ConnectOne Bancorp, Inc. 10-K

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Security Market Information The common stock of the Company is traded on the NASDAQ Global Select Market under the symbol “CNOB”. As of December 31, 2020, the Company had 729 stockholders of record, excluding beneficial owners for whom Cede & Company or others act as nominees. Share Repurchase Program Historically, repurchases have been made from time to time as, in the opinion of management, market conditions warranted, in the open market or in privately negotiated transactions. In March 2019, the Board of Directors of the Company approved a share repurchase program for up to 1,200,000 shares. The Company may repurchase shares from time to time in the open market, in privately negotiated share purchases or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission and applicable federal securities laws. The share repurchase plan does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company's discretion. During the year ended December 31, 2020, the Company repurchased a total of 54,693 shares. As of December 31, 2020, shares remaining for repurchase under the program were 605,289. The following table details share repurchases for the year 2020: Total Number of Shares Purchased Average Price Paid per Share Cumulative Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs 659,982 First quarter 2020 54,693 $ 16.61 13,000 605,289 During the first quarter of 2020, the Company suspended its share repurchase program due to the potential risks of COVID-19. On January 26, 2021, the Board of Directors lifted such suspension. Dividends Federal laws and regulations contain restrictions on the ability of the Parent Corporation and the Bank to pay dividends. For information regarding restrictions on dividends, see Part I, Item 1, “Business” and Part II, Item 8, “Financial Statements and Supplementary Data”, Note 20 of the Notes to Consolidated Financial Statements.” Stockholders Return Comparison Set forth on the following page is a line graph presentation comparing the cumulative stockholder return on the Parent Corporation’s common stock, on a dividend reinvested basis, against the cumulative total returns of the NASDAQ Composite and the KBW Bank Index for the period from December 31, 2015 through December 31, 2020. - 25 - Table of Contents COMPARE 5-YEAR CUMULATIVE TOTAL RETURN AMONG CONNECTONE BANCORP INC. NASDAQ AND KBW BANK INDEX   Assumes $100 Invested on December 31, 2015, with Dividends Reinvested Year Ended December 31, 2020 COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS Fiscal Year Ending Company/Index/Market 12/31/15 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 ConnectOne Bancorp, Inc. 100.00 141.29 141.96 118.47 145.79 114.58 NASDAQ 100.00 108.97 141.36 137.39 187.87 272.51 KBW Bank Index 100.00 128.51 152.41 125.42 170.72 153.12 - 26 - Table of Contents Item 6. Selected Financial Data The following tables set forth selected consolidated financial data as of the dates and for the periods presented. The selected consolidated statement of financial condition data as of December 31, 2020 and 2019 and the selected consolidated summary of income data for the years ended December 31, 2020, 2019 and 2018 have been derived from our audited consolidated financial statements and related notes that we have included elsewhere in this Annual Report. The selected consolidated statement of financial condition data as of December 31, 2018, 2017, 2016 and the selected consolidated summary of income data for the years ended December 31, 2017 and 2016 have been derived from audited consolidated financial statements that are not presented in this Annual Report. The selected historical consolidated financial data as of any date and for any period are not necessarily indicative of the results that may be achieved as of any future date or for any future period. You should read the following selected statistical and financial data in conjunction with the more detailed information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes that we have presented elsewhere in this Annual Report. - 27 - Table of Contents SUMMARY OF SELECTED STATISTICAL INFORMATION AND FINANCIAL DATA As of or For the Years Ended December 31, 2020 2019 2018 2017 2016 (dollars in thousands, except share data) Selected Statement of Financial Condition Data Total assets $ 7,547,339 $ 6,174,032 $ 5,462,092 $ 5,108,442 $ 4,426,348 Loans receivable 6,236,307 5,113,527 4,541,092 4,171,456 3,475,832 Allowance for loan losses 79,226 38,293 34,954 31,748 25,744 Securities – available-for-sale 487,955 404,701 412,034 435,284 353,290 Goodwill and other intangible assets 219,349 168,034 147,646 148,273 148,997 Borrowings 425,954 500,293 600,001 670,077 476,280 Subordinated debt (net of issuance costs) 202,648 128,885 128,556 54,699 54,534 Deposits 5,959,224 4,767,542 4,092,092 3,795,128 3,344,271 Tangible common stockholders’ equity (1) 695,961 563,156 466,281 417,164 325,127 Total stockholders’ equity 915,310 731,190 613,927 565,437 531,032 Average total assets 7,453,474 6,014,535 5,159,567 4,629,380 4,236,758 Average common stockholders’ equity 880,720 705,496 586,727 553,390 491,110 Dividends Cash dividends paid on common stock $ 14,317 $ 12,160 $ 9,664 $ 9,612 $ 9,067 Dividend payout ratio 20.08 % 16.57 % 16.01 % 22.24 % 29.19 % Cash dividends per common share $ 0.27 $ 0.36 $ 0.30 $ 0.30 $ 0.30   Selected Statement of Income Data Interest income $ 308,200 $ 271,484 $ 216,133 $ 181,324 $ 161,241 Interest expense   (70,209 )   (85,165 )   (58,918 )   (36,255 )   (31,096 ) Net interest income 237,991 186,319 157,215 145,069 130,145 Provision for loan losses   (41,000 )   (8,100 )   (21,100 )   (6,000 )   (38,700 ) Net interest income after provision for loan losses​​ 196,991 178,219 136,115 139,069 91,445 Noninterest income 14,000 8,035 5,739 8,204 9,920 Noninterest expense   (121,001 )   (92,228 )   (70,720 )   (78,759 )   (58,507 ) Income before income tax expense 90,390 94,026 71,134 68,514 42,858 Income tax expense   (19,101 )   (20,631 )   (10,782 )   (25,294 )   (11,776 ) Net income 71,289 73,395 60,352 43,220 31,082 Preferred stock dividends   -   -   -   -   (22 ) Net income available to common stockholders $ 71,289 $ 73,395 $ 60,352 $ 43,220 $ 31,060 (1) This measure is not recognized under generally accepted accounting principles in the United States (“GAAP”) and is therefore considered to be a non-GAAP financial measure. See –“Non-GAAP Reconciliation Table” for a reconciliation of this measure to its most comparable GAAP measure. - 28 - Table of Contents As of or For the Years Ended December 31, 2020 2019 2018 2017 2016 (dollars in thousands, except share data) Per Common Share Data Basic earnings per share $ 1.80 $ 2.08 $ 1.87 $ 1.35 $ 1.02 Diluted earnings per share 1.79 2.07 1.86 1.34 1.01 Book value per common share 23.01 20.85 18.99 17.63 16.62 Tangible book value per common share (1) 17.49 16.06 14.42 13.01 11.96   Selected Performance Ratios Return on average assets 0.96 % 1.22 % 1.17 % 0.93 % 0.73 % Return on average common stockholders’ equity 8.09 10.40 10.29 7.81 6.30 Return on average tangible common equity (1) 10.80 13.61 13.76 10.68 9.09 Net interest margin 3.46 3.35 3.28 3.45 3.38   Selected Asset Quality Ratios as a % of Loans Receivable: Nonaccrual loans (excluding loans held-for-sale) 0.99 % 0.97 % 1.14 % 1.57 % 0.16 % Loans 90 days or greater past due and still accruing (PCI) 0.21 0.06 0.04 0.04 0.15 Performing TDRs 0.38 0.42 0.21 0.36 0.38 Allowance for loan losses 1.27 0.75 0.77 0.76 0.74   Nonperforming assets (2) to total assets 0.82 % 0.80 % 0.95 % 1.29 % 1.57 % Allowance for loan losses to nonaccrual loans (excluding tax medallion loans) 204.9 147.0 146.8 168.4 449.0 Net loan charge-offs to average loans (3) 0.00 0.10 0.41 0.00 1.18   Company Capital Ratios Leverage ratio 9.51 % 9.54 % 9.34 % 8.92 % 9.29 % Common equity Tier 1 risk-based ratio 10.79 9.95 9.75 9.15 9.74 Risk-based Tier 1 capital ratio 10.87 10.04 9.86 9.26 9.87 Risk-based capital ratio 15.08 12.96 13.15 11.04 11.78 Tangible common equity to tangible assets (1) 9.50 9.38 8.77 8.41 8.93 (1) These measures are not measures recognized under generally accepted accounting principles in the United States (“GAAP”), and are therefore considered to be non-GAAP financial measures. See –“Non-GAAP Reconciliation Table” for a reconciliation of these measurers to their most comparable GAAP measures. (2) Nonperforming assets are defined as nonaccrual loans, nonaccrual loans held-for-sale, and other real estate owned. (3) Charge-offs in 2019, 2018 and 2016 included $1.0 million, $17.0 