---- ---- ---- ---- ----- ----
Total equity securities $ 3,588 4.49 $ - - $ - - $ - - $ 3,588 4.49
----- ---- ---- ---- ---- ---- ---- ---- ----- ----
Deposits
The Bank offers a variety of deposit accounts with a range of interest rates and
terms. The deposit accounts of the Bank 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 government 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,
2002 2001 2000
--------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
(dollars in thousands)
Non-interest bearing accounts $ 70,198 -% $ 51,487 -% $40,842 -%
Savings accounts 63,231 1.64 39,221 2.67 31,507 3.71
NOW and money market deposits 58,448 1.13 49,431 1.88 43,865 2.31
Certificates issued in excess of $100,000 30,572 2.29 40,442 4.58 25,576 5.97
Other time deposits 94,557 4.24 88,804 5.82 80,503 6.15
------ ------ ------
Total average deposits $ 317,006 $269,385 $222,293
======= ======= =======
9
At December 31, 2002, the Bank had outstanding approximately $20.5 million in
certificates of deposit accounts in excess of $100,000, maturing as follows:
(In thousands)
3 months or less $ 12,637
Over three through six months 1,457
Over six through 12 months 4,348
Over 12 months 2,073
-------
Total $ 20,516
======
Borrowings
The Bank utilizes borrowings to leverage the capital of the Bank and provide
liquidity when necessary. At December 31, 2002 borrowed funds primarily
consisted of $55 million of advances from the FHLB secured by various callable
U.S. agency securities, mortgage-backed securities and certain qualifying
commercial real estate loans. At certain times, the Bank will use sales of
securities sold under agreements to repurchase as a lower cost alternative to
its FHLB advances and other sources of funds. There were no securities sold
under agreements to repurchase at December 31, 2002. At December 31, 2002 the
Bank had available a 12-month commitment for overnight and one month lines of
credit with the FHLB totaling $33.4 million dollars. Both lines of credit are
priced at a spread above the the federal funds rate and reprice daily. At
December 31, 2002, there was no overnight line of credit balance. The Company
has a $500,000 secured line of credit with another financial institution
permitting the Company to borrow at that institution's prime rate. At December
31, 2002, there was no balance outstanding under that line of credit agreement.
In addition, the Bank has available $6.5 million in lines of credit with
unaffiliated institutions, which enable it to borrow funds on an unsecured
basis, on which no balance was outstanding at December 31, 2002. The following
table sets forth certain information regarding the Bank's borrowed funds for the
years indicated:
For the years ended December 31,
2002 2001 2000
-------------------------------------------
(Dollars in thousands)
FHLB Advances:
Maximum amount outstanding at any month-end
during the year $ 55,000 $ 55,000 $ 39,000
Average balance outstanding 55,000 43,000 36,760
Balance outstanding at end of year 55,000 55,000 29,000
Weighted average interest rate during the year 4.80% 5.06 % 4.94%
Weighted average interest rate at the end of the year 4.80% 4.80 % 5.02%
Repurchase Agreements:
Maximum amount outstanding at any month-end
during the year $ - $ - $ 29,850
Average balance outstanding - 555 4,719
Balance outstanding at end of year - - -
Weighted average interest rate during the year -% 4.93 % 5.94%
Weighted average interest rate at the end of the year - - -
Federal Funds Purchased:
Maximum amount outstanding at any month-end
during the year $ 12,800 $ 4,500 $ 16,650
Average balance outstanding 2,214 695 5,729
Balance outstanding at end of year - 4,500 -
Weighted average interest rate during the year 1.69% 4.88 % 6.40%
Weighted average interest rate at the end of the year -% 1.75 % -
Line of Credit:
Maximum amount outstanding at any month-end
during the year $ - $ - $ 500
Average balance outstanding - - 244
Balance outstanding at end of year - - -
Weighted average interest rate during the year -% - % 9.14%
Weighted average interest rate at the end of the year -% - % -%
10
Subsidiary Activities
The Company has four wholly-owned subsidiaries as follows:
LIF Statutory Trust I. On September 7, 2000, LIF Statutory Trust issued $7.5
million aggregate liquidation amount of 10.60% Capital Securities due September
7, 2030, referred to as Capital Securities. The Company has fully and
unconditionally guaranteed the Capital Securities along with all obligations of
LIF Statutory Trust I under the trust agreement. LIF Statutory Trust I was
formed for the exclusive purpose of issuing the Capital Securities and common
securities and using the proceeds to acquire an aggregate principal amount of
$7.7 million of the Company's 10.60% Junior Subordinated Debentures due
September 7, 2030, referred to as the Company's Junior Subordinated Debentures.
