Item 7. Management’s Discussion and
Analysis (“MD&A”) of Financial Condition and Results of Operations
The purpose of this analysis is to provide the reader
with information relevant to understanding and assessing the Company’s results of operations for each of the past three years and
financial condition for each of the past two years. In order to fully appreciate this analysis, the reader is encouraged to review the
consolidated financial statements and accompanying notes thereto appearing under Item 8 of this report, and statistical data presented
in this document.
Cautionary Statement Concerning Forward-Looking Statements
See Item 1 of this Annual Report on Form 10-K for
information regarding forward-looking statements.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial
Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with U.S.
generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses. Accounting policies considered critical to our financial results
include the allowance for credit losses and related provision and income taxes. For information on our significant accounting policies,
see Note 1a in the Notes to Consolidated Financial Statements.
Allowance for Credit Losses and Related
Provision
The allowance for credit losses is an estimate of
current expected credit losses considering available information relevant to assessing collectability of cash flows over the contractual
term of the financial assets necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The
methodology for determining the allowance for credit losses is considered a critical accounting policy by management because of the high
degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment
that could result in changes to the amount of the recorded allowance for credit losses. The loan portfolio also represents the largest
asset type on the Company’s Consolidated Statements of Condition.
Expected credit losses of financial assets are measured
on a collective (pool) basis when similar risk characteristic(s) exist. If the Company determines that a financial asset does not
share risk characteristics with other financial assets, the Company shall evaluate the financial asset for expected credit losses on an
individual basis. Financial assets are assessed once, either through collective assessments or individual assessments. Standard
expected losses are evaluated on a collective, or pool, basis when financial assets share similar risk characteristics. For pooled loan
segments, utilizing a quantitative analysis, the Company calculates estimated credit losses using a probability of default and loss given
default methodology, the results of which are applied to the aggregated discounted cash flow of each individual loan within the segment.
The point in time probability of default and loss given default are then conditioned by macroeconomic scenarios to incorporate reasonable
and supportable forecasts that affect the collectability of the reported amount.
Financial assets may be segmented based on one characteristic,
or a combination of characteristics. Examples of risk characteristics relevant to the Company’s evaluation included, but were not
limited to: (1) internal or external credit scores or credit ratings, (2) risk ratings or classifications, (3) financial asset type, (4)
collateral type, (5) size, (6) effective interest rate, (7) term, (8) geographical location, (9) industry of the borrower and (10) vintage. Various
regulatory agencies, as an integral part of their examination process, periodically review our allowance for credit losses. Such agencies
may require us to make additional provisions for credit losses based upon information available to them at the time of their examination.
All of the factors considered in the analysis of the adequacy of the allowance for credit losses may be subject to change. To the extent
actual outcomes differ from management estimates, additional provisions for credit losses may be required that could materially adversely
impact earnings in future periods. Additional information can be found in Note 1a of the Notes to Consolidated Financial Statements.
Income Taxes
The objectives of accounting for income taxes are
to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing
the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns.
Fluctuations in the actual outcome of these future
tax consequences could impact the Company’s consolidated financial condition or results of operations. Note 1 (under the caption
“Use of Estimates”) and Note 10 of the Notes to Consolidated Financial Statements include additional discussion on the accounting
for income taxes.
-31-
Table of Contents
Overview and Strategy
We serve as a holding company for the Bank, which
is our primary asset and only operating subsidiary. We follow a business plan that emphasizes the delivery of customized banking services
in our market area to clients who desire a high level of personalized service and responsiveness. The Bank conducts a traditional banking
business, making commercial loans, consumer loans and residential and commercial real estate loans. In addition, the Bank offers various
non-deposit products through non-proprietary relationships with third party vendors. The Bank relies upon deposits as the primary funding
source for its assets. The Bank offers traditional deposit products.
Many of our clients relationships start with referrals
from existing clients. We then seek to cross sell our products to clients to grow the client relationship. For example, we will frequently
offer an interest rate concession on credit products for clients that maintain a noninterest-bearing deposit account at the Bank. This
strategy has helped maintain our funding costs and the growth of our interest expense even as we have substantially increased our total
deposits. It has also helped fuel our significant loan growth. We believe that the Bank’s significant growth and increasing profitability
demonstrate the need for and success of our brand of banking.
Our results of operations depend primarily on our
net interest income, which is the difference between the interest earned on our interest-earning assets and the interest paid on funds
borrowed to support those assets, primarily deposits. Net interest margin is the difference between the weighted average rate received
on interest-earning assets and the weighted average rate paid to fund those interest-earning assets, which is also affected by the average
level of interest-earning assets as compared with that of interest-bearing liabilities. Net income is also affected by the amount of noninterest
income and noninterest expenses.
General
The following discussion and analysis present the
more significant factors affecting the Company’s financial condition as of December 31, 2021 and 2020 and results of operations
for each of the years in the three-year period ended December 31, 2021. The MD&A should be read in conjunction with the consolidated
financial statements, notes to consolidated financial statements and other information contained in this report.
