Forward-Looking Statements
Certain statements contained herein are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such forward-looking statements may be
identified by reference to a future period or periods, or by the use of
forward-looking terminology, such as "may," "will," "believe," "expect,"
"estimate," "project," "intend," "anticipate," "continue," or similar terms or
variations on those terms, or the negative of those terms. Forward-looking
statements are subject to numerous risks and uncertainties, including, but not
limited to, those set forth in Item 1A of the Company's Annual Report on Form
10-K, as supplemented by its Quarterly Reports on Form 10-Q, and those related
to the economic environment, particularly in the market areas in which the
Company operates, competitive products and pricing, fiscal and monetary policies
of the U.S. Government, changes in accounting policies and practices that may be
adopted by the regulatory agencies and the accounting standards setters, changes
in government regulations affecting financial institutions, including regulatory
fees and capital requirements, changes in prevailing interest rates,
acquisitions and the integration of acquired businesses, credit risk management,
asset-liability management, the financial and securities markets and the
availability of and costs associated with sources of liquidity.
In addition, COVID-19 continues to have an adverse impact on the Company, its
customers and the communities it serves. Given its ongoing and dynamic nature,
it is difficult to predict the full impact of the pandemic on the Company's
business, financial condition or results of operations. The extent of such
impact will depend on future developments, which are highly uncertain, including
when the pandemic will be controlled and abated, and the extent to which the
economy can remain open. As the result of the pandemic and the related adverse
local and national economic consequences, the Company could be subject to any of
the following risks, any of which could have a material, adverse effect on our
business, financial condition, liquidity, and results of operations: the demand
for our products and services may decline, making it difficult to grow assets
and income; if the economy is unable to remain substantially open, and high
levels of unemployment continue for an extended period of time, loan
delinquencies, problem assets, and foreclosures may increase, resulting in
increased charges and reduced income; collateral for loans, especially real
estate, may decline in value, which could cause loan losses to increase; our
allowance for credit losses may increase if borrowers experience financial
difficulties, which will adversely affect our net income; the net worth and
liquidity of loan guarantors may decline, impairing their ability to honor
commitments to us; as the result of the decline in the Federal Reserve Board's
target federal funds rate to near 0%, the yield on our assets may decline to a
greater extent than the decline in our cost of interest-bearing liabilities,
reducing our net interest margin and spread and reducing net income; our wealth
management revenues may decline with continuing market turmoil; we may face the
risk of a goodwill write-down due to stock price decline; and our cyber security
risks are increased as the result of an increase in the number of employees
working remotely.
The Company cautions readers not to place undue reliance on any such
forward-looking statements which speak only as of the date made. The Company
advises readers that the factors listed above could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from any opinions or statements expressed with
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respect to future periods in any current statements. The Company does not have
any obligation to update any forward-looking statements to reflect events or
circumstances after the date of this statement.
Acquisition
SB One Bancorp Acquisition
On July 31, 2020, the Company completed its acquisition of SB One Bancorp ("SB
One"), which added $2.20 billion to total assets, $1.77 billion to total loans
and $1.76 billion to total deposits, and added 18 full-service banking offices
in New Jersey and New York. As part of the acquisition, the addition of SB One
Insurance Agency allows the Company to expand its products offerings to its
customers to include an array of commercial and personal insurance products.
Under the merger agreement, each share of outstanding SB One common stock was
exchanged for 1.357 shares of the Company's common stock. The Company issued
12.8 million shares of common stock from treasury stock, plus cash in lieu of
fractional shares in the acquisition of SB One. The total consideration paid for
the acquisition of SB One was $180.8 million. In connection with the
acquisition, SB One Bank, a wholly owned subsidiary of SB One, was merged with
and into Provident Bank, a wholly owned subsidiary of the Company.
Critical Accounting Policies
The Company considers certain accounting policies to be critically important to
the fair presentation of its financial condition and results of operations.
These policies require management to make complex judgments on matters which by
their nature have elements of uncertainty. The sensitivity of the Company's
consolidated financial statements to these critical accounting policies, and the
assumptions and estimates applied, could have a significant impact on its
financial condition and results of operations. These assumptions, estimates and
judgments made by management can be influenced by a number of factors, including
the general economic environment. The Company has identified the following as
critical accounting policies:
•Adequacy of the allowance for credit losses; and
•Valuation of deferred tax assets
On January 1, 2020, the Company adopted ASU 2016-13, "Measurement of Credit
Losses on Financial Instruments," which replaces the incurred loss methodology
with an expected loss methodology that is referred to as the current expected
credit loss ("CECL") methodology. It also applies to off-balance sheet credit
exposures, including loan commitments and lines of credit. The adoption of the
new standard resulted in the Company recording a $7.9 million increase to the
allowance for credit losses and a $3.2 million liability for off-balance sheet
credit exposures. The adoption of the standard did not result in a change to the
Company's results of operations upon adoption as it was recorded as an $8.3
million cumulative effect adjustment, net of income taxes, to retained earnings.
