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, 1998
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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
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 NOVEMBER 3, 1998
Common stock, par value 3,096,744
$.10 per share
<PAGE>
THE FIRST OF LONG ISLAND CORPORATION
SEPTEMBER 30, 1998
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 1
CONSOLIDATED STATEMENTS OF INCOME
NINE AND THREE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997 2
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 3
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6-14
PART II. OTHER INFORMATION 15
SIGNATURES 16
<PAGE>
================================================================================
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Assets:
Cash and due from banks ................................................ $ 13,856,000 $ 13,343,000
Federal funds sold ..................................................... 55,000,000 60,500,000
------------- -------------
Cash and cash equivalents ............................................ 68,856,000 73,843,000
------------- -------------
Investment securities:
Held-to-maturity, at amortized cost (approximate fair
value of $193,411,000 and $192,357,000) ...................... 188,594,000 190,577,000
Available-for-sale, at fair value (amortized cost
of $79,240,000 and $56,052,000) .............................. 81,702,000 56,844,000
------------- -------------
270,296,000 247,421,000
------------- -------------
Loans:
Commercial and industrial ....................................... 28,443,000 25,686,000
Secured by real estate .......................................... 132,996,000 121,620,000
Consumer ........................................................ 6,011,000 7,152,000
Other ........................................................... 3,440,000 1,101,000
------------- -------------
170,890,000 155,559,000
Unearned income ................................................. (912,000) (829,000)
------------- -------------
169,978,000 154,730,000
Allowance for loan losses ....................................... (3,648,000) (3,579,000)
------------- -------------
166,330,000 151,151,000
------------- -------------
Bank premises and equipment ............................................ 5,581,000 5,037,000
Deferred income tax benefits ........................................... 64,000 785,000
Other assets ........................................................... 7,102,000 6,437,000
------------- -------------
$ 518,229,000 $ 484,674,000
============= =============
Liabilities:
Deposits:
Checking ........................................................ $ 155,937,000 $ 142,848,000
Savings and money market ........................................ 257,985,000 242,579,000
Time, other ..................................................... 25,242,000 26,726,000
Time, $100,000 and over ......................................... 12,273,000 10,606,000
------------- -------------
451,437,000 422,759,000
Accrued expenses and other liabilities ................................. 2,393,000 2,764,000
Income taxes payable ................................................... 247,000 185,000
------------- -------------
454,077,000 425,708,000
------------- -------------
Commitments and Contingent Liabilities
Stockholders' Equity:
Common stock, par value $.10 per share:
Authorized, 20,000,000 shares;
Issued and outstanding, 3,096,744 and 3,113,061 shares ............. 309,000 311,000
Surplus ................................................................ 4,368,000 5,471,000
Retained earnings ...................................................... 58,021,000 52,717,000
------------- -------------
62,698,000 58,499,000
Accumulated other comprehensive income, net of tax ..................... 1,454,000 467,000
------------- -------------
64,152,000 58,966,000
------------- -------------
$ 518,229,000 $ 484,674,000
============= =============
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
================================================================================
CONSOLIDATED STATEMENTS OF INCOME
================================================================================
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Interest income:
Loans ............................................ $ 10,852,000 $ 10,275,000 $ 3,688,000 $ 3,520,000
Investment securities:
Taxable ...................................... 9,047,000 8,797,000 3,053,000 2,968,000
Nontaxable ................................... 2,234,000 1,538,000 818,000 545,000
Federal funds sold ............................... 2,161,000 1,836,000 851,000 789,000
------------ ------------ ------------ ------------
24,294,000 22,446,000 8,410,000 7,822,000
------------ ------------ ------------ ------------
