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Flushing Financial (FFIC)

Filed: 7 Mar 22, 5:29pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2021

Commission file number 001-33013

FLUSHING FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

11-3209278

(State or other jurisdiction of
incorporation or organization)

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

220 RXR Plaza, Uniondale, New York 11556

(Address of principal executive offices)

(718) 961-5400

(Registrant’s telephone number, including area code)

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, $0.01 par value

FFIC

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:  None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act.         Yes    X        No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.         Yes    X        No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         X    Yes        No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      X    Yes        No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See 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  X   

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.   X   Yes            No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).         Yes    X        No

As of June 30, 2021, the last business day of the registrant’s most recently completed second fiscal quarter; the aggregate market value of the voting stock held by non-affiliates of the registrant was $628,986,000. This figure is based on the closing price on that date on the NASDAQ Global Select Market for a share of the registrant’s Common Stock, $0.01 par value, which was $21.43.

The number of shares of the registrant’s Common Stock outstanding as of February 28, 2022 was 30,481,543 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 18, 2021 are incorporated herein by reference in Part III.

TABLE OF CONTENTS

Page

1

Item 1A. Risk Factors

46

Item 1B. Unresolved Staff Comments

56

Item 2. Properties

56

Item 3. Legal Proceedings

56

Item 4. Mine Safety Disclosures

56

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

56

Item 6. Reserved

59

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

59

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

73

Item 8. Financial Statements and Supplementary Data

74

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

142

Item 9A. Controls and Procedures

142

Item 9B. Other Information

142

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

143

PART III

Item 10. Directors, Executive Officers and Corporate Governance

143

Item 11. Executive Compensation

143

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

143

Item 13. Certain Relationships and Related Transactions, and Director Independence

143

Item 14. Principal Accounting Fees and Services

143

PART IV

Item 15. Exhibits, Financial Statement Schedules

144

(a)  1. Financial Statements

144

(a)  2. Financial Statement Schedules

144

(a)  3. Exhibits Required by Securities and Exchange Commission Regulation S-K

145

SIGNATURES

POWER OF ATTORNEY

i

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

Statements contained in this Annual Report on Form 10-K (this “Annual Report”) relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed under the captions “Business — General — Allowance for Credit Losses” and “Business — General — Market Area and Competition” in Item 1 below, “Risk Factors” in Item 1A below, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview” in Item 7 below, and elsewhere in this Annual Report and in other documents filed by the Company with the Securities and Exchange Commission from time to time. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,”, “goals”, “forecasts,” “potential” or “continue” or similar terms or the negative of these terms. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We have no obligation to update these forward-looking statements.

PART I

As used in this Report, the words “we,” “us,” “our” and the “Company” are used to refer to Flushing Financial Corporation (the “Holding Company”) and its direct and indirect wholly owned subsidiaries, Flushing Bank (the “Bank”), Flushing Service Corporation, FSB Properties Inc., and Flushing Preferred Funding Corporation, which was dissolved as of June 30, 2021.

Item 1.    Business.

GENERAL

Overview

The Holding Company is a Delaware corporation organized in 1994. The Bank was organized in 1929 as a New York State-chartered mutual savings bank. Today the Bank operates as a full-service New York State commercial bank. Our primary business is the operation of the Bank. The Bank owned three subsidiaries during all or a portion of 2021: Flushing Service Corporation, FSB Properties Inc., and Flushing Preferred Funding Corporation, which was dissolved as of June 30, 2021. The Bank also operates an internet branch (the “Internet Branch”), which operates under the brands of iGObanking.com® and BankPurely®. The activities of the Holding Company are primarily funded by dividends, if any, received from the Bank, issuances of subordinated debt and junior subordinated debt, and issuances of equity securities. The Holding Company’s common stock is traded on the NASDAQ Global Select Market under the symbol “FFIC.”

The Holding Company also owns Flushing Financial Capital Trust II, Flushing Financial Capital Trust III, and Flushing Financial Capital Trust IV (the “Trusts”), which are special purpose business trusts formed to issue a total of $60.0 million of capital securities and $1.9 million of common securities (which are the only voting securities). The Holding Company owns 100% of the common securities of the Trusts. The Trusts used the proceeds from the issuance of these securities to purchase junior subordinated debentures from the Holding Company. The Trusts are not included in our consolidated financial statements as we would not absorb the losses of the Trusts if losses were to occur.

Unless otherwise disclosed, the information presented in this Annual Report reflects the financial condition and results of operations of the Company. Management views the Company as operating a single unit – a community bank. Therefore, segment information is not provided. At December 31, 2021, the Company had total assets of $8.0 billion, deposits of $6.3 billion and stockholders’ equity of $0.7 billion.

1

On October 30, 2020, the Company completed its acquisition of Empire Bancorp, Inc. (“Empire”), in a transaction valued at $87.5 million upon closing, all outstanding shares of Empire voting and non-voting common stock were exchanged for consideration consisting of $54.8 million in cash and 2,557,028 shares of Holding Company common stock. Goodwill of $1.5 million was recorded as a result of the Empire acquisition. Under the terms of the merger agreement, each share of Empire common stock was exchanged for either 0.6548 shares of the Company’s common stock or $14.04 in cash, based upon the election of each Empire shareholder, subject to the election and proration procedures specified in the merger agreement (which provided for an aggregate split of total consideration of 50% Company common stock and 50% cash). In connection with the transaction, Empire National Bank (“Empire Bank”), a wholly-owned subsidiary of Empire, merged with and into the Bank, with the Bank as the surviving entity.

Our principal business is attracting retail deposits from the general public and investing those deposits together with funds generated from ongoing operations and borrowings, primarily in (1) originations and purchases of multi-family residential properties loans, commercial business loans, commercial real estate mortgage loans and, to a lesser extent, one-to-four family loans (focusing on mixed-use properties, which are properties that contain both residential dwelling units and commercial units); (2) construction loans; (3) Small Business Administration (“SBA”) loans; (4) mortgage loan surrogates such as mortgage-backed securities; and (5) U.S. government securities, corporate fixed-income securities and other marketable securities. We also originate certain other consumer loans including overdraft lines of credit. At December 31, 2021, we had gross loans outstanding of $6,633.9 million (before the allowance for credit losses and net deferred costs), with gross mortgage loans totaling $5,200.8 million, or 78.4% of gross loans, and non-mortgage loans totaling $1,433.1 million, or 21.6% of gross loans. Mortgage loans are primarily multi-family, commercial and one-to-four family mixed-use properties, which represent 73.3% of gross loans. Our revenues are derived principally from interest on loans, our mortgage-backed securities portfolio, and interest and dividends on other investments in our securities portfolio. Our primary sources of funds are deposits, Federal Home Loan Bank of New York (“FHLB-NY”) borrowings, principal and interest payments on loans, mortgage-backed, other securities and to a lesser extent proceeds from sales of securities and loans. The Bank’s primary regulator is the New York State Department of Financial Services (“NYDFS”), and its primary federal regulator is the Federal Deposit Insurance Corporation (“FDIC”). Deposits are insured to the maximum allowable amount by the FDIC. Additionally, the Bank is a member of the Federal Home Loan Bank (“FHLB”) system.

Our operating results are significantly affected by changes in interest rates as well as national and local economic conditions, including the strength of the local economy. The outbreak of the Coronavirus Disease 2019 (“COVID-19”) pandemic has adversely impacted a broad range of industries in which the Company’s customers operate and impaired to some extent the ability of some customers to fulfill their financial obligations to the Company. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law in response to the coronavirus pandemic. This legislation provided relief for individuals and businesses negatively impacted by the coronavirus pandemic. On December 27, 2020, the 2021 Consolidated Appropriations Act (“CAA”) was signed into law, providing for, among other things, further suspension of the exception for loan modifications to not be classified as “troubled debt restructuring” (“TDR”) if certain criteria are met, as described below.

The CARES Act, as amended, includes provisions for the Company to temporarily opt out of applying the TDR accounting guidance in Accounting Standards Codification (“ASC”) 310-40 for certain loan modifications. Loan modifications have been eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2019. The Bank adopted this provision and at December 31, 2021, we had 20 active forbearances for loans with an aggregate outstanding loan balance of approximately $71.9 million.

According to the New York Department of Labor, the unemployment rate for the New York City region decreased to 8.8% at December 2021 from 12.0% at December 2020. Although, the unemployment rate improved year-over-year, the rate is still elevated compared to many parts of the United States, primarily resulting from the increased impact COVID-19 had on the New York City metropolitan area. Non-performing loans totaled $14.9 million, $21.1 million, and $13.3 million at December 31, 2021, 2020, and 2019, respectively. We had net charge-offs of impaired loans in 2021 totaling $3.1 million compared to $3.6 million and $2.0 million for the years ended December 31, 2020, and 2019, respectively.

2

Additionally, primarily as a result of improved economic conditions, our (benefit) provision for credit losses decreased to ($4.9) million for the year ended December 31, 2021 from $23.1 million and $2.8 million for the years ended December 31, 2020 and 2019, respectively.

Market Area and Competition

We are a community oriented commercial bank offering a wide variety of financial services to meet the needs of the communities we serve. The Bank’s main office and it’s executive offices are in Uniondale, New York, located in Nassau County. At December 31, 2021, the Bank operated 24 full-service offices and the Internet Branch. We have offices located in the New York City Boroughs of Queens, Brooklyn, and Manhattan, and in Nassau and Suffolk County, New York. The vast majority of all of our mortgage loans are secured by properties located in the New York City metropolitan area.

