What changed in this filing

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Item 1A. Risk Factors

2021-03-01 compared with 2020-03-02 · 63 added, 32 removed, 264 unchanged (26% of the section changed)

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Risks Applicable to Our Business:

The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.

Global health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus, including the initial closure of non-essential business and stay at home orders, and continuing restrictions on certain businesses, such as bars restaurants and gyms, have been weighing on the macroeconomic environment in our New Jersey/New York metropolitan market trade area, and the outbreak has significantly increased economic uncertainty and reduced economic activity.

The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns.

Such measures, even as certain of them have been eased, have significantly contributed to rising unemployment and negatively impacted consumer and business spending.

The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act and the Economic Aid Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.

The outbreak has adversely impacted and is likely to further adversely impact our workforce and operations and the operations of our borrowers, customers and business partners.

In particular, we may experience financial losses due to a number of operational factors impacting us or our borrowers, customers or business partners, including but not limited:

to credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, energy, retail and restaurant industries, but across other industries as well.

As of December 31, 2020, the Bank had approximately $207 million of outstanding loans on deferral for customers facing financial stress due to the COVID-19 pandemic.

Although many of the loans receiving deferrals during 2020 have returned to normal repayment cycles, we can give you no assurance that these borrowers will be able to sustain repayment of their credits, or that other borrowers will need/seek payment deferrals;  

declines in collateral values;  

third party disruptions, including outages at network providers and other suppliers;  

increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity;

and  

operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.  

These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 outbreak has subsided.

The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel, and developing work from home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners.

There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.

The extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.

Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change.

We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole.

However, the effects could have a material impact on our results of operations and heighten many of our known risks described in this “Risk Factors”

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Our growth-oriented business strategy could be adversely affected if we are not able to attract and retain skilled employees or if we lose the services of our senior management team.

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Any significant failure to pay on time by our customers or a significant default by our customers would materially and adversely affect us.

At December 31, 2019, we had $3.7 billion of commercial real estate loans, including commercial construction loans, which represented 71.6% of loans receivable.

As of December 31, 2020, we had $4.4 billion of commercial real estate loans, including commercial construction loans, which represented 70.6% of loans receivable.

Concentrations in commercial real estate are also monitored by regulatory agencies and subject to scrutiny.

Guidance from these regulatory agencies includes all commercial real estate loans, including commercial construction loans, in calculating our commercial real estate concentration, but excludes owner-occupied commercial real estate loans.

Based on this regulatory definition, our commercial real estate loans represented 452% of total risk-based capital.

Based on this regulatory definition, our commercial real estate loans represented 442% of the Bank’s total risk-based capital as of December 31, 2020.

Loans secured by owner-occupied real estate are reliant on the operating businesses to provide cash flow to meet debt service obligations, and as a result they are more susceptible to the general impact on the economic environment affecting those operating companies as well as the real estate.

Although the economy in our market area generally, and the real estate market in particular, is growing, we can give you no assurance that it will continue to grow or that the rate of growth will accelerate.

Many factors, including the exchange rate for the U.S.

dollar, potential international trade tariffs, possible virus pandemics and changes in federal tax laws affecting the deductibility of state and local taxes and mortgage interest could reduce or halt growth in our local economy and real estate market.

The impact of the COVID-19 pandemic on the metropolitan New York area commercial real estate market is uncertain, with rents in certain core urban markets declining.Many other factors, including the exchange rate for the U.S.

dollar, potential international trade tariffs,and changes in federal tax laws affecting the deductibility of state and local taxes and mortgage interest could negatively impact our local economy and real estate market.

Accordingly, it may be more difficult for commercial real estate borrowers to repay their loans in a timely manner, as commercial real estate borrowers’

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Any of these events could increase our costs, require management time and attention, and materially and adversely affect us.

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Federal banking agencies have issued guidance regarding high concentrations of commercial real estate loans within bank loan portfolios.

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Such capital may not be available at that time and may result in our regulators requiring us to reduce our concentration in commercial real estate loans.

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If we are limited in our ability to originate loans secured by commercial real estate, we may face greater risk in our loan portfolio.

If, because of our concentration of commercial real estate loans, or for any other reasons, we are limited in our ability to originate loans secured by commercial real estate, we may incur greater risk in our loan portfolio.

For example, we are and may seek to further increase our growth rate in commercial and industrial loans, including both secured and unsecured commercial and industrial loans.

For example, we are and may continue to seek to further increase our growth rate in commercial and industrial loans, including both secured and unsecured commercial and industrial loans.

Unsecured loans generally involve a higher degree of risk of loss than do secured loans because, without collateral, repayment is wholly dependent upon the success of the borrowers’

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Approximately 48.4% of the loans, or $1.9 billion, had been originated in the past three years.

In addition, as part of the GHB merger, we acquired $0.4 billion in loans from GHB.

In addition, as part of the Bancorp of New Jersey merger, we acquired $0.8 billion in loans from Bancorp of New Jersey.

