UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-34096
BRIDGE BANCORP, INC.
(Exact name of registrant as specified in its charter)
NEW YORK |
11-2934195 |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification Number) |
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2200 MONTAUK HIGHWAY, BRIDGEHAMPTON, NEW YORK |
11932 |
(Address of principal executive offices) |
(Zip Code) |
Registrant's telephone number, including area code: (631) 537-1000
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ |
Accelerated filer ☒ |
Non-accelerated filer ☐ |
Smaller reporting company ☐ |
|
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 19,759,711 shares of common stock outstanding as of October 31, 2020.
BRIDGE BANCORP, INC.
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PART I |
FINANCIAL INFORMATION |
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3 |
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Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 |
3 |
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Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2020 and 2019 |
4 |
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5 |
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6 |
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Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 |
7 |
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8 |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
40 |
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61 |
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63 |
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64 |
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64 |
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64 |
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64 |
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64 |
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65 |
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66 |
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66 |
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2
Item 1. Financial Statements
BRIDGE BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
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September 30, |
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December 31, |
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2020 |
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2019 |
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(unaudited) |
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Assets |
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Cash and due from banks |
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$ |
94,892 |
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$ |
77,693 |
Interest-bearing deposits with banks |
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615,575 |
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39,501 |
Total cash and cash equivalents |
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710,467 |
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117,194 |
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Securities available for sale, at fair value |
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466,081 |
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638,291 |
Securities held to maturity (fair value of $104,911 and $135,027, respectively) |
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100,934 |
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133,638 |
Total securities |
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567,015 |
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771,929 |
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Securities, restricted |
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23,362 |
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32,879 |
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Loans held for sale |
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10,000 |
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12,643 |
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Loans held for investment |
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4,639,473 |
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3,680,285 |
Allowance for credit losses |
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(43,474) |
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(32,786) |
Loans, net |
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4,595,999 |
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3,647,499 |
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Premises and equipment, net |
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34,341 |
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34,062 |
Operating lease right-of-use assets |
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44,642 |
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43,450 |
Accrued interest receivable |
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15,823 |
|
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10,908 |
Goodwill |
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105,950 |
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105,950 |
Other intangible assets |
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3,448 |
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3,677 |
Prepaid pension |
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12,914 |
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10,988 |
Bank owned life insurance |
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93,352 |
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91,942 |
Other assets |
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105,064 |
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|
38,399 |
Total assets |
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$ |
6,322,377 |
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$ |
4,921,520 |
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Liabilities |
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Demand deposits |
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$ |
2,246,305 |
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$ |
1,518,958 |
Savings, NOW and money market deposits |
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2,832,362 |
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1,987,712 |
Certificates of deposit of $100,000 or more |
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213,110 |
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214,093 |
Other time deposits |
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77,292 |
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93,884 |
Total deposits |
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5,369,069 |
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3,814,647 |
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Repurchase agreements |
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1,353 |
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|
999 |
Federal Home Loan Bank ("FHLB") advances |
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215,000 |
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435,000 |
Subordinated debentures, net |
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79,024 |
|
|
78,920 |
Operating lease liabilities |
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47,383 |
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45,977 |
Other liabilities and accrued expenses |
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98,327 |
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48,823 |
Total liabilities |
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5,810,156 |
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4,424,366 |
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Commitments and contingencies |
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— |
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— |
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Stockholders’ equity |
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Preferred stock, par value $.01 per share (2,000,000 shares authorized; none issued) |
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— |
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— |
Common stock, par value $.01 per share (40,000,000 shares authorized; 19,935,517 and 19,898,022 shares issued, respectively; and 19,748,837 and 19,836,797 shares outstanding, respectively) |
|
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199 |
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|
199 |
Surplus |
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357,704 |
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356,436 |
Retained earnings |
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167,899 |
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150,703 |
Treasury stock at cost, 186,680 and 61,225 shares, respectively |
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(4,832) |
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(1,843) |
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520,970 |
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505,495 |
Accumulated other comprehensive loss, net of income taxes |
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(8,749) |
|
|
(8,341) |
Total stockholders’ equity |
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512,221 |
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|
497,154 |
Total liabilities and stockholders’ equity |
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$ |
6,322,377 |
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$ |
4,921,520 |
See accompanying condensed notes to the Unaudited Consolidated Financial Statements.
3
BRIDGE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income (unaudited)
(In thousands, except per share amounts)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2020 |
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2019 |
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2020 |
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2019 |
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Interest income: |
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Loans (including fee income) |
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$ |
43,058 |
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$ |
41,005 |
|
$ |
124,812 |
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$ |
118,495 |
Mortgage-backed securities, CMOs and other asset-backed securities |
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2,003 |
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3,775 |
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7,613 |
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13,007 |
U.S. GSE securities |
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1 |
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56 |
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365 |
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414 |
State and municipal obligations |
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443 |
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|
507 |
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1,433 |
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1,711 |
Corporate bonds |
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244 |
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296 |
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854 |
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951 |
Deposits with banks |
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135 |
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342 |
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514 |
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1,485 |
Other interest and dividend income |
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412 |
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373 |
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1,157 |
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1,158 |
Total interest income |
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46,296 |
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46,354 |
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136,748 |
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137,221 |
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Interest expense: |
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Savings, NOW and money market deposits |
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2,092 |
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5,816 |
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8,632 |
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19,182 |
Certificates of deposit of $100,000 or more |
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727 |
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1,139 |
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2,676 |
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3,201 |
Other time deposits |
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228 |
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300 |
|
|
1,004 |
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|
1,150 |
Federal funds purchased and repurchase agreements |
|
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— |
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70 |
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|
79 |
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|
273 |
FHLB advances |
|
|
1,407 |
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1,179 |
|
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3,163 |
|
|
3,455 |
Subordinated debentures |
|
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1,135 |
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1,135 |
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|
3,405 |
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3,405 |
Total interest expense |
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5,589 |
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9,639 |
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18,959 |
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30,666 |
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Net interest income |
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40,707 |
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|
36,715 |
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|
117,789 |
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|
106,555 |
Provision for credit losses |
|
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1,500 |
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|
1,000 |
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|
11,000 |
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|
5,100 |
Net interest income after provision for credit losses |
|
|
39,207 |
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35,715 |
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106,789 |
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101,455 |
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Non-interest income: |
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Service charges and other fees |
|
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2,215 |
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2,588 |
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6,604 |
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|
7,572 |
Net securities gains |
|
|
3,540 |
|
|
— |
|
|
3,525 |
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|
201 |
Loss on termination of swaps |
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(3,403) |
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— |
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(3,403) |
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— |
Change in fair value of loans held for sale |
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— |
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|
— |
|
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(2,643) |
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|
— |
Title fees |
|
|
695 |
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|
508 |
|
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1,409 |
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|
1,149 |
Gain on sale of Small Business Administration ("SBA") loans |
|
|
2,191 |
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|
601 |
|
|
3,031 |
|
|
1,662 |
Bank owned life insurance |
|
|
543 |
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|
561 |
|
|
1,638 |
|
|
1,670 |
Loan swap fees |
|
|
554 |
|
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1,557 |
|
|
3,105 |
|
|
3,200 |
Other |
|
|
455 |
|
|
429 |
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|
993 |
|
|
1,507 |
Total non-interest income |
|
|
6,790 |
|
|
6,244 |
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|
14,259 |
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|
16,961 |
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|
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Non-interest expense: |
|
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|
|
|
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|
|
|
|
|
|
Salaries and employee benefits |
|
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16,406 |
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|
14,294 |
|
|
45,874 |
|
|
41,233 |
Occupancy and equipment |
|
|
3,599 |
|
|
3,490 |
|
|
10,618 |
|
|
10,581 |
Technology and communications |
|
|
2,487 |
|
|
2,129 |
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|
7,074 |
|
|
5,787 |
Marketing and advertising |
|
|
449 |
|
|
1,282 |
|
|
2,240 |
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|
3,729 |
Professional services |
|
|
1,356 |
|
|
1,055 |
|
|
3,351 |
|
|
2,615 |
FDIC assessments |
|
|
678 |
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18 |
|
|
1,159 |
|
|
652 |
Merger expenses |
|
|
2,352 |
|
|
— |
|
|
2,352 |
|
|
— |
Amortization of other intangible assets |
|
|
149 |
|
|
182 |
|
|
507 |
|
|
605 |
Other |
|
|
1,461 |
|
|
1,754 |
|
|
5,004 |
|
|
5,605 |
Total non-interest expense |
|
|
28,937 |
|
|
24,204 |
|
|
78,179 |
|
|
70,807 |
|
|
|
|
|
|
|
|
|
|
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|
Income before income taxes |
|
|
17,060 |
|
|
17,755 |
|
|
42,869 |
|
|
47,609 |
Income tax expense |
|
|
3,999 |
|
|
3,852 |
|
|
9,804 |
|
|
10,126 |
Net income |
|
$ |
13,061 |
|
$ |
13,903 |
|
$ |
33,065 |
|
$ |
37,483 |
Basic earnings per share |
|
$ |
0.66 |
|
$ |
0.70 |
|
$ |
1.66 |
|
$ |
1.88 |
Diluted earnings per share |
|
$ |
0.66 |
|
$ |
0.70 |
|
$ |
1.66 |
|
$ |
1.88 |
See accompanying condensed notes to the Unaudited Consolidated Financial Statements.
4
BRIDGE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (unaudited)
(In thousands)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2020 |
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2019 |
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2020 |
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2019 |
||||
Net income |
|
$ |
13,061 |
|
$ |
13,903 |
|
$ |
33,065 |
|
$ |
37,483 |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized net (losses) gains on securities available for sale, net of reclassifications and deferred income taxes |
|
|
(3,166) |
|
|
1,578 |
|
|
4,006 |
|
|
11,367 |
Adjustment to pension liability, net of reclassifications and deferred income taxes |
|
|
97 |
|
|
91 |
|
|
292 |
|
|
272 |
Unrealized gains (losses) on cash flow hedges, net of reclassifications and deferred income taxes |
|
|
3,082 |
|
|
(700) |
|
|
(4,706) |
|
|
(4,755) |
Total other comprehensive income (loss) |
|
|
13 |
|
|
969 |
|
|
(408) |
|
|
6,884 |
Comprehensive income |
|
$ |
13,074 |
|
$ |
14,872 |
|
$ |
32,657 |
|
$ |
44,367 |
See accompanying condensed notes to the Unaudited Consolidated Financial Statements.
5
BRIDGE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (unaudited)
(In thousands, except per share amounts)
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Three Months Ended September 30, 2020 |
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Accumulated Other |
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Common |
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Retained |
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Treasury |
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Comprehensive |
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Stock |
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Surplus |
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Earnings |
|
Stock |
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Loss |
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Total |
||||||
Balance at June 30, 2020 |
|
$ |
199 |
|
$ |
356,510 |
|
$ |
159,635 |
|
$ |
(4,961) |
|
$ |
(8,762) |
|
$ |
502,621 |
Net income |
|
|
|
|
|
|
|
|
13,061 |
|
|
|
|
|
|
|
|
13,061 |
Shares issued under the dividend reinvestment plan (11,423 shares) |
|
|
|
|
|
261 |
|
|
|
|
|
|
|
|
|
|
|
261 |
Stock awards granted and distributed (5,000 shares) |
|
|
|
|
|
(169) |
|
|
|
|
|
169 |
|
|
|
|
|
— |
Stock awards forfeited (600 shares) |
|
|
|
|
|
20 |
|
|
|
|
|
(20) |
|
|
|
|
|
— |
Repurchase of surrendered stock from vesting of stock plans (1,020 shares) |
|
|
|
|
|
|
|
|
|
|
|
(20) |
|
|
|
|
|
(20) |
Share based compensation expense |
|
|
|
|
|
1,082 |
|
|
|
|
|
|
|
|
|
|
|
1,082 |
Cash dividend declared, $0.24 per share |
|
|
|
|
|
|
|
|
(4,797) |
|
|
|
|
|
|
|
|
(4,797) |
Other comprehensive income, net of deferred income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
13 |
Balance at September 30, 2020 |
|
$ |
199 |
|
$ |
357,704 |
|
$ |
167,899 |
|
$ |
(4,832) |
|
$ |
(8,749) |
|
$ |
512,221 |
See accompanying condensed notes to the Unaudited Consolidated Financial Statements.
