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Item 2. Management’s Discussion and Analysis

2021-05-10 compared with 2020-11-06 · 326 added, 651 removed, 31 unchanged (97% 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.

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”).

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

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

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

revenue growth in retail banking, lending and other areas;

origination volume in the consumer, commercial and other lending businesses;

current and future capital management programs;

non-interest income levels,

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

tangible capital generation;

market share;

expense levels;

and other business operations and strategies.

We claim the protection of the safe harbor for forward-looking statements contained in the PSLRA.

Factors that could cause future results to vary from current management expectations include, but are not limited to, changing economic conditions;

legislative and regulatory changes, including increases in FDIC insurance rates;

monetary and fiscal policies of the federal government;

changes in tax policies;

rates and regulations of federal, state and local tax authorities;

changes in interest rates;

deposit flows;

the cost of funds;

demands for loan products;

demand for financial services;

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

changes in management’s business strategies;

changes in accounting principles, policies or guidelines;

changes in real estate values;

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

Bridge Bancorp, Inc., a New York corporation, is a bank holding company formed in 1989.

Dime Community Bancshares, Inc., a New York corporation previously known as “Bridge Bancorp, Inc.,” is a bank holding company formed in 1988.

On a parent-only basis, the Holding Company has had minimal results of operations.

The Holding Company is dependent on dividends from its wholly-owned subsidiary, BNB Bank, its own earnings, additional capital raised, and borrowings as sources of funds.

The Holding Company is dependent on dividends from its wholly-owned subsidiary, Dime Community Bank, which was previously known as “BNB Bank,” its own earnings, additional capital raised, and borrowings as sources of funds.

The information in this report reflects principally the financial condition and results of operations of the Bank.

2 unchanged sentences

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.

We believe the Merger created the opportunity for the resulting company to leverage complementary and diversified revenue streams and to potentially have superior future earnings and prospects compared to our current earnings and prospects on a stand-alone basis.

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

These reclassifications did not have an impact on net income or total stockholders' equity.

Our Principal Products and Services and Locations of Operations

The Bank was established in 1910 and is headquartered in Bridgehampton, New York.

We operate 39 branch locations in the primary market areas of Suffolk and Nassau Counties on Long Island and the New York City boroughs, including 35 in Suffolk and Nassau Counties, two in Queens and two in Manhattan.

For over a century, we have maintained our focus on building customer relationships in our market area.

Our mission is to grow through the provision of exceptional service to our customers, our employees, and the community.

We strive to achieve excellence in financial performance and build long-term shareholder value.

We engage in full service commercial and consumer banking business, including accepting time, savings and demand deposits from the consumers, businesses and local municipalities in our market area.

These deposits, together with funds generated from operations and borrowings, are invested primarily in:

(1) commercial real estate loans;

(2) multi-family mortgage loans;

(3) residential mortgage loans;

(4) secured and unsecured commercial and consumer loans;

(5) home equity loans;

(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;

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.

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

Our customer base is comprised principally of small businesses, municipal relationships and consumer relationships.

COVID-19 Operational Update

In December 2019, a novel coronavirus was reported in China, and, in March 2020, the World Health Organization declared COVID-19 a pandemic.

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, 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.

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 SBA PPP for small business customers.

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 September 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.

Fee income from processing PPP loans is amortized as a yield adjustment over the life of the loan.

PPP loans are fully guaranteed by the SBA.

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.

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.

COVID-19 Loan Moratoriums and Forbearance Programs

We are supporting our customers who may experience financial difficulty due to COVID-19 through loan moratoriums and forbearance programs.

We began offering 90-day payment modifications on a case-by-case basis to those customers whose income was adversely impacted by COVID-19.

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

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

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

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.

Community Support

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

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

We have partnered with local governments to help coordinate emergency relief.

The PPP loans we funded also benefitted hundreds of non-profit partners.

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

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 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.

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 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

The COVID-19 pandemic has caused us to modify our business practices, including employee travel and employee work locations, as many employees are working remotely.

Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers, such as waiving late payment and other fees.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the challenges our business will face and the full impact of the COVID-19 outbreak on our business.

We continue to face challenges associated with ever-increasing banking regulations and the current low interest rate environment.

A prolonged inverted or flat yield curve presents a challenge to a bank, like us, that derives most of its revenue from net interest margin.

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

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

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

In response to the COVID-19 outbreak, 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.

We established five strategic objectives to achieve our vision:

(1) acquire new customers in growth markets;

(2) build new sales and marketing disciplines;

(3) deepen customer relationships;

(4) expand use of automation;

and (5) improve talent management.

We believe there remain opportunities to grow our franchise and that continued investments to generate core funding, quality loans and new sources of revenue remain keys to continue creating long-term shareholder value.

Our ability to attract, retain, train and cultivate employees at all levels of our Company remains significant to meeting our corporate objectives.

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

We have capitalized on opportunities presented by the market and diligently seek opportunities to grow and strengthen the franchise.

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

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

Completion of Merger of Equals

On February 1, 2021, Dime Community Bancshares, Inc., a Delaware corporation (“Legacy Dime”) merged with and into Bridge Bancorp, Inc., a New York corporation (“Legacy Bridge”) (the “Merger”), with Legacy Bridge as the surviving corporation under the name “Dime Community Bancshares, Inc.” (the “Company”).

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

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

Immediately following the Merger, Dime Community Bank, a New York-chartered commercial bank and a wholly-owned subsidiary of Legacy Dime, merged with and into BNB Bank, a New York-chartered commercial bank and a wholly-owned subsidiary of Bridge, with BNB Bank as the surviving bank, under the name “Dime Community Bank.”

