10-K 1 d54529_10k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ----------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF 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 0-12220 THE FIRST OF LONG ISLAND CORPORATION (Exact Name Of Registrant As Specified In Its Charter) New York 11-2672906 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 10 Glen Head Road, Glen Head, NY 11545 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (516) 671-4900 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- None N/A Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10 par value per share -------------------------------------- (Title of class) 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 requirement 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 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] [Cover page 1 of 2 pages] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes |X| No |_| The aggregate market value of the Corporation's voting common stock held by nonaffiliates as of June 28, 2002, the last business day of the Corporation's most recently completed second fiscal quarter, was $116,470,620. This value was computed by reference to the price at which the stock was last sold on June 28th and excludes $19,932,787 representing the market value of common stock beneficially owned by directors and executive officers of the Registrant. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. Class Outstanding March 13, 2003 ---------------------------- -------------------------- Common Stock, $.10 par value 4,071,011 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Corporation's Annual Report to shareholders for the fiscal year ended December 31, 2002 are incorporated by reference into Parts II and IV. Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held April 15, 2003 are incorporated by reference into Part III. [Cover page 2 of 2 pages] PART I ITEM 1. BUSINESS General The First of Long Island Corporation (the "Registrant" or the "Corporation"), a one-bank holding Company, was incorporated on February 7, 1984 for the purpose of providing financial services through its wholly-owned subsidiary, The First National Bank of Long Island (the "Bank"). The Bank was organized in 1927 as a national banking association under the laws of the United States of America and was known as the First National Bank of Glen Head through June 30, 1978. The Bank has an Investment Management Division that provides investment management, pension trust, personal trust, estate, and custody services. In addition, in 1994 the Bank organized a wholly-owned subsidiary, The First of Long Island Agency (the "Agency"), as a licensed insurance agency under the laws of the State of New York. The Bank currently plans to begin using the Agency in 2003 to once again offer mutual funds and annuities to its customers. The Bank has served the financial needs of privately owned businesses, professionals, consumers, public bodies, and other organizations primarily in Nassau and Suffolk Counties, Long Island. The Bank expects to expand the geographic distribution of its customer base in 2003 by opening several branch offices in Manhattan. In the coming years, the Bank will continue to search for favorable locations at which to establish new branches, with continued emphasis on the commercial banking unit type. The principal business of the Bank has historically consisted of attracting business and consumer checking, money market and savings deposits and investing those funds in investment securities, commercial and residential mortgage loans, commercial loans, and home equity loans and lines. The Corporation's loan portfolio is currently primarily comprised of loans to borrowers in Nassau and Suffolk Counties and real estate loans are principally secured by properties located in these Counties. The Bank's investment securities portfolio is comprised of U.S. Treasury securities, U.S. government agency securities (principally modified pass-through, mortgage-backed securities of Federal agencies), collateralized mortgage obligations, state and municipal securities and corporate bonds. The Bank also regularly sells federal funds on an overnight basis to a number of banking institutions. The Bank offers a variety of deposit products having a wide range of interest rates and terms. The principal products include checking accounts, money market type accounts, savings accounts, escrow service and IOLA (interest on lawyer) accounts, and time deposit accounts. In addition to its loan and deposit products, the Bank offers other services to its customers including the following: o ATM Banking o Bank by Mail o Bill Payment Using PC or Telephone Banking o Collection Services o Counter Checks and Certified Checks o Drive-Through Banking o Gift Checks and Personal Money Orders o Internet PC Banking For Personal and Commercial Customers o Merchant Credit Card Depository Services o Night Depository Services o Lock Box Services o Payroll Services o Safe Deposit Boxes o Securities Transactions o Signature Guarantee Services o Telephone Banking o Travelers Checks o Trust and Investment Management Services o U.S. Savings Bonds o Wire Transfers and Foreign Cables o Withholding Tax Depository Services The Bank has a main office located in Huntington, New York, eight other full service offices (Glen Head, Greenvale, Locust Valley, Northport, Old Brookville, Rockville Centre, Roslyn Heights, Woodbury) and twelve commercial banking offices (Allen Boulevard, Bohemia, Deer Park, Garden City, Great Neck, Hauppauge, Hicksville, Lake Success, Mineola, New Highway, New Hyde Park, Valley Stream), all of which are in Nassau and Suffolk Counties. The Bank's revenues are derived principally from interest on loans, interest on investment securities, service charges and fees on deposit accounts, and income from trust and investment management services. The Bank did not commence, abandon, or significantly change any of its lines of business during 2002. The Bank encounters substantial competition in its banking business from numerous other banking corporations which have offices located in the communities served by the Bank. Principal competitors are branches of large banks, such as Citibank, J.P. Morgan Chase & Co., Bank of New York, and Fleet NA, and various Long Island based banks. 1 Lending Activities General. The Bank's loan portfolio is currently primarily comprised of loans to small and medium-sized privately owned businesses, professionals, and consumers in Nassau and Suffolk Counties. The Bank offers a full range of lending services including construction loans, commercial and residential mortgage loans, home equity loans and lines, commercial loans, consumer loans, and commercial and standby letters of credit. Commercial loans include, among other things, short-term business loans; term and installment loans; revolving credit term loans; and loans secured by marketable securities, the cash surrender value of life insurance policies, or deposit accounts. Consumer loans include, among other things, auto loans, unsecured home improvement loans, secured and unsecured personal loans, overdraft checking lines, and VISA(R) credit cards. The Bank makes both fixed and variable rate loans. Variable rate loans are tied to and reprice with changes in the Bank's prime interest rate, The Wall Street Journal prime interest rate, U.S. Treasury rates, or the Federal Home Loan Bank of New York regular fixed advance rate. Commercial mortgage loans are made with terms usually not in excess of fifteen years, while the maximum term on residential mortgage loans is thirty years. Commercial and consumer loans generally mature within five years. The Bank's current practice is to usually lend no more than 75% of appraised value on residential mortgage loans, 60% on home equity lines and 70% on commercial mortgage loans. The risks inherent in the Bank's loan portfolio primarily stem from the following factors relating to borrower size, geographic concentration, and environmental contamination: first, loans to small and medium-sized businesses sometimes involve a higher degree of risk than those to larger companies because such businesses may have shorter operating histories and higher debt-to-equity ratios than larger companies and may lack sophistication in internal record keeping and financial and operational controls; second, the ability of many of the Bank's borrowers to repay their loans can be dependent on the strength of the local economy; and finally, if it becomes necessary to foreclose a loan secured by real estate, the ability of the Bank to fully realize its investment is dependent on, among other things, the strength of the Long Island real estate market and the condition of the property including the absence of environmental contamination. The Bank does not have any significant industry concentrations or any foreign loans. Except home equity products, loans from $300,000 to $750,000 require the approval of the Management Loan Committee (home equity loans and lines have more stringent approval requirements). All loans in excess of $750,000 require the approval of the Management Loan Committee and two members of the Board Loan Committee, one of whom must be a non-management director. The Bank's lending is subject to written underwriting standards and loan origination procedures, as approved by the Bank's Board of Directors and contained in the Bank's loan policies. The Bank's loan policies allow for exceptions and set forth the specific approvals required. Decisions on loan applications are based on, among other things, the borrower's credit history, the financial strength of the borrower, estimates of the borrower's ability to repay the loan, and the value of the collateral, if any. All real estate appraisals must meet the requirements of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The composition of the Bank's loan portfolio is set forth below.
December 31, ------------------------------------------------------------- 2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- (in thousands) Commercial and industrial .... $ 37,329 $ 40,993 $ 30,514 $ 30,296 $ 28,748 Secured by real estate ....... 217,730 179,905 155,283 147,598 132,357 Consumer ..................... 6,414 6,198 7,504 5,284 6,366 Other ........................ 628 593 560 549 4,119 --------- --------- --------- --------- --------- 262,101 227,689 193,861 183,727 171,590 Unearned income .............. (993) (1,001) (952) (953) (872) --------- --------- --------- --------- --------- 261,108 226,688 192,909 182,774 170,718 Allowance for loan losses .... (2,085) (2,020) (1,943) (2,033) (3,651) --------- --------- --------- --------- --------- $ 259,023 $ 224,668 $ 190,966 $ 180,741 $ 167,067 ========= ========= ========= ========= =========
2 Commercial and Industrial Loans. The Bank makes commercial loans on a demand basis, short-term basis, or installment basis. Short-term business loans are generally due and payable within one year and should be self liquidating during the normal course of the borrower's business cycle. Term and installment loans are usually due and payable within five years. Generally, it is the policy of the Bank to obtain personal guarantees of principal owners on loans made to privately-owned businesses. Maturity and rate information for the Bank's commercial and industrial loans is set forth below.
Maturity ------------------------------------------------- After One Within But Within After One Year Five Years Five Years Total ---------- ---------- ---------- ---------- (in thousands) Commercial and industrial loans: Fixed rate ....................... $ 6,408 $ 3,039 $ -- $ 9,447 Variable rate .................... 10,273 16,669 940 27,882 ---------- ---------- ---------- ---------- $ 16,681 $ 19,708 $ 940 $ 37,329 ========== ========== ========== ==========
Real Estate Mortgage and Home Equity Loans and Lines. The Bank makes residential and commercial mortgage loans and home equity loans and establishes home equity lines of credit. Applicants for residential mortgage loans and home equity loans and lines will be considered for approval provided they have satisfactory credit history and the Bank believes that there is sufficient monthly income to service both the loan or line applied for and existing debt. Applicants for commercial mortgage loans will be considered for approval provided they, as well as any guarantors, generally have satisfactory credit history and can demonstrate, through financial statements and otherwise, the ability to repay. If the source of repayment is rental income, such income must almost always be more than sufficient to amortize the debt. In processing requests for commercial mortgage loans, the Bank almost always requires an environmental assessment to identify the possibility of environmental contamination. The extent of the assessment procedures varies from property to property and is based on factors such as whether or not the subject property is an industrial building or has a suspected environmental risk based on current or past use. Construction Loans. The Bank makes loans to finance the construction of both residential and commercial properties. The maturity of such loans is generally one year or less and advances are made as the construction progresses. The advances can require the submission of bills by the contractor, verification by a Bank-approved inspector that the work has been performed, and obtaining title insurance updates to insure that no intervening liens have been placed. Consumer Loans and Lines. The Bank makes auto loans, home improvement loans, and other consumer loans, establishes revolving overdraft lines of credit, and issues VISA(R) credit cards. Consumer loans and lines may be secured or unsecured. Consumer loans are generally made on an installment basis over terms not exceeding five years. In reviewing loans and lines for approval, the Bank considers, among other things, ability to repay, stability of employment and residence, and past credit history. Past Due, Nonaccrual, and Restructured Loans. Selected information about the Bank's past due, nonaccrual, and restructured loans can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" which has been incorporated by reference into Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K. The accrual of interest on loans is generally discontinued when principal or interest payments become past due 90 days or more. As of December 31, 2002, the Bank did not have any impaired loans or material potential problem loans except for the loans disclosed in "Note C - Loans" to the Corporation's consolidated financial statements which have been incorporated by reference into "Item 8. Financial Statements and Supplemental Data" of this Form 10-K. Economic conditions in the Bank's market area were reasonably favorable during the 2002 year. Future levels of past due, nonperforming, and restructured loans will be affected by the strength of the local economy. Allowance for Loan Losses. The allowance for loan losses is established through provisions for loan losses charged against income and reductions in the allowance are credited to income. Amounts deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is an amount that management currently believes will be adequate to absorb estimated inherent losses in the Bank's loan portfolio. The process for estimating credit losses and determining the allowance for loan losses as of any balance sheet date is subjective in nature and requires material estimates. Actual results could differ significantly from these estimates. In determining the allowance for loan losses, there is not an exact amount but rather a range for what constitutes an appropriate allowance. In estimating losses the Bank reviews individual credits in its portfolio and, for those loans deemed to be impaired, 3 measures impairment losses based on either the fair value of collateral or the discounted value of expected future cash flows. Estimated losses for loans that are not specifically reviewed are determined on a pooled basis taking into account a variety of factors including historical losses; levels of and trends in delinquencies and nonaccruing loans; trends in volume and terms of loans; changes in lending policies and procedures; experience, ability and depth of lending staff; national and local economic conditions; concentrations of credit; and environmental risks. Management also considers relevant loan loss statistics for the Bank's peer group. The estimated losses on the loans specifically reviewed plus those determined on a pooled basis make up the allocated component of the allowance for loan losses. The unallocated or general component of the allowance for loan losses could cover losses in the portfolio that have not otherwise been identified through the review of specific loans or pools of loans. Changes in the Bank's allowance for loan losses for each of the five years in the period ended December 31, 2002 and the allocation of the Bank's allowance for loan losses by loan type at the end of each of these years can be found in "Note C - Loans" to the Corporation's consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations", respectively, which have been incorporated by reference into Items 7 and 8, respectively, of this Form 10-K. The amount of future chargeoffs and provisions for loan losses will be affected by, among other things, economic conditions on Long Island. Such conditions affect the financial strength of the Bank's borrowers and the value of real estate collateral securing the Bank's mortgage loans. Loans secured by real estate represent approximately 83% of the Bank's total loans outstanding at December 31, 2002. The majority of these loans were made to borrowers domiciled on Long Island and are secured by Long Island properties. In recent years, economic conditions on Long Island have been strong and residential real estate values have grown to unprecedented highs. Such conditions and values could deteriorate in the future, and such deterioration could be substantial. If this were to occur, some of the Bank's borrowers may be unable to make the required contractual payments on their loans, and the Bank may be unable to realize the full carrying value of such loans through foreclosure. However, management believes that the Bank's underwriting policies for residential mortgages are relatively conservative and, as a result, the Bank should be less affected than the overall market. Investment Activities General. The investment policy of the Bank, as approved by the Board of Directors and supervised by both the Board and the Management Investment Committee, is intended to promote investment practices which are both safe and sound and in full compliance with the Federal Financial Institutions Examination Council (FFIEC) Supervisory Policy Statement on Investment Securities and End-User Derivative Activities and all other applicable regulations. Investment authority will be granted and amended as is necessary by the Board of Directors. The Bank's investment decisions seek to maximize income while keeping both credit and market risk at acceptable levels, provide for the Bank's liquidity needs, assist in managing interest rate sensitivity, and provide securities that can be pledged, as needed, to secure deposits or borrowing lines. The Bank's investment policy limits individual maturities to twenty years and average lives, in the case of collateralized mortgage obligations (CMOs) and other mortgage-backed securities, to 10 years. At the time of purchase, bonds of states and political subdivisions must generally be rated A or better, notes of states and political subdivisions must generally be rated MIG-2 (or equivalent) or better, and commercial paper must be rated A-1 or P-1. In addition, management periodically reviews issuer credit ratings for all securities in the Bank's portfolio other than those issued by the U.S. government or its agencies. Any significant deterioration in the creditworthiness of an issuer will be analyzed and action will be taken if deemed appropriate. The Bank has not engaged in the purchase and sale of securities for the primary purpose of producing trading profits and its current investment policy does not allow such activity. At December 31, 2002, the Bank had net unrealized gains of $9,336,000 in its held-to-maturity portfolio, consisting of gross unrealized gains of $9,425,000 and gross unrealized losses of $89,000. The unrealized gains and losses were principally caused by decreases and increases, respectively, in interest rates since the securities were purchased. The Bank intends and expects to be able to hold these securities to maturity and therefore expects that neither the unrealized gains nor the unrealized losses will ever be realized. Portfolio Composition. The composition of the Bank's investment portfolio can be found in "Note B - Investment Securities" to the Corporation's consolidated financial statements which have been incorporated by reference into Item 8 of this Form 10-K. Maturity Information. The maturities and weighted average yields of the Bank's investment securities at December 31, 2002 can be found in "Note B - Investment Securities" to the Corporation's consolidated financial statements which have been incorporated by reference into Item 8 of this Form 10-K. The Bank received dividends on its Federal Reserve Bank stock of $6,924 in 2002 representing a yield of 6.00%. Sources of Funds General. The Bank's primary sources of funds are deposits, maturity and redemption of investment securities, interest earned on investment securities and federal funds sold, collection of principal and interest on loans, retained earnings, and other funds provided from operations. The Bank offers checking and interest-bearing deposit products. In addition to business checking, the Bank has a variety of personal checking products including "First Class", "Prime", regular, budget, senior citizen and special checking. Among other 4 things, the personal products differ in minimum balance requirements, monthly maintenance fees, and per check charges. The interest-bearing deposit products, which have a wide range of interest rates and terms, consist of checking, including interest on lawyer accounts (IOLA); escrow service accounts; rent security accounts; three money-market-type products, including a traditional money market savings account, "Select Savings" - a statement savings account that earns a money market rate, and "Diamond Savings" - a passbook savings account that earns a money market rate; traditional statement savings; traditional passbook savings; savings certificates (3 month, 6 month and 1 to 6 year terms); large and jumbo certificates; holiday club accounts; and individual retirement accounts (savings certificates with terms of 1 to 6 years). Total certificates of deposits, the majority of which mature within one year, were $30,466,000, or 4.4% of total deposits, at December 31, 2002. Certificates of deposit in amounts of $100,000 or more were $13,107,000 at December 31, 2002, or 1.9% of total deposits. The Bank relies primarily on customer service, calling programs, competitive pricing, and advertising to attract and retain deposits. Currently, the Bank solicits deposits only from its local market area and does not have any deposits which qualify as brokered deposits under applicable Federal regulations. The flow of deposits is influenced by general economic conditions, changes in interest rates and competition. Classification of Average Deposits. The Bank's average deposit balances by major classification are set forth below.
