Docoh
Loading...

MCB Metropolitan Bank Holding

Filed: 4 Nov 20, 4:03pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________

Commission File No. 001-38282

Metropolitan Bank Holding Corp.

(Exact Name of Registrant as Specified in Its Charter)

New York

    

13-4042724

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

99 Park Avenue, New York, New York

10016

(Address of Principal Executive Offices)

(Zip Code)

(212) 659-0600

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

MCB

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

YES NO

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES      NO

There were 8,291,264 shares of the Registrant’s common stock, par value $0.01 per share, outstanding as of October 30, 2020.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which may be identified by the use of such words as “may,” “believe,” “expect,” “anticipate,” “consider,” “should,” “plan,” “estimate,” “predict,” “continue,” “probable,” and “potential” or the negative of these terms or other comparable terminology. Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of Metropolitan Bank Holding Corp. (the “Company”) and its wholly-owned subsidiary Metropolitan Commercial Bank (the “Bank”), and the Company’s strategies, plans, objectives, expectations and intentions, and other statements contained in this Quarterly Report on Form 10-Q that are not historical facts. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors (many of which are beyond the Company’s control) that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Factors that may cause actual results to differ from those results expressed or implied include those factors listed under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 9, 2020, “Item 1A. Risk Factors” of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2020 filed with the SEC on May 5, 2020 and “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q. In addition, these factors include but are not limited to:

increases in competitive pressure among financial institutions or from non-financial institutions;
changes in the interest rate environment may reduce interest margins or affect the value of the Bank’s investments;
changes in deposit flows, loan demand or real estate values may adversely affect the Bank’s business;
changes in accounting principles, policies or guidelines may cause the Company’s financial condition to be perceived differently;
general economic conditions, including unemployment rates, either nationally or locally in some or all of the areas in which the Bank does business, or conditions in the securities markets or the banking industry may be less favorable than currently anticipated;
declines in real estate values in Bank’s market area may adversely affect its loan production;
legislative or regulatory changes may adversely affect the Bank’s business;
applicable technological changes may be more difficult or expensive than anticipated;
success or consummation of new business initiatives may be more difficult or expensive than anticipated;
the risks associated with adverse changes to credit quality, including changes in the level of loan delinquencies and non-performing assets and charge-offs and changes in estimates of the adequacy of the allowance for loan losses;
difficulties associated with achieving or predicting expected future financial results; and
the potential impact on the Bank’s operations and customers resulting from natural or man-made disasters, wars, acts of terrorism, cyber-attacks and pandemics such as the Novel Coronavirus (“COVID-19”), as discussed below.

Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on the Company’s business. The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 can be controlled and abated, the timing of an effective vaccine and whether the gradual reopening of businesses will result in a meaningful increase in economic activity. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Company could be subject to any of the following risks, any of which could have a material, adverse effect on its business, financial condition, liquidity, and results of operations: the demand for the Bank’s products and services may decline, making it difficult to grow assets and income; if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral

3

for loans, especially real estate, may decline in value, which could cause loan losses to increase; the Company’s allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect the Company’s net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to the Bank; as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on the Company’s assets may decline to a greater extent than the decline in the Company’s  cost of interest-bearing liabilities, reducing its net interest margin and spread and reducing net income; if legislation is enacted or governmental or regulatory action is enacted limiting the amount of ATM fees or surcharges that Bank may receive or on its ability to charge overdraft or other fees, it could adversely impact the Company’s financial results; the Company’s cyber security risks are increased as the result of an increased use of the Bank’s online banking platform and an increase in the number of employees working remotely; and FDIC premiums may increase if the agency experiences additional resolution costs.

However, this is a period of great uncertainty. The impact of COVID-19 is likely to be felt over the next several quarters particularly as the term of loan modifications expire and borrowers return to a normal debt service schedule as well as the commencement of a repayment schedule for payments that were deferred. As such, significant adjustments to the ALLL may be required as the full impact of COVID-19 on the Bank’s borrowers becomes known.

The Company’s ability to predict results or the actual effects of its plans or strategies is inherently uncertain. As such, forward-looking statements can be affected by inaccurate assumptions made or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect conditions only as of the date of this filing. The Company does not intend to update any of the forward-looking statements after the date of this Form 10-Q or to conform these statements to actual events.

4

METROPOLITAN BANK HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)

(in thousands, except share data)

September 30, 

December 31, 

    

2020

    

2019

Assets

Cash and due from banks

$

8,991

$

8,116

Overnight deposits

758,913

381,104

Total cash and cash equivalents

767,904

389,220

Investment securities available for sale, at fair value

182,334

234,942

Investment securities held to maturity (estimated fair value of $3,124 and $3,712 at September 30, 2020 and December 31, 2019 respectively)

3,050

3,722

Equity investment securities

2,311

2,224

Total securities

187,695

240,888

Other investments

11,097

21,437

Loans, net of deferred fees and unamortized costs

2,989,550

2,672,949

Allowance for loan losses

(33,614)

(26,272)

Net loans

2,955,936

2,646,677

Receivable from prepaid card programs, net

31,237

11,581

Accrued interest receivable

12,524

8,862

Premises and equipment, net

15,913

12,100

Prepaid expenses and other assets

9,720

17,074

Goodwill

9,733

9,733

Total assets

$

4,001,759

$

3,357,572

Liabilities and Stockholders’ Equity

Deposits:

Noninterest-bearing demand deposits

$

1,553,241

$

1,090,479

Interest-bearing deposits

1,974,385

1,700,295

Total deposits

3,527,626

2,790,774

Federal Home Loan Bank of New York advances

144,000

Trust preferred securities

20,620

20,620

Subordinated debt, net of issuance cost

24,643

24,601

Secured borrowing

32,224

42,972

Accounts payable, accrued expenses and other liabilities

37,014

23,556

Accrued interest payable

479

1,229

Prepaid third-party debit cardholder balances

30,569

10,696

Total liabilities

$

3,673,175

$

3,058,448

Class B preferred stock, $0.01 par value, authorized 2,000,000 shares, 272,636 issued and outstanding at September 30, 2020 and December 31, 2019

$

3

$

3

Common stock, $0.01 par value, 25,000,000 shares authorized, 8,289,479 and 8,312,918 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

82

82

Additional paid in capital

218,360

216,468

Retained earnings

109,055

81,364

Accumulated other comprehensive gain, net of tax effect

1,084

1,207

Total stockholders’ equity

$

328,584

$

299,124

Total liabilities and stockholders’ equity

$

4,001,759

$

3,357,572

See accompanying notes to unaudited consolidated financial statements

5

METROPOLITAN BANK HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(in thousands, except share and per share data)

Three months ended September 30, 

Nine months ended September 30, 

    

2020

    

2019

    

2020

    

2019

    

Interest and dividend income:

Loans, including fees

$

34,844

$

31,208

$

100,655

$

84,277

Securities:

Taxable

606

1,554

2,615

2,161

Tax-exempt

11

Money market funds

38

34

112

Overnight deposits

299

2,436

2,266

5,957

Other interest and dividends

196

260

666

796

Total interest income

35,945

35,496

106,236

93,314

Interest expense:

Deposits

2,681

7,881

11,364

18,463

Borrowed funds

423

943

1,742

3,369

Trust preferred securities interest expense

112

214

461

699

Subordinated debt interest expense

405

405

1,214

1,215

Total interest expense

3,621

9,443

14,781

23,746

Net interest income

32,324

26,053

91,455

69,568

Provision for loan losses

1,137

2,004

7,693

1,923

Net interest income after provision for loan losses

31,187

24,049

83,762

67,645

Non-interest income:

