UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended | December 31, |
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 001-32964
THE FIRST OF LONG ISLAND CORPORATION
(Exact Name Of Registrant As Specified In Its Charter)
New York | 11-2672906 | |||
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(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||
275 Broadhollow Road, Melville, NY | 11747 | |||
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(Address of Principal Executive Offices) | (Zip Code) |
(516) 671-4900
(Registrant's telephone number, including area codecode)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered |
Common | FLIC |
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Securities registered pursuant to Section 12(g) of the Act:
None |
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☒ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes Indicate by check mark if disclosure (Check one):Large acceleratedNon-accelerated filer ☐Accelerated filer ☒Non-accelerated filer ☐
The aggregate market value of the Corporation’s voting common stock held by nonaffiliates as of June 30, 2017,2023, the last business day of the Corporation’s most recently completed second fiscal quarter, was $663.5$253.8 million. This value was computed by reference to the price at which the stock was last sold on June 30, 20172023 and excludes $26.6$17.4 million representing the market value of common stock beneficially owned by directors and executive officers of the registrant.
IndicateAs of March 4, 2024, the numberregistrant had 22,462,725 of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.$0.10 par value per share, outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’sRegistrant’s Proxy Statement for the Annual Meeting of Stockholders to be held April 17, 201816, 2024 are incorporated by reference into Part III.
General
The First of Long Island Corporation (“Registrant”), a one-bank holding company, was incorporated on February 7, 1984 for the purpose of providing financial services through its wholly-owned subsidiary, The First National Bank of Long Island. The consolidated entity is referred to as the "Corporation," and the Bank and its subsidiaries are collectively referred to as the "Bank."
The Bank was organized in 1927 as a national banking association under the laws of the United States of America. The Bank has two wholly owned subsidiaries:one wholly-owned subsidiary: FNY Service Corp., an investment company, and The First of Long Island Agency, Inc.company. The Bank and FNY Service Corp. jointly own another subsidiary, The First of Long Island REIT, Inc., a real estate investment trust (“REIT”).trust.
All of the financial operations of the Corporation are aggregated in one reportable operating segment. All revenues are attributed to and all long-lived assets are located in the United States.
The Bank’s revenues are derived principally from interest on loans and investment securities, service charges and fees on deposit accounts income from investment management and trust services and bank-owned life insurance (“BOLI”).
The Bank did not commence, abandon or significantly change any of its lines of business during 2017.2023.
Markets Served and Products Offered
The Bank serves the financial needs of privately ownedsmall to middle market businesses, professional service firms, not-for-profits, municipalities and publicly held businesses, professionals, consumers public bodies and other organizations primarily in Nassau and Suffolk Counties of Long Island, and the boroughs of New York City.City (“NYC”). The Bank’s head office is located in Glen Head, New York, and the Bank has 37 other full service branches, ten commercial banking offices and two select service banking centers. Included in these totals are five full service40 branch locations including 16 branches in Nassau, 16 in Suffolk, five in Queens, onetwo in Brooklyn and two commercial banking officesone in Manhattan. During 2023, the Bank closed one branch in Nassau and relocated two of its branches in Suffolk, offering an improved customer experience and modern design. The Bank continues to evaluate potential newthe strategic placement of its branch sites on Long Islandnetwork and invests in the boroughs of New York City.digital channels to best serve customer demand both within and beyond its physical locations.
The Bank’s loan portfolio is primarily comprised of loans to borrowers on Long Island and in the boroughs of New York City,NYC, and its real estate loans are principally secured by properties located in those areas. The Bank’s investment securities portfolio is comprised of direct obligations of the U.S. government and its agencies, obligations of the Small Business Administration ("SBA"), corporate bonds of large U.S. financial institutions and highly rated obligations of states and political subdivisions.
The Bank has an Investment Management Division that provides investment management, pension trust, personaloffers trust, estate, custody and custody services.investment services through a partnership with Financial Resources Group, an affiliate of LPL Financial ("LPL"). The Bank offers residential mortgage loans through a co-marketing referral agreement with Rocket Mortgage®.
In addition to its loan, investment and deposit products, the Bank offers othera wide array of banking services to its customers including the following:through its branch network, mobile applications and interactive website.
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Competition
The Bank encounters substantial competition in its banking business from numerous other financial services organizations that have offices located in the communities served by the Bank. Principal competitors are large money center, large regional and community banks located within the Bank’s market area, as well as mortgage brokers, brokerage firms, credit unions and credit unions.fintech or e-commerce companies. The Bank competes for loans based on the quality of service it provides, loan structure, competitive pricing and branch locations, and competes for deposits by offering a high level of customer service, payingflexible product structures, competitive ratespricing, convenient locations and through the geographic distribution of its branch system.maintaining a well-designed website. Cash management tools and digital channels support our loan and deposit offerings.
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Investment Activities
The Bank’s investment policy, of the Bank, as approved by the Board Asset Liability Committee of the Board (“BALCO”ALCO”) and supervised by both the BALCOALCO and the Management InvestmentAsset Liability Committee, is intended to promote investment practices which are both safe and sound and in full compliance with applicable regulations. Investment authority will beis granted and amended as is necessary by the Board of Directors or BALCO.ALCO.
The Bank's investment decisions seek to optimize income while keeping both credit and interest rate risk at acceptable levels, provide for the Bank's liquidity needs and provide securities that can be pledged, as needed, to secure deposits and borrowings.
The Bank’s investment policy generally limits individual maturities on municipal bonds to twenty20 years and estimated average lives on collateralized mortgage obligations (“CMOs”) and other mortgage-backed securities to ten years. At the time of purchase, bonds of states and political subdivisions must generally be rated AA or better, notes of states and political subdivisions must generally be rated MIG-1 (or equivalent), commercial paper must be rated A-1 or P-1, and corporate bonds of large U.S. based financial institutions must be rated AAhave a rating of BBB+ or better. In addition, management periodically reviews the creditworthiness of all securities in the Bank’s portfolio other than those issued by the U.S. government or its agencies. Any significant deterioration in the creditworthiness of an issuer is analyzed and action is taken if deemed appropriate.
At year-end 2017year end 2023 and 2016,2022, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.
At December 31, 2017, $464.2 million of the Corporation’s municipal securities were rated AA or better and $4.1 million were non-rated bonds issued by local municipalities. The Corporation’s pass-through mortgage securitiesBank’s investment portfolio at December 31, 2017 is2023 was comprised of $4.9available-for-sale (“AFS”) securities totaling $695.9 million and $66.8was made up of state and municipal securities of $143.6 million, pass-through mortgage securities of $138.6 million, CMOs of $182.3 million, SBA agency obligations of $125.5 million and corporate bonds of $105.9 million. Substantially all the municipal securities are rated AA or better. The pass-through mortgage securities and CMOs are issued by the Government National Mortgage Association (“GNMA”) and the, Federal National Mortgage Association (“FNMA”), respectively. Each issuer’s pass-through mortgage securities are backed by residential mortgages conforming to the issuer’s underwriting guidelines and each issuer guarantees the timely payment of principal and interest on its securities. All of the Corporation’s CMOs were issued byFederal Home Loan Mortgage Corporation (“FHLMC”). GNMA and such securities are backed by GNMA residential pass-through mortgage securities. GNMA guarantees the timely payment of principal and interest on its CMOs and the underlying pass-through mortgage securities. Obligations of GNMA,is a U.S. government agency represent full faith and credit obligations of the U.S. government, while obligations of FNMA which is aand FHLMC are U.S. government-sponsored agencies. SBA agency do not.obligations are floating rate, government guaranteed securities backed by $92.2 million of commercial mortgages and $33.3 million of equipment finance loans at December 31, 2023. The corporate bonds are investment grade securities issued by large U.S. based financial institutions with variable rates that reset quarterly based on the ten-year swap rate.
The Bank has not engaged in the purchase and sale of securities for the primary purpose of producing trading profits and its current investment policy does not allow for such activity.
Lending Activities
General.The Bank’s lending is subject to written underwriting standards and loan origination procedures, as approved by the Board Loan Committee of the Board (“Loan Committee”) and contained in the Bank’s loan policy. The loan policies allowpolicy allows for exceptions and setsets forth specific exception approval requirements. Decisions on loan applications are based on among other things, the borrower’s credit history, the financial strength of the borrower, estimates of the borrower’s ability to repay the loan and the value of the collateral and guarantees, if any. All real estate appraisals must meet the requirements of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), banking agency guidance and, for those loans in excess of $250,000, be reviewed by the Bank’s independent appraisal review function.
The Bank conducts its lending activities out of its main office in Glen Head, New York and its Suffolk County regional office in Hauppauge, New York. The Bank’s loan portfolio is primarily comprised of loans to small and medium-sized privately ownedmiddle market businesses, professionalsprofessional service firms, real estate investors and consumers on Long Island and in the boroughs of New York City.NYC. The Bank offers a fullBank’s range of lending services includingincludes commercial and residential mortgage loans, home equity lines, commercial and industrial loans, small business credit scored loans, Small Business Administration (“SBA”)SBA loans, construction and land development loans, consumer loans and commercial and standby letters of credit. During 2023, the Bank discontinued the origination of residential mortgages. Commercial lending is emphasized and supported by increases in credit and lending staff.
The Bank makes both fixed and variable rate loans. Variable rate loans arereprice primarily tied to and reprice with changes in the prime interest rate of the Bank, the prime interest rate as published in The Wall Street Journal, U.S. Treasury rates Federal Home Loan Bank of New York advance rates and the London Interbank OfferedSecured Overnight Financing Rate (LIBOR)(“SOFR”).
Residential mortgage loans in excess of $1.0 million and other loans in excess of $750,000 generally require the approval of the Management Loan Committee. Loans in excess of $12.5 million require the additional approval of two non-management members of the Board Loan Committee, while those in excess of $17.5 million require the approval of a majority of the Board of Directors.
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Commercial and Industrial Loans.Commercial and industrial loans include among other things, short-term business loans and lines of credit; revolving credit facilities, term and installment loans; common interest realty association (“CIRA”) loans, secured by marketable securities, the cash surrender value of life insurance policies, deposit accounts or general business assets;asset-based loans, leveraged loans and small business credit scored loans as described hereinafter;hereinafter. Commercial and industrial loans may be secured by general business assets, specific equipment, finance loans.cash and other liquid collateral, or real estate. The Bank makes commercial and industrial loans on a demand basis, short-term basis, installment or installmentrevolving basis. Short-term business loans are generally due and payable within one year and should be self-liquidating during the normal course of the borrower’s business cycle. Lines of credit are reaffirmed annually and generally require an annual cleanup period. TermRevolving credit facilities, term and installment loans are usually due and payable within five years. Generally, it isThe Bank’s loan policy delineates the policy of the Bank to request personal guarantees of principal ownersminimum required guarantee based on loans made to privately-owned businesses.specific loan categories.
Small Business Credit Scored
Commercial Mortgage Loans. The Bank makes small business credit scored loans and issues VISA® credit cards to businesses that generally have annual sales at the time of application of less than $2 million. Most of these loans are in the form of revolving credit lines and, depending on the type of business, the maximum amount generally ranges from $100,000 to $500,000. Others are installment loans made to finance business automobiles, trucks and equipment and can be secured by the asset financed and/or deposit accounts with the Bank. Both installment loans and revolving credit commitments generally have maturities up to sixty months. Business profile reports are used in conjunction with credit reports and FICO (Fair Isaac Corporation) small business score cards for loan underwriting and decision making purposes. Credit and FICO small business risk scores enable the Bank to quickly and efficiently identify and approve loans to low-risk business applicants and decline loans to high-risk business applicants. There were $1.0 million of small business credit scored term loans outstanding at December 31, 2017. In addition, the Bank had commitments on small business credit scored revolving lines of credit of $42.9 million, of which $17.7 million were drawn and funded.
Real Estate Mortgage Loans and Home Equity Lines. The Bank makes residential and commercial mortgage loans secured by owner-occupied and establishes home equity lines of credit.investment properties, including multifamily properties. Applicants for residential mortgage loans and home equity lines will be considered for approval provided they have satisfactory credit history and collateral and the Bank believes that there is sufficient monthly income to service both the loan or line applied for and existing debt. Applicants for commercial mortgage loans will be considered for approval provided they, as well as any guarantors, have satisfactory credit history and can demonstrate through financial statements and otherwise, the ability to repay. Commercialrepay through documentation such as financial statements, leases and residentialrent rolls. The Bank obtains independent appraisals in accordance with regulatory requirements and an appropriate environmental assessment. All properties are inspected by Bank personnel and/or approved third-party vendors before closing on the mortgage and annually thereafter for loans are made with terms not in excess of thirty years and are generally maintained inover $2.5 million. Properties may also be re-inspected if concerns arise during the Bank’s portfolio. The residential mortgage loans made by the Bank in recent years consist of both fixed rate loans with terms ranging from 10 to 30 years and variable rate loans that reprice in five, seven or ten years and then every year thereafter.annual review process described below. Commercial mortgage loans generally mature in 10 years with amortization schedules ranging between 20 and 30 years. We strive to reprice withincommercial mortgage loans every five years and home equity lines generally mature within ten years. Depending on the type of property, thealthough pricing may be fixed for longer terms. The Bank will generally not lend more than 75% of appraised value on residential mortgage, home equity and commercial mortgage loans. The lending limitations with regard to appraised value are more stringent for loans on co-ops and condominiums.investment properties, including multifamily properties.
In processing requests for commercial mortgage loans, the Bank generally requires an environmental assessment to identify the possibility of environmental contamination. The extent of the assessment procedures varies from property to property and is based on factors such as the use and location of the subject property and whether or not the property has a suspected environmental risk based on current or past use.
Construction Loans.From time to time, the Bank makes loans to finance the construction of both residential and commercial properties. The maturity of such loans is generally eighteen24 months or less and advances are made as the construction progresses. The advances can require the submission of bills and lien waivers by the contractor, verification by a Bank-approved inspector that the work has been performed, and title insurance updates to ensure that no intervening liens have been placed. The Bank also will consider loans on unimproved land subject to a maximum loan-to-value of 50% and a maximum 10 year term and amortization. Variable rate construction and land development loans are included in Commercial Mortgagescommercial mortgages on the Consolidated Balance Sheet and amounted to $8.5 million at December 31, 2017.consolidated balance sheets.
Consumer Loans and Lines. The Bank makes auto loans, home improvement loanssecured and otherunsecured consumer loans, establishes revolving overdraft lines of credit and issues VISA®VISA® credit cards. Consumer loans are generally made on an installment basis over terms not in excess of five years. In reviewing loans and lines for approval, the Bank generally considers among other things, the borrower’s ability to repay, stability of employment and residence and past credit history.
Sources of Funds
The Corporation’sBank’s primary sources of cash are deposits, maturities and amortization of loans and investment securities, operations borrowings and funds received under the Dividend Reinvestment and Stock Purchase Plan (“DRIP”).borrowings. The CorporationBank 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 operatingcorporate purposes.
The Bank offers checking and interest-bearing deposit products. In addition to business and small business checking, theThe Bank has a variety of business and personal checking products that differ in minimum balance requirements monthly maintenanceand fees, and per check charges, if any. The interest-bearingInterest-bearing deposit products, which have a wide range of interest rates and terms, consist of checking accounts, which include negotiable order of withdrawal (“NOW”) accounts, and IOLA,interest on lawyer accounts, escrow service accounts, rent security accounts, a variety of personal and nonpersonal money market accounts, a variety of personal and nonpersonal savings products,accounts, time deposits holiday club accounts, and a variety of individual retirement accounts.
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The Bank relies primarily on its branch network, customer service, calling programs, lending relationships, referral sources, competitive pricing and advertising to attract and retain local deposits. The flow of deposits is influenced by general economic conditions, changes in interest rates and competition.
EmployeesHuman Capital Resources
AsWe aspire to provide all employees equal opportunity to realize their maximum potential with the Bank. We are a diverse workplace that encourages open and honest employee comment without retaliation. We seek to attract, recruit and retain a workforce which is reflective of the communities in which we live and work. By encouraging different viewpoints, styles, experiences, cultures, ethnicities, sexual orientations and gender identities, we build a more flexible, creative and competitive corporate culture while remaining socially accountable to our local communities. Using employee feedback, we implemented initiatives to improve communication and enhance employee development opportunities.
Employee Profile. At December 31, 2017, the Bank2023, we had 333 full-timeapproximately 288 full time equivalent employees in locations across the New York ("NY") metropolitan area. This represents a decrease of 15 employees, or 5.0%, from December 31, 2022 due to factors such as reducing branch hours, improving technology and considerseliminating our residential mortgage sales department.
Total Rewards. As part of our compensation philosophy, we believe that we must offer and maintain market competitive total rewards programs for our employees in order to attract and retain superior talent. In addition to base wages, additional programs include annual equity and/or cash incentive opportunities, a Company matched 401(k) plan, a defined benefit pension plan, healthcare and insurance benefits, health savings accounts, transit benefits, flexible spending accounts, paid time off, family leave and employee relationsassistance programs.
Health and Safety. The success of our business is fundamentally connected to be good.the well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees. We provide our employees and their families with access to a variety of flexible and convenient health and welfare programs, including benefits that support their physical and mental health. We provide tools and resources to help them and their families experience healthier living.
Training and Development. We are committed to the ongoing success and development of our employees at every level to promote and foster individual and organizational effectiveness. Employees take part in recurring training that covers regulatory compliance, cybersecurity, sales and retail strategies and other programs tailored to specific job functions. Additional professional development and leadership training is offered for growth opportunities.
Talent. A core tenet of maintaining our highly skilled workforce is to foster career opportunities for existing staff while actively recruiting seasoned bankers for certain roles. Hiring entry level staff is also important as we prepare for our future. These approaches create loyalty in our employee base while also bringing in new perspectives and ideas to help us grow the Bank are not represented bybusiness, expand our product lines and benefit our customers. We believe a collective bargaining unit.favorable reputation in the marketplace and our corporate headquarters centrally located in Melville on Long Island allows us to attract highly skilled workers. We use internal and external resources to identify the best job candidates while encouraging employee referrals for open positions.
Our performance management framework includes annual reviews, a review of goals achieved and a discussion of future goals and employee development, including training opportunities, and annual merit-based salary adjustments.
Employee retention helps us operate efficiently and achieve one of our business objectives, which is being a high-quality, efficient provider of financial services. We believe our commitment to core values, prioritizing concern for our employees’ well-being, supporting our employees’ career goals, offering competitive wages and providing valuable benefits aids in the retention of our employees.
Supervision and Regulation
General. The banking industry is highly regulated. Statutory and regulatory controls are designed primarily for the protection of depositors and the banking system, and not for the purpose of protecting shareholders. The following discussion is not intended to be a complete list of all the activities regulated by banking laws or of the impact of such laws and regulations on the Corporation and the Bank. Changes in applicable laws or regulations and in their interpretation and application by regulatory agencies cannot be predicted butand may have a material effect on our business and results of operations.
As a registered bank holding company, the Corporation is regulated under the Bank Holding Company Act of 1956, as amended (“BHC Act”), and subject to inspection, examination and supervision by the Federal Reserve Board.Bank (“FRB”). In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks, performing servicing activities for subsidiaries and engaging in activities that the Federal ReserveFRB has determined, by order or regulation, are so closely related to banking as to be a proper incident thereto under the BHC Act. The Corporation is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the Securities and Exchange Commission (“SEC”). Our common stock is listed on the Capital Market tier of the NASDAQ Stock Market (“NASDAQ”) under the symbol “FLIC” and is subject to NASDAQ rules for listed companies.
As a national bank, the Bank is subject to regulation and examination by the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”). Insured banks, such as the Bank, are subject to extensive regulation of many aspects of their businesses. These regulations generally relate to, among other things: (i)to: (1) the nature and amount of loans that may be made by the Bank and the rates of interest that may be charged; (ii)(2) types and amounts of other investments; (iii)(3) branching; (iv)(4) anti-money laundering; (v)laundering and Office of Foreign Control ("OFAC"); (5) permissible activities; (vi)(6) reserve requirements; (7) information security and (vii)technology; and (8) dealings with officers, directors and affiliates.
The Dodd-Frank Act made extensive changes in the regulation of depository institutions and their holding companies. For example, the Dodd-Frank Act created a new Consumer Financial Protection Bureau (“CFPB”) as an independent bureau of the Federal Reserve Board.FRB. The CFPB has assumed responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations, a function previously assigned to principal federal banking regulators, and has authority to impose new requirements. However, institutions of less than $10 billion in assets, such as the Bank, continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the enforcement authority of, their primary federal regulator, although the CFPB has limited back-up authority to examine such institutions.
Bank Holding Company Regulation. The BHC Act requires the prior approval of the Federal Reserve BoardFRB for the acquisition by a bank holding company of 5% or more of the voting stock or substantially all of the assets of any bank or bank holding company. Also, under the BHC Act, bank holding companies are prohibited, with certain exceptions, from engaging in, or from acquiring 5% or more of the voting stock of any company engaging in activities other than (i)(1) banking or managing or controlling banks, (ii)(2) furnishing services to or performing services for their subsidiaries, or (iii)(3) activities that the Federal Reserve BoardFRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Bank holding companies that meet certain criteria specified by the Federal ReserveFRB may elect to be regulated as a “financial holding company” and thereby engage in a broader array of financial activities including insurance and investment banking.
Payment of Dividends. A large The source of the Corporation’s liquidity is dividends from the Bank. Prior approval of the OCC is required if the total of all dividends declared by a national bank in any calendar year would exceed the sum of the bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Under the foregoing dividend restrictions, and while maintaining its “well-capitalized”“well capitalized” status and absent affirmative governmental approvals, during 20182024 the Bank could declare dividends to the Corporation of approximately $52.7$25.1 million plus any 20182024 net profits retained to the date of the dividend declaration.
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In addition, the Corporation and the Bank are subject to other regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimum capital levels. The Federal Reserve BoardFRB is authorized to determine under certain circumstances relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. Federal ReserveFRB guidance sets forth the supervisory expectation that bank holding companies will inform and consult with Federal ReserveFRB staff in advance of declaring a dividend that exceeds earnings for the quarter and should inform the Federal ReserveFRB and should eliminate, defer or significantly reduce dividends if (i)(1) net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends, (ii)(2) the prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition, or (iii)(3) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
Stock Repurchases. Current FRB regulations provide that a bank holding company that is not well capitalized or well managed, as such terms are defined in the regulations, or that is subject to any unresolved supervisory issues, is required to give the FRB prior written notice of any repurchase or redemption of its outstanding equity securities if the gross consideration for repurchase or redemption, when combined with the net consideration paid for all such repurchases or redemptions during the preceding 12 months, will be equal to 10% or more of the company’s consolidated net worth. The FRB may disapprove such a repurchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice or violate a law or regulation. FRB guidance generally provides for bank holding company consultation with FRB staff prior to engaging in a repurchase or redemption of a bank holding company’s stock, even if a formal written notice is not required.
Transactions with Affiliates. Federal laws strictly limit the ability of banks to engage in transactions with their affiliates, including their bank holding companies. Regulations promulgated by the Federal Reserve BoardFRB limit the types and amounts of these transactions (including loans due and extensions of credit from their U.S. bank subsidiaries) that may take place and generally require those transactions to be on an arm’s-length basis. In general, these regulations require that any “covered transactions” between a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company be limited to 10% of the bank subsidiary’s capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary’s capital and surplus. Further, loans and extensions of credit to affiliates generally are required to be secured by eligible collateral in specified amounts.
Source of Strength Doctrine. Federal Reserve FRB policy has historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement, the Corporation is expected to commit resources to support the Bank, including at times when the Corporation may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
Capital Requirements. As a bank holding company, the Corporation is subject to consolidated regulatory capital requirements administered by the Federal Reserve.FRB. The Bank is subject to similar capital requirements administered by the OCC.
The Corporation and the Bank implementedare subject to the Basel III regulatory capital standards (“Basel III”) issued by the Federal Reserve BoardFRB and the OCC. Under the Basel III capital requirements, the Corporation and the Bank are required to maintain minimum ratios of capital to assets of 4.00% for Tier 1 capital to average assets 4.50% forof 4.00%, Common equity tier 1 capital to risk weighted assets 6.00% forof 4.50%, Tier 1 capital to risk weighted assets of 6.00% and 8.00% for Total capital to risk weighted assets.assets of 8.00%. Common equity tier 1 capital, Tier 1 capital, Total capital, risk weighted assets and average assets are defined in the Basel III rules. Failure to meet the minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the financial statements of the Corporation and Bank. The Corporation and the Bank exceeded the Basel III minimum capital adequacy requirements at December 31, 2017.opted to exclude accumulated other comprehensive income components from Tier 1 and Total regulatory capital.
Basel III also phases-inrequires the Corporation and the Bank to maintain a capital conservation buffer from 2016 through 2019. The capital conservation buffer must be maintainedof 2.50% in order for a banking organization to avoid being subject to limitations on capital distributions, including dividend payments, and discretionary bonus payments to executive officers. The capital ratio phase-in schedule,requirements, including the capital conservation buffer, for banks with $250 billion or less in total assets is as follows:are 7.00% for Common equity tier 1 capital to risk weighted assets, 8.50% for Tier 1 capital to risk weighted assets and 10.50% for Total capital to risk weighted assets.
In accordance with the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies adopted a final rule whereby financial institutions and financial institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9% (“qualifying community banking organizations”), are eligible to opt into a community bank leverage ratio (“CBLR”) framework. Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% are considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules and will be considered to have met the well capitalized ratio requirements under the prompt corrective action (“PCA”) statutes. The agencies reserved the authority to disallow the use of the CBLR framework by a financial institution or holding company, based on the risk profile of the organization. On January 1, 2020, the CBLR framework became effective, and management elected to adopt the alternative framework. 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.
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| 2015 |
| 2016 |
| 2017 |
| 2018 |
| 2019 |
Minimum leverage measure (%) |
| 4.0 |
| 4.0 |
| 4.0 |
| 4.0 |
| 4.0 |
Minimum common equity tier 1 risk-based capital ("RBC") (%) |
| 4.5 |
| 4.5 |
| 4.5 |
| 4.5 |
| 4.5 |
Capital conservation buffer (%) |
| N/A |
| .625 |
| 1.25 |
| 1.875 |
| 2.5 |
Minimum common equity tier 1 RBC with capital conservation buffer (%) |
| 4.5 |
| 5.125 |
| 5.75 |
| 6.375 |
| 7.0 |
Minimum tier 1 RBC (%) |
| 6.0 |
| 6.0 |
| 6.0 |
| 6.0 |
| 6.0 |
Minimum tier 1 RBC with capital conservation buffer (%) |
| 6.0 |
| 6.625 |
| 7.25 |
| 7.875 |
| 8.5 |
Minimum total RBC (%) |
| 8.0 |
| 8.0 |
| 8.0 |
| 8.0 |
| 8.0 |
Minimum total RBC with capital conservation buffer (%) |
| 8.0 |
| 8.625 |
| 9.25 |
| 9.875 |
| 10.5 |
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 ratio of the Corporation and the Bank at December 31, 2023 was 10.05% and 10.13%, respectively. 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 the current expected credit loss (“CECL”) methodology.
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Prompt Corrective ActionPCA Regulations. The Federal Deposit Insurance Act, as amended (“FDIA”), requires among other things,that the federal banking agencies to take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. The FDIA sets forth the following five capital tiers for purposes of implementing the prompt corrective action (“PCA”)PCA regulations: “well-capitalized,“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” The PCA thresholds established by Basel III for eachAs of December 31, 2023, the capital tiers is as follows:
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The Bank was well capitalized under the Basel III PCA thresholds at December 31, 2017. capitalized.
Deposit Insurance. The FDIC imposes an assessment on financial institutions for deposit insurance. The assessment is based on the risk categoryFDIC’s statistical model for estimating the institution’s probability of the institution as assigned by the FDIC,failure over a three-year period and the institution’s average total assets and average tangible equity. The FDIC periodically adjusts the deposit insurance assessment rates, which may raise or lower the cost to an institution of maintaining FDIC insurance coverage.
The FDIC may terminate the insurance of an institution’s depositsdeposit insurance upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management is not aware of any practice, condition or violation that might lead to termination of the Bank’s deposit insurance.
Safety and Soundness Standards. The FDIA requires the federal bank regulatory agencies to prescribe standards, through regulations or guidelines, relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial standards as the agencies deem appropriate. Guidelines adopted by the federal bank regulatory agencies establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits. In general, the guidelines require among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying one or more of the safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the PCA provisions of the FDIA. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.
Community Reinvestment Act and Fair Lending Laws. The Community Reinvestment Act of 1977 (“CRA”) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by among other things, providing credit to lowlow- and moderate incomemoderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. Banking regulators take into account CRA ratings when considering approval of proposed acquisition transactions. The Bank received a “Satisfactory” CRA rating on its most recent FederalCRA examination. The Bank and the Corporation are firmly committed to the practice of fair lending and maintaining strict adherence to all federal and state fair lending laws which prohibit discriminatory lending practices.
On May 5, 2022, the federal banking agencies released a notice of proposed rulemaking to “strengthen and modernize” the CRA regulations and the related regulatory framework. This final rule was codified on October 24, 2023 with an effective date of April 1, 2024. Under the final rule, banks with assets of at least $2 billion as of December 31 in both of the prior two calendar years will be a "large bank." The agencies will evaluate large banks under four performance tests: the Retails Lending test, the Retail Services and Products Test, the Community Development Financing Test and the Community Development Services Test. The applicability date for the majority of the provisions in the CRA regulations is January 1, 2026, and additional requirements will be applicable on January 1, 2027. The Bank is committed to comply with the changes, much of which are programmatic changes that will address technology changes in the banking industry and providing greater clarity, consistency and transparency in the application of the CRA.
Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank System (“FHLB System”), which consists of 11 regional Federal Home Loan Banks (each a “FHLB”). The FHLB System provides a central credit facility primarily for member banks. As a member of the FHLB of New York ("FHLBNY"), the Bank is required to acquire and hold shares of capital stock in the FHLB in an amount equal to 4.5% of its borrowings from the FHLB (transaction-based stock) plus .15%0.125% of the total principal amount at the beginning of the year of the Bank’s unpaid residential real estate loans, commercial real estate loans, home equity loans, CMOs and other similar obligations (membership stock). At December 31, 2017,2023, the Bank was in compliance with the FHLB’s capital stock ownership requirement.
6
Financial Privacy. Federal regulations require the Bank to disclose its privacy policy, including identifying with whom it shares “nonpublic personal information,” to its customers at the time the customer establishes a relationship with the Bank and annually thereafter. In addition, we are required to provide our customers with the ability to “opt-out” of having the Bank share their nonpublic personal information with nonaffiliated third parties before we can disclose that information, subject to certain exceptions.
The federal banking agencies adopted guidelines establishing standards for safeguarding our customer information. The guidelines describe the agencies’ expectation that regulated entities create, implement and maintain an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity and the nature and scope of our activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of customer records, and protect against unauthorized access to records or information that could result in substantial harm or inconvenience to customers. Additionally, the guidance states that banks, such as the Bank, should develop and implement a response program to address security breaches involving customer information, including customer notification procedures. The Bank has developed such a program.
Anti-Money Laundering and the USA PATRIOT Act. A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (“Patriot Act”) substantially broadened the scope of United StatesU.S. anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United StatesU.S. Treasury Department has issued and, in some cases, proposed a number of regulations that apply various requirements of the Patriot Act to financial institutions such as the Bank. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Certain of those regulations impose specific due diligence requirements on financial institutions that maintain correspondent or private banking relationships with non-U.S. financial institutions or persons. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal, financial and reputational consequences for the institution. The Bank and the Corporation are firmly committed to maintaining strong policies, procedures and controls to ensure compliance with anti-money laundering laws and regulations and to combat money laundering and terrorist financing. In recent months, the Financial Crimes Enforcement Network ("FinCEN"), a division of the U.S. Treasury Department, has begun to promulgate regulations to establish a national beneficial owner registry for legal entities, as mandated under the Anti-Money Laundering Act of 2020 (“AMLA”) and the Corporate Transparency Act (“CTA”). The AMLA and CTA are included in the National Defense Authorization Act of 2020, passed in December of 2020. The AMLA and CTA establish a federal beneficial ownership registry, new-and-enhanced Bank Secrecy Act penalties, expands the ability to subpoena foreign banks and creates an expanded whistleblower reward program. On January 1, 2024, the U.S. Department of the Treasury's FinCEN began accepting beneficial ownership information reports as part of the promulgated registry.
Office of Foreign Assets Control. The OFAC of the U.S. Department of the Treasury administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States. The Bank maintains a risk based OFAC program to screen applicable transactions against the required watchlists. Additionally, the Bank remains aware of geo-political and high-risk jurisdiction guidance that is released by government agencies periodically.
Legislative Initiatives and Regulatory Reform. From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to change substantially the financial institution regulatory system. Such legislation could change banking statutes and the operating environment in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. The Corporation cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on our financial condition or results of operations. A change in statutes, regulations or regulatory policies applicable to the Corporation could have a material effect on our business.
Availability of Reports
The Bank maintains a website at www.fnbli.com. The Corporation’s annual reportsAnnual Reports on Form 10-K, quarterly reportsQuarterly Reports on Form 10-Q, current reportsCurrent Reports on Form 8-K, and amendments to these reports and proxy materials filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through the Bank’s website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. To access these reports go to the homepage of the Bank’s website, hover over FLIC and click on “Investor“FLIC Investor Relations,” thenplace the cursor over “Financial Information” and click on “SEC Filings,” and then click on “Corporate SEC Filings.” This will bring you to a listing of the Corporation’s reports maintained on the SEC’s EDGAR website. You can then click on any report to view its contents.reports. Information on our website shall not be considered a part of this annual reportAnnual Report on Form 10-K.
You may also read and copy any document we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You should call 1-800-SEC-0330 for more information on the Public Reference Room. Our SEC filings are also available on the SEC’s website at www.sec.gov.
The Corporation is exposed to a variety of risks, some of which are inherent in the banking business. The more significant of these are addressed by the Corporation’s written policies and procedures. While management is responsible for identifying, assessing and managing risk, the Board of Directors is responsible for risk oversight. The Board fulfills its risk oversight responsibilities largely through its committees. The following provides information regarding material risk factors faced by the Corporation. Additional risks and uncertainties not currently known to the Corporation, or that the Corporation currently deems to be immaterial, could also have a material impact on the Corporation’s business, financial condition or results of operations.
Economic and Market Area
7
The inability to realize the full carrying valueA worsening of the Bank’s investment securities, loans and bank-owned life insurancenational or local economic conditions could negatively impactadversely affect our financial condition and results of operations.
Deteriorating economic conditions could significantly affect the markets in which we do business, the value of our loans and investments, the value of real estate collateral securing our mortgage loans, the financial strength of our borrowers and our on-going operations, costs and profitability. A recession or slowed economic conditions could lead to decreased consumer spending and lower profits, while rising interest rates could increase borrower costs and make it more difficult for companies to access capital. Declines in real estate values, sales volumes and employment levels together with increased vacancy rates, particularly in the NY metropolitan area, may result in greater loan delinquencies, increases in our nonperforming, criticized and classified assets and a decline in demand for our products and services. These events may cause us to increase our credit loss reserves, incur credit losses and may adversely affect our financial condition and results of operations. The majority of our loan portfolio is secured by real estate in the NY metropolitan area.
A concentration of loans in our primary market area may increase the risk of higher nonperforming assets.
Our success depends primarily on the general economic conditions in Nassau and Suffolk Counties of Long Island, and the boroughs of NYC as nearly all of our loans are to customers in these markets. Accordingly, the local economic conditions in these market areas have a significant impact on the ability of our borrowers to repay loans as well as our ability to originate new loans. A decline in real estate values in these market areas would also lower the value of the collateral securing loans on properties in these market areas.
Inflationary pressures and rising prices may affect our results of operations and financial condition.
Inflation rose sharply in 2021, remained elevated through 2022, and the rate of inflation began to moderate in 2023. Inflation may present a significant risk as it can lead to increased costs and reduced purchasing power for consumers. Small to medium-sized businesses may be impacted more during periods of high inflation as they are not able to leverage economies of scale to mitigate cost pressures compared to larger businesses. Consequently, the ability of our business customers to repay their loans may deteriorate, and in some cases this deterioration may occur quickly. Furthermore, a prolonged period of inflation could cause wages and other operating costs to increase. These factors could adversely affect our results of operations and financial condition.
