THE FIRST OF LONG ISLAND CORPORATION The following is management's discussion and analysis ofThe First of Long Island Corporation's financial condition and operating results during the periods included in the accompanying consolidated financial statements and should be read in conjunction with such financial statements. The Corporation's financial condition and operating results principally reflect those of its wholly-owned subsidiary,The First National Bank of Long Island , and subsidiaries wholly-owned by the Bank, either directly or indirectly,FNY Service Corp. , The First ofLong Island REIT, Inc. andThe First of Long Island Agency, Inc. The consolidated entity is referred to as the Corporation and the Bank and its subsidiaries are collectively referred to as the Bank. The Bank's primary service area isNassau andSuffolk Counties on Long Island,New York and the NYC boroughs ofQueens ,Brooklyn andManhattan .
Overview
Net income and earnings per share for the first six months of 2020 were$19.9 million and$.83 respectively, compared to$21.6 million and$.86 , respectively, for the same period last year. Dividends per share increased 5.9%, from$.34 for the first six months of 2019 to$.36 for the current period. Returns on average assets ("ROA") and average equity ("ROE") for the first half of 2020 were .96% and 10.34%, respectively, versus 1.03% and 11.15%, respectively, for the same period last year. Book value per share was$16.34 at the close of the current period, compared to$16.26 at year-end 2019. Analysis of Earnings - Six Month Periods. Net income for the first six months of 2020 was$19.9 million , a decrease of$1.7 million , or 7.8%, versus the same period last year. The decrease is due to increases in the provision for credit losses of$2.5 million and noninterest expense of$607,000 . These items were partially offset by increases in net interest income of$405,000 and noninterest income of$428,000 and a decrease in income tax expense of$581,000 . The increase in net interest income is mainly attributable to a reduction in deposit rates in response to decreases in the Federal Funds Target Rate and a very low interest rate environment. The cost of savings, NOW and money market deposits declined 28 basis points and the cost of interest-bearing liabilities declined 26 basis points. These decreases far outpaced the 10 basis point 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. The increase in average checking deposits is mainly attributable to the SBA PPP. 21
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Net interest margin for the first six months of 2020 was 2.63%, increasing 6 basis points over the comparable period of 2019. The increase was mainly attributable to our ability to reduce the rates paid on interest-bearing deposits faster than our interest-earning assets repriced downward as a significant portion of our municipal bond and mortgage loan portfolios have fixed rates.
The provision for credit losses was$2.5 million for the first six months of 2020 on a CECL basis as compared to a credit provision of ($35,000 ) for the 2019 period on an incurred loss basis. The$2.5 million provision for the current six-month period was largely attributable to the pandemic and includes$4.2 million to reflect current and forecasted economic conditions and$576,000 for net chargeoffs, partially offset by a decline in outstanding residential and commercial mortgage loans and lower historical loss rates. The credit provision of ($35,000 ) for the 2019 period was driven mainly by declines in outstanding loans and historical loss rates partially offset by net chargeoffs. The increase in noninterest income of$428,000 is primarily attributable to an increase in the non-service components of the Bank's defined benefit pension plan. Management remains focused on revenue enhancement initiatives, however, the pandemic is negatively affecting most categories of noninterest income. The increase in noninterest expense of$607,000 includes approximately$300,000 of expenses attributable to the pandemic as well as increases in salaries, employee benefits and equity compensation expense, partially offset by declines inFDIC insurance expense and marketing expense. The decrease in income tax expense of$581,000 is primarily attributable lower pretax earnings in the current six-month period as compared to the 2019 period and a decline in the effective tax rate to 16.1%. Asset Quality. The Bank's allowance for credit losses to total loans (reserve coverage ratio) was 1.01% atJanuary 1, 2020 on a CECL basis, 1.09% atMarch 31, 2020 and 1.08% atJune 30, 2020 . The reserve coverage ratio increased 8 basis points during the first quarter and, excluding Federally-guaranteed SBA PPP loans, increased 4 basis points during the second quarter to 1.13% atJune 30, 2020 . The smaller increase in the reserve coverage ratio in the second quarter reflects lower charges for current and forecasted economic conditions as a substantial portion of the estimated negative impact of the pandemic was recorded in the first quarter. TheJanuary 1, 2020 implementation of CECL increased the reserve coverage ratio 9 basis points from .92% atDecember 31, 2019 on an incurred loss basis.