Service charges on deposit accounts

863

852

2,747

2,579

Prepaid third-party debit card income

2,572

1,482

6,301

4,161

Other service charges and fees

202

349

1,238

940

Unrealized gain on equity securities

17

55

87

Gain on sale of securities

3,286

Total non-interest income

3,637

2,700

13,627

7,767

Non-interest expense:

Compensation and benefits

9,944

7,875

29,962

23,286

Bank premises and equipment

2,111

1,790

6,498

4,473

Professional fees

1,221

906

3,058

2,617

Licensing fees and technology costs

2,960

3,526

10,226

7,529

Other expenses

2,694

1,398

6,984

5,008

Total non-interest expense

18,930

15,495

56,728

42,913

Net income before income tax expense

15,894

11,254

40,661

32,499

Income tax expense

5,111

3,571

12,971

10,228

Net income

$

10,783

$

7,683

$

27,690

$

22,271

Earnings per common share:

Basic earnings

$

1.30

$

0.92

$

3.34

$

2.69

Diluted earnings

$

1.27

$

0.90

$

3.27

$

2.63

See accompanying notes to unaudited consolidated financial statements

6

METROPOLITAN BANK HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(in thousands)

Three months ended September 30, 

Nine months ended September 30, 

    

2020

    

2019

    

2020

    

2019

    

Net Income

$

10,783

$

7,683

$

27,690

$

22,271

Other comprehensive income:

Unrealized gain on securities available for sale:

Unrealized holding gain arising during the period

$

100

$

1,740

5,210

3,134

Reclassification adjustment for gain included in net income

(3,286)

Tax effect

(43)

(548)

(620)

(990)

Net of tax

$

57

$

1,192

$

1,304

$

2,144

Unrealized loss on cash flow hedges:

Unrealized holding loss arising during the period

$

(218)

$

(2,095)

Tax effect

76

668

Net of tax

$

(142)

$

(1,427)

Total other comprehensive (loss) income

$

(85)

$

1,192

$

(123)

$

2,144

Comprehensive Income

$

10,698

$

8,875

$

27,567

$

24,415

See accompanying notes to unaudited consolidated financial statements

7

METROPOLITAN BANK HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

For three months ended September 30, 2020 and 2019

(in thousands, except share data)

Preferred

Additional

AOCI

Stock,

Common

Paid-in

Retained

(Loss),

  

Class B

  

Stock

  

Capital

  

Earnings

  

Net

  

Total

Shares

Amount

Shares

Amount

Balance at July 1, 2020

272,636

$

3

8,294,801

$

82

$

217,643

$

98,272

$

1,169

$

317,169

Employee and non-employee stock-based compensation

(4,732)

735

735

Repurchase of shares for tax withholding for restricted stock vesting

(590)

(18)

(18)

Net income

10,783

10,783

Other comprehensive loss

(85)

(85)

Balance at September 30, 2020

272,636

$

3

8,289,479

$

82

$

218,360

$

109,055

$

1,084

$

328,584

Preferred

Additional

AOCI

Stock,

Common

Paid-in

Retained

(Loss),

  

Class B

  

Stock

  

Capital

  

Earnings

  

Net

  

Total

Shares

Amount

Shares

Amount

Balance at July 1, 2019

272,636

$

3

8,320,816

$

82

$

214,880

$

65,818

$

547

$

281,330

Restricted stock, net of forfeiture

(964)

(1)

(1)

Employee and non-employee stock-based compensation

798

798

Net income

7,683

7,683

Other comprehensive income

1,192

1,192

Balance at September 30, 2019

272,636

$

3

8,319,852

$

82

$

215,677

$

73,501

$

1,739

$

291,002

See accompanying notes to unaudited consolidated financial statements

8

METROPOLITAN BANK HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

For nine months ended September 30, 2020 and 2019

(in thousands, except share data)

Preferred

Additional

AOCI

Stock,

Common

Paid-in

Retained

(Loss),

  

Class B

  

Stock

  

Capital

  

Earnings

  

Net

  

Total

Shares

Amount

Shares

Amount

Balance at January 1, 2020

272,636

$

3

8,312,918

$

82

$

216,468

$

81,364

$

1,207

$

299,124

Restricted stock, net of forfeiture

(16,976)

1

1

Employee and non-employee stock-based compensation

2,489

2,489

Repurchase of shares for tax withholding for restricted stock vesting

(6,463)

(597)

(597)

Net income

27,690

27,690

Other comprehensive loss

(123)

(123)

Balance at September 30, 2020

272,636

$

3

8,289,479

$

82

$

218,360

$

109,055

$

1,084

$

328,584

Preferred

Additional

AOCI

Stock,

Common

Paid-in

Retained

(Loss),

  

Class B

  

Stock

  

Capital

  

Earnings

  

Net

  

Total

Shares

Amount

Shares

Amount

Balance at January 1, 2019

272,636

$

3

8,217,274

$

82

$

213,490

$

51,415

$

(473)

$

264,517

ASU 2016-01 Accounting adjustment to opening retained earnings

(68)

68

ASU 2014-09 Accounting adjustment to opening retained earnings

(117)

(117)

Balance at January 1, 2019, as adjusted

272,636

3

8,217,274

82

213,490

51,230

(405)

264,400

Restricted stock, net of forfeiture

105,459

(1)

(1)

Employee and non-employee stock-based compensation

2,276

2,276

Repurchase of shares for tax withholding for restricted stock vesting

(2,881)

(88)

(88)

Net income

22,271

22,271

Other comprehensive income

2,144

2,144

Balance at September 30, 2019

272,636

$

3

8,319,852

$

82

$

215,677

$

73,501

$

1,739

$

291,002

See accompanying notes to unaudited consolidated financial statements

9

METROPOLITAN BANK HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

(in thousands, except share data)

Nine months ended September 30, 

    

2020

    

2019

    

Cash flows from operating activities:

Net income

$

27,690

$

22,271

Adjustments to reconcile net income to net cash:

Net depreciation amortization and accretion

4,178

1,586

Provision for loan losses

7,693

1,923

Net change in deferred loan fees

278

2,539

Income taxes

43

Gain on sale of available-for-sale securities

(3,286)

Employee and non-employee stock-based expense

2,489

2,276

Gain on sale of loans

(18)

Dividends earned on CRA fund

(32)

(25)

Unrealized gain/loss of equity securities

(55)

(87)

Net change in:

Accrued interest receivable

(3,662)

(2,766)

Accounts payable, accrued expenses and other liabilities

13,458

22,628

Prepaid third-party debit cardholder balances

19,873

8,044

Accrued interest payable

(750)

324

Receivable from prepaid card programs, net

(19,656)

(8,039)

Prepaid expenses and other assets

8,239

(153)

Net cash provided by operating activities

56,482

50,521

Cash flows from investing activities:

Loan originations, purchases and payments, net of recoveries

(327,194)

(632,200)

Proceeds from loans sold

9,968

Redemptions of other investments

11,480

12,354

Purchases of other investments

(1,140)

(10,988)

Purchases of securities available for sale

(127,730)

(226,858)

Proceeds from calls of securities available for sale

30,000

1,065

Proceeds from sales of securities available for sale

111,422

Proceeds from paydowns and maturities of securities available for sale

43,069

8,386

Proceeds from paydowns and maturities of securities held to maturity

650

611

Purchase of derivative contract

(2,980)