6
BRIDGE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
Nine Months Ended |
||||
|
|
September 30, |
||||
|
|
2020 |
|
2019 |
||
Cash flows from operating activities: |
|
|
|
|
|
|
Net income |
|
$ |
33,065 |
|
$ |
37,483 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
Provision for credit losses |
|
|
11,000 |
|
|
5,100 |
Depreciation and amortization of premises and equipment |
|
|
3,141 |
|
|
3,148 |
Net (accretion) and other amortization |
|
|
(772) |
|
|
(1,044) |
Net amortization on securities |
|
|
2,543 |
|
|
2,716 |
Increase in cash surrender value of bank owned life insurance |
|
|
(1,638) |
|
|
(1,670) |
Amortization of other intangible assets |
|
|
507 |
|
|
605 |
Share based compensation expense |
|
|
3,086 |
|
|
2,755 |
Net securities gains |
|
|
(3,525) |
|
|
(201) |
Loss on termination of swaps |
|
|
3,403 |
|
|
— |
Change in fair value of loans held for sale |
|
|
2,643 |
|
|
— |
Increase in accrued interest receivable |
|
|
(4,915) |
|
|
(461) |
SBA loans originated for sale |
|
|
(36,228) |
|
|
(23,012) |
Proceeds from sale of the guaranteed portion of SBA loans |
|
|
40,016 |
|
|
25,108 |
Gain on sale of the guaranteed portion of SBA loans |
|
|
(3,031) |
|
|
(1,662) |
(Increase) decrease in other assets |
|
|
(26,545) |
|
|
3,149 |
Decrease in accrued expenses and other liabilities |
|
|
(1,047) |
|
|
(4,551) |
Net cash provided by operating activities |
|
|
21,703 |
|
|
47,463 |
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
Purchases of securities available for sale |
|
|
(334,028) |
|
|
(64,373) |
Purchases of securities, restricted |
|
|
(43,313) |
|
|
(63,771) |
Proceeds from sales of securities available for sale |
|
|
152,981 |
|
|
46,478 |
Redemption of securities, restricted |
|
|
52,830 |
|
|
59,330 |
Maturities, calls and principal payments of securities available for sale |
|
|
360,225 |
|
|
102,141 |
Maturities, calls and principal payments of securities held to maturity |
|
|
32,380 |
|
|
19,900 |
Net increase in loans |
|
|
(961,658) |
|
|
(249,274) |
Proceeds from sales of other real estate owned ("OREO"), net |
|
|
— |
|
|
297 |
Purchase of premises and equipment |
|
|
(3,421) |
|
|
(1,684) |
Net cash used in investing activities |
|
|
(744,004) |
|
|
(150,956) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
Net increase (decrease) in deposits |
|
|
1,554,423 |
|
|
(143,093) |
Net (decrease) increase in FHLB advances |
|
|
(220,000) |
|
|
96,568 |
Net increase in repurchase agreements |
|
|
354 |
|
|
417 |
Net proceeds from issuance of common stock |
|
|
876 |
|
|
765 |
Purchase of treasury stock |
|
|
(4,633) |
|
|
(625) |
Repurchase of surrendered stock from vesting of stock plans |
|
|
(1,050) |
|
|
(877) |
Cash dividends paid |
|
|
(14,396) |
|
|
(13,812) |
Net cash provided by (used in) financing activities |
|
|
1,315,574 |
|
|
(60,657) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
593,273 |
|
|
(164,150) |
Cash and cash equivalents at beginning of period |
|
|
117,194 |
|
|
295,368 |
Cash and cash equivalents at end of period |
|
$ |
710,467 |
|
$ |
131,218 |
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
Interest |
|
$ |
20,099 |
|
$ |
31,805 |
Income taxes |
|
$ |
8,613 |
|
$ |
5,783 |
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
Transfers from portfolio loans to loans held for sale |
|
$ |
— |
|
$ |
12,643 |
See accompanying condensed notes to the Unaudited Consolidated Financial Statements.
7
BRIDGE BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
Bridge Bancorp, Inc. (the “Holding Company”), is a bank holding company incorporated under the laws of the State of New York. The Holding Company’s business consists of the operations of its wholly-owned subsidiary, BNB Bank (the “Bank”). The Bank’s operations include its real estate investment trust subsidiary, Bridgehampton Community, Inc.; a financial title insurance subsidiary, Bridge Abstract LLC (“Bridge Abstract”); and an investment services subsidiary, Bridge Financial Services, Inc. (“Bridge Financial Services”).
The unaudited consolidated financial statements presented in this Quarterly Report on Form 10-Q include the collective results of the Holding Company and its wholly-owned subsidiary, the Bank, which are collectively herein referred to as “we”, “us”, “our” and the “Company.”
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The unaudited consolidated financial statements included herein reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. In preparing the interim financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reported periods. Such estimates are subject to change in the future as additional information becomes available or previously existing circumstances are modified. Actual future results could differ significantly from those estimates. The annualized results of operations for the nine months ended September 30, 2020 are not necessarily indicative of the results of operations that may be expected for the entire fiscal year. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). 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. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
COVID-19 Risks
In December 2019, a novel coronavirus (“COVID-19”) was reported in China, and, in March 2020, the World Health Organization declared COVID-19 a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments, including New York, ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment.
The Company’s unaudited consolidated financial statements reflect the impact of COVID-19 on the assumptions and estimates used. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on the Company’s business. The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Company may be subject to the following risks, any of which could have a material, adverse effect on its business, financial condition, liquidity, and results of operations:
● | demand for the Company’s products and services may decline, making it difficult to grow assets and income; |
8
● | if the economy is unable to substantially reopen or remain 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; |
● | the Company’s allowance for credit losses (“ACL”) may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect the Company’s net income; |
● | the Company may recognize impairment of its goodwill; |
● | the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to the Company; |
● | as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on the Company’s assets may decline to a greater extent than the decline in its cost of interest-bearing liabilities, reducing net interest margin and spread and reducing net income; |
● | a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of the Company’s quarterly cash dividend; |
● | the Company’s cyber security risks are increased as the result of an increase in the number of employees working remotely; and |
● | the Company relies on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on the Company. |
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)
Effective for periods after December 31, 2019, the Company adopted Accounting Standards Update (“ASU”) No 2016-13, Financial Instruments – Credit Losses (Topic 326), which replaced the long-standing incurred loss model used in calculating the allowance for loan and lease losses with a more forward-looking, current expected credit loss model (“CECL” or the “CECL Standard”). Furthermore, the CECL Standard requires financial institutions to measure all expected credit losses for in-scope financial assets held at amortized cost at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts, including estimates of prepayments. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. Accordingly, financial institutions will now leverage forward-looking information to better inform their credit loss estimates. For the Company, this standard applies to loans held for investment, unfunded commitments, and securities held to maturity. In addition, the CECL Standard made changes to the accounting for available for sale debt securities. Credit losses on available for sale debt securities under the CECL Standard should be measured in a manner similar to legacy GAAP. However, the amendments in the CECL Standard require that credit losses be presented as an allowance for credit losses rather than as a write-down. The CECL Standard approach is an improvement because an entity is able to record reversals of credit losses (in situations in which the estimate of credit losses declines) in current period net income, which in turn should align the income statement recognition of credit losses with the reporting period in which changes occur. Although the Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act) provided the option to delay the adoption of the CECL Standard until the earlier of December 31, 2020 or the termination of the current national emergency declaration related to the COVID-19 outbreak, the Company adopted the CECL Standard in the first quarter of 2020 as previously planned using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. The adoption of the CECL Standard resulted in an initial increase of $1.6 million to the allowance for credit losses and $0.5 million to the reserve for unfunded commitments. The after-tax cumulative-effect adjustment of $1.5 million was recorded in retained earnings as of January 1, 2020. Based on the credit quality of the Company's securities portfolio, there was no initial adjustment to retained earnings for credit losses associated with debt securities held to maturity.
Results for reporting periods beginning after January 1, 2020 are presented under the CECL Standard while prior period amounts will continue to be reported in accordance with previously applicable GAAP.
9
2. EARNINGS PER SHARE
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 260-10-45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”). The restricted stock awards (“RSAs”) and certain restricted stock units (“RSUs”) granted by the Company contain non-forfeitable rights to dividends and therefore are considered participating securities. The two-class method for calculating basic EPS excludes dividends paid to participating securities and any undistributed earnings attributable to participating securities.
The following table presents the computation of EPS for the three and nine months ended September 30, 2020 and 2019:
There were 180,020 stock options outstanding at September 30, 2020 that were not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2020 because the options' exercise prices were greater than the average market price of common stock and were, therefore, antidilutive. There were 110,660 stock options outstanding at September 30, 2019 that were not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2019 because the options' exercise prices were greater than the average market price of common stock and were, therefore, antidilutive.
There were 46,625 and zero RSUs that were antidilutive for the three months ended September 30, 2020 and 2019, respectively. There were 46,625 and 9,190 RSUs that were antidilutive for the nine months ended September 30, 2020 and 2019, respectively.
3. STOCK-BASED COMPENSATION PLANS
In May 2019, the Company’s shareholders approved the Bridge Bancorp, Inc. 2019 Equity Incentive Plan (the “2019 Equity Incentive Plan”), which provides for the grant of stock-based and other incentive awards to officers, employees and directors of the Company. The 2019 Equity Incentive Plan superseded the Bridge Bancorp, Inc. 2012 Stock-Based Incentive Plan (the “2012 Equity Incentive Plan”). The 2012 Equity Incentive Plan superseded the 2006 Stock-Based Incentive Plan. The maximum number of shares of stock, in the aggregate, that may be granted under the 2019 Equity Incentive Plan as stock options, restricted stock, or restricted stock units is 370,000 plus the number of shares of stock which have been reserved but not issued under the 2012 Equity Incentive Plan, and any awards that are forfeited under the 2012 Equity Incentive Plan after the effective date of the 2019 Equity Incentive Plan. No further grants will be made under the 2012 Equity Incentive Plan. Currently outstanding grants under the 2012 Equity Incentive Plan will not be affected.
The number of shares of common stock of Bridge Bancorp, Inc. available for stock-based awards under the 2019 Equity Incentive Plan is 370,000 plus 162,738 shares that were remaining under the 2012 Equity Incentive Plan. At September 30, 2020, 351,856 shares remain available for issuance, including shares that may be granted in the form of stock options, RSAs, or RSUs.
10
The Compensation Committee of the Board of Directors determines awards under the 2019 Equity Incentive Plan. The Company accounts for the 2019 Equity Incentive Plan under FASB ASC No. 718.
Stock Options
Stock options may be either incentive stock options, which bestow certain tax benefits on the optionee, or non-qualified stock options, not qualifying for such benefits. All options have an exercise price that is not less than the market value of the Company's common stock on the date of the grant.
The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option-pricing model. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of the Company's common stock as of the exercise or reporting date.
During the nine months ended September 30, 2020 and 2019, in accordance with the Long Term Incentive Plan (“LTI Plan”) for Named Executive Officers (“NEOs”), the Company granted 69,360 and 63,267 stock options, respectively, with an exercise price set to equal a 10.0% premium over the grant date stock price. All of the stock options granted vest ratably over three years. The estimated weighted-average grant-date fair value of all stock options granted in the nine months ended September 30, 2020 and 2019 was $4.10 and $5.05 per stock option, respectively, using the Black-Scholes option-pricing model with assumptions as follows:
Compensation expense attributable to stock options was $75 thousand and $217 thousand for the three and nine months ended September 30, 2020, respectively. Compensation expense attributable to stock options was $53 thousand and $144 thousand for the three and nine months ended September 30, 2019, respectively. As of September 30, 2020, there was $409 thousand of total unrecognized compensation cost related to unvested stock options. The cost is expected to be recognized over a weighted-average period of 1.8 years.
The following table summarizes the status of the Company's stock options as of and for the nine months ended September 30, 2020:
|
|
|
|
Number of |
|
Exercise |
|
Options |
|
Price |
|
69,360 |
|
$ |
34.87 |
63,267 |
|
|
35.35 |
47,393 |
|
|
36.19 |
180,020 |
|
|
|
Restricted Stock Awards
The Company's RSAs are shares of the Company's common stock that are forfeitable and are subject to restrictions on transfer prior to the vesting date. RSAs are forfeited if the award holder departs the Company before vesting. RSAs carry dividend and voting rights from the date of grant. The vesting of time-vested RSAs depends upon the award holder
11
continuing to render services to the Company. The Company's performance-based RSAs vest subject to the achievement of the Company's corporate goals.
The following table summarizes the unvested RSA activity for the nine months ended September 30, 2020:
During the nine months ended September 30, 2020, the Company granted a total of 91,428 RSAs. Of the 91,428 RSAs granted, 57,850 time-vested RSAs vest ratably over five years and 33,578 time-vested RSAs vest ratably over three years. During the nine months ended September 30, 2019, the Company granted a total of 78,952 RSAs. Of the 78,952 RSAs granted, 49,925 time-vested RSAs vest ratably over five years, 29,027 time-vested RSAs vest ratably over three years. As of September 30, 2020, there were 272,274 unvested RSAs, all of which were time-vested RSAs and there were no unvested performance-based RSAs.
Compensation expense attributable to RSAs was $628 thousand and $1.8 million for the three and nine months ended September 30, 2020, respectively, and $537 thousand and $1.7 million for the three and nine months ended September 30, 2019, respectively. As of September 30, 2020, there was $5.4 million of total unrecognized compensation cost related to non-vested RSAs. The cost is expected to be recognized over a weighted-average period of 3.0 years.
