0000891554-01-506017.txt : 20011112 0000891554-01-506017.hdr.sgml : 20011112 ACCESSION NUMBER: 0000891554-01-506017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011105 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12220 FILM NUMBER: 1774653 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-Q 1 d27209_10q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ----------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 2001 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 Identification No.) Incorporation or Organization) 10 Glen Head Road, Glen Head, New York 11545 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (516) 671-4900 Not Applicable (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT OCTOBER 23, 2001 ----- ------------------------------- Common stock, par value 2,817,107 $.10 per share THE FIRST OF LONG ISLAND CORPORATION SEPTEMBER 30, 2001 INDEX PART I. FINANCIAL INFORMATION PAGE NO. ITEM 1. CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 1 CONSOLIDATED STATEMENTS OF INCOME NINE AND THREE MONTHS ENDED 2 SEPTEMBER 30, 2001 AND 2000 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 3 CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6-13 PART II. OTHER INFORMATION 14 SIGNATURES 15 CONSOLIDATED BALANCE SHEETS

September 30, December 31, 2001 2000 ------------- ------------- Assets: Cash and due from banks .................................. $ 28,171,000 $ 23,872,000 Federal funds sold ....................................... 83,300,000 87,800,000 ------------- ------------- Cash and cash equivalents .............................. 111,471,000 111,672,000 ------------- ------------- Investment securities: Held-to-maturity, at amortized cost (fair value of $273,581,000 and $229,045,000) ........ 265,370,000 226,361,000 Available-for-sale, at fair value (amortized cost of $92,202,000 and $82,582,000) ................ 95,570,000 83,680,000 ------------- ------------- 360,940,000 310,041,000 ------------- ------------- Loans: Commercial and industrial ......................... 33,515,000 30,514,000 Secured by real estate ............................ 170,641,000 155,283,000 Consumer .......................................... 7,069,000 7,504,000 Other ............................................. 1,480,000 560,000 ------------- ------------- 212,705,000 193,861,000 Unearned income ................................... (1,000,000) (952,000) ------------- ------------- 211,705,000 192,909,000 Allowance for loan losses ......................... (1,925,000) (1,943,000) ------------- ------------- 209,780,000 190,966,000 ------------- ------------- Bank premises and equipment, net ......................... 7,257,000 7,021,000 Other assets ............................................. 6,786,000 6,292,000 ------------- ------------- $ 696,234,000 $ 625,992,000 ============= ============= Liabilities: Deposits: Checking .......................................... $ 211,771,000 $ 195,617,000 Savings and money market .......................... 366,468,000 310,681,000 Time, less than $100,000 .......................... 24,144,000 24,255,000 Time, $100,000 and over ........................... 13,903,000 19,919,000 ------------- ------------- 616,286,000 550,472,000 Accrued expenses and other liabilities ................... 2,850,000 4,137,000 Current income taxes payable ............................. 299,000 91,000 Deferred income taxes payable ............................ 1,184,000 426,000 ------------- ------------- 620,619,000 555,126,000 ------------- ------------- Commitments and Contingent Liabilities Stockholders' Equity: Common stock, par value $.10 per share: Authorized, 20,000,000 shares; Issued and outstanding, 2,817,107 and 2,892,549 shares 282,000 289,000 Surplus .................................................. 517,000 1,188,000 Retained earnings ........................................ 72,814,000 68,737,000 ------------- ------------- 73,613,000 70,214,000 Accumulated other comprehensive income, net of tax ....... 2,002,000 652,000 ------------- ------------- 75,615,000 70,866,000 ------------- ------------- $ 696,234,000 $ 625,992,000 ============= =============

See notes to consolidated financial statements 1 CONSOLIDATED STATEMENTS OF INCOME

Nine months ended Three months ended September 30, September 30, -------------------------- ------------------------- 2001 2000 2001 2000 ----------- ------------ ----------- ----------- Interest income: Loans .................................................... $12,657,000 $ 12,214,000 $ 4,181,000 $ 4,244,000 Investment securities: Taxable .............................................. 9,444,000 9,320,000 3,223,000 3,171,000 Nontaxable ........................................... 3,926,000 3,311,000 1,357,000 1,160,000 Federal funds sold ....................................... 2,948,000 3,668,000 763,000 1,490,000 ----------- ------------ ----------- ----------- 28,975,000 28,513,000 9,524,000 10,065,000 ----------- ------------ ----------- ----------- Interest expense: Savings and money market deposits ........................ 6,647,000 8,059,000 1,957,000 2,997,000 Time deposits ............................................ 