The Junior Subordinated Debentures are pre-payable, in whole or in part, at the
Company's option on or after September 7, 2010 at declining premiums to
maturity. Proceeds totaling approximately $7.2 million are being used for
general corporate purposes.
Long Island Financial Client Services Corp. Long Island Financial Client
Services Corp. was formed for the purpose of providing Private Banking Services
to clients of the Company. Private Banking Services provided include, but are
not limited to, professional money management, investment planning, life
insurance, business insurance, charitable planning, estate planning, business
valuation services, business succession planning, and pension design and
administration. The operations of Long Island Financial Client Services Corp.
were not material to the operating results of the Company for the year ended
December 31, 2002.
Long Island Commercial Services Corp. Long Island Commercial Services Corp. was
formed for the purpose of providing insurance services to clients of the
Company. Insurance services provided include, but are not limited to, group
health insurance, group dental plans, business insurance, life insurance, home,
auto, boat insurance, and long term care planning. The operations of Long Island
Commercial Services Corp. were not material to the operating results of the
Company for the year ended December 31, 2002.
Long Island Commercial 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, Nassau and Kings 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.
Long Island Commercial Bank currently has one subsidiary, Long Island Commercial
Capital Corporation. Long Island Commercial Capital Corporation was organized
for the purpose of investing in mortgage related assets as a real estate
investment trust. The Bank transferred $48.3 million in commercial real estate
loans to Long Island Commercial Capital Corporation, which included certain
associated assets and liabilities. In return, the Bank received shares of common
and preferred stock of Long Island Commercial Capital Corporation.
In 1999, the Company established the Long Island Commercial Bank Foundation (the
"Foundation"). The purpose of the Foundation is to contribute funds to local
entities that are organized and operated exclusively for charitable,
educational, religious, scientific, and other specified purposes. The foundation
is primarily funded by annual contributions from Long Island Commercial Bank,
which equal 1% of the Bank's prior year pretax income. The officers and trustees
of the foundation are comprised of certain officers and Board members
of the Company.
Personnel
At December 31, 2002, the Bank employed 104 employees, 5 of which are part-time.
No employees are covered by a collective bargaining agreement and the Bank
believes its relations with its employees are good.
Federal and State Taxation
General - The Company, the Bank and their subsidiaries, (excluding Long Island
Commercial Capital Corporation)report their income on a consolidated basis using
the accrual method of accounting and are subject to federal and state income
taxation in the same manner as other corporations. Long Island Commercial
Capital Corporation is taxable as a Real Estate Investment Trust (REIT). 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 its subsidiaries. The Internal Revenue Service has not audited the
Company or its subsidiaries during the last five years.
11
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 debt instruments are generally treated as ordinary, rather
than capital, gains and losses, and a "small bank" (i.e. 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.
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 carry forwards. The AMT is available as a
credit against future regular income tax. The AMT credit can be carried forward
indefinitely. The Company 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. Distributions recieved by the Bank from
Long Island Commercial Capital Corporation are not eligible for the federal
dividends received deduction. Meanwhile, Long Island Commercial Capital
Corporation, as a REIT, is entitled to a 100% dividends paid deduction for
federal income tax purposes.
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 ) 8.0% 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. 60% of dividend income, and gains and losses from subsidiary
capital are excluded from New York State entire net income. Distributions
received from Long Island Commercial Capital Corporation are eligible for the
New York State dividends received deduction.
In addition, net operating losses cannot be carried back. For tax years
beginning on or after January 1, 2001 a deduction for net operating losses
sustained in 2001 and subsequent years may be carried forward. The deduction may
not exceed the allowable federal net operating loss deduction augmented by the
excess of the New York State bad debt deduction over the federal bad debt
deduction. The losses may be carried forward for the 20 year period allowed
under federal Code Section 172. 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 State
Franchise Tax. The Company, the Bank and their subsidiaries (excluding Long
Island Commercial Capital Corporation) file a combined return.