Interest expense:
Savings and money market deposits ................ 5,972,000 5,365,000 2,112,000 1,881,000
Time deposits .................................... 1,430,000 1,406,000 479,000 495,000
------------ ------------ ------------ ------------
7,402,000 6,771,000 2,591,000 2,376,000
------------ ------------ ------------ ------------
Net interest income .......................... 16,892,000 15,675,000 5,819,000 5,446,000
Provision for loan losses (credit) ................... (100,000) (100,000) -- --
------------ ------------ ------------ ------------
Net interest income after provision
for loan losses (credit) ................. 16,992,000 15,775,000 5,819,000 5,446,000
------------ ------------ ------------ ------------
Noninterest income:
Trust Department income .......................... 977,000 865,000 342,000 283,000
Service charges on deposit account ............... 2,226,000 1,940,000 722,000 680,000
Other ............................................ 372,000 331,000 138,000 140,000
------------ ------------ ------------ ------------
3,575,000 3,136,000 1,202,000 1,103,000
------------ ------------ ------------ ------------
Noninterest expense:
Salaries ......................................... 5,432,000 4,957,000 1,875,000 1,680,000
Employee benefits ................................ 2,061,000 1,892,000 699,000 599,000
Occupancy and equipment expense .................. 1,531,000 1,390,000 527,000 464,000
Other operating expenses ......................... 2,497,000 2,354,000 865,000 777,000
------------ ------------ ------------ ------------
11,521,000 10,593,000 3,966,000 3,520,000
------------ ------------ ------------ ------------
Income before income taxes ................... 9,046,000 8,318,000 3,055,000 3,029,000
Income tax expense ................................... 2,890,000 2,738,000 961,000 997,000
------------ ------------ ------------ ------------
Net income ................................... $ 6,156,000 $ 5,580,000 $ 2,094,000 $ 2,032,000
============ ============ ============ ============
Weighted average:
Common shares .................................... 3,108,669 3,120,759 3,101,932 3,108,434
Dilutive stock options ........................... 67,987 63,993 67,220 62,192
------------ ------------ ------------ ------------
3,176,656 3,184,752 3,169,152 3,170,626
============ ============ ============ ============
Earnings per share:
Basic ............................................ $ 1.98 $ 1.79 $ .68 $ .65
============ ============ ============ ============
Diluted .......................................... $ 1.94 $ 1.75 $ .66 $ .64
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
================================================================================
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLKERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1998
----------------------------------------------------------------------------------------------
Accumulated
Other
Common Stock Compre- Compre-
---------------------- hensive Retained hensive
Shares Amount Surplus Income Earnings Income Total
---------- --------- ----------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 ............ 3,113,061 $ 311,000 $ 5,471,000 $ 52,717,000 $ 467,000 $ 58,966,000
Net Income ....................... $ 6,156,000 6,156,000 6,156,000
Repurchase and retirement
of common stock ................ (28,285) (3,000) (1,353,000) (1,356,000)
Exercise of stock options ........ 11,968 1,000 159,000 160,000
Unrealized gains on available-
for-sale-securities, net of
tax of $684,000 ................ 987,000 987,000 987,000
-----------
Comprehensive income ............. $ 7,143,000
===========
Cash dividends declared -
$.27 per share ................. (838,000) (838,000)
Cash in lieu of fractional
shares on 3-for-2 stock split... (14,000) (14,000)
Tax benefit of stock options ..... 91,000 91,000
--------- --------- ----------- ------------ ---------- ------------
Balance, September 30, 1998 ......... 3,096,744 $ 309,000 $ 4,368,000 $ 58,021,000 $1,454,000 $ 64,152,000
========= ========= =========== ============ ========== ============
<CAPTION>
----------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1997
----------------------------------------------------------------------------------------------
Accumulated
Other
Common Stock Compre- Compre-
---------------------- hensive Retained hensive
Shares Amount Surplus Income Earnings Income Total
---------- --------- ----------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 ............ 2,088,784 $ 209,000 $ 6,924,000 $ 46,733,000 $ 303,000 $ 54,169,000
Net Income ....................... $ 5,580,000 5,580,000 5,580,000
Repurchase and retirement
of common stock ................ (41,846) (4,000) (1,786,000) (1,790,000)
Exercise of stock options ........ 23,036 2,000 407,000 409,000
