AMALGAMATED FINANCIAL CORP. Holding Company Reorganization
Amalgamated Financial Corp. , aDelaware public benefit corporation, was formed onAugust 25, 2020 to serve as the holding company forAmalgamated Bank and is a bank holding company registered with theFederal Reserve . OnMarch 1, 2021 (the "Effective Date"), the Company acquired all of the outstanding stock ofAmalgamated Bank , aNew York state -chartered commercial bank in a statutory share exchange transaction (the "Reorganization") effected underNew York law and in accordance with the terms of a Plan of Acquisition datedSeptember 4, 2020 (the "Agreement"). Pursuant to the Reorganization, the Bank became the sole subsidiary of the Company, the Company became the holding company for the Bank and the stockholders of the Bank became stockholders of the Company. In this discussion, unless the context indicates otherwise, references to "we," "us," and "our" refer to the Company and the Bank. However, if the discussion relates to a period before the Effective Date, the terms refer only to the Bank.
General
The following is a discussion of our consolidated financial condition as ofSeptember 30, 2021 , as compared toDecember 31, 2020 , and our results of operations for the three and nine month periods endedSeptember 30, 2021 andSeptember 30, 2020 . The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from our consolidated financial statements and is intended to provide insight into our results of operations and financial condition. This discussion and analysis is best read in conjunction with our unaudited consolidated financial statements and related notes as well as the financial and statistical data appearing elsewhere in this report and our Annual Report on Form 10-K for the year endedDecember 31, 2020 (the "2020 Annual Report"), filed with theSecurities and Exchange Commission onMarch 15, 2021 . Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate results of operations for any future periods. In addition to historical information, this discussion includes certain forward-looking statements regarding business matters and events and trends that may affect our future results. For additional information regarding forward-looking statements and our related cautionary disclosures, see the "Cautionary Note Regarding Forward-Looking Statements" beginning on page ii of this report. Overview Our business The Company was formed onAugust 25, 2020 to serve as the holding company for the Bank, which was formed in 1923 asAmalgamated Bank of New York by theAmalgamated Clothing Workers of America , one of the country's oldest labor unions. Although we are no longer majority union-owned,The Amalgamated Clothing Workers of America's successor, Workers United, an affiliate of theService Employees International Union that represents workers in the textile, distribution, food service and gaming industries, remains a significant stockholder, holding approximately 40% of our equity as ofSeptember 30, 2021 . As ofSeptember 30, 2021 , our total assets were$6.9 billion , our total loans, net of deferred fees and allowance were$3.1 billion , our total deposits were$6.2 billion , and our stockholders' equity was$556.4 million . As ofSeptember 30, 2021 , our trust business held$39.5 billion in assets under custody and$16.1 billion in assets under management. OnSeptember 22, 2021 , the Company announced it has entered into a definitive agreement to acquireAmalgamated Investments Company ("AIC"), the holding company forAmalgamated Bank of Chicago ("ABOC"), in an all-cash transaction for approximately$98.1 million , which includes an earnout of up to$1.1 million . ABOC was founded inChicago in 1922 by theAmalgamated Clothing Workers of America , the same union that founded the Bank. ABOC has an attractive, mission compatible customer base and the acquisition will allow us to expand our geographic presence and better serve clients with expanded capacity. The acquisition, which we expect to close late in the fourth quarter of 2021, is subject to customary closing conditions, including regulatory approval and the approval of AIC's shareholders. Approval of the acquisition by the Company's shareholders is not required for the transaction. We offer a complete suite of commercial and retail banking, investment management and trust and custody services. Our commercial banking and trust businesses are national in scope and we also offer a full range of products and services to both commercial and retail customers through our three branch offices acrossNew York City , one branch office inWashington, D.C. , one branch office inSan Francisco , one commercial office inBoston and our digital banking platform. Our corporate divisions include Commercial Banking, Trust and Investment Management and Consumer Banking. Our product line includes residential 37 -------------------------------------------------------------------------------- mortgage loans, C&I loans, CRE loans, multifamily mortgages, and a variety of commercial and consumer deposit products, including non-interest bearing accounts, interest-bearing demand products, savings accounts, money market accounts and certificates of deposit. We also offer online banking and bill payment services, online cash management, safe deposit box rentals, debit card and ATM card services and the availability of a nationwide network of ATMs for our customers. We currently offer a wide range of trust, custody and investment management services, including asset safekeeping, corporate actions, income collections, proxy services, account transition, asset transfers, and conversion management. We also offer a broad range of investment products, including both index and actively-managed funds spanning equity, fixed-income, real estate and alternative investment strategies to meet the needs of our clients. Our products and services are tailored to our target customer base that prefers a financial partner that is socially responsible, values-oriented and committed to creating positive change in the world. These customers include advocacy-based non-profits, social welfare organizations, national labor unions, political organizations, foundations, socially responsible businesses, and other for-profit companies that seek to balance their profit-making activities with activities that benefit their other stakeholders, as well as the members and stakeholders of these commercial customers. Our goal is to be the go-to financial partner for people and organizations who strive to make a meaningful impact in our society and who care about their communities, the environment, and social justice. The Bank has obtained B CorporationTM certification, a distinction earned after being evaluated under rigorous standards of social and environmental performance, accountability, and transparency. The Bank is also the largest of twelve commercial financial institutions inthe United States that are members of theGlobal Alliance for Banking on Values , a network of banking leaders from around the world committed to advancing positive change in the banking sector. Subordinated Debt Issuance OnNovember 8, 2021 , the Company completed a public offering of$85.0 million of aggregated principal amount of 3.250% Fixed-to-Floating Rate subordinated notes due 2031. The subordinated notes will mature onNovember 15, 2031 . We intend to use the net proceeds from this offering for general business purposes, including for funding the cash consideration to be paid in the Company's pending acquisition of AIC and for ongoing working capital needs. Continued impact of the COVID-19 pandemic on our business The COVID-19 pandemic continues to create disruptions to the global economy and financial markets and to businesses and the lives of individuals throughout the world. The impact of the COVID-19 pandemic and its related variants is fluid and continues to evolve, adversely affecting many of our clients. Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets where we operate and inthe United States as a whole. The unprecedented and rapid spread of COVID-19 and its variants and their associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities have resulted in, and continue to result in, less economic activity, and volatility and disruption in financial markets, and has had an adverse effect on our business, financial condition and results of operations. In addition, due to the COVID-19 pandemic, market interest rates have declined to and remain at historic lows, despite the increase in market interest rates that the economy is beginning to experience. These reductions in interest rates and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, material adverse effects on our business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including the effect of governmental and private sector initiatives, the effect of the rollout of vaccinations for the virus and its variants, whether such vaccinations will be effective against another resurgence of the virus, including any new strains, and the ability for customers and businesses to return to their pre-pandemic routines. In addition, it is reasonably possible that certain significant estimates made in our financial statements could be materially and adversely affected in the near term as a result of these conditions. As a result of these events, we have seen the following continuing impacts to our business since the start of the pandemic: Impacts on our operations Our primary geographic markets include the metropolitan areas ofNew York City ,Washington, D.C. ,San Francisco and Boston.New York City was one of the areas inthe United States initially hardest hit by the COVID-19 pandemic. Accordingly, we had to close or reduce hours at our branches in several locations due to the risk of transmission of COVID-19. In response to the pandemic, we took a wide range of actions to help protect our employees and customers and to ensure the operational continuity of our business, while continuing to provide core banking services to our consumer and commercial clients. The majority of our employees continue to work remotely with the exception of essential branch and facility staff. 38 -------------------------------------------------------------------------------- As a result of the temporary closures or reduced hours at several of our branches, we reassessed our branch network and permanently closed six branches due to low traffic. We expect to fully serve these affected customers through our remaining branch network and through our digital platform. We took a charge of$8.3 million related to these branch closures in 2020. However, we expect these closures to benefit our non-interest expenses by approximately$4.0 million annually once fully phased in over time. As the pandemic subsides, we expect more of our employees to return to the office. There may be risks inherent in providing safe, effective working environments for our staff, including transport, building logistics, and working conditions. Impacts on our loan portfolio The disruption in economic activity acrossthe United States , and particularly inNew York , caused stress in the financial condition of both our consumer and commercial clients. As a result, we established programs offering payment deferrals for customers that needed assistance. In accordance with interagency guidance and the CARES Act, short term deferrals granted due to the COVID-19 pandemic are not considered troubled debt restructurings ("TDRs") unless the borrower was experiencing financial difficulty prior to the pandemic. The CARES Act provided temporary relief from the accounting and reporting requirements for TDRs regarding certain loan modifications related to COVID-19. In addition, under the terms of these deferral agreements, the loans will not be reported as past due or as non-accrual for the agreed upon term of the deferral, unless additional information becomes available that indicates the loan will not perform as expected when the deferral is complete. Interest will continue to accrue during the deferral period. In general, the interest and principal originally due during the deferral period will be due at the contractual end of the loan. If the loan does not exit deferral and does not continue to pay according to contractual terms, the loan will then be considered as any other loan that is past due or not in agreement with contractual terms, and additional allowance and reversal of related accrued interest will likely be required for these loans.
