NO
TES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1 - BASIS OF PRESENTATION
The accounting and reporting policies of The First of Long Island Corporation (“Corporation”) reflect banking industry practice and conform to generally accepted accounting principles
(“GAAP”)
in the United States. 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 consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiary, The First National Bank of Long Island (“Bank”). The Bank has
two
wholly owned subsidiaries: FNY Service Corp., an investment company, and The First of Long Island Agency, Inc. The Bank and FNY Service Corp. jointly own another subsidiary, The First of Long Island REIT, Inc., a real estate investment trust
(“REIT”)
. 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. For further information refer to the consolidated financial statements and notes thereto included in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2017
.
The consolidated financial information included herein as of and for the periods ended
September
30, 2018
and
2017
is unaudited. However, such information reflects all adjustments which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The
December 31, 2017
consolidated balance sheet was derived from the Corporation's
December 31, 2017
audited consolidated financial statements. When appropriate, items in the prior year financial statements are reclassified to conform to the current period presentation.
2 - EARNINGS PER SHARE
The following table sets forth the calculation of basic and diluted earnings per share (“EPS”) for the periods indicated.
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Nine Months Ended
|
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Three Months Ended
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|
September 30,
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September 30,
|
(dollars in thousands, except per share data)
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2018
|
|
2017
|
|
2018
|
|
2017
|
Net income
|
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$
|
31,483
|
|
$
|
27,556
|
|
$
|
10,057
|
|
$
|
9,342
|
Income allocated to participating securities (1)
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|
86
|
|
|
101
|
|
|
26
|
|
|
34
|
Income allocated to common stockholders
|
|
$
|
31,397
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|
$
|
27,455
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|
$
|
10,031
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|
$
|
9,308
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Weighted average:
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Common shares
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25,236,889
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24,096,079
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|
25,409,087
|
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|
24,332,939
|
Dilutive stock options and restricted stock units (1)
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174,095
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|
253,715
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|
144,933
|
|
|
247,127
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|
25,410,984
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24,349,794
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|
25,554,020
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24,580,066
|
Earnings per share:
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Basic
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$1.24
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$1.14
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$.39
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|
$.38
|
Diluted
|
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|
1.24
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|
1.13
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|
.39
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|
.38
|
(1) Restricted stock units (“RSUs”) awarded in
2016
accrue dividends at the same rate as the dividends declared by the Board of Directors on the Corporation’s common stock. For purposes of computing EPS, these RSUs are considered to participate with common stock in the earnings of the Corporation and, therefore, the Corporation calculates basic and diluted EPS using the two-class method. Under the two-class method, net income for the period is allocated between common stockholders and participating securities according to dividends declared and participation rights in undistributed earnings.
As a result, the RSUs awarded in 2016 are not included in the weighted average
“dilutive stock options and restricted stock units” in the table above.
3 - COMPREHENSIVE INCOME
Comprehensive income includes net income and other comprehensive income (loss). Other comprehensive income (loss) includes revenues, expenses, gains and losses that under GAAP are included in comprehensive income but excluded from net income. Other comprehensive income (loss) for the Corporation consists of unrealized holding gains or losses on available-for-sale securities and derivative instruments and changes in the funded status of the Bank’s defined benefit pension plan, all net of related income taxes. Accumulated other comprehensive income (loss) is recognized as a separate component of stockholders’ equity.
The components of other comprehensive income (loss) and the related tax effects are as follows:
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Nine Months Ended
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Three Months Ended
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September 30,
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September 30,
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(in thousands)
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2018
|
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2017
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2018
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2017
|
Change in net unrealized holding gains (losses) on
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available-for-sale securities:
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Change arising during the period
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$
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(22,059)
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|
$
|
4,847
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|
$
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(7,231)
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$
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(561)
|
Reclassification adjustment for net (gains) losses
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|
|
|
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|
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|
included in net income (1)
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4,960
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(73)
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|
4,960
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(16)
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(17,099)
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4,774
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(2,271)
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(577)
|
Tax effect
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(5,166)
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2,004
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(686)
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(242)
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(11,933)
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2,770
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(1,585)
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(335)
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Change in funded status of pension plan:
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Amortization of net actuarial loss included in net income (2)
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—
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13
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—
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4
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Tax effect
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—
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6
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—
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2
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—
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7
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—
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2
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Change in unrealized gain on derivative instrument:
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Amount of gain (loss) recognized during the period
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(34)
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—
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462
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—
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Reclassification adjustment for net interest expense
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|
|
|
|
|
|
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included in net income (3)
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315
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—
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225
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—
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|
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281
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|
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—
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|
687
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|
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—
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Tax effect
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85
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—
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207
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—
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196
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—
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480
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—
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Other comprehensive income (loss)
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$
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(11,737)
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$
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2,777
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$
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(1,105)
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$
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(333)
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(1) Represents net realized gains
or losses
arising from the sale of available-for-sale securities. The net realized gains
or losses
are included in the consolidated statements of income in the line item, “Net gains
(losses)
on sales of securities.” See “Note 4 – Investment Securities” for the income tax expense
or benefit
related to the net realized gains
or losses
, which is included in the consolidated statements of income in the line item, “Income tax expense.”
(2) Represents the amortization of net actuarial loss relating to the Corporation’s defined benefit pension plan. This item is a component of net periodic pension cost (see “Note 7 – Defined Benefit Pension Plan”).
(3) Represents the net interest expense recorded on a derivative transaction and included in the consolidated statements of income in the line item “Interest expense – short-term borrowings.”
The following table sets forth the components of accumulated other comprehensive income (loss), net of tax:
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Current Period Change due to
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Other
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Adoption
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Balance
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Comprehensive
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of ASU
|
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Balance
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(in thousands)
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12/31/17
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Income (Loss)
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2018-02 (1)
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9/30/18
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Unrealized holding gains (losses) on available-for-sale securities
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$
|
2,600
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$
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(11,933)
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$
|
361
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$
|
(8,972)
|
Unrealized actuarial losses on pension plan
|
|
|
(2,054)
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—
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(638)
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(2,692)
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Unrealized gain on derivative instrument
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—
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196
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—
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196
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Accumulated other comprehensive income (loss), net of tax
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$
|
546
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$
|
(11,737)
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$
|
(277)
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$
|
(11,468)
|
(1) The adoption of Accounting Standards Update (“ASU”) 2018-02
“Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”
in the first quarter of 2018 allowed the Corporation to reclassify certain stranded tax effects arising from the enactment of the Tax Cuts and Jobs Act (“Tax Act”) in December 2017 from accumulated other comprehensive income to retained earnings. See “Note 11 – Adoption of New Accounting Standards” for more information regarding the effects of adopting ASU 2018-02.
4 - INVESTMENT SECURITIES
The following tables set forth the amortized cost and estimated fair values of the Bank’s investment securities.
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September 30, 2018
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Gross
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Gross
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Amortized
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Unrealized
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Unrealized
|
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Fair
|
(in thousands)
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Cost
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Gains
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Losses
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Value
|
Held-to-Maturity Securities:
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State and municipals
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$
|
6,412
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|
$
|
42
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$
|
—
|
|
$
|
6,454
|
Pass-through mortgage securities
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|
274
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|
12
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|
|
—
|
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|
286
|
Collateralized mortgage obligations
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|
159
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|
3
|
|
|
—
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|
162
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|
|
$
|
6,845
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|
$
|
57
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|
$
|
—
|
|
$
|
6,902
|
Available-for-Sale Securities:
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State and municipals
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$
|
428,977
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|
$
|
2,966
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|
$
|
(8,151)
|
|
$
|
423,792
|
Pass-through mortgage securities
|
|
|
74,576
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|
|
4
|
|
|
(2,146)
|
|
|
72,434
|
Collateralized mortgage obligations
|
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|
252,129
|
|
|
—
|
|
|
(5,516)
|
|
|
246,613
|
Corporate bonds
|
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|
60,000
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|
|
—
|
|
|
—
|
|
|
60,000
|
|
|
$
|
815,682
|
|
$
|
2,970
|
|
$
|
(15,813)
|
|
$
|
802,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Held-to-Maturity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipals
|
|
$
|
6,970
|
|
$
|
78
|
|
$
|
—
|
|
$
|
7,048
|
Pass-through mortgage securities
|
|
|
311
|
|
|
21
|
|
|
—
|
|
|
332
|
Collateralized mortgage obligations
|
|
|
355
|
|
|
14
|
|
|
—
|
|
|
369
|
|
|
$
|
7,636
|
|
$
|
113
|
|
$
|
—
|
|
$
|
7,749
|
Available-for-Sale Securities:
|
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|
|
|
|
|
|
|
|
|
|
|
State and municipals
|
|
$
|
453,158
|
|
$
|
10,051
|
|
$
|
(1,886)
|
|
$
|
461,323
|
Pass-through mortgage securities
|
|
|
72,539
|
|
|
84
|
|
|
(1,232)
|
|
|
71,391
|
Collateralized mortgage obligations
|
|
|
190,175
|
|
|
15
|
|
|
(2,776)
|
|
|
187,414
|
|
|
$
|
715,872
|
|
$
|
10,150
|
|
$
|
(5,894)
|
|
$
|
720,128
|
At
September
30, 2018
and
December 31, 2017
, investment securities with a carrying value of
$463,501,000
and
$423,360,000
, respectively, were pledged as collateral to secure public deposits and borrowed funds.
