THE FIRST OF LONG ISLAND CORPORATION The following selected financial data should be read in conjunction with the accompanying consolidated financial statements. (dollars in thousands, except per share data) 2021 2020 2019 2018 2017 INCOME STATEMENT DATA: Interest Income$ 122,959 $ 131,216 $ 143,850 $ 138,237 $ 118,265 Interest Expense 16,152 29,188 43,681 35,730 21,709 Net Interest Income 106,807 102,028 100,169 102,507 96,556 Provision (Credit) for Credit Losses (2,573) 3,006 33 (1,755) 4,854 Net Income 43,089 41,203 41,555 41,573 35,122 PER SHARE DATA: Basic Earnings$ 1.82 $ 1.73 $ 1.68 $ 1.64 $ 1.44 Diluted Earnings 1.81 1.72 1.67 1.63 1.43 Cash Dividends Declared .78 .74 .70 .64 .58 Dividend Payout Ratio 43.09 % 43.02 % 41.92 % 39.26 % 40.56 % Book Value$ 17.81 $ 17.11 $ 16.26 $ 15.27 $ 14.37 BALANCE SHEET DATA AT YEAR END: Total Assets$ 4,068,789 $ 4,069,141 $ 4,097,843 $ 4,241,060 $ 3,894,708 Loans 3,105,036 3,033,454 3,188,249 3,263,399 2,950,352 Allowance for Credit Losses 29,831 33,037 29,289 30,838 33,784 Deposits 3,315,245 3,321,588 3,144,016 3,084,972 2,821,997 Borrowed Funds 311,322 306,097 528,182 750,950 704,938 Stockholders' Equity 413,812 407,118 389,108 388,187 354,450 AVERAGE BALANCE SHEET DATA: Total Assets$ 4,151,577 $ 4,140,867 $ 4,194,355 $ 4,177,341 $ 3,695,850 Loans 2,976,061 3,110,512 3,217,530 3,177,519 2,758,116 Allowance for Credit Losses 31,300 33,180 30,080 34,960 32,022 Deposits 3,425,976 3,257,317 3,276,699 3,168,348 2,812,733 Borrowed Funds 281,191 457,939 494,785 623,587 540,307 Stockholders' Equity 416,885 393,662 391,613 374,876 334,088 FINANCIAL RATIOS: Return on Average Assets (ROA) 1.04 % 1.00 % .99 % 1.00 % .95 % Return on Average Equity (ROE) 10.34 % 10.47 % 10.61 % 11.09 % 10.51 % Average Equity to Average Assets 10.04 % 9.51 % 9.34 % 8.97 % 9.04 % 14
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Overview - 2021 Versus 2020
Analysis of 2021 Earnings. Net income and diluted earnings per share ("EPS") for
2021 were $43.1 million and $1.81 , respectively. Dividends per share increased
5.4% from $.74 for 2020 to $.78 for 2021. ROA and ROE for 2021 were 1.04% and
10.34%, respectively, compared to 1.00% and 10.47%, respectively, for 2020.
Net income for 2021 was $43.1 million , an increase of $1.9 million , or 4.6%, as
compared to 2020. The increase is mainly due to growth in net interest income of
$4.8 million and an improvement in the provision for credit losses of $5.6
million . These items were partially offset by increases in noninterest expense,
net of debt extinguishment costs, of $6.6 million and income tax expense of $1.9
million .
The increase in net interest income reflects a favorable shift in the mix of
funding due to an increase in average noninterest-bearing checking deposits of
$242.5 million and a decline in average interest-bearing liabilities of $250.6
million . The increase is also attributable to higher income from SBA PPP loans
of $2.9 million and prepayment and late fees of $1.1 million .
Partially offsetting the favorable impact of the above items on net interest
income was a decline in the average balance of loans of $134.5 million . The
average yield on interest-earning assets declined 22 basis points ("bps") from
3.37% for 2020 to 3.15% for 2021. The negative impact of declining asset yields
on net interest income was more than offset through reductions in non-maturity
and time deposit rates. The average cost of interest-bearing liabilities
declined 44 bps from 1.12% for 2020 to .68% for 2021 helped by the repayment of
a maturing interest rate swap in May 2021 that lowered the cost of funds in 2021
by $2.5 million . Net interest margin for 2021 of 2.74% increased 10 bps as
compared to 2.64% for 2020. Income from PPP loans and prepayment and late fees
improved net interest margin by 7 bps and 2 bps, respectively. We currently
anticipate going into 2022 with a net interest margin similar to the fourth
quarter of 2021. The direction of the margin throughout 2022 is largely
dependent on changes in the yield curve and competitive conditions.
PPP income for 2021 was $6.5 million driven by an average balance of $108.8
million and a weighted average yield of 6.0%. As of December 31, 2021 , the Bank
had $30.5 million of outstanding PPP loans with unearned fees of $978,000 . We
expect most of the outstanding PPP loans will be fully satisfied during the
first half of 2022.
