The following selected financial data should be read in conjunction with the accompanying consolidated financial statements. (dollars in thousands, except per share data) 2021 2020 2019 2018 2017 INCOME STATEMENT DATA: Interest Income$ 122,959 $ 131,216 $ 143,850 $ 138,237 $ 118,265 Interest Expense 16,152 29,188 43,681 35,730 21,709 Net Interest Income 106,807 102,028 100,169 102,507 96,556 Provision (Credit) for Credit Losses (2,573) 3,006 33 (1,755) 4,854 Net Income 43,089 41,203 41,555 41,573 35,122 PER SHARE DATA: Basic Earnings$ 1.82 $ 1.73 $ 1.68 $ 1.64 $ 1.44 Diluted Earnings 1.81 1.72 1.67 1.63 1.43 Cash Dividends Declared .78 .74 .70 .64 .58 Dividend Payout Ratio 43.09 % 43.02 % 41.92 % 39.26 % 40.56 % Book Value$ 17.81 $ 17.11 $ 16.26 $ 15.27 $ 14.37 BALANCE SHEET DATA AT YEAR END: Total Assets$ 4,068,789 $ 4,069,141 $ 4,097,843 $ 4,241,060 $ 3,894,708 Loans 3,105,036 3,033,454 3,188,249 3,263,399 2,950,352 Allowance for Credit Losses 29,831 33,037 29,289 30,838 33,784 Deposits 3,315,245 3,321,588 3,144,016 3,084,972 2,821,997 Borrowed Funds 311,322 306,097 528,182 750,950 704,938 Stockholders' Equity 413,812 407,118 389,108 388,187 354,450 AVERAGE BALANCE SHEET DATA: Total Assets$ 4,151,577 $ 4,140,867 $ 4,194,355 $ 4,177,341 $ 3,695,850 Loans 2,976,061 3,110,512 3,217,530 3,177,519 2,758,116 Allowance for Credit Losses 31,300 33,180 30,080 34,960 32,022 Deposits 3,425,976 3,257,317 3,276,699 3,168,348 2,812,733 Borrowed Funds 281,191 457,939 494,785 623,587 540,307 Stockholders' Equity 416,885 393,662 391,613 374,876 334,088 FINANCIAL RATIOS: Return on Average Assets (ROA) 1.04 % 1.00 % .99 % 1.00 % .95 % Return on Average Equity (ROE) 10.34 % 10.47 % 10.61 % 11.09 % 10.51 % Average Equity to Average Assets 10.04 % 9.51 % 9.34 % 8.97 % 9.04 % 14
-------------------------------------------------------------------------------- Overview - 2021 Versus 2020 Analysis of 2021 Earnings. Net income and diluted earnings per share ("EPS") for 2021 were$43.1 million and$1.81 , respectively. Dividends per share increased 5.4% from$.74 for 2020 to$.78 for 2021. ROA and ROE for 2021 were 1.04% and 10.34%, respectively, compared to 1.00% and 10.47%, respectively, for 2020. Net income for 2021 was$43.1 million , an increase of$1.9 million , or 4.6%, as compared to 2020. The increase is mainly due to growth in net interest income of$4.8 million and an improvement in the provision for credit losses of$5.6 million . These items were partially offset by increases in noninterest expense, net of debt extinguishment costs, of$6.6 million and income tax expense of$1.9 million . The increase in net interest income reflects a favorable shift in the mix of funding due to an increase in average noninterest-bearing checking deposits of$242.5 million and a decline in average interest-bearing liabilities of$250.6 million . The increase is also attributable to higher income from SBA PPP loans of$2.9 million and prepayment and late fees of$1.1 million . Partially offsetting the favorable impact of the above items on net interest income was a decline in the average balance of loans of$134.5 million . The average yield on interest-earning assets declined 22 basis points ("bps") from 3.37% for 2020 to 3.15% for 2021. The negative impact of declining asset yields on net interest income was more than offset through reductions in non-maturity and time deposit rates. The average cost of interest-bearing liabilities declined 44 bps from 1.12% for 2020 to .68% for 2021 helped by the repayment of a maturing interest rate swap inMay 2021 that lowered the cost of funds in 2021 by$2.5 million . Net interest margin for 2021 of 2.74% increased 10 bps as compared to 2.64% for 2020. Income from PPP loans and prepayment and late fees improved net interest margin by 7 bps and 2 bps, respectively. We currently anticipate going into 2022 with a net interest margin similar to the fourth quarter of 2021. The direction of the margin throughout 2022 is largely dependent on changes in the yield curve and competitive conditions. PPP income for 2021 was$6.5 million driven by an average balance of$108.8 million and a weighted average yield of 6.0%. As ofDecember 31, 2021 , the Bank had$30.5 million of outstanding PPP loans with unearned fees of$978,000 . We expect most of the outstanding PPP loans will be fully satisfied during the first half of 2022. Although low loan demand throughout most of the first half of 2021 put pressure on the pipeline and originations, the Bank successfully deployed excess cash during the second half of 2021 into loan originations of$459 million . The expansion of our lending teams helped grow commercial mortgages by$315.5 million during the year, which now comprise 58.2% of total mortgages compared to 50.9% a year ago. While commercial and industrial lines of credit have increased, line utilization remains historically low contributing to a decrease in commercial and industrial loans outstanding. The loan pipeline was$152 million onDecember 31, 2021 with a weighted average rate of approximately 3.2%. The provision for credit losses decreased$5.6 million when comparing the full year periods from a provision of$3.0 million in 2020 to a credit of$2.6 million in 2021. The credit for the current year was mainly due to improvements in economic conditions, asset quality and other portfolio metrics, partially offset by an increase in outstanding commercial mortgage loans and net chargeoffs of$633,000 . The net chargeoffs were mainly the result of discounted sales of eight mortgage loans with varying concerns. Noninterest income, net of gains on sales of securities, decreased$60,000 in 2021 as compared to 2020. The decrease is mainly due to a decline in investment services income of$958,000 as the shift to an outside service provider resulted in less assets under management, and a transition payment received in 2020 of$370,000 for the conversion of the Bank's retail broker and advisory accounts. These amounts were partially offset by increases in the non-service cost components of the Bank's defined benefit pension plan of$550,000 and fees from debit and credit cards of$615,000 . We currently anticipate noninterest income to be between$2.5 million to$3.0 million per quarter in 2022 excluding securities gains. The increase in noninterest expense, net of debt extinguishment costs, of$6.6 million