We face intense competition both in making loans and in attracting deposits. Our market area has a high density of financial institutions, many of which have greater financial resources, name recognition and market presence than we do, and all of which are competitors to varying degrees. Particularly intense competition exists for deposits, as we compete with 113 banks and thrifts in the counties in which we have branch locations. Our market share of deposits, as of June 30, 2021, in these counties was 0.32% of the total deposits of these FDIC insured competing financial institutions, and we are the 22nd largest financial institution. 1 In addition, we compete with credit unions, the stock market and mutual funds for customers’ funds. Competition for deposits in our market and for national brokered deposits is primarily based on the types of deposits offered and rate paid on the deposits. Particularly intense competition also exists in all of the lending activities we emphasize.

In addition to the financial institutions mentioned above, we compete against mortgage banks and insurance companies located both within our market and available on the internet. Competition for loans in our market is primarily based on the types of loans offered and the related terms for these loans, including fixed-rate versus adjustable-rate loans and the interest rate on the loan. For adjustable rate loans, competition is also based on the repricing period, the index to which the rate is referenced, and the spread over the index rate. Also, competition is influenced by the ability of a financial institution to respond to customer requests and to provide the borrower with a timely decision to approve or deny the loan application. The internet banking arena also has many larger financial institutions which have greater financial resources, name recognition and market presence than we do. Our future earnings prospects will be affected by our ability to compete effectively with other financial institutions and to implement our business strategies. Our strategy for attracting deposits includes using various marketing techniques, delivering enhanced technology and customer friendly banking services, and focusing on the unique personal and small business banking needs of the multi-ethnic communities we serve. Our strategy for attracting new loans is primarily dependent on providing timely response to applicants and maintaining a network of quality brokers and other business sources. See “Risk Factors – The Markets in Which We Operate Are Highly Competitive” included in Item 1A of this Annual Report.

For a discussion of our business strategies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Management Strategy” included in Item 7 of this Annual Report.

1 Per June 2021 FDIC Summary of Deposits for the New York State Counties of New York, Kings, Queens, Nassau and Suffolk

3

Lending Activities

Loan Portfolio Composition. Our loan portfolio consists primarily of mortgage loans secured by multi-family residential, commercial real estate, one-to-four family mixed-use property, one-to-four family residential property, and commercial business loans. In addition, we also offer construction loans, SBA loans and other consumer loans. The vast majority of our mortgage loans are secured by properties located within our market area. At December 31, 2021, we had gross loans outstanding of $6,633.9 million (before the allowance for credit losses and net deferred costs).

We have focused our loan origination efforts on multi-family residential mortgage loans, commercial real estate and commercial business loans with full banking relationships. All of these loan types generally include prepayment penalties that we collect if the loans pay in full prior to the contractual maturity. We expect to continue this emphasis through marketing and by maintaining competitive interest rates and origination fees. Our marketing efforts include frequent contact with mortgage brokers and other professionals who serve as referral sources.

Fully underwritten one-to-four family residential mortgage loans generally are considered by the banking industry to have less risk than other types of loans. Multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans generally have higher yields than one-to-four family residential property mortgage loans and shorter terms to maturity, but typically involve higher principal amounts and may expose the lender to a greater risk of credit loss than one-to-four family residential property mortgage loans. The greater risk associated with multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans could require us to increase our provisions for credit losses and to maintain an allowance for credit losses as a percentage of total loans in excess of the allowance we currently maintain. We continually review the composition of our mortgage loan portfolio to manage the risk in the portfolio. See “General – Overview” in this Item 1 of this Annual Report.

Our loan portfolio consists of adjustable rate (“ARM”) and fixed-rate loans. Interest rates we charge on loans are affected primarily by the demand for such loans, the supply of money available for lending purposes, the rate offered by our competitors and the creditworthiness of the borrower. Many of those factors are, in turn, affected by local and national economic conditions, and the fiscal, monetary and tax policies of the federal, state and local governments.

In general, consumers show a preference for ARM loans in periods of high interest rates and for fixed-rate loans when interest rates are low. In periods of declining interest rates, we may experience refinancing activity in ARM loans, as borrowers show a preference to lock-in the lower rates available on fixed-rate loans. In the case of ARM loans we originated, volume and adjustment periods are affected by the interest rates and other market factors as discussed above as well as consumer preferences. We have not in the past, nor do we currently, originate ARM loans that provide for negative amortization.

The majority of our commercial business loans are generated by the Company’s business banking group which focuses on loan and deposit relationships to businesses located within our market area. These loans are generally personally guaranteed by the owners, and may be secured by the assets of the business, which at times may include real estate. The interest rate on these loans are generally adjustable based on a published index. These loans, while providing us a higher rate of return, also present a higher level of risk. The greater risk associated with commercial business loans could require us to increase our provision for credit losses, and to maintain an allowance for credit losses as a percentage of total loans in excess of the allowance we currently maintain.

At times, we may purchase whole or participations in loans from banks, mortgage bankers and other financial institutions when the loans complement our loan portfolio strategy. Loans purchased must meet our underwriting standards when they were originated. Our lending activities are subject to federal and state laws and regulations. See “— Regulation.”

4

The following table sets forth the composition of our loan portfolio at the dates indicated:

At December 31, 

 

2021

2020

2019

2018

2017

 

Percent

Percent

Percent

Percent

Percent

 

    

Amount

    

of Total

    

Amount

    

of Total

    

Amount

    

of Total

    

Amount

    

of Total

    

Amount

    

of Total

 

(Dollars in thousands)

 

Mortgage Loans:

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Multi-family residential

$

2,517,026

 

37.94

%  

$

2,533,952

 

37.81

%  

$

2,238,591

 

38.88

%  

$

2,269,048

 

41.00

%  

$

2,273,595

 

44.08

%

Commercial real estate

 

1,775,629

 

26.77

 

1,754,754

 

26.18

 

1,582,008

 

27.48

 

1,542,547

 

27.86

 

1,368,112

 

26.51

One-to-four family - mixed-use property

 

571,795

 

8.62

 

602,981

 

9.00

 

592,471

 

10.29

 

577,741

 

10.44

 

564,206

 

10.93

One-to-four family - residential (1)

 

268,255

 

4.04

 

245,211

 

3.66

 

188,216

 

3.27

 

190,350

 

3.44

 

180,663

 

3.50

Co-operative apartment (2)

 

8,316

 

0.13

 

8,051

 

0.12

 

 

8,663

 

0.15

 

8,498

 

0.15

 

6,895

 

0.13

Construction

 

59,761

 

0.90

 

83,322

 

1.24

67,754

 

1.18

 

50,600

 

0.91

 

8,479

 

0.16

Gross mortgage loans

 

5,200,782

 

78.40

 

5,228,271

 

78.01

 

4,677,703

 

81.25

 

4,638,784

 

83.80

 

4,401,950

 

85.31

Non-mortgage loans:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Small Business Administration (3)

 

93,811

 

1.41

 

167,376

 

2.50

 

14,445

 

0.25

 

15,210

 

0.27

 

18,479

 

0.36

Taxi medallion

 

 

 

2,757

 

0.04

 

3,309

 

0.06

 

4,539

 

0.08

 

6,834

 

0.13

Commercial business and other

 

1,339,273

 

20.19

 

1,303,225

 

19.45

 

1,061,478

 

18.44

 

877,763

 

15.85

 

732,973

 

14.20

Gross non-mortgage loans

 

1,433,084

 

21.60

 

1,473,358

 

21.99

 

1,079,232

 

18.75

 

897,512

 

16.20

 

758,286

 

14.69

Gross loans

 

6,633,866

 

100.00

%  

 

6,701,629

 

100.00

%  

 

5,756,935

 

100.00

%  

 

5,536,296

 

100.00

%  

 

5,160,236

 

100.00

%

Unearned loan fees and deferred costs, net

 

4,239

 

 

3,045

 

15,271

 

 

15,188

 

  

16,763

 

  

Less: Allowance for credit losses

 

(37,135)

 

 

(45,153)

 

(21,751)

 

 

(20,945)

 

  

(20,351)

 

  

Loans, net

$

6,600,970

$

6,659,521

$

5,750,455

$

5,530,539

 

  

$

5,156,648

 

  

(1)One-to-four family residential mortgage loans also include home equity and condominium loans. At December 31, 2021, gross home equity loans totaled $28.4 million and condominium loans totaled $29.0 million.
(2)Consists of loans secured by shares representing interests in individual co-operative units that are generally owner occupied.
(3)Includes SBA Payment Protection Program (“SBA PPP”) loans totaling $77.4 million and $151.9 million at December 31, 2021 and 2020, respectively.

5

The following table sets forth our loan originations (including the net effect of refinancing) and the changes in our portfolio of loans, including purchases, sales and principal reductions for the years indicated:

For the years ended December 31, 

(In thousands)

    

2021

    

2020

    

2019

Mortgage Loans

 

  

 

  

 

  

At beginning of year

$

5,228,271

$

4,677,703

$

4,638,784

Mortgage loans originated:

 

  

 

  

 

  

Multi-family residential

 

246,964

 

207,101

 

245,775

Commercial real estate

 

140,948

 

157,592

 

178,336

One-to-four family mixed-use property

 

41,110

 

35,131

 

66,128

One-to-four family residential

 

12,596

 

21,805

 

25,024

Co-operative apartment

 

413

 

704

 

2,117

Construction

 

26,375

 

12,059

 

16,153

Total mortgage loans originated

 

468,406

 

434,392

 

533,533

Mortgage loans purchased:

 

  

 

  

 

  

Multi-family residential

 

 

5,628

 

1,832

Commercial real estate

 

27,534

 

34,260

 

One-to-four family residential

 

57,952

 

 

Construction

 

11,749

 

9,800

 

17,766

Total mortgage loans purchased

 

97,235

 

49,688

 

19,598

Acquisition of Empire loans:

 

  

 

  

 

  

Multi-family residential

 

 

287,239

 

Commercial real estate

 

 

81,349

 

One-to-four family mixed-use property

 

 

25,151

 

One-to-four family residential

 

 

54,437

 

Construction

 

 

12,912

 