Although low loan demand throughout most of the first half of 2021 put pressure
on the pipeline and originations, the Bank successfully deployed excess cash
during the second half of 2021 into loan originations of $459 million . The
expansion of our lending teams helped grow commercial mortgages by $315.5
million during the year, which now comprise 58.2% of total mortgages compared to
50.9% a year ago. While commercial and industrial lines of credit have
increased, line utilization remains historically low contributing to a decrease
in commercial and industrial loans outstanding. The loan pipeline was $152
million on December 31, 2021 with a weighted average rate of approximately 3.2%.
The provision for credit losses decreased $5.6 million when comparing the full
year periods from a provision of $3.0 million in 2020 to a credit of $2.6
million in 2021. The credit for the current year 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 of $633,000 . The net chargeoffs were mainly the result of discounted
sales of eight mortgage loans with varying concerns.
Noninterest income, net of gains on sales of securities, decreased $60,000 in
2021 as compared to 2020. The decrease is mainly due to a decline in investment
services income of $958,000 as the shift to an outside service provider resulted
in less assets under management, and a transition payment received in 2020 of
$370,000 for the conversion of the Bank's retail broker and advisory accounts.
These amounts were partially offset by increases in the non-service cost
components of the Bank's defined benefit pension plan of $550,000 and fees from
debit and credit cards of $615,000 . We currently anticipate noninterest income
to be between $2.5 million to $3.0 million per quarter in 2022 excluding
securities gains.
The increase in noninterest expense, net of debt extinguishment costs, of $6.6
million includes charges of $3.2 million related to closing eight branches under
our branch optimization strategy. The $3.2 million includes severance-related
salary and benefits expense of $123,000 and occupancy and equipment expense
related to rent, depreciation and asset disposals of $3.1 million . The remaining
increase in noninterest expense is related to normal increases and changes in
operating expenses. We currently anticipate total 2022 noninterest expense to be
in line with 2021 excluding debt extinguishment costs.
Income tax expense increased $1.9 million due to growth in pre-tax earnings in
2021 and an increase in the effective tax rate (income tax expense as a
percentage of pre-tax book income) to 19.2% for 2021 from 16.8% for 2020. The
increase in the effective tax rate is due to a decrease in the percentage of
pre-tax income derived from tax-exempt municipal securities and BOLI in 2021 and
a change in New York State tax law to implement a capital tax in the second
quarter of 2021. We currently anticipate the 2022 effective tax rate to be in
line with 2021.
Asset Quality. The Bank's ACL to total loans ("reserve coverage ratio") was .96%
at December 31, 2021 , compared to 1.09% at December 31, 2020 . The decrease in
the reserve coverage ratio was mainly due to improvements in economic
conditions, asset quality
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and other portfolio metrics. Gross loan chargeoffs and recoveries were $1.2
million and $573,000 , respectively, for the year ended December 31, 2021 .
Nonaccrual loans amounted to $1.2 million , or .04% of total loans outstanding,
at December 31, 2021 , compared to $1.1 million , or .04%, at December 31, 2020 .
Troubled debt restructurings ("TDRs") amounted to $554,000 , or .02% of total
loans outstanding, at December 31, 2021 , compared to $1.3 million , or .04%, at
December 31, 2020 . All TDRs are performing in accordance with their modified
terms at December 31, 2021 . Loans past due 30 through 89 days amounted to
$460,000 , or .01% of total loans outstanding, at December 31, 2021 , compared to
$1.4 million , or .05%, at December 31, 2020 .
The Bank's mortgage securities are backed by mortgages underwritten on
conventional terms, with 11% 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.
Key Strategic Initiatives. We continue focusing on strategic initiatives
supporting the growth of our balance sheet with a profitable relationship
banking business. Such initiatives include improving the quality of technology
through continuing digital enhancements, optimizing our branch network across a
larger geography, using new branding and "Community First" focus to improve name
recognition, enhancing our website and social media presence including the
promotion of FirstInvestments, and ongoing recruitment of additional seasoned
banking professionals to support our growth initiatives. Renovations of our
leased space at 275 Broadhollow Road in Melville, N.Y. for a state-of-the-art
branch and office space are nearing completion with occupancy expected to begin
during the first quarter of 2022. Our signage at the Melville location now
visibly overlooks the Long Island Expressway and Route 110 . Management continues
to focus on the areas of cybersecurity, environmental, social and governance
practices.
Overview - 2020 Versus 2019
Analysis of 2020 Earnings. Net income and diluted EPS for 2020 were $41.2
million and $1.72 , respectively. Dividends per share increased 5.7% from $.70
for 2019 to $.74 for 2020. ROA and ROE for 2020 were 1.00% and 10.47%,
respectively, compared to .99% and 10.61%, respectively, for 2019.
