Item 1. Business.
GENERAL
Overview
We are a Delaware corporation organized in May
1994. The Bank was organized in 1929 as a New York State-chartered mutual savings bank. In 1994, the Bank converted to a federally
chartered mutual savings bank and changed its name from Flushing Savings Bank to Flushing Savings Bank, FSB. The Bank converted
from a federally chartered mutual savings bank to a federally chartered stock savings bank on November 21, 1995, at which time
Flushing Financial Corporation acquired all of the stock of the Savings Bank. On February 28, 2013, the Savings Bank merged with
and into the Commercial Bank, with the Commercial Bank as the surviving entity. Pursuant to the Merger, the Commercial Bank’s
charter was changed to a full-service New York State commercial bank charter, and its name was changed to Flushing Bank. Also in
connection with the Merger, Flushing Financial Corporation became a bank holding company. We have not made any significant changes
to our operations or services as a result of the Merger. The primary business of Flushing Financial Corporation has been the operation
of the Bank. The Bank owns three subsidiaries: Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties
Inc. The Bank has an internet branch, iGObanking.com
®
. The activities of Flushing Financial Corporation are primarily
funded by dividends, if any, received from the Bank, issuances of junior subordinated debt, and issuances of equity securities.
Flushing Financial Corporation’s common stock is traded on the NASDAQ Global Select Market under the symbol “FFIC.”
Flushing Financial Corporation also owns Flushing
Financial Capital Trust II, Flushing Financial Capital Trust III, and Flushing Financial Capital Trust IV (the “Trusts”),
which are special purpose business trusts formed to issue a total of $60.0 million of capital securities and $1.9 million of common
securities (which are the only voting securities). Flushing Financial Corporation owns 100% of the common securities of the Trusts.
The Trusts used the proceeds from the issuance of these securities to purchase junior subordinated debentures from Flushing Financial
Corporation. The Trusts are not included in our consolidated financial statements as we would not absorb the losses of the Trusts
if losses were to occur.
Unless otherwise disclosed, the information
presented in this Annual Report reflects the financial condition and results of operations of Flushing Financial Corporation, the
Bank and the Bank’s subsidiaries on a consolidated basis (collectively, the “Company”). Management views the
Company as operating a single unit – a community bank. Therefore, segment information is not provided. At December 31, 2016,
the Company had total assets of $6.1 billion, deposits of $4.2 billion and stockholders’ equity of $513.9 million.
Our principal
business is attracting retail deposits from the general public and investing those deposits together with funds generated from
ongoing operations and borrowings, primarily in (1) originations and purchases of multi-family residential properties, commercial
business loans, commercial real estate mortgage loans and, to a lesser extent, one-to-four family (focusing on mixed-use properties,
which are properties that contain both residential dwelling units and commercial units); (2) construction loans, primarily for
residential properties; (3) Small Business Administration (“SBA”) loans and other small business loans; (4) mortgage
loan surrogates such as mortgage-backed securities; and (5) U.S. government securities, corporate fixed-income securities and other
marketable securities. We also originate certain other consumer loans including overdraft lines of credit. At December 31, 2016,
we had gross loans outstanding of $4,819.1 million (before the allowance for loan losses and net deferred costs), with gross mortgage
loans totaling $4,187.8 million, or 86.9% of gross loans, and non-mortgage loans totaling $631.3 million, or 13.1% of gross loans.
Mortgage loans are primarily multi-family, commercial and one-to-four family mixed-use properties, which totaled 82.6% of gross
loans. Our revenues are derived principally from interest on our mortgage and other loans and mortgage-backed securities portfolio,
and interest and dividends on other investments in our securities portfolio. Our primary sources of funds are deposits, Federal
Home Loan Bank of New York (“FHLB-NY”) borrowings, repurchase agreements, principal and interest payments on loans,
mortgage-backed, other securities and to a lesser extent proceeds from sales of securities and loans. The Bank’s primary
regulator is the New York State Department of Financial Services (“NYDFS”)
(formerly, the New York State Banking
Department)
, and its primary federal regulator is the Federal Deposit Insurance Corporation (“FDIC”).
Deposits are insured to the maximum allowable amount by the FDIC. Additionally, the Bank is a member of the Federal Home Loan Bank
(“FHLB”) system.
Our operating results are significantly affected
by national and local economic conditions, including the strength of the local economy. The unemployment rate was 5.2% at December
2016 and 2015, for the New York City region, according to the New York Department of Labor. In this economic environment, we saw
improvements in our non-performing loans. Non-performing loans totaled $21.4 million, $26.1 million and $34.2 million at December
31, 2016, 2015 and 2014, respectively. Foreclosed properties decreased by 89.2% to $0.5 million at December 31, 2016 from $4.9
million at December 31, 2015. Additionally, net charge-offs of impaired loans decreased in 2016 to a recovery of $0.7 million from
net charge-offs of $2.6 million for the year ended December 31, 2015, as we continue to maintain conservative underwriting standards
to reduce risk.
Our operating results are also affected by extensions,
renewals, modifications and restructuring of loans in our loan portfolio. Loans which are renewed, modified or restructured are
required to be fully underwritten in accordance with our policy for new loans, except when the borrower is seeking a reduction
in the interest rate due to a decline in interest rates in the market, or for a loan classified as a troubled debt restructured
(“TDR”). Our policy for modifying a loan due to the borrower’s request for changes in the terms will depend on
the change requested. The borrower must be current and have a good payment history to have a loan modified. If the borrower is
seeking additional funds, the loan is fully underwritten in accordance with our policy for new loans. If the borrower is seeking
a reduction in the interest rate due to a decline in interest rates in the market, we generally limit our review as follows: (1)
for income producing properties and business loans, to a review of the operating results of the property/business and a satisfactory
inspection of the property, and (2) for one-to-four residential properties, to a satisfactory inspection of the property. Our policy
on restructuring a loan when the loan will be classified as a TDR requires the loan to be fully underwritten in accordance with
Company policy. The borrower must demonstrate the ability to repay the loan under the new terms. When the restructuring results
in a TDR, we may waive some requirements of Company policy provided the borrower has demonstrated the ability to meet the requirements
of the restructured loan and repay the restructured loan. While our formal lending policies do not prohibit making additional loans
to a borrower or any related interest of the borrower who is past due in principal or interest more than 90 days, it has been our
practice not to make additional loans to a borrower or a related interest of the borrower if the borrower is past due more than
90 days as to principal or interest. During the last three fiscal years, we did not make any additional loans to a borrower or
any related interest of the borrower who was past due in principal or interest more than 90 days. All extensions, renewals, restructurings
and modifications must be approved by either the Board of Directors of the Bank (the “Bank Board of Directors”) or
its Loan Committee (the “Loan Committee”).
Our operating results are also affected by losses
on non-performing loans. Our policy requires a reappraisal by an independent third party when a loan becomes twelve months delinquent.
We generally obtain a reappraisal by an independent third party for loans over 90 days delinquent when the outstanding loan balance
is at least $1.0 million. We also obtain reappraisals when our internally prepared valuation of a property indicates there has
been a decline in value below the outstanding balance of the loan, or when a property inspection has indicated significant deterioration
in the condition of the property. These internal valuations are prepared when a loan becomes 90 days delinquent.
The Bank has a business banking unit which focuses
on the development of a full complement of commercial business deposit, loan and cash management products. As of December 31, 2016
and 2015, the business banking unit had $613.0 million and $525.3 million, respectively, in gross loans outstanding and $144.4
million and $146.3 million, respectively, of customer deposits.
The Bank has an internet branch, iGObanking.com®,
which provides access to consumers in markets outside our geographic locations. Accounts can be opened online at www.iGObanking.com
or by mail. Currently iGObanking.com® does not accept loan applications. As of December 31, 2016 and 2015, iGObanking.com®
had $417.3 million and $323.7 million, respectively, of customer deposits.
The Bank has a governmental banking unit, which
provides banking services to public entities including counties, cities, towns, villages, school districts, libraries, fire districts
and the various courts throughout the New York City metropolitan area. At December 31, 2016 and 2015, the government banking unit
had $1,062.1 million and $975.9 million, respectively, in customer deposits.
Market Area and Competition
We are a community oriented financial institution
offering a wide variety of financial services to meet the needs of the communities we serve. The Bank’s main office is in
Uniondale, New York, located in Nassau County. At December 31, 2016, the Bank operated out of 19 full-service offices, located
in the New York City Boroughs of Queens, Brooklyn, and Manhattan, and in Nassau County, New York. We also operate an internet branch,
iGObanking.com
®
. We maintain our executive offices in Uniondale in Nassau County, New York. Substantially all of
our mortgage loans are secured by properties located in the New York City metropolitan area.
We face intense competition both in making loans
and in attracting deposits. Competition for loans in our market is primarily based on the types of loans offered and the related
terms for these loans, including fixed-rate versus adjustable-rate loans and the interest rate on the loan. For adjustable rate
loans, competition is also based on the repricing period, the index to which the rate is referenced, and the spread over the index
rate. Also, competition is influenced by the ability of a financial institution to respond to customer requests and to provide
the borrower with a timely decision to approve or deny the loan application.
Our market area has a high density of financial
institutions, many of which have greater financial resources, name recognition and market presence, and all of which are competitors
to varying degrees. Particularly intense competition exists for deposits, as we compete with 115 banks and thrifts in the counties
in which we have branch locations. Our market share of deposits, as of June 30, 2016, in these counties was approximately 0.33%
of the total deposits of these FDIC insured competing financial institutions, and we are the 25th largest financial institution.
In addition, we compete with credit unions, the stock market and mutual funds for customers’ funds. Competition for deposits
in our market and for national brokered deposits is primarily based on the types of deposits offered and rate paid on the deposits.
Particularly intense competition also exists in all of the lending activities we emphasize. In addition to the financial institutions
mentioned above, we compete against mortgage banks and insurance companies located both within our market and available on the
internet. Competition for loans in our market is primarily based on the types of loans offered and the related terms for these
loans, including fixed-rate versus adjustable-rate loans and the interest rate on the loan. For adjustable rate loans, competition
is also based on the repricing period, the index to which the rate is referenced, and the spread over the index rate. Also, competition
is influenced by the ability of a financial institution to respond to customer requests and to provide the borrower with a timely
decision to approve or deny the loan application. The internet banking arena also has many larger financial institutions which
have greater financial resources, name recognition and market presence. Our future earnings prospects will be affected by our ability
to compete effectively with other financial institutions and to implement our business strategies. Our strategy for attracting
deposits includes using various marketing techniques, delivering enhanced technology and customer friendly banking services, and
focusing on the unique personal and small business banking needs of the multi-ethnic communities we serve. Our strategy for attracting
new loans is primarily dependent on providing timely response to applicants and maintaining a network of quality brokers. See “Risk
Factors – The Markets in Which We Operate Are Highly Competitive” included in Item 1A of this Annual Report.
For a discussion of our business strategies,
see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview —
Management Strategy” included in Item 7 of this Annual Report.
Lending Activities
Loan Portfolio Composition
. Our loan
portfolio consists primarily of mortgage loans secured by multi-family residential, commercial real estate, one-to-four family
mixed-use property, one-to-four family residential property, and commercial business loans. In addition, we also offer construction
loans, SBA loans and other consumer loans. Substantially all of our mortgage loans are secured by properties located within our
market area. At December 31, 2016, we had gross loans outstanding of $4,819.1 million (before the allowance for loan losses and
net deferred costs).
In recent years we have focused our mortgage
loan origination efforts on multi-family residential mortgage loans, although starting in 2014 we increased our focus on commercial
real estate and business loans with full banking relationships. In prior years we had focused our mortgage loan originations on
multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans. These loans generally
have higher yields than one-to-four family residential properties, and include prepayment penalties that we collect if the loans
pay in full prior to the contractual maturity. We expect to continue this emphasis on multi-family residential mortgage loans,
commercial real estate and business loans with full banking relationships through marketing and by maintaining competitive interest
rates and origination fees. Our marketing efforts include frequent contact with mortgage brokers and other professionals who serve
as referral sources.
Fully underwritten one-to-four family residential
mortgage loans generally are considered by the banking industry to have less risk than other types of loans. Multi-family residential,
commercial real estate and one-to-four family mixed-use property mortgage loans generally have higher yields than one-to-four family
residential property mortgage loans and shorter terms to maturity, but typically involve higher principal amounts and may expose
the lender to a greater risk of credit loss than one-to-four family residential property mortgage loans. The greater risk associated
with multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans could require us
to increase our provisions for loan losses and to maintain an allowance for loan losses as a percentage of total loans in excess
of the allowance we currently maintain. We continually review the composition of our mortgage loan portfolio to manage the risk
in the portfolio. See “General – Overview” in this Item 1 of this Annual Report. To date, we have not experienced
significant losses in our multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loan
portfolios.
Our mortgage loan portfolio consists of adjustable
rate mortgage (“ARM”) loans and fixed-rate mortgage loans. Interest rates we charge on loans are affected primarily
by the demand for such loans, the supply of money available for lending purposes, the rate offered by our competitors and the creditworthiness
of the borrower. Many of those factors are, in turn, affected by local and national economic conditions, and the fiscal, monetary
and tax policies of the federal, state and local governments.
In general, consumers show a preference for
ARM loans in periods of high interest rates and for fixed-rate loans when interest rates are low. In periods of declining interest
rates, we may experience refinancing activity in ARM loans, as borrowers show a preference to lock-in the lower rates available
on fixed-rate loans. In the case of ARM loans we originated, volume and adjustment periods are affected by the interest rates and
other market factors as discussed above as well as consumer preferences. We have not in the past, nor do we currently, originate
ARM loans that provide for negative amortization.
At December 31, 2016, we had $11.5 million in
construction loans outstanding. We obtain a first lien position on the underlying collateral, and generally obtain guarantees on
construction loans. These loans generally have a term of two years or less. Construction loans involve a greater degree of risk
than other loans because, among other things, the underwriting of such loans is based on an estimated value of the developed property,
which can be difficult to ascertain in light of uncertainties inherent in such estimations. In addition, construction lending entails
the risk that the project may not be completed due to cost overruns or changes in market conditions. The greater risk associated
with construction loans could require us to increase our provision for loan losses, and to maintain an allowance for loan losses
as a percentage of total loans in excess of the allowance we currently maintain.
The business banking unit focuses on loan and
deposit relationships to businesses located within our market area. These loans are generally personally guaranteed by the owners,
and may be secured by the assets of the business, including real estate. The interest rate on these loans is generally an adjustable
rate based on a published index. These loans, while providing us a higher rate of return, also present a higher level of risk.
The greater risk associated with business loans could require us to increase our provision for loan losses, and to maintain an
allowance for loan losses as a percentage of total loans in excess of the allowance we currently maintain. To date, we have not
incurred significant losses in our business loan portfolio.
At times, we may purchase loans from banks,
mortgage bankers and other financial institutions when the loans complement our loan portfolio strategy. Loans purchased must meet
our underwriting standards when they were originated. Our lending activities are subject to federal and state laws and regulations.
See “— Regulation.”
The following table sets forth the composition
of our loan portfolio at the dates indicated.
|
|
At December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
2012
|
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
Amount
|
|
of Total
|
|
Amount
|
|
of Total
|
|
Amount
|
|
of Total
|
|
Amount
|
|
of Total
|
|
Amount
|
|
of Total
|
|
|
(Dollars in thousands)
|
Mortgage Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family residential
|
|
$
|
2,178,504
|
|
|
|
45.21
|
%
|
|
$
|
2,055,228
|
|
|
|
46.98
|
%
|
|
$
|
1,923,460
|
|
|
|
50.64
|
%
|
|
$
|
1,712,039
|
|
|
|
50.02
|
%
|
|
$
|
1,534,438
|
|
|
|
47.62
|
%
|
Commercial real estate
|
|
|
1,246,132
|
|
|
|
25.86
|
|
|
|
1,001,236
|
|
|
|
22.90
|
|
|
|
621,569
|
|
|
|
16.36
|
|
|
|
512,552
|
|
|
|
14.97
|
|
|
|
515,438
|
|
|
|
16.00
|
|
One-to-four family -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mixed-use property
|
|
|
558,502
|
|
|
|
11.59
|
|
|
|
573,043
|
|
|
|
13.11
|
|
|
|
573,779
|
|
|
|
15.10
|
|
|
|
595,751
|
|
|
|
17.40
|
|
|
|
637,353
|
|
|
|
19.79
|
|
One-to-four family -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
residential (1)
|
|
|
185,767
|
|
|
|
3.85
|
|
|
|
187,838
|
|
|
|
4.30
|
|
|
|
187,572
|
|
|
|
4.94
|
|
|
|
193,726
|
|
|
|
5.66
|
|
|
|
198,968
|
|
|
|
6.18
|
|
Co-operative apartment (2)
|
|
|
7,418
|
|
|
|
0.15
|
|
|
|
8,285
|
|
|
|
0.19
|
|
|
|
9,835
|
|
|
|
0.26
|
|
|
|
10,137
|
|
|
|
0.30
|
|
|
|
6,303
|
|
|
|
0.20
|
|
Construction
|
|
|
11,495
|
|
|
|
0.24
|
|
|
|
7,284
|
|
|
|
0.17
|
|
|
|
5,286
|
|
|
|
0.14
|
|
|
|
4,247
|
|
|
|
0.12
|
|
|
|
14,381
|
|
|
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross mortgage loans
|
|
|
4,187,818
|
|
|
|
86.90
|
|
|
|
3,832,914
|
|
|
|
87.65
|
|
|
|
3,321,501
|
|
|
|
87.44
|
|
|
|
3,028,452
|
|
|
|
88.47
|
|
|
|
2,906,881
|
|
|
|
90.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small Business Administration
|
|
|
15,198
|
|
|
|
0.32
|
|
|
|
12,194
|
|
|
|
0.28
|
|
|
|
7,134
|
|
|
|
0.19
|
|
|
|
7,792
|
|
|
|
0.23
|
|
|
|
9,496
|
|
|
|
0.29
|
|
Taxi medallion
|
|
|
18,996
|
|
|
|
0.39
|
|
|
|
20,881
|
|
|
|
0.48
|
|
|
|
22,519
|
|
|
|
0.59
|
|
|
|
13,123
|
|
|
|
0.38
|
|
|
|
9,922
|
|
|
|
0.31
|
|
Commercial business and other
|
|
|
597,122
|
|
|
|
12.39
|
|
|
|
506,622
|
|
|
|
11.59
|
|
|
|
447,500
|
|
|
|
11.78
|
|
|
|
373,641
|
|
|
|
10.92
|
|
|
|
295,076
|
|
|
|
9.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross non-mortgage loans
|
|
|
631,316
|
|
|
|
13.10
|
|
|
|
539,697
|
|
|
|
12.35
|
|
|
|
477,153
|
|
|
|
12.56
|
|
|
|
394,556
|
|
|
|
11.53
|
|
|
|
314,494
|
|
|
|
9.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
4,819,134
|
|
|
|
100.00
|
%
|
|
|
4,372,611
|
|
|
|
100.00
|
%
|
|
|
3,798,654
|
|
|
|
100.00
|
%
|
|
|
3,423,008
|
|
|
|
100.00
|
%
|
|
|
3,221,375
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned loan fees and deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs, net
|
|
|
16,559
|
|
|
|
|
|
|
|
15,368
|
|
|
|
|
|
|
|
11,719
|
|
|
|
|
|
|
|
11,170
|
|
|
|
|
|
|
|
12,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
(22,229
|
)
|
|
|
|
|
|
|
(21,535
|
)
|
|
|
|
|
|
|
(25,096
|
)
|
|
|
|
|
|
|
(31,776
|
)
|
|
|
|
|
|
|
(31,104
|
)
|
|
|
|
|
Loans, net
|
|
$
|
4,813,464
|
|
|
|
|
|
|
$
|
4,366,444
|
|
|
|
|
|
|
$
|
3,785,277
|
|
|
|
|
|
|
$
|
3,402,402
|
|
|
|
|
|
|
$
|
3,203,017
|
|
|
|
|
|
|
(1)
|
One-to-four family residential mortgage loans also include home equity and condominium loans. At December 31, 2016, gross home
equity loans totaled $52.4 million and condominium loans totaled $22.7 million.
|
|
(2)
|
Consists of loans secured by shares representing interests in individual co-operative units that are generally owner occupied.
|
The following table sets forth our loan originations
(including the net effect of refinancing) and the changes in our portfolio of loans, including purchases, sales and principal reductions
for the years indicated:
|
|
For the years ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
Mortgage Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At beginning of year
|
|
$
|
3,832,914
|
|
|
$
|
3,321,501
|
|
|
$
|
3,028,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans originated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family residential
|
|
|
245,175
|
|
|
|
205,393
|
|
|
|
314,148
|
|
Commercial real estate
|
|
|
296,620
|
|
|
|
376,036
|
|
|
|
165,054
|
|
One-to-four family mixed-use property
|
|
|
62,735
|
|
|
|
68,295
|
|
|
|
50,070
|
|
One-to-four family residential
|
|
|
24,820
|
|
|
|
40,831
|
|
|
|
24,727
|
|
Co-operative apartment
|
|
|
470
|
|
|
|
1,625
|
|
|
|
170
|
|
Construction
|
|
|
15,772
|
|
|
|
4,999
|
|
|
|
1,566
|
|
Total mortgage loans originated
|
|
|
645,592
|
|
|
|
697,179
|
|
|
|
555,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family residential
|
|
|
126,022
|
|
|
|
168,450
|
|
|
|
106,830
|
|
Commercial real estate
|
|
|
26,101
|
|
|
|
76,053
|
|
|
|
14,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans purchased
|
|
|
152,123
|
|
|
|
244,503
|
|
|
|
121,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal reductions
|
|
|
434,587
|
|
|
|
416,101
|
|
|
|
363,206
|
|
Loans transferred to loans held for sale
|
|
|
-
|
|
|
|
300
|
|
|
|
-
|
|
Mortgage loan sales
|
|
|
7,259
|
|
|
|
11,057
|
|
|
|
12,871
|
|
Charge-offs
|
|
|
419
|
|
|
|
1,440
|
|
|
|
1,780
|
|
Mortgage loan foreclosures
|
|
|
546
|
|
|
|
1,371
|
|
|
|
6,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of year
|
|
$
|
4,187,818
|
|
|
$
|
3,832,914
|
|
|
$
|
3,321,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At beginning of year
|
|
$
|
539,697
|
|
|
$
|
477,153
|
|
|
$
|
394,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans originated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Small Business Administration
|
|
|
8,447
|
|
|
|
11,261
|
|
|
|
1,611
|
|
Commercial business
|
|
|
290,444
|
|
|
|
243,316
|
|
|
|
227,904
|
|
Other
|
|
|
1,738
|
|
|
|
2,777
|
|
|
|
3,056
|
|
Total other loans originated
|
|
|
300,629
|
|
|
|
257,354
|
|
|
|
232,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage loans purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxi Medallion
|
|
|
-
|
|
|
|
-
|
|
|
|
14,431
|
|
Commercial business
|
|
|
34,594
|
|
|
|
34,425
|
|
|
|
33,805
|
|
Total non-mortgage loans purchased
|
|
|
34,594
|
|
|
|
34,425
|
|
|
|
48,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage loan sales
|
|
|
3,211
|
|
|
|
3,935
|
|
|
|
4
|
|
Loans transferred to loans held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
1,150
|
|
Principal reductions
|
|
|
239,653
|
|
|
|
222,895
|
|
|
|
196,394
|
|
Charge-offs
|
|
|
740
|
|
|
|
2,405
|
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of year
|
|
$
|
631,316
|
|
|
$
|
539,697
|
|
|
$
|
477,153
|
|
Loan Maturity and Repricing.
