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 nine months of 2020 were$30.7 million and$1.28 respectively, compared to$32.4 million and$1.29 , respectively, for the same period last year. Dividends per share increased 5.8%, from$.52 for the first nine months of 2019 to$.55 for the current period. Returns on average assets ("ROA") and average equity ("ROE") for the first nine months of 2020 were .98% and 10.49%, respectively, versus 1.03% and 11.04%, respectively, for the same period last year. Book value per share was$16.67 at the close of the current period, compared to$16.26 at year-end 2019. Analysis of Earnings - Nine Month Periods. Net income for the first nine months of 2020 was$30.7 million , a decrease of$1.7 million , or 5.2%, versus the same period last year. The decrease is due to increases in the provision for credit losses of$2.2 million and noninterest expense, before debt extinguishment costs, of$1.9 million . These items were partially offset by increases in net interest income of$1.4 million and noninterest income, before securities gains, of$508,000 and a decrease in income tax expense of$400,000 . 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 to near zero as well as significant declines in rates across the entire yield curve. Decreases 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. Average checking deposits include a portion of the proceeds of PPP loans.
Net interest margin for the first nine months of 2020 was 2.64%, increasing 7 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 nine months of 2020 on a CECL basis as compared to$279,000 for the 2019 period on an incurred loss basis. The$2.5 million provision for the current nine-month period was primarily attributable to the pandemic and includes$4.2 million to reflect current and forecasted economic conditions and$1.8 million for net chargeoffs, partially offset by a decline in outstanding loan balance of residential and commercial mortgages. The$279,000 provision for the 2019 period was driven mainly by net chargeoffs of$1.3 million , partially offset by a decline in outstanding loans. 20
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The increase in noninterest income, before securities gains, of
The increase in noninterest expense, before debt extinguishment costs, of
In lateSeptember 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. Because of the timing of the transactions, there was little impact on net interest margin for the current quarter or nine-month period. The deleveraging is expected to benefit net interest margin in the fourth quarter of 2020 by approximately 10 basis points and improve the leverage ratio. The benefit to net interest margin could be offset by challenges we face discussed throughout this Form 10-Q. The decrease in income tax expense of$400,000 is attributable to lower pretax earnings in the current nine-month period as compared to the 2019 period and a decline in the effective tax rate to 16.8%. Asset Quality. The Bank's allowance for credit losses to total loans (reserve coverage ratio) on a CECL basis was 1.01% atJanuary 1, 2020 , 1.09% atMarch 31, 2020 and 1.08% atJune 30, 2020 andSeptember 30, 2020 . Excluding PPP loans, the reserve coverage ratio increased 8 basis points during the first quarter of 2020, another 4 basis points during the second quarter of 2020 and maintained that level during the third quarter of 2020. Nonaccrual loans, TDRs and loans past due 30 through 89 days all remain at low levels. COVID-19 Loan Modifications. During the second quarter, 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. As ofOctober 26, 2020 , all such loans have resumed making payment and are current except for three small business loans that were charged-off in the third quarter totaling$281,000 , one loan that was 30 to 89 days past due in the amount of$123,000 and four loans that have not yet made full payments in the amount of$1.3 million . Key Initiatives and Challenges We Face. Our 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 include building on our relationship banking business, growing fee income, enhancing our brand, highlighting our digital offerings and refining our branch strategy. The interest rate and economic environment continues to exert substantial pressure on net interest income, net interest margin, earnings, profitability metrics, loans outstanding and the Bank's ability to grow. These items could be negatively impacted by yield curve inversion, low yields available on loans and securities and potential credit losses arising from current economic conditions. Among other things, very low interest rates have caused an acceleration of residential mortgage loan repayments and repricings which are expected to continue in the fourth quarter. The weighted average reduction in yield for refinancings completed or in process at quarter end was 75 basis points which will reduce quarterly net interest income by approximately$500,000 . In addition, during the fourth quarters of 2020 and 2021, corporate bonds with current fair values of$80.6 million and$30.2 million , respectively, and an original weighted average fixed rate yield of 5.14% begin repricing on a quarterly basis to a floating rate. At current rates, the weighted average floating rate yield would be .89%. Such repricings will reduce net interest income for the fourth quarter of 2020 by approximately$700,000 . The pandemic continues to present substantial challenges for the Bank and its customers. While business activity in the NYC metropolitan area has started to improve, the pace of the recovery is slow and remains uncertain. An elevated level of unemployment and the significant business disruption experienced in the spring and summer cast some doubt on the extent of economic recovery that is possible in the near term and the ability of some businesses to continue operations. 21
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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.
