What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-07 compared with 2020-05-08 · 325 added, 217 removed, 367 unchanged (60% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

In this Quarterly Report on Form 10-Q, unless otherwise mentioned, the terms the “Company”, “we”, “us”

and “our”

refer to Bridge Bancorp, Inc.

and its wholly-owned subsidiary, BNB Bank (the “Bank”).

We use the term “Holding Company”

to refer solely to Bridge Bancorp, Inc.

In this Quarterly Report on Form 10-Q, unless otherwise mentioned, the terms the “Company”, “we”, “us” and “our” refer to Bridge Bancorp, Inc.

and its wholly-owned subsidiary, BNB Bank (the “Bank”).

We use the term “Holding Company” to refer solely to Bridge Bancorp, Inc.

and not to its consolidated subsidiary.

Private Securities Litigation Reform Act Safe Harbor Statement

This report may contain statements relating to our future results (including certain projections and business trends) that are considered “forward-looking statements”

as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”).

This report may contain statements relating to our future results (including certain projections and business trends) that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”).

Such forward-looking statements, in addition to historical information, which involve risk and uncertainties, are based on the beliefs, assumptions and expectations of our management.

Words such as “expects,”

“believes,”

“should,”

“plans,”

“anticipates,”

“will,”

“potential,”

“could,”

“intend,”

“may,”

“outlook,”

“predict,”

“project,”

“would,”

“estimated,”

“assumes,”

“likely,”

and variations of such similar expressions are intended to identify such forward-looking statements.

Words such as “expects,” “believes,” “should,” “plans,” “anticipates,” “will,” “potential,” “could,” “intend,” “may,” “outlook,” “predict,” “project,” “would,” “estimated,” “assumes,” “likely,” and variations of such similar expressions are intended to identify such forward-looking statements.

Examples of forward-looking statements include, but are not limited to, possible or assumed estimates with respect to the financial condition, expected or anticipated revenue, and results of operations and our business, including earnings growth;

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the cost of funds;

demand for loan products;

demands for loan products;

demand for financial services;

our ability to successfully integrate acquired entities;

changes in the quality and composition of our loan and investment portfolios;

changes in the quality and composition of BNB’s loan and investment portfolios;

changes in management’s business strategies;

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changes in real estate values;

expanded regulatory requirements, which could adversely affect operating results;

and the “Risk Factors”

discussed in the our Annual Report on Form 10‑K for the year ended December 31, 2019 as updated by our Quarterly Reports on Form 10-Q.

In addition, the novel coronavirus (“COVID-19”) pandemic is having an adverse impact on us, our customers and the communities we serve.

The adverse effect of the COVID-19 pandemic on us, our customers and the communities where we operate may adversely affect our business, results of operations and financial condition for an indefinite period of time.

The forward-looking statements are made as of the date of this report, and we assume no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

an unexpected increase in operating costs;

expanded regulatory requirements;

expenses related to our proposed merger with Dime Community Bancshares, Inc., unexpected delays related to the merger, or our inability to obtain regulatory approvals or satisfy other closing conditions required to complete the merger;

and other risk factors discussed elsewhere, and in our reports filed with the Securities and Exchange Commission.

In addition, the COVID-19 pandemic is having an adverse impact on the Company, its customers and the communities it serves.

The adverse effect of the COVID-19 pandemic on the Company, its customers and the communities where it operates may adversely affect the Company’s business, results of operations and financial condition for an indefinite period of time.

The forward-looking statements are made as of the date of this report, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

Who We Are and How We Generate Income

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The Bank also generates non-interest income, such as fee income on deposit accounts and merchant credit and debit card processing programs, loan swap fees, investment services, income from its title insurance subsidiary, and net gains on sales of securities and loans.

The level of non-interest expenses, such as salaries and benefits, occupancy and equipment costs, other general and administrative expenses, expenses from the Bank’s title insurance subsidiary, and income tax expense, further affects our net income.

Certain reclassifications have been made to prior year amounts and the related discussion and analysis to conform to the current year presentation.

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(6) construction and land loans;

(7) Federal Home Loan Bank (“FHLB”), Federal National Mortgage Association (“Fannie Mae”), Government National Mortgage Association (“Ginnie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) mortgage-backed securities, collateralized mortgage obligations and other asset backed securities;

(8) New York State and local municipal obligations;

government-sponsored enterprise (“U.S.

GSE”) securities;

government-sponsored enterprise (“U.S.

GSE”) securities;

and (10) corporate bonds.

We also offer the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) programs, providing multi-millions of dollars of Federal Deposit Insurance Corporation (“FDIC”) insurance on deposits to our customers.

In addition, we offer merchant credit and debit card processing, automated teller machines, cash management services, lockbox processing, online banking services, remote deposit capture, safe deposit boxes, and individual retirement accounts as well as investment services through Bridge Financial Services LLC, which offers a full range of investment products and services through a third-party broker dealer.

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On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency.

The COVID-19 pandemic has caused significant economic dislocation in the United States, as many state and local governments, including New York, have ordered non-essential businesses to close and residents to shelter in place at home.

In response to the COVID-19 outbreak, we implemented our contingency plans to ensure the health and safety of our employees and customers.

The COVID-19 pandemic has caused significant economic dislocation in the United States, as many state and local governments, including New York, ordered non-essential businesses to close and residents to shelter in place at home.

In response to the COVID-19 outbreak, in the first quarter of 2020 we implemented our contingency plans to ensure the health and safety of our employees and customers.

We modified access to our workplace to promote stay-at-home and social distancing mandates.

Approximately 300 of our non-branch employees are working remotely.

Our branch network continues to operate well, with drive-up, appointment banking, and reduced hours.

Our branch employees receive 100% weekly pay, regardless of the number of hours worked.

All front-line employees received special payments for work performed during the COVID-19 outbreak.

In addition, we provided additional paid time off for employees required to quarantine.

We enhanced facility cleaning protocols and took additional safety measures at all of our locations.

In addition, we provided additional paid time off for employees required to quarantine.

Our return to work phase-in began on July 6, 2020 for back office employees.

Our branch network has returned to operating regular business hours.

Our branch employees receive 100% weekly pay, regardless of the number of hours worked.

All front-line employees received special payments for the team effort in issuing the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) loans.

Paycheck Protection Program

We are an active participant in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) for small business customers.

As of April 30, 2020, we had received over 3,500 loan applications and registered $926 million in total funding requests with the SBA.

We are an active participant in the SBA PPP for small business customers.

As of June 30, 2020, we originated over 4,000 loans totaling $949.7 million.

The top five industries were construction, professional, manufacturing, accommodation/food, and administrative.

The mean and median PPP loan amounts were $233 thousand and $75 thousand, respectively.

PPP loans have a two-year term and a 1% interest rate.

The following table presents the outstanding balance and range of loan size of our PPP loans as of June 30, 2020:

(Dollars in thousands)

Range of Loan Size

$150 and Below

Between $150 and $350

Between $350 and $2,000

Substantially all of the PPP loans we originated have a two-year term and a 1% interest rate.

Subsequent Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act) changes extended the maturities of these loans to potentially five years at the borrower’s option.

Any changes are expected to be made at the end of the interest only phase and are expected to coincide with the forgiveness process.

The SBA pays us fees ranging from 1% to 5% per loan depending on the loan principal amount.

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Prior to the commencement of the PPP program, we funded 79 loans totaling $4.2 million with an average loan size of $53 thousand.

These streamlined loans were our initial response to the COVID-19 pandemic to quickly provide customers with

small loans to bridge short term cash flow.

These streamlined loans were our initial response to the COVID-19 pandemic to quickly provide customers with small loans to bridge short term cash flow.

We terminated this program and focused our efforts on developing a process to accept PPP loans when the PPP program commenced on April 3, 2020.

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The loan modifications in this program primarily consist of three-month deferrals of interest and principal payments.

As of April 30, 2020, we have approved 275 loan moratoriums totaling $371.6 million, or 9.9% of total loan balances.

Percentage of

(Dollars in millions)

Loans category

Commercial real estate mortgage loans

Multi-family mortgage loans

As of July 20, 2020, we have approved 500 loan moratoriums totaling $632.6 million, or 13.6% of total loan balances.

Approximately $400 million of these loans have reached the end of their three-month deferral period.

Of these loans, 54% have returned to making their agreed-on payments, 36% have requested an extension and 10% are pending.

Extensions are being granted on a case-by-case basis.

The following table presents the major classifications of our loan moratoriums as of July 20, 2020:

(Dollars in thousands)

Commercial real estate mortgage loans-owner occupied

Commercial real estate mortgage loans-non-owner occupied and multi-family

Commercial and industrial loans

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Community Support

We continue to support our communities during the COVID-19 pandemic by providing $260 thousand in grants to non-profit partners working on the COVID-19 relief effort in our footprint.

We continue to support our communities during the COVID-19 pandemic by pledging a total of $1.8 million to support COVID-19 affected communities, including $500 thousand in grants to non-profit partners working on the COVID-19 relief effort in our footprint.