Nonaccrual loans, TDRs and loans past due 30 through 89 days all remain at low
levels. The increase in nonaccrual loans of
Loan Modifications. During the second quarter the Bank entered into$621 million of loan modifications on 775 loans. These modifications were done to support borrowers experiencing financial disruption and economic hardship as a result of the pandemic. Loan modifications were evaluated on a case-by-case basis for borrowers that were current as to principal and interest and were not in default prior to the pandemic. Modifications outstanding as ofJune 30, 2020 were as follows: Number Outstanding Accrued Type of Modification of Loans Type of Loans Loan Balance Interest 3 Month Deferral of Commercial and Principal 274 Industrial$23 million $94,000 3 Month Deferral of Residential Principal and Interest 284 Mortgages 163 million 1.4 million 3 Month Deferral of Commercial Principal and Interest 189 Mortgages 423 million 4.5 million 3 Month Deferral of Commercial and Principal and Interest 28 Industrial 12 million 161,000 Accrued interest on loan modifications of$6.2 million is included in interest income for the six months endedJune 30, 2020 and is a component of other assets on the balance sheet. As ofJuly 27, 2020 , approximately$217 million of loan modifications came due with$189 million , or 87%, making their scheduled payment,$16 million requesting and receiving a further deferral of principal and interest and the remaining$12 million making only a partial payment or no payment at all. Second deferrals of principal and interest for up to an additional three months are considered for certain borrowers that continue to experience a significant reduction in income or liquidity as a result of the pandemic. Payments on all modified loans are scheduled to commence on or beforeOctober 1, 2020 . Management is carefully monitoring the payment status of modified loans and the extent such loans become past due or are in default under their modified terms. ? 22
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Modified residential and commercial mortgage loans are secured by first liens on
underlying real estate, substantially all of which is located in the NYC
metropolitan area. Such residential and commercial mortgage loans have median
original loan-to-value ratios of 64% and 58%, respectively. Concentrations of
commercial mortgage loans are as follows:
By Location: By Property Type:
Number Balance at Number Balance at
County of Loans 6/30/2020 Type of Loans 6/30/2020
Suffolk 50 $97 million Multifamily 79 $206 million
Bronx 27 90 million Retail 40 100 million
Kings 29 62 million Office 20 64 million
New York 19 49 million Mixed Use 27 23 million
Nassau 38 46 million
Queens 13 34 million
Loans to borrowers in the hospitality industry, such as hotels and restaurants, are not significant.
