ex13.htm

It gives me great pride to report to you that as of year end 2010, The First National Bank of Long Island was the largest independent commercial bank headquartered on Long Island. On an average balance basis, the Bank’s total assets grew $244 million, or 17.2%, during 2010. Profits were at a historic high of $18.4 million, an increase of almost 37% over 2009. On a per share basis, we were up 46 cents, or 25%. We improved our returns on average assets and average equity, which were 1.11% and 12.94%, respectively, in 2010 compared to .95% and 12.15%, respectively, for last year. More importantly, this was the third year in a row our stock price appreciated. Using year end measurement dates, the compounded annual growth rate of our stock price over the last three years was 15.74%. In 2010, our dividend increased by 8 cents per share, or 10.5%. We continued to increase our dividend at a double digit rate because of the confidence we have in our earnings power. Our positioning within the market is gaining momentum and our future remains bright. We are proud of the many accomplishments of our organization.

There are many reasons for the Bank’s positive performance, the most significant being our corporate culture of balance and discipline. The growth of the institution over the last five years has been built upon the foundation of meticulous attention to the risks associated with the business, namely liquidity, interest rate and, most of all, credit risk. Regardless of the temptation for instant gratification, we have remained measured and disciplined with our underwriting standards, our loan review process, and the selection of investment securities; and after we have checked it twice, we do not hesitate to check it again. Our securities portfolio of over $700 million remains our first line of defense as a liquidity cushion. This cushion is backed by the placement of loans and securities at the Federal Reserve Bank and the Federal Home Loan Bank of New York that gives us a borrowing capacity of approximately $700 million. We have, by all accounts, tremendous funding capacity if needed. We have used this capacity sparingly as the Management Team has been able to organically grow deposits at a comfortable double digit rate. In 2010, on an average balance basis, our deposits grew $209 million, or 19%, which funded the growth of our balance sheet. More importantly, our average Checking Deposits grew by $39.3 million, or 11.7%. Growth in Checking Deposits was primarily driven by our market share penetration associated with small business and middle market customers, a valuable and lucrative market segment. We remain dedicated to growing the institution organically, and building the franchise stone by stone.

The First National Bank of Long Island is becoming a unique banking organization that is developing its brand and reputation based on unparalleled customer service. What differentiates us is a culture dedicated to personalizing our service quality approach. We believe the only long-term sustainable competitive advantage we have in the marketplace is the level of service we deliver. This is the overriding fulcrum of our success.

Our history dates back to 1927 and 2011 will be our 84th year of serving the Long Island marketplace. Over the last seven years we have built 14 new branches and converted two commercial banking units into full service branches. This growth represents an increase of 70% to the branch distribution system. With each and every new branch location, we have been able to hire individuals dedicated to the principle of service quality and personalization. With each and every hire of a new commercial banker or new commercial lender, we have attracted a high degree of professional talent as well as an individual who can fit into the culture we are building. As we expand into new markets on Long Island, each newly hired individual and each new branch location work to enhance our reputation and recognition of our brand of banking within the geography. We pride ourselves in knowing every one of our customers, both from a business and personal perspective. That is why we call ourselves the Bank “Where Everyone Knows Your Name.” The Bank is gaining momentum as a recognizable Long Island institution, attracting many new customers, and significantly increasing our market share within one of the most affluent geographies in the country. We will open our 35th branch by this summer.

As we continue to build talent and add branches, our franchise value grows, benefitting our shareholders. The case in point is that over the last two years our Bank has been able to establish relationships with over 100 upper-end small businesses and middle market customers. This increase of market share is a significant part of our deposit growth and exactly the kind of business we want to attract to enhance the future prospects of our stock price. Our momentum is building and has not been interrupted by credit quality concerns.

Our credit quality remains excellent, not only with our loans, but also with our securities. At December 31, 2010, we had only four nonaccruing loans which represent .44% of our total loans. Net chargeoffs in 2010 were four basis points of average loans. We have no more than a handful of delinquencies, almost all of which are 30-day items. Although no one can predict what the future holds, the balance sheet of The First National Bank of Long Island remains among the strongest in the country. We are determined to continue our measured and disciplined approach in booking new earning assets.

In the short term, we do not have plans to redirect tactics. Our strategic initiatives remain the same. We continue to change the composition of our earning assets from securities to loans to enhance our earnings prospects. We are confident loan growth will drive our deposit balances and corresponding franchise value. Our target markets remain consistent: lower middle market companies, small businesses, professionals, and service conscious affluent consumers. We will keep building branch locations in micro-markets we presently do not service, which inevitably will add to the enhancement and recognition of our reputation and brand of banking. Commensurate with our good fortune and success, we have been receiving more calls and interest from the marketplace, both in terms of new business prospects who desire real relationship banking and individual bankers who want to associate themselves with a growing and well disciplined organization. It is our intent to choose the best from both of these categories, and in the process, create additional value.

Regardless of our performance to date, I want to assure you the Management Team feels we can not in any way let down our guard. It is hard not to notice record foreclosures, bankruptcies, and an unemployment rate that remains stubbornly high. We remain cautiously optimistic that with our focus on booking loan products we consider to be of a lower risk, we will maintain the quality of our loan portfolio. You may have noticed on our balance sheet that as of December 31, 2010 our Bank had no construction loans in its portfolio. Evergreen and unsecured loans to individuals also remain loan products of which we are wary. We remain strictly “cash flow” lenders who structure our credits carefully with guarantees and collateral as secondary and tertiary sources of repayment.

In closing, I would be remiss if I did not mention the efforts of our employees who certainly are among the most important factors associated with our success. I am extremely proud of our Senior Management Team and our employees at The First National Bank of Long Island. They are, in aggregate, a great group of people and are the secret behind the franchise value we are creating. I would also like to express my appreciation to all of my fellow stockholders for your investment in our company. I can assure you the Executive Team of The First National Bank of Long Island will continue to work diligently with a long-term view towards increasing shareholder value. That objective is what our job is all about; and each and every day, we do not take our eye off that ball. It is our hope our track record and potential for future success will continue to attract an ever-growing number of additional stockholders, and we are confident over the long-term our company will continue to meet your expectations as investors. Although we have been around for almost 85 years, it was only a few years ago that most of Long Island did not seem to recognize The First National Bank of Long Island name. Today, in ever-growing numbers, the marketplace is recognizing our expanding franchise and our reputation for a high quality service culture.

Our people are committed. Our energy level is high. Our work ethic is strong. We are not distracted from building our momentum with capital constraints, credit quality problems or the lack of products to service our desired targeted market segments. Our technology investments have been significant and integrate well into our growth strategy. We have capacity, timely information and processing efficiency. Despite challenges, my expectations are that we will continue to grow and prosper in terms of household share, size, profitability and reputation. More and more customers, more and more people will continue to hear about The First National Bank of Long Island, the Bank “Where Everyone Knows Your Name.”

