-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ln3gEfk0rHXaPmt+in4l+RrBmU09nNMOxOFhURJqzseiyQX+H6RYDODnZWm88JWf A2iCDgTryx+OpyjTTYdChQ== 0001169232-04-001724.txt : 20040315 0001169232-04-001724.hdr.sgml : 20040315 20040315112015 ACCESSION NUMBER: 0001169232-04-001724 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST OF LONG ISLAND CORP CENTRAL INDEX KEY: 0000740663 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 112672906 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12220 FILM NUMBER: 04668219 BUSINESS ADDRESS: STREET 1: 10 GLEN HEAD RD CITY: GLEN HEAD STATE: NY ZIP: 11545 BUSINESS PHONE: 5166714900 MAIL ADDRESS: STREET 1: 10 GLEN HEAD ROAD CITY: GLEN HEAD STATE: NY ZIP: 11545 10-K 1 d58672_10-k.txt ANNUAL REPORT UNITED STATES 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, 2003 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. |_| [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 30, 2003, the last business day of the Corporation's most recently completed second fiscal quarter, was $138,313,296. This value was computed by reference to the price at which the stock was last sold on June 30, 2003 and excludes $24,914,018 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, February 29, 2004 ----- ------------------------------ Common Stock, $.10 par value 4,093,932 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Corporation's Annual Report to shareholders for the fiscal year ended December 31, 2003 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 20, 2004 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. 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. In 2003, the Agency once again began selling mutual funds and annuities to customers of the Bank. Such products are being made available through a third party provider. The Bank has two other wholly-owned subsidiaries, The First of Long Island REIT, Inc. and FNY Service Corp., an investment company. The Bank has historically served the financial needs of privately owned businesses, professionals, consumers, public bodies, and other organizations primarily in Nassau and Suffolk Counties, Long Island. However, the Bank opened three new commercial banking branches in Manhattan in the second quarter of 2003. On an ongoing basis, management will continue to evaluate potential new branch sites. 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 on Long Island (Glen Head, Greenvale, Locust Valley, Northport, Old Brookville, Rockville Centre, Roslyn Heights, Woodbury), twelve commercial banking offices on Long Island (Bohemia, Deer Park, Farmingdale, Garden City, Great Neck, Hauppauge, Hicksville, Lake Success, Mineola, New Hyde Park, Valley Stream), and three commercial banking offices in Manhattan. 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 2003. 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., and Bank of New York, and various Long Island and Manhattan 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, deposit accounts, or general business assets. 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 primarily 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 rates. 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 70% to 75% of appraised value on residential mortgage loans, 50% to 60% on home equity lines, and 70% to 75% 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, real estate values 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). Loans in excess of $750,000 up to and including $3 million 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. Loans in excess of $3 million up to and including $5 million require the approval of the Management Loan Committee, the Chairman or Chief Executive Officer, and two non-management directors, one of whom must be a member of the Board Loan Committee. 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, ---------------------------------------------------------------------- 2003 2002 2001 2000 1999 --------- --------- --------- --------- --------- (in thousands) Commercial and industrial ........... $ 47,886 $ 37,329 $ 40,993 $ 30,514 $ 30,296 Secured by real estate .............. 268,508 217,730 179,905 155,283 147,598 Consumer ............................ 5,730 6,414 6,198 7,504 5,284 Other ............................... 729 628 593 560 549 --------- --------- --------- --------- --------- 322,853 262,101 227,689 193,861 183,727 Unearned income ..................... (882) (993) (1,001) (952) (953) --------- --------- --------- --------- --------- 321,971 261,108 226,688 192,909 182,774 Allowance for loan losses ........... (2,452) (2,085) (2,020) (1,943) (2,033) --------- --------- --------- --------- --------- $ 319,519 $ 259,023 $ 224,668 $ 190,966 $ 180,741 ========= ========= ========= ========= =========
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 ................................ $ 8,042 $ 2,921 $ -- $ 10,963 Variable rate ............................. 18,488 14,776 3,659 36,923 -------- -------- -------- -------- $ 26,530 $ 17,697 $ 3,659 $ 47,886 ======== ======== ======== ========
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 collateral 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 title insurance updates to ensure 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, 2003, 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 favorable during the 2003 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 probable incurred 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 reserved for are determined on a pooled basis taking into account a variety of 3 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. The allowance for loan losses is comprised of impairment losses on the loans specifically reserved for plus estimated losses on the pools of loans. Changes in the Bank's allowance for loan losses for each of the five years in the period ended December 31, 2003 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 8 and 7, 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, 2003. 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 good and residential real estate values have grown to unprecedented highs. Such conditions and values could deteriorate in the future, and such deterioration could be substantial. If this were to occur, some of the Bank's borrowers may be unable to make the required contractual payments on their loans, and the Bank may be unable to realize the full carrying value of such loans through foreclosure. However, management believes that the Bank's underwriting policies for residential mortgages are relatively conservative and, as a result, the Bank should be less affected than the overall market. 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 and/or borrowings. 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, 2003, the Bank had net unrealized gains of $4,274,000 in its held-to-maturity portfolio, consisting of gross unrealized gains of $6,093,000 and gross unrealized losses of $1,819,000. The unrealized gains and losses were principally caused by decreases and increases, respectively, in interest rates since the securities were purchased. Gains that could be recognized currently upon the sale of securities with unrealized gains would be approximately offset by the reduction in future interest income that would result from purchasing replacement securities that are similar with respect to issuer and duration but currently have lower yields. The Bank intends and expects to be able to hold its held to maturity 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, 2003 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 2003 representing a yield of 6.00%. Sources of Funds General. The Bank's primary sources of cash are deposit growth, maturity and amortization of investment securities, loan payments, operations, and borrowings under repurchase agreements. The Bank can also borrow overnight federal funds from other commercial banks and borrow at the Federal Reserve Bank discount window. A further discussion of borrowing sources 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. 4 The Bank offers checking and interest-bearing deposit products. In addition to business checking, the Bank has a variety of personal checking products including "Free", "First Class", "Regular", and "Senior Citizen" checking. Among other things, the personal products differ in minimum balance requirements, monthly maintenance fees, and per check charges, if any. The interest-bearing deposit products, which have a wide range of interest rates and terms, consist of checking accounts, including 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 $33,850,000, or 4.4% of total deposits, at December 31, 2003. Certificates of deposit in amounts of $100,000 or more were $16,428,000 at December 31, 2003, or 2.1% of total deposits. The Bank relies primarily on customer service, calling programs, referral sources, 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, --------------------------------------------------------------------------- 2003 2002 2001 --------------------- ---------------------- -------------------- Average Average Average Average Average Average Balance Rate Paid Balance Rate Paid Balance Rate Paid ------- --------- ------- --------- ------- --------- (dollars in thousands) Checking ....................................... $277,096 --% $241,683 --% $201,688 --% Savings and money market ....................... 431,978 .76 391,829 1.14 343,389 2.31 Time deposits .................................. 33,917 1.29 34,810 1.84 39,202 3.84 -------- ---- -------- ---- -------- ---- $742,991 .50% $668,322 0.76% $584,279 1.62% ======== ==== ======== ==== ======== ====
Remaining Maturities of Time Deposits. The remaining maturities of the Bank's time deposits in amounts of $100,000 or more at December 31, 2003 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 for loans on the basis of the quality of service it provides and by offering competitive interest rates, and competes 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, 2003, the Bank had 189 full-time equivalent employees and considers employee relations to be good. 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 at present simply go to the homepage of the Bank's Internet website and click on "About Us", then click on "SEC Filings", and then click on "Corporate 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, 2003, the Bank owns a total of ten buildings in fee and occupies sixteen other facilities under lease arrangements, all of which are in Nassau and Suffolk Counties, Long Island and Manhattan. 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 From time to time the Corporation and the Bank may be involved in litigation that arises in the normal course of business. As of the date of this Form 10-K, neither the Corporation nor the Bank is a party to any litigation that management believes could reasonably be expected to have a material adverse effect on the Corporation's or the Bank's financial position or results of operations. 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 2003. 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, 2003 showing the high and low sales prices, by quarter, for the years ended December 31, 2003 and 2002 is incorporated herein by reference. On February 29, 2004, there were 4,093,932 shares of the Corporation's common stock outstanding with 681 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 2003 and 2002, the Corporation declared semi-annual cash dividends aggregating $.70 and $.63 per share, respectively. 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, 2003 is incorporated herein by reference. The Corporation's dividend payout ratio was 25.74%, 23.08% and 23.18% for 2003, 2002 and 2001, respectively. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on pages 9 through 23 of the Corporation's Annual Report to Shareholders for the fiscal year ended December 31, 2003 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 20 through 22 of the Corporation's Annual Report to Shareholders for the fiscal year ended December 31, 2003 is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The report of independent auditors and consolidated financial statements appearing on pages 25 through 49 of Corporation's Annual Report to Shareholders for the fiscal year ended December 31, 2003 are incorporated herein by reference. The reports of the Corporation's prior independent auditors included in exhibits 99.1 and 99.2 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 Company approved the dismissal of the Company's independent auditors, Arthur Andersen LLP, and the engagement of Grant Thornton LLP as its new independent auditors. The dismissal of Arthur Andersen LLP and the engagement of Grant Thornton LLP was previously reported by the Corporation on July 2, 2002 on Form 8-K. 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 subsequent interim periods preceding the dismissal and up to the date of 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 and there were no reportable events with respect to Arthur Andersen LLP as that term is described in Item 304 of Regulations S-K. 6 On October 21, 2003, the Audit Committee dismissed the Company's independent auditors, Grant Thornton LLP, and the engaged Crowe Chizek and Company LLC as its new independent auditors. The dismissal of Grant Thornton LLP and the engagement of Crowe Chizek and Company LLC was previously reported by the Corporation on October 28, 2003 on Form 8-K. Grant Thornton's report for the fiscal year ended December 31, 2002, which was the only report issued by them, did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's 2002 fiscal year and all interim periods preceding the dismissal and to the date of dismissal, there were no disagreements between the Company and Grant Thornton LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure and there were no reportable events with respect to Grant Thornton LLP as that term is described in Item 304 of Regulation S-K. ITEM 9A. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures The Company's Chief Executive Officer, Michael N. Vittorio, and Chief Financial Officer, Mark D. Curtis, have evaluated the Corporation's disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, they have concluded that the Corporation's disclosure controls and procedures are effective in ensuring that material information related to the Corporation is made known to them by others within the Corporation. (b) Changes in Internal Control Over Financial Reporting There have been no significant changes in internal control over financial reporting that occurred during the fourth quarter of 2003 that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT "ELECTION OF DIRECTORS" appearing on pages 3 through 5, "MANAGEMENT" appearing on pages 9 and 10, "Audit Committees" appearing on pages 6 and 7, and "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" appearing on page 21 of Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held April 20, 2004 are incorporated herein by reference. The Corporation has adopted a code of ethics for senior financial officers. For the purposes of the code of ethics, senior financial officer means the Corporation's Chairman of the Board of Directors, President and Chief Executive Officer, Chief Financial Officer and Treasurer, and Controller. The Corporation will provide a copy of its code of ethics to any person upon request and without charge. Requests should be directed to the Corporation's Finance Department located at 10 Glen Head Road, Glen Head, New York 11545. ITEM 11. EXECUTIVE COMPENSATION "COMPENSATION OF DIRECTORS", "BOARD COMPENSATION COMMITTEE REPORT", "COMPENSATION OF EXECUTIVE OFFICERS", "SUMMARY COMPENSATION TABLE", "COMPENSATION PURSUANT TO PLANS", "PERFORMANCE GRAPH", "EMPLOYMENT CONTRACTS", and "SEVERANCE AGREEMENTS" appearing on pages 8 and 9 and 11 through 21 of the Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held April 20, 2004 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 20, 2004 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS "TRANSACTIONS WITH MANAGEMENT AND OTHERS" appearing on page 21 of Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held April 20, 2004 is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES "INDEPENDENT AUDITORS" appearing on pages 21 through 23 of Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held April 20, 2004 is incorporated herein by reference. 7 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 reports of independent auditors thereon as required by Item 8 of this report are incorporated herein by reference o Consolidated Balance Sheets - December 31, 2003 and 2002 o Consolidated Statements of Income - Years ended December 31, 2003, 2002 and 2001 o Consolidated Statement of Changes in Stockholders' Equity - Years ended December 31, 2003, 2002 and 2001 o Consolidated Statements of Cash Flows - Years ended December 31, 2003, 2002 and 2001 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) 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, July 9, 2002, and August 31, 2003 (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, 2003 21 Subsidiary of Registrant 23.1 Consent of Crowe Chizek and Company LLC, Independent Auditors 23.2 Consent of Grant Thornton LLP, Independent Certified Public Accountants 31 Rule 13a-14(a)/15d-14(a) Certifications 32 Section 1350 Certifications 99.1 Report of Grant Thornton dated January 24, 2003 99.2 Report of Arthur Andersen LLP dated January 22, 2002 *Compensatory plan (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. 8 (3) "Incentive Compensation Plan" and "Board Compensation Committee Report" appearing on pages 16 and 11, respectively, of the Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held April 20, 2004 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". The August 31, 2003 amendment to Mr. Johnson's employment contract was filed as part of Report on Form 10-Q for the quarterly period ended September 30, 2003, filed on November 10, 2003, as exhibit 10.1, which exhibit is incorporated herein by reference. Mr. Johnson's current base annual salary is disclosed in Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held April 20, 2004. (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. Mr. Vittorio's current base annual salary is disclosed in Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held April 20, 2004. (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 Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held April 20, 2004. (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 Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held April 20, 2004. (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 Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held April 20, 2004. (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 10.10, 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 10.11, which exhibit is incorporated herein by reference. (b) Reports on Form 8-K During the quarter ended December 31, 2003 and thereafter to the date hereof the Corporation filed the following reports on Form 8-K with the Securities and Exchange Commission: 1) The Corporation filed a Form 8-K dated November 4, 2003 to report under Item 12 that it had: (1) issued a press release disclosing material non-public information regarding the Corporation's financial condition and results of operations as of and for the nine and three month periods ended September 30, 2003, and (2) mailed a quarterly report to shareholders disclosing substantially similar non-public information regarding the Corporation's financial condition and results of operations. The press release was furnished as Exhibit 99.1 to the Form 8-K filing and the quarterly report to shareholders was furnished as Exhibit 99.2 to the Form 8-K filing. 2) The Corporation filed a Form 8-K dated October 28, 2003 to report under Item 4 that the Audit Committee of the Board of Directors dismissed the Company's independent auditors, Grant Thornton LLP, and engaged Crowe Chizek and Company LLC as its new independent auditors. Crowe Chizek and Company LLC audited the Company's financial statements for the fiscal year ended December 31, 2003. 3) The Corporation filed a Form 8-K dated January 26, 2004 to report under Item 12 that it had: (1) issued a press release disclosing material non-public information regarding the Corporation's financial condition as of December 31, 2003 and results of operations for the year and quarterly period then ended, and (2) mailed a newsletter to its stockholders disclosing similar nonpublic information regarding the Corporation's financial condition as of December 31, 2003 and results of operations for the year then ended. The press release was furnished as Exhibit 99.1 to the Form 8-K filing and the newsletter to stockholders was furnished as Exhibit 99.2 to the Form 8-K filing. 9 (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 1, 2004 By /s/ MICHAEL N. VITTORIO -------------------------------------------- MICHAEL N. VITTORIO, 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 2, 2004 - ---------------------------- J. William Johnson /s/ ALLEN E. BUSCHING Director MARCH 5, 2004 - ---------------------------- Allen E. Busching /s/ Paul T. Canarick Director MARCH 9, 2004 - ---------------------------- Paul T. Canarick /s/ ALEXANDER L. COVER Director MARCH 3, 2004 - ---------------------------- Alexander L. Cover /s/ BEVERLY ANN GEHLMEYER Director MARCH 2, 2004 - ---------------------------- Beverly Ann Gehlmeyer /s/ HOWARD THOMAS HOGAN, JR. Director MARCH 10, 2004 - ---------------------------- Howard Thomas Hogan, Jr. /s/ J. DOUGLAS MAXWELL, JR. Director MARCH 3, 2004 - ---------------------------- J. Douglas Maxwell, Jr. /s/ JOHN R. MILLER III Director MARCH 3, 2004 - ---------------------------- John R. Miller III /s/ WALTER C. TEAGLE III Director MARCH 4, 2004 - ---------------------------- Walter C. Teagle III /s/ MICHAEL N. VITTORIO Director MARCH 1, 2004 - ---------------------------- Michael N. Vittorio 11 EX-13 4 d58672_ex-13.txt REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 - REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 12 [LOGO] The First of Long Island The First of Long Island Corporation 2003 Annual Report [PHOTO OMITTED] History Personal Service Big Bank Alternative Financial Strength "A Beacon of Strength in all Economic Climates" 13 [LOGO] The First of Long Island Business of the Corporation The First of Long Island Corporation ("Corporation") is a one-bank holding company organized under the laws of the State of New York. Its primary business is the operation of its sole subsidiary, The First National Bank of Long Island ("Bank"). The Bank was organized in 1927 under national banking laws and became the sole subsidiary of the Corporation under a plan of reorganization effected April 30, 1984. The Bank is a full service commercial bank which provides a broad range of financial services to individual, professional, corporate, institutional and government customers through its twenty-four branch system on Long Island and in Manhattan. The First of Long Island Agency, Inc. was organized in 1994 under the laws of the State of New York, as a subsidiary of the Bank to conduct business as a licensed insurance agency engaged in the sale of mutual funds and insurance, primarily fixed annuity products. The Bank is subject to regulation and supervision of the Federal Reserve Board, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation which also insures its deposits. The Comptroller of the Currency is the primary banking agency responsible for regulating the subsidiary Bank. In addition, the Corporation is subject to the regulations and supervision of the Federal Reserve Board and the Securities and Exchange Commission. Table of Contents Selected Financial Data - 1 Letter to Shareholders - 2 A Beacon of Strength in All Economic Climates - 4 Senior Management - 7 Board of Directors - 8 Management's Discussion and Analysis of Financial Condition and Results of Operations - 9 Report of Independent Auditors - 25 Consolidated Financial Statements and Notes - 26 Annual Meeting Notice - 50 Business Development Board - IBC Branch Listings - OBC 14 SELECTED FINANCIAL DATA The following is selected consolidated financial data for the past five years. This data should be read in conjunction with the information contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the accompanying consolidated financial statements and related notes.
