DIME COMMUNITY BANCSHARES, INC. In this Quarterly Report on Form 10-Q, unless otherwise mentioned, the terms the "Company", "we", "us" and "our" refer toBridge Bancorp, Inc. and its wholly-owned subsidiary,BNB Bank (the "Bank"). We use the term "Holding Company" to refer solely toBridge Bancorp, Inc. and not to its consolidated subsidiary.
Private Securities Litigation Reform Act Safe Harbor Statement
This report may contain statements relating to our future results (including certain projections and business trends) that are considered "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 (the "PSLRA"). Such forward-looking statements, in addition to historical information, which involve risk and uncertainties, are based on the beliefs, assumptions and expectations of our management. Words such as "expects," "believes," "should," "plans," "anticipates," "will," "potential," "could," "intend," "may," "outlook," "predict," "project," "would," "estimated," "assumes," "likely," and variations of such similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements include, but are not limited to, possible or assumed estimates with respect to the financial condition, expected or anticipated revenue, and results of operations and our business, including earnings growth; revenue growth in retail banking, lending and other areas; origination volume in the consumer, commercial and other lending businesses; current and future capital management programs; non-interest income levels, including fees from the title insurance subsidiary and banking services as well as product sales; tangible capital generation; market share; expense levels; and other business operations and strategies. We claim the protection of the safe harbor for forward-looking statements contained in the PSLRA. Factors that could cause future results to vary from current management expectations include, but are not limited to, changing economic conditions; legislative and regulatory changes, including increases inFDIC insurance rates; monetary and fiscal policies of the federal government; changes in tax policies; rates and regulations of federal, state and local tax authorities; changes in interest rates; deposit flows; the cost of funds; demands for loan products; demand for financial services; competition; changes in the quality and composition of BNB's loan and investment portfolios; changes in management's business strategies; changes in accounting principles, policies or guidelines; changes in real estate values; an unexpected increase in operating costs; expanded regulatory requirements; expenses related to our proposed merger with Dime Community Bancshares, Inc., unexpected delays related to the merger, or our inability to obtain regulatory approvals or satisfy other closing conditions required to complete the merger; and other risk factors discussed elsewhere, and in our reports filed with theSecurities and Exchange Commission . In addition, the COVID-19 pandemic is having an adverse impact on the Company, its customers and the communities it serves. The adverse effect of the COVID-19 pandemic on the Company, its customers and the communities where it operates may adversely affect the Company's business, results of operations and financial condition for an indefinite period of time. The forward-looking statements are made as of the date of this report, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.
Overview
Bridge Bancorp, Inc. , aNew York corporation, is a bank holding company formed in 1989. On a parent-only basis, the Holding Company has had minimal results of operations.The Holding Company is dependent on dividends from its wholly-owned subsidiary,BNB Bank , its own earnings, additional capital raised, and borrowings as sources of funds. The information in this report reflects principally the financial condition and results of operations of the Bank. The Bank's results of operations are primarily dependent on its net interest income, which is the difference between interest income on loans and investments and interest expense on deposits and borrowings. The Bank also generates non-interest income, such as fee income on deposit accounts and merchant credit and debit card processing programs, loan swap fees, investment services, income from its title insurance subsidiary, and net gains on sales of securities and loans. The level of non-interest expenses, such as salaries and benefits, occupancy and equipment costs, other general and administrative expenses, expenses from the Bank's title insurance subsidiary, and income tax expense, further affects our net income. Certain reclassifications have been made to prior year amounts and the related discussion and analysis to conform to the current year presentation. These reclassifications did not have an impact on net income or total stockholders' equity. 41
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Our Principal Products and Services and Locations of Operations
The Bank was established in 1910 and is headquartered inBridgehampton, New York . We operate 39 branch locations in the primary market areas ofSuffolk andNassau Counties onLong Island and theNew York City boroughs, including 35 inSuffolk andNassau Counties, two inQueens and two inManhattan . For over a century, we have maintained our focus on building customer relationships in our market area. Our mission is to grow through the provision of exceptional service to our customers, our employees, and the community. We strive to achieve excellence in financial performance and build long-term shareholder value. We engage in full service commercial and consumer banking business, including accepting time, savings and demand deposits from the consumers, businesses and local municipalities in our market area. These deposits, together with funds generated from operations and borrowings, are invested primarily in: (1) commercial real estate loans; (2) multi-family mortgage loans; (3) residential mortgage loans; (4) secured and unsecured commercial and consumer loans; (5) home equity loans; (6) construction and land loans; (7)Federal Home Loan Bank ("FHLB"), Federal National Mortgage Association ("Fannie Mae"),Government National Mortgage Association ("Ginnie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac") mortgage-backed securities, collateralized mortgage obligations and other asset backed securities; (8)New York State and local municipal obligations; (9)U.S. government-sponsored enterprise ("U.S. GSE") securities; and (10) corporate bonds. We also offer the Certificate of Deposit Account Registry Service ("CDARS") and Insured Cash Sweep ("ICS") programs, providing multi-millions of dollars ofFederal Deposit Insurance Corporation ("FDIC") insurance on deposits to our customers. In addition, we offer merchant credit and debit card processing, automated teller machines, cash management services, lockbox processing, online banking services, remote deposit capture, safe deposit boxes, and individual retirement accounts as well as investment services throughBridge Financial Services LLC , which offers a full range of investment products and services through a third-party broker dealer. Through its title insurance abstract subsidiary, the Bank acts as a broker for title insurance services. Our customer base is comprised principally of small businesses, municipal relationships and consumer relationships.
COVID-19 Operational Update
InDecember 2019 , a novel coronavirus was reported inChina , and, inMarch 2020 , theWorld Health Organization declared COVID-19 a pandemic. OnMarch 12, 2020 , the President ofthe United States declared the COVID-19 outbreak inthe United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation inthe United States , as many state and local governments, includingNew York , ordered non-essential businesses to close and residents to shelter in place at home.
In response to the COVID-19 outbreak, in the first quarter of 2020 we implemented our contingency plans to ensure the health and safety of our employees and customers. We modified access to our workplace to promote stay-at-home and social distancing mandates. We enhanced facility cleaning protocols and took additional safety measures at all of our locations. In addition, we provided additional paid time off for employees required to quarantine.
Our return to work phase-in began onJuly 6, 2020 for back office employees. Our branch network has returned to operating regular business hours. Our branch employees receive 100% weekly pay, regardless of the number of hours worked. All front-line employees received special payments for the team effort in issuing theSmall Business Administration's ("SBA") Paycheck Protection Program ("PPP") loans. Paycheck Protection Program
We are an active participant in the SBA PPP for small business customers. As ofJune 30, 2020 , we originated over 4,000 loans totaling$949.7 million . The top five industries were construction, professional, manufacturing, accommodation/food, and administrative. The mean and median PPP loan amounts were$233 thousand and$75 thousand , respectively.
The following table presents the outstanding balance and range of loan size of
our PPP loans as of
(Dollars in thousands) Number of
2,813 $ 146,641
Between $150 and $350 664 152,436
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Between $350 and $2,000 536 415,098
Over $2,000 65 235,487
Total 4,078 $ 949,662 Substantially all of the PPP loans we originated have a two-year term and a 1%
interest rate. Subsequent Coronavirus Aid, Relief, and Economic Security Act
("CARES" Act) changes extended the maturities of these loans to potentially five
years at the borrower's option. Any changes are expected to be made at the end
of the interest only phase and are expected to coincide with the forgiveness
process. The SBA pays us fees ranging from 1% to 5% per loan depending on the
loan principal amount. Fee income from processing PPP loans is amortized as a
yield adjustment over the life of the loan. PPP loans are fully guaranteed by
the SBA.
Prior to the commencement of the PPP program, we funded 79 loans totaling $4.2
million with an average loan size of $53 thousand . These streamlined loans were
our initial response to the COVID-19 pandemic to quickly provide customers with
small loans to bridge short term cash flow. We terminated this program and
focused our efforts on developing a process to accept PPP loans when the PPP
program commenced on April 3, 2020 .
COVID-19 Loan Moratoriums and Forbearance Programs
We are supporting our customerswho may experience financial difficulty due to COVID-19 through loan moratoriums and forbearance programs. We began offering 90-day payment modifications on a case-by-case basis to those customers whose income was adversely impacted by COVID-19. The loan modifications in this program primarily consist of three-month deferrals of interest and principal payments. As ofJuly 20, 2020 , we have approved 500 loan moratoriums totaling$632.6 million , or 13.6% of total loan balances. Approximately$400 million of these loans have reached the end of their three-month deferral period. Of these loans, 54% have returned to making their agreed-on payments, 36% have requested an extension and 10% are pending. Extensions are being granted on a case-by-case basis. The following table presents the major classifications of our loan moratoriums as ofJuly 20, 2020 : Number of Carrying (Dollars in thousands) Loans Amount
Commercial real estate mortgage loans-owner occupied 71$ 103,221 Commercial real estate mortgage loans-non-owner occupied and multi-family 152 426,557 Commercial and industrial loans 194 62,884 Residential real estate mortgage loans/Consumer loans
83 39,946
Total 500 $ 632,608 The industries we identified as most significantly impacted by the COVID-19 pandemic based on the potential risk to cash flows are hotels, restaurants, passenger transportation, leisure, museums and catering.