City of New York Taxation
The Bank is subject to a New York City banking corporation tax in an annual
amount equal to the greater of (a) 9% of entire net income allocable to New York
City, or (b) the applicable alternative tax. The applicable alternative tax is
the greater of (a) .01% of the value of taxable assets allocable to New York
City with certain modifications, (b) 3% of alternative entire net income
allocable to New York City, or (c) $125. Entire net income and alternative net
income are calculated in a manner similar to New York State including the
allowance of a deduction for an addition to the tax bad debt reserve. Net
operating losses are not permitted to be carried back or forward for New York
City purposes. The income is allocated to New York City based upon three
factors: receipts, wages and deposits. The Company, the Bank and their
subsidiaries (excluding Long Island Commercial Capital Corporation) 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 file
an annual report with and pay an annual franchise tax based on issued shares and
asset size to the State of Delaware.
12
Supervision and Regulation
General - References in this section to applicable statutes and regulations are
brief summaries only, and do not purport to be complete. The readers should
consult such statutes and regulations themselves for a full understanding of the
details of their operation.
As a consequence of the extensive regulation of commercial banking activities in
the United States, the business of Long Island Financial Corp. and its
subsidiaries are particularly susceptible to federal and state legislation that
may have the effect of increasing or decreasing the cost of doing business,
modifying permissible activities, or enhancing the competitive position of other
financial institutions.
Holding Company Regulation - As a registered financial 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 to 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. 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.
Restrictions on Transactions with Affiliates - Section 23A of the Federal
Reserve Act imposes quantitative and qualitative limits on transactions between
a bank and any affiliate, and requires certain levels of collateral for such
transactions. It also limits the amount of advances to third parties which are
collateralized by the securities or obligations of the Company or its
subsidiaries. Section 23B requires that certain transactions between a bank and
its affiliates be on terms substantially the same, or at least as favorable, as
those prevailing at the time for comparable transactions with or involving
other, nonaffiliated companies. In the absence of such comparable transactions,
any transactions between a bank and its affiliates must be on terms and under
circumstances, including credit standards, that in good faith would be offered
to or would apply to nonaffiliated companies.
Gramm-Leach-Bliley - On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 (also known as the Financial Services
Modernization Act). The Financial Services Modernization Act repealed provisions
of the Glass-Steagall Act which restricted the affiliation of banks with firms
engaged principally in specified securities activities, and provided for
regulation of a new form of bank holding company, known as a financial holding
company under the Bank Holding Company Act. Financial holding companies, such as
the Company, can engage in a statutorily provided list of financial activities,
including insurance and securities underwriting and agency activities, merchant
banking and insurance company portfolio activities.
The general effect of the Financial Services Modernization Act is to establish a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms and other financial service providers. In addition,
activities that the Federal Reserve, in consultation with the Secretary of the
Treasury, determines to be financial in nature, incidental to such financial
activities, or complementary activities that do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally are authorized.
13
In addition to repealing historical restrictions on, and eliminating federal and
state law barriers to affiliations among banks, securities firms, insurance
companies, and other financial service providers, the Financial Services
Modernization Act provides a uniform framework for the functional regulation of
the activities of banks, savings institutions and their holding companies;
provides an enhanced framework for protecting the privacy of consumer
information; modifies the laws governing the implementation of the Community
Reinvestment Act; and addresses a variety of other legal and regulatory issues
affecting both the day-to-day operations and the long-term activities of
financial institutions.
In order for the Company to take advantage of the ability to affiliate with
other financial services providers without obtaining prior approval, the Company
filed a declaration with the Federal Reserve Board, electing to engage in
activities permissible for financial holding companies and certifying that it is
eligible to do so because the Bank is well-capitalized and well-managed. In
addition, the Federal Reserve determined that the Bank and the Company have at
least a satisfactory CRA rating. The Company met those requirements and
qualifies as a financial holding company.
The Company does not believe that the Financial Services Modernization Act will
have a material adverse effect on its operations in the near-term. However, to
the extent that it permits banks, securities firms, and insurance companies to
affiliate, the financial services industry may experience further consolidation.
The Financial Services Modernization Act is intended to grant to community banks
certain powers as a matter of right that larger institutions have accumulated on
an ad hoc basis. Nevertheless, that Act may have the result of increasing the
amount of competition that the Company and the Bank face from larger
institutions and other types of companies offering financial products, many of
which may have substantially more financial resources than the Company or the
Bank.