Unrealized gains on available-
for-sale-securities, net of
tax of $65,000 ................. 8,000 8,000 8,000
-----------
Comprehensive income ............. $ 5,588,000
===========
Cash dividends declared -
$.23 per share ................. (709,000) (709,000)
Tax benefit of stock options ..... 174,000 174,000
--------- --------- ----------- ------------ --------- ------------
Balance, September 30, 1997 ........ 2,069,974 $ 207,000 $ 5,719,000 $ 51,604,000 $ 311,000 $ 57,841,000
========= ========= =========== ============ ========= ============
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
Increase (Decrease) in Cash and Cash Equivalents 1998 1997
-------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income .............................................................. $ 6,156,000 $ 5,580,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses (credit) .................................... (100,000) (100,000)
Deferred income tax provision ......................................... 37,000 146,000
Depreciation and amortization ......................................... 518,000 443,000
Premium amortization (discount accretion) on investment securities, net (132,000) (667,000)
Decrease in prepaid income taxes ...................................... -- 1,000
Increase in other assets .............................................. (665,000) (327,000)
Increase in accrued expenses and other liabilities .................... 459,000 325,000
Increase in income taxes payable ...................................... 153,000 214,000
------------ ------------
Net cash provided by operating activities .......................... 6,426,000 5,615,000
------------ ------------
Cash Flows From Investing Activities:
Proceeds from maturities and redemptions of investment securities:
Held-to-maturity ...................................................... 48,022,000 39,261,000
Available-for-sale .................................................... 4,260,000 4,343,000
Purchase of investment securities:
Held-to-maturity ...................................................... (45,742,000) (52,727,000)
Available-for-sale .................................................... (27,612,000) (6,732,000)
Net increase in loans to customers ...................................... (15,079,000) (526,000)
Purchases of bank premises and equipment ................................ (1,062,000) (280,000)
------------ ------------
Net cash used in investing activities .............................. (37,213,000) (16,661,000)
------------ ------------
Cash Flows From Financing Activities:
Net increase in total deposits .......................................... 28,678,000 34,700,000
Proceeds from exercise of stock options ................................. 160,000 409,000
Repurchase and retirement of common stock ............................... (1,356,000) (1,790,000)
Cash dividends paid ..................................................... (1,668,000) (1,419,000)
Cash in lieu of fractional shares on 3-for-2 stock split ................ (14,000) --
------------ ------------
Net cash provided by financing activities .......................... 25,800,000 31,900,000
------------ ------------
Net increase (decrease) in cash and cash equivalents ....................... (4,987,000) 20,854,000
Cash and cash equivalents, beginning of year ............................... 73,843,000 57,430,000
------------ ------------
Cash and cash equivalents, end of period ................................... $ 68,856,000 $ 78,284,000
============ ============
Supplemental Schedule of Noncash:
Investing Activities
Unrealized gains on available-for-sale securities ....................... $ 1,671,000 $ 73,000
Transfer of available-for-sale securities to held-to-maturity category .. -- 28,886,000
Financing Activities
Tax benefit from exercise of employee stock options ..................... 91,000 174,000
</TABLE>
The Corporation made interest payments of $7,386,000 and $6,731,000 and income
tax payments of $2,700,000 and $2,379,000 during the nine months ended September
30, 1998 and 1997, respectively.
See notes to consolidated financial statements
4
<PAGE>
THE FIRST OF LONG ISLAND CORPORATION AND SUBSIDIARY
SEPTEMBER 30, 1998
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, 1998 and 1997 is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods. The December 31, 1997 consolidated
balance sheet was derived from the Company's December 31, 1997 audited
consolidated financial statements.
2. EARNINGS PER SHARE
Earnings per share data for the nine and three months ended September 30,
1997 have been adjusted to reflect the 3-for-2 stock split paid February 2, 1998
and restated to conform to the provisions of Statement of Financial Accounting
Standards No. 128 "Earnings per Share."