million and $36.5 million, respectively, related to the taxi medallion portfolio. - 29 - Table of Contents Non-GAAP Reconciliation Table As of December 31, 2020 2019 2018 2017 2016 (dollars in thousands, except per share data) Tangible common equity and tangible common equity/tangible assets Common stockholders’ equity $ 915,310 $ 731,190 $ 613,927 $ 565,437 $ 531,032 Less: goodwill and other intangible assets   219,349   168,034   147,646   148,273   148,997 Tangible common stockholders’ equity $ 695,961 $ 563,156 $ 466,281 $ 417,164 $ 382,035   Total assets $ 7,547,339 $ 6,174,032 $ 5,462,092 $ 5,108,442 $ 4,426,348 Less: goodwill and other intangible assets   219,349   168,034   147,646   148,273   148,997 Tangible assets $ 7,327,990 $ 6,005,998 $ 5,314,446 $ 4,960,169 $ 4,277,351   Tangible common equity ratio 9.50 % 9.38 % 8.77 % 8.41 % 8.93 %   Tangible book value per common share Book value per common share $ 23.01 $ 20.85 $ 18.99 $ 17.63 $ 16.62 Less: goodwill and other intangible assets   5.52   4.79   4.57   4.62   4.66 Tangible book value per common share $ 17.49 $ 16.06 $ 14.42 $ 13.01 $ 11.96   Return on average tangible common equity Net income available to common stockholders $ 71,289 $ 73,395 $ 60,352 $ 43,220 $ 31,060   Average common stockholders’ equity $ 880,720 $ 705,496 $ 586,727 $ 553,390 $ 491,110 Less: goodwill and other intangible assets   220,570   166,116   147,970   148,649   149,425 Average tangible common stockholders’ equity $ 660,150 $ 539,380 $ 438,757 $ 404,741 $ 341,685   Return on average common stockholders’ equity 8.09 % 10.40 % 10.29 % 7.81 % 6.32 %   Return on average tangible common stockholders’ equity 10.80 % 13.61 % 13.76 % 10.68 % 9.09 % - 30 - Table of Contents Item 7. Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing under Item 8 of this report, and statistical data presented in this document. Cautionary Statement Concerning Forward-Looking Statements See Item 1 of this Annual Report on Form 10-K for information regarding forward-looking statements. Critical Accounting Policies and Estimates Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Accounting policies considered critical to our financial results include the allowance for loan losses and related provision, income taxes, goodwill and business combinations. For information on our significant accounting policies, see Note 1a in the Notes to Consolidated Financial Statements. Allowance for Loan Losses and Related Provision The allowance for loan losses represents management’s estimate of probable incurred loan losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated probable incurred losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the Company’s Consolidated Statements of Condition. The evaluation of the adequacy of the allowance for loan losses includes, among other factors, an analysis of historical loss rates by loan category applied to current loan totals. However, actual loan losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss percentages, which are established based upon a limited number of potential loss classifications. The allowance for loan losses is established through a provision for loan losses charged to expense. Management believes that the current allowance for loan losses will be adequate to absorb probable incurred loan losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the originated loan portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and specific problem loans and current economic conditions which may affect our borrowers’ ability to pay. The evaluation also details historical losses by loan category and the resulting loan loss rates which are projected for current loan total amounts. Loss estimates for specified problem loans are also detailed. Various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to make additional provisions for loan losses based upon information available to them at the time of their examination. All of the factors considered in the analysis of the adequacy of the allowance for loan losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 1a of the Notes to Consolidated Financial Statements. Income Taxes The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact the Company’s consolidated financial condition or results of operations. Note 1 (under the caption “Use of Estimates”) and Note 11 of the Notes to Consolidated Financial Statements include additional discussion on the accounting for income taxes. - 31 - Table of Contents Goodwill The Company has adopted the provisions of FASB ASC 350-10-05, which requires that goodwill be reported separate from other intangible assets in the Consolidated Statements of Condition and not be amortized but tested for impairment annually or more frequently if indicators arise for impairment. The goodwill impairment evaluation involves significant estimates and subjective assumptions, which requires Management’s judgment on factors such as discount rate, prospective financial information, earnings retention rate and peer group market data. Changes in these estimates and assumptions could have a significant impact on the conclusions reached regarding whether impairment occurred and the amount of impairment. No impairment charge was deemed necessary for the years ended December 31, 2020, 2019 and 2018. Business Combinations The Company accounts for business combinations under the purchase method of accounting. The application of this method of accounting requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are amortized, accreted or depreciated from those that are recorded as goodwill. Our estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions that we believe to be reasonable, and whenever necessary, include assistance from independent third-party appraisal and valuation firms. Overview and Strategy We serve as a holding company for the Bank, which is our primary asset and only operating subsidiary. We follow a business plan that emphasizes the delivery of customized banking services in our market area to customers who desire a high level of personalized service and responsiveness. The Bank conducts a traditional banking business, making commercial loans, consumer loans and residential and commercial real estate loans. In addition, the Bank offers various non-deposit products through non-proprietary relationships with third party vendors. The Bank relies upon deposits as the primary funding source for its assets. The Bank offers traditional deposit products. Many of our customer relationships start with referrals from existing customers. We then seek to cross sell our products to customers to grow the customer relationship. For example, we will frequently offer an interest rate concession on credit products for customers that maintain a noninterest-bearing deposit account at the Bank. This strategy has helped maintain our funding costs and the growth of our interest expense even as we have substantially increased our total deposits. It has also helped fuel our significant loan growth. We believe that the Bank’s significant growth and increasing profitability demonstrate the need for and success of our brand of banking. Our results of operations depend primarily on our net interest income, which is the difference between the interest earned on our interest-earning assets and the interest paid on funds borrowed to support those assets, primarily deposits. Net interest margin is the difference between the weighted average rate received on interest-earning assets and the weighted average rate paid to fund those interest-earning assets, which is also affected by the average level of interest-earning assets as compared with that of interest-bearing liabilities. Net income is also affected by the amount of noninterest income and noninterest expenses. General The following discussion and analysis present the more significant factors affecting the Company’s financial condition as of December 31, 2020 and 2019 and results of operations for each of the years in the three-year period ended December 31, 2020. The MD&A should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and other information contained in this report. - 32 - Table of Contents Operating Results Overview Net income for the year ended December 31, 2020 was $71.3 million, a decrease of $2.1 million, or 2.9%, compared to net income of $73.4 million for 2019. Diluted earnings per share were $1.79 for 2020, a 13.5% decrease from $2.07 for 2019. The change in net income from 2019 to 2020 was attributable to the following: • Increased provision for loan losses of $32.9 million was primarily due to the continued economic