10-Q 1 longisland10q8-04.txt 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) Quarterly Report Pursuant to Section 13 or 15(d) of [X] the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2004 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 No.: 0-29826 ------- LONG ISLAND FINANCIAL CORP. --------------------------- (Exact name of registrant as specified in its charter) Delaware 11-3453684 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One Suffolk Square ------------------ 1601 Veterans Memorial Highway ------------------------------ Islandia, New York 11749 ------------------ ------- (Address of Principal Executive Offices) (Zip Code) (631) 348-0888 -------------- (Registrant's telephone number, including area code) 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the Exchange Act): Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock par value $.01, per share. The registrant had 1,507,372 shares of Common Stock outstanding as of August 6, 2004. 2 FORM 10-Q LONG ISLAND FINANCIAL CORP. INDEX

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5 7 LONG ISLAND FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT Statements contained in this Form 10-Q which are not historical facts are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Amounts stated herein could vary as a result of market and other factors. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by Long Island Financial Corp. (the "Company") with the Securities and Exchange Commission from time to time. Such forward-looking statements may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated," "intend" and "potential." Examples of forward looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company include, but are not limited to, changes in: interest rates; general economic conditions; monetary and fiscal policies of the U. S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; the quality or composition of the loan or investment portfolios; demand for loan and non-deposit products; deposit flows; real estate values; the level of defaults, losses and prepayments on loans held by the Company in its portfolio or sold in the secondary markets; demand for financial services in the Company's market area; competition; accounting principles, policies, practices or guidelines; legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company's operations, pricing, products and services. The forward-looking statements are made as of the date of this Form 10-Q, and, except as required by applicable law, the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements. These risks and uncertainties should be considered in evaluating forward-looking statements, which speak only as of the date of this Form 10-Q, and undue reliance should not be placed on such statements. 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of Long Island Financial Corp. and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements included herein reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the six-month period ended June 30, 2004, are not necessarily indicative of the results of operations that may be expected for the entire fiscal year. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements, and notes thereto, included in the Company's 2003 Annual Report on Form 10-K. 6 8 The Company makes available through its Internet website, WWW.LICB.COM, its ------------ annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Such reports are free of charge and are available as soon as reasonably practicable after the Company electronically files such materials with, or furnishes it to, the Securities and Exchange Commission. 2. SECURITIES The following table sets forth certain information regarding amortized cost and estimated fair value of the securities held-to-maturity and available-for-sale as of the dates indicated:

On March 10, 2004, the Company complied with an issuer's tender offer which resulted in the redemption of a $1,000,000 par value corporate debt security classified as "held to maturity" and recognized a gain of $335,155. On March 10, 2004, as a result of that tender offer, the Company transferred the remaining $12.0 million par value of corporate debt securities with a market value of $13.5 million from the classification of "held-to-maturity" to "available-for-sale." On April 1, 2004, the Company sold the entire corporate debt securities portfolio recognizing a gain of $2.5 million, which is recorded in other operating income in the caption "net gain on sales and calls of securities." 3. LOANS, NET Loans, net, are summarized as follows:

7 9 AUTOMOBILE LOANS ---------------- The Company maintained a program of making non-recourse loans to a local automobile leasing company (the "third party") and received as security an assignment of each individual lease and a collateral interest in each automobile. The third party, in addition to providing complete servicing of the portfolio, was obligated for the repayment of the entire principal balance of each loan at the time each individual lease terminates. In March 2004, the Company learned that, due to liquidity issues and financial difficulties, the third party would not have the ability to fulfill its obligations. During the second quarter of 2004, the Company closely monitored issues concerning the third party's performance. The Company, acting collectively with nine other bank lenders to the third party, utilized internal resources and consulted with the third party enabling the third party to engage the services of experienced industry professionals, to ensure the performance of the servicing of the portfolio, and obtain the timely and orderly disposition of the collateral. The Company believes the course of action taken during the second quarter, along with the cooperation of the other nine banks, stabilized the portfolio and will ultimately lead to maximizing the value of disposed collateral. At June 30, 2004, the automobile loan portfolio consisted of approximately 1,695 loans and the balance of the portfolio amounted to $33.9 million. It represented 14.2% of the Bank's loan portfolio, net of unearned income and deferred fees. Approximately 86.4% of those loans mature through June 2006. Portfolio delinquencies at June 30, 2004, consisted of ten loans, 30-89 days past due, representing $151,443, or .4 % of the portfolio. There were no loans greater than 90 days past due. Since the portfolio was underwritten to lessees of high credit quality, those delinquency statistics remain favorable and are in line with the Company's expectations. The Company incurred operating expenses of $798,000 for the quarter ended June 30, 2004, and $855,000 for the six months ended June 30, 2004, relating to the automobile loan portfolio. Those expenses include, but are not limited to, expenses for legal services, portfolio servicing and administration, collateral verification and disposition services, and audit and accounting services. At June 30, 2004, approximately 74.3% of the operating expenses incurred related to the automobile loan portfolio were attributable to the satisfaction of certain liabilities of the third party and are not recurring. While the Company expects to incur future operating expenses related to the automobile loan portfolio, it expects those expenses to decrease as the portfolio matures. Recurring operating costs for portfolio servicing and collateral disposition are expensed when incurred and recorded in "automobile loan expense" in the consolidated statement of operations. ALLOWANCE FOR LOAN LOSSES ------------------------- The Company has continued to recognize losses in the automobile loan portfolio related to the shortfall between the principal balance of loans and the collateral value realized upon termination of the leases. The extent to which the Company can recover value will depend to a large extent on future market conditions for used automobiles combined with the success of the third party's national remarketing servicer's efforts. Based upon the Company's assessment of the portfolio and a review of recent collateral disposition activity, the Company made a provision for loan losses of $5.0 million for the three months ended June 30, 2004. Total charge-offs, relating to the automobile portfolio, amounted to $1.0 million for the six months ended June 30, 2004. 8 10 4. STOCK BASED COMPENSATION The Company applies the intrinsic-value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. That method includes Financial Accounting Standards Board (FASB) Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to account for its fixed-plan stock options. Under that method, compensation expense is recorded on the date of grant only if the current market price of the stock exceeds the exercise price. Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net income if the fair-value-based method had been applied to all stock options granted or vested in each period:

5. RECENT DEVELOPMENTS On May 26, 2004, the Board of Directors of the Company declared a quarterly dividend of $.12 per common share. The dividend was paid July 1, 2004, to shareholders of record as of June 18, 2004. 6. OTHER COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, the Bank enters into commitments to purchase investment securities. At June 30, 2004, the Bank had no outstanding commitments to purchase investment securities. 7. RECENT ACCOUNTING PRONOUNCEMENTS In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and requires that an issuer classify financial instruments that are considered a liability (or an asset in some circumstances) when that financial instrument embodies an obligation of the issuer. 9 11 SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. In November 2003, the FASB also issued a staff position that indefinitely deferred the effective date of SFAS No. 150 for certain mandatorily redeemable non-controlling interests. The Company currently believes that the deferral of the effective date of SFAS No. 150 will not have a material impact on its consolidated balance sheets or consolidated statements of operations when implemented. In December 2003, FASB issued FASB Interpretation No. 46(R) ("FIN 46(R)"), "Consolidation of Variable Interest Entities" which clarified certain provisions of a previously released interpretation. On December 31, 2003, the Company adopted FIN 46(R). Under the provisions of FIN 46(R), the Company deconsolidated LIF Statutory Trust I and accounts for its investment in the trust as an asset, its subordinated debentures as a liability, and the interest paid on those debentures as interest expense. As a result of the adoption of FIN 46(R), the Company's prior period presentations have been restated to conform to the current presentation. In March 2004, the FASB published an Exposure Draft, "Share-based Payment, an Amendment of FASB Statements No. 123 and 95." The Exposure Draft proposes changes in accounting that would replace existing requirements under SFAS 123 and APB Opinion No 25. Under the proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award would generally be measured at fair value at the grant date. Current accounting guidance requires that the expense relating to employee stock options only be disclosed in the footnotes to the financial statements. In March 2004, the SEC issued Staff Accounting Bulletin ("SAB") No. 105, "Application of Accounting Principles to Loan Commitments." SAB No. 105 clarifies certain provisions of SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amended