PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

See notes to unaudited consolidated financial statements

 

 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

See notes to unaudited consolidated financial statements 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) 

 

 

See notes to unaudited consolidated financial statements 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

 

 

 

 

See notes to unaudited consolidated financial statements

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 

 

 

See notes to unaudited consolidated financial statements

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1 - BASIS OF PRESENTATION 

 

The accounting and reporting policies of The First of Long Island Corporation (“Corporation”) reflect banking industry practice and conform to generally accepted accounting principles (“GAAP”) in the United States.

 

The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiary, The First National Bank of Long Island (“Bank”). The Bank has two wholly-owned subsidiaries: FNY Service Corp. and The First of Long Island Agency, Inc. The Bank and FNY Service Corp. jointly own another subsidiary, The First of Long Island REIT, Inc., a real estate investment trust. The consolidated entity is referred to as the “Corporation” and the Bank and its subsidiaries are collectively referred to as the “Bank.” All intercompany balances and amounts have been eliminated. For further information refer to the consolidated financial statements and notes thereto included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2022.

 

The consolidated financial information included herein as of and for the periods ended June 30, 2023 and 2022 is unaudited. However, such information reflects all adjustments which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The December 31, 2022 consolidated balance sheet was derived from the Corporation's  December 31, 2022 audited consolidated financial statements. When appropriate, items in the prior year financial statements are reclassified to conform to the current period presentation.

 

Use of Estimates. In preparing the consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported asset and liability balances, revenue and expense amounts, and the disclosures provided, including disclosure of contingent assets and liabilities, based on available information. Actual results could differ significantly from those estimates. Information available which could affect these judgements include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers.

2 - COMPREHENSIVE INCOME (LOSS)

 

Comprehensive income (loss) includes net income and other comprehensive income (loss) (“OCI”). OCI includes revenues, expenses, gains and losses that under GAAP are included in comprehensive income but excluded from net income. OCI for the Corporation consists of unrealized holding gains or losses on available-for-sale (“AFS”) securities, derivative instruments designated as cash flow hedges and changes in the funded status of the Bank’s defined benefit pension plan, all net of related income taxes. Accumulated OCI is recognized as a separate component of stockholders’ equity.

 

The following table sets forth the components of accumulated OCI, net of tax.

 

						Current
		Balance				Period				Balance
(in thousands)		12/31/2022				Change				6/30/2023
Unrealized holding loss on available-for-sale securities		$	(56,055	)		$	(3,684	)		$	(59,739	)
Unrealized actuarial loss on pension plan			(8,712	)			353				(8,359	)
Accumulated other comprehensive loss, net of tax		$	(64,767	)		$	(3,331	)		$	(68,098	)

 

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The components of OCI and the related tax effects are as follows:

 

		Six Months Ended								Three Months Ended
		June 30,								June 30,
(in thousands)		2023				2022				2023				2022
Change in net unrealized holding gains or losses on available-for-sale securities:
Change arising during the period		$	(8,686	)		$	(65,217	)		$	(10,617	)		$	(23,661	)
Reclassification adjustment for losses included in net income (1)			3,489				—				—				—
			(5,197	)			(65,217	)			(10,617	)			(23,661	)
Tax effect			(1,513	)			(20,090	)			(3,260	)			(7,290	)
			(3,684	)			(45,127	)			(7,357	)			(16,371	)
Change in funded status of pension plan:
Amortization of net actuarial loss included in pension expense (2)			509				—				255				—
Tax effect			156				—				78				—
			353				—				177				—
Change in unrealized loss on derivative instrument:
Amount of gain during the period			—				1,324				—				76
Reclassification adjustment for net interest expense included in net income (3)			—				426				—				127
			—				1,750				—				203
Tax effect			—				538				—				63
			—				1,212				—				140
Other comprehensive gain (loss)		$	(3,331	)		$	(43,915	)		$	(7,180	)		$	(16,231	)

 

(1) Represents net realized losses arising from the sale of AFS securities, included in the consolidated statements of income in the line item “net loss on sales of securities.” See “Note 3 – Investment Securities” for the income tax benefit related to these net realized losses, included in the consolidated statements of income in the line item “income tax expense.”

(2) Represents the amortization of net actuarial loss relating to the Corporation’s defined benefit pension plan. This item is a component of net periodic pension cost and is included in the consolidated statements of income in the line item “salaries and employee benefits.”

(3) Represents the net interest expense recorded on derivative transactions and included in the consolidated statements of income under “interest expense.”

3 - INVESTMENT SECURITIES

 

The following tables set forth the amortized cost and estimated fair values of the Bank’s AFS investment securities at the dates indicated.

 

		June 30, 2023
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(in thousands)		Cost				Gains				Losses				Value
State and municipals		$	164,138			$	44			$	(15,583	)		$	148,599
Pass-through mortgage securities			172,991				—				(30,126	)			142,865
Collateralized mortgage obligations			159,438				—				(22,810	)			136,628
SBA agency obligations			136,826				359				(958	)			136,227
Corporate bonds			119,000				—				(17,135	)			101,865
		$	752,393			$	403			$	(86,612	)		$	666,184

 

		December 31, 2022
State and municipals		$	321,700			$	136			$	(16,589	)		$	305,247
Pass-through mortgage securities			179,655				—				(31,135	)			148,520
Collateralized mortgage obligations			134,070				—				(20,676	)			113,394
Corporate bonds			119,000				—				(12,748	)			106,252
		$	754,425			$	136			$	(81,148	)		$	673,413

 

 

 

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Small Business Administration (“SBA”) agency obligations are floating rate, government guaranteed securities backed by $96.4 million of commercial mortgages and $39.8 million of equipment finance loans at June 30, 2023.

 

At June 30, 2023 and December 31, 2022, investment securities with a carrying value of $387.8 million and $350.8 million, respectively, were pledged as collateral to secure public deposits and borrowed funds.

 

There were no holdings of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity at June 30, 2023 and December 31, 2022.

 

There was no allowance for credit losses associated with the investment securities portfolio at June 30, 2023 or December 31, 2022.

 

Securities With Unrealized Losses. The following tables set forth securities with unrealized losses presented by the length of time the securities have been in a continuous unrealized loss position.

 

		June 30, 2023
		Less than								12 Months
		12 Months								or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(in thousands)		Value				Loss				Value				Loss				Value				Loss
State and municipals		$	54,538			$	(2,237	)		$	83,594			$	(13,346	)		$	138,132			$	(15,583	)
Pass-through mortgage securities			8,162				(316	)			134,702				(29,810	)			142,864				(30,126	)
Collateralized mortgage obligations			60,432				(2,102	)			68,741				(20,708	)			129,173				(22,810	)
SBA agency obligations			125,604				(958	)			—				—				125,604				(958	)
Corporate bonds			—				—				101,865				(17,135	)			101,865				(17,135	)
Total temporarily impaired		$	248,736			$	(5,613	)		$	388,902			$	(80,999	)		$	637,638			$	(86,612	)

 

		December 31, 2022
State and municipals		$	238,157			$	(12,047	)		$	13,934			$	(4,542	)		$	252,091			$	(16,589	)
Pass-through mortgage securities			12,667				(979	)			135,853				(30,156	)			148,520				(31,135	)
Collateralized mortgage obligations			42,560				(1,515	)			70,834				(19,161	)			113,394				(20,676	)
Corporate bonds			—				—				106,252				(12,748	)			106,252				(12,748	)
Total temporarily impaired		$	293,384			$	(14,541	)		$	326,873			$	(66,607	)		$	620,257			$	(81,148	)

 

State and Municipals

 

At June 30, 2023, approximately $138.1 million of state and municipal bonds had an unrealized loss of $15.6 million. Substantially all the state and municipal bonds are considered high investment grade and rated Aa2/AA- or higher. The unrealized loss is attributable to changes in interest rates and illiquidity and not credit quality. The issuers continue to make timely principal and interest payments on the bonds. The Bank does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. The fair value is expected to recover as the bonds approach maturity.

 

Pass-through Mortgage Securities

 

At June 30, 2023, pass-through mortgage securities of approximately $142.9 million had an unrealized loss of $30.1 million. These securities were issued by U.S. government and government-sponsored agencies and are considered high investment grade. The unrealized loss is attributable to changes in interest rates and not credit quality. The issuers continue to make timely principal and interest payments on the bonds. The Bank does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. The fair value is expected to recover as the bonds approach maturity.

 

Collateralized Mortgage Obligations

 

At June 30, 2023, collateralized mortgage obligations of approximately $129.2 million had an unrealized loss of $22.8 million. These securities were issued by U.S. government and government-sponsored agencies and are considered high investment grade. The unrealized loss is attributable to changes in interest rates and not credit quality. The issuers continue to make timely principal and interest payments on the bonds. The Bank does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. The fair value is expected to recover as the bonds approach maturity.

 

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SBA Agency Obligations

 

At June 30, 2023, SBA agency obligations of approximately $125.6 million had an unrealized loss of $1.0 million. These securities were issued by the SBA, a U.S. government agency and are considered high investment grade. The unrealized loss is attributable to changes in interest rates and not credit quality. The issuer continues to make timely principal and interest payments on the bonds. The Bank does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. The fair value is expected to recover as the bonds approach maturity.

 

Corporate Bonds

 

At June 30, 2023, approximately $101.9 million of corporate bonds had an unrealized loss of $17.1 million. The corporate bonds represent senior unsecured debt obligations of six of the largest U.S. based financial institutions, including JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo. Each of the corporate bonds has a stated maturity of ten years and matures in 2028. The bonds reprice quarterly based on the ten year constant maturity swap rate.