Purchase of premises and equipment, net

(6,850)

(3,965)

Net cash used in investing activities

(259,305)

(851,595)

Cash flows from financing activities:

Proceeds from FHLB advances

988,000

Repayments of FHLB advances

(144,000)

(1,029,000)

Redemption of common stock for tax withholdings for restricted stock vesting

(597)

(88)

Payments of secured borrowings

(10,748)

Net increase in deposits

736,852

1,044,652

Net cash provided by financing activities

581,507

1,003,564

Increase in cash and cash equivalents

378,684

202,490

Cash and cash equivalents at the beginning of the period

389,220

232,950

Cash and cash equivalents at the end of the period

$

767,904

$

435,440

Supplemental information:

Cash paid for:

Interest

$

15,531

$

24,070

Income Taxes

$

7,235

$

12,370

See accompanying notes to unaudited consolidated financial statements

10

METROPOLITAN BANK HOLDING CORP. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION

Metropolitan Bank Holding Corp., a New York corporation (the “Company”), is a bank holding company whose principal activity is the ownership and management of Metropolitan Commercial Bank (the “Bank”), its wholly-owned subsidiary. The Bank’s primary market is the New York metropolitan area. The Bank offers a traditional range of services to individuals, businesses and others needing banking services. Its primary lending products are commercial and multifamily real estate loans and commercial and industrial loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from the cash flows from the operations of the business. The Bank’s primary deposit products are checking, savings, and term deposit accounts, and its deposit accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the maximum amounts allowed by law.

The Company and the Bank are subject to the regulations of certain state and federal agencies and, accordingly, are periodically examined by those regulatory authorities. As a consequence of the extensive regulation of commercial banking activities, the Company’s business is affected by state and federal legislation and regulations.

NOTE 2 – BASIS OF PRESENTATION

The accounting and reporting policies of the Company conform with U.S. generally accepted accounting principles (“GAAP”) and predominant practices within the U.S. banking industry. All intercompany balances and transactions have been eliminated. The Unaudited Consolidated Financial Statements, which include the accounts of the Company and the Bank, have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. The Unaudited Consolidated Financial Statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. In preparing the interim financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reported periods. The accounting and reporting policies of the Company conform with U.S generally accepted accounting principles and predominant practices within the U.S. banking industry.

Certain prior period amounts have been reclassified to conform to current period’s presentation.

The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results of operations that may be expected for the entire fiscal year or for any other period. Management believes that results of future periods are rendered particularly unpredictable due to the Novel Coronavirus (“COVID-19”).

To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and actual results could differ. Information available which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, including COVID-19-related changes, and changes in the financial condition of borrowers.

The Company has evaluated goodwill for impairment resulting from COVID-19 and has concluded that 0 impairment existed at September 30, 2020. Management will continue to monitor if a triggering event requiring further goodwill impairment testing has occurred.

The Company could experience a material adverse effect on its business as a result of the impact of the COVID-19 pandemic, and the resulting governmental actions to curtail its spread. It is at least reasonably possible that information that was available at the date of the financial statements will change in the near term due to the COVID-19 pandemic and

11

that the effect of the change would be material to the financial statements. Particularly susceptible to change would be the allowance for loan losses and interest income on loans. The extent to which the COVID-19 pandemic will impact Bank’s estimates and assumptions is highly uncertain at this time.

The unaudited consolidated financial statements presented in this report should be read in conjunction with the Company’s audited consolidated financial statements and notes to audited consolidated financial statements included in the Company’s Annual Report on Form 10-K (“Annual Report”) for the year ended December 31, 2019 as filed with the Securities and Exchange Commission (“SEC”).

The following accounting policy represents a material update and addition to the accounting policies previously disclosed in the Company’s Annual Report for the fiscal year ended December 31, 2019 as filed with the SEC.

Derivatives: During the first quarter of 2020, the Company entered into an interest rate cap derivative that, based on the Company’s intentions and belief as to the likely effectiveness as a hedge, was designated as a cash flow hedge. A cash flow hedge is a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability.  For a cash flow hedge, the gain or loss on the derivative is reported in accumulated other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. Changes in the fair value of the derivative that are not highly effective in hedging the changes in expected cash flows of the hedged item are recognized immediately in current earnings. The amounts are reclassified to earnings in the same income statement line item that is used to present the earnings effect of the hedged item when the hedged item affects earnings.

The Company formally documents the relationship between derivatives and hedged items, as well as the risk management objective and the strategy for undertaking hedged transactions at the inception of the hedging relationship. The documentation includes linking the cash flow hedges to specific assets and liabilities on the balance sheet or to specific forecasted transactions or group of forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, or treatment of the derivative as a hedge is no longer appropriate or intended.

When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were in accumulated other comprehensive income are amortized into earnings over the same periods in which the hedged transactions will affect earnings. If the forecasted transaction is deemed probable to not occur, the derivative gain or loss reported in accumulated other comprehensive income is reclassified into current earnings.  

NOTE 3 – SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS

Pursuant to the Jumpstart Our Business Startups Act (“JOBS Act”), an Emerging Growth Company (“EGC”) is permitted to elect to adopt new accounting guidance using adoption dates of nonpublic entities. The Company elected delayed effective dates of recently issued accounting standards.

Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In August 2016, the Financial Accounting Standards Board (“FASB”) deferred the effective date of the ASU by one year which resulted in ASU 2014-09 being effective for the Company beginning January 1, 2019. The Company adopted the new revenue guidance as of January 1, 2019, using the five-step model prescribed by the ASU and described

12

above. Management evaluated the Company’s revenue streams and recorded an adjustment to opening retained earnings of $117,000 in accordance with the modified retrospective method allowed by the ASU.

In January 2016, the FASB issued ASU 2016-01, an amendment to Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). The objectives of the ASU are to: (1) require equity investments to be measured at fair value, with changes in fair value recognized in net income, (2) simplify the impairment assessment of equity investments without readily determinable fair values, (3) eliminate the requirement to disclose methods and significant assumptions used to estimate fair value for financial instruments measured at amortized cost on the balance sheet, (4) require the use of the exit price notion when measuring the fair value of financial instruments, and (5) clarify the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall – Recognition and Measurement of Financial Assets and Liabilities, an amendment to ASU 2016-01. The amendments clarify certain aspects of the guidance issued in ASU 2016-01. The Company adopted these ASUs on January 1, 2019. The Company evaluated the impact of ASU 2016-01 and 2018-03 and recorded $68,000, net of tax, as an adjustment to opening retained earnings and accumulated other comprehensive income in accordance with the modified retrospective method allowed by the ASU.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires companies that lease valuable assets to recognize on their balance sheets the assets and liabilities generated by contracts longer than a year. In October 2019, the FASB approved a delay for the implementation of the ASU for non-public business entities (“PBE”) and smaller reporting companies (“SRC”). Accordingly, for the Company, which is an EGC and an SRC, the ASU will be effective fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Under ASU 2016-02, the Company will recognize a right-of-use asset and a lease obligation liability on the consolidated balance sheet, which will increase the Company’s assets and liabilities. The Company is evaluating other potential impacts of ASU 2016-02 on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), which requires the measurement of all expected credit losses for financial assets held at the reporting date be based on historical experience, current condition, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. This guidance also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. In October 2019, the FASB approved a delay for the implementation of the ASU for non-PBEs and SRCs. Accordingly, as an EGC and an  SRC, the Company’s effective date for the implementation of the ASU will be January 1, 2023. Management has established a committee to evaluate the impact of ASU 2016-13 on the Company’s financial statements. The Company expects to recognize a one-time cumulative adjustment to the allowance for loan losses as of the beginning of the reporting period in which the ASU takes effect but cannot yet determine the magnitude of the impact on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the second step in the goodwill impairment test, which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard is effective for the Company beginning January 1, 2021, with early adoption permitted for goodwill impairment tests performed after January 1, 2017. Management expects that ASU 2017-04 will not have a material impact on its consolidated financial statements.