These grants are focused on organizations working to address meeting the basic needs of the vulnerable populations, providing emergency food, and health services.

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A portion of the fees generated by the PPP will be set aside to increase funding for local organizations.

Significant Events

Merger Agreement with Dime Community Bancshares, Inc.

On July 1, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Dime Community Bancshares, Inc.

The Merger Agreement, which was unanimously approved by the board of directors of both companies, provides that upon the terms and subject to the conditions set forth therein, Dime will merge with and into the Company (the “Merger”), with the Company as the surviving corporation under the name “Dime Community Bancshares, Inc.” (the “Surviving Corporation”).

The Surviving Corporation will be headquartered in Hauppauge, New York, and will have a corporate office located in New York, New York.

At the effective time of the Merger (the “Effective Time”), each outstanding share of Dime common stock, par value $0.01 per share (the “Dime Common Stock”), will be converted into the right to receive 0.6480 shares of the Company’s common stock, par value $0.01 per share (the “Merger Consideration”).

At the Effective Time, each outstanding share of Dime’s Series A preferred stock, par value $0.01 (the “Dime Preferred Stock”), will be converted into the right to receive one share of a newly created series of Company preferred stock having the same powers, preferences and rights as the Dime Preferred Stock.

Following the Merger, Dime Community Bank, a New York-chartered commercial bank and a wholly-owned subsidiary of Dime, will merge with and into BNB Bank, a New York-chartered commercial bank and a wholly-owned subsidiary of the Company, with BNB Bank as the surviving bank, under the name “Dime Community Bank.”

The Merger Agreement provides certain termination rights for both the Company and Dime and further provides that a termination fee of $18.0 million will be payable by Dime to the Company, or by the Company to Dime, upon termination of the Merger Agreement under certain circumstances.

Upon completion of the transaction, which is subject to both Dime and Company shareholder approval, Dime shareholders will own approximately 52% and the Company’s shareholders will own approximately 48% of the combined company.

Following the Merger, the Surviving Corporation’s board of directors will, until the third anniversary of the completion of the Merger, have twelve directors, consisting of six directors from the Company (the “Legacy Company Directors”) and six directors from Dime (the “Legacy Dime Directors”), unless determined otherwise by 75% of the Surviving Corporation’s board of directors.

For the period ending on the third anniversary of the completion of the Merger, Legacy Company Directors will nominate directors for any vacancy on the Surviving Corporation’s board of directors resulting from the vacancy of a Legacy Company Director, and Legacy Dime Directors will nominate directors for any vacancy on the Surviving Corporation’s board of directors resulting from the vacancy of a Legacy Dime Director.

The Merger is expected to close in the first quarter of 2021.

The completion of the Merger is subject to customary conditions, including, among others, (1) the approval of the Merger Agreement and the transactions contemplated thereby, as applicable, by Dime’s shareholders and the Company’s shareholders, (2) authorization for listing on the Nasdaq Stock Market of the shares of Company’s common stock to be issued in the Merger, (3) the effectiveness of the Registration Statement on Form S-4 (the “Registration Statement”) to be filed with the Securities and Exchange Commission (the “SEC”) to register the Company’s common stock to be issued in the Merger, (4) the absence of any order, decree or injunction preventing the completion of the Merger, and (5) the receipt or waiver of required regulatory approvals.

Each party’s obligation to complete the Merger is also subject to certain additional customary conditions, including (i) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (ii) performance in all material respects by the other party of its obligations under the Merger Agreement and (iii) receipt by such party of an opinion from its counsel to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.

The foregoing description of the proposed Merger and the Merger Agreement is not complete and is qualified in its entirety by reference to the full text of the Merger Agreement, which is attached to this Quarterly Report on Form 10-Q as Exhibit 2.1.

Quarterly Highlights

Net income for the 2020 first quarter of $9.3 million, or $0.47 per diluted share, compared to $12.9 million, or $0.65 per diluted share for the 2019 first quarter.

Net interest income increased to $36.7 million for the first quarter of 2020 compared to $34.3 million in 2019.

Tax-equivalent net interest margin was 3.26% for the first quarter of 2020 compared to 3.29% for the 2019 period.

Total assets of $5.1 billion at March 31, 2020, increased $139.4 million compared to December 31, 2019 and increased $385.7 million compared to March 31, 2019.

Total loans held for investment at March 31, 2020 totaled $3.8 billion, an increase of $81.8 million, or 2.2%, from December 31, 2019 and an increase of $371.0 million, or 10.9%, over March 31, 2019.

Total deposits of $4.1 billion at March 31, 2020, increased $241.1 million from December 31, 2019 and increased $330.3 million compared to March 31, 2019.

We adopted the current expected credit loss model (“CECL”

or the “CECL Standard”) on January 1, 2020, which resulted in a charge to retained earnings and reduction to stockholders’

equity of $1.5 million.

Provision for credit losses of $5.0 million included approximately $4.0 million related to our initial estimate of the economic impact of the COVID-19 pandemic.

Allowance for credit losses to total loans was 1.04% at March 31, 2020 compared to 0.89% at December 31, 2019.

A cash dividend of $0.24 per share was declared in April 2020 for the first quarter .

● Net income for the 2020 second quarter of $10.7 million, or $0.54 per diluted share, compared to $10.7 million, or $0.53 per diluted share for the 2019 second quarter.

● Net interest income increased to $40.4 million for the second quarter of 2020 compared to $35.5 million in 2019.

● Tax-equivalent net interest margin was 3.00% for the second quarter of 2020 compared to 3.30% for the 2019 period.

● Total assets of $6.2 billion at June 30, 2020, increased $1.2 billion compared to December 31, 2019 and increased $1.4 billion compared to June 30, 2019.

● Total loans held for investment at June 30, 2020 totaled $4.6 billion, an increase of $940.5 million, or 25.6%, from December 31, 2019 and an increase of $1.2 billion, or 34.7%, over June 30, 2019.

● Loan and line of credit originations of $1.1 billion for the second quarter of 2020, inclusive of $950.0 million PPP loans.

● Total deposits of $5.1 billion at June 30, 2020, increased $1.3 billion from December 31, 2019 and increased $1.2 billion compared to June 30, 2019.

● Provision for credit losses of $4.5 million included approximately $3.5 million related to our estimate of the economic impact of the COVID-19 pandemic.

Additionally, we recorded a $2.6 million charge related to our one loan held for sale.

● Allowance for credit losses to total loans was 0.94% at June 30, 2020 compared to 0.89% at December 31, 2019.

● A cash dividend of $0.24 per share was declared in July 2020 for the second quarter.

Challenges and Opportunities

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We recognize the potential risks of the current economic environment and will monitor the impact of market events as we evaluate loans and investments and consider growth initiatives.

Our management and Board of Directors have built a solid foundation for growth, and we are positioned to adapt to anticipated changes in the industry resulting from new regulations and legislative initiatives.

Our management and Board of

Directors have built a solid foundation for growth, and we are positioned to adapt to anticipated changes in the industry resulting from new regulations and legislative initiatives.

Critical Accounting Policies

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On January 1, 2020, we adopted the CECL Standard, which requires that loans held for investment be accounted for under the current expected credit losses model.

Although the Coronavirus Aid, Relief, and Economic Security Act (the “CARES”

Act) provided the option to delay the adoption of the current expected credit loss model until the earlier of December 31, 2020 or the termination of the current national emergency declaration related to the COVID-19 outbreak, we implemented the CECL Standard in the first quarter of 2020 as previously planned.

Although the CARES Act provided the option to delay the adoption of the current expected credit loss model until the earlier of December 31, 2020 or the termination of the current national emergency declaration related to the COVID-19 outbreak, we implemented the CECL Standard in the first quarter of 2020 as previously planned.

The allowance for credit losses is established and maintained through a provision for credit losses based on expected losses inherent in our loan portfolio.

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When computing allowance levels, credit loss assumptions are estimated using a model that categorizes loan pools based on expected loss history, delinquency status and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future.

Determining the appropriateness of the allowance is

complex and requires judgment by management about the effect of matters that are inherently uncertain.

Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain.

In future periods, evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and provision for credit losses in those future periods.

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Generally, collateral values for real estate loans for which measurement of expected losses is dependent on collateral values are updated every twelve months.

Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the borrower and its business.

Once the expected credit loss amount is determined, an allowance is provided for equal to the calculated expected credit loss and included in the allowance for credit losses.

Once the expected credit

loss amount is determined, an allowance is provided for equal to the calculated expected credit loss and included in the allowance for credit losses.

Pursuant to our policy, credit losses must be charged-off in the period the loans, or portions thereof, are deemed uncollectable.