includes charges of$3.2 million related to closing eight branches under our branch optimization strategy. The$3.2 million includes severance-related salary and benefits expense of$123,000 and occupancy and equipment expense related to rent, depreciation and asset disposals of$3.1 million . The remaining increase in noninterest expense is related to normal increases and changes in operating expenses. We currently anticipate total 2022 noninterest expense to be in line with 2021 excluding debt extinguishment costs. Income tax expense increased$1.9 million due to growth in pre-tax earnings in 2021 and an increase in the effective tax rate (income tax expense as a percentage of pre-tax book income) to 19.2% for 2021 from 16.8% for 2020. The increase in the effective tax rate is due to a decrease in the percentage of pre-tax income derived from tax-exempt municipal securities and BOLI in 2021 and a change inNew York State tax law to implement a capital tax in the second quarter of 2021. We currently anticipate the 2022 effective tax rate to be in line with 2021. Asset Quality. The Bank's ACL to total loans ("reserve coverage ratio") was .96% atDecember 31, 2021 , compared to 1.09% atDecember 31, 2020 . The decrease in the reserve coverage ratio was mainly due to improvements in economic conditions, asset quality 15 -------------------------------------------------------------------------------- and other portfolio metrics. Gross loan chargeoffs and recoveries were$1.2 million and$573,000 , respectively, for the year endedDecember 31, 2021 . Nonaccrual loans amounted to$1.2 million , or .04% of total loans outstanding, atDecember 31, 2021 , compared to$1.1 million , or .04%, atDecember 31, 2020 . Troubled debt restructurings ("TDRs") amounted to$554,000 , or .02% of total loans outstanding, atDecember 31, 2021 , compared to$1.3 million , or .04%, atDecember 31, 2020 . All TDRs are performing in accordance with their modified terms atDecember 31, 2021 . Loans past due 30 through 89 days amounted to$460,000 , or .01% of total loans outstanding, atDecember 31, 2021 , compared to$1.4 million , or .05%, atDecember 31, 2020 . The Bank's mortgage securities are backed by mortgages underwritten on conventional terms, with 11% of these securities being full faith and credit obligations of theU.S. government and the balance being obligations ofU.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 and investment grade corporate bonds of largeU.S. financial institutions. In selecting 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 securities in its portfolio and makes decisions to hold or sell based on such assessments. Key Strategic Initiatives. We continue focusing on strategic initiatives supporting the growth of our balance sheet with a profitable relationship banking business. Such initiatives include improving the quality of technology through continuing digital enhancements, optimizing our branch network across a larger geography, using new branding and "Community First" focus to improve name recognition, enhancing our website and social media presence including the promotion of FirstInvestments, and ongoing recruitment of additional seasoned banking professionals to support our growth initiatives. Renovations of our leased space at275 Broadhollow Road inMelville, N.Y. for a state-of-the-art branch and office space are nearing completion with occupancy expected to begin during the first quarter of 2022. Our signage at theMelville location now visibly overlooks theLong Island Expressway andRoute 110 . Management continues to focus on the areas of cybersecurity, environmental, social and governance practices. Overview - 2020 Versus 2019 Analysis of 2020 Earnings. Net income and diluted EPS for 2020 were$41.2 million and$1.72 , respectively. Dividends per share increased 5.7% from$.70 for 2019 to$.74 for 2020. ROA and ROE for 2020 were 1.00% and 10.47%, respectively, compared to .99% and 10.61%, respectively, for 2019. Net income for 2020 was$41.2 million , a decrease of$352,000 , or .8%, as compared to 2019. The decrease was mainly due to an increase in the provision for credit losses of$3.0 million partially offset by increases in net interest income of$1.9 million , or 1.9%, and noninterest income, before securities gains, of$933,000 , or 8.8%. The increase in net interest income was mainly attributable to a reduction in deposit rates in response to decreases in the federal funds target rate to near zero as well as significant declines in rates across the entire yield curve. Declines in the cost of savings, NOW and money market deposits and interest-bearing liabilities far outpaced the decline in yield on securities and loans which are generally not subject to immediate repricing with changes in market interest rates. The increase in net interest income was also attributable to income from SBA PPP loans and a favorable shift in the mix of funding as an increase in average checking deposits and a decline in average interest-bearing liabilities resulted in average checking deposits comprising a larger portion of total funding. Average checking deposits included a portion of the proceeds of PPP loans. Net interest margin for 2020 was 2.64%, an increase of 7 bps over 2019. The increase was mainly attributable to our ability to reduce the rates paid on interest-bearing deposits faster than interest-earning assets repriced downward and a deleveraging transaction completed in the third quarter of 2020. The provision for credit losses was$3.0 million for 2020 on a CECL basis as compared to$33,000 for 2019 on an incurred loss basis. The provision for 2020 was primarily attributable to the pandemic and reflected higher historical loss rates, economic conditions and net chargeoffs, partially offset by a decline in the outstanding loan balance of residential and commercial mortgages. The provision for 2019 was driven mainly by net chargeoffs, partially offset by declines in outstanding loans and lower growth rate trends. The increase in noninterest income, before securities gains, of$933,000 was primarily attributable to an increase in the non-service components of the Bank's defined benefit pension plan and income relating to a transition payment from an independent broker-dealer for the initial conversion of the Bank's retail broker and advisory accounts. Partially offsetting these increases was a decrease in service charges on deposit accounts due to the pandemic. Noninterest expense, before debt extinguishment costs, increased$58,000 in 2020 as compared to 2019. Excluding executive severance and retirement charges of$2.6 million in 2019, the increase over 2019 was primarily due to increases in compensation and benefit costs mainly related to normal salary adjustments and hiring of lending and credit staff. 