13

NOTE 4 - INVESTMENT SECURITIES

The following tables summarize the amortized cost and fair value of securities available for sale and securities held to maturity at September 30, 2020 and December 31, 2019 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss and gross unrecognized gains and losses (in thousands):

Gross

Gross

Amortized

Unrealized

Unrealized

At September 30, 2020

    

Cost

    

Gains

    

Losses

    

Fair Value

Debt securities available for sale:

Residential mortgage securities

$

124,411

$

2,709

$

$

127,120

Commercial mortgage securities

26,246

1,051

(42)

27,255

U.S. Government agency securities

27,997

0

(38)

27,959

Total securities available-for-sale

$

178,654

$

3,760

$

(80)

$

182,334

Held-to-maturity securities:

Residential mortgage securities

$

3,050

$

74

$

$

3,124

Total securities held-to-maturity

$

3,050

$

74

$

$

3,124

Equity investments:

CRA Mutual Fund

$

2,290

$

21

$

$

2,311

Total non-trading equity investment securities

$

2,290

$

21

$

$

2,311

Gross

Gross

Amortized

Unrealized

Unrealized

At December 31, 2019

    

Cost

    

Gains

    

Losses

    

Fair Value

Debt securities available for sale:

Residential mortgage securities

$

175,902

$

1,478

$

(117)

$

177,263

Commercial mortgage securities

32,284

206

(18)

32,472

U.S. Government agency securities

25,000

207

0

25,207

Total securities available for sale

$

233,186

$

1,891

$

(135)

$

234,942

Held-to-maturity securities:

Residential mortgage securities

3,722

9

(19)

3,712

Total securities held to maturity

$

3,722

$

9

$

(19)

$

3,712

Equity investments:

CRA Mutual Fund

2,258

0

(34)

2,224

Total non-trading equity investment securities

$

2,258

$

0

$

(34)

$

2,224

For the three months ended September 30, 2020, there were calls of $25.0 million, at amortized cost, of available-for-sale securities. There were sales and calls of $108.1 million and $30.0 million, at amortized cost, respectively, for the nine months ended September 30, 2020 and calls of $1.1 million for the nine months ended September 30, 2019. The proceeds from sales and calls of securities and associated gains for the three and nine months ended September 30, 2020 and 2019 (in thousands):

Three months ended September 30, 

Nine months ended September 30, 

2020

2019

    

2020

    

2019

Proceeds

$

25,000

$

$

141,422

$

1,065

Gross gains

$

$

$

3,286

$

Tax impact

$

$

$

(1,036)

$

14

Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately. The following tables summarize, by contractual maturity, the amortized cost and fair value of debt securities at September 30, 2020 and December 31, 2019 (in thousands):

Held-to-Maturity

Available-for-Sale

At September 30, 2020

    

Amortized Cost

    

Fair Value

    

Amortized Cost

    

Fair Value

Within one year

$

$

$

$

One to five years

27,997

27,959

Five to ten years

After ten years

Total

$

$

$

27,997

$

27,959

Residential mortgage securities

$

3,050

$

3,124

124,411

127,120

Commercial mortgage securities

26,246

27,255

Total Securities

$

3,050

$

3,124

$

178,654

$

182,334

Held-to-Maturity

Available-for-Sale

At December 31, 2019

    

Amortized Cost

    

Fair Value

    

Amortized Cost

    

Fair Value

Within one year

$

$

$

$

One to five years

Five to ten years

25,000

25,207

Due after ten years

Total

$

$

$

25,000

$

25,207

Residential mortgage securities

$

3,722

$

3,712

$

175,902

$

177,263

Commercial mortgage securities

32,284

32,472

Total Securities

$

3,722

$

3,712

$

233,186

$

234,942

There were 0 securities pledged as collateral at September 30, 2020. At December 31, 2019, there were $126.2 million of securities available for sale pledged as collateral for certain deposits.

At September 30, 2020 and December 31, 2019, all of the residential mortgage securities and commercial mortgage securities held by the Bank were issued by U.S. Government-sponsored entities and agencies.

Securities with unrealized/unrecognized losses at September 30, 2020 and December 31, 2019, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands):

Less than 12 Months

12 months or more

Total

Estimated

Unrealized

Estimated

Unrealized

Estimated

Unrealized

At September 30, 2020

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

Debt securities available for sale:

Commercial mortgage securities

$

5,477

$

(41)

$

387

$

(1)

$

5,864

$

(42)

U.S. Government agency securities

27,959

(38)

27,959

(38)

Total securities available for sale

$

33,436

$

(79)

$

387

$

(1)

$

33,823

$

(80)

15

Less than 12 Months

12 months or more

Total

Estimated

Unrealized

Estimated

Unrealized

Estimated

Unrealized

At December 31, 2019

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

Debt securities available for sale:

Residential mortgage securities

$

22,850

$

(52)

$

6,728

$

(65)

$

29,578

$

(117)

Commercial mortgage securities

9,911

(18)

9,911

(18)

Total securities available-for-sale

$

32,761

$

(70)

$

6,728

$

(65)

$

39,489

$

(135)

Held-to-Maturity Securities:

Residential mortgage securities

$

$

$

1,470

$

(19)

$

1,470

$

(19)

Total securities held to maturity

$

$

$

1,470

$

(19)

$

1,470

$

(19)

Equity investments:

CRA Mutual Fund

$

$

$

2,224

$

(34)

$

2,224

$

(34)

Total equity investment securities

$

$

$

2,224

$

(34)

$

2,224

$

(34)

The unrealized losses on securities are primarily due to the changes in market interest rates subsequent to purchase. The Bank did not consider these securities to be other-than-temporarily impaired at September 30, 2020 or December 31, 2019 since the decline in market value was attributable to changes in interest rates and not credit quality. In addition, the Bank does not intend to sell and does not believe that it is more likely than not that it will be required to sell these investments until there is a full recovery of the unrealized loss, which may be at maturity. As a result, 0 impairment loss was recognized during the nine months ended September 30, 2020 or for the year ended December 31, 2019.

At September 30, 2020 and December 31, 2019, there were 0 holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans, net of deferred costs and fees, consist of the following as of September 30, 2020 and December 31, 2019 (in thousands):

    

September 30, 2020

December 31, 2019

Real estate

Commercial

$

1,842,969

$

1,668,236

Construction

100,957

30,827

Multifamily

407,802

375,611

One-to-four family

63,588

82,670

Total real estate loans

2,415,316

2,157,344

Commercial and industrial

528,063

448,619

Consumer

51,419

71,956

Total loans

2,994,798

2,677,919

Deferred fees

(5,248)

(4,970)

Loans, net of deferred fees and unamortized costs

2,989,550

2,672,949

Allowance for loan losses

(33,614)

(26,272)

Balance at the end of the period

$

2,955,936

$

2,646,677

Included in Commercial and Industrial loans at September 30, 2020 are $3.8 million of Paycheck Protection Program loans.