As of
No COVID-19 related loan deferrals were graded as criticized by our internal grading system solely on the basis of the deferral request, nor was any related additional allowance recorded. We continue to accrue interest on all COVID-19 related loan deferrals for up to six months. As ofSeptember 30, 2021 , the accrued interest balance on loans where balances were still on a COVID-19 related deferral was$4.4 million . Other impacts on our results of operation and financial condition
In addition to the factors above, we believe the following factors may impact our earnings, though we are unable to quantify the impacts at this time:
•Increased allowance related to loans that continue to be impacted by the economy after the payment deferral periods end •Lower net interest margin due to theFederal Reserve's decision to hold rate targets "near zero"; and •Lower loan originations as the credit worthiness of borrowers may be impacted by the current economic environment As ofSeptember 30, 2021 , we had$12.9 million of goodwill. During the second quarter of 2021, we performed our annual impairment analysis and determined no goodwill impairment was required. However, we will continue to monitor the COVID-19 pandemic and the related economic fallout, including changes in our stock price, theFederal Reserve's significant reduction in interest rates and other business and market considerations, which may require us to reevaluate our goodwill impairment analysis. Any goodwill impairment charges we incur could have a material adverse effect on our earnings for one reporting period, but would not impact our cash flow or regulatory capital levels. These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect our business, financial condition and results of operations. Critical and Significant Accounting Policies and Estimates Our consolidated financial statements are prepared based on the application of accounting policies generally accepted inthe United States , or GAAP, and conform to general practices within the banking industry. Our significant accounting policies are more fully described in Note 1 of our audited consolidated financial statements included in our 2020 Annual Report and our critical accounting policies are more fully described under "Critical Accounting Policies and Estimates" included in the 39 -------------------------------------------------------------------------------- "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2020 Annual Report. There have been no significant changes to our critical and significant accounting policies, or the estimates made pursuant to those policies as described in our 2020 Annual Report. Results of Operations General Our results of operations depend substantially on net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of interest income on loans, investment securities and other short-term investments and interest expense on interest-bearing liabilities, consisting primarily of interest expense on deposits and borrowings. Our results of operations are also dependent on non-interest income, consisting primarily of income from Trust Department fees, service charges on deposit accounts, net gains on sales of investment securities and income from bank-owned life insurance ("BOLI"). Other factors contributing to our results of operations include our provisions for loan losses, income taxes, and non-interest expenses, such as salaries and employee benefits, occupancy and depreciation expenses, professional fees, data processing fees and other miscellaneous operating costs.
Net income for the third quarter of 2021 was
Net income for the nine months endedSeptember 30, 2021 was$37.0 million , or$1.17 per diluted share, compared to$32.4 million , or$1.04 per diluted share, for same period in 2020. The$4.6 million increase was primarily due to a$3.9 million recovery of provision for loan loss compared to a$20.2 million provision for loan loss for the same period in 2020, as well as a$4.0 million decrease in non-interest expense. This recovery of provision was partially offset by a$14.6 million decrease in non-interest income and a$7.2 million decrease in net interest income. Net Interest Income Net interest income, representing interest income less interest expense, is a significant contributor to our revenues and earnings. We generate interest income from interest, dividends and prepayment fees on interest-earning assets, including loans, investment securities and other short-term investments. We incur interest expense from interest paid on interest-bearing liabilities, including interest-bearing deposits, FHLB advances and other borrowings. To evaluate net interest income, we measure and monitor (i) yields on our loans and other interest-earning assets, (ii) the costs of our deposits and other funding sources, (iii) our net interest spread and (iv) our net interest margin. Net interest spread is equal to the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is equal to the annualized net interest income divided by average interest-earning assets. Because non-interest-bearing sources of funds, such as non-interest-bearing deposits and stockholders' equity, also fund interest-earning assets, net interest margin includes the benefit of these non-interest-bearing sources. Changes in the market interest rates and interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and non-interest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Three Months EndedSeptember 30, 2021 and 2020 The following table sets forth information related to our average balance sheet, average yields on assets, and average costs of liabilities for the periods indicated: 40 --------------------------------------------------------------------------------
Three Months Ended Three Months Ended
September 30, 2021 September 30, 2020
(In thousands) Average Income / Yield / Average Income / Yield /
Balance Expense Rate Balance Expense Rate
Interest earning assets:
Interest-bearing deposits in banks
0.14 % $ 632,268 $ 152 0.10 %
Securities and FHLB stock (1) 2,659,803 14,655 2.19 % 2,045,231 11,529 2.24 %
Total loans, net (2)(3) 3,087,744 29,915 3.84 % 3,569,313 35,602 3.97 %
Total interest earning assets 6,380,073 44,800 2.79 % 6,246,812 47,283 3.01 %
Non-interest earning assets:
Cash and due from banks 8,464 9,239
Other assets 243,969 234,248
Total assets $ 6,632,506 $ 6,490,299
Interest bearing liabilities:
Savings, NOW and money market
deposits 2,641,719 $ 1,173 0.18 % 2,376,701 $ 1,427 0.24 %
Time deposits 241,009 240 0.40 % 321,696 622 0.77 %
Total interest bearing liabilities 2,882,728 1,413 0.19 % 2,698,397 2,049 0.30 %
Non-interest bearing liabilities:
Demand and transaction deposits 3,077,231 3,191,858
Other liabilities 116,790 84,138
Total liabilities 6,076,749 5,974,393
Stockholders' equity 555,757 515,906
Total liabilities and
stockholders' equity $ 6,632,506 $ 6,490,299
Net interest income / interest
rate spread $ 43,387 2.60 % $ 45,234 2.71 %
Net interest earning assets / net
interest margin $ 3,497,345 2.70 % $ 3,548,415 2.88 %
Total Cost of Deposits 0.09 % 0.14 %
(1) Amounts include resell agreements
(2) Amounts are net of deferred origination costs (fees) and the allowance for
loan losses and includes loans held for sale
(3)Income and yield includes prepayment penalty income in 3Q2021 and 3Q2020 of
$169 thousand and $1,110 thousand , respectively
Net interest income was $43.4 million for the third quarter of 2021, compared to
$42.0 million for the second quarter of 2021 and $45.2 million for the third
quarter of 2020. The $1.4 million increase from the preceding quarter reflected
higher income on securities and lower interest expense on deposits, almost
wholly offset by a decrease in interest income as average loans decreased $75.2
million from the prepayment and paydowns of residential and commercial loans.
The $1.8 million decrease from the third quarter of 2020 was primarily
attributable to a decrease in average loans of $354.2 million from the
prepayment of residential and commercial loans and a 13 basis point decrease in
loan yields, partially offset by higher income on securities and lower interest
expense on deposits.
Our net interest spread was 2.60% for the three months ended September 30, 2021 ,
compared to 2.71% for the same period in 2020, a decrease of 11 basis points.
Our net interest margin was 2.70% for the third quarter of 2021, a decrease of
18 basis points from 2.88% in the third quarter of 2020. The accretion of the
loan mark from the loans we acquired in our New Resource Bank ("NRB")
acquisition contributed one basis point to our net interest margin in the third
quarter of 2021, compared to two basis points in the third quarter of 2020.
Prepayment penalties earned through loan income contributed $0.2 million , or one
basis point, to our net interest margin in the third quarter of 2021, compared
to seven basis points in the third quarter of 2020.
The yield on average earning assets was 2.79% for the three months ended
September 30, 2021 , compared to 3.01% for the same period in 2020, a decrease of
22 basis points. This decrease was driven primarily by a decrease in yields on
loans and securities due to a decrease in the Federal Funds rate.
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The average rate on interest-bearing liabilities was 0.19% for the three months
ended September 30, 2021 , a decrease of 11 basis points from the same period in
2020, which was primarily due to a decrease in the rates paid on
interest-bearing deposits. Noninterest-bearing deposits represented 51% of
average deposits for the three months ended September 30, 2021 , contributing to
a total cost of deposits of nine basis points in the third quarter of 2021.