Our limited experience with these loans does not provide us with a significant payment history pattern with which to judge future collectability.

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We maintain a credit exposure ($24.7 million carrying value as of December 31, 2020) of loans secured by New York City taxi medallions.

The taxi industry in New York City is facing significant competition and pressure from technology-based ride share companies such as Uber and Lyft.

The taxi industry in New York City is facing significant competition and pressure from technology-based ride share companies such as Uber and Lyft, as well as from the impact of the COVID-19 pandemic and the trend toward working from home as a mitigant to the pandemic.

This has resulted in volatility in the pricing of medallions, and has impacted the earnings of many medallion holders, including our borrowers.

Any further deterioration in the value of New York City taxi medallions, or in the medallion taxi industry in New York City, could expose us to additional losses through additional write downs on these loans.

We expect that the implementation of Current Expected Credit Loss (“CECL”), which will require us to record an allowance for credit losses materially in excess of our existing allowance for loan losses, could cause increased volatility in our financial condition and results of operation.

The Financial Accounting Standards Board (“FASB”) has adopted a new accounting standard, CECL, effective for the Company as of January 1, 2020.

We expect that the implementation of Current Expected Credit Loss (“CECL”), which will require us to record an allowance for credit losses in excess of our existing allowance for loan losses, could cause increased volatility in our financial condition and results of operation.

The Financial Accounting Standards Board (“FASB”) has adopted a new accounting standard, CECL.

The effective date for the Company of CECL has been delayed by the Economic Aid Act until January 1, 2022, although earlier adoption is permitted.

CECL will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, other financial instruments and other commitments to extend credit and provide for the expected credit losses as allowances for credit losses.

This will change the current method of providing allowances for loan losses that are probable, which will require us to record an allowance for credit losses as of January 1, 2020 materially in excess of our existing allowance for loan losses, and will greatly increase the data we will need to collect and review to determine the appropriate level of the allowance for credit losses.

However, the Company has decided to adopt CECL as of January 1, 2021.

This will change the current method of providing allowances for loan losses that are probable, which will require us to record an allowance for credit losses as of January 1, 2021 in excess of our existing allowance for loan losses, and will greatly increase the data we will need to collect and review to determine the appropriate level of the allowance for credit losses.

Although we expect the Bank and the Parent Corporation will continue to meet all capital adequacy requirements to which they are subject following recording of the impact of adoption to stockholders’

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We have also been active in competing for New York and New Jersey governmental and municipal deposits.

At December 31, 2019, governmental and municipal deposits accounted for approximately $614.5 million in deposits.

As of December 31, 2020, governmental and municipal deposits accounted for approximately $693.1 million in deposits.

The governor of New Jersey has proposed that the state form and own a bank in which governmental and municipal entities would deposit their excess funds, with the state-owned bank then financing small businesses and municipal projects in New Jersey.

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Liquidity is required to fund various obligations, including credit commitments to borrowers, mortgage and other loan originations, withdrawals by depositors, repayment of borrowings, operating expenses, capital expenditures and dividend payments to shareholders.

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Liquidity is derived primarily from deposit growth and retention;

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sale, maturity and prepayment of investment securities;

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provided from operations, and access to other funding sources.

net cash provided from operations, and access to other funding sources.

In addition, in recent periods we have substantially increased our use of alternate deposit origination channels, such as brokered deposits, including reciprocal deposit services, and internet listing services.

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Future results of operations will depend in large part on our ability to successfully integrate the operations of the acquired institutions and retain the customers of those institutions.

If we are unable to successfully manage the integration of the separate cultures, customer bases and operating systems of the acquired institutions, and any other institutions that may be acquired in the future, our results of operations may be adversely affected.

If we are unable to successfully manage the integration of the separate cultures, customer bases

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and operating systems of the acquired institutions, and any other institutions that may be acquired in the future, our results of operations may be adversely affected.

In addition, to successfully manage substantial growth, we may need to increase non-interest expenses through additional personnel, leasehold and data processing costs, among others.

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Attractive acquisition opportunities may not be available to us in the future.

We expect that other banking and financial service companies, many of which have significantly greater resources than us, will compete with us in acquiring other financial institutions if we pursue such acquisitions.

We expect that other banking and financial service companies, many of which have significantly greater resources than us, will compete with us in acquiring other target companies if we pursue such acquisitions.

This competition could increase prices for potential acquisitions that we believe are attractive.

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Finally, health related events, such as a viral pandemic, could adversely affect the business of our customers and our local economies, thereby adversely affecting our results of operations.

We may be adversely affected by changes in U.S.

tax laws related to the Tax Cuts and Jobs Act.

Changes in tax laws contained in The Tax Cuts and Jobs Act, enacted in December 2017, include a number of provisions that have an impact on the banking industry, borrowers and the market for single-family residential real estate.

We may be adversely affected by changes in Federal tax laws.

Our business may be adversely affected by changes in tax laws.