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(1) lending policies and procedures;

(2) international, national, regional and local economic business conditions

and developments that affect the collectability of the portfolio, including the condition of various markets;

(2) international, national, regional and local economic business conditions and developments that affect the collectability of the portfolio, including the condition of various markets;

(3) the nature and volume of the loan portfolio including the terms of the loans;

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Management believes that this transition approach to the Probability of Default/Loss Given Default is a relevant calculation of expected credit losses as there is sufficient volume as well as movement in the risk ratings due to the initial grading system as well as timely updates to risk ratings when necessary.

Credit risk ratings are based on management’s evaluation of a credit’s cash flow, collateral, guarantor support, financial disclosures, industry trends and strength of borrowers’

Finally, management evaluates and considers the allowance ratios and coverage percentages of both peer group and regulatory agency data.

These evaluations are inherently subjective because, even though they are based on objective data, it is management’s interpretation of that data that determines the amount of the appropriate allowance.

If the evaluations prove to be incorrect, the allowance for credit losses may not be sufficient to cover expected losses inherent in the loan portfolio, resulting in additions to the allowance for credit losses.

The Credit Risk Management Committee (“CRMC”) is comprised of management.

Credit risk ratings are based on management’s evaluation of a credit’s cash flow, collateral, guarantor support, financial disclosures, industry trends and strength of borrowers’ management.

The Credit Risk Management Committee (“CRMC”) is comprised of management.

The adequacy of the allowance is analyzed quarterly, with any adjustment to a level deemed appropriate by the CRMC, based on its risk assessment of the entire portfolio.

Each quarter, members of the CRMC meet with the Credit Risk Committee of our Board of Directors to review credit risk trends and the adequacy of the allowance for credit losses.

Based on the CRMC’s review of the classified loans, delinquency and charge-off trends, current economic conditions, reasonable and supportable forecasts, and the overall allowance levels as they relate to the entire loan portfolio at March 31, 2020 and December 31, 2019, we believe the allowance for credit losses has been established at levels sufficient to cover the expected losses inherent in our loan portfolio.

Based on the CRMC’s review of the classified loans, delinquency and charge-off trends, current economic conditions, reasonable and supportable forecasts, and the overall allowance levels as they relate to the entire loan portfolio at June 30, 2020 and December 31, 2019, we believe the allowance for credit losses has been established at levels sufficient to cover the expected losses inherent in our loan portfolio.

Future additions or reductions to the allowance may be necessary based on changes in economic, market or other conditions.

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For additional information regarding the allowance for credit losses, see Note 6 of the Notes to the Consolidated Financial Statements.

Net income for the three months ended March 31, 2020 was $9.3 million and $0.47 per diluted share as compared to $12.9 million and $0.65 per diluted share for the same period in 2019.

Changes in net income for the three months ended March 31, 2020 compared to March 31, 2019 include:

Net income for the three months ended June 30, 2020 was $10.7 million and $0.54 per diluted share which was in line with the same period in 2019.

Changes in net income for the three months ended June 30, 2020 compared to June 30, 2019 include:

(i) a $4.9 million, or 13.8%, increase in net interest income;

(ii) a $1.0 million, or 28.6%, increase in the provision for credit losses;

(iii) a $2.2 million, or 9.9%, increase in non-interest expense;

and (iv) a $0.7 million, or 21.6%, decrease in income tax expense.

(iii) a $3.2 million, or 59.0% decrease in non-interest income;

(iv) a $0.4 million, or 1.6%, increase in non-interest expense;

and (v) a $0.3 million, or 9.4%, increase in income tax expense.

Net income for the six months ended June 30, 2020 was $20.0 million and $1.00 per diluted share as compared to $23.6 million and $1.18 per diluted share for the same period in 2019.

Changes in net income for the six months ended June 30, 2020 compared to June 30, 2019 include:

(i) a $7.2 million, or 10.4%, increase in net interest income;

(ii) a $5.4 million, or 131.7%, increase in the provision for credit losses;

(iii) a $3.2 million, or 30.3% decrease in non-interest income;

(iv) a $2.6 million, or 5.7%, increase in non-interest expense;

and (v) a $0.5 million, or 7.5%, decrease in income tax expense.

Net Interest Income

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Net interest income depends on the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.

The following tables present certain information relating to our average consolidated balance sheets and our consolidated statements of income for the periods indicated and reflects the average yield on assets and average cost of liabilities for

those periods on a tax-equivalent basis based on the U.S.

federal statutory tax rate.

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Interest on non-accrual loans has been included only to the extent reflected in the consolidated statements of income.

For purposes of this table, the average balances for investments in debt and equity securities exclude unrealized appreciation/depreciation due to the application of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320, “Investments - Debt and Equity Securities.”

Three Months Ended March 31,

Three Months Ended June 30,

(Dollars in thousands)

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(4) Net interest margin represents net interest income divided by average interest-earning assets.

Six Months Ended June 30,

(Dollars in thousands)

Interest-earning assets:

Loans, net (1)(2)

Mortgage-backed securities, CMOs and other asset-backed securities

Taxable securities

Tax-exempt securities (2)

Deposits with banks

Total interest-earning assets (2)

Non-interest-earning assets:

Cash and due from banks

Interest-bearing liabilities:

Savings, NOW and money market deposits

Certificates of deposit of $100,000 or more

Other time deposits

Federal funds purchased and repurchase agreements

FHLB advances

Subordinated debentures

Total interest-bearing liabilities

Non-interest-bearing liabilities:

Demand deposits

Other liabilities

Total liabilities

Stockholders' equity

Total liabilities and stockholders' equity

Net interest income/interest rate spread (2) (3)

Net interest-earning assets

Net interest margin (2) (4)

Tax-equivalent adjustment

Net interest income

Net interest margin (4)

Ratio of interest-earning assets to interest-bearing liabilities

(1) Amounts are net of deferred origination costs/(fees) and the allowance for credit losses, and include loans held for sale.

(2) Presented on a tax-equivalent basis based on the U.S.

federal statutory tax rate of 21%.

(3) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average interest-earning assets.

Rate/Volume Analysis

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In addition, average interest-earning assets include non-accrual loans.

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

2020 Over 2019

Changes Due To

(In thousands)

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federal statutory tax rate of 21%.

Analysis of Net Interest Income for the Three Months Ended March 31, 2020 and 2019

Net interest income was $36.7 million for the three months ended March 31, 2020 compared to $34.3 million for the three months ended March 31, 2019.

Average net interest-earning assets increased $162.1 million to $1.6 billion for the three months ended March 31, 2020 compared to $1.5 billion for the three months ended March 31, 2019.

The increase in average net interest-earning assets reflects organic growth in loans, partially offset by increases in average borrowings and average deposits, and a decrease in average investment securities.

Tax-equivalent net interest margin decreased to 3.26% for the three months ended March 31, 2020 compared to 3.29% for the three months ended March 31, 2019.

The decrease in tax-equivalent net interest margin for 2020 compared to 2019 reflects the lower average yield on investment securities and loans, partially offset by lower overall funding costs, due in part to federal funds rate decreases during the third and fourth quarter of 2019 and the first quarter of 2020.

Analysis of Net Interest Income for the Three Months Ended June 30, 2020 and 2019

Net interest income was $40.4 million for the three months ended June 30, 2020 compared to $35.5 million for the three months ended June 30, 2019.

Average net interest-earning assets increased $722.1 million to $2.2 billion for the three months ended June 30, 2020 compared to $1.5 billion for the three months ended June 30, 2019.

The increase in average net interest-earning assets was primarily driven by loan growth in the commercial and industrial portfolio and a rise in deposits with banks, partially offset by increases in average borrowings and average deposits, and a decrease in average investment securities.

Tax-equivalent net interest margin decreased to 3.00% for the three months ended June 30, 2020 compared to 3.30% for the three months ended June 30, 2019.

The decrease in tax-equivalent net interest margin for 2020 compared to 2019 reflects the lower average yield on our loan portfolio and significantly higher levels of cash earning low average yields, partially offset by lower overall funding costs, due in part to federal funds rate decreases during the third and fourth quarter of 2019 and the first quarter of 2020.

In response to the COVID-19 outbreak, the Federal Reserve has reduced the benchmark federal funds rate to a target range of 0% to 0.25% during the 2020 first quarter.

We took this opportunity to lower our funding costs and stabilize our net interest margin.

Total interest income increased $0.1 million, or 0.2%, to $44.6 million for the three months ended March 31, 2020 from $44.5 million for the same period in 2019, as average interest-earning assets increased $279.5 million, or 6.6%, to $4.5 billion for the three months ended March 31, 2020 compared to $4.3 billion for the same period in 2019.

The increase in

average interest-earning assets for the three months ended March 31, 2020 compared to 2019 reflects organic growth in loans, partially offset by a decrease in average investment securities.

The tax-equivalent average yield on interest-earning assets was 3.97% for the quarter ended March 31, 2020 compared to 4.26% for the quarter ended March 31, 2019.

Interest income on loans increased $2.2 million to $39.8 million for the three months ended March 31, 2020 over 2019, primarily due to growth in the loan portfolio, partially offset by a decrease in yield on loans.