5
<PAGE>
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 $1.94 per share for the first nine months of 1998 as
compared to $1.75 for the same period last year, an increase of approximately
11%. Based on year-to-date 1998 net income of $6,156,000, the Corporation
returned 1.64% on average total assets and 13.38% on average total equity. This
compares to returns on assets and equity of 1.64% and 13.45%, respectively, for
the same period last year. Total assets, deposits, and capital grew by 8.2%,
7.7%, and 10.9%, respectively, when comparing balances at September 30, 1998 to
those at September 30, 1997. The Corporation's capital ratios continue to
substantially exceed the current regulatory criteria for a well-capitalized
bank.
The most significant factor favorably affecting earnings for the first nine
months of 1998 when compared to the same period last year was growth in average
checking balances. Average checking balances were approximately $151.8 million
for the first nine months of 1998 as compared to $130.2 million for the same
period last year, an increase of 16.5%. Earnings were also favorably impacted by
a 14.0% increase in noninterest 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
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
--------- -------- ------- --------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold ...................... $ 53,367 $ 2,161 5.41% $ 45,377 $ 1,836 5.41%
Investment Securities
Taxable ............................... 194,656 9,047 6.21 186,807 8,797 6.30
Nontaxable (1) ........................ 65,967 3,385 6.84 44,504 2,330 6.98
Loans (1)(2) ............................ 162,013 10,911 9.00 153,450 10,324 9.00
--------- -------- ----- --------- -------- -----
Total interest-earning assets ........... 476,003 25,504 7.16 430,138 23,287 7.24
-------- ----- -------- -----
Allowance for loan losses ............... (3,641) (3,600)
--------- ---------
Net interest-earning assets ............. 472,362 426,538
Cash and due from banks ................. 17,090 16,726
Premises and equipment, net ............. 5,267 4,955
Other assets ............................ 7,181 6,395
--------- ---------
$ 501,900 $ 454,614
========= =========
Liabilities and
Stockholders' Equity
Savings and money market deposits ....... $ 246,655 5,972 3.24 $ 226,754 5,365 3.16
Time deposits ........................... 39,202 1,430 4.88 39,824 1,406 4.72
--------- -------- ----- --------- -------- -----
Total interest-bearing deposits ......... 285,857 7,402 3.46 266,578 6,771 3.40
--------- -------- ----- --------- -------- -----
Checking deposits (3) ................... 151,769 130,226
Other liabilities ....................... 2,755 2,331
--------- ---------
440,381 399,135
Stockholders' equity .................... 61,519 55,479
--------- ---------
$ 501,900 $ 454,614
========= =========
Net interest income (1) ................. $ 18,102 $ 16,516
======== ========
Net interest spread (1) ................. 3.70% 3.84%
===== =====
Net interest yield (1) .................. 5.08% 5.13%
===== =====
</TABLE>
(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 for the first nine months of 1998 and
1997 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
<PAGE>
Rate/Volume Analysis. The following table sets forth the effect of changes
in volume, changes in rates, and changes in rate/volume on tax-equivalent
interest income, interest expense and net interest income.
Nine Months Ended September 30,
------------------------------------------
1998 Versus 1997
Increase (decrease) due to changes in:
------------------------------------------
Rate/ Net
Volume Rate Volume (2) Change
------- ------- ---------- ------
(in thousands)
Interest Income:
Federal funds sold .............. $ 323 $ 1 $ 1 $ 325
Investment securities:
Taxable ....................... 370 (115) (5) 250
Nontaxable (1) ................ 1,124 (46) (23) 1,055
Loans (1) ....................... 576 10 1 587
------- ------- ------- -------
Total interest income ........... 2,393 (150) (26) 2,217
------- ------- ------- -------
Interest Expense:
Savings and money
market deposits ............... 471 125 11 607
Time deposits ................... (22) 47 (1) 24
------- ------- ------- -------
Total interest expense .......... 449 172 10 631
------- ------- ------- -------
Increase (decrease) in net
interest income ............... $ 1,944 $ (322) $ (36) $ 1,586
======= ======= ======= =======
(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 $1,586,000, or
9.6%, from $16,516,000 for the nine months ended September 30, 1997 to
$18,102,000 for the comparable period in 1998. As can be seen from the above
rate/volume analysis, the increase is comprised of a positive volume variance of
$1,944,000 and negative rate and rate/volume variances of $322,000 and $36,000,
respectively.