Competition within our market area could limit our ability to increase interest-earning assets and noninterest income.
Competition in the banking and financial services industry is intense. In our market area, we compete with numerous commercial banks, savings institutions, mortgage brokers, credit unions, finance companies, mutual funds, fintech or e-commerce companies, insurance companies and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors have substantially greater resources and lending limits than we have and have greater name recognition and market presence that benefit them in attracting business. In addition, large competitors may be able to price loans and deposits more aggressively than we do, and some have recently eliminated certain noninterest income charges such as overdraft fees. Furthermore, fintech developments such as peer-to-peer platforms, blockchain and other distributed ledger technologies have the potential to disrupt the financial services industry and change the way banks do business. Competitive forces may limit our ability to increase our interest-earning assets or maintain the current level of noninterest income. Our profitability depends upon our continued ability to successfully compete in our market area. For additional information see “Item 1 – Business – Competition.”
Severe weather, acts of terrorism and other external events could impact our ability to conduct business.
Weather-related events have adversely impacted our market area, especially areas located near coastal waters and flood prone areas. Such events that may cause significant flooding and other storm-related damage may become more common events in the future. Financial institutions have been, and continue to be, targets of terrorist threats aimed at compromising operating and communication systems and the NY metropolitan area remains central targets for potential acts of terrorism. Such events could cause significant damage, impact the stability of our facilities and result in additional expenses, impair the ability of our borrowers to repay their loans, reduce the value of collateral securing repayment of our loans, and result in the loss of revenue. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and financial condition.
Additionally, global markets may be adversely affected by natural disasters, the emergence of widespread health emergencies or pandemics, cyber attacks or campaigns, military conflict such as the Russia-Ukraine war and conflicts in the Middle East, supply chain disruptions, terrorism or other geopolitical events. Global market fluctuations may affect our business liquidity. Also, any sudden or prolonged market downturn in the U.S. or abroad, resulting from the above factors or otherwise, could result in a decline in revenue and adversely affect our results of operations and financial condition, including capital and liquidity levels.
Interest Rates and Asset Quality
Declines in the value of investment securities, loans and bank-owned life insurance, thereBOLI may result in impairment charges and may adversely affect our financial condition and results of operations.
There is always the risk that the Bank will be unable to realize theirthe full carrying value. Credit riskvalue of our investment securities, loans and BOLI. Fluctuations in the Bank’s securities and bank-owned life insurance portfolios has been addressed by adopting board committee approved investment and bank-owned life insurance policies that, among other things, limit terms, types and amounts of holdings and specify minimum required credit ratings. Allowable investments include direct obligations of the U.S. government and its agencies, highly rated obligations of states and political subdivisions, highly rated corporate obligations and bank-owned life insurance policies issued by highly rated insurance carriers. At the time of purchase, bonds of states and political subdivisions must generally be rated AA or better, notes of states and political subdivisions must generally be rated MIG-1 (or equivalent), commercial paper must be rated A-1 or P-1, and corporate bonds must be rated AA or better. Bank-owned life insurance may only be purchased from insurance carriers rated A or better. For carriers rated AA or better, cash surrender value is limited to 15% of Tier 1 capital, and for those carriers rated below AA, the limitation is 10% of Tier 1 capital. The cash surrendermarket value of policies with all carriers, plus corporate bond holdings of such carriers, cannot exceed 25% of Tier 1 capital.investment securities may be caused by changes in market interest rates, lower market prices, rating downgrades and limited investor demand. Management periodically reviews the creditworthiness of all securities in the Bank’s portfolio, other than those issued by the U.S. government or its agencies, and all bank-owned life insuranceBOLI carriers. Any significant deterioration in the creditworthiness of an issuer or carrier will be analyzed and action taken if deemed appropriate. If an investment's value is deemed other-than-temporarily impaired, the Bank must write down the fair value of the debt security which may involve a charge to earnings.
Credit risk in the Bank’s loan portfolio has been addressed by adopting a board committee approved loan policy and by maintaining independent loan and appraisal review functions and an independent credit department. The loan policy contains what the Corporation believes to be prudent underwriting guidelines, which include, among other things, specific loan approval requirements, maximum loan terms, loan to appraised value and debt service coverage limits for mortgage loans, credit score minimums, guarantor support and environmental study requirements.
The 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.contamination 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,NYC, and a large percentage of these loans are mortgage loans secured by properties located in those areas. At December 31, 2017,2023, residential mortgage loans, including home equity lines of credit, amounted to approximately $1.6$1.2 billion and comprised approximately 58%37% of loans secured by real estate.total loans. The primary source of repayment for residential mortgage loans is cash flows from individual borrowers and co-borrowers. Also, atAt December 31, 2017,2023, multifamily loans amounted to approximately $683$857.2 million and comprised approximately 57%45% of the Bank’s total commercial mortgage portfolio and approximately 24%26% of the Bank’s total loans secured by real estate.loans. The primary source of repayment for multifamily loans is cash flows from the underlying properties, which generally involves a substantial portiongreater risk than residential real estate loans because of legislation and government regulations involving rent control, rent stabilization and eviction, which are rent stabilizedoutside the control of the borrower or rent controlled. Such cashthe Bank and could impair the value of the collateral for the loans. Cash flows for both residential mortgage and multifamily loans are dependent on the strength of the local economy.
Environmental impairment of properties securing mortgage loans is always a risk. However, at the present time, the Bank is not aware of any existing loans in the portfolio where there is environmental pollution originating on or near the mortgaged properties that would materially affect the value of the portfolio.
Uncertainty,Changes in interest rates and the shape of the yield curve could negatively impact our earnings.
The Bank’s financial condition and results of operations are subject to risk resulting from interest rate fluctuations 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.
In a period of rising interest rates, the interest income earned on the Bank’s assets may not increase as rapidly as the interest paid on its liabilities such as deposits and FHLB advances. The Bank’s cost of funds is expected to increase more rapidly than interest earned on its loan and investment portfolios as its primary source of funds is deposits and FHLB advances with generally shorter maturities or repricing characteristics than the maturities and repricing characteristics of its loans and investments. At December 31, 2023, 21.6% of the Bank’s loans and securities reprice or mature within one year. This makes the balance sheet more liability sensitive in the short-term. In addition, in a period of rising interest rates, noninterest-bearing deposits may convert to interest-bearing deposits further increasing the Bank’s funding costs. The current economic environment, characterized by a high rate of inflation, a pause after a period of rapidly rising interest rates and an inverted yield curve, presents significant financial challenges to the Corporation.
When interest rates decline, borrowers may refinance higher rate loans to lower rates causing prepayments on mortgage loans and mortgage-backed securities to be elevated. Under those circumstances, the Bank may not be able to reinvest the resulting cash flows in new interest-earning assets with rates as favorable as those that prepaid. In addition, subject to the floors contained in many of the Bank’s loan agreements, the Bank’s loans at variable interest rates may adjust to lower rates at their reset dates. While lower rates may reduce the Bank’s cost of funds on non-maturity deposits, certificates of deposit (“CDs”) and FHLB advances, the cost savings could be somewhat constrained because decreases in the Bank’s funding rates may occur more slowly than decreases in yields earned on the Bank’s assets and a significant portion of the Bank’s funding is currently derived from noninterest-bearing checking deposits and capital. In addition, in a prolonged low interest rate environment, the Bank’s deposit products could reach an effective floor rate close to zero which would not allow for any further reduction in its cost of funds.
Changes in interest rates also affect the value of our interest-earning assets and in particular our securities and loan portfolios. Generally, the value of securities fluctuates inversely with changes in accounting rulesinterest rates. At December 31, 2023, our AFS securities portfolio totaled $695.9 million. Unrealized gains and regulatory principalslosses on AFS securities are reported as a separate component of stockholders’ equity. Therefore, decreases in the fair value of AFS securities resulting from increases in interest rates could have an adverse effect on stockholders’ equity.
In addition to the risks arising from changes in interest rates, the shape of the yield curve could create downward pressure on net interest income and other factorsnet interest margin. In the current flat or inverted yield curve environment, asset growth could negatively impact the Bank’s earnings and/or profitability metrics. As a result, the Bank may be unable to increase earnings, or maintain the current level of earnings, until the yield curve steepens.
The performance of our multifamily real estate loans could be adversely impacted by regulation.
Multifamily real estate loans generally involve a greater risk of non-payment and loss than one-to-four family residential real estate loans. Repayment of the loans often depends on the successful operation of the properties and the sale of such properties securing the loans. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one-to-four family residential loans. If loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could cause us to increase our provision for credit losses and adversely affect our operating results and financial condition.
Additionally, legislation and government regulations involving rent control and rent stabilization which are outside the control of the borrower or the Bank, could impair the value of the collateral for the loan or the future cash flow of such properties. As an example, on June 14, 2019, the New York State legislature passed the New York Housing Stability and Tenant Protection Act of 2019. This legislation represents the most extensive reform of New York State’s rent laws in several decades and generally limits a landlord’s ability to increase rents on rent regulated apartments and makes it more difficult to convert rent regulated apartments to market rate apartments. As a result, the value of the collateral located in New York State securing the Company’s multifamily loans or the future net operating income of such properties could potentially become impaired which, in turn, could have a material adverse effect on our financial condition and results of operations. To date, the Company has not experienced any material negative impacts as a result of this legislation.
Management’s estimate of the Allowance for Credit Losses (“ACL” or “allowance”) may not be sufficient and could result in a need to increase the Bank’s Allowance for Loan Lossesincreased provisions and adversely impact our financial condition and results of operations.
The Bank maintains an allowance for loan lossesACL in an amount believed to be adequate to absorb probable incurredcurrent expected lifetime credit losses in its loan portfolio. The maintenance of the allowance for loan lossesACL is governed by a board committee approved allowance for loan and lease lossesACL policy. In arriving at the allowance for loan losses,ACL, an impairment analysisindividual evaluation is performed on each loan where it is probablewith disparate risk characteristics or information suggesting that the borrowerBank will not be ableunable to makecollect all requiredthe principal and interest paymentsdue according to contractual terms. In addition, incurredcurrent expected lifetime credit losses for all other loans in the Bank’s portfolio are determined on a pooled basis using the CECL model and taking into account among other things, historical loss experience delinquencies,and numerous quantitative and qualitative factors (“Q-factors”), including current and forecasted economic conditions measured by such things as gross domestic product (“GDP”), unemployment levels, vacancies, changes in the value of underlying collateral, trendsaverage growth in nature and volume of loans,loan pools, concentrations of credit, changes in lending policies and procedures, experience, ability and depth of lending staff, changes in quality of the loan review function, environmental risks and loan risk ratings. Because estimating the allowance for loan lossesACL is highly subjective in nature and involves a variety of estimates and assumptions that are inherently uncertain, there is the risk that management’s estimate may not accurately capture probable incurredlifetime losses in the loan portfolio. The Bank’s allowance may need to be increased based on among other things, additional information that comes to light after the estimate is made, changes in circumstances or a recommendation by bank regulators based on their review of the Bank’s loan portfolio. The impact of one or more of these factors on the Bank’s allowance could result in the need for a significant increase in the Bank’s provision for loancredit losses and have a material adverse impact on the Bank’s financial condition and results of operations.
8
In addition, the Financial Accounting Standards Board has adopted an Accounting Standards Update (“ASU”) 2016-13, that will be effective for reporting periods beginning after December 15, 2019. This standard changes the accounting methodology used to determine the allowance for loan losses from an incurred loss model to a current expected credit loss (“CECL”) model. The CECL model will require the Bank to maintain at each periodic reporting date an allowance for loan losses in an amount that is equal to its estimate of expected lifetime credit losses on the loans in its portfolio. Utilization of the CECL model may require the Bank to increase its allowance for loan losses and will increase the types and amount of data the Bank will need to collect and consider in determining an appropriate level for its allowance for loan losses.Regulatory Matters
If our regulators impose limitations on our commercial real estate lending activities, earnings could be adversely affected, and we may face greater risk in our loan portfolio.
In 2006, the federal bank regulatory agencies issued joint guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” (the “CRE Guidance”). Although the CRE Guidance did not establish specific lending limits, it provides that a bank’s commercial mortgage lending exposure may receive increased supervisory scrutiny where total non-owner occupied commercial mortgages, including loans secured by apartment buildings, investor commercial mortgages and construction and land loans ("CRE loans"), represent 300% or more of an institution’s total risk-based capital and the outstanding balance of the CRE loan portfolio has increased by 50% or more during the preceding 36 months ("CRE growth rate"). The Company’s CRE loans, equaled 361% of total risk-based capital at December 31, 2023 and the Company's CRE growth rate during the 36-month period ended December 31, 2023 was 30.7%. The Company did not meet the combined thresholds for increased supervisory scrutiny. However, if our regulators were to impose restrictions on the amount of CRE loans we can hold in our portfolio or require higher capital ratios as a result of the level of CRE loans held, our earnings would be adversely affected.
If we are limited in our ability to originate loans secured by commercial real estate, we may incur greater risk in our loan portfolio. For example, we are and may continue to seek to further increase our growth rate in commercial and industrial loans, including both secured and unsecured commercial and industrial loans. Unsecured loans generally involve a higher degree of risk of loss than do secured loans because, without collateral, repayment is wholly dependent upon the success of the borrowers’ businesses and personal guarantees. Secured commercial and industrial loans are generally collateralized by accounts receivable, inventory, equipment or other assets owned by the borrower and typically include a personal guaranty of the business owner. Compared to real estate, that type of collateral is more difficult to monitor, its value is harder to ascertain, it may depreciate more rapidly, and it may not be as readily saleable if repossessed. Therefore, we may be exposed to greater risk of loss on these credits.
The Bank is subject to the CRA and fair lending laws, and failure to comply with these laws could lead to material penalties.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose non-discriminatory lending requirements on financial institutions. With respect to the Bank, the FRB, U.S. Department of Justice and other federal and state agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on the Bank’s business, financial condition and results of operations.
Changes in interest rates,laws, government regulation and supervisory guidance could have a significant negative impact on our financial condition and results of operations.
The Corporation and the shapeBank are subject to regulation, supervision and examination by, among others, the FRB, OCC and FDIC. The FDIC also insures the Bank’s deposits. Regulation and supervision govern the activities in which a bank and its holding company may engage and are intended primarily for the protection of depositors. Regulatory requirements affect virtually all aspects of the yield curveCorporation’s and the Bank’s business, including investment and lending practices, deposit offerings and capital levels. The regulators have extensive discretion in connection with their supervisory and enforcement activities, including imposing restrictions on Bank operations and expansion plans, imposing deposit insurance premiums and other assessments, setting required levels for the ACL, capital and liquidity, and imposing restrictions on the ability to pay cash dividends and other capital distributions to stockholders. Changes in laws, regulations and supervisory guidance, or the Corporation’s and the Bank’s compliance with these laws and regulations as judged by the regulators, could have a sustained periodsignificant negative impact on the Corporation’s financial condition and results of low interest ratesoperations.
Increasing scrutiny and evolving expectations from customers, regulators, investors and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
Companies are facing increasing scrutiny from customers, regulators, investors and other stakeholders related to their environmental, social and governance ("ESG") practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and human rights. Increased ESG related compliance costs could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or stakeholder expectations could negatively impact our earnings.reputation, ability to do business with certain partners and our stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory or voluntary reporting, diligence and disclosure.
Business Issues
Our stock price may be negatively impacted by unrelated bank failures and negative depositor confidence in depository institutions.Further, if we are unable to adequately manage our liquidity, deposits, capital levels and interest rate risk, which have come under greater scrutiny in light of recent bank failures, it may have a material adverse effect on our financial condition and results of operations.
On March 9, 2023, Silvergate Bank, La Jolla, California, announced its decision to voluntarily liquidate its assets and wind down operations. On March 10, 2023, Silicon Valley Bank, Santa Clara, California, was closed by the California Department of Financial Protection and Innovation (“DFPI”), on March 12, 2023, Signature Bank, New York, New York, was closed by the New York State Department of Financial Services, and on May 1, 2023, First Republic Bank, San Francisco, California, was closed by the DFPI, and in each case the FDIC was appointed receiver for the failed institution. These banks had elevated levels of uninsured deposits, which may be less likely to remain at the bank over time and a less stable source of funding than insured deposits. These failures have led to volatility and declines in the market for bank stocks and questions about depositor confidence in depository institutions.
These events have led to a greater focus by institutions, investors and regulators on the on-balance sheet liquidity of and funding sources for financial institutions, the composition of its deposits, including the amount of uninsured deposits, the amount of accumulated other comprehensive loss, capital levels and interest rate risk management. If we are unable to adequately manage our liquidity, deposits, capital levels and interest rate risk, it may have a material adverse effect on our financial condition and results of operations.
There can be no assurance that we will continue to declare cash dividends.
The Bank’s resultsdeclaration and payment of operations areany dividend is subject to risk resultingthe approval of our Board of Directors and our dividend may be discontinued or reduced at any time. Our ability to pay cash dividends is limited by restrictions or limitations on our ability to obtain sufficient funds through dividends from interest rate fluctuations and having assets and liabilities that have different maturity, repricing and prepayment/withdrawal characteristics. The Bank defines interest rate risk as the riskBank. There can be no assurance that the Bank's net interest income and/current payout ratio is sustainable or economic value of equity (“EVE”)that we will change when interest rates change. The Bank has addressed interest rate risk by adopting a board committee approved interest rate risk policy which sets forth quantitative risk limits and calls for monitoring and controlling interest rate risk through a variety of techniques including the use of interest rate sensitivity models and traditional repricing gap analysis. Management utilizes a consultant with expertise in bank asset liability management to aid them in these efforts.
A sustained period of low interest rates and a flattening of the yield curve over the past several years have resulted in continued pressure on our net interest margin. The historic low interest rate environment appears to be ending as the Federal Reserve Bank (“FRB”) has slowly changed from an accommodative monetary policy to a tightening of monetary policy. The FRB has increased the federal funds target rate 100 basis points since December 2016 and has stated that it plans to increase rates an additional three times in 2018 if economic growth continues to expand and the unemployment rate remains at historic lows.
Increases in the federal funds target rate have already begun to exert upward pressure on non-maturity deposit liability rates and the cost of overnight borrowings. Should short-term rates continue to increase and a further flattening of the yield curve were to occur, the Bank’s loans and investment securities could reprice slower than its interest-bearing liabilities, which would have a negative effect on net interest income. However, over a longer period of time, the effect on the Bank’s earnings should be positive primarily because with the passage of time the yield curve should steepen and more loans and investment securities would reprice at the higher rates and there would be no offsetting increase in interest expense for those interest-earning assets funded by noninterest-bearing checking deposits and capital.
When interest rates decline, borrowers tend to refinance higher rate loans at lower rates and prepayments on mortgage loans and mortgage-backed securities are elevated. Under those circumstances, the Bank may not be able to reinvestdeclare cash dividends in the resulting cash flowsfuture in new interest-earning assets with rates as favorable as those on the prepaid loansany particular amounts, or investment securities. In addition, subject to the floors contained in manyat all. For additional information, see "Item 1 - Business - Payment of the Bank’s loan agreements, the Bank’s loans at variable interest rates may adjust to lower rates at their reset dates. While lower rates could reduce the Bank’s cost of funds on non-maturity deposits, certificates of deposits and FHLB advances, the cost savings would be somewhat constrained as overall funding rates have not increased significantly from the decade-long historic low interest rate environment and a significant portion of the Bank’s funding comes from noninterest-bearing checking deposits and capital.Dividends."
The Bank and Corporation may not have sufficient funds or funding sources to meet liquidity demands.
Liquidity risk is the risk that the Bank will not have sufficient funds to accommodate loan growth, meet deposit outflows or make contractual payments on borrowing arrangements. The Bank has addressed liquidity risk by adopting a board committee approved liquidity policy and liquidity contingency plan that set forth quantitative risk limits and a protocol for responding to liquidity stress conditions should they arise. The Bank encounters significant competition for deposits in its market area from branches of larger banks, various community banks, credit unions and other financial services organizations. This in addition to consumer confidencecompetition for deposits, particularly in the equity markets,recent rapidly rising interest rate environment, could cause depositresult in significant outflows and such outflowsfurther exert upward pressure on the Bank’s funding costs. In addition, the Bank’s concentration of deposits with certain customers could be significant.limit our ability to favorably reprice deposits and grow net interest income, net interest margin and earnings.
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 overnight investments and maturities and monthly payments on its investment securities and loan portfolios, operations and investment securities designated as available-for-sale. portfolios.
The Bank is a member of the FRB of New YorkNY (“FRBNY”) and the FHLB of New York,FHLBNY and has a federal funds line with a commercial bank. In addition to customer deposits, the Bank’s primary external sources of liquidity are secured borrowings from the FHLB of New YorkFHLBNY and FRB of New York.FRBNY. In addition, the Bank can purchase overnight federal funds under its existing line.line and the Corporation may raise funds through its Dividend Reinvestment and Stock Purchase Plan (“DRIP”). However, the Bank’s FRB of New YorkFRBNY membership, FHLB of New YorkFHLBNY membership and federal funds line do not represent legal commitments to extend credit to the Bank. The amount that the Bank can potentially borrow is currently dependent on among other things, 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 FRBNY or the FHLBNY 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. Regulatory or strategic changes affecting the access to and availability of funding from the FHLBNY could adversely impact the Bank’s liquidity.
The Corporation relies on dividends from the Bank to fund its operating expenses, dividends to shareholders and repurchases of common stock. The OCC restricts the dividends the Bank may pay to the Corporation to its retained net profits for the preceding two calendar years plus current year retained net profits. These restrictions may limit the Corporation’s ability to pay dividends or repurchase shares. In addition, the Corporation may not be successful in raising funds from the issuance of its stock under the DRIP or otherwise.
9Our funding sources may prove insufficient to replace deposits at maturity and support our future growth.A lack of liquidity could adversely affect our financial condition and results of operations and result in regulatory limits being placed on the Corporation.
The Bank must maintain sufficient funds to respond to the needs of depositors and borrowers. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also receive funds from loan repayments, investment maturities and income on other interest-earning assets. While we emphasize the generation of low-cost core deposits as a source of funding, there is strong competition for such deposits in our market area. Additionally, deposit balances can decrease if customers perceive alternative investments as providing a better risk/return tradeoff. Accordingly, as part of our liquidity management, we must use a number of funding sources in addition to deposits and repayments and maturities of loans and investments, including FHLB advances, federal funds purchased and brokered CDs. Adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources.
Our financial flexibility will be severely constrained if we are unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Further, if we are required to rely more heavily on more expensive funding sources to support liquidity and future growth, our revenues may not increase proportionately to cover the increased costs. In this case, our operating margins and profitability would be adversely affected. Alternatively, we may need to sell a portion of our securities and/or loan portfolio to raise funds which, depending upon market conditions, could result in us realizing a loss on the sale of such assets. As of December 31, 2023, we had a net unrealized loss of $71.9 million on our AFS securities portfolio resulting from the change in the interest rate environment. Investment securities totaled $695.9 million, or 16% of total assets, at December 31, 2023.
Any decline in available funding could adversely impact our ability to originate loans, invest in securities, pay our expenses, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.
A lack of liquidity could also attract increased regulatory scrutiny and potential restraints imposed on us by regulators. Depending on the capitalization status and regulatory treatment of depository institutions, including whether an institution is subject to a supervisory PCA directive, certain additional regulatory restrictions and prohibitions may apply, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends and restrictions on the acceptance of brokered deposits.
A decline in the Corporation’sCorporation’s market capitalization could negatively impact the price, trading volume and liquidity of our common stock.
The Corporation’s market capitalization on December 31, 2017 was approximately $703 million, exceeding the $500 million market capitalization which may make the Corporation’s common stock more attractive to certain investors. In addition, the Corporation’s common stock is included in the Russell 3000 and Russell 2000 Indexes, which are reconstituted annually. Upon reconstitution in May 2017, the average market capitalization of companies in the Russell 2000 Index was $2.0 billion,2023, the median market capitalization of the Russell 2000 index was $784$896.6 million, the capitalization of the largest company in the index was $3.4$6.0 billion and the capitalization of the smallest company in the index was $144$159.5 million. The Corporation believes that aCorporation’s market capitalization in excess of $500was approximately $299 million and inclusion in the Russell indexes have positively impacted the price, trading volume and liquidity of its common stock. Conversely, ifon December 31, 2023. If the Corporation’s market capitalization falls below the minimum necessary to be included in the indexes at any future reconstitution date, the opposite could occur.price, trading volume and liquidity of its common stock may be negatively impacted.
Changes in national and local economic conditions could negatively impact our financial condition and results of operations.
Although the economy has improved, national and local economic conditions could deteriorate. This poses risks to both the Corporation’s business and the banking industry as a whole. Specific risks include reduced loan demand from quality borrowers; increased competition for loans; increased loan loss provisions resulting from deterioration in loan quality; reduced net interest income and net interest margin caused by a sustained period of low interest rates; interest rate volatility; price competition for deposits due to liquidity concerns or otherwise; volatile equity markets; and higher cost to attract capital to support growth.
In addition to the significant risks posed by economic conditions, the Corporation could experience deposit outflows as national and local economic conditions improve and investors pursue alternative investment opportunities.
The Bank’sBank’s internal controls and those of its third-party service providers (“TPSPs”) may be ineffective or circumvented, resulting in significant financial loss, adverse action by governmental bodies and damaged reputation.
The Corporation relies on its system of internal controls and the internal controls of its third-party service providers (“TPSPs”)TPSPs to ensure that transactions are captured, recorded, processed and reported properly; confidential customer information is safeguarded; and fraud by employees and persons outside the Corporation is detected and prevented. The Corporation’s internal controls and/or those of its TPSPs may prove to be ineffective or employees of the Corporation and/or its TPSPs may fail to comply with or override the controls, either of which could result in significant financial loss to the Corporation, adverse action by bank regulatory authorities or the SEC and damage to the Corporation’s reputation.
The Bank’sBank’s inability to keep pace with technological advances could negatively impact our business, financial condition and results of operations.
The delivery of financial products and services has increasingly become technology-driven.technology driven. The Bank’s ability to competitively meet the needs of its customers in a cost-efficient manner is dependent on its ability to keep pace with technological advances and to invest in new technology as it becomes available. The ability to keep pace with technological change is important, and failure to do so could have a material adverse impact on the Corporation’s business, financial condition and results of operations.
The inability to attract, motivate or retain qualified key personnel could negatively impact our performance.
The Corporation’s future success depends in part on the continued service of its executive officers and other key members of management and its staff, as well as its ability to continue to attract, motivate and retain highly qualified employees. The loss of services of key personnel and our inability to timely recruit or promote qualified replacements could have an adverse effect on the Bank’s business, operating results and financial condition. Their skills, knowledge of the Bank’s market and years of industry experience may be difficult to replace.
The inability to control the risks associated with social media and other internet postings could adversely impact the Corporation's business and reputation.
Customers, shareholders, employees and outsiders could potentially share sensitive or inaccurate information on social media platforms or engage in behavior that may reflect poorly on the company and lead to adverse impacts on the Corporation’s business. While social media activity may provide benefits like increased brand awareness, even positive social media posts have the potential to create controversy and increase the Corporation's risk profile.
Mergers and acquisitions involve numerous risks and uncertainties.
The Corporation may in the future pursue mergers and acquisitions opportunities. Mergers and acquisitions involve a number of risks and challenges, including the expenses involved; potential diversion of management’s attention from other strategic matters; integration of branches and operations acquired; outflow of customers from the acquired branches; retention of personnel from acquired companies or branches; competing effectively in geographic areas not previously served; managing growth resulting from the transaction; and dilution in the acquirer's book and tangible book value per share.
Security
System failures, interruptions and security breaches could negatively impact our customers, reputation and results of operations.
The Bank outsources most of its data processing to TPSPs. If TPSPs encounter difficulties, or if the Bank has difficulty communicating with them, the Bank’s ability to adequately process and account for customer transactions could be affected, and the Bank’s business operations could be adversely impacted. Threats to information security also exist in the processing of customer information through TPSPs. The Bank’s website and online banking products have been the target of cyber attackscyberattacks in the past. While the Bank and its TPSPs believe they have successfully blocked attempts to infiltrate the Bank’s systems, there is always the possibility that successful attacks have not yet been identified and that future attacks may not be blocked. A significant cybersecurity incident may be determined to be material insider information and would prohibit corporate insiders from trading in Companythe Corporation’s stock until appropriate public disclosures are made.
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The Board Audit Committee has oversight responsibility for cybersecurity risk, which it administers through periodic meetings with managementOpportunistic cyberattacks and malicious financial crimes have been growing globally in number and complexity and increase the approvalcost of information technology, compliance and cybersecurity policies. In this regard, board committee approved policies address information security, IT vulnerability assessment, cybersecurity incident response and electronic communications. These policies are intended to prevent, detect and respond to cybersecurity incidents. In addition, these policies prevent or limit the impact of systems failures, interruptions and security breaches and rely on commonly used security and processing systems to provide the security and authentication necessary for the processing of data.labor. The Bank makes use of logon and user access controls, multifactor and out of band authentication, transaction limits, firewalls, antivirus software, intrusion protection monitoring and vulnerability scans and conducts independent penetration testing. Thetesting and cybersecurity audits. Bank also ensurescommunications encourage employee and executive awareness of cybersecurity trends. System failures or interruptions are addressed in the board committee approved emergency and disaster recovery policy and business continuity policy. In addition, for TPSPs of data processing and other significant services, the board committee approved vendor management policy and procedures require reviews of audit reports prepared by independent registered public accounting firms regarding their financial condition and the effectiveness of their internal controls.
These precautions may not protect our systems from all compromises or breaches of security and there can be no assurance that such events will not occur or that they will be adequately addressed if they do. The Bank carries a cyber liability insurance policy to mitigate the amountrisks of any financial loss. However, the occurrence of any systems failure, interruption or breach of security could damage the Bank’s reputation and result in a loss of customers and business, could subject the Bank to additional regulatory scrutiny or could expose the Bank to civil litigation and possible financial liability beyond any insurance coverage. Any of these occurrences could have a material adverse effect on the Corporation’s financial condition and results of operations.
The inability to attract, motivate or retain qualified key personnelRisks associated with cybersecurity could negatively impactaffect our performance.earnings.
The Corporation’s future success dependsfinancial services industry has experienced an increase in partboth the number and severity of reported cyberattacks aimed at gaining unauthorized access to bank systems as a way to misappropriate assets and sensitive information, corrupt and destroy data, or cause operational disruptions.
We have established policies and procedures to prevent or limit the impact of security breaches, but such events may still occur or may not be adequately addressed if they do occur. Although we rely on security safeguards to secure our data, these safeguards may not fully protect our systems from compromises or breaches.
We also rely on the continued serviceintegrity and security of its executive officersa variety of third-party processors, payment, clearing and other key members of management and its staff,settlement systems, as well as the various participants involved in these systems, many of which have no direct relationship with us. Failure by these participants or their systems to protect our customers’ transaction data may put us at risk for possible losses due to fraud or operational disruption.
Our customers are also the target of cyberattacks and identity theft. Large scale identity theft could result in customers’ accounts being compromised and fraudulent activities being performed in their name. We have implemented certain safeguards against these types of activities, but they may not fully protect us from fraudulent financial losses.
The occurrence of a breach of security involving our customers’ information, regardless of its ability to continue to attract, motivateorigin, could damage our reputation and retain additional highly qualified employees. Theresult in a loss of servicescustomers and business and subject us to additional regulatory scrutiny, and could expose us to litigation and possible financial liability. Any of key personnel and our inability to timely recruit or promote qualified replacements could have an adverse effect on the Bank’s business, operating results and financial condition. Their skills, knowledge of the Bank’s market and years of industry experience may be difficult to replace.
Changes in laws, government regulation and supervisory guidancethese events could have a significant negative impactmaterial adverse effect on our financial condition and results of operations.
TheWhile our Board of Directors takes an oversight role in cybersecurity risk tolerance, we rely to a large degree on management and outside consultants in overseeing cybersecurity risk management.
Our Board of Directors takes an oversight role in the cybersecurity risk tolerance of the Corporation and all members receive cybersecurity training annually. The Board approves information technology policies, including those relative to cybersecurity. Furthermore, our Audit Committee is responsible for reviewing all audit findings related to information technology general controls, internal and external vulnerability, and penetration testing. We also engage outside consultants to support our cybersecurity efforts. However, our directors do not have significant experience in cybersecurity risk management outside of the Bank are subjectCorporation and therefore, its ability to regulation, supervisionfulfill its oversight function remains dependent on the input it receives from management and examination by, among others, the Federal Reserve Board, OCCoutside consultants.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Our risk management program is designed to identify, assess, and FDIC. The FDIC also insures the Bank’s deposits. Regulation and supervision govern the activities in which a bank and its holding company may engage and are intended primarily for the protection of depositors. Regulatory requirements affect virtually allmitigate risks across various aspects of our company, including but not limited to the Corporation’sfollowing risks: operational, regulatory compliance, reputational, strategic, information technology, data security and privacy, and market risks such as interest rate, credit, liquidity and price risks. Cybersecurity is a critical component of this program, given the Bank’s business, including, amongincreasing reliance on technology and potential of cyber threats. Our Board of Directors is responsible for risk oversight over all significant risks facing the Corporation and fulfills this responsibility mainly through its committees. While our Board of Directors takes an oversight role in cybersecurity risk tolerance, we rely to a large degree on management and outside consultants in overseeing cybersecurity risk management. Our Director of Information Security, who reports directly to our Chief Information Officer, is primarily responsible for this cybersecurity component and is a member of management's Operational Risk and IT Steering Committees, and regularly attends and presents to the Risk Committee of our Board of Directors ("Risk Committee").
Our objective for managing cybersecurity risk is to avoid or minimize the impacts of external threat events or other things, investment practices, lending practices, deposit offerings and capital levels.efforts to penetrate, disrupt or misuse our systems or information. The regulators have extensive discretion in connection with their supervisory and enforcement activities, including imposing restrictions on bank operations and expansion plans, imposing deposit insurance premiumsstructure of our information security program is designed around regulatory guidance, and other industry standards. In addition, we leverage certain industry and government associations, audits, and threat intelligence feeds to facilitate and promote program effectiveness.
We leverage people, processes, and technology as part of our efforts to manage and maintain cybersecurity controls. We also employ a variety of preventative and detective tools designed to monitor, block, and provide alerts regarding suspicious activity, as well as to report on suspected advanced persistent threats. We have established processes and systems designed to mitigate cyber risk, including regular and on-going education and training for employees, preparedness simulations and tabletop exercises, and recovery and resilience tests. We engage in regular assessments setting required levelsof our infrastructure, software systems, and network architecture, using internal and third-party specialists. We also maintain a third-party risk management program designed to identify, assess, and manage risks, including cybersecurity risks, associated with external service providers. We also actively monitor our email gateways for the allowance for loan losses, capitalmalicious phishing email campaigns and liquidity, and imposing restrictions onmonitor remote connections as a significant portion of our workforce has the ability to pay cash dividendswork remotely. We leverage internal and other capital distributionsexternal auditors and independent external partners to stockholders. Changes in laws, regulationsperiodically review our processes, systems, and supervisory guidance, or the Corporation’scontrols, including with respect to our information security program, to assess their design and the Bank’s compliance with these lawsoperating effectiveness and regulations as judged by the regulators, could have a significant negative impact on the Corporation’s financial condition and results of operations. The Corporation manages themake recommendations to strengthen our risk of noncompliance with laws and regulations by having board committee approved compliance policies, hiring and retaining employees with the experience and skills necessary to address compliance on an ongoing basis, and consulting, when necessary with legal counsel and other outside experts on compliance matters.management program.
We may be adversely affectedmaintain an Incident Response Plan that provides a documented framework for responding to actual or potential cybersecurity incidents, including notification of and escalation to the appropriate team members as well as executive management and the Board of Directors. The Incident Response Plan is coordinated through the Director of Information Security and key members of management. The Incident Response Plan facilitates coordination across multiple departments and is evaluated at least annually.
Notwithstanding our defensive measures and processes, the threat posed by recent changes in U.S. tax laws.cyberattacks is severe. Our internal systems, processes, and controls are designed to mitigate loss from cyberattacks. To date, the Corporation has not, to its knowledge, experienced an incident materially affecting or reasonably likely to materially affect the Corporation.