Operating Results Overview
Net income available to common stockholders for
the year ended December 31, 2021 was $128.6 million, an increase of $57.3 million, or 80.4%, compared to net income of $71.3 million for
2020. Diluted earnings per share were $3.22 for 2021, a 79.9% increase from $1.79 for 2020.
The change in net income from 2020 to 2021 was attributable
to the following:
· Increase in net interest income of $24.9 million.
Net income for the year ended December 31, 2020
was $71.3 million, a decrease of $2.1 million, or 2.9%, compared to net income of $73.4 million for 2019. Diluted earnings per share were
$1.79 for 2020, a 13.5% decrease from $2.07 for 2019.
The change in net income from 2019 to 2020 was attributable
to the following:
-32-
Table of Contents
Net Interest Income
Fully taxable equivalent net interest income for
2021 totaled $264.7 million, an increase of $24.8 million, or 10.3%, from 2020. The increase in net interest income was due to an increase
in average interest-earning assets, which grew by 4.2% to $7.2 billion and a widening of 20 basis-points in the net interest margin. The
widening of the net interest margin was mainly attributable to lower cost of funds, offset by higher average cash balances and lower yields
on loans and securities. Average total loans, which includes loans held-for-sale, increased by 3.6% to $6.4 billion in 2021 from $6.2
billion in 2020. The increase in average total loans is primarily attributable to higher, non PPP, loan originations.
Fully taxable equivalent net interest income for
2020 totaled $239.9 million, an increase of $51.9 million, or 27.6%, from 2019. The increase in net interest income was due to an increase
in average interest-earning assets, which grew by 23.6% to $6.9 billion and a widening of 11 basis-points in the net interest margin.
The widening of the net interest margin was mainly attributable to lower cost of funds, offset by higher average cash balances and lower
yields on loans and securities. Average total loans, which includes loans held-for-sale, increased by 22.8% to $6.2 billion in 2020 from
$5.0 billion in 2019. The increase in average total loans is primarily attributable to the acquisition of BNJ.
-33-
Table of Contents
Average Balance Sheets
The following table sets forth certain information
relating to our average assets and liabilities for the years ended December 31, 2021, 2020 and 2019 and reflects the average yield
on assets and average cost of liabilities for the periods indicated. Such yields are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods shown.
Years Ended December 31,
(dollars in thousands)
ASSETS
Interest-earning assets:
Noninterest-earning assets:
LIABILITIES & STOCKHOLDERS’ EQUITY
(1) Average balances are based on amortized cost.
(3) Includes loan fee income and accretion of purchase accounting adjustments.
(4) Loans include nonaccrual loans.
-34-
Table of Contents
Rate/Volume Analysis
The following table presents, by category, the
major factors that contributed to the changes in net interest income. Changes due to both volume and rate have been allocated in proportion
to the relationship of the dollar amount change in each.
Average Volume Average Rate Net Change Average Volume Average Rate Net Change
(dollars in thousands)
Interest income:
Interest expense:
Capital lease obligation (12 ) 1 (11 ) (11 ) - (11 )
Provision for (Reversal of) Credit Losses
In determining the provision for credit losses,
management considers national and local economic trends and conditions; trends in the portfolio including orientation to specific loan
types or industries; experience, ability and depth of lending management in relation to the complexity of the portfolio; effects of changes
in lending policies, trends in volume and terms of loans; levels and trends in delinquencies, impaired loans and net charge-offs and the
results of independent third party loan review.
The Bank adopted CECL beginning on January 1, 2021.
Provision expense may therefore become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors
and conditions, and loan composition, which drive the allowance for credit losses balance. See Note 1b to our audited financial statements
included herein.
For the year ended December 31, 2021, the (reversal
of) provision for credit losses was ($5.5) million, a decrease of $46.5 million, compared to the provision for loan losses of $41.0 million
for the year ended December 31, 2020. The elevated provision for loan losses for the year ended December 31, 2020 was due to the economic
uncertainties of the COVID-19 pandemic, including consideration of related borrower payment deferrals requested and/or granted. The release
of allowance for credit losses during the year ended December 31, 2021 was the result of the continually improving macro-economic outlook
during the course of 2021.
For the year ended December 31, 2020, the provision
for credit losses was $41.0 million, an increase of $32.9 million, compared to the provision for credit losses of $8.1 million for 2019.
The increase was due to the continued economic uncertainties associated with the COVID-19 pandemic and increases to specific reserves
within our commercial portfolio.
-35-
Table of Contents
Noninterest Income
Noninterest income for the full-year 2021 increased
by $1.3 million, or 9.0%, to $15.7 million from $14.4 million in 2020. The increase was primarily due to increases in net gains on loans
held for sale of $1.7 million, gain on sale of branches of $0.7 million and net gains on sale/redemption of investment securities of $0.2
million, partially offset by decreases in deposit, loan and other income of $0.5 million, income on bank owned life insurance of $0.2
million and net gains on equity securities of $0.6 million. The increase in net gains on loans held-for-sale resulted from mortgage loan
sales, SBA loan sales and elevated commercial loan sales. The increase in gain on sale of branches was the result of the Bank selling
two branches during the first quarter of 2021 related to the BNJ acquisition.