portions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and is effective for periods following June 30, 2004. Together, SAB No. 105 and SFAS No. 149 provide guidance with regard to accounting for loan commitments. Under SAB No. 105 and SFAS No. 149, loan commitments relating to the origination of mortgage loans that will be held for sale shall be accounted for as derivative instruments by the issuer of the commitment. The adoption of SFAS No. 149 on April 1, 2004, did not have any impact on the Company's consolidated financial statements, as the Company has determined that the loan commitments relating to the origination of the mortgage loans held-for-sale outstanding as of June 30, 2004 do not constitute a derivative instrument and therefore do not fall under the scope of SFAS 149. Such loans are originated and sold simultaneously to an institutional investor and therefore do not carry any inherent interest rate risk. 10 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ------- ----------------------------------------------------------------------- OF OPERATIONS ------------- OVERVIEW The principal business of Long Island Financial Corp. consists of the operation of a wholly-owned subsidiary, Long Island Commercial Bank. Long Island Commercial Bank is a New York state-chartered commercial bank, which began operations in 1990, and is engaged in commercial and consumer banking in Islandia, New York and the surrounding communities of Suffolk, and Nassau counties and in Kings County. The Bank offers a broad range of commercial and consumer banking services, including loans to and deposit accounts for small and medium-sized businesses, professionals, high net worth individuals and consumers. The Bank is an independent local bank, emphasizing personal attention and responsiveness to the needs of its customers. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company identifies accounting policies critical to the Company's operations and understanding of the Company's results of operations. Certain accounting policies are considered to be important to the portrayal of the Company's financial condition, since they require management to make complex or subjective judgments, some of which may relate to matters that are inherently uncertain. ALLOWANCE FOR LOAN LOSSES The Company has determined that the methodology used in determining the level of its allowance for loan losses is critical in the presentation and understanding of the Company's consolidated financial statements. The allowance for loan losses represents management's estimate of probable losses inherent in the portfolio. The evaluation process for making provisions for loan losses is subject to numerous estimates and judgments. Changes in those estimates would have a direct impact on the provision for loan losses and could result in a change in the allowance. While management uses available information to determine losses on loans, future additions to the allowance may be necessary based on, among other things, unanticipated changes in economic conditions, particularly in Suffolk and Nassau counties. In evaluating the portfolio, management takes into consideration numerous factors such as the Company's loan growth, prior loss experience, present and potential risks of the loan portfolio, risk ratings assigned by lending personnel, ratings assigned by the independent loan review function, the present financial condition of the borrowers, current economic conditions, and other portfolio risk characteristics. The Company's formalized process for assessing the adequacy of the allowance for loan losses and the resultant need, if any, for periodic provisions to the allowance charged to income consists of both individual loan analyses and loan pool analyses. The individual loan analyses are periodically performed on individually significant loans or when otherwise deemed necessary and primarily encompass commercial real estate loans and commercial and industrial loans. Management believes that the Company's allowance for loan losses at June 30, 2004 is adequate to provide for estimated probable losses inherent in the portfolio. SECURITIES The fair value of securities classified as held-to-maturity or available-for-sale is based upon quoted market prices. If quoted market prices are not available, fair values are extrapolated from the quoted prices of similar instruments. 11 13 DEFERRED TAX ASSETS The Company uses estimates of future earnings to support the position that the benefit of its deferred tax assets will be realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced. FINANCIAL CONDITION Total assets were $545.5 million as of June 30, 2004, an increase of $20.8 million, or 4.0%, from $524.7 million at December 31, 2003. The increase primarily was due to an increase in the securities available-for-sale portfolio, offset in part by decreases in cash and due from banks, federal funds sold, and the securities held-to-maturity portfolio. Securities available-for-sale increased $52.7 million, or 24.3%, to $269.7 million at June 30, 2004, compared to $217.0 million at December 31, 2003. The increase in securities available-for-sale was due to increased purchase activity. The decrease from period to period in federal funds sold and cash and due from banks, of $25.2 million and $10.1 million, respectively, primarily reflects the decrease of seasonal municipal funds on deposit at December 31, 2003. Loans, net of unearned income and deferred fees, increased $13.1 million, from $226.1 million at December 31, 2003, to $239.2 million at June 30, 2004, reflecting increases primarily in commercial real estate loans and commercial and industrial loans. Deferred tax assets increased $4.0 million, or 269.9%, from $1.5 million at December 31, 2003, to $5.4 million at June 30, 2004 reflecting an increase in deferred tax assets which, in turn, was directly related to both the $3.9 million increase in accumulated other comprehensive loss at June 30, 2004, and the $5.5 million provision for loan losses for the six months ended June 30, 2004. Total liabilities increased $24.6 million, or 4.9%, from $498.3 million at December 31, 2003, to $522.9 million at June 30, 2004. The increase in total liabilities was due principally to an increase in federal funds purchased and other borrowings, partially offset by a decrease in total deposits. The Company utilizes borrowings, primarily in the form of overnight federal funds purchased, securities sold under agreements to repurchase, and medium and convertible term advances from the Federal Home Loan Bank of New York (FHLBNY), as a low cost funding source to fund asset growth. The decrease in total deposits is primarily the result of a decrease in NOW and money market deposits of $46.6 million, or 37.7%, from $123.7 million at December 31, 2003 to $77.1 million at June 30, 2004, attributable to the withdrawal of seasonal municipal funds on deposit at December 31, 2003. Other time deposits decreased $12.5 million, or 14.6%, from $85.5 million at December 31, 2003, to $73.0 million at June 30, 2004 as the Bank strives to substitute low cost demand, savings, NOW and money market deposits for time deposits. There were $69.9 million of federal funds purchased and securities sold under agreements to repurchase at June 30, 2004. Other borrowings increased $15.0 million, or 24.6%, to $76.0 million at June 30, 2004. Stockholders' equity decreased $3.8 million, or 14.4%, from $26.4 million at December 31, 2003, to $22.6 million at June 30, 2004. The decrease in stockholders equity was attributable to a $3.9 million increase in accumulated other comprehensive loss relating to the securities available-for-sale portfolio, and dividends declared of $361,000. Offsetting in part those decreases, were $427,000 of stock issued through the exercise of stock options and the dividend reinvestment and stock purchase plan, and $24,000 of net income for the six months ended June 30, 2004. 12 14 ANALYSIS OF NET INTEREST INCOME Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon both the volume of interest-earning assets and interest-bearing liabilities and the rates earned or paid on them. The following tables set forth certain information relating to the Company's consolidated average balance sheets and its consolidated statements of operations for the three and six months ended June 30, 2004 and 2003, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing annualized income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively. Average balances are derived from average daily balances. Average loan balances include non-performing loans although the amount of non-performing loans is not material. 13 15

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15 17 COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003 GENERAL The Company reported a net loss of $897,000, or a basic loss per share of $.60 for the three months ended June 30, 2004, compared to net income of $782,000, or basic earnings per share of $.53, for the three months ended June 30, 2003. The loss recognized for the quarter ended June 30, 2004, is attributable to an increase in the Company's provision for loan losses relating to its automobile loan portfolio. INTEREST INCOME Interest income increased $699,000, or 11.8%, for the three months ended June 30, 2004, compared to the three months ended June 30, 2003. That increase was attributable to the $80.6 million, or 18.4%, increase in the average balance of interest-earning assets from $437.9 million for the three months ended June 30, 2003, to $518.5 million for the three months ended June 30, 2004. The increase in income from the increase in the average balance of interest earning assets was offset in part by a 30 basis point decrease in the average yield on interest-earning assets from 5.42% for the three months ended June 30, 2003, to 5.12% for the comparable 2004 period. The decrease in average yield on interest-earning assets was attributable to an 8 basis point decrease in yield on securities which declined from 4.01% for the three months ended June 30, 2003, to 3.93% for the three months ended June 30, 2004, and a 51 basis point decrease in the average yield on loans, net, from 7.06% for the three months ended June 30, 2003, to 6.55% for the comparable 2004 period. Partially offsetting the declines in yield from period to period was a $72.1 million, or 34.6% increase in the average balance of securities from $208.7 million for three months ended June 30, 2003, to $280.8 million for the three months ended June 30, 2004, and a $21.0 million, or 9.8% increase in the average balance of loans, net, from $215.4 million for the three months ended June 30, 2003, to $236.4 million for the comparable 2004 period. INTEREST EXPENSE Interest expense for the three months ended June 30, 2004 was $2.2 million, compared to $2.4 million for the three months ended June 30, 2003, a decrease of $135,000, or 5.7%. The decrease was attributable to a 51 basis point decrease in the average cost of interest-bearing liabilities from 2.61% for the three months ended June 30, 2003 to 2.10% for the three months ended June 30, 2004. The decrease in average cost was partially offset by a $62.7 million, or 17.4%, increase in the average balance of total interest-bearing liabilities from $361.7 million for the three months ended June 30, 2003 to $424.4 million for the three months ended June 30, 2004. The increase in average interest-bearing liabilities, when compared