1,255,000 1,438,000 324,000 513,000 ----------- ------------ ----------- ----------- 7,902,000 9,497,000 2,281,000 3,510,000 ----------- ------------ ----------- ----------- Net interest income .................................. 21,073,000 19,016,000 7,243,000 6,555,000 Provision for loan losses (credit) ........................... -- (75,000) -- -- ----------- ------------ ----------- ----------- Net interest income after provision for loan losses (credit) . 21,073,000 19,091,000 7,243,000 6,555,000 ----------- ------------ ----------- ----------- Noninterest income: Trust Department income .................................. 833,000 859,000 254,000 284,000 Service charges on deposit accounts ...................... 2,624,000 2,167,000 860,000 779,000 Other .................................................... 489,000 435,000 167,000 184,000 ----------- ------------ ----------- ----------- 3,946,000 3,461,000 1,281,000 1,247,000 ----------- ------------ ----------- ----------- Noninterest expense: Salaries ................................................. 6,694,000 6,096,000 2,259,000 2,084,000 Employee benefits ........................................ 2,640,000 2,278,000 866,000 723,000 Occupancy and equipment expense .......................... 2,112,000 1,903,000 692,000 638,000 Other operating expenses ................................. 3,161,000 2,800,000 1,059,000 912,000 ----------- ------------ ----------- ----------- 14,607,000 13,077,000 4,876,000 4,357,000 ----------- ------------ ----------- ----------- Income before income taxes ........................... 10,412,000 9,475,000 3,648,000 3,445,000 Income tax expense ........................................... 2,753,000 2,557,000 974,000 908,000 ----------- ------------ ----------- ----------- Net Income ........................................... $ 7,659,000 $ 6,918,000 $ 2,674,000 $ 2,537,000 =========== ============ =========== =========== Weighted average: Common shares ............................................ 2,860,280 2,932,961 2,831,200 2,911,380 Dilutive stock options ................................... 40,384 37,968 38,674 40,228 ----------- ------------ ----------- ----------- 2,900,664 2,970,929 2,869,874 2,951,608 =========== ============ =========== =========== Earnings per share: Basic .................................................... $ 2.68 $ 2.36 $ .94 $ .87 =========== ============ =========== =========== Diluted .................................................. $ 2.64 $ 2.33 $ .93 $ .86 =========== ============ =========== ===========

See notes to consolidated financial statements 2 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Nine Months Ended September 30, 2001 ------------------------------------------------------------------------------------- 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 ..................... $ 7,659,000 7,659,000 7,659,000 Repurchase and retirement of common stock ................ (86,972) (8,000) (3,429,000) (3,437,000) Exercise of stock options ...... 11,530 1,000 227,000 228,000 Unrealized gains on available- for-sale-securities, net of income taxes ................... 1,350,000 1,350,000 1,350,000 ----------- Comprehensive income ........... $ 9,009,000 =========== Cash dividends declared - $.38 per share ................. (1,082,000) (1,082,000) Tax benefit of stock options .. 31,000 31,000 Transfer from retained earnings to surplus .................... 2,500,000 (2,500,000) -- --------- -------- ---------- ------------ ----------- ------------ Balance, September 30, 2001 .... 2,817,107 $282,000 $ 517,000 $ 72,814,000 $ 2,002,000 $ 75,615,000 ========= ======== ========== ============ =========== ============

Nine Months Ended September 30, 2000 ------------------------------------------------------------------------------------------ Accumulated Other Common Stock Compre- Compre- ------------------- hensive Retained hensive Shares Amount Surplus Income Earnings Income (Loss) Total --------- ------- ---------- ----------- ------------ ------------- ------------- Balance, January 1, 2000 ....... 2,962,803 $296,000 $2,258,000 $ 63,013,000 $(1,334,000) $ 64,233,000 Net Income ..................... $ 6,918,000 6,918,000 6,918,000 Repurchase and retirement of common stock ................ (81,157) (8,000) (2,683,000) (2,691,000) Exercise of stock options ...... 8,175 1,000 140,000 141,000 Unrealized gains on available- for-sale-securities, net of income taxes ................... 839,000 839,000 839,000 ----------- Comprehensive income ........... $ 7,757,000 =========== Cash dividends declared - $.34 per share ................. (994,000) (994,000) Tax benefit of stock options .. 7,000 7,000 Transfer from retained earnings to surplus .................... 1,500,000 (1,500,000) --------- --------- ---------- ------------ ----------- ------------- Balance, September 30, 2000 .... 2,889,821 $ 289,000 $1,222,000 $ 67,437,000 $ (495,000) $ 68,453,000 ========= ========= ========== ============ =========== =============