In connection with the Merger, the Company assumed $115.0 million in aggregate principal amount of the 4.50% Fixed-to-Floating Rate Subordinated Debentures due 2027 of Legacy Dime.

“Merger” of the Notes to the Consolidated Financial Statements for further information.

Recent Developments Relating to the COVID-19 Pandemic

The disruption to the economy and financial markets brought on by the COVID-19 pandemic will continue to have an impact on the Company’s operations and financial results.

As banking was designated by New York State as an essential business, the Company remains committed to being a source of capital to businesses in its footprint.

Our retail branch office locations remain open to conduct business.

The locations are following the Centers for Disease Control and Prevention guidance on safe practices and social distancing, including social distancing signs and floor markings to guide employees and customers.

All employees and customers must wear masks and floor traffic is limited to three customers in a branch.

The Bank also offers mobile and digital banking platforms.

The Company also prioritizes the well-being of employees.

The Company has deployed its Business Continuity Plans and shifted to a remote working environment during the "New York State on PAUSE"

executive order, which began on March 22, 2020.

All non-branch staff have the ability to use remote desktop software to re-create their desktop environment in order to work from home.

The Company has not furloughed any of its employees.

The Company continues to follow the guidance of New York State in the reopening phases, with phase four which began for New York City on July 20, 2020.

As the COVID-19 vaccine is becoming more readily available, the Company continues to assess its own internal “return to office” strategy.

Guidelines have been established for those employees that are working from a corporate office location.

Many of the Bank’s back office personnel are still working remotely.

Business Continuity Plan

When "New York State on PAUSE"

was initiated, the Company had already invoked its Board-approved Business Continuity Plan (“BCP”), that was updated earlier in the year, to address specific risks and operational concerns related to the COVID-19 pandemic.

The BCP includes a remote working environment for many of the Company’s back office personnel, strategic branch closures for locations that do not have plexiglass barriers, and other considerations.

No material operational or internal control challenges or risks have been identified to date.

The Company does not currently anticipate significant challenges to its ability to maintain its systems.

Lending operations and accommodations to borrowers

The Company’s business, financial condition and results of operations generally rely upon the ability of the Bank’s borrowers to repay their loans, the value of collateral underlying the Bank’s secured loans, and demand for loans and other products and services the Bank offers, which are highly dependent on the business environment in the Bank’s primary markets where it operates.

Consistent with regulatory guidance to work with borrowers during the unprecedented situation caused by the COVID-19 pandemic and as outlined in the CARES Act, the Company established a formal payment deferral program in April 2020 for borrowers that have been adversely affected by the pandemic.

As of March 31, 2021, the Company had 34 loans, representing outstanding loan balances of $66.7 million, that were deferring both principal and interest.

In accordance with Section 4013 of the CARES Act, issued in March 2020, these deferrals are not considered troubled debt restructurings.

Risk-ratings on COVID-19 loan deferrals are evaluated as part of the deferral request approval process.

The loans will be subject to the Bank’s normal credit monitoring.

The collectability of accrued interest will be evaluated on a periodic basis.

The Bank is closely monitoring the developments and uncertainties regarding the pandemic, including various segments of our loan portfolio that may be disproportionately impacted by the pandemic.

The Company does not have any exposure to the energy industry, airline industry, leveraged lending, or auto loans.

The Company does not have any hotel loans that are in full P&I deferral.

With the passage of the Paycheck Protection Program (“PPP”), administered by the SBA, the Company participated in assisting its customers with applications for resources through the program.

Dime's PPP loans generally have a two-year or five-year term and earn interest at 1%.

The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.

As of March 31, 2021, the Company had PPP loans totaling $1.4 billion, net of deferred fees.

It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S.

Should those circumstances change, the Company could be required to establish additional allowance for loan losses through additional provision expense charged to earnings.

We continue to monitor unfunded commitments through the pandemic, including commercial and home equity lines of credit, for evidence of increased credit exposure as borrowers utilize these lines for liquidity purposes.

Selected Financial Highlights and Other Data

(Dollars in Thousands Except Per Share Amounts)

At or For the

Three Months Ended

Per Share Data:

Reported EPS (Diluted)

Cash dividends paid per common share

Book value per common share

Dividend Payout Ratio

Performance and Other Selected Ratios:

Return on average assets

Return on average equity

Net interest spread

Net interest margin

Average interest-earning assets to average interest-bearing liabilities

Non-interest expense to average assets

Efficiency Ratio

Loan-to-Deposit ratio at end of period

Effective tax rate

Asset Quality Summary:

Non-performing loans (1)

Non-performing assets

Net charge-offs (recoveries)

Non-performing assets/Total assets

Non-performing loans/Total loans

Allowance for credit loss/Total loans

Allowance for credit loss/Non-performing loans

(1) Non-performing loans are defined as all loans on non-accrual status.

Critical Accounting Policies

The Company’s policies with respect to the methodologies it uses to determine the allowance for loan losses (including reserves for loan commitments), are its most critical accounting policies because they are important to the presentation of the Company’s consolidated financial condition and results of operations, involve a significant degree of complexity and require management to make difficult and subjective judgments which often necessitate assumptions or estimates about highly uncertain matters.

The use of different judgments, assumptions or estimates could result in material variations in the Company’s consolidated results of operations or financial condition.

Allowance for Credit Losses.

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 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.

Management evaluates the adequacy of the allowance on a quarterly basis.

Management monitors its entire loan portfolio regularly, with consideration given to detailed analysis of classified loans, repayment patterns, past loss experience, various types of concentrations of credit, current economic conditions, and reasonable and supportable forecasts.