16

The portfolio segments in the tables below represent the categories that the Bank uses to determine its Allowance for Loan Losses (“ALLL”). As part of the determination of the ALLL, the Bank considered the effects of COVID-19 on macro-economic conditions such as unemployment rates and the gradual reopening of all non-essential businesses. The Bank also analyzed the impact of COVID-19 on its primary market, which is the New York metropolitan area, as well as the impact on the Bank’s market sectors and its specific clients. Based on current economic conditions, particularly the unemployment rate, and the Bank’s ALLL methodology, the total provision for loan losses for the nine months ended September 30, 2020 was $7.7 million. Included in the provision for loan losses for the nine months ended September 30, 2020 was a $2.6 million specific reserve related to one C&I loan, included in the Bank’s transportation segment, with a principal balance of $3.5 million. This loan became impaired due to COVID-19.

However, this is a period of great uncertainty and the impact of COVID-19 is likely to be felt over the next several quarters, particularly as the term of loan modifications expire and borrowers return to a normal debt service schedule as well as the commencement of a repayment schedule for payments that were deferred. As such, significant adjustments to the ALLL may be required as the full impact of COVID-19 on the Bank’s borrowers becomes known.

The following tables present the activity in the ALLL by segment for the three and nine months ended September 30, 2020 and 2019 (in thousands):

Commercial

Commercial

Multi

One-to-four

Three months ended September 30, 2020

    

Real Estate

    

& Industrial

    

Construction

    

Family

    

Family

Consumer

Total

Allowance for loan losses:

Beginning balance

$

18,690

$

9,132

$

741

$

2,739

$

242

$

961

$

32,505

Provision/(credit) for loan losses

(1,611)

2,104

706

(215)

(61)

214

1,137

Loans charged-off

(82)

(82)

Recoveries

54

54

Total ending allowance balance

$

17,079

$

11,208

$

1,447

$

2,524

$

181

$

1,175

$

33,614

Commercial

Commercial

���

Multi

One-to-four

Three months ended September 30, 2019

    

Real Estate

    

& Industrial

    

Construction

    

Family

    

Family

Consumer

Total

Allowance for loan losses:

Beginning balance

$

13,006

$

6,142

$

501

$

2,249

$

253

$

564

$

22,715

Provision/(credit) for loan losses

1,223

422

6

104

(31)

280

2,004

Loans charged-off

(74)

(201)

(275)

Recoveries

Total ending allowance balance

$

14,229

$

6,490

$

507

$

2,353

$

222

$

643

$

24,444

Commercial

Commercial

Multi

One-to-four

Nine months ended September 30, 2020

    

Real Estate

    

& Industrial

    

Construction

    

Family

    

Family

Consumer

Total

Allowance for loan losses:

Beginning balance

$

15,317

$

7,070

$

411

$

2,453

$

267

$

754

$

26,272

Provision/(credit) for loan losses

1,762

4,278

1,036

71

(86)

632

7,693

Loans charged-off

(254)

(221)

(475)

Recoveries

114

10

124

Total ending allowance balance

$

17,079

$

11,208

$

1,447

$

2,524

$

181

$

1,175

$

33,614

17

Commercial

Commercial

Multi

One-to-four

Nine months ended September 30, 2019

    

Real Estate

    

& Industrial

    

Construction

    

Family

    

Family

Consumer

Total

Allowance for loan losses:

Beginning balance

$

9,037

6,257

625

2,047

228

748

$

18,942

Provision/(credit) for loan losses

5,192

(3,677)

(118)

306

(6)

226

1,923

Loans charged-off

(360)

(331)

(691)

Recoveries

4,270

4,270

Total ending allowance balance

$

14,229

$

6,490

$

507

$

2,353

$

222

$

643

$

24,444

Net charge-offs were $28,000 and $275,000 for the three months ended September 30, 2020 and 2019, respectively. Net charge-offs were $351,000 for the nine months ended September 30, 2020, as compared to net recoveries of $3.6 million for the nine months ended September 30, 2019. Included in the net recoveries during the nine months ended September 30, 2019 were $4.3 million in recoveries, of which $4.2 million related to taxi medallion loans charged-off in 2016 and 2017.

The following tables present the balance in the ALLL and the recorded investment in loans by portfolio segment based on impairment method as of September 30, 2020 and December 31, 2019 (in thousands):

Commercial

Commercial

Multi

One-to-four

At September 30, 2020

    

Real Estate

    

& Industrial

    

Construction

    

Family

    

Family

    

Consumer

    

Total

Allowance for loan losses:

Individually evaluated for impairment

$

$

3,437

$

$

$

51

$

775

$

4,263

Collectively evaluated for impairment

17,079

7,771

1,447

2,524

130

400

29,351

Total ending allowance balance

$

17,079

$

11,208

$

1,447

$

2,524

$

181

$

1,175

$

33,614

Loans:

Individually evaluated for impairment

$

363

$

4,512

$

$

$

1,008

$

2,298

$

8,181

Collectively evaluated for impairment

1,842,606

523,551

100,957

407,802

62,580

49,121

2,986,617

Total ending loan balance

$

1,842,969

$

528,063

$

100,957

$

407,802

$

63,588

$

51,419

$

2,994,798

Commercial

Commercial

Multi

One-to-four

At December 31, 2019

    

Real Estate

    

& Industrial

    

Construction

    

Family

    

Family

    

Consumer

    

Total

Allowance for loan losses:

Individually evaluated for impairment

$

$

805

$

$

$

64

$

311

$

1,180

Collectively evaluated for impairment

15,317

6,265

411

2,453

203

443

25,092

Total ending allowance balance

$

15,317

$

7,070

$

411

$

2,453

$

267

$

754

$

26,272

Loans:

Individually evaluated for impairment

$

367

$

1,047

$

$

$

3,384

$

728

$

5,526

Collectively evaluated for impairment

1,667,869

447,572

30,827

375,611

79,286

71,228

2,672,393

Total ending loan balance

$

1,668,236

$

448,619

$

30,827

$

375,611

$

82,670

$

71,956

$

2,677,919

18

The following tables present loans individually evaluated for impairment recognized as of September 30, 2020 and December 31, 2019 (in thousands):

Unpaid Principal

Allowance for Loan

At September 30, 2020

    

Balance

    

Recorded Investment

    

Losses Allocated

With an allowance recorded:

One-to-four family

$

615

$

485

$

51

Consumer

2,298

2,298

775

Commercial & industrial

4,512

4,512

3,437

Total

$

7,425

$

7,295

$

4,263

Without an allowance recorded:

One-to-four family

$

671

$

523

$

Commercial real estate

363

363

Commercial & industrial

Total

$

1,034

$

886

$

Unpaid Principal

Allowance for Loan

At December 31, 2019

    

Balance

    

Recorded Investment

    

Losses Allocated

With an allowance recorded:

One-to-four family

$

633

$

503

$

64

Consumer

731

728

311

Commercial & industrial

1,047

1,047

805

Total

$

2,411

$

2,278

$

1,180

Without an allowance recorded:

One-to-four family

3,028

$

2,881

$

Commercial real estate

367

367

Total

$

3,395

$

3,248

$

The recorded investment in loans excludes accrued interest receivable and loan origination fees.