From time to time, various federal and state legislation is proposed that could
result in additional regulation of, and restrictions on, the business of the
Company and the Bank. We cannot predict whether any such legislation will be
enacted or, if enacted, how the legislation would affect the business of the
Company and the Bank. As a consequence of the extensive regulation of commercial
banking activities in the United States, the Company's and the Bank's business
is particularly susceptible to being affected by federal legislation and
regulations that may increase the cost of doing business. Except as specifically
described above, management does not believe that the Financial Services
Modernization Act will have a material effect on the liquidity, capital
resources or results of operations of the Company.
Management is not aware of any other current specific recommendations by
regulatory authorities or proposed legislation, which, if they were implemented,
would have a material adverse effect upon the liquidity, capital resources, or
results of operations, although the general cost of compliance with numerous and
multiple federal and state laws and regulations does have, and in the future may
have, a negative impact on the corporation's results of operations.
Further, the business of the Corporation is also affected by the state of the
financial services industry in general. As a result of legal and industry
changes, management believes that the industry will continue to experience
consolidations and mergers as the financial services industry strives for
greater cost efficiencies and market share. Management also expects increased
diversification of financial products and services offered by the Bank and its
competitors. Management believes that such consolidations and mergers, and
diversification of products and services may enhance the Bank's competitive
position.
Sarbanes-Oxley Act of 2002 - This recently enacted statute generally prohibits
loans by the Company to its executive officers and directors. However, that act
contains a specific exception for loans by the Bank to its executive officers
and directors in compliance with federal banking laws. Under such laws, the
Bank's authority to extend credit to executive officers, directors and 10%
shareholders ("insiders"), as well as entities such persons control, is limited.
The law limits both the individual and aggregate amount of loans the Bank may
make to insiders based, in part, on the Bank's capital position and requires
certain board approval procedures to be followed. Such loans are required to be
made on terms substantially the same as those offered to unaffiliated
individuals and not involve more than the normal risk of repayment. There is an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees.
New York State and FDIC
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.
14
Federal Securities Laws
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. The Company is subject to the
periodic reporting, proxy solicitation, tender offer, insider trading
restrictions and other requirements under the Securities and Exchange Act of
1934, as amended.
Delaware Corporation Law
The Company is incorporated under the laws of the State of Delaware. Thus, we
are subject to the regulation by the State of Delaware and the rights of our
shareholders are governed by Delaware General Corporation Law.
ITEM 2. PROPERTIES
The Bank conducts its business from its main branch office and executive offices
located at One Suffolk Square, Islandia, New York, and ten branch offices
located in Babylon, Smithtown, Westbury, Jericho, Shirley, Ronkonkoma, Melville,
and Central Islip, Deer Park, and Bay Ridge-Brooklyn. The following table sets
forth information relating to each of the offices of the Bank at December 31,
2002.
Lease Net
Expiration Book Value
Date Including at
Location Leased Lease Acquired Options Dec. 31,2002
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Main Office:
One Suffolk Square, Islandia, LI, New York 11749 Leased 1987 2005 $ 78
Branch Offices:
400 West Main Street, Babylon, LI, NY 11702 Leased 1995 2005 1
50 Route 111, Smithtown, LI, NY 11787 Leased 1997 2012 -
900 Merchants Concourse, Westbury, LI, NY 11590 Leased 1997 2003 3
390 North Broadway, Jericho, LI, NY 11753 Leased 1997 2008 7
861 Montauk Highway, Shirley, LI, NY 11967 Leased 1998 2002 -
950 Montauk Highway, Shirley, LI, NY 11967 Owned 2002 ---- 20
3425 Veterans Memorial Hwy, Ronkonkoma, LI, NY 11779 Leased 2001 2011 145
610 Broadhollow Road, Melville, LI, NY 11747 Leased 2001 2019 124
320 Carlton Avenue, Central Islip, LI, NY 11722 Leased 2001 2019 36
720 Grand Boulevard, Deer Park, LI, NY 11729 Owned 2001 ---- 321
375 86th Street, Brooklyn, NY 11209 Leased 2002 2023 -
---
$ 735
---
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
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 2002 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 5 and 6 of the
2002 Annual Report to Stockholders under the caption "Selected Financial Data"
and is incorporated herein by this reference.
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 7 through 16 of the 2002 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 2002 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 2002 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 5 of the Proxy Statement for the
Annual Meeting of Stockholders to be held April 23, 2003 under the caption
"Election of Directors" is incorporated herein by reference.