Additions to the allowance are charged to expense and realized losses, net of recoveries, are charged against the allowance.

The loan loss estimation process involves procedures to appropriately consider the unique characteristics of our loan portfolio segments.

These segments are further disaggregated into loan risk ratings, the level at which credit risk is monitored.

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

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

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

Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in our process for estimation of expected credit losses.

The allowance level is influenced by loan volumes, loan risk rating migration, historic loss experience and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions.

The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components:

(1) an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans;

and (2) a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.

Loans that do not share similar credit risk characteristics

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

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

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

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

The fair value of the collateral is adjusted for the estimated costs to sell the loan if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral.

The fair value of real estate collateral is determined based on recent appraised values.

Appraisals are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by us.

All appraisals undergo a second review process to ensure that the methodology employed and the values derived are reasonable.

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

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

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

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

Loans that share similar credit risk characteristics

In estimating the component of the allowance for credit losses for loans that share similar risk characteristics with other loans, such loans are segmented into loan types.

Loans are designated into loan pools with similar risk characteristics based on product type in conjunction with other homogeneous characteristics.

Loan types include commercial real estate mortgages, owner and non-owner occupied;

multi-family mortgage loans;

residential real estate mortgages and home equity loans;

commercial, industrial and agricultural loans, real estate construction and land loans;

and consumer loans.

In determining the allowance for credit losses, we derive an estimated credit loss assumption from a model that categorizes loan pools based on loan type and further segmented by risk rating.

This model is known as Probability of Default/Loss Given Default, utilizing a Transition Matrix approach.

This model calculates an expected loss percentage for each loan pool by considering the probability of default, based upon the historical transition or migration of loans from performing (various pass ratings) to criticized, and classified risk ratings to default by risk rating buckets using life-of-loan analysis runout periods for all loan segments, and the historical severity of loss, based on the aggregate net lifetime losses (loss given default) per loan pool.

The default trigger, which is defined as the earlier of ninety days past-due or non-accrual status, and severity factors used to calculate the allowance for credit losses for loans in pools that share similar risk characteristics with other loans, are adjusted for differences between the historical period used to calculate historical default and loss severity rates and expected conditions over the remaining lives of the loans in the portfolio.

These factors include:

(1) lending policies and procedures;

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

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

(4) the experience, ability, and depth of the lending management and other relevant staff;

(5) the volume and severity of past due and adversely classified or graded loans and the volume of non-accrual loans;

(6) the quality of our loan review system;

(7) the value of underlying collateral for collateralized loans;

(8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations;

and (9) the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.

Such factors are used to adjust the historical probabilities of default and severity of loss for current conditions that are not reflective of the model results.

In addition, the economic factor includes management expectation of future conditions based on a reasonable and supportable forecast of the economy.

To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made (currently two years), the Bank immediately reverts back to the historical rates of default and severity of loss.

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

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

The 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 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.

Changes in estimates could result in a material change in the allowance.

In addition, various regulatory agencies, as an integral part of the examination process, periodically review the allowance for credit losses.

Such agencies may require us to recognize adjustments to the allowance based on their judgments of the information available to them at the time of their examination.

For 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 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 $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 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;

(iii) a $2.7 million, or 15.9%, decrease in non-interest income;

(iv) a $7.4 million, or 10.4%, increase in non-interest expense;

and (v) a $0.3 million, or 3.2%, decrease in income tax expense.

The Bank’s methods and assumptions utilized to periodically determine its allowance for credit losses are summarized in Note 3 to the Company’s condensed consolidated financial statements.

Liquidity and Capital Resources

The Board of Directors of the Bank has approved a liquidity policy that it reviews and updates at least annually.

Senior management is responsible for implementing the policy.

The Bank’s Asset Liability Committee (“ALCO”) is responsible for general oversight and strategic implementation of the policy and management of the appropriate departments are designated responsibility for implementing any strategies established by ALCO.

On a daily basis, appropriate senior management receives a current cash position report and one-week forecast to ensure that all short-term obligations are timely satisfied and that adequate liquidity exists to fund future activities.

Reports detailing the Bank’s liquidity reserves are presented to appropriate senior management on a monthly basis, and the Board of Directors at each of its meetings.

In addition, a twelve-month liquidity forecast is presented to ALCO in order to assess potential future liquidity concerns.

A forecast of cash flow data for the upcoming 12 months is presented to the Board of Directors on an annual basis.

The Bank’s primary sources of funding for its lending and investment activities include deposits, loan and MBS payments, investment security principal and interest payments and advances from the FHLBNY.

The Bank may also sell or securitize selected multifamily residential, mixed-use or one-to-four family residential real estate loans to private sector secondary market purchasers, and has in the past sold such loans to FNMA and FHLMC.

The Company may additionally issue debt or equity under appropriate circumstances.

Although maturities and scheduled amortization of loans and investments are predictable sources of funds, deposit flows and prepayments on real estate loans and MBS are influenced by interest rates, economic conditions and competition.

The Bank is a member of AFX, through which it may either borrow or lend funds on an overnight or short-term basis with other member institutions.

The availability of funds changes daily.

The Bank gathers deposits in direct competition with commercial banks, savings banks and brokerage firms, many among the largest in the nation.

It must additionally compete for deposit monies against the stock and bond markets, especially during periods of strong performance in those arenas.

The Bank’s deposit flows are affected primarily by the pricing and marketing of its deposit products compared to its competitors, as well as the market performance of depositor investment alternatives such as the U.S.

bond or equity markets.

To the extent that the Bank is responsive to general market increases or declines in interest rates, its deposit flows should not be materially impacted.

