ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Overview – 2013 Versus 2012
Analysis of 2013 Earnings.
N
et income and earnings per share for 2013 were $21.3 million and $2.32, respectively, representing increases over the comparable 2012 amounts of 4.4% and 2.2%, respectively. Dividends per share increased by 6.3% from $.96 for 2012 to $1.02 for 2013. Returns on average assets and average equity for 2013 were .95% and 10.49%, respectively, as compared to .99% and 10.19%, respectively, for 2012.
Net income for 2013 increased by $907,000 over 2012. The increase is primarily attributable to an increase in net interest income of $2.4 million, or 4.0%, a decrease in the provision for loan losses of $631,000, or 17.4%, and an increase in noninterest income (excluding securities gains) of $454,000, or 6.9%. Partially offsetting these items were increases in noninterest expense (excluding debt extinguishment costs) of $2.1 million, or 5.5%, and income tax expense of $718,000, or 14.3%. Results for 2012 include a net loss of $338,000 on a deleveraging transaction, comprised of $3.8 million of debt extinguishment costs partially offset by $3.5 million of securities gains.
The increase in net interest income resulted from an increase in average interest-earning assets of $177.4 million, or 8.9%, as partially offset by a 16 basis point decline in net interest margin. The increase in average interest-earning assets is primarily attributable to increases in the average balances of loans outstanding of $213.2 million, or 19.9%, as partially offset by a decrease in the average balance of taxable securities of $46.2 million, or 8.5%. From a yield perspective, the shift from lower yielding taxable securities to better yielding loans resulted in an improvement in the mix of the Bank’s interest-earning assets. Partially offsetting these items was a 16 basis point decline in net interest margin from 3.34% in 2012 to 3.18% in 2013. Net interest margin declined year-over-year as loans were repriced and cash flows were deployed in a low interest rate environment.
Loan growth, to the extent not funded by the decline in taxable securities, was funded by growth in the average balances of noninterest-bearing checking deposits of $99.9 million, or 21.3%, interest-bearing deposits of $69.8 million, or 6.3%, and short-term borrowings of $30.5 million, or 53.2%.
The $631,000 decrease in the provision for loan losses is due to a reduction in historical losses, a change in management’s estimate of the impact of current economic conditions on the required allowance for loan losses and a decrease in net chargeoffs. The impact of these items in reducing the provision was partially offset by more loan growth in 2013 than 2012 and a smaller decrease in 2013 than 2012 in reserves on loans individually deemed to be impaired.
The increase in noninterest income (excluding securities gains) of $454,000 is largely attributable to increases in Investment Management Division income and other noninterest income. The $2.1 million increase in noninterest expense (excluding debt extinguishment costs) is comprised of increases in salaries, employee benefits expense, occupancy and equipment expense, and other noninterest expense.
Analysis of Fourth Quarter 2013 Earnings
.
Net income for the fourth quarter of 2013 was $5.2 million, an increase of 2.5% over $5.1 million for the fourth quarter of 2012. The increase in net income is attributable to increases in net interest income of $1.2 million, or 8.2%, and noninterest income of $188,000, or 11.4%, as largely offset by increases in noninterest expense of $747,000, or 7.8%, the provision for loan losses of $437,000 and income tax expense of $104,000.
The changes in net interest income, noninterest income and noninterest expense occurred for substantially the same reasons discussed with respect to the full year periods. The provision for loan losses increased in the fourth quarter largely because of more loan growth and a partial chargeoff on a loan transferred to held-for-sale, as partially offset by a decrease during the current quarter in specific reserves on loans individually deemed to be impaired. Earnings per share remained unchanged at $.56 in each quarter.
Asset Quality.
The Bank’s allowance for loan losses to total loans (reserve coverage ratio) was 1.41% at December 31, 2013 compared to 1.62% at year-end 2012. The reserve coverage ratio decreased due to a reduction in the portion of the allowance attributable to historical losses and management’s assessment of current economic conditions. The $3.0 million provision for loan losses for 2013 is primarily attributable to loan growth and net chargeoffs, as partially offset by a decrease in specific reserves on loans individually deemed to be impaired and a decrease in the reserve coverage ratio. The $3.6 million provision for loan losses for 2012 was mostly attributable to loan growth and net chargeoffs.
The credit quality of the Bank’s loan portfolio remains excellent, with nonaccrual loans, including a $900,000 loan held-for-sale, amounting to $4.5 million, or .3% of total loans outstanding at December 31, 2013. The held-for-sale loan was sold in January 2014 for its carrying value of $900,000. Additionally, loans past due 30 through 89 days amounted to only $184,000, or .01% of total loans outstanding. Troubled debt restructurings declined during 2013 amounting to $3.1 million at the end of the year compared to $4.4 million at year-end 2012. Of the $3.1 million in troubled debt restructurings outstanding at December 31, 2013, which includes the $900,000 loan held-for-sale, $541,000 are performing in accordance with their modified terms and $2.5 million are nonaccrual and included in the aforementioned amount of nonaccrual loans. The credit quality of the Bank’s securities portfolio also remains excellent. The Bank’s mortgage securities are backed by mortgages underwritten on conventional terms, with 83% of these securities being full faith and credit obligations of the U.S. government and the balance being obligations of U.S. government sponsored entities. The remainder of the Bank’s securities portfolio principally consists of high quality, general obligation municipal securities rated AA or better by major rating agencies. In selecting municipal securities for purchase, the Bank uses credit agency ratings for screening purposes only and then performs its own credit analysis. On an ongoing basis, the Bank periodically assesses the credit strength of the municipal securities in its portfolio and makes decisions to hold or sell based on such assessments.
Capital Ratios and Book Value Per Share.
The Corporation’s Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios were 8.62%, 15.77% and 17.02%, respectively, at December 31, 2013. The strength of the Corporation’s balance sheet from both a capital and asset quality perspective positions the Corporation for continued growth in a measured and disciplined fashion.
Despite net income for 2013 of $21.3 million, book value per share decreased from $22.81 at year-end 2012 to $22.59 at year-end 2013. The decrease resulted from an increase in intermediate and long-term interest rates during 2013 and a resulting reduction in unrealized gains on available-for-sale securities. Unrealized gains on available-for-sale securities, net of tax, decreased by $19.9 million from $22.7 million at year-end 2012 to $2.8 million at year-end 2013. Additionally, without the decrease in unrealized gains on available-for-sale securities, net of tax, return on average equity for 2013 would have been 66 basis points lower.
Key Strategic Initiatives.
Key strategic initiatives will continue to include loan and deposit growth through effective relationship management, targeted solicitation efforts, new product offerings and continued expansion of the Bank’s branch distribution system. Additionally, with respect to loan growth, the Bank recently established a correspondent lending relationship and will continue to develop its existing broker relationships. All loans originated through correspondent and broker relationships are underwritten by Bank personnel. During 2013, the Bank opened full service branches in Massapequa Park and Sayville, Long Island and expects to open branches in Oceanside and Manhasset, Long Island in the latter part of 2014. The Bank is continuing to pursue additional sites for future branch expansion.
Challenges We Face
. Although intermediate and long-term interest rates are significantly higher than they were at year-end 2012, they are still relatively low and could remain so for the foreseeable future. In addition, there is significant price competition for loans in the Bank’s marketplace and there is little room for the Bank to further reduce its deposit rates. The persistence of these factors could result in a decline in net interest margin from its current level. If that were to occur, and management is unable to offset the resulting negative impact by increasing the volume of the Bank’s interest-earning assets, effecting a favorable change in the mix of the Bank’s interest-earning assets or interest-bearing liabilities, reducing expenses or the employment of other measures, the Bank’s profitability could decline.
Commercial and residential real estate values have been negatively impacted by persistently high levels of unemployment and underemployment, the erosion of household disposable income, foreclosures and commercial vacancies. Although economic conditions improved somewhat during 2013, these factors still present meaningful threats to the maintenance of loan quality.
The banking industry is currently faced with an ever-increasing number of new and complex regulatory requirements which are putting downward pressure on revenues and upward pressure on required capital levels and the cost of doing business.
Overview – 2012 Versus 2011
Analysis of 2012 Earnings.
Net income and earnings per share for 2012 were $20.4 million and $2.27, respectively, representing increases over 2011 net income and earnings per share of 4.8% and 3.2%, respectively. Dividends per share were $.96 for 2012, or 6.7% more than the $.90 per share declared in 2011. ROA and ROE for 2012 were .99% and 10.19%, respectively, versus 1.05% and 11.15%, respectively, for 2011. An increase in average unrealized gains on available-for-sale securities accounts for a significant portion of the decline in ROE.
The increase in net income for 2012 was primarily attributable to an increase in net interest income of $1.4 million, or 2.3%, a decrease in the provision for loan losses of $433,000, and an increase in noninterest income (excluding securities gains) of $287,000, or 4.6%. Partially offsetting the positive earnings impact of these items was a net loss of $338,000 on a deleveraging transaction executed in the second quarter of 2012, an increase in noninterest expense (before debt extinguishment costs) of $731,000, or 2.0%, and an increase in income tax expense of $73,000. Despite a $1.0 million increase in income before income taxes in 2012, income tax expense only increased by $73,000 largely because of a $869,000 increase in tax-exempt income on municipal securities.
The increase in net interest income resulted from an increase in average interest-earning assets of $204.8 million, or 11.4%, as partially offset by a 29 basis point decline in net interest margin. The growth in average interest-earning assets was principally comprised of increases in average loans outstanding of $125.7 million, or 13.3%, nontaxable securities of $61.5 million, or 20.2%, and taxable securities of $24.1 million, or 4.7%. Although net interest margin declined year-over-year as loans repriced and cash flows were deployed in a very low interest rate environment, it was relatively stable throughout 2012 at 3.37%, 3.36%, 3.35% and 3.30% for the first, second, third and fourth quarters of 2012, respectively. Management’s efforts to make loans a larger portion of total assets and reduce deposit and borrowing costs contributed to this stabilization.
The most significant sources of funding for the growth in the average balances of loans and securities were growth in the average balances of savings, NOW and money market deposits of $93.2 million, or 12.5%, noninterest-bearing checking deposits of $48.3 million, or 11.5%, and borrowings of $31.0 million, or 13.7%.
The decrease in the provision for loan losses for 2012 was due to a reduction in specific reserves on loans individually deemed to be impaired and the stabilization of historical loss rates. The impact of these items in reducing the provision was partially offset by an increased level of loan growth.
The $287,000 increase in noninterest income (excluding securities gains) for 2012 was primarily attributable to an increase in Investment Management Division income, an increase in mortgage assignment and other loan related fees, and a decrease in losses on loans held-for-sale. The positive impact on earnings of these items was partially offset by a decrease in return check charges incurred by the Bank’s customers. The increase in noninterest expense (before debt extinguishment costs) largely resulted from increases in salaries, depreciation and certain loan related costs, as partially offset by a reduction in amounts expensed for the settlement of pending litigation.
Analysis of Fourth Quarter 2012 Earnings.
For the fourth quarter of 2012, net income and earnings per share were $5.1 million and $.56, respectively, representing increases over the same quarter of 2011 of 6.8% and 5.7%, respectively. The increase in net income for the fourth quarter of 2012 versus the same quarter of 2011 was primarily attributable to a decrease in the provision for loan losses of $699,000 and an increase in noninterest income of $71,000, or 4.5%, as partially offset by a decrease in net interest income of $143,000, or .9%, and an increase in noninterest expense of $79,000, or .8%. The net positive earnings impact of these items was partially offset by a related increase in income tax expense of $225,000.
The decline in net interest income occurred because the negative impact of a 20 basis point decline in net interest margin for the quarter more than offset the positive impact of quarterly growth in average interest-earnings assets of 4.7%. The provision for loan losses decreased for the current quarter largely because of a reduction in specific reserves on loans individually deemed to be impaired. The impact of these items in reducing the provision was partially offset by an increased level of loan growth.
Asset Quality.
The Bank’s allowance for loan losses to gross loans (reserve coverage ratio) was 1.62% at December 31, 2012 compared to 1.68% at December 31, 2011. The reduction in the reserve coverage ratio was largely due to a reduction in specific reserves on loans individually deemed to be impaired. The $3.6 million provision for loan losses for 2012 was mostly attributable to loan growth and $1.3 million of chargeoffs on three loans. The $4.1 million provision for loan losses for 2011 was mostly attributable to loan growth, $1.5 million of chargeoffs on two loans and a 13 basis point increase in the reserve coverage ratio.
The credit quality of the Bank’s loan portfolio remained excellent, with nonaccrual loans amounting to $4.1 million, or .36% of total loans, at December 31, 2012. Additionally, loans past due 30 to 89 days amounted to only $884,000, or .08% of total loans. Troubled debt restructurings declined from $5.4 million at the beginning of 2012 to $4.4 million at the end of the year primarily due to the sale of one such loan. Of the $4.4 million in troubled debt restructurings outstanding at December 31, 2012, $1.8 million were performing in accordance with their modified terms and $2.6 million were delinquent and included in the aforementioned amounts for delinquent and nonaccrual loans. The credit quality of the Bank’s securities portfolio also remained excellent. The Bank’s mortgage securities were backed by mortgages underwritten on conventional terms, and almost all of these securities were full faith and credit obligations of the U.S. government. The remainder of the Bank’s securities portfolio consisted principally of high quality, general obligation municipal securities rated AA or better by major rating agencies.
Capital.
The Corporation’s Tier 1 leverage capital, Tier 1 risk-based capital and total risk-based capital ratios were 9.29%, 19.01% and 20.26%, respectively, at December 31, 2012.
Balance Sheet.
In the second quarter of 2012, the Bank executed a deleveraging transaction and also refinanced a portion of its overnight borrowings with long-term debt. These transactions were undertaken to bolster the Bank’s Tier 1 leverage capital ratio and potentially reduce the negative impact that an eventual increase in interest rates could have on the Bank’s earnings. Absent the deleveraging transaction, total asset growth during 2012 would have been slightly more than double the reported growth of 4.2%.
The deleveraging transaction involved using the proceeds from the sale of investment securities with a market value of $97.1 million to extinguish long-term debt with a redemption value of $68.8 million. The excess proceeds on this transaction were initially used to repay short-term borrowings and eventually used to fund a combination of loan originations and securities purchases. The net loss of $338,000 on the deleveraging transaction resulted from the combination of $3.8 million in debt extinguishment costs and $3.5 million in securities gains. The refinancing strategy involved the repayment of $50 million of overnight borrowings with approximately equal amounts of six and seven year term borrowings.
Application of Critical Accounting Policies
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported asset and liability balances and revenue and expense amounts. Our determination of the allowance for loan losses is a critical accounting estimate because it is based on our subjective evaluation of a variety of factors at a specific point in time and involves difficult and complex judgments about matters that are inherently uncertain. In the event that management’s estimate needs to be adjusted based on, among other things, additional information that comes to light after the estimate is made or changes in circumstances, such adjustment could result in the need for a significantly different allowance for loan losses and thereby materially impact, either positively or negatively, the Bank’s results of operations.
The Bank’s Allowance for Loan and Lease Losses Committee (“ALLL Committee”), which is chaired by the Chief Credit Officer, meets on a quarterly basis and is responsible for determining the allowance for loan losses after considering, among other things, the results of credit reviews performed by the Bank’s independent loan review consultants and the Bank’s credit department. In addition, and in consultation with the Bank’s Chief Financial Officer and Chief Risk Officer, the ALLL Committee is responsible for implementing and maintaining policies and procedures surrounding the calculation of the required allowance. The Board Loan Committee reviews and approves the Bank’s Allowance for Loan and Lease Losses Policy at least once each calendar year. The Bank’s allowance for loan losses is reviewed and ratified by the Board Loan Committee on a quarterly basis and is subject to periodic examination by the OCC whose safety and soundness examination includes a determination as to its adequacy to absorb probable incurred losses.
