10-Q: First of Long Island Corp. Reports Lower Net Income in Second Quarter Amidst Rising Interest Expenses

First of Long Island Corporation's net income decreased in the second quarter of 2024 due to a decline in net interest income and an increase in provision for credit losses.

Summary

• First of Long Island Corporation reported a net income of $9.2 million for the first six months of 2024, a decrease compared to $13.4 million for the same period last year.
• Diluted earnings per share were $0.41 for the first six months of 2024, down from $0.59 in the prior year.
• The decline in earnings was primarily driven by a decrease in net interest income of $8.9 million and an increase in the provision for credit losses of $1.6 million.
• Net interest income decreased due to a $18.8 million increase in interest expense, partially offset by a $9.9 million increase in interest income.
• The cost of interest-bearing liabilities increased by 128 basis points, while the yield on interest-earning assets increased by 45 basis points.
• The provision for credit losses was $570,000 for the first six months of 2024, compared to a reversal of $1.1 million in the same period last year.
• Noninterest expense decreased by $1.0 million due to reductions in occupancy, equipment, telecommunications, professional fees, and salaries.
• The effective tax rate decreased from 11.6% to 3.9% due to an increase in the percentage of pre-tax income derived from the Bank's REIT and BOLI.
• Total average deposits declined by $81.0 million, reflecting industry trends.
• The bank had $1.4 billion of available liquidity at June 30, 2024.
• The leverage ratio was approximately 9.91% at June 30, 2024.
• Book value per share was $16.71 at June 30, 2024, compared to $16.83 at year-end 2023.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with some positive aspects like cost control and strong capital, but the overall tone is negative due to decreased profitability and increased credit risk. The decrease in net income and the increase in provision for credit losses are concerning.

Positives

• Noninterest expense decreased by $1.0 million due to cost-cutting measures.
• Recurring components of noninterest income, including bank-owned life insurance and service charges on deposit accounts, increased by 7.8% and 10.5%, respectively.
• The bank maintains a strong capital position with a leverage ratio of 9.91%.
• The bank has $1.4 billion of available liquidity.
• The bank's ACL to total loans (reserve coverage ratio) remained stable at 0.88% of total loans at June 30, 2024 as compared to 0.88% at March 31, 2024 and 0.89% at December 31, 2023.

Negatives

• Net income decreased due to a decline in net interest income and an increase in the provision for credit losses.
• Net interest income declined by $8.9 million due to increased interest expenses.
• The provision for credit losses increased by $1.6 million compared to a reversal in the prior year.
• Total average deposits declined by $81.0 million, reflecting industry trends.
• Returns on average assets (ROA) and average equity (ROE) decreased compared to the same period last year.

Risks

• Changes in interest rates could negatively impact net interest income.
• Economic conditions on Long Island and in the boroughs of NYC could affect the financial strength of borrowers and the value of real estate collateral.
• Inflation, increasing interest rates, and government regulation pose economic challenges.
• Environmental impairment of properties securing mortgage loans could affect future provisions and chargeoffs.
• Regulatory or strategic changes affecting the access to and availability of funding from the FHLB and FRB could adversely impact the Bank's liquidity.

Future Outlook

The bank expects approximately $51.2 million of cash inflows from the investment securities portfolio over the next twelve months and will consider reinvesting them in higher yielding agency mortgage securities. The bank expects an additional $240 million, or 7%, of the loan portfolio to reprice from approximately 3.51% to 7.31% from June 30,2025 to June 30, 2026 based on current rates. We expect approximately $361 million of cash inflows from the mortgage loan portfolio over the next twelve months.

Management Comments

• The Bank's balance sheet remains liability sensitive but the pace of repricing of average interest-earning assets is beginning to match the pace of repricing of average interest-bearing liabilities, which stabilized the net interest margin over the first six months of 2024.
• Overall credit quality of the loan and investment portfolios remain strong.
• The Board and management continue to evaluate both capital management tools to provide the best opportunity to maximize shareholder value.

Industry Context

The decrease in net interest income and deposit outflows reflect broader industry trends of rising interest rates and increased competition for deposits. The bank's focus on cost management and maintaining strong capital ratios is consistent with strategies employed by other financial institutions in the current economic environment.

Comparison to Industry Standards

• The bank's net interest margin of 1.80% is below the average for regional banks, which have seen margins compress due to rising funding costs.
• The efficiency ratio of 75.00% is higher than the industry average, indicating potential for further cost optimization.
• The bank's leverage ratio of 9.91% is above the regulatory minimum, suggesting a strong capital position compared to peers.
• The bank's loan portfolio is heavily concentrated in commercial and residential real estate, which is typical for community banks in the New York metropolitan area, but exposes it to regional economic risks.
• The bank's reliance on brokered deposits, which represent 5.2% of total deposits, is a common practice but can be a more expensive funding source than core deposits.

Legal Proceedings

• The Corporation is involved in various legal actions and claims arising in the normal course of its business, but these are not expected to have a material adverse impact.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and diluted earnings per share.
• Employees may be affected by cost-cutting measures, including reductions in salaries and employee benefits.
• Customers may experience changes in deposit rates and loan terms due to interest rate fluctuations.
• Creditors may be impacted by changes in the bank's financial performance and liquidity.

Next Steps

• The bank will consider reinvesting cash inflows from the investment securities portfolio in higher yielding agency mortgage securities.
• The bank will continue to monitor and manage interest rate risk.
• The bank will continue to evaluate capital management tools to maximize shareholder value.

Key Dates

Keywords

net interest income, credit losses, interest rates, liquidity, capital, loans, deposits, financial performance, bank, mortgages