There were
no
holdings of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity at
September
30, 2018
and
December 31, 2017
.
Securities With Unrealized Losses.
The following tables set forth securities with unrealized losses presented by the length of time the securities have been in a continuous unrealized loss position.
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|
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|
|
September 30, 2018
|
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|
Less than
|
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12 Months
|
|
|
|
|
|
|
|
|
12 Months
|
|
or More
|
|
Total
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
(in thousands)
|
|
Value
|
|
Loss
|
|
Value
|
|
Loss
|
|
Value
|
|
Loss
|
State and municipals
|
|
$
|
175,087
|
|
$
|
(4,533)
|
|
$
|
34,708
|
|
$
|
(3,618)
|
|
$
|
209,795
|
|
$
|
(8,151)
|
Pass-through mortgage securities
|
|
|
51,251
|
|
|
(886)
|
|
|
19,965
|
|
|
(1,260)
|
|
|
71,216
|
|
|
(2,146)
|
Collateralized mortgage obligations
|
|
|
187,737
|
|
|
(3,844)
|
|
|
28,351
|
|
|
(1,672)
|
|
|
216,088
|
|
|
(5,516)
|
Total temporarily impaired
|
|
$
|
414,075
|
|
$
|
(9,263)
|
|
$
|
83,024
|
|
$
|
(6,550)
|
|
$
|
497,099
|
|
$
|
(15,813)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
State and municipals
|
|
$
|
54,732
|
|
$
|
(574)
|
|
$
|
28,723
|
|
$
|
(1,312)
|
|
$
|
83,455
|
|
$
|
(1,886)
|
Pass-through mortgage securities
|
|
|
10,172
|
|
|
(81)
|
|
|
52,652
|
|
|
(1,151)
|
|
|
62,824
|
|
|
(1,232)
|
Collateralized mortgage obligations
|
|
|
130,267
|
|
|
(1,230)
|
|
|
54,751
|
|
|
(1,546)
|
|
|
185,018
|
|
|
(2,776)
|
Total temporarily impaired
|
|
$
|
195,171
|
|
$
|
(1,885)
|
|
$
|
136,126
|
|
$
|
(4,009)
|
|
$
|
331,297
|
|
$
|
(5,894)
|
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
September
30, 2018
.
See “Note 13
–
Subsequent Events” for information on a sale of available-for-sale securities in the fourth quarter of 2018.
Sales of Available-for-Sale Securities.
Sales of available-for-sale securities were as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Three Months Ended
|
(in thousands)
|
|
September 30,
|
|
September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
|
|
$
|
169,631
|
|
$
|
49,077
|
|
$
|
169,631
|
|
$
|
9,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains
|
|
$
|
300
|
|
$
|
382
|
|
$
|
300
|
|
$
|
16
|
Gross losses
|
|
|
(5,260)
|
|
|
(309)
|
|
|
(5,260)
|
|
|
—
|
Net gain (loss)
|
|
$
|
(4,960)
|
|
$
|
73
|
|
$
|
(4,960)
|
|
$
|
16
|
Income tax benefit
related to the net realized
lo
s
ses
for the
n
ine
and three
months ended
September
30, 2018 was
$1,495,000
. Income tax expense related to the net realized gains
for the nine and
three months ended September 30, 2017 was
$31,000
and
$7,000
, respectively.
Sales of Held-to-Maturity Securities.
There were
no
sales of held-to-maturity securities during the n
ine
months ended
September
30, 2018. During the second quarter of 2017, the Bank sold
one
municipal security that was classified as held-to-maturity. The sale was in response to a significant deterioration in the creditworthiness of the issuer. The security sold had a carrying value of
$354,000
at the time of sale and the Bank realized a gain upon sale of
$1,000
.
Maturities.
The following table sets forth by maturity the amortized cost and fair value of the Bank’s state and municipal securities
and corporate bonds
at
September
30, 2018
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Amortized Cost
|
|
Fair Value
|
|
|
Held-to-Maturity Securities:
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
4,335
|
|
$
|
4,339
|
|
|
After 1 through 5 years
|
|
|
2,077
|
|
|
2,115
|
|
|
After 5 through 10 years
|
|
|
—
|
|
|
—
|
|
|
After 10 years
|
|
|
—
|
|
|
—
|
|
|
Mortgage-backed securities
|
|
|
433
|
|
|
448
|
|
|
|
|
$
|
6,845
|
|
$
|
6,902
|
|
|
Available-for-Sale Securities:
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
46,642
|
|
$
|
47,179
|
|
|
After 1 through 5 years
|
|
|
37,623
|
|
|
37,733
|
|
|
After 5 through 10 years
|
|
|
227,010
|
|
|
225,866
|
|
|
After 10 years
|
|
|
177,702
|
|
|
173,014
|
|
|
Mortgage-backed securities
|
|
|
326,705
|
|
|
319,047
|
|
|
|
|
$
|
815,682
|
|
$
|
802,839
|
|
5 - LOANS
The following tables set forth by class of loans the amount of loans individually and collectively evaluated for impairment and the portion of the allowance for loan losses allocable to such loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
Loans
|
|
Allowance for Loan Losses
|
(in thousands)
|
|
Individually
Evaluated for
Impairment
|
|
Collectively
Evaluated for
Impairment
|
|
Ending
Balance
|
|
Individually
Evaluated for
Impairment
|
|
Collectively
Evaluated for
Impairment
|
|
Ending
Balance
|
Commercial and industrial
|
|
$
|
53
|
|
$
|
93,848
|
|
$
|
93,901
|
|
$
|
—
|
|
$
|
1,152
|
|
$
|
1,152
|
Commercial mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
|
—
|
|
|
733,132
|
|
|
733,132
|
|
|
—
|
|
|
6,497
|
|
|
6,497
|
Other
|
|
|
2,777
|
|
|
426,987
|
|
|
429,764
|
|
|
—
|
|
|
4,196
|
|
|
4,196
|
Owner-occupied
|
|
|
522
|
|
|
95,868
|
|
|
96,390
|
|
|
—
|
|
|
826
|
|
|
826
|
Residential mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end
|
|
|
970
|
|
|
1,787,175
|
|
|
1,788,145
|
|
|
16
|
|
|
20,295
|
|
|
20,311
|
Revolving home equity
|
|
|
756
|
|
|
73,323
|
|
|
74,079
|
|
|
—
|
|
|
507
|
|
|
507
|
Consumer and other
|
|
|
333
|
|
|
5,551
|
|
|
5,884
|
|
|
—
|
|
|
62
|
|
|
62
|
|
|
$
|
5,411
|
|
$
|
3,215,884
|
|
$
|
3,221,295
|
|
$
|
16
|
|
$
|
33,535
|
|
$
|
33,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Commercial and industrial
|
|
$
|
48
|
|
$
|
109,575
|
|
$
|
109,623
|
|
$
|
—
|
|
$
|
1,441
|
|
$
|
1,441
|
Commercial mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
|
—
|
|
|
682,593
|
|
|
682,593
|
|
|
—
|
|
|
6,423
|
|
|
6,423
|
Other
|
|
|
—
|
|
|
414,783
|
|
|
414,783
|
|
|
—
|
|
|
4,734
|
|
|
4,734
|
Owner-occupied
|
|
|
531
|
|
|
95,100
|
|
|
95,631
|
|
|
—
|
|
|
1,076
|
|
|
1,076
|
Residential mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end
|
|
|
1,368
|
|
|
1,557,196
|
|
|
1,558,564
|
|
|
18
|
|
|
19,329
|
|
|
19,347
|
Revolving home equity
|
|
|
—
|
|
|
83,625
|
|
|
83,625
|
|
|
—
|
|
|
689
|
|
|
689
|
Consumer and other
|
|
|
—
|
|
|
5,533
|
|
|
5,533
|
|
|
—
|
|
|
74
|
|
|
74
|
|
|
$
|
1,947
|
|
$
|
2,948,405
|
|
$
|
2,950,352
|
|
$
|
18
|
|
$
|
33,766
|
|
$
|
33,784
|
The following tables present the activity in the allowance for loan losses for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Balance at
1/1/18
|
|
Chargeoffs
|
|
Recoveries
|
|
Provision for
Loan Losses
(Credit)
|
|
Balance at
9/30/18
|
Commercial and industrial
|
|
$
|
1,441
|
|
$
|
482
|
|
$
|
6
|
|
$
|
187
|
|
$
|
1,152
|
Commercial mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
|
6,423
|
|
|
—
|
|
|
—
|
|
|
74
|
|
|
6,497
|
Other
|
|
|
4,734
|
|
|
—
|
|
|
—
|
|
|
(538)
|
|
|
4,196
|
Owner-occupied
|
|
|
1,076
|
|
|
—
|
|
|
—
|
|
|
(250)
|
|
|
826
|
Residential mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end
|
|
|
19,347
|
|
|
413
|
|
|
101
|
|
|
1,276
|
|
|
20,311
|
Revolving home equity
|
|
|
689
|
|
|
138
|
|
|
150
|
|
|
(194)
|
|
|
507
|
Consumer and other
|
|
|
74
|
|
|
4
|
|
|
—
|
|
|
(8)
|
|
|
62
|
|
|
$
|
33,784
|
|
$
|
1,037
|
|
$
|
257
|
|
$
|
547
|
|
$
|
33,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
7/1/18
|
|
Chargeoffs