The following tables present the average recorded investment and interest income of loans individually evaluated for impairment recognized by class of loans for the three and nine months ended September 30, 2020 and 2019 (in thousands):

Average Recorded

Interest Income

Three months ended September 30, 2020

    

Investment

    

Recognized

With an allowance recorded:

One-to-four family

$

488

$

5

Consumer

2,112

27

Commercial & industrial

5,497

Total

$

8,097

$

32

Without an allowance recorded:

One-to-four family

$

524

$

3

Commercial real estate

363

Total

$

887

$

3

19

Average Recorded

Interest Income

Three months ended September 30, 2019

    

Investment

    

Recognized

With an allowance recorded:

One-to-four family

$

513

$

5

Consumer

316

3

Commercial & industrial

524

Total

$

1,353

$

8

Without an allowance recorded:

One-to-four family

$

2,907

$

66

Commercial real estate

373

4

Total

$

3,280

$

70

Average Recorded

Interest Income

Nine months ended September 30, 2020

    

Investment

    

Recognized

With an allowance recorded:

One-to-four family

$

494

$

13

Consumer

1,330

58

Commercial & industrial

3,272

Total

$

5,096

$

71

Without an allowance recorded:

One-to-four family

$

1,115

$

13

Commercial real estate

364

4

Commercial & industrial

1,188

Total

$

2,667

$

17

Average Recorded

Interest Income

Nine months ended September 30, 2019

    

Investment

    

Recognized

With an allowance recorded:

One-to-four family

$

388

$

15

Consumer

207

7

Commercial & industrial

262

Total

$

857

$

22

Without an allowance recorded:

One-to-four family

$

1,859

$

156

Commercial real estate

377

12

Total

$

2,236

$

168

For a loan to be considered impaired, management determines whether it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Management applies its normal loan review procedures in making these judgments. Impaired loans include individually classified non-accrual loans and troubled debt restructurings (“TDRs”). Impairment is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate. For loans that are collateral dependent, the fair value of the collateral is used to determine the fair value of the loan. The fair value of the collateral is determined based on recent appraised values. The fair value of the collateral or present value of expected cash flows is compared to the carrying value to determine if any write-down or specific loan loss allowance allocation is required.

For discussion on modification of loans to borrowers impacted by COVID-19, refer to the “COVID-19 Loan Modifications” section herein.

20

The following tables present the recorded investment in non-accrual loans and loans past due over 90 days and still accruing, by class of loans, as of September 30, 2020 and December 31, 2019 (in thousands):

At September 30, 2020

    

Non-accrual

Loans Past Due Over 90 Days Still Accruing

Commercial & industrial

$

4,512

$

0

Consumer

1,157

954

Total

$

5,669

$

954

At December 31, 2019

Non-accrual

Loans Past Due Over 90 Days Still Accruing

Commercial & industrial

$

1,047

$

408

One-to-four family

2,345

0

Consumer

693

0

Total

$

4,085

$

408

Interest income that would have been recorded for the three and nine months ended September 30, 2020 and 2019 had non-accrual loans been current according to their original terms, was immaterial.

The following tables present the aging of the recorded investment in past due loans by class of loans as of September 30, 2020 and December 31, 2019 (in thousands):

Greater

30-59

60-89

than 90

Total past

Current

At September 30, 2020

    

Days

    

Days

    

days

    

due

    

loans

    

Total

Commercial real estate

$

$

$

$

$

1,842,969

$

1,842,969

Commercial & industrial

3,642

6,665

4,512

14,819

513,244

528,063

Construction

100,957

100,957

Multifamily

407,802

407,802

One-to-four family

615

615

62,973

63,588

Consumer

83

25

2,111

2,219

49,200

51,419

Total

$

4,340

$

6,690

$

6,623

$

17,652

$

2,977,145

$

2,994,798

Greater

30-59

60-89

than 90

Total past

Current

At December 31, 2019

    

Days

    

Days

    

days

    

due

    

loans

    

Total

Commercial real estate

$

$

$

$

$

1,668,236

$

1,668,236

Commercial & industrial

346

1,455

1,801

446,818

448,619

Construction

30,827

30,827

Multifamily

375,611

375,611

One-to-four family

82,670

82,670

Consumer

636

14

693

1,343

70,613

71,956

Total

$

982

$

14

$

2,148

$

3,144

$

2,674,775

$

2,677,919

Troubled Debt Restructurings

Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered TDRs and classified as impaired.

Included in impaired loans at September 30, 2020 and December 31, 2019 were $1.4 million of loans modified as TDRs. The Bank allocated specific reserves amounting to $51,000 and $81,000 for TDRs as of September 30, 2020 and December 31, 2019, respectively. There were 0 loans modified as a TDR during the three and nine months ended

21

September 30, 2020 or the year ended December 31, 2019. The Bank has not committed to lend additional amounts as of September 30, 2020 to customers with outstanding loans that are classified as TDRs. During the nine months ended September 30, 2020 and September 30, 2019 there were 0 payment defaults on any loans previously identified as TDRs. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Bank’s internal underwriting policy.

The following tables present the recorded investment in TDRs by class of loans as of September 30, 2020 and December 31, 2019 (in thousands):

    

September 30, 2020

    

December 31, 2019

    

Troubled debt restructurings:

Real Estate:

Commercial real estate

$

363

$

367

One-to-four family

1,008

1,039

Consumer

35

Total troubled debt restructurings

$

1,371

$

1,441

All TDRs at September 30, 2020 and December 31, 2019 were performing in accordance with their restructured terms.

Credit Quality Indicators:

The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Bank generally analyzes all loans over $500,000, other than one-to-four family and consumer loans, individually by classifying the loans as to credit risk at least annually. For one-to-four family loans and consumer loans, the Bank evaluates credit quality based on the aging status of the loan and by performance status. An analysis is performed on a quarterly basis for loans classified as special mention, substandard, or doubtful. The Bank uses the following definitions for risk ratings:

Special Mention - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above are considered to be pass-rated loans. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):

22

Special

At September 30, 2020

    

Pass

    

Mention

    

Substandard

    

Doubtful

Total

Commercial real estate

$

1,842,606

$

363

$

$

$

1,842,969

Commercial & industrial

523,551

4,512

528,063

Construction

100,957

100,957

Multifamily

407,802

407,802

Total

$

2,874,916

$

363

$

$

4,512

$

2,879,791

Special

At December 31, 2019

    

Pass

    

Mention

    

Substandard

    

Doubtful

Total

Commercial real estate

$

1,667,869

$

367

$

$

$

1,668,236

Commercial & industrial

446,612

960

1,047

448,619

Construction

30,827

30,827

Multi-family

375,611

375,611

Total

$

2,520,919

$

367

$

960

$

1,047

$

2,523,293

COVID-19 Loan Modifications

On March 22, 2020, the banking regulators and the FASB issued guidance to financial institutions who are working with borrowers affected by COVID-19 (“COVID-19 Guidance”). The COVID-19 Guidance indicated that regulatory agencies will not criticize institutions for working with borrowers and will not direct banks to automatically categorize all COVID-19 related loan modifications as TDRs. In addition, the COVID-19 Guidance noted that modification or deferral programs mandated by the federal or a state government related to COVID-19 would not be in the scope of Accounting Standards Codification Subtopic 310-40 – Receivables – Troubled Debt Restructurings by Creditors (“ASC 310-40”), such as a state program that requires all institutions within that state to suspend mortgage payments for a specified period.  

