QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2007
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)
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
10 Glen Head Road, Glen Head, New York
(Address of Principal Executive Offices)
Registrants Telephone Number, Including Area Code (516) 671-4900
(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 o
by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
The accounting and reporting policies of the Corporation reflect banking industry practice and conform
to generally accepted accounting principles in the United States. 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 and the disclosure of contingent assets and
liabilities. Actual results could differ significantly from those estimates.
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 subsidiaries wholly-owned by the Bank, either directly or indirectly,
The First of Long Island Agency, Inc., FNY Service Corp., and The First of Long Island REIT, Inc.
The consolidated entity is referred to as the Corporation and the Bank and its direct
and indirect subsidiaries are collectively referred to as the Bank. The Corporations
financial condition and operating results principally reflect those of the Bank. All intercompany
balances and amounts have been eliminated. For further information refer to the consolidated financial
statements and notes thereto included in the Corporations Annual Report on Form 10-K for the
year ended December 31, 2006.
The consolidated financial information included herein as of and for the periods ended September 30,
2007 and 2006 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, 2006 consolidated balance sheet was derived from the Corporations December 31, 2006 audited
consolidated financial statements.
On March 22, 2007, the Corporation announced the declaration of a 2-for-1 stock split which was issued
on April 16, 2007. Where applicable, all share and per share amounts included in the consolidated
financial statements and notes thereto have been adjusted to reflect the effect of the split.
Repurchase Agreements - Other. In September 2007, the Bank entered into two repurchase agreements for ten year terms aggregating
$15,000,000. One is for $5,000,000 at a fixed rate of 4.00% and callable quarterly beginning September
2010. The other is for $10,000,000 at a fixed rate of 4.37% and callable quarterly beginning September
2012. These agreements are collateralized by mortgage-backed securities.
Federal Home Loan Bank Advances. The Bank borrowed $14,000,000 from the Federal Home Loan Bank of New York in September 2007
for a period of 30 days at a fixed rate of 4.82%. The advance is collateralized by mortgage-backed
The Corporation has two share-based compensation
plans which are described below. The Corporations 2006 Stock Compensation Plan (the 2006
Plan) was approved by its shareholders on April 18, 2006 as a successor to the 1996 Stock Option
and Appreciation Rights Plan (the 1996 Plan). The 2006 Plan permits the granting of stock
options, stock appreciation rights, restricted stock, and restricted stock units (RSUs)
to employees and non-employee directors for up to 600,000 shares of common stock of which 420,068
shares remain available for grant as of September 30, 2007. The number of awards that can be granted
under the 2006 Plan to any one person in any one fiscal year is limited to 70,000 shares. Under the
terms of the 2006 Plan, stock options and stock appreciation rights can not have an exercise price
that is less than 100% of the fair market value of one share of the underlying common stock on the
date of grant. The term and/or vesting of awards made under the 2006 Plan will be determined from
time to time in accordance with rules adopted by the Corporations Compensation Committee and
be in compliance with the applicable provisions, if any, of the Internal Revenue Code. Thus far,
the Compensation Committee has used a five year vesting period and a ten year term for stock options
granted under the 2006 Plan and has made the ability to convert RSUs into shares of common stock
and the related conversion ratio contingent upon the financial performance of the Corporation in
the third year of the three calendar year period beginning in the year in which the RSUs were awarded.
Notwithstanding anything to the contrary in any award agreement, awards under the 2006 Plan will
become immediately exercisable or will immediately vest, as the case may be, in the event of a change
in control and, in accordance with the terms of the related award agreements, all awards granted
to date under the 2006 Plan will become immediately exercisable or will immediately vest, as applicable,
in the event of retirement or total and permanent disability, as defined, or death.