However, favorable performance of the equity or bond markets could adversely impact the Bank’s deposit flows.

Total deposits increased $6.36 billion during the three months ended March 31, 2021, compared to a decrease of $42.8 million for the three months ended March 31, 2020.

Within deposits, core deposits ( i.e., non-CDs) increased $6.15 billion during the three months ended March 31, 2020 and decreased $111.4 million during the three months ended March 31, 2020.

CDs decreased $217.7 million during the three months ended March 31, 2021 compared to an increase of $68.6 million during the three months ended March 31, 2020.

The increase in deposits during the current period was primarily due to the acquisition of deposits in the merger.

In the event that the Bank should require funds beyond its ability or desire to generate them internally, an additional source of funds is available through its borrowing line at the FHLBNY or borrowing capacity through AFX and lines of credit with unaffiliated correspondent banks.

At March 31, 2021, the Bank had an additional unused borrowing capacity of $2.3 billion through the FHLBNY, subject to customary minimum FHLBNY common stock ownership requirements ( i.e.

, 4.5% of the Bank’s outstanding FHLBNY borrowings).

The Bank decreased its outstanding FHLBNY advances by $670.1 million during the three months ended March 31, 2021, compared to a $25.1 million increase during the three months ended March 31, 2020.

Federal Home Loan Bank Advances for further information.

During the three months ended March 31, 2021 and 2020, real estate loan originations totaled $349.1 million and $166.8 million, respectively.

During the three months ended March 31, 2021 and 2020, C&I loan originations totaled $612.1 million (including $573.3 million of PPP loans) and $51.9 million, respectively.

Sales of available-for-sale securities totaled $133.8 million and $4.2 million during the three-month periods ended March 31, 2021 and 2020, respectively.

Purchases of available-for-sale securities totaled $979.2 million and $33.2 million during the three-month periods ended March 31, 2021 and 2020, respectively.

Proceeds from pay downs and calls and maturities of available-for-sale securities were $214.0 million and $32.3 million for the three-month periods ended March 31, 2021 and 2020, respectively.

The Company and the Bank are subject to minimum regulatory capital requirements imposed by its primary federal regulator.

As a general matter, these capital requirements are based on the amount and composition of an institution’s assets.

At March 31, 2021, each of the Company and the Bank were in compliance with all applicable regulatory capital requirements and the Bank was considered "well capitalized"

for all regulatory purposes.

The following table summarizes Company and Bank capital ratios calculated under the Basel III Capital Rules framework as of the period indicated:

Actual Ratios at March 31, 2021

To Be Categorized as

“Well Capitalized” (1)

Tier 1 common equity ratio

Tier 1 risk-based based capital ratio

Total risk-based based capital ratio

Tier 1 leverage ratio

(1) Only the Bank is subject to these requirements.

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.

The leverage ratio was temporarily lowered to 8% by the Federal Reserve Board in March 2020, gradually increasing back to 9% by 2022.

The framework is available for use by election in the Bank’s Call Report.

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 by a financial institution or holding company based on the risk profile of the organization.

As of March 31, 2021, the Bank has not opted into the Community Bank Leverage Ratio framework.

Legacy Dime repurchased 825,992 shares of its common stock during the three months ended March 31, 2020.

The Holding Company did not repurchase any shares of its common stock during the three months ended March 31, 2021.

As of March 31, 2021, up to 797,870 shares remained available for purchase under the authorized share repurchase programs.

See "Part II - Item 2.

Other Information - Unregistered Sales of Equity Securities and Use of Proceeds"

for additional information about repurchases of common stock.

The Holding Company paid $1.8 million in cash dividends on preferred stock during the three months ended March 31, 2021, and none during the three months ended March 31, 2020.

The Holding Company paid $4.9 million in cash dividends on common stock during the three months ended March 31, 2020.

Contractual Obligations

The Bank is obligated to make rental payments under leases on certain of its branches and equipment.

In addition, the Bank generally has outstanding at any time significant borrowings in the form of FHLBNY advances, or overnight or short-term borrowings, as well as customer and brokered CDs with fixed contractual interest rates.

Off-Balance Sheet Arrangements

As part of its loan origination business, the Bank generally has outstanding commitments to extend credit to third parties, which are granted pursuant to its regular underwriting standards.

Since these loan commitments may expire prior to funding, in whole or in part, the contract amounts are not estimates of future cash flows.

Asset Quality

The Bank does not originate or purchase loans, either whole loans or loans underlying mortgage-backed securities (“MBS”), which would have been considered subprime loans at origination, i.e ., real estate loans advanced to borrowers who did not qualify for market interest rates because of problems with their income or credit history.

See Note 6 to the Company’s Unaudited Condensed Consolidated Financial Statements for a discussion of evaluation for impaired securities.

COVID-19 Related Loan Deferrals

As of March 31, 2021, the Company had 34 loans, representing outstanding loan balances of $66.7 million, that were deferring both principal and interest (“P&I” deferrals).

The table below presents the loans with P&I deferrals as of March 31, 2021:

March 31, 2021

(Dollars in thousands)

One-to-four family residential and cooperative/condominium apartment

Multifamily residential and residential mixed-use

(1) Amount excludes net deferred costs due to immateriality.

Pursuant to regulatory guidance, and guidance under Section 4013 of the CARES Act, a qualified loan modification, such as a payment deferral, is exempt by law from classification as a TDR as defined by GAAP, was expected to expire on December 31, 2020.

The 2021 Consolidated Appropriations Act, which was signed into law December of 2020, extended the exemption for TDR classification until the earlier of January 1, 2022 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak is lifted.

