Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Dime Community Bancshares, Inc., a New York corporation, is a bank holding company formed in 1988. On a parent-only basis, the Holding Company has minimal operations, other than as owner of Dime Community Bank. The Holding Company is dependent on dividends from its wholly-owned subsidiary, Dime Community 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. The Bank's results of operations are primarily dependent on its net interest income, which is the difference between interest income on loans and investments and interest expense on deposits and borrowings. The Bank also generates non-interest income, such as fee income on deposit and loan accounts, merchant credit and debit card processing programs, loan swap fees, investment services, income from its title insurance subsidiary, and net gains on sales of securities and loans. The level of non-interest expenses, such as salaries and benefits, occupancy and equipment costs, other general and administrative expenses, expenses from the Bank’s title insurance subsidiary, and income tax expense, further affects our net income. Certain reclassifications have been made to prior year amounts and the related discussion and analysis to conform to the current year presentation. These reclassifications did not have an impact on net income or total stockholders' equity.
COVID-19 Pandemic Response
Following the March 2020 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. Since the inception of the program, the consolidated PPP originations for the Company through December 31, 2021, including originations by both Legacy Dime and Bridge, exceeded $1.90 billion. Following the completion of the PPP, the Company sold its 2021 PPP loan originations in order to re-deploy funds into ongoing loan portfolio growth. The Company believes that the remainder of its SBA PPP loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of March 31, 2023, the Company had SBA PPP loans totaling $2.1 million, net of deferred fees. It is the Company’s expectation that loans funded through the PPP are fully guaranteed by the U.S. government.
We continue to monitor unfunded commitments, including commercial and home equity lines of credit, for evidence of increased credit exposure as borrowers utilize these lines for liquidity purposes.
It is possible that there will be continued material, adverse impacts to significant estimates, asset valuations, and business operations, including intangible assets, investments, loans, deferred tax assets, and derivative counter party risk, changes in consumer behavior, and supply chain interruptions as a result of the COVID-19 pandemic. Future government actions in response to the COVID-19 pandemic, including vaccination mandates, may also affect our workforce, human capital resources, and infrastructure.
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Selected Financial Highlights and Other Data
(Dollars in Thousands Except Per Share Amounts)
At or For the
Three Months Ended
March 31,
2023
2022
Per Share Data:
Reported EPS (Diluted)
$
0.92
$
0.82
Cash dividends paid per common share
0.24
0.24
Book value per common share
27.70
26.32
Dividend payout ratio
26.09
%
29.27
%
Performance and Other Selected Ratios:
Return on average assets
1.11
%
1.13
%
Return on average equity
12.50
11.53
Net interest spread
1.92
3.07
Net interest margin
2.74
3.19
Average interest-earning assets to average interest-bearing liabilities
146.80
165.88
Non-interest expense to average assets
1.41
1.64
Efficiency ratio
50.1
51.8
Loan-to-deposit ratio at end of period
101.5
88.7
Effective tax rate
26.75
28.08
Asset Quality Summary:
Non-performing loans (1)
$
31,544
$
35,962
Non-performing assets
31,544
35,962
Net charge-offs
1,541
2,584
Non-performing assets/Total assets
0.23
%
0.30
%
Non-performing loans/Total loans
0.29
0.39
Allowance for credit losses/Total loans
0.73
0.86
Allowance for credit losses/Non-performing loans
248.34
221.39
(1) Non-performing loans are defined as all loans on non-accrual status.
Critical Accounting Estimates
Note 1. Summary of Significant Accounting Policies, to the Company’s Audited Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2022 contains a summary of significant accounting policies. These accounting policies may require various levels of subjectivity, estimates or judgment by management. Policies with respect to the methodologies it uses to determine the allowance for credit losses on loans held for investment and fair value of loans acquired in a business combinations are critical accounting policies because they are important to the presentation of the Company’s consolidated financial condition and results of operations. These critical accounting estimates 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.
Management has reviewed the following critical accounting estimates and related disclosures with its Audit Committee.
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Allowance for Credit Losses on Loans Held for Investment
Methods and Assumptions Underlying the Estimate
On January 1, 2021, we adopted the Current Expected Credit Losses (“CECL”) Standard, which requires that loans held for investment be accounted for under the current expected credit losses model. 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, and additions to the allowance are charged to expense and realized losses, net of recoveries, are charged against the allowance.
Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In determining the allowance for credit losses for loans that share similar risk characteristics, the Company utilizes a model which compares the amortized cost basis of the loan to the net present value of expected cash flows to be collected. Expected credit losses are determined by aggregating the individual cash flows and calculating a loss percentage by loan segment, or pool, for loans that share similar risk characteristics. For a loan that does not share risk characteristics with other loans, the Company will evaluate the loan on an individual basis. Within the model, assumptions are made in the determination of probability of default, loss given default, reasonable and supportable economic forecasts, prepayment rate, curtailment rate, and recovery lag periods. Management assesses the sensitivity of key assumptions at least annually by stressing the assumptions to understand the impact on the model.
Statistical regression is utilized to relate historical macro-economic variables to historical credit loss experience of a peer group of banks that operate in and around Dime’s footprint. These models are then utilized to forecast future expected loan losses based on expected future behavior of the same macro-economic variables. Adjustments to the quantitative results are made using qualitative factors. 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; (4) the experience, ability, and depth of the lending management and other relevant staff; (5) the volume and severity of past due 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.
The Company evaluates loans that do not share risk characteristics on an individual basis based on various factors. Factors that may be considered are borrower delinquency trends and non-accrual status, probability of foreclosure or note sale, changes in the borrower’s circumstances or cash collections, borrower’s industry, or other facts and circumstances of the loan or collateral. The 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 collateral dependent loans, expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral, less estimated costs to sell.
Uncertainties Regarding the Estimate
Estimating the timing and amounts of future losses is subject to significant management judgment as these projected cash flows rely upon the estimates discussed above and factors that are reflective of current or future expected conditions. These estimates depend on the duration of current overall economic conditions, industry, borrower, or portfolio specific conditions. Volatility in certain credit metrics and differences between expected and actual outcomes are to be expected.
Customers may not repay their loans according to the original terms, and the collateral securing the payment of those loans may be insufficient to pay any remaining loan balance. Bank regulators periodically review our allowance for credit losses and may require us to increase our provision for credit losses or loan charge-offs.
Impact on Financial Condition and Results of Operations
If our assumptions prove to be incorrect, the allowance for credit losses may not be sufficient to cover expected losses in the loan portfolio, resulting in additions to the allowance. Future additions or reductions to the allowance may be necessary
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based on changes in economic, market or other conditions. Changes in estimates could result in a material change in the allowance through charges to earnings would materially decrease our net income.
We may experience significant credit losses if borrowers experience financial difficulties, which could have a material adverse effect on our operating results.
In addition, various regulatory agencies, as an integral part of the examination process, periodically review the allowance for credit losses. Such agencies may require the Bank to recognize adjustments to the allowance based on their judgments of the information available to them at the time of their examination.
Fair value of loans acquired in a business combination
Methods and Assumptions Underlying the Estimate
On February 1, 2021, the Company completed a merger of equals business combination accounted for as a reverse merger using the acquisition method of accounting. As a part of accounting for the Merger, fair value estimates were calculated with a combination of assumptions by management and by using a third party. The fair value often involved third-party estimates utilizing input assumptions by management which may be complex or uncertain. The fair value of acquired loans was based on a discounted cash flow methodology that considers factors such as type of loan and related collateral, and requires management’s judgment on estimates about discount rates, expected future cash flows, market conditions and other future events.
For purchased financial loans with credit deterioration (“PCD”), an estimate of expected credit losses was made for loans with similar risk characteristics and was added to the purchase price to establish the initial amortized cost basis of the PCD loans. Any difference between the unpaid principal balance and the amortized cost basis is considered to relate to non-credit factors and resulted in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. For acquired loans not deemed PCD at acquisition, the differences between the initial fair value and the unpaid principal balance are recognized as interest income on a level-yield basis over the lives of the related loans.
Uncertainties Regarding the Estimate
Management relied on economic forecasts, internal valuations, or other relevant factors which were available at the time of the Merger in the determination of the assumptions used to calculate the fair value of the acquired loans. Discount rates, expected future cash flows, market conditions and other future events are subjective and may differ from estimates.