Noninterest income for the full-year 2020 increased
by $6.4 million, or 79.2%, to $14.4 million from $8.0 million in 2019. The increase was primarily the result of a $3.0 million increase
in deposit, loan and other income. This increase was largely attributable to loan referral fee income of $2.3 million generated by BoeFly
as a result of its participation in the PPP program. Additionally, increases in net gains on sale of loans held-for-sale of $1.6 million
and increases in bank owned life insurance of $1.5 million contributed to the overall increase in noninterest income.
Noninterest Expense
Noninterest expenses for the full-year 2021 decreased
by $12.0 million, or 9.9%, to $109.0 million from $121.0 million in 2020. The decrease was primarily due to decreases in merger expenses
of $14.6 million, change in value of acquisition price of $2.3 million, occupancy and equipment of $2.2 million, and FDIC insurance of
$1.3 million, partially offset by increases in salaries and employee benefits of $5.5 million, other expenses of $2.6 million and professional
and consulting of $0.9 million. Excluding the impact on expenses related to mergers costs, expense increases were mainly attributable
to increased levels of business.
Noninterest expenses for the full-year 2020 increased
by $28.8 million, or 31.2%, to $121.0 million from $92.2 million in 2019. The increase was primarily attributable to increases in salaries
and employee benefits of $9.9 million, merger expenses of $5.7 million, occupancy and equipment of $4.2 million, increase in value of
acquisition price of $2.3 million, FDIC insurance expense of $2.0 million, professional and consulting of $1.9 million and amortization
of core deposit intangibles of $1.1 million. These increases were mainly the result of the acquisition of BNJ.
Income Taxes
Income tax expense was $44.7 million for 2021 compared
to $19.1 million for 2020 and $20.6 million for 2019. The increase in income tax expense in 2021 when compared to 2020 was primarily the
result of higher taxable income. The slight decrease in income tax expense in 2020 when compared to 2019 was primarily the result of lower
taxable income. The effective tax rates were 25.5% in 2021, 21.1% in 2020 and 21.9% for 2019. The higher effective tax rate during 2021
when compared to 2020 and 2019, was the result of a higher percentage of income being derived from taxable sources. The Company expects
its effective tax rate to increase in 2022, as a result of the Company’s revenue growth in existing and new markets.
For a more detailed description of income taxes
see Note 10 of the Notes to Consolidated Financial Statements.
Financial Condition Overview
As of December 31, 2021, the Company’s total
assets were $8.1 billion, an increase of $0.6 billion from December 31, 2020. Total loans (including loans held-for-sale) were $6.8 billion,
an increase of $0.6 billion from December 31, 2020. Deposits were $6.3 billion, an increase of $0.4 billion from December 31, 2020.
As of December 31, 2020, the Company’s total
assets were $7.5 billion, an increase of $1.4 billion from December 31, 2019. Total loans (including loans held-for-sale) were $6.2 billion,
an increase of $1.1 billion from December 31, 2019. Deposits were $6.0 billion, an increase of $1.2 billion from December 31, 2019. These
increases were primarily the result of the acquisition of BNJ.
Loan Portfolio
The Bank’s lending activities are generally
oriented to small-to-medium sized businesses, high net worth individuals, professional practices and consumer and retail clients living
and working in the Bank’s metropolitan, New York market area, consisting of Bergen, Union, Morris, Essex, Hudson, Mercer and Monmouth
counties, New Jersey, as well as NYC’s five boroughs, Nassau, Rockland, Orange and Westchester counties, in New York. The Bank has
not made loans to borrowers outside of the United States. The Bank believes that its strategy of high-quality client service, competitive
rate structures and selective marketing have enabled it to gain market share.
Commercial loans are loans made for business purposes
and are primarily secured by collateral such as cash balances with the Bank, marketable securities held by or under the control of the
Bank, business assets including accounts receivable, inventory and equipment and liens on commercial and residential real estate. Commercial
construction loans are loans to finance the construction of commercial or residential properties secured by first liens on such properties.
Commercial real estate loans include loans secured by first liens on completed commercial properties, including multi-family properties,
to purchase or refinance such properties. Residential mortgages include loans secured by first liens on residential real estate and are
generally made to existing clients of the Bank to purchase or refinance primary and secondary residences. Home equity loans and lines
of credit include loans secured by first or second liens on residential real estate for primary or secondary residences. Consumer loans
are made to individuals who qualify for auto loans, cash reserve, credit cards and installment loans.
-36-
Table of Contents
Gross loans as of December 31, 2021 totaled $6.8
billion, an increase of $0.6 billion, or 9.5%, over gross loans as of December 31, 2020 of $6.3 billion.