The Tax Cuts and Jobs Act (“Tax Act”), which was enacted in December 2017, is likelyDirector of Information Security provides information security updates to have both positive and negative effects on our financial performance. For example, the new legislation will result in a reduction in the federal corporate tax rate from 35% to 21% beginning in 2018, which will have a favorable impact on our earnings and capital generation abilities. However, the new legislation also enacted limitations on certain deductions that will have an impact on the banking industry, borrowersIT Steering Committee and the market for single-family residential real estate. These limitations include (1)Risk Committee. Cybersecurity metrics are reported to the IT Steering Committee monthly and to the Risk Committee on a lower limit onquarterly basis. Security training is provided to all staff through targeted training overseen by the deductibilityDirector of mortgage interest on single-family residential mortgage loans, (2) the elimination of interest deductions for home equity loans, (3) a limitation on the deductibility of business interest expense and (4) a limitation on the deductibility of property taxes and state and local income taxes.Information Security. All Board members receive cybersecurity training annually.
The recent changesBoard of Directors recognizes the importance of the Interagency Guidelines Establishing Standards for Safeguarding Customer Information and has incorporated those elements in its ongoing oversight of the tax laws may have an adverse effect onInformation Security Program. At least annually, the market for,Director of Information Security and the valuation of, residential properties, and onChief Risk Officer report to the demand for such loans inRisk Committee the future, and could make it harder for borrowers to make their loan payments. In addition, these recent changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes, like New York. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of properties securing loans in our portfolio may be adversely impacted as a resultoverall status of the changing economics of home ownership, which could require an increase in our provision for loan losses, which would reduce our profitabilityInformation Security Program. Any material findings related to the risk assessment, risk management and could materially adversely affect our business, financial condition andcontrol decisions, service provider arrangements, results of operations.testing, security breaches or violations are discussed as are management’s responses and any recommendations for program changes.
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Weather-related and terrorist events could cause significant harm to our business.
Weather-related events have adversely impacted our market area, especially flood prone areas located near coastal waters and otherwise. Significant flooding and other storm-related damage may become more common in the future. Financial institutions have been, and continue to be, targets of terrorist threats aimed at compromising operating and communication systems, and the metropolitan New York area remains a central target for potential acts of terrorism. Weather-related and terrorist events could cause significant damage, impact the stability of our facilities and result in additional operating expenses, impair the ability of our borrowers to repay their loans, reduce the value of collateral securing repayment of our loans and result in the loss of revenue. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, results of operations and financial condition.
Competition within our market area could limit our ability to increase interest-earning assets.
Competition in the banking and financial services industry is intense. In our market area, we compete with numerous commercial banks, savings institutions, mortgage brokers, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors have substantially greater resources and lending limits than we have and have greater name recognition and market presence that benefit them in attracting business. In addition, large competitors may be able to price loans and deposits more aggressively than we do. Competitive forces may limit our ability to increase our interest-earning assets. Our profitability depends upon our continued ability to successfully compete in our market area. For additional information see “Item 1 – Business – Competition.”
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
The Corporation neither owns nor leases any real estate. Office facilities of the Corporation are located at 275 Broadhollow Road, Melville, NY and the Bank’s main office arebranch is located at 10 Glen Head Road, Glen Head, New YorkNY in a building ownedoffice space leased by the Bank.
As of December 31, 2017,2023, the Bank owns 2319 buildings and leases 3830 other facilities, all of which are in Nassau and Suffolk Counties of Long Island and the New York CityNYC boroughs of Queens, Brooklyn and Manhattan. Included in the leased facilities is one branch location that was closed in 2023 and one closed in 2022 for which the Bank continues to be obligated to make lease payments. One owned building is classified as held-for-sale and currently in contract to be sold. The Corporation believes that the remaining physical facilities of the Bank are suitable and adequate at present and are being fully utilized.
ITEM 3. LEGALLEGAL PROCEEDINGS
In the ordinary course of business,From time to time, the Corporation is party toinvolved in various legal actions which are incidental toand claims arising in the operationnormal course of its business. Although the ultimate outcome and amount of liability, if any, with respect to these legal actions cannot presently be ascertained with certainty, inIn the opinion of management, based upon information currently availablethese legal actions and claims are not expected to us, any resulting liability is believed to be immaterial tohave a material adverse impact on the Corporation's consolidatedCorporation’s financial position,condition and results of operations and cash flows.operations.
ITEM 4. MINE SAFETYSAFETY DISCLOSURES
Not applicable.
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ITEM 5. MARKETMARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Corporation’s common stock trades on the NASDAQ Capital Market tier of the NASDAQ Stock Market under the symbol “FLIC.” At December 31, 2017,2023, there were 585765 stockholders of record of the Corporation’s Common Stock.common stock. The number of stockholders of record includes banks and brokers who act as nominees, each of whom may represent more than one stockholder. The following table sets forth high and low sales prices andCorporation declared cash dividends declared, by quarter,of $0.84 per share for the yearsyear ended December 31, 20172023, compared to cash dividends declared in 2022 of $0.82 per share. The timing and 2016. amount of future dividends are at the discretion of the Board of Directors and will depend upon a number of economic and company-specific factors.
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| 2017 |
| 2016 | ||||||||||||||
Quarter |
| High |
| Low |
| Dividends |
| High |
| Low |
| Dividends | ||||||
First |
| $ | 29.30 |
| $ | 26.00 |
| $ | .14 |
| $ | 20.33 |
| $ | 17.43 |
| $ | .13 |
Second |
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| 30.15 |
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| 25.60 |
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| .14 |
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| 21.29 |
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| 18.06 |
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| .13 |
Third |
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| 31.10 |
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| 26.05 |
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| .15 |
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| 22.35 |
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| 18.68 |
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| .14 |
Fourth |
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| 33.50 |
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| 27.50 |
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| .15 |
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| 29.67 |
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| 20.99 |
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| .14 |
Performance Graph
The following performance graph compares the Corporation's total stockholder return with the NASDAQ U.S. Benchmark, and NASDAQ U.S. Benchmark Banks and the ABA Community Bank NASDAQ Indexes over a 5-yearfive-year measurement period assuming $100 invested on January 1, 2013,2019, and dividends reinvested in the Corporation’s stock. In 2023, the ABA Community Bank NASDAQ Index was selected to replace the NASDAQ U.S. Benchmark Banks Index as we concluded it more closely reflects the size and characteristics of the Corporation.
Issuer Purchase of Equity Securities
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 of its own common stock in the fourth quarter of 2017. 2023.
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The following is selected consolidated financial data for the past five years, adjusted as appropriate to reflect the Corporation’s stock splits. This data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the accompanying consolidated financial statements and related notes.
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(dollars in thousands, except per share data) | 2017 |
| 2016 |
| 2015 |
| 2014 |
| 2013 | ||||||||||
INCOME STATEMENT DATA: |
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Interest Income | $ | 118,265 |
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| $ | 104,123 |
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| $ | 92,135 |
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| $ | 81,976 |
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| $ | 74,851 |
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Interest Expense |
| 21,709 |
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| 18,002 |
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| 16,529 |
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| 15,048 |
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| 12,364 |
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Net Interest Income |
| 96,556 |
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| 86,121 |
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| 75,606 |
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| 66,928 |
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| 62,487 |
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Provision for Loan Losses |
| 4,854 |
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| 3,480 |
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| 4,317 |
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| 3,189 |
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| 2,997 |
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Net Income |
| 35,122 |
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| 30,880 |
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| 25,890 |
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| 23,014 |
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| 21,300 |
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PER SHARE DATA: |
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Basic Earnings | $ | 1.44 |
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| $ | 1.35 |
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| $ | 1.23 |
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| $ | 1.11 |
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| $ | 1.04 |
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Diluted Earnings |
| 1.43 |
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| 1.34 |
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| 1.22 |
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| 1.10 |
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| 1.03 |
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Cash Dividends Declared |
| .58 |
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| .55 |
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| .52 |
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| .48 |
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| .45 |
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Dividend Payout Ratio |
| 40.56 | % |
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| 41.04 | % |
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| 42.62 | % |
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| 43.64 | % |
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| 43.69 | % |
Book Value | $ | 14.37 |
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| $ | 12.90 |
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| $ | 11.85 |
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| $ | 11.20 |
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| $ | 10.04 |
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Tangible Book Value |
| 14.36 |
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| 12.90 |
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| 11.84 |
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| 11.19 |
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| 10.03 |
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BALANCE SHEET DATA AT YEAR END: |
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Total Assets | $ | 3,894,708 |
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| $ | 3,510,320 |
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| $ | 3,130,343 |
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| $ | 2,721,494 |
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| $ | 2,399,892 |
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Loans |
| 2,950,352 |
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| 2,545,421 |
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| 2,248,183 |
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| 1,804,819 |
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| 1,477,937 |
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Allowance for Loan Losses |
| 33,784 |
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| 30,057 |
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| 27,256 |
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| 23,221 |
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| 20,848 |
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Deposits |
| 2,821,997 |
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| 2,608,717 |
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| 2,284,675 |
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| 1,985,025 |
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| 1,782,128 |
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Borrowed Funds |
| 704,938 |
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| 586,224 |
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| 577,214 |
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| 481,486 |
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| 395,463 |
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Stockholders' Equity |
| 354,450 |
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| 305,830 |
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| 250,936 |
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| 233,303 |
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| 206,556 |
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AVERAGE BALANCE SHEET DATA: |
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Total Assets | $ | 3,695,850 |
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| $ | 3,329,308 |
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| $ | 2,897,548 |
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| $ | 2,515,103 |
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| $ | 2,240,139 |
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Loans |
| 2,758,116 |
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| 2,364,187 |
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| 1,990,823 |
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| 1,584,198 |
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| 1,286,227 |
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Allowance for Loan Losses |
| 32,022 |
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| 28,238 |
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| 24,531 |
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| 21,554 |
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| 19,847 |
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Deposits |
| 2,812,733 |
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| 2,590,988 |
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| 2,215,883 |
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| 1,922,172 |
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| 1,747,888 |
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Borrowed Funds |
| 540,307 |
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| 432,554 |
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| 419,372 |
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| 347,946 |
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| 272,737 |
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Stockholders' Equity |
| 334,088 |
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| 290,806 |
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| 243,330 |
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| 224,585 |
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| 203,125 |
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FINANCIAL RATIOS: |
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Return on Average Assets (ROA) |
| .95 | % |
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| .93 | % |
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| .89 | % |
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| .92 | % |
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| .95 | % |
Return on Average |
| 10.51 | % |
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| 10.62 | % |
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| 10.64 | % |
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| 10.25 | % |
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| 10.49 | % |
Average Equity to Average Assets |
| 9.04 | % |
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| 8.73 | % |
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| 8.40 | % |
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| 8.93 | % |
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| 9.07 | % |
14
ITEM 7. MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview – 2017 Versus 2016
Analysis of 2017 Earnings. Net income and diluted earnings per share (“EPS”) for 2017 were $35.1 million and $1.43, respectively, representing increases of 13.7% and 6.7%, respectively, over the comparable 2016 amounts. Dividends per share increased 5.5% from $.55 for 2016 to $.58 for 2017. Returns on average assets and average equity for 2017 were .95% and 10.51%, respectively, as compared to .93% and 10.62%, respectively, for 2016.
Net income for 2017 increased $4.2 million over 2016. The increase is primarily attributable to increases in net interest income of $10.4 million, or 12.1%, and noninterest income, before securities gains and losses, of $1.2 million, or 15.8%. The impact of these items was partially offset by securities losses of $1.9 million and increases in the provision for loan losses of $1.4 million, noninterest expense, before debt extinguishment costs of $3.2 million, or 6.3%, and income tax expense of $840,000.
The increasefollowing selected financial data should be read in net interest income is mainly attributable to growth in average interest-earning assets of $335.6 million, or 10.4%, which was driven by an increase inconjunction with the average balance of loans of $393.9 million, or 16.7%. Although most of the loan growth occurred in residential and commercial mortgage loans, commercial and industrial loans also grew with an increase in average outstandings of $19.6 million, or 18.9%. The growth in loans was funded mainly by growth in the average balances of noninterest-bearing checking deposits of $81.0 million, or 10.2%, interest-bearing deposits of $140.8 million, or 7.8%, short-term borrowings of $74.7 million and stockholders’ equity of $43.3 million, or 14.9%. Also funding the growth in loans was a decrease in the average balance of taxable investment securities of $46.7 million, or 12.5%.accompanying consolidated financial statements.
The increase in noninterest income, before securities gains and losses, of $1.2 million, or 15.8%, is primarily attributable to increases in income from BOLI of $530,000, service charges on deposit accounts of $126,000, checkbook income of $116,000 and Investment Management Division income of $90,000. Also contributing to the increase in noninterest income were refunds of sales taxes, real estate taxes and telecommunications charges of $167,000.
The increase in noninterest expense, before debt extinguishment costs, of $3.2 million, or 6.3%, is primarily attributable to increases in salaries of $2.0 million, or 9.2%, employee benefits expense of $261,000, or 3.8%, occupancy and equipment expense of $981,000, or 10.6%, and marketing expense of $389,000. Also contributing to the increase was a valuation allowance of $725,000 recorded in the fourth quarter of 2017 on other real estate owned. The impact of these items was partially offset by decreases in consulting fees of $635,000, computer and telecommunications expense of $743,000 and FDIC insurance expense of $201,000.
During the fourth quarter of 2017, the Bank sold approximately $88.6 million of mortgage-backed securities with a yield of 1.55% and an expected average life of 3.4 years and reinvested substantially all of the proceeds in mortgage-backed securities with a yield of 2.61% and an expected average life of 4.9 years. The sale resulted in a pretax loss of $1.9 million and an after-tax loss of $1.3 million, or $.05 per share. Due to changes in federal tax law enacted in December 2017, most of the future incremental income will be taxed at a federal tax rate of 21% while the $1.9 million pre-tax loss in 2017 will receive a federal tax benefit at a rate of 35%. Considering both the future incremental income on the replacement securities and the change in the federal tax rate effective in 2018, the payback period for the 2017 loss is approximately 1.7 years. The securities loss negatively impacted 2017 ROA and ROE by 3 and 38 basis points, respectively.
The $1.4 million increase in the provision for loan losses in 2017 is mainly due to more loan growth, an increase in net chargeoffs of $448,000 from $679,000 in 2016 to $1,127,000 in 2017 and a decline in historical loss rates in 2016. The impact of these items was partially offset by improved economic conditions in 2017 and a $510,000 decline in specific reserves on loans individually deemed to be impaired.
The $840,000 increase in income tax expense is due to higher pre-tax earnings in 2017 and a decline in income from tax-exempt securities. Another important contributor to the increase in income tax expense is the fact that in 2017 the Corporation was subject to New York State (“NYS”) and New York City (“NYC”) taxes based on capital rather than business income and did not record the potential NYS and NYC tax benefits of deductible temporary differences that arose in 2017. The impact of these items was partially offset by a $909,000 credit to income tax expense in 2017 resulting from a reduction in the Corporation’s net deferred tax liability to reflect the decrease in the federal income tax rate effective January 1, 2018. In addition, the Corporation realized higher tax benefits in 2017 from stock awards and BOLI. The vesting and exercise of stock awards resulted in tax benefits over and above those accrued during the vesting period of $762,000 and $385,000 in 2017 and 2016, respectively.
Analysis of Fourth Quarter 2017 Earnings. Net income for the fourth quarter of 2017 was $7.6 million, up slightly from $7.5 million in the same quarter last year. The increase is primarily attributable to increases in net interest income and income from BOLI of $1.9 million and $188,000, respectively, and decreases in the provision for loan losses and income tax expense of $319,000 and $968,000, respectively. These items were substantially offset by increases in salaries and occupancy and equipment expense of $536,000 and $380,000, respectively, and the aforementioned securities loss and valuation allowance of $1.9 million and $725,000, respectively. The securities loss negatively impacted fourth quarter 2017 ROA and ROE by 13 and 141 basis points, respectively. The decrease in
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the provision for loan losses was primarily driven by a decrease in specific reserves in the fourth quarter of 2017 of $821,000 versus an increase of $482,000 in the same quarter last year, as partially offset by higher net chargeoffs in the 2017 quarter and adjustments to qualitative factors used in determining the allowance for loan losses. The decrease in income tax expense occurred because of lower pretax earnings in the fourth quarter of 2017 and for the same reasons for a decrease discussed above with respect to the full year periods. Other fourth quarter variances occurred for substantially the same reasons discussed above with respect to the full year periods.
Asset Quality. The Bank’s allowance for loan losses to total loans decreased three basis points from 1.18% at year-end 2016 to 1.15% at year-end 2017. The decrease is primarily due to an improvement in the local housing market and overall economic conditions and a decline in specific reserves.
The overall credit quality of the Bank’s loan portfolio remains excellent. Nonaccrual loans amounted to $1.0 million, or .03% of total loans outstanding, at December 31, 2017, compared to $2.6 million, or .10%, at December 31, 2016. The decrease is attributable to paydowns and loans returned to an accrual status based on the demonstrated ability of the borrowers to service their debt, as partially offset by new nonaccrual loans. Troubled debt restructurings amounted to $1.0 million, or .04% of total loans outstanding, at December 31, 2017, representing a decrease of $498,000 from year-end 2016. The decrease was primarily attributable to payoffs of some loans and paydowns on other loans. Troubled debt restructurings at year-end include $785,000 that are performing in accordance with their modified terms and $100,000 that are nonaccrual and included in the aforementioned amount of nonaccrual loans. Loans past due 30 through 89 days amounted to $2.8 million, or .09% of total loans outstanding, at December 31, 2017, compared to $1.1 million, or .04%, at December 31, 2016. Management does not believe that the increase in loans past due 30 through 89 days is indicative of a deterioration in the overall credit quality of the Bank’s loan portfolio.
The credit quality of the Bank’s securities portfolio also remains excellent. The Bank’s mortgage securities are backed by mortgages underwritten on conventional terms, with 74% of these securities being full faith and credit obligations of the U.S. government and the balance being obligations of U.S. government sponsored entities. The remainder of the Bank’s securities portfolio principally consists of high quality, general obligation municipal securities rated AA or better by major rating agencies. In selecting municipal securities for purchase, the Bank uses credit agency ratings for screening purposes only and then performs its own credit analysis. On an ongoing basis, the Bank periodically assesses the credit strength of the municipal securities in its portfolio and makes decisions to hold or sell based on such assessments.
Key Strategic Initiatives. Key strategic initiatives will continue to include loan and deposit growth through effective relationship management, targeted solicitation efforts, new product offerings and continued expansion of the Bank’s branch distribution system on Long Island and in the New York City boroughs of Queens and Brooklyn. With respect to loan growth, the Bank will continue to prudently manage concentration risk and further develop its broker and correspondent relationships. Small business credit scored loans, equipment finance loans and SBA loans, along with the Bank’s traditional commercial and industrial loan products, will be originated to diversify the Bank’s loan portfolio and help mitigate the impact of the low rate environment on the Bank’s earnings.
The Bank achieved a significant milestone in December 2017 by opening its 50th branch which is located in Astoria, Queens. The Bank’s growing branch distribution system consists of branches in Nassau and Suffolk Counties, Long Island and the New York City boroughs of Queens, Brooklyn and Manhattan. The Bank expects to open three or four more branches in Queens and Brooklyn over the next twelve months and continues to evaluate sites for further branch expansion. In addition to loan and deposit growth, management is also focused on growing noninterest income from existing and potential new sources, which may include the development or acquisition of fee-based businesses.
Tax Reform. On December 22, 2017, the Tax Act was signed into law. The most significant impact of the Tax Act on the Corporation is a reduction in the federal corporate tax rate from 35% to 21% commencing in 2018. Some of the other provisions affecting the Corporation are:
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The Corporation’s effective tax rate for 2017 is 22.0%. Considering, among other things, the changes included in the Tax Act, the Corporation currently expects that its effective tax rate for 2018 will be in the range of 14% to 16%.
Challenges We Face. Beginning in December 2015, there have been five 25 basis point increases in the federal funds target rate to its current level of 1.25% to 1.50%. These increases have exerted upward pressure on non-maturity deposit rates and have caused these rates and overnight borrowing rates to move upward. Further increases in the federal funds target rate are expected in the foreseeable future. At the same time, the Bank generally lends and invests at a spread to intermediate and long-term interest rates which remain relatively low and without what management believes to be near term prospects for sustained improvement. This together with
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significant price competition for loans in the Bank’s marketplace have resulted in suboptimal investing and lending rates. These factors are expected to continue to exert downward pressure on net interest margin.
The banking industry continues to be faced with new and complex regulatory requirements and enhanced supervisory oversight. The financial markets expect that regulatory relief will be forthcoming, but the timing, magnitude and positive impact of any such relief are yet to be determined. In the current environment, banking regulators are increasingly concerned about, among other things, growth, commercial real estate concentrations, underwriting of commercial real estate and commercial and industrial loans, capital levels, cyber security and predatory sales practices. Regulatory requirements and enhanced supervisory oversight are exerting downward pressure on revenues and upward pressure on required capital levels and the cost of doing business.
Overview – 2016 Versus 2015
Analysis of 2016 Earnings. Net income and EPS for 2016 were $30.9 million and $1.34, respectively, representing increases of 19.3% and 9.8%, respectively, over the comparable 2015 amounts. Dividends per share increased 5.8% from $.52 for 2015 to $.55 for 2016. Returns on average assets and average equity for 2016 were .93% and 10.62%, respectively, as compared to .89% and 10.64%, respectively, for 2015.
Net income for 2016 increased $5.0 million over 2015. The increase was primarily attributable to an increase in net interest income of $10.5 million, or 13.9%, and a decrease in the provision for loan losses of $837,000. The impact of these items was partially offset by increases in noninterest expense, before debt extinguishment costs, of $4.7 million and income tax expense of $1.6 million.
The increase in net interest income was primarily driven by growth in average interest-earning assets of $431.2 million, or 15.4%, partially offset by a seven basis point decline in net interest margin. Average interest-earning assets grew mostly because of increases in the average balances of loans of $373.4 million, or 18.8%, and securities of $45.6 million, or 5.7%. Although most of the loan growth occurred in mortgage loans, commercial and industrial loans also grew with an increase in average outstandings of $23.5 million, or 27.5%. The growth in loans and securities was primarily funded by growth in the average balances of noninterest-bearing checking deposits of $56.0 million, or 7.6%, interest-bearing deposits of $319.1 million, or 21.6%, and stockholders’ equity of $47.5 million, or 19.5%.
The decrease in the provision for loan losses for 2016 versus the prior year was largely due to lesser loan growth, a decline in historical loss rates and a lower increase in specific reserves. These items were partially offset by higher net chargeoffs in 2016.
The increase in noninterest expense, before debt extinguishment costs, of $4.7 million, or 10.4%, was largely attributable to increases in salaries, employee benefits expense, consulting expense, occupancy and equipment expense and computer and telecommunications expense. The increase in consulting expense included a one-time charge of $800,000 in 2016 for advisory services rendered in renegotiating the Bank’s data processing contract. The Corporation expects that the cost savings negotiated by the consultant over the life of the contract will far exceed the one-time consulting charge.
In the fourth quarter of 2016, the Corporation adopted ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting” effective as of January 1, 2016. Adoption of the ASU increased 2016 net income through a credit to income tax expense in the amount of $385,000, or $.02 per share.
The increase in income tax expense was attributable to higher pre-tax earnings in 2016 as compared to the prior year, partially offset by the credit to income tax expense from the adoption of ASU 2016-09, additional New York State income tax benefits derived from the Corporation’s captive REIT and the inclusion of a one-time charge of $402,000 in 2015 caused by changes in New York City tax law.
Analysis of Fourth Quarter 2016 Earnings. Net income for the fourth quarter of 2016 was $7.5 million, an increase of $900,000, or 13.6%, over $6.6 million earned in the same quarter of 2015. EPS was $.31 for the fourth quarter of 2016, unchanged from the fourth quarter of 2015. The increase in net income was primarily attributable to an increase in net interest income of $2.1 million, partially offset by increases in salaries of $133,000, occupancy and equipment expense of $182,000 and income tax expense of $414,000, and a partial writedown of $168,000 on the Bank’s investment in a trade association. The increases in net interest income, salaries and occupancy and equipment expense occurred for substantially the same reasons discussed with respect to the full year periods. Excluding the aforementioned one-time charge of $402,000, income tax expense also increased for the same reasons discussed with respect to the full year periods.
Asset Quality. The Bank’s allowance for loan losses to total loans decreased three basis points from 1.21% at year-end 2015 to 1.18% at year-end 2016. The decrease was primarily due to improved economic conditions and a reduction in the historical loss component of the allowance for loan losses.
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The credit quality of the Bank’s loan portfolio at year-end 2016 was excellent. Nonaccrual loans amounted to $2.6 million, or .10% of total loans outstanding, compared to $1.4 million, or .06%, at December 31, 2015, and troubled debt restructurings amounted to $1.5 million, or .06% of total loans outstanding at December 31, 2016. Of the troubled debt restructurings, $757,000 were performing in accordance with their modified terms and $788,000 were nonaccrual and included in the aforementioned amount of nonaccrual loans. Troubled debt restructurings declined $2.9 million during 2016 from $4.5 million at year-end 2015. The decrease was primarily attributable to the payoff of two loans to one borrower, partially offset by two loans that were restructured in troubled debt restructurings during the year. Loans past due 30 through 89 days amounted to $1.1 million, or .04% of total loans outstanding, at December 31, 2016, compared to $1.0 million, or .04%, at December 31, 2015.
The credit quality of the Bank’s securities portfolio at year-end 2016 was also excellent. The Bank’s mortgage securities were backed by mortgages underwritten on conventional terms, with 60% of these securities being full faith and credit obligations of the U.S. government and the balance being obligations of U.S. government sponsored entities. The remainder of the Bank’s securities portfolio principally consisted of high quality, general obligation municipal securities rated AA or better by major rating agencies.
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 Allowance for Loan and Lease Losses Committee (“ALLL Committee”), which is a management committee chaired by the Chief Credit 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 independent loan review consultants and the Bank’s credit department. In addition, and in consultation with the Bank’s Chief Financial Officer and Chief Risk Officer, the ALLL Committee is responsible for implementing and maintaining accounting policies and procedures surrounding the calculation of the required allowance. The Board Loan Committee reviews and approves the Bank’s Loan Policy at least once each calendar year. The Bank’s allowance for loan losses is reviewed and ratified by the Board Loan Committee on a quarterly basis and is subject to periodic examination by the OCC whose safety and soundness examination includes a determination as to the adequacy of the allowance for loan losses 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 and then measure impairment losses 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 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. The Bank’s highest average annualized loss experience over periods of 24, 36, 48 or 60 months is generally the starting point in determining its allowance for loan losses for each pool of loans. Management believes that this approach appropriately reflects losses from the current economic cycle and those incurred losses 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. 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: (1) delinquencies, (2) economic conditions as judged by things such as national and local unemployment levels, (3) changes in value of underlying collateral as judged by things such as median home prices, commercial vacancy rates and forecasted vacancy and rental rates in the Bank’s service area, (4) trends in the nature and volume of loans, (5) concentrations of credit, (6) changes in lending policies and procedures, (7) experience, ability and depth of lending staff, (8) changes in the quality of the loan review function, (9) environmental risks, and (10) loan risk ratings. Substantially all of the Bank’s allowance for loan losses allocable to pools of loans that are collectively evaluated for impairment results from these qualitative adjustments to historical loss experience. Because of the nature of the qualitative 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.
18
(dollars in thousands, except per share data) | 2023 | 2022 | 2021 | 2020 | 2019 | |||||||||||||||
INCOME STATEMENT DATA: | ||||||||||||||||||||
Interest Income | $ | 155,483 | $ | 134,210 | $ | 122,959 | $ | 131,216 | $ | 143,850 | ||||||||||
Interest Expense | 68,618 | 18,497 | 16,152 | 29,188 | 43,681 | |||||||||||||||
Net Interest Income | 86,865 | 115,713 | 106,807 | 102,028 | 100,169 | |||||||||||||||
Provision (Credit) for Credit Losses | (326 | ) | 2,331 | (2,573 | ) | 3,006 | 33 | |||||||||||||
Net Income | 26,239 | 46,932 | 43,089 | 41,203 | 41,555 | |||||||||||||||
PER SHARE DATA: | ||||||||||||||||||||
Basic Earnings | $ | 1.16 | $ | 2.05 | $ | 1.82 | $ | 1.73 | $ | 1.68 | ||||||||||
Diluted Earnings | 1.16 | 2.04 | 1.81 | 1.72 | 1.67 | |||||||||||||||
Cash Dividends Declared | 0.84 | 0.82 | 0.78 | 0.74 | 0.70 | |||||||||||||||
Dividend Payout Ratio | 72.41 | % | 40.20 | % | 43.09 | % | 43.02 | % | 41.92 | % | ||||||||||
Book Value | $ | 16.83 | $ | 16.24 | $ | 17.81 | $ | 17.11 | $ | 16.26 | ||||||||||
BALANCE SHEET DATA AT YEAR END: | ||||||||||||||||||||
Total Assets | $ | 4,235,900 | $ | 4,281,511 | $ | 4,068,789 | $ | 4,069,141 | $ | 4,097,843 | ||||||||||
Loans | 3,248,064 | 3,311,733 | 3,105,036 | 3,033,454 | 3,188,249 | |||||||||||||||
Allowance for Credit Losses | 28,992 | 31,432 | 29,831 | 33,037 | 29,289 | |||||||||||||||
Deposits | 3,270,986 | 3,464,634 | 3,315,245 | 3,321,588 | 3,144,016 | |||||||||||||||
Borrowed Funds | 542,500 | 411,000 | 311,322 | 306,097 | 528,182 | |||||||||||||||
Stockholders' Equity | 380,146 | 364,536 | 413,812 | 407,118 | 389,108 | |||||||||||||||
AVERAGE BALANCE SHEET DATA: | ||||||||||||||||||||
Total Assets | $ | 4,235,989 | $ | 4,247,052 | $ | 4,151,577 | $ | 4,140,867 | $ | 4,194,355 | ||||||||||
Loans | 3,260,903 | 3,276,589 | 2,976,061 | 3,110,512 | 3,217,530 | |||||||||||||||
Allowance for Credit Losses | 30,291 | 30,604 | 31,300 | 33,180 | 30,080 | |||||||||||||||
Deposits | 3,431,990 | 3,536,709 | 3,425,976 | 3,257,317 | 3,276,699 | |||||||||||||||
Borrowed Funds | 397,928 | 289,584 | 281,191 | 457,939 | 494,785 | |||||||||||||||
Stockholders' Equity | 367,496 | 386,839 | 416,885 | 393,662 | 391,613 | |||||||||||||||
FINANCIAL RATIOS: | ||||||||||||||||||||
Return on Average Assets (ROA) | 0.62 | % | 1.11 | % | 1.04 | % | 1.00 | % | 0.99 | % | ||||||||||
Return on Average Equity (ROE) | 7.14 | % | 12.13 | % | 10.34 | % | 10.47 | % | 10.61 | % | ||||||||||
Average Equity to Average Assets | 8.68 | % | 9.11 | % | 10.04 | % | 9.51 | % | 9.34 | % |
Overview – 2023 Versus 2022
Analysis of 2023 Earnings. Net income and diluted earnings per share (“EPS”) for 2023 were $26.2 million and $1.16, respectively. Dividends per share increased 2.4% from $0.82 for 2022 to $0.84 for 2023. ROA and ROE for 2023 were 0.62% and 7.14%, respectively, compared to 1.11% and 12.13%, respectively, for 2022.
Net income and EPS for 2023 were $26.2 million and $1.16, respectively, compared to $46.9 million and $2.04, respectively, in 2022. The principal drivers of the decreases were declines in net interest income of $28.8 million, or 24.9%, and a loss on sale of securities of $3.5 million. These items were partially offset by a decrease in income tax expense of $8.1 million and a decrease in the provision for credit losses of $2.7 million. The decline in net interest income primarily resulted from the current rate environment’s impact on the Bank’s liability sensitive balance sheet. Reductions in net income negatively impacted key financial ratios for the year as compared to historical results. For the year ended December 31, 2023, the ROA was 0.62%, ROE was 7.14%, the net interest margin was 2.16%, and the efficiency ratio was 65.52%.
Over the second half of 2023, the pace of the decline in the net interest margin slowed considerably. After a 57 basis point reduction in the margin during the first two quarters of 2023, over the final two quarters of 2023 the margin decreased 17 basis points ("bps"). The slowing downward trend in the net interest margin largely resulted from a large portion of the wholesale funding and time deposits being repriced to higher market rates by mid-2023 and two balance sheet repositioning transactions in the first quarter of 2023 that helped reduce the Bank’s liability sensitive position. Additionally, as the federal funds rate held steady in the second half of the year, the demand for higher rates from depositors slowed.
For the year ended December 31, 2023, net interest income declined due to an increase in interest expense of $50.1 million that was only partially offset by a $21.3 million increase in interest income. Year over year, the cost of interest-bearing liabilities increased 186 bps while the yield on interest-earning assets increased 48 bps. Also contributing to the decline in net interest income was a shift in the mix of funding as average noninterest-bearing deposits decreased $217.9 million while average interest-bearing liabilities increased $221.6 million as depositors took advantage of interest rates not seen in over a decade.
Noninterest income declined $2.8 million year over year excluding the net gains and losses on sales of securities and the disposition of premises and fixed assets. The primary factor reducing noninterest income for the current year was a $2.3 million decline in the net pension credit, excluding service costs. The remaining difference was related to a payment received in 2022 for the conversion of the Bank’s retail broker and advisory accounts to LPL.
Noninterest expense declined $3.0 million, or 4.4%, for the year ended December 31, 2023, as compared to the prior year. Reductions in salaries and employee benefits of $3.7 million primarily drove the decline as short-term incentive compensation and stock-based compensation costs were substantially lower than 2022 based on the Company falling short of established performance metrics for 2023. The primary offset to the lower salaries and employee benefits was a $782,000 increase in FDIC insurance expense due to higher assessment rates.
The Bank recorded a credit loan loss provision of $326,000 during 2023. Changes in the loan loss reserve were driven largely by adjustments for economic conditions offset by net chargeoffs of $2.1 million, or 6 bps of average loans. The ACL to total loans ("reserve coverage ratio") at year end 2023 was 0.89% of total loans as compared to 0.95% of total loans at December 31, 2022. Past due loans and nonaccrual loans were modest at $3.1 million and $1.1 million, respectively, at December 31, 2023. During the fourth quarter of 2023, the Bank partially charged off a previously identified substandard commercial and industrial loan relationship in the amount of $1.4 million. The remaining outstanding balance of $632,000 is fully reserved and represents the majority of outstanding nonaccrual loans. Overall credit quality in the loan and investment portfolios remains strong.
Income tax expense decreased $8.1 million and the effective tax rate (income tax expense as a percentage of pre-tax book income) declined from 19.4% in 2022 to 11.0% in 2023. 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.
Asset Quality. The Bank’s reserve coverage ratio was 0.89% at December 31, 2023, compared to 0.95% at December 31, 2022. The decrease in the reserve coverage ratio was mainly due to improvements in historical loss rates and other portfolio metrics, partially offset by specific reserves taken against two commercial and industrial loans. Gross loan chargeoffs and recoveries were $2.2 million and $96,000, respectively, for the year ended December 31, 2023.
Nonaccrual loans were $1.1 million, or 0.03% of total loans outstanding, at December 31, 2023. The Bank had no nonaccrual loans at December 31, 2022. Loans modified for borrowers experiencing financial difficulty prior to 2023 amounted to $431,000, or 0.01% of total loans outstanding, at December 31, 2023, compared to $480,000, or 0.01%, at December 31, 2022. All such modifications are performing in accordance with their modified terms at December 31, 2023. Loans past due 30 through 89 days amounted to $3.1 million, or 0.10% of total loans outstanding, at December 31, 2023, compared to $750,000, or 0.02%, at December 31, 2022.
The Bank’s mortgage securities are backed by mortgages underwritten on conventional terms, with 26% of these securities being full faith and credit obligations of the U.S. government and the balance being obligations of U.S. government sponsored entities. The remainder of the Bank’s securities portfolio principally consists of high quality, general obligation municipal securities rated AA or better by major rating agencies and investment grade corporate bonds of large U.S. financial institutions. In selecting securities for purchase, the Bank uses credit agency ratings for screening purposes only and then performs its own credit analysis. On an ongoing basis, the Bank periodically assesses the credit strength of the securities in its portfolio and makes decisions to hold or sell based on such assessments.