Restricted Stock Units
Long Term Incentive Plan
RSUs represent an obligation to deliver shares to a grantee at a future date if certain vesting conditions are met. RSUs are subject to a time-based vesting schedule, or the satisfaction of performance conditions, and are settled in shares of the Company's common stock. RSUs do not provide voting rights and RSUs may provide dividend equivalent rights from the date of grant.
The following table summarizes the unvested NEO RSU activity for the nine months ended September 30, 2020:
During the nine months ended September 30, 2020, in accordance with the LTI Plan for NEOs, the Company granted 26,556 RSUs. Of the 26,556 RSUs granted, 17,943 time-vested RSUs vest ratably over three years and 8,613 performance-based RSUs vest subject to the achievement of the Company's three-year corporate goal for the three-year period ending December 31, 2022.
Compensation expense attributable to LTI Plan RSUs was $224 thousand and $642 thousand for the three and nine months ended September 30, 2020, respectively, and $175 thousand and $518 thousand for the three and nine months ended September 30, 2019, respectively. As of September 30, 2020, there was $1.5 million of total unrecognized compensation cost related to non-vested RSUs. The cost is expected to be recognized over a weighted-average period of 2.3 years.
12
Directors Plan
In April 2009, the Company adopted a Directors Deferred Compensation Plan (“Directors Plan”). Under the Directors Plan, independent directors may elect to defer all or a portion of their annual retainer fee in the form of RSUs. In addition, directors receive a non-election retainer in the form of RSUs. These RSUs vest ratably over one year and have dividend rights but no voting rights. In connection with the Directors Plan, the Company recorded expense of $155 thousand and $397 thousand for the three and nine months ended September 30, 2020, respectively, and $142 thousand and $427 thousand for the three and nine months ended September 30, 2019, respectively.
Employee Stock Purchase Plan
In May 2018, the Board of Directors adopted, and stockholders approved the Employee Stock Purchase Plan (“ESPP”). A total of 1,000,000 shares of the Company’s common stock have been initially authorized for issuance under the ESPP. Subject to any plan limitations, the ESPP allows eligible employees to contribute, normally through payroll deductions, up to $25 thousand for the purchase of the Company’s common stock at a discounted price per share for any calendar year. The current offering period is from July 1, 2020 through December 31, 2020.
During the nine months ended September 30, 2020, 5,888 shares of common stock were purchased, and no expense was recorded related to the ESPP. During the nine months ended September 30, 2019, 4,355 shares of common stock were purchased, and no expense was recorded related to ESPP.
4. SECURITIES
Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Equity securities are carried at fair value, with changes in fair value reported in net income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting in observable price changes in orderly transactions for the identical or a similar investment.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. The Company has made a policy election to exclude accrued interest from the amortized cost basis of debt securities and report accrued interest separately in other assets in the consolidated balance sheet. A debt security is placed on non-accrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a security placed on non-accrual is reversed against interest income. There were no non-accrual debt securities at September 30, 2020 and there was no accrued interest related to debt securities reversed against interest income for the three and nine months ended September 30, 2020. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
On January 1, 2020, the Company adopted the CECL Standard, which requires that debt securities held to maturity be accounted for under the current expected credit losses model, including historical loss experience and impact of current conditions and reasonable and supportable forecasts, with an associated allowance for credit losses. In addition, while credit losses on debt securities available for sale should be measured in accordance with the other-than-temporary impairment (“OTTI”) framework under current GAAP, the amendments in the CECL Standard require that these credit losses be presented as an allowance for credit losses. For AFS debt securities, a decline in fair value due to credit loss results in recording an allowance for credit losses to the extent the fair value is less than the amortized cost basis.
Held to maturity debt securities and the allowance for credit losses
To the extent that debt securities in the held-to-maturity portfolio share common risk characteristics, estimated expected credit losses are calculated in a manner like that used for loans held for investment. That is, for pools of such debt securities with common risk characteristics, the historical lifetime probability of default and severity of loss in the event of default is derived or obtained from external sources and adjusted for the expected effects of reasonable and supportable forecasts over the expected lives of the securities.
13
Expected credit loss on each debt security in the held-to-maturity portfolio that do not share common risk characteristics with any of the pools of debt securities is individually measured based on net realizable value, or the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the recorded amortized cost basis of the security.
With respect to certain classes of debt securities, primarily U.S. Treasuries and securities issued by Government Sponsored Entities, the Company considers the history of credit losses, current conditions and reasonable and supportable forecasts, which may indicate that the expectation that nonpayment of the amortized cost basis is or continues to be zero, even if the U.S. government were to technically default. Therefore, for those securities, the Company does not record expected credit losses.
Accrued interest receivable is excluded from the estimate of credit losses.
Available for sale debt securities and the allowance for credit losses
Management evaluates available for sale debt securities for OTTI on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the near-term prospects of the issuer. Impairment may result from credit deterioration of the issuer or collateral underlying the security. In performing an assessment of whether any decline in fair value is due to a credit loss, all relevant information is considered at the individual security level. For asset-backed securities performance indicators considered related to the underlying assets include default rates, delinquency rates, percentage of non-performing assets, debt-to-collateral ratios, third party guarantees, current levels of subordination, vintage, geographic concentration, analyst reports and forecasts, credit ratings and other market data. In assessing whether a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount the fair value is less than amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are excluded from earnings and reported, net of tax, in other comprehensive income (“OCI”). Management also assesses whether it intends to sell or is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.
Accrued interest receivable is excluded from the estimate of credit losses.
14
The following table summarizes the amortized cost and estimated fair value of the available for sale and held to maturity investment securities portfolio at September 30, 2020 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses, respectively:
As of September 30, 2020, none of the Company’s available for sale debt securities were in an unrealized loss position due to credit and therefore no allowance for credit losses on available for sale debt securities was required. Additionally, the calculated allowance for credit losses on held to maturity securities was inconsequential given the high quality composition of the Company’s held to maturity portfolio and therefore no allowance for credit losses was recorded. Accrued interest receivable on securities totaling $1.8 million at September 30, 2020 was included in other assets in the consolidated balance sheet and excluded from the amortized cost and estimated fair value totals in the table above.
15
The following table summarizes the amortized cost and estimated fair value of the available for sale and held to maturity investment securities portfolio at December 31, 2019 and the corresponding amounts of gross unrealized gains and losses therein:
The following table summarizes available for sale debt securities with gross unrealized losses for which an allowance for credit losses has not been recorded at September 30, 2020, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position:
16
The following table summarizes securities with gross unrealized losses at December 31, 2019, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position:
Other-Than-Temporary Impairment
Management evaluates available for sale debt securities in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. Consideration is given to (1) the extent to which the fair value is less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.
At September 30, 2020, substantially all of the securities in an unrealized loss position had a variable interest rate and the cause of the temporary impairment was directly related to changes in interest rates. The Company generally views changes in fair value caused by changes in interest rates as temporary, which is consistent with its experience. Other asset backed securities are comprised of student loan backed bonds which are guaranteed by the U.S. Department of Education for 97% to 100% of principal. Additionally, the bonds have credit support of 3% to 5% and have maintained their Aa3 Moody's rating during the time the Bank has owned them. The corporate bonds within the portfolio have all maintained an investment grade rating by either Moody's or Standard and Poor's. None of the unrealized losses is related to credit losses. The Company does not have the intent to sell these securities and it is more likely than not that it will not be required to sell the securities before their anticipated recovery. The issuers continue to make timely principal and interest payments on the debt. The fair value is expected to recover as the securities approach maturity. Therefore, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2020.
Sales and Calls of Securities
There were $78.4 million in proceeds from sales of securities with gross gains of $3.5 million and gross losses of $7 thousand realized for the three months ended September 30, 2020. There were $153.0 million of proceeds from sales of securities with gross gains of $4.3 million realized and gross losses of $0.8 million realized for the nine months ended September 30, 2020. There were no proceeds from sale of securities for the three ended September 30, 2019. There were $46.5 million in proceeds from sales of securities with gross gain $0.2 million realized for the nine months ended September 30, 2019. There were $1.3 million and $13.5 million of proceeds from calls of securities for the three and nine months ended September 30, 2020, respectively. There were $10.0 million and $20.3 million of proceeds from calls of securities for the three and nine months ended September 30, 2019, respectively.
17
Pledged Securities
Securities having a fair value of $451.8 million and $402.2 million at September 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits and Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) overnight borrowings.
Trading Securities
The Company did not hold any trading securities during the nine months ended September 30, 2020 or the year ended December 31, 2019.
Restricted Securities
The Bank is a member of the FHLB of New York. Members are required to own a particular amount of stock based on the level of borrowings and other factors and may invest in additional amounts. The Bank is a member of the Atlantic Central Banker's Bank (“ACBB”) and is required to own ACBB stock. The Bank is also a member of the FRB system and required to own FRB stock. FHLB, ACBB and FRB stock is carried at cost and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. The Bank owned $23.4 million and $32.9 million in FHLB, ACBB and FRB stock at September 30, 2020 and December 31, 2019, respectively. These amounts were reported as restricted securities in the consolidated balance sheets.
As of September 30, 2020 and 2019, there was no issuer, other than the U.S. Government and its sponsored entities, where the bank had invested holdings that exceeded 10% of consolidated stockholders’ equity.
The following table summarizes the amortized cost and estimated fair value by contractual maturity of the available for sale and held to maturity investment securities portfolio at September 30, 2020. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
18
5. FAIR VALUE
The Company adopted ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities during the first quarter of 2018.
FASB ASC No. 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The following tables summarize assets and liabilities measured at fair value on a recurring basis:
19
The following tables summarize assets measured at fair value on a non-recurring basis:
Loans held for sale at September 30, 2020 had a carrying amount of $10.0 million which is net of a $2.6 million valuation allowance. Loans held for sale at December 31, 2019 had a carrying amount of $12.6 million with no valuation allowance recorded.
Individually evaluated commercial and industrial loans with an allowance for credit losses at September 30, 2020 had a carrying amount of $7.0 million, which is made up of the outstanding balance of $14.0 million, net of a valuation allowance of $7.0 million. This resulted in an additional provision for credit losses of $2.6 million that is included in the amount reported on the consolidated statements of income for the nine months ended September 30, 2020. Impaired loans (prior to the adoption of CECL standard) with an allowance for credit losses at December 31, 2019 had a carrying amount of $7.0 million, which is made up of the outstanding balance of $11.7 million, net of a valuation allowance of $4.7 million.
There was no other real estate owned at September 30, 2020 and December 31, 2019.
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The Company used the following methods and assumptions in estimating the fair value of its financial instruments:
Securities Available for Sale and Held to Maturity: If available, the estimated fair values are based on independent dealer quotations on nationally recognized securities exchanges and are classified as Level 1. For securities where quoted prices are not available, fair value is based on matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities resulting in a Level 2 classification.
Derivatives: Represents interest rate swaps for which the estimated fair values are based on valuation models using observable market data as of the measurement date resulting in a Level 2 classification.
Loans Held for Sale: Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is initially determined using the price we expect to receive for the loans based on commitments received from third-party investors. Thereafter, loans held for sale are re-evaluated quarterly to determine if a valuation allowance is required to adjust for a decline in fair value below the carrying amount. Subsequent fair value determinations are based on commitments received from third party investors and/or through appraisals using a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraisals may be discounted for changes in market conditions. These valuation methods result in a Level 3 classification.
Individually Evaluated Loans with an ACL (Impaired Loans with an ACL prior to the adoption of the CECL Standard) and Other Real Estate Owned: For collateral dependent loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. The fair value of real estate collateral is determined based on recent appraised values. The fair value of other real estate owned is also determined based on recent appraised values less the estimated cost to sell. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Adjustments may relate to location, square footage, condition, amenities, market rate of leases as well as timing of comparable sales. All appraisals undergo a second review process to ensure that the methodology employed and the values derived are reasonable. Non-real estate collateral, which includes inventory and taxi medallions, may be valued using an appraisal, net book value per the borrower’s financial statements, aging reports, or by reference to market activity, 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. These valuation methods result in a Level 3 classification.
Appraisals for collateral-dependent loans 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 the Company. Once received, the Appraisal and Credit Departments review the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Management also considers the appraisal values for commercial properties associated with current loan origination activity. Collectively, this information is reviewed to help assess current trends in commercial property values. For each collateral dependent loan, management considers information that relates to the type of property to determine if such properties may have appreciated or depreciated in value since the date of the most recent appraisal. Adjustments to fair value are made only when the analysis indicates a probable decline in collateral values. Adjustments made in the appraisal process are not deemed material to the overall consolidated financial statements given the level of collateral dependent loans measured at fair value on a non-recurring basis.
