DIME COMMUNITY BANCSHARES: NY / Management’s Discussion and Analysis of Financial Position and Results of Operations (Form 10-K)
In this Annual Report on Form 10-K, unless otherwise mentioned, the terms the "Company", "we", "us" and "our" refer toDime Community Bancshares, Inc. and our wholly-owned subsidiary,Dime Community Bank (the "Bank"). We use the term "Holding Company" to refer solely toDime Community Bancshares, Inc. and not to our consolidated subsidiary. The following discussion and analysis covers changes in our results of operations and financial condition from 2019 to 2020. A discussion and analysis of changes in our results of operations and financial condition from 2018 to 2019 may be found in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which was filed with theU.S. Securities and Exchange Commission onMarch 11, 2020 .
Safe Harbor Statement of the Securities Litigation Reform Act
This report may contain statements relating to our future results (including certain projections and business trends) that are considered "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 (the "PSLRA"). Such forward-looking statements, in addition to historical information, which involve risk and uncertainties, are based on the beliefs, assumptions and expectations of our management. Words such as "expects," "believes," "should," "plans," "anticipates," "will," "potential," "could," "intend," "may," "outlook," "predict," "project," "would," "estimated," "assumes," "likely," and variations of such similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements include, but are not limited to, possible or assumed estimates with respect to the financial condition, expected or anticipated revenue, and results of operations and our business, including earnings growth; revenue growth in retail banking, lending and other areas; origination volume in the consumer, commercial and other lending businesses; current and future capital management programs; non-interest income levels, including fees from the title insurance subsidiary and banking services as well as product sales; tangible capital generation; market share; expense levels; and other business operations and strategies. We claim the protection of the safe harbor for forward-looking statements contained in the PSLRA. Factors that could cause future results to vary from current management expectations include, but are not limited to, changing economic conditions; legislative and regulatory changes, including increases inFDIC insurance rates; monetary and fiscal policies of the federal government; changes in tax policies; rates and regulations of federal, state and local tax authorities; changes in interest rates; deposit flows; the cost of funds; demand for loan products; demand for financial services; competition; our ability to successfully integrate acquired entities; changes in the quality and composition of our loan and investment portfolios; changes in management's business strategies; changes in accounting principles, policies or guidelines; changes in real estate values; expanded regulatory requirements, which could adversely affect operating results; and other factors discussed elsewhere in this report including factors set forth under Item 1A., Risk Factors, and in quarterly and other reports filed by us with theSecurities and Exchange Commission . The forward-looking statements are made as of the date of this report, and we assume no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.
Overview
Who we are and how we generate income
Dime Community Bancshares, Inc. , aNew York corporation previously known as "Bridge Bancorp, Inc. ," is a bank holding company formed in 1989. On a parent-only basis, the Holding Company has had minimal results of operations.The Holding Company is dependent on dividends from its wholly-owned subsidiary,Dime Community Bank , which was previously known as "BNB Bank ," its own earnings, additional capital raised, and borrowings as sources of funds. The information in this report reflects principally the financial condition and results of operations of the Bank. The Bank's results of operations are primarily dependent on its net interest income, which is the difference between interest income on loans and investments and interest expense on deposits and borrowings. The Bank also generates non-interest income, such as fee income on deposit accounts and merchant credit and debit card processing programs, loan swap fees, investment services, income from its title insurance subsidiary, and net gains on sales of securities and loans. The level of non-interest expenses, such as salaries and benefits, occupancy and equipment costs, other general and administrative expenses, Page -23- expenses from the Bank's title insurance subsidiary, and income tax expense, further affects our net income. We believe the Merger created the opportunity for the resulting company to leverage complementary and diversified revenue streams and to potentially have superior future earnings and prospects compared to our current earnings and prospects on a stand-alone basis. Certain reclassifications have been made to prior year amounts and the related discussion and analysis to conform to the current year presentation. These reclassifications did not have an impact on net income or total stockholders' equity.
Highlights of the year and the quarter (before the completion of the Merger on
Fourth quarter 2020 net income of
Merger.
The net result for the 2020 financial year amounts to
2019. Including:
o Pre-tax merger costs of
last six months of 2020.
o Pre-tax inventory acceleration costs of
share, in the fourth quarter of 2020.
? Net interest income increased to
million in 2019.
? The net interest margin in tax equivalent was 2.99% for 2020 and 3.31% in 2019.
? Total assets of
or 30.7%, more
Total loans held for investment purposes at
more than
? Total deposits of
billion, or 43.9%, compared to
? Provision for credit losses of
in 2019.
? The allowance for credit losses was 0.96% of loans in the
against 0.89% at
Cash dividends of
Challenges and opportunities
The COVID-19 pandemic has caused us to modify our business practices, including employee travel and employee work locations, as many employees are working remotely. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers, such as waiving late payment and other fees. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the challenges our business will face and the full impact of the COVID-19 outbreak on our business. We continue to face challenges associated with ever-increasing banking regulations and the current low interest rate environment. A prolonged inverted or flat yield curve presents a challenge to a bank, like us, that derives most of its revenue from net interest margin. A sustained decrease in market interest rates could adversely affect our earnings. When interest rates decline, borrowers tend to refinance higher-rate, fixed-rate loans at lower rates. In addition, the majority of our loans are at variable interest rates, which would adjust to lower rates. In response to the COVID-19 outbreak, theFederal Reserve has reduced the benchmark federal funds rate to a target range of 0% to 0.25% during the 2020 first quarter. We took this opportunity to lower our funding costs and stabilize our net interest margin. Page -24- We established five strategic objectives to achieve our vision: (1) acquire new customers in growth markets; (2) build new sales and marketing disciplines; (3) deepen customer relationships; (4) expand use of automation; and (5) improve talent management. We believe there remain opportunities to grow our franchise and that continued investments to generate core funding, quality loans and new sources of revenue remain keys to continue creating long-term shareholder value. Our ability to attract, retain, train and cultivate employees at all levels of our Company remains significant to meeting our corporate objectives. In particular, we are focused on expanding and retaining our loan team as we continue to grow the loan portfolio. We have capitalized on opportunities presented by the market and diligently seek opportunities to grow and strengthen the franchise. We recognize the potential risks of the current economic environment and will monitor the impact of market events as we evaluate loans and investments and consider growth initiatives. Our management and Board of Directors have built a solid foundation for growth, and we are positioned to adapt to anticipated changes in the industry resulting from new regulations
and legislative initiatives. Paycheck Protection Program
We are an active participant in the SBA PPP for small business customers. As ofDecember 31, 2020 , we originated over 4,200 loans totaling approximately$980 million . The top industries were construction, professional, manufacturing, health care, accommodation/food, and administrative. The mean and median PPP loan amounts were$229 thousand and$70 thousand , respectively.
The following table shows the outstanding balance and loan size range of our PPP loans in
(Dollars in thousands) Number of Outstanding Range of Loan Size Loans Balance$150 and Below 2,618$ 124,461 Between$150 and$350 539 122,600 Between$350 and$2,000 463 359,307 Over$2,000 66 238,284 Total 3,686$ 844,652
Substantially all of the PPP loans we originated have a two-year term and a 1% interest rate. Subsequent CARES Act changes extended the maturities of these loans to potentially five years at the borrower's option. Any changes are expected to be made at the end of the interest only phase and are expected to coincide with the forgiveness process. The SBA pays us fees ranging from 1% to 5% per loan depending on the loan principal amount. Fee income from processing PPP loans is amortized as a yield adjustment over the life of the loan. PPP loans are expected to be fully guaranteed by the SBA. Prior to the commencement of the PPP program, in the 2020 first quarter we funded 80 loans totaling$4.2 million with an average loan size of$53 thousand . These streamlined loans were our initial response to the COVID-19 pandemic to quickly provide customers with small loans to bridge short term cash flow. We terminated this program and focused our efforts on developing a process to accept PPP loans when the PPP program commenced onApril 3, 2020 . As ofDecember 31, 2020 ,$3.2 million of these loans remain outstanding.