Year ended December 31, -------------------------------------------------------------------------- 2002 2001 2000 ---------------------- ---------------------- ---------------------- Average Average Average Average Average Average Balance Rate Paid Balance Rate Paid Balance Rate Paid --------- --------- --------- --------- --------- --------- (dollars in thousands) Checking .................... $ 241,683 --% $ 201,688 --% $ 186,215 --% Savings and money market .... 391,829 1.14 343,389 2.31 303,530 3.67 Time deposits ............... 34,810 1.84 39,202 3.84 41,105 4.81 --------- --------- --------- --------- --------- --------- $ 668,322 0.76% $ 584,279 1.62% $ 530,850 2.47% ========= ========= ========= ========= ========= =========
Remaining Maturities of Time Deposits. The remaining maturities of the Bank's time deposits in amounts of $100,000 or more at December 31, 2002 can be found in "Note E - Deposits" to the Corporation's consolidated financial statements which have been incorporated by reference into Item 8 of this Form 10-K. Competition The Bank competes against other commercial banks as well as savings banks, mortgage brokers, brokerage firms and credit unions in its market area. The Bank competes effectively for loans on the basis of the quality of service it provides and by offering competitive interest rates, and competes effectively for deposits by offering a high level of customer service, paying competitive rates on money market type deposit products, and through the geographic distribution of its branch system. Employees As of December 31, 2002, the Bank had 181 full-time equivalent employees and considers employee relations to be satisfactory. Employees of the Bank are not represented by a collective bargaining unit. Regulation The Corporation is subject to the regulation and supervision of the Federal Reserve Board and the Securities and Exchange Commission. The primary banking agency responsible for regulating the Bank is the Comptroller of the Currency. The Bank is also subject to regulation and supervision by the Federal Reserve Board and the Federal Deposit Insurance Corporation. Availability of Reports The First National Bank of Long Island maintains an Internet website at www.fnbli.com. The Corporation's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed with or furnished to the Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through the Bank's Internet website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. To access these reports simply go to the homepage of the Bank's Internet website and click on "First of Long Island Corporation" and then click on "SEC Filings". This will bring you to a listing of the Corporation's reports maintained on the SEC's EDGAR website. You can then click on any report to view its contents. 5 ITEM 2. PROPERTIES The Corporation neither owns nor leases any real estate. Office facilities of the Corporation are located at 10 Glen Head Road, Glen Head, NY in a building owned by the Bank. The Bank's designated main office is located at 253 New York Avenue, Huntington, New York. As of December 31, 2002, the Bank owns a total of ten buildings in fee and occupies thirteen other facilities under lease arrangements, all of which are in Nassau and Suffolk Counties New York. Subsequent to December 31, 2002, the Bank obtained regulatory approval for three new branch offices in Manhattan and has entered into lease agreements for all of these offices. The Corporation believes that the physical facilities of the Bank are suitable and adequate at present and are being fully utilized. ITEM 3. LEGAL PROCEEDINGS Other than ordinary routine litigation incidental to the business, it is believed that there are no material legal proceedings, either individually or in the aggregate, to which the Corporation or the Bank is a party or to which any of their property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS None were submitted to a vote of security holders during the fourth quarter of 2002. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Corporation's common stock trades on the Nasdaq SmallCap Market tier of the Nasdaq Stock Market ("Nasdaq") under the symbol "FLIC". The table appearing on page 1 of the Corporation's Annual Report to Shareholders for the fiscal year ended December 31, 2002 showing the high and low sales prices, by quarter, for the years ended December 31, 2002 and 2001 is incorporated herein by reference. On March 13, 2003, there were 4,071,011 shares of the Corporation's common stock outstanding with 698 holders of record. The holders of record include banks and brokers who act as nominees, each of whom may represent more than one stockholder. During 2002 and 2001, the Corporation declared semi-annual cash dividends aggregating $.63 and $.54 per share, respectively. All of the Corporation's equity compensation plans, which consist solely of stock option and appreciation rights plans, were previously approved by its stockholders. Information as of December 31, 2002 regarding the number of shares of common stock to be issued upon the exercise of outstanding stock options, the weighted average exercise price of outstanding stock options, and the number of stock options remaining available for future issuance are set forth in "Note I - Stock-Based Compensation" to the Corporation's consolidated financial statements which have been incorporated by reference into "Item 8. Financial Statements and Supplemental Data" of this Form 10-K. Trading in the Corporation's common stock is limited. The total trading volumes for 2002 and 2001 as reported by Nasdaq and as adjusted for the 3-for-2 stock split declared June 18, 2002 were 743,903 and 534,408 shares, respectively, with average daily trading volumes of 2,952 and 2,155 shares, respectively. During 2002, the Corporation purchased 52,848 shares, 12,000 of which were purchased in market transactions, and in 2001 purchased 178,427 shares, 121,050 of which were purchased in market transactions. These market purchases represent approximately 2% and 23% of the total trading volumes reported by Nasdaq for 2002 and 2001, respectively. Although the Corporation has had a stock repurchase program since 1988, if the Company discontinues the program it could adversely affect market liquidity for the Corporation's common stock, the price of the Corporation's common stock, or both. In addition, effective July 1, 2002, the Corporation's common stock was included for the first time in the Russell 3000(R) and 2000(R) Indices. The Corporation believes that inclusion in the Russell indices has positively impacted the price of its common stock and has increased the stock's trading volume and liquidity. Conversely, if the Corporation's market capitalization falls below the minimum necessary to be included in the indices at any future index reconstitution date, the Corporation believes that this could adversely affect the price, volume and liquidity of its common stock. For a further discussion of the Corporation's share repurchase program, including its impact on earnings per share, and the Russell indices please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Note A" to the Corporation's consolidated financial statements, both of which are included in the Corporations Annual Report to Shareholders for the fiscal year ended December 31, 2002. ITEM 6. SELECTED FINANCIAL DATA "Selected Financial Data" appearing on page 1 of the Corporation's Annual Report to Shareholders for the fiscal year ended December 31, 2002 is incorporated herein by reference. The Corporation's dividend payout ratio was 23.08%, 23.18% and 22.86% for 2002, 2001 and 2000, respectively. 6 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" appearing on pages 9 through 20 of the Corporation's Annual Report to Shareholders for the fiscal year ended December 31, 2002 is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The market risk information included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and appearing on pages 18 through 20 of the Corporation's Annual Report to Shareholders for the fiscal year ended December 31, 2002 is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and report of independent public accountants appearing on pages 22 through 43 of Corporation's Annual Report to Shareholders for the fiscal year ended December 31, 2002 are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On June 27, 2002, based on a recommendation by the Audit Committee of the Board of Directors (the "Audit Committee"), the Board of Directors of The First of Long Island Corporation (the "Company") approved the dismissal of the Company's independent public accountant, Arthur Andersen LLP. No reports by Arthur Andersen LLP within the two years prior to their dismissal contained an adverse opinion or a disclaimer of opinion, or were qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's two most recent fiscal years and all interim periods preceding the dismissal, there were no disagreements between the Company and Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. Within the last two most recent fiscal years and all subsequent interim periods preceding the dismissal and to the date of dismissal, there were no reportable events with respect to Arthur Andersen LLP as that term is described in Item 304 of Regulations S-K. On July 2, 2002, the Corporation filed a Form 8-K with the Securities and Exchange Commission to report the dismissal of Arthur Andersen LLP. In connection with the Form 8-K filing, the Company requested that Arthur Andersen LLP furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the above statements. A copy of such letter, dated June 27, 2002, is filed as exhibit 16 to this Form 10-K On June 27, 2002, based on a recommendation by the Audit Committee, the Board of Directors of the Company selected and engaged Grant Thornton LLP as its independent public accountant. Grant Thornton LLP audited the Company's financial statements for the fiscal year ended December 31, 2002. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT "ELECTION OF DIRECTORS" appearing on pages 3 through 5 and "MANAGEMENT" appearing on pages 8 and 9 of Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held April 15, 2003 are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION "COMPENSATION OF DIRECTORS", "BOARD COMPENSATION COMMITTEE REPORT", "COMPENSATION OF EXECUTIVE OFFICERS", "SUMMARY COMPENSATION TABLE", "COMPENSATION PURSUANT TO PLANS", and "PERFORMANCE GRAPH" appearing on pages 5 and 6 and 9 through 18 of the Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held April 15, 2003 are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT "VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS" appearing on Pages 1 through 3 of Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held April 15, 2003 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS "TRANSACTIONS WITH MANAGEMENT AND OTHERS" appearing on pages 18 and 19 of Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held April 15, 2003 is incorporated herein by reference. ITEM 14. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures The Company's Chief Executive Officer, J. William Johnson, and Chief Financial Officer, Mark D. Curtis, have reviewed the Corporation's disclosure controls and procedures within 90 days prior to the filing of this report on Form 10-K. Based upon this review, these officers believe that the Corporation's disclosure controls and procedures are effective in ensuring that material information related to the Corporation is made known to them by others within the Corporation. 7 (b) Changes in Internal Controls There were no significant changes in the Corporation's internal controls or in other factors that could significantly affect these controls subsequent to the date of the review performed by the Chief Executive Officer and the Chief Financial Officer. In addition, there were no corrective actions with regard to significant deficiencies and material weaknesses in internal controls subsequent to the review performed by the Chief Executive Officer and the Chief Financial Officer. ITEM 16. PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees. Grant Thornton LLP became the Corporation's principal accountant on June 27, 2002, and prior to this Arthur Andersen LLP served as the Corporation's principal accountant. Grant Thornton LLP's fees for audit services for the 2002 year were $86,500 and Arthur Andersen's fees for audit services for the 2001 year were $85,000. Audit services include the following: (1) professional services rendered for the audit of the Corporation's annual financial statements; (2) reviews of the financial statements included in the Corporation's Forms 10-Q; (3) a reading of the Corporation's annual report on Form 10-K; (4) rendering an opinion on management's assertion about the effectiveness of the Bank's internal control structure over financial reporting; and (5) consultation on matters related to accounting and financial reporting. With respect to the reviews of financial statements included in the Corporation's Forms 10-Q, Arthur Andersen LLP performed the review for the quarter ended March 31, 2002 for a fee of $5,000 and Grant Thornton LLP performed the reviews for the remaining quarters in 2002. Audit Related Fees. In neither of the last two fiscal years was the Corporation billed by its principal accountant for "Audit-Related Fees" as that term is described in Item 9(e)(2) of Schedule 14A of the Securities and Exchange Commission's Proxy Rules. Tax Fees. For the 2002 fiscal year, Grant Thornton LLP billed the Corporation $7,000 for the preparation of most of its tax returns for the 2001 fiscal year. Arthur Andersen LLP billed the Corporation $10,000 during 2002 for preparing the 2001 tax returns for the Bank's REIT (real estate investment trust) subsidiary, providing advice regarding the Bank's REIT and investment subsidiaries and for analysis of the tax consequences of bank owned life insurance. All Other Fees. In neither of the last two fiscal years was the Corporation billed by its principal accountant for any fees other than those described above under the captions "Audit Fees" and "Tax Fees". Audit Committee Administration of the Engagement. The rendering of audit and non-audit services by the Corporation's principal accountant are approved by the Audit Committee of the Corporation's Board of Directors before the accountant is engaged to perform such services. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Consolidated Financial Statements The following consolidated financial statements of the Corporation and its subsidiary, and Report of Independent Public Accountants thereon, as required by Item 8 of this report are incorporated herein by reference. o Consolidated Balance Sheets - December 31, 2002 and 2001 o Consolidated Statements of Income - Years ended December 31, 2002, 2001 and 2000 o Consolidated Statement of Changes in Stockholders' Equity - Years ended December 31, 2002, 2001 and 2000 o Consolidated Statements of Cash Flows - Years ended December 31, 2002, 2001 and 2000 o Notes to Consolidated Financial Statements (a) 2. Financial Statement Schedules None Applicable. (a) 3. Listing of Exhibits The following exhibits are submitted herewith.
EXHIBIT NO. NAME ----------- ---- 3(i) Certificate of Incorporation, as amended (1) 3(ii) By-laws, as amended (2) 10.1 Incentive Compensation Plan (3) 10.2 1986 Stock Option and Appreciation Rights Plan (4) 10.3 1996 Stock Option and Appreciation Rights Plan (5) 10.4 Amendment to 1996 Stock Option and Appreciation Rights Plan dated February 20, 2001 (6)
8 10.5 Employment Agreement between Registrant and J. William Johnson dated January 31, 1996, as amended December 18, 1996, January 2, 1998, January 6, 1999, July 20, 1999, and July 9, 2002 (7) 10.6 Employment Agreement between Registrant and Michael N. Vittorio dated June 22, 2002 (8) 10.7 Employment Agreement between Registrant and Arthur J. Lupinacci, Jr. dated July 1, 1999, as amended July 9, 2002 (9) 10.8 Employment Agreement between Registrant and Donald L. Manfredonia dated January 1, 2002, as amended July 9, 2002 (10) 10.9 Employment Agreement between Registrant and Joseph G. Perri, dated January 1, 2002, as amended July 9, 2002 (11) 10.10 Special Severance Agreement between Registrant and Richard Kick, dated January 1, 2002 (12) 10.11 Special Severance Agreement between Registrant and Mark D. Curtis, dated January 1, 2002 (13) 10.12 Special Severance Agreement between Registrant and Brian J. Keeney, dated January 1, 2002 (14) 13 Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 2002 Included herein 16 Letter from Arthur Andersen LLP dated June 27, 2002 (15) 21 Subsidiary of Registrant Included herein 23 Consent of Independent Public Accountants Included herein 99.1 Notice of 2003 Annual Meeting and Proxy Statement (16) 99.2 Certification by Chief Executive Officer and Chief Financial Officer Included herein
(1) Previously filed as part of Report on Form 10-K for 1998, filed on March 29, 1999, as exhibit 3(i), which exhibit is incorporated herein by reference. (2) Previously filed as part of Report on Form 10-K for 1999, filed on March 29, 2000, as exhibit 3(ii), which exhibit is incorporated herein by reference. (3) "Incentive Compensation Plan" and "Board Compensation Committee Report" appearing on pages 13 and 9, respectively, of the Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held April 15, 2003 are incorporated herein by reference. (4) Previously filed as an exhibit to Form 10-K which exhibit is incorporated herein by reference. (5) Previously filed as part of Report on Form 10-K for 1995, filed on March 22, 1996, as exhibit 10(b), which exhibit is incorporated herein by reference. (6) Previously filed as part of Report on Form 10-K for 2000, filed on March 27, 2001, as Exhibit 10.4, which exhibit is incorporated herein by reference. (7) Employment agreement previously filed as part of Report on Form 10-K for 1995, filed on March 22, 1996, as exhibit 10(c), which exhibit is incorporated herein by reference. The December 18, 1996, January 2, 1998, and January 6, 1999 amendments to Mr. Johnson's employment agreement each involved an increase in Mr. Johnson's base annual salary, the dollar amounts of which were previously disclosed in Form 10-K. The July 20, 1999 amendment to Mr. Johnson's employment contract served to correct the date set forth in Section 4(c) from May 31, 2005 to May 31, 2006. The July 9, 2002 amendment to Mr. Johnson's employment contract served to delete Section 4(d) "Additional Insurance". Mr. Johnson's current base annual salary is disclosed in Exhibit 99.1 to this Form 10-K filing. (8) Previously filed as part of Report on Form 10-Q for the quarterly period ended June 30, 2002, filed on August 9, 2002, as Exhibit 10.1, which exhibit is incorporated herein by reference. (9) Previously filed as part of Report on Form 10-K for 1999, filed on March 29, 2000, as exhibit 10.5, which exhibit is incorporated herein by reference. The July 9, 2002 amendment to Mr. Lupinacci's employment contract served to delete Section 8.1(b) "Additional Insurance" and eliminate the references in Section 8.2 to Section 8.1(b) and to "other insurance coverage". Mr. Lupinacci's current base annual salary is disclosed in Exhibit 99.1 to this Form 10-K filing. (10) Employment agreement previously filed as part of Report on Form 10-K for 2001, filed on March 29, 2002, as exhibit 10.7, which exhibit is incorporated herein by reference. The July 9, 2002 amendment to Mr. Manfredonia's employment contract served to delete Section 8.1(b) "Additional Insurance" and eliminate the references in Section 8.2 to Section 8.1(b) and to "other insurance coverage". Mr. Manfredonia's current base annual salary is disclosed in Exhibit 99.1 to this Form 10-K filing. (11) Employment agreement previously filed as part of Report on Form 10-K for 2001, filed on March 29, 2002, as exhibit 10.8, which exhibit is incorporated herein by reference. The July 9, 2002 amendment to Mr. Perri's employment contract served to delete Section 8.1(b) "Additional Insurance" and eliminate the references in Section 8.2 to Section 8.1(b) and to "other insurance coverage". Mr. Perri's current base annual salary is disclosed in Exhibit 99.1 to this Form 10-K filing. (12) Special Severance Agreement previously filed as part of Report on Form 10-K for 2001, filed on March 29, 2002, as exhibit 10.9, which exhibit is incorporated herein by reference. 9 (13) Special Severance Agreement previously filed as part of Report on Form 10-K for 2001, filed on March 29, 2002, as exhibit 10.9, which exhibit is incorporated herein by reference. (14) Special Severance Agreement previously filed as part of Report on Form 10-K for 2001, filed on March 29, 2002, as exhibit 10.9, which exhibit is incorporated herein by reference. (15) Previously filed as part of report on Form 8-K dated June 27, 2002, filed on July 2, 2002, as exhibit 16.1, which exhibit is incorporated herein by reference. (16) The Corporation's Proxy Statement for its Annual Meeting of Stockholders to be held April 15, 2003 was submitted in electronic format on March 4, 2003 and is incorporated herein by reference. (b) Reports on Form 8-K None (c) Exhibits Exhibits as listed under 15(a) 3. above are submitted as a separate section of this report. (d) Financial Statement Schedules - None 10 Signatures Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE FIRST OF LONG ISLAND CORPORATION (Registrant) Dated: March 18, 2003 By /s/ J. WILLIAM JOHNSON -------------------------------------------------- J. WILLIAM JOHNSON, Chief Executive Officer (principal executive officer) By /s/ MARK D. CURTIS -------------------------------------------------- MARK D. CURTIS, Senior Vice President and Treasurer (principal financial officer and principal accounting officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signatures Titles Date /s/ J. WILLIAM JOHNSON Chairman of the Board MARCH 18, 2003 ---------------------------- J. William Johnson /s/ ALLEN E. BUSCHING Director MARCH 18, 2003 ---------------------------- Allen E. Busching /s/ PAUL T. CANARICK Director MARCH 18, 2003 ---------------------------- Paul T. Canarick /s/ BEVERLY ANN GEHLMEYER Director MARCH 18, 2003 ---------------------------- Beverly Ann Gehlmeyer /s/ HOWARD THOMAS HOGAN, JR. Director MARCH 18, 2003 ---------------------------- Howard Thomas Hogan, Jr. /s/ J. DOUGLAS MAXWELL, JR. Director MARCH 18, 2003 ---------------------------- J. Douglas Maxwell, Jr. /s/ JOHN R. MILLER III Director MARCH 18, 2003 ---------------------------- John R. Miller III /s/ WALTER C. TEAGLE III Director MARCH 18, 2003 ---------------------------- Walter C. Teagle III /s/ MICHAEL N. VITTORIO Director MARCH 18, 2003 ---------------------------- Michael N. Vittorio 11 CERTIFICATIONS 1. I, J. William Johnson, have reviewed this annual report on Form 10-K of The First of Long Island Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this 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 the registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other 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 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 18, 2003 By /s/ J. WILLIAM JOHNSON ------------------------------------ J. WILLIAM JOHNSON CHAIRMAN AND CHIEF EXECUTIVE OFFICER (principal executive officer) 1. I, Mark D. Curtis, have reviewed this annual report on Form 10-K of The First of Long Island Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this 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 the registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 12 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 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 18, 2003 By /s/ MARK D. CURTIS -------------------------------------------- MARK D. CURTIS SENIOR VICE PRESIDENT & TREASURER (principal financial and accounting officer) 13 EXHIBIT INDEX
EXHIBIT BEGINS ON SEQUENTIAL EXHIBIT DESCRIPTION PAGE NO. ------- ----------- -------------- 3(i) Certificate of Incorporation, as amended (1) 3(ii) By-laws, as amended (2) 10.1 Incentive Compensation Plan (3) 10.2 1986 Stock Option and Appreciation Rights Plan (4) 10.3 1996 Stock Option and Appreciation Rights Plan (5) 10.4 Amendment to 1996 Stock Option and Appreciation Rights Plan dated February 20, 2001 (6) 10.5 Employment Agreement between Registrant and J. William Johnson dated January 31, 1996, as amended December 18, 1996, January 2, 1998, January 6, 1999, July 20, 1999, and July 9, 2002 (7) 10.6 Employment Agreement between Registrant and Michael N. Vittorio dated June 22, 2002 (8) 10.7 Employment Agreement between Registrant and Arthur J. Lupinacci, Jr. dated July 1, 1999, as amended July 9, 2002 (9) 10.8 Employment Agreement between Registrant and Donald L. Manfredonia dated January 1, 2002, as amended July 9, 2002 (10) 10.9 Employment Agreement between Registrant and Joseph G. Perri, dated January 1, 2002, as amended July 9, 2002 (11) 10.10 Special Severance Agreement between Registrant and Richard Kick, dated January 1, 2002 (12) 10.11 Special Severance Agreement between Registrant and Mark D. Curtis, dated January 1, 2002 (13) 10.12 Special Severance Agreement between Registrant and Brian J. Keeney, dated January 1, 2002 (14) 13 Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 2002 16 16 Letter from Arthur Andersen LLP dated June 27, 2002 (15) 21 Subsidiary of Registrant 74 23 Consent of Independent Public Accountants 76 99.1 Notice of 2003 Annual Meeting and Proxy Statement (16) 99.2 Certification by Chief Executive Officer and Chief Financial Officer 78
(1) Previously filed as part of Report on Form 10-K for 1998, filed on March 29, 1999, as exhibit 3(i), which exhibit is incorporated herein by reference. (2) Previously filed as part of Report on Form 10-K for 1999, filed on March 29, 2000, as exhibit 3(ii), which exhibit is incorporated herein by reference. (3) "Incentive Compensation Plan" and "Board Compensation Committee Report" appearing on pages 13 and 9, respectively, of the Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held April 15, 2003 are incorporated herein by reference. (4) Previously filed as an exhibit to Form 10-K which exhibit is incorporated herein by reference. (5) Previously filed as part of Report on Form 10-K for 1995, filed on March 22, 1996, as exhibit 10(b), which exhibit is incorporated herein by reference. (6) Previously filed as part of Report on Form 10-K for 2000, filed on March 27, 2001, as Exhibit 10.4, which exhibit is incorporated herein by reference. (7) Employment agreement previously filed as part of Report on Form 10-K for 1995, filed on March 22, 1996, as exhibit 10(c), which exhibit is incorporated herein by reference. The December 18, 1996, January 2, 1998, and January 6, 1999 amendments to Mr. Johnson's employment agreement each involved an increase in Mr. Johnson's base annual salary, the dollar amounts of which were previously disclosed in Form 10-K. The July 20, 1999 amendment to Mr. Johnson's employment contract served to correct the date set forth in Section 4(c) from May 31, 2005 to May 31, 2006. The July 9, 2002 amendment to Mr. Johnson's employment contract served to delete Section 4(d) "Additional Insurance". Mr. Johnson's current base annual salary is disclosed in Exhibit 99.1 to this Form 10-K filing. (8) Previously filed as part of Report on Form 10-Q for the quarterly period ended June 30, 2002, filed on August 9, 2002, as Exhibit 10.1, which exhibit is incorporated herein by reference. (9) Previously filed as part of Report on Form 10-K for 1999, filed on March 29, 2000, as exhibit 10.5, which exhibit is incorporated herein by reference. The July 9, 2002 amendment to Mr. Lupinacci's employment 14 contract served to delete Section 8.1(b) "Additional Insurance" and eliminate the references in Section 8.2 to Section 8.1(b) and to "other insurance coverage". Mr. Lupinacci's current base annual salary is disclosed in Exhibit 99.1 to this Form 10-K filing. (10) Employment agreement previously filed as part of Report on Form 10-K for 2001, filed on March 29, 2002, as exhibit 10.7, which exhibit is incorporated herein by reference. The July 9, 2002 amendment to Mr. Manfredonia's employment contract served to delete Section 8.1(b) "Additional Insurance" and eliminate the references in Section 8.2 to Section 8.1(b) and to "other insurance coverage". Mr. Manfredonia's current base annual salary is disclosed in Exhibit 99.1 to this Form 10-K filing. (11) Employment agreement previously filed as part of Report on Form 10-K for 2001, filed on March 29, 2002, as exhibit 10.8, which exhibit is incorporated herein by reference. The July 9, 2002 amendment to Mr. Perri's employment contract served to delete Section 8.1(b) "Additional Insurance" and eliminate the references in Section 8.2 to Section 8.1(b) and to "other insurance coverage". Mr. Perri's current base annual salary is disclosed in Exhibit 99.1 to this Form 10-K filing. (12) Special Severance Agreement previously filed as part of Report on Form 10-K for 2001, filed on March 29, 2002, as exhibit 10.9, which exhibit is incorporated herein by reference. (13) Special Severance Agreement previously filed as part of Report on Form 10-K for 2001, filed on March 29, 2002, as exhibit 10.9, which exhibit is incorporated herein by reference. (14) Special Severance Agreement previously filed as part of Report on Form 10-K for 2001, filed on March 29, 2002, as exhibit 10.9, which exhibit is incorporated herein by reference. (15) Previously filed as part of report on Form 8-K dated June 27, 2002, filed on July 2, 2002, as exhibit 16.1, which exhibit is incorporated herein by reference. (16) The Corporation's Proxy Statement for its Annual Meeting of Stockholders to be held April 15, 2003 was submitted in electronic format on March 4, 2003 and is incorporated herein by reference. 15 EXHIBIT 13 - REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 16 [LOGO] The First of Long Island 2002 ANNUAL REPORT [PHOTO OMITTED] 1927............Celebrating 75 Years............2002 The First of Long Island Corporation 17 [LOGO] The First of Long Island A BEACON OF STRENGTH FOR 75 YEARS Business of the Corporation The First of Long Island Corporation ("Corporation") is a one-bank holding company organized under the laws of the State of New York. Its primary business is the operation of its sole subsidiary, The First National Bank of Long Island ("Bank"). The Bank was organized in 1927 under national banking laws and became the sole subsidiary of the Corporation under a plan of reorganization effected April 30, 1984. The Bank is a full service commercial bank which provides a broad range of financial services to individual, professional, corporate, institutional and government customers through its twenty-one branch system on Long Island. The First of Long Island Agency, Inc. was organized in 1994 under the laws of the State of New York, as a subsidiary of the Bank to conduct business as a licensed insurance agency engaged in the sale of insurance, primarily fixed annuity products. The Bank is subject to regulation and supervision of the Federal Reserve Board, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation which also insures its deposits. The Comptroller of the Currency is the primary banking agency responsible for regulating the subsidiary Bank. In addition, the Corporation is subject to the regulations and supervision of the Federal Reserve Board and the Securities and Exchange Commission. About the Cover: Top photo: The First National Bank of Glen Head - in Glen Head circa 1930's; pictured left is the first employee, Robert S. Miller. He had a long career with the Bank, becoming President in 1954 and Chairman of the Board in 1966. The identity of the individual on the right is unknown to us. If you recognize this person, please call the Marketing Department and help us update our records. Bottom photo: The First National Bank of Long Island - the Glen Head Branch circa 1990's. Table of Contents Selected Financial Data - 1 Letter to Shareholders - 2 Testimonials - 4 Board of Directors - 7 Senior Management - 8 Management's Discussion and Analysis of Financial Condition and Results of Operations - 9 Management's Responsibility for Financial Reporting - 21 Consolidated Financial Statements and Notes - 22 Report of Independent Public Accountants - 43 Annual Meeting Notice - 44 Business Development Board - IBC Branch Listings - OBC 18 SELECTED FINANCIAL DATA The following is selected consolidated financial data for the past five years. This data should be read in conjunction with the information contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the accompanying consolidated financial statements and related notes.