For non-collateral dependent loans, estimated fair value may be based on the observable market price for the loan, if available, resulting in a Level 1 classification.
21
The following tables summarize the estimated fair values and recorded carrying amounts of the Company's financial instruments at September 30, 2020 and December 31, 2019:
22
6. LOANS
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, net of partial charge-offs, deferred origination costs and fees and purchase premiums and discounts. Loan origination and commitment fees and certain direct and indirect costs incurred in connection with loan originations are deferred and amortized to income over the life of the related loans as an adjustment to yield. When a loan prepays, the remaining unamortized net deferred origination fees or costs are recognized in the current year. Interest on loans is credited to income based on the principal outstanding during the period. The Company has made a policy election to exclude accrued interest from the amortized cost basis of loans and report accrued interest separately from the related loan balance in other assets on consolidated balance sheets. Past due status is based on the contractual terms of the loan. Loans that are 90 days past due are automatically placed on non-accrual and previously accrued interest is reversed and charged against interest income. However, if the loan is in the process of collection and the Bank has reasonable assurance that the loan will be fully collectable based upon an individual loan evaluation assessing such factors as collateral and collectability, accrued interest will be recognized as earned. If a payment is received when a loan is non-accrual or a troubled debt restructuring (“TDR”) loan is non-accrual, the payment is applied to the principal balance. A TDR loan performing in accordance with its modified terms is maintained on accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Loans that were acquired through the acquisition of Community National Bank on June 19, 2015 and First National Bank of New York on February 14, 2014, were initially recorded at fair value with no carryover of the related allowance for loan losses. After acquisition, losses are recognized through the allowance for loan losses. Determining fair value of the loans involves estimating the amount and timing of expected principal and interest cash flows to be collected on the loans and discounting those cash flows at a market interest rate. Some of the loans at the time of acquisition showed evidence of credit deterioration since origination. These loans were considered purchased credit impaired (“PCI”) loans. As of December 31, 2019, the remaining balance of PCI loans was immaterial to the Company’s financial condition and results of operations.
Unless otherwise noted, the above policy is applied consistently to all loan segments.
Allowance for Credit Losses
On January 1, 2020, the Company adopted the CECL Standard, which requires that loans held for investment be accounted for under the current expected credit losses model. The allowance for credit losses is established and maintained through a provision for credit losses based on expected losses inherent in the Company’s 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 the Company’s 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
23
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, the Company recognizes 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 the Company. 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 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 the Company’s 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, the Company derives 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
24
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 reverts immediately 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.
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 the Bank to recognize adjustments to the allowance based on their judgments of the information available to them at the time of their examination.
A loan is considered a potential charge-off when it is in default of either principal or interest for a period of 90, 120 or 180 days, depending upon the loan type, as of the end of the prior month. In addition to delinquency criteria, other triggering events may include, but are not limited to, notice of bankruptcy by the borrower or guarantor, death of the borrower, and deficiency balance from the sale of collateral.
Unless otherwise noted, the above policy is applied consistently to all loan portfolio segments.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as unused lines of credit, commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded on the balance sheet when they are funded. In accordance with the CECL Standard, the Company maintains a separate reserve for off-balance sheet credit instruments, which is included in other liabilities on the consolidated statements of financial condition. Management estimates the amount of expected losses by calculating a commitment usage factor over the contractual period for exposures that are not unconditionally cancellable by the Company and applying the loss factors, current conditions and forecasting adjustments used in the allowance for credit loss methodology to the results of the usage calculation to estimate the liability for credit losses related to unfunded commitments for each loan type. No credit loss estimate is reported for off-balance sheet credit exposures that are unconditionally cancellable by the Company. At September 30, 2020, the reserve for off-balance sheet credit exposures was immaterial to the Company’s consolidated statements of financial condition and results of operations.
25
The following table sets forth the major classifications of loans:
Included in commercial, industrial and agricultural loans at September 30, 2020 was $960.4 million of Paycheck Protection Program (“PPP”) loans. The shift from net deferred loan costs at December 31, 2019 to net deferred loan fees at September 30, 2020 was the result of the net deferred loan fees associated with the PPP loans.
Accrued interest receivable on loans totaling $14.0 million at September 30, 2020 and $8.7 million at December 31, 2019 was included in other assets in the consolidated balance sheet and excluded from the table above. The increase in accrued interest receivable from December 31, 2019 relates primarily to accrued interest on PPP loans.
As of September 30, 2020 and December 31, 2019, one commercial real estate (“CRE”) mortgage loan totaling $10.0 million and $12.6 million, respectively, was classified as held for sale. The loan was reclassified from loans held for investment to loans held for sale and written down from $16.3 million to the loan’s estimated fair value of $12.6 million, as of June 30, 2019, through a $3.7 million charge-off during the 2019 second quarter. During the 2020 second quarter, an additional write-down was recognized 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.
Lending Risk
The principal business of the Bank is lending in CRE mortgage loans, multi-family mortgage loans, residential real estate mortgage loans, construction loans, home equity loans, commercial, industrial and agricultural loans, land loans and consumer loans. The Bank considers its primary lending area to be Nassau and Suffolk Counties located on Long Island and the New York City boroughs. A substantial portion of the Bank's loans are secured by real estate in these areas. Accordingly, the ultimate collectability of the loan portfolio is susceptible to changes in market and economic conditions in this region.
Commercial Real Estate Mortgages
Loans in this classification include income producing investment properties and owner-occupied real estate used for business purposes. The underlying properties are located largely in the Bank's primary market area. The cash flows of the income producing investment properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on credit quality. Generally, management seeks to obtain annual financial information for borrowers with loans in excess of $1.0 million in this category. In the case of owner-occupied real estate used for business purposes, a weakened economy and resultant decreased consumer and/or business spending will have an adverse effect on credit quality.
Multi-Family Mortgages
Loans in this classification include income producing residential investment properties of five or more families. Loans are made to established owners with a proven and demonstrable record of strong performance. Loans are secured by a first mortgage lien on the subject property with a loan to value ratio generally not exceeding 75%. Repayment is derived
26
generally from the rental income generated from the property and may be supplemented by the owners' personal cash flow. Credit risk arises with an increase in vacancy rates, property mismanagement and the predominance of non-recourse loans that are customary in the industry.
Residential Real Estate Mortgages and Home Equity Loans
Loans in these classifications are generally secured by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, can have an effect on the credit quality in this loan class. The Bank generally does not originate loans with a loan-to-value ratio greater than 80% and does not grant subprime loans.
Commercial, Industrial and Agricultural Loans
Loans in this classification are made to businesses and include term loans, lines of credit, senior secured loans to corporations, equipment financing and taxi medallion loans. Generally, these loans are secured by assets of the business and repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer and/or business spending, will have an effect on the credit quality in this loan class.
Real Estate Construction and Land Loans
Loans in this classification primarily include land loans to local individuals, contractors and developers for developing the land for sale or for the purpose of making improvements thereon. Repayment is derived primarily from sale of the lots/units including any pre-sold units. Credit risk is affected by market conditions, time to sell at an adequate price and cost overruns. To a lesser extent, this class includes commercial development projects that the Company finances, which in most cases require interest only during construction, and then convert to permanent financing. Construction delays, cost overruns, market conditions and the availability of permanent financing, to the extent such permanent financing is not being provided by the Bank, all affect the credit risk in this loan class.
Installment and Consumer Loans
Loans in this classification may be either secured or unsecured. Repayment is dependent on the credit quality of the individual borrower and, if applicable, sale of the collateral securing the loan, such as automobiles. Therefore, the overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this loan class.
Credit Quality Indicators
The Company categorizes loans into risk categories of pass, watch, special mention, substandard and doubtful based on relevant information about the ability of borrowers to service their debt including repayment patterns, past loss experience, current economic conditions, and various types of concentrations of credit. Assigned risk rating grades are continuously updated as new information is obtained. Loans risk rated special mention, substandard and doubtful are reviewed on a quarterly basis. The Company uses the following definitions for risk rating grades:
Pass: Loans classified as pass include current loans performing in accordance with contractual terms, pools of homogenous residential real estate and installment/consumer loans that are not individually risk rated and loans which do not exhibit certain risk factors that require greater than usual monitoring by management.
Watch: Loans classified as watch are considered pass rated loans. These loans carry additional risk factors above those of pass loans but do not have all the risk characteristics of loans classified as special mention. Such risk factors require monitoring and if left uncorrected, could lead these loans to be downgraded.
Special mention: Loans classified as special mention, while generally not delinquent, have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank's credit position at some future date.
27
Substandard: Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in a substandard loan, may also be in delinquency status and have defined weaknesses based on currently existing facts, conditions and values making collection or liquidation in full highly questionable and improbable.
The following tables represent loans categorized by internally assigned risk grades as of September 30, 2020 and December 31, 2019. In the September 30, 2020 table, the years noted represent the year of origination for non-revolving loans.
28
Past Due and Non-accrual Loans
The following tables represents the aging of past due loans as of September 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|||||||||||||||||||
|
|
|
|
|
|
|
|
90+ Days |
|
Non-accrual |
|
|
|
|
|
|
|
|
|
||
|
|
30-59 |
|
60-89 |
|
Past Due |
|
Including 90 |
|
Total Past |
|
|
|
|
|
|
|||||
|
|
Days |
|
Days |
|
And |
|
Days or More |
|
Due and |
|
|
|
|
|
|
|||||
(In thousands) |
|
Past Due |
|
Past Due |
|
Accruing |
|
Past Due |
|
Non-accrual |
|
Current |
|
Total Loans |
|||||||
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
|
$ |
442 |
|
$ |
1,025 |
|
$ |
— |
|
$ |
1,653 |
|
$ |
3,120 |
|
$ |
529,477 |
|
$ |
532,597 |
Non-owner occupied |
|
|
— |
|
|
14 |
|
|
— |
|
|
746 |
|
|
760 |
|
|
1,096,530 |
|
|
1,097,290 |
Multi-family |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
853,263 |
|
|
853,263 |
Residential real estate |
|
|
5,220 |
|
|
349 |
|
|
— |
|
|
3,032 |
|
|
8,601 |
|
|
441,383 |
|
|
449,984 |
Commercial, industrial and agricultural |
|
|
2,788 |
|
|
743 |
|
|
— |
|
|
1,506 |
|
|
5,037 |
|
|
1,626,130 |
|
|
1,631,167 |
Real estate construction and land loans |
|
|
— |
|
|
— |
|
|
— |
|
|
117 |
|
|
117 |
|
|
66,709 |
|
|
66,826 |
Installment/consumer loans |
|
|
101 |
|
|
— |
|
|
— |
|
|
10 |
|
|
111 |
|
|
22,409 |
|
|
22,520 |
Total loans |
|
$ |
8,551 |
|
$ |
2,131 |
|
$ |
— |
|
$ |
7,064 |
|
$ |
17,746 |
|
$ |
4,635,901 |
|
$ |
4,653,647 |
In the absence of other intervening factors, loans granted payment deferrals related to COVID-19 are not reported as past due or placed on non-accrual status provided the borrowers have met the criteria in the CARES Act or otherwise have met the criteria included in an interagency statement issued by bank regulatory agencies.
During the nine months ended September 30, 2020, there was no interest earned on non-accrual loans and $151 thousand in accrued interest on non-accrual loans was reversed through interest income.
There was no other real estate owned at September 30, 2020 and December 31, 2019.
Troubled Debt Restructurings
The terms of certain loans were modified and are considered TDRs. The modification of the terms of such loans generally includes one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent
29
reduction of the recorded investment in the loan. The modification of these loans involved loans to borrowers who were experiencing financial difficulties.
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed to determine if that borrower is currently in payment default under any of its obligations or whether there is a probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.
The following table presents loans modified as TDRs during the periods indicated:
During the nine months ended September 30, 2020, there were four charge-offs totaling $1.7 million relating to TDRs and there was one loan modified as a TDR for which there was a payment default within twelve months following the modification. During the nine months ended September 30, 2019, there were three charge-offs totaling $84 thousand relating to TDRs and there were three loans modified as a TDR for which there was a payment default within twelve months following the modification. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.
As of September 30, 2020 and December 31, 2019, the Company had $581 thousand and $405 thousand, respectively, of non-accrual TDRs and $23.4 million and $26.3 million, respectively, of performing TDRs. The decrease in performing TDRs is primarily due to one TDR relationship which became non-accrual during the 2020 second quarter and totaled $2.7 million at June 30, 2020. In the 2020 third quarter, a settlement agreement was entered into resulting in $875 thousand in payments received to date and a charge-off totaling $1.3 million. The remaining loan balance is included in non-accrual TDRs and is secured by inventory. At September 30, 2020, the remaining non-accrual TDRs were unsecured and at December 31, 2019, the non-accrual TDRs were unsecured. The Bank has no commitment to lend additional funds to these debtors.