Nine Months Ended September 30, 2021 and 2020
The following table sets forth information related to our average balance sheet,
average yields on assets, and average costs of liabilities for the periods
indicated:
Nine Months Ended Nine Months Ended
September 30, 2021 September 30, 2020
(In thousands) Average Income / Yield / Average Income / Yield /
Balance Expense Rate Balance Expense Rate
Interest earning assets:
Interest-bearing deposits in banks $ 508,421 $ 451 0.12 % $ 395,029 $ 631 0.21 %
Securities and FHLB stock (1) 2,460,946 40,008 2.17 % 1,809,188 35,962 2.66 %
Total loans, net (2)(3) 3,180,890 91,180 3.83 % 3,535,096 106,440
4.02 %
Total interest earning assets 6,150,257 131,639 2.86 % 5,739,313 143,033
3.33 %
Non-interest earning assets: Cash and due from banks 7,780 31,138 Other assets 263,170 227,205 Total assets$ 6,421,207 $ 5,997,656 Interest bearing liabilities: Savings, NOW and money market deposits 2,574,463$ 3,568 0.19 % 2,278,267$ 5,919 0.35 % Time deposits 259,609 848 0.44 % 357,774 2,726 1.02 % Total deposits 2,834,072 4,416 0.21 % 2,636,041 8,645 0.44 % Federal Home Loan Bank advances 165 - 0.00 % 2,117 27
1.70 %
Total interest bearing liabilities 2,834,237 4,416 0.21 % 2,638,158 8,672
0.44 %
Non-interest bearing liabilities: Demand and transaction deposits 2,925,516 2,748,088 Other liabilities 112,721 109,586 Total liabilities 5,872,474 5,495,832 Stockholders' equity 548,733 501,824 Total liabilities and stockholders' equity$ 6,421,207 $ 5,997,656 Net interest income / interest rate spread$ 127,223 2.65 %$ 134,361
2.89 %
Net interest earning assets / net interest margin$ 3,316,020 2.77 %$ 3,101,155 3.13 % Total Cost of Deposits 0.10 % 0.21 % (1) Amounts include resell agreements (2) Amounts are net of deferred origination costs (fees) and the allowance for loan losses and includes loans held for sale (3) Income and yield includes prepayment penalty income in September YTD 2021 and September YTD 2020 of$1.3 million and$2.1 million , respectively Our net interest income was$127.2 million for the nine months endedSeptember 30, 2021 , compared to$134.4 million for the same period in 2020. The year-over-year decrease of$7.1 million , or 5.3%, was primarily attributable to a decrease in average loans of$354.2 million and lower yields earned on interest bearing assets. These impacts are partially offset by an increase in average securities of$651.8 million , and a decrease in average rates paid on deposits. 42
-------------------------------------------------------------------------------- Our net interest spread was 2.65% for the nine months endedSeptember 30, 2021 , compared to 2.89% for the same period in 2020, a decrease of 24 basis points. Our net interest margin was 2.77% for the nine months endedSeptember 30, 2021 , a decrease of 36 basis points from 3.13% in the same period in 2020. The yield on average earning assets was 2.86% for the nine months endedSeptember 30, 2021 , compared to 3.33% for the same period in 2020, a decrease of 47 basis points. This decrease was driven primarily by a decrease in yields on loans and securities due to a decrease in the Federal Funds rate. The average rate on interest-bearing liabilities, comprised almost entirely of deposits, was 0.21% for the nine months endedSeptember 30, 2021 , a decrease of 23 basis points from the same period in 2020, which was primarily due to the mix of deposits shifting from higher cost CDs to lower cost money market deposits and a decrease in rates paid on interest-bearing deposits. Noninterest-bearing deposits represented 51% of average deposits for the nine months endedSeptember 30, 2021 , contributing to a total cost of deposits of 10 basis points in the first nine months of 2021. Rate-Volume Analysis Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in weighted average interest rates. The table below presents the effect of volume and rate changes on interest income and expense. Changes in volume are changes in the average balance multiplied by the previous period's average rate. Changes in rate are changes in the average rate multiplied by the average balance from the previous period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate: Three Months Ended Nine Months Ended September 30, 2021 over September 30, 2020 September 30, 2021 over September 30, 2020 Changes Due Changes Due To To (In thousands) Volume Rate Net Change Volume Rate Net Change
Interest earning assets:
Interest-bearing deposits in banks $ - $ 78 $ 78 $ 116 $ (296) $ (180)
Securities and FHLB stock 3,449
(323) 3,126 11,920 (7,874) 4,046
Total loans, net (4,672) (1,015) (5,687) (10,557) (4,703) (15,260)
Total interest income (1,223) (1,260) (2,483) 1,479 (12,873) (11,394)
Interest bearing liabilities:
Savings, NOW and money market (378) (254) (2,809) (2,351)
deposits 124 458
Time deposits (101) (281) (382) (419) (1,459) (1,878)
Total deposits 23 (659) (636) 39 (4,268) (4,229)
Federal Home Loan Bank advances (27) 27 - - (27) (27)
Total borrowings (27) 27 - - (27) (27)
Total interest expense (4) (632) (636) 39 (4,295) (4,256)
Change in net interest income $ (1,219) $ (628) $ (1,847) $ 1,440 $ (8,578) $ (7,138)
Provision for Loan Losses
We establish an allowance for loan losses through a provision for loan losses
charged as an expense in our Consolidated Statements of Income. The provision
for loan losses is the amount of expense that, based on our judgment, is
required to maintain the allowance at an adequate level to absorb probable
incurred losses inherent in the loan portfolio at the balance sheet date and
that, in management's judgment, is appropriate under GAAP. Our determination of
the amount of the allowance and corresponding provision for loan losses
considers ongoing evaluations of the credit quality and level of credit risk
inherent in our loan portfolio, levels of nonperforming loans and charge-offs,
statistical trends and economic and other relevant factors. The allowance is
increased by provisions charged to expense and decreased by recoveries of
provisions released from expense or by actual charge-offs, net of recoveries on
prior loan charge-offs. In accordance with accounting guidance for business
combinations, we recorded all loans acquired in the NRB acquisition at their
estimated fair value at the date of acquisition with no carryover of the related
allowance.
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Three Months Ended
Our provision for loan losses totaled a release of$2.3 million for the third quarter of 2021 compared to an expense of$3.4 million for the same period in 2020. The release in the third quarter of 2021 was primarily driven by an improvement in loss rates and other qualitative factors, improved credit quality and lower loan balances. Nine Months EndedSeptember 30, 2021 and 2020 Our provisions for loan losses totaled a release of$3.9 million for the nine months endedSeptember 30, 2021 , compared to an expense of$20.2 million for the same period in 2020. The release for the nine months endedSeptember 30, 2021 was primarily driven by a release of allowance for loan loss due to improvement in loss rates and other qualitative factors, improved credit quality and lower loan balances. For a further discussion of the allowance, see "Allowance for Loan Losses" below. Non-Interest Income Our non-interest income includes Trust Department fees, which consist of fees received in connection with investment advisory and custodial management services of investment accounts, service fees charged on deposit accounts, income on BOLI, gain or loss on sales of securities, sales of loans, and other real estate owned, income from equity method investments, and other income. The following table presents our non-interest income for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2021 2020 2021 2020 Trust Department fees$ 3,353 $ 3,622 $ 10,471 $ 11,688 Service charges on deposit accounts 2,466 2,130 6,941 6,391 Bank-owned life insurance 539 1,227 1,858 2,722 Gain (loss) on sale of investment securities available for sale, net 413 619 755 1,605 Gain (loss) on sale of loans, net 280 903 1,706 1,200 Gain (loss) on other real estate owned, net - (176) (407) (482) Equity method investments (483) 4,297 (5,720) 5,586 Other income 134 154 424 1,855 Total non-interest income$ 6,702 $ 12,776 $ 16,028 $ 30,565
Three Months Ended
Non-interest income was$6.7 million for the third quarter of 2021, compared to$12.8 million for the third quarter in 2020. The decrease of$6.1 million in the third quarter of 2021 compared to the corresponding quarter in 2020 was primarily due to a loss of$0.5 million related to equity investments in solar initiatives in the third quarter of 2021 compared to a$4.3 million gain in the third quarter in 2020. We primarily recognized the benefit of the tax credits in 2020, the initial year of the equity investment. We expect minimal losses in equity method investments during the remainder of 2021. These impacts do not include any benefits of new solar equity investments that we may make in the future. Trust Department fees consist of fees we receive in connection with our investment advisory and custodial management services of investment accounts. Our Trust Department fees were$3.4 million in the third quarter of 2021, a decrease of$0.3 million , or 7.4%, from same period in 2020. The decrease is attributed to the fact that our investment management business historically earned fees from a real estate fund that we have been winding down since 2018 and from which we no longer earn fees.
