FIRST OF LONG ISLAND CORP - Quarter Report: 2016 June (Form 10-Q)

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		June 30,				December 31,
(dollars in thousands)		2016				2015
Assets:
Cash and cash equivalents		$	51,026			$	39,635
Investment securities:
Held-to-maturity, at amortized cost (fair value of $12,637 and $14,910)			12,206				14,371
Available-for-sale, at fair value			862,001				737,700
			874,207				752,071
Loans held-for-sale			-				105
Loans:
Commercial and industrial			105,106				93,056
Secured by real estate:
Commercial mortgages			1,043,560				1,036,331
Residential mortgages			1,110,977				1,025,215
Home equity lines			87,971				87,848
Consumer and other			5,998				5,733
			2,353,612				2,248,183
Allowance for loan losses			(27,677	)			(27,256	)
			2,325,935				2,220,927
Restricted stock, at cost			23,074				28,435
Bank premises and equipment, net			31,527				30,330
Bank-owned life insurance			32,914				32,447
Pension plan assets, net			14,451				14,337
Other assets			14,154				12,056
		$	3,367,288			$	3,130,343
Liabilities:
Deposits:
Checking		$	765,392			$	777,994
Savings, NOW and money market			1,562,740				1,195,968
Time, $100,000 and over			190,606				198,147
Time, other			106,117				112,566
			2,624,855				2,284,675
Short-term borrowings			57,666				211,502
Long-term debt			359,212				365,712
Accrued expenses and other liabilities			9,497				12,313
Deferred income taxes payable			10,406				5,205
			3,061,636				2,879,407
Stockholders' Equity:
Common stock, par value $.10 per share:
Authorized, 40,000,000 shares; Issued and outstanding, 15,590,694 and 14,116,677 shares			1,559				1,412
Surplus			96,273				56,931
Retained earnings			194,128				185,069
			291,960				243,412
Accumulated other comprehensive income, net of tax			13,692				7,524
			305,652				250,936
		$	3,367,288			$	3,130,343

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		Six Months Ended June 30,								Three Months Ended June 30,
(dollars in thousands, except per share data)		2016				2015				2016				2015
Interest and dividend income:
Loans		$	40,055			$	33,691			$	20,241			$	17,140
Investment securities:
Taxable			3,910				4,242				2,020				2,124
Nontaxable			6,823				6,792				3,420				3,403
			50,788				44,725				25,681				22,667
Interest expense:
Savings, NOW and money market deposits			2,343				1,150				1,410				605
Time deposits			2,674				3,070				1,299				1,489
Short-term borrowings			131				94				7				13
Long-term debt			3,666				4,111				1,692				2,066
			8,814				8,425				4,408				4,173
Net interest income			41,974				36,300				21,273				18,494
Provision for loan losses			392				1,353				139				942
Net interest income after provision for loan losses			41,582				34,947				21,134				17,552
Noninterest income:
Investment Management Division income			990				1,039				514				532
Service charges on deposit accounts			1,290				1,325				656				669
Net gains on sales of securities			1,844				1,133				1,844				1,133
Other			1,361				1,542				717				749
			5,485				5,039				3,731				3,083
Noninterest expense:
Salaries			11,049				10,020				5,471				4,968
Employee benefits			3,449				2,739				1,780				1,376
Occupancy and equipment			4,579				4,569				2,202				2,111
Debt extinguishment			1,756				1,084				1,756				1,084
Other			6,470				4,777				3,663				2,503
			27,303				23,189				14,872				12,042
Income before income taxes			19,764				16,797				9,993				8,593
Income tax expense			4,714				4,036				2,373				2,317
Net income		$	15,050			$	12,761			$	7,620			$	6,276
Earnings per share:
Basic		$	1.03			$	.91			$	.51			$	.45
Diluted			1.02				.90				.50				.44
Cash dividends declared per share			.40				.38				.20				.19

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		Six Months Ended								Three Months Ended
		June 30,								June 30,
(dollars in thousands)		2016				2015				2016				2015
Net income		$	15,050			$	12,761			$	7,620			$	6,276
Other comprehensive income (loss):
Change in net unrealized holding gains on available-for-sale securities			10,653				(6,861	)			5,511				(9,445	)
Change in funded status of pension plan			122				-				61				-
Other comprehensive income (loss) before income taxes			10,775				(6,861	)			5,572				(9,445	)
Income tax expense (benefit)			4,607				(2,862	)			2,335				(3,839	)
Other comprehensive income (loss)			6,168				(3,999	)			3,237				(5,606	)
Comprehensive income		$	21,218			$	8,762			$	10,857			$	670

