ITEM 1. BUSINESS
Forward-Looking Statements
This Annual Report contains certain “forward-looking statements,” which can be identified by the use of such words as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “could,” “may,” “should,” “will,” and words of similar meaning. These forward-looking statements include, but are not limited to:
•statements of our goals, intentions, and expectations;
•statements regarding our business plans, prospects, growth and operating strategies;
•statements regarding the quality of our loan and investment portfolios; and
•estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties, and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
•the disruption to local, regional, national and global economic activity caused by infectious disease outbreaks, including the novel coronavirus pandemic and variants thereof, including the delta and omicron variants (“COVID-19”), and the significant impact that such pandemics may have on our growth, operations, earnings and asset quality;
•general economic conditions, internationally, nationally, or in our market areas, including inflationary pressures, supply chain disruptions, employment prospects, real estate values, and geopolitical risks that are worse than expected;
•competition among depository and other financial institutions;
•inflation and changes in the interest rate environment that reduce our margins and yields or reduce the fair value of financial instruments;
•adverse changes in the securities or credit markets;
•changes in laws, tax policies, or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
•changes in the quality and/or composition of our loan and securities portfolios;
•our ability to enter new markets successfully and capitalize on growth opportunities;
•our ability to access cost-effective funding;
•our ability to successfully integrate acquired entities;
•changes in consumer demand, spending, borrowing and savings habits;
•changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board (the “FASB”), the Securities and Exchange Commission (the “SEC”), or the Public Company Accounting Oversight Board;
•cyber attacks, computer viruses and other technological risks that may breach the security of our website or other systems to obtain unauthorized access to confidential information and destroy data or disable our systems;
•technological changes that may be more difficult or expensive than expected;
•changes in our organization, compensation, and benefit plans;
•our ability to retain key employees;
•changes in the level of government support for housing finance;
•changes in monetary or fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board (the “FRB”);
•the ability of third-party providers to perform their obligations to us;
•the effects of any U.S. Government shutdowns;
•significant increases in our loan losses; and
•changes in the financial condition, results of operations, or future prospects of issuers of securities that we own.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Accordingly, you should not place undue reliance on such statements. Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements after the date of this Form 10-K, whether as a result of new information, future events or otherwise.
Northfield Bancorp, Inc.
Northfield Bancorp, Inc., a Delaware corporation (the “Company”), was organized in 2010 and is the holding company for Northfield Bank. Northfield Bancorp, Inc. uses the support staff and offices of Northfield Bank (the "Bank") and reimburses Northfield Bank for these services. If Northfield Bancorp, Inc. expands or changes its business in the future, it may hire its own employees. In the future, we may pursue other business activities, including mergers and acquisitions, investment alternatives and diversification of operations.
Northfield Bancorp, Inc. is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System.
Northfield Bancorp, Inc.’s main office is located at 581 Main Street, Suite 810, Woodbridge, New Jersey 07095, and its telephone number at this address is (732) 499-7200. The Company's filings with the SEC, including copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these filings, if any, are available, free of charge, as soon as practicable after they are filed with the SEC under the Investor Relations section of the Company's website, www.eNorthfield.com, and on the SEC website, www.sec.gov. Information on these websites is not and should not be considered to be a part of this Annual Report on Form 10-K.
Northfield Bank
Northfield Bank was organized in 1887 and is a federally chartered savings bank. Northfield Bank conducts business from its operations center located in Woodbridge, New Jersey, its home office located in Staten Island, New York, and its 37 additional branch offices located in New York and New Jersey. The branch offices are located in Staten Island, Brooklyn, and the New Jersey counties of Hunterdon, Mercer, Middlesex, and Union. Northfield Bank also offers select loan and deposit products through the internet.
On July 1, 2020, the Company completed its acquisition of VSB Bancorp, Inc. (“Victory”), parent company of Victory State Bank, in a stock transaction, which, after purchase accounting adjustments, added $402.8 million to total assets, including $180.4 million to loans, and $354.6 million to deposits. Victory State Bank operated six branch offices in Staten Island, New York (two of which were subsequently consolidated with existing branches). Under the terms of the merger agreement, each share of Victory common stock was exchanged for 2.0463 shares of Northfield common stock with fractional shares paid out in cash, valued at approximately $41.2 million.
Northfield Bank’s principal business consists of originating commercial real estate loans (primarily loans secured by multifamily properties), construction and land loans, commercial and industrial loans, and home equity loans and lines of credit. From time to time Northfield Bank will also purchase loan participations and pools of loans. For liquidity and other financial reasons, Northfield Bank will also purchase investment securities, including mortgage-backed securities and corporate bonds, and to a lesser extent deposit funds in other financial institutions, including the Federal Reserve Bank of New York, and the Federal Home Loan Bank (“FHLB”) of New York (“FHLBNY”). Northfield Bank offers a variety of deposit accounts, including certificates of deposit, passbook, statement, and money market savings accounts, transaction deposit accounts (negotiable orders of withdrawal (“NOW”) accounts and interest and non-interest bearing demand accounts), individual retirement accounts, and, to a lesser extent, when it is deemed cost effective, brokered deposits. Deposits are Northfield Bank’s primary source of funds for its lending and investing activities. Northfield Bank also borrows funds, principally through FHLBNY advances and repurchase agreements with brokers. Northfield Bank owns 100% of NSB Services Corp., which, in turn, owns 100% of the voting common stock of a real estate investment trust, NSB Realty Trust, which holds primarily mortgage loans. In addition, Northfield Bank refers its customers to independent third parties that provide non-deposit investment products, merchant processing services, and one-to-four family residential mortgage products.
Northfield Bank is subject to comprehensive regulation and examination by the Office of the Comptroller of the Currency (the “OCC”).
Northfield Bank’s main office is located at 1731 Victory Boulevard, Staten Island, New York 10314, and its telephone number at this address is (718) 448-1000. Its website address is www.eNorthfield.com. Information on this website is not and should not be considered to be a part of this Annual Report on Form 10-K.
Market Area and Competition
Northfield Bank has been in business since 1887, offering a variety of financial products and services to meet the needs of the communities we serve. Our commercial and retail banking network consists of multiple delivery channels including full-service banking offices, automated teller machines and telephone and internet banking capabilities, including mobile banking and remote deposit capture. We consider our competitive products and pricing, branch network, customer service, and financial position, as our major strengths in attracting and retaining customers in our market areas.
We face intense competition in our market areas both in making loans and attracting deposits. Our market areas have a high concentration of financial institutions, including large money center and regional banks, non-traditional banks, community banks, and credit unions. We face additional competition for deposits from money market funds, brokerage firms, mutual funds, and insurance companies. Some of our competitors offer products and services that we do not offer, such as trust services and private banking. In addition, competition has further intensified as a result of advances in technology and product delivery systems, and we face strong competition for our borrowers, depositors, and other customers from Financial Technology (“Fintech”) companies that provide web-based solutions to traditional retail banking services and products. Fintech companies tend to have stronger operating efficiencies and less regulatory burdens than traditional banks.
Our deposit sources are primarily concentrated in the communities surrounding our branch offices in the New York counties of Richmond (Staten Island) and Kings (Brooklyn), and Hunterdon, Mercer, Middlesex and Union counties in New Jersey. As of June 30, 2021 (the latest date for which information is publicly available), we ranked fourth in deposit market share out of 17 institutions for Federal Deposit Insurance Corporation (the “FDIC”) Insured Institutions in Staten Island with an 11.95% market share. As of that date, we ranked 18th in deposit market share out of 41 institutions with a 0.62% deposit market share in Brooklyn, New York, and we ranked 13th in deposit market share out of 53 financial institutions with a combined deposit market share of 1.46% in the Hunterdon, Mercer, Middlesex and Union counties in New Jersey.
The following table sets forth the unemployment rates for the communities we serve and the national average for the last five years, as published by the U.S. Bureau of Labor Statistics:
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| Unemployment Rate at December 31, |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
Hunterdon County, NJ | 3.5 | % | | 5.5 | % | | 2.7 | % | | 2.8 | % | | 3.1 | % |
Middlesex County, NJ | 4.3 | | | 6.6 | | | 3.0 | | | 3.1 | | | 3.5 | |
Mercer County, NJ | 3.8 | | | 6.0 | | | 3.1 | | | 3.1 | | | 3.6 | |
Union County, NJ | 5.3 | | | 7.8 | | | 3.7 | | | 3.7 | | | 4.2 | |
Richmond County, NY | 7.1 | | | 9.4 | | | 3.0 | | | 3.9 | | | 3.8 | |
Kings County, NY | 8.1 | | | 11.3 | | | 3.2 | | | 4.0 | | | 4.0 | |
National Average | 3.9 | | | 6.7 | | | 3.5 | | | 3.6 | | | 4.1 | |
The following table sets forth median household income at December 31, 2021 and 2020, for the communities we serve, as published by the U.S. Census Bureau:
| | | | | | | | | | | |
| Median Household Income |
| at December 31, |
| 2021 | | 2020 |
Hunterdon County, NJ | $ | 118,864 | | | $ | 121,401 | |
Middlesex County, NJ | 95,004 | | | 92,389 | |
Mercer County, NJ | 86,188 | | | 85,018 | |
Union County, NJ | 90,213 | | | 84,594 | |
Richmond County, NY | 92,563 | | | 87,011 | |
Kings County, NY | 68,871 | | | 65,129 | |
National Average | 67,761 | | | 66,010 | |
COVID-19
The COVID-19 pandemic has negatively impacted the national and local economy, disrupted supply chains and had increased unemployment levels. While vaccination rollouts, government stimulus, continued business re-openings and increased consumer activity (as social restrictions have eased) led to a sharp rebound in economic activity during 2021, there are substantial variations in the pace of recovery across and within corporate sectors, and economic activity both on a national level and in the markets we serve has not yet returned to pre-pandemic levels. The initial temporary closure and gradual reopening of many businesses and the implementation of social distancing and stay-at-home policies has, and will, continue to impact many of the Company’s customers. The economic recovery in 2021 was affected mid-year by the COVID-19 Delta variant and again in late 2021 by the Omicron variant and current and future variants may threaten to undermine the economic recovery. The Company is committed to supporting its customers, employees and communities and continues to update protocols to adapt to the changing environment. A majority of the Company's bank branches offer drive through services without interruption, while lobbies are fully open. The Company continues to provide secure and efficient remote and in-person work options for back office employees.
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the Paycheck Protection Program and Health Care Enhancement Act were passed in March and April 2020, which were intended to provide emergency relief to several groups and individuals impacted by the COVID-19 pandemic. To assist its customers during the pandemic, the Company implemented several actions including loan modifications such as principal and/or interest payment deferrals, and participation in the Paycheck Protection Program (“PPP”) which provides loans for small businesses to cover eligible payroll, utilities, rent and interest. The loans are fully guaranteed by the Small Business Administration (“SBA”) and may be forgiven if borrowers maintain their payrolls and satisfy certain other conditions for a period of time during the COVID-19 pandemic. In addition, the Company also assisted customers by waiving fees during the early part of the pandemic.
Lending Activities
Our principal lending activity is the origination of multifamily real estate loans and, to a lesser extent, other commercial real estate loans (typically on office, retail, and industrial properties), in New York City, New Jersey, and eastern Pennsylvania. We also originate one-to-four family residential real estate loans (non-owner occupied investment properties), construction and land loans, commercial and industrial loans, and home equity loans and lines of credit.
Loan Originations, Purchases and Sales, Participations, and Servicing. All loans we originate are underwritten pursuant to our policies and procedures or are properly approved as exceptions to our policies and procedures. Our ability to originate fixed- or adjustable-rate loans is dependent on the relative demand for such loans, which is affected by various factors including current and anticipated future market interest rates. Our loan origination activity may be adversely affected by changes in economic conditions that result in decreased loan demand. Our home equity loans and lines of credit typically are generated through digital and social media advertising, referrals from branch personnel, direct mail advertisements and online applications through our website. A significant portion of our multifamily real estate loans and other commercial real estate loans are generated with the use of third-party loan brokers. Our commercial and industrial loans typically are generated through our loan and business development officers and referrals from accountants and other professional contacts. We typically retain in our portfolio all loans we originate and generally only sell non-performing loans. Beginning in 2019, we began offering interest rate swap contracts to qualified commercial borrowers.
From time-to-time, we may sell or purchase participation interests in individual loans (in addition to loans we acquire in assisted transactions, mergers or acquisitions, and pool purchases). We underwrite our participation interest in the loans that we are purchasing according to our own underwriting criteria and procedures. At December 31, 2021, we had outstanding balances totaling $62.6 million of loan participations that we purchased (where we are not the primary lender) and $44.2 million of loan participations that we sold (where we are the primary lender). At December 31, 2020, we had outstanding balances totaling $72.1 million of loan participations that we purchased and $32.5 million of loan participations that we sold. All loan participations are secured by real estate and adhere to our loan policies. At December 31, 2021, all participation loans were performing in accordance with their terms.
Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory, underwriting standards approved by our Board of Directors. The loan approval process is intended to assess the borrower’s ability to repay the loan and the value of the collateral that will secure the loan, if any. To assess the borrower’s ability to repay, we review the borrower’s income and credit history, and information on the historical and projected income and expenses of the borrower.
In underwriting a loan secured by real property, we require an appraisal of the property by an independent licensed or certified appraiser approved by our Board of Directors. For commercial real estate loans $500,000 or less, we obtain an evaluation from an independent firm for non-special type properties. The appraisals and evaluations of multifamily and other commercial real estate properties are also reviewed by an independent appraisal management firm. We, along with the assistance of a third-party inspector, review and inspect properties before disbursement of funds during the term of a construction loan. Generally, management obtains updated appraisals when a loan is deemed impaired. These appraisals may be more limited than those prepared for the underwriting of a new loan. In addition, when we acquire other real estate owned, we generally obtain a current appraisal to substantiate the net carrying value of the asset.
The Board of Directors maintains a Loan Committee consisting of bank directors to: periodically review and recommend for approval our policies related to lending as prepared by management; approve or reject loan applicants meeting certain criteria; and monitor loan quality including concentrations and certain other aspects of our lending functions, as applicable. Certain Northfield Bank officers, at levels beginning with vice president, have individual lending authority that is approved by the Board of Directors.
Loan Portfolio Composition. On January 1, 2021, the Company adopted new accounting guidance known as the current expected credit loss (“CECL”) standard for measuring credit losses, which replaced the incurred loss methodology. As a result of adopting CECL, the Company combined its originated loan portfolio and the acquired loan portfolio into the respective portfolio segments. Other than to combine the originated and non-purchased credit-deteriorated (“PCD”) (formerly purchased credit-impaired (“PCI”)) acquired loan portfolios, the Company's portfolio segments and loan classes remain unchanged following the adoption of the CECL standard. Prior period disclosures have been revised to conform to current period presentation (by combining originated and acquired portfolio segments), however, the Company did not recast comparative financial information and that is still presented in accordance with previous applicable provisions of U.S. GAAP. The following table sets forth the composition of our loan portfolio, by type of loan, at the dates indicated.
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| At December 31, |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
| Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
| (Dollars in thousands) |
Total loans: | | | | | | | | | |
Real estate loans: | | | | | | | | | |
Multifamily | $ | 2,518,065 | | | 66.16 | % | | $ | 2,509,310 | | | 65.71 | % | | $ | 2,304,824 | | | 67.21 | % | | $ | 2,076,020 | | | 64.11 | % | | $ | 1,934,861 | | | 61.72 | % |
Commercial | 808,597 | | | 21.24 | | | 716,973 | | | 18.78 | | | 641,708 | | | 18.71 | | | 632,574 | | | 19.53 | | | 609,187 | | | 19.43 | |
One-to-four family residential | 183,665 | | | 4.82 | | | 210,817 | | | 5.52 | | | 271,717 | | | 7.92 | | | 317,248 | | | 9.80 | | | 375,995 | | | 12.00 | |
Home equity and lines of credit | 109,956 | | | 2.89 | | | 91,126 | | | 2.39 | | | 96,936 | | | 2.83 | | | 96,176 | | | 2.97 | | | 86,709 | | | 2.77 | |
Construction and land | 27,495 | | | 0.72 | | | 74,318 | | | 1.95 | | | 40,821 | | | 1.19 | | | 38,555 | | | 1.19 | | | 51,746 | | | 1.65 | |
Commercial and industrial loans(1) | 141,005 | | | 3.70 | | | 194,352 | | | 5.09 | | | 54,017 | | | 1.58 | | | 56,037 | | | 1.73 | | | 51,774 | | | 1.65 | |
Other loans | 2,015 | | | 0.05 | | | 3,029 | | | 0.08 | | | 2,083 | | | 0.05 | | | 1,525 | | | 0.05 | | | 1,467 | | | 0.05 | |
Total loans originated | 3,790,798 | | | 99.58 | | | 3,799,925 | | | 99.52 | | | 3,412,106 | | | 99.49 | | | 3,218,135 | | | 99.38 | | | 3,111,739 | | | 99.27 | |
PCD/PCI loans | 15,819 | | | 0.42 | | | 18,518 | | | 0.48 | | | 17,365 | | | 0.51 | | | 20,143 | | | 0.62 | | | 22,741 | | | 0.73 | |
Total loans | $ | 3,806,617 | | | 100.00 | % | | $ | 3,818,443 | | | 100.00 | % | | $ | 3,429,471 | | | 100.00 | % | | $ | 3,238,278 | | | 100.00 | % | | $ | 3,134,480 | | | 100.00 | % |
Other items: | | | | | | | | | | | | | | | | | | | |
Deferred loan costs, net (2) | — | | | | | 4,795 | | | | | 7,614 | | | | | 6,892 | | | | | 6,339 | | | |
Allowance for credit losses | (38,973) | | | | | (37,607) | | | | | (28,707) | | | | | (27,497) | | | | | (26,160) | | | |
Net loans held-for-investment | $ | 3,767,644 | | | | | $ | 3,785,631 | | | | | $ | 3,408,378 | | | | | $ | 3,217,673 | | | | | $ | 3,114,659 | | | |
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(1) Included in commercial and industrial loans at December 31, 2021 and 2020 are PPP loans totaling $40.5 million and $126.5 million, respectively.