Nine Months Ended September 30,
2020 2019
Average Interest/ Average Average Interest/ Average
(dollars in thousands) Balance Dividends Rate Balance Dividends Rate
Assets:
Interest-earning bank
balances $ 111,979 $ 159 .19 % $ 30,617 $ 530 2.31 %
Investment securities:
Taxable 356,512 9,813 3.67 369,525 11,196 4.04
Nontaxable (1) 375,570 9,519 3.38 411,354 11,163 3.62
Loans (1) 3,146,738 83,353 3.53 3,231,573 88,388 3.65
Total interest-earning
assets 3,990,799 102,844 3.44 4,043,069 111,277 3.67
Allowance for credit losses (33,286) (30,203)
Net interest-earning assets 3,957,513 4,012,866
Cash and due from banks 33,144 37,104
Premises and equipment, net 39,588 41,064
Other assets 135,351 127,565
$ 4,165,596 $ 4,218,599
Liabilities and
Stockholders' Equity:
Savings, NOW & money market
deposits $ 1,687,377 7,946 .63 $ 1,710,985 13,856 1.08
Time deposits 486,181 8,487 2.33 645,596 11,361 2.35
Total interest-bearing
deposits 2,173,558 16,433 1.01 2,356,581 25,217 1.43
Short-term borrowings 81,509 1,219 2.00 137,100 2,569 2.51
Long-term debt 420,255 6,177 1.96 361,791 5,558 2.05
Total interest-bearing
liabilities 2,675,322 23,829 1.19 2,855,472 33,344 1.56
Checking deposits 1,067,839 940,717
Other liabilities 31,878 30,554
3,775,039 3,826,743
Stockholders' equity 390,557 391,856
$ 4,165,596 $ 4,218,599
Net interest income (1) $ 79,015 $ 77,933
Net interest spread (1) 2.25 % 2.11 %
Net interest margin (1) 2.64 % 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.
Nine Months Ended September 30,
2020 Versus 2019
Increase (decrease) due to changes in:
Net
(in thousands) Volume Rate Change
Interest Income:
Interest-earning bank balances $ 447 $ (818) $ (371)
Investment securities:
Taxable (384) (999) (1,383)
Nontaxable (934) (710) (1,644)
Loans (2,226) (2,809) (5,035)
Total interest income (3,097) (5,336) (8,433)
Interest Expense:
Savings, NOW & money market deposits (177) (5,733) (5,910)
Time deposits (2,783) (91) (2,874)
Short-term borrowings (901) (449) (1,350)
Long-term debt 869 (250) 619
Total interest expense (2,992) (6,523) (9,515)
Increase (decrease) in net interest income $ (105)
$ 1,082 Net Interest Income Net interest income on a tax-equivalent basis for the nine months endedSeptember 30, 2020 was$79.0 million , an increase of$1.1 million , or 1.4%, from$77.9 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 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 45 basis points to .63% and the cost of interest-bearing liabilities declined 37 basis points to 1.19%. These decreases far outpaced the 15 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$1.9 million and a favorable shift in the mix of funding as an increase in average checking deposits of$127.1 million and a decline in average interest-bearing liabilities of$180.2 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 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 caused loans and the overall balance sheet to shrink during the past two quarters. The average balance of loans decreased$84.8 million , or 2.6%, and the average balance of investment securities declined$48.8 million , or 6.2%. The average balance of loans for the current nine-month period includes$97.4 million of PPP loans at a weighted average yield of approximately 2.65%. Measures taken to contain the pandemic significantly disrupted economic activity in our area, caused business and school closures and thus increased unemployment. These disruptions caused management to put a pause on its loan pipeline and slow new business development efforts. The decrease in loans and securities resulted in average interest-earning bank balances increasing$81.4 million , or 266%. Assuming economic activity continues to improve and business restrictions continue to be relaxed in our marketplace, our mortgage loan pipeline is expected to increase through year-end. The mortgage loan pipeline was$72 million atSeptember 30, 2020 , an increase of$33 million during the quarter. Net interest margin for the third quarter and first nine months of 2020 were 2.66% and 2.64%, respectively, increasing 10 and 7 basis points, respectively, 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. The PPP loan yields and acceleration of prepayments of residential mortgage loans during 2020 exerted downward pressure on net interest income and margin.