For the three months ended March 31, 2020, average loans grew by $401.2 million, or 12.2%, to $3.7 billion as compared to $3.3 billion for the same period in 2019.

The increase in average loans was the result of organic growth in multi-family mortgage loans, commercial real estate mortgage loans, and commercial and industrial loans, partially offset by a decrease in real estate construction and land loans and residential mortgage loans.

The tax-equivalent yield on average loans was 4.35% for the first quarter of 2020 and 4.66% for the same period in 2019.

Total interest income decreased $0.5 million, or 1.1%, to $45.9 million for the three months ended June 30, 2020 from $46.4 million for the same period in 2019.

The average interest-earning assets increased $1.1 billion, or 25.5%, to $5.4 billion for the three months ended June 30, 2020 compared to $4.3 billion for the same period in 2019.

The increase in average interest-earning assets for the three months ended June 30, 2020 compared to 2019 reflects loan growth in the commercial and industrial portfolio driven by PPP loan originations, and a rise in deposits with banks driven by deposit growth, partially offset by a decrease in average investment securities.

The decline in economic activity during the COVID-19 shut-down resulted in more of our customers increasing their deposits, which raised our average deposits with banks in the current quarter.

The tax-equivalent average yield on interest-earning assets was 3.40% for the quarter ended June 30, 2020 compared to 4.30% for the quarter ended June 30, 2019.

The PPP loans and excess liquidity in banks had the effect of depressing our net interest margin in the current quarter.

Interest income on loans increased $2.1 million to $42.0 million for the three months ended June 30, 2020 over 2019, primarily due to growth in the commercial and industrial loan portfolio, partially offset by a decrease in yield on loans.

For the three months ended June 30, 2020, average loans grew by $1.0 billion, or 31.3%, to $4.4 billion as compared to $3.4 billion for the same period in 2019.

The tax-equivalent yield on average loans was 3.82% for the second quarter of 2020 compared to 4.76% for the same period in 2019.

The average balance of loans for the quarter ended June 30, 2020 includes $721.6 million of PPP loans with an average yield of 2.55%.

The PPP loans had the effect of decreasing the tax-equivalent yield by 24 basis points in the current quarter.

We remain committed to growing loans with prudent underwriting, sensible pricing, and limited credit and extension risk.

Interest income on investment securities decreased $1.8 million to $4.6 million for the three months ended March 31, 2020 compared to $6.4 million for the same period in 2019, primarily due to a decrease in the average balance of investment securities and a lower average yield on investment securities.

Interest income on securities included net amortization of premiums on securities of $0.7 million for the three months ended March 31, 2020 compared to $0.6 million for the same period in 2019.

For the three months ended March 31, 2020, average total investment securities decreased by $121.9 million, or 13.8%, to $763.9 million as compared to $885.8 million for the same period in 2019.

The tax-equivalent average yield on total investment securities was 2.44% for the three months ended March 31, 2020 and 2.95% for the three months ended March 31, 2019.

Total interest expense decreased to $8.0 million for the three months ended March 31, 2020 as compared to $10.2 million for the same period in 2019.

The decrease in interest expense for the three months ended March 31, 2020 is a result of the decrease in the cost of average interest-bearing liabilities, partially offset by an increase in average deposits and average borrowings.

The cost of average interest-bearing liabilities was 1.11% for the three months ended March 31, 2020 and 1.49% for the three months ended March 31, 2019.

Interest income on investment securities decreased $2.2 million to $3.7 million for the three months ended June 30, 2020 compared to $5.9 million for the same period in 2019, primarily due to a decrease in the average balance of investment securities and a lower average yield on investment securities.

Interest income on securities included net amortization of premiums on securities of $0.8 million for the three months ended June 30, 2020 compared to $0.9 million for the same period in 2019.

For the three months ended June 30, 2020, average total investment securities decreased by $212.8 million, or 24.7%, to $647.2 million as compared to $860.0 million for the same period in 2019.

The decline in tax-equivalent average yield on total investment securities to 2.36% for the three months ended June 30, 2020 compared to 2.77% in the same period in 2019 reflected the impact of the 150 basis point reduction in the benchmark federal funds rate by the Federal Reserve in March 2020 and the related decline in market interest rates available on securities purchases.

Total interest expense decreased to $5.4 million for the three months ended June 30, 2020 as compared to $10.8 million for the same period in 2019.

The decrease in interest expense for the three months ended June 30, 2020 is a result of the decrease in the cost of average interest-bearing liabilities, partially offset by an increase in average deposits and average borrowings.

The cost of average interest-bearing liabilities was 0.68% for the three months ended June 30, 2020 and 1.54% for the three months ended June 30, 2019.

The decrease in the cost of average interest-bearing liabilities is primarily due to federal funds rate decreases during the third and fourth quarter of 2019 and the first quarter of 2020.

Average total interest-bearing liabilities were $2.9 billion for the three months ended March 31, 2020 and $2.8 billion for the same period in 2019 due to increases in average deposits and average borrowings.

Average total deposits increased to $4.0 billion for the three months ended March 31, 2020, compared to $3.8 billion for the three months ended March 31, 2019 due to increases in average savings, NOW and money market accounts, and average demand deposits, partially offset by a decrease in average certificates of deposit.

The average balance of savings, NOW and money market accounts increased $100.6 million, or 4.7%, to $2.2 billion for the three months ended March 31, 2020 compared to $2.1 billion for the three months ended March 31, 2019.

The cost of average savings, NOW and money market deposits was 0.77% for the 2020 first quarter compared to 1.22% for the 2019 first quarter.

Average demand deposits totaled $1.5 billion for the three months ended March 31, 2020 compared to $1.3 billion for the three months ended March 31, 2019.

Average balances in certificates of deposit decreased $15.3 million, or 4.7%, to $308.4 million for the three months ended March 31, 2020 compared to $323.8 million for the three months ended March 31, 2019.

The cost of average certificates of deposit decreased to 1.89% for the three months ended March 31, 2020 compared to 1.94% for the same period in 2019.

Average public fund deposits comprised 19.1% of total average deposits during the 2020 first quarter and 16.3% for the 2019 first quarter.

Average federal funds purchased and repurchase agreements increased $21.9 million, to $29.6 million for the three months ended March 31, 2020 compared to $7.7 million for the same period in 2019.

The cost of average federal funds purchased and repurchase agreements was 1.06% for the 2020 first quarter compared to 2.37% for the 2019 first quarter.

Average FHLB advances increased $10.1 million, or 4.1%, to $253.4 million for the three months ended March 31, 2020 compared to $243.3 million for the three months ended March 31, 2019.

Average total interest-bearing liabilities were $3.2 billion for the three months ended June 30, 2020 and $2.8 billion for the same period in 2019 due to increases in average deposits and average borrowings.

Average total deposits increased to $4.8 billion for the three months ended June 30, 2020, compared to $3.8 billion for the three months ended June 30, 2019 primarily due to a rise in average demand deposits and average savings, NOW and money market accounts.

Average demand deposits totaled $2.1 billion for the three months ended June 30, 2020 compared to $1.4 billion for the three months ended June 30, 2019.

The increase in demand deposits was driven by an inflow of deposits from PPP loan customers in the second quarter of 2020.

The average balance of savings, NOW and money market accounts increased $259.4 million, or 11.8%, to $2.5 billion for the three months ended June 30, 2020 compared to $2.2 billion for the three months ended June 30, 2019.

The cost of average savings, NOW and money market deposits was 0.37% for the 2020 second quarter compared to 1.27% for the 2019 second quarter.

Average balances in certificates of deposit increased $50.4 million, or 18.5%, to $323.0 million for the three months ended June 30, 2020 compared to $272.6 million for the three months ended June 30, 2019.

The cost of average certificates of deposit decreased to 1.59% for the three months ended June 30, 2020 compared to 2.01% for the same period in 2019.

Average public fund deposits comprised 17.5% of total average deposits during the 2020 second quarter and 16.2% for the 2019 second quarter.

Average federal funds purchased and repurchase agreements decreased $23.6 million, to $1.6 million for the three months ended June 30, 2020 compared to $25.2 million for the same period in 2019.

The cost of average federal funds purchased and repurchase agreements was 0.24% for the 2020 second quarter compared to 2.51% for the 2019 second quarter.

Average FHLB advances increased $97.8 million, or 40.2%, to $341.1 million for the three months ended June 30, 2020 compared to $243.3 million for the three months ended June 30, 2019.

Analysis of Net Interest Income for the Six Months Ended June 30, 2020 and 2019

Net interest income was $77.1 million for the six months ended June 30, 2020 compared to $69.8 million for the six months ended June 30, 2019.

Average net interest-earning assets increased $442.0 million to $1.9 billion for the six months ended June 30, 2020 compared to $1.5 billion for the six months ended June 30, 2019.

The increase in average net interest-earning assets was primarily driven by loan growth in the commercial and industrial portfolio, and a rise in deposits with banks, partially offset by increases in average borrowings and average deposits, and a decrease in average investment securities.