(2) Under CECL, origination deferred fees, deferred fees on acquired loans, and purchase accounting adjustments in connection with loans acquired are included in loans by respective portfolio.
Loan Portfolio Maturities. The following tables summarize the scheduled repayments of our loan portfolio and weighted average contractual rate by loan type at December 31, 2021. Demand loans (loans having no stated repayment schedule or maturity) and overdraft loans are reported as being due in the year ending December 31, 2022. Maturities are based on the final contractual payment date and do not reflect the effect of prepayments, repricing and scheduled principal amortization.
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| Loans Held-For-Investment |
| Multifamily | | Commercial Real Estate | | One-to-Four Family Residential | | Home Equity and Lines of Credit |
| Amount | | Weighted Average Rate | | Amount | | Weighted Average Rate | | Amount | | Weighted Average Rate | | Amount | | Weighted Average Rate |
| (Dollars in thousands) |
Due | | | | | | | | | | | | | | | |
One year or less | $ | 214 | | | 4.04 | % | | $ | 18,703 | | | 3.79 | % | | $ | 1,712 | | | 5.83 | % | | $ | 215 | | | 3.64 | % |
After one year through five years | 40,814 | | | 3.49 | % | | 40,102 | | | 4.49 | % | | 2,267 | | | 4.10 | % | | 6,088 | | | 3.42 | % |
After five years through fifteen years | 120,815 | | | 4.28 | % | | 174,967 | | | 4.37 | % | | 29,628 | | | 4.80 | % | | 37,557 | | | 3.67 | % |
After fifteen years | 2,356,222 | | | 3.50 | % | | 574,825 | | | 3.94 | % | | 150,058 | | | 3.87 | % | | 66,096 | | | 3.06 | % |
Total | $ | 2,518,065 | | | 3.54 | % | | $ | 808,597 | | | 4.06 | % | | $ | 183,665 | | | 4.04 | % | | $ | 109,956 | | | 3.29 | % |
| | | | | | | | | | | | | | | |
| Construction and Land | | Commercial and Industrial | | Other | | PCD |
| Amount | | Weighted Average Rate | | Amount | | Weighted Average Rate | | Amount | | Weighted Average Rate | | Amount | | Weighted Average Rate (1) |
| (Dollars in thousands) | | | | |
Due | | | | | | | | | | | | | | | |
One year or less | $ | 16,392 | | | 4.51 | % | | $ | 65,468 | | | 4.61 | % | | $ | 1,735 | | | 0.06 | % | | $ | 6,161 | | | 13.12 | % |
After one year through five years | 4,181 | | | 4.38 | % | | 56,478 | | | 1.54 | % | | 119 | | | 1.07 | % | | 2,031 | | | 17.86 | % |
After five years through fifteen years | 2,940 | | | 3.25 | % | | 14,624 | | | 4.89 | % | | 82 | | | 4.99 | % | | 7,135 | | | 17.14 | % |
After fifteen years | 3,982 | | | 4.21 | % | | 4,435 | | | 2.07 | % | | 79 | | | 1.98 | % | | 492 | | | 5.55 | % |
Total | $ | 27,495 | | | 4.31 | % | | $ | 141,005 | | | 3.33 | % | | $ | 2,015 | | | 0.40 | % | | $ | 15,819 | | | 15.31 | % |
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(1) Represents estimated accretable yield.
| | | | | | | | | | | | | | |
| | Total Loans |
| | Amount | | Weighted Average Rate |
| | | | |
Due | | | | |
One year or less | | $ | 110,600 | | | 4.88 | % |
After one year through five years | | 152,080 | | | 3.25 | % |
After five years through fifteen years | | 387,748 | | | 4.55 | % |
After fifteen years | | 3,156,189 | | | 3.59 | % |
Total | | $ | 3,806,617 | | | 3.71 | % |
The following table summarizes fixed and adjustable-rate loans at December 31, 2021, that are contractually due after December 31, 2022:
| | | | | | | | | | | | | | | | | |
| Due After December 31, 2021 |
| Fixed Rate | | Adjustable Rate | | Total |
| (Dollars in thousands) |
Real estate loans: | | | | | |
Multifamily | $ | 83,217 | | | $ | 2,434,634 | | | $ | 2,517,851 | |
Commercial | 59,740 | | | 730,154 | | | 789,894 | |
One-to-four family residential | 81,078 | | | 100,875 | | | 181,953 | |
Construction and land | 3,159 | | | 7,944 | | | 11,103 | |
Home equity and lines of credit | 55,294 | | | 54,447 | | | 109,741 | |
Commercial and industrial loans | 58,624 | | | 16,913 | | | 75,537 | |
Other loans | 280 | | | — | | | 280 | |
PCD loans | 2,784 | | | 6,874 | | | 9,658 | |
Total loans | $ | 344,176 | | | $ | 3,351,841 | | | $ | 3,696,017 | |
At December 31, 2021, the Company had $3.16 billion in loans due to mature in 2037 and beyond, of which $85.6 million, or 2.71%, are fixed-rate loans.
Multifamily Real Estate Loans. Loans secured by multifamily properties totaled approximately $2.52 billion, or 66.2% of our total loan portfolio, at December 31, 2021. We include in this category properties having more than four residential units and a business or businesses where the majority of space is utilized for residential purposes, which we refer to as mixed-use. At December 31, 2021, we had 1,121 multifamily real estate loans, with an average loan balance of approximately $2.2 million, although there are a large number of loans with balances substantially greater than this average. At December 31, 2021, our largest multifamily real estate loan had a principal balance of $31.8 million, was secured by a five-building, 133-unit garden-style apartment complex located in Millburn Township, New Jersey, and was performing in accordance with its original contractual terms. Substantially all of our multifamily real estate loans are secured by properties located in our primary market areas and eastern Pennsylvania.
Our multifamily real estate loans typically amortize over 30 years with negotiated interest rates that adjust after an initial five-, seven-, or 10-year period, and every five years thereafter. Adjustable-rate loan originations are generally tied to a specifically identified market rate index. We also originate, to a lesser extent, 10- to 15-year fixed-rate, fully amortizing loans. In general, our multifamily real estate loans have interest rate floors equal to the interest rate on the date the loan is originated, and have prepayment penalties should the loan be prepaid during the initial five-, seven-, or 10-year term. In addition, our multifamily loans may contain an initial interest-only period which typically does not exceed two years; however, these loans are underwritten on a fully amortizing basis. Loans that we have purchased typically adjust to different market rate indexes.
In underwriting multifamily real estate loans, we consider a number of factors, including the ratio of the projected net cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 120%, computed after deduction for a vacancy factor and property expenses we deem appropriate), the age and condition of the collateral, the financial resources and income of the sponsor, and the sponsor’s experience in owning or managing similar properties. Multifamily real estate loans generally are originated in amounts up to the lesser of 75% of the appraised value or the purchase price of the property securing the loan. We require title insurance, fire and extended coverage casualty insurance, and, if required, flood insurance up to the regulatory required maximum in order to protect our security interest in the underlying property. Although a significant portion of our multifamily real estate loans are referred to us by third-party loan brokers, we underwrite all multifamily real estate loans in accordance with our underwriting standards. Due to competitor considerations, as is customary in our marketplace, we typically do not obtain personal guarantees of the principals on multifamily real estate loans, except when warranted.
The repayment of loans secured by multifamily real estate properties typically depends on the successful operation of the property. If the cash flow from the property is reduced, or interest payments on the loan increase, the borrower’s ability to repay the loan may be impaired.
In a ruling that was contrary to a 1996 advisory opinion from the New York State Division of Housing and Community Renewal that owners of housing units who benefited from the receipt of “J-51” tax incentives under the Rent Stabilization Law are eligible to decontrol apartments, the New York State Court of Appeals ruled in 2009, that residential housing units located in two major housing complexes in New York City had been illegally decontrolled by the current and previous property owners. This ruling may subject other property owners that have previously or are currently benefiting from a J-51 tax incentive to litigation, possibly resulting in a significant reduction to property cash flows. Based on management’s assessment of our multifamily loan portfolio, we believe that nine loans may be affected by the ruling regarding J-51. These loans had an aggregate principal balance of $17.5 million at December 31, 2021, and were all performing in accordance with their original contractual terms at that date.
In 2019, the New York State legislature passed the Housing Stability and Tenant Protection Act, impacting approximately 1,000,000 rent-regulated apartment units. Among other things, the legislation: (i) curtails rent increases from material capital improvements and individual apartment improvements; (ii) all but eliminates the ability for apartments to exit rent regulation; (iii) does away with vacancy decontrol and high-income deregulation; and (iv) repealed the 20% vacancy bonus. At December 31, 2021, the Company has approximately $414.9 million in multifamily loans in New York City with tenants that have some form of rent stabilization or rent control. All of the loans are performing as agreed as of December 31, 2021.
The following table summarizes our variable-interest multifamily loan repricing (excluding PCD loans) at December 31, 2021:
| | | | | | | | | | | |
| Amount | | Weighted Average Rate |
| (Dollars in thousands) |
| |
One year or less | $ | 74,702 | | | 3.59 | % |
After one year through five years | 1,387,638 | | | 3.58 | % |
After five years through ten years | 935,821 | | | 3.38 | % |
After ten years | 36,471 | | | 4.41 | % |
| $ | 2,434,632 | | | 3.51 | % |
Commercial Real Estate Loans. Commercial real estate loans (other than multifamily real estate loans) totaled $808.6 million, or 21.2% of our loan portfolio, as of December 31, 2021. At December 31, 2021, our commercial real estate loan portfolio consisted of 736 loans with an average loan balance of approximately $1.1 million, although there are a large number of loans with balances substantially greater than this average. At December 31, 2021, our largest commercial real estate loan had a principal balance of $80.0 million (net active principal balance of $26.7 million as we have a 33.3% participation interest), was secured by an eight-story office facility located in Staten Island, New York, and was performing in accordance with its original contractual terms. Substantially all of our commercial real estate loans are secured by properties located in our primary market areas.
The following table sets forth the property types collateralizing our commercial real estate loans held-for-investment as of December 31, 2021:
| | | | | | | | | | | |
| December 31, 2021 |
| Amount | | Percent |
| (Dollars in thousands) |
Mixed use (majority of space is non-residential) | $ | 165,469 | | | 20.5 | % |
Office buildings | 207,334 | | | 25.6 | |
Retail | 155,976 | | | 19.3 | |
Accommodations (hotel/motel) | 59,562 | | | 7.4 | |
Warehousing | 78,842 | | | 9.8 | |
Healthcare facilities | 27,278 | | | 3.4 | |
Services | 26,888 | | | 3.3 | |
Restaurant | 12,369 | | | 1.5 | |
Schools/daycare | 5,440 | | | 0.7 | |
Recreational | 10,639 | | | 1.3 | |
Manufacturing | 19,442 | | | 2.4 | |
Other | 39,358 | | | 4.8 | |
| $ | 808,597 | | | 100.0 | % |
Our commercial real estate loans typically amortize over 20 to 25 years with negotiated interest rates that adjust after an initial five-, seven-, or 10-year period, and every five years thereafter. Adjustable-rate loan originations are generally tied to a specifically identified market rate index. We also originate, to a lesser extent, 10- to 15-year fixed-rate, fully amortizing loans. In general, our commercial real estate loans have interest rate floors equal to the interest rate on the date the loan is originated, and generally have prepayment penalties if the loan is repaid in the initial five-, seven-, or 10-year term. Loans that we have purchased typically adjust to different market indexes.
In underwriting commercial real estate loans, we generally lend up to the lesser of 75% of either the property’s appraised value or purchase price. Our policies permit the origination of certain single-use property types but at lower loan-to-appraised value ratios. We base our decision to lend primarily on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, we emphasize the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 125%, computed after deduction for a vacancy factor and property expenses we deem appropriate). Personal guarantees of the principals are typically obtained. We require title insurance, fire and extended coverage casualty insurance, and, if appropriate, flood insurance up to the regulatory required maximum amount in order to protect our security interest in the underlying property. Although a significant portion of our commercial real estate loans were referred to us by third-party loan brokers, we underwrite all commercial real estate loans in accordance with our underwriting standards.
Commercial real estate loans generally carry higher interest rates than multifamily residential real estate loans. Commercial real estate loans also generally have greater credit risk compared to multifamily residential real estate loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Changes in economic conditions that are not in the control of the borrower or lender may affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial real estate than for multifamily residential properties.
Construction and Land Loans. At December 31, 2021, construction and land loans totaled $27.5 million, or 0.7% of total loans receivable, and the additional unadvanced portion of these construction loans totaled $15.7 million. At December 31, 2021, we had 28 construction and land loans with an average balance of approximately $985,000. Our largest construction and land loan had a principal balance of $6.4 million (at a participation rate of 50%), and is secured by a proposed two building, 93-unit midrise apartment complex in Woodbridge, New Jersey. At December 31, 2021, this loan was performing in accordance with its original contractual terms.
Our construction and land loans typically are interest-only loans with interest rates that are tied to the prime rate as published in The Wall Street Journal. Margins generally range from zero to 200 basis points above the prime rate. We also originate, to a lesser extent, 10- to 15-year fixed-rate, fully amortizing land loans. In general, our construction and land loans have interest rate floors equal to the interest rate on the date the loan is originated, and we do not typically charge prepayment penalties.
We grant construction and land loans to experienced developers for the construction of single-family residences, including condominiums, and commercial properties. Construction and land loans also are made to individuals for the construction of their personal residences. Advances on construction loans are made in accordance with a schedule reflecting the cost of construction, but are generally limited to a loan-to-completed appraised value ratio of 70%. Repayment of construction loans on residential properties normally is expected from the sale of units to individual purchasers, or in the case of individuals building their own residences, with a permanent mortgage. In the case of income-producing property, repayment usually is expected from permanent financing upon completion of construction. We typically offer permanent mortgage financing on our construction loans only on income-producing properties.
Land loans also help finance the purchase of land intended for future development, including single-family housing, multifamily housing, and commercial property. In some cases, we may make an acquisition loan before the borrower has received municipal approvals to develop the land. In general, the maximum loan-to-value ratio for land acquisition loans is 50% of the appraised value of the property, and the maximum term of these loans is three years. Generally, if the maturity of the loan exceeds three years, the loan must be an amortizing loan.
Construction and land loans generally carry higher interest rates and have shorter terms than multifamily and commercial real estate loans. Construction and land loans have greater credit risk than long-term financing on improved, income-producing real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the project at completion of construction as compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction costs is inaccurate, we may decide to advance additional funds beyond the amount originally committed in order to protect our security interest in the underlying property. However, if the estimated value of the completed project is inaccurate, the borrower may hold the real estate with a value that is insufficient to assure full repayment of the construction loan upon its sale. In the event we make a land acquisition loan on real estate that is not yet approved for the planned development, there is a risk that approvals will not be granted or will be delayed. Construction loans also expose us to a risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the project may not occur as anticipated and the market value of collateral, when completed, may be less than the outstanding loans and there may be no permanent financing available upon completion. Substantially all of our construction and land loans are secured by real estate located in our primary market areas.
Commercial and Industrial Loans. At December 31, 2021, commercial and industrial loans totaled $141.0 million or 3.7% of the total loan portfolio, and the additional unadvanced portion of these commercial and industrial loans totaled $91.2 million. Included within commercial and industrial loans at December 31, 2021 were 377 PPP loans (discussed further below) totaling $40.5 million. Excluding the PPP loans, as of December 31, 2021, we had 793 commercial and industrial loans with an average loan balance of approximately $127,000, although we originate these types of loans in amounts substantially greater than this average. At December 31, 2021, our largest commercial and industrial loan had a principal balance of $10.7 million and was performing in accordance with its original contractual terms.
Our term commercial and industrial loans typically amortize over five to seven years with interest rates that are primarily indexed to various FHLB rates, and to a lesser extent, prime rates. Margins generally range from zero to 300 basis points above the index rate. We also originate, to a lesser extent, 10-year fixed-rate, fully amortizing loans. In general, our commercial and industrial loans have interest rate floors equal to the interest rate on the date the loan is originated and have prepayment penalties.