Total mortgage loans acquired

 

 

461,088

 

Less:

 

  

 

  

 

  

Principal reductions

 

565,606

 

394,099

 

505,099

Mortgage loan sales

 

27,384

 

498

 

8,482

Charge-offs

 

140

 

3

 

392

Loans transferred to OREO

 

 

 

239

At end of year

$

5,200,782

$

5,228,271

$

4,677,703

Non-mortgage loans

 

  

 

  

 

  

At beginning of year

$

1,473,358

$

1,079,232

$

897,512

Loans originated:

 

  

 

  

 

  

Small Business Administration (1)

 

143,363

 

112,352

 

3,426

Commercial business

 

375,508

 

254,121

 

402,127

Other

 

4,594

 

9,960

 

1,992

Total other loans originated

 

523,465

 

376,433

 

407,545

Non-mortgage loans purchased:

 

 

  

 

  

Commercial business

 

164,856

 

143,601

 

201,624

Total non-mortgage loans purchased

 

164,856

 

143,601

 

201,624

Acquisition of Empire loans:

 

  

 

  

 

  

Small Business Administration (2)

62,778

Commercial business

161,495

Other

 

 

43

 

Total non-mortgage loans acquired

 

 

224,316

 

Less:

 

  

 

  

 

  

Non-mortgage loan sales

 

 

6,876

 

5,213

Principal reductions

 

723,601

 

339,346

 

419,850

Charge-offs

 

4,994

 

4,002

 

2,386

At end of year

$

1,433,084

$

1,473,358

$

1,079,232

(1)Includes $138.7 million and $111.6 million of SBA PPP loans for the years ended December 31, 2021 and 2020, respectively.
(2)Includes $55.5 million of SBA PPP loans acquired from Empire at December 31, 2020.

6

Loan Maturity and Repricing. The following table shows the maturity of our total loan portfolio at December 31, 2021. Scheduled repayments are shown in the maturity category in which the payments become due.

Mortgage loans

Non-mortgage loans

One-to-four

 

family

One-to-four

Commercial

 

Multi-family

Commercial

mixed-use

family

Co-operative

Small Business

business

 

(In thousands)

    

residential

    

real estate

    

property

    

residential

    

apartment

    

Construction

   

Administration

    

and other

    

Total loans

Amounts due within one year

$

304,068

$

316,919

$

45,083

$

17,196

$

283

$

36,064

$

29,712

$

458,313

 

$

1,207,638

Amounts due after one year:

One to two years

 

267,807

 

225,765

43,359

17,676

296

19,154

16,586

 

231,610

 

 

822,253

Two to three years

 

240,565

 

190,783

41,338

17,044

303

3,327

16,584

 

179,033

 

 

688,977

Three to five years

 

226,995

 

179,467

42,360

15,863

314

291

16,414

 

132,439

 

 

614,143

Five to fifteen years

 

208,956

 

151,399

42,534

15,352

7,120

925

3,307

 

104,097

 

 

533,690

Over fifteen years

 

1,268,635

 

711,296

357,121

185,124

11,208

 

233,781

 

 

2,767,165

Total due after one year

 

2,212,958

 

1,458,710

 

526,712

 

251,059

 

8,033

23,697

 

64,099

 

880,960

 

 

5,426,228

Total amounts due

$

2,517,026

$

1,775,629

$

571,795

$

268,255

$

8,316

$

59,761

$

93,811

$

1,339,273

 

$

6,633,866

Sensitivity of loans to changes in interest rates - loans due after one year :

Fixed rate loans

$

282,325

$

107,558

$

164,361

$

24,300

$

677

$

$

47,948

$

531,291

 

$

1,158,460

Adjustable rate loans

 

1,930,633

1,351,152

362,352

226,759

7,356

23,697

16,151

349,669

 

 

4,267,769

Total loans due after one year

$

2,212,958

$

1,458,710

$

526,713

$

251,059

$

8,033

$

23,697

$

64,099

$

880,960

 

$

5,426,229

Multi-family Residential Lending. Loans secured by multi-family residential properties were $2,517.0 million, or 37.94% of gross loans at December 31, 2021. Our multi-family residential mortgage loans had an average principal balance of $1.1 million at December 31, 2021, and the largest multi-family residential mortgage loan held in our portfolio had a principal balance of $31.6 million. We offer both fixed-rate and adjustable-rate multi-family residential mortgage loans, with maturities of up to 30 years.

In underwriting multi-family residential mortgage loans, we review the expected net operating income generated by the real estate collateral securing the loan, the age and condition of the collateral, the financial resources and income level of the borrower and the borrower’s experience in owning or managing similar properties. We typically require debt service coverage of at least 125% of the monthly loan payment. We generally originate these loans up to only 75% of the appraised value or the purchase price of the property, whichever is less. Any loan with a final loan-to-value ratio in excess of 75% must be approved by the Board of Directors of the Bank (the “Bank Board of Directors”) or the Loan Committee as an exception to policy. We generally rely on the income generated by the property as the primary means by which the loan is repaid. However, personal guarantees may be obtained for additional security from these borrowers. We typically order an environmental report on our multi-family and commercial real estate loans.

Loans secured by multi-family residential property generally involve a greater degree of risk than residential mortgage loans and carry larger loan balances. The increased credit risk is the result of several factors, including the concentration of principal in a smaller number of loans and borrowers, the effects of general economic conditions on income producing properties and the increased difficulty in evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family residential property is typically dependent upon the successful operation of the related property, which is usually owned by a legal entity with the property being the entity’s only asset. If the cash flow from the property is reduced, the borrower’s ability to repay the loan may be impaired. If the borrower defaults, our only remedy may be to foreclose on the property, for which the market value may be less than the balance due on the related mortgage loan. Loans secured by multi-family residential property also may involve a greater degree of environmental risk. We seek to protect against this risk through obtaining an environmental report. See “Asset Quality — Environmental Concerns Relating to Loans.”

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At December 31, 2021, $2,145.9 million, or 85.26%, of our multi-family mortgage loans consisted of ARM loans. We offer ARM loans with adjustment periods typically of five years and for terms of up to 30 years. Interest rates on ARM loans currently offered by us are adjusted at the beginning of each adjustment period based upon a fixed spread above the FHLB-NY corresponding Regular Advance Rate. From time to time, due to competitive forces, we may originate ARM loans at an initial rate lower than the fully indexed rate as a result of a discount on the spread for the initial adjustment period. Multi-family adjustable-rate mortgage loans generally are not subject to limitations on interest rate increases either on an adjustment period or aggregate basis over the life of the loan; however, the loans generally contain interest rate floors. We originated and purchased multi-family ARM loans totaling $188.7 million, $173.6 million, and $206.2 million during 2021, 2020, and 2019, respectively.

At December 31, 2021, $371.1 million, or 14.74%, of our multi-family mortgage loans consisted of fixed rate loans. Our fixed-rate multi-family mortgage loans are generally originated for terms up to 15 years and are competitively priced based on market conditions and our cost of funds. We originated and purchased $58.3 million, $39.1 million, and $41.4 million of fixed-rate multi-family mortgage loans in 2021, 2020, and 2019, respectively.

Commercial Real Estate Lending. Loans secured by commercial real estate were $1,775.6 million, or 26.77% of gross loans, at December 31, 2021. Our commercial real estate mortgage loans are secured by properties such as office buildings, hotels/motels, small business facilities, strip shopping centers and warehouses. At December 31, 2021, our commercial real estate mortgage loans had an average principal balance of $2.3 million and the largest of such loans, which is secured by a multi-tenant shopping center, had a principal balance of $40.1 million. Commercial real estate mortgage loans are generally originated in a range of $100,000 to $10.0 million.

In underwriting commercial real estate mortgage loans, we employ the same underwriting standards and procedures as are employed in underwriting multi-family residential mortgage loans.

Commercial real estate mortgage loans generally involve a greater degree of credit risk for the same reasons applicable to multi-family residential mortgage loans.

At December 31, 2021, $1,549.5 million, or 87.26%, of our commercial mortgage loans consisted of ARM loans. We offer ARM loans with adjustment periods of one to five years and generally for terms of up to 15 years. Interest rates on ARM loans currently offered by us are adjusted at the beginning of each adjustment period based upon a fixed spread above the FHLB-NY corresponding Regular Advance Rate. From time to time, we may originate ARM loans at an initial rate lower than the index as a result of a discount on the spread for the initial adjustment period. Commercial adjustable-rate mortgage loans generally are not subject to limitations on interest rate increases either on an adjustment period or aggregate basis over the life of the loan; however, the loans generally contain interest rate floors. We originated and purchased commercial ARM loans totaling $148.8 million, $134.0 million, and $158.0 million during 2021, 2020, and 2019, respectively.

At December 31, 2021, $226.1 million, or 12.74%, of our commercial mortgage loans consisted of fixed-rate loans. Our fixed-rate commercial mortgage loans are generally originated for terms up to 20 years and are competitively priced based on market conditions and our cost of funds. We originated and purchased $19.6 million, $57.9 million, and $20.3 million of fixed-rate commercial mortgage loans in 2021, 2020, and 2019, respectively.

One-to-Four Family Mortgage Lending – Mixed-Use Properties. We offer mortgage loans secured by one-to-four family mixed-use properties. These properties contain up to four residential dwelling units and include a commercial component. We offer both fixed-rate and adjustable-rate one-to-four family mixed-use property mortgage loans with maturities of up to 30 years and a general maximum loan amount of $1.0 million. One-to-four family mixed-use property mortgage loans were $571.8 million, or 8.62% of gross loans, at December 31, 2021.

In underwriting one-to-four family mixed-use property mortgage loans, we employ the same underwriting standards as are employed in underwriting multi-family residential mortgage loans.