Modified loans present an elevated level of credit risk to the Bank because they involve borrowers adversely affected by the pandemic. Such modifications could result in a higher level of nonaccrual loans, reversal of accrued interest and loan chargeoffs in the future which could have a material negative effect on earnings. Serving Customers. The Bank remains focused on serving customers during the pandemic. Our employees have been heroic in their efforts to assist customers, especially during periods of limited branch access, split shifts and working remotely. The loan modifications and lending we have engaged in under the SBA's PPP provide support to customers adversely affected by the economic downturn. We maintain open communication with customers, provide ready access to deposits through our branch network, ATMs and digital offerings and process daily transactions such as deposits and fund transfers. The Bank's participation in the SBA's PPP for small business customers began in the second quarter of 2020 and includes 687 loans with a carrying value of$166 million as ofJune 30, 2020 . PPP loans have a 1% rate of interest and 2-year term with fees paid to the Bank by the SBA ranging from 1% to 5% of each loan depending on the loan amount. Fees are amortized as a yield adjustment over the expected life of the loans. PPP loans are 100% guaranteed by the SBA. The Bank's strong capital and liquidity positions, branch network, lending and deposit platforms and focus on internal controls and cybersecurity provide a solid foundation for serving customers during these challenging times. Our liquidity position is monitored daily and remains strong and stable. The Bank maintains a series of operating, health and safety protocols through a pandemic committee to ensure business continuity and protect customers and employees. As the severity of the pandemic has subsided in the NYC metropolitan area, which is the main market the Bank serves, our branches have returned to their traditional service model including hours and methods of operating and staffing, and back office personnel returned to the office. Key Initiatives and Challenges We Face. The Bank's strategy is focused on increasing shareholder value through loan and deposit growth, the maintenance of strong credit quality, a strong efficiency ratio and an optimal amount of capital. Key strategic initiatives in 2020 include enhancing our brand, highlighting our digital offerings, refining our branch strategy, building on our relationship banking business and growing fee income. These initiatives are being negatively impacted by the pandemic. Notwithstanding the actions taken to mitigate the impact on earnings of the current interest rate and economic environment, net interest income, net interest margin, earnings, profitability metrics and ability to grow remain under pressure. These items could be negatively impacted by yield curve inversion, low yields available on loans and securities and potential credit losses arising from weak economic conditions and loan modifications. In addition, during the fourth quarters of 2020 and 2021, corporate bonds with current fair values of$77.6 million and$28.6 million , respectively, and a fixed rate yield of 5.14% will begin to reprice on a quarterly basis to a floating rate. OnJuly 28, 2020 , the weighted average floating rate yield would have been approximately .77%. The pandemic continues to create substantial challenges for the Bank and its customers. Normal business activity in the NYC metropolitan area was significantly disrupted for an extended period of time due to government mandated business and school closures and stay-at-home orders to protect public health. As a result, many of the Bank's customers, which include small and medium-sized businesses, professionals, consumers, municipalities and other organizations, experienced a significant decline in, or complete discontinuance of, business activity, earnings and cash flow. Although the local economy is slowly reopening, the full impact of the pandemic on the Bank is beyond the Bank's current knowledge and will ultimately be determined by the pace at which economic activity rebounds and the extent to which the economy recovers from the high level of unemployment and business disruption. 23
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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 securities, and the
average balances of loans include nonaccrual loans.
Six Months Ended June 30,
2020 2019
Average Interest/ Average Average Interest/ Average
(dollars in thousands) Balance Dividends Rate Balance Dividends Rate
Assets:
Interest-earning bank
balances $ 91,821 $ 120 .26 % $ 25,253 $ 300 2.40 %
Investment securities:
Taxable 344,932 6,629 3.84 368,572 7,668 4.16
Nontaxable (1) 375,326 6,412 3.42 416,006 7,653 3.68
Loans (1) 3,170,449 56,891 3.59 3,248,214 59,032 3.63
Total interest-earning
assets 3,982,528 70,052 3.52 4,058,045 74,653 3.68
Allowance for credit losses (33,115) (30,501)
Net interest-earning assets 3,949,413 4,027,544
Cash and due from banks 32,925 36,252
Premises and equipment, net 39,814 41,217
Other assets 134,421 128,493
$ 4,156,573 $ 4,233,506
Liabilities and
Stockholders' Equity:
Savings, NOW & money market
deposits $ 1,704,484 6,639 .78 $ 1,685,467 8,841 1.06
Time deposits 503,364 5,928 2.37 637,630 7,331 2.32
Total interest-bearing
deposits 2,207,848 12,567 1.14 2,323,097 16,172 1.40
Short-term borrowings 92,235 885 1.93 196,481 2,507 2.57
Long-term debt 423,846 4,157 1.97 362,461 3,675 2.04
Total interest-bearing
liabilities 2,723,929 17,609 1.30 2,882,039 22,354 1.56
Checking deposits 1,013,832 931,942
Other liabilities 31,819 29,233
3,769,580 3,843,214
Stockholders' equity 386,993 390,292
$ 4,156,573 $ 4,233,506
Net interest income (1) $ 52,443 $ 52,299
Net interest spread (1) 2.22 % 2.12 %
Net interest margin (1) 2.63 % 2.57 %
(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 in each period presented, using the statutory
federal income tax rate of 21%.