We make various types of secured and unsecured commercial and industrial loans for the purpose of working capital and other general business purposes. The terms of these loans generally range from less than one year to a maximum of seven years, however we could allow for a maximum of 10 years depending on industry or asset type. The loans either are negotiated on a fixed-rate basis or carry adjustable interest rates indexed to the prime rate as published in The Wall Street Journal.
Commercial credit decisions are based on our credit assessment of the applicant. We evaluate the applicant’s ability to repay in accordance with the proposed terms of the loan and assess the risks involved. Personal guarantees of the principals are typically obtained. In addition to evaluating the loan applicant’s financial statements, we consider the adequacy of the secondary sources of repayment for the loan, such as pledged collateral and the financial stability of the guarantors. Credit agency reports of each guarantor’s personal credit history supplement our analysis of the applicant’s creditworthiness. We also attempt to confirm with other banks and conduct trade investigations as part of our credit assessment of the borrower. Collateral securing a loan also is analyzed to determine its marketability.
Commercial and industrial loans generally carry higher interest rates than multifamily and commercial real estate loans of like maturity because they have a higher risk of default since their repayment generally depends on the successful operation of the borrowers’ business.
During 2020 and 2021, the Company participated in the SBA PPP program, which provides 100% federally guaranteed loans for small businesses to cover payroll, utilities, rent and interest. These loans are fully guaranteed by the SBA and may be forgiven if borrowers maintain their payrolls and satisfy certain other conditions for a period of time during the COVID-19 pandemic. Loans that do not meet the forgiveness criteria will enter a repayment period of two or five years. There were 377 PPP loans outstanding totaling $40.5 million at December 31, 2021, compared to 1,275 loans outstanding totaling $126.5 million at December 31, 2020.
One-to-Four Family Residential Real Estate Loans. At December 31, 2021, we had 386 one-to-four family residential real estate loans outstanding with an aggregate balance of $183.7 million, or 4.8% of our total loan portfolio. As of December 31, 2021, the average balance of one-to-four family residential real estate loans was approximately $457,000, although we have originated these types of loan in amounts substantially greater than this average. At December 31, 2021, our largest loan of this type (excluding purchased loan pools, discussed below) had a principal balance of $5.5 million and was collateralized by 42 condominiums within a complex in Plainfield, New Jersey. The loan was performing in accordance with its original contractual terms. We no longer offer loans secured by owner-occupied, one-to-four family residential real estate, but may purchase them from time-to-time to meet our Community Reinvestment Act obligations.
Historically, we have not offered “interest-only” mortgage loans on one-to-four family residential real estate properties, where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan. However, since 2014 we have purchased pools of one-to-four family residential real estate loans, a substantial amount of which are interest-only mortgage loans. We also historically have not offered loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan.
Home Equity Loans and Lines of Credit. At December 31, 2021, we had 1,925 home equity loans and lines of credit with an aggregate outstanding balance of $110.0 million, or 2.9% of our total loan portfolio. Of this total, outstanding home equity lines of credit totaled $53.6 million, or 1.4%, of our total loan portfolio and home equity loans totaled $53.2 million, or 1.4%, of our total loan portfolio. At December 31, 2021, the average home equity loan and line of credit balance was approximately $57,000, although we originate these types of loans in amounts substantially greater than this average. At December 31, 2021, our largest home equity line of credit had a maximum exposure of approximately $3.3 million, and the largest loan under a line of credit had an outstanding balance of approximately $701,000. This loan was performing in accordance with its original contractual terms. At December 31, 2021, our largest outstanding home equity loan was $1.5 million and was performing in accordance with its original contractual terms.
We offer home equity loans and home equity lines of credit that are secured by the borrower’s primary residence or second home. Home equity lines of credit are adjustable-rate loans tied to the prime rate as published in The Wall Street Journal adjusted for a margin, and have a maximum term of 25 years during which time the borrower is required to make principal payments based on a 30-year amortization. Home equity lines generally have interest rate floors and ceilings. The borrower is permitted to draw against the line during the entire term on originations occurring prior to June 15, 2011. For home equity loans originated beginning on June 15, 2011, the borrower is only permitted to draw against the line for the initial 10 years. Our home equity loans typically are fully amortizing with fixed terms up to 25 years. Home equity loans and lines of credit generally are underwritten with the same criteria we historically used to underwrite fixed-rate, one-to-four family residential real estate loans. Home equity loans and lines of credit may be underwritten with a loan-to-value ratio of 80% when combined with the principal balance of the existing mortgage loan. We appraise the property securing the loan at the time of the loan application to determine the value of the property. At the time we close a home equity loan or line of credit, we record a mortgage to perfect our security interest in the underlying collateral.
PCD Loans. The Company adopted CECL using the prospective transition approach for PCD loans that were previously classified as PCI loans and accounted for under ASC Subtopic 310-30 - Accounting for Purchased Loans with Deteriorated Credit Quality ("ASC 310-30"). In accordance with the standard, management did not reassess whether PCI loans met the criteria of PCD loans as of the date of adoption. On January 1, 2021, the amortized cost basis of the PCD assets was adjusted to reflect the addition of the $6.8 million of the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost basis) was accreted into interest income at the effective interest rate as of January 1, 2021.
Upon adoption of CECL, the Company elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. Loans are only removed from existing pools if they are written off, paid off, or sold. Upon adoption of CECL, the allowance for credit losses was determined for each pool and added to the pool's carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the pool and the new amortized cost basis is the noncredit premium or discount which will be amortized into interest income over the remaining life of the pool. Changes to the allowance for credit losses after adoption are recorded through provision expense.
At December 31, 2021, PCD loans consisted of approximately 16% one-to-four family residential loans, 25% commercial real estate loans and 48% commercial and industrial loans, with the remaining balance in construction and land and home equity loans. At December 31, 2020, PCI loans consisted of approximately 22% one-to-four family residential loans, 23% commercial real estate loans and 40% commercial and industrial loans, with the remaining balance in construction and land and home equity loans.
Non-Performing and Problem Assets
When a loan is between 10 to 15 days delinquent, we generally send the borrower a late charge notice. When a loan is 30 days past due, we generally mail the borrower a letter reminding the borrower of the delinquency and, except for loans secured by one-to-four family residential real estate, we attempt personal contact with the borrower to determine the reason for the delinquency, to ensure the borrower correctly understands the terms of the loan, and to emphasize the importance of making payments on or before the due date. If necessary, additional late charges and delinquency notices are issued and the account will be monitored. After 90 days of delinquency, we generally send the borrower a final demand for payment and refer the loan to legal counsel to commence foreclosure and related legal proceedings. At times, we may shorten or lengthen these time frames.
Generally, loans (excluding PCD loans) are placed on non-accrual status when payment of principal or interest is 90 days or more delinquent unless the loan is considered well-secured and in the process of collection. Loans also are placed on non-accrual status at any time if the ultimate collection of principal or interest in full is in doubt. When loans are placed on non-accrual status, unpaid accrued interest is reversed, and further income is recognized only to the extent received, and only if the principal balance is deemed fully collectible. The loan may be returned to accrual status if both principal and interest payments are brought current and factors indicating doubtful collection no longer exist, including performance by the borrower under the loan terms for a consecutive six-month period. Our Chief Credit Officer reports monitored loans, including all loans rated watch, special mention, substandard, doubtful or loss, to the Loan Committee of the Board of Directors at least quarterly.
To minimize our losses on delinquent loans we work with borrowers experiencing financial difficulties and will consider modifying existing loan terms and conditions that we would not otherwise consider, commonly referred to as troubled debt restructurings (“TDRs”). We record an impairment loss associated with TDRs, if any, based on the present value of expected future cash flows discounted at the original loan’s effective interest rate or the underlying collateral value, less estimated cost to sell, if the loan is collateral dependent. Once an obligation has been restructured because of credit problems, it continues to be considered restructured until paid in full or, if the obligation yields a market rate (a rate equal to or greater than the rate we were willing to accept at the time of the restructuring for a new loan with comparable risk), until the year after which the restructuring takes place, provided the borrower has performed under the modified terms for a consecutive six-month period.
The CARES Act included a provision that permits a financial institution to elect to suspend temporarily TDR accounting under current U.S. generally accepted accounting principles (“U.S. GAAP”). To be eligible, a loan modification must be: (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020 and the earlier of (a) 60 days after the date of termination of the national emergency or (b) December 31, 2020. This relief was further extended by the Consolidated Appropriations Act to the earlier of January 1, 2022 or 60 days after the date of termination of the national emergency. The relief provided includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. The banking regulators issued similar guidance, which also clarified that a COVID-19-related modification should not be considered a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification is considered to be short-term. In response to the COVID-19 pandemic and its economic impact to customers, the Company introduced a short-term modification program in March 2020 that provided temporary payment relief to those borrowers directly impacted by COVID-19. The program allows for a deferral of payments for 90 days, which may extend for an additional 90 days, with modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment. In accordance with regulatory guidance under the CARES Act, these loan deferrals are not considered TDRs at December 31, 2021 and will not be reported as past due during the deferral period. See Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset Quality - COVID-19 Exposure” and Item 8. “Financial Statements and Supplementary Data - Notes to the Consolidated Financial Statements - Note 6. Loans” for further details about loan modifications under the CARES Act.
Non-Performing and Restructured Loans (excluding PCD). The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. At December 31, 2021, 2020, 2019, 2018, and 2017, we had TDRs of $3.2 million, $3.7 million, $4.4 million, $513,000, and $251,000 respectively, which are included in the appropriate categories within non-accrual loans. Additionally, we had $5.8 million, $7.7 million, $14.1 million, $16.4 million, and $18.0 million of TDRs on accrual status at December 31, 2021, 2020, 2019, 2018, and 2017, respectively, which do not appear in the table below. Generally, the types of concessions that we make to troubled borrowers include reductions in interest rates and payment extensions and to a lesser extent interest and principal forgiveness. At December 31, 2021, 74.4% of TDRs were commercial real estate loans, 17.3% were one-to-four family residential loans, 6.7% were multifamily loans, 0.4% were home equity loans, and 1.2% were commercial and industrial loans. At December 31, 2021, loans totaling $146,000, or 2.5% of the $5.8 million accruing TDRs, were not performing in accordance with their restructured terms, and one loan totaling $368,000, or 11.4% of the $3.2 million non-accruing TDRs, was not performing in accordance with its restructured terms.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
| (Dollars in thousands) |
Non-accrual loans held-for-investment: | | | | | | | | | |
Real estate loans: | | | | | | | | | |
Commercial | $ | 5,117 | | | $ | 6,229 | | | $ | 7,922 | | | $ | 7,291 | | | $ | 4,087 | |
One-to-four family residential | 314 | | | 906 | | | 889 | | | 1,129 | | | 774 | |
| | | | | | | | | |
Multifamily | 1,882 | | | 1,153 | | | 437 | | | 566 | | | 417 | |
Home equity and lines of credit | 281 | | | 191 | | | 185 | | | 151 | | | 156 | |
Commercial and industrial loans | 28 | | | 37 | | | — | | | 25 | | | 74 | |
| | | | | | | | | |
Total non-accrual loans held-for-investment | 7,622 | | | 8,516 | | | 9,433 | | | 9,162 | | | 5,508 | |
Loans delinquent 90 days or more and still accruing held-for-investment: | | | | | | | | | |
Real estate loans: | | | | | | | | | |
| | | | | | | | | |
Commercial | 147 | | | 500 | | | 253 | | | — | | | — | |
One-to-four family residential | 165 | | | 174 | | | 265 | | | 33 | | | 27 | |
| | | | | | | | | |
| | | | | | | | | |
Home equity and lines of credit | — | | | — | | | — | | | — | | | — | |
Other | — | | | 3 | | | — | | | — | | | 1 | |
Commercial and industrial loans | 72 | | | 436 | | | — | | | — | | | — | |
Total loans delinquent 90 days or more and still accruing | 384 | | | 1,113 | | | 518 | | | 33 | | | 28 | |
Total non-performing loans held-for-investment | 8,006 | | | 9,629 | | | 9,951 | | | 9,195 | | | 5,536 | |
Other real estate owned | 100 | | | — | | | — | | | — | | | 850 | |
Non-performing loans held-for-sale | — | | | 19,895 | | | — | | | — | | | — | |
Total non-performing assets | $ | 8,106 | | | $ | 29,524 | | | $ | 9,951 | | | $ | 9,195 | | | $ | 6,386 | |
Ratios: | | | | | | | | | |
Non-performing loans to total loans (1) | 0.21 | % | | 0.77 | % | | 0.29 | % | | 0.28 | % | | 0.18 | % |
Non-accrual loans held-for-investment to total loans held-for-investment, net | 0.20 | % | | 0.22 | % | | 0.27 | % | | 0.28 | % | | 0.18 | % |
Non-performing assets to total assets | 0.15 | % | | 0.54 | % | | 0.20 | % | | 0.21 | % | | 0.16 | % |
Total assets | $ | 5,430,542 | | | $ | 5,514,544 | | | $ | 5,055,302 | | | $ | 4,408,432 | | | $ | 3,991,417 | |
Loans held-for-investment, net | $ | 3,806,617 | | | $ | 3,823,238 | | | $ | 3,437,085 | | | $ | 3,245,170 | | | $ | 3,140,819 | |
| | | | | | | | | |
(1) Includes non-performing loans transferred to held-for-sale.
At December 31, 2021, 10.5% of PCD loans were past due 30 to 89 days, and 19.2% were past due 90 days or more. At December 31, 2020, 9.6% of PCI loans were past due 30 to 89 days, and 35.2% were past due 90 days or more. At December 31, 2019, 20.9% of PCI loans were past due 30 to 89 days, and 24.3% were past due 90 days or more. At December 31, 2018, 10.0% of PCI loans were past due 30 to 89 days, and 23.3% were past due 90 days or more. At December 31, 2017, 10.8% of PCI loans were past due 30 to 89 days, and 17.1% were past due 90 days or more.
The following table sets forth the property types collateralizing non-accrual commercial real estate loans held-for investment at December 31, 2021:
| | | | | | | | | | | |
| At December 31, 2021 |
| Amount | | Percent |
| (Dollars in thousands) |
Services | $ | 2,890 | | | 56.5 | % |
Mixed use | 1,234 | | | 24.1 | |
Restaurant | 510 | | | 10.0 | |
Office buildings | 348 | | | 6.8 | |
Recreational | 77 | | | 1.5 | |
Warehousing | 58 | | | 1.1 | |
| | | |
Total | $ | 5,117 | | | 100.0 | % |
Other Real Estate Owned. Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned. On the date the property is acquired, it is recorded at the lower of cost or estimated fair value, establishing a new cost basis. Estimated fair value generally represents the sale price a buyer would be willing to pay on the basis of current market conditions, including normal terms from other financial institutions, less the estimated costs to sell the property. Holding costs and declines in estimated fair value result in charges to expense after acquisition. At December 31, 2021, other real estate owned is comprised of one property acquired during the year as a result of foreclosure. The property is located in New Jersey, had a carrying value of approximately $100,000 and was included in other assets on the consolidated balance sheet at December 31, 2021. The Company had no other real estate owned at December 31, 2020.
Non-Performing Loans Held-For-Sale. Non-performing loans held-for-sale at December 31, 2020 totaled $19.9 million and were comprised of high-risk commercial real estate and multifamily loans, primarily accommodation (hotel/motel) loans that were modified in the form of interest and/or principal payment deferrals due to COVID-19 related hardships, and have not returned to contractual payments after 180 days of relief. The sale of these loans was completed in the first quarter of 2021.
Potential Problem Loans and Classification of Assets. Our relationship managers and credit administration department monitor their loan portfolios, including evaluations of borrowers’ business operations, current financial condition, underlying values of any collateral, and assessment of their financial prospects in the current economic environment. Based on these evaluations, we determine an appropriate strategy for individual potential problem loans, with the objective of maximizing the recovery of the related loan balances.
Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is classified substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are designated as special mention. At December 31, 2021, classified assets, excluding loans on non-accrual status, consisted of substandard assets of $51.1 million and no doubtful or loss assets. At December 31, 2021, we also had $13.8 million of assets designated as special mention. At December 31, 2020, classified assets, excluding loans on non-accrual status, consisted of substandard assets of $40.2 million and no doubtful or loss assets. At December 31, 2020, we also had $24.1 million of assets designated as special mention.
Our determination as to the classification of our assets (and the amount of our loss allowances) is subject to review by our principal federal regulator, the OCC, which can require that we adjust our classification and related loss allowances. We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. We also engage the services of a third party to review, on a sample basis, our risk ratings on a semi-annual basis.
At December 31, 2021, the Company had $1.2 million of accruing loans that were 30 to 89 days delinquent, as compared to $14.0 million at December 31, 2020.