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings,” allows banks to temporarily suspend certain requirements under GAAP related to TDRs for a limited period to account for the effects of COVID-19. A bank may elect to account for modifications on certain loans under Section 4013 of the CARES Act or, if a loan modification is not eligible under Section 4013, a bank may use the criteria in the COVID-19 Guidance to determine when a loan modification is not a TDR in accordance with ASC 310-40.

As of September 30, 2020, the Company had 107 loans amounting to $329.9 million, or 11% of total loans,that were modified in accordance with the COVID-19 Guidance and the CARES Act.

23

NOTE 6 – EARNINGS PER SHARE

The computation of basic and diluted earnings per share is shown below (dollars in thousands, except share data):

Three months ended September 30, 

Nine months ended September 30, 

    

2020

    

2019

    

2020

    

2019

    

Basic

Net income per consolidated statements of income

$

10,783

$

7,683

$

27,690

$

22,271

Less: Earnings allocated to participating securities

(89)

(133)

(255)

(326)

Net income available to common stockholders

$

10,694

$

7,550

$

27,435

$

21,945

Weighted average common shares outstanding including participating securities

8,291,068

8,319,725

8,296,701

8,294,019

Less: Weighted average participating securities

(68,198)

(144,561)

(76,499)

(121,381)

Weighted average common shares outstanding

8,222,870

8,175,164

8,220,202

8,172,638

Basic earnings per common share

$

1.30

$

0.92

$

3.34

$

2.69

Diluted

Net income allocated to common stockholders

$

10,694

$

7,550

$

27,435

$

21,945

Weighted average common shares outstanding for basic earnings per common share

8,222,870

8,175,164

8,220,202

8,172,638

Add: Dilutive effects of assumed exercise of stock options

92,269

128,060

103,737

123,524

Add: Dilutive effects of assumed vesting of performance based restricted stock units

78,072

45,746

68,116

43,796

Average shares and dilutive potential common shares

8,393,211

8,348,970

8,392,055

8,339,958

Dilutive earnings per common share

$

1.27

$

0.90

$

3.27

$

2.63

All stock options and performance based restricted stock units were considered in computing diluted earnings per common share for the three and nine months ended September 30, 2020 and 2019. 45,508 restricted stock units were not considered in the calculation of diluted earnings per share as their inclusion would be anti-dilutive for the three and nine months ended September 30, 2020.

NOTE 7 - STOCK COMPENSATION PLAN

Equity Incentive Plan

On May 28, 2019, the Company's 2019 Equity Incentive Plan (the “2019 EIP”) was approved by stockholders of the Company. Under the 2019 EIP, the maximum number of shares of stock that may be delivered to participants in the form of restricted stock, restricted stock units and stock options, including incentive stock options (“ISO”) and non-qualified stock options, is 340,000, plus any awards that are forfeited under the 2009 Equity Incentive Plan (the “2009 Plan”) after the effective date of the 2019 EIP, which was May 28, 2019.  Under the 2009 Plan, there are 468,382 shares that are subject to outstanding and/or unexercised awards that have been granted and, if forfeited after May 28, 2019, such shares will be available to be granted under the 2019 EIP. Upon expiration, the 628,719 shares that were unauthorized and unissued under the 2009 Plan have expired and may not be granted (and such shares of stock did not roll over to the 2019 EIP).  

Under the terms of the 2019 EIP, a stock option cannot have an exercise price that is less than 100% of the fair market value of the shares covered by the stock option on the date of grant. In the case of an ISO granted to a 10% stockholder, the exercise price shall not be less than 110% of the fair market value of the shares covered by the stock option on the date of grant.  In no event shall the exercise period exceed ten years from the date of grant of the option, except, in the case of

24

an ISO granted to a 10% stockholder, the exercise period shall not exceed five years from the date of grant. The 2019 EIP contains a double trigger change in control feature, providing for an acceleration of vesting upon an involuntary termination of employment simultaneous with or following a change in control.

The fair value of each stock option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model. Expected volatilities based on historical volatilities of the Company’s common stock are not significant. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

A summary of the status of the Company’s stock options and the changes during the nine months ended September 30, 2020 is presented below:

Nine Months Ended September 30, 2020

    

Number of

    

Weighted Average

Options

Exercise Price

Outstanding, beginning of period

231,000

$

18.00

Granted

Exercised

Cancelled/forfeited

Outstanding, end of period

231,000

$

18.00

Options vested and exercisable at end of period

231,000

$

18.00

Weighted average remaining contractual life (years)

3.63

There was 0 unrecognized compensation cost related to stock options at September 30, 2020 or December 31, 2019.

There was 0 compensation cost related to stock options for the nine months ended September 30, 2020 and 2019.

The following table summarizes information about stock options outstanding at September 30, 2020:

At September 30, 2020

Range of Average

Weighted Average

Weighted Average

Weighted Average

Exercise Prices

    

Number Outstanding at

    

Remaining Contractual Life

    

Exercise Price

Intrinsic Price per Share

$10 – 20

231,000

3.63

$

18.00

$

10.00

$21 – 30

0

$

0

$

0

$10 – 30

231,000

3.63

$

18.00

$

10.00

There were 0 stock options exercised during the nine months ended September 30, 2020.

Restricted Stock Awards and Restricted Stock Units

The Company issued restricted stock awards under the 2009 Plan and restricted stock units under the 2019 Plan (collectively, “restricted stock grants”) to certain key personnel. Each restricted stock grant vests based on the vesting schedule outlined in the restricted stock grant agreement. Restricted stock grants are subject to forfeiture if the holder is not employed by the Company on the vesting date.

In the first quarter of 2020, 60,307 restricted stock units were issued to certain key personnel. These shares vest one-third each year for three years beginning December 15, 2020. NaN restricted stock units were granted in the second and third quarter of 2020.

25

Total compensation cost that has been charged against income for restricted stock grants was $277,000 and $340,000 for the three months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020 and 2019 compensation cost that has been charged against income for restricted stock grants was $1.1 million and $903,000, respectively. As of September 30, 2020, there was $2.3 million of total unrecognized compensation expense related to the restricted stock awards. The cost is expected to be recognized over a weighted-average period of 1.93 years.

Additionally, on January 1, 2019, 38,900 restricted shares were granted to members of the Board of Directors in lieu of retainer fees for three years of service. These shares vest one-third each year for three years beginning on December 31, 2019. Total expense for these awards was $100,000 for the three months ended September 30, 2020 and 2019 and $300,000 for nine months ended September 30, 2020 and 2019. As of September 30, 2020, there was $500,000 of unrecognized expense related to these grants. The cost is expected to be recognized over a weighted-average period of 1.25 years.

The following table summarizes the changes in the Company’s restricted stock grants for the nine months ended September 30, 2020:

Nine Months Ended September 30, 2020

Weighted Average

    

Number of Shares

    

Grant Date Fair Value

Outstanding, beginning of period

104,838

$

29.86

Granted

60,307

45.29

Forfeited

(31,781)

38.24

Vested

(21,738)

21.32

Outstanding at end of period

111,626

$

37.48

The total fair value of shares vested was $807,000 for the nine months ended September 30, 2020.

Performance Based Stock Awards

During the first quarter of 2018, the Company established a long-term incentive award program under the 2009 Plan. For each award, Performance Restricted Share Units (“PRSUs”) are eligible to be earned over a three-year performance period based on personal performance and the Company’s relative performance, in each case, as compared to certain measurement goals that were established at the onset of the performance period. These awards were accounted for in accordance with guidance prescribed in ASC Topic 718, Compensation – Stock Compensation. 90,000 PRSUs were awarded under the program. The earned units will be granted at the end of the three-year performance period.