 

Each of the financial institutions is considered upper medium investment grade. The unrealized loss is attributable to changes in credit spreads and interest rates and the illiquid nature of the securities. The Bank does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. Each of these financial institutions has diversified revenue streams, is well capitalized and continues to make timely interest payments. Management evaluates the quarterly financial statements of each company to determine if full payment of principal and interest is in doubt and does not believe there is any impairment at June 30, 2023.

 

Sales of AFS Securities. Sales of AFS securities were as follows:

 

		Six Months Ended								Three Months Ended
		June 30,								June 30,
(in thousands)		2023				2022				2023				2022
Proceeds		$	145,451			$	—			$	—			$	—
Gains		$	—			$	—			$	—			$	—
Losses			(3,489	)			—				—				—
Net loss		$	(3,489	)		$	—			$	—			$	—

 

Income tax benefit related to the net realized losses for the six months ended June 30, 2023 was $1.1 million.

 

Maturities. The following table sets forth by maturity the amortized cost and fair value of the Bank’s state and municipal securities and corporate bonds at June 30, 2023 based on the earlier of their stated maturity or, if applicable, their pre-refunded date. The remaining securities in the Bank’s investment securities portfolio are mortgage-backed securities, consisting of pass-through mortgage securities and collateralized mortgage obligations. Although these securities are expected to have substantial periodic repayments, they are reflected in the table below in aggregate amounts.

 

(in thousands)		Amortized Cost				Fair Value
Within one year		$	11,453			$	11,409
After 1 through 5 years			9,117				8,627
After 5 through 10 years			190,646				171,356
After 10 years			111,573				98,898
Mortgage-backed securities			429,604				375,894
		$	752,393			$	666,184

 

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4 - LOANS

 

The following table sets forth the loans outstanding by class of loans at the dates indicated.

 

(in thousands)		June 30, 2023				December 31, 2022
Commercial and industrial		$	119,379			$	108,493
Commercial mortgages:
Multifamily			857,203				906,498
Other			812,211				789,140
Owner-occupied			229,472				220,855
Residential mortgages:
Closed end			1,200,640				1,240,144
Revolving home equity			45,293				45,213
Consumer and other			1,700				1,390
		$	3,265,898			$	3,311,733

 

Allowance for Credit Losses. Loans that do not share similar risk characteristics are evaluated on an individual basis. Such disparate risk characteristics may include internal or external credit ratings, risk ratings, collateral type, size of loan, effective interest rate, term, geographic location, industry or historical or expected loss pattern. For loans individually evaluated, an allowance for credit losses (“ACL” or “allowance”) is estimated based on either the fair value of collateral or the discounted value of expected future cash flows. In estimating the fair value of real estate collateral, management utilizes appraisals or evaluations adjusted for costs to dispose and a distressed sale adjustment, if needed. Estimating the fair value of collateral other than real estate is also subjective in nature and sometimes requires difficult and complex judgements. 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. Individually evaluated loans are excluded from the estimation of credit losses for the pooled portfolio.

 

For loans collectively evaluated for credit loss, management segregates its loan portfolio into distinct pools, certain of which are combined in reporting loans outstanding by class of loans: (1) commercial and industrial; (2) small business credit scored; (3) multifamily; (4) owner-occupied; (5) other commercial real estate; (6) construction and land development; (7) closed end residential mortgage; (8) revolving home equity; (9) consumer; and (10) municipal loans. An additional pool was used for SBA Paycheck Protection Program (“PPP”) loans while those loans were outstanding. Historical loss information from the Bank’s own loan portfolio from December 31, 2007 to present provides a basis for management’s assessment of expected credit losses. The choice of a historical look-back period that begins in 2007 covers an entire economic cycle and impacts the average historical loss rates used to calculate the final ACL. Due to the extensive loss data available, management selected the vintage approach to measure the historical loss component of credit losses for most of its loan pools. For the revolving home equity and small business credit scored pools, the lifetime PD/LGD (probability of default/loss given default) method is used to measure historical losses.

 

Modifications to borrowers experiencing financial difficulty are included in loans collectively evaluated for credit loss. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. A charge to the allowance for credit losses is generally not recorded upon modification.

 

Management believes that the methods selected fairly reflect the historical loss component of expected losses inherent in the Bank’s loan portfolio. However, since future losses could vary significantly from those experienced in the past, on a quarterly basis management adjusts its historical loss experience to reflect current and forecasted conditions. In doing so, management considers a variety of general qualitative and quantitative factors (“Q-factors”) and then subjectively determines the weight to assign to each in estimating losses. Qualitative characteristics include such things as differences in underwriting standards, policies, lending staff and environmental risks. Management also considers whether further adjustments to historical loss information are needed to reflect the extent to which current conditions and reasonable and supportable forecasts over a one year to two year forecasting horizon differ from the conditions that existed during the historical loss period. These quantitative adjustments reflect changes to relevant data such as changes in unemployment rates, gross domestic product (“GDP”), vacancies, average growth in pools of loans, concentrations of credit, delinquencies or other factors associated with the financial assets. The immediate reversion method is applied for periods beyond the forecasting horizon. The Bank’s ACL allocable to pools of loans that are collectively evaluated for credit loss results primarily from these qualitative and quantitative adjustments to historical loss experience. Because of the nature of the Q-factors and the degree of judgement involved in assessing their impact, management’s resulting estimate of losses may not accurately reflect current and future losses in the portfolio.

 

The main drivers of the credit provision recorded in the first six months of 2023 were improvements in historical loss rates and declines in outstanding loans and average growth rates, partially offset by deteriorating economic conditions and net chargeoffs of $409,000.

 

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The following tables present the activity in the ACL for the periods indicated.

 

		Balance at												Provision (Credit) for				Balance at
(in thousands)		1/1/2023				Chargeoffs				Recoveries				Credit Losses				6/30/2023
Commercial and industrial		$	1,543			$	320			$	33			$	227			$	1,483
Commercial mortgages:
Multifamily			8,430				—				—				(1,132	)			7,298
Other			7,425				—				—				597				8,022
Owner-occupied			3,024				—				—				137				3,161
Residential mortgages:
Closed end			10,633				122				—				(892	)			9,619
Revolving home equity			362				—				—				7				369
Consumer and other			15				—				—				—				15
		$	31,432			$	442			$	33			$	(1,056	)		$	29,967

 

		Balance at												Provision (Credit) for				Balance at
(in thousands)		4/1/2023				Chargeoffs				Recoveries				Credit Losses				6/30/2023
Commercial and industrial		$	1,390			$	138			$	18			$	213			$	1,483
Commercial mortgages:
Multifamily			7,472				—				—				(174	)			7,298
Other			7,613				—				—				409				8,022
Owner-occupied			3,117				—				—				44				3,161
Residential mortgages:
Closed end			10,226				122				—				(485	)			9,619
Revolving home equity			377				—				—				(8	)			369
Consumer and other			14				—				—				1				15
		$	30,209			$	260			$	18			$	—			$	29,967

 

		Balance at												Provision (Credit) for				Balance at
(in thousands)		1/1/2022				Chargeoffs				Recoveries				Credit Losses				6/30/2022
Commercial and industrial		$	888			$	80			$	43			$	190			$	1,041
SBA PPP			46				—				—				(39	)			7
Commercial mortgages:
Multifamily			8,154				—				—				723				8,877
Other			6,478				—				—				446				6,924
Owner-occupied			2,515				—				—				446				2,961
Residential mortgages:
Closed end			11,298				88				—				(516	)			10,694
Revolving home equity			449				—				—				(99	)			350
Consumer and other			3				—				—				8				11
		$	29,831			$	168			$	43			$	1,159			$	30,865

 

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		Balance at												Provision (Credit) for				Balance at
(in thousands)		4/1/2022				Chargeoffs				Recoveries				Credit Losses				6/30/2022
Commercial and industrial		$	1,042			$	76			$	16			$	59			$	1,041
SBA PPP			19				—				—				(12	)			7
Commercial mortgages:
Multifamily			8,384				—				—				493				8,877
Other			6,715				—				—				209				6,924
Owner-occupied			2,722				—				—				239				2,961
Residential mortgages:
Closed end			11,016				88				—				(234	)			10,694
Revolving home equity			376				—				—				(26	)			350
Consumer and other			13				—				—				(2	)			11
		$	30,287			$	164			$	16			$	726			$	30,865

 

Aging of Loans. The following tables present the aging of loans past due and loans on nonaccrual status by class of loans.

 

		June 30, 2023
		Past Due												Nonaccrual
(in thousands)		30-59 Days				60-89 Days				90 Days or More and Still Accruing				With an Allowance for Credit Loss				With No Allowance for Credit Loss				Total Past Due Loans & Nonaccrual Loans				Current				Total Loans
Commercial and industrial		$	189			$	—			$	—			$	—			$	—			$	189			$	119,190			$	119,379
Commercial mortgages:
Multifamily			—				—				—				—				—				—				857,203				857,203
Other			—				—				—				—				—				—				812,211				812,211
Owner-occupied			—				—				—				—				—				—				229,472				229,472
Residential mortgages:
Closed end			491				—				—				—				—				491				1,200,149				1,200,640
Revolving home equity			199				—				—				—				—				199				45,094				45,293
Consumer and other			8				—				—				—				—				8				1,692				1,700
		$	887			$	—			$	—			$	—			$	—			$	887			$	3,265,011			$	3,265,898

 

		December 31, 2022
Commercial and industrial		$	297			$	—			$	—			$	—			$	—			$	297			$	108,196			$	108,493
Commercial mortgages:
Multifamily			—				—				—				—				—				—				906,498				906,498
Other			—				—				—				—				—				—				789,140				789,140
Owner-occupied			—				—				—				—				—				—				220,855				220,855
Residential mortgages:
Closed end			452				—				—				—				—				452				1,239,692				1,240,144
Revolving home equity			—				—				—				—				—				—				45,213				45,213
Consumer and other			1				—				—				—				—				1				1,389				1,390
		$	750			$	—			$	—			$	—			$	—			$	750			$	3,310,983			$	3,311,733

 

There were no loans in the process of foreclosure nor did the Bank hold any foreclosed residential real estate property at June 30, 2023 or December 31, 2022.