The following table sets forth the total amounts of delinquencies for accruing loans that were 30 to 89 days past due by type and by amount at the dates indicated:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (Dollars in thousands) |
Real estate loans: | | | |
Multifamily | $ | — | | | $ | 1,893 | |
Commercial | 144 | | | 8,792 | |
One-to-four family residential | 593 | | | 1,152 | |
Home equity and lines of credit | 412 | | | 380 | |
Construction and land | — | | | 994 | |
Commercial and industrial loans | 2 | | | 760 | |
Other loans | 15 | | | 11 | |
Total | $ | 1,166 | | | $ | 13,982 | |
Allowance for Credit Losses on Loans
We provide for credit losses on loans based on the consistent application of our documented allowance for credit losses methodology. Credit losses are charged to the allowance for credit losses and recoveries are credited to it. Additions to the allowance for credit losses are provided by charges against income based on various factors, which, in our judgment, deserve current recognition in estimating probable losses. Credit losses are charged-off in the period the loans, or portion thereof, are deemed uncollectible. Generally, the Company will record a loan charge-off (including a partial charge-off) to reduce a loan to the estimated fair value of the underlying collateral, less cost to sell, for collateral dependent loans. We regularly review the loan portfolio in order to maintain the allowance for credit losses in accordance with U.S. GAAP. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Polices - Allowance for Credit Losses” for a description of our allowance methodology.
The following table sets forth activity in our allowance for credit losses for the years indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At or For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
| (Dollars in thousands) |
Balance at beginning of year | $ | 37,607 | | | $ | 28,707 | | | $ | 27,497 | | | $ | 26,160 | | | $ | 24,595 | |
Impact of CECL adoption | 10,353 | | | — | | | — | | | — | | | — | |
Balance at January 1, 2021 | 47,960 | | | 28,707 | | | 27,497 | | | 26,160 | | | 24,595 | |
Charge-offs: | | | | | | | | | |
Commercial real estate (1) | — | | | (4,213) | | | (651) | | | (1,257) | | | (196) | |
One-to-four family residential | (21) | | | — | | | (64) | | | (3) | | | — | |
| | | | | | | | | |
| | | | | | | | | |
Home equity and lines of credit | — | | | — | | | (49) | | | (60) | | | (115) | |
Commercial and industrial | (646) | | | (94) | | | (100) | | | (70) | | | (88) | |
Other | (3) | | | — | | | (123) | | | — | | | (3) | |
PCD loans | (2,411) | | | — | | | — | | | — | | | — | |
| | | | | | | | | |
Total charge-offs | (3,081) | | | (4,307) | | | (987) | | | (1,390) | | | (402) | |
Recoveries: | | | | | | | | | |
Commercial real estate (1) | 60 | | | 414 | | | 1,916 | | | 76 | | | 354 | |
One-to-four family residential | 29 | | | 5 | | | 228 | | | 7 | | | 4 | |
Construction and land | 26 | | | — | | | — | | | — | | | — | |
| | | | | | | | | |
Home equity and lines of credit | — | | | 27 | | | 2 | | | 3 | | | 100 | |
Commercial and industrial | 39 | | | 13 | | | 21 | | | 20 | | | 80 | |
Other | 5 | | | 6 | | | 8 | | | 6 | | | 18 | |
PCD loans | 119 | | | — | | | — | | | — | | | — | |
| | | | | | | | | |
Total recoveries | 278 | | | 465 | | | 2,175 | | | 112 | | | 556 | |
Net (charge-offs)/recoveries | (2,803) | | | (3,842) | | | 1,188 | | | (1,278) | | | 154 | |
(Benefit)/provision for credit losses | (6,184) | | | 12,742 | | | 22 | | | 2,615 | | | 1,411 | |
Balance at end of year | $ | 38,973 | | | $ | 37,607 | | | $ | 28,707 | | | $ | 27,497 | | | $ | 26,160 | |
Ratios: | | | | | | | | | |
Net (charge-offs)/recoveries to average loans outstanding (7): | | | | | | | | | |
Commercial real estate (1) | — | % | | (0.10) | % | | 0.04 | % | | (0.04) | % | | 0.01 | % |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Commercial and industrial | (0.01) | | | (0.01) | | | — | | | — | | | — | |
PCD | (0.06) | | | — | | | — | | | — | | | — | |
Total net (charge-offs)/recoveries | (0.07) | % | | (0.11) | % | | 0.04 | % | | (0.04) | % | | 0.01 | % |
Allowance for credit losses to non-performing loans held-for-investment at end of year (2)(6) | 486.80 | | | 390.56 | | | 288.48 | | | 299.06 | | | 472.63 | |
Allowance for credit losses to total non-performing loans at end of year (2)(3)(4)(6) | 486.80 | | | 127.38 | | | 288.48 | | | 299.06 | | | 472.63 | |
| | | | | | | | | |
Allowance for credit losses to total loans held-for-investment, net, at end of year (2)(4)(5)(6) | 1.02 | | | 0.98 | | | 0.84 | | | 0.85 | | | 0.83 | |
Allowance for credit losses to non-accrual loans held-for-investment at end of year (2)(4)(5)(6) | 511.32 | | | 441.60 | | | 304.33 | | | 300.12 | | | 474.95 | |
| | | | | | | | | | | | | | |
| | | | |
| | | | |
(1) | Commercial includes commercial real estate loans collateralized by owner-occupied, non-owner occupied, and multifamily properties. |
(2) | The year ended December 31, 2020 includes an allowance for loan losses of $8.0 million related to additional factors considered for COVID-19. |
(3) | Includes non-performing loans held-for-sale at December 31, 2020. |
(4) | Excluding PPP loans (which are fully government guaranteed and do not carry any provision for losses) of $40.5 million and $100.0 million (originated) at December 31, 2021 and 2020, respectively, the allowance for credit losses to total loans held for investment, net, totaled 1.03% and 1.00%, respectively, at December 31, 2021 and 2020. |
(5) | Includes PCD and acquired loans held-for-investment (and related allowance for credit losses). |
(6) | The Company adopted the CECL accounting standard effective January 1, 2021, and recorded a $10.4 million increase to its allowance for credit losses, including reserves of $6.8 million related to PCD loans. Ratios prior to December 31, 2021 do not reflect the adoption of CECL. |
(7) | Calculated based on average total loans. |
At December 31, 2021 and 2020, the allowance for loan losses related to PCD loans was $4.7 million and $881,000, respectively. Loans held-for-sale are excluded from the allowance for loan losses coverage ratios in the table above.
Allocation of Allowance for Credit Losses. The following tables set forth the allowance for credit losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for credit losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2021 | | 2020 | | 2019 |
| Allowance for Credit Losses | | Percent of Loans in Each Category to Total Loans | | Allowance for Loan Losses | | Percent of Loans in Each Category to Total Loans | | Allowance for Loan Losses | | Percent of Loans in Each Category to Total Loans |
| (Dollars in thousands) |
Real estate loans: | | | | | | | | | | | |
Commercial (1) | $ | 26,785 | | | 87.40 | % | | $ | 33,005 | | | 84.49 | % | | $ | 25,094 | | | 85.92 | % |
One-to-four family residential | 3,545 | | | 4.82 | | | 207 | | | 5.52 | | | 180 | | | 7.92 | |
Construction and land | 169 | | | 0.72 | | | 1,214 | | | 1.95 | | | 536 | | | 1.19 | |
| | | | | | | | | | | |
Home equity and lines of credit | 560 | | | 2.89 | | | 260 | | | 2.39 | | | 317 | | | 2.83 | |
Commercial and industrial | 3,173 | | | 3.70 | | | 1,842 | | | 5.09 | | | 1,640 | | | 1.58 | |
| | | | | | | | | | | |
PCD/PCI loans | 4,732 | | | 0.42 | | | 881 | | | 0.48 | | | 789 | | | 0.51 | |
| | | | | | | | | | | |
Other | 9 | | | 0.05 | | | 198 | | | 0.08 | | | 151 | | | 0.05 | |
Total allowance | $ | 38,973 | | | 100.00 | % | | $ | 37,607 | | | 100.00 | % | | $ | 28,707 | | | 100.00 | % |
| | | | | | | | | | | |
| At December 31, | | | | |
| 2018 | | 2017 | | | | |
| Allowance for Loan Losses | | Percent of Loans in Each Category to Total Loans | | Allowance for Loan Losses | | Percent of Loans in Each Category to Total Loans | | | | |
| (Dollars in thousands) | | | | |
Real estate loans: | | | | | | | | | | | |
Commercial (1) | $ | 23,714 | | | 83.64 | % | | $ | 22,570 | | | 81.15 | % | | | | |
One-to-four family residential | 342 | | | 9.80 | | | 540 | | | 12.00 | | | | | |
Construction and land | 463 | | | 1.19 | | | 610 | | | 1.65 | | | | | |
| | | | | | | | | | | |
Home equity and lines of credit | 291 | | | 2.97 | | | 122 | | | 2.77 | | | | | |
Commercial and industrial | 1,569 | | | 1.73 | | | 1,273 | | | 1.65 | | | | | |
| | | | | | | | | | | |
PCI loans | 1,010 | | | 0.62 | | | 951 | | | 0.73 | | | | | |
| | | | | | | | | | | |
Other | 108 | | | 0.05 | | | 94 | | | 0.05 | | | | | |
Total allowance | $ | 27,497 | | | 100.00 | % | | $ | 26,160 | | | 100.00 | % | | | | |
| | | | | | | | | | | |
(1) Commercial includes commercial real estate loans collateralized by owner-occupied, non-owner occupied, and multifamily properties.
Investments
We conduct securities portfolio transactions in accordance with our board-approved investment policy. Northfield Bank's investment policy is reviewed at least annually by the Risk Committee of the Board of Directors. Any changes to the policy are subject to ratification by the full Board of Directors. This policy dictates that investment decisions give consideration to the safety of the investment, liquidity requirements, potential returns, the ability to provide collateral for pledging requirements, and consistency with our interest rate risk management strategy. Our Chief Investment Officer executes our securities portfolio transactions, within policy requirements, with the approval of either the Chief Executive Officer or the Chief Financial Officer. NSB Services Corp.’s and NSB Realty Trust’s (which are each Bank subsidiaries) investment officers execute security portfolio transactions in accordance with investment policies that substantially mirror Northfield Bank’s investment policy. All purchase and sale transactions are reviewed by the Risk Committee at least quarterly.
Our current investment policy permits investments in mortgage-backed securities, including pass-through securities and real estate mortgage investment conduits (“REMICs”). The investment policy also permits, with certain limitations, investments in debt securities issued by the U.S. Government, agencies of the U.S. Government or U.S. Government-sponsored enterprises (“GSEs”), asset-backed securities, municipal obligations (including bonds, tax anticipation notes and bond anticipation notes), money market mutual funds, federal funds, investment grade corporate bonds, subordinated debt, reverse repurchase agreements, and certificates of deposit.
Northfield Bank’s investment policy does not permit investment in common stock of other entities including GSEs, other than our required investment in the common stock of the FHLBNY or as permitted for community reinvestment purposes or to fund Northfield Bank’s deferred compensation plan. Northfield Bancorp, Inc. may invest in equity securities of other financial institutions, as well as preferred stock, up to certain limitations. As of December 31, 2021, we did not hold any asset-backed securities other than mortgage-backed securities. Our Board of Directors may change these limitations in the future.
Our current investment policy does permit hedging through the use of derivative instruments such as financial futures or interest rate options and swaps, although we currently have no derivative hedging instruments in place.
At the time of purchase, we designate a security as either held-to-maturity, available-for-sale, or trading, based upon our ability and intent to hold such securities. Trading securities and securities available-for-sale are reported at estimated fair value, and securities held-to-maturity are reported at amortized cost. A periodic review and evaluation of the available-for-sale and held-to-maturity securities portfolios is conducted to determine if the estimated fair value of any security has declined below its carrying value and whether such impairment is other-than-temporary. If such impairment is deemed to be other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged against earnings. The estimated fair values of our securities are obtained from an independent nationally recognized pricing service. At December 31, 2021, our investment portfolio consisted primarily of mortgage-backed securities guaranteed by GSEs, U.S. Government agency securities, corporate debt securities, and, to a lesser extent, municipal bonds, private label mortgage-backed securities, and mutual funds. The market for these securities primarily consists of other financial institutions, insurance companies, real estate investment trusts, and mutual funds.
We purchase mortgage-backed securities insured or guaranteed primarily by the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or the Government National Mortgage Association (“Ginnie Mae”), and to a lesser extent, securities issued by private companies (private label). We invest in mortgage-backed securities to achieve positive interest rate spreads with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by Fannie Mae, Freddie Mac, or Ginnie Mae as well as to provide us liquidity to fund loan originations and deposit outflows. In 2008, the Federal Housing Finance Agency placed Freddie Mac and Fannie Mae into conservatorship. The U.S. Treasury Department has established financing agreements to ensure that Freddie Mac and Fannie Mae meet their obligations to holders of mortgage-backed securities that they have issued or guaranteed.
Mortgage-backed securities are securities sold in the secondary market that are collateralized by pools of mortgages. Certain types of mortgage-backed securities are commonly referred to as “pass-through” certificates because the principal and interest of the underlying loans is “passed through” pro rata to investors, net of certain costs, including servicing and guarantee fees, in proportion to an investor’s ownership in the entire pool. The issuers of such securities pool mortgages and resell the participation interests in the form of securities to investors. The interest rate on the security is lower than the interest rates on the underlying loans to allow for payment of servicing and guaranty fees. Ginnie Mae, a U.S. Government agency, and GSEs, such as Fannie Mae and Freddie Mac, may guarantee the payments, or guarantee the timely payment of principal and interest to investors.
Mortgage-backed securities are more liquid than individual mortgage loans since there is a more active market for such securities. In addition, mortgage-backed securities may be used to collateralize our specific liabilities and obligations. Investments in mortgage-backed securities issued or guaranteed by GSEs involve a risk that actual payments will be greater or less than estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. We periodically review current prepayment speeds to determine whether prepayment estimates require modification that could cause adjustment of amortization or accretion.
REMICs are a type of mortgage-backed security issued by special purpose entities that aggregate pools of mortgages and mortgage-backed securities and create different classes of securities with varying maturities and amortization schedules, as well as a residual interest, with each class possessing different risk characteristics. The cash flows from the underlying collateral are generally divided into “tranches” or classes that have descending priorities with respect to the distribution of principal and interest cash flows.
The timely payment of principal and interest on these REMICs is generally supported (credit enhanced) in varying degrees by either insurance issued by a financial guarantee insurer, letters of credit, over collateralization, or subordination techniques. Privately issued REMICs and pass-throughs can be subject to certain credit-related risks normally not associated with U.S. Government agency and GSE mortgage-backed securities. The loss protection generally provided by the various forms of credit enhancements is limited, and losses in excess of certain levels are not protected. Furthermore, the credit enhancement itself is subject to the creditworthiness of the credit enhancer. Thus, in the event a credit enhancer does not fulfill its obligations, the holder could be subject to risk of loss similar to a purchaser of a whole loan pool. Management believes that the credit enhancements are adequate to protect us from material losses on our private label mortgage-backed securities investments.
At December 31, 2021, our corporate bond portfolio consisted of securities, all of which were investment-grade, and had remaining maturities generally shorter than five years. Our investment policy provides that we may invest up to 15% of our Tier 1 risk-based capital in corporate bonds from individual issuers which, at the time of purchase, are within the investment-grade ratings from Standard & Poor’s, Moody’s or Fitch. The maturity of these bonds may not exceed 10 years, and there is no aggregate limit for this security type. Corporate bonds from individual issuers not rated investment grade at the time of purchase, are limited to the lesser of 1% of our total assets or 15% of our Tier 1 risk-based capital, and must have a maturity of less than one year. Aggregate holdings of this security type cannot exceed 5% of our total assets. Aggregate holdings of individual issuers of corporate bonds and commercial paper, both investment grade and non-investment grade, are not to exceed 50% of Tier 1 capital of the Company. Additionally, at the time of purchase, management performs due diligence to conclude that the security meets the regulatory standard for investment grade. Bonds that subsequently experience a decline in credit rating below investment grade are monitored at least quarterly.