uncertainties associated with the COVID-19 pandemic. • Increase in noninterest expenses of $28.8 million, primarily due to an increase in salaries and employee benefits of $9.9 million, merger expenses of $5.7 million, occupancy and equipment expense of $4.2 million and professional and consulting expenses of $1.9 million. These increases are mainly attributable to the acquisition of BNJ. Additionally, the Company saw an increase in value of acquisition price of $2.3 million related to its BoeFly acquisition. • Increased net interest income of $51.7 million primarily due to the acquisition of BNJ and an 11-basis point widening of the net interest margin. • Increase in noninterest income of $6.4 million primarily resulting from an increase in deposit, loan, and other income, increase in bank owned life insurance and net gains on sale of loans held-for-sale. • Decrease in income tax expense of $1.5 million resulting primarily from a decrease in income from taxable sources. Net income for the year ended December 31, 2019 was $73.4 million, an increase of $13.0 million, or 21.6%, compared to net income of $60.4 million for 2018. Diluted earnings per share were $2.07 for 2019, an 11.3% increase from $1.86 for 2018. The change in net income from 2018 to 2019 was attributable to the following: • Increased net interest income of $29.1 million primarily due to the acquisition of GHB. • Decreased provision for loan losses of $13.0 million primarily due to $17.0 million increase in specific reserves (then concurrently charged-off) within the taxi medallion loan portfolio in 2018. • Increase in noninterest income of $2.6 million primarily resulting from an increase in deposit, loan, and other income, which included higher overdrafts fees, and income related to the operations of BoeFly. • Increase in noninterest expenses of $21.8 million, primarily due to an increase in salaries and employee benefits of $9.6 million, merger expenses of $7.6 million and professional and consulting expenses of $1.9 million. The increases are mainly attributable to the acquisition of GHB. • Increase in income tax expense of $9.8 million resulting primarily from an increase in income from taxable sources. Net Interest Income Fully taxable equivalent net interest income for 2020 totaled $239.9 million, an increase of $51.9 million, or 27.6%, from 2019. The increase in net interest income was due to an increase in average interest-earning assets, which grew by 23.6% to $6.9 billion and a widening of 11 basis-points in the net interest margin. The widening of the net interest margin was mainly attributable to lower cost of funds, offset by higher average cash balances and lower yields on loans and securities. Average total loans, which includes loans held-for-sale, increased by 22.8% to $6.2 billion in 2020 from $5.0 billion in 2019. The increase in average total loans is primarily attributable to the acquisition of BNJ. Fully taxable equivalent net interest income for 2019 totaled $188.0 million, an increase of $28.8 million, or 18.1%, from 2018. The increase in net interest income was due to an increase in average interest-earning assets, which grew by 15.7% to $5.6 billion and a widening of 7 basis-points in the net interest margin. The widening of the net interest margin was mainly attributable to increases in both rates and the volume of loans, offset by higher cost of funds. Average total loans, which includes loans held-for-sale, increased by 16.6% to $5.0 billion in 2019 from $4.3 billion in 2018. The increase in average total loans is primarily attributable to the acquisition of GHB. - 33 - Table of Contents Average Balance Sheets The following table sets forth certain information relating to our average assets and liabilities for the years ended December 31, 2020, 2019 and 2018 and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Years Ended December 31, 2020 2019 2018 (Tax-Equivalent Basis) Average Balance Income/ Expense Yield/ Rate Average Balance Income/ Expense Yield/ Rate Average Balance Income/ Expense Yield/ Rate (dollars in thousands) ASSETS Interest-earning assets: Investment securities (1) (2) $ 444,070 $ 9,996 2.25 % $ 478,478 $ 13,885 2.90 % $ 432,780 $ 12,629 2.92 % Loans receivable and loans held-for-sale (2) (3) (4) 6,198,753 297,756 4.80 % 5,049,458 256,299 5.08 % 4,330,874 202,578 4.68 % Federal funds sold and interest-earning deposits with banks 267,824 694   0.22 % 55,819 1,167   2.09 % 58,631 839 1.43 % Restricted investment in bank stocks   27,185   1,642   6.04 %   27,389   1,778   6.49 %   29,200   2,012   6.89 % Total interest-earning assets 6,937,832 310,088 4.47 % 5,611,144 273,129 4.87 % 4,851,485 218,058 4.49 % Noninterest-earning assets: Allowance for loan losses (59,271 ) (37,433 ) (33,449 ) Noninterest-earning assets   574,913   440,824   341,531 Total assets $ 7,453,474 $ 6,014,535 $ 5,159,567   LIABILITIES & STOCKHOLDERS’ EQUITY Time deposits $ 1,792,568 34,813 1.94 % $ 1,549,700 37,177 2.40 % $ 1,278,821 24,158 1.89 % Other interest-bearing deposits   2,819,908   17,573 0.62 %   2,267,812   28,393 1.25 %   1,838,025   15,778 0.86 % Total interest-bearing deposits 4,612,476 52,386 1.14 % 3,817,512 65,570 1.72 % 3,116,846 39,936 1.28 %   Borrowings 537,773 8,435 1.57 % 502,314 12,079 2.40 % 562,728 11,639 2.07 % Subordinated debentures 169,139 9,254 5.47 % 128,708 7,371 5.73 % 125,156 7,189 5.74 % Capital lease obligation   2,233   134 6.00 %   2,414   145 6.01 %   2,571   154 5.99 % Total interest-bearing liabilities 5,321,621 70,209 1.32 % 4,450,948 85,165 1.91 % 3,807,301 58,918 1.55 % Noninterest-bearing deposits 1,195,547 819,917 745,548 Other liabilities 55,586 38,174 19,991 Stockholders’ equity   880,720   705,496   586,727 Total liabilities and stockholders’ equity $ 7,453,474 $ 6,014,535 $ 5,159,567   Net interest income/interest rate spread (5) 239,879 3.15 % 187,964 2.96 % 159,140 2.94 % Tax-equivalent adjustment   (1,888 )   (1,645 )   (1,925 ) Net interest income as reported $ 237,991 $ 186,319 $ 157,215 Net interest margin (6) 3.46 % 3.35 % 3.28 %   (1) Average balances are based on amortized cost. (2) Interest income is presented on a tax equivalent basis using 21% federal tax rate. (3) Includes loan fee income and accretion of purchase accounting adjustments. (4) Loans include nonaccrual loans. (5) Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax equivalent basis. (6) Represents net interest income on a tax equivalent basis divided by average total interest-earning assets. - 34 - Table of Contents Rate/Volume Analysis The following table presents, by category, the major factors that contributed to the changes in net interest income. Changes due to both volume and rate have been allocated in proportion to the relationship of the dollar amount change in each. 2020/2019 Increase (Decrease) Due to Change in: 2019/2018 Increase (Decrease) Due to Change in: Average Volume   Average Rate   Net Change Average Volume   Average Rate   Net Change (dollars in thousands) Interest income: Investment securities: $ (775 ) $ (3,114 ) $ (3,889 ) $ 1,326 $ (70 ) $ 1,256 Loans receivable and loans held- for-sale​​ 55,206 (13,749 ) 41,457 36,474 17,247 53,721 Federal funds sold and interest- earnings deposits with banks (549 ) (1,022 ) (473 ) (59 ) 387 328 Restricted investment in bank stocks​​   (12 )   (124 )   (136 )   (118 )   (116 )   (234 ) Total interest income: $ 54,968 $ (18,009 ) $ 36,959 $ 37,623 $ 17,448 $ 55,071   Interest expense: Savings, NOW,  money market, interest checking $ 3,441 $ (14,261 ) $ (10,820 ) $ 5,416 $ 7,199 $ 12,615 Time deposits 4,717 (7,081 ) (2,364 ) 6,498 6,521 13,019 Borrowings and subordinated debentures​​ 2,768 (4,529 ) (1,761 ) (1,250 ) 1,872 622 Capital lease obligation   (11 )   -   (11 )   (9 )   -   (9 ) Total interest expense: $ 10,915 $ (25,871 ) $ (14,956 ) $ 10,655 $ 15,592 $ 26,247   Net interest income: $ 44,053 $ 7,862 $ 51,915 $ 26,968 $ 1,856 $ 28,824 Provision for Loan Losses In determining the provision for loan losses, management considers national and local economic trends and conditions; trends in the portfolio including orientation to specific loan types or industries; experience, ability and depth of lending management in relation to the complexity of the portfolio; effects of changes in lending policies, trends in volume and terms of loans; levels and trends in delinquencies, impaired loans and net charge-offs and the results of independent third party loan review. For the year ended December 31, 2020, the provision for loan losses was $41.0 million, an increase of $32.9 million, compared to the provision for loan losses of $8.1 million for 