The first step in determining the allowance for loan losses is to identify loans in the Bank’s portfolio that are individually deemed to be impaired and then measure impairment losses based on either the fair value of collateral or the discounted value of expected future cash flows. For all collateral dependent impaired loans, impairment losses are measured based on the fair value of the collateral. A loan is considered to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled principal and interest payments when due and according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment shortfalls are not automatically considered to be impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and financial condition, and the amount of the shortfall in relation to the principal and interest owed. In estimating the fair value of real estate collateral, management utilizes appraisals and also makes qualitative judgments based on, among other things, its knowledge of the local real estate market and analyses of current economic conditions and trends. Estimating the fair value of collateral other than real estate is also subjective in nature and sometimes requires difficult and complex judgments. Determining expected future cash flows can be more subjective than determining fair values. Expected future cash flows could differ significantly, both in timing and amount, from the cash flows actually received over the loan’s remaining life.
In addition to estimating losses for loans individually deemed to be impaired, management also estimates collective impairment losses for pools of loans that are not specifically reviewed. Statistical information regarding the Bank’s loss experience over a period of 24 to 60 months is the starting point in making such estimates. Management believes that this loss period appropriately reflects losses from the current economic cycle and incurred losses in the Bank’s loan portfolio. However, future losses could vary significantly from those experienced in the past, and accordingly on a quarterly basis management adjusts its historical loss experience to reflect current conditions. In doing so, management considers a variety of general qualitative factors and then subjectively determines the weight to assign to each in estimating losses. The factors include, among others: (1) delinquencies, (2) economic conditions as judged by things such as median home prices and commercial vacancy rates in the Bank’s service area and national and local unemployment levels, (3) trends in the nature and volume of loans, (4) concentrations of credit, (5) changes in lending policies and procedures, (6) experience, ability and depth of lending staff, (7) changes in the quality of the loan review function, (8) environmental risks, and (9) loan risk ratings. Because of the nature of the factors and the difficulty in assessing their impact, management’s resulting estimate of losses may not accurately reflect actual losses in the portfolio.
The allowance for loan losses is comprised of impairment losses on loans specifically reviewed and estimated losses on the pools of loans that are collectively reviewed. Although the allowance for loan losses has two separate components, one for impairment losses on individual loans and one for collective impairment losses on pools of loans, the entire allowance for loan losses is available to absorb realized losses as they occur whether they relate to individual loans or pools of loans.
Net Interest Income
Average Balance Sheet; Interest Rates and Interest Differential.
The following table sets forth the average daily balances for each major category of assets, liabilities and stockholders’ equity as well as the amounts and average rates earned or paid on each major category of interest-earning assets and interest-bearing liabilities. The average balances of investment securities include unrealized gains and losses on available-for-sale securities.
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
Average
|
|
|
Interest/
|
|
|
Average
|
|
|
Average
|
|
|
Interest/
|
|
|
Average
|
|
|
Average
|
|
|
Interest/
|
|
|
Average
|
|
|
|
Balance
|
|
|
Dividends
|
|
|
Rate
|
|
|
Balance
|
|
|
Dividends
|
|
|
Rate
|
|
|
Balance
|
|
|
Dividends
|
|
|
Rate
|
|
Assets:
|
|
(dollars in thousands)
|
|
Interest-bearing bank balances
|
|
$
|
13,166
|
|
|
$
|
34
|
|
|
|
.26
|
%
|
|
$
|
12,809
|
|
|
$
|
31
|
|
|
|
.24
|
%
|
|
$
|
19,398
|
|
|
$
|
47
|
|
|
|
.24
|
%
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
495,818
|
|
|
|
10,130
|
|
|
|
2.04
|
|
|
|
541,970
|
|
|
|
13,805
|
|
|
|
2.55
|
|
|
|
517,856
|
|
|
|
16,615
|
|
|
|
3.21
|
|
Nontaxable (1)
|
|
|
376,131
|
|
|
|
19,342
|
|
|
|
5.14
|
|
|
|
366,146
|
|
|
|
19,306
|
|
|
|
5.27
|
|
|
|
304,647
|
|
|
|
17,989
|
|
|
|
5.90
|
|
Loans (1) (2)
|
|
|
1,286,227
|
|
|
|
51,940
|
|
|
|
4.04
|
|
|
|
1,073,046
|
|
|
|
49,679
|
|
|
|
4.63
|
|
|
|
947,309
|
|
|
|
47,806
|
|
|
|
5.05
|
|
Total interest-earning assets (1)
|
|
|
2,171,342
|
|
|
|
81,446
|
|
|
|
3.75
|
|
|
|
1,993,971
|
|
|
|
82,821
|
|
|
|
4.15
|
|
|
|
1,789,210
|
|
|
|
82,457
|
|
|
|
4.61
|
|
Allowance for loan losses
|
|
|
(19,847
|
)
|
|
|
|
|
|
|
|
|
|
|
(18,098
|
)
|
|
|
|
|
|
|
|
|
|
|
(15,013
|
)
|
|
|
|
|
|
|
|
|
Net interest-earning assets
|
|
|
2,151,495
|
|
|
|
|
|
|
|
|
|
|
|
1,975,873
|
|
|
|
|
|
|
|
|
|
|
|
1,774,197
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
28,328
|
|
|
|
|
|
|
|
|
|
|
|
27,476
|
|
|
|
|
|
|
|
|
|
|
|
26,346
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
24,747
|
|
|
|
|
|
|
|
|
|
|
|
23,334
|
|
|
|
|
|
|
|
|
|
|
|
21,410
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
35,569
|
|
|
|
|
|
|
|
|
|
|
|
30,925
|
|
|
|
|
|
|
|
|
|
|
|
30,658
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,240,139
|
|
|
|
|
|
|
|
|
|
|
$
|
2,057,608
|
|
|
|
|
|
|
|
|
|
|
$
|
1,852,611
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings, NOW and money market deposits
|
|
$
|
925,044
|
|
|
|
2,302
|
|
|
|
.25
|
|
|
$
|
839,143
|
|
|
|
3,393
|
|
|
|
.40
|
|
|
$
|
745,916
|
|
|
|
4,035
|
|
|
|
.54
|
|
Time deposits
|
|
|
253,369
|
|
|
|
5,040
|
|
|
|
1.99
|
|
|
|
269,492
|
|
|
|
5,803
|
|
|
|
2.15
|
|
|
|
272,458
|
|
|
|
6,052
|
|
|
|
2.22
|
|
Total interest-bearing deposits
|
|
|
1,178,413
|
|
|
|
7,342
|
|
|
|
.62
|
|
|
|
1,108,635
|
|
|
|
9,196
|
|
|
|
.83
|
|
|
|
1,018,374
|
|
|
|
10,087
|
|
|
|
.99
|
|
Short-term borrowings
|
|
|
87,882
|
|
|
|
288
|
|
|
|
.33
|
|
|
|
57,351
|
|
|
|
195
|
|
|
|
.34
|
|
|
|
26,798
|
|
|
|
93
|
|
|
|
.35
|
|
Long-term debt
|
|
|
184,855
|
|
|
|
4,734
|
|
|
|
2.56
|
|
|
|
200,041
|
|
|
|
6,736
|
|
|
|
3.37
|
|
|
|
199,584
|
|
|
|
7,387
|
|
|
|
3.70
|
|
Total interest-bearing liabilities
|
|
|
1,451,150
|
|
|
|
12,364
|
|
|
|
.85
|
|
|
|
1,366,027
|
|
|
|
16,127
|
|
|
|
1.18
|
|
|
|
1,244,756
|
|
|
|
17,567
|
|
|
|
1.41
|
|
Checking deposits
|
|
|
569,475
|
|
|
|
|
|
|
|
|
|
|
|
469,598
|
|
|
|
|
|
|
|
|
|
|
|
421,273
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
16,389
|
|
|
|
|
|
|
|
|
|
|
|
21,846
|
|
|
|
|
|
|
|
|
|
|
|
12,124
|
|
|
|
|
|
|
|
|
|
|
|
|
2,037,014
|
|
|
|
|
|
|
|
|
|
|
|
1,857,471
|
|
|
|
|
|
|
|
|
|
|
|
1,678,153
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
203,125
|
|
|
|
|
|
|
|
|
|
|
|
200,137
|
|
|
|
|
|
|
|
|
|
|
|
174,458
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,240,139
|
|
|
|
|
|
|
|
|
|
|
$
|
2,057,608
|
|
|
|
|
|
|
|
|
|
|
$
|
1,852,611
|
|
|
|
|
|
|
|
|
|
Net interest income (1)
|
|
|
|
|
|
$
|
69,082
|
|
|
|
|
|
|
|
|
|
|
$
|
66,694
|
|
|
|
|
|
|
|
|
|
|
$
|
64,890
|
|
|
|
|
|
Net interest spread (1)
|
|
|
|
|
|
|
|
|
|
|
2.90
|
%
|
|
|
|
|
|
|
|
|
|
|
2.97
|
%
|
|
|
|
|
|
|
|
|
|
|
3.20
|
%
|
Net interest margin (1)
|
|
|
|
|
|
|
|
|
|
|
3.18
|
%
|
|
|
|
|
|
|
|
|
|
|
3.34
|
%
|
|
|
|
|
|
|
|
|
|
|
3.63
|
%
|
(1)
|
Tax-equivalent basis. Interest income on a tax-equivalent basis includes the additional amount of interest income that would have been earned if the Corporation's investment in tax-exempt loans and investment securities had been made in loans and investment securities subject to Federal income taxes yielding the same after-tax income. The tax-equivalent amount of $1.00 of nontaxable income was $1.52 in each period presented, based on a Federal income tax rate of 34%.
|
(2)
|
For the purpose of these computations, nonaccruing loans are included in the daily average loan amounts outstanding.
|
Rate/Volume Analysis.
The following table sets forth the effect of changes in volumes, rates and rate/volume on tax-equivalent interest income, interest expense and net interest income.
|
|
2013 versus 2012
|
|
|
2012 versus 2011
|
|
|
|
Increase (decrease) due to changes in:
|
|
|
Increase (decrease) due to changes in:
|
|
|
|
|
|
|
|
|
|
Rate/
|
|
|
Net
|
|
|
|
|
|
|
|
|
Rate/
|
|
|
Net
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Volume
(1)
|
|
|
Change
|
|
|
Volume
|
|
|
Rate
|
|
|
Volume
(1)
|
|
|
Change
|
|
|
|
(in thousands)
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing bank balances
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
(16
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(16
|
)
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(1,176
|
)
|
|
|
(2,732
|
)
|
|
|
233
|
|
|
|
(3,675
|
)
|
|
|
774
|
|
|
|
(3,424
|
)
|
|
|
(160
|
)
|
|
|
(2,810
|
)
|
Nontaxable
|
|
|
526
|
|
|
|
(477
|
)
|
|
|
(13
|
)
|
|
|
36
|
|
|
|
3,631
|
|
|
|
(1,926
|
)
|
|
|
(388
|
)
|
|
|
1,317
|
|
Loans
|
|
|
9,870
|
|
|
|
(6,348
|
)
|
|
|
(1,261
|
)
|
|
|
2,261
|
|
|
|
6,345
|
|
|
|
(3,948
|
)
|
|
|
(524
|
)
|
|
|
1,873
|
|
Total interest income
|
|
|
9,221
|
|
|
|
(9,555
|
)
|
|
|
(1,041
|
)
|
|
|
(1,375
|
)
|
|
|
10,734
|
|
|
|
(9,298
|
)
|
|
|
(1,072
|
)
|
|
|
364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings, NOW and money market deposits
|
|
|
347
|
|
|
|
(1,305
|
)
|
|
|
(133
|
)
|
|
|
(1,091
|
)
|
|
|
504
|
|
|
|
(1,019
|
)
|
|
|
(127
|
)
|
|
|
(642
|
)
|
Time deposits
|
|
|
(347
|
)
|
|
|
(442
|
)
|
|
|
26
|
|
|
|
(763
|
)
|
|
|
(66
|
)
|
|
|
(185
|
)
|
|
|
2
|
|
|
|
(249
|
)
|
Short-term borrowings
|
|
|
104
|
|
|
|
(7
|
)
|
|
|
(4
|
)
|
|
|
93
|
|
|
|
106
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
102
|
|
Long-term debt
|
|
|
(511
|
)
|
|
|
(1,613
|
)
|
|
|
122
|
|
|
|
(2,002
|
)
|
|
|
17
|
|
|
|
(666
|
)
|
|
|
(2
|
)
|
|
|
(651
|
)
|
Total interest expense
|
|
|
(407
|
)
|
|
|
(3,367
|
)
|
|
|
11
|
|
|
|
(3,763
|
)
|
|
|
561
|
|
|
|
(1,872
|
)
|
|
|
(129
|
)
|
|
|
(1,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net interest income
|
|
$
|
9,628
|
|
|
$
|
(6,188
|
)
|
|
$
|
(1,052
|
)
|
|
$
|
2,388
|
|
|
$
|
10,173
|
|
|
$
|
(7,426
|
)
|
|
$
|
(943
|
)
|
|
$
|
1,804
|
|
(1)
|
Represents the change not solely attributable to change in rate or change in volume but a combination of these two factors. The rate/volume variance could be allocated between the volume and rate variances shown in the table based on the absolute value of each to the total for both.
|
Net Interest Income – 2013 Versus 2012
Net interest income on a tax-equivalent basis was $69.1 million in 2013, an increase of $2.4 million, or 3.6%, from $66.7 million in 2012. The increase resulted from an increase in average interest-earning assets of $177.4 million, or 8.9%, as partially offset by a 16 basis point decline in net interest margin.
The growth in average interest-earning assets is primarily attributable to increases in the average balances of loans outstanding of $213.2 million, or 19.9%, as partially offset by a decrease in the average balance of taxable securities of $46.2 million, or 8.5%. Although most of the loan growth occurred in residential and commercial mortgage loans, commercial and industrial loans grew as well. The Bank’s continued ability to grow loans is attributable to a variety of factors including, among others, competitive pricing, superior customer service, targeted solicitation efforts, advertising campaigns, and broker relationships for both residential and commercial mortgages.
Loan growth, to the extent not funded by the decline in taxable securities, was funded by growth in the average balances of noninterest-bearing checking deposits of $99.9 million, or 21.3%, interest-bearing deposits of $69.8 million, or 6.3%, and short-term borrowings of $30.5 million, or 53.2%. The Bank’s ability to continue to grow deposits is attributable to, among other things, expansion of the Bank’s branch distribution system, targeted solicitation of local commercial businesses and municipalities, new and expanded lending relationships, and the Bank’s positive reputation in its marketplace.
Intermediate and long-term interest rates moved up significantly in 2013, but they are still relatively low. In this low rate environment, despite significant growth in the average balances of loans and noninterest-bearing checking deposits, the Bank’s net interest income only increased by $2.4 million over 2012. In addition, net interest margin declined by 16 basis points from 3.34% in 2012 to 3.18% in 2013. A low interest rate environment negatively impacts net interest income and net interest margin primarily because: (1) the benefit of no cost funding in the form of noninterest-bearing checking deposits and capital is reduced; (2) cash received from payments and prepayments of higher yielding loans and securities is often used to originate or purchase lower yielding loans and securities; (3) the rates on some loans are modified downward, while other loans prepay in full resulting in the immediate writeoff of deferred costs; and (4) prepayment speeds on mortgage securities are elevated, thereby necessitating faster amortization of purchase premiums.
During 2013, long-term borrowings increased $140 million, from $145 million at December 31, 2012 to $285 million at December 31, 2013. The increase in long-term borrowings resulted from management’s desire to better match the duration of the Bank’s assets and liabilities and thereby hedge against an eventual increase in interest rates.
Net Interest Income – 2012 Versus 2011
Net interest income on a tax-equivalent basis was $66.7 million in 2012, an increase of $1.8 million, or 2.8%, from $64.9 million in 2011. The increase resulted from an increase in average interest-earning assets of $204.8 million, or 11.4%, as partially offset by a 29 basis point decline in net interest margin. The growth in average interest-earning assets was principally comprised of increases in average loans outstanding of $125.7 million, or 13.3%, nontaxable securities of $61.5 million, or 20.2%, and taxable securities of $24.1 million, or 4.7%. While the average balance of the Bank’s taxable securities portfolio grew moderately when comparing 2012 to 2011, the size of the portfolio declined by $106.9 million, or 17.8%, when comparing year-end 2012 to 2011. The decline occurred because of the deleveraging transaction and the deployment of funds, when possible, into loans rather than securities.