The positive volume variance was largely caused by growth in average
checking deposits and stockholders' equity and the use of such funds to purchase
investment securities and originate loans. When comparing the first nine months
of 1998 to the like period in 1997, average checking deposits increased by
$21,543,000, or 16.5%, and average stockholders' equity increased by $6,040,000,
or 10.9%.
Also contributing to the positive volume variance was growth in savings and
money market deposits. The resulting funds were used 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 1998 to the same period
in 1997, average savings and money market deposits increased by $19,901,000, or
8.8%.
Funding interest-earning asset growth with growth in checking deposits and
capital has a greater impact on net interest income than funding such growth
with interest-bearing deposits because checking deposits and capital, unlike
interest-bearing deposits, have no associated interest cost. The growth of
checking balances has historically been one of the Corporation's key strategies
for increasing earnings per share.
8
<PAGE>
The Bank's calling programs are a significant factor that favorably
impacted the growth in average checking balances noted when comparing the first
nine months of 1998 to the same period last year, and competitive pricing is a
significant contributing factor 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 attributable to the
Bank's attention to customer service and local economic conditions.
Net interest spread and yield were 3.70% and 5.08%, respectively, for the
first nine months of 1998 as compared to 3.84% and 5.13%, respectively, for the
same period in 1997. It would appear that the principal causes for the decreases
in spread and yield are pressure on loan rates brought about by competitive
pricing and reduced yield on the Bank's investment securities portfolio.
Allowance and Provision For Loan Losses
The allowance for loan losses was $3,648,000 at September 30, 1998 as
compared to $3,579,000 at December 31, 1997, representing 2.1% and 2.3% of total
loans, respectively, and 11.4 times and 8.3 times the total of nonaccruing loans
and loans past due 90 days or more as to principal and interest and still
accruing, respectively. The change in the allowance during the first nine months
of 1998 is due to recoveries of $256,000, chargeoffs of $87,000, and a $100,000
credit in the provision for loan losses.
The allowance for loan losses is an amount that management currently
believes will be adequate to absorb possible future losses on existing loans.
The provision charged to operations, if any, and the related balance in the
allowance for loan losses is based upon periodic evaluations of the loan
portfolio by management. These evaluations consider a variety of factors
including, but not limited to, historical losses; a borrower's ability to repay;
the value of any related collateral; 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.
During 1998, the Bank realized $261,000 more than the carrying value of a
nonaccruing loan. The excess proceeds were more than sufficient to fully recover
prior chargeoffs on the loan of $241,000. The recovery increased the level of
the allowance for loan losses beyond what management deemed necessary to absorb
possible future losses on existing loans. As a result, management reduced the
level of the allowance by $100,000 with an offsetting credit to the provision
for loan losses.
The amount of future chargeoffs and provisions for loans 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 78.2% of total loans outstanding at September 30, 1998. Since 1987,
environmental audits have been instituted on commercial properties and the
incidence and scope of these audits has been increased over the succeeding
years. 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.
9
<PAGE>
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 Company will be unable to eventually collect or realize
their full carrying value. As shown in the table that follows, the total level
of risk elements has not changed substantially since December 31, 1997.
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(dollars in thousands)
<S> <C> <C>
Nonaccruing loans ................................................... $ 316 $ 382
Foreclosed real estate .............................................. -- --
------------- ------------
Total nonperforming assets ........................................ 316 382
Troubled debt restructurings ........................................ -- 6
Loans past due 90 days or more as to
principal or interest payments and still accruing ................. 3 49
------------- ------------
Total risk elements ............................................... $ 319 $ 437
============= ============
Nonaccruing loans as a percentage of total loans .................... .19% .25%
============= ============
Nonperforming assets as a percentage of total loans
and foreclosed real estate ........................................ .19% .25%
============= ============
Risk elements as a percentage of total loans and
foreclosed real estate ............................................ .19% .28%
============= ============
</TABLE>
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
$286,000, or 14.7%, from $1,940,000 for the first nine months of 1997 to
$2,226,000 for the same period in 1998. The increase is largely comprised of
increases in insufficient funds charges, unavailable funds charges, and
maintenance/activity charges.