The following
table shows the maturity of our total loan portfolio at December 31, 2016. Scheduled repayments are shown in the maturity category
in which the payments become due.
|
|
Mortgage loans
|
|
Non-mortgage loans
|
|
|
|
|
|
|
|
|
One-to-four
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
family
|
|
One-to-four
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
Multi-family
|
|
Commercial
|
|
mixed-use
|
|
family
|
|
Co-operative
|
|
|
|
Small Business
|
|
Taxi
|
|
business
|
|
|
(In thousands)
|
|
residential
|
|
real estate
|
|
property
|
|
residential
|
|
apartment
|
|
Construction
|
|
Administration
|
|
Medallion
|
|
and other
|
|
Total loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due within one year
|
|
$
|
206,074
|
|
|
$
|
176,764
|
|
|
$
|
38,803
|
|
|
$
|
7,756
|
|
|
$
|
251
|
|
|
$
|
7,799
|
|
|
$
|
2,176
|
|
|
$
|
12,055
|
|
|
$
|
180,982
|
|
|
$
|
632,660
|
|
Amounts due after one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to two years
|
|
|
184,443
|
|
|
|
132,153
|
|
|
|
28,609
|
|
|
|
7,170
|
|
|
|
260
|
|
|
|
3,696
|
|
|
|
1,463
|
|
|
|
4,235
|
|
|
|
79,689
|
|
|
|
441,718
|
|
Two to three years
|
|
|
181,955
|
|
|
|
113,596
|
|
|
|
27,404
|
|
|
|
7,048
|
|
|
|
260
|
|
|
|
-
|
|
|
|
1,309
|
|
|
|
2,706
|
|
|
|
65,210
|
|
|
|
399,488
|
|
Three to five years
|
|
|
179,895
|
|
|
|
106,904
|
|
|
|
27,268
|
|
|
|
7,128
|
|
|
|
260
|
|
|
|
-
|
|
|
|
1,151
|
|
|
|
-
|
|
|
|
55,841
|
|
|
|
378,447
|
|
Over five years
|
|
|
1,426,137
|
|
|
|
716,715
|
|
|
|
436,418
|
|
|
|
156,665
|
|
|
|
6,387
|
|
|
|
-
|
|
|
|
9,099
|
|
|
|
-
|
|
|
|
215,400
|
|
|
|
2,966,821
|
|
Total due after one year
|
|
|
1,972,430
|
|
|
|
1,069,368
|
|
|
|
519,699
|
|
|
|
178,011
|
|
|
|
7,167
|
|
|
|
3,696
|
|
|
|
13,022
|
|
|
|
6,941
|
|
|
|
416,140
|
|
|
|
4,186,474
|
|
Total amounts due
|
|
$
|
2,178,504
|
|
|
$
|
1,246,132
|
|
|
$
|
558,502
|
|
|
$
|
185,767
|
|
|
$
|
7,418
|
|
|
$
|
11,495
|
|
|
$
|
15,198
|
|
|
$
|
18,996
|
|
|
$
|
597,122
|
|
|
$
|
4,819,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sensitivity of loans to changes in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest rates - loans due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
after one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate loans
|
|
$
|
354,707
|
|
|
$
|
86,742
|
|
|
$
|
87,321
|
|
|
$
|
31,701
|
|
|
$
|
858
|
|
|
$
|
-
|
|
|
$
|
3,828
|
|
|
$
|
6,357
|
|
|
$
|
171,436
|
|
|
$
|
742,950
|
|
Adjustable rate loans
|
|
|
1,617,723
|
|
|
|
982,626
|
|
|
|
432,378
|
|
|
|
146,310
|
|
|
|
6,309
|
|
|
|
3,696
|
|
|
|
9,194
|
|
|
|
584
|
|
|
|
244,704
|
|
|
|
3,443,524
|
|
Total loans due after one year
|
|
$
|
1,972,430
|
|
|
$
|
1,069,368
|
|
|
$
|
519,699
|
|
|
$
|
178,011
|
|
|
$
|
7,167
|
|
|
$
|
3,696
|
|
|
$
|
13,022
|
|
|
$
|
6,941
|
|
|
$
|
416,140
|
|
|
$
|
4,186,474
|
|
Multi-Family Residential Lending.
Loans
secured by multi-family residential properties were $2,178.5 million, or 45.21% of gross loans at December 31, 2016. Our multi-family
residential mortgage loans had an average principal balance of $1.0 million at December 31, 2016, and the largest multi-family
residential mortgage loan held in our portfolio had a principal balance of $28.0 million. We offer both fixed-rate and adjustable-rate
multi-family residential mortgage loans, with maturities of up to 30 years.
In underwriting multi-family residential mortgage
loans, we review the expected net operating income generated by the real estate collateral securing the loan, the age and condition
of the collateral, the financial resources and income level of the borrower and the borrower’s experience in owning or managing
similar properties. We typically require debt service coverage of at least 125% of the monthly loan payment. We generally originate
these loans up to only 75% of the appraised value or the purchase price of the property, whichever is less. Any loan with a final
loan-to-value ratio in excess of 75% must be approved by the Bank Board of Directors or the Loan Committee as an exception to policy.
We generally rely on the income generated by the property as the primary means by which the loan is repaid. However, personal guarantees
may be obtained for additional security from these borrowers. We typically order an environmental report on our multi-family and
commercial real estate loans.
Loans secured by multi-family residential property
generally involve a greater degree of risk than residential mortgage loans and carry larger loan balances. The increased credit
risk is the result of several factors, including the concentration of principal in a smaller number of loans and borrowers, the
effects of general economic conditions on income producing properties and the increased difficulty in evaluating and monitoring
these types of loans. Furthermore, the repayment of loans secured by multi-family residential property is typically dependent upon
the successful operation of the related property, which is usually owned by a legal entity with the property being the entity’s
only asset. If the cash flow from the property is reduced, the borrower’s ability to repay the loan may be impaired. If the
borrower defaults, our only remedy may be to foreclose on the property, for which the market value may be less than the balance
due on the related mortgage loan. Loans secured by multi-family residential property also may involve a greater degree of environmental
risk. We seek to protect against this risk through obtaining an environmental report. See “—Asset Quality — Environmental
Concerns Relating to Loans.”
At December 31, 2016, $1,792.9 million,
or 82.30%, of our multi-family mortgage loans consisted of ARM loans. We offer ARM loans with adjustment periods typically of five
years and for terms of up to 30 years. Interest rates on ARM loans currently offered by us are adjusted at the beginning of each
adjustment period based upon a fixed spread above the FHLB-NY corresponding Regular Advance Rate. From time to time, due to competitive
forces, we may originate ARM loans at an initial rate lower than the fully indexed rate as a result of a discount on the spread
for the initial adjustment period. Multi-family adjustable-rate mortgage loans generally are not subject to limitations on interest
rate increases either on an adjustment period or aggregate basis over the life of the loan; however, the loans generally contain
interest rate floors. We originated and purchased multi-family ARM loans totaling $330.6 million, $339.5 million and $398.9 million
during 2016, 2015 and 2014, respectively.
At December 31, 2016, $385.7 million, or
17.70%, of our multi-family mortgage loans consisted of fixed rate loans. Our fixed-rate multi-family mortgage loans are generally
originated for terms up to 15 years and are competitively priced based on market conditions and our cost of funds. We originated
and purchased $40.6 million, $34.3 million and $22.1 million of fixed-rate multi-family mortgage loans in 2016, 2015 and 2014,
respectively.
Commercial Real Estate Lending.
Loans
secured by commercial real estate were $1,246.1 million, or 25.86% of gross loans, at December 31, 2016. Our commercial real
estate mortgage loans are secured by properties such as office buildings, hotels/motels, nursing homes, small business facilities,
strip shopping centers and warehouses. At December 31, 2016, our commercial real estate mortgage loans had an average principal
balance of $1.8 million and the largest of such loans, which was secured by seven multi-tenant shopping centers, had a principal
balance of $42.7 million. Commercial real estate mortgage loans are generally originated in a range of $100,000 to $6.0 million.
In underwriting commercial real estate mortgage
loans, we employ the same underwriting standards and procedures as are employed in underwriting multi-family residential mortgage
loans.
Commercial real estate mortgage loans generally
carry larger loan balances than one-to-four family residential mortgage loans and involve a greater degree of credit risk for the
same reasons applicable to multi-family residential mortgage loans.
At December 31, 2016, $1,132.5 million,
or 90.88%, of our commercial mortgage loans consisted of ARM loans. We offer ARM loans with adjustment periods of one to five years
and generally for terms of up to 15 years. Interest rates on ARM loans currently offered by us are adjusted at the beginning of
each adjustment period based upon a fixed spread above the FHLB-NY corresponding Regular Advance Rate. From time to time, we may
originate ARM loans at an initial rate lower than the index as a result of a discount on the spread for the initial adjustment
period. Commercial adjustable-rate mortgage loans generally are not subject to limitations on interest rate increases either on
an adjustment period or aggregate basis over the life of the loan; however, the loans generally contain interest rate floors. We
originated and purchased commercial ARM loans totaling $293.9 million, $441.1 million and $169.6 million during 2016, 2015 and
2014, respectively.
At December 31, 2016, $113.6 million, or
9.12%, of our commercial mortgage loans consisted of fixed-rate loans. Our fixed-rate commercial mortgage loans are generally originated
for terms up to 20 years and are competitively priced based on market conditions and our cost of funds. We originated and purchased
$28.8 million, $11.0 million and $10.2 million of fixed-rate commercial mortgage loans in 2016, 2015 and 2014, respectively.
One-to-Four Family Mortgage Lending –
Mixed-Use Properties
. We offer mortgage loans secured by one-to-four family mixed-use properties. These properties contain
up to four residential dwelling units and a commercial unit. We offer both fixed-rate and adjustable-rate one-to-four family mixed-use
property mortgage loans with maturities of up to 30 years and a general maximum loan amount of $1.0 million. Loan originations
primarily result from applications received from mortgage brokers and mortgage bankers, existing or past customers, and persons
who respond to our marketing efforts and referrals. One-to-four family mixed-use property mortgage loans were $558.5 million, or
11.59% of gross loans, at December 31, 2016.
In underwriting one-to-four family mixed-use
property mortgage loans, we employ the same underwriting standards as are employed in underwriting multi-family residential mortgage
loans.
At December 31, 2016, $452.6 million, or
81.03%, of our one-to-four family mixed-use property mortgage loans consisted of ARM loans. We offer adjustable-rate one-to-four
family mixed-use property mortgage loans with adjustment periods typically of five years and for terms of up to 30 years. Interest
rates on ARM loans currently offered by the Bank are adjusted at the beginning of each adjustment period based upon a fixed spread
above the FHLB-NY corresponding Regular Advance Rate. From time to time, we may originate ARM loans at an initial rate lower than
the index as a result of a discount on the spread for the initial adjustment period. One-to-four family mixed-use property adjustable-rate
mortgage loans generally are not subject to limitations on interest rate increases either on an adjustment period or aggregate
basis over the life of the loan; however, the loans generally contain interest rate floors. We originated and purchased one-to-four
family mixed-use property ARM loans totaling $72.4 million, $54.6 million and $39.4 million during 2016, 2015 and 2014, respectively.
At December 31, 2016, $105.9 million, or
18.97%, of our one-to-four family mixed-use property mortgage loans consisted of fixed-rate loans. Our fixed-rate one-to-four family
mixed-use property mortgage loans are originated for terms of up to 15 years and are competitively priced based on market conditions
and the Bank’s cost of funds. We originated and purchased $15.6 million, $13.7 million and $10.7 million of fixed-rate one-to-four
family mixed-use property mortgage loans in 2016, 2015 and 2014, respectively.
One-to-Four Family Mortgage Lending –
Residential Properties.
We offer mortgage loans secured by one-to-four family residential properties, including townhouses
and condominium units. For purposes of the description contained in this section, one-to-four family residential mortgage loans,
co-operative apartment loans and home equity loans are collectively referred to herein as “residential mortgage loans.”
We offer both fixed-rate and adjustable-rate residential mortgage loans with maturities of up to 30 years and a general maximum
loan amount of $1.0 million. Loan originations generally result from applications received from mortgage brokers and mortgage bankers,
existing or past customers, and referrals. Residential mortgage loans were $193.2 million, or 4.00% of gross loans, at December
31, 2016.
We generally originate residential mortgage
loans in amounts up to 80% of the appraised value or the sale price, whichever is less. We may make residential mortgage loans
with loan-to-value ratios of up to 90% of the appraised value of the mortgaged property; however, private mortgage insurance is
required whenever loan-to-value ratios exceed 80% of the appraised value of the property securing the loan.
In addition to income verified loans, we have
in the past originated residential mortgage loans to self-employed individuals within our local community based on stated income
and verifiable assets that allowed us to assess repayment ability, provided that the borrower’s stated income is considered
reasonable for the borrower’s type of business. The preponderance of stated income one-to-four family residential mortgage
loans were made available to self-employed individuals within our local community for their primary residence. Our underwriting
standards required that we verify the assets of the borrowers and the sources of their cash flows. The information reviewed for
purchases included at least three months and refinances included at least one month of personal bank statements (checking and savings
accounts), statements of investment accounts, business checking account statements (when applicable), and other information provided
by the borrowers about their personal holdings. Our review of these bank statements allowed us to assess whether or not their stated
income appeared reasonable in comparison to their cash flows, and if their income level supported their personal holdings. We also
obtained and reviewed credit reports on these borrowers. An acceptable credit report was one of the key factors in approving this
type of mortgage loan. We obtained appraisals from an independent third party for the property, and limited the amount we lent
on the properties to 80% of the lesser of the property’s appraised value or the purchase price. Home equity lines of credit
were offered on one-to-four residential properties to homeowners based on various levels of income verification. We limited the
amount available under a home equity line of credit to 80% of the lesser of the appraised value of the property or the purchase
price. These loans involve a higher degree of risk as compared to our other fully underwritten residential mortgage loans as there
is a greater opportunity for self-employed borrowers to falsify or overstate their level of income and ability to service indebtedness.
This risk is mitigated by the requirements discussed above in our loan policy. In addition, since 2009, the underwriting standards
for home equity loans were modified to discontinue originating home equity lines of credit without verifying the borrower’s
income. We also discontinued offering one-to-four family residential property mortgage loans to self-employed individuals based
on stated income and verifiable assets in June 2010. We had $9.0 million and $9.9 million outstanding of one-to four family residential
mortgage loans originated to individuals based on stated income and verifiable assets at December 31, 2016 and 2015, respectively.
We had $38.6 million and $41.4 million advanced on home equity lines of credit for which we did not verify the borrowers’
income at December 31, 2016 and 2015, respectively.
At December 31, 2016, $151.0 million, or
81.29%, of our residential mortgage loans consisted of ARM loans. We offer ARM loans with adjustment periods of one, three, five,
seven or ten years. Interest rates on ARM loans currently offered by us are adjusted at the beginning of each adjustment period
based upon a fixed spread above the FHLB-NY corresponding Regular Advance Rate. From time to time, we may originate ARM loans at
an initial rate lower than the index as a result of a discount on the spread for the initial adjustment period. ARM loans generally
are subject to limitations on interest rate increases of 2% per adjustment period and an aggregate adjustment of 6% over the life
of the loan and have interest rate floors. We originated and purchased adjustable rate residential mortgage loans totaling $24.3
million, $39.2 million and $21.0 million during 2016, 2015 and 2014, respectively.
The retention of ARM loans in our portfolio
helps us reduce our exposure to interest rate risks. However, in an environment of rapidly increasing interest rates, it is possible
for the interest rate increase to exceed the maximum aggregate adjustment on one-to-four family residential ARM loans and negatively
affect the spread between our interest income and our cost of funds.
ARM loans generally involve credit risks different
from those inherent in fixed-rate loans, primarily because if interest rates rise, the underlying payments of the borrower rise,
thereby increasing the potential for default. However, this potential risk is lessened by our policy of originating one-to-four
family residential ARM loans with annual and lifetime interest rate caps that limit the increase of a borrower’s monthly
payment.
At December 31, 2016, $34.8 million, or
18.71%, of our residential mortgage loans consisted of fixed-rate loans. Our fixed-rate residential mortgage loans typically are
originated for terms of 15 and 30 years and are competitively priced based on market conditions and our cost of funds. We originated
and purchased $0.9 million, $3.3 million and $3.9 million in 15-year fixed-rate residential mortgages in 2016, 2015 and 2014, respectively.
We did not originate or purchase any 30-year fixed-rate residential mortgages in 2016, 2015 and 2014.
At December 31, 2016, home equity loans totaled
$52.4 million, or 1.09%, of gross loans. Home equity loans are included in our portfolio of residential mortgage loans. These
loans are offered as adjustable-rate “home equity lines of credit” on which interest only is due for an initial term
of 10 years and thereafter principal and interest payments sufficient to liquidate the loan are required for the remaining term,
not to exceed 30 years. These adjustable “home equity lines of credit” may include a “floor” and/or a “ceiling”
on the interest rate that we charge for these loans. These loans also may be offered as fully amortizing closed-end fixed-rate
loans for terms up to 15 years. The majority of home equity loans originated are owner occupied one-to-four family residential
properties and condominium units. To a lesser extent, home equity loans are also originated on one-to-four residential properties
held for investment and second homes. All home equity loans are subject to an 80% loan-to-value ratio computed on the basis of
the aggregate of the first mortgage loan amount outstanding and the proposed home equity loan. They are generally granted in amounts
from $25,000 to $300,000.
Construction Loans.
At December 31, 2016,
construction loans totaled $11.5 million, or 0.24%, of gross loans. Our construction loans primarily have been made to finance
the construction of one-to-four family residential properties, multi-family residential properties and residential condominiums.
We also, to a limited extent, finance the construction of commercial real estate. Our policies provide that construction loans
may be made in amounts up to 70% of the estimated value of the developed property and only if we obtain a first lien position on
the underlying real estate. However, we generally limit construction loans to 60% of the estimated value of the developed property.
In addition, we generally require personal guarantees on all construction loans. Construction loans are generally made with terms
of two years or less. Advances are made as construction progresses and inspection warrants, subject to continued title searches
to ensure that we maintain a first lien position. We made construction loans of $15.8 million, $5.0 million and $1.6 million during
2016, 2015 and 2014, respectively.
Construction loans involve a greater degree
of risk than other loans because, among other things, the underwriting of such loans is based on an estimated value of the developed
property, which can be difficult to ascertain in light of uncertainties inherent in such estimations. In addition, construction
lending entails the risk that the project may not be completed due to cost overruns or changes in market conditions.
Small Business Administration Lending
.
At December 31, 2016, SBA loans totaled $15.2 million, representing 0.32%, of gross loans. These loans are extended to small businesses
and are guaranteed by the SBA up to a maximum of 85% of the loan balance for loans with balances of $150,000 or less, and to a
maximum of 75% of the loan balance for loans with balances greater than $150,000. We also provide term loans and lines of credit
up to $350,000 under the SBA Express Program, on which the SBA provides a 50% guaranty. The maximum loan size under the SBA guarantee
program was $2.0 million, with a maximum loan guarantee of $1.5 million. The Small Business Jobs Act of 2010 permanently increased
the limits to a maximum loan size of $5.0 million, with a maximum loan guarantee of $3.75 million. All SBA loans are underwritten
in accordance with SBA Standard Operating Procedures which requires collateral and the personal guarantee of the owners with more
than 20% ownership from SBA borrowers. Typically, SBA loans are originated in the range of $25,000 to $2.0 million with terms ranging
from one to seven years and up to 25 years for owner occupied commercial real estate mortgages. SBA loans are generally offered
at adjustable rates tied to the prime rate (as published in the
Wall Street Journal
) with adjustment periods of one to three
months. At times, we may sell the guaranteed portion of certain SBA term loans in the secondary market, realizing a gain at the
time of sale, and retaining the servicing rights on these loans, collecting a servicing fee of approximately 1%. We originated
and purchased $8.4 million, $11.3 million and $1.6 million of SBA loans during 2016, 2015 and 2014, respectively.
Taxi Medallion.
At December 31, 2016,
taxi medallion loans consisted of loans made to New York City and Chicago taxi medallion owners, which are secured by liens on
the taxi medallions, totaling $19.0 million, or 0.39%, of gross loans. In 2015, we decided to no longer originate or purchase taxi
medallion loans. Therefore, we did not originate or purchase any taxi medallion loans in 2016 or 2015, but originated and purchased
$14.4 million during 2014.
Commercial Business and Other Lending.
At
December 31, 2016, commercial business and other loans totaled $597.1 million, or 12.39%, of gross loans. We originate and purchase
commercial business loans and other loans for business, personal, or household purposes. Commercial business loans are provided
to businesses in the New York City metropolitan area with annual sales of up to $250.0 million. Our commercial business loans include
lines of credit and term loans including owner occupied mortgages. These loans are secured by business assets, including accounts
receivables, inventory and real estate and generally require personal guarantees. The Bank also, at times, enters into participations/syndications
with other banks on senior secured commercial business loans. Commercial business loans are generally originated in a range of
$100,000 to $10.0 million.
At December 31, 2016, $409.7 million, or
68.61%, of our commercial business loans consisted of adjustable rate loans. We generally offer adjustable rate loans with adjustment
periods of five years for owner occupied mortgages and for lines of credit the adjustment period is generally monthly. Interest
rates on adjustable rate loans currently offered by us are adjusted at the beginning of each adjustment period based upon a fixed
spread above the FHLB-NY corresponding Regular Advance Rate for owner occupied mortgages and a fixed spread above the London Interbank
Offered Rate (“LIBOR”) or Prime Rate for lines of credit. Commercial business adjustable-rate loans generally are not
subject to limitations on interest rate increases either on an adjustment period or aggregate basis over the life of the loan,
however they generally are subject to interest rate floors.
At December 31, 2016, $187.4 million, or
31.39%, of our commercial business loans consisted of fixed-rate loans. Our fixed-rate commercial business loans are generally
originated for terms up to 20 years and are competitively priced based on market conditions and our cost of funds.
Other loans generally consist of overdraft lines
of credit. Generally, unsecured consumer loans are limited to amounts of $5,000 or less for terms of up to five years. We originated
and purchased $1.7 million, $2.8 million and $3.1 million of other loans during 2016, 2015 and 2014, respectively. The underwriting
standards employed by us for consumer and other loans include a determination of the applicant’s payment history on other
debts and assessment of the applicant’s ability to meet payments on all of his or her obligations. In addition to the creditworthiness
of the applicant, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan
amount. Unsecured loans tend to have higher risk, and therefore command a higher interest rate.
Loan Extensions, Renewals, Modifications
and Restructuring
. Extensions, renewals, modifications or restructuring a loan, other than a loan that is classified as a TDR,
requires the loan to be fully underwritten in accordance with our policy. The borrower must be current to have a loan extended,
renewed or restructured. Our policy for modifying a mortgage loan due to the borrower’s request for changes in the terms
will depend on the changes requested. The borrower must be current and have a good payment history to have a loan modified. If
the borrower is seeking additional funds, the loan is fully underwritten in accordance with our policy for new loans. If the borrower
is seeking a reduction in the interest rate due to a decline in interest rates in the market, we generally limit our review as
follows: (1) for income producing properties and business loans, to a review of the operating results of the property/business
and a satisfactory inspection of the property, and (2) for one-to-four residential properties, to a satisfactory inspection of
the property. Our policy on restructuring a loan when the loan will be classified as a TDR requires the loan to be fully underwritten
in accordance with Company policy. The borrower must demonstrate the ability to repay the loan under the new terms. When the restructuring
results in a TDR, we may waive some requirements of Company policy provided the borrower has demonstrated the ability to meet the
requirements of the restructured loan and repay the restructured loan. While our formal lending policies do not prohibit making
additional loans to a borrower or any related interest of the borrower who is past due in principal or interest more than 90 days,
it has been our practice not to make additional loans to a borrower or a related interest of the borrower if the borrower is past
due more than 90 days as to principal or interest. During the most recent three fiscal years, we did not make any additional loans
to a borrower or any related interest of the borrower who was past due in principal or interest more than 90 days. All extensions,
renewals, restructurings and modifications must be approved by the appropriate Loan Committee.
Loan Approval Procedures and Authority.
The Board of Directors of the Company (the “Board of Directors”) approved lending policies establishing loan approval
requirements for our various types of loan products. Our Residential Mortgage Lending Policy (which applies to all one-to-four
family mortgage loans, including residential and mixed-use property) establishes authorized levels of approval. One-to-four family
mortgage loans that do not exceed $750,000 require two signatures for approval, one of which must be from either the Senior Executive
Vice President, the Executive Vice President or a Senior Vice President (collectively, “Authorized Officers”) and the
other from a Senior Underwriter, Manager, Underwriter or Junior Underwriter in the Residential Mortgage Loan Department (collectively,
“Loan Officers”), and ratification by the Management Loan Committee. For one-to-four family mortgage loans in excess
of $750,000 up to $2.5 million, three signatures are required for approval, at least two of which must be from Authorized Officers,
and the other one may be a Loan Officer, and ratification by the Management Loan Committee and the Director’s Loan Committee.
The Director’s Loan Committee or the Bank Board of Directors also must approve one-to-four family mortgage loans in excess
of $2.5 million. Pursuant to our Commercial Real Estate Lending Policy, loans secured by commercial real estate and multi-family
residential properties up to $2.0 million are approved by the Executive Vice President of Commercial Real Estate and the Senior
Executive Vice President, Chief of Real Estate Lending and then ratified by the Management Loan Committee and/or the Director’s
Loan Committee. Loans provided in excess of $2.0 million and up to and including $5.0 million must be submitted to the Management
Loan Committee for final approval and then to the Director’s Loan Committee and/or Board of Directors for ratification. Loans
in excess of $5.0 million and up to and including $25.0 million must be submitted to the Director’s Loan Committee and/ or
the Board of Directors for approval. Loan amounts in excess of $25.0 million must be approved by the Board of Directors.