Risk-ratings on COVID-19 loan deferrals are evaluated on an ongoing basis.

While interest is expected to still accrue to income during the deferral period, should deterioration in the financial condition of the borrowers that would not support the ultimate repayment of interest emerge, interest income accrued would need to be reversed.

In such a scenario, interest income in future periods could be negatively impacted.

Monitoring and Collection of Delinquent Loans

Management of the Bank reviews delinquent loans on a monthly basis and reports to its Board of Directors at each regularly scheduled Board meeting regarding the status of all non-performing and otherwise delinquent loans in the Bank’s portfolio.

The Bank’s loan servicing policies and procedures require that an automated late notice be sent to a delinquent borrower as soon as possible after a payment is ten days late in the case of multifamily residential, commercial real estate loans, and C&I loans, or fifteen days late in connection with one-to-four family or consumer loans.

Thereafter, periodic letters are mailed and phone calls placed to the borrower until payment is received.

When contact is made with the borrower at any

time prior to foreclosure, the Bank will attempt to obtain the full payment due or negotiate a repayment schedule with the borrower to avoid foreclosure.

Accrual of interest is generally discontinued on a loan that meets any of the following three criteria:

(i) full payment of principal or interest is not expected;

(ii) principal or interest has been in default for a period of 90 days or more (unless the loan is both deemed to be well secured and in the process of collection);

or (iii) an election has otherwise been made to maintain the loan on a cash basis due to deterioration in the financial condition of the borrower.

Such non-accrual determination practices are applied consistently to all loans regardless of their internal classification or designation.

Upon entering non-accrual status, the Bank reverses all outstanding accrued interest receivable.

The Bank generally initiates foreclosure proceedings on real estate loans when a loan enters non-accrual status based upon non-payment, unless the borrower is paying in accordance with an agreed upon modified payment agreement.

The Bank obtains an updated appraisal upon the commencement of legal action to calculate a potential collateral shortfall and to reserve appropriately for the potential loss.

If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure action is completed, the property securing the loan is transferred to Other Real Estate Owned (“OREO”) status.

The Bank generally attempts to utilize all available remedies, such as note sales in lieu of foreclosure, in an effort to resolve non-accrual loans and OREO properties as quickly and prudently as possible in consideration of market conditions, the physical condition of the property and any other mitigating circumstances.

In the event that a non-accrual loan is subsequently brought current, it is returned to accrual status once the doubt concerning collectability has been removed and the borrower has demonstrated performance in accordance with the loan terms and conditions for a period of at least six months.

The C&I portfolio is actively managed by the Bank’s lenders and underwriters.

All credit facilities at a minimum require an annual review of the exposure and typically terms of the loan require annual and interim financial reporting and have financial covenants to indicate expected performance levels.

Guarantors are also required to, at a minimum, annually update their financial reporting.

All exposures are risk rated and those entering adverse ratings due to financial performance concerns of the borrower or material delinquency of any payments or financial reporting are subjected to added management scrutiny.

Measures taken typically include amendments to the amount of the available credit facility, requirements for increased collateral, a request for a capital infusion, additional guarantor support or a material enhancement to the frequency and quality of financial reporting.

Loans determined to reach adverse risk rating standards are subject to quarterly updating to Credit Administration and executive management.

When warranted, loans reaching a Substandard rating could be reassigned to the Workout Group for direct handling.

Non-accrual Loans

Within the Bank’s held-for-investment loan portfolio, non-accrual loans totaled $35.5 million at March 31, 2021, and $17.9 million at December 31, 2020.

During the three months ended March 31, 2021, loans totaling $17.7 million were placed on non-accrual status, including $11.9 million in non-accrual PCD loans.

There were no sales or payoffs of non-accrual loans during the three months ended March 31, 2021.

The following is a reconciliation of non-accrual loans as of the dates indicated:

(Dollars in thousands)

Non-accrual loans (1) :

One-to-four family residential, including condominium and cooperative apartment

Multifamily residential and residential mixed-use real estate

Total non-accrual loans

Total non-accrual loans to total loans

Total non-performing assets to total assets (2)

(1) There were no TDRs for the periods indicated.

(2) Non-performing assets includes non-accrual loans.

Property acquired by the Bank, or a subsidiary, as a result of foreclosure on a mortgage loan or a deed in lieu of foreclosure is classified as OREO.

Upon entering OREO status, the Bank obtains a current appraisal on the property and reassesses the likely realizable value ( a/k/a fair value) of the property quarterly thereafter.

OREO is carried at the lower of the fair value or book balance, with any write downs recognized through a provision recorded in non-interest expense.

Only the appraised value, or either a contractual or formal marketed value that falls below the appraised value, is used when determining the likely realizable value of OREO at each reporting period.

The Bank typically seeks to dispose of OREO properties in a timely manner.

As a result, OREO properties have generally not warranted subsequent independent appraisals.

The Bank had no OREO properties at March 31, 2021 or December 31, 2020.

The Bank did not recognize any provisions for losses on OREO properties during the three months ended March 31, 2021 or 2020.

Other Potential Problem Loans

Accruing Loans 90 Days or More Past Due

The Bank continued accruing interest on eight loans with an aggregate outstanding balance of $8.8 million at March 31, 2021, and three loans with an aggregate outstanding balance of $3.3 million at December 31, 2020, all of which were 90 days or more past due on their respective contractual maturity dates.

These loans continued to make monthly payments consistent with their initial contractual amortization schedule exclusive of the balloon payments due at maturity.

These loans were well secured and/or were expected to be refinanced, and, therefore, remained on accrual status and were deemed performing assets at the dates indicated above.

