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| FLIC > SEC Filings for FLIC > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
The following is management's discussion and analysis of certain significant factors that have affected the Corporation's financial condition and operating results during the periods included in the accompanying consolidated financial statements, and should be read in conjunction with such financial statements. The Corporation's financial condition and operating results principally reflect those of its wholly-owned subsidiary, The First National Bank of Long Island, and subsidiaries wholly-owned by the Bank, either directly or indirectly, The First of Long Island Agency, Inc., FNY Service Corp., and The First of Long Island REIT, Inc. The consolidated entity is referred to as the Corporation and the Bank and its subsidiaries are collectively referred to as the Bank. The Bank's primary service area is Nassau and Suffolk Counties, Long Island, although the Bank has three commercial banking branches in Manhattan and may open additional Manhattan branches in the future.
Overview
The Corporation's earnings for the first nine months of 2009 were $1.54 per share, an increase of 21 cents, or 16%, over the same period last year. Earnings for the third quarter of 2009 were $.53 per share, an increase of 4 cents, or 8%, over the same quarter last year. Excluding the FDIC special assessment discussed hereinafter, the increase in earnings for the first nine months of 2009 was 26 cents per share, or 20%.
Returns on average assets ("ROA") and equity ("ROE") were 1.11% and 13.88%, respectively, for the first nine months of 2009 as compared to 1.12% and 12.98% for the same period last year.
The increase in earnings in 2009 is largely attributable to loan growth. On an average balance basis, total loans grew by $137 million, or 25%, when comparing the first nine months of 2009 to the same period last year. The growth, most of which occurred in commercial mortgages, residential mortgages and home equity loans, resulted from management's continued efforts to improve the Bank's current and future earnings prospects by making loans a larger portion of the overall balance sheet. The loan growth was funded by deposit growth and borrowings.
Also contributing to the earnings increase was the sale of approximately $43 million of available-for-sale securities at a gain of $1,264,000. The proceeds of the sale were generally reinvested in securities having a longer duration and average yield slightly higher than the securities sold.
Other positive factors with respect to the increase in earnings are a $251,000 decrease in the provision for loan losses and a decrease in the Corporation's effective income tax rate. The decrease in the provision for loan losses is attributable to a reversal of impairment reserves on several loans and an increase in recoveries of loans previously charged off. The decrease in the effective income tax rate is primarily due to a tax planning strategy with respect to the Bank's REIT entity and an increase in tax-exempt income.
The positive factors described above were partially offset by increases in retirement plan expense and FDIC insurance expense of $735,000 and $1,339,000, respectively. A substantial portion of the increase in retirement plan expense resulted from significant declines during 2008 in the value of pension plan assets and long-term interest rates. FDIC insurance expense increased primarily because of an increase in the FDIC's base assessment rates for 2009 and a 5 basis point special assessment that the FDIC levied on the banking industry effective June 30, 2009. The special assessment cost the Corporation $648,000.
Also negatively impacting earnings are lower market interest rates and a resulting decline in the overall yield earned by the Corporation on interest-earning assets. For those interest-earning assets funded by noninterest-bearing liabilities and capital, there is no offsetting reduction in interest cost. Therefore, the yield reduction results in a corresponding reduction in net interest income.
Total deposits increased by $278 million, or 31%, in the first nine months of 2009. The increase is attributable to branch openings, the promotion of several deposit products, and the increased desirability of bank deposit products based on their perceived safety and the volatility and poor performance of the equity markets. In addition, management believes that the Bank's financial strength relative to other financial institutions in its market area also played a role.
The credit quality of the Bank's loan portfolio continues to be excellent as evidenced by the low level of nonperforming loans. The Bank has not originated nor does it hold any subprime or alt-A mortgages in its loan portfolio, nor has it originated any loans that management would otherwise consider high risk. In addition, all of the Bank's mortgage securities are backed by mortgages underwritten on conventional terms. The U.S. government guarantees the timely payment of principal and interest on most of these securities and underlying mortgages. Substantially all of the remaining debt securities in the Bank's portfolio, consisting primarily of municipal securities, are rated A or better.
In the first quarter of this year, the Bank opened a commercial banking office in Port Jefferson Station, Long Island. Subsequently, a full service branch was opened in Bayville, Long Island and the Valley Stream commercial banking office was converted to a full service branch. Continued branch expansion in targeted markets on Long Island and in Manhattan remains a key strategic initiative.
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.