Net income for 2020 was $41.2 million , a decrease of $352,000 , or .8%, as
compared to 2019. The decrease was mainly due to an increase in the provision
for credit losses of $3.0 million partially offset by increases in net interest
income of $1.9 million , or 1.9%, and noninterest income, before securities
gains, of $933,000 , or 8.8%.
The increase in net interest income was mainly attributable to a reduction in
deposit rates in response to decreases in the federal funds target rate to near
zero as well as significant declines in rates across the entire yield curve.
Declines in the cost of savings, NOW and money market deposits and
interest-bearing liabilities far outpaced the decline in yield on securities and
loans which are generally not subject to immediate repricing with changes in
market interest rates. The increase in net interest income was also attributable
to income from SBA PPP loans and a favorable shift in the mix of funding as an
increase in average checking deposits and a decline in average interest-bearing
liabilities resulted in average checking deposits comprising a larger portion of
total funding. Average checking deposits included a portion of the proceeds of
PPP loans.
Net interest margin for 2020 was 2.64%, an increase of 7 bps over 2019. The
increase was mainly attributable to our ability to reduce the rates paid on
interest-bearing deposits faster than interest-earning assets repriced downward
and a deleveraging transaction completed in the third quarter of 2020.
The provision for credit losses was $3.0 million for 2020 on a CECL basis as
compared to $33,000 for 2019 on an incurred loss basis. The provision for 2020
was primarily attributable to the pandemic and reflected higher historical loss
rates, economic conditions and net chargeoffs, partially offset by a decline in
the outstanding loan balance of residential and commercial mortgages. The
provision for 2019 was driven mainly by net chargeoffs, partially offset by
declines in outstanding loans and lower growth rate trends.
The increase in noninterest income, before securities gains, of $933,000 was
primarily attributable to an increase in the non-service components of the
Bank's defined benefit pension plan and income relating to a transition payment
from an independent broker-dealer for the initial conversion of the Bank's
retail broker and advisory accounts. Partially offsetting these increases was a
decrease in service charges on deposit accounts due to the pandemic.
Noninterest expense, before debt extinguishment costs, increased $58,000 in 2020
as compared to 2019. Excluding executive severance and retirement charges of
$2.6 million in 2019, the increase over 2019 was primarily due to increases in
compensation and benefit costs mainly related to normal salary adjustments and
hiring of lending and credit staff.
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The increase in income tax expense of $96,000 was attributable to an increase in
the effective tax rate from 16.5% in 2019 to 16.8% in 2020 as tax-exempt income
from municipal securities and BOLI declined in 2020 as a percentage of pre-tax
earnings when compared to 2019.
Asset Quality. The Bank's reserve coverage ratio on a CECL basis was 1.01% at
January 1, 2020 , 1.09% at March 31 , 1.08% at June 30 and September 30 and 1.09%
at December 31, 2020 . Excluding PPP loans, the reserve coverage ratio increased
12 bps during 2020 to 1.13% at year end. The increase was mainly due to current
and forecasted economic conditions and higher historical loss rates. Gross loan
chargeoffs and recoveries were $2.7 million and $584,000 , respectively, for the
year ended December 31, 2020 .
Nonaccrual loans amounted to $1.1 million , or .04% of total loans outstanding,
at December 31, 2020 , compared to $888,000 , or .03%, at December 31, 2019 . The
increase in nonaccrual loans was mainly due to three new nonaccrual loans,
partially offset by one loan returned to accrual status and paydowns. TDRs
amounted to $1.3 million , or .04% of total loans outstanding, at December 31,
2020 . Of the TDRs, $815,000 were performing in accordance with their modified
terms and $494,000 were nonaccrual and included in the aforementioned amount of
nonaccrual loans. Loans past due 30 through 89 days amounted to $1.4 million , or
.05% of total loans outstanding, at December 31, 2020 , compared to $2.9 million ,
or .09%, at December 31, 2019 .
During the second and third quarters of 2020, the Bank provided payment
deferrals in the form of loan modifications to borrowers experiencing financial
disruption and economic hardship as a result of the pandemic. At December 31,
2020 , all such loans had resumed making payment and were current except for
seven loans that were charged-off totaling $440,000 and one loan that was past
due 30 to 89 days in the amount of $41,000 . Additionally, three loans totaling
$862,000 were in nonaccrual status at year end.
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 eleven
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; (10) municipal loans; and (11) SBA PPP 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 migration method
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was selected to measure historical losses; no historical loss method was applied
to the SBA PPP loan pool. 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 general qualitative
and quantitative 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 the nature and volume of loans; (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 national and local
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 changes in the
economy. 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 and provision arising from loan growth and concentrations, credit
quality and forecasts of unemployment, GDP, vacancies and economic conditions.
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.
TDRs are individually evaluated for loss and generally reported at the present
value of estimated future cash flows using the loan's effective rate at
inception. However, if a TDR is a collateral dependent loan, the loan is
reported at the fair value of the collateral.
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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 investment securities
include unrealized gains and losses on available-for-sale ("AFS") securities,
and the average balances of loans include nonaccrual loans.
