The First of Long Island
Annual Report 2008

Plain-text annual report

Defining the Future 2008 Annual Report 18% Total assets grew $193 million or 18% to $1.26 billion $12,962,000 Historical record profits of $12,962,000 $1.78 Earnings per share grew by 17.9% or 27 cents per share tab le of contents President’s message seLected financi aL data board of directors & eXecUtiVe officers branch Locations branch eXP ansion ProdUcts & ser Vices PersonaL ser Vice Looking ahead commUnity inVoLVement financiaLs officers & offi ciaL staff bUsiness adVi sory board 2 - 3 4 5 6 - 7 8 9 10 11 12 13 - 59 60 61 14% Cash dividends increased 14%, or 8 cents per share 6% Deposits grew $51 million or 6% 37% Commercial Mortgages grew $54 million or 37% e g a s s e M s ’ t n e d i s e r P 2 michaeL n. Vittorio, President & chief executive officer Dear Shareholder, 2008 was one of the most challenging years for banking and the financial services industry. Our philosophy of balanced and disciplined growth, coupled with sound credit underwriting, paid off during this tumultuous period. To date, we have only a handful of relatively small delinquencies; our capital is above that of our peer group, and we have a strong liquidity position. We say it often within the Bank.....we must remain measured and disciplined, yet I am sure our growth in footings and earnings has not escaped your attention. On an average year-to-date basis, Commercial Mortgages grew $54 million, or 37%. Our Residential Mortgages grew $19 million, or 10%, and our Home Equity loans grew $17 million, or 23%. Our average year-to-date deposits outperformed most of our peer group, growing $51 million, or 6%. We feel our deposit growth was While these accolades are certainly I would like to thank our directly related to new branch satisfying, they have not lulled us shareholders for the confidence openings, lending, and local market into a sense of complacency, and we you have expressed in our Bank. recognition of our institution’s are ever watchful of the economic I want to assure our customers financial strength. During this environment in which we operate. of our continued focus on service same time period, we maintained As we enter 2009, we foresee quality, and want to applaud our a solid net interest margin of new challenges for the banking employees for their high energy 4.12%, which again reflected our industry in terms of managing level, strong work ethic and adherence to disciplined and interest rate risk, namely, inflation. dedication to the needs of those measured growth. Earnings per We are already repositioning our they serve. The First National share grew from $1.51 last year balance sheet to prepare for this Bank of Long Island is positioned to $1.78 this year, representing an challenge, and we will continue to as well as any institution can be in increase of $.27, or 17.9%. This look at each new business situation this economic climate. We remain performance did not go unnoticed. with a sense of urgency and a long- committed to the principles of a On October 27, 2008, Newsday term view. We are determined steady and consistent management reported that our stock was up 10% not to abandon the principles of approach that have guided us in 2008, making it Long Island’s measured and disciplined growth over the years, as we continue to best performing stock. For the full that have given us the financial build shareholder value through year 2008, our stock was up 28%. success we experienced in the past, sustainable and profitable long- and again this year. term growth. Michael N. Vittorio President & Chief Executive Officer 3 Selected Financial Data The following is selected consolidated financial data for the past five years. This data should be read in conjunction with the information contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the accompanying consolidated financial statements and related notes. Income Statement Data Interest Income Interest Expense Net Interest Income Provision for Loan Losses Net Income Per Share Data Basic Earnings Diluted Earnings Cash Dividends Declared Dividend Payout Ratio Stock Splits/Dividends Declared Book Value Balance Sheet Data At Year End Total Assets Loans Allowance for Loan Losses Deposits Borrowed Funds Stockholders’ Equity Average Balance Sheet Data Total Assets Loans Allowance for Loan Losses Deposits Borrowed Funds Stockholders’ Equity 2008 2007 2006 2005 2004 $ 59,686,000 16,743,000 42,943,000 1,945,000 12,962,000 $ 53,023,000 16,269,000 36,754,000 575,000 11,482,000 $ 49,000,000 12,949,000 36,051,000 670,000 11,227,000 $ 42,689,000 7,426,000 35,263,000 470,000 12,277,000 $ 38,407,000 3,665,000 34,742,000 356,000 12,081,000 $1.79 1.78 .66 37.08% - $14.25 $1.52 1.51 .58 38.41% 2-for-1 $13.73 $1.47 1.45 .50 34.48% - $12.60 $1.57 1.55 .44 28.06% - $11.79 $1.48 1.45 .39 26.90% - $11.37 $ 1,261,609,000 $ 1,069,019,000 525,539,000 4,453,000 869,038,000 92,110,000 102,384,000 658,134,000 6,076,000 900,337,000 251,122,000 102,532,000 $ 954,166,000 449,465,000 3,891,000 824,797,000 28,143,000 95,561,000 $ 944,156,000 380,492,000 3,282,000 788,011,000 60,195,000 90,698,000 $ 917,778,000 342,437,000 2,808,000 771,250,000 49,654,000 90,240,000 $ 1,181,655,000 $ 1,003,240,000 480,166,000 4,167,000 868,421,000 32,705,000 98,402,000 572,356,000 4,947,000 919,490,000 157,275,000 100,710,000 $ 977,232,000 418,746,000 3,609,000 842,399,000 37,989,000 93,064,000 $ 978,869,000 359,288,000 3,072,000 818,842,000 65,714,000 90,403,000 $ 935,278,000 336,587,000 2,655,000 799,458,000 38,682,000 92,248,000 Financial Ratios Return on Average Assets (ROA) 1.10% Return on Average Stockholders’ Equity (ROE) 12.87% 8.52% Average Equity to Average Assets 1.14% 11.67% 9.81% 1.15% 12.06% 9.52% 1.25% 13.58% 9.24% 1.29% 13.10% 9.86% Stock Prices The Corporation’s Common Stock trades on The Nasdaq Capital Market tier of The Nasdaq Stock Market under the symbol FLIC. The following table sets forth high and low sales prices for the years ended December 31, 2008 and 2007. At December 31, 2008, there were 600 stockholders of record of the Corporation’s Common Stock. The number of stockholders of record includes banks and brokers who act as nominees, each of whom may represent more than one stockholder. 2008 2007 Quarter High Low High Low First $ 19.49 $ 18.25 $ 22.89 $ 21.30 Second Third Fourth 21.00 24.50 24.45 18.53 18.55 20.00 23.99 22.00 20.99 20.20 17.50 18.04 a t a D l a i c n a n i F d e t c e l e S 4 Board of Directors – The First of Long Island Corporation allen e. busching Principal b&b capital (consulting and private investment) William H.J. Hoefling CEO – Managing Member crystal Pond capital Partners LLc (equity investments) J. Douglas Maxwell Jr. Chief Financial Officer nirx medical technologies LLc (medical instrumentation) Paul t. canarick President & Principal Paul todd, inc. (construction company) alexander l. cover Management Consultant self employed (financial consulting) Howard thomas Hogan Jr., esq. Director hogan & hogan (attorney at law) stephen V. Murphy President s.V. murphy & co., inc. (investment banking) John t. lane Retired Managing Director J.P. morgan & co. Milbrey Rennie taylor Strategic and Media Consultant Walter c. teagle III Non-executive Chairman President teagle management, inc. (private investment company) Michael n. Vittorio President & Chief Executive Officer fRoM left to RIGHt: (standing): aLeXander L. coVer, J. doUgLas maXweLL Jr., stePhen V. mUrPhy, miLbrey rennie tayLor, michaeL n. Vittorio, aLLen e. bUsching, PaUL t. canarick, and howard thomas hogan Jr., esq. (sitting): John t. Lane, waLter c. teagLe iii, wiLLiam h.J. hoefLing Executive Officers – The First National Bank of Long Island fRoM left to RIGHt: (standing): brian J. keeney, donaLd L. manfredonia, michaeL n. Vittorio, richard kick and John grasso; (sitting): saLLyanne k. baLLweg and mark d. cUrtis Michael n. Vittorio President & Chief Executive Officer sallyanne K. ballweg Senior Executive Vice President Mark D. curtis Executive Vice President Chief Financial Officer & Cashier John Grasso Executive Vice President Distribution Executive brian J. Keeney Executive Vice President Executive Trust Officer Richard Kick Executive Vice President Senior Operations Officer Donald l. Manfredonia Executive Vice President Senior Lending Officer B o a r d o f D i r e c t o r s & E x e c u t i v e O f fi c e r s 5 s n o i t a c o L h c n a r B 27 25 26 29 23 15 2 7 4 13 5 11 14 28 22 3 19 24 12 8 10 6 9 20 16 21 18 17 1 Full Service Offices BABYLON 42 deer Park avenue, babylon, ny 11702 (631) 422-1700 colleen a. Vogelsberg, Vice President & branch manager BAYVILLE 282 bayville avenue, bayville, new york 11709 coming soon! GARDEN CITY 1050 franklin avenue, garden city, ny 11530 (516) 742-6262 carol a. kolesar, Vice President & branch manager GLEN HEAD 10 glen head road, glen head, ny 11545 (516) 671-4900 John J. mulder Jr., Vice President & branch manager GREENVALE 7 glen cove road, greenvale, ny 11548 (516) 621-8811 christina marotta, Vice President & branch manager HUNTINGTON 253 new york avenue, huntington, ny 11743 (631) 427-4143 frank m. Plesche, Vice President & branch manager 1 2 3 4 5 6 7 8 9 10 11 12 LOCUST VALLEY 108 forest avenue, Locust Valley, ny 11560 (516) 671-2299 elizabeth a. materia, Vice President & branch manager MERRICK 1810 merrick avenue, merrick, ny 11566 (516) 771-6000 cathy c. o’malley, Vice President & branch manager NORTHPORT 711 fort salonga road, northport, ny 11768 (631) 261-4000 mary t. sullivan, Vice President & branch market manager NORTHPORT VILLAGE 105 main street, northport, ny 11768 (631) 261-0331 mary t. sullivan, Vice President & branch market manager OLD BROOKVILLE 209 glen head road, old brookville, ny 11545 (516) 759-9002 henry c. suhr, Vice President & branch manager ROCKVILLE CENTRE 310 merrick road, rockville centre, ny 11570 (516) 763-5533 Linda roldan, Vice President & branch manager 6 HICKSVILLE 106 old country road, hicksville, ny 11801 (516) 932-7150 Joyce c. graber, Vice President & branch manager NEW HYDE PARK 243 Jericho turnpike, new hyde Park, ny 11040 (516) 328-3100 Joanne maiorana-davis, Vice President & branch manager PORT JEFFERSON STATION davis Professional Park, 5225 nesconset highway building 4, suite 21, Port Jefferson station, ny 11776 (631) 928-4411 susan donovan, Vice President & branch manager VALLEY STREAM 133 east merrick road, Valley stream, ny 11580 (516) 825-0202 toni Valente, Vice President & branch manager MANHATTAN 232 madison avenue, new york, ny 10016 (212) 213-8111 Judith a. ferdinand, Vice President & branch manager 225 broadway, suite 703, new york, ny 10007 (212) 693-1515 gladys ruggiero, Vice President & branch manager 1501 broadway, suite 301, new york, ny 10036 (212) 278-0707 doris m. burkett, Vice President & branch manager 21 22 23 24 25 26 27 Select Service Banking Centers ROSLYN HEIGHTS 130 mineola avenue, roslyn heights, ny 11577 (516) 621-1900 frieda m. o’mara, Vice President & branch manager WOODBURY 800 woodbury road, suite m, woodbury, ny 11797 (516) 364-3434 allison stansfield, Vice President & branch manager 13 14 Commercial Banking Offices BOHEMIA 30 orville drive, bohemia, ny 11716 (631) 218-2500 kathleen crowe, Vice President & branch manager DEER PARK 60 east industry court, deer Park, ny 11729 (631) 243-2600 albert m. nordt Jr., Vice President & branch manager FARMINGDALE 22 allen boulevard, farmingdale, ny 11735 (631) 753-8888 sandy f. buttacy, Vice President & branch manager 2091 new highway, farmingdale, ny 11735 (631) 454-2022 Lorraine russo, Vice President & branch manager 15 16 17 18 19 20 GREAT NECK 536 northern boulevard, great neck, ny 11021 (516) 482-6666 Joanne bosco, Vice President & branch manager HAUPPAUGE 330 motor Parkway, hauppauge, ny 11788 (631) 952-2900 Joann diamond, Vice President & branch manager 28 29 LAKE SUCCESS 3000 marcus avenue, Lake success, ny 11042 (516) 775-3133 Jerry scansarole, Vice President & branch manager SMITHTOWN 285 middle country road, suite 104, smithtown, ny 11787 (631) 265-0200 frances a. koslow, Vice President & branch manager 7 we are one of the strongest and most financially stable community banks. It remains an ongoing initiative for us to build our franchise in the affluent communities of Nassau and Suffolk Counties, as well as Manhattan. Our branch-expansion strategy has proven to be successful and has allowed us to capture a share of the loan and deposit growth in our operating markets. opened a new commercial banking more branches in the future, our model Most recently, in February 2009, we of banking and reputation as the Bank have grown at rates that exceed our expectations, and as we continue to open office in Port Jefferson Station. Our recent grand openings in these markets service branch in Babylon, Long opportunities, we opened a new full- presence and capture new banking Conveniently located in the heart In an effort to expand our market Island, during the first quarter of 2008. is equipped with a 24-hour ATM, a of the Village of Babylon, the office talented staff of banking professionals n Our new full-service branch in Babylon, Long Island o i s n a p x E h c n a r B In addition, we converted our Garden City office from a commercial banking serve the needs of affluent households second quarter of 2008 in order to better office to a full-service branch during the will continue to be enhanced. and businesses in the area. and upscale decor. Manhattan and continue to grow during Since 2003, we have opened eight markets. With over $1 billion in assets, 28 “Where Everyone Knows Your Name™” this challenging time for financial branches and more than 275 employees, new branches on Long Island and in 8 10% Residential Mortgages grew $19 million or 10% 23% Home Equity loans were up $17 million or 23% fRoM left to RIGHt: mrs. PaLLadino, from the homestead school in garden city, and caroL a. koLesar, Vice President & branch manager of our garden city office. carol introduced the bank’s “teach children to save” program to mrs. Palladino’s kindergarten class. Since the upgrade of our technology ƒ infrastructure in 2007, and the ongoing investment we have made toward hiring talented professionals, the Bank has been able to deliver more value-added products and services to our customers, which has strengthened the value of our franchise. In 2008, we implemented several new programs, such as: ƒ The Teach Children to Save Program – Our branches have been actively involved with the schools in their communities, educating children about the importance of saving money and banking. This includes teaching in the classroom setting and providing banking-related premium items to students. Interest in the program grew to such an extent that in 2008, we introduced a new product called “K” Savings. The program was accompanied with a promotion in our full-service branches in which children who opened up a “K” Savings account not only received a free gift and a special 90-day rate, but also qualified to participate in our annual credit incentive plan where they are rewarded for saving money. ƒ Online Statements – Our online banking customers now have access to log into their accounts and view their statements online. 24/7 Banking – Customers now have greater access to 24/7 banking through our growing Internet and telephone banking services. ƒ Green Initiative – The First National Bank of Long Island implemented a “going green” initiative and developed a free e-statements campaign for personal banking customers. ƒ Online Education Center – The Bank introduced an online education center, found on our web site at www.fnbli. com. The resource provides useful information to our customers such as identity theft prevention, enhanced business security and online bill pay. st o cK PeRf oRMa nce The First National Bank of Long Island, corporately recognized as The First of Long Island Corporation (FLIC), is proud to have been recognized by Newsday as a top performing Long Island stock. On October 27, 2008, Newsday reported that “FLIC is up 10% in 2008, making it Long Island’s best performing stock.” For the full year 2008, our stock was up 28%. “Our commitment is to build value for our shareholders,” said Michael Vittorio, President & CEO of The First National Bank of Long Island, In addition to these accomplishments, in reaction to the news. “Our Bank credit quality continues to remain our remains financially sound, growing in strength. Unlike some of our mega-bank a controlled and disciplined way.” In addition, FLIC raised its quarterly dividend 20 percent in 2008, and when compared to competitor Long Island banks, its stock performance clearly overshadowed the others, as it was one of the few to see a continued upward trend toward the end of the calendar year, despite the nation’s economic woes. competitors that experienced credit quality problems, insufficient capital and liquidity issues, we have no exposure to the sub-prime mortgages that have caused these issues in the current market. The First National Bank of Long Island has excellent credit quality, a capital level well beyond that of our peer group and no liquidity problems. The emphasis on credit culture and underwriting quality loans will continue within our organization. We remain an extremely strong financial institution and are poised for future expansion throughout the Long Island and Manhattan marketplaces. P r o d u c t s & S e r v i c e s 9 e c i v r e S l a n o s r e P 10 Service quality is what differentiates us from our competitors. Our goal is to build long-term customer relationships with affluent businesses and consumers by providing superior service that is not available from the large mega banks. We have established a relationship-based culture in the Bank that has helped us build a loyal and growing customer base. We understand that personal and business banking is relationship driven, and our branches have been structured to avoid the rigid systems found at larger banks. Branches are staffed with highly skilled and experienced bankers, and clients are given access to executive decision makers, a rarity at large financial institutions. The First National Bank of Long Island is a customer-focused financial institution, which is why we are the Bank “Where Everyone Knows Your Name.™” saLLyanne k. baLL weg, senior executive Vice President, bernard esqUenet, chief executive officer, the ruhof corporation and James P. Johnis, senior Vice President, commercial banking L o o k i n g A h e a d l ooK InG aHe aD As a growing community banking organization, we continue to transform to a more market-savvy banking organization that is focused on enhancing its earnings performance for shareholders. In addition to our existing community banking philosophy, which includes a strong management team, the drivers for our success looking ahead in the future include: ƒ Further branch growth in our operating footprint. ƒ Additional hiring and an expanded employee base. Although the economy is experiencing one of the worst recessions in recent years, we continued to grow and prosper in 2008, in part by hiring more experienced banking professionals. Unlike so many other banks and companies, we did not have to resort to draconian expense measures because our growth was disciplined and balanced. We plan to continue this positive trend in 2009. ƒ Adding more innovative products and services. ƒ Expanding the emphasis of our financial- services plan by offering customers products such as annuities, mutual funds and life insurance. ƒ Continued loan growth. We are lending money and are in a strong position to continue doing so. 11 t n e m e v l o v n I y t i n u m m o C 12 the first nationaL bank of Long isLand proudly supports Long island cares, inc. and the harry chapin food bank tHe fI Rst natIonal banK of lonG IslanD ƒ Participated in the by the New York State Society of Certified Public Accountants (NYSSCPA) – Suffolk Chapter. Toys for Tots Campaign, conducted ƒ Supported Long Island Cares, Inc. and The Harry Chapin Food Bank by collecting 682 pounds of food in our branches to help feed Long Island families. ƒ Team members raised more than $4,000 as part of the Making Strides Against Breast Cancer Walk at Jones Beach in October 2008! ƒ Team members raised more than $3,000 for the March of Dimes WalkAmerica Event! cynthia barry, Partner, sheehan & company, cPa Pc, John reiLLy, Vice President, commercial Lending, Jane reed, Vice President, commercial banking, the first national bank of Long island and Lisa martineLLi- bowman, cPa, Partner, owen Peterson & co., LLP and President of nysscPas suffolk chapter M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S The following is management's discussion and analysis of certain significant factors that have affected the Corporation’s financial condition and operating results during the periods included in the accompanying consolidated financial statements, and should be read in conjunction with such financial statements. The Corporation’s financial condition and operating results principally reflect those of its wholly-owned subsidiary, The First National Bank of Long Island, 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 Bank’s primary service area is Nassau and Suffolk Counties, Long Island. However, the Bank has three commercial banking branches in Manhattan and may open additional Manhattan branches in the future. Overview Overview – 2008 Versus 2007. Earnings per share increased by 17.9%, or $.27 per share, from $1.51 in 2007 to $1.78 this year. Net income increased by $1,480,000 from $11,482,000 in 2007 to $12,962,000 this year. Returns on average assets (“ROA”) and equity (“ROE”) were 1.10% and 12.87%, respectively, in 2008 as compared to 1.14% and 11.67% in 2007. The improvement in ROE is attributable to increased earnings and share repurchases made pursuant to the Corporation’s share repurchase program. Earnings increased in 2008 largely because of loan growth. From year-end 2007 to year-end 2008 total loans grew by $132.6 million, or 25.2%. Commercial mortgages were up $103.5 million, or 61.0%, traditional residential mortgage loans were up $21.7 million, or 11.1%, and home equity loans were up $18.1 million, or 22.1%. The loan growth resulted from management’s continued efforts to improve the Bank’s current and future earnings prospects by making loans a larger portion of the overall balance sheet. The growth was partially funded by a $31.3 million increase in deposits, with the balance being funded by an increase in overnight borrowings. Also contributing to the increase in earnings was a borrowing and investing strategy undertaken in the latter part of 2007 and continued in 2008. This strategy, which accounts for $127 million of the borrowings under repurchase agreements at December 31, 2008, is primarily responsible for the increase in investment securities of $81.9 million when comparing year-end 2008 to 2007. The borrowings were undertaken to increase current earnings and, for those borrowings with embedded interest rate caps (“caps”), protect the Bank’s future earnings in the event of an increase in interest rates. A decline in interest rates in 2008 is yet another important factor that contributed to the increase in earnings. Earnings increased because the Bank’s interest-bearing deposits are generally shorter in duration than its interest-earning assets and therefore reprice faster in a changing rate environment. In addition, short-term interest rates, which are the primary driver of the rates paid by the Bank on its deposit products, declined more than intermediate and longer-term interest rates, which are the primary drivers of the yields available to the Bank on the repricing and origination of loans and purchase of securities. The Corporation continued its share repurchase program in 2008. Under the program, the Corporation purchased 296,479 shares, representing 4.0% of total shares outstanding at the beginning of the year. This compares to 180,800 shares purchased in 2007, or 2.4% of total shares outstanding at the start of the year. The share repurchase program has historically enhanced earnings per share and return on average stockholders’ equity. The program is estimated to have contributed four cents more to earnings per share in 2008 than 2007. The larger contribution to earnings per share this year is attributable to the full-year impact of the shares purchased in 2007 plus the pro rata impact of the shares purchased throughout 2008. The positive impact on earnings of loan growth, the borrowing and investing strategy, the decline in interest rates and the share repurchase program was partially offset by an increase in noninterest expense of $2.3 million and a loss of the tax benefit associated with the Corporation’s REIT entity of approximately $600,000. The major components of the increase in noninterest expense are a $458,000 increase in FDIC deposit insurance expense, a $460,000 increase in retirement plan expense, and personnel costs and other expenses of branch expansion. The loss of the REIT tax benefit resulted from a change in New York State tax law effective January 1, 2008. In response to the law change, the ownership of the REIT entity within the consolidated group was changed in December 2008 to once again obtain favorable tax treatment. The ownership change combined with the simultaneous implementation of other tax planning strategies should reduce 2009 income taxes by approximately $800,000. 