16 -------------------------------------------------------------------------------- The increase in income tax expense of$96,000 was attributable to an increase in the effective tax rate from 16.5% in 2019 to 16.8% in 2020 as tax-exempt income from municipal securities and BOLI declined in 2020 as a percentage of pre-tax earnings when compared to 2019. Asset Quality. The Bank's reserve coverage ratio on a CECL basis was 1.01% atJanuary 1, 2020 , 1.09% atMarch 31 , 1.08% atJune 30 andSeptember 30 and 1.09% atDecember 31, 2020 . Excluding PPP loans, the reserve coverage ratio increased 12 bps during 2020 to 1.13% at year end. The increase was mainly due to current and forecasted economic conditions and higher historical loss rates. Gross loan chargeoffs and recoveries were$2.7 million and$584,000 , respectively, for the year endedDecember 31, 2020 . Nonaccrual loans amounted to$1.1 million , or .04% of total loans outstanding, atDecember 31, 2020 , compared to$888,000 , or .03%, atDecember 31, 2019 . The increase in nonaccrual loans was mainly due to three new nonaccrual loans, partially offset by one loan returned to accrual status and paydowns. TDRs amounted to$1.3 million , or .04% of total loans outstanding, atDecember 31, 2020 . Of the TDRs,$815,000 were performing in accordance with their modified terms and$494,000 were nonaccrual and included in the aforementioned amount of nonaccrual loans. Loans past due 30 through 89 days amounted to$1.4 million , or .05% of total loans outstanding, atDecember 31, 2020 , compared to$2.9 million , or .09%, atDecember 31, 2019 . During the second and third quarters of 2020, the Bank provided payment deferrals in the form of loan modifications to borrowers experiencing financial disruption and economic hardship as a result of the pandemic. AtDecember 31, 2020 , all such loans had resumed making payment and were current except for seven loans that were charged-off totaling$440,000 and one loan that was past due 30 to 89 days in the amount of$41,000 . Additionally, three loans totaling$862,000 were in nonaccrual status at year end. Application of Critical Accounting Policies In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported asset and liability balances and revenue and expense amounts. Our determination of the ACL is a critical accounting estimate because it is based on our subjective evaluation of a variety of factors at a specific point in time and involves difficult and complex judgments about matters that are inherently uncertain. In the event that management's estimate needs to be adjusted based on additional information that comes to light after the estimate is made or changes in circumstances, such adjustment could result in the need for a significantly different ACL and thereby materially impact, either positively or negatively, the Bank's results of operations. The Bank's Allowance for Credit Losses Committee ("ACL Committee"), which is a management committee chaired by the Chief Credit Officer, meets on a quarterly basis and is responsible for determining the ACL after considering 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, the ACL Committee is responsible for implementing and maintaining accounting policies and procedures surrounding the calculation of the required allowance. The Loan Committee reviews and approves the Bank's Loan Policy at least once each calendar year. The Bank's ACL is reviewed and ratified by the 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 the adequacy of the allowance to absorb current expected credit losses. The ACL is a valuation amount that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the Bank's loan portfolio. The allowance is established through provisions for credit losses charged against income. When available information confirms that specific loans, or portions thereof, are uncollectible, these amounts are charged against the ACL, and subsequent recoveries, if any, are credited to the allowance. Management estimates the ACL balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical loss information from the Bank's own loan portfolio has been compiled sinceDecember 31, 2007 and generally provides a starting point for management's assessment of expected credit losses. A historical look-back period that begins in 2007 covers an entire economic cycle and impacts the average historical loss rates used to calculate the final ACL. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level or term as well as for current and potential future changes in economic conditions over a one year to two year forecasting horizon, such as unemployment rates, GDP, vacancy rates or other relevant factors. The immediate reversion method is applied for periods beyond the forecasting horizon. The ACL is an amount that management currently believes will be adequate to absorb expected lifetime losses in the Bank's loan portfolio. The process for estimating credit losses and determining the ACL as of any balance sheet date is subjective in nature and requires material estimates and judgements. Actual results could differ significantly from those estimates. The ACL is measured on a collective (pool) basis when similar risk characteristics exist. Management segregates its loan portfolio into eleven distinct pools: (1) commercial and industrial; (2) small business credit scored; (3) multifamily; (4) owner-occupied; (5) other commercial real estate; (6) construction and land development; (7) residential mortgage; (8) revolving home equity; (9) consumer; (10) municipal loans; and (11) SBA PPP loans. The vintage method is applied to measure the historical loss component of lifetime credit losses inherent in most of its loan pools. For the revolving home equity and small business credit scored pools, the migration method 17 -------------------------------------------------------------------------------- was selected to measure historical losses; no historical