The largest component of the gross loan portfolio
as of December 31, 2021 and December 31, 2020 was commercial real estate loans. Commercial real estate loans as of December 31, 2021 totaled
$4.7 billion, an increase of $958.0 million, or 25.3%, compared to commercial real estate loans as of December 31, 2020 of $3.8 billion.
The main component contributing to the increase in commercial real estate loans is an increase in the multifamily loans. Commercial loans
totaled $1.3 billion as of December 31, 2021, a decrease of $222.5 million, or 14.6%, compared to commercial loans as of December 31,
2020 of $1.5 billion. Included in commercial loans were PPP loans of $93.1 million as of December 31, 2021 and $397.5 million as of December
31, 2020. The decrease in commercial loans was mainly attributable to accelerated forgiveness of the outstanding PPP loans. Commercial
construction loans as of December 31, 2021 totaled $540.2 million, a decrease of $77.6 million, or 12.6%, compared to construction loans
as of December 31, 2020 of $617.8 million.
Residential real estate loans totaled $255.3 million
as of December 31, 2021, a decrease of $67.3 million, or 20.9%, compared to residential real estate loans as of December 31, 2020 of $322.6
million. Consumer loans as of December 31, 2021 and December 31, 2020 totaled $1.9 million.
The following table sets forth the classification
of our loans by loan portfolio segment for the periods presented.
-37-
Table of Contents
The following table sets forth
the classification of our gross loans by loan portfolio segment and by fixed and adjustable rate loans as of December 31, 2021 by remaining
contractual maturity.
As of December 31, 2021, Maturing
Loans with:
For additional information regarding loans, see
Note 4 of the Notes to the Consolidated Financial Statements
Asset Quality
General. One of our key
objectives is to maintain a high level of asset quality. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency
by sending late notices, as well as making personal contact with the borrower. Typically, late notices are sent approximately 10 days
after the date the payment is due, followed up by direct contact with the borrower approximately 15 days after payment is due. In most
cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed, and additional efforts are made to
collect the deficiency. Total loans delinquent 30 days or more are reported to the board of directors of the Bank on a monthly basis.
On loans where the collection
of principal or interest payments is doubtful, the accrual of interest income ceases (“nonaccrual” loans). Except for loans
that are well-secured and in the process of collection, it is our policy to discontinue accruing additional interest and reverse any interest
accrued on any loan that is 90 days or greater past due. On occasion, this action may be taken earlier if the financial condition of the
borrower raises significant concern with regard to the borrower’s ability to service the debt in accordance with the terms of the
loan agreement. Interest income is not accrued on these loans until the borrower’s financial condition and payment record demonstrate
an ability to service the debt. Typically, a nonaccrual loan may return to accrual status if the borrower makes the loan current, and
then makes six consecutive payments as scheduled.
Real estate acquired as a result
of foreclosure is classified as other real estate owned (“OREO”) until sold. OREO is recorded at the lower of cost or fair
value less estimated selling costs. Costs associated with acquiring and improving a foreclosed property are usually capitalized to the
extent that the carrying value does not exceed fair value less estimated selling costs. Holding costs are charged to expense. Gains and
losses on the sale of OREO are charged to operations, as incurred.
The Company evaluates individual
instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated using
a collective (pooled) basis. The Company evaluates the pooling methodology at least annually. Loans transition from defined
segments for individual analysis when credit characteristics, or risk traits, change in a material manner. A loan is considered
for individual analysis when, based on current information and events, it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by the Company
in determining individual analysis include payment status and the probability of collecting scheduled principal and interest payments
when due. Loans for which the terms have been modified as a concession to the borrower due to the borrower experiencing financial
difficulties are troubled debt restructurings (“TDR”) and are individually analyzed if carrying value is $250,000 or
higher. Additionally, nonaccrual loans that are $250,000 or higher are also individually analyzed. All PCD loans are individually
analyzed. For loans designated as TDR or nonaccrual with balances less than $250,000, these loans are collectively evaluated,
and, accordingly, are not separately identified for analysis or disclosures. Instruments will not be included in both collective
and individual analysis. Individual analysis will establish a specific reserve for instruments in scope.
Asset Classification. Federal
regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential
problem assets. We have incorporated an internal asset classification system, substantially consistent with Federal banking regulations,
as a part of our credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem
assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard”
if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard”
assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss”
if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified
“substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,”
on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified
as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without
the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient
risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “special
mention.”
-38-
Table of Contents
When an insured institution classifies
one or more assets, or portions thereof, as “substandard” or “doubtful,” it is required that a general valuation
allowance for credit losses must be established in an amount deemed prudent by management. General valuation allowances represent loss
allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets, or portions
thereof, as “loss,” it is required either to establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount.