In July 2010, we bolstered our capital position through the sale of 1.4 million shares of common stock at a price of $24 per share. The net proceeds of the offering, after underwriting discount and expenses, were $32.4 million. The purpose of the capital raise was to enable the Corporation to continue to grow in a measured and disciplined manner and meet current regulatory expectations as to what constitutes an appropriate level of capital. The offering was very well received and resulted in the Bank adding a number of high quality institutional investors such as Wellington Management, Putnam Investments, Goldman Sachs Asset Management and JP Morgan Asset Management. Institutional ownership now represents 35% of total shares outstanding.

Toward the latter half of 2009 and the beginning of last year, we embarked upon a comprehensive review of our credit policies in order to insure that our underwriting standards reflected the current economic climate. With certain loan products we became more conservative. For example, we totally eliminated our exposure to construction loans. In addition, in the multifamily product category we elected not to underwrite transactions where there were limited residential units, and in the residential mortgage category we increased our required FICO score minimums.

The credit quality of the Bank’s loan portfolio remains excellent, as evidenced by a very low level of delinquent and nonperforming loans. During the year, we built our reserve for loan losses in light of current economic conditions. Our approach toward risk management has served us well. We were able to grow our loans and maintain asset quality. We believe credit risk is the most critical risk we manage for the benefit of our shareholders.

Our branch expansion strategy has proven to be successful as demonstrated by our deposit growth. On an average balance basis our deposits grew by 19%, or $209 million, in 2010. Ours is a relationship management strategy, not a pricing strategy. We want to know our customers and we want them to know us. Over the long-term, we are confident that building the Bank’s franchise through the growth of deposits will enhance shareholder value.

Our momentum will continue in 2011. The outlook for the Bank is promising. We opened our 34th branch in February in Point Lookout and we are currently scheduled to open a new full service branch in Massapequa, New York later this year. As of today, we have tentative plans to open two more branches in 2012. Our Bank continues to grow because of the dedication and hard work of our employees who contribute to our everyday success. Our employees are the strength behind our balance sheet.

2010 was a very busy year for the Bank as we opened four new branches on Long Island in Sea Cliff, Cold Spring Harbor, Bellmore and East Meadow. Each branch is richly decorated and designed to create a welcoming, friendly atmosphere with a living room style. The beauty of our branches speaks for itself and our banking professionals are dedicated towards delivering unparalleled service to their customers. These new locations were instrumental in developing household share with the commercial segment and individual consumers. They are all in key markets that will add to our organization’s franchise value in the years that lie ahead.

Our detailed Technology Plan supports our business goals, optimizes business investment, and manages the technology related risks and opportunities for the Bank. In order to help drive shareholder value and deliver more effective and convenient services to our customers, we use technology as a tool to increase our business capacity and create expense efficiencies. Plus, it allows us to be the provider of choice within the markets that we service.

In 2010, the Bank built a new Data Center, which serves as the IT Department’s base of operations, as well as our Disaster Recovery Facility. This state-of-the-art facility was built to the highest technological and engineering standards and employs best practices. This includes a Server Room with the appropriate technology, equipment and security to enable substantial future growth of the Bank and ensure we have the appropriate backup capability to manage in the event of a disaster.

Teach Kids to Save Program – The Bank continues to work with local schools on Long Island to promote financial literacy to elementary school students. “Banking Days” are held at the schools and a local Branch Manager makes a presentation to students. In 2010, more than ten schools participated in our program and hundreds of students learned about the importance of saving money and developing good banking habits.

	2010			2009			2008			2007			2006
INCOME STATEMENT DATA:
Interest Income	$	72,369,000		$	66,274,000		$	59,686,000		$	53,023,000		$	49,000,000
Interest Expense		16,774,000			18,334,000			16,743,000			16,269,000			12,949,000
Net Interest Income		55,595,000			47,940,000			42,943,000			36,754,000			36,051,000
Provision for Loan Losses		3,973,000			4,285,000			1,945,000			575,000			670,000
Net Income		18,392,000			13,463,000			12,962,000			11,482,000			11,227,000
PER SHARE DATA:
Basic Earnings		$ 2.33			$ 1.87			$ 1.79			$ 1.52			$ 1.47
Diluted Earnings		2.30			1.84			1.78			1.51			1.45
Cash Dividends Declared		.84			.76			.66			.58			.50
Dividend Payout Ratio		36.52	%		41.30	%		37.08	%		38.41	%		34.48	%
Stock Splits/Dividends Declared		-			-			-		2-for-1				-
Book Value		$ 17.99			$ 16.15			$ 14.25			$ 13.73			$ 12.60
Tangible Book Value		17.97			16.12			14.22			13.71			12.57
BALANCE SHEET DATA AT YEAR END:
Total Assets	$	1,711,023,000		$	1,675,169,000		$	1,261,609,000		$	1,069,019,000		$	954,166,000
Loans		902,959,000			827,666,000			658,134,000			525,539,000			449,465,000
Allowance for Loan Losses		14,014,000			10,346,000			6,076,000			4,453,000			3,891,000
Deposits		1,292,938,000			1,277,550,000			900,337,000			869,038,000			824,797,000
Borrowed Funds		253,590,000			273,407,000			251,122,000			92,110,000			28,143,000
Stockholders' Equity		156,694,000			116,462,000			102,532,000			102,384,000			95,561,000
AVERAGE BALANCE SHEET DATA:
Total Assets	$	1,657,396,000		$	1,413,632,000		$	1,181,655,000		$	1,003,240,000		$	977,232,000
Loans		864,163,000			716,569,000			572,356,000			480,166,000			418,746,000
Allowance for Loan Losses		11,954,000			6,357,000			4,947,000			4,167,000			3,609,000
Deposits		1,310,507,000			1,101,828,000			919,490,000			868,421,000			842,399,000
Borrowed Funds		193,823,000			194,129,000			157,275,000			32,705,000			37,989,000
Stockholders' Equity		142,140,000			110,767,000			100,710,000			98,402,000			93,064,000
FINANCIAL RATIOS:
Return on Average Assets (ROA)		1.11	%		0.95	%		1.10	%		1.14	%		1.15	%
Return on Average Stockholders' Equity (ROE)		12.94	%		12.15	%		12.87	%		11.67	%		12.06	%
Average Equity to Average Assets		8.58	%		7.84	%		8.52	%		9.81	%		9.52	%

The following is management's discussion and analysis of certain significant factors that have affected the Corporation’s financial condition and operating results during the periods included in the accompanying consolidated financial statements, and should be read in conjunction with such financial statements. The Corporation’s financial condition and operating results principally reflect those of its wholly-owned subsidiary, The First National Bank of Long Island (the “Bank”), and subsidiaries wholly-owned by the Bank, either directly or indirectly, The First of Long Island Agency, Inc., FNY Service Corp. (“FNY”), and The First of Long Island REIT, Inc. (“REIT”). 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 New York City branches in the future.