2 0 0 8 an nUaL rePo r t 13 The credit quality of the Bank’s loan portfolio continues to be excellent as evidenced by the low level of nonperforming loans. The Bank has not originated nor does it hold any subprime mortgages in its loan portfolio. In addition, all of the Bank’s mortgage securities are backed by mortgages underwritten on conventional terms. The U.S. government guarantees the timely payment of principal and interest on most of the securities and underlying mortgages. Fannie Mae and Freddie Mac guarantee the remainder. Fannie Mae and Freddie Mac have been placed into conservatorship by their primary regulator, the Federal Housing Finance Agency who also acts as conservator. In conjunction with the conservatorship, the U.S. Department of the Treasury entered into Preferred Stock Purchase Agreements with Fannie Mae and Freddie Mac to ensure that each of these entities maintains positive net worth and established new borrowing facilities for these entities intended to serve as an ultimate liquidity backstop. The Preferred Stock Purchase Agreements and borrowing facilities serve to protect the existing and future holders of Fannie Mae and Freddie Mac mortgage securities and other debt instruments. Total stockholders’ equity before accumulated other comprehensive income or loss grew by $3,449,000 in 2008, despite the amount spent for share repurchases and a 13.8% increase in cash dividends. The Bank’s capital ratios continue to substantially exceed the current regulatory criteria for a well-capitalized bank. The Bank opened a full service branch in Northport Village, Long Island in late 2007. In early 2008, the Bank opened a full service branch in Babylon, Long Island, consolidated its Mineola branch with its Garden City branch, and converted the Garden City branch from a commercial banking office to a full service branch. In early 2009, The Bank opened a commercial banking office in Port Jefferson Station, Long Island. During the remainder of 2009, the Bank expects to open a full service branch in Bayville, Long Island and relocate its Valley Stream commercial banking office to premises purchased by the Bank in January 2009 and convert it to a full service branch. Continued branch expansion in key markets on Long Island and in Manhattan remains a key strategic initiative. Looking forward into 2009, the Bank’s earnings could be challenged by low interest rates and strong competition for deposits in its market area. Making loans and purchasing securities in a low rate environment could cause the overall yield on the Bank’s loan and securities portfolios to decline. Competition for deposits could exert upward pressure on deposit cost and make core deposit growth challenging. The Bank’s earnings could also be challenged by an increased level of loan losses caused by the upward trend in unemployment levels and downward trend in real estate values experienced in 2008 and thus far in 2009. Other challenges in 2009 will include significant increases in pension expense and FDIC insurance cost. Pension expense will increase by approximately $1,025,000 because of a significant decline during 2008 in the value of pension plan assets. Management currently estimates that FDIC insurance cost could increase by approximately $2,800,000 as a result of recent bank failures. Overview – 2007 Versus 2006. In 2007, the Corporation earned $1.51 per share versus $1.45 in the prior year. Net income increased by $255,000, or from $11,227,000 in 2006 to $11,482,000 in 2007. ROA and ROE were 1.14% and 11.67%, respectively, in 2007 as compared to 1.15% and 12.06% in 2006. In addition the Corporation declared a 2-for-1 stock split in the first quarter of 2007 and changed from a semi-annual to a quarterly cash dividend. Earnings increased in 2007 largely because of loan growth. From year-end 2006 to year-end 2007 total loans grew by $76.1 million, or 16.9%. The loan categories with the most significant growth were commercial mortgages which were up $31.4 million, or 22.7%, traditional residential mortgage loans which were up $21.2 million, or 12.2%, and home equity loans which were up by $14.9 million, or 22.3%. Credit quality was excellent at December 31, 2007 as measured by the year-end ratio of nonaccruing loans to total loans of .05%. In 2007, the Bank continued to use maturities and paydowns from its investment securities portfolio to fund loan growth. As a result, loans became an increasingly larger portion of the Bank’s overall balance sheet. This, along with a better yielding securities portfolio and deposit cost controls, enabled the Bank to maintain its net interest margin in 2007 despite the unfavorable interest rate environment and the strong competition for loans and deposits in its market area. Contributing to the better securities portfolio yield was the loss program conducted in the fourth quarter of 2006 and an improvement in yields available for reinvestment during 2007. Salaries expense increased in 2007 by $1.1 million, or 8.5%. In addition to normal annual salary adjustments, the increase in salaries expense was due to staffing for lending and business development initiatives and new branches and an increase in stock-based compensation expense. Employee benefits expense declined by $695,000 in 2007, or 14.8%, principally because of changes to the Bank’s retirement program. The Corporation continued its share repurchase program in 2007. Under the program, the Corporation purchased 180,800 shares, representing 2.4% of total shares outstanding at the beginning of 2007. This compares to 131,010 shares purchased in 2006, or 1.7% of total shares outstanding at the start of that year. The program is estimated to have contributed two cents more to earnings per share in 2007 than 2006. The larger contribution to earnings per share in 2007 14 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n is attributable to the full-year impact of the shares purchased in 2006 plus the pro rata impact of the shares purchased throughout 2007. Total stockholders’ equity before accumulated other comprehensive income or loss grew by $4,659,000 in 2007, despite the amount spent for share repurchases and a 16% increase in cash dividends. The Bank’s capital ratios continue to substantially exceed the current regulatory criteria for a well-capitalized bank. Net Interest Income Average Balance Sheet; Interest Rates and Interest Differential. The following table sets forth the average daily balances for each major category of assets, liabilities and stockholders’ equity as well as the amounts and average rates earned or paid on each major category of interest-earning assets and interest-bearing liabilities. Assets: Federal funds sold and overnight investments .................................. Investment securities: Taxable ......................................... Nontaxable (1) .............................. Loans (1) (2) ................................... Total interest-earning assets (1) ..... Allowance for loan losses ............... Net interest-earning assets …......... Cash and due from banks …........... Premises and equipment, net ......... Other assets ................................... Liabilities and Stockholders' Equity: Savings and money market deposits ............................ Time deposits ................................. Total interest-bearing deposits ....... Short-term borrowings .................... Long-term debt ............................... Total interest-bearing liabilities ....... Checking deposits .......................... Other liabilities ................................ Stockholders' equity ........................ Net interest income (1) ................... Net interest spread (1) .................... Net interest margin (1) …................ 2008 2007 2006 Average Balance Interest/ Dividends Average Rate Average Balance Interest/ Dividends Average Rate Average Balance Interest/ Dividends Average Rate (dollars in thousands) $ 19,362 $ 480 2.48% $ 30,166 $ 1,505 4.99% $ 17,866 $ 882 4.94% 13,529 9,639 31,632 56,305 4.68 6.59 6.59 5.96 18,857 9,373 34,193 62,903 4.88 6.55 5.97 5.61 386,404 143,121 572,356 1,121,243 (4,947) 1,116,296 32,524 11,587 21,248 289,040 146,341 480,166 945,713 (4,167) 941,546 32,672 9,374 19,648 14,536 9,520 27,303 52,241 4.23 6.61 6.52 5.65 344,012 143,918 418,746 924,542 (3,609) 920,933 29,252 8,149 18,898 $ 1,181,655 $ 1,003,240 $ 977,232 $ 364,974 236,820 601,794 48,379 108,896 759,069 317,696 4,180 1,080,945 100,710 $ 1,181,655 4,576 6,782 11,358 746 4,639 16,743 1.25 2.86 1.89 1.54 4.26 2.21 $ 320,539 220,196 540,735 20,856 11,849 573,440 327,686 3,712 904,838 98,402 4,768 10,081 14,849 896 524 16,269 1.49 4.58 2.75 4.30 4.42 2.84 $ 362,339 158,622 520,961 37,989 - 558,950 321,438 3,780 884,168 93,064 4,629 6,575 11,204 1,745 - 12,949 1.28 4.15 2.15 4.59 - 2.32 $ 1,003,240 $ 977,232 $ 46,160 $ 40,036 $ 39,292 3.40% 4.12% 3.12% 4.23% 3.33% 4.25% (1) (2) Tax-equivalent basis. Interest income on a tax-equivalent basis includes the additional amount of interest income that would have been earned if the Corporation's investment in tax-exempt loans and investment securities had been made in loans and investment securities subject to Federal income taxes yielding the same after-tax income. The tax-equivalent amount of $1.00 of nontaxable income was $1.52 in each period presented, based on a Federal income tax rate of 34%. For the purpose of these computations, nonaccruing loans are included in the daily average loan amounts outstanding. 2 0 0 8 an nUaL rePo r t 15 Rate/Volume Analysis. The following table sets forth the effect of changes in volumes, rates, and rate/volume on tax- ivalent interest income, interest expense and net interest income. equ Year Ended December 31, 2008 versus 2007 Increase (decrease) due to changes in: Net Rate/ 2007 versus 2006 Increase (decrease) due to changes in: Net Rate/ Volume Rate Volume (1) Change Volume Rate Volume (1) Change (in thousands) $ (539) $ (757) $ 271 $ (1,025) $ 607 $ 9 $ 7 $ 623 4,557 (212) 6,073 9,879 577 (55) (2,947) (3,182) 194 1 (565) (99) 5,328 (266) 2,561 6,598 (2,323) 160 4,005 2,449 1,566 (41) 283 1,817 661 761 1,182 4,292 6,896 (749) (3,775) (574) (19) (5,117) (104) (285) (758) (158) (1,305) (192) (3,299) (150) 4,115 474 (534) 2,552 (243) - 1,775 761 687 (96) - 1,352 (250) - 41 (202) (88) 267 (510) 524 193 (1,007) 119 4,329 4,064 139 3,506 (849) 524 3,320 $ 2,983 $ 1,935 $ 1,206 $ 6,124 $ 674 $ 465 $ (395) $ 744 Interest Income: Federal funds sold and overnight investments...... Investment securities: Taxable …............................................................ Nontaxable …...................................................... Loans..................................................................... Total interest income.............................................. Interest Expense: Savings and money market deposits ................................................... Time deposits ........................................................ Short-term borrowings .......................................... Long-term debt ...................................................... Total interest expense ........................................... Increase (decrease) in net interest income..................................................... (1) Represents the change not solely attributable to change in rate or change i rate/volume variance could be allocated between the volume and rate va each to the total for both. n volume but a combination of these two factors. The riances shown in the table based on the absolute value of N et Interest Income – 2008 Versus 2007 Net interest income on a tax-equivalent basis increased by $6,124,000, or from $40,036,000 in 2007 to $46,160,000 he increase in net interest income was growth in the Bank’s loan portfolio. On y $92.2 million in 2008, or 19.2%. A majority of the growth in average loan nces was funded by an increase of $61.1 million in average interest bearing deposits and the remainder was funded by this year. The most significant reason for t an average balance basis, total loans grew b bala an increase in average borrowings. Also contributing to the increase in net interest income was a borrowing and investing strategy undertaken in the latter part of 2007 and continued in 2008. This strategy, which accounts for $127 million of the borrowings under repurchase is primarily responsible for an increase in average borrowings under repurchase agreements at December 31, 2008, agreements of $98.7 million and the increase in average taxable investment securities of $97.4 million when comparing 2008 to 2007. Of the total borrowings under this strategy, $75 million have embedded interest rate caps with a notional amount of $120 million. The borrowings without caps were undertaken to increase current earnings by taking advantage of the spread between borrowing and investing rates for similar duration instruments. The borrowings with caps also added to earnings, but to a lesser extent because they include the cost of the caps, and were primarily undertaken to protect the Bank’s future earnings in the event of an increase in interest rates. A decline in interest rates in 2008 is yet another important factor that contributed to the increase in net interest income. Net interest income increased because the Bank’s interest-bearing deposit liabilities are generally shorter in duration than its interest-earning assets and therefore reprice faster in a chan ging rate environment. In addition, short- term interest rates, which are the primary driver of the rates paid by the Bank on its deposit products, declined more than intermediate and longer-term interest rates, which are the primary drivers of the yields available to the Bank on the repricing and origination of loans and purchase of securities. When comparing 2008 to 2007, the overall yield on interest- earning assets declined by 35 basis points while the overall cost of deposits decreased by 86 basis points. 16 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n The investment securities purchased with borrowed funds had a higher overall yield than the Bank’s existing securities portfolio. This is the primary reason that the yield on the Bank’s taxable securities portfolio increased by 20 basis points when comparing 2008 to 2007. Although net interest spread increased by 28 basis points in 2008, net interest margin declined by 11 basis points. The decline in net interest margin occurred largely because the margin on the borrowing and investing strategy is less than the margin on the balance of the Bank’s interest-earning assets and interest-bearing liabilities. In addition, the return on noninterest-bearing checking balances and capital decreased due to the lower yield on interest-earning assets. Excluding the borrowing and investing strategy, net interest margin for 2008 would have increased versus 2007 and the increase in net interest spread would have been greater. Competition for deposits in the Bank’s market area could continue to exert downward pressure on net interest margin branch openings should cause the Bank’s overall cost of deposits to trend and net interest spread. Furthermore, new upw ard because new branches will have a competitively priced deposit base rather than a base consisting of a mix of historically and competitively priced deposits as found in the Bank’s established branches. The “Market Risk” section of this discussion and analysis of financial condition and results of operations includes a more complete discussion of the impact of interest rate movements on the Bank’s net interest income. Net Interest Income – 2007 Versus 2006 Net interest income on a tax-equivalent basis increased by $744,0 00, or from $39,292,000 in 2006 to $40,036,000 in growth in net interest income was that management used proceeds from the 2007. The most significant reason for the mat urity and paydown of taxable securities to fund loan growth and thereby moved money from a lower to a higher yielding asset category. In 2007, average total loan balances grew by $61.4 million, or 14.7%, and represented 50.8% of average interest earning assets compared to 45.3% in 2006. iel In 2007, the yield on interest-earning assets increased by 31 basis points. Important reasons for the increase were the ields better than those currently in portfolio, and the better shift from securities to loans, the purchase of securities at y y ds realized on securities purchased as part of the portfolio restructuring conducted late in 2006. The higher overall yield on interest-earning assets resulted in an increase in net interest income on those interest-earning assets funded by checking deposits and capital, since checking deposits and capital have no associated interest cost. Although checking balances decreased by approximately $3.2 million when comparing year-end 2007 to year-end 2006, on an average balance basis checking deposits were up by $6.2 million, or 1.9%, in 2007 versus 2006. Although competition in the Bank’s market area and higher interest rates have caused the rate of growth in checking deposits to trend down in recent years, a significant portion of the Bank’s 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 decrease in net deposits and capital, the Bank’s net interest spread declined by 21 basis points in 2007 thus causing a inte rest 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 were approximately the same or higher than intermediate and longer-term interest rates. This negatively impacted the Bank’s net interest spread because short-term interest rates are a key driver of the Bank’s deposit rates and intermediate and longer-term interest rates are key drivers of the 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 Bank’s 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 Bank’s lower yielding savings and money market products to its higher priced savings and money market products and competitively priced time deposits. This accounts for the downward trend in savings and money market balances and upward trend in time deposits experienced in recent years. Noninterest Income, Noninterest Expense, and Income Taxes Noninterest income includes service charges on deposit accounts, Investment Mana gement Division income, gains or han interest, resulting from the business activities of the losses on sales of securities, and all other items of income, other t Cor poration. Noninterest income increased by $699,000, or 12.5%, from $5,582,000 in 2007 to $6,281,000 in 2008. The increase is principally due to a $482,000 increase in net gains on sales of available-for-sale securities, a $198,000 increase in other noninterest income and a $102,000 increase in service charge income. The increase in other noninterest income is primarily attributable to small increases in miscellaneous consumer fees. Service charge income increased as a result of an increase in maintenance and activity charges. 2 0 0 8 an nUaL rePo r t 17 Excluding net losses on sales of securities, noninterest income decreased by $117,000, or 2.0%, from $5,933,000 in 2006 to $5,816,000 in 2007. The decrease is primarily due to a decrease in service charge income of $179,000 largely caused by reductions in maintenance and activity and returned check charges. Noninterest expense is comprised of salaries, employee benefits, occupancy and equipment expense and other operating expenses incurred in supporting the various business activities of the Corporation. Noninterest expense was $29,689,000 and $27,384,000 in 2008 and 2007, respectively, representing increases over prior year amounts of $2,305,000, or 8.4%, and $717,000, or 2.7%. The increase in noninterest expense for 2008 is comprised of increases in other operating expenses of $730,000, or 13.7%, employee benefits expense of $608,000, or 15.2%, occupancy and equipment expense of $567,000, or 12.8%, and salaries of $400,000, or 2.9%. The increase in other operating expenses is largely attributable to a $458,000 increase in FDIC deposit insurance expense. Based on the FDIC’s base assessment rates for 2009 and a recently adopted emergency special assessment of 20 basis points on deposits as of June 30, 2009, the Bank currently estimates that its FDIC insurance expense will increase by approximately $2,800,000 in 2009. The increase in employee benefits expense is largely the result of an increase in retirement plan expense. Based primarily on the poor performance of the equity markets in 2008, pension expense will increase by approximately $1,025,000 in 2009. Occupancy and equipment expense increased primarily due to branch openings and branch expansion. The increase in salaries expense is due to normal annual salary adjustments, additions to staff related to branch expansion, and severance payments, as largely offset by staff reductions accomplished through attrition. The increase in noninterest expense for 2007 is largely comprised of an increase in salaries of $1,074,000, or 8.5%, and an increase in occupancy and equipment expense of $379,000, or 9.4%, as partially offset by a decrease in employee benefits of $695,000, or 14.8%. In addition to normal salary adjustments, the increase in salaries expense principally resulted from an increase in lending and business development staff, staffing for new branches, and an increase in stock- based compensation expense. A significant reason for the increase in stock-based compensation expense is additional equity awards in 2007 as well as the timing and terms of such 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. Significant reasons for the decrease in employee benefits expense are the discontinuation of profit sharing contributions beginning in 2007 and a reduction in the number of SERP plan participants in 2007. Income tax expense as a percentage of book income (“effective tax rate”) was 26.3% in 2008, 20.1% in 2007 and 19.9% in 2006. Despite state income taxes, the benefit of tax-exempt income causes the effective tax rate to be considerably lower than the statutory Federal income tax rate of 34%. The increase in the effective tax rate in 2008 is the result of the Corporation losing the tax benefit derived from its REIT entity and tax-exempt income now representing a smaller percentage of income before income taxes. The loss of the REIT tax benefit resulted from a change in New York State tax law effective January 1, 2008. In December 2008, the ownership of the REIT entity within the consolidated group was changed to once again obtain favorable tax treatment. This change, combined with the implementation of other tax planning strategies, should reduce 2009 taxes by approximately $800,000. Application of Critical Accounting Policies In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported asset and liability balances and revenue and expense amounts. Our determination of the allowance for loan losses is a critical accounting estimate because it is based on our subjective evaluation of a variety of factors at a specific point in time and involves difficult and complex judgments about matters that are inherently uncertain. In the event that management’s estimate needs to be adjusted based on, among other things, additional information that comes to light after the estimate is made or changes in circumstances, such adjustment could result in the need for a significantly different allowance for loan losses and thereby materially impact, either positively or negatively, the Bank’s results of operations. The Bank’s Reserve Committee, which is chaired by the Senior Lending Officer, meets on a quarterly basis and is responsible for determining the allowance for loan losses after considering, among other things, the results of credit reviews performed by the Bank’s loan review officers. In addition, and in consultation with the Bank’s Chief Financial Officer, the Reserve Committee is responsible for implementing and maintaining policies and procedures surrounding the calculation of the required allowance. The Bank’s allowance for loan losses is subject to periodic examination by the Office of the Comptroller of the Currency, the Bank’s primary federal banking regulator, whose safety and soundness examination includes a determination as to its adequacy to absorb probable incurred losses. The first step in determining the allowance for loan losses is to identify loans in the Bank’s portfolio that are individually deemed to be impaired. In doing so, subjective judgments need to be made regarding whether or not it is 18 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n 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. Estimating the fair value of collateral other than real estate is also subjective in nature and sometimes requires difficult and complex judgments. Determining expected future cash flows can be more subjective than determining fair values. Expected future cash flows could differ significantly, both in timing and amount, from the cash flows actually received over the loan’s remaining life. In addition to estimating losses for loans individually deemed to be impaired, management also estimates collective impairment losses for pools of loans that are not specifically reviewed. Statistical information regarding the Bank’s historical loss experience over a period of time 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, environmental risks, trends in volume and terms of loans, concentrations of credit, changes in lending policies and procedures, and experience, ability, and depth of the Bank’s lending staff. Because of the nature of the factors and the difficulty in assessing their impact, management’s resulting estimate of losses may not accurately reflect actual losses in the portfolio. Although the allowance for loan losses has two separate components, one for impairment losses on individual loans and one for collective impairment losses on pools of loans, the entire allowance for loan losses is available to absorb realized losses as they occur whether they relate to individual loans or pools of loans. Asset Quality The Corporation has identified certain assets as risk elements. These assets include nonaccruing loans, foreclosed real estate, loans that are contractually past due 90 days or more as to principal or interest payments and still accruing and troubled debt restructurings. These assets present more than the normal risk that the Corporation will be unable to eventually collect or realize their full carrying value. Information about the Corporation’s risk elements is as follows: Nonaccrual loans …..................................................................................................... Loans past due 90 days or more and still accruing ….................................................. Foreclosed real estate .................................................................................................. Total nonperforming assets ........................................................................................ Troubled debt restructurings …..................................................................................... Total risk elements ..................................................................................................... 112 42 - 154 - 154 257 95 - 352 - 352 135 50 - 185 - 185 $ $ $ $ 2008 2007 December 31, 2006 (dollars in thousands) 2005 $ $ $ $ 2004 - $ 18 - 18 - 18 $ 151 - - 151 - 151 Nonaccrual 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 ................................................................................................. .02% .05% .03% .04% .00% .02% .07% .04% .04% .01% .02% .07% .04% .04% .01% Gross interest income on nonaccrual loans: Amount that would have been recorded during the year under original terms ........... Actual amount recorded during the year .................................................................... $ 10 - $ 13 10 $ 12 - 9 $ 4 - $ - Commitments for additional funds - Nonaccrual, restructured, past due loans ............ None None None None None 2008 2007 Year Ended December 31, 2005 2006 (in thousands) 2004 2 0 0 8 an nUaL rePo r t 19 Allowance and Provision for Loan Losses The allowance for loan losses grew by $1,623,000 during 2008, amounting to $6,076,000, or .92% of total loans, at December 31, 2008 as compared to $4,453,000, or .85% of total loans, at December 31, 2007. During 2008, the Bank had loan chargeoffs and recoveries of $325,000 and $3,000, respectively, and recorded a $1,945,000 provision for loan losses. The provision for loan losses increased by $1,370,000 in 2008 primarily because of more loan growth in 2008, a $275,000 chargeoff on one commercial loan, the establishment of a $200,000 impairment reserve on another commercial loan, and a deterioration in local economic conditions. The chargeoff and establishment of the impairment reserve occurred in the fourth quarter. The allowance for loan losses is an amount that management currently believes will be adequate to absorb probable incurred losses in the Bank’s loan portfolio. 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. The following table sets forth changes in the Bank’s allowance for loan losses. Balance, beginning of year ................................ Loans charged off: Commercial and industrial ............................... Other …............................................................ Recoveries of loans charged off: Commercial and industrial ............................... Other …............................................................ Net (chargeoffs) recoveries ............................... Provision for loan losses …................................ Balance, end of year …...................................... Ratio of net chargeoffs or recoveries to average loans outstanding ……................... 2008 2007 Year ended December 31, 2006 (dollars in thousands) 2005 2004 $ 4,453 $ 3,891 $ 3,282 $ 2,808 $ 2,452 275 50 325 - 3 3 (322) 1,945 6,076 $ - 14 14 - 1 1 (13) 575 4,453 $ 65 11 76 - 15 15 (61) 670 3,891 $ - 25 25 - 29 29 4 470 3,282 $ 12 33 45 7 38 45 - 356 2,808 $ .06% .00% .01% .00% .00% The following table sets forth the allocation of the Bank’s total allowance for loan losses by loan type. Amount Amount Amount Amount 2008 2007 2005 2004 December 31, 2006 % of Loans To Total Amount Loans (dollars in thousands) 833 1,464 914 497 89 94 3,891 12.3% 30.7 38.7 14.9 2.2 1.2 100.0% % of Loans To Total Loans 11.7% 32.3 37.1 15.8 2.2 .9 100.0% 874 1,785 1,026 551 116 101 4,453 % of Loans To Total Loans 8.1% 41.5 32.9 15.5 1.4 .6 100.0% % of Loans To Total Loans 12.4% 28.3 42.0 14.0 1.9 1.4 100.0% % of Loans To Total Loans 15.1% 25.9 44.0 12.0 1.4 1.6 100.0% 789 865 790 226 45 93 2,808 827 1,095 843 348 71 98 3,282 $ $ $ $ $ $ $ $ $ $ Commercial and industrial ..... Commercial mortgages ......... Residential mortgages ........... Home equity loans ................. Construction loans ................. Other ..................................... 933 3,011 1,227 706 100 99 6,076 The amount of future chargeoffs and provisions for loan losses will be affected by, among other things, economic conditions on Long Island and in New York City. Such conditions could affect the financial strength of the Bank’s borrowers and will affect the value of real estate collateral securing the Bank’s mortgage loans. Loans secured by real estate represent approximately 91% of the Bank’s total loans outstanding at December 31, 2008. Most of these loans were made to borrowers domiciled on Long Island and in New York City. Although local economic conditions had been good 20 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n and real estate values had grown considerably over a number of years, over the last year or so residential real estate values on Long Island declined and economic conditions deteriorated. The decline and deterioration could continue, and commercial real estate values could also decline. This could cause some of the Bank’s borrowers to be unable to make the required contractual payments on their loans and the Bank to be unable to realize the full carrying value of such loans through foreclosure. However, management believes that the Bank’s 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 Bank’s mortgage loans. At the present time, management is not aware of any environmental pollution originating on or near properties securing the Bank’s loans that would materially affect the carrying value of such loans. Off-Balance Sheet Arrangements and Contractual Obligations The Corporation’s off-balance sheet arrangements and contractual obligations at December 31, 2008 are summarized in the table that follows. The amounts shown for commitments to extend credit and letters of credit are contingent obligations, some of which are expected to expire without being drawn upon. As a result, the amounts shown for these items do not necessarily represent future cash requirements. The amounts shown for securities sold under repurchas e agreements are based on the contractual maturities of such agreements and include scheduled principal and interest ments. The interest payments do not reflect any offset that the Bank could get from interest rate caps embedded in the pay agreements. Some of these repurchase agreements can be terminated by the purchaser prior to contractual maturity (see Note F to the Corporation’s 2008 consolidated financial statements for more detailed disclosures regarding repurchase agreements). The Corporation believes that its current sources of liquidity are more than sufficient to fulfill the obligations it has at December 31, 2008 pursuant to off-balance sheet arrangements and contractual obligations. Amount of Commitment Expiration Per Period Total Amounts Committed One Year or Less Over One Year Through Three Years (in thousands) Over Three Years Through Five Years Over Five Years Commitments to extend credit ........................................................... Standby letters of credit ..................................................................... Commercial letters of credit ............................................................... Securities sold under repurchase agreements - Long-term ............... rating lease obligations ............................................................... Ope Purchase obligations .......................................................................... Time Deposits .................................................................................... $ $ $ $ $ 116,653 3,641 - 157,97 0 8,974 1,687 192,152 481,077 48,291 3,641 - 5,478 1,181 348 167,834 226,773 14,392 - - 22,682 2,245 697 10,513 50,529 8,890 - - 67,592 1,794 642 13,600 92,518 45,080 - - 62,218 3,754 - 205 111,257 $ $ $ $ $ Commitments to extend credit and letters of credit arise in the normal course of the Bank’s business of meeting the financing needs of its customers and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to financial instruments for commitments to extend credit, standby letters of credit, and commercial letters of credit is represented by the co ntractual notional amount of these instruments. The Bank uses the same credit policies in making commitments to extend credit and generally uses the same credit policies for letters of credit as it does for on-balance-sheet instruments. Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Unused home equity lines, which comprise a substantial portion of these commitments, generally expire ten years from their date of origination. Other real estate loan commitments generally expire within 60 days and commercial loan commitments generally expire within one year. The amount of collateral obtained, if any, by the Bank upon extension of credit is based on management’s credit evaluation of the borrower. Collateral held varies but may include mortgages on commercial and residential real estate, security interests in business assets, deposit accounts with the Bank or other financial institutions, and securities. Standby letters of credit are conditional commitments issued by the Bank to assure the performance or financial obligations of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. The Bank generally holds collateral and/or obtains personal 2 0 0 8 an nUaL rePo r t 21 guarantees supporting these commitments. Commercial letters of credit are conditional commitments issued by the Bank to assure the payment by a customer to a supplier. The Bank generally obtains personal guarantees supporting these commitments. The purchase obligations shown in the preceding table are pursuant to contracts that the Bank has with providers of data processing services. Required pension plan contributions for years beyond 2009 are not presently known and are therefore not included in the table. For the Plan year ending September 30, 2009, the Bank has a minimum required pension contribution of $1,119,000 and a maximum tax deductible contribution of $8,765,000. The Bank expects to make a contribution within that range by September 30, 2009, but the amount of such contribution has not yet been determined. Capital The Corporation’s capital management policy is designed to build and maintain capital levels that exceed regulatory standards. Under current regulatory capital standards, banks are classified as well capitalized, adequately capitalized or undercapitalized. Under such standards, a well-capitalized bank is one that has a total risk-based capital ratio 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 Bank’s total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage capital ratios of 17.27%, 16.29% and 8.03%, respectivel y, at December 31, 2008 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 exceeds as of December 31, 2008. Total stockholders' equity increased slightly from $102,384,000 at December 31, 2007 to $102,532,000 at December 31, 2008. The positive impact on stockholders’ equity of net income, unrealized gains on available-for-sale securities, and stock-based compensation transactions was almost entirely offset by stock repurchases, cash dividends declared, and a decrease in the funded status of the Bank’s pension plan. 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. Under plans approved by the Board of Directors in 2007 and 2008, the Corporation purchased 296,479 shares in 2008 and can purchase 114,011 shares in the future. The details of the Corporation’s purchases under the stock repurchase program during the fourth quarter of 2008 are set forth in the table that follows. Period October 1, 2008 to October 31, 2008............................ November 1, 2008 to November 30, 2008..................... December 1, 2008 t o December 31, 2008..................... Total Number of Shares Purchased - 2,500 200 Average Price Paid Per Share - $21.40 $22.08 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) - 2,500 200 Maximum Number of of Shares that May Yet Be Purchased Under the Plans or Programs (1) 116,711 114,211 114,011 (1) All shares purchased by the Corporation under its stock repurchase program in the fourth quarter of 2008 were purchased under a 200,000 share plan approved by the Corporation’s Board of Directors on February 21, 2008 and publicly announced on February 22, 2008. The Corporation’s share repurchase plans do not have fixed expiration dates. The stock repurchase program has historically enhanced earnings per share and return on average stockholders’ he program is estimated to have contributed four cents more to earnings per share in 2008 than 2007. The larger equity. T con tribution to earnings per share this year is attributable to the full-year impact of the shares purchased in 2007 plus the pro rata impact of the shares purchased throughout 2008, taking into account the volume of shares purchased, the price paid per share, and current interest rates. The Corporation periodically reevaluates whether it wants to continue purchasing shares of its own common stock in open market transactions under the safe harbor provisions of Rule 10b-18 or otherwise. Because the trading volume in the Corporation’s 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 7 was 979,245 and 615,795 shares, publicly reported trading volume in the Corporation’s common stock in 2008 and 200 resp ectively. Open market purchases by the Corporation under its share repurchase program accounted for 14.6% of the trading volume in 2008 and 12.2% in 2007. 22 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n Russell Microcap Index. Frank Russell Company (“Russell”) 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 Corporation’s common stock is included in the Russell Microcap Index. When reconstituted in June 2008, the average market capitalization of companies in the Russell Microcap Index was $310 million, the median market capitalization was $169 million, the capitalization of the largest company in the index was $617 million, and the . The Corporation’s market capitalization as of capitalization of the smallest company in the index was $37 million December 31, 2008 was approximately $171 million. The strong performance of the Corporation’s stock over the last year relative to the overall market should result in its stock being included in the Russell 3000 and 2000 Indexes when they are reconstituted in June 2009. The Corporation believes that migration of its stock from the Russell Microcap to the Russell 3000 and 2000 Indexes could improve the stock’s price, trading volume and liquidity. Conversely, if the Corporation’s market capitalization falls below the minimum necessary to be included in the Russell 3000 and 2000 Indexes or the Russell Microcap Index at any future reconstitution date, the opposite could occur. Performance Graph. The following graph compares the Corporation's total stockholder return over a 5-year measurement period with the NASDAQ Market Index and the NASDAQ Bank Stocks Index. $200 $160 $120 $80 $40 $0 1/1/04 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 The First of Long Island NASDAQ Market Index NASDAQ Bank Stocks COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN THE FIRST OF LO NG ISLAND CORPORATION, NASDAQ BANK STOCKS INDEX AND NASDAQ MARKET INDEX Assumes $100 Invested on January 1, 2004 Assumes Dividends Reinvested Fiscal Year Ended December 31, 2008 Cash Flows and Liquidity Cash Flows. The Corporation’s primary sources of cash are depo sit growth, maturities and amortization of loans and investment securities, operations, and borrowing. The Corporation uses cash from these and other sources to fund loan growth, purchase investment securities, pay cash dividends, and repurchase common stock under the Corporation’s share repurchase program. During 2008, the cash needed to grow loans significantly exceeded the cash provided by deposit growth and operations. This is the main reason for the increase in Federal Home Loan Bank advances. Savings and money market products increased during the year, driven partially by new branch openings and the migration of funds 2 0 0 8 an nUaL rePo r t 23  time deposit accounts. As further discussed below, the increase in securities sold under repurchase agreements is from primarily a result of the Corporation’s borrowing and investing strategy. In 2008, the Bank continued to use maturities and paydowns from its investment securities portfolio to fund loan growth. Despite this, the securities portfolio grew by almost $82 million from year-end 2007 to year-end 2008. The growth occurred because the Bank continued with the leveraging program that began in the latter part of 2007, whereby it borrowed an additional $47 million under repurchase agreements and used the resulting proceeds to purchase securities. The leveraging program was undertaken to increase current earnings and also protect the Bank’s future earnings in the event of an increase in interest rates. $75 million of the borrowings have embedded interest rate caps. The purpose of borrowing with embedded interest rate caps is to potentially reduce the negative impact on the Bank’s net interest income that could occur with an increase in interest rates. Additional information regarding the Bank’s sensitivity to changes in interest rates can be found under the caption “Market Risk” in this discussion and analysis of financial condition and results of operations. Additional information regarding the borrowings under repurchase agreements and embedded interest rate caps can be found in Note F to the Corporation’s consolidated financial statements. The Corporation paid $4,575,000 in cash dividends in 2008, which is $767,000 less than the $5,342,000 paid in 2007. The decrease is primarily due to the change from a semi-annual to a quarterly dividend in 2007 and the resulting payment in 2007 of one semi-annual and three quarterly dividends. Liquidity. The Bank has both internal and external sources of liquidity that can be used to fund loan growth and accommodate deposit outflows. The Bank’s primary internal sources of liquidity are its overnight investments, investment securities designated as available-for-sale, and maturities and monthly payments on its investment securities and loan portfolios. At December 31, 2008, the Bank had approximately $93 million in unencumbered available-for-sale securities. 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 Bank’s primary external sources of liquidity are secured borrowings in the form of FHLB advances and repurchase agreements. However, n the part of the FHLB or neither the Bank’s FHLB m embership nor repurchase agreements represent legal commitments o y borrow from repurchase agreement coun terpartie s to extend credit to the Bank. The amount that the these parties is currently d le securities that the Bank ependent on, among other things, the amount of unencumbered eligib can use as collateral. At December 31, ies of approximately $183 million that 2008, the Bank had unencumbered securit securities, $35 million are eligible collateral are eligible collateral for borrowing under rep urchase agreements. Of these reasing its liquidity by obtaining FHLB for FHLB borrowings. In addition, the B ank is currently working towards inc approval to pledge its residen tial and commercial mortgages as collateral for borrowings. Bank can potentiall 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 between 25 and 50 basis points above the federal funds target rate, is viewed by the FRB as a backup source of short-term the Bank can borrow under the primary credit funds for sound depository institutions like the Bank. The amount that program depends on, among other things, the amount of available eligible collateral. Market Risk The Bank invests in interest-earning assets which are funded by interest-bearing deposits and borrowings, noninterest- bearing deposits, and capital. The Bank’s results of operations are subject to risk resulting from interest rate fluctuations generally and having assets and liabilities that have different maturity, repricing, and prepayment/withdrawal characteristics. The Bank defines interest rate risk as the risk that the Bank's earnings and/or net portfolio value (present value of expected future cash flows from assets less the present value of expected future cash flows from liabilities) will change when interest rates change. The principal objective of the Bank’s asset/liability management activities is to maximize net interest income while at the same time maintain acceptable levels of interest rate and liquidity risk and facilitate the funding needs of the Bank. Because the Bank’s 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 24 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n incr eases in market interest rates and/or owns interest rate caps that are in-the-money at the time of the interest rate increase or become in-the-money as a result of the increase, the magnitude of the negative impact will decline and the impact could even 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 her yields, the impact of an increase in interest rates should be positive. This occurs primarily because with loans at hig 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 Bank’s net interest income. Furthermore, if the Bank owns interest rate floors that are in-the-money at the time of the interest rate decrease or become in-the-money as a result of the decrease, the magnitude of the positive impact should increase. 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, regardless of whether or not it owns interest rate floors, the magnitude of the positive impact will decline and could even be negative. as a result, the Bank purchases If interest rates decline, or have declined, and are sustained at the lower levels and, secu rities at lower yields and loans are originated or repriced at lower yields, the impact on net interest income should be negative because a significant portion of the Bank’s 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 repricing gap analysis. Through use of the models, the Bank projects future net interest income and then estimates the effect on projected net interest income of various changes in interest rates and balance sheet growth rates. The Bank also uses the models to calculate the change in net portfolio value over a range of interest rate change scenarios. Traditional gap analysis involves arranging the Bank’s interest-earning asset s and interest-bearing liabilities by d and then computing the difference, or gap, between the assets and liabilities which are estimated to rice during each time period and cumulatively through the end of each time period. repricing perio s rep 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 change 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 igned to the same repricing period will reprice at the same time and in the same unt. Like sensitivity modeling, gap analysis does not fully take into account the fact that the repricing of some assets and assumes that assets and liabilities ass amo and liabilities is discretionary and subject to competitive and other pressures. Changes in the estimates and assumptions made for interest rate sensitivity modeling and gap analysis could have a significant impact on projected results and conclusions. Therefore, these techniques may not accurately reflect the actual impact of changes in the interest rate environment on the Bank’s net interest income or net portfolio value. The table that follows summarizes the Corporation's cumulative interest repricing gap at December 31, 2008 based upon significant estimates and assumptions that the Corporation believes to be reasonable. The table arranges interest- earning assets and interest-bearing liabilities according to the period in which they contractually mature or, if earlier, are estimated to repay or reprice. Repayment and repricing estimates are based on internal data and management’s ons about factors that are inherently uncertain. These factors include, among others, prepayment speeds, changes assumpti in m arket interest rates and the Bank’s response thereto, early withdrawal of deposits, and competition. The balances of non-maturity deposit products have been included in categories beyond three months in the table because management believes, based on past experience and its knowledge of current competitive pressures, that the repricing of these products will lag market changes in interest rates to varying degrees. The table does not reflect any protection against interest rate changes that the Corporation may have as a result of its ownership of derivative instruments such as interest rate caps or floors. The only such instruments that the Corporation owns at December 31, 2008 are the interest rate caps disclosed in Note F to the Corporation’s December 31, 2008 consolida ted financial statements. 