8

At December 31, 2021, $384.3 million, or 67.20%, of our one-to-four family mixed-use property mortgage loans consisted of ARM loans. We offer adjustable-rate one-to-four family mixed-use property mortgage loans with adjustment periods typically of five years and for terms of up to 30 years. Interest rates on ARM loans currently offered by the Bank are adjusted at the beginning of each adjustment period based upon a fixed spread above the FHLB-NY corresponding Regular Advance Rate. From time to time, we may originate ARM loans at an initial rate lower than the index as a result of a discount on the spread for the initial adjustment period. One-to-four family mixed-use property adjustable-rate mortgage loans generally are not subject to limitations on interest rate increases either on an adjustment period or aggregate basis over the life of the loan; however, the loans generally contain interest rate floors. We originated and purchased one-to-four family mixed-use property ARM loans totaling $15.1 million, $10.0 million, and $22.4 million during 2021, 2020, and 2019, respectively.

At December 31, 2021, $187.5 million, or 32.80%, of our one-to-four family mixed-use property mortgage loans consisted of fixed-rate loans. Our fixed-rate one-to-four family mixed-use property mortgage loans are originated for terms of up to 15 years and are competitively priced based on market conditions and the Bank’s cost of funds. We originated and purchased $26.0 million, $25.2 million, and $43.8 million of fixed-rate one-to-four family mixed-use property mortgage loans in 2021, 2020, and 2019, respectively.

One-to-Four Family Mortgage Lending – Residential Properties. We offer mortgage loans secured by one-to-four family residential properties, including townhouses and condominium units. For purposes of the description contained in this section, one-to-four family residential mortgage loans, co-operative apartment loans and home equity loans are collectively referred to herein as “residential mortgage loans.” We offer both fixed-rate and adjustable-rate residential mortgage loans with maturities of up to 30 years and a general maximum loan amount of $1.0 million. Residential mortgage loans were $268.3 million, or 4.04% of gross loans, at December 31, 2021.

We generally originate residential mortgage loans in amounts up to 80% of the appraised value or the sale price, whichever is less. Private mortgage insurance is required whenever loan-to-value ratios exceed 80% of the appraised value of the property securing the loan.

At December 31, 2021, $241.1 million, or 89.89%, of our residential mortgage loans consisted of ARM loans. We offer ARM loans with adjustment periods of one, three, five, seven or ten years. Interest rates on ARM loans currently offered by us are adjusted at the beginning of each adjustment period based upon a fixed spread above the FHLB-NY corresponding Regular Advance Rate. From time to time, we may originate ARM loans at an initial rate lower than the index as a result of a discount on the spread for the initial adjustment period. ARM loans generally are subject to limitations on interest rate increases of 2% per adjustment period and an aggregate adjustment of 6% over the life of the loan and have interest rate floors. We originated and purchased residential ARM loans totaling $70.2 million, $18.3 million, and $22.6 million during 2021, 2020, and 2019, respectively.

The retention of ARM loans in our portfolio helps us reduce our exposure to interest rate risks. However, in an environment of rapidly increasing interest rates, it is possible for the interest rate increase to exceed the maximum aggregate adjustment on one-to-four family residential ARM loans and negatively affect the spread between our interest income and our cost of funds.

ARM loans generally involve credit risks different from those inherent in fixed-rate loans, primarily because if interest rates rise, the underlying payments of the borrower rise, thereby increasing the potential for default. However, this potential risk is lessened by our policy of originating one-to-four family residential ARM loans with annual and lifetime interest rate caps that limit the increase of a borrower’s monthly payment.

At December 31, 2021, $27.1 million, or 10.11%, of our residential mortgage loans consisted of fixed-rate loans. Our fixed-rate residential mortgage loans typically are originated for terms of 15 and 30 years and are competitively priced based on market conditions and our cost of funds. We originated and purchased $0.8 million, $4.2 million, and $2.4 million in 15-year fixed-rate residential mortgages in 2021, 2020, and 2019, respectively. We did not originate or purchase any 30-year fixed-rate residential mortgages in 2021, 2020, and 2019.

9

At December 31, 2021, home equity loans totaled $28.4 million, or 0.43%, of gross loans. Home equity loans are included in our portfolio of residential mortgage loans. These loans are offered as adjustable-rate “home equity lines of credit” on which interest only is due for an initial term of 10 years and thereafter principal and interest payments sufficient to liquidate the loan are required for the remaining term, not to exceed 30 years. These adjustable “home equity lines of credit” may include a “floor” and/or a “ceiling” on the interest rate that we charge for these loans. These loans also may be offered as fully amortizing closed-end fixed-rate loans for terms up to 15 years. The majority of home equity loans originated are owner occupied one-to-four family residential properties and condominium units. To a lesser extent, home equity loans are also originated on one-to-four residential properties held for investment and second homes. All home equity loans are subject to an 80% loan-to-value ratio computed on the basis of the aggregate of the first mortgage loan amount outstanding and the proposed home equity loan. They are generally granted in amounts from $25,000 to $300,000.

Construction Loans. At December 31, 2021, construction loans totaled $59.8 million, or 0.90%, of gross loans. Our construction loans primarily are adjustable rate loans to finance the construction of one-to-four family residential properties, multi-family residential properties and owner-occupied commercial properties. We also, to a limited extent, finance the construction of commercial properties. Our policies provide that construction loans may be made in amounts up to 70% of the estimated value of the developed property and only if we obtain a first lien position on the underlying real estate. Construction loans are generally made with terms of two years or less. Advances are made as construction progresses and inspection warrants, subject to continued title searches to ensure that we maintain a first lien position. We originated and purchased construction loans totaling $38.1 million, $21.9 million, and $33.9 million during 2021, 2020, and 2019, respectively.

Construction loans involve a greater degree of risk than other loans because, among other things, the underwriting of such loans is based on an estimated value of the developed property, which can be difficult to ascertain in light of uncertainties inherent in such estimations. In addition, construction lending entails the risk that the project may not be completed due to cost overruns or changes in market conditions.

Small Business Administration Lending. At December 31, 2021, SBA loans totaled $93.8 million, representing 1.41%, of gross loans. These loans are extended to small businesses and are guaranteed by the SBA up to a maximum of 85% of the loan balance for loans with balances of $150,000 or less, and to a maximum of 75% of the loan balance for loans with balances greater than $150,000. We also provide term loans and lines of credit up to $350,000 under the SBA Express Program, on which the SBA provides a 50% guaranty. The maximum loan size under the SBA guarantee program is $5.0 million, with a maximum loan guarantee of $3.75 million. All SBA loans are underwritten in accordance with SBA Standard Operating Procedures which requires collateral and the personal guarantee of the owners with more than 20% ownership from SBA borrowers. Typically, SBA loans are originated in the range of $25,000 to $2.0 million with terms ranging from one to seven years and up to 25 years for owner occupied commercial real estate mortgages. SBA loans are generally offered at adjustable rates tied to the prime rate (as published in the Wall Street Journal) with adjustment periods of one to three months. At times, we may sell the guaranteed portion of certain SBA term loans in the secondary market, realizing a gain at the time of sale, and retaining the servicing rights on these loans, collecting a servicing fee of approximately 1%.

The CARES Act created the SBA PPP. The SBA guarantees 100% of the amounts loaned by preferred banks. These loans are extended to small businesses with less than 500 employees that were in business prior to February 15, 2020 with loan amounts of $10.0 million or less to cover their payroll costs, health care benefits (including paid sick or medical leave, and insurance premiums), mortgage interest obligations of business, rent obligations, utility payments, interest on other debt obligations with terms ranging up to two years with no interest payments required for six months from the date of disbursement. We originated and purchased $143.4 million (including $138.7 million of SBA PPP loans), $112.4 million (including $111.6 million of SBA PPP loans), and $3.4 million of SBA loans during 2021, 2020, and 2019, respectively.

10

Commercial Business and Other Lending. At December 31, 2021, commercial business and other loans totaled $1,339.3 million, or 20.19%, of gross loans. We originate and purchase commercial business loans and other loans for business, personal, or household purposes. Commercial business loans are provided to businesses in the New York City metropolitan area with annual sales of up to $250.0 million. Our commercial business loans include lines of credit and term loans including owner occupied mortgages. These loans are secured by business assets, including accounts receivables, inventory, equipment and real estate and generally require personal guarantees. The Bank also enters into participations/syndications on senior secured commercial business loans, which are serviced by other banks. Commercial business loans are generally originated in a range of $100,000 to $10.0 million. We generally offer adjustable rate loans with adjustment periods of five years for owner occupied mortgages and for lines of credit the adjustment period is generally monthly. Interest rates on adjustable rate loans currently offered by us are adjusted at the beginning of each adjustment period based upon a fixed spread above the FHLB-NY corresponding Regular Advance Rate for owner occupied mortgages and a fixed spread above the London Interbank Offered Rate (“LIBOR”) or Prime Rate for lines of credit. Beginning in mid-2023 these loans will no longer reprice using LIBOR and will reprice on an alternative index, such as Secured Overnight Financing Rate (“SOFR”), which is intended to replace U.S. dollar LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. Commercial business adjustable-rate loans generally are not subject to limitations on interest rate increases either on an adjustment period or aggregate basis over the life of the loan, however they generally are subject to interest rate floors. Our fixed-rate commercial business loans are generally originated for terms up to 20 years and are competitively priced based on market conditions and our cost of funds. We originated and purchased $540.4 million, $397.7 million, and $603.8 million of commercial business loans during 2021, 2020, and 2019, respectively.

Other loans generally consist of overdraft lines of credit. Generally, unsecured consumer loans are limited to amounts of $5,000 or less for terms of up to five years. We originated and purchased $4.6 million, $10.0 million, and $1.9 million of other loans during 2021, 2020, and 2019, respectively. The underwriting standards employed by us for consumer and other loans include a determination of the applicant’s payment history on other debts and assessment of the applicant’s ability to meet payments on all of his or her obligations. In addition to the creditworthiness of the applicant, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. Unsecured loans tend to have higher risk, and therefore command a higher interest rate.