 

Accrued interest receivable from loans totaled $9.5 million and $9.2 million at  June 30, 2023 and December 31, 2022, respectively, and is included in the line item “other assets” on the consolidated balance sheets.

 

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Loan Modifications. The Bank did not modify the terms of any loans for borrowers experiencing financial difficulty in the form of principal forgiveness, an interest reduction, an other-than-insignificant payment delay or a term extension during the previous twelve months.

 

Risk Characteristics. Credit risk within the Bank’s loan portfolio primarily stems from factors such as changes in the borrower’s financial condition, credit concentrations, changes in collateral values, economic conditions, rent regulation and environmental contamination of properties securing mortgage loans. The Bank’s commercial loans, including those secured by real estate mortgages, are primarily made to small and medium-sized businesses. Such loans sometimes involve a higher degree of risk than those to larger companies because such businesses may have shorter operating histories, higher debt-to-equity ratios and may lack sophistication in internal record keeping and financial and operational controls. In addition, most of the Bank’s loans are made to businesses and consumers on Long Island and in the boroughs of New York City (“NYC”), and a large percentage of these loans are mortgage loans secured by properties located in those areas. The primary sources of repayment for residential and commercial mortgage loans include employment and other income of the borrowers, the businesses of the borrowers and cash flows from the underlying properties. In the case of multifamily mortgage loans, a substantial portion of the underlying properties are rent stabilized or rent controlled. These sources of repayment are dependent on the strength of the local economy.

 

Credit Quality Indicators. The Bank categorizes loans into risk categories based on relevant information about the borrower’s ability to service their debt including, but not limited to, current financial information for the borrower and any guarantors, payment experience, credit underwriting documentation, public records, due diligence checks and current economic trends. Management analyzes loans individually and classifies them using risk rating matrices consistent with regulatory guidance as follows.

 

Watch: The borrower’s cash flow has a high degree of variability and subject to economic downturns. Liquidity is strained and the ability of the borrower to access traditional sources of credit is diminished.

 

Special Mention: The borrower has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Bank to risk sufficient to warrant adverse classification.

 

Substandard: Loans are inadequately protected by the current sound worth and paying capacity of the borrower or the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

 

Doubtful: Loans have all the inherent weaknesses of those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on existing facts, conditions and values, highly questionable and improbable.

 

Risk ratings on commercial and industrial loans and commercial mortgages are initially assigned during the underwriting process and affirmed as part of the approval process. The ratings are periodically reviewed and evaluated based on borrower contact, credit department review or independent loan review.

 

The Bank's loan risk rating and review policy establishes requirements for the annual review of commercial real estate and commercial and industrial loans. The requirements include details of the scope of coverage and selection process based on loan-type and risk rating. The Bank reviews at least 80% of its commercial real estate loan portfolio on an annual basis. Lines of credit are also reviewed annually at each proposed reaffirmation. The frequency of the review of other loans is determined by minimum principal balance thresholds and the Bank’s ongoing assessments of the borrower’s condition.

 

Residential mortgage loans, revolving home equity lines and other consumer loans are initially evaluated utilizing the borrower’s credit score. A credit score is a tool used in the Bank’s loan approval process, and a minimum score of 680 is generally required for new loans. Credit scores for each borrower are updated at least annually. However, regardless of credit score, loans may be classified, criticized or placed on management’s watch list if relevant information comes to light.

 

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The following tables present the amortized cost basis of loans by class of loans, vintage and risk rating. Loans shown as Pass are all loans other than those risk rated Watch, Special Mention, Substandard or Doubtful. Also presented are gross chargeoffs and recoveries recorded in the current year-to-date period by year of origination.

 

		June 30, 2023
		Term Loans by Origination Year																								Revolving
(in thousands)		2023				2022				2021				2020				2019				Prior				Loans (1)				Total
Commercial and industrial:
Risk rating:
Pass		$	20,901			$	30,856			$	21,152			$	6,773			$	2,628			$	11,593			$	12,634			$	106,537
Watch			—				—				3,844				—				—				—				—				3,844
Special Mention			—				—				—				—				—				—				—				—
Substandard			—				1,998				7,000				—				—				—				—				8,998
Doubtful			—				—				—				—				—				—				—				—
		$	20,901			$	32,854			$	31,996			$	6,773			$	2,628			$	11,593			$	12,634			$	119,379
Current-period gross chargeoffs		$	—			$	—			$	—			$	—			$	—			$	—			$	(320	)		$	(320	)
Current-period recoveries			—				—				—				—				—				—				33				33
Current-period net chargeoffs		$	—			$	—			$	—			$	—			$	—			$	—			$	(287	)		$	(287	)
Commercial mortgages – multifamily:
Risk rating:
Pass		$	7,681			$	193,684			$	178,724			$	37,739			$	121,025			$	318,200			$	150			$	857,203
Watch			—				—				—				—				—				—				—				—
Special Mention			—				—				—				—				—				—				—				—
Substandard			—				—				—				—				—				—				—				—
Doubtful			—				—				—				—				—				—				—				—
		$	7,681			$	193,684			$	178,724			$	37,739			$	121,025			$	318,200			$	150			$	857,203
Current-period gross chargeoffs		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Current-period recoveries			—				—				—				—				—				—				—				—
Current-period net chargeoffs		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Commercial mortgages – other:
Risk rating:
Pass		$	46,910			$	191,604			$	222,805			$	98,216			$	34,048			$	196,915			$	—			$	790,498
Watch			—				—				—				—				—				925				—				925
Special Mention			—				—				—				—				—				—				—				—
Substandard			—				—				—				—				—				20,788				—				20,788
Doubtful			—				—				—				—				—				—				—				—
		$	46,910			$	191,604			$	222,805			$	98,216			$	34,048			$	218,628			$	—			$	812,211
Current-period gross chargeoffs		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Current-period recoveries			—				—				—				—				—				—				—				—
Current-period net chargeoffs		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Commercial mortgages – owner-occupied:
Risk rating:
Pass		$	11,845			$	55,740			$	55,052			$	23,926			$	40,945			$	34,668			$	2,117			$	224,293
Watch			—				—				5,179				—				—				—				—				5,179
Special Mention			—				—				—				—				—				—				—				—
Substandard			—				—				—				—				—				—				—				—
Doubtful			—				—				—				—				—				—				—				—
		$	11,845			$	55,740			$	60,231			$	23,926			$	40,945			$	34,668			$	2,117			$	229,472
Current-period gross chargeoffs		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Current-period recoveries			—				—				—				—				—				—				—				—
Current-period net chargeoffs		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—

 

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		June 30, 2023
		Term Loans by Origination Year																								Revolving
(in thousands)		2023				2022				2021				2020				2019				Prior				Loans (1)				Total
Residential mortgages (2):
Risk rating:
Pass		$	17,881			$	199,927			$	166,395			$	35,104			$	16,011			$	769,697			$	45,293			$	1,250,308
Watch			—				—				—				—				—				—				—				—
Special Mention			—				—				—				—				—				—				—				—
Substandard			—				—				—				—				—				—				—				—
Doubtful			—				—				—				—				—				—				—				—
		$	17,881			$	199,927			$	166,395			$	35,104			$	16,011			$	769,697			$	45,293			$	1,250,308
Current-period gross chargeoffs		$	—			$	—			$	—			$	—			$	—			$	(122	)		$	—			$	(122	)
Current-period recoveries			—				—				—				—				—				—				—				—
Current-period net chargeoffs		$	—			$	—			$	—			$	—			$	—			$	(122	)		$	—			$	(122	)
Consumer and other:
Risk rating:
Pass		$	49			$	257			$	—			$	—			$	100			$	3			$	849			$	1,258
Watch			—				—				—				—				—				—				—				—
Special Mention			—				—				—				—				—				—				—				—
Substandard			—				—				—				—				—				—				—				—
Doubtful			—				—				—				—				—				—				—				—
Not Rated			—				—				—				—				—				—				442				442
		$	49			$	257			$	—			$	—			$	100			$	3			$	1,291			$	1,700
Current-period gross chargeoffs		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Current-period recoveries			—				—				—				—				—				—				—				—
Current-period net chargeoffs		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Total Loans		$	105,267			$	674,066			$	660,151			$	201,758			$	214,757			$	1,352,789			$	61,485			$	3,270,273
Total net chargeoffs		$	—			$	—			$	—			$	—			$	—			$	(122	)		$	(287	)		$	(409	)

 

(1) Includes revolving lines converted to term of $3.9 million of commercial and industrial, $1.0 million of owner-occupied commercial mortgage and $7.3 million of residential home equity.

(2) Certain fixed rate residential mortgage loans are included in a fair value hedging relationship. The amortized cost excludes a contra asset of $4.4 million related to basis adjustments for loans in the closed portfolio under the portfolio layer method at June 30, 2023. These basis adjustments would be allocated to the amortized cost of specific loans within the pool if the hedge was dedesignated. See "Note 7 - Derivatives" for more information on the fair value hedge.