Overview – 2010 Versus 2009. The Corporation earned $18.4 million in 2010. This is an increase of 36.6% over 2009 earnings of $13.5 million. On a per share basis, earnings for 2010 were $2.30. This is $.46 better than $1.84 per share earned in 2009. Returns on average assets and equity were 1.11% and 12.94%, respectively, for 2010 compared to .95% and 12.15%, respectively, for 2009. Cash dividends per share grew by 8 cents, or 10.5%, from 76 cents per share in 2009 to 84 cents this year. In July 2010 the Corporation bolstered its capital position through the sale of 1.4 million shares of common stock at a price of $24 per share. The resulting net proceeds of the offering after underwriting discount and expenses was $32.4 million.

Earnings for the fourth quarter of 2010 were $.46 per share, representing an increase of $.16 per share, or 53.3% over $.30 per share earned in the same quarter last year. The improvement was primarily due to the fact that the provision for loan losses was $2.1 million higher in the fourth quarter of 2009, which impacted earnings by approximately $.17 per share. When comparing fourth quarter to third quarter 2010 results, earnings are down $.09 per share, or 16.4%, primarily as a result of an increase in the provision for loan losses of $725,000, the establishment of a $300,000 valuation allowance on one loan held for sale and the full quarter dilutive impact of the common stock offering. The increase in the provision for loan losses was driven by the establishment of an impairment reserve of $870,000 on one nonaccrual loan.

The large drivers of earnings per share growth in 2010 were growth in the average balances of loans and tax-exempt municipal securities and decreases in the rates paid on various categories of deposits. The positive impact of these items was partially offset by decreases in overall yield on the Bank’s loan and taxable securities portfolios, expense increases attributable to the Bank’s branch growth initiative and general inflation in the cost of goods and services, and the dilutive impact of the 2010 common stock offering which is estimated to be approximately $.16 per share.

On an average balance basis, loans grew by $147.6 million, or 20.6% when comparing 2010 to 2009. Almost all of the growth occurred in commercial and residential mortgages, the average balances of which were up $92.4 million, or 29.2%, and $66.3 million, or 29.5%, respectively. A significant portion of the growth in the average balance of residential mortgages was attributable to loans originated during 2010, with the remainder attributable to loans originated in 2009. By contrast, almost all of the growth in the average balance of commercial mortgages was attributable to loans originated in 2009, with the remainder attributable to loans originated this year. The large reduction in commercial mortgage originations in 2010 was the result of a variety of factors including, but not limited to, a deliberate reduction in originations during the first half of 2010 in order to build the Bank’s Tier 1 leverage capital ratio, a softening in loan demand during the latter half of 2010 and a reduction in multifamily loan originations throughout 2010 in an effort to diversify the Bank’s commercial mortgage portfolio.

The overall yield earned on the Bank’s loan portfolio declined by 26 basis points in 2010 and the overall yield on the Bank’s taxable securities portfolio declined by 70 basis points. The decline in yield on the loan portfolio was primarily attributable to a decline in general interest rates and competitive conditions in the local marketplace. The decline in yield on the taxable securities portfolio was also attributable to a decline in general interest rates and, additionally, a significant increase in the size of the short-term mortgage securities portfolio relative to the total taxable securities portfolio. Short-term mortgage securities, which the Bank generally defines as those having an estimated average life of 2.5 years or less at the date of purchase, represented 38.8% of the average balance of the total taxable securities portfolio in 2010 as compared to 18.2% last year. Management grew this segment of the taxable securities portfolio as a hedge against potential future increases in interest rates, to balance the duration of the overall securities portfolio in light of the increased size of the longer-term municipal securities portfolio, and because the incremental yield that could be earned on longer average life mortgage securities was relatively small. In addition, management temporarily invested a significant portion of the proceeds of the 2010 common stock offering in short-term mortgage securities with the intention of reinvesting the monthly paydowns on such securities in better yielding loans.

The credit quality of the Bank’s loan portfolio remains excellent as evidenced by, among other things, low levels of past due, nonaccrual and impaired loans. In an attempt to maintain credit quality, management continues to focus its loan portfolio growth efforts on what it considers lower risk loan categories (i.e., owner occupied commercial mortgages, multifamily loans, and first lien residential mortgages having terms generally between ten and fifteen years) and continues to avoid growing what it considers higher risk loan categories (i.e., construction loans and unsecured loans to individuals). The credit quality of the Bank’s securities portfolio also remains excellent. All of the Bank’s mortgage securities are backed by mortgages underwritten on conventional terms, and almost all of these securities are full faith and credit obligations of the U.S. government. The remainder of the Bank’s securities portfolio consists principally of municipal securities rated AA or better by major rating agencies.

Looking forward to 2011, challenges for the Bank and our industry as a whole will likely include, among others, the maintenance of net interest margin and the cost of complying with the abundance of recently enacted laws and regulations impacting the financial services industry. With respect to net interest margin, the general level of interest rates and competition could cause the yields available on securities and loans to remain relatively low, while at the same time the Bank may have limited opportunity to further reduce its deposit rates. Furthermore, earnings per share in 2011 will include the dilutive impact of the July 2010 common stock offering for a full year. Notwithstanding these challenges, the Bank enters 2011 with a record of steady earnings growth, excellent credit quality, sufficient capital to provide for growth and a corporate philosophy that remains focused on maintaining the strength and quality of the Bank’s balance sheet and creating long-term shareholder value.

Key strategic initiatives for 2011 and beyond include continued loan growth, maintenance of asset quality, maintenance of capital strength and expansion of the Bank’s branch distribution system both on Long Island and in New York City. During 2010 the Bank opened four full service branches on Long Island in Sea Cliff, Cold Spring Harbor, East Meadow and Bellmore. Thus far in 2011, the Bank opened a full service branch in Point Lookout, Long Island and plans to open a full service branch in Massapequa, Long Island later in the year.

The Bank’s core business of gathering deposits and making loans was strong in 2009. Total deposits grew by $377.2 million, or 41.9%, and gross loans grew by $169.5 million, or 25.8%. Two thirds of the overall deposit growth came from savings and money market products, with most of the remaining growth occurring in time deposits. Contributing to deposit growth were new branch openings and expansion of existing branches, competitively priced deposit products, a high level of customer service and deposit rate promotions. In addition, management believed that uncertainty in the equity markets and the negative publicity surrounding money center banks also played a role.

Loan growth, the primary driver of earnings growth in 2009, principally occurred in what management considers to be lower risk loan categories including multifamily loans, owner occupied commercial mortgages, and first lien residential mortgages with ten to fifteen year terms. By contrast, management considers construction and land development loans to be high risk and had purposely not grown this category. Construction and land development loans amounted to only $3.1 million, or .4% of gross loans, at year-end 2009. Loan growth occurred in 2009 as part of management’s continued efforts to improve the Bank’s earnings prospects by making loans a larger portion of the overall balance sheet.

National and local economic conditions remained unfavorable throughout 2009. Furthermore, management believed that economic conditions would not improve considerably in 2010, and any improvement beyond 2010 would occur slowly over an extended period of time. In addition the Bank grew its loan portfolio at a compound annual growth rate of 19% over the five year period ended December 31, 2009 and its loan portfolio was primarily comprised of commercial and residential real estate loans concentrated on Long Island and in New York City. Based on these and other factors, and despite the fact that the Bank had a very low level of identified problem loans, in closing the fourth quarter of 2009 management decided to increase the Bank’s allowance for loan losses relative to gross loans. The Bank’s allowance for loan losses at year-end 2009 was $10.3 million, or 1.25% of gross loans, compared to $6.1 million, or .92% of gross loans, at year-end 2008.