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		Six Months Ended June 30, 2016
																		Accumulated
																		Other
		Common Stock												Retained				Comprehensive
(dollars in thousands)		Shares				Amount				Surplus				Earnings				Income				Total
Balance, January 1, 2016			14,116,677			$	1,412			$	56,931			$	185,069			$	7,524			$	250,936
Net income															15,050								15,050
Other comprehensive income																			6,168				6,168
Common stock issued in public offering, net of issuance costs			1,300,000				130				35,132												35,262
Repurchase of common stock			(13,393	)			(1	)			(369	)											(370	)
Common stock issued under stock compensation plans, including tax benefit			82,762				8				776												784
Common stock issued under dividend reinvestment and stock purchase plan			104,648				10				2,889												2,899
Stock-based compensation											914												914
Cash dividends declared															(5,991	)							(5,991	)
Balance, June 30, 2016			15,590,694			$	1,559			$	96,273			$	194,128			$	13,692			$	305,652

		Six Months Ended June 30, 2015
																		Accumulated
																		Other
		Common Stock												Retained				Comprehensive
(dollars in thousands)		Shares				Amount				Surplus				Earnings				Income				Total
Balance, January 1, 2015			13,887,134			$	1,389			$	51,009			$	170,120			$	10,785			$	233,303
Net income															12,761								12,761
Other comprehensive loss																			(3,999	)			(3,999	)
Repurchase of common stock			(12,227	)			(1	)			(286	)											(287	)
Common stock issued under stock compensation plans, including tax benefit			61,138				6				461												467
Common stock issued under dividend reinvestment and stock purchase plan			59,576				6				1,428												1,434
Stock-based compensation											746												746
Cash dividends declared															(5,312	)							(5,312	)
Balance, June 30, 2015			13,995,621			$	1,400			$	53,358			$	177,569			$	6,786			$	239,113

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		Six Months Ended June 30,
(dollars in thousands)		2016				2015
Cash Flows From Operating Activities:
Net income		$	15,050			$	12,761
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			392				1,353
Provision for deferred income taxes			594				420
Depreciation and amortization			1,590				1,543
Premium amortization on investment securities, net			1,880				2,581
Net gains on sales of securities			(1,844	)			(1,133	)
Net loss on sales of loans held-for-sale			5				-
Loss on debt extinguishment			1,756				1,084
Stock-based compensation expense			914				746
Accretion of cash surrender value on bank-owned life insurance			(467	)			(447	)
Pension expense (credit)			9				(245	)
Increase in other assets			(2,098	)			(849	)
Decrease in accrued expenses and other liabilities			(3,138	)			(892	)
Net cash provided by operating activities			14,643				16,922
Cash Flows From Investing Activities:
Proceeds from sales of investment securities:
Held-to-maturity			123				243
Available-for-sale			40,989				66,140
Proceeds from maturities and redemptions of investment securities:
Held-to-maturity			3,384				3,599
Available-for-sale			48,646				60,186
Purchases of investment securities:
Held-to-maturity			(1,287	)			(1,619	)
Available-for-sale			(203,374	)			(65,742	)
Proceeds from sales of loans held-for-sale			100				-
Net increase in loans			(105,400	)			(167,866	)
Net decrease in restricted stock			5,361				4,526
Purchases of premises and equipment, net			(2,787	)			(2,709	)
Net cash used in investing activities			(214,245	)			(103,242	)
Cash Flows From Financing Activities:
Net increase in deposits			340,180				223,640
Net decrease in short-term borrowings			(153,836	)			(100,028	)
Proceeds from long-term debt			23,500				54,612
Repayment of long-term debt			(31,756	)			(74,584	)
Proceeds from issuance of common stock, net			38,161				1,434
Proceeds from exercise of stock options			470				303
Tax benefit from stock compensation plans			314				164
Repurchase and retirement of common stock			(370	)			(287	)
Cash dividends paid			(5,670	)			(5,291	)
Net cash provided by financing activities			210,993				99,963
Net increase in cash and cash equivalents			11,391				13,643
Cash and cash equivalents, beginning of year			39,635				32,944
Cash and cash equivalents, end of period		$	51,026			$	46,587
Supplemental Information:
Cash paid for:
Interest		$	12,048			$	8,509
Income taxes			4,857				4,535
Noncash investing and financing activities:
Cash dividends payable			3,144				2,659

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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 in the United States. In preparing the consolidated financial statements, management is required to make estimates, such as the allowance for loan losses, and assumptions that affect the reported asset and liability balances, revenue and expense amounts, and the disclosure of contingent assets and liabilities. Actual results could differ significantly from those estimates.

 

The 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., an investment company, and The First of Long Island Agency, Inc., a licensed insurance agency under the laws of the State of New York. 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, 2015.