|
|
Recoveries
|
|
Provision for
Loan Losses
(Credit)
|
|
Balance at
9/30/18
|
Commercial and industrial
|
|
$
|
1,298
|
|
$
|
178
|
|
$
|
—
|
|
$
|
32
|
|
$
|
1,152
|
Commercial mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
|
7,048
|
|
|
—
|
|
|
—
|
|
|
(551)
|
|
|
6,497
|
Other
|
|
|
4,768
|
|
|
—
|
|
|
—
|
|
|
(572)
|
|
|
4,196
|
Owner-occupied
|
|
|
911
|
|
|
—
|
|
|
—
|
|
|
(85)
|
|
|
826
|
Residential mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end
|
|
|
20,953
|
|
|
393
|
|
|
1
|
|
|
(250)
|
|
|
20,311
|
Revolving home equity
|
|
|
775
|
|
|
89
|
|
|
150
|
|
|
(329)
|
|
|
507
|
Consumer and other
|
|
|
79
|
|
|
4
|
|
|
—
|
|
|
(13)
|
|
|
62
|
|
|
$
|
35,832
|
|
$
|
664
|
|
$
|
151
|
|
$
|
(1,768)
|
|
$
|
33,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Balance at
1/1/17
|
|
Chargeoffs
|
|
|
Recoveries
|
|
Provision for Loan Losses (Credit)
|
|
Balance at
9/30/17
|
Commercial and industrial
|
|
$
|
1,408
|
|
$
|
102
|
|
$
|
10
|
|
$
|
341
|
|
$
|
1,657
|
Commercial mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
|
6,119
|
|
|
—
|
|
|
—
|
|
|
(221)
|
|
|
5,898
|
Other
|
|
|
4,296
|
|
|
—
|
|
|
—
|
|
|
451
|
|
|
4,747
|
Owner-occupied
|
|
|
959
|
|
|
—
|
|
|
—
|
|
|
616
|
|
|
1,575
|
Residential mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end
|
|
|
15,740
|
|
|
—
|
|
|
3
|
|
|
2,362
|
|
|
18,105
|
Revolving home equity
|
|
|
1,401
|
|
|
—
|
|
|
—
|
|
|
(311)
|
|
|
1,090
|
Consumer and other
|
|
|
134
|
|
|
27
|
|
|
2
|
|
|
(35)
|
|
|
74
|
|
|
$
|
30,057
|
|
$
|
129
|
|
$
|
15
|
|
$
|
3,203
|
|
$
|
33,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
7/1/17
|
|
Chargeoffs
|
|
|
Recoveries
|
|
Provision for Loan Losses (Credit)
|
|
Balance at
9/30/17
|
Commercial and industrial
|
|
$
|
1,544
|
|
$
|
96
|
|
$
|
3
|
|
$
|
206
|
|
$
|
1,657
|
Commercial mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
|
5,921
|
|
|
—
|
|
|
—
|
|
|
(23)
|
|
|
5,898
|
Other
|
|
|
4,674
|
|
|
—
|
|
|
—
|
|
|
73
|
|
|
4,747
|
Owner-occupied
|
|
|
1,685
|
|
|
—
|
|
|
—
|
|
|
(110)
|
|
|
1,575
|
Residential mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end
|
|
|
17,035
|
|
|
—
|
|
|
1
|
|
|
1,069
|
|
|
18,105
|
Revolving home equity
|
|
|
1,203
|
|
|
—
|
|
|
—
|
|
|
(113)
|
|
|
1,090
|
Consumer and other
|
|
|
74
|
|
|
21
|
|
|
1
|
|
|
20
|
|
|
74
|
|
|
$
|
32,136
|
|
$
|
117
|
|
$
|
5
|
|
$
|
1,122
|
|
$
|
33,146
|
For individually impaired loans, the following tables set forth by class of loans at
September
30, 2018
and
December 31, 2017
the recorded investment, unpaid principal balance and related allowance. The tables also set forth the average recorded investment of individually impaired loans and interest income recognized while the loans were impaired during the
n
ine
and three months ended
September
30, 2018 and 2017
. The recorded investment is the unpaid principal balance of the loans less any interest payments applied to principal
and any direct chargeoffs plus o
r minus net deferred loan costs and fees. Any principal and interest payments received on nonaccrual impaired loans are applied to the recorded investment in the loans. The Bank recognizes interest income on other impaired loans using the accrual method of accounting.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Three Months Ended
|
|
|
September 30, 2018
|
|
September 30, 2018
|
|
September 30, 2018
|
|
|
|
|
|
Unpaid
|
|
|
|
|
Average
|
|
Interest
|
|
Average
|
|
Interest
|
|
|
Recorded
|
|
Principal
|
|
Related
|
|
Recorded
|
|
Income
|
|
Recorded
|
|
Income
|
(in thousands)
|
|
Investment
|
|
Balance
|
|
Allowance
|
|
Investment
|
|
Recognized
|
|
Investment
|
|
Recognized
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
53
|
|
$
|
53
|
|
$
|
—
|
|
$
|
82
|
|
$
|
2
|
|
$
|
55
|
|
$
|
—
|
Commercial mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,777
|
|
|
2,777
|
|
|
—
|
|
|
2,800
|
|
|
—
|
|
|
2,777
|
|
|
—
|
Owner-occupied
|
|
|
522
|
|
|
606
|
|
|
—
|
|
|
534
|
|
|
18
|
|
|
523
|
|
|
6
|
Residential mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end
|
|
|
712
|
|
|
738
|
|
|
—
|
|
|
751
|
|
|
4
|
|
|
718
|
|
|
1
|
Revolving home equity
|
|
|
756
|
|
|
751
|
|
|
—
|
|
|
757
|
|
|
—
|
|
|
756
|
|
|
—
|
Consumer and other
|
|
|
333
|
|
|
333
|
|
|
—
|
|
|
266
|
|
|
12
|
|
|
336
|
|
|
6
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages - closed end
|
|
|
258
|
|
|
257
|
|
|
16
|
|
|
270
|
|
|
9
|
|
|
259
|
|
|
3
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
53
|
|
|
53
|
|
|
—
|
|
|
82
|
|
|
2
|
|
|
55
|
|
|
—
|
Commercial mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,777
|
|
|
2,777
|
|
|
—
|
|
|
2,800
|
|
|
—
|
|
|
2,777
|
|
|
—
|
Owner-occupied
|
|
|
522
|
|
|
606
|
|
|
—
|
|
|
534
|
|
|
18
|
|
|
523
|
|
|
6
|
Residential mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end
|
|
|
970
|
|
|
995
|
|
|
16
|
|
|
1,021
|
|
|
13
|
|
|
977
|
|
|
4
|
Revolving home equity
|
|
|
756
|
|
|
751
|
|
|
—
|
|
|
757
|
|
|
—
|
|
|
756
|
|
|
—
|
Consumer and other
|
|
|
333
|
|
|
333
|
|
|
—
|
|
|
266
|
|
|
12
|
|
|
336
|
|
|
6
|
|
|
$
|
5,411
|
|
$
|
5,515
|
|
$
|
16
|
|
$
|
5,460
|
|
$
|
45
|
|
$
|
5,424
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Three Months Ended
|
|
|
December 31, 2017
|
|
September 30, 2017
|
|
September 30, 2017
|
|
|
|
|
|
Unpaid
|
|
|
|
|
Average
|
|
Interest
|
|
Average
|
|
Interest
|
|
|
Recorded
|
|
Principal
|
|
Related
|
|
Recorded
|
|
Income
|
|
Recorded
|
|
Income
|
(in thousands)
|
|
Investment
|
|
Balance
|
|
Allowance
|
|
Investment
|
|
Recognized
|
|
Investment
|
|
Recognized
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
48
|
|
$
|
48
|
|
$
|
—
|
|
$
|
73
|
|
$
|
4
|
|
$
|
57
|
|
$
|
2
|
Commercial mortgages - owner-occupied
|
|
|
531
|
|
|
615
|
|
|
—
|
|
|
545
|
|
|
16
|
|
|
536
|
|
|
5
|
Residential mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end
|
|
|
1,095
|
|
|
1,102
|
|
|
—
|
|
|
346
|
|
|
—
|
|
|
505
|
|
|
—
|
Revolving home equity
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,575
|
|
|
—
|
|
|
1,574
|
|
|
—
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages - owner-occupied
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,079
|
|
|
—
|
|
|
6,977
|
|
|
—
|
Residential mortgages - closed end
|
|
|
273
|
|
|
272
|
|
|
18
|
|
|
384
|
|
|
14
|
|
|
377
|
|
|
5
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
48
|
|
|
48
|
|
|
—
|
|
|
73
|
|
|
4
|
|
|
57
|
|
|
2
|
Commercial mortgages - owner-occupied
|
|
|
531
|
|
|
615
|
|
|
—
|
|
|
7,624
|
|
|
16
|
|
|
7,513
|
|
|
5
|
Residential mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end
|
|
|
1,368
|
|
|
1,374
|
|
|
18
|
|
|
730
|
|
|
14
|
|
|
882
|
|
|
5
|
Revolving home equity
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,575
|
|
|
—
|
|
|
1,574
|
|
|
—
|
|
|
$
|
1,947
|
|
$
|
2,037
|
|
$
|
18
|
|
$
|
10,002
|
|
$
|
34
|
|
$
|
10,026
|
|
$
|
12
|
Aging of Loans
. The following tables present the aging of the recorded investment in loans by class of loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
Past Due
|
|
|
|
|
Total Past
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 Days or
|
|
|
|
|
Due Loans &
|
|
|
|
|
|
|
|
|
30-59 Days
|
|
60-89 Days
|
|
More and
|
|
Nonaccrual
|
|
Nonaccrual
|
|
|
|
|
Total
|
(in thousands)
|
|
Past Due
|
|
Past Due
|
|
Still Accruing
|
|
Loans
|
|
Loans
|
|
Current
|
|
Loans
|
Commercial and industrial
|
|
$
|
195
|
|
$
|