Impact on Financial Condition and Results of Operations
The estimate of fair values on acquired loans contributed to the recorded goodwill from the Merger. In future income statement periods, interest income on loans will include the amortization and accretion of any premiums and discounts resulting from the fair value of acquired loans. Additionally, the provision for credit losses on acquired individually analyzed PCD loans may be impacted due to changes in the assumptions used to calculate expected cash flows.
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
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forecast of cash flow data for the upcoming 12 months is presented to the Board of Directors on an annual basis. Given recent banking industry events, management is also monitoring the level of uninsured deposits on a daily basis.
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 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 utilizes repurchase agreements as part of its borrowing policy to add liquidity. Repurchase agreements represent funds received from customers, generally on an overnight basis, which are collateralized by investment securities. As of March 31, 2023 and December 31, 2022, the Bank’s repurchase agreements totaling $2.1 million and $1.4 million, respectively, were included in other short-term borrowings on the consolidated balance sheets.
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 $315.8 million during the three months ended March 31, 2023 compared to a decrease of $28.9 million for the three months ended March 31, 2022. Within deposits, core deposits ( i.e., non-CDs) decreased $88.1 million during the three months ended March 31, 2023 and increased $42.6 million during the three months ended March 31, 2022. CDs increased $403.9 million during the three months ended March 31, 2023 compared to a decrease of $71.5 million during the three months ended March 31, 2022. The decrease in core deposits and increase in CDs was due to customer migration to higher-rate CDs as a result of the increasing interest rate environment. 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, 2023, the Bank had an additional unused borrowing capacity of $1.53 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 increased its outstanding FHLBNY advances by $367.0 million during the three months ended March 31, 2023, compared to a $25.0 million increase during the three months ended March 31, 2022. See Note 12. “FHLBNY Advances” for further information.
Subordinated debentures totaled $200.3 million at March 31, 2023 and $197.1 million at March 31, 2022. See Note 13. “Subordinated Debentures” to our consolidated financial statements for further information.
During the three months ended March 31, 2023 and 2022, real estate loan originations totaled $346.7 million and $454.3 million, respectively. During the three months ended March 31, 2023 and 2022, C&I loan originations totaled $5.2 million and $26.1 million, respectively.
Sale of securities available-for-sale totaled $79.3 million during the three months ended March 31, 2023. The Bank did not have any sale of securities available-for-sale during the three months ended March 31, 2022. Purchases of available-
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for-sale securities totaled $78.2 million and $3.0 million during the three months ended March 31, 2023 and 2022, respectively. Proceeds from pay downs and calls and maturities of available-for-sale securities were $16.2 million and $49.9 million for the three months ended March 31, 2023 and 2022, respectively.
The Bank did not have proceeds from sales of held-to-maturity securities during the three months ended March 31, 2023 or 2022, respectively. Purchases of held-to-maturity securities totaled $23.7 million and $31.9 million during the three months ended March 31, 2023 and 2022, respectively. Proceeds from pay downs and calls and maturities of held-to-maturity securities were $4.7 million and $2.7 million for the three months ended March 31, 2023 and 2022, 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, 2023, 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, 2023
Basel III
Consolidated
Minimum
To Be Categorized as
Bank
Company
Requirement
“Well Capitalized” (1)
Tier 1 common equity ratio
12.1
%
9.3
%
4.5
%
6.5
%
Tier 1 risk-based capital ratio
12.1
10.4
6.0
8.0
Total risk-based capital ratio
12.9
13.0
8.0
10.0
Tier 1 leverage ratio
9.8
8.4
4.0
5.0
(1) Only the Bank is subject to these requirements.
During the three months ended March 31, 2023, the Holding Company repurchased 24,813 shares of its common stock at an aggregate cost of $715 thousand. The Holding Company repurchased 505,005 shares of its common stock at an aggregate cost of $17.4 million during the three months ended March 31, 2022. As of March 31, 2023, 1,578,947 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 its preferred stock during the three months ended March 31, 2023 and 2022, respectively.
The Holding Company paid $9.2 million and $9.4 million in cash dividends on its common stock during the three months ended March 31, 2023 and 2022, respectively.
Contractual Obligations
The Bank generally has outstanding at any time borrowings in the form of FHLBNY advances, short-term or overnight borrowings, subordinated debt, as well as customer CDs with fixed contractual interest rates. In addition, the Bank is obligated to make rental payments under leases on certain of its branches and equipment.