2021 2020 2019
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 $ 200,063 $ 261 .13 % $
135,475
455,532 7,901 1.73 346,956 11,661 3.36 367,157 14,574 3.97 Nontaxable (1)
345,688 10,799 3.12 373,500 12,470 3.34 405,454 14,515 3.58 Loans (1)
2,976,061 106,271 3.57 3,110,512 109,498 3.52 3,217,530 117,177 3.64 Total interest-earning assets
3,977,344 125,232 3.15 3,966,443 133,841 3.37 4,019,702 146,904 3.65
Allowance for credit
losses (31,300) (33,180) (30,080)
Net interest-earning
assets 3,946,044 3,933,263 3,989,622
Cash and due from
banks 33,808 33,092 36,482
Premises and
equipment, net 38,700 39,403 40,894
Other assets 133,025 135,109 127,357
$ 4,151,577 $ 4,140,867 $ 4,194,355
Liabilities and
Stockholders'
Equity:
Savings, NOW & money
market deposits $ 1,782,789 4,414 .25 $ 1,683,290 9,097 .54 $ 1,721,604 18,563 1.08
Time deposits 300,374 5,712 1.90 473,720 10,977 2.32 613,166 14,494 2.36 Total interest-bearing deposits
2,083,163 10,126 .49 2,157,010 20,074 .93 2,334,770 33,057 1.42 Short-term borrowings (2)
54,416 1,427 2.62 75,805 1,574 2.08 137,546 3,261 2.37 Long-term debt
226,775 4,599 2.03 382,134 7,540 1.97 357,239 7,363 2.06 Total interest-bearing liabilities
2,364,354 16,152 .68 2,614,949 29,188 1.12 2,829,555 43,681 1.54
Checking deposits 1,342,813 1,100,307 941,929
Other liabilities 27,525 31,949 31,258
3,734,692 3,747,205 3,802,742
Stockholders'
equity 416,885 393,662 391,613
$ 4,151,577 $ 4,140,867 $ 4,194,355
Net interest income
(1) $ 109,080 $ 104,653 $ 103,223
Net interest spread
(1) 2.47 % 2.25 % 2.11 %
Net interest margin 2.74 % 2.64 % 2.57 %
(1)
(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%.
(2) The Bank entered into a five-year interest rate swap with a notional amount
totaling $50 million on January 17, 2019 , which was designated as a cash flow
hedge of certain FHLB advances and included in short-term borrowings. The
weighted average rate paid on the interest rate swap was 2.62% in 2021, 2020 and
2019. See Note O - Derivatives in the consolidated financial statements for more
information on the interest rate swaps.
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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.
2021 versus 2020 2020 versus 2019
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 $ 91 $ (42) $ 49 $ 600 $ (1,026) $ (426)
Investment securities:
Taxable 2,961 (6,721) (3,760) (767) (2,146) (2,913)
Nontaxable (887) (784) (1,671) (1,105) (940) (2,045)
Loans (4,767) 1,540 (3,227) (3,856) (3,823) (7,679)
Total interest income (2,602) (6,007) (8,609) (5,128) (7,935) (13,063)
Interest Expense:
Savings, NOW & money market deposits 498 (5,181) (4,683) (404) (9,062) (9,466)
Time deposits (3,526) (1,739) (5,265) (3,253) (264) (3,517)
Short-term borrowings (503) 356 (147) (1,325) (362) (1,687)
Long-term debt (3,152) 211 (2,941) 505 (328) 177
Total interest expense (6,683) (6,353) (13,036) (4,477) (10,016) (14,493)
Increase (decrease) in net interest
income $ 4,081 $ 346 $ 4,427 $ (651) $ 2,081 $ 1,430
Net Interest Income - 2021 Versus 2020
Net interest income on a tax-equivalent basis was $109.1 million in 2021, an
increase of $4.4 million , or 4.2%, from $104.7 million in 2020. The increase in
net interest income reflects a favorable shift in the mix of funding due to an
increase in average noninterest-bearing checking deposits of $242.5 million , or
22.0%, and a decline in average interest-bearing liabilities of $250.6 million ,
or 9.6%. The increase is also attributable to higher income from SBA PPP loans
of $2.9 million and prepayment and late fees of $1.1 million .
Partially offsetting the favorable impact of the above items on net interest
income was a decline in the average balance of loans of $134.5 million , or 4.3%.
The average yield on interest-earning assets declined 22 bps from 3.37% for 2020
to 3.15% for 2021. The negative impact of declining asset yields on net interest
income was more than offset through reductions in non-maturity and time deposit
rates. The average cost of interest-bearing liabilities declined 44 bps from
1.12% for 2020 to .68% for 2021 helped by the repayment of a maturing interest
rate swap in May 2021 that lowered the cost of funds in 2021 by $2.5 million .