In accordance with our Business Credit Policy
all business and SBA loans up to $2.5 million must be approved by the Business Loan Committee and ratified by the Management Loan
Committee. Business and SBA loans in excess of $2.5 million up to $5.0 million must be approved by the Management Loan Committee
and ratified by the Loan Committee. Commercial business and other loans require two signatures from the Business Loan Committee
for approval.
Our Construction Loan Policy requires construction
loans up to and including $1.0 million must be approved by the Senior Executive Vice President, Chief of Real Estate Lending and
the Executive Vice President of Commercial Real Estate, and ratified by the Management Loan Committee or the Director’s Loan
Committee. Such loans in excess of $1.0 million up to and including $2.5 million require the same officer approvals, approval of
the Management Loan Committee, and ratification of the Director’s Loan Committee or the Bank Board of Directors. Construction
loans in excess of $15.0 million require the same officer approvals, approval by the Management Loan Committee, and approval of
the Bank Board of Directors. Any loan, regardless of type, that deviates from our written credit policies must be approved by the
Loan Committee or the Bank Board of Directors.
For all loans originated by us, upon receipt
of a completed loan application, a credit report is ordered and certain other financial information is obtained. An appraisal of
the real estate intended to secure the proposed loan is required to be received. An independent appraiser designated and approved
by us currently performs such appraisals. Our staff appraisers review all appraisals. The Bank Board of Directors annually approves
the independent appraisers used by the Bank and approves the Bank’s appraisal policy. It is our policy to require borrowers
to obtain title insurance and hazard insurance on all real estate loans prior to closing. For certain borrowers, and/or as required
by law, the Bank may require escrow funds on a monthly basis together with each payment of principal and interest to a mortgage
escrow account from which we make disbursements for items such as real estate taxes and, in some cases, hazard insurance premiums.
Loan Concentrations.
The maximum amount
of credit that the Bank can extend to any single borrower or related group of borrowers generally is limited to 15% of the Bank’s
unimpaired capital and surplus, or $91.1 million at December 31, 2016. Applicable laws and regulations permit an additional amount
of credit to be extended, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral,
which generally does not include real estate. See “-Regulation.” However, it is currently our policy not to extend
such additional credit. At December 31, 2016, there were no loans in excess of the maximum dollar amount of loans to one borrower
that the Bank was authorized to make. At that date, the three largest concentrations of loans to one borrower consisted of loans
secured by commercial real estate, multi-family income producing properties and business loans with an aggregate principal balance
of $74.0 million, $60.0 million and $54.5 million for each of the three borrowers, respectively.
Loan Servicing.
At December 31, 2016,
we were servicing $1.3 million of mortgage loans and $13.1 million of SBA loans for others. Our policy is to retain the servicing
rights to the mortgage and SBA loans that we sell in the secondary market, other than non-performing loans that are sold with servicing
released to the buyer. In order to increase revenue, management intends to continue this policy.
Asset Quality
Loan Collection
.
When a borrower fails to make a required payment on a loan, we take a number of steps to induce the
borrower to cure the delinquency and restore the loan to current status. In the case of mortgage loans, personal contact is made
with the borrower after the loan becomes 30 days delinquent. We take a proactive approach to managing delinquent loans, including
conducting site examinations and encouraging borrowers to meet with one of our representatives. When deemed appropriate, we develop
short-term payment plans that enable borrowers to bring their loans current, generally within six to nine months. At times, when
a borrower is experiencing financial difficulties, we may restructure a loan to enable a borrower to continue making payments when
it is deemed to be in our best long-term interest. This restructure may include reducing the interest rate or amount of the monthly
payment for a specified period of time, after which the interest rate and repayment terms revert to the original terms of the loan.
We classify these loans as TDR. At December 31, 2016, we had $17.8 million of loans classified as TDR, with $17.4 million of these
loans performing according to their restructured terms and $0.4 million not performing according to their restructured terms. We
review delinquencies on a loan by loan basis, diligently exploring ways to help borrowers meet their obligations and return them
back to current status, and we have increased staffing to handle delinquent loans by hiring people experienced in loan workouts.
When the borrower has indicated that they will
be unable to bring the loan current, or due to other circumstances which, in our opinion, indicate the borrower will be unable
to bring the loan current within a reasonable time, the loan is classified as non-performing. All loans classified as non-performing,
which includes all loans past due 90 days or more, are classified as non-accrual unless there is, in our opinion, compelling evidence
the borrower will bring the loan current in the immediate future. At December 31, 2016, there were two loans, which totaled $0.4
million, past due 90 days or more and still accruing interest.
Upon classifying a loan as non-performing, we
review available information and conditions that relate to the status of the loan, including the estimated value of the loan’s
collateral and any legal considerations that may affect the borrower’s ability to continue to make payments. Based upon the
available information, we will consider the sale of the loan or retention of the loan. If the loan is retained, we may continue
to work with the borrower to collect the amounts due or start foreclosure proceedings. If a foreclosure action is initiated and
the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan is
sold at foreclosure or by us as soon thereafter as practicable.
Once the decision to sell a loan is made, we
determine what we would consider adequate consideration to be obtained when that loan is sold, based on the facts and circumstances
related to that loan. Investors and brokers are then contacted to seek interest in purchasing the loan. We have been successful
in finding buyers for some of our non-performing loans offered for sale that are willing to pay what we consider to be adequate
consideration. Terms of the sale include cash due upon closing of the sale, no contingencies or recourse to us, servicing is released
to the buyer and time is of the essence. These sales usually close within a reasonably short time period.
This strategy of selling non-performing loans
has allowed us to optimize our return by quickly converting our non-performing loans to cash, which can then be reinvested in earning
assets. This strategy also allows us to avoid lengthy and costly legal proceedings that may occur with non-performing loans. There
can be no assurances that we will continue this strategy in future periods, or if continued, we will be able to find buyers to
pay adequate consideration.
The following tables show delinquent and non-performing
loans sold during the period indicated:
|
|
For the years ended December 31,
|
(Dollars in thousands)
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
Count
|
|
|
26
|
|
|
|
23
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
|
|
$
|
7,965
|
|
|
$
|
8,986
|
|
|
$
|
15,857
|
|
Net recoveries
|
|
|
48
|
|
|
|
134
|
|
|
|
357
|
|
Gross gains
|
|
|
265
|
|
|
|
71
|
|
|
|
67
|
|
Gross losses
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
On mortgage loans or loan participations purchased
by us for whom the seller retains the servicing rights, we receive monthly reports with which we monitor the loan portfolio. Based
upon servicing agreements with the servicers of the loans, we rely upon the servicer to contact delinquent borrowers, collect delinquent
amounts and initiate foreclosure proceedings, when necessary, all in accordance with applicable laws, regulations and the terms
of the servicing agreements between us and our servicing agents. The servicers are required to submit monthly reports on their
collection efforts on delinquent loans. At December 31, 2016, we held $742.6 million of loans that were serviced by others.
In the case of commercial business or other
loans, we generally send the borrower a written notice of non-payment when the loan is first past due. In the event payment is
not then received, additional letters and phone calls generally are made in order to encourage the borrower to meet with one of
our representatives to discuss the delinquency. If the loan still is not brought current and it becomes necessary for us to take
legal action, which typically occurs after a loan is delinquent 90 days or more, we may attempt to repossess personal or business
property that secures an SBA loan, commercial business loan or consumer loan.
Troubled Debt Restructured
. We have
restructured certain problem loans for borrowers who are experiencing financial difficulties by either: reducing the interest rate
until the next reset date, extending the amortization period thereby lowering the monthly payments, deferring a portion of the
interest payment, or changing the loan to interest only payments for a limited time period. At times, certain problem loans have
been restructured by combining more than one of these options. These restructurings have not included a reduction of principal
balance. We believe that restructuring these loans in this manner will allow certain borrowers to become and remain current on
their loans. These restructured loans are classified TDR. Loans which have been current for six consecutive months at the time
they are restructured as TDR remain on accrual status. Loans which were delinquent at the time they are restructured as a TDR are
placed on non-accrual status until they have made timely payments for six consecutive months.
The following table shows our recorded investment in loans classified
as TDR that are performing according to their restructured terms at the periods indicated:
|
|
At December 31,
|
(Dollars in thousands)
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family residential
|
|
$
|
2,572
|
|
|
$
|
2,626
|
|
|
$
|
3,035
|
|
|
$
|
3,087
|
|
|
$
|
2,347
|
|
Commercial real estate
|
|
|
2,062
|
|
|
|
2,371
|
|
|
|
2,373
|
|
|
|
2,407
|
|
|
|
7,190
|
|
One-to-four family mixed-use property
|
|
|
1,800
|
|
|
|
2,052
|
|
|
|
2,381
|
|
|
|
2,692
|
|
|
|
2,336
|
|
One-to-four family residential
|
|
|
591
|
|
|
|
343
|
|
|
|
354
|
|
|
|
364
|
|
|
|
374
|
|
Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
746
|
|
|
|
3,805
|
|
Small Business Administration
|
|
|
-
|
|
|
|
34
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Taxi medallion
|
|
|
9,735
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial business and other
|
|
|
675
|
|
|
|
2,083
|
|
|
|
2,249
|
|
|
|
4,406
|
|
|
|
3,849
|
|
Total performing troubled debt restructured
|
|
$
|
17,435
|
|
|
$
|
9,509
|
|
|
$
|
10,392
|
|
|
$
|
13,702
|
|
|
$
|
19,901
|
|
Loans that are restructured as TDR but are not
performing in accordance with the restructured terms are excluded from the TDR table above, as they are placed on non-accrual status
and reported as non-performing loans. At December 31, 2016 and 2015, there was one loan for $0.4 million which was restructured
as TDR which was not performing in accordance with its restructured terms.
Delinquent Loans and Non-performing Assets
.
We generally discontinue accruing interest on delinquent loans when a loan is 90 days past due or foreclosure proceedings have
been commenced, whichever first occurs. At that time, previously accrued but uncollected interest is reversed from income. Loans
in default 90 days or more as to their maturity date but not their payments, however, continue to accrue interest as long as the
borrower continues to remit monthly payments.
The following table shows our non-performing
assets, including loans held for sale, at the dates indicated. During the years ended December 31, 2016, 2015 and 2014, the amounts
of additional interest income that would have been recorded on non-accrual loans, had they been current, totaled $1.5 million,
$1.7 million and $2.1 million, respectively. These amounts were not included in our interest income for the respective periods.
|
|
At December 31,
|
(Dollars in thousands)
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
Loans 90 days or more past due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and still accruing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family residential
|
|
$
|
-
|
|
|
$
|
233
|
|
|
$
|
676
|
|
|
$
|
52
|
|
|
$
|
-
|
|
Commercial real estate
|
|
|
-
|
|
|
|
1,183
|
|
|
|
820
|
|
|
|
-
|
|
|
|
-
|
|
One-to-four family mixed-use property
|
|
|
386
|
|
|
|
611
|
|
|
|
405
|
|
|
|
-
|
|
|
|
-
|
|
One-to-four family - residential
|
|
|
-
|
|
|
|
13
|
|
|
|
14
|
|
|
|
15
|
|
|
|
-
|
|
Construction
|
|
|
-
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial Business and other
|
|
|
-
|
|
|
|
220
|
|
|
|
386
|
|
|
|
539
|
|
|
|
644
|
|
Total
|
|
|
386
|
|
|
|
3,260
|
|
|
|
2,301
|
|
|
|
606
|
|
|
|
644
|
|
Non-accrual mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family residential
|
|
|
1,837
|
|
|
|
3,561
|
|
|
|
6,878
|
|
|
|
13,682
|
|
|
|
16,486
|
|
Commercial real estate
|
|
|
1,148
|
|
|
|
2,398
|
|
|
|
5,689
|
|
|
|
9,962
|
|
|
|
15,640
|
|
One-to-four family mixed-use property
|
|
|
4,025
|
|
|
|
5,952
|
|
|
|
6,936
|
|
|
|
9,063
|
|
|
|
18,280
|
|
One-to-four family residential
|
|
|
8,241
|
|
|
|
10,120
|
|
|
|
11,244
|
|
|
|
13,250
|
|
|
|
13,726
|
|
Co-operative apartments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57
|
|
|
|
234
|
|
Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,695
|
|
Total
|
|
|
15,251
|
|
|
|
22,031
|
|
|
|
30,747
|
|
|
|
46,014
|
|
|
|
72,061
|
|
Non-accrual non-mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small Business Administration
|
|
|
1,886
|
|
|
|
218
|
|
|
|
-
|
|
|
|
-
|
|
|
|
283
|
|
Taxi Medallion
|
|
|
3,825
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial Business and other
|
|
|
68
|
|
|
|
568
|
|
|
|
1,143
|
|
|
|
2,348
|
|
|
|
16,860
|
|
Total
|
|
|
5,779
|
|
|
|
786
|
|
|
|
1,143
|
|
|
|
2,348
|
|
|
|
17,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
|
21,030
|
|
|
|
22,817
|
|
|
|
31,890
|
|
|
|
48,362
|
|
|
|
89,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
21,416
|
|
|
|
26,077
|
|
|
|
34,191
|
|
|
|
48,968
|
|
|
|
89,848
|
|
Other non-performing assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Owned
|
|
|
533
|
|
|
|
4,932
|
|
|
|
6,326
|
|
|
|
2,985
|
|
|
|
5,278
|
|
Investment securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,871
|
|
|
|
3,332
|
|
Total
|
|
|
533
|
|
|
|
4,932
|
|
|
|
6,326
|
|
|
|
4,856
|
|
|
|
8,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
21,949
|
|
|
$
|
31,009
|
|
|
$
|
40,517
|
|
|
$
|
53,824
|
|
|
$
|
98,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to gross loans
|
|
|
0.44
|
%
|
|
|
0.60
|
%
|
|
|
0.90
|
%
|
|
|
1.43
|
%
|
|
|
2.79
|
%
|
Non-performing assets to total assets
|
|
|
0.36
|
%
|
|
|
0.54
|
%
|
|
|
0.80
|
%
|
|
|
1.14
|
%
|
|
|
2.21
|
%
|
The following table shows our delinquent loans
that are less than 90 days past due and still accruing interest at the periods indicated:
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
60 - 89
|
|
30 - 59
|
|
60 - 89
|
|
30 - 59
|
|
|
days
|
|
days
|
|
days
|
|
days
|
|
|
(In thousands)
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Multi-family residential
|
|
$
|
287
|
|
|
$
|
2,575
|
|
|
$
|
804
|
|
|
$
|
9,422
|
|
Commercial real estate
|
|
|
22
|
|
|
|
3,363
|
|
|
|
153
|
|
|
|
2,820
|
|
One-to-four family - mixed-use property
|
|
|
762
|
|
|
|
4,671
|
|
|
|
1,257
|
|
|
|
8,630
|
|
One-to-four family - residential
|
|
|
-
|
|
|
|
3,831
|
|
|
|
154
|
|
|
|
4,261
|
|
Construction loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Small Business Administration
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
|
|
42
|
|
Commercial business and other
|
|
|
1
|
|
|
|
22
|
|
|
|
2
|
|
|
|
-
|
|
Total
|
|
$
|
1,072
|
|
|
$
|
14,475
|
|
|
$
|
2,370
|
|
|
$
|
25,175
|
|
Other Real Estate Owned.
We aggressively
market our Other Real Estate Owned (“OREO”) properties. At December 31, 2016, we owned one OREO properties with a fair
value of $0.5 million. At December 31, 2015, we owned four OREO properties with a combined fair value of $4.9 million. At
December 31, 2014, we owned eight OREO properties with a combined fair value of $6.3 million.
We may obtain physical possession of residential
real estate collateralizing a consumer mortgage loan via foreclosure as an in-substance repossession. During the year ended December
31, 2016, we did not foreclose on any consumer mortgages through in-substance repossession. At December 31, 2016, 2015 and 2014,
we held foreclosed residential real estate totaling $0.5 million, $0.1 million and $1.3 million, respectively. Included within
net loans as of December 31, 2016 was a recorded investment of $11.4 million of consumer mortgage loans secured by residential
real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable
jurisdiction.
Environmental Concerns Relating to Loans.
We currently obtain environmental reports in connection with the underwriting of commercial real estate loans, and typically
obtain environmental reports in connection with the underwriting of multi-family loans. For all other loans, we obtain environmental
reports only if the nature of the current or, to the extent known to us, prior use of the property securing the loan indicates
a potential environmental risk. However, we may not be aware of such uses or risks in any particular case, and, accordingly, there
is no assurance that real estate acquired by us in foreclosure is free from environmental contamination or that, if any such contamination
or other violation exists, whether we will have any liability.
Classified Assets.
Our policy is to review
our assets, focusing primarily on the loan portfolio, OREO and the investment portfolios, to ensure that the credit quality is
maintained at the highest levels. When weaknesses are identified, immediate action is taken to correct the problem through direct
contact with the borrower or issuer. We then monitor these assets, and, in accordance with our policy and current regulatory guidelines,
we designate them as “Special Mention,” which is considered a “Criticized Asset,” and “Substandard,”
“Doubtful,” or “Loss” which are considered “Classified Assets,” as deemed necessary. These
loan designations are updated quarterly. We designate an asset as Substandard when a well-defined weakness is identified that jeopardizes
the orderly liquidation of the debt. We designate an asset as Doubtful when it displays the inherent weakness of a Substandard
asset with the added provision that collection of the debt in full, on the basis of existing facts, is highly improbable. We designate
an asset as Loss if it is deemed the debtor is incapable of repayment. We do not hold any loans designated as loss, as loans that
are designated as Loss are charged to the Allowance for Loan Losses. Assets that are non-accrual are designated as Substandard,
Doubtful or Loss. We designate an asset as Special Mention if the asset does not warrant designation within one of the other categories,
but does contain a potential weakness that deserves closer attention. Our total Criticized and Classified assets were $72.6 million
at December 31, 2016, an increase of $17.8 million from $54.8 million at December 31, 2015. The increase in criticized and classified
assets was primarily due to an increase in special mention and substandard taxi medallion loans and special mention commercial
business and other loans.
The following table sets forth the Bank's Criticized and Classified assets at December 31, 2016:
(In thousands)
|
|
Special Mention
|
|
Substandard
|
|
Doubtful
|
|
Loss
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
Multi-family residential
|
|
$
|
7,133
|
|
|
$
|
3,351
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,484
|
|
Commercial real estate
|
|
|
2,941
|
|
|
|
4,489
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,430
|
|
One-to-four family - mixed-use property
|
|
|
4,197
|
|
|
|
7,009
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,206
|
|
One-to-four family - residential
|
|
|
1,205
|
|
|
|
9,399
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,604
|
|
Construction loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Small Business Administration
|
|
|
540
|
|
|
|
436
|
|
|
|
-
|
|
|
|
-
|
|
|
|
976
|
|
Taxi medallion
|
|
|
2,715
|
|
|
|
16,228
|
|
|
|
54
|
|
|
|
-
|
|
|
|
18,997
|
|
Commercial business and other
|
|
|
9,924
|
|
|
|
2,493
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,417
|
|
Total loans
|
|
|
28,655
|
|
|
|
43,405
|
|
|
|
54
|
|
|
|
-
|
|
|
|
72,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Real Estate Owned
|
|
|
-
|
|
|
|
533
|
|
|
|
-
|
|
|
|
-
|
|
|
|
533
|
|
Total
|
|
$
|
28,655
|
|
|
$
|
43,938
|
|
|
$
|
54
|
|
|
$
|
-
|
|
|
$
|
72,647
|
|
The following table sets forth the Bank's Criticized and Classified assets at December 31, 2015:
(In thousands)
|
|
Special Mention
|
|
Substandard
|
|
Doubtful
|
|
Loss
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
Multi-family residential
|
|
$
|
4,361
|
|
|
$
|
5,421
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,782
|
|
Commercial real estate
|
|
|
1,821
|
|
|
|
3,812
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,633
|
|
One-to-four family - mixed-use property
|
|
|
3,087
|
|
|
|
10,990
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,077
|
|
One-to-four family - residential
|
|
|
1,437
|
|
|
|
12,255
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,692
|
|
Construction loans
|
|
|
-
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
Small Business Administration
|
|
|
229
|
|
|
|
224
|
|
|
|
-
|
|
|
|
-
|
|
|
|
453
|
|
Taxi medallion
|
|
|
-
|
|
|
|
2,118
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,118
|
|
Commercial business and other
|
|
|
-
|
|
|
|
3,123
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,123
|
|
Total loans
|
|
|
10,935
|
|
|
|
38,943
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Real Estate Owned
|
|
|
-
|
|
|
|
4,932
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,932
|
|
Total
|
|
$
|
10,935
|
|
|
$
|
43,875
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
54,810
|
|
On a quarterly basis all mortgage loans that
are classified as Substandard or Doubtful are internally reviewed for impairment, based on updated cash flows for income producing
properties, or updated independent appraisals. The loan balances of collateral dependent loans reviewed for impairment are then
compared to the loans updated fair value. We consider fair value of collateral dependent loans to be 85% of the appraised or internally
estimated value of the property, except for taxi medallion loans. The fair value of the underlying collateral of taxi medallion
loans is the most recent reported arm’s length transaction. The balance which exceeds fair value is generally charged-off
against the allowance for loan losses. At December 31, 2016, the current loan-to-value ratio on our collateral dependent loans
reviewed for impairment was 48.15%.
Allowance for Loan Losses
We have established and maintain on our books
an allowance for loan losses (“ALL”) that is designed to provide a reserve against estimated losses inherent in our
overall loan portfolio. The allowance is established through a provision for loan losses based on management’s evaluation
of the risk inherent in the various components of the loan portfolio and other factors, including historical loan loss experience
(which is updated quarterly), current economic conditions, delinquency and non-accrual trends, classified loan levels, risk in
the portfolio and volumes and trends in loan types, recent trends in charge-offs, changes in underwriting standards, experience,
ability and depth of our lenders, collection policies and experience, internal loan review function and other external factors.
Additionally, we segregated our loans into two portfolios based on year of origination. One portfolio is loans originated after
December 31, 2009 and the second portfolio loans originated prior to January 1, 2010. Our decision to segregate the portfolio based
upon origination dates was based on changes made in our underwriting standards during 2009. By the end of 2009, all loans were
being underwritten based on revised and tightened underwriting standards. Loans originated prior to 2010 have a higher delinquency
rate and loss history. Each of the years in the portfolio for loans originated prior to 2010 has a similar delinquency rate. The
determination of the amount of the allowance for loan losses includes estimates that are susceptible to significant changes due
to changes in appraisal values of collateral, national and local economic conditions and other factors. We review our loan portfolio
by separate categories with similar risk and collateral characteristics. Impaired loans are segregated and reviewed separately.
All non-accrual loans are classified impaired. Impaired loans secured by collateral are reviewed based on the fair value of their
collateral. For non-collateralized impaired loans, management estimates any recoveries that are anticipated for each loan. In connection
with the determination of the allowance, the market value of collateral ordinarily is evaluated by our staff appraiser. On a quarterly
basis, the estimated values of impaired mortgage loans are internally reviewed, based on updated cash flows for income producing
properties, and at times an updated independent appraisal is obtained. The loan balances of collateral dependent impaired loans
are then compared to the property’s updated fair value. We consider fair value of collateral dependent loans to be 85% of
the appraised or internally estimated value of the property. The fair value of the underlying collateral of taxi medallion loans
is the value of the underlying medallion based upon the most recently reported arm’s length transaction. When there is no
recent sale activity, the fair value is calculated using capitalization rates. In addition, taxi medallion loans with a loan-to-value
greater than 100% are classified as impaired and allocated a portion of the reserve in the amount of the excess of the loan-to-value
over the loan’s principal balance. The balance which exceeds fair value is generally charged-off, except for taxi medallion
loans. The 85% is based on the actual net proceeds the Bank has received from the sale of OREO as a percentage of OREO’s
appraised value. When evaluating a loan for impairment, we do not rely on guarantees, and the amount of impairment, if any, is
based on the fair value of the collateral. We do not carry loans at a value in excess of the fair value due to a guarantee from
the borrower. Impaired mortgage loans that were written down resulted from quarterly reviews or updated appraisals that indicated
the properties’ estimated value had declined from when the loan was originated. The Board of Directors reviews and approves
the adequacy of the allowance for loan losses on a quarterly basis.