See notes to consolidated financial statements 3 CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended September 30, ------------------------------- Increase (Decrease) in Cash and Cash Equivalents 2001 2000 ------------- ------------- Cash Flows From Operating Activities: Net income ............................................................ $ 7,659,000 $ 6,918,000 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses (credit) .................................... -- (75,000) Deferred income tax provision (credit) ................................ (164,000) 201,000 Depreciation and amortization ......................................... 877,000 819,000 Premium amortization (discount accretion) on investment securities, net (126,000) 808,000 Decrease in prepaid income taxes ...................................... -- 194,000 Increase in other assets .............................................. (494,000) (461,000) Increase (decrease) in accrued expenses and other liabilities ......... (188,000) 214,000 Increase in income taxes payable ...................................... 239,000 231,000 ------------- ------------- Net cash provided by operating activities ............................. 7,803,000 8,849,000 ------------- ------------- Cash Flows From Investing Activities: Proceeds from maturities and redemptions of investment securities: Held-to-maturity ...................................................... 270,270,000 159,610,000 Available-for-sale .................................................... 10,777,000 11,016,000 Purchase of investment securities: Held-to-maturity ...................................................... (308,981,000) (173,788,000) Available-for-sale .................................................... (20,567,000) (7,365,000) Net increase in loans to customers .................................... (18,814,000) (7,072,000) Purchases of bank premises and equipment .............................. (1,113,000) (639,000) ------------- ------------- Net cash used in investing activities ................................. (68,428,000) (18,238,000) ------------- ------------- Cash Flows From Financing Activities: Net increase in total deposits ........................................ 65,814,000 46,853,000 Proceeds from exercise of stock options ............................... 228,000 141,000 Repurchase and retirement of common stock ............................. (3,437,000) (2,691,000) Cash dividends paid ................................................... (2,181,000) (2,001,000) ------------- ------------- Net cash provided by financing activities ............................. 60,424,000 42,302,000 ------------- ------------- Net increase (decrease) in cash and cash equivalents .................. (201,000) 32,913,000 Cash and cash equivalents, beginning of year .......................... 111,672,000 85,174,000 ------------- ------------- Cash and cash equivalents, end of period .............................. $ 111,471,000 $ 118,087,000 ============= ============= Supplemental Schedule of Noncash: Investing Activities Unrealized gains on available-for-sale securities ..................... $ 2,272,000 $ 1,427,000 Transfer of available-for-sale securities to held-to-maturity category -- 14,836,000 Financing Activities Tax benefit from exercise of employee stock options ................... $ 31,000 $ 7,000

The Corporation made interest payments of $8,039,000 and $9,417,000 and income tax payments of $2,677,000 and $1,931,000 during the nine months ended September 30, 2001 and 2000, respectively. See notes to consolidated financial statements 4 THE FIRST OF LONG ISLAND CORPORATION AND SUBSIDIARY SEPTEMBER 30, 2001 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of The First of Long Island Corporation and its wholly-owned subsidiary, The First National Bank of Long Island (collectively referred to as the "Corporation"). The consolidated financial information included herein as of and for the periods ended September 30, 2001 and 2000 is unaudited; however, such information reflects all adjustments which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The December 31, 2000 consolidated balance sheet was derived from the Company's December 31, 2000 audited consolidated financial statements. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors that have affected the Corporation's financial condition and operating results during the periods included in the accompanying consolidated financial statements, and should be read in conjunction with such financial statements. The Corporation's financial condition and operating results principally reflect those of its wholly-owned subsidiary, The First National Bank of Long Island (the "Bank"). The Corporation's primary service area is Nassau and Suffolk Counties, Long Island. Overview The Corporation earned $2.64 per share for the first nine months of 2001 as compared to $2.33 for the same period last year, an increase of approximately 13%. Based on net income of $7,659,000, the Corporation returned 1.57% on average total assets and 14.08% on average total equity. This compares to returns on assets and equity of 1.56% and 14.02%, respectively, for the same period last year. Total assets and deposits each grew by approximately 12% when comparing balances at September 30, 2001 to those at September 30, 2000. In addition, during this same time period and despite continued purchases under the Corporation's stock repurchase program, total capital before unrealized gains and losses on available-for-sale securities grew by approximately 7%. The Corporation's capital ratios continue to substantially exceed the current regulatory criteria for a well-capitalized bank. The growth in earnings for the first nine months of 2001 when compared to the same period last year was largely attributable to increases in average checking, money market type savings, and loan balances and an increase in service charge income. 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. 6

