The First of Long Island (FLIC) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) Unaudited financial statements reflect the company's financial position, operations, and cash flows, significantly impacted by CECL adoption and increased credit loss provisions due to COVID-19 Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $163,852 | $38,968 | | Net loans | $3,003,326 | $3,158,960 | | Total assets | $4,011,308 | $4,097,843 | | Liabilities & Equity | | | | Total deposits | $3,248,846 | $3,144,016 | | Total liabilities | $3,613,574 | $3,708,735 | | Total stockholders' equity | $397,734 | $389,108 | - The company participated in the SBA Paycheck Protection Program (PPP), holding $166.4 million in PPP loans as of September 30, 2020[8] Consolidated Statements of Income Net income for the nine months ended September 30, 2020, decreased to $30.7 million, primarily due to a higher provision for credit losses Income Statement Summary (in thousands, except per share data) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $77,012 | $75,583 | $25,918 | $24,894 | | Provision for credit losses | $2,450 | $279 | $0 | $314 | | Net Income | $30,674 | $32,368 | $10,767 | $10,783 | | Diluted EPS | $1.28 | $1.29 | $0.45 | $0.44 | - The company recognized a $2.6 million gain on the sale of securities and a $2.6 million loss on debt extinguishment in the third quarter of 2020[9] Consolidated Statements of Comprehensive Income Total comprehensive income decreased to $29.2 million, driven by a net loss in Other Comprehensive Income primarily from unrealized losses on derivatives Comprehensive Income (in thousands) | Component | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net Income | $30,674 | $32,368 | | Other Comprehensive Income (Loss) | $(1,454) | $8,645 | | Comprehensive Income | $29,220 | $41,013 | Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity increased to $397.7 million, driven by net income, partially offset by dividends, share repurchases, and CECL adoption adjustments - The adoption of ASU 2016-13 (CECL) on January 1, 2020, resulted in a $2.3 million decrease to retained earnings[14] - During the first nine months of 2020, the company repurchased 261,700 shares of common stock for $5.9 million and declared cash dividends totaling approximately $13.1 million[14] Consolidated Statements of Cash Flows Cash and cash equivalents increased by $124.9 million, with strong cash generation from investing activities offsetting cash used in financing Cash Flow Summary - Nine Months Ended Sep 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $26,847 | $36,869 | | Net cash provided by investing activities | $210,240 | $119,983 | | Net cash used in financing activities | $(112,203) | $(140,322) | | Net increase in cash and cash equivalents | $124,884 | $16,530 | Notes to Unaudited Consolidated Financial Statements Notes detail accounting policies and financial instruments, including CECL adoption, SBA PPP loans, and interest rate swaps for hedging - The company adopted ASU 2016-13 (CECL) on January 1, 2020, recording a net decrease to retained earnings of $2,325,000 and increasing the allowance for credit losses on loans by $2,888,000[25][26] - At September 30, 2020, the investment securities portfolio had unrealized losses of $8.3 million, primarily from $110.8 million in corporate bonds of six large U.S. financial institutions[39][44] - As of October 26, 2020, nearly all loans that received COVID-19 related payment deferrals had resumed making payments[62] - The company uses two interest rate swaps with a total notional amount of $200 million to hedge cash flows on FHLB advances and brokered CDs[96][98] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 5.2% net income decrease to $30.7 million, primarily due to higher credit loss provisions and expenses, despite strong asset quality and capital levels - Net income for the first nine months of 2020 was $30.7 million ($1.28 per share), down from $32.4 million ($1.29 per share) in the same period of 2019[104] - The decrease in net income is attributed to a higher provision for credit losses ($2.2 million increase) and higher noninterest expense, partially offset by increased net interest income ($1.4 million increase)[105] - In September 2020, the bank executed a deleveraging strategy, selling $64.5 million in securities to prepay $128.7 million in long-term debt, resulting in a net neutral impact on earnings but expected to benefit future net interest margin[112][133] Net