In assessing the adequacy of the allowance,
we review our loan portfolio by separate categories which have similar risk and collateral characteristics, e.g., multi-family
residential, commercial real estate, one-to-four family mixed-use property, one-to-four family residential, co-operative apartment,
construction, SBA, commercial business, taxi medallion and consumer loans. General provisions are established against performing
loans in our portfolio in amounts deemed prudent based on our qualitative analysis of the factors, including the historical loss
experience, delinquency trends and local economic conditions. Non-performing loans totaled $21.4 million and $26.1 million at December
31, 2016 and 2015, respectively. The Bank’s underwriting standards generally require a loan-to-value ratio of no more than
75% at the time the loan is originated. At December 31, 2016, the outstanding principal balance of our impaired mortgage loans
was approximately 39% of the estimated current value of the supporting collateral, after considering the charge-offs that have
been recorded. We incurred total net recoveries (charge-offs) of $0.7 million and ($2.6) million during the years ended December
31, 2016 and 2015, respectively. The improvement in non-performing loans allowed us to not record a provision for the year ended
December 31, 2016 and record a benefit in the provision for loan losses of $1.0 million and $6.0 million for the years ended December
31, 2015 and 2014, respectively. Management has concluded, and the Board of Directors has concurred, that at December 31, 2016,
the allowance was sufficient to absorb losses inherent in our loan portfolio.
Our determination as to the classification of
our assets and the amount of our valuation allowance is subject to review by our regulators, which can require the establishment
of additional general allowances or specific loss allowances or require charge-offs. Such authorities may require us to make additional
provisions to the allowance based on their judgments about information available to them at the time of their examination. A policy
statement provides guidance for examiners in determining whether the levels of general valuation allowances for banking institutions
are adequate. The policy statement requires that if a bank’s general valuation allowance policies and procedures are deemed
to be inadequate, recommendations for correcting deficiencies, including any examiner concerns regarding the level of the allowance,
should be noted in the report of examination. Additional supervisory action may also be taken based on the magnitude of the observed
shortcomings in the allowance process, including the materiality of any error in the reported amount of the allowance.
During the year ended December 31, 2106, the
portion of the ALL related to the loss history declined. Charge-offs recorded in the past twelve quarters have decreased as credit
conditions have improved. The percentage of loans originated prior to 2009, compared to the total loan portfolio, is decreasing
as scheduled amortization and repayments have occurred. These reductions in the ALL were partially offset by an additional allocation
to our taxi medallion portfolio coupled with an increase in the outstanding loan balances. Management believes that our current
allowance for loan losses is adequate in light of current economic conditions, the composition of our loan portfolio, the level
and type of delinquent loans, our level of classified loans, charge-offs recorded and other available information and the Board
of Directors concurs in this belief. At December 31, 2016, the total allowance for loan losses was $22.2 million, representing
103.80% of non-performing loans and 101.28% of non-performing assets, compared to 82.58% of non-performing loans and 69.45% of
non-performing assets at December 31, 2015. We continue to monitor and, as necessary, modify the level of our allowance for loan
losses in order to maintain the allowance at a level which we consider adequate to provide for probable loan losses based on available
information.
Many factors may require additions to the allowance
for loan losses in future periods beyond those currently revealed. These factors include further adverse changes in economic conditions,
changes in interest rates and changes in the financial capacity of individual borrowers (any of which may affect the ability of
borrowers to make repayments on loans), changes in the real estate market within our lending area and the value of collateral,
or a review and evaluation of our loan portfolio in the future. The determination of the amount of the allowance for loan losses
includes estimates that are susceptible to significant changes due to changes in appraised values of collateral, national and local
economic conditions, interest rates and other factors. In addition, our overall level of credit risk inherent in our loan portfolio
can be affected by the loan portfolio’s composition. At December 31, 2016, multi-family residential, commercial real estate,
construction and one-to-four family mixed-use property mortgage loans, totaled 82.9% of our gross loans. The greater risk associated
with these loans, as well as business loans, could require us to increase our provisions for loan losses and to maintain an allowance
for loan losses as a percentage of total loans that is in excess of the allowance we currently maintain. Provisions for loan losses
are charged against net income. See “—Lending Activities” and “—Asset Quality.”
The following table sets forth changes in, and
the balance of, our allowance for loan losses.
|
|
At and for the years ended December 31,
|
(Dollars in thousands)
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
21,535
|
|
|
$
|
25,096
|
|
|
$
|
31,776
|
|
|
$
|
31,104
|
|
|
$
|
30,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for loan losses
|
|
|
-
|
|
|
|
(956
|
)
|
|
|
(6,021
|
)
|
|
|
13,935
|
|
|
|
21,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family residential
|
|
|
(161
|
)
|
|
|
(474
|
)
|
|
|
(1,161
|
)
|
|
|
(3,585
|
)
|
|
|
(6,016
|
)
|
Commercial real estate
|
|
|
-
|
|
|
|
(32
|
)
|
|
|
(325
|
)
|
|
|
(1,051
|
)
|
|
|
(2,746
|
)
|
One-to-four family mixed-use property
|
|
|
(144
|
)
|
|
|
(592
|
)
|
|
|
(423
|
)
|
|
|
(4,206
|
)
|
|
|
(4,286
|
)
|
One-to-four family residential
|
|
|
(114
|
)
|
|
|
(342
|
)
|
|
|
(103
|
)
|
|
|
(701
|
)
|
|
|
(1,583
|
)
|
Co-operative apartment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(108
|
)
|
|
|
(62
|
)
|
Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,678
|
)
|
|
|
(4,591
|
)
|
SBA
|
|
|
(529
|
)
|
|
|
(34
|
)
|
|
|
(49
|
)
|
|
|
(457
|
)
|
|
|
(324
|
)
|
Taxi Medallion
|
|
|
(142
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial business and other loans
|
|
|
(69
|
)
|
|
|
(2,371
|
)
|
|
|
(381
|
)
|
|
|
(2,057
|
)
|
|
|
(1,661
|
)
|
Total loans charged-off
|
|
|
(1,159
|
)
|
|
|
(3,845
|
)
|
|
|
(2,442
|
)
|
|
|
(14,843
|
)
|
|
|
(21,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
|
1,493
|
|
|
|
888
|
|
|
|
1,515
|
|
|
|
1,407
|
|
|
|
838
|
|
SBA, commercial business and other loans
|
|
|
360
|
|
|
|
352
|
|
|
|
268
|
|
|
|
173
|
|
|
|
191
|
|
Total recoveries
|
|
|
1,853
|
|
|
|
1,240
|
|
|
|
1,783
|
|
|
|
1,580
|
|
|
|
1,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recoveries (charge-offs)
|
|
|
694
|
|
|
|
(2,605
|
)
|
|
|
(659
|
)
|
|
|
(13,263
|
)
|
|
|
(20,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
22,229
|
|
|
$
|
21,535
|
|
|
$
|
25,096
|
|
|
$
|
31,776
|
|
|
$
|
31,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net (recoveries) charge-offs during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to average loans outstanding during the year
|
|
|
-0.02
|
%
|
|
|
0.06
|
%
|
|
|
0.02
|
%
|
|
|
0.41
|
%
|
|
|
0.64
|
%
|
Ratio of allowance for loan losses to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gross loans at end of the year
|
|
|
0.46
|
%
|
|
|
0.49
|
%
|
|
|
0.66
|
%
|
|
|
0.93
|
%
|
|
|
0.97
|
%
|
Ratio of allowance for loan losses to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-performing loans at the end of the year
|
|
|
103.80
|
%
|
|
|
82.58
|
%
|
|
|
73.40
|
%
|
|
|
64.89
|
%
|
|
|
34.62
|
%
|
Ratio of allowance for loan losses to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-performing assets at the end of the year
|
|
|
101.28
|
%
|
|
|
69.45
|
%
|
|
|
61.94
|
%
|
|
|
59.04
|
%
|
|
|
31.59
|
%
|
The following table sets forth our allocation
of the allowance for loan losses to the total amount of loans in each of the categories listed at the dates indicated. The numbers
contained in the “Amount” column indicate the allowance for loan losses allocated for each particular loan category.
The numbers contained in the column entitled “Percentage of Loans in Category to Total Loans” indicate the total amount
of loans in each particular category as a percentage of our loan portfolio.
|
|
At December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
2012
|
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
|
of Loans in
|
|
|
|
of Loans in
|
|
|
|
of Loans in
|
|
|
|
of Loans in
|
|
|
|
of Loans in
|
|
|
|
|
Category to
|
|
|
|
Category to
|
|
|
|
Category to
|
|
|
|
Category to
|
|
|
|
Category to
|
Loan Category
|
|
Amount
|
|
Total loans
|
|
Amount
|
|
Total loans
|
|
Amount
|
|
Total loans
|
|
Amount
|
|
Total loans
|
|
Amount
|
|
Total loans
|
|
|
(Dollars in thousands)
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family residential
|
|
$
|
5,923
|
|
|
|
45.21
|
%
|
|
$
|
6,718
|
|
|
|
46.98
|
%
|
|
$
|
8,827
|
|
|
|
50.64
|
%
|
|
$
|
12,084
|
|
|
|
50.02
|
%
|
|
$
|
13,001
|
|
|
|
47.62
|
%
|
Commercial real estate
|
|
|
4,487
|
|
|
|
25.86
|
|
|
|
4,239
|
|
|
|
22.90
|
|
|
|
4,202
|
|
|
|
16.36
|
|
|
|
4,959
|
|
|
|
14.97
|
|
|
|
5,705
|
|
|
|
16.00
|
|
One-to-four family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mixed-use property
|
|
|
2,903
|
|
|
|
11.59
|
|
|
|
4,227
|
|
|
|
13.11
|
|
|
|
5,840
|
|
|
|
15.10
|
|
|
|
6,328
|
|
|
|
17.40
|
|
|
|
5,960
|
|
|
|
19.79
|
|
One-to-four family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
residential
|
|
|
1,015
|
|
|
|
3.85
|
|
|
|
1,227
|
|
|
|
4.30
|
|
|
|
1,690
|
|
|
|
4.94
|
|
|
|
2,079
|
|
|
|
5.66
|
|
|
|
1,999
|
|
|
|
6.18
|
|
Co-operative apartment
|
|
|
-
|
|
|
|
0.15
|
|
|
|
-
|
|
|
|
0.19
|
|
|
|
-
|
|
|
|
0.26
|
|
|
|
104
|
|
|
|
0.30
|
|
|
|
46
|
|
|
|
0.20
|
|
Construction
|
|
|
92
|
|
|
|
0.24
|
|
|
|
50
|
|
|
|
0.17
|
|
|
|
42
|
|
|
|
0.14
|
|
|
|
444
|
|
|
|
0.12
|
|
|
|
66
|
|
|
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross mortgage loans
|
|
|
14,420
|
|
|
|
86.90
|
|
|
|
16,461
|
|
|
|
87.65
|
|
|
|
20,601
|
|
|
|
87.44
|
|
|
|
25,998
|
|
|
|
88.47
|
|
|
|
26,777
|
|
|
|
90.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small Business Administration
|
|
|
481
|
|
|
|
0.32
|
|
|
|
262
|
|
|
|
0.28
|
|
|
|
279
|
|
|
|
0.19
|
|
|
|
458
|
|
|
|
0.23
|
|
|
|
505
|
|
|
|
0.29
|
|
Taxi Medallion
|
|
|
2,243
|
|
|
|
0.39
|
|
|
|
343
|
|
|
|
0.48
|
|
|
|
11
|
|
|
|
0.59
|
|
|
|
-
|
|
|
|
0.38
|
|
|
|
7
|
|
|
|
0.31
|
|
Commercial business and other
|
|
|
4,492
|
|
|
|
12.39
|
|
|
|
4,469
|
|
|
|
11.59
|
|
|
|
4,205
|
|
|
|
11.78
|
|
|
|
5,320
|
|
|
|
10.92
|
|
|
|
3,815
|
|
|
|
9.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross non-mortgage loans
|
|
|
7,216
|
|
|
|
13.10
|
|
|
|
5,074
|
|
|
|
12.35
|
|
|
|
4,495
|
|
|
|
12.56
|
|
|
|
5,778
|
|
|
|
11.53
|
|
|
|
4,327
|
|
|
|
9.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
|
|
|
593
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total loans
|
|
$
|
22,229
|
|
|
|
100.00
|
%
|
|
$
|
21,535
|
|
|
|
100.00
|
%
|
|
$
|
25,096
|
|
|
|
100.00
|
%
|
|
$
|
31,776
|
|
|
|
100.00
|
%
|
|
$
|
31,104
|
|
|
|
100.00
|
%
|
Investment Activities
General
. Our investment policy, which
is approved by the Board of Directors, is designed primarily to manage the interest rate sensitivity of our overall assets and
liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement our lending activities
and to provide and maintain liquidity. In establishing our investment strategies, we consider our business and growth strategies,
the economic environment, our interest rate risk exposure, our interest rate sensitivity “gap” position, the types
of securities to be held, and other factors. See “Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Overview—Management Strategy” in Item 7 of this Annual Report.
Although we have authority to invest in various
types of assets, we primarily invest in mortgage-backed securities, securities issued by mutual or bond funds that invest in government
and government agency securities, municipal bonds, corporate bonds and collateralized loan obligations (“CLO”). We
did not hold any issues of foreign sovereign debt at December 31, 2016 and 2015.
Our Investment Committee meets quarterly to
monitor investment transactions and to establish investment strategy. The Board of Directors reviews the investment policy on an
annual basis and investment activity on a monthly basis.
We classify our investment securities as available
for sale when management intends to hold the securities for an indefinite period of time or when the securities may be utilized
for tactical asset/liability purposes and may be sold from time to time to effectively manage interest rate exposure and resultant
prepayment risk and liquidity needs. Securities are classified as held-to-maturity when management intends to hold the securities
until maturity. We carry some of our investments under the fair value option. Unrealized gains and losses for investments carried
under the fair value option are included in our Consolidated Statements of Income. Unrealized gains and losses on securities available
for sale, other than unrealized credit losses considered other than temporary, are excluded from earnings and included in accumulated
other comprehensive loss (a separate component of equity), net of taxes. Securities held-to-maturity are carried at their cost
basis. At December 31, 2016, we had $861.4 million in securities available for sale and $37.7 million in securities held-to-maturity,
which together represented 14.83% of total assets. These securities had an aggregate market value at December 31, 2016 that was
approximately 1.7 times the amount of our equity at that date.
There were no credit related OTTI charges recorded
during the years ended December 31, 2016, 2015 and 2014. As a result of the magnitude of our holdings of securities available for
sale, changes in interest rates could produce significant changes in the value of such securities and could produce significant
fluctuations in our operating results and equity. (See Notes 6 and 18 of Notes to Consolidated Financial Statements, included
in Item 8 of this Annual Report.)
The table below sets forth certain information
regarding the amortized cost and market values of our securities portfolio, interest-earning deposits and federal funds sold, at
the dates indicated. Securities available for sale are recorded at market value. (See Notes 6 and 18 of Notes to Consolidated
Financial Statements, included in Item 8 of this Annual Report.)
|
|
At December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds and other debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
37,735
|
|
|
$
|
35,408
|
|
|
$
|
6,180
|
|
|
$
|
6,180
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total bonds and other debt securities
|
|
|
37,735
|
|
|
|
35,408
|
|
|
|
6,180
|
|
|
|
6,180
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds and other debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
|
124,984
|
|
|
|
126,903
|
|
|
|
127,696
|
|
|
|
131,583
|
|
|
|
145,864
|
|
|
|
148,896
|
|
Corporate debentures
|
|
|
110,000
|
|
|
|
102,910
|
|
|
|
115,976
|
|
|
|
111,674
|
|
|
|
90,719
|
|
|
|
91,273
|
|
Collateralized loan obligations
|
|
|
85,470
|
|
|
|
86,365
|
|
|
|
53,225
|
|
|
|
52,898
|
|
|
|
-
|
|
|
|
-
|
|
Total bonds and other debt securities
|
|
|
320,454
|
|
|
|
316,178
|
|
|
|
296,897
|
|
|
|
296,155
|
|
|
|
236,583
|
|
|
|
240,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
21,366
|
|
|
|
21,366
|
|
|
|
21,290
|
|
|
|
21,290
|
|
|
|
21,118
|
|
|
|
21,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1,019
|
|
|
|
1,019
|
|
|
|
871
|
|
|
|
871
|
|
|
|
864
|
|
|
|
864
|
|
Preferred stock
|
|
|
6,344
|
|
|
|
6,342
|
|
|
|
6,343
|
|
|
|
6,341
|
|
|
|
6,234
|
|
|
|
6,226
|
|
Total equity securities
|
|
|
7,363
|
|
|
|
7,361
|
|
|
|
7,214
|
|
|
|
7,212
|
|
|
|
7,098
|
|
|
|
7,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REMIC and CMO
|
|
|
402,636
|
|
|
|
401,370
|
|
|
|
469,987
|
|
|
|
469,936
|
|
|
|
504,207
|
|
|
|
505,768
|
|
GNMA
|
|
|
1,319
|
|
|
|
1,427
|
|
|
|
11,635
|
|
|
|
11,798
|
|
|
|
13,862
|
|
|
|
14,159
|
|
FNMA
|
|
|
109,493
|
|
|
|
108,351
|
|
|
|
170,327
|
|
|
|
170,057
|
|
|
|
169,956
|
|
|
|
170,367
|
|
FHLMC
|
|
|
5,378
|
|
|
|
5,328
|
|
|
|
16,961
|
|
|
|
16,949
|
|
|
|
14,505
|
|
|
|
14,639
|
|
Total mortgage-backed securities
|
|
|
518,826
|
|
|
|
516,476
|
|
|
|
668,910
|
|
|
|
668,740
|
|
|
|
702,530
|
|
|
|
704,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
|
868,009
|
|
|
|
861,381
|
|
|
|
994,311
|
|
|
|
993,397
|
|
|
|
967,329
|
|
|
|
973,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
|
25,771
|
|
|
|
25,771
|
|
|
|
32,825
|
|
|
|
32,825
|
|
|
|
22,977
|
|
|
|
22,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
931,515
|
|
|
$
|
922,560
|
|
|
$
|
1,033,316
|
|
|
$
|
1,032,402
|
|
|
$
|
990,306
|
|
|
$
|
996,287
|
|
Mortgage-backed securities
.
At December 31, 2016, we had $516.5 million invested in mortgage-backed securities, of which $2.8 million was invested in adjustable-rate
mortgage-backed securities. The mortgage loans underlying these adjustable-rate securities generally are subject to limitations
on annual and lifetime interest rate increases. We anticipate that investments in mortgage-backed securities may continue to be
used in the future to supplement mortgage-lending activities. Mortgage-backed securities are more liquid than individual mortgage
loans and may be used more easily to collateralize our obligations, including collateralizing of the governmental deposits of the
Bank.
The following table sets forth our
mortgage-backed securities purchases, sales and principal repayments for the years indicated:
|
|
For the years ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
668,740
|
|
|
$
|
704,933
|
|
|
$
|
756,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of mortgage-backed securities
|
|
|
90,572
|
|
|
|
169,383
|
|
|
|
125,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned premium, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
accretion of unearned discount
|
|
|
(2,086
|
)
|
|
|
(2,747
|
)
|
|
|
(2,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gains on mortgage-backed
|
|
|
|
|
|
|
|
|
|
|
|
|
securities available for sale
|
|
|
(2,180
|
)
|
|
|
(2,573
|
)
|
|
|
11,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) recorded on mortgage-backed
|
|
|
|
|
|
|
|
|
|
|
|
|
securities carried at fair value
|
|
|
(33
|
)
|
|
|
77
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in interest due on securities carried at fair value
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of mortgage-backed securities
|
|
|
(126,045
|
)
|
|
|
(103,100
|
)
|
|
|
(85,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal repayments received on
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgage-backed securities
|
|
|
(112,492
|
)
|
|
|
(97,227
|
)
|
|
|
(100,593
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in mortgage-backed securities
|
|
|
(152,264
|
)
|
|
|
(36,193
|
)
|
|
|
(51,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
516,476
|
|
|
$
|
668,740
|
|
|
$
|
704,933
|
|
While mortgage-backed securities carry a reduced
credit risk as compared to whole loans, such securities remain subject to the risk that a fluctuating interest rate environment,
along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of
such mortgage loans and so affect both the prepayment speed and value of such securities.
The table below sets forth certain information
regarding the amortized cost, fair value, annualized weighted average yields and maturities of our investment in debt and equity
securities and interest-earning deposits at December 31, 2016. The stratification of balances is based on stated maturities. Assumptions
for repayments and prepayments are not reflected for mortgage-backed securities. Securities available for sale are carried at their
fair value in the consolidated financial statements and securities held-to-maturity are carried at their amortized cost.
|
|
One year or Less
|
|
One to Five Years
|
|
Five to Ten Years
|
|
More than Ten Years
|
|
Total Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
Remaining
|
|
|
|
|
|
Weighted
|
|
|
Amortized
|
|
Average
|
|
Amortized
|
|
Average
|
|
Amortized
|
|
Average
|
|
Amortized
|
|
Average
|
|
Years to
|
|
Amortized
|
|
Fair
|
|
Average
|
|
|
Cost
|
|
Yield
|
|
Cost
|
|
Yield
|
|
Cost
|
|
Yield
|
|
Cost
|
|
Yield
|
|
Maturity
|
|
Cost
|
|
Value
|
|
Yield
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds and other debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
15,870
|
|
|
|
1.04
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
21,865
|
|
|
|
3.27
|
%
|
|
|
15.41
|
|
|
$
|
37,735
|
|
|
$
|
35,408
|
|
|
|
2.33
|
%
|
Total bonds and other debt securities
|
|
|
15,870
|
|
|
|
1.04
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,865
|
|
|
|
3.27
|
|
|
|
15.41
|
|
|
|
37,735
|
|
|
|
35,408
|
|
|
|
2.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds and other debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
1,781
|
|
|
|
4.86
|
%
|
|
$
|
19,430
|
|
|
|
4.52
|
%
|
|
$
|
103,773
|
|
|
|
4.72
|
%
|
|
|
14.76
|
|
|
$
|
124,984
|
|
|
$
|
126,903
|
|
|
|
4.69
|
%
|
Corporate debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,000
|
|
|
|
2.89
|
|
|
|
55,000
|
|
|
|
4.05
|
|
|
|
9.17
|
|
|
|
110,000
|
|
|
|
102,910
|
|
|
|
3.47
|
|
CLO
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36,919
|
|
|
|
2.87
|
|
|
|
48,551
|
|
|
|
3.18
|
|
|
|
10.02
|
|
|
|
85,470
|
|
|
|
86,365
|
|
|
|
3.05
|
|
Total bonds and other debt securities
|
|
|
-
|
|
|
|
-
|
|
|
|
1,781
|
|
|
|
4.86
|
|
|
|
111,349
|
|
|
|
3.17
|
|
|
|
207,324
|
|
|
|
4.18
|
|
|
|
11.58
|
|
|
|
320,454
|
|
|
|
316,178
|
|
|
|
3.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
21,366
|
|
|
|
1.84
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
N/A
|
|
|
|
21,366
|
|
|
|
21,366
|
|
|
|
1.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,019
|
|
|
|
4.28
|
|
|
|
N/A
|
|
|
|
1,019
|
|
|
|
1,019
|
|
|
|
4.28
|
|
Preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,344
|
|
|
|
6.95
|
|
|
|
N/A
|
|
|
|
6,344
|
|
|
|
6,342
|
|
|
|
6.95
|
|
Total equity securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,363
|
|
|
|
6.58
|
|
|
|
N/A
|
|
|
|
7,363
|
|
|
|
7,361
|
|
|
|
6.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REMIC and CMO
|
|
|
-
|
|
|
|
-
|
|
|
|
5,073
|
|
|
|
4.22
|
|
|
|
7,891
|
|
|
|
2.99
|
|
|
|
389,672
|
|
|
|
2.85
|
|
|
|
27.31
|
|
|
|
402,636
|
|
|
|
401,370
|
|
|
|
2.87
|
|
GNMA
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,319
|
|
|
|
5.90
|
|
|
|
18.44
|
|
|
|
1,319
|
|
|
|
1,427
|
|
|
|
5.90
|
|
FNMA
|
|
|
4
|
|
|
|
6.00
|
|
|
|
9,915
|
|
|
|
3.65
|
|
|
|
26,268
|
|
|
|
2.44
|
|
|
|
73,306
|
|
|
|
2.89
|
|
|
|
14.76
|
|
|
|
109,493
|
|
|
|
108,351
|
|
|
|
2.85
|
|
FHLMC
|
|
|
-
|
|
|
|
-
|
|
|
|
65
|
|
|
|
6.41
|
|
|
|
1,195
|
|
|
|
4.27
|
|
|
|
4,118
|
|
|
|
3.33
|
|
|
|
23.55
|
|
|
|
5,378
|
|
|
|
5,328
|
|
|
|
3.58
|
|
Total mortgage-backed securities
|
|
|
4
|
|
|
|
6.00
|
|
|
|
15,053
|
|
|
|
3.85
|
|
|
|
35,354
|
|
|
|
2.62
|
|
|
|
468,415
|
|
|
|
2.87
|
|
|
|
24.60
|
|
|
|
518,826
|
|
|
|
516,476
|
|
|
|
2.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits
|
|
|
25,771
|
|
|
|
0.75
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
N/A
|
|
|
|
25,771
|
|
|
|
25,771
|
|
|
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
63,011
|
|
|
|
1.19
|
%
|
|
$
|
16,834
|
|
|
|
3.96
|
%
|
|
$
|
146,703
|
|
|
|
3.04
|
%
|
|
$
|
704,967
|
|
|
|
3.31
|
%
|
|
|
20.32
|
|
|
$
|
931,515
|
|
|
$
|
922,560
|
|
|
|
3.13
|
%
|
Sources of Funds
General
. Deposits, FHLB-NY borrowings,
other borrowings, repurchase agreements, principal and interest payments on loans, mortgage-backed and other securities, and proceeds
from sales of loans and securities are our primary sources of funds for lending, investing and other general purposes.