Nine Months Ended September 30, ---------------------------------------------------------------- 2001 2000 ------------------------------- ------------------------------ Average Average Average Average Balance Interest Rate Balance Interest Rate --------- ---------- -------- --------- ------- ------- (dollars in thousands) Assets Federal funds sold ....................... $ 88,154 $ 2,948 4.47% $ 79,237 $ 3,668 6.18% Investment Securities: Taxable ................................ 213,587 9,444 5.91 200,989 9,320 6.19 Nontaxable (1) ......................... 113,201 5,948 7.01 94,034 5,017 7.11 Loans (1)(2) ............................. 201,593 12,683 8.41 184,943 12,254 8.85 --------- ------- -------- --------- ------- ------- Total interest-earning assets ............ 616,535 31,023 6.72 559,203 30,259 7.22 ------- -------- ------- ------- Allowance for loan losses ................ (1,944) (1,968) --------- --------- Net interest-earning assets .............. 614,591 557,235 Cash and due from banks .................. 23,575 21,669 Premises and equipment, net .............. 7,103 6,702 Other assets ............................. 5,711 6,460 --------- --------- $ 650,980 $ 592,066 ========= ========= Liabilities and Stockholders' Equity Savings and money market deposits ........ $ 337,060 6,647 2.64 $ 299,636 8,059 3.59 Time deposits ............................ 40,676 1,255 4.13 40,895 1,438 4.70 --------- ------- -------- --------- ------- ------- Total interest-bearing deposits .......... 377,736 7,902 2.80 340,531 9,497 3.73 --------- ------- -------- --------- ------- ------- Checking deposits (3) .................... 196,430 183,179 Other liabilities ........................ 4,075 2,463 --------- --------- 578,241 526,173 Stockholders' equity ..................... 72,739 65,893 --------- --------- $ 650,980 $ 592,066 ========= ========= Net interest income (1) .................. $23,121 $20,762 ======= ======= Net interest spread (1) .................. 3.92% 3.49% ======== ======= Net interest yield (1) ................... 5.01% 4.96% ======== =======

(1) Tax-equivalent basis. Interest income on a tax-equivalent basis includes the additional amount of interest income that would have been earned if the Corporation's investment in tax-exempt loans and investment securities had been made in loans and investment securities subject to Federal income taxes yielding the same after-tax income. The tax-equivalent amount of $1.00 of nontaxable income was $1.52 in each period presented, based on a Federal income tax rate of 34%. (2) For the purpose of these computations, nonaccruing loans are included in the daily average loan amounts outstanding. (3) Includes official check and treasury tax and loan balances. 7 Rate/Volume Analysis. The following table sets forth the effect of changes in volumes, changes in rates, and changes in rate/volume on tax-equivalent interest income, interest expense and net interest income. Nine Months Ended September 30, ----------------------------------------- 2001 Versus 2000 Increase (decrease) due to changes in: ----------------------------------------- Rate/ Net Volume Rate Volume(2) Change ------ ------- --------- ------ (in thousands) Interest Income: Federal funds sold ......... $ 412 $(1,015) $(117) $ (720) Investment securities: Taxable .................. 584 (424) (36) 124 Nontaxable (1) ........... 1,023 (76) (16) 931 Loans (1) .................. 1,102 (607) (66) 429 ------ ------- ----- ------ Total interest income ...... 3,121 (2,122) (235) 764 ------ ------- ----- ------ Interest Expense: Savings and money market deposits .......... 1,006 (2,143) (275) (1,412) Time deposits .............. (8) (175) -- (183) ------ ------- ----- ------ Total interest expense ..... 998 (2,318) (275) (1,595) ------ ------- ----- ------ Increase (decrease) in net interest income .......... $2,123 $ 196 $ 40 $2,359 ====== ======= ===== ====== (1) Tax-equivalent basis. (2) Represents the change not solely attributable to change in rate or change in volume but a combination of these two factors. Net interest income on a tax-equivalent basis increased by $2,359,000, or 11.4%, from $20,762,000 for the first nine months of 2000 to $23,121,000 for the same period this year. As can be seen from the above rate/volume analysis, the increase is primarily comprised of a positive volume variance of $2,123,000 and a positive rate variance of $196,000. The positive volume variance was largely caused by: (1) growth in average checking deposits and the use of such funds to purchase investment securities and originate loans; and (2) growth in money market type deposits and the use of such funds to increase the Bank's overnight position in federal funds sold and to purchase securities and originate loans. When comparing the