16
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 81 Chairman of the Board
Roy M. Kern, Sr. 69 Vice Chairman of the Board
Douglas C. Manditch 55 President and Chief Executive Officer
Thomas Buonaiuto 37 Vice President and Treasurer
Carmelo C. Vizzini 57 Vice President and Secretary
Biographical Information
Positions held by a director or officers have been held for at least the past
five years unless stated otherwise.
Perry B. Duryea 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 8 through 11 of the Proxy Statement for the
Annual Meeting of Stockholders to be held on April 23, 2003 under the captions
"Directors' Compensation" and " Executive Compensation" is incorporated herein
by reference.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained on page 3 through 5 of the Proxy Statement for the
Annual Meeting of Stockholders to be held April 23, 2003 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 23, 2003 under the caption
"Transactions with Certain Related Persons" is incorporated herein by reference.
ITEM 14.CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company maintains
controls and procedures designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities Exchange
Commission. Based upon their evaluation of those controls and procedures
performed within 90 days of the filing date of this report, the chief executive
officer and the chief financial officer of the Company concluded that the
Company's disclosure controls and procedures were adequate.
(b) Changes in internal controls. The Company made no significant changes in its
internal controls or in other factors that could significantly affect these
controls susequent to the date of the evaluation of those controls by the chief
executive officer and chief financial officer.
17
PART IV
ITEM 15.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, 2002 and are
incorporated by this reference:
Consolidated Balance Sheets at December 31, 2002 and 2001
Consolidated Statements of Earnings for the Years Ended December 31, 2002,
2001 and 2000
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001 and 2000
Notes to Consolidated Financial Statements
Independent Auditors' Report
The remaining information appearing in the 2002 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 2002.
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. *
10.1 Change of Control Agreement between Long Island Financial Corp. and
Douglas C. Manditch. **
10.2 Change of Control Agreement between Long Island Financial Corp. and
Thomas Buonaiuto. **
10.3 Change of Control Agreement between Long Island Financial Corp. and
Carmelo C. Vizzini. **
11.0 Statement re: Computation of per Share Earnings (incorporated by
reference to Note 13 to Notes to Consolidated Financial Statements -
Part IV, Item 15)
13.0 2002 Annual Report to Stockholders.
21.0 Subsidiary information is incorporated by reference to "Part I -
Subsidiary Activities"
23.0 Consent of KPMG LLP.
99.1 Certification of Chief Executive Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
===============================================================================
* Incorporated herein by reference in this document to the S-4
Registration Statement initially filed on September 22, 1998,
Registration No. 333-63971
** Incorporated herein by reference in this document from the
2001 Long Island Financial Corp.Form 10-K filed on March 29, 2002.
18
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 Date: March 26, 2003
-----------------------------
Douglas C. Manditch
President and Chief Executive Officer
By: /s/ Thomas Buonaiuto Date: March 26, 2003
-----------------------------
Thomas Buonaiuto
Vice President and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 26, 2003 by the following persons on behalf of
the Registrant and in the capacities indicated.
/s/ Perry B. Duryea, Jr. /s/ Gordon A. Lenz
----------------------------- ----------------------------
Perry B. Duryea, Jr. Gordon A. Lenz
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/ John C. Tsunis, Esq.
----------------------------- ---------------------------
Frank J. Esposito John C. Tsunis, Esq.
Director Director
/s/ Waldemar Fernandez
-----------------------------
Waldemar Fernandez
Director
19
CERTIFICATION
I, Douglas C. Manditch, certify, that:
1. I have reviewed this annual report on Form 10-K of Long Island
Financial Corp.;
2. Based on my knowledge, the annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of the
internal controls which could adversely affect the registrant's
ability to record process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
the internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Douglas C. Manditch
-----------------------
Douglas C. Manditch
President & Chief Executive Officer
20
CERTIFICATION
I, Thomas Buonaiuto, certify, that:
1. I have reviewed this annual report on Form 10-K of Long Island
Financial Corp.;
2. Based on my knowledge, the annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of the
internal controls which could adversely affect the registrant's
ability to record process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
the internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Thomas Buonaiuto
---------------------
Thomas Buonaiuto
Vice President & Treasurer
21
EXHIBIT 13. 2002 ANNUAL REPORT TO STOCKHOLDERS
Selected Financial Data
The following tables set forth selected financial data for the last five years.