Loans Delinquent 30 to 89 Days

The Bank had loans totaling $41.8 million that were delinquent between 30 and 89 days at March 31, 2021 and $16.3 million at December 31, 2020.

The increase in 30 to 89 day delinquencies was primarily attributable to acquired loans totaling $18.3 million.

The 30 to 89 day delinquency levels fluctuate monthly, and are generally considered a less accurate indicator of near-term credit quality trends than non-accrual loans.

Reserve for Loan Commitments

The Bank maintains a reserve associated with unfunded loan commitments accepted by the borrower.

The amount of reserve was $4.6 million at March 31, 2021 and $25 thousand at December 31, 2020.

This reserve is determined based upon the outstanding volume of loan commitments at each period end.

Any increases or reductions in this reserve are recognized in provision for credit losses.

The adoption of the CECL standard resulted in a $1.4 million increase in the reserve.

An additional $3.1 million increase in the reserve was recorded as a provision for credit losses primarily attributable to acquired loan commitments.

Allowance for Credit Losses

On January 1, 2021, the Company adopted ASU No.

2016-13 "Financial Instruments – Credit Losses (Topic 326)".

ASU 2016-13 was effective for the Company as of January 1, 2020.

Under Section 4014 of the CARES Act, financial institutions required to adopt ASU 2016-13 as of January 1, 2020 were provided an option to delay the adoption of the CECL framework.

The Company elected to defer adoption of CECL until January 1, 2021.

This standard requires that the measurement of all expected credit losses for financial assets held at the reporting date be based on historical experience, current conditions, and reasonable and supportable forecasts.

This standard requires financial institutions and other organizations to use forward-looking information to better inform their credit loss estimates.

The adoption of the CECL standard resulted in an initial decrease of $3.9 million to the allowance for credit losses and an increase of $1.4 million to the reserve for unfunded commitments.

The after-tax cumulative-effect adjustment of $1.7 million was recorded in retained earnings as of January 1, 2021.

A provision of $15.8 million and $8.0 million were recorded during the three month periods ended March 31, 2021 and 2020, respectively.

The $15.8 million credit loss provision for the first quarter of 2021 was primarily associated with the provision for credit losses recorded on acquired non-PCD loans which totaled $20.3 million for the first quarter of 2021 and a provision for unfunded commitments which totaled $3.1 million for the first quarter of 2021.

The provision on the remainder of the portfolio for the first quarter of 2021 was negative $7.6 million primarily as a result of improvement in forecasted macroeconomic conditions.

Durin g the three - mont hs ende d Marc h 31 , 2020 , th e credit los s provisio n wa s drive n mainl y b y a n increas e i n th e genera l allowanc e fo r credit losse s due t o th e adjustmen t o f qualitativ e factor s t o accoun t fo r th e effect s o f th e COVID - 1 9 pandemi c an d relate d economi c disruption .

For a further discussion of the allowance for loan losses and related activity during the three-month periods ended March 31, 2021 and 2020, and as of December 31, 2020, please see Note 8 to the condensed consolidated financial statements.

Comparison of Financial Condition at March 31, 2021 and December 31, 2020

Assets totaled $13.02 billion at March 31, 2021, $6.24 billion above their level at December 31, 2020, primarily due to an increase in the loan portfolio of $4.83 billion, an increase in securities of $607.7 million, an increase in BOLI of $95.4 million, an increase in derivative assets of $26.8 million, an increase in accrued interest receivable of $16.3 million, and an increase in other assets of $47.9 million, offset by a decrease in FHLBNY capital stock of $15.6 million.

These changes were mainly due to the acquisition of assets due to the Merger.

Total loans increased $4.83 billion during the three months ended March 31, 2021.

During the period, the Bank had originations of $909.7 million.

Additionally, the allowance for credit losses increased by $56.7 million which was due to the acquisition (credit mark on PCD loans plus provision on non-PCD), offset by CECL adoption and improvements in forecasted macroeconomic conditions during the three months ended March 31, 2021.

The $26.8 million increase in derivative assets was primarily the result of the Merger.

The Company had 111 loan swaps that were acquired.

The $16.3 million increase in accrued interest receivables was primarily due to the acquired loan portfolio as part of the Merger.

Total liabilities increased $5.77 billion during the three months ended March 31, 2021, primarily due to an increase of $6.29 billion in deposits, an increase of $83.2 million in subordinated debt, an increase of $31.4 million in

lease liability for operating leases, and an increase of $4.4 million in derivative liabilities.

These changes were mainly due to the assumption of liabilities due to the Merger.

FHLBNY advances and other borrowings declined by $670.1 million, as the Company used excess liquidity on the balance sheet to paydown borrowings.

The Company terminated 28 interest rates swaps related to FHLBNY advances totaling $505.0 million during the quarter with a termination fee of $16.0 million.

The remaining four interest rate swaps are in an asset position as of the end of the quarter.

Stockholders’ Equity.

Stockholders’ equity increased $471.7 million during the three months ended March 31, 2021, due to share issuances associated with the Merger of $491.2 million and income from other comprehensive income of $6.5 million, offset by net loss in the period of $21.0 million, common stock dividends of $5.2 million and preferred stock dividends of $1.8 million.

Comparison of Operating Results for the Three Months Ended March 31, 2021 and 2020

Net loss was $22.9 million during the three months ended March 31, 2021, lower than net income of $8.4 million for the three months ended March 31, 2020.