—
|
|
$
|
—
|
|
$
|
24
|
|
$
|
219
|
|
$
|
93,682
|
|
$
|
93,901
|
Commercial mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
733,132
|
|
|
733,132
|
Other
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,777
|
|
|
2,777
|
|
|
426,987
|
|
|
429,764
|
Owner-occupied
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
96,390
|
|
|
96,390
|
Residential mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end
|
|
|
37
|
|
|
624
|
|
|
—
|
|
|
625
|
|
|
1,286
|
|
|
1,786,859
|
|
|
1,788,145
|
Revolving home equity
|
|
|
251
|
|
|
22
|
|
|
—
|
|
|
756
|
|
|
1,029
|
|
|
73,050
|
|
|
74,079
|
Consumer and other
|
|
|
9
|
|
|
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
5,875
|
|
|
5,884
|
|
|
$
|
492
|
|
$
|
646
|
|
$
|
—
|
|
$
|
4,182
|
|
$
|
5,320
|
|
$
|
3,215,975
|
|
$
|
3,221,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Commercial and industrial
|
|
$
|
20
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
20
|
|
$
|
109,603
|
|
$
|
109,623
|
Commercial mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
682,593
|
|
|
682,593
|
Other
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
414,783
|
|
|
414,783
|
Owner-occupied
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
95,631
|
|
|
95,631
|
Residential mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end
|
|
|
2,186
|
|
|
21
|
|
|
—
|
|
|
1,000
|
|
|
3,207
|
|
|
1,555,357
|
|
|
1,558,564
|
Revolving home equity
|
|
|
522
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
522
|
|
|
83,103
|
|
|
83,625
|
Consumer and other
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
5,526
|
|
|
5,533
|
|
|
$
|
2,735
|
|
$
|
21
|
|
$
|
—
|
|
$
|
1,000
|
|
$
|
3,756
|
|
$
|
2,946,596
|
|
$
|
2,950,352
|
There were
no
loans in the process of foreclosure nor did the Bank hold any
foreclosed
residential real estate property at
September
30, 2018
or December 31,
2017. In 2017, the Bank took a deed-in-lieu of foreclosure for
one
commercial real estate property. The property was recorded as other real estate owned at December 31, 2017 and had a carrying value of
$5,125,000
, which was net of a valuation allowance of
$725,000
. Other real estate owned at December 31, 2017 consisted solely of th
is
property and was included in the consolidated balance sh
eet under “O
ther assets.” The Bank sold the property for its carrying value in the first quarter of 2018.
Troubled Debt Restructurings.
A restructuring constitutes a troubled debt restructuring when it includes a concession by the Bank and the borrower is experiencing financial difficulty. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. The Bank performs the evaluation under its internal underwriting policy.
During the nine months ended
September
30, 2018, the Bank modified
two
consumer loans to a single borrower into
one
loan in a troubled debt restructuring amounting to
$350,000
. The term of the restructured loan was extended for 12-months and the post-modification interest rate was lower than the current market rate for new debt with similar risk
.
The Bank did
not
modify any loans in troubled debt restructurings during the first nine months of 2017.
At
September
30, 2018
and
December 31, 2017
, the Bank had an allowance for loan losses of
$16,000
and
$18,000
, respectively, allocated to specific troubled debt restructurings. The Bank had
no
commitments to lend additional amounts in connection with loans that were classified a
s troubled debt restructurings.
There were
no
troubled debt restructurings for which there was a payment default during the
nine months ended
September
30, 2018
and
2017
that were modified during the twelve-month period prior to default. A loan is considered to be in payment default once it is
90
days contractually past due under the modified terms.
Risk Characteristics
.
Credit risk within the Bank’s loan portfolio primarily stems from factors such as
changes in the
borrower
’
s
financial condition,
c
redit
concentration
s
,
changes in collateral values
, economic conditions and environmental
contamination
of properties securing mortgage loans. The Bank’s commercial loans, including those secured by
real estate
mortgages, are primarily made to small and medium-sized businesses. Such loans sometimes involve a higher degree of risk than those to larger companies because such businesses may have shorter operating histories, higher debt-to-equity ratios and may lack sophistication in internal record keeping and financial and operational controls. In addition,
most
of the Bank’s loans are made to businesses and consumers on Long Island and
in the boroughs of New York City, and a large percentage of these loans are mortgage loans secured by properties located in those areas.
The primary sources of repayment for residential and commercial mortgage loans include employment of the borrowers, the businesses of the borrowers and cash flows from the underlying properties. In t
he
case of
multifamily
mortgage
loans
, a substantial portion of the
underlying properties are rent stabilized or rent controlled.
These sources of repayment are dependent on, among other things,
the strength of the local economy.
Credit Quality Indicators.
The
Corporation
categorizes loans into risk categories based on relevant information about the borrower’s ability to service their debt including, but not limited to, current financial information for the borrower and any guarantors, payment experience, credit underwriting documentation, public records
, due diligence checks
and current economic trends.
Commercial and industrial loans and commercial mortgage loans are risk rated utilizing a ten point rating system. The ten point risk rating s
ystem is described hereinafter.
|
|
Internally
Assigned
Risk Rating
|
|
1 – 2
|
Cash flow is of high quality and stable. Borrower has very good liquidity and ready access to traditional sources of credit. This category also includes loans to borrowers secured by cash and/or marketable securities within approved margin requirements.
|
3 – 4
|
Cash flow quality is strong, but shows some variability. Borrower has good liquidity and asset quality. Borrower has access to traditional sources of credit with minimal restrictions.
|
5 – 6
|
Cash flow quality is acceptable but shows some variability. Liquidity varies with operating cycle and assets provide an adequate margin of protection. Borrower has access to traditional sources of credit, but generally on a secured basis.
|
7
|
Watch - Cash flow has a high degree of variability and subject to economic downturns. Liquidity is strained and the ability of the borrower to access traditional sources of credit is diminished.
|
8
|
Special Mention - The borrower has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Bank to risk sufficient to warrant adverse classification.
|
9
|
Substandard - Loans are inadequately protected by the current sound worth and paying capacity of the borrower or the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
|
10
|
Doubtful - Loans have all the inherent weaknesses of those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
|
Risk ratings on commercial and industrial loans and commercial mortgages are initially assigned
during the underwriting process
and affirmed
as part of the
approval
process
. The ratings are periodically reviewed and
evaluated based
on borrower contact, credit department review or independent loan review.