The Bank’s capital ratios trended down in 2009 due to overall balance sheet growth and growth in the Bank’s loan portfolio, but at year-end 2009 still exceeded the regulatory criteria for a well-capitalized bank. Total stockholders’ equity before accumulated other comprehensive income or loss grew by $8.7 million in 2009 versus $3.4 million in 2008. The larger growth in 2009 was primarily attributable to the fact that the Corporation significantly reduced its share repurchases in order to preserve and build capital in light of the unfavorable economic climate.

Net interest margin declined in 2009 because the rates available for investments in loans and securities declined, and rapid deposit growth resulted in the need to temporarily invest excess cash in low yielding balances with correspondent banks until better yielding loans and securities could be originated or purchased. Margin also declined because management shortened the average duration of the Bank’s taxable securities portfolio as a prudent measure to, among other things, protect the Bank’s net interest income in the event of an increase in interest rates. Noninterest income increased by $1.5 million, or 23.6%, in 2009 because of increases in service charge income and gains on sales of securities of $518,000 and $1.2 million, respectively. FDIC insurance expense increased by $1,630,000, or from $558,000 in 2008 to $2,188,000 in 2009. The increase was caused by failures in the industry and their adverse impact on the deposit insurance fund (“DIF”). Pension plan expense increased by $1,041,000, or from $576,000 in 2008 to $1,617,000 in 2009. The increase resulted from a decline in long-term interest rates and the poor performance of the equity markets in 2008.

The Corporation’s effective tax rate, or income tax expense as a percentage of book income, declined from 26.3% in 2008 to 18.8% in 2009. The decline was attributable to a restructuring of the ownership of the Corporation’s REIT entity in December 2008 and a significant increase during 2009 in the size of the Bank’s tax-exempt municipal securities portfolio. The REIT restructuring, which reduced the Corporation’s 2009 income tax burden by approximately $700,000, was done in response to a change in New York State tax law in 2008. The law change deprived the Corporation in 2008 of the tax benefit that had traditionally been derived from its REIT entity and the restructuring restored that benefit. The Bank significantly increased the size of its tax-exempt municipal securities portfolio in 2009 in response to provisions of the American Recovery and Reinvestment Act of 2009 which enabled the Bank to buy certain tax-exempt securities at what it believed to be attractive yields without the usual limitations imposed by the federal alternative minimum tax.

	2010								2009								2008
	Average Balance			Interest/ Dividends		Average Rate			Average Balance			Interest/ Dividends		Average Rate			Average Balance			Interest/ Dividends		Average Rate
Assets:	(dollars in thousands)
Federal funds sold and overnight investments	$	283		$	-		-	%	$	374		$	-		-	%	$	19,362		$	480		2.48	%
Investment securities:
Taxable		472,039			16,845		3.57			443,559			18,926		4.27			386,404			18,857		4.88
Nontaxable (1)		242,830			14,945		6.15			181,084			11,508		6.36			143,121			9,373		6.55
Loans (1) (2)		864,163			45,683		5.29			716,569			39,780		5.55			572,356			34,193		5.97
Total interest-earning assets (1)		1,579,315			77,473		4.91			1,341,586			70,214		5.23			1,121,243			62,903		5.61
Allowance for loan losses		(11,954	)							(6,357	)							(4,947	)
Net interest-earning assets		1,567,361								1,335,229								1,116,296
Cash and due from banks		40,261								42,962								32,524
Premises and equipment, net		20,442								16,937								11,587
Other assets		29,332								18,504								21,248
	$	1,657,396							$	1,413,632							$	1,181,655
Liabilities and
Stockholders' Equity:
Savings and money market deposits	$	651,506			4,049		.62		$	501,125			5,287		1.06		$	364,974			4,576		1.25
Time deposits		285,213			5,977		2.10			266,216			6,485		2.44			236,820			6,782		2.86
Total interest-bearing deposits		936,719			10,026		1.07			767,341			11,772		1.53			601,794			11,358		1.89
Short-term borrowings		28,864			108		.37			40,663			221		.54			48,379			746		1.54
Long-term debt		164,959			6,640		4.03			153,466			6,341		4.13			108,896			4,639		4.26
Total interest-bearing liabilities		1,130,542			16,774		1.48			961,470			18,334		1.91			759,069			16,743		2.21
Checking deposits		373,788								334,487								317,696
Other liabilities		10,926								6,908								4,180
		1,515,256								1,302,865								1,080,945
Stockholders' equity		142,140								110,767								100,710
	$	1,657,396							$	1,413,632							$	1,181,655
Net interest income (1)				$	60,699							$	51,880							$	46,160
Net interest spread (1)							3.43	%							3.32	%							3.40	%
Net interest margin (1)							3.84	%							3.87	%							4.12	%

(1)

Tax-equivalent basis. Interest income on a tax-equivalent basis includes the additional amount of interest income that would have been earned if the Corporation's investment in tax-exempt loans and investment securities had been made in loans and investment securities subject to Federal income taxes yielding the same after-tax income. The tax-equivalent amount of $1.00 of nontaxable income was $1.52 in each period presented, based on a Federal income tax rate of 34%.

	Year Ended December 31,
	2010 versus 2009												2009 versus 2008
	Increase (decrease) due to changes in:												Increase (decrease) due to changes in:
	Volume			Rate			Rate/ Volume (1)			Net Change			Volume			Rate			Rate/ Volume (1)			Net Change
	(in thousands)
Interest Income:
Federal funds sold and overnight investments	$	-		$	-		$	-		$	-		$	(471	)	$	(480	)	$	471		$	(480	)
Investment securities:
Taxable		1,215			(3,097	)		(199	)		(2,081	)		2,789			(2,370	)		(350	)		69
Nontaxable		3,924			(363	)		(124	)		3,437			2,486			(278	)		(73	)		2,135
Loans		8,194			(1,899	)		(392	)		5,903			8,615			(2,419	)		(609	)		5,587
Total interest income		13,333			(5,359	)		(715	)		7,259			13,419			(5,547	)		(561	)		7,311

Interest Expense:
Savings and money market deposits		1,587			(2,173	)		(652	)		(1,238	)		1,707			(725	)		(271	)		711
Time deposits		463			(906	)		(65	)		(508	)		842			(1,013	)		(126	)		(297	)
Short-term borrowings		(64	)		(69	)		20			(113	)		(119	)		(483	)		77			(525	)
Long-term debt		475			(164	)		(12	)		299			1,899			(140	)		(57	)		1,702
Total interest expense		2,461			(3,312	)		(709	)		(1,560	)		4,329			(2,361	)		(377	)		1,591

Increase (decrease) in net interest income	$	10,872		$	(2,047	)	$	(6	)	$	8,819		$	9,090		$	(3,186	)	$	(184	)	$	5,720

Net interest income on a tax-equivalent basis increased by $8.8 million, or from $51.9 million in 2009 to $60.7 million this year. The most significant reasons for the increase in net interest income were growth in the Bank’s loan and tax-exempt securities portfolios and decreases in the rates paid on various categories of deposits. On an average balance basis, loans grew by $147.6 million, or 20.6%, and tax-exempt securities grew by $61.7 million, or 34.1%. Growth in these asset categories was funded by an increase in interest-bearing deposits, which on an average balance basis grew by $169.4 million, or 22.1%, and an increase in checking deposits, which on an average balance basis grew by $39.3 million, or 11.7%. The positive impact of loan and securities growth and decreases in deposit rates was partially offset by decreases in the overall yield on the Bank’s loan and taxable securities portfolios.