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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 the combined impact of volume and
rate have been allocated to the changes due to volume and the changes due to
rate.
Six Months Ended June 30,
2020 Versus 2019
Increase (decrease) due to changes in:
Net
(in thousands) Volume Rate Change
Interest Income:
Interest-earning bank balances $ 266 $ (446) $ (180)
Investment securities:
Taxable (473) (566) (1,039)
Nontaxable (721) (520) (1,241)
Loans (1,438) (703) (2,141)
Total interest income (2,366) (2,235) (4,601)
Interest Expense:
Savings, NOW & money market deposits 139 (2,341) (2,202)
Time deposits (1,575) 172 (1,403)
Short-term borrowings (1,105) (517) (1,622)
Long-term debt 606 (124) 482
Total interest expense (1,935) (2,810) (4,745)
Increase (decrease) in net interest income $ (431)
$ 144 Net Interest Income Net interest income on a tax-equivalent basis for the six months endedJune 30, 2020 was$52.4 million , an increase of$144,000 , or .3%, from$52.3 million for the same period of 2019. The increase in net interest income is mainly attributable to a reduction in deposit rates in response to decreases in the Federal Funds Target Rate and a very low interest rate environment. The cost of savings, NOW and money market deposits declined 28 basis points to .78% and the cost of interest-bearing liabilities declined 26 basis points to 1.30%. These decreases far outpaced the 10 basis point 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$896,000 and a favorable shift in the mix of funding as an increase in average checking deposits of$81.9 million and a decline in average interest-bearing liabilities of$158.1 million resulted in average checking deposits comprising a larger portion of total funding. The increase in average checking deposits is mainly attributable to the SBA PPP. The decline in yield on securities and loans was mainly attributable to an increase in prepayment speeds and lower yields available on securities purchases and loan originations. The economic impact of the pandemic has slowed loan and overall balance sheet growth. The average balance of loans decreased$77.8 million , or 2.4%, and the average balance of investment securities declined$64.3 million , or 8.2%. The average balance of loans includes$62.7 million of SBA PPP loans at a weighted average yield of 2.9% for the current six-month period. The pandemic and measures taken to contain it significantly disrupted economic activity in our area, causing businesses and schools to close and an increase in unemployment. These disruptions made it difficult to solicit new business, analyze the financial impact on new and existing customers and grow our loan pipeline. The pandemic was largely responsible for a mortgage loan pipeline of$39 million at quarter end and an increase in average interest-earning bank balances of$66.6 million .
Net interest margin for the second quarter and first six months of 2020 was 2.64% and 2.63%, respectively, each increasing 6 basis points over the comparable periods of 2019. The increases were mainly attributable to our ability to reduce the rates paid on interest-bearing deposits faster than our interest-earning assets repriced downward as a significant portion of our municipal bond and mortgage loan portfolios have fixed rates.