first nine months of 2001 to the same period last year, average checking deposits increased by $13,251,000, or 7.2%, average savings and money market deposits increased by $37,424,000, or 12.5%, average loans increased by $16,650,000, or 9.00%, and average investment securities increased by $31,765,000, or 10.8%. The growth in loans was largely comprised of increases in commercial loans, construction loans, residential mortgages, and home equity loans, with the commercial and construction loan growth having the largest positive impact on net interest income. Funding interest-earning asset growth with growth in checking deposits has a greater impact on net interest income than funding such growth with interest-bearing deposits because checking deposits, unlike interest-bearing deposits, have no associated interest cost. This is the primary reason that the growth of checking balances has historically been one of the Corporation's key strategies for increasing earnings per share. 8 The Bank's new business program is a significant factor that favorably impacted the growth in average checking balances noted when comparing the first nine months of 2001 to the same period last year, and competitive pricing and customer demographics are believed to be important factors with respect to the growth in average interest-bearing deposits noted during the same period. In addition, the growth in both checking and interest-bearing deposits is also believed to be attributable to the Bank's attention to customer service and local economic conditions. The Bank's net interest spread and yield increased from 3.49% and 4.96%, respectively, for the first nine months of 2000 to 3.92% and 5.01%, respectively, for the same period this year. It would appear that the principal cause of these increases was the significant decline in short-term interest rates experienced during the first nine months of 2001. During this period, both the federal funds target rate and the Bank's prime lending rate decreased by 350 basis points. As more fully discussed in the Market Risk section of this discussion and analysis of financial condition and results of operations, a decline in interest rates should initially have a positive impact on net interest income. However, over the longer term, the impact should be negative. Allowance and Provision For Loan Losses The allowance for loan losses decreased slightly during the first nine months of 2001, amounting to $1,925,000 at September 30, 2001 as compared to $1,943,000 at December 31, 2000. The allowance represented .91% of total loans at September 30, 2001 as compared to approximately 1% at December 31, 2000. During the first nine months of 2001, the Bank recorded loan chargeoffs and recoveries of $41,000 and $23,000, respectively. The allowance for loan losses is an amount that management currently believes will be adequate to absorb estimated inherent losses in the Bank's loan portfolio. Because 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, there is not an exact amount but rather a range for what constitutes an appropriate allowance. In estimating a range the Bank selectively 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. Losses for loans that are not specifically reviewed are determined on a pooled basis taking into account a variety of factors including historical losses; levels of and trends in delinquencies and nonaccruing loans; trends in volume and terms of loans; changes in lending policies and procedures; experience, ability and depth of lending staff; national and local economic conditions; concentrations of credit; and environmental risks. Management also considers relevant loan loss statistics for the Bank's peer group. The 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. In addition, future provisions and chargeoffs could be affected by environmental impairment of properties securing the Bank's mortgage loans. Loans secured by real estate represent approximately 80% of total loans outstanding at September 30, 2001. 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 9 environmental pollution originating on the mortgaged properties that would materially affect the value of the portfolio. Asset Quality The Corporation has identified certain assets as risk elements. These assets include nonaccruing loans, foreclosed real estate, loans that are contractually past due 90 days or more as to principal or interest payments and still accruing and troubled debt restructurings. These assets present more than the normal risk that the Corporation will be unable to eventually collect or realize their full carrying value. The Corporation's risk elements at September 30, 2001 and December 31, 2000 are as follows: September 30, December 31, 2001 2000 ------- ------- (dollars in thousands) Nonaccruing loans ................................... $105 $ -- Foreclosed real estate .............................. -- -- ------- ------- Total nonperforming assets ........................ 105 -- Troubled debt restructurings ........................ -- -- Loans past due 90 days or more as to principal or interest payments and still accruing . 