COVID-19 loan moratoriums and forbearance programs
We are supporting our customers who may experience financial difficulty due to COVID-19 through loan moratoriums and forbearance programs. We began offering 90-day payment modifications on a case-by-case basis to those customers whose income was adversely impacted by COVID-19. The loan modifications in this program primarily consist of three-month deferrals of interest and principal payments. Extensions may be granted on a case by case basis. As ofDecember 31, 2020 , approximately 500 loans totaling$635 million were granted payment moratoriums during 2020. These deferrals are not considered TDRs based on the CARES Act and/or the interagency guidance. As ofJanuary 21, 2021 ,$76.1 million in moratoriums were outstanding.
The sectors that we have identified as the most affected by the COVID-19 pandemic based on the potential risk to cash flow are hotels, restaurants, passenger transportation, recreation, museums and catering.
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Community support
We continue to support our communities during the COVID-19 pandemic by pledging a total of$1.8 million to support COVID-19 affected communities, including$500 thousand in grants to non-profit partners working on the COVID-19 relief effort in our footprint. These grants are focused on organizations working to address meeting the basic needs of the vulnerable populations, providing emergency food, and health services. We have partnered with local governments to help coordinate emergency relief. The PPP loans we funded also benefitted hundreds of non-profit partners. A portion of the fees generated by the PPP will be set aside to increase funding for local organizations.
Important events
Merger agreement with
OnJuly 1, 2020 , the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Legacy Dime. Pursuant to the Merger Agreement, onFebruary 1, 2021 , Legacy Dime merged with and into Bridge, with Bridge as the surviving corporation under the name "Dime Community Bancshares, Inc. " At the Effective Time, each outstanding share of Legacy Dime common stock, par value$0.01 per share, was converted into the right to receive 0.6480 shares of the Company's common stock, par value$0.01 per share. At the Effective Time of the Merger, each outstanding share of Dime Preferred Stock was converted into the right to receive one share of a newly created series of Company preferred stock having the same powers, preferences and rights as the Dime Preferred Stock. Immediately following the Merger,Dime Community Bank , aNew York -chartered commercial bank and a wholly-owned subsidiary of Legacy Dime, merged with and intoBNB Bank , aNew York -chartered commercial bank and a wholly-owned subsidiary of the Company, withBNB Bank as the surviving bank, under the name "Dime Community Bank ." In connection with the Merger, the Company assumed$115.0 million in aggregate principal amount of the 4.50% Fixed-to-Floating Rate Subordinated Debentures due 2027 of Legacy Dime.
Critical accounting policies
Note 1 of the Notes to the Consolidated Financial Statements for the year endedDecember 31, 2020 contains a summary of significant accounting policies. Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Our policy with respect to the methodologies used to determine the allowance for credit losses is our most critical accounting policy. This policy is important to the presentation of the financial condition and results of operations, and it involves a higher degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in the results of operations or financial condition.
The following is a description of this critical accounting policy and an explanation of the methods and assumptions underlying its application.
Provision for credit losses
OnJanuary 1, 2020 , we adopted the current expected credit loss model ("CECL" or the "CECL Standard"), which requires that loans held for investment be accounted for under the current expected credit losses model. Although the CARES Act provided the option to delay the adoption of the current expected credit loss model until the earlier ofDecember 31, 2020 or the termination of the current national emergency declaration related to the COVID-19 outbreak, we implemented the CECL Standard in the first quarter of 2020 as previously planned. The allowance for credit losses is established and maintained through a provision for credit losses based on expected losses inherent in our loan portfolio. Management evaluates the adequacy of the allowance on a quarterly basis. Management monitors its entire loan portfolio regularly, with consideration given to detailed analysis of classified loans, repayment patterns, past loss experience, various types of Page -26-
credit concentrations, current economic conditions and reasonable and supportable forecasts. Additions to the provision are charged to expenditure and realized losses, net of recoveries, are charged to the provision.
The credit loss estimation process involves procedures to appropriately consider the unique characteristics of our loan portfolio segments. These segments are further disaggregated into loan risk ratings, the level at which credit risk is monitored. When computing allowance levels, credit loss assumptions are estimated using a model that categorizes loan pools based on expected loss history, delinquency status and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods, evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and provision for credit losses in those future periods. Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in our process for estimation of expected credit losses. The allowance level is influenced by loan volumes, loan risk rating migration, historic loss experience and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: (1) an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans; and (2) a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.
Loans that do not share similar credit risk characteristics
For a loan that does not share risk characteristics with other loans, expected credit loss is measured based on net realizable value, that is, the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the amortized cost basis of the loan. For these loans, we recognize expected credit loss equal to the amount by which the net realizable value of the loan is less than the amortized cost basis of the loan (which is net of previous charge-offs), except when the loan is collateral dependent, that is, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In these cases, expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral. The fair value of the collateral is adjusted for the estimated costs to sell the loan if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral. The fair value of real estate collateral is determined based on recent appraised values. Appraisals are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by us. All appraisals undergo a second review process to ensure that the methodology employed and the values derived are reasonable. Generally, collateral values for real estate loans for which measurement of expected losses is dependent on collateral values are updated every twelve months. Non-real estate collateral may be valued using an appraisal, net book value per the borrower's financial statements, or aging reports, adjusted or discounted based on management's historical knowledge, changes in market conditions from the time of the valuation, and management's expertise and knowledge of the borrower and its business. Once the expected credit loss amount is determined, an allowance is provided for equal to the calculated expected credit loss and included in the allowance for credit losses. Pursuant to our policy, credit losses must be charged-off in the period the loans, or portions thereof, are deemed uncollectable.
Loans that share similar credit risk characteristics
In estimating the component of the allowance for credit losses for loans that share similar risk characteristics with other loans, such loans are segmented into loan types. Loans are designated into loan pools with similar risk characteristics based on product type in conjunction with other homogeneous characteristics. Loan types include commercial real estate mortgages, owner and non-owner occupied; multi-family mortgage loans; residential real estate mortgages and home equity loans; commercial, industrial and agricultural loans, real estate construction and land loans; and consumer loans. In determining the allowance for credit losses, we derive an estimated credit loss assumption from a model that categorizes loan pools based on loan type and further segmented by risk rating. This model is known as Probability of Default/Loss Given Default, utilizing a Transition Matrix approach. This model calculates an expected loss percentage for each loan Page -27- pool by considering the probability of default, based upon the historical transition or migration of loans from performing (various pass ratings) to criticized, and classified risk ratings to default by risk rating buckets using life-of-loan analysis runout periods for all loan segments, and the historical severity of loss, based on the aggregate net lifetime losses (loss given default) per loan pool. The default trigger, which is defined as the earlier of ninety days past-due or non-accrual status, and severity factors used to calculate the allowance for credit losses for loans in pools that share similar risk characteristics with other loans, are adjusted for differences between the historical period used to calculate historical default and loss severity rates and expected conditions over the remaining lives of the loans in the portfolio. These factors include: (1) lending policies and procedures; (2) international, national, regional and local economic business conditions and developments that affect the collectability of the portfolio, including the condition of various markets; (3) the nature and volume of the loan portfolio including the terms of the loans; (4) the experience, ability, and depth of the lending management and other relevant staff; (5) the volume and severity of past due and adversely classified or graded loans and the volume of non-accrual loans; (6) the quality of our loan review system; (7) the value of underlying collateral for collateralized loans; (8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and (9) the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio. Such factors are used to adjust the historical probabilities of default and severity of loss for current conditions that are not reflective of the model results. In addition, the economic factor includes management's expectation of future conditions based on a reasonable and supportable forecast of the economy. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made (currently two years), the Bank immediately reverts back to the historical rates of default and severity of loss. Management believes that this transition approach to the Probability of Default/Loss Given Default is a relevant calculation of expected credit losses as there is sufficient volume as well as movement in the risk ratings due to the initial grading system as well as timely updates to risk ratings when necessary. Credit risk ratings are based on management's evaluation of a credit's cash flow, collateral, guarantor support, financial disclosures, industry trends and strength of borrowers' management. The adequacy of the allowance is analyzed quarterly, with any adjustment to a level deemed appropriate by the Credit Risk Management Committee ("CRMC"), based on its risk assessment of the entire portfolio. Each quarter, members of the CRMC meet with the Credit Risk Committee of our Board of Directors to review credit risk trends and the adequacy of the allowance for credit losses. Based on the CRMC's review of the classified loans, delinquency and charge-off trends, current economic conditions, reasonable and supportable forecasts, and the overall allowance levels as they relate to the entire loan portfolio atDecember 31, 2020 andDecember 31, 2019 , we believe the allowance for credit losses has been established at levels sufficient to cover the expected losses inherent in our loan portfolio. Future additions or reductions to the allowance may be necessary based on changes in economic, market or other conditions. Changes in estimates could result in a material change in the allowance. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the allowance for credit losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments of the information available to them at the time of their examination.