At or for the years ended December 31,
2002 2001 2000 1999 1998
------------------------------------------------------------------------
(Dollars in thousands, except share data)
Selected Operating Data:
Interest income $ 23,327 $ 22,945 $ 20,996 $ 18,410 $ 15,285
Interest expense 9,078 11,233 11,143 9,482 8,229
Net interest income 14,249 11,712 9,853 8,928 7,056
Provision for loan losses 270 150 150 600 420
Other operating income 3,254 2,139 1,566 1,706 918
Other operating expenses 12,909 10,716 8,635 7,581 5,799
Income before income taxes 4,324 2,985 2,634 2,453 1,755
Income taxes 1,487 1,023 880 847 630
Net income $ 2,837 $ 1,962 $ 1,754 $ 1,606 $ 1,125
----- ----- ----- ----- -----
Basic earnings per share $ 1.96 $ 1.35 $ 1.10 $ .92 $ .64
---- ---- ---- --- ---
Diluted earnings per share $ 1.90 $ 1.33 $ 1.10 $ .92 $ .64
---- ---- ---- --- ---
Selected Financial Condition Data:
Total assets $ 491,951 $ 438,390 $ 332,934 $ 331,054 $ 266,543
Loans, net 215,385 176,769 134,853 119,836 94,144
Allowance for loan losses 2,346 2,028 1,872 1,475 1,071
Securities 235,639 217,282 169,422 170,149 145,819
Deposits 400,534 345,917 273,189 269,740 217,867
Borrowed funds 55,000 59,500 29,000 39,500 24,000
Stockholders' equity 25,573 21,127 19,261 18,343 21,868
Book value per share $ 17.68 $ 14.67 $ 13.02 $ 11.14 $ 12.35
Stockholders' equity (1) 23,746 21,354 20,428 21,327 21,803
Book value per share (1) $ 16.42 $ 14.83 $ 13.81 $ 12.95 $ 12.31
Shares outstanding 1,446,226 1,439,926 1,479,426 1,646,326 1,771,306
Average Balance Sheet Data:
Loans, net $ 193,194 $ 155,303 $ 131,165 $ 104,512 $ 86,647
Securities 176,306 155,833 145,291 145,881 109,552
Assets 408,955 345,985 293,884 273,736 216,941
Demand deposits 70,198 51,487 40,842 33,791 25,811
Savings deposits 63,231 39,221 31,507 22,747 9,030
NOW and money market deposits 58,448 49,431 43,865 49,413 35,852
Certificates of deposit 125,129 129,246 106,079 103,596 105,741
Stockholders' equity $ 23,409 $ 20,689 $ 18,138 $ 20,470 $ 21,717
22
Selected Financial Data (cont'd)
At or for the years ended December 31,
2002 2001 2000 1999 1998
------------------------------------------------------------------------
(Dollars in thousands)
Performance Ratios:
Return on average assets .69 % .57 % .60 % .59 % .52 %
Return on average equity 12.12 9.48 9.67 7.85 5.18
Average equity to average assets 5.72 5.98 6.17 7.48 10.01
Equity to total assets at end of year 5.20 4.82 5.79 5.54 8.20
Interest rate spread (2) 3.22 2.82 2.69 2.81 2.51
Net interest margin (3) 3.79 3.63 3.55 3.50 3.48
Ratio of average interest-earning assets to
average interest-bearing liabilities 1.24 1.23 1.21 1.19 1.25
Non-interest expense to average assets 3.16 3.10 2.94 2.77 2.67
Efficiency ratio (4) 73.75 77.37 75.62 71.29 72.72
Dividend payout ratio 19.47 24.81 29.09 34.78 50.00
Asset Quality Ratios and Other Data:
Total non-performing loans $ 307 $ 178 $ 416 $ 179 $ 511
Allowance for loan losses 2,346 2,028 1,872 1,475 1,071
Non-performing loans as a percent of
total loans (5) (6) .14 % .10 % .30 % .15 % .54 %
Non-performing loans as a percent of
total assets (5) .06 .04 .12 .05 .19
Allowance for loan losses as a percent of:
Non-performing loans (5) 764.17 1,139.33 450.00 824.02 209.59
Total loans (6) 1.08 % 1.13 % 1.37 % 1.22 % 1.12 %
Full service offices 11 8 6 6 6
(1) Excludes the unrealized appreciation (depreciation) in available-for-sale
securities.
(2) Interest rate spread represents the difference between the yield on
interest-earning assets and the cost of 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 ofoperating 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 general policy to cease
accruing interest on all loans 90 days or more past due.