 

5 - STOCK-BASED COMPENSATION 

 

The following table presents a summary of restricted stock units (“RSUs”) outstanding at June 30, 2023 and changes during the six month period then ended.

 

										Weighted-
						Weighted-				Average				Aggregate
						Average				Remaining				Intrinsic
		Number of				Grant-Date				Contractual				Value
		RSUs				Fair Value				Term (yrs.)				(in thousands)
Outstanding at January 1, 2023			246,993			$	18.35
Granted			182,811				15.43
Converted			(119,448	)			18.32
Forfeited			(5,047	)			17.86
Outstanding at June 30, 2023			305,309			$	16.62				1.26			$	3,670

 

As of June 30, 2023, there was $3.4 million of unrecognized compensation cost related to non-vested RSUs. The total cost is expected to be recognized over a weighted-average period of 1.7 years.

 

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6 - FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Financial Instruments Recorded at Fair Value. When measuring fair value, the Corporation uses a fair value hierarchy, which is designed to maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy involves 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 Corporation can 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 the Corporation’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The fair values of the Corporation’s financial assets and liabilities measured at fair value on a recurring basis are set forth in the table that follows. The fair values of AFS securities are 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 relationship of such securities to other benchmark quoted securities. Where no significant other observable inputs were available, Level 3 inputs were used.

 

		Fair Value Measurements Using:
						Quoted Prices				Significant
						in Active				Other				Significant
						Markets for				Observable				Unobservable
						Identical Assets				Inputs				Inputs
(in thousands)		Total				(Level 1)				(Level 2)				(Level 3)
June 30, 2023:
Financial Assets:
Available-for-Sale Securities:
State and municipals		$	148,599			$	—			$	148,119			$	480
Pass-through mortgage securities			142,865				—				142,865				—
Collateralized mortgage obligations			136,628				—				136,628				—
SBA agency obligations			136,227				—				136,227				—
Corporate bonds			101,865				—				101,865				—
			666,184				—				665,704				480
Derivative - interest rate swaps			4,355				—				4,355				—
		$	670,539			$	—			$	670,059			$	480
December 31, 2022:
Financial Assets:
Available-for-Sale Securities:
State and municipals		$	305,247			$	—			$	304,680			$	567
Pass-through mortgage securities			148,520				—				148,520				—
Collateralized mortgage obligations			113,394				—				113,394				—
Corporate bonds			106,252				—				106,252				—
		$	673,413			$	—			$	672,846			$	567

 

State and municipal AFS securities measured using Level 3 inputs. The Bank held four non-rated bond anticipation notes with a book value of $0.5 million at June 30, 2023. These bonds have a one year maturity and are issued by local municipalities that are customers of the Bank. Due to the short duration of the bonds, book value approximates fair value at June 30, 2023.

 

Land and Buildings. Premises and facilities held-for-sale of $383,000 and $2.4 million at June 30, 2023 and December 31, 2022, respectively, are reported in the line item “Other assets” in the consolidated balance sheets and are measured at lower of cost or fair value on a nonrecurring basis.

 

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Financial Instruments Not Recorded at Fair Value. Fair value estimates are made at a specific point in time. 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, liquidity, 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 income tax consequences of realizing gains or losses on the sale of financial instruments.

 

The following table sets forth the carrying amounts and estimated fair values of financial instruments that are not recorded at fair value in the Corporation’s financial statements.

 

		Level of				June 30, 2023								December 31, 2022
		Fair Value				Carrying								Carrying
(in thousands)		Hierarchy				Amount				Fair Value				Amount				Fair Value
Financial Assets:
Cash and cash equivalents		Level 1				$	77,538			$	77,538			$	74,178			$	74,178
Loans, net (1)		Level 3					3,235,931				2,943,563				3,280,301				3,064,849
Restricted stock		n/a					25,380				n/a				26,363				n/a
Financial Liabilities:
Checking deposits		Level 1					1,219,027				1,219,027				1,324,141				1,324,141
Savings, NOW and money market deposits		Level 1					1,663,551				1,663,551				1,661,512				1,661,512
Time deposits		Level 2					570,137				561,385				478,981				467,986
Short-term borrowings		Level 1					—				—				—				—
Long-term debt		Level 2					382,500				378,707				411,000				407,890

 

(1)

The decrease in fair value of net loans is mainly due to an increase in interest rates.

7 – DERIVATIVES

 

As part of its asset liability management activities, the Corporation may utilize interest rate swaps to help manage its interest rate risk position. The notional amount of an interest rate swap does not represent the amount exchanged by the parties. The exchange of cash flows is determined by reference to the notional amount and the other terms of the interest rate swap agreements.

 

Fair Value Hedge. On March 16, 2023, the Bank entered into a three year interest rate swap with a notional amount totaling $300 million which was designated as a fair value hedge of certain fixed rate residential mortgages. The Bank pays a fixed rate of 3.82% and receives a floating rate based on the secured overnight financing rate (“SOFR”) for the life of the agreement without an exchange of the underlying notional amount. The hedge was determined to be effective during the six months ended  June 30, 2023 and the Corporation expects the hedge to remain effective during the remaining term of the swap. The gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk is recognized in interest income.

 

The following table summarizes information about the interest rate swap designated as a fair value hedge.

 

		June 30, 2023
Notional amount (in millions)		$300
Fixed pay rate		3.82%
Overnight SOFR receive rate		5.07%
Maturity (in years)		2.71

 

The carrying value of the closed portfolio of fixed rate residential mortgage loans at June 30, 2023 totaled $478.5 million. The amount identified as the last-of-layer in the open hedge relationship was $300.0 million, which is the amount of loans in the closed portfolio anticipated to be outstanding for the designated hedge period. The basis adjustment associated with the hedge was a $4.4 million contra asset as of June 30, 2023, which would be allocated across the entire remaining closed pool upon termination or maturity of the hedged relationship. 

 

During the first six months of 2023, the Bank recorded a $912,000 credit from the swap transaction as a component of interest income in the consolidated statements of income.

 

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Cash Flow Hedge. The Bank entered into a five year interest rate swap with a notional amount totaling $50 million in January 2019, which was designated as a cash flow hedge of certain Federal Home Loan Bank (“FHLB”) advances and included in short-term borrowings on the consolidated balance sheets. In April 2022, the swap was terminated and the FHLB advance was paid off. Termination fees were immaterial.

 

Interest expense recorded on the swap transaction, which totaled $426,000 for the six months ended June 30, 2022, was recorded as a component of interest expense in the consolidated statements of income. Amounts reported in accumulated OCI related to swaps were reclassified to interest expense as interest payments were made on the Bank’s variable-rate liabilities. During the six months ended June 30, 2022, the Corporation had $426,000 of reclassifications to interest expense.

 

The following table presents the amounts recorded in the consolidated statements of income and the consolidated statements of comprehensive income relating to the interest rate swap for the six months ended June 30, 2022.

 

		Six Months Ended				Three Months Ended
(in thousands)		June 30, 2022				June 30, 2022
Interest rate contract:
Amount of gain recognized in OCI (effective portion)		$	1,324			$	76
Amount of loss reclassified from OCI to interest expense			426				127
Amount of loss recognized in other noninterest income (ineffective portion)			—				—

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is management's discussion and analysis of The First of Long Island 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, FNY Service Corp., The First of Long Island REIT, Inc. and The First of Long Island Agency, 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 on Long Island and the NYC boroughs of Queens, Brooklyn and Manhattan.

 

Overview

 

Net income and diluted earnings per share for the first six months of 2023 were $13.4 million and $0.59, respectively, compared to $24.6 million and $1.06, respectively, for the same period last year. Dividends per share increased 5.0%, from $0.40 for the first six months of 2022 to $0.42 for the current period. Returns on average assets (“ROA”) and average equity (“ROE”) for the first six months of 2023 were 0.64% and 7.27%, respectively, compared to 1.18% and 12.43%, respectively, for the same period last year. Book value per share was $16.22 at June 30, 2023 versus $16.24 at year end 2022.

 

The Bank's earnings continue to be significantly impacted by actions taken by the Federal Reserve Bank ("FRB") to combat rising inflation. The increase in the upper limit of the Fed's target range for the federal funds rate from 0.25% in March 2022 to the current 5.50%, as well as other monetary and industry conditions, has resulted in a significant increase in our cost of funds that has not been matched by the increase in our yield on earning assets. We continue to take proactive steps to manage our business in the current interest rate environment, which includes continuing to execute on shifting our focus to commercial, relationship-based business as part of our strategic plan.

 

Analysis of Earnings – Six Month Periods. Net income for the first six months of 2023 was $13.4 million, representing a decrease of $11.2 million from the same period last year. The primary drivers of the decrease were a decline in net interest income of $12.2 million and a loss on sale of securities of $3.5 million, partially offset by a decrease in income tax expense of $4.5 million.

 

Net interest income declined due to the significant rise in interest rates, which resulted in the cost of deposits and long-term debt increasing at a faster pace than the yields on interest-earning assets. An increase in interest expense of $22.5 million was only partially offset by a $10.2 million increase in interest income. The cost of interest-bearing liabilities increased 170 basis points (“bps”) while the yield on interest-earning assets increased 42 bps when comparing the first six months of 2023 and 2022. Also contributing to the decline in net interest income was a shift in the mix of funding as average noninterest-bearing deposits decreased $200.8 million while average interest-bearing liabilities increased $263.5 million. The $300 million interest rate swap entered into during the first quarter of 2023 increased interest income for the first six months of 2023 by $912,000. Net interest margin for the first six months of 2023 was 2.25% compared to 2.93% for the same period of 2022. The Bank expects that net interest margin will remain under pressure throughout 2023 and 2024 unless the FRB reduces short-term rates and the yield curve steepens.