Looking Forward to 2024. Management is encouraged by recent declines in inflation figures that may lead to reductions in short-term rates in 2024. Our liability-sensitive balance sheet should perform well in a falling rate environment. Current expectations are for our net interest margin to remain under pressure during the first half of 2024 before improving in the second half of the year based on falling rate assumptions and an improving yield curve.
Management continues to pursue ways to reduce noninterest expense as a tactic to offset the impact of the decline in net interest income yet remains cognizant of preventing short term expense reductions that could have longer term negative impacts on shareholder value. We invested in upgrades to the Bank’s core system, business online banking, branch systems and other ancillary systems that were completed in the first quarter of 2024. Both customer facing technology and back-office operations will see benefits. We anticipate a lower run rate of noninterest expenses in 2024 including the cost associated with making these technology upgrades.
Overview –2022 Versus 2021
Analysis of 2022 Earnings. Net income and diluted EPS for 2022 were $46.9 million and $2.04, respectively. Dividends per share increased 5.1% from $0.78 for 2021 to $0.82 for 2022. ROA and ROE for 2022 were 1.11% and 12.13%, respectively, compared to 1.04% and 10.34%, respectively, for 2021.
Net income for 2022 was $46.9 million, an increase of $3.8 million, or 8.9%, as compared to 2021. The increase was primarily due to growth in net interest income of $8.9 million and a decrease in noninterest expense of $1.1 million. These items were partially offset by increases in the provision for credit losses of $4.9 million and income tax expense of $1.1 million.
The increase in net interest income reflected growth in interest income on loans of $10.1 million due to higher average loans outstanding of $300.5 million in 2022 offset by $2.3 million of growth in interest expense on total interest-bearing liabilities resulting from increases in short-term rates. Also contributing to the increase was a favorable shift in the mix of funding as an increase in average checking deposits of $96.1 million outpaced the growth in average interest-bearing liabilities of $23.0 million resulting in average checking deposits comprising a larger portion of total funding. Net interest margin for 2022 was 2.89% versus 2.74% for 2021.
In 2022, we originated $656 million in mortgage loans at a weighted average rate of approximately 3.69% which included $452 million and $204 million of commercial and residential mortgages at weighted average rates of 3.66% and 3.74%, respectively. The Bank’s commercial and industrial loan portfolio grew $18.1 million to $108 million in 2022 and had a weighted average rate of 6.34%.
The provision for credit losses increased $4.9 million when comparing the full year periods from a credit of $2.6 million in 2021 to a charge of $2.3 million in 2022. The provision for 2022 was mainly due to an increase in outstanding loans, deteriorating economic conditions and low net chargeoffs, partially offset by lower historical loss rates.
Total noninterest income remained flat from the prior year although several line items had ups and downs. BOLI and merchant card services revenues increased by $618,000 and $410,000, respectively. The Bank received a final transition payment of $477,000 for the conversion of the Bank’s retail broker and advisory accounts. Service charges on deposit accounts increased $232,000. These increases were offset by a decrease in investment services income of $693,000 as the shift to an outside service provider resulted in a revenue sharing agreement and less assets under management. Also, there were no net gains on sales of securities in 2022 down from $1.1 million in 2021.
The decrease in noninterest expense of $1.1 million reflected the reduction in debt extinguishment costs from 2021. The Bank did have increases in noninterest expense during 2022. Salaries and benefits expense increased $1.3 million due to the hiring of seasoned banking professionals, competitive mid-year salary increases in 2022 and higher stock-based compensation expense. The Bank had a net loss of $553,000 on the disposition of premises and fixed assets relating to the Bank’s former buildings in Glen Head and costs relating to the branding initiative in the Bank’s branches of $531,000. Other items contributing to increases in noninterest expense included the cost of new branch locations on the east end of Long Island, two branch relocations, new corporate office space in Melville, NY, higher marketing expense and increases in other costs of operating the business. All increases in expenses were offset by branch optimization and back-office consolidation initiatives.
Income tax expense increased $1.1 million and the effective tax rate increased from 19.2% to 19.4% when comparing the full year periods. The increase in the effective tax rate was mainly due to a decrease in the percentage of pre-tax income derived from tax-exempt sources. The increase in income tax expense was due to higher pre-tax earnings in 2022 as compared to the prior year and the higher effective tax rate.
Asset Quality. The Bank’s reserve coverage ratio was 0.95% at December 31, 2022, compared to 0.96% at December 31, 2021. The decrease in the reserve coverage ratio was mainly due to improvements in historical loss rates, partially offset by current and forecasted economic conditions. Gross loan chargeoffs and recoveries were $884,000 and $154,000, respectively, for the year ended December 31, 2022.
The Bank had no nonaccrual loans at December 31, 2022, compared to $1.2 million, or 0.04% of total loans outstanding, at December 31, 2021. Modifications negotiated prior to 2022 amounted to $480,000, or 0.01% of total loans outstanding, at December 31, 2022, compared to $554,000, or 0.02%, at December 31, 2021. All such modifications were performing in accordance with their modified terms at December 31, 2022. Loans past due 30 through 89 days amounted to $750,000, or 0.02% of total loans outstanding, at December 31, 2022, compared to $460,000, or 0.01%, at December 31, 2021.
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 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 judgments 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 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 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. 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 (probability of default/loss given default) 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 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 arising from loan growth, loan concentrations and economic forecasts of unemployment, GDP and vacancies. At December 31, 2023, the ACL was composed approximately 77% of Q-factors, 21% of historical losses and 2% reserves on individually evaluated loans. 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.
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 in the 2023 and 2022 periods and include such amounts in the 2021 period. Unrealized gains and losses were immaterial in 2021.
2023 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||
Average | Interest/ | Average | Average | Interest/ | Average | Average | Interest/ | Average | ||||||||||||||||||||||||||||
(dollars in thousands) | Balance | Dividends | Rate | Balance | Dividends | Rate | Balance | Dividends | Rate | |||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Interest-earning bank balances | $ | 48,879 | $ | 2,508 | 5.13 | % | $ | 35,733 | $ | 674 | 1.89 | % | $ | 200,063 | $ | 261 | 0.13 | % | ||||||||||||||||||
Investment securities: | ||||||||||||||||||||||||||||||||||||
Taxable | 584,450 | 20,155 | 3.45 | 442,758 | 9,121 | 2.06 | 455,532 | 7,901 | 1.73 | |||||||||||||||||||||||||||
Nontaxable (1) | 196,341 | 6,271 | 3.19 | 318,836 | 10,206 | 3.20 | 345,688 | 10,799 | 3.12 | |||||||||||||||||||||||||||
Loans (1) | 3,260,903 | 127,868 | 3.92 | 3,276,589 | 116,357 | 3.55 | 2,976,061 | 106,271 | 3.57 | |||||||||||||||||||||||||||
Total interest-earning assets | 4,090,573 | 156,802 | 3.83 | 4,073,916 | 136,358 | 3.35 | 3,977,344 | 125,232 | 3.15 | |||||||||||||||||||||||||||
Allowance for credit losses | (30,291 | ) | (30,604 | ) | (31,300 | ) | ||||||||||||||||||||||||||||||
Net interest-earning assets | 4,060,282 | 4,043,312 | 3,946,044 | |||||||||||||||||||||||||||||||||
Cash and due from banks | 30,847 | 33,471 | 33,808 | |||||||||||||||||||||||||||||||||
Premises and equipment, net | 32,027 | 37,376 | 38,700 | |||||||||||||||||||||||||||||||||
Other assets | 112,833 | 132,893 | 133,025 | |||||||||||||||||||||||||||||||||
$ | 4,235,989 | $ | 4,247,052 | $ | 4,151,577 | |||||||||||||||||||||||||||||||
Liabilities and Stockholders' Equity: | ||||||||||||||||||||||||||||||||||||
Savings, NOW & money market deposits | $ | 1,657,947 | 32,164 | 1.94 | $ | 1,728,897 | 7,180 | 0.42 | $ | 1,782,789 | 4,414 | 0.25 | ||||||||||||||||||||||||
Time deposits | 553,096 | 19,267 | 3.48 | 368,922 | 5,296 | 1.44 | 300,374 | 5,712 | 1.90 | |||||||||||||||||||||||||||
Total interest-bearing deposits | 2,211,043 | 51,431 | 2.33 | 2,097,819 | 12,476 | 0.59 | 2,083,163 | 10,126 | 0.49 | |||||||||||||||||||||||||||
Short-term borrowings | 17,529 | 950 | 5.42 | 57,119 | 1,207 | 2.11 | 54,416 | 1,427 | 2.62 | |||||||||||||||||||||||||||
Long-term debt | 380,399 | 16,237 | 4.27 | 232,465 | 4,814 | 2.07 | 226,775 | 4,599 | 2.03 | |||||||||||||||||||||||||||
Total interest-bearing liabilities | 2,608,971 | 68,618 | 2.63 | 2,387,403 | 18,497 | 0.77 | 2,364,354 | 16,152 | 0.68 | |||||||||||||||||||||||||||
Checking deposits | 1,220,947 | 1,438,890 | 1,342,813 | |||||||||||||||||||||||||||||||||
Other liabilities | 38,575 | 33,920 | 27,525 | |||||||||||||||||||||||||||||||||
3,868,493 | 3,860,213 | 3,734,692 | ||||||||||||||||||||||||||||||||||
Stockholders' equity | 367,496 | 386,839 | 416,885 | |||||||||||||||||||||||||||||||||
$ | 4,235,989 | $ | 4,247,052 | $ | 4,151,577 | |||||||||||||||||||||||||||||||
Net interest income (1) | $ | 88,184 | $ | 117,861 | $ | 109,080 | ||||||||||||||||||||||||||||||
Net interest spread (1) | 1.20 | % | 2.58 | % | 2.47 | % | ||||||||||||||||||||||||||||||
Net interest margin (1) | 2.16 | % | 2.89 | % | 2.74 | % |
(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 for 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 a combined impact of volume and rate have been allocated to the changes due to volume and the changes due to rate.
2023 Versus 2022 | 2022 Versus 2021 | |||||||||||||||||||||||
Increase (decrease) due to changes in: | Increase (decrease) due to changes in: | |||||||||||||||||||||||
Net | Net | |||||||||||||||||||||||
(in thousands) | Volume | Rate | Change | Volume | Rate | Change | ||||||||||||||||||
Interest Income: | ||||||||||||||||||||||||
Interest-earning bank balances | $ | 325 | $ | 1,509 | $ | 1,834 | $ | (381 | ) | $ | 794 | $ | 413 | |||||||||||
Investment securities: | ||||||||||||||||||||||||
Taxable | 3,550 | 7,484 | 11,034 | (244 | ) | 1,464 | 1,220 | |||||||||||||||||
Nontaxable | (3,900 | ) | (35 | ) | (3,935 | ) | (855 | ) | 262 | (593 | ) | |||||||||||||
Loans | (594 | ) | 12,105 | 11,511 | 10,707 | (621 | ) | 10,086 | ||||||||||||||||
Total interest income | (619 | ) | 21,063 | 20,444 | 9,227 | 1,899 | 11,126 | |||||||||||||||||
Interest Expense: | ||||||||||||||||||||||||
Savings, NOW & money market deposits | (226 | ) | 25,210 | 24,984 | (98 | ) | 2,864 | 2,766 | ||||||||||||||||
Time deposits | 3,652 | 10,319 | 13,971 | 1,140 | (1,556 | ) | (416 | ) | ||||||||||||||||
Short-term borrowings | (1,239 | ) | 982 | (257 | ) | 67 | (287 | ) | (220 | ) | ||||||||||||||
Long-term debt | 4,277 | 7,146 | 11,423 | 120 | 95 | 215 | ||||||||||||||||||
Total interest expense | 6,464 | 43,657 | 50,121 | 1,229 | 1,116 | 2,345 | ||||||||||||||||||
(Decrease) increase in net interest income | $ | (7,083 | ) | $ | (22,594 | ) | $ | (29,677 | ) | $ | 7,998 | $ | 783 | $ | 8,781 |
Net Interest Income – 2023 Versus 2022
Net interest income on a tax-equivalent basis was $88.2 million in 2023, a decrease of $29.7 million, or 25.2%, from $117.9 million in 2022. Net interest income declined due to an increase in interest expense that was only partially offset by an increase in interest income. Year over year, the cost of interest-bearing liabilities increased 186 bps while the yield on interest-earning assets increased 48 bps. Also contributing to the decline in net interest income was a shift in the mix of funding as average noninterest-bearing deposits decreased $217.9 million while average interest-bearing liabilities increased $221.6 million as depositors took advantage of interest rates not seen in over a decade.
Net Interest Income – 2022 Versus 2021
Net interest income on a tax-equivalent basis was $117.9 million in 2022, an increase of $8.8 million, or 8.1%, from $109.1 million in 2021. The increase in net interest income reflected growth in interest income on loans of $10.1 million due to higher average loans outstanding of $300.5 million, or 10.1%, to $3.3 billion in 2022, offset by $2.3 million of growth in interest expense on total interest-bearing liabilities. Also contributing to the increase was a favorable shift in the mix of funding as an increase in average checking deposits of $96.1 million, or 7.2%, outpaced the growth in average interest-bearing liabilities of $23.0 million, or 1.0%, resulting in average checking deposits comprising a larger portion of total funding.
Noninterest Income
Noninterest income includes service charges on deposit accounts, gains or losses on sales of securities and other assets, income on BOLI, and all other items of income, other than interest, resulting from the business activities of the Corporation.
Noninterest income was $6.3 million in 2023 compared to $11.9 million in 2022. Excluding the net gains and losses on sales of securities and the disposition of premises and fixed assets, noninterest income was $9.6 million in 2023 compared to $12.4 million in 2022. The primary factor reducing noninterest income for the current year was a $2.3 million decline in the net pension credit, excluding service costs. The remaining difference was related to a payment received in 2022 for the conversion of the Bank’s retail broker and advisory accounts to LPL.
Total noninterest income in 2022 of $11.9 million decreased $0.7 million from the prior year. Investment services income decreased $693,000 as the shift to an outside service provider resulted in a revenue sharing agreement and less assets under management. The Bank had a net loss of $553,000 on the disposition of premises and fixed assets relating to the Bank’s former buildings in Glen Head, NY and there were no net gains on sales of securities in 2022 down from $1.1 million in 2021. These decreases were offset by increases in BOLI and merchant card services revenues of $618,000 and $410,000, respectively. Service charges on deposit accounts increased $232,000 and the Bank received a final transition payment of $477,000 for the conversion of the Bank’s retail broker and advisory accounts.
Noninterest Expense
Noninterest expense is comprised of salaries and employee benefits and other personnel expense, occupancy and equipment expense and other operating expenses incurred in supporting the various business activities of the Corporation.
Noninterest expense declined $3.0 million, or 4.4%, for the year ended December 31, 2023, as compared to 2022. Reductions in salaries and employee benefits of $3.7 million primarily drove the decline as short-term incentive compensation and stock-based compensation costs were substantially lower than 2022 based on the Company falling short of established performance metrics for 2023. The primary offset to the lower salaries and employee benefits was a $782,000 increase in FDIC insurance expense due to higher assessment rates.
Noninterest expense was $67.0 million in 2022, compared to $68.6 million in 2021. The decrease reflects the reduction in debt extinguishment costs from 2021. The Bank did have increases in noninterest expense during 2022. Salaries and benefits expense increased $1.3 million due to the hiring of seasoned banking professionals, competitive mid-year salary increases in 2022 and higher stock-based compensation expense. Other items contributing to the increase in noninterest expense include the cost of new branch locations on the east end of Long Island, two branch relocations, new corporate office space in Melville, NY, higher marketing expense, costs relating to the branding initiative in the Bank’s branches of $531,000 and increases in other costs of operating the business. All increases in expenses were offset by branch optimization and back-office consolidation initiatives.
Income Taxes
The Corporation’s effective tax rate was 11.0% and 19.4% in 2023 and 2022, respectively. The effective tax rate reflects the tax benefits derived from the Bank’s municipal securities portfolio, ownership of BOLI and maintenance of a captive REIT.
2023 Versus 2022. Income tax expense decreased $8.1 million due to lower pre-tax earnings in 2023 and a decrease in the effective tax rate. The decrease in the effective tax rate is mainly due to an increase in the percentage of pre-tax income derived from the REIT and BOLI in 2023.
2022 Versus 2021. Income tax expense increased $1.1 million due to higher pre-tax earnings in 2022 and an increase in the effective tax rate. The increase in the effective tax rate was mainly due to a decrease in the percentage of pre-tax income derived from tax-exempt municipal securities and BOLI in 2022.
Financial Condition
Total assets were $4.2 billion at December 31, 2023, a decrease of $45.6 million, or 1.1%, from the previous year end. The decrease was primarily attributable to a decrease in loans of $63.7 million, or 1.9%, partially offset by an increase in securities of $22.5 million, or 3.3%. Total deposits decreased $193.6 million to $3.3 billion at December 31, 2023. Total borrowings increased $131.5 million, or 32.0%, due to an increase in short-term borrowings of $70.0 million and long-term debt of $61.5 million. Stockholders’ equity increased $15.6 million, or 4.3%, from December 31, 2022. The increase was primarily due to net income of $26.2 million and an increase in the after-tax value of the Bank’s AFS investment securities of $6.2 million, partially offset by cash dividends declared of $18.9 million.
Investment Securities.The following table presents the estimated fair value of AFS securities at December 31, 2023 and 2022.
(in thousands) | 2023 | 2022 | ||||||
State and municipals | $ | 143,621 | $ | 305,247 | ||||
Pass-through mortgage securities | 138,603 | 148,520 | ||||||
Collateralized mortgage obligations | 182,262 | 113,394 | ||||||
SBA agency obligations | 125,476 | — | ||||||
Corporate bonds | 105,915 | 106,252 | ||||||
$ | 695,877 | $ | 673,413 |
The following table presents the maturities and weighted average tax equivalent yields of the Bank’s AFS investment securities at December 31, 2023. Yields on AFS securities have been computed based on amortized cost.
Principal Maturing (1) | ||||||||||||||||||||||||||||||||
Within | After One But | After Five But | After | |||||||||||||||||||||||||||||
One Year | Within Five Years | Within Ten Years | Ten Years | |||||||||||||||||||||||||||||
(dollars in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||
State and municipals | $ | 3,076 | 3.26 | % | $ | 11,315 | 2.83 | % | $ | 33,999 | 3.09 | % | $ | 95,231 | 3.22 | % | ||||||||||||||||
Pass-through mortgage securities | — | — | 67 | 2.58 | — | — | 138,536 | 1.59 | ||||||||||||||||||||||||
Collateralized mortgage obligations | — | — | — | — | — | — | 182,262 | 3.52 | ||||||||||||||||||||||||
SBA agency obligations | — | — | — | — | 30,960 | 6.29 | 94,516 | 6.47 | ||||||||||||||||||||||||
Corporate bonds | — | — | 105,915 | 4.20 | — | — | — | — | ||||||||||||||||||||||||
$ | 3,076 | 3.26 | % | $ | 117,297 | 4.07 | % | $ | 64,959 | 4.62 | % | $ | 510,545 | 3.49 | % |
(1) Maturities shown are stated maturities, except in the case of municipal securities, which are shown at the earlier of their stated maturity or pre-refunded dates. Securities backed by mortgages, which include pass-through mortgage securities, collateralized mortgage obligations and certain SBA agency obligations, are expected to have periodic repayments resulting in average lives shorter than the stated maturities shown in the table above.
During 2023, the Bank sold $148.9 million of fixed rate municipal securities at a loss of $3.5 million. In 2021, the Bank sold $70.6 million of mortgage-backed securities at a gain of $1.1 million. No securities were sold in 2022.
During 2023, the Bank received cash dividends of $2.0 million on its FRB and FHLB stock, representing an average yield of 7.61%.
Loans. The composition of the Bank’s loan portfolio is set forth below.
December 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Commercial and industrial | $ | 116,163 | $ | 108,493 | ||||
Commercial mortgages: | ||||||||
Multifamily | 857,163 | 906,498 | ||||||
Other | 829,090 | 789,140 | ||||||
Owner-occupied | 233,461 | 220,855 | ||||||
Residential mortgages: | ||||||||
Closed end | 1,166,887 | 1,240,144 | ||||||
Revolving home equity | 44,070 | 45,213 | ||||||
Consumer and other | 1,230 | 1,390 | ||||||
3,248,064 | 3,311,733 | |||||||
Allowance for credit losses | (28,992 | ) | (31,432 | ) | ||||
$ | 3,219,072 | $ | 3,280,301 |
Maturity information for loans outstanding at December 31, 2023 is set forth below. Variable rate loans have varying repricing dates but are disclosed at their contractual maturity.
Maturity | ||||||||||||||||||||||||||||||||
Within | After One But Within | After Five But Within | After | |||||||||||||||||||||||||||||
One Year | Five Years | Fifteen Years | Fifteen Years | Total | ||||||||||||||||||||||||||||
(in thousands) | Fixed | Variable | Fixed | Variable | Fixed | Variable | ||||||||||||||||||||||||||
Commercial and industrial | $ | 58,430 | $ | 29,190 | $ | 10,074 | $ | 18,469 | $ | — | $ | — | $ | — | $ | 116,163 | ||||||||||||||||
Commercial mortgages: | ||||||||||||||||||||||||||||||||
Multifamily | — | 33,847 | 59,164 | 139,038 | 406,586 | 34,245 | 184,283 | 857,163 | ||||||||||||||||||||||||
Other | 37,551 | 103,332 | 23,814 | 316,624 | 215,541 | 22,938 | 109,290 | 829,090 | ||||||||||||||||||||||||
Owner-occupied | 3 | 4,070 | 4,877 | 122,521 | 30,045 | 329 | 71,616 | 233,461 | ||||||||||||||||||||||||
Residential mortgages: | ||||||||||||||||||||||||||||||||
Closed end (1) | 98 | 13,746 | 71 | 75,710 | 17,789 | 557,153 | 502,826 | 1,167,393 | ||||||||||||||||||||||||
Revolving home equity | 2,285 | — | 12,884 | 1,152 | 27,749 | — | — | 44,070 | ||||||||||||||||||||||||
Consumer and other | 615 | 68 | 547 | — | — | — | — | 1,230 | ||||||||||||||||||||||||
$ | 98,982 | $ | 184,253 | $ | 111,431 | $ | 673,514 | $ | 697,710 | $ | 614,665 | $ | 868,015 | $ | 3,248,570 |
(1) Certain fixed rate residential mortgage loans are included in a fair value hedging relationship. The amortized cost excludes a contra asset of $506,000 related to basis adjustments for loans in the closed portfolio under the portfolio layer method at December 31, 2023. These basis adjustments would be allocated to the amortized cost of specific loans within the pool if the hedge was de-designated. See "Note 7 - Derivatives" to the Corporation’s consolidated financial statements of this Form 10-K for more information on the fair value hedge.
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.
December 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Loans including modifications to borrowers experiencing financial difficulty: | ||||||||
Modified and performing according to their modified terms | $ | 431 | $ | 480 | ||||
Past due 30 through 89 days | 3,086 | 750 | ||||||
Past due 90 days or more and still accruing | — | — | ||||||
Nonaccrual | 1,053 | — | ||||||
4,570 | 1,230 | |||||||
Other real estate owned | — | — | ||||||
$ | 4,570 | $ | 1,230 |
The past due status of a loan is based on the contractual terms in the loan agreement. Unless a loan is well secured and in the process of collection, the accrual of interest income is discontinued when a loan becomes 90 days past due as to principal or interest payments. The accrual of interest income on a loan is also discontinued when it is determined that the borrower will not be able to make principal and interest payments according to the contractual terms of the current loan agreement. When the accrual of interest income is discontinued on a loan, any accrued but unpaid interest is reversed against current period income.
Loan Risk Ratings. Risk ratings of the Corporation’s loans are set forth in the tables below. Risk ratings are defined in “Note C – Loans” to the Corporation’s consolidated financial statements of this Form 10-K. Deposit account overdrafts are not assigned a risk rating and appear as “not rated” in the following tables.
December 31, 2023 | ||||||||||||||||||||||||||||
Internally Assigned Risk Rating | ||||||||||||||||||||||||||||
Special | ||||||||||||||||||||||||||||
(in thousands) | Pass | Watch | Mention | Substandard | Doubtful | Not Rated | Total | |||||||||||||||||||||
Commercial and industrial | $ | 112,732 | $ | 2,709 | $ | — | $ | 722 | $ | — | $ | — | $ | 116,163 | ||||||||||||||
Commercial mortgages: | ||||||||||||||||||||||||||||
Multifamily | 857,163 | — | — | — | — | — | 857,163 | |||||||||||||||||||||
Other | 807,630 | 916 | — | 20,544 | — | — | 829,090 | |||||||||||||||||||||
Owner-occupied | 228,107 | 5,354 | — | — | — | — | 233,461 | |||||||||||||||||||||
Residential mortgages: | ||||||||||||||||||||||||||||
Closed end | 1,166,556 | — | — | 331 | — | — | 1,166,887 | |||||||||||||||||||||
Revolving home equity | 44,070 | — | — | — | — | — | 44,070 | |||||||||||||||||||||
Consumer and other | 1,123 | — | — | — | — | 107 | 1,230 | |||||||||||||||||||||
$ | 3,217,381 | $ | 8,979 | $ | — | $ | 21,597 | $ | — | $ | 107 | $ | 3,248,064 |
December 31, 2022 | ||||||||||||||||||||||||||||
Internally Assigned Risk Rating | ||||||||||||||||||||||||||||
Special | ||||||||||||||||||||||||||||
(in thousands) | Pass | Watch | Mention | Substandard | Doubtful | Not Rated | Total | |||||||||||||||||||||
Commercial and industrial | $ | 96,154 | $ | 12,339 | $ | — | $ | — | $ | — | $ | — | $ | 108,493 | ||||||||||||||
Commercial mortgages: | ||||||||||||||||||||||||||||
Multifamily | 900,199 | 6,299 | — | — | — | — | 906,498 | |||||||||||||||||||||
Other | 781,343 | 934 | — | 6,863 | — | — | 789,140 | |||||||||||||||||||||
Owner-occupied | 215,576 | 5,279 | — | — | — | — | 220,855 | |||||||||||||||||||||
Residential mortgages: | ||||||||||||||||||||||||||||
Closed end | 1,239,865 | 279 | — | — | — | — | 1,240,144 | |||||||||||||||||||||
Revolving home equity | 45,213 | — | — | — | — | — | 45,213 | |||||||||||||||||||||
Consumer and other | 1,257 | — | — | — | — | 133 | 1,390 | |||||||||||||||||||||
$ | 3,279,607 | $ | 25,130 | $ | — | $ | 6,863 | $ | — | $ | 133 | $ | 3,311,733 |
Allowance and Provision for Credit Losses.The ACL decreased by $2.4 million during 2023 amounting to $29.0 million, or 0.89% of total loans, on December 31, 2023, compared to $31.4 million, or 0.95% of total loans, at December 31, 2022. The decrease in the reserve coverage ratio was mainly due to improvements in historical loss rates and other portfolio metrics, partially offset by reserves taken against two individually evaluated commercial and industrial loans. Nonaccrual loans, modifications to borrowers experiencing financial difficulty and loans past due 30 through 89 days remain at low levels.
During 2023, the Bank had loan chargeoffs of $2.2 million, recoveries of $96,000 and recorded a credit provision for credit losses of $326,000. The credit provision recorded in 2023 was mainly due to improvements in historical loss rates, economic forecasts of unemployment and GDP, and other portfolio metrics and a decrease in outstanding mortgage loans, partially offset by net chargeoffs and reserves for individually evaluated loans.
During 2022, the Bank had loan chargeoffs of $884,000, recoveries of $154,000 and recorded a provision for credit losses of $2.3 million. The provision was mainly attributable to loan growth, economic conditions and net chargeoffs of $730,000, partially offset by improvements in 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 the “Application of Critical Accounting Policies” section of this document, 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 C – Loans” to the Corporation’s consolidated financial statements of this Form 10-K.
The following table sets forth balances and credit ratios of the Bank’s loan portfolio.
December 31, | ||||||||
(dollars in thousands) | 2023 | 2022 | ||||||
Total loans outstanding | $ | 3,248,064 | $ | 3,311,733 | ||||
Average loans outstanding | 3,260,903 | 3,276,589 | ||||||
Allowance for credit losses | 28,992 | 31,432 | ||||||
Total nonaccrual loans | 1,053 | — | ||||||
Net chargeoffs | 2,114 | 730 | ||||||
Allowance for credit losses as a percentage of total loans | 0.89 | % | 0.95 | % | ||||
Nonaccrual loans as a percentage of total loans | 0.03 | % | — | % | ||||
Net chargeoffs as a percentage of average loans outstanding | 0.06 | % | 0.02 | % | ||||
Allowance for credit losses as a multiple of nonaccrual loans | 27.5x | — |
The following table sets forth net chargeoffs by loan type, average loans during the period and the percentage of net chargeoffs over average loans.
December 31, | ||||||||||||||||||||||||
2023 | 2022 | |||||||||||||||||||||||
Net | Average | % of Average | Net | Average | % of Average | |||||||||||||||||||
(dollars in thousands) | Chargeoffs | Loans | Loans | Chargeoffs | Loans | Loans | ||||||||||||||||||
Commercial and industrial | $ | 1,945 | $ | 108,453 | 1.79 | % | $ | 357 | $ | 104,883 | 0.34 | % | ||||||||||||
SBA PPP | — | — | — | — | 7,565 | — | ||||||||||||||||||
Commercial mortgages: | ||||||||||||||||||||||||
Multifamily | — | 861,758 | — | — | 922,463 | — | ||||||||||||||||||
Other | (15 | ) | 801,772 | — | — | 757,119 | — | |||||||||||||||||
Owner-occupied | — | 242,917 | — | — | 219,449 | — | ||||||||||||||||||
Residential mortgages: | ||||||||||||||||||||||||
Closed end | 176 | 1,199,594 | 0.01 | 372 | 1,218,741 | 0.03 | ||||||||||||||||||
Revolving home equity | — | 45,321 | — | — | 45,429 | — | ||||||||||||||||||
Consumer and other | 8 | 1,088 | 0.74 | 1 | 940 | 0.11 | ||||||||||||||||||
$ | 2,114 | $ | 3,260,903 | 0.06 | % | $ | 730 | $ | 3,276,589 | 0.02 | % |
The following table sets forth the allocation of the Bank’s total ACL by loan type.
December 31, | ||||||||||||||||
2023 | 2022 | |||||||||||||||
% of Loans | % of Loans | |||||||||||||||
to Total | to Total | |||||||||||||||
(dollars in thousands) | Amount | Loans | Amount | Loans | ||||||||||||
Commercial and industrial | $ | 2,030 | 3.6 | % | $ | 1,543 | 3.3 | % | ||||||||
Commercial mortgages: | ||||||||||||||||
Multifamily | 6,817 | 26.4 | 8,430 | 27.4 | ||||||||||||
Other | 7,850 | 25.5 | 7,425 | 23.8 | ||||||||||||
Owner-occupied | 3,104 | 7.2 | 3,024 | 6.7 | ||||||||||||
Residential mortgages: | ||||||||||||||||
Closed end | 8,838 | 35.9 | 10,633 | 37.4 | ||||||||||||
Revolving home equity | 339 | 1.4 | 362 | 1.4 | ||||||||||||
Consumer and other | 14 | — | 15 | — | ||||||||||||
$ | 28,992 | 100.0 | % | $ | 31,432 | 100.0 | % |
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 December 31, 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 NY metropolitan area continues to improve, inflation, increasing interest rates and housing legislation pose new 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.
Deposits and Other Borrowings. Total deposits were $3.3 billion at December 31, 2023, compared to $3.5 billion at December 31, 2022. Decreases in noninterest-bearing checking deposits of $191.0 million, or 14.4%, and savings, NOW and money market deposits of $115.1 million, or 6.9%, was partially offset by growth in time deposits of $112.5 million, or 23.5%.
The aggregate amount of uninsured deposits (amounts greater than or equal to $250,000, which is the maximum amount for federal deposit insurance) was $1.7 billion at December 31, 2023 and $2.0 billion at December 31, 2022.
The following table sets forth the remaining maturity of uninsured time deposits, by account.
(in thousands) | December 31, 2023 | |||
3 months or less | $ | 28,662 | ||
Over 3 through 6 months | 19,605 | |||
Over 6 through 12 months | 18,967 | |||
Over 12 months | 3,070 | |||
$ | 70,304 |
Borrowings include short-term and long-term FHLB advances. Total borrowings increased $131.5 million from $411.0 million at year-end 2022 to $542.5 million at year-end 2023. Short-term borrowings and long-term debt increased $70.0 million and $61.5 million, respectively. The increase in long-term debt includes $275.0 million new FHLB advances partially offset by maturities of $213.5 million.
Capital. Stockholders’ equity totaled $380.1 million at December 31, 2023, an increase of $15.6 million from $364.5 million at December 31, 2022. The increase was primarily attributable to net income of $26.2 million and an increase in the after-tax value of the Bank’s AFS investment securities of $6.2 million, partially offset by cash dividends declared of $18.9 million.
The Corporation and the Bank elected to adopt the CBLR framework in 2020. 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.
The Corporation’s ROE was 7.14%, 12.13% and 10.34% for the years ended December 31, 2023, 2022 and 2021, respectively and its ROA was 0.62%, 1.11% and 1.04%, respectively. Book value per share increased 3.6% during 2023 to $16.83 at December 31, 2023, from $16.24 at December 31, 2022. The decrease in ROE in 2023 as compared to 2022 was due to lower net income as well as a decrease in the net unrealized loss in the AFS securities portfolio. Based on the Corporation’s market value per share at December 31, 2023 of $13.24, the dividend yield is 6.34%.
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 ratio of the Corporation and the Bank at December 31, 2023 was 10.05% and 10.13%, respectively. 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 2023.
Cash Flows and Liquidity
Cash Flows. During 2023, the Corporation’s cash and cash equivalent position decreased by $13.3 million, from $74.2 million at December 31, 2022 to $60.9 million at December 31, 2023. The decrease occurred primarily because cash used to repay deposits and borrowings, purchase securities, originate loans and pay cash dividends exceeded cash provided by sales, paydowns or repayments of securities and loans, deposit inflows, proceeds from long-term debt and operations.
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 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.
Based on securities and loan collateral in place at the FRBNY and FHLBNY, the Bank had borrowing capacity of approximately $1.5 billion at December 31, 2023, which includes $386.1 million of unencumbered AFS securities. The Bank’s borrowing capacity may be adjusted by the FRBNY or the FHLBNY 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.
Off-Balance Sheet Arrangements and Contractual Obligations. Commitments to extend credit and letters of credit arise in the normal course of the Bank’s business of meeting the financing needs of its customers and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. Since some of the commitments to extend credit and letters of credit are expected to expire without being drawn upon and, with respect to unused home equity, small business and certain other lines, can be frozen, reduced or terminated by the Bank based on the financial condition of the borrower, the total commitment amounts do not necessarily represent future cash requirements.
The Bank's exposure to credit loss in the event of non-performance by the other party to financial instruments for commitments to extend credit and letters of credit is represented by the contractual notional amount of these instruments. The Bank uses the same credit policies in making commitments to extend credit, and generally uses the same credit policies for letters of credit, as it does for on-balance sheet instruments such as loans.
The Corporation believes that its current sources of liquidity are sufficient to fulfill the obligations it has at December 31, 2023 pursuant to off-balance sheet arrangements and contractual obligations.
ITEM 7A. 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 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 time 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 December 31, 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 December 31, 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 6.2 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 December 31, 2024 and calculations of EVE at December 31, 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 December 31, 2023 | 2024 | |||||||||||||
Percent Change | Percent Change | |||||||||||||
From | From | |||||||||||||
Rate Change Scenario (dollars in thousands) | Amount | Base Case | Amount | Base Case | ||||||||||
+ 300 basis point rate shock | $ | 333,169 | -31.2% | $ | 57,283 | -23.2% | ||||||||
+ 200 basis point rate shock | 380,224 | -21.5% | 62,966 | -15.6% | ||||||||||
+ 100 basis point rate shock | 435,902 | -10.0% | 69,099 | -7.4% | ||||||||||
Base case (no rate change) | 484,094 | — | 74,632 | — | ||||||||||
- 100 basis point rate shock | 525,465 | 8.5% | 79,690 | 6.8% | ||||||||||
- 200 basis point rate shock | 547,540 | 13.1% | 83,398 | 11.7% | ||||||||||
- 300 basis point rate shock | 554,726 | 14.6% | 86,104 | 15.4% |
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 December 31, 2024 because the Bank might need to increase the rates paid on its nonmaturity deposits to remain competitive and any time deposits or 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 December 31, 2023, approximately $853 million of the Bank's loans and securities, or 21% of total assets, 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 pay less for time deposits or borrowings that mature and reprice at a lower interest rate and would be able to reduce non-maturity 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 in 2024 could be more significant than the amounts shown in the table.