Loan Extensions, Renewals, Modifications and Restructuring. Extensions, renewals, modifications or restructuring a loan, other than a loan that is classified as a TDR, requires the loan to be fully underwritten in accordance with our policy. The borrower must be current to have a loan extended, renewed or restructured. Our policy for modifying a mortgage loan due to the borrower’s request for changes in the terms will depend on the changes requested. The borrower must be current and have a good payment history to have a loan modified. If the borrower is seeking additional funds, the loan is fully underwritten in accordance with our policy for new loans. If the borrower is seeking a reduction in the interest rate due to a decline in interest rates in the market, we generally limit our review as follows: (1) for income producing properties and commercial business loans, to a review of the operating results of the property/business and a satisfactory inspection of the property, and (2) for one-to-four residential properties, to a satisfactory inspection of the property. Our policy on restructuring a loan when the loan will be classified as a TDR requires the loan to be fully underwritten in accordance with Company policy. The borrower must demonstrate the ability to repay the loan under the new terms. When the restructuring results in a TDR, we may waive some requirements of Company policy provided the borrower has demonstrated the ability to meet the requirements of the restructured loan and repay the restructured loan. While our formal lending policies do not prohibit making additional loans to a borrower or any related interest of the borrower who is past due in principal or interest more than 90 days, it has been our practice not to make additional loans to a borrower or a related interest of the borrower if the borrower is past due more than 90 days as to principal or interest. During the most recent three fiscal years, we did not make any additional loans to a borrower or any related interest of the borrower who was past due in principal or interest more than 90 days. All extensions, renewals, restructurings and modifications must be approved by the appropriate Loan Committee.

Covid-19 Modifications.Pursuant to the CARES Act and CAA, certain loan modifications are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. The Company has elected that loans temporarily modified for borrowers directly impacted by COVID-19 are not considered TDR, assuming the above criteria is met and as such, these loans are considered current and continue to accrue interest at its original contractual terms.  Deferrals granted under the Cares Act are deemed in accrual status and interest income is accrued until the end of

11

deferral period even if there are no payments being collected. When the forbearance period is over, borrowers are expected to resume contractual payments. The determination of whether a loan is past due is based on the modified terms of the agreement. Once the deferral period is over, the borrower will resume making payments and normal delinquency-based non-accrual policies will apply. Loans modified after January 2, 2022 are no longer eligible to be modified under the CARES Act or CAA.

Loan Approval Procedures and Authority. The Board of Directors of the Company (the “Board of Directors”) approved lending policies establishing loan approval requirements for our various types of loan products. Our Residential Mortgage Lending Policy (which applies to all one-to-four family mortgage loans, including residential and mixed-use property) establishes authorized levels of approval. One-to-four family mortgage loans that do not exceed $750,000 require two signatures for approval, one of which must be from either the President, Senior Executive Vice President Chief of Real Estate Lending, the Executive Vice President of Residential, Mixed Use & Small Multi-family Lending or Executive Vice President Real Estate Credit Center (collectively, “Authorized Officers”) and the other from a Senior Underwriter, Manager, Underwriter or Junior Underwriter in the Residential Mortgage Loan Department (collectively, “Loan Officers”), and ratification by the Management Loan Committee. For one-to-four family mortgage loans in excess of $750,000 up to $2.0 million, three signatures are required for approval, at least two of which must be from Authorized Officers, and the other one may be a Loan Officer, and ratification by the Management Loan Committee and the Director’s Loan Committee. The Director’s Loan Committee or the Bank Board of Directors also must approve one-to-four family mortgage loans in excess of $2.0 million up to and including $5.0 million after obtaining two signatures from authorized officers and one signature from loan officers with Management Loan Committee approval. One-to-four family mortgage loans in excess of $5.0 million may require Director’s inspection.

Pursuant to our Commercial Real Estate Lending Policy, loans secured by commercial real estate and multi-family residential properties up to $2.0 million are approved by the Executive Vice President of Commercial Real Estate and the Senior Executive Vice President, Chief of Real Estate Lending or Executive Vice President Credit Center Manager and then ratified by the Management Loan Committee and/or the Director’s Loan Committee. Loans provided in excess of $2.0 million and up to and including $5.0 million must be submitted with the two signatures of the officers to the Management Loan Committee for final approval and then to the Director’s Loan Committee and/or Board of Directors for ratification. Loans in excess of $5.0 million and up to and including $25.0 million must be submitted subsequently to the Director’s Loan Committee and/ or the Board of Directors for approval. Loan amounts in excess of $25.0 million must be approved by the Board of Directors.

In accordance with our Business Banking Credit Policy, commercial business and other loans require two signatures from the Business Loan Committee for approval up to $0.5 million. All commercial business loans and SBA loans over $0.5 million and up to $2.5 million must be approved by obtaining two signatures from the Business Loan Committee and ratified by the Management Loan Committee with the exception of SBA PPP loans. SBA PPP loans were approved by Business Loan Committee regardless of the lending limit and ratified by Management Loan Committee. Commercial business loans and SBA loans in excess of $2.5 million up to $5.0 million must be approved by the Management Loan Committee and ratified by the Director’s Loan Committee. Loans in excess of $5.0 million must be submitted to the Director’s Loan Committee and/ or the Board of Directors for approval.

Our Construction Loan Policy requires construction loans up to and including $2.0 million must be approved by the Senior Executive Vice President, Chief of Real Estate Lending and the Executive Vice President of Commercial Real Estate, and ratified by the Management Loan Committee or the Director’s Loan Committee. Such loans in excess of $2.0 million up to and including $5.0 million require the same officer approvals, approval of the Management Loan Committee, and ratification of the Director’s Loan Committee or the Bank Board of Directors. Loan proposals in excess of $5.0 million up to and including $25.0 million that are approved by Management Loan Committee will subsequently be submitted to either the Directors Loan Committee and/or the Board of Directors for their approval. Construction loans in excess of $25.0 million require the subsequent approval of the Bank Board of Directors. Any loan, regardless of type, that deviates from our written credit policies must be approved by the Director’s Loan Committee or the Bank Board of Directors.

For all loans originated by us, upon receipt of a completed loan application, a credit report is ordered and certain other financial information is obtained. An appraisal of the real estate intended to secure the proposed loan is required to be received. An independent appraiser designated and approved by us currently performs such appraisals. Our staff

12

appraisers review all appraisals. The Bank Board of Directors annually approves the independent appraisers used by the Bank and approves the Bank’s appraisal policy. It is our policy to require borrowers to obtain title insurance and hazard insurance on all real estate loans prior to closing. For certain borrowers, and/or as required by law, the Bank may require escrow funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from which we make disbursements for items such as real estate taxes and, in some cases, hazard insurance premiums.

Loan Concentrations. The maximum amount of credit that the Bank can extend to any single borrower or related group of borrowers generally is limited to 15% of the Bank’s unimpaired capital and surplus, or $126.0 million at December 31, 2021. Applicable laws and regulations permit an additional amount of credit to be extended, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. See “-Regulation.”  However, it is currently our policy not to extend such additional credit. At December 31, 2021, there were no loans in excess of the maximum dollar amount of loans to one borrower that the Bank was authorized to make. At that date, the three largest concentrations of loans to one borrower consisted of loans secured by commercial real estate, multi-family income producing properties and commercial business loans with an aggregate principal balance outstanding of $93.8 million, $89.0 million, and $78.7 million for each of the three borrowers, respectively.

Loan Servicing. At December 31, 2021, we were servicing $34.1 million of loans for others. Our policy is to retain the servicing rights to the mortgage and SBA loans that we sell in the secondary market, other than sales of delinquent loans, which are sold with servicing released to the buyer. On mortgage loans and commercial business loan participations purchased by us for whom the seller retains the servicing rights, we receive monthly reports with which we monitor the loan portfolio. Based upon servicing agreements with the servicers of the loans, we rely upon the servicer to contact delinquent borrowers, collect delinquent amounts and initiate foreclosure proceedings, when necessary, all in accordance with applicable laws, regulations and the terms of the servicing agreements between us and our servicing agents. The servicers are required to submit monthly reports on their collection efforts on delinquent loans. At December 31, 2021 and 2020, we held $653.4 million and $788.9 million, respectively, of loans that were serviced by others.

Asset Quality

Loan Collection. When a borrower fails to make a required payment on a loan, except for serviced loans as described above, we take a number of steps to induce the borrower to cure the delinquency and restore the loan to current status. In the case of mortgage loans, personal contact is made with the borrower after the loan becomes 30 days delinquent. We take a proactive approach to managing delinquent loans, including conducting site examinations and encouraging borrowers to meet with one of our representatives. When deemed appropriate, we develop short-term payment plans that enable borrowers to bring their loans current, generally within six to nine months. We review delinquencies on a loan by loan basis, diligently exploring ways to help borrowers meet their obligations and return them back to current status.

In the case of commercial business or other loans, we generally send the borrower a written notice of non-payment when the loan is first past due. In the event payment is not then received, additional letters and phone calls generally are made in order to encourage the borrower to meet with one of our representatives to discuss the delinquency. If the loan still is not brought current and it becomes necessary for us to take legal action, which typically occurs after a loan is delinquent 90 days or more, we may attempt to repossess personal or business property that secures a SBA loan, commercial business loan or consumer loan.

When the borrower has indicated that they will be unable to bring the loan current, or due to other circumstances which, in our opinion, indicate the borrower will be unable to bring the loan current within a reasonable time, the loan is classified as non-performing. All loans classified as non-performing, which includes all loans past due 90 days or more, are on non-accrual status unless there is, in our opinion, compelling evidence the borrower will bring the loan current in the immediate future. At December 31, 2021, there were no loans that were past due 90 days or more and still accruing interest.