 

The consolidated financial information included herein as of and for the periods ended June 30, 2016 and 2015 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, 2015 consolidated balance sheet was derived from the Corporation's December 31, 2015 audited consolidated financial statements. When appropriate, items in the prior year financial statements are reclassified to conform to the current period presentation.

 

2 – EARNINGS PER SHARE

 

The following table is a reconciliation of basic and diluted earnings per share (“EPS”) for the periods indicated.

  

 

(1) Restricted stock units (“RSUs”) awarded in January 2016 accrue dividends at the same rate as the dividends declared by the Board of Directors on the Corporation’s common stock. For purposes of computing EPS, these RSUs are considered to participate with common stock in the undistributed earnings of the Corporation and, therefore, the Corporation is required to calculate basic and diluted EPS using the two-class method. Under the two-class method, net income for the period is allocated between common stockholders and participating securities according to dividends declared and participation rights in undistributed earnings. See Note 6 for additional details on the RSUs awarded in 2016.

 

3 - COMPREHENSIVE INCOME 

 

Comprehensive income includes net income and other comprehensive income. Other comprehensive income includes revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income. Other comprehensive income for the Corporation consists of unrealized holding gains or losses on available-for-sale securities and changes in the funded status of the Bank’s defined benefit pension plan, both net of related income taxes. Accumulated other comprehensive income is recognized as a separate component of stockholders’ equity.

  

 

The components of other comprehensive income (loss) and the related tax effects are as follows: 

 

 

 (1) Reclassification adjustment represents net realized gains arising from the sale of available-for-sale securities. The net realized gains are included in the consolidated statements of income in the line item, “Net gains on sales of securities.” See “Note 4 – Investment Securities” for the income tax expense related to the net realized gains.

 

(2) Represents the amortization into expense of net actuarial loss relating to the Bank’s defined benefit pension plan. This item is included in net periodic pension cost (see Note 7) and in the consolidated statements of income in the line item, “Employee benefits.” The related income tax expense is included in the consolidated statements of income in the line item, “Income tax expense.”

 

The following table sets forth the components of accumulated other comprehensive income, net of tax:

 

 

 

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4 - INVESTMENT SECURITIES

 

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

  

 

 

At June 30, 2016 and December 31, 2015, investment securities with a carrying value of $469,334,000 and $405,769,000, 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, 2016 and December 31, 2015.

 

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.

 

 

 

Because the unrealized losses reflected in the preceding tables are deemed by management to be attributable to changes in interest rates and not credit losses, and because management does not have the intent to sell these securities and it is not more likely than not that it will be required to sell these securities before their anticipated recovery, the Bank does not consider these securities to be other-than-temporarily impaired at June 30, 2016.

  

 

Sales of Available-for-Sale Securities. Sales of available-for-sale securities were as follows:

  

 

Income tax expense related to the net realized gains was $761,000 for the six and three months ended June 30, 2016, and $463,000 for the six and three months ended June 30, 2015.

 

Sales of Held-to-Maturity Securities. During the second quarter of 2016, the Bank sold one mortgage-backed security that was classified as held-to-maturity. The sale occurred after the Bank collected 85% or more of the principal outstanding at acquisition. The security sold had a carrying value of $106,000 at the time of sale and the Bank realized a gain upon sale of $17,000.

 

During the second quarter of 2015, the Bank sold one municipal security that was classified as held-to-maturity. The sale was in response to a significant deterioration in the creditworthiness of the issuer. The security sold had a carrying value of $235,000 at the time of sale and the Bank realized a gain upon sale of $8,000.

 

Maturities. The following table sets forth by maturity the amortized cost and fair value of the Bank’s state and municipal securities at June 30, 2016 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 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.  

 

 

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5 – LOANS

 

The following tables set forth by class of loans the amount of loans individually and collectively evaluated for impairment and the portion of the allowance for loan losses allocable to such loans.

 

 

 

The following tables present the activity in the allowance for loan losses for the six and three months ended June 30, 2016 and 2015. 

 

  

 

 

  

 

For individually impaired loans, the following tables set forth by class of loans at June 30, 2016 and December 31, 2015 the recorded investment, unpaid principal balance and related allowance. The tables also set forth the average recorded investment of individually impaired loans and interest income recognized while the loans were impaired during the six and three months ended June 30, 2016 and 2015. The recorded investment is the unpaid principal balance of the loans less any interest payments applied to principal and any direct chargeoffs plus or minus net deferred loan costs and fees. Any principal and interest payments received on nonaccrual impaired loans are applied to the recorded investment in the loans. The Bank recognizes interest income on other impaired loans using the accrual method of accounting.

 

 

 

 

 

Aging of Loans. The following tables present the aging of the recorded investment in loans by class of loans.