Noninterest expense is comprised of salaries, employee benefits, occupancy
and equipment expense and other operating expenses incurred in supporting the
various business activities of the Corporation. Noninterest expense increased by
$928,000, or 8.8%, from $10,593,000 for the first nine months of 1997 to
$11,521,000 for the same period in 1998. A significant portion of the increase
resulted from an increase in salaries of $475,000, or 9.6%. Salaries increased
largely because of normal annual salary increases and an increase in the number
of full-time-equivalent employees. The opening of a full-service branch in
Rockville Centre, Nassau County, Long Island in February of 1998 (the Bank
simultaneously closed its Rockville Centre commercial banking office) and the
opening of two new commercial banking offices in Suffolk County, Long Island in
the third quarter of 1998 contributed to the increase in staff.
In addition to the new full-service branch and commercial banking offices
discussed above, the Bank has received approval from the Office of the
Comptroller of the Currency to open an additional commercial banking office.
Although the new locations are expected to positively impact results of
operations on a longer-term basis, the near-term impact will be negative as a
result of start-up expenses, increased marketing efforts, and operating expenses
incurred while a customer base is being built. Based on available
10
<PAGE>
information, management does not expect the magnitude of the near-term impact to
be material to the Corporation's results of operations, financial position, or
liquidity.
The Bank is in the process of upgrading various equipment, particularly in
its branch system, to better serve its customers and improve the efficiency of
its operations. Such upgrades are expected to be completed in 1999, and will
have a negative effect on results of operations as the new items replace ones
that are fully-depreciated. The magnitude of the impact is not expected to be
material to the Corporation's results of operations, financial position, or
liquidity.
Income tax expense as a percentage of book income was 31.9% and 32.9% for
the first nine months of 1998 and 1997, respectively. 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 1998 is primarily attributable to an increase in the amount
of tax-exempt income on municipal securities.
Results of Operations - Three Months Ended September 30, 1998 Versus Three
Months Ended September 30, 1997
Net income for the third quarter of 1998 was $2,094,000, or $.66 per share,
as compared to $2,032,000, or $.64 per share, for the same quarter in 1997. When
comparing the third quarter of 1998 to the same quarter in 1997, net interest
income increased by $373,000, noninterest income increased by $99,000, and
income tax expense decreased by $36,000. The positive effect of these changes
was largely offset by an increase in noninterest expense of $446,000. The
significant reasons for the changes in net interest income, noninterest income,
and noninterest expense are substantially the same as those discussed above with
regard to the nine-month periods.
It should be noted that the first two quarters of 1998 showed larger
increases over the comparable prior year quarters than did the third quarter of
1998 because of an acceleration of earnings in the third quarter of 1997 over
the first two quarters. Earnings accelerated in the third quarter of 1997
primarily because of strong growth in checking balances.
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, 1998 and the
minimum ratios necessary to be classified as well capitalized and adequately
capitalized. The Corporation's capital ratios at September 30, 1998
substantially exceed the requirements for a well-capitalized bank.
<TABLE>
<CAPTION>
Regulatory Standards
Corporation's --------------------------
Capital Ratios at Well Adequately
September 30, 1998 Capitalized Capitalized
------------------ ----------- -----------
<S> <C> <C> <C>
Total Risk-Based Capital Ratio ............. 32.39% 10.00% 8.00%
Tier 1 Risk-Based Capital Ratio ............. 31.14 6.00 4.00
Tier 1 Leverage Capital Ratio ............... 12.02 5.00 4.00
</TABLE>
Total stockholders' equity increased by $5,186,000, or from $58,966,000 at
December 31, 1997 to $64,152,000 at September 30, 1998. The increase in
stockholders' equity is primarily attributable to the net effect of net income
of $6,156,000, unrealized gains on
11
<PAGE>
available-for-sale securities of $987,000, repurchases of common stock amounting
to $1,356,000, and cash dividends declared of $838,000.