Tax-equivalent net interest margin decreased to 3.12% for the six months ended June 30, 2020 compared to 3.29% for the six months ended June 30, 2019.

In response to the COVID-19 outbreak, the Federal Reserve has reduced the benchmark federal funds rate to a target range of 0% to 0.25% during the 2020 first quarter.

We took this opportunity to lower our funding costs and stabilize our net interest margin.

Total interest income decreased $0.4 million, or 0.5%, to $90.5 million for the six months ended June 30, 2020 from $90.9 million for the same period in 2019, as average interest-earning assets increased $692.6 million, or 16.1%, to $5.0 billion for the six months ended June 30, 2020 compared to $4.3 billion for the same period in 2019.

The increase in average interest-earning assets for the six months ended June 30, 2020 compared to 2019 reflects growth in the commercial and industrial portfolio driven by PPP loan originations, and a rise in deposits with banks driven by deposit growth, partially offset by a decrease in average investment securities.

The decline in economic activity during the COVID-19 shut-down resulted in more of our customers increasing their deposits, which raised our average deposits with banks in the current year.

The tax-equivalent average yield on interest-earning assets was 3.66% for the six months ended June 30, 2020 compared to 4.28% for the six months ended June 30, 2019.

The PPP loans and excess liquidity in banks had the effect of depressing our net interest margin in the current year.

Interest income on loans increased $4.2 million to $81.9 million for the six months ended June 30, 2020 over 2019, primarily due to growth in the commercial and industrial loan portfolio, partially offset by a decrease in yield on loans.

For the six months ended June 30, 2020, average loans grew by $728.2 million, or 21.9%, to $4.1 billion as compared to $3.3 billion for the same period in 2019.

The tax-equivalent yield on average loans was 4.06% for the six months ended June 30, 2020 compared to 4.71% for the same period in 2019.

The average balance of loans for the six months ended June 30, 2020 includes $360.8 million of PPP loans with an average yield of 2.55%.

The PPP loans had the effect of decreasing the tax-equivalent yield by 15 basis points in 2020.

We remain committed to growing loans with prudent underwriting, sensible pricing, and limited credit and extension risk.

Interest income on investment securities decreased $3.9 million to $8.3 million for the six months ended June 30, 2020 compared to $12.2 million for the same period in 2019, primarily due to a decrease in the average balance of investment securities and a lower average yield on investment securities.

Interest income on securities included net amortization of premiums on securities of $1.5 million for the six months ended June 30, 2020 and for the same period in 2019.

For the six months ended June 30, 2020, average total investment securities decreased by $167.3 million, or 19.2%, to $705.6 million as compared to $872.9 million for the same period in 2019.

The decline in tax-equivalent average yield on total investment securities to 2.40% for the six months ended June 30, 2020 compared to 2.86% in the same period in 2019 reflected the impact of the reductions in the benchmark federal funds rate by the Federal Reserve in the third and fourth quarter of 2019, and the first quarter of 2020, and the related decline in market interest rates available on securities purchases.

Total interest expense decreased to $13.4 million for the six months ended June 30, 2020 as compared to $21.0 million for the same period in 2019.

The decrease in interest expense for the six months ended June 30, 2020 is a result of the decrease in the cost of average interest-bearing liabilities, partially offset by an increase in average deposits and average borrowings.

The cost of average interest-bearing liabilities was 0.88% for the six months ended June 30, 2020 and 1.52% for the six months ended June 30, 2019.

The decrease in the cost of average interest-bearing liabilities is primarily due to federal funds rate decreases during the third and fourth quarter of 2019 and the first quarter of 2020.

Average total interest-bearing liabilities were $3.0 billion for the six months ended June 30, 2020 and $2.8 billion for the same period in 2019 due to increases in average deposits and average borrowings.

Average total deposits increased to $4.4 billion for the six months ended June 30, 2020, compared to $3.8 billion for the six months ended June 30, 2019 primarily due to an increase in average demand deposits and average savings, NOW and money market accounts.

Average demand deposits totaled $1.8 billion for the six months ended June 30, 2020 compared to $1.3 billion for the six months ended June 30, 2019.

The increase in demand deposits was primarily driven by an inflow of deposits from PPP loan customers in the second quarter of 2020.

The average balance of savings, NOW and money market accounts increased $179.8 million, or 8.3%, to $2.3 billion for the six months ended June 30, 2020 compared to $2.2 billion for the six months ended June 30, 2019.

The cost of average savings, NOW and money market deposits was 0.56% for the 2020 second quarter compared to 1.25% for the 2019 second quarter.

Average balances in certificates of deposit increased $17.7 million, or 5.9%, to $315.7 million for the six months ended June 30, 2020 compared to $298.0 million for the six months ended June 30, 2019.

The cost of average certificates of deposit decreased to 1.74% for the six months ended June 30, 2020 compared to 1.97% for the same period in 2019.

Average public fund deposits comprised 18.2% of total average deposits during the six months ended June 30, 2020 and 16.2% for the same period in 2019.

Average federal funds purchased and repurchase agreements decreased $0.9 million, to $15.6 million for the six months ended June 30, 2020 compared to $16.5 million for the same period in 2019.

The cost of average federal funds purchased and repurchase agreements was 1.02% for the six months ended June 30, 2020 compared to 2.48% for the same period in 2019.

Average FHLB advances increased $53.9 million, or 22.2%, to $297.2 million for the six months ended June 30, 2020 compared to $243.3 million for the six months ended June 30, 2019.

Provision and Allowance for Credit Losses

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These factors are affected by general and economic conditions including, but not limited to, monetary policies of the federal government, including the Federal Reserve Board, legislative policies and governmental budgetary matters.

Based on our adoption of the CECL Standard on January 1, 2020, our continuing review of the overall loan portfolio, the current asset quality of the portfolio, the growth in the loan portfolio and the net charge-offs, and current and forecasted economic conditions, a provision for credit losses of $5.0 million was recorded during the three months ended March 31, 2020, compared to a provision for credit losses of $0.6 million during the same period in 2019.

The increase in the first-quarter 2020 allowance for credit losses is primarily related to the reasonable and supportable forecast component of the newly adopted CECL standard.

We believe, based on all of the evidence gathered to date, that COVID-19 will continue to have a meaningful negative impact on economic conditions in 2020 but will be shorter-term in nature and expect to see an economic recovery begin in 2021 during the second year of our CECL forecast time horizon.

Net charge-offs were $0.2 million for the quarter ended March 31, 2020 and 2019.

The ratio of the allowance for credit losses to non-accrual loans was 851%, 750% and 1,035%, at March 31, 2020, December 31, 2019, and March 31, 2019, respectively.

The allowance for credit losses totaled $39.2 million at March 31, 2020 as compared to $32.8 million at December 31, 2019 and $31.8 million at March 31, 2019.

The allowance as a percentage of total loans was 1.04% at March 31, 2020, compared to 0.89% at December 31, 2019 and 0.94% at March 31, 2019.

We continue to carefully monitor the loan portfolio real estate trends in Nassau and Suffolk Counties and the New York City boroughs, and current and forecasted economic condition.

Loans totaling $84.5 million, or 2.3%, of total loans at March 31, 2020 were categorized as classified loans compared to $88.3 million, or 2.4%, at December 31, 2019 and $90.9 million, or 2.7%, at March 31, 2019.

Based on our adoption of the CECL Standard on January 1, 2020, our continuing review of the overall loan portfolio, the current asset quality of the portfolio, the growth in the loan portfolio, the net charge-offs, and current and forecasted economic conditions, a provision for credit losses of $4.5 million and $9.5 million was recorded during the three and six months ended June 30, 2020, respectively, compared to a provision for credit losses of $3.5 million and $4.1 million, respectively, during the same periods in 2019.

The increase in the second quarter 2020 allowance for credit losses is primarily related to the reasonable and supportable forecast component of the newly adopted CECL standard which includes the impact of COVID-19, coupled with an increase in the specific reserves and reserves on PPP loans, partially offset by decreases in the outstanding balances of commercial and industrial lines of credit and changes in other qualitative factors resulting from changes in the loan portfolio.

We believe, based on all of the evidence gathered to date, that COVID-19 has had a more profound impact on economic activity in the first half of 2020 than anticipated during the first quarter analysis and will continue to have a material impact on economic conditions in 2020.

Evidence also suggests that the recovery may be more gradual than previously expected.

We still believe the economic degradation will be shorter-term in nature and expect to see an economic recovery begin in 2021 during the second year of our CECL forecast time horizon.

Net charge-offs were $0.3 million for the quarter ended June 30, 2020, compared to net charge-offs of $4.1 million for the quarter ended June 30, 2019.

Net charge-offs were $0.5 million for the six months ended June 30, 2020, compared to net charge-offs of $4.3 million for the six months ended June 30, 2019.