Interest Income Net interest income increased by $1.1 million (1.4%) due to lower liability costs, improving net interest margin to 2.64%, but future pressure is expected Net Interest Margin and Spread (Tax-equivalent basis) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net interest spread | 2.25% | 2.11% | | Net interest margin | 2.64% | 2.57% | - Future net interest income is expected to be negatively impacted by approximately $500,000 quarterly from residential mortgage refinancings and $700,000 in Q4 2020 from corporate bonds repricing to lower floating rates[117] Asset Quality Asset quality remains strong despite an increase in nonperforming assets to $2.15 million, with most COVID-19 modified loans resuming payments Risk Elements (in thousands) | Category | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total nonaccrual loans | $2,154 | $888 | | Total nonperforming assets | $2,154 | $888 | | Total risk elements | $3,483 | $1,958 | | Nonperforming assets as a % of total loans | 0.07% | 0.03% | - As of October 26, 2020, almost all loans that received COVID-19 payment deferrals have resumed payments and are current[147] Allowance and Provision for Credit Losses ACL reached $32.8 million (1.08% of loans), with a $2.5 million provision for credit losses driven by CECL adoption and COVID-19 economic forecasts - The provision for credit losses for the first nine months of 2020 was $2.5 million, which included $4.2 million to reflect current and forecasted economic conditions due to the pandemic[149] - The ACL to total loans ratio was 1.08% at September 30, 2020, up from 0.92% at December 31, 2019 (on an incurred loss basis)[149] Cash Flows and Liquidity The Corporation maintains a strong liquidity position with cash and equivalents increasing to $163.9 million and significant borrowing capacity - The Bank's borrowing capacity was approximately $1.7 billion at September 30, 2020, based on unencumbered securities and loan collateral[162] - Primary sources of cash in the first nine months of 2020 were deposit growth, loan and security paydowns, and operations[155][156] Capital Stockholders' equity increased to $397.7 million, with the Corporation and Bank maintaining strong CBLR leverage ratios exceeding regulatory requirements - The Corporation and Bank elected to adopt the CBLR framework and maintained leverage ratios of 9.57% and 9.58%, respectively, exceeding the well-capitalized requirements[166][167] - The company repurchased 261,700 shares for $5.9 million in Q1 2020 and expects to resume its share repurchase program in Q4 2020[169] Quantitative and Qualitative Disclosures About Market Risk The Bank's primary market risk is interest rate risk, with sensitivity analysis showing benefit from modest rate increases but negative impact from larger rate changes Interest Rate Sensitivity Analysis (as of Sep 30, 2020) | Rate Change Scenario | EVE % Change from Base | NII % Change from Base (1-Year) | | :--- | :--- | :--- | | +300 bps | -0.8% | -2.7% | | +200 bps | 1.5% | -1.1% | | +100 bps | 2.7% | 0.1% | | -100 bps | -17.9% | -1.3% | - The bank is asset-sensitive in modest rising rate scenarios but becomes liability-sensitive in larger rate shocks due to the assumed need to increase rates on non-maturity deposits while a large portion of assets remain at fixed rates[178] Controls and Procedures Disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - The Corporation's management concluded that disclosure controls and procedures are effective as of September 30, 2020[182] - No material changes to internal control over financial reporting occurred during the third quarter of 2020[183] PART II. OTHER INFORMATION Legal Proceedings The Corporation is involved in ordinary course legal actions, with management believing any resulting liability will be immaterial - In the opinion of management, any liability from ongoing legal actions is believed to be immaterial to the Corporation's consolidated financial position[184] Risk Factors No material changes to previously disclosed risk factors were reported for the quarter - No material changes to risk factors were reported for the quarter[185] Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable for the reporting period - Not applicable[186] Exhibits The report includes an index of exhibits, featuring officer certifications and iXBRL formatted financial statements - Exhibits filed with the report include officer certifications (31.1, 31.2, 32) and iXBRL data files (101, 104)[189]