Off-Balance Sheet Arrangements
As part of its loan origination business, the Bank generally has outstanding commitments to extend credit to borrowers, which are originated pursuant to its regular underwriting standards. Available lines of credit may not be drawn on or may expire prior to funding, in whole or in part, and amounts are not estimates of future cash flows. As of March 31, 2023, the
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Bank had $105.3 million of firm loan commitments that were accepted by the borrowers. All of these commitments are expected to close during the remainder of the year ended December 31, 2023.
Additionally, in connection with a loan securitization completed in December 2017, the Bank executed a reimbursement agreement with FHLMC that obligates the Company to reimburse FHLMC for any contractual principal and interest payments on defaulted loans, not to exceed 10% of the original principal amount of the loans comprising the aggregate balance of the loan pool at securitization. The maximum exposure under this reimbursement obligation is $28.0 million. The Bank has pledged $28.0 million of available-for-sale pass-through MBS issued by GSEs as collateral.
Asset Quality
General
We do 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 our unaudited condensed consolidated financial statements for a discussion of evaluation for impaired securities.
Monitoring and Collection of Delinquent Loans
Our management reviews delinquent loans on a monthly basis and reports to our Board of Directors at each regularly scheduled Board meeting regarding the status of all non-performing and otherwise delinquent loans in our loan portfolio.
Our 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, we 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, we reverse all outstanding accrued interest receivable.
We generally initiate 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. We obtain 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. We generally attempt 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. We have not initiated any expected or imminent foreclosure proceedings that are likely to have a material adverse impact on our consolidated financial statements. 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 generally at least six months.
The C&I portfolio is actively managed by our lenders and underwriters. Most credit facilities typically require an annual review of the exposure and borrowers are required to submit annual financial reporting and loans are structured with financial covenants to indicate expected performance levels. Smaller C&I loans are monitored based on performance and the ability to draw against a credit line is curtailed if there are any indications of credit deterioration. Guarantors are also
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required to 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, additional guarantor support or a material enhancement to the frequency and quality of financial reporting. Loans determined to reach adverse risk rating standards are monitored closely by Credit Administration to identify any potential credit losses. When warranted, loans reaching a Substandard rating could be reassigned to the Workout Group for direct handling.
Non-accrual Loans
Within our held-for-investment loan portfolio, non-accrual loans totaled $31.5 million at March 31, 2023 and $34.2 million at December 31, 2022.
The following is a reconciliation of non-accrual loans as of the dates indicated:
March 31,
December 31,
March 31,
2023
2022
2022
(Dollars in thousands)
Non-accrual loans:
One-to-four family residential, including condominium and cooperative apartment
$
2,808
$
3,203
$
5,241
Multifamily residential and residential mixed-use real estate
—
—
—
CRE
8,068
8,332
4,972
Acquisition, development, and construction
657
657
665
C&I
19,912
21,946
25,000
Other
99
99
84
Total non-accrual loans
$
31,544
$
34,237
$
35,962
Ratios:
Total non-accrual loans to total loans
0.29
%
0.32
%
0.39
%
Total non-performing assets to total assets
0.23
0.26
0.30
Troubled Debt Restructuring Disclosures Prior to Our Adoption of ASU No. 2022-02
Prior to our adoption of ASU No. 2022-02, we accounted for a Troubled Debt Restructuring (“TDRs”) as a loan that we, for economic or legal reasons related to a borrower’s financial difficulties, granted a concession to the borrower that we would not otherwise grant. Those concessions included a reduction of interest rate for the remaining term of the loan, the maturity date of the loan was extended with a stated interest rate lower than the current market rate for new debt with similar risk, and the outstanding principal amount and/or accrued interest have been reduced. In instances in which the interest rate had been reduced, management would not deem the modification a TDR in the event that the reduction in interest rate reflected either a general decline in market interest rates or an effort to maintain a relationship with a borrower who could readily obtain funds from other sources at the current market interest rate, and the terms of the restructured loan are comparable to the terms offered by the Bank to non-troubled debtors.