The net charge-offs during the quarter and six months ended June 30, 2019 relate primarily to the $3.7 million charge-off related to one CRE loan totaling $16.3 million which was written down to the loan’s estimated fair value of $12.6 million and moved into loans held for sale as of June 30, 2019.

The ratio of the allowance for credit losses to non-accrual loans was 561%, 750% and 566%, at June 30, 2020, December 31, 2019, and June 30, 2019, respectively.

The allowance for credit losses totaled $43.4 million at June 30, 2020 as compared to $32.8 million at December 31, 2019 and $31.2 million at June 30, 2019.

The allowance as a percentage of total loans was 0.94% at June 30, 2020, compared to 0.89% at December 31, 2019 and 0.91% at June 30, 2019.

We continue to carefully monitor the loan portfolio, real estate trends in Nassau and Suffolk Counties and the New York City boroughs, and current and forecasted economic conditions.

Loans totaling $84.7 million, or 1.8%, of total loans at June 30, 2020 were categorized as classified loans compared to $88.3 million, or 2.4%, at December 31, 2019 and $74.2

million, or 2.2%, at June 30, 2019.

Classified loans include loans with credit quality indicators with the internally assigned grades of special mention, substandard and doubtful.

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These loans are subject to increased management attention and their classification is reviewed at least quarterly.

At March 31, 2020 , $30.1 million of classified loans were commercial real estate (“CRE”) loans.

At June 30, 2020, $30.3 million of classified loans were commercial real estate (“CRE”) loans.

Of the $30.3 million of CRE loans, $27.9 million were current and $2.4 million were past due.

At March 31, 2020 , $16.6 million of classified loans were residential real estate loans, with $13.4 million current and $3.2 million past due.

At June 30, 2020, $16.9 million of classified loans were residential real estate loans, with $13.2 million current and $3.7 million past due.

Commercial, industrial, and agricultural loans represented $35.1 million of classified loans, with $31.1 million current and $4.0 million past due.

Taxi medallion loans represented $9.6 million of the classified commercial, industrial and agricultural loans at March 31, 2020 .

Taxi medallion loans represented $9.6 million of the classified commercial, industrial and agricultural loans at June 30, 2020.

All of our taxi medallion loans are collateralized by New York City medallions and have personal guarantees.

All taxi medallion loans were current as of March 31, 2020 .

As of June 30, 2020, substantially all of our taxi medallion loans were on payment moratoriums.

All taxi medallion loans were current prior to their payment moratorium.

No new originations of taxi medallion loans are currently planned and we expect these balances to continue to decline through amortization and pay-offs.

At March 31, 2020 , there was $1.5 million of classified real estate construction and land loans, which were past due;

At June 30, 2020, there was $1.1 million of classified real estate construction and land loans, which were past due;

$0.9 million of classified consumer loans substantially all of which were current;

and $0.4 million of classified multi-family loans which were current.

CRE loans, including multi-family loans, represented $2.4 billion, or 63.5%, of the total loan portfolio at March 31, 2020 compared to $2.4 billion, or 64.8%, at December 31, 2019 and $2.0 billion, or 59.9 %, at March 31, 2019.

CRE loans, including multi-family loans, represented $2.4 billion, or 52.5%, of the total loan portfolio at June 30, 2020 compared to $2.4 billion, or 64.8%, at December 31, 2019 and $2.1 billion, or 60.4%, at June 30, 2019.

Our underwriting standards for CRE loans require an evaluation of the cash flow of the property, the overall cash flow of the borrower and related guarantors as well as the value of the real estate securing the loan.

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We consider charge-off history, delinquency trends, cash flow analysis, and the impact of the local economy on CRE values when evaluating the appropriate level of the allowance for credit losses.

As of March 31, 2020, we had $7.3 million in collateral dependent loans individually evaluated for impairment, with a specific reserve of $4.4 million.

As of June 30, 2020, we had $12.3 million in collateral dependent loans which were individually evaluated, with a specific reserve of $7.4 million.

The increase in individually evaluated loans and the related reserve during the 2020 second quarter relates primarily to taxi loans.

As of June 30, 2020, taxi loans were changed from being collectively evaluated to individually evaluated.

While our collectively evaluated taxi loans were all performing in accordance with the terms of the renewals, the COVID-19 pandemic brought New York City to a halt and the taxi industry, like many others, suffered greatly.

Substantially all of our taxi borrowers requested payment moratoriums and until such time as business fully resumes and cash flows return to normal, we feel it is most appropriate to value the taxi loans assuming they are collateral dependent.

As of December 31, 2019, we had individually impaired loans as defined by FASB ASC No.

310, “Receivables”

(prior to adoption of the CECL Standard) of $27.0 million, with a specific reserve totaling $4.7 million.

Impaired loans include individually classified non-accrual loans and troubled debt restructuring loans (“TDRs”).

310, “Receivables” (prior to adoption of the CECL Standard) of $27.0 million, with a specific reserve totaling $4.7 million.

Impaired loans include individually classified non-accrual loans and troubled debt restructuring loans (“TDRs”).

At December 31, 2019, impaired loans also included $1.1 million in other impaired performing loans which were related to borrowers with other performing TDRs.

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We concluded the risks associated with these loans were consistent with the other pooled loans and therefore they were appropriately evaluated on a collective (pooled) basis under the CECL Standard.

Non-accrual loans were $4.6 million, or 0.12%, of total loans at March 31, 2020 , and $4.4 million, or 0.12%, of total loans at December 31, 2019.

TDRs represent $635 thousand of the non-accrual loans at March 31, 2020 and $405 thousand of the non-accrual loans at December 31, 2019.

There was no other real estate owned at March 31, 2020 and December 31, 2019.

Non-accrual loans were $7.7 million, or 0.17%, of total loans, at June 30, 2020, and $4.4 million, or 0.12% of total loans at December 31, 2019.

TDRs represent $3.1 million of the non-accrual loans at June 30, 2020 and $405 thousand of the non-accrual loans at December 31, 2019.

The increase in non-accrual TDRs is primarily due to one TDR relationship totaling $2.7 million at June 30, 2020 becoming non-accrual during the second quarter.

There was no other real estate owned at June 30, 2020 and December 31, 2019.

The following table presents changes in the allowance for credit losses:

Three Months Ended

Six Months Ended

(In thousands)

March 31, 2020

March 31, 2019

June 30, 2020

June 30, 2019

Beginning balance

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The following table presents the allocation of the total allowance for credit losses by loan classification:

March 31, 2020

June 30, 2020

December 31, 2019

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Non-Interest Income

Total non-interest income during the three months ended March 31, 2020 and 2019 was $5.2 million.

The change in non-interest income is attributable to a $0.2 million increase in gain on sales of SBA loans and a $0.1 million increase in loan swap fees, partially offset by a $0.3 million decrease in other operating income .

Loan swap fees recorded on interest rate swaps increased to $1.2 million for the three months ended March 31, 2020 , compared to $1.1 million for the three months ended March 31, 2019 .

We increased the notional amount of interest rate swaps to $918.8 million at March 31, 2020, compared to $823.8 million at December 31, 2019.

Total non-interest income during the three months ended June 30, 2020 was $2.3 million compared to $5.5 million for the three months ended June 30, 2019.

The decline in non-interest income in the current quarter compared to 2019 was attributable to a $2.6 million decrease in fair value of one loan held for sale, a $0.7 million decrease in service charges and other fees, a $0.4 million decrease in gain on sales of SBA loans, a $0.2 million decrease in other operating income, and $0.2 million of net securities gains recorded during the three months ended June 30, 2019, partially offset by a $0.8 million increase in loan swap fees.

Total non-interest income during the six months ended June 30, 2020 was $7.5 million compared to $10.7 million during the six months ended June 30, 2019.

The decline in non-interest income in the current year compared to 2019 was attributable to a $2.6 million decrease in fair value of one loan held for sale, a $0.6 million decrease in service charges and other fees, a $0.5 million decrease in other operating income, a $0.2 million decrease in gain on sales of SBA loans, and $0.2 million of net securities gains recorded during the three months ended June 30, 2019, partially offset by a $0.9 million increase in loan swap fees.

During the second quarter of 2020, an additional write-down was recognized on our one CRE mortgage loan held for sale for the decrease in the estimated fair value of the loan by $2.6 million to $10.0 million through a valuation allowance which was charged against non-interest income in the consolidated statements of income.

Loan swap fees recorded on interest rate swaps increased to $1.3 million for the three months ended June 30, 2020, compared to $0.5 million for the three months ended June 30, 2019.

Loan swap fees recorded on interest rate swaps increased to $2.6 million for the six months ended June 30, 2020, compared to $1.6 million for the six months ended June 30, 2019.

We increased the notional amount of interest rate swaps to $1.0 billion at June 30, 2020, compared to $823.8 million at December 31, 2019.

The loan swap program allows us to deliver fixed rate exposure to our customers while we retain a floating rate asset and generate fee income.

These interest rate swap agreements do not qualify for hedge accounting treatment, and therefore changes in fair value are reported in non-interest income in the consolidated statement of income.