Cash Flows and Liquidity
Cash Flows. During the nine months ended September 30, 1998, cash and cash
equivalents decreased by $4,987,000. The resulting cash, along with cash
provided by deposit growth and operations of $28,678,000 and $6,426,000,
respectively, were the primary sources of funding growth in the investment
securities portfolio of $21,072,000, growth in the loan portfolio of
$15,079,000, cash dividends paid of $1,668,000, repurchases of common stock
under the Corporation's stock repurchase program of $1,356,000, and capital
expenditures of $1,062,000.
During the first nine months of 1998, commercial and industrial loans
increased by $2,757,000, loans secured by residential real estate increased by
$6,614,000, and commercial mortgages increased by $4,762,000. These increases,
when taken together with a decrease in consumer loans of $1,141,000, are the
primary reason for the growth in the loan portfolio during the first nine months
of 1998.
As reflected in the accompanying consolidated balance sheet, the
$28,678,000 growth in deposits is comprised of increases in checking deposits
and total interest-bearing deposits of $13,089,000 and $15,589,000,
respectively. The increase in interest-bearing deposits is primarily
attributable to growth in money market balances.
Liquidity. The Corporation's primary sources of liquidity are its overnight
position in federal funds sold, its short-term investment securities portfolio
which consists of securities purchased to mature within approximately one year,
maturities and monthly payments on the balance of the investment securities
portfolio, and investment securities designated as available-for-sale. At
September 30, 1998, the Corporation had $55,000,000 in federal funds sales, a
short-term securities portfolio of $9,747,000, and available-for-sale securities
of $81,702,000. The Corporation's liquidity is enhanced by its stable deposit
base which primarily consists of checking, savings and money market accounts.
Such accounts comprised 91.7% of total deposits at September 30, 1998, while
time deposits of $100,000 and over and other time deposits comprised only 2.7%
and 5.6%, 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 originates and invests in interest-earning assets and solicits
interest-bearing deposit accounts. The operations of the Bank are subject to
market risk resulting from interest rate fluctuations to the extent that there
is a difference between the amount of the Bank's interest-earning assets and the
amount of interest-bearing liabilities that mature or reprice or are
prepaid/withdrawn in specified time periods. 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
cash flows from liabilities) will change when interest rates change. The
principal objective of the Bank's asset/liability management activities is to
provide maximum levels of net interest income while maintaining acceptable
levels of interest rate and liquidity risk and facilitating the funding needs of
the Bank.
12
<PAGE>
Interest rates generally trended lower during the latter part of the third
quarter of 1998, which trend was accelerated by the Federal Reserve's decision
this fall to twice decrease the federal funds rate. The immediate effect of
lower rates on the Bank's net interest income is expected to be positive.
However, sustained lower rates should have a negative effect on the Bank's net
interest income over time. The reason for this apparent anomaly is that the
Bank's interest-bearing deposit accounts, principally money market type savings
accounts, reprice faster than associated loans and investment securities. On the
other hand, a significant portion of the Bank's loans and investment securities
are funded by noninterest-bearing checking accounts and capital, whose costs are
not affected by the level of interest rates. As these related loans and
investment securities mature or reprice they are replaced or repriced at lower
interest yields.
New Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 "Employers' Disclosures about Pensions
and Other Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132 supersedes the
disclosure requirements for pension and other postretirement plans as set forth
in SFAS No. 87 "Employers' Accounting For Pensions", SFAS No. 88 "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
For Termination Benefits, and SFAS No. 106 "Employers' Accounting For
Postretirement Benefits Other Than Pensions." SFAS No. 132 does not address
measurement or recognition for pension and other postretirement benefit plans.
SFAS No. 132 is effective for fiscal years beginning after December 15,
1997. Restatement of disclosures for earlier periods provided for comparative
purposes is required unless the information is not readily available, in which
case the notes to the financial statements shall include all available
information and a description of the information not available.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting For Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). This Statement establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the intended
use of the derivative and the resulting designation. SFAS No. 133 will not
impact the Corporation's accounting or disclosures.