Forward-Looking Statements
This Annual Report on Form 10-K 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 probable loan 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: the recent global pandemic, general economic conditions and trends, either nationally or locally; conditions in the securities markets; fluctuations in the trading price of our common stock; changes in interest rates; 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; our ability to maintain liquidity, including the percentage of uninsured deposits in our portfolio; 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 Item 1A, “Risk Factors” included in this report. 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 SEC from time to time.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
December 31, (dollars in thousands) | 2023 | 2022 | ||||||
Assets: | ||||||||
Cash and cash equivalents | $ | 60,887 | $ | 74,178 | ||||
Investment securities available-for-sale, at fair value | 695,877 | 673,413 | ||||||
Loans: | ||||||||
Commercial and industrial | 116,163 | 108,493 | ||||||
Secured by real estate: | ||||||||
Commercial mortgages | 1,919,714 | 1,916,493 | ||||||
Residential mortgages | 1,166,887 | 1,240,144 | ||||||
Home equity lines | 44,070 | 45,213 | ||||||
Consumer and other | 1,230 | 1,390 | ||||||
3,248,064 | 3,311,733 | |||||||
Allowance for credit losses | (28,992 | ) | (31,432 | ) | ||||
3,219,072 | 3,280,301 | |||||||
Restricted stock, at cost | 32,659 | 26,363 | ||||||
Bank premises and equipment, net | 31,414 | 31,660 | ||||||
Right-of-use asset - operating leases | 22,588 | 23,952 | ||||||
Bank-owned life insurance | 114,045 | 110,848 | ||||||
Pension plan assets, net | 10,740 | 11,049 | ||||||
Deferred income tax benefit | 28,996 | 31,124 | ||||||
Other assets | 19,622 | 18,623 | ||||||
$ | 4,235,900 | $ | 4,281,511 | |||||
Liabilities: | ||||||||
Deposits: | ||||||||
Checking | $ | 1,133,184 | $ | 1,324,141 | ||||
Savings, NOW and money market | 1,546,369 | 1,661,512 | ||||||
Time | 591,433 | 478,981 | ||||||
3,270,986 | 3,464,634 | |||||||
Short-term borrowings | 70,000 | — | ||||||
Long-term debt | 472,500 | 411,000 | ||||||
Operating lease liability | 24,940 | 25,896 | ||||||
Accrued expenses and other liabilities | 17,328 | 15,445 | ||||||
3,855,754 | 3,916,975 | |||||||
Commitments and Contingent Liabilities (Note L) | ||||||||
Stockholders' Equity: | ||||||||
Common stock, par value $0.10 per share: Authorized, 80,000,000 shares; Issued and outstanding, 22,590,942 and 22,443,380 shares | 2,259 | 2,244 | ||||||
Surplus | 79,728 | 78,462 | ||||||
Retained earnings | 355,887 | 348,597 | ||||||
437,874 | 429,303 | |||||||
Accumulated other comprehensive loss, net of tax | (57,728 | ) | (64,767 | ) | ||||
380,146 | 364,536 | |||||||
$ | 4,235,900 | $ | 4,281,511 |
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, (dollars in thousands, except per share data) | 2023 | 2022 | 2021 | |||||||||
Interest and dividend income: | ||||||||||||
Loans | $ | 127,866 | $ | 116,352 | $ | 106,266 | ||||||
Investment securities: | ||||||||||||
Taxable | 22,663 | 9,795 | 8,162 | |||||||||
Nontaxable | 4,954 | 8,063 | 8,531 | |||||||||
155,483 | 134,210 | 122,959 | ||||||||||
Interest expense: | ||||||||||||
Savings, NOW and money market deposits | 32,164 | 7,180 | 4,414 | |||||||||
Time deposits | 19,267 | 5,296 | 5,712 | |||||||||
Short-term borrowings | 950 | 1,207 | 1,427 | |||||||||
Long-term debt | 16,237 | 4,814 | 4,599 | |||||||||
68,618 | 18,497 | 16,152 | ||||||||||
Net interest income | 86,865 | 115,713 | 106,807 | |||||||||
Provision (credit) for credit losses | (326 | ) | 2,331 | (2,573 | ) | |||||||
Net interest income after provision (credit) for credit losses | 87,191 | 113,382 | 109,380 | |||||||||
Noninterest income: | ||||||||||||
Bank-owned life insurance | 3,197 | 3,017 | 2,399 | |||||||||
Service charges on deposit accounts | 3,034 | 3,157 | 2,925 | |||||||||
Net gain (loss) on sales of securities | (3,489 | ) | — | 1,104 | ||||||||
Gain (loss) on disposition of premises and fixed assets | 240 | (553 | ) | — | ||||||||
Other | 3,354 | 6,242 | 6,146 | |||||||||
6,336 | 11,863 | 12,574 | ||||||||||
Noninterest expense: | ||||||||||||
Salaries and employee benefits | 37,373 | 41,096 | 39,753 | |||||||||
Occupancy and equipment | 13,140 | 13,407 | 15,338 | |||||||||
Debt extinguishment | — | — | 1,021 | |||||||||
Other | 13,546 | 12,523 | 12,535 | |||||||||
64,059 | 67,026 | 68,647 | ||||||||||
Income before income taxes | 29,468 | 58,219 | 53,307 | |||||||||
Income tax expense | 3,229 | 11,287 | 10,218 | |||||||||
Net income | $ | 26,239 | $ | 46,932 | $ | 43,089 | ||||||
Weighted average: | ||||||||||||
Common shares | 22,550,562 | 22,868,658 | 23,655,635 | |||||||||
Dilutive stock options and restricted stock units | 82,609 | 99,895 | 107,348 | |||||||||
22,633,171 | 22,968,553 | 23,762,983 | ||||||||||
Earnings per share: | ||||||||||||
Basic | $ | 1.16 | $ | 2.05 | $ | 1.82 | ||||||
Diluted | $ | 1.16 | $ | 2.04 | $ | 1.81 | ||||||
Cash dividends declared per share | $ | 0.84 | $ | 0.82 | $ | 0.78 |
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31, (in thousands) | 2023 | 2022 | 2021 | |||||||||
Net income | $ | 26,239 | $ | 46,932 | $ | 43,089 | ||||||
Other comprehensive income (loss): | ||||||||||||
Change in net unrealized holding gains (losses) on available-for-sale securities | 9,133 | (83,835 | ) | (10,633 | ) | |||||||
Change in funded status of pension plan | 1,183 | (8,176 | ) | (1,341 | ) | |||||||
Change in net unrealized loss on derivative instruments | — | 1,750 | 3,535 | |||||||||
Other comprehensive income (loss) before income taxes | 10,316 | (90,261 | ) | (8,439 | ) | |||||||
Income tax expense (benefit) | 3,277 | (27,807 | ) | (2,556 | ) | |||||||
Other comprehensive income (loss) | 7,039 | (62,454 | ) | (5,883 | ) | |||||||
Comprehensive income (loss) | $ | 33,278 | $ | (15,522 | ) | $ | 37,206 |
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated | ||||||||||||||||||||||||
Other | ||||||||||||||||||||||||
Common Stock | Retained | Comprehensive | ||||||||||||||||||||||
(dollars in thousands) | Shares | Amount | Surplus | Earnings | Income/(Loss) | Total | ||||||||||||||||||
Balance, January 1, 2021 | 23,790,589 | $ | 2,379 | $ | 105,547 | $ | 295,622 | $ | 3,570 | $ | 407,118 | |||||||||||||
Net income | 43,089 | 43,089 | ||||||||||||||||||||||
Other comprehensive loss | (5,883 | ) | (5,883 | ) | ||||||||||||||||||||
Repurchase of common stock | (679,873 | ) | (68 | ) | (14,433 | ) | (14,501 | ) | ||||||||||||||||
Shares withheld upon the vesting and conversion of RSUs | (18,822 | ) | (2 | ) | (359 | ) | (361 | ) | ||||||||||||||||
Common stock issued under stock compensation plans | 105,674 | 11 | 259 | 270 | ||||||||||||||||||||
Common stock issued under dividend reinvestment and stock purchase plan | 43,028 | 4 | 831 | 835 | ||||||||||||||||||||
Stock-based compensation | 1,635 | 1,635 | ||||||||||||||||||||||
Cash dividends declared | (18,390 | ) | (18,390 | ) | ||||||||||||||||||||
Balance, December 31, 2021 | 23,240,596 | 2,324 | 93,480 | 320,321 | (2,313 | ) | 413,812 | |||||||||||||||||
Net income | 46,932 | 46,932 | ||||||||||||||||||||||
Other comprehensive loss | (62,454 | ) | (62,454 | ) | ||||||||||||||||||||
Repurchase of common stock | (915,868 | ) | (92 | ) | (17,797 | ) | (17,889 | ) | ||||||||||||||||
Shares withheld upon the vesting and conversion of RSUs | (27,287 | ) | (3 | ) | (573 | ) | (576 | ) | ||||||||||||||||
Common stock issued under stock compensation plans | 100,973 | 10 | 52 | 62 | ||||||||||||||||||||
Common stock issued under dividend reinvestment and stock purchase plan | 44,966 | 5 | 834 | 839 | ||||||||||||||||||||
Stock-based compensation | 2,466 | 2,466 | ||||||||||||||||||||||
Cash dividends declared | (18,656 | ) | (18,656 | ) | ||||||||||||||||||||
Balance, December 31, 2022 | 22,443,380 | 2,244 | 78,462 | 348,597 | (64,767 | ) | 364,536 | |||||||||||||||||
Net income | 26,239 | 26,239 | ||||||||||||||||||||||
Other comprehensive income | 7,039 | 7,039 | ||||||||||||||||||||||
Shares withheld upon the vesting and conversion of RSUs | (48,941 | ) | (5 | ) | (865 | ) | (870 | ) | ||||||||||||||||
Common stock issued under stock compensation plans | 133,796 | 14 | 46 | 60 | ||||||||||||||||||||
Common stock issued under dividend reinvestment and stock purchase plan | 62,707 | 6 | 836 | 842 | ||||||||||||||||||||
Stock-based compensation | 1,249 | 1,249 | ||||||||||||||||||||||
Cash dividends declared | (18,949 | ) | (18,949 | ) | ||||||||||||||||||||
Balance, December 31, 2023 | 22,590,942 | $ | 2,259 | $ | 79,728 | $ | 355,887 | $ | (57,728 | ) | $ | 380,146 |
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, (in thousands) | 2023 | 2022 | 2021 | |||||||||
Cash Flows From Operating Activities: | ||||||||||||
Net income | $ | 26,239 | $ | 46,932 | $ | 43,089 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Provision (credit) for credit losses | (326 | ) | 2,331 | (2,573 | ) | |||||||
Provision (credit) for deferred income taxes | (1,149 | ) | 670 | (56 | ) | |||||||
Depreciation and amortization of premises and equipment | 3,108 | 3,612 | 4,905 | |||||||||
Amortization of right-of-use asset - operating leases | 2,644 | 2,699 | 3,774 | |||||||||
Premium amortization on investment securities, net | 2,227 | 1,578 | 2,247 | |||||||||
Net (gain) loss on sales of securities | 3,489 | — | (1,104 | ) | ||||||||
Loss on debt extinguishment | — | — | 1,021 | |||||||||
(Gain) loss on disposition of premises and fixed assets | (240 | ) | 553 | — | ||||||||
Stock-based compensation expense | 1,249 | 2,466 | 1,635 | |||||||||
Accretion of cash surrender value on bank-owned life insurance | (3,197 | ) | (3,017 | ) | (2,399 | ) | ||||||
Pension expense (credit) | 1,492 | (129 | ) | (329 | ) | |||||||
Decrease in other liabilities | (384 | ) | (3,770 | ) | (2,522 | ) | ||||||
Other decreases (increases) in assets | (2,990 | ) | (2,501 | ) | 3,093 | |||||||
Net cash provided by operating activities | 32,162 | 51,424 | 50,781 | |||||||||
Cash Flows From Investing Activities: | ||||||||||||
Available-for-sale securities: | ||||||||||||
Proceeds from sales | 145,451 | — | 71,695 | |||||||||
Proceeds from maturities and redemptions | 56,413 | 45,054 | 113,736 | |||||||||
Purchases | (220,911 | ) | (69,562 | ) | (268,803 | ) | ||||||
Net decrease (increase) in loans | 61,555 | (207,427 | ) | (72,215 | ) | |||||||
Net increase in restricted stock | (6,296 | ) | (4,839 | ) | (710 | ) | ||||||
Purchases of premises and equipment, net | (2,862 | ) | (3,598 | ) | (7,697 | ) | ||||||
Proceeds from disposition of premises and fixed assets | 2,291 | 6,601 | — | |||||||||
Purchases of bank-owned life insurance | — | — | (20,000 | ) | ||||||||
Net cash provided by (used in) investing activities | 35,641 | (233,771 | ) | (183,994 | ) | |||||||
Cash Flows From Financing Activities: | ||||||||||||
Net increase (decrease) in deposits | (193,648 | ) | 149,389 | (6,343 | ) | |||||||
Net increase (decrease) in short-term borrowings | 70,000 | (125,000 | ) | 64,905 | ||||||||
Proceeds from long-term debt | 275,000 | 300,000 | — | |||||||||
Repayment of long-term debt | (213,500 | ) | (75,322 | ) | (60,701 | ) | ||||||
Proceeds from issuance of common stock, net of shares withheld | (28 | ) | 263 | 607 | ||||||||
Repurchase of common stock | — | (17,889 | ) | (14,501 | ) | |||||||
Cash dividends paid | (18,918 | ) | (18,591 | ) | (18,261 | ) | ||||||
Net cash provided by (used in) financing activities | (81,094 | ) | 212,850 | (34,294 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | (13,291 | ) | 30,503 | (167,507 | ) | |||||||
Cash and cash equivalents, beginning of year | 74,178 | 43,675 | 211,182 | |||||||||
Cash and cash equivalents, end of period | $ | 60,887 | $ | 74,178 | $ | 43,675 | ||||||
Supplemental Cash Flow Disclosures: | ||||||||||||
Cash paid for interest | $ | 64,319 | $ | 17,142 | $ | 16,713 | ||||||
Cash paid for income taxes | 3,676 | 11,610 | 11,650 | |||||||||
Operating cash flows from operating leases | 3,072 | 4,148 | 2,475 | |||||||||
Noncash investing and financing activities: | ||||||||||||
Right-of-use assets obtained in exchange for operating lease liabilities | 1,280 | 18,386 | — | |||||||||
Cash dividends payable | 4,744 | 4,713 | 4,648 | |||||||||
Bank premises transferred to held-for-sale | — | 2,407 | 3,796 |
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of The First of Long Island Corporation and 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. and The First of Long Island REIT, Inc. (“REIT”). The Corporation’s financial condition and operating results principally reflect those of the Bank and its subsidiaries. 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 have been eliminated.
The accounting and reporting policies of the Corporation reflect banking industry practice and conform to generally accepted accounting principles (“GAAP”) in the United States. The following is a summary of the Corporation’s significant accounting policies.
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.
Cash and Cash Equivalents
Cash and cash equivalents include cash and deposits with other financial institutions that generally mature within 90 days. Net cash flows are reported for customer loan and deposit transactions.
Investment Securities
Current accounting standards require that investment securities be classified as held-to-maturity (“HTM”), available-for-sale (“AFS”) or trading. The trading category is not applicable to any securities in the Bank's portfolio because the Bank does not buy or hold debt or equity securities principally for the purpose of selling in the near term. HTM securities, or debt securities which the Bank has the intent and ability to hold to maturity, are reported at amortized cost, net of allowance for credit losses (“ACL” or “allowance”), if any. AFS securities, or debt securities which are neither HTM securities nor trading securities, are reported at fair value, with unrealized gains and losses, net of the related income tax effect, included in other comprehensive income (loss) (“OCI”). Equity securities, if any, are carried at fair value, with changes in fair value reported in net income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.
Interest income includes amortization or accretion of purchase premium or discount. Premiums and discounts on securities are amortized or accreted using the level-yield method. Prepayments are anticipated for mortgage-backed securities. Premiums on municipal securities are amortized to the earlier of the stated maturity date or the first call date, while discounts on municipal securities are accreted to the stated maturity date. Realized gains and losses on the sale of securities are determined using the specific identification method.
Management measures expected credit losses on HTM debt securities, if any, on a collective basis by major security type. Accrued interest receivable on HTM debt securities is excluded from the estimate of credit losses.
For AFS securities in an unrealized loss position, management first evaluates whether the decline in fair value has resulted from an actual or estimated credit loss event. Management considers the extent to which fair value is less than amortized cost, changes to the rating of the security, and adverse conditions specifically related to the security. If this assessment indicates that a credit loss is likely, management then assesses whether it has the intent to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost and determines the present value of cash flows expected to be collected from the security as compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, an allowance is recorded for the estimated credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance is recognized in OCI. Accrued interest receivable on AFS securities is excluded from the estimate of credit losses.
Loans Held-for-Sale
Loans held-for-sale are carried at the lower of cost or fair value. Any subsequent declines in fair value below the initial carrying value are recorded as a valuation allowance established through a charge to noninterest income.
Loans and Allowance for Credit Losses
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost, net of the ACL. Amortized cost is the principal balance outstanding plus or minus net deferred loan costs and fees. Accrued interest receivable is reported in “Other assets” on the consolidated balance sheets and is excluded from the estimate of credit losses. Interest on loans is credited to income based on the principal amount outstanding. Direct loan origination costs, net of loan origination fees, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.
The past due status of a loan is based on the contractual terms in the loan agreement. Unless a loan is well secured and in the process of collection, the accrual of interest income is discontinued when a loan becomes 90 days past due as to principal or interest payments. The accrual of interest income on a loan is also discontinued when it is determined that the borrower will not be able to make principal and interest payments according to the contractual terms of the current loan agreement. When the accrual of interest income is discontinued on a loan, any accrued but unpaid interest is reversed against current period income. Interest received on nonaccrual loans is applied to the outstanding principal balance until the loans qualify for return to an accrual status, if ever. Return to an accrual status occurs when all the principal and interest amounts contractually past due are brought current and all future payments are reasonably assured.
The ACL is a valuation account 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 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 against the ACL, and subsequent recoveries, if any, are credited to the ACL.
Management identifies loans in the Bank’s portfolio that must be individually evaluated for loss due to disparate risk characteristics. For loans individually evaluated, an 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. 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 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, 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 ACL is an amount that management currently believes will be adequate to absorb current expected credit 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. Actual results could differ significantly from those estimates.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Corporation, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Bank Premises and Equipment and Operating Leases
Land is carried at cost. Other bank premises and equipment are carried at cost less accumulated depreciation and amortization. Buildings are depreciated using the straight-line method over their estimated useful lives, which range from 31 to 40 years. Building and leasehold improvements are depreciated using the straight-line method over the remaining lives of the buildings or leases, as applicable, or their estimated useful lives, whichever is shorter. The lives of the respective leases range from five years to fifteen years. Furniture, fixtures and equipment are depreciated using the straight-line method over their estimated useful lives, which range from three years to ten years. Premises and equipment held-for-sale, if any, is included in “other assets” on the Corporation’s consolidated balance sheets and carried at the lower of cost or fair value. Writedowns upon transfer to held-for-sale are included in “other noninterest expense” on the consolidated income statements. Fair value is based on an appraisal, where available, adjusted for estimated costs to sell.
The Bank determines if an arrangement is a lease at inception and recognizes a right-of-use (“ROU”) asset and lease liability at the commencement date based on the present value of lease payments over the lease term. As most of the Bank’s leases do not provide an implicit interest rate, the Bank uses its incremental borrowing rate to determine the present value of the lease payments. Leases with an initial lease term of 12 months or less are not recorded on the consolidated balance sheets. The Bank’s ROU asset and lease liability may include options to extend the lease when it is reasonably certain that the Bank will exercise that option. Lease expense is recognized on a straight-line basis over the lease term.
Bank-owned Life Insurance
The Bank is the owner and beneficiary of insurance policies on the lives of certain current and past employed officers. Bank-owned life insurance (“BOLI”) is recorded at the amount that can be realized under the contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement, if any.
Restricted Stock
The Bank is a member of and is required to own stock in the Federal Home Loan Bank of NY (“FHLBNY”) and the Federal Reserve Bank of NY (“FRBNY”). The amount of FHLBNY stock held is based on membership and the level of FHLBNY advances. The amount of FRBNY stock held is based on the Bank’s capital and surplus balances. These stocks do not have a readily determinable fair value, are carried at cost, classified as restricted stock and periodically evaluated for impairment based on the prospects for the ultimate recovery of cost. Cash dividends, if any, are reported as interest income on taxable investment securities.
Other Real Estate Owned
Real estate acquired through foreclosure or by deed-in-lieu of foreclosure is initially recorded at the lower of cost or fair value, less estimated selling costs and is included in “other assets” on the consolidated balance sheets. Chargeoffs recorded at the time of acquisition are charged to the ACL. Subsequently, decreases in the property’s estimated fair value are charged to earnings and credited to a valuation allowance and recoveries in fair value are credited to earnings and charged to the valuation allowance. Such adjustments to earnings are included in other noninterest expense along with any additional property maintenance costs incurred in owning the property. Rental income received from tenants of other real estate owned is included in other noninterest income.
Long-term Assets
Premises and equipment, intangible assets, BOLI and other long-term assets, if any, are reviewed for impairment when events indicate that their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, commercial letters of credit and standby letters of credit. The face amount of these items represents the exposure to loss, before considering collateral held or ability to repay. The Bank estimates credit losses on off-balance sheet credit exposures by considering the likelihood of an outstanding commitment converting into an outstanding loan and applying an estimate of expected lifetime credit losses used on similar portfolio segments, unless the obligation is unconditionally cancellable by the Bank. The ACL on off-balance sheet credit exposures is recorded in the line item “Accrued expenses and other liabilities” in the consolidated balance sheets and totaled $590,000 and $421,000, respectively, at December 31, 2023 and 2022. The ACL is adjusted through a provision (credit) for credit loss expense which is included in the line item “other noninterest expense” in the consolidated statements of income and amounted to $169,000, ($71,000) and $82,000 in 2023, 2022 and 2021, respectively. Off-balance sheet credit instruments are recorded on the balance sheet when they are funded or drawn down.
Derivatives
At the inception of a derivative contract, the Corporation designates the derivative as one of three types based on the Corporation's intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value hedge"), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"), or (3) an instrument with no hedging designation ("non-designated derivative"). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item is attributable to the hedged risk, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is recorded in OCI and is reclassified into earnings in the same period during which the hedged transaction affects earnings. The changes in the fair value of a derivative that is not designated is recorded currently in earnings, as noninterest income.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income or noninterest expense. Cash flows from hedges are classified in the consolidated statements of cash flows in the same manner as the items being hedged.
The Corporation formally documents the relationship between derivatives and hedged items, as well as the risk management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Corporation also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in cash flows of the hedged item. The Corporation discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in cash flows of the hedged item, the derivative is settled or terminated, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm or treatment of the derivative as a hedge is no longer appropriate or intended.
When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as interest expense. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in OCI are amortized into earnings over the same periods which the hedged transactions will affect earnings.
Income Taxes
A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year. A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law. The effects of future changes in tax laws or rates are not considered. The Corporation recognizes interest and/or penalties related to income tax matters in noninterest income or noninterest expense as appropriate.
Retirement Plans
Pension expense is the sum of service cost, interest cost, amortization of actuarial gains and losses and plan expenses, net of the expected return on plan assets and participant contributions. The service cost component of pension expense is included in salaries and employee benefits on the consolidated statements of income. All other components of pension expense are included in other noninterest income. Employee 401(k) plan expense is equal to the amount of the Corporation’s matching contributions and is included in salaries and employee benefits in the consolidated statements of income.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Operating Segments
While management monitors the revenue streams of the Bank’s various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the financial operations of the Bank are aggregated in one reportable operating segment.
Investment Services
Assets held in a fiduciary capacity are not assets of the Corporation and, accordingly, are not included in the accompanying consolidated financial statements. The Bank records investment services fees on the accrual basis.
Reclassifications
When appropriate, items in the prior year financial statements are reclassified to conform to the current period presentation.
Earnings Per Share
The Corporation calculates basic and diluted earnings per share (“EPS”) using the treasury stock method. Basic EPS excludes the dilutive effect of outstanding restricted stock units (“RSUs”) and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if outstanding RSUs were converted into shares of common stock that then shared in the earnings of the Corporation. Diluted EPS is computed by dividing net income by the weighted average number of common shares and dilutive RSUs. There were 101,480 and 33,017 RSUs excluded from the calculation of EPS at December 31, 2023 and 2022, because their inclusion would be anti-dilutive. There were no anti-dilutive RSUs at December 31, 2021. Other than the RSUs described in “Note I – Stock-Based Compensation,” the Corporation has no securities that could be converted into common stock nor does the Corporation have any contracts that could result in the issuance of common stock.
Stock-based Compensation
The Corporation’s stock-based compensation plans are described in “Note I – Stock-Based Compensation.” Compensation cost is determined for RSUs issued to employees and non-employee directors based on the grant date fair value of the award.
Compensation expense for RSUs is recognized over the applicable performance or service period, which is usually the vesting period. Compensation expense is adjusted at the end of the performance period, if applicable, to reflect the actual number of shares of the Corporation’s common stock into which the RSUs will be converted. The Corporation accounts for forfeitures as they occur.
Comprehensive Income
Comprehensive income (loss) includes net income and 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 net unrealized holding gains or losses on AFS securities and derivative instruments 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 sets forth the components of accumulated OCI, net of tax:
Current | ||||||||||||
Balance | Period | Balance | ||||||||||
(in thousands) | 12/31/2022 | Change | 12/31/2023 | |||||||||
Unrealized holding loss on available-for-sale securities | $ | (56,055 | ) | $ | 6,246 | $ | (49,809 | ) | ||||
Unrealized actuarial loss on pension plan | (8,712 | ) | 793 | (7,919 | ) | |||||||
Accumulated other comprehensive loss, net of tax | $ | (64,767 | ) | $ | 7,039 | $ | (57,728 | ) |
The components of OCI and the related tax effects are as follows:
(in thousands) | 2023 | 2022 | 2021 | |||||||||
Change in net unrealized holding gains (losses) on available-for-sale securities: | ||||||||||||
Change arising during the period | $ | 5,644 | $ | (83,835 | ) | $ | (9,529 | ) | ||||
Reclassification adjustment for loss (gain) included in net income (1) | 3,489 | — | (1,104 | ) | ||||||||
9,133 | (83,835 | ) | (10,633 | ) | ||||||||
Tax effect | 2,887 | (25,825 | ) | (3,163 | ) | |||||||
6,246 | (58,010 | ) | (7,470 | ) | ||||||||
Change in funded status of pension plan: | ||||||||||||
Unrecognized net gain (loss) arising during the period | 165 | (8,176 | ) | (1,341 | ) | |||||||
Amortization of net actuarial loss included in pension expense (2) | 1,018 | — | — | |||||||||
1,183 | (8,176 | ) | (1,341 | ) | ||||||||
Tax effect | 390 | (2,520 | ) | (438 | ) | |||||||
793 | (5,656 | ) | (903 | ) | ||||||||
Change in unrealized loss on derivative instrument: | ||||||||||||
Amount of gain during the period | — | 1,324 | 668 | |||||||||
Reclassification adjustment for net interest expense included in net income (3) | — | 426 | 2,867 | |||||||||
— | 1,750 | 3,535 | ||||||||||
Tax effect | — | 538 | 1,045 | |||||||||
— | 1,212 | 2,490 | ||||||||||
Other comprehensive income (loss) | $ | 7,039 | $ | (62,454 | ) | $ | (5,883 | ) |
(1) Represents net realized gains and losses arising from the sale of AFS securities, included in the consolidated statements of income in the line item “Net gain (loss) on sales of securities.” See “Note B – Investment Securities” for the income tax expense related to these net realized gains, 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 (see "Note J - Retirement Plans") and included in the consolidated statements of income in the line item "Salaries and employee benefits."
(3) Represents the net interest expense recorded from derivative transactions and included in the consolidated statements of income under “Interest expense.”
Adoption of New Accounting Standards
The Corporation did not adopt any new accounting standards in 2023.
Impact of Issued But Not Yet Effective Accounting Standards
There were no issued but not yet effective pronouncements at December 31, 2023 that could materially impact the Corporation’s financial position, results of operations or disclosures.
NOTE B – INVESTMENT SECURITIES
The following tables set forth the amortized cost and estimated fair values of the Bank’s AFS investment securities at December 31, 2023 and 2022.
2023 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
(in thousands) | Cost | Gains | Losses | Value | ||||||||||||
State and municipals | $ | 155,294 | $ | 317 | $ | (11,990 | ) | $ | 143,621 | |||||||
Pass-through mortgage securities | 165,734 | — | (27,131 | ) | 138,603 | |||||||||||
Collateralized mortgage obligations | 201,500 | 1,836 | (21,074 | ) | 182,262 | |||||||||||
SBA agency obligations | 126,228 | 331 | (1,083 | ) | 125,476 | |||||||||||
Corporate bonds | 119,000 | — | (13,085 | ) | 105,915 | |||||||||||
$ | 767,756 | $ | 2,484 | $ | (74,363 | ) | $ | 695,877 |
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 |
Small Business Administration ("SBA") agency obligations are floating rate, government guaranteed securities backed by $92.2 million of commercial mortgages and $33.3 million of equipment finance loans at December 31, 2023.
At December 31, 2023 and 2022, investment securities with a carrying value of $203.9 million and $350.8 million, respectively, were pledged as collateral to secure public deposits and borrowed funds.
There were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity at December 31, 2023 and 2022.
There was no allowance for credit losses associated with the investment securities portfolio at December 31, 2023 or 2022.
Securities With Unrealized Losses.The following tables set forth securities with unrealized losses at December 31, 2023 and 2022 presented by length of time the securities had been in a continuous unrealized loss position.
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 | $ | 29,522 | $ | (719 | ) | $ | 95,725 | $ | (11,271 | ) | $ | 125,247 | $ | (11,990 | ) | |||||||||
Pass-through mortgage securities | 2,361 | (1 | ) | 134,558 | (27,130 | ) | 136,919 | (27,131 | ) | |||||||||||||||
Collateralized mortgage obligations | — | — | 102,528 | (21,074 | ) | 102,528 | (21,074 | ) | ||||||||||||||||
SBA agency obligations | 98,879 | (1,083 | ) | — | — | 98,879 | (1,083 | ) | ||||||||||||||||
Corporate bonds | — | — | 105,915 | (13,085 | ) | 105,915 | (13,085 | ) | ||||||||||||||||
Total temporarily impaired | $ | 130,762 | $ | (1,803 | ) | $ | 438,726 | $ | (72,560 | ) | $ | 569,488 | $ | (74,363 | ) |
2022 | ||||||||||||||||||||||||
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 | $ | 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 | ) |
Following is a discussion of unrealized losses by type of security, none of which are considered impaired at December 31, 2023.
State and Municipals
At December 31, 2023, approximately $125.2 million of state and municipal bonds had an unrealized loss of $12.0 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 has the ability to hold 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 December 31, 2023, pass-through mortgage securities of approximately $136.9 million had an unrealized loss of $27.1 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 has the ability to hold 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 December 31, 2023, collateralized mortgage obligations of approximately $102.5 million had an unrealized loss of $21.1 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 has the ability to hold 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.
SBA Agency Obligations
At December 31, 2023, SBA agency obligations of approximately $98.9 million had an unrealized loss of $1.1 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 has the ability to hold 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 December 31, 2023, approximately $105.9 million of corporate bonds had an unrealized loss of $13.1 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 medium investment grade and rated A3 or higher. 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 December 31, 2023.
Sales of AFS Securities.Sales of AFS securities were as follows:
(in thousands) | 2023 | 2022 | 2021 | |||||||||
Proceeds | $ | 145,451 | $ | — | $ | 71,695 | ||||||
Gains | $ | — | $ | — | $ | 1,120 | ||||||
Losses | (3,489 | ) | — | (16 | ) | |||||||
Net gain (loss) | $ | (3,489 | ) | $ | — | $ | 1,104 |
The income tax expense (benefit) related to these net realized gains and losses was ($1.1 million) and $340,000 in 2023 and 2021, respectively, and is included in the consolidated statements of income in the line item “Income tax expense.”
Sales of HTM Securities. The Bank did not have any securities classified as HTM in 2023, 2022 or 2021.
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 December 31, 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 and asset-backed securities, consisting of pass-through mortgage securities, collateralized mortgage obligations and SBA agency 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 | $ | 3,078 | $ | 3,076 | ||||
After 1 through 5 years | 130,736 | 117,230 | ||||||
After 5 through 10 years | 35,930 | 33,999 | ||||||
After 10 years | 104,550 | 95,231 | ||||||
Mortgage and asset-backed securities | 493,462 | 446,341 | ||||||
$ | 767,756 | $ | 695,877 |
NOTE C – LOANS
The following table sets forth the loans outstanding by class of loans for the periods indicated.
December 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Commercial and industrial | $ | 116,163 | $ | 108,493 | ||||
Commercial mortgages: | ||||||||
Multifamily | 857,163 | 906,498 | ||||||
Other | 829,090 | 789,140 | ||||||
Owner-occupied | 233,461 | 220,855 | ||||||
Residential mortgages: | ||||||||
Closed end | 1,166,887 | 1,240,144 | ||||||
Revolving home equity | 44,070 | 45,213 | ||||||
Consumer and other | 1,230 | 1,390 | ||||||
$ | 3,248,064 | $ | 3,311,733 |
The following tables present the activity in the ACL for the years ended December 31, 2023, 2022 and 2021.
Balance at | Provision (Credit) for | Balance at | ||||||||||||||||||
(in thousands) | 1/1/2023 | Chargeoffs | Recoveries | Credit Losses | 12/31/2023 | |||||||||||||||
Commercial and industrial | $ | 1,543 | $ | 2,026 | $ | 81 | $ | 2,432 | $ | 2,030 | ||||||||||
Commercial mortgages: | ||||||||||||||||||||
Multifamily | 8,430 | — | — | (1,613 | ) | 6,817 | ||||||||||||||
Other | 7,425 | — | 15 | 410 | 7,850 | |||||||||||||||
Owner-occupied | 3,024 | — | — | 80 | 3,104 | |||||||||||||||
Residential mortgages: | ||||||||||||||||||||
Closed end | 10,633 | 176 | — | (1,619 | ) | 8,838 | ||||||||||||||
Revolving home equity | 362 | — | — | (23 | ) | 339 | ||||||||||||||
Consumer and other | 15 | 8 | — | 7 | 14 | |||||||||||||||
$ | 31,432 | $ | 2,210 | $ | 96 | $ | (326 | ) | $ | 28,992 |
Balance at | Provision (Credit) for | Balance at | ||||||||||||||||||
(in thousands) | 1/1/2022 | Chargeoffs | Recoveries | Credit Losses | 12/31/2022 | |||||||||||||||
Commercial and industrial | $ | 888 | $ | 511 | $ | 154 | $ | 1,012 | $ | 1,543 | ||||||||||
SBA PPP | 46 | — | — | (46 | ) | — | ||||||||||||||
Commercial mortgages: | ||||||||||||||||||||
Multifamily | 8,154 | — | — | 276 | 8,430 | |||||||||||||||
Other | 6,478 | — | — | 947 | 7,425 | |||||||||||||||
Owner-occupied | 2,515 | — | — | 509 | 3,024 | |||||||||||||||
Residential mortgages: | ||||||||||||||||||||
Closed end | 11,298 | 372 | — | (293 | ) | 10,633 | ||||||||||||||
Revolving home equity | 449 | — | — | (87 | ) | 362 | ||||||||||||||
Consumer and other | 3 | 1 | — | 13 | 15 | |||||||||||||||
$ | 29,831 | $ | 884 | $ | 154 | $ | 2,331 | $ | 31,432 |
Balance at | Provision (Credit) for | Balance at | ||||||||||||||||||
(in thousands) | 1/1/2021 | Chargeoffs | Recoveries | Credit Losses | 12/31/2021 | |||||||||||||||
Commercial and industrial | $ | 1,416 | $ | 307 | $ | 205 | $ | (426 | ) | $ | 888 | |||||||||
SBA PPP | 209 | — | — | (163 | ) | 46 | ||||||||||||||
Commercial mortgages: | ||||||||||||||||||||
Multifamily | 9,474 | 544 | — | (776 | ) | 8,154 | ||||||||||||||
Other | 4,913 | — | — | 1,565 | 6,478 | |||||||||||||||
Owner-occupied | 1,905 | 165 | 91 | 684 | 2,515 | |||||||||||||||
Residential mortgages: | ||||||||||||||||||||
Closed end | 14,706 | 189 | 22 | (3,241 | ) | 11,298 | ||||||||||||||
Revolving home equity | 407 | — | 254 | (212 | ) | 449 | ||||||||||||||
Consumer and other | 7 | 1 | 1 | (4 | ) | 3 | ||||||||||||||
$ | 33,037 | $ | 1,206 | $ | 573 | $ | (2,573 | ) | $ | 29,831 |
The credit provision recorded in 2023 was mainly due to improvements in historical loss rates, the economic forecasts of unemployment and GDP and other portfolio metrics and a decrease in outstanding mortgage loans, partially offset by net chargeoffs and allowances for individually evaluated loans. The provision recorded in 2022 was mainly due to an increase in outstanding mortgage loans, chargeoffs and deteriorating economic conditions, partially offset by lower historical loss rates. The credit provision recorded in 2021 was mainly due to improvements in economic conditions, asset quality and other portfolio metrics, partially offset by an increase in outstanding commercial mortgage loans and net chargeoffs.