2003 2002 2001 2000 1999* ------------- ------------- ------------- ------------- ------------- INCOME STATEMENT DATA: Total Interest Income ......................... $ 36,968,000 $ 36,929,000 $ 37,989,000 $ 38,822,000 $ 33,963,000 Total Interest Expense ........................ 3,878,000 5,111,000 9,451,000 13,106,000 9,513,000 Net Interest Income ........................... 33,090,000 31,818,000 28,538,000 25,716,000 24,450,000 Provision for Loan Losses (Credit) ............ 457,000 100,000 100,000 (75,000) -- Net Income .................................... 11,365,000 11,563,000 10,094,000 9,318,000 9,034,000 PER SHARE DATA: Basic Earnings ................................ $ 2.78 $ 2.77 $ 2.37 $ 2.13 $ 1.98 Diluted Earnings .............................. 2.72 2.73 2.33 2.10 1.95 Cash Dividends Declared ....................... .70 .63 .54 .48 .43 Stock Splits/Dividends Declared ............... -- 3-for-2 -- -- -- Book Value .................................... $ 21.87 $ 20.53 $ 17.84 $ 16.33 $ 14.45 BALANCE SHEET DATA AT YEAR END: Total Assets .................................. $ 914,264,000 $ 792,342,000 $ 684,081,000 $ 625,992,000 $ 570,551,000 Total Loans ................................... 321,971,000 261,108,000 226,688,000 192,909,000 182,774,000 Allowance for Loan Losses ..................... 2,452,000 2,085,000 2,020,000 1,943,000 2,033,000 Total Deposits ................................ 777,155,000 699,725,000 604,870,000 550,472,000 503,189,000 Securities Sold Under Repurchase Agreements ... 41,184,000 -- -- -- -- Stockholders' Equity .......................... 89,291,000 85,442,000 74,746,000 70,866,000 64,233,000 AVERAGE BALANCE SHEET DATA: Total Assets .................................. $ 851,407,000 $ 753,703,000 $ 661,958,000 $ 600,326,000 $ 554,561,000 Total Loans ................................... 281,556,000 242,773,000 205,959,000 186,451,000 176,078,000 Allowance for Loan Losses ..................... 2,246,000 2,101,000 1,941,000 1,961,000 2,835,000 Total Deposits ................................ 742,991,000 668,322,000 584,279,000 530,850,000 486,532,000 Securities Sold Under Repurchase Agreements ... 17,100,000 -- -- -- -- Stockholders' Equity .......................... 86,099,000 80,516,000 73,390,000 66,711,000 65,406,000 FINANCIAL RATIOS: Return on Average Total Assets (ROA) .......... 1.33% 1.53% 1.52% 1.55% 1.63% Return on Average Stockholders' Equity (ROE) .. 13.20% 14.36% 13.75% 13.97% 13.81% Average Equity to Average Assets .............. 10.11% 10.68% 11.09% 11.11% 11.79%
* Net income, earnings per share, ROA, and ROE for 1999 are before a $945,000 ($.21 per share) credit resulting from a transition adjustment to the allowance for loan losses. STOCK PRICES The Corporation's Common Stock trades on The Nasdaq SmallCap Market tier of The Nasdaq Stock Market under the symbol FLIC. The following table sets forth high and low sales prices for the years ended December 31, 2003 and 2002. 2003 2002 -------------------- -------------------- Quarter High Low High Low - ------- -------- -------- -------- -------- First $ 36.40 $ 32.65 $ 26.67 $ 24.10 Second 40.06 31.60 33.83 25.94 Third 45.49 36.55 36.57 32.25 Fourth 46.78 38.34 36.75 30.50 At December 31, 2003, there were 688 stockholders of record of the Corporation's Common Stock. The number of stockholders of record includes banks and brokers who act as nominees, each of whom may represent more than one stockholder. 15 Letter To Shareholders [PHOTO OMITTED] A good-sized business will be called a "small" business by a mega-bank. Well, small businesses are "big business" to us. That's why we see ourselves as THE BIG BANK ALTERNATIVE. - -Michael N. Vittorio, President & Chief Executive Officer Dear Shareholders, I am pleased to report to you on the year 2003, which has been both exciting and challenging. The excitement had to do with some of our new initiatives and campaigns; the challenges mostly revolved around the significant pressure on net interest margin caused by low interest rates and expenses associated with our growth strategies. Earnings per share were $2.72 in 2003 as compared to $2.73 in 2002. Our net income was $11,365,000. As of December 31, 2003, total assets were $914,264,000. For the twenty-fifth consecutive year, we are pleased to have been able to increase our dividend. Total dividends declared in 2003 amounted to 70 cents per share, an increase of 11% over the 63 cents declared in 2002. Our Return on Assets remained high at 1.33%, while Return on Equity was 13.20%. The most important factors favorably impacting the earnings growth for 2003 were a substantial 15% increase in average checking balances and strategy changes with respect to the Corporation's securities portfolio. Our growth in checking balances is significantly attributable to the efforts of our commercial calling program. For the year, total average checking balances were up $35,413,000. Strategy changes regarding the securities portfolio included reducing the size of our short-term portfolio to redeploy funds into intermediate-term securities and loans outstanding. This allowed us to take advantage of higher yields. In order for us to take advantage of the higher yields more quickly, borrowings under repurchase agreements were used to pre-invest future security and loan cash flows. Our loan growth was most evident in our average residential mortgage portfolio that was up $28,098,000, or 35%. [THE FOLLOWING WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL] Earnings Per Share 1979 $.08 1980 $.15 1981 $.17 1982 $.21 1983 $.26 1984 $.38 1985 $.58 1986 $.68 1987 $.73 1988 $.83 1989 $.86 1990 $.91 1991 $.86 1992 $1.03 1993 $1.11 1994 $1.21 1995 $1.24 1996 $1.39 1997 $1.55 1998 $1.73 1999 $1.95 2000 $2.10 2001 $2.33 2002 $2.73 2003 $2.72 On a fully diluted basis excluding special credits. Adjusted for stock dividends and splits. 16 [THE FOLLOWING WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL] Return on Average Assets 2000 1.55% 2001 1.52% 2002 1.53% 2003 1.33% Other important factors favorably impacting earnings were an unusually large commercial mortgage prepayment fee received in January, net gains on sales of securities and growth in the average balances of other deposit liability products. There is no doubt that the overall decline in interest rates had the most negative influence on earnings. During midyear 2003, there was a further reduction in the federal funds rate to a very low 1%. This along with lower intermediate and longer term rates caused added downward pressure on our net interest margin. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL] Average Checking Balances In Thousands of Dollars 1997 $133,082 1998 $154,781 1999 $168,791 2000 $186,215 2001 $201,688 2002 $241,683 2003 $277,096 In 2003 the Bank expanded into a new geographical market by opening three new branches in the borough of Manhattan. Although these openings have initially created some drag on earnings, we are enthusiastic regarding our prospects in New York City. To augment our growth and banking model, we fully expect to continue to open new branches in the future. Through our branches we are confident we will continue to offer a unique type of service not available from the larger institutions with which we compete. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL] Cash Dividends Declared Per Share 1979 $.01 1980 $.02 1981 $.02 1982 $.03 1983 $.05 1984 $.05 1985 $.08 1986 $.10 1987 $.11 1988 $.13 1989 $.13 1990 $.15 1991 $.17 1992 $.19 1993 $.21 1994 $.23 1995 $.25 1996 $.29 1997 $.33 1998 $.38 1999 $.43 2000 $.48 2001 $.54 2002 $.63 2003 $.70 Adjusted for stock dividends and splits. 17 Additional 2003 initiatives included a Free Checking Campaign that had a positive influence on the growth of our consumer checking account base. For the year, the number of consumer checking accounts increased by 11%, and average balances were up $8.1 million or 16.5%. We also entered into a strategic partnership with a third party provider to offer fixed and variable annuities and a select family of high quality mutual funds. Investment representatives are now available to assist our customers in meeting their growing financial needs. This is an opportunity to provide "one-stop shopping" and increase fee income with minimal expense to the Bank. As we assess the year 2004, interest rates will challenge us like no other year in recent memory. Other challenging items include increasing benefit costs, new local competition and an improving stock market that may provide an alternative to traditional bank deposits. Despite challenges, we remain enthusiastic about our growth prospects. The big banks continue to merge, acquire and then downsize their organizations. Their attention seems to be distracted with national and international market strategies as opposed to emphasizing the management of local markets. This provides community minded organizations like The First of Long Island with market opportunities, as we remain intently focused on our most important strategy---the solicitation of banking relationships from service conscious consumers, professionals and privately owned businesses. As the Bank enters its 78th year serving the community, our most important goal remains unchanged---to maintain the financial strength of the Bank. We are gratified to know that Weiss Ratings, the nation's leading provider of ratings and analyses of financial service companies, continues to rank The First of Long Island "Excellent" among an elite group of top tier banks and thrifts in the country. We continue to manage the Corporation based on the long-term viability of the organization. Every tactic and every decision is based on the effect it has on you, our stockholders. We look forward to the future with optimism, a willingness to meet the challenges that lie ahead, and confidence in our ability to remain a beacon of strength in all economic climates. /s/ Michael N. Vittorio Michael N. Vittorio President & Chief Executive Officer 18 1927.....History.....Independent [PHOTO OMITTED] A Beacon of Strength in All Economic Climates For over seventy-five years The First National Bank of Long Island has had a reputation for consistently providing the highest level of service tailored to meet the needs of our customers. We pride ourselves in taking the time to get to know the individual consumers and businesses that we service. Our twenty-four branches are professionally staffed and conveniently located on Long Island and, most recently, in Manhattan. Our staff is made up of seasoned, professional account officers who look to build relationships. We remain committed to a personal banking approach, paying attention to the details, and delivering creative financial solutions. HISTORY In 1927, the founders of the Bank believed in order to succeed, everything had to revolve around the customer. Since our inception, every product introduced, branch built or solution implemented has been brought about to accomplish this goal. Our success continues to be measured by the generations of customers who have grown with us over the years. Our style remains to greet our customers by name, answer our own phones and make all management and credit decisions locally. FINANCIAL STRENGTH The number one priority of our Bank remains financial strength. Just growing is not a strategy. Growth must remain consistent with strategic initiatives that enhance our competitive position. Growth should always be secondary to profitability in its importance. We are gratified to know that Weiss Ratings, the nation's leading provider of ratings and analyses of financial services companies, continues to rank The First of Long Island "EXCELLENT" among an elite group of the top tier banks and thrifts in the country. Excellent.....Financial Strength.....A Rating [PHOTO OMITTED] Quality.....Personal Service.....Innovations [PHOTO OMITTED] PERSONAL SERVICE Our Bank's philosophy is to distinguish ourselves from the competition through our deeply rooted commitment to unparalleled personal service. We demonstrate this commitment in all of our dealings with our customers: privately owned businesses, professionals, and service conscious consumers. We know customers do not want to be routed through 800 numbers and endless prompts only to be connected to a faceless entity or a call center hundreds or even thousands of miles away. We know customers want to speak to a real person who knows them . . . by walking into one of our twenty-four branches or calling a local phone number answered by a familiar and friendly voice. This is our style of banking . . . a style dedicated to meeting customer needs. A style determined to deliver overall service quality and personal attention often lacking in banking today. BIG BANK ALTERNATIVE We have been able to deliver on the promise of personal service because that concept has remained the focus of our entire Bank. With direct access to senior executives and decision makers, our customers are kept informed on the progress of lending decisions, receive financial advice and have their problems resolved quickly and efficiently. It's not about the Bank, it's about the customer. That's why we are an alternative we think you'll like. [PHOTO OMITTED] Professional.....The "Big Bank Alternative".....Unique [PHOTOS OMITTED] 19 Today banking is experiencing more than its share of mergers, acquisitions and consolidations. As the big banks get bigger, it is often at the expense of the consumer, professional and individual commercial business. It's logical to surmise that "big" will almost inevitably mean bureaucratic and impersonal. A good-sized business will be called a "small" business by a mega-bank. Well, small businesses are big business to us. That's why we see ourselves as THE BIG BANK ALTERNATIVE. As THE BIG BANK ALTERNATIVE, we strive to live up to and exceed the expectations of our most important customer - y o u ! History, Financial Strength, Personal Service, The Big Bank Alternative - a winning combination at The First National Bank of Long Island. [PHOTOS OMITTED] 20 [PHOTO OMITTED] left to right: Joseph G. Perri, Donald L. Manfredonia, Richard Kick, Michael N. Vittorio, J. William Johnson, Brian J. Keeney, Arthur J. Lupinacci Jr., Mark D. Curtis The First of Long Island Corporation Officers J. William Johnson Chairman Michael N. Vittorio President & Chief Executive Officer Arthur J. Lupinacci, Jr. Executive Vice President and Chief Administrative Officer Mark D. Curtis Senior Vice President and Treasurer Brian J. Keeney Senior Vice President Richard Kick Senior Vice President Donald L. Manfredonia Senior Vice President Joseph G. Perri Senior Vice President and Secretary Wayne B. Drake Assistant Treasurer The First National Bank of Long Island Executive Officers J. William Johnson Chairman Michael N. Vittorio President & Chief Executive Officer Arthur J. Lupinacci, Jr. Executive Vice President and Chief Administrative Officer Donald L. Manfredonia Executive Vice President Senior Lending Officer Joseph G. Perri Executive Vice President Senior Commercial Marketing Officer Mark D. Curtis Senior Vice President Chief Financial Officer and Cashier Brian J. Keeney Senior Vice President Executive Trust Officer Richard Kick Senior Vice President Senior Operations and Senior Retail Loan Officer 21 [PHOTO OMITTED] on stairs, left to right: Alexander L. Cover, J. Douglas Maxwell Jr., J. William Johnson, Michael N. Vittorio front row, left to right: Howard Thomas Hogan Jr., Beverly Ann Gehlmeyer, Walter C. Teagle III, Allen E. Busching, Paul T. Canarick, John R. Miller III The First of Long Island Corporation Board of Directors J. William Johnson Chairman Michael N. Vittorio President & Chief Executive Officer Allen E. Busching Principal, B&B Capital (consulting and private investment) Paul T. Canarick President and Principal Paul Todd, Inc. (construction company) Alexander L, Cover (business consultant) Beverly Ann Gehlmeyer Tax Manager and Principal Gehlmeyer & Gehlmeyer, P.C. (certified public accounting firm) Howard Thomas Hogan, Jr., Esq. Hogan & Hogan (attorney, private practice) J. Douglas Maxwell, Jr. Chief Financial Officer NIRx Medical Technologies LLC (medical technology) John R. Miller III President and Publisher Equal Opportunity Publications, Inc. (publishing) Walter C. Teagle III President Teagle Management, Inc. (private investment consulting firm) 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors that have affected the Corporation's financial condition and operating results during the periods included in the accompanying consolidated financial statements, and should be read in conjunction with such financial statements. The Corporation's financial condition and operating results principally reflect those of its wholly-owned subsidiary, The First National Bank of Long Island (the "Bank"), and the Bank's wholly-owned subsidiaries, The First of Long Island Agency, Inc., The First of Long Island REIT, Inc., and FNY Service Corp., an investment company. The Corporation's primary service area has historically been Nassau and Suffolk Counties, Long Island. However, the Bank opened three new commercial banking branches in Manhattan in the second quarter of this year and may open additional Manhattan branches in the future. Overview 2003 Versus 2002 Summary. During 2003, the Corporation experienced strong growth in its core business products. This enabled the Corporation to achieve relatively stable earnings in 2003 despite the expenses of its growth strategies and, more importantly, significant downward pressure on net interest margin caused by low interest rates. The Corporation earned $2.72 per share in 2003 as compared to $2.73 in 2002. Returns on Average Assets (ROA) and Equity (ROE) were 1.33% and 13.20%, respectively, in 2003 as compared to returns of 1.53% and 14.36%, respectively, in 2002. The core business products that experienced the most significant growth in average balances were checking deposits which were up 15%, money-market-type savings deposits which were up 9%, attorney escrow-type deposits which were up 28%, and residential mortgages which were up 35%. As in prior years, the growth in average checking balances was once again among the most significant items positively affecting earnings. The growth in checking balances is believed to be attributable to a variety of factors including targeted solicitation efforts by the Bank's business development officers, the opening of three commercial branches in Manhattan, the introduction and promotion of a free checking product for consumers, favorable conditions in the local economy, the high level of customer service offered by the Bank, and a lack of incentive for the Bank's customers to invest excess balances as a result of the low interest rate environment. The Bank's free checking campaign was launched in the first quarter and resulted in an increase this year of approximately 11% in the number of personal checking accounts. The growth in money-market-type savings balances was largely comprised of growth in "Select Savings", a statement savings account that earns a higher money market rate, and growth in nonpersonal money market balances. In addition to the competitive rate offered, the growth in Select Savings balances may be partially attributable to perceived risk in the equity markets. The growth in attorney escrow-type accounts is believed to be largely attributable to solicitation efforts and the high volume of mortgage refinance activity. Although the Bank has enjoyed strong deposit growth in recent years, management believes that an increase in interest rates and/or recovery in the equity markets may put pressure on the Bank's ability to grow its deposit base. Businesses could become more sensitive regarding balances maintained in noninterest-bearing deposit accounts and the risk/reward tradeoff offered by alternatives to bank deposit products may become more attractive. The growth in residential mortgages resulted from a strong housing market on Long Island, the low interest rate environment and its impact on the desire of bank customers to refinance their existing mortgages, and an aggressive residential mortgage campaign conducted by the Bank during the second half of 2003. Along with growth in its core business products, particularly checking balances, strategy changes with respect to the Bank's securities portfolio was among the most significant items positively impacting 2003 earnings. The changes involved reducing the size of the short-term securities portfolio, increasing the intermediate-term securities portfolio and loan portfolio, and borrowing under repurchase agreements to pre-invest future security and loan cash flows. The shift from short-term to intermediate-term securities enabled the Bank to take advantage of the better yields offered by somewhat longer maturities, and borrowing and pre-investing allowed this to happen faster. Other important factors also favorably impacting earnings were an unusually large commercial mortgage prepayment fee of $564,000 received in the first quarter and net gains on sales of securities of $333,000. The large prepayment fee added 8 cents to earnings per share. Overwhelmingly, the most negative influence on 2003 earnings was the overall decline in interest rates. On a 23 sequential quarter-to-quarter basis, after a modest uptick in the first quarter, net interest margin continued to decrease. Management expects rates to remain low during the upcoming year. As cautioned in the past, sustained lower interest rates should result in continued margin pressure and further negatively impact the Bank's income. Conversely, if interest rates were to increase this may initially have a negative impact on net interest margin. However, sustained higher interest rates should have a positive impact. Also affecting 2003 earnings were increases in personnel costs and expenses of the Corporation's growth strategies, particularly the opening of three New York City commercial branches on June 2, 2003. While it is too soon to predict their ultimate success, management is optimistic regarding the long-term results of the New York City branches. On an ongoing basis management will continue to evaluate potential new branch sites. 2003 was a more active year from the standpoint of the Corporation's stock repurchase program. During 2003, the Corporation was able to purchase 124,678 shares of common stock for an aggregate consideration of approximately $4,503,000. This compares to purchases of 49,894 and 168,147 shares in 2002 and 2001, respectively, each of which have been adjusted where applicable for the 3-for-2 stock split paid July 2002. The stock repurchase program has historically enhanced earnings per share and return on average stockholders' equity. This year the program contributed approximately 4 cents to per share earnings. The estimated contribution includes the full-year impact of the shares purchased in 2002 plus the additional impact of the shares purchased throughout 2003. Despite the amount spent for share repurchases and continued growth of cash dividends, total capital before unrealized gains on available-for-sale securities grew by $4,559,000 in 2003, or approximately 6%, and the Corporation's capital ratios continue to substantially exceed the current regulatory criteria for a well-capitalized bank. In addition, the Corporation's liquidity continues to be strong. 2002 Versus 2001 Summary. The Corporation earned $2.73 per share in 2002 as compared to $2.33 in 2001, an increase of 17%. Based on 2002 net income of $11,563,000, the Corporation returned 1.53% on average total assets and 14.36% on average total equity as compared to returns of 1.52% and 13.75% in 2001. Total assets and deposits were $792,342,000 and $699,725,000, respectively, at December 31, 2002, each up by approximately 16% when compared to the prior year-end balance. Despite continued cash dividends and purchases under the Corporation's stock repurchase program, total capital before unrealized gains on available-for-sale securities grew by $7,710,000 in 2002, or approximately 10%, and the Corporation's capital ratios continued to substantially exceed the regulatory criteria for a well-capitalized bank. In addition, the Corporation's liquidity continued to be strong. Overwhelmingly, the most important reason for the earnings increase in 2002 was the significant growth in average checking balances. Average checking balances for 2002 were up approximately 20%. Except for the impact of the new branches opened in 2003, the growth in checking balances in 2002 is believed to be attributable to the same factors previously discussed with respect to the 2003 growth. Other factors that made a meaningful contribution to earnings growth in 2002 were loan growth and growth in savings and money market balances. Average loans outstanding grew by almost 18%, with the majority of the growth occurring in residential mortgages, commercial mortgages, and home equity lines. Growth in these categories is believed to be partially attributable to favorable conditions in the Long Island economy as well as a decline in interest rates and the resulting increase in the desire of bank customers to refinance their existing mortgages. The growth in savings and money market balances was largely comprised of growth in Select Savings and growth in nonpersonal money market balances. The growth in Select Savings balances in 2002 is believed to be attributable to the same factors previously cited with respect to the 2003 growth. The positive impact on earnings of checking, loan, and savings and money market growth was partially offset by a downtrend in net interest margin and an increase in noninterest expense. The volume of shares purchased during 2002 under the Corporation's stock repurchase program declined. As adjusted for 3-for-2 stock split paid July 2002, the Corporation purchased 49,894 shares in 2002 as compared to 168,147 shares in 2001. The stock repurchase program has historically enhanced earnings per share and return on average stockholders' equity. In 2002, the stock repurchase program contributed approximately 5 cents of the 40-cent increase in earnings per share. The estimated contribution to earnings per share includes the full-year impact of the shares purchased in 2001 plus the additional impact of the shares purchased throughout 2002. 24 Net Interest Income Average Balance Sheet, Interest Rates and Interest Differential. The following table sets forth the average daily balances for each major category of assets, liabilities and stockholders' equity as well as the amounts and average rates earned or paid on each major category of interest-earning assets and interest-bearing liabilities.
2003 2002 2001 ---------------------------- --------------------------- ------------------------------ Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate -------- -------- ------- -------- -------- ------- -------- -------- ------- Assets: (dollars in thousands) Federal funds sold ............... $ 43,185 $ 473 1.10% $ 50,586 $ 823 1.63% $ 82,017 $ 3,291 4.01% Investment securities: Taxable ........................ 330,336 12,426 3.76 290,322 13,669 4.71 223,538 12,643 5.66 Nontaxable(1) .................. 152,997 9,421 6.16 128,337 8,791 6.85 114,982 8,038 6.99 Loans(1)(2) ...................... 281,556 17,861 6.34 242,773 16,651 6.86 205,959 16,781 8.15 -------- ------- ---- -------- ------- ---- -------- -------- ---- Total interest-earning assets(1) . 808,074 40,181 4.97 712,018 39,934 5.61 626,496 40,753 6.51 ------- ---- ------- ---- -------- ---- Allowance for loan losses ........ (2,246) (2,101) (1,941) -------- -------- -------- Net interest-earning assets ...... 805,828 709,917 624,555 Cash and due from banks .......... 33,006 31,284 24,472 Premises and equipment, net ...... 6,608 6,654 7,133 Other assets ..................... 5,965 5,848 5,798 -------- -------- -------- $851,407 $753,703 $661,958 ======== ======== ======== Liabilities and Stockholders' Equity: Savings and money market deposits ................ $431,978 3,294 .76 $391,829 4,472 1.14 $343,389 7,944 2.31 Time deposits .................... 33,917 436 1.29 34,810 639 1.84 39,202 1,507 3.84 Securities sold under repurchase agreements .......... 17,100 148 .86 -- -- -- -- -- -- -------- ------- ---- -------- ------- ---- -------- -------- ---- Total interest-bearing liabilities 482,995 3,878 .80 426,639 5,111 1.20 382,591 9,451 2.47 ------- ---- ------- ---- -------- ---- Checking deposits(3) ............. 277,096 241,683 201,688 Other liabilities ................ 5,217 4,865 4,289 -------- -------- -------- 765,308 673,187 588,568 Stockholders' equity ............. 86,099 80,516 73,390 -------- -------- -------- $851,407 $753,703 $661,958 ======== ======== ======== Net interest income(1) ........... $36,303 $34,823 $ 31,302 ======= ======= ======== Net interest spread(1) ........... 4.17% 4.41% 4.04% ==== ==== ==== Net interest margin(1) ........... 4.49% 4.89% 5.00% ==== ==== ====
(1) Tax-equivalent basis. Interest income on a tax-equivalent basis includes the additional amount of interest income that would have been earned if the Bank's investment in tax-exempt loans and investment securities had been made in loans and investment securities subject to federal income taxes yielding the same after-tax income. The tax-equivalent amount of $1.00 of nontaxable income was $1.52 in each year presented, based on a federal income tax rate of 34%. (2) For the purpose of these computations, nonaccruing loans are included in the daily average loan amounts outstanding. (3) Includes official check and treasury tax and loan balances. 25 Rate/Volume Analysis. The following table sets forth the effect of changes in volumes, rates, and rate/volume on tax-equivalent interest income, interest expense and net interest income.