Community Support
We continue to support our communities during the COVID-19 pandemic by pledging a total of$1.8 million to support COVID-19 affected communities, including$500 thousand in grants to non-profit partners working on the COVID-19 relief effort in our footprint. These grants are focused on organizations working to address meeting the basic needs of the vulnerable populations, providing emergency food, and health services. We have partnered with local governments to help coordinate emergency relief. The PPP loans we funded also benefitted hundreds of non-profit partners. A portion of the fees generated by the PPP will be set aside to increase funding for local organizations. 43 Table of Contents Significant Events
Merger Agreement with Dime Community Bancshares, Inc.
OnJuly 1, 2020 , the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Dime Community Bancshares, Inc. ("Dime"). The Merger Agreement, which was unanimously approved by the board of directors of both companies, provides that upon the terms and subject to the conditions set forth therein, Dime will merge with and into the Company (the "Merger"), with the Company as the surviving corporation under the name "Dime Community Bancshares, Inc. " (the "Surviving Corporation").The Surviving Corporation will be headquartered inHauppauge, New York , and will have a corporate office located inNew York, New York . At the effective time of the Merger (the "Effective Time"), each outstanding share of Dime common stock, par value$0.01 per share (the "Dime Common Stock"), will be converted into the right to receive 0.6480 shares of the Company's common stock, par value$0.01 per share (the "Merger Consideration"). At the Effective Time, each outstanding share of Dime's Series A preferred stock, par value$0.01 (the "Dime Preferred Stock"), will be converted into the right to receive one share of a newly created series of Company preferred stock having the same powers, preferences and rights as the Dime Preferred Stock. Following the Merger,Dime Community Bank , aNew York -chartered commercial bank and a wholly-owned subsidiary of Dime, will merge with and intoBNB Bank , aNew York -chartered commercial bank and a wholly-owned subsidiary of the Company, withBNB Bank as the surviving bank, under the name "Dime Community Bank ." The Merger Agreement provides certain termination rights for both the Company and Dime and further provides that a termination fee of$18.0 million will be payable by Dime to the Company, or by the Company to Dime, upon termination of the Merger Agreement under certain circumstances.
Upon completion of the transaction, which is subject to both
Following the Merger, theSurviving Corporation's board of directors will, until the third anniversary of the completion of the Merger, have twelve directors, consisting of six directors from the Company (the "Legacy Company Directors") and six directors from Dime (the "Legacy Dime Directors"), unless determined otherwise by 75% of theSurviving Corporation's board of directors. For the period ending on the third anniversary of the completion of the Merger,Legacy Company Directors will nominate directors for any vacancy on theSurviving Corporation's board of directors resulting from the vacancy of aLegacy Company Director, and Legacy Dime Directors will nominate directors for any vacancy on theSurviving Corporation's board of directors resulting from the vacancy of a Legacy Dime Director. The Merger is expected to close in the first quarter of 2021. The completion of the Merger is subject to customary conditions, including, among others, (1) the approval of the Merger Agreement and the transactions contemplated thereby, as applicable, by Dime's shareholders and the Company's shareholders, (2) authorization for listing on theNasdaq Stock Market of the shares of Company's common stock to be issued in the Merger, (3) the effectiveness of the Registration Statement on Form S-4 (the "Registration Statement") to be filed with theSecurities and Exchange Commission (the "SEC") to register the Company's common stock to be issued in the Merger, (4) the absence of any order, decree or injunction preventing the completion of the Merger, and (5) the receipt or waiver of required regulatory approvals. Each party's obligation to complete the Merger is also subject to certain additional customary conditions, including (i) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (ii) performance in all material respects by the other party of its obligations under the Merger Agreement and (iii) receipt by such party of an opinion from its counsel to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. The foregoing description of the proposed Merger and the Merger Agreement is not complete and is qualified in its entirety by reference to the full text of the Merger Agreement, which is attached to this Quarterly Report on Form 10-Q as Exhibit 2.1. 44 Table of Contents Quarterly Highlights
Net income for the 2020 second quarter of
second quarter.
? Net interest income increased to
compared to
? Tax-equivalent net interest margin was 3.00% for the second quarter of 2020
compared to 3.30% for the 2019 period.
? Total assets of
to
Total loans held for investment at
? Loan and line of credit originations of
2020, inclusive of
? Total deposits of
Provision for credit losses of
Additionally, we recorded a
for sale.
? Allowance for credit losses to total loans was 0.94% at
to 0.89% at
? A cash dividend of
quarter. Challenges and Opportunities The COVID-19 pandemic has caused us to modify our business practices, including employee travel and employee work locations, as many employees are working remotely. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers, such as waiving late payment and other fees. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the challenges our business will face and the full impact of the COVID-19 outbreak on our business. We continue to face challenges associated with ever-increasing banking regulations and the current low interest rate environment. A prolonged inverted or flat yield curve presents a challenge to a bank, like us, that derives most of its revenue from net interest margin. A sustained decrease in market interest rates could adversely affect our earnings. When interest rates decline, borrowers tend to refinance higher-rate, fixed-rate loans at lower rates. In addition, the majority of our loans are at variable interest rates, which would adjust to lower rates. In response to the COVID-19 outbreak, theFederal Reserve has reduced the benchmark federal funds rate to a target range of 0% to 0.25% during the 2020 first quarter. We took this opportunity to lower our funding costs and stabilize our net interest margin. We established five strategic objectives to achieve our vision: (1) acquire new customers in growth markets; (2) build new sales and marketing disciplines; (3) deepen customer relationships; (4) expand use of automation; and (5) improve talent management. We believe there remain opportunities to grow our franchise and that continued investments to generate core funding, quality loans and new sources of revenue remain keys to continue creating long-term shareholder value. Our ability to attract, retain, train and cultivate employees at all levels of our Company remains significant to meeting our corporate objectives. In particular, we are focused on expanding and retaining our loan team as we continue to grow the loan portfolio. We have capitalized on opportunities presented by the market and diligently seek opportunities to grow and strengthen the franchise. We recognize the potential risks of the current economic environment and will monitor the impact of market events as we evaluate loans and investments and consider growth initiatives. Our management and Board of 45 Table of Contents Directors have built a solid foundation for growth, and we are positioned to adapt to anticipated changes in the industry resulting from new regulations and legislative initiatives.
Critical Accounting Policies
Allowance for Credit Losses
OnJanuary 1, 2020 , we adopted the CECL Standard, which requires that loans held for investment be accounted for under the current expected credit losses model. Although the CARES Act provided the option to delay the adoption of the current expected credit loss model until the earlier ofDecember 31, 2020 or the termination of the current national emergency declaration related to the COVID-19 outbreak, we implemented the CECL Standard in the first quarter of 2020 as previously planned. The allowance for credit losses is established and maintained through a provision for credit losses based on expected losses inherent in our loan portfolio. Management evaluates the adequacy of the allowance on a quarterly basis. Management monitors its entire loan portfolio regularly, with consideration given to detailed analysis of classified loans, repayment patterns, past loss experience, various types of concentrations of credit, current economic conditions, and reasonable and supportable forecasts. Additions to the allowance are charged to expense and realized losses, net of recoveries, are charged against the allowance. The loan loss estimation process involves procedures to appropriately consider the unique characteristics of our loan portfolio segments. These segments are further disaggregated into loan risk ratings, the level at which credit risk is monitored. When computing allowance levels, credit loss assumptions are estimated using a model that categorizes loan pools based on expected loss history, delinquency status and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods, evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and provision for credit losses in those future periods. Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in our process for estimation of expected credit losses. The allowance level is influenced by loan volumes, loan risk rating migration, historic loss experience and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: (1) an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans; and (2) a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.
Loans that do not share similar credit risk characteristics
For a loan that does not share risk characteristics with other loans, expected
credit loss is measured based on net realizable value, that is, the difference
between the discounted value of the expected future cash flows, based on the
original effective interest rate, and the amortized cost basis of the loan. For
these loans, we recognize expected credit loss equal to the amount by which the
net realizable value of the loan is less than the amortized cost basis of the
loan (which is net of previous charge-offs), except when the loan is collateral
dependent, that is, when the borrower is experiencing financial difficulty and
repayment is expected to be provided substantially through the operation or sale
of the collateral. In these cases, expected credit loss is measured as the
difference between the amortized cost basis of the loan and the fair value of
the collateral. The fair value of the collateral is adjusted for the estimated
costs to sell the loan if repayment or satisfaction of a loan is dependent on
the sale (rather than only on the operation) of the collateral.