AtJune 30, 2020 , corporate bonds totaling$106.2 million had an unrealized loss of$12.8 million . The corporate bonds have a stated maturity of ten years and mature in 2028. The bonds provide a fixed interest rate for a period of two or three years and have a weighted average fixed rate yield of 5.14% atJune 30, 2020 , and then reset quarterly based on the ten year constant maturity swap rate. During the fourth quarters of 2020 and 2021, corporate bonds with current fair values totaling$77.6 million and$28.6 million , respectively, will begin to reprice on a quarterly basis. If the corporate bonds were to reprice onJuly 28, 2020 , the weighted average floating rate yield would be approximately .77%. 25
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Noninterest Income
Noninterest income includes service charges on deposit accounts,
The increase in noninterest income of$428,000 was primarily attributable to an increase in the non-service components of the Bank's defined benefit pension plan of$523,000 . Management remains focused on revenue enhancement initiatives, however, the pandemic is negatively affecting most categories of noninterest income. Noninterest Expense Noninterest expense is comprised of salaries and employee benefits, occupancy and equipment expense and other operating expenses incurred in supporting the various business activities of the Corporation. The increase in noninterest expense of$607,000 includes approximately$300,000 of expenses attributable to the pandemic, and$128,000 of severance charges related to the pending closure and consolidation of three branches. Pandemic expenses include branch and office sanitizing expenses, cleaning and safety equipment, IT-related expenditures and special staff bonuses in recognition of COVID-19 work-related challenges and the SBA PPP. Other factors which increased noninterest expense include higher salaries, employee benefits and equity compensation expense mainly related to hiring a middle market lending team, salary adjustments and the immediate vesting of stock awards granted to directors in the second quarter of 2020. These expenses were partially offset by decreases inFDIC insurance expense of$413,000 and marketing expense of$210,000 . The decrease inFDIC insurance expense was due to assessment credits received by the Bank which are now fully utilized.
Income Taxes
Income tax expense decreased$581,000 when comparing the first six months of 2019 to the current six month period. The decrease is primarily attributable to lower pretax earnings in the current six-month period as compared to the 2019 period and a decline in the effective tax rate to 16.1%.
Results of Operations - Second Quarter 2020 Versus Second Quarter 2019
Net income for the second quarter of 2020 of$10.8 million was relatively unchanged from the comparable period of 2019. Earnings for the second quarter include an increase in net interest income of$829,000 and a decrease in the provision for credit losses of$330,000 . Substantially offsetting these items were increases in noninterest expense and income tax expense of$884,000 and$114,000 , respectively, and a decline in service charges on deposit accounts of$161,000 due to the pandemic. The increase in net interest income occurred for substantially the same reasons discussed above with respect to the six-month periods. The provision for credit losses was$92,000 for the current quarter on a CECL basis. The$92,000 provision was mainly attributable to the pandemic and includes$1.5 million to reflect current and forecasted economic conditions and$146,000 for net chargeoffs, partially offset by a decline in outstanding residential and commercial mortgage loans and lower historical loss rates. The increase in noninterest expense was primarily attributable to the items discussed above with respect to the six-month periods. The increase in income tax expense reflects higher pretax earnings in the current quarter and an increase in the effective tax rate to 16.8%.
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 judgements about current and future 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 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, among other
things, the results of credit reviews performed by the Bank's independent loan
review function and the Bank's credit department. In addition, and in
consultation with the Bank's Chief Financial Officer and Chief Risk Officer , the
ACL 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 ACL is reviewed and ratified by the Board
Loan Committee on a quarterly basis and is subject to periodic examination by
the Office of the Comptroller of the Currency ("OCC"), whose safety and
soundness examination includes a determination as to the adequacy of the
allowance to absorb current expected credit losses.
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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 sinceDecember 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, home prices 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 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, among others: (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 qualitative and quantitative 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 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 actually 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 considered to be a collateral dependent loan, the loan is reported at the fair value of the collateral. 27
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Asset Quality
The Corporation has identified certain assets as risk elements. These assets
include nonaccrual loans, other real estate owned, loans that are contractually
past due 90 days or more as to principal or interest payments and still accruing
and TDRs. These assets present more than the normal risk that the Corporation
will be unable to eventually collect or realize their full carrying value.
Information about the Corporation's risk elements is set forth below.