Nine Months Ended September 30,
2009 2008
Average Interest/ Average Average Interest/ Average
Balance Dividends Rate Balance Dividends Rate
Assets (dollars in thousands)
Federal funds sold and
overnight investments $ 410 $ - - % $ 25,842 $ 480 2.48 %
Investment Securities:
Taxable 420,310 13,951 4.43 376,758 13,810 4.89
Nontaxable (1) 172,429 8,273 6.40 143,735 7,045 6.54
Loans (1) (2) 689,364 28,879 5.60 551,871 24,967 6.04
Total interest-earning
assets 1,282,513 51,103 5.32 1,098,206 46,302 5.63
Allowance for loan
losses (6,153 ) (4,792 )
Net interest-earning
assets 1,276,360 1,093,414
Cash and due from banks 45,103 32,643
Premises and equipment,
net 16,589 11,351
Other assets 18,571 20,403
$ 1,356,623 $ 1,157,811
Liabilities and
Stockholders' Equity
Savings and money
market deposits $ 468,904 3,822 1.09 $ 357,162 3,409 1.27
Time deposits 251,579 4,710 2.50 248,911 5,568 2.99
Total interest-bearing
deposits 720,483 8,532 1.58 606,073 8,977 1.98
Short-term borrowings 43,853 190 .58 26,895 433 2.15
Long-term debt 150,590 4,683 4.16 102,748 3,297 4.29
Total interest-bearing
liabilities 914,926 13,405 1.96 735,716 12,707 2.31
Checking deposits 326,320 317,842
Other liabilities 7,079 4,122
1,248,325 1,057,680
Stockholders' equity 108,298 100,131
$ 1,356,623 $ 1,157,811
Net interest income (1) $ 37,698 $ 33,595
Net interest spread (1) 3.36 % 3.32 %
Net interest margin (1) 3.93 % 4.09 %
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(1) Tax-equivalent basis. Interest income on a tax-equivalent basis includes the additional amount of interest income that would have been earned if the Corporation's investment in tax-exempt loans and investment securities had been made in loans and investment securities subject to Federal income taxes yielding the same after-tax income. The tax-equivalent amount of $1.00 of nontaxable income was $1.52 in each period presented based on a Federal income tax rate of 34%.
(2) For the purpose of these computations, nonaccruing loans, if any, are included in the average loan amounts outstanding.
Rate/Volume Analysis. The following table sets forth the effect of changes in volumes, rates, and rate/volume on tax-equivalent interest income, interest expense and net interest income.
Nine Months Ended September 30,
2009 Versus 2008
Increase (decrease) due to changes in:
Rate/ Net
Volume Rate Volume (1) Change
(in thousands)
Interest Income:
Federal funds sold and overnight investments $ (472 ) $ (480 ) $ 472 $ (480 )
Investment securities:
Taxable 1,596 (1,305 ) (150 ) 141
Nontaxable 1,406 (149 ) (29 ) 1,228
Loans 6,192 (1,825 ) (455 ) 3,912
Total interest income 8,722 (3,759 ) (162 ) 4,801
Interest Expense:
Savings and money market deposits 1,063 (495 ) (155 ) 413
Time deposits 55 (903 ) (10 ) (858 )
Short-term borrowings 273 (316 ) (200 ) (243 )
Long-term debt 1,531 (99 ) (46 ) 1,386
Total interest expense 2,922 (1,813 ) (411 ) 698
Increase in net interest income $ 5,800 $ (1,946 ) $ 249 $ 4,103
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(1) Represents the change not solely attributable to change in rate or change in volume but a combination of these two factors. The rate/volume variance could be allocated between the volume and rate variances shown in the table based on the absolute value of each to the total for both.
Net interest income on a tax-equivalent basis increased by $4,103,000 when comparing the first nine months of 2009 to the same period last year. The most significant reason for the increase is the growth of the Bank's loan portfolio. On an average balance basis, total loans grew by $137 million, or 25%, when comparing the first nine months of 2009 to the same period last year. The growth in loan balances was funded by increases in interest-bearing deposits and borrowings.
Lower market interest rates partially offset the positive impact of loan growth. Lower rates are the principal cause of a 31 basis point reduction in the yield on interest earning assets for the first nine months of 2009 when compared to the same period last year. During the first nine months of 2009, approximately 29% of the Corporation's interest-earning assets were funded by noninterest-bearing liabilities and capital. For these assets, a reduction in yield caused by lower market interest rates has no offsetting reduction in interest cost and therefore results in a corresponding reduction in net interest income.
Application of Critical Accounting Policies
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported asset and liability balances and revenue and expense amounts. Our determination of the allowance for loan losses is a critical accounting estimate because it is based on our subjective evaluation of a variety of factors at a specific point in time and involves difficult and complex judgments about matters that are inherently uncertain. In the event that management's estimate needs to be adjusted based on, among other things, additional information that comes to light after the estimate is made or changes in circumstances, such adjustment could result in the need for a significantly different allowance for loan losses and thereby materially impact, either positively or negatively, the Bank's results of operations.