Upon classifying a loan as non-performing, we review available information and conditions that relate to the status of the loan, including the estimated value of the loan’s collateral and any legal considerations that may affect the borrower’s ability to continue to make payments. Based upon the available information, we will consider the sale of the

13

loan or retention of the loan. If the loan is retained, we may continue to work with the borrower to collect the amounts due or start foreclosure proceedings. If a foreclosure action is initiated and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan is sold at foreclosure or by us as soon thereafter as practicable.

Once the decision to sell a loan is made, we determine what we would consider adequate consideration to be obtained when that loan is sold, based on the facts and circumstances related to that loan. Investors and brokers are then contacted to seek interest in purchasing the loan. We have been successful in finding buyers for our non-performing loans offered for sale that are willing to pay what we consider to be adequate consideration. Terms of the sale include cash due upon closing of the sale, no contingencies or recourse to us, servicing is released to the buyer and time is of the essence. These sales usually close within a reasonably short time period.

This strategy of selling non-performing loans has allowed us to optimize our return by quickly converting our non-performing loans to cash, which can then be reinvested in earning assets. This strategy also allows us to avoid lengthy and costly legal proceedings that may occur with non-performing loans. There can be no assurances that we will continue this strategy in future periods, or if continued, we will be able to find buyers to pay adequate consideration.

The following table shows delinquent and non-performing loans sold during the periods indicated:

For the years ended December 31, 

(Dollars in thousands)

    

2021

    

2020

    

2019

Count

 

33

 

2

 

11

Proceeds

$

28,632

$

580

$

13,048

Net (charge-offs) recoveries

 

(121)

 

 

(1)

Gross gains

 

335

 

42

 

Gross losses

 

 

 

756

Troubled Debt Restructured. For borrowers who are experiencing financial difficulties, we have restructured certain problem loans by: reducing the interest rate until the next reset date, extending the amortization period thereby lowering the monthly payments, deferring a portion of the interest payment, and/or changing the loan to interest only payments for a limited time period. At times, certain problem loans have been restructured by combining more than one of these options. These restructurings have not included a reduction of principal balance. We believe that restructuring these loans in this manner will allow certain borrowers to become and remain current on their loans. These restructured loans are classified TDR. Loans which have been current for six consecutive months at the time they are restructured as TDR remain on accrual status. Loans which were delinquent at the time they are restructured as a TDR are placed on non-accrual status until they have made timely payments for six consecutive months. The CARES Act, as amended by the CAA, includes provisions for the Company to temporarily opt out of applying the TDR accounting guidance in ASC 310-40 for certain loan modifications.

14

The following table shows loans classified as TDR at amortized cost that are performing according to their restructured terms at the periods indicated:

At December 31, 

(In thousands)

    

2021

    

2020

    

2019

    

2018

    

2017

Accrual Status:

 

  

 

  

 

  

 

  

 

  

Multi-family residential

$

1,690

$

1,700

$

1,873

$

1,916

$

2,518

Commercial real estate

 

7,572

 

7,702

 

 

 

1,986

One-to-four family - mixed-use property

 

1,375

 

1,459

 

1,481

 

1,692

 

1,753

One-to-four family - residential

 

483

 

507

 

531

 

552

 

572

Commercial business and other

 

1,340

 

1,588

 

 

279

 

462

Total

 

12,460

 

12,956

 

3,885

 

4,439

 

7,291

Non-Accrual Status:

 

  

 

  

 

  

 

  

 

  

One-to-four family - mixed-use property

 

261

 

272

 

 

 

Taxi medallion

 

 

440

 

1,668

 

3,926

 

5,916

Commercial business and other

 

41

 

2,243

 

941

 

 

Total

 

302

 

2,955

 

2,609

 

3,926

 

5,916

Total performing troubled debt restructured

$

12,762

$

15,911

$

6,494

$

8,365

$

13,207

Loans that are restructured as TDR but are not performing in accordance with the restructured terms are excluded from the TDR table above, as they are placed on non-accrual status and reported as non-performing loans. At December 31, 2021, there were no loans which were restructured as TDR not performing in accordance with its restructured terms. At December 31, 2020, there were 12 loans totaling $2.2 million which were restructured as TDR not performing in accordance with their restructured terms.

Delinquent Loans and Non-performing Assets. We generally discontinue accruing interest on delinquent loans when a loan is 90 days past due. At that time, previously accrued but uncollected interest is reversed from income. Loans in default 90 days or more as to their maturity date but not their interest payments, however, continue to accrue interest as long as the borrower continues to timely remit interest payments.

15

The following table shows our non-performing assets at the dates indicated. During the years ended December 31, 2021, 2020, and 2019, the amounts of additional interest income that would have been recorded on non-accrual loans, had they been current, totaled $1.1 million, $1.4 million, and $1.1 million, respectively. These amounts were not included in our interest income for the respective periods.

At December 31, 

 

(Dollars in thousands)

    

2021

    

2020

    

2019

    

2018

    

2017

 

Loans 90 days or more past due and still accruing:

 

  

Multi-family residential

$

$

201

$

445

$

$

Commercial real estate

 

 

2,547

 

 

 

2,424

Total

 

 

2,748

 

445

 

 

2,424

Non-accrual mortgage loans:

 

  

 

  

 

  

 

  

 

  

Multi-family residential

 

2,431

 

2,524

 

2,296

 

2,410

 

3,598

Commercial real estate

 

613

 

1,683

 

367

 

1,379

 

1,473

One-to-four family mixed-use property (1)

 

1,309

 

1,366

 

274

 

928

 

1,867

One-to-four family residential

 

7,725

 

5,854

 

5,139

 

6,144

 

7,808

Total

 

12,078

 

11,427

 

8,076

 

10,861

 

14,746

Non-accrual non-mortgage loans:

 

  

 

  

 

  

 

  

 

  

Small Business Administration

 

937

 

1,151

 

1,151

 

1,267

 

46

Taxi medallion(1)

 

 

2,317

 

1,641

 

613

 

918

Commercial business and other (1)

 

1,918

 

3,430

 

1,945

 

3,512

 

Total

 

2,855

 

6,898

 

4,737

 

5,392

 

964

Total non-accrual loans

 

14,933

 

18,325

 

12,813

 

16,253

 

15,710

Total non-performing loans

 

14,933

 

21,073

 

13,258

 

16,253

 

18,134

Other non-performing assets:

 

  

 

  

 

  

 

  

 

  

Real Estate Owned

 

 

 

239

 

 

Other assets acquired through foreclosure

 

 

35

 

35

 

35

 

Total

 

 

35

 

274

 

35

 

Total non-performing assets

$

14,933

$

21,108

$

13,532

$

16,288

$

18,134

Non-performing loans to gross loans

 

0.23

%  

 

0.31

%  

 

0.23

%  

 

0.29

%  

 

0.35

%  

Non-performing assets to total assets

 

0.19

%  

 

0.26

%  

 

0.19

%  

 

0.24

%  

 

0.29

%  

(1)Not included in the above analysis are the following non-accrual TDRs that are performing according to their restructured terms: taxi medallion loans totaling $0.4 million, $1.7 million, $3.9 million and $5.9 million at December 31, 2020, 2019, 2018 and 2017 respectively, One-to-four family mixed-use property loans totaling $0.3 million at December 31, 2021 and 2020, and commercial business loans totaling less than $0.1 million, $2.2 million and $0.9 million at December 31, 2021, 2020 and 2019, respectively.

16

The following table shows our delinquent loans that are less than 90 days past due and still accruing interest at the periods indicated:

December 31, 2021

December 31, 2020

30 - 59

60 - 89

30 - 59

60 - 89

    

days

    

days

    

days

    

days

(In thousands)

Multi-family residential

$

3,652

$

4,193

$

7,582

$

3,186

Commercial real estate

 

5,743

 

 

17,903

 

5,123

One-to-four family ― mixed-use property

 

2,319

 

 

5,673

 

1,132

One-to-four family ― residential

 

163

 

224

 

3,087

 

805

Construction

 

 

 

750

 

Small Business Administration

 

 

 

1,823

 

Commercial business and other

 

101

 

40

 

129

 

1,273

Total

$

11,978

$

4,457

$

36,947

$

11,519

Other Real Estate Owned. We aggressively market our Other Real Estate Owned (“OREO”) properties. At December 31, 2021 and 2020, we held no OREO.

We may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via foreclosure through an in-substance repossession. During the years ended December 31, 2021 and 2020, we did not foreclose any real estate property. Included within net loans as of December 31, 2021 and 2020, was a recorded investment of $8.7 million and $5.9 million, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction.

Environmental Concerns Relating to Loans. We currently obtain environmental reports in connection with the underwriting of commercial real estate loans, and typically obtain environmental reports in connection with the underwriting of multi-family loans. For all other loans, we obtain environmental reports only if the nature of the current or, to the extent known to us, prior use of the property securing the loan indicates a potential environmental risk. However, we may not be aware of such uses or risks in any particular case, and, accordingly, there can be no assurance that real estate acquired by us in foreclosure is free from environmental contamination nor that we will not have any liability with respect thereto.