For more information on the allowance for credit losses, refer to Note 4 of the Notes to the Consolidated Financial Statements.
Net revenue
Net income for the year endedDecember 31, 2020 was$42.0 million and$2.11 per diluted share as compared to$51.7 million and$2.59 per diluted share for the same period in 2019. Changes in net income for the year endedDecember 31, 2020 compared toDecember 31, 2019 include: (i) an$18.6 million , or 13.1%, increase in net interest income; (ii) a$5.8 million , or 101.8%, increase in the provision for credit losses; (iii) a$5.7 million , or 22.4%, decrease in non-interest Page -28-
Income; (iv) a
Net interest income
Net interest income, the main contributor to profits, is the difference between income on interest-bearing assets and expenditure on interest-bearing liabilities. Net interest income depends on the volume of interest-bearing assets and interest-bearing liabilities and the interest rates earned or paid on them.
The following table presents certain information relating to our average consolidated balance sheets and our consolidated statements of income for the periods indicated and reflects the average yield on assets and average cost of liabilities for those periods on a tax-equivalent basis based on theU.S. federal statutory tax rate. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from daily average balances and include non-accrual loans. The yields and costs include fees and costs, which are considered adjustments to yields. Interest on non-accrual loans has been included only to the extent reflected in the consolidated statements of income. For purposes of this table, the average balances for investments in debt and equity securities exclude unrealized appreciation/depreciation due to the application of FASB Accounting Standards Codification ("ASC") 320, "Investments - Debt and Equity Securities". Page -29- Year Ended December 31, 2020 2019 2018 Average Average Average Average Yield/ Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Cost Balance Interest Cost Balance Interest Cost Interest-earning assets: Loans, net (1)(2)$ 4,341,647 $ 169,611 3.91 %$ 3,410,773 $ 158,492 4.65 %$ 3,167,933 $ 144,568 4.56 % Mortgage-backed securities, CMOs and other asset-backed securities 470,306 9,329 1.98 651,262 16,182 2.48 679,805 16,591 2.44 Taxable securities 149,156 4,158 2.79 138,625 4,477 3.23 168,326 5,413 3.22 Tax-exempt securities (2) 22,999 841 3.66 33,393 1,215 3.64 62,595 1,932 3.09 Deposits with banks 404,272 673 0.17
75,600 1,697 2.24 52 143 1,076 2.06 Total remunerated assets (2)
5,388,380 184,612 3.43 4,309,653 182,063 4.22 4,130,802 169,580 4.11 Non-interest-earning assets: Cash and due from banks 91,736 81,850 76,730 Other assets 391,911 326,963 285,546 Total assets$ 5,872,027 $ 4,718,466 $ 4,493,078 Interest-bearing liabilities: Savings, NOW and money market deposits$ 2,527,785 $ 10,435 0.41 %$ 2,109,891 $ 23,687 1.12 %$ 1,922,515 $ 15,928 0.83 % Certificates of deposit of$100,000 or more 217,624 3,346 1.54 208,875 4,270 2.04 184,438 3,007 1.63 Other time deposits 86,113 1,198 1.39 78,800 1,502 1.91 107,153 1,801 1.68 Federal funds purchased and repurchase agreements 8,595 79 0.92 41,077 767 1.87 69,604 1,200 1.72 FHLB advances 284,718 3,992 1.40 245,283 4,573 1.86 324,653 5,729 1.76 Subordinated debentures 78,985 4,401 5.57 78,845 4,539 5.76 78,706 4,539 5.77 Total interest-bearing liabilities 3,203,820 23,451 0.73 2,762,771 39,338 1.42 2,687,069 32,204 1.20 Non-interest-bearing liabilities: Demand deposits 2,020,575 1,392,606 1,310,857 Other liabilities 138,665 86,130 42,392 Total liabilities 5,363,060 4,241,507 4,040,318 Stockholders' equity 508,967 476,959 452,760 Total liabilities and stockholders' equity$ 5,872,027 $ 4,718,466 $ 4,493,078 Net interest income/net interest rate spread (2) (3) 161,161 2.70 % 142,725 2.80 % 137,376 2.91 % Net interest-earning assets$ 2,184,560 $ 1,546,882 $ 1,443,733 Net interest margin (2) (4) 2.99 % 3.31 % 3.33 % Tax-equivalent adjustment (380) (0.01)
(522) (0.01) (596) (0.02) Net interest income$ 160,781 $ 142,203 $ 136,780 Net interest margin (4) 2.98 % 3.30 % 3.31 % Ratio of interest-earning assets to interest-bearing liabilities 168.19 % 155.99 % 153.73 %
(1) The amounts are net of deferred origination costs / (costs) and the provision for credit
losses and include loans held for sale.
(2) Presented in tax equivalent based on the
rate of 21%.
The net interest rate differential represents the difference between the return on (3) average interest-bearing assets and the cost of average interest-bearing assets
Liabilities.
(4) The net interest margin represents the net interest income divided by the average
interest-earning assets.
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Rate/Volume Analysis
Net interest income can be analyzed in terms of the impact of changes in rates
and volumes. The following table illustrates the extent to which changes in
interest rates and in the volume of average interest-earning assets and
interest-bearing liabilities have affected our interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rates
(changes in rates multiplied by prior volume); and (iii) the net changes. For
purposes of this table, changes that are not due solely to volume or rate
changes have been allocated to these categories based on the
respective percentage changes in average volume and rate. Due to the numerous
simultaneous volume and rate changes during the periods analyzed, it is not
possible to precisely allocate changes between volume and rates. In addition,
average interest-earning assets include non-accrual loans.
Year
Finished
2020 Over 2019 2019 Over 2018
Changes Due To Changes Due To
Net Net
(In thousands) Volume Rate Change Volume Rate Change
Interest income on interest-earning
assets:
Loans, net (1) (2) $ 38,905 $ (27,786) $ 11,119 $ 11,245 $ 2,679 $ 13,924
Mortgage-backed securities, CMOs and
other asset-backed securities (3,970) (2,883)
(6,853) (706) 297 (409) Taxable securities 323 (642) (319) (958) 22 (936) Tax-exempt securities (2) (380) 6 (374) (1,018) 301 (717) Deposits with banks 1,746 (2,770) (1,024) 520 101 621 Total interest income on interest-earning assets (2) 36,624 (34,075)
2,549 9,083 3,400 12,483
Interest expense on interest-bearing liabilities: Savings, NOW and money market deposits 3,984 (17,236) (13,252) 1,671 6,088 7,759 Certificates of deposit of$100,000 or more 172 (1,096) (924) 433 830 1,263 Other time deposits 130 (434) (304) (519) 220 (299) Federal funds purchased and repurchase agreements (419) (269) (688) (526) 93 (433) FHLB advances 664 (1,245) (581) (1,465) 309 (1,156) Subordinated debentures 8 (146) (138) 8 (8) - Total interest expense on interest-bearing liabilities 4,539 (20,426) (15,887) (398) 7,532 7,134 Net interest income (2)$ 32,085 $ (13,649) $
18,436
(1) The amounts are net of deferred origination costs / (costs) and the provision for credit
losses and include loans held for sale.