2019. The increase was due to the continued economic uncertainties associated with the COVID-19 pandemic and increases to specific reserves within our commercial portfolio. For the year ended December 31, 2019, the provision for loan losses was $8.1 million, a decrease of $13.0 million, compared to the provision for loan losses of $21.1 million for 2018. The decline was due primarily to specific reserves (and concurrent charge-offs) of $17.0 million related to the taxi medallion loans in 2018. With the adoption of CECL beginning on January 1, 2021, provision expense may become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance. See Note 1b to our audited financial statements included herein. - 35 - Table of Contents Noninterest Income Noninterest income for the full-year 2020 increased by $6.4 million, or 79.2%, to $14.4 million from $8.0 million in 2019. The increase was primarily the result of a $3.0 million increase in deposit, loan and other income. This increase was largely attributable to loan referral fee income of $2.3 million generated by BoeFly as a result of its participation in the PPP program. Additionally, increases in net gains on sale of loans held-for-sale of $1.6 million and increases in bank owned life insurance of $1.5 million contributed to the overall increase in noninterest income. Noninterest income for the full-year 2019 increased by $2.6 million, or 46.8%, to $8.0 million from $5.5 million in 2018. The increase was primarily the result of a $1.4 million increase in deposit, loan and other income. This increase was mainly attributable to higher overdraft fees and income related to the operations of BoeFly. Increase in net gains on sale of loans held-for-sale of $0.5 million was mainly attributable to increases in gains on mortgage loan sales of $0.3 million and net gains on the sale of a pool of commercial real estate loans during the third quarter 2019 of $0.2 million. Other increases in noninterest income include an increase of $0.4 million in BOLI and increase of $0.6 million in net gains on equity securities, offset by net losses in sales of securities available-for-sale of $0.3 million. Noninterest Expense Noninterest expenses for the full-year 2020 increased by $28.8 million, or 31.2%, to $121.0 million from $92.2 million in 2019. The increase was primarily attributable to increases in salaries and employee benefits of $9.9 million, merger expenses of $5.7 million, occupancy and equipment of $4.2 million, increase in value of acquisition price of $2.3 million, FDIC insurance expense of $2.0 million, professional and consulting of $1.9 million and amortization of core deposit intangibles of $1.1 million. These increases were mainly the result of the acquisition of BNJ. Noninterest expenses for the full-year 2019 increased by $21.8 million, or 30.9%, to $92.2 million from $70.5 million in 2018. The increase was primarily attributable to increases in salaries and employee benefits of $9.6 million, merger expenses of $7.6 million, professional and consulting of $1.9 million, and occupancy and equipment of $1.4 million. These increases were mainly the result of the acquisitions of GHB and BNJ. In addition, the Bank had a loss on extinguishment of debt of $1.0 million during the second quarter of 2019. Lastly, there was a decrease in FDIC expense of $1.1 million that was attributable to the Bank receiving a small bank credit of approximately $1.3 million during the second quarter of 2019. Income Taxes Income tax expense was $19.1 million for 2020 compared to $20.6 million for 2019 and $10.8 million for 2018. The slight decrease in income tax expense in 2020 when compared to 2019 was primarily the result of lower taxable income. The higher level of income tax expense in 2019 when compared to 2018 was primarily attributable to higher income before taxes and the negative impact of recent tax legislation in New Jersey. The effective tax rates were 21.1% in 2020, 21.9% in 2019 and 15.2% for 2018. For a more detailed description of income taxes see Note 11 of the Notes to Consolidated Financial Statements. Financial Condition Overview As of December 31, 2020, the Company’s total assets were $7.5 billion, an increase of $1.4 billion from December 31, 2019. Total loans (including loans held-for-sale) were $6.2 billion, an increase of $1.1 billion from December 31, 2019. Deposits were $6.0 billion, an increase of $1.2 billion from December 31, 2019. These increases were primarily the result of the acquisition of BNJ. As of December 31, 2019, the Company’s total assets were $6.2 billion, an increase of $712 million from December 31, 2018. Total loans (including loans held-for-sale) were $5.1 billion, an increase of $606 million from December 31, 2018. Deposits were $4.8 billion, an increase of $675 million from December 31, 2018. These increases were primarily the result of the acquisition of GHB. Loan Portfolio The Bank’s lending activities are generally oriented to small-to-medium sized businesses, high net worth individuals, professional practices and consumer and retail clients living and working in the Bank’s metropolitan, New York market area, consisting of Bergen, Union, Morris, Essex, Hudson, Mercer and Monmouth counties, New Jersey, as well as NYC’s five boroughs, Nassau Rockland, Orange and Westchester counties, in New York. The Bank has not made loans to borrowers outside of the United States. The Bank believes that its strategy of high-quality client service, competitive rate structures and selective marketing have enabled it to gain market share. Commercial loans are loans made for business purposes and are primarily secured by collateral such as cash balances with the Bank, marketable securities held by or under the control of the Bank, business assets including accounts receivable, inventory and equipment and liens on commercial and residential real estate. Commercial construction loans are loans to finance the construction of commercial or residential properties secured by first liens on such properties. Commercial real estate loans include loans secured by first liens on completed commercial properties, including multi-family properties, to purchase or refinance such properties. Residential mortgages include loans secured by first liens on residential real estate and are generally made to existing clients of the Bank to purchase or refinance primary and secondary residences. Home equity loans and lines of credit include loans secured by first or second liens on residential real estate for primary or secondary residences. Consumer loans are made to individuals who qualify for auto loans, cash reserve, credit cards and installment loans. - 36 - Table of Contents Gross loans as of December 31, 2020 totaled $6.3 billion, an increase of $1.2 billion, or 23.8%, over gross loans as of December 31, 2019 of $5.1 billion. The increase in gross loans was primarily attributable to the acquisition of BNJ. The largest component of the gross loan portfolio as of December 31, 2020 and December 31, 2019 was commercial real estate loans. Commercial real estate loans as of December 31, 2020 totaled $3.8 billion, an increase of $742 million, or 24.4%, compared to commercial real estate loans as of December 31, 2019 of $3.0 billion. Commercial loans totaled $1.5 billion as of December 31, 2020, an increase of $392 million, or 34.7%, compared to commercial loans as of December 31, 2019 of $1.1 billion. Included in commercial loans were PPP loans of $397.5 million, contributing to the increase. Commercial construction loans as of December 31, 2020 totaled $618 million, a decrease of $5.6 million, or 0.9%, compared to construction loans as of December 31, 2019 of $623 million. Residential real estate loans totaled $323 million as of December 31, 2020, an increase of $3 million, or 0.8%, compared to residential real estate loans as of December 31, 2019 of $320 million. Consumer loans as of December 31, 2020 totaled $2 million, a decrease of $1 million, or 44.3%, compared to consumer loans of $3 million as of December 31, 2019. The growth in our gross loans for 2020 was primarily attributable to the acquisition of BNJ. The following table sets forth the classification of our loans by loan portfolio segment for the periods presented. December 31, 2020 2019 2018 2017 2016 (dollars in thousands) Commercial (1) $ 1,521,967 $ 1,129,661 $ 988,758 $ 824,082 $ 553,576 Commercial real estate 3,783,550 3,041,959 2,778,167 2,592,909 2,204,710 Commercial construction 617,747 623,326 465,389 483,216 486,228 Residential real estate 322,564 320,020 309,991 271,795 232,547 Consumer   1,853   3,328   2,594   2,808   