loss method was applied to the SBA PPP loan pool. Management believes that the methods selected fairly reflect the historical loss component of expected losses inherent in the Bank's loan portfolio. However, since future losses could vary significantly from those experienced in the past, on a quarterly basis management adjusts its historical loss experience to reflect current conditions and reasonable and supportable forecasts. In doing so, management considers a variety of general qualitative and quantitative factors and then subjectively determines the weight to assign to each in estimating losses. The factors include: (1) changes in lending policies and procedures; (2) experience, ability and depth of lending staff; (3) trends in the nature and volume of loans; (4) changes in the quality of the loan review function; (5) delinquencies; (6) environmental risks; (7) current and forecasted economic conditions as judged by things such as national and local unemployment levels and GDP; (8) changes in the value of underlying collateral as judged by things such as median home prices and forecasted vacancy rates in the Bank's service area; and (9) direction and magnitude of changes in the economy. The Bank's ACL allocable to its loan pools results primarily from these Q-factor adjustments to historical loss experience with the largest sensitivity of the ACL and provision arising from loan growth and concentrations, credit quality and forecasts of unemployment, GDP, vacancies and economic conditions. Because of the nature of the Q-factors and the difficulty in assessing their impact, management's resulting estimate of losses may not accurately reflect lifetime losses in the portfolio. Loans that do not share similar risk characteristics are evaluated on an individual basis. Such disparate risk characteristics may include internal or external credit ratings, risk ratings, collateral type, size of loan, effective interest rate, term, geographic location, industry or historical or expected loss pattern. Estimated losses for loans individually evaluated are based on either the fair value of collateral or the discounted value of expected future cash flows. For all collateral dependent loans evaluated on an individual basis, credit losses are measured based on the fair value of the collateral. In estimating the fair value of real estate collateral, management utilizes appraisals or evaluations adjusted for costs to dispose and a distressed sale adjustment, if needed. Estimating the fair value of collateral other than real estate is also subjective in nature and sometimes requires difficult and complex judgements. Determining expected future cash flows can be more subjective than determining fair values. Expected future cash flows could differ significantly, both in timing and amount, from the cash flows received over the loan's remaining life. Individually evaluated loans are not included in the estimation of credit losses from the pooled portfolio. TDRs are individually evaluated for loss and generally reported at the present value of estimated future cash flows using the loan's effective rate at inception. However, if a TDR is a collateral dependent loan, the loan is reported at the fair value of the collateral. 18 -------------------------------------------------------------------------------- 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 ("AFS") securities, and the average balances of loans include nonaccrual loans. 2021 2020 2019 Average Interest/ Average Average
Interest/ Average Average Interest/ Average (dollars in thousands) ?Balance ?Dividends ?Rate ?Balance
?Dividends ?Rate ?Balance ?Dividends ?Rate Assets: Interest-earning bank balances$ 200,063 $ 261 .13 % $
135,475
455,532 7,901 1.73
346,956 11,661 3.36 367,157 14,574 3.97 Nontaxable (1)
345,688 10,799 3.12
373,500 12,470 3.34 405,454 14,515 3.58 Loans (1)
2,976,061 106,271 3.57
3,110,512 109,498 3.52 3,217,530 117,177 3.64 Total interest-earning assets
3,977,344 125,232 3.15 3,966,443 133,841 3.37 4,019,702 146,904 3.65 Allowance for credit losses (31,300) (33,180) (30,080) Net interest-earning assets 3,946,044 3,933,263 3,989,622 Cash and due from banks 33,808 33,092 36,482 Premises and equipment, net 38,700 39,403 40,894 Other assets 133,025 135,109 127,357$ 4,151,577 $ 4,140,867 $ 4,194,355 Liabilities and Stockholders' Equity: Savings, NOW & money market deposits$ 1,782,789 4,414 .25$ 1,683,290 9,097 .54$ 1,721,604 18,563 1.08 Time deposits 300,374 5,712 1.90
473,720 10,977 2.32 613,166 14,494 2.36 Total interest-bearing deposits
2,083,163 10,126 .49
2,157,010 20,074 .93 2,334,770 33,057 1.42 Short-term borrowings (2)
54,416 1,427 2.62
75,805 1,574 2.08 137,546 3,261 2.37 Long-term debt
226,775 4,599 2.03
382,134 7,540 1.97 357,239 7,363 2.06 Total interest-bearing liabilities
2,364,354 16,152 .68 2,614,949 29,188 1.12 2,829,555 43,681 1.54 Checking deposits 1,342,813 1,100,307 941,929 Other liabilities 27,525 31,949 31,258 3,734,692 3,747,205 3,802,742 Stockholders' equity 416,885 393,662 391,613$ 4,151,577 $ 4,140,867 $ 4,194,355 Net interest income (1)$ 109,080 $ 104,653 $ 103,223 Net interest spread (1) 2.47 % 2.25 % 2.11 % Net interest margin 2.74 % 2.64 % 2.57 % (1) (1) Tax-equivalent basis. Interest income on a tax-equivalent basis includes the additional amount of interest income that would have been earned if the Corporation's investment in tax-exempt loans and investment securities had been made in loans and investment securities subject to federal income taxes yielding the same after-tax income. The tax-equivalent amount of$1.00 of nontaxable income was$1.27 for each period presented using the statutory federal income tax rate of 21%. (2) The Bank entered into a five-year interest rate swap with a notional amount totaling$50 million onJanuary 17, 2019 , which was designated as a cash flow hedge of certain FHLB advances and included in short-term borrowings. The weighted average rate paid on the interest rate swap was 2.62% in 2021, 2020 and 2019. See Note O - Derivatives in the consolidated financial statements for more information on the interest rate swaps. 