A bank’s determination
as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal bank regulators which
can order the establishment of additional general or specific loss allowances. The Federal banking agencies have adopted an interagency
policy statement on the allowance for credit losses. The policy statement provides guidance for financial institutions on both the responsibilities
of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy
of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify,
monitor and address asset quality problems; that management analyze all significant factors that affect the collectability of the portfolio
in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in
the policy statement. Our management believes that, based on information currently available, our allowance for credit losses is maintained
at a level which covers all known and probable incurred losses in the portfolio at each reporting date. However, actual losses are dependent
upon future events and, as such, further additions to the level of allowances for credit losses may become necessary.
The table below sets forth information
on our classified loans and loans designated as special mention (excluding loans held-for-sale) as of the dates presented:
(dollars in thousands)
Classified Loans:
Loss - -
Total classified and special mention loans $ 229,720 $ 199,793
During the year ended December
31, 2021, “substandard” loans and “doubtful” loans, which include lower credit quality loans which possess higher
risk characteristics than “special mention” loans, increased to $157.4 million, or 2.3% of loans receivable, as of December
31, 2021 from $119.9 million, or 1.9% of loans receivable, as of December 31, 2020. The increase of $37.7 million is primarily attributable
to loans migrating to substandard that have recently come off deferment status. During the year ended December 31, 2021, “special
mention” loans were $72.3 million, or 1.0% of loans receivable, while “special mention” loans as of December 31, 2020
were $79.9 million, or 1.3% of loans receivable. As of December 31, 2021, deferred loans were $0.5 million.
Nonaccrual Loans, Performing Troubled Debt Restructurings, OREO
and Loans 90 Days or Greater Past Due and Still Accruing
Nonperforming loans include nonaccrual
loans. Nonaccrual loans represent loans on which interest accruals have been suspended. The Company considers charging off loans, or a
portion thereof, when they become contractually past due ninety days or more as to interest or principal payments or when other internal
or external factors indicate that collection of principal or interest is doubtful. Performing troubled debt restructurings represent loans
on which a concession was granted to a borrower, such as a reduction in interest rate to a rate lower than the current market rate for
new debt with similar risks, and which are currently performing in accordance with the modified terms. For additional information regarding
loans, see Note 4 of the Notes to the Consolidated Financial Statements.
-39-
Table of Contents
The following table sets forth,
as of the dates indicated, the amount of the Company’s nonaccrual loans, other real estate owned (“OREO”), performing
troubled debt restructurings (“TDRs”) and loans past due 90 days or greater and still accruing:
December 31, December 31, December 31,
OREO - - -
Nonaccrual loans to loans receivable 0.90 % 0.99 % 0.97 %
Nonperforming assets to total assets 0.76 % 0.82 % 0.80 %
Allowance for Credit Losses and Related Provision
The allowance for credit losses
is a reserve established through charges to earnings in the form of a provision for credit losses. We maintain an allowance for credit
losses at a level considered adequate to provide for all known and probable incurred losses in the portfolio. The level of the allowance
is based on management’s evaluation of estimated losses in the portfolio, after consideration of risk characteristics of the loans
and prevailing and anticipated economic conditions. Loan charge-offs (i.e., loans judged to be uncollectible) are charged against the
reserve and any subsequent recovery is credited. Our officers analyze risks within the loan portfolio on a continuous basis and through
an external independent loan review function, and the results of the loan review function are also reviewed by our Audit Committee. A
risk system, consisting of multiple grading categories for each portfolio class, is utilized as an analytical tool to assess risk and
appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current
and anticipated economic conditions and considers such factors as the financial condition of the borrower, past and expected loss experience,
and other factors which management feels deserve recognition in establishing an appropriate reserve. These estimates are reviewed at least
quarterly and, as adjustments become necessary, they are recognized in the periods in which they become known. Although management strives
to maintain an allowance it deems adequate, future economic changes, deterioration of borrowers’ creditworthiness, and the impact
of examinations by regulatory agencies all could cause changes to our allowance for credit losses.
As of December 31, 2021, the
allowance for credit losses for loans was $78.8 million, a decrease of $0.5 million, or 0.6%, from $79.2 million as of December 31, 2020.
The Bank adopted CECL as of January 1, 2021. As a result of the adoption, the Bank recorded a “Day 1” CECL adjustment on January
1, 2021 of $6.5 million that increased the allowance for credit losses for loans. This increase was offset by a release of provision for
credit losses of $5.5 million as well as $2.0 million in net charge-offs during the year ended December 31, 2021. The $5.5 million release
of provision for credit losses during the year ended December 31, 2021 was the result of a continued improvement in the macroeconomic
outlook during 2021. Included in the $2.0 million net charge-offs for the year ended December 31, 2021 was a $1.4 million charge-off of
a commercial real estate loan that previously had a specific credit reserve.
The allowance for credit losses
for loans as a percentage of loans receivable was 1.15% as of December 31, 2021 and 1.27% as of December 31, 2020. Excluding PPP
loans receivable, which are 100% federally guaranteed, the allowance for credit losses as a percentage of loans receivable was 1.17% as
of December 31, 2021.