Aging of Loans. The following tables present the aging of loans past due and loans in nonaccrual status by class of loans.
December 31, 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 | $ | 73 | $ | — | $ | — | $ | 722 | $ | — | $ | 795 | $ | 115,368 | $ | 116,163 | ||||||||||||||||
Commercial mortgages: | ||||||||||||||||||||||||||||||||
Multifamily | — | — | — | — | — | — | 857,163 | 857,163 | ||||||||||||||||||||||||
Other | 1,624 | — | — | — | — | 1,624 | 827,466 | 829,090 | ||||||||||||||||||||||||
Owner-occupied | — | — | — | — | — | — | 233,461 | 233,461 | ||||||||||||||||||||||||
Residential mortgages: | ||||||||||||||||||||||||||||||||
Closed end | 1,389 | — | — | — | 331 | 1,720 | 1,165,167 | 1,166,887 | ||||||||||||||||||||||||
Revolving home equity | — | — | — | — | — | — | 44,070 | 44,070 | ||||||||||||||||||||||||
Consumer and other | — | — | — | — | — | — | 1,230 | 1,230 | ||||||||||||||||||||||||
$ | 3,086 | $ | — | $ | — | $ | 722 | $ | 331 | $ | 4,139 | $ | 3,243,925 | $ | 3,248,064 |
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 December 31,2023, 2022 or 2021.
Accrued interest receivable from loans totaled $10.4 million and $9.2 million at December 31, 2023 and 2022, respectively, and is included in the line item “Other assets” on the consolidated balance sheets.
Loans to Directors and Executive Officers. At December 31, 2023, loans outstanding to executive officers and directors, including their immediate families and companies in which they are principal owners totaled $1.6 million. There were no such loans outstanding at December 31, 2022.
Loan Modifications. From time to time, the Bank may modify the terms of loans to borrowers experiencing financial difficulty in the form of principal forgiveness, an interest reduction, an other-than-insignificant payment delay or a term extension. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of 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.
The Bank did not modify any loans to borrowers experiencing financial difficulty during 2023, 2022 or 2021.
There were no modifications for which there was a payment default during 2023, 2022 and 2021 that were modified during the 12 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 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.
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 2023 by year of origination.
December 31, 2023 | ||||||||||||||||||||||||||||||||
Term Loans by Origination Year | Revolving | |||||||||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Loans (1) | Total | ||||||||||||||||||||||||
Commercial and industrial: | ||||||||||||||||||||||||||||||||
Risk rating: | ||||||||||||||||||||||||||||||||
Pass | $ | 46,086 | $ | 20,928 | $ | 22,289 | $ | 5,283 | $ | 1,978 | $ | 5,209 | $ | 10,959 | $ | 112,732 | ||||||||||||||||
Watch | — | — | 2,709 | — | — | — | — | 2,709 | ||||||||||||||||||||||||
Special Mention | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Substandard | — | 632 | — | — | — | — | 90 | 722 | ||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
$ | 46,086 | $ | 21,560 | $ | 24,998 | $ | 5,283 | $ | 1,978 | $ | 5,209 | $ | 11,049 | $ | 116,163 | |||||||||||||||||
Current-period gross chargeoffs | $ | — | $ | (1,354 | ) | $ | — | $ | — | $ | — | $ | — | $ | (672 | ) | $ | (2,026 | ) | |||||||||||||
Current-period recoveries | — | — | — | — | — | — | 81 | 81 | ||||||||||||||||||||||||
Current-period net chargeoffs | $ | — | $ | (1,354 | ) | $ | — | $ | — | $ | — | $ | — | $ | (591 | ) | $ | (1,945 | ) | |||||||||||||
Commercial mortgages – multifamily: | ||||||||||||||||||||||||||||||||
Risk rating: | ||||||||||||||||||||||||||||||||
Pass | $ | 42,030 | $ | 191,738 | $ | 176,836 | $ | 37,340 | $ | 116,805 | $ | 292,289 | $ | 125 | $ | 857,163 | ||||||||||||||||
Watch | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Special Mention | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Substandard | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
$ | 42,030 | $ | 191,738 | $ | 176,836 | $ | 37,340 | $ | 116,805 | $ | 292,289 | $ | 125 | $ | 857,163 | |||||||||||||||||
Current-period gross chargeoffs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Current-period recoveries | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Current-period net chargeoffs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Commercial mortgages – other: | ||||||||||||||||||||||||||||||||
Risk rating: | ||||||||||||||||||||||||||||||||
Pass | $ | 72,098 | $ | 195,215 | $ | 221,488 | $ | 97,080 | $ | 33,645 | $ | 188,078 | $ | 26 | $ | 807,630 | ||||||||||||||||
Watch | — | — | — | — | — | 916 | — | 916 | ||||||||||||||||||||||||
Special Mention | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Substandard | — | — | — | — | — | 20,544 | — | 20,544 | ||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
$ | 72,098 | $ | 195,215 | $ | 221,488 | $ | 97,080 | $ | 33,645 | $ | 209,538 | $ | 26 | $ | 829,090 | |||||||||||||||||
Current-period gross chargeoffs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Current-period recoveries | — | — | — | — | — | 15 | — | 15 | ||||||||||||||||||||||||
Current-period net chargeoffs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 15 | $ | — | $ | 15 | ||||||||||||||||
Commercial mortgages – owner-occupied: | ||||||||||||||||||||||||||||||||
Risk rating: | ||||||||||||||||||||||||||||||||
Pass | $ | 21,841 | $ | 53,796 | $ | 53,073 | $ | 23,638 | $ | 40,347 | $ | 32,618 | $ | 2,794 | $ | 228,107 | ||||||||||||||||
Watch | 277 | — | 5,077 | — | — | — | — | 5,354 | ||||||||||||||||||||||||
Special Mention | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Substandard | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
$ | 22,118 | $ | 53,796 | $ | 58,150 | $ | 23,638 | $ | 40,347 | $ | 32,618 | $ | 2,794 | $ | 233,461 | |||||||||||||||||
Current-period gross chargeoffs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Current-period recoveries | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Current-period net chargeoffs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
December 31, 2023 | ||||||||||||||||||||||||||||||||
Term Loans by Origination Year | Revolving | |||||||||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Loans (1) | Total | ||||||||||||||||||||||||
Residential mortgages (2): | ||||||||||||||||||||||||||||||||
Risk rating: | ||||||||||||||||||||||||||||||||
Pass | $ | 27,649 | $ | 195,602 | $ | 162,898 | $ | 34,055 | $ | 15,452 | $ | 731,406 | $ | 44,070 | $ | 1,211,132 | ||||||||||||||||
Watch | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Special Mention | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Substandard | — | — | — | — | — | 331 | — | 331 | ||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
$ | 27,649 | $ | 195,602 | $ | 162,898 | $ | 34,055 | $ | 15,452 | $ | 731,737 | $ | 44,070 | $ | 1,211,463 | |||||||||||||||||
Current-period gross chargeoffs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (176 | ) | $ | — | $ | (176 | ) | ||||||||||||||
Current-period recoveries | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Current-period net chargeoffs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (176 | ) | $ | — | $ | (176 | ) | ||||||||||||||
Consumer and other: | ||||||||||||||||||||||||||||||||
Risk rating: | ||||||||||||||||||||||||||||||||
Pass | $ | 45 | $ | 220 | $ | — | $ | — | $ | 100 | $ | 1 | $ | 757 | $ | 1,123 | ||||||||||||||||
Watch | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Special Mention | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Substandard | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Not Rated | — | — | — | — | — | — | 107 | 107 | ||||||||||||||||||||||||
$ | 45 | $ | 220 | $ | — | $ | — | $ | 100 | $ | 1 | $ | 864 | $ | 1,230 | |||||||||||||||||
Current-period gross chargeoffs | $ | — | $ | (8 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (8 | ) | ||||||||||||||
Current-period recoveries | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Current-period net chargeoffs | $ | — | $ | (8 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (8 | ) | ||||||||||||||
Total Loans | $ | 210,026 | $ | 658,131 | $ | 644,370 | $ | 197,396 | $ | 208,327 | $ | 1,271,392 | $ | 58,928 | $ | 3,248,570 | ||||||||||||||||
Total net chargeoffs | $ | — | $ | (1,362 | ) | $ | — | $ | — | $ | — | $ | (161 | ) | $ | (591 | ) | $ | (2,114 | ) |
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. Loan pools include: commercial and industrial loans; small business credit scored loans; owner-occupied commercial mortgages; multifamily commercial mortgages; other commercial mortgages; construction and land development loans; first-lien residential mortgages; junior-lien residential mortgages; first-lien home equity lines; junior-lien home equity lines; and consumer loans. The Bank’s highest average annualized loss experience over periods of 24, 36, 48 or 60 months is generally the starting point in determining its allowance for loan losses for each pool of loans. Management believes that this approach appropriately reflects losses from the current economic cycle and those incurred losses 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. 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: (1) delinquencies, (2) economic conditions as judged by things such as national and local unemployment levels, (3) changes in value of underlying collateral as judged by things such as median home prices, commercial vacancy rates and forecasted vacancy and rental rates in the Bank’s service area, (4) trends in the nature and volume of loans, (5) concentrations of credit, (6) changes in lending policies and procedures, (7) experience, ability and depth of lending staff, (8) changes in the quality of the loan review function, (9) environmental risks, and (10) loan risk ratings. Substantially all of the Bank’s allowance for loan losses allocable to pools of loans that are collectively evaluated for impairment results from these qualitative adjustments to historical loss experience. Because of the nature of the qualitative factors and the difficulty in assessing their impact, management’s resulting estimate of losses may not accurately reflect actual losses in the portfolio.
Troubled debt restructurings are by definition impaired loans and are generally reported at the present value of estimated future cash flows using the loan’s effective rate at inception. However, if a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported at the fair value of the collateral.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Corporation, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
40
Bank Premises and Equipment
Land is carried at cost. Other bank premises and equipment are carried at cost less accumulated depreciation and amortization. Buildings are depreciated using the straight-line method over their estimated useful lives, which range from thirty-one to forty years. Building and leasehold improvements are depreciated using the straight-line method over the remaining lives of the buildings or leases, as applicable, or their estimated useful lives, whichever is shorter. The lives of the respective leases range from five to twenty years. Furniture, fixtures and equipment are depreciated using the straight-line method over their estimated useful lives, which range from three to ten years. Land and building held-for-sale is included in Other Assets on the Corporation’s consolidated balance sheet and carried at the lower of cost or fair value.
Bank-owned Life Insurance
The Bank is the owner and beneficiary of insurance policies on the lives of certain officers. Bank-owned life insurance (“BOLI”) is recorded at the amount that can be realized under the contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement, if any.
Restricted Stock
The Bank is a member of and is required to own stock in the Federal Home Loan Bank of New York (“FHLB”) and the Federal Reserve Bank of New York (“FRB”). The amount of FHLB stock held is based on membership and the level of FHLB advances. The amount of FRB stock held is based on the Bank’s capital and surplus balances. These stocks do not have a readily determinable fair value, are carried at cost, classified as restricted stock and periodically evaluated for impairment based on the prospects for the ultimate recovery of cost. Cash dividends, if any, are reported as interest income on taxable investment securities.
Other Real Estate Owned
Real estate acquired through foreclosure or by deed-in-lieu of foreclosure is initially recorded at the lower of cost or fair value, less estimated selling costs and is included in other assets on the consolidated balance sheet. Chargeoffs recorded at the time of acquisition are charged to the allowance for loan losses. Thereafter, the Bank maintains a valuation allowance, representing decreases in the property’s estimated fair value, through charges to earnings. Such charges are included in other noninterest expense along with any additional property maintenance costs incurred in owning the property. Rental income received from tenants of other real estate owned is included in other noninterest income.
Long-term Assets
Premises and equipment, intangible assets, BOLI and other long-term assets, if any, are reviewed for impairment when events indicate that their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans, commercial letters of credit and standby letters of credit. The face amount of these items represents the exposure to loss, before considering collateral held or ability to repay. The Bank maintains a reserve for losses on off-balance-sheet credit exposures which is included in accrued expenses and other liabilities on the consolidated balance sheet. Off-balance-sheet credit instruments are recorded on the balance sheet when they are funded or drawn down.
Checking Deposits
The Bank’s commercial checking accounts generally have a related noninterest-bearing sweep account. The sole purpose of the sweep accounts is to reduce the reserve balances that the Bank is required to maintain with the FRB, and thereby increase funds available for investment. Although the sweep accounts are classified as savings accounts for regulatory purposes, they are included in checking deposits in the accompanying consolidated balance sheets.
Income Taxes
A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year. A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law. The effects of future changes in tax laws or rates are not considered. The Corporation recognizes interest and/or penalties related to income tax matters in noninterest income or noninterest expense as appropriate.
41
Retirement Plans
Pension expense is the sum of service cost, interest cost, amortization of actuarial gains and losses and plan expenses, net of the expected return on plan assets and participant contributions. Employee 401(k) plan expense is equal to the amount of matching contributions.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Stockholders’ Equity
Earnings Per Share. The Corporation calculates basic and diluted earnings per share (“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. Basic EPS excludes the dilutive effect of outstanding stock options and restricted stock units (“RSUs”) and is computed by dividing net income allocated to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if outstanding stock options and RSUs were converted into shares of common stock that then shared in the earnings of the Corporation. Diluted EPS is computed by dividing net income allocated to common stockholders by the weighted average number of common shares and dilutive stock options and RSUs. There were no anti-dilutive stock options or RSUs at December 31, 2017 or 2016. Anti-dilutive stock options and RSUs at December 31, 2015 were de minimis. Other than the stock options and RSUs described in “Note I – Stock-Based Compensation”, the Corporation has no securities that could be converted into common stock nor does the Corporation have any contracts that could result in the issuance of common stock.
The following table is a calculation of basic and diluted EPS for the periods indicated.
NOTE D – PREMISES AND EQUIPMENT AND OPERATING LEASES
Premises and equipment. Bank premises and equipment consist of the following:
December 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Land | $ | 9,002 | $ | 8,552 | ||||
Buildings and improvements | 22,250 | 22,120 | ||||||
Leasehold improvements | 12,412 | 12,002 | ||||||
Furniture and equipment | 37,010 | 36,595 | ||||||
Construction in process | 642 | 433 | ||||||
81,316 | 79,702 | |||||||
Accumulated depreciation and amortization | (49,902 | ) | (48,042 | ) | ||||
$ | 31,414 | $ | 31,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, except per share data) |
| 2017 |
| 2016 |
| 2015 | |||
Net income |
| $ | 35,122 |
| $ | 30,880 |
| $ | 25,890 |
Income allocated to participating securities (1) |
|
| 128 |
|
| 127 |
|
| — |
Income allocated to common stockholders |
| $ | 34,994 |
| $ | 30,753 |
| $ | 25,890 |
|
|
|
|
|
|
|
|
|
|
Weighted average: |
|
|
|
|
|
|
|
|
|
Common shares |
|
| 24,219,813 |
|
| 22,745,967 |
|
| 21,017,808 |
Dilutive stock options and restricted stock units (1) |
|
| 255,333 |
|
| 271,929 |
|
| 244,452 |
|
|
| 24,475,146 |
|
| 23,017,896 |
|
| 21,262,260 |
Earnings per share: |
|
|
|
|
|
|
|
|
|
Basic |
|
| $1.44 |
|
| $1.35 |
|
| $1.23 |
Diluted |
|
| $1.43 |
|
| $1.34 |
|
| $1.22 |
(1) RSUs awarded in 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 earnings of the Corporation and, therefore, the Corporation calculates 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 I – Stock-Based Compensation” for additional details on the RSUs awarded in 2016.
Stock Split. On October 27, 2016, the Corporation declared a 3-for-2 stock split. The stock split was effected through a 50% stock dividend. Additional shares issued as a result of the stock split were distributed on November 28, 2016 to stockholders of record on November 10, 2016, and are shown for 2016 on the line captioned “3-for-2 stock split” in the Consolidated Statement of Changes in Stockholders’ Equity. Share and per share amounts included in the consolidated financial statements and notes thereto have been adjusted as appropriate to reflect the effect of the split.
Public Offering of Common Stock. In May 2016, the Corporation sold 1,300,000 shares of common stock (1,950,000 shares post-split) in an underwritten public offering at a price of $29.00 per share ($19.33 post-split). The net proceeds of the offering, after the underwriting discount and offering expenses paid by the Corporation, were $35,270,000.
Stock-based Compensation
The Corporation’s stock-based compensation plans are described in “Note I – Stock-Based Compensation”. Compensation cost is determined for stock options and RSUs issued to employees and non-employee directors based on the grant date fair value of the award.
42
Compensation expense for performance-based RSUs is recognized over a three-year performance period, which is usually the vesting period, and adjusted at the end of the performance period to reflect the actual number of shares of the Corporation’s common stock into which the RSUs will be converted. Compensation expense for service-based RSUs is recognized over the applicable service period, which is usually the vesting period. Compensation expense for stock options is recognized ratably over the five-year vesting period or the period from the grant date to the participant’s eligible retirement date, whichever is shorter. The Corporation accounts for forfeitures as they occur.
Comprehensive Income
Comprehensive income includes net income and other comprehensive income (loss). Other comprehensive income (loss) 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 net 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 (loss) is recognized as a separate component of stockholders’ equity.
The components of other comprehensive income (loss) and the related tax effects are as follows:
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
| 2017 |
| 2016 |
| 2015 | |||
Change in net unrealized holding gains on available-for-sale securities: |
|
|
|
|
|
|
|
|
|
Change arising during the period |
| $ | (236) |
| $ | (15,153) |
| $ | (1,851) |
Reclassification adjustment for losses (gains) included in net income (1) |
|
| 1,867 |
|
| (1,851) |
|
| (1,183) |
Change in net unrealized holding gains on available-for-sale securities |
|
| 1,631 |
|
| (17,004) |
|
| (3,034) |
Tax effect |
|
| 685 |
|
| (6,983) |
|
| (1,249) |
|
|
| 946 |
|
| (10,021) |
|
| (1,785) |
Change in funded status of pension plan: |
|
|
|
|
|
|
|
|
|
Unrecognized net gain (loss) arising during the period |
|
| 1,700 |
|
| 1,199 |
|
| (2,573) |
Amortization of net actuarial loss included in pension expense (2) |
|
| 18 |
|
| 244 |
|
| — |
|
|
| 1,718 |
|
| 1,443 |
|
| (2,573) |
Tax effect |
|
| 514 |
|
| 550 |
|
| (1,097) |
|
|
| 1,204 |
|
| 893 |
|
| (1,476) |
Other comprehensive income (loss) |
| $ | 2,150 |
| $ | (9,128) |
| $ | (3,261) |
(1) Reclassification adjustment represents net realized gains and losses arising from the sale of available-for-sale securities. These net realized gains and losses are included in the consolidated statements of income in the line item, “Net gains (losses) on sales of securities.” See “Note B – Investment Securities” for the income tax expense (benefit) related to these net realized gains and losses.
(2) Represents the amortization into expense of net actuarial loss relating to the Corporation’s defined benefit pension plan. This item is included in net periodic pension cost (see “Note J – Retirement Plans”) and in the consolidated statements of income in the line item, “Employee benefits.” The income tax expense relating to this cost is included in the consolidated statements of income in the line item, “Income tax expense.”
The following sets forth the components of accumulated other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
| Balance |
| Current |
| Balance | |||
Unrealized holding gains on available-for-sale securities |
| $ | 1,654 |
| $ | 946 |
| $ | 2,600 |
Unrealized actuarial losses on pension plan |
|
| (3,258) |
|
| 1,204 |
|
| (2,054) |
Total accumulated other comprehensive income (loss), net of tax |
| $ | (1,604) |
| $ | 2,150 |
| $ | 546 |
Operating Segments
While senior management monitors the revenue streams of the Bank’s various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the financial operations of the Bank are aggregated in one reportable operating segment.
43
Investment Management Division
Assets held in a fiduciary capacity are not assets of the Corporation and, accordingly, are not included in the accompanying consolidated financial statements. The Investment Management Division records fees on the accrual basis.
Reclassifications
When appropriate, items in the prior year financial statements are reclassified to conform to the current period presentation.
Adoption of New Accounting Standards
There were no accounting standards adopted during 2017.
Impact of Issued But Not Yet Effective Accounting Standards
The pronouncements discussed in this section are not intended to be an all-inclusive list, but rather only those pronouncements that could potentially have an impact on the Corporation’s financial position, results of operations or disclosures.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers.” The amendments in ASU 2014-09 provide a comprehensive framework for addressing revenue recognition issues that can be applied to all contracts with customers. While the guidance in ASU 2014-09 supersedes most existing industry-specific revenue recognition accounting guidance, much of a bank’s revenue comes from financial instruments such as debt securities and loans that are scoped-out of the guidance. The amendments in ASU 2014-09 also include improved disclosures to enable users of financial statements to better understand the nature, amount, timing and uncertainty of revenue that is recognized. For public entities such as the Corporation, ASU 2014-09, as amended, is effective for interim and annual reporting periods beginning after December 15, 2017. Implementation of ASU 2014-09 on January 1, 2018 will result in enhancements to certain revenue recognition disclosures, but the amendments in the ASU did not have a material impact on the Corporation’s financial position or results of operations. Management used the modified retrospective transition method to implement the standard and has updated its internal control procedures to address the new requirements.
In January 2016, the FASB issued ASU 2016-01 “Financial Instruments – Overall.” The amendments in ASU 2016-01 are intended to improve the recognition, measurement, presentation and disclosure of financial assets and liabilities to provide users of financial statements with information that is more useful for decision-making purposes. Among other changes, ASU 2016-01 requires equity securities to be measured at fair value with changes in fair value recognized through net income, but allows equity securities that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. The amendments simplify the impairment assessment of such equity securities and require enhanced disclosure about these investments. ASU 2016-01 also requires the use of an exit price when measuring the fair value of financial instruments and separate presentation of financial assets and liabilities by measurement category and type of instrument on the balance sheet or in the notes. The ASU eliminates certain disclosures relating to the methods and assumptions used to estimate fair value. For public entities such as the Corporation, the amendments in ASU 2016-01 are effective for interim and annual reporting periods beginning after December 15, 2017. Implementation of ASU 2016-01 on January 1, 2018 did not have a material impact on the Corporation’s financial position or results of operations, but will result in certain modifications to fair value disclosures.
In February 2016, the FASB issued ASU 2016-02 “Leases.” ASU 2016-02 affects any entity that enters into a lease and is intended to increase the transparency and comparability of financial statements among organizations. The ASU requires, among other changes, a lessee to recognize on its balance sheet a lease asset and a lease liability for those leases previously classified as operating leases. The lease asset would represent the right to use the underlying asset for the lease term and the lease liability would represent the discounted value of the required lease payments to the lessor. The ASU would also require entities to disclose key information about leasing arrangements. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. Upon implementation of the ASU, the Corporation’s assets and liabilities will increase due to the recognition of a lease asset and a lease obligation. Management has allocated staffing resources to implement the ASU and is developing an implementation plan including, among other things, engaging a third party software provider and evaluating the impact that other aspects of ASU 2016-02 will have on the Corporation’s financial position, results of operations and disclosures.
In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 affects entities holding financial assets that are not accounted for at fair value through net income, including loans, debt securities, and other financial assets. The ASU requires financial assets measured at amortized cost to be presented at the net amount expected to be collected by recording an allowance for credit losses. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years. Management has established an internal committee to manage the implementation of the ASU. The committee is led by the Bank’s Chief Accounting Officer and includes the Chief Financial Officer and Chief Risk Officer. A broader advisory group has been established to assist in implementing the ASU and includes representatives of the Bank’s loan operations, credit administration, lending, investments
44
and technology functions. The committee has selected and engaged a third-party software provider, and is currently accumulating historical data needed to implement the ASU. In addition, the committee continues to analyze the provisions of the ASU to understand the impact that it will have on the Corporation’s financial position, results of operations and disclosures.
In August 2016, the FASB issued ASU 2016-15 “Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 affects all entities that are required to present a statement of cash flows under Accounting Standards Codification (“ASC”) Topic 230, Statement of Cash Flows, and other ASC Topics, addressing eight specific cash flow issues with the objective of reducing diversity in practice. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Implementation of ASU 2016-15 on January 1, 2018 did not have a material impact on the Corporation’s financial position, results of operations or disclosures.
In March 2017, the FASB issued ASU 2017-07 “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 applies to all employers that offer to their employees defined benefit pension plans, other postretirement benefit plans or other types of benefits accounted for under ASC Topic 715. The ASU requires, among other things, that an employer disaggregate the service cost component from other components of net benefit cost and provides explicit guidance on how to present the service cost component and other components of net benefit cost in the income statement. ASU 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017. Implementation of ASU 2017-07 on January 1, 2018 results in reclassifications between certain income statement categories, but the amendments in the ASU did not have a material impact on the Corporation’s financial position, results of operations or disclosures.
In February 2018, the FASB issued ASU 2018-02 “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 affects any entity that has items of other comprehensive income for which the related tax effects are presented in other comprehensive income. The ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act which was signed into law on December 22, 2017. ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. Management plans to implement the ASU in the first quarter of 2018 with no impact on the Corporation’s financial position or results of operations.
NOTE B – INVESTMENT SECURITIES
The following tables set forth the amortized cost and estimated fair values of the Bank’s investment securities at December 31, 2017 and 2016.
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|
|
|
| 2017 | ||||||||||
(in thousands) |
| Amortized |
| Gross |
| Gross |
| Fair | ||||
Held-to-Maturity Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
State and municipals |
| $ | 6,970 |
| $ | 78 |
| $ | — |
| $ | 7,048 |
Pass-through mortgage securities |
|
| 311 |
|
| 21 |
|
| — |
|
| 332 |
Collateralized mortgage obligations |
|
| 355 |
|
| 14 |
|
| — |
|
| 369 |
|
| $ | 7,636 |
| $ | 113 |
| $ | — |
| $ | 7,749 |
Available-for-Sale Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
State and municipals |
| $ | 453,158 |
| $ | 10,051 |
| $ | (1,886) |
| $ | 461,323 |
Pass-through mortgage securities |
|
| 72,539 |
|
| 84 |
|
| (1,232) |
|
| 71,391 |
Collateralized mortgage obligations |
|
| 190,175 |
|
| 15 |
|
| (2,776) |
|
| 187,414 |
|
| $ | 715,872 |
| $ | 10,150 |
| $ | (5,894) |
| $ | 720,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2016 | ||||||||||
Held-to-Maturity Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
State and municipals |
| $ | 10,419 |
| $ | 177 |
| $ | — |
| $ | 10,596 |
Pass-through mortgage securities |
|
| 361 |
|
| 33 |
|
| — |
|
| 394 |
Collateralized mortgage obligations |
|
| 607 |
|
| 40 |
|
| — |
|
| 647 |
|
| $ | 11,387 |
| $ | 250 |
| $ | — |
| $ | 11,637 |
Available-for-Sale Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
State and municipals |
| $ | 444,154 |
| $ | 10,137 |
| $ | (3,631) |
| $ | 450,660 |
Pass-through mortgage securities |
|
| 188,527 |
|
| 156 |
|
| (2,874) |
|
| 185,809 |
Collateralized mortgage obligations |
|
| 179,993 |
|
| 862 |
|
| (2,025) |
|
| 178,830 |
|
| $ | 812,674 |
| $ | 11,155 |
| $ | (8,530) |
| $ | 815,299 |
45
At December 31, 2017 and 2016, investment securities with a carrying value of $423,360,000 and $415,419,000, respectively, were pledged as collateral to secure public deposits and borrowed funds.
There were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity at December 31, 2017 and 2016.
Securities With Unrealized Losses.The following tables set forth securities with unrealized losses at December 31, 2017 and 2016 presented by length of time the securities had been in a continuous unrealized loss position.
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|
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|
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|
|
|
|
|
| 2017 | ||||||||||||||||
|
| Less than |
| 12 Months |
| Total | ||||||||||||
(in thousands) |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | ||||||
State and municipals |
| $ | 54,732 |
| $ | (574) |
| $ | 28,723 |
| $ | (1,312) |
| $ | 83,455 |
| $ | (1,886) |
Pass-through mortgage securities |
|
| 10,172 |
|
| (81) |
|
| 52,652 |
|
| (1,151) |
|
| 62,824 |
|
| (1,232) |
Collateralized mortgage obligations |
|
| 130,267 |
|
| (1,230) |
|
| 54,751 |
|
| (1,546) |
|
| 185,018 |
|
| (2,776) |
Total temporarily impaired |
| $ | 195,171 |
| $ | (1,885) |
| $ | 136,126 |
| $ | (4,009) |
| $ | 331,297 |
| $ | (5,894) |
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|
|
|
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|
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|
|
|
|
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|
|
| 2016 | ||||||||||||||||
State and municipals |
| $ | 117,181 |
| $ | (3,631) |
| $ | — |
| $ | — |
| $ | 117,181 |
| $ | (3,631) |
Pass-through mortgage securities |
|
| 175,000 |
|
| (2,874) |
|
| — |
|
| — |
|
| 175,000 |
|
| (2,874) |
Collateralized mortgage obligations |
|
| 125,424 |
|
| (1,820) |
|
| 7,737 |
|
| (205) |
|
| 133,161 |
|
| (2,025) |
Total temporarily impaired |
| $ | 417,605 |
| $ | (8,325) |
| $ | 7,737 |
| $ | (205) |
| $ | 425,342 |
| $ | (8,530) |
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 December 31, 2017.
Sales of Available-for-Sale Securities.Sales of available-for-sale securities were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
| 2017 |
| 2016 |
| 2015 | |||
|
|
|
|
|
|
|
|
|
|
Proceeds |
| $ | 135,695 |
| $ | 62,047 |
| $ | 69,649 |
|
|
|
|
|
|
|
|
|
|
Gains |
| $ | 382 |
| $ | 1,869 |
| $ | 1,560 |
Losses |
|
| (2,249) |
|
| (18) |
|
| (377) |
Net gain (loss) |
| $ | (1,867) |
| $ | 1,851 |
| $ | 1,183 |
The income tax expense (benefit) related to these net realized gains (losses) was ($782,000), $772,000 and $487,000 in 2017, 2016 and 2015, respectively, and is included in the consolidated statements of income in the line item, “Income tax expense.”
Sales of Held-to-Maturity Securities. During 2017, 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 $354,000 at the time of sale and the Bank realized a gain upon sale of $1,000.
During 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 amount 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 2015, the Bank sold municipal securities that were classified as held-to-maturity securities. These sales were in response to a significant deterioration in the creditworthiness of the issuers. The securities sold had a carrying value of $4,062,000 at the time of sale and the Bank realized a gain upon sale of $141,000.