229 173 ------- ------- Total risk elements ............................... $334 $ 173 ======= ======= Nonaccruing loans as a percentage of total loans .... .05% .00% ======= ======= Nonperforming assets as a percentage of total loans and foreclosed real estate ........................ .05% .00% ======= ======= Risk elements as a percentage of total loans and foreclosed real estate ............................ .16% .09% ======= ======= Noninterest Income, Noninterest Expense, and Income Taxes Noninterest income consists primarily of service charges on deposit accounts and Trust Department income. Service charge income increased by $457,000, or 21.1%, from $2,167,000 for the first nine months of 2000 to $2,624,000 for the same period this year. The increase, which is mostly comprised of increases in overdraft check charges and maintenance/activity charges, is largely attributable to revisions made to the Bank's service charge schedule in the third quarter of 2000. Noninterest expense is comprised of salaries, employee benefits, occupancy and equipment expense and other operating expenses incurred in supporting the various business activities of the Corporation. Noninterest expense increased by $1,530,000, or 11.7%, from $13,077,000 for the first nine months of 2000 to $14,607,000 for the same period this year. The increase is comprised of an increase in salaries of $598,000, or 9.8%, an increase in employee benefits expense of $362,000, or 15.9%, an increase in occupancy and equipment expense of $209,000, or 11.0%, and an increase in other operating expenses of $361,000, or 12.9%. The increase in salaries is attributable to normal annual salary adjustments, filling of staff vacancies, and additions to staff resulting from, among other things, the opening of three new branch offices in the latter part of 2000 and one new branch office in the early part of 2001. The increase in employee benefits expense is largely attributable to the increased number of employees and revisions made to the Bank's incentive compensation 10 program. Increases in depreciation expense, maintenance costs, rental expense, and computer processing costs, a portion of which resulted from new branch openings and new technology, and increased consulting expense and mortgage recording tax are the larger items that account for the increases in occupancy and equipment expense and other operating expenses. Income tax expense as a percentage of book income was 26.4% for the first nine months of 2001 as compared to 27.0% for the same period last year. These percentages vary from the statutory Federal income tax rate of 34% primarily because of state income taxes and tax-exempt interest on municipal securities. The decrease in the percentage for 2001 is primarily attributable to an increase in the amount of tax-exempt income on municipal securities and increased funding by the Bank of its REIT (real estate investment trust) and investment subsidiaries. Results of Operations - Three Months Ended September 30, 2001 Versus September 30, 2000 Net income for the third quarter of 2001 was $2,674,000, or $.93 per share, as compared to $2,537,000, or $.86 per share, for the same quarter last year. The primary reasons for the 8% increase in earnings per share are substantially the same as those discussed with respect to the nine-month period except that increased service charge income played a smaller role in the third quarter than the nine-months. Capital Under current regulatory capital standards, banks are classified as well capitalized, adequately capitalized or undercapitalized. The Corporation's capital management policy is designed to build and maintain capital levels that exceed the minimum requirements for a well-capitalized bank. The following table sets forth the Corporation's capital ratios at September 30, 2001 and the minimum ratios necessary to be classified as well capitalized and adequately capitalized. The Corporation's capital ratios at September 30, 2001 substantially exceed the requirements for a well-capitalized bank. Regulatory Standards Corporation's ------------------------ Capital Ratios at Well Adequately September 30, 2001 Capitalized Capitalized ------------------ ----------- ----------- Total Risk-Based Capital Ratio 26.52% 10.00% 8.00% Tier 1 Risk-Based Capital Ratio 25.84 6.00 4.00 Tier 1 Leverage Capital Ratio 10.80 5.00 4.00 Total stockholders' equity increased by $4,749,000, or from $70,866,000 at December 31, 2000 to $75,615,000 at September 30, 2001. The increase in stockholders' equity is primarily attributable to the combined effect of net income of $7,659,000, unrealized gains on available-for-sale securities of $1,350,000, stock repurchases amounting to $3,437,000, and cash dividends of $1,082,000. Stock Repurchase Program. Since 1988, the Corporation has had a stock repurchase program under which it can purchase, from time to time, shares of its own common stock in market or private transactions. Under plans previously approved by the Board of Directors, the Corporation purchased 86,972 shares thus far in 2001 and can purchase 80,054 shares in the future. The stock repurchase program has been used by management to enhance earnings per share and return on average stockholders' equity. When comparing the first nine months of 2001 to the same period last year, earnings per share are up 31 cents. Of