The allowance for credit losses is a valuation account that reflects
management's evaluation of the current expected credit losses in the loan
portfolio. The Company maintains the allowance for credit losses through
provisions for credit losses that are charged to income. Charge-offs against the
allowance for credit losses are taken on loans where management determines that
the collection of loan principal and interest is unlikely. Recoveries made on
loans that have been charged-off are credited to the allowance for credit
losses.
The calculation of the allowance for credit losses is a critical accounting
policy of the Company. Management estimates the allowance balance using relevant
available information, from internal and external sources, related to past
events, current conditions, and a reasonable and supportable forecast.
Historical credit loss experience for both the Company and peers provides the
basis for the estimation of expected credit losses, where observed credit losses
are converted to probability of default rate ("PDR") curves through the use of
segment-specific loss given default ("LGD") risk factors that convert default
rates to loss severity based on industry-level, observed relationships between
the two variables for each segment, primarily due to the nature of the
underlying collateral. These risk factors were assessed for reasonableness
against the Company's own loss experience and adjusted in certain cases when the
relationship between the Company's historical default and loss severity deviate
from that of the wider industry. The historical PDR curves, together with
corresponding economic conditions, establish a quantitative relationship between
economic conditions and loan performance through an economic cycle.
Using the historical relationship between economic conditions and loan
performance, management's expectation of future loan performance is incorporated
using an externally developed economic forecast. This forecast is applied over a
period that management has determined to be reasonable and supportable. Beyond
the period over which management can develop or source a reasonable and
supportable forecast, the model will revert to long-term average economic
conditions using a straight-line, time-based methodology. The Company's current
forecast period is six quarters, with a four quarter reversion period to
historical average macroeconomic factors. The Company's economic forecast is
approved by the Company's Asset-Liability Committee.
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The allowance for credit losses is measured on a collective (pool) basis, with
both a quantitative and qualitative analysis that is applied on a quarterly
basis, when similar risk characteristics exist. The respective quantitative
allowance for each segment is measured using an econometric, discounted PD/LGD
modeling methodology in which distinct, segment-specific multi-variate
regression models are applied to an external economic forecast. Under the
discounted cash flows methodology, expected credit losses are estimated over the
effective life of the loans by measuring the difference between the net present
value of modeled cash flows and amortized cost basis. Contractual cash flows
over the contractual life of the loans are the basis for modeled cash flows,
adjusted for modeled defaults and expected prepayments and discounted at the
loan-level effective interest rate. The contractual term excludes expected
extensions, renewals, and modifications unless either of the following applies:
management has a reasonable expectation at the reporting date that a troubled
debt restructuring ("TDR") will be executed with an individual borrower or the
extension or renewal options are included in the original or modified contract
at the reporting date and are not unconditionally cancellable by the Company.
After quantitative considerations, management applies additional qualitative
adjustments so that the allowance for credit loss is reflective of the estimate
of lifetime losses that exist in the loan portfolio at the balance sheet date.
Qualitative considerations include limitations inherent in the quantitative
model; portfolio concentrations that may affect loss experience across one or
more components of the portfolio; changes in industry conditions; changes in the
Company's loan review process; changes in the Company's loan policies and
procedures, economic forecast uncertainty and model imprecision.
Portfolio segment is defined as the level at which an entity develops and
documents a systematic methodology to determine its allowance for credit losses.
Management developed segments for estimating loss based on type of borrower and
collateral which is generally based upon federal call report segmentation and
have been combined or sub-segmented as needed to ensure loans of similar risk
profiles are appropriately pooled. As of March 31, 2021, the portfolio and class
segments for the Company's loan portfolio were:
•Mortgage Loans - Residential, Commercial Real Estate, Multi-Family and
Construction
•Commercial Loans - Commercial Owner Occupied and Commercial Non-Owner Occupied
•Consumer Loans - First Lien Home Equity and Other Consumer
The allowance for credit losses on loans individually evaluated for impairment
is based upon loans that have been identified through the Company's normal loan
monitoring process. This process includes the review of delinquent and problem
loans at the Company's Delinquency, Credit, Credit Risk Management and Allowance
Committees; or which may be identified through the Company's loan review
process. Generally, the Company only evaluates loans individually for impairment
if the loan is non-accrual, non-homogeneous and the balance is at least $1.0
million, or if the loan was modified in a TDR.
For all classes of loans deemed collateral-dependent, the Company estimates
expected credit losses based on the fair value of the collateral less any
selling costs. If the loan is not collateral dependent, the allowance for credit
losses related to individually assessed loans is based on discounted expected
cash flows using the loan's initial effective interest rate.