Nine Months Ended
Non-interest income was$16.0 million for the nine months endedSeptember 30, 2021 , compared to$30.6 million for the same period in 2020, a decrease of$14.6 million . This decrease is primarily due to the tax credits on equity investment projects being in a$5.7 million loss position compared to a$5.6 million gain position in the prior year, as well as a$1.4 million gain on the sale of 44 -------------------------------------------------------------------------------- a branch reported in other non-interest income in the prior year, and a$1.2 million decrease in Trust Department fees primarily attributed to a real estate fund that we have been winding down since 2018 and from which we no longer earn fees. Non-Interest Expense Non-interest expense includes compensation and employee benefits, occupancy and depreciation expense, professional fees (including legal, accounting and other professional services), data processing, office maintenance and depreciation, amortization of intangible assets, advertising and promotion, and other expenses. The following table presents non-interest expense for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2021 2020 2021 2020 Compensation and employee benefits, net$ 17,482 $ 17,547 $ 52,485 $ 52,338 Occupancy and depreciation 3,440 9,908 10,293 19,655 Professional fees 2,348 2,202 9,219 7,173 Data processing 4,521 2,916 10,848 8,157 Office maintenance and depreciation 887 863 2,362 2,538 Amortization of intangible assets 301 342 905 1,027 Advertising and promotion 1,023 1,172 2,248 2,511 Other 3,032 2,927 8,863 7,817 Total non-interest expense$ 33,034 $ 37,877 97,223 101,216 Three Months EndedSeptember 30, 2021 and 2020 Non-interest expense for the third quarter of 2021 was$33.0 million , a decrease of$4.9 million from the third quarter of 2020. The decrease of$4.9 million from the third quarter of 2020 is due to a$6.5 million decrease in occupancy and depreciation expenses related to branch closures in 2020. Nine Months EndedSeptember 30, 2021 and 2020 Non-interest expense for the nine months endedSeptember 30, 2021 was$97.2 million , a decrease of$4.0 million from$101.2 million for the nine months endedSeptember 30, 2020 . The decrease was primarily due to a$9.4 million decrease in occupancy and depreciation expense due to the branch closures in the prior year and lower rent expense in the current year, offset by a$2.0 million increase in professional fees mainly related to our holding company formation and chief executive officer search, and a$2.7 million increase in data processing mainly related to the modernization of our Trust Department and increased transaction processing post COVID-19.
Income Taxes
Three Months Ended
We had a provision for income tax expense of$4.9 million for the third quarter of 2021, compared to$4.3 million for the third quarter of 2020. Our effective tax rate for the third quarter of 2021 was 25.4%, compared to 25.4% for the third quarter of 2020.
Nine Months Ended
We had a provision for income tax expense of$12.9 million for the nine months endedSeptember 30, 2021 , compared to$11.1 million for the same period in 2020. Our effective tax rate was 25.8% for the nine months endedSeptember 30, 2021 , compared to 25.5% for the same period in 2020. The increase in our effective tax rate was driven by discrete events related to new states that we elected to begin filing state tax returns with and an executive compensation disallowance. 45
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Financial Condition
Balance Sheet
Our total assets were$6.9 billion atSeptember 30, 2021 , compared to$6.0 billion atDecember 31, 2020 . The increase of$0.9 billion was driven primarily by a$651.5 million increase in cash and cash equivalents, a$646.3 million increase in investment securities, which was partially offset by a$359.8 million decrease in loans receivable, net.Investment Securities The primary goal of our securities portfolio is to maintain an available source of liquidity and an efficient investment return on excess capital, while maintaining a low-risk profile. We also use our securities portfolio to manage interest rate risk, meet Community Reinvestment Act ("CRA") goals and to provide collateral for certain types of deposits or borrowings. An Investment Committee chaired by our Chief Financial Officer manages our investment securities portfolio according to written investment policies approved by our Board of Directors. Investments in our securities portfolio may change over time based on management's objectives and market conditions. We seek to minimize credit risk in our securities portfolio through diversification, concentration limits, restrictions on high risk investments (such as subordinated positions), comprehensive pre-purchase analysis and stress testing, ongoing monitoring and by investing a significant portion of our securities portfolio inU.S. Government sponsored entity ("GSE") obligations. GSEs include the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA"), theGovernment National Mortgage Association ("GNMA") and theSmall Business Administration ("SBA"). GNMA is a wholly-ownedU.S. Government corporation whereas FHLMC andFNMA are private. Mortgage-related securities may include mortgage pass-through certificates, participation certificates and collateralized mortgage obligations ("CMOs"). We invest in non-GSE securities, including property assessed clean energy, or PACE, bonds, in order to generate higher returns, improve portfolio diversification and reduce interest rate and prepayment risk. With the exception of small legacy CRA investments, Trust Preferred securities, and certain corporate bonds, all of our non-GSE securities are senior positions that are the top of the capital structure. Our investment securities portfolio consists of securities classified as available for sale and held to maturity. There were no trading securities in our investment portfolio atSeptember 30, 2021 or atDecember 31, 2020 . All available for sale securities are carried at fair value and may be used for liquidity purposes should management consider it to be in our best interest. AtSeptember 30, 2021 andDecember 31, 2020 , we had available for sale securities of$2.0 billion and$1.5 billion , respectively. The$415.6 million increase was primarily from the purchase of asset-backed securities ("ABS"). AtSeptember 30, 2021 , our held to maturity securities portfolio primarily consisted of PACE bonds, tax-exempt municipal securities, GSE residential certificates and other debt. We carry these securities at amortized cost. We had held to maturity securities of$725.1 million atSeptember 30, 2021 , and$494.4 million atDecember 31, 2020 . Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. AtSeptember 30, 2021 , we evaluated those securities which had an unrealized loss for OTTI, and determined all of the decline in value to be temporary. There were$781.4 million of investment securities with unrealized losses atSeptember 30, 2021 of which none had a continuous unrealized loss position for 12 consecutive months or longer that was greater than 5% of amortized cost. We anticipate full recovery of amortized cost with respect to these securities by the time that these securities mature, or sooner in the case that a more favorable market interest rate environment causes their fair value to increase. We do not intend to sell these securities and we believe it is more likely than not that we will be required to sell them before full recovery of their amortized cost basis, which may be at the time of their maturity. 46 --------------------------------------------------------------------------------
The following table is a summary of our investment portfolio, using market value for available for sale securities and amortized cost for held to maturity securities, as of the dates indicated.