19 -------------------------------------------------------------------------------- Rate/Volume Analysis. The following table sets forth the effect of changes in volumes and rates on tax-equivalent interest income, interest expense and net interest income. The changes attributable to a combined impact of volume and rate have been allocated to the changes due to volume and the changes due to rate. 2021 versus 2020 2020 versus 2019 Increase (decrease) due to changes in: Increase (decrease) due to changes in: Net Net (in thousands) Volume Rate ?Change Volume Rate ?Change Interest Income: Interest-earning bank balances $ 91$ (42) $ 49 $ 600$ (1,026) $ (426) Investment securities: Taxable 2,961 (6,721) (3,760) (767) (2,146) (2,913) Nontaxable (887) (784) (1,671) (1,105) (940) (2,045) Loans (4,767) 1,540 (3,227) (3,856) (3,823) (7,679) Total interest income (2,602) (6,007) (8,609) (5,128) (7,935) (13,063) Interest Expense: Savings, NOW & money market deposits 498 (5,181) (4,683) (404) (9,062) (9,466) Time deposits (3,526) (1,739) (5,265) (3,253) (264) (3,517) Short-term borrowings (503) 356 (147) (1,325) (362) (1,687) Long-term debt (3,152) 211 (2,941) 505 (328) 177 Total interest expense (6,683) (6,353) (13,036) (4,477) (10,016) (14,493) Increase (decrease) in net interest income$ 4,081 $ 346 $ 4,427 $ (651) $ 2,081 $ 1,430 Net Interest Income - 2021 Versus 2020 Net interest income on a tax-equivalent basis was$109.1 million in 2021, an increase of$4.4 million , or 4.2%, from$104.7 million in 2020. The increase in net interest income reflects a favorable shift in the mix of funding due to an increase in average noninterest-bearing checking deposits of$242.5 million , or 22.0%, and a decline in average interest-bearing liabilities of$250.6 million , or 9.6%. The increase is also attributable to higher income from SBA PPP loans of$2.9 million and prepayment and late fees of$1.1 million . Partially offsetting the favorable impact of the above items on net interest income was a decline in the average balance of loans of$134.5 million , or 4.3%. The average yield on interest-earning assets declined 22 bps from 3.37% for 2020 to 3.15% for 2021. The negative impact of declining asset yields on net interest income was more than offset through reductions in non-maturity and time deposit rates. The average cost of interest-bearing liabilities declined 44 bps from 1.12% for 2020 to .68% for 2021 helped by the repayment of a maturing interest rate swap inMay 2021 that lowered the cost of funds in 2021 by$2.5 million . Net interest margin for 2021 of 2.74% increased 10 bps as compared to 2.64% for 2020. Income from PPP loans and prepayment and late fees improved net interest margin by 7 bps and 2 bps, respectively. PPP income for 2021 was$6.5 million driven by an average balance of$108.8 million and a weighted average yield of 6.0%. As ofDecember 31, 2021 , the Bank had$30.5 million of outstanding PPP loans with unearned fees of$978,000 . We expect most of the outstanding PPP loans will be fully satisfied during the first half of 2022. Net Interest Income - 2020 Versus 2019 Net interest income on a tax-equivalent basis was$104.7 million in 2020, an increase of$1.4 million , or 1.4%, from$103.2 million in 2019. The increase in net interest income was mainly attributable to a reduction in deposit rates in response to decreases in the federal funds target rate to near zero as well as significant declines in rates across the entire yield curve. The cost of savings, NOW and money market deposits declined 54 bps to .54% and the cost of interest-bearing liabilities declined 42 bps to 1.12%. These decreases far outpaced the 18 bp decline in yield on securities and loans which are generally not subject to immediate repricing with changes in market interest rates. The increase in net interest income was also attributable to income from SBA PPP loans of$3.7 million and a favorable shift in the mix of funding as an increase in average checking deposits of$158.4 million and a decline in average interest-bearing liabilities of$214.6 million resulted in average checking deposits comprising a larger portion of total funding. Average checking deposits include a portion of the proceeds of PPP loans. The decline in yield on securities and loans of 42 bps and 12 bps, respectively, was mainly attributable to an increase in prepayment speeds on mortgage-backed securities, lower yields available on securities purchases and loan originations, acceleration of loan prepayments and refinancing on residential mortgages and downward repricing of corporate bonds. While the economic impact of the pandemic caused the outstanding balance of loans to shrink during the first nine months of 2020, outstanding mortgage loans grew$26.7 million , or 1%, during the fourth quarter. For the year, the average balance of loans decreased$107 million , or 3.3%, and the average balance of investment securities declined$52.2 million , or 6.8%. The average balance of loans included$112.6 million of PPP loans at a weighted average yield earned in 2020 of 3.25%. Through year-end 2020, the Bank had$25.2 million , or 15%, of its PPP loans 20 -------------------------------------------------------------------------------- forgiven by the SBA. The decrease in loans and securities resulted in a notable increase in cash and cash equivalents on the Balance Sheet. Net interest margin for 2020 was 2.64%, an increase of 7 bps over 2019. The increase was mainly attributable to our ability to reduce the rates paid on interest-bearing deposits faster than interest-earning assets repriced downward and a deleveraging transaction completed in the third quarter of 2020. Noninterest Income Noninterest income includes service charges on deposit accounts, investment services income, gains or losses on sales of securities and other assets, income on BOLI, and all other items of income, other than interest, resulting from the business activities of the Corporation. Noninterest income, net of gains on sales of securities, decreased$60,000 in 2021 as compared to 2020. The decrease is mainly due to a decline in investment services income of$958,000 as the shift to an outside service provider resulted in less assets under management, and a transition payment received in 2020 of$370,000 for the conversion of the Bank's retail broker and advisory accounts. These amounts were partially offset by increases in the non-service cost components of the Bank's defined benefit pension plan of$550,000 and fees from debit and credit cards of$615,000 . Noninterest income before securities gains