The terms of certain other loans were modified during the nine months ended September 30, 2020 that did not meet the definition of a TDR. These loans have a total recorded investment at September 30, 2020 of $122.3 million. These loans were to borrowers who were not experiencing financial difficulties.
In connection with the COVID-19 relief provided by the CARES Act and interagency guidance issued in March 2020, the Company is supporting its customers who may experience financial difficulty due to COVID-19 through loan moratoriums and forbearance programs. The Company began offering 90-day payment modifications on a case-by-case basis to those
30
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 of September 30, 2020, approximately 490 loans totaling $615 million were granted payment moratoriums. These deferrals are not considered TDRs based on the CARES Act and/or the interagency guidance. As of October 25, 2020, approximately $610 million of these loans have reached the end of their three month deferral period. Of these loans, 66% returned to making their agreed on payments and 34% have requested an extension. Extensions are being granted on a case-by-case basis. Approximately $44 million in commercial loan payment deferrals were outstanding as of October 25, 2020.
Collateral Dependent Loans
At September 30, 2020, the Company had collateral dependent loans which were individually evaluated to determine expected credit losses. Collateral dependent commercial, industrial and agricultural totaled $10.1 million and had a related allowance for credit losses totaling $6.6 million. The loans were secured by inventory and other assets. Collateral dependent commercial real estate loans totaled $1.4 million and had no related allowance for credit losses.
Impaired Loans (prior to the adoption of the CECL Standard)
At December 31, 2019 the Company had individually impaired loans as defined by FASB ASC 310, “Receivables” of $27.0 million. For a loan to be considered impaired, management determines after review whether it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Management applies its normal loan review procedures in making these judgments. Impaired loans include individually classified non-accrual loans and TDRs. At December 31, 2019, impaired loans also included $1.1 million in other impaired performing loans which were related to borrowers with other performing TDRs. For impaired loans, the Bank evaluates the impairment of the loan in accordance with FASB ASC 310-10-35-22. Impairment is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate. For loans that are collateral dependent, the fair value of the collateral is used to determine the fair value of the loan. The fair value of the collateral is determined based on recent appraised values. The fair value of the collateral or present value of expected cash flows is compared to the carrying value to determine if any write-down or specific loan loss allowance allocation is required.
31
The following table sets forth the recorded investment, unpaid principal balance and related allowance for individually impaired loans at December 31, 2019. The table also sets forth the average recorded investment of individually impaired loans and interest income recognized while the loans were impaired during the period ended September 30, 2019:
The following tables represent the changes in the allowance for credit losses for the three and nine months ended September 30, 2020 and 2019.
32
The allowance for credit losses at September 30, 2020 was consistent with the prior quarter primarily as a result of there being no change to the reasonable and supportable forecast component of the analysis. COVID-19 continues to have a profound impact on economic activity. While there have been some signs of economic improvement during the third quarter, significant uncertainty remains. Management still believes that the economic recovery will accelerate during 2021 and 2022, however, based on the aforementioned uncertainty and negative impact the virus has had to date, the decision was made to maintain the current risk level for the reasonable and supportable forecast component of the allowance for credit losses in the third quarter.
The following table represents the balance in the allowance for loan losses and the recorded investment in loans, as defined under FASB ASC 310-10 (prior to adoption of the CECL Standard), and based on impairment method as of December 31, 2019.
33
7. PENSION AND POSTRETIREMENT PLANS
The Bank maintains a noncontributory pension plan (the “Pension Plan”) covering all eligible employees. The Bank uses a December 31 measurement date for this plan in accordance with FASB ASC 715-30 “Compensation – Retirement Benefits – Defined Benefit Plans – Pension.” During 2012, the Company amended the Pension Plan by revising the formula for determining benefits effective January 1, 2013, except for certain grandfathered employees. Additionally, new employees hired on or after October 1, 2012 are not eligible for the Pension Plan.
During 2001, the Bank adopted the Bridgehampton National Bank Supplemental Executive Retirement Plan (“SERP”). As recommended by the Compensation Committee of the Board of Directors and approved by the full Board of Directors, the SERP provides benefits to certain employees, whose benefits under the Pension Plan are limited by the applicable provisions of the Internal Revenue Code. The benefit under the SERP is equal to the additional amount the employee would be entitled to under the Pension Plan and the 401(k) Plan in the absence of such Internal Revenue Code limitations. The assets of the SERP are held in a rabbi trust to maintain the tax-deferred status of the plan and are subject to the general, unsecured creditors of the Company. As a result, the assets of the rabbi trust are reflected on the Company’s consolidated balance sheets.
There were $1.2 million of contributions to the Pension Plan during the nine months ended September 30, 2020. There were no contributions to the Pension Plan during the nine months ended September 30, 2019. There were no contributions to the SERP during the nine months ended September 30, 2020 and 2019, respectively. In accordance with the SERP, a retired executive received a distribution totaling $84 thousand during each of the nine months ended September 30, 2020 and 2019, respectively.
The Company's funding policy with respect to its benefit plans is to contribute at least the minimum amounts required by applicable laws and regulations.
The following table presents the components of net periodic benefit (credit) cost:
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase totaled $1.4 million at September 30, 2020 and $1.0 million at December 31, 2019. The repurchase agreements were collateralized by investment securities, of which 37% were U.S. GSE residential collateralized mortgage obligations and 63% were U.S. GSE residential mortgage-backed securities with a carrying amount of $2.4 million at September 30, 2020 and 17% were U.S. GSE residential collateralized mortgage obligations and 83% were U.S. GSE residential mortgage-backed securities with a carrying amount of $2.1 million at December 31, 2019.
Securities sold under agreements to repurchase are financing arrangements with $1.4 million maturing during the fourth quarter of 2020. At maturity, the securities underlying the agreements are returned to the Company. The primary risk associated with these secured borrowings is the requirement to pledge a market value-based balance of collateral in excess of the borrowed amount. The excess collateral pledged represents an unsecured exposure to the lending counterparty. As the market value of the collateral changes, both through changes in discount rates and spreads as well as related cash flows,
34
additional collateral may need to be pledged. In accordance with the Company's policies, eligible counterparties are defined and monitored to minimize exposure.
9. FEDERAL HOME LOAN BANK ADVANCES
The following tables present the contractual maturities and weighted average interest rates of FHLB advances for each of the next five years. There are no FHLB advances with contractual maturities after 2020.
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
|||
(Dollars in thousands) |
|
|
|
|
Weighted |
|
Contractual Maturity |
|
Amount |
|
Average Rate |
|
|
Overnight |
|
$ |
— |
|
— |
% |
|
|
|
|
|
|
|
2020 |
|
|
215,000 |
|
0.39 |
|
Total FHLB advances |
|
$ |
215,000 |
|
0.39 |
% |
Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances were collateralized by $1.6 billion and $1.4 billion of residential and commercial mortgage loans under a blanket lien arrangement at September 30, 2020 and December 31, 2019. Based on this collateral and the Company's holdings of FHLB stock, the Company is eligible to borrow up to a total of $1.9 billion at September 30, 2020.
10. SUBORDINATED DEBENTURES
In September 2015, the Company issued $80.0 million in aggregate principal amount of fixed-to-floating rate subordinated debentures. $40.0 million of the subordinated debentures are callable at par after five years, have a stated maturity of September 30, 2025 and bear interest at a fixed annual rate of 5.25% per year, from and including September 21, 2015 until but excluding September 30, 2020. From and including September 30, 2020 to the maturity date or early redemption date, the interest rate will reset quarterly to an annual interest rate equal to the then-current three-month LIBOR plus 360 basis points. The remaining $40.0 million of the subordinated debentures are callable at par after ten years, have a stated maturity of September 30, 2030 and bear interest at a fixed annual rate of 5.75% per year, from and including September 21, 2015 until but excluding September 30, 2025. From and including September 30, 2025 to the maturity date or early redemption date, the interest rate will reset quarterly to an annual interest rate equal to the then-current three-month LIBOR plus 345 basis points. The subordinated debentures totaled $79.0 million at September 30, 2020 and $78.9 million at December 31, 2019.
The subordinated debentures are included in tier 2 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.
11. DERIVATIVES
During the first quarter of 2019 the Company adopted ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. The Company has adopted the standard in 2019 with minimal impact to its financial position upon transition.
35
The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Funding Rate ("SOFR") replace USD-LIBOR. ARRC has proposed that the transition to SOFR from USD-LIBOR will take place by the end of 2021. The Company has material contracts that are indexed to USD-LIBOR. Industry organizations are currently working on the transition plan. The Company is currently monitoring this activity and evaluating the risks involved.
Cash Flow Hedges of Interest Rate Risk
As part of its asset liability management, the Company utilizes interest rate swap agreements to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent the amount exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.
Interest rate swaps with notional amounts totaling $280.0 million and $290.0 million at September 30, 2020 and December 31, 2019, respectively, were designated as cash flow hedges of certain FHLB advances. The swaps were determined to be fully effective during the periods presented. The aggregate fair value of the swaps is recorded in other assets or other liabilities, with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps.
The following table summarizes information about the interest rate swaps designated as cash flow hedges at September 30, 2020 and December 31, 2019:
Four interest rate swaps, with notional amounts totaling $125.0 million, were terminated resulting in $3.4 million in loss on termination of swaps, which is reported as a component of non-interest income, for the three and nine months ended September 30, 2020.
Interest expense recorded on these swap transactions totaled $4.3 million and $4.4 million for the three and nine months ended September 30, 2020, and interest income recorded on these swap transactions totaled $331 thousand and $1.4 million for the three and nine months ended September 30, 2019, which is reported as a component of interest expense on FHLB advances. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income/expense as interest payments are made/received on the Company's variable-rate assets/liabilities. During the nine months ended September 30, 2020, the Company had $4.4 million of reclassifications as an increase to interest expense. During the next twelve months, the Company estimates that an additional $2.2 million will be reclassified as an increase to interest expense. During the quarter ended September 30, 2020, the Company accelerated the reclassification of $3.3 million loss from other comprehensive income to earnings as a result of the hedged forecasted transactions becoming probable not to occur.
The following table presents the net gains (losses) recorded in accumulated other comprehensive income and the consolidated statements of income relating to the cash flow derivative instruments for the three and nine months ended September 30, 2020 and 2019:
36
The following table reflects the cash flow hedges included in the consolidated balance sheets at the dates indicated:
Non-Designated Hedges
Derivatives not designated as hedges may be used to manage the Company's exposure to interest rate movements or to provide service to customers but do not meet the requirements for hedge accounting under U.S. GAAP. The Company executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that the Company executes with a third party in order to minimize the net risk exposure resulting from such transactions. These interest-rate swap agreements do not qualify for hedge accounting treatment, and therefore changes in fair value are reported in current period earnings.
Interest rate swaps with notional amounts totaled $1.1 billion at September 30, 2020. Of the $1.1 billion notional amounts, $530.5 million were from loan customers and $530.5 million were from bank counterparties. Interest rate swaps with notional amounts totaled $823.9 million at December 31, 2019. Of the $823.9 million notional amounts, $411.9 million were from loan customers and $411.9 million were from bank counterparties.
The following table presents summary information about the interest rate swaps at September 30, 2020 and December 31, 2019:
Loan swap fees recorded on these swap transactions, which is reported as a component of non-interest income, totaled $0.6 million and $3.1 million for the three and nine months ended September 30, 2020 and $1.6 million and $3.2 million for the three and nine months ended September 30, 2019.
Credit-Risk-Related Contingent Features
As of September 30, 2020, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $68.0 million, while there were no derivatives in a net asset position. The Company has minimum collateral posting thresholds with certain of its derivative counterparties. If the termination value of derivatives is a net liability position, the Company is required to post collateral against its obligations under the agreements. However, if the termination value of derivatives is a net asset position, the counterparty is required to post collateral to the Company. At September 30, 2020, the Company posted collateral of $69.1 million to its counterparties under the agreements in a net liability position and received no collateral from its counterparties under the agreements in a net asset position. If the Company had breached any of these provisions at September 30, 2020, it could have been required to settle its obligations under the agreements at the termination value.
37
12. LEASES
The Company has operating leases for certain branch locations, corporate offices and equipment. Certain leases contain rent escalation clauses, which are reflected in the Company’s operating lease liabilities. The Company’s lease agreements do not contain any material residual value guarantees, restrictions or covenants.
The components of lease cost were as follows:
The Company reports lease cost in occupancy and equipment expense in the consolidated statements of income. The Company subleases a portion of its leased properties to commercial sublessees. Sublease income is included in other operating income in the consolidated statements of income.
Supplemental cash flow and balance sheet information related to operating leases were as follows:
1) | The Company computes the present value of operating lease liabilities using its incremental borrowing rate as the discount rate. |
Certain leases contain renewal options which are not reflected in the tables below. The exercise of renewal options, which extend the lease term from five to ten years, is at the Company’s discretion.