Deposits
. We offer a variety of deposit
accounts having a range of interest rates and terms. Our deposits primarily consist of savings accounts, money market accounts,
demand accounts, NOW accounts and certificates of deposit. We have a relatively stable retail deposit base drawn from our market
area through our 19 full-service offices. We seek to retain existing depositor relationships by offering quality service and competitive
interest rates, while keeping deposit growth within reasonable limits. It is management’s intention to balance its goal to
maintain competitive interest rates on deposits while seeking to manage its cost of funds to finance its strategies.
In addition to our full-service offices we have
an internet branch “iGObanking.com
®
”, which currently offers savings accounts, money market accounts,
checking accounts, and certificates of deposit. This allows us to compete on a national scale without the geographical constraints
of physical locations. Since the number of U.S. households with accounts at Web-only banks has grown, our strategy was to join
the market place by creating a branch that offers clients the simplicity and flexibility of a virtual online bank, which is a division
of a stable, traditional bank that was established in 1929. At December 31, 2016 and 2015, total deposits for iGObanking.com®
were $417.3 million and $323.7 million, respectively.
We have a government banking division, which
prior to the Merger in 2013 operated as the Commercial Bank, a New York State-chartered commercial bank, which provided banking
services to public municipalities, including counties, cities, towns, villages, school districts, libraries, fire districts, and
the various courts throughout the New York City metropolitan area as an additional source of deposits. At December 31, 2016 and
2015, total deposits in our government banking division totaled $1,062.1 million and $975.9 million, respectively.
Our core deposits, consisting of savings accounts,
NOW accounts, money market accounts, and non-interest bearing demand accounts, are typically more stable and lower costing than
other sources of funding. However, the flow of deposits into a particular type of account is influenced significantly by general
economic conditions, changes in prevailing interest rates, and competition. We experienced an increase in our due to depositors’
during 2016 of $309.7 million. During the year ended December 31, 2016, the cost of our interest-bearing due to depositors’
accounts increased one basis point to 0.89% from 0.88% for the year ended December 31, 2015. This increase in the cost of deposits
was primarily due to increases in the cost of money market, NOW and savings accounts of 21 basis points, seven basis points and
four basis points, respectively, partially offset by a decrease of nine basis points in the cost of certificates of deposit. The
increase in the cost of money market accounts was primarily due to our shifting of Government NOW deposits to a money market product
which does not require us to provide collateral, allowing us to invest these funds in higher yielding assets. The cost of NOW and
savings accounts increased as we increased the rate we pay on some of our products to attract additional deposits. The decrease
in the cost of certificates of deposit was primarily due to maturing issuances being replaced at lower rates. While we are unable
to predict the direction of future interest rate changes, if interest rates rise during 2017, the result could be an increase in
our cost of deposits, which could reduce our net interest margin. Similarly, if interest rates remain at their current level or
decline in 2017, we could see a decline in our cost of deposits, which could increase our net interest margin.
Included in deposits are certificates of deposit
with balances of $100,000 or more (excluding brokered deposits issued in $1,000 amounts under a master certificate of deposit)
totaling $648.1 million, $484.7 million and $403.1 million at December 31, 2016, 2015 and 2014, respectively.
We utilize brokered deposits as an additional
funding source and to assist in the management of our interest rate risk. We have obtained brokered certificates of deposit when
the interest rate on these deposits is below the prevailing interest rate for non-brokered certificates of deposit with similar
maturities in our market, or when obtaining them allowed us to extend the maturities of our deposits at favorable rates compared
to borrowing funds with similar maturities, when we are seeking to extend the maturities of our funding to assist in the management
of our interest rate risk. Brokered certificates of deposit provide a large deposit for us at a lower operating cost as compared
to non-brokered certificates of deposit since we only have one account to maintain versus several accounts with multiple interest
and maturity checks. The Depository Trust Company is used as the clearing house, maintaining each deposit under the name of CEDE
& Co. These deposits are transferable just like a stock or bond investment and the customer can open the account with only
a phone call, just like buying a stock or bond. Unlike non-brokered certificates of deposit, where the deposit amount can be withdrawn
with a penalty for any reason, including increasing interest rates, a brokered certificate of deposit can only be withdrawn in
the event of the death, or court declared mental incompetence, of the depositor. This allows us to better manage the maturity of
our deposits and our interest rate risk. We also utilized brokers to obtain money market account deposits. The rate we pay on brokered
money market accounts is the same or below the rate we pay on non-brokered money market accounts, and the rate is agreed to in
a contract between the Bank and the broker. These accounts are similar to brokered certificates of deposit accounts in that we
only maintain one account for the total deposit per broker, with the broker maintaining the detailed records of each depositor.
We also offer access to FDIC insurance coverage
in excess of $250,000 through a Certificate of Deposit Account Registry Service (“CDARS®”) and through an Insured
Cash Sweep service (“ICS”). CDARS® and ICS are deposit placement services. These networks arrange for placement
of funds into certificate of deposit accounts or money market accounts issued by other member banks of the network in increments
of less than $250,000 to ensure that both principal and interest are eligible for full FDIC deposit insurance. This allows us to
accept deposits in excess of $250,000 from a depositor, and place the deposits through the network to other member banks to provide
full FDIC deposit insurance coverage. We may receive deposits from other member banks in exchange for the deposits we place into
the network. We may also obtain deposits from other network member banks without placing deposits into the network. We will obtain
deposits in this manner primarily as a short-term funding source. We also can place deposits with other member banks without receiving
deposits from other member banks. Depositors are allowed to withdraw funds, with a penalty, from these accounts at one or more
of the member banks that hold the deposits. Additionally, we place a portion of our government deposits in an ICS brokered money
market product which does not require us to provide collateral. This allows us to invest our funds in higher yielding assets. At
December 31, 2016 and 2015 the Bank held government ICS deposits totaling $539.0 million and $210.7 million, respectively.
We also utilize brokers to obtain money market
account deposits. These accounts are similar to brokered certificate of deposit accounts in that we only maintain one account for
the total deposit per broker, with the broker maintaining the detailed records of each depositor.
Traditional brokered deposits and funds obtained
through the CDARS® and ICS networks are classified as brokered deposits for financial reporting purposes. At December 31, 2016,
we had $1,114.9 million classified as brokered deposits, with $458.8 million in brokered certificates of deposit, $655.0 million
in brokered money market accounts and $1.1 million in brokered checking accounts. The brokered certificates of deposit include
$28.8 million obtained through the CDARS® network and the brokered money market accounts include $539.0 million obtained through
the ICS network.
The following table sets forth the distribution
of our deposit accounts at the dates indicated and the weighted average nominal interest rates on each category of deposits presented.
|
|
At December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
Percent
|
|
Average
|
|
|
|
Percent
|
|
Average
|
|
|
|
Percent
|
|
Average
|
|
|
|
|
of Total
|
|
Nominal
|
|
|
|
of Total
|
|
Nominal
|
|
|
|
of Total
|
|
Nominal
|
|
|
Amount
|
|
Deposits
|
|
Rate
|
|
Amount
|
|
Deposits
|
|
Rate
|
|
Amount
|
|
Deposits
|
|
Rate
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
254,283
|
|
|
|
6.05
|
%
|
|
|
0.48
|
%
|
|
$
|
261,748
|
|
|
|
6.72
|
%
|
|
|
0.45
|
%
|
|
$
|
261,942
|
|
|
|
7.47
|
%
|
|
|
0.38
|
%
|
NOW accounts
(9)
|
|
|
1,362,484
|
|
|
|
32.40
|
|
|
|
0.59
|
|
|
|
1,448,695
|
|
|
|
37.22
|
|
|
|
0.49
|
|
|
|
1,359,057
|
|
|
|
38.74
|
|
|
|
0.45
|
|
Demand accounts
(10)
|
|
|
333,163
|
|
|
|
7.92
|
|
|
|
-
|
|
|
|
269,469
|
|
|
|
6.92
|
|
|
|
-
|
|
|
|
255,834
|
|
|
|
7.29
|
|
|
|
-
|
|
Mortgagors' escrow deposits
|
|
|
40,216
|
|
|
|
0.96
|
|
|
|
0.22
|
|
|
|
36,844
|
|
|
|
0.95
|
|
|
|
0.17
|
|
|
|
35,679
|
|
|
|
1.02
|
|
|
|
0.09
|
|
Total
|
|
|
1,990,146
|
|
|
|
47.32
|
|
|
|
0.47
|
|
|
|
2,016,756
|
|
|
|
51.81
|
|
|
|
0.42
|
|
|
|
1,912,512
|
|
|
|
54.51
|
|
|
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts
(8)
|
|
|
843,370
|
|
|
|
20.05
|
|
|
|
0.67
|
|
|
|
472,489
|
|
|
|
12.14
|
|
|
|
0.46
|
|
|
|
290,263
|
|
|
|
8.27
|
|
|
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposit accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
with original maturities of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 6 Months
(2)
|
|
|
31,432
|
|
|
|
0.75
|
|
|
|
0.64
|
|
|
|
19,615
|
|
|
|
0.50
|
|
|
|
0.40
|
|
|
|
7,059
|
|
|
|
0.20
|
|
|
|
0.10
|
|
6 to less than 12 Months
(3)
|
|
|
53,222
|
|
|
|
1.27
|
|
|
|
0.99
|
|
|
|
21,962
|
|
|
|
0.56
|
|
|
|
0.41
|
|
|
|
82,966
|
|
|
|
2.36
|
|
|
|
0.80
|
|
12 to less than 30 Months
(4)
|
|
|
588,751
|
|
|
|
14.00
|
|
|
|
1.18
|
|
|
|
496,343
|
|
|
|
12.75
|
|
|
|
1.08
|
|
|
|
275,828
|
|
|
|
7.86
|
|
|
|
0.89
|
|
30 to less than 48 Months
(5)
|
|
|
281,454
|
|
|
|
6.69
|
|
|
|
1.26
|
|
|
|
316,475
|
|
|
|
8.13
|
|
|
|
1.20
|
|
|
|
198,290
|
|
|
|
5.65
|
|
|
|
1.08
|
|
48 to less than 72 Months
(6)
|
|
|
369,630
|
|
|
|
8.79
|
|
|
|
1.83
|
|
|
|
461,843
|
|
|
|
11.86
|
|
|
|
1.73
|
|
|
|
622,908
|
|
|
|
17.75
|
|
|
|
2.06
|
|
72 Months or more
(7)
|
|
|
47,626
|
|
|
|
1.13
|
|
|
|
2.86
|
|
|
|
87,064
|
|
|
|
2.24
|
|
|
|
2.77
|
|
|
|
118,772
|
|
|
|
3.39
|
|
|
|
2.88
|
|
Total certificate of deposit accounts
|
|
|
1,372,115
|
|
|
|
32.63
|
|
|
|
1.41
|
|
|
|
1,403,302
|
|
|
|
36.05
|
|
|
|
1.41
|
|
|
|
1,305,823
|
|
|
|
37.22
|
|
|
|
1.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
(1)
|
|
$
|
4,205,631
|
|
|
|
100.00
|
%
|
|
|
0.82
|
%
|
|
$
|
3,892,547
|
|
|
|
100.00
|
%
|
|
|
0.78
|
%
|
|
$
|
3,508,598
|
|
|
|
100.00
|
%
|
|
|
0.84
|
%
|
|
(1)
|
Included in the above balances are IRA and Keogh deposits totaling $69.3 million, $71.5 million
and $91.0 million at December 31, 2016, 2015 and 2014, respectively.
|
|
(2)
|
Includes brokered deposits of $29.1 million, $5.0 million and $3.0 million at December 31, 2016,
2015 and 2014, respectively.
|
|
(3)
|
Includes brokered deposits of $0.8 million and $5.7 million at December 31, 2015 and 2014, respectively,
and zero at December 31, 2016.
|
|
(4)
|
Includes brokered deposits of $84.0 million, $168.2 million and $85.9 million at December 31, 2016,
2015 and 2014, respectively.
|
|
(5)
|
Includes brokered deposits of $229.5 million, $244.6 million and $145.2 million at December 31,
2016, 2015 and 2014, respectively.
|
|
(6)
|
Includes brokered deposits of $113.0 million, $165.6 million and $271.4 million at December 31,
2016, 2015 and 2014, respectively.
|
|
(7)
|
Includes brokered deposits of $3.1 million, $41.0 million and $72.4 million at December 31, 2016,
2015 and 2014, respectively.
|
|
(8)
|
Includes brokered deposits of $655.0 million, $339.8 million and $180.2 million at December 31, 2016,
2015 and 2014, respectively.
|
|
(9)
|
Includes brokered deposits of $15.0 million at December 31, 2015, and zero at December 31, 2016 and
2014.
|
|
(10)
|
Includes brokered deposits of $1.1 million and $2.8 million at December 31, 2016 and 2015, respectively.
|
The following table presents by various rate
categories, the amount of time deposit accounts outstanding at the dates indicated, and the years to maturity of the certificate
accounts outstanding at December 31, 2016.
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
|
|
|
|
At December 31,
|
|
Within
|
|
One to
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
One Year
|
|
Three Years
|
|
Thereafter
|
|
|
|
|
(In thousands)
|
Interest rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.99% or less
|
|
(1)
|
|
$
|
1,107,882
|
|
|
$
|
1,074,229
|
|
|
$
|
817,100
|
|
|
$
|
631,816
|
|
|
$
|
447,776
|
|
|
$
|
28,290
|
|
2.00% to 2.99%
|
|
(2)
|
|
|
237,122
|
|
|
|
279,688
|
|
|
|
301,445
|
|
|
|
12,516
|
|
|
|
200,078
|
|
|
|
24,528
|
|
3.00% to 3.99%
|
|
(3)
|
|
|
27,111
|
|
|
|
49,385
|
|
|
|
184,172
|
|
|
|
4
|
|
|
|
1,940
|
|
|
|
25,167
|
|
Total
|
|
|
|
|
|
$
|
1,372,115
|
|
|
$
|
1,403,302
|
|
|
$
|
1,302,717
|
|
|
$
|
644,336
|
|
|
$
|
649,794
|
|
|
$
|
77,985
|
|
|
(1)
|
Includes brokered deposits of $442.4 million, $542.3 million and $435.3 million at December 31, 2016, 2015 and 2014, respectively.
|
|
(2)
|
Includes brokered deposits of $16.4 million, $59.9 million and $83.1 million at December 31, 2016, 2015 and 2014, respectively.
|
|
(3)
|
Includes brokered deposits of $23.0 million and $65.3 million at December 31, 2015 and 2014, respectively.
|
The following table presents by remaining maturity
categories the amount of certificate of deposit accounts with balances of $100,000 or more at December 31, 2016 and their annualized
weighted average interest rates.
|
|
|
|
Weighted
|
|
|
Amount
|
|
Average Rate
|
|
|
(Dollars in thousands)
|
Maturity Period:
|
|
|
|
|
|
|
|
|
Three months or less
|
|
$
|
159,371
|
|
|
|
1.16
|
%
|
Over three through six months
|
|
|
66,237
|
|
|
|
1.20
|
|
Over six through 12 months
|
|
|
47,632
|
|
|
|
1.37
|
|
Over 12 months
|
|
|
374,858
|
|
|
|
1.59
|
|
Total
|
|
$
|
648,098
|
|
|
|
1.43
|
%
|
The above table does not include brokered deposits issued in $1,000
amounts under a master certificate of deposit totaling $393.5 million with a weighted average rate of 1.30%.
The following table presents the deposit activity,
including mortgagors’ escrow deposits, for the periods indicated.
|
|
For the year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
(In thousands)
|
Net deposits
|
|
$
|
278,793
|
|
|
$
|
352,602
|
|
|
$
|
244,830
|
|
Amortization of premiums, net
|
|
|
747
|
|
|
|
1,012
|
|
|
|
944
|
|
Interest on deposits
|
|
|
33,350
|
|
|
|
30,336
|
|
|
|
30,044
|
|
Net increase in deposits
|
|
$
|
312,890
|
|
|
$
|
383,950
|
|
|
$
|
275,818
|
|
The following table sets forth the distribution
of our average deposit accounts for the years indicated, the percentage of total deposit portfolio, and the average interest cost
of each deposit category presented. Average balances for all years shown are derived from daily balances.
|
|
At December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
Average
|
|
of Total
|
|
Average
|
|
Average
|
|
of Total
|
|
Average
|
|
Average
|
|
of Total
|
|
Average
|
|
|
Balance
|
|
Deposits
|
|
Cost
|
|
Balance
|
|
Deposits
|
|
Cost
|
|
Balance
|
|
Deposits
|
|
Cost
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
260,948
|
|
|
|
6.35
|
%
|
|
|
0.47
|
%
|
|
$
|
264,891
|
|
|
|
7.10
|
%
|
|
|
0.43
|
%
|
|
$
|
258,243
|
|
|
|
7.70
|
%
|
|
|
0.23
|
%
|
NOW accounts
|
|
|
1,496,712
|
|
|
|
36.41
|
|
|
|
0.53
|
|
|
|
1,432,609
|
|
|
|
38.38
|
|
|
|
0.46
|
|
|
|
1,390,899
|
|
|
|
41.47
|
|
|
|
0.45
|
|
Demand accounts
|
|
|
305,096
|
|
|
|
7.42
|
|
|
|
-
|
|
|
|
250,488
|
|
|
|
6.71
|
|
|
|
-
|
|
|
|
211,389
|
|
|
|
6.30
|
|
|
|
-
|
|
Mortgagors' escrow deposits
|
|
|
56,152
|
|
|
|
1.37
|
|
|
|
0.20
|
|
|
|
52,364
|
|
|
|
1.40
|
|
|
|
0.19
|
|
|
|
47,876
|
|
|
|
1.43
|
|
|
|
0.28
|
|
Total
|
|
|
2,118,908
|
|
|
|
51.55
|
|
|
|
0.44
|
|
|
|
2,000,352
|
|
|
|
53.59
|
|
|
|
0.39
|
|
|
|
1,908,407
|
|
|
|
56.90
|
|
|
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts
|
|
|
581,390
|
|
|
|
14.15
|
|
|
|
0.62
|
|
|
|
380,595
|
|
|
|
10.20
|
|
|
|
0.41
|
|
|
|
245,752
|
|
|
|
7.33
|
|
|
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposit accounts
|
|
|
1,409,772
|
|
|
|
34.30
|
|
|
|
1.46
|
|
|
|
1,351,619
|
|
|
|
36.21
|
|
|
|
1.55
|
|
|
|
1,199,849
|
|
|
|
35.77
|
|
|
|
1.87
|
|
Total deposits
|
|
$
|
4,110,070
|
|
|
|
100.00
|
%
|
|
|
0.81
|
%
|
|
$
|
3,732,566
|
|
|
|
100.00
|
%
|
|
|
0.81
|
%
|
|
$
|
3,354,008
|
|
|
|
100.00
|
%
|
|
|
0.90
|
%
|
Borrowings.
Although deposits are our primary source of
funds, we also use borrowings as an alternative and cost effective source of funds for lending, investing and other general purposes.
The Bank is a member of, and is eligible to obtain advances from, the FHLB-NY. Such advances generally are secured by a blanket
lien against the Bank’s mortgage portfolio and the Bank’s investment in the stock of the FHLB-NY. In addition, the
Bank may pledge mortgage-backed securities to obtain advances from the FHLB-NY. See “— Regulation — Federal Home
Loan Bank System.” The maximum amount that the FHLB-NY will advance for purposes other than for meeting withdrawals fluctuates
from time to time in accordance with the policies of the FHLB-NY. The Bank may also enter into repurchase agreements with broker-dealers
and the FHLB-NY. These agreements are recorded as financing transactions and the obligations to repurchase are reflected as a liability
in our consolidated financial statements. In addition, we issued junior subordinated debentures with a total par of $61.9 million
in June and July 2007. These junior subordinated debentures are carried at fair value in the Consolidated Statement of Financial
Condition. During the year ended December 31, 2016, the Holding Company issued subordinated debt with an aggregated principal amount
of $75.0 million, receiving net proceeds totaling $73.4 million. The subordinated debt was issued at 5.25% fixed-to-floating rate
maturing in 2026. The debt is callable at par quarterly through its maturity date beginning December 15, 2021.
The average cost of borrowings was 1.67%, 1.76%
and 2.49% for the years ended December 31, 2016, 2015 and 2014, respectively. The average balances of borrowings were $1,231,0
million, $1,104.4 million and $993.8 million for the same years, respectively.
The following table sets forth certain
information regarding our borrowings at or for the periods ended on the dates indicated.
|
|
At or for the years ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(Dollars in thousands)
|
Securities Sold with the Agreement to Repurchase
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance outstanding
|
|
$
|
64,087
|
|
|
$
|
116,000
|
|
|
$
|
137,824
|
|
Maximum amount outstanding at any month
|
|
|
|
|
|
|
|
|
|
|
|
|
end during the period
|
|
|
116,000
|
|
|
|
116,000
|
|
|
|
155,300
|
|
Balance outstanding at the end of period
|
|
|
-
|
|
|
|
116,000
|
|
|
|
116,000
|
|
Weighted average interest rate during the period
|
|
|
3.26
|
%
|
|
|
3.22
|
%
|
|
|
3.40
|
%
|
Weighted average interest rate at end of period
|
|
|
n/a
|
|
|
|
3.18
|
|
|
|
3.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB-NY Advances
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance outstanding
|
|
$
|
1,123,411
|
|
|
$
|
947,370
|
|
|
$
|
826,132
|
|
Maximum amount outstanding at any month
|
|
|
|
|
|
|
|
|
|
|
|
|
end during the period
|
|
|
1,337,265
|
|
|
|
1,106,658
|
|
|
|
936,813
|
|
Balance outstanding at the end of period
|
|
|
1,159,190
|
|
|
|
1,106,658
|
|
|
|
911,721
|
|
Weighted average interest rate during the period
|
|
|
1.46
|
%
|
|
|
1.48
|
%
|
|
|
1.60
|
%
|
Weighted average interest rate at end of period
|
|
|
1.17
|
|
|
|
1.40
|
|
|
|
1.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance outstanding
|
|
$
|
43,516
|
|
|
$
|
40,998
|
|
|
$
|
29,834
|
|
Maximum amount outstanding at any month
|
|
|
|
|
|
|
|
|
|
|
|
|
end during the period
|
|
|
107,373
|
|
|
|
89,479
|
|
|
|
30,352
|
|
Balance outstanding at the end of period
|
|
|
107,373
|
|
|
|
49,018
|
|
|
|
28,771
|
|
Weighted average interest rate during the period
|
|
|
4.76
|
%
|
|
|
4.02
|
%
|
|
|
5.30
|
%
|
Weighted average interest rate at end of period
|
|
|
5.02
|
|
|
|
2.56
|
|
|
|
5.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Borrowings
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance outstanding
|
|
$
|
1,231,014
|
|
|
$
|
1,104,368
|
|
|
$
|
993,790
|
|
Maximum amount outstanding at any month
|
|
|
|
|
|
|
|
|
|
|
|
|
end during the period
|
|
|
1,560,639
|
|
|
|
1,312,137
|
|
|
|
1,112,201
|
|
Balance outstanding at the end of period
|
|
|
1,266,563
|
|
|
|
1,271,676
|
|
|
|
1,056,492
|
|
Weighted average interest rate during the period
|
|
|
1.67
|
%
|
|
|
1.76
|
%
|
|
|
1.96
|
%
|
Weighted average interest rate at end of period
|
|
|
1.53
|
|
|
|
1.61
|
|
|
|
1.75
|
|
|
(1)
|
The “weighted average interest rate during the period” for the year ended December
31, 2014, excludes prepayment penalties on borrowings incurred from the extinguishment of debt to conform to the presentation for
the year ended December 31, 2016. These penalties are reflected in non-interest expense.
|
Subsidiary Activities
At December 31, 2016, Flushing Financial Corporation
had four wholly owned subsidiaries: the Bank and the Trusts. In addition, the Bank had three wholly owned subsidiaries: FSB Properties
Inc. (“Properties”), Flushing Preferred Funding Corporation (“FPFC”), and Flushing Service Corporation.