2002 2001 2000 1999* 1998 ------------ ------------ ------------- ------------ ------------- INCOME STATEMENT DATA: Total Interest Income ......................... $ 36,929,000 $ 37,989,000 $ 38,822,000 $ 33,963,000 $ 32,682,000 Total Interest Expense ........................ 5,111,000 9,451,000 13,106,000 9,513,000 9,867,000 Net Interest Income ........................... 31,818,000 28,538,000 25,716,000 24,450,000 22,815,000 Provision for Loan Losses (Credit) ............ 100,000 100,000 (75,000) -- (100,000) Net Income .................................... 11,563,000 10,094,000 9,318,000 9,034,000 8,236,000 PER SHARE DATA:** Basic Earnings ................................ $ 2.77 $ 2.37 $ 2.13 $ 1.98 $ 1.77 Diluted Earnings .............................. 2.73 2.33 2.10 1.95 1.73 Cash Dividends Declared ....................... .63 .54 .48 .43 .38 Stock Splits/Dividends Declared ............... 3-for-2 -- -- -- -- Book Value .................................... $ 20.53 $ 17.84 $ 16.33 $ 14.45 $ 13.73 BALANCE SHEET DATA AT YEAR END: Total Assets .................................. $792,342,000 $684,081,000 $ 625,992,000 $570,551,000 $ 546,127,000 Total Loans ................................... 261,108,000 226,688,000 192,909,000 182,774,000 170,718,000 Allowance for Loan Losses ..................... 2,085,000 2,020,000 1,943,000 2,033,000 3,651,000 Total Deposits ................................ 699,725,000 604,870,000 550,472,000 503,189,000 479,231,000 Stockholders' Equity .......................... 85,442,000 74,746,000 70,866,000 64,233,000 63,744,000 AVERAGE BALANCE SHEET DATA: Total Assets .................................. $753,703,000 $661,958,000 $ 600,326,000 $554,561,000 $ 508,982,000 Total Loans ................................... 242,773,000 205,959,000 186,451,000 176,078,000 164,063,000 Allowance for Loan Losses ..................... 2,101,000 1,941,000 1,961,000 2,835,000 3,643,000 Total Deposits ................................ 668,322,000 584,279,000 530,850,000 486,532,000 445,266,000 Stockholders' Equity .......................... 80,516,000 73,390,000 66,711,000 65,406,000 61,037,000 FINANCIAL RATIOS: Return on Average Total Assets (ROA) .......... 1.53% 1.52% 1.55% 1.63% 1.62% Return on Average Stockholders' Equity (ROE) .. 14.36% 13.75% 13.97% 13.81% 13.49% Average Equity to Average Assets .............. 10.68% 11.09% 11.11% 11.79% 11.99%
*Net income, earnings per share, ROA, and ROE for 1999 are before a $945,000 ($.21 per share) credit resulting from a transition adjustment to the allowance for loan losses. **Adjusted to reflect the 3-for-2 stock split paid July 2002 STOCK PRICES** The Corporation's Common Stock trades on The Nasdaq SmallCap Market tier of The Nasdaq Stock Market under the symbol FLIC. The following table sets forth high and low sales prices for the years ended December 31, 2002 and 2001. 2002 2001 ----------------- ----------------- Quarter High Low High Low ------- ------- ------- ------- ------- First $ 26.67 $ 24.10 $ 26.04 $ 25.17 Second 33.83 25.94 27.17 25.50 Third 36.57 32.25 27.27 25.77 Fourth 36.75 30.50 26.83 25.20 At December 31, 2002, there were 696 stockholders of record of the Corporation's Common Stock. The number of stockholders of record includes banks and brokers who act as nominees, each of whom may represent more than one stockholder. 19 Letter to Shareholders [PHOTO OMITTED] Dear Shareholders, We are very pleased to report on our results for 2002. Earnings per share were $2.73 versus $2.33 in 2001, reflecting a substantial growth of 17%. Our net income was $11,563,000. The graph below depicts earnings per share growth since 1979. The Corporation declared total dividends of 63 cents per share in 2002, a 17% increase over the 54 cents per share declared last year. As you will recall, The First of Long Island also split its stock 3-for-2 in July 2002. Return on Assets, a key measure of a bank's performance, remained high at 1.53%, and Return on Equity increased to 14.4% from 13.8%. The results in 2002 are particularly gratifying as they were achieved in a difficult interest rate environment. For example, the federal funds rate was reduced again to an incredibly low 1.25% in November 2002. The negative effects of the resultant lower net interest margin were overcome by growth in our business, particularly checking account balances. Average checking account balances were 20% greater in 2002 than in the prior year, largely the result of our new business development program, and were clearly the most important reason for the growth in earnings per share. The solicitation of commercial checking account relationships is our most important strategy to increase earnings per share. Other important factors contributing to the earnings growth were increases in money market type savings balances and loans. In the loan categories, mortgage based products accounted for most of the increase, especially loans to consumers on residential real estate. Residential mortgages alone increased 37% in average outstandings as consumers refinanced their mortgages, added to their homes and bought new houses. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL] Earnings Per Share 1979 $.08 1980 $.15 1981 $.17 1982 $.21 1983 $.26 1984 $.38 1985 $.58 1986 $.68 1987 $.73 1988 $.83 1989 $.86 1990 $.91 1991 $.86 1992 $1.03 1993 $1.11 1994 $1.21 1995 $1.24 1996 $1.39 1997 $1.55 1998 $1.73 1999 $1.95 2000 $2.10 2001 $2.33 2002 $2.73 On a fully diluted basis excluding special credits. Adjusted for dividends and splits. 20 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL] Average Checking Balances In Millions of Dollars 1997 $133,082 1998 $154,781 1999 $168,791 2000 $186,215 2001 $201,688 2002 $241,683 As we look towards the year 2003 we are excited by the opportunities, although significant challenges lie ahead. The most difficult will likely be an even more stressful interest rate environment, placing even greater pressure on our net interest margin. Other issues include an escalation in insurance premiums for most of our important coverages and the possibility of Congress passing legislation to permit interest on corporate checking accounts. In addition, we are dealing with a lackluster economy indicating little evidence of any meaningful expansion. We continue, however, to be enthusiastic about our growth opportunities. As our shareholders know, two of our most important markets are privately owned businesses and professionals. We have had excellent success over the years in attracting and retaining these customers at The First of Long Island. We will continue the strategy of soliciting banking relationships from these types of customers both on Long Island and soon in Manhattan, as we look forward to establishing branches in that borough. We also plan on pricing our consumer checking accounts more aggressively in order to grow that business which has been stagnant, not in terms of balances maintained, but in numbers of accounts. Also, in the consumer market, we expect to offer mutual funds and annuities again in order to more fully meet the investing needs of our personal customers. The strength of The First of Long Island has always been our most important goal. It is our duty not only to our shareholders but to our customers to ensure that the Bank will always be a "Beacon of Financial Strength in all Economic Climates". There are 10,000 banks and thrifts in the United States, and we were proud to report that Weiss Ratings, Inc. recently rated The First National Bank of Long Island one of the ten strongest amongst the 10,000 banks and thrifts. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL] Return on Average Assets 1998 1.62% 1999 1.63% 2000 1.55% 2001 1.52% 2002 1.53% Excluding special credits. 21 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL] Cash Dividends Declared Per Share 1979 $.01 1980 $.02 1981 $.02 1982 $.03 1983 $.05 1984 $.05 1985 $.08 1986 $.10 1987 $.11 1988 $.13 1989 $.13 1990 $.15 1991 $.17 1992 $.19 1993 $.21 1994 $.23 1995 $.25 1996 $.29 1997 $.33 1998 $.38 1999 $.43 2000 $.48 2001 $.54 2002 $.63 Adjusted to reflect the 3-for-2 split paid July 2002. Although we will be challenged in 2003, not only by external factors but by the expenses of our growth strategies, we look to the future with confidence. As we have said before, we sincerely believe the quality of service provided by The First of Long Island is unequaled by any of our competitors, and we will continue to work very hard to perpetuate that level of service and maintain The First of Long Island as a premier and prosperous financial institution. We are also pleased to announce that Michael N. Vittorio, Executive Vice President, was elected to the Board of Directors of the Corporation and the Bank on February 18, 2003, and his name is submitted to you for a full year term beginning this April. At the same meetings Mike was also elected President of both entities effective March 1, 2003. I know you will all join me in wishing him well in his new responsibilities. /s/ J. William Johnson J. William Johnson Chairman and Chief Executive Officer 22 We have a deeply rooted commitment to provide an unparalleled level of service to our customers - privately owned businesses, professionals and service conscious consumers. - J. William Johnson [PHOTO OMITTED] Arthur J. Lupinacci Executive Vice President, Chief Administrative Officer The First National Bank of Long Island Senior Management We've always prided ourselves on the financial strength of The First of Long Island. Under the leadership of J. William Johnson, our shareholders have seen positive growth in cash dividends and earnings. The Bank prides itself on remaining a "Beacon of Strength in All Economic Climates." Recently, Weiss Ratings, a major independent ratings agency, named The First National Bank of Long Island one of the 10 strongest amongst 10,000 banks and thrifts across the nation based on capital adequacy, asset quality, earnings, and liquidity. We are particularly gratified with this rating as it acknowledges our continued commitment to the financial health of our community bank. [PHOTO OMITTED] Mark Udell Chief Executive Officer London Jewelers Customer My grandfather established our business in 1926, catering to the wealthy estates in the area. Over time, mergers and liquidations eroded the atmosphere and service of our original bank; we began to feel like we were just a number. That all changed when we were introduced to The First of Long Island. Both Don Manfredonia and Bill Johnson were instrumental in providing small business loans to allow us to expand our network of fine stores on Long Island. Our business models and philosophies are very similar: a business environment both genuine and sincere, staffed by people who really care; and an ethical and conservative management structure. I always feel like a significant part of the Bank - a self-titled ambassador, if you could go that far. We are both progressive organizations forging steady growth for over three-quarters of a century. [PHOTO OMITTED] Donald Brown Vice Chairman Slant/Fin Corporation Customer I live locally and because I value relationships within the community, I make it a point to patronize the stores in my neighborhood. Whenever I do my personal banking at the Glen Head branch, I run into friends and other local community people. It's not just the Bank's employees' professionalism, or convenient locations, nor even the hand delivery of personal documents that distinguishes The First of Long Island from other financial institutions. There's a special warmth and friendliness that exists at the Bank. From my perspective, The First of Long Island and I have a nice solid comfortable relationship. I've always liked that about them. [PHOTO OMITTED] Robert Giambalvo, CPA President Giambalvo, Kilgannon & Giammarese, CPAs, PC Customer As a CPA firm, we are committed to giving our clients exceptional service. We expect the same consideration and attention to detail when we are the customer. And that's exactly what we get from The First National Bank of Long Island. We appreciate the personal attention from the staff - especially Executive Vice President Joe Perri, who exemplifies what a banker should be - as well as the Bank's local perspective. Everything is handled here and I don't have to wait for some anonymous person across the state or the country for a response. In my business, personal service is what keeps clients. That's also true 23 in banking, and it's the reason I chose The First of Long Island over every other bank in the New York metro area. [PHOTO OMITTED] Patricia Petersen President & CEO Daniel Gale Real Estate Organization Customer The real estate industry, much like banking, is highly influenced by the dynamics of the Long Island economy. In good and bad times, the strength of our relationship has kept us loyal customers of The First of Long Island. Not only has the Bank provided special financing over the years, they've also given invaluable counsel. Even though we have both grown into powerful organizations in our own right, The First of Long Island has remained the small town community bank for us. Their professionalism and firsthand knowledge of banking and finance make the Bank a significant partner in the Daniel Gale success story. As we expand further on Long Island, we know The First of Long Island will be there for us. [PHOTO OMITTED] Steven Dubner President Steven Dubner Landscaping, Inc. Customer The Bank's capital strength is a given; it's their customer loyalty that impresses me. I can always reach out and speak directly to anyone at my branch or at the executive level. It's probably why I continue to bank at the Woodbury branch with George Knott and June Pipito. I have found both to be very capable and professional in addressing my banking needs. We can always count on them in any situation. There are always open lines of communication to discuss any of my business or personal banking needs. I like the fact that there is no staff turnover. No issue is ever too big or too small to handle. As a businessperson, I recognize the importance of capital adequacy for a bank, but it's really the human aspect that I consider the most important factor in this relationship. Customer since 1968 [PHOTO OMITTED] Jeffrey D. Forchelli Esquire Managing Partner Forchelli, Curto, Schwartz, Mineo, Carlino & Cohn, LLP Customer We were originally introduced to the Bank through, of all things, a direct mail piece. Due to dissatisfaction with our `big bank,' we turned to The First of Long Island for our banking needs. Whatever our needs, they have always worked with us to meet them in a mutually beneficial way. They have always been pleasant, professional, and very helpful. Our bank officer and the branch network - especially Mineola and Allen Blvd. - have a strong commitment to our continued success by providing quality products and services. Because of our positive experience with the Bank, we have enthusiastically referred clients to The First of Long Island for more than thirteen years. [PHOTO OMITTED] Camilla Wnuk Business Owner Glen Head Hardware Shareholder My husband Carl believes in staying in the community. The First of Long Island has had the same relationship with the communities they serve. Even from the days when my husband's family made their deliveries in "a little wagon," the Bank has always been there to provide quality service to the people of our community. From John Mulder, the Glen Head Branch Manager, to Mr. Johnson the Chairman, The First National Bank of Long Island is made up of good people who really care about us - both personally and 24 professionally. We've always been able to count on them. We've never banked anywhere else; it's something we've never even considered! Customer since 1935 [PHOTO OMITTED] Herb Schnipper Business Owner Harbor Lumber Shareholder It's been 50 years and we're still with The First of Long Island - a local and fair-minded bank that has always been there for us. I've always felt quite at home - never a stranger. I can remember when Robert Miller, the Bank's president, ran the show; I'm glad to see that The First of Long Island remains true to its philosophy of providing the best customer service to the private business owner - like me. Customer since 1952 [PHOTO OMITTED] Quentin B. Sammis President Coldwell Banker Sammis Business Development Board Member Ten years ago, we were a relatively small real estate firm, approached by a major competitor offering to sell us their Long Island operations. They were losing money and desperate to unload twelve locations. It was a monumental business decision for us. Fortunately, the Bank believed in us; they provided advice, encouragement, and financing for the expansion. As a result, the acquisition more than quadrupled our exposure in the marketplace. Because The First of Long Island is a sound commercial bank, we trust their judgment; they have good people on staff and the right management team in place. In fact, we consider the Bank to be an important part of our company, helping us to develop new properties and make strategically sound business decisions. Relationships like this don't develop overnight; they are cultivated with mutual trust and respect. [PHOTO OMITTED] Bernard Esquenet Chief Executive Officer The Ruhof Corporation Business Development Board Member Since we are manufacturers of medical cleaning agents, environmental safety issues affect the growth of our business; expansion becomes a very complex subject. Many years ago, we banked with one of the large money centers; they couldn't offer solutions, just endless excuses and broken promises. In 1989, The First of Long Island came to the rescue. As 'The Big Bank Alternative,' they listened; their decisions had a profound impact on the success of our organization. For the last fourteen years, I've worked closely with my branch manager, Peter Arebalo in Valley Stream. He has a talent for orchestrating introductions when his customers need assistance: he actually helps them solve each other's problems. It's part of his job - it's what he brings to the table; he's an important part of each customer's success. Because of his intervention, I've made valuable lifelong allegiances with people and companies I trust and respect. [PHOTO OMITTED] J. Douglas Maxwell, Jr. Chief Financial Officer NIRx Medical Technologies LLC Board of Directors One of the great strengths of the Bank is consistency of focus. We have enjoyed growth and profitability by providing exceptional service to a very specific group of customers - small private businesses, professionals and service conscious consumers. As we look forward, we believe more strongly than ever that in today's complex and demanding world these customers and others like them will continue to value the individual attention we provide them. Our aim, as it has been, is to keep expanding geographically - 25 carefully and selectively. To use today's business jargon, we think that our business model is reproducible. We are testing that belief by venturing into New York City. We are confident that this initial step outside our traditional geographic boundaries will be followed by many more and that this vision will sustain our commitment to both our shareholders and customers. 26 [PHOTO OMITTED] Executive Committee, l. to r: Donald L. Manfredonia, Mark D. Curtis, Michael N. Vittorio, J. William Johnson, Arthur J. Lupinacci Jr., Joseph G. Perri, Richard Kick, Brian J. Keeney THE FIRST OF LONG ISLAND CORPORATION Officers J. William Johnson Chairman and Chief Executive Officer Michael N. Vittorio President Arthur J. Lupinacci, Jr. Executive Vice President and Chief Administrative Officer Mark D. Curtis Senior Vice President and Treasurer Brian J. Keeney Senior Vice President Richard Kick Senior Vice President Donald L. Manfredonia Senior Vice President Joseph G. Perri Senior Vice President and Secretary Wayne B. Drake Assistant Treasurer THE FIRST NATIONAL BANK OF LONG ISLAND Executive Officers J. William Johnson Chairman and Chief Executive Officer Michael N. Vittorio President Arthur J. Lupinacci, Jr. Executive Vice President and Chief Administrative Officer Donald L. Manfredonia Executive Vice President Senior Lending Officer Joseph G. Perri Executive Vice President Senior Commercial Marketing Officer Mark D. Curtis Senior Vice President Chief Financial Officer and Cashier Brian J. Keeney Senior Vice President Executive Trust Officer Richard Kick Senior Vice President Senior Operations and Senior Retail Loan Officer 27 [PHOTO OMITTED] Standing, l to r: Walter C. Teagle III, Paul T. Canarick, J. William Johnson, Howard Thomas Hogan Jr., John R. Miller III Seated, l to r: J. Douglas Maxwell Jr., Allen E. Busching, Beverly Ann Gehlmeyer THE FIRST OF LONG ISLAND CORPORATION Board of Directors J. William Johnson Chairman and Chief Executive Officer Allen E. Busching Principal, B&B Capital (consulting and private investment) Paul T. Canarick President and Principal Paul Todd, Inc. (construction company) Beverly Ann Gehlmeyer Tax Manager and Principal Gehlmeyer & Gehlmeyer, P.C. (certified public accounting firm) Howard Thomas Hogan, Jr. Hogan & Hogan (attorney, private practice) J. Douglas Maxwell, Jr. Chief Financial Officer NIRx Medical Technologies LLC (medical technology) John R. Miller III President and Publisher Equal Opportunity Publications, Inc. (publishing) Walter C. Teagle III President Teagle Management, Inc. (private investment consulting firm) Michael N. Vittorio President The First of Long Island is here for today...and tomorrow. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors that have affected the Corporation's financial condition and operating results during the periods included in the accompanying consolidated financial statements, and should be read in conjunction with such financial statements. The Corporation's financial condition and operating results principally reflect those of its wholly-owned subsidiary, The First National Bank of Long Island (the "Bank"). The Corporation's primary service area is Nassau and Suffolk Counties, Long Island. Overview 2002 Versus 2001 Summary. The Corporation earned $2.73 per share in 2002 as compared to $2.33 in 2001, an increase of 17%. Based on 2002 net income of $11,563,000, the Corporation returned 1.53% on average total assets and 14.36% on average total equity as compared to returns of 1.52% and 13.75% in 2001. Total assets and deposits were $792,342,000 and $699,725,000, respectively, at December 31, 2002, each up by approximately 16% when compared to the prior year-end balance. Despite continued cash dividends and purchases under the Corporation's stock repurchase program, total capital before unrealized gains on available-for-sale securities grew by $7,710,000 in 2002, or approximately 10%, and the Corporation's capital ratios continue to substantially exceed the current regulatory criteria for a well-capitalized bank. In addition, the Corporation's liquidity continues to be good. Overwhelmingly, the most important reason for the earnings increase in 2002 was significant growth in average checking balances. Average checking balances for 2002 were up approximately 20%. The growth is believed to be attributable to a variety of factors including targeted solicitation efforts by the Bank's business development officers, favorable conditions in the local economy, the high level of customer service offered by the Bank, and, as a result of the currently low interest rate environment, a lack of incentive for the Bank's customers to invest excess balances. Other factors that made a meaningful contribution to this year's earnings growth were loan growth and growth in savings and money market balances. Average loans outstanding grew by almost 18%, with the majority of the growth occurring in residential mortgages, commercial mortgages, and home equity lines. Growth in these categories is believed to be partially attributable to favorable conditions in the Long Island economy as well as a decline in interest rates and the resulting increase in the desire of bank customers to refinance their existing mortgages. The growth in savings and money market balances was largely comprised of growth in "Select Savings", a statement savings account that earns a higher money market rate, and growth in nonpersonal money market balances. The growth in Select Savings balances is believed to be partially attributable to troubled conditions in the equity markets and a resulting increase in the attractiveness of FDIC insured bank deposits as an investment vehicle. The positive impact on earnings of checking, loan and savings growth was partially offset by a downtrend in net interest margin and an increase in noninterest expense. 2002 was a slower year from the standpoint of the Corporation's stock repurchase program. During 2002, and as adjusted for the 3-for-2 stock split paid July 2002, the Corporation was able to purchase approximately 53,000 shares of common stock as compared to approximately 178,000 shares in 2001 and 127,000 shares in 2000. The stock repurchase program has been used by management to enhance earnings per share and return on average stockholders' equity (ROE). The stock repurchase program is estimated to have contributed approximately 5 cents of the 40-cent increase in earnings per share for 2002. The estimated contribution to earnings per share includes the full-year impact of the shares purchased in 2001 plus the additional impact of the shares purchased throughout 2002. Management expects that continued downward pressure on net interest margin and, to a lesser extent, increased insurance cost and the cost of new branch openings will challenge the Bank from an earnings perspective in 2003. Net interest margin trended downward throughout 2002 as a result of a decline in intermediate and longer-term rates that began in 2001 and became significantly more pronounced during 2002, particularly during the last half of the year. Net interest margin was negatively impacted as interest-earning assets repriced at lower yields and proceeds from the maturity and amortization of such assets were reinvested at lower yields. Management expects that net interest margin will decline even further in 2003. In addition, due to current conditions in the insurance marketplace, the Bank's 2003 earnings will be negatively impacted by a significant increase in insurance premiums for liability, health care, and other coverages. Furthermore, the Bank currently plans to open several new commercial banking offices in Manhattan during the first half of 2003. Although the new locations are expected to positively impact results of operations on a longer-term basis, the near-term impact is expected to be negative as a result of start-up expenses, increased marketing efforts, and operating expenses incurred while a customer base is being built. 29 2001 Versus 2000 Summary. The Corporation earned $2.33 per share in 2001 as compared to $2.10 in 2000, an increase of 11%. Based on 2001 net income of $10,094,000, the Corporation returned 1.52% on average total assets and 13.75% on average total equity as compared to returns of 1.55% and 13.97% in 2000. Total assets and deposits were $684,081,000 and $604,870,000, respectively, at December 31, 2001, representing increases over prior year-end balances of 9.3% and 9.9%, respectively. Despite continued purchases under the Corporation's stock repurchase program, total capital before unrealized gains on available-for-sale securities grew by $3,570,000 in 2001, or approximately 5%, and the Corporation's capital ratios continued to substantially exceed the current regulatory criteria for a well-capitalized bank. In addition, the Corporation's liquidity continued to be strong. The most important reason for the earnings increase in 2001 was growth in average checking balances. Other important factors were growth in average loan and money market type savings balances and an increase in service charge income. Average checking balances for 2001 were up approximately $15.5 million, or just over 8%, average loans outstanding were up approximately $19.5 million, or 10.5%, average money market type savings balances were up approximately $41.3 million, or almost 16%, and service charge income grew by $509,000, or approximately 17%. Also positively impacting earnings were growth in stockholders' equity and the Corporation's share repurchase program. An increase in noninterest expense partially offset the earnings growth brought about by the aforementioned items. When comparing year-end balances, the Bank's mortgage loan portfolio grew by almost 16% in 2001 as compared to 5.2% in 2000 and 11.5% in 1999. The 2001 growth was comprised of an increase in commercial mortgages of 6.8% and an increase in residential mortgages, including home equity loans and lines, of 25.0%. This compares to increases of 3.2% for commercial mortgages and 7.4% for residential mortgages in 2000. The increased growth rates for residential and commercial mortgage loans experienced in 2001 is believed to be partially attributable to a decrease in mortgage rates and a resulting increase in the desire of bank customers to refinance their existing mortgages and favorable conditions in the Long Island economy. Commercial mortgages continued to be the Bank's most important loan product. The Bank's portfolios of tax-exempt and mortgage securities grew during 2001, while the long-term U.S. Treasury portfolio declined. This occurred as a result of management's efforts to take advantage of the better returns afforded by municipal and mortgage securities relative to the Treasury sector. Savings and money market deposits were up 11.8% when comparing year-end 2001 to 2000 primarily because of growth in Select Savings, nonpersonal money market, and IOLA (interest on lawyer) accounts. 2001 was a successful year from the standpoint of the Corporation's stock repurchase program. During 2001, and as adjusted for the 3-for-2 stock split paid July 2002, the Corporation was able to repurchase approximately 178,000 shares of common stock, representing approximately 4% of total shares outstanding at the beginning of the year. This compares to repurchases of approximately 127,000 and 214,000 shares in 2000 and 1999, respectively. The stock repurchase program has been used by management to enhance earnings per share and return on average stockholders' equity (ROE). The stock repurchase program is estimated to have contributed approximately 5 cents of the 23 cent increase in earnings per share for 2001. 30 Net Interest Income Average Balance Sheet; Interest Rates and Interest Differential. The following table sets forth the average daily balances for each major category of assets, liabilities and stockholders' equity as well as the amounts and average rates earned or paid on each major category of interest-earning assets and interest-bearing liabilities.