increased$933,000 , or 8.8%, when comparing 2020 to 2019. The increase was primarily attributable to an increase in the non-service components of the Bank's defined benefit pension plan of$1.0 million and income of$370,000 relating to a transition payment from an independent broker-dealer for the initial conversion of the Bank's retail broker and advisory accounts. Partially offsetting these increases was a decrease in service charges on deposit accounts of$252,000 due to the pandemic. Noninterest Expense Noninterest expense is comprised of salaries and employee benefits and other personnel expense, occupancy and equipment expense and other operating expenses incurred in supporting the various business activities of the Corporation. The increase in noninterest expense, net of debt extinguishment costs, of$6.6 million includes charges of$3.2 million related to closing eight branches under our branch optimization strategy. The$3.2 million includes severance-related salary and benefits expense of$123,000 and occupancy and equipment expense related to rent, depreciation and asset disposals of$3.1 million . The increase in noninterest expense also includes higher salaries and employee benefits related to our two new branches, building our lending and credit teams, salary adjustments, incentive compensation, the service cost component of the Bank's pension plan and a health insurance premium credit in 2020. Also contributing to the increase was higherFDIC insurance expense due to deposit growth and an assessment credit in 2020. Noninterest expense, before debt extinguishment costs, increased$58,000 in 2020 as compared to 2019. Excluding executive severance and retirement charges of$2.6 million in 2019, the increase over 2019 was$2.6 million . The$2.6 million increase was primarily due to increases in compensation and benefit costs mainly related to normal salary adjustments and hiring of lending and credit staff. The increase over 2019 also included charges related to the closure and consolidation of six branches of$476,000 and technology and service contract termination costs related to a new investment services platform of$315,000 , partially offset by declines in consulting and marketing costs of$352,000 and$242,000 , respectively. 2020 Deleveraging and Securities Portfolio Restructuring Transactions During 2020, the Bank eliminated some inefficient leverage by selling mortgage-backed securities with a carrying value of$64.5 million and using the proceeds along with excess cash of$66.8 million to prepay long-term debt of$128.7 million . The transactions resulted in an overall net loss of$3,000 with the gain on sale of securities and loss on extinguishment of debt essentially the same at$2.6 million each. The deleveraging benefited net interest margin by approximately 10 bps beginning in the fourth quarter of 2020 and improved leverage capital. Income Taxes The Corporation's effective tax rate was 19.2% and 16.8% in 2021 and 2020, respectively. The effective tax rate reflects the tax benefits derived from the Bank's municipal securities portfolio, ownership of BOLI and maintenance of a captive REIT. 2021 Versus 2020. Income tax expense increased$1.9 million due to growth in pre-tax earnings in 2021 and an increase in the effective tax rate. The increase in the effective tax rate was due to a decrease in the percentage of pre-tax income derived from tax-exempt municipal securities and BOLI in 2021 and a change inNew York State tax law to implement a capital tax in the second quarter of 2021. 21 -------------------------------------------------------------------------------- 2020 Versus 2019. The increase in income tax expense of$96,000 was attributable to an increase in the effective tax rate from 16.5% in 2019 to 16.8% in 2020 as tax-exempt income from municipal securities and BOLI in 2020 declined as a percentage of pre-tax earnings when compared to 2019. Financial Condition Total assets were$4.1 billion atDecember 31, 2021 , substantially unchanged from the previous year end. A decrease of$167.5 million in cash and cash equivalents was used primarily to fund increases in loans of$71.6 million , or 2.4%, securities of$71.6 million , or 10.8%, and BOLI of$22.4 million . Total deposits were unchanged at$3.3 billion forDecember 31, 2021 and 2020. Total borrowings increased$5.2 million , or 1.7%, due to an increase in short-term borrowings of$64.9 million offset by a decrease in long-term debt of$59.7 million . Stockholders' equity increased$6.7 million , or 1.6% fromDecember 31, 2020 . The increase was primarily attributable to net income, partially offset by dividends declared and shares repurchased.Investment Securities . The following table presents the estimated fair value of AFS securities atDecember 31, 2021 and 2020. (in thousands) 2021 2020 State and municipals$ 327,171 $ 364,211
Pass-through mortgage securities 182,957 131,720 Collateralized mortgage obligations 106,082 53,711 Corporate bonds
118,108 113,080$ 734,318 $ 662,722 The following table presents the maturities and weighted average tax equivalent yields of the Bank's AFS investment securities atDecember 31, 2021 . Yields on AFS securities have been computed based on amortized cost. Principal Maturing (1) (2) Within After One But After Five But After ?One Year ?Within Five Years ?Within Ten Years ?Ten Years (dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield State and municipals$ 2,541 3.40 %$ 92,919 3.03 %$ 98,187 3.32 %$ 133,524 3.13 % Pass-through mortgage securities - - 321 2.58 1 6.18 182,635 1.16 Collateralized mortgage obligations - - - - - - 106,082 1.11 Corporate bonds - - - - 118,108 1.81 - -$ 2,541 3.40 %$ 93,240 3.03 %$ 216,296 2.50 %$ 422,241 1.77 % (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 AFS securities have been computed based on amortized cost. During 2021 and 2020, the Bank sold$70.6 million and$61.9 million , respectively, of mortgage-backed securities at a gain of$1.1 million and$2.6 million , respectively. During 2021, the Bank received cash dividends of$1.0 million on its FRB and FHLB stock, representing an average yield of 5.04%. 22 --------------------------------------------------------------------------------
Loans. The composition of the Bank's loan portfolio is set forth below.