The Corporations 1996 Plan permitted the granting of stock options, with or without stock appreciation
rights attached, and stand alone stock appreciation rights to employees and non-employee directors
for up to 1,080,000 shares of common stock. The number of stock options and stock appreciation rights
that could have been granted under the 1996 Plan to any one person in any one fiscal year was limited
to 50,000. Each option granted under the 1996 Plan was granted at a price equal to the fair market
value of one share of the Corporations stock on the date of grant. Options granted under the
1996 Plan on or before December 31, 2000 became 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 under the 1996
Plan in January 2005 became exercisable in whole or in part commencing ninety days from the date
of grant and ending ten years after the date of grant. By the terms of their grant, all other options
under the 1996 Plan were granted with a three year vesting period and a ten year expiration date.
However, vesting was subject to acceleration in the event of a change in control, retirement, death,
disability, and certain other limited circumstances.
Fair Value of Stock Option Awards. The fair value of options awarded in 2007 and 2006 was estimated on the date of grant using the
Black-Scholes option pricing model and the assumptions noted in the following table.
Expected term (in years)
Risk-free interest rate
Expected volatility was based on historical volatility
for the expected term of the options. The Corporation used historical data to estimate the expected
term of options granted. The risk-free interest rate is the implied yield at the time of grant on
U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the options.
The weighted average grant date fair value of options granted in 2007 and 2006 was $6.05 and $5.98,
Fair Value of Restricted Stock Units. The fair value of restricted stock units is based on the market price of the shares underlying
the awards on the grant date, discounted for dividends which are not paid on restricted stock units
during the vesting period.
Compensation Expense. Compensation expense for stock options is recognized ratably over the five-year vesting period or the
period from the grant date to the participants eligible retirement date, whichever is shorter.
Compensation expense for RSUs is recognized over the three-year performance period and adjusted periodically
throughout the period to reflect the estimated probability of vesting. However, if the period between
the grant date and the grantees eligible retirement date is less than three years, compensation
expense is recognized ratably over this shorter period. The Corporation recorded compensation expense
for share-based payments of $397,000 and $170,000 and recognized income tax benefits of $157,000
and $56,000 in the first nine months of 2007 and 2006, respectively.
Option Activity. On January 18, 2007 the Corporations board of directors granted 50,248 nonqualified
stock options under the 2006 Plan. The options were granted at a price equal to the fair market value
of one share of the Corporations stock on the date of grant.
A summary of options outstanding under
the Corporations stock compensation plans as of September 30, 2007 and changes during the nine
month period then ended is presented below.
Outstanding at January 1, 2007
Forfeited or expired
Outstanding at September 30, 2007
Exercisable at September 30, 2007
The total intrinsic value of options exercised during the first nine months of 2007 and 2006 was $318,000 and $151,000, respectively.
The total fair value of options vested during the first nine months of 2007 and 2006 was $251,000 and $102,000, respectively.
Restricted Stock Activity. On January 18, 2007, the Corporations Board of Directors granted RSUs under the 2006 Plan.
The Corporations financial performance for 2009 will determine the number of shares of common stock, if any, into which the RSUs can be converted. In the table that follows, the number of shares granted represents the maximum number of shares into which the RSUs can be converted.
A summary of the status of the Corporations nonvested shares as of September 30, 2007 and changes during the nine month period then ended is presented below.
Nonvested at January 1, 2007
Nonvested at September 30, 2007
Unrecognized Compensation Cost. As of September 30, 2007, there was $712,000 of total unrecognized compensation cost related to nonvested
equity awards. The cost is expected to be recognized over a weighted-average period of 1.47 years.
Cash Received and Tax Benefits Realized. Cash received from option exercises for the nine months ended September 30, 2007 and 2006 was
$598,000 and $281,000, respectively. The actual tax benefits realized for the tax deductions from
option exercises for the first nine months of 2007 and 2006 was $73,000 and $17,000, respectively.
Other. No cash was used to settle stock options during the first nine months of 2007 or 2006. The Corporation
uses newly issued shares for stock option exercises and currently plans to use newly issued shares
upon the conversion of restricted stock units.
RSUs and options to purchase 327,372 and 173,968 shares of common stock were outstanding at September
30, 2007 and 2006, respectively, and for the quarterly periods then ended, but were not included
in the computation of diluted earnings per share because to do so would have been antidilutive for
The following table sets forth the components of net
periodic pension cost for accounting purposes.