A loan for which the terms have been modified resulting in a concession by the
Company, and for which the borrower is experiencing financial difficulties is
considered to be a TDR. The allowance for credit losses on a TDR is measured
using the same method as all other impaired loans, except that the original
interest rate is used to discount the expected cash flows, not the rate
specified within the restructuring.
As previously noted, in accordance with the CARES Act, the Company elected to
not apply troubled debt restructuring classification to any COVID-19 related
loan modifications that occurred after March 1, 2020 to borrowers who were
current as of December 31, 2019. Accordingly, these modifications were not
classified as TDRs. In addition, for loans modified in response to COVID-19 that
did not meet the above criteria (e.g., current payment status at December 31,
2019), the Company applied the guidance included in an interagency statement
issued by the bank regulatory agencies. This guidance states that loan
modifications performed in light of COVID-19, including loan payment deferrals
that are up to six months in duration, that were granted to borrowers who were
current as of the implementation date of a loan modification program or
modifications granted under government mandated modification programs, are not
TDRs.
Loans that have been or are expected to be granted short-term COVID-19 related
deferrals have decreased from a peak level of $1.31 billion, or 16.8% of loans,
to $132.0 million, or 1.3% of loans as of April 20, 2021. This $132.0 million of
loans consists of $300,000 in a first 90-day deferral period, $46.6 million in a
second 90-day deferral period, and $85.1 million in a third deferral period. Of
the $123.5 million in commercial loans in deferral, $119.0 million (96.4%) are
under principal only deferral and are paying interest. Included in the $132.0
million of total loans in deferral, $40.9 million are secured by hotels, $33.1
million are secured by multi-family properties (of which $20.1 million is
student housing related), $8.6 million are secured by retail properties, $6.5
million are secured by restaurants, and $8.5 million are secured by residential
mortgages, with the balance comprised of diverse commercial loans.
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For loans acquired that have experienced more-than-insignificant deterioration
in credit quality since origination are considered PCD loans. The Company
evaluates acquired loans for deterioration in credit quality based on any of,
but not limited to, the following: (1) non-accrual status; (2) troubled debt
restructured designation; (3) risk ratings of special mention, substandard or
doubtful; (4) watchlist credits; and (5) delinquency status, including loans
that are current on acquisition date, but had been previously delinquent. At the
acquisition date, an estimate of expected credit losses is made for groups of
PCD loans with similar risk characteristics and individual PCD loans without
similar risk characteristics. Subsequent to the acquisition date, the initial
allowance for credit losses on PCD loans will increase or decrease based on
future evaluations, with changes recognized in the provision for credit losses.
Management believes the primary risks inherent in the portfolio are a general
decline in the economy, a decline in real estate market values, rising
unemployment or a protracted period of elevated unemployment, increasing vacancy
rates in commercial investment properties and possible increases in interest
rates in the absence of economic improvement. As the impact of COVID-19
continues to unfold, the effectiveness of medical advances, government programs,
and the resulting impact on consumer behavior and employment conditions will
have a material bearing on future credit conditions. Any one or a combination of
these events may adversely affect borrowers' ability to repay the loans,
resulting in increased delinquencies, credit losses and higher levels of
provisions. Management considers it important to maintain the ratio of the
allowance for credit losses to total loans at an acceptable level given current
and forecasted economic conditions, interest rates and the composition of the
portfolio.
Although management believes that the Company has established and maintained the
allowance for credit losses at appropriate levels, additions may be necessary if
future economic and other conditions differ substantially from the current
operating environment and economic forecast. Management evaluates its estimates
and assumptions on an ongoing basis giving consideration to forecasted economic
factors, historical loss experience and other factors. Such estimates and
assumptions are adjusted when facts and circumstances dictate. In addition to
the ongoing impact of COVID-19, illiquid credit markets, volatile securities
markets, and declines in the housing and commercial real estate markets and the
economy in general may increase the uncertainty inherent in such estimates and
assumptions. As future events and their effects cannot be determined with
precision, actual results could differ significantly from these estimates.
Changes in estimates resulting from continuing changes in the economic
environment will be reflected in the financial statements in future periods. In
addition, various regulatory agencies periodically review the adequacy of the
Company's allowance for credit losses as an integral part of their examination
process. Such agencies may require the Company to recognize additions to the
allowance or additional write-downs based on their judgments about information
available to them at the time of their examination. Although management uses the
best information available, the level of the allowance for credit losses remains
an estimate that is subject to significant judgment and short-term change.