Net interest margin for 2021 of 2.74% increased 10 bps as compared to 2.64% for
2020. Income from PPP loans and prepayment and late fees improved net interest
margin by 7 bps and 2 bps, respectively.
PPP income for 2021 was $6.5 million driven by an average balance of $108.8
million and a weighted average yield of 6.0%. As of December 31, 2021 , the Bank
had $30.5 million of outstanding PPP loans with unearned fees of $978,000 . We
expect most of the outstanding PPP loans will be fully satisfied during the
first half of 2022.
Net Interest Income - 2020 Versus 2019
Net interest income on a tax-equivalent basis was $104.7 million in 2020, an
increase of $1.4 million , or 1.4%, from $103.2 million in 2019. The increase in
net interest income was mainly attributable to a reduction in deposit rates in
response to decreases in the federal funds target rate to near zero as well as
significant declines in rates across the entire yield curve. The cost of
savings, NOW and money market deposits declined 54 bps to .54% and the cost of
interest-bearing liabilities declined 42 bps to 1.12%. These decreases far
outpaced the 18 bp decline in yield on securities and loans which are generally
not subject to immediate repricing with changes in market interest rates. The
increase in net interest income was also attributable to income from SBA PPP
loans of $3.7 million and a favorable shift in the mix of funding as an increase
in average checking deposits of $158.4 million and a decline in average
interest-bearing liabilities of $214.6 million resulted in average checking
deposits comprising a larger portion of total funding. Average checking deposits
include a portion of the proceeds of PPP loans.
The decline in yield on securities and loans of 42 bps and 12 bps, respectively,
was mainly attributable to an increase in prepayment speeds on mortgage-backed
securities, lower yields available on securities purchases and loan
originations, acceleration of loan prepayments and refinancing on residential
mortgages and downward repricing of corporate bonds. While the economic impact
of the pandemic caused the outstanding balance of loans to shrink during the
first nine months of 2020, outstanding mortgage loans grew $26.7 million , or 1%,
during the fourth quarter. For the year, the average balance of loans decreased
$107 million , or 3.3%, and the average balance of investment securities declined
$52.2 million , or 6.8%. The average balance of loans included $112.6 million of
PPP loans at a weighted average yield earned in 2020 of 3.25%. Through year-end
2020, the Bank had $25.2 million , or 15%, of its PPP loans
20
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forgiven by the SBA. The decrease in loans and securities resulted in a notable
increase in cash and cash equivalents on the Balance Sheet.
Net interest margin for 2020 was 2.64%, an increase of 7 bps over 2019. The
increase was mainly attributable to our ability to reduce the rates paid on
interest-bearing deposits faster than interest-earning assets repriced downward
and a deleveraging transaction completed in the third quarter of 2020.
Noninterest Income
Noninterest income includes service charges on deposit accounts, investment
services income, 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, net of gains on sales of securities, decreased $60,000 in
2021 as compared to 2020. The decrease is mainly due to a decline in investment
services income of $958,000 as the shift to an outside service provider resulted
in less assets under management, and a transition payment received in 2020 of
$370,000 for the conversion of the Bank's retail broker and advisory accounts.
These amounts were partially offset by increases in the non-service cost
components of the Bank's defined benefit pension plan of $550,000 and fees from
debit and credit cards of $615,000 .
Noninterest income before securities gains increased $933,000 , or 8.8%, when
comparing 2020 to 2019. The increase was primarily attributable to an increase
in the non-service components of the Bank's defined benefit pension plan of $1.0
million and income of $370,000 relating to a transition payment from an
independent broker-dealer for the initial conversion of the Bank's retail broker
and advisory accounts. Partially offsetting these increases was a decrease in
service charges on deposit accounts of $252,000 due to the pandemic.
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.
The increase in noninterest expense, net of debt extinguishment costs, of $6.6
million includes charges of $3.2 million related to closing eight branches under
our branch optimization strategy. The $3.2 million includes severance-related
salary and benefits expense of $123,000 and occupancy and equipment expense
related to rent, depreciation and asset disposals of $3.1 million . The increase
in noninterest expense also includes higher salaries and employee benefits
related to our two new branches, building our lending and credit teams, salary
adjustments, incentive compensation, the service cost component of the Bank's
pension plan and a health insurance premium credit in 2020. Also contributing to
the increase was higher FDIC insurance expense due to deposit growth and an
assessment credit in 2020.
Noninterest expense, before debt extinguishment costs, increased $58,000 in 2020
as compared to 2019. Excluding executive severance and retirement charges of
$2.6 million in 2019, the increase over 2019 was $2.6 million . The $2.6 million
increase was primarily due to increases in compensation and benefit costs mainly
related to normal salary adjustments and hiring of lending and credit staff. The
increase over 2019 also included charges related to the closure and
consolidation of six branches of $476,000 and technology and service contract
termination costs related to a new investment services platform of $315,000 ,
partially offset by declines in consulting and marketing costs of $352,000 and
$242,000 , respectively.