2 0 0 8 an nUaL rePo r t 25 Over Three Months Through Six Months Over Six Months Through One Year Three Months or Less Repricing Period Over One Year Through Five Years Total Within One Year (in thousands) Over Five Years Non- interest- Sensitive Total $ 514 30,014 172,449 - 202,977 $ - 33,884 29,941 - 63,825 - $ 77,036 59,881 - 136,917 $ 514 140,934 262,271 - 403,719 $ - 258,835 313,899 - 572,734 $ - 143,057 81,088 - 224,145 $ - 5,427 (5,200) 60,784 61,011 $ 514 548,253 652,058 60,784 1,261,609 - 287,772 110,706 28,105 124,122 - - 550,705 (347,728) $ - 8,069 7,717 11,593 - - - 27,379 36,446 $ - 16,137 5,330 4,382 - - - 25,849 111,068 $ - 311,978 123,753 44,080 124,122 - - 603,933 (200,214) $ - 72,069 10,197 13,917 72,000 - - 168,183 404,551 $ - - 100 105 55,000 - - 55,205 168,940 $ 324,138 - - - - 7,618 102,532 434,288 77) (373,2 $ 324,138 384,047 134,050 58,102 251,122 7,618 102,532 1,261,609 $ - $ (347,728) $ (311,282) $ (200,214) $ (200,214) $ 204,337 $ 373,277 $ - $ - Assets: Federal funds sold & overnight investments............................... Investment securities ...................... Loans .............................................. O ther assets …................................ Liabilities & Stockholders' Equity: Checking deposits …....................... Savings & money market deposits .. Ti me deposits, $100,000 and over... Time deposits, other ….................... Borrowed funds................................ Other liabilities …............................. St ockholders' equity ….................... Interest-rate sensitivity gap ................ Cum sensitivity gap ................................... ulative interest-rate As shown in the preceding table, the Bank has a significant volume of deposit accounts and borrowings that are subject to repricing as short-term interest rates change. Since the amount of these liabilities outweighs the assets held by the Bank whose pricing is tied to short-term interest rates, an increase in short-term interest rates should negatively impact the Bank’s net interest income in the near term. The interest rate caps owned by the Bank at December 31, 2008 may help to reduce the negative impact. In addition, the Bank can reduce the magnitude of the negative impact by not increasing the rates paid on its deposit accounts as quickly or in the same amount as market increases in the overnight funds rate, the prime lending rate, or other short-term rates. Conversely, a decrease in short-term interest rates should positively impact the Bank’s net interest income in the near term. However, if short-term rates decline and the Bank cannot, due to competitive pressures and/or the absolute level of rates, decrease its deposit rates in the same amount as market decreases in the federal funds target rate, the prime lending rate, and other short-term rates, the magnitude of the positive impact will decline and the impact could even be negative. 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 Corporation’s net portfolio value at December 31, 2008 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 December 31, 2009 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 December 31, 2008 and net interest income on a tax-equivalent basis for the year ending December 31, 2009 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 eight 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. 26 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n Based on the foregoing assumptions and as depicted in the table that follows, an immediate increase in interest rates of 100 or 200 basis points would have a negative effect on net interest income over a one-year time period. This is principally because the Bank’s interest-bearing deposit accounts are assumed to 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, the positive impact of a decrease in interest rates of 100 or 200 basis points is currently reduced by the fact that some of the Bank’s deposit products have yields below 1% while others have yields below 2%. Net Portfolio Value at December 31, 2008 Net Interest Income for 2009 Rate Change Scenario Amount Percent Change From Base Case rcent Pe Change From Base Case Amount (dollars in thousands) + 200 basis point rate shock .............................................. + 100 basis point rate shock .............................................. Base case (no rate change)............................................. - 100 basis point rate shock ............................................... - 200 basis point rate shock ............................................... $ 83,957 88,054 92,426 97,111 104,289 (9.2)% (4.7) - 5.1 12.8 $ 44,493 48,365 52,310 56,037 57,163 (14.9)% (7.5) - 7.1 9.3 L egislation and Regulatory Matters Enacted Legislation. In the latter part of 2008, two major pieces of legislation (the “Legislation”) impacting the financial services industry were enacted; the Housing and Economic Recovery Act of 2008 and the Emergency Economic Stabilization Act of 2008. This Legislation was enacted to address the subprime mortgage crisis and in response to capital adequacy, asset quality, management, liquidity, earnings and sensitivity to market risk problems being experienced by a large number of financial institutions. It contains broad changes that impact, either directly or indirectly, the Bank’s business operations. The significant changes brought about by this Legislation include, among others, the following: • The placing of Fannie Mae and Freddie Mac into conservatorship by their primary regulator, the Federal Housing Finance Agency; • A temporary increase through December 31, 2009 in FDIC insurance coverage from $100,000 to $250,000; • A temporary guarantee by the FDIC th rough December 31, 2009 of all transaction account balances, without limitation, which is in addition to and separate from the $250,000 insurance limit under the FDIC’s general deposit insurance regulations. Transaction accounts include traditional checking accounts and funds swept from such accounts to another noninterest-bearing deposit account, NOW accounts paying less than .5% interest, and Interest on Lawyer Accounts; • A guarantee by the FDIC of the senior unsecured debt of financial institutions issued through June 30, 2009. The guarantee expires upon maturity of the debt or June 30, 2012, whichever is earlier; • A provision that allows the Federal Reserve Bank to pay interest to banks on sterile reserves beginning October 1, 2008, three years earlier than previously permitted; • The creation of the $700 billion Troubled Asset Relief Program (“TARP”) within the U.S. Treasury Department to purchase troubled assets from any financial institution through December 31, 2009; • As part of the TARP, the $250 billion Capital Purchase Program that enables financial institutions to raise capital by selling senior preferred shares to the federal government. 2 0 0 8 an nUaL rePo r t 27 Financial institutions may opt out of the FDIC’s unlimited guarantee of transaction account balances and the FDIC’s guarantee of senior unsecured debt. In addition, raising capital by selling senior preferred shares to the federal government is voluntary on the part of banks. The Bank did not opt out of the FDIC’s transaction account and senior unsecured debt guarantees and, based on the Bank’s strong capital position, chose not to participate in the Capital Purchase Program. In addition, the Bank has no assets in its loan or securities portfolios that it would consider selling to the Treasury Department under the TARP. In February 2009, the American Recovery and Reinvestment Act of 2009 (the “Act”) became law. Otherwise known as the Stimulus Plan, the Act is a $787 billion package of spending, tax cuts and tax credits that’s designed to help pull the nation out of the significant current downturn. The provisions of the Act are intended to have significant positive impact on the economy and could significantly impact the Bank’s business on a near and longer-term basis. Also in February 2009, the FDIC took two actions designed to allow the Deposit Insurance Fund to withstand the existing problems in the banking industry. The first was the imposition of an emergency special assessment of 20 basis points on deposits of insured banks and savings associations as of June 30, 2009. The second was adoption of previously proposed changes to its risk-based assessment system. These changes considered, the Bank currently estimates that its FDIC insurance cost will increase by approximately $2,800,000 in 2009. Pending Legislation. Commercial checking deposits currently account for approximately 27% of the Bank’s 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. Either could have a material adverse impact on the Bank’s future results of operations. Examination. The Bank was examined by the Office of the Comptroller of the Currency as of September 30, 2008. The examination was a regularly scheduled safety and soundness examination. Management is not aware, nor has it been apprised, of any recommendations by regulatory authorities that would have a material adverse impact on the Corporation’s liquidity, capital resources, or operations. Impact of Not Yet Effective Authoritative Accounting Pronouncements In December 2007, the FASB issued SFAS No. 141 (revised 2007) “Business Combinations” (“SFAS No. 141(R)”), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements t he identifiable assets acquired, liabilities a ssumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquir ed in a business combination. SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to materially affect the Corporation’s results of operations or financial position. In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No. 160”), which will change the accounting and reporting for minority interests. Under SFAS No. 160, minority interests will be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets. SFAS No. 160 is effective as of the beginning of the first fiscal year inn ng on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to beg i materia ration’s results of operations or financial position. lly affect the Corpo In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activi ties – am ndment of SFAS No. 133” (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about an entity’s ve and hedging activities and thereby improves the transparency of financial reporting. SFAS No. 161 is effective ncial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of dard is not expected to materially affect the Corporation’s results of operations or financial position. an e derivati for fina this stan In May 2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 1 ”). This Statement identifies the sources of accounting principles and the framework for selecting the principles No. 62 e used in the preparation of financial statements of nongovernmental entities that are presented in conformity with to b ra ly accepted accounting principles (“GAAP”) in the United States. This Statement will be effective 60 days gene l ow g the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411. The foll in adop o ti n of SFAS No. 162 is not expected to impact the Corporation’s consolidated financial statements. 28 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n On February 20, 2008, the FASB issued FSP FAS 140-3 “Accounting for Transfers of Financial Assets and urchase Financing Transactions” (“FSP 140-3”) to resolve questions about the accounting for repurchase financings. Rep This FSP is effective for repurchase financings in which the initial transfer is entered into in fiscal years beginning after November 15, 2008. The adoption of FSP 140-3 on January 1, 2009 had no impact on the Corporation’s consolidated financial statements. On April 25, 2008, the FASB issued FSP FAS 142-3 “Determination of the Useful Life of Intangible Assets” (“FSP entity should consider in developing renewal or extension assumptions used 142-3”), which amends the list of factors an in d etermining the useful life of recognized intangible assets under SFAS No. 142 “Goodwill and Other Intangible Assets.” FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of FSP 142-3 on January 1, 2009 did not impact the Corporation’s consolidated financial statements. On May 9, 2008, the FASB issued FSP APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP 14-1”). FSP 14-1 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of FSP 14-1 on January 1, 2009 had no impact on the Corporation’s consolidated financial statements. On June 16, 2008, the FASB issued FSP EITF 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP 03-6-1”). The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in paragraphs 60 and 61 of SFAS No. 128, Earnings per Share. FSP 03-6-1 is effective for financial statements issued for fiscal years and int erim peri ods beginning after December 15, 2008. The adoption of FSP 03-6-1 on January 1, 2009 had no impact on the Corporation’s consolidated financial statements. Forward Looking Statements d Results of Operations” contains various “Management’s Discussion and Analysis of Financial Condition an ness matters. Such statements are generally forward-looking statements with respect to financial performance and busi con tained in sentences including the words “may” or “expect” or “could” or “should” or “would” or “believe”. The Corporation cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, and therefore actual results could differ materially from those contemplated by the forward-looking statements. In addition, the Corporation assumes no duty to update forward-looking statements. 2 0 0 8 an nUaL rePo r t 29 C O N S O L I D A T E D B A L A N C E S H E E T S Assets: Cash and due from banks ..................................................................................................... Federal funds sold and overnight investments...................................................................... Cash and cash equivalents ................................................................................................. $ 20,924,000 514,000 21,438,000 $ 25,729,000 21,768,000 47,497,000 December 31, 2008 2007 Investment securities: Held-to-maturity, at amortized cost (fair value of $172,640,000 and $193,890,000)................................................................. Available-for-sale, at fair value (amortized cost of $373,346,000 and $270,325,000) ........................................................................... Loans: Commercial and industrial.............................................................................................. Secured by real estate: Commercial mortgages............................................................................................. Residential mortgages.............................................................................................. Home equity loans.................................................................................................... Construction loans.................................................................................................... Other .............................................................................................................................. Net deferred loan origination costs ................................................................................ Allowance for loan losses .............................................................................................. Federal Home Loan Bank stock, at cost................................................................................ Bank premises and equipment, net....................................................................................... Deferred income tax benefits ................................................................................................ Bank-owned life insurance..................................................................................................... Other assets.......................................................................................................................... Liabilities: Deposits: Checking......................................................................................................................... Savings and money market............................................................................................ Time, $100,000 and over ............................................................................................... Time, other ..................................................................................................................... Short-term borrowings........................................................................................................... Long-term debt...................................................................................................................... Accrued expenses and other liabilities.................................................................................. Current income taxes payable............................................................................................... Deferred income taxes payable............................................................................................. Commitments and Contingent Liabilities (Note M) Stockholders' Equity: Common stock, par value $.10 per share: Authorized, 20,000,000 shares; Issued and outstanding, 7,194,747 and 7,454,385 shares................................................ Surplus .................................................................................................................................. Retained earnings ................................................................................................................. Accumulated other comprehensive income (loss) net of tax ................................................ See notes to consolidated financial statements 30 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n 169,480,000 378,773,000 548,253,000 53,555,000 273,097,000 216,654,000 99,953,000 9,175,000 3,761,000 656,195,000 1,939,000 658,134,000 (6,076,000) 652,058,000 6,199,000 12,593,000 1,638,000 11,650,000 7,780,000 1,261,609,000 $ $ 324,138,000 384,047,000 134,050,000 58,102,000 900,337,000 124,122,000 127,000,000 7,543,000 75,000 - 1,159,077,000 193,234,000 273,080,000 466,314,000 61,317,000 169,621,000 194,926,000 81,846,000 11,751,000 4,893,000 524,354,000 1,185,000 525,539,000 (4,453,000) 521,086,000 1,184,000 10,922,000 - 11,158,000 10,858,000 1,069,019,000 $ $ 318,322,000 302,158,000 197,554,000 51,004,000 869,038,000 12,110,000 80,000,000 4,686,000 37,000 764,000 966,635,000 719,000 1,354,000 102,061,000 104,134,000 (1,602,000) 102,532,000 1,261,609,000 $ 745,000 96,000 99,844,000 100,685,000 1,699,000 102,384,000 1,069,019,000 $ C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E Interest and dividend income: Loans......................................................................................................... Investment securities: Taxable.................................................................................................. Nontaxable ............................................................................................ Federal funds sold and overnight investments.......................................... Interest expense: Savings and money market deposits ........................................................ Time deposits …........................................................................................ Short-term borrowings............................................................................... Long-term debt.......................................................................................... Net interest income ............................................................................... Provision for loan losses ............................................................................... Net interest income after provision for loan losses.................................... Noninterest income: Investment Management Division income................................................. Service charges on deposit accounts........................................................ Net gains (losses) on sales of available-for-sale securities....................... Other.......................................................................................................... Noninterest expense: Salaries ..................................................................................................... Employee benefits .................................................................................... Occupancy and equipment expense ........................................................ Other operating expenses ........................................................................ 2008 Year Ended December 31, 2007 2006 $ 34,163,000 $ 31,627,000 $ 27,299,000 18,857,000 6,186,000 480,000 59,686,000 4,576,000 6,782,000 746,000 4,639,000 16,743,000 42,943,000 1,945,000 40,998,000 1,703,000 2,985,000 248,000 1,345,000 6,281,000 14,037,000 4,599,000 4,987,000 6,066,000 29,689,000 13,529,000 6,362,000 1,505,000 53,023,000 4,768,000 10,081,000 896,000 524,000 16,269,000 36,754,000 575,000 36,179,000 1,786,000 2,883,000 (234,000) 1,147,000 5,582,000 13,637,000 3,991,000 4,420,000 5,336,000 27,384,000 14,536,000 6,283,000 882,000 49,000,000 4,629,000 6,575,000 1,745,000 - 12,949,000 36,051,000 670,000 35,381,000 1,728,000 3,062,000 (635,000) 1,143,000 5,298,000 12,563,000 4,686,000 4,041,000 5,377,000 26,667,000 Income before income taxes.................................................................. Income tax expense ….................................................................................. Net Income........................................................................................... 17,590,000 4,628,000 12,962,000 $ 14,377,000 2,895,000 11,482,000 $ 14,012,000 2,785,000 11,227,000 $ Weighted average: Common shares ….................................................................................... Dilutive stock options and restricted stock units........................................ Earnings per share: Basic.......................................................................................................... Diluted ....................................................................................................... Cash dividends declared per share See notes to consolidated financial statements 7,225,530 69,012 7,294,542 $1.79 $1.78 $.66 7,553,495 73,740 7,627,235 $1.52 $1.51 $.58 7,641,424 92,244 7,733,668 $1.47 $1.45 $.50 2 0 0 8 an nUaL rePo r t 31 C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S I N S T O C K H O L D E R S' E Q U I T Y Common Stock Shares 3,846,716 Amount 385,000 $ Surplus $ 817,000 (67,814) (7,000) (2,920,000) Compre- hensive Income $ 11,227,000 Retained Earnings 89,701,000 11,227,000 $ Balance, January 1, 2006 .................... Net Income ....................................... Repurchase of common stock .......... Common stock issued under stock compensation plans, including tax benefit .................. 14,673 1,000 418,000 Accumulated Other Compre- hensive Income (Loss) $ (205,000) Total $ 90,698,000 11,227,000 (2,927,000) 419,000 Unrealized gains on available- for-sale-securities, net of reclassification adjustment and taxes ................................... Comprehensive income .................... Adjustment to initially apply SFAS No. 158, net of taxes .................... Cash dividends declared .................. Stock-based compensation .............. Transfer from retained earnings to surplus ...................................... Balance, December 31, 2006 ............... Net Income ....................................... Repurchase of common stock .......... Common stock issued under stock compensation plans, including tax benefit .................. 2-for-1 stock split .............................. Unrealized gains on available- for-sale-securities, net of reclassification adjustment and taxes ................................... Change in funded status of pension plan, net of taxes .......................... Comprehensive income .................... Cash dividends declared .................. Stock-based compensation .............. Transfer from retained earnings to surplus ...................................... Balance, December 31, 2007 ............... Net Income ....................................... Repurchase of common stock .......... Common stock issued under stock compensation plans, 447,000 11,674,000 $ 447,000 447,000 3,793,575 379,000 210,000 2,000,000 525,000 (183,015) (18,000) (3,701,000) $ 11,482,000 39,202 3,804,623 4,000 380,000 766,000 (707,000) (465,000) (707,000) (3,806,000) 210,000 95,561,000 11,482,000 (3,719,000) 770,000 (3,806,000) (2,000,000) 95,122,000 11,482,000 (380,000) 1,419,000 745,000 13,646,000 $ 1,419,000 1,419,000 745,000 745,000 7,454,385 745,000 506,000 2,000,000 96,000 (298,322) (30,000) (5,734,000) $ 12,962,000 (4,380,000) (2,000,000) 99,844,000 12,962,000 1,699,000 (4,380,000) 506,000 102,384,000 12,962,000 (5,764,000) 546,000 including tax benefit .................. 