-40-
Table of Contents
Three-Year Statistical Allowance for Credit Losses for Loans
The following table reflects
the relationship of loan volume, the provision and allowance for credit losses for loans and net charge-offs for the periods presented.
CECL Day 1 Adjustment 6,557 - -
Charge-offs:
Recoveries:
Residential real estate 20 23 3
(Release of) provision for credit losses for loans (5,018 ) 41,000 8,100
(1) For the years ended December
31, 2019 the loan charge-offs within the commercial loan segment included $1.0 million related to the taxi medallion portfolio.
For additional information
regarding loans, see Note 4 of the Notes to the Consolidated Financial Statements.
Implicit in the lending function
is the fact that credit losses will be experienced and that the risk of loss will vary with the type of loan being made, the creditworthiness
of the borrower and prevailing economic conditions. The allowance for credit losses has been allocated in the table below according to
the estimated amount deemed to be reasonably and supportably necessary to provide for the possibility of either lifetime expected losses
or losses being incurred within the following categories of loans as of December 31, for each of the past three years.
The table below shows, for three types of loans,
the amounts of the allowance allocable to such loans and the percentage of such loans to gross loans, along with the amount of the unallocated
allowance. Commercial loan type shown below includes commercial, commercial real estate and commercial construction loans.
Commercial Residential Real Estate Consumer Unallocated
(dollars in thousands)
-41-
Table of Contents
Investments
For the year ended December 31, 2021, the average
volume of investment securities, including equity securities, increased by $20.3 million to approximately $464.3 million or 6.4% of average
earning assets, from $444.1 million, or 6.4% of average earning assets, for the year ended December 31, 2020. As of December 31, 2021,
the principal components of the investment portfolio are U.S. Treasury and Government Agency Obligations, Federal Agency Obligations including
mortgage-backed securities, Obligations of U.S. States and Political Subdivisions, Corporate Bonds and other debt and equity securities.
During the year ended December 31, 2021, rate related
factors decreased investment revenue by $2.8 million, while volume related factors increased investment revenue by $0.3 million. The tax-equivalent
yield on investments decreased by 64 basis points to 1.61% from a yield of 2.25% during the year ended December 31, 2020. This was primarily
due to overall declines in prevailing interest rates over the course of 2021.
Securities available-for-sale are a part of the
Company’s interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment
risk, liquidity management and other factors. The Company continues to reposition the investment portfolio as part of an overall corporate-wide
strategy to produce reasonable and consistent margins where feasible, while attempting to limit risks inherent in the Company’s
Consolidated Statement of Condition.
As of December 31, 2021, net unrealized gains on
securities available-for-sale, which are carried as a component of accumulated other comprehensive income (loss) and included in stockholders’
equity, net of tax, amounted to $0.5 million as compared with net unrealized gains of $7.9 million as of December 31, 2020. The decrease
in unrealized gains is predominately attributable to changes in market conditions and interest rates. For additional information regarding
the Company’s investment portfolio, see Note 3, Note 15 and Note 20 of the Notes to the Consolidated Financial Statements.
During 2021, there were no sales from the Company’s
available-for-sale portfolio, as compared with $19.6 million in sales in 2020 and $183.7 million in 2019. The gross realized gains (losses)
on securities sold, called or matured mounted to approximately $195 thousand in 2021, $29 thousand in 2020 and $(280) thousand in 2019,
while there were no impairment charges in 2021, 2020 and 2019. The table below illustrates the maturity distribution and weighted average
yield on a tax-equivalent basis for amortized cost of our investment securities, excluding equity securities, as of December 31, 2021,
on a contractual maturity basis.
(dollars in thousands)
Investment Securities Available-for-Sale
For information regarding the carrying value of
the investment portfolio, see Note 3, Note 15 and Note 20 of the Notes to the Consolidated Financial Statements.
The securities listed in the table above are either
rated investment grade by Moody’s and/or Standard and Poor’s or have shadow credit ratings from a credit agency supporting
an investment grade and conform to the Company’s investment policy guidelines. There were no municipal securities, or corporate
securities, of any single issuer exceeding 10% of stockholders’ equity as of December 31, 2021. Other securities do not have a contractual
maturity and are included in the “Due in 1 year or less” maturity in the table above.
-42-
Table of Contents
The following table sets forth
the carrying value of the Company’s investment securities, as of December 31 for each of the last three years.
(dollars in thousands)
Investment Securities Available-for-Sale:
For other information regarding the Company’s
investment securities portfolio, see Note 3, Note 15 and Note 20 of the Notes to the Consolidated Financial Statements.
Interest Rate Sensitivity Analysis
The principal objective of our asset and liability
management function is to evaluate the interest-rate risk included in certain balance sheet accounts; determine the level of risk appropriate
given our business focus, operating environment, and capital and liquidity requirements; establish prudent asset concentration guidelines;
and manage the risk consistent with Board approved guidelines. We seek to reduce the vulnerability of our operations to changes in interest
rates, and actions in this regard are taken under the guidance of the Bank’s Asset Liability Committee (the “ALCO”).