2020 Deleveraging and Securities Portfolio Restructuring Transactions
During 2020, the Bank eliminated some inefficient leverage by selling
mortgage-backed securities with a carrying value of $64.5 million and using the
proceeds along with excess cash of $66.8 million to prepay long-term debt of
$128.7 million . The transactions resulted in an overall net loss of $3,000 with
the gain on sale of securities and loss on extinguishment of debt essentially
the same at $2.6 million each. The deleveraging benefited net interest margin by
approximately 10 bps beginning in the fourth quarter of 2020 and improved
leverage capital.
Income Taxes
The Corporation's effective tax rate was 19.2% and 16.8% in 2021 and 2020,
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.
2021 Versus 2020. Income tax expense increased $1.9 million due to growth in
pre-tax earnings in 2021 and an increase in the effective tax rate. The increase
in the effective tax rate was due to a decrease in the percentage of pre-tax
income derived from tax-exempt municipal securities and BOLI in 2021 and a
change in New York State tax law to implement a capital tax in the second
quarter of 2021.
21
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2020 Versus 2019. The increase in income tax expense of $96,000 was attributable
to an increase in the effective tax rate from 16.5% in 2019 to 16.8% in 2020 as
tax-exempt income from municipal securities and BOLI in 2020 declined as a
percentage of pre-tax earnings when compared to 2019.
Financial Condition
Total assets were $4.1 billion at December 31, 2021 , substantially unchanged
from the previous year end. A decrease of $167.5 million in cash and cash
equivalents was used primarily to fund increases in loans of $71.6 million , or
2.4%, securities of $71.6 million , or 10.8%, and BOLI of $22.4 million . Total
deposits were unchanged at $3.3 billion for December 31, 2021 and 2020. Total
borrowings increased $5.2 million , or 1.7%, due to an increase in short-term
borrowings of $64.9 million offset by a decrease in long-term debt of $59.7
million . Stockholders' equity increased $6.7 million , or 1.6% from December 31,
2020 . The increase was primarily attributable to net income, partially offset by
dividends declared and shares repurchased.
Investment Securities . The following table presents the estimated fair value of
AFS securities at December 31, 2021 and 2020.
(in thousands) 2021 2020
State and municipals $ 327,171 $ 364,211 Pass-through mortgage securities 182,957 131,720 Collateralized mortgage obligations 106,082 53,711 Corporate bonds
118,108 113,080
$ 734,318 $ 662,722
The following table presents the maturities and weighted average tax equivalent
yields of the Bank's AFS investment securities at December 31, 2021 . Yields on
AFS securities have been computed based on amortized cost.
Principal Maturing (1) (2)
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 $ 2,541 3.40 % $ 92,919 3.03 % $ 98,187 3.32 % $ 133,524 3.13 %
Pass-through mortgage
securities - - 321 2.58 1 6.18 182,635 1.16
Collateralized mortgage
obligations - - - - - - 106,082 1.11
Corporate bonds - - - - 118,108 1.81 - -
$ 2,541 3.40 % $ 93,240 3.03 % $ 216,296 2.50 % $ 422,241 1.77 %
(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 the
pass-through mortgage securities and collateralized mortgage obligations shown
above, are expected to have substantial periodic repayments resulting in
weighted average lives considerably shorter than would be surmised from the
above table.
(2) Yields on AFS securities have been computed based on amortized cost.
During 2021 and 2020, the Bank sold $70.6 million and $61.9 million ,
respectively, of mortgage-backed securities at a gain of $1.1 million and $2.6
million , respectively.
During 2021, the Bank received cash dividends of $1.0 million on its FRB and
FHLB stock, representing an average yield of 5.04%.
22
--------------------------------------------------------------------------------Loans. The composition of the Bank's loan portfolio is set forth below.