During the three months ended March 31, 2021, net interest income increased by $37.3 million, non-interest income decreased by $11.6 million, non-interest expense increased by $56.8 million, income tax expense decreased by $9.4 million and the loan loss provision increased by $7.8 million, compared to the three months ended March 31, 2020.

Please see "Provision for Credit Losses"

for a discussion of the increase in the credit loss provision for the period ended March 31, 2021.

Net Interest Income.

Net interest income, the primary contributor to earnings, represents the difference between income on interest-earning assets and expenses on interest-bearing liabilities.

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.

Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown.

Average balances are derived from daily average balances and include non-accrual loans.

The yields and costs include fees and costs, which are considered adjustments to yields.

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

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

Three Months Ended September 30,

The discussion of net interest income for the three months ended March 31, 2021 and 2020 should be read in conjunction with the following tables, which set forth certain information related to the consolidated statements of income for those periods, and which also present the average yield on assets and average cost of liabilities for the periods indicated.

The average yields and costs were derived by dividing income or expense by the average balance of their related assets or liabilities during the periods represented.

Average balances were derived from average daily balances.

The yields include fees that are considered adjustments to yields.

Analysis of Net Interest Income

Three Months Ended March 31,

(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

Real estate loans

Commercial and industrial loans

SBA PPP loans

Mortgage-backed securities

Investment securities

Other short-term investments

Total interest-earning assets

Non-interest earning assets

Cash and due from banks

Liabilities and Stockholders' Equity:

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

Interest-bearing checking

Certificates of deposit

Total interest-bearing deposits

FHLBNY Advances

Subordinated debt, net

Other short-term borrowings

Total borrowings

Total interest-bearing liabilities

Non-interest-bearing liabilities:

Demand deposits

Other liabilities

Non-interest-bearing checking

Other non-interest-bearing liabilities

Total liabilities

1 unchanged sentence

Total liabilities and stockholders' equity

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

Net interest-earning assets

Net interest margin (2) (4)

Tax-equivalent adjustment

Net interest income

Net interest spread

Net interest-earning assets

Net interest margin

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.

Nine Months Ended September 30,

Deposits (including non-interest-bearing checking accounts)

Rate/Volume Analysis

Three Months Ended March 31, 2021

Compared to Three Months Ended March 31, 2020

Increase / (Decrease) Due to:

(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

Real estate loans

Commercial and industrial loans

SBA PPP loans

Mortgage-backed securities

Investment securities

Other short-term investments

Total interest-earning assets

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

Interest-bearing checking

Certificates of deposit

FHLBNY Advances

Subordinated debt, net

Other short-term borrowings

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

Net interest income can be analyzed in terms of the impact of changes in rates and volumes.

The following table illustrates the extent to which changes in interest rates and in the volume of average interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated.

Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate);

(ii) changes attributable to changes in rates (changes in rates multiplied by prior volume);

and (iii) the net changes.

For purposes of this table, changes that are not due solely to volume or rate changes have been allocated to these categories based on the respective percentage changes in average volume and rate.

Due to the numerous simultaneous volume and rate changes during the periods analyzed, it is not possible to precisely allocate changes between volume and rate.

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

Three Months Ended September 30,

Nine Months Ended September 30,

2020 Over 2019

Changes Due To

(In thousands)

Interest income on 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 income on interest-earning assets (2)

Interest expense on 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 expense on interest-bearing liabilities

Net interest income (2)

(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%.

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 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.

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 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 3.21% 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 $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 $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 $3.4 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 3.01% 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.

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 $0.5 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 3.49% 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 $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 $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 $3.2 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

Our loan portfolio consists primarily of real estate loans secured by commercial, multi-family and residential real estate properties located in our principal lending areas of Nassau and Suffolk Counties on Long Island and the New York City boroughs.

The interest rates we charge on loans are affected primarily by the demand for such loans, the supply of money available for lending purposes, the rates offered by our competitors, our relationship with the customer, and the related credit risks of the transaction.

These factors are affected by general and economic conditions including, but not limited to, monetary policies of the federal government, including 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 $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 $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.

These loans are categorized as classified loans because we have information that indicates the borrower may not be able to comply with the present repayment terms.

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

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 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 September 30, 2020.

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

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 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 $2.5 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.

In addition, our underwriting standards for CRE loans are consistent with regulatory requirements with original loan to value ratios generally less than or equal to 75%.

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

As 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.

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”).

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.

Upon adoption of the CECL Standard on January 1, 2020, we re-evaluated our impaired loans to determine which loans should be evaluated on a collective (pooled) basis and which loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis and therefore should be individually evaluated.

The majority of our impaired loans at December 31, 2019 were performing TDRs where there was no write-off of principal as a result of the restructure and interest was at a market rate.

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

Non-accrual loans were $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:

Nine Months Ended

(In thousands)

September 30, 2020

September 30, 2019

Beginning balance

Impact of adopting CECL

Commercial real estate mortgage loans

Residential real estate mortgage loans

Commercial, industrial and agricultural loans

Installment/consumer loans

Commercial real estate mortgage loans

Residential real estate mortgage loans

Commercial, industrial and agricultural loans

Installment/consumer loans

Net charge-offs

Provision for credit losses charged to operations

Ending balance

Allocation of Allowance for Credit Losses

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

September 30, 2020

December 31, 2019

Percentage of Loans

(Dollars in thousands)

to Total Loans

Commercial real estate mortgage loans

Multi-family mortgage loans

Residential real estate mortgage loans

Commercial, industrial and agricultural loans

Real estate construction and land loans

Installment/consumer loans

Net change in net interest income

Net interest income was $77.8 million during the three months ended March 31, 2021, an increase of $37.3 million from the three months ended March 31, 2020.