Nine Months Ended
Three Months Ended
Service cost, net of plan participant contributions
Expected return on plan assets
Net amortization and deferral
The Bank makes cash contributions to the pension plan (the Plan) which comply with the funding requirements of applicable Federal laws and regulations. For funding purposes, the laws and regulations set forth both minimum required and maximum tax deductible contributions. The Banks cash contributions are
usually made once a year just prior to the Plans year end of September 30. The Bank had no minimum required contribution to the Plan for the plan year ending September 30, 2007, and its maximum tax deductible contribution was approximately $2,258,000. The Bank contributed $1,000,000 to the Pension Plan in August 2007 for the Plan year ended September 30, 2007. In September 2006, the Bank contributed $1,087,431 to the Pension Plan representing the maximum tax deductible contribution for the Plan year ended September 30, 2006.
In June 2006, the FASB issued Interpretation No. 48 Accounting for Uncertainty in Income Taxes
(FIN No. 48). FIN No. 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years
beginning after December 15, 2006. The adoption of FIN No. 48 on January 1, 2007 had no impact on
the Corporations consolidated financial statements.
The Corporation is subject to U.S. federal income tax as well as New York state income tax. The Corporation
is not subject to examination by taxing authorities for years before 2004. The Corporation has no
unrecognized tax benefits and does not currently expect to have any in the next twelve months.
The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense.
The Corporation did not have any amounts accrued for interest and penalties at January 1, 2007.
ITEM 2. -
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is managements discussion and analysis
of certain significant factors that have affected the Corporations 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 Corporations financial
condition and operating results principally reflect those of its wholly-owned subsidiary, The First
National Bank of Long Island, and subsidiaries wholly-owned by the Bank, either directly or indirectly,
The First of Long Island Agency, Inc., FNY Service Corp., and The First of Long Island REIT, Inc.
The consolidated entity is referred to as the Corporation and the Bank and its subsidiaries
are collectively referred to as the Bank. The Banks primary service area is
Nassau and Suffolk Counties, Long Island, although the Bank has three commercial banking branches
in Manhattan and may open additional Manhattan branches in the future.
For the first nine months of 2007, the Corporation
earned $1.10 per share versus $1.09 for the same period last year. In the third quarter of 2007,
earnings were $.39 per share versus $.37 for the same quarter last year.
Loan and deposit growth continued throughout the first
nine months of 2007. The 12.1% increase in loans and 4.5% increase in deposits are due in part to
recent hires in the Banks lending and business development groups and new branch openings.
A portion of the loan growth was funded by runoff from the Banks investment securities portfolio,
thus increasing the concentration of loans on the Banks balance sheet. The increase in loan
concentration, along with deposit cost controls, was largely responsible for a nine basis point
improvement in the Banks net interest margin in 2006 and the Banks ability to maintain
its margin in 2007. Improvement and maintenance of margin are contrary to the declines experienced
by many other regional and community banks throughout the country.
The current interest rate environment and competitive
conditions in the Banks market area both pose challenges. The yield curve continues to be
to inverted, with short-term interest rates at approximately the same or higher levels than
and longer-term interest rates. This negatively impacts the Banks net interest
spread, or the
difference between what the Bank pays for deposits and earns on loans and securities,
interest rates are a key driver of the Banks deposit rates and intermediate
interest rates are key drivers of yields that can be earned by the Bank on loans
In addition to the unfavorable yield curve, strong competition for loans and deposits
in the Banks
market area has put upward pressure on deposit pricing, downward pressure on
loan pricing and made
core deposit growth challenging. Either a restoration of yield curve slope
or a lessening of competition
should enhance earnings.
The Bank expects to open two branches in Suffolk County,
Long Island in late 2007 or early 2008. The branch sites are located in Babylon and on Main Street
in Northport Village.
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.
Nine Months Ended September 30,
(dollars in thousands)
Federal funds sold
Loans (1) (2)
Total interest-earning assets
Allowance for loan losses
Net interest-earning assets
Cash and due from banks
Premises and equipment, net
Savings and money market deposits
Total interest-bearing liabilities
Net interest income (1)
Net interest spread (1)
Net interest margin (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 Corporations 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%.