December 31,
(in thousands) 2021 2020
Commercial and industrial $ 90,386 $ 100,015
SBA PPP 30,534 139,487
Commercial mortgages:
Multifamily 864,207 776,976
Other 700,872 513,176
Owner-occupied 171,533 130,919
Residential mortgages:
Closed end 1,202,374 1,316,727
Revolving home equity 44,139 54,005
Consumer and other 991 2,149
3,105,036 3,033,454
Allowance for credit losses (29,831) (33,037)
$ 3,075,205 $ 3,000,417 Maturity information for loans outstanding at
Maturity
Within After One But Within After Five But Within After
?One Year ?Five Years ?Fifteen Years ?Fifteen Years Total
(in thousands) Fixed Adjustable Fixed Adjustable Fixed Adjustable
Commercial and
industrial $ 41,711 $ 21,768 $ 15,466 $ 11,008 $ 433 $ - $ - $ 90,386
SBA PPP 264 30,270 - - - - - 30,534
Commercial
mortgages:
Multifamily 22 8,389 559 101,526 456,917 35,631 261,163 864,207
Other 12,885 95,231 15,843 229,960 154,974 23,893 168,086 700,872
Owner-occupied 116 1,883 2,823 68,724 28,337 352 69,298 171,533
Residential
mortgages:
Closed end 279 8,035 143 82,601 16,925 555,015 539,376 1,202,374
Revolving home
equity 2,949 - 14,920 1,978 24,287 - 5 44,139
Consumer and other 555 266 170 - - - - 991
$ 58,781 $ 165,842 $ 49,924 $ 495,797 $ 681,873 $ 614,891 $ 1,037,928 $ 3,105,036
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 TDRs, and 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) 2021
2020
Loans, excluding troubled debt restructurings: Past due 30 through 89 days$ 460 $
1,422
Past due 90 days or more and still accruing - -
Nonaccrual 1,235 628
1,695 2,050
Troubled debt restructurings:
Performing according to their modified terms 554 815
Past due 30 through 89 days -
-
Past due 90 days or more and still accruing - -
Nonaccrual - 494
554 1,309Total past due, nonaccrual and restructured loans: Restructured and performing according to their modified terms 554 815 Past due 30 through 89 days
460 1,422
Past due 90 days or more and still accruing - -
Nonaccrual 1,235 1,122
2,249 3,359
Other real estate owned - -
$ 2,249 $ 3,359
23
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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, 2021
Internally Assigned Risk Rating
Special
(in thousands) Pass Watch Mention
Substandard Doubtful Not Rated Total
Commercial and industrial
- $ - $ -
30,534 - - - - - 30,534
Commercial mortgages:
Multifamily 856,510 1,260 - 6,437 - - 864,207
Other 695,040 - - 5,832 - - 700,872
Owner-occupied 171,533 - - - - - 171,533
Residential mortgages:
Closed end 1,199,999 488 - 1,887 - - 1,202,374
Revolving home equity 44,139 - - - - - 44,139
Consumer and other 890 - - - - 101 991
$ 3,088,769 $ 2,010 $ - $ 14,156 $ - $ 101 $ 3,105,036
December 31, 2020
Internally Assigned Risk Rating
Special
(in thousands) Pass Watch Mention
Substandard Doubtful Not Rated Total
Commercial and industrial
139,487 - - - - - 139,487
Commercial mortgages:
Multifamily 764,376 6,039 - 6,561 - - 776,976
Other 505,892 1,403 - 5,881 - - 513,176
Owner-occupied 122,491 6,094 - 2,334 - - 130,919
Residential mortgages:
Closed end 1,315,467 298 - 962 - - 1,316,727
Revolving home equity 53,223 414 - 368 - - 54,005
Consumer and other 864 - - 229 - 1,056 2,149
$ 2,992,076 $ 21,598 $ 529 $ 18,195 $ - $ 1,056 $ 3,033,454
Allowance and Provision for Credit Losses. The ACL decreased by $3.2 million
during 2021 amounting to $29.8 million , or .96% of total loans, on December 31,
2021 , compared to $33.0 million , or 1.09% of total loans, at December 31, 2020 .
The decrease in the reserve coverage ratio was mainly due to improvements in
economic conditions, asset quality and other portfolio metrics. Nonaccrual
loans, TDRs and loans past due 30 through 89 days remain at low levels.
During 2021, the Bank had loan chargeoffs of $1.2 million , recoveries of
$573,000 and recorded a credit provision for credit losses of $2.6 million . The
credit provision was largely attributable to improvements in current and
forecasted economic conditions and historical loss rates, partially offset by
net chargeoffs of $633,000 and growth in commercial mortgages.
During 2020, the Bank had loan chargeoffs of $2.7 million , recoveries of
$584,000 and recorded a provision for credit losses of $3.0 million . The
provision was largely attributable to the pandemic and included $4.2 million
related to higher historical loss rates and economic conditions and $2.1 million
for net chargeoffs, partially offset by a decline in outstanding loan balances
of residential and commercial mortgages.
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
discussion, 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.
24
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The following table sets forth balances and credit ratios of the Bank's loan
portfolio.
December 31,
(dollars in thousands) 2021 2020
Total loans outstanding $ 3,105,036 $ 3,033,454
Average loans outstanding 2,976,061 3,110,512
Allowance for credit losses 29,831 33,037
Total nonaccrual loans 1,235 1,122
Net chargeoffs 633 2,146
Allowance for credit losses as a percentage of total loans
.96 % 1.09 %
Nonaccrual loans as a percentage of total loans .04 % .04 %
Net chargeoffs as a percentage of average loans
outstanding .02 % .07 %
Allowance for credit losses as a multiple of
nonaccrual loans 24.2 x 29.4 x
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,
2021 2020
Net Average % of Average Net Average % of Average
(dollars in thousands) Chargeoffs Loans Loans Chargeoffs Loans Loans
Commercial and industrial $ 102 $ 82,749 0.12 % $ 764 $ 111,770 0.68 %
SBA PPP - 108,771 - - 109,194 -
Commercial mortgages:
Multifamily 544 778,349 0.07 298 782,795 0.04
Other - 553,015 - 501 448,347 0.11
Owner-occupied 74 156,499 0.05 - 132,664 -
Residential mortgages:
Closed end 167 1,245,892 0.01 526 1,465,417 0.04
Revolving home equity (254) 50,109 (0.51) 56 58,699 0.10
Consumer and other - 677 - 1 1,626 0.06
$ 633 $ 2,976,061 0.02 % $ 2,146 $ 3,110,512 0.07 %
The following table sets forth the allocation of the Bank's total ACL by loan
type.