 

 

During the second quarter of 2023 we originated $76 million in loans at a weighted average rate of approximately 5.97% as compared to $38 million at a weighted average rate of approximately 6.05% during the first quarter of 2023. The Bank’s total loan pipeline was $135 million at the end of the current quarter. The origination volume and current loan pipeline reflect low demand for loans in the marketplace and high interest rates.

 

The provision for credit losses decreased $2.2 million when comparing the six-month periods from a charge of $1.2 million in 2022 to a credit of $1.1 million in 2023. The credit provision for the current six-month period was mainly due to an improvement in historical loss rates and declines in outstanding loans and average growth rates, partially offset by deteriorating economic conditions and net chargeoffs of $409,000.

 

Noninterest income, excluding the loss on the sale of securities of $3.5 million in 2023, declined $1.3 million when comparing the six-month periods. The decline was mainly due to the nonservice cost component of the Bank’s defined benefit pension plan and a payment received in the first quarter of 2022 for the conversion of the Bank’s retail broker and advisory accounts. Partially offsetting these items was a gain of $240,000 in the second quarter of 2023 from the sale of our last building in Glen Head, NY. Recurring components of noninterest income including bank-owned life insurance (“BOLI”) and service charges on deposit accounts had increases of 5.6% and 2.3%, respectively.

 

The increase in noninterest expense of $890,000 includes higher rent and FDIC insurance attributable to higher assessment rates. Salaries and benefits expense was down slightly when comparing the six-month periods mainly due to declines in incentive compensation and group health insurance expense offset by annual base salary increases and lower deferred compensation costs for loan originations.

 

Income tax expense decreased $4.5 million and the effective tax rate (income tax expense as a percentage of pre-tax book income) declined from 20.2% to 11.6% when comparing the six-month periods. The decline in the effective tax rate is mainly due to an increase in the percentage of pre-tax income derived from the Bank’s REIT and BOLI. The decrease in income tax expense reflects the lower effective tax rate and a decline in pre-tax income.

 

Liquidity. Our Bank continues to have ample liquidity despite the disruptions that occurred in the banking industry beginning in the first quarter of this year. Through the end of the second quarter, deposits have only declined $12 million since December 31, 2022 which is the result of proactive management and a testament to the strength of our deposit franchise. Reflecting current trends in the industry, our mix of deposits has shifted. Even with a move of approximately $100 million of deposits out of noninterest-bearing checking accounts into time deposits, noninterest-bearing deposits make up 35% of total deposits. During the first six months of 2023, brokered time deposits remained steady, representing approximately 5% of total deposits, and we reduced our long-term FHLB advances by $28.5 million, or 6.9%. As of June 30, 2023, we had no short-term borrowings.

 

The Bank has $1.4 billion in collateralized borrowing lines with the FHLB of New York and the FRB at June 30, 2023, as well as a $20 million unsecured line of credit with a correspondent bank. We also have $173.3 million in unencumbered cash and securities that can be pledged if needed to secure additional liquidity. In total, we have approximately $1.6 billion of available liquidity, compared to an aggregate of uninsured and uncollateralized deposits of $1.3 billion. Uninsured and uncollateralized deposits represent 38% of total deposits. While we have taken the appropriate steps to ensure that we have access to the FRB’s Term Funding Program, we have not utilized that program and do not anticipate doing so in the immediate future.

 

Moving the Bank Forward. As part of our comprehensive branch optimization strategy that has resulted in a net decrease of 11 branches since 2020, the Bank celebrated the grand opening of three legacy branch relocations in Bohemia, Hauppauge and Port Jefferson during the second quarter of 2023. Each of these branches highlight our new branding, offer new service conveniences and maintain the same knowledgeable teams with a proven successful history of catering to businesses operating in these markets.

 

The Bank continues to focus on expanding its business development activities by opportunistically hiring relationship bankers and promoting leaders from our existing staff. Our focus is building upon our commercial relationship business franchise.

 

In addition, the Bank is diligently working on technology upgrades to customer facing technology including new business online banking and branch systems designed to enhance the customer experience. Completion is scheduled for October 2023.

 

Finally, the Bank sold the remaining building in Glen Head, NY, completing the sale of all of the buildings that constituted the Company’s former headquarters location. Our corporate space in Melville, NY continues fostering internal collaboration as well as promoting corporate initiatives to increase brand recognition and prominence.

 

 

Asset Quality. The Bank’s allowance for credit losses to total loans (reserve coverage ratio) was 0.92% at June 30, 2023 as compared to 0.95% at December 31, 2022. The decrease in the reserve coverage ratio was mainly due to an improvement in historical loss rates and declines in average growth rates and concentrations of credit, partially offset by deteriorating economic conditions. Nonaccrual loans were zero at June 30, 2023. Modified loans and loans past due 30 through 89 days remain at low levels.

 

Capital. The Corporation’s capital position remains strong with a leverage ratio of approximately 10.1% at June 30, 2023. Book value per share was $16.22 at June 30, 2023 versus $16.24 at year end 2022. The accumulated OCI component of stockholders’ equity is mainly comprised of a net unrealized loss in the AFS securities portfolio due to higher market interest rates. We have not repurchased any shares under the Corporation’s stock repurchase program in 2023 and the Corporation declared its quarterly cash dividend of $0.21 per share on June 29, 2023. The Board and management continue to evaluate both capital management tools to provide the best opportunity to maximize shareholder value.

 

Challenges We Face. The current economic environment is characterized by higher inflation, interest rate increases not seen in over 40 years and an inverted yield curve. These factors are causing the Bank’s cost of funds to increase at a substantially faster rate than the increase in asset yields resulting in declines in earnings and profitability metrics. While the pace of deposit rate increases slowed during the second quarter, the Corporation’s earnings and key financial metrics will continue to face significant challenges in the near term. In this difficult economic environment, our deposit franchise has remained steady, asset quality has remained strong and the Corporation is closely monitoring its capital and liquidity positions which remain strong. We continue to stay focused on our long-term strategic initiatives.

 

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. The average balances of loans include nonaccrual loans. The average balances of investment securities exclude unrealized gains and losses on AFS securities.

 

		Six Months Ended June 30,
		2023												2022
		Average				Interest/				Average				Average				Interest/				Average
(dollars in thousands)		Balance				Dividends				Rate				Balance				Dividends				Rate
Assets:
Interest-earning bank balances		$	44,889			$	1,067				4.79	%		$	33,674			$	97				0.58	%
Investment securities:
Taxable			533,866				8,216				3.08				432,303				3,708				1.72
Nontaxable (1)			234,036				3,762				3.21				315,418				5,015				3.18
Loans (1)			3,270,722				61,890				3.78				3,220,953				56,151				3.49
Total interest-earning assets			4,083,513				74,935				3.67				4,002,348				64,971				3.25
Allowance for credit losses			(30,811	)											(30,059	)
Net interest-earning assets			4,052,702												3,972,289
Cash and due from banks			30,388												33,106
Premises and equipment, net			32,024												37,942
Other assets			116,229												144,329
		$	4,231,343											$	4,187,666
Liabilities and Stockholders' Equity:
Savings, NOW & money market deposits		$	1,675,355				13,386				1.61			$	1,713,883				1,564				0.18
Time deposits			510,461				7,301				2.88				319,206				2,100				1.33
Total interest-bearing deposits			2,185,816				20,687				1.91				2,033,089				3,664				0.36
Short-term borrowings			20,845				546				5.28				88,091				684				1.57
Long-term debt			374,285				7,435				4.01				196,268				1,868				1.92
Total interest-bearing liabilities			2,580,946				28,668				2.24				2,317,448				6,216				0.54
Checking deposits			1,241,566												1,442,398
Other liabilities			37,541												29,342
			3,860,053												3,789,188
Stockholders' equity			371,290												398,478
		$	4,231,343											$	4,187,666
Net interest income (1)						$	46,267											$	58,755
Net interest spread (1)											1.43	%											2.71	%
Net interest margin (1)											2.25	%											2.93	%

 

(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 $1.27 in each period presented, using the statutory federal income tax rate of 21%.

 

 

Rate/Volume Analysis. The following table sets forth the effect of changes in volumes and rates on tax-equivalent interest income, interest expense and net interest income. The changes attributable to the combined impact of volume and rate have been allocated to the changes due to volume and the changes due to rate.

 

		Six Months Ended June 30,
		2023 Versus 2022
		Increase (decrease) due to changes in:
										Net
(in thousands)		Volume				Rate				Change
Interest Income:
Interest-earning bank balances		$	42			$	928			$	970
Investment securities:
Taxable			1,039				3,469				4,508
Nontaxable			(1,300	)			47				(1,253	)
Loans			938				4,801				5,739
Total interest income			719				9,245				9,964
Interest Expense:
Savings, NOW & money market deposits			(70	)			11,892				11,822
Time deposits			1,768				3,433				5,201
Short-term borrowings			(823	)			685				(138	)
Long-term debt			2,531				3,036				5,567
Total interest expense			3,406				19,046				22,452
Decrease in net interest income		$	(2,687	)		$	(9,801	)		$	(12,488	)

 

Net Interest Income

 

Net interest income on a tax-equivalent basis for the six months ended June 30, 2023 was $46.3 million, a decrease of $12.5 million, or 21.3%, from the same period of 2022. Net interest income declined due to the significant rise in interest rates, which resulted in the cost of deposits and long-term debt increasing at a faster pace than the yields on interest-earning assets. An increase in interest expense of $22.5 million was only partially offset by a $10.2 million increase in interest income. The cost of interest-bearing liabilities increased 170 bps while the yield on interest-earning assets increased 42 bps when comparing the first six months of 2023 and 2022. Also contributing to the decline in net interest income was a shift in the mix of funding as average noninterest-bearing deposits decreased $200.8 million while average interest-bearing liabilities increased $263.5 million. The $300 million interest rate swap entered into during the first quarter of 2023 increased interest income for the first six months of 2023 by $912,000.  Net interest margin for the first six months of 2023 was 2.25% compared to 2.93% for the same period of 2022. The Bank expects that net interest margin will remain under pressure throughout 2023 and into 2024 unless the FRB reduces short term rates and the yield curve steepens.