to the prior year period, reflects increases of $23.7 million in the average balance of interest-bearing deposits and $39.1 million in the average balance of borrowed funds. There was no change in the average balance of subordinated debentures from June 30, 2003, to June 30, 2004. Interest expense on interest-bearing deposits decreased $287,000, or 20.0%, for the three months ended June 30, 2004, from $1.4 million for the corresponding 2003 period to $1.1 million for the current period. That decrease was primarily due to a 53 basis point decrease in the average rate paid on interest-bearing deposits from 2.02% for three months ended June 30, 2003 to 1.49% for the corresponding period in 2004. Offsetting, in part, the decrease in the average rate paid was an increase in the average balance of interest-bearing deposits of $23.7 million for the three months ended June 30, 2004 from the corresponding period in 2003. The increase in the average balance of interest-bearing deposits was the result of increases in the average balance of savings deposits of $13.1 million, or 14.8%, and in the average balances of NOW and money market deposits of $27.3 million, or 30.5% from period to period. 16 18 Interest expense on borrowed funds increased $151,000, or 21.0%, from $720,000 for the three months ended June 30, 2003, to $871,000 for the three months ended June 30, 2004. The increase was primarily due to the average balance of borrowed funds, which increased from $69.9 million for the three months ended June 30, 2003 to $109.0 million for the three months ended June 30, 2004. Offsetting in part the cost from the increase in the average balance was a 92 basis point decrease in the average cost of borrowed funds from 4.12% for the 2003 period, to 3.20% for the 2004 period. NET INTEREST INCOME Net interest income increased by $834,000, or 23.4%, from $3.6 million for the three months ended June 30, 2003, to $4.4 million for the three months ended June 30, 2004. The average cost of total interest-bearing liabilities for the period decreased 51 basis points from 2.61% in the 2003 period to 2.10% in the 2004 period. The average yield on total interest-earning assets for the period decreased 30 basis points from 5.42% in the 2003 period to 5.12% in the 2004 period. The net interest rate spread increased 21 basis points, from 2.81% for the three months ended June 30, 2003, to 3.02% for the three months ended June 30, 2004. PROVISION FOR LOAN LOSSES The Company made a $5,000,000 provision for loan losses for the three months ended June 30, 2004, compared to no provision for loan losses made for the three months ended June 30, 2003. The determination to increase the provision for loan losses for the three months ended June 30, 2004 reflects management's qualitative and quantitative assessment of the loan portfolio, net charge-offs and collection of delinquent loans. The allowance for loan losses amounted to $6.7 million and $2.3 million at June 30, 2004 and December 31, 2003, respectively. The allowance for loan losses as a percentage of loans was 2.81% and 1.01% at June 30, 2004 and December 31, 2003, respectively. The following table sets forth information regarding non-accrual loans and loans delinquent 90 days or more and still accruing interest at the dates indicated. It is the Company's general policy to discontinue accruing interest on all loans, which are past-due more than 90 days or when, in the opinion of management, such suspension is warranted. When a loan is placed on non-accrual status, the Company ceases the accrual of interest owed and previously accrued interest is charged against interest income. Loans are generally returned to accrual status when principal and interest payments are current, there is reasonable assurance that the loan is fully collectible and a consistent record of performance has been demonstrated.

17 19 OTHER OPERATING INCOME Other operating income increased $2.4 million, to $3.5 million for the three months ended June 30, 2004, as compared to the three months ended June 30, 2003. That increase was primarily attributable to an increase in net gain on sales and calls of securities of $2.3 million, and a $100,000, or 19.3%, increase in service charges on deposit accounts reflecting an increased fee structure and overall growth in the depositor base. OTHER OPERATING EXPENSES Other operating expenses increased $1.0 million, or 29.5%, from $3.4 million for the three months ended June 30, 2003, to $4.4 million for the three months ended June 30, 2004. The increase in operating expenses stemmed from expenses associated with the automobile loan portfolio of $798,000. INCOME TAXES For the three months ended June 30, 2004, an income tax benefit of $592,000 was recorded for the three months ended June 30, 2004, compared to income tax expense of $434,000 for the three months ended June 30, 2003. For the three months ended June 30, 2004, the Company recorded a loss before income taxes of $1.4 million, compared to income before income taxes of $1.2 million for the three months ended June 30, 2003. COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 GENERAL The Company reported net income of $24,000, or diluted earnings per share of $.02 for the six months ended June 30, 2004, compared to $782,000, or diluted earnings per share of $1.03 for the six months ended June 30, 2003. INTEREST INCOME Interest income increased $950,000, or 7.9%, for the six months ended June 30, 2004, compared to the six months ended June 30, 2003. That increase was attributable to the $70.6 million, or 16.1%, increase in the average balance of interest-earning assets from $438.6 million for the six months ended June 30, 2003, to $509.1 million for the six months ended June 30, 2004. The increase