The CECL approach to calculate the allowance for credit losses on loans is
significantly influenced by the composition, characteristics and quality of the
Company's loan portfolio, as well as the prevailing economic conditions and
forecast utilized. Material changes to these and other relevant factors creates
greater volatility to the allowance for credit losses, and therefore, greater
volatility to the Company's reported earnings. For the three months ended March
31, 2021, the changing economic forecasts attributable to COVID-19 and projected
economic recovery led to the Company recording negative provisions for credit
losses and off-balance sheet credit exposures. See Note 4 to the Consolidated
Financial Statements and the Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") for more information on the
allowance for credit losses on loans.
The determination of whether deferred tax assets will be realizable is
predicated on the reversal of existing deferred tax liabilities and estimates of
future taxable income. Such estimates are subject to management's judgment. A
valuation allowance is established when management is unable to conclude that it
is more likely than not that it will realize deferred tax assets based on the
nature and timing of these items. The Company did not require a valuation
allowance at March 31, 2021 or December 31, 2020.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2021 AND DECEMBER 31, 2020
Total assets at March 31, 2021 were $13.13 billion, a $210.7 million increase
from December 31, 2020. The increase in total assets was primarily due to a
$155.2 million increase in cash and cash equivalents and a $97.9 million
increase in total investments.
The loan portfolio decreased $19.4 million from December 31, 2020 to $9.80
billion at March 31, 2021, despite strong originations, as prepayments,
including Paycheck Protection Program ("PPP") loan forgiveness, were elevated.
For the three months ended March 31, 2021, loan originations, including advances
on lines of credit, totaled $770.5 million, compared with $678.3 million for the
same period in 2020. During the quarter ended March 31, 2021, the Company
originated $190.1 million of loans under the current round of the PPP. Total PPP
loans outstanding increased to $486.6 million at March 31, 2021, from
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$473.2 million at December 31, 2020. In addition to net growth in PPP loans, the
Company had net growth in commercial real estate and construction loans during
the three months ended March 31, 2021, with all other loan categories
decreasing. Commercial real estate, commercial and construction loans
represented 83.3% of the loan portfolio at March 31, 2021, compared to 81.8% at
December 31, 2020.
The Company participates in loans originated by other banks, including
participations designated as Shared National Credits ("SNCs"). The Company's
gross commitments and outstanding balances as a participant in SNCs were $198.5
million and $99.7 million, respectively, at March 31, 2021, compared to $225.4
million and $110.6 million, respectively, at December 31, 2020. One SNC
relationship consisting of two individual loans was 90 days or more delinquent
at March 31, 2021. All of these loans are unsecured/non-real estate secured.
These loans are currently not paying in accordance with their restructured
terms. The Company's share of the outstanding balances for this substandard SNC
relationship totaled $10.2 million.
The Company had outstanding junior lien mortgages totaling $156.4 million at
March 31, 2021. Of this total, 14 loans totaling $1.9 million were 90 days or
more delinquent. These loans were allocated a total loss reserve of $51,000.
The following table sets forth information regarding the Company's
non-performing assets as of March 31, 2021 and December 31, 2020 (in thousands):
                                            March 31, 2021       December 31, 2020
          Mortgage loans:
          Residential                      $         7,797             9,315
          Commercial                                33,742            31,982
          Multi-family                                 101                 -
          Construction                               1,392             1,392
          Total mortgage loans                      43,032            42,689
          Commercial loans                          36,042            42,118
          Consumer loans                             3,010             2,283

          Total non-performing loans                82,084            87,090
          Foreclosed assets                          3,554             4,475
          Total non-performing assets      $        85,638            91,565

The following table sets forth information regarding the Company's 60-89 day delinquent loans as of March 31, 2021 and December 31, 2020 (in thousands):


                                        March 31, 2021      December 31, 2020
Mortgage loans:
Residential                            $        6,161             8,852
Commercial                                        520               113
Multi-family                                        -               585
Construction                                     1656                 -
Total mortgage loans                            8,337             9,550
Commercial loans                                  235             1,179
Consumer loans                                    277             4,519
Total 60-89 day delinquent loans       $        8,849            15,248


At March 31, 2021, the Company's allowance for credit losses related to the loan
portfolio was 0.87% of total loans, compared to 1.03% and 1.02% at December 31,
2020 and March 31, 2020, respectively. Excluding PPP loans, the Company's
allowance for credit losses related to the loan portfolio was 0.92% at March 31,
2021. The Company recorded a $15.0 million negative provision for credit losses
related to loans for the three months ended March 31, 2021, compared with a
$14.7 million provision for credit losses for the three months ended March 31,
2020. For the three months ended March 31, 2021, the Company had net charge-offs
of $875,000, compared to net charge-offs of $3.0 million for the same period in
2020. The allowance for loan losses decreased $15.9 million to $85.6 million at
March 31, 2021 from $101.5 million at December 31, 2020. The negative provision
for credit losses for the first quarter of 2021 was primarily the result of an
improved economic forecast and the resultant favorable impact on expected credit
losses, compared with a provision for credit losses for the prior year, which
was based upon a weak economic forecast and more uncertain outlook attributable
to COVID-19. Future credit loss provisions are subject to significant
uncertainty given the undetermined nature of prospective changes in economic
conditions, as the impact of COVID-19 and recovery continues to unfold. The
effectiveness of medical advances, government programs, and the
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resulting impact on consumer behavior and employment conditions will have a
material bearing on future credit conditions and reserve requirements.