The fair value of real estate collateral is determined based on recent appraised
values. Appraisals are performed by certified general appraisers (for commercial
properties) or certified residential appraisers (for residential properties)
whose qualifications and licenses have been reviewed and verified by us. All
appraisals undergo a second review process to ensure that the methodology
employed and the values derived are reasonable. Generally, collateral values for
real estate loans for which measurement of expected losses is dependent on
collateral values are updated every twelve months. Non-real estate collateral
may be valued using an appraisal, net book value per the borrower's financial
statements, or aging reports, adjusted or discounted based on management's
historical knowledge, changes in market conditions from the time of the
valuation, and management's expertise and knowledge of the borrower and its
business. Once the expected credit
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loss amount is determined, an allowance is provided for equal to the calculated expected credit loss and included in the allowance for credit losses. Pursuant to our policy, credit losses must be charged-off in the period the loans, or portions thereof, are deemed uncollectable.
Loans that share similar credit risk characteristics
In estimating the component of the allowance for credit losses for loans that
share similar risk characteristics with other loans, such loans are segmented
into loan types. Loans are designated into loan pools with similar risk
characteristics based on product type in conjunction with other homogeneous
characteristics. Loan types include commercial real estate mortgages, owner and
non-owner occupied; multi-family mortgage loans; residential real estate
mortgages and home equity loans; commercial, industrial and agricultural loans,
real estate construction and land loans; and consumer loans.
In determining the allowance for credit losses, we derive an estimated credit
loss assumption from a model that categorizes loan pools based on loan type and
further segmented by risk rating. This model is known as Probability of
Default/Loss Given Default, utilizing a Transition Matrix approach. This model
calculates an expected loss percentage for each loan pool by considering the
probability of default, based upon the historical transition or migration of
loans from performing (various pass ratings) to criticized, and classified risk
ratings to default by risk rating buckets using life-of-loan analysis runout
periods for all loan segments, and the historical severity of loss, based on the
aggregate net lifetime losses (loss given default) per loan pool. The default
trigger, which is defined as the earlier of ninety days past-due or non-accrual
status, and severity factors used to calculate the allowance for credit losses
for loans in pools that share similar risk characteristics with other loans, are
adjusted for differences between the historical period used to calculate
historical default and loss severity rates and expected conditions over the
remaining lives of the loans in the portfolio. These factors include: (1)
lending policies and procedures; (2) international, national, regional and local
economic business conditions and developments that affect the collectability of
the portfolio, including the condition of various markets; (3) the nature and
volume of the loan portfolio including the terms of the loans; (4) the
experience, ability, and depth of the lending management and other relevant
staff; (5) the volume and severity of past due and adversely classified or
graded loans and the volume of non-accrual loans; (6) the quality of our loan
review system; (7) the value of underlying collateral for collateralized loans;
(8) the existence and effect of any concentrations of credit, and changes in the
level of such concentrations; and (9) the effect of external factors such as
competition and legal and regulatory requirements on the level of estimated
credit losses in the existing portfolio. Such factors are used to adjust the
historical probabilities of default and severity of loss for current conditions
that are not reflective of the model results. In addition, the economic factor
includes management expectation of future conditions based on a reasonable and
supportable forecast of the economy. To the extent the lives of the loans in the
portfolio extend beyond the period for which a reasonable and supportable
forecast can be made (currently two years), the Bank immediately reverts back to
the historical rates of default and severity of loss. Management believes that
this transition approach to the Probability of Default/Loss Given Default is a
relevant calculation of expected credit losses as there is sufficient volume as
well as movement in the risk ratings due to the initial grading system as well
as timely updates to risk ratings when necessary. Credit risk ratings are based
on management's evaluation of a credit's cash flow, collateral, guarantor
support, financial disclosures, industry trends and strength of borrowers'
management.
The Credit Risk Management Committee ("CRMC") is comprised of management. The
adequacy of the allowance is analyzed quarterly, with any adjustment to a level
deemed appropriate by the CRMC, based on its risk assessment of the entire
portfolio. Each quarter, members of the CRMC meet with the Credit Risk Committee
of our Board of Directors to review credit risk trends and the adequacy of the
allowance for credit losses. Based on the CRMC's review of the classified loans,
delinquency and charge-off trends, current economic conditions, reasonable and
supportable forecasts, and the overall allowance levels as they relate to the
entire loan portfolio at June 30, 2020 and December 31, 2019 , we believe the
allowance for credit losses has been established at levels sufficient to cover
the expected losses inherent in our loan portfolio. Future additions or
reductions to the allowance may be necessary based on changes in economic,
market or other conditions. Changes in estimates could result in a material
change in the allowance. In addition, various regulatory agencies, as an
integral part of the examination process, periodically review the allowance for
credit losses. Such agencies may require us to recognize adjustments to the
allowance based on their judgments of the information available to them at the
time of their examination.
For additional information regarding the allowance for credit losses, see Note 6 of the Notes to the Consolidated Financial Statements.
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Net Income
Net income for the three months ended June 30, 2020 was $10.7 million and $0.54
per diluted share which was in line with the same period in 2019. Changes in
net income for the three months ended June 30, 2020 compared to June 30, 2019
include: (i) a $4.9 million , or 13.8%, increase in net interest income; (ii) a
$1.0 million , or 28.6%, increase in the provision for credit losses; (iii) a
$3.2 million , or 59.0% decrease in non-interest income; (iv) a $0.4 million , or
1.6%, increase in non-interest expense; and (v) a $0.3 million , or 9.4%,
increase in income tax expense.
Net income for the six months ended June 30, 2020 was $20.0 million and $1.00
per diluted share as compared to $23.6 million and $1.18 per diluted share for
the same period in 2019. Changes in net income for the six months ended June
30, 2020 compared to June 30, 2019 include: (i) a $7.2 million , or 10.4%,
increase in net interest income; (ii) a $5.4 million , or 131.7%, increase in the
provision for credit losses; (iii) a $3.2 million , or 30.3% decrease in
non-interest income; (iv) a $2.6 million , or 5.7%, increase in non-interest
expense; and (v) a $0.5 million , or 7.5%, decrease in income tax expense.
Net Interest Income
Net interest income, the primary contributor to earnings, represents the difference between income on interest-earning assets and expenses on interest-bearing liabilities. Net interest income depends on the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.
The following tables present certain information relating to our average consolidated balance sheets and our consolidated statements of income for the periods indicated and reflects the average yield on assets and average cost of liabilities for those periods on a tax-equivalent basis based on theU.S. federal statutory tax rate. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from daily average balances and include non-accrual loans. The yields and costs include fees and costs, which are considered adjustments to yields. Interest on non-accrual loans has been included only to the extent reflected in the consolidated statements of income. For purposes of this table, the average balances for investments in debt and equity securities exclude unrealized appreciation/depreciation due to the application ofFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 320, "Investments - Debt and Equity Securities." 48 Table of Contents Three Months Ended June 30, 2020 2019 Average Average Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Cost Balance Interest Cost Interest-earning assets: Loans, net (1)(2)$ 4,429,423 $ 42,044 3.82 %$ 3,373,601 $ 40,000 4.76 % Mortgage-backed securities, CMOs and other asset-backed securities 473,939 2,570 2.18 676,100 4,444 2.64 Taxable securities 148,259 988 2.68 148,906 1,187 3.20 Tax-exempt securities (2) 25,020 238 3.83 35,025 309 3.54 Deposits with banks 365,770 112 0.12 102,515 599 2.34 Total interest-earning assets (2) 5,442,411 45,952 3.40 4,336,147 46,539 4.30 Non-interest-earning assets: Cash and due from banks 75,035 81,823 Other assets 396,197 319,897 Total assets$ 5,913,643 $ 4,737,867 Interest-bearing liabilities: Savings, NOW and money market 2,462,348 2,285 2,202,916 6,997 deposits $ $ 0.37 % $ $ 1.27 % Certificates of deposit of 224,043 913 211,357 1,079$100,000 or more 1.64 2.05 Other time deposits 98,952 361 1.47 61,206 288 1.89 Federal funds purchased and 1,659 1 25,246 158 repurchase agreements 0.24 2.51 FHLB advances 341,099 723 0.85 243,322 1,178 1.94 Subordinated debentures 78,968 1,135 5.78 78,827 1,135 5.78 Total interest-bearing liabilities 3,207,069 5,418 0.68 2,822,874 10,835 1.54 Non-interest-bearing liabilities: Demand deposits 2,061,371 1,365,279 Other liabilities 144,541 78,278 Total liabilities 5,412,981 4,266,431 Stockholders' equity 500,662 471,436 Total liabilities and stockholders' equity$ 5,913,643 $ 4,737,867 Net interest income/net interest rate spread (2) (3) 40,534 2.72 % 35,704 2.76 % Net interest-earning assets$ 2,235,342 $ 1,513,273 Net interest margin (2) (4) 3.00 % 3.30 % Tax-equivalent adjustment (102) (0.01) (187) (0.01) Net interest income$ 40,432 $ 35,517 Net interest margin (4) 2.99 % 3.29 % Ratio of interest-earning assets to interest-bearing liabilities 169.70 % 153.61 %
(1) Amounts are net of deferred origination costs/(fees) and the allowance for
credit losses, and include loans held for sale.