2,380 Gross loans 6,247,681 5,118,294 4,544,899 4,174,810 3,479,441 Net deferred (fees) costs   (11,374 )   (4,767 )   (3,807 )   (3,354 )   (3,609 ) Loans receivable 6,236,307 5,113,527 4,541,092 4,171,456 3,475,832 Allowance for loan losses   (79,226 )   (38,293 )   (34,954 )   (31,748 )   (25,744 ) Net loans receivable $ 6,157,081 $ 5,075,234 $ 4,506,138 $ 4,139,708 $ 3,450,088   (1) Included in commercial loans as of December 31, 2020 were PPP loans of $397.5 million. The following table sets forth the classification of our gross loans by loan portfolio segment and by fixed and adjustable rate loans as of December 31, 2020 by remaining contractual maturity. As of December 31, 2020, Maturing In One Year or Less After One Year through Five Years After Five Years Total (dollars in thousands) Commercial $ 518,053 $ 676,973 $ 326,941 $ 1,521,967 Commercial real estate 326,248 957,011 2,500,291 3,783,550 Commercial construction 565,827 51,920 - 617,747 Residential real estate 4,395 18,436 299,733 322,564 Consumer   1,524   241   88   1,853   Total $ 1,416,047 $ 1,704,581 $ 3,127,053 $ 6,247,681 Loans with: Fixed rates $ 335,383 $ 1,332,871 $ 1,014,087 $ 2,682,341 Variable rates   1,080,664   371,710   2,112,966   3,565,340   Total $ 1,416,047 $ 1,704,581 $ 3,127,053 $ 6,247,681 For additional information regarding loans, see Note 5 of the Notes to the Consolidated Financial Statements. - 37 - Table of Contents Asset Quality General. One of our key objectives is to maintain a high level of asset quality. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by sending late notices, as well as making personal contact with the borrower. Typically, late notices are sent approximately 10 days after the date the payment is due, followed up by direct contact with the borrower approximately 15 days after payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed, and additional efforts are made to collect the deficiency. Total loans delinquent 30 days or more are reported to the board of directors of the Bank on a monthly basis. On loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases (“nonaccrual” loans). Except for loans that are well secured and in the process of collection, it is our policy to discontinue accruing additional interest and reverse any interest accrued on any loan that is 90 days or greater past due. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to his/her ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower’s financial condition and payment record demonstrate an ability to service the debt. Real estate acquired as a result of foreclosure is classified as other real estate owned (“OREO”) until sold. OREO is recorded at the lower of cost or fair value less estimated selling costs. Costs associated with acquiring and improving a foreclosed property are usually capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs. Holding costs are charged to expense. Gains and losses on the sale of OREO are charged to operations, as incurred. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans for which the terms have been modified as a concession to the borrower due to the borrower experiencing financial difficulties are considered troubled debt restructurings (“TDR”) and are classified as impaired, unless the restructuring complies with the provisions of the CARES Act and regulatory guidance related to the COVID-19 pandamic. Loans considered to be TDRs can be categorized as nonaccrual or performing. The impairment of a loan can be measured at (1) the fair value of the collateral less costs to sell, if the loan is collateral dependent, (2) at the value of expected future cash flows using the loan’s effective interest rate, or (3) at the loan’s observable market price. Generally, the Bank measures impairment of such loans by reference to the fair value of the collateral less costs to sell. Loans that experience minor payment delays and payment shortfalls generally are not classified as impaired. Generally, impaired loans consist of nonaccrual loans and performing troubled debt restructurings. Of this group of impaired loans, loans of $250,000 and over are individually evaluated for impairment, while loans with balances less than $250,000 are collectively evaluated for impairment, and, accordingly, are not separately identified for impairment disclosures. Asset Classification. Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated an internal asset classification system, substantially consistent with Federal banking regulations, as a part of our credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “special mention.” When an insured institution classifies one or more assets, or portions thereof, as “substandard” or “doubtful,” it is required that a general valuation allowance for loan losses must be established for loan losses in an amount deemed prudent by management. General valuation allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets, or portions thereof, as “loss,” it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. A bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal bank regulators which can order the establishment of additional general or specific loss allowances. The Federal banking agencies have adopted an interagency policy statement on the allowance for loan losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Our management believes that, based on information currently available, our allowance for loan losses is maintained at a level which covers all known and probable incurred losses in the portfolio at each reporting date. However, actual losses are dependent upon future events and, as such, further additions to the level of allowances for loan losses may become necessary. - 38 - Table of Contents The table below sets forth information on our classified loans and loans designated as special mention (excluding loans held-for-sale) as of the dates presented: December 31, 2020 2019 (dollars in thousands) Classified Loans:                 Substandard $ 119,710 $ 82,315 Doubtful 215 - Loss   -   - Total classified loans 119,925 82,315 Special Mention Loans   79,868   37,009 Total classified and special mention loans $ 199,793 $ 119,324 During the year ended December 31, 2020, “substandard” loans and “doubtful” loans, which include lower credit quality loans which possess higher risk characteristics than “special mention” loans, increased from $82.3 million, or 1.6% of loans receivable, as of December 31, 2019 to $119.7 million, or 1.9% of loans receivable, as of December 31, 2020. During the year ended December 31, 2020, “special mention” loans increased to $79.9 million, or 1.3% of loans receivable from $37.0 million, or 0.7% of loans receivable, as of December 31, 2019. The increase in both substandard and special mention loans is primarily attributable to an increased level in deferrals resulting from the continued economic uncertainty regarding the ongoing pandemic. Deferred loans as of December 31, 2020 were $207.1 million, of which $166.8 million were not included in the table above. Nonperforming Loans, Performing Troubled Debt Restructurings, Past Due Loans and OREO Nonperforming loans include nonaccrual loans. Nonaccrual loans represent loans on which interest accruals have been suspended. The Company considers charging off loans, or a portion thereof, when they become contractually past due ninety days or more as to interest or principal payments or when other internal or external factors indicate that collection of principal or interest is doubtful. Performing troubled debt restructurings represent loans on which a concession was granted to a borrower, such as a reduction in interest rate to a rate lower than the current market rate for new debt with similar risks, and which are currently performing in accordance with the modified terms. For additional information regarding loans, see Note 5 of the Notes to the Consolidated Financial Statements. The following table sets forth, as of the dates indicated, the amount of the Company’s nonaccrual loans, other real estate owned (“OREO”), performing troubled debt restructurings (“TDRs”) and loans past due 90 days or greater and still accruing: As of December 31, 2020 2019 2018 2017 2016 (dollars in thousands) Nonaccrual loans $ 61,696 $ 49,481 $ 51,855 $ 65,613 $ 5,734 Nonaccrual loans (held-for-sale) - - - - 63,044 OREO   -   -   -   538   626 Total nonperforming assets (1) $ 61,696 $ 49,481 $ 51,855 $ 66,151 $ 69,404   Performing TDRs $ 23,655 $ 21,410 $ 11,165 $ 14,920 $ 13,338 Loans 90 days or greater past due and still accruing (non-PCI) $ - $ - $ - $ - $ - Loans 90 days or greater past due and still