For example, changes in tax laws contained in The Tax Cuts and Jobs Act, enacted in December 2017, include a number of provisions that have an impact on the banking industry, borrowers and the market for single-family residential real estate.

Changes include (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans, (ii) the elimination of interest deductions for home equity loans, (iii) a limitation on the deductibility of business interest expense and (iv) a limitation on the deductibility of property taxes and state and local income taxes.

The changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand for such loans in the future and could make it harder for borrowers to make their loan payments.

In addition, these changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes, such as New Jersey.

In addition, these changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes, such as New Jersey and New York.

If home ownership becomes less attractive, demand for mortgage loans could decrease.

The value of the properties securing loans in the loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in the provision for loan losses, which would reduce profitability and could have a material adverse effect on the Company’s business, financial condition and results of operations.

In addition, the incoming Biden administration has discussed raising corporate income tax rates.

Any increase in our federal income tax rates could adversely impact our results of operations.

Recent New Jersey legislative changes may increase our tax expense.

In connection with adopting the 2019 fiscal year budget, the New Jersey legislature adopted, and the Governor signed, legislation that will increase our state income tax liability and could increase our overall tax expense.

The legislation imposes a temporary surtax on corporations earning New Jersey allocated income in excess of $1 million of 2.5% for tax years beginning on or after January 1, 2018 through December 31, 2019, and of 1.5% for tax years beginning on or after January 1, 2020 through December 31, 2021.

The legislation also requires combined filing for members of an affiliated group for tax years beginning on or after January 1, 2019, changing New Jersey’s current status as a separate return state, and limits the deductibility of dividends received.

In 2019, New Jersey adopted legislation that will increase our state income tax liability and could increase our overall tax expense.

The legislation imposed a temporary surtax on corporations earning New Jersey allocated income in excess of $1 million of 2.5% for tax years beginning on or after January 1, 2018 through December 31, 2019, and of 1.5% for tax years beginning on or after January 1, 2020 through December 31, 2021.

However, in 2020, this surtax was extended through December 31, 2023, at the 2.5% level.

The legislation also required combined filing for members of an affiliated group for tax years beginning on or after January 1, 2019, changing New Jersey’s current status as a separate return state, and limits, to varying degrees related to the Company’s size, operating area and organizational structure, the deductibility of dividends received.

These changes are not temporary.

Although regulations implementing the legislative changes have not yet been issued, it is possible that the Company will lose the benefit of at least certain of its tax management strategies, and, if so, our total tax expense will likely increase.

Although regulations implementing the legislative changes have not yet

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been issued, it is possible that the Company will lose the benefit of at least certain of its tax management strategies, and, if so, our total tax expense will likely increase.

The Company will be subject to heightened regulatory requirements if total assets exceed $10 billion.

The Company’s total assets were $6.2 billion at December 31, 2019 and approximately $7.1 billion at January 2, 2020 after closing on the BNJ acquisition.

The Company’s total assets were $7.5 billion as of December 31, 2020.

Banks with assets in excess of $10 billion are subject to requirements imposed by the Dodd-Frank Act and its implementing regulations, including:

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Upon reaching this threshold, the Company faces the risk of failing to meet these requirements, which may negatively impact results of operations and financial condition.

While the effect of any presently contemplated or future changes in the laws or regulations or their interpretations would have is unpredictable, these changes could be materially adverse to the Company’s investors.

While the effect of any presently contemplated or future changes in the laws or regulations or their interpretations would have been unpredictable, these changes could be materially adverse to the Company’s investors.

Reforms to and uncertainty regarding LIBOR may adversely affect the business.

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Risks Applicable to the Banking Industry Generally:

Our allowance for loan losses and allowance for credit losses beginning January 1, 2020 may not be adequate to cover actual losses.

Like all financial institutions, we maintain an allowance for loan losses and allowance for credit losses beginning January 1, 2020 to provide for loan defaults and nonperformance.

Our allowance for loan losses and allowance for credit losses may not be adequate to cover actual losses.

Like all financial institutions, we maintain an allowance for loan losses and allowance for credit losses to provide for loan defaults and nonperformance.

The process for determining the amount of the allowance is critical to our financial results and condition.

It requires difficult, subjective and complex judgments about the future, including the impact of national and regional economic conditions on the ability of our borrowers to repay their loans.

If our judgment proves to be incorrect, our allowance for loan losses may not be sufficient to cover losses in our loan portfolio.

Further, state and federal regulatory agencies, as an integral part of their examination process, review our loans and allowance and may require an increase in our allowance for loan losses and allowance for credit losses beginning January 1, 2020.

If our judgment proves to be incorrect, our allowance may not be sufficient to cover losses in our loan portfolio.

Further increases to the allowance could adversely affect our earnings.

Changes in interest rates may adversely affect our earnings and financial condition.

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Remote deposit capture.

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Our ability to compete successfully in the future will depend, to a certain extent, on whether we can anticipate and respond to technological changes.

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Unresolved Staff Comments

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors