What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-07 · 187 added, 197 removed, 495 unchanged (44% of the section changed)

12 unchanged sentences

current and future capital management programs;

non-interest income levels, including fees from the title insurance subsidiary and banking services as well as product sales;

non-interest income levels,

including fees from the title insurance subsidiary and banking services as well as product sales;

tangible capital generation;

54 unchanged sentences

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.

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.

Through its title insurance abstract subsidiary, the Bank acts as a broker for title insurance services.

14 unchanged sentences

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.

As of September 30, 2020, we originated over 4,200 loans totaling $960.4 million.

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

The mean and median PPP loan amounts were $226 thousand and $70 thousand, respectively.

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

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

(Dollars in thousands)

16 unchanged sentences

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

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

As of October 25, 2020, we have approved 491 loan moratoriums totaling $615 million, or 13% of total loan balances.

Approximately $610 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.

Of these loans, 66% returned to making their agreed-on payments and 34% requested an extension.

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

Residential real estate mortgage loans/Consumer loans

Approximately $44 million in commercial loan payment deferrals were outstanding as of October 25, 2020.

The industries we identified as most significantly impacted by the COVID-19 pandemic based on the potential risk to cash flows are hotels, restaurants, passenger transportation, leisure, museums and catering.

16 unchanged sentences

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.

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.

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 and preferred stock to be issued in the Merger, (3) the absence of any order, decree or injunction preventing the completion of the Merger, and (4) 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.

1 unchanged sentence

Quarterly Highlights

● 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.

● Net income for the 2020 third quarter of $13.1 million, or $0.66 per diluted share, inclusive of pre-tax merger expenses of $2.4 million, or $0.11 per diluted share after tax, related to our merger with Dime.

● Net interest income increased to $40.7 million for the third quarter of 2020 compared to $36.7 million in 2019.

● Tax-equivalent net interest margin was 2.83% for the third quarter of 2020 compared to 3.40% for the 2019 period.

● Total assets of $6.3 billion at September 30, 2020, increased $1.4 billion compared to December 31, 2019 and increased $171.7 million compared to June 30, 2020.

● Total loans held for investment at September 30, 2020 totaled $4.6 billion, inclusive of PPP loans totaling $960.4 million, an increase of $959.2 million, or 26.1%, from December 31, 2019, and an increase of $18.6 million, or 1.6%, over June 30, 2020.

● Total deposits of $5.4 billion at September 30, 2020, increased $1.6 billion, or 40.7%, from December 31, 2019, and increased $288.7 million, or 5.7%, from June 30, 2020.

● Provision for credit losses of $1.5 million for the third quarter of 2020 compared to $1.0 million in 2019.

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

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

Challenges and Opportunities

5 unchanged sentences

A sustained decrease in market interest rates could adversely affect our earnings.

When interest rates decline, borrowers tend to refinance higher-rate, fixed-rate loans at lower rates.

interest rates decline, borrowers tend to refinance higher-rate, fixed-rate loans at lower rates.

In addition, the majority of our loans are at variable interest rates, which would adjust to lower rates.

12 unchanged sentences

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

18 unchanged sentences

For a loan that does not share risk characteristics with other loans, expected credit loss is measured based on net realizable value, that is, the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the amortized cost basis of the loan.

For these loans, we recognize expected credit loss equal to the amount by which the net realizable value of the loan is less than the amortized cost basis of the loan (which is net of previous charge-offs), except when the loan is collateral dependent, that is, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.

For these loans, we recognize expected credit loss equal to the amount by which the net realizable value of the loan is less than the amortized cost basis of the loan (which is net of

previous charge-offs), except when the loan is collateral dependent, that is, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.

In these cases, expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral.

5 unchanged sentences

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.

29 unchanged sentences

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 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.

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 September 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.

3 unchanged sentences

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 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:

Net income for the three months ended September 30, 2020 was $13.1 million and $0.66 per diluted share as compared to $13.9 million and $0.70 per diluted share for the same period in 2019.

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

(i) a $4.0 million, or 10.9%, increase in net interest income;

(ii) a $0.5 million, or 50.0%, increase in the provision for credit losses;

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

(iii) a $0.5 million, or 8.7%, increase in non-interest income;

(iv) a $4.7 million, or 19.6%, increase in non-interest expense;

and (v) a $0.1 million, or 3.8%, 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;

Net income for the nine months ended September 30, 2020 was $33.1 million and $1.66 per diluted share as compared to $37.5 million and $1.88 per diluted share for the same period in 2019.

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

(i) an $11.2 million, or 10.5%, increase in net interest income;

(ii) a $5.9 million, or 115.7%, increase in the provision for credit losses;

12 unchanged sentences

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 June 30,

Three Months Ended September 30,

(Dollars in thousands)

34 unchanged sentences

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

Six Months Ended June 30,

Nine Months Ended September 30,

(Dollars in thousands)

43 unchanged sentences

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2020 Over 2019

22 unchanged sentences

federal statutory tax rate of 21%.

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.

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

Net interest income was $40.7 million for the three months ended September 30, 2020 compared to $36.7 million for the three months ended September 30, 2019.

Average net interest-earning assets increased $774.8 million to $2.3 billion for the three months ended September 30, 2020 compared to $1.6 billion for the three months ended September 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.

Tax-equivalent net interest margin decreased to 2.83% for the three months ended September 30, 2020 compared to 3.40% for the three months ended September 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.

1 unchanged sentence

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

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.

Total interest income was $46.3 million for the three months ended September 30, 2020 compared to $46.4 million for the same period in 2019.

The average interest-earning assets increased $1.4 billion, or 33.8%, to $5.7 billion for the three months ended September 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 September 30, 2020 compared to 2019 reflects loan growth in the commercial and industrial portfolio driven by PPP loan originations in the 2020 second quarter, 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 tax-equivalent average yield on interest-earning assets was 3.21% for the quarter ended September 30, 2020 compared to 4.29% for the quarter ended September 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%.

Interest income on loans increased $2.1 million to $43.1 million for the three months ended September 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 September 30, 2020, average loans grew by $1.2 billion, or 34.0%, to $4.6 billion as compared to $3.4 billion for the same period in 2019.

The tax-equivalent yield on average loans was 3.72% for the third quarter of 2020 compared to 4.73% for the same period in 2019.

The average balance of loans for the quarter ended September 30, 2020 includes $933.3 million of PPP loans with an average yield of 2.56%.

The PPP loans had the effect of decreasing the tax-equivalent yield by 29 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 $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.

Interest income on investment securities decreased $1.9 million to $3.1 million for the three months ended September 30, 2020 compared to $5.0 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 $1.0 million for the three months ended September 30, 2020 compared to $1.2 million for the same period in 2019.

For the three months ended September 30, 2020, average total investment securities decreased by $190.4 million, or 24.2%, to $597.0 million as compared to $787.4 million for the same period in 2019.

The decline in tax-equivalent average yield on total investment securities to 2.10% for the three months ended September 30, 2020 compared to 2.55% 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 $5.6 million for the three months ended September 30, 2020 as compared to $9.6 million for the same period in 2019.

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

The cost of average interest-bearing liabilities was 0.66% for the three months ended September 30, 2020 and 1.41% for the three months ended September 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 $3.2 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.

Average total interest-bearing liabilities were $3.4 billion for the three months ended September 30, 2020 and $2.7 billion for the same period in 2019 due to increases in average deposits and average borrowings.

Average total deposits increased to $5.2 billion for the three months ended September 30, 2020, compared to $3.8 billion for the three months ended September 30, 2019 primarily due to a rise in average demand deposits and average savings, NOW and money market accounts.

Average demand deposits totaled $2.2 billion for the three months ended September 30, 2020 compared to $1.4 billion for the three months ended September 30, 2019.

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

The average balance of savings, NOW and money market accounts increased $577.9 million, or 27.4%, to $2.7 billion for the three months ended September 30, 2020 compared to $2.1 billion for the three months ended September 30, 2019.

The cost of average savings, NOW and money market deposits was 0.31% for the 2020 third quarter compared to 1.09% for the 2019 third quarter.

Average balances in certificates of deposit increased $22.4 million, or 8.2%, to $295.1 million for the three months ended September 30, 2020 compared to $272.7 million for the three months ended September 30, 2019.