 

Management considers deposit betas to be the cumulative change in the rates paid on savings, NOW and money market deposits compared to the cumulative change in the fed funds rate. Historically in a rising rate environment, these deposit betas have been approximately 35% over a complete rising rate cycle. For the twelve months ended June 30, 2023, these deposit betas in the current rising rate cycle are approximately 34%. This could be because we are nearing the end of the cycle of deposits repricing higher. However, our historical tracking of deposit betas does not include a 500 bp rate increase over fifteen months with four consecutive 75 bp moves within the period. As a result, we cannot be confident that our historical betas will hold in this rate cycle. Based on the current pace of deposit rate increases, deposit betas could exceed 40%.

 

During the second quarter of 2023, we originated $76 million in loans at a weighted average rate of approximately 5.97% as compared to $38 million at a weighted average rate of approximately 6.05% during the first quarter of 2023. The Bank’s total loan pipeline was $135 million at the end of the current quarter. The origination volume and current loan pipeline reflect lower demand for loans in the marketplace and higher interest rates.

 

Noninterest Income

 

Noninterest income includes BOLI, service charges on deposit accounts, 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, excluding the loss on the sale of securities of $3.5 million, declined $1.3 million when comparing the six-month periods. The decline was comprised of the nonservice cost component of the Bank’s defined benefit pension plan and a payment received in the first quarter of 2022 for the conversion of the Bank’s retail broker and advisory accounts. Partially offsetting these items was a gain of $240,000 in the second quarter of 2023 from the sale of our last building in Glen Head, NY. Recurring components of noninterest income including BOLI and service charges on deposit accounts had increases of 5.6% and 2.3%, respectively.

 

Noninterest Expense

 

Noninterest expense is comprised of salaries and employee benefits, occupancy and equipment expense and other operating expenses incurred in supporting the various business activities of the Corporation.

 

The increase in noninterest expense of $890,000 includes higher rent and FDIC insurance attributable to higher assessment rates. Salaries and benefits expense was down slightly when comparing the six-month periods mainly due to declines in incentive compensation and group health insurance expense offset by annual base salary increases and lower deferred compensation costs for loan originations.   

 

Income Taxes

 

Income tax expense decreased $4.5 million and the effective tax rate declined from 20.2% to 11.6% when comparing the six-month periods. The decline in the effective tax rate is mainly due to an increase in the percentage of pre-tax income derived from the Bank’s REIT and BOLI. The decrease in income tax expense reflects the lower effective tax rate and a decline in pre-tax income.

 

Results of Operations - Second Quarter 2023 Versus Second Quarter 2022

 

Net income for the second quarter of 2023 decreased $5.6 million as compared to the second quarter of last year. The decrease is mainly attributable to a $7.9 million decline in net interest income for substantially the same reasons discussed above with respect to the six-month periods. Partially offsetting this was a decrease in the provision for credit losses of $726,000 and a decline in income tax expense of $2.0 million for substantially the same reasons previously discussed with respect to the six-month periods.

 

Critical Accounting Policies and Estimates

 

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 ACL 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 judgements about matters that are inherently uncertain. In the event that management’s estimate needs to be adjusted based on 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 ACL and thereby materially impact, either positively or negatively, the Bank’s results of operations.

 

The Bank’s Allowance for Credit Losses Committee (“ACL Committee”), which is a management committee chaired by the Chief Credit Officer, meets on a quarterly basis and is responsible for determining the ACL after considering the results of credit reviews performed by the Bank’s independent loan review consultants and the Bank’s credit department. In addition, and in consultation with the Bank’s Chief Financial Officer, the ACL Committee is responsible for implementing and maintaining accounting policies and procedures surrounding the calculation of the required allowance. The Loan Committee of the Board reviews and approves the Bank’s Loan Policy at least once each calendar year. The Bank’s ACL is reviewed and ratified by the Loan Committee on a quarterly basis and is subject to periodic examination by the Office of the Comptroller of the Currency (“OCC”), whose safety and soundness examination includes a determination as to the adequacy of the allowance to absorb current expected credit losses.

 

The ACL is a valuation amount that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the Bank’s loan portfolio. The allowance is established through provisions for credit losses charged against income. When available information confirms that specific loans, or portions thereof, are uncollectible, these amounts are charged against the ACL, and subsequent recoveries, if any, are credited to the allowance.

 

 

Management estimates the ACL balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical loss information from the Bank’s own loan portfolio has been compiled since December 31, 2007 and generally provides a starting point for management’s assessment of expected credit losses. A historical look-back period that begins in 2007 covers an entire economic cycle and impacts the average historical loss rates used to calculate the final ACL. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level or term as well as for current and potential future changes in economic conditions over a one year to two year forecasting horizon, such as unemployment rates, GDP, vacancy rates or other relevant factors. The immediate reversion method is applied for periods beyond the forecasting horizon. The ACL is an amount that management currently believes will be adequate to absorb expected lifetime losses in the Bank’s loan portfolio. The process for estimating credit losses and determining the ACL as of any balance sheet date is subjective in nature and requires material estimates and judgements. Actual results could differ significantly from those estimates.

 

The ACL is measured on a collective (pool) basis when similar risk characteristics exist. Management segregates its loan portfolio into ten distinct pools: (1) commercial and industrial; (2) small business credit scored; (3) multifamily; (4) owner-occupied; (5) other commercial real estate; (6) construction and land development; (7) residential mortgage; (8) revolving home equity; (9) consumer; and (10) municipal loans. An additional pool was used for SBA PPP loans while those loans were outstanding. The vintage method is applied to measure the historical loss component of lifetime credit losses inherent in most of its loan pools. For the revolving home equity and small business credit scored pools, the lifetime PD/LGD method is used to measure historical losses.

 

Management believes that the methods selected fairly reflect the historical loss component of expected losses inherent in the Bank’s loan portfolio. However, since future losses could vary significantly from those experienced in the past, on a quarterly basis management adjusts its historical loss experience to reflect current conditions and reasonable and supportable forecasts. In doing so, management considers a variety of Q-factors and then subjectively determines the weight to assign to each in estimating losses. The factors include: (1) changes in lending policies and procedures; (2) experience, ability and depth of lending staff; (3) trends in average loan growth and concentrations; (4) changes in the quality of the loan review function; (5) delinquencies; (6) environmental risks; (7) current and forecasted economic conditions as judged by things such as national and local unemployment levels and GDP; (8) changes in the value of underlying collateral as judged by things such as median home prices and forecasted vacancy rates in the Bank’s service area; and (9) direction and magnitude of risks in the portfolio. The Bank’s ACL allocable to its loan pools results primarily from these Q-factor adjustments to historical loss experience with the largest sensitivity of the ACL and provision arising from loan growth, loan concentrations and economic forecasts of unemployment, GDP and vacancies. Because of the nature of the Q-factors and the difficulty in assessing their impact, management’s resulting estimate of losses may not accurately reflect lifetime losses in the portfolio.

 

Loans that do not share similar risk characteristics are evaluated on an individual basis. Such disparate risk characteristics may include internal or external credit ratings, risk ratings, collateral type, size of loan, effective interest rate, term, geographic location, industry or historical or expected loss pattern. Estimated losses for loans individually evaluated are based on either the fair value of collateral or the discounted value of expected future cash flows. For all collateral dependent loans evaluated on an individual basis, credit losses are measured based on the fair value of the collateral. In estimating the fair value of real estate collateral, management utilizes appraisals or evaluations adjusted for costs to dispose and a distressed sale adjustment, if needed. Estimating the fair value of collateral other than real estate is also subjective in nature and sometimes requires difficult and complex judgements. 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 received over the loan’s remaining life. Individually evaluated loans are not included in the estimation of credit losses from the pooled portfolio.

 

Asset Quality

 

Information about the Corporation’s risk elements is set forth below. Risk elements include nonaccrual loans, other real estate owned, loans that are contractually past due 30 days or more and modifications made to borrowers experiencing financial difficulty. These risk elements present more than the normal risk that the Corporation will be unable to eventually collect or realize their full carrying value.

 

		June 30,				December 31,
(in thousands)		2023				2022
Loans including modifications to borrowers experiencing financial difficulty:
Modified and performing according to their modified terms		$	435			$	480
Past due 30 through 89 days			887				750
Past due 90 days or more and still accruing			—				—
Nonaccrual			—				—
			1,322				1,230
Other real estate owned			—				—
		$	1,322			$	1,230

 

The disclosure of other potential problem loans can be found in “Note 4 – Loans” to the Corporation’s consolidated financial statements of this Form 10-Q.

 

 

Allowance and Provision for Credit Losses

 

The ACL is established through provisions for credit losses charged against income. When available information confirms that specific loans, or portions thereof, are uncollectible, these amounts are charged off against the ACL, and subsequent recoveries, if any, are credited to the ACL.