in income from the increase in the average balance of interest earning assets was offset in part by a 39 basis point decrease in the average yield on interest-earning assets from 5.49% for the six months ended June 30, 2003, to 5.10% for the comparable 2004 period. The decrease in average yield on interest-earning assets was attributable to a 23 basis point decrease in yield on securities which declined from 4.09% for the six months ended June 30, 2003, to 3.86% for the six months ended June 30, 2004, and a 48 basis point decrease in the average yield on loans, net, from 7.06% for the six months ended June 30, 2003, to 6.58% for the comparable 2004 period. Partially offsetting the declines in yield from period to period was a $60.6 million, or 28.3% increase in the average balance of securities from $214.3 million for the six months ended June 30, 2003, to $274.9 million for the six months ended June 30, 2004, and a $17.9 million, or 8.3% increase in the average balance of loans, net of unearned income and deferred fees, from $215.2 million for the six months ended June 30, 2003, to $233.1 million for the comparable 2004 period. 18 20 INTEREST EXPENSE Interest expense for the six months ended June 30, 2004 was $4.4 million, compared to $4.8 million for the three months ended June 30, 2003, a decrease of $311,000, or 6.5%. The decrease was attributable to a 46 basis point decrease in the average cost of interest-bearing liabilities from 2.59% for the six months ended June 30, 2003 to 2.13% for the six months ended June 30, 2004. The decrease in average cost was partially offset by a $50.8 million, or 13.8%, increase in the average balance of total interest-bearing liabilities from $366.8 million for the six months ended June 30, 2003 to $417.6 million for the six months ended June 30, 2004. The increase in average interest-bearing liabilities, when compared to the prior year period, reflects increases of $20.7 million in the average balance of interest-bearing deposits and $30.0 million in the average balance of borrowed funds. There was no change in the average balance of subordinated debentures from June 30, 2003, to June 30, 2004. Interest expense on interest-bearing deposits decreased $552,000, or 18.8%, for the six months ended June 30, 2004, from $2.9 million for the corresponding 2003 period to $2.4 million for the current period. That decrease was primarily due to a 48 basis point decrease in the average rate paid on interest-bearing deposits from 2.01% for six months ended June 30, 2003 to 1.53% for the corresponding period in 2004. Offsetting, in part, the decrease in the average rate paid was an increase in the average balance of interest-bearing deposits of $20.7 million for the six months ended June 30, 2004 from the corresponding period in 2003. The increase in the average balance of interest-bearing deposits was the result of increases in the average balance of savings deposits of $17.6 million, or 20.6%, and in the average balances of NOW and money market deposits of $19.0 million, or 19.3% from period to period. Interest expense on borrowed funds increased $239,000, or 17.1%, from $1.4 million for the six months ended June 30, 2003, to $1.6 million for the six months ended June 30, 2004. The increase was primarily due to the average balance of borrowed funds, which increased from $66.5 million for the six months ended June 30, 2003 to $96.6 million for the six months ended June 30, 2004. Offsetting in part the cost from the increase in the average balance was an 81 basis point decrease in the average cost of borrowed funds from 4.20% for the 2003 period, to 3.39% for the 2004 period. NET INTEREST INCOME Net interest income increased by $1.2 million, or 17.3%, from $7.3 million for the six months ended June 30, 2003, to $8.5 million for the three months ended June 30, 2004. The average cost of total interest-bearing liabilities for the period decreased 46 basis points from 2.59% in the 2003 period to 2.13% in the 2004 period. The average yield on total interest-earning assets for the period decreased 39 basis points from 5.49% in the 2003 period to 5.10% in the 2004 period. The net interest rate spread increased 7 basis points, from 2.90% for the six months ended June 30, 2003, to 2.97% for the period ended June 30, 2004. PROVISION FOR LOAN LOSSES The Company made a $5,500,000 provision for loan losses for the six months ended June 30, 2004, compared to a $60,000 provision for loan losses made for the six months ended June 30, 2003. The determination to increase the provision for loan losses for the three months ended June 30, 2004 reflects management's qualitative and quantitative assessment of the loan portfolio, net charge-offs and collection of delinquent loans. The allowance for loan losses amounted to $6.7 million and $2.3 million at June 30, 2004 and December 31, 2003, respectively. The allowance for loan losses as a percentage of loans was 2.81% and 1.01% at June 30, 2004 and December 31, 2003, respectively. 