For the purpose of these computations, nonaccruing loans are included in the daily average loan amounts outstanding.
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.
Nine Months Ended September 30,
2007 Versus 2006
Increase (decrease) due to changes in:
Federal funds sold
Total interest income
Savings and money market deposits
Total interest expense
Increase (decrease) in net
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 on a tax-equivalent basis increased
by $163,000 from $29,426,000 for the first nine months of 2006 to $29,589,000 for the same period
this year. The most significant reason for the growth in net interest income was that management
used proceeds from the maturity and paydown of taxable securities to fund loan growth and thereby
moved money from a lower to a higher yielding asset category. Total loans grew by $65.9 million,
or 15.1%, from $437.8 million at September 30, 2006 to $503.7 million at September 30, 2007. Loans
now represent 49.9% of total assets versus 44.2% of total assets at September 30, 2006.
The yield on interest-earning assets increased by 32
basis points largely because of the shift from securities to loans. The higher yield resulted in
an increase in net interest income on those interest-earning assets funded by checking deposits and
capital. Checking deposits and capital have no associated interest cost, and this is the primary
reason that the growth of checking balances has historically been one of the Corporations key
strategies for increasing earnings per share. Although actual checking deposits decreased by approximately
$6.9 million between December 31, 2006 and September 30, 2007, average checking deposits grew by
approximately $10.5 million, or 3.3% when comparing the first nine months of 2007 to the same period
last year. A significant portion of the Banks interest-earning assets continues to be funded
by such deposits.
As a partial offset to the increase in net interest
income realized on interest-earning assets funded by checking deposits and capital, the Banks
net interest spread declined by
28 basis points thus causing a decrease in net interest income on those interest-earning assets funded
by interest-bearing liabilities. Net interest spread declined in the presence of a yield curve characterized
by short-term interest rates that are approximately the same or higher than intermediate and longer-term
interest rates. This negatively impacted the Banks net interest spread because short-term interest
rates are a key driver of the Banks deposit rates and intermediate and longer-term interest
rates are key drivers of yields that can be earned by the Bank on loans and securities. Net interest
spread was also negatively impacted by increased competition for loans and deposits in the Banks
market area which put upward pressure on deposit pricing, downward pressure on loan pricing and made
core deposit growth challenging. With upward pressure on deposit pricing, funds migrated from the
Banks lower yielding savings and money market products to its higher priced savings and money
market products and competitively priced certificates of deposit.
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 managements 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 positively
or negatively, the Banks results of operations.
The Banks Reserve Committee 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 Banks loan review officer. In addition, the Reserve Committee is responsible for implementing
and maintaining policies and procedures surrounding the calculation of the required allowance. The
Banks allowance for loan losses is subject to periodic examination by the Office of the Comptroller
of the Currency, the Banks 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 Banks
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 the fair value of the underlying collateral and/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. In estimating the fair value of real estate collateral management utilizes
appraisals and also makes qualitative judgments based on, among other things, its knowledge of the
local real estate market and analyses of current economic conditions and trends. 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 loans 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 Banks historical loss experience over a period of time is the starting point
in making such estimates. However, future losses could vary significantly from those experienced
in the past and accordingly management periodically adjusts its historical loss experience to reflect
current conditions. In doing so, management considers a variety of general qualitative factors and
then subjectively determines the weight to assign to each in estimating losses. The factors include,
among others, national and local economic conditions and trends, 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 Banks lending staff. Because of the nature of the factors and the
difficulty in assessing their impact, managements 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
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 Corporations risk elements at September 30, 2007 and December 31, 2006
are as follows:
(dollars in thousands)
Loans past due 90 days or more as to
principal or interest payments and still accruing
Foreclosed real estate
Total nonperforming assets
Troubled debt restructurings
Total risk elements
Nonaccruing loans as a percentage of total loans
Nonperforming assets as a percentage of total loans
and foreclosed real estate
Risk elements as a percentage of total loans and
foreclosed real estate
The allowance for loan losses grew by $373,000 during the first nine months of 2007, amounting to $4,264,000
at September 30, 2007, or .8% of total loans, as compared to $3,891,000 at December 31, 2006, or
.9% of total loans. During the first nine months of 2007 the Bank had loan chargeoffs and recoveries
of $4,000 and $1,000, respectively, and recorded a $376,000 provision for loan losses. The provision
for loan losses decreased by $98,000 when comparing the first nine months of 2007 to the same period
last year primarily as a result of greater loan growth in the first nine months of 2006.