 

The ACL decreased $1.5 million during the first six months of 2023, amounting to $30.0 million, or 0.92% of total loans, at June 30, 2023 compared to $31.4 million, or 0.95% of total loans, at December 31, 2022. During the first six months of 2023, the Bank had loan chargeoffs of $442,000, recoveries of $33,000 and recorded a credit provision of $1.1 million. During the first six months of 2022, the Bank had loan chargeoffs of $168,000, recoveries of $43,000 and recorded a provision of $1.2 million. The credit provision in the current period was mainly due to an improvement in historical loss rates and declines in outstanding loans and average growth rates, partially offset by deteriorating economic conditions and net chargeoffs of $409,000. The provision in the 2022 period was mainly due to an increase in outstanding mortgage loans, partially offset by qualitative adjustments for current conditions and historical loss rates.

 

The ACL is an amount that management currently believes will be adequate to absorb expected lifetime losses in the Bank’s loan portfolio. As more fully discussed in “Critical Accounting Policies and Estimates,” the process for estimating credit losses and determining the ACL as of any balance sheet date is subjective in nature and requires material estimates and judgements. Actual results could differ significantly from those estimates. Other detailed information on the Bank’s loan portfolio and ACL can be found in “Note 4 – Loans” to the Corporation’s consolidated financial statements included in this Form 10-Q.

 

The amount of future chargeoffs and provisions for credit losses will be affected by economic conditions on Long Island and in the boroughs of NYC. 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 96% of the Bank’s total loans outstanding at June 30, 2023. The majority of these loans are collateralized by properties located on Long Island and in the boroughs of NYC. While business activity in the New York metropolitan area has improved, inflation and increasing interest rates pose economic challenges and may result in higher chargeoffs and provisions.

 

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.

 

Cash Flows and Liquidity

 

Cash Flows. The Bank’s primary sources of cash are deposits, maturities and amortization of loans and investment securities, operations and borrowings. The Bank uses cash from these and other sources to fund loan growth, purchase investment securities, repay deposits and borrowings, expand and improve its physical facilities and pay cash dividends to the Corporation. The Corporation uses dividends from the Bank to pay stockholder dividends, repurchase its common stock and for general corporate purposes.

 

The Corporation’s cash and cash equivalent position at June 30, 2023 was $77.5 million versus $74.2 million at December 31, 2022. The increase occurred primarily because cash provided by sales, paydowns or repayments of securities and loans, deposit inflows, proceeds from long-term debt and operations exceeded cash used to repay deposits and borrowings, purchase securities, originate loans and pay cash dividends.

 

Securities decreased $7.2 million during the first six months of 2023, from $673.4 million at year-end 2022 to $666.2 million at June 30, 2023. The decrease is primarily attributable to the sale of $148.9 million of municipal securities, maturities and redemptions of $23.3 million and an increase in the unrealized loss of $5.2 million, partially offset by purchases of $171.1 million during the period. The purchase and sale transactions were completed to help reduce the Bank’s liability sensitive position.

 

The Bank’s securities portfolio comprised 16% of total assets at June 30, 2023 and had a duration of approximately 4.0 years. Approximately 36% of the portfolio was comprised of floating rate assets, including $136.2 million of SBA agency obligations with a current yield of 6.13% that reprice quarterly based on the prime rate and represent 20% of the investment portfolio and $101.9 million of floating rate corporate bonds with a current yield of approximately 4.00% that reprice quarterly based on the ten year constant maturity swap rate.

 

 

Government agency fixed rate mortgage-backed securities, including collateralized mortgage obligations, were $279.5 million and comprised 42% of the investment portfolio at June 30, 2023. This portfolio had a current yield of 2.14%. The Bank expects approximately $29.7 million of cash inflows from the investment securities portfolio in 2023 and will look to reinvest them in higher yielding agency mortgage securities that provide some lock out protection when rates eventually decline. The remaining 22% of the portfolio is invested in tax exempt municipal bonds that currently yield 3.58%.

 

 

During the first six months of 2023, total deposits were unchanged at $3.5 billion. Noninterest-bearing checking deposits declined $105.1 million, partially offset by growth in savings, NOW and money market deposits of $2.0 million and time deposits of $91.2 million. Noninterest-bearing checking deposits of $1.2 billion represent 35.3% of total deposits. Brokered time deposits remained at the same level as December 31, 2022, totaling $176.1 million, or 5.1%, of total deposits. Brokered time deposits have a weighted average cost of 4.43% and an average maturity of approximately five months, of which $74.9 million, or 43%, will mature in the third quarter of 2023 with an average cost of 5.08%. Reciprocal deposits under the Insured Cash Sweep (“ICS”) program were $28.0 million at June 30, 2023.

 

Long-term FHLB advances declined $28.5 million, or 6.9%, during the first six months of 2023, to $382.5 million at June 30, 2023. Maturities of $153.5 million with a weighted average rate of 2.18% were partially offset by new FHLB advances of $125.0 million with a weighted average rate of 4.93%. FHLB advances at June 30, 2023 had a weighted average cost of 4.51% and an average maturity of 1.1 years.

 

Liquidity. The Bank has a board committee approved liquidity policy and liquidity contingency plan, which are intended to ensure that the Bank has sufficient liquidity at all times to meet the ongoing needs of its customers in terms of credit and deposit outflows, take advantage of earnings enhancement opportunities and respond to liquidity stress conditions should they arise.

 

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 maturities and monthly payments from its investment securities and loan portfolios, operations and investment securities designated as AFS.

 

The Bank is a member of the FRB of New York and the FHLB of New York and has an unsecured line of credit with a correspondent bank. In addition to customer deposits, the Bank’s primary external sources of liquidity are secured borrowings from the FRB of New York and FHLB of New York. In addition, the Bank can draw funds under its existing line and the Corporation may raise funds through its Dividend Reinvestment and Stock Purchase Plan.

 

The Bank has $1.4 billion in collateralized borrowing lines with the FHLB of New York and the FRB of New York at June 30, 2023, as well as a $20 million unsecured line of credit with a correspondent bank. We also have $173.3 million in unencumbered cash and securities that can be pledged if needed to secure additional liquidity. In total, we have approximately $1.6 billion of available liquidity, compared to an aggregate of uninsured and uncollateralized deposits of $1.3 billion. Uninsured and uncollateralized deposits represent 38% of total deposits. While we have taken appropriate steps to ensure that we have ready access to the FRB’s Term Funding Program, we have not utilized that program and do not anticipate doing so in the immediate future.

 

The Bank’s FRB of New York membership, FHLB of New York membership and unsecured line do not represent legal commitments to extend credit to the Bank. The amount that the Bank can potentially borrow is currently dependent on the amount of unencumbered eligible securities and loans that the Bank can use as collateral and the collateral margins required by the lenders. The Bank’s borrowing capacity may be adjusted by the FRB of New York or the FHLB of New York and may take into account factors such as the Bank’s tangible common equity ratio, collateral margins required by the lender or other factors. A possible future downgrade of securities and loans pledged as collateral could also impact the amount of available funding.

 

Capital

 

Stockholders’ equity was $365.9 million at June 30, 2023 versus $364.5 million at December 31, 2022. The increase was mainly due to net income of $13.4 million, partially offset by cash dividends declared of $9.5 million and an increase in the after-tax loss on the Bank’s AFS investment securities of $3.7 million.

 

The Corporation’s ROA and ROE for the first six months of 2023 were 0.64% and 7.27%, respectively, compared to 1.18% and 12.43%, respectively, for the 2022 period. Book value per share was $16.22 at June 30, 2023, compared to $16.24 at year-end 2022. Based on the Corporation’s market value per share at June 30, 2023 of $12.02, the dividend yield is 7.0%.

 

 

The Corporation and the Bank have elected to adopt the community bank leverage ratio (“CBLR”) framework, which requires a leverage ratio of greater than 9.00%. As a qualifying community banking organization, the Corporation and the Bank may opt out of the CBLR framework in any subsequent quarter by completing its regulatory agency reporting using the traditional capital rules. In addition, the Corporation and the Bank exclude accumulated OCI components from Tier 1 and Total regulatory capital, in accordance with the federal banking agencies’ regulatory capital guidelines.

 

The Corporation’s capital management policy is designed to build and maintain capital levels that exceed regulatory standards and appropriately provide for growth. The Leverage Ratios of the Corporation and the Bank at June 30, 2023 were 10.11% and 10.09%, respectively, and satisfy the well capitalized ratio requirements under the Prompt Corrective Action statutes. The Corporation and the Bank elected the optional five-year transition period provided by the federal banking agencies for recognizing the regulatory capital impact of the implementation of CECL.

 

The Corporation has a stock repurchase program under which it is authorized to purchase shares of its common stock from time to time through open market purchases, privately negotiated transactions, or in any other manner that is compliant with applicable securities laws. The stock repurchase program does not obligate the Corporation to purchase shares and there is no guarantee as to the exact number of shares that may be repurchased pursuant to this program, which is subject to market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity and other factors deemed appropriate. Under this program, the Corporation has approval to repurchase another $15 million. No shares were repurchased in the first six months of 2023.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Bank invests in interest-earning assets, which are funded by interest-bearing deposits and borrowings, noninterest-bearing deposits and capital. The 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 net interest income and/or economic value of equity (“EVE”) will change when interest rates change. The principal objective of the Bank’s asset liability management activities is to optimize current and future 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.

 

The Bank monitors and manages interest rate risk through a variety of techniques including traditional gap analysis and the use of interest rate sensitivity models. Both gap analysis and interest rate sensitivity modeling involve a variety of significant estimates and assumptions and are done at a specific point in time. Changes in the estimates and assumptions made in gap analysis and interest rate sensitivity modeling 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 EVE.