The following table sets forth the amortized cost and estimated fair value of our available-for-sale and held-to-maturity securities portfolios (excluding FHLBNY common stock) at the dates indicated. As of December 31, 2021, 2020, and 2019, we also had a trading portfolio with a fair value of $13.5 million, $12.3 million and $11.2 million, respectively, consisting of mutual funds quoted in actively traded markets. These securities are utilized to fund non-qualified deferred compensation obligations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2021 | | 2020 | | 2019 |
| Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| (Dollars in thousands) |
Debt securities available-for-sale: | | | | | | | | | | | |
U.S. Government agency securities | $ | 2,344 | | | $ | 2,290 | | | $ | 3,168 | | | $ | 3,158 | | | $ | — | | | $ | — | |
Mortgage-backed securities: | | | | | | | | | | | |
Pass-through certificates: | | | | | | | | | | | |
GSEs | 579,035 | | | 581,406 | | | 270,867 | | | 281,343 | | | 324,080 | | | 329,407 | |
| | | | | | | | | | | |
REMICs: | | | | | | | | | | | |
GSEs | 390,755 | | | 391,710 | | | 884,414 | | | 890,965 | | | 643,816 | | | 643,667 | |
Non-GSEs | — | | | — | | | 4 | | | 4 | | | 53 | | | 53 | |
Other debt securities: | | | | | | | | | | | |
Municipal bonds | 71 | | | 72 | | | 122 | | | 123 | | | 296 | | | 299 | |
Corporate bonds | 233,311 | | | 232,759 | | | 87,319 | | | 88,418 | | | 163,725 | | | 164,926 | |
Asset-backed securities | — | | | — | | | 779 | | | 794 | | | — | | | — | |
Total debt securities available-for-sale | $ | 1,205,516 | | | $ | 1,208,237 | | | $ | 1,246,673 | | | $ | 1,264,805 | | | $ | 1,131,970 | | | $ | 1,138,352 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2021 | | 2020 | | 2019 |
| Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| (Dollars in thousands) |
Securities held-to-maturity: | | | | | | | | | | | |
Mortgage-backed securities: | | | | | | | | | | | |
Pass-through certificates - GSEs | $ | 5,283 | | | $ | 5,475 | | | $ | 7,234 | | | $ | 7,574 | | | $ | 8,762 | | | $ | 8,886 | |
| | | | | | | | | | | |
Total securities held-to-maturity | $ | 5,283 | | | $ | 5,475 | | | $ | 7,234 | | | $ | 7,574 | | | $ | 8,762 | | | $ | 8,886 | |
The following table sets forth the amortized cost and estimated fair value of securities as of December 31, 2021, for issuers that exceeded 10% of our stockholders’ equity as of that date:
| | | | | | | | | | | |
| At December 31, 2021 |
| Amortized Cost | | Estimated Fair Value |
| (Dollars in thousands) |
Mortgage-backed securities: | | | |
Freddie Mac | $ | 240,441 | | | $ | 242,848 | |
Fannie Mae | $ | 564,034 | | | $ | 566,075 | |
Ginnie Mae | $ | 170,598 | | | $ | 169,668 | |
Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2021, are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. All of our securities at December 31, 2021, were taxable with the exception of our U.S. Government agency securities and municipal portfolio. Weighted average yield is based on amortized cost.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One Year or Less | | More than One Year through Five Years | | More than Five Years through Ten Years | | More than Ten Years | | Total |
| Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Fair Value | | Weighted Average Yield |
| (Dollars in thousands) |
Securities available-for-sale: | | | | | | | | | | | | | | | | | | |
U.S. Government agency securities: | $ | — | | | — | % | | $ | — | | | — | % | | $ | 2,344 | | | 3.14 | % | | $ | — | | | — | % | | $ | 2,344 | | | $ | 2,290 | | | 3.14 | % |
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | |
Pass-through certificates: | | | | | | | | | | | | | | | | | | |
GSEs | 14,587 | | | 2.09 | % | | 32,263 | | | 3.28 | % | | 228,089 | | | 2.37 | % | | 304,096 | | | 2.29 | % | | 579,035 | | | 581,406 | | | 2.37 | % |
REMICs: | | | | | | | | | | | | | | | | | | | | | |
GSE | — | | | — | % | | 19,115 | | | 2.64 | % | | 20,331 | | | 2.24 | % | | 351,309 | | | 1.24 | % | | 390,755 | | | 391,710 | | | 1.36 | % |
| | | | | | | | | | | | | | | | | | | | | |
| $ | 14,587 | | | 2.09 | % | | $ | 51,378 | | | 3.04 | % | | $ | 248,420 | | | 2.36 | % | | $ | 655,405 | | | 1.73 | % | | $ | 969,790 | | | $ | 973,116 | | | 1.96 | % |
Other debt securities: | | | | | | | | | | | | | | | | | | | | |
Municipal bonds | 31 | | | 3.30 | % | | 40 | | | 3.64 | % | | — | | | — | % | | — | | | — | % | | 71 | | | 72 | | | 3.49 | % |
Corporate bonds | 57,268 | | | 1.88 | % | | 161,033 | | | 0.98 | % | | 15,010 | | | 1.42 | % | | — | | | — | % | | 233,311 | | | 232,759 | | | 1.23 | % |
| | | | | | | | | | | | | | | | | | | | | |
| $ | 57,299 | | | 1.88 | % | | $ | 161,073 | | | 0.98 | % | | $ | 15,010 | | | 1.42 | % | | $ | — | | | — | % | | $ | 233,382 | | | $ | 232,831 | | | 1.23 | % |
Total securities available-for-sale | $ | 71,886 | | | 1.92 | % | | $ | 212,451 | | | 1.48 | % | | $ | 265,774 | | | 2.31 | % | | $ | 655,405 | | | 1.73 | % | | $ | 1,205,516 | | | $ | 1,208,237 | | | 1.82 | % |
| | | | | | | | | | | | | | | | | | | | | |
Securities held-to-maturity: | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | |
Pass-through certificates: | | | | | | | | | | | | | | | | | | |
GSEs | $ | — | | | — | % | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 5,283 | | | 3.52 | % | | $ | 5,283 | | | $ | 5,475 | | | 3.52 | % |
Total securities held-to-maturity | $ | — | | | — | % | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 5,283 | | | 3.52 | % | | $ | 5,283 | | | $ | 5,475 | | | 3.52 | % |
Sources of Funds
General. Deposits traditionally have been our primary source of funds for our securities and lending activities. We also borrow from the FHLBNY and other financial institutions to supplement cash flow needs, to manage the maturities of liabilities for interest rate and investment risk management purposes, and to manage our cost of funds. Our additional sources of funds are the proceeds of loan sales, scheduled loan and investment payments, maturing investments, loan prepayments, brokered deposits, and stockholders' equity, including retained earnings.
Deposits. We accept deposits primarily from the areas in which our offices are located. We rely on our convenient locations, customer service, and competitive products and pricing to attract and retain deposits. We offer a variety of deposit accounts to businesses, consumers and municipalities with a range of interest rates and terms. Our deposit accounts consist of transaction accounts (NOW and interest and non-interest bearing checking accounts), savings accounts (money market, passbook, and statement savings), and certificates of deposit, including individual retirement accounts. We accept brokered deposits when it is deemed cost effective. At December 31, 2021 and 2020, we had brokered deposits totaling $31.0 million and $147.8 million, respectively. In addition, municipal deposits which primarily consist of funds from local government entities domiciled in New Jersey, and are a significant source of funds, totaled $633.5 million, or 15.2% of our total deposits at December 31, 2021. At December 31, 2020, municipal deposits totaled $501.0 million, or 12.3% of our total deposits. Municipal deposits are primarily secured by mortgaged-backed securities.
Uninsured deposits were estimated at $1.64 billion and $1.51 billion at December 31, 2021, and December 31, 2020, respectively.
The following table provides the uninsured portion of certificates of deposit at December 31, 2021, by account, with a maturity of:
| | | | | |
| |
| December 31, 2021 |
| (Dollars in thousands) |
Three months or less | $ | 14,051 | |
Over three months through six months | 13,036 | |
Over six months through one year | 1,028 | |
Over one year | 5,322 | |
Total | $ | 33,437 | |
Interest rates offered on deposit accounts generally are established weekly, while maturity terms, service fees, and withdrawal penalties are reviewed on a periodic basis. Deposit rates and terms are based primarily on current operating strategies, market interest rates, and liquidity requirements.
At December 31, 2021, we had $382.4 million in certificates of deposit, of which $295.8 million had remaining maturities of one year or less.
The following table sets forth the distribution of our average total deposit accounts, by account type, for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Average Balance | | Percent | | Weighted Average Rate | | Average Balance | | Percent | | Weighted Average Rate | | Average Balance | | Percent | | Weighted Average Rate |
| (Dollars in thousands) |
Non-interest bearing demand | $ | 812,805 | | | 19.68 | % | | — | % | | $ | 529,138 | | | 13.94 | % | | — | % | | $ | 384,740 | | | 11.54 | % | | — | % |
NOW and interest bearing demand | 1,085,259 | | | 26.28 | | | 0.07 | % | | 787,351 | | | 20.74 | % | | 0.30 | % | | 575,893 | | | 17.28 | % | | 0.80 | % |
Money market accounts | 594,081 | | | 14.38 | | | 0.11 | % | | 609,426 | | | 16.05 | % | | 0.51 | % | | 630,273 | | | 18.91 | % | | 1.32 | % |
Savings | 1,132,212 | | | 27.42 | | | 0.14 | % | | 959,857 | | | 25.29 | % | | 0.50 | % | | 715,398 | | | 21.46 | % | | 1.05 | % |
Certificates of deposit | 505,472 | | | 12.24 | | | 0.63 | % | | 910,444 | | | 23.98 | % | | 1.65 | % | | 1,027,122 | | | 30.81 | % | | 2.03 | % |
Total deposits | $ | 4,129,829 | | | 100.00 | % | | 0.15 | % | | $ | 3,796,216 | | | 100.00 | % | | 0.67 | % | | $ | 3,333,426 | | | 100.00 | % | | 1.24 | % |
As of December 31, 2021, the aggregate amount of our outstanding certificates of deposit in amounts greater than $250,000 was $64.8 million. The following table sets forth the maturity of these certificates at December 31, 2021:
| | | | | |
| |
| December 31, 2021 |
| (Dollars in thousands) |
Three months or less | $ | 22,051 | |
Over three months through six months | 23,286 | |
Over six months through one year | 6,028 | |
Over one year | 13,416 | |
Total | $ | 64,781 | |
Borrowings. Our borrowings consist primarily of advances from the FHLBNY as well as securities sold under agreements to repurchase (repurchase agreements) with third-party financial institutions. As of December 31, 2021, our FHLB advances totaled $365.0 million, or 7.8%, of total liabilities, repurchase agreements totaled $50.0 million, or 1.1%, and floating rate advances totaled $6.8 million, or 0.1%, of total liabilities. At December 31, 2021, the Company had the ability to obtain additional funding from the FHLBNY and Federal Reserve Bank discount window of approximately $2.1 billion, utilizing unencumbered securities of $647.5 million and multifamily loans of $1.4 billion. Repurchase agreements are primarily secured by mortgage-backed securities. Advances from the FHLBNY are secured by our investment in the common stock of the FHLBNY as well as by pledged mortgage-backed securities and loans.
The following table sets forth information concerning balances and interest rates on our borrowings at and for the years indicated:
| | | | | | | | | | | | | | | | | |
| At Or For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (Dollars in thousands) |
Balance at end of year | $ | 421,755 | | | $ | 591,789 | | | $ | 857,004 | |
Average balance during year | $ | 501,523 | | | $ | 645,305 | | | $ | 576,284 | |
Maximum outstanding at any month end | $ | 592,170 | | | $ | 776,979 | | | $ | 857,004 | |
Weighted average interest rate at end of year | 2.13 | % | | 2.08 | % | | 2.12 | % |
Weighted average interest rate during year | 2.08 | % | | 2.03 | % | | 2.09 | % |
Human Capital
At December 31, 2021, the Company had 379 full-time employees and 12 part-time employees, located primarily in the states of New York and New Jersey, of which approximately 67% were women and 38% were minorities. We welcome and promote diversity and inclusion to achieve exceptional business results and a sustainable competitive advantage. We are focused on attracting, developing and retaining employees with diverse backgrounds and experiences whose contributions can maximize our financial and strategic growth objectives and build long-term stockholder value. Our core values of trust, respect and excellence, coupled with our vision of being a high-performing socially responsible community bank where employees want to work, customers want to bank, and stockholders want to invest, promotes innovation, increases business value, and enriches our corporate culture. We believe our relationship with our employees is good. We have not experienced any material employment-related issues or interruptions of services due to labor disagreements and are not a party to any collective bargaining agreements. Key items related to our human capital are described below.
Compensation and Benefits. We offer employees competitive short-term and long-term compensation that we periodically benchmark to market data utilizing third party consultants specialized in employee compensation and retention. We provide a comprehensive and competitive portfolio of health and welfare benefits including medical, dental and vision insurance, life insurance, short-term disability, and various expense reimbursement programs. We sponsor a 401(k) plan, which provides eligible employees the opportunity to invest a portion of their pre-tax and after-tax base salary, up to regulatory limits, in professionally managed investment options, and self-directed brokerage accounts. Over time, we match up to 50% of employee contributions up to the first 6% of compensation, as defined, based on years of service. We also maintain the Northfield Bank Employee Stock Ownership Plan (the “ESOP”) for eligible employees. The ESOP is a tax-qualified plan invested in our common stock. The ESOP provides employees with the opportunity to receive a funded retirement benefit based on the value of our common stock, and years of service, as defined, and is 100% funded by Northfield Bank.
Employee Engagement. We partner with various third parties to measure employee engagement and satisfaction, and develop action plans for continued improvement. We have introduced virtual town hall meetings for all employees, opening the lines of communications and answering employee questions and concerns. In conjunction with the town hall meetings, surveys were completed related to well-being, compensation, benefits, and our core values. These surveys provided insight into our employees’ needs and preferences, which we consider in future program development.
Diversity, Equity and Inclusion. We prioritize diversity, equity and inclusion as an employer, a financial institution, and as a member of the communities in which we operate and recognize that differences in gender, race, ethnicity, religion, age, culture, physical ability, veteran’s status, thinking style, and background enrich our work environment and help us to better respond to the needs of our customers. We are committed to attracting, retaining and promoting quality talent regardless of characteristics. Our recruiting efforts include participation in select venues that provide us opportunities to identify and select from a diverse group of candidates for all open positions based on critical skill sets of each position. We are dedicated to providing a workplace for our employees that is inclusive, supportive, and free of discrimination or harassment. We recognize and reward our employees based on their individual results and performance; and promote a respectful work environment that values characteristics and differences that make each of our employees unique.
Training and Development. We encourage and support the growth and development of our employees and seek to fill positions by promotion and transfer from within the Company. Ongoing learning and career development is advanced through bi-annual performance and development conversations between associates and their managers, internally developed training programs, customized corporate training engagements, and educational reimbursement programs. Reimbursement is available to employees enrolled in pre-approved degree or certification programs at accredited entities that teach skills or knowledge relevant to our business and employee job duties.
Safety and Wellness. The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic presented significant challenges with regard to maintaining employee safety while continuing to provide essential banking services. Through teamwork and the adaptability of our management and staff, we were able to transition, over a short period of time, the majority of our back office employees to effectively work remotely and ensure a safely-distanced working environment for employees performing customer facing activities, at branches and our operation centers. We perform daily COVID-19 employee health screenings through a confidential smartphone application and our human resource team acts as a critical resource to our employees providing consultation to assist in health related questions or concerns at work or home. We have implemented a number of COVID-19 related employee support benefits, including additional paid time off, wellness resources, and vaccination education and awareness. On a regular basis, we further promote the health and wellness of our employees by encouraging work-life balance, offering flexible work schedules, and encouraging and sponsoring various wellness programs.
Subsidiary Activities
Northfield-Bancorp, Inc. owns 100% of Northfield Investments, Inc., an inactive New Jersey investment company, and 100% of Northfield Bank. Northfield Bank owns 100% of NSB Services Corp., a Delaware corporation, which in turn owns 100% of the voting common stock of NSB Realty Trust. NSB Realty Trust is a Maryland real estate investment trust that holds mortgage loans, mortgage-backed securities and other investments. These entities enable us to segregate certain assets for management purposes, and or borrow against assets or stock of these entities for liquidity purposes. At December 31, 2021, Northfield Bank’s investment in NSB Services Corp. was $804.6 million, and NSB Services Corp. had assets of $804.7 million and liabilities of $122,000 at that date. At December 31, 2021, NSB Services Corp.’s investment in NSB Realty Trust was $804.4 million, and NSB Realty Trust had $804.4 million in assets, and liabilities of $14,000 at that date.
Expense and Tax Allocation Agreements
Northfield Bank has an agreement with Northfield Bancorp, Inc. to provide it with certain administrative support services, whereby Northfield Bank will be compensated at not less than the fair market value of the services provided. In addition, Northfield Bank and Northfield Bancorp, Inc. have an agreement for allocating and reimbursing Northfield Bancorp, Inc. for Northfield Bank's portion of its consolidated tax liability.
SUPERVISION AND REGULATION
General
Northfield Bank is a federally chartered savings bank that is regulated, examined, and supervised by the OCC and the FDIC. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s Deposit Insurance Fund and depositors, and not for the protection of security holders. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity, and sensitivity to market interest rates. Northfield Bank also is regulated to a lesser extent by the FRB, governing reserves to be maintained against deposits and other matters, including payments of dividends. The OCC examines Northfield Bank and prepares reports for the consideration of its Board of Directors on any operating deficiencies. Northfield Bank’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of Northfield Bank’s loan documents. Northfield Bank is also a member of and owns stock in the FHLBNY, which is one of the 11 regional banks in the FHLB System.
As a savings and loan holding company, Northfield Bancorp, Inc. is required to comply with the rules and regulations of the FRB. It is required to file certain reports with and is subject to examination by and the enforcement authority of the FRB. Northfield Bancorp, Inc. is also subject to the rules and regulations of the SEC under the federal securities laws.
Any change in applicable laws or regulations, whether by the FDIC, the OCC, the FRB, the SEC, or Congress, could have a material adverse effect on Northfield Bancorp, Inc. and Northfield Bank and their operations.
Set forth below is a brief description of material regulatory requirements that are or will be applicable to Northfield Bank and Northfield Bancorp, Inc. The description is limited to certain material aspects of the statutes and regulations addressed and is not intended to be a complete description of such statutes and regulations and their effects on Northfield Bank and Northfield Bancorp, Inc.