June 30, December 31,
(dollars in thousands) 2020 2019
Nonaccrual loans:
Troubled debt restructurings $ - $ 465
Other 6,964 423
Total nonaccrual loans 6,964 888
Loans past due 90 days or more and still accruing - -
Other real estate owned - -
Total nonperforming assets 6,964 888
Troubled debt restructurings - performing 1,346 1,070
Total risk elements$ 8,310
Nonaccrual loans as a percentage of total loans .22%
.03%
Nonperforming assets as a percentage of total loans and other real estate owned
.22% .03%
Risk elements as a percentage of total loans and other real estate owned
.26% .06%
The disclosure of other potential problem loans can be found in "Note 4 - Loans" to the Corporation's consolidated financial statements of this Form 10-Q.
In addition, during the second quarter of 2020, the Bank entered into$621 million of loan modifications on 775 loans. These modifications were done to support borrowers experiencing financial disruption and economic hardship as a result of the pandemic. Loan modifications were evaluated on a case-by-case basis for borrowers that were current as to principal and interest and were not in default prior to the pandemic. Loan modifications include a three month deferral of principal on 274 loans with an outstanding balance of$23 million and a three month deferral of principal and interest on 501 loans with an outstanding balance of$598 million . See "Loan Modifications" in the MD&A section of this Form 10-Q for further details.
Allowance and Provision for Credit Losses
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 off against the ACL, and subsequent recoveries, if any, are credited to the ACL. OnJanuary 1, 2020 , the Bank recorded a$2.9 million credit to the allowance for credit losses to establish the ACL beginning balance of$32.2 million , or 1.01% of total loans, using the CECL methodology. The ACL increased$1.9 million fromJanuary 1, 2020 toJune 30, 2020 , amounting to$34.1 million , or 1.08% of total loans, atJune 30, 2020 compared to$29.3 million , or .92% of total loans, on an incurred loss basis atDecember 31, 2019 . Excluding SBA PPP loans, the reserve coverage ratio atJune 30, 2020 is 1.13%. During the first half of 2020, the Bank had loan chargeoffs of$837,000 , recoveries of$261,000 and recorded a provision for credit losses of$2.5 million . During the first six months of 2019, the Bank had loan chargeoffs of$1.0 million , recoveries of$12,000 and recorded a credit provision for loan losses of$35,000 . The provision in the current period was largely attributable to the pandemic and includes$4.2 million to reflect current and forecasted economic conditions and$576,000 for net chargeoffs, partially offset by a decline in outstanding residential and commercial mortgage loans and lower historical loss rates. The credit provision in the 2019 period was driven mainly by declines in outstanding loans and historical loss rates, partially offset by net chargeoffs. 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 "Application of Critical Accounting Policies," 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 4 - Loans" to the Corporation's consolidated financial statements included in this Form 10-Q. The pandemic continues to create substantial challenges for the Bank and its customers. The amount of future chargeoffs and provisions for credit losses will be affected by, among other things, economic conditions on Long Island and in 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. 28
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Loans secured by real estate represent approximately 91% of the Bank's total loans outstanding atJune 30, 2020 . The majority of these loans are collateralized by properties located on Long Island and in the boroughs of NYC. Economic conditions have deteriorated substantially as a result of the pandemic. The full impact of the pandemic on the Bank and our customers is beyond the Bank's control and current knowledge and will ultimately be determined by the pace at which economic activity rebounds and the extent to which the economy recovers from the high level of unemployment and business disruptions.
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.