the 31-cent 11 increase, approximately 5 cents is attributable to shares repurchased in 2000 and thus far this year. On a full-year basis, these repurchases should add approximately 11 cents to earnings per share. Cash Flows and Liquidity Cash Flows. During the first nine months of 2001, cash and cash equivalents decreased by $201,000. As shown in the consolidated statement of cash flows, this occurred primarily because the cash provided by operations and deposit growth was slightly less than the cash used for loan growth, investment securities growth, cash dividends, stock repurchases, and capital improvements. The deposit growth, which amounted to $65,814,000, is primarily attributable to growth in money market type balances, checking balances, and IOLA balances (interest on lawyer accounts). Liquidity. The Corporation's primary 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 one year and securities with average lives of one year or less, maturities and monthly payments on the balance of the investment securities portfolio and the loan portfolio, and investment securities designated as available-for-sale. At September 30, 2001, the Corporation had $83,300,000 in federal funds sales, a short-term securities portfolio of $72,587,000, and available-for-sale securities of $95,570,000. The Corporation's liquidity is enhanced by its stable deposit base which primarily consists of checking, savings, and money market accounts. Such accounts comprised 93.8% of total deposits at September 30, 2001, while time deposits of $100,000 and over and other time deposits comprised only 2.3% and 3.9%, respectively. The Bank attracts all of its deposits through its banking offices primarily from the communities in which those banking offices are located and does not rely on brokered deposits. In addition, the Bank has not historically relied on purchased or borrowed funds as sources of liquidity. Market Risk The Bank invests in interest-earning assets which are funded by interest-bearing deposits, noninterest-bearing deposits, and capital. The Bank's results of operations are subject to risk resulting from interest rate fluctuations generally and having assets and liabilities that have different maturity, repricing, and prepayment/withdrawal characteristics. The Bank defines interest rate risk as the risk that the Bank's earnings and/or net portfolio value 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 maintain acceptable levels of interest rate and liquidity risk and facilitate the funding needs of the Bank. During the first nine months of 2001, there was a significant decrease in short-term interest rates as evidenced by a 350 basis point reduction in both the federal funds target rate and the Bank's prime lending rate. In addition, rates on intermediate term securities and loans also decreased but by lesser amounts. Because the Bank's loans and investment securities generally reprice slower than its interest-bearing deposit accounts, a decrease in interest rates should initially have a positive impact on the Bank's net interest income. The magnitude of the initial positive impact realized from a decrease in interest rates may decline as interest rates decline because the Bank may not decrease the rates paid on its money market type deposit accounts as quickly or in the same amount as 12 market decreases in the overnight federal funds rate or the prime lending rate. In addition, rates may decrease to the point that the Bank can not reduce its money market rates any further. If interest rates decline and are sustained at the lower levels and, as a result, the Bank purchases securities and originates loans at yields lower than those maturing, the impact on net interest income should eventually be negative because 39% of the Bank's average interest-earning assets are funded by noninterest-bearing checking deposits and capital. It is believed that the Corporation's exposure to interest rate risk has not changed materially since December 31, 2000. Legislation Commercial checking deposits currently account for approximately 27% of the Bank's total deposits. Congress is 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. 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". 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. 13 PART II. OTHER INFORMATION ITEM 1. NONE ITEM 2. NONE ITEM 3. NONE ITEM 4. NONE ITEM 5. STOCK REPURCHASE PROGRAM Since 1988, the Corporation has had a stock repurchase program under which it can purchase, from time to time, shares of its own common stock in market or private transactions. Under plans previously approved by the Board of Directors, the Corporation purchased 86,972 shares thus far in 2001 and can purchase 80,054 shares in the future. ITEM 6. (a) Exhibits - None (b) Reports on Form 8-K - None 14 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. THE FIRST OF LONG ISLAND CORPORATION ---------------------------------------------- (Registrant) DATE: November 5, 2001 By /s/ J. WILLIAM JOHNSON ------------------------- J. WILLIAM JOHNSON, PRESIDENT (principal executive officer) By /s/ MARK D. CURTIS ---------------------------------------------- MARK D. CURTIS SENIOR VICE PRESIDENT AND TREASURER (principal financial and accounting officer) 15