Year Ended December 31, ----------------------------------------------------------------------------------- 2003 versus 2002 2002 versus 2001 Increase (decrease) due to changes in: Increase (decrease) due to changes in: ---------------------------------------- ---------------------------------------- Rate/ Net Rate/ Net Volume Rate Volume(2) Change Volume Rate Volume(2) Change ------- ------- --------- ------- ------- ------- --------- ------- (in thousands) Interest Income: Federal funds sold ........................ $ (120) $ (269) $ 39 $ (350) $(1,261) $(1,957) $ 750 $(2,468) Investment securities: Taxable ................................. 1,884 (2,748) (379) (1,243) 3,777 (2,118) (633) 1,026 Nontaxable(1) ........................... 1,689 (888) (171) 630 934 (162) (19) 753 Loans(1) .................................. 2,660 (1,250) (200) 1,210 3,000 (2,655) (475) (130) ------- ------- ------- ------- ------- ------- ------- ------- Total interest income(1) .................. 6,113 (5,155) (711) 247 6,450 (6,892) (377) (819) ------- ------- ------- ------- ------- ------- ------- ------- Interest Expense: Savings and money market deposits ......................... 458 (1,484) (152) (1,178) 1,121 (4,025) (568) (3,472) Time deposits ............................. (16) (192) 5 (203) (169) (787) 88 (868) Securities sold under repurchase agreements 148 -- -- 148 -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- Total interest expense .................... 590 (1,676) (147) (1,233) 952 (4,812) (480) (4,340) ------- ------- ------- ------- ------- ------- ------- ------- Increase (decrease) in net interest income(1) ...................... $ 5,523 $(3,479) $ (564) $ 1,480 $ 5,498 $(2,080) $ 103 $ 3,521 ======= ======= ======= ======= ======= ======= ======= =======
(1) Tax-equivalent basis. (2) Represents the change not solely attributable to change in rate or change in volume but a combination of these two factors. The rate/volume variance could be allocated between the volume and rate variances shown in the table based on the absolute value of each to the total for both. Net Interest Income - 2003 Versus 2002 Net interest income on a tax-equivalent basis increased by $1,480,000, or 4.3%, from $34,823,000 in 2002 to $36,303,000 this year. As can be seen from the above rate/volume analysis, the increase is primarily comprised of a positive volume variance of $5,523,000 and a negative rate variance of $3,479,000. It should be noted that without the large commercial mortgage prepayment fee previously discussed, net interest income on a tax-equivalent basis would have been up by $916,000, or 2.6%, rather than $1,480,000, and the negative rate variance for loans would have been $564,000 higher. Volume Variance. During 2003, the Bank experienced strong growth in its core deposit products, with the largest increases occurring in checking, money-market-type savings balances, and attorney escrow-type balances. In addition, in response to continued downward pressure on net interest margin caused by low interest rates, management implemented strategy changes with respect to the Bank's securities portfolio. These changes involved reducing the size of the short-term securities portfolio, increasing the size of the intermediate-term securities portfolio and loan portfolio, and using borrowings under repurchase agreements to pre-invest future security and loan cash flows. The aggregate positive impact of these items, which largely comprises the positive volume variance referred to above, more than offset the negative impact of the downtrend in net interest margin discussed in the "Rate Variance" section that follows. The growth in the intermediate-term securities portfolio is largely comprised of U.S. government agency ten-year pass-through mortgage securities and U.S. Treasury securities with maturities ranging from three to five years. Management views the ten-year pass-through mortgage security as an attractive instrument for the Bank's investment portfolio because of the incremental income that can be earned when compared to a similar duration U.S. Treasury security and because these securities have a relatively short average life and are generally collateralized by low loan-to-value mortgage loans that have borrowers with high credit scores. Comparing 2003 to 2002, average checking deposits increased by $35,413,000, or approximately 15%. Funding interest-earning asset growth with growth in checking deposits has a greater positive impact on net interest income than 26 funding such growth with interest-bearing deposits because checking deposits, unlike interest-bearing deposits, have no associated interest cost. This is the primary reason that the growth of checking balances has historically been one of the Corporation's key strategies for increasing earnings per share. Also when comparing 2003 to 2002, average money-market-type deposit balances increased by $25,945,000, or approximately 9% and average attorney escrow-type balances increased by $9,506,000, or approximately 28%. In addition, average borrowings under repurchase agreements amounted to $17,100,000. With respect to the growth in money-market-type deposit balances, the largest components were growth in Select Savings and nonpersonal money market accounts. The Bank's new business solicitation program is a significant factor that favorably impacted growth in the average balances of checking accounts, money-market-type deposit accounts, and attorney escrow-type accounts. The Bank's attention to customer service, favorable conditions in the local economy, and a lack of incentive for the Bank's customers to invest excess balances as a result of the low interest rate environment are also believed to have made a contribution. Competitive pricing and customer demographics are believed to be other important factors with respect to growth in the average balance of money-market-type deposits. Perceived risk in the equity markets may have also played a role. As with its core deposit products, the Bank also experienced good growth in its core loan products, with the most significant growth occurring in residential mortgages and home equity loans. From year end 2002 to year end 2003, the residential mortgage portfolio increased by over $48 million, or approximately 53%, and home equity line outstandings increased by approximately $4.5 million, or 15%. On an average balance basis, residential mortgages are up by approximately $28 million, or 35%, and home equity line outstandings are up by approximately $5.5 million, or 20%. At December 31, 2003, loans secured by residential real estate represent 66% of total loans secured by real estate and 55% of total loans. This compares to 58% of loans secured by real estate and 48% of total loans, respectively, at December 31, 2002. The low interest rate environment and a strong housing market on Long Island are important factors that favorably impacted the growth in both residential mortgages and home equity line outstandings. Another important factor was an aggressive residential mortgage campaign mounted during the latter half of 2003 that focused on ten-year fixed rate mortgages. The ten-year mortgage like the similar ten-year pass-through mortgage security is viewed by management to be an attractive instrument for the Bank's portfolio. In addition to the benefits offered by the ten-year pass-through security, the ten-year mortgage provides even more interest income and the opportunity to build franchise value by attracting new customers and doing additional business with existing customers. Rate Variance. Interest rates began to decline in early 2001. By the end of the year, short-term interest-rates had fallen significantly as evidenced by a reduction of 4.75% in both the federal funds target rate and the Bank's prime lending rate. During 2002, there were no further reductions in short-term rates until November when both the federal funds target rate and the Bank's prime lending rate declined by an additional .50%. Rates on intermediate and longer-term securities and loans also declined during 2001 and 2002, but by contrast to short-term rates, the magnitude of the decline was far more significant in 2002. The largest portion of the decrease occurred in the latter half of the year. During 2003, longer-term rates were volatile but remained low. In addition, in late June 2003, the federal funds target rate and the Bank's prime lending rate were reduced further, by an additional .25%. Although both short and long-term rates are now at extremely low levels, they could decline more. As a result of the sharp and sustained decrease in interest rates, net interest margin trended downward during the latter half of 2002 as interest-earning assets repriced at lower yields and proceeds from the maturity, amortization and prepayment of such assets were reinvested at lower yields without an equal and offsetting reduction in the cost of funds. Excluding the effect of the large prepayment fee, there was a modest uptick in net interest margin for the first quarter of 2003 followed by a continuation of the downward trend for the rest of the year. It should be noted that a portion of the decline in the Bank's net interest margin was caused by an acceleration of prepayments on mortgage securities and the resulting need to amortize premiums on these securities faster. Although prepayments slowed in the last few months of 2003, future prepayments and their impact on premium amortization will be very much dependent on interest rate movements. Management believes that available yields will remain low in the upcoming year. If this were to occur and as a result assets continue to reprice and be reinvested at lower yields, the Bank's net interest margin will continue downward. In addition, the rate variance as depicted in the preceding table should become more negative. This obviously exerts a good deal of pressure on earnings. Conversely, while an increase in interest rates may initially have a negative impact on net interest margin, sustained higher interest rates should have a positive impact. 27 Net Interest Income - 2002 Versus 2001 Net interest income on a tax-equivalent basis increased by $3,521,000, or 11.2%, from $31,302,000 in 2001 to $34,823,000 in 2002. As can be seen from the preceding rate/volume analysis, the increase is primarily comprised of a positive volume variance of $5,498,000 and a negative rate variance of $2,080,000. Volume Variance. The positive volume variance was largely caused by substantial growth in average checking deposits and the use of such funds to purchase investment securities and originate loans. When comparing 2002 to 2001, average checking deposits increased by $39,995,000, or approximately 20%. Also making a contribution to the positive volume variance was growth in savings and money market deposit balances and the use of such funds to purchase investment securities and originate loans. When comparing 2002 to 2001, average savings and money market deposit balances increased by $48,440,000, or 14.1%. Although the largest components of this increase were growth in Select Savings and nonpersonal money market accounts, the Bank also experienced good growth in traditional savings and IOLA (interest on lawyer) accounts. The reasons for the increases in checking and money market deposits are the same as those previously discussed with respect to the 2003 year. Rate Variance. As previously discussed, short-term interest rates decreased during 2002 and 2001, with the most pronounced decrease occurring in the 2001 year. Despite these decreases, the Bank was able to preserve its spread on short-term interest-earning assets and liabilities by extending the average maturity of its short-term securities portfolio and thereby taking advantage of the slope of the yield curve. Rates on intermediate and longer-term securities and loans also declined during 2001 and 2002, but by contrast to short-term rates, the magnitude of the decline was far more significant in 2002. During 2002, yields on two, five, and ten-year U.S. Treasury securities decreased by 142, 157, and 124 basis points, respectively, with most of the decrease occurring in the last half of the year. As a result, net interest margin trended downward throughout 2002 as interest-earning assets repriced at lower yields and proceeds from the maturity and amortization of such assets were reinvested at lower yields. Noninterest Income, Noninterest Expense, and Income Taxes Noninterest income includes service charges on deposit accounts, Investment Management Division income, gains or losses on sales of available-for-sale securities, and all other items of income, other than interest, resulting from the business activities of the Corporation. Noninterest income was $5,998,000, $5,488,000, and $4,949,000 in 2003, 2002, and 2001, respectively. The 9.3% increase in noninterest income in 2003 is largely comprised of net gains on sales of available-for-sale securities of $333,000 and an increase of $155,000 in Investment Management Division income. The positive earnings impact of these items was partially offset by a decrease in service charges on deposit accounts of $162,000. Net gains on sales of available-for-sale securities includes $408,000 in gains which resulted from the sale of an equity security that the Bank was once required to acquire and hold as part of a government sponsored loan program. The increase in Investment Management Division income is largely attributable to market appreciation in assets under management and new business. The decrease in service charges is believed to be attributable to customers maintaining higher balances in the low interest rate environment. The 10.9% increase in noninterest income in 2002 is primarily attributable to a revised service charge schedule which went into effect on March 1, 2002 and the fact that losses on sales of available-for-sale securities decreased by $237,000. Noninterest expense is comprised of salaries, employee benefits, occupancy and equipment expense and other operating expenses incurred in supporting the various business activities of the Corporation. Noninterest expense was $23,475,000 and $21,488,000 in 2003 and 2002, respectively, representing increases over prior year amounts of $1,987,000, or 9.2%, and $1,721,000, or 8.7%. The increase for 2003 is largely comprised of an increase in salaries of $602,000, or 6.1%, an increase in occupancy and equipment expense of $446,000, or 15.2%, and an increase in other operating expenses of $750,000, or 17.2%. The increase in salaries is attributable to normal annual salary adjustments and additions to staff resulting primarily from the opening of three New York City branches. The increase in occupancy and equipment expense is largely attributable to increases in rent expense, maintenance costs, and equipment depreciation, a significant portion of which resulted from the opening of the New York City branches. The largest components of the increase in other operating expenses are an increase in general insurance expense, due primarily to conditions in the insurance marketplace and increased levels of liability coverage, and an increase in marketing expense, a substantial portion of which is attributable to the Bank's free checking campaign and the New York City branches. 28 The increase in noninterest expense for 2002 is primarily comprised of an increase in salaries of $871,000, or 9.7%, and an increase in employee benefits expense of $731,000, or 20.1%. The increase in salaries is attributable to normal annual salary adjustments and additions to staff. The increase in employee benefits expense is largely attributable to increases in the cost of health care insurance, profit sharing expense, and incentive compensation. The strong growth in earnings per share for 2002 was the primary reason for the increase in profit sharing expense. Earnings per share growth, goals being exceeded, and a further move toward performance based compensation are the primary reasons for the increase in incentive compensation. Income tax expense as a percentage of book income was 25.0%, 26.4%, and 25.9% in 2003, 2002, and 2001, respectively. The decrease in the percentage for 2003 is primarily attributable to the fact tax-exempt interest income became a larger component of income before income taxes. The reverse was true for 2002 and therefore income tax expense as a percentage of book income increased over 2001. Application of Critical Accounting Policies In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported asset and liability balances and revenue and expense amounts. Our determination of the allowance for loan losses is a critical accounting estimate because it is based on our subjective evaluation of a variety of factors at a specific point in time and involves difficult and complex judgments about matters that are inherently uncertain. In the event that management's estimate needs to be adjusted based on, among other things, additional information that comes to light after the estimate is made or changes in circumstances, such adjustment could result in the need for a significantly different allowance for loan losses and thereby materially impact, either positive or negative, the Bank's results of operations. The Bank's Reserve Committee, which is chaired by the Senior Lending Officer, meets on a quarterly basis and is responsible for determining the allowance for loan losses after considering, among other things, the results of credit reviews performed by the Bank's loan review officer. In addition, and in conjunction with the Bank's Chief Financial Officer, the Reserve Committee is responsible for implementing and maintaining policies and procedures surrounding the calculation of the required allowance. The Bank's allowance for loan losses is subject to periodic examination by the Office of the Comptroller of the Currency, the Bank's primary federal banking regulator, whose safety and soundness examination includes a determination as to its adequacy to absorb probable losses. The first step in determining the allowance for loan losses is to identify loans in the Bank's portfolio that are individually deemed to be impaired. In doing so, subjective judgments need to be made regarding whether or not it is probable that a borrower will be unable to pay all principal and interest due according to contractual terms. Once a loan is identified as being impaired, management uses either the fair value of the underlying collateral or the discounted value of expected future cash flows to determine the amount of the impairment loss, if any, that needs to be included in the overall allowance for loan losses. Although appraisals are used as a starting point in estimating the fair value of real estate collateral, management also makes qualitative judgments based on knowledge of the local real estate market, analysis of current economic conditions, and expectations with regard to conditions that may prevail in the future. Estimating the fair value of collateral other than real estate is also subjective in nature and sometimes requires difficult and complex judgments. Determining expected future cash flows can be more subjective than determining fair values. Expected future cash flows could differ significantly, both in timing and amount, from the cash flows actually received over the loan's remaining life. In addition to estimating losses for loans individually deemed to be impaired, management also estimates collective impairment losses for pools of loans that are not specifically reviewed. Statistical information regarding the Bank's historical loss experience over a period of time believed to be relevant is weighted very heavily in management's estimate of such losses. However, future losses could vary significantly from those experienced in the past. In addition, management also considers a variety of general qualitative factors and then subjectively determines the amount of weight to assign to each in estimating losses. The factors include, among others, national and local economic conditions, environmental risks, trends in volume and terms of loans, concentrations of credit, changes in lending policies and procedures, and experience, ability, and depth of the Bank's lending staff. Because of the nature of the factors and the difficulty in assessing their impact, management's resulting estimate of losses may not accurately reflect actual losses in the portfolio. Although the allowance for loan losses has two separate components, one for impairment losses on individual loans and one for collective impairment losses on pools of loans, the entire allowance for loan losses is available to absorb realized losses as they occur whether they relate to individual loans or pools of loans. 29 Asset Quality The Corporation has identified certain assets as risk elements. These assets present more than the normal risk that the Bank will be unable to eventually collect or realize their full carrying value. Information about the Corporation's risk elements is as follows:
December 31, ------------------------------------------------ 2003 2002 2001 2000 1999 ------ ------ ------ ------ ----- (dollars in thousands) Nonaccruing loans ............................................................ $ 97 $ -- $ 105 $ -- $ 28 Loans past due 90 days or more as to principal or interest payments and still accruing .......................... 348 2 236 173 5 Foreclosed real estate ....................................................... -- -- -- -- -- ------ ------ ------ ------ ----- Total nonperforming assets ................................................. 445 2 341 173 33 Troubled debt restructurings ................................................. 5 -- 10 -- -- ------ ------ ------ ------ ----- Total risk elements ........................................................ $ 450 $ 2 $ 351 $ 173 $ 33 ====== ====== ====== ====== ===== Nonaccruing loans as a percentage of total loans ............................. .03% .00% .05% .00% .02% ====== ====== ====== ====== ===== Nonperforming assets as a percentage of total loans and foreclosed real estate ................................................. .14% .00% .15% .09% .02% ====== ====== ====== ====== ===== Risk elements as a percentage of total loans and foreclosed real estate ..................................................... .14% .00% .15% .09% .02% ====== ====== ====== ====== ===== Year Ended December 31, ------------------------------------------------ 2003 2002 2001 2000 1999 ------ ------ ------ ------ ----- (in thousands) Gross interest income that would have been recorded during the year under original terms: Nonaccrual loans ........................................................... $ 5 $ -- $ 8 $ -- $ 4 Restructured loans ......................................................... -- -- -- -- -- Gross interest income recorded during the year: Nonaccrual loans ........................................................... 2 -- 4 -- 3 Restructured loans ......................................................... -- -- -- -- -- Commitments for additional funds - Nonaccrual, restructed, past due loans .... None None 150 150 None
Allowance and Provision For Loan Losses The allowance for loan losses was $2,452,000 and $2,085,000 at December 31, 2003 and 2002, respectively, representing .8% of total loans at each date. The change in the allowance during 2003 is due to a $457,000 provision for loan losses, chargeoffs of $110,000, and recoveries of $20,000. As compared to 2002, the provision for loan losses increased by $357,000 in 2003 primarily because of growth in the portfolio and the resulting impact on calculated pool reserves. The allowance for loan losses is an amount that management currently believes will be adequate to absorb estimated probable losses inherent in the Bank's loan portfolio. In determining the allowance for loan losses, there is not an exact amount but rather a range for what constitutes an appropriate allowance. As more fully discussed in the "Application of Critical Accounting Policies" section of this discussion and analysis of financial condition and results of operations, the process for estimating credit losses and determining the allowance for loan losses as of any balance sheet date is subjective in nature and requires material estimates. Actual results could differ significantly from these estimates. 30 The following table sets forth the allocation of the Bank's total allowance for loan losses by loan type.