2002 2001 2000 ------------------------------- ------------------------------- ------------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate --------- --------- ------- --------- --------- ------- --------- --------- ------- (dollars in thousands) Assets: Federal funds sold .............. $ 50,586 $ 823 1.63% $ 82,017 $ 3,291 4.01% $ 80,387 $ 5,044 6.27% Investment securities: Taxable ....................... 290,322 13,669 4.71 223,538 12,643 5.66 204,272 12,725 6.23 Nontaxable(1) ................. 128,337 8,791 6.85 114,982 8,038 6.99 96,141 6,832 7.11 Loans(1)(2) ..................... 242,773 16,651 6.86 205,959 16,781 8.15 186,451 16,596 8.90 --------- --------- ------- --------- --------- ------- --------- --------- ------- Total interest-earning assets(1) .................... 712,018 39,934 5.61 626,496 40,753 6.51 567,251 41,197 7.26 --------- ------- --------- ------- --------- ------- Allowance for loan losses ....... (2,101) (1,941) (1,961) --------- --------- --------- Net interest-earning assets ..... 709,917 624,555 565,290 Cash and due from banks ......... 31,284 24,472 22,026 Premises and equipment, net ..... 6,654 7,133 6,695 Other assets .................... 5,848 5,798 6,315 --------- --------- --------- $ 753,703 $ 661,958 $ 600,326 ========= ========= ========= Liabilities and Stockholders' Equity: Savings and money market deposits ............... $ 391,829 4,472 1.14 $ 343,389 7,944 2.31 $ 303,530 11,127 3.67 Time deposits ................... 34,810 639 1.84 39,202 1,507 3.84 41,105 1,979 4.81 --------- --------- ------- --------- --------- ------- --------- --------- ------- Total interest-bearing deposits . 426,639 5,111 1.20 382,591 9,451 2.47 344,635 13,106 3.80 --------- --------- ------- --------- --------- ------- --------- --------- ------- Checking deposits(3) ............ 241,683 201,688 186,215 Other liabilities ............... 4,865 4,289 2,765 --------- --------- --------- 673,187 588,568 533,615 Stockholders' equity ............ 80,516 73,390 66,711 --------- --------- --------- $ 753,703 $ 661,958 $ 600,326 ========= ========= ========= Net interest income(1) .......... $ 34,823 $ 31,302 $ 28,091 ========= ========= ========= Net interest spread(1) .......... 4.41% 4.04% 3.46% ======= ======= ======= Net interest yield(1) ........... 4.89% 5.00% 4.95% ======= ======= =======
(1) Tax-equivalent basis. Interest income on a tax-equivalent basis includes the additional amount of interest income that would have been earned if the Bank's investment in tax-exempt loans and investment securities had been made in loans and investment securities subject to federal income taxes yielding the same after-tax income. The tax-equivalent amount of $1.00 of nontaxable income was $1.52 in each year presented, based on a federal income tax rate of 34%. (2) For the purpose of these computations, nonaccruing loans are included in the daily average loan amounts outstanding. (3) Includes official check and treasury tax and loan balances. 31 Rate/Volume Analysis. The following table sets forth the effect of changes in volumes, rates, and rate/volume on tax-equivalent interest income, interest expense and net interest income.
Year Ended December 31, ------------------------------------------------------------------------------------ 2002 versus 2001 2001 versus 2000 Increase (decrease) due to changes in: Increase (decrease) due to changes in: ---------------------------------------- ---------------------------------------- Rate/ Net Rate/ Net Volume Rate Volume(2) Change Volume Rate Volume(2) Change ------- ------- ------- ------- ------- ------- ------- ------- (in thousands) Interest Income: Federal funds sold ............ $(1,261) $(1,957) $ 750 $(2,468) $ 102 $(1,818) $ (37) $(1,753) Investment securities: Taxable ..................... 3,777 (2,118) (633) 1,026 1,200 (1,172) (110) (82) Nontaxable (1) .............. 934 (162) (19) 753 1,339 (111) (22) 1,206 Loans (1) ..................... 3,000 (2,655) (475) (130) 1,736 (1,404) (147) 185 ------- ------- ------- ------- ------- ------- ------- ------- Total interest income ......... 6,450 (6,892) (377) (819) 4,377 (4,505) (316) (444) ------- ------- ------- ------- ------- ------- ------- ------- Interest Expense: Savings and money market deposits ............. 1,121 (4,025) (568) (3,472) 1,461 (4,105) (539) (3,183) Time deposits ................. (169) (787) 88 (868) (92) (399) 19 (472) ------- ------- ------- ------- ------- ------- ------- ------- Total interest expense ........ 952 (4,812) (480) (4,340) 1,369 (4,504) (520) (3,655) ------- ------- ------- ------- ------- ------- ------- ------- Increase (decrease) in net interest income ............. $ 5,498 $(2,080) $ 103 $ 3,521 $ 3,008 $ (1) $ 204 $ 3,211 ======= ======= ======= ======= ======= ======= ======= =======
(1) Tax-equivalent basis. (2) Represents the change not solely attributable to change in rate or change in volume but a combination of these two factors. Net Interest Income - 2002 Versus 2001 Net interest income on a tax-equivalent basis increased by $3,521,000, or 11.2%, from $31,302,000 in 2001 to $34,823,000 in 2002. As can be seen from the above rate/volume analysis, the increase is primarily comprised of a positive volume variance of $5,498,000 and a negative rate variance of $2,080,000. Volume Variance. The positive volume variance was largely caused by substantial growth in average checking deposits and the use of such funds to purchase investment securities and originate loans. When comparing 2002 to 2001, average checking deposits increased by $39,995,000, or approximately 20%. Funding interest-earning asset growth with growth in checking deposits has a greater impact on net interest income than funding such growth with interest-bearing deposits because checking deposits, unlike interest-bearing deposits, have no associated interest cost. This is the primary reason that the growth of checking balances has historically been one of the Corporation's key strategies for increasing earnings per share. Also making a contribution to the positive volume variance was growth in savings and money market deposit balances and the use of such funds to purchase investment securities and originate loans. When comparing 2002 to 2001, average savings and money market deposit balances increased by $48,440,000, or 14.1%. Although the largest components of this increase were growth in Select Savings and nonpersonal money market accounts, the Bank also experienced nice growth in traditional savings and IOLA accounts. The Bank's new business program is a significant factor that favorably impacted the growth in average checking balances during 2002. Competitive pricing, customer demographics, and troubled conditions in the equity markets are believed to be important factors with respect to the growth in average interest-bearing deposits noted during the same period. In addition, the growth in checking and interest-bearing deposits is also believed to be attributable to the Bank's attention to customer service as well as national and local economic conditions. 32 Rate Variance. During 2001, there was a significant decrease in short-term interest rates as evidenced by a 475 basis point reduction in both the federal funds target rate and the Bank's prime lending rate. During 2002, there were no further reductions in short-term rates until November when both the federal funds target rate and the Bank's prime lending rate declined by an additional 50 basis points. As shown in the interest rate sensitivity gap table included in the Market Risk section of this discussion and analysis, the Bank has a significant volume of money market type deposit accounts that are subject to repricing as short-term interest rates change. Since the amount of these deposits outweighs the assets held by the Bank whose pricing is tied to short-term interest rates, a decrease in short-term interest rates should positively impact the Bank's net interest income in the near term. However, if short-term rates decline to the point that the Bank can not, due to competitive pressures, decrease its money market rates in the same amount as market decreases in the federal funds target rate, the prime lending rate, and other short-term rates, the magnitude of the positive impact will decline. This is what happened as short-term interest rates dropped significantly in 2001. In response, the Bank took advantage of the slope of the yield curve by extending the average maturity of its short-term securities portfolio and thereby preserving its spread on short-term interest-earning assets and liabilities. Rates on intermediate and longer-term securities and loans also declined during 2001 and 2002, but by contrast to short-term rates, the magnitude of the decline was far more significant in 2002. During 2002, yields on two, five, and ten year U.S. Treasury securities decreased by 142, 157, and 124 basis points, respectively, with most of the decrease occurring in the last half of the year. As a result, net interest margin trended downward throughout 2002 as interest-earning assets repriced at lower yields and proceeds from the maturity and amortization of such assets were reinvested at lower yields. Management expects that net interest margin will continue its downward trend in 2003 and that the decline for the year as a whole will be more severe than the 11 basis point decline experienced in 2002. Net Interest Income - 2001 Versus 2000 Net interest income on a tax-equivalent basis increased by $3,211,000, or 11.4%, from $28,091,000 in 2000 to $31,302,000 in 2001. As can be seen from the above rate/volume analysis, the increase is primarily comprised of a positive volume variance of $3,008,000 and a positive rate/volume variance of $204,000. The positive volume variance was largely caused by: (1) growth in average checking deposits and the use of such funds to purchase investment securities and originate loans; and (2) growth in money market type deposits and the use of such funds to increase the Bank's overnight position in federal funds sold and to purchase securities and originate loans. When comparing 2001 to 2000, average checking deposits increased by $15,473,000, or 8.3%, average savings and money market deposits increased by $39,859,000, or 13.1%, average loans increased by $19,508,000, or 10.5%, and average investment securities increased by $38,107,000, or 12.7%. The growth in loans was largely comprised of increases in residential mortgages, including home equity loans, and commercial loans, with the commercial loan growth having the largest positive impact on net interest income. The Bank's new business program is a significant factor that favorably impacted the growth in average checking balances noted when comparing 2001 to 2000, and competitive pricing and customer demographics are believed to be important factors with respect to the growth in average interest-bearing deposits noted during the same period. In addition, the growth in both checking and interest-bearing deposits is also believed to be attributable to the Bank's attention to customer service and local economic conditions. The Bank's net interest spread and yield increased from 3.46% and 4.95%, respectively, in 2000 to 4.04% and 5.00%, respectively, in 2001. It would appear that the principal cause of the increase in net interest spread was the significant decline in short-term interest rates experienced during 2001, and the principal cause of the increase in net interest margin was a change in the mix of investments. Federal funds sold, which is the Bank's lowest yielding investment, became a smaller percentage of total interest-earning assets and nontaxable securities, a higher yielding investment, became a larger percentage. During 2001, both the federal funds target rate and the Bank's prime lending rate decreased by 475 basis points. As more fully discussed in the Market Risk section of this discussion and analysis, a decline in interest rates should initially have a positive impact on net interest income. However, net interest income in 2001 was not positively impacted by declining interest rates because the Bank did not decrease the rates paid on its money market type deposit accounts as quickly or in the same amount as market decreases in the overnight federal funds rate or the prime lending rate. 33 Noninterest Income, Noninterest Expense, and Income Taxes Noninterest income includes service charges on deposit accounts, Investment Management Division income, gains or losses on sales of available-for-sale securities, and all other items of income, other than interest, resulting from the business activities of the Corporation. Noninterest income was $5,488,000, $4,949,000, and $4,525,000 in 2002, 2001, and 2000, respectively. The 10.9% increase in noninterest income in 2002 is primarily attributable to a revised service charge schedule which went into effect on March 1, 2002 and the fact that losses on sales of available-for-sale securities decreased by $237,000 in 2002. The 9.4% increase in noninterest income in 2001 is primarily attributable to revisions made to the Bank's service charge schedule in the third quarter of 2000 and the resulting impact on overdraft check charges and maintenance/activity charges. Noninterest expense is comprised of salaries, employee benefits, occupancy and equipment expense and other operating expenses incurred in supporting the various business activities of the Corporation. Noninterest expense was $21,488,000 and $19,767,000 in 2002 and 2001, respectively, representing increases over prior year amounts of $1,721,000, or 8.7%, and $2,200,000, or 12.5%. The increase for 2002 is primarily comprised of an increase in salaries of $871,000, or 9.7%, and an increase in employee benefits expense of $731,000, or 20.1%. The increase in salaries is attributable to normal annual salary adjustments and additions to staff. The increase in employee benefits expense is largely attributable to increases in the cost of health care insurance, profit sharing expense, and incentive compensation. The strong growth in earnings per share for 2002 was the primary reason for the increase in profit sharing expense. Earnings per share growth, goals being exceeded, and a further move toward performance based compensation are the primary reasons for the increase in incentive compensation. The increase in noninterest expense for 2001 is comprised of an increase in salaries of $822,000, or 10.1%, an increase in employee benefits expense of $413,000, or 12.8%, an increase in occupancy and equipment expense of $409,000, or 17.0%, and an increase in other operating expenses of $556,000, or 14.6%. The increase in salaries is attributable to normal annual salary adjustments, filling of staff vacancies, and additions to staff resulting from, among other things, the opening of three new branch offices in the latter part of 2000 and one new branch office in the early part of 2001. The increase in employee benefits expense is largely attributable to the increased number of employees, an increase in retirement plan expense resulting from decreased interest rates and lower returns on retirement plan assets, revisions made to the Bank's incentive compensation program, and an increase in medical insurance premiums. The increase in occupancy and equipment expense is primarily attributable to increases in depreciation and rental expense resulting from improvements in technology and new branch openings, respectively. A substantial portion of the increase in other operating expenses resulted from increases in mortgage recording tax, appraisal fees, stationery and supplies expense, marketing expense, and charges associated with the January 2002 closing of the Bank's Cross Island Plaza branch. The increases in mortgage recording tax and appraisal fees resulted from increased mortgage origination activity and the increase in stationery and supplies expense is partially attributable to the new branch openings and form changes necessitated by the implementation of imaging technology. The Bank currently expects to open several new commercial banking offices in Manhattan during the first half of 2003. Although the new locations are expected to positively impact results of operations on a longer-term basis, the near-term impact is expected to be negative as a result of start-up expenses, increased marketing efforts, and operating expenses incurred while a customer base is being built. Based on available information, management expects that the negative impact on 2003 net income before income taxes should not exceed $400,000. Income tax expense as a percentage of book income was 26.4%, 25.9%, and 26.9% in 2002, 2001, and 2000, respectively. The increase in the percentage for 2002 is primarily attributable to the fact that tax-exempt interest income became a smaller component of income before income taxes. The decrease in the percentage for 2001 is primarily attributable to an increase in the amount of tax-exempt income on municipal securities and increased funding by the Bank of its REIT (real estate investment trust) and investment subsidiaries. Application of Critical Accounting Policies In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported asset and liability balances and revenue and expense amounts. Our determination of the allowance for loan losses is a critical accounting estimate because it is based on our subjective evaluation of a variety of factors at a specific point in time. As discussed more fully in the Allowance and Provision For Loan Losses section below and in Note A to the consolidated financial statements, some of the factors we evaluate in determining an appropriate allowance for loans losses include expected future cash flows and/or collateral values on loans considered to be impaired, national and local economic conditions, the strength of the local real estate market, and environmental risks. Changes in the 34 estimated impact of these factors on the ultimate collectibility of loans in the Bank's portfolio could require a significant change in the allowance, and this change could have a material impact on the Bank's results of operations. Asset Quality The Corporation has identified certain assets as risk elements. These assets present more than the normal risk that the Bank will be unable to eventually collect or realize their full carrying value. Information about the Corporation's risk elements is as follows:
December 31, --------------------------------------------------- 2002 2001 2000 1999 1998 ------- ------- ------- ------- ------- (dollars in thousands) Nonaccruing loans ............................................... $ -- $ 105 $ -- $ 28 $ 22 Foreclosed real estate .......................................... -- -- -- -- -- ------- ------- ------- ------- ------- Total nonperforming assets .................................... -- 105 -- 28 22 Troubled debt restructurings .................................... -- 10 -- -- -- Loans past due 90 days or more as to principal or interest payments and still accruing ............. 2 236 173 5 -- ------- ------- ------- ------- ------- Total risk elements ........................................... $ 2 $ 351 $ 173 $ 33 $ 22 ======= ======= ======= ======= ======= Nonaccruing loans as a percentage of total loans ................ .00% .05% .00% .02% .01% ======= ======= ======= ======= ======= Nonperforming assets as a percentage of total loans and foreclosed real estate .................................... .00% .05% .00% .02% .01% ======= ======= ======= ======= ======= Risk elements as a percentage of total loans and foreclosed real estate ........................................ .00% .15% .09% .02% .01% ======= ======= ======= ======= =======
Year Ended December 31, --------------------------------------------------- 2002 2001 2000 1999 1998 ------- ------- ------- ------- ------- (dollars in thousands) Gross interest income that would have been recorded during the year under original terms: Nonaccrual loans .............................................. $ -- $ 8 $ -- $ 4 $ 2 Restructured loans ............................................ -- -- -- -- -- Gross interest income recorded during the year: Nonaccrual loans .............................................. -- 4 -- 3 2 Restructured loans ............................................ -- -- -- -- -- Commitments for additional funds - Nonaccrual, restructured, past due loans .................................................. None 150 150 None None
Allowance and Provision for Loan Losses The allowance for loan losses was $2,085,000, or .8% of total loans at December 31, 2002 as compared to $2,020,000, or .9% of total loans, at December 31, 2001. The change in the allowance during 2002 is due to a $100,000 provision for loan losses, chargeoffs of $84,000, and recoveries of $49,000. The allowance for loan losses is an amount that management currently believes will be adequate to absorb estimated inherent losses in the Bank's loan portfolio. The process for estimating credit losses and determining the allowance for loan losses as of any balance sheet date is subjective in nature and requires material estimates. Actual results could differ significantly from these estimates. In determining the allowance for loan losses, there is not an exact amount but rather a range for what constitutes an appropriate allowance. In estimating losses the Bank reviews individual credits in its portfolio and, for those loans deemed to be impaired, measures impairment losses based on either the fair value of collateral or the discounted value of expected future cash flows. Estimated losses for loans that are not specifically reviewed are determined on a pooled basis taking into account a variety of factors including historical losses; levels of and trends in delinquencies and nonaccruing loans; trends in volume and terms of loans; changes in lending policies and procedures; experience, ability and depth of lending staff; national and local economic conditions; concentrations of credit; and environmental risks. Management also considers relevant loan loss statistics for the Bank's peer group. The estimated losses on the loans specifically reviewed plus those determined on a pooled basis make up the allocated component of the allowance for loan 35 losses. The unallocated or general component of the allowance for loan losses could cover losses in the portfolio that have not otherwise been identified through the review of specific loans or pools of loans. The following table sets forth the allocation of the Bank's total allowance for loan losses by loan type.