38,684 4,000 542,000 Unrealized gains on available- for-sale-securities, net of reclassification adjustment and taxes ................................... Change in funded status of pension plan, net of taxes .......................... Comprehensive income .................... Cash dividends declared .................. Stock-based compensation .............. Transfer from retained earnings to surplus ...................................... Balance, December 31, 2008 ............... 1,612,000 (4,913,000) 9,661,000 $ 1,612,000 1,612,000 (4,913,000) (4,913,000) (4,745,000) 450,000 $ (1,602,000) $ 102,532,000 (4,745,000) (6,000,000) 102,061,000 $ 450,000 6,000,000 1,354,000 $ 7,194,747 $ 719,000 See notes to consolidated financial statements 32 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S Cash Flows From Operating Activities: Net income .......................................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ................................................................................. Deferred income tax credit .............................................................................. Depreciation and amortization ........................................................................ Premium amortization on investment securities, net ....................................... Net losses (gains) on sales of securities …..................................................... Stock-based compensation expense............................................................... Accretion of cash surrender value on bank-owned life insurance.................... Decrease (increase) in prepaid income taxes …............................................. Increase in other assets ……........................................................................... Increase (decrease) in accrued expenses and other liabilities ….................... Increase (decrease) in income taxes payable …............................................. Net cash provided by operating activities .................................................... Cash Flows From Investing Activities: Proceeds from sales of available-for-sale securities............................................ Proceeds from maturities and redemptions of investment securities: Held-to-maturity ……………............................................................................. Available-for-sale …......................................................................................... Purchase of investment securities: 2008 Year Ended December 31, 2007 2006 $ 12,962,000 $ 11,482,000 $ 11,227,000 1,945,000 (229,000) 1,831,000 544,000 (248,000) 450,000 (492,000) - (2,355,000) (27,000) 38,000 14,419,000 575,000 - 1,536,000 358,000 234,000 506,000 (449,000) 240,000 (1,159,000) (17,000) 37,000 13,343,000 670,000 (211,000) 1,363,000 306,000 635,000 210,000 (410,000) (240,000) (1,130,000) 90,000 (33,000) 12,477,000 36,993,000 14,578,000 28,048,000 28,410,000 66,569,000 43,537,000 95,708,000 49,257,000 81,996,000 (8,560,000) (88,798,000) (69,034,000) - (2,475,000) (2,500,000) (12,066,000) Held-to-maturity................................................................................................ Available-for-sale............................................................................................. Net increase in loans to customers ..................................................................... Net increase in Federal Home Loan Bank stock.................................................. Purchases of bank premises and equipment ...................................................... Purchase of bank-owned life insurance............................................................... Net cash used in investing activities ……..................................................... (4,637,000) (206,897,000) (132,917,000) (5,015,000) (3,502,000) - (220,996,000) (18,477,000) (145,049,000) (76,087,000) - (3,763,000) - (89,553,000) Cash Flows From Financing Activities: Net increase in total deposits .............................................................................. Net increase (decrease) in short-term borrowings .............................................. Proceeds from long-term debt ............................................................................ Proceeds from exercise of stock options ........................................................... Tax benefit of stock options ................................................................................ Repurchase and retirement of common stock .................................................... Cash dividends paid …........................................................................................ Net cash provided by (used in) financing activities ...................................... Net increase (decrease) in cash and cash equivalents........................................... Cash and cash equivalents, beginning of year........................................................ Cash and cash equivalents, end of year................................................................. 31,299,000 112,012,000 47,000,000 525,000 21,000 (5,764,000) (4,575,000) 180,518,000 (26,059,000) 47,497,000 21,438,000 $ 44,241,000 (16,033,000) 80,000,000 694,000 76,000 (3,719,000) (5,342,000) 99,917,000 23,707,000 23,790,000 47,497,000 $ 36,786,000 (32,052,000) - 402,000 17,000 (2,927,000) (3,450,000) (1,224,000) (813,000) 24,603,000 23,790,000 $ Supplemental Schedule of Noncash Financing Activities: Cash dividends payable ...................................................................................... $ 1,295,000 $ 1,125,000 $ 2,087,000 The Corporation made interest payments of $17,159,000, $15,590,000, and $12,571,000 and income tax payments of $4,797,000, $2,541,000, and $3,253,000 in 2008, 2007 and 2006, respectively. See notes to consolidated financial statements 2 0 0 8 an nUaL rePo r t 33 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of The First of Long Island Corporation (the “Corporation”) and its wholly-owned subsidiary, The First National Bank of Long Island (the “Bank”), and 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 “REIT”). The Corporation’s financial condition and operating results principally reflect those of the Bank and its subsidiaries. All intercompany balances and amounts have been eliminated. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported asset and liability balances, revenue and expense amounts, and the disclosure of contingent assets and liabilities. Actual results could differ significantly from those estimates. The accounting and reporting policies of the Corporation reflect banking industry practice and conform to generally accepted accounting principles in the United States. The following is a summary of the Corporation’s significant accounting policies. Investment Securities Current accounting standards require that investment securities be classified as held-to-maturity, trading, or available- for-sale. The trading category is not applicable to any securities in the Bank's portfolio because the Bank does not buy or hold debt or equity securities principally for the purpose of selling in the near term. Held-to-maturity securities are those debt securities which the Bank has the intent and ability to hold to maturity, and are reported at amortized cost. Available-for-sale securities are those debt and equity securities which are neither held-to-maturity securities nor trading securities and are reported at fair value, with unrealized gains and losses, net of the related income tax effect, included in other comprehensive income. Interest on investment securities includes amortization or accretion of purchase premium or discount. Premiums and discounts on securities are amortized or accreted on the level-yield method. Realized gains and losses on the sale of securities are determined using the specific identification method. The Bank evaluates declines in fair value below the amortized cost basis for individual securities classified as either available-for-sale or held-to-maturity. In estimating other than temporary declines, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the Bank’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value. If a decline in fair value is judged to be other than temporary, the cost basis of the individual security is written down to fair value as a new cost basis and the amount of the write-down is included in earnings as a realized loss. The new cost basis is not changed for subsequent recoveries, if any, in fair value. Subsequent increases in the fair value of available-for-sale securities are included in other comprehensive income and subsequent decreases in fair value, if not an other-than-temporary impairment, are also included in other comprehensive income. Loans and Allowance For Loan Losses Loans are reported at their outstanding principal balance less any chargeoffs and the allowance for loan losses and plus or minus net deferred loan costs and fees, respectively. Interest on loans is credited to income based on the principal amount outstanding. Direct loan origination costs, net of loan origination fees, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. The accrual of interest income on loans is discontinued when a loan becomes 90 days past due as to principal or interest payments and any accrued but unpaid interest is reversed against current period income unless the loan is well secured and in the process of collection. The Bank considers nonaccruing loans to be impaired under Statement of Financial Accounting Standards No. 114 “Accounting by Creditors for Impairment of a Loan” (“SFAS No. 114”) as amended. The valuation allowance for nonaccrual and other impaired loans is reported within the overall allowance for loan losses. At December 31, 2008, the Bank had nonaccrual loans of $112,000 and loans past due 90 days or more as to principal and interest payments and still accruing of $42,000. At December 31, 2007, the Bank had nonaccrual loans of $257,000 and loans past due 90 days or more as to principal and interest payments and still accruing of $95,000. The allowance for loan losses is established through provisions for loan losses charged against income. Amounts deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. 34 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n The allowance for loan losses is an amount that management currently believes will be adequate to absorb probable incurred losses in the Bank’s loan portfolio. The process for estimating credit losses and determining the allowance for loan losses as of any balance sheet date is subjective in nature and requires material estimates. Actual results could differ significantly from those estimates. In determining the allowance for loan losses, there is not an exact amount but rather a range for what constitutes an appropriate allowance. In estimating losses the Bank reviews individual loans in its portfolio and, for those loans deemed to be impaired, measures impairment losses based on either the fair value of collateral or the discounted value of expected future cash flows. A loan is considered to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled principal and interest when due according to the contractual terms of the loan agreement. Estimated losses for loans that are not specifically reviewed are determined on a pooled basis using the Bank’s historical loss experience adjusted to reflect current conditions. In adjusting historical loss experience, management considers a variety of factors including levels of and trends in delinquencies and nonaccruing loans; trends in volume and terms of loans; changes in lending policies and procedures; experience, ability and depth of lending staff; national and local economic conditions; concentrations of credit; and environmental risks. The allowance for loan losses is comprised of impairment losses on the loans specifically reviewed plus estimated losses on the pools of loans that are not specifically reviewed. Bank Premises and Equipment Land is carried at cost. Other Bank premises and equipment are carried at cost, less accumulated depreciation and amortization. Buildings are depreciated using the straight-line method over their estimated useful lives, which range between thirty-one and forty years. Building improvements are depreciated using the straight-line method over the then remaining lives of the buildings or their estimated useful lives, whichever is shorter. Leasehold improvements are amortized using the straight-line method over the remaining lives of the leases or their estimated useful lives, whichever is shorter. The lives of the respective leases range between five and twenty years. Furniture, fixtures, and equipment are depreciated using the straight-line method over their estimated useful lives, which range between three and ten years. Bank-owned Life Insurance The Bank is the owner and beneficiary of insurance policies on the lives of certain executives. In accordance with Financial Accounting Standards Board Emerging Issues Task Force Issue No. 06-5, bank-owned life insurance is recorded at the lower of its cash surrender value or the amount that can be realized. Federal Home Loan Bank Stock The Bank is a member of the Federal Home Loan Bank of New York (“FHLB”) and as such is required to own a certain amount of stock based on membership and the level of FHLB advances. FHLB stock is carried at cost, classified as a restricted stock, and periodically evaluated for impairment based on the ultimate recovery of cost. Cash dividends, if any, are reported as income. Long-term Assets Premises and equipment, intangible assets, and other long-term assets, if any, are reviewed for impairment when events indicate that their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. Checking Deposits Each of the Bank’s commercial checking accounts has a related noninterest-bearing sweep account. The sole purpose of the sweep accounts is to reduce the reserve balances that the Bank is required to maintain with the Federal Reserve Bank, and thereby increase funds available for investment. Although the sweep accounts are classified as savings accounts for regulatory purposes, they are included in checking deposits in the accompanying consolidated balance sheets. Income Taxes A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year. A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law. The effects of future changes in tax laws or rates are not considered. The Corporation recognizes interest and/or penalties related to income tax matters in noninterest income or noninterest expense as appropriate. 2 0 0 8 an nUaL rePo r t 35 The Corporation adopted FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”) as of January 1, 2007. 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. The adoption of FIN No. 48 had no impact on the Corporation’s consolidated financial statements. Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management is not currently aware of any loss contingencies that will have a material effect on the Corporation’s consolidated financial statements. Stockholders’ Equity Earnings Per Share. Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options and restricted stock units (“RSUs”) were converted into shares of common stock that then shared in the earnings of the Corporation. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and dilutive stock options and RSUs. There were 275,762, 308,420 and 277,286 antidilutive stock options at December 31, 2008, 2007 and 2006, respectively, and no antidilutive RSUs. Other than the stock options and RSUs described in Note J and the Rights described in Note I, the Corporation has no securities that could be converted into common stock nor does the Corporation have any contracts that could result in the issuance of common stock. Stock Split. On March 22, 2007, the Corporation announced the declaration of a 2-for-1 stock split which was paid 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. Stock Repurchase Program. Since 1988, the Corporation has had a stock repurchase program under which it is authorized to purchase shares of its own common stock in market or private transactions. At December 31, 2008, and in accordance with prior approval by its Board of Directors, the Corporation was authorized to purchase 114,011 shares of stock. Share repurchases are financed through available corporate cash. Shares Tendered Upon The Exercise of Stock Options. The line captioned repurchase and retirement of common stock in the Consolidated Statement of Changes in Stockholders’ Equity includes common stock tendered upon the exercise of stock options of 1,843 shares in 2008 with a value of $40,000, 2,215 shares in 2007 with a value of $43,000, and 2,309 shares in 2006 with a value of $100,000. Stock-based Compensation The Corporation has a stock-based compensation plan as more fully described in Note J. Compensation cost is recognized for stock options and RSUs issued to employees, based on the grant date fair value of the award. The cost is recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). 36 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n Comprehensive Income Comprehensive income includes net income and other comprehensive income. Other comprehensive income includes revenues, expenses, gains, and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income. Other comprehensive income for the Corporation consists of unrealized holding gains or losses on available-for-sale securities and changes in the funded status of the Bank’s defined benefit pension plan, both net of related income taxes, which are also recognized as a separate component of stockholders’ equity. The components of other comprehensive income (loss) and the related tax effects are as follows: Unrealized holding gains on available-for-sale securities: Net unrealized holding gains arising during period ............................................. Reclassification adjustment for (gain) losses included in net income ................. Net unrealized gains on available-for-sale securities ......................................... Tax effect ............................................................................................................ Change in funded status of pension plan: Net unrealized gain (loss) arising during period ................................................. Amortization of prior service cost included in pension expense ......................... Tax effect ............................................................................................................ 2008 2007 (in thousands) 2006 $ 2,921 (248) 2,673 1,061 1,612 $ 2,118 234 2,352 933 1,419 $ 109 635 744 297 447 (8,172) 25 (8,147) (3,234) (4,913) 1,220 20 1,240 495 745 - - - - - Other comprehensive income (loss) ........................................................... $ (3,301) $ 2,164 $ 447 Embedded Derivative Instruments The Corporation accounts for embedded derivative instruments under Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) and related pronouncements. Accordingly, changes in the fair value of embedded derivative instruments with economic characteristics and risks that are clearly and closely related to the economic characteristics and risks of the related host contracts are not recognized in earnings in the period of change. Generally, all other embedded derivative instruments, unless they are embedded in contracts that are remeasured at fair value with changes in fair value reported in earnings as they occur, are accounted for as fair value hedges, cash flow hedges, foreign currency hedges or nonhedging instruments under SFAS No. 133 and related pronouncements. Fair Values of Financial Instruments The following methods and assumptions are used by the Corporation in measuring assets and liabilities carried at fair value in its financial statements and for the fair values of financial instruments disclosed herein. Cash and cash equivalents. The recorded book value of cash and due from banks is their fair value. Investment securities. Fair values are based on quoted prices for similar assets in active markets or derived principally from observable market data. Loans. Fair values are estimated for portfolios of loans with similar financial characteristics. The total loan portfolio is first divided into adjustable and fixed rate interest terms. For adjustable rate loans that are subject to immediate repricing, the recorded book value less the related allowance for loan losses is a reasonable estimate of fair value. For adjustable rate loans that are subject to repricing over time and fixed rate loans, fair value is calculated by discounting anticipated future repricing amounts or cash flows using discount rates equivalent to the rates at which the Bank would currently make loans which are similar with regard to collateral, maturity, and the type of borrower. The discounted value of the repricing amounts and cash flows is reduced by the related allowance for loan losses to arrive at an estimate of fair value. FHLB stock. The recorded book value of FHLB stock is its fair value. Deposit liabilities. The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, money market accounts, and savings accounts, is equal to their recorded book value at December 31 of each year. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is equivalent to the rate currently offered by the Bank for deposits of similar size, type and maturity. 2 0 0 8 an nUaL rePo r t 37 Borrowed funds. For repurchase agreements and FHLB advances maturing within ninety days, the recorded book value is a reasonable estimate of fair value. The fair values of longer-term repurchase agreements, including those with embedded derivative instruments, are based on quoted prices for similar instruments in active markets. Accrued interest receivable and payable. For these short-term instruments, the recorded book value is a reasonable estimate of fair value. Operating Segments While senior management monitors the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the financial operations are considered by senior management to be aggregated in one reportable operating segment. Investment Management Division Assets held in a fiduciary capacity are not assets of the Corporation and, accordingly, are not included in the accompanying consolidated financial statements. The Investment Management Division records fees on the accrual basis. Reclassifications Some items in the prior year financial statements were reclassified to conform to the current presentation. Adoption of New Accounting Pronouncements In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157 “Fair Value Measurements” (“SFAS No. 157”). This statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (“FSP”) 157-2, “Effective Date of SFAS No. 157.” This FSP delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. In October 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset when the Market for That Asset Is Not Active.” This FSP clarifies the application of SFAS No. 157 in a market that is not active. The adoption of SFAS No. 157 on January 1, 2008 did not materially impact the disclosures made in the Corporation’s consolidated financial statements. In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The Corporation has not elected the fair value option for any financial assets or financial liabilities. 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. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or the future death benefit, depending on the contractual terms of the underlying agreement. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The adoption of EITF 06-4 on January 1, 2008 had no impact on the Corporation’s consolidated financial statements. On November 5, 2007, the SEC issued Staff Accounting Bulletin (“SAB”) No. 109, “Written Loan Commitments Recorded at Fair Value through Earnings” (“SAB 109”). Previously, SAB 105, “Application of Accounting Principles to Loan Commitments”, stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 is effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The adoption of SAB 109 on January 1, 2008 had no impact on the Corporation’s consolidated financial statements. 