December 31, -------------------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ---------------- ---------------- ---------------- ----------------- ---------------- % of % of % of % of % of Loans Loans Loans Loans Loans To Total To Total To Total To Total To Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (dollars in thousands) Commercial .......................... $ 605 14.9% $ 438 14.3% $ 667 18.1% $ 566 15.8% $ 397 16.5% Real-estate secured ................. 1,763 83.4 1,469 83.4 1,252 79.4 1,160 80.5 1,304 80.8 Consumer and other .................. 84 1.7 94 2.3 94 2.5 129 3.7 137 2.7 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total allocated .................. 2,452 100.0 2,001 100.0 2,013 100.0 1,855 100.0 1,838 100.0 Unallocated ......................... -- -- 84 -- 7 -- 88 -- 195 -- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- $2,452 100.0% $2,085 100.0% $2,020 100.0% $1,943 100.0% $2,033 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
The amount of future chargeoffs and provisions for loan losses will be affected by, among other things, economic conditions on Long Island. Such conditions could affect the financial strength of the Bank's borrowers and do effect the value of real estate collateral securing the Bank's mortgage loans. Loans secured by real estate represent approximately 83% of the Bank's total loans outstanding at December 31, 2003. Most of these loans were made to borrowers domiciled on Long Island and are secured by Long Island properties. In recent years, economic conditions on Long Island have been good and residential real estate values have grown to unprecedented highs. Such conditions and values could deteriorate in the future, and such deterioration could be substantial. If this were to occur, some of the Bank's borrowers may be unable to make the required contractual payments on their loans, and the Bank may be unable to realize the full carrying value of such loans through foreclosure. However, management believes that the Bank's underwriting policies for residential mortgages are relatively conservative and, as a result, the Bank should be less affected than the overall market. Future provisions and chargeoffs could also be affected by environmental impairment of properties securing the Bank's mortgage loans. Environmental audits for commercial mortgages were instituted by the Bank in 1987. Under the Bank's current policy, an environmental audit is required on practically all commercial-type properties that are considered for a mortgage loan. At the present time, the Bank is not aware of any existing loans in the portfolio where there is environmental pollution originating on the mortgaged properties that would materially affect the value of the portfolio. Cash Flows and Liquidity Cash Flows. As shown in the Consolidated Statement of Cash Flows, the Corporation's primary sources of cash are deposit growth, maturities and amortization of investment securities, operations, and borrowings under repurchase agreements. The Corporation uses cash from these and other sources to first fund loan growth. Any remaining cash is used primarily to purchase a combination of short, intermediate, and longer-term investment securities, pay cash dividends, and repurchase common stock under the Corporation's share repurchase program. During 2003, the Corporation reduced its cash and cash equivalent position by $5,799,000 in an attempt to take advantage of the higher yields offered by investment securities. Liquidity. The Corporation has both internal and external sources of near-term liquidity that can be used to fund loan growth and accommodate deposit outflows. The primary internal sources of liquidity are its overnight position in federal funds sold; its short-term investment securities portfolio which generally consists of securities purchased to mature within two years and securities with average lives of approximately two years; maturities and monthly payments on the balance of the investment securities portfolio and the loan portfolio; and intermediate and longer-term investment securities designated as available-for-sale. At December 31, 2003, the Corporation had $30,000,000 in federal funds sold, a short-term securities portfolio not subject to pledge agreements of $74,676,000, and intermediate and longer-term available-for-sale securities not subject to pledge agreements of $207,432,000. While maturities of shorter-term securities in the Corporation's portfolio provide a significant source of near term liquidity, the intermediate and longer-term securities provide higher current returns and their maturities will provide a significant source of liquidity in the future. 31 The Corporation's primary external sources of liquidity are customer deposits and borrowings from brokerage firms, other commercial banks, and the Federal Reserve Bank of New York. The Bank's deposit base consists largely of core deposits from businesses and consumers in its local market area and does not include any brokered deposits. The Bank has the ability to borrow on a secured basis from brokerage firms under repurchase agreements. Although the Bank currently has repurchase agreements in place with three brokerage firms, these agreements do not represent legal commitments on the part of the brokerage firms to extend credit to the Bank. The amount that the Bank can potentially borrow under these agreements is believed to be currently in excess of $100 million and depends on, among other things, the amount and quality of the Bank's eligible collateral and the financial condition of the Bank. Recently the Bank began utilizing short-term borrowings under repurchase agreements to pre-invest cash flows from the securities and loan portfolios. The Bank can also borrow overnight federal funds on an unsecured basis under lines with other commercial banks. These lines in the aggregate amount of $30 million do not represent legal commitments to extend credit on the part of the other banks. As a backup to borrowing from brokerage firms and other commercial banks, the Bank is eligible to borrow on a secured basis at the Federal Reserve Bank ("FRB") discount window under the primary credit program. Primary credit is normally granted on a "no questions asked" basis at a rate 100 basis points above the federal funds target rate. Primary credit is generally extended on a very short-term basis, typically overnight, and is viewed by the FRB as a backup source of short-term funds for sound depository institutions like the Bank. The amount that the Bank can borrow under the primary credit program depends on, among other things, the amount of available eligible collateral. Off-Balance Sheet Arrangements and Contractual Obligations The Corporation's off-balance sheet arrangements and contractual obligations at December 31, 2003 are summarized in the table that follows. The amounts shown for commitments to extend credit and letters of credit are contingent obligations, some of which are expected to expire without being drawn upon. As a result, the amounts shown for these items do not necessarily represent future cash requirements. The Corporation believes that its current sources of liquidity are more than sufficient to fulfill the obligations it has as of December 31, 2003 pursuant to off-balance sheet arrangements and contractual obligations.
Amount of Commitment Expiration Per Period ----------------------------------------------------- Over Over Total One One Year Three Years Over Amounts Year Through Through Five Committed or Less Three Years Five Years Years --------- -------- ------------ ----------- -------- (in thousands) Commitments to extend credit .................. $ 58,700 $ 29,549 $ 9,703 $ 19,394 $ 54 Standby letters of credit ..................... 2,778 2,778 -- -- -- Commercial letters of credit .................. 90 90 -- -- -- Operating lease obligations ................... 4,602 692 1,177 938 1,795 Purchase obligations .......................... 948 296 622 30 -- -------- -------- -------- -------- -------- $ 67,118 $ 33,405 $ 11,502 $ 20,362 $ 1,849 ======== ======== ======== ======== ========
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to financial instruments for commitments to extend credit, standby letters of credit, and commercial letters of credit is represented by the contractual notional amount of these instruments. The Bank uses the same credit policies in making commitments to extend credit and generally uses the same credit policies for letters of credit as it does for on-balance-sheet instruments. Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Unused home equity lines, which comprise a substantial portion of these commitments, generally expire five years from their date of origination. Other loan commitments generally expire in 45 days. The amount of collateral obtained, if any, by the Bank upon extension of credit is based on management's credit 32 evaluation of the borrower. Collateral held varies but may include security interests in business assets, mortgages on commercial and residential real estate, deposit accounts with the Bank or other financial institutions, and securities. Standby letters of credit are conditional commitments issued by the Bank to assure the performance or financial obligations of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. The Bank generally holds collateral and/or obtains personal guarantees supporting these commitments. Commercial letters of credit are conditional commitments issued by the Bank to assure the payment by a customer to a supplier. The Bank generally obtains personal guarantees supporting these commitments. The purchase obligations are pursuant to contracts that the Bank has with providers of data processing and custodial services. Capital The Corporation's capital management policy is designed to build and maintain capital levels that exceed regulatory standards. Under current regulatory capital standards, banks are classified as well capitalized, adequately capitalized or undercapitalized. Under such standards, a well capitalized bank is one that has a total risk-based capital ratio, as defined, equal to or greater than 10%, a Tier 1 risk-based capital ratio, as defined, equal to or greater than 6%, and a Tier 1 leverage capital ratio, as defined, equal to or greater than 5%. The Corporation's total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage capital ratios of 27.16%, 26.41% and 9.36%, respectively, at December 31, 2003 substantially exceed the requirements for a well-capitalized bank. Total stockholders' equity increased by $3,849,000 during 2003, or from $85,442,000 at December 31, 2002 to $89,291,000 at December 31, 2003. Net income was the largest contributor to the growth in stockholders' equity. However, amounts expended for share repurchases and cash dividends largely offset the contribution made by net income. Stock Repurchase Program. Since 1988, the Corporation has had a stock repurchase program under which it is authorized to purchase, from time to time, shares of its own common stock in market or private transactions. Under plans approved by the Board of Directors in 2003 and 2001, the Corporation purchased 124,678 shares in 2003 and can purchase 53,743 shares in the future. The details of the Corporation's purchases under the stock repurchase program during the fourth quarter of 2003 are set forth in the table that follows.
Total Number of Shares Purchased as Maximum Number of Total Average Part of Publicly of Shares that May Yet Number of Price Paid Announced Plans Be Purchased Under the Period Shares Per Share or Programs(1) Plans or Programs (1) - -------------------------------------------------- --------- ---------- ------------------- ---------------------- October 1, 2003 to October 31, 2003 ............. -- -- -- 58,302 November 1, 2003 to November 30, 2003 ............ 4,060 $42.59 4,060 54,242 December 1, 2003 to December 31, 2003 ............ 499 $44.35 499 53,743
(1) All shares purchased by the Corporation under its stock repurchase program in the fourth quarter of 2003 were purchased under a 100,000 share plan approved by the Corporation's board of directors on January 21, 2003 and publicly announced on January 24, 2003. In addition, the Corporation publicly announced a 50,000 share program on April 24, 2003 under which no shares have yet been purchased. The Corporation's share repurchase plans do not have fixed expiration dates. The stock repurchase program has historically enhanced earnings per share and return on average stockholders' equity. This year the program contributed approximately 4 cents to per share earnings. The estimated contribution includes the full-year impact of the shares purchased in 2002 plus the additional impact of the shares purchased throughout 2003. Market Liquidity. Trading in the Corporation's common stock is limited. The total trading volumes for 2003 and 2002 as reported by Nasdaq were 1,151,590 and 743,903 shares, respectively, with average daily trading volumes of 4,570 and 2,952 shares, respectively. During 2003, the Corporation purchased 124,678 shares, 116,400 of which were purchased in market transactions, and in 2002 purchased 49,894 shares, 12,000 of which were purchased in market transactions. These market purchases represent approximately 10% and 2% of the total trading volumes for the Corporation's common stock as reported by Nasdaq for 2003 and 2002, respectively. Although the Corporation has had a stock repurchase program since 1988, if the Company discontinues the program it could adversely affect market liquidity for the Corporation's common stock, the price of the Corporation's common stock, or both. 33 Russell 3000(R) and 2000(R) Indices. Frank Russell Company ("Russell") currently maintains 21 U.S. common stock indices. The indices are reconstituted each July 1st using objective criteria, primarily market capitalization, and do not reflect subjective opinions. All indices are subsets of the Russell 3000(R) Index which represents most of the investable U. S. equity market. The broad market Russell 3000(R) Index includes the largest 3,000 companies in terms of market capitalization and the small cap Russell 2000(R) Index is comprised of the smallest 2,000 companies in the Russell 3000(R) Index. The Corporation's capitalization, as computed by Russell, would place it at the low end of the range for both the Russell 3000(R) and 2000(R) Indices. The Corporation's common stock is included in the Russell 3000(R) and 2000(R) Indices. The Corporation believes that inclusion in the Russell Indices positively impacts the price of its common stock and increases the stock's trading volume and liquidity. Conversely, if the Corporation's market capitalization falls below the minimum necessary to be included in the Indices at any future annual reconstitution date, the Corporation believes that this could adversely affect the price, volume and liquidity of its common stock. Market Risk The Bank invests in interest-earning assets which are funded by interest-bearing deposits and borrowings, noninterest-bearing deposits, and capital. The Bank's results of operations are subject to risk resulting from interest rate fluctuations generally and having assets and liabilities that have different maturity, repricing, and prepayment/withdrawal characteristics. The Bank defines interest rate risk as the risk that the Bank's earnings and/or net portfolio value (present value of expected future cash flows from assets less the present value of expected future cash flows from liabilities) will change when interest rates change. The principal objective of the Bank's asset/liability management activities is to maximize net interest income while at the same time maintaining acceptable levels of interest rate and liquidity risk and facilitating the funding needs of the Bank. Because the Bank's loans and investment securities generally reprice slower than its interest-bearing deposit accounts, a decrease in interest rates uniformly across the yield curve should initially have a positive impact on the Bank's net interest income. However, if the Bank does not decrease the rates paid on its money-market-type deposit accounts as quickly or in the same amount as market decreases in the overnight federal funds rate or the prime lending rate, the magnitude of the positive impact will decline. In addition, rates may decrease to the point that the Bank can not reduce its money market rates any further. If interest rates decline and are sustained at the lower levels and, as a result, the Bank purchases securities at lower yields and loans are originated or repriced at lower yields, the impact on net interest income should be negative because 40% of the Bank's average interest-earning assets are funded by noninterest-bearing checking deposits and capital. Conversely, an immediate increase in interest rates uniformly across the yield curve should initially have a negative effect on net interest income. However, if the Bank does not increase the rates paid on its money-market-type deposit accounts as quickly or in the same amount as market increases in the overnight federal funds rate, the prime lending rate, and other short-term market rates, the magnitude of the negative impact will decline. Over a longer period of time, and assuming that interest rates remain stable after the initial rate increase and the Bank purchases securities and originates loans at yields higher than those maturing and reprices loans at higher yields, the impact of an increase in interest rates should be positive. This occurs primarily because with the passage of time more loans and investment securities will reprice at the higher rates and there will be no offsetting increase in interest expense for those loans and investment securities funded by noninterest-bearing checking deposits and capital. The Bank monitors and controls interest rate risk through a variety of techniques including the use of interest rate sensitivity models and traditional interest rate sensitivity gap analysis. Through use of the models, the Bank projects future net interest income and then estimates the effect on projected net interest income of various changes in interest rates and balance sheet growth rates. The Bank also uses the models to calculate the change in net portfolio value over a range of interest rate change scenarios. Traditional gap analysis involves arranging the Bank's interest-earning assets and interest-bearing liabilities by repricing periods and then computing the difference, or interest-rate sensitivity gap, between the assets and liabilities which are estimated to reprice during each time period and cumulatively through the end of each time period. Both interest rate sensitivity modeling and gap analysis involve a variety of significant estimates and assumptions and are done at a specific point in time. Interest rate sensitivity modeling requires, among other things, estimates of: (1) 34 how much and when yields and costs on individual categories of interest-earning assets and interest-bearing liabilities will adjust because of projected changes in market interest rates; (2) future cash flows; and (3) discount rates. Gap analysis requires estimates as to when individual categories of interest-sensitive assets and liabilities will reprice and assumes that assets and liabilities assigned to the same repricing period will reprice at the same time and in the same amount. Like sensitivity modeling, gap analysis does not fully take into account the fact that the repricing of some assets and liabilities is discretionary and subject to competitive and other pressures. Changes in the estimates and assumptions made for interest rate sensitivity modeling and gap analysis could have a significant impact on projected results and conclusions. Therefore, these techniques may not accurately reflect the actual impact of changes in the interest rate environment on the Bank's net interest income or net portfolio value. The following table is provided pursuant to the market risk disclosure rules set forth in Item 305 of Regulation S-K of the Securities and Exchange Commission. The information provided in the table is based on significant estimates and assumptions and constitutes, like certain other statements included herein, a forward-looking statement. The base case information in the table shows (1) an estimate of the Corporation's net portfolio value at December 31, 2003 arrived at by discounting estimated future cash flows at current market rates and (2) an estimate of net interest income for the year ending December 31, 2004 assuming that maturing assets or liabilities are replaced with new balances of the same type, in the same amount, and at current rate levels and repricing balances are adjusted to current rate levels. The rate change information in the table shows estimates of net portfolio value at December 31, 2003 and net interest income for the year ending December 31, 2004 assuming rate changes of plus 100 and 200 basis points and minus 100 and 200 basis points. The changes in net portfolio value from the base case have not been tax effected. In addition, rate changes are assumed to be shock or immediate changes and occur uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. In projecting future net interest income under the indicated rate change scenarios, activity is simulated by replacing maturing balances with new balances of the same type, in the same amount, but at the assumed rate level and adjusting repricing balances to the assumed rate level. Based on the foregoing assumptions and as depicted in the table that follows, an immediate increase in interest rates of 100 or 200 basis points would have a negative effect on net interest income over a one-year time period. This is principally because the Bank's interest-bearing deposit accounts reprice faster than its loans and investment securities. However, if the Bank does not increase the rates paid on its money-market-type deposit accounts as quickly or in the same amount as market increases in the overnight federal funds rate or the prime lending rate, the magnitude of the negative impact will decline. Over a longer period of time, and assuming that interest rates remain stable after the initial rate increase and the Bank purchases securities and originates loans at yields higher than those maturing and reprices loans at higher yields, the impact of an increase in interest rates should be positive. This occurs primarily because with the passage of time more loans and investment securities will reprice at the higher rates and there will be no offsetting increase in interest expense for those loans and investment securities funded by noninterest-bearing checking deposits and capital. Generally, the reverse should be true of an immediate decrease in interest rates of 100 or 200 basis points. However, deposit rates are currently very low as indicated by the Bank's overall cost of deposits of 80 basis points in 2003. Therefore, while rates on many of the Bank's interest earning assets could drop by 100 or 200 basis points, deposit rates could not. It is for this reason that in rates down 100 basis points the projected increase in net interest income as compared to the base case is less than the projected decrease in rates up 100 basis points. In addition, as shown in the table, in rates down 200 basis points net income is actually less rather than more than the base case.
Net Portfolio Value (NPV) Net Interest Income at December 31, 2003 for 2004 -------------------------- --------------------- Percent Percent Change Change From From Rate Change Scenario Amount Base Case Amount Base Case -------------------------------------------- -------- --------- -------- --------- (dollars in thousands) + 200 basis point rate shock ............... $ 54,666 (44.1)% $ 27,742 (17.2)% + 100 basis point rate shock ............... 75,702 (22.6) 30,618 (8.6) Base case (no rate change) ............... 97,832 -- 33,495 -- - 100 basis point rate shock ............... 121,170 23.9 34,896 4.2 - 200 basis point rate shock ............... 145,998 49.2 33,220 (0.8)
35 The table that follows summarizes the Corporation's cumulative interest rate sensitivity gap at December 31, 2003 based upon significant estimates and assumptions that the Corporation believes to be reasonable. As shown in the table, the Bank has a significant volume of money market deposit accounts that are subject to repricing as short-term interest rates change. Since the amount of these deposits outweighs the assets held by the Bank whose pricing is tied to short-term interest rates, an increase in short-term interest rates should negatively impact the Bank's net interest income in the near term. However, the Bank can reduce the magnitude of the negative impact by not increasing the rates paid on its money market deposit accounts as quickly or in the same amount as market increases in the overnight funds rate, the prime lending rate, or other short-term rates. Conversely, a decrease in short-term interest rates should positively impact the Bank's net interest income in the near term. However, if short-term rates decline to the point that the Bank can not, due to competitive pressures and/or the absolute level of rates, decrease its money market rates in the same amount as market decreases in the federal funds target rate, the prime lending rate, and other short-term rates, the magnitude of the positive impact will decline.