December 31,
2021 2020
% of Loans % of Loans
?to Total ?to Total
(dollars in thousands) Amount ?Loans Amount ?Loans
Commercial and industrial $ 888 2.9 % $ 1,416 3.3 %
SBA PPP 46 1.0 209 4.6
Commercial mortgages:
Multifamily 8,154 27.8 9,474 25.6
Other 6,478 22.6 4,913 16.9
Owner-occupied 2,515 5.6 1,905 4.3
Residential mortgages:
Closed end 11,298 38.7 14,706 43.4
Revolving home equity 449 1.4 407 1.8
Consumer and other 3 .0 7 .1
$ 29,831 100.0 % $ 33,037 100.0 %
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, 2021 . The majority of these loans are
collateralized by properties located on Long Island and in the boroughs of NYC.
While business activity in the New York metropolitan area has started to
improve, the pace of the recovery is slow and remains uncertain. These
challenges may result in higher drawdowns by customers on the Bank's lending
commitments and higher past due and nonaccrual loans, TDRs and credit losses.
25
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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,
2021 , substantially unchanged from the prior year end. Growth in
noninterest-bearing checking deposits of $192.9 million , or 16.0%, was more than
offset by a decrease in time deposits of $205.5 million , or 47.3%. The decrease
in time deposits includes the repayment of $150 million of brokered CDs used in
a cash flow hedge which expired in May 2021 .
The aggregate amount of uninsured deposits (amounts greater than or equal to
$250,000 , which is the maximum amount for federal deposit insurance) was $2.0
billion and $1.9 billion at December 31, 2021 and 2020, respectively.
The following table sets forth the remaining maturity of uninsured time
deposits, by account.
(in thousands) December 31, 2021
3 months or less $ 6,341
Over 3 through 6 months 2,883
Over 6 through 12 months 1,598
Over 12 months 7,476
$ 18,298
Borrowings include short-term and long-term FHLB borrowings and borrowings under
repurchase agreements. Total borrowings increased $5.2 million from $306.1
million in 2020 to $311.3 million at year-end 2021. The increase is comprised of
an increase in short-term borrowings of $64.9 million , offset by a decrease in
long-term debt of $59.7 million . Short-term borrowings are used to offset the
seasonal outflow of deposits. Short-term FHLB borrowings totaled $125 million at
December 31, 2021 and included $75 million in overnight advances and $50 million
in three-month advances used to hedge an interest rate swap. The decrease in
long-term debt includes maturities of $20.0 million and early extinguishments of
$39.7 million . The early extinguishments resulted in a loss of $1.0 million in
2021.
Capital. Stockholders' equity totaled $413.8 million at December 31, 2021 , an
increase of $6.7 million from $407.1 million at December 31, 2020 . The increase
was primarily attributable to net income of $43.1 million , partially offset by
dividends declared of $18.4 million and shares repurchased of $14.5 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 10.34%, 10.47% and 10.61% for the years ended December
31, 2021 , 2020 and 2019, respectively and its ROA was 1.04%, 1.00% and .99%,
respectively. Book value per share increased 4.1% during 2021 to $17.81 at
December 31, 2021 . Book value per share was $17.11 and $16.26 at December 31,
2020 and 2019, respectively.
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, 2021
was 10.23%. 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 up to $65 million in 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. During 2021, the
Corporation repurchased 679,873 shares of its common stock at a total cost of
$14.5 million . Total repurchases completed since the commencement of the program
amount to 2,820,473 shares at a cost of $62.1 million .
In January 2022 , the Corporation's Board of Directors approved a new stock
repurchase program which authorizes the Corporation to purchase up to $30
million of its shares 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.
26--------------------------------------------------------------------------------
Cash Flows and Liquidity Cash Flows. During 2021, the Corporation's cash and cash equivalent position decreased by$167.5 million , from$211.2 million atDecember 31, 2020 to$43.7 million atDecember 31, 2021 . The decrease occurred primarily because cash used to purchase securities and BOLI, originate loans, repurchase common stock and pay cash dividends exceeded cash provided by paydowns of securities and loans 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 at all times 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$1.8 billion atDecember 31, 2021 , which includes$269 million of unencumbered AFS securities. 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 credit scored 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 more than sufficient to fulfill the obligations it has atDecember 31, 2021 pursuant to off-balance sheet arrangements and contractual obligations.
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