(2) Presented on a tax-equivalent basis based on the
rate of 21%.
Net interest rate spread represents the difference between the yield on (3) average interest-earning assets and the cost of average interest-bearing
liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
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Six Months Ended June 30,
2020 2019
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
Interest-earning assets:
Loans, net (1)(2) $ 4,053,220 $ 81,854 4.06 % $ 3,324,985 $ 77,659 4.71 %
Mortgage-backed securities, CMOs
and other asset-backed
securities 502,340 5,610 2.25 682,214 9,233 2.73
Taxable securities 176,912 2,316 2.63 151,198 2,451 3.27
Tax-exempt securities (2) 26,303 498 3.81 39,449 698 3.57
Deposits with banks 228,827 379 0.33 97,128 1,143 2.37Total interest-earning assets(2) 4,987,602 90,657 3.66 4,294,974 91,184 4.28 Non-interest-earning assets: Cash and due from banks 81,365 80,722 Other assets 377,381 316,305 Total assets$ 5,446,348 $ 4,692,001 Interest-bearing liabilities: Savings, NOW and money market 2,341,485 6,540 2,161,720 13,366 deposits $ $ 0.56 % $ $ 1.25 % Certificates of deposit of 219,272 1,949 207,936 2,062$100,000 or more 1.79 2.00 Other time deposits 96,440 776 1.62 90,088 850 1.90 Federal funds purchased and 15,617 79
16,517 203
repurchase agreements 1.02 2.48
FHLB advances 297,236 1,756 1.19 243,306 2,276 1.89
Subordinated debentures 78,950 2,270 5.78 78,810 2,270 5.81
Total interest-bearing
liabilities 3,049,000 13,370 0.88 2,798,377 21,027 1.52
Non-interest-bearing
liabilities:
Demand deposits 1,767,666 1,349,476
Other liabilities 128,563 78,677
Total liabilities 4,945,229 4,226,530
Stockholders' equity 501,119 465,471
Total liabilities and
stockholders' equity $ 5,446,348 $ 4,692,001
Net interest income/interest
rate spread (2) (3) 77,287 2.78 % 70,157 2.76 %
Net interest-earning assets $ 1,938,602 $ 1,496,597
Net interest margin (2) (4) 3.12 % 3.29 %
Tax-equivalent adjustment (205) (0.01) (317) (0.01)
Net interest income $ 77,082 $ 69,840
Net interest margin (4) 3.11 % 3.28 %
Ratio of interest-earning assets
to interest-bearing liabilities 163.58 % 153.48 %
(1)Amounts are net of deferred origination costs/(fees) and the allowance for
credit losses, and include loans held for sale.
(2)Presented on a tax-equivalent basis based on the U.S. federal statutory tax
rate of 21%.
(3)Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
(4)Net interest margin represents net interest income divided by average
interest-earning assets.
Rate/Volume Analysis
Net interest income can be analyzed in terms of the impact of changes in rates
and volumes. The following table illustrates the extent to which changes in
interest rates and in the volume of average interest-earning assets and
interest-bearing liabilities have affected our interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rates
(changes in rates multiplied by prior volume); and (iii) the net changes. For
purposes of this table, changes that are not due solely to volume or rate
changes have been allocated to these categories based on the
respective percentage changes in average volume and rate. Due to the numerous
simultaneous volume and rate changes during the periods analyzed, it is not
possible to precisely allocate changes between volume and rate. In addition,
average interest-earning assets include non-accrual loans.
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Three Months Ended June 30, Six Months Ended June 30,
2020 Over 2019 2020 Over 2019
Changes Due To Changes Due To
Net Net
(In thousands) Volume Rate Change Volume Rate Change
Interest income on
interest-earning assets:
Loans, net (1) (2) $ 40,140 $ (38,096) $ 2,044 $ 29,062 $ (24,867) $ 4,195
Mortgage-backed securities, CMOs
and other asset-backed securities (1,184) (690) (1,874) (2,167) (1,456) (3,623) Taxable securities (5) (194) (199) 834 (969) (135) Tax-exempt securities (2) (213) 142 (71) (324) 124 (200) Deposits with banks 2,968 (3,455) (487) 1,958 (2,722) (764) Total interest income on interest-earning assets (2) 41,706 (42,293) (587) 29,363 (29,890) (527) Interest expense on interest-bearing liabilities: Savings, NOW and money market deposits 4,979 (9,691) (4,712) 2,996 (9,822) (6,826) Certificates of deposit of$100,000 or more 362 (528) (166) 261 (374) (113) Other time deposits 432 (359) 73 141 (215) (74) Federal funds purchased and repurchase agreements (80) (77) (157) (10) (114) (124) FHLB advances 2,022 (2,477) (455) 1,078 (1,598) (520) Subordinated debentures - - - 12 (12) - Total interest expense on
interest-bearing liabilities 7,715 (13,132) (5,417)
4,478 (12,135) (7,657)
Net interest income (2) $ 33,991 $ (29,161) $ 4,830 $ 24,885 $ (17,755) $ 7,130 (1) Amounts are net of deferred origination costs/(fees) and the allowance for
credit losses, and include loans held for sale.
(2) Presented on a tax-equivalent basis based on the
rate of 21%.
Analysis of Net Interest Income for the Three Months Ended
Net interest income was$40.4 million for the three months endedJune 30, 2020 compared to$35.5 million for the three months endedJune 30, 2019 . Average net interest-earning assets increased$722.1 million to$2.2 billion for the three months endedJune 30, 2020 compared to$1.5 billion for the three months endedJune 30, 2019 . The increase in average net interest-earning assets was primarily driven by loan growth in the commercial and industrial portfolio and a rise in deposits with banks, partially offset by increases in average borrowings and average deposits, and a decrease in average investment securities. Tax-equivalent net interest margin decreased to 3.00% for the three months endedJune 30, 2020 compared to 3.30% for the three months endedJune 30, 2019 . The decrease in tax-equivalent net interest margin for 2020 compared to 2019 reflects the lower average yield on our loan portfolio and significantly higher levels of cash earning low average yields, partially offset by lower overall funding costs, due in part to federal funds rate decreases during the third and fourth quarter of 2019 and the first quarter of 2020. In response to the COVID-19 outbreak, theFederal Reserve has reduced the benchmark federal funds rate to a target range of 0% to 0.25% during the 2020 first quarter. We took this opportunity to lower our funding costs and stabilize our net interest margin. Total interest income decreased$0.5 million , or 1.1%, to$45.9 million for the three months endedJune 30, 2020 from$46.4 million for the same period in 2019. The average interest-earning assets increased$1.1 billion , or 25.5%, to$5.4 billion for the three months endedJune 30, 2020 compared to$4.3 billion for the same period in 2019. The increase in average interest-earning assets for the three months endedJune 30, 2020 compared to 2019 reflects loan growth in the commercial and industrial portfolio driven by PPP loan originations, and a rise in deposits with banks driven by deposit growth, partially offset by a decrease in average investment securities. The decline in economic activity during the COVID-19 shut-down resulted in more of our customers increasing their deposits, which raised our average deposits with banks in the current quarter. The tax-equivalent average yield on interest-earning assets was 3.40% for the quarter endedJune 30, 2020 compared to 4.30% for the quarter endedJune 30, 2019 . The PPP loans and excess liquidity in banks had the effect of depressing our net interest margin in the current quarter. 51
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Interest income on loans increased$2.1 million to$42.0 million for the three months endedJune 30, 2020 over 2019, primarily due to growth in the commercial and industrial loan portfolio, partially offset by a decrease in yield on loans. For the three months endedJune 30, 2020 , average loans grew by$1.0 billion , or 31.3%, to$4.4 billion as compared to$3.4 billion for the same period in 2019. The tax-equivalent yield on average loans was 3.82% for the second quarter of 2020 compared to 4.76% for the same period in 2019. The average balance of loans for the quarter endedJune 30, 2020 includes$721.6 million of PPP loans with an average yield of 2.55%. The PPP loans had the effect of decreasing the tax-equivalent yield by 24 basis points in the current quarter. We remain committed to growing loans with prudent underwriting, sensible pricing, and limited credit and extension risk. Interest income on investment securities decreased$2.2 million to$3.7 million for the three months endedJune 30, 2020 compared to$5.9 million for the same period in 2019, primarily due to a decrease in the average balance of investment securities and a lower average yield on investment securities. Interest income on securities included net amortization of premiums on securities of$0.8 million for the three months endedJune 30, 2020 compared to$0.9 million for the same period in 2019. For the three months endedJune 30, 2020 , average total investment securities decreased by$212.8 million , or 24.7%, to$647.2 million as compared to$860.0 million for the same period in 2019. The decline in tax-equivalent average yield on total investment securities to 2.36% for the three months endedJune 30, 2020 compared to 2.77% in the same period in 2019 reflected the impact of the 150 basis point reduction in the benchmark federal funds rate by theFederal Reserve inMarch 2020 and the related decline in market interest rates available on securities purchases. Total interest expense decreased to$5.4 million for the three months endedJune 30, 2020 as compared to$10.8 million for the same period in 2019. The decrease in interest expense for the three months endedJune 30, 2020 is a result of the decrease in the cost of average interest-bearing liabilities, partially offset by an increase in average deposits and average borrowings. The