Repricing Date ------------------------------------------------------------------------------------------- Over Over Over Three Six One Year Three Months Months Total Through Over Non- Months Through Through Within Five Five interest- or Less Six Months One Year One Year Years Years Sensitive Total --------- --------- --------- --------- --------- --------- --------- --------- (in thousands) Assets: Federal funds sold ............... $ 30,000 $ -- $ -- $ 30,000 $ -- $ -- $ -- $ 30,000 Investment securities ............ 38,802 24,319 40,394 103,515 259,623 150,777 5,512 519,427 Loans ............................ 105,033 16,594 33,186 154,813 115,039 51,390 (1,723) 319,519 Other assets ..................... -- -- -- -- -- -- 45,318 45,318 --------- --------- --------- --------- --------- --------- --------- --------- 173,835 40,913 73,580 288,328 374,662 202,167 49,107 914,264 --------- --------- --------- --------- --------- --------- --------- --------- Liabilities and Stockholders' Equity: Checking deposits ................ -- -- -- -- -- -- 297,454 297,454 Savings and money market deposits 330,008 9,347 13,315 352,670 93,181 -- -- 445,851 Time deposits, other ............. 7,240 4,695 3,368 15,303 2,035 84 -- 17,422 Time deposits, $100,000 and over . 13,592 526 2,202 16,320 108 -- -- 16,428 Securities sold under repurchase agreements ..................... 41,184 -- -- 41,184 -- -- -- 41,184 Other liabilities ................ -- -- -- -- -- -- 6,634 6,634 Stockholders' equity ............. -- -- -- -- -- -- 89,291 89,291 --------- --------- --------- --------- --------- --------- --------- --------- 392,024 14,568 18,885 425,477 95,324 84 393,379 914,264 --------- --------- --------- --------- --------- --------- --------- --------- Interest-rate sensitivity gap ....... $(218,189) $ 26,345 $ 54,695 $(137,149) $ 279,338 $ 202,083 $(344,272) $ -- ========= ========= ========= ========= ========= ========= ========= ========= Cumulative interest-rate sensitivity gap .................... $(218,189) $(191,844) $(137,149) $(137,149) $ 142,189 $ 344,272 $ -- $ -- ========= ========= ========= ========= ========= ========= ========= =========
Regulatory Matters Pending Legislation. Commercial checking deposits currently account for approximately 29% of the Bank's total deposits. Congress is currently considering legislation that would allow customers to cover checks by sweeping funds from interest-bearing deposit accounts each business day and repeal the prohibition of the payment of interest on corporate checking deposits in the future. Although management currently believes that the Bank's earnings could be more severely impacted by permitting the payment of interest on corporate checking deposits than the daily sweeping of funds from interest-bearing accounts to cover checks, either could have a material adverse impact on the Bank's future results of operations. Examinations. The Bank was examined by the Office of the Comptroller of the Currency as of September 30, 2003. The examination was a regularly scheduled safety and soundness examination. Management is not aware, nor has it been apprised, of any recommendations by regulatory authorities that would have a material adverse impact on the Corporation's liquidity, capital resources, or operations. 36 New Accounting Pronouncements A discussion of new accounting pronouncements is included in Note A to the Corporation's consolidated financial statements. Forward Looking Statements "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains various forward-looking statements with respect to financial performance and business matters. Such statements are generally contained in sentences including the words "expect" or "could" or "should" or "would" or "believe". The Corporation cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, and therefore actual results could differ materially from those contemplated by the forward-looking statements. In addition, the Corporation assumes no duty to update forward-looking statements. 37 [LOGO] The First of Long Island A BEACON OF STRENGTH IN ALL ECONOMIC CLIMATES 38 [LOGO] CROWE Crowe Chizek and Company LLC Member Horwath International REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders The First of Long Island Corporation Glen Head, New York We have audited the accompanying consolidated balance sheet of The First of Long Island Corporation as of December 31, 2003 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of The First of Long Island Corporation as of and for the year ended December 31, 2002 were audited by other auditors who issued an unqualified opinion on those financial statements in their report dated January 24, 2003. The financial statements of The First of Long Island Corporation as of and for the year ended December 31, 2001 were audited by other auditors who have ceased operations and who expressed an unqualified opinion on those financial statements in their report dated January 22, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2003 consolidated financial statements referred to above present fairly, in all material respects, the financial position of The First of Long Island Corporation as of December 31, 2003, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Crowe Chizek and Company LLC Crowe Chizek and Company LLC Morristown, New Jersey January 16, 2004 39 CONSOLIDATED BALANCE SHEETS
December 31, -------------------------------- 2003 2002 ------------- ------------- Assets: Cash and due from banks ..................................................... $ 31,430,000 $ 33,229,000 Federal funds sold .......................................................... 30,000,000 34,000,000 ------------- ------------- Cash and cash equivalents ................................................. 61,430,000 67,229,000 ------------- ------------- Investment securities: Held-to-maturity, at amortized cost (fair value of $242,563,000 and $282,438,000) .......................... 238,289,000 273,102,000 Available-for-sale, at fair value (amortized cost of $275,745,000 and $173,794,000) ................................. 281,138,000 180,406,000 ------------- ------------- 519,427,000 453,508,000 ------------- ------------- Loans: Commercial and industrial ............................................ 47,886,000 37,329,000 Secured by real estate ............................................... 268,508,000 217,730,000 Consumer ............................................................. 5,730,000 6,414,000 Other ................................................................ 729,000 628,000 ------------- ------------- 322,853,000 262,101,000 Unearned income ...................................................... (882,000) (993,000) ------------- ------------- 321,971,000 261,108,000 Allowance for loan losses ............................................ (2,452,000) (2,085,000) ------------- ------------- 319,519,000 259,023,000 ------------- ------------- Bank premises and equipment, net ............................................ 6,795,000 6,398,000 Other assets ................................................................ 7,093,000 6,184,000 ------------- ------------- $ 914,264,000 $ 792,342,000 ============= ============= Liabilities: Deposits: Checking ............................................................. $ 297,454,000 $ 256,444,000 Savings and money market ............................................. 445,851,000 412,815,000 Time, other .......................................................... 17,422,000 17,359,000 Time, $100,000 and over .............................................. 16,428,000 13,107,000 ------------- ------------- 777,155,000 699,725,000 Securities sold under repurchase agreements ................................. 41,184,000 -- Accrued expenses and other liabilities ...................................... 4,332,000 4,492,000 Current income taxes payable ................................................ 267,000 289,000 Deferred income taxes payable ............................................... 2,035,000 2,394,000 ------------- ------------- 824,973,000 706,900,000 ------------- ------------- Stockholders' Equity: Common stock, par value $.10 per share: Authorized, 20,000,000 shares; Issued and outstanding, 4,083,733 and 4,161,173 shares .................. 408,000 416,000 Surplus ..................................................................... 781,000 724,000 Retained earnings ........................................................... 84,864,000 80,354,000 ------------- ------------- 86,053,000 81,494,000 Accumulated other comprehensive income net of tax ........................... 3,238,000 3,948,000 ------------- ------------- 89,291,000 85,442,000 ------------- ------------- $ 914,264,000 $ 792,342,000 ============= =============
See notes to consolidated financial statements 40 CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, --------------------------------------------------- 2003 2002 2001 ------------ ------------ ------------ Interest income: Loans ............................................................... $ 17,851,000 $ 16,635,000 $ 16,750,000 Investment securities: Taxable ......................................................... 12,426,000 13,669,000 12,643,000 Nontaxable ...................................................... 6,218,000 5,802,000 5,305,000 Federal funds sold .................................................. 473,000 823,000 3,291,000 ------------ ------------ ------------ 36,968,000 36,929,000 37,989,000 ------------ ------------ ------------ Interest expense: Savings and money market deposits ................................... 3,294,000 4,472,000 7,944,000 Time deposits ....................................................... 436,000 639,000 1,507,000 Securities sold under repurchase agreements ......................... 148,000 -- -- ------------ ------------ ------------ 3,878,000 5,111,000 9,451,000 ------------ ------------ ------------ Net interest income ............................................. 33,090,000 31,818,000 28,538,000 Provision for loan losses ............................................... 457,000 100,000 100,000 ------------ ------------ ------------ Net interest income after provision for loan losses ..................... 32,633,000 31,718,000 28,438,000 ------------ ------------ ------------ Noninterest income: Investment Management Division income ............................... 1,288,000 1,133,000 1,081,000 Service charges on deposit accounts ................................. 3,585,000 3,747,000 3,481,000 Net gains (losses) on sales of available-for-sale securities ........ 333,000 (12,000) (249,000) Other ............................................................... 792,000 620,000 636,000 ------------ ------------ ------------ 5,998,000 5,488,000 4,949,000 ------------ ------------ ------------ Noninterest expense: Salaries ............................................................ 10,431,000 9,829,000 8,958,000 Employee benefits ................................................... 4,548,000 4,359,000 3,628,000 Occupancy and equipment expense ..................................... 3,383,000 2,937,000 2,819,000 Other operating expenses ............................................ 5,113,000 4,363,000 4,362,000 ------------ ------------ ------------ 23,475,000 21,488,000 19,767,000 ------------ ------------ ------------ Income before income taxes ...................................... 15,156,000 15,718,000 13,620,000 Income tax expense ...................................................... 3,791,000 4,155,000 3,526,000 ------------ ------------ ------------ Net Income ...................................................... $ 11,365,000 $ 11,563,000 $ 10,094,000 ============ ============ ============ Weighted average: Common shares ....................................................... 4,086,650 4,180,029 4,266,114 Dilutive stock options .............................................. 85,974 63,221 59,288 ------------ ------------ ------------ 4,172,624 4,243,250 4,325,402 ============ ============ ============ Earnings per share: Basic ............................................................... $ 2.78 $ 2.77 $ 2.37 ============ ============ ============ Diluted ............................................................. $ 2.72 $ 2.73 $ 2.33 ============ ============ ============
See notes to consolidated financial statements 41 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated Other Common Stock Compre- Compre- ---------------------- hensive Retained hensive Shares Amount Surplus Income Earnings Income Total --------- --------- ------------ ----------- ------------ ------------ ------------ Balance, January 1, 2001 ........ 2,892,549 $ 289,000 $ 1,188,000 $ 68,737,000 $ 652,000 $ 70,866,000 Net Income .................... $ 10,094,000 10,094,000 10,094,000 Repurchase and retirement of common stock ............. (118,951) (12,000) (4,686,000) (4,698,000) Exercise of stock options ..... 19,304 2,000 418,000 420,000 Unrealized gains on available- for-sale-securities, net of tax of $213,000 ........... 310,000 310,000 310,000 ------------ Comprehensive income ............ $ 10,404,000 ============ Cash dividends declared - $.54 per share .............. (2,281,000) (2,281,000) Tax benefit of stock options .... 35,000 35,000 Transfer from retained earnings to surplus ......... 4,000,000 (4,000,000) --------- --------- ------------ ------------ ---------- ------------ Balance, December 31, 2001 ...... 2,792,902 279,000 955,000 72,550,000 962,000 74,746,000 Net Income .................... $ 11,563,000 11,563,000 11,563,000 Repurchase and retirement of common stock ............. (43,736) (4,000) (1,588,000) (1,592,000) Exercise of stock options ..... 20,340 2,000 311,000 313,000 Unrealized gains on available- for-sale-securities, net of tax of $2,005,000 ......... 2,986,000 2,986,000 2,986,000 ------------ Comprehensive income .......... $ 14,549,000 ============ 3-for-2 stock split ........... 1,391,667 139,000 (139,000) Cash in lieu of fractional shares on 3-for-2 stock split (7,000) (7,000) Cash dividends declared - $.63 per share .............. (2,613,000) (2,613,000) Tax benefit of stock options .. 46,000 46,000 Transfer from retained earnings to surplus ......... 1,000,000 (1,000,000) --------- --------- ------------ ------------ ---------- ------------ Balance, December 31, 2002 ...... 4,161,173 416,000 724,000 80,354,000 3,948,000 85,442,000 Net Income .................... $ 11,365,000 11,365,000 11,365,000 Repurchase and retirement of common stock ............. (140,121) (14,000) (5,115,000) (5,129,000) Exercise of stock options ..... 62,681 6,000 1,063,000 1,069,000 Unrealized losses on available- for-sale-securities, net of tax of $510,000 ........... (710,000) (710,000) (710,000) ------------ Comprehensive income .......... $ 10,655,000 ============ Cash dividends declared - $.70 per share .............. (2,855,000) (2,855,000) Tax benefit of stock options .. 109,000 109,000 Transfer from retained earnings to surplus ......... 4,000,000 (4,000,000) --------- --------- ------------ ------------ ---------- ------------ Balance, December 31, 2003 ...... 4,083,733 $ 408,000 $ 781,000 $ 84,864,000 $3,238,000 $ 89,291,000 ========= ========= ============ ============ ========== ============
See notes to consolidated financial statements 42 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, --------------------------------------------------- 2003 2002 2001 ------------- ------------- ------------- Cash Flows From Operating Activities: Net income .............................................................. $ 11,365,000 $ 11,563,000 $ 10,094,000 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ............................................ 457,000 100,000 100,000 Deferred income tax provision (credit) ............................... 151,000 (109,000) (142,000) Depreciation and amortization ........................................ 1,286,000 1,173,000 1,166,000 Premium amortization on investment securities, net ................... 4,477,000 2,908,000 174,000 Losses (gains) on sales of available-for-sale securities ............. (333,000) 12,000 249,000 Decrease in prepaid income taxes ..................................... -- 1,000 34,000 Decrease (increase) in other assets .................................. (909,000) 373,000 (265,000) Increase (decrease) in accrued expenses and other liabilities ........ (215,000) 372,000 (270,000) Increase (decrease) in income taxes payable .......................... 87,000 335,000 (91,000) ------------- ------------- ------------- Net cash provided by operating activities .......................... 16,366,000 16,728,000 11,049,000 ------------- ------------- ------------- Cash Flows From Investing Activities: Proceeds from sales of available-for-sale securities .................... 16,452,000 687,000 5,270,000 Proceeds from maturities and redemptions of investment securities: Held-to-maturity ..................................................... 117,718,000 114,971,000 391,181,000 Available-for-sale ................................................... 90,687,000 11,131,000 15,003,000 Purchase of investment securities: Held-to-maturity ..................................................... (86,202,000) (137,562,000) (416,922,000) Available-for-sale ................................................... (209,938,000) (50,174,000) (74,881,000) Net increase in loans to customers ...................................... (60,953,000) (34,455,000) (33,802,000) Purchases of bank premises and equipment ................................ (1,683,000) (480,000) (1,301,000) Proceeds from sale of equipment ......................................... -- 3,000 -- ------------- ------------- ------------- Net cash used in investing activities .............................. (133,919,000) (95,879,000) (115,452,000) ------------- ------------- ------------- Cash Flows From Financing Activities: Net increase in total deposits .......................................... 77,430,000 94,855,000 54,398,000 Net increase in securities sold under repurchase agreements ............. 41,184,000 -- -- Proceeds from exercise of stock options ................................. 1,069,000 313,000 420,000 Repurchase and retirement of common stock ............................... (5,129,000) (1,592,000) (4,698,000) Cash dividends paid ..................................................... (2,800,000) (2,398,000) (2,180,000) Cash in lieu of fractional shares on 3-for-2 stock split ................ -- (7,000) -- ------------- ------------- ------------- Net cash provided by financing activities .......................... 111,754,000 91,171,000 47,940,000 ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents ...................... (5,799,000) 12,020,000 (56,463,000) Cash and cash equivalents, beginning of year .............................. 67,229,000 55,209,000 111,672,000 ------------- ------------- ------------- Cash and cash equivalents, end of year .................................... $ 61,430,000 $ 67,229,000 $ 55,209,000 ============= ============= ============= Supplemental Schedule of Noncash: Investing Activities Unrealized gains (losses) on available-for-sale securities .............. $ (1,220,000) $ 4,991,000 $ 523,000 Writeoff of premises and equipment against reserve ...................... -- 62,000 -- Financing Activities Tax benefit from exercise of employee stock options ..................... 109,000 46,000 35,000 Cash dividends payable .................................................. 1,470,000 1,415,000 1,200,000
The Corporation made interest payments of $3,873,000, $5,145,000, and $9,632,000 and income tax payments of $3,552,000, $3,927,000, and $3,726,000 in 2003, 2002 and 2001, respectively. See notes to consolidated financial statements 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of The First of Long Island Corporation (the "Corporation") and its wholly-owned subsidiary, The First National Bank of Long Island (the "Bank"), and the Bank's wholly-owned subsidiaries, The First of Long Island Agency, Inc., The First of Long Island REIT, Inc., and FNY Service Corp., an investment company. The Corporation's financial condition and operating results principally reflect those of the Bank and its subsidiaries. All intercompany balances and amounts have been eliminated. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported asset and liability balances and revenue and expense amounts. Actual results could differ significantly from those estimates. The accounting and reporting policies of the Corporation reflect banking industry practice and conform to generally accepted accounting principles. The following is a summary of the significant accounting policies. Investment Securities Current accounting standards require that investment securities be classified as held-to-maturity, trading, or available-for-sale. The trading category is not applicable to any securities in the Bank's portfolio because the Bank does not buy or hold debt or equity securities principally for the purpose of selling in the near term. Held-to-maturity securities are those debt securities which the Bank has the intent and expected ability to hold to maturity, and are reported at amortized cost. Available-for-sale securities are those debt and equity securities which are neither held-to-maturity securities nor trading securities and are reported at fair value, with unrealized gains and losses, net of the related income tax effect, included in accumulated other comprehensive income. Realized gains and losses on the sale of available-for-sale securities are determined using the specific identification method. The Bank evaluates declines in fair value below the amortized cost basis for individual securities classified as either available-for-sale or held-to-maturity. If a decline in fair value is judged to be other than temporary, the cost basis of the individual security is written down to fair value as a new cost basis and the amount of the write-down is included in earnings as a realized loss. The new cost basis is not changed for subsequent recoveries, if any, in fair value. Subsequent increases in the fair value of available-for-sale securities are included in other comprehensive income and subsequent decreases in fair value, if not an other-than-temporary impairment, are also included in other comprehensive income. Loans and Allowance For Loan Losses Loans are reported at their outstanding principal balance less any chargeoffs, the allowance for loan losses, and any unearned income. Interest on loans is credited to income based on the principal amount outstanding. Unearned discounts are recognized as income over the terms of the loans by the interest method. Nonrefundable loan origination fees are deferred and amortized as yield adjustments over the lives of the related loans. The accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal or interest payments and any accrued but unpaid interest is generally reversed against current period income. The Bank considers nonaccruing loans to be impaired under Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114") as amended. The valuation allowance for nonaccrual and other impaired loans is reported within the overall allowance for loan losses. The allowance for loan losses is established through provisions for loan losses charged against income. Amounts deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is an amount that management currently believes will be adequate to absorb probable losses inherent in the Bank's loan portfolio. The process for estimating credit losses and determining the allowance for loan losses as of any balance sheet date is subjective in nature and requires material estimates. Actual results could differ significantly from these estimates. In determining the allowance for loan losses, there is not an exact amount but rather a range for what constitutes an appropriate allowance. In estimating losses the Bank reviews individual credits in its portfolio and, for those loans deemed to be impaired, measures impairment losses based on either the fair value of collateral or the discounted value of expected future cash flows. Estimated losses for loans that are not specifically reviewed are determined on a pooled basis taking into account a variety of factors including historical losses; levels of and trends in delinquencies and nonaccruing loans; trends in volume and terms of loans; changes in lending policies and procedures; experience, ability and depth of 44 lending staff; national and local economic conditions; concentrations of credit; and environmental risks. The allowance for loan losses is comprised of impairment losses on the loans specifically reviewed plus estimated losses on the pools of loans that are not specifically reviewed. Bank Premises and Equipment Bank premises and equipment are carried at cost, less accumulated depreciation and amortization. Buildings are depreciated using the straight-line method over their estimated useful lives which range between thirty-one and forty years. Building improvements are depreciated using the straight-line method over the then remaining lives of the buildings. Leasehold improvements are amortized using the straight-line method over the remaining lives of the leases or their estimated useful lives, whichever is shorter. The lives of the respective leases range between five and ten years. Furniture, fixtures, and equipment are depreciated over their estimated useful lives which range between three and seven years. The straight-line method of depreciation is used for furniture, fixtures, and equipment acquired after 1997 and the 150% declining balance method is used for all other assets. Goodwill Goodwill for the Corporation resulted from the acquisition of a corporation with favorable tax attributes and represents the excess of the purchase price of the corporation over the fair value of acquired tangible and intangible assets less liabilities assumed. Upon adopting new accounting guidance in 2002, the Corporation ceased amortizing goodwill. Goodwill, which amounted to $220,000 at December 31, 2003 and 2002, is assessed at least annually for impairment. No impairment was recognized in 2003 or 2002. Long-Term Assets Premises and equipment and intangible assets, if any, and other long-term assets, if any, are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. Checking Deposits Each of the Bank's commercial checking accounts has a related noninterest-bearing sweep account. The sole purpose of the sweep accounts is to reduce the noninterest-bearing reserve balances that the Bank is required to maintain with the Federal Reserve Bank, and thereby increase funds available for investment. Although the sweep accounts are classified as savings accounts for regulatory purposes, they are included in checking deposits in the accompanying consolidated balance sheets. Income Taxes A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year. A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law. The effects of future changes in tax laws or rates are not considered. Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management is not currently aware of any loss contingencies that will have a material effect on the Corporation's consolidated financial statements. Stockholders' Equity Earnings Per Share. Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options were exercised and resulted in the issuance of common stock that then shared in the earnings of the Corporation, is computed by dividing net income by the weighted average number of common shares and dilutive stock options. There were no antidilutive stock options at December 31, 2003. Other than the stock options described in Note J and the Rights described in Note I, the Corporation has no securities that could be converted into common stock nor does the Corporation have any contracts that could result in the issuance of common stock. 45 Stock Split. On June 18, 2002, the Corporation declared a 3-for-2 stock split which was paid on July 24, 2002 by means of a 50% stock dividend. Where applicable, all comparative share and per share amounts included in the consolidated financial statements and notes thereto have been adjusted to reflect the effect of the split. Stock Repurchase Program. Since 1988, the Corporation has had a stock repurchase program under which it is authorized to purchase shares of its own common stock in market or private transactions. As of December 31, 2003, and in accordance with prior approval by its Board of Directors, the Corporation was authorized to purchase 53,743 shares of stock. Share repurchases are financed through available corporate cash. Shares Tendered Upon The Exercise of Stock Options. The line captioned repurchase and retirement of common stock in the Consolidated Statement of Changes in Stockholders' Equity includes common stock tendered upon the exercise of stock options of 15,443 shares in 2003 with a value of $626,000, 2,335 shares in 2002 with a value of $83,000, and 6,853 shares in 2001 with a value of $269,000. Stock-Based Compensation At December 31, 2003, the Corporation had two stock option and appreciation plans, which are described more fully in Note J. The Corporation accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. No stock-based employee compensation cost is reflected in net income for stock options, as all options granted under those plans have an exercise price equal to the market value of the underlying common stock on the date of grant. If there were any stock appreciation rights outstanding, compensation costs would be recorded annually based on the quoted market price of the Corporation's stock at the end of the period. The following table illustrates the effect on net income and earnings per share of applying the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation" to stock-based employee compensation.
2003 2002 2001 ---------- ---------- ---------- (in thousands) Net income, as reported .......................... $ 11,365 $ 11,563 $ 10,094 Deduct: Total cost of stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects ................ (341) (228) (64) ---------- ---------- ---------- Pro forma net income ............................. $ 11,024 $ 11,335 $ 10,030 ========== ========== ========== Earnings per share: Basic - as reported ............................ $ 2.78 $ 2.77 $ 2.37 Basic - pro forma .............................. $ 2.70 $ 2.71 $ 2.35 Diluted - as reported .......................... $ 2.72 $ 2.73 $ 2.33 Diluted - pro forma ............................ $ 2.65 $ 2.68 $ 2.33
Comprehensive Income Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by owners and distributions to owners. Other comprehensive income includes revenues, expenses, gains, and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income. Comprehensive income and accumulated other comprehensive income are reported net of related income taxes. Accumulated other comprehensive income for the Corporation consists solely of unrealized holding gains or losses on available-for-sale securities. Fair Values of Financial Instruments The following methods and assumptions are used by the Corporation in estimating fair values of financial instruments as disclosed herein. Cash and cash equivalents. The recorded book value of cash and cash equivalents is their fair value. Investment securities. Fair values are based on quoted market prices. 46 Loans. Fair values are estimated for portfolios of loans with similar financial characteristics. The total loan portfolio is first divided into adjustable and fixed rate interest terms. For adjustable rate loans that are subject to immediate repricing, the recorded book value less the related allowance for loan losses is a reasonable estimate of fair value. For adjustable rate loans that are subject to repricing over time and fixed rate loans, fair value is calculated by discounting anticipated future repricing amounts or cash flows using discount rates equivalent to the rates at which the Bank would currently make loans which are similar with regard to collateral, maturity, and the type of borrower. The discounted value of the repricing amounts and cash flows is reduced by the related allowance for loan losses to arrive at an estimate of fair value. Deposit liabilities. The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, money market accounts, and savings accounts, is equal to their recorded book value at December 31 of each year. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is equivalent to the rate currently offered by the Bank for deposits of similar size, type and maturity. Securities sold under repurchase agreements. For these short-term instruments, the recorded book value is a reasonable estimate of fair value. Accrued interest receivable and payable. For these short-term instruments, the recorded book value is a reasonable estimate of fair value. Off-balance-sheet assets and liabilities. The fair value of off-balance-sheet commitments to extend credit and letters of credit is estimated using fees currently charged to enter into similar agreements. Operating Segments While senior management monitors the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial operations are considered by senior management to be aggregated in one reportable operating segment. Investment Management Division Assets held in a fiduciary capacity are not assets of the Corporation and, accordingly, are not included in the accompanying financial statements. Trust fees are recorded on the accrual basis. Adoption of New Accounting Pronouncements In November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The Corporation adopted the disclosure provisions of FIN No. 45 in the fourth quarter of 2002 and, for guarantees issued or modified after December 31, 2002, adopted the initial recognition and measurement provisions on January 1, 2003. In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN No. 46"). FIN No. 46, which is an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", addresses the accounting and reporting for variable interest entities, as defined. FIN No. 46 was later revised in December 2003. The provisions of FIN No. 46, as revised, do not impact the Corporation's financial condition, results of operations, or disclosures. In April 2003, the Financial Accounting Standards Board issued SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. All provisions of this Statement shall be applied prospectively. Based on the Corporation's current business operations, the provisions of SFAS No. 149 do not impact the Corporation's financial condition, results of operations, or disclosures. In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 is generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Based on the Corporation's current business operations, the provisions of SFAS No. 150 do not impact the Corporation's financial condition, results of operations, or disclosures. 47 NOTE B - INVESTMENT SECURITIES The following table sets forth the amortized cost and estimated fair values of the Bank's investment securities at December 31, 2003 and 2002.