December 31, -------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------------ ------------------ ------------------ ------------------ ------------------ % of % of % of % of % of Loans Loans Loans Loans Loans To Total To Total To Total To Total To Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (dollars in thousands) Commercial ............. $ 438 14.3% $ 667 18.1% $ 566 15.8% $ 397 16.5% $ 730 16.9% Real-estate secured .... 1,469 83.4 1,252 79.4 1,160 80.5 1,304 80.8 2,325 77.5 Consumer and other ..... 94 2.3 94 2.5 129 3.7 137 2.7 249 5.6 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total allocated ..... 2,001 100.0 2,013 100.0 1,855 100.0 1,838 100.0 3,304 100.0 Unallocated ............ 84 -- 7 -- 88 -- 195 -- 347 -- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- $2,085 100.0% $2,020 100.0% $1,943 100.0% $2,033 100.0% $3,651 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
The amount of future chargeoffs and provisions for loan losses will be affected by, among other things, economic conditions on Long Island. Such conditions affect the financial strength of the Bank's borrowers and the value of real estate collateral securing the Bank's mortgage loans. Loans secured by real estate represent approximately 83% of the Bank's total loans outstanding at December 31, 2002. The majority of these loans were made to borrowers domiciled on Long Island and are secured by Long Island properties. In recent years, economic conditions on Long Island have been strong and residential real estate values have grown to unprecedented highs. Such conditions and values could deteriorate in the future, and such deterioration could be substantial. If this were to occur, some of the Bank's borrowers may be unable to make the required contractual payments on their loans, and the Bank may be unable to realize the full carrying value of such loans through foreclosure. However, management believes that the Bank's underwriting policies for residential mortgages are relatively conservative and, as a result, the Bank should be less affected than the overall market. Cash Flows and Liquidity Cash Flows. As shown in the consolidated statement of cash flows, cash and cash equivalents increased by $12,020,000 during 2002. This occurred primarily because the cash provided by checking growth, money market type deposit growth, and operations exceeded the cash used for loan and securities portfolio growth. Liquidity. The Corporation's primary sources of near-term liquidity are its overnight position in federal funds sold; its short-term investment securities portfolio which generally consists of securities purchased to mature within two years or have average lives of approximately two years; maturities and monthly payments on the balance of the investment securities portfolio and the loan portfolio; and longer-term investment securities designated as available-for-sale. At December 31, 2002, the Corporation had $34,000,000 in federal funds sales, a short-term securities portfolio not subject to pledge agreements of $154,175,000, and longer-term available-for-sale securities not subject to pledge agreements of $89,874,000. The Corporation's liquidity is enhanced by its substantial core deposit base which primarily consists of checking, savings, and money market accounts. Such accounts comprised 95.6% of total deposits at December 31, 2002, while time deposits comprised only 4.4%. The Bank attracts all of its deposits through its banking offices primarily from the communities in which those banking offices are located and has not historically relied on purchased or borrowed funds as sources of liquidity. As shown in the Consolidated Statement of Cash Flows, the Corporation uses cash and cash equivalents to fund loan growth, pay cash dividends, and repurchase common stock under its share repurchase program. To the extent the Corporation has cash in excess of that needed to meet these requirements, it is generally used to purchase a combination of short, intermediate, and longer-term investment securities. While the shorter-term securities in the Corporation's portfolio provide a significant source of near term liquidity, the intermediate and longer-term securities provide higher current returns and will provide a significant source of liquidity in the future. The amount of cash needed by the Corporation to satisfy the commercial commitments it has outstanding at December 31, 2002 is indicated in the table that follows. As can be seen from the table, loan commitments make up the majority of the Corporation's commercial commitments and a significant portion of the Corporation's commercial commitments expire within one year. Since some of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation believes that its current sources of near-term liquidity are more than sufficient to fulfill its outstanding commercial commitments at December 31, 2002. 36
Amount of Commitment Expiration Per Period --------------------------------------------------------- Over Over Total One One Year Three Years Over Amounts Year Through Through Five Committed or Less Three Years Five Years Years --------- --------- ----------- ----------- --------- (in thousands) Commitments to extend credit ...... $ 58,962 $ 30,721 $ 6,654 $ 16,742 $ 4,845 Standby letters of credit ......... 1,077 1,077 -- -- -- Commercial letters of credit ...... -- -- -- -- -- --------- --------- --------- --------- --------- $ 60,039 $ 31,798 $ 6,654 $ 16,742 $ 4,845 ========= ========= ========= ========= =========
Capital The Corporation's capital management policy is designed to build and maintain capital levels that exceed regulatory standards. Under current regulatory capital standards, banks are classified as well capitalized, adequately capitalized or undercapitalized. Under such standards, a well capitalized bank is one that has a total risk-based capital ratio equal to or greater than 10%, a Tier 1 risk-based capital ratio equal to or greater than 6%, and a Tier 1 leverage capital ratio equal to or greater than 5%. The Corporation's total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage capital ratios of 30.28%, 29.52% and 10.25%, respectively, at December 31, 2002 substantially exceed the requirements for a well-capitalized bank. During the 2002 year, total stockholders' equity increased by $10,696,000 from $74,746,000 at December 31, 2001 to $85,442,000 at December 31, 2002. The increase in stockholders' equity is primarily attributable to net income of $11,563,000 plus unrealized gains on sales of available-for-sale securities of $2,986,000 and less repurchases of common stock amounting to $1,592,000 and cash dividends declared of $2,613,000. Stock Repurchase Program. Since 1988, the Corporation has had a stock repurchase program under which it is authorized to purchase, from time to time, shares of its own common stock in market or private transactions. Under plans approved by the Board of Directors in 2001, and as adjusted for the 3-for-2 stock split paid July 2002, the Corporation purchased 52,848 shares in 2002 and can purchase 28,421 shares in the future. In addition, in January 2003, the Corporation's Board of Directors approved an additional share repurchase plan for 100,000 shares. Share repurchases under this plan will be financed through available corporate cash. The stock repurchase program has been used by management to enhance earnings per share. When comparing 2002 to 2001, earnings per share are up 40 cents. The stock repurchase program is estimated to have contributed approximately 5 cents of the 40-cent increase in earnings per share. The estimated contribution to earnings per share includes the full-year impact of the shares purchased in 2001 plus the additional impact of the shares purchased throughout 2002. Market Liquidity. Trading in the Corporation's common stock is limited. The total trading volumes for 2002 and 2001 as reported by Nasdaq and as adjusted for the 3-for-2 stock split declared June 18, 2002 were 743,903 and 534,408 shares, respectively, with average daily trading volumes of 2,952 and 2,155 shares, respectively. During 2002, the Corporation purchased 52,848 shares, 12,000 of which were purchased in market transactions, and in 2001 purchased 178,427 shares, 121,050 of which were purchased in market transactions. These market purchases represent approximately 2% and 23% of the total trading volumes reported by Nasdaq for 2002 and 2001, respectively. Although the Corporation has had a stock repurchase program since 1988, if the Company discontinues the program it could adversely affect market liquidity for the Corporation's common stock, the price of the Corporation's common stock, or both. Russell 3000(R) and 2000(R) Indices Frank Russell Company ("Russell") currently maintains 21 U.S. common stock indices. The indices are reconstituted each July 1st using objective criteria, primarily market capitalization, and do not reflect subjective opinions. All indices are subsets of the Russell 3000(R)Index which represents approximately 98% of the investable U. S. equity market. The broad market Russell 3000(R) Index includes the largest 3,000 companies in terms of market capitalization and the small cap Russell 2000(R) Index is comprised of the smallest 2,000 companies in the Russell 3000(R) Index. The 37 Corporation's capitalization, as computed by Russell, would place it at the low end of the range for both the Russell 3000(R) and 2000(R) Indices. Effective July 1, 2002, and for the first time in its history, the Corporation's common stock was included in the Russell 3000(R) and 2000(R) Indices. The Corporation believes that inclusion in the Russell indices has positively impacted the price of its common stock and has increased the stock's trading volume and liquidity. Conversely, if the Corporation's market capitalization falls below the minimum necessary to be included in the indices at any future reconstitution date, the Corporation believes that this could adversely affect the price, volume and liquidity of its common stock. Market Risk The Bank invests in interest-earning assets which are funded by interest-bearing deposits, noninterest-bearing deposits, and capital. The Bank's results of operations are subject to risk resulting from interest rate fluctuations generally and having assets and liabilities that have different maturity, repricing, and prepayment/withdrawal characteristics. The Bank defines interest rate risk as the risk that the Bank's earnings and/or net portfolio value (defined below) will change when interest rates change. The principal objective of the Bank's asset/liability management activities is to maximize net interest income while at the same time maintaining acceptable levels of interest rate and liquidity risk and facilitating the funding needs of the Bank. Because the Bank's loans and investment securities generally reprice slower than its interest-bearing deposit accounts, a decrease in interest rates uniformly across the yield curve should initially have a positive impact on the Bank's net interest income. However, if the Bank does not decrease the rates paid on its money market type deposit accounts as quickly or in the same amount as market decreases in the overnight federal funds rate or the prime lending rate, the magnitude of the positive impact will decline. In addition, rates may decrease to the point that the Bank can not reduce its money market rates any further. If interest rates decline and are sustained at the lower levels and, as a result, the Bank purchases securities and originates loans at yields lower than those maturing, the impact on net interest income should be negative because 40% of the Bank's average interest-earning assets are funded by noninterest-bearing checking deposits and capital. Conversely, an immediate increase in interest rates uniformly across the yield curve should initially have a negative effect on net interest income. However, if the Bank does not increase the rates paid on its money market type deposit accounts as quickly or in the same amount as market increases in the overnight federal funds rate or the prime lending rate, the magnitude of the negative impact will decline. Over a longer period of time, and assuming that interest rates remain stable after the initial rate increase and the Bank purchases securities and originates loans at yields higher than those maturing and reprices loans at higher yields, the impact of an increase in interest rates should be positive. This occurs primarily because with the passage of time more loans and investment securities will reprice at the higher rates and there will be no offsetting increase in interest expense for those loans and investment securities funded by noninterest-bearing checking deposits and capital. The Bank monitors and controls interest rate risk through a variety of techniques including the use of interest rate sensitivity models and traditional interest rate sensitivity gap analysis. Through use of the models, the Bank projects future net interest income and then estimates the effect on projected net interest income of various changes in interest rates and balance sheet growth rates. The Bank also uses the models to calculate the change in net portfolio value ("NPV") over a range of interest rate change scenarios. Net portfolio value is the present value of expected future cash flows from assets less the present value of expected cash flows from liabilities. Traditional gap analysis involves arranging the Bank's interest-earning assets and interest-bearing liabilities by repricing periods and then computing the difference, or interest-rate sensitivity gap, between the assets and liabilities which are estimated to reprice during each time period and cumulatively through the end of each time period. Both interest rate sensitivity modeling and gap analysis involve a variety of significant estimates and assumptions and are done at a specific point in time. Interest rate sensitivity modeling requires, among other things, estimates of: (1) how much and when yields and costs on individual categories of interest-earning assets and interest-bearing liabilities will adjust because of projected changes in market interest rates; (2) future cash flows; and (3) discount rates. Gap analysis requires estimates as to when individual categories of interest-sensitive assets and liabilities will reprice and assumes that assets and liabilities assigned to the same repricing period will reprice at the same time and in the same amount. Like sensitivity modeling, gap analysis does not fully take into account the fact that the repricing of some assets and liabilities is discretionary and subject to competitive and other pressures. 38 Changes in the estimates and assumptions made for interest rate sensitivity modeling and gap analysis could have a significant impact on projected results and conclusions. Therefore, these techniques may not accurately reflect the actual impact of changes in the interest rate environment on the Bank's net interest income or net portfolio value. The following table is provided pursuant to the market risk disclosure rules set forth in Item 305 of Regulation S-K of the Securities and Exchange Commission. The information provided in the table is based on significant estimates and assumptions and constitutes, like certain other statements included herein, a forward-looking statement. The base case information in the table shows (1) an estimate of the Corporation's NPV at December 31, 2002 arrived at by discounting estimated future cash flows at current market rates and (2) an estimate of net interest income for 2003 assuming that maturing assets or liabilities are replaced with new balances of the same type, in the same amount, and at current rate levels and repricing balances are adjusted to current rate levels. The rate change information in the table shows estimates of NPV at December 31, 2002 and net interest income for 2003 assuming rate changes of plus 100 and 200 basis points and minus 100 and 200 basis points. Rate changes are assumed to be shock or immediate changes and occur uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. In projecting future net interest income under the indicated rate change scenarios, activity is simulated by replacing maturing balances with new balances of the same type, in the same amount, but at the assumed rate level and adjusting repricing balances to the assumed rate level. Based on the foregoing assumptions and as depicted in the table that follows, an immediate increase in interest rates of 100 or 200 basis points would have a negative effect on net interest income over a one-year time period. This is principally because the Bank's interest-bearing deposit accounts reprice faster than its loans and investment securities. However, if the Bank does not increase the rates paid on its money market type deposit accounts as quickly or in the same amount as market increases in the overnight federal funds rate or the prime lending rate, the magnitude of the negative impact will decline. Over a longer period of time, and assuming that interest rates remain stable after the initial rate increase and the Bank purchases securities and originates loans at yields higher than those maturing and reprices loans at higher yields, the impact of an increase in interest rates should be positive. This occurs primarily because with the passage of time more loans and investment securities will reprice at the higher rates and there will be no offsetting increase in interest expense for those loans and investment securities funded by noninterest-bearing checking deposits and capital.
Net Portfolio Value (NPV) Net Interest Income at December 31, 2002 for 2003 ------------------------- ------------------- Percent Percent Change Change From From Rate Change Scenario Amount Base Case Amount Base Case -------------------- ------ --------- ------ --------- (dollars in thousands) + 200 basis point rate shock ..... $ 71,552 (28.6)% $ 26,901 (13.5)% + 100 basis point rate shock ..... 85,533 (14.6) 29,006 (6.8) Base case (no rate change) .... 100,200 -- 31,112 -- - 100 basis point rate shock ..... 115,633 15.4 32,594 4.8 - 200 basis point rate shock ..... 131,952 31.7 31,340 0.7
39 The following table summarizes the Corporation's cumulative interest rate sensitivity gap at December 31, 2002 based upon significant estimates and assumptions that the Corporation believes to be reasonable.
Repricing Date ---------------------------------------------------- Over Over Three Six Three Months Months Total Months Through Through Within or Less Six Months One Year One Year ---------- ---------- ---------- ---------- (in thousands) Assets: Federal funds sold .................... $ 34,000 $ -- $ -- $ 34,000 Investment securities ................. 40,768 32,529 69,085 142,382 Loans ................................. 94,132 16,507 33,012 143,651 Other assets .......................... -- -- -- -- ---------- ---------- ---------- ---------- 168,900 49,036 102,097 320,033 ---------- ---------- ---------- ---------- Liabilities and Stockholders' Equity: Checking deposits ..................... -- -- -- -- Savings and money market deposits ..... 309,128 8,380 12,018 329,526 Time deposits ......................... 21,665 4,361 3,310 29,336 Other liabilities ..................... -- -- -- -- Stockholders' equity .................. -- -- -- -- ---------- ---------- ---------- ---------- 330,793 12,741 15,328 358,862 ---------- ---------- ---------- ---------- Interest-rate sensitivity gap ............ $ (161,893) $ 36,295 $ 86,769 $ (38,829) ========== ========== ========== ========== Cumulative interest-rate sensitivity gap ......................... $ (161,893) $ (125,598) $ (38,829) $ (38,829) ========== ========== ========== ========== Repricing Date ---------------------------------------------------- Over One Year Through Over Non- Five Five interest- Years Years Sensitive Total ---------- ---------- ---------- ---------- (in thousands) Assets: Federal funds sold .................... $ -- $ -- $ -- $ 34,000 Investment securities ................. 207,339 97,042 6,745 453,508 Loans ................................. 84,081 32,748 (1,457) 259,023 Other assets .......................... -- -- 45,811 45,811 ---------- ---------- ---------- ---------- 291,420 129,790 51,099 792,342 ---------- ---------- ---------- ---------- Liabilities and Stockholders' Equity: Checking deposits ..................... -- -- 256,444 256,444 Savings and money market deposits ..... 35,083 48,206 -- 412,815 Time deposits ......................... 1,110 20 -- 30,466 Other liabilities ..................... -- -- 7,175 7,175 Stockholders' equity .................. -- -- 85,442 85,442 ---------- ---------- ---------- ---------- 36,193 48,226 349,061 792,342 ---------- ---------- ---------- ---------- Interest-rate sensitivity gap ............ $ 255,227 $ 81,564 $ (297,962) $ -- ========== ========== ========== ========== Cumulative interest-rate sensitivity gap ......................... $ 216,398 $ 297,962 $ -- $ -- ========== ========== ========== ==========
Regulatory Matters Pending Legislation. Commercial checking deposits currently account for approximately 28% of the Bank's total deposits. Congress is currently considering legislation that would allow customers to cover checks by sweeping funds from interest-bearing deposit accounts each business day and repeal the prohibition of the payment of interest on corporate checking deposits in the future. Although management currently believes that the Bank's earnings could be more severely impacted by permitting the payment of interest on corporate checking deposits than the daily sweeping of funds from interest-bearing accounts to cover checks, either could have a material adverse impact on the Bank's future results of operations. Examinations. The subsidiary Bank was examined by the Office of the Comptroller of the Currency in the third quarter of 2002. The examination was a regularly scheduled safety and soundness examination. Management is not aware, nor has it been apprised, of any recommendations by regulatory authorities that would have a material adverse impact on the Corporation's liquidity, capital resources, or operations. New Accounting Pronouncements A discussion of new accounting pronouncements is included in Note A to the Corporation's consolidated financial statements. Forward Looking Statements With respect to financial performance and business matters, Management's Discussion and Analysis of Financial Condition and Results of Operations contains various "forward-looking statements" within the meaning of that term as set forth in Rule 175 of the Securities Act of 1933 and Rule 3b-6 of the Securities Act of 1934. Such statements are generally contained in sentences including the words "may" or "expect" or "could" or "should" or "would". The Corporation cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, and therefore actual results could differ materially from those contemplated by the forward-looking statements. In addition, the Corporation assumes no duty to update forward-looking statements. 40 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The management of The First of Long Island Corporation is responsible for the preparation of the consolidated financial statements, related financial data and other information in this annual report. The consolidated financial statements are prepared in accordance with generally accepted accounting principles and include amounts based on management's estimates and judgment where appropriate. Financial information appearing throughout this annual report is consistent with the consolidated financial statements. In meeting its responsibility both for the reliability and integrity of these statements and information, management depends on its accounting systems and related internal control structures. These systems and controls have been designed to provide reasonable assurances that assets are safeguarded and that transactions are authorized and recorded in accordance with established procedures and that reliable records are maintained. As an integral part of the internal control structure, the Corporation maintains a staff of internal auditors who monitor compliance with and assess the effectiveness of the internal control structure and coordinate audit coverage with the independent auditors. The Corporation's Audit Committee of the Board of Directors, composed solely of outside directors, meets regularly with the Corporation's internal auditors, independent auditors and regulatory examiners to review matters relating to financial reporting, internal control structure and the nature, extent and results of the audit effort. The independent auditors, internal auditors and banking regulators have direct access to the Audit Committee with or without management present. The consolidated financial statements for the year ended December 31, 2002 have been audited by Grant Thornton LLP, independent public accountants, and the consolidated financial statements for each of the two years in the period ended December 31, 2001 were audited by Arthur Andersen LLP. The Board of Directors of the Corporation approves the appointment of independent public accountants. The independent public accountants render a professional opinion on management's consolidated financial statements and their examinations provide an objective assessment of the degree to which the Corporation's management meets its responsibility for financial reporting. Their opinion on the consolidated financial statements is based on auditing procedures which include reviewing internal control structures and performing selected tests of transactions and records as deemed appropriate. These auditing procedures are designed to provide a reasonable level of assurance that the consolidated financial statements are fairly presented in all material respects. 41 CONSOLIDATED BALANCE SHEETS
December 31, ------------------------------ 2002 2001 ------------- ------------- Assets: Cash and due from banks ....................................... $ 33,229,000 $ 28,209,000 Federal funds sold ............................................ 34,000,000 27,000,000 ------------- ------------- Cash and cash equivalents ................................... 67,229,000 55,209,000 ------------- ------------- Investment securities: Held-to-maturity, at amortized cost (fair value of $282,438,000 and $257,670,000) ............ 273,102,000 252,215,000 Available-for-sale, at fair value (amortized cost of $173,794,000 and $136,654,000) ................... 180,406,000 138,275,000 ------------- ------------- 453,508,000 390,490,000 ------------- ------------- Loans: Commercial and industrial .............................. 37,329,000 40,993,000 Secured by real estate ................................. 217,730,000 179,905,000 Consumer ............................................... 6,414,000 6,198,000 Other .................................................. 628,000 593,000 ------------- ------------- 262,101,000 227,689,000 Unearned income ........................................ (993,000) (1,001,000) ------------- ------------- 261,108,000 226,688,000 Allowance for loan losses .............................. (2,085,000) (2,020,000) ------------- ------------- 259,023,000 224,668,000 ------------- ------------- Bank premises and equipment, net .............................. 6,398,000 7,156,000 Prepaid income taxes .......................................... -- 1,000 Other assets .................................................. 6,184,000 6,557,000 ------------- ------------- $ 792,342,000 $ 684,081,000 ============= ============= Liabilities: Deposits: Checking ............................................... $ 256,444,000 $ 222,822,000 Savings and money market ............................... 412,815,000 347,430,000 Time, other ............................................ 17,359,000 21,022,000 Time, $100,000 and over ................................ 13,107,000 13,596,000 ------------- ------------- 699,725,000 604,870,000 Accrued expenses and other liabilities ........................ 4,492,000 3,968,000 Current income taxes payable .................................. 289,000 -- Deferred income taxes payable ................................. 2,394,000 497,000 ------------- ------------- 706,900,000 609,335,000 ------------- ------------- Commitments and Contingent Liabilities (Note G) Stockholders' Equity: Common stock, par value $.10 per share: Authorized, 20,000,000 shares; Issued and outstanding, 4,161,173 and 2,792,902 shares .... 416,000 279,000 Surplus ....................................................... 724,000 955,000 Retained earnings ............................................. 80,354,000 72,550,000 ------------- ------------- 81,494,000 73,784,000 Accumulated other comprehensive income net of tax ............. 3,948,000 962,000 ------------- ------------- 85,442,000 74,746,000 ------------- ------------- $ 792,342,000 $ 684,081,000 ============= =============