On January 1, 2023, we adopted ASU 2022-02, which eliminated TDR accounting prospectively for all restructurings occurring on or after January 1, 2023. The accrual status of each restructured loan is determined separately in accordance with our policies for determining accrual or non-accrual status. At the time the modification agreement is entered into between the Bank and the borrower the loan can be on either accrual or non-accrual status. If a loan is on non-accrual status at the time it is restructured, it continues to be classified as non-accrual until the borrower has demonstrated compliance with the modified loan terms for a period of at least six months. Conversely, if at the time of restructuring the loan is performing (and accruing) it will remain accruing throughout its restructured period, unless the loan subsequently meets any of the criteria for non-accrual status under our policy and agency regulations.
Within the allowance for credit losses, losses are estimated for restructured loan on accrual status and well as restructured loans on non-accrual status that are one-to-four family loans or consumer loans, on a pooled basis with loans that share similar risk characteristics. Restructured loans on non-accrual status excluding one-to-four family and consumer loans are individually evaluated to determine expected credit losses. For restructured loans that are collateral-dependent where we
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have determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and we expect repayment of the loan to be provided substantially through the operation or sale of the collateral, the allowance for credit losses (“ACL”) is measured based on the difference between the fair value of collateral, less the estimated costs to sell, and the amortized cost basis of the loan as of the measurement date. For non-collateral-dependent loans, the ACL is measured based on the difference between the present value of expected cash flows and the amortized cost basis of the loan as of the measurement date.
OREO
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, we obtain a current appraisal on the property and reassess 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. We typically seek to dispose of OREO properties in a timely manner. As a result, OREO properties have generally not warranted subsequent independent appraisals.
There was no carrying value of OREO properties on our consolidated balance sheets at March 31, 2023 or December 31, 2022. We did not recognize any provisions for losses on OREO properties during the three months ended March 31, 2023 or 2022.
Past Due Loans
Loans Delinquent 30 to 59 Days
At March 31, 2023, we had loans totaling $18.7 million that were past due between 30 and 59 days. At December 31, 2022, we had loans totaling $23.5 million that were past due between 30 and 59 days. The 30 to 59-day delinquency levels fluctuate monthly, and are generally considered a less accurate indicator of near-term credit quality trends than non-accrual loans.
Loans Delinquent 60 to 89 Days
At March 31, 2023, we had loans totaling $1.4 million that were past due between 60 and 89 days. At December 31, 2022, we had loans totaling $0.7 million that were past due between 60 and 89 days. The 60 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.
Accruing Loans 90 Days or More Past Due
There were no accruing loans 90 days or more past due at March 31, 2023 or at December 31, 2022.
Allowance for Off-Balance Sheet Exposures
We maintain an allowance, recorded in other liabilities, associated with unfunded loan commitments accepted by the borrower. The amount of our allowance was $2.8 million at March 31, 2023 and at December 31, 2022, respectively. This allowance is determined based upon the outstanding volume of loan commitments at each period end. Any increases or reductions in this allowance are recognized in provision for credit losses.
Allowance for Credit Losses
We recognized a credit loss recovery of $3.6 million during the three months ended March 31, 2023, compared to a credit loss recovery of $1.6 million for the three months ended March 31, 2022. The $3.6 million credit loss recovery for the three months ended March 31, 2023 was primarily associated with a reduction in reserves on pooled Purchased Credit
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Deteriorated ("PCD”) loans that were acquired as part of the Company’s 2021 merger of equals transaction. The $1.6 million credit loss recovery for the first quarter of 2022 was primarily associated with the improvement in forecasted macroeconomic conditions , as well as a reduction in reserves for individually evaluated loans.
For a further discussion of the allowance for credit losses and related activity during the three months ended March 31, 2023 and 2022, please see Note 7 to the condensed consolidated financial statements.
The following table presents our allowance for credit losses allocated by loan type and the percent of loans in each category to total loans as of the dates indicated.