The most significant sources of funding for the growth in the average balances of loans and securities were growth in the average balances of savings, NOW and money market deposits of $93.2 million, or 12.5%, noninterest-bearing checking deposits of $48.3 million, or 11.5%, and borrowings of $31.0 million, or 13.7%.
Net interest margin declined from 3.63% in 2011 to 3.34% in 2012 as loans repriced and cash flows were deployed in a very low interest rate environment. Also contributing to the decline in the net interest margin was the aforementioned refinancing transaction involving the repayment of overnight borrowings with six and seven year term borrowings.
Noninterest Income
Noninterest income includes service charges on deposit accounts, Investment Management Division income, gains or losses on sales of securities, and all other items of income, other than interest, resulting from the business activities of the Corporation. Noninterest income (excluding securities gains) increased $454,000, or 6.9%, when comparing 2013 to 2012. The increase is largely attributable to increases in Investment Management Division income of $248,000, or 15.3%, and other noninterest income of $240,000, or 12.6%. The increase in Investment Management Division income is due to appreciation in the market value of assets under management and new business. The $240,000 increase in other noninterest income includes increases in debit and credit card fees of $120,000, or 33.9%, and mortgage assignment and other loan related fees of $82,000, or 29.6%. Gains on sales of securities decreased by $3.6 million when comparing 2013 to 2012 as a result of the deleveraging transaction in 2012.
Noninterest income (excluding securities gains) increased $287,000, or 4.6%, when comparing 2012 to 2011. The increase was primarily attributable to an increase in Investment Management Division income of $85,000, an increase in mortgage assignment and other loan related fees of $195,000, and a decrease in losses on loans held-for-sale of $103,000. The positive impact on earnings of these items was partially offset by a decrease in return check charges incurred by the Bank’s customers of $157,000. Gains on sales of securities increased $3.5 million when comparing 2012 to 2011 as a result of the 2012 deleveraging transaction.
Noninterest Expense
Noninterest expense is comprised of salaries, employee benefits, occupancy and equipment expense and other operating expenses incurred in supporting the various business activities of the Corporation. Noninterest expense (excluding debt extinguishment costs) increased $2.1 million, or 5.5%, when comparing 2013 to 2012. The increase is comprised of increases in salaries of $800,000, or 4.9%, employee benefits expense of $482,000, or 9.6%, occupancy and equipment expense of $404,000, or 5.6%, and other noninterest expense of $374,000, or 4.3%. The increase in salaries is primarily due to normal annual salary adjustments and additions to staff, as partially offset by a decrease in stock-based compensation expense. Stock-based compensation expense declined because of a reduction in the estimated number of shares to be issued upon the vesting of restricted stock units and forfeitures of some outstanding awards. The increase in employee benefits expense is primarily attributable to increases in incentive compensation cost, payroll tax expense and group health insurance expense, as partially offset by a decrease in pension expense. The increase in occupancy and equipment expense is largely due to increases in general maintenance and repairs expense, snow removal costs, rent expense and the cost of servicing equipment. The increase in other noninterest expense includes increases in consulting expense and marketing expense and growth-related increases in FDIC insurance expense and the Bank’s OCC assessment. Debt extinguishment costs of $3.8 million in 2012 resulted from the deleveraging transaction. Management continues to maintain a strong focus on expense control measures and enhancements in operating efficiency.
Noninterest expense (excluding debt extinguishment costs) increased $731,000, or 2.0%, when comparing 2012 to 2011. The largest components of the increase were increases in salaries of $575,000, depreciation of $148,000, and certain loan related costs of $203,000, as partially offset by a reduction in amounts expensed for the settlement of pending litigation of $448,000. Salaries increased primarily because of normal annual salary adjustments and additions to both branch and back-office staff. Depreciation expense increased due to new branch facilities, investments in technology, and the expansion and restoration of existing branch and back-office facilities. Certain loan related costs increased due to an increased volume of lending.
Income Taxes
Income tax expense as a percentage of book income (“effective tax rate”) was 21.2% in 2013, 19.7% in 2012 and 20.3% in 2011. The effective tax rate increased in 2013 as compared to 2012 and 2011 largely because interest income on tax-exempt securities became a smaller percentage of income before income taxes.
Financial Condition
Total assets were $2.4 billion at December 31, 2013, an increase of $291.6 million, or 13.8%, from the previous year-end. The increase was primarily attributable to growth in loans of $330.6 million, or 28.8%, partially offset by a reduction in investment securities of $44.7 million, or 5.2%. The increase in volume and change in the mix of the Bank’s interest-earning assets benefited earnings and financial condition by offsetting the decline in net interest margin caused by the persistently low interest rate environment.
Asset growth during 2013 was largely funded by deposit growth and an increase in long-term debt. Total deposits grew $149.1 million, or 9.1%, to $1.8 billion, and long-term debt grew $140.0 million, or 96.6%, to $285.0 million, at December 31, 2013. For the year, noninterest-bearing checking deposits increased $70.2 million, or 13.3%, and savings, NOW and money market deposits increased $73.4 million, or 8.7%. Stockholders’ equity at year-end 2013 totaled $206.6 million, an increase of $1.2 million from year-end 2012.
Investment Securities.
The following table presents the estimated fair value of available-for-sale securities and amortized cost of held-to-maturity securities at December 31, 2013, 2012 and 2011.
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Held-to-Maturity Securities:
|
|
(in thousands)
|
|
State and municipals
|
|
$
|
27,968
|
|
|
$
|
36,255
|
|
|
$
|
43,091
|
|
Pass-through mortgage securities
|
|
|
1,878
|
|
|
|
3,782
|
|
|
|
6,851
|
|
Collateralized mortgage obligations
|
|
|
2,258
|
|
|
|
4,130
|
|
|
|
12,143
|
|
|
|
$
|
32,104
|
|
|
$
|
44,167
|
|
|
$
|
62,085
|
|
Available-for-Sale Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,113
|
|
State and municipals
|
|
|
356,553
|
|
|
|
332,513
|
|
|
|
313,195
|
|
Pass-through mortgage securities
|
|
|
151,818
|
|
|
|
84,956
|
|
|
|
73,786
|
|
Collateralized mortgage obligations
|
|
|
276,422
|
|
|
|
399,965
|
|
|
|
501,862
|
|
|
|
$
|
784,793
|
|
|
$
|
817,434
|
|
|
$
|
893,956
|
|
The following table presents the maturities and weighted average yields of the Bank’s investment securities at December 31, 2013.
|
|
Principal Maturing
(1)
|
|
|
|
Within
|
|
|
After One But
|
|
|
After Five But
|
|
|
After
|
|
|
|
One Year
|
|
|
Within Five Years
|
|
|
Within Ten Years
|
|
|
Ten Years
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
|
(dollars in thousands)
|
|
Held-to-Maturity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipals (2)
|
|
$
|
4,877
|
|
|
|
5.33
|
%
|
|
$
|
11,917
|
|
|
|
5.92
|
%
|
|
$
|
10,341
|
|
|
|
6.01
|
%
|
|
$
|
833
|
|
|
|
6.20
|
%
|
Pass-through mortgage securities
|
|
|
38
|
|
|
|
7.39
|
|
|
|
394
|
|
|
|
5.46
|
|
|
|
380
|
|
|
|
6.12
|
|
|
|
1,066
|
|
|
|
5.40
|
|
Collateralized mortgage obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,258
|
|
|
|
5.13
|
|
|
|
$
|
4,915
|
|
|
|
5.35
|
%
|
|
$
|
12,311
|
|
|
|
5.91
|
%
|
|
$
|
10,721
|
|
|
|
6.01
|
%
|
|
$
|
4,157
|
|
|
|
5.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipals (2)
|
|
$
|
6,516
|
|
|
|
5.93
|
%
|
|
$
|
12,269
|
|
|
|
4.87
|
%
|
|
$
|
79,413
|
|
|
|
3.72
|
%
|
|
$
|
258,355
|
|
|
|
5.59
|
%
|
Pass-through mortgage securities
|
|
|
-
|
|
|
|
-
|
|
|
|
959
|
|
|
|
5.80
|
|
|
|
61,560
|
|
|
|
1.24
|
|
|
|
89,299
|
|
|
|
2.17
|
|
Collateralized mortgage obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,219
|
|
|
|
1.63
|
|
|
|
238,203
|
|
|
|
2.11
|
|
|
|
$
|
6,516
|
|
|
|
5.93
|
%
|
|
$
|
13,228
|
|
|
|
4.94
|
%
|
|
$
|
179,192
|
|
|
|
2.07
|
%
|
|
$
|
585,857
|
|
|
|
3.65
|
%
|
(1)
|
Maturities shown are stated maturities, except in the case of municipal securities, which are shown at the earlier of their stated maturity or pre-refunded dates. Securities backed by mortgages, which include the pass-through mortgage securities and collateralized mortgage obligations shown above, are expected to have substantial periodic repayments resulting in weighted average lives considerably shorter than would be surmised from the above table.
|
(2)
|
Yields on tax-exempt state and municipal securities have been computed on a tax-equivalent basis.
|
(3)
|
Yields on available-for-sale securities have been computed based on amortized cost.
|
During
2013, the Bank received cash dividends totaling $507,000 on its Federal Reserve Bank and Federal Home Loan Bank of New York stock, representing an average yield of 3.70%.
Loans.
The composition of the Bank’s loan portfolio over the past five years is set forth below.
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Commercial and industrial
|
|
$
|
71,818
|
|
|
$
|
54,339
|
|
|
$
|
42,572
|
|
|
$
|
39,055
|
|
|
$
|
48,891
|
|
Commercial mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
|
469,486
|
|
|
|
278,503
|
|
|
|
229,925
|
|
|
|
208,682
|
|
|
|
185,632
|
|
Other
|
|
|
162,874
|
|
|
|
141,986
|
|
|
|
140,738
|
|
|
|
125,521
|
|
|
|
116,723
|
|
Owner-occupied
|
|
|
83,651
|
|
|
|
83,879
|
|
|
|
89,919
|
|
|
|
83,299
|
|
|
|
110,873
|
|
Residential mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end
|
|
|
605,343
|
|
|
|
502,367
|
|
|
|
386,478
|
|
|
|
346,195
|
|
|
|
266,059
|
|
Revolving home equity
|
|
|
77,581
|
|
|
|
81,975
|
|
|
|
91,630
|
|
|
|
94,417
|
|
|
|
93,726
|
|
Consumer
|
|
|
7,184
|
|
|
|
4,335
|
|
|
|
4,597
|
|
|
|
5,790
|
|
|
|
5,762
|
|
|
|
|
1,477,937
|
|
|
|
1,147,384
|
|
|
|
985,859
|
|
|
|
902,959
|
|
|
|
827,666
|
|
Allowance for loan losses
|
|
|
(20,848
|
)
|
|
|
(18,624
|
)
|
|
|
(16,572
|
)
|
|
|
(14,014
|
)
|
|
|
(10,346
|
)
|
|
|
$
|
1,457,089
|
|
|
$
|
1,128,760
|
|
|
$
|
969,287
|
|
|
$
|
888,945
|
|
|
$
|
817,320
|
|
Commercial mortgage loans outstanding at December 31, 2013 include $973,000 of variable rate construction loans due within one year.
Maturity and rate information for the Bank’s commercial and industrial loans outstanding at December 31, 2013 is set forth below.
|
|
Maturity
|
|
|
|
|
|
|
After One
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
But Within
|
|
|
After
|
|
|
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
Five Years
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Commercial and industrial loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
$
|
370
|
|
|
$
|
10,255
|
|
|
$
|
3,194
|
|
|
$
|
13,819
|
|
Variable rate
|
|
|
42,297
|
|
|
|
14,312
|
|
|
|
1,390
|
|
|
|
57,999
|
|
|
|
$
|
42,667
|
|
|
$
|
24,567
|
|
|
$
|
4,584
|
|
|
$
|
71,818
|
|
Asset Quality.
The Corporation has identified certain assets as risk elements. These assets include nonaccrual loans, other real estate owned, loans that are contractually past due 90 days or more as to principal or interest payments and still accruing and troubled debt restructurings. These assets present more than the normal risk that the Corporation will be unable to eventually collect or realize their full carrying value. Information about the Corporation’s risk elements is set forth below.
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in thousands)
|
|
Nonaccrual loans (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled debt restructurings
|
|
$
|
2,548
|
|
|
$
|
2,430
|
|
|
$
|
1,637
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Other
|
|
|
1,948
|
|
|
|
1,668
|
|
|
|
1,574
|
|
|
|
3,936
|
|
|
|
432
|
|
Total nonaccrual loans
|
|
|
4,496
|
|
|
|
4,098
|
|
|
|
3,211
|
|
|
|
3,936
|
|
|
|
432
|
|
Loans past due 90 days or more and still accruing
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other real estate owned
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total nonperforming assets
|
|
|
4,496
|
|
|
|
4,098
|
|
|
|
3,211
|
|
|
|
3,936
|
|
|
|
432
|
|
Troubled debt restructurings - performing
|
|
|
541
|
|
|
|
1,953
|
|
|
|
3,757
|
|
|
|
2,433
|
|
|
|
200
|
|
Total risk elements
|
|
$
|
5,037
|
|
|
$
|
6,051
|
|
|
$
|
6,968
|
|
|
$
|
6,369
|
|
|
$
|
632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans as a percentage of total loans
|
|
|
.30
|
%
|
|
|
.36
|
%
|
|
|
.33
|
%
|
|
|
.44
|
%
|
|
|
.05
|
%
|
Nonperforming assets as a percentage of total loans and other real estate owned
|
|
|
.30
|
%
|
|
|
.36
|
%
|
|
|
.33
|
%
|
|
|
.44
|
%
|
|
|
.05
|
%
|
Risk elements as a percentage of total loans and other real estate owned
|
|
|
.34
|
%
|
|
|
.53
|
%
|
|
|
.71
|
%
|
|
|
.71
|
%
|
|
|
.08
|
%
|
(1)
|
Includes loans held-for-sale
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Gross interest income on nonaccrual loans and troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount that would have been recorded during the year under original terms
|
|
$
|
311
|
|
|
$
|
365
|
|
|
$
|
369
|
|
|
$
|
332
|
|
|
$
|
24
|
|
Actual amount recorded during the year
|
|
|
60
|
|
|
|
134
|
|
|
|
246
|
|
|
|
300
|
|
|
|
16
|
|
The past due status of a loan is based on the contractual terms in the loan agreement. Unless a loan is well secured and in the process of collection, the accrual of interest income is discontinued when a loan becomes 90 days past due as to principal or interest payments. The accrual of interest income on a loan is also discontinued when it is determined that the borrower will not be able to make principal and interest payments according to the contractual terms of the current loan agreement. When the accrual of interest income is discontinued on a loan, any accrued but unpaid interest is reversed against current period income.
In addition to the Bank’s past due, nonaccrual and restructured loans, the disclosure of other potential problem loans can be found in “Note C – Loans” to the Corporation’s consolidated financial statements of this Form 10-K.
Loan Risk Ratings.