December 31, (in thousands) 2021 2020 Commercial and industrial$ 90,386 $ 100,015 SBA PPP 30,534 139,487 Commercial mortgages: Multifamily 864,207 776,976 Other 700,872 513,176 Owner-occupied 171,533 130,919 Residential mortgages: Closed end 1,202,374 1,316,727 Revolving home equity 44,139 54,005 Consumer and other 991 2,149 3,105,036 3,033,454 Allowance for credit losses (29,831) (33,037)$ 3,075,205 $ 3,000,417
Maturity information for loans outstanding at
Maturity Within After One But Within After Five But Within After ?One Year ?Five Years ?Fifteen Years ?Fifteen Years Total (in thousands) Fixed Adjustable Fixed Adjustable Fixed Adjustable Commercial and industrial$ 41,711 $ 21,768 $ 15,466 $ 11,008 $ 433 $ - $ -$ 90,386 SBA PPP 264 30,270 - - - - - 30,534 Commercial mortgages: Multifamily 22 8,389 559 101,526 456,917 35,631 261,163 864,207 Other 12,885 95,231 15,843 229,960 154,974 23,893 168,086 700,872 Owner-occupied 116 1,883 2,823 68,724 28,337 352 69,298 171,533 Residential mortgages: Closed end 279 8,035 143 82,601 16,925 555,015 539,376 1,202,374 Revolving home equity 2,949 - 14,920 1,978 24,287 - 5 44,139 Consumer and other 555 266 170 - - - - 991$ 58,781 $ 165,842 $ 49,924 $ 495,797 $ 681,873 $ 614,891 $ 1,037,928 $ 3,105,036 Asset Quality. Information about the Corporation's risk elements is set forth below. Risk elements include nonaccrual loans, other real estate owned, loans that are contractually past due 30 days or more and TDRs, and present more than the normal risk that the Corporation will be unable to eventually collect or realize their full carrying value. December
31,
(in thousands) 2021
2020
Loans, excluding troubled debt restructurings: Past due 30 through 89 days$ 460 $
1,422
Past due 90 days or more and still accruing - - Nonaccrual 1,235 628 1,695 2,050 Troubled debt restructurings: Performing according to their modified terms 554
815
Past due 30 through 89 days -
-
Past due 90 days or more and still accruing - - Nonaccrual - 494 554 1,309
Total past due, nonaccrual and restructured loans: Restructured and performing according to their modified terms 554 815 Past due 30 through 89 days
460
1,422
Past due 90 days or more and still accruing - - Nonaccrual 1,235 1,122 2,249 3,359 Other real estate owned - -$ 2,249 $ 3,359 23
-------------------------------------------------------------------------------- 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. Loan Risk Ratings. Risk ratings of the Corporation's 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. Deposit account overdrafts are not assigned a risk rating and appear as "not rated" in the following tables. December 31, 2021 Internally Assigned Risk Rating Special (in thousands) Pass Watch Mention
Substandard Doubtful Not Rated Total
Commercial and industrial
- $ - $ -
30,534 - - - - - 30,534 Commercial mortgages: Multifamily 856,510 1,260 - 6,437 - - 864,207 Other 695,040 - - 5,832 - - 700,872 Owner-occupied 171,533 - - - - - 171,533 Residential mortgages: Closed end 1,199,999 488 - 1,887 - - 1,202,374 Revolving home equity 44,139 - - - - - 44,139 Consumer and other 890 - - - - 101 991$ 3,088,769 $ 2,010 $ -$ 14,156 $ -$ 101 $ 3,105,036 December 31, 2020 Internally Assigned Risk Rating Special (in thousands) Pass Watch Mention
Substandard Doubtful Not Rated Total
Commercial and industrial
139,487 - - - - - 139,487 Commercial mortgages: Multifamily 764,376 6,039 - 6,561 - - 776,976 Other 505,892 1,403 - 5,881 - - 513,176 Owner-occupied 122,491 6,094 - 2,334 - - 130,919 Residential mortgages: Closed end 1,315,467 298 - 962 - - 1,316,727 Revolving home equity 53,223 414 - 368 - - 54,005 Consumer and other 864 - - 229 - 1,056 2,149$ 2,992,076 $ 21,598 $ 529 $ 18,195 $ -$ 1,056 $ 3,033,454 Allowance and Provision for Credit Losses. The ACL decreased by$3.2 million during 2021 amounting to$29.8 million , or .96% of total loans, onDecember 31, 2021 , compared to$33.0 million , or 1.09% of total loans, atDecember 31, 2020 . The decrease in the reserve coverage ratio was mainly due to improvements in economic conditions, asset quality and other portfolio metrics. Nonaccrual loans, TDRs and loans past due 30 through 89 days remain at low levels. During 2021, the Bank had loan chargeoffs of$1.2 million , recoveries of$573,000 and recorded a credit provision for credit losses of$2.6 million . The credit provision was largely attributable to improvements in current and forecasted economic conditions and historical loss rates, partially offset by net chargeoffs of$633,000 and growth in commercial mortgages. During 2020, the Bank had loan chargeoffs of$2.7 million , recoveries of$584,000 and recorded a provision for credit losses of$3.0 million . The provision was largely attributable to the pandemic and included$4.2 million related to higher historical loss rates and economic conditions and$2.1 million for net chargeoffs, partially offset by a decline in outstanding loan balances of residential and commercial mortgages. The ACL is an amount that management currently believes will be adequate to absorb expected lifetime losses in the Bank's loan portfolio. As more fully discussed in the "Application of Critical Accounting Policies" section of this discussion, the process for estimating credit losses and determining the ACL as of any balance sheet date is subjective in nature and requires material estimates and judgements. Actual results could differ significantly from those estimates. Other detailed information on the Bank's loan portfolio and ACL can be found in "Note C - Loans" to the Corporation's consolidated financial statements of this Form 10-K. 24 -------------------------------------------------------------------------------- The following table sets forth balances and credit ratios of the Bank's loan portfolio. December 31, (dollars in thousands) 2021 2020 Total loans outstanding$ 3,105,036 $ 3,033,454 Average loans outstanding 2,976,061 3,110,512 Allowance for credit losses 29,831 33,037 Total nonaccrual loans 1,235 1,122 Net chargeoffs 633 2,146
Allowance for credit losses as a percentage of total loans
.96 % 1.09 % Nonaccrual loans as a percentage of total loans .04 % .04 % Net chargeoffs as a percentage of average loans outstanding .02 % .07 % Allowance for credit losses as a multiple of nonaccrual loans 24.2 x
29.4 x
The following table sets forth net chargeoffs by loan type, average loans during the period and the percentage of net chargeoffs over average loans.