The ALCO generally reviews our liquidity, cash flow needs, maturities of investments, deposits and borrowings, and current market conditions
and interest rates.
We currently utilize net interest income simulation
and economic value of equity (“EVE”) models to measure the potential impact to the Bank of future changes in interest rates.
As of December 31, 2021, and December 31, 2020, the results of the models were within guidelines prescribed by our Board of Directors.
If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be
required by the ALCO and Bank’s management.
The net interest income simulation model attempts
to measure the change in net interest income over the next one-year period, and over the next three-year period on a cumulative basis,
assuming certain changes in the general level of interest rates.
Based on our model, which was run as of December
31, 2021, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates
would increase our net interest income by 3.35%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest
income by 5.64%. As of December 31, 2020, we estimated that over the next one-year period a 200 basis-point instantaneous increase
in the general level of interest rates would increase our net interest income by 0.70%, while a 100 basis-point instantaneous decrease
in interest rates would decrease net interest income by 5.18%.
Based on our model, which was run as of December
31, 2021, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general
level of interest rates would increase our net interest income by 9.77%, while a 100 basis-point instantaneous decrease in interest rates
would decrease net interest income by 10.41%. As of December 31, 2020, we estimated that over the next three years, on a cumulative basis,
a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 3.89%, while
a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 8.56%.
An EVE analysis is also
used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and
down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of December 31, 2021,
would increase by 0.24% with an instantaneous rate shock of up 200 basis points, and decline by 5.20% with an instantaneous rate shock
of down 100 basis points. Our EVE as of December 31, 2020, would decline by 7.76% with an instantaneous rate shock of up 200
basis points, and increase by 5.70% with an instantaneous rate shock of down 100 basis points.
-43-
Table of Contents
The following table illustrates
the most recent results for EVE and NII as of December 31, 2021.
(basis points) EVE Amount % (basis points) NII Amount %
Estimates of Fair Value
The estimation of fair value is significant to certain
assets of the Company, including available-for-sale investment securities. These are all recorded at either fair value or the lower of
cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of
the fair value of certain assets and liabilities to change include a change in prepayment speeds, expected cash flows, credit quality,
discount rates, or market interest rates. Fair values for most available-for-sale investment securities are based on quoted market prices.
If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic
condition risk characteristics of various financial instruments, and other factors. See Note 20 of the Notes to Consolidated Financial
Statements for additional discussion.
These estimates are subjective in nature, involve
uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly
affect the estimates.
Impact of Inflation and Changing Prices
The financial statements and notes thereto presented
elsewhere herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money
over time due to inflation. The impact of inflation is reflected in the increased cost of the operations; unlike most industrial companies,
nearly all of the Company’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance
than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent
as the prices of goods and services.
Liquidity
Liquidity is a measure of a bank’s ability
to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. Our principal sources of funds
are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations.
While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments
are greatly influenced by general interest rates, economic conditions and competition.
As of December 31, 2021, the amount of liquid assets
remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’
withdrawal requirements, and other operational and client credit needs could be satisfied. As of December 31, 2021, liquid assets (cash
and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $742.1 million, which represented
9.1% of total assets and 10.9% of total deposits and borrowings, compared to $697.4 million as of December 31, 2020, which represented
9.2% of total assets and 10.9% of total deposits and borrowings on such date.
The Bank is a member of the Federal Home Loan Bank
of New York and, based on available qualified collateral as of December 31, 2021, had the ability to borrow $1.9 billion. In addition,
as of December 31, 2021, the Bank had borrowing capacity of $25 million through correspondent banks. The Bank also has a credit facility
established with the Federal Reserve Bank of New York for direct discount window borrowings with capacity based on pledged collateral
of $1.8 million. As of December 31, 2021, the Bank had aggregate available and unused credit of approximately $894.0 million, which represents
the aforementioned facilities totaling $1.9 billion net of $1.0 billion in outstanding borrowings and letters of credit. As of December
31, 2021, outstanding commitments for the Bank to extend credit were $1.2 billion.
-44-
Table of Contents
Cash and cash equivalents totaled $265.5 million
as of December 31, 2021, decreasing by $38.2 million from $303.8 million as of December 31, 2020. Operating activities provided $202.3
million in net cash. Investing activities used $689.9 million in net cash, primarily reflecting an increase in loans. Financing activities
provided $449.4 million in net cash, primarily reflecting a net increase in deposits of $376.0 million, net proceeds raised from the issuance
of preferred stock of $110.9 million, a decrease of $50.0 million from the redemption of subordinate debt and an increase in net borrowings
of $42.3 million.