Business Activities
A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and the regulations of the OCC. Under these laws and regulations, Northfield Bank may originate mortgage loans secured by residential and commercial real estate, commercial business loans, and consumer loans, and it may invest in certain types of debt securities and certain other assets. Certain types of lending, such as commercial and consumer loans, are subject to aggregate limits calculated as a specified percentage of Northfield Bank’s capital or assets. Northfield Bank also may establish subsidiaries that may engage in a variety of activities, including some that are not otherwise permissible for Northfield Bank, including real estate investment and securities and insurance brokerage.
Loans-to-One-Borrower
We generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of Northfield Bank’s unimpaired capital and unimpaired surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and unimpaired surplus, if the loan is secured by readily marketable collateral, which is defined to include certain financial instruments and bullion, but generally does not include real estate. As of December 31, 2021, we were in compliance with our loans-to-one-borrower limitations.
Qualified Thrift Lender Test
As a federally chartered savings bank, Northfield Bank is required to satisfy a qualified thrift lender (“QTL”) test, under which we either must qualify as a “domestic building and loan” association as defined by the Internal Revenue Code or maintain at least 65% of our “portfolio assets” in “qualified thrift investments.” “Qualified thrift investments” consist primarily of residential mortgages and related investments, including mortgage-backed and related securities. “Portfolio assets” generally mean total assets less specified liquid assets up to 20% of total assets, goodwill, and other intangible assets and the value of property used to conduct business. A savings bank that fails the QTL test must operate under specified restrictions. Federal law also makes noncompliance with the QTL test subject to agency enforcement action for a violation of law. As of December 31, 2021, we maintained 79.6% of our portfolio assets in qualified thrift investments and, therefore, we met the QTL test.
Standards for Safety and Soundness
Federal law requires each federal banking agency to prescribe for insured depository institutions under its jurisdiction standards relating to, among other things, internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, employee compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to submit or implement an acceptable plan, the appropriate federal banking agency may issue an enforceable order requiring correction of the deficiencies.
Capital Requirements
Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital generally is defined as common stockholders’ equity and retained earnings. Tier 1 capital generally is defined as common equity Tier 1 plus additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and certain other items. In assessing an institution’s capital adequacy, the OCC takes into consideration, not only these numeric factors, but qualitative adjustments as well, and has the authority to establish higher capital requirements for individual institutions when deemed necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.
Legislation enacted in 2018 required the federal banking agencies, including the OCC, to specify for qualifying institutions with less than $10 billion of assets, an alternative “community bank leverage ratio” that ranges between 8% to 10% of consolidated assets. Institutions with capital levels meeting or exceeding the specified requirement and choosing the alternative regulatory capital framework are considered to comply with the applicable regulatory capital requirements, including all risk-based requirements. A final rule was issued by the federal regulators, effective January 1, 2020, that establishes the elective community bank leverage ratio at 9.0% Tier 1 capital to average total consolidated assets. Eligible institutions may opt into and out of the community bank ratio framework on their quarterly call report. Northfield Bank elected to opt into the new framework effective March 31, 2020.
As of December 31, 2021, Northfield Bancorp, Inc. and Northfield Bank exceeded all capital adequacy requirements to which they were subject. Further, the most recent OCC notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations discussed below. See Note 15 of the Notes to the Consolidated Financial Statements for further discussion about Regulatory Requirements.
Prompt Corrective Regulatory Action
Federal law requires, among other things, that federal bank regulators take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For this purpose, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under the applicable regulations, an institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
The regulations provide that a capital restoration plan must be filed with the OCC within 45 days of the date a savings institution receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company for the savings institution required to submit a capital restoration plan must guarantee the lesser of an amount equal to 5.0% of the savings institution’s assets at the time it was notified or deemed to be undercapitalized by the OCC, or the amount necessary to restore the savings institution to adequately capitalized status. This guarantee remains in place until the OCC notifies the savings institution that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the OCC has the authority to require payment and collect payment under the guarantee. Various restrictions, including on growth and capital distributions, also apply to “undercapitalized” institutions. If an “undercapitalized” institution fails to submit an acceptable capital plan, it is treated as “significantly undercapitalized.” “Significantly undercapitalized” institutions must comply with one or more additional restrictions including, but not limited to, an order by the OCC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss officers or directors and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the issuance of a capital directive and the replacement of senior executive officers and directors.
The previously referenced final rule that establishes an elective “community bank leverage ratio” provides that a qualifying institution whose Tier 1 capital equals or exceeds the specified community bank leverage ratio and opts into that framework will be considered to be “well capitalized” for purposes of prompt corrective action.
Capital Distributions
Federal regulations restrict “capital distributions” by savings institutions. For purposes of the regulations, capital distributions generally include cash dividends and other transactions charged to the capital account of a savings institution. A federal savings institution must file an application with the OCC for approval of the capital distribution if:
•the total capital distributions for the applicable calendar year exceeds the sum of the institution’s net income for that year to date plus the institution’s retained net income for the preceding two years that is still available for dividend;
•the institution would not be at least adequately capitalized following the distribution;
•the distribution would violate any applicable statute, regulation, agreement or written regulatory condition; or
•the institution is not eligible for expedited review of its filings (i.e., generally, institutions that do not have safety and soundness, compliance and Community Reinvestment Act ratings in the top two categories or fail a capital requirement).
A savings institution that is a subsidiary of a holding company, which is the case with Northfield Bank, must file a notice with the FRB at least 30 days before the Board of Directors declares any dividend and receives FRB non-objection to the payment of the dividend.
Applications or notices may be denied if the institution will be undercapitalized after the proposed dividend, the proposed dividend raises safety and soundness concerns or the proposed dividend would violate a law, regulation enforcement order, or regulatory condition.
In the event that a savings institution’s capital falls below its regulatory requirements or it is notified by the regulatory agency that it is in need of more than normal supervision, its ability to make capital distributions would be restricted. In addition, any proposed capital distribution could be prohibited if the regulatory agency determines that the distribution would constitute an unsafe or unsound practice.
Transactions with Related Parties
A savings institution’s authority to engage in transactions with related parties or “affiliates” is limited by Sections 23A and 23B of the Federal Reserve Act and its implementing regulation, FRB Regulation W. The term “affiliate” generally means any company that controls or is under common control with an institution, including Northfield Bancorp, Inc. and its non-savings institution subsidiaries (although certain subsidiaries of the institution itself are not considered affiliates). Applicable law limits the aggregate amount of “covered” transactions with any individual affiliate, including loans to the affiliate, to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution’s capital and surplus. Certain covered transactions with affiliates, such as loans to or guarantees issued on behalf of affiliates, are required to be secured by specified amounts of collateral. Purchasing low quality assets from affiliates is generally prohibited. Regulation W also provides that transactions with affiliates, including covered transactions, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited by law from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.
Authority to extend credit to executive officers, directors and 10% or greater shareholders (insiders), as well as entities controlled by insiders, is governed by Sections 22(g) and 22(h) of the Federal Reserve Act and its implementing regulation, FRB Regulation O. Among other things, loans to insiders must be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for bank-wide lending programs that do not discriminate in favor of insiders. Regulation O also places individual and aggregate limits on the amount of loans that may be made to insiders based, in part, on the institution’s capital position, and requires that certain prior board approval procedures be followed. Extensions of credit to executive officers are subject to additional restrictions on the types and amounts of loans that may be made. At December 31, 2021, Northfield Bank was in compliance with these regulations.
Enforcement
The OCC has primary enforcement responsibility over federal savings institutions, including the authority to bring enforcement action against “institution-related parties,” including officers, directors, certain shareholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or "cease and desist" order to removal of officers and/or directors of the institution, receivership, conservatorship or the termination of deposit insurance. Civil penalties cover a wide range of violations and actions. The maximum penalties that can be assessed are generally based on the type and severity of the violation, unsafe and unsound practice or other action, and are adjusted annually for inflation.
Deposit Insurance
Northfield Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. Deposit accounts in Northfield Bank are insured up to a maximum of $250,000 for each separately insured depositor by the FDIC.
The FDIC assesses insured depository institutions to maintain the Deposit Insurance Fund. Under the FDIC’s risk-based assessment system, institutions deemed less risky pay lower assessments. Assessments for institutions with less than $10 billion of assets are based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of an institution’s failure within three years.
The current assessment range (inclusive of possible adjustments) for insured institutions of less than $10 billion of total assets is 1.5 basis points.
The minimum target Deposit Insurance Fund ratio established by federal law was increased in 2011 from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC was required to achieve the 1.35% ratio by September 30, 2020. Federal law required institutions with assets of $10 billion or more to fund the increase from 1.15% to 1.35% and, effective July 1, 2016, such institutions became subject to a surcharge to achieve that goal. On September 30, 2018, the Deposit Insurance Fund ratio reached 1.36%, exceeding the statutorily required minimum reserve ratio of 1.35% ahead of the September 30, 2020 deadline. Consequently, surcharges on insured depository institutions with total consolidated assets of $10 billion or more ceased; and such smaller banks received assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from between 1.15% and 1.35%. The credits were exhausted as of September 30, 2020.
The FDIC has established a long-range target Deposit Insurance fund ratio of 2%. The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Northfield Bank. Future insurance assessments cannot be predicted.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed in writing. Management of Northfield Bank does not know of any practice, condition, or violation that may lead to termination of the Northfield Bank’s deposit insurance.
Federal Home Loan Bank System
Northfield Bank is a member of the FHLBNY, and therefore is a member of the FHLB System, which consists of 11 regional FHLBs. The FHLB System provides a central credit facility primarily for member institutions. Members of the FHLB are required to acquire and hold a specified amount of shares of FHLB capital stock. Northfield Bank was in compliance with this requirement at December 31, 2021.
Community Reinvestment Act and Fair Lending Laws
Savings institutions have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. An institution’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on certain activities such as branching and acquisitions. In the most recent Community Reinvestment Act Public Disclosure issued by the OCC as of March 9, 2020, Northfield Bank was rated “Satisfactory.”
Other Regulations
Interest and other charges collected or contracted for by Northfield Bank are subject to state usury laws and federal laws concerning interest rates. Northfield Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:
•Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
•Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one-to-four family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;
•Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
•Equal Credit Opportunity Act and the Fair Housing Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
•Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
•Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
•Flood Disaster Protection Act, requiring flood insurance of collateral properties located in designated flood zones;
•Servicemembers Civil Relief Act, a program that provides a wide range of protections in lending for individuals entering, called to active duty in the military, or deployed service members; and
•Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
The operations of Northfield Bank also are subject to the:
•Truth in Savings Act and Regulation DD, which requires disclosures of deposit terms to consumers;
•Regulation CC, which relates to the availability of deposit funds to consumers;
•Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
•Electronic Funds Transfer Act, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;
•The USA PATRIOT Act, which requires banks and savings institutions to, among other things, establish broadened anti-money laundering compliance programs and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement pre-existing compliance requirements that apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and
•The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties and requires all financial institutions offering products or services to retail customers to provide such customers with the financial institution’s privacy policy and allow such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.
Holding Company Regulation
Northfield Bancorp, Inc. is a unitary savings and loan holding company subject to regulation and supervision by the FRB. The FRB has enforcement authority over Northfield Bancorp, Inc. and its non-savings institution subsidiaries. Among other things, that authority permits the FRB to restrict or prohibit activities that are determined to be a risk to Northfield Bank.
The business activities of savings and loan holding companies are generally limited to those activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Federal Reserve Board, and certain additional activities authorized by Federal Reserve Board regulations, unless the holding company has elected “financial holding company” status. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. Northfield Bancorp Inc. has not elected financial holding company status. Federal law generally prohibits the acquisition of more than 5% of a class of voting stock of a company engaged in impermissible activities.
Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or savings and loan holding company without prior written approval of the FRB and from acquiring or retaining control of any depository institution not insured by the FDIC. In evaluating applications by savings and loan holding companies to acquire savings institutions, the FRB must consider such things as the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the institution, the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors. An acquisition by a savings and loan holding company of a savings institution in another state to be held as a separate subsidiary may not be approved unless it is a supervisory acquisition under Section 13(k) of the Federal Deposit Insurance Act or the law of the state in which the target is located authorizes such acquisitions by out-of-state companies.
Savings and loan holding companies above $3 billion in consolidated assets, such as Northfield Bancorp, Inc., are subject to consolidated regulatory capital requirements that are as stringent as those required for their insured depository subsidiaries. Consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions (including the community bank leverage ratio alternative) also apply to savings and loan holding companies. Northfield Bancorp, Inc. exceeded the FRB’s consolidated capital requirements as of December 31, 2021.
Federal law applies the FRB's “source of strength” doctrine to savings and loan holding companies. The FRB has issued regulations implementing the “source of strength” policy that requires holding companies act as a source of strength to their subsidiary depository institutions by providing capital, liquidity, and other support in times of financial stress.
The FRB has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank and savings and loan holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital requirements, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The guidance also provides for prior consultation with supervisory staff for material increases in the amount of a company’s common stock dividend. The ability of a holding company to pay dividends may also be restricted if a subsidiary bank becomes undercapitalized. Regulatory guidance specifies that a holding company should advise FRB supervisory staff prior to redeeming or repurchasing common or perpetual preferred stock, to provide opportunity for supervisory review, and possible objection, when the holding company is experiencing financial weaknesses or the repurchase or redemption would result in a net reduction as of the end of a quarter in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurs. These regulatory policies could affect the ability of Northfield Bancorp, Inc. to pay dividends, repurchase common stock or otherwise engage in capital distributions.
Federal Securities Laws
Northfield Bancorp, Inc.’s common stock is registered with the SEC under the Securities Exchange Act of 1934, as amended. Northfield Bancorp, Inc. is subject to the information, proxy solicitation, insider trading restrictions, and other requirements under the Securities Exchange Act of 1934.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. Northfield Bancorp, Inc. has policies, procedures and systems designed to comply with the Sarbanes-Oxley Act.
Change in Control Regulations
Under the Change in Bank Control Act, no person may acquire control of a savings and loan holding company, such as Northfield Bancorp, Inc., unless the FRB has been given 60 days prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under the Change in Bank Control Act, means ownership, control of or the power to vote 25% or more of any class of voting stock. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where, as is the case with Northfield Bancorp, Inc., the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
The CARES Act
In response to the COVID-19 pandemic, the CARES Act, which was signed into law on March 27, 2020, provided over $2 trillion to provide national emergency economic relief measures. The law had several provisions relevant to depository institutions, including:
•Allowing institutions not to characterize loan modifications relating to the COVID-19 pandemic as a TDR and also allowing them to suspend the corresponding impairment determination for accounting purposes (discussed further below under Guidance on Non-TDR Modifications due to COVID-19).
•Temporarily reducing the community bank leverage ratio alternative available to institutions of less than $10 billion of assets to 8%.
•Providing for a borrower of a federally-backed mortgage loan (VA, FHA, USDA, Freddie Mac and Fannie Mae) experiencing financial hardship due, directly or indirectly, to the COVID-19 pandemic, to request forbearance from paying their mortgage by submitting a request to the borrower’s servicer affirming their financial hardship during the COVID-19 emergency. Such a forbearance could be granted for up to 180 days, subject to extension for an additional 180-day period upon the request of the borrower. During that time, no fees, penalties or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the mortgage contract could accrue on the borrower’s account. Except for vacant or abandoned property, the servicer of a federally-backed mortgage was prohibited from taking any foreclosure action, including any eviction or sale action, for not less than the 60-day period beginning March 18, 2020, extended by federal mortgage-backing agencies several times by administrative action.
•Providing for a borrower of a multifamily federally-backed mortgage loan that was current as of February 1, 2020, to submit a request for forbearance to the borrower’s servicer affirming that the borrower is experiencing financial hardship during the COVID-19 emergency. A forbearance would be granted for up to 30 days, which could be extended for up to two additional 30-day periods upon the request of the borrower. Later extensions were made available, for a total of six months, for certain federally-backed multifamily mortgage loans. During the time of the forbearance, the multifamily borrower could not evict or initiate the eviction of a tenant or charge any late fees, penalties or other charges to a tenant for late payment of rent. Additionally, a multifamily borrower that received a forbearance could not require a tenant to vacate a dwelling unit before a date that is 30 days after the date on which the borrower provided the tenant notice to vacate and may not issue a notice to vacate until after the expiration of the forbearance.
The CARES Act encouraged the FRB, in coordination with the Secretary of the Treasury, to establish or implement various programs to help mitigate the adverse effects of COVID-19 on midsize businesses, nonprofits, and municipalities. In April 2020, the FRB established the Main Street Lending Program (“MSLP”) to implement certain of these recommendations. The MSLP supported lending to small and medium-sized businesses that were in sound financial condition before the onset of COVID-19. The Company continues to monitor developments related to the MSLP.
The Paycheck Protection Program
The PPP, established as part of the CARES Act, provided 100% federally guaranteed loans to eligible small businesses through the SBA's 7(a) loan guaranty program for amounts up to 2.5 times the average monthly payroll costs of the business, as defined. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible for PPP loan forgiveness so long as employee and compensation levels of the business are maintained at certain levels, as defined, and at least a certain portion of loan proceeds are used for payroll expenses, as defined, with the remaining loan proceeds eligible to be used for other qualifying expenses, as defined. The PPP was implemented in April 2020. On December 27, 2020, the Consolidated Appropriations Act, 2021 (the “Relief Act”) was signed into law, granting additional funds for a new round of PPP loans. In May 2021, the SBA announced that PPP funding had been exhausted and the SBA stopped accepting new PPP loan applications. The Company originated approximately $232.1 million of PPP loans (including $32.3 million of PPP loans acquired through the Victory acquisition). At December 31, 2021, we had $40.5 million of PPP loans outstanding.