Average interest-earning assets were $10.06 billion for the three months ended March 31, 2021, an increase of $4.11 billion from $5.95 billion for the three months ended March 31, 2020.

Net interest margin (“NIM”) was 3.14% during the three months ended March 31, 2021, up from 2.72% during the three months ended March 31, 2020.

Interest Income.

Interest income was $86.8 million during the three months ended March 31, 2021, an increase of $27.9 million from the three months ended March 31, 2020, primarily reflecting increases in interest income of $16.0 million on real estate loans, $5.8 million on C&I loans, $5.0 million on SBA PPP loans, $0.3 million on other loans, $0.9 million on investment securities, partially offset by decreases of $0.2 million in mortgaged-backed securities and other short term investments.

The increased interest income on real estate loans was related to an increase of $2.09 billion in the average balance of such loans in the period, offset by a 24-basis point decrease in the yield.

The increased interest income on C&I loans was due to an increase of $407.5 million in the average balance of such loans during the period.

Interest Expense.

Interest expense decreased $9.5 million, to $8.9 million, during the three months ended March 31, 2021, from $18.4 million during the three months ended March 31, 2020.

The decreased interest expense was mainly attributable to a reduction in interest rates offered on CDs as well as a decrease in average balances of $64.5 million in CD products, and a decrease in average balances of $232.4 million in FHLBNY advances.

Provision for Credit Losses.

The Company recognized a provision for credit losses of $15.8 million during the three months ended March 31, 2021, compared to a provision of $8.0 million for the three months ended March 31, 2020.

The provision on the remainder of the portfolio for the first quarter of 2021 was negative $7.6 million primarily as a result of improvement in forecasted macroeconomic conditions.

Non-Interest Income.

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 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.

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 loss was $7.4 million during the three months ended March 31, 2021, compared to non-interest income of $4.2 million during the three months ended March 31, 2020, primarily due to loss on termination of derivatives of $16.5 million, offset by an increase of service charges and other fees of $1.7 million, an increase of $0.6 million of loan level derivative income, and an increase of $0.6 million in gains on sale of loans for the three months ended March 31, 2021.

Non-Interest Expense.

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 $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 $6.3 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 $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 $5.8 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 $1.6 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 $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 $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.

Liquidity management addresses our ability to meet financial obligations that arise in the normal course of business.

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

The Holding Company’s principal sources of liquidity included cash and cash equivalents of $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 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 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.

The levels of these assets are dependent on the Bank's operating, financing, lending and investing activities during any given period.

Other sources of liquidity include loan and investment securities principal repayments and maturities, lines of credit with other financial institutions including the FHLB and FRB, growth in core deposits and sources of wholesale funding such as brokered deposits.

While scheduled loan amortization, maturing securities and short-term investments are a relatively predictable source of funds, deposit flows and loan and mortgage-backed securities prepayments are greatly influenced by general interest rates, economic conditions and competition.

The Bank adjusts its liquidity levels as appropriate to meet funding needs such as seasonal deposit outflows, loans, and asset and liability management objectives.

Historically, the Bank has relied on its deposit base, drawn through its full-service branches that serve its market area and local municipal deposits, as its principal source of funding.

The Bank seeks to retain existing deposits and loans and maintain customer relationships by offering quality service and competitive interest rates to its customers, while managing the overall cost of funds needed to finance its strategies.

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

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 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 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 $1.4 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 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.

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

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

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

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

Capital Resources

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.

Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements.

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.

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.

Tier 1 capital, risk-weighted assets and average assets are as defined by regulation.

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 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:

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

b) 6.0% based on tier 1 capital;

and c) 8.0% based on total regulatory capital.

A minimum leverage ratio (tier 1 capital as a percentage of total average assets) of 4.0% is also required under the Basel III Capital Rules.

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.

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;

b) 8.5% based on tier 1 capital;

and c) 10.5% based on total regulatory capital.

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 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.

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

Minimum To Be Well

Minimum Capital

Adequacy Requirement with

Capitalized Under Prompt

Actual Capital

Adequacy Requirement

Capital Conservation Buffer

Corrective Action Provisions

(Dollars in thousands)

Common equity tier 1 capital to risk-weighted assets:

Total capital to risk-weighted assets:

Tier 1 capital to risk-weighted assets:

Tier 1 capital to average assets:

December 31, 2019

Minimum Capital

Minimum To Be Well

Minimum Capital

Adequacy Requirement with

Capitalized Under Prompt

Actual Capital

Adequacy Requirement

Capital Conservation Buffer

Corrective Action Provisions

(Dollars in thousands)

Common equity tier 1 capital to risk-weighted assets:

Total capital to risk-weighted assets:

Tier 1 capital to risk-weighted assets:

Tier 1 capital to average assets:

Non-interest expense was $82.8 million during the three months ended March 31, 2021, an increase of $56.8 million from $26.0 million during the three months ended March 31, 2020, primarily the result of merger expenses of $25.8 million during the quarter, an increase in salaries and employee benefit expense of $9.1 million, and an increase in severance of $12.0 million.

Non-interest expense was 1.61% and 1.68% of average assets during the three-month periods ended March 31, 2021 and 2020, respectively.

Income Tax Expense.

Income tax benefit was $7.1 million during the three months ended March 31, 2021, compared to tax expense of $2.3 million during the three months ended March 31, 2020.

The Company’s consolidated tax rate was 25.2% during the three months ended March 31, 2021, compared to 21.6% during the three months ended March 31, 2020.

The higher tax rate for the three months ended March 31, 2021 was primarily the result of non-deductible merger expenses and salary expenses during the period.

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