46
Maturities. The following table sets forth by maturity the amortized cost and fair value of the Bank’s state and municipal securities at December 31, 2017 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.
|
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|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
| Amortized |
| Fair Value | ||
Held-to-Maturity Securities: |
|
|
|
|
|
|
Within one year |
| $ | 4,409 |
| $ | 4,425 |
After 1 through 5 years |
|
| 2,311 |
|
| 2,373 |
After 5 through 10 years |
|
| 250 |
|
| 250 |
After 10 years |
|
| — |
|
| — |
Mortgage-backed securities |
|
| 666 |
|
| 701 |
|
| $ | 7,636 |
| $ | 7,749 |
Available-for-Sale Securities: |
|
|
|
|
|
|
Within one year |
| $ | 24,160 |
| $ | 24,444 |
After 1 through 5 years |
|
| 93,467 |
|
| 95,566 |
After 5 through 10 years |
|
| 169,372 |
|
| 172,905 |
After 10 years |
|
| 166,159 |
|
| 168,408 |
Mortgage-backed securities |
|
| 262,714 |
|
| 258,805 |
|
| $ | 715,872 |
| $ | 720,128 |
NOTE C – LOANS
The following tables set forth by class of loans as of December 31, 2017 and 2016 the amount of loans individually and collectively evaluated for impairment and the portion of the allowance for loan losses allocable to such loans.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 | ||||||||||||||||
|
| Loans |
| Allowance for Loan Losses | ||||||||||||||
(in thousands) |
| Individually |
| Collectively |
| Ending |
| Individually |
| Collectively |
| Ending | ||||||
Commercial and industrial |
| $ | 48 |
| $ | 109,575 |
| $ | 109,623 |
| $ | — |
| $ | 1,441 |
| $ | 1,441 |
Commercial mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily |
|
| — |
|
| 682,593 |
|
| 682,593 |
|
| — |
|
| 6,423 |
|
| 6,423 |
Other |
|
| — |
|
| 414,783 |
|
| 414,783 |
|
| — |
|
| 4,734 |
|
| 4,734 |
Owner-occupied |
|
| 531 |
|
| 95,100 |
|
| 95,631 |
|
| — |
|
| 1,076 |
|
| 1,076 |
Residential mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end |
|
| 1,368 |
|
| 1,557,196 |
|
| 1,558,564 |
|
| 18 |
|
| 19,329 |
|
| 19,347 |
Revolving home equity |
|
| — |
|
| 83,625 |
|
| 83,625 |
|
| — |
|
| 689 |
|
| 689 |
Consumer and other |
|
| — |
|
| 5,533 |
|
| 5,533 |
|
| — |
|
| 74 |
|
| 74 |
|
| $ | 1,947 |
| $ | 2,948,405 |
| $ | 2,950,352 |
| $ | 18 |
| $ | 33,766 |
| $ | 33,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 | ||||||||||||||||
Commercial and industrial |
| $ | 131 |
| $ | 125,907 |
| $ | 126,038 |
| $ | — |
| $ | 1,408 |
| $ | 1,408 |
Commercial mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily |
|
| — |
|
| 610,385 |
|
| 610,385 |
|
| — |
|
| 6,119 |
|
| 6,119 |
Other |
|
| — |
|
| 371,142 |
|
| 371,142 |
|
| — |
|
| 4,296 |
|
| 4,296 |
Owner-occupied |
|
| 558 |
|
| 103,113 |
|
| 103,671 |
|
| — |
|
| 959 |
|
| 959 |
Residential mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end |
|
| 856 |
|
| 1,237,575 |
|
| 1,238,431 |
|
| 45 |
|
| 15,695 |
|
| 15,740 |
Revolving home equity |
|
| 1,770 |
|
| 84,691 |
|
| 86,461 |
|
| 482 |
|
| 919 |
|
| 1,401 |
Consumer and other |
|
| — |
|
| 9,293 |
|
| 9,293 |
|
| — |
|
| 134 |
|
| 134 |
|
| $ | 3,315 |
| $ | 2,542,106 |
| $ | 2,545,421 |
| $ | 527 |
| $ | 29,530 |
| $ | 30,057 |
47
The following tables present the activity in the allowance for loan losses for the years ended December 31, 2017, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
| Balance at |
| Chargeoffs |
| Recoveries |
| Provision for |
| Balance at | |||||
Commercial and industrial |
| $ | 1,408 |
| $ | 102 |
| $ | 13 |
| $ | 122 |
| $ | 1,441 |
Commercial mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily |
|
| 6,119 |
|
| — |
|
| — |
|
| 304 |
|
| 6,423 |
Other |
|
| 4,296 |
|
| — |
|
| — |
|
| 438 |
|
| 4,734 |
Owner-occupied |
|
| 959 |
|
| 820 |
|
| — |
|
| 937 |
|
| 1,076 |
Residential mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end |
|
| 15,740 |
|
| 97 |
|
| 3 |
|
| 3,701 |
|
| 19,347 |
Revolving home equity |
|
| 1,401 |
|
| 100 |
|
| — |
|
| (612) |
|
| 689 |
Consumer and other |
|
| 134 |
|
| 27 |
|
| 3 |
|
| (36) |
|
| 74 |
|
| $ | 30,057 |
| $ | 1,146 |
| $ | 19 |
| $ | 4,854 |
| $ | 33,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
| Balance at |
| Chargeoffs |
| Recoveries |
| Provision for |
| Balance at | |||||
Commercial and industrial |
| $ | 928 |
| $ | 445 |
| $ | 4 |
| $ | 921 |
| $ | 1,408 |
Commercial mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily |
|
| 6,858 |
|
| — |
|
| — |
|
| (739) |
|
| 6,119 |
Other |
|
| 3,674 |
|
| — |
|
| — |
|
| 622 |
|
| 4,296 |
Owner-occupied |
|
| 1,047 |
|
| — |
|
| — |
|
| (88) |
|
| 959 |
Residential mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end |
|
| 13,639 |
|
| 259 |
|
| 9 |
|
| 2,351 |
|
| 15,740 |
Revolving home equity |
|
| 1,016 |
|
| — |
|
| 12 |
|
| 373 |
|
| 1,401 |
Consumer and other |
|
| 94 |
|
| 5 |
|
| 5 |
|
| 40 |
|
| 134 |
|
| $ | 27,256 |
| $ | 709 |
| $ | 30 |
| $ | 3,480 |
| $ | 30,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
| Balance at |
| Chargeoffs |
| Recoveries |
| Provision for |
| Balance at | |||||
Commercial and industrial |
| $ | 838 |
| $ | 166 |
| $ | 7 |
| $ | 249 |
| $ | 928 |
Commercial mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily |
|
| 7,207 |
|
| 91 |
|
| 27 |
|
| (285) |
|
| 6,858 |
Other |
|
| 2,340 |
|
| 1 |
|
| 39 |
|
| 1,296 |
|
| 3,674 |
Owner-occupied |
|
| 1,023 |
|
| — |
|
| — |
|
| 24 |
|
| 1,047 |
Residential mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end |
|
| 10,599 |
|
| 7 |
|
| 9 |
|
| 3,038 |
|
| 13,639 |
Revolving home equity |
|
| 1,121 |
|
| 67 |
|
| 5 |
|
| (43) |
|
| 1,016 |
Consumer and other |
|
| 93 |
|
| 37 |
|
| — |
|
| 38 |
|
| 94 |
|
| $ | 23,221 |
| $ | 369 |
| $ | 87 |
| $ | 4,317 |
| $ | 27,256 |
48
For individually impaired loans, the following tables set forth by class of loans at December 31, 2017, 2016 and 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 years ended December 31, 2017, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 | |||||||||||||
(in thousands) |
| Recorded |
| Unpaid |
| Related |
| Average |
| Interest | |||||
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
| $ | 48 |
| $ | 48 |
| $ | — |
| $ | 67 |
| $ | 5 |
Commercial mortgages - owner-occupied |
|
| 531 |
|
| 615 |
|
| — |
|
| 654 |
|
| 21 |
Residential mortgages - closed end |
|
| 1,095 |
|
| 1,102 |
|
| — |
|
| 1,122 |
|
| 7 |
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages - closed end |
|
| 273 |
|
| 272 |
|
| 18 |
|
| 280 |
|
| 13 |
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
| 48 |
|
| 48 |
|
| — |
|
| 67 |
|
| 5 |
Commercial mortgages - owner-occupied |
|
| 531 |
|
| 615 |
|
| — |
|
| 654 |
|
| 21 |
Residential mortgages - closed end |
|
| 1,368 |
|
| 1,374 |
|
| 18 |
|
| 1,402 |
|
| 20 |
|
| $ | 1,947 |
| $ | 2,037 |
| $ | 18 |
| $ | 2,123 |
| $ | 46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2016 | |||||||||||||
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
| $ | 131 |
| $ | 131 |
| $ | — |
| $ | 134 |
| $ | 1 |
Commercial mortgages - owner-occupied |
|
| 558 |
|
| 636 |
|
| — |
|
| 575 |
|
| — |
Residential mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end |
|
| 230 |
|
| 313 |
|
| — |
|
| 245 |
|
| — |
Revolving home equity |
|
| 280 |
|
| 279 |
|
| — |
|
| 280 |
|
| — |
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end |
|
| 626 |
|
| 634 |
|
| 45 |
|
| 641 |
|
| 29 |
Revolving home equity |
|
| 1,490 |
|
| 1,491 |
|
| 482 |
|
| 1,493 |
|
| — |
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
| 131 |
|
| 131 |
|
| — |
|
| 134 |
|
| 1 |
Commercial mortgages - owner-occupied |
|
| 558 |
|
| 636 |
|
| — |
|
| 575 |
|
| — |
Residential mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end |
|
| 856 |
|
| 947 |
|
| 45 |
|
| 886 |
|
| 29 |
Revolving home equity |
|
| 1,770 |
|
| 1,770 |
|
| 482 |
|
| 1,773 |
|
| — |
|
| $ | 3,315 |
| $ | 3,484 |
| $ | 527 |
| $ | 3,368 |
| $ | 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2015 | |||||||||||||
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages - owner-occupied |
| $ | 594 |
| $ | 654 |
| $ | — |
| $ | 612 |
| $ | — |
Residential mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end |
|
| 306 |
|
| 405 |
|
| — |
|
| 530 |
|
| — |
Revolving home equity |
|
| 522 |
|
| 521 |
|
| — |
|
| 525 |
|
| 6 |
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages - closed end |
|
| 3,491 |
|
| 3,494 |
|
| 428 |
|
| 3,555 |
|
| 89 |
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages - owner-occupied |
|
| 594 |
|
| 654 |
|
| — |
|
| 612 |
|
| — |
Residential mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end |
|
| 3,797 |
|
| 3,899 |
|
| 428 |
|
| 4,085 |
|
| 89 |
Revolving home equity |
|
| 522 |
|
| 521 |
|
| — |
|
| 525 |
|
| 6 |
|
| $ | 4,913 |
| $ | 5,074 |
| $ | 428 |
| $ | 5,222 |
| $ | 95 |
49
Aging of Loans. The following tables present the aging of the recorded investment in loans by class of loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 | |||||||||||||||||||
(in thousands) |
| 30-59 Days |
| 60-89 Days |
| Past Due |
| Nonaccrual |
| Total Past |
| Current |
| Total | |||||||
Commercial and industrial |
| $ | 20 |
| $ | — |
| $ | — |
| $ | — |
| $ | 20 |
| $ | 109,603 |
| $ | 109,623 |
Commercial mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 682,593 |
|
| 682,593 |
Other |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 414,783 |
|
| 414,783 |
Owner-occupied |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 95,631 |
|
| 95,631 |
Residential mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end |
|
| 2,186 |
|
| 21 |
|
| — |
|
| 1,000 |
|
| 3,207 |
|
| 1,555,357 |
|
| 1,558,564 |
Revolving home equity |
|
| 522 |
|
| — |
|
| — |
|
| — |
|
| 522 |
|
| 83,103 |
|
| 83,625 |
Consumer and other |
|
| 7 |
|
| — |
|
| — |
|
| — |
|
| 7 |
|
| 5,526 |
|
| 5,533 |
|
| $ | 2,735 |
| $ | 21 |
| $ | — |
| $ | 1,000 |
| $ | 3,756 |
| $ | 2,946,596 |
| $ | 2,950,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 | |||||||||||||||||||
Commercial and industrial |
| $ | 224 |
| $ | — |
| $ | — |
| $ | — |
| $ | 224 |
| $ | 125,814 |
| $ | 126,038 |
Commercial mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 610,385 |
|
| 610,385 |
Other |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 371,142 |
|
| 371,142 |
Owner-occupied |
|
| — |
|
| — |
|
| 621 |
|
| 558 |
|
| 1,179 |
|
| 102,492 |
|
| 103,671 |
Residential mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end |
|
| 881 |
|
| — |
|
| — |
|
| 230 |
|
| 1,111 |
|
| 1,237,320 |
|
| 1,238,431 |
Revolving home equity |
|
| — |
|
| — |
|
| — |
|
| 1,770 |
|
| 1,770 |
|
| 84,691 |
|
| 86,461 |
Consumer and other |
|
| 1 |
|
| — |
|
| — |
|
| — |
|
| 1 |
|
| 9,292 |
|
| 9,293 |
|
| $ | 1,106 |
| $ | — |
| $ | 621 |
| $ | 2,558 |
| $ | 4,285 |
| $ | 2,541,136 |
| $ | 2,545,421 |
There were no loans in the process of foreclosure nor did the Bank hold any foreclosed residential real estate property at December 31, 2017 or 2016. In 2017, the Bank took a deed-in-lieu of foreclosure for one commercial real estate property. The property is recorded as other real estate owned at December 31, 2017 and has a carrying value of $5,125,000, which is net of a valuation allowance of $725,000. Other real estate owned at December 31, 2017 consists solely of the property taken and is included in the consolidated balance sheet under “other assets.” The Bank sold the property for its carrying value in the first quarter of 2018.
Troubled Debt Restructurings. A restructuring constitutes a troubled debt restructuring when the restructuring 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 of 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.
The following table presents information about loans modified in troubled debt restructurings during the year ended December 31, 2016 and 2015. The Bank did not modify any loans in troubled debt restructurings during 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding |
| Interest Rates | ||||||||
(dollars in thousands) |
| Number |
| Pre- |
| Post- |
| Pre- |
| Post- | ||
2016: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
| 2 |
| $ | 1,131 |
| $ | 1,131 |
| 5.00% and 6.75% |
| 5.00% and 6.75% |
Residential mortgages - closed end |
| 1 |
|
| 109 |
|
| 109 |
| 3.95% |
| 3.95% |
|
| 3 |
| $ | 1,240 |
| $ | 1,240 |
|
|
|
|
2015: |
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
Closed end |
| 1 |
| $ | 2,713 |
| $ | 2,713 |
| 5.25% |
| 4.00% |
Revolving home equity |
| 1 |
|
| 245 |
|
| 245 |
| 5.25% |
| 4.00% |
|
| 2 |
| $ | 2,958 |
| $ | 2,958 |
|
|
|
|
50
The 2016 troubled debt restructurings include the modification of a $1.0 million commercial and industrial loan into a new time loan with a maturity of December 31, 2016. The loan was subsequently repaid during 2016. The 2015 restructurings involved two loans to a single borrower and resulted in a charge to the provision for loan losses at the time of restructuring of $332,000. The post-modification interest rates for all of the 2016 and 2015 restructurings in the table above were lower than the current market rate for new debt with similar risk.
At December 31, 2017, 2016 and 2015, the Bank had an allowance for loan losses of $18,000, $45,000 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 2017, 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 changes in the borrower’s financial condition, credit concentrations, changes in collateral values, economic conditions 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, and a large percentage of these loans are mortgage loans secured by properties located in those areas. The primary source of repayment for residential mortgage loans is cash flows from individual borrowers and co-borrowers. 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 for both residential mortgage and multifamily loans are dependent on the strength of the local economy.
Credit Quality Indicators. The Corporation 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 of the borrower and any guarantors, payment experience, credit underwriting, documentation, public records, due diligence checks 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.
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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 upon borrower contact, credit department review or independent loan review.
51
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. Among other things, at least 80% of the recorded investment of commercial real estate loans as of December 31 of the prior year must be reviewed annually. Lines of credit are also reviewed annually at each proposed reaffirmation. 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 and other consumer 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 680 is generally required for new loans. Credit scores for each borrower are updated at least annually. The risk ratings along with their definitions
In 2022, the Bank incurred a net loss of $553,000 on the disposition of certain premises and fixed assets. The net loss includes a gain on sale of five Glen Head, NY buildings, a writedown and transfer to held-for-sale of a remaining building in Glen Head and a write-off of all related equipment and fixed assets including a nearby freestanding ATM location. In 2023, the Bank sold the remaining Glen Head building held-for-sale and realized a net gain of $240,000.
Land and buildings held-for-sale at December 31, 2023 and 2022 amounted to $383,000 and $2.4 million, respectively.
Operating Leases. The Bank leases certain branch and back-office locations under long-term, non-cancelable operating lease agreements. The leases expire at various dates through 2038 and had a weighted average remaining term of 11.15 and 11.79 years at December 31, 2023 and 2022, respectively. Many of the Bank’s leases include renewal options of up to 10 years with the longest option extending to 25 years. The exercise of lease renewal options is at the Bank’s sole discretion.
The weighted average discount rate for leases in place at December 31, 2023 and 2022 was 3.29% and 3.24%, respectively. Leases with an initial term of 12 months or less arenot recorded on the balance sheet. The Bank had one such lease in 2023 and 2022 and recognized rent expense for these leases on a straight-line basis over the lease term. There were no short-term leases in 2021.
The Bank’s branch optimization strategy resulted in charges of $905,000 in 2022 and $3.1 million in 2021 related to the closing or relocation of leased branch office space. The charges include rent and depreciation expenses, lease acceleration costs and asset disposal charges. These charges are included in the consolidated statements of income in “occupancy and equipment expense” and, in 2022, partially included in “loss on disposition of premises and fixed assets.”
Rental payments required by the Bank’s lease agreements may increase over time based on certain variable components such as real estate taxes and common area maintenance charges.
The components of rent expense were as follows:
December 31, | ||||||||||||
(in thousands) | 2023 | 2022 | 2021 | |||||||||
Operating lease cost | $ | 3,480 | $ | 3,271 | $ | 4,462 | ||||||
Variable lease cost | 463 | 490 | 405 | |||||||||
Short-term lease cost | 78 | 10 | — | |||||||||
$ | 4,021 | $ | 3,771 | $ | 4,867 |
The following is a maturity analysis of the operating lease liability at December 31, 2023.
Year (dollars in thousands) | Total | |||
2024 | $ | 3,522 | ||
2025 | 3,379 | |||
2026 | 3,097 | |||
2027 | 2,750 | |||
2028 | 1,879 | |||
Thereafter | 15,422 | |||
Total lease payments | 30,049 | |||
Less: interest | 5,109 | |||
$ | 24,940 |
NOTE E – DEPOSITS
The following table sets forth the remaining maturities of the Bank’s time deposits at December 31, 2023.
Year (dollars in thousands) | Total | |||
2024 | $ | 528,784 | ||
2025 | 15,455 | |||
2026 | 11,194 | |||
2027 | 18,209 | |||
2028 | 16,218 | |||
Thereafter | 1,573 | |||
$ | 591,433 |
Time deposits that meet or exceed the FDIC insurance limit of $250,000 totaled $70.3 million and $104.7 million at December 31, 2023 and 2022, respectively. Deposits from executive officers, directors and their affiliates at December 31, 2023 and 2022 were approximately $8.4 million and $8.8 million, respectively. Time deposits maturing in 2024 include $176.0 million of brokered deposits.
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The following tables present the recorded investment in commercial and industrial loans and commercial real estate 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.
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|
| December 31, 2017 | ||||||||||||||||
|
| Internally Assigned Risk Rating |
|
|
| |||||||||||||
|
|
|
|
|
|
|
| Special |
|
|
|
|
|
|
|
|
| |
(in thousands) |
| Pass |
| Watch |
| Mention |
| Substandard |
| Doubtful |
| Total | ||||||
Commercial and industrial |
| $ | 108,846 |
| $ | 450 |
| $ | 279 |
| $ | 48 |
| $ | — |
| $ | 109,623 |
Commercial mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily |
|
| 673,128 |
|
| 2,354 |
|
| 7,111 |
|
| — |
|
| — |
|
| 682,593 |
Other |
|
| 404,379 |
|
| 7,567 |
|
| 2,837 |
|
| — |
|
| — |
|
| 414,783 |
Owner-occupied |
|
| 93,618 |
|
| — |
|
| 1,482 |
|
| 531 |
|
| — |
|
| 95,631 |
|
| $ | 1,279,971 |
| $ | 10,371 |
| $ | 11,709 |
| $ | 579 |
| $ | — |
| $ | 1,302,630 |
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 | ||||||||||||||||
Commercial and industrial |
| $ | 125,097 |
| $ | 810 |
| $ | — |
| $ | 131 |
| $ | — |
| $ | 126,038 |
Commercial mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily |
|
| 603,103 |
|
| — |
|
| 7,282 |
|
| — |
|
| — |
|
| 610,385 |
Other |
|
| 369,740 |
|
| 1,402 |
|
| — |
|
| — |
|
| — |
|
| 371,142 |
Owner-occupied |
|
| 102,725 |
|
| 389 |
|
| — |
|
| 557 |
|
| — |
|
| 103,671 |
|
| $ | 1,200,665 |
| $ | 2,601 |
| $ | 7,282 |
| $ | 688 |
| $ | — |
| $ | 1,211,236 |
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.
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|
| December 31, 2017 | ||||||||||||||||
|
| Internally Assigned Risk Rating |
|
|
| |||||||||||||
|
|
|
|
|
|
|
| Special |
|
|
|
|
|
|
|
|
| |
(in thousands) |
| Pass |
| Watch |
| Mention |
| Substandard |
| Doubtful |
| Total | ||||||
Residential mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end |
| $ | 1,554,168 |
| $ | 2,200 |
| $ | 828 |
| $ | 1,368 |
| $ | — |
| $ | 1,558,564 |
Revolving home equity |
|
| 82,665 |
|
| 256 |
|
| 704 |
|
| — |
|
| — |
|
| 83,625 |
Consumer and other |
|
| 5,236 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 5,236 |
|
| $ | 1,642,069 |
| $ | 2,456 |
| $ | 1,532 |
| $ | 1,368 |
| $ | — |
| $ | 1,647,425 |
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 | ||||||||||||||||
Residential mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end |
| $ | 1,236,152 |
| $ | 982 |
| $ | 441 |
| $ | 856 |
| $ | — |
| $ | 1,238,431 |
Revolving home equity |
|
| 84,189 |
|
| — |
|
| 501 |
|
| 1,771 |
|
| — |
|
| 86,461 |
Consumer and other |
|
| 8,614 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 8,614 |
|
| $ | 1,328,955 |
| $ | 982 |
| $ | 942 |
| $ | 2,627 |
| $ | — |
| $ | 1,333,506 |
52
Deposit account overdrafts were $297,000 and $679,000 at December 31, 2017 and 2016, respectively. They are not assigned a risk rating and are therefore excluded from consumer loans in the above tables.
Loans to Directors and Executive Officers. Certain directors, including their immediate families and companies in which they are principal owners, and executive officers were loan customers of the Bank during 2017 and 2016. The aggregate outstanding amount of these loans was $36,000 and $99,000 at December 31, 2017 and 2016, respectively. During 2017, no new loans were made to such persons. Repayments totaled $63,000 in 2017. There were no loans to directors or executive officers that were nonaccrual at December 31, 2017 or 2016.
NOTE D – PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, | ||||
(in thousands) |
| 2017 |
| 2016 | ||
Land |
| $ | 9,038 |
| $ | 8,466 |
Buildings and improvements |
|
| 26,825 |
|
| 21,660 |
Leasehold improvements |
|
| 12,652 |
|
| 11,808 |
Furniture and equipment |
|
| 30,800 |
|
| 29,016 |
Construction in process |
|
| 2,425 |
|
| 1,911 |
|
|
| 81,740 |
|
| 72,861 |
Accumulated depreciation and amortization |
|
| (42,092) |
|
| (38,500) |
|
| $ | 39,648 |
| $ | 34,361 |
NOTE E – DEPOSITS
The following table sets forth the remaining maturities of the Bank’s time deposits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year (dollars in thousands) |
| Less than |
| $100,000 or |
| Total | |||
2018 |
| $ | 27,972 |
| $ | 47,654 |
| $ | 75,626 |
2019 |
|
| 35,742 |
|
| 54,911 |
|
| 90,653 |
2020 |
|
| 6,245 |
|
| 13,246 |
|
| 19,491 |
2021 |
|
| 18,862 |
|
| 33,461 |
|
| 52,323 |
2022 |
|
| 10,429 |
|
| 28,297 |
|
| 38,726 |
Thereafter |
|
| 20,268 |
|
| 26,321 |
|
| 46,589 |
|
| $ | 119,518 |
| $ | 203,890 |
| $ | 323,408 |
The total amount of time deposits that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2017 and 2016 was $75.1 million and $63.3 million, respectively. Deposits from executive officers, directors and their affiliates at December 31, 2017 and 2016 were approximately $9.4 million and $4.9 million, respectively.
NOTE F – BORROWED FUNDS
The following table summarizes borrowed funds at December 31, 2017 and 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, | |||||
(in thousands) |
| 2017 |
|
| 2016 | ||
Short-term borrowings: |
|
|
|
|
|
|
|
Securities sold under repurchase agreements |
| $ | 11,141 |
|
| $ | 7,012 |
Federal Home Loan Bank advances |
|
| 270,000 |
|
|
| 200,000 |
|
|
| 281,141 |
|
|
| 207,012 |
Long-term debt: |
|
|
|
|
|
|
|
Securities sold under repurchase agreements |
|
| 5,000 |
|
|
| 5,000 |
Federal Home Loan Bank advances |
|
| 418,797 |
|
|
| 374,212 |
|
|
| 423,797 |
|
|
| 379,212 |
|
| $ | 704,938 |
|
| $ | 586,224 |
53
Accrued interest payable on borrowed funds is included in “accrued expenses and other liabilities” in the consolidated balance sheets and amounted to $711,000 and $598,000 at December 31, 2017 and 2016, respectively.
Securities Sold Under Repurchase Agreements. Securities sold under repurchase agreements are fixed rate financing arrangements with remaining contractual maturities of up to one year as of December 31, 2017.
At December 31, 2017, the Bank has a $5 million repurchase agreement outstanding with a commercial bank. At maturity, the securities underlying the agreement will be returned to the Bank. The agreement is subject to counterparty risk arising from the Bank’s pledge of securities collateral in excess of the amount borrowed. This risk is monitored on an ongoing basis through the Bank’s existing correspondent concentration risk policy. The repurchase agreement is callable as of December 31, 2017.
The following table sets forth information concerning securities sold under repurchase agreements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
| 2017 |
| 2016 | ||||
Average daily balance during the year |
| $ | 15,903 |
|
| $ | 24,403 |
|
Average interest rate during the year |
|
| 1.77 | % |
|
| 2.58 | % |
Maximum month-end balance during the year |
| $ | 19,188 |
|
| $ | 47,938 |
|
Weighted average interest rate at year-end |
|
| 1.72 | % |
|
| 2.30 | % |
The following table sets forth as of December 31, 2017 the contractual maturities and weighted average interest rates of securities sold under repurchase agreements for each of the next five years. There are no securities sold under repurchase agreements with contractual maturities after 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Maturity (dollars in thousands) |
| Amount |
|
| Weighted | ||
Overnight |
| $ | 11,141 |
|
| .05 | % |
2018 |
|
| 5,000 |
|
| 5.45 |
|
|
| $ | 16,141 |
|
| 1.72 | % |
Overnight repurchase agreements at December 31, 2017 are collateralized by $3.2 million of municipal securities and repurchase agreements due in 2018 are collateralized by $5.5 million of mortgage-backed securities.
Federal Home Loan Bank Advances. FHLB advances are collateralized by a blanket lien on residential and commercial mortgage loans with a lendable value of $2.0 billion at December 31, 2017 and residential and commercial mortgage loans with a lendable value of $1.7 billion at December 31, 2016. Each advance is non-amortizing and, for those advances with a term greater than one day, subject to a prepayment penalty.
The following table sets forth information concerning FHLB advances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
| 2017 |
| 2016 | ||||
Average daily balance during the year |
| $ | 524,404 |
|
| $ | 408,151 |
|
Average interest rate during the year |
|
| 1.68 | % |
|
| 1.70 | % |
Maximum month-end balance during the year |
| $ | 688,797 |
|
| $ | 574,212 |
|
Weighted average interest rate at year-end |
|
| 1.75 | % |
|
| 1.45 | % |
54
The following table sets forth as of December 31, 2017 the contractual maturities and weighted average interest rates of FHLB advances for each of the next five years and the period thereafter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Maturity (dollars in thousands) |
| Amount |
|
| Weighted | ||
Overnight |
| $ | 270,000 |
|
| 1.53 | % |
2018 |
|
| 96,450 |
|
| 1.71 |
|
2019 |
|
| 73,500 |
|
| 1.91 |
|
2020 |
|
| 82,750 |
|
| 1.84 |
|
2021 |
|
| 54,225 |
|
| 1.90 |
|
2022 |
|
| 75,872 |
|
| 2.05 |
|
After 2022 |
|
| 36,000 |
|
| 2.06 |
|
|
|
| 418,797 |
|
| 1.89 |
|
|
| $ | 688,797 |
|
| 1.75 | % |
Other Borrowings. The Bank had no other borrowings at December 31, 2017 or 2016, or at any time during 2016. In 2017, the average balance of other borrowings were de minimis.
NOTE G – INCOME TAXES
The Corporation, the Bank and the Bank’s subsidiaries, except for the REIT, file a consolidated federal income tax return. Income taxes charged to earnings in 2017, 2016 and 2015 had effective tax rates of 22.0%, 22.7% and 22.4%, respectively. The following table sets forth a reconciliation of the statutory federal income tax rate to the Corporation’s effective tax rate.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, | |||||||
|
|
| 2017 |
| 2016 |
| 2015 | |||
Statutory federal income tax rate |
|
| 35.0 | % |
| 35.0 | % |
| 35.0 | % |
State and local income taxes, net of federal income tax benefit |
|
| 2.0 |
|
| .9 |
|
| 2.1 |
|
Tax-exempt income, net of disallowed cost of funding |
|
| (10.2) |
|
| (11.8) |
|
| (14.0) |
|
BOLI income |
|
| (1.2) |
|
| (.9) |
|
| (.9) |
|
Excess tax benefit of stock-based compensation |
|
| (1.7) |
|
| (.9) |
|
| — |
|
Impact of federal tax reform on deferred taxes |
|
| (2.0) |
|
| — |
|
| — |
|
Other |
|
| .1 |
|
| .4 |
|
| .2 |
|
|
|
| 22.0 | % |
| 22.7 | % |
| 22.4 | % |
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. The Corporation recorded a $909,000 credit to income tax expense in 2017, representing a 2.0% reduction in the effective tax rate, resulting from a decrease in the net deferred tax liability to reflect the change in federal tax law.
Provision for Income Taxes. The following table sets forth the components of the provision for income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, | |||||||
(in thousands) |
| 2017 |
| 2016 |
| 2015 | |||
Current: |
|
|
|
|
|
|
|
|
|
Federal |
| $ | 8,139 |
| $ | 7,407 |
| $ | 7,473 |
State and local |
|
| 636 |
|
| 409 |
|
| 874 |
|
|
| 8,775 |
|
| 7,816 |
|
| 8,347 |
Deferred: |
|
|
|
|
|
|
|
|
|
Federal |
|
| 335 |
|
| 1,114 |
|
| (1,059) |
State and local |
|
| 779 |
|
| 119 |
|
| 178 |
|
|
| 1,114 |
|
| 1,233 |
|
| (881) |
|
| $ | 9,889 |
| $ | 9,049 |
| $ | 7,466 |
55
Net Deferred Tax Liability. The following table sets forth the components of the Corporation’s net deferred tax liability.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, | ||||
(in thousands) |
| 2017 |
| 2016 | ||
Deferred tax assets: |
|
|
|
|
|
|
Allowance for loan losses and off-balance-sheet credit exposure |
| $ | 10,097 |
| $ | 12,613 |
Interest on nonperforming loans |
|
| 55 |
|
| 75 |
Accrued bonuses |
|
| — |
|
| 622 |
Accrued legal settlement |
|
| 12 |
|
| 21 |
Stock-based compensation |
|
| 1,382 |
|
| 1,548 |
Supplemental executive retirement expense |
|
| 17 |
|
| 24 |
Directors' retirement expense |
|
| 47 |
|
| 66 |
Accrued rent expense |
|
| 224 |
|
| 277 |
Depreciation |
|
| 724 |
|
| 567 |
Other real estate owned valuation allowance and asset writedown |
|
| 266 |
|
| 70 |
|
|
| 12,824 |
|
| 15,883 |
Valuation allowance |
|
| — |
|
| — |
|
|
| 12,824 |
|
| 15,883 |
Deferred tax liabilities: |
|
|
|
|
|
|
Prepaid pension |
|
| 5,615 |
|
| 7,144 |
Unrealized gains on available-for-sale securities |
|
| 1,259 |
|
| 1,101 |
Deferred loan costs |
|
| 5,142 |
|
| 6,840 |
Prepaid expenses |
|
| 146 |
|
| 141 |
REIT spillover dividend and other |
|
| 3,043 |
|
| 725 |
|
|
| 15,205 |
|
| 15,951 |
Net deferred tax liability |
| $ | 2,381 |
| $ | 68 |
Unrecognized tax benefits at December 31, 2017 were immaterial. The Corporation had no unrecognized tax benefits at December 31, 2016 and 2015. The Corporation has not taken any tax positions for which it is reasonably possible that unrecognized tax benefits will significantly increase within the next twelve months.
The Corporation is subject to Federal, New York State, New York City, New Jersey and Connecticut income taxes. The Corporation did not incur any amounts for interest and penalties due taxing authorities for calendar years 2017, 2016 or 2015. The Corporation’s 2015 federal income tax return is currently under examination.
NOTE H – REGULATORY MATTERS
Minimum Regulatory Capital Requirements. The Corporation and the Bank are subject to the Basel III regulatory capital requirements issued by the Federal Reserve Board and the Office of the Comptroller of the Currency. These requirements are intended to ensure that the Corporation and the Bank maintain minimum ratios of Tier 1 capital to average assets as well as Common Equity Tier 1 capital, Tier 1 capital and Total capital to risk weighted assets. Failure to meet the minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the financial statements of the Corporation and Bank.
Basel III includes guidelines with respect to the components of regulatory capital and calculation of risk weighted assets for balance sheet assets and liabilities and off-balance-sheet positions. The Corporation and the Bank exclude accumulated other comprehensive income components from Tier 1 and Total regulatory capital.
56
Basel III sets forth prompt corrective action (“PCA”) requirements for all banks and establishes a capital conservation buffer and multi-year capital ratio phase-in schedule with full phase-in by 2019. The Corporation and the Bank exceeded the Basel III minimum capital adequacy requirements, including the capital conservation buffer of 1.25% applicable to the Bank for 2017, and the Bank was well capitalized under the PCA provisions at December 31, 2017. The Corporation’s and the Bank’s actual capital amounts and ratios under the Basel III rules at December 31, 2017 and 2016 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 | ||||||||||||||||
|
| Actual Capital |
| Minimum |
| Minimum To Be Well | ||||||||||||
(dollars in thousands) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio | ||||||
Tier 1 capital to average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
| $ | 353,684 |
| 9.34 | % |
| $ | 151,398 |
| 4.00 | % |
|
| N/A |
| N/A |
|
Bank |
|
| 353,568 |
| 9.34 |
|
|
| 151,358 |
| 4.00 |
|
| $ | 189,197 |
| 5.00 | % |
Common equity tier 1 capital to risk |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
| 353,684 |
| 15.28 |
|
|
| 104,128 |
| 4.50 |
|
|
| N/A |
| N/A |
|
Bank |
|
| 353,568 |
| 15.29 |
|
|
| 104,051 |
| 4.50 |
|
|
| 150,296 |
| 6.50 |
|
Tier 1 capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
| 353,684 |
| 15.28 |
|
|
| 138,837 |
| 6.00 |
|
|
| N/A |
| N/A |
|
Bank |
|
| 353,568 |
| 15.29 |
|
|
| 138,735 |
| 6.00 |
|
|
| 184,980 |
| 8.00 |
|
Total capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
| 382,670 |
| 16.54 |
|
|
| 185,116 |
| 8.00 |
|
|
| N/A |
| N/A |
|
Bank |
|
| 382,533 |
| 16.54 |
|
|
| 184,980 |
| 8.00 |
|
|
| 231,225 |
| 10.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2016 | ||||||||||||||||
Tier 1 capital to average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
| $ | 307,214 |
| 8.89 | % |
| $ | 138,249 |
| 4.00 | % |
|
| N/A |
| N/A |
|
Bank |
|
| 307,491 |
| 8.90 |
|
|
| 138,224 |
| 4.00 |
|
| $ | 172,781 |
| 5.00 | % |
Common equity tier 1 capital to risk |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
| 307,214 |
| 14.70 |
|
|
| 94,032 |
| 4.50 |
|
|
| N/A |
| N/A |
|
Bank |
|
| 307,491 |
| 14.72 |
|
|
| 94,022 |
| 4.50 |
|
|
| 135,809 |
| 6.50 |
|
Tier 1 capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
| 307,214 |
| 14.70 |
|
|
| 125,377 |
| 6.00 |
|
|
| N/A |
| N/A |
|
Bank |
|
| 307,491 |
| 14.72 |
|
|
| 125,362 |
| 6.00 |
|
|
| 167,150 |
| 8.00 |
|
Total capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
| 333,384 |
| 15.95 |
|
|
| 167,169 |
| 8.00 |
|
|
| N/A |
| N/A |
|
Bank |
|
| 333,658 |
| 15.97 |
|
|
| 167,150 |
| 8.00 |
|
|
| 208,937 |
| 10.00 |
|
Other Matters.A source of funds for dividend payments to shareholders is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid by the Bank without prior approval of regulatory agencies. Under these regulations, the amount of dividends that the Bank may pay in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the minimum capital requirements described above. During 2018, the Bank could, without prior approval, declare dividends of approximately $52,669,000 plus any 2018 net profits retained to the date of the dividend declaration.
Regulation D of the Board of Governors of The Federal Reserve System requires banks to maintain reserves against certain deposit balances. The Bank’s average reserve requirement for 2017 was approximately $29,917,000.
NOTE I – STOCK-BASED COMPENSATION
On April 22, 2014, the stockholders of the Corporation approved the 2014 Equity Incentive Plan (“2014 Plan”). Upon approval of the 2014 Plan, no further awards could be made under the 2006 Stock Compensation Plan (“2006 Plan”).
57
2014 Plan. Under the 2014 Plan, awards may be granted to employees and non-employee directors as non-qualified stock options (“NQSOs”), stock appreciation rights (“SARs”), restricted stock awards, RSUs, or any combination thereof, any of which may be subject to performance-based vesting conditions. Awards may also be granted to employees as incentive stock options (“ISOs”). The exercise price of stock options and SARs granted under the 2014 Plan may not be less than the fair market value of the Corporation’s common stock on the date the stock option is granted. The 2014 Plan is administered by the Compensation Committee of the Board of Directors. Almost all of the awards granted to date under the 2014 Plan are RSUs. All awards granted under the 2014 Plan will immediately vest upon an involuntary termination following a change in control, total and permanent disability, as defined, or death, and with certain exceptions, will immediately vest in the event of retirement, as defined.
The Corporation has 2,250,000 shares of common stock reserved for awards under the 2014 Plan. Awards granted under the 2006 Plan that expire or are forfeited after April 22, 2014 will be added to the number of shares of common stock reserved for issuance of awards under the 2014 Plan. All of the 2,250,000 shares may be issued pursuant to the exercise of stock options or SARs. A maximum of 787,500 shares may be issued as restricted stock awards or RSUs. At December 31, 2017, 1,933,819 equity awards remain available to be granted under the 2014 Plan of which 454,449 may be granted as restricted stock awards or RSUs.