Risk ratings of the Corporation’s commercial and industrial loans and commercial real estate loans are set forth in the tables below. Risk ratings are defined in “Note C – Loans” to the Corporation’s consolidated financial statements of this Form 10-K.
|
|
2013
|
|
|
|
Internally Assigned Risk Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 - 2
|
|
|
|
3 - 4
|
|
|
|
5 - 6
|
|
|
Watch
|
|
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Commercial and industrial
|
|
$
|
6,021
|
|
|
$
|
6,208
|
|
|
$
|
58,120
|
|
|
$
|
280
|
|
|
$
|
1,155
|
|
|
$
|
34
|
|
|
$
|
-
|
|
|
$
|
71,818
|
|
Commercial mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
|
-
|
|
|
|
31,211
|
|
|
|
428,459
|
|
|
|
9,470
|
|
|
|
-
|
|
|
|
346
|
|
|
|
-
|
|
|
|
469,486
|
|
Other
|
|
|
-
|
|
|
|
10,424
|
|
|
|
148,812
|
|
|
|
601
|
|
|
|
-
|
|
|
|
3,037
|
|
|
|
-
|
|
|
|
162,874
|
|
Owner-occupied
|
|
|
-
|
|
|
|
3,871
|
|
|
|
71,810
|
|
|
|
4,161
|
|
|
|
837
|
|
|
|
2,972
|
|
|
|
-
|
|
|
|
83,651
|
|
|
|
$
|
6,021
|
|
|
$
|
51,714
|
|
|
$
|
707,201
|
|
|
$
|
14,512
|
|
|
$
|
1,992
|
|
|
$
|
6,389
|
|
|
$
|
-
|
|
|
$
|
787,829
|
|
|
|
2012
|
|
|
|
Internally Assigned Risk Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 - 2
|
|
|
|
3 - 4
|
|
|
|
5 - 6
|
|
|
Watch
|
|
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Commercial and industrial
|
|
$
|
4,401
|
|
|
$
|
6,225
|
|
|
$
|
42,007
|
|
|
$
|
1,268
|
|
|
$
|
390
|
|
|
$
|
48
|
|
|
$
|
-
|
|
|
$
|
54,339
|
|
Commercial mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
|
-
|
|
|
|
-
|
|
|
|
274,205
|
|
|
|
2,502
|
|
|
|
687
|
|
|
|
1,109
|
|
|
|
-
|
|
|
|
278,503
|
|
Other
|
|
|
-
|
|
|
|
1,906
|
|
|
|
131,970
|
|
|
|
3,452
|
|
|
|
2,897
|
|
|
|
1,761
|
|
|
|
-
|
|
|
|
141,986
|
|
Owner-occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
72,518
|
|
|
|
5,254
|
|
|
|
965
|
|
|
|
5,142
|
|
|
|
-
|
|
|
|
83,879
|
|
|
|
$
|
4,401
|
|
|
$
|
8,131
|
|
|
$
|
520,700
|
|
|
$
|
12,476
|
|
|
$
|
4,939
|
|
|
$
|
8,060
|
|
|
$
|
-
|
|
|
$
|
558,707
|
|
Risk ratings of the Corporation’s residential mortgage loans, home equity lines and other consumer loans are set forth in the tables below. Risk ratings are defined in “Note C – Loans” to the Corporation’s consolidated financial statements of this Form 10-K.
|
|
2013
|
|
|
|
Internally Assigned Risk Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
Watch
|
|
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Residential mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end
|
|
$
|
554,579
|
|
|
$
|
30,530
|
|
|
$
|
16,916
|
|
|
$
|
1,779
|
|
|
$
|
-
|
|
|
$
|
1,539
|
|
|
$
|
-
|
|
|
$
|
605,343
|
|
Revolving home equity
|
|
|
64,135
|
|
|
|
7,324
|
|
|
|
5,559
|
|
|
|
352
|
|
|
|
-
|
|
|
|
211
|
|
|
|
-
|
|
|
|
77,581
|
|
Consumer
|
|
|
5,068
|
|
|
|
520
|
|
|
|
214
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,802
|
|
|
|
$
|
623,782
|
|
|
$
|
38,374
|
|
|
$
|
22,689
|
|
|
$
|
2,131
|
|
|
$
|
-
|
|
|
$
|
1,750
|
|
|
$
|
-
|
|
|
$
|
688,726
|
|
|
|
2012
|
|
|
|
Internally Assigned Risk Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
Watch
|
|
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Residential mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end
|
|
$
|
454,700
|
|
|
$
|
25,287
|
|
|
$
|
16,825
|
|
|
$
|
501
|
|
|
$
|
-
|
|
|
$
|
5,054
|
|
|
$
|
-
|
|
|
$
|
502,367
|
|
Revolving home equity
|
|
|
67,432
|
|
|
|
6,683
|
|
|
|
6,698
|
|
|
|
778
|
|
|
|
-
|
|
|
|
384
|
|
|
|
-
|
|
|
|
81,975
|
|
Consumer
|
|
|
2,861
|
|
|
|
702
|
|
|
|
140
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,703
|
|
|
|
$
|
524,993
|
|
|
$
|
32,672
|
|
|
$
|
23,663
|
|
|
$
|
1,279
|
|
|
$
|
-
|
|
|
$
|
5,438
|
|
|
$
|
-
|
|
|
$
|
588,045
|
|
Deposit account overdrafts are not assigned a risk-rating and are therefore excluded from consumer loans in the above tables.
Allowance and Provision for Loan Losses.
The allowance for loan losses is established through provisions for loan losses charged against income. When available information confirms that specific loans, or portions thereof, are uncollectible, these amounts are charged off against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance for loan losses.
The allowance for loan losses increased by $2.2 million during 2013, amounting to $20.8 million, or 1.41% of total loans, at December 31, 2013, as compared to $18.6 million, or 1.62% of total loans, at December 31, 2012. During 2013, the Bank had loan chargeoffs and recoveries of $932,000 and $159,000, respectively, and recorded a $3.0 million provision for loan losses. The $3.0 million provision for loan losses for 2013 was primarily attributable to growth in the loan portfolio and net chargeoffs, including a chargeoff of $871,000 on a first-lien residential mortgage loan transferred to held-for-sale, as partially offset by a decrease in specific reserves on loans individually deemed impaired and a decrease in the reserve coverage ratio. The reserve coverage ratio decreased due to a reduction in the portion of the allowance attributable to historical losses and management’s assessment of current economic conditions. The $3.6 million provision for loan losses for 2012 was mostly attributable to loan growth and $1.3 million of chargeoffs on three loans.
The allowance for loan losses is an amount that management currently believes will be adequate to absorb probable incurred losses in the Bank’s loan portfolio. As more fully discussed in the “Application of Critical Accounting Policies” section of this discussion and analysis of financial condition and results of operations, the process for estimating credit losses and determining the allowance for loan losses as of any balance sheet date is subjective in nature and requires material estimates. Actual results could differ significantly from those estimates. Other detailed information on the Bank’s allowance for loan losses, impaired loans and the aging of loans can be found in “Note C – Loans” to the Corporation’s consolidated financial statements of this Form 10-K.
The following table sets forth changes in the Bank’s allowance for loan losses.
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
18,624
|
|
|
$
|
16,572
|
|
|
$
|
14,014
|
|
|
$
|
10,346
|
|
|
$
|
6,076
|
|
Loans charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
162
|
|
Commercial mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
|
-
|
|
|
|
501
|
|
|
|
1,257
|
|
|
|
325
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
233
|
|
|
|
-
|
|
|
|
-
|
|
Residential mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end
|
|
|
914
|
|
|
|
659
|
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
Revolving home equity
|
|
|
-
|
|
|
|
450
|
|
|
|
100
|
|
|
|
22
|
|
|
|
-
|
|
Consumer
|
|
|
18
|
|
|
|
4
|
|
|
|
36
|
|
|
|
30
|
|
|
|
13
|
|
|
|
|
932
|
|
|
|
1,619
|
|
|
|
1,634
|
|
|
|
377
|
|
|
|
175
|
|
Recoveries of loans charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
19
|
|
|
|
4
|
|
|
|
115
|
|
|
|
46
|
|
|
|
148
|
|
Commercial mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
|
-
|
|
|
|
4
|
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
113
|
|
|
|
19
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential mortgages - closed end
|
|
|
13
|
|
|
|
10
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
14
|
|
|
|
6
|
|
|
|
6
|
|
|
|
26
|
|
|
|
12
|
|
|
|
|
159
|
|
|
|
43
|
|
|
|
131
|
|
|
|
72
|
|
|
|
160
|
|
Net chargeoffs
|
|
|
773
|
|
|
|
1,576
|
|
|
|
1,503
|
|
|
|
305
|
|
|
|
15
|
|
Provision for loan losses
|
|
|
2,997
|
|
|
|
3,628
|
|
|
|
4,061
|
|
|
|
3,973
|
|
|
|
4,285
|
|
Balance, end of year
|
|
$
|
20,848
|
|
|
$
|
18,624
|
|
|
$
|
16,572
|
|
|
$
|
14,014
|
|
|
$
|
10,346
|
|
Ratio of net chargeoffs to average loans outstanding
|
|
|
.06
|
%
|
|
|
.15
|
%
|
|
|
.16
|
%
|
|
|
.04
|
%
|
|
|
.00
|
%
|
The following table sets forth the allocation of the Bank’s total allowance for loan losses by loan type.
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
To Total
|
|
|
|
|
|
To Total
|
|
|
|
|
|
To Total
|
|
|
|
|
|
To Total
|
|
|
|
|
|
To Total
|
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
|
(dollars in thousands)
|
|
Commercial and industrial
|
|
$
|
808
|
|
|
|
4.9
|
%
|
|
$
|
834
|
|
|
|
4.7
|
%
|
|
$
|
699
|
|
|
|
4.3
|
%
|
|
$
|
803
|
|
|
|
4.3
|
%
|
|
$
|
971
|
|
|
|
5.9
|
%
|
Commercial mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
|
7,348
|
|
|
|
31.8
|
|
|
|
5,342
|
|
|
|
24.3
|
|
|
|
5,365
|
|
|
|
23.3
|
|
|
|
3,848
|
|
|
|
23.1
|
|
|
|
2,685
|
|
|
|
22.4
|
|
Other
|
|
|
1,501
|
|
|
|
11.0
|
|
|
|
1,978
|
|
|
|
12.4
|
|
|
|
2,316
|
|
|
|
14.3
|
|
|
|
2,303
|
|
|
|
13.9
|
|
|
|
1,687
|
|
|
|
14.1
|
|
Owner-occupied
|
|
|
1,191
|
|
|
|
5.7
|
|
|
|
1,163
|
|
|
|
7.3
|
|
|
|
1,388
|
|
|
|
9.1
|
|
|
|
1,529
|
|
|
|
9.2
|
|
|
|
1,603
|
|
|
|
13.4
|
|
Residential mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end
|
|
|
8,607
|
|
|
|
40.9
|
|
|
|
7,729
|
|
|
|
43.8
|
|
|
|
5,228
|
|
|
|
39.2
|
|
|
|
4,059
|
|
|
|
38.4
|
|
|
|
2,242
|
|
|
|
32.2
|
|
Revolving home equity
|
|
|
1,240
|
|
|
|
5.2
|
|
|
|
1,453
|
|
|
|
7.1
|
|
|
|
1,415
|
|
|
|
9.3
|
|
|
|
1,415
|
|
|
|
10.5
|
|
|
|
1,102
|
|
|
|
11.3
|
|
Consumer
|
|
|
153
|
|
|
|
.5
|
|
|
|
125
|
|
|
|
.4
|
|
|
|
161
|
|
|
|
.5
|
|
|
|
57
|
|
|
|
.6
|
|
|
|
56
|
|
|
|
.7
|
|
|
|
$
|
20,848
|
|
|
|
100.0
|
%
|
|
$
|
18,624
|
|
|
|
100.0
|
%
|
|
$
|
16,572
|
|
|
|
100.0
|
%
|
|
$
|
14,014
|
|
|
|
100.0
|
%
|
|
$
|
10,346
|
|
|
|
100.0
|
%
|
The amount of future chargeoffs and provisions for loan losses will be affected by, among other things, economic conditions on Long Island and in New York City. Such conditions could affect the financial strength of the Bank’s borrowers and will affect the value of real estate collateral securing the Bank’s mortgage loans
.
Loans secured by real estate represent approximately 95% of the Bank’s total loans outstanding at December 31, 2013. Most of these loans were made to borrowers domiciled on Long Island and in the boroughs of New York City. Although economic conditions improved somewhat during 2013, general economic conditions have been unfavorable as characterized by high levels of unemployment and underemployment, suppressed commercial and residential real estate values and elevated commercial real estate vacancies. These conditions have caused some of the Bank’s borrowers to be unable to make the required contractual payments on their loans and could cause the Bank to be unable to realize the full carrying value of such loans through foreclosure or other collection efforts.
Future provisions and chargeoffs could also be affected by environmental impairment of properties securing the Bank’s mortgage loans. At the present time, management is not aware of any environmental pollution originating on or near properties securing the Bank’s loans that would materially affect the carrying value of such loans.
Other Assets.
The Bank is seeking to sell the land and building of one of its branch banking offices. The carrying value of the assets to be sold was $280,000 and $292,000 at December 31, 2013 and 2012, respectively, and is included in Other Assets on the Corporation’s consolidated balance sheets.
Deposits and Other Borrowings.
Total deposits grew $149.1 million, or 9.1%, to $1.8 billion at December 31, 2013. The increase was primarily attributable to growth in savings, NOW and money market deposits, which increased $73.4 million, or 8.7%, to $918.0 million at year end 2013, and noninterest-bearing checking balances, which increased $70.2 million, or 13.3%, to $599.1 million. The largest segment of the deposit base is savings, NOW and money market deposits which represent 51.5% of total deposits at December 31, 2013.
The remaining maturities of the Bank’s time deposits at December 31, 2013 can be found in “Note E – Deposits” to the Corporation’s December 31, 2013 consolidated financial statements.
Borrowings include short-term and long-term FHLB borrowings and borrowings under repurchase agreements. Total borrowings increased $146.8 million during 2013 to $395.5 million at year-end. The increase is principally due to an increase in fixed rate long-term debt of $140.0 million. The increase in long-term borrowings resulted from management’s desire to better match the duration of the Bank’s assets and liabilities and thereby hedge against an eventual increase in interest rates.
Capital.
The Corporation’s capital management policy is designed to build and maintain capital levels that exceed regulatory standards. Under regulatory capital standards in effect at December 31, 2013, banks are classified as well capitalized, adequately capitalized or undercapitalized. Under such standards, a well-capitalized bank is one that has a Tier 1 leverage capital ratio equal to or greater than 5%, a Tier 1 risk-based capital ratio equal to or greater than 6%, and a total risk-based capital ratio equal to or greater than 10%. The Bank’s Tier 1 leverage capital, Tier 1 risk-based capital and total risk-based capital ratios of 8.59%, 15.72% and 16.97%, respectively, at December 31, 2013 exceed the requirements for a well-capitalized bank and, based on management’s belief, are adequate in the current regulatory and economic environments. The strength of the Bank’s balance sheet, from both a capital and asset quality perspective, positions the Bank for continued growth in a measured and disciplined fashion. The Corporation on a consolidated basis is subject to minimum risk-based and leverage capital requirements, which the Corporation exceeds as of December 31, 2013.
Stockholders’ equity totaled $206.6 million at December 31, 2013, an increase of $1.2 million from $205.4 million at December 31, 2012. The increase was primarily attributable to net income of $21.3 million and the issuance of shares under the Corporation’s stock-based compensation, dividend reinvestment and stock purchase plans of $3.7 million, substantially offset by a decline in accumulated other comprehensive income of $15.1 million and cash dividends declared of $9.3 million. Accumulated other comprehensive income declined due to a reduction in the after-tax amount of unrealized gains on available-for-sale securities of $19.9 million, as partially offset by a change in the funded status of the Bank’s defined benefit pension plan of $4.9 million.
The ratio of average stockholders’ equity to average total assets declined from 9.73% for 2012 to 9.07% for 2013. The decrease occurred because the growth rate in average total assets of 8.9% during 2013, primarily due to 19.9% growth in average loans, exceeded the 1.5% growth rate in average stockholders’ equity. The Corporation had returns on average equity of 10.49%, 10.19% and 11.15% and returns on average assets of .95%, .99% and 1.05%, for the years ended December 31, 2013, 2012 and 2011, respectively.
For a discussion of regulatory capital rulemakings, see “Regulatory Rulemakings” included in Part II, Item 7 of this Form 10-K.
Cash Flows and Liquidity
Cash Flows.
The Corporation’s primary sources of cash are deposits, maturities and amortization of loans and investment securities, operations and borrowings. The Corporation uses cash from these and other sources to fund loan growth, purchase investment securities, repay borrowings, expand and improve its physical facilities, pay cash dividends and for general operating purposes. During 2013, the Corporation’s cash and cash equivalent position declined by $6.7 million, from $42.2 million at December 31, 2012 to $35.5 million at December 31, 2013. The decrease occurred primarily because cash used to originate loans, purchase investment securities and restricted stock, pay cash dividends, and expand and improve physical facilities exceeded the cash provided by the growth in deposits and borrowings, maturities and paydowns of loans and securities and operations.
Liquidity.