accruing (PCI) $ 12,821 $ 3,107 $ 1,647 $ 1,664 $ 5,293   (1) Nonperforming assets are defined as nonaccrual loans, nonaccrual loans held-for-sale, and other real estate owned. Nonaccrual loans (excluding loans held-for-sale) to loans receivable 0.99 % 0.97 % 1.14 % 1.57 % 0.16 % Nonperforming assets to total assets 0.82 % 0.80 % 0.95 % 1.29 % 1.57 % Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to total loans (2) 1.57 % 1.44 % 1.42 % 1.97 % 2.48 %   (2) Includes loans held-for-sale. - 39 - Table of Contents Allowance for Loan Losses and Related Provision The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. We maintain an allowance for loan losses at a level considered adequate to provide for all known and probable incurred losses in the portfolio. The level of the allowance is based on management’s evaluation of estimated losses in the portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic conditions. Loan charge-offs (i.e., loans judged to be uncollectible) are charged against the reserve and any subsequent recovery is credited. Our officers analyze risks within the loan portfolio on a continuous basis and through an external independent loan review function, and the results of the loan review function are also reviewed by our Audit Committee. A risk system, consisting of multiple grading categories for each portfolio class, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated economic conditions and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management feels deserve recognition in establishing an appropriate reserve. These estimates are reviewed at least quarterly and, as adjustments become necessary, they are recognized in the periods in which they become known. Although management strives to maintain an allowance it deems adequate, future economic changes, deterioration of borrowers’ creditworthiness, and the impact of examinations by regulatory agencies all could cause changes to our allowance for loan losses. As of December 31, 2020, the allowance for loan losses was $79.2 million, an increase of $40.9 million, or 106.9%, from $38.3 million as of December 31, 2019. The increase in the allowance for loan losses was primarily attributable to an increase in general provisioning related to economic uncertainties associated with the COVID-19 pandemic. With our adoption of CECL beginning on January 1, 2021, provision expense may become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance. During the year ended December 31, 2020, the Bank recorded net charge-offs of $0.1 million, compared with net charge-offs of $4.8 million during the year ended December 31, 2019. The allowance for loan losses as a percentage of loans receivable was 1.27% as of December 31, 2020 and 0.75% as of December 31, 2019. Excluding PPP loans receivable, which are 100% federally guaranteed, the allowance for loan losses as a percentage of loans receivable was 1.36% as of December 31, 2020. During 2019, the bank had a $2.1 million charge-off related to one commercial real estate secured credit. In 2020, a $0.8 million recovery was received for this credit. The Company is adopting ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) effective January 1, 2021. The main objective of this amendment is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendment requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to enhance their credit loss estimates. The Company’s CECL implementation efforts are continuing to focus on completion of model validation, developing new disclosures, establishing formal policies and procedures and other governance and control documentation. Based on the Company’s portfolio balances, and forecasted economic conditions as of December 31, 2020, management believes the adoption of the CECL standard will result in an increase to its total current reserves. An increase to the Company's reserve levels will include nonaccretable credit marks on PCI loans, which will be transferred into current reserves at adoption. - 40 - Table of Contents Five-Year Statistical Allowance for Loan Losses The following table reflects the relationship of loan volume, the provision and allowance for loan losses and net charge-offs for the past five years. Years Ended December 31, 2020 2019 2018 2017 2016 (dollars in thousands) Balance at the January 1, $ 38,293 $ 34,954 $ 31,748 $ 25,744 $ 26,572 Charge-offs: Commercial (1) 552 1,029 17,066 70 39,343 Commercial real estate - 3,470 915 155 107 Residential real estate 341 557 23 14 94 Consumer   7   20   7   -   29 Total charge-offs   900   5,076   18,011   239   39,573 Recoveries: Commercial 4 265 109 178 4 Commercial real estate 802 30 - 51 35 Residential real estate 23 3 2 12 3 Consumer   4   17   6   2   3 Total recoveries   833   315   117   243   45 Net charge-offs (recoveries) 67 4,761 17,894 (4) 39,528 Provision for loan losses   41,000   8,100   21,100   6,000   38,700 Balance at end of year $ 79,226 $ 38,293 $ 34,954 $ 31,748 $ 25,744 Ratio of net charge-offs (recoveries) during the year to average loans outstanding during the year 0.00 % 0.09 % 0.41 % 0.00 % 1.18 % Allowance for loan losses as a percentage of loans receivable as of December 31, 1.27 % 0.75 % 0.77 % 0.76 % 0.74 % (1) For the years ended December 31, 2019, December 31, 2018 and December 31, 2016, the loan charge-offs within the commercial loan segment included $1.0 million, $17.0 million and $36.7 million in charge-offs related to the taxi medallion portfolio, respectively. For additional information regarding loans, see Note 5 of the Notes to the Consolidated Financial Statements. Implicit in the lending function is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan being made, the creditworthiness of the borrower and prevailing economic conditions. The allowance for loan losses has been allocated in the table below according to the estimated amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within the following categories of loans as of December 31, for each of the past five years. The table below shows, for three types of loans, the amounts of the allowance allocable to such loans and the percentage of such loans to gross loans, along with the amount of the unallocated allowance. Commercial loan type shown below includes commercial, commercial real estate and construction loans. Commercial Residential Real Estate Consumer Unallocated Amount of Allowance Loans to Gross Loans Amount of Allowance Loans to Gross Loans Amount of Allowance Loans to Gross Loans Amount of Allowance Total Allowance (dollars in thousands) 2020 $ 75,967 94.8 % $ 2,687 5.2 % $ 4 0.0 % $ 568 $ 79,226 2019 36,506 93.7 % 1,685 6.3 % 3 0.1 % 99 38,293 2018 33,241 93.1 % 1,266 6.8 % 2 0.1 % 445 34,954 2017 30,090 93.4 % 1,051 6.5 % 2 0.1 % 605 31,748 2016 24,005 93.2 % 957 6.7 % 3 0.1 % 779 25,744 Investments For the year ended December 31, 2020, the average volume of investment securities, including equity securities, decreased by $34.4 million to approximately $444.1 million or 6.4% of average earning assets, from $478.5 million, or 8.5% of average earning assets, for the year ended December 31, 2019. As of December 31, 2020, the principal components of the investment portfolio are U.S. Treasury and Government Agency Obligations, Federal Agency Obligations including mortgage-backed securities, Obligations of U.S. States and Political Subdivisions, Corporate Bonds and other debt and equity securities. During the year ended December 31, 2020, rate related factors decreased investment revenue by $3.1 million, while volume related factors decreased investment revenue by $0.8 million. The tax-equivalent yield on investments decreased by 65 basis points to 2.25% from a yield of 2.90% during the year ended December 31, 2019. This was primarily due to overall declines in prevailing investment rates over the course of 2020. - 41 - Table of Contents Securities available-for-sale are a part of the Company’s interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment risk, liquidity management and other factors. The Company continues to reposition the investment portfolio as part of an overall corporate-wide strategy to produce reasonable and consistent margins where feasible, while attempting to limit risks inherent in the Company’s Consolidated Statement of Condition. As of December 31, 2020, net unrealized gains on securities available-for-sale, which are carried as a component of accumulated other comprehensive income and included in stockholders’ equity, net of tax, amounted to $7.9 million as compared with net unrealized gains of $2.7 million as of December 31, 2019. The increase in unrealized gains is predominately attributable to changes in market conditions and interest rates. For additional information regarding the Company’s investment portfolio, see Note 4, Note 16 and Note 21 of the Notes to the Consolidated Financial Statements. During 2020, there were sales totaling $19.6 million from the Company’s available-for-sale portfolio, as compared with $183.7 million in sales in 2019 and no sales in 2018. The gross realized gains or (losses) on securities sold, called or matured mounted to approximately $29 thousand in 2020, $(280) thousand in 2019 and $-0- in 2018, while there were no impairment charges in 2020, 2019 and 2018. The table below illustrates the maturity distribution and weighted average yield on a tax-equivalent basis for amortized cost of our investment securities, excluding equity securities, as of December 31, 2020, on a contractual maturity basis.   