The Bank's Management Loan Committee, which is chaired by the Senior Lending Officer, meets on a quarterly basis and is responsible for determining the allowance for loan losses after considering, among other things, the results of credit reviews performed by the Bank's loan review officer. In addition, and in consultation with the Bank's Chief Financial Officer, the Management Loan Committee is responsible for implementing and maintaining policies and procedures surrounding the calculation of the required allowance. The Bank's allowance for loan losses is subject to periodic examination by the Office of the Comptroller of the Currency, the Bank's primary federal banking regulator, whose safety and soundness examination includes a determination as to its adequacy to absorb probable incurred losses.
The first step in determining the allowance for loan losses is to identify loans in the Bank's portfolio that are individually deemed to be impaired. In doing so, subjective judgments need to be made regarding whether or not it is probable that a borrower will be unable to pay all principal and interest due according to contractual terms. Once a loan is identified as being impaired, management uses the fair value of the underlying collateral and/or the discounted value of expected future cash flows to determine the amount of the impairment loss, if any, that needs to be included in the overall allowance for loan losses. In estimating the fair value of real estate collateral management utilizes appraisals and also makes qualitative judgments based on, among other things, its knowledge of the local real estate market and analyses of current economic conditions and trends. Estimating the fair value of collateral other than real estate is also subjective in nature and sometimes requires difficult and complex judgments. Determining expected future cash flows can be more subjective than determining fair values. Expected future cash flows could differ significantly, both in timing and amount, from the cash flows actually received over the loan's remaining life.
In addition to estimating losses for loans individually deemed to be impaired, management also estimates collective impairment losses for pools of loans that are not specifically reviewed. Statistical information regarding the Bank's historical loss experience over a period of time is the starting point in making such estimates. However, future losses could vary significantly from those experienced in the past and accordingly management periodically adjusts its historical loss experience to reflect current conditions. In doing so, management considers a variety of general qualitative factors and then subjectively determines the weight to assign to each in estimating losses. The factors include, among others, national and local economic conditions and trends, environmental risks, trends in volume and terms of loans, concentrations of credit, changes in lending policies and procedures, and experience, ability, and depth of the Bank's lending staff. Because of the nature of the factors and the difficulty in assessing their impact, management's resulting estimate of losses may not accurately reflect actual losses in the portfolio.
Although the allowance for loan losses has two separate components, one for impairment losses on individual loans and one for collective impairment losses on pools of loans, the entire allowance for loan losses is available to absorb realized losses as they occur whether they relate to individual loans or pools of loans.
Asset Quality
The Corporation has identified certain assets as risk elements. These assets
include nonaccruing loans, foreclosed real estate, loans that are contractually
past due 90 days or more as to principal or interest payments and still accruing
and troubled debt restructurings. These assets present more than the normal risk
that the Corporation will be unable to eventually collect or realize their full
carrying value. The Corporation's risk elements at September 30, 2009 and
December 31, 2008 are as follows:
September 30, December 31,
2009 2008
(dollars in thousands)
Nonaccruing loans $ 546 $ 112
Loans past due 90 days or more as to principal or interest
payments and still accruing - 42
Foreclosed real estate - -
Total nonperforming assets 546 154
Troubled debt restructurings - -
Total risk elements $ 546 $ 154
Nonaccruing loans as a percentage of total loans .07 % .02 %
Nonperforming assets as a percentage of total loans and
foreclosed real estate .07 % .02 %
Risk elements as a percentage of total loans and foreclosed
real estate .07 % .02 %
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Allowance and Provision for Loan Losses
The allowance for loan losses increased by $717,000 during the first nine months of 2009, amounting to $6,793,000, or .89% of total loans at September 30, 2009, as compared to $6,076,000, or .92% of total loans at December 31, 2008. During the first nine months of 2009 the Bank had loan chargeoffs and recoveries of $56,000 and $137,000, respectively, and recorded a $636,000 provision for loan losses. The provision for loan losses decreased by $251,000 when comparing the first nine months of 2009 to the same period last year. This was primarily a result of an increase in recoveries of loans previously charged off and the reversal of impairment reserves on several loans that were either repaid or better collateralized.
The allowance for loan losses is an amount that management currently believes will be adequate to absorb probable incurred losses in the Bank's loan portfolio. In determining the allowance for loan losses, there is not an exact amount but rather a range for what constitutes an appropriate allowance. As more fully discussed in the "Application of Critical Accounting Policies" section of this discussion and analysis of financial condition and results of operations, the process for estimating credit losses and determining the allowance for loan losses as of any balance sheet date is subjective in nature and requires material estimates. Actual results could differ significantly from those estimates.
Loans secured by real estate represent approximately 93% of the Bank's total loans outstanding at September 30, 2009. Most of these loans were made to borrowers domiciled on Long Island and in New York City. The amount of future chargeoffs and provisions for loan losses will be affected by, among other things, economic conditions in these areas. Over the last year or so, general economic conditions on Long Island have deteriorated and residential real estate values have declined. In addition, in more recent months, commercial real estate values have declined. The deterioration in economic conditions and decline in real estate values could continue. This could cause some of the Bank's borrowers to be unable to make the required contractual payments on their loans and the Bank to be unable to realize the full carrying value of such loans through foreclosure. However, management believes that the Bank's underwriting policies are relatively conservative and, as a result, the Bank should be less affected than the overall market.
Future provisions and chargeoffs could also be affected by environmental impairment of properties securing the Bank's mortgage loans. At the present time, management is not aware of any environmental pollution originating on or near properties securing the Bank's loans that would materially affect the carrying value of such loans.
Noninterest Income, Noninterest Expense, and Income Taxes
Noninterest income includes service charges on deposit accounts, Investment Management Division income, gains or losses on sales of securities, and all other items of income, other than interest, resulting from the business activities of the Corporation. Noninterest income increased by $1,264,000, or 26.8%, when comparing the first nine months of 2009 to the same period last year. The increase is principally due to a $1,055,000 increase in net gains on sales of available-for-sale securities and a $350,000 increase in service charge income, as partially offset by a $185,000 decrease in Investment Management Division income. The security gains resulted from the sale of approximately $43 million of available-for-sale securities. The proceeds of the sale were generally reinvested in securities having a longer duration and average yield slightly higher than the securities sold. Service charge income increased primarily as a result of an increase in return check charges. Investment Management Division income is down primarily as a result of a market related decrease in the value of assets under management.
Noninterest expense is comprised of salaries, employee benefits, occupancy and equipment expense and other operating expenses incurred in supporting the various business activities of the Corporation. Noninterest expense increased by $3,899,000, or 17.9%, from $21,836,000 for the first nine months of 2008 to $25,735,000 for the current nine-month period. The increase is due to increases in other operating expenses of $1,821,000, or 41.8%, employee benefits expense of $914,000, or 26.7%, occupancy and equipment expense of $764,000, or 20.9%, and salaries expense of $400,000, or 3.8%.
The increase in other operating expenses is largely attributable to a $1,339,000 increase in FDIC deposit insurance expense. This increase is due to an industry wide special assessment of 5 basis points on the Bank's total assets minus Tier 1 capital as of June 30, 2009, as well as an increase in the FDIC's base assessment rates for 2009. The special assessment cost the Bank approximately $648,000. Occupancy and equipment expense increased primarily due to branch expansion, technology upgrades, and maintenance of facilities. The increase in employee benefits expense is largely the result of the $735,000 increase in retirement plan expense for reasons previously discussed. The increase in salaries expense was primarily the result of normal annual salary adjustments.
Income tax expense as a percentage of pre-tax income ("effective tax rate") was 22.3% for the first nine months of 2009 as compared to 26.1% for the same period last year. The decrease in the effective income tax rate is primarily due to a tax planning strategy with respect to the Bank's REIT entity and an increase in tax-exempt income.
Results of Operations - Three Months Ended September 30, 2009 versus September 30, 2008
Net income for the third quarter of 2009 was $3,905,000, or $.53 per share, as compared to $3,568,000, or $.49 per share, for the same quarter last year. The largest contributors to the increase in net income are a $1,207,000 increase in net interest income, a $208,000 increase in net gains on sales of available-for-sale securities, and a decrease in the Corporation's effective tax rate from 28.9% in the third quarter of 2008 to 23.0% for the current quarter. The positive impact of these items was partially offset by an increase in noninterest expense of $1,291,000. The reasons for these variances are substantially the same as those discussed with respect to the nine-month periods.
Capital
The Corporation's capital management policy is designed to build and maintain capital levels that exceed regulatory standards. Under current regulatory capital standards, banks are classified as well capitalized, adequately capitalized or undercapitalized. Under such standards, a well-capitalized bank is one that has a total risk-based capital ratio equal to or greater than 10%, a Tier 1 risk-based capital ratio equal to or greater than 6%, and a Tier 1 leverage capital ratio equal to or greater than 5%. The Bank's total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage capital ratios of 16.01%, 15.08% and 7.56%, respectively, at September 30, 2009 substantially exceed the requirements for a well-capitalized bank. The Corporation (on a consolidated basis) is subject to minimum risk-based and leverage capital requirements, which the Corporation substantially exceeded at September 30, 2009.
Total stockholders' equity increased by $15,649,000, from $102,532,000 at December 31, 2008 to $118,181,000 at September 30, 2009. The increase is primarily comprised of net income of $11,241,000 and unrealized gains on available-for-sale securities of $7,553,000, as partially offset by $4,034,000 in cash dividends declared.
Stock Repurchase Program and Market Liquidity. Since 1988, the Corporation has had a stock repurchase program under which it has purchased, from time to time, shares of its own common stock in market or private transactions. The . . .
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