The allowance for loan losses is an amount that management currently believes will be adequate to absorb
probable incurred losses in the Banks 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 those estimates.
Loans secured by real estate represent approximately 88% of the Banks total loans outstanding
at September 30, 2007. Most of these loans were made to borrowers domiciled on Long Island and are
secured by Long Island properties. The amount of future chargeoffs and provisions for loan losses
could be affected by, among other things, economic conditions on Long Island. Such conditions could
affect the financial strength of the Banks borrowers and the value of real estate collateral
securing the Banks mortgage loans. If economic conditions on Long Island were to deteriorate,
some of the Banks 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 Banks underwriting policies 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 Banks mortgage loans. At the present time management is not aware of any environmental
pollution originating on or near properties securing the Banks loans that would materially
affect the carrying value of such loans.
Noninterest income includes service charges on deposit accounts, Investment Management Division income,
gains or losses on sales of securities, and all other items of income, other than interest, resulting
from the business activities of the Corporation. Noninterest income decreased by $94,000, or 2.1%,
when comparing the first nine months of 2007 to the same period last year. The decrease is principally
due to a decrease in service charges on deposit accounts of $188,000, as partially offset by a $49,000
increase in Investment Management Division income. Service charge income decreased primarily as a
result of reductions in maintenance and activity and returned check charges. Service charge income
continues to be negatively impacted by increased competition in the Banks market area and the
maintenance of higher deposit balances by customers.
Noninterest expense is comprised of salaries, employee
benefits, occupancy and equipment expense and other operating expenses incurred in supporting the
business activities of the Corporation. Noninterest expense increased by $358,000, or 1.8%, from $20,267,000
for the first nine months of 2006 to $20,625,000 for the current nine-month period. The increase
is primarily comprised of an increase in salaries of $795,000, or 8.4% and an increase in occupancy
and equipment expense of $307,000, or 10.2%, as partially offset by a decrease in employee benefits
expense of $692,000, or 18.8%. In addition to normal annual salary adjustments, the increase in salaries
expense principally resulted from the increases in lending and business development staff and, to
a lesser extent, an increase in stock-based compensation expense. A significant reason for the increase
in stock-based compensation expense is additional equity awards this year as well as the timing and
nature of equity awards. The increase in occupancy and equipment expense is largely attributable
to the opening of the Smithtown branch in the fourth quarter of 2006 and investments in new technology.
The decrease in employee benefits expense is primarily the result of the discontinuation of profit
sharing contributions beginning in 2007 and a reduction in the cost of the Banks supplemental
executive retirement program (SERP). SERP expense is down partially because of a reduction
in the number of SERP plan participants.
Income tax expense as a percentage of book income (effective tax rate) was 19.5% for the
first nine months of 2007 as compared to 21.0% for the same period last year. The decrease in the
effective tax rate is primarily due to the fact that tax-exempt income is a larger portion of pre-tax
income in 2007 than it was in 2006.
Results of Operations
Three Months Ended September 30, 2007 versus September 30, 2006
Net income for the third quarter of 2007 was $2,976,000, or $.39 per share, as compared to $2,879,000,
or $.37 per share, for the same quarter last year. The largest components of the increase in net
income are an $87,000 increase in net interest income and a $270,000 decrease in employee benefits
expense. The impact of these items was partially offset by an increase in occupancy and equipment
expense of $110,000, an increase in the Corporations effective tax rate from 18.5% in the third
quarter of 2006 to 20.0% for the current quarter, and an $84,000 increase in the provision for loan
losses. The provision for loan losses increased as a result of greater loan growth in the third quarter
of 2007. The effective tax rate was lower in the third quarter of 2006 due to a decrease in taxes
accrued with respect to the Banks REIT subsidiary. The reasons for the other variances are
substantially the same as those discussed with respect to the nine-month periods.