The Bank's loan risk rating and review policy establishes requirements for the annual review of commercial real estate and commercial and industrial loans. The requirements include details of the scope of coverage and selection process based on loan-type and risk rating. Among other things, at least
80%
of the recorded investment of commercial real estate loans as of December 31 of the prior year must be reviewed annually.
Lines of credit are also reviewed annually at each proposed reaffirmation.
The frequency of the review of other loans is determined by the Bank’s ongoing assessments of the borrower’s condition.
Residential mortgage loans, revolving home equity lines and other consumer loans are risk rated utilizing a three point rating system. In most cases, the borrower’s credit score dictates the risk rating. However, regardless of credit score, loans that are on management’s watch list or have been criticized or classified by management are assigned a risk rating of 3. A credit score is a tool used in the Bank’s loan approval process, and a minimum score of 680 is generally required for new loans. Credit scores for each borrower are updated at least annually. The risk ratings along with their definitions are as follows:
|
|
Internally
Assigned
Risk Rating
|
|
1
|
Credit score is equal to or greater than 680.
|
2
|
Credit score is 635 to 679.
|
3
|
Credit score is below 635 or, regardless of credit score, the loan has been classified, criticized or placed on watch
by management
.
|
The following tables present the recorded investment in commercial and industrial loans and commercial mortgage loans by class of loans and risk rating. Loans shown as Pass are all loans other than those risk rated Watch, Special Mention, Substandard or Doubtful.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
Internally Assigned Risk Rating
|
|
|
|
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Pass
|
|
Watch
|
|
Mention
|
|
Substandard
|
|
Doubtful
|
|
Total
|
Commercial and industrial
|
|
$
|
92,758
|
|
$
|
450
|
|
$
|
199
|
|
$
|
494
|
|
$
|
—
|
|
$
|
93,901
|
Commercial mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
|
730,699
|
|
|
—
|
|
|
2,433
|
|
|
—
|
|
|
—
|
|
|
733,132
|
Other
|
|
|
411,407
|
|
|
—
|
|
|
15,580
|
|
|
2,777
|
|
|
—
|
|
|
429,764
|
Owner-occupied
|
|
|
91,802
|
|
|
—
|
|
|
4,043
|
|
|
545
|
|
|
—
|
|
|
96,390
|
|
|
$
|
1,326,666
|
|
$
|
450
|
|
$
|
22,255
|
|
$
|
3,816
|
|
$
|
—
|
|
$
|
1,353,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Commercial and industrial
|
|
$
|
108,846
|
|
$
|
450
|
|
$
|
279
|
|
$
|
48
|
|
$
|
—
|
|
$
|
109,623
|
Commercial mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
|
673,128
|
|
|
2,354
|
|
|
7,111
|
|
|
—
|
|
|
—
|
|
|
682,593
|
Other
|
|
|
404,379
|
|
|
7,567
|
|
|
2,837
|
|
|
—
|
|
|
—
|
|
|
414,783
|
Owner-occupied
|
|
|
93,618
|
|
|
—
|
|
|
1,482
|
|
|
531
|
|
|
—
|
|
|
95,631
|
|
|
$
|
1,279,971
|
|
$
|
10,371
|
|
$
|
11,709
|
|
$
|
579
|
|
$
|
—
|
|
$
|
1,302,630
|
The following tables present the recorded investment in residential mortgage loans, home equity lines and other consumer loans by class of loans and risk rating. Loans shown as Pass are all loans other than those risk rated
by management as
Watch, Special Mention, Substandard or Doubtful.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
Internally Assigned Risk Rating
|
|
|
|
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Pass
|
|
Watch
|
|
Mention
|
|
Substandard
|
|
|
Doubtful
|
|
Total
|
Residential mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end
|
|
$
|
1,786,334
|
|
$
|
841
|
|
$
|
—
|
|
$
|
970
|
|
$
|
—
|
|
$
|
1,788,145
|
Revolving home equity
|
|
|
73,070
|
|
|
—
|
|
|
253
|
|
|
756
|
|
|
—
|
|
|
74,079
|
Consumer and other
|
|
|
5,369
|
|
|
—
|
|
|
—
|
|
|
333
|
|
|
—
|
|
|
5,702
|
|
|
$
|
1,864,773
|
|
$
|
841
|
|
$
|
253
|
|
$
|
2,059
|
|
$
|
—
|
|
$
|
1,867,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Residential mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end
|
|
$
|
1,554,168
|
|
$
|
2,200
|
|
$
|
828
|
|
$
|
1,368
|
|
$
|
—
|
|
$
|
1,558,564
|
Revolving home equity
|
|
|
82,665
|
|
|
256
|
|
|
704
|
|
|
—
|
|
|
—
|
|
|
83,625
|
Consumer and other
|
|
|
5,236
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,236
|
|
|
$
|
1,642,069
|
|
$
|
2,456
|
|
$
|
1,532
|
|
$
|
1,368
|
|
$
|
—
|
|
$
|
1,647,425
|
Deposit account overdrafts were
$182,000
and
$297,000
at
September
30, 2018
and
December 31, 2017
, respectively. Overdrafts are not assigned a risk rating and are therefore excluded from consumer loans in the tables above.
6 - STOCK-BASED COMPENSATION
On April 22, 2014, the stockholders of the Corporation approved the 2014 Equity Incentive Plan (“2014 Plan”). Upon approval of the 2014 Plan,
no
further awards could be made under the 2006 Stock Compensation Plan (“2006 Plan”).
2014 Plan.
Under the 2014 Plan, awards may be granted to employees and non-employee directors as non-qualified stock options (“NQSOs”), stock appreciation rights (“SARs”), restricted stock awards, RSUs, or any combination thereof, any of which may be subject to performance-based vesting conditions. Awards may also be granted to employees as incentive stock options (“ISOs”). The exercise price of stock options and SARs granted under the 2014 Plan may not be less than the fair market value of the Corporation’s common stock on the date the stock option
or SAR
is granted. The 2014 Plan is administered by the Compensation Committee of the Board of Directors. Almost all of the awards granted to date under the 2014 Plan are RSUs. All awards granted under the 2014 Plan will immediately vest upon an involuntary termination following a change in control, total and permanent disability, as defined, or death, and with certain exceptions, will immediately vest in the event of retirement, as defined.
The Corporation has
2,250,000
shares of common stock reserved for awards under the 2014 Plan. Awards granted under the 2006 Plan that expire or are forfeited after April 22, 2014 will be added to the number of shares of common stock reserved for issuance of awards under the 2014 Plan. All of the 2,250,000 shares may be issued upon the exercise of stock options or SARs. A maximum of
787,500
shares may be issued as restricted stock awards or upon the conversion of RSUs. At
September
30, 2018
,
1,861,297
equity awards remain available to be granted under the 2014 Plan of which
405,653
may be granted as restricted stock awards or RSUs.
Details
of RSUs.
The following table summarizes the vesting schedule of RSUs outstanding at
September
30, 2018
by the year they were originally granted.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted During the Year Ended December 31,
|
|
Total
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
Number of RSUs :
|
|
|
|
|
|
|
|
|
|
Granted
|
385,159
|
|
70,688
|
|
94,329
|
|
107,274
|
|
112,868
|
Outstanding at September 30, 2018
|
216,408
|
|
65,514
|
|
76,033
|
|
73,661
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
RSUs scheduled to vest during:
|
|
|
|
|
|
|
|
|
|
2018
|
81,672
|
|
14,357
|
|
—
|
|
66,115
|
|
1,200
|
2019
|
91,582
|
|
21,179
|
|
62,857
|
|
7,546
|
|
—
|
2020
|
18,707
|
|
8,781
|
|
9,926
|
|
—
|
|
—
|
2021
|
24,447
|
|
21,197
|
|
3,250
|
|
—
|
|
—
|
|
216,408
|
|
65,514
|
|
76,033
|
|
73,661
|
|
1,200
|
The RSUs in the table above include performance-based RSUs with vesting based on the financial performance of the Corporation in 2018 and 2019 and service-based RSUs with various service-based vesting periods. The grant date fair value of RSUs awarded in 2016 is equal to the market price of the shares underlying the awards on the grant date. RSUs awarded in 2016 accrue dividends at the same rate as dividends declared by the Board of Directors on the Corporation’s common stock. The grant date fair value of RSUs awarded in 2015, 2017 and 2018 is equal to the market price of the shares underlying the awards on the grant date, discounted for dividends that are not paid on these RSUs.