At March 31, 2021 and December 31, 2020, the Company held foreclosed assets of
$3.6 million and $4.5 million, respectively. During the three months ended March
31, 2021, there were two additions to foreclosed assets with an aggregate
carrying value of $434,000, four assets sold with an aggregate carrying value of
$580,000 and valuation charges of $775,000. Foreclosed assets at March 31, 2021
consisted of $2.6 million of commercial real estate, $434,000 of residential
real estate and $530,000 of commercial vehicles.
Total non-performing loans were $82.1 million, or 0.84% of total loans at
March 31, 2021, compared to $87.1 million, or 0.89% of total loans at
December 31, 2020.
Cash and cash equivalents were $687.6 million at March 31, 2021, a $155.2
million increase from December 31, 2020, due to net deposit inflows and loan
repayments, largely attributable to government stimulus programs, proceeds from
the forgiveness of PPP loan and a seasonal increase in municipal deposits.
Total investments were $1.71 billion at March 31, 2021, a $97.9 million increase
from December 31, 2020. This increase was primarily due to purchases of
mortgage-backed and municipal securities, partially offset by repayments of
mortgage-backed securities, maturities and calls of certain municipal and agency
bonds, and a decrease in unrealized gains on available for sale debt securities.
Total deposits increased $459.7 million during the three months ended March 31,
2021 to $10.30 billion. Total core deposits, consisting of savings and demand
deposit accounts, increased $590.9 million to $9.33 billion at March 31, 2021,
while total time deposits decreased $131.2 million to $963.0 million at
March 31, 2021. The increase in core deposits was largely attributable to a
$266.5 million increase in interest bearing demand deposits, a $169.9 million
increase in non-interest bearing demand deposits, a $100.2 million increase in
money market deposits and a $54.2 million increase in savings deposits. Core
deposit growth benefited from the deposit of PPP loan proceeds and government
stimulus payments. The decrease in time deposits was largely the result of a
$75.1 million decrease in brokered deposits and a $56.1 million decrease in
retail time deposits. Core deposits represented 90.6% of total deposits at
March 31, 2021, compared to 88.9% at December 31, 2020.
Borrowed funds decreased $235.4 million during the three months ended March 31,
2021, to $940.6 million. The decrease in borrowings for the period was primarily
a function of wholesale funding being partially replaced by the net inflows of
lower-costing deposits. Borrowed funds represented 7.2% of total assets at
March 31, 2021, a decrease from 9.1% at December 31, 2020.
Stockholders' equity increased $27.4 million during the three months ended March
31, 2021, to $1.65 billion, primarily due to net income earned for the period,
partially offset by dividends paid to stockholders, a decrease in unrealized
gains on available for sale debt securities and common stock repurchases. For
the three months ended March 31, 2021, common stock repurchases totaled 44,937
shares at an average cost of $21.42 per share, of which 42,224 shares, at an
average cost of $21.67 per share, were made in connection with withholding to
cover income taxes on the vesting of stock-based compensation. At March 31,
2021, approximately 4.1 million shares remained eligible for repurchase under
the current stock repurchase authorization.
Liquidity and Capital Resources. Liquidity refers to the Company's ability to
generate adequate amounts of cash to meet financial obligations to its
depositors, to fund loans and securities purchases, deposit outflows and
operating expenses. Sources of funds include scheduled amortization of loans,
loan prepayments, scheduled maturities of investments, cash flows from
mortgage-backed securities and the ability to borrow funds from the FHLBNY and
approved broker-dealers.
Cash flows from loan payments and maturing investment securities are fairly
predictable sources of funds. Changes in interest rates, local economic
conditions, COVID-19 and related government response and the competitive
marketplace can influence loan prepayments, prepayments on mortgage-backed
securities and deposit flows. For each of the years ended March 31, 2021 and
2020, loan repayments totaled $773.5 million and $633.2 billion, respectively.
In response to COVID-19, the Company has escalated the monitoring of deposit
behavior, utilization of credit lines, and borrowing capacity with the FHLBNY
and FRBNY, and is enhancing its collateral position with these funding sources.