Net interest spread, or the difference between the overall yield on interest-earning assets and the overall cost of interest-bearing liabilities, increased by 11 basis points in 2010. This occurred primarily because management, through a steady reduction in the Bank’s deposit rates throughout 2010, was able to lower the Bank’s cost of deposits by 46 basis points while at the same time the overall yield on the Bank’s interest-earning assets declined by only 32 basis points. The spread increase, when applied to those interest-earning assets funded by interest-bearing liabilities, positively impacted both net interest income and net interest margin. On the other hand, for those interest-earning assets funded by noninterest-bearing checking deposits and capital, the 32 basis point decline in asset yield had a more than offsetting negative impact on net interest income and net interest margin and thereby caused net interest margin to decline. The 32 basis point decline in overall asset yield was primarily attributable to a decline in general interest rates, competitive loan pricing in the Bank’s marketplace, and a significant increase, for reasons previously discussed, in the Bank’s short-term mortgage securities portfolio.

Net interest income on a tax-equivalent basis increased by $5,720,000 or from $46,160,000 in 2008 to $51,880,000 in 2009. The most significant reason for the increase was growth in the Bank’s loan portfolio, which, on an average balance basis, grew by $144.2 million, or 25.2%. Loan growth was funded by an increase in interest-bearing deposits, which, on an average balance basis, grew by $165.5 million, or 27.5%. Deposit growth in excess of that needed to grow loans was mostly invested in a combination of taxable and nontaxable securities. Also contributing to the growth in net interest income was a 30 basis point reduction in the overall cost of deposits and borrowings in 2009 resulting from the steady decline in market interest rates in 2008 and the Bank’s ability to lower its deposit rates throughout 2009 in response to more rational pricing in its marketplace.

The positive impact of loan growth and lower deposit and borrowing costs was partially offset by a decline in rates available for investments in loans and securities. Other offsetting factors were management shortened the average duration of the Bank’s taxable securities portfolio as a prudent measure to, among other things, protect the Bank’s net interest income in the event of an increase in interest rates, and the Bank’s need to temporarily invest excess cash resulting from rapid deposit growth in low yielding balances with correspondent banks until better yielding loans and securities could be originated or purchased. These offsetting factors are the principal causes of the 38 basis point reduction in the overall yield on interest-earning assets in 2009.

While net interest income increased in 2009, net interest spread declined by 8 basis points as the yield on interest-earning assets declined more than the cost of deposits and borrowings. Net interest margin declined even more than net interest spread, or by 38 basis points, because a significant portion of the Corporation’s interest-earning assets are funded by noninterest-bearing liabilities and capital. For these assets, a reduction in yield has no offsetting reduction in interest cost and therefore results in a corresponding reduction in net interest margin. Also negatively impacting net interest margin were deposit rate promotions associated with new branch openings, expansion of existing branches and management’s desire to grow certain categories of deposits.

Noninterest income includes service charges on deposit accounts, Investment Management Division income, gains or losses on sales of securities, and all other items of income, other than interest, resulting from the business activities of the Corporation. Noninterest income was $8.0 million and $7.8 million in 2010 and 2009, respectively, representing increases over prior year amounts of $201,000, or 2.6%, and $1.5 million, or 23.6%.

The increase in noninterest income in 2010 is almost entirely due to a $291,000 increase in net gains on sales of available-for-sale securities, as partially offset by small decreases in the other categories of noninterest income. The gains on sales of securities resulted from the sale of approximately $77 million of available-for-sale securities. The proceeds of the sales were used to limit the growth of the balance sheet by paying down short-term borrowings and thereby preserving the Bank’s Tier I leverage capital ratio.

The increase in noninterest income in 2009 was almost entirely due to a $1.2 million increase in net gains on sales of available-for-sale securities and a $518,000 increase in service charge income, as partially offset by a $219,000 decrease in Investment Management Division income. The gains on sales of securities resulted from the sale of approximately $49 million of available-for-sale securities. The proceeds of the sale were generally reinvested in securities having a longer duration and average yield slightly higher than the securities sold. Service charge income increased primarily as a result of an increase in return check charges. Investment Management Division income was down primarily as a result of a market related decrease in the value of assets under management.

The increase in noninterest expense in 2010 is comprised of increases in salaries of $589,000, or 4.0%, occupancy and equipment expense of $461,000, or 7.7%, and other operating expenses of $460,000, or 5.7%, as partially offset by a decrease in employee benefits of $524,000, or 9.0%. The increase in salaries expense is primarily due to normal annual salary adjustments and additions to staff related to the opening of four full service branches during 2010. Occupancy and equipment expense increased primarily due to branch expansion, technology upgrades and the creation of a state-of-the-art disaster recovery center for both information technology and back office functions. The increase in other operating expenses is the result of a $221,000 increase in data processing expense and a number of other small increases, as partially offset by a $279,000 decrease in FDIC deposit insurance expense from $2.2 million in 2009 to $1.9 million this year. The decline in deposit insurance expense occurred because 2009 was burdened with a $647,000 FDIC special assessment. In February 2011, the FDIC approved a final rule which implements changes to the deposit insurance assessment system effective April 1, 2011. These changes include, among other things, basing deposit insurance assessments on average total assets less average tangible capital (rather than total deposits) and changing the assessment rate applicable to each risk category defined by the FDIC. Based on the Bank’s total asset and tangible capital levels at year end 2010 and, assuming that the Bank’s current FDIC risk category remains the same, the changes to the deposit insurance assessment system would reduce the Bank’s FDIC premiums by approximately $900,000 on an annual basis. However, management is concerned about the high level of bank failures that have occurred in the last two years and the resulting depletion of the FDIC deposit insurance fund. Management believes that continued bank failures could make it necessary for the FDIC to raise its assessment rates, impose additional special assessments or both.

The increase in noninterest expense for 2009 was comprised of increases in other operating expenses of $2.1 million, or 33.8%, employee benefits expense of $1.2 million, or 26.7%, occupancy and equipment expense of $1.0 million, or 20.8%, and salaries of $832,000, or 5.9%. The increase in other operating expenses is largely attributable to a $1.6 million increase in FDIC deposit insurance expense caused by failures in the banking industry. Such failures resulted in an increase in the FDIC’s base assessment rates for 2009 and an industry wide special assessment of 5 basis points on total assets minus Tier 1 capital as of June 30, 2009. The special assessment cost the Bank approximately $647,000.