The Corporations capital management policy is designed to build and maintain capital levels that
exceed regulatory standards. Under current regulatory capital standards, banks are classified as
well capitalized, adequately capitalized or undercapitalized. Under such standards, a well-capitalized
bank is one that has a total risk-based capital ratio equal to or greater than 10%, a Tier 1 risk-based
capital ratio equal to or greater than 6%, and a Tier 1 leverage capital ratio equal to or greater
than 5%. The Banks total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage
capital ratios of 20.93%, 20.05% and 9.67%, respectively, at September 30, 2007 substantially exceed
the requirements for a well-capitalized bank. The Corporation (on a consolidated basis) is subject
to minimum risk-based and leverage capital requirements, which the Corporation substantially exceeded
at September 30, 2007.
Total stockholders equity increased by $3,947,000, from $95,561,000 at December 31, 2006 to $99,508,000
at September 30, 2007. The increase is largely attributable to net income of $8,444,000, as partially
offset by $3,254,000 in cash dividends declared and $2,527,000 expended for share repurchases. Also
contributing to the increase, but to a much lesser extent, are proceeds from the exercise of stock
options, stock-based compensation and unrealized gains on available-for-sale securities.
Stock Repurchase Program and Market Liquidity. Since 1988, the Corporation has had a stock repurchase program under which it has purchased,
from time to time, shares of its own common stock in market or private transactions. The Corporations
market transactions are generally intended to comply with the manner, timing, price and volume conditions
set forth in SEC Rule 10b-18 and therefore, with respect to such transactions, provide the Corporation
with safe harbor from liability for market manipulation under section 9(a)(2) and Rule 10b-5 of the
Securities Exchange Act of 1934.
The Corporation periodically reevaluates whether it wants to continue purchasing shares of its own
common stock in open market transactions under Rule 10b-18 or otherwise. Because the trading volume
in the Corporations common stock is limited, the Corporation believes that a reduction or discontinuance
of its share repurchase program could adversely impact market liquidity for its common stock, the
price of its common stock, or both. The publicly reported trading volume in the Corporations
common stock for the year ended September 30, 2007 was 628,547 shares, 4.6% of which resulted from
open market purchases by the Corporation under its share repurchase program.
Russell Microcap Index. Frank Russell Company maintains a family of U.S. equity indices. The indices are reconstituted in June
of each year based on market capitalization and do not reflect subjective opinions. All Indices are
subsets of the Russell 3000E Index, which represents most of the investable U. S. equity market.
The Corporations common stock is included in the Russell Microcap Index. The average market capitalization
of companies in the Russell Microcap Index is $300.9 million, the median market capitalization is
$260.1 million, the capitalization of the largest company in the index is $711.4 million, and the
capitalization of the smallest company in the index is $78.6 million. The Corporations market
capitalization as of September 30, 2007 was approximately $158 million.
The Corporation believes that inclusion in the Russell Microcap Index positively impacts the price,
trading volume and liquidity of its common stock. Conversely, if the Corporations market capitalization
falls below the minimum necessary to be included in the Russell Microcap Index at any future annual
reconstitution date, the Corporation believes that this could adversely affect the price, volume
and liquidity of its common stock.
Cash Flows. The Corporations primary sources of cash are deposit growth, maturities and amortization
of loans and investment securities, operations, and borrowing. 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 Corporations share repurchase program. During the first nine months
of 2007, the Corporations cash and cash equivalent position increased by $17,902,000. The increase
occurred primarily because cash provided by deposit growth, securities runoff, borrowed funds and
operations exceeded the cash needed to grow loans.
Total time deposits grew by $57,349,000 during the period, amounting to $242,128,000 at September 30,
2007. Of that amount, $237,124,000 matures within twelve months, and of that amount, $198,551,000
matures in three months or less.