March 31, 2023
December 31, 2022
Percent
Percent
of Loans
of Loans
in Each
in Each
Category
Category
Allocated
to Total
Allocated
to Total
Amount
Loans
Amount
Loans
(Dollars in thousands)
One-to-four family residential and cooperative/condominium apartment
$
6,012
7.45
%
$
5,969
7.32
%
Multifamily residential and residential mixed-use
7,613
38.38
8,360
38.11
CRE
24,478
42.02
27,329
42.19
Acquisition, development, and construction
2,515
2.06
1,723
2.17
C&I
37,477
10.02
39,853
10.14
Other loans
240
0.07
273
0.07
Total
$
78,335
100.00
%
$
83,507
100.00
%
The following table sets forth information about our allowance for credit losses at or for the dates indicated:
At or for the Three Months Ended March 31,
2023
2022
(Dollars in thousands)
Total loans outstanding at end of period (1)
$
10,731,845
$
9,249,849
Average total loans outstanding during the period (2)
10,613,353
9,228,480
Allowance for credit losses balance at end of period
78,335
79,615
Allowance for credit losses to total loans at end of period
0.73
%
0.86
%
Non-performing loans to total loans at end of period
0.29
0.39
Allowance for credit losses to total non-performing loans at end of period
248.34
221.39
Ratio of net charge-offs to average loans outstanding during the period:
One-to-four family residential and cooperative/condominium apartment
—
%
—
%
Multifamily residential and residential mixed-use
—
—
CRE
—
—
Acquisition, development, and construction
—
—
C&I
0.59
1.13
Other loans
(0.05)
0.04
Total
0.06
0.11
(1) Total loans represent gross loans (excluding loans held for sale), inclusive of deferred fees/costs and premiums/discounts.
(2) Total average loans represent gross loans (including loans held for sale), inclusive of deferred loan fees/costs and premiums/discounts.
Comparison of Financial Condition at March 31, 2023 and December 31, 2022
Assets. Assets totaled $13.84 billion at March 31, 2023, $651.8 million above their level at December 31, 2022, primarily due to increases of $493.8 million in cash and due from banks, $170.2 million in our loan portfolio and $16.5 million in restricted stock, partially offset by a decrease of $24.2 million in derivative assets and a decrease of $3.9 million in total investment securities.
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Table of Contents
Total loans increased $170.2 million during the three months ended March 31, 2023, to $10.65 billion at period end. During the period, we had loan originations of $351.9 million.
Total securities decreased $3.9 million during the three months ended March 31, 2023, to $1.53 billion at period end, primarily due to proceeds from principal payments, calls, maturities, and sales of $105.0 million, offset in part by purchases of $101.9 million. There were no transfers to or from securities held-to-maturity during the three months ended March 31, 2023.
Liabilities. Total liabilities increased $630.1 million during the three months ended March 31, 2023, to $12.65 billion at period end, primarily due to an increase of $367.0 million in FHLBNY advances and an increase of $315.8 million in deposits, partially offset by a decrease of $32.4 million in derivative cash collateral and a decrease of $21.8 million in derivative liabilities.
Stockholders’ Equity. Stockholders’ equity increased $21.7 million during the three months ended March 31, 2023 to $1.19 billion at period end, primarily due to net income for the period of $37.3 million, partially offset by common stock dividends of $9.2 million, other comprehensive loss of $4.3 million, preferred stock dividends of $1.8 million and repurchases of shares of common stock of $715 thousand.
Comparison of Operating Results for the Three Months Ended March 31, 2023 and 2022
General. Net income was $37.3 million during the three months ended March 31, 2023, compared to net income of $34.5 million for the three months ended March 31, 2022. During the three months ended March 31, 2023, non-interest expense decreased by $2.4 million, the credit loss provision decreased by $2.1 million, non-interest income increased by $1.8 million, net interest income decreased by $3.3 million, and income tax expense increased by $138 thousand, compared to the three months ended March 31, 2022.
The discussion of net interest income for the three months ended March 31, 2023 and 2022 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. No tax-equivalent adjustments have been made for interest income exempt from Federal, state, and local taxation. The yields include loan fees consisting of amortization of loan origination and commitment fees and certain direct and indirect origination costs, prepayment fees, and late charges that are considered adjustments to yields. Loan fees included in interest income were $292 thousand and $834 thousand during the three months ended March 31, 2023 and 2022, respectively. The decrease in loan fees was primarily due to a decline in loan prepayment fees in 2023. There are no out-of-period adjustments included in the rate/volume analysis in the following table.