38 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n  In December 2007, the SEC issued SAB 110, which expresses the views of the SEC regarding the use of a “simplified” method, as discussed in SAB 107, in developing an estimate of expected term of “plain vanilla” share options in accordance with SFAS No. 123(R) “Share-Based Payment.” The SEC concluded that a company could, under certain circumstances, continue to use the simplified method for share option grants after December 31, 2007. The Company does not use the simplified method for share options and therefore SAB 110 had no impact on the Company’s consolidated financial statements. Impact of Not Yet Effective Authoritative Accounting Pronouncements In December 2007, the FASB issued SFAS No. 141 (revised 2007) “Business Combinations” (“SFAS No. 141(R)”), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to materially affect the Corporation’s results of operations or financial position. In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No. 160”), which will change the accounting and reporting for minority interests. Under SFAS No. 160, minority interests will be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets. SFAS No. 160 is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to materially affect the Corporation’s results of operations or financial position. In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities – an amendment of SFAS No. 133” (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this standard is not expected to materially affect the Corporation’s results of operations or financial position. In May 2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States. This Statement will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411. The adoption of SFAS No. 162 is not expected to impact the Corporation’s consolidated financial statements. On February 20, 2008, the FASB issued FSP FAS 140-3 “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions” (“FSP 140-3”) to resolve questions about the accounting for repurchase financings. This FSP is effective for repurchase financings in which the initial transfer is entered into in fiscal years beginning after November 15, 2008. The adoption of FSP 140-3 on January 1, 2009 had no impact on the Corporation’s consolidated financial statements. On April 25, 2008, the FASB issued FSP FAS 142-3 “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”), which amends the list of factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142 “Goodwill and Other Intangible Assets.” FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of FSP 142-3 on January 1, 2009 did not impact the Corporation’s consolidated financial statements. On May 9, 2008, the FASB issued FSP APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP 14-1”). FSP 14-1 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of FSP 14-1 on January 1, 2009 had no impact on the Corporation’s consolidated financial statements. On June 16, 2008, the FASB issued FSP EITF 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP 03-6-1”). The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in paragraphs 60 and 61 of SFAS No. 128, Earnings per Share. FSP 03-6-1 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of FSP 03-6-1 on January 1, 2009 had no impact on the Corporation’s consolidated financial statements. 2 0 0 8 an nUaL rePo r t 39 NOTE B – INVESTMENT SECURITIES The following table sets forth the amortized cost and estimated fair values of the Bank’s investment securities at December 31, 2008 and 2007. Held-to-Maturity Securities: State and municipals ................................................................ Pass-through mortgage securities ........................................... Collateralized mortgage obligations ......................................... Available-for-Sale Securities: U.S. government agencies ....................................................... State and municipals ................................................................ Pass-through mortgage securities ........................................... Collateralized mortgage obligations ......................................... Held-to-Maturity Securities: State and municipals ................................................................ Pass-through mortgage securities ........................................... Collateralized mortgage obligations ......................................... Available-for-Sale Securities: U.S. Treasury ........................................................................... U.S. government agencies ....................................................... State and municipals ................................................................ Pass-through mortgage securities ........................................... Collateralized mortgage obligations ......................................... Amortized Cost 2008 Gross Unrealized Gains Gross Unrealized Losses (in thousands) Fair Value $ $ $ $ $ $ $ $ $ 1,708 447 1,330 3,485 130 2,375 2,324 1,052 5,881 1,327 146 388 1,861 - $ 158 2,070 896 6 3,130 $ (228) (1) (96) (325) - $ (359) (19) (76) (454) $ (130) (264) (811) (1,205) (2) (4) (27) (339) (3) (375) $ $ $ Amortized Cost 2007 Gross Unrealized Gains Gross Unrealized Losses (in thousands) Fair Value $ $ $ $ $ $ $ $ $ $ $ $ $ 66,817 20,802 81,861 169,480 33,555 74,625 122,465 142,701 373,346 67,233 27,119 98,882 193,234 5,058 49,961 74,579 92,492 48,235 270,325 68,297 21,248 83,095 172,640 33,685 76,641 124,770 143,677 378,773 68,430 27,001 98,459 193,890 5,056 50,115 76,622 93,049 48,238 273,080 $ $ $ The pass-through mortgage securities shown in the preceding tables were issued by the Government National Mortgage Association (“GNMA”), the Federal National Mortgage Association (“FNMA”), and the Federal Home Loan Mortgage Corporation (“FHLMC”). Each issuer’s pass-through securities are backed by mortgages conforming to its underwriting guidelines and each issuer guarantees the timely payment of principal and interest on its securities. The collateralized mortgage obligations (“CMOs”) shown in the table were also issued by GNMA, FNMA, or FHLMC and all such securities, regardless of the issuer, are backed by GNMA pass-through mortgage securities. Each issuer guarantees the timely payment of principal and interest on its CMOs and GNMA guarantees the timely payment of principal and interest on the underlying pass-through mortgage securities. Obligations of GNMA represent full faith and credit obligations of the U.S. government (the “Government”), while obligations of FNMA, which is a corporate instrumentality of the Government, and FHLMC, which is a Government sponsored corporation, do not. FNMA and FHLMC have been placed into conservatorship by their primary regulator, the Federal Housing Finance Agency (“FHFA”) who also acts as conservator. In conjunction with the conservatorship, the U.S. Department of the Treasury entered into Preferred Stock Purchase Agreements with FNMA and FHLMC to ensure that each of these entities maintains positive net worth, and established new borrowing facilities for these entities intended to serve as an ultimate liquidity backstop. The Preferred Stock Purchase Agreements and borrowing facilities serve to protect the existing and future holders of FNMA and FHLMC mortgage securities and other debt instruments. At December 31, 2008 and 2007, investment securities with a carrying value of $365,134,000 and $178,925,000, respectively, were pledged as collateral to secure public deposits and borrowed funds. 40 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n Securities With Unrealized Losses. The following table sets forth securities with unrealized losses at December 31, 2008 and 2007 presented by length of time the securities have been in a continuous unrealized loss position. Less than 12 Months 2008 12 Months or More Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss State and municipals..…................................ Pass-through mortgage securities…............. Collateralized mortgage obligations .............. Total temporarily impaired..…........................ U.S. Treasury ................................................ U.S. government agencies ........................... State and municipals..…................................ Pass-through mortgage securities…….......... Collateralized mortgage obligations .............. Total temporarily impaired..…........................ $ $ $ $ $ 19,839 895 34,391 55,125 (555) (19) (75) (649) $ (in thousands) 1,769 16 9,337 11,122 $ (32) (1) (97) (130) 21,608 911 43,728 66,247 (587) (20) (172) (779) $ $ $ $ $ Less than 12 Months 2007 12 Months or More Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss $ $ $ $ 5,056 6,141 6,779 18,660 11,119 47,755 (2) (4) (31) (97) (154) (288) (in thousands) - $ - 9,726 18,921 38,024 66,671 $ - $ - (126) (506) (660) (1,292) $ 5,056 6,141 16,505 37,581 49,143 114,426 (2) (4) (157) (603) (814) (1,580) $ $ $ $ Unrealized losses reflected in the preceding tables have not been included in results of operations because the affected securities are of high credit quality, management has the intent and ability to hold these securities for the foreseeable future, and the decline in fair value is largely due to an increase in interest rates since the time the securities were purchased. The losses on these securities are expected to dissipate as they approach their maturity dates and/or if interest rates decline. Sales of Available-for-Sale Securities. Sales of available-for-sale securities were as follows: 2008 2007 (in thousands) 2006 Proceeds ............................................................... $ 36,993 $ 14,578 $ 28,048 Gross gains ........................................................... Gross losses .......................................................... Net gains (losses) .................................................. 287 (39) 248 $ 17 (251) (234) $ - (635) (635) $ The tax benefit (provision) related to these net realized losses and gains was $(98,000), $93,000 and $254,000 in 2008, 2007 and 2006, respectively. 2 0 0 8 an nUaL rePo r t 41  Maturities and Average Yields. The following table sets forth the maturities and weighted average yields of the Bank’s investment securities at December 31, 2008. Principal Maturing (1) Within One Year Amount Yield After One But Within Five Years Yield Amount After Five But Within Ten Years Yield Amount After Ten Years Amount Yield (dollars in thousands) Held-to-Maturity Securities (Amortized Cost) State and municipals (2) ….................... Pass-through mortgage securities …..... Collateralized mortgage obligations ...... Held-to-Maturity Securities (Fair Value) State and municipals (2) ….................... Pass-through mortgage securities …..... Collateralized mortgage obligations ...... $ $ 7,845 33 - 7,878 6.71% 5.85 - 6.70% $ $ 16,077 11,547 232 27,856 7.43% 3.84 4.24 5.92% $ $ 22,590 4,036 - 26,626 6.07% 4.71 - 5.86% $ 20,305 5,186 81,629 107,120 $ 6.22% 5.36 4.87 5.15% Principal Maturing (1) Within One Year Amount Yield After One But Within Five Years Yield Amount After Five But Within Ten Years Yield Amount After Ten Years Amount Yield (dollars in thousands) $ $ 7,973 33 - 8,006 6.71% 5.85 - 6.70% $ $ 16,700 11,680 233 28,613 7.43% 3.84 4.24 5.92% $ $ 23,271 4,186 - 27,457 6.07% 4.71 - 5.86% $ 20,353 5,349 82,862 108,564 $ 6.22% 5.36 4.87 5.15% Principal Maturing (1) Within One Year Amount Yield After One But Within Five Years Yield Amount After Five But Within Ten Years Yield Amount After Ten Years Amount Yield (dollars in thousands) Available-for-Sale Securities (Fair Value) U.S. government agencies …................. State and municipals (2) ….................... Pass-through mortgage securities …..... Collateralized mortgage obligations ...... - $ 6,295 - - 6,295 $ - % 7.11 - - 7.11% - $ 27,434 - - 27,434 $ - % 7.06 - - 7.06% $ $ 33,685 17,661 20,470 - 71,816 5.24% 6.78 4.76 - 5.48% - $ 25,251 104,300 143,677 273,228 $ - % 6.45 5.64 4.56 5.15% (1) Maturities shown are stated maturities, except in the case of municipal securities which are shown at the earlier of their stated maturity or pre-refunded dates. Securities backed by mortgages, which include the pass-through mortgage securities and collateralized mortgage obligations shown above, are expected to have substantial periodic repayments resulting in weighted average lives considerably shorter than would be surmised from the above table. (2) Yields on tax-exempt state and municipal securities have been computed on a tax-equivalent basis. 42 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n NOTE C – LOANS The following table sets forth changes in the Bank’s allowance for loan losses. Balance, beginning of year ..................................................... Loans charged off: Commercial and industrial .................................................... Other …................................................................................. Recoveries of loans charged off: Other …................................................................................. Net chargeoffs.......................................................................... Provision for loan losses …...................................................... Balance, end of year …........................................................... Ratio of net chargeoffs to average loans outstanding ……......................................... 2008 Year ended December 31, 2007 (dollars in thousands) 2006 $ 4,453 $ 3,891 $ 3,282 275 50 325 3 3 (322) 1,945 6,076 $ - 14 14 1 1 (13) 575 4,453 $ 65 11 76 15 15 (61) 670 3,891 $ .06% .00% .01% The following tables set forth information regarding individually impaired loans. December 31, 2008 2007 (in thousands) Impaired loans at year end: With no allocated allowance for loan losses ........................ With an allocated allowance for loan losses ........................ $ 744 1,455 2,199 $ $ 397 987 1,384 $ Amount of allocated allowance for loan losses ....................... $ 355 $ 104 Average of individually impaired loans during year ................. Interest income recognized while impaired ............................. $ 1,975 158 2008 Year ended December 31, 2007 (in thousands) $ 1,538 115 2006 $ 2,327 180 All interest income recorded by the Corporation during 2008, 2007 and 2006 on loans considered to be impaired was generally recognized using the accrual method of accounting. Nonaccrual loans and loans past due 90 days or more and still accruing are as follows: December 31, 2008 2007 (in thousands) Nonaccrual loans ................................................................... Loans past due 90 days or more and still accruing ................. $ $ 112 42 154 $ $ 257 95 352 Certain directors, including their immediate families and companies in which they are principal owners, and executive officers were loan customers of the Bank during 2008 and 2007. The aggregate amount of these loans was $2,374,000 and $2,554,000 at December 31, 2008 and 2007, respectively. During 2008, $22,000 of new loans to such persons were made and repayments totaled $202,000. There were no loans to directors or executive officers which were nonaccruing at December 31, 2008 or 2007. 2 0 0 8 an nUaL rePo r t 43 NOTE D – PREMISES AND EQUIPMENT Bank premises and equipment consist of the following: Land .................................................................................................................. Buildings and improvements …......................................................................... Leasehold improvements ................................................................................. Furniture and equipment .................................................................................. Construction in process..................................................................................... Accumulated depreciation and amortization ..................................................... December 31, 2008 2007 (in thousands) $ $ 1,650 7,741 4,654 15,265 932 30,242 (17,649) 12,593 1,650 5,439 4,264 13,741 1,646 26,740 (15,818) 10,922 $ $ A building occupied by one of the Bank’s branch offices is leased from a director of the Corporation and the Bank. The lease expires on October 31, 2012 and provides for annual base rent of $32,983 for the year ending October 31, 2009. In addition to base rent, the Bank is responsible for its proportionate share of the real estate taxes on the building in which the leased premises are located. The Corporation believes that the foregoing is comparable to the rent that would be charged by an unrelated third party. NOTE E – DEPOSITS The following table sets forth the remaining maturities of the Bank’s time deposits. Less than $100,000 Amount $100,000 or More (in thousands) Total 2009 ................................................................................... 2010 ................................................................................... 2011 ................................................................................... 2012 ................................................................................... 2013 ................................................................................... Thereafter ........................................................................... $ $ $ 44,080 3,975 2,543 1,522 5,877 105 58,102 123,753 2,061 1,935 1,374 4,827 100 134,050 $ $ $ 167,833 6,036 4,478 2,896 10,704 205 192,152 The aggregate amount of deposit account overdrafts included in other loans on the consolidated balance sheet was $876,000 and $1,546,000 at December 31, 2008 and 2007, respectively. NOTE F – BORROWED FUNDS The following table summarizes borrowed funds at December 31, 2008 and 2007. Short-term borrowings: Securities sold under repurchase agreements ............................................ Federal Home Loan Bank advances ........................................................... Long-term debt: Securities sold under repurchase agreements ............................................ December 31, 2008 2007 (in thousands) $ 18,122 106,000 124,122 127,000 251,122 $ $ 12,110 - 12,110 80,000 92,110 $ Accrued interest payable on borrowed funds is included in “accrued expenses and other liabilities” in the Consolidated Balance Sheets, and amounted to $621,000 and $356,000, respectively, at December 31, 2008 and 2007. 44 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n Securities Sold Under Repurchase Agreements. Securities sold under repurchase agreements are financing arrangements with contractual maturities between one day and ten years that are collateralized by mortgage-backed securities. With the exception of those repurchase agreements with embedded interest rate caps as described hereinafter, securities sold under repurchase agreements have fixed rates of interest. At maturity, the securities underlying the agreements will be returned to the Bank. The following table sets forth information concerning securities sold under repurchase agreements. 2008 2007 (dollars in thousands) Average daily balance during the year............................................................. Average interest rate during the year............................................................... Maximum month-end balance during the year................................................. Weighted average interest rate at year-end..................................................... $ $ 130,010 3.89% 151,439 3.82% $ $ 31,324 4.32% 99,058 4.34% The following table summarizes the contractual maturities and weighted average interest rates of securities sold under repurchase agreements and the amortized cost and fair value, including accrued interest, of the securities collateralizing the repurchase agreements at December 31, 2008. Contractual Maturity Borrowing Amount Weighted Average Rate Securities Collateral Pass-through Mortgage Securities Fair Value Amortized Cost (dollars in thousands) Collateralized Mortgage Obligations Fair Value Amortized Cost Overnight.......................................... $ 18,122 0.81% $ - $ - $ 18,652 $ 18,905 2011 ................................................ 2012 ................................................ 2013 ................................................ Thereafter ........................................ 12,000 50,000 10,000 55,000 127,000 2.92 4.47 4.19 4.37 4.25 77,660 79,148 70,033 69,178 $ 145,122 3.82% $ 77,660 $ 79,148 $ 88,685 $ 88,083 The repurchase agreements maturing in 2012 are callable in 2010, the repurchase agreements maturing in 2013 are callable in 2011, and the repurchase agreements maturing after 2013 are callable beginning in 2010. $75 million of the repurchase agreements have embedded interest rate caps with a notional amount of $120 million and a weighted average LIBOR strike rate of 4.46%. The interest rate on the repurchase agreements will, as a result of the embedded caps, be reduced on a quarterly basis by the excess, if any, of 3 month LIBOR at the beginning of the quarter over the strike rate on the cap. However, the interest rate on the repurchase agreements can never go below zero. Since the economic characteristics and risks of the embedded caps are clearly and closely related to the economic characteristics and risks of the repurchase agreements, changes in the fair value of the caps are not recognized in earnings in the period of change. Because the Bank’s 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. The purpose of the embedded interest rate caps is to potentially reduce the Corporation’s exposure in the event of an increase in interest rates. Federal Home Loan Bank Advances. At December 31, 2008, the Bank had $106,000,000 of outstanding FHLB advances which mature in January 2009 and are collateralized by $111 million of CMOs and pass-through mortgage securities. The following table sets forth information concerning FHLB advances. December 31, 2008 2007 Average daily balance during the year............................................................. Average interest rate during the year............................................................... Maximum month-end balance during the year................................................. Weighted average interest rate at year-end..................................................... (dollars in thousands) $ 1,381 4.86% 14,000 $ $ $ 21,306 .93% 110,000 .44% N/A 2 0 0 8 an nUaL rePo r t 45 Other Borrowings. The Bank had no other borrowings at December 31, 2008 or 2007. In 2008, the average balance of other borrowings amounted to $5,959,000 with an average interest rate of 2.22%. The funds were borrowed predominantly at the Federal Reserve Bank discount window. There were no other borrowing transactions in 2007. NOTE G – INCOME TAXES The Corporation, the Bank, and the Bank’s subsidiaries with the exception of the REIT, file a consolidated federal income tax return. Income taxes charged to earnings in 2008, 2007, and 2006 had effective tax rates of 26.3%, 20.1%, and 19.9%, respectively. The following table sets forth a reconciliation of the statutory Federal income tax rate to the Corporation’s effective tax rate. Statutory federal income tax rate ............................................................................ State and local income taxes, net of federal income tax benefit ............................ Tax-exempt income, net of disallowed cost of funding ........................................... Other …................................................................................................................... 2008 34.0% 5.5 (12.6) (0.6) 26.3% Year Ended December 31, 2007 34.0% 1.4 (15.1) (0.2) 20.1% 2006 34.0% .8 (15.3) .4 19.9% The increase in the effective tax rate in 2008 is the result of the Corporation losing the tax benefit derived from its REIT entity and tax-exempt income now representing a smaller percentage of income before income taxes. The loss of the REIT tax benefit resulted from a change in New York State tax law effective January 1, 2008. Provision For Income Taxes. The following table sets forth the components of the provision for income taxes. Current: Federal ........................................................................................................... State and local ................................................................................................ Deferred: Federal ........................................................................................................... State and local ................................................................................................ 2008 $ 3,388 1,469 4,857 (217) (12) (229) 4,628 $ Year Ended December 31, 2007 (in thousands) $ 2,607 288 2,895 (9) 9 - 2,895 $ 2006 $ 2,800 196 2,996 (188) (23) (211) 2,785 $ Net Deferred Tax Asset or Liability. The following table sets forth the components of the Bank’s net deferred tax asset or liability. Deferred tax assets: Allowance for loan losses.................................................................................... Pension obligation................................................................................................ Stock-based compensation ................................................................................. Supplemental executive retirement expense....................................................... Directors' retirement expense ............................................................................. Depreciation ....................................................................................................... Accrued rent expense.......................................................................................... Other.................................................................................................................... Valuation allowance ................................................................................................ Deferred tax liabilities: Prepaid pension................................................................................................... Unrealized gains on available-for-sale securities ................................................ Depreciation ....................................................................................................... Net deferred tax asset (liability) .............................................................................. December 31, 2008 2007 (in thousands) $ 2,041 1,193 423 23 87 - 53 21 3,841 - 3,841 $ 1,244 - 255 13 91 21 - 12 1,636 - 1,636 - 2,154 49 2,203 1,638 $ 1,306 1,094 - 2,400 (764) $ 46 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n The Corporation is subject to U.S. federal income tax as well as New York State and New York City income taxes. The Corporation is not subject to examination by taxing authorities for years before 2005 and did not have any amounts accrued for interest and penalties due taxing authorities at December 31, 2008. NOTE H – REGULATORY MATTERS Minimum Regulatory Capital Requirements. The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Corporation’s and Bank’s financial statements. Under capital adequacy guidelines and, with respect to the Bank, the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined) and of Tier 1 capital to average assets (as defined). As of December 31, 2008, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Bank’s category. The Corporation’s and the Bank’s actual capital amounts and ratios at December 31, 2008 and 2007 are also presented in the table. Total Capital to Risk Weighted Assets: Consolidated ..................................................... Bank .................................................................. Tier 1 Capital to Risk Weighted Assets: Consolidated ..................................................... Bank .................................................................. Tier 1 Capital to Average Assets: Consolidated ..................................................... Bank .................................................................. Actual Capital 2008 Minimum Capital Requirement (dollars in thousands) Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio $ 109,990 106,748 17.79% 17.27 $ 49,470 49,435 8.00% 8.00 N/A 61,794 $ N/A 10.00% 103,914 100,672 103,914 100,672 16.80 16.29 8.29 8.03 Actual Capital 24,735 24,718 50,144 50,127 4.00 4.00 4.00 4.00 2007 Minimum Capital Requirement (dollars in thousands) N/A 37,076 N/A 62,659 N/A 6.00 N/A 5.00 Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Total Capital to Risk Weighted Assets: Consolidated ..................................................... Bank .................................................................. Tier 1 Capital to Risk Weighted Assets: Consolidated ..................................................... Bank .................................................................. Tier 1 Capital to Average Assets: Consolidated ..................................................... Bank .................................................................. Amount Ratio Amount Ratio Amount Ratio $ 104,918 102,850 20.79% 20.38 $ 40,379 40,377 8.00% 8.00 N/A 50,471 $ N/A 10.00% 100,465 98,397 100,465 98,397 19.90 19.50 9.53 9.33 20,189 20,188 42,179 42,171 4.00 4.00 4.00 4.00 N/A 30,283 N/A 52,714 N/A 6.00 N/A 5.00 2 0 0 8 an nUaL rePo r t 47  Other Matters. The Corporation’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the minimum capital requirements described above. During 2009, the Bank could, without prior approval, declare dividends of approximately $5,872,000 plus any 2009 net profits retained to the date of the dividend declaration. Regulation D of the Board of Governors of The Federal Reserve System requires banks to maintain reserves against certain deposit balances. The Bank’s average reserve requirement for 2008 was approximately $9,644,000. Under national banking laws and related statutes, the Bank is limited as to the amount it may loan to the Corporation, unless such loans are collateralized by specified obligations. At December 31, 2008, the maximum amount available for transfer from the Bank to the Corporation in the form of loans approximated $14,894,000. NOTE I – SHAREHOLDER PROTECTION RIGHTS PLAN On July 18, 2006, the Board of Directors of the Corporation (the “Board”) unanimously determined to renew the Corporation’s Shareholder Protection Rights Plan and declared a distribution of one right (“Right”) for each share of the Corporation’s common stock (the “Common Stock”) outstanding on August 1, 2006. In the absence of an event of the type described below, the Rights will be evidenced by and trade with the Common Stock and will not be exercisable. However, the Rights will separate from the Common Stock and become exercisable following the earlier of (1) the tenth business day, or such later date as the Board may decide, after any person or persons (collectively referred to as “person”) commences a tender offer that would result in such person holding a total of 20% or more of the outstanding Common Stock, or (2) ten business days after, or such earlier or later date as the Board may decide, the announcement by the Corporation that any person has acquired 20% or more of the outstanding Common Stock. When separated from the Common Stock, each Right will entitle the holder to purchase one share of Common Stock for $75 (the “Exercise Price”). However, in the event that the Corporation has announced that any person has acquired 20% or more of the outstanding Common Stock, the Rights owned by that person will be automatically void and each other Right will automatically become a right to buy, for the Exercise Price, that number of shares of Common Stock having a market value of twice the Exercise Price. Also, if any person acquires 20% or more of the outstanding Common Stock, the Board can require that, in lieu of exercise, each outstanding Right be exchanged for one share of Common Stock. The Rights may be redeemed by action of the Board at a price of $.01 per Right at any time prior to announcement by the Corporation that any person has acquired 20% or more of the outstanding Common Stock. The Exercise Price and the number of Rights outstanding are subject to adjustment to prevent dilution. The Rights expire ten years from the date of their issuance. NOTE J – STOCK-BASED COMPENSATION The Corporation has two share-based compensation plans which are described below. The Corporation’s 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 342,950 shares remain available for grant at December 31, 2008. 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 Corporation’s 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, total and permanent disability, or death. 48 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n  The Corporation’s 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 Corporation’s 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 is 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 grant date fair value of option awards is estimated on the date of grant using the Black-Scholes option pricing model. The values of awards made in 2008, 2007 and 2006, as well as the assumptions utilized in determining such values, are as follows: Grant date fair value................................... Expected volatility...................................... Expected dividends.................................... Expected term (in years)............................ Risk-free interest rate................................. 2008 $6.72 45.42% 3.24% 6.82 3.49% 2007 $6.05 25.24% 2.06% 6.70 4.53% 2006 $5.98 25.11% 2.09% 6.70 5.07% 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. 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. 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 participant’s 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 number of shares of the Corporation’s common stock into which the RSUs will ultimately be convertible. However, if the period between the grant date and the grantee’s eligible retirement date is less than three years, compensation expense is recognized ratably over this shorter period. For options outstanding and not yet exercisable, the Corporation assumes an annual forfeiture rate of 1.26% in determining compensation expense. The Corporation’s income statement reflects compensation expense for share-based payments of $450,000, $506,000 and $210,000 in 2008, 2007 and 2006, respectively, and related income tax benefits of $178,000, $200,000 and $68,000, respectively. Stock Option Activity. On January 22, 2008, the Corporation’s board of directors granted 78,451 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 Corporation’s stock on the date of grant. A summary of options outstanding under the Corporation’s stock compensation plans as of December 31, 2008 and changes during the year then ended is presented below. Weighted- Average Exercise Price $ $ $ 18.90 18.50 14.07 20.26 19.04 18.61 Number of Options 516,266 78,451 (37,328) (57,107) 500,282 345,214 Weighted- Average Remaining Contractual Term (yrs.) Aggregate Intrinsic Value (in thousands) 5.84 4.73 $ $ 2,364 1,783 Outstanding at January 1, 2008............... Granted .................................................. Exercised................................................. Forfeited or expired................................ Outstanding at December 31, 2008......... Exercisable at December 31, 2008.......... 2 0 0 8 an nUaL rePo r t 49 The total intrinsic value of options exercised in 2008, 2007, and 2006 was $232,000, $371,000 and $233,000, respectively. The total fair value of options vested during the years ended December 31, 2008, 2007, and 2006 was $194,000, $251,000 and $102,000, respectively. Restricted Stock Activity. On January 22, 2008, the Corporation’s Board of Directors granted 24,241 RSUs under the 2006 Plan. The Corporation’s financial performance for 2010 will determine the number of shares of common stock, if any, into which the RSUs will ultimately be converted. The maximum number of shares that could be issued upon conversion of the RSUs is reflected as granted shares in the table that follows. Nonvested at January 1, 2008....................... Granted.......................................................... Vested............................................................ Forfeited......................................................... Nonvested at December 31, 2008................. Weighted- Average Grant-Date Fair Value 21.06 $ 16.81 18.99 19.25 19.10 $ Number of Shares 28,306 24,241 (1,356) (5,121) 46,070 The total fair value of shares vested during the year ended December 31, 2008 was $26,000. No shares were vested during the years ended December 31, 2007 or 2006. Unrecognized Compensation Cost. As of December 31, 2008, there was $899,000 of total unrecognized compensation cost related to nonvested equity awards. The cost is expected to be recognized over a weighted-average period of 1.42 years. Cash Received and Tax Benefits Realized. Cash received from option exercises in 2008, 2007, and 2006 was $525,000, $694,000 and $402,000, respectively. The actual tax benefit realized for the tax deductions from option exercises in 2008, 2007, and 2006 was $21,000, $76,000 and $17,000, respectively. Other. No cash was used to settle stock options in 2008 or 2007. The Corporation uses newly issued shares to settle stock option exercises and currently plans to use newly issued shares upon the conversion of restricted stock units. NOTE K – RETIREMENT PLANS The Bank has a 401(k) plan, defined benefit pension plan and supplemental executive retirement plan. Employees are eligible to participate in the 401(k) plan provided they are at least 21 years of age and have completed one year of service in which they worked 1,000 hours if full-time and 700 hours if part-time. Participants may elect to contribute, on a tax- deferred basis, up to 25% of gross compensation, as defined, subject to the limitations of Section 401(k) of the Internal Revenue Code. The Bank may, at its sole discretion, make matching contributions to each participant's account based on the amount of the participant's tax deferred contributions. Participants are fully vested in their elective contributions and, after five years of participation in the 401(k) plan, are fully vested (20% vesting per year) in the matching contributions, if any, made by the Bank. Matching contributions were $291,000, $279,000, and $179,000 for 2008, 2007, and 2006, respectively. The provisions of the Bank’s defined benefit pension plan (the “Pension Plan” or the “Plan”) are governed by the rules and regulations contained in the Prototype Plan of the New York State Bankers Retirement System (the “Retirement System”) and the Retirement System Adoption Agreement executed by the Bank. The Retirement System is overseen by a Board of Trustees (the “Trustees”) who meet quarterly and, among other things, set the investment policy guidelines. For investment purposes, the Pension Plan’s contributions are pooled with the contributions of the other participants in the Retirement System. Assets of the Pension Plan are invested in various debt and equity securities, the major categories of which are set forth in a table that follows. Employees are eligible to participate in the Pension Plan after attaining 21 years of age and completing 12 full months of service. Pension benefits are generally based on a percentage of average annual compensation during the period of creditable service. The Bank makes annual contributions to the Pension Plan in an amount sufficient to fund these benefits and participants contribute 2% of their compensation. The Bank’s funding method, the unit credit actuarial cost method, is consistent with the funding requirements of federal law and regulations. Employees become fully vested after four years of participation in the Pension Plan (no vesting occurs during the four- year period). In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R).” This Statement requires that defined benefit plan assets and obligations be measured as of the date of 50 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n the employer’s fiscal year-end, starting in 2008. Through 2007, the Company utilized the early measurement date option available under FASB Statement No. 87 “Employers’ Accounting for Pensions”, and measured the funded status of the defined benefit plan assets and obligations as of September 30 each year. The impact of the change was not material. Major Categories of Plan Assets. The following table sets forth the major categories of Plan assets as of the last two Plan year ends and the percentage of the total value of Plan assets accounted for by each. Equity Securities...................................................................................................... Debt Securities........................................................................................................ All Other Assets....................................................................................................... Percentage of Fair Value of Total Plan Assets at: 12/31/08 50 % 43 7 100 % 12/31/07 54 % 40 6 100 % The Retirement System uses two investment management firms, with one firm investing approximately 70% and the other firm investing approximately 30% of the total portfolio. The Retirement System investment objective is to exceed the investment benchmark in each asset category. Each firm operates under a separate written investment policy approved by the Trustees. The mix of equity and debt securities is determined from time to time by the Trustees based on a review of the Retirement System's requirements. The current target allocation percentage for equity securities is 60% but may vary from 50% to 70% based on the investment managers’ discretion. The equity portfolio includes, among other things, international securities and equities in a separately managed large cap core equity fund that is permitted to invest in a diversified range of securities in the US equity markets. The current target allocation percentage for debt securities is 40% but may vary from 30% to 50% at the investment managers’ discretion. Fixed income investments include various debt securities included in a fixed income portfolio and a core bond fixed income fund. The fixed income portfolio operates with guidelines relating to types of debt securities, quality ratings, maturities, and single company and sector allocation limits. The portfolio investments in the core bond fixed income fund are limited to US Dollar denominated, fixed income securities and selective derivatives designed to have attributes similar to such fixed income securities. Net Pension Cost. The following table sets forth the components of net periodic pension cost. Service cost, net of plan participant contributions .................................................. Interest cost ............................................................................................................ Expected return on plan assets .............................................................................. Amortization of prior service cost ........................................................................... Amortization of net actuarial loss ............................................................................ Net pension cost .................................................................................................. 2008 $ 1,014 910 (1,368) 20 - 576 $ 2007 (in thousands) 870 $ 829 (1,159) 20 - 560 $ 2006 $ 785 743 (1,001) 20 27 574 $ The estimated prior service costs and net actuarial loss for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $23,000 and $635,000, respectively. Significant Actuarial Assumptions. The following tables set forth the significant actuarial assumptions used to determine the benefit obligations at year-end 2008, 2007 and 2006 and the benefit cost for each of the Plan years then ended. Weighted average assumptions used to determine the benefit obligation at year end Discount rate .......................................................................................................... Rate of increase in compensation levels ................................................................ Weighted average assumptions used to determine net pension cost Discount rate .......................................................................................................... Rate of increase in compensation levels ................................................................ Expected long-term rate of return on plan assets ................................................... 2008 6.00% 3.50% 2008 5.75% 5.00% 7.00% 2007 5.75% 5.00% 2007 5.75% 5.00% 7.00% 2006 5.75% 5.00% 2006 5.50% 5.00% 7.00% 2 0 0 8 an nUaL rePo r t 51 The expected long-term rate-of-return on plan assets reflects long-term earnings expectations on the total assets currently in the Retirement System and contributions expected to be received by the Retirement System during the current plan year. In estimating the rate, appropriate consideration is given to historical returns earned by the Retirement System assets and the rates of return expected to be available for reinvestment. Average rates of return over the past 1, 3, 5 and 10 year periods were determined and subsequently adjusted to reflect current capital market assumptions and changes in investment allocations. Funded Status of The Plan. The following table sets forth the change in the projected benefit obligation and Plan assets for each Plan year and, as of the end of each Plan year, the funded status of the Plan and accumulated benefit obligation. Change in projected benefit obligation Projected benefit obligation at beginning of year..................................................... Service cost before plan participant contributions................................................... Expenses................................................................................................................. Interest cost............................................................................................................. Benefits paid............................................................................................................ Assumption changes............................................................................................... Experience loss (gain) and other............................................................................. Projected benefit obligation at end of year......................................................... Change in plan assets Fair value of plan assets at beginning of year......................................................... Actual return on plan assets.................................................................................... Employer contributions............................................................................................ Plan participant contributions.................................................................................. Benefits paid............................................................................................................ Expenses................................................................................................................. Fair value of plan assets at end of year.............................................................. 2008 2007 (in thousands) 2006 $ 16,139 1,551 (183) 1,137 (794) 428 466 18,744 19,864 (5,567) 2,427 283 (794) (183) 16,030 $ 14,727 1,053 (146) 829 (503) - 179 16,139 16,772 2,558 1,000 183 (503) (146) 19,864 $ 13,794 941 (105) 743 (577) - (69) 14,727 14,501 1,710 1,087 156 (577) (105) 16,772 Funded status at end of year............................................................................... $ (2,714) $ 3,725 $ 2,045 Accumulated Benefit Obligation.......................................................................... $ 16,404 $ 12,944 $ 11,779 The net amount recognized in the balance sheet as of December 31, 2007 differs from the funded status in the above table due to an accrual of three additional months of pension expense. The Bank has a minimum required contribution to the Pension Plan for the Plan year ending September 30, 2009 of approximately $1,119,000, and its maximum tax deductible contribution is approximately $8,765,000. The Bank expects to make a contribution within that range by September 30, 2009, but the amount of such contribution has not yet been determined. The net actuarial gain (loss) and prior service cost included in accumulated other comprehensive income as of December 31 consist of the following: 2008 2007 (in thousands) Net actuarial gain (loss) .................................. Prior service cost ............................................ $ $ (7,953) (132) (8,085) $ 219 (157) 62 $ Estimated Future Benefit Payments. The following benefit payments, which reflect expected future service, as appropriate, are expected to be made by the Plan. Year 2009 .......................................................................... 2010 .......................................................................... 2011 .......................................................................... 2012 .......................................................................... 2013 .......................................................................... 2014-2018 ................................................................. 52 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n Amount (in thousands) 732 $ 797 879 991 1,128 7,841 The Bank’s Supplemental Executive Retirement Program (“SERP”) provides benefits to certain employees, designated by the Compensation Committee of the Board of Directors, whose benefits under the Pension Plan and 401(k) plan are limited by the applicable provisions of the Internal Revenue Code. The benefit under the SERP is equal to the additional amount the employee would be entitled to under the Pension and 401(k) plans in the absence of such Internal Revenue Code limitations. SERP expense was $150,000, $72,000, and $113,000 in 2008, 2007, and 2006, respectively. NOTE L – OTHER OPERATING EXPENSES Expenses included in other operating expenses which exceed one percent of the aggregate of total interest income and noninterest income in one or more of the years shown are as follows: 2008 Computer services ...................................................... Property and liability insurance ................................... $1,229 408 NOTE M – COMMITMENTS AND CONTINGENT LIABILITIES 2007 (in thousands) $1,171 492 2006 $1,102 633 Financial Instruments With Off-Balance-Sheet Risk. The Bank is a party to financial instruments with off-balance- sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to financial instruments for commitments to extend credit, standby letters of credit, and commercial letters of credit is represented by the contractual notional amount of these instruments. The Bank uses the same credit policies in making commitments to extend credit and generally uses the same credit policies for letters of credit as it does for on-balance-sheet instruments. At December 31, financial instruments whose contract amounts represent credit risk are as follows: 2008 2007 Fixed Rate Variable Rate Fixed Rate Variable Rate (in thousands) Commitments to extend credit .............................................................. Standby letters of credit ........................................................................ Commercial letters of credit .................................................................. $ 5,348 3,641 - $ 111,305 - - $ 6,461 5,375 382 $ 70,563 - - Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since some of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Unused home equity lines, which comprise a substantial portion of the variable rate commitments, generally expire ten years from their date of origination. Other real estate loan commitments generally expire within 60 days and commercial loan commitments generally expire within one year. The fixed rate loan commitments shown in the table are to make loans with interest rates ranging from 5.50% to 6.50% and maturities ranging from 9 years to 30 years. The amount of collateral obtained, if any, by the Bank upon extension of credit is based on management’s credit evaluation of the borrower. Collateral held varies but may include mortgages on commercial and residential real estate, security interests in business assets, deposit accounts with the Bank or other financial institutions, and securities. Standby letters of credit are conditional commitments issued by the Bank to assure the performance or financial obligations of a customer to a third party. The Bank's standby letters of credit extend through December 31, 2009. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. The Bank generally holds collateral and/or obtains personal guarantees supporting these commitments. The extent of collateral held for these commitments at December 31, 2008 varied from 0% to 100%, and averaged 45%. Standby letters of credit are considered financial guarantees and are recorded at fair value. Commercial letters of credit are conditional commitments issued by the Bank to assure the payment by a customer to a supplier. The credit risk involved in issuing commercial letters of credit is the same as that discussed in the preceding paragraph for standby letters of credit. The Bank generally obtains personal guarantees supporting these commitments. There were no commercial letters of credit outstanding as of December 31, 2008. 2 0 0 8 an nUaL rePo r t 53 Concentrations of Credit Risk. Most of the Bank’s loans, personal and commercial, are to borrowers who are domiciled on Long Island and in New York City, and most of the Bank's real estate loans involve mortgages on Long Island and New York City properties. In addition, the Bank’s loan portfolio includes a significant concentration of multifamily loans that amounted to $105,898,000 at December 31, 2008. As a result, the income of many of the Bank’s borrowers and the value of and cash flows from collateral securing a majority of the Bank’s mortgage loans is largely dependent on the Long Island and New York City economies. Lease Commitments. At December 31, 2008, minimum annual rental commitments under noncancelable operating leases are as follows: Year 2009 ................................................................................ 2010 ................................................................................ 2011 ................................................................................ 2012 ................................................................................ 2013 ................................................................................ Thereafter ....................................................................... Amount (in thousands) $ 1,181 1,151 1,094 1,063 731 3,754 8,974 $ The Bank has various renewal options on the above leases. Rent expense, including amounts paid for real estate taxes and common area maintenance, was $1,204,000, $1,006,000, and $896,000 in 2008, 2007, and 2006, respectively. Employment Contracts. Currently, all of the Bank’s executive officers have employment contracts with the Corporation under which they are entitled to severance compensation in the event of an involuntary termination of employment or resignation of employment following a change in control. The terms of these contracts currently range from one to three years and, unless the Corporation gives written notice of non-extension within the time frames set forth in the contracts, are automatically extended at the expiration of each year for an additional period of one year, thus resulting in new terms of between one and three years. The current aggregate annual salaries provided for in these contracts is approximately $1,640,000. NOTE N – FAIR VALUE OF FINANCIAL INSTRUMENTS Assets and Liabilities Measured at Fair Value. SFAS No. 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. SFAS No. 157 describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The fair values of the Corporation’s investment securities designated as available-for-sale are currently determined on a recurring basis using matrix pricing (Level 2 inputs). Matrix pricing, which is a mathematical technique widely used in the industry to value debt securities, does not rely exclusively on quoted prices for the specific securities but rather on the securities’ relationship to other benchmark quoted securities. The fair values of impaired loans with specific allocations of the allowance for loan losses are generally based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are sometimes made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. 54 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n Assets and liabilities measured at fair value on a recurring basis are summarized below. Fair Value Measurements at December 31, 2008 Using: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (in thousands) Total Available-for-sale securities .................................. $378,773 $ - $378,773 $ - Assets and liabilities measured at fair value on a nonrecurring basis are summarized below. Fair Value Measurements at December 31, 2008 Using: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (in thousands) Total Impaired loans ....................................................... $1,644 $ - $900 $744 Impaired loans measured at fair value had a carrying amount of $1,744,000 at December 31, 2008 with a valuation allowance of $100,000. The amount included for these loans in the 2008 provision for loan losses was $100,000. Estimated Fair Value of Financial Instruments. Fair value estimates are made at a specific point in time and are based on existing on and off-balance-sheet financial instruments. Such estimates are generally subjective in nature and dependent upon a number of significant assumptions associated with each financial instrument or group of similar financial instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows, and relevant available market information. Changes in assumptions could significantly affect the estimates. In addition, fair value estimates do not reflect the value of anticipated future business, premiums or discounts that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument, or the tax consequences of realizing gains or losses on the sale of financial instruments. The following table sets forth the carrying/contract amounts and estimated fair values of the Corporation’s financial instruments at December 31, 2008 and 2007. Financial Assets: Cash and due from banks …............................................................. Federal funds sold and overnight investments.................................. Held-to-maturity securities ................................................................ Available-for-sale securities ............................................................. Loans …............................................................................................ Federal Home Loan Bank stock........................................................ Restricted stocks (included in other assets)...................................... Accrued interest receivable .............................................................. Financial Liabilities: Checking deposits …........................................................................ Savings and money market deposits ............................................... Time deposits …............................................................................... Short-term borrowings....................................................................... Long-term debt.................................................................................. Accrued interest payable ……........................................................... Carrying/ Contract Amount $ 20,924 514 169,480 378,773 652,058 6,199 467 6,156 324,138 384,047 192,152 124,122 127,000 1,051 2008 2007 Fair Value Carrying/ Contract Amount (in thousands) $ 20,924 514 172,640 378,773 655,193 6,199 467 6,156 324,138 384,047 193,330 124,122 142,224 1,051 $ 25,729 21,768 193,234 273,080 521,086 1,184 467 5,472 318,322 302,158 248,558 12,110 80,000 1,466 Fair Value $ 25,729 21,768 193,890 273,080 528,482 1,184 467 5,472 318,322 302,158 248,867 12,110 82,537 1,466 2 0 0 8 an nUaL rePo r t 55 NOTE O – PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for The First of Long Island Corporation (parent company only) is as follows: CONDENSED BALANCE SHEETS Assets: Cash and due from banks........................................................................................... Investment in subsidiary bank, at equity …................................................................ Prepaid income taxes................................................................................................. Deferred income tax benefits ..................................................................................... Other assets .............................................................................................................. December 31, 2008 2007 (in thousands) $ $ 3,975 99,290 137 423 2 103,827 2,775 100,317 160 255 2 103,509 $ $ Liabilities: Cash dividends payable ............................................................................................. $ 1,295 $ 1,125 Stockholders' equity: Common stock …....................................................................................................... Surplus ....................................................................................................................... Retained earnings ...................................................................................................... Accumulated other comprehensive income (loss) net of tax ..................................... CONDENSED STATEMENTS OF INCOME Income: Dividends from subsidiary bank ................................................................................. Interest on deposits with subsidiary bank .................................................................. Other .......................................................................................................................... Expenses: Salaries ...................................................................................................................... Other operating expenses ......................................................................................... Income before income taxes ...................................................................................... Income tax benefit ......................................................................................................... Income before undistributed earnings of 719 1,354 102,061 104,134 (1,602) 102,532 103,827 $ 745 96 99,844 100,685 1,699 102,384 103,509 $ 2008 $ 11,100 43 1 11,144 Year ended December 31, 2007 (in thousands) $ 8,300 118 5 8,423 2006 $ 5,590 26 3 5,619 450 278 728 10,416 (272) 506 303 809 7,614 (271) 210 236 446 5,173 (151) subsidiary bank ....................................................................................................... Equity in undistributed earnings .................................................................................... Net income …............................................................................................................ 10,688 2,274 12,962 $ 7,885 3,597 11,482 $ 5,324 5,903 11,227 $ 56 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n CONDENSED STATEMENTS OF CASH FLOWS Cash Flows From Operating Activities: Net income ................................................................................................................. Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of subsidiary bank .......................................................... Deferred income tax credit .................................................................................. Stock-based compensation expense .................................................................. Decrease (increase) in prepaid income taxes ..................................................... Increase in other assets ...................................................................................... Net cash provided by operating activities ............................................................... Cash Flows From Financing Activities: Repurchase and retirement of common stock ........................................................... Proceeds from exercise of stock options ................................................................... Tax benefit of stock options ....................................................................................... Cash dividends paid …............................................................................................... Net cash used in financing activities ....................................................................... Net increase (decrease) in cash and cash equivalents* .............................................. Cash and cash equivalents, beginning of year ….......................................................... Cash and cash equivalents, end of year ....................................................................... Supplemental Schedule of Noncash Financing Activities: 2008 $ 12,962 Year ended December 31, 2007 (in thousands) $ 11,482 2006 $ 11,227 (2,274) (168) 450 23 - 10,993 (5,764) 525 21 (4,575) (9,793) 1,200 2,775 3,975 $ (3,597) (187) 506 (61) (2) 8,141 (3,719) 694 76 (5,342) (8,291) (150) 2,925 2,775 $ (5,903) (68) 210 196 - 5,662 (2,927) 402 17 (3,450) (5,958) (296) 3,221 2,925 $ Cash dividends payable ............................................................................................. $ 1,295 $ 1,125 $ 2,087 *Cash and cash equivalents is defined as cash and due from banks and includes the checking and money market accounts with the Corporation’s wholly-owned bank subsidiary. NOTE P – QUARTERLY FINANCIAL DATA (Unaudited) 2008 Interest income ................................................................... Interest expense ................................................................. Net interest income …......................................................... Provision for loan losses…………....................................... Noninterest income before net securities gains.................. Net gains on sales of securities…....................................... Noninterest expense …....................................................... Income before income taxes ............................................. Income taxes ...................................................................... Net income …….................................................................. Earnings per share: Basic…............................................................................. Diluted ............................................................................. Comprehensive income...................................................... 2007 Interest income ................................................................... Interest expense ................................................................. Net interest income …......................................................... Provision for loan losses…………....................................... Noninterest income before net securities gains (losses)…. Net gains (losses) on sales of securities…......................... Noninterest expense …....................................................... Income before income taxes ............................................. Income taxes ...................................................................... Net income …….................................................................. Earnings per share: Basic…............................................................................. Diluted ............................................................................. Comprehensive income...................................................... First Quarter $ 14,161 4,584 9,577 164 1,437 91 7,336 3,605 748 2,857 Second Quarter Third Quarter (in thousands, except per share data) $ $ Fourth Quarter $ 14,662 4,107 10,555 261 1,503 9 7,263 4,543 1,236 3,307 15,061 4,016 11,045 462 1,563 109 7,237 5,018 1,450 3,568 Total $ 59,686 16,743 42,943 1,945 6,033 248 29,689 17,590 4,628 12,962 15,802 4,036 11,766 1,058 1,530 39 7,853 4,424 1,194 3,230 .39 .39 3,775 .46 .45 37 .50 .49 4,539 .45 .44 1,310 1.79 1.78 9,661 $ 12,647 3,849 8,798 122 1,442 17 6,921 3,214 586 2,628 $ 12,846 3,758 9,088 81 1,461 - 6,912 3,556 716 2,840 $ 13,298 4,069 9,229 173 1,454 - 6,792 3,718 742 2,976 $ 14,232 4,593 9,639 199 1,459 (251) 6,759 3,889 851 3,038 $ 53,023 16,269 36,754 575 5,816 (234) 27,384 14,377 2,895 11,482 .35 .34 2,835 .37 .37 1,470 .40 .39 4,355 .40 .40 4,986 1.52 1.51 13,646 2 0 0 8 an nUaL rePo r t 57 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of The First of Long Island Corporation is responsible for establishing and maintaining adequate internal control over financial reporting, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The First of Long Island Corporation’s system of internal control over financial reporting was designed by or under the supervision of the Corporation’s chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of the preparation of the Corporation’s financial statements for external and regulatory reporting purposes, in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The First of Long Island Corporation’s management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment, management determined that, as of December 31, 2008, the Corporation’s internal control over financial reporting is effective. Crowe Horwath LLP, an independent registered public accounting firm, has expressed an opinion of the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2008 in their report which appears on page 59. /s/ MICHAEL N. VITTORIO Michael N. Vittorio President & Chief Executive Officer /s/ MARK D. CURTIS Mark D. Curtis Senior Vice President & Treasurer 58 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The First of Long Island Corporation Glen Head, New York We have audited the accompanying consolidated balance sheets of The First of Long Island Corporation as of December 31, 2008 and 2007, and the related statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2008. We also have audited The First of Long Island Corporation’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The First of Long Island Corporation’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the company's internal control over financial reporting based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The First of Long Island Corporation as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, The First of Long Island Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Livingston, New Jersey February 20, 2009 Crowe Horwath LLP 2 0 0 8 an nUaL rePo r t 59 f f a t S l a i c fi f O & s r e c fi f O Officers – The First of Long Island Corporation Michael n. Vittorio President & Chief Executive Officer John Grasso Senior Vice President sallyanne K. ballweg Senior Vice President & Secretary brian J. Keeney Senior Vice President Richard Kick Senior Vice President Donald l. Manfredonia Senior Vice President Wayne b. Drake Assistant Treasurer Kitty W. craig Chief Auditor Mark D. curtis Senior Vice President & Treasurer Official Staff – The First National Bank of Long Island aDMInIstRatIon Michael n. Vittorio President & Chief Executive Officer sallyanne K. ballweg Senior Executive Vice President aUDItInG Kitty W. craig Vice President and Chief Auditor bRancH aDMInIstRatIon John Grasso Executive Vice President nassaU coUntY ReGIonal offIce (coMMeRcIal banKInG) albert arena Vice President Dante D. Mancini Vice President Jane f. Reed Vice President sUffolK coUntY ReGIonal offIce (coMMeRcIal banKInG) Margaret M. curran-Rusch Vice President stephen Durso Vice President Richard b. smith Vice President coMMeRcIal lenDInG Donald l. Manfredonia Executive Vice President Paul J. Daley Senior Vice President Ivan G. nunez Vice President John J. Reilly Vice President Kevin J. talty Vice President coMPlIance anD PRoceDURes louis a. antoniello Vice President James clavell Senior Vice President Richard P. Perro Senior Vice President linda cutter Vice President coMMeRcIal banKInG James P. Johnis Senior Vice President Janine chaisty Vice President Patricia a. DeMasi Vice President albert t. Ghelarducci Vice President Robert a. Pizza Vice President alessandro scichilone Vice President coUnsel schupbach, Williams & Pavone llP InDePenDent aUDItoRs crowe Horwath llP cReDIt DePaRtMent anne Marie stefanucci Vice President Data PRocessInG Jose Diaz Vice President DePosIt oPeRatIons carmela lalonde Assistant Cashier fInance Mark D. curtis Executive Vice President Wayne b. Drake Senior Vice President Howard f. Hoeberlein Senior Vice President Matthew J. Mankowski Vice President GeneRal seRVIces Daniel sapanara Vice President HUMan ResoURces Debbie l. Ryan Senior Vice President susan J. Hempton Vice President InfoRMatIon tecHnoloGY seRVIces conrad lissade Assistant Vice President InVestMent ManaGeMent DIVIsIon brian J. Keeney Executive Vice President Josephine buckley Vice President Jane carmody Vice President sharon e. Pazienza Vice President loan centeR Robert b. Jacobs Vice President MaRKetInG laura c. Ierulli Vice President oPeRatIons aDMInIstRatIon Richard Kick Executive Vice President betsy Gustafson Senior Vice President ResIDentIal MoRtGaGe frederick t. Hughes Vice President eXecUtIVe offIce the first of Long island corporation 10 glen head road, glen head, new york 11545 (516) 671-4900 | www.fnbli.com tRansfeR aGent anD ReGIstRaR registrar and transfer company 10 commerce drive, cranford, new Jersey 07016-3572 (800) 368-5948 | www.rtco.com annUal MeetInG notIce the annual meeting of stockholders will be held at the westbury manor, 1100 Jericho turnpike, westbury, n.y. on monday, april 20, 2009 at 3:30 P.m. annUal RePoRt on foRM 10-K a copy of the corporation’s annual report on form 10-k for 2008, filed with the securities and exchange commission, may be obtained without charge upon written request to mark d. curtis, senior Vice President and treasurer, the first of Long island corporation, 10 glen head road, Po box 67, glen head, new york 11545-0067. 60 tHe fI Rs t o f l o nG Is l a nD c oR PoRa tIo n Howard annenberg President & ceo shannen Promotions, inc. nicola arena chairman & ceo mediterranean shipping co. (Usa), inc. Richard arote sr. President a.d.e. systems, inc./air distribution enterprises, inc. beverly J. bell, esq. humes & wagner, LLP thomas burke chief executive officer ophthalmic consultants of Long island emil V. cianciulli, esq. Partner cianciulli, meng & Panos, P.c. Michael DeVivo Vice President mrZ trucking corporation thomas n. Dufek, cPa President dufek & associates bernard esquenet chief executive officer the ruhof corp. Robert Giambalvo, cPa President giambalvo, giammarese & stalzer, cPas, P.c. Kevin J. Harding, esq. Partner harding and harding Herbert Kotler, esq. Melvin f. lazar, cPa founder Lazar Levine & felix LLP Wallace leinheardt, esq. Jaspan schlesinger LLP linda levy, cPa tax consultant James lynch, esq. John I. Martinelli Principal owen Petersen & co., LLP christopher t. McGrath, esq. Partner sullivan, Papain, block, mcgrath & cannavo, P.c. susan Hirschfeld Mohr President J. w. hirschfeld agency, inc. James Panos, esq. Partner cianciulli, meng & Panos, P.c. John G. Passarelli, M.D., f.a.a.o. medical director Long island eye surgery center Long island eye surgical care, P.c. Jay Pitti President merrick house & gardens stephen Ruchman ruchman associates scott sammis President Usi sammis, inc. Melvin schreiber, cPa moses & schreiber arthur c. schupbach, esq. Partner schupbach, williams & Pavone, LLP frank shahery director of marketing convermat corporation owen t. smith milleridge inn former chief deputy county executive, nassau county H. craig treiber chairman & ceo the treiber insurance group sal turano President abstracts incorporated arthur Ventura President badge agency, inc. George J. Walsh, esq. thompson hine LLP Robert a. Wilkie, esq. wilkie & wilkie Mark Wurzel President calico cottage, inc. B u s i n e s s A d v i s o r y B o a r d 61 Business of the Corporation. The First of Long Island Corporation (“Corporation”) is a one-bank holding company organized under the laws of the State of New York. Its primary business is the operation of its sole subsidiary, The First National Bank of Long Island (“Bank”). The Bank was organized in 1927 under national banking laws and became the sole subsidiary of the Corporation under a plan of reorganization effected April 30, 1984. The Bank is a full-service commercial bank which provides a broad range of financial services to individual, professional, corporate, institutional and government customers through its twenty-eight branch system on Long Island and in Manhattan. The First of Long Island Agency, Inc. was organized in 1994 under the laws of the State of New York, as a subsidiary of the Bank to conduct business as a licensed insurance agency engaged in the sale of mutual funds and insurance, primarily fixed annuity products. The Bank is subject to regulation and supervision of the Federal Reserve Board, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation which also insures its deposits. The Comptroller of the Currency is the primary banking agency responsible for regulating the subsidiary Bank. In addition, the Corporation is subject to the regulations and supervision of the Federal Reserve Board and the Securities and Exchange Commission. Long i sL a nd (5 1 6 ) 6 7 1- 49 0 0 ma n hat ta n (2 1 2) 5 6 6 -1 50 0 www.f nb l i. c om 

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