See notes to consolidated financial statements 42 CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, -------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ Interest income: Loans ....................................................... $ 16,635,000 $ 16,750,000 $ 16,544,000 Investment securities: Taxable ................................................. 13,669,000 12,643,000 12,725,000 Nontaxable .............................................. 5,802,000 5,305,000 4,509,000 Federal funds sold .......................................... 823,000 3,291,000 5,044,000 ------------ ------------ ------------ 36,929,000 37,989,000 38,822,000 ------------ ------------ ------------ Interest expense: Savings and money market deposits ........................... 4,472,000 7,944,000 11,127,000 Time deposits ............................................... 639,000 1,507,000 1,979,000 ------------ ------------ ------------ 5,111,000 9,451,000 13,106,000 ------------ ------------ ------------ Net interest income ..................................... 31,818,000 28,538,000 25,716,000 Provision for loan losses (credit) .............................. 100,000 100,000 (75,000) ------------ ------------ ------------ Net interest income after provision for loan losses (credit) .... 31,718,000 28,438,000 25,791,000 ------------ ------------ ------------ Noninterest income: Investment Management Division income ....................... 1,133,000 1,081,000 1,131,000 Service charges on deposit accounts ......................... 3,747,000 3,481,000 2,972,000 Losses on sales of available-for-sale securities ............ (12,000) (249,000) (229,000) Other ....................................................... 620,000 636,000 651,000 ------------ ------------ ------------ 5,488,000 4,949,000 4,525,000 ------------ ------------ ------------ Noninterest expense: Salaries .................................................... 9,829,000 8,958,000 8,136,000 Employee benefits ........................................... 4,359,000 3,628,000 3,215,000 Occupancy and equipment expense ............................. 2,937,000 2,819,000 2,410,000 Other operating expenses .................................... 4,363,000 4,362,000 3,806,000 ------------ ------------ ------------ 21,488,000 19,767,000 17,567,000 ------------ ------------ ------------ Income before income taxes .............................. 15,718,000 13,620,000 12,749,000 Income tax expense .............................................. 4,155,000 3,526,000 3,431,000 ------------ ------------ ------------ Net Income .............................................. $ 11,563,000 $ 10,094,000 $ 9,318,000 ============ ============ ============ Weighted average: Common shares ............................................... 4,180,029 4,266,114 4,383,518 Dilutive stock options ...................................... 63,221 59,288 59,103 ------------ ------------ ------------ 4,243,250 4,325,402 4,442,621 ============ ============ ============ Earnings per share: Basic ....................................................... $ 2.77 $ 2.37 $ 2.13 ============ ============ ============ Diluted ..................................................... $ 2.73 $ 2.33 $ 2.10 ============ ============ ============
See notes to consolidated financial statements 43 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated Other Common Stock Compre- Compre- ----------------------- hensive Retained hensive Shares Amount Surplus Income Earnings Income (Loss) Total --------- ----------- ----------- ----------- ----------- ------------- ------------ Balance, January 1, 2000 ........... 2,962,803 $ 296,000 $ 2,258,000 $63,013,000 $(1,334,000) $ 64,233,000 Net Income ....................... $ 9,318,000 9,318,000 9,318,000 Repurchase and retirement ........ of common stock ................ (84,435) (8,000) (2,811,000) (2,819,000) Exercise of stock options ........ 14,181 1,000 222,000 223,000 Unrealized gains on available- for-sale-securities, net of tax of $1,372,000 ............ 1,986,000 1,986,000 1,986,000 ----------- Comprehensive income ............. $11,304,000 =========== Cash dividends declared - $.48 per share ................. (2,094,000) (2,094,000) Tax benefit of stock options ..... 19,000 19,000 Transfer from retained earnings to surplus ............ 1,500,000 (1,500,000) --------- --------- ---------- ----------- ----------- ------------ Balance, December 31, 2000 ......... 2,892,549 289,000 1,188,000 68,737,000 652,000 70,866,000 Net Income ....................... $10,094,000 10,094,000 10,094,000 Repurchase and retirement of common stock ................ (118,951) (12,000) (4,686,000) (4,698,000) Exercise of stock options ........ 19,304 2,000 418,000 420,000 Unrealized gains on available- for-sale-securities, net of tax of $213,000 .............. 310,000 310,000 310,000 ----------- Comprehensive income ............. $10,404,000 =========== Cash dividends declared - $.54 per share ................. (2,281,000) (2,281,000) Tax benefit of stock options ..... 35,000 35,000 Transfer from retained earnings to surplus ............ 4,000,000 (4,000,000) --------- --------- ---------- ----------- ----------- ------------ Balance, December 31, 2001 ......... 2,792,902 279,000 955,000 72,550,000 962,000 74,746,000 Net Income ....................... $11,563,000 11,563,000 11,563,000 Repurchase and retirement of common stock ................ (43,736) (4,000) (1,588,000) (1,592,000) Exercise of stock options ........ 20,340 2,000 311,000 313,000 Unrealized gains on available- for-sale-securities, net of tax of $2,005,000 ............ 2,986,000 2,986,000 2,986,000 ----------- Comprehensive income ............. $14,549,000 =========== 3-for-2 stock split .............. 1,391,667 139,000 (139,000) Cash in lieu of fractional shares on 3-for-2 stock split ........ (7,000) (7,000) Cash dividends declared - $.63 per share ................. (2,613,000) (2,613,000) Tax benefit of stock options ..... 46,000 46,000 Transfer from retained earnings to surplus ............ 1,000,000 (1,000,000) --------- --------- ---------- ----------- ----------- ------------ Balance, December 31, 2002 ......... 4,161,173 $ 416,000 $ 724,000 $80,354,000 $ 3,948,000 $ 85,442,000 ========= ========= ========== =========== =========== ============
See notes to consolidated financial statements 44 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ----------------------------------------------- 2002 2001 2000 ------------- ------------- ------------- Cash Flows From Operating Activities: Net income ................................................................... $ 11,563,000 $ 10,094,000 $ 9,318,000 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses (credit) ......................................... 100,000 100,000 (75,000) Deferred income tax provision (credit) ..................................... (109,000) (142,000) 252,000 Depreciation and amortization .............................................. 1,173,000 1,166,000 918,000 Premium amortization (discount accretion) on investment securities, net .... 2,908,000 174,000 (243,000) Losses on sales of available-for-sale securities ........................... 12,000 249,000 229,000 Decrease in prepaid income taxes ........................................... 1,000 34,000 194,000 Decrease (increase) in other assets ........................................ 373,000 (265,000) (656,000) Increase (decrease) in accrued expenses and other liabilities .............. 372,000 (270,000) 915,000 Increase (decrease) in income taxes payable ................................ 335,000 (91,000) 110,000 ------------- ------------- ------------- Net cash provided by operating activities .............................. 16,728,000 11,049,000 10,962,000 ------------- ------------- ------------- Cash Flows From Investing Activities: Proceeds from sales of available-for-sale securities ....................... 687,000 5,270,000 7,423,000 Proceeds from maturities and redemptions of investment securities: Held-to-maturity ......................................................... 114,971,000 391,181,000 229,246,000 Available-for-sale ....................................................... 11,131,000 15,003,000 13,765,000 Purchase of investment securities: Held-to-maturity ......................................................... (137,562,000) (416,922,000) (250,235,000) Available-for-sale ....................................................... (50,174,000) (74,881,000) (16,005,000) Net increase in loans to customers ......................................... (34,455,000) (33,802,000) (10,150,000) Purchases of bank premises and equipment ................................... (480,000) (1,301,000) (1,193,000) Proceeds from sale of equipment ............................................ 3,000 -- -- ------------- ------------- ------------- Net cash used in investing activities .................................. (95,879,000) (115,452,000) (27,149,000) ------------- ------------- ------------- Cash Flows From Financing Activities: Net increase in total deposits ............................................. 94,855,000 54,398,000 47,283,000 Proceeds from exercise of stock options .................................... 313,000 420,000 223,000 Repurchase and retirement of common stock .................................. (1,592,000) (4,698,000) (2,819,000) Cash dividends paid ........................................................ (2,398,000) (2,180,000) (2,002,000) Cash in lieu of fractional shares on 3-for-2 stock split ................... (7,000) -- -- ------------- ------------- ------------- Net cash provided by financing activities .............................. 91,171,000 47,940,000 42,685,000 ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents ........................... 12,020,000 (56,463,000) 26,498,000 Cash and cash equivalents, beginning of year ................................... 55,209,000 111,672,000 85,174,000 ------------- ------------- ------------- Cash and cash equivalents, end of year ......................................... $ 67,229,000 $ 55,209,000 $ 111,672,000 ============= ============= ============= Supplemental Schedule of Noncash: Investing Activities Unrealized gains on available-for-sale securities ............................ $ 4,991,000 $ 523,000 $ 3,358,000 Transfer of available-for-sale securities to held-to-maturity category ....... -- -- 14,836,000 Writeoff of premises and equipment against reserve ........................... 62,000 -- -- Financing Activities Tax benefit from exercise of employee stock options .......................... 46,000 35,000 19,000 Cash dividends payable ....................................................... 1,415,000 1,200,000 1,099,000
The Corporation made interest payments of $5,145,000, $9,632,000, and $13,016,000 and income tax payments of $3,927,000, $3,726,000, and $2,875,000 in 2002, 2001 and 2000, respectively. See notes to consolidated financial statements 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of The First of Long Island Corporation (the "Corporation") and its wholly-owned subsidiary, The First National Bank of Long Island (the "Bank"). The Corporation's financial condition and operating results principally reflect those of the Bank. All intercompany balances and amounts have been eliminated. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported asset and liability balances and revenue and expense amounts. Actual results could differ significantly from those estimates. The accounting and reporting policies of the Corporation reflect banking industry practice and conform to generally accepted accounting principles. The following is a summary of the significant accounting policies. Investment Securities Current accounting standards require that investment securities be classified as held-to-maturity, trading, or available-for-sale. The trading category is not applicable to any securities in the Bank's portfolio because the Bank does not buy or hold debt or equity securities principally for the purpose of selling in the near term. Held-to-maturity securities are those debt securities which the Bank has the intent and expected ability to hold to maturity, and are reported at amortized cost. Available-for-sale securities are those debt and equity securities which are neither held-to-maturity securities nor trading securities and are reported at fair value, with unrealized gains and losses, net of the related income tax effect, included in accumulated other comprehensive income. Realized gains and losses on the sale of available-for-sale securities are determined using the specific identification method. Loans and Allowance for Loan Losses Loans are reported at their outstanding principal balance less any chargeoffs, the allowance for loan losses, and any unearned income. Interest on loans is credited to income based on the principal amount outstanding. Unearned discounts are recognized as income over the terms of the loans by the interest method. Nonrefundable loan origination fees are deferred and amortized as yield adjustments over the lives of the related loans. The accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal or interest payments. In addition, any accrued but unpaid interest is reversed against current period income. The Bank considers nonaccruing loans to be impaired under Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114") as amended. The valuation allowance for nonaccrual and other impaired loans is reported within the overall allowance for loan losses. The allowance for loan losses is established through provisions for loan losses charged against income. Amounts deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is an amount that management currently believes will be adequate to absorb estimated inherent losses in the Bank's loan portfolio. The process for estimating credit losses and determining the allowance for loan losses as of any balance sheet date is subjective in nature and requires material estimates. Actual results could differ significantly from these estimates. In determining the allowance for loan losses, there is not an exact amount but rather a range for what constitutes an appropriate allowance. In estimating losses the Bank reviews individual credits in its portfolio and, for those loans deemed to be impaired, measures impairment losses based on either the fair value of collateral or the discounted value of expected future cash flows. Estimated losses for loans that are not specifically reviewed are determined on a pooled basis taking into account a variety of factors including historical losses; levels of and trends in delinquencies and nonaccruing loans; trends in volume and terms of loans; changes in lending policies and procedures; experience, ability and depth of lending staff; national and local economic conditions; concentrations of credit; and environmental risks. Management also considers relevant loan loss statistics for the Bank's peer group. The estimated losses on the loans specifically reviewed plus those determined on a pooled basis make up the allocated component of the allowance for loan losses. The unallocated or general component of the allowance for loan losses could cover losses in the portfolio that have not otherwise been identified through the review of specific loans or pools of loans. 46 Bank Premises and Equipment Bank premises and equipment are carried at cost, less accumulated depreciation and amortization. Buildings are depreciated using the straight-line method over their estimated useful lives which range between thirty-one and forty years. Building improvements are depreciated using the straight-line method over the then remaining lives of the buildings. Leasehold improvements are amortized using the straight-line method over the remaining lives of the leases or their estimated useful lives, whichever is shorter. The lives of the respective leases range between five and ten years. Furniture, fixtures, and equipment are depreciated over their estimated useful lives which range between three and seven years. The straight-line method of depreciation is used for furniture, fixtures, and equipment acquired after 1997 and the 150% declining balance method is used for all other assets. Checking Deposits Each of the Bank's commercial checking accounts has a related noninterest-bearing sweep account. The sole purpose of the sweep accounts is to reduce the noninterest-bearing reserve balances that the Bank is required to maintain with the Federal Reserve Bank, and thereby increase funds available for investment. Although the sweep accounts are classified as savings accounts for regulatory purposes, they are included in checking deposits in the accompanying consolidated balance sheets. Income Taxes A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year. A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law. The effects of future changes in tax laws or rates are not considered. Fair Values of Financial Instruments The following methods and assumptions are used by the Corporation in estimating fair values of financial instruments as disclosed herein. Cash and cash equivalents. The recorded book value of cash and cash equivalents is their fair value. Investment securities. For investment securities other than commercial paper, fair values are based on quoted market prices. All of the commercial paper in the Bank's investment portfolio as of December 31, 2001 had a remaining maturity of less than thirty days. For these short-term instruments, the recorded book value is deemed to be a reasonable estimate of fair value. Loans. Fair values are estimated for portfolios of loans with similar financial characteristics. The total loan portfolio is first divided into adjustable and fixed rate interest terms. For adjustable rate loans that are subject to immediate repricing, the recorded book value less the related allowance for loan losses is a reasonable estimate of fair value. For adjustable rate loans that are subject to repricing over time and fixed rate loans, fair value is calculated by discounting anticipated future repricing amounts or cash flows using discount rates equivalent to the rates at which the Bank would currently make loans which are similar with regard to collateral, maturity, and the type of borrower. The discounted value of the repricing amounts and cash flows is reduced by the related allowance for loan losses to arrive at an estimate of fair value. Deposit liabilities. The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, money market accounts, and savings accounts, is equal to their recorded book value at December 31 of each year. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is equivalent to the rate currently offered by the Bank for deposits of similar size, type and maturity. Accrued interest receivable and payable. For these short-term instruments, the recorded book value is a reasonable estimate of fair value. Off-balance-sheet assets and liabilities. The fair value of off-balance-sheet commitments to extend credit and letters of credit is estimated using fees currently charged to enter into similar agreements. 47 Stockholders' Equity Earnings Per Share. Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options were exercised and resulted in the issuance of common stock that then shared in the earnings of the Corporation, is computed by dividing net income by the weighted average number of common shares and dilutive stock options. There were no antidilutive stock options at December 31, 2002. Other than stock options described in Note I and the Rights described in Note H, the Corporation has no securities that could be converted into common stock nor does the Corporation have any contracts that could result in the issuance of common stock. Stock Split. On June 18, 2002, the Corporation declared a 3-for-2 stock split which was paid on July 24, 2002 by means of a 50% stock dividend. Where applicable, all comparative share and per share amounts included in the consolidated financial statements and notes thereto have been adjusted to reflect the effect of the split. Stock Repurchase Program. Since 1988, the Corporation has had a stock repurchase program under which it is authorized to purchase shares of its own common stock in market or private transactions. As of December 31, 2002, and in accordance with prior approval by its Board of Directors, the Corporation was authorized to purchase 28,410 shares of stock under the latest stock repurchase plan. In addition, in January 2003, the Corporation's Board of Directors approved an additional share repurchase plan for 100,000 shares. Share repurchases under this plan will be financed through available corporate cash. Stock-based Compensation At December 31, 2002, the Corporation had two stock option and appreciation plans, which are described more fully in Note I. The Corporation accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. No stock-based employee compensation cost is reflected in net income for stock options, as all options granted under those plans have an exercise price equal to the market value of the underlying common stock on the date of grant. If there were any stock appreciation rights outstanding, compensation costs would be recorded annually based on the quoted market price of the Corporation's stock at the end of the period. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based Compensation--Transition and Disclosure" ("SFAS No. 148") in December 2002. SFAS No. 148 amends the disclosure and certain transition provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation". The new disclosure provisions are effective for financial statements for fiscal years ending after December 15, 2002 and for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The following table provides the disclosures required by SFAS No. 148 and illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.
2002 2001 2000 ---------- ---------- ---------- (in thousands) Net income, as reported ........................ $ 11,563 $ 10,094 $ 9,318 Deduct: Total cost of stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects ............... (228) (64) (162) ---------- ---------- ---------- Pro forma net income ........................... $ 11,335 $ 10,030 $ 9,156 ========== ========== ========== Earnings per share: Basic - as reported .......................... $ 2.77 $ 2.37 $ 2.13 Basic - pro forma ............................ $ 2.71 $ 2.35 $ 2.09 Diluted - as reported ........................ $ 2.73 $ 2.33 $ 2.10 Diluted - pro forma .......................... $ 2.68 $ 2.33 $ 2.06
48 Comprehensive Income Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by owners and distributions to owners. Other comprehensive income includes revenues, expenses, gains, and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income. Comprehensive income and accumulated other comprehensive income are reported net of related income taxes. Accumulated other comprehensive income for the Corporation consists solely of unrealized holding gains or losses on available-for-sale securities. Investment Management Division Assets held in a fiduciary capacity are not assets of the Corporation and, accordingly, are not included in the accompanying financial statements. Trust fees are recorded on the accrual basis. Derivative Financial Instruments Statement of Financial Accounting Standards No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments" ("SFAS No. 119") requires disclosures about derivative financial instruments, which are defined as futures, forwards, swap and option contracts, and other financial instruments with similar characteristics. Receivables and payables on the balance sheet are excluded from this definition. The Corporation did not hold any derivative financial instruments as defined by SFAS No. 119 at December 31, 2002 and 2001. Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activity" ("SFAS No. 133") establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives either as assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 2000, Statement of Financial Accounting Standards No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities" ("SFAS No. 138") amended SFAS No. 133. SFAS No. 138 is effective for fiscal years beginning after June 30, 2000. The adoption of SFAS No. 138 did not impact the Corporation's financial condition or results of operations. Adoption of New Accounting Pronouncements On January 1, 2002, the Corporation adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets" ("APB No. 17"). At January 1, 2002, the Corporation had goodwill of $220,000. No goodwill impairment loss was recorded during 2002. In 2001 and 2000, and under the provisions of APB No. 17, the Corporation recorded goodwill amortization of $18,000. The Corporation adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") on January 1, 2002. SFAS No. 144 retains the existing requirements to recognize and measure the impairment of long-lived assets to be held and used or to be disposed of by sale. However, SFAS No. 144 makes changes to the scope and certain measurement requirements of existing accounting guidance. SFAS No. 144 also changes the requirements relating to reporting the effects of a disposal or discontinuation of a segment of a business. The adoption of this Statement did not have an impact on the financial condition or results of operations of the Corporation. 49 NOTE B - INVESTMENT SECURITIES The following table sets forth the amortized cost and estimated fair values of the Bank's investment securities at December 31, 2002, 2001 and 2000.
2002 --------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- (in thousands) Held-to-maturity Securities: U.S. Treasury .................................. $ 27,770 $ 1,045 $ -- $ 28,815 U.S. government agencies ....................... 34,655 1,514 (22) 36,147 Corporates ..................................... 2,979 222 -- 3,201 State and municipals ........................... 63,899 3,389 (39) 67,249 Collateralized mortgage obligations ............ 143,799 3,255 (28) 147,026 ---------- ---------- ---------- ---------- $ 273,102 $ 9,425 $ (89) $ 282,438 ========== ========== ========== ========== Available-for-sale Securities: U.S. Treasury .................................. $ 93,616 $ 1,712 $ -- $ 95,328 Corporates ..................................... 5,964 477 -- 6,441 State and municipals ........................... 74,087 3,912 (27) 77,972 Equity ......................................... 127 538 -- 665 ---------- ---------- ---------- ---------- $ 173,794 $ 6,639 $ (27) $ 180,406 ========== ========== ========== ========== 2001 --------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- (in thousands) Held-to-Maturity Securities: U.S. Treasury .................................. $ 84,579 $ 1,526 $ -- $ 86,105 U.S. government agencies ....................... 30,430 586 (125) 30,891 Commercial paper ............................... 7,994 -- -- 7,994 Corporates ..................................... 2,970 194 -- 3,164 State and municipals ........................... 55,511 1,789 (97) 57,203 Collateralized mortgage obligations ............ 70,731 1,761 (179) 72,313 ---------- ---------- ---------- ---------- $ 252,215 $ 5,856 $ (401) $ 257,670 ========== ========== ========== ========== Available-for-Sale Securities: U.S. Treasury .................................. $ 67,223 $ 891 $ (10) $ 68,104 Corporates ..................................... 5,951 187 -- 6,138 State and municipals ........................... 63,353 837 (284) 63,906 Equity ......................................... 127 -- -- 127 ---------- ---------- ---------- ---------- $ 136,654 $ 1,915 $ (294) $ 138,275 ========== ========== ========== ========== 2000 (unaudited) --------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- (in thousands) Held-to-Maturity Securities: U.S. Treasury .................................. $ 56,172 $ 645 $ -- $ 56,817 U.S. government agencies ....................... 20,862 228 (125) 20,965 Commercial paper ............................... 22,962 -- -- 22,962 Corporates ..................................... 2,961 87 -- 3,048 State and municipals ........................... 57,747 1,510 (28) 59,229 Collateralized mortgage obligations ............ 65,657 640 (273) 66,024 ---------- ---------- ---------- ---------- $ 226,361 $ 3,110 $ (426) $ 229,045 ========== ========== ========== ========== Available-for-Sale Securities: U.S. Treasury .................................. $ 35,380 $ 358 $ -- $ 35,738 Corporates ..................................... 2,922 48 -- 2,970 State and municipals ........................... 44,153 722 (30) 44,845 Equity ......................................... 127 -- -- 127 ---------- ---------- ---------- ---------- $ 82,582 $ 1,128 $ (30) $ 83,680 ========== ========== ========== ==========
At December 31, 2002 and 2001, investment securities with a carrying value of $59,944,000 and $37,793,000, respectively, were pledged as collateral to secure public deposits and for other purposes. There were no gains on security sales for each of the three years in the period ended December 31, 2002. 50 Maturities and Average Yields. The following table sets forth the maturities and weighted average yields of the Bank's investment securities at December 31, 2002.