September 30, 2021 December 31, 2020
(In thousands) Amount % of Amount % of
Portfolio Portfolio
Available for sale:
Mortgage-related:
GSE residential certificates $ 4,402 0.2 % $ 13,299 0.7 %
GSE residential CMOs 425,794 15.9 % 366,421 18.0 %
GSE commercial certificates & CMO 391,201 14.6 % 432,614 21.3 %
Non-GSE residential certificates 39,736 1.5 % 33,384 1.6 %
Non-GSE commercial certificates 57,060 2.1 % 44,968 2.2 %
Other debt:
U.S. Treasury 201 0.0 % 203 0.0 %
ABS 948,350 35.4 % 597,546 29.3 %
Trust preferred 14,190 0.5 % 13,773 0.7 %
Corporate 74,568 2.8 % 37,654 1.9 %
Total available for sale 1,955,502 73.0 % 1,539,862 75.7 %
Held to maturity:
Mortgage-related:
GSE commercial certificates $ 12,467 0.4 % $ - 0.0 %
GSE residential certificates 446 0.0 % 611 0.0 %
Non GSE commercial certificates 10,346 0.4 % 212 0.0 %
Other debt:
PACE 627,195 23.4 % 421,036 20.7 %
Municipal 71,522 2.7 % 67,490 3.3 %
Other 3,100 0.1 % 5,100 0.3 %
Total held to maturity 725,076 27.0 % 494,449 24.3 %
Total securities $ 2,680,578 100.0 % $ 2,034,311 100.0 %
47
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The following table show contractual maturities and yields for the available-for sale and held-to-maturity securities portfolios:
Contractual Maturity as of
One Year or Less One to Five Years Five to Ten Years Due after Ten Years
Amortized Weighted Amortized Weighted Amortized Weighted Amortized Weighted
Cost Average Cost Average Cost Average Cost Average
(In thousands) Yield (1) Yield (1) Yield (1) Yield (1)
Available for sale:
Mortgage-related:
GSE residential certificates $ - 0.0 % $ - 0.0 % $ - 0.0 %$ 4,205 2.5 % GSE residential CMOs - 0.0 % - 0.0 % 30,363 1.7 % 388,656 1.5 % GSE commercial certificates & 15,300 1.8 % 7,384 2.4 % 257,187 1.2 % 104,400 2.3 % CMO Non-GSE residential - 0.0 % - 0.0 % - 0.0 % 39,785 1.9 % certificates Non-GSE commercial - 0.0 % - 0.0 % - 0.0 % 57,285 1.4 % certificates Other debt: U.S. Treasury 200 1.7 % - 0.0 % - 0.0 % - 0.0 % ABS - 0.0 % 5,000 1.1 % 298,062 1.6 % 641,364 1.7 % Trust preferred - 0.0 % - 0.0 % 14,630 0.7 % - 0.0 % Corporate - 0.0 % 16,000 4.4 % 52,009 3.9 % 5,000 2.7 % Held to maturity: Mortgage-related: GSE commercial certificates - 0.0 % - 0.0 % - 0.0 % 12,467 1.7 % GSE residential certificates - 0.0 % - 0.0 % - 0.0 % 446 3.6 % Non GSE commercial - 0.0 % - 0.0 % - 0.0 % 10,346 certificates 1.9 % Other debt: PACE - 0.0 % - 0.0 % - 0.0 % 627,195 4.1 % Municipal - 0.0 % - 0.0 % - 0.0 % 71,522 2.1 % Other 1,100 3.4 % 2,000 3.3 % - 0.0 % - 0.0 % Total securities$ 16,600 1.9 %$ 30,384 3.3 %$ 652,251 1.6 %$ 1,962,671 2.5 %
(1) Estimated yield based on book price (amortized cost divided by par) using estimated prepayments and no change in interest rates.
The following table shows a breakdown of our asset backed securities by sector
and ratings as of
Credit Ratings
Highest Rating if split rated
Expected Avg. % %Not
(In thousands) Amount % Life in Years
Floating %
CLO Commercial & Industrial$ 535,968 57 % 2.7 100 % 100 % 0 % 0 % 0 % 0 % 100 % Consumer 182,707 19 % 4.0 0 % 20 % 12 % 66 % 2 % 0 % 100 % Mortgage 142,460 15 % 2.7 100 % 100 % 0 % 0 % 0 % 0 % 100 % Student 87,215 9 % 5.2 83 % 95 % 5 % 0 % 0 % 0 % 100 %Total Securities :$ 948,350 100 % 3.5 79 % 84 % 3 % 13 % 0 % 0 % 100 % 48
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Loans
Lending-related income is the most important component of our net interest income and is the main driver of our results of operations. Total loans, net of deferred origination fees and allowance for loan losses, were$3.1 billion as ofSeptember 30, 2021 compared to$3.4 billion as ofDecember 31, 2020 . Within our commercial loan portfolio, our primary focus has been on C&I, multifamily and CRE lending. Within our retail loan portfolio, our primary focus has been on residential 1-4 family (1st lien) mortgages. We intend to focus any organic growth in our loan portfolio on these lending areas as part of our strategic plan. In the third quarter of 2021, we purchased$41.3 million of solar loans and$15.3 million of commercial loans that are unconditionally guaranteed bythe United States government. The following table sets forth the composition of our loan portfolio, as ofSeptember 30, 2021 andDecember 31, 2020 : (In thousands) September 30, 2021 December 31, 2020 Amount % of total loans Amount % of total loans Commercial portfolio: Commercial and industrial $ 628,388 20.2 % $ 677,192 19.5 % Multifamily mortgages 826,143 26.5 % 947,177 27.2 % Commercial real estate mortgages 346,996 11.1 % 372,736 10.7 % Construction and land development 34,863 1.1 % 56,087 mortgages 1.6 % Total commercial portfolio 1,836,390 58.9 % 2,053,192 59.0 % Retail portfolio: Residential real estate lending 1,032,947 33.1 % 1,238,697 35.5 % Consumer and other 249,050 8.0 % 190,676 5.5 % Total retail portfolio 1,281,997 41.1 % 1,429,373 41.0 % Total loans 3,118,387 100.0 % 3,482,565 100.0 % Net deferred loan origination costs 4,942 6,330 (fees) Allowance for loan losses (35,863) (41,589) Total loans, net$ 3,087,466 $ 3,447,306 Commercial loan portfolio Our commercial loan portfolio comprised 58.9% of our total loan portfolio atSeptember 30, 2021 and 59.0% of our total loan portfolio atDecember 31, 2020 . The major categories of our commercial loan portfolio are discussed below: C&I. Our C&I loans are generally made to small and medium-sized manufacturers and wholesale, retail and service-based businesses to provide either working capital or to finance major capital expenditures. The primary source of repayment for C&I loans is generally operating cash flows of the business. We also seek to minimize risks related to these loans by requiring such loans to be collateralized by various business assets (including inventory, equipment and accounts receivable). The average size of our C&I loans atSeptember 30, 2021 by exposure was$3.5 million with a median size of$1.0 million . We have shifted our lending strategy to focus on developing full customer relationships including deposits, cash management, and lending. The businesses that we focus on are generally mission aligned with our core values, including organic and natural products, sustainable companies, clean energy, nonprofits, and B Corporations TM. Our C&I loans totaled$628.4 million atSeptember 30, 2021 , which comprised 20.2% of our total loan portfolio. During the nine months endedSeptember 30, 2021 , the C&I loan portfolio decreased by 7.2% from$677.2 million atDecember 31, 2020 . Multifamily. Our multifamily loans are generally used to purchase or refinance apartment buildings of five units or more, which collateralize the loan, in major metropolitan areas within our markets. Multifamily loans have 78% of their exposure inNew York City -our largest geographic concentration. Our multifamily loans have been underwritten under stringent guidelines on loan-to-value and debt service coverage ratios that are designed to mitigate credit and concentration risk in this loan category. 49 -------------------------------------------------------------------------------- Our multifamily loans totaled$826.1 million atSeptember 30, 2021 , which comprised 26.5% of our total loan portfolio. During the nine months endedSeptember 30, 2021 , the multifamily loan portfolio decreased by 12.8% from$947.2 million atDecember 31, 2020 . CRE. Our CRE loans are used to purchase or refinance office buildings, retail centers, industrial facilities, medical facilities and mixed-used buildings. Included in this total are 23 borrowers financing owneroccupied buildings which account for an aggregate total of$44.0 million in loans as ofSeptember 30, 2021 .
Our CRE loans totaled
Retail loan portfolio Our retail loan portfolio comprised 41.1% of our total loan portfolio atSeptember 30, 2021 and 41.0% of our loan portfolio atDecember 31, 2020 . The major categories of our retail loan portfolio are discussed below. Residential real estate lending. Our residential 1-4 family mortgage loans are residential mortgages that are primarily secured by single-family homes, which can be owner occupied or investor owned. These loans are either originated by our loan officers or purchased from other originators with the servicing retained by such originators. Our residential real estate lending portfolio is 99% first mortgage loans and 1% second mortgage loans. As ofSeptember 30, 2021 , 84% of our residential 1-4 family mortgage loans were either originated by our loan officers since 2012 or were acquired in our acquisition of NRB, 11% were purchased from two third parties on or afterJuly 2014 , and 5% were purchased by us from other originators before 2010. Our residential real estate lending loans totaled$1.0 billion atSeptember 30, 2021 , which comprised 80.6% of our retail loan portfolio and 33.1% of our total loan portfolio. InSeptember 30, 2021 , our residential real estate lending loans decreased by 16.6% from$1.2 billion atDecember 31, 2020 . Consumer and other. Our consumer and other portfolio is comprised of purchased student loans, residential solar loans, unsecured consumer loans and overdraft lines. Our consumer and other loans totaled$249.1 million atSeptember 30, 2021 , which comprised 8.0% of our total loan portfolio, compared to$190.7 million , or 5.5% of our total loan portfolio, atDecember 31, 2020 . Maturities and Sensitivity of Loans to Changes in Interest Rates The information in the following table is based on the contractual maturities of individual loans, including loans that may be subject to renewal at their contractual maturity. Renewal of these loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties. The following tables summarize the loan maturity distribution by type and related interest rate characteristics atSeptember 30, 2021 andDecember 31, 2020 : After one but One year or within five (In thousands) less years After 5 years Total
Commercial Portfolio:
Commercial and industrial$ 83,560 $
210,339
Multifamily 138,465 430,085 257,593 826,143 Commercial real estate 79,504 230,382 37,110 346,996 Construction and land development 32,123 2,740 - 34,863
Retail Portfolio:
Residential real estate lending 398 1,821 1,030,728 1,032,947
Consumer and other 745 1,276 247,029 249,050
Total Loans $ 334,795 $ 876,643$ 1,906,949 $ 3,118,387 50
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After one but
within five
(In thousands) years After 5 years Total
Gross loan maturing after one year
with:
Fixed interest rates $ 747,530 $ 1,297,508 $ 2,045,038
Floating or adjustable interest rates 129,113 609,441 738,554
Total Loans $ 876,643 $ 1,906,949 $ 2,783,592
After one but
One year or within five
(In thousands) less years After 5 years Total
December 31, 2020:
Commercial Portfolio:
Commercial and industrial $ 149,870 $ 266,209 $ 261,113 $ 677,192
Multifamily 127,009 496,107 324,061 947,177
Commercial real estate 58,124 259,664 54,948 372,736
Construction and land development 41,293 9,773 5,021 56,087
Retail Portfolio:
Residential real estate lending 450 1,834 1,236,413 1,238,697
Consumer and other 536 2,372 187,768 190,676
Total Loans $ 377,282 $ 1,035,959 $ 2,069,324 $ 3,482,565
After one but
within five
(In thousands) years After 5 years Total
Gross loan maturing after one year
with:
Fixed interest rates $ 870,644 $ 1,360,222 $ 2,230,865
Floating or adjustable interest rates 165,315 709,102 874,417
Total Loans $ 1,035,959 $ 2,069,324 $ 3,105,282
Allowance for Loan Losses
We maintain the allowance at a level we believe is sufficient to absorb probable
incurred losses in our loan portfolio given the conditions at the time.