These interest rate swap agreements do not qualify for hedge accounting treatment, and therefore changes in fair value are reported in non-interest income in the consolidated statements of income.

Non-Interest Expense

Total non-interest expense was $24.8 million during the three months ended March 31, 2020 compared to $22.6 million for the three months ended March 31, 2019.

The increase was primarily due to higher salaries and benefits, and technology and communications, partially offset by lower FDIC assessments.

Salaries and benefits increased $2.3 million to $15.5 million for the three months ended March 31, 2020 compared to the same period in 2019.

The rise in salaries and employee benefits reflects our objective to attract, retain, train and cultivate employees at all levels of the Company.

Total non-interest expense was $24.4 million during the three months ended June 30, 2020 compared to $24.0 million for the three months ended June 30, 2019.

The increase was primarily due to higher technology and communications, salaries and benefits, and professional services expenses, partially offset by lower marketing and advertising expenses.

Total non-interest expense was $49.2 million during the six months ended June 30, 2020 compared to $46.6 million for the six months ended June 30, 2019.

The increase was primarily due to higher salaries and benefits, technology and communications and professional services expenses, partially offset by lower marketing and advertising expenses, and FDIC assessments.

Salaries and benefits increased $0.3 million to $13.9 million for the three months ended June 30, 2020 compared to the same period in 2019.

Technology and communications expenses increased $0.5 million to $2.4 million for the three months ended June 30, 2020 compared to the same period in the prior year.

Marketing and advertising expenses decreased $0.5 million to $1.0 million for the three months ended June 30, 2020, compared to the same period in 2019.

Professional services increased to $1.0 million in the second quarter of 2020 compared to $0.8 million in the second quarter of 2019.

Other operating expenses decreased $0.2 million to $1.9 million for the three months ended June 30, 2020 compared to the same period in 2019.

Salaries and benefits increased $2.5 million to $29.5 million for the six months ended June 30, 2020 compared to the same period in 2019.

Technology and communications expenses increased $0.9 million to $4.6 million for the six months ended June 30, 2020 compared to the same period in the prior year.

Professional services increased to $2.0 million in the second quarter of 2020 compared to $1.6 million for the same period in 2019.

Marketing and advertising expenses decreased $0.7 million to $1.8 million for the six months ended June 30, 2020, compared to the same period in 2019.

FDIC assessments decreased to $0.5 million for the six months ended June 30, 2020, compared to $0.6 million for the same period in 2019, primarily due to FDIC assessment credits totaling $0.3 million in the 2020 period.

Other operating expenses decreased $0.3 million to $3.5 million for the six months ended June 30, 2020 compared to the same period in 2019.

The rise in salaries and employee benefits in the three months ended and six months ended 2020 compared to 2019 reflects our objective to attract, retain, train and cultivate employees at all levels of the Company.

In particular, we are focused on expanding and retaining our loan team as we continue to grow our loan portfolio.

Technology and communications increased $0.4 million to $2.2 million for the three months ended March 31, 2020 compared to the same period in the prior year.

The rise in technology and communications expenses reflects higher software maintenance and system services expenses as we increased our investment in technology and expanded our use of automation in the 2020 period.

FDIC assessments decreased to $1 thousand for the three months ended March 31, 2020, compared to $0.2 million for the same period in 2019, primarily due to FDIC assessment credits totaling $0.3 million in the 2020 period.

Marketing and advertising decreased $0.2 million to $0.8 million for the three months ended March 31, 2020, compared to the same period in 2019.

Professional services increased to $1.0 million in the first quarter of 2020 compared to $0.8 million in the first quarter of 2019.

Other operating expenses decreased $0.2 million to $1.6 million for the three months ended March 31, 2020 compared to the same period in 2019.

Income tax expense was $2.7 million for the three months ended March 31, 2020 compared to $3.4 million for the three months ended March 31, 2019, reflecting lower income before income taxes, partially offset by a higher effective tax rate in the 2020 period.

The effective tax rate was 22.3% for the three months ended March 31, 2020 compared to 20.9% for the same period in 2019.

The increase in technology and communications expenses in the current quarter and current year compared to 2019 reflects higher software maintenance and system services expenses as we increased our investment in technology and expanded our use of automation in the 2020 periods.

Income tax expense was $3.1 million for the three months ended June 30, 2020 compared to $2.9 million for the three months ended June 30, 2019, reflecting higher income before income taxes and a higher effective tax rate in the 2020 period.

The effective tax rate was 22.7% for the three months ended June 30, 2020 compared to 21.2% for the same period in 2019.

Income tax expense was $5.8 million for the six months ended June 30, 2020 compared to $6.3 million for the six months ended June 30, 2019, reflecting lower income before income taxes, partially offset by a higher effective tax rate in the 2020 period.

The effective tax rate was 22.7% for the six months ended June 30, 2020 compared to 21.0% for the same period in 2019.

We estimate we will record income tax at an effective tax rate of approximately 22.7% for the remainder of 2020.

Financial Condition

Total assets were $5.1 billion at March 31, 2020, $139.4 million, or 2.8%, higher than December 31, 2019.

The rise in total assets in 2020 reflects increases in cash and cash equivalents, and loans held for investment, partially offset by a decrease in securities.

Cash and cash equivalents increased $117.0 million, or 99.8%, to $234.2 million at March 31, 2020 compared to December 31, 2019.

Total securities decreased $100.9 million, or 12.5%, to $703.9 million at March 31, 2020 compared to December 31, 2019.

Total loans held for investment, net, increased $75.4 million, or 2.1%, to $3.7 billion at March 31, 2020 compared to December 31, 2019.

Total assets were $6.2 billion at June 30, 2020, $1.2 billion, or 25.0%, higher than December 31, 2019.

The rise in total assets in 2020 reflects increases in loans held for investment and cash and cash equivalents, partially offset by a decrease in securities.

Cash and cash equivalents increased $372.6 million, or 317.9%, to $489.8 million at June 30, 2020 compared to December 31, 2019.

Total securities decreased $126.8 million, or 15.8%, to $678.0 million at June 30, 2020 compared to December 31, 2019.

Total loans held for investment, net, increased $940.5 million, or 25.6%, to $4.6 billion at June 30, 2020 compared to December 31, 2019, inclusive of PPP loans totaling $949.7 million.

Net deferred loan fees were $17.3 million at June 30, 2020, inclusive of $26.0 million remaining unamortized net loan fees related to PPP loans.

Our focus is on our ability to grow the loan portfolio, while minimizing interest rate risk sensitivity and maintaining credit quality.

Total liabilities were $4.6 billion at March 31, 2020, $143.3 million higher than December 31, 2019.

The increase in total liabilities in 2020 was mainly due to deposit growth, partially offset by a decrease in FHLB advances.

Total deposits increased $241.1 million, or 6.3%, to $4.1 billion at March 31, 2020, compared to December 31, 2019.

The increase in total deposits in 2020 was largely attributable to higher Savings, NOW and money market deposits, partially offset by lower demand deposits.

Savings, NOW and money market deposits increased $276.4 million, or 13.9%, to $2.3 billion at March 31, 2020 compared to December 31, 2019.

Demand deposits decreased $37.4 million, or 2.5%, to $1.5 billion at March 31, 2020 compared to December 31, 2019.

Certificates of deposit increased $2.1 million, or 0.7%, to $310.1 million at March 31, 2020 compared to December 31, 2019.

FHLB advances decreased $145.0 million to $290.0 million at March 31, 2020 compared to December 31, 2019.

Total stockholders' equity decreased $3.9 million to $493.3 million at March 31, 2020 compared to $497.2 million at December 31, 2019.

We adopted the CECL Standard on January 1, 2020, which resulted in a charge to retained earnings and reduction to stockholders’

equity of $1.5 million.

The decrease in stockholders’

equity was largely attributable to $4.8 million in dividends, $4.6 million in purchases of treasury stock, and other comprehensive loss, net of deferred income taxes, of $2.6 million, partially offset by net income of $9.3 million.

During the three months ended March 31, 2020, there were 179,620 shares purchased under the 2019 Stock Repurchase Program at a cost of $4.6 million.

Total liabilities were $5.6 billion at June 30, 2020, $1.2 billion higher than December 31, 2019.

The increase in total liabilities in 2020 was mainly due to deposit growth, attributable to PPP related deposits, partially offset by a decrease in FHLB advances.

Total deposits increased $1.3 billion, or 33.2%, to $5.1 billion at June 30, 2020, compared to December 31, 2019.

The increase in total deposits in 2020 was largely attributable to higher demand deposits and savings, NOW and money market deposits.

Demand deposits increased $645.2 million, or 42.5%, to $2.2 billion at June 30, 2020 compared to December 31, 2019.

The rise in demand deposits in the second quarter of 2020 was primarily driven by an inflow of PPP-related deposits.