The cost of average certificates of deposit decreased to 1.29% for the three months ended September 30, 2020 compared to 2.09% for the same period in 2019.

Average public fund deposits comprised 17.1% of total average deposits during the 2020 third quarter and 14.6% for the 2019 third quarter.

Average FHLB advances increased $85.7 million, or 35.1%, to $329.7 million for the three months ended September 30, 2020 compared to $244.0 million for the three months ended September 30, 2019.

Analysis of Net Interest Income for the Nine Months Ended September 30, 2020 and 2019

Net interest income was $117.8 million for the nine months ended September 30, 2020 compared to $106.6 million for the nine months ended September 30, 2019.

Average net interest-earning assets increased $553.6 million to $2.1 billion for the nine months ended September 30, 2020 compared to $1.5 billion for the nine months ended September 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.

Tax-equivalent net interest margin decreased to 3.01% for the nine months ended September 30, 2020 compared to 3.33% for the nine months ended September 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.

1 unchanged sentence

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.

Total interest income decreased $0.5 million, or 0.3%, to $136.7 million for the nine months ended September 30, 2020 from $137.2 million for the same period in 2019, as average interest-earning assets increased $946.5 million, or 22.0%, to $5.2 billion for the nine months ended September 30, 2020 compared to $4.3 billion for the same period in 2019.

The increase in average interest-earning assets for the nine months ended September 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 tax-equivalent average yield on interest-earning assets was 3.49% for the nine months ended September 30, 2020 compared to 4.29% for the nine months ended September 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%.

Interest income on loans increased $6.3 million to $124.8 million for the nine months ended September 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 nine months ended September 30, 2020, average loans grew by $876.3 million, or 26.1%, to $4.2 billion as compared to $3.4 billion for the same period in 2019.

The tax-equivalent yield on average loans was 3.94% for the nine months ended September 30, 2020 compared to 4.72% for the same period in 2019.

The average balance of loans for the nine months ended September 30, 2020 includes $621.1 million of PPP loans with an average yield of 2.55%.

The PPP loans had the effect of decreasing the tax-equivalent yield by 20 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.

Interest income on investment securities decreased $5.8 million to $11.4 million for the nine months ended September 30, 2020 compared to $17.2 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 $2.5 million for the nine months ended September 30, 2020 as compared to $2.7 million for the same period in 2019.

For the nine months ended September 30, 2020, average total investment securities decreased by $175.0 million, or 20.7%, to $669.1 million as compared to $844.1 million for the same period in 2019.

The decline in tax-equivalent average yield on total investment securities to 2.31% for the nine months ended September 30, 2020 compared to 2.76% 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 $19.0 million for the nine months ended September 30, 2020 as compared to $30.7 million for the same period in 2019.

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

The cost of average interest-bearing liabilities was 0.80% for the nine months ended September 30, 2020 and 1.48% for the nine months ended September 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.

Average total interest-bearing liabilities were $3.2 billion for the nine months ended September 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 $4.7 billion for the nine months ended September 30, 2020, compared to $3.8 billion for the nine months ended September 30, 2019 primarily due to an increase in average demand deposits and average savings, NOW and money market accounts.

Average demand deposits totaled $1.9 billion for the nine months ended September 30, 2020 compared to $1.4 billion for the nine months ended September 30, 2019.

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

The average balance of savings, NOW and money market accounts increased $313.5 million, or 14.6%, to $2.5 billion for the nine months ended September 30, 2020 compared to $2.1 billion for the nine months ended September 30, 2019.

The cost of average savings, NOW and money market deposits was 0.47% for the nine months ended September 30, 2020 compared to 1.20% for the same period in 2019.

Average balances in certificates of deposit increased $19.3 million, or 6.7%, to $308.8 million for the nine months ended September 30, 2020 compared to $289.5 million for the nine months ended September 30, 2019.

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

Average public fund deposits comprised 17.8% of total average deposits during the nine months ended September 30, 2020 and 15.7% for the same period in 2019.

Average federal funds purchased and repurchase agreements decreased $4.7 million, to $11.0 million for the nine months ended September 30, 2020 compared to $15.7 million for the same period in 2019.