The following table presents a summary of RSUs outstanding at
September
30, 2018
and changes during the
nine
month period then ended.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
Aggregate
|
|
|
|
|
Average
|
|
Remaining
|
|
Intrinsic
|
|
|
Number of
|
|
Grant-Date
|
|
Contractual
|
|
Value
|
|
|
RSUs
|
|
Fair Value
|
|
Term (yrs.)
|
|
(in thousands)
|
Outstanding at January 1, 2018
|
|
274,134
|
|
$
|
19.64
|
|
|
|
|
|
|
Granted
|
|
70,688
|
|
|
27.10
|
|
|
|
|
|
|
Converted
|
|
(106,522)
|
|
|
15.56
|
|
|
|
|
|
|
Forfeited
|
|
(21,892)
|
|
|
22.83
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
216,408
|
|
$
|
23.76
|
|
|
0.92
|
|
$
|
4,707
|
Vested and Convertible at September 30, 2018
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
The performance-based RSUs granted in
2018
and 2017
have a maximum payout potential of
1.50
and
1.25
shares of the Corporation’s common stock, respectively, for each RSU awarded. All other RSUs outstanding at
September
30, 2018
have a maximum payout potential of one share of the Corporation’s common stock for each RSU awarded. All of the RSUs outstanding at
September
30, 2018
are currently expected to vest and become convertible in the future. The total intrinsic value of RSUs converted during the first
nine
months of 2018 and 2017 was
$3,011,000
and
$1,779,000
, respectively.
2006 Plan.
The 2006 Plan was approved by the stockholders of the Corporation on April 18, 2006. The 2006 Plan permitted the granting of stock options, SARs, restricted stock awards and RSUs to employees and non-employee directors. Under the terms of the 2006 Plan, stock options and SARs could not have an exercise price that was less than
100%
of the fair market value of one share of the underlying common stock on the date of grant. Through December 31, 2011, equity grants to executive officers and directors under the 2006 Plan consisted of a combination of NQSOs and RSUs, while equity grants to other officers consisted solely of NQSOs. Beginning in 2012, equity grants under the 2006 Plan consisted solely of RSUs. Stock options granted under the 2006 Plan have a
five
year vesting period and a
ten
year term.
Fair Value of Stock Options.
The grant date fair value of options was estimated on the date of grant using the Black-Scholes option pricing model. Substantially all outstanding stock options were expensed in prior years.
Stock Option Activity.
The following table presents a summary of options outstanding at
September
30, 2018
, and changes during the
nine
month period
then ended.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
Aggregate
|
|
|
|
|
Average
|
|
Remaining
|
|
Intrinsic
|
|
|
Number of
|
|
Exercise
|
|
Contractual
|
|
Value
|
|
|
Options
|
|
Price
|
|
Term (yrs.)
|
|
(in thousands)
|
Outstanding at January 1, 2018
|
|
159,807
|
|
$
|
11.35
|
|
|
|
|
|
|
Exercised
|
|
(48,158)
|
|
|
10.79
|
|
|
|
|
|
|
Forfeited or expired
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
111,649
|
|
$
|
11.59
|
|
|
1.50
|
|
$
|
1,134
|
Exercisable at September 30, 2018
|
|
111,349
|
|
$
|
11.57
|
|
|
1.49
|
|
$
|
1,133
|
All options outstanding at
September
30, 2018
are either fully vested or expected to vest. The total intrinsic value of options exercised during the first
nine
months of 2018 and 2017 was
$734,000
and
$1,062,000
, respectively.
Compensation Expense.
The Corporation recorded compensation expense for share-based payments of
$1,526,000
and
$1,925,000
and reco
rd
ed related income tax benefits of
$460,000
and
$808,000
for the
nine
months ended
September
30, 2018
and 2017, respectively.
Unrecognized Compensation Cost.
As of
September
30,
2018, there was
$1,298,000
of total unrecognized compensation cost related to non-vested equity awards comprised of
$2,000
for stock options and
$1,296,000
for RSUs. The total cost is expected to be recognized over a weighted-average period of
1.0
year, which is based on weighted-average periods of
1.7
years and
1.0
year
for stock options and RSUs, respectively.
Cash Received and Tax Benefits Realized.
Cash received from stock option exercises for the
nine
months ended
September
30,
2018 and 2017 was
$1
53
,000
and
$604,000
, respectively. Tax benefits from stock option exercises for the
nine
months ended
September
30,
2018 and 2017 were
$1
67
,000
and
$445,000
, respectively.
Other.
No
cash was used to settle stock options during the first
nine
months of 2018 or 2017. The Corporation uses newly issued shares to settle stock option exercises and for the conversion of RSUs. During the
nine months ended
September
30, 2018 and 2017,
1,834
and
1,445
shares
, respectively,
of the Corporation’s common stock were issued to a member of the Board of Directors in payment of director fees.
7 - DEFINED BENEFIT
PENSION PLAN
The following table sets forth the components of net periodic pension
credit
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Three Months Ended
|
|
|
September 30,
|
|
September 30,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
|
$
|
1,027
|
|
$
|
911
|
|
$
|
342
|
|
$
|
304
|
Interest cost
|
|
|
1,190
|
|
|
1,193
|
|
|
396
|
|
|
398
|
Expected return on plan assets
|
|
|
(2,456)
|
|
|
(2,205)
|
|
|
(818)
|
|
|
(735)
|
Amortization of net actuarial loss
|
|
|
—
|
|
|
13
|
|
|
—
|
|
|
4
|
Net pension credit
|
|
$
|
(239)
|
|
$
|
(88)
|
|
$
|
(80)
|
|
$
|
(29)
|
As a result of the adoption of ASU 2017-07, for all periods presented, the components of net pension credit other than the service cost component were included in the line item “Other noninterest income” in the consolidated statements of income. The service cost component was included in the line item “Salaries” in the consolidated statements of income. See “Note 11 – Adoption of New Accounting Standards” for more information regarding the provisions of ASU 2017-07.
The Bank makes cash contributions to the pension plan (“Plan”) which comply with the fund
ing requirements of applicable f
ederal laws and regulations. For funding purposes, the laws and regulations set forth both minimum required and maximum tax-deductible contributions. The Bank has
no
minimum required pension contribution for the Plan year ending
September 30, 2018
and it
cannot
make a tax-deductible contribution for the tax year beginning January 1, 201
8
.
8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Instruments Recorded at Fair Value
. When measuring fair value, the Corporation uses a fair value hierarchy, which is designed to maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy involves three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect the Corporation’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Corporation deems transfers between levels of the fair value hierarchy to have occurred on the date of the event or change in circumstance that caused the transfer. There were
no
transfers between levels of the fair value hierarchy during the
nine months ended
September
30, 2018
or
2017
.
The fair values of the Corporation’s
financial assets and liabilities measured at fair value on a recurring basis
at
September
30, 2018
and
December 31, 2017
are set forth in the tables that follow. These values are determined using matrix pricing (Level 2 inputs). Matrix pricing, which is a mathematical technique widely used in the industry to value debt securities, does not rely exclusively on quoted prices for the specific securities but rather on the relationship of such securities to other benchmark quoted securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
Quoted Prices
|
|
Significant
|
|
|
|
|
|
|
|
|
in Active
|
|
Other
|
|
Significant
|
|
|
|
|
|
Markets for
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
Identical Assets
|
|
Inputs
|
|
Inputs
|
(in thousands)
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipals
|
|
$
|
423,792
|
|
$
|
—
|
|
$
|
423,792
|
|
$
|
—
|
Pass-through mortgage securities
|
|
|
72,434
|
|
|
—
|
|
|
72,434
|
|
|
—
|
Collateralized mortgage obligations
|
|
|
246,613
|
|
|
—
|
|
|
246,613
|
|
|
—
|
Corporate Bonds
|
|
|
60,000
|
|
|
—
|
|
|
60,000
|
|
|
—
|
|
|
$
|
802,839
|
|
$
|
—
|
|
$
|
802,839
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative - interest rate swap
|
|
$
|
281
|
|
$
|
—
|
|
$
|
281
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipals
|
|
$
|
461,323
|
|
$
|
—
|
|
$
|
461,323
|
|
$
|
—
|
Pass-through mortgage securities
|
|
|
71,391
|
|
|
—
|
|
|
71,391
|
|
|
—
|
Collateralized mortgage obligations
|
|
|
187,414
|
|
|
—
|
|
|
187,414
|
|
|
—
|
|
|
$
|
720,128
|
|
$
|
—
|
|
$
|
720,128
|
|
$
|
—
|
Assets measured at fair value on a nonrecurring basis at
September 30, 2018 and December 31, 2017
, are set forth in the table that follows. Real estate appraisals utilized in measuring the fair value of impaired loans
, if any,
may employ a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. In arriving at fair value, the Corporation adjusts the value set forth in the appraisal by deducting costs to sell and a distressed sale adjustment when appropriate. The adjustments made by the appraisers and the Corporation are deemed to be significant unobservable inputs and therefore result in a Level 3 classification of the inputs used for determining the fair value of impaired loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
Quoted Prices
|
|
Significant
|
|
|
|
|
|
|
|
|
in Active
|
|
Other
|
|
Significant
|
|
|
|
|
|
Markets for
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
Identical Assets
|
|
Inputs
|
|
Inputs
|
(in thousands)
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages held-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed-end
|
|
$
|
509
|
|
$
|
—
|
|
$
|
—
|
|
$
|
509
|
Revolving home equity
|
|
|
162
|
|
|
—
|
|
|
—
|
|
|
162
|
|
|
$
|
671
|
|
$
|
—
|
|
$
|
—
|
|
$
|
671
|
December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
$
|
5,125
|
|
$
|
—
|
|
$
|
—
|
|
$
|
5,125
|
The residential mortgage loans held-for-sale at September 30, 2018 in the preceding table were accounted for on a non-accrual basis and carried at the lower of cost or fair value.