The Bank has a Board committee approved Liquidity Policy and Liquidity Contingency Plan, which are intended to ensure that the Bank has sufficient liquidity at all times to meet the ongoing needs of its customers in terms of credit and deposit outflows, take advantage of earnings enhancement opportunities and respond to liquidity stress conditions should they arise.
The Bank has both internal and external sources of liquidity that can be used to fund loan growth and accommodate deposit outflows. The Bank’s primary internal sources of liquidity are its overnight investments, investment securities designated as available-for-sale, maturities and monthly payments on its investment securities and loan portfolios and operations. At December 31, 2013, the Bank had approximately $503 million of unencumbered available-for-sale securities.
The Bank is a member of the Federal Reserve Bank of New York (“FRB”) and the Federal Home Loan Bank of New York (“FHLB of New York”), has repurchase agreements in place with a number of brokerage firms and commercial banks and has federal funds lines with several commercial banks. In addition to customer deposits, the Bank’s primary external sources of liquidity are secured borrowings from the FRB, FHLB of New York and repurchase agreement counterparties. In addition, the Bank can purchase overnight federal funds under its existing lines. However, the Bank’s FRB membership, FHLB of New York membership, repurchase agreements and federal funds lines do not represent legal commitments to extend credit to the Bank. The amount that the Bank can potentially borrow is currently dependent on, among other things, the amount of unencumbered eligible securities and loans that the Bank can use as collateral and the collateral margins required by the lenders. Based on the securities and loan collateral in place at the FRB and FHLB of New York at December 31, 2013, the Bank had borrowing capacity of approximately $1.2 billion.
Off-Balance Sheet Arrangements and Contractual Obligations
The Corporation’s off-balance sheet arrangements and contractual obligations at December 31, 2013 are summarized in the table that follows. Unused home equity lines are the largest component of the amount shown for commitments to extend credit. Since some of the commitments to extend credit and letters of credit are expected to expire without being drawn upon and, with respect to unused home equity lines, can be frozen, reduced or terminated by the Bank based on the financial condition of the borrower, the total commitment amounts shown in the table do not necessarily represent future cash requirements. The amounts shown for long-term debt and time deposits are based on the contractual maturities and do not include interest payments. Some repurchase agreements can be terminated by the purchaser prior to contractual maturity (see Note F to the Corporation’s December 31, 2013 consolidated financial statements for more detailed information regarding repurchase agreements). The Corporation believes that its current sources of liquidity are more than sufficient to fulfill the obligations it has at December 31, 2013 pursuant to off-balance sheet arrangements and contractual obligations.
|
|
|
|
|
Amount of Commitment Expiration Per Period
|
|
|
|
|
|
|
|
|
|
Over
|
|
|
Over
|
|
|
|
|
|
|
Total
|
|
|
One
|
|
|
One Year
|
|
|
Three Years
|
|
|
Over
|
|
|
|
Amounts
|
|
|
Year
|
|
|
Through
|
|
|
Through
|
|
|
Five
|
|
|
|
Committed
|
|
|
or Less
|
|
|
Three Years
|
|
|
Five Years
|
|
|
Years
|
|
|
|
(in thousands)
|
|
Commitments to extend credit
|
|
$
|
145,482
|
|
|
$
|
64,668
|
|
|
$
|
14,108
|
|
|
$
|
34,239
|
|
|
$
|
32,467
|
|
Standby letters of credit
|
|
|
4,347
|
|
|
|
4,107
|
|
|
|
240
|
|
|
|
-
|
|
|
|
-
|
|
Long-term debt
|
|
|
285,000
|
|
|
|
-
|
|
|
|
47,500
|
|
|
|
184,500
|
|
|
|
53,000
|
|
Operating lease obligations
|
|
|
10,246
|
|
|
|
1,516
|
|
|
|
2,806
|
|
|
|
2,313
|
|
|
|
3,611
|
|
Purchase obligations
|
|
|
10,207
|
|
|
|
2,211
|
|
|
|
4,022
|
|
|
|
3,974
|
|
|
|
-
|
|
Time deposits
|
|
|
265,040
|
|
|
|
112,076
|
|
|
|
100,028
|
|
|
|
46,661
|
|
|
|
6,275
|
|
|
|
$
|
720,322
|
|
|
$
|
184,578
|
|
|
$
|
168,704
|
|
|
$
|
271,687
|
|
|
$
|
95,353
|
|
Commitments to extend credit and letters of credit arise in the normal course of the Bank’s business of meeting the financing needs of its customers and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other party to financial instruments for commitments to extend credit and letters of credit is represented by the contractual notional amount of these instruments. The Bank uses the same credit policies in making commitments to extend credit, and generally uses the same credit policies for letters of credit, as it does for on-balance-sheet instruments such as loans.
The purchase obligations shown in the preceding table are pursuant to contracts that the Bank has with providers of data processing services. Required pension plan contributions for years beyond 2014 are not presently known and are therefore not included in the table. The Bank has no minimum required pension contribution for the Plan year ending September 30, 2014 and its maximum tax-deductible contribution is $1,177,000. Management has not yet determined whether the Bank will make a contribution to the Plan in 2014.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein have been prepared in accordance with accounting principles generally accepted in the United States, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary effect of inflation on the operations of the Corporation is reflected in increased operating costs. Unlike most industrial companies, most of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in interest rates generally have a more significant effect on the performance of a financial institution than do the effects of changes in the general rate of inflation and changes in prices. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Interest rates are highly sensitive to many factors, which are beyond the control of the Corporation, including the influence of domestic and foreign economic conditions and the monetary and fiscal policies of the United States government and federal agencies, particularly the Federal Reserve Board.
Impact of Issued But Not Yet Effective Accounting Standards
For a discussion regarding the impact of issued but not yet effective accounting standards, see Note A to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
Regulatory Rulemakings
Capital.
In July 2013, the Federal Reserve Board and the OCC approved a final rule (“final rule”) that changes the regulatory capital framework for all banking organizations and revises the prompt corrective action categories to incorporate the revised regulatory capital standards. The final rule implements for U.S. banks the Basel III regulatory capital reforms of the Basel Committee and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rule strengthens areas of weakness identified in the current capital rules by: (1) enhancing the quantity and quality of regulatory capital in the banking system; (2) better reflecting the risk of certain on and off-balance sheet exposures in the measurement of risk-weighted assets; and (3) building additional capital capacity into the banking system to absorb losses in times of future market and economic stress. Subject to certain transition provisions, banking organizations like the Corporation with $250 billion or less in total assets must comply with the new requirements beginning January 1, 2015.
The final rule establishes new prompt corrective action requirements for all banks and includes a new common equity Tier 1 risk-based capital measure. The risk-based capital (“RBC”) and leverage capital requirements under the final rule are set forth in the table that follows.
|
|
|
|
|
|
Common Equity
|
|
|
|
|
Total RBC
|
|
Tier 1 RBC
|
|
Tier 1 RBC
|
|
Leverage
|
Requirement
|
|
Measure (%)
|
|
Measure (%)
|
|
Measure (%)
|
|
Measure (%)
|
|
|
|
|
|
|
|
|
|
Well Capitalized
|
|
≥
10
|
|
≥
8
|
|
≥
6.5
|
|
≥
5
|
|
|
|
|
|
|
|
|
|
Adequately Capitalized
|
|
≥
8
|
|
≥
6
|
|
≥
4.5
|
|
≥
4
|
|
|
|
|
|
|
|
|
|
Undercapitalized
|
|
< 8
|
|
< 6
|
|
< 4.5
|
|
< 4
|
|
|
|
|
|
|
|
|
|
Significantly Undercapitalized
|
|
< 6
|
|
< 4
|
|
< 3
|
|
< 3
|
|
|
|
|
|
|
|
|
|
Critically Undercapitalized
|
|
Tangible equity to total assets
≤
2
|
The final rule also sets forth a capital ratio phase-in schedule. The phase-in provisions for banks with $250 billion or less in total assets are set forth in the following table.
January 1,
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Leverage Measure (%)
|
|
4.0
|
|
4.0
|
|
4.0
|
|
4.0
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Common Equity Tier 1 RBC (%)
|
|
4.5
|
|
4.5
|
|
4.5
|
|
4.5
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
Capital Conservation Buffer (%)
(1)
|
|
N/A
|
|
.625
|
|
1.25
|
|
1.875
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Common Equity Tier 1 RBC with Capital Conservation Buffer (%)
|
4.5
|
|
5.125
|
|
5.75
|
|
6.375
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Tier 1 RBC (%)
|
|
6.0
|
|
6.0
|
|
6.0
|
|
6.0
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Tier 1 RBC with Capital Conservation Buffer (%)
|
|
6.0
|
|
6.625
|
|
7.25
|
|
7.875
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Total RBC (%)
|
|
8.0
|
|
8.0
|
|
8.0
|
|
8.0
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Total RBC with Capital Conservation Buffer (%)
|
|
8.0
|
|
8.625
|
|
9.25
|
|
9.875
|
|
10.5
|
(1)
|
The capital conservation buffer must be maintained in order for a banking organization to avoid being subject to limitations on capital distributions, including dividend payments, and discretionary bonus payments to executive officers.
|
The final rule includes comprehensive guidance with respect to the measurement of risk-weighted assets. For residential mortgages, Basel III retains the risk-weights contained in the current capital rules which assign a risk-weight of 50% to most first-lien exposures and 100% to other residential mortgage exposures. The final rule would increase the risk-weights associated with certain on-balance sheet assets, such as high volatility commercial real estate loans, as defined, and loans that are more than 90 days past due or in nonaccrual status. Capital requirements would also increase for certain off-balance sheet exposures including, for example, loan commitments with an original maturity of one year or less.
Under the final rule, certain banking organizations, including the Corporation, are permitted to make a one-time election to continue the current treatment of excluding from regulatory capital most accumulated other comprehensive income (“AOCI”) components, including amounts relating to unrealized gains and losses on available-for-sale debt securities and amounts attributable to defined benefit postretirement plans. Institutions that elect to exclude most AOCI components from regulatory capital under Basel III will be able to avoid volatility that would otherwise be caused by things such as the impact of fluctuations in interest rates on the fair value of available-for-sale debt securities.
Management does not currently expect implementation of the final rule to have a material impact on the Corporation’s regulatory capital position, lines of business or profitability.
Liquidity.
In December 2010, the Basel Committee published “Basel III: International Framework for Liquidity Risk Measurement, Standards and Monitoring” and in January 2013 published a revised liquidity coverage ratio (collectively referred to as the “Liquidity Standard”). The Liquidity Standard includes: (1) a liquidity coverage ratio to ensure that sufficient high quality liquid resources are available in case of a liquidity crisis; (2) a net stable funding ratio to promote liquidity resiliency over longer time horizons by creating incentives for banks to fund their activities with stable sources of funding on an ongoing basis; and (3) additional liquidity monitoring metrics focused on maturity mismatch, concentration of funding and available unencumbered assets. The Liquidity Standard would be phased-in through 2019.
In November 2013, the U.S. banking agencies issued a Notice of Proposed Rulemaking (“NPR”) that would implement a quantitative liquidity requirement consistent with the liquidity coverage ratio established by the Basel Committee. The NPR would apply to all internationally active banking organizations, systemically important non-bank financial institutions and certain other large holding companies with more than $50 billion in total assets. The transition period in the NPR is shorter than that provided by the Basel Committee. The U.S. banking agencies have not adopted or proposed rules to implement a quantitative liquidity requirement for community banks such as the Bank. As a result, it is uncertain whether such a requirement will be implemented for community banks and, if implemented, its potential impact on the Bank, if any.
ITEM 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The Bank invests in interest-earning assets, which are funded by interest-bearing deposits and borrowings, noninterest-bearing deposits and capital. The Bank’s results of operations are subject to risk resulting from interest rate fluctuations generally and having assets and liabilities that have different maturity, repricing, and prepayment/withdrawal characteristics. The Bank defines interest rate risk as the risk that the Bank's net interest income and/or economic value of equity (“EVE”) will change when interest rates change. The principal objective of the Bank’s asset liability management activities is to optimize current and future net interest income while at the same time maintain acceptable levels of interest rate and liquidity risk and facilitate the funding needs of the Bank.
The Bank monitors and manages interest rate risk through a variety of techniques including traditional gap analysis and the use of interest rate sensitivity models. Both gap analysis and interest rate sensitivity modeling involve a variety of significant estimates and assumptions and are done at a specific point in time. Changes in the estimates and assumptions made in gap analysis and interest rate sensitivity modeling could have a significant impact on projected results and conclusions. Therefore, these techniques may not accurately reflect the actual impact of changes in the interest rate environment on the Bank’s net interest income or EVE.
Gap analysis.
Traditional gap analysis involves arranging the Bank’s interest-earning assets and interest-bearing liabilities by repricing periods and then computing the difference, or interest-rate sensitivity gap, between the assets and liabilities which are estimated to reprice during each time period and cumulatively through the end of each time period. Gap analysis requires estimates as to when individual categories of interest-sensitive assets and liabilities will reprice and assumes that assets and liabilities assigned to the same repricing period will reprice at the same time and in the same amount. Gap analysis also assumes that cash flows from maturing assets and liabilities will be reinvested in or refinanced by assets and liabilities of the same type, and does not fully take into account the fact that the repricing of some assets and liabilities is discretionary and subject to competitive and other pressures.
The table that follows summarizes the Corporation's cumulative interest rate sensitivity gap at December 31, 2013, based upon significant estimates and assumptions that the Corporation believes to be reasonable. The table arranges interest-earning assets and interest-bearing liabilities according to the period in which they contractually mature or, if earlier, are estimated to repay or reprice. Repayment and repricing estimates are based on internal data, market data and management’s assumptions about factors that are inherently uncertain. These factors include, among others, prepayment speeds, changes in market interest rates and the Bank’s response thereto, early withdrawal of deposits and competition. The balances of non-maturity deposit products have been included in categories beyond three months in the table because management believes, based on past experience and its knowledge of current competitive pressures, that the repricing of these products will lag market changes in interest rates to varying degrees.
|
|
Repricing Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Assets:
|
|
(in thousands)
|
|
Overnight Investments
|
|
$
|
463
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
463
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
463
|
|
Investment securities
|
|
|
24,298
|
|
|
|
22,161
|
|
|
|
45,983
|
|
|
|
92,442
|
|
|
|
257,492
|
|
|
|
462,346
|
|
|
|
4,617
|
|
|
|
816,897
|
|
Loans (1)
|
|
|
179,981
|
|
|
|
22,122
|
|
|
|
61,092
|
|
|
|
263,195
|
|
|
|
627,364
|
|
|
|
582,400
|
|
|
|
(14,970
|
)
|
|
|
1,457,989
|
|
Other assets
|
|
|
19,869
|
|
|
|
-
|
|
|
|
14,185
|
|
|
|
34,054
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90,489
|
|
|
|
124,543
|
|
|
|
|
224,611
|
|
|
|
44,283
|
|
|
|
121,260
|
|
|
|
390,154
|
|
|
|
884,856
|
|
|
|
1,044,746
|
|
|
|
80,136
|
|
|
|
2,399,892
|
|
Liabilities & Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking deposits
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
599,114
|
|
|
|
599,114
|
|
Savings, NOW and money market deposits
|
|
|
169,144
|
|
|
|
53,255
|
|
|
|
106,509
|
|
|
|
328,908
|
|
|
|
485,785
|
|
|
|
103,281
|
|
|
|
-
|
|
|
|
917,974
|
|
Time deposits, $100,000 and Over
|
|
|
48,347
|
|
|
|
20,282
|
|
|
|
9,673
|
|
|
|
78,302
|
|
|
|
91,228
|
|
|
|
3,849
|
|
|
|
-
|
|
|
|
173,379
|
|
Time deposits, other
|
|
|
21,146
|
|
|
|
8,748
|
|
|
|
3,880
|
|
|
|
33,774
|
|
|
|
55,461
|
|
|
|
2,426
|
|
|
|
-
|
|
|
|
91,661
|
|
Borrowed funds
|
|
|
110,463
|
|
|
|
-
|
|
|
|
-
|
|
|
|
110,463
|
|
|
|
232,000
|
|
|
|
53,000
|
|
|
|
-
|
|
|
|
395,463
|
|
Other liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,745
|
|
|
|
15,745
|
|
Stockholders' equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
206,556
|
|
|
|
206,556
|
|
|
|
|
349,100
|
|
|
|
82,285
|
|
|
|
120,062
|
|
|
|
551,447
|
|
|
|
864,474
|
|
|
|
162,556
|
|
|
|
821,415
|
|
|
|
2,399,892
|
|
Interest-rate sensitivity gap
|
|
$
|
(124,489
|
)
|
|
$
|
(38,002
|
)
|
|
$
|
1,198
|
|
|
$
|
(161,293
|
)
|
|
$
|
20,382
|
|
|
$
|
882,190
|
|
|
$
|
(741,279
|
)
|
|
$
|
-
|
|
Cumulative interest-rate sensitivity gap
|
|
$
|
(124,489
|
)
|
|
$
|
(162,491
|
)
|
|
$
|
(161,293
|
)
|
|
$
|
(161,293
|
)
|
|
$
|
(140,911
|
)
|
|
$
|
741,279
|
|
|
$
|
-
|
|
|
$
|
-
|
|
(1)
|
Includes loan held-for-sale.
|
As shown in the preceding table, the Bank has a larger volume of interest-bearing deposit accounts and borrowings than interest-earning assets that are subject to repricing in a one-year time frame. Nonetheless, an increase in short-term interest rates could positively impact the Bank’s net interest income in the near-term if increases in the rates paid on the Bank’s deposit accounts lag and occur in lesser amounts than increases in the rates earned on the Bank’s interest-earning assets. Conversely, net interest income in the near-term could be negatively impacted if the rates paid on the Bank’s deposit accounts are increased at the same time and in the same amount as increases in the rates earned on the Bank’s interest-earning assets. Furthermore, a decrease in short-term interest rates would likely have a negative impact on the Bank’s net interest income in the near term because interest rates are currently very low and there is little if any room to reduce the rates being paid on the Bank’s deposit accounts below current levels.