The cost of average federal funds purchased and repurchase agreements was 0.96% for the nine months ended September 30, 2020 compared to 2.32% for the same period in 2019.

Average FHLB advances increased $64.6 million, or 26.5%, to $308.1 million for the nine months ended September 30, 2020 compared to $243.5 million for the nine months ended September 30, 2019.

Provision and Allowance for Credit Losses

2 unchanged sentences

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, 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.

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 $1.5 million and $11.0 million was recorded during the three and nine months ended September 30, 2020, respectively, compared to a provision for credit losses of $1.0 million and $5.1 million, respectively, during the same periods in 2019.

The third quarter 2020 provision was primarily driven by net charge-offs for the quarter.

The allowance for credit losses at September 30, 2020 was consistent with the prior quarter primarily as a result of there being no change to the reasonable and supportable forecast component of the analysis.

COVID-19 continues to have a profound impact on economic activity.

While there have been some signs of economic improvement during the third quarter, significant uncertainty remains.

Management still believes that the economic recovery will accelerate during 2021 and 2022, however, based on the aforementioned uncertainty and negative impact the virus has had to date, the decision was made to maintain the current risk level for the reasonable and supportable forecast component of the allowance for credit losses in the third quarter.

The increase in the allowance for credit losses and related provision for credit losses for the nine months ended September 30, 2020 is primarily related to the reasonable and supportable forecast component of the analysis which includes the impact of COVID-19 on economic conditions, coupled with an increase in the specific reserves.

Net charge-offs were $1.4 million for the quarter ended September 30, 2020, compared to net recoveries of $2 thousand for the quarter ended September 30, 2019.

Net charge-offs were $1.9 million for the nine months ended September 30, 2020, compared to net charge-offs of $4.3 million for the nine months ended September 30, 2019.

The net charge-offs during the nine months ended September 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 615%, 750% and 764%, at September 30, 2020, December 31, 2019, and September 30, 2019, respectively.

The allowance for credit losses totaled $43.5 million at September 30, 2020 as compared to $32.8 million at December 31, 2019 and $32.2 million at September 30, 2019.

The allowance as a percentage of total loans was 0.94% at September 30, 2020, compared to 0.89%

at December 31, 2019 and 0.92% at September 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.

Loans totaling $93.1 million, or 2.0%, of total loans at September 30, 2020 were categorized as classified loans compared to $88.3 million, or 2.4% of total loans, at December 31, 2019 and $82.5 million, or 2.4% of total loans, at September 30, 2019.

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

1 unchanged sentence

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

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

At September 30, 2020, $31.0 million of classified loans were commercial real estate (“CRE”) loans.

Of the $31.0 million of CRE loans, $28.6 million were current and $2.4 million were 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.

At September 30, 2020, $17.0 million of classified loans were residential real estate loans, with $14.1 million current and $2.9 million past due.

Commercial, industrial, and agricultural loans represented $42.5 million of classified loans, with $40.6 million current and $1.9 million past due.

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

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

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

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

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

At September 30, 2020, there was $1.2 million of classified real estate construction and land loans substantially all of which were current;

$1.0 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 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.

CRE loans, including multi-family loans, represented $2.5 billion, or 53.3%, of the total loan portfolio at September 30, 2020 compared to $2.4 billion, or 64.8%, at December 31, 2019 and $2.2 billion, or 62.7%, at September 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.

1 unchanged sentence

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 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 September 30, 2020, we had $15.9 million in loans which were individually evaluated, with a specific reserve of $7.0 million.

Individually evaluated loans include $9.6 million of taxi medallion loans.

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

8 unchanged sentences

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 $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.

Non-accrual loans were $7.1 million, or 0.15%, of total loans, at September 30, 2020, and $4.4 million, or 0.12% of total loans at December 31, 2019.

TDRs represent $581 thousand of the non-accrual loans at September 30, 2020 and $405 thousand of the non-accrual loans at December 31, 2019.

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

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

Six Months Ended

Nine Months Ended

(In thousands)

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

Beginning balance

13 unchanged sentences

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

June 30, 2020

September 30, 2020

December 31, 2019

11 unchanged sentences

Non-Interest Income

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.

Total non-interest income during the three months ended September 30, 2020 was $6.8 million compared to $6.2 million for the three months ended September 30, 2019.