Principal Maturing (1) --------------------------------------------------------------------------------- Within After One But After Five But After One Year Within Five Years Within Ten Years Ten Years ------------------ ------------------ ------------------ ------------------ Amount Yield Amount Yield Amount Yield Amount Yield -------- ------ -------- ----- -------- ----- -------- ----- (dollars in thousands) Held-to-Maturity Securities: U.S. Treasury .......................... $ 15,627 4.44% $ 12,143 5.76% $ -- --% $ -- --% U.S. government agencies ............... 1,081 5.52 3,378 6.64 7,292 6.00 22,904 5.46 Corporates ............................. 1,007 7.31 983 7.56 -- -- 989 7.15 State and municipals (2) ............... 15,547 4.11 16,895 7.22 24,984 7.53 6,473 7.03 Collateralized mortgage obligations .... -- -- 1,171 6.15 7,004 6.23 135,624 4.77 -------- ---- -------- ---- -------- ---- -------- ---- $ 33,262 4.41% $ 34,570 6.63% $ 39,280 7.01% $165,990 4.97% ======== ==== ======== ==== ======== ==== ======== ==== Principal Maturing (1) --------------------------------------------------------------------------------- Within After One But After Five But After One Year Within Five Years Within Ten Years Ten Years ------------------ ------------------ ------------------ ------------------ Amount Yield Amount Yield Amount Yield Amount Yield -------- ------ -------- ----- -------- ----- -------- ----- (dollars in thousands) Available-for-Sale Securities: U.S. Treasury .......................... $ 64,504 2.95% $ 30,824 4.04% $ -- --% $ -- --% Corporates ............................. -- -- 6,441 6.17 -- -- -- -- State and municipals (2) ............... 3,795 2.81 12,172 6.89 39,008 6.99 22,997 7.16 -------- ---- -------- ---- -------- ---- -------- ---- Total debt securities ................ 68,299 2.94 49,437 5.02 39,008 6.99 22,997 7.16 Equity ................................. -- -- -- -- -- -- 665 1.70 -------- ---- -------- ---- -------- ---- -------- ---- $ 68,299 2.94% $ 49,437 5.02% $ 39,008 6.99% $ 23,662 7.00% ======== ==== ======== ==== ======== ==== ======== ====
(1) Maturities shown are stated maturities, except in the case of municipal securities which are shown at the earlier of their stated maturity or pre-refunded dates. Securities backed by mortgages, which include the U.S. government agencies and collateralized mortgage obligations shown above, are expected to have substantial periodic repayments resulting in weighted average lives considerably shorter than would be surmised from the above table. (2) Yields on tax-exempt obligations have been computed on a tax-equivalent basis. 51 NOTE C - LOANS In the second quarter of 1999, the Bank made a transition adjustment to reduce its allowance for loan losses by $1,600,000. The transition adjustment was made in response to guidance issued by staff members of the Financial Accounting Standards Board in April 1999 and further guidance issued by staff members of the Securities and Exchange Commission. The following table sets forth changes in the Bank's allowance for loan losses.
Year ended December 31, ------------------------------------------------------- 2002 2001 2000* 1999* 1998* ------- ------- ------- ------- ------- (dollars in thousands) Balance, beginning of year ................. $ 2,020 $ 1,943 $ 2,033 $ 3,651 $ 3,579 ------- ------- ------- ------- ------- Loans charged off: Commercial and industrial ................ (68) (17) (28) (32) (50) Secured by real estate ................... -- -- -- -- -- Consumer and other ....................... (16) (35) (28) (28) (49) ------- ------- ------- ------- ------- (84) (52) (56) (60) (99) ------- ------- ------- ------- ------- Recoveries of loans charged off: Commercial and industrial ................ 13 -- -- -- -- Secured by real estate ................... 16 16 17 16 257 Consumer and other ....................... 20 13 24 26 14 ------- ------- ------- ------- ------- 49 29 41 42 271 ------- ------- ------- ------- ------- Net (chargeoffs) recoveries ................ (35) (23) (15) (18) 172 Provision for loan losses (credit) ......... 100 100 (75) -- (100) Transition adjustment ...................... -- -- -- (1,600) -- ------- ------- ------- ------- ------- Balance, end of year ....................... $ 2,085 $ 2,020 $ 1,943 $ 2,033 $ 3,651 ======= ======= ======= ======= ======= Ratio of net (chargeoffs) recoveries to average loans outstanding ................ (.01)% (.01)% (.01)% (.01)% .10% ======= ======= ======= ======= =======
*Unaudited The Corporation's loan portfolio at December 31, 2002 and 2001 included $923,000 and $1,503,000, respectively, of loans considered to be impaired under SFAS No. 114. Of the Corporation's total impaired loans at December 31, 2002, $546,000 had a related allowance for loan losses of $39,000 and the balance had no related allowance for loan losses. The average recorded investment during 2002 in loans considered to be impaired as of December 31, 2002 was $944,000. Interest income recognized during 2002 on loans considered to be impaired as of December 31, 2002 and during the period in 2002 that such loans were impaired amounted to $24,000. Of the Corporation's total impaired loans at December 31, 2001, $688,000 had a related allowance for loan losses of $347,000 and the balance had no related allowance for loan losses. The average recorded investment during 2001 in loans considered to be impaired as of December 31, 2001 was $1,611,000. Interest income recognized during 2001 on loans considered to be impaired as of December 31, 2001 and during the period in 2001 that such loans were impaired amounted to $122,000. All interest income recorded by the Corporation during 2002 and 2001 on loans considered to be impaired was recognized using the accrual method of accounting. Certain directors, including their immediate families and companies in which they are principal owners, and executive officers were loan customers of the Bank during 2002 and 2001. Such loans are made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and do not involve more than the normal risk of collectibility or present other unfavorable features. The aggregate amount of these loans was approximately $2,108,000 and $2,239,000 at December 31, 2002 and 2001, respectively. During 2002, $410,000 of new loans to such persons were made and repayments totaled $541,000. There were no loans to directors or executive officers which were nonaccruing at December 31, 2002 or 2001. 52 NOTE D - PREMISES AND EQUIPMENT Bank premises and equipment consist of the following:
December 31, -------------------- 2002 2001 -------- -------- (in thousands) Land ........................................ $ 1,274 $ 1,274 Buildings ................................... 4,820 4,771 Leasehold improvements ...................... 1,888 1,953 Furniture and equipment ..................... 7,969 11,284 -------- -------- 15,951 19,282 Accumulated depreciation and amortization ... (9,553) (12,126) -------- -------- $ 6,398 $ 7,156 ======== ========
A building occupied by one of the Bank's branch offices is leased from a director of the Corporation and the Bank. The lease, which had an initial term of ten years and one month ending on October 30, 2002, was modified and extended through October 31, 2007. The Bank may, on ninety (90) days written notice, elect to extend the lease for an additional five (5) year period. The lease provides for annual base rent of $30,184 for the year ending October 31, 2003. In addition to base rent, the Bank is responsible for its proportionate share of the real estate taxes on the building in which the leased premises are located. The Bank believes that the terms of this lease are comparable to those that could have been obtained from other persons. NOTE E - DEPOSITS The following table sets forth the remaining maturities of the Bank's time deposits in amounts of $100,000 or more.
Year Amount ---- ------- (in thousands) 2003 .................... $12,750 2004 .................... 357 2005 .................... -- 2006 .................... -- 2007 .................... -- Thereafter .............. -- ------- $13,107 =======
53 NOTE F - INCOME TAXES The Corporation and its subsidiary file a consolidated federal income tax return. Income taxes charged to earnings in 2002, 2001, and 2000 had effective tax rates of 26.4%, 25.9%, and 26.9%, respectively. The following table sets forth a reconciliation of the statutory Federal income tax rate to the Corporation's effective tax rate.
Year Ended December 31, ----------------------- 2002 2001 2000 ---- ---- ---- Statutory federal income tax rate .................................. 34.0% 34.0% 34.0% State and local income taxes, net of federal income tax benefit .... 4.4 4.2 4.1 Tax-exempt interest on securities and loans, net of disallowed cost of funding ......................................... (12.2) (12.6) (11.1) Other .............................................................. .2 .3 (.1) ---- ---- ---- 26.4% 25.9% 26.9% ==== ==== ====
Provision for Income Taxes. The following table sets forth the components of the provision for income taxes.
Year Ended December 31, ----------------------------- 2002 2001 2000 ------- ------- ------- (in thousands) Current: Federal ................................... $ 3,258 $ 2,840 $ 2,506 State and local ........................... 1,006 828 673 ------- ------- ------- 4,264 3,668 3,179 ------- ------- ------- Deferred: Federal ................................... (148) (175) 141 State and local ........................... 39 33 111 ------- ------- ------- (109) (142) 252 ------- ------- ------- $ 4,155 $ 3,526 $ 3,431 ======= ======= =======
Net Deferred Tax Asset/Liability. The following table sets forth the components of the Bank's net deferred tax asset/liability.
December 31, ------------------ 2002 2001 ------- ------- (in thousands) Deferred tax assets: Allowance for loan losses ............................ $ 387 $ 366 Supplemental executive retirement expense ............ 84 54 Directors' retirement expense ........................ 66 62 Postretirement benefits expense ...................... 42 41 Writeoff of bank premises and equipment .............. -- 32 Accrued professional fees ............................ 12 12 Other ................................................ 4 1 ------- ------- 595 568 Valuation allowance .................................. -- -- ------- ------- 595 568 ------- ------- Deferred tax liabilities: Pension expense ...................................... 105 117 Depreciation ......................................... 78 197 Accumulated earnings of Bank subsidiaries ............ 142 93 Unrealized gains on available-for-sale securities .... 2,664 658 ------- ------- 2,989 1,065 ------- ------- Net deferred tax liability ........................... $(2,394) $ (497) ======= =======
54 NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES Financial Instruments With Off-Balance-Sheet Risk. The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to financial instruments for commitments to extend credit, standby letters of credit, and commercial letters of credit is represented by the contractual notional amount of these instruments. The Bank uses the same credit policies in making commitments to extend credit and generally uses the same credit policies for letters of credit as it does for on-balance-sheet instruments. At December 31, financial instruments whose contract amounts represent credit risk are as follows:
2002 2001 ------- ------- (in thousands) Commitments to extend credit .... $58,962 $53,513 Standby letters of credit ....... 1,077 999 Commercial letters of credit .... -- 38
Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if any, by the Bank upon extension of credit is based on management's credit evaluation of the borrower. Collateral held varies but may include security interests in business assets, mortgages on commercial and residential real estate, deposit accounts with the Bank or other financial institutions, and securities. Standby letters of credit are conditional commitments issued by the Bank to assure the performance or financial obligations of a customer to a third party. The Bank's standby letters of credit extend through December 2003. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. The Bank generally holds collateral and/or obtains personal guarantees supporting these commitments. The extent of collateral held for these commitments at December 31, 2002 varied from 0% to 100%, and averaged 90%. Commercial letters of credit are conditional commitments issued by the Bank to assure the payment by a customer to a supplier. The credit risk involved in issuing commercial letters of credit is believed to be generally less than that involved in extending loans to customers. The Bank generally obtains personal guarantees supporting these commitments. Concentrations of Credit Risk. Most of the Bank's loans, personal and commercial, are to borrowers who are domiciled on Long Island. As a result, the income of many of the Bank's borrowers is dependent on the Long Island economy. In addition, most of the Bank's real estate loans involve mortgages on Long Island properties. Thus, the Bank's loan portfolio is susceptible to the economy of Long Island. Lease Commitments. At December 31, 2002, minimum annual rental commitments under noncancelable operating leases are as follows:
Year Amount ---- ------ (in thousands) 2003 .............................. $ 453 2004 .............................. 426 2005 .............................. 306 2006 .............................. 196 2007 .............................. 169 Thereafter ........................ 66 ------ $1,616 ======
In addition, the Bank has various renewal options on the above leases. Rent expense was $461,000, $457,000, and $384,000 in 2002, 2001, and 2000, respectively. 55 NOTE H - SHAREHOLDER PROTECTION RIGHTS PLAN On July 16, 1996, the Board of Directors of the Corporation (the "Board") adopted a Shareholder Protection Rights Plan and declared a dividend of one right ("Right") on each outstanding share of the Corporation's common stock (the "Common Stock"). The dividend was paid on July 31, 1996 to shareholders of record as of the same date. In the absence of an event of the type described below, the Rights will be evidenced by and trade with the Common Stock and will not be exercisable. However, the Rights will separate from the Common Stock and become exercisable following the earlier of (1) the tenth business day, or such later date as the Board may decide, after any person or persons (collectively referred to as "person") commences a tender offer that would result in such person holding a total of 20% or more of the outstanding Common Stock, or (2) ten business days after, or such earlier or later date as the Board may decide, the announcement by the Corporation that any person has acquired 20% or more of the outstanding Common Stock. When separated from the Common Stock, each Right will entitle the holder to purchase one share of Common Stock for $56 (the "Exercise Price"). However, in the event that the Corporation has announced that any person has acquired 20% or more of the outstanding Common Stock, the Rights owned by that person will be automatically void and each other Right will automatically become a right to buy, for the Exercise Price, that number of shares of Common Stock having a market value of twice the Exercise Price. Also, if any person acquires 20% or more of the outstanding Common Stock, the Board can require that, in lieu of exercise, each outstanding Right be exchanged for one share of Common Stock. The Rights may be redeemed by action of the Board at a price of $.01 per Right at any time prior to announcement by the Corporation that any person has acquired 20% or more of the outstanding Common Stock. The Exercise Price and the number of Rights outstanding are subject to adjustment to prevent dilution. The Rights expire ten years from the date of their issuance. NOTE I - STOCK-BASED COMPENSATION The Corporation has two stock option and appreciation rights plans (the "Plans"). The 1996 Plan was approved by the Corporation's Board of Directors on January 16, 1996 and subsequently approved by its stockholders. Under the 1996 Plan, as amended, options to purchase up to 540,000 shares of common stock were made available for grant to key employees and to non-employee directors of the Corporation and its subsidiaries through January 15, 2006. The number of stock options and stock appreciation rights that can be granted to any one person in any one fiscal year is limited to 25,000. Each option granted under the 1996 Plan is granted at a price equal to the fair market value of one share of the Corporation's stock on the date of grant. Options granted on or before December 31, 2000 are exercisable in whole or in part commencing six months from the date of grant and ending ten years after the date of grant. Options granted after December 31, 2000 are exercisable in whole or in part commencing three years from the date of grant and ending ten years after the date of grant. The date on which options first become exercisable is subject to acceleration in the event of a change in control, retirement, death, disability, and certain other limited circumstances. Each option granted to an employee under the 1996 Plan may be granted with or without a stock appreciation right ("SAR") attached. The 1996 Plan also provides for the granting of stand-alone SARs to employees. Non-employee directors are not eligible for SAR grants, whether stand-alone or attached to options. As of December 31, 2002 there were 302,633 options available for grant under the 1996 Plan, 207,441 options outstanding, and 70,167 options currently exercisable. No stock appreciation rights have been granted under the 1996 Plan, either attached to options or on a stand-alone basis. The 1986 Plan was approved by the Corporation's Board of Directors on January 21, 1986 and subsequently approved by its stockholders. Under the 1986 Plan, as later amended, options to purchase up to 387,675 shares of common stock were available to be granted to key employees of the Corporation and its subsidiaries through January 21, 1996. The terms of the 1986 Plan are substantially the same as those of the 1996 Plan except that the 1986 Plan did not provide for the granting of stock options to non-employee directors and did not limit to 25,000 the number of stock options and stock appreciation rights that could be granted to any one person in any one fiscal year. At December 31, 2002, options to purchase 54,479 shares of Common Stock were outstanding and exercisable under the 1986 Plan and there were no outstanding stock appreciation rights. The Corporation has chosen to account for stock-based compensation using the intrinsic value method prescribed in APB No. 25. Since each option is granted at a price equal to the fair market value of one share of the Corporation's stock on the date of grant, no compensation cost has been recognized. 56 Stock Option Activity. The following table sets forth stock option activity and the weighted average fair value of options granted.
Year Ended December 31, ------------------------------------------------------------------ 2002 2001 2000 -------------------- --------------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price -------- -------- -------- -------- -------- -------- Outstanding, beginning of year .................... 214,391 $ 19.77 177,884 $ 16.81 166,530 $ 15.46 Granted ........................................... 76,891 25.17 68,532 25.51 34,650 20.06 Exercised ......................................... (24,870) 12.59 (28,956) 14.51 (21,271) 10.49 Forfeited ......................................... (4,492) 24.97 (3,069) 26.11 (2,025) 27.95 -------- -------- -------- -------- -------- -------- Outstanding, end of year .......................... 261,920 $ 21.95 214,391 $ 19.77 177,884 $ 16.81 ======== ======== ======== ======== ======== ======== Exercisable, end of year .......................... 124,646 $ 18.21 148,102 $ 17.19 177,884 $ 16.81 ======== ======== ======== ======== ======== ======== Weighted average fair value of options granted .... $ 4.92 $ 5.51 $ 4.67 ======== ======== ========
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions: risk-free interest rates of 3.69%, 4.85%, and 5.14% for options granted in 2002, 2001, and 2000, respectively; volatility of 16.70%, 15.30%, and 15.80% for options granted in 2002, 2001, and 2000, respectively; expected dividend yield of 2.0%, 2.0%, and 1.9% for options granted in 2002, 2001, and 2000 respectively; and expected lives of 7 years for options granted in 2002, 2001, and 2000. Stock Options Outstanding. The following table sets forth information about outstanding and exercisable stock options at December 31, 2002.
Outstanding Stock Options Exercisable Stock Options ---------------------------------- ------------------------- Weighted Average ----------------------- Weighted Remaining Average Contractual Exercise Exercise Range of Exercise Prices Number Life (yrs.) Price Number Price ------------------------ ------- ----------- ----------- ------- ----------- $9.01 to $13.26 ..... 54,479 2.07 $ 11.94 54,479 $ 11.94 $16.22 to $21.83 .... 36,342 5.92 18.63 36,342 18.63 $24.68 to $29.33 .... 171,099 8.03 25.84 33,825 27.86 ------- ---- ----------- ------- ----------- 261,920 6.50 $ 21.95 124,646 $ 18.21 ======= ==== =========== ======= ===========
NOTE J - RETIREMENT PLANS The Bank has a defined benefit pension plan (the "Pension Plan") covering eligible employees. The provisions of the Pension Plan are governed by the rules and regulations contained in the Prototype Plan of the New York State Bankers Retirement System (the "Retirement System") and the Retirement System Adoption Agreement executed by the Bank. For investment purposes, the Pension Plan's contributions are pooled with the contributions of the other participants in the Retirement System. Assets of the Pension Plan are invested in various debt and equity securities. Employees are eligible to participate in the Pension Plan after attaining 21 years of age and completing 12 full months of service. Pension benefits are generally based on a percentage of average annual compensation during the period of creditable service. The Bank makes annual contributions to the Pension Plan in an amount sufficient to fund these benefits and participants contribute 2% of their compensation. The Bank's funding policy, the entry age normal cost-frozen initial liability method, is consistent with the funding requirements of federal law and regulations. Employees become fully vested after four years of participation in the Pension Plan (no vesting occurs during the four-year period). Net Pension Cost. The following table sets forth the components of net periodic pension cost.
2002 2001 2000 ----- ----- ----- (in thousands) Service cost ................................ $ 482 $ 410 $ 397 Interest cost ............................... 517 462 428 Expected return on plan assets .............. (594) (598) (540) Net amortization and deferral ............... (21) (44) (44) ----- ----- ----- Net pension cost ............................ $ 384 $ 230 $ 241 ===== ===== =====
57 Significant Actuarial Assumptions. The following table sets forth the significant actuarial assumptions as of the end of each plan year.
2002 2001 2000 ---- ---- ---- Discount rate ....................................... 6.75% 6.75% 6.75% Rate of increase in compensation levels ............. 5.00% 5.00% 5.00% Expected long-term rate of return on plan assets .... 7.50% 7.50% 7.00%
Funded Status of the Plan. The following table sets forth the change in the benefit obligation and plan assets for each Plan year and, as of the end of each Plan year, the funded status of the plan and prepaid benefit cost.