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Table of Contents
Analysis of Net Interest Income
Three Months Ended March 31,
2023
2022
Average
Average
Average
Yield/
Average
Yield/
Balance
Interest
Cost
Balance
Interest
Cost
Assets:
(Dollars in thousands)
Interest-earning assets:
Real estate loans (1)
$
9,560,755
$
109,589
4.65
%
$
8,296,732
$
76,437
3.74
%
Commercial and industrial loans (1)
1,045,048
18,735
7.27
916,090
9,786
4.33
Other loans (1)
7,550
115
6.18
15,658
197
5.10
Securities
1,699,846
8,431
2.01
1,726,189
7,131
1.68
Other short-term investments
372,036
3,802
4.14
379,136
368
0.39
Total interest-earning assets
12,685,235
140,672
4.50
%
11,333,805
93,919
3.36
%
Non-interest earning assets
764,511
865,916
Total assets
$
13,449,746
$
12,199,721
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing checking
$
843,108
$
1,523
0.73
%
$
870,889
$
367
0.17
%
Money market
2,699,640
13,849
2.08
3,632,438
973
0.11
Savings
2,327,126
14,599
2.54
1,256,701
207
0.07
Certificates of deposit
1,167,736
7,301
2.54
824,883
984
0.48
Total interest-bearing deposits
7,037,610
37,272
2.15
6,584,911
2,531
0.16
FHLBNY advances
1,255,700
13,500
4.36
33,889
77
0.92
Subordinated debt, net
200,276
2,553
5.17
197,080
2,201
4.53
Other short-term borrowings
11,827
118
4.05
2,459
—
—
Total borrowings
1,467,803
16,171
4.47
233,428
2,278
3.96
Derivative cash collateral
135,641
1,477
4.42
14,335
1
—
Total interest-bearing liabilities
8,641,054
54,920
2.58
%
6,832,674
4,810
0.29
%
Non-interest-bearing checking
3,341,707
3,979,741
Other non-interest-bearing liabilities
273,281
189,843
Total liabilities
12,256,042
11,002,258
Stockholders' equity
1,193,704
1,197,463
Total liabilities and stockholders' equity
$
13,449,746
$
12,199,721
Net interest income
$
85,752
$
89,109
Net interest spread (2)
1.92
%
3.07
%
Net interest-earning assets
$
4,044,181
$
4,501,131
Net interest margin (3)
2.74
%
3.19
%
Ratio of interest-earning assets to interest-bearing liabilities
146.80
%
165.88
%
Deposits (including non-interest-bearing checking accounts)
$
10,379,317
$
37,272
1.46
%
$
10,564,652
$
2,531
0.10
%
(1) Amounts are net of deferred origination costs/ (fees) and allowance for credit losses, and include loans held for sale.
(2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average-interest earning assets.
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Table of Contents
Rate/Volume Analysis
Three Months Ended March 31, 2023
Compared to Three Months Ended March 31, 2022
Increase / (Decrease) Due to:
Volume
Rate
Total
(Dollars in thousands)
Interest-earning assets:
Real estate loans (1)
$
13,096
$
20,056
$
33,152
Commercial and industrial (1)
1,843
7,106
8,949
Other loans (1)
(114)
32
(82)
Securities
(107)
1,407
1,300
Other short-term investments
(40)
3,474
3,434
Total interest-earning assets
$
14,678
$
32,075
$
46,753
Interest-bearing liabilities:
Interest-bearing checking
$
(30)
$
1,186
$
1,156
Money market
(2,511)
15,387
12,876
Savings
3,462
10,930
14,392
Certificates of deposit
1,267
5,050
6,317
FHLBNY advances
7,954
5,469
13,423
Subordinated debt, net
39
313
352
Other short-term borrowings
47
71
118
Derivative cash collateral
660
816
1,476
Total interest-bearing liabilities
$
10,888
$
39,222
$
50,110
Net change in net interest income
$
3,790
$
(7,147)
$
(3,357)
(1) Amounts are net of deferred origination costs/ (fees) and allowance for credit losses, and include loans held for sale.
Net interest income. Net interest income was $85.8 million during the three months ended March 31, 2023, a decrease of $3.3 million from the three months ended March 31, 2022. Average interest-earning assets were $12.69 billion for the three months ended March 31, 2023, an increase of $1.36 billion from $11.33 billion for the three months ended March 31, 2022. Net interest margin (“NIM”) was 2.74% during the three months ended March 31, 2023, down from 3.19% during the three months ended March 31, 2022.