(a) Properties,
which is incorporated in the State of New York, was formed in 1976 under the Savings Bank’s New York State leeway investment
authority. The original purpose of Properties was to engage in joint venture real estate equity investments. The Savings Bank discontinued
these activities in 1986. The last joint venture in which Properties was a partner was dissolved in 1989, and the remaining property
disposed. Properties is currently used to hold title to real estate owned that is obtained via foreclosure.
(b) FPFC,
which is incorporated in the State of Delaware, was formed in 1997 as a real estate investment trust for the purpose of acquiring,
holding and managing real estate mortgage assets. FPFC also provides an additional vehicle for access by the Company to the capital
markets for future opportunities.
(c) Flushing
Service Corporation, which is incorporated in the State of New York, was formed in 1998 to market insurance products and mutual
funds.
Personnel
At December 31, 2016, we had 447 full-time employees
and 23 part-time employees. None of our employees are represented by a collective bargaining unit, and we consider our relationship
with our employees to be good. At the present time, Flushing Financial Corporation only employs certain officers of the Bank. These
employees do not receive any extra compensation as officers of Flushing Financial Corporation.
Omnibus Incentive Plan
The 2014 Omnibus Incentive Plan (“2014
Omnibus Plan”) became effective on May 20, 2014 after adoption by the Board of Directors and approval by the stockholders.
The 2014 Omnibus Plan authorizes the Compensation Committee of the Company’s Board of Directors (the “Compensation
Committee”) to grant a variety of equity compensation awards as well as long-term and annual cash incentive awards, all of
which can, but need not, be structured so as to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended (the
“Internal Revenue Code”). The 2014 Omnibus Plan authorizes the issuance of 1,100,000 shares. To the extent that an
award under the 2014 Omnibus Plan is cancelled, expired, forfeited, settled in cash, settled by issuance of fewer shares than the
number underlying the award, or otherwise terminated without delivery of shares to a participant in payment of the exercise price
or taxes relating to an award, the shares retained by or returned to the Company will be available for future issuance under the
2014 Omnibus Plan. No further awards may be granted under the Company’s 2005 Omnibus Incentive Plan, 1996 Stock Option Incentive
Plan, and 1996 Restricted Stock Incentive Plan. At December 31, 2016, there were 489,320 shares available for delivery in connection
with awards under the 2014 Omnibus Plan.
For additional information concerning this plan,
see “Note 11 of Notes to Consolidated Financial Statements” in Item 8 of this Annual Report.
FEDERAL, STATE AND LOCAL TAXATION
The following discussion of tax matters is intended
only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Company.
Federal Taxation
General
. We report our income using a
calendar year and the accrual method of accounting. We are subject to the federal tax laws and regulations which apply to corporations
generally, and, since the enactment of the Small Business Job Protection Act of 1996 (the “Act”), those laws and regulations
governing the Bank’s deductions for bad debts, described below.
Bad Debt Reserves.
Prior to the enactment
of the Act, which was signed into law on August 20, 1996, savings institutions which met certain definitional tests primarily relating
to their assets and the nature of their business (“qualifying thrifts”), such as the Savings Bank, were allowed deductions
for bad debts under methods more favorable than those granted to other taxpayers. Qualifying thrifts could compute deductions for
bad debts using either the specific charge off method of Section 166 of the Internal Revenue Code (the “Code”) or the
reserve method of Section 593 of the Code. Section 1616(a) of the Act repealed the Section 593 reserve method of accounting for
bad debts by qualifying thrifts, effective for taxable years beginning after 1995. Qualifying thrifts that are treated as large
banks, such as the Savings Bank was, are required to use the specific charge off method, pursuant to which the amount of any debt
may be deducted only as it actually becomes wholly or partially worthless.
Distributions.
To the extent that the
Bank makes “non-dividend distributions” to stockholders that are considered to result in distributions from its pre-1988
reserves or the supplemental reserve for losses on loans (“excess distributions”), then an amount based on the amount
distributed will be included in the Bank’s taxable income. Non-dividend distributions include distributions in excess of
the Bank’s current and post-1951 accumulated earnings and profits, as calculated for federal income tax purposes, distributions
in redemption of stock and distributions in partial or complete liquidation. The amount of additional taxable income resulting
from an excess distribution is an amount that when reduced by the tax attributable to the income is equal to the amount of the
excess distribution. Thus, slightly more than one and one-half times the amount of the excess distribution made would be includable
in gross income for federal income tax purposes, assuming a 35% federal corporate income tax rate. See “Regulation
¾
Restrictions on Dividends and Capital Distributions” for limits on the payment of dividends by the Bank. The Bank does not
intend to pay dividends or make non-dividend distributions described above that would result in a recapture of any portion of its
pre-1988 bad debt reserves.
Corporate Alternative Minimum Tax
. The
Code imposes an alternative minimum tax on corporations equal to the excess, if any, of 20% of alternative minimum taxable income
(“AMTI”) over a corporation’s regular federal income tax liability. AMTI is equal to taxable income with certain
adjustments. Generally, only 90% of AMTI can be offset by net operating loss carrybacks and carryforwards.
State and Local Taxation
New
York State and New York City Taxation
. We are subject to the New York State Franchise Tax on Banking Corporations. New York
State recently enacted several reforms (the "Tax Reform Package") to its tax structure, including changes to the franchise,
sales, estate and personal income taxes. These changes generally became effective for tax years beginning on or after January 1,
2015. The Tax Reform Package simplified the existing corporate tax code for New York State businesses while remaining relatively
neutral in relation to corporate tax receipts. Under the Tax Reform Package, the N
ew York State
corporate
income tax rate was reduced, effective January 1, 2016, from 7.10% to 6.50%. The metropolitan commuter transportation district
surcharge ("MTA Tax") increased to 28% of the surcharge base for tax years beginning on or after January 1, 2016. The
MTA Tax rate for tax years beginning on or after January 1, 2017 will be adjusted based upon future Metropolitan Transit Authority
budget projections.
Some of the most significant elements of the
Tax Reform Package include the merger of the bank franchise tax regime into the general corporate franchise tax regime, expanded
application of economic nexus, adoption of unitary reporting, and apportionment of source income solely by reference to customer
location.
New York State formerly had imposed a franchise
tax on general business corporations and a separate franchise tax on banking corporations. Under these statutes, New York State
financial service companies and banks were previously taxed under different regimes. The Tax Reform Package repealed the prior
bank franchise taxation regime and merged it into the corporate franchise tax regime. It also made certain subtraction modifications
to the corporate franchise tax regime, most notably by providing a choice between three potential financial tax subtraction modifications:
(i) a subtraction modification equal to 32% of New York State’s entire net income available to all thrifts and community
banks with assets that do not exceed $8 billion, provided certain residential lending tests are met; (ii) a subtraction modification,
available to both small thrifts and community banks with assets that do not exceed $8 billion, based upon 50% of the net interest
income from loans multiplied by the fraction of interest received from loans secured by real estate located in New York State or
small business loans made to New York State borrowers with a principal amount of $5 million or less divided by total interest income
from all loans; and (iii) both small thrifts and community banks with assets that do not exceed $8 billion that owned a captive
real estate investment trust as of April 1, 2014, may, for tax years beginning on or after January 1, 2015, subtract 160% of dividends
received from the trust in determining New York State taxable income.
The Tax Reform Package requires that all firms
meeting an ownership test of 50% or more be deemed a unitary business and required to file a combined tax return. Substantial
intercompany transactions are eliminated, and a domestic corporation without any assets or customers in New York State, but engaged
in a unitary business with a related New York taxpayer, could become part of the New York State unitary group. The Tax Reform Package
also requires business income to be apportioned to and taxed by New York State using a single receipts factor based on the customer's
location. These provisions also contain favorable apportionment rules for asset-backed securities that are beneficial to the Company.
The Company is subject to New York City franchise
tax on a consolidated basis. New York City tax law generally was conformed to New York State tax law with provisions similar to
those described above for York State purposes, with only a few minor differences. For tax years beginning on or after January 1,
2015, the New York City income tax rate applied to the Company apportioned New York City taxable income was and is 8.85%.
New Jersey State Taxation
. The Bank is
required to pay New Jersey State income tax based on the percentage of receipts from activity in New Jersey.
Delaware State Taxation
. As a Delaware
holding company not earning income in Delaware, we are exempt from Delaware corporate income tax but are required to file an annual
report with and pay an annual franchise tax to the State of Delaware.
REGULATION
General
The Bank is a New York State-chartered commercial
bank and its deposit accounts are insured under the Deposit Insurance Fund (the “DIF”) of the Federal Deposit Insurance
Corporation (the “FDIC”) up to applicable legal limits. The Bank is subject to extensive regulation and supervision
by the New York State Department of Financial Services (“NYDFS”), as its chartering agency, by the FDIC, as its insurer
of deposits, and by the Consumer Financial Protection Bureau (the “CFPB”), which was created under the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in 2011 to implement and enforce consumer protection
laws applying to banks. The Bank must file reports with the NYDFS, the FDIC, and the CFPB concerning its activities and financial
condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions
of, other depository institutions. Furthermore, the Bank is periodically examined by the NYDFS and the FDIC to assess compliance
with various regulatory requirements, including safety and soundness considerations. This regulation and supervision establishes
a comprehensive framework of activities in which a commercial bank can engage, and is intended primarily for the protection of
the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection
with its supervisory and enforcement activities and examination policies, including policies with respect to the classification
of assets and the establishment of adequate loan loss allowances for regulatory purposes. Any change in such regulation, whether
by the NYDFS, the FDIC, or through legislation, could have a material adverse impact on the Company, the Bank and its operations,
and the Company’s shareholders.
The Company is required to file certain reports
under, and otherwise comply with, the rules and regulations of the Federal Reserve Board of Governors (the “FRB”),
the FDIC, the NYDFS, and the Securities and Exchange Commission (the “SEC”) under federal securities laws. In addition,
the FRB periodically examines the Company. Certain of the regulatory requirements applicable to the Bank and the Company are referred
to below or elsewhere herein. However, such discussion is not meant to be a complete explanation of all laws and regulations and
is qualified in its entirety by reference to the actual laws and regulations.
The Dodd-Frank Act
The Dodd-Frank Act has significantly impacted
the current bank regulatory structure and is expected to continue to affect, into the immediate future, the lending and investment
activities and general operations of depository institutions and their holding companies. In addition to creating the CFPB, the
Dodd-Frank Act requires the FRB to establish minimum consolidated capital requirements for bank holding companies that are as
stringent as those required for insured depository institutions; the components of Tier 1 capital will be restricted to capital
instruments that are currently considered to be Tier 1 capital for insured depository institutions. In addition, the proceeds
of trust preferred securities will be excluded from Tier 1 capital unless (i) such securities are issued by bank holding
companies with assets of less than $500 million, or (ii) such securities were issued prior to May 19, 2010 by bank or
savings and loan holding companies with assets of less than $15 billion. The Dodd-Frank Act created a new supervisory structure
for oversight of the U.S. financial system, including the establishment of a new council of regulators, the Financial Stability
Oversight Council, to monitor and address systemic risks to the financial system. Non-bank financial companies that are deemed
to be significant to the stability of the U.S. financial system and all bank holding companies with $50 billion or more in total
consolidated assets will be subject to heightened supervision and regulation. The FRB will implement prudential requirements and
prompt corrective action procedures for such companies.
The Dodd-Frank Act made many additional
changes in banking regulation, including: authorizing depository institutions, for the first time, to pay interest on business
checking accounts; requiring originators of securitized loans to retain a percentage of the risk for transferred loans; establishing
regulatory rate-setting for certain debit card interchange fees; and establishing a number of reforms for mortgage lending and
consumer protection.
The Dodd-Frank Act also broadened the base
for FDIC insurance assessments. The FDIC was required to promulgate rules revising its assessment system so that it is based not
on deposits, but on the average consolidated total assets less the tangible equity capital of an insured institution. That rule
took effect April 1, 2011. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks,
savings institutions, and credit unions to $250,000 per depositor, retroactive to January 1, 2008, and provided non-interest-bearing
transaction accounts with unlimited deposit insurance through December 31, 2012.
Some of the provisions of the Dodd-Frank Act
are not yet in effect. The Dodd-Frank Act requires various federal agencies to promulgate numerous and extensive implementing
regulations over the next several years.
On
February
3, 2017, however, President Trump signed an executive order requiring a comprehensive review of financial system regulations, including
the Dodd-Frank Act. President Trump has promised other significant changes to financial system regulations. Nonetheless, changes
to these regulations are expected to be politically controversial and may be slow and unpredictable in enactment and effect. It
is too early to predict when or what, if any, existing regulations affecting us will be repealed or amended and what if any new
regulations affecting us will be adopted, leaving the bank regulatory environment particularly uncertain at present. Further, there
can be no assurance as to the impact that any laws, regulations or governmental programs that may be introduced or implemented
in the future will have on the financial markets and the economy.
Basel III
In the summer of 2012, our primary federal
regulators published two notices of proposed rulemaking (“NPRs”) that would have substantially revised the risk-based
capital requirements applicable to bank holding companies and depository institutions, including the Company and the Bank, compared
to the then current U.S. risk-based capital rules, which are based on the international capital accords of the Basel Committee
on Banking Supervision, which are generally referred to as “Basel I.”
During July
2013,
our primary federal regulators
issued revised NPRs that will revise and replace the
agencies' current capital rules. The NPRs included numerous revisions to the existing capital regulations, including, but not limited
to, the following:
|
•
|
|
Revised the definition of regulatory capital components and related
calculations.
|
|
•
|
|
Added a new common equity tier 1 capital ratio.
|
|
•
|
|
Increased the minimum tier 1 capital ratio requirement from four
percent to six percent.
|
|
•
|
|
Incorporated the revised regulatory capital requirements into the
Prompt Corrective Action framework.
|
|
•
|
|
Implemented a new capital conservation buffer that would limit
payment of capital distributions and certain discretionary bonus payments to executive officers and key risk takers if the banking
organization does not hold certain amounts of common equity tier 1 capital in addition to those needed to meet its minimum risk-based
capital requirements.
|
|
•
|
|
Provided a transition period for several aspects of the proposed
rule: the new minimum capital ratio requirements, the capital conservation buffer, and the regulatory capital adjustments and deductions.
|
|
•
|
|
Increased capital requirements for past-due loans, high volatility
commercial real estate exposures, and certain short-term loan commitments.
|
|
•
|
|
Removed references to credit ratings consistent with Section 939A
of the Dodd-Frank Act.
|
|
•
|
|
Established due diligence requirements for securitization exposures.
|
The capital regulations became effective January
1, 2015 for bank holding companies and banks with less than $15 billion in total assets, such as our Company and Bank. We continue
to be considered well-capitalized under Basel III.
Volcker Rule
On December 10, 2013, our primary federal regulators
adopted Section 619 of the Dodd-Frank Act, commonly referred to as the “Volcker Rule,” which prohibits insured depository
institutions from engaging in short-term proprietary trading of certain securities, derivatives and other financial instruments
for the firm’s own account, subject to certain exemptions, including market making and risk-mitigating hedging. The Volcker
Rule also imposes limits on banking entities’ investments in, and other relationships with, hedge funds and private equity
funds. The financial industry has strongly opposed the Volcker Rule, which remains controversial and the subject of continuing
debate. Further, as noted above, President Trump has indicated an intention to review many financial industry regulations. In this
regard, in January 2017, the Treasury Secretary, Steven Mnuchin, publicly stated the intention that the regulatory impact of the
Volcker Rule be loosened. At this time, it is too early to know whether any changes will be proposed or implemented or what impact
any changes may have on the Bank or the Company.
The rule as adopted prohibited banking entities
from owning collateralized debt obligations backed primarily by trust preferred securities (“TruPS CDOs”) after July
21, 2015. At December 31, 2016 and 2015, the Company did not hold any TruPs CDOs.
New York State Law
The Bank derives its lending, investment,
and other authority primarily from the applicable provisions of New York State Banking Law and the regulations of the NYDFS, as
limited by FDIC regulations. Under these laws and regulations, banks, including the Bank, may invest in real estate mortgages,
consumer and commercial loans, certain types of debt securities (including certain corporate debt securities, and obligations of
federal, state, and local governments and agencies), certain types of corporate equity securities, and certain other assets. The
lending powers of New York State-chartered commercial banks are not subject to percentage-of-assets or capital limitations, although
there are limits applicable to loans to individual borrowers.
The exercise by an FDIC-insured commercial
bank of the lending and investment powers under New York State Banking Law is limited by FDIC regulations and other federal laws
and regulations. In particular, the applicable provisions of New York State Banking Law and regulations governing the investment
authority and activities of an FDIC-insured state-chartered savings bank and commercial bank have been effectively limited by
the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) and the FDIC regulations issued pursuant
thereto.
With certain limited exceptions, a New York
State-chartered commercial bank may not make loans or extend credit for commercial, corporate, or business purposes (including
lease financing) to a single borrower, the aggregate amount of which would be in excess of 15% of the bank’s net worth or
up to 25% for loans secured by collateral having an ascertainable market value at least equal to the excess of such loans over
the bank’s net worth. The Bank currently complies with all applicable loans-to-one-borrower limitations. At December 31,
2016, the Bank’s largest aggregate amount of loans to one borrower was $74.0 million, all of which were performing according
to their terms. See “— General — Lending Activities.”
Under New York State Banking Law, New York
State-chartered stock-form commercial banks may declare and pay dividends out of its net profits, unless there is an impairment
of capital, but approval of the NYDFS Superintendent (the “Superintendent”) is required if the total of all dividends
declared by the bank in a calendar year would exceed the total of its net profits for that year combined with its retained net
profits for the preceding two years less prior dividends paid.
New York State Banking Law gives the Superintendent
authority to issue an order to a New York State-chartered banking institution to appear and explain an apparent violation of law,
to discontinue unauthorized or unsafe practices, and to keep prescribed books and accounts. Upon a finding by the NYDFS that any
director, trustee, or officer of any banking organization has violated any law, or has continued unauthorized or unsafe practices
in conducting the business of the banking organization after having been notified by the Superintendent to discontinue such practices,
such director, trustee, or officer may be removed from office after notice and an opportunity to be heard. The Superintendent also
has authority to appoint a conservator or a receiver for a savings or commercial bank under certain circumstances.
In addition, on February 16, 2017, the NYDFS
issued the final version of its cybersecurity regulation, which has an effective date of March 1, 2017. The regulation, which is
detailed and broad in scope, covers five basic areas.
Governance
: The regulation requires senior
management and boards of directors must adopt a cybersecurity policy for protecting information systems and most sensitive information.
Covered companies must also designate a Chief Information Security Officer, who must report to the board annually. The cybersecurity
policy must be in place, and the security officer designated, by August 28, 2017.
Testing
: The regulation requires the
conduct of cybersecurity tests and analyses, including a “risk assessment” to “evaluate and categorize risks,”
evaluate the integrity and confidentiality of information systems and non-public information, and develop a process to mitigate
any identified risks. These tests and assessments must be conducted by March 1, 2018.
Ongoing Requirements
: The regulation
imposes substantial day-to-day and technical requirements. Among others, we must develop access controls for our information systems,
ensure the physical security of our computer systems, encrypt or protect personally identifiable information, perform reviews of
in-house and externally created applications, train employees, and build an audit trail system. The timeline to ensure compliance
with these rules ranges from one year to eighteen months.
Vendors:
The new regulation also regulates
third-party vendors with access to our information technology or non-public information. We will be required to develop and implement
written policies and procedures to ensure the security of our information technology systems or non-public information that can
be accessed by our vendors, including identifying the risks from third-party access, imposing minimum cybersecurity practices for
vendors, and creating a due-diligence process for evaluating those vendors. We will have two years to satisfy these extensive requirements.
Reports:
The new regulation imposes a
notification process for any material cybersecurity event. Within 72 hours, a cybersecurity event that has a “reasonable
likelihood” of “materially harming” us or that must be reported to another government or self-regulating agency
must be reported to the NYDFS. In addition, an annual compliance certification to the NYDFS from either the board or a senior officer
is required.
FDIC Regulations
Capital Requirements.
The FDIC has adopted
risk-based capital guidelines to which the Bank is subject. The guidelines establish a systematic analytical framework that makes
regulatory capital requirements sensitive to differences in risk profiles among banking organizations. The Bank is required to
maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. The ratio of such regulatory capital
to regulatory risk-weighted assets is referred to as a “risk-based capital ratio.” Risk-based capital ratios are determined
by allocating assets and specified off-balance-sheet items to risk-weighted categories ranging from 0% to 1,250%, with higher
levels of capital being required for the categories perceived as representing greater risk.
These guidelines divide an institution’s
capital into two tiers. The first tier (“Tier 1”) includes common equity, retained earnings, certain non-cumulative
perpetual preferred stock (excluding auction rate issues), and minority interests in equity accounts of consolidated subsidiaries,
less goodwill and other intangible assets (except mortgage servicing rights and purchased credit card relationships subject to
certain limitations). Supplementary (“Tier 2”) capital includes, among other items, cumulative perpetual and long-term
limited-life preferred stock, mandatorily convertible securities, certain hybrid capital instruments, term subordinated debt,
and the allowance for loan losses, subject to certain limitations, and up to 45% of pre-tax net unrealized gains on equity securities
with readily determinable fair market values, less required deductions. Commercial banks are required to maintain a total risk-based
capital ratio of at least 8%, of which at least 4% must be Tier 1 capital.
In addition, the FDIC has established regulations
prescribing a minimum Tier 1 leverage capital ratio (the ratio of Tier 1 capital to adjusted average assets as specified in the
regulations). These regulations provide for a minimum Tier 1 leverage capital ratio of at least 4%. The FDIC may, however, set
higher leverage and risk-based capital requirements on individual institutions when particular circumstances warrant. Institutions
experiencing or anticipating significant growth are expected to maintain capital ratios, including tangible capital positions,
well above the minimum levels.
As of December 31, 2016, the Bank was deemed
to be well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, a bank
must maintain a minimum Tier 1 leverage capital ratio of 5%, a minimum common equity Tier 1 capital ratio of 6.5%, a minimum Tier
1 risk-based capital ratio of 8%, and a minimum total risk-based capital ratio of 10%. For a summary of the regulatory capital
ratios of the Bank at December 31, 2016, see “Note 14 of Notes to Consolidated Financial Statements” in Item 8
of this Annual Report.
The regulatory capital regulations of the FDIC
and other federal banking agencies provide that the agencies will take into account the exposure of an institution’s capital
and economic value to changes in interest rate risk in assessing capital adequacy. According to such agencies, applicable considerations
include the quality of the institution’s interest rate risk management process, overall financial condition, and the level
of other risks at the institution for which capital is needed. Institutions with significant interest rate risk may be required
to hold additional capital. The agencies have issued a joint policy statement providing guidance on interest rate risk management,
including a discussion of the critical factors affecting the agencies’ evaluation of interest rate risk in connection with
capital adequacy. Institutions that engage in specified amounts of trading activity may be subject to adjustments in the calculation
of the risk-based capital requirement to assure sufficient additional capital to support market risk.
Standards for Safety and Soundness.
Federal
law requires each federal banking agency to prescribe, for the depository institutions under its jurisdiction, standards that
relate to, among other things, internal controls; information and audit systems; loan documentation; credit underwriting; the
monitoring of interest rate risk; asset growth; compensation; fees and benefits; and such other operational and managerial standards
as the agency deems appropriate. The federal banking agencies adopted final regulations and Interagency Guidelines Establishing
Standards for Safety and Soundness (the “Guidelines”) to implement these safety and soundness standards. The Guidelines
set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution
fails to meet any standard prescribed by the Guidelines, the agency may require the institution to provide it with an acceptable
plan to achieve compliance with the standard, as required by the Federal Deposit Insurance Act, as amended, (the “FDI Act”).
The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans.