The Federal Deposit Insurance Corporation and the other federal bank regulatory
agencies issued a final rule that revised the leverage and risk-based capital
requirements and the method for calculating risk-weighted assets to make them
consistent with agreements that were reached by the Basel Committee on Banking
Supervision and certain provisions of the Dodd-Frank Act, that were effective
January 1, 2015. Among other things, the rule established a new common equity
Tier 1 minimum capital requirement (4.5% of risk-weighted assets), adopted a
uniform minimum leverage capital ratio at 4%, increased the minimum
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Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted
assets) and assigned a higher risk weight (150%) to exposures that are more than
90 days past due or are on non-accrual status and to certain commercial real
estate facilities that finance the acquisition, development or construction of
real property. The rule also required unrealized gains and losses on certain
"available-for-sale" securities holdings to be included for purposes of
calculating regulatory capital unless a one-time opt-out was exercised. The
Company exercised the option to exclude unrealized gains and losses from the
calculation of regulatory capital. Additional constraints were also imposed on
the inclusion in regulatory capital of mortgage-servicing assets, deferred tax
assets and minority interests. The rule limits a banking organization's capital
distributions and certain discretionary bonus payments if the banking
organization does not hold a "capital conservation buffer," of 2.5% in addition
to the amount necessary to meet its minimum risk-based capital requirements.
In the first quarter of 2020, U.S. federal regulatory authorities issued an
interim final rule providing banking institutions that adopt CECL during the
2020 calendar year with the option to delay for two years the estimated impact
of CECL on regulatory capital, followed by a three-year transition period to
phase out the aggregate amount of the capital benefit provided during the
initial two-year delay (i.e., a five year transition in total). In connection
with its adoption of CECL on January 1, 2020, the Company elected to utilize the
five-year CECL transition.
At March 31, 2021, the Bank and the Company exceeded all current minimum
regulatory capital requirements as follows:
                                                                                              March 31, 2021
                                                                                  Required with Capital Conservation
                                                     Required                                   Buffer                                     Actual
                                             Amount             Ratio                 Amount                 Ratio               Amount               Ratio
                                                                                          (Dollars in thousands)

Bank:(1)


Tier 1 leverage capital                   $ 502,556               4.00  %       $       502,556                4.00  %       $ 1,112,034                 8.85  %
Common equity Tier 1 risk-based
capital                                     482,030               4.50                  749,825                7.00            1,112,034                10.38
Tier 1 risk-based capital                   642,707               6.00                  910,502                8.50            1,112,034                10.38
Total risk-based capital                    856,943               8.00                1,124,738               10.50            1,197,762                11.18

Company:
Tier 1 leverage capital                   $ 502,770               4.00  %       $       502,770                4.00  %       $ 1,182,231                 9.41  %
Common equity Tier 1 risk-based
capital                                     482,255               4.50                  750,174                7.00            1,169,344                10.91
Tier 1 risk-based capital                   643,006               6.00                  910,926                8.50            1,182,231                11.03
Total risk-based capital                    857,342               8.00                1,125,261               10.50            1,280,245                11.95


(1) Under the FDIC's prompt corrective action provisions, the Bank is considered
well capitalized if it has: a leverage (Tier 1) capital ratio of at least 5.00%;
a common equity Tier 1 risk-based capital ratio of 6.50%; a Tier 1 risk-based
capital ratio of at least 8.00%; and a total risk-based capital ratio of at
least 10.00%.
COMPARISON OF OPERATING RESULTS FOR THREE MONTHS ENDED MARCH 31, 2021 AND 2020
General. The Company reported net income of $48.6 million, or $0.63 per basic
and diluted share, for the three months ended March 31, 2021, compared to net
income of $14.9 million, or $0.23 per basic and diluted share, for the three
months ended March 31, 2020.
Earnings for the quarter were aided by an improved economic outlook and
resulting lower allowance for credit loss requirements, as well as additional
earnings attributable to the July 31, 2020 acquisition of SB One Bancorp ("SB
One"). For the three months ended March 31, 2021, the Company recorded a
negative provision for credit losses on loans of $15.0 million and a negative
provision for off-balance sheet credit exposures of $875,000.
Net Interest Income. Total net interest income increased $18.0 million to $90.0
million for the quarter ended March 31, 2021, from $72.0 million for the quarter
ended March 31, 2020. For the three months ended March 31, 2021, interest income
increased $12.4 million to $100.5 million, from $88.2 million for the three
months ended March 31, 2020. Interest expense decreased $5.6 million to $10.5
million for the quarter ended March 31, 2021, from $16.1 million for the quarter
ended March 31, 2020. The increase in net interest income was favorably impacted
by the net earning assets acquired from SB One and the accelerated recognition
of fees related to PPP loan forgiveness, partially offset by period-over-period
compression in the net interest margin. The degree of net interest margin
compression was tempered by growth in both average loans outstanding and
lower-costing average interest-bearing and non-interest bearing core deposits.