Deposits
Deposits are our primary source of funds. Average
total deposits increased by $0.4 billion, or 6.9%, to $6.2 billion in 2021 from $5.8 billion in 2020 and increased $1.2 million, or 25.3%,
to $5.8 billion in 2020 from $4.6 billion in 2019. The increase in total average deposits in 2021 was attributable to organic growth,
while the increase in 2020 was attributable to both the acquisition of BNJ and organic growth. The following table sets forth the year-to-date
average balances and weighted average rates for various types of deposits for 2021, 2020 and 2019.
Balance Rate Balance Rate Balance Rate
(dollars in thousands)
The following table sets forth the distribution
of total deposit accounts, by account types for each of the dates indicated.
Amount % of total Amount % of total
(dollars in thousands)
As of December 31, 2021, we held $250.5 million
of time deposits that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit, which was a decrease of $117.8
million from $368.3 million as of December 31, 2020. The following table provides information on the maturity distribution of the time
deposits exceeding the FDIC insurance limit as of December 31, 2021 and 2020:
December 31, December 31,
(dollars in thousands)
-45-
Table of Contents
Federal Home Loan Bank Advances
Federal Home Loan Bank advances are secured, under
the terms of a blanket collateral agreement, primarily by commercial mortgage loans. As of December 31, 2021, the Company had a gross
carrying value of $468.3 million, excluding a net fair value discount of $120 thousand, in notes outstanding at a weighted average interest
rate of 0.73%. As of December 31, 2020, the Company had a gross carrying value of $426.0 million, excluding a net fair value discount
of $84 thousand, in notes outstanding at a weighted average interest rate of 1.07%.
Contractual Obligations and Other Commitments
The following table summarizes contractual obligations
as of December 31, 2021 and the effect such obligations are expected to have on liquidity and cash flows in future periods.
Total Less than 1 year 1 – 3 years 4 – 5 years Over 5 years
December 31, 2021 (dollars in thousands)
Contractual obligations:
Other long-term liabilities/long-term debt:
Subordinated debentures, net of debt issuance costs 152,951 - - - 152,951
Other commercial commitments – off balance sheet:
Capital
The maintenance of a solid capital foundation continues
to be a primary goal for the Company. Accordingly, capital plans, stock repurchases, and dividend policies are monitored on an ongoing
basis. The most important objective of the capital planning process is to balance effectively the retention of capital to support future
growth and the goal of providing stockholders with an attractive long-term return on their investment.
The Company’s Tier 1 leverage capital (defined
as tangible stockholders’ equity for common stock and Trust Preferred Capital Securities) as of December 31, 2021 amounted to $909.6
million or 11.7% of average total assets. As of December 31, 2020, the Company’s Tier 1 leverage capital amounted to $694.9 million
or 9.5% of average total assets. The increase in Tier 1 capital reflects the Company’s retained earnings during 2021, and the issuance
of $115 million in aggregate Tier 1 qualifying fixed-rate non-cumulative perpetual preferred
stock.
United States bank regulators have issued guidelines
establishing minimum capital standards related to the level of assets and off balance-sheet exposures adjusted for credit risk. Specifically,
these guidelines categorize assets and off balance-sheet items into risk-weightings and require banking institutions to maintain a minimum
ratio of capital to risk-weighted assets. As of December 31, 2021, the Company’s CET 1, Tier 1 and total risk-based capital ratios
were 10.64%, 12.19% and 15.26%, respectively. For information on risk-based capital and regulatory guidelines for the Parent Corporation
and its bank subsidiary, see Note 15 to the Consolidated Financial Statements.
The foregoing capital ratios are based in part on
specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by the bank regulators regarding capital components, risk
weightings, and other factors.
-46-
Table of Contents
Subordinated Debentures
During December 2003, Center Bancorp Statutory Trust
II, a statutory business trust and wholly owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities
to investors due on January 23, 2034. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million
of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part. The floating interest
rate on the subordinated debentures is three-month LIBOR plus 2.85% and re-prices quarterly. The
rate as of December 31, 2021 was 2.98%.
During September 2020, the Parent Corporation issued
$75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2020 Notes”). The 2020 Notes
bear interest at 5.75% annually from, and including, the date of initial issuance to, but excluding, September 15, 2025 or the date of
earlier redemption, payable semi-annually in arrears on September 15 and December 15 of each year, commencing December 15, 2020. From
and including September 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per
annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus
560.5 basis points, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September
15, 2025. Notwithstanding the foregoing, if the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero.
During January 2018, the Parent Corporation issued
$75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”) to certain accredited
investors. The net proceeds from the sale of the Notes were used in the first quarter of 2018 for general corporate purposes, which included
the Parent Corporation contributing $65 million of the net proceeds to the Bank in the form of debt and common equity. The Notes are non-callable
for five years, have a stated maturity of February 1, 2028 and bear interest at a fixed rate of 5.20% per year, from and including January
17, 2018 to, but excluding February 1, 2023. From and including February 1, 2023 to, but excluding the maturity date, or early redemption
date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 284 basis points.