The following table summarizes the changes in the Company’s non-vested PRSU awards for the nine months ended September 30, 2020:

    

September 30, 2020

Weighted average service inception date fair value of award shares

$

4,064,295

Minimum aggregate share payout

12,000

Maximum aggregate share payout

90,000

Likely aggregate share payout

90,000

Total compensation cost that has been charged against income for this plan was $358,000 for the three months ended September 30, 2020 and 2019 and $1.1 million for the nine months ended September 30, 2020 and 2019.

NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. The Company did not have any liabilities that were measured at fair value at September 30, 2020 and

26

December 31, 2019. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets or liabilities on a non-recurring basis, such as certain impaired loans. These non-recurring fair value adjustments generally involve the write-down of individual assets due to impairment losses.

Accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Assets and Liabilities Measured on a Recurring Basis

Assets measured on a recurring basis are limited to the Bank’s available-for-sale securities (“AFS”) portfolio, equity investments and an interest rate cap derivative contract. The AFS portfolio is carried at estimated fair value with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income or loss in shareholders’ equity. Equity investments are carried at estimated fair value with changes in fair value reported as unrealized gain/(loss) on the statement of operations. The interest rate cap derivative contract is carried at estimated fair value with changes in fair value reported as accumulated other comprehensive income or loss in shareholders’ equity. The fair values for substantially all of these assets are obtained monthly from an independent nationally recognized pricing service. On a quarterly basis, the Bank assesses the reasonableness of the fair values obtained for the AFS portfolio by reference to a second independent nationally recognized pricing service. Based on the nature of these securities, the Bank’s independent pricing service provides prices which are categorized as Level 2 since quoted prices in active markets for identical assets are generally not available for the majority of securities in the Bank’s portfolio. Various modeling techniques are used to determine pricing for the Bank’s mortgage-backed securities, including option pricing and discounted cash flow models. The inputs to these models include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. On an annual basis, the Bank obtains the models, inputs and assumptions utilized by its pricing service and reviews them for reasonableness.

27

Assets measured at fair value on a recurring basis are summarized below (in thousands):

Fair Value Measurement using:

Quoted Prices

in Active

Significant

Markets

Other

Significant

Carrying

For Identical

Observable

Unobservable

    

Amount

    

Assets (Level 1)

    

Inputs (Level 2)

    

Inputs (Level 3)

At September 30, 2020

Residential mortgage securities

$

127,120

$

$

127,120

$

Commercial mortgage securities

27,255

27,255

U.S. Government agency securities

27,959

27,959

CRA Mutual Fund

2,311

2,311

0

Interest rate cap derivative

686

686

Fair Value Measurement using:

Quoted Prices

in Active

Significant

Markets

Other

Significant

Carrying

For Identical

Observable

Unobservable

    

Amount

    

Assets (Level 1)

    

Inputs (Level 2)

    

Inputs (Level 3)

At December 31, 2019

Residential mortgage securities

$

177,263

$

$

177,263

$

Commercial mortgage securities

32,472

32,472

U.S. Government agency securities

25,207

25,207

CRA Mutual Fund

2,224

2,224

0

There were 0 transfers between Level 1 and Level 2 during the three months ended September 30, 2020 and 2019.

There were 0 material assets measured at fair value on a non-recurring basis at September 30, 2020 or December 31, 2019.

The Bank has engaged an independent pricing service provider to provide the fair values of its financial assets and liabilities measured at amortized cost. This provider follows FASB’s exit pricing guidelines, as required by

ASU 2016-01, when calculating the fair market value.

28

Carrying amount and estimated fair values of financial instruments at September 30, 2020 and December 31, 2019 were as follows (in thousands):

Fair Value Measurement Using:

Quoted Prices

in Active

Significant

Markets

Other

Significant

Carrying

For Identical

Observable

Unobservable

Total Fair

At September 30, 2020

    

Amount

    

Assets (Level 1)

    

Inputs (Level 2)

    

Inputs (Level 3)

    

Value

Financial Assets:

Cash and due from banks

$

8,991

$

8,991

$

$

$

8,991

Overnight deposits

758,913

758,913

758,913

Securities available for sale

182,334

182,334

182,334

Securities held to maturity

3,050

3,124

3,124

Equity investments

2,311

2,311

2,311

Loans, net

2,955,936

2,963,761

2,963,761

Other investments

FRB Stock

7,381

N/A

N/A

N/A

N/A

FHLB Stock

2,718

N/A

N/A

N/A

N/A

Disability Fund

500

500

500

Time deposits at banks

498

498

498

Interest rate cap derivative

686

686

686

Accrued interest receivable

12,524

353

12,171

12,524

Financial liabilities:

Non-interest-bearing demand deposits

$

1,553,241

$

1,553,241

$

$

$

1,553,241

Money market and savings deposits

1,877,420

1,877,420

0

0

1,877,420

Time deposits

96,965

98,254

98,254

Federal Home Loan Bank of New York advances

Trust preferred securities payable

20,620

20,005

20,005

Subordinated debt, net of issuance cost

24,643

25,313

25,313

Accrued interest payable

479

6

357

116

479

29

Fair Value Measurement Using:

Quoted Prices

in Active

Significant

Markets

Other

Significant

Carrying

For Identical

Observable

Unobservable

Total Fair

At December 31, 2019

    

Amount

    

Assets (Level 1)

    

Inputs (Level 2)

    

Inputs (Level 3)

    

Value

Financial Assets:

Cash and due from banks

$

8,116

$

8,116

$

$

$

8,116

Overnight deposits

381,104

381,104

381,104

Securities available for sale

234,942

234,942

234,942

Securities held to maturity

3,722

3,712

3,712

Equity investments

2,224

2,224

2,224

Loans, net

2,646,677

2,609,233

2,609,233

Other investments

FRB Stock

7,317

N/A

N/A

N/A

N/A

FHLB Stock

8,122

N/A

N/A

N/A

N/A

SBA Loan Fund

5,000

N/A

N/A

N/A

N/A

Disability Fund

500

500

500

Time deposits at banks

498

498

498

Accrued interest receivable

8,862

544

8,318

8,862

Financial liabilities:

Non-interest-bearing demand deposits

$

1,090,479

$

1,090,479

$

$

$

1,090,479

Money market and savings deposits

1,589,920

1,589,920

1,589,920

Time deposits

110,375

110,800

110,800

Federal Home Loan Bank of New York advances

144,000

144,229

144,229

Trust preferred securities payable

20,620

20,011

20,011

Subordinated debt, net of issuance cost

24,601

25,375

25,375

Accrued interest payable

1,229

14

1,009

206

1,229

30

NOTE 9 - ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table presents changes in Accumulated Other Comprehensive Income, net of tax, for the three and nine months ended September 30, 2020 and 2019 (in thousands):

Three months ended

Nine months ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

    

Beginning balance

$

1,169

$

547

$

1,207

$

(473)

Cumulative effect of adopting new accounting standard ASU 2016-01, net of taxes

0

0

0

68

Balance net of cumulative effect of adopting ASU 2016-01

$

1,169

$

547

$

1,207

$

(405)

Other comprehensive income, net of tax:

Unrealized gain on securities available for sale

Unrealized holding gain arising during the period

$

100

$

1,740

$

5,210

$