Liquidity. The Bank has both internal and external sources of liquidity that can be used to fund loan growth
and accommodate deposit outflows. The Banks primary internal sources of liquidity are its overnight
position in federal funds sold, investment securities designated as available-for-sale, and maturities
and monthly payments on its investment securities and loan portfolios. At September 30, 2007, the
Bank had an overnight federal funds sold position of $7,000,000 and an available-for-sale securities
portfolio of $234,793,000.
The Bank is a member of the Federal Home Loan Bank of New York (FHLB) and has repurchase
agreements in place with a number of brokerage firms and commercial banks. In addition to customer
deposits, the Banks primary external sources of liquidity are secured borrowings in the form
of FHLB advances and repurchase agreements. However, neither the Banks FHLB membership nor
the repurchase agreements represent legal commitments on the part of the FHLB or repurchase agreement
counterparties to extend credit to the Bank. The amount that the Bank can potentially borrow from
these parties is dependent on, among other things, the amount of unencumbered eligible securities
that the Bank can use as collateral. At September 30, 2007, the Bank has unencumbered eligible securities
collateral of approximately $169 million.
The Bank can also purchase overnight federal funds on an unsecured basis under lines with two
other commercial banks. These lines in the aggregate amount of $25 million do not represent legal
commitments to extend credit on the part of the other banks.
As a backup to borrowing from the FHLB, 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, which is normally extended on a very short-term basis,
typically overnight, at a rate which is currently 50 basis points above the federal funds target
rate, 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.
Commercial checking deposits currently account for approximately 27% of the Banks total deposits.
Congress has been considering legislation that would allow corporate 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. Either could have a material
adverse impact on the Banks future results of operations.
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 157 Fair Value Measurements (SFAS No. 157).
This statement defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157
is effective for financial statements issued for fiscal years beginning after November 15, 2007.
Management is currently evaluating the impact of SFAS No. 157 on the Corporations consolidated
In September 2006, the
FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (EITF
06-4). This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after employment terminates. Depending on the contractual
terms of the split-dollar agreement, the required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or the future death benefit. EITF
06-4 is effective for fiscal years beginning after December 15, 2007. The adoption of EITF 06-4 is not expected to impact the Corporations consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159 The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 permits entities
to choose to measure certain financial assets and financial liabilities at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility
in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective as of the beginning
of an entitys first fiscal year that begins after November 15, 2007. Management is currently evaluating whether or not the fair value option will be applied to any of the Corporations
financial assets or financial liabilities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank invests in interest-earning
assets which are funded by interest-bearing deposits and borrowings, noninterest-bearing deposits, and capital. The Banks 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 Banks 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 Banks 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.
Because the Banks loans and investment securities
generally reprice slower than its interest-bearing liabilities, 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 deposit accounts as quickly or in the
same amount as increases in market interest rates, the magnitude of the negative impact will decline.
If the Bank does not increase its deposit rates at all, the impact should be positive. 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.
Conversely, a decrease in interest rates uniformly across the yield curve should initially have a positive
impact on the Banks net interest income. However, if the Bank does not or cannot decrease the
rates paid on its deposit accounts as quickly or in the same amount as decreases in market interest
rates, the magnitude of the positive impact will decline. If the Bank does not decrease its deposit
rates at all, the impact should be negative.
If interest rates decline, or have declined, 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 39% of the Banks average interest-earning
assets are 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 Banks interest-earning assets and interest-bearing
liabilities by repricing periods and then computing the difference, or interest-rate sensitivity
gap, between the assets and liabilities which are estimated to reprice during each time period and
cumulatively through the end of each time period.
Both interest rate sensitivity modeling and gap analysis involve a variety of significant estimates
and assumptions and are done at a specific point in time. Interest rate sensitivity modeling requires,
among other things, estimates of: (1) how much and when yields and costs on individual categories
of interest-earning assets and interest-bearing liabilities will adjust because of projected changes
in market interest rates; (2) future cash flows; (3) discount rates; and (4) decay or runoff rates
for nonmaturity deposits such as checking, savings, and money market accounts.