Classified Assets. Our policy is to review our assets, focusing primarily on the loan portfolio, OREO and the investment portfolios, to ensure that the credit quality is maintained at the highest levels. When weaknesses are identified, immediate action is taken to correct the problem through direct contact with the borrower or issuer. We then monitor these assets, and, in accordance with our policy and current regulatory guidelines, we designate them as “Special Mention,” which is considered a “Criticized Asset,” and “Substandard,” “Doubtful,” or “Loss” which are considered “Classified Assets,” as deemed necessary. If a loan does not fall within one of the previous mentioned categories and management believes weakness is evident then we designate the loan as “Watch”, all other loans would be considered “Pass”. These loan designations are updated quarterly. We designate an asset as Substandard when a well-defined weakness is identified that jeopardizes the orderly liquidation of the debt. We designate an asset as Doubtful when it displays the inherent weakness of a Substandard asset with the added provision that collection of the debt in full, on the basis of existing facts, is highly improbable. We designate an asset as Loss if it is deemed the debtor is incapable of repayment. We do not hold any loans designated as loss, as loans that are designated as Loss are charged to the Allowance for Credit Losses. Assets that are non-accrual are designated as Substandard, Doubtful or Loss. We designate an asset as Special Mention if the asset does not warrant designation within one of the other categories, but contains a potential weakness that deserves closer attention. Loans that are in forbearance pursuant to the CARES Act or CAA and continue to perform according to the terms of the forbearance agreement, are generally reported in the same category as they were reported immediately prior to modification. Our Criticized and Classified Assets totaled $78.6 million at December 31, 2021, an increase of $6.7 million from $71.9 million at December 31, 2020. At December 31, 2021, we had one investment security classified as special mention that has an outstanding balance of $21.0 million.

17

The following table sets forth the Bank’s Criticized and Classified assets at December 31, 2021:

(In thousands)

    

Special Mention

    

Substandard

    

Doubtful

    

Loss

    

Total

Loans:

 

  

 

  

 

  

 

  

 

  

Multi-family residential

$

4,787

$

3,021

$

$

 

$

7,808

Commercial real estate

 

794

 

1,053

 

 

 

 

1,847

One-to-four family - mixed-use property

 

1,130

 

1,835

 

 

 

 

2,965

One-to-four family - residential

 

354

 

7,661

 

 

 

 

8,015

Construction

 

856

 

873

 

 

 

 

1,729

Small Business Administration (1)

 

48

 

957

 

 

 

 

1,005

Commercial business and other

 

17,988

 

14,878

 

1,081

 

 

 

33,947

Total loans

25,957

30,278

1,081

 

57,316

Investment Securities:

Held-to-maturity securities

20,977

 

20,977

Total investment securities

20,977

 

20,977

Total

$

46,934

$

30,278

$

1,081

$

 

$

78,293

The following table sets forth the Bank’s Criticized and Classified assets at December 31, 2020:

(In thousands)

    

Special Mention

    

Substandard

    

Doubtful

    

Loss

    

Total

Loans:

 

  

 

  

 

  

 

  

 

  

Multi-family residential

$

4,367

$

2,778

$

$

 

$

7,145

Commercial real estate

 

6,473

 

12,015

 

 

 

 

18,488

One-to-four family - mixed-use property

 

2,523

 

2,324

 

 

 

 

4,847

One-to-four family - residential

 

1,673

 

5,702

 

 

 

 

7,375

Co-operative apartments

48

48

Construction

 

3,336

 

 

 

 

 

3,336

Small Business Administration (1)

 

50

 

1,174

 

 

 

 

1,224

Taxi medallion

 

 

2,597

 

 

 

 

2,597

Commercial business and other

 

3,363

 

22,224

 

1,273

 

 

 

26,860

Total

$

21,833

$

48,814

$

1,273

$

 

$

71,920

(1)Balance reported net of SBA Guaranteed portion.

Allowance for Credit Losses

The Allowance for credit losses (“ACL”) is an estimate that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial assets. Loans are charged off against that ACL when management believes that a loan balance is uncollectable based on quarterly analysis of credit risk.

As of January 1, 2020, the Company adopted ASC Topic 326 “Credit Losses”. The amount of the ACL is based upon a loss rate model that considers multiple factors which reflects management’s assessment of the credit quality of the loan portfolio. Management estimates the allowance balance using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The factors are both quantitative and qualitative in nature including, but not limited to, historical losses, economic conditions, trends in delinquencies, value and adequacy of underlying collateral, volume and portfolio mix, and internal loan processes.

18

The quantitative allowance is calculated using a number of inputs and assumptions. The process and guidelines were developed using, among other factors, the guidance from federal banking regulatory agencies and GAAP. The results of this process, support management’s assessment as to the adequacy of the ACL at each balance sheet date.

The process for calculating the allowance for credit losses begins with our historical losses by portfolio segment. The losses are then incorporated into reasonable and supportable forecast to develop the quantitative component of the allowance for credit losses.

When calculating the ACL estimate for December 31, 2021, the reasonable and supportable forecast was for a period of two quarters and the reversion period was six quarters which were based on the established framework for transition periods. This resulted in the ACL for loans totaling $37.1 million at December 31, 2021.

Non-performing loans totaled $14.9 million and $21.1 million at December 31, 2021 and 2020, respectively. The Bank’s underwriting standards generally require a loan-to-value ratio of no more than 75% at the time the loan is originated. At December 31, 2021, the outstanding principal balance of our non-performing loans was 30.4% of the estimated current value of the supporting collateral, after considering the charge-offs that have been recorded. We incurred total net charge-offs of $3.1 million and $3.6 million during the years ended December 31, 2021 and 2020, respectively. The Company recorded a (benefit) provision for credit losses on loans totaling ($4.9) million, and $22.6 million for the years ended December 31, 2021 and 2020, respectively. The decrease in the provision for credit losses recorded in the year ended December 31, 2021, was primarily due to improved economic conditions. We believe that at December 31, 2021, the allowance was sufficient to absorb losses inherent in our loan portfolio. The allowance for credit losses represented 0.56% and 0.67% of gross loans outstanding at December 31, 2021 and 2020. The allowance for credit losses represented 248.7% of non-performing loans at December 31, 2021 compared to 214.3% at December 31, 2020.

At December 31, 2021, we had one active forbearance for held-to-maturity securities with an outstanding balance of $21.0 million. During the time this security is in forbearance, it is considered current and as such, continues to accrue interest at its original contractual terms. This resulted in the ACL for held-to-maturity securities totaling $0.9 million at December 31, 2021.

19

The following table sets forth changes in, and the balance of, our Allowance for credit losses.

For the year ended December 31,

For the year ended December 31,

(Dollars in thousands)

2021

2020

Balance at beginning of period

$

45,153

$

21,751

Loans- CECL Adoption

379

Loans- Allowance recorded at the time of Acquisition

4,099

Loans- Charge-off

(5,134)

(4,005)

Loans- Recovery

2,015

366

Loans- (Benefit) Provision

(4,899)

22,563

Allowance for Credit Losses - Loans

$

37,135

$

45,153

Balance at beginning of period

$

907

$

HTM Securities- CECL Adoption

340

HTM Securities- (Benefit) Provision

(45)

567

Allowance for HTM Securities losses

$

862

$

907

Balance at beginning of period

$

1,815

$

Off-Balance Sheet - CECL Adoption

553

Off-Balance Sheet- (Benefit) Provision

(606)

1,262

Allowance for Off-Balance Sheet losses

$

1,209

$

1,815

Allowance for Credit Losses

$

39,206

$

47,875

20

The following table sets forth changes in, and the balance of, our Allowance for credit losses - loans.

At and for the years ended December 31, 

 

(Dollars in thousands)

    

2021

    

2020

    

2019

    

2018

    

2017

Balance at beginning of year

$

45,153

$

21,751

$

20,945

$

20,351

$

22,229

Allowance recorded at the time of Acquisition

4,099

CECL Adoption

379

(Benefit) provision for credit losses

 

(4,899)

 

22,563

 

2,811

 

575

 

9,861

Loans charged-off:

 

  

 

  

 

  

 

  

 

  

Multi-family residential

 

(43)

 

 

(190)

 

(99)

 

(454)

Commercial real estate

 

(64)

 

 

 

 

(4)

One-to-four family mixed-use property

 

(33)

 

(3)

 

(89)

 

(3)

 

(39)

One-to-four family residential

 

 

 

(113)

 

(1)

 

(415)

SBA

 

 

(178)

 

 

(392)

 

(212)

Taxi medallion

 

(2,758)

 

(1,075)

 

 

(393)

 

(11,283)

Commercial business and other loans

 

(2,236)

 

(2,749)

 

(2,386)

 

(44)

 

(65)

Total loans charged-off

 

(5,134)

 

(4,005)

 

(2,778)

 

(932)

 

(12,472)

Recoveries:

 

  

 

  

 

  

 

  

 

  

Mortgage loans

 

300

 

188

 

291

 

711

 

595

SBA, commercial business and other loans

 

258

 

178

 

348

 

97

 

138

Taxi medallion

 

1,457

 

 

134

 

143

 

Total recoveries

 

2,015

 

366

 

773

 

951

 

733

Net (charge-offs) recoveries

 

(3,119)

 

(3,639)

 

(2,005)

 

19

 

(11,739)

Balance at end of year

$

37,135

$

45,153

$

21,751

$

20,945

$

20,351

Ratio of net charge-offs (recoveries) during the year to average loans outstanding during the year

 

0.05

%  

 

0.06

%  

 

0.04

%  

 

%  

 

0.24

%

Ratio of allowance for credit losses to gross loans at end of the year

 

0.56

%  

 

0.67

%  

 

0.38

%  

 

0.38

%  

 

0.39

%  

Ratio of allowance for credit losses to non-accrual loans at the end of the year

248.66

%  

 

246.40

%  

 

169.76

%  

 

128.87

%  

 

129.54

%  

Ratio of allowance for credit losses to non-performing loans at the end of the year

 

248.66

%  

 

214.27

%  

 

164.05

%  

 

128.87

%  

 

112.23

%  

Ratio of allowance for credit losses to non-performing assets at the end of the year

 

248.66

%  

 

213.91

%  

 

160.73

%  

 

128.60

%  

 

112.23

%  

21

The following table sets forth our allocation of the allowance for credit losses to the total amount for loans in each of the loan categories listed at the dates indicated. The numbers contained in the “Amount” column indicate the allowance for credit losses allocated for each loan category. The numbers contained in the column entitled “Percentage of Loans in Category to Total Loans” indicate the total amount of loans in each loan category as a percentage of our loan portfolio.