Savings, NOW and money market deposits increased $630.5 million, or 31.7%, to $2.6 billion at June 30, 2020 compared to December 31, 2019.

Certificates of deposit decreased $10.0 million, or 3.2%, to $298.0 million at June 30, 2020 compared to December 31, 2019.

FHLB advances decreased $95.0 million to $340.0 million at June 30, 2020 compared to December 31, 2019.

Total stockholders' equity increased $5.5 million to $502.6 million at June 30, 2020 compared to $497.2 million at December 31, 2019.

We adopted the CECL Standard on January 1, 2020, which resulted in a charge to retained earnings and reduction to stockholders’ equity of $1.5 million.

The increase in stockholders’ equity was largely attributable to net income of $20.0 million, partially offset $9.6 million in dividends, $4.6 million in purchases of treasury stock, and other comprehensive loss, net of deferred income taxes, of $0.4 million.

During the six months ended June 30, 2020, there were 179,620 shares purchased under the 2019 Stock Repurchase Program at a cost of $4.6 million.

Our liquidity management objectives are to ensure the sufficiency of funds available to respond to the needs of depositors and borrowers, and to take advantage of unanticipated opportunities for our growth or earnings enhancement.

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Liquidity is primarily needed to meet customer borrowing commitments and deposit withdrawals, either on demand or on contractual maturity, to repay borrowings as they mature, to fund current and planned expenditures and to make new loans and investments as opportunities arise.

The Holding Company’s principal sources of liquidity included cash and cash equivalents of $6.4 million as of March 31, 2020, and dividend capabilities from the Bank.

The Holding Company’s principal sources of liquidity included cash and cash equivalents of $2.0 million as of June 30, 2020, and dividend capabilities from the Bank.

Cash available for distribution of dividends to our shareholders is primarily derived from dividends paid by the Bank to the Company.

For the three months ended March 31, 2020, the Bank paid $15.0 million in cash dividends to the Holding Company.

For the six months ended June 30, 2020, the Bank paid $15.0 million in cash dividends to the Holding Company.

Prior regulatory approval is required if the total of all dividends declared by the Bank in any calendar year exceeds the total of the Bank's net income of that year combined with its retained net income of the preceding two years.

As of March 31, 2020, the Bank had $54.0 million of retained net income available for dividends to the Holding Company.

In the event the Holding Company subsequently expands its current operations, in addition to dividends from the Bank, it will need to rely on its own earnings, additional capital raised and other borrowings to meet liquidity needs.

The Holding Company did not make any capital contributions to the Bank during the three months ended March 31, 2020.

As of June 30, 2020, the Bank had $65.5 million of retained net income available for dividends to the Holding Company.

In the event the Holding Company subsequently expands its current operations, in

addition to dividends from the Bank, it will need to rely on its own earnings, additional capital raised and other borrowings to meet liquidity needs.

The Holding Company did not make any capital contributions to the Bank during the six months ended June 30, 2020.

The Bank's most liquid assets are cash and cash equivalents, securities available for sale and securities held to maturity due within one year.

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The Bank's Asset/Liability and Funds Management Policy allows for wholesale borrowings of up to 25% of total assets.

At March 31, 2020 , the Bank had aggregate lines of credit of $373.0 million with unaffiliated correspondent banks to provide short-term credit for liquidity requirements.

At June 30, 2020, the Bank had aggregate lines of credit of $418.0 million with unaffiliated correspondent banks to provide short-term credit for liquidity requirements.

Of these aggregate lines of credit, $398.0 million is available on an unsecured basis.

As of March 31, 2020 , the Bank had no overnight borrowings outstanding under these lines.

also has the ability, as a member of the FHLB system, to borrow against unencumbered residential and commercial mortgages owned by the Bank.

As of June 30, 2020, the Bank had no overnight borrowings outstanding under these lines.

The Bank also has the ability, as a member of the FHLB system, to borrow against unencumbered residential and commercial mortgages owned by the Bank.

The Bank also has a master repurchase agreement with the FHLB, which increases its borrowing capacity.

As of March 31, 2020, the Bank had no FHLB overnight borrowings outstanding and $290.0 million outstanding in FHLB term borrowings.

As of June 30, 2020, the Bank had no FHLB overnight borrowings outstanding and $340.0 million outstanding in FHLB term borrowings.

As of December 31, 2019, the Bank had $195.0 million FHLB overnight borrowings outstanding and $240.0 million outstanding in FHLB term borrowings.

The Bank had $1.2 million and $1.0 million at March 31, 2020 and December 31, 2019, respectively, of securities sold under agreements to repurchase outstanding with customers and no such agreements outstanding with brokers.

The Bank had $1.7 million and $1.0 million at June 30, 2020 and December 31, 2019, respectively, of securities sold under agreements to repurchase outstanding with customers and no such agreements outstanding with brokers.

In addition, the Bank has approved broker relationships for the purpose of issuing brokered deposits.

As of March 31, 2020, the Bank had $77.5 million outstanding in brokered certificates of deposit and $120.3 million outstanding in brokered money market accounts.

As of June 30, 2020, the Bank had $66.9 million outstanding in brokered certificates of deposit and $120.4 million outstanding in brokered money market accounts.

As of December 31, 2019, the Bank had $77.3 million outstanding in brokered certificates of deposit and $85.1 million outstanding in brokered money market accounts.

Liquidity policies are established by senior management and reviewed and approved by the full Board of Directors at least annually.

Management continually monitors the liquidity position and believes that sufficient liquidity exists to meet all of the Company’s operating requirements.

The Bank’s liquidity levels are affected by the use of short-term and wholesale borrowings and the amount of public funds in the deposit mix.

Management continually monitors the liquidity position and believes that sufficient liquidity exists to meet all of the Company’s operating requirements.

The Bank’s liquidity levels are affected by the use of short-term and wholesale borrowings and the amount of public funds in the deposit mix.

Excess short-term liquidity is invested in overnight federal funds sold or in an interest-earning account at the FRB.

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The required minimums for the Company and Bank are set forth in the tables that follow.

The Company and the Bank met all capital adequacy requirements at March 31, 2020 and December 31, 2019.

On January 1, 2015, the Basel III Capital Rules became effective and include transition provisions through January 1, 2019.

These rules provide for the following minimum capital to risk-weighted assets ratios as of January 1, 2015:

a) 4.5% based on common equity tier 1 capital ("CET1");

The Company and the Bank met all capital adequacy requirements at June 30, 2020 and December 31, 2019.

Under the Basel III Capital Rules the Company and the Bank are subject to the following minimum capital to risk-weighted assets ratios:

a) 4.5% based on common equity tier 1 capital ("CET1");

b) 6.0% based on tier 1 capital;

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The Basel III Capital Rules additionally require institutions to retain a capital conservation buffer, composed of CET1, of 2.5% above these required minimum capital ratio levels.

The capital conservation buffer requirement was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increased by 0.625% each subsequent January 1, until fully implemented at 2.5% on January 1, 2019.

Including the capital conservation buffer, the Company and the Bank effectively have the following minimum capital to risk-weighted assets ratios:

Including the capital conservation buffer, the Company and the Bank effectively are subject to the following minimum capital to risk-weighted assets ratios:

a) 7.0% based on CET1;

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The Company and the Bank made the one-time, permanent election to continue to exclude the effects of accumulated other comprehensive income or loss items included in stockholders' equity for the purposes of determining the regulatory capital ratios.

As of March 31, 2020 , the most recent notification from the FDIC categorized the Bank as “well capitalized”

under the regulatory framework for prompt corrective action.

To be categorized as “well capitalized,”

the Bank must maintain minimum total risk-based, tier 1 risk-based, common equity tier 1 risk-based and tier 1 leverage ratios as set forth in the tables below.

As of June 30, 2020, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action.

To be categorized as “well capitalized,” the Bank must maintain minimum total risk-based, tier 1 risk-based, common equity tier 1 risk-based and tier 1 leverage ratios as set forth in the tables below.

Since that notification, there are no conditions or events that management believes have changed the institution's category.

In accordance with the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies have adopted, effective January 1, 2020, a final rule whereby financial institutions and financial institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, will be eligible to opt into a community bank leverage ratio framework (“qualifying community banking organizations”).

capital rules and will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action statutes.

Qualifying community banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules and will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action statutes.

The agencies reserved the authority to disallow the use of the community bank leverage ratio framework by a financial institution or holding company, based on the risk profile of the organization.

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The CARES Act also provides that, during the same time period, if a qualifying community banking organization falls no more than 1% below the community bank leverage ratio, it will have a two-quarter grace period to satisfy the community bank leverage ratio.

The following tables present actual capital levels and minimum required levels for the Company and the Bank under Basel III rules at March 31, 2020 and December 31, 2019:

March 31, 2020

The following tables present actual capital levels and minimum required levels for the Company and the Bank under Basel III rules at June 30, 2020 and December 31, 2019:

June 30, 2020

Minimum Capital

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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-Q

Item 2. Management’s Discussion and Analysis