cost of average interest-bearing liabilities was 0.68% for the three months endedJune 30, 2020 and 1.54% for the three months endedJune 30, 2019 . The decrease in the cost of average interest-bearing liabilities is primarily due to federal funds rate decreases during the third and fourth quarter of 2019 and the first quarter of 2020. Average total interest-bearing liabilities were$3.2 billion for the three months endedJune 30, 2020 and$2.8 billion for the same period in 2019 due to increases in average deposits and average borrowings. Average total deposits increased to$4.8 billion for the three months endedJune 30, 2020 , compared to$3.8 billion for the three months endedJune 30, 2019 primarily due to a rise in average demand deposits and average savings, NOW and money market accounts. Average demand deposits totaled$2.1 billion for the three months endedJune 30, 2020 compared to$1.4 billion for the three months endedJune 30, 2019 . The increase in demand deposits was driven by an inflow of deposits from PPP loan customers in the second quarter of 2020. The average balance of savings, NOW and money market accounts increased$259.4 million , or 11.8%, to$2.5 billion for the three months endedJune 30, 2020 compared to$2.2 billion for the three months endedJune 30, 2019 . The cost of average savings, NOW and money market deposits was 0.37% for the 2020 second quarter compared to 1.27% for the 2019 second quarter. Average balances in certificates of deposit increased$50.4 million , or 18.5%, to$323.0 million for the three months endedJune 30, 2020 compared to$272.6 million for the three months endedJune 30, 2019 . The cost of average certificates of deposit decreased to 1.59% for the three months endedJune 30, 2020 compared to 2.01% for the same period in 2019. Average public fund deposits comprised 17.5% of total average deposits during the 2020 second quarter and 16.2% for the 2019 second quarter. Average federal funds purchased and repurchase agreements decreased$23.6 million , to$1.6 million for the three months endedJune 30, 2020 compared to$25.2 million for the same period in 2019. The cost of average federal funds purchased and repurchase agreements was 0.24% for the 2020 second quarter compared to 2.51% for the 2019 second quarter. Average FHLB advances increased$97.8 million , or 40.2%, to$341.1 million for the three months endedJune 30, 2020 compared to$243.3 million for the three months endedJune 30, 2019 . 52 Table of Contents
Analysis of Net Interest Income for the Six Months Ended
Net interest income was$77.1 million for the six months endedJune 30, 2020 compared to$69.8 million for the six months endedJune 30, 2019 . Average net interest-earning assets increased$442.0 million to$1.9 billion for the six months endedJune 30, 2020 compared to$1.5 billion for the six months endedJune 30, 2019 . The increase in average net interest-earning assets was primarily driven by loan growth in the commercial and industrial portfolio, and a rise in deposits with banks, partially offset by increases in average borrowings and average deposits, and a decrease in average investment securities. Tax-equivalent net interest margin decreased to 3.12% for the six months endedJune 30, 2020 compared to 3.29% for the six months endedJune 30, 2019 . The decrease in tax-equivalent net interest margin for 2020 compared to 2019 reflects the lower average yield on our loan portfolio and significantly higher levels of cash earning low average yields, partially offset by lower overall funding costs, due in part to federal funds rate decreases during the third and fourth quarter of 2019 and the first quarter of 2020. In response to the COVID-19 outbreak, theFederal Reserve has reduced the benchmark federal funds rate to a target range of 0% to 0.25% during the 2020 first quarter. We took this opportunity to lower our funding costs and stabilize our net interest margin. Total interest income decreased$0.4 million , or 0.5%, to$90.5 million for the six months endedJune 30, 2020 from$90.9 million for the same period in 2019, as average interest-earning assets increased$692.6 million , or 16.1%, to$5.0 billion for the six months endedJune 30, 2020 compared to$4.3 billion for the same period in 2019. The increase in average interest-earning assets for the six months endedJune 30, 2020 compared to 2019 reflects growth in the commercial and industrial portfolio driven by PPP loan originations, and a rise in deposits with banks driven by deposit growth, partially offset by a decrease in average investment securities. The decline in economic activity during the COVID-19 shut-down resulted in more of our customers increasing their deposits, which raised our average deposits with banks in the current year. The tax-equivalent average yield on interest-earning assets was 3.66% for the six months endedJune 30, 2020 compared to 4.28% for the six months endedJune 30, 2019 . The PPP loans and excess liquidity in banks had the effect of depressing our net interest margin in the current year. Interest income on loans increased$4.2 million to$81.9 million for the six months endedJune 30, 2020 over 2019, primarily due to growth in the commercial and industrial loan portfolio, partially offset by a decrease in yield on loans. For the six months endedJune 30, 2020 , average loans grew by$728.2 million , or 21.9%, to$4.1 billion as compared to$3.3 billion for the same period in 2019. The tax-equivalent yield on average loans was 4.06% for the six months endedJune 30, 2020 compared to 4.71% for the same period in 2019. The average balance of loans for the six months endedJune 30, 2020 includes$360.8 million of PPP loans with an average yield of 2.55%. The PPP loans had the effect of decreasing the tax-equivalent yield by 15 basis points in 2020. We remain committed to growing loans with prudent underwriting, sensible pricing, and limited credit and extension risk. Interest income on investment securities decreased$3.9 million to$8.3 million for the six months endedJune 30, 2020 compared to$12.2 million for the same period in 2019, primarily due to a decrease in the average balance of investment securities and a lower average yield on investment securities. Interest income on securities included net amortization of premiums on securities of$1.5 million for the six months endedJune 30, 2020 and for the same period in 2019. For the six months endedJune 30, 2020 , average total investment securities decreased by$167.3 million , or 19.2%, to$705.6 million as compared to$872.9 million for the same period in 2019. The decline in tax-equivalent average yield on total investment securities to 2.40% for the six months endedJune 30, 2020 compared to 2.86% in the same period in 2019 reflected the impact of the reductions in the benchmark federal funds rate by theFederal Reserve in the third and fourth quarter of 2019, and the first quarter of 2020, and the related decline in market interest rates available on securities purchases. Total interest expense decreased to$13.4 million for the six months endedJune 30, 2020 as compared to$21.0 million for the same period in 2019. The decrease in interest expense for the six months endedJune 30, 2020 is a result of the decrease in the cost of average interest-bearing liabilities, partially offset by an increase in average deposits and average borrowings. The cost of average interest-bearing liabilities was 0.88% for the six months endedJune 30, 2020 and 1.52% for the six months endedJune 30, 2019 . The decrease in the cost of average interest-bearing liabilities is primarily due to federal funds rate decreases during the third and fourth quarter of 2019 and the first quarter of 2020. Average total interest-bearing liabilities were$3.0 billion for the six months endedJune 30, 2020 and$2.8 billion for the same period in 2019 due to increases in average deposits and average borrowings. 53
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Average total deposits increased to$4.4 billion for the six months endedJune 30, 2020 , compared to$3.8 billion for the six months endedJune 30, 2019 primarily due to an increase in average demand deposits and average savings, NOW and money market accounts. Average demand deposits totaled$1.8 billion for the six months endedJune 30, 2020 compared to$1.3 billion for the six months endedJune 30, 2019 . The increase in demand deposits was primarily driven by an inflow of deposits from PPP loan customers in the second quarter of 2020. The average balance of savings, NOW and money market accounts increased$179.8 million , or 8.3%, to$2.3 billion for the six months endedJune 30, 2020 compared to$2.2 billion for the six months endedJune 30, 2019 . The cost of average savings, NOW and money market deposits was 0.56% for the 2020 second quarter compared to 1.25% for the 2019 second quarter. Average balances in certificates of deposit increased$17.7 million , or 5.9%, to$315.7 million for the six months endedJune 30, 2020 compared to$298.0 million for the six months endedJune 30, 2019 . The cost of average certificates of deposit decreased to 1.74% for the six months endedJune 30, 2020 compared to 1.97% for the same period in 2019. Average public fund deposits comprised 18.2% of total average deposits during the six months endedJune 30, 2020 and 16.2% for the same period in 2019. Average federal funds purchased and repurchase agreements decreased$0.9 million , to$15.6 million for the six months endedJune 30, 2020 compared to$16.5 million for the same period in 2019. The cost of average federal funds purchased and repurchase agreements was 1.02% for the six months endedJune 30, 2020 compared to 2.48% for the same period in 2019. Average FHLB advances increased$53.9 million , or 22.2%, to$297.2 million for the six months endedJune 30, 2020 compared to$243.3 million for the six months endedJune 30, 2019 .