Management determines the adequacy of the allowance based on periodic
evaluations of the loan portfolio and other factors, including end-of-period
loan levels and portfolio composition, observable trends in nonperforming loans,
our historical loan losses, known and inherent risks in the portfolio,
underwriting practices, adverse situations that may impact a borrower's ability
to repay, the estimated value and sufficiency of any underlying collateral,
credit risk grade assessments, loan impairment and economic conditions. These
evaluations are inherently subjective as they require management to make
material estimates, all of which may be susceptible to significant change. The
allowance is increased by provisions for loan losses charged to expense and
decreased by actual charge-offs, net of recoveries.
The allowance consists of specific allowances for loans that are individually
classified as impaired and general components. Impaired loans include loans
placed on nonaccrual status and TDRs. Loans are considered impaired when, based
on current information and events, it is probable that we will be unable to
collect all amounts due in accordance with the original contractual terms of the
loan agreements. When determining if we will be unable to collect all principal
and interest payments due in accordance with the original contractual terms of
the loan agreement, we consider the borrower's overall financial condition,
resources and payment record, support from guarantors, and the realized value of
any collateral. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis,
taking into consideration all of the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay, the
borrower's prior payment record, and the amount of the shortfall in relation to
the principal and interest owed.
Impaired loans are individually identified and evaluated for impairment based on
a combination of internally assigned risk ratings and a defined dollar
threshold. If a loan is impaired, a specific reserve is applied to the loan so
that the loan is reported, net, at the
51
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discounted expected future cash flows or at the fair value of collateral if
repayment is collateral dependent. Impaired loans which do not meet the criteria
for individual evaluation are evaluated in homogeneous pools of loans with
similar risk characteristics. In accordance with the accounting guidance for
business combinations, there was no allowance brought forward on any of the
loans we acquired in our acquisition of NRB. For purchased non-credit impaired
loans, credit discounts representing the principal losses expected over the life
of the loan are a component of the initial fair value and the discount is
accreted to interest income over the life of the loan. Subsequent to the
acquisition date, the method used to evaluate the sufficiency of the credit
discount is similar to organic loans, and if necessary, additional reserves are
recognized in the allowance. At the close of the NRB acquisition, there were no
purchase credit impaired loans. As of September 30, 2021 , the remaining mark is
$1.1 million . In addition, the allowance includes $1.5 million on-balance-sheet
and $32 thousand off-balance-sheet reserves for loan downgrades, increases in
usage of lines of credit, construction disbursements and reclassifications of
product types subsequent to the acquisition. Since the close of the NRB
acquisition, we have charged off $1.5 million of commercial loans and as of
September 30, 2021 , there were $772 thousand of nonaccrual loans.
The following tables presents, by loan type, the changes in the allowance for
the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2021 2020 2021 2020
Balance at beginning of period
$ 41,589 $ 33,847 Loan charge-offs: Commercial portfolio: Commercial and industrial - 78 - 79 Multifamily - - 1,908 - Commercial real estate 314 3,787 314 3,787 Construction and land development - 970 - 970
Retail portfolio:
Residential real estate lending 29 188 230 452 Consumer and other 420 515 1,596 1,306 Total loan charge-offs 763 5,538 4,048 6,594 Recoveries of loans previously charged-off: Commercial portfolio: Commercial and industrial 2 1 209 4 Multifamily - - - - Commercial real estate - - - - Construction and land development 1 1 2 1
Retail portfolio:
Residential real estate lending 858 119 1,897 482 Consumer and other 29 85 69 130 Total loan recoveries 890 206 2,177 617 Net (recoveries) charge-offs (127) 5,332 1,871 5,977 Provision for (recovery of) loan losses (2,276) 3,394 (3,855) 20,202 Balance at end of period$ 35,863 $ 48,072 $ 35,863 $ 48,072 The allowance decreased$5.7 million to$35.9 million atSeptember 30, 2021 from$41.6 million atDecember 31, 2020 . The decrease was primarily due to decreases in loan balances. AtSeptember 30, 2021 , we had$67.5 million of impaired loans for which a specific allowance of$6.5 million was made, compared to$80.5 million of impaired loans atDecember 31, 2020 for which a specific allowance of$6.2 million was made. The ratio of allowance to total loans was 1.15% forSeptember 30, 2021 and 1.19% forDecember 31, 2020 . 52 -------------------------------------------------------------------------------- Allocation of Allowance for Loan Losses The following table presents the allocation of the allowance and the percentage of the total amount of loans in each loan category listed as of the dates indicated: At September 30, 2021 At December 31, 2020 (In thousands) Amount % of total loans Amount % of total loans Commercial Portfolio: Commercial and industrial$ 13,479 20.2 %$ 9,065 19.5 % Multifamily 5,128 26.5 % 10,324 27.2 % Commercial real estate 7,604 11.1 % 6,213 10.7 % Construction and land development 487 1.1 % 2,077 1.6 % Total commercial portfolio$ 26,698 58.9 %$ 27,679 59.0 % Retail Portfolio: Residential real estate lending$ 8,937 33.1 %$ 12,330 35.5 % Consumer and other 228 8.0 % 1,580 5.5 % Total retail portfolio$ 9,165 41.1 %$ 13,910 41.0 % Total allowance for loan losses$ 35,863 $ 41,589 Nonperforming Assets Nonperforming assets include all loans categorized as nonaccrual or restructured, other real estate owned and other repossessed assets. The accrual of interest on loans is discontinued, or the loan is placed on nonaccrual, when the full collection of principal and interest is in doubt. We generally do not accrue interest on loans that are 90 days or more past due (unless we are in the process of collection or an extension and determine that the customer is not in financial difficulty). When a loan is placed on nonaccrual, previously accrued but unpaid interest is reversed and charged against interest income and future accruals of interest are discontinued. Payments by borrowers for loans on nonaccrual are applied to loan principal. Loans are returned to accrual status when, in our judgment, the borrower's ability to satisfy principal and interest obligations under the loan agreement has improved sufficiently to reasonably assure recovery of principal and the borrower has demonstrated a sustained period of repayment performance. A loan is identified as a troubled debt restructuring, or TDR, when we, for economic or legal reasons related to the borrower's financial difficulties, grant a concession to the borrower. The concessions may be granted in various forms, including interest rate reductions, principal forgiveness, extension of maturity date, waiver or deferral of payments and other actions intended to minimize potential losses. A loan that has been restructured as a TDR may not be disclosed as a TDR in years subsequent to the restructuring if certain conditions are met. Generally, a nonaccrual loan that is restructured remains on nonaccrual status for a period no less than six months to demonstrate that the borrower can meet the restructured terms. However, the borrower's performance prior to the restructuring or other significant events at the time of restructuring may be considered in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status after a shorter performance period. If the borrower's performance under the new terms is not reasonably assured, the loan remains classified as a nonaccrual loan. As a result of the COVID-19 pandemic, we have experienced a significant increase in the number of requests for temporary loan modifications. As ofSeptember 30, 2021 , we had COVID-19 related loan payment deferrals or deferral requests in process totaling$16.7 million , of which 60% were in our commercial portfolio. We have granted these borrowers short-term concessions of three to six months in the form of payment deferrals. According to the interagency guidance and the CARES Act, loans modified during the COVID-19 pandemic are not considered TDRs as long as the borrower was not experiencing financial difficulty before the pandemic and the reason for the deferral is temporary in nature and the loans are expected to continue performing after the COVID-19 pandemic. 53 -------------------------------------------------------------------------------- The following table sets forth our nonperforming assets as ofSeptember 30, 2021 andDecember 31, 2020 : (In thousands) September 30, 2021 December 31, 2020 Loans 90 days past due and accruing $ - $ 1,404