The other real estate owned in the preceding table is one commercial real estate property acquired by deed-in-lieu of foreclosure
. A valuation allowance of
$725,000
was recorded and
included in other noninterest expense in the consolidated statements of income for the year ended December 31, 2017. The Bank sold the property for its carrying value in the first quarter of 2018.
Other than the loans held-for-sale discussed above, t
he Corporation had
no
impaired loans recorded at fair value at
September
30, 2018
or December 31, 2017. During the
nine and three months ended
September
30, 2017
, the Corporation recorded provision
s (credits)
for loan losses of
$338,000
and (
$530,000
), respectively,
for impaired loans measured at fair value.
Financial Instruments Not Recorded at Fair Value.
Fair value estimates are made at a specific point in time. Such estimates are generally subjective in nature and dependent upon a number of significant assumptions associated with each financial instrument or group of similar financial instruments, including estimates of discount rates, risks associated with specific financial instruments
such as liquidity, credit and nonperformance risk
, estimates of future cash flows, and relevant available market information. Changes in assumptions could significantly affect the estimates. In addition, fair value estimates do not reflect the value of anticipated future business, premiums or discounts that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument, or the
income
tax consequences of realizing gains or losses on the sale of financial instruments.
The following table sets forth the carrying amounts and estimated fair values of financial instruments that are not recorded at fair value in the Corporation’s financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level of
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Fair Value
|
|
Carrying
|
|
|
|
|
Carrying
|
|
|
|
(in thousands)
|
Hierarchy
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
Level 1
|
|
$
|
50,462
|
|
$
|
50,462
|
|
$
|
69,672
|
|
$
|
69,672
|
Held-to-maturity securities
|
Level 2
|
|
|
3,682
|
|
|
3,739
|
|
|
5,030
|
|
|
5,143
|
Held-to-maturity securities
|
Level 3
|
|
|
3,163
|
|
|
3,163
|
|
|
2,606
|
|
|
2,606
|
Loans
|
Level 3
|
|
|
3,187,744
|
|
|
2,998,186
|
|
|
2,916,568
|
|
|
2,855,812
|
Restricted stock
|
Level 1
|
|
|
37,941
|
|
|
37,941
|
|
|
37,314
|
|
|
37,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking deposits
|
Level 1
|
|
|
946,236
|
|
|
946,236
|
|
|
896,129
|
|
|
896,129
|
Savings, NOW and money market deposits
|
Level 1
|
|
|
1,679,617
|
|
|
1,679,617
|
|
|
1,602,460
|
|
|
1,602,460
|
Time deposits
|
Level 2
|
|
|
534,656
|
|
|
528,725
|
|
|
323,408
|
|
|
323,108
|
Short-term borrowings
|
Level 1
|
|
|
292,176
|
|
|
292,176
|
|
|
281,141
|
|
|
281,141
|
Long-term debt
|
Level 2
|
|
|
403,027
|
|
|
392,865
|
|
|
423,797
|
|
|
418,465
|
As described in “Note 11 – Adoption of New Accounting Standards,” t
he Corporation adopted ASU 2016-01 on January 1, 2018 and applied the provisions of the standard prospectively to the fair value amounts in the table above.
9 – REVENUE FROM CONTRACTS WITH CUSTOMERS
As described in “Note 1
1
– Adoption of New Accounting Standards,” the
Corporation
adopted ASU 2014-09 “Revenue from Contracts with Customers”
and all subsequent amendments
on January 1, 2018.
The majority of the Bank's income streams are outside of the scope of ASU 2014-09, such as interest and dividend income on loans and securities. Income streams that are within the scope of ASU 2014-09
are
recorded in the noninterest income section of the co
nsolidated statements of income and include the
f
ollowing types of fees earned from the Bank's contracts with customers.
Investment Management Division
Revenue
s.
The Bank holds customer assets in a fiduciary capacity and provides various services, including trust account services, estate settlement, custody and asset management. The services
are performed for
customer
s
over time, requiring a time-based measure of progress. Fees are assessed based on market
valu
es
of customer assets held or under management
as of a certain point in time, and income cannot be estimated prior to the end of the measurement period.
Volatility in equity and other market
values
will impact
the amount of revenue that will be earned.
Fees are generally earned and collected on a monthly or quarterly basis, accrued to income as earned and included in the consolidated statements of income in the line item "Investment Management Division income."
Deposit Account
Revenue
s.
Fees are earned and collected on a monthl
y basis for account maintenance and
activity
-based
service charges o
n
deposit accounts. The services
are performed for
customer
s
over time, requiring a time-based measure of progress. Customers may be required to maintain minimum balances and average balances. Additional fees may also be earned for overdrafts, replacement of debit cards, bill payment, lockbox services and ACH services, among others, and are earned and collected as transactions take place. All deposit account fees are accrued to income as earned, either monthly or
a
t
t
he point of sale
, and included in the consolidated statements of income in the line item "Service charges on deposit accounts."
Transaction and Branch Service Fees.
The following revenue streams are components of “Other noninterest income” on the consolidated statements of income. These components totaled
$
1,567,00
0
and
$
1,4
2
6
,000
for the
nine
months ended
September
30, 2018
and 2017, respectively. Other items included in “Other noninterest income,” such as
bank-owned life insurance (“
BOLI
”)
income,
non-service components of net pension cost
and real estate tax refunds
are outside of the scope of ASU 2014-09.
Debit/Credit Card
Revenue
s
.
The Bank earns a fee when its customers use their
debit or credit cards in point-of-s
ale transactions.
These fees are
generally known as interchange fees.
Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recorded daily, concurrently with the transact
ion processing services provided
to the cardholder.
Branch
Service
s
Revenues
.
The Bank charges fees for safe deposit box rentals, wire transfers, money orders,
checkbook printing, official
checks an
d ATM usage. Fees are earned,
collected
and generally recorded as revenue when the service is provided.
Investment Advisory Services
.
The Bank provides branch space to a third party who sells financial products to
the Bank’s customers and pays
commissions
to the Bank
based on the products sold. Commissions are variable
and based on the market
valu
es of financial assets sold
. C
ommissions are accrued to incom
e as earned and collected.
10 – DERIVATIVES
As part of its asset liability management
activities
, the Co
rporation
may utilize
interest rate swap
s
to help manage its interest rate risk posi
tion. The notional amount of an
interest rate swap does not represent the amount exchanged by the parties. The
exchange of cash flows
is determined by reference to the notional amount and the other terms of the interest rate swap agreement
s
.
The Bank entered into an interest rate swap
with
a
notional amount totaling
$150
million on May 22, 2018, which was
designated as
a
cash flow hedge of certain
Federal Home Loan Bank (“
FHLB
”) advances included in short-term borrowings on the consolidated balance sheet. The swap
w
as
determined to be fully effective during the period
s
presented and therefore no amount of ineffectiveness has been included in net income. The aggregate fa
ir value of the swap
is recorded in other
asset
s, with changes in fair value
net of related income taxes
recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedge no longer be considered effective. The
Corporation
expects the hedge to remain fully effective during
the remaining term of the swap
.
The following table summarizes informati
on about the interest rate swap
designated as
a
c
ash flow hedge at
September
30, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$150 million
|
|
|
Weighted average fixed pay rate
|
|
2.90%
|
|
|
Weighted average 3-month LIBOR receive rate
|
|
Currently 2.32%
|
|
|
Weighted average maturity
|
|
2.68
Years
|
|
|
Interest expense recorded on the swap transaction
, which
totaled
$315,000
and
$225,000
, respectively,
for the
nine
and three months ended
September
30, 2018
,
is
includ
ed
in the line item “I
nterest expense
– short-term borrowings” in the consolidated statements of income
. Amounts reported in accumulated other comprehensive income related to
the
swap
will be reclassified to interest expense as interest payments are received
/made
on the
Bank
’s variable-rate assets/liabilities. During the
nine
months ended
September
30, 2018, the Co
rporation
had
$315,000
of reclassifications to interest expense. During the next twelve months, the Co
rporation
estimates that
$
243
,000
will be reclassified as a
n
in
crease
to
interest expense.