2003 ------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ----------- ----------- Held-to-Maturity Securities: (in thousands) U.S. Treasury .................................................. $ 15,203 $ 342 $ -- $ 15,545 U.S. government agencies ....................................... 2,997 143 -- 3,140 Corporates ..................................................... 1,991 144 -- 2,135 State and municipals ........................................... 57,312 3,728 (188) 60,852 Pass-through mortgage securities ............................... 52,772 856 (462) 53,166 Collateralized mortgage obligations ............................ 108,014 880 (1,169) 107,725 ----------- ----------- ----------- ----------- $ 238,289 $ 6,093 $ (1,819) $ 242,563 =========== =========== =========== =========== Available-for-Sale Securities: U.S. Treasury .................................................. $ 116,206 $ 970 $ (23) $ 117,153 Corporates ..................................................... 4,987 372 -- 5,359 State and municipals ........................................... 86,793 5,311 (93) 92,011 Pass-through mortgage securities ............................... 67,639 -- (1,330) 66,309 Equity ......................................................... 120 186 -- 306 ----------- ----------- ----------- ----------- $ 275,745 $ 6,839 $ (1,446) $ 281,138 =========== =========== =========== =========== 2002 ------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ----------- ----------- Held-to-Maturity Securities: (in thousands) U.S. Treasury .................................................. $ 27,770 $ 1,045 $ -- $ 28,815 U.S. government agencies ....................................... 3,995 304 -- 4,299 Corporates ..................................................... 2,979 222 -- 3,201 State and municipals ........................................... 63,899 3,389 (39) 67,249 Pass-through mortgage securities ............................... 30,660 1,210 (22) 31,848 Collateralized mortgage obligations ............................ 143,799 3,255 (28) 147,026 ----------- ----------- ----------- ----------- $ 273,102 $ 9,425 $ (89) $ 282,438 =========== =========== =========== =========== Available-for-Sale Securities: U.S. Treasury .................................................. $ 93,616 $ 1,712 $ -- $ 95,328 Corporates ..................................................... 5,964 477 -- 6,441 State and municipals ........................................... 74,087 3,912 (27) 77,972 Equity ......................................................... 127 538 -- 665 ----------- ----------- ----------- ----------- $ 173,794 $ 6,639 $ (27) $ 180,406 =========== =========== =========== ===========
The pass-through mortgage securities shown in the preceding table were issued by the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC"). Each issuer's pass-through securities are backed by mortgages conforming to its underwriting guidelines and each issuer guarantees the timely payment of principal and interest on its securities. The collateralized mortgage obligations ("CMOs") shown in the table were also issued by GNMA, FNMA, or FHLMC and all such securities, regardless of the issuer, are backed by GNMA pass-through mortgage securities. Each issuer guarantees the timely payment of principal and interest on its CMOs and GNMA guarantees the timely payment of principal and interest on the underlying pass-through mortgage securities. Obligations of GNMA represent full faith and credit obligations of the U.S. government (the "Government"), while obligations of FNMA, which is a corporate instrumentality of the Government, and FHLMC, which is a Government sponsored corporation, do not. At December 31, 2003 and 2002, investment securities with a carrying value of $110,996,000 and $59,944,000, respectively, were pledged as collateral to secure public deposits and borrowings under repurchase agreements. 48 Securities With Unrealized Losses. The following table sets forth securities with unrealized losses at December 31, 2003 presented by length of time the securities have been in an unrealized loss position.
Less than 12 Months 12 Months or More Total ----------------------- ----------------------- ------------------------ Fair Unrealized Fair Unrealized Fair Unrealized Value Loss Value Loss Value Loss --------- ---------- --------- ---------- --------- ---------- (in thousands) U.S. Treasury ......................... $ 4,992 $ (23) $ -- $ -- $ 4,992 $ (23) State and municipals .................. 14,473 (268) 827 (13) 15,300 (281) Pass-through mortgage securities ...... 96,489 (1,785) 431 (7) 96,920 (1,792) Collateralized mortgage obligations ... 44,756 (1,169) -- -- 44,756 (1,169) --------- --------- --------- --------- --------- --------- Total temporarily impaired ............ $ 160,710 $ (3,245) $ 1,258 $ (20) $ 161,968 $ (3,265) ========= ========= ========= ========= ========= =========
Unrealized losses reflected in the preceding table have not been included in results of operations because the affected securities are of high credit quality, management has the intent and ability to hold these securities for the foreseeable future, and the decline in fair value is largely due to an increase in interest rates since the time the securities were purchased. The losses on these securities are expected to dissipate as they approach their maturity dates and/or interest rates decline. Sales of Available-for-Sale Securities. Sales of available-for-sale securities were as follows:
2003 2002 2001 -------- -------- -------- (in thousands) Proceeds .................. $ 16,452 $ 687 $ 5,270 ======== ======== ======== Gross gains ............... 464 -- -- Gross losses .............. (131) (12) (249) -------- -------- -------- Net gains (losses) ........ $ 333 $ (12) $ (249) ======== ======== ========
49 Maturities and Average Yields. The following table sets forth the maturities and weighted average yields of the Bank's investment securities at December 31, 2003.
Principal Maturing(1) --------------------------------------------------------------------------------- Within After One But After Five But After One Year Within Five Years Within Ten Years Ten Years ---------------- ------------------ ----------------- ----------------- Amount Yield Amount Yield Amount Yield Amount Yield -------- ----- -------- ----- -------- ----- -------- ----- (dollars in thousands) Held-to-Maturity Securities (Amortized Cost) U.S. Treasury .......................... $ 11,725 5.76% $ 3,478 3.18% $ -- --% $ -- --% U.S. government agencies ............... 1,000 5.32 1,997 7.22 -- -- -- -- Corporates ............................. 999 7.56 -- -- -- -- 992 7.15 State and municipals(2) ................ 4,171 6.69 15,754 7.10 24,322 7.49 13,065 6.40 Pass-through mortgage securities ....... 5 7.84 1,383 6.26 41,617 3.95 9,767 5.18 Collateralized mortgage obligations .... -- -- 1,108 6.42 4,426 4.37 102,480 3.67 -------- ---- -------- ---- -------- ---- -------- ---- $ 17,900 6.05% $ 23,720 6.46% $ 70,365 5.20% $126,304 4.10% ======== ==== ======== ==== ======== ==== ======== ==== Principal Maturing(1) --------------------------------------------------------------------------------- Within After One But After Five But After One Year Within Five Years Within Ten Years Ten Years ---------------- ------------------ ----------------- ----------------- Amount Yield Amount Yield Amount Yield Amount Yield -------- ----- -------- ----- -------- ----- -------- ----- (dollars in thousands) Held-to-Maturity Securities (Fair Value) U.S. Treasury .......................... $ 12,018 5.76% $ 3,527 3.18% $ -- --% $ -- --% U.S. government agencies ............... 1,014 5.32 2,126 7.22 -- -- -- -- Corporates ............................. 1,001 7.56 -- -- -- -- 1,134 7.15 State and municipals(2) ................ 4,241 6.69 16,795 7.10 26,744 7.49 13,072 6.40 Pass-through mortgage securities ....... 5 7.84 1,463 6.26 41,500 3.95 10,198 5.18 Collateralized mortgage obligations .... -- -- 1,154 6.42 4,520 4.37 102,051 3.67 -------- ---- -------- ---- -------- ---- -------- ---- $ 18,279 6.05% $ 25,065 6.46% $ 72,764 5.20% $126,455 4.10% ======== ==== ======== ==== ======== ==== ======== ==== Principal Maturing(1) --------------------------------------------------------------------------------- Within After One But After Five But After One Year Within Five Years Within Ten Years Ten Years ---------------- ------------------ ----------------- ----------------- Amount Yield Amount Yield Amount Yield Amount Yield -------- ----- -------- ----- -------- ----- -------- ----- (dollars in thousands) Available-for-Sale Securities (Fair Value) U.S. Treasury .......................... $ 29,886 4.04% $ 87,267 3.06% $ -- --% $ -- --% Corporates ............................. -- -- 5,359 6.00 -- -- -- -- State and municipals (2) ............... 2,839 5.21 26,731 5.72 45,636 6.94 16,805 6.91 Pass-through mortgage securities ....... -- -- -- -- 47,366 2.94 18,943 2.86 -------- ---- -------- ---- -------- ---- -------- ---- Total debt securities ............. 32,725 4.14 119,357 3.79 93,002 4.90 35,748 4.77 Equity ................................. -- -- -- -- -- -- 306 3.37 -------- ---- -------- ---- -------- ---- -------- ---- $ 32,725 4.14% $119,357 3.79% $ 93,002 4.90% $ 36,054 4.75% ======== ==== ======== ==== ======== ==== ======== ====
(1) Maturities shown are stated maturities, except in the case of municipal securities which are shown at the earlier of their stated maturity or pre-refunded dates. Securities backed by mortgages, which include the pass-through mortgage securities and collateralized mortgage obligations shown above, are expected to have substantial periodic repayments resulting in weighted average lives considerably shorter than would be surmised from the above table. (2) Yields on tax-exempt state and municipal securities have been computed on a tax-equivalent basis. 50 NOTE C - LOANS In the second quarter of 1999, the Bank made a transition adjustment to reduce its allowance for loan losses by $1,600,000. The transition adjustment was made in response to guidance issued by staff members of the Financial Accounting Standards Board in April 1999 and further guidance issued by staff members of the Securities and Exchange Commission. The following table sets forth changes in the Bank's allowance for loan losses.
Year ended December 31, --------------------------------------------------------------------------- 2003 2002 2001 2000* 1999* ------- ------- ------- ------- ------- (dollars in thousands) Balance, beginning of year .................... $ 2,085 $ 2,020 $ 1,943 $ 2,033 $ 3,651 ------- ------- ------- ------- ------- Loans charged off: Commercial and industrial ................... 41 68 17 28 32 Secured by real estate ...................... -- -- -- -- -- Consumer and other .......................... 69 16 35 28 28 ------- ------- ------- ------- ------- 110 84 52 56 60 ------- ------- ------- ------- ------- Recoveries of loans charged off: Commercial and industrial ................... -- 13 -- -- -- Secured by real estate ...................... 12 16 16 17 16 Consumer and other .......................... 8 20 13 24 26 ------- ------- ------- ------- ------- 20 49 29 41 42 ------- ------- ------- ------- ------- Net chargeoffs ................................ (90) (35) (23) (15) (18) Provision for loan losses (credit) ............ 457 100 100 (75) -- Transition adjustment ......................... -- -- -- -- (1,600) ------- ------- ------- ------- ------- Balance, end of year .......................... $ 2,452 $ 2,085 $ 2,020 $ 1,943 $ 2,033 ======= ======= ======= ======= ======= Ratio of net chargeoffs to average loans outstanding ................... .03% .01% .01% .01% .01% ======= ======= ======= ======= =======
* Unaudited The Corporation's loan portfolio at December 31, 2003 and 2002 included $1,152,000 and $923,000, respectively, of loans considered to be impaired under SFAS No. 114. Of the Corporation's total impaired loans at December 31, 2003, $727,000 had a related allowance for loan losses of $88,000 and the balance had no related allowance for loan losses. The average recorded investment during 2003 in loans considered to be impaired as of December 31, 2003 was $1,288,000. Interest income recognized during 2003 on loans considered to be impaired as of December 31, 2003 and during the period in 2003 that such loans were impaired amounted to $45,000. Of the Corporation's total impaired loans at December 31, 2002, $546,000 had a related allowance for loan losses of $39,000 and the balance had no related allowance for loan losses. The average recorded investment during 2002 in loans considered to be impaired as of December 31, 2002 was $944,000. Interest income recognized during 2002 on loans considered to be impaired as of December 31, 2002 and during the period in 2002 that such loans were impaired amounted to $24,000. The average recorded investment during 2001 in loans considered to be impaired as of December 31, 2001 was $1,611,000. Interest income recognized during 2001 on loans considered to be impaired as of December 31, 2001 and during the period in 2001 that such loans were impaired amounted to $122,000. All interest income recorded by the Corporation during 2003, 2002, and 2001 on loans considered to be impaired was recognized using the accrual method of accounting. Certain directors, including their immediate families and companies in which they are principal owners, and executive officers were loan customers of the Bank during 2003 and 2002. Such loans are permitted under Regulation O of the Board of Governors of The Federal Reserve System. The aggregate amount of these loans was approximately $1,762,000 and $2,108,000 at December 31, 2003 and 2002, respectively. During 2003, $298,000 of new loans to such persons were made and repayments totaled $644,000. There were no loans to directors or executive officers which were nonaccruing at December 31, 2003 or 2002. 51 NOTE D - PREMISES AND EQUIPMENT Bank premises and equipment consist of the following: December 31, ---------------------- 2003 2002 -------- -------- (in thousands) Land ............................................ $ 1,274 $ 1,274 Buildings ....................................... 4,954 4,820 Leasehold improvements .......................... 2,412 1,888 Furniture and equipment ......................... 8,994 7,969 -------- -------- 17,634 15,951 Accumulated depreciation and amortization ....... (10,839) (9,553) -------- -------- $ 6,795 $ 6,398 ======== ======== A building occupied by one of the Bank's branch offices is leased from a director of the Corporation and the Bank. Although the lease expires on October 31, 2007, the Bank may, on ninety (90) days written notice, elect to extend the lease for an additional five (5) year period. The lease provides for annual base rent of $30,184 for the year ending October 31, 2004. In addition to base rent, the Bank is responsible for its proportionate share of the real estate taxes on the building in which the leased premises are located. NOTE E - DEPOSITS The following table sets forth the remaining maturities of the Bank's time deposits. Amount ------------------------------------- Less than $100,000 or Year $100,000 More Total ----------------- --------- ----------- ------- (in thousands) 2004 ............ $15,303 $16,320 $31,623 2005 ............ 1,559 108 1,667 2006 ............ 273 -- 273 2007 ............ 125 -- 125 2008 ............ 78 -- 78 Thereafter ...... 84 -- 84 ------- ------- ------- $17,422 $16,428 $33,850 ======= ======= ======= NOTE F - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Securities sold under repurchase agreements at December 31, 2003 are short-term collateralized financing arrangements that mature within sixty days. At maturity, the securities underlying the agreements will be returned to the Bank. The following table sets forth information concerning securities sold under repurchase agreements during 2003. There were no securities sold under repurchase agreements during 2002. 2003 --------- (dollars in thousands) Average daily balance during the year ............ $ 17,100 Average interest rate during the year ............ .86% Maximum month-end balance during the year ........ $ 51,155 Weighted average interest rate at year-end ....... .91% 52 NOTE G - INCOME TAXES The Corporation and its subsidiary file a consolidated federal income tax return. Income taxes charged to earnings in 2003, 2002, and 2001 had effective tax rates of 25.0%, 26.4%, and 25.9%, respectively. The following table sets forth a reconciliation of the statutory Federal income tax rate to the Corporation's effective tax rate.
Year Ended December 31, -------------------------------------- 2003 2002 2001 ------- ------- -------- Statutory federal income tax rate .................................................... 34.0% 34.0% 34.0% State and local income taxes, net of federal income tax benefit ...................... 4.3 4.4 4.2 Tax-exempt interest on securities and loans, net of disallowed cost of funding ......................................................... (13.7) (12.2) (12.6) Other ................................................................................ .4 .2 .3 ------- ------- -------- 25.0% 26.4% 25.9% ======= ======= ========
Provision For Income Taxes. The following table sets forth the components of the provision for income taxes.
Year Ended December 31, -------------------------------------- 2003 2002 2001 ------- ------- -------- (in thousands) Current: Federal ............................................................................ $ 2,757 $ 3,258 $ 2,840 State and local .................................................................... 883 1,006 828 ------- ------- -------- 3,640 4,264 3,668 ------- ------- -------- Deferred: Federal ............................................................................ 56 (148) (175) State and local .................................................................... 95 39 33 ------- ------- -------- 151 (109) (142) ------- ------- -------- $ 3,791 $ 4,155 $ 3,526 ======= ======= ========
Net Deferred Tax Liability. The following table sets forth the components of the Bank's net deferred tax liability.
December 31, ---------------------- 2003 2002 ------- ------- Deferred tax assets: (in thousands) Allowance for loan losses .......................................................... $ 539 $ 387 Supplemental executive retirement expense .......................................... 93 84 Directors' retirement expense ...................................................... 70 66 Other retirement expense ........................................................... 77 42 Accrued professional fees .......................................................... 12 12 Other .............................................................................. 4 4 ------- ------- 795 595 Valuation allowance .................................................................. -- -- ------- ------- 795 595 ------- ------- Deferred tax liabilities: Pension expense .................................................................... 421 105 Depreciation ....................................................................... 68 78 Accumulated earnings of Bank subsidiaries .......................................... 186 142 Unrealized gains on available-for-sale securities .................................. 2,155 2,664 ------- ------- 2,830 2,989 ------- ------- Net deferred tax liability ........................................................... $ 2,035 $ 2,394 ======= =======
53 NOTE H - REGULATORY MATTERS Capital. The Corporation is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgments by the regulators. The following table sets forth the Corporation's capital ratios at December 31, 2003 and 2002 and the minimum ratios necessary for a bank to be classified as well capitalized and adequately capitalized. The capital ratios of the Corporation's subsidiary bank at December 31, 2003 and 2002 are not significantly different than those shown in the table below and substantially exceed the requirements for a well-capitalized bank.