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The net interest margin decreased 10 basis points to 3.10% for the quarter ended
March 31, 2021, compared to 3.20% for the quarter ended March 31, 2020. The
weighted average yield on interest-earning assets decreased 45 basis points to
3.47% for the quarter ended March 31, 2021, compared to 3.92% for the quarter
ended March 31, 2020, while the weighted average cost of interest bearing
liabilities decreased 46 basis points for the quarter ended March 31, 2021 to
0.49%, compared to the first quarter of 2020. The average cost of interest
bearing deposits for the quarter ended March 31, 2021 was 0.39%, compared to
0.78% for the same period last year. Average non-interest bearing demand
deposits totaled $2.38 billion for the quarter ended March 31, 2021, compared to
$1.50 billion for the quarter ended March 31, 2020. The average cost of all
deposits, including non-interest bearing deposits, was 0.30% for the quarter
ended March 31, 2021, compared with 0.62% for the quarter ended March 31, 2020.
The average cost of borrowed funds for the quarter ended March 31, 2021 was
1.12%, compared to 1.80% for the same period last year.
Interest income on loans secured by real estate increased $7.6 million to $62.0
million for the three months ended March 31, 2021, from $54.4 million for the
three months ended March 31, 2020. Commercial loan interest income increased
$7.5 million to $26.1 million for the three months ended March 31, 2021, from
$18.7 million for the three months ended March 31, 2020. Consumer loan interest
income decreased $680,000 to $3.5 million for the three months ended March 31,
2021, from $4.2 million for the three months ended March 31, 2020. For the three
months ended March 31, 2021, the average balance of total loans increased $2.47
billion to $9.72 billion, from $7.26 billion for the same period in 2020,
primarily due to total loans acquired from SB One and organic growth, including
PPP loans. The average yield on total loans for the three months ended March 31,
2021 decreased 45 basis points to 3.78%, from 4.23% for the same period in 2020.
Interest income on held to maturity debt securities decreased $156,000 to $2.8
million for the quarter ended March 31, 2021, compared to the same period last
year. Average held to maturity debt securities increased $1.3 million to $450.4
million for the quarter ended March 31, 2021, from $449.1 million for the same
period last year.
Interest income on available for sale debt securities and FHLBNY stock decreased
$1.5 million to $5.6 million for the quarter ended March 31, 2021, from $7.1
million for the quarter ended March 31, 2020. The average balance of available
for sale debt securities and FHLBNY stock increased $125.6 million to $1.19
billion for the three months ended March 31, 2021, compared to the same period
in 2020.
The average yield on total securities decreased to 1.87% for the three months
ended March 31, 2021, compared with 2.57% for the same period in 2020.
Interest expense on deposit accounts decreased $3.5 million to $7.4 million for
the quarter ended March 31, 2021, compared with $11.0 million for the quarter
ended March 31, 2020. The average cost of interest bearing deposits decreased to
0.39% for the three months ended March 31, 2021, from 0.78% for the three months
ended March 31, 2020, respectively. The average balance of interest bearing core
deposits for the quarter ended March 31, 2021 increased $1.79 billion to $6.69
billion, from $4.89 billion for the same period in 2020. The increase in average
core deposits for the three months ended March 31, 2021 was largely due to
deposits acquired from SB One, combined with organic growth, activity associated
with PPP loans and government stimulus payments. Average time deposit account
balances increased $271.9 million, to $1.04 billion for the quarter ended
March 31, 2021, from $771.2 million for the quarter ended March 31, 2020,
largely due to time deposits associated with the SB One acquisition.
Interest expense on borrowed funds decreased $2.4 million to $2.8 million for
the quarter ended March 31, 2021, from $5.2 million for the quarter ended
March 31, 2020. The average cost of borrowings decreased to 1.12% for the three
months ended March 31, 2021, from 1.80% for the three months ended March 31,
2020. Average borrowings decreased $142.5 million to $1.02 billion for the
quarter ended March 31, 2021, from $1.16 billion for the quarter ended March 31,
2020.
Provision for Credit Losses. Provisions for credit losses are charged to
operations in order to maintain the allowance for credit losses at a level
management considers necessary to absorb projected credit losses that may arise
over the expected term of each loan in the portfolio. In determining the level
of the allowance for credit losses, management estimates the allowance balance
using relevant available information from internal and external sources relating
to past events, current conditions and a reasonable and supportable forecast.
The amount of the allowance is based on estimates, and the ultimate losses may
vary from such estimates as more information becomes available or later events
change. Management assesses the adequacy of the allowance for credit losses on a
quarterly basis and makes provisions for credit losses, if necessary, in order
to maintain the valuation of the allowance.