Nonaccrual loans excluding held for sale loans and restructured loans
24,960 40,039
Troubled debt restructured loans - nonaccrual 20,534 20,885
Troubled debt restructured loans - accruing 21,958 19,553
Other real estate owned 307 306
Impaired securities 64 47
Total nonperforming assets $ 67,823 $ 82,234
Nonaccrual loans:
Commercial and industrial $ 13,709 $ 12,444 Multifamily 6,079 9,575 Commercial real estate 4,023 3,433 Construction and land development - 11,184 Total commercial portfolio 23,811 36,636 Residential real estate lending 20,797 23,656 Consumer and other 886 632 Total retail portfolio 21,683 24,288 Total nonaccrual loans $ 45,494 $ 60,924 Nonperforming assets to total assets 0.99 % 1.38 % Nonaccrual assets to total assets 0.67 % 1.02 % Nonaccrual loans to total loans 1.46 % 1.75 % Allowance for loan losses to nonaccrual loans 78.83 % 68.26 % Nonperforming assets totaled$67.8 million , or 0.99% of period-end total assets atSeptember 30, 2021 , a decrease of$14.4 million , compared with$82.2 million , or 1.38% of period-end total assets atDecember 31, 2020 . The decrease in non-performing assets atSeptember 30, 2021 compared toDecember 31, 2020 was primarily driven by the payoff of$11.2 million of non-accruing construction loans and$3.5 million of multifamily loans, and the decrease of$1.4 million of loans 90 days past due and accruing, partially offset by an increase of$2.1 million of TDRs. Potential problem loans are loans which management has doubts as to the ability of the borrowers to comply with the present loan repayment terms. Potential problem loans are performing loans and include our special mention and substandard-accruing commercial loans and/or loans 30-89 days past due. Potential problem loans are not included in the nonperforming assets table above and totaled$251.7 million , or 3.8% of total assets, atSeptember 30, 2021 , as follows:$256.2 million are commercial loans currently in workout that management expects will be rehabilitated;$31.4 million are commercial loans that are current on payments and are reported as 30-89 days past due, in renewal or extension negotiations, and inclusive of workouts;$3.2 million are residential 1-4 family or retail loans, with$662 thousand at 30 days delinquent, and$2.5 million at 60 days delinquent. Resell Agreements As ofSeptember 30, 2021 , we have entered into$130.4 million of short term investments of resell agreements backed by government guaranteed loans, with a weighted interest rate of 1.79%. As ofDecember 31, 2020 , we have entered into$154.8 million of short term investments of resell agreements backed by government guaranteed loans, with a weighted interest rate of 1.25%. 54 -------------------------------------------------------------------------------- Deferred Tax Asset We had a deferred tax asset, net of deferred tax liabilities, of$24.7 million atSeptember 30, 2021 and$27.9 million atDecember 31, 2020 . As ofSeptember 30, 2021 , our deferred tax assets were fully realizable with no valuation allowance held against the balance. Our management concluded that it was more-likely-than-not that the entire amount will be realized. We will evaluate the recoverability of our net deferred tax asset on a periodic basis and record decreases (increases) as a deferred tax provision (benefit) in the Consolidated Statements of Income as appropriate. Deposits Deposits represent our primary source of funds. We are focused on growing our core deposits through relationship-based banking with our business and consumer clients. Total deposits were$6.2 billion atSeptember 30, 2021 , compared to$5.3 billion atDecember 31, 2020 . We believe that our strong deposit franchise is attributable to our mission-based strategy of developing and maintaining relationships with our clients who share similar values and through maintaining a high level of service. We gather deposits through each of our three branch locations acrossNew York City , our one branch inWashington, D.C. , our one branch inSan Francisco and through the efforts of our commercial banking team including ourBoston group which focuses nationally on business growth. Through our branch network, online, mobile and direct banking channels, we offer a variety of deposit products including demand deposit accounts, money market deposits, NOW accounts, savings and certificates of deposit. We bank politically active customers, such as campaigns, PACs, and state and national party committees, which we refer to as political deposits. These deposits exhibit seasonality based on election cycles. As ofSeptember 30, 2021 andDecember 31, 2020 , we had approximately$1.0 billion and$602.8 million , respectively, in political deposits which are primarily in demand deposits. Maturities of time certificates of deposit and other time deposits of$100,000 or more outstanding atSeptember 30, 2021 are summarized as follows: Maturities as ofSeptember 30, 2021 (In thousands) Within three months$ 59,624 After three but within six months 23,919
After six months but within twelve months 46,826 After twelve months
15,456
$ 145,825
Evaluation of Interest Rate Risk
Our simulation models incorporate various assumptions, which we believe are
reasonable but which may have a significant impact on results such as: (1) the
timing of changes in interest rates, (2) shifts or rotations in the yield curve,
(3) loan and securities prepayment speeds for different interest rate scenarios,
(4) interest rates and balances of indeterminate-maturity deposits for different
scenarios, and (5) new volume and yield assumptions for loans, securities and
deposits. Because of limitations inherent in any approach used to measure
interest rate risk, simulation results are not intended as a forecast of the
actual effect of a change in market interest rates on our results but rather to
better plan and execute appropriate asset-liability management strategies and
manage our interest rate risk.
Potential changes to our net interest income and economic value of equity in
hypothetical rising and declining rate scenarios calculated as of September 30,
2021 are presented in the following table. The projections assume immediate,
parallel shifts downward of the yield curve of 100 basis points and immediate,
parallel shifts upward of the yield curve of 100, 200, 300 and 400 basis points.
In the current interest rate environment, a downward shift of the yield curve of
200, 300 and 400 basis points does not provide us with meaningful results and,
therefore, is not shown.
The results of this simulation analysis are hypothetical and should not be
relied on as indicative of expected operating results. A variety of factors
might cause actual results to differ substantially from what is depicted. For
example, if the timing and magnitude of interest rate changes differ from those
projected, our net interest income might vary significantly. Non-parallel yield
curve shifts such as a flattening or steepening of the yield curve or changes in
interest rate spreads, would also cause our net interest income to be different
from that depicted. An increasing interest rate environment could reduce
projected net interest
55
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income if deposits and other short-term liabilities re-price faster than
expected or faster than our assets re-price. Actual results could differ from
those projected if we grow assets and liabilities faster or slower than
estimated, if we experience a net outflow of deposit liabilities or if our mix
of assets and liabilities otherwise changes. Actual results could also differ
from those projected if we experience substantially different repayment speeds
in our loan portfolio than those assumed in the simulation model. Finally, these
simulation results do not contemplate all the actions that we may undertake in
response to potential or actual changes in interest rates, such as changes to
our loan, investment, deposit, funding or hedging strategies.