Guidance on Non-TDR Loan Modifications due to COVID-19
On March 22, 2020, a statement was issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the “Interagency Statement”) that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act permits a financial institution to elect to suspend temporarily TDR accounting under current U.S. GAAP. To be eligible, a loan modification must be: (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (a) 60 days after the date of termination of the national emergency or (b) December 31, 2020. This relief was further extended by Section 541 of the Relief Act to the earlier of January 1, 2022 or 60 days after the date of termination of the national emergency. The relief provided includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. In response to the COVID-19 pandemic and its economic impact to customers, the Company introduced a short-term modification program in March 2020 that provides temporary payment relief to those borrowers directly impacted by COVID-19. The program allows for a deferral of payments for 90 days, which may extend for an additional 90 days, with modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment.
Federal Taxation
General. Northfield Bank and Northfield Bancorp, Inc. are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. Northfield Bancorp, Inc.'s consolidated federal tax returns are not currently under audit.
The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to Northfield Bancorp, Inc. or Northfield Bank.
Method of Accounting. For federal income tax purposes, Northfield Bancorp, Inc. currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31 for filing its federal and state income tax returns.
Bad Debt Reserves. Historically, Northfield Bank was subject to special provisions in the tax law applicable to qualifying savings banks regarding allowable tax bad debt deductions and related reserves. Tax law changes were enacted in 1996 that eliminated the ability of savings banks to use the percentage of taxable income method for computing tax bad debt reserves for tax years after 1995, and required recapture into taxable income over a six-year period of all bad debt reserves accumulated after a savings bank’s last tax year beginning before January 1, 1988. Northfield Bank recaptured its post December 31, 1987, bad-debt reserve balance over the six-year period ended December 31, 2004. Northfield Bancorp, Inc. is required to use the specific charge-off method to account for tax bad debt deductions.
Taxable Distributions and Recapture. Prior to 1996, bad debt reserves created prior to 1988 were subject to recapture into taxable income if Northfield Bank failed to meet certain thrift asset and definitional tests or made certain distributions. Tax law changes in 1996 eliminated thrift-related recapture rules. However, under current law, pre-1988 tax bad debt reserves remain subject to recapture if Northfield Bank makes certain non-dividend distributions, repurchases any of its common stock, pays dividends in excess of earnings and profits, or fails to qualify as a “bank” for tax purposes. At December 31, 2021, the total federal pre-base year bad debt reserve of Northfield Bank was approximately $5.9 million.
Net Operating Loss Carryovers. Prior to December 31, 2017, The Internal Revenue Code allowed corporations to carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. Effective January 1, 2018 net operating losses can no longer be carried back but can be carried forward indefinitely. The CARES Act that was signed into law on March 27, 2020, provided for net operating losses generated in 2018, 2019 and 2020 to be carried back five years. At December 31, 2021, Northfield Bancorp, Inc.’s consolidated group had no net operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. Northfield Bancorp, Inc. may exclude from its federal taxable income 100% of dividends received from Northfield Bank as a wholly-owned subsidiary by filing consolidated tax returns. Through December 31, 2017, the corporate dividends-received deduction was 80% in the case of dividends received from a corporation in which a corporate recipient owns at least 20% of its stock, and corporations that own less than 20% of the stock of a corporation distributing a dividend could deduct only 70% of dividends received or accrued on their behalf. Effective January 1, 2018, the dividends received deduction decreased from 80% to 65% and 70% to 50% for corporate recipients owning at least 20% or less than 20%, respectively, of a corporation’s stock.
State Taxation
New York State Taxation. In 2014, New York State enacted significant and comprehensive reforms to its corporate tax system that went into effect January 1, 2015, including changes to the franchise, sales, estate, and personal income taxes and the elimination of the banking corporation tax so that banking corporations are taxed under New York State’s corporate franchise tax. New York State imposes a corporate income tax, based on net income allocable to New York State at a rate of 6.5%. In April 2021, legislation increased the corporate franchise tax rate to 7.25% for tax years beginning on or after January 1, 2021 and before January 1, 2024 for taxpayers with a business income base greater than $5 million. In addition, the scheduled phase-out of the capital base tax was delayed. The rate of the capital base was to have been 0% starting in 2021. The legislation imposed a tax rate of 0.1875% for tax years beginning on or after January 1, 2021 and before January 1, 2024, with the 0% rate to take effect in 2024. New York State also imposes the Metropolitan Transportation Authority (“MTA”) Tax Surcharge allocable to business activities carried on in the Metropolitan Commuter Transportation District. The MTA surcharge rate for 2021 was 30.0%, and will remain at 30.0% for tax years beginning on or after January 1, 2022, and before January 1, 2023.
New York City Taxation. Northfield Bank reports income on a calendar year basis to New York City and is subject to the New York City Financial Corporation Tax calculated, subject to a New York City income and expense allocation, on a similar basis as the New York State Tax, at a rate of 8.85%.
Our New York State tax returns are currently under audit for tax years 2015 through 2017 and New York City tax returns are currently under audit for tax years 2018 and 2019.
New Jersey State Taxation. Northfield Bancorp, Inc. and Northfield Bank file New Jersey Corporation Business Tax returns on a calendar year basis. Generally, the income derived from New Jersey sources is subject to New Jersey tax. Northfield Bancorp, Inc. and Northfield Bank pay the greater of the corporate business tax at 9% of taxable income or the minimum tax of $2,000 per entity. On July 1, 2018, the State of New Jersey enacted new legislation that imposes a temporary surtax of 2.5% for tax years beginning on or after January 1, 2018 through December 31, 2019, and of 1.5% for tax years beginning on or after January 1, 2020 through December 31, 2021. On September 29, 2020, the state extended the 2.5% surtax through December 31, 2023, retroactively to tax years beginning January 1, 2020. The legislation also requires combined filing for certain members of an affiliated group for tax years beginning on or after January 1, 2019. In May 2019, the State of New Jersey issued a tax technical bulletin, subsequently revised in December 2019, which gives guidance on the treatment of real estate investment trusts in connection with the combined reporting for New Jersey corporate business tax purposes. Real estate investment trusts and investment companies will be excluded from the combined group and will continue to file separate New Jersey tax returns.
Delaware State Taxation. As a Delaware business corporation, Northfield Bancorp, Inc. is required to file an annual report with and pay franchise taxes to the state of Delaware.
ITEM 1A. RISK FACTORS
The material risks and uncertainties that management believes affect us are described below. You should carefully consider the risks and uncertainties described below, together with all of the other information included or incorporated by reference herein as well as in other documents we file with the SEC. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This report is qualified in its entirety by these risk factors. See also, “Forward-Looking Statements.”
Risks Related to the COVID-19 Pandemic
The economic impact of the COVID-19 outbreak could continue to affect our financial condition and results of operations.
The COVID-19 pandemic has caused significant economic dislocation in the United States, including disruptions to the global supply chain and a slow-down in economic activity. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and passed legislation to provide relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry.
The spread of COVID-19 has caused us to significantly modify our business practices, including business operating hours and delivery methods, as well as employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. These changes, as well as adverse economic conditions, could cause us not to be able to execute on our growth strategies.
Given the ongoing and dynamic nature of current economic circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be fully controlled and abated. As a result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:
•demand for our products and services may decline, making it difficult to execute on our strategic initiatives related to growing assets and earnings;
•loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charge-offs and reduced income;
•certain industries and/or business models may never fully recover which could result in increased loan delinquencies, problem assets, and foreclosures, resulting in increased charge-offs and reduced income;
•a worsening of business and economic conditions or a further downturn in the financial markets could result in an impairment of certain intangible assets, such as goodwill or our core deposit intangibles;
•disruptions in the businesses or the unavailability of the services of third parties we use or rely on in our operations such as property appraisers, loan servicers, providers of electronic payment and settlement systems, and local and federal government agencies and courthouses, could negatively affect our operations;
•collateral for loans, especially real estate, may decline in value, (including due to the inability to complete construction projects due to disruption in the supply chain)which could cause credit losses on loans to increase;
•our allowance for credit losses on loans may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
•the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
•a material decrease in net income or a net loss over several quarters could result in a decrease or elimination of our quarterly cash dividend;
•potential goodwill impairment charges if acquired assets and operations are adversely affected and remain at reduced levels;
•our cyber security risks are increased as the result of an increase in the number of employees working remotely;
•FDIC premiums may increase if the agency experience additional resolution costs;
•internal controls as designed may not prove effective, to the extent procedures are modified as a result of remote work locations; and
•the unanticipated loss or unavailability of key employees due to the pandemic, which could harm our ability to operate our business or execute our business strategy, especially as we may not be successful in finding or attracting new talent.
Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.
Risks Related to Our Lending Activities
The level of our commercial real estate loan portfolio subjects us to additional regulatory scrutiny.
The OCC and the other federal bank regulatory agencies have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under the guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors, (i) total reported loans for construction, land acquisition and development, and other land represent 100% or more of total capital, or (ii) total reported loans secured by multifamily and non-farm residential properties, loans for construction, land acquisition and development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital.
Based on these factors we have a concentration in multifamily and commercial real estate lending, as such loans represent approximately 443.5% of Northfield Bank's capital as of December 31, 2021. The particular focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment, and monitoring through market analysis and stress testing. While we believe we have implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us or that may result in a curtailment of our multifamily and commercial real estate lending and/or the requirement that we maintain higher levels of regulatory capital, either of which would adversely affect our loan originations and profitability.
Our concentration in multifamily loans and commercial real estate loans could expose us to increased lending risks and related credit losses.
Our current business strategy is to continue to originate multifamily loans and to a lesser extent other commercial real estate loans. At December 31, 2021, $3.33 billion, or 87.8% of our loan portfolio held-for-investment, net, consisted of multifamily and other commercial real estate loans.
These types of loans generally expose a lender to greater risk of non-payment and loss than one-to-four family residential mortgage loans because repayment of the loans often depends on the successful operation of the properties and the sale of such properties securing the loans. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one-to-four family residential mortgage loans. Also, many of our borrowers have more than one of these types of loans outstanding. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one-to-four family residential real estate loan.
In addition, if loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could cause us to increase our provision for credit losses and adversely affect our operating results and financial condition.
Our New York State multifamily loan portfolio could be adversely impacted by changes in legislation or regulation.
On June 14, 2019, the New York State legislature passed the Housing Stability and Tenant Protection Act of 2019, impacting about one million rent regulated apartment units. Among other things, the new legislation: (i) curtails rent increases from material capital improvements and individual apartment improvements; (ii) all but eliminates the ability for apartments to exit rent regulation; (iii) does away with vacancy decontrol and high-income deregulation; and (iv) repealed the 20% vacancy bonus. This legislation generally limits a landlord’s ability to increase rents on rent-regulated apartments and makes it more difficult to convert rent regulated apartments to market rate apartments. As a result, the value of the collateral located in New York State securing our multifamily loans or the future net operating income of such properties could potentially become impaired.
Uncertainties associated with increased loan originations may result in errors in judging collectability, which may lead to additional provisions for credit losses or charge-offs, which would negatively affect our financial condition and results of operations.
Increasing loan originations would likely require us to lend to borrowers with which we have limited experience. Accordingly, we would not have a significant payment history pattern with which to judge future collectability. Further, newly originated loans have not been subjected to unfavorable economic conditions. As a result, it may be difficult to predict the future performance of newly originated loans. These loans may have delinquency or charge-off levels above our recent historical experience, which could adversely affect our future performance.
If our allowance for credit losses is not sufficient to cover actual credit losses, our earnings and capital could decrease.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for credit losses, we review our loans and our loss and delinquency experience, as well as the experience of other similarly situated institutions, and we evaluate other factors including, among other things, current economic conditions. If our assumptions are incorrect, or if delinquencies, non-accrual or non-performing loans increase, our allowance for credit losses may not be sufficient to cover losses inherent in our loan portfolio, which would require additions to our allowance. Material additions to our allowance would materially decrease our net income.
Effective January 1, 2021, the Company adopted Accounting Standards Update (“ASU”), Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) or “CECL”, which makes significant changes to the accounting for credit losses on financial instruments presented on an amortized cost basis, such as our loans held for investment, and disclosures about them. The CECL model requires an estimate of expected credit losses, measured over the contractual life of an instrument, which considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions. The standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. Providing for losses over the life of our loan portfolio is a change to the previous method of providing allowances for loan losses that are probable and incurred. This change may require us to increase our allowance for credit losses in future periods, and greatly increases the types of data we need to collect and review to determine the appropriate level of the allowance for credit losses. It may also result in even small changes to future forecasts having a significant impact on the allowance, which could make the allowance more volatile. Any requirement to increase our allowance for credit losses on loans could have a material adverse effect on our financial condition and results of operations.
In addition, bank regulators periodically review our allowance for credit losses and, based on information available to them at the time of their review, may require us to increase our allowance for credit losses or recognize further loan charge-offs. An increase in our allowance for credit losses on loans or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our financial condition and results of operations. In addition, any future credit deterioration, including as a result of COVID-19, could require us to increase our allowance for credit losses.
The foreclosure process may adversely impact the Bank’s recoveries on non-performing loans.
The judicial foreclosure process is protracted, which delays our ability to resolve non-performing loans through the sale of the underlying collateral. The longer timelines were the result of the economic crisis, additional consumer protection initiatives related to the foreclosure process, increased documentary requirements and judicial scrutiny, and, both voluntary and mandatory programs under which lenders may consider loan modifications or other alternatives to foreclosure. These reasons, historical issues at the largest mortgage loan servicers, and the legal and regulatory responses have impacted the foreclosure process and completion time of foreclosures for residential mortgage lenders. This may result in a material adverse effect on collateral values and our ability to minimize our losses.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or regulations, or more stringent interpretations or enforcement policies with respect to existing laws and regulations may increase our exposure to environmental liability, and heightened pressure from investors and other stakeholders may require us to incur additional expenses with respect to environmental matters. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.
Risks Related to Regulatory Matters
We are subject to extensive regulatory oversight.
We are subject to extensive supervision, regulation, and examination by the OCC, the FRB, and the FDIC. As a result, we are limited in the manner in which we conduct our business, undertake new investments and activities, and obtain financing. This regulatory structure is designed primarily for the protection of the Deposit Insurance Fund and our depositors, and not to benefit our stockholders. This regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement actions and examination policies, including policies with respect to capital levels, the timing and amount of dividend payments, the classification of assets, the establishment of adequate loan loss reserves for regulatory purposes and the timing and amounts of assessments and fees.
We are subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to material penalties.
The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. A successful regulatory challenge to an institution’s performance under the Community Reinvestment Act or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations.
The FRB may require us to commit capital resources to support Northfield Bank.
Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the FRB may require a holding company to make capital injections into a troubled subsidiary bank and may charge the holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to borrow the funds or raise capital. Any borrowing or funds needed to raise capital required to make a capital injection may be difficult and expensive and could have an adverse effect on our business, financial condition and results of operations.
Legislative or regulatory responses to perceived financial and market problems could impair our rights against borrowers.
Federal, state and local laws and policies could reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans, and may limit the ability of lenders to foreclose on mortgage collateral. Restrictions on Northfield Bank’s rights as creditor could result in increased credit losses on our loans and mortgage-backed securities, or increased expense in pursuing our remedies as a creditor.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions. Recently, several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, these policies and procedures may not be effective in preventing violations of these laws and regulations.
Monetary policies and regulations of the FRB could adversely affect our business, financial condition and results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the FRB. An important function of the FRB is to regulate the money supply and credit environment. Among the instruments used by the FRB to implement these objectives are open market purchases and sales of U.S. Government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the FRB have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.
We are required to maintain a significant percentage of our total assets in residential mortgage loans and investments secured by residential mortgage loans, which restricts our ability to diversify our loan portfolio.
A federal savings bank differs from a commercial bank in that it is required to maintain at least 65% of its total assets in “qualified thrift investments,” which generally includes loans and investments for the purchase, refinance, construction, improvement, or repair of residential real estate, as well as home equity loans, education loans and small business loans. To maintain our federal savings bank charter we have to be a “qualified thrift lender” or “QTL” in nine out of each 12 immediately preceding months. The QTL requirement limits the extent to which we can grow our commercial loan portfolio, and failing the QTL test can result in an enforcement action. However, a loan that does not exceed $2 million (including a group of loans to one borrower) that is for commercial, corporate, business, or agricultural purposes is included in our qualified thrift investments. As of December 31, 2021, we maintained 79.6% of our portfolio assets in qualified thrift investments. Because of the QTL requirement, we may be limited in our ability to change our asset mix and increase the yield on our earning assets by growing our commercial loan portfolio.
In addition, if we continue to grow our commercial real estate loan portfolio and our residential mortgage loan portfolio decreases, it is possible that in order to maintain our QTL status, we could be forced to buy mortgage-backed securities or other qualifying assets at times when the terms of such investments may not be attractive. Alternatively, we may find it necessary to pursue different structures, including converting Northfield Bank’s savings bank charter to a commercial bank charter.