Noninterest Income
Noninterest income includes service charges on deposit accounts,
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The increase in noninterest income, before securities gains, of$508,000 , or 6.4%, was primarily attributable to an increase in the non-service components of the Bank's defined benefit pension plan of$784,000 . 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, before debt extinguishment costs, of$1.9 million includes charges related to the closure and consolidation of six branches of$476,000 , technology and service contract termination costs related to ourInvestment Management Division of$315,000 and expenses attributable to the pandemic of approximately$300,000 . Other factors which increased noninterest expense include salaries, employee benefits and equity compensation expense mainly related to hiring lending and credit staff, salary adjustments and the immediate vesting of stock awards in 2020. These expenses were partially offset by decreases in consulting fees of$634,000 and marketing expense of$216,000 . The decrease in consulting fees was mainly due to a revenue enhancement project in 2019. In lateSeptember 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.
Income Taxes
Income tax expense decreased$400,000 when comparing the first nine months of 2019 to the current nine month period. The decrease is primarily attributable to lower pretax earnings in the current nine-month period as compared to the 2019 period and a decline in the effective tax rate to 16.8%.
Results of Operations - Third Quarter 2020 Versus Third Quarter 2019
Net income for the third quarter of 2020 of$10.8 million was essentially unchanged from the comparable period of 2019. Earnings for the third quarter include increases in net interest income of$1.0 million and noninterest income, before securities gains, of$80,000 , and a decrease in the provision for credit losses of$314,000 . The positive impact of these items was offset by increases in noninterest expense, before debt extinguishment costs, of$1.3 million , and income tax expense of$181,000 . The increases in net interest income and noninterest income occurred for substantially the same reasons discussed above with respect to the nine-month periods. There was no provision for credit losses for the current quarter on a CECL basis as net chargeoffs of$1.3 million and an increase in historical loss rates were offset by a decline in the outstanding loan balance of residential and commercial mortgages. The increase in noninterest expense was mainly due to the aforementioned branch closures and consolidations, contract termination charges and higher salaries and employee benefits-related costs in the current quarter. Partially offsetting these increases was a decline in consulting fees of$431,000 due to the aforementioned revenue enhancement project. The increase in income tax expense reflects higher pretax earnings in the current quarter and an increase in the effective tax rate to 18.0%. Earnings for the current quarter also reflects the aforementioned deleveraging transaction.
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 results primarily from these qualitative and quantitative adjustments to historical loss experience. 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 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. 25
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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.
September 30, December 31,
(dollars in thousands) 2020 2019
Nonaccrual loans:
Troubled debt restructurings $ - $ 465
Other 2,154 423
Total nonaccrual loans 2,154 888
Loans past due 90 days or more and still accruing - -
Other real estate owned - -
Total nonperforming assets 2,154 888
Troubled debt restructurings - performing 1,329 1,070
Total risk elements $
3,483
Nonaccrual loans as a percentage of total loans .07% .03%
Nonperforming assets as a percentage of total loans and other real estate owned
.07% .03%
Risk elements as a percentage of total loans and other real estate owned
.11% .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, 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. As ofOctober 26, 2020 , all such loans have resumed making payment and are current except for three small business loans that were charged-off in the third quarter totaling$281,000 , one loan that was 30 to 89 days past due in the amount of$123,000 and four loans that have not yet made full payments in the amount of$1.3 million .