19 21 OTHER OPERATING INCOME Other operating income increased $3.2 million, to $5.2 million for the six months ended June 30, 2004, as compared to the six months ended June 30, 2003. That increase was primarily attributable to an increase in net gain on sales and calls of securities of $2.6 million, an increase in income relating to earnings on bank owned life insurance which resulted in proceeds of $192,000 received in conjunction with the death of the Company's Chairman, and an increase from service charges on deposit accounts. The latter increased $290,000, or 29.6%, reflecting an increased fee structure and overall growth in the depositor base. OTHER OPERATING EXPENSES Other operating expenses increased $1.6 million, or 24.3%, from $6.8 million for the six months ended June 30, 2003, to $8.4 million for the six months ended June 30, 2004. The increase in operating expenses stemmed from expenses associated with the automobile loan portfolio of $855,000 and the Bank's continued planned branch expansion. INCOME TAXES For the six months ended June 30, 2004, an income tax benefit of $193,000 was recorded for the six months ended June 30, 2004, compared to income tax expense of $880,000 for the six months ended June 30, 2003. For the six months ended June 30, 2004, the Company recorded a loss before income taxes of $169,000, compared to income before income taxes of $2.5 million for the six months ended June 30, 2003. LIQUIDITY Liquidity management for the Company requires that funds be available to pay all deposit withdrawal and maturing financial obligations and meet credit funding requirements promptly and fully in accordance with their terms. For most banks, including the Bank, maturing assets provide only a limited portion of the funds required to pay maturing liabilities over a short time frame. The balance of the funds required is provided by liquid assets and the acquisition of additional liabilities, making liability management integral to liquidity management in the short term. The Company maintains levels of liquidity that it considers adequate to meet its current needs. The Company's principal sources of cash include incoming deposits, the repayment of loans and sales of investment securities. When cash requirements increase faster than cash is generated, either through increased loan demand or withdrawal of deposited funds, the Company can arrange for the sale of loans or liquidate available-for-sale securities. It can also access its lines of credit, totaling $9.5 million, with unaffiliated financial institutions, which enable it to borrow federal funds on an unsecured basis. In addition, the Company has available lines of credit with the Federal Home Loan Bank of New York equal to 12.8% of the Company's assets at June 30, 2004, which enable it to borrow funds on a secured basis. The Company could also engage in other forms of borrowings, including repurchase agreements. 20 22 At June 30, 2004, the Company's other borrowings consisted of convertible and medium term advances from the FHLB. The convertible feature of these advances allows the FHLB, at a specified call date and quarterly thereafter, to convert those advances into replacement funding for the same or a lesser principal amount, based on any advance then offered by the FHLB, at then current market rates. If the FHLB elects to convert those advances, the Bank may repay any portion of the advances without penalty. The convertible advances are secured by various mortgage-backed, callable U.S. agency securities, and certain other qualifying commercial real-estate collateral. At June 30, 2004, convertible and medium term advances outstanding were as follows:

The primary investing activities of the Company are the purchase of securities available-for-sale and the origination of loans. During the six months ended June 30, 2004, and 2003, the Company's purchases of securities that were classified available-for-sale totaled $577.7 million and $487.5 million, respectively. Loan originations, net of principal repayments on loans, totaled $14.4 million and $.3 million for the six months ended June 30, 2004, and 2003, respectively. Borrowings, principal repayments and maturities of securities were used primarily to fund those activities. CAPITAL RESOURCES The Bank is subject to the risk based capital guidelines administered by the banking regulatory agencies. The guidelines currently require all banks to maintain a minimum ratio of total risk based capital to total risk weighted assets of 8%, including a minimum ratio of Tier 1 capital to total risk weighted assets of 4% and a Tier 1 capital to average adjusted assets of 4%. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by the FDIC, the Bank's primary federal regulator that, if undertaken, could have a direct material effect on the Bank's financial statements. As of December 31, 2003, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. In accordance with the requirements of the FDIC and the New York State Banking Department, the Bank must meet certain measures of capital adequacy with respect to leverage and risk-based capital. As of June 30, 2004, the Bank exceeded those requirements with a leverage capital ratio, risk-based capital ratio and total-risk based capital ratio of 5.40%, 9.57%, and 10.83%, respectively. The Company achieves what it considers "capital adequacy" through the continuous monitoring of its financial performance and plans for expansion. Sources of the Company's capital are generated primarily through current period earnings and the issuance of common stock via the dividend reinvestment plan or the exercise of stock options. Uses of capital currently result from the payment of 21 23 dividends on common stock or the repurchase of common stock through a stock repurchase program. In February 2004, the Board of Directors, approved a 5% stock repurchase program that would enable the Company to repurchase approximately 74,000 shares of its outstanding common stock. There have been no repurchases made under that stock purchase program since its announcement. In determining the extent and timing of stock repurchase programs, in addition to capital adequacy, the Company considers, the effect on the Company's financial condition, average daily trading volume, and listing requirements applicable to the NASDAQ National Market System. At June 30, 2004, the Company held 336,900 shares of treasury stock at an average cost of $12.40 per share. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------- ---------------------------------------------------------- The principal objective of the Company's interest rate management is to evaluate the interest rate risk inherent in certain balance sheet accounts, determine the level of risk appropriate given the Company's business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with guidelines approved by the Board of Directors. Through such management, the Company seeks to reduce the vulnerability of its operations to changes in interest rates. The Board has directed the Investment Committee to review the Company's interest rate risk position on a quarterly basis. Funds management is the process by which the Company seeks to maximize the profit potential which is derived from the spread between the rates earned on interest-earning assets and the rates paid on interest-bearing liabilities through the management of various balance sheet components. It involves virtually every aspect of the Company's management and decision-making process. Accordingly, the Company's results of operations and financial condition are largely dependent on the movements in market interest rates and the Company's ability to manage its assets and liabilities in response to such movements. At June 30, 2004, 78.5% of the Company's gross loans had adjustable interest rates and its loan portfolio had an average weighted maturity of 9.2 years. At that date, $52.0 million, or 18.8%, of the Company's securities had adjustable interest rates, and its securities portfolio had a weighted average contractual maturity of 8.3 years. At June 30, 2004, the Company had $50.3 million of certificates of deposit with maturities of one year or less and $11.9 million of deposits over $100,000, which tend to be less stable sources of funding when compared to core deposits, and which represented 14.7% of the Company's interest-bearing liabilities. In a rising interest rate environment the Company's interest-bearing liabilities may adjust upwardly more rapidly than the yield on its adjustable-rate assets. Thus, due to the Company's level of shorter term certificates of deposit, federal funds purchased and securities sold under agreements to repurchase, the Company's cost of funds may increase at a greater rate in a rising rate environment than if it had a greater amount of core deposits which, in turn, may adversely affect net interest income and net income. The Company's interest rate sensitivity is monitored by management through the use of a quarterly interest rate risk analysis model which evaluates (i) the potential change in the net interest income over the succeeding four quarter period and (ii) the potential change in the fair market value of equity, of the Company ("Net Economic Value of Equity"), which would result from an instantaneous and sustained interest rate change of zero and plus or minus 200 basis points in 100 basis point increments. 22 24 At June 30, 2004, the effect of instantaneous and sustained interest rate changes on the Company's Net Interest Income and Net Economic Value of Equity are as follows:

ITEM 4. CONTROLS AND PROCEDURES ------- ----------------------- 1. Evaluation of disclosure controls and procedures. The Company maintains ------------------------------------------------ controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures as of the end of the period covered by the report required by paragraph (b) of Section 240.13a-15 or Section 240.15d-15 of this chapter, the Chief Executive and Chief Financial officers of the Company concluded that the Company's disclosure controls and procedures were adequate. 2. Changes in internal controls. The Company made no significant changes in ---------------------------- its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the Chief Executive and Chief Financial officers. PART II - OTHER INFORMATION --------------------------- ITEM 1. LEGAL PROCEEDINGS ------- ----------------- Not applicable. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF ------- --------------------------------------------------------------- EQUITY SECURITIES ----------------- In February 2004, the Board of Directors approved a 5% stock repurchase program that would enable the Company to repurchase approximately 74,000 shares of its outstanding common stock. There have been no repurchases made under that stock purchase program since its announcement. ITEM 3. DEFAULTS UPON SENIOR SECURITIES ------- ------------------------------- Not applicable. 23 25 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------- --------------------------------------------------- The Company's Annual Meeting of Stockholders was held on April 28, 2004, and the following individuals were elected as Directors for a term of three years each:

ITEM 5. OTHER INFORMATION ------- ----------------- Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ------- --------------------------------

b. REPORTS ON FORM 8-K ------------------- On April 27, 2004 the Company filed a Form 8-K to disclose that the Company had issued a press release to announce the Company's financial results for the three months ended March 31, 2004. On July 26, 2004 the Company filed a Form 8-K to disclose that the Company had issued a press release to announce the Company's financial results for the three and six months ended June 30, 2004. 24 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf of the undersigned thereunto duly authorized. LONG ISLAND FINANCIAL CORP. (REGISTRANT) Date: August 16, 2004 By: /s/ Douglas C. Manditch ----------------------- Douglas C. Manditch President and Chief Executive Officer Date: August 16, 2004 By: /s/ Thomas Buonaiuto -------------------- Thomas Buonaiuto Vice President and Treasurer 25

LONG ISLAND FINANCIAL CORP 10-Q