Change in Market Interest
Rates as of September 30,
2021 Estimated Increase (Decrease) in:
Economic Value of Economic Value of Year 1 Net Interest Year 1 Net Interest
Immediate Shift Equity Equity ($) Income Income ($)
+400 basis points 14.0% 145,493 37.6% 67,960
+300 basis points 18.3% 189,537 33.8% 61,057
+200 basis points 18.4% 190,103 26.1% 47,066
+100 basis points 12.4% 127,987 13.9% 25,133
-100 basis points -17.5% (181,179) -13.6% (24,593)
Liquidity
Liquidity refers to our ability to maintain cash flow that is adequate to fund
our operations, support asset growth, maintain reserve requirements and meet
present and future obligations of deposit withdrawals, lending obligations and
other contractual obligations through either the sale or maturity of existing
assets or by obtaining additional funding through liability management. Our
liquidity risk management policy provides the framework that we use to maintain
adequate liquidity and sources of available liquidity at levels that enable us
to meet all reasonably foreseeable short-term, long-term and strategic liquidity
demands. The Asset and Liability Management Committee is responsible for
oversight of liquidity risk management activities in accordance with the
provisions of our liquidity risk policy and applicable bank regulatory capital
and liquidity laws and regulations. Our liquidity risk management process
includes (i) ongoing analysis and monitoring of our funding requirements under
various balance sheet and economic scenarios, (ii) review and monitoring of
lenders, depositors, brokers and other liability holders to ensure appropriate
diversification of funding sources and (iii) liquidity contingency planning to
address liquidity needs in the event of unforeseen market disruption impacting a
wide range of variables. We continuously monitor our liquidity position in order
for our assets and liabilities to be managed in a manner that will meet our
immediate and long-term funding requirements. We manage our liquidity position
to meet the daily cash flow needs of customers, while maintaining an appropriate
balance between assets and liabilities to meet the return on investment
objectives of our stockholders. We also monitor our liquidity requirements in
light of interest rate trends, changes in the economy, and the scheduled
maturity and interest rate sensitivity of our securities and loan portfolios and
deposits. Liquidity management is made more complicated because different
balance sheet components are subject to varying degrees of management control.
For example, the timing of maturities of our investment portfolio is fairly
predictable and subject to a high degree of control when we make investment
decisions. Net deposit inflows and outflows, however, are far less predictable
and are not subject to the same degree of certainty.
Our liquidity position is supported by management of our liquid assets and
liabilities and access to alternative sources of funds. Our short-term and
long-term liquidity requirements are primarily to fund on-going operations,
including payment of interest on deposits and debt, extensions of credit to
borrowers and capital expenditures. These liquidity requirements are met
primarily through our deposits, FHLB advances and the principal and interest
payments we receive on loans and investment securities. Cash, interest-bearing
deposits in third-party banks, securities available for sale and maturing or
prepaying balances in our investment and loan portfolios are our most liquid
assets. Other sources of liquidity that are available to us include the sale of
loans we hold for investment, the ability to acquire additional national market
non-core deposits, borrowings through the Federal Reserve's discount window and
the issuance of debt or equity securities. We believe that the sources of
available liquidity are adequate to meet our current and reasonably foreseeable
future liquidity needs.
At September 30, 2021 , our cash and equivalents, which consist of cash and
amounts due from banks and interest-bearing deposits in other financial
institutions, amounted to $690.2 million , or 10.1% of total assets, compared to
$38.8 million , or 0.6% of total assets at December 31, 2020 . Our available for
sale securities at September 30, 2021 were $2.0 billion , or 28.5% of total
assets, compared to $1.5 billion , or 25.8% of total assets at December 31, 2020 .
Investment securities with an aggregate fair value of $95.5 million at
September 30, 2021 were pledged to secure public deposits and repurchase
agreements.
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The liability portion of the balance sheet serves as our primary source of
liquidity. We plan to meet our future cash needs through the generation of
deposits. Customer deposits have historically provided a sizeable source of
relatively stable and low-cost funds. We are also a member of the FHLB, from
which we can borrow for leverage or liquidity purposes. The FHLB requires that
securities and qualifying loans be pledged to secure any advances. At
September 30, 2021 , we had no advances from the FHLB and a remaining credit
availability of $1.4 billion . In addition, we maintain borrowing capacity of
approximately $85.9 million with the Federal Reserve's discount window that is
secured by certain securities from our portfolio which are not pledged for other
purposes.
Capital Resources
Total stockholders' equity at September 30, 2021 was $556.4 million , compared to
$535.8 million at December 31, 2020 , an increase of $20.6 million . The increase
was primarily driven by $37.0 million of net income, partially offset by $7.6
million of dividends and a $5.8 million decrease in accumulated other
comprehensive income due to the mark to market on our securities portfolio and a
$3.1 million decrease in additional paid-in capital, which was primarily driven
by $2.9 million of common stock that was purchased as part of our share
repurchase program in the first half of 2021.
We are subject to various regulatory capital requirements administered by
federal banking regulators. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
federal banking regulators that, if undertaken, could have a direct material
effect on our financial statements.
Regulatory capital rules adopted in July 2013 and fully phased in as of January
1, 2019 , which are referred to as the Basel III rules, impose minimum capital
requirements for bank holding companies and banks. The Basel III rules apply to
all national and state banks and savings associations regardless of size and
bank holding companies and savings and loan holding companies with consolidated
assets of more than $3 billion . In order to avoid restrictions on capital
distributions or discretionary bonus payments to executives, a covered banking
organization must maintain the fully phased in "capital conservation buffer" of
2.5% on top of its minimum risk-based capital requirements. This buffer must
consist solely of common equity Tier 1 risk-based capital, but the buffer
applies to all three measurements (common equity Tier 1 risk-based capital, Tier
1 capital and total capital). The capital conservation is equal to 2.5% of
risk-weighted assets.
57
--------------------------------------------------------------------------------The following table shows the regulatory capital ratios for the Bank and the Company at the dates indicated:
For Capital To Be Considered
Actual Adequacy Purposes(1) Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
(In thousands)
September 30, 2021
Consolidated:
Total capital to risk weighted
assets $ 557,007 14.99 % $ 297,321 8.00 % $ 371,652 10.00 %
Tier I capital to risk weighted
assets 519,645 13.98 % 222,991 6.00 % 297,321
8.00 %
Tier I capital to average assets 519,645 7.85 % 264,666 4.00 % 330,832 5.00 %
Common equity tier 1 to risk
weighted assets 519,645 13.98 % 167,243 4.50 % 241,574
6.50 %
Bank:
Total capital to risk weighted
assets$ 555,328 14.94 %$ 297,320 8.00 %$ 371,650
10.00 %
Tier I capital to risk weighted
assets 517,966 13.94 % 222,990 6.00 % 297,320
8.00 %
Tier I capital to average assets 517,966 7.83 % 148,660 4.00 % 185,825
5.00 %
Common equity tier 1 to risk
weighted assets 517,966 13.94 % 167,243 4.50 % 241,573 6.50 %
December 31, 2020
Bank(2):
Total capital to risk weighted
assets $ 534,684 14.25 % $ 300,199 8.00 % $ 375,249 10.00 %
Tier I capital to risk weighted
assets 491,913 13.11 % 225,149 6.00 % 300,199
8.00 %
Tier I capital to average assets 491,913 7.97 % 246,904 4.00 % 308,630 5.00 %
Common equity tier 1 to risk
weighted assets 491,913 13.11 % 168,862 4.50 % 243,912 6.50 % (1) Amounts are shown exclusive of the capital conservation buffer of 2.50%. (2) As the Reorganization occurred in 2021, the prior period numbers presented are for the Bank. As ofSeptember 30, 2021 , the Company and the Bank were categorized as "well capitalized" under the prompt corrective action measures and met the capital conservation buffer requirements. Contractual Obligations We have entered into contractual obligations in the normal course of business that involve elements of credit risk, interest rate risk and liquidity risk. The following table summarizes these relations as ofSeptember 30, 2021 andDecember 31, 2020 :September 30, 2021 More than 5 (In thousands) Total Less than 1 year 1-3 years 3-5 years years Operating Leases$ 54,445 $ 2,621$ 21,850 $ 20,690 $ 9,284 Purchase Obligations 33,935 2,012 9,224 8,672 14,027 Certificates of Deposit 222,259 83,321 127,190 10,126 1,622$ 310,639 $ 87,954$ 158,264 $ 39,488 $ 24,933 December 31, 2020 Less than 1 More than 5 (In thousands) Total year 1-3 years 3-5 years years Operating Leases$ 58,146 $ 9,806 $ 19,749 $ 19,679 $ 8,912 Purchase Obligations 36,437 3,962 9,224 9,224 14,027 Certificates of Deposit 272,025 231,239 32,236 7,825 725$ 366,608 $ 245,007 $ 61,209 $ 36,728 $ 23,664 58
-------------------------------------------------------------------------------- Investment Obligations We are party to agreements withPace Funding Group LLC , or PFG, for the purchase of up to$399 million of property assessed clean energy, or PACE, assessment securities by the end of the first quarter of 2022. Additionally, the Bank has an additional obligation up to$100 million for other PACE related purchases. These investments are to be held in our held-to-maturity investment portfolio. As ofSeptember 30, 2021 , we had fulfilled$315.7 million of these obligations. The PACE assessments have equal-lien priority with property taxes and generally rank senior to first lien mortgages. 59
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