Provision and Allowance for Credit Losses
Our loan portfolio consists primarily of real estate loans secured by commercial, multi-family and residential real estate properties located in our principal lending areas ofNassau andSuffolk Counties onLong Island and theNew York City boroughs. The interest rates we charge on loans are affected primarily by the demand for such loans, the supply of money available for lending purposes, the rates offered by our competitors, our relationship with the customer, and the related credit risks of the transaction. These factors are affected by general and economic conditions including, but not limited to, monetary policies of the federal government, including theFederal Reserve Board , legislative policies and governmental budgetary matters. Based on our adoption of the CECL Standard onJanuary 1, 2020 , our continuing review of the overall loan portfolio, the current asset quality of the portfolio, the growth in the loan portfolio, the net charge-offs, and current and forecasted economic conditions, a provision for credit losses of$4.5 million and$9.5 million was recorded during the three and six months endedJune 30, 2020 , respectively, compared to a provision for credit losses of$3.5 million and$4.1 million , respectively, during the same periods in 2019. The increase in the second quarter 2020 allowance for credit losses is primarily related to the reasonable and supportable forecast component of the newly adopted CECL standard which includes the impact of COVID-19, coupled with an increase in the specific reserves and reserves on PPP loans, partially offset by decreases in the outstanding balances of commercial and industrial lines of credit and changes in other qualitative factors resulting from changes in the loan portfolio. We believe, based on all of the evidence gathered to date, that COVID-19 has had a more profound impact on economic activity in the first half of 2020 than anticipated during the first quarter analysis and will continue to have a material impact on economic conditions in 2020. Evidence also suggests that the recovery may be more gradual than previously expected. We still believe the economic degradation will be shorter-term in nature and expect to see an economic recovery begin in 2021 during the second year of our CECL forecast time horizon. Net charge-offs were$0.3 million for the quarter endedJune 30, 2020 , compared to net charge-offs of$4.1 million for the quarter endedJune 30, 2019 . Net charge-offs were$0.5 million for the six months endedJune 30, 2020 , compared to net charge-offs of$4.3 million for the six months endedJune 30, 2019 . The net charge-offs during the quarter and six months endedJune 30, 2019 relate primarily to the$3.7 million charge-off related to one CRE loan totaling$16.3 million which was written down to the loan's estimated fair value of$12.6 million and moved into loans held for sale as ofJune 30, 2019 . The ratio of the allowance for credit losses to non-accrual loans was 561%, 750% and 566%, atJune 30, 2020 ,December 31, 2019 , andJune 30, 2019 , respectively. The allowance for credit losses totaled$43.4 million atJune 30, 2020 as compared to$32.8 million atDecember 31, 2019 and$31.2 million atJune 30, 2019 . The allowance as a percentage of total loans was 0.94% atJune 30, 2020 , compared to 0.89% atDecember 31, 2019 and 0.91% atJune 30, 2019 . We continue to carefully monitor the loan portfolio, real estate trends inNassau andSuffolk Counties and theNew York City boroughs, and current and forecasted economic conditions. Loans totaling$84.7 million , or 1.8%, of total loans atJune 30, 2020 were categorized as classified loans compared to$88.3 million , or 2.4%, atDecember 31, 2019 and$74.2 54 Table of Contents million, or 2.2%, atJune 30, 2019 . Classified loans include loans with credit quality indicators with the internally assigned grades of special mention, substandard and doubtful. These loans are categorized as classified loans because we have information that indicates the borrower may not be able to comply with the present repayment terms. These loans are subject to increased management attention and their classification is reviewed at least quarterly. AtJune 30, 2020 ,$30.3 million of classified loans were commercial real estate ("CRE") loans. Of the$30.3 million of CRE loans,$27.9 million were current and$2.4 million were past due. AtJune 30, 2020 ,$16.9 million of classified loans were residential real estate loans, with$13.2 million current and$3.7 million past due. Commercial, industrial, and agricultural loans represented$35.1 million of classified loans, with$31.1 million current and$4.0 million past due. Taxi medallion loans represented$9.6 million of the classified commercial, industrial and agricultural loans atJune 30, 2020 . All of our taxi medallion loans are collateralized byNew York City medallions and have personal guarantees. As ofJune 30, 2020 , substantially all of our taxi medallion loans were on payment moratoriums. All taxi medallion loans were current prior to their payment moratorium. No new originations of taxi medallion loans are currently planned and we expect these balances to continue to decline through amortization and pay-offs. AtJune 30, 2020 , there was$1.1 million of classified real estate construction and land loans, which were past due;$0.9 million of classified consumer loans substantially all of which were current; and$0.4 million of classified multi-family loans which were current. CRE loans, including multi-family loans, represented$2.4 billion , or 52.5%, of the total loan portfolio atJune 30, 2020 compared to$2.4 billion , or 64.8%, atDecember 31, 2019 and$2.1 billion , or 60.4%, atJune 30, 2019 . Our underwriting standards for CRE loans require an evaluation of the cash flow of the property, the overall cash flow of the borrower and related guarantors as well as the value of the real estate securing the loan. In addition, our underwriting standards for CRE loans are consistent with regulatory requirements with original loan to value ratios generally less than or equal to 75%. We consider charge-off history, delinquency trends, cash flow analysis, and the impact of the local economy on CRE values when evaluating the appropriate level of the allowance for credit losses. As ofJune 30, 2020 , we had$12.3 million in collateral dependent loans which were individually evaluated, with a specific reserve of$7.4 million . The increase in individually evaluated loans and the related reserve during the 2020 second quarter relates primarily to taxi loans. As ofJune 30, 2020 , taxi loans were changed from being collectively evaluated to individually evaluated. While our collectively evaluated taxi loans were all performing in accordance with the terms of the renewals, the COVID-19 pandemic broughtNew York City to a halt and the taxi industry, like many others, suffered greatly. Substantially all of our taxi borrowers requested payment moratoriums and until such time as business fully resumes and cash flows return to normal, we feel it is most appropriate to value the taxi loans assuming they are collateral dependent. As ofDecember 31, 2019 , we had individually impaired loans as defined by FASB ASC No. 310, "Receivables" (prior to adoption of the CECL Standard) of$27.0 million , with a specific reserve totaling$4.7 million . Impaired loans include individually classified non-accrual loans and troubled debt restructuring loans ("TDRs"). AtDecember 31, 2019 , impaired loans also included$1.1 million in other impaired performing loans which were related to borrowers with other performing TDRs. Upon adoption of the CECL Standard onJanuary 1, 2020 , we re-evaluated our impaired loans to determine which loans should be evaluated on a collective (pooled) basis and which loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis and therefore should be individually evaluated. The majority of our impaired loans atDecember 31, 2019 were performing TDRs where there was no write-off of principal as a result of the restructure and interest was at a market rate. We concluded the risks associated with these loans were consistent with the other pooled loans and therefore they were appropriately evaluated on a collective (pooled) basis under the CECL Standard. Non-accrual loans were$7.7 million , or 0.17%, of total loans, atJune 30, 2020 , and$4.4 million , or 0.12% of total loans atDecember 31, 2019 . TDRs represent$3.1 million of the non-accrual loans atJune 30, 2020 and$405 thousand of the non-accrual loans atDecember 31, 2019 . The increase in non-accrual TDRs is primarily due to one TDR relationship totaling$2.7 million atJune 30, 2020 becoming non-accrual during the second quarter.