Interest Rate Sensitivity Modeling
.
Through use of interest rate sensitivity modeling, the Bank first projects net interest income over a five-year time period assuming a static balance sheet and no changes in interest rates from current levels. Utilization of a static balance sheet ensures that interest rate risk embedded in the Bank’s current balance sheet is not masked by assumed balance sheet growth or contraction. Net interest income is then projected over a five-year time period utilizing: (1) a static balance sheet and various interest rate change scenarios, including both ramped and shock changes; and (2) a most likely balance sheet growth scenario and these same interest rate change scenarios. The interest rate scenarios modeled are based on, among other things, the shape of the current yield curve and the relative level of rates and management’s expectations as to potential future yield curve shapes and rate levels.
The Bank also uses interest rate sensitivity modeling to calculate EVE in the current rate environment assuming both shock increases and decreases in interest rates. EVE is the difference between the present value of expected future cash flows from the Bank’s assets and the present value of the expected future cash flows from the Bank’s liabilities. Present values are determined using discount rates that management believes are reflective of current market conditions. EVE can capture long-term interest rate risk that would not be captured in a five-year projection of net interest income.
In utilizing interest rate sensitivity modeling to project net interest income and calculate EVE, management makes a variety of estimates and assumptions which include, among others, the following: (1) how much and when yields and costs on individual categories of interest-earning assets and interest-bearing liabilities will change in response to projected changes in market interest rates; (2) future cash flows, including prepayments of mortgage assets and calls of municipal securities; (3) cash flow reinvestment assumptions; (4) appropriate discount rates to be applied to loan, deposit and borrowing cash flows; and (5) decay or runoff rates for nonmaturity deposits such as checking, savings, NOW and money market accounts. The repricing of loans and borrowings and the reinvestment of loan and security cash flows are generally assumed to be impacted by the full amount of each assumed rate change, while the repricing of nonmaturity deposits is not. For nonmaturity deposits, management makes estimates of how much and when it will need to change the rates paid on the Bank’s various deposit products in response to changes in general market interest rates. These estimates are based on, among other things, product type, management’s experience with needed deposit rate adjustments in prior interest rate change cycles, and management’s assessment of competitive conditions in its marketplace.
The information provided in the following table is based on a variety of estimates and assumptions that management believes to be reasonable, the more significant of which are set forth hereinafter. The base case information in the table shows (1) a calculation of the Corporation’s EVE at December 31, 2013 arrived at by discounting estimated future cash flows at rates that management believes are reflective of current market conditions and (2) an estimate of net interest income on a tax-equivalent basis for the year ending December 31, 2014 assuming a static balance sheet, the adjustment of repricing balances to current rate levels, and the reinvestment at current rate levels of cash flows from maturing assets and liabilities in a mix of assets and liabilities that mirrors the Bank’s strategic plan. In addition, in calculating EVE, cash flows for nonmaturity deposits are based on a base case average life of 5.5 years.
The rate change information in the table shows estimates of net interest income on a tax-equivalent basis for the year ending December 31, 2014 and calculations of EVE at December 31, 2013 assuming rate changes of plus 100, 200 and 300 basis points and minus 100 points. The rate change scenarios were selected based on, among other things, the relative level of current interest rates and are: (1) assumed to be shock or immediate changes, (2) occur uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities, and (3) impact the repricing and reinvestment of all assets and liabilities, except nonmaturity deposits, by the full amount of the rate change. In projecting future net interest income under the indicated rate change scenarios, activity is simulated by assuming that cash flows from maturing assets and liabilities are reinvested in a mix of assets and liabilities that mirrors the Bank’s strategic plan. The changes in EVE from the base case have not been tax affected.
|
|
Economic Value of Equity
at December 31, 2013
|
|
|
Net Interest Income
for 2014
|
|
Rate Change Scenario (dollars in thousands)
|
|
Amount
|
|
|
|
|
|
Amount
|
|
|
|
|
+ 300 basis point rate shock
|
|
$
|
181,712
|
|
|
|
-32.1
|
%
|
|
$
|
65,691
|
|
|
|
-9.8
|
%
|
+ 200 basis point rate shock
|
|
|
223,598
|
|
|
|
-16.4
|
%
|
|
|
72,459
|
|
|
|
-0.5
|
%
|
+ 100 basis point rate shock
|
|
|
254,695
|
|
|
|
-4.8
|
%
|
|
|
74,604
|
|
|
|
2.5
|
%
|
Base case (no rate change)
|
|
|
267,472
|
|
|
|
-
|
|
|
|
72,791
|
|
|
|
-
|
|
- 100 basis point rate shock
|
|
|
259,784
|
|
|
|
-2.9
|
%
|
|
|
69,258
|
|
|
|
-4.9
|
%
|
As shown in the preceding table, assuming a static balance sheet, an immediate decrease in interest rates of 100 basis points or an immediate increase in interest rates of 200 or 300 basis points could negatively impact the Bank’s net interest income for the year ended December 31, 2014. Conversely, an immediate increase in interest rates of 100 basis points could positively impact the Bank’s net interest income for the same time period. The Bank’s net interest income could be negatively impacted in a shock down 100 basis point scenario because, among other things, the rates currently being paid on many of the Bank’s deposit products are approaching zero and there is little room to reduce them further. Unlike the shock up 100 basis point scenario, in the shock up 200 or 300 basis point scenarios it is assumed that the Bank will need to make more significant changes to the rates paid on its nonmaturity deposits in order to remain competitive and thus net interest income could be negatively impacted. Changes in management’s estimates as to the rates that will need to be paid on nonmaturity deposits could have a significant impact on the net interest income amounts shown for each scenario in the table.
Forward-Looking Statements
This report on Form 10-K and the documents incorporated into it by reference contain various forward-looking statements. These forward-looking statements include statements of goals; intentions and expectations; estimates of risks and of future costs and benefits; assessments of probable loan losses; assessments of market risk; and statements of the ability to achieve financial and other goals. Forward-looking statements are typically identified by words such as “would,” “should,” “could,” “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project” and other similar words and expressions. Forward-looking statements are subject to numerous assumptions, risks and uncertainties which may change over time. Forward-looking statements speak only as of the date they are made. We do not assume any duty and do not undertake to update our forward-looking statements. Because forward-looking statements are subject to assumptions and uncertainties, actual results or future events could differ, possibly materially, from those that we anticipated in our forward-looking statements and future results could differ materially from historical performance.
Our forward-looking statements are subject to the following principal risks and uncertainties: general economic conditions and trends, either nationally or locally; conditions in the securities markets; fluctuations in the trading price of our common stock; changes in interest rates; changes in deposit flows, and in the demand for deposit and loan products and other financial services; changes in real estate values; changes in the quality or composition of our loan or investment portfolios; changes in competitive pressures among financial institutions or from non-financial institutions; our ability to retain key members of management; changes in legislation, regulation, and policies; and a variety of other matters which, by their nature, are subject to significant uncertainties. We provide greater detail regarding some of these factors in Item 1A, “Risk Factors” included in this report. Our forward-looking statements may also be subject to other risks and uncertainties, including those that we may discuss elsewhere in other documents we file with the SEC from time to time.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
C O N S O L I D A T E D B A L A N C E S H E E T S
December 31 (in thousands)
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
35,034
|
|
|
$
|
41,871
|
|
Temporary investments
|
|
|
463
|
|
|
|
320
|
|
Cash and cash equivalents
|
|
|
35,497
|
|
|
|
42,191
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Held-to-maturity, at amortized cost (fair value of $33,548 and $46,958)
|
|
|
32,104
|
|
|
|
44,167
|
|
Available-for-sale, at fair value
|
|
|
784,793
|
|
|
|
817,434
|
|
|
|
|
816,897
|
|
|
|
861,601
|
|
|
|
|
|
|
|
|
|
|
Loan held-for-sale
|
|
|
900
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
71,818
|
|
|
|
54,339
|
|
Secured by real estate:
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
716,011
|
|
|
|
504,368
|
|
Residential mortgages
|
|
|
605,343
|
|
|
|
502,367
|
|
Home equity lines
|
|
|
77,581
|
|
|
|
81,975
|
|
Consumer
|
|
|
7,184
|
|
|
|
4,335
|
|
|
|
|
1,477,937
|
|
|
|
1,147,384
|
|
Allowance for loan losses
|
|
|
(20,848
|
)
|
|
|
(18,624
|
)
|
|
|
|
1,457,089
|
|
|
|
1,128,760
|
|
|
|
|
|
|
|
|
|
|
Restricted stock, at cost
|
|
|
19,869
|
|
|
|
13,104
|
|
Bank premises and equipment, net
|
|
|
24,463
|
|
|
|
24,271
|
|
Bank-owned life insurance
|
|
|
14,185
|
|
|
|
13,665
|
|
Pension plan assets, net
|
|
|
18,532
|
|
|
|
10,900
|
|
Other assets
|
|
|
12,460
|
|
|
|
13,798
|
|
|
|
$
|
2,399,892
|
|
|
$
|
2,108,290
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Checking
|
|
$
|
599,114
|
|
|
$
|
528,940
|
|
Savings, NOW and money market
|
|
|
917,974
|
|
|
|
844,583
|
|
Time, $100,000 and over
|
|
|
173,379
|
|
|
|
168,437
|
|
Time, other
|
|
|
91,661
|
|
|
|
91,116
|
|
|
|
|
1,782,128
|
|
|
|
1,633,076
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
110,463
|
|
|
|
103,634
|
|
Long-term debt
|
|
|
285,000
|
|
|
|
145,000
|
|
Accrued expenses and other liabilities
|
|
|
13,141
|
|
|
|
7,880
|
|
Deferred income taxes payable
|
|
|
2,604
|
|
|
|
13,330
|
|
|
|
|
2,193,336
|
|
|
|
1,902,920
|
|
Commitments and Contingent Liabilities (Note M)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
|
|
Common stock, par value $.10 per share: Authorized, 20,000,000 shares;
|
|
|
|
|
|
|
|
|
Issued and outstanding, 9,141,767 and 9,001,686 shares
|
|
|
914
|
|
|
|
900
|
|
Surplus
|
|
|
46,873
|
|
|
|
42,643
|
|
Retained earnings
|
|
|
157,107
|
|
|
|
145,087
|
|
|
|
|
204,894
|
|
|
|
188,630
|
|
Accumulated other comprehensive income, net of tax
|
|
|
1,662
|
|
|
|
16,740
|
|
|
|
|
206,556
|
|
|
|
205,370
|
|
|
|
$
|
2,399,892
|
|
|
$
|
2,108,290
|
|
See notes to consolidated financial statements
C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E
Year Ended December 31 (dollars in thousands, except per share data)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
51,921
|
|
|
$
|
49,651
|
|
|
$
|
47,777
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
10,164
|
|
|
|
13,836
|
|
|
|
16,662
|
|
Nontaxable
|
|
|
12,766
|
|
|
|
12,742
|
|
|
|
11,873
|
|
|
|
|
74,851
|
|
|
|
76,229
|
|
|
|
76,312
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings, NOW and money market deposits
|
|
|
2,302
|
|
|
|
3,393
|
|
|
|
4,035
|
|
Time deposits
|
|
|
5,040
|
|
|
|
5,803
|
|
|
|
6,052
|
|
Short-term borrowings
|
|
|
288
|
|
|
|
195
|
|
|
|
93
|
|
Long-term debt
|
|
|
4,734
|
|
|
|
6,736
|
|
|
|
7,387
|
|
|
|
|
12,364
|
|
|
|
16,127
|
|
|
|
17,567
|
|
Net interest income
|
|
|
62,487
|
|
|
|
60,102
|
|
|
|
58,745
|
|
Provision for loan losses
|
|
|
2,997
|
|
|
|
3,628
|
|
|
|
4,061
|
|
Net interest income after provision for loan losses
|
|
|
59,490
|
|
|
|
56,474
|
|
|
|
54,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Management Division income
|
|
|
1,872
|
|
|
|
1,624
|
|
|
|
1,539
|
|
Service charges on deposit accounts
|
|
|
3,019
|
|
|
|
3,053
|
|
|
|
3,186
|
|
Net gains on sales of securities
|
|
|
16
|
|
|
|
3,613
|
|
|
|
138
|
|
Other
|
|
|
2,138
|
|
|
|
1,898
|
|
|
|
1,563
|
|
|
|
|
7,045
|
|
|
|
10,188
|
|
|
|
6,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
|
17,160
|
|
|
|
16,360
|
|
|
|
15,785
|
|
Employee benefits
|
|
|
5,517
|
|
|
|
5,035
|
|
|
|
5,066
|
|
Occupancy and equipment
|
|
|
7,669
|
|
|
|
7,265
|
|
|
|
7,148
|
|
Debt extinguishment
|
|
|
-
|
|
|
|
3,812
|
|
|
|
-
|
|
Other
|
|
|
9,154
|
|
|
|
8,780
|
|
|
|
8,710
|
|
|
|
|
39,500
|
|
|
|
41,252
|
|
|
|
36,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
27,035
|
|
|
|
25,410
|
|
|
|
24,401
|
|
Income tax expense
|
|
|
5,735
|
|
|
|
5,017
|
|
|
|
4,944
|
|
Net Income
|
|
$
|
21,300
|
|
|
$
|
20,393
|
|
|
$
|
19,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares
|
|
9,088,986
|
|
|
8,915,226
|
|
|
8,761,895
|
|
Dilutive stock options and restricted stock units
|
|
|
83,164
|
|
|
|
85,541
|
|
|
|
93,069
|
|
|
|
9,172,150
|
|
|
9,000,767
|
|
|
8,854,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.34
|
|
|
$
|
2.29
|
|
|
$
|
2.22
|
|
Diluted
|
|
$
|
2.32
|
|
|
$
|
2.27
|
|
|
$
|
2.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share
|
|
$
|
1.02
|
|
|
$
|
.96
|
|
|
$
|
.90
|
|
See notes to consolidated financial statements
C O N S O L I D A T E D S T A T E M E N T S O F C O M P R E H E N S I V E I N C O M E
Year Ended December 31 (in thousands)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
21,300
|
|
|
$
|
20,393
|
|
|
$
|
19,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on available-for-sale securities
|
|
|
(33,060
|
)
|
|
|
(1,011
|
)
|
|
|
34,851
|
|
Change in funded status of pension plan
|
|
|
8,057
|
|
|
|
(561
|
)
|
|
|
(3,172
|
)
|
Other comprehensive income (loss) before income taxes
|
|
|
(25,003
|
)
|
|
|
(1,572
|
)
|
|
|
31,679
|
|
Income tax expense (benefit)
|
|
|
(9,925
|
)
|
|
|
(624
|
)
|
|
|
12,575
|
|
Other comprehensive income (loss)
|
|
|
(15,078
|
)
|
|
|
(948
|
)
|
|
|
19,104
|
|
Comprehensive Income
|
|
$
|
6,222
|
|
|
$
|
19,445
|
|
|
$
|
38,561
|
|
See notes to consolidated financial statements
C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S I N S T O C K H O L D E R S' E Q U I T Y
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
(dollars in thousands)
|
|
Shares
|
|
|
Amount
|
|
|
Surplus
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2011
|
|
|
8,707,665
|
|
|
$
|
871
|
|
|
$
|
35,526
|
|
|
$
|
121,713
|
|
|
$
|
(1,416
|
)
|
|
$
|
156,694
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,457
|
|
|
|
|
|
|
|
19,457
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,104
|
|
|
|
19,104
|
|
Repurchase of common stock
|
|
|
(7,022
|
)
|
|
|
(1
|
)
|
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
|
(185
|
)
|
Common stock issued under stock compensation plans, including tax benefit
|
|
|
93,289
|
|
|
|
9
|
|
|
|
1,409
|
|
|
|
|
|
|
|
|
|
|
|
1,418
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
756
|
|
|
|
|
|
|
|
|
|
|
|
756
|
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,897
|
)
|
|
|
|
|
|
|
(7,897
|
)
|
Balance, December 31, 2011
|
|
|
8,793,932
|
|
|
|
879
|
|
|
|
37,507