Interest Income. Interest income was $140.7 million during the three months ended March 31, 2023, compared to $93.9 million during the three months ended March 31, 2022. During the first quarter of 2023, interest income increased $46.8 million from the first quarter of 2022, primarily reflecting increases in interest income of $33.1 million on real estate loans, $8.9 million on C&I loans, $3.4 million on other short-term investments and $1.3 million on securities, partially offset by decrease in interest income of $82 thousand on other loans.
The increased interest income on real estate loans was related to an increase of a 91-basis point increase in the average yield and an increase of $1.26 billion in the average balance of such loans in the 2023 period. The increased interest income on C&I loans was related to a 294-basis point increase in the average yield and an increase of $129.0 million in the average balance of such loans in the period. The increased interest income on short-term investments was due to an increase of a 375-basis point increase in the average yield offset by a $7.1 million decrease in the average balance of such short-term investments during the period. The increased interest income on securities was due to an increase of a 33-basis point increase in the average yield offset by a $26.3 million decrease in the average balance of such securities during the period. The decreased interest income on other loans was due to a 108-basis point increase in the average yield offset by a $8.1 million decrease in the average balance of other loans during the period.
Interest Expense. Interest expense was $54.9 million during the three months ended March 31, 2023, compared to $4.8 million during the three months ended March 31, 2022, primarily reflecting increases in interest expense of $34.7 million on deposits, $13.9 million on total borrowings and $1.5 million on derivative cash collateral. The increased interest expense
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on deposits primarily reflects a 247-basis point increase in rates paid on savings accounts and an increase of $1.07 billion in average balance of such deposits, a 197 basis-point increase in rates paid on money market accounts offset by $932.8 million in average balances of such deposits and a 206 basis-point increase in rates paid on CDs and an increase of $342.9 million in average balance of such deposits. The increases in interest expenses on money market accounts, saving accounts and CDs were primarily due to intense price competition among banks and other financial institutions. The increased interest expense on total borrowings primarily reflects a $1.22 billion increase in the average balance of FHLBNY advances and a 344-basis point increase in rates paid on such advances.
Provision for Credit Losses. We recognized a credit loss recovery of $3.6 million during the three months ended March 31, 2023, compared to a credit loss recovery of $1.6 million for the three months ended March 31, 2022. The $3.6 million credit loss recovery for the first quarter of 2023 was primarily associated with a reduction in reserves on pooled Purchased Credit Deteriorated (“PCD”) loans that were acquired as part of the Company’s 2021 merger of equals transaction. The $1.6 million credit loss recovery for the first quarter of 2022 was primarily associated with an improvement in forecasted macroeconomic conditions , as well as a reduction in reserves for individually evaluated loans.
Non-Interest Income. Non-interest income was $9.0 million during the three months ended March 31, 2023, compared to $7.2 million during the three months ended March 31, 2022. During the first quarter of 2023, non-interest income increased $1.8 million from the first quarter of 2022, reflecting an increase of $3.1 million in loan level derivative income, an increase of $324 thousand in BOLI income and a $274 thousand increase in gain on sale of SBA, partially offset by a $1.4 million loss on sale of securities and a $244 thousand decrease on service charges and other fees during the 2023 period.
Non-Interest Expense. Non-interest expense was $47.5 million during the three months ended March 31, 2023, compared to $49.9 million during the three months ended March 31, 2022. During the first quarter of 2023, non-interest expense decreased $2.4 million from the first quarter of 2022, primarily due to a $4.2 million decrease in salaries and employee benefits, offset by increases of $723 thousand in federal deposit insurance premiums, $433 thousand in data processing costs and $631 thousand in all other non-interest expenses. The increase in federal deposit insurance premiums relates to an increase in deposit insurance rates due to a special assessment by the FDIC.
Non-interest expense was 1.41% and 1.64% of average assets during the three months ended March 31, 2023 and 2022, respectively.
Income Tax Expense. Income tax expense was $13.6 million during the three months ended March 31, 2023, compared to income tax expense of $13.5 million during the three months ended March 31, 2022. The reported effective tax rate for the first quarter ending March 31, 2023 was 26.8%, and 28.1% for the first quarter ending March 31, 2022.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.