 

 

 

Nonaccrual loans at June 30, 2016 include a first lien residential mortgage in the amount of $152,000 that is in the process of foreclosure. There were no loans in the process of foreclosure at December 31, 2015. The Bank did not hold any foreclosed residential real estate property at June 30, 2016 or December 31, 2015.

 

Troubled Debt Restructurings. A restructuring constitutes a troubled debt restructuring when it includes a concession by the Bank and the borrower is experiencing financial difficulty. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed as to the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. The Bank performs the evaluation under its internal underwriting policy.

 

During the six months ended June 30, 2016 the Bank did not modify any loans in troubled debt restructurings.

 

During the six months ended June 30, 2015, the Bank modified two loans to a single borrower in a troubled debt restructuring. The loans were a first lien residential mortgage with a pre and post-modification outstanding recorded investment of $2.7 million and a junior lien residential mortgage with a pre and post-modification outstanding recorded investment of $245,000. The restructuring reduced the interest rate on each loan from 5.25% to 4.00%, which is lower than the current market rate for new debt with similar risk. The restructuring resulted in a charge to the provision for loan losses of $332,000.

 

At June 30, 2016 and December 31, 2015, the Bank had an allowance for loan losses of $383,000 and $395,000, respectively, allocated to specific troubled debt restructurings. The Bank had no commitments to lend additional amounts to loans that were classified as troubled debt restructurings.

 

There were no troubled debt restructurings for which there was a payment default during the six months ended June 30, 2016 and 2015 that were modified during the twelve-month period prior to default. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

 

Risk Characteristics. Credit risk within the Bank’s loan portfolio primarily stems from factors such as borrower size, geographic concentration, industry concentration, real estate values, local and national economic conditions and environmental impairment of properties securing mortgage loans. The Bank’s commercial loans, including those secured by 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, and a large percentage of these loans are mortgage loans secured by properties located in those areas. The primary source of repayment for multifamily loans is cash flows from the underlying properties, a substantial portion of which are rent stabilized or rent controlled. Such cash flows 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 and current economic trends.

 

Commercial and industrial loans and commercial mortgage loans are risk rated utilizing a ten point rating system. The ten point risk rating system is described hereinafter.

  

Internally  Assigned  Risk Rating
1 – 2	Cash flow is of high quality and stable. Borrower has very good liquidity and ready access to traditional sources of credit. This category also includes loans to borrowers secured by cash and/or marketable securities within approved margin requirements.
3 – 4	Cash flow quality is strong, but shows some variability. Borrower has good liquidity and asset quality. Borrower has access to traditional sources of credit with minimal restrictions.
5 – 6	Cash flow quality is acceptable but shows some variability. Liquidity varies with operating cycle and assets provide an adequate margin of protection. Borrower has access to traditional sources of credit, but generally on a secured basis.
7	Watch - 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.
8	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.
9	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.
10	Doubtful - Loans have all the inherent weaknesses of those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

 

Risk ratings on commercial and industrial loans and commercial mortgages are initially assigned by the lending officer together with any necessary approval authority. The ratings are periodically reviewed and evaluated based upon borrower contact, credit department review or independent loan review.

 

The Bank's Loan 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. Among other requirements, at least 60% of the recorded investment of commercial real estate loans as of December 31 of the prior year must be reviewed annually. The frequency of the review of other loans is determined by the Bank’s ongoing assessments of the borrower’s condition.

 

Residential mortgage loans, revolving home equity lines, other consumer loans and small business credit scored loans are risk rated utilizing a three point rating system. In most cases, the borrower’s credit score dictates the risk rating. However, regardless of credit score, loans that are on management’s watch list or have been criticized or classified by management are assigned a risk rating of 3. A credit score is a tool used in the Bank’s loan approval process, and a minimum score of 700 is generally required for new loans. Credit scores for each borrower are updated at least annually. The risk ratings along with their definitions are as follows:

 

Internally Assigned Risk Rating
1	Credit score is equal to or greater than 680.
2	Credit score is 635 to 679.
3	Credit score is below 635 or, regardless of credit score, the loan has been classified, criticized or placed on watch.

  

 

The following tables present the recorded investment in commercial and industrial loans and commercial mortgage loans by class of loans and risk rating. Loans shown as Pass are all loans other than those risk rated Watch, Special Mention, Substandard or Doubtful.

  

 

 

The following tables present the recorded investment in residential mortgage loans, home equity lines and other consumer loans by class of loans and risk rating. Loans shown as Pass are all loans other than those risk rated Watch, Special Mention, Substandard or Doubtful.

 

 

 

Deposit account overdrafts were $232,000 and $290,000 at June 30, 2016 and December 31, 2015, respectively. Overdrafts are not assigned a risk rating and are therefore excluded from consumer loans in the tables above.