Corporation's Capital Ratios at December 31: ----------------------------- Well Adequately 2003 2002 Capitalized Capitalized ----- ----- ----------- ------------ Total Risk-Based Capital Ratio ................. 27.16% 30.28% 10.00% 8.00% Tier 1 Risk-Based Capital Ratio ................. 26.41 29.52 6.00 4.00 Tier 1 Leverage Capital Ratio ................... 9.36 10.25 5.00 4.00
For purposes of computing the capital ratios in the preceding table, the Corporation had total capital, as defined, of $88,285,000 and $83,359,000 at December 31, 2003 and 2002, respectively, and Tier 1 capital, as defined, of $85,833,000 and $81,274,000, respectively. The minimum capital needed to be classified as well capitalized at December 31, 2003 for total risk-based, Tier 1 risk-based, and Tier 1 leverage capital purposes is $32,506,000, $19,503,000 and $45,846,000, respectively. The minimum capital needed to be classified as adequately capitalized at December 31, 2003 for total risk-based, Tier 1 risk-based, and Tier 1 leverage capital purposes is $26,005,000, $13,002,000 and $36,676,000, respectively. The minimum capital needed to be classified as well capitalized at December 31, 2002 for total risk-based, Tier 1 risk-based, and Tier 1 leverage capital purposes is $27,533,000, $16,520,000 and $39,632,000, respectively. The minimum capital needed to be classified as adequately capitalized at December 31, 2002 for total risk-based, Tier 1 risk-based, and Tier 1 leverage capital purposes is $22,026,000, $11,013,000 and $31,706,000, respectively. Other Matters. The amount of dividends paid by the Bank to the Corporation is subject to restrictions under Federal Reserve Board Regulation H. Under Regulation H, the Bank is required to obtain regulatory approval for the payment of dividends during any one calendar year that exceed the Bank's net income for the calendar year plus the retained net income for the two preceding calendar years. At December 31, 2003, the Bank had retained net income for the current and two preceding calendar years of $16,006,000. Regulation D of the Board of Governors of The Federal Reserve System requires banks to maintain reserves against certain deposit balances. The Bank's average reserve requirement for 2003 was approximately $8,386,000. Under national banking laws and related statutes, the Bank is limited as to the amount it may loan to the Corporation, unless such loans are collateralized by specified obligations. At December 31, 2003, the maximum amount available for transfer from the Bank to the Corporation in the form of loans approximated $13,219,000. NOTE I - SHAREHOLDER PROTECTION RIGHTS PLAN On July 16, 1996, the Board of Directors of the Corporation (the "Board") adopted a Shareholder Protection Rights Plan and declared a dividend of one right ("Right") on each outstanding share of the Corporation's common stock (the "Common Stock"). The dividend was paid on July 31, 1996 to shareholders of record as of the same date. In the absence of an event of the type described below, the Rights will be evidenced by and trade with the Common Stock and will not be exercisable. However, the Rights will separate from the Common Stock and become exercisable following the earlier of (1) the tenth business day, or such later date as the Board may decide, after any person or persons (collectively referred to as "person") commences a tender offer that would result in such person holding a total of 20% or more of the outstanding Common Stock, or (2) ten business days after, or such earlier or later date as the Board may decide, the announcement by the Corporation that any person has acquired 20% or more of the outstanding Common Stock. When separated from the Common Stock, each Right will entitle the holder to purchase one share of Common Stock for $56 (the "Exercise Price"). However, in the event that the Corporation has announced that any person has acquired 54 20% or more of the outstanding Common Stock, the Rights owned by that person will be automatically void and each other Right will automatically become a right to buy, for the Exercise Price, that number of shares of Common Stock having a market value of twice the Exercise Price. Also, if any person acquires 20% or more of the outstanding Common Stock, the Board can require that, in lieu of exercise, each outstanding Right be exchanged for one share of Common Stock. The Rights may be redeemed by action of the Board at a price of $.01 per Right at any time prior to announcement by the Corporation that any person has acquired 20% or more of the outstanding Common Stock. The Exercise Price and the number of Rights outstanding are subject to adjustment to prevent dilution. The Rights expire ten years from the date of their issuance. NOTE J - STOCK-BASED COMPENSATION The Corporation has two stock option and appreciation rights plans (the "Plans"). The 1996 Plan was approved by the Corporation's Board of Directors on January 16, 1996 and subsequently approved by its stockholders. Under the 1996 Plan, as amended, options to purchase up to 540,000 shares of common stock were made available for grant to key employees and to non-employee directors of the Corporation and its subsidiaries through January 15, 2006. The number of stock options and stock appreciation rights that can be granted to any one person in any one fiscal year is limited to 25,000. Each option granted under the 1996 Plan is granted at a price equal to the fair market value of one share of the Corporation's stock on the date of grant. Options granted on or before December 31, 2000 are exercisable in whole or in part commencing six months from the date of grant and ending ten years after the date of grant. Options granted after December 31, 2000 are exercisable in whole or in part commencing three years from the date of grant and ending ten years after the date of grant. The date on which options first become exercisable is subject to acceleration in the event of a change in control, retirement, death, disability, and certain other limited circumstances. Each option granted to an employee under the 1996 Plan may be granted with or without a stock appreciation right ("SAR") attached. The 1996 Plan also provides for the granting of stand-alone SARs to employees. Non-employee directors are not eligible for SAR grants, whether stand-alone or attached to options. As of December 31, 2003, there were 278,152 options available for grant under the 1996 Plan, 234,639 options outstanding, and 46,003 options currently exercisable. No stock appreciation rights have been granted under the 1996 Plan, either attached to options or on a stand-alone basis. The 1986 Plan was approved by the Corporation's Board of Directors on January 21, 1986 and subsequently approved by its stockholders. Under the 1986 Plan, as later amended, options to purchase up to 387,675 shares of common stock were available to be granted to key employees of the Corporation and its subsidiaries through January 21, 1996. The terms of the 1986 Plan are substantially the same as those of the 1996 Plan except that the 1986 Plan did not provide for the granting of stock options to non-employee directors and did not limit to 25,000 the number of stock options and stock appreciation rights that could be granted to any one person in any one fiscal year. At December 31, 2003, options to purchase 19,007 shares of Common Stock were outstanding and exercisable under the 1986 Plan and there were no outstanding stock appreciation rights. The Corporation has chosen to account for stock-based compensation using the intrinsic value method prescribed in APB No. 25. Since each option is granted at a price equal to the fair market value of one share of the Corporation's stock on the date of grant, no compensation cost has been recognized. Stock Option Activity. The following table sets forth stock option activity and the weighted average fair value of options granted.
2003 2002 2001 ---------------------- ---------------------- ---------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price -------- -------- -------- -------- -------- -------- Outstanding, beginning of year ................... 261,920 $ 21.95 214,391 $ 19.77 177,884 $ 16.81 Granted .......................................... 62,010 33.11 76,891 25.17 68,532 25.51 Exercised ........................................ (62,681) 17.06 (24,870) 12.59 (28,956) 14.51 Forfeited ........................................ (7,603) 27.30 (4,492) 24.97 (3,069) 26.11 -------- -------- -------- -------- -------- -------- Outstanding, end of year ......................... 253,646 $ 25.73 261,920 $ 21.95 214,391 $ 19.77 ======== ======== ======== ======== ======== ======== Exercisable, end of year ......................... 65,010 $ 19.68 124,646 $ 18.21 148,102 $ 17.19 ======== ======== ======== ======== ======== ======== Weighted average fair value of options granted ... $ 6.47 $ 4.92 $ 5.51 ======== ======== ========
55 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions: risk-free interest rates of 3.64%, 3.69%, and 4.85% for options granted in 2003, 2002, and 2001, respectively; volatility of 17.00%, 16.70%, and 15.30% for options granted in 2003, 2002, and 2001, respectively; and expected dividend yield of 2.0% and expected life of 7 years for the options granted in each of the three years in the period ended December 31, 2003. Stock Options Outstanding. The following table sets forth information about outstanding and exercisable stock options at December 31, 2003.
Outstanding Stock Options Exercisable Stock Options ------------------------------------------- --------------------------- Weighted Average --------------------------- Weighted Remaining Average Contractual Exercise Exercise Range of Exercise Prices Number Life (yrs.) Price Number Price - ----------------------------------------------- ------- ----------- --------- --------- --------- $10.59 to $13.26 .............................. 19,007 1.39 $12.27 19,007 $12.27 $16.22 to $19.98 .............................. 25,378 4.93 18.57 25,378 18.57 $24.68 to $33.11 .............................. 209,261 7.74 27.82 20,625 27.86 ------- ------ ------ ------- ------ 253,646 6.98 $25.73 65,010 $19.68 ======= ====== ====== ======= ======
NOTE K - RETIREMENT PLANS The Bank has a combined profit sharing/401(k) plan (the "Profit Sharing Plan"). Employees are eligible to participate provided they are at least 21 years of age and have completed one year of service in which they worked 1,000 hours if full-time and 700 hours if part-time. Participants may elect to contribute, on a tax-deferred basis, up to 25% of gross compensation, as defined, subject to the limitations of Section 401(k) of the Internal Revenue Code. The Bank may, at its sole discretion, make "Additional" contributions to each participant's account based on the amount of the participant's tax deferred contributions and make profit sharing contributions to each participant's account equal to a percentage of the participant's compensation, as defined. In determining an appropriate profit sharing contribution percentage for any given year, the Compensation Committee of the Board of Directors considers the Bank's actual performance against targeted earnings goals. Participants are fully vested in their elective contributions and, after five years of participation in the Profit Sharing Plan, are fully vested (20% vesting per year) in the Additional and profit sharing contributions made by the Bank. Additional contributions were $149,000, $142,000, and $130,000 for 2003, 2002, and 2001, respectively, and profit sharing contributions were $492,000, $743,000, and $587,000, respectively. On August 3, 1995, the Bank adopted The First National Bank of Long Island Supplemental Executive Retirement Program ("SERP"). The SERP provides benefits to certain employees, designated by the Compensation Committee of the Board of Directors, whose benefits under the Pension Plan and Profit Sharing Plan are limited by the applicable provisions of the Internal Revenue Code. The benefit under the SERP is equal to the additional amount the employee would be entitled to under the Pension and Profit Sharing Plans in the absence of such Internal Revenue Code limitations. The effective date of the SERP, which superseded the Bank's previous supplemental retirement benefit plan, was January 1, 1994. SERP expense was $205,000, $250,000, and $389,000 in 2003, 2002, and 2001, respectively. The fluctuations in SERP expense during the three year period ended December 31, 2003 are primarily attributable to the impact on required employer contributions of changing interest rates and stock market performance, increases in executive compensation levels, and, for 2002, an increase under the Internal Revenue Code of the amount of compensation that can be covered by the Bank's qualified pension plan. The Bank has a defined benefit pension plan (the "Pension Plan" or the "Plan") covering eligible employees. The provisions of the Pension Plan are governed by the rules and regulations contained in the Prototype Plan of the New York State Bankers Retirement System (the "Retirement System") and the Retirement System Adoption Agreement executed by the Bank. The Retirement System is overseen by a Board of Trustees (the "Trustees") who meet quarterly and, among other things, set the investment policy guidelines. For investment purposes, the Pension Plan's contributions are pooled with the contributions of the other participants in the Retirement System. Assets of the Pension Plan are invested in various debt and equity securities, the major categories of which are set forth in the table that follows. The Pension Plan has a September 30 year end and therefore the Company uses September 30 as the measurement date for this Plan. Employees are eligible to participate in the Pension Plan after attaining 21 years of age and completing 12 full months of service. Pension benefits are generally based on a percentage of average annual compensation during the period of creditable service. The Bank makes annual contributions to the Pension Plan in an amount sufficient to fund these benefits and participants contribute 2% of their compensation. The Bank's funding policy, the entry age normal cost- 56 frozen initial liability method, is consistent with the funding requirements of federal law and regulations. Employees become fully vested after four years of participation in the Pension Plan (no vesting occurs during the four-year period). Major Categories of Plan Assets. The following table sets forth the major categories of Plan assets as of the last two Plan year ends and the percentage of the total value of Plan assets accounted for by each. Percentage of Fair Value of Total Plan Assets at: -------------------------- 9/30/03 9/30/02 --------- --------- Equity Securities............ 59.7% 55.3% Debt Securities.............. 34.5 36.3 Real Estate.................. -- -- All Other Assets............. 5.8 8.4 ----- ----- 100.0% 100.0% ===== ===== The Retirement System uses two investment managers. The mix of equity and long-term fixed income securities are determined from time to time by the Trustees based on a review of the Retirement System's requirements. The current target allocation percentage for equity securities is 60% and for debt securities is 40%. However, the target percentage for equities may vary from 50% to 70% and the target percentage for debt securities may vary from 30% to 50% based on the investment managers' discretion. The equity portfolio includes, among other things, equities in a commingled large cap equity fund. Although there are no specific restrictions on either the quality rating or the type of equities to be purchased, an equity investment in a single company is limited to 5% of the cost of the portfolio. Fixed income investments include various debt securities included in a fixed income portfolio and a commingled fixed income fund. The fixed income portfolio must maintain an average quality rating of "AA"/"Aa3" or above by Standard & Poor's/Moody's. A quality rating by Moody's and/or Standard and Poor's of "A" or better is generally required for new purchases. In addition, up to 15% of the purchases of debt securities may be corporate bonds rated "BBB". If a security is not rated and is considered by the investment managers to be of "A" quality or higher, it may be purchased. With the exception of securities issued by the United States government, an individual issuer may not exceed 10% of the fixed income portfolio at the time of purchase. Structured notes and mortgage backed derivatives that have inverse floating coupons or that are interest only securities are not permitted. The commingled fixed income fund must maintain an average quality rating of "AA" or above by Moody's, Standard & Poor's, or Fitch. A maximum of 20% of the fund may be invested in securities rated below "A3" or equivalent. All rated securities must be investment grade ("Baa3" or equivalent) or higher by at least one rating agency at the time of purchase. Non-rated securities may be purchased in the fund if they are deemed to be investment grade equivalent by the Trustees. Net Pension Cost. The following table sets forth the components of net periodic pension cost.
2003 2002 2001 -------- -------- -------- (in thousands) Service cost, net of plan participant contributions ...... $ 504 $ 482 $ 410 Interest cost ............................................ 570 517 462 Expected return on plan assets ........................... (543) (594) (598) Net amortization and deferral ............................ 23 (21) (44) -------- -------- -------- Net pension cost ......................................... $ 554 $ 384 $ 230 ======== ======== ========
57 Significant Actuarial Assumptions. The following tables set forth the significant actuarial assumptions used to determine the benefit obligation as of September 30, 2003, 2002, and 2001 and the benefit cost for each of the Plan years then ended.
Weighted average assumptions used to determine the benefit obligation at September 30 2003 2002 2001 ------- ------- ------- Discount rate ....................................................... 6.00% 6.75% 6.75% Rate of increase in compensation levels ............................. 5.00% 5.00% 5.00% Expected long-term rate of return on plan assets .................... 7.00% 7.50% 7.50% Weighted average assumptions used to determine pension cost for the year ended September 30 2003 2002 2001 ------- ------- ------- Discount rate ....................................................... 6.75% 6.75% 6.75% Rate of increase in compensation levels ............................. 5.00% 5.00% 5.00% Expected long-term rate of return on plan assets .................... 7.50% 7.50% 7.00%
The expected long-term rate-of-return on plan assets reflects long-term earnings expectations on the total assets currently in the Retirement System and contributions expected to be received by the Retirement System during the current plan year. In estimating the rate, appropriate consideration is given to historical returns earned by the Retirement System assets and the rates of return expected to be available for reinvestment. Average rates of return over the past 10, 15, and 20 year periods were determined and subsequently adjusted to reflect current capital market assumptions and changes in investment allocations. Funded Status of The Plan. The following table sets forth the change in the projected benefit obligation and Plan assets for each Plan year and, as of the end of each Plan year, the funded status of the Plan, prepaid benefit cost, and accumulated benefit obligation.
Year Ended September 30, ------------------------------------------- 2003 2002 2001 -------- -------- -------- Change in projected benefit obligation (in thousands) Projected benefit obligation at beginning of year ................... $ 8,608 $ 7,796 $ 6,969 Service cost ........................................................ 659 625 520 Plan participants' contributions .................................... (155) (143) (110) Expenses ............................................................ (59) (59) (55) Interest cost ....................................................... 570 517 462 Benefits paid ....................................................... (374) (324) (260) Additional prior service cost at valuation date ..................... -- -- 302 Assumption changes and other ........................................ 1,368 196 (32) -------- -------- -------- Projected benefit obligation at end of year ......................... 10,617 8,608 7,796 -------- -------- -------- Change in plan assets Fair value of plan assets at beginning of year ...................... 7,329 7,990 8,580 Actual return on plan assets ........................................ 1,309 (421) (712) Employer contributions .............................................. 1,773 -- 327 Plan participants' contributions .................................... 155 143 110 Benefits paid ....................................................... (374) (324) (260) Expenses ............................................................ (59) (59) (55) -------- -------- -------- Fair value of plan assets at end of year ............................ 10,133 7,329 7,990 -------- -------- -------- Funded status ....................................................... (484) (1,279) 194 Unrecognized net actuarial loss ..................................... 1,857 1,453 385 Unrecognized prior service cost ..................................... 235 255 275 Unrecognized transition asset ....................................... (6) (46) (87) -------- -------- -------- Prepaid benefit cost ................................................ $ 1,602 $ 383 $ 767 ======== ======== ======== Accumulated Benefit Obligation ...................................... $ 8,406 $ 6,988 $ 6,169 ======== ======== ========
The Bank currently expects to contribute approximately $1,183,000 to the Pension Plan on or before September 30, 2004, representing the maximum tax deductible contribution for the Plan year then ended. 58 NOTE L - OTHER OPERATING EXPENSES Expenses included in other operating expenses which exceed one percent of the aggregate of total interest income and noninterest income in 2003, 2002, and 2001 are as follows: 2003 2002 2001 ---- ---- ---- (in thousands) Computer services ......... $712 $556 $543 Insurance ................. 726 545 481 Marketing ................. 619 416 465 NOTE M - COMMITMENTS AND CONTINGENT LIABILITIES Financial Instruments With Off-Balance-Sheet Risk. The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to financial instruments for commitments to extend credit, standby letters of credit, and commercial letters of credit is represented by the contractual notional amount of these instruments. The Bank uses the same credit policies in making commitments to extend credit and generally uses the same credit policies for letters of credit as it does for on-balance-sheet instruments. At December 31, financial instruments whose contract amounts represent credit risk are as follows:
2003 2002 ------------------- -------------------- Fixed Variable Fixed Variable Rate Rate Rate Rate ------- -------- ------- -------- (in thousands) Commitments to extend credit .......... $ 8,391 $50,309 $12,007 $46,955 Standby letters of credit ............. 2,778 -- 1,077 -- Commercial letters of credit .......... 90 -- -- --
Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since some of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Unused home equity lines, which comprise a substantial portion of these commitments, generally expire five years from their date of origination. Other loan commitments generally expire in 45 days. The fixed rate loan commitments shown in the table are to make loans with interest rates ranging from 4.00% to 6.00% and maturities ranging from 9 years to 20 years. The amount of collateral obtained, if any, by the Bank upon extension of credit is based on management's credit evaluation of the borrower. Collateral held varies but may include security interests in business assets, mortgages on commercial and residential real estate, deposit accounts with the Bank or other financial institutions, and securities. Standby letters of credit are conditional commitments issued by the Bank to assure the performance or financial obligations of a customer to a third party. The Bank's standby letters of credit extend through December 2004; however, most are effectively automatically renewable. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. The Bank generally holds collateral and/or obtains personal guarantees supporting these commitments. The extent of collateral held for these commitments at December 31, 2003 varied from 0% to 100%, and averaged 81%. Standby letters of credit are considered financial guarantees in accordance with FIN No. 45, and are recorded at fair value. Commercial letters of credit are conditional commitments issued by the Bank to assure the payment by a customer to a supplier. All of the Bank's commercial letters of credit extend for less than one year. The Bank generally obtains personal guarantees supporting these commitments. Concentrations of Credit Risk. Most of the Bank's loans, personal and commercial, are to borrowers who are domiciled on Long Island. As a result, the income of many of the Bank's borrowers is dependent on the Long Island economy. In addition, most of the Bank's real estate loans involve mortgages on Long Island properties. Thus, the Bank's loan portfolio is susceptible to the economy of Long Island. 59 Lease Commitments. At December 31, 2003, minimum annual rental commitments under noncancelable operating leases are as follows: Year Amount ---------------------------------- ----------- (in thousands) 2004 ............................. $ 692 2005 ............................. 642 2006 ............................. 535 2007 ............................. 514 2008 ............................. 424 Thereafter ....................... 1,795 ----------- $ 4,602 =========== The Bank has various renewal options on the above leases. Rent expense was $620,000, $461,000, and $457,000 in 2003, 2002, and 2001, respectively. Employment Contracts and Severance Agreements. Five of the Bank's executive officers have employment contracts with the Corporation under which they are entitled to severance compensation in the event of an involuntary termination of employment or resignation of employment following a change in control. The terms of these contracts range from eighteen months to three years and are automatically extended at the expiration of each year for an additional period of one year, thus resulting in new terms of between eighteen months and three years. The current aggregate annual salaries provided for in these contracts is approximately $1,118,000. Three other executive officers have severance agreements with the Corporation which apply in the event of a change in control. The current aggregate annual salaries provided for in these severance agreements is approximately $517,000. NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates are made at a specific point in time and are based on existing on and off-balance-sheet financial instruments. Such estimates are generally subjective in nature and dependent upon a number of significant assumptions associated with each financial instrument or group of similar financial instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows, and relevant available market information. Changes in assumptions could significantly affect the estimates. In addition, fair value estimates do not reflect the value of anticipated future business, premiums or discounts that could result from offering for sale at one time the Corporation's entire holdings of a particular financial instrument, or the tax consequences of realizing gains or losses on the sale of financial instruments. The following table sets forth the carrying/contract amounts and estimated fair values of the Corporation's financial instruments at December 31, 2003 and 2002.