Real Estate Lending Standards
. The FDIC
and the other federal banking agencies have adopted regulations that prescribe standards for extensions of credit that are (i) secured
by real estate, or (ii) made for the purpose of financing construction or improvements on real estate. The FDIC regulations
require each institution to establish and maintain written internal real estate lending standards that are consistent with safe
and sound banking practices, and appropriate to the size of the institution and the nature and scope of its real estate lending
activities. The standards also must be consistent with accompanying FDIC guidelines, which include loan-to-value limitations for
the different types of real estate loans. Institutions are also permitted to make a limited amount of loans that do not conform
to the proposed loan-to-value limitations so long as such exceptions are reviewed and justified appropriately. The FDIC guidelines
also list a number of lending situations in which exceptions to the loan-to-value standard are justified.
Dividend Limitations.
The FDIC has
authority to use its enforcement powers to prohibit a commercial bank from paying dividends if, in its opinion, the payment of
dividends would constitute an unsafe or unsound practice. Federal law prohibits the payment of dividends that will result in the
institution failing to meet applicable capital requirements on a pro forma basis. The Bank is also subject to dividend declaration
restrictions imposed by New York State law as previously discussed under “New York State Law.”
Investment Activities.
Since the
enactment of FDICIA, all state-chartered financial institutions, including commercial banks and their subsidiaries, have generally
been limited to such activities as principal and equity investments of the type, and in the amount, authorized for national banks.
State law, FDICIA, and FDIC regulations permit certain exceptions to these limitations. In addition, the FDIC is authorized to
permit institutions to engage in state-authorized activities or investments not permitted for national banks (other than non-subsidiary
equity investments) for institutions that meet all applicable capital requirements if it is determined that such activities or
investments do not pose a significant risk to the insurance fund. The Gramm-Leach-Bliley Act of 1999 and FDIC regulations impose
certain quantitative and qualitative restrictions on such activities and on a bank’s dealings with a subsidiary that engages
in specified activities.
Prompt Corrective Regulatory Action
.
Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action”
with respect to institutions that do not meet minimum capital requirements. For such purposes, the law establishes five capital
tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.
The FDIC has adopted regulations to implement
prompt corrective action. Among other things, the regulations define the relevant capital measures for the five capital categories.
An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10% or greater, a
Tier 1 risk-based capital ratio of 8% or greater, a common equity Tier 1 risk-based capital ratio of 6.5% and a leverage capital
ratio of 5% or greater, and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital
level for any capital measure. An institution is deemed to be “adequately capitalized” if it has a total risk-based
capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 6% or greater, a common equity Tier 1 risk-based capital
ratio of 4.5% or greater and a leverage capital ratio of 4% or greater. An institution is deemed to be “undercapitalized”
if it has a total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than 6%, a common equity
Tier 1 risk-based capital ratio of less than 4.5% or a leverage capital ratio of less than 4%. An institution is deemed to be
“significantly undercapitalized” if it has a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital
ratio of less than 4% a common equity Tier 1 risk-based capital ratio of less than 3.0%, or a leverage capital ratio of less than
3%. An institution is deemed to be “critically undercapitalized” if it has a ratio of tangible equity (as defined
in the regulations) to total assets that is equal to or less than 2%.
“Undercapitalized”
institutions
are subject to growth, capital distribution (including dividend), and other limitations, and are required to submit a capital restoration
plan. An institution’s compliance with such plan is required to be guaranteed by any company that controls the undercapitalized
institution in an amount equal to the lesser of 5% of the bank’s total assets when deemed undercapitalized or the amount
necessary to achieve the status of adequately capitalized. If an undercapitalized institution fails to submit an acceptable plan,
it is treated as if it is “significantly undercapitalized.” Significantly undercapitalized institutions are subject
to one or more additional restrictions including, but not limited to, an order by the FDIC to sell sufficient voting stock to become
adequately capitalized; requirements to reduce total assets, cease receipt of deposits from correspondent banks, or dismiss directors
or officers; and restrictions on interest rates paid on deposits, compensation of executive officers, and capital distributions
by the parent holding company.
Beginning 60 days after becoming “critically
undercapitalized,” critically undercapitalized institutions also may not make any payment of principal or interest on certain
subordinated debt, or extend credit for a highly leveraged transaction, or enter into any material transaction outside the ordinary
course of business. In addition, subject to a narrow exception, the appointment of a receiver is required for a critically undercapitalized
institution within 270 days after it obtains such status.
Insurance of Deposit Accounts
. The Dodd-Frank
Act made permanent the standard maximum amount of FDIC deposit insurance at $250,000 per depositor. In addition, the deposits
of the Bank are insured up to applicable limits by the DIF. In this regard, insured depository institutions are required to pay
quarterly deposit insurance assessments to the DIF. Assessments are based on average total assets minus average tangible
equity. The assessment rate is determined through a risk-based system. For depository institutions with less than
$10 billion in assets, such as the Bank, under the FDIC’s risk-based assessment system, insured institutions are assigned
to one of four risk categories based upon supervisory evaluations, regulatory capital level, and certain other factors, with less
risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned
and certain other factors. The initial base assessment rate currently ranges from five to 35 basis points on an annualized basis.
The initial base assessment rate is then decreased depending on the institution's ratio of long-term unsecured debt to its assessment
base (with such decrease not to exceed the lesser of five basis points or 50% of the initial base assessment rate) and, for institutions
not in the highest risk category, increased if the institution's brokered deposits are more than ten percent of its domestic deposits
(with such increase not to exceed ten basis points). The current total base assessment rate is therefore from 2.5 to 45
basis points on an annualized basis.
The Dodd-Frank Act increased the minimum target
DIF ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35%
ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The
Dodd-Frank Act eliminated the 1.5% maximum fund ratio, leaving it, instead, to the discretion of the FDIC. The FDIC has exercised
that discretion by establishing a long range fund ratio of 2%, which could result in our paying higher deposit insurance premiums
in the future.
Insurance of deposits may be terminated by
the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC. Management
does not know of any practice, condition, or violation that would lead to termination of the deposit insurance of the Bank.
As part of an omnibus appropriations bill,
the Deposit Insurance Funds Act of 1996 (the “Funds Act”) was enacted. The Funds Act required Bank Insurance Fund
(“BIF”) institutions, including the Savings Bank, beginning January 1, 1997, to pay a portion of the interest
due on the Finance Corporation (“FICO”) bonds issued in connection with the savings and loan association crisis in
the late 1980s, and required BIF institutions to pay their full pro rata share of the FICO payments starting the earlier of January
1, 2000 or the date at which no savings institution continues to exist. We were required, as of January 1, 2000, to pay our full
pro rata share of the FICO payments. The FICO assessment rate is subject to change. The Bank paid $297,000, $278,000 and $267,000
for their share of the interest due on FICO bonds in 2016, 2015 and 2014, respectively, which is included in FDIC insurance expense.
These payments, which generally approximate 10% of the Bank's annual FDIC insurance payments, will continue until those bonds
mature through 2019.
Brokered Deposits.
The FDIC has
promulgated regulations implementing the FDICIA limitations on brokered deposits. Under the regulations, well-capitalized institutions
are not subject to brokered deposit limitations, while adequately capitalized institutions are able to accept, renew or roll over
brokered deposits only with a waiver from the FDIC and subject to restrictions on the interest rate that can be paid on such deposits.
Undercapitalized institutions are not permitted to accept brokered deposits and may not solicit deposits by offering an effective
yield that exceeds by more than 75 basis points the prevailing effective yields on insured deposits of comparable maturity in
the institution’s normal market area or in the market area in which such deposits are being solicited. Pursuant to the regulation,
the Bank, as a well-capitalized institution, may accept brokered deposits. At December 31, 2016, the Bank had $1,114.9 million
in brokered deposit accounts.
Transactions with Affiliates
Under current federal law, transactions
between depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act and the FRB’s
Regulation W promulgated thereunder. An affiliate of a commercial bank is any company or entity that controls, is controlled by,
or is under common control with, the institution, other than a subsidiary. Generally, an institution’s subsidiaries are not
treated as affiliates unless they are engaged in activities as principal that are not permissible for national banks. In a holding
company context, at a minimum, the parent holding company of an institution, and any companies that are controlled by such parent
holding company, are affiliates of the institution. Generally, Section 23A limits the extent to which the institution or its
subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of the institution’s
capital stock and surplus, and contains an aggregate limit on all such transactions with all affiliates to an amount equal to 20%
of such capital stock and surplus. The term “covered transaction” includes the making of loans or other extensions
of credit to an affiliate; the purchase of assets from an affiliate; the purchase of, or an investment in, the securities of an
affiliate; the acceptance of securities of an affiliate as collateral for a loan or extension of credit to any person; or issuance
of a guarantee, acceptance, or letter of credit on behalf of an affiliate. Section 23A also establishes specific collateral
requirements for loans or extensions of credit to, or guarantees or acceptances on letters of credit issued on behalf of, an affiliate.
Section 23B requires that covered transactions and a broad list of other specified transactions be on terms substantially
the same as, or at least as favorable to, the institution or its subsidiary as similar transactions with non-affiliates.
The Sarbanes-Oxley Act of 2002 generally
prohibits loans by the Company to its executive officers and directors. However, the Sarbanes-Oxley Act contains a specific exemption
for loans by an institution to its executive officers and directors in compliance with federal banking laws. Section 22(h)
of the Federal Reserve Act, and FRB Regulation O adopted thereunder, governs loans by a savings bank or commercial bank to directors,
executive officers, and principal shareholders. Under Section 22(h), loans to directors, executive officers, and shareholders
who control, directly or indirectly, 10% or more of voting securities of an institution, and certain related interests of any of
the foregoing, may not exceed, together with all other outstanding loans to such persons and affiliated entities, the institution’s
total capital and surplus. Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking
agency to directors, executive officers, and shareholders who control 10% or more of the voting securities of an institution, and
its respective related interests, unless such loan is approved in advance by a majority of the board of the institution’s
directors. Any “interested” director may not participate in the voting. The loan amount (which includes all other outstanding
loans to such person) as to which such prior board of director approval is required, is the greater of $25,000 or 5% of capital
and surplus or any loans aggregating over $500,000. Further, pursuant to Section 22(h), loans to directors, executive officers,
and principal shareholders must be made on terms substantially the same as those offered in comparable transactions to other persons.
There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of
the institution and does not give preference to executive officers over other employees. Section 22(g) of the Federal Reserve
Act places additional limitations on loans to executive officers.
Community Reinvestment Act
Federal Regulation
. Under the Community
Reinvestment Act (“CRA”), as implemented by FDIC regulations, an institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate
income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does
it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the FDIC, in connection with its examinations, to assess the institution’s
record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications
by such institution. The CRA requires public disclosure of an institution’s CRA rating and further requires the FDIC to provide
a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. The Bank received
a CRA rating of “Satisfactory” in its most recent completed CRA examination, which was completed as of April 16, 2015.
Institutions that receive less than a satisfactory rating may face difficulties in securing approval for new activities or acquisitions.
The CRA requires all institutions to make public disclosures of their CRA ratings. As a special purpose commercial bank, the Commercial
Bank was not required to comply with the CRA prior to the Merger. Since the Merger, the Bank is required to comply with CRA.
New York State Regulation
. The Bank
is also subject to provisions of the New York State Banking Law that impose continuing and affirmative obligations upon a banking
institution organized in New York State to serve the credit needs of its local community (the “NYCRA”). Such obligations
are substantially similar to those imposed by the CRA. The NYCRA requires the NYDFS to make a periodic written assessment of an
institution’s compliance with the NYCRA, utilizing a four-tiered rating system, and to make such assessment available to
the public. The NYCRA also requires the Superintendent to consider the NYCRA rating when reviewing an application to engage in
certain transactions, including mergers, asset purchases, and the establishment of branch offices or ATMs, and provides that such
assessment may serve as a basis for the denial of any such application.
Federal Reserve System
Under FRB regulations, the Bank is required
to maintain reserves against its transaction accounts. The FRB regulations generally require that reserves be maintained against
aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $103.6 million or less (subject
to adjustment by the FRB), the reserve requirement is 3%; for amounts greater than $103.6 million, the reserve requirement is 10%
(subject to adjustment by the FRB between 8% and 14%). The first $14.5 million of otherwise reservable balances (subject to adjustments
by the FRB) are exempted from the reserve requirements. The Bank is in compliance with the foregoing requirements.
Federal Home Loan Bank System
The Bank is a member of the FHLB-NY, one
of 11 regional FHLBs comprising the FHLB system. Each regional FHLB manages its customer relationships, while the 11 FHLBs use
its combined size and strength to obtain its necessary funding at the lowest possible cost. As a member of the FHLB-NY, the Bank
is required to acquire and hold shares of FHLB-NY capital stock. Pursuant to this requirement, at December 31, 2016, the Bank was
required to maintain $59.2 million of FHLB-NY stock.
Holding Company Regulation
Subsequent to the Merger, the Company
is subject to examination, regulation, and periodic reporting under the Bank Holding Company Act of 1956, as amended (the “BHCA”),
as administered by the FRB. The Company is required to obtain the prior approval of the FRB to acquire all, or substantially all,
of the assets of any bank or bank holding company. Prior FRB approval would be required for the Company to acquire direct or indirect
ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition,
it would, directly or indirectly, own or control more than 5% of any class of voting shares of such bank or bank holding company.
In addition before any bank acquisition can be completed, prior approval thereof may also be required to be obtained from other
agencies having supervisory jurisdiction over the bank to be acquired, including the NYDFS.
FRB regulations generally prohibit a bank holding
company from engaging in, or acquiring, direct or indirect control of more than 5% of the voting securities of any company engaged
in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the FRB to be so closely
related to banking or managing or controlling Bank as to be a proper incident thereto. Some of the principal activities that the
FRB has determined by regulation to be so closely related to banking are: (i) making or servicing loans; (ii) performing
certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary, investment,
or financial advisor; (v) leasing personal or real property; (vi) making investments in corporations or projects designed
primarily to promote community welfare; and (vii) acquiring a savings and loan association.
The FRB has adopted capital adequacy guidelines
for bank holding companies (on a consolidated basis). At December 31, 2016, the Company’s consolidated capital exceeded these
requirements. The Dodd-Frank Act required the FRB to issue consolidated regulatory capital requirements for bank holding companies
that are at least as stringent as those applicable to insured depository institutions. Such regulations eliminated the use of certain
instruments, such as cumulative preferred stock and trust preferred securities, as Tier 1 holding company capital.
Bank holding companies are generally required
to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration
for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the
preceding twelve months, is equal to 10% or more of the Company’s consolidated net worth. The FRB may disapprove such a purchase
or redemption if it determines that the proposal would constitute an unsafe or unsound practice, or would violate any law, regulation,
FRB order or directive, or any condition imposed by, or written agreement with, the FRB. The FRB has adopted an exception to this
approval requirement for well-capitalized bank holding companies that meet certain other conditions.
The FRB has issued a policy statement regarding
the payment of dividends by bank holding companies. In general, the FRB’s policies provide that dividends should be paid
only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent
with the organization’s capital needs, asset quality, and overall financial condition. The FRB’s policies also require
that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available
resources to provide adequate capital funds to those banks during periods of financial stress or adversity, and by maintaining
the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where
necessary. The Dodd-Frank Act codifies the source of financial strength policy and requires regulations to facilitate its application.
Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary
bank becomes undercapitalized. These regulatory policies could affect the ability of the Company to pay dividends or otherwise
engage in capital distributions.
Under the FDI Act, a depository institution
may be liable to the FDIC for losses caused the DIF if a commonly controlled depository institution were to fail. The Bank is commonly
controlled within the meaning of that law.
The status of the Company as a registered
bank holding company under the BHCA does not exempt it from certain federal and state laws and regulations applicable to corporations
generally, including, without limitation, certain provisions of the federal securities laws.
The Company, the Bank, and their respective
affiliates will be affected by the monetary and fiscal policies of various agencies of the United States Government, including
the Federal Reserve System. In view of changing conditions in the national economy and in the money markets, it is difficult for
management to accurately predict future changes in monetary policy or the effect of such changes on the business or financial condition
of the Company or the Bank.
Acquisition of the Holding Company
Under the Federal Change in Bank Control
Act (“CIBCA”), a notice must be submitted to the FRB if any person (including a company), or group acting in concert,
seeks to acquire 10% or more of the Company’s shares of outstanding common stock, unless the FRB has found that the acquisition
will not result in a change in control of the Company. Under the CIBCA, the FRB generally has 60 days within which to act on such
notices, taking into consideration certain factors, including the financial and managerial resources of the acquirer; the convenience
and needs of the communities served by the Company and the Bank; and the anti-trust effects of the acquisition. Under the BHCA,
any company would be required to obtain approval from the FRB before it may obtain “control” of the Company within
the meaning of the BHCA. Control generally is defined to mean the ownership or power to vote 25% or more of any class of voting
securities of the Company or the ability to control in any manner the election of a majority of the Company’s directors.
An existing bank holding company would, under the BHCA, be required to obtain the FRB’s approval before acquiring more than
5% of the Company’s voting stock. In addition to the CIBCA and the BHCA, New York State Banking Law generally requires prior
approval of the New York State Banking Board before any action is taken that causes any company to acquire direct or indirect control
of a banking institution that is organized in New York.
Consumer Financial Protection Bureau
Created under the Dodd-Frank Act, and given
extensive implementation and enforcement powers, the CFPB has broad rulemaking authority for a wide range of consumer financial
laws that apply to all banks, including, among other things, the authority to prohibit “unfair, deceptive, or abusive”
acts and practices. Abusive acts or practices are defined as those that (1) materially interfere with a consumer’s ability
to understand a term or condition of a consumer financial product or service, or (2) take unreasonable advantage of a consumer’s
(a) lack of financial savvy, (b) inability to protect himself in the selection or use of consumer financial products
or services, or (c) reasonable reliance on a covered entity to act in the consumer’s interests. The CFPB has the authority
to investigate possible violations of federal consumer financial law, hold hearings and commence civil litigation. The CFPB can
issue cease-and-desist orders against banks and other entities that violate consumer financial laws. The CFPB may also institute
a civil action against an entity in violation of federal consumer financial law in order to impose a civil penalty or an injunction.
Mortgage Banking and Related Consumer Protection Regulations
The retail activities of the Bank, including
lending and the acceptance of deposits, are subject to a variety of statutes and regulations designed to protect consumers. Interest
and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest
rates. Loan operations are also subject to federal laws applicable to credit transactions, such as:
|
•
|
|
The federal Truth-In-Lending Act and Regulation Z issued by the FRB, governing disclosures of credit terms to consumer borrowers;
|
|
•
|
|
The Home Mortgage Disclosure Act and Regulation C issued by the FRB, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
|
|
•
|
|
The Equal Credit Opportunity Act and Regulation B issued by the FRB, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
|
|
•
|
|
The Fair Credit Reporting Act and Regulation V issued by the FRB, governing the use and provision of information to consumer reporting agencies;
|
|
•
|
|
The Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and
|
|
•
|
|
The guidance of the various federal agencies charged with the responsibility of implementing such federal laws.
|
Deposit operations also are subject to:
|
•
|
|
The Truth in Savings Act and Regulation DD issued by the FRB, which requires disclosure of deposit terms to consumers;
|
|
•
|
|
Regulation CC issued by the FRB, which relates to the availability of deposit funds to consumers;
|
|
•
|
|
The Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and
|
|
•
|
|
The Electronic Funds Transfer Act and Regulation E issued by the FRB, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
|
In addition, the Bank and its subsidiaries may
also be subject to certain state laws and regulations designed to protect consumers.
Many of the foregoing laws and regulations
are subject to change resulting from the provisions in the Dodd-Frank Act, which in many cases calls for revisions to implementing
regulations. In addition, oversight responsibilities of these and other consumer protection laws and regulations will, in large
measure, transfer from the Bank’s primary regulators to the CFPB. We cannot predict the effect that being regulated by a
new, additional regulatory authority focused on consumer financial protection, or any new implementing regulations or revisions
to existing regulations that may result from the establishment of this new authority, will have on our businesses.
Available Information
We are a reporting company and file annual,
quarterly and current reports, proxy statements and other information with the SEC. We make available free of charge on or through
our web site at www.flushingbank.com our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as
soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our SEC filings are
also available to the public free of charge over the Internet at the SEC’s web site at http://www.sec.gov.
You may also read and copy any document we file
at the SEC’s public reference room located at 100 F. Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information
about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. You may request copies of these documents
by writing to the SEC and paying a fee for the copying cost.
Item 1A. Risk Factors.
In addition to the other information contained
in this Annual Report, the following factors and other considerations should be considered carefully in evaluating us and our business.
Changes in Interest Rates May Significantly
Impact Our Financial Condition and Results of Operations
Like most financial institutions, our results
of operations depend to a large degree on our net interest income. When interest-bearing liabilities mature or reprice more quickly
than interest-earning assets, a significant increase in market interest rates could adversely affect net interest income. Conversely,
a significant decrease in market interest rates could result in increased net interest income. As a general matter, we seek to
manage our business to limit our overall exposure to interest rate fluctuations. However, fluctuations in market interest rates
are neither predictable nor controllable and may have a material adverse impact on our operations and financial condition. Additionally,
in a rising interest rate environment, a borrower’s ability to repay adjustable rate mortgages can be negatively affected
as payments increase at repricing dates.
Prevailing interest rates also affect the extent
to which borrowers repay and refinance loans. In a declining interest rate environment, the number of loan prepayments and loan
refinancing may increase, as well as prepayments of mortgage-backed securities. Call provisions associated with our investment
in U.S. government agency and corporate securities may also adversely affect yield in a declining interest rate environment. Such
prepayments and calls may adversely affect the yield of our loan portfolio and mortgage-backed and other securities as we reinvest
the prepaid funds in a lower interest rate environment. However, we typically receive additional loan fees when existing loans
are refinanced, which partially offset the reduced yield on our loan portfolio resulting from prepayments. In periods of low interest
rates, our level of core deposits also may decline if depositors seek higher-yielding instruments or other investments not offered
by us, which in turn may increase our cost of funds and decrease our net interest margin to the extent alternative funding sources
are utilized. An increasing interest rate environment would tend to extend the average lives of lower yielding fixed rate mortgages
and mortgage-backed securities, which could adversely affect net interest income. In addition, depositors tend to open longer term,
higher costing certificate of deposit accounts which could adversely affect our net interest income if rates were to subsequently
decline. Additionally, adjustable rate mortgage loans and mortgage-backed securities generally contain interim and lifetime caps
that limit the amount the interest rate can increase or decrease at repricing dates. Significant increases in prevailing interest
rates may significantly affect demand for loans and the value of bank collateral. See “— Local Economic Conditions.”
Our Lending Activities Involve Risks
that May Be Exacerbated Depending on the Mix of Loan Types
At December 31, 2016, our gross loan portfolio
was $4,819.1 million, of which 86.9% was mortgage loans secured by real estate. The majority of these real estate loans were secured
by multi-family residential property ($2,178.5 million), commercial real estate ($1,246.1 million) and one-to-four family mixed-use
property ($558.5 million), which combined represent 82.7% of our loan portfolio. Our loan portfolio is concentrated in the New
York City metropolitan area. Multi-family residential, one-to-four family mixed-use property, commercial real estate mortgage loans,
and construction loans, are generally viewed as exposing the lender to a greater risk of loss than fully underwritten one-to-four
family residential mortgage loans and typically involve higher principal amounts per loan. Multi-family residential, one-to-four
family mixed-use property and commercial real estate mortgage loans are typically dependent upon the successful operation of the
related property, which is usually owned by a legal entity with the property being the entity’s only asset. If the cash flow
from the property is reduced, the borrower’s ability to repay the loan may be impaired. If the borrower defaults, our only
remedy may be to foreclose on the property, for which the market value may be less than the balance due on the related mortgage
loan. We attempt to mitigate this risk by generally requiring a loan-to-value ratio of no more than 75% at a time the loan is originated,
except for one-to-four family residential mortgage loans, where we require a loan-to value ratio of no more than 80%. Repayment
of construction loans is contingent upon the successful completion and operation of the project. The repayment of commercial business
loans (the increased origination of which is part of management’s strategy), is contingent on the successful operation of
the related business. Changes in local economic conditions and government regulations, which are outside the control of the borrower
or lender, also could affect the value of the security for the loan or the future cash flow of the affected properties. We continually
review the composition of our mortgage loan portfolio to manage the risk in the portfolio.