There was no other real estate owned at
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The following table presents changes in the allowance for credit losses:
Six Months Ended
(In thousands) June 30, 2020 June 30, 2019
Beginning balance $ 32,786 $ 31,418
Impact of adopting CECL 1,625 -
Charge-offs:Commercial real estate mortgage loans (1)
(3,670)
Residential real estate mortgage loans - - Commercial, industrial and agricultural loans (533)
(796)
Installment/consumer loans (2) (4)
Total (536) (4,470)
Recoveries:Commercial real estate mortgage loans - - Residential real estate mortgage loans 2 111 Commercial, industrial and agricultural loans 24
12
Installment/consumer loans - -
Total 26 123
Net charge-offs (510) (4,347)Provision for credit losses charged to operations 9,500
4,100
Ending balance $ 43,401 $ 31,171 Allocation of Allowance for Credit Losses
The following table presents the allocation of the total allowance for credit losses by loan classification:
June 30, 2020 December 31, 2019
Percentage of Loans Percentage of Loans
(Dollars in thousands) Amount to Total Loans Amount to Total Loans
Commercial real estate mortgage loans $ 6,993 34.3 % $ 12,150 42.7 %
Multi-family mortgage loans 1,628 18.2 4,829 22.1
Residential real estate mortgage loans 3,692 10.1 1,882 13.4
Commercial, industrial and agricultural loans 26,949 35.1 12,583 18.5
Real estate construction and land loans 2,620 1.8 1,066 2.6 Installment/consumer loans 1,519 0.5 276 0.7 Total$ 43,401 100.0 %$ 32,786 100.0 % Non-Interest Income Total non-interest income during the three months endedJune 30, 2020 was$2.3 million compared to$5.5 million for the three months endedJune 30, 2019 . The decline in non-interest income in the current quarter compared to 2019 was attributable to a$2.6 million decrease in fair value of one loan held for sale, a$0.7 million decrease in service charges and other fees, a$0.4 million decrease in gain on sales of SBA loans, a$0.2 million decrease in other operating income, and$0.2 million of net securities gains recorded during the three months endedJune 30, 2019 , partially offset by a$0.8 million increase in loan swap fees. Total non-interest income during the six months endedJune 30, 2020 was$7.5 million compared to$10.7 million during the six months endedJune 30, 2019 . The decline in non-interest income in the current year compared to 2019 was attributable to a$2.6 million decrease in fair value of one loan held for sale, a$0.6 million decrease in service charges and other fees, a$0.5 million decrease in other operating income, a$0.2 million decrease in gain on sales of SBA loans, and$0.2 million of net securities gains recorded during the three months endedJune 30, 2019 , partially offset by a$0.9 million increase in
loan
swap fees.
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During the second quarter of 2020, an additional write-down was recognized on our one CRE mortgage loan held for sale for the decrease in the estimated fair value of the loan by$2.6 million to$10.0 million through a valuation allowance which was charged against non-interest income in the consolidated statements of income. Loan swap fees recorded on interest rate swaps increased to$1.3 million for the three months endedJune 30, 2020 , compared to$0.5 million for the three months endedJune 30, 2019 . Loan swap fees recorded on interest rate swaps increased to$2.6 million for the six months endedJune 30, 2020 , compared to$1.6 million for the six months endedJune 30, 2019 . We increased the notional amount of interest rate swaps to$1.0 billion atJune 30, 2020 , compared to$823.8 million atDecember 31, 2019 . The loan swap program allows us to deliver fixed rate exposure to our customers while we retain a floating rate asset and generate fee income. These interest rate swap agreements do not qualify for hedge accounting treatment, and therefore changes in fair value are reported in non-interest income in the consolidated statements of income.
Non-Interest Expense
Total non-interest expense was$24.4 million during the three months endedJune 30, 2020 compared to$24.0 million for the three months endedJune 30, 2019 . The increase was primarily due to higher technology and communications, salaries and benefits, and professional services expenses, partially offset by lower marketing and advertising expenses. Total non-interest expense was$49.2 million during the six months endedJune 30, 2020 compared to$46.6 million for the six months endedJune 30, 2019 . The increase was primarily due to higher salaries and benefits, technology and communications and professional services expenses, partially offset by lower marketing and advertising expenses, andFDIC assessments. Salaries and benefits increased$0.3 million to$13.9 million for the three months endedJune 30, 2020 compared to the same period in 2019. Technology and communications expenses increased$0.5 million to$2.4 million for the three months endedJune 30, 2020 compared to the same period in the prior year. Marketing and advertising expenses decreased$0.5 million to$1.0 million for the three months endedJune 30, 2020 , compared to the same period in 2019. Professional services increased to$1.0 million in the second quarter of 2020 compared to$0.8 million in the second quarter of 2019. Other operating expenses decreased$0.2 million to$1.9 million for the three months endedJune 30, 2020 compared to the same period in 2019. Salaries and benefits increased$2.5 million to$29.5 million for the six months endedJune 30, 2020 compared to the same period in 2019. Technology and communications expenses increased$0.9 million to$4.6 million for the six months endedJune 30, 2020 compared to the same period in the prior year. Professional services increased to$2.0 million in the second quarter of 2020 compared to$1.6 million for the same period in 2019. Marketing and advertising expenses decreased$0.7 million to$1.8 million for the six months endedJune 30, 2020 , compared to the same period in 2019.FDIC assessments decreased to$0.5 million for the six months endedJune 30, 2020 , compared to$0.6 million for the same period in 2019, primarily due toFDIC assessment credits totaling$0.3 million in the 2020 period. Other operating expenses decreased$0.3 million to$3.5 million for the six months endedJune 30, 2020 compared to the same period in 2019. The rise in salaries and employee benefits in the three months ended and six months ended 2020 compared to 2019 reflects our objective to attract, retain, train and cultivate employees at all levels of the Company. In particular, we are focused on expanding and retaining our loan team as we continue to grow our loan portfolio.
The increase in technology and communications expenses in the current quarter and current year compared to 2019 reflects higher software maintenance and system services expenses as we increased our investment in technology and expanded our use of automation in the 2020 periods.
Income Taxes
Income tax expense was$3.1 million for the three months endedJune 30, 2020 compared to$2.9 million for the three months endedJune 30, 2019 , reflecting higher income before income taxes and a higher effective tax rate in the 2020 period. The effective tax rate was 22.7% for the three months endedJune 30, 2020 compared to 21.2% for the same period in 2019. 57
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Income tax expense was$5.8 million for the six months endedJune 30, 2020 compared to$6.3 million for the six months endedJune 30, 2019 , reflecting lower income before income taxes, partially offset by a higher effective tax rate in the 2020 period. The effective tax rate was 22.7% for the six months endedJune 30, 2020 compared to 21.0% for the same period in 2019. We estimate we will record income tax at an effective tax rate of approximately 22.7% for the remainder of 2020. Financial Condition Total assets were$6.2 billion atJune 30, 2020 ,$1.2 billion , or 25.0%, higher thanDecember 31, 2019 . The rise in total assets in 2020 reflects increases in loans held for investment and cash and cash equivalents, partially offset by a decrease in securities. Cash and cash equivalents increased$372.6 million , or 317.9%, to$489.8 million atJune 30, 2020 compared toDecember 31, 2019 . Total securities decreased$126.8 million , or 15.8%, to$678.0 million atJune 30, 2020 compared toDecember 31, 2019 . Total loans held for investment, net, increased$940.5 million , or 25.6%, to$4.6 billion atJune 30, 2020 compared toDecember 31, 2019 , inclusive of PPP loans totaling$949.7 million . Net deferred loan fees were$17.3 million atJune 30, 2020 , inclusive of$26.0 million remaining unamortized net loan fees related to PPP loans. Our focus is on our ability to grow the loan portfolio, while minimizing interest rate risk sensitivity and maintaining credit quality. Total liabilities were$5.6 billion atJune 30, 2020 ,$1.2 billion higher thanDecember 31, 2019 . The increase in total liabilities in 2020 was mainly due to deposit growth, attributable to PPP related deposits, partially offset by a decrease in FHLB advances. Total deposits increased$1.3 billion , or 33.2%, to$5.1 billion atJune 30, 2020 , compared toDecember 31, 2019 . The increase in total deposits in 2020 was largely attributable to higher demand deposits and savings, NOW and money market deposits. Demand deposits increased$645.2 million , or 42.5%, to$2.2 billion atJune 30, 2020 compared toDecember 31, 2019 . The rise in demand deposits in the second quarter of 2020 was primarily driven by an inflow of PPP-related deposits. Savings, NOW and money market deposits increased$630.5 million , or 31.7%, to$2.6 billion atJune 30, 2020 compared toDecember 31, 2019 . Certificates of deposit decreased$10.0 million , or 3.2%, to$298.0 million atJune 30, 2020 compared toDecember 31, 2019 . FHLB advances decreased$95.0 million to$340.0 million atJune 30, 2020 compared toDecember 31, 2019 . Total stockholders' equity increased$5.5 million to$502.6 million atJune 30, 2020 compared to$497.2 million atDecember 31, 2019 . We adopted the CECL Standard onJanuary 1, 2020 , which resulted in a charge to retained earnings and reduction to stockholders' equity of$1.5 million . The increase in stockholders' equity was largely attributable to net income of$20.0 million , partially offset$9.6 million in dividends,$4.6 million in purchases of treasury stock, and other comprehensive loss, net of deferred income taxes, of$0.4 million . During the six months endedJune 30, 2020 , there were 179,620 shares purchased under the 2019 Stock Repurchase Program at a cost of$4.6 million .