December 31, 2021 2020 Net Average % of Average Net Average % of Average (dollars in thousands) Chargeoffs Loans Loans Chargeoffs Loans Loans Commercial and industrial$ 102 $ 82,749 0.12 %$ 764 $ 111,770 0.68 % SBA PPP - 108,771 - - 109,194 - Commercial mortgages: Multifamily 544 778,349 0.07 298 782,795 0.04 Other - 553,015 - 501 448,347 0.11 Owner-occupied 74 156,499 0.05 - 132,664 - Residential mortgages: Closed end 167 1,245,892 0.01 526 1,465,417 0.04 Revolving home equity (254) 50,109 (0.51) 56 58,699 0.10 Consumer and other - 677 - 1 1,626 0.06$ 633 $ 2,976,061 0.02 %$ 2,146 $ 3,110,512 0.07 % The following table sets forth the allocation of the Bank's total ACL by loan type. December 31, 2021 2020 % of Loans % of Loans ?to Total ?to Total (dollars in thousands) Amount ?Loans Amount ?Loans Commercial and industrial$ 888 2.9 %$ 1,416 3.3 % SBA PPP 46 1.0 209 4.6 Commercial mortgages: Multifamily 8,154 27.8 9,474 25.6 Other 6,478 22.6 4,913 16.9 Owner-occupied 2,515 5.6 1,905 4.3 Residential mortgages: Closed end 11,298 38.7 14,706 43.4 Revolving home equity 449 1.4 407 1.8 Consumer and other 3 .0 7 .1$ 29,831 100.0 %$ 33,037 100.0 % The amount of future chargeoffs and provisions for credit losses will be affected by economic conditions onLong Island and in the boroughs of NYC. Such conditions could affect the financial strength of the Bank's borrowers and will affect the value of real estate collateral securing the Bank's mortgage loans. Loans secured by real estate represent approximately 96% of the Bank's total loans outstanding atDecember 31, 2021 . The majority of these loans are collateralized by properties located onLong Island and in the boroughs of NYC. While business activity in theNew York metropolitan area has started to improve, the pace of the recovery is slow and remains uncertain. These challenges may result in higher drawdowns by customers on the Bank's lending commitments and higher past due and nonaccrual loans, TDRs and credit losses. 25 -------------------------------------------------------------------------------- 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. Deposits and Other Borrowings. Total deposits were$3.3 billion atDecember 31, 2021 , substantially unchanged from the prior year end. Growth in noninterest-bearing checking deposits of$192.9 million , or 16.0%, was more than offset by a decrease in time deposits of$205.5 million , or 47.3%. The decrease in time deposits includes the repayment of$150 million of brokered CDs used in a cash flow hedge which expired inMay 2021 . The aggregate amount of uninsured deposits (amounts greater than or equal to$250,000 , which is the maximum amount for federal deposit insurance) was$2.0 billion and$1.9 billion atDecember 31, 2021 and 2020, respectively. The following table sets forth the remaining maturity of uninsured time deposits, by account. (in thousands) December 31, 2021 3 months or less $ 6,341 Over 3 through 6 months 2,883 Over 6 through 12 months 1,598 Over 12 months 7,476 $ 18,298 Borrowings include short-term and long-term FHLB borrowings and borrowings under repurchase agreements. Total borrowings increased$5.2 million from$306.1 million in 2020 to$311.3 million at year-end 2021. The increase is comprised of an increase in short-term borrowings of$64.9 million , offset by a decrease in long-term debt of$59.7 million . Short-term borrowings are used to offset the seasonal outflow of deposits. Short-term FHLB borrowings totaled$125 million atDecember 31, 2021 and included$75 million in overnight advances and$50 million in three-month advances used to hedge an interest rate swap. The decrease in long-term debt includes maturities of$20.0 million and early extinguishments of$39.7 million . The early extinguishments resulted in a loss of$1.0 million in 2021. Capital. Stockholders' equity totaled$413.8 million atDecember 31, 2021 , an increase of$6.7 million from$407.1 million atDecember 31, 2020 . The increase was primarily attributable to net income of$43.1 million , partially offset by dividends declared of$18.4 million and shares repurchased of$14.5 million . The Corporation and the Bank elected to adopt the CBLR framework in 2020. As a qualifying community banking organization, the Corporation and the Bank may opt out of the CBLR framework in any subsequent quarter by completing its regulatory agency reporting using the traditional capital rules. The Corporation's ROE was 10.34%, 10.47% and 10.61% for the years endedDecember 31, 2021 , 2020 and 2019, respectively and its ROA was 1.04%, 1.00% and .99%, respectively. Book value per share increased 4.1% during 2021 to$17.81 atDecember 31, 2021 . Book value per share was$17.11 and$16.26 atDecember 31, 2020 and 2019, respectively. The Corporation's capital management policy is designed to build and maintain capital levels that exceed regulatory standards and appropriately provide for growth. The leverage ratio of the Corporation and the Bank atDecember 31, 2021 was 10.23%. The Corporation and the Bank elected the optional five-year transition period provided by the federal banking agencies for recognizing the regulatory capital impact of the implementation of CECL.The Corporation has a stock repurchase program under which it is authorized to purchase up to$65 million in shares of its common stock from time to time through open market purchases, privately negotiated transactions, or in any other manner that is compliant with applicable securities laws. During 2021, the Corporation repurchased 679,873 shares of its common stock at a total cost of$14.5 million . Total repurchases completed since the commencement of the program amount to 2,820,473 shares at a cost of$62.1 million . InJanuary 2022 , the Corporation's Board of Directors approved a new stock repurchase program which authorizes the Corporation to purchase up to$30 million of its shares from time to time through open market purchases, privately negotiated transactions or in any other manner that is compliant with applicable securities laws. The stock repurchase program does not obligate the Corporation to purchase shares and there is no guarantee as to the exact number of shares that may be repurchased pursuant to this program, which is subject to market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity and other factors deemed appropriate. 26
--------------------------------------------------------------------------------
Cash Flows and Liquidity Cash Flows. During 2021, the Corporation's cash and cash equivalent position decreased by$167.5 million , from$211.2 million atDecember 31, 2020 to$43.7 million atDecember 31, 2021 . The decrease occurred primarily because cash used to purchase securities and BOLI, originate loans, repurchase common stock and pay cash dividends exceeded cash provided by paydowns of securities and loans 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. Based on securities and loan collateral in place at the FRBNY and FHLBNY, the Bank had borrowing capacity of approximately$1.8 billion atDecember 31, 2021 , which includes$269 million of unencumbered AFS securities. Off-Balance Sheet Arrangements and Contractual Obligations. 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. 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, small business credit scored and certain other lines, can be frozen, reduced or terminated by the Bank based on the financial condition of the borrower, the total commitment amounts do not necessarily represent future cash requirements. The Bank's exposure to credit loss in the event of non-performance 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 Corporation believes that its current sources of liquidity are more than sufficient to fulfill the obligations it has atDecember 31, 2021 pursuant to off-balance sheet arrangements and contractual obligations.
© Edgar Online, source