The Company recorded a $15.0 million negative provision for credit losses
related to loans for the three months ended March 31, 2021, compared with
provisions of $14.7 million for the three months ended March 31, 2020. The
negative provision for credit losses for the first quarter of 2021 was primarily
the result of an improved economic forecast and the resultant favorable impact
on expected credit losses, compared with a provision for credit losses for the
prior year, which was based upon a weak
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economic forecast and a more uncertain outlook attributable to COVID-19. Future
credit loss provisions are subject to significant uncertainty given the
undetermined nature of prospective changes in economic conditions, as the impact
of COVID-19 and recovery continues to unfold. The effectiveness of medical
advances, government programs, and the resulting impact on consumer behavior and
employment conditions will have a material bearing on future credit conditions
and reserve requirements.
Non-Interest Income. Non-interest income totaled $21.6 million for the quarter
ended March 31, 2021, an increase of $4.6 million, compared to the same period
in 2020. Insurance agency income, a new fee revenue source for the Company
resulting from the SB One acquisition, totaled $2.7 million for the three months
ended March 31, 2021. Income from Bank-owned life insurance ("BOLI") increased
$1.8 million to $2.6 million for the three months ended March 31, 2021, compared
to the same period in 2020, primarily due to an increase in benefit claims,
increased equity valuations and additional income related to the BOLI assets
acquired from SB One. Wealth management income increased $883,000 to $7.1
million for the three months ended March 31, 2021. The increase was largely a
function of an increase in the market value of assets under management as a
result of strong equity market performance and solid new business results, and
an increase in the level of managed mutual funds. Also, fee income increased
$663,000 to $7.2 million for the three months ended March 31, 2021, compared to
the same period in 2020, largely due to an increase in ATM and debit card
revenue, a portion of which is attributable to the addition of the SB One
customer base, and increases in commercial loan prepayment fees and late
charges, partially offset by a decrease in deposit-related fees. Other income
decreased $1.6 million to $1.8 million for the three months ended March 31,
2021, compared to the quarter ended March 31, 2020, primarily due to a $1.8
million decrease in net fees on loan-level interest rate swap transactions,
partially offset by a $455,000 increase in net gains on the sale of loans.
Non-Interest Expense. For the three months ended March 31, 2021, non-interest
expense totaled $61.9 million, an increase of $7.7 million, compared to the
three months ended March 31, 2020. Compensation and benefits expense increased
$4.1 million to $35.3 million for the three months ended March 31, 2021,
compared to $31.2 million for the same period in 2020. The increase was
principally due to increases in salary expense, the accrual for incentive
compensation and employee benefits, each associated with the addition of former
SB One employees, as well as company-wide annual merit increases, partially
offset by a decrease in severance expense. Net occupancy expense increased $3.1
million primarily due to increases in rent, depreciation, utility and
maintenance expenses related to the facilities acquired from SB One, along with
an increase in snow removal costs. FDIC insurance increased $1.8 million due to
an increase in the insurance assessment rate, an increase in total assets
subject to assessment, including assets acquired from SB One, and the receipt of
the small bank assessment credit in the prior year quarter that was not
available in the current quarter. Other operating expenses increased $937,000 to
$10.1 million for the three months ended March 31, 2021, compared to $9.2
million for the same period in 2020. The increase in other operating expense was
largely due to a valuation adjustment on foreclosed assets and an increase in
debit card maintenance expense, partially offset by non-recurring merger related
and COVID-19 expenses incurred in the prior year quarter. Also, the amortization
of intangibles increased $228,000 for the three months ended March 31, 2021,
compared with the same period in 2020, mainly due to increases in the
amortization of the customer relationship and core-deposit intangibles
attributable to the acquisition of SB One. Partially offsetting these increases,
credit loss expense for off-balance sheet credit exposures decreased $1.9
million for the three months ended March 31, 2021, compared to the same period
in 2020. The decrease was primarily a function of an improved economic forecast
resulting in a decline in projected loss factors, partially offset by an
increase in the availability of committed lines of credit due to below average
utilization.
Income Tax Expense. For the three months ended March 31, 2021, income tax
expense was $16.2 million with an effective tax rate of 25.0%, compared with
income tax expense of $5.3 million with an effective tax rate of 26.0% for the
three months ended March 31, 2020. The increase in tax expense for the three
months ended March 31, 2021, compared with the same period last year was largely
the result of an increase in taxable income, while the decrease in the effective
tax rate for the three months ended March 31, 2021 compared with the same period
in 2020 was primarily due to a discrete item related to the vesting of stock
awards at a market value below the fair value used for expense recognition which
resulted in a higher effective tax rate in the prior year, partially offset by
increased projections of taxable income for the remainder of 2021.

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