The following table presents the net
gains (
losses
)
recorded in
the consolidated statements of i
ncome
and the consolidated statements of c
omprehensive income relating to the
interest rate swap
for the
nine
and three
months ended
September
30, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
|
|
Amount of Loss
|
|
|
|
Gain/(Loss)
|
|
Amount of Loss
|
|
Recognized in Other
|
|
|
|
Recognized in OCI
|
|
Reclassified from OCI
|
|
Noninterest Income
|
|
(in thousands)
|
|
(Effective Portion)
|
|
to Interest Expense
|
|
(Ineffective Portion)
|
|
Interest rate contract:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2018
|
|
$
|
(34)
|
|
$
|
315
|
|
$
|
—
|
|
Three months ended September 30, 2018
|
|
$
|
462
|
|
$
|
225
|
|
$
|
—
|
|
The following table reflects the
amounts relating to the
interest rate swap
included in the consolidated balance sheet
at
September
30, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
Fair Value
|
|
(in thousands)
|
|
Amount
|
|
Asset
|
|
Liability
|
|
Included in other assets or other liabilities
|
|
|
|
|
$
|
281
|
|
$
|
—
|
|
Interest rate swap related to FHLB advances
|
|
$
|
150,000
|
|
|
|
|
|
|
|
Credit Risk Related Contingent Features
.
The
Bank’s agreement with its
interest rate swap
counterparty
s
ets forth
minimum collateral
posting thresholds
. If the termination value of
the
swap
is a net asset position, the counterparty
may be
required to post collateral against its obligations to the
Bank
under the agreement. However, if the termination value of
the
swap
is a net liability position, the
Bank
may be
required to post collateral to the counterparty. At
September
30, 2018,
the termination value of
the
Bank
’s
swap
is in an asset position
of
$
281
,000
. If the
Bank
had breached any of these provisions at
September
30, 2018, it could have been required to settle its obligations under the agreement at the termination value.
11 – ADOPTION OF NEW ACCOUNTING STANDARDS
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09 “Revenue from Contracts with Customers.” The amendments in ASU 2014-09 provide a comprehensive framework for addressing revenue recognition issues that can be applied to all contracts with customers. While the guidance in ASU 2014-09 supersedes most existing industry-specific revenue recognition accounting guidance, much of a bank’s revenue comes from financial instruments such as debt securities and loans that are scoped-out of the guidance. The amendments in ASU 2014-09 also include improved disclosures to enable users of financial statements to better understand the nature, amount, timing and uncertainty of revenue that is recognized. For public entities such as the Corporation, ASU 2014-09, as amended, is effective for interim and annual reporting periods beginning after December 15, 2017. The adoption of ASU 2014-09 and all subsequent amendments on January 1, 2018, using the modified retrospective transition method, did not impact the Corporation’s financial position or results of operations and, as such, no cumulative effect adjustment was recorded. See “Note 9 – Revenue from Contracts with Customers” for disclosures pertaining to the revenue streams within the scope of ASU 2014-09.
In January 2016, the FASB issued ASU 2016-01 “Financial Instruments – Overall.” The amendments in ASU 2016-01 are intended to improve the recognition, measurement, presentation and disclosure of financial assets and liabilities to provide users of financial statements with information that is more useful for decision-making purposes. For public entities such as the Corporation, the amendments in ASU 2016-01 are effective for interim and annual reporting periods beginning after December 15, 2017. The adoption of ASU 2016-01 on January 1, 2018 did not have an impact on the Corporation’s financial position or results of operations, but resulted in the prospective application of an exit price notion in the determination of the fair value of certain financial instruments as disclosed in “Note 8 – Fair Value of Financial Instruments.” Adoption of the ASU also resulted in the elimination of disclosures regarding the methods and assumptions used to estimate fair value. The Bank’s FHLB and Federal Reserve Bank (“FRB”) stock,
included under the line item “Restricted stock, at cost” in the consolidated balance sheets, are specifically excluded from the scope of the ASU.
In August 2016, the FASB issued ASU 2016-15 “Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 affects all entities that are required to present a statement of cash flows under Accounting Standards Codification (“ASC”) Topic 230, Statement of Cash Flows, and other ASC Topics, addressing eight specific cash flow issues with the objective of reducing diversity in practice.
ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. The adoption of ASU 2016-15 on January 1, 2018 did not have a material impact on the Corporation’s cash flows or disclosures.
In March 2017, the FASB issued ASU 2017-07 “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 applies to all employers that offer to their employees defined benefit pension plans, other postretirement benefit plans or other types of benefits accounted for under ASC Topic 715. The ASU requires, among other things, that an employer disaggregate the service cost component from other components of net benefit cost and provides explicit guidance on how to present the service cost component and other components of net benefit cost in the income statement. ASU 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017. The adoption of ASU 2017-07 on January 1, 2018 resulted in revised income statement classifications of the components of net periodic pension cost for all periods presented. T
he Corporation used the amounts disclosed in “Note 7 – Defined Benefit Pension Plan” as the basis for applying the retrospective presentation requirements
of the ASU. See Note 7 for details of the reclassified amounts. The other amendments in the ASU did not impact the Corporation’s financial position or results of operations.
In February 2018, the FASB issued ASU 2018-02 “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 affects any entity that has items of other comprehensive income for which the related tax effects are presented in other comprehensive income. The ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act which was signed into law on December 22, 2017. ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. Management
early-adopted
the ASU in the first quarter of 2018
and reclassified $277,000 of stranded tax effect credits from accumulated other comprehensive income to retained earnings on January 1, 2018. The reclassification had
no
net
impact on the Corporation’s financial position or results of operations.
1
2
–
IMPACT OF IS
SUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS
The pronouncements discussed in this section are not inten
ded 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 February 2016, the FASB issued ASU 2016-02 “Leases.” ASU 2016-02 affects any entity that enters into a lease and is intended to increase the transparency and comparability of financial statements among organizations. The ASU requires, among other changes, a lessee to recognize on its balance sheet a lease asset and a lease liability for those leases previously classified as operating leases. The lease asset would represent the right to use the underlying asset for the lease term and the lease liability would represent the discounted value of the required lease payments to the lessor. The ASU would also require entities to disclose key information about leasing arrangements. ASU 2016-02
, as amended,
is effective for interim and annual reporting periods beginning after December 15, 2018.
Based on the lease arrangements in effect at September 30, 2018 and the work completed to date in implementing the ASU, ma
nagement
believes that the ASU will not have a material impact on the
Corporation’s financial position, results of operations
or regulatory capital
ratios
. The Corporation expects to utilize the transition method described in ASU 2018-11 “Leases – Targeted Improvements”
with an application date of January 1, 2019
to implement the ASU
.
In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Los
ses on Financial Instruments.”
ASU 2016-13 affects entities holding financial assets that are
not accounted for at fair value
, i
ncluding loans, debt securities
and other financial assets. The ASU requires financial assets measured at amortized cost to be presented at the net amount expected to be collected by recording an allowance for credit losses. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years. Management has established an internal committee to manage the implementation of the ASU. The committee is led by the Bank’s Chief Accounting Officer and includes the Chief Financial Officer and Chief Risk Officer. A broader group
of Bank staff
has been
identifi
ed to assist in implementing the ASU
including
representatives of the Bank’s loan operations, credit administration, lending, investments and technology functions. The committee has selected and engaged a third-party software provider,
developed an implementation timeline, accumulated
the historical data needed to implement the ASU and is
in the process of
evaluating
the accuracy and completeness of
this
data
.
In addition, the committee continues to analyze the ASU to understand the impact that it will have on the Corporation’s financial position, results of operations and disclosures.
In August 2018, the FASB issued ASU 2018-13 “Changes to the Disclosure Requirements for Fair Value Measurement” and ASU 2018-14 “Changes to the Disclosure Requirements for Defined Benefit Plans.” These ASUs modify certain disclosure requirements pertaining to fair value measurements and defined benefit plans, respectively, as part of the
FASB’s
disclosure framework project intended to improve the effectiveness of disclosures in the notes to financial statements. ASU 2018-13 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. ASU 2018-14 is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The adoption of these ASUs will modify the Corporation’s disclosures but will not impact its financial position or results of operations.
13
– SUBSEQUENT EVENTS
During
October
2018
,
the Bank
made a decision to restructure
the securities portfolio by selling
$61.6
million of mortgage-backed securities
that were classified as available-for-sale. The securities sold had
a yield of
2.51%
and resulted in a pre-tax
loss of approximately
$3.2
million
. The proceeds from the sale were
used to pay down overnight borrowings with a cost of
2.47%
.
Also during October 2018
,
the Bank completed a sale of
the land and building related to
one
of its branches which was previously included in “other assets” in the consolidated balance sheets and carried at the lower of cost or fair value at September 30, 2018. The sale resulted in a pre-tax gain of
$1.2
million in the fourth quarter of 2018.