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 Banks
net interest income or net portfolio value.
The table that follows 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 following
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 Corporations net portfolio value at September 30, 2007 arrived at by discounting
estimated future cash flows at current market rates and (2) an estimate of net interest income on
a tax-equivalent basis for the year ending September 30, 2008 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. For
purposes of the base case, nonmaturity deposits are included in the calculation of net portfolio
value at their carrying amount. The rate change information in the table shows estimates of net portfolio
value at September 30, 2007 and net interest income on a tax-equivalent basis for the year ending
September 30, 2008 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 affected. In addition,
cash flows for nonmaturity deposits are based on a decay or runoff rate of six years. Also, 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 Banks interest-bearing deposit
accounts reprice faster than its loans and investment securities. However, if the Bank does not increase
the rates paid on its deposit accounts as quickly or in the same amount as increases in market interest
rates, the magnitude of the negative impact will decline. If the Bank does not increase its deposit
rates at all, the impact should be positive. 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, while rates
on all of the Banks interest earning assets could drop by 100 or 200 basis points, rates on
a number of its deposit products could not because they are priced at or below 100 basis points.
It is for this reason that in rates down 100 and 200 basis points the projected increases in net
interest income as compared to the base case are somewhat less than the projected decreases in rates
up 100 and 200 basis points.
Net Portfolio Value at
September 30, 2007
Net Interest Income
September 30, 2008
Managements Discussion and Analysis of Financial Condition and Results of Operations
and Quantitative and Qualitative Disclosures About Market Risk contain various forward-looking
statements with respect to financial performance and business matters. Such statements are generally
contained in sentences including the words may, expect, could,
should, 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.
(a) Evaluation of Disclosure Controls and Procedures
The Corporations Chief Executive Officer, Michael N. Vittorio, and Chief Financial Officer, Mark
D. Curtis, have evaluated the Corporations disclosure controls and procedures, as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Act), as of the end of
the period covered by this report. Based upon that evaluation, they have concluded that the Corporations
disclosure controls and procedures are effective in ensuring that information required to be disclosed
by the Corporation in the reports that it files or submits under the Act, as amended, is recorded,
processed, summarized, and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms. Such controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed is accumulated and communicated
to the Corporations management, including the principal executive and principal financial officers,
to allow timely decisions regarding disclosure.
(b) Changes in Internal Control Over Financial Reporting
There were no changes in internal control over financial reporting that occurred during the fiscal
quarter covered by this report that have materially affected, or are reasonably likely to materially
affect, the Corporations internal control over financial reporting.
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-Q, 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 Corporations or the Banks financial
position or results of operations for an annual period.
Item 2. Issuer Purchase of Equity Securities
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. The details of the Corporations purchases under the stock repurchase
program during the third quarter of 2007 are set forth in the table that follows.
Total Number of
Shares Purchased as
Part of Publicly
Maximum Number of
Shares that May Yet
Plans or Programs(1)
July 1, 2007 to July 31, 2007
August 1, 2007 to August 31, 2007
September 1, 2007 to September 30, 2007
All shares purchased by the Corporation under its stock repurchase program in the third quarter of
2007 were purchased under a 300,000 share plan approved by the Corporations board of directors
on January 17, 2006 and publicly announced on January 20, 2006. In addition, a 200,000 share plan
under which no shares have yet been purchased was approved by the Board on August 21, 2007 and publicly
announced on August 23, 2007. The Corporations share repurchase plans do not have fixed expiration
Item 5. Other Information
On November 8, 2007, the Corporation issued a press release regarding
the Corporations financial condition as of September 30, 2007 and its results of operations
for the nine and three month periods then ended. The press release is furnished as Exhibit 99.1 to
this Form 10-Q.
Item 6. Exhibits
a) The following exhibits are included herein.
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14(a) and
15d-14(a) of the Exchange Act)
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
Press Release dated November 8, 2007 regarding the nine and three month periods ended September
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.