The increase in employee benefits expense for 2009 was largely the result of a $1.0 million increase in pension plan expense. The increase resulted from the poor performance of the equity markets in 2008. Occupancy and equipment expense increased primarily due to branch expansion, technology upgrades and maintenance of facilities. The increase in salaries expense is primarily due to normal annual salary adjustments and additions to staff related to branch expansion.

Income tax expense as a percentage of book income (“effective tax rate”) was 22.6% in 2010, 18.8% in 2009 and 26.3% in 2008. The effective tax rate was elevated in 2008 because the Corporation lost the tax benefit derived from its REIT entity. 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 an increase in tax-exempt income, caused the effective tax rate to decrease in 2009. The effective tax rate increased in 2010 because tax-exempt income as a percentage of income before income taxes declined. Also contributing to the increase in the effective tax rate was the fact that the tax benefit derived from the Corporation’s FNY and REIT entities decreased somewhat in 2010 while income before income taxes increased significantly.

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 Management Loan 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 officer. In addition, and in consultation with the Bank’s Chief Financial Officer, the Management Loan 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 reviewed by the Loan Committee of the Board of Directors and 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 probable that a borrower will be unable to pay all principal and interest due according to contractual terms. Once a loan is identified as being impaired, management uses the fair value of the underlying collateral and/or the discounted value of expected future cash flows to determine the amount of the impairment loss, if any, that needs to be included in the overall allowance for loan losses. In estimating the fair value of real estate collateral, management utilizes appraisals and also makes qualitative judgments based on, among other things, its knowledge of the local real estate market and analyses of current economic conditions and trends. Estimating the fair value of collateral other than real estate is also subjective in nature and sometimes requires difficult and complex judgments. Determining expected future cash flows can be more subjective than determining fair values. Expected future cash flows could differ significantly, both in timing and amount, from the cash flows actually received over the 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 on a quarterly basis management 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, loan risk ratings, national and local economic conditions and trends, environmental risks, trends in volume and terms of loans, concentrations of credit, changes in lending policies and procedures, changes in the quality of the Bank’s loan review function, 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.

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:

	December 31,
	2010			2009			2008			2007			2006
	(dollars in thousands)
Nonaccrual loans (including loan held for sale)	$	3,936		$	432		$	112		$	257		$	135
Loans past due 90 days or more and still accruing		-			-			42			95			50
Foreclosed real estate		-			-			-			-			-
Total nonperforming assets		3,936			432			154			352			185
Troubled debt restructurings		2,433			200			-			-			-
Total risk elements	$	6,369		$	632		$	154		$	352		$	185

Nonaccrual loans as a percentage of total loans		.44	%		.05	%		.02	%		.05	%		.03	%
Nonperforming assets as a percentage of total loans and foreclosed real estate		.44	%		.05	%		.02	%		.07	%		.04	%
Risk elements as a percentage of total loans and foreclosed real estate		.70	%		.08	%		.02	%		.07	%		.04	%

The allowance for loan losses increased by $3.7 million during 2010, amounting to $14.0 million, or 1.55% of total loans, at December 31, 2010 as compared to $10.3 million, or 1.25% of total loans, at December 31, 2009. During 2010, the Bank had loan chargeoffs and recoveries of $377,000 and $72,000, respectively, and recorded a $4.0 million provision for loan losses. Although the provision for loan losses decreased by $312,000 when comparing 2010 to 2009, the provision in both years was elevated versus prior years. The elevated provisioning in 2010 was primarily attributable to: (1) management’s decision to increase the Bank’s allowance for loan losses relative to gross loans in recognition of, among other things, unfavorable economic conditions and the large concentration of real estate loans in the Bank’s portfolio; (2) the establishment of an $870,000 impairment reserve on one nonaccruing loan; and (3) a $300,000 chargeoff upon the transfer of one nonaccruing loan to the held-for-sale category. The elevated provisioning in 2009 was also primarily attributable to unfavorable economic conditions and the Bank’s large real estate loan concentration and, additionally, robust loan growth.

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. 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.

	Year ended December 31,
	2010			2009			2008			2007			2006
	(dollars in thousands)

Balance, beginning of year	$	10,346		$	6,076		$	4,453		$	3,891		$	3,282
Loans charged off:
Commercial and industrial		-			162			275			-			65
Commercial mortgages		325			-			-			-			-
Residential mortgages		22			-			-			-			-
Other		30			13			50			14			11
		377			175			325			14			76
Recoveries of loans charged off:
Commercial and industrial		46			148			-			-			-
Other		26			12			3			1			15
		72			160			3			1			15
Net chargeoffs		(305	)		(15	)		(322	)		(13	)		(61	)
Provision for loan losses		3,973			4,285			1,945			575			670
Balance, end of year	$	14,014		$	10,346		$	6,076		$	4,453		$	3,891
Ratio of net chargeoffs to average loans outstanding		.04	%		.00	%		.06	%		.00	%		.01	%

	December 31,
	2010					2009					2008					2007					2006
	Amount		% of Loans To Total Loans			Amount		% of Loans To Total Loans			Amount		% of Loans To Total Loans			Amount		% of Loans To Total Loans			Amount		% of Loans To Total Loans
	(dollars in thousands)

Commercial and industrial	$	803		4.3	%	$	971		5.9	%	$	933		8.1	%	$	874		11.7	%	$	833		12.3	%
Commercial mortgages		7,680		46.2			5,932		49.5			3,011		41.5			1,785		32.3			1,464		30.7
Residential mortgages		4,059		37.1			2,242		30.1			1,227		32.9			1,026		37.1			914		38.7
Home equity loans		1,415		11.8			1,102		13.4			706		15.5			551		15.8			497		14.9
Construction loans		-		-			43		.4			100		1.4			116		2.2			89		2.2
Other		57		.6			56		.7			99		.6			101		.9			94		1.2
	$	14,014		100.0	%	$	10,346		100.0	%	$	6,076		100.0	%	$	4,453		100.0	%	$	3,891		100.0	%

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 95% of the Bank’s total loans outstanding at December 31, 2010. Most of these loans were made to borrowers domiciled on Long Island and in New York City. In the last few years general economic conditions have been unfavorable as characterized by high levels of unemployment, declines in commercial and residential real estate values, and increases in commercial real estate vacancies. These conditions have caused some of the Bank’s borrowers to be unable to make the required contractual payments on their loans and could cause the Bank to be unable to realize the full carrying value of such loans through foreclosure or other collection efforts.