In addition, prior to 2010, we have originated
one-to-four family residential mortgage loans without verifying the borrower’s level of income. These loans involve a higher
degree of risk as compared to our other fully underwritten one-to-four family residential mortgage loans. These risks are mitigated
by our policy to generally limit the amount of one-to-four family residential mortgage loans to 80% of the appraised value or sale
price, whichever is less, as well as charging a higher interest rate than when the borrower’s income is verified. At December
31, 2016, we had $9.0 million outstanding of one-to-four family residential properties originated to individuals based on stated
income and verifiable assets, and $36.6 million advanced on home equity lines of credit for which we did not verify the borrower’s
income. The total loans for which we did not verify the borrower’s income at December 31, 2016 was $45.6 million, or 0.9%
of gross loans. These types of loans are generally referred to as “Alt A” loans since the borrower’s income was
not verified. These loans are not as readily saleable in the secondary market as our other fully underwritten loans, either as
whole loans or when pooled or securitized. We no longer originate one-to-four family residential mortgage loans or home equity
lines of credit to individuals without verifying their income. We have not originated, nor do we hold in portfolio, any subprime
loans.
Even in stable economic times, higher default
rates may be expected for Alt A and similar loans. Although we attempted to incorporate the higher default rates associated with
these loans into our pricing models, there can be no assurance that the premiums earned and the associated investment income will
prove adequate to compensate for future losses from these loans. Worsening economic conditions, rising unemployment rates and/or
other regional real estate price declines could even more significantly increase the default risks associated with these loans.
In addition, these same negative economic and market conditions could also significantly increase the default risk on loans for
which we did not assume higher default and claim rates.
In assessing our future earnings prospects,
investors should consider, among other things, our level of origination of one-to-four family residential, multi-family residential,
commercial real estate and one-to-four family mixed-use property mortgage loans, and commercial business and construction loans,
and the greater risks associated with such loans. See “Business — Lending Activities” in Item 1 of this Annual
Report.
Failure to Effectively Manage Our Liquidity Could
Significantly Impact Our Financial Condition and Results of Operations
Our liquidity is critical to our ability to
operate our business. Our primary sources of liquidity are deposits, both retail deposits from our branch network including iGObanking.com®,
brokered deposits, and borrowed funds, primarily wholesale borrowing from the FHLB-NY. Funds are also provided by the repayment
and sale of securities and loans. Our ability to obtain funds are influenced by many external factors, including but not limited
to, local and national economic conditions, the direction of interest rates and competition for deposits in the markets we serve.
Additionally, changes in the FHLB-NY underwriting guidelines may limit or restrict our ability to borrow. A decline in available
funding caused by any of the above factors or could adversely impact our ability to originate loans, invest in securities, meet
our expenses, or fulfill our obligations such as repaying our borrowings or meeting deposit withdrawal demands.
Our Ability to Obtain Brokered Deposits
as an Additional Funding Source Could be Limited
We utilize brokered deposits as an additional
funding source and to assist in the management of our interest rate risk. The Bank had $1,114.9 million, or 26.5% of total deposits,
and $982.8 million, or 25.2% of total deposits, in brokered deposit accounts at December 31, 2016 and 2015, respectively. We have
obtained brokered certificates of deposit when the interest rate on these deposits is below the prevailing interest rate for non-brokered
certificates of deposit with similar maturities in our market, or when obtaining them allowed us to extend the maturities of our
deposits at favorable rates compared to borrowing funds with similar maturities, when we are seeking to extend the maturities of
our funding to assist in the management of our interest rate risk. Brokered certificates of deposit provide a large deposit for
us at a lower operating cost as compared to non-brokered certificates of deposit since we only have one account to maintain versus
several accounts with multiple interest and maturity checks. Unlike non-brokered certificates of deposit where the deposit amount
can be withdrawn with a penalty for any reason, including increasing interest rates, a brokered certificate of deposit can only
be withdrawn in the event of the death or court declared mental incompetence of the depositor. This allows us to better manage
the maturity of our deposits and our interest rate risk. We also utilize brokers to obtain money market account deposits. The rate
we pay on brokered money market accounts is the same or below the rate we pay on non-brokered money market accounts, and the rate
is agreed to in a contract between the Bank and the broker. These accounts are similar to brokered certificates of deposit accounts
in that we only maintain one account for the total deposit per broker, with the broker maintaining the detailed records of each
depositor. Additionally, we place a portion of our government deposits in an ICS brokered money market product which does not require
us to provide collateral. This allows us to invest our funds in higher yielding assets. The Bank had $655.0 million and $339.8
million in brokered money market accounts at December 31, 2016 and 2015, respectively. The Bank also had $1.1 million and $17.8
million in brokered checking accounts at December 31, 2016 and 2015, respectively.
The FDIC has promulgated regulations implementing
limitations on brokered deposits. Under the regulations, well-capitalized institutions, such as the Bank, are not subject to brokered
deposit limitations, while adequately capitalized institutions are able to accept, renew or roll over brokered deposits only with
a waiver from the FDIC and subject to restrictions on the interest rate that can be paid on such deposits. Undercapitalized institutions
are not permitted to accept brokered deposits. Pursuant to the regulation, the Bank, as a well-capitalized institution, may accept
brokered deposits. Should our capital ratios decline, this could limit our ability to replace brokered deposits when they mature.
The maturity of brokered certificates of deposit
could result in a significant funding source maturing at one time. Should this occur, it might be difficult to replace the maturing
certificates with new brokered certificates of deposit. We have used brokers to obtain these deposits which results in depositors
with whom we have no other relationships since these depositors are outside of our market, and there may not be a sufficient source
of new brokered certificates of deposit at the time of maturity. In addition, upon maturity, brokers could require us to offer
some of the highest interest rates in the country to retain these deposits, which would negatively impact our earnings. The Bank
mitigates this risk by obtaining brokered certificates of deposit with various maturities ranging up to six years, and attempts
to avoid having a significant amount maturing in any one year.
The Markets in Which We Operate
Are Highly Competitive
We face intense and increasing competition both
in making loans and in attracting deposits. Our market area has a high density of financial institutions, many of which have greater
financial resources, name recognition and market presence than us, and all of which are our competitors to varying degrees. Particularly
intense competition exists for deposits and in all of the lending activities we emphasize. Our competition for loans comes principally
from commercial banks, savings banks, savings and loan associations, mortgage banking companies, insurance companies, finance companies
and credit unions. Management anticipates that competition for mortgage loans will continue to increase in the future. Our most
direct competition for deposits historically has come from savings banks, commercial banks, savings and loan associations and credit
unions. In addition, we face competition for deposits from products offered by brokerage firms, insurance companies and other financial
intermediaries, such as money market and other mutual funds and annuities. Consolidation in the banking industry and the lifting
of interstate banking and branching restrictions have made it more difficult for smaller, community-oriented banks, such as us,
to compete effectively with large, national, regional and super-regional banking institutions. Our internet branch, “iGObanking.com
®
”,
a division of the Bank, provides us access to consumers in markets outside our geographic locations. The internet banking arena
exposes us to competition with many larger financial institutions that have greater financial resources, name recognition and market
presence than we do.
Our Results of Operations May Be
Adversely Affected by Changes in National and/or Local Economic Conditions
Our operating results are affected by national
and local economic and competitive conditions, including changes in market interest rates, the strength of the local economy, government
policies and actions of regulatory authorities. During the Great Recession, for example, unemployment increased, the housing market
in the United States experienced a significant slowdown, and foreclosures rose. Adverse economic conditions can result in borrowers
defaulting on their loans, or withdrawing their funds on deposit at the Bank to meet their financial obligations. A decline in
the local or national economy or the New York City metropolitan area real estate market could adversely affect our financial condition
and results of operations, including through decreased demand for loans or increased competition for good loans, increased non-performing
loans and loan losses and resulting additional provisions for loan losses and for losses on real estate owned. Many factors could
require additions to the allowance for loan losses in future periods above those currently maintained. These factors include: (1)
adverse changes in economic conditions and changes in interest rates that may affect the ability of borrowers to make payments
on loans, (2) changes in the financial capacity of individual borrowers, (3) changes in the local real estate market and the value
of our loan collateral, and (4) future review and evaluation of our loan portfolio, internally or by regulators. The amount of
the allowance for loan losses at any time represents good faith estimates that are susceptible to significant changes due to changes
in appraisal values of collateral, national and local economic conditions, prevailing interest rates and other factors. See “Business
— General — Allowance for Loan Losses” in Item 1 of this Annual Report.
These same factors could cause delinquencies
to increase for the mortgages which are the collateral for the mortgage-backed securities we hold in our investment portfolio.
Combining increased delinquencies with liquidity problems in the market could result in a decline in the market value of our investments
in privately issued mortgage-backed securities. There can be no assurance that a decline in the market value of these investments
will not result in other-than-temporary impairment charges in our financial statements.
Changes in Laws and Regulations Could
Adversely Affect Our Business
From time to time, legislation, such as the
Dodd-Frank Act, is enacted or regulations are promulgated that have the effect of increasing the cost of doing business, limiting
or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals
to change the laws and regulations governing the operations and taxation of banks and other financial institutions are frequently
made in Congress, in the New York legislature and before various bank regulatory agencies. In particular, on February 3, 2017,
President Trump signed an executive order requiring a comprehensive review of financial system regulations, including the Dodd-Frank
Act. President Trump has promised other significant changes to financial system regulations. Nonetheless, changes to these regulations
are expected to be politically controversial and may be slow and unpredictable in enactment and effect. It is too early to predict
when or what, if any, existing regulations affecting us will be repealed or amended and what if any new regulations affecting us
will be adopted, leaving the bank regulatory environment particularly uncertain at present. Further, there can be no assurance
as to the impact that any laws, regulations or governmental programs that may be introduced or implemented in the future will have
on the financial markets and the economy. . For a discussion of regulations affecting us, see “Business —Regulation”
and “Business—Federal, State and Local Taxation” in Item 1 of this Annual Report.
Current Conditions in, and Regulation
of, the Banking Industry May Have a Material Adverse Effect on Our Results of Operations
Financial institutions have been the subject
of significant legislative and regulatory changes and may be the subject of further significant legislation or regulation in the
future, none of which is within our control. Significant new laws or regulations or changes in, or repeals of, existing laws or
regulations, including those with respect to federal and state taxation, may cause our results of operations to differ materially.
In addition, the cost and burden of compliance, over time, have significantly increased and could adversely affect our ability
to operate profitably.
In particular, as noted above the Dodd-Frank
Act has been implemented in significant part. The Dodd-Frank Act imposes a variety of regulations affecting us, including:
|
·
|
New Regulators
. The Dodd-Frank Act initiated changes in our regulatory regimes that over
time evolved such that we became subject to regulation, supervision and examination by two federal banking agencies, the FDIC and
the Federal Reserve. The Dodd-Frank Act also provided for the creation of the Consumer Financial Protection Bureau (the “CFPB”).
The CFPB has the authority to implement and enforce a variety of existing consumer protection statutes and to issue new regulations.
The CFPB has focused its attention on consumers and pursuing enforcement or corrective measures in addition to those imposed by
other bank regulatory agencies. In addition to regulatory changes promised by President Trump, he has indicated his intention,
facilitated by Congressional support, to reduce the powers and impact of the CFPB. It is too early to predict when or what, if
any, powers of the CFPB will be repealed or amended, leaving the CFPB regulatory environment particularly uncertain at present.
|
|
·
|
Consolidated Holding Company Capital Requirements.
The Dodd-Frank Act required the federal
banking agencies to establish consolidated risk-based and leverage capital requirements for insured depository institutions, depository
institution holding companies and systemically important nonbank financial companies. The Company is a bank holding company subject
to these consolidated capital requirements. Among other things, the new requirements effectively eliminated the use of newly-issued
trust preferred securities as a component of Tier 1 Capital for depository institution holding companies of our size.
|
|
·
|
Roll Back of Federal Preemption.
The Dodd-Frank Act significantly rolls back the federal
preemption of state consumer protection laws that federal savings associations and national banks currently enjoy by (1) permitting
federal preemption of a state consumer financial law only if such law prevents or significantly interferes with the exercise of
a federal savings association’s or national bank’s powers or such state law is preempted by another federal law, (2)
mandating that any preemption decision be made on a case by case basis rather than a blanket rule, and (3) ending the applicability
of preemption to subsidiaries and affiliates of national banks and federal savings associations. As a result, we may now be subject
to state laws in each state where we do business, and those laws may be interpreted and enforced differently in different states.
|
The Dodd-Frank Act also includes provisions,
subject to further rulemaking by the federal bank regulatory agencies, that may affect our future operations, including provisions
that create minimum standards for the origination of mortgages, restrict proprietary trading by banking entities, restrict the
sponsorship of and investment in hedge funds and private equity funds by banking entities that remove certain obstacles to the
conversion of savings associations to national banks. We will not be able to determine the impact of these provisions until final
rules are promulgated to implement these provisions and other regulatory guidance is provided interpreting these provisions.
At the New York State level, the Company and
the Bank are subject to extensive supervision, regulation and examination by the NYDFS and the FDIC. Such regulation limits the
manner in which the Company and Bank conduct business, undertake new investments and activities and obtain financing. This regulation
is designed primarily for the protection of the deposit insurance funds and the Bank's depositors, and not to benefit the Bank
or its creditors. The regulatory structure also provides the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including policies with respect to capital levels, the classification
of assets and the establishment of adequate loan loss reserves for regulatory purposes. Failure to comply with applicable
laws and regulations could subject the Company and Bank to regulatory enforcement action that could result in the assessment of
significant civil money penalties against the Company and Bank.
The fiscal and monetary policies of the federal
government and its agencies could have a material adverse effect on the Company's results of operations. The Federal Reserve regulates
the supply of money and credit in the United States. Its policies determine in significant part the cost of funds for lending
and investing and the return earned on those loans and investments, both of which affect the Company's net interest margin.
Governmental policies can also adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans.
Changes in Federal Reserve or governmental policies are beyond the Company's control and difficult to predict; consequently, the
impact of these changes on the Company's activities and results of operations is difficult to predict.
As noted above, financial institution regulation
has been the subject of significant legislation in recent years, and may be the subject of further significant legislation in the
future, especially in light of the uncertainty of initiatives suggested by the Trump administration in the context of a Republican-controlled
Congress, none of which is within the control of the Company or the Bank. Significant new laws or changes in, or repeals of, existing
laws, may cause the Company's results of operations to differ materially. Further, federal monetary policy significantly affects
credit conditions for the Company, primarily through open market operations in United States government securities, the discount
rate for bank borrowings and reserve requirements for liquid assets. A material change in any of these conditions could have a
material adverse impact on the Bank, and therefore, on the Company's results of operations.
The FDIC’s Restoration Plan
and Related Increased Assessment Rates May Have a Material Effect on Our Results of Operations
In 2016, the FDIC approved a final rule that
imposes a surcharge on the quarterly assessments of institutions with total consolidated assets of $10 billion or more to increase
the reserve ratio of the DIF from 1.15 percent to 1.35 percent, as required by the Dodd-Frank Act. If this surcharge is insufficient
to increase the reserve ratio to 1.35 percent by December 31, 2018, a one-time shortfall assessment will be imposed on institutions
with total consolidated assets of $10 billion (small banks) or more on March 31, 2019. The rule also provides assessment credits
to institutions with total consolidated assets of less than $10 billion to offset the effect of the increase in the reserve ratio
on these institutions, such as us. The final rule also noted that assessment rates for all established small banks will be determined
using financial measures and supervisory ratings derived from a statistical model estimating the probability of failure over three
years. The new pricing system eliminates risk categories, but establishes minimum and maximum assessment rates for established
small banks based on the regulatory safety and soundness rating assigned to the Bank. The final rule is revenue neutral; that is,
it leaves aggregate assessment revenue collected from small banks approximately the same as it would have been absent the final
rule. Therefore, depending on what circumstances will achieve revenue neutrality and whether new rules applicable to us are adopted,
the FDIC’s rulemaking and related new assessment rates may have a material adverse effect on our results of operations.
There is no guarantee that the rules described
above be sufficient for the DIF to meet its funding requirements, which may necessitate further rulemaking, special assessments
or increases in deposit insurance premiums. Any such future rulemaking, assessments or increases could have a further material
impact on our results of operations.
Section 620 of the Dodd-Frank Act required federal
banking agencies to conduct a study and report to Congress on the types of activities and investments permissible for banking entities
such as us, the associated risks, and how banking entities mitigate those risks. The report was finalized and delivered in September
2016. Each regulatory agency prepared the section of the report relative to the banking entities that it supervises. Each of the
three sections of the report includes a discussion of permissible activities, risk mitigation, legal limitations, and specific
recommendations as required by the Dodd-Frank Act. It is too early to determine what if any regulatory new or changed regulatory
measures may arise from the report, which adds to the currently uncertain regulatory landscape for us.
A Failure in or Breach of Our Operational or Security Systems
or Infrastructure, or Those of Our Third Party Vendors and Other Service Providers, Including as a Result of Cyber Attacks, Could
Disrupt Our Business, Result in the Disclosure or Misuse of Confidential or Proprietary Information, Damage Our Reputation, Increase
Our Costs and Cause Losses.
We depend upon our ability to process, record
and monitor our client transactions on a continuous basis. As client, public and regulatory expectations regarding operational
and information security have increased, our operational systems and infrastructure must continue to be safeguarded and monitored
for potential failures, disruptions and breakdowns. Our business, financial, accounting and data processing systems, or other operating
systems and facilities, may stop operating properly or become disabled or damaged as a result of a number of factors, including
events that are wholly or partially beyond our control. For example, there could be electrical or telecommunications outages; natural
disasters such as earthquakes, tornadoes and hurricanes; disease pandemics; events arising from local or larger scale political
or social matters, including terrorist acts; and, as described below, cyber-attacks. Although we have business continuity plans
and other safeguards in place, our business operations may be adversely affected by significant and widespread disruption to our
physical infrastructure or operating systems that support our business and clients.
Information security risks for financial institutions
such as ours have generally increased in recent years in part because of the proliferation of new technologies, the use of the
internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities
of organized crime, hackers, terrorists, activists and other external parties. As noted above, our operations rely on the secure
processing, transmission and storage of confidential information in our computer systems and networks. Our business relies on our
digital technologies, computer and email systems, software and networks to conduct its operations. In addition, to access our products
and services, our clients may use personal smartphones, tablet PC’s, personal computers and other mobile devices that are
beyond our control systems. Although we have information security procedures and controls in place, our technologies, systems,
networks and our clients’ devices may become the target of cyber-attacks or information security breaches that could result
in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our clients’ confidential, proprietary
and other information, or otherwise disrupt our or our clients’ or other third parties’ business operations.
Third parties with whom we do business or that
facilitate our business activities, including financial intermediaries or vendors that provide services or security solutions for
our operations, could also be sources of operational and information security risk to us, including from breakdowns or failures
of their own systems or capacity constraints.
Although to date we have not experienced any
material losses relating to cyber-attacks or other information security breaches, there can be no assurance that we will not suffer
such losses in the future. Our risk and exposure to these matters remains heightened because of the evolving nature of these threats.
As a result, cyber security and the continued development and enhancement of our controls, processes and practices designed to
protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a focus for us. As
threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures
or to investigate and remediate information security vulnerabilities.
Disruptions or failures in the physical infrastructure
or operating systems that support our business and clients, or cyber-attacks or security breaches of the networks, systems or devices
that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention,
reputational damage, reimbursement or other compensation costs and/or additional compliance costs, any of which could materially
and adversely affect our financial condition or results of operations.
In addition, on February 16, 2017, the NYDFS
issued the final version of its cybersecurity regulation, which has an effective date of March 1, 2017. The regulation, which is
detailed and broad in scope, covers five basic areas.
Governance
: The regulation requires senior
management and boards of directors must adopt a cybersecurity policy for protecting information systems and most sensitive information.
Covered companies must also designate a Chief Information Security Officer, who must report to the board annually. The cybersecurity
policy must be in place, and the security officer designated, by August 28, 2017.
Testing
: The regulation requires the
conduct of cybersecurity tests and analyses, including a “risk assessment” to “evaluate and categorize risks,”
evaluate the integrity and confidentiality of information systems and non-public information, and develop a process to mitigate
any identified risks. These tests and assessments must be conducted by March 1, 2018.
Ongoing Requirements
: The regulation
imposes substantial day-to-day and technical requirements. Among others, we must develop access controls for our information systems,
ensure the physical security of our computer systems, encrypt or protect personally identifiable information, perform reviews of
in-house and externally created applications, train employees, and build an audit trail system. The timeline to ensure compliance
with these rules ranges from one year to eighteen months.
Vendors:
The new regulation also regulates
third-party vendors with access to our information technology or non-public information. We will be required to develop and implement
written policies and procedures to ensure the security of our information technology systems or non-public information that can
be accessed by our vendors, including identifying the risks from third-party access, imposing minimum cybersecurity practices for
vendors, and creating a due-diligence process for evaluating those vendors. We will have two years to satisfy these extensive requirements.
Reports:
The new regulation imposes a
notification process for any material cybersecurity event. Within 72 hours, a cybersecurity event that has a “reasonable
likelihood” of “materially harming” us or that must be reported to another government or self-regulating agency
must be reported to the NYDFS. In addition, an annual compliance certification to the NYDFS from either the board or a senior officer
is required.
In light of the newness of the cybersecurity regulation, it is impossible
to determine the cost and other effects on us of full and timely compliance. In addition to resources that may be required, in
the event that we do not timely and fully comply, we would be subject to enforcement and other consequences in addition to any
other claims that might arise. There can be no assurance that we will achieve full and timely compliance with the regulation, in
which event our business mat be materially adversely affected.
We May Experience Increased Delays in Foreclosure Proceedings
Foreclosure proceedings face increasing delays.
While we cannot predict the ultimate impact of any delay in foreclosure sales, we may be subject to additional borrower and non-borrower
litigation and governmental and regulatory scrutiny related to our past and current foreclosure activities. Delays in foreclosure
sales, including any delays beyond those currently anticipated could increase the costs associated with our mortgage operations
and make it more difficult for us to prevent losses in our loan portfolio.
We May Need to Recognize Other-Than-Temporary
Impairment Charges in the Future
We conduct a periodic review and evaluation
of the securities portfolio to determine if the decline in the fair value of any security below its cost basis is other-than-temporary.
Factors which we consider in our analysis include, but are not limited to, the severity and duration of the decline in fair value
of the security, the financial condition and near-term prospects of the issuer, whether the decline appears to be related to issuer
conditions or general market or industry conditions, our intent and ability to retain the security for a period of time sufficient
to allow for any anticipated recovery in fair value and the likelihood of any near-term fair value recovery. We generally view
changes in fair value caused by changes in interest rates as temporary. However, we have recorded other-than-temporary impairment
charges on some securities in our portfolio. If we deem such decline to be other-than-temporary, the security is written down to
a new cost basis and the resulting loss is charged to earnings as a component of non-interest income.
We continue to monitor the fair value of our
securities portfolio as part of our ongoing other-than-temporary impairment evaluation process. There can be no assurance that
we will not need to recognize other-than-temporary impairment charges related to securities in the future.
Our Inability to Hire or Retain Key Personnel Could Adversely Affect Our Business
Our success depends, in large part, on our ability
to retain and attract key personnel. We face intense competition from commercial banks, savings banks, savings and loan associations,
mortgage banking companies, insurance companies, finance companies and credit unions. As a result, it could prove difficult to
retain and attract key personnel. The inability to hire or retain key personnel may result in the loss of customer relationships
and may adversely affect our financial condition or results of operations.
We Are Not Required to Pay Dividends on Our Common Stock
Holders of shares of our common stock are only
entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Although
we have historically declared cash dividends on our common stock, we are not required to do so and may reduce or eliminate our
common stock dividend in the future. This could adversely affect the market price of our common stock.
Goodwill Recorded as a Result of Acquisitions Could Become Impaired,
Negatively Impacting Our Earnings and Capital
Goodwill is presumed to have an indefinite life
and is tested annually, or when certain conditions are met, for impairment. If the fair value of the reporting unit is greater
than the goodwill amount, no further evaluation is required and no impairment is recorded. If the fair value of the reporting unit
is less than the goodwill amount, further evaluation would be required to compare the fair value of the reporting unit to the goodwill
amount and determine if a write down is required. Management views the Company as operating as a single unit - a community bank.
At December 31, 2016, we had goodwill with a carrying amount of $16.1 million. Declines in the fair value of the reporting unit
may result in a future impairment charge. Any such impairment charge could have a material effect on our earnings and capital.
We May Not Fully Realize the Expected Benefit of Our Deferred
Tax Assets
At December 31, 2016, we had a deferred tax
asset of $34.7 million. This represents the anticipated federal, state and local tax benefits expected to be realized in future
years upon the utilization of the underlying tax attributes comprising this balance. In order to use the future benefit of these
deferred tax assets, we will need to report taxable income for federal, state and local tax purposes. Although we have reported
taxable income for federal, state, and local tax purposes in each of the past three years, there can be no assurance that this
will continue in the future.