We are subject to stringent capital requirements, which may adversely affect our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.
“Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act substantially amended the regulatory risk-based capital rules applicable to Northfield Bancorp, Inc. and Northfield Bank. The minimum capital requirements are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The final rule also established a “capital conservation buffer” of 2.5%, resulting in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. An institution may become subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations established a maximum percentage of eligible retained income that can be utilized for such actions.
The application of these more stringent capital requirements, among other things, could result in lower returns on equity, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy, and could limit our ability to make distributions, including paying dividends or buying back shares. Recent regulatory changes have made available to qualifying institutions of under $10 billion in assets an alternative “community bank leverage ratio” framework of 9% Tier 1 capital to average total consolidated assets. That framework was available for election starting in 2020, which the Northfield Bank opted into in the first quarter of 2020. However, the framework is not expected to effectively lower the amount of capital needed to comply with regulatory requirements. See “Item 1. Business - Supervision and Regulation.”
Risks Related to Strategic Matters
Implementing our growth strategies could cause us to incur significant costs and expenses which may negatively affect our financial condition and results of operations.
We expect to continue to grow our assets, the level of our deposits or borrowings, and the scale of our operations. Achieving our growth targets depends, in part, on our ability to attract customers that currently bank at other financial institutions in our market, thereby increasing our share of the market, implement new lines of business or offer new products and services within existing lines of business, identify favorable loan and investment opportunities, and acquire other banks and non-bank entities. Our ability to grow successfully will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, competitive responses from other financial institutions in our market areas and our ability to manage our growth. Growth opportunities may not be available or we may not be able to manage our growth successfully. If we do not manage our growth effectively, our financial condition and operating results could be negatively affected.
Acquisitions may disrupt our business and dilute stockholder value.
We regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, negotiations may take place and future mergers or acquisitions involving cash, or equity securities may occur at any time. We seek acquisition partners that offer us either significant market presence or the potential to expand our market footprint and improve profitability through economies of scale or expanded services.
Acquiring other banks, businesses, or branches may have an adverse effect on our financial results and may involve various other risks commonly associated with acquisitions. These include:
•integrating personnel with diverse business backgrounds;
•converting customers to new systems;
•combining different corporate cultures; and
•retaining key employees.
The success of an acquisition will depend, in part, on our ability to realize the anticipated benefits and cost savings. If we are unable to integrate an acquired company successfully, the anticipated benefits and cost savings may not be realized fully or may take longer to realize than expected. A significant decline in asset valuations or cash flows may also cause us not to realize expected benefits.
Risks Related to Economic Matters
A decline in economic conditions could reduce demand for our products and services and/or result in increases in our level of non-performing loans, which could have an adverse effect on our results of operations.
Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in New York, New Jersey and, to a lesser extent, eastern Pennsylvania. Local economic conditions have a significant impact on our commercial real estate, construction, and consumer loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. Almost all of our loans are to borrowers located in or secured by collateral in the New York metropolitan area.
Deterioration in economic conditions, including disruptions to the global supply chain, could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:
•demand for our products and services may decline;
•loan delinquencies, problem assets, and foreclosures may increase;
•collateral for loans, especially real estate, may decline in value, (including due to the inability to complete construction projects due to disruption in the supply chain) in turn reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans;
•the value of our securities portfolio may decline; and
•the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.
Moreover, a significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic events, tax reform, unemployment or other factors beyond our control could further affect these local economic conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.
Societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers
Concerns over the long-term impacts of climate change have led and could continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behaviors as a result of these concerns. We and our customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. We and our customers may face cost increases, asset value reductions, operating process changes and other issues. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Among the impacts to us could be a drop in demand for our products and services, particularly in certain sectors. In addition, we could face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.
Risks Related to Competitive Matters
Strong traditional and non-traditional competition within our market areas may limit our growth and profitability.
We face intense competition in making loans and attracting deposits. Price competition from other financial institutions, credit unions, money market and mutual funds, insurance companies, and other non-traditional competitors such as financial technology companies for loans and deposits sometimes results in us charging lower interest rates on our loans and paying higher interest rates on our deposits and may reduce our net interest income. Competition also makes it more difficult and costly to attract and retain qualified employees. Many of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. Our competitors also may price loan and deposit products aggressively when they enter into new lines of business or new market areas. We expect competition to increase in the future as a result of legislative, regulatory, and technological changes and the continuing trend of consolidation in the financial services industry. If we are not able to compete effectively in our market area, our profitability may be negatively affected. The greater resources and broader offering of deposit and loan products of some of our competitors may also limit our ability to increase our interest-earning assets.
Risks Related to Interest Rates
Changes in market interest rates in an increasing rate environment could adversely affect our financial condition and results of operations.
Our financial condition and results of operations are significantly affected by changes in market interest rates. Our results of operations substantially depend on our net interest income, which is the difference between the interest income we earn on our interest-earning assets and the interest expense we pay on our interest-bearing liabilities. Our interest-bearing liabilities generally reprice or mature more quickly than our interest-earning assets. If rates increase rapidly, we would likely have to increase the rates we pay on our deposits and borrowed funds more quickly than interest rates earned on our loans and investments, resulting in a negative effect on interest spreads and net interest income. In addition, the effect of rising rates could be compounded if deposit customers move funds from transaction and savings accounts to higher rate money market or certificate of deposit accounts. Conversely, should market interest rates fall below current levels, our net interest margin could also be affected negatively if competitive pressures keep us from further reducing rates on our deposits, while the yields on our assets decrease more rapidly through loan prepayments and interest rate adjustments.
In an attempt to help the overall economy, the FRB kept interest rates low through its targeted Fed Funds rate for a number of years. If the FRB increases the Fed Funds rate, given our liability sensitivity, our net interest rate spread and net interest margin are at risk of being reduced due to potential increases in our cost of funds that may outpace any increases in our yield on interest-earning assets.
Increases in interest rates also may decrease loan demand and/or may make it more difficult for borrowers to repay adjustable rate loans. Additionally, increases in interest rates may increase capitalization rates utilized in valuing income-producing properties. This can result in lower appraised values, which can limit the ability of borrowers to refinance existing debt and may result in higher charge-offs of our non-performing collateral dependent loans.
Our balance sheet composition is weighted towards assets with longer durations, which expose us to risks upon changes in interest rates.
We are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and mortgage-related securities. Decreases in interest rates often result in increased prepayments of loans and mortgage-related securities, as borrowers refinance their loans to reduce borrowings costs. Under these circumstances, we are subject to reinvestment risk to the extent we are unable to reinvest the cash received from such prepayments in loans or other investments that have interest rates that are comparable to the interest rates on existing loans and securities. Increases in interest rates generally reduce prepayments.
Changes in interest rates also affect the value of our interest earning assets and in particular the carrying value of our securities portfolio. Generally, the value of interest-earning assets fluctuates inversely with changes in interest rates. To the extent interest rates increase and the value of our available-for-sale portfolio decreases, our stockholders’ equity will be adversely affected.
At December 31, 2021, our simulation model indicated that our net portfolio value (the net present value of our interest-earning assets and interest-bearing liabilities) would decrease by 5.98% if there was an instantaneous parallel 200 basis point increase in market interest rates. Although interest rate risk calculations provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net portfolio value or net interest income and likely will differ from actual results.
Risks Related to Operational Matters
Our funding sources may prove insufficient to replace deposits and support our future growth.
We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These additional sources consist primarily of FHLB advances, proceeds from the sale of loans, federal funds purchased, and brokered certificates of deposit. As we continue to grow, we are likely to become more dependent on these sources. Adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.
Our success depends on hiring and retaining certain key personnel.
Our performance largely depends on the talents and efforts of highly skilled individuals. We rely on key personnel to manage and operate our business, including major revenue generating functions such as loan and deposit generation. The loss of key staff may adversely affect our ability to maintain and manage these functions effectively, which could negatively affect our revenues. In addition, competition for senior executives and skilled personnel in the financial services and banking industry is intense, which means the loss of key personnel could result in increased recruiting and hiring expenses, which could cause a decrease in our net income. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.
Risks associated with system failures, interruptions, or breaches of security could affect our earnings negatively.
Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities, deposits, and loans. We have established policies and procedures to prevent or limit the effect of system failures, interruptions, and security breaches, but such events may still occur or may not be adequately addressed if they do occur. In addition, any compromise of our systems could deter customers from using our products and services. Although we rely on security systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.
In addition, we outsource a majority of our data processing to certain third-party providers. If these third-party providers encounter difficulties, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
The occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business thereby subjecting us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.
Cyber-attacks or other security breaches could adversely affect our operations, net income, or reputation.
We regularly collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and others and concerning our own business, operations, plans and strategies. In some cases, this confidential or proprietary information is collected, compiled, processed, transmitted, or stored by third parties on our behalf.
Information security risks have generally increased in recent years because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial and other transactions, and the increased sophistication and activities of perpetrators of cyber-attacks and mobile phishing. Mobile phishing, a means for identity thieves to obtain sensitive personal information through fraudulent e-mail, text or voice mail, is an emerging threat targeting the customers of financial entities. A failure in or breach of our operational or information security systems, or those of our third-party service providers, as a result of cyber-attacks or information security breaches or due to employee error, malfeasance or other disruptions could adversely affect our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and/or cause losses.
If this confidential or proprietary information were to be mishandled, misused, or lost, we could be exposed to significant regulatory consequences, reputational damage, civil litigation, and financial loss.
Although we employ a variety of physical, procedural, and technological safeguards to protect this confidential and proprietary information from mishandling, misuse, or loss, these safeguards do not provide absolute assurance that mishandling, misuse, or loss of the information will not occur, and that if mishandling, misuse, or loss of information does occur, those events will be promptly detected and addressed. Similarly, when confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf, our policies and procedures require that the third party agree to maintain the confidentiality of the information, establish and maintain policies and procedures designed to preserve the confidentiality of the information, and permit us to confirm the third party’s compliance with the terms of the agreement. As information security risks and cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities.
Because the nature of the financial services business involves a high volume of transactions, we face significant operational risks, including fraud and other financial crimes.
We operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions over short periods of time. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside our company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal control system and compliance requirements, and business continuation and disaster recovery. Our loans to businesses and individuals and our deposit relationships and related transactions are subject to exposure to the risk of loss due to fraud and other financial crimes. In addition, employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. In the event of a breakdown in the internal control system, improper operation of systems or improper employee actions, we could suffer financial loss, face regulatory action, and suffer damage to our reputation.
Our risk management framework may not be effective in mitigating risk and reducing the potential for significant losses.
Our risk management framework is designed to minimize risk and loss to us. We seek to identify, measure, monitor, report, and control our exposure to the types of risk to which we are subject, including strategic, market, liquidity, compliance, and operational risks. While we employ a broad and diversified set of risk monitoring and mitigation techniques, those techniques are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Heightened regulatory scrutiny of the financial services industry, among other developments, has resulted in a heightened level of risk for us. Accordingly, we could suffer losses as a result of our failure to properly anticipate and manage these risks.
If our enterprise risk management framework is not effective at mitigating risk and loss to us, we could suffer unexpected losses and our results of operations could be materially adversely affected.
Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which is critical to optimizing stockholder value. We have established processes and procedures intended to identify, measure, monitor, report and analyze the types of risk to which we are subject, including credit, liquidity, operational, regulatory compliance and reputational. However, as with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses and our business and results of operations could be materially adversely affected.
Other Risks Related to Our Business
Changes in our accounting policies or in accounting standards could materially affect how we report our financial condition and results of operations.
Our accounting policies are essential to understanding our financial results and condition. Some of these policies require the use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Some of our accounting policies are critical because they require management to make difficult, subjective, and complex judgments about matters that are uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions underlying our financial statements are incorrect, we may experience material losses.
From time to time, the FASB and the SEC change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our financial statements. These changes are beyond our control, can be hard to predict and could materially affect how we report our results of operations and financial condition. We could also be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements in material amounts.
We hold certain intangible assets that could be classified as impaired in the future. If these assets are considered to be either partially or fully impaired in the future, our earnings and the book values of these assets would decrease.
We are required to test our goodwill for impairment on a periodic basis. The impairment testing process considers a variety of factors, including the current market price of our common shares, the estimated net present value of our assets and liabilities and information concerning the terminal valuation of similarly situated insured depository institutions. It is possible that future impairment testing could result in a partial or full impairment of the value of our goodwill. If an impairment determination is made in a future reporting period, our earnings and the book value of goodwill will be reduced by the amount of the impairment.
Changes in the valuation of our securities portfolio could reduce net income and lower our capital levels.
Our securities portfolio may be affected by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Management evaluates securities for other-than-temporary impairment on a quarterly basis, with more frequent evaluation for selected issues. In analyzing a debt issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, industry analysts’ reports and, to a lesser extent given the relatively insignificant levels of depreciation in our debt portfolio, spread differentials between the effective rates on instruments in the portfolio compared to risk-free rates. In analyzing an equity issuer’s financial condition, management considers industry analysts’ reports, financial performance, and projected target prices of investment analysts within a one-year time period. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to earnings may occur. Changes in interest rates also can have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. We increase or decrease our stockholders’ equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes. The declines in market value could result in other-than-temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.
Federal banking regulations restrict insured depository institutions and their affiliated companies from engaging in short-term proprietary trading of certain securities, investing in funds with collateral comprised of less than 100% of loans that are not registered with the SEC and from engaging in hedging activities that do not hedge a specific identified risk. We continue to analyze the impact of this regulation on our investment portfolio, and whether any changes are required to our investment strategies that could negatively affect our earnings.
We may be adversely affected by recent changes in tax laws.
Changes in tax laws contained in the Tax Act, which was enacted in 2017, include a number of provisions that have had both positive and negative effects on our financial performance. For example, the new legislation resulted in a reduction in the federal corporate tax rate from 35% to 21% beginning in 2018, which has had a favorable impact on our earnings and capital generation abilities. However, the new legislation also enacted limitations on certain deductions that will have an impact on the banking industry, borrowers and the market for single-family residential real estate. These limitations include (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans, (ii) the elimination of interest deductions for certain home equity loans, (iii) a limitation on the deductibility of business interest expense, and (iv) a limitation on the deductibility of property taxes and state and local income taxes.
These changes in the federal tax laws may have an adverse effect on the market for, and the valuation of, residential properties, and on the demand for such loans in the future and could make it harder for borrowers to make their loan payments. In addition, these changes also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes, like New Jersey and New York. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in our provision for credit losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.
Additionally, legislation in New Jersey that was adopted in 2018 increased our state income tax liability and our overall tax expense. The legislation imposes a temporary surtax on corporations earning New Jersey allocated income in excess of $1 million of 2.5% for tax years beginning on or after January 1, 2018 through December 31, 2019, and of 1.5% for tax years beginning on or after January 1, 2020 through December 31, 2021. On September 29, 2020, the state extended the 2.5% surtax through December 31, 2023, retroactively to tax years beginning January 1, 2020. The legislation also requires combined filing for certain members of an affiliated group for tax years beginning on or after January 1, 2019. The new legislation may cause us to lose the benefit of certain of our tax management strategies and may cause our total tax expense to increase.
Various factors may make takeover attempts more difficult to achieve.
Our certificate of incorporation and bylaws, federal regulations, Delaware law, shares of restricted stock and stock options that we have granted or may grant to employees and directors, stock ownership by our management and directors and employment agreements that we have entered into with our executive officers, and various other factors may make it more difficult for companies or persons to acquire control of Northfield Bancorp, Inc. without the consent of our Board of Directors.
We may not pay dividends on our shares of common stock.
Although we currently pay dividends on a quarterly basis, stockholders are not entitled to receive dividends. Federal regulations also may restrict capital distributions, which include cash dividends, to ensure the institution maintains adequate capital requirements.
Legal and regulatory proceedings and related matters could adversely affect us or the financial services industry in general.
We, and other participants in the financial services industry upon whom we rely to operate, have been and may in the future become involved in legal and regulatory proceedings. Most of the proceedings we consider to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and other participants in the financial services industry or we may not prevail in any proceeding or litigation. Any adverse determination could negatively affect our business, brand or image, or our financial condition and results of our operations.
We will be required to transition from the use of the LIBOR interest rate index in the future.
We have certain loans and investment securities indexed to the London Interbank Offered Rate (“LIBOR”). The LIBOR index will be discontinued for U.S. Dollar settings effective June 30, 2023. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR (with the exception of overnight repurchase agreements, which are expected to be based on the Secured Overnight Financing Rate, or SOFR). The language in our LIBOR-based contracts and financial instruments has developed over time and may have various events that trigger when a successor rate to the designated rate would be selected. If a trigger is satisfied, contracts and financial instruments may give the calculation agent discretion over the substitute index or indices for the calculation of interest rates to be selected. The implementation of a substitute index or indices for the calculation of interest rates under our loan agreements with our borrowers may result in our incurring expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may result in disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute index or indices, which could have an adverse effect on our results of operations. Additionally, since alternative rates are calculated differently, the transition may change our market risk profile, requiring changes to risk and pricing models.