Due in 1 year or less Due after 1 year through 5 years Due after 5 years through 10 years Due after 10 years Total Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Market Value (dollars in thousands) Investment Securities Available-for-Sale Federal Agency Obligations $ - - % $ - - % $ - - % $ 37,015 2.35 % $ 37,015 2.35 % $ 38,458 Residential Mortgage Pass-through Securities 6 4.03 350 2.58 3,323 3.36 262,435 1.67 266,114 1.69 270,884 Commercial Mortgage Pass-through Securities - - - - - - 6,906 1.61 6,906 1.61 6,922 Obligations of U.S. States and Political Subdivisions​​ 2,002 3.65 8,355 4.20 12,717 4.30 115,465 3.80 138,539 3.87 142,808 Corporate Bonds and Notes 8,484 2.34 11,464 3.31 4,977 5.18 - - 24,925 3.35 25,095 Asset-backed Securities - - - - 622 0.84 2,899 0.94 3,521 0.92 3,480 Certificates of Deposit - - 149 1.53 - - - - 149 1.53 151 Other Securities   156   0.25   -   -   -   -   -   -   156   0.25   156 Total Investment Securities $ 10,648   2.56 % $ 20,318   3.65 % $ 21,639   4.26 % $ 424,720   2.30 % $ 477,325   2.45 % $ 487,954 For information regarding the carrying value of the investment portfolio, see Note 4, Note 16 and Note 21 of the Notes to the Consolidated Financial Statements. The securities listed in the table above are either rated investment grade by Moody’s and/or Standard and Poor’s or have shadow credit ratings from a credit agency supporting an investment grade and conform to the Company’s investment policy guidelines. There were no municipal securities, or corporate securities, of any single issuer exceeding 10% of stockholders’ equity as of December 31, 2020. Other securities do not have a contractual maturity and are included in the “Due in 1 year or less” maturity in the table above. The following table sets forth the carrying value of the Company’s investment securities, as of December 31 for each of the last three years. 2020 2019 2018 (dollars in thousands) Investment Securities Available-for-Sale:                           Federal agency obligations $ 38,458 $ 28,237 $ 44,955 Residential mortgage pass-through securities 270,884 200,496 185,204 Commercial mortgage pass-through securities 6,922 4,997 3,874 Obligations of U.S. States and political subdivisions 142,808 136,519 139,185 Trust preferred securities - - - Corporate bonds and notes 25,095 28,382 25,813 Asset-backed securities 3,480 5,780 9,691 Certificates of deposit 151 150 322 Other securities   157   140   2,990 Total $ 487,955 $ 404,701 $ 412,034 - 42 - Table of Contents For other information regarding the Company’s investment securities portfolio, see Note 4, Note 16 and Note 21 of the Notes to the Consolidated Financial Statements. Interest Rate Sensitivity Analysis The principal objective of our asset and liability management function is to evaluate the interest-rate risk included in certain balance sheet accounts; determine the level of risk appropriate given our business focus, operating environment, and capital and liquidity requirements; establish prudent asset concentration guidelines; and manage the risk consistent with Board approved guidelines. We seek to reduce the vulnerability of our operations to changes in interest rates, and actions in this regard are taken under the guidance of the Bank’s Asset Liability Committee (the “ALCO”). The ALCO generally reviews our liquidity, cash flow needs, maturities of investments, deposits and borrowings, and current market conditions and interest rates. We currently utilize net interest income simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank of future changes in interest rates. As of December 31, 2020, and December 31, 2019, the results of the models were within guidelines prescribed by our Board of Directors. If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be required by the ALCO and Bank’s management. The net interest income simulation model attempts to measure the change in net interest income over the next one-year period, and over the next three-year period on a cumulative basis, assuming certain changes in the general level of interest rates. Based on our model, which was run as of December 31, 2020, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 0.70%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 5.18%. As of December 31, 2019, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 1.55%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 1.71%. Based on our model, which was run as of December 31, 2020, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 3.89%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 8.56%. As of December 31, 2019, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 2.86%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 4.86%. An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of December 31, 2020, would decline by 7.76% with an instantaneous rate shock of up 200 basis points, and increase by 5.70% with an instantaneous rate shock of down 100 basis points. Our EVE as of December 31, 2019, would decline by 7.2% with an instantaneous rate shock of up 200 basis points, and increase by 3.69% with an instantaneous rate shock of down 100 basis points. The following table illustrates the most recent results for EVE and NII as of December 31, 2020. Interest Rates (basis points) Estimated EVE Estimated Change in EVE Interest Rates (basis points) Estimated NII Estimated Change in NII Amount % Amount %   +300 $ 866,429 $(96,001 ) (9.97 ) +300 $239,904 $3,630 1.54   +200 887,726 (74,704 ) (7.76 ) +200 237,933 1,659 0.70   +100 914,969 (47,461 ) (4.93 ) +100 236,623 349 0.15   0 962,430 - 0.0 0 236,274 - 0.0   -100 1,017,329 54,899 5.70 -100 224,026 (12,248 ) (5.18 ) Estimates of Fair Value The estimation of fair value is significant to certain assets of the Company, including available-for-sale investment securities. These are all recorded at either fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, expected cash flows, credit quality, discount rates, or market interest rates. Fair values for most available-for-sale investment securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors. See Note 21 of the Notes to Consolidated Financial Statements for additional discussion. - 43 - Table of Contents These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Impact of Inflation and Changing Prices The financial statements and notes thereto presented elsewhere herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the operations; unlike most industrial companies, nearly all of the Company’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. Liquidity Liquidity is a measure of a bank’s ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. Our principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. As of December 31, 2020, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’ withdrawal requirements, and other operational and client credit needs could be satisfied. As of December 31, 2020, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $697.4 million, which represented 9.2% of total assets and 10.9% of total deposits and borrowings, compared to $506.0 million as of December 31, 2019, which represented 8.2% of total assets and 9.6% of total deposits and borrowings on such date. The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of December 31, 2020, had the ability to borrow $2.0 billion. In addition, as of December 31, 2020, the Bank had in place borrowing capacity of $25 million through correspondent banks. The Bank also has a credit facility established with the Federal Reserve Bank of New York for direct discount window borrowings with capacity based on pledged collateral of $5.2 million. As of December 31, 2020, the Bank had aggregate available and unused credit of approximately $1.1 billion, which