(2) Presented in tax equivalent based on the
rate of 21%. Net interest income increased$18.6 million , or 13.1%, to$160.8 million for the year endedDecember 31, 2020 compared to$142.2 million for the year endedDecember 31, 2019 . Average net interest-earning assets increased$637.7 million to$2.2 billion for 2020 compared to$1.5 billion for 2019. The increase in average net interest-earning assets was primarily driven by loan growth in the commercial and industrial portfolio, and a rise in deposits with banks, partially offset by increases in average deposits and average borrowings, and a decrease in average investment securities. Tax-equivalent net interest margin was 2.99% in 2020 compared to 3.31% in 2019. The decrease in tax-equivalent net interest margin for 2020 compared to 2019 reflects the lower average yield on our loan portfolio and significantly higher levels of cash earning low average yields, partially offset by lower overall funding costs, due in part to federal funds rate decreases during the third and fourth quarter of 2019 and the first quarter of 2020. In response to the COVID-19 outbreak, theFederal Reserve has reduced the benchmark federal funds rate to a target range of 0% to 0.25% during the 2020 first quarter. We took this opportunity to lower our funding costs and stabilize our net interest margin. Total interest income increased$2.7 million , or 1.5%, to$184.2 million in 2020 compared to$181.5 million in 2019 as average interest-earning assets increased$1.1 billion , or 25.0%, to$5.4 billion in 2020 compared to$4.3 billion in 2019. The increase in average interest-earning assets in 2020 compared to 2019 reflects growth in the commercial and industrial portfolio driven by PPP loan originations, and a rise in deposits with banks driven by deposit growth, partially offset by a Page -31-
decline in average investment securities. The decline in economic activity during the COVID-19 shutdown has led more of our customers to increase their deposits, which has increased our average deposits with banks in the current year.
the
tax-equivalent average yield on interest-earning assets decreased to 3.43% in 2020 compared to 4.22% in 2019. The PPP loans and excess liquidity in banks had the effect of depressing our net interest margin in the current year. Interest income on loans increased to$169.4 million for 2020 compared to$158.2 million for 2019, primarily due to growth in the commercial and industrial loan portfolio, partially offset by a decrease in yield on loans. Average loans grew by$930.9 million , or 21.4%, to$4.3 billion in 2020 compared to$3.4 billion in 2019. The tax-equivalent average yield on loans was 3.91% in 2020 compared to 4.65% in 2019. The PPP loans had the effect of decreasing the tax-equivalent yield by 17 basis points in 2020. Interest income on investment securities decreased to$14.1 million in 2020 from$21.6 million in 2019. The decrease in 2020 compared to 2019 reflects a decrease in the average balance of investment securities and a lower average yield on investment securities. Interest income on investment securities included net amortization of premiums on securities of$3.6 million in 2020, compared to$4.4 million in 2019. Average total investment securities decreased by$180.8 million , or 22.0%, to$642.5 million in 2020 compared to$823.3 million in 2019. The decline in tax-equivalent average yield on total investment securities to 2.23% in 2020 compared to 2.66% in 2019 reflected the impact of the reductions in the benchmark federal funds rate by theFederal Reserve in the third and fourth quarter of 2019, and the first quarter of 2020, and the related decline in market interest rates available on securities purchases. Total interest expense decreased$15.9 million , or 40.4%, to$23.5 million in 2020 compared to$39.3 million in 2019. The decrease in interest expense between periods was a result of the decrease in the cost of average interest-bearing liabilities, partially offset by an increase in average deposits and average borrowings. The average cost of interest-bearing liabilities was 0.73% in 2020 compared to 1.42% in 2019. The decrease in the cost of average interest-bearing liabilities is primarily due to federal funds rate decreases during the third and fourth quarter of 2019 and the first quarter of 2020. Average total interest-bearing liabilities increased to$3.2 billion in 2020 compared to$2.8 billion in 2019 due to an increase in average deposits and average borrowings. Average total deposits increased to$4.9 billion in 2020 compared to$3.8 billion in 2019 primarily due to increases in average demand deposits, and average savings, NOW and money market deposits. Average demand deposits increased to$2.0 billion in 2020 compared to$1.4 billion in 2019. The increase in demand deposits was primarily driven by an inflow of deposits from PPP loan customers in 2020. The average balances in savings, NOW and money market accounts increased to$2.5 billion in 2020 compared to$2.1 billion in 2019. Average certificates of deposit increased$16.1 million to$303.7 million in 2020 compared to 2019. The average cost of savings, NOW and money market accounts decreased to 0.41% in 2020 compared to 1.12% in 2019. The average cost of certificates of deposit decreased to 1.50% in 2020 compared to 2.01% in 2019. Average public fund deposits increased to 17.5% of total average deposits during 2020 compared to 15.2% in 2019. Average federal funds purchased and repurchase agreements declined to$8.6 million in 2020 compared to$41.1 million in 2019. The cost of average federal funds purchased and repurchase agreements was 0.92% in 2020, compared to 1.87% for the same period in 2019. Average FHLB advances increased to$284.7 million in 2020, compared to$245.3 million in 2019. Average subordinated debentures increased to$79.0 million in 2020, compared to$78.8 million in 2019.
Provision and allowance for bad debts
AtDecember 31, 2020 , our loan portfolio consists primarily of real estate loans secured by commercial, multi-family and residential real estate properties located in our principal lending areas ofNassau andSuffolk Counties onLong Island and theNew York City boroughs. The interest rates we charge on loans are affected primarily by the demand for such loans, the supply of money available for lending purposes, the rates offered by our competitors, our relationship with the customer, and the related credit risks of the transaction. These factors are affected by general and economic conditions including, but not limited to, monetary policies of the federal government, including theFederal Reserve Board , legislative policies and governmental budgetary matters. Based on our adoption of the CECL Standard onJanuary 1, 2020 , our continuing review of the overall loan portfolio, the current asset quality of the portfolio, the growth in the loan portfolio, the net charge-offs, and current and forecasted Page -32- economic conditions, a provision for credit losses of$11.5 million was recorded in 2020, as compared to$5.7 million in 2019. The increase in allowance for credit losses in the first half of 2020 was primarily related to the reasonable and supportable forecast component of the newly adopted CECL Standard which includes the impact of COVID-19. COVID-19 continues to have a profound impact on economic activity. While there have been some signs of economic improvement during the latter half of 2020, significant uncertainty remains. Management still believes that the economic recovery will continue during 2021 and 2022, however, based on the aforementioned uncertainty and negative impact the virus has had to date, the decision was made to maintain the current risk level for the reasonable and supportable forecast component of the allowance for credit losses as ofDecember 31, 2020 . Net charge-offs were$1.7 million for the year endedDecember 31, 2020 , as compared to$4.3 million for the year endedDecember 31, 2019 . The charge-offs in 2020 relate primarily to one relationship that totaled$2.7 million as ofJune 30, 2020 . In the 2020 third quarter, a settlement agreement was entered into resulting in$1.4 million in payments and a charge-off totaling$1.3 million . The charge-offs in 2019 relate primarily to the$3.7 million charge-off related to one CRE loan totaling$16.3 million which was written down to the loan's estimated fair value of$12.6 million and moved into loans held for sale inJune 2019 . The ratio of allowance for credit losses to non-accrual loans was 363% and 750% atDecember 31, 2020 and 2019, respectively. The allowance for credit losses totaled$44.2 million atDecember 31, 2020 and$32.8 million atDecember 31, 2019 . The allowance as a percentage of total loans was 0.96% and 0.89% atDecember 31, 2020 and 2019, respectively. The addition of PPP loans, which are expected to be fully guaranteed by the SBA and have a nominal reserve associated with them, decreased the allowance as a percentage of total loans by 20 basis points atDecember 31, 2020 . We continue to carefully monitor the loan portfolio as well as real estate trends inNassau andSuffolk Counties and theNew York City boroughs. Loans totaling$121.7 million , or 2.6%, of total loans atDecember 31, 2020 were categorized as classified loans compared to$88.3 million or 2.4%, atDecember 31, 2019 . Classified loans include loans with credit quality indicators with the internally assigned grades of special mention, substandard and doubtful. These loans are categorized as classified loans as we have information that indicates the borrower may not be able to comply with the present repayment terms. These loans are subject to increased management attention and their classification is reviewed at least quarterly. AtDecember 31, 2020 ,$43.3 million of these classified loans were commercial real estate ("CRE") loans. Of the$43.3 million of CRE loans,$35.9 million were current and$7.4 million were past due. AtDecember 31, 2020 ,$20.0 million of classified loans were residential real estate loans with$15.7 million current and$4.3 million past due. Commercial, industrial, and agricultural loans represented$47.7 million of classified loans, with$41.2 million current and$6.5 million past due. Taxi medallion loans represented$9.6 million of the classified commercial, industrial and agricultural loans atDecember 31, 2020 . All of our taxi medallion loans are collateralized byNew York City medallions and have personal guarantees. No new originations of taxi medallion loans are currently planned, and we expect these balances to continue to decline through amortization and pay-offs. InJanuary 2021 , six taxi medallion loans, totaling$2.6 million , net of charge-offs, were paid off under settlements we accepted. The charge-offs related to the settlements were recognized inJanuary 2021 . AtDecember 31, 2020 , there was$8.5 million of classified multi-family loans which were current;$1.2 million of classified real estate construction and land loans substantially all of which were current; and$1.0 million of classified consumer loans substantially all of which were current. CRE loans, including multi-family loans, represented$2.5 billion , or 55.1%, of the total loan portfolio atDecember 31, 2020 compared to$2.4 billion , or 64.8%, atDecember 31, 2019 . Our underwriting standards for CRE loans require an evaluation of the cash flow of the property, the overall cash flow of the borrower and related guarantors as well as the value of the real estate securing the loan. In addition, our underwriting standards for CRE loans are consistent with regulatory requirements with original loan to value ratios generally less than or equal to 75%. We consider charge-off history, delinquency trends, cash flow analysis, and the impact of the local economy on CRE values when evaluating the appropriate level of the allowance for credit losses. As ofDecember 31, 2020 , we had$20.3 million in loans which were individually evaluated, with a specific reserve of$6.7 million . Individually evaluated loans include$9.6 million of taxi medallion loans. As ofJune 30, 2020 , taxi loans were changed from being collectively evaluated to individually evaluated. While our collectively evaluated taxi loans were all performing in accordance with the terms of the renewals, the taxi industry, like many others, suffered greatly as a result of the COVID-19 pandemic. Substantially all of our taxi borrowers requested payment moratoriums and until such time as business fully resumes and cash flows return to normal, we will value the taxi loans assuming they are collateral Page -33- dependent. As ofDecember 31, 2019 , we had individually impaired loans as defined by FASB ASC No. 310, "Receivables" (prior to adoption of the CECL Standard) of$27.0 million , with a specific reserve totaling$4.7 million . Impaired loans include individually classified non-accrual loans and troubled debt restructuring loans ("TDRs"). AtDecember 31, 2019 , impaired loans also included$1.1 million in other impaired performing loans which were related to borrowers with other performing TDRs. Upon adoption of the CECL Standard onJanuary 1, 2020 , we re-evaluated our impaired loans to determine which loans should be evaluated on a collective (pooled) basis and which loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis and therefore should be individually evaluated. The majority of our impaired loans atDecember 31, 2019 were performing TDRs where there was no write-off of principal as a result of the restructure and interest was at a market rate. We concluded the risks associated with these loans were consistent with the other pooled loans and therefore they were appropriately evaluated on a collective (pooled) basis under the CECL Standard. Non-accrual loans were$12.2 million , or 0.26%, of total loans atDecember 31, 2020 compared to$4.4 million , or 0.12%, of total loans atDecember 31, 2019 . TDRs represent$346 thousand of the non-accrual loans atDecember 31, 2020 and$405 thousand atDecember 31, 2019 .
There was no other property owned at
The following table shows the changes in the allowance for credit losses:
Year Ended December 31,
(In thousands) 2020 2019 2018 2017 2016
Beginning balance $ 32,786 $ 31,418 $ 31,707 $ 25,904 $ 20,744
Impact of adopting CECL 1,625 - - - -
Charge-offs:
Commercial real estate mortgage loans (1) (3,670) - - - Residential real estate mortgage loans - - (24) - (56) Commercial, industrial and agricultural loans (2,004) (799) (2,806) (8,245) (930) Installment/consumer loans (7) (13) (11) (49) (1) Total (2,012) (4,482) (2,841) (8,294) (987) Recoveries: Commercial real estate mortgage loans - 1 - - 109 Residential real estate mortgage loans 3 112 3 28 96 Commercial, industrial and agricultural loans 298 25
747 16 386 Installment/consumer loans - 12 2 3 6 Total 301 150 752 47 597 Net charge-offs (1,711) (4,332) (2,089) (8,247) (390) Provision for credit losses charged to operations 11,500 5,700 1,800 14,050 5,550 Ending balance$ 44,200 $ 32,786 $ 31,418 $ 31,707 $ 25,904 Ratio of net charge-offs during period to average loans outstanding (0.04) % (0.13) % (0.07) % (0.30) % (0.02) % Page -34-
Allocation of the allowance for credit losses
The following table shows the breakdown of the total allowance for credit losses by loan classification:
December 31,
2020 2019 2018 2017 2016
Percentage Percentage Percentage Percentage Percentage
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
(Dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
Commercial real estate
mortgage loans $ 8,534 35.6 % $ 12,150 42.7 % $ 10,792 42.0 % $ 11,048 41.7 % $ 9,225 42.0 %
Multi-family mortgage loans 1,736 19.5 4,829
22.1 2,566 17.9 4,521 19.2 6,264 20.0 Residential real estate mortgage loans 3,062 9.4 1,882 13.4 3,935 15.9 2,438 15.0 1,495 14.1 Commercial, industrial and agricultural loans 27,363 33.2 12,583
18.5 12 722 19.8 12 838 19.9 7 837
20.2
Real estate construction and land loans 2,175 1.8 1,066 2.6 1,297 3.8 740 3.5 955 3.1 Installment/consumer loans 1,330 0.5 276 0.7 106 0.6 122 0.7 128 0.6 Total$ 44,200 100.0 %$ 32,786 100.0 %$ 31,418 100.0 %$ 31,707 100.0 %$ 25,904 100.0 % Non-Interest Income Total non-interest income decreased$5.7 million , or 22.4%, to$19.7 million for the year endedDecember 31, 2020 , compared to$25.4 million for the year endedDecember 31, 2019 . The decline in total non-interest income in the current year compared to 2019 was driven by a$3.7 million decrease in loan swap fees, a$3.4 million loss on termination of swaps, a$2.9 million decrease in fair value of loans held for sale, and a$1.1 million decrease in service charges and other fees, partially offset by a$3.3 million increase in net securities gains, a$2.0 million increase in gain on sale ofSmall Business Administration ("SBA") loans, and a$0.6 million increase in title fees. During the third quarter of 2020, we restructured our wholesale balance sheet, offsetting net securities gains of$3.5 million with swap termination losses of$3.4 million , which positively impacted our net interest margin in the fourth quarter of 2020. During the second quarter of 2020, an additional write-down was recognized on one CRE mortgage loan held for sale for the decrease in the estimated fair value of the loan by$2.6 million to$10.0 million through a valuation allowance which was charged against non-interest income in the consolidated statements of income. Loan swap fees recorded on interest rate swaps decreased to$3.7 million in 2020, compared to$7.5 million in 2019. We increased the notional amount of interest rate swaps to$1.1 billion atDecember 31, 2020 , compared to$823.8 million atDecember 31, 2019 . The loan swap program allows us to deliver fixed rate exposure to our customers while we retain a floating rate asset and generate fee income. These interest rate swap agreements do not qualify for hedge accounting treatment, and therefore changes in fair value are reported in non-interest income in the consolidated statements of income.
Non-interest charges
Total non-interest charges increased
in 2020 compared to
Salaries and employee benefits increased to$67.2 million in 2020 compared to$56.2 million in 2019. The rise in salaries and employee benefits was primarily due to stock acceleration expense related to the Merger and higher incentive accruals in 2020. Page -35-
Technology and communications increased to$9.7 million in 2020 compared to$7.9 million in 2019. The rise in technology and communications expenses reflect higher software maintenance and system services expenses as we increased our investment in technology and expanded our use of automation in 2020.
Marketing and advertising decreased to$3.3 million in 2020 compared to$4.7 million in 2019. Professional services increased to$5.0 million in 2020 compared to$3.8 million in 2019. We recorded amortization of other intangible assets of$0.7 million in 2020 and$0.8 million in 2019, related to the CNB and FNBNY core deposit intangible assets subject to amortization. Other operating expenses increased to$6.8 million in 2020 compared to$7.7 million in 2019.
Income tax expense
Income tax expense decreased to$13.7 million in 2020 compared to$14.1 million in 2019, reflecting lower income before income taxes, partially offset by a higher effective tax rate in 2020. The effective tax rate for 2020 was 24.6%, compared to 21.4% for 2019. The increase in our effective tax rate resulted primarily from non-deductible salaries and merger expenses related to the Merger. Financial Condition Total assets were$6.4 billion atDecember 31, 2020 ,$1.5 billion , or 30.7%, higher thanDecember 31, 2019 . The rise in total assets in 2020 reflects increases in loans held for investment and cash and cash equivalents, partially offset by a decrease in securities. Cash and cash equivalents increased$759.6 million , or 648.2%, to$876.8 million atDecember 31, 2020 compared toDecember 31, 2019 . Total securities decreased$245.4 million to$559.4 million atDecember 31, 2020 compared toDecember 31, 2019 . Total loans held for investment, net, increased$917.1 million , or 24.9%, to$4.6 billion atDecember 31, 2020 compared toDecember 31, 2019 , inclusive of PPP loans totaling$844.7 million . Net deferred loan fees were$8.2 million atDecember 31, 2020 , inclusive of$15.4 million remaining unamortized net loan fees related to PPP loans. Our focus is on our ability to grow the loan portfolio, while maintaining interest rate risk sensitivity and maintaining credit quality. Total liabilities were$5.9 billion atDecember 31, 2020 ,$1.5 billion higher thanDecember 31, 2019 . The increase in total liabilities in 2020 was mainly due to deposit growth, primarily attributable to PPP related deposits, partially offset by a decrease in FHLB advances. Total deposits increased$1.7 billion , or 43.9%, to$5.5 billion atDecember 31, 2020 compared toDecember 31, 2019 . The increase in total deposits in 2020 was largely attributable to higher demand deposits and savings, NOW and money market deposits, partially offset by a decrease in certificates of deposit. Demand deposits increased$953.8 million , or 62.8% year-over-year, to$2.5 billion atDecember 31, 2020 . The rise in demand deposits in 2020 was primarily driven by an inflow of PPP-related deposits. Savings, NOW and money market deposits increased$740.4 million , or 37.2% year-over-year, to$2.7 billion atDecember 31, 2020 . Certificates of deposit decreased$19.5 million , or 6.3% year-over-year, to$288.4 million atDecember 31, 2020 . FHLB advances decreased$220.0 million , or 50.6% year-over-year, to$215.0 million atDecember 31, 2020 . The decline in FHLB advances was mainly due to our decreased reliance on borrowings in 2020 by using deposit growth to fund our loan portfolio growth. Total stockholders' equity was$517.8 million atDecember 31, 2020 , an increase of$20.7 million , or 4.2%, fromDecember 31, 2019 . We adopted the CECL Standard onJanuary 1, 2020 , which resulted in a charge to retained earnings and reduction to stockholders' equity of$1.5 million . The increase in stockholders' equity was largely attributable to net income of$42.0 million , partially offset by$19.2 million in dividends, and$4.6 million in purchases of common stock. During the year endedDecember 31, 2020 , there were 179,620 shares purchased under the 2019 Stock Repurchase Program at a cost of$4.6 million . Page -36-
Loans
During 2020, despite the pandemic, we continued to experience growth in the commercial real estate and multifamily mortgage loan portfolios, coupled with significant growth in the commercial, industrial and agricultural loan portfolio as a result of the PPP loans. The concentration of loans in our primary market areas may increase risk. Unlike larger banks that are more geographically diversified, our loan portfolio consists primarily of real estate loans secured by commercial, multi-family and residential real estate properties located in our principal lending areas ofNassau andSuffolk Counties onLong Island and theNew York City boroughs. The local economic conditions onLong Island and theNew York City boroughs have a significant impact on the volume of loan originations, the quality of loans, the ability of borrowers to repay these loans, and the value of collateral securing these loans. A considerable decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control would impact these local economic conditions and could negatively affect the financial results of our operations. Additionally, decreases in tenant occupancy may also have a negative effect on the ability of borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings. The interest rates charged by us on loans are affected primarily by the demand for such loans, the supply of money available for lending purposes, the rates offered by our competitors, our relationship with the customer, and the related credit risks of the transaction. These factors are affected by general and economic conditions including, but not limited to, monetary policies of the federal government, including the FRB, legislative policies and governmental budgetary matters. We target our business lending and marketing initiatives towards promotion of loans that primarily meet the needs of small to medium-sized businesses. These small to medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact these businesses, our results of operations and financial condition may be adversely affected. With respect to the underwriting of loans, there are certain risks, including the risk of non-payment that are associated with each type of loan that we market. Approximately 66.3% of our loan portfolio atDecember 31, 2020 was secured by real estate. Commercial real estate loans represented 35.6% of our loan portfolio. Multi-family mortgage loans represented 19.5% of our loan portfolio. Residential real estate mortgage loans represented 9.4% of our loan portfolio, including home equity lines of credit representing 1.4% and residential mortgages representing 8.0% of our loan portfolio. Real estate construction and land loans represented 1.8% of our loan portfolio. Risks associated with a concentration in real estate loans include potential losses from fluctuating values of land and improved properties. Home equity loans represent loans originated in our geographic markets with original loan to value ratios generally of 75% or less. Our residential mortgage portfolio included approximately$14.7 million in interest only mortgages atDecember 31, 2020 . The underwriting standards for interest only mortgages are consistent with the remainder of the loan portfolio and do not include any features that result in negative amortization. We use conservative underwriting criteria to better insulate us from a downturn in real estate values and economic conditions onLong Island and theNew York City boroughs that could have a significant impact on the value of collateral securing the loans as well as the ability of customers to repay loans. The remainder of the loan portfolio was comprised of commercial and consumer loans, which represented 33.7% of our loan portfolio, atDecember 31, 2020 . The commercial loans are made to businesses and include term loans, lines of credit, senior secured loans to corporations, equipment financing, taxi medallion loans and, beginning in 2020, PPP loans. The primary risks associated with commercial loans are the cash flow of the business, the experience and quality of the borrowers' management, the business climate, and the impact of economic factors. The primary risks associated with consumer loans relate to the borrower, such as the risk of a borrower's unemployment as a result of deteriorating economic conditions or the amount and nature of a borrower's other existing indebtedness, and the value of the collateral securing the loan if we must take possession of the collateral. Our policy for charging off loans is a multi-step process. A loan is considered a potential charge-off when it is in default of either principal or interest for a period of 90, 120 or 180 days, depending upon the loan type, as of the end of the prior month. In addition to delinquency criteria, other triggering events may include, but are not limited to, notice of bankruptcy by the borrower or guarantor, death of the borrower, and deficiency balance from the sale of collateral. These loans identified are presented for evaluation at the regular meeting of the CRMC. A loan is charged off when a loss is reasonably assured. The recovery of charged-off balances is actively pursued until the potential for recovery has been exhausted, or until the expense of collection does not justify the recovery efforts. Page -37-
Total loans grew$917.1 million , or 24.9%, to$4.6 billion atDecember 31, 2020 compared to$3.7 billion atDecember 31, 2019 , with commercial, industrial, and agricultural loans being the largest contributor of the growth. Commercial, industrial and agricultural loans increased$847.7 million , or 124.8% in 2020 as a result of PPP loans totaling$844.7 million atDecember 31, 2020 . Multi-family mortgage loans increased$87.6 million , or 10.8%, in 2020. Commercial real estate mortgage loans increased$72.8 million , or 4.7%, during 2020. Residential real estate mortgage loans decreased$58.5 million , or 11.9%, during 2020. Real estate construction and land loans decreased$14.8 million , or 15.2%, in 2020. Installment/consumer loans decreased slightly during 2020. Fixed rate loans represented 35.5% and 21.9% of total loans atDecember 31, 2020 and 2019, respectively. The increase in fixed rate loans fromDecember 31, 2019 relates to the PPP loans. The following table presents the major classifications of loans at the dates indicated: December 31, (In thousands) 2020 2019 2018 2017 2016
Commercial real estate mortgage loans$ 1,638,519 $ 1,565,687 $ 1,373,556 $ 1,293,906 $ 1,091,752 Multi-family mortgage loans 899,730 812,174 585,827 595,280 518,146 Residential real estate mortgage loans 434,689 493,144 519,763 464,264 364,884 Commercial, industrial and agricultural loans 1,527,147 679,444 645,724 616,003 524,450 Real estate construction and land loans 82,479 97,311
123,393 107,759 80,605 Installment/consumer loans 23,019 24,836 20,509 21,041 16,368 Total loans 4,605,583 3,672,596 3,268,772 3,098,253 2,596,205
Net deferred loan costs and fees (8,180) 7,689 7,039 4,499 4,235 Total loans held for investment 4,597,403 3,680,285
3,275,811 3,102,752 2,600,440 Allowance for credit losses (44,200) (32,786) (31,418) (31,707) (25,904) Net loans$ 4,553,203 $ 3,647,499 $ 3,244,393 $ 3,071,045 $ 2,574,536
Information on the maturity date of the selected loan
The following table presents the approximate maturities and sensitivity to changes in interest rates of certain loans, exclusive of real estate mortgage loans and installment/consumer loans to individuals as ofDecember 31, 2020 : After One Within One But Within After (In thousands) Year Five Years Five Years Total Commercial loans (1)$ 303,631 $ 1,081,141 $ 142,375 $ 1,527,147
Construction and land loans (2) 23,643 41,648
17,188 82,479 Total$ 327,274 $ 1,122,789 $ 159,563 $ 1,609,626 Rate provisions:
Amounts with fixed interest rates$ 19,532 $ 989,921 $ 46,450 $ 1,055,903 Amounts with variable interest rates 307,742 132,868
113,113 553,723 Total$ 327,274 $ 1,122,789 $ 159,563 $ 1,609,626
(1) The fixed rate PPP is included in the column “After one year but within five years”
loans totaling
(2) Included in the column “After five years” are one-stage construction loans
which contain a preliminary construction period (interest only) which
automatically converts to depreciation at the end of the construction phase.
Page -38-
Defaulted, unaccounted for and restructured loans and other real estate held
The following table presents a selection of information on past due, unaccounted for and restructured loans and on other real estate held:
December 31,
(In thousands) 2020 2019 2018 2017 2016
Loans 90 days or more past due and still accruing $ -$ 343 $ 308 $ 1,834 $ 1,027 Non-accrual loans excluding restructured loans 11,816 3,964 2,675 6,950 909 Restructured loans - non-accrual 346 405 133 5 332 Restructured loans - performing 22,187 26,340 16,913 16,727 2,417 Other real estate owned, net - -
175 - - Total$ 34,349 $ 31,052 $ 20,204 $ 25,516 $ 4,685 Year Ended December 31, (In thousands) 2020 2019 2018 2017 2016 Gross interest income that has not been paid or recorded during the year under original terms: Non-accrual loans$ 167 $ 47 $ 36 $ 110 $ 17 Restructured loans - - - - 1 Gross interest income recorded during the year: Non-accrual loans$ 93 $ 48 $ 39 $ 282 $ 1 Restructured loans 948 1,212 716 619 123
Commitments for additional funds - -
- - - Securities
Securities decreased$245.4 million to$559.4 million atDecember 31, 2020 compared toDecember 31, 2019 , including restricted securities totaling$23.4 million atDecember 31, 2020 and$32.9 million atDecember 31, 2019 . The available for sale portfolio decreased$187.9 million to$450.4 million atDecember 31, 2020 compared toDecember 31, 2019 . Securities classified as available for sale may be sold in response to, or in anticipation of, changes in interest rates and resulting prepayment risk, or other factors. During 2020, we sold$149.5 million of securities available for sale compared to$46.2 million in 2019. The decrease in securities available for sale is primarily the result of a$149.0 million decrease in residential collateral mortgage obligations, a$50.8 million decrease inU.S. Treasury securities and a$41.8 million decrease in commercial collateralized mortgage obligations, partially offset by a$28.5 million increase in residential mortgage-backed,$11.1 million increase in commercial mortgage-backed, and$11.3 million increase in Corporate bonds. Securities held to maturity decreased$47.9 million to$85.7 million atDecember 31, 2020 compared toDecember 31, 2019 . The decrease in securities held to maturity is primarily the result of a$21.4 million decrease in residential collateralized mortgage obligations and a$17.3 million decrease in state and municipal obligations. Fixed rate securities represented 82.4% of total available for sale and held to maturity securities atDecember 31, 2020 compared to 88.2% atDecember 31, 2019 . Page -39- The following table presents the fair values, amortized costs, contractual maturities and approximate weighted average yields of the available for sale and held to maturity securities portfolios atDecember 31, 2020 . Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Yields on tax-exempt obligations have been computed on a tax equivalent basis based on theU.S. federal statutory tax rate of 21%. December 31, 2020 Within After One But After Five But After One Year Within Five Years Within Ten Years Ten Years Total Estimated Estimated Estimated Estimated Estimated (Dollars in Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized thousands) Value Cost Yield Value Cost Yield Value Cost Yield Value Cost Yield Value Cost Available for sale: U.S. Treasury securities $ - $ - - % $ - $
– -% $ – $ – -% $ – $
- - % $ - $ -U.S. GSE securities - - - - - - - - - - - - - - State and municipal obligations 678 676 2.75 18,562
17,696 2.50 16,914 16,153 2.69 5,934 5,923 1.88 42,088 40,448U.S. GSE residential mortgage-backed securities - - - - - - - - - 113,235 111,398 1.72 113,235 111,398 U.S. GSE residential collateralized mortgage obligations - - - - - - - - - 128,804 127,369 1.01 128,804 127,369 U.S. GSE commercial mortgage-backed securities 3,438 3,455 3.04 9,042 8,912 2.42 770 762 2.51 11,557 11,791 1.43 24,807 24,920 U.S. GSE commercial collateralized mortgage obligations - - - - - - - - - 62,336 61,102 1.83 62,336 61,102 Other asset backed securities - - - - - - - - - 23,950 24,250 1.61 23,950 24,250 Corporate bonds - - - 31,257 32,000 1.38 20,913 21,500 2.02 2,970 3,000 5.98 55,140 56,500 Total available for sale$ 4,116 $ 4,131 2.99 %$ 58,861 $
58,608 1.88%
Held to maturity: State and municipal obligations$ 1,902 $ 1,885 2.97 %$ 18,065 17,058 2.80 %$ 5,154 4,772 3.05 % $ - - - %$ 25,121 $ 23,715 U.S. GSE residential mortgage-backed securities - - - - - - 4,412 4,244 1.54 2,087 2,028 2.22 6,499 6,272 U.S. GSE residential collateralized mortgage obligations - - - 98
95 3.69 2,578 2,519 1.80 16,315 15,897 2.17 18,991 18,511U.S. GSE commercial mortgage-backed securities - - - 6,080 5,778 2.35 - - - 7,614 7,291 3.16 13,694 13,069 U.S. GSE commercial collateralized mortgage obligations - - - 209 209 1.42 - - - 24,811 23,924 2.59 25,020 24,133 Total held to maturity 1,902 1,885 2.97 24,452
23 140 2.68 12 144 11 535 2.22 50 827 49 140 2.52 89 325 85 700 Total securities
Deposits and Borrowings Borrowings, consisting of repurchase agreements, FHLB advances and subordinated debentures, decreased$219.6 million year-over-year to$295.3 million atDecember 31, 2020 . Total deposits increased$1.7 billion to$5.5 billion atDecember 31, 2020 compared toDecember 31, 2019 . Individual, partnership and corporate ("IPC deposits") account balances increased$1.3 billion and public funds and brokered deposits increased$378.6 million . The increase in deposits is attributable to an increase in savings, NOW and money market deposits of$740.4 million , or 37.2%, to$2.7 billion atDecember 31, 2020 , and an increase in demand deposits of$953.8 million , or 62.8%, to$2.5 billion at December
31,
2020,
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partially offset by a decrease in certificates of deposit of$19.5 million , or 6.3%, to$288.4 million atDecember 31, 2020 . Certificates of deposit of$100,000 or more increased$1.9 million , or 0.9%, fromDecember 31, 2019 and other time deposits decreased$21.5 million , or 22.9%, compared toDecember 31, 2019 .
The following table shows the remaining maturities of the Bank’s term deposits at
Less than $100,000 or
(In thousands) $100,000 Greater Total
3 months or less $ 10,986 $ 24,244 $ 35,230
Over 3 through 6 months 36,522 63,698 100,220
Over 6 through 12 months 12,552 90,115 102,667
Over 12 months through 24 months 5,831 20,871
26,702
Over 24 months through 36 months 3,414 10,844
14 258
Over 36 months through 48 months 1,925 2,972
4,897
Over 48 months through 60 months 1,198 3,067 4,265 Over 60 months - 206 206 Total$ 72,428 $ 216,017 $ 288,445 Liquidity
Our liquidity management objectives are to ensure the sufficiency of funds available to respond to the needs of depositors and borrowers, and to take advantage of unanticipated opportunities for our growth or earnings enhancement. Liquidity management addresses our ability to meet financial obligations that arise in the normal course of business. Liquidity is primarily needed to meet customer borrowing commitments and deposit withdrawals, either on demand or on contractual maturity, to repay borrowings as they mature, to fund current and planned expenditures and to make new loans and investments as opportunities arise.The Holding Company's principal sources of liquidity included cash and cash equivalents of$0.3 million as ofDecember 31, 2020 , and dividend capabilities from the Bank. Cash available for distribution of dividends to our shareholders is primarily derived from dividends paid by the Bank to the Company. During 2020, the Bank paid$26.5 million in cash dividends to the Holding Company. Prior regulatory approval is required if the total of all dividends declared by the Bank in any calendar year exceeds the total of the Bank's net income for that year combined with its retained net income of the preceding two years. As ofJanuary 1, 2021 , the Bank had$49.8 million of retained net income available for dividends to the Holding Company. In the event that the Holding Company subsequently expands its current operations, in addition to dividends from the Bank, it will need to rely on its own earnings, additional capital raised and other borrowings to meet liquidity needs.The Holding Company did not make any capital contributions to the Bank during the year endedDecember 31, 2020 . The Bank's most liquid assets are cash and cash equivalents, securities available for sale and securities held to maturity due within one year. The levels of these assets are dependent on the Bank's operating, financing, lending and investing activities during any given period. Other sources of liquidity include loan and investment securities principal repayments and maturities, lines of credit with other financial institutions including the FHLB and FRB, growth in core deposits and sources of wholesale funding such as brokered deposits. While scheduled loan amortization, maturing securities and short-term investments are a relatively predictable source of funds, deposit flows and loan and mortgage-backed securities prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank adjusts its liquidity levels as appropriate to meet funding needs such as seasonal deposit flows, loans, and asset and liability management objectives. Historically, the Bank has relied on its deposit base, drawn through its full-service branches that serve its market area and local municipal deposits, as its principal source of funding. The Bank seeks to retain existing deposits and loans and maintain customer relationships by offering quality service and competitive interest rates to its customers, while managing the overall cost of funds needed to finance its strategies. The Bank's Asset/Liability and Funds Management Policy allows for wholesale borrowings of up to 25% of total assets. AtDecember 31, 2020 , the Bank had aggregate lines of credit of$418.0 million with unaffiliated correspondent banks to provide short-term credit for liquidity requirements. Of these aggregate lines of credit,$398.0 million is available on an unsecured basis. As ofDecember 31, 2020 , the Bank had no overnight borrowings outstanding under these lines. As ofDecember 31, 2019 , the Bank had no overnight borrowings outstanding under these lines. The Bank also has the ability, as a member of the FHLB system, to borrow against unencumbered residential and commercial mortgages owned by the Page -41-
Bank. The Bank also has a master repurchase agreement with the FHLB, which increases its borrowing capacity. As ofDecember 31, 2020 , the Bank had no FHLB overnight borrowings outstanding and$215.0 million outstanding in FHLB term borrowings. As ofDecember 31, 2019 , the Bank had$195.0 million outstanding in FHLB overnight borrowings and$240.0 million outstanding in FHLB term borrowings. As ofDecember 31, 2020 , the Bank had securities sold under agreements to repurchase of$1.2 million outstanding with customers and nothing outstanding with brokers. As ofDecember 31, 2019 , the Bank had securities sold under agreements to repurchase of$1.0 million outstanding with customers and nothing outstanding with brokers. In addition, the Bank has approved broker relationships for the purpose of issuing brokered deposits. As ofDecember 31, 2020 , the Bank had$64.1 million outstanding in brokered certificates of deposit and$50.2 million outstanding in brokered money market accounts. As ofDecember 31, 2019 , the Bank had$77.3 million outstanding in brokered certificates of deposits and$85.1 million outstanding in brokered money market accounts. Liquidity policies are established by senior management and reviewed and approved by the full Board of Directors at least annually. Management continually monitors the liquidity position and believes that sufficient liquidity exists to meet all of the Company's operating requirements. The Bank's liquidity levels are affected by the use of short-term and wholesale borrowings and the amount of public funds in the deposit mix. Excess short-term liquidity is invested in overnight federal funds sold or in an interest-earning account at the FRB. Contractual Obligations
In the normal course of our business, we enter into certain contractual obligations.
The following table presents contractual obligations outstanding atDecember 31, 2020 : Less than One to Four to Over Five (In thousands) Total One Year Three Years Five Years Years
Operating leases$ 52,319 $ 7,387 $ 13,809 $ 12,474 $ 18,649 FHLB advances and repurchase agreements 216,223 216,223
- - - Subordinated debentures 80,000 - - 40,000 40,000 Time deposits 288,445 238,117 40,960 9,162 206
Total current contractual obligations
54,769$ 61,636 $ 58,855
Commitments, contingent liabilities and off-balance sheet arrangements
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, often including obtaining collateral at exercise of the commitment. AtDecember 31, 2020 , we had$150.5 million in outstanding loan commitments and$808.3 million in outstanding commitments for various lines of credit including unused overdraft lines. We also had$25.5 million of standby letters of credit as ofDecember 31, 2020 . See Note 17 of the Notes to the Consolidated Financial Statements for additional information on loan commitments and standby letters of credit.
Capital resources
Stockholders' equity increased$20.7 million year-over-year to$517.8 million atDecember 31, 2020 primarily as a result of net income, partially offset by dividends declared and purchases of treasury stock. We adopted the CECL Standard onJanuary 1, 2020 , which resulted in a charge to retained earnings and reduction to stockholders' equity of$1.5 million . The Page -42-
the ratio of average equity to average total assets was 8.67% for the year ended
The Company's capital strength is paralleled by the solid capital position of the Bank, as reflected in the excess of its regulatory capital ratios over the risk-based capital adequacy ratio levels required for classification as a "well capitalized" institution by theFDIC (see Note 18 of the Notes to the Consolidated Financial Statements). We utilize cash dividends and stock repurchases to manage our capital levels. In 2020, the Company declared four quarterly cash dividends totaling$19.2 million compared to four quarterly cash dividends of$18.4 million in 2019. The dividend payout ratios for 2020 and 2019 were 45.66% and 35.63%, respectively. InFebruary 2019 , we announced the approval of a stock repurchase plan for up to 1,000,000 shares of common stock. There is no expiration date for the stock repurchase plan. During the year endedDecember 31, 2020 , we purchased 179,620 shares of our common stock under the repurchase plan at a cost of$4.6 million . Our return on average equity decreased to 8.26% for the year endedDecember 31, 2020 from 10.84% for the year endedDecember 31, 2019 . Our return on average assets decreased to 0.72% in 2020 compared to 1.10% in 2019. The year-over-year decreases in return on average equity and return on average assets were due to lower net income in 2020 compared to 2019.
Impact of inflation and price changes
The consolidated financial statements and notes presented herein have been prepared in accordance withU.S. generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary effect of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in interest rates have a more significant effect on the performance of a financial institution than do the effects of changes in the general rate of inflation and changes in prices. Changes in interest rates could adversely affect our results of operations and financial condition. Interest rates do not necessarily move in the same direction, or in the same magnitude, as the prices of goods and services. Interest rates are highly sensitive to many factors, which are beyond our control, including the influence of domestic and foreign economic conditions and the monetary and fiscal policies ofthe United States government and federal agencies, particularly the FRB.
Impact of prospective accounting standards
For a discussion of the impact of the new accounting standards, see Note 1 of the Notes to the Consolidated Financial Statements.
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