|
|
|
|
133,273
|
|
|
|
17,688
|
|
|
|
189,347
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,393
|
|
|
|
|
|
|
|
20,393
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(948
|
)
|
|
|
(948
|
)
|
Repurchase of common stock
|
|
|
(13,150
|
)
|
|
|
(1
|
)
|
|
|
(368
|
)
|
|
|
|
|
|
|
|
|
|
|
(369
|
)
|
Common stock issued under stock compensation plans, including tax benefit
|
|
|
145,604
|
|
|
|
14
|
|
|
|
2,724
|
|
|
|
|
|
|
|
|
|
|
|
2,738
|
|
Common stock issued under dividend reinvestment and stock purchase plan
|
|
|
75,300
|
|
|
|
8
|
|
|
|
1,998
|
|
|
|
|
|
|
|
|
|
|
|
2,006
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
782
|
|
|
|
|
|
|
|
|
|
|
|
782
|
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,579
|
)
|
|
|
|
|
|
|
(8,579
|
)
|
Balance, December 31, 2012
|
|
|
9,001,686
|
|
|
|
900
|
|
|
|
42,643
|
|
|
|
145,087
|
|
|
|
16,740
|
|
|
|
205,370
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,300
|
|
|
|
|
|
|
|
21,300
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,078
|
)
|
|
|
(15,078
|
)
|
Repurchase of common stock
|
|
|
(3,211
|
)
|
|
|
|
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
(95
|
)
|
Common stock issued under stock compensation plans, including tax benefit
|
|
|
74,209
|
|
|
|
7
|
|
|
|
1,573
|
|
|
|
|
|
|
|
|
|
|
|
1,580
|
|
Common stock issued under dividend reinvestment and stock purchase plan
|
|
|
69,083
|
|
|
|
7
|
|
|
|
2,160
|
|
|
|
|
|
|
|
|
|
|
|
2,167
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
592
|
|
|
|
|
|
|
|
|
|
|
|
592
|
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,280
|
)
|
|
|
|
|
|
|
(9,280
|
)
|
Balance, December 31, 2013
|
|
|
9,141,767
|
|
|
$
|
914
|
|
|
$
|
46,873
|
|
|
$
|
157,107
|
|
|
$
|
1,662
|
|
|
$
|
206,556
|
|
See notes to consolidated financial statements
C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S
Year Ended December 31 (in thousands)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
21,300
|
|
|
$
|
20,393
|
|
|
$
|
19,457
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
2,997
|
|
|
|
3,628
|
|
|
|
4,061
|
|
Loss (gain) on loans held-for-sale
|
|
|
-
|
|
|
|
(28
|
)
|
|
|
75
|
|
Deferred income tax provision (credit)
|
|
|
(801
|
)
|
|
|
2,835
|
|
|
|
743
|
|
Depreciation and amortization
|
|
|
2,824
|
|
|
|
2,816
|
|
|
|
2,667
|
|
Premium amortization on investment securities, net
|
|
|
8,664
|
|
|
|
8,981
|
|
|
|
5,396
|
|
Net gains on sales of securities
|
|
|
(16
|
)
|
|
|
(3,613
|
)
|
|
|
(138
|
)
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
3,812
|
|
|
|
-
|
|
Stock-based compensation expense
|
|
|
592
|
|
|
|
782
|
|
|
|
756
|
|
Accretion of cash surrender value on bank-owned life insurance
|
|
|
(520
|
)
|
|
|
(500
|
)
|
|
|
(502
|
)
|
Pension expense less contribution
|
|
|
425
|
|
|
|
(5,328
|
)
|
|
|
(3,436
|
)
|
Decrease (increase) in other assets
|
|
|
1,336
|
|
|
|
688
|
|
|
|
(957
|
)
|
Increase in accrued expenses and other liabilities
|
|
|
2,885
|
|
|
|
555
|
|
|
|
1,439
|
|
Net cash provided by operating activities
|
|
|
39,686
|
|
|
|
35,021
|
|
|
|
29,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of held-to-maturity securities
|
|
|
722
|
|
|
|
-
|
|
|
|
-
|
|
Proceeds from sales of available-for-sale securities
|
|
|
1,780
|
|
|
|
102,687
|
|
|
|
4,610
|
|
Proceeds from maturities and redemptions of investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
12,120
|
|
|
|
18,427
|
|
|
|
25,073
|
|
Available-for-sale
|
|
|
137,256
|
|
|
|
136,518
|
|
|
|
122,620
|
|
Purchase of investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
(689
|
)
|
|
|
(400
|
)
|
|
|
(472
|
)
|
Available-for-sale
|
|
|
(148,193
|
)
|
|
|
(169,171
|
)
|
|
|
(338,586
|
)
|
Proceeds from sales of other real estate owned and loan held-for-sale
|
|
|
427
|
|
|
|
928
|
|
|
|
1,535
|
|
Net increase in loans to customers
|
|
|
(332,651
|
)
|
|
|
(164,000
|
)
|
|
|
(85,013
|
)
|
Net increase in restricted stock
|
|
|
(6,765
|
)
|
|
|
(820
|
)
|
|
|
(4,129
|
)
|
Purchase of bank premises and equipment, net
|
|
|
(3,016
|
)
|
|
|
(5,570
|
)
|
|
|
(3,634
|
)
|
Net cash used in investing activities
|
|
|
(339,009
|
)
|
|
|
(81,401
|
)
|
|
|
(277,996
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in total deposits
|
|
|
149,052
|
|
|
|
130,208
|
|
|
|
209,930
|
|
Net increase in short-term borrowings
|
|
|
6,829
|
|
|
|
1,407
|
|
|
|
40,637
|
|
Proceeds from long-term debt
|
|
|
140,000
|
|
|
|
62,500
|
|
|
|
27,500
|
|
Repayment of long-term debt
|
|
|
-
|
|
|
|
(128,812
|
)
|
|
|
(12,000
|
)
|
Proceeds from issuance of common stock
|
|
|
2,167
|
|
|
|
2,006
|
|
|
|
-
|
|
Proceeds from exercise of stock options
|
|
|
1,418
|
|
|
|
2,603
|
|
|
|
1,279
|
|
Tax benefit of stock compensation plans
|
|
|
162
|
|
|
|
135
|
|
|
|
139
|
|
Repurchase and retirement of common stock
|
|
|
(95
|
)
|
|
|
(369
|
)
|
|
|
(185
|
)
|
Cash dividends paid
|
|
|
(6,904
|
)
|
|
|
(10,602
|
)
|
|
|
(7,790
|
)
|
Net cash provided by financing activities
|
|
|
292,629
|
|
|
|
59,076
|
|
|
|
259,510
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(6,694
|
)
|
|
|
12,696
|
|
|
|
11,075
|
|
Cash and cash equivalents, beginning of year
|
|
|
42,191
|
|
|
|
29,495
|
|
|
|
18,420
|
|
Cash and cash equivalents, end of year
|
|
$
|
35,497
|
|
|
$
|
42,191
|
|
|
$
|
29,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
10,905
|
|
|
$
|
15,378
|
|
|
$
|
16,397
|
|
Income taxes
|
|
|
6,325
|
|
|
|
2,874
|
|
|
|
4,116
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends payable
|
|
|
2,376
|
|
|
|
-
|
|
|
|
2,022
|
|
Loans transferred from portfolio to other real estate owned and held-for-sale
|
|
|
1,325
|
|
|
|
900
|
|
|
|
610
|
|
See notes to consolidated financial statements
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of The First of Long Island Corporation (“Corporation”) and its wholly-owned subsidiary, The First National Bank of Long Island (“Bank”), and subsidiaries wholly-owned by the Bank, either directly or indirectly: The First of Long Island Agency, Inc.; FNY Service Corp. (“FNY”); and The First of Long Island REIT, Inc. (“REIT”). The Corporation’s financial condition and operating results principally reflect those of the Bank and its subsidiaries. The consolidated entity is referred to as the “Corporation,” and the Bank and its subsidiaries are collectively referred to as the “Bank.” All intercompany balances and amounts have been eliminated. In preparing the consolidated financial statements, management is required to make estimates, such as the allowance for loan losses, and assumptions that affect the reported asset and liability balances, revenue and expense amounts, and the disclosure of contingent assets and liabilities. Actual results could differ significantly from those estimates.
The accounting and reporting policies of the Corporation reflect banking industry practice and conform to generally accepted accounting principles in the United States. The following is a summary of the Corporation’s significant accounting policies.
Cash and Cash Equivalents
Cash and cash equivalents include cash, federal funds sold and deposits with other financial institutions that generally mature within 90 days.
Investment Securities
Current accounting standards require that investment securities be classified as held-to-maturity, available-for-sale or trading. The trading category is not applicable to any securities in the Bank's portfolio because the Bank does not buy or hold debt or equity securities principally for the purpose of selling in the near term. Held-to-maturity securities, or debt securities which the Bank has the intent and ability to hold to maturity, are reported at amortized cost. Available-for-sale securities, or debt and equity securities which are neither held-to-maturity securities nor trading securities, are reported at fair value, with unrealized gains and losses, net of the related income tax effect, included in other comprehensive income.
Interest income includes amortization or accretion of purchase premium or discount. Premiums and discounts on securities are amortized or accreted on the level-yield method. Prepayments are anticipated for mortgage-backed securities. Premiums on municipal securities are amortized to the earlier of the stated maturity date or the first call date, while discounts on municipal securities are accreted to the stated maturity date. Realized gains and losses on the sale of securities are determined using the specific identification method.
Investment securities are evaluated for other-than-temporary impairment (“OTTI”) no less often than quarterly. In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; (3) whether the market decline was affected by macroeconomic conditions; and (4) whether management has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
When OTTI occurs, management considers whether it intends to sell, or, more likely than not, will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or fair value. Any subsequent declines in fair value below the initial carrying value are recorded as a valuation allowance established through a charge to noninterest income.
Loans and Allowance for Loan Losses
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance less any chargeoffs and the allowance for loan losses and plus or minus net deferred loan costs and fees, respectively. Interest on loans is credited to income based on the principal amount outstanding. Direct loan origination costs, net of loan origination fees, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.
The past due status of a loan is based on the contractual terms in the loan agreement. Unless a loan is well secured and in the process of collection, the accrual of interest income is discontinued when a loan becomes 90 days past due as to principal or interest payments. The accrual of interest income on a loan is also discontinued when it is determined that the borrower will not be able to make principal and interest payments according to the contractual terms of the current loan agreement. When the accrual of interest income is discontinued on a loan, any accrued but unpaid interest is reversed against current period income. Interest received on nonaccrual loans is accounted for on the cash basis or cost-recovery method until the loans qualify for return to an accrual status. Return to an accrual status occurs when all the principal and interest amounts contractually due are brought current and all future payments are reasonably assured.
The allowance for loan losses is established through provisions for loan losses charged against income. When available information confirms that specific loans, or portions thereof, are uncollectible, these amounts are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is an amount that management currently believes will be adequate to absorb probable incurred losses in the Bank’s loan portfolio. The process for estimating credit losses and determining the allowance for loan losses as of any balance sheet date is subjective in nature and requires material estimates. Actual results could differ significantly from those estimates.
The allowance for loan losses is comprised of specific reserves allocated to individually impaired loans plus estimated losses on pools of loans that are collectively reviewed. Although the allowance for loan losses has two separate components, one for impairment losses on individual loans and one for collective impairment losses on pools of loans, the entire allowance for loan losses is available to absorb realized losses as they occur whether they relate to individual loans or pools of loans.
Estimated losses for loans individually deemed to be impaired are based on either the fair value of collateral or the discounted value of expected future cash flows. For all collateral dependent impaired loans, impairment losses are measured based on the fair value of the collateral. A loan is considered to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled principal and interest when due according to the contractual terms of the current loan agreement. Loans that experience insignificant payment delays and payment shortfalls are not automatically considered to be impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and financial condition and the amount of the shortfall in relation to the principal and interest owed.
Estimated losses for loans that are not individually deemed to be impaired are determined on a pooled basis using the Bank’s historical loss experience. The time period utilized in determining historical losses currently ranges from 24 to 60 months, but varies from time-to-time based on, among other things, the economic cycle. Loan pools include; commercial and industrial loans; small business credit scored loans; owner-occupied commercial mortgages; multifamily commercial mortgages; other commercial mortgages; construction and land development loans; first-lien residential mortgages; junior-lien residential mortgages; first-lien home equity lines; junior-lien home equity lines; and consumer loans. Risk ratings and a variety of credit metrics are used to adjust historical losses to current conditions for each pool. Management utilizes a ten point risk rating system for commercial and industrial loans, owner-occupied commercial mortgages, multifamily commercial mortgages, other commercial mortgages and construction and land development loans. A three point risk rating system is used for residential mortgages, home equity lines, consumer loans and small business credit scored loans. Credit metrics used for the various pools include, but are not limited to, delinquencies, general economic conditions, local and national unemployment rates, commercial vacancies, trends in local median home prices, trends in the nature and volume of loans, compound average growth rates, changes in the mix of loans, concentrations of credit, changes in lending policies and procedures, changes in lending staff, changes in the loan review function and environmental factors including a general assessment of the legal, regulatory and competitive risks.
Other detailed information about the Bank’s rating systems for the above pools of loans can be found in “Note C – Loans.”
Troubled debt restructurings are by definition impaired loans and are generally reported at the present value of estimated future cash flows using the loan’s effective rate at inception. However, if a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported at the fair value of the collateral.
Unless otherwise noted, the policies and methodologies described above relating to loans and the allowance for loan losses are consistently applied to all classes of loans.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Corporation, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Bank Premises and Equipment
Land is carried at cost. Other bank premises and equipment are carried at cost, less accumulated depreciation and amortization. Buildings are depreciated using the straight-line method over their estimated useful lives, which range from thirty-one to forty years. Building improvements are depreciated using the straight-line method over the then remaining lives of the buildings or their estimated useful lives, whichever is shorter. Leasehold improvements are amortized using the straight-line method over the remaining lives of the leases or their estimated useful lives, whichever is shorter. The lives of the respective leases range from five to twenty years. Furniture, fixtures and equipment are depreciated using the straight-line method over their estimated useful lives, which range from three to ten years.
Bank-owned Life Insurance
The Bank is the owner and beneficiary of insurance policies on the lives of certain officers. Bank-owned life insurance is recorded at the amount that can be realized under the contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement.