Year Ended September 30, ----------------------------- 2002 2001 2000 ------- ------- ------- (in thousands) Change in projected benefit obligation Projected benefit obligation at beginning of year .... $ 7,796 $ 6,969 $ 6,457 Service cost ......................................... 625 520 519 Plan participants' contributions ..................... (143) (110) (122) Expenses ............................................. (59) (55) (63) Interest cost ........................................ 517 462 428 Benefits paid ........................................ (324) (260) (312) Additional prior service cost at valuation date ...... -- 302 -- Assumption changes and other ......................... 196 (32) 62 ------- ------- ------- Projected benefit obligation at end of year .......... 8,608 7,796 6,969 ------- ------- ------- Change in plan assets Fair value of plan assets at beginning of year ....... 7,990 8,580 7,751 Actual return on plan assets ......................... (421) (712) 796 Employer contribution ................................ -- 327 286 Plan participants' contributions ..................... 143 110 122 Benefits paid ........................................ (324) (260) (312) Expenses ............................................. (59) (55) (63) ------- ------- ------- Fair value of plan assets at end of year ............. 7,329 7,990 8,580 ------- ------- ------- Funded status ........................................ (1,279) 194 1,611 Unrecognized net actuarial loss (gain) ............... 1,453 385 (784) Unrecognized prior service cost ...................... 255 275 (31) Unrecognized transition asset ........................ (46) (87) (127) ------- ------- ------- Prepaid benefit cost ................................. $ 383 $ 767 $ 669 ======= ======= =======
The Bank has a combined profit sharing/401(k) plan (the "Profit Sharing Plan"). Employees are eligible to participate provided they are at least 21 years of age and have completed one year of service in which they worked 1,000 hours if full-time and 700 hours if part-time. Participants may elect to contribute, on a tax-deferred basis, up to 25% of gross compensation, as defined, subject to the limitations of Section 401(k) of the Internal Revenue Code. The Bank may, at its sole discretion, make "Additional" contributions to each participant's account based on the amount of the participant's tax deferred contributions and make profit sharing contributions to each participant's account equal to a percentage of the participant's compensation, as defined. Participants are fully vested in their elective contributions and, after five years of participation in the Profit Sharing Plan, are fully vested (20% vesting per year) in the Additional and profit sharing contributions made by the Bank. Additional contributions were $142,000, $130,000, and $113,000 for 2002, 2001, and 2000, respectively, and profit sharing contributions were $743,000, $587,000, and $446,000, respectively. On August 3, 1995, the Bank adopted The First National Bank of Long Island Supplemental Executive Retirement Program ("SERP"). The SERP provides benefits to certain employees, designated by the Compensation Committee of the Board of Directors, whose benefits under the Pension Plan and Profit Sharing Plan are limited by the applicable provisions of the Internal Revenue Code. The benefit under the SERP is equal to the additional amount the employee would be entitled to under the Pension and Profit Sharing Plans in the absence of such Internal Revenue Code limitations. The effective date of the SERP, which superseded the Bank's previous supplemental retirement benefit plan, was January 1, 1994. SERP expense was $250,000, $389,000, and $190,000 in 2002, 2001, and 2000, respectively. The fluctuations in SERP expense during the three year period ended December 31, 2002 are primarily attributable to the impact of changing 58 interest rates and stock market performance on required employer contributions and, for 2002, an increase under the Internal Revenue Code of the amount of compensation that can be covered by the Bank's qualified pension plan. NOTE K - OTHER OPERATING EXPENSES Expenses included in other operating expenses which exceed one percent of the aggregate of total interest income and noninterest income in 2002, 2001, and 2000 are as follows:
2002 2001 2000 ---- ---- ---- (in thousands) Computer services ..... $556 $543 $490 Insurance ............. 545 481 440 Marketing ............. 416 465 393
NOTE L - REGULATORY MATTERS Capital. The Corporation is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The following table sets forth the Corporation's capital ratios at December 31, 2002 and 2001 and the minimum ratios necessary for a bank to be classified as well capitalized and adequately capitalized. The capital ratios of the Corporation's subsidiary bank at December 31, 2002 and 2001 are not significantly different than those shown in the table below and substantially exceed the requirements for a well-capitalized bank.
Corporation's Capital Ratios at December 31: ---------------------------- Well Adequately 2002 2001 Capitalized Capitalized ----- ----- ----------- ----------- Total Risk-Based Capital Ratio .... 30.28% 29.22% 10.00% 8.00% Tier 1 Risk-Based Capital Ratio .... 29.52 28.44 6.00 4.00 Tier 1 Leverage Capital Ratio ...... 10.25 10.63 5.00 4.00
Other Matters. The amount of dividends paid by the Bank to the Corporation is subject to restrictions under Federal Reserve Board Regulation H. Under Regulation H, the Bank is required to obtain regulatory approval for the payment of dividends during any one calendar year that exceed the Bank's net income for the calendar year plus the retained net income for the two preceding calendar years. At December 31, 2002, the Bank had retained net income for the current and two preceding calendar years of $16,114,000. Regulation D of the Board of Governors of The Federal Reserve System requires banks to maintain reserves against certain deposit balances. The Bank's average reserve requirement for 2002 was approximately $6,783,000. Under national banking laws and related statutes, the Bank is limited as to the amount it may loan to the Corporation, unless such loans are collateralized by specified obligations. At December 31, 2002, the maximum amount available for transfer from the Bank to the Corporation in the form of loans approximated $12,621,000. 59 NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates are made at a specific point in time and are based on existing on and off-balance-sheet financial instruments. Such estimates are generally subjective in nature and dependent upon a number of significant assumptions associated with each financial instrument or group of similar financial instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows, and relevant available market information. Changes in assumptions could significantly affect the estimates. In addition, fair value estimates do not reflect the value of anticipated future business, premiums or discounts that could result from offering for sale at one time the Corporation's entire holdings of a particular financial instrument, or the tax consequences of realizing gains or losses on the sale of financial instruments. The following table sets forth the carrying/contract amounts and estimated fair values of the Corporation's financial instruments at December 31, 2002 and 2001.
2002 2001 --------------------- --------------------- Carrying/ Carrying/ Contract Contract Amount Fair Value Amount Fair Value --------- ---------- --------- ---------- (in thousands) Financial Assets: Cash and due from banks ..................... $ 33,229 $ 33,229 $ 28,209 $ 28,209 Federal funds sold .......................... 34,000 34,000 27,000 27,000 Held-to-maturity securities ................. 273,102 282,438 252,215 257,670 Available-for-sale securities ............... 180,406 180,406 138,275 138,275 Loans ....................................... 259,023 264,500 224,668 226,675 Accrued interest receivable ................. 5,353 5,353 5,047 5,047 Financial Liabilities: Checking deposits ........................... 256,444 256,444 222,822 222,822 Savings and money market deposits ........... 412,815 412,815 347,430 347,430 Time deposits ............................... 30,466 30,521 34,618 34,645 Accrued interest payable .................... 61 61 95 95 Off-Balance-Sheet Liabilities: Commitments to extend credit ................ 58,962 -- 53,513 -- Standby and commercial letters of credit .... 1,077 11 1,037 10
NOTE N - PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for The First of Long Island Corporation (parent company only) is as follows: CONDENSED BALANCE SHEETS
December 31, ------------------- 2002 2001 -------- -------- (in thousands) Assets: Checking and money market accounts with subsidiary .... $ 2,653 $ 3,646 Investment in subsidiary bank, at equity .............. 84,138 72,255 Other assets .......................................... 66 45 -------- -------- $ 86,857 $ 75,946 ======== ======== Liabilities: Cash dividends payable ................................ $ 1,415 $ 1,200 -------- -------- Stockholders' Equity: Common stock .......................................... 416 279 Surplus ............................................... 724 955 Retained earnings ..................................... 80,354 72,550 -------- -------- 81,494 73,784 Accumulated other comprehensive income, net of tax .... 3,948 962 -------- -------- 85,442 74,746 -------- -------- $ 86,857 $ 75,946 ======== ========
60
CONDENSED STATEMENTS OF INCOME Year ended December 31, -------------------------------- 2002 2001 2000 -------- -------- -------- (in thousands) Income: Dividends from subsidiary bank ............................ $ 2,700 $ 7,700 $ 4,500 Interest on deposits with subsidiary bank ................. 24 33 73 -------- -------- -------- 2,724 7,733 4,573 -------- -------- -------- Expenses: Other operating expenses .................................. 79 59 58 -------- -------- -------- Income before income taxes ................................ 2,645 7,674 4,515 Income tax expense (credit) ................................. (22) (11) 6 -------- -------- -------- Income before undistributed earnings of subsidiary bank ......................................... 2,667 7,685 4,509 Equity in undistributed earnings ............................ 8,896 2,409 4,809 -------- -------- -------- Net income ................................................ $ 11,563 $ 10,094 $ 9,318 ======== ======== ======== CONDENSED STATEMENTS OF CASH FLOWS Year ended December 31, Increase (Decrease) in Cash and Cash Equivalents* -------------------------------- 2002 2001 2000 -------- -------- -------- (in thousands) Cash Flows From Operating Activities: Net income ................................................ $ 11,563 $ 10,094 $ 9,318 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of subsidiary bank ............. (8,896) (2,409) (4,809) Decrease in other assets .............................. 24 2 13 -------- -------- -------- Net cash provided by operating activities ............... 2,691 7,687 4,522 -------- -------- -------- Cash Flows From Financing Activities: Repurchase and retirement of common stock ................. (1,592) (4,698) (2,819) Proceeds from exercise of stock options ................... 313 420 223 Cash dividends paid ....................................... (2,398) (2,180) (2,002) Cash in lieu of fractional shares on 3-for-2 stock split .. (7) -- -- -------- -------- -------- Net cash used in financing activities ................... (3,684) (6,458) (4,598) -------- -------- -------- Net increase (decrease) in cash and cash equivalents ...... (993) 1,229 (76) Cash and cash equivalents, beginning of year .............. 3,646 2,417 2,493 -------- -------- -------- Cash and cash equivalents, end of year .................... $ 2,653 $ 3,646 $ 2,417 ======== ======== ======== Supplemental Schedule of Noncash Financing Activities: Tax benefit from exercise of employee stock options ....... $ 46 $ 35 $ 19 Cash dividends payable .................................... 1,415 1,200 1,099
* Cash and cash equivalents include the checking and money market accounts with the Corporation's wholly-owned bank subsidiary. 61 NOTE O - QUARTERLY FINANCIAL DATA (Unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ------- (in thousands, except per share data) 2002 Interest income ....................... $ 8,804 $ 9,338 $ 9,460 $ 9,327 $36,929 Interest expense ...................... 1,218 1,254 1,347 1,292 5,111 Net interest income ................... 7,586 8,084 8,113 8,035 31,818 Provision for loan losses (credit) .... 100 50 (100) 50 100 Noninterest income .................... 1,329 1,479 1,319 1,361 5,488 Noninterest expense ................... 5,301 5,447 5,426 5,314 21,488 Income before income taxes ............ 3,514 4,066 4,106 4,032 15,718 Income taxes .......................... 866 1,099 1,112 1,078 4,155 Net income ............................ 2,648 2,967 2,994 2,954 11,563 Earnings per share: Basic ............................... .63 .71 .72 .71 2.77 Diluted ............................. .62 .70 .71 .70 2.73 Comprehensive income .................. 2,264 5,433 4,477 2,375 14,549 2001 Interest income ....................... $ 9,881 $ 9,570 $ 9,524 $ 9,014 $37,989 Interest expense ...................... 3,127 2,494 2,281 1,549 9,451 Net interest income ................... 6,754 7,076 7,243 7,465 28,538 Provision for loan losses (credit) .... -- -- -- 100 100 Noninterest income .................... 1,280 1,385 1,281 1,003 4,949 Noninterest expense ................... 4,895 4,836 4,876 5,160 19,767 Income before income taxes ............ 3,139 3,625 3,648 3,208 13,620 Income taxes .......................... 804 975 974 773 3,526 Net income ............................ 2,335 2,650 2,674 2,435 10,094 Earnings per share: Basic ............................... .54 .62 .63 .58 2.37 Diluted ............................. .53 .61 .62 .57 2.33 Comprehensive income .................. 2,938 2,458 3,613 1,395 10,404
62 [Grant Thornton Letterhead] Report of Independent Certified Public Accountants Board of Directors and Stockholders The First of Long Island Corporation We have audited the accompanying consolidated balance sheet of The First of Long Island Corporation and subsidiaries as of December 31, 2002, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of The First of Long Island Corporation as of December 31, 2001, and for the two-year period ended December 31, 2001, were audited by other auditors who have ceased operations whose report dated January 22, 2002 expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The First of Long Island Corporation as of December 31, 2002, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ Grant Thornton LLP Philadelphia, Pennsylvania January 24, 2003 63 Official Staff Administration J. William Johnson Chairman and Chief Executive Officer Michael N. Vittorio President Arthur J. Lupinacci, Jr. Executive Vice President Lorraine Fogarty Executive Assistant Constance Miller Executive Assistant Auditing Kitty W. Craig Vice President Margaret M. DeBonis Assistant Vice President Mathew Wallis Administrative Assistant Branch Administration James Clavell Vice President Monica T. Baker Assistant Vice President Carole Ann Snayd Assistant Vice President JoAnn Diamond Assistant Cashier Leonora Mintz Assistant Manager Patricia Ovalle Wood Assistant Manager Sara Melamed Administrative Assistant Commercial Banking Donald L. Manfredonia Executive Vice President Joseph G. Perri Executive Vice President Paul J. Daley Senior Vice President James P. Johnis Senior Vice President Albert Arena Vice President Stephen Durso Vice President MaryAnn Fiume Vice President Edward V. Mirabella Vice President 64 William W. Riley Vice President John P. Solensky Vice President Margaret M. Curran Assistant Vice President Gretchen B. Nesky Assistant Vice President Frank Pelliccione Assistant Vice President Andrew W. Malone Commercial Mortgage Originator Maureen Cannarsa Administrative Assistant Diane Mucci Executive Assistant Compliance and Procedures Wayne M. Sturges Vice President Computer Services Conrad A. Lissade Computer Services Manager Data Center Jose Diaz Assistant Vice President Kristen Mucci Administrative Assistant Linda Sue Rudloff Administrative Assistant Deposit Operations Carmela Lalonde Assistant Manager Donna Long Assistant Manager Linda Bannen Administrative Assistant Neil Dastas Administrative Assistant Finance Mark D. Curtis Senior Vice President Wayne B. Drake Vice President Howard Hoeberlein Vice President Matthew J. Mankowski Assistant Vice President Catherine Irvin Assistant Manager Cheryl Romanski Assistant Manager 65 Diane Pascucci Administrative Assistant General Services Daniel Sapanara General Services Officer Human Resources Donna M. Kelly Vice President Takako Endo Assistant Vice President Susan J. Hempton Assistant Vice President Loan Center Robert Jacobs Assistant Vice President John F. Darcy Senior Mortgage Consultant Frederick T. Hughes Mortgage Originator Eveline Ratte Assistant Manager Anna S. Fleming Administrative Assistant Veronica Gajkowski Administrative Assistant Barbara Johnson Administrative Assistant Patricia Lacorazza Administrative Assistant Marketing Cathy M. Poturny Assistant Vice President Anne Urtnowski Assistant Manager Operations Administration Richard Kick Senior Vice President Betsy Gustafson Vice President Counsel Schupbach, Williams & Pavone LLP Independent Auditors Grant Thornton LLP Form 10-K Report A copy of the Corporation's annual report on Form 10-K for 2002, filed with the Securities and Exchange Commission, may be obtained without charge upon written request to Mark D. Curtis, Senior Vice President and Treasurer, The First of Long Island Corporation, 10 Glen Head Road, PO Box 67, Glen Head, New York 11545-0067. 66 Executive Office The First of Long Island Corporation 10 Glen Head Road Glen Head, New York 11545 (516) 671-4900 www.fnbli.com Transfer Agent and Registrar Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016-3572 (800) 368-5948 www.rtco.com Annual Meeting Notice The Annual Meeting of Stockholders will be held at the American Legion Hall, 190 Glen Head Road, Glen Head, New York 11545 on Tuesday, April 15, 2003 at 3:30 P.M. 67 Business Development Board [PHOTO OMITTED] Robert J. Bogardt, CPA Bogardt & Company, LLP [PHOTO OMITTED] Christopher S. Byczek, Esq. Partner Cronin & Byczek, LLP [PHOTO OMITTED] Louis Campanelli Board Director SCORE Foundation [PHOTO OMITTED] Emil V. Cianciulli, Esq. Partner Cianciulli & Meng, P.C. [PHOTO OMITTED] Thomas N. Dufek, CPA Dufek & Associates [PHOTO OMITTED] William L. Edwards Real Estate Investor [PHOTO OMITTED] C. J. Erickson, Esq. Hodgson Russ LLP [PHOTO OMITTED] Bernard Esquenet Chief Executive Officer The Ruhof Corp. [PHOTO OMITTED] Leonard Gleicher Partner Goldberg Bros. Realtors [PHOTO OMITTED] Kenneth R. Going GOING SIGN CO. Inc. [PHOTO OMITTED] Herbert Haber, Cpa [PHOTO OMITTED] Kevin J. Harding, Esq. Partner Harding and Harding [PHOTO OMITTED] Alan B. Katcher Chief Executive Officer Terry Alan Adv. Co., Inc. 68 [PHOTO OMITTED] Kevin T. Kelly Management Consultant [PHOTO OMITTED] Herbert Kotler, Esq. [PHOTO OMITTED] Kenneth R. Latham Chairman of the Board Latham Bros. Lumber Co., Inc. [PHOTO OMITTED] James J. Lynch, Esq. [PHOTO OMITTED] Susan Hirschfeld Mohr President J. W. Hirschfeld Agency, Inc. [PHOTO OMITTED] Richard E. Nussbaum, CPA Managing Partner Nussbaum Yates & Wolpow, P.C. [PHOTO OMITTED] James Panos, Esq. Partner Cianciulli & Meng, P.C. [PHOTO OMITTED] Douglas Pierce President Pierce Country Day School & Camp Inc. [PHOTO OMITTED] Quentin Sammis President Coldwell Banker Sammis [PHOTO OMITTED] Arthur C. Schupbach, Esq. Partner Schupbach, Williams & Pavone LLP [PHOTO OMITTED] H. Craig Treiber Chairman/CEO The Treiber Insurance Group [PHOTO OMITTED] Arthur Ventura President Badge Agency, Inc. [PHOTO OMITTED] Mark Wurzel President Calico Cottage, Inc. Photos not available: David Black, CPA; Zachary Levy, Esq.; Lawrence F. Steiner 69 Full Service Offices Glen Head 10 Glen Head Road Glen Head, NY 11545 (516) 671-4900 John J. Mulder, Jr. Vice President and Branch Manager Elaine Ballinger Assistant Cashier Patrice Goncalves Administrative Assistant Greenvale 7 Glen Cove Road Greenvale, NY 11548 (516) 621-8811 Philip R. Thompson Vice President and Branch Manager Daphne Johnson Assistant Manager Huntington 253 New York Avenue Huntington, NY 11743 (631) 427-4143 Rick Perro Vice President and Branch Manager Jenny Malandruccolo Assistant Vice President Margaret Hanrahan Administrative Assistant Marco Leon Administrative Assistant Locust Valley 108 Forest Avenue Locust Valley, NY 11560 (516) 671-2299 John T. Noonan Vice President and Branch Manager Mary Lou Martin Assistant Vice President Carol Luzynski Administrative Assistant Northport 711 Fort Salonga Road Northport, NY 11768 (631) 261-4000 Henry C. Suhr Vice President and Branch Manager David Lippa Assistant Vice President Janet Kittle Administrative Assistant 70 Old Brookville 209 Glen Head Road Old Brookville, NY 11545 (516) 759-9002 Frank Plesche Vice President and Branch Manager Carolyn McIntyre Assistant Vice President Melissa Grella Administrative Assistant Rockville Centre 310 Merrick Road Rockville Centre, NY 11570 (516) 763-5533 Raffaella Marciari Vice President and Branch Manager Theresa Crawford Administrative Assistant Roslyn Heights 130 Mineola Avenue Roslyn Heights, NY 11577 (516) 621-1900 Frieda O'Mara Vice President and Branch Manager Susan Sciacca Assistant Cashier Lucile Pelliccione Administrative Assistant Woodbury 800 Woodbury Road Woodbury, NY 11797 (516) 364-3434 George P. Knott Vice President and Branch Manager June Pipito Assistant Vice President Commercial Banking Offices Allen Boulevard 22 Allen Boulevard Farmingdale, NY 11735 (631) 753-8888 Patricia M. Gramble Assistant Vice President and Branch Manager Bohemia 30 Orville Drive Bohemia, NY 11716 (631) 218-2500 Robert F. Covino Vice President and Branch Manager 71 Deer Park 60 E. Industry Court Deer Park, NY 11729 (631) 243-2600 Albert M. Nordt, Jr. Assistant Vice President and Branch Manager Garden City 1050 Franklin Avenue Garden City, NY 11530 (516) 742-6262 Elizabeth A. Materia Assistant Vice President and Branch Manager Great Neck 536 Northern Boulevard Great Neck, NY 11021 (516) 482-6666 Janice B. Manditch Assistant Vice President and Branch Manager Joanne Bosco Administrative Assistant Hauppauge 330 Motor Parkway Hauppauge, NY 11788 (631) 952-2900 Mark A. Ryan Assistant Vice President and Branch Manager Hicksville 106 Old Country Road Hicksville, NY 11801 (516) 932-7150 Joyce C. Graber Assistant Vice President and Branch Manager Arlyne H. Kramer Assistant Cashier Lake Success 3000 Marcus Avenue Lake Success, NY 11042 (516) 775-3133 Lucy Ortiz Assistant Vice President and Branch Manager Patricia Scrudato Assistant Manager Mineola 194 First Street Mineola, NY 11501 (516) 742-1144 Herta Tscherne Assistant Vice President and Branch Manager Rosemary Kerrane Assistant Manager 72 New Highway 2091 New Highway Farmingdale, NY 11735 (631) 454-2022 Barbara Cavalier Assistant Vice President and Branch Manager New Hyde Park 200 Jericho Turnpike New Hyde Park, NY 11040 (516) 328-3100 Linda A. Cutter Assistant Vice President and Branch Manager Kathleen Martin Assistant Manager Valley Stream 133 E. Merrick Road Valley Stream, NY 11580 (516) 825-0202 Peter J. Arebalo Assistant Vice President and Branch Manager Susan Costabile Assistant Manager Investment Management Division 800 Woodbury Road Woodbury, NY 11797 (516) 364-3436 Brian J. Keeney Senior Vice President Robert M. Heyssel, Jr. Vice President Francis V. Liantonio Vice President Sharon E. Pazienza Vice President Joanne Buckley Assistant Vice President Quyen T. Pham Operations Manager Dawn LoBraico Administrative Assistant [LOGO] The First of Long Island 73