The Corporation’s off-balance sheet arrangements and contractual obligations at December 31, 2010 are summarized in the table that follows. Unused home equity lines comprise a substantial portion of the amount shown for commitments to extend credit. Since some of the commitments to extend credit and letters of credit are expected to expire without being drawn upon and, with respect to unused home equity lines, can be frozen, reduced or terminated by the Bank based on the financial condition of the borrower, the total commitment amounts shown in the table do not necessarily represent future cash requirements. The amounts shown for long-term debt are based on the contractual maturities of such borrowings and include scheduled principal and interest payments. The interest payments do not reflect any reduction in payments that the Bank could get from interest rate caps embedded in certain repurchase agreements. Some of these repurchase agreements can be terminated by the purchaser prior to contractual maturity (see Note F to the Corporation’s 2010 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, 2010 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		Over Three Years Through Five Years		Over Five Years
	(in thousands)

Commitments to extend credit	$	141,897	$	66,066	$	13,288	$	6,584	$	55,959
Standby letters of credit		4,483		4,065		418		-		-
Commercial letters of credit		314		314		-		-		-
Long-term debt		218,633		18,973		80,836		80,750		38,074
Operating lease obligations		9,356		1,486		2,573		1,707		3,590
Purchase obligations		990		348		642		-		-
Time deposits		268,166		177,092		31,099		59,540		435
	$	643,839	$	268,344	$	128,856	$	148,581	$	98,058

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.

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. Home equity lines 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 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 2011 are not presently known and are therefore not included in the table. For the Plan year ending September 30, 2011, the Bank has no minimum required pension contribution and a maximum tax deductible contribution of $4.2 million. The Bank expects to make a contribution within that range by September 30, 2011, but the amount of such contribution has not yet been determined.

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 21.82%, 20.56% and 9.38%, respectively, at December 31, 2010 exceed the requirements for a well-capitalized bank and, based on management’s belief, are adequate in the current regulatory and economic environment. The Corporation (on a consolidated basis) is subject to minimum risk-based and leverage capital requirements, which the Corporation exceeds as of December 31, 2010.

Total stockholders' equity increased by $40.2 million, from $116.5 million at December 31, 2009 to $156.7 million at December 31, 2010. The most significant reason for the increase was the sale of 1,437,500 shares of common stock through an underwritten public offering at a price of $24 per share. The net proceeds of the offering after the underwriting discount and offering expenses paid by the Corporation were $32.4 million. The offering was undertaken to position the Bank for future growth and to meet current regulatory expectations as to what constitutes an appropriate level of capital. A significant portion of the proceeds of the offering were temporarily invested in short-term mortgage securities with the intention of reinvesting the monthly paydowns on such securities in better yielding loans. The other primary reason for the increase in stockholders’ equity was net income of $18.4 million, as partially offset by $6.7 million in cash dividends declared and unrealized losses on available-for-sale securities of $4.7 million.

Stock Repurchase Program and Market Liquidity. Since 1988, the Corporation has had a stock repurchase program under which it has purchased from time to time shares of its own common stock in market or private transactions. The Corporation’s market transactions are generally intended to comply with the manner, timing, price and volume conditions set forth in SEC Rule 10b-18 and therefore, with respect to such transactions, provide the Corporation with safe harbor from liability for market manipulation under section 9(a)(2) and Rule 10b-5 of the Securities Exchange Act of 1934. Under a plan approved by the Board of Directors in 2008, the Corporation can purchase 76,568 shares in the future.

Russell 3000 and 2000 Indexes. The Corporation’s common stock is included in the Russell 3000 and Russell 2000 Indices, which were reconstituted in June 2010. Upon reconstitution, the average market capitalization of companies in the Russell 2000 Index was $987 million, the median market capitalization was $448 million, the capitalization of the largest company in the index was $2.3 billion, and the capitalization of the smallest company in the index was $112 million. The Corporation’s market capitalization on December 31, 2010 was approximately $250 million.

Cash Flows. The Corporation’s primary sources of cash are deposit growth, maturities and amortization of loans and investment securities, operations and borrowings. The Corporation uses cash from these and other sources to fund loan growth, purchase investment securities, repay borrowings, expand and improve its physical facilities and pay cash dividends. During 2010, the Corporation’s cash and cash equivalent position decreased by $14.9 million. The decrease occurred primarily because cash used to grow the loan portfolio, repay short-term borrowings, pay cash dividends and improve physical facilities exceeded the cash provided by deposit growth, the securities portfolio, the common stock offering, additional long-term borrowings and operations.

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, 2010, the Bank had approximately $414 million in unencumbered available-for-sale securities.

The Bank is a member of the Federal Reserve Bank of New York (“FRB”) and the Federal Home Loan Bank of New York (“FHLB”), has repurchase agreements in place with a number of brokerage firms and commercial banks and has federal funds lines with several commercial banks. In addition to customer deposits, the Bank’s primary external sources of liquidity are secured borrowings from the FRB, FHLB and repurchase agreement counterparties. In addition, the Bank can purchase overnight federal funds under its existing lines. However, the Bank’s FRB membership, FHLB membership, repurchase agreements and federal funds lines do not represent legal commitments to extend credit to the Bank. The amount that the Bank can potentially borrow is currently dependent on, among other things, the amount of unencumbered eligible securities and loans that the Bank can use as collateral and the collateral margins required by the lenders. Based on the collateral in place at the FRB and FHLB at December 31, 2010, the Bank had a total borrowing capacity of approximately $700 million.

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 in general 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 increases 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 loans at higher yields, the impact of an increase in interest rates should be positive. This occurs primarily because with the passage of time more loans and investment securities will reprice at the higher rates and there will be no offsetting increase in interest expense for those loans and investment securities funded by noninterest-bearing checking deposits and capital.

Conversely, a decrease in interest rates uniformly across the yield curve should initially have a positive impact on the 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.

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.

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 and assumes that assets and liabilities assigned to the same repricing period will reprice at the same time and in the same amount. Like sensitivity modeling, gap analysis does not fully take into account the fact that the repricing of some assets and liabilities is discretionary and subject to competitive and other pressures.

The table that follows summarizes the Corporation's cumulative interest rate sensitivity gap at December 31, 2010 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 assumptions about factors that are inherently uncertain. These factors include, among others, prepayment speeds, changes in market 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, 2010 are the interest rate caps disclosed in Note F to the Corporation’s December 31, 2010 consolidated financial statements.

	Repricing Period
	Three Months or Less			Over Three Months Through Six Months			Over Six Months Through One Year			Total Within One Year			Over One Year Through Five Years		Over Five Years		Non-interest- Sensitive			Total
Assets:	(in thousands)
Overnight Investments	$	276		$	-		$	-		$	276		$	-	$	-	$	-		$	276
Investment securities		36,359			32,662			61,189			130,210			246,502		359,144		3,837			739,693
Loans		181,297			39,098			78,197			298,592			478,472		125,481		(12,600	)		889,945
Other assets		7,688			-			12,663			20,351			-		-		60,758			81,109
		225,620			71,760			152,049			449,429			724,974		484,625		51,995			1,711,023
Liabilities & Stockholders' Equity:
Checking deposits		-			-			-			-			-		-		386,797			386,797
Savings & money market deposits		503,404			11,694			23,386			538,484			99,491		-		-			637,975
Time deposits, $100,000 and over		91,022			21,596			16,239			128,857			49,680		364		-			178,901
Time deposits, other		27,556			13,331			7,348			48,235			40,959		71		-			89,265
Borrowed funds		71,590			-			2,000			73,590			145,000		35,000		-			253,590
Other liabilities		-			-			-			-			-		-		7,801			7,801
Stockholders' equity		-			-			-			-			-		-		156,694			156,694
		693,572			46,621			48,973			789,166			335,130		35,435		551,292			1,711,023
Interest-rate sensitivity gap	$	(467,952	)	$	25,139		$	103,076		$	(339,737	)	$	389,844	$	449,190	$	(499,297	)	$	-
Cumulative interest-rate sensitivity gap	$	(467,952	)	$	(442,813	)	$	(339,737	)	$	(339,737	)	$	50,107	$	499,297	$	-		$	-