Other Matters
Year 2000. The Bank has established formal processes for identifying,
assessing, and managing the Year 2000 risks posed by internal bank activities,
vendors, and customers. In the third quarter of 1998, the Bank completed an
initial assessment of the risks posed by its customers. Testing of internal
systems and testing with significant third party vendors is expected to be
substantially complete by December 31, 1998 and March 31, 1999, respectively.
During the next fifteen months the Bank will continue to monitor its own
internal activities and the plans of its vendors and customers to address the
Year 2000 issue. Any identified impact on the Bank will be evaluated.
The Bank utilizes Fiserv, one of the largest data processing providers for
banks and savings institutions, to perform a significant portion of its data
processing activities. The Bank is closely monitoring Fiserv's efforts to
address the Year 2000 issue and currently
13
<PAGE>
expects that Fiserv will be Year 2000 compliant in time for the new millennium.
If Fiserv fails in its Year 2000 compliance efforts and the Bank is not given
sufficient advance warning, such failure could have a significant adverse impact
on the operations of the Bank.
For internal bank activities, the Bank has certain contingency plans in
place and is in the process of developing others where it is deemed appropriate.
With respect to significant outside vendors, various contingency plans have been
developed and are being considered. A contingency arrangement would be expected
to provide the Bank with a backup methodology, plan, or vendor that could be
utilized in the event that a Year 2000 failure occurs or the Bank believes that
such a failure may occur.
The Bank is currently upgrading equipment in its branch system to better
serve its customers and improve the efficiency of its operations. The timing of
the upgrades was accelerated as a result of the Year 2000 issue. The total cost
of the upgrades is expected to be approximately $1,500,000, of which
approximately $500,000 will be placed in service in fourth quarter of 1998 and
the balance in the early part of 1999. Based on current information, management
does not expect these costs when taken together with other Year 2000 compliance
costs to materially impact the Corporation's future results of operations,
financial condition, or liquidity.
Financial Reform Legislation. Corporate checking deposits currently account
for approximately 26% of the Bank's total deposits. During 1998, Congress
considered financial reform legislation that would allow customers to cover
checks by sweeping funds from interest-bearing accounts each business day and
repeal the prohibition of the payment of interest on corporate checking deposits
in the future. Neither was enacted in the latest session of Congress. Although
management currently believes that the Bank's earnings could be more severely
impacted by 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 contained in sentences including the words "expect" or "could" or
"should". 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.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. NONE
ITEM 2. NONE
ITEM 3. NONE
ITEM 4. NONE
ITEM 5. NONE
ITEM 6. (a) Exhibits: Exhibit 27 - Financial Data Schedule is submitted
herewith
(b) Reports on Form 8-K - NONE
15
<PAGE>
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 4, 1998 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)
16
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 13,856,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 55,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 81,702,000
<INVESTMENTS-CARRYING> 188,594,000
<INVESTMENTS-MARKET> 193,411,000
<LOANS> 169,978,000
<ALLOWANCE> 3,648,000
<TOTAL-ASSETS> 518,229,000
<DEPOSITS> 451,437,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,640,000
<LONG-TERM> 0
0
0
<COMMON> 309,000
<OTHER-SE> 63,843,000
<TOTAL-LIABILITIES-AND-EQUITY> 518,229,000
<INTEREST-LOAN> 10,852,000
<INTEREST-INVEST> 11,281,000
<INTEREST-OTHER> 2,161,000
<INTEREST-TOTAL> 24,294,000
<INTEREST-DEPOSIT> 7,402,000
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 16,892,000
<LOAN-LOSSES> (100,000)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,521,000
<INCOME-PRETAX> 9,046,000
<INCOME-PRE-EXTRAORDINARY> 9,046,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,156,000
<EPS-PRIMARY> 1.98
<EPS-DILUTED> 1.94
<YIELD-ACTUAL> 5.08
<LOANS-NON> 316,000
<LOANS-PAST> 3,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,579,000
<CHARGE-OFFS> 87,000
<RECOVERIES> 256,000
<ALLOWANCE-CLOSE> 3,648,000
<ALLOWANCE-DOMESTIC> 3,648,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