2003 2002 ----------------------- ------------------------ Carrying/ Carrying/ Contract Contract Amount Fair Value Amount Fair Value --------- ---------- --------- ---------- (in thousands) Financial Assets: Cash and due from banks ............................. $ 31,430 $ 31,430 $ 33,229 $ 33,229 Federal funds sold .................................. 30,000 30,000 34,000 34,000 Held-to-maturity securities ......................... 238,289 242,563 273,102 282,438 Available-for-sale securities ....................... 281,138 281,138 180,406 180,406 Loans ............................................... 319,519 323,746 259,023 264,500 Accrued interest receivable ......................... 4,903 4,903 5,353 5,353 Financial Liabilities: Checking deposits ................................... 297,454 297,454 256,444 256,444 Savings and money market deposits ................... 445,851 445,851 412,815 412,815 Time deposits ....................................... 33,850 33,810 30,466 30,521 Securities sold under repurchase agreements 41,184 41,184 -- -- Accrued interest payable ............................ 65 65 61 61 Off-Balance-Sheet Liabilities: Commitments to extend credit ........................ 58,700 -- 58,962 --
60 NOTE O - PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for The First of Long Island Corporation (parent company only) is as follows:
CONDENSED BALANCE SHEETS December 31, --------------------------- 2003 2002 --------- --------- Assets: (in thousands) Checking and money market accounts with subsidiary ......................... $ 2,499 $ 2,653 Investment in subsidiary bank, at equity ................................... 88,128 84,138 Other assets ............................................................... 134 66 --------- --------- $ 90,761 $ 86,857 ========= ========= Liabilities: Cash dividends payable ..................................................... $ 1,470 $ 1,415 --------- --------- Stockholders' equity: Common stock ............................................................... 408 416 Surplus .................................................................... 781 724 Retained earnings .......................................................... 84,864 80,354 --------- --------- 86,053 81,494 Accumulated other comprehensive income, net of tax ......................... 3,238 3,948 --------- --------- 89,291 85,442 --------- --------- $ 90,761 $ 86,857 ========= ========= CONDENSED STATEMENTS OF INCOME Year ended December 31, --------------------------------------------- 2003 2002 2001 --------- --------- --------- Income: (in thousands) Dividends from subsidiary bank ............................................. $ 6,700 $ 2,700 $ 7,700 Interest on deposits with subsidiary bank .................................. 17 24 33 --------- --------- --------- 6,717 2,724 7,733 --------- --------- --------- Expenses: Other operating expenses ................................................... 76 79 59 --------- --------- --------- Income before income taxes ................................................. 6,641 2,645 7,674 Income tax benefit ........................................................... (23) (22) (11) --------- --------- --------- Income before undistributed earnings of subsidiary bank .......................................................... 6,664 2,667 7,685 Equity in undistributed earnings ............................................. 4,701 8,896 2,409 --------- --------- --------- Net income ................................................................. $ 11,365 $ 11,563 $ 10,094 ========= ========= =========
61
CONDENSED STATEMENTS OF CASH FLOWS Year ended December 31, --------------------------------------- 2003 2002 2001 --------- --------- --------- (in thousands) Cash Flows From Operating Activities: Net income .................................................................... $ 11,365 $ 11,563 $ 10,094 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of subsidiary bank ................................. (4,701) (8,896) (2,409) Decrease in other assets .................................................. 42 24 2 --------- --------- --------- Net cash provided by operating activities ................................... 6,706 2,691 7,687 --------- --------- --------- Cash Flows From Financing Activities: Repurchase and retirement of common stock ..................................... (5,129) (1,592) (4,698) Proceeds from exercise of stock options ....................................... 1,069 313 420 Cash dividends paid ........................................................... (2,800) (2,398) (2,180) Cash in lieu of fractional shares on 3-for-2 stock split ...................... -- (7) -- --------- --------- --------- Net cash used in financing activities ....................................... (6,860) (3,684) (6,458) --------- --------- --------- Net increase (decrease) in cash and cash equivalents* ........................... (154) (993) 1,229 Cash and cash equivalents, beginning of year .................................... 2,653 3,646 2,417 --------- --------- --------- Cash and cash equivalents, end of year .......................................... $ 2,499 $ 2,653 $ 3,646 ========= ========= ========= Supplemental Schedule of Noncash Financing Activities: Tax benefit from exercise of employee stock options ........................... $ 109 $ 46 $ 35 Cash dividends payable ........................................................ 1,470 1,415 1,200
*Cash and cash equivalents include the checking and money market accounts with the Corporation's wholly-owned bank subsidiary. 62 NOTE P - QUARTERLY FINANCIAL DATA (Unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ----- (in thousands, except per share data) 2003 Interest income .............................. $ 9,525 $ 8,667 $ 9,192 $ 9,584 $36,968 Interest expense ............................. 1,053 966 906 953 3,878 Net interest income .......................... 8,472 7,701 8,286 8,631 33,090 Provision for loan losses .................... 75 75 185 122 457 Noninterest income ........................... 1,485 1,517 1,651 1,345 5,998 Noninterest expense .......................... 5,685 5,872 5,899 6,019 23,475 Income before income taxes ................... 4,197 3,271 3,853 3,835 15,156 Income taxes ................................. 1,104 761 969 957 3,791 Net income ................................... 3,093 2,510 2,884 2,878 11,365 Earnings per share: Basic ...................................... .75 .62 .71 .70 2.78 Diluted .................................... .74 .60 .70 .68 2.72 Comprehensive income ......................... 3,154 3,263 1,684 2,554 10,655 2002 Interest income .............................. $ 8,804 $ 9,338 $ 9,460 $ 9,327 $36,929 Interest expense ............................. 1,218 1,254 1,347 1,292 5,111 Net interest income .......................... 7,586 8,084 8,113 8,035 31,818 Provision for loan losses (credit) ........... 100 50 (100) 50 100 Noninterest income ........................... 1,329 1,479 1,319 1,361 5,488 Noninterest expense .......................... 5,301 5,447 5,426 5,314 21,488 Income before income taxes ................... 3,514 4,066 4,106 4,032 15,718 Income taxes ................................. 866 1,099 1,112 1,078 4,155 Net income ................................... 2,648 2,967 2,994 2,954 11,563 Earnings per share: Basic ...................................... .63 .71 .72 .71 2.77 Diluted .................................... .62 .70 .71 .70 2.73 Comprehensive income ......................... 2,264 5,433 4,477 2,375 14,549
63 Official Staff Administration J. William Johnson Chairman Michael N. Vittorio President & Chief Executive Officer Arthur J. Lupinacci, Jr. Executive Vice President Lorraine Fogarty Executive Assistant Constance Miller Executive Assistant Auditing Kitty W. Craig Vice President Margaret M. DeBonis Assistant Vice President Matthew Wallis Administrative Assistant Branch Administration James Clavell Vice President Monica T. Baker Assistant Vice President JoAnn Diamond Assistant Vice President Carole Ann Snayd Assistant Vice President Leonora Mintz Assistant Manager Patricia Ovalle Wood Assistant Manager Sara Melamed Assistant Manager Patrice Gonclaves Administrative Assistant Commercial Banking Donald L. Manfredonia Executive Vice President Joseph G. Perri Executive Vice President Paul J. Daley Senior Vice President James P. Johnis Senior Vice President Albert Arena Vice President Sergei A. Boboshko Vice President Deborah A. Cassidy Vice President 64 Stephen Durso Vice President Albert Ghelarducci Vice President Edward V. Mirabella Vice President Peter C. Puccio Vice President William W. Riley Vice President John P. Solensky Vice President Margaret M. Curran Assistant Vice President Gretchen B. Nesky Assistant Vice President Maureen Cannarsa Administrative Assistant Diane Mucci Executive Assistant Compliance and Procedures John Vivona Assistant Vice President Sandra Dato Administrative Assistant Computer Services Conrad A. Lissade Computer Services Manager Data Center Jose Diaz Vice President Margaret Hanrahan Administrative Assistant Kristen Mucci Administrative Assistant Linda Sue Rudloff Administrative Assistant Deposit Operations Carmela Lalonde Assistant Manager Donna Long Assistant Manager Linda Bannen Administrative Assistant Neil Dastas Administrative Assistant Finance Mark D. Curtis Senior Vice President Wayne B. Drake Vice President 65 Howard Hoeberlein Vice President Matthew J. Mankowski Assistant Vice President Cheryl Romanski Assistant Cashier Catherine Irvin Assistant Manager Diane Pascucci Administrative Assistant General Services Daniel Sapanara General Services Officer Carol Daley Administrative Assistant Human Resources Mary E. Casey Vice President Takako Endo Assistant Vice President Susan J. Hempton Assistant Vice President Rita Quinn Administrative Assistant Loan Center Robert Jacobs Vice President John F. Darcy Senior Mortgage Consultant Carmine D'Ambrosio Mortgage Originator Frederick T. Hughes Mortgage Originator Eveline Ratte Assistant Manager Anna S. Fleming Administrative Assistant Veronica Gajkowski Administrative Assistant Barbara Johnson Administrative Assistant Patricia Lacorazza Administrative Assistant Marketing Cathy M. Poturny Assistant Vice President Anne Urtnowski Assistant Manager Donna A. Blacharski Administrative Assistant 66 Operations Administration Richard Kick Senior Vice President Betsy Gustafson Vice President Counsel Schupbach, Williams & Pavone LLP Independent Auditors Crowe Chizek and Company LLC Form 10-K Report A copy of the Corporation's annual report on Form 10-K for 2003, filed with the Securities and Exchange Commission, may be obtained without charge upon written request to Mark D. Curtis, Senior Vice President and Treasurer, The First of Long Island Corporation, 10 Glen Head Road, PO Box 67, Glen Head, New York 11545-0067. Executive Office The First of Long Island Corporation 10 Glen Head Road Glen Head, New York 11545 (516) 671-4900 www.fnbli.com Transfer Agent and Registrar Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016-3572 (800) 368-5948 www.rtco.com Annual Meeting Notice The Annual Meeting of Stockholders will be held at the American Legion Hall, 190 Glen Head Road, Glen Head, New York 11545 on Tuesday, April 20, 2004 at 3:30 P.M. 67 Business Development Board [PHOTO OMITTED] Howard P. Annenberg President & CEO Shannen Promotions, Inc. [PHOTO OMITTED] Nicola Arena President Mediterranean Shipping Co. (USA) Inc. [PHOTO OMITTED] Richard Arote, Sr. President Air Distribution Enterprises, Inc. [PHOTO OMITTED] Beverly J. Bell, Esq. Humes & Wagner, LLP [PHOTO OMITTED] Robert J. Bogardt, CPA Bogardt & Company, LLP [PHOTO OMITTED] Thomas Burke Chief Executive Officer Ophthalmic Consultants of Long Island [PHOTO OMITTED] Christopher S. Byczek, Esq. Partner Cronin & Byczek, LLP [PHOTO OMITTED] Louis Campanelli Member of the Board of Directors SCORE Foundation [PHOTO OMITTED] Emil V. Cianciulli, Esq. Partner Cianciulli, Meng & Panos, P.C. [PHOTO OMITTED] Phillip M. Damashek, Esq. Schneider, Kleinick, Weitz & Damashek [PHOTO OMITTED] Thomas N. Dufek, CPA Dufek & Associates [PHOTO OMITTED] William L. Edwards Real Estate Investor [PHOTO OMITTED] C. J. Erickson, Esq. Hodgson Russ LLP 68 [PHOTO OMITTED] Bernard Esquenet Chief Executive Officer The Ruhof Corp. [PHOTO OMITTED] Robert Giambalvo, CPA President Giambalvo, Kilgannon & Giammarese, CPAs, PC [PHOTO OMITTED] Leonard Gleicher Partner Goldberg Bros. Realtors [PHOTO OMITTED] Stephen R. Greenwald President Metropolitan College of New York [PHOTO OMITTED] Herbert Haber, CPA [PHOTO OMITTED] Kevin J. Harding, Esq. Partner Harding and Harding [PHOTO OMITTED] Alan B. Katcher Chief Executive Officer Terry Alan Adv. Co., Inc. [PHOTO OMITTED] Kevin T. Kelly Management Consultant [PHOTO OMITTED] Herbert Kotler, Esq. [PHOTO OMITTED] Kenneth R. Latham [PHOTO OMITTED] Melvin F. Lazar, CPA Founder Lazar, Levine & Felix, LLP [PHOTO OMITTED] James J. Lynch, Esq. [PHOTO OMITTED] John I. Martinelli Principal/Partner Owen Petersen & Co., LLP Petersen Accounting Consulting LLP [PHOTO OMITTED] Bruce McNaughton Trustee Frank Melville Park Foundation 69 [PHOTO OMITTED] Susan Hirschfeld Mohr President J. W. Hirschfeld Agency, Inc. [PHOTO OMITTED] Richard E. Nussbaum, CPA Managing Partner Nussbaum Yates & Wolpow, P.C. [PHOTO OMITTED] James Panos, Esq. Partner Cianciulli, Meng & Panos, P.C. [PHOTO OMITTED] Robert J. Pape, Jr., Esq. [PHOTO OMITTED] Douglas Pierce President Pierce Country Day School & Camp Inc. [PHOTO OMITTED] Quentin Sammis Chairman Coldwell Banker Residential Brokerage [PHOTO OMITTED] Melvin Schreiber, CPA Moses and Schreiber LLP [PHOTO OMITTED] Arthur C. Schupbach, Esq. Partner Schupbach, Williams & Pavone LLP [PHOTO OMITTED] Shaw Shahery President & CEO Convermat Corporation [PHOTO OMITTED] Marino Sorbara President Sorbara Construction Corp. [PHOTO OMITTED] H. Craig Treiber Chairman/CEO The Treiber Insurance Group [PHOTO OMITTED] Sal J. Turano President Abstracts Incorporated [PHOTO OMITTED] Arthur Ventura President Badge Agency, Inc. 70 [PHOTO OMITTED] George J. Walsh, Esq. Thompson Hine LLP [PHOTO OMITTED] Robert A. Wilkie, Esq. Wilkie & Wilkie [PHOTO OMITTED] Mark Wurzel President Calico Cottage, Inc. Photos not available: David Black, CPA; Zachary Levy, Esq.; Lawrence F. Steiner 71 [LOGO] The First of Long Island (516) 671-4900 www.fnbli.com (212) 566-1500 Full Service Offices Glen Head 10 Glen Head Road Glen Head, NY 11545 (516) 671-4900 John J. Mulder, Jr. Vice President and Branch Manager Elaine Ballinger Assistant Cashier Vincent Bartilucci Administrative Assistant Greenvale 7 Glen Cove Road Greenvale, NY 11548 (516) 621-8811 Philip R. Thompson Vice President and Branch Manager Daphne Johnson Assistant Manager Huntington 253 New York Avenue Huntington, NY 11743 (631) 427-4143 Rick Perro Vice President and Branch Manager Jenny Malandruccolo Assistant Vice President Marco Leon Administrative Assistant Carol Luzynski Administrative Assistant Giuseppe Sparacino Administrative Assistant Locust Valley 108 Forest Avenue Locust Valley, NY 11560 (516) 671-2299 John T. Noonan Vice President and Branch Manager Mary Lou Martin Assistant Vice President James McGlynn Administrative Assistant 72 Northport 711 Fort Salonga Road Northport, NY 11768 (631) 261-4000 Henry C. Suhr Vice President and Branch Manager David Lippa Assistant Vice President Janet Kittle Administrative Assistant Old Brookville 209 Glen Head Road Old Brookville, NY 11545 (516) 759-9002 Frank Plesche Vice President and Branch Manager Carolyn McIntyre Assistant Vice President Melissa Grella Administrative Assistant Rockville Centre 310 Merrick Road Rockville Centre, NY 11570 (516) 763-5533 Lucy Ortiz Vice President and Branch Manager Patricia Scrudato Assistant Manager Theresa Crawford Administrative Assistant Roslyn Heights 130 Mineola Avenue Roslyn Heights, NY 11577 (516) 621-1900 Frieda O'Mara Vice President and Branch Manager Susan Sciacca Assistant Cashier Lucile Pelliccione Administrative Assistant Woodbury 800 Woodbury Road Woodbury, NY 11797 (516) 364-3434 George P. Knott Vice President and Branch Manager June Pipito Assistant Vice President 73 Commercial Banking Offices Bohemia 30 Orville Drive Bohemia, NY 11716 (631) 218-2500 Robert F. Covino Vice President and Branch Manager Deer Park 60 E. Industry Court Deer Park, NY 11729 (631) 243-2600 Albert M. Nordt, Jr. Vice President and Branch Manager Farmingdale 22 Allen Boulevard Farmingdale, NY 11735 (631) 753-8888 Patricia M. Gramble Vice President and Branch Manager 2091 New Highway Farmingdale, NY 11735 (631) 454-2022 Barbara Cavalier Vice President and Branch Manager Garden City 1050 Franklin Avenue Garden City, NY 11530 (516) 742-6262 Elizabeth A. Materia Vice President and Branch Manager Great Neck 536 Northern Boulevard Great Neck, NY 11021 (516) 482-6666 Jane B. Manditch Vice President and Branch Manager Joanne Bosco Administrative Assistant Hauppauge 330 Motor Parkway Hauppauge, NY 11788 (631) 952-2900 Mark A. Ryan Vice President and Branch Manager 74 Hicksville 106 Old Country Road Hicksville, NY 11801 (516) 932-7150 Joyce C. Graber Vice President and Branch Manager Arlyne H. Kramer Assistant Cashier Lake Success 3000 Marcus Avenue Lake Success, NY 11042 (516) 775-3133 Allison Stansfield Vice President and Branch Manager Susan Costabile Assistant Manager Mineola 194 First Street Mineola, NY 11501 (516) 742-1144 Herta Tscherne Vice President and Branch Manager Rosemary Kerrane Assistant Manager New Hyde Park 200 Jericho Turnpike New Hyde Park, NY 11040 (516) 328-3100 Linda A. Cutter Vice President and Branch Manager Kathleen Martin Assistant Manager Valley Stream 133 E. Merrick Road Valley Stream, NY 11580 (516) 825-0202 Peter J. Arebalo Vice President and Branch Manager Susan Pickrodt Assistant Manager Manhattan 232 Madison Avenue New York, NY 10016 (212) 213-8111 Judy Ferdinand Vice President and Branch Manager Augustus W. Imor Assistant Manager 75 225 Broadway, Suite 703 New York, NY 10007 (212) 693-1515 Bruce Knepple Vice President and Branch Manager Paula Phillips Administrative Assistant 1501 Broadway, Suite 301 New York, NY 10036 (212) 278-0707 Robert Oehler Vice President and Branch Manager Investment Management Division 800 Woodbury Road Woodbury, NY 11797 (516) 364-3436 Brian J. Keeney Senior Vice President Alexander B. Young Vice President Francis V. Liantonio Vice President Sharon E. Pazienza Vice President Joanne Buckley Assistant Vice President Quyen T. Pham Operations Manager Dawn LoBraico Administrative Assistant 76 EX-21 5 d58672_ex-21.txt SUBSIDIARY OF REGISTRANT EXHIBIT 21 - SUBSIDIARY OF REGISTRANT 77 SUBSIDIARY OF REGISTRANT THE FIRST NATIONAL BANK OF LONG ISLAND 10 GLEN HEAD ROAD GLEN HEAD, NY 11545 78 EX-23.1 6 d58672_ex23-1.txt CONSENT OF CROWE CHIZEK AND COMPANY LLC EXHIBIT 23.1 - CONSENT OF CROWE CHIZEK AND COMPANY LLC, INDEPENDENT AUDITORS 79 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement Nos. 33-44393, 33-79274, and 33-02049 on Form S-8 of The First of Long Island Corporation of our report dated January 16, 2004 appearing in this annual report on Form 10-K of The First of Long Island Corporation for the year ended December 31, 2003. Crowe Chizek and Company LLC Morristown, New Jersey March 9, 2004 80 EX-23.2 7 d58672_ex23-2.txt CONSENT OF GRANT THORNTON LLP EXHIBIT 23.2 - CONSENT OF GRANT THORNTON LLP, INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 81 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated January 24, 2003 accompanying the consolidated financial statements included in the 2003 Annual Report of The First of Long Island Corporation on Form 10-K for the year ended December 31, 2002. We hereby consent to the incorporation by reference of said report in the Registration Statements of The First of Long Island Corporation on Forms S-8 (File No. 33-44393, effective December 6, 1991, File No. 33-79274, effective May 24, 1994, and File No. 333-02049, effective March 29, 1996). /s/ GRANT THORNTON LLP Philadelphia, Pennsylvania March 9, 2004 82 EX-31.1 8 d58672_ex31-1.txt RULE 13A-14(A)/15D-14(A) CERTIFICATIONS OF CEO EXHIBIT 31 - RULE 13a-14(a)/15d-14(a) CERTIFICATIONS 83 CERTIFICATIONS I, Michael N. Vittorio, certify that: 1. I have reviewed this Form 10-K of The First of Long Island Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 1, 2004 By /s/ MICHAEL N. VITTORIO - ----------------------------- MICHAEL N. VITTORIO CHIEF EXECUTIVE OFFICER (principal executive officer) 84 EX-31.2 9 d58672_ex31-2.txt RULE 13A-14(A)/15D-14(A) CERT OF ACCT OFFICER Exhibit 31.2 I, Mark D. Curtis, certify that: 1. I have reviewed this Form 10-K of The First of Long Island Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 1, 2004 By /s/ MARK D. CURTIS - --------------------- MARK D. CURTIS SENIOR VICE PRESIDENT & TREASURER (principal financial and accounting officer) 85 EX-32 10 d58672_ex32.txt SECTION 1350 CERTIFICATIONS EXHIBIT 32 - SECTION 1350 CERTIFICATIONS 86 CERTIFICATION The undersigned certifies pursuant to 18 U.S.C. Section 1350, that: (1) The accompanying report on Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the accompanying report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. Date: March 1, 2004 /s/ Michael N. Vittorio - -------------------------------------------- MICHAEL N. VITTORIO PRESIDENT AND CHIEF EXECUTIVE OFFICER (principal executive officer) /s/ Mark D. Curtis - -------------------------------------------- MARK D. CURTIS SENIOR VICE PRESIDENT AND TREASURER (principal financial and accounting officer) 87 EX-99.1 11 d58672_ex99-1.txt REPORT OF GRANT THORNTON DATED1/24/2003 EXHIBIT 99.1 - REPORT OF GRANT THORNTON LLP, INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 88 [Grant Thornton LLP 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 for the year 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 89 EX-99.2 12 d58672_ex99-2.txt REPORT OF ARTHUR ANDERSEN LLP DATED 1/22/2002 EXHIBIT 99.2 - REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT AUDITORS 90 THE FOLLOWING REPORT OF INDEPENDENT AUDITORS IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP ON JANUARY 22, 2002. THE REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors of The First of Long Island Corporation: We have audited the accompanying consolidated balance sheets of The First of Long Island Corporation and subsidiary as of December 31, 2001 and 2000 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The First of Long Island Corporation and subsidiary as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP New York, New York January 22, 2002 91 -----END PRIVACY-ENHANCED MESSAGE-----