The increase in non-interest income in the current quarter compared to 2019 was attributable to a $3.5 million increase in net securities gains, a $1.6 million increase in gain on sale of SBA loans, and a $0.2 million increase in title fees, partially offset by a $3.4 million loss on termination of swaps, a $1.0 million decrease in loan swap fees, and a $0.4 million decrease in service charges and other fees.

Total non-interest income during the nine months ended September 30, 2020 was $14.3 million compared to $17.0 million during the nine months ended September 30, 2019.

The decline in non-interest income in the current year compared to 2019 was attributable to a $3.4 million loss on termination of swaps, a $2.6 million decrease in fair value of one loan held for sale, a $1.0 million decrease in service charges and other fees, and a $0.5 million decrease in other operating income, partially offset by a $3.3 million increase in net securities gains, a $1.4 million increase in gain on sale of SBA loans, and a $0.3 million increase in title fees.

During the third quarter of 2020, we restructured our wholesale balance sheet, offsetting net securities gains of $3.5 million with swap termination losses of $3.4 million, which we expect will positively impact our net interest margin in the fourth quarter of 2020.

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.

Loan swap fees recorded on interest rate swaps decreased to $0.6 million for the three months ended September 30, 2020, compared to $1.6 million for the three months ended September 30, 2019.

Loan swap fees recorded on interest rate swaps decreased to $3.1 million for the nine months ended September 30, 2020, compared to $3.2 million for the nine months ended September 30, 2019.

We increased the notional amount of interest rate swaps to $1.1 billion at September 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.

1 unchanged sentence

Non-Interest Expense

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.

Total non-interest expense was $28.9 million during the three months ended September 30, 2020 compared to $24.2 million for the three months ended September 30, 2019.

The increase was primarily due to merger expenses associated with our proposed merger with Dime, and higher salaries and benefits, FDIC assessments, technology and communications, professional services and occupancy and equipment expenses, partially offset by lower marketing and advertising, and other operating expenses.

Total non-interest expense was $78.2 million during the nine months ended September 30, 2020 compared to $70.8 million for the nine months ended September 30, 2019.

The increase was primarily due to merger expenses associated with our proposed merger with Dime, and higher salaries and benefits, technology and communications, professional services, and FDIC assessments expenses, partially offset by lower marketing and advertising expenses and other operating expenses.

Salaries and benefits increased $2.1 million to $16.4 million for the three months ended September 30, 2020 compared to the same period in 2019.

Technology and communications expenses increased $0.4 million to $2.5 million for the three months ended September 30, 2020 compared to the same period in the prior year.

Marketing and advertising expenses decreased $0.8 million to $0.5 million for the three months ended September 30, 2020 compared to the same period in 2019.

Professional services increased to $1.4 million in the third quarter of 2020 compared to $1.1 million in the third quarter of 2019.

FDIC assessments increased to $0.7 million for the three months ended September 30, 2020, compared to $18 thousand for the same period in 2019, primarily due to FDIC assessment credits totaling $0.4 million in the 2019 period.

Other operating expenses decreased $0.3 million to $1.5 million for the three months ended September 30, 2020 compared to the same period in 2019.

Salaries and benefits increased $4.6 million to $45.9 million for the nine months ended September 30, 2020 compared to the same period in 2019.

Technology and communications expenses increased $1.3 million to $7.1 million for the nine months ended September 30, 2020 compared to the same period in the prior year.

Professional services increased to $3.4 million in the third quarter of 2020 compared to $2.6 million for the same period in 2019.

Marketing and advertising expenses decreased $1.5 million to $2.2 million for the nine months ended September 30, 2020, compared to the same period in 2019.

FDIC assessments increased to $1.2 million for the nine months ended September 30, 2020, compared to $0.7 million for the same period in 2019, primarily due to FDIC assessment credits totaling $0.4 million in the 2019 period.

Other operating expenses decreased $0.6 million to $5.0 million for the nine months ended September 30, 2020 compared to the same period in 2019.

The rise in salaries and employee benefits in the three months ended and nine months ended 2020 compared to 2019 was related to higher incentive accruals in 2020.

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.