 

Through the use of interest rate sensitivity modeling, the Bank projects net interest income over a five-year period assuming a static balance sheet and no changes in interest rates from current levels. Utilization of a static balance sheet ensures that interest rate risk embedded in the Bank’s current balance sheet is not masked by assumed balance sheet growth or contraction. Net interest income is projected over a five-year time period utilizing various interest rate change scenarios, including both ramped and shocked changes as well as changes in the shape of the yield curve. The interest rate scenarios modeled are based on the shape of the current yield curve and the relative level of rates and management’s expectations as to potential future yield curve shapes and rate levels.

 

The Bank also uses interest rate sensitivity modeling to calculate EVE in the current rate environment assuming shock increases and decreases in interest rates. EVE is the difference between the present value of expected future cash flows from the Bank’s assets and the present value of the expected future cash flows from the Bank’s liabilities. Present values are determined using discount rates that management believes are reflective of current market conditions. EVE can capture long-term interest rate risk that would not be captured in a five-year projection of net interest income.

 

In utilizing interest rate sensitivity modeling to project net interest income and calculate EVE, management makes a variety of estimates and assumptions which include the following: (1) how much and when yields and costs on individual categories of interest-earning assets and interest-bearing liabilities will change in response to projected changes in market interest rates; (2) future cash flows, including prepayments of mortgage assets and calls of municipal securities; (3) cash flow reinvestment assumptions; (4) appropriate discount rates to be applied to loan, deposit and borrowing cash flows; and (5) decay or runoff rates for nonmaturity deposits such as checking, savings, NOW and money market accounts. The repricing of loans and borrowings and the reinvestment of loan and security cash flows are generally assumed to be impacted by the full amount of each assumed rate change, while the repricing of nonmaturity deposits is not. For nonmaturity deposits, management makes estimates of how much and when it will need to change the rates paid on the Bank’s various nonmaturity deposit products in response to changes in general market interest rates. These estimates are based on product type, management’s experience with needed deposit rate adjustments in prior interest rate change cycles, the results of a nonmaturity deposit study conducted by an independent consultant and updated on a periodic basis and management’s assessment of competitive conditions in its marketplace.

 

 

The information provided in the following table is based on a variety of estimates and assumptions that management believes to be reasonable, the more significant of which are set forth hereinafter. The base case information in the table shows: (1) a calculation of the Corporation’s EVE at June 30, 2023 arrived at by discounting estimated future cash flows at rates that management believes are reflective of current market conditions; and (2) an estimate of net interest income for the year ending June 30, 2024 assuming a static balance sheet, the adjustment of repricing balances to current rate levels, and the reinvestment at current rate levels of cash flows from maturing assets and liabilities in a mix of assets and liabilities that is intended to reflect a static balance sheet. In addition, in calculating EVE, cash flows for nonmaturity deposits are assumed to have an overall life of 6.1 years based on the current mix of such deposits and the most recently updated nonmaturity deposit study.

 

The rate change information in the following table shows estimates of net interest income for the year ending June 30, 2024 and calculations of EVE at June 30, 2023 assuming rate changes of plus and minus 100, 200 and 300 bps. The rate change scenarios were selected based on the relative level of current interest rates and: (1) are assumed to be shock or immediate changes for both EVE and net interest income; (2) occur uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities; and (3) impact the repricing and reinvestment of all assets and liabilities, except nonmaturity deposits, by the full amount of the rate change. In projecting future net interest income under the indicated rate change scenarios, activity is simulated by assuming that cash flows from maturing assets and liabilities are reinvested in a mix of assets and liabilities that is intended to reflect a static balance sheet. The changes in EVE from the base case have not been tax affected.

 

		Economic Value of Equity							Net Interest Income for
		at June 30, 2023							Year Ending June 30, 2024
						Percent Change							Percent Change
						From							From
Rate Change Scenario (dollars in thousands)		Amount				Base Case			Amount				Base Case
+ 300 basis point rate shock		$	416,300			-24.5%			$	79,963			-9.7%
+ 200 basis point rate shock			457,504			-17.0%				82,523			-6.8%
+ 100 basis point rate shock			507,748			-7.9%				85,673			-3.2%
Base case (no rate change)			551,425			—				88,534			—
- 100 basis point rate shock			586,939			6.4%				90,842			2.6%
- 200 basis point rate shock			599,740			8.8%				91,422			3.3%
- 300 basis point rate shock			596,469			8.2%				90,796			2.6%

 

As shown in the preceding table, assuming a static balance sheet, an immediate increase in interest rates of 100, 200 or 300 bps could negatively impact the Bank’s net interest income for the year ended June 30, 2024 because the Bank might need to increase the rates paid on its nonmaturity deposits to remain competitive and any borrowings that mature would reprice at a higher interest rate. In addition, the Bank’s securities portfolio, excluding corporate bonds and SBA agency obligations, and a large portion of its loan portfolio do not immediately reprice with changes in market rates. At June 30, 2023, approximately $837 million, or 21%, of the Bank's loans and securities reprice or mature within one year. An immediate decrease in interest rates of 100, 200 or 300 bps could positively impact the Bank’s net interest income for the same time period because the Bank would immediately pay less for overnight borrowings and be able to reduce deposit rates while the downward repricing of its assets would lag. The positive impact on net interest income of an immediate decrease in interest rates is somewhat constrained because the decrease is assumed to occur uniformly across the inverted yield curve. Changes in management’s estimates as to the rates that will need to be paid on nonmaturity deposits could have a material impact on the net interest income amounts shown for each scenario in the table.

 

The negative impact of rising interest rates on net interest income for the year ended June 30, 2024 could be more significant than the amounts shown in the table because (1) deposit betas on nonmaturity deposits in the current rising rate cycle could be higher than historical deposit betas, (2) additional upward deposit repricing may occur on accounts that have lagged the market even if rates remain static, and (3) noninterest-bearing checking deposits could continue to migrate into interest-bearing accounts. 

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q and the documents incorporated into it by reference contain or may contain various forward-looking statements. These forward-looking statements include statements of goals; intentions and expectations; estimates of risks and of future costs and benefits; assessments of expected future credit losses; assessments of market risk; and statements of the ability to achieve financial and other goals. Forward-looking statements are typically identified by words such as “would,” “should,” “could,” “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project” and other similar words and expressions. Forward-looking statements are subject to numerous assumptions, risks and uncertainties which may change over time. Forward-looking statements speak only as of the date they are made. We do not assume any duty and do not undertake to update our forward-looking statements. Because forward-looking statements are subject to assumptions and uncertainties, actual results or future events could differ, possibly materially, from those that we anticipated in our forward-looking statements and future results could differ materially from historical performance.

 

 

Our forward-looking statements are subject to the following principal risks and uncertainties: general economic conditions and trends, either nationally or locally; the effects of the recent turmoil in the banking industry (including the failure of three financial institutions); conditions in the securities markets; fluctuations in the trading price of our common stock; changes in interest rates and the rate of inflation; changes in the shape of the yield curve; changes in deposit flows, and in the demand for deposit and loan products and other financial services; changes in real estate values; changes in the quality or composition of our loan or investment portfolios; changes in competitive pressures among financial institutions or from non-financial institutions; our ability to retain key members of management; changes in legislation, regulation, and policies; and a variety of other matters which, by their nature, are subject to significant uncertainties. We provide greater detail regarding some of these factors in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022, in Part I under “Item 1A. Risk Factors” and in the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, under “Item 1A. Risk Factors.” Our forward-looking statements may also be subject to other risks and uncertainties, including those that we may discuss elsewhere in other documents we file with the Securities and Exchange Commission from time to time.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

The Corporation’s Principal Executive Officer and Principal Financial Officer have evaluated the Corporation’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report. Based upon that evaluation, they have concluded that the Corporation’s disclosure controls and procedures are effective as of the end of the period covered by this report.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in internal control over financial reporting that occurred during the second quarter of 2023 that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting. 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, the Corporation is involved in various legal actions and claims arising in the normal course of its business. In the opinion of management, these legal actions and claims are not expected to have a material adverse impact on the Corporation's financial condition and results of operations.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors, in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2022, as supplemented by the disclosure in Item 1A. Risk Factors, included in the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(c) Stock Repurchases. The Corporation has a stock repurchase program under which it is authorized to purchase shares of its common stock from time to time through open market purchases, privately negotiated transactions, or in any other manner that is compliant with applicable securities laws. The Corporation did not repurchase any shares in the second quarter of 2023.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

ITEM 5. OTHER INFORMATION

 

Securities Trading Plan of Directors and Executive Officers

 

During the three months ended June 30, 2023, none of the directors or executive officers of the Corporation adopted or terminated any contract, instruction or written plan for the purchase of the Corporation's securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any "non-Rule 10b5-1 trading arrangement."

 

ITEM 6. EXHIBITS

 

See Index of Exhibits that follows.

 

 

INDEX OF EXHIBITS

 

Exhibit No.	Description of Exhibit
31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a)
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a)
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) and U.S.C. Section 1350
101	The following materials from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to the Consolidated Financial Statements.
104	Cover Page Interactive Data File (formatted in iXBRL and contained in Exhibit 101)

 

 

SIGNATURES

 

Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

	THE FIRST OF LONG ISLAND CORPORATION
	(Registrant)
Dated: August 2, 2023	By /s/ CHRISTOPHER BECKER
	Christopher Becker, President & Chief Executive Officer
	(principal executive officer)
	By /s/ JAY P. MCCONIE
	Jay P. McConie, Executive Vice President,
	Chief Financial Officer & Treasurer
	(principal financial officer)