represents the aforementioned facilities totaling $2.0 billion net of $935 million in outstanding borrowings and letters of credit. As of December 31, 2020, outstanding commitments for the Bank to extend credit were $0.9 billion. Cash and cash equivalents totaled $303.8 million on December 31, 2020, increasing by $102.3 million from $201.5 million as of December 31, 2019. Operating activities provided $81.1 million in net cash. Investing activities used $323.4 million in net cash, primarily reflecting an increase in loans. Financing activities provided $344.5 million in net cash, primarily reflecting a net increase of $410.6 million in deposits, offset by net FHLB repayments of $123.9 million. Deposits Deposits are our primary source of funds. Average total deposits increased by $1.2 billion, or 25.3%, to $5.8 billion in 2020 from $4.6 billion in 2019 and increased $775 million, or 20.1%, to $4.6 billion in 2019 from 2018. The increase in total average deposits in 2020 was primarily attributable to both the acquisition of BNJ and organic growth, while the increase in 2019 was attributable to the acquisition of GHB and organic growth. The following table sets forth the year-to-date average balances and weighted average rates for various types of deposits for 2020, 2019 and 2018. 2020 2019 2018 Balance Rate Balance Rate Balance Rate (dollars in thousands) Demand, noninterest-bearing $ 1,195,547 - $ 819,917 - $ 745,548 - Demand, interest-bearing & NOW 1,270,520 0.59 % 980,669 1.04 % 726,665 0.69 % Money market accounts 1,313,070 0.72 % 1,121,605 1.59 % 947,157 1.11 % Savings 236,318 0.27 % 165,538 0.24 % 164,203 0.17 %   Time   1,792,568 1.94 %   1,549,700 2.40 %   1,278,821 1.89 %   Total Deposits $ 5,808,023 0.90 % $ 4,637,429 1.41 % $ 3,862,394 1.03 % - 44 - Table of Contents The following table sets forth the distribution of total deposit accounts, by account types for each of the dates indicated. December 31, 2020 December 31, 2019 Amount % of total Amount % of total (dollars in thousands) Demand, noninterest-bearing $ 1,339,108 22.5 % $ 861,728 18.1 % Demand, interest-bearing & NOW 1,462,675 24.5 % 1,079,621 22.6 %   Money market accounts 1,399,145 23.5 % 1,108,983 23.3 % Savings 294,163 4.9 % 163,489 3.4 %   Time   1,464,133 24.6 %   1,553,721 32.6 %   Total Deposits $ 5,959,226 100.0 % $ 4,767,542 100.0 % The following table summarizes the maturity distribution of time deposits in denomination of $100,000 or more: December 31, 2020 December 31, 2019 (dollars in thousands) 3 months or less $ 236,888 $ 244,747 Over 3 to 6 months 226,780 136,167 Over 6 to 12 months 225,708 242,445 Over 12 months   294,828   301,166   Total $ 984,204 $ 924,525 Federal Home Loan Bank Advances Federal Home Loan Bank advances are secured, under the terms of a blanket collateral agreement, primarily by commercial mortgage loans. As of December 31, 2020, the Company had a net carrying value of $426.0 million in notes outstanding at a weighted average interest rate of 1.07%. As of December 31, 2019, the Company had a net carrying value of $500.3 million in notes outstanding at a weighted average interest rate of 1.96%. - 45 - Table of Contents Contractual Obligations and Other Commitments The following table summarizes contractual obligations as of December 31, 2020 and the effect such obligations are expected to have on liquidity and cash flows in future periods. Total Less than 1 year 1 – 3 years 4 – 5 years Over 5 years December 31, 2020 (dollars in thousands) Contractual obligations: Operating lease obligations $ 19,856 $ 4,229 $ 6,438 $ 4,754 $ 4,435 Other long-term liabilities/long-term debt:   Time Deposits 1,460,765 1,028,184 415,498 17,083 - Federal Home Loan Bank advances and repurchase agreements, net 426,038 297,570 125,644 - 2,824 Finance lease 2,133 321 644 706 462 Subordinated debentures   202,648   -   -   -   202,648 Total other long-term liabilities/long-term debt   2,091,584   1,326,075   541,786   17,789   205,934 Other commercial commitments – off balance sheet: Commitments under commercial loans and lines of credit 525,606 385,462 122,736 11,330 6,078 Home equity and other revolving lines of credit 65,690 13,576 12,267 13,794 26,053 Outstanding commercial mortgage loan commitments 327,745 177,301 147,299 1,124 2,021 Standby letters of credit 28,738 26,192 546 2,000 - Overdraft protection lines   1,020   497   20   32   471 Total off-balance sheet arrangements and contractual obligations   948,799   603,028   282,868   28,280   34,623 Total contractual obligations and other commitments $ 3,060,239 $ 1,933,332 $ 831,092 $ 50,823 $ 244,992 Capital The maintenance of a solid capital foundation continues to be a primary goal for the Company. Accordingly, capital plans, stock repurchases, and dividend policies are monitored on an ongoing basis. The most important objective of the capital planning process is to balance effectively the retention of capital to support future growth and the goal of providing stockholders with an attractive long-term return on their investment. The Company’s Tier 1 leverage capital (defined as tangible stockholders’ equity for common stock and Trust Preferred Capital Securities) as of December 31, 2020 amounted to $694.9 million or 9.5% of average total assets. As of December 31, 2019, the Company’s Tier 1 leverage capital amounted to $563.5 million or 9.5% of average total assets. The increase in Tier 1 capital reflects the Company’s retained earnings during 2019 and the acquisition of BNJ. United States bank regulators have issued guidelines establishing minimum capital standards related to the level of assets and off balance-sheet exposures adjusted for credit risk. Specifically, these guidelines categorize assets and off balance-sheet items into risk-weightings and require banking institutions to maintain a minimum ratio of capital to risk-weighted assets. As of December 31, 2020, the Company’s CET 1, Tier 1 and total risk-based capital ratios were 10.79%, 10.87% and 15.08%, respectively. For information on risk-based capital and regulatory guidelines for the Parent Corporation and its bank subsidiary, see Note 15 to the Consolidated Financial Statements. The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the bank regulators regarding capital components, risk weightings, and other factors. - 46 - Table of Contents Subordinated Debentures During December 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part. The floating interest rate on the subordinated debentures is three-month LIBOR plus 2.85% and re-prices quarterly. The rate as of December 31, 2020 was 3.06%. During June 2020, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2020 Notes”). The 2020 Notes bear interest at 5.75% annually from, and including, the date of initial issuance to, but excluding, June 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2020. From and including June 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2025. Notwithstanding the foregoing, if the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero. During January 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”) to certain accredited investors. The net proceeds from the sale of the Notes were used in the first quarter of 2018 for general corporate purposes, which included the Parent Corporation contributing $65 million of the net proceeds to the Bank in the form of debt and common equity. The Notes are non-callable for five years, have a stated maturity of February 1, 2028 and bear interest at a fixed rate of 5.20% per year, from and including January 17, 2018 to, but excluding February 1, 2023. From and including February 1, 2023 to, but excluding the maturity date, or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 284 basis points. During June 2015, the Parent Corporation issued $50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2015 Notes”). As of December 31, 2020, the 2015 Notes have a stated maturity of July 1, 2025, and bear interest until the maturity date or early redemption date at a variable rate equal to the then current three-month LIBOR rate plus 393 basis points. As of December 31, 2020, the variable interest rate was 4.16% and all costs related to 2015 issuance have been amortized. The 2015 Notes were redeemed in full on January 1, 2021. - 47 - Table of Contents Item 7A. Quantitative and Qualitative Disclosures about Market Risk Interest Sensitivity Market Risk Interest rate risk management is our primary market risk. See “Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operation- Interest Rate Sensitivity Analysis” herein for a discussion of our management of our interest rate risk.