Income tax expense was $4.0 million for the three months ended September 30, 2020 compared to $3.9 million for the three months ended September 30, 2019, reflecting a higher effective tax rate, partially offset by lower income before income taxes in the 2020 period.

The effective tax rate was 23.4% for the three months ended September 30, 2020 compared to 21.7% for the same period in 2019.

The increase in our effective tax rate resulted primarily from non-deductible merger expenses in the 2020 third quarter.

Income tax expense was $9.8 million for the nine months ended September 30, 2020 compared to $10.1 million for the nine months ended September 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 22.9% for the nine months ended September 30, 2020 compared to 21.3% for the same period in 2019.

The increase in our effective tax rate resulted primarily from non-deductible merger expenses in the 2020 third quarter.

Financial Condition

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

Total assets were $6.3 billion at September 30, 2020, $1.4 billion, or 28.5%, 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.

Cash and cash equivalents increased $593.3 million, or 506.2%, to $710.5 million at September 30, 2020 compared to December 31, 2019.

Total securities decreased $214.4 million, or 26.6%, to $590.4 million at September 30, 2020 compared to December 31, 2019.

Total loans held for investment, net, increased $959.2 million, or 26.1%, to $4.6 billion at September 30, 2020 compared to December 31, 2019, inclusive of PPP loans totaling $960.4 million.

Net deferred loan fees were $14.2 million at September 30, 2020, inclusive of $22.7 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 $5.6 billion at June 30, 2020, $1.2 billion higher than December 31, 2019.

Total liabilities were $5.8 billion at September 30, 2020, $1.4 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.

Total deposits increased $1.6 billion, or 40.7%, to $5.4 billion at September 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.

Demand deposits increased $727.3 million, or 47.9%, to $2.2 billion at September 30, 2020 compared to December 31, 2019.

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

Savings, NOW and money market deposits increased $844.7 million, or 42.5%, to $2.8 billion at September 30, 2020 compared to December 31, 2019.

Certificates of deposit decreased $17.6 million, or 5.7%, to $290.4 million at September 30, 2020 compared to December 31, 2019.

FHLB advances decreased $220.0 million to $215.0 million at September 30, 2020 compared to December 31, 2019.

Total stockholders' equity increased $15.1 million to $512.2 million at September 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.

The increase in stockholders’ equity was largely attributable to net income of $33.1 million, partially offset by $14.4 million in dividends, $4.6 million in purchases of treasury stock, and $0.4 million of other comprehensive loss, net of deferred income taxes.

During the nine months ended September 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.

1 unchanged sentence

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 $2.0 million as of June 30, 2020, and dividend capabilities from the Bank.

The Holding Company’s principal sources of liquidity included cash and cash equivalents of $1.5 million as of September 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 six months ended June 30, 2020, the Bank paid $15.0 million in cash dividends to the Holding Company.

For the nine months ended September 30, 2020, the Bank paid $21.0 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 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.

As of September 30, 2020, the Bank had $68.0 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 nine months ended September 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.

6 unchanged sentences

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

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.

At September 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 June 30, 2020, the Bank had no overnight borrowings outstanding under these lines.

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

As of September 30, 2020, the Bank had no FHLB overnight borrowings outstanding and $215.0 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 $1.7 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.

The Bank had $1.4 million and $1.0 million at September 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 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 September 30, 2020, the Bank had $67.1 million outstanding in brokered certificates of deposit and $50.2 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.

7 unchanged sentences

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital requirements that involve quantitative measures of the Company's and Bank's assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices.

The Company's and Bank's capital amounts and classifications also are subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Company's and Bank's capital amounts and classifications also are subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total, tier 1 and common equity tier 1 capital to risk-weighted assets and of tier 1 capital to average assets.

1 unchanged sentence

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 June 30, 2020 and December 31, 2019.

The Company and the Bank met all capital adequacy requirements at September 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:

9 unchanged sentences

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

As of September 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”).

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.

The CARES Act and implementing rules temporarily reduced the community bank leverage ratio to 8%, to be gradually increased back to 9% by 2022.

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 June 30, 2020 and December 31, 2019:

June 30, 2020

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

September 30, 2020

Minimum Capital

28 unchanged sentences

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