The maturities of operating lease liabilities were as follows:
38
13. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The following table summarizes the components of other comprehensive income (loss) and related income tax effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
|
September 30, |
|
September 30, |
|
September 30, |
|
September 30, |
||||
(In thousands) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
Unrealized holding (losses) gains on available for sale securities |
|
$ |
(935) |
|
$ |
2,227 |
|
$ |
9,186 |
|
$ |
16,247 |
Reclassification adjustments for gains realized in income |
|
|
(3,540) |
|
|
— |
|
|
(3,525) |
|
|
(201) |
Income tax effect |
|
|
1,309 |
|
|
(649) |
|
|
(1,655) |
|
|
(4,679) |
Net change in unrealized (losses) gains on available for sale securities |
|
|
(3,166) |
|
|
1,578 |
|
|
4,006 |
|
|
11,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustments for amortization realized in income |
|
|
136 |
|
|
128 |
|
|
412 |
|
|
385 |
Income tax effect |
|
|
(39) |
|
|
(37) |
|
|
(120) |
|
|
(113) |
Net change in post-retirement obligation |
|
|
97 |
|
|
91 |
|
|
292 |
|
|
272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives used for cash flow hedges |
|
|
3,364 |
|
|
(657) |
|
|
(7,709) |
|
|
(5,360) |
Reclassification adjustments for losses (gains) realized in income |
|
|
992 |
|
|
(331) |
|
|
1,058 |
|
|
(1,353) |
Income tax effect |
|
|
(1,274) |
|
|
288 |
|
|
1,945 |
|
|
1,958 |
Net change in unrealized gains (losses) on cash flow hedges |
|
|
3,082 |
|
|
(700) |
|
|
(4,706) |
|
|
(4,755) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
$ |
13 |
|
$ |
969 |
|
$ |
(408) |
|
$ |
6,884 |
The following is a summary of the accumulated other comprehensive loss balances, net of income taxes, at the dates indicated:
The following represents the reclassifications out of accumulated other comprehensive (loss) income for the three and nine months ended September 30, 2020 and 2019:
39
14. RECENT ACCOUNTING PRONOUNCEMENTS
Standards Effective in 2020
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)
Effective for periods after December 31, 2019, the Company adopted the CECL Standard. Refer to Note 1. “Basis of Presentation” for further details of the recent accounting pronouncement and its effect on the Company’s consolidated financial statements.
ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
In January 2017, the FASB amended existing guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments require an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments are effective for public business entities that are an SEC filer, like the Company, for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The amendments should be applied prospectively. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition in the first annual period when the entity initially adopts the amendments. The adoption of ASU 2017-04 did not have an effect on the Company's consolidated financial statements.
ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
In August 2018, the FASB issued ASU 2018-15 to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments in this ASU are effective for public business entities, like the Company, for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The adoption of ASU 2018-15 did not have a material effect on the Company's consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
In this Quarterly Report on Form 10-Q, unless otherwise mentioned, the terms the “Company”, “we”, “us” and “our” refer to Bridge Bancorp, Inc. and its wholly-owned subsidiary, BNB Bank (the “Bank”). We use the term “Holding Company” to refer solely to Bridge 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,
40
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 in FDIC 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 the Securities 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
Who We Are and How We Generate Income
Bridge Bancorp, Inc., a New 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.
Our Principal Products and Services and Locations of Operations
The Bank was established in 1910 and is headquartered in Bridgehampton, New York. We operate 39 branch locations in the primary market areas of Suffolk and Nassau Counties on Long Island and the New York City boroughs, including 35 in Suffolk and Nassau Counties, two in Queens and two in Manhattan. 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 of Federal Deposit Insurance Corporation (“FDIC”) insurance on deposits to our customers. In addition, we offer merchant credit and debit
41
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 through Bridge 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
In December 2019, a novel coronavirus was reported in China, and, in March 2020, the World Health Organization declared COVID-19 a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States, as many state and local governments, including New 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 on July 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 the Small 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 of September 30, 2020, we originated over 4,200 loans totaling $960.4 million. The top five industries were construction, professional, manufacturing, accommodation/food, and administrative. The mean and median PPP loan amounts were $226 thousand and $70 thousand, respectively.
The following table presents the outstanding balance and range of loan size of our PPP loans as of September 30, 2020:
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.
42
COVID-19 Loan Moratoriums and Forbearance Programs
We are supporting our customers who 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 of October 25, 2020, we have approved 491 loan moratoriums totaling $615 million, or 13% of total loan balances. Approximately $610 million of these loans have reached the end of their three-month deferral period. Of these loans, 66% returned to making their agreed-on payments and 34% requested an extension. Extensions are being granted on a case-by-case basis. Approximately $44 million in commercial loan payment deferrals were outstanding as of October 25, 2020.
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.
Significant Events
Merger Agreement with Dime Community Bancshares, Inc.
On July 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 in Hauppauge, New York, and will have a corporate office located in New 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, a New York-chartered commercial bank and a wholly-owned subsidiary of Dime, will merge with and into BNB Bank, a New York-chartered commercial bank and a wholly-owned subsidiary of the Company, with BNB 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 Dime and Company shareholder approval, Dime shareholders will own approximately 52% and the Company’s shareholders will own approximately 48% of the combined company.
Following the Merger, the Surviving 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 the Surviving Corporation’s board of directors. For the period ending on the third anniversary of the completion of the Merger, Legacy
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Company Directors will nominate directors for any vacancy on the Surviving Corporation’s board of directors resulting from the vacancy of a Legacy Company Director, and Legacy Dime Directors will nominate directors for any vacancy on the Surviving 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 the Nasdaq Stock Market of the shares of Company’s common and preferred stock to be issued in the Merger, (3) the absence of any order, decree or injunction preventing the completion of the Merger, and (4) 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.
Quarterly Highlights
● | Net income for the 2020 third quarter of $13.1 million, or $0.66 per diluted share, inclusive of pre-tax merger expenses of $2.4 million, or $0.11 per diluted share after tax, related to our merger with Dime. |
● | Net interest income increased to $40.7 million for the third quarter of 2020 compared to $36.7 million in 2019. |
● | Tax-equivalent net interest margin was 2.83% for the third quarter of 2020 compared to 3.40% for the 2019 period. |
● | Total assets of $6.3 billion at September 30, 2020, increased $1.4 billion compared to December 31, 2019 and increased $171.7 million compared to June 30, 2020. |
● | Total loans held for investment at September 30, 2020 totaled $4.6 billion, inclusive of PPP loans totaling $960.4 million, an increase of $959.2 million, or 26.1%, from December 31, 2019, and an increase of $18.6 million, or 1.6%, over June 30, 2020. |
● | Total deposits of $5.4 billion at September 30, 2020, increased $1.6 billion, or 40.7%, from December 31, 2019, and increased $288.7 million, or 5.7%, from June 30, 2020. |
● | Provision for credit losses of $1.5 million for the third quarter of 2020 compared to $1.0 million in 2019. |
● | Allowance for credit losses to total loans was 0.94% at September 30, 2020 compared to 0.89% at December 31, 2019, and 0.94% at June 30, 2020. |
● | A cash dividend of $0.24 per share was declared in October 2020 for the third 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
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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, the Federal 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 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
On January 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 of December 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
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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 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.
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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 September 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.
Net Income
Net income for the three months ended September 30, 2020 was $13.1 million and $0.66 per diluted share as compared to $13.9 million and $0.70 per diluted share for the same period in 2019. Changes in net income for the three months ended September 30, 2020 compared to September 30, 2019 include: (i) a $4.0 million, or 10.9%, increase in net interest income; (ii) a $0.5 million, or 50.0%, increase in the provision for credit losses; (iii) a $0.5 million, or 8.7%, increase in non-interest income; (iv) a $4.7 million, or 19.6%, increase in non-interest expense; and (v) a $0.1 million, or 3.8%, increase in income tax expense.
Net income for the nine months ended September 30, 2020 was $33.1 million and $1.66 per diluted share as compared to $37.5 million and $1.88 per diluted share for the same period in 2019. Changes in net income for the nine months ended September 30, 2020 compared to September 30, 2019 include: (i) an $11.2 million, or 10.5%, increase in net interest income; (ii) a $5.9 million, or 115.7%, increase in the provision for credit losses; (iii) a $2.7 million, or 15.9%, decrease in non-interest income; (iv) a $7.4 million, or 10.4%, increase in non-interest expense; and (v) a $0.3 million, or 3.2%, 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 the U.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 of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320, “Investments - Debt and Equity Securities.”
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(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. |
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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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(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%. |
Analysis of Net Interest Income for the Three Months Ended September 30, 2020 and 2019
Net interest income was $40.7 million for the three months ended September 30, 2020 compared to $36.7 million for the three months ended September 30, 2019. Average net interest-earning assets increased $774.8 million to $2.3 billion for the three months ended September 30, 2020 compared to $1.6 billion for the three months ended September 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 2.83% for the three months ended September 30, 2020 compared to 3.40% for the three months ended September 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, the Federal 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 was $46.3 million for the three months ended September 30, 2020 compared to $46.4 million for the same period in 2019. The average interest-earning assets increased $1.4 billion, or 33.8%, to $5.7 billion for the three months ended September 30, 2020 compared to $4.3 billion for the same period in 2019. The increase in average interest-earning assets for the three months ended September 30, 2020 compared to 2019 reflects loan growth in the commercial and industrial portfolio driven by PPP loan originations in the 2020 second quarter, 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 3.21% for the quarter ended September 30, 2020 compared to 4.29% for the quarter ended September 30, 2019. The PPP loans and excess liquidity in banks had the effect of depressing our net interest margin in the current quarter.
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Interest income on loans increased $2.1 million to $43.1 million for the three months ended September 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 ended September 30, 2020, average loans grew by $1.2 billion, or 34.0%, to $4.6 billion as compared to $3.4 billion for the same period in 2019. The tax-equivalent yield on average loans was 3.72% for the third quarter of 2020 compared to 4.73% for the same period in 2019. The average balance of loans for the quarter ended September 30, 2020 includes $933.3 million of PPP loans with an average yield of 2.56%. The PPP loans had the effect of decreasing the tax-equivalent yield by 29 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 $1.9 million to $3.1 million for the three months ended September 30, 2020 compared to $5.0 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 $1.0 million for the three months ended September 30, 2020 compared to $1.2 million for the same period in 2019. For the three months ended September 30, 2020, average total investment securities decreased by $190.4 million, or 24.2%, to $597.0 million as compared to $787.4 million for the same period in 2019. The decline in tax-equivalent average yield on total investment securities to 2.10% for the three months ended September 30, 2020 compared to 2.55% in the same period in 2019 reflected the impact of the 150 basis point reduction in the benchmark federal funds rate by the Federal Reserve in March 2020 and the related decline in market interest rates available on securities purchases.
Total interest expense decreased to $5.6 million for the three months ended September 30, 2020 as compared to $9.6 million for the same period in 2019. The decrease in interest expense for the three months ended September 30, 2020 was 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 0.66% for the three months ended September 30, 2020 and 1.41% for the three months ended September 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 $3.4 billion for the three months ended September 30, 2020 and $2.7 billion for the same period in 2019 due to increases in average deposits and average borrowings.
Average total deposits increased to $5.2 billion for the three months ended September 30, 2020, compared to $3.8 billion for the three months ended September 30, 2019 primarily due to a rise in average demand deposits and average savings, NOW and money market accounts. Average demand deposits totaled $2.2 billion for the three months ended September 30, 2020 compared to $1.4 billion for the three months ended September 30, 2019. The increase in demand deposits was driven by an inflow of deposits from PPP loan customers in 2020. The average balance of savings, NOW and money market accounts increased $577.9 million, or 27.4%, to $2.7 billion for the three months ended September 30, 2020 compared to $2.1 billion for the three months ended September 30, 2019. The cost of average savings, NOW and money market deposits was 0.31% for the 2020 third quarter compared to 1.09% for the 2019 third quarter. Average balances in certificates of deposit increased $22.4 million, or 8.2%, to $295.1 million for the three months ended September 30, 2020 compared to $272.7 million for the three months ended September 30, 2019. The cost of average certificates of deposit decreased to 1.29% for the three months ended September 30, 2020 compared to 2.09% for the same period in 2019. Average public fund deposits comprised 17.1% of total average deposits during the 2020 third quarter and 14.6% for the 2019 third quarter.
Average FHLB advances increased $85.7 million, or 35.1%, to $329.7 million for the three months ended September 30, 2020 compared to $244.0 million for the three months ended September 30, 2019.