Restricted Stock
The Bank is a member of and owns stock in the Federal Home Loan Bank of New York (“FHLB of New York”) and the Federal Reserve Bank of New York (“FRB”). The FHLB of New York requires member banks to own stock, the amount of which is based on membership and the level of FHLB of New York advances. The stocks are carried at cost, classified as restricted stock and periodically evaluated for impairment based on the prospects for the ultimate recovery of cost. Cash dividends, if any, are reported as income.
Long-term Assets
Premises and equipment, intangible assets, and other long-term assets, if any, are reviewed for impairment when events indicate that their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Loan Commitments and Related Financial Instruments
Financial instruments include off balance sheet credit instruments, such as commitments to make loans, commercial letters of credit and standby letters of credit. The face amount of these items represents the exposure to loss, before considering customer collateral or ability to repay. The Bank maintains a reserve for losses on off-balance-sheet credit exposures which is included in accrued expense and other liabilities on the consolidated balance sheet. Off-balance-sheet credit instruments are recorded on the balance sheet when they are funded or drawn down.
Checking Deposits
Each of the Bank’s commercial checking accounts has a related noninterest-bearing sweep account. The sole purpose of the sweep accounts is to reduce the reserve balances that the Bank is required to maintain with the FRB, and thereby increase funds available for investment. Although the sweep accounts are classified as savings accounts for regulatory purposes, they are included in checking deposits in the accompanying consolidated balance sheets.
Income Taxes
A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year. A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law. The effects of future changes in tax laws or rates are not considered. The Corporation recognizes interest and/or penalties related to income tax matters in noninterest income or noninterest expense as appropriate.
Retirement Plans
Pension expense is the sum of service cost, interest cost and amortization of prior service costs and actuarial gains and losses, net of the expected return on plan assets. Employee 401(k) plan expense is equal to the amount of matching contributions.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Stockholders’ Equity
Earnings Per Share
.
Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options and restricted stock units (“RSUs”) were converted into shares of common stock that then shared in the earnings of the Corporation. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and dilutive stock options and RSUs. There were no anti-dilutive stock options at December 31, 2013. There were 46,102 and 95,119 anti-dilutive stock options at December 31, 2012 and 2011, respectively. There were no anti-dilutive RSUs in 2013, 2012 or 2011. Other than the stock options and RSUs described in Note J and the Rights described in Note I, the Corporation has no securities that could be converted into common stock nor does the Corporation have any contracts that could result in the issuance of common stock.
Shares Tendered Upon the Exercise of Stock Options and Withheld Upon the Vesting of RSUs.
The amount shown for 2013 on the line captioned “Repurchase of common stock” in the Consolidated Statement of Changes in Stockholders’ Equity represents 3,211 shares with a value of $95,000 withheld upon the conversion of RSUs. The amount shown for 2012 represents 8,450 shares with a value of $244,000 tendered upon the exercise of stock options and 4,700 shares with a value of $125,000 withheld upon the conversion of RSUs. The amount shown for 2011 represents 1,897 shares with a value of $49,000 tendered upon the exercise of stock options and 5,125 shares with a value of $136,000 withheld upon the conversion of RSUs.
Stock-based Compensation
The Corporation has a stock-based compensation plan as more fully described in Note J. Compensation cost is recognized for stock options and RSUs issued to employees based on the grant date fair value of the award. The cost is recognized over the period during which an employee is required to provide service in exchange for the award, which is usually the vesting period. For stock options, compensation expense is recognized ratably over the five-year vesting period or the period from the grant date to the participant’s eligible retirement date, whichever is shorter. For RSUs, compensation expense is recognized over the three-year performance period and adjusted periodically to reflect the estimated number of shares of the Corporation’s common stock into which the RSUs will ultimately be convertible. However, if the period between the grant date and the grantee’s eligible retirement date is less than three years, compensation expense is recognized ratably over this shorter period. In determining compensation expense for stock options and RSUs outstanding and not yet vested, the Corporation assumes, based on prior experience that no forfeitures will occur.
Comprehensive Income
Comprehensive income includes net income and other comprehensive income. Other comprehensive income includes revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income. Other comprehensive income for the Corporation consists of unrealized holding gains or losses on available-for-sale securities and changes in the funded status of the Bank’s defined benefit pension plan, both net of related income taxes. Accumulated other comprehensive income is recognized as a separate component of stockholders’ equity.
The components of other comprehensive income (loss) and the related tax effects are as follows:
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Unrealized holding gains (losses) on available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
Change arising during period
|
|
$
|
(33,061
|
)
|
|
$
|
2,602
|
|
|
$
|
34,989
|
|
Reclassification adjustment for losses (gains) included in net income (1)
|
|
|
1
|
|
|
|
(3,613
|
)
|
|
|
(138
|
)
|
Net unrealized gains (losses) on available-for-sale securities
|
|
|
(33,060
|
)
|
|
|
(1,011
|
)
|
|
|
34,851
|
|
Tax effect
|
|
|
(13,123
|
)
|
|
|
(401
|
)
|
|
|
13,834
|
|
|
|
|
(19,937
|
)
|
|
|
(610
|
)
|
|
|
21,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in funded status of pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net gain (loss) arising during period
|
|
|
7,403
|
|
|
|
(1,248
|
)
|
|
|
(3,461
|
)
|
Amortization of prior service cost included in pension expense (2)
|
|
|
23
|
|
|
|
23
|
|
|
|
23
|
|
Amortization of net actuarial loss included in pension expense (2)
|
|
|
631
|
|
|
|
664
|
|
|
|
266
|
|
|
|
|
8,057
|
|
|
|
(561
|
)
|
|
|
(3,172
|
)
|
Tax effect
|
|
|
3,198
|
|
|
|
(223
|
)
|
|
|
(1,259
|
)
|
|
|
|
4,859
|
|
|
|
(338
|
)
|
|
|
(1,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$
|
(15,078
|
)
|
|
$
|
(948
|
)
|
|
$
|
19,104
|
|
(1)
Reclassification adjustment represents net realized gains or losses arising from the sale of available-for-sale securities. These net realized gains or losses are included in the consolidated statements of income in the line item, “Net gains on sales of securities.” See “Note B – Investment Securities” for the income tax expense (benefit) related to these net realized gains or losses.
(2)
Represents the amortization into expense of prior service cost and net actuarial loss relating to the Corporation’s defined benefit pension plan. These items are included in net periodic pension cost (see “Note K – Retirement Plans”) and in the consolidated statements of income in the line item, “Employee benefits.” The income tax expense relating to these costs is included in the consolidated statements of income in the line item, “Income tax expense.”
The following sets forth the components of accumulated other comprehensive income, net of tax:
|
|
|
|
|
Current
|
|
|
|
|
|
|
Balance
|
|
|
Period
|
|
|
Balance
|
|
|
|
12/31/12
|
|
|
Change
|
|
|
12/31/13
|
|
|
|
(in thousands)
|
|
Unrealized holding gains on available-for-sale securities
|
|
$
|
22,720
|
|
|
$
|
(19,937
|
)
|
|
$
|
2,783
|
|
Unrealized actuarial losses and prior service costs on pension plan
|
|
|
(5,980
|
)
|
|
|
4,859
|
|
|
|
(1,121
|
)
|
Total accumulated other comprehensive income
|
|
$
|
16,740
|
|
|
$
|
(15,078
|
)
|
|
$
|
1,662
|
|
Operating Segments
While senior management monitors the revenue streams of the Bank’s various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the financial operations of the Bank are aggregated in one reportable operating segment.
Investment Management Division
Assets held in a fiduciary capacity are not assets of the Corporation and, accordingly, are not included in the accompanying consolidated financial statements. The Investment Management Division records fees on the accrual basis.
Reclassifications
When appropriate, items in the prior year financial statements are reclassified to conform to the current period presentation.
Adoption of New Accounting Standards
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments in ASU 2013-02 require entities like the Corporation to provide information on a quarterly and annual basis about significant reclassifications out of accumulated other comprehensive income. The information would be provided either on the face of the consolidated income statement or as a separate disclosure in the notes to the consolidated financial statements if the item reclassified is included in net income in its entirety in the period of reclassification. Such information would include the effects on net income of significant amounts reclassified out of each component of accumulated other comprehensive income. Where a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account rather than directly to income or expense, the entity is required to cross-reference to other disclosures that provide additional detail about that amount. The amendments do not change the requirements for reporting net income or other comprehensive income in financial statements. For public entities like the Corporation, the amendments became effective for interim and annual reporting periods beginning in 2013. The adoption of ASU 2013-02 on January 1, 2013 resulted in the disclosures in “Note A – Summary of Significant Accounting Policies” of the specific income statement line items impacted by the reclassification adjustments and their related tax effect.
Impact of Issued But Not Yet Effective Accounting Standards
The pronouncements discussed in this section are not intended to be an all-inclusive list, but rather only those pronouncements that could potentially have an impact on the Corporation’s financial position, results of operations or disclosures.
In January 2014, the FASB issued ASU 2014-04 “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The amendments in ASU 2014-04 are intended to reduce diversity in practice by clarifying when an in-substance repossession or foreclosure occurs, that is, when a creditor such as the Bank should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized. Additionally, the amendments in ASU 2014-04 require interim and annual disclosure of both the amount of foreclosed residential real estate property held by a creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. For public entities such as the Corporation, the amendments are effective for interim and annual reporting periods beginning after December 15, 2014. Early adoption in 2014 is permitted. ASU 2014-04 is not expected to have a material impact on the Corporation’s financial position, results of operations or disclosures.
NOTE B – INVESTMENT SECURITIES
The following tables set forth the amortized cost and estimated fair values of the Bank’s investment securities at December 31, 2013 and 2012.
|
|
2013
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Held-to-Maturity Securities:
|
|
(in thousands)
|
|
State and municipals
|
|
$
|
27,968
|
|
|
$
|
1,087
|
|
|
$
|
-
|
|
|
$
|
29,055
|
|
Pass-through mortgage securities
|
|
|
1,878
|
|
|
|
181
|
|
|
|
-
|
|
|
|
2,059
|
|
Collateralized mortgage obligations
|
|
|
2,258
|
|
|
|
176
|
|
|
|
-
|
|
|
|
2,434
|
|
|
|
$
|
32,104
|
|
|
$
|
1,444
|
|
|
$
|
-
|
|
|
$
|
33,548
|
|
Available-for-Sale Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipals
|
|
$
|
353,333
|
|
|
$
|
8,250
|
|
|
$
|
(5,030
|
)
|
|
$
|
356,553
|
|
Pass-through mortgage securities
|
|
|
154,760
|
|
|
|
1,040
|
|
|
|
(3,982
|
)
|
|
|
151,818
|
|
Collateralized mortgage obligations
|
|
|
272,083
|
|
|
|
6,190
|
|
|
|
(1,851
|
)
|
|
|
276,422
|
|
|
|
$
|
780,176
|
|
|
$
|
15,480
|
|
|
$
|
(10,863
|
)
|
|
$
|
784,793
|
|
|
|
2012
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Held-to-Maturity Securities:
|
|
(in thousands)
|
|
State and municipals
|
|
$
|
36,255
|
|
|
$
|
2,182
|
|
|
$
|
-
|
|
|
$
|
38,437
|
|
Pass-through mortgage securities
|
|
|
3,782
|
|
|
|
342
|
|
|
|
-
|
|
|
|
4,124
|
|
Collateralized mortgage obligations
|
|
|
4,130
|
|
|
|
267
|
|
|
|
-
|
|
|
|
4,397
|
|
|
|
$
|
44,167
|
|
|
$
|
2,791
|
|
|
$
|
-
|
|
|
$
|
46,958
|
|
Available-for-Sale Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipals
|
|
$
|
307,958
|
|
|
$
|
24,703
|
|
|
$
|
(148
|
)
|
|
$
|
332,513
|
|
Pass-through mortgage securities
|
|
|
82,863
|
|
|
|
2,093
|
|
|
|
-
|
|
|
|
84,956
|
|
Collateralized mortgage obligations
|
|
|
388,936
|
|
|
|
12,202
|
|
|
|
(1,173
|
)
|
|
|
399,965
|
|
|
|
$
|
779,757
|
|
|
$
|
38,998
|
|
|
$
|
(1,321
|
)
|
|
$
|
817,434
|
|
At December 31, 2013 and 2012, investment securities with a carrying value of $281,444,000 and $245,365,000, respectively, were pledged as collateral to secure public deposits and borrowed funds.
There were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity at December 31, 2013 and 2012.
Securities With Unrealized Losses.
The following tables set forth securities with unrealized losses at December 31, 2013 and 2012 presented by length of time the securities have been in a continuous unrealized loss position.
|
|
2013
|
|
|
|
Less than
|
|
|
12 Months
|
|
|
|
|
|
|
|
|
|
12 Months
|
|
|
or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
|
(in thousands)
|
|
State and municipals
|
|
$
|
103,010
|
|
|
$
|
(4,549
|
)
|
|
$
|
7,729
|
|
|
$
|
(481
|
)
|
|
$
|
110,739
|
|
|
$
|
(5,030
|
)
|
Pass-through mortgage securities
|
|
|
89,092
|
|
|
|
(2,279
|
)
|
|
|
38,237
|
|
|
|
(1,703
|
)
|
|
|
127,329
|
|
|
|
(3,982
|
)
|
Collateralized mortgage obligations
|
|
|
36,652
|
|
|
|
(652
|
)
|
|
|
54,660
|
|
|
|
(1,199
|
)
|
|
|
91,312
|
|
|
|
(1,851
|
)
|
Total temporarily impaired
|
|
$
|
228,754
|
|
|
$
|
(7,480
|
)
|
|
$
|
100,626
|
|
|
$
|
(3,383
|
)
|
|
$
|
329,380
|
|
|
$
|
(10,863
|
)
|
|
|
2012
|
|
|
|
Less than
|
|
|
12 Months
|
|
|
|
|
|
|
|
|
|
12 Months
|
|
|
or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
|
(in thousands)
|
|
State and municipals
|
|
$
|
12,765
|
|
|
$
|
(148
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12,765
|
|
|
$
|
(148
|
)
|
Collateralized mortgage obligations
|
|
|
92,674
|
|
|
|
(1,011
|
)
|
|
|
6,170
|
|
|
|
(162
|
)
|
|
|
98,844
|
|
|
|
(1,173
|
)
|
Total temporarily impaired
|
|
$
|
105,439
|
|
|
$
|
(1,159
|
)
|
|
$
|
6,170
|
|
|
$
|
(162
|
)
|
|
$
|
111,609
|
|
|
$
|
(1,321
|
)
|
Because the unrealized losses reflected in the preceding tables are deemed by management to be attributable to changes in interest rates and not credit losses, and because management does not have the intent to sell these securities and it is not more likely than not that it will be required to sell these securities before their anticipated recovery, the Bank does not consider these securities to be other-than-temporarily impaired at December 31, 2013.
Sales of Available-for-Sale Securities.
Sales of available-for-sale securities were as follows:
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Proceeds
|
|
$
|
1,780
|
|
|
$
|
102,687
|
|
|
$
|
4,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
$
|
48
|
|
|
$
|
4,248
|
|
|
$
|
138
|
|
Losses
|
|
|
(49
|
)
|
|
|
(635
|
)
|
|
|
-
|
|
Net gain (loss)
|
|
$
|
(1
|
)
|
|
$
|
3,613
|
|
|
$
|
138
|
|
The income tax expense (benefit) related to these net realized gains (losses) was $(0), $1,434,000 and $55,000, in 2013, 2012 and 2011, respectively, and is included in the consolidated statements of income in the line item, “Income tax expense.”
Sales of Held-to-Maturity Securities.
During 2013, the Bank sold municipal securities of two issuers that were classified as held-to-maturity securities. These sales were in response to a significant deterioration in the creditworthiness of the issuers. The securities sold had a carrying value of $705,000 at the time of sale and the Bank realized a gain upon sale of $17,000.
Maturities.
The following table sets forth by maturity the amortized cost and fair value of the Bank’s state and municipal securities at December 31, 2013 based on the earlier of their stated maturity or, if applicable, their pre-refunded date. The remaining securities in the Bank’s investment securities portfolio are mortgage-backed securities, consisting of pass-through mortgage securities and collateralized mortgage obligations. Although these securities are expected to have substantial periodic repayments they are reflected in the table below in aggregate amounts.