Liquidity
Our liquidity management objectives are to ensure the sufficiency of funds available to respond to the needs of depositors and borrowers, and to take advantage of unanticipated opportunities for our growth or earnings enhancement. Liquidity management addresses our ability to meet financial obligations that arise in the normal course of business. Liquidity is primarily needed to meet customer borrowing commitments and deposit withdrawals, either on demand or on contractual maturity, to repay borrowings as they mature, to fund current and planned expenditures and to make new loans and investments as opportunities arise.The Holding Company's principal sources of liquidity included cash and cash equivalents of$2.0 million as ofJune 30, 2020 , and dividend capabilities from the Bank. Cash available for distribution of dividends to our shareholders is primarily derived from dividends paid by the Bank to the Company. For the six months endedJune 30, 2020 , the Bank paid$15.0 million in cash dividends to the Holding Company. Prior regulatory approval is required if the total of all dividends declared by the Bank in any calendar year exceeds the total of the Bank's net income of that year combined with its retained net income of the preceding two years. As ofJune 30, 2020 , the Bank had$65.5 million of retained net income available for dividends to the Holding Company. In the event the Holding Company subsequently expands its current operations, in 58
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addition to dividends from the Bank, it will need to rely on its own earnings, additional capital raised and other borrowings to meet liquidity needs.The Holding Company did not make any capital contributions to the Bank during the six months endedJune 30, 2020 . The Bank's most liquid assets are cash and cash equivalents, securities available for sale and securities held to maturity due within one year. The levels of these assets are dependent on the Bank's operating, financing, lending and investing activities during any given period. Other sources of liquidity include loan and investment securities principal repayments and maturities, lines of credit with other financial institutions including the FHLB and FRB, growth in core deposits and sources of wholesale funding such as brokered deposits. While scheduled loan amortization, maturing securities and short-term investments are a relatively predictable source of funds, deposit flows and loan and mortgage-backed securities prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank adjusts its liquidity levels as appropriate to meet funding needs such as seasonal deposit outflows, loans, and asset and liability management objectives. Historically, the Bank has relied on its deposit base, drawn through its full-service branches that serve its market area and local municipal deposits, as its principal source of funding. The Bank seeks to retain existing deposits and loans and maintain customer relationships by offering quality service and competitive interest rates to its customers, while managing the overall cost of funds needed to finance its strategies. The Bank's Asset/Liability and Funds Management Policy allows for wholesale borrowings of up to 25% of total assets. AtJune 30, 2020 , the Bank had aggregate lines of credit of$418.0 million with unaffiliated correspondent banks to provide short-term credit for liquidity requirements. Of these aggregate lines of credit,$398.0 million is available on an unsecured basis. As ofJune 30, 2020 , the Bank had no overnight borrowings outstanding under these lines. The Bank also has the ability, as a member of the FHLB system, to borrow against unencumbered residential and commercial mortgages owned by the Bank. The Bank also has a master repurchase agreement with the FHLB, which increases its borrowing capacity. As ofJune 30, 2020 , the Bank had no FHLB overnight borrowings outstanding and$340.0 million outstanding in FHLB term borrowings. As ofDecember 31, 2019 , the Bank had$195.0 million FHLB overnight borrowings outstanding and$240.0 million outstanding in FHLB term borrowings. The Bank had$1.7 million and$1.0 million atJune 30, 2020 andDecember 31, 2019 , respectively, of securities sold under agreements to repurchase outstanding with customers and no such agreements outstanding with brokers. In addition, the Bank has approved broker relationships for the purpose of issuing brokered deposits. As ofJune 30, 2020 , the Bank had$66.9 million outstanding in brokered certificates of deposit and$120.4 million outstanding in brokered money market accounts. As ofDecember 31, 2019 , the Bank had$77.3 million outstanding in brokered certificates of deposit and$85.1 million outstanding in brokered money market accounts. Liquidity policies are established by senior management and reviewed and approved by the full Board of Directors at least annually. Management continually monitors the liquidity position and believes that sufficient liquidity exists to meet all of the Company's operating requirements. The Bank's liquidity levels are affected by the use of short-term and wholesale borrowings and the amount of public funds in the deposit mix. Excess short-term liquidity is invested in overnight federal funds sold or in an interest-earning account at the FRB. Capital Resources The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital requirements that involve quantitative measures of the Company's and Bank's assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The Company's and Bank's capital amounts and classifications also are subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total, tier 1 and common equity tier 1 capital to risk-weighted assets and of tier 1 capital to average assets. Tier 1 capital, risk-weighted assets and average assets are as defined by regulation. The required minimums for the Company and Bank are set forth in the tables that follow. The Company and the Bank met all capital adequacy requirements atJune 30, 2020 andDecember 31, 2019 . 59 Table of Contents Under the Basel III Capital Rules the Company and the Bank are subject to the following minimum capital to risk-weighted assets ratios: a) 4.5% based on common equity tier 1 capital ("CET1"); b) 6.0% based on tier 1 capital; and c) 8.0% based on total regulatory capital. A minimum leverage ratio (tier 1 capital as a percentage of total average assets) of 4.0% is also required under the Basel III Capital Rules. The Basel III Capital Rules additionally require institutions to retain a capital conservation buffer, composed of CET1, of 2.5% above these required minimum capital ratio levels. Including the capital conservation buffer, the Company and the Bank effectively are subject to the following minimum capital to risk-weighted assets ratios: a) 7.0% based on CET1; b) 8.5% based on tier 1 capital; and c) 10.5% based on total regulatory capital. The Company and the Bank made the one-time, permanent election to continue to exclude the effects of accumulated other comprehensive income or loss items included in stockholders' equity for the purposes of determining the regulatory capital ratios. As ofJune 30, 2020 , the most recent notification from theFDIC categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized," the Bank must maintain minimum total risk-based, tier 1 risk-based, common equity tier 1 risk-based and tier 1 leverage ratios as set forth in the tables below. Since that notification, there are no conditions or events that management believes have changed the institution's category. In accordance with the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies have adopted, effectiveJanuary 1, 2020 , a final rule whereby financial institutions and financial institution holding companies that have less than$10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, will be eligible to opt into a community bank leverage ratio framework ("qualifying community banking organizations"). Qualifying community banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies' capital rules and will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action statutes. The agencies reserved the authority to disallow the use of the community bank leverage ratio framework by a financial institution or holding company, based on the risk profile of the organization. The CARES Act and implementing rules temporarily reduced the community bank leverage ratio to 8%, to be gradually increased back to 9% by 2022. The CARES Act also provides that, during the same time period, if a qualifying community banking organization falls no more than 1% below the community bank leverage ratio, it will have a two-quarter grace period to satisfy the community bank leverage ratio. The following tables present actual capital levels and minimum required levels for the Company and the Bank under Basel III rules atJune 30, 2020 andDecember 31, 2019 : June 30, 2020 Minimum Capital Minimum To Be Well Minimum Capital Adequacy Requirement with Capitalized Under Prompt Actual Capital Adequacy
Requirement Capital Conservation Buffer Corrective Action Provisions (Dollars in thousands)
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
Common equity tier 1 capital to risk-weighted assets: Consolidated$ 407,665 10.2 %$ 180,033 4.5 %$ 280,051 7.0 % n/a n/a Bank 485,337 12.1 180,022 4.5 280,035 7.0 $ 260,032 6.5 % Total capital to risk-weighted assets: Consolidated 528,077 13.2 320,058 8.0 420,076 10.5 n/a n/a Bank 525,749 13.1 320,040 8.0 420,052 10.5 400,050 10.0 Tier 1 capital to risk-weighted assets: Consolidated 407,665 10.2 240,043 6.0 340,061 8.5 n/a n/a Bank 485,337 12.1 240,030 6.0 340,042 8.5 320,040 8.0 Tier 1 capital to average assets: Consolidated 407,665 7.0 232,386 4.0 n/a n/a n/a n/a Bank 485,337 8.4 232,392 4.0 n/a n/a 290,489 5.0 60 Table of Contents December 31, 2019 Minimum Capital Minimum To Be Well Minimum Capital Adequacy Requirement with Capitalized Under Prompt Actual Capital Adequacy
Requirement Capital Conservation Buffer Corrective Action Provisions (Dollars in thousands)
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
Common equity tier 1 capital to risk-weighted assets: Consolidated$ 397,800 10.2 %$ 176,121 4.5 %$ 273,967 7.0 % n/a n/a Bank 474,056 12.1 176,114 4.5 273,954 7.0 $ 254,386 6.5 % Total capital to risk-weighted assets: Consolidated 510,862 13.1 313,105 8.0 410,950 10.5 n/a n/a Bank 507,118 13.0 313,091 8.0 410,932 10.5 391,363 10.0 Tier 1 capital to risk-weighted assets: Consolidated 397,800 10.2 234,828 6.0 332,674 8.5 n/a n/a Bank 474,056 12.1 234,818 6.0 332,659 8.5 313,091 8.0 Tier 1 capital to average assets: Consolidated 397,800 8.5 187,386 4.0 n/a n/a n/a n/a Bank 474,056 10.1 187,377 4.0 n/a n/a 234,222 5.0 61 Table of Contents
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