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Analysis of Net Interest Income for the Nine Months Ended September 30, 2020 and 2019
Net interest income was $117.8 million for the nine months ended September 30, 2020 compared to $106.6 million for the nine months ended September 30, 2019. Average net interest-earning assets increased $553.6 million to $2.1 billion for the nine months ended September 30, 2020 compared to $1.5 billion for the nine months ended September 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 3.01% for the nine months ended September 30, 2020 compared to 3.33% for the nine months ended September 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, the Federal 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 0.3%, to $136.7 million for the nine months ended September 30, 2020 from $137.2 million for the same period in 2019, as average interest-earning assets increased $946.5 million, or 22.0%, to $5.2 billion for the nine months ended September 30, 2020 compared to $4.3 billion for the same period in 2019. The increase in average interest-earning assets for the nine months ended September 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 3.49% for the nine months ended September 30, 2020 compared to 4.29% for the nine months ended September 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 $6.3 million to $124.8 million for the nine months ended September 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 nine months ended September 30, 2020, average loans grew by $876.3 million, or 26.1%, to $4.2 billion as compared to $3.4 billion for the same period in 2019. The tax-equivalent yield on average loans was 3.94% for the nine months ended September 30, 2020 compared to 4.72% for the same period in 2019. The average balance of loans for the nine months ended September 30, 2020 includes $621.1 million of PPP loans with an average yield of 2.55%. The PPP loans had the effect of decreasing the tax-equivalent yield by 20 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 $5.8 million to $11.4 million for the nine months ended September 30, 2020 compared to $17.2 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 $2.5 million for the nine months ended September 30, 2020 as compared to $2.7 million for the same period in 2019. For the nine months ended September 30, 2020, average total investment securities decreased by $175.0 million, or 20.7%, to $669.1 million as compared to $844.1 million for the same period in 2019. The decline in tax-equivalent average yield on total investment securities to 2.31% for the nine months ended September 30, 2020 compared to 2.76% in the same period in 2019 reflected the impact of the reductions in the benchmark federal funds rate by the Federal 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 $19.0 million for the nine months ended September 30, 2020 as compared to $30.7 million for the same period in 2019. The decrease in interest expense for the nine months ended September 30, 2020 was 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 0.80% for the nine months ended September 30, 2020 and 1.48% for the nine months ended September 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 nine months ended September 30, 2020 and $2.8 billion for the same period in 2019 due to increases in average deposits and average borrowings.
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Average total deposits increased to $4.7 billion for the nine months ended September 30, 2020, compared to $3.8 billion for the nine months ended September 30, 2019 primarily due to an increase in average demand deposits and average savings, NOW and money market accounts. Average demand deposits totaled $1.9 billion for the nine months ended September 30, 2020 compared to $1.4 billion for the nine months ended September 30, 2019. The increase in demand deposits was primarily driven by an inflow of deposits from PPP loan customers in 2020. The average balance of savings, NOW and money market accounts increased $313.5 million, or 14.6%, to $2.5 billion for the nine months ended September 30, 2020 compared to $2.1 billion for the nine months ended September 30, 2019. The cost of average savings, NOW and money market deposits was 0.47% for the nine months ended September 30, 2020 compared to 1.20% for the same period in 2019. Average balances in certificates of deposit increased $19.3 million, or 6.7%, to $308.8 million for the nine months ended September 30, 2020 compared to $289.5 million for the nine months ended September 30, 2019. The cost of average certificates of deposit decreased to 1.59% for the nine months ended September 30, 2020 compared to 2.01% for the same period in 2019. Average public fund deposits comprised 17.8% of total average deposits during the nine months ended September 30, 2020 and 15.7% for the same period in 2019.
Average federal funds purchased and repurchase agreements decreased $4.7 million, to $11.0 million for the nine months ended September 30, 2020 compared to $15.7 million for the same period in 2019. The cost of average federal funds purchased and repurchase agreements was 0.96% for the nine months ended September 30, 2020 compared to 2.32% for the same period in 2019. Average FHLB advances increased $64.6 million, or 26.5%, to $308.1 million for the nine months ended September 30, 2020 compared to $243.5 million for the nine months ended September 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 of Nassau and Suffolk Counties on Long Island and the New 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 the Federal Reserve Board, legislative policies and governmental budgetary matters.
Based on our adoption of the CECL Standard on January 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 $1.5 million and $11.0 million was recorded during the three and nine months ended September 30, 2020, respectively, compared to a provision for credit losses of $1.0 million and $5.1 million, respectively, during the same periods in 2019. The third quarter 2020 provision was primarily driven by net charge-offs for the quarter. The allowance for credit losses at September 30, 2020 was consistent with the prior quarter primarily as a result of there being no change to the reasonable and supportable forecast component of the analysis. COVID-19 continues to have a profound impact on economic activity. While there have been some signs of economic improvement during the third quarter, significant uncertainty remains. Management still believes that the economic recovery will accelerate during 2021 and 2022, however, based on the aforementioned uncertainty and negative impact the virus has had to date, the decision was made to maintain the current risk level for the reasonable and supportable forecast component of the allowance for credit losses in the third quarter. The increase in the allowance for credit losses and related provision for credit losses for the nine months ended September 30, 2020 is primarily related to the reasonable and supportable forecast component of the analysis which includes the impact of COVID-19 on economic conditions, coupled with an increase in the specific reserves.
Net charge-offs were $1.4 million for the quarter ended September 30, 2020, compared to net recoveries of $2 thousand for the quarter ended September 30, 2019. Net charge-offs were $1.9 million for the nine months ended September 30, 2020, compared to net charge-offs of $4.3 million for the nine months ended September 30, 2019. The net charge-offs during the nine months ended September 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 of June 30, 2019. The ratio of the allowance for credit losses to non-accrual loans was 615%, 750% and 764%, at September 30, 2020, December 31, 2019, and September 30, 2019, respectively. The allowance for credit losses totaled $43.5 million at September 30, 2020 as compared to $32.8 million at December 31, 2019 and $32.2 million at September 30, 2019. The allowance as a percentage of total loans was 0.94% at September 30, 2020, compared to 0.89%
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at December 31, 2019 and 0.92% at September 30, 2019. We continue to carefully monitor the loan portfolio, real estate trends in Nassau and Suffolk Counties and the New York City boroughs, and current and forecasted economic conditions. Loans totaling $93.1 million, or 2.0%, of total loans at September 30, 2020 were categorized as classified loans compared to $88.3 million, or 2.4% of total loans, at December 31, 2019 and $82.5 million, or 2.4% of total loans, at September 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.
At September 30, 2020, $31.0 million of classified loans were commercial real estate (“CRE”) loans. Of the $31.0 million of CRE loans, $28.6 million were current and $2.4 million were past due. At September 30, 2020, $17.0 million of classified loans were residential real estate loans, with $14.1 million current and $2.9 million past due. Commercial, industrial, and agricultural loans represented $42.5 million of classified loans, with $40.6 million current and $1.9 million past due. Taxi medallion loans represented $9.6 million of the classified commercial, industrial and agricultural loans at September 30, 2020. All of our taxi medallion loans are collateralized by New York City medallions and have personal guarantees. As of September 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. At September 30, 2020, there was $1.2 million of classified real estate construction and land loans substantially all of which were current; $1.0 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 $2.5 billion, or 53.3%, of the total loan portfolio at September 30, 2020 compared to $2.4 billion, or 64.8%, at December 31, 2019 and $2.2 billion, or 62.7%, at September 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 of September 30, 2020, we had $15.9 million in loans which were individually evaluated, with a specific reserve of $7.0 million. Individually evaluated loans include $9.6 million of taxi medallion loans. As of June 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 brought New 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 of December 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”). At December 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 on January 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 at December 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 $7.1 million, or 0.15%, of total loans, at September 30, 2020, and $4.4 million, or 0.12% of total loans at December 31, 2019. TDRs represent $581 thousand of the non-accrual loans at September 30, 2020 and $405 thousand of the non-accrual loans at December 31, 2019.
There was no other real estate owned at September 30, 2020 and December 31, 2019.
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The following table presents changes in the allowance for credit losses:
Allocation of Allowance for Credit Losses
The following table presents the allocation of the total allowance for credit losses by loan classification:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 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 |
|
$ |
8,086 |
|
35.0 |
% |
|
$ |
12,150 |
|
42.7 |
% |
Multi-family mortgage loans |
|
|
1,674 |
|
18.3 |
|
|
|
4,829 |
|
22.1 |
|
Residential real estate mortgage loans |
|
|
3,198 |
|
9.7 |
|
|
|
1,882 |
|
13.4 |
|
Commercial, industrial and agricultural loans |
|
|
27,581 |
|
35.1 |
|
|
|
12,583 |
|
18.5 |
|
Real estate construction and land loans |
|
|
1,763 |
|
1.4 |
|
|
|
1,066 |
|
2.6 |
|
Installment/consumer loans |
|
|
1,172 |
|
0.5 |
|
|
|
276 |
|
0.7 |
|
Total |
|
$ |
43,474 |
|
100.0 |
% |
|
$ |
32,786 |
|
100.0 |
% |
Non-Interest Income
Total non-interest income during the three months ended September 30, 2020 was $6.8 million compared to $6.2 million for the three months ended September 30, 2019. The increase in non-interest income in the current quarter compared to 2019 was attributable to a $3.5 million increase in net securities gains, a $1.6 million increase in gain on sale of SBA loans, and a $0.2 million increase in title fees, partially offset by a $3.4 million loss on termination of swaps, a $1.0 million decrease in loan swap fees, and a $0.4 million decrease in service charges and other fees.
Total non-interest income during the nine months ended September 30, 2020 was $14.3 million compared to $17.0 million during the nine months ended September 30, 2019. The decline in non-interest income in the current year compared to 2019 was attributable to a $3.4 million loss on termination of swaps, a $2.6 million decrease in fair value of one loan held for sale, a $1.0 million decrease in service charges and other fees, and a $0.5 million decrease in other operating income, partially offset by a $3.3 million increase in net securities gains, a $1.4 million increase in gain on sale of SBA loans, and a $0.3 million increase in title fees.
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During the third quarter of 2020, we restructured our wholesale balance sheet, offsetting net securities gains of $3.5 million with swap termination losses of $3.4 million, which we expect will positively impact our net interest margin in the fourth quarter of 2020.
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 decreased to $0.6 million for the three months ended September 30, 2020, compared to $1.6 million for the three months ended September 30, 2019. Loan swap fees recorded on interest rate swaps decreased to $3.1 million for the nine months ended September 30, 2020, compared to $3.2 million for the nine months ended September 30, 2019. We increased the notional amount of interest rate swaps to $1.1 billion at September 30, 2020, compared to $823.8 million at December 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 $28.9 million during the three months ended September 30, 2020 compared to $24.2 million for the three months ended September 30, 2019. The increase was primarily due to merger expenses associated with our proposed merger with Dime, and higher salaries and benefits, FDIC assessments, technology and communications, professional services and occupancy and equipment expenses, partially offset by lower marketing and advertising, and other operating expenses.
Total non-interest expense was $78.2 million during the nine months ended September 30, 2020 compared to $70.8 million for the nine months ended September 30, 2019. The increase was primarily due to merger expenses associated with our proposed merger with Dime, and higher salaries and benefits, technology and communications, professional services, and FDIC assessments expenses, partially offset by lower marketing and advertising expenses and other operating expenses.
Salaries and benefits increased $2.1 million to $16.4 million for the three months ended September 30, 2020 compared to the same period in 2019. Technology and communications expenses increased $0.4 million to $2.5 million for the three months ended September 30, 2020 compared to the same period in the prior year. Marketing and advertising expenses decreased $0.8 million to $0.5 million for the three months ended September 30, 2020 compared to the same period in 2019. Professional services increased to $1.4 million in the third quarter of 2020 compared to $1.1 million in the third quarter of 2019. FDIC assessments increased to $0.7 million for the three months ended September 30, 2020, compared to $18 thousand for the same period in 2019, primarily due to FDIC assessment credits totaling $0.4 million in the 2019 period. Other operating expenses decreased $0.3 million to $1.5 million for the three months ended September 30, 2020 compared to the same period in 2019.
Salaries and benefits increased $4.6 million to $45.9 million for the nine months ended September 30, 2020 compared to the same period in 2019. Technology and communications expenses increased $1.3 million to $7.1 million for the nine months ended September 30, 2020 compared to the same period in the prior year. Professional services increased to $3.4 million in the third quarter of 2020 compared to $2.6 million for the same period in 2019. Marketing and advertising expenses decreased $1.5 million to $2.2 million for the nine months ended September 30, 2020, compared to the same period in 2019. FDIC assessments increased to $1.2 million for the nine months ended September 30, 2020, compared to $0.7 million for the same period in 2019, primarily due to FDIC assessment credits totaling $0.4 million in the 2019 period. Other operating expenses decreased $0.6 million to $5.0 million for the nine months ended September 30, 2020 compared to the same period in 2019.
The rise in salaries and employee benefits in the three months ended and nine months ended 2020 compared to 2019 was related to higher incentive accruals in 2020. 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.