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$615,000 fromJanuary 1, 2020 toSeptember 30, 2020 , amounting to$32.8 million , or 1.08% of total loans, atSeptember 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 atSeptember 30, 2020 is 1.13%. During the first nine months of 2020, the Bank had loan chargeoffs of$2.1 million , recoveries of$300,000 and recorded a provision for credit losses of$2.5 million . During the first nine months of 2019, the Bank had loan chargeoffs of$1.3 million , recoveries of$23,000 and recorded a provision for loan losses of$279,000 . 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$1.8 million for net chargeoffs, partially offset by a decline in outstanding residential and commercial mortgage loans. The provision in the 2019 period was driven mainly by net chargeoffs of$1.3 million , partially offset a decline in outstanding loans. 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 present 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. Loans secured by real estate represent approximately 91% of the Bank's total loans outstanding atSeptember 30, 2020 . The majority of these loans are collateralized by properties located on Long Island and in the boroughs of NYC. While business activity in the NYC 26
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metropolitan area has started to improve, the pace of the recovery is slow and remains uncertain. An elevated level of unemployment and the significant business disruption experienced in the spring and summer cast some doubt on the extent of economic recovery that is possible in the near term and the ability of some businesses to continue operations.
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 at
Securities decreased$51.4 million during the first nine months of 2020, from$697.5 million at year-end 2019 to$646.1 million atSeptember 30, 2020 . The decrease is primarily attributable to maturities and redemptions of$109.4 million and sales of$64.5 million , partially offset by purchases of$120.9 million . During the first nine months of 2020, total deposits grew$104.8 million , or 3.3%, to$3.2 billion atSeptember 30, 2020 . The increase was attributable to growth in checking deposits of$253.1 million , partially offset by decreases in time deposits of$66.6 million and savings, NOW and money market deposits of$81.6 million . Checking deposits include a portion of the proceeds of PPP loans. In lateSeptember 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 is expected to benefit net interest margin in the fourth quarter of 2020 by approximately 10 basis points and improve the leverage ratio. 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. AtSeptember 30, 2020 , the Bank had approximately$190.0 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$1.7 billion atSeptember 30, 2020 .
Capital
Stockholders' equity was$397.7 million atSeptember 30, 2020 versus$389.1 million atDecember 31, 2019 . The increase was mainly due to net income of$30.7 million , partially offset by cash dividends declared of$13.1 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 derivative instruments of$1.5 million . In accordance with the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies have adopted, effectiveJanuary 1, 2020 , a final rule whereby financial institutions and financial institution holding companies that have less than$10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9% ("qualifying 27
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community banking organizations"), will be eligible to opt into a community bank leverage ratio (the "CBLR") framework. Qualifying community banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies' capital rules and will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action statutes. The agencies reserved the authority to disallow the use of the community bank leverage ratio framework by a financial institution or holding company, based on the risk profile of the organization. The Corporation and the Bank elected to adopt the alternative CBLR framework. As a qualifying community banking organization, the Corporation and the Bank may opt out of the CBLR framework in any subsequent quarter by completing its regulatory agency reporting using the traditional capital rules. The Corporation'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 atSeptember 30, 2020 were 9.57% and 9.58%, 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. OnApril 6, 2020 , the federal banking agencies issued interim final rules pursuant to section 4012 of the CARES Act, temporarily lowering the CBLR requirement to 8.00% through the end of 2020, 8.50% for calendar year 2021 and 9.00% in 2022. The CARES Act also provides that, during the same time period, if a qualifying community banking organization falls no more than 1% below the CBLR, it will have a two-quarter grace period to satisfy the CBLR. 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 . The Corporation did not repurchase shares in the second and third quarters and expects to restart its share repurchase program during the fourth quarter of 2020.
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