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, 2010 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 as quickly or in the same amount as decreases in market interest 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 (“SEC”). The information provided in the 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, 2010 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, 2011 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, 2010 and net interest income on a tax-equivalent basis for the year ending December 31, 2011 assuming rate changes of plus 100 and 200 basis points and minus 100 and 200 basis points. The changes in net portfolio value from the base case have not been tax affected. In addition, cash flows for nonmaturity deposits are based on a decay or runoff rate of six years. Also, rate changes are assumed to be shock or immediate changes and occur uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. In projecting future net interest income under the indicated rate change scenarios, activity is simulated by replacing maturing balances with new balances of the same type, in the same amount, but at the assumed rate level and adjusting repricing balances to the assumed rate level.

Based on the foregoing assumptions and as depicted in the table that follows, an immediate increase in interest rates of 100 or 200 basis points would have a negative effect on net interest income over a one-year time period. This is principally because the 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 decline in interest rates of 100 or 200 basis points is currently constrained by the fact that the annual percentage yields on many of the Bank’s deposit products are below 1%.

	Net Portfolio Value at December 31, 2010					Net Interest Income for 2011
Rate Change Scenario	Amount		Percent Change From Base Case			Amount		Percent Change From Base Case
	(dollars in thousands)

+ 200 basis point rate shock	$	125,806		(16.0	)%	$	50,914		(17.4	)%
+ 100 basis point rate shock		137,233		(8.3	)		56,273		(8.7	)
Base case (no rate change)		149,698		-			61,634		-
- 100 basis point rate shock		163,693		9.3			63,825		3.6
- 200 basis point rate shock		180,446		20.5			62,822		1.9

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”) was signed into law. The Reform Act includes sweeping changes that increase regulation and oversight of the financial services industry and impose restrictions on the ability of firms within the industry to conduct business consistent with historical practices. The Reform Act addresses, among other things, corporate governance, systemic risk, deposit insurance assessments, consumer financial protection, interchange fees, derivatives, lending limits, interest on business checking and reassignment of regulatory authority among agencies. In particular, the Reform Act contains the following provisions which, when implemented, could have a significant impact on the Corporation and the Bank.

The long standing prohibition on the payment of interest on corporate checking deposits is repealed effective July 2011. As a result, the Bank may need to pay interest on corporate checking deposits in order to remain competitive. Commercial checking deposits currently account for approximately 21% of the Bank’s total deposits. If the Bank is unable to offset the interest cost with service charges on these accounts, it could have a material adverse impact on the Corporation’s results of operations.

The minimum Deposit Insurance Fund (“DIF”) ratio is increased from 1.15% of insured deposits to 1.35% and the FDIC is required to reach that level by September 30, 2020. Based on the most recent available information, the DIF balance was a negative $7 billion at December 31, 2010 and would need to be increased by approximately $91 billion to be at the statutory minimum of 1.35% of insured deposits. The long-term impact of this change on the Bank’s deposit insurance cost is uncertain.

Certain provisions of the American Recovery and Reinvestment Act of 2009 (the “ARRA”) resulted in more municipal security issuances qualifying for favorable tax treatment by banks and exempted many such issuances from the federal alternative minimum tax (“AMT”). Management took advantage of these provisions and purchased a significant amount of tax-advantaged municipal securities during 2009 and 2010 at what is believed to be attractive yields and without the usual limitations imposed by the AMT. These provisions of the ARRA impacting municipal securities expired on December 31, 2010. The expiration of these provisions could reduce the available supply of municipal securities for which the Bank can receive favorable tax treatment, reduce yields on municipal securities purchased by the Bank or reduce the amount of municipal securities the Bank can hold without being subject to the AMT. The occurrence of any or all of these could adversely impact the income the Bank is able to earn on its securities portfolio.

The SEC is currently considering the incorporation of International Financial Reporting Standards (“IFRS”) into the U.S. financial reporting system and is scheduled to make a determination sometime in 2011. If IFRS is adopted by the SEC, the first time that U.S. companies would report under IFRS would be no earlier than 2015. The Corporation is evaluating the impact of the adoption of IFRS on its results of operations, financial position and disclosures.

In September 2010, the oversight body of the Basel Committee on Banking Supervision released new capital standards for banks including a time frame over which they would need to be implemented. The new common equity requirement and new capital conservation buffer will require banks to hold more capital, predominantly in the form of common equity, than under current rules. The new common equity requirement will be phased in between January 1, 2013 and January 1, 2016, and the new capital conservation buffer will be phased in between January 1, 2016 and January 1, 2019. Management is currently evaluating the impact of the new capital standards on the Bank’s financial position and results of operations.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains various forward-looking statements with respect to financial performance and other business matters. Such statements are generally contained 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.

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, 2010, based on the criteria established in Internal Control—Integrated Framework issued by COSO. Based on the assessment, management determined that, as of December 31, 2010, 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, 2010 in their report which appears on page 64.

	December 31,
	2010			2009
Assets:
Cash and due from banks	$	18,144,000		$	33,123,000
Overnight investments		276,000			219,000
Cash and cash equivalents		18,420,000			33,342,000

Investment securities:
Held-to-maturity, at amortized cost (fair value of $89,760,000 and $133,233,000)		86,578,000			128,979,000
Available-for-sale, at fair value (amortized cost of $649,278,000 and $627,189,000)		653,115,000			638,794,000
		739,693,000			767,773,000

Loan held for sale		1,000,000			-

Loans:
Commercial and industrial		39,055,000			48,891,000
Secured by real estate:
Commercial mortgages		416,946,000			409,681,000
Residential mortgages		334,768,000			248,888,000
Home equity		103,829,000			109,010,000
Construction and land development		-			3,050,000
Other		5,790,000			5,763,000
		900,388,000			825,283,000
Net deferred loan origination costs		2,571,000			2,383,000
		902,959,000			827,666,000
Allowance for loan losses		(14,014,000	)		(10,346,000	)
		888,945,000			817,320,000

Federal Home Loan Bank stock, at cost		7,688,000			7,882,000
Bank premises and equipment, net		20,843,000			18,090,000
Prepaid income taxes		412,000			179,000
Deferred income tax benefits		2,199,000			-
Bank-owned life insurance		12,663,000			12,167,000
Pension plan assets, net		5,868,000

	2010				2009
Quarter	High		Low		High		Low
First		$25.97		$22.46		$23.75		$19.34
Second		28.08		23.62		26.25		19.75
Third		27.00		24.01		30.00		22.25
Fourth		29.24		24.55		28.50		22.75