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Income Taxes
Income tax expense was $4.0 million for the three months ended September 30, 2020 compared to $3.9 million for the three months ended September 30, 2019, reflecting a higher effective tax rate, partially offset by lower income before income taxes in the 2020 period. The effective tax rate was 23.4% for the three months ended September 30, 2020 compared to 21.7% for the same period in 2019. The increase in our effective tax rate resulted primarily from non-deductible merger expenses in the 2020 third quarter.
Income tax expense was $9.8 million for the nine months ended September 30, 2020 compared to $10.1 million for the nine months ended September 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 22.9% for the nine months ended September 30, 2020 compared to 21.3% for the same period in 2019. The increase in our effective tax rate resulted primarily from non-deductible merger expenses in the 2020 third quarter.
Financial Condition
Total assets were $6.3 billion at September 30, 2020, $1.4 billion, or 28.5%, higher than December 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 $593.3 million, or 506.2%, to $710.5 million at September 30, 2020 compared to December 31, 2019. Total securities decreased $214.4 million, or 26.6%, to $590.4 million at September 30, 2020 compared to December 31, 2019. Total loans held for investment, net, increased $959.2 million, or 26.1%, to $4.6 billion at September 30, 2020 compared to December 31, 2019, inclusive of PPP loans totaling $960.4 million. Net deferred loan fees were $14.2 million at September 30, 2020, inclusive of $22.7 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 $5.8 billion at September 30, 2020, $1.4 billion higher than December 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 $1.6 billion, or 40.7%, to $5.4 billion at September 30, 2020, compared to December 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 $727.3 million, or 47.9%, to $2.2 billion at September 30, 2020 compared to December 31, 2019. The rise in demand deposits in the third quarter of 2020 was primarily driven by an inflow of PPP-related deposits. Savings, NOW and money market deposits increased $844.7 million, or 42.5%, to $2.8 billion at September 30, 2020 compared to December 31, 2019. Certificates of deposit decreased $17.6 million, or 5.7%, to $290.4 million at September 30, 2020 compared to December 31, 2019. FHLB advances decreased $220.0 million to $215.0 million at September 30, 2020 compared to December 31, 2019.
Total stockholders' equity increased $15.1 million to $512.2 million at September 30, 2020 compared to $497.2 million at December 31, 2019. We adopted the CECL Standard on January 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 $33.1 million, partially offset by $14.4 million in dividends, $4.6 million in purchases of treasury stock, and $0.4 million of other comprehensive loss, net of deferred income taxes. During the nine months ended September 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.
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The Holding Company’s principal sources of liquidity included cash and cash equivalents of $1.5 million as of September 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 nine months ended September 30, 2020, the Bank paid $21.0 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 of September 30, 2020, the Bank had $68.0 million of retained net income available for dividends to the Holding Company. In the event the Holding Company subsequently expands its current operations, in 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 nine months ended September 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. At September 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 of September 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 of September 30, 2020, the Bank had no FHLB overnight borrowings outstanding and $215.0 million outstanding in FHLB term borrowings. As of December 31, 2019, the Bank had $195.0 million FHLB overnight borrowings outstanding and $240.0 million outstanding in FHLB term borrowings. The Bank had $1.4 million and $1.0 million at September 30, 2020 and December 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 of September 30, 2020, the Bank had $67.1 million outstanding in brokered certificates of deposit and $50.2 million outstanding in brokered money market accounts. As of December 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
58
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 at September 30, 2020 and December 31, 2019.
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 of September 30, 2020, the most recent notification from the FDIC 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.
The following tables present actual capital levels and minimum required levels for the Company and the Bank under Basel III rules at September 30, 2020 and December 31, 2019:
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Asset/Liability Management
Management considers interest rate risk to be our most significant market risk. Market risk is the risk of loss from adverse changes in market prices and rates. Interest rate risk is the exposure to adverse changes in our net income as a result of changes in interest rates.
Our primary earnings source is net interest income, which is affected by changes in the level of interest rates, the relationship between rates, the impact of interest rate fluctuations on asset prepayments, the level and composition of deposits and liabilities, and the credit quality of earning assets. Our asset and liability management objectives are to maintain a strong, stable net interest margin, to utilize our capital effectively without taking undue risks, to maintain adequate liquidity, and to reduce vulnerability of our operations to changes in interest rates.
Our Asset and Liability Committee evaluates periodically, but at least four times a year, the impact of changes in market interest rates on assets and liabilities, net interest margin, capital and liquidity. Risk assessments are governed by policies and limits established by senior management, which are reviewed and approved by the full Board of Directors at least annually. The economic environment continually presents uncertainties as to future interest rate trends. The Asset and Liability Committee regularly utilizes a model that projects net interest income based on increasing or decreasing interest rates, in order to be better able to respond to changes in interest rates.
At September 30, 2020, $478.0 million, or 84.3%, of our available for sale and held to maturity securities had fixed interest rates. At September 30, 2020, $2.9 billion, or 62.5%, of our loan portfolio had adjustable or floating interest rates. Changes in interest rates affect the value of our interest-earning assets and, in particular, our securities portfolio. Generally, the value of securities fluctuates inversely with changes in interest rates. Increases in interest rates could result in decreases in the market value of interest-earning assets, which could adversely affect our stockholders' equity and results of operations if sold. We are also subject to reinvestment risk associated with changes in interest rates. Changes in market interest rates also could affect the type (fixed-rate or adjustable-rate) and amount of loans we originate and the average life of loans and securities, which can impact the yields earned on our loans and securities. In periods of decreasing interest rates, the average life of loans and securities we hold may be shortened to the extent increased prepayment activity occurs during such periods which, in turn, may result in the investment of funds from such prepayments in lower yielding assets. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities. Additionally, increases in interest rates may result in decreasing loan prepayments with respect to fixed rate loans (and therefore an increase in the average life of such loans), may result in a decrease in loan demand, and may make it more difficult for borrowers to repay adjustable rate loans.
We utilize the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. Management routinely monitors simulated net interest income sensitivity over a rolling two-year horizon. The simulation model captures the impact of changing interest rates on the interest income received and the interest expense paid on all assets and liabilities reflected on our consolidated balance sheet. This sensitivity analysis is compared to the asset and liability policy limits that specify a maximum tolerance level for net interest income exposure over a one-year horizon given 100 and 200-basis point upward shifts in interest rates and a 100-basis point downward shift in interest rates. A parallel and pro-rata shift in rates over a twelve-month period is assumed.
In addition to the above scenarios, we consider other non-parallel rate shifts that would also exert pressure on earnings. The current low interest rate environment presents the possibility for a flattening of the yield curve, which presents a challenge to a bank, like us, that derives most of its revenue from net interest margin. During the nine months ended September 30, 2020, the yield on U.S. Treasury 5-year notes decreased 141 basis points from 1.69% to 0.28%, while the yield on 3-month Treasury bills decreased 145 basis points from 1.55% to 0.10%. The 3-month/5-year Treasury spread increased from 14 basis points at December 31, 2019 to 18 basis points at September 30, 2020, and continues to be considerably flat compared to the 3-month/5-year Treasury spread of 81 basis points at December 31, 2017. A continued flat or inverted yield curve in 2020 may adversely affect net interest income as borrowers tend to refinance higher-rate fixed rate loans at lower rates and we may not be able to reinvest those prepayments in assets earning interest rates as high as the rates on those prepaid assets.
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The following reflects our net interest income sensitivity analysis at September 30, 2020 and December 31, 2019:
As noted in the table above, a 200-basis point increase in interest rates is projected to increase net interest income by 6.12% in year 1 and increase net interest income by 1.62% in year 2. Our balance sheet sensitivity to such a move in interest rates at September 30, 2020 increased as compared to December 31, 2019 (which was an increase of 0.70% in net interest income over a twelve-month period). This increase is the result of a higher portion of our loans repricing to market rates in addition to the increase in our floating rate portfolio over the last year. We also continue to show the ability to hold the costs of interest-bearing deposits to below market rates. Overall, our strategy has been to proactively take advantage of the falling rate cycle in aggressively lowering deposit costs, ultimately dampening the effect of variable and adjustable rate loan repricing and additional fixed rate loan refinancing. Over the intervening year, the effective duration (a measure of price sensitivity to interest rates) of the bond portfolio decreased from 2.35 years at December 31, 2019 to 2.03 years at September 30, 2020.
The preceding sensitivity analysis does not represent a Company forecast and should not be relied on as being indicative of expected operating results. These hypothetical estimates are based on numerous assumptions including, but not limited to, the nature and timing of interest rate levels and yield curve shapes, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment and replacement of asset and liability cash flows. While assumptions are developed based on perceived current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences may change. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals, prepayment penalties and product preference changes and other internal and external variables. Furthermore, the sensitivity analysis does not reflect actions that management might take in responding to, or anticipating, changes in interest rates and market conditions.
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Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company's management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2020. Based on that evaluation, the Company's Principal Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this quarterly report. There has been no change in the Company's internal control over financial reporting during the quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are subject to certain pending and threatened legal actions that arise out of the normal course of business. In the opinion of management, the resolution of any such pending or threatened litigation is not expected to have a material adverse effect on the Company's consolidated financial statements.
Additionally, two lawsuits have been filed in federal courts by purported shareholders of the Company alleging the registration statement filed by the Company with the SEC on September 14, 2020 in connection with the Merger with Dime contains materially misleading omissions or misrepresentations in violation of Section 14(a) of the Exchange Act, and Rule 14a-9 promulgated thereunder. The plaintiffs generally seek injunctive relief, unspecified damages, and an award of attorneys’ fees and expenses. The Company is reviewing the complaints and has not yet formally responded. Such litigations are common in connection with mergers involving public companies, regardless of any merits related to the underlying transaction. Although the ultimate outcome of these actions cannot be predicted with certainty, the Company believes that the claims asserted against them in these lawsuits are without merit and intend to defend against these actions vigorously.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as supplemented by the disclosure in Item 1A. Risk Factors included in the Company’s Quarterly Report on Form 10-Q for the quarters ended June 30, 2020 and March 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Stock Repurchases.
The following table presents information in connection with repurchases of our shares of common stock during the three months ended September 30, 2020:
(1) | Includes shares withheld by the Company to pay the taxes associated with the vesting of restricted stock awards. |
(2) | The Board of Directors approved a stock repurchase plan in March 2006 that authorized the repurchase of 309,000 shares. In February 2019, the Company announced the adoption of a new stock repurchase plan for up to 1,000,000 shares, replacing the previous plan. There is no expiration date for the stock repurchase plan. No shares were purchased under the repurchase program during the three months ended September 30, 2020. |
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 6. Exhibits
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2.1 |
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31.1 |
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Certification of Principal Executive Officer pursuant to Rule 13a-14(a) |
31.2 |
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Certification of Principal Financial Officer pursuant to Rule 13a-14(a) |
32.1 |
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101 |
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The following financial statements from Bridge Bancorp, Inc.'s Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2020, filed on November 6, 2020, formatted in XBRL: (i) Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, (ii) Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2020 and 2019, (iii) Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2020 and 2019, (iv) Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended September 30, 2020 and 2019, (v) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019, and (vi) the Condensed Notes to Consolidated Financial Statements. |
101.INS |
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XBRL Instance Document |
101.SCH |
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XBRL Taxonomy Extension Schema Document |
101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB |
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XBRL Taxonomy Extension Labels Linkbase Document |
101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF |
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XBRL Taxonomy Extension Definitions Linkbase Document |
104 |
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Cover page to this Quarterly Report on Form 10-Q, formatted in Inline XBRL |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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BRIDGE BANCORP, INC. |
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Registrant |
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November 6, 2020 |
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/s/ Kevin M. O'Connor |
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Kevin M. O'Connor |
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President and Chief Executive Officer |
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November 6, 2020 |
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/s/ John M. McCaffery |
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John M. McCaffery |
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Executive Vice President and Chief Financial Officer |
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EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a)
I, Kevin M. O'Connor, certify that:
1) | I have reviewed this quarterly report on Form 10-Q of Bridge Bancorp, Inc.; |
2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4) | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5) | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: November 6, 2020
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/s/ Kevin M. O'Connor |
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Kevin M. O'Connor |
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President and Chief Executive Officer |
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EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a)
I, John M. McCaffery, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Bridge Bancorp, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: November 6, 2020
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/s/ John M. McCaffery |
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John M. McCaffery |
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Executive Vice President and Chief Financial Officer |
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This certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing.
EXHIBIT 32.1
CERTIFICATION PURSUANT TO RULE 13a-14(b) 18 U.S.C. SECTION 1350,
As adopted pursuant to
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Bridge Bancorp, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2020 as filed with the Securities and Exchange Commission, (the “Report”), we, Kevin M. O'Connor, President and Chief Executive Officer of the Company and, John M. McCaffery, Executive Vice President and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Date: November 6, 2020 |
/s/ Kevin M. O'Connor |
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Kevin M. O'Connor |
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President and Chief Executive Officer |
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/s/ John M. McCaffery |
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John M. McCaffery |
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Executive Vice President and Chief Financial Officer |