Cash Flows and Liquidity
Cash Flows. The Corporation's primary sources of cash are deposits, maturities and amortization of loans and investment securities, operations and borrowings. The Corporation uses cash from these and other sources to fund loan growth, purchase investment securities, repay borrowings, expand and improve its physical facilities, pay cash dividends, repurchase its common stock and for general corporate purposes. The Corporation's cash and cash equivalent position atJune 30, 2020 was$173.7 million , up from$39.0 million atDecember 31, 2019 . The increase occurred primarily because cash provided by deposit growth, paydowns or repayments of securities and loans and operations exceeded the cash used to repay borrowings, purchase securities, repurchase common stock and pay cash dividends. Securities increased$50.5 million during the first six months of 2020, from$697.5 million at year-end 2019 to$748.0 million atJune 30, 2020 . The increase is primarily attributable to purchases of$106.3 million , partially offset by maturities and redemptions of$54.8 million . During the first half of 2020, total deposits grew$178.9 million , or 5.7%, to$3.3 billion atJune 30, 2020 . The increase was attributable to growth in checking deposits of$241.0 million , partially offset by decreases in time deposits of$42.7 million and savings, NOW and money market deposits of$19.3 million . The increase in checking deposits is mainly attributable to the SBA PPP. Substantially all of the Bank's borrowings are from the FHLB. Total borrowings decreased$28.2 million during the first six months of 2020. Short-term borrowings were mostly replaced with long-term debt as interest rates continued to decline in the first half of 2020. Long-term debt atJune 30, 2020 represented 88.0% of total borrowings. The Bank's long-term fixed-rate borrowing position, time deposits and pay-fixed interest rate swaps mitigate the impact that increases in interest rates could have on the Bank's earnings. 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. 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, maturities and monthly payments on its investment securities and loan portfolios, operations and investment securities designated as available-for-sale. AtJune 30, 2020 , the Bank had approximately$198.4 million of unencumbered available-for-sale securities. The Bank is a member of theFederal Reserve Bank ("FRB") ofNew York and the FHLB ofNew York 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 FRB ofNew York and FHLB ofNew York . In addition, the Bank can purchase overnight federal funds under its existing line and the Corporation can raise funds through its Dividend Reinvestment and Stock Purchase Plan. However, the Bank's FRB ofNew York membership, FHLB ofNew York 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 dependent on the amount of unencumbered eligible securities and loans that the Bank can use as collateral and the collateral margins required by the lenders. Based on the Bank's unencumbered securities and loan collateral, a substantial portion of which is in place at the FRB ofNew York and FHLB ofNew York , the Bank had borrowing capacity of approximately$1.6 billion atJune 30, 2020 .
Capital
Stockholders' equity was$389.7 million atJune 30, 2020 versus$389.1 million atDecember 31, 2019 . The increase was mainly due to net income of$19.9 million , partially offset by cash dividends declared of$8.6 million , common stock repurchases of$5.9 million , a charge to retained earnings from the adoption of ASU 2016-13 of$2.3 million , and decreases in the after-tax value of available-for-sale securities of$287,000 and derivative instruments of$2.4 million . 29
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InSeptember 2019 , the federal banking agencies, including the OCC and FRB, adopted a new rule to provide an optional, simplified measure of capital adequacy, the Community Bank Leverage Ratio ("CBLR") framework, for qualifying community banking organizations. Under the rule, insured depository institutions and holding companies with less than$10 billion of total consolidated assets that meet certain qualifying criteria may elect to use the new framework. OnJanuary 1, 2020 , the CBLR final rule 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. By satisfying the CBLR, the Corporation and the Bank are deemed in compliance with all regulatory capital requirements, including the risk-based capital requirements, and are considered well-capitalized under the Prompt Corrective Action framework. 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 Ratios of the Corporation and the Bank atJune 30, 2020 were 9.30% and 9.28%, 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.
On
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. During the first quarter of 2020, the Corporation repurchased 261,700 shares of its common stock at a total cost of$5.9 million . Total repurchases completed since the commencement of the program amount to 2,025,100 shares at a cost of$45.6 million . Management does not expect to repurchase any additional shares in 2020 due to the economic uncertainty surrounding the pandemic and banking regulations regarding the amount of dividends a Bank can declare relative to its retained net income for the current year combined with the previous two calendar years.
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