Details of RSUs. The following table summarizes the vesting schedule of RSUs outstanding at December 31, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
Number of RSUs : |
|
|
|
|
|
Awarded during the year | 94,329 |
| 107,274 |
| 112,868 |
Outstanding at December 31, 2017 | 92,997 |
| 88,074 |
| 93,063 |
|
|
|
|
|
|
Vested and convertible at December 31, 2017 | — |
| — |
| 86,532 |
Scheduled to vest during: |
|
|
|
|
|
2018 | 10,113 |
| 78,278 |
| 6,531 |
2019 | 69,208 |
| 7,546 |
| — |
2020 | 10,426 |
| 2,250 |
| — |
2021 | 3,250 |
| — |
| — |
Total RSUs vested and expected to vest | 92,997 |
| 88,074 |
| 93,063 |
The RSUs in the table above include performance-based RSUs with vesting based on the financial performance of the Corporation in 2017, 2018 and 2019 and service-based RSUs with various service-based vesting periods. The grant date fair value of RSUs awarded in 2016 is equal to the market price of the shares underlying the awards on the grant date. The grant date fair value of RSUs awarded in 2015 and 2017 is equal to the market price of the shares underlying the awards on the grant date, discounted for dividends that are not paid on these RSUs. The fair values of awards made in 2017, 2016 and 2015, as well as the assumptions utilized in determining such values, is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 | ||||
|
| Performance-Based |
| Service-Based | ||
|
| Vesting |
| Vesting | ||
Grant date fair value |
| $26.27 |
| $ 25.35 | to | $ 26.00 |
Market price on grant date |
| $27.90 |
| $ 27.50 | to | $ 28.15 |
Expected annual dividend |
| $.56 |
|
|
| $.56 |
Expected term (in years) |
| 3.0 |
| 3.0 | to | 4.0 |
Risk-free interest rate |
| 1.49% |
| 1.60% | to | 1.67% |
|
|
|
|
|
|
|
|
| 2016 | ||||
Grant date fair value |
| $18.17 |
| $ 18.17 | to | $ 22.17 |
Market price on grant date |
| $18.17 |
| $ 18.17 | to | $ 22.17 |
|
|
|
|
|
|
|
|
| 2015 | ||||
Grant date fair value |
| $14.12 |
| $ 15.61 | to | $ 16.94 |
Market price on grant date |
| $15.63 |
| $ 17.13 | to | $ 18.51 |
Expected annual dividend |
| $.51 |
| $.51 | to | $.53 |
Expected term (in years) |
| 3.0 |
|
|
| 3.0 |
Risk-free interest rate |
| .21% |
| .28% | to | .38% |
In January 2018, 72,128 RSUs were awarded under the 2014 Plan, including 32,840 performance-based RSUs and 39,288 service-based RSUs.
58
The following table presents a summary of RSUs outstanding at December 31, 2017 and changes during the year 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, 2017 |
| 245,010 |
| $ 16.52 |
|
|
|
|
|
Granted |
| 94,329 |
| 26.24 |
|
|
|
|
|
Converted |
| (65,205) |
| 17.48 |
|
|
|
|
|
Outstanding at December 31, 2017 |
| 274,134 |
| $ 19.64 |
| 0.94 |
| $ 7,813 |
|
Vested and Convertible at December 31, 2017 |
| 86,532 |
| $ 14.12 |
| — |
| $ 2,466 |
|
|
|
|
|
|
|
|
|
|
|
The performance-based RSUs granted in 2017 have a maximum payout potential of 1.25 shares of the Corporation’s common stock for each RSU awarded. All other RSUs outstanding at December 31, 2017 have a maximum payout potential of one share of the Corporation’s common stock for each RSU awarded. RSUs outstanding at December 31, 2017 include 86,532 RSUs that were vested and convertible into common stock at year-end and 187,602 RSUs that are currently expected to vest and become convertible in the future. The total intrinsic value of RSUs converted in 2017, 2016 and 2015 was $1,779,000, $1,445,000 and $965,000, respectively.
2006 Plan. The 2006 Plan was approved by the stockholders of the Corporation on April 18, 2006. The 2006 Plan permitted the granting of stock options, SARs, restricted stock awards and RSUs to employees and non-employee directors. Under the terms of the 2006 Plan, stock options and SARs could not have an exercise price that was less than 100% of the fair market value of one share of the underlying common stock on the date of grant. Through December 31, 2011, equity grants to executive officers and directors under the 2006 Plan consisted of a combination of NQSOs and RSUs, while equity grants to other officers consisted solely of NQSOs. Beginning in 2012, equity grants under the 2006 Plan consisted solely of RSUs. Stock options granted under the 2006 Plan have a five year vesting period and a ten year term.
Fair Value of Stock Options. The grant date fair value of options was estimated on the date of grant using the Black-Scholes option pricing model. Expected volatility was based on historical volatility for the expected term of the options. The Corporation used historical data to estimate the expected term of options granted. The risk-free interest rate was the implied yield at the time of grant on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the options.
Stock Option Activity. The following table presents a summary of options outstanding at December 31, 2017 and changes during the year then ended.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted- |
|
|
|
|
|
|
| Weighted- |
| Average |
| Aggregate |
|
|
|
|
| Average |
| Remaining |
| Intrinsic |
|
|
| Number of |
| Exercise |
| Contractual |
| Value |
|
|
| Options |
| Price |
| Term (yrs.) |
| (in thousands) |
|
Outstanding at January 1, 2017 |
| 257,262 |
| $ 10.61 |
|
|
|
|
|
Exercised |
| (97,455) |
| 9.41 |
|
|
|
|
|
Outstanding at December 31, 2017 |
| 159,807 |
| $ 11.35 |
| 2.08 |
| $ 2,741 |
|
Exercisable at December 31, 2017 |
| 159,357 |
| $ 11.33 |
| 2.07 |
| $ 2,736 |
|
|
|
|
|
|
|
|
|
|
|
All options outstanding at December 31, 2017 are either fully vested or expected to vest. The total intrinsic value of options exercised in 2017, 2016 and 2015 was $1,833,000, $853,000 and $602,000, respectively.
Compensation Expense. The Corporation recorded compensation expense for share-based payments of $2,434,000, $1,517,000 and $1,319,000 in 2017, 2016 and 2015, respectively, and related income tax benefits of $1,019,000, $637,000 and $543,000, respectively.
Unrecognized Compensation Cost. As of December 31, 2017, there was $1,408,000 of total unrecognized compensation cost related to non-vested equity awards comprised of $2,000 for options and $1,406,000 for RSUs. The total cost is expected to be recognized over a weighted-average period of 1.50 years which is based on weighted average periods of 2.43 years and 1.49 years for options and RSUs, respectively.
Cash Received and Tax Benefits Realized. Cash received from option exercises in 2017, 2016 and 2015, was $917,000, $906,000 and $707,000, respectively. Tax benefits from stock option exercises were $767,000, $356,000 and $240,000 in 2017, 2016 and 2015, respectively.
59
Other. No cash was used to settle stock options in 2017, 2016 or 2015. The Corporation uses newly issued shares to settle stock option exercises and for the conversion of RSUs. During 2017, 2,060 shares of the Corporation’s common stock were issued to a member of the Board of Directors in payment of director fees.
NOTE J – RETIREMENT PLANS
The Bank has a 401(k) plan, defined benefit pension plan and supplemental executive retirement plan. Employees are immediately eligible to participate in the 401(k) plan provided they are at least 18 years of age. Participants may elect to contribute, on a tax-deferred basis, up to 100% of gross compensation, as defined, subject to the limitations of Section 401(k) of the Internal Revenue Code. The Bank may, at its sole discretion, make matching contributions to each participant's account based on the amount of the participant's tax deferred contributions. Participants are fully vested in their elective contributions and, after five years of participation in the 401(k) plan, are fully vested (20% vesting per year) in the matching contributions, if any, made by the Bank. The Bank’s expense for matching contributions was $441,000, $396,000 and $397,000 for 2017, 2016 and 2015, respectively.
The Bank has a defined benefit pension plan (“Pension Plan” or “Plan”). An internal management committee (the “Committee”) oversees the affairs of the Plan and acts as named fiduciary. The Committee has retained Vanguard Group, Inc., including its subsidiaries and affiliates (“Vanguard”), to act as discretionary investment agent, trustee and custodian for the Plan. Vanguard has formulated investment recommendations customized to meet the Committee’s objectives and, after approval by the Committee, such investment recommendations are incorporated into the investment guidelines and policies contained in the investment management agreement between the Bank and Vanguard (the “Investment Management Agreement”). The Committee adopted a formal Investment Policy Statement which includes, among other things, the investment guidelines and policies contained in the Investment Management Agreement. The Investment Policy Statement is periodically revised by the Committee as deemed appropriate.
Employees are eligible to participate in the Pension Plan after attaining 21 years of age and completing 12 full months of service. Pension benefits are generally based on a percentage of average annual compensation during the period of creditable service. The Bank makes contributions to the Pension Plan which, when taken together with participant contributions equal to 2% of their compensation, will be sufficient to fund these benefits. The Bank’s funding method, the unit credit actuarial cost method, is consistent with the funding requirements of applicable federal laws and regulations which set forth both minimum required and maximum tax deductible contributions. Employees become fully vested after four years of participation in the Pension Plan (no vesting occurs during the four-year period).
Significant Actuarial Assumptions. The following table sets forth the significant actuarial assumptions used to determine the benefit obligation at December 31, 2017, 2016 and 2015 and the benefit cost for each of the Plan years then ended.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
|
| 2015 | |||||
Weighted average assumptions used to determine the |
|
|
|
|
|
|
|
|
|
|
|
|
benefit obligation at year end: |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
| 3.93% |
|
|
| 4.40% |
|
|
| 4.54% |
|
Rate of increase in compensation levels |
|
| 3.50% |
|
|
| 3.50% |
|
|
| 3.50% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions used to determine net pension cost: |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
| 4.40% |
|
|
| 4.54% |
|
|
| 4.02% |
|
Rate of increase in compensation levels |
|
| 3.50% |
|
|
| 3.50% |
|
|
| 3.50% |
|
Expected long-term rate of return on plan assets |
|
| 5.50% |
|
|
| 6.00% |
|
|
| 6.00% |
|
The decrease in the discount rate from 4.40% in 2016 to 3.93% in 2017 increased the projected benefit obligation at December 31, 2017 by approximately $2,377,000. In calculating the benefit obligation at December 31, 2017, the mortality table previously utilized, RP-2014 Healthy Annuitant/Employee Mortality Table with Projection Scale MP-2016, was adjusted to reflect Scale MP-2017. The updated mortality table decreased the projected benefit obligation at December 31, 2017 by approximately $277,000.
The decrease in the discount rate from 4.54% in 2015 to 4.40% in 2016 increased the projected benefit obligation at December 31, 2016 by $643,000. In calculating the benefit obligation at December 31, 2016, the mortality table previously utilized, RP-2014 Healthy Annuitant/Employee Mortality Table with Projection Scale MP-2015, was adjusted to reflect Scale MP-2016. The updated mortality table decreased the projected benefit obligation at December 31, 2016 by approximately $536,000. In addition, a change in the withdrawal/ turnover assumption from the T-3 table of the Pension Actuary’s Handbook to the 2003 SOA Pension Plan Turnover Table decreased the projected benefit obligation at December 31, 2016 by $157,000.
60
The increase in the discount rate from 4.02% in 2014 to 4.54% in 2015 decreased the projected benefit obligation at December 31, 2015 by $2,915,000. In calculating the benefit obligation at December 31, 2015, the mortality table was changed from RP-2014 Healthy Annuitant/Employee Mortality Table with Projection Scale MP-2014 to reflect Scale MP-2015. The updated mortality table decreased the projected benefit obligation at December 31, 2015 by approximately $270,000.
Net Pension Cost. The following table sets forth the components of net periodic pension cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
| 2017 |
|
| 2016 |
|
| 2015 | |||
Service cost plus expected expenses and net of expected |
| $ | 1,214 |
|
| $ | 1,142 |
|
| $ | 1,189 |
Interest cost |
|
| 1,590 |
|
|
| 1,584 |
|
|
| 1,408 |
Expected return on plan assets |
|
| (2,940) |
|
|
| (2,953) |
|
|
| (3,086) |
Amortization of net actuarial loss |
|
| 18 |
|
|
| 244 |
|
|
| — |
Net pension cost (credit) |
| $ | (118) |
|
| $ | 17 |
|
| $ | (489) |
No portion of the net actuarial loss for the defined benefit plan will be amortized from accumulated other comprehensive income into net periodic pension cost in 2018. Prior service cost was fully amortized from accumulated other comprehensive income into net periodic pension cost as of December 31, 2014.
Funded Status of the Plan. The following table sets forth the change in the projected benefit obligation and Plan assets for each year and, as of the end of each year, the funded status of the Plan and accumulated benefit obligation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
| 2017 |
|
| 2016 |
|
| 2015 | |||
Change in projected benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year |
| $ | 37,016 |
|
| $ | 35,684 |
|
| $ | 35,787 |
Service cost |
|
| 1,386 |
|
|
| 1,283 |
|
|
| 1,267 |
Interest cost |
|
| 1,590 |
|
|
| 1,584 |
|
|
| 1,408 |
Benefits paid |
|
| (1,510) |
|
|
| (1,364) |
|
|
| (1,288) |
Assumption changes |
|
| 2,100 |
|
|
| (50) |
|
|
| (3,185) |
Experience loss (gain) and other |
|
| 802 |
|
|
| (121) |
|
|
| 1,695 |
Projected benefit obligation at end of year |
|
| 41,384 |
|
|
| 37,016 |
|
|
| 35,684 |
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of plan assets: |
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
| 54,332 |
|
|
| 50,021 |
|
|
| 52,208 |
Actual return on plan assets |
|
| 7,497 |
|
|
| 3,919 |
|
|
| (1,071) |
Employer contributions |
|
| — |
|
|
| 1,553 |
|
|
| — |
Plan participant contributions |
|
| 321 |
|
|
| 301 |
|
|
| 270 |
Benefits paid |
|
| (1,510) |
|
|
| (1,365) |
|
|
| (1,288) |
Expenses |
|
| (104) |
|
|
| (97) |
|
|
| (98) |
Fair value of plan assets at end of year |
|
| 60,536 |
|
|
| 54,332 |
|
|
| 50,021 |
Funded status at end of year |
| $ | 19,152 |
|
| $ | 17,316 |
|
| $ | 14,337 |
Accumulated benefit obligation |
| $ | 38,544 |
|
| $ | 34,451 |
|
| $ | 32,716 |
During 2017, the Bank did not make a contribution into the Plan and the Bank has no minimum required pension contribution for the Plan year ending September 30, 2018. The Bank cannot make a tax-deductible contribution for the tax year beginning January 1, 2018.
Plan Assets. The objective for the Plan’s assets is to generate long-term investment returns from both income and capital appreciation which outpaces the rate of inflation, while maintaining sufficient liquidity to ensure the Plan’s ability to pay all anticipated benefit and expense obligations when due. The Plan will maintain a de minimis amount of cash equivalents, with the remaining assets allocated across two broadly-defined financial asset categories: (1) equity, both domestic and international; and (2) fixed income of various durations and issuer type. The goal of the equity allocation is to supplement the Bank’s contributions to the Plan when the Plan is underfunded and increase surplus when the Plan is overfunded. The fixed income component will include longer-duration bonds designed to match and hedge the characteristics of the Plan’s liabilities. Cash equivalents, under normal circumstances, will be temporary holdings for the purpose of paying expenses and monthly benefits.
For fixed income investments: (1) the minimum average credit quality shall be investment grade (Standard & Poor’s BBB or Moody’s Baa) or higher; and (2) no more than 5% of the portfolio may be invested in securities with ratings below investment grade, and none
NOTE F – BORROWED FUNDS
Borrowings at December 31, 2023 and 2022 consisted of overnight and fixed rate Federal Home Loan Bank (“FHLB”) advances as follows.
December 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Short-term borrowings: | ||||||||
FHLB overnight advances | $ | 70,000 | $ | — | ||||
Long-term debt: | ||||||||
FHLB advances | 472,500 | 411,000 | ||||||
$ | 542,500 | $ | 411,000 |
Accrued interest payable on borrowed funds is included in “accrued expenses and other liabilities” in the consolidated balance sheets and amounted to $1.4 million and $535,000 at December 31, 2023 and 2022, respectively.
FHLB advances are collateralized by a blanket lien on residential and commercial mortgage loans with a lendable value of $1.9 billion and $2.2 billion at December 31, 2023 and 2022, respectively. Each advance is non-amortizing and, for those advances with a term greater than one day, subject to a prepayment penalty. Short-term FHLB advances are those with original maturities of 90 days or less.
The following table sets forth as of December 31, 2023 the contractual maturities and weighted average interest rates of FHLB advances for each of the next five years. There are no FHLB advances with contractual maturities beyond three years at December 31, 2023.
Contractual Maturity (dollars in thousands) | Amount | Weighted Average Rate | ||||||
Overnight | $ | 70,000 | 5.64 | % | ||||
2024 | 387,500 | 4.79 | ||||||
2025 | 75,000 | 4.51 | ||||||
2026 | 10,000 | 2.12 | ||||||
2027 | — | — | ||||||
2028 | — | — | ||||||
After 2028 | — | — | ||||||
472,500 | 4.69 | |||||||
$ | 542,500 | 4.81 | % |
NOTE G – INCOME TAXES
The Corporation, the Bank and it’s subsidiaries, except for the REIT, file a consolidated federal income tax return. Income taxes charged to earnings in 2023, 2022 and 2021 had effective tax rates of 11.0%, 19.4% and 19.2%, respectively. The following table sets forth a reconciliation of the statutory federal income tax rate to the Corporation’s effective tax rate.
Year Ended December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Statutory federal income tax rate | 21.0 | % | 21.0 | % | 21.0 | % | ||||||
State and local income taxes, net of federal income tax benefit | (4.8 | ) | 1.7 | 2.1 | ||||||||
Tax-exempt income, net of disallowed cost of funding | (3.3 | ) | (2.8 | ) | (3.3 | ) | ||||||
BOLI income | (2.3 | ) | (1.1 | ) | (0.9 | ) | ||||||
Excess tax benefit of stock-based compensation | 0.4 | — | 0.1 | |||||||||
Non-deductible officer compensation | — | 0.1 | — | |||||||||
Other | — | 0.5 | 0.2 | |||||||||
11.0 | % | 19.4 | % | 19.2 | % |
Provision for Income Taxes. The following table sets forth the components of the provision for income taxes.
Year Ended December 31, | ||||||||||||
(in thousands) | 2023 | 2022 | 2021 | |||||||||
Current: | ||||||||||||
Federal | $ | 3,469 | $ | 9,287 | $ | 8,807 | ||||||
State and local | 909 | 1,330 | 1,467 | |||||||||
4,378 | 10,617 | 10,274 | ||||||||||
Deferred: | ||||||||||||
Federal | 1,771 | 358 | (76 | ) | ||||||||
State and local | (2,920 | ) | 312 | 20 | ||||||||
(1,149 | ) | 670 | (56 | ) | ||||||||
$ | 3,229 | $ | 11,287 | $ | 10,218 |
Net Deferred Tax Asset. The following table sets forth the components of the Corporation’s net deferred tax asset.
December 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Deferred tax assets: | ||||||||
Unrealized loss on AFS securities | $ | 22,070 | $ | 24,957 | ||||
Allowance for credit losses and off-balance sheet credit exposure | 9,036 | 9,767 | ||||||
Operating lease liability | 7,627 | 7,951 | ||||||
Net operating loss carryforwards | 2,869 | — | ||||||
Stock-based compensation | 519 | 865 | ||||||
Asset writedown | 51 | 51 | ||||||
Retirement expense | 35 | 38 | ||||||
Interest on nonperforming loans | 14 | 6 | ||||||
Contract incentive | — | 139 | ||||||
Accrued bonuses and severance | — | 50 | ||||||
42,221 | 43,824 | |||||||
Valuation allowance | — | — | ||||||
42,221 | 43,824 | |||||||
Deferred tax liabilities: | ||||||||
Right-of-use asset | 6,908 | 7,354 | ||||||
Prepaid pension | 3,274 | 3,370 | ||||||
Depreciation | 1,509 | 272 | ||||||
Deferred loan costs | 1,365 | 1,545 | ||||||
Prepaid expenses | 146 | 159 | ||||||
Interest rate swap fair market value adjustment | 23 | — | ||||||
13,225 | 12,700 | |||||||
Net deferred tax asset | $ | 28,996 | $ | 31,124 |
The Corporation had no material unrecognized tax benefits at December 31,2023, 2022 or 2021. The Corporation has not taken any tax positions for which it is reasonably possible that unrecognized tax benefits will significantly increase within the next 12 months.
The Corporation is subject to Federal, New York State ("NYS"), NYC, New Jersey and Connecticut income taxes. The Corporation did not incur any amounts for interest and penalties due taxing authorities for calendar years 2023, 2022 or 2021. The tax years 2021 through 2023 remain open to examination by the Internal Revenue Service, NYS, NYC, New Jersey and Connecticut.
NOTE H – REGULATORY MATTERS
Minimum Regulatory Capital Requirements. The Corporation and the Bank are subject to the Basel III regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action (“PCA”) regulations, involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Failure to meet the minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the financial statements of the Corporation and Bank. The most recent regulatory notifications categorized the Bank as well capitalized under the PCA provisions and there are no conditions or events since that notification that management believes have changed that category.
In accordance with the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies adopted, effective January 1, 2020, a final rule whereby financial institutions and financial institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9% (“qualifying community banking organizations”), are eligible to opt into a community bank leverage ratio (“CBLR”) framework. Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% are considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules and will be considered to have met the well capitalized ratio requirements under the PCA statutes. The agencies reserved the authority to disallow the use of the CBLR framework by a financial institution or holding company, based on the risk profile of the organization.
The Corporation and the Bank elected to adopt the CBLR framework. 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.
The Corporation and the Bank exclude accumulated OCI components from Tier 1 and Total regulatory capital.
During 2020, 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’s and the Bank’s actual and required capital amounts and ratios under the CBLR rules at December 31, 2023 and 2022 are presented in the tables below.
2023 | ||||||||||||||||
Actual Capital | To Be Well Capitalized Under CBLR Framework | |||||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | ||||||||||||
Tier 1 capital to average assets: | ||||||||||||||||
Consolidated | $ | 435,643 | 10.05 | % | $ | 389,969 | 9.00 | % | ||||||||
Bank | 438,648 | 10.13 | 389,874 | 9.00 |
2022 | ||||||||||||||||
Actual Capital | To Be Well Capitalized Under CBLR Framework | |||||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | ||||||||||||
Tier 1 capital to average assets: | ||||||||||||||||
Consolidated | $ | 430,366 | 9.83 | % | $ | 394,017 | 9.00 | % | ||||||||
Bank | 429,377 | 9.81 | 393,883 | 9.00 |
Other Matters.The source of funds for the Corporation’s dividend payments to shareholders is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid by the Bank without prior approval of regulatory agencies. Under these regulations, the amount of dividends that the Bank may pay in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the minimum capital requirements described above. During 2024, the Bank could, without prior approval, declare dividends of approximately $25.1 million plus any 2024 net profits retained to the date of the dividend declaration.
Regulation D of the Board of Governors of The Federal Reserve System may require banks to maintain reserves against certain deposit balances. There was no reserve requirement in 2023 or 2022.
NOTE I – STOCK-BASED COMPENSATION
On April 20,2021, the stockholders of the Corporation approved the 2021 Equity Incentive Plan (“2021 Plan”). Upon approval of the 2021 Plan, no further awards could be made under the 2014 Equity Incentive Plan (“2014 Plan”).
2021 Plan. Under the 2021 Plan, awards may be granted to employees and non-employee directors as stock options, restricted stock awards or RSUs, with a one year minimum vesting period for at least 95% of the awards granted. All awards granted under the 2021 Plan will immediately vest upon an involuntary termination following a change in control, total and permanent disability, as defined, or death.
The Corporation has 750,000 shares of common stock reserved for awards under the 2021 Plan, plus 23,167 shares that remained available for grant as full value RSUs or restricted stock awards under the 2014 Plan. RSUs granted under the 2014 Plan that expire or are forfeited after April 20,2021 are added to the number of shares of common stock reserved for issuance of awards under the 2021 Plan. At December 31, 2023, 524,573 equity awards remain available to be granted under the 2021 Plan.
2014 Plan. Under the 2014 Plan, awards were granted to employees and non-employee directors as non-qualified stock options, restricted stock awards and RSUs. Substantially all of the awards granted under the 2014 Plan were RSUs. All awards granted under the 2014 Plan will immediately vest upon an involuntary termination following a change in control, total and permanent disability, as defined, or death, and with certain exceptions, will immediately vest in the event of retirement, as defined.
Details of RSUs. The following table summarizes the vesting schedule of RSUs outstanding at December 31, 2023.
Total | |||
Number of RSUs: | |||
Vested and convertible at December 31, 2023 | 6,641 | ||
Scheduled to vest during: | |||
2024 | 119,983 | ||
2025 | 35,770 | ||
2026 | 42,276 | ||
2027 | 6,060 | ||
2028 | 3,149 | ||
213,879 |
The RSUs in the table above include performance-based RSUs with vesting based on the financial performance of the Corporation in 2023 and 2024 and service-based RSUs with various service-based vesting periods. The grant date fair value of RSUs is equal to the market price of the shares underlying the awards on the grant date, discounted for dividends that are not paid on these RSUs.
The fair values of awards made in 2023, 2022 and 2021, and the assumptions utilized in determining such values, are presented below.
2023 | ||||||
Performance-Based | Service-Based | |||||
Vesting | Vesting | |||||
Grant date fair value | $16.57 | $11.77 | to | $16.57 | ||
Market price on grant date | $18.14 | $12.57 | to | $18.14 | ||
Expected annual dividend | $0.84 | $0.84 | ||||
Expected term (in years) | 2.0 | 1.0 | to | 5.0 | ||
Risk-free interest rate | 4.24% | 4.01% | to | 4.80% | ||
2022 | ||||||
Grant date fair value | $20.07 | $17.70 | to | $20.07 | ||
Market price on grant date | $21.64 | $18.12 | to | $21.64 | ||
Expected annual dividend | $0.80 | $0.42 | to | $0.80 | ||
Expected term (in years) | 2.0 | 1.0 | to | 5.0 | ||
Risk-free interest rate | 1.12% | 1.12% | to | 4.56% | ||
2021 | ||||||
Grant date fair value | $15.31 | $15.31 | to | $20.54 | ||
Market price on grant date | $16.83 | $16.83 | to | $21.58 | ||
Expected annual dividend | $0.76 | $0.76 | to | $0.80 | ||
Expected term (in years) | 2.0 | 1.0 | to | 3.0 | ||
Risk-free interest rate | 0.13% | 0.08% | to | 0.52% |
In January 2024, 185,911 RSUs were awarded under the 2021 Plan, including 118,298 performance-based RSUs and 67,613 service-based RSUs.
The following table presents a summary of RSUs outstanding at December 31, 2023 and changes during the year 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 | (122,114 | ) | 18.32 | |||||||||||||
Forfeited | (93,811 | ) | 17.97 | |||||||||||||
Outstanding at December 31, 2023 | 213,879 | $ | 16.04 | 0.98 | $ | 2,832 | ||||||||||
Vested and convertible at December 31, 2023 | 6,641 | $ | 16.57 | — | $ | 88 |
RSUs outstanding at December 31, 2023 include 42,847 performance-based RSUs granted in 2023, of which 6,641 are vested and convertible at year-end, and 171,032 service-based RSUs. The performance-based RSUs have a maximum payout potential of 1.50 shares of the Corporation’s common stock for each RSU awarded. Based on the Corporation’s performance in 2023, 63,917 shares were forfeited on the performance-based RSUs and reflected in the table above. Service-based RSUs have a maximum payout potential of one share of the Corporation’s common stock for each RSU awarded.
The total intrinsic value of RSUs converted in 2023, 2022 and 2021 was $2.2 million, $2.0 million and $1.6 million, respectively.
Stock Option Activity. During 2022, the 750 stock options outstanding at December 31, 2021 were forfeited. There were no stock options outstanding at December 31, 2023 or 2022.
No stock options were exercised in 2023 or 2022. The total intrinsic value of options exercised in 2021 was $55,000. Cash received from option exercises in 2021 was $133,000 and the tax benefit from these exercises was $17,000.
Compensation Expense. The Corporation recorded expense for share-based payments of $1.2 million, $2.5 million and $1.6 million in 2023, 2022 and 2021, respectively, and related income tax benefits of $383,000, $760,000 and $420,000, respectively.
Unrecognized Compensation Cost. As of December 31, 2023, there was $1.8 million of total 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.
Other. No cash was used to settle stock options in 2022 or 2021. The Corporation uses newly issued shares for the conversion of RSUs. During 2023, 2022 and 2021, 4,573, 3,315 and 6,580 shares, respectively, of the Corporation’s common stock were issued to members of the Board of Directors in payment of director fees.
NOTE J – RETIREMENT PLANS
The Bank has a 401(k) plan and a defined benefit pension plan (“Pension Plan” or “Plan”). Employees are immediately eligible to participate in the 401(k) plan provided they are at least 18 years of age. Participants may elect to contribute up to 100% of gross compensation, as defined, subject to the limitations of Section 401(k) of the Internal Revenue Code. The Bank may, at its sole discretion, make matching contributions to each participant's account based on the amount of the participant's contributions. Participants are fully vested in their elective contributions and, after five years of participation in the 401(k) plan, are fully vested (20% vesting per year) in the matching contributions, if any, made by the Bank. The Bank’s expense for matching contributions was $571,000, $530,000 and $519,000 for 2023, 2022 and 2021, respectively.
An internal management committee (the “Committee”) oversees the affairs of the Pension Plan and acts as named fiduciary. The Committee has retained Vanguard Group, Inc., including its subsidiaries and affiliates (“Vanguard”), to act as discretionary investment agent, trustee and custodian for the Plan. Vanguard has formulated investment recommendations customized to meet the Committee’s objectives and, after approval by the Committee, such investment recommendations are incorporated into the investment guidelines and policies contained in the investment management agreement between the Bank and Vanguard (the “Investment Management Agreement”). The Committee utilizes a formal Investment Policy Statement which includes the investment guidelines and policies contained in the Investment Management Agreement. The Investment Policy Statement is periodically revised by the Committee as deemed appropriate.
Employees are eligible to participate in the Pension Plan after attaining 21 years of age and completing 12 full months of service. Pension benefits are generally based on a percentage of average annual compensation during the period of creditable service. The Bank makes contributions to the Pension Plan which, when taken together with participant contributions equal to 2% of their compensation, will be sufficient to fund these benefits. The Bank’s funding method, the unit credit actuarial cost method, is consistent with the funding requirements of applicable federal laws and regulations which set forth both minimum required and maximum tax deductible contributions. Employees become fully vested after four years of participation in the Pension Plan (no vesting occurs during the four year period).
Significant Actuarial Assumptions. The following table sets forth the significant actuarial assumptions used to determine the benefit obligation at December 31,2023, 2022 and 2021 and the benefit cost for each of the Plan years then ended.
2023 | 2022 | 2021 | ||||||||||
Weighted average assumptions used to determine the | ||||||||||||
benefit obligation at year end: | ||||||||||||
Discount rate | 5.16% | 5.44% | 2.97% | |||||||||
Rate of increase in compensation levels | 4.00% | 3.50% | 3.50% | |||||||||
Weighted average assumptions used to determine net pension cost: | ||||||||||||
Discount rate | 5.44% | 2.97% | 2.67% | |||||||||
Rate of increase in compensation levels | 3.50% | 3.50% | 3.50% | |||||||||
Expected long-term rate of return on plan assets | 6.00% | 5.25% | 5.25% |
The decrease in the discount rate from 5.44% in 2022 to 5.16% in 2023 increased the projected benefit obligation at December 31, 2023 by approximately $1.5 million. The increase in the salary scale from 3.50% in 2022 to 4.00% in 2023 increased the projected benefit obligation at December 31, 2023 by approximately $296,000. Changes due to experience, including changes in participant demographics, resulted in a net actuarial loss of approximately $1.0 million during 2023.
The increase in the discount rate from 2.97% in 2021 to 5.44% in 2022 decreased the projected benefit obligation at December 31, 2022 by approximately $15.3 million. Changes due to experience, including changes in participant demographics, resulted in a net actuarial loss of approximately $1.6 million during 2022.
Net Pension Cost. The following table sets forth the components of net periodic pension cost.
(in thousands) | 2023 | 2022 | 2021 | |||||||||
Service cost plus expected expenses and net of expected plan | ||||||||||||
participant contributions | $ | 1,378 | $ | 2,133 | $ | 2,131 | ||||||
Interest cost | 2,341 | 1,641 | 1,454 | |||||||||
Expected return on plan assets | (3,245 | ) | (3,903 | ) | (3,914 | ) | ||||||
Amortization of net actuarial loss | 1,018 | — | — | |||||||||
Net pension cost (credit) | $ | 1,492 | $ | (129 | ) | $ | (329 | ) |
The components of net pension credit other than the service cost component were included in the line item “Other noninterest income” in the consolidated statements of income. The service cost component was included in the line item “Salaries and employee benefits” in the consolidated statements of income.
Funded Status of the Plan. The following table sets forth the change in the projected benefit obligation and Plan assets for each year and, as of the end of each year, the funded status of the Plan and accumulated benefit obligation.
(in thousands) | 2023 | 2022 | 2021 | |||||||||
Change in projected benefit obligation: | ||||||||||||
Projected benefit obligation at beginning of year | $ | 44,460 | $ | 56,587 | $ | 55,642 | ||||||
Service cost | 1,630 | 2,357 | 2,340 | |||||||||
Interest cost | 2,341 | 1,641 | 1,454 | |||||||||
Benefits paid | (2,430 | ) | (2,361 | ) | (2,264 | ) | ||||||
Assumption changes | 1,778 | (15,343 | ) | (2,173 | ) | |||||||
Experience loss and other | 1,019 | 1,579 | 1,588 | |||||||||
Projected benefit obligation at end of year | 48,798 | 44,460 | 56,587 | |||||||||
Change in fair value of plan assets: | ||||||||||||
Fair value of plan assets at beginning of year | 55,509 | 75,684 | 75,751 | |||||||||
Actual return on plan assets | 6,127 | (18,113 | ) | 1,906 | ||||||||
Plan participant contributions | 455 | 425 | 413 | |||||||||
Benefits paid | (2,430 | ) | (2,361 | ) | (2,264 | ) | ||||||
Expenses | (123 | ) | (126 | ) | (122 | ) | ||||||
Fair value of plan assets at end of year | 59,538 | 55,509 | 75,684 | |||||||||
Funded status at end of year | $ | 10,740 | $ | 11,049 | $ | 19,097 | ||||||
Accumulated benefit obligation | $ | 45,185 | $ | 41,551 | $ | 52,362 |
During 2023, the Bank did not make a contribution to the Plan and the Bank has no minimum required pension contribution for the Plan year ending September 30,2024. The Bank does not expect to make a contribution in 2024.
Plan Assets. The objective for the Plan’s assets is to generate long-term investment returns from both income and capital appreciation which outpaces the rate of inflation, while maintaining sufficient liquidity to ensure the Plan’s ability to pay all anticipated benefit and expense obligations when due. The Plan will maintain a de minimis amount of cash equivalents, with the remaining assets allocated across two broadly-defined financial asset categories: (1) equity, both domestic and international; and (2) fixed income of various durations and issuer type. The goal of the equity allocation is to supplement the Bank’s contributions to the Plan when the Plan is underfunded and increase surplus when the Plan is overfunded. The fixed income component will include longer-duration bonds designed to match and hedge the characteristics of the Plan’s liabilities. Cash equivalents, under normal circumstances, will be temporary holdings for the purpose of paying expenses and monthly benefits.
For fixed income investments: (1) the minimum average credit quality shall be investment grade (Standard & Poor’s BBB or Moody’s Baa) or higher; and (2) no more than 5% of the portfolio may be invested in securities with ratings below investment grade, and nonemay be rated below investment grade at the time of purchase.
61
Reasonable precautions are taken to avoid excessive concentrations to protect the portfolio against unfavorable outcomes within an asset class. Specifically, the following guidelines are in place:
|