(6) Loans include loans, net of unearned income and deferred fees.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
Statements contained in this Annual Report, which are not historical facts, are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Amounts herein could vary as a result of market
and other factors. Such forward-looking statements are subject to risks and
uncertainties which could cause actual results to differ materially from those
currently anticipated due to a number of factors, which include, but are not
limited to, factors discussed in documents filed by Long Island Financial Corp.
(the "Company") with the Securities Exchange Commission from time to time. Such
forward-looking statements may be identified by the use of such words as
"believe," "expect," "anticipate," "should," "planned," "estimated" and
"potential." Examples of forward-looking statements include, but are not limited
to, estimates with respect to the financial condition, expected or anticipated
revenue, results of operations and business of the Company that are subject to
various factors which could cause actual results to differ materially from these
estimates. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a
material adverse effect on the operations of the Company and its subsidiaries
include, but are not limited to, changes in: interest rates; general economic
conditions; monetary and fiscal policies of the U.S. Government, including
policies of the U.S. Treasury and the Federal Reserve Board; the quality or
composition of the loan or investment portfolios; demand for loan products;
deposit flows; real estate values; the level of defaults; losses and prepayments
on loans held by the Company in portfolio or sold in the secondary markets;
demand for financial services in the Company's market area; changes in
accounting principles, policies, or guidelines; changes in legislation or
regulation; and other economic, competitive, governmental, regulatory, and
technological factors affecting the Company's operations, pricing, products and
services. The forward-looking statements are made as of the date of this Annual
Report, and, except as required by applicable law, the Company assumes no
obligation to update the forward-looking statements or to update the reasons why
actual results could differ from those projected in the forward-looking
statements.
Those risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Readers
are cautioned not to place undue reliance on forward-looking statements, which
speak only as of the date of this Annual Report.
GENERAL
Long Island Financial Corp. is a registered Delaware financial 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, Nassau and Kings 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 securities 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
the residential real estate loans it originates together with the servicing
rights to those loans on a non-recourse basis to institutional investors. The
Company limits its exposure to interest rate fluctuations and credit risk on
those loans by obtaining, at the point of origination, a commitment from an
institutional investor to purchase that loan from the Company. Further, 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 on the fees charged and interest earned during the period the Company holds
the loans for sale.
24
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 continues to implement an aggressive
expansion plan. The key components of that plan are to (i) expand the Company's
network of branch offices into existing and new markets, (ii) originate
commercial loans, (iii) develop strong customer relationships that generate
multiple services for individual customers 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 financial 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 Bank or in separate
subsidiaries of the Company. Finally, that structure will permit 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.
CRITICAL ACCOUNTING POLICIES
The Company identifies accounting policies critical to the Company's operations
and understanding of the Company's results of operations. Certain accounting
policies are considered to be important to the portrayal of the Company's
financial condition, since they require management to make complex or subjective
judgments, some of which may relate to matters that are inherently uncertain.
The Company has determined that the methodology used in determining the level of
its allowance for loan losses is critical in the presentation and understanding
of the Company's consolidated financial statements. The allowance for loan
losses represents management's estimate of probable losses inherent in the
portfolio. The evaluation process for making provisions for loan losses is
subject to numerous estimates and judgments. Changes in these estimates could
have a direct impact on the provision for loan losses and could result in a
change in the allowance. While management uses available information to
determine losses on loans, future additions to the allowance may be necessary
based on, among other things, unanticipated changes in economic conditions,
particularly in the counties of Suffolk and Nassau.
In evaluating the portfolio, management takes into consideration numerous
factors such as the Company's loan growth, prior loss experience, present and
potential risks of the loan portfolio, risk ratings assigned by lending
personnel, ratings assigned by the independent loan review function, the present
financial condition of the borrowers, current economic conditions, and other
portfolio risk characteristics. The Company's formalized process for assessing
the adequacy of the allowance for loan losses and the resultant need, if any,
for periodic provisions to the allowance charged to income consists of both
individual loan analyses and loan pool analyses. The individual loan analyses
are periodically performed on individually significant loans or when otherwise
deemed necessary and primarily encompass commercial real estate and commercial
and industrial loans. Management believes that the Company's allowance for loan
losses at December 31, 2002 is adequate to provide for estimated probable losses
inherent in the portfolio.
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,
its 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 interest rate risk position of the Company 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 management and decision-making process of the
Company. Accordingly,