At December 31, 

 

2021

2020

2019

2018

2017

 

Percent

Percent

Percent

Percent

Percent

 

of Loans in

of Loans in

of Loans in

of Loans in

of Loans in

 

Category to

Category to

Category to

Category to

Category to

 

Loan Category

    

Amount

    

Total loans

    

Amount

    

Total loans

    

Amount

    

Total loans

    

Amount

    

Total loans

    

Amount

    

Total loans

(Dollars in thousands)

 

Mortgage loans:

Multi-family residential

$

8,185

 

37.94

%  

$

6,557

 

37.81

%  

$

5,391

 

38.88

%  

$

5,676

 

41.00

%  

$

5,823

 

44.08

%  

Commercial real estate

 

7,158

 

26.77

 

8,327

 

26.18

 

4,429

 

27.48

 

4,315

 

27.86

 

4,643

 

26.51

One-to-four family mixed-use property

 

1,755

 

8.62

 

1,986

 

9.00

 

1,817

 

10.29

 

1,867

 

10.44

 

2,545

 

10.93

One-to-four family residential

 

784

 

4.04

 

869

 

3.66

 

756

 

3.27

 

749

 

3.44

 

1,082

 

3.50

Co-operative apartment

 

 

0.13

 

 

0.12

 

 

0.15

 

 

0.15

 

 

0.13

Construction

 

186

 

0.90

 

497

 

1.24

 

441

 

1.18

 

329

 

0.91

 

68

 

0.16

Gross mortgage loans

 

18,068

 

78.40

 

18,236

 

78.01

 

12,834

 

81.25

 

12,936

 

83.80

 

14,161

 

85.31

Non-mortgage loans:

Small Business Administration

 

1,209

 

1.41

 

2,251

 

2.50

 

363

 

0.25

 

418

 

0.27

 

669

 

0.36

Taxi medallion

 

 

 

 

0.04

 

 

0.06

 

 

0.08

 

 

0.13

Commercial business and other

 

17,858

 

20.19

 

24,666

 

19.45

 

8,554

 

18.44

 

7,591

 

15.85

 

5,521

 

14.20

Gross non-mortgage loans

 

19,067

 

21.60

 

26,917

 

21.99

 

8,917

 

18.75

 

8,009

 

16.20

 

6,190

 

14.69

Total loans

$

37,135

 

100.00

%  

$

45,153

 

100.00

%  

$

21,751

 

100.00

%  

$

20,945

 

100.00

%  

$

20,351

 

100.00

%  

Investment Activities

General. Our investment policy is designed primarily to manage the interest rate sensitivity of our overall assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement our lending activities and to provide and maintain liquidity. In establishing our investment strategies, we consider our business and growth strategies, the economic environment, our interest rate risk exposure, our interest rate sensitivity “gap” position, the types of securities to be held, and other factors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview—Management Strategy” in Item 7 of this Annual Report.

Although we have authority to invest in various types of assets, we primarily invest in mortgage-backed securities, securities issued by mutual or bond funds that invest in government and government agency securities, municipal bonds, corporate bonds and collateralized loan obligations (“CLO”). We did not hold any issues of foreign sovereign debt at December 31, 2021 and 2020.

Our ALCO Investment Committee meets quarterly to monitor investment transactions and to establish investment strategy. The Board of Directors reviews the investment policy on an annual basis and investment activity on a monthly basis.

22

We classify our investment securities as available for sale when management intends to hold the securities for an indefinite period of time or when the securities may be utilized for tactical asset/liability purposes and may be sold from time to time to effectively manage interest rate exposure and resultant prepayment risk and liquidity needs. Securities are classified as held-to-maturity when management intends to hold the securities until maturity. We carry some of our investments under the fair value option, totaling $14.6 million and $14.5 million at December 31, 2021 and 2020, respectively. Unrealized gains and losses for investments carried under the fair value option are included in our Consolidated Statements of Income. Unrealized gains and losses on securities available for sale, are excluded from earnings and included in accumulated other comprehensive loss, net of taxes. Securities held-to-maturity are carried at their amortized cost basis. At December 31, 2021, we had $777.2 million in securities available for sale and $57.9 million in securities held-to-maturity, which together represented 10.38% of total assets. These securities had an aggregate market value at December 31, 2021 that was approximately 1.2 times the amount of our equity at that date.

The Company’s estimate of expected credit losses for held-to-maturity debt securities is based on historical information, current conditions and a reasonable and supportable forecast. The Company’s portfolio is made up of three securities totaling $58.7 million (before allowance for credit losses): the first with an amortized cost of $29.9 million structured similar to a commercial owner occupied loan and modeled for credit losses similar to commercial business loans secured by real estate with an allowance for credit losses of $0.2 million at December 31, 2021; the second with an amortized cost of $21.0 million that currently is under forbearance with an individually evaluated allowance for credit loss of $0.6 million at December 31, 2021; and the third with an amortized cost of $7.9 million issued and guaranteed by Fannie Mae, which is a government sponsored enterprise that has a credit rating and perceived credit risk comparable to the U.S. government. Accordingly, the Company assumes a zero loss expectation from the Fannie Mae security. The security currently in forbearance is considered current and as such, continues to accrue interest at its original contractual terms.

23

The table below sets forth certain information regarding the amortized cost and market values of our securities portfolio, interest-earning deposits and federal funds sold, at the dates indicated. Securities available for sale are recorded at market value.

At December 31, 

2021

2020

2019

Amortized

Fair

Amortized

Fair

Amortized

Fair

    

Cost

    

Value

    

Cost

    

Value

    

Cost

    

Value

(In thousands)

Securities held-to-maturity

 

  

 

  

 

  

 

  

 

  

 

  

Bonds and other debt securities:

 

  

 

  

 

  

 

  

 

  

 

  

Municipal securities (1)

$

50,836

$

53,362

$

50,825

$

54,538

$

50,954

$

53,998

Total bonds and other debt securities

 

50,836

 

53,362

 

50,825

 

54,538

 

50,954

 

53,998

Mortgage-backed securities:

 

  

 

  

 

  

 

  

 

  

 

  

FNMA

 

7,894

 

8,667

 

7,914

 

8,991

 

7,934

 

8,114

Total mortgage-backed securities

 

7,894

 

8,667

 

7,914

 

8,991

 

7,934

 

8,114

Total securities held-to-maturity

 

58,730

 

62,029

 

58,739

 

63,529

 

58,888

 

62,112

Securities available for sale

 

  

 

  

 

  

 

  

 

  

 

  

Bonds and other debt securities:

 

  

 

  

 

  

 

  

 

  

 

  

U.S. government agencies

5,599

5,590

6,452

6,453

Municipal securities

 

 

 

 

 

12,797

 

12,916

Corporate debentures

 

107,423

 

104,370

 

130,000

 

123,865

 

130,000

 

123,050

Collateralized loan obligations

 

81,166

 

80,912

 

100,561

 

99,198

 

100,349

 

99,137

Total bonds and other debt securities

 

194,188

 

190,872

 

237,013

 

229,516

 

243,146

 

235,103

Mutual funds

 

12,485

 

12,485

 

12,703

 

12,703

 

12,216

 

12,216

Equity securities:

 

  

 

  

 

  

 

  

 

  

 

  

Common stock

 

1,695

 

1,695

 

1,295

 

1,295

 

1,332

 

1,332

Total equity securities

 

1,695

 

1,695

 

1,295

 

1,295

 

1,332

 

1,332

Mortgage-backed securities:

 

  

 

  

 

  

 

  

 

  

 

  

REMIC and CMO

 

210,948

 

208,509

 

175,142

 

180,877

 

348,236

 

348,989

GNMA

 

10,572

 

10,286

 

13,009

 

13,053

 

653

 

704

FNMA

 

203,777

 

202,938

 

143,154

 

146,169

 

104,235

 

104,882

FHLMC

 

152,760

 

150,451

 

63,796

 

64,361

 

68,476

 

69,274

Total mortgage-backed securities

 

578,057

 

572,184

 

395,101

 

404,460

 

521,600

 

523,849

Total securities available for sale

 

786,425

 

777,236

 

646,112

 

647,974

 

778,294

 

772,500

Interest-earning deposits and Federal funds sold

 

51,699

 

51,699

133,683

 

133,683

36,511

 

36,511

Total

$

896,854

$

890,964

$

838,534

$

845,186

$

873,693

$

871,123

(1)Does not include allowance for credit losses totaling $0.9 million for each of the years ended December 31, 2021 and 2020.

24

Mortgage-backed securities. At December 31, 2021, we had available for sale and held-to-maturity mortgage-backed securities with a market value totaling $580.9 million, of which $11.5 million was invested in adjustable-rate mortgage-backed securities. The mortgage loans underlying these adjustable-rate securities generally are subject to limitations on annual and lifetime interest rate increases. We anticipate that investments in mortgage-backed securities may continue to be used in the future to supplement mortgage-lending activities. Mortgage-backed securities are more liquid than individual mortgage loans and may be used more easily to collateralize our obligations, including collateralizing of the governmental deposits of the Bank.

The following table sets forth our available for sale mortgage-backed securities purchases, sales and principal repayments for the years indicated:

For the years ended December 31, 

    

2021

    

2020

    

2019

(In thousands)

Balance at beginning of year

$

404,460

$

523,849

$

557,953

Purchases of mortgage-backed securities

 

340,789

 

308,078

 

128,001

Amortization of unearned premium, net of accretion of unearned discount

 

(2,943)

 

(4,100)

 

(3,145)

Net change in unrealized gains (losses) on mortgage-backed securities available for sale

 

(15,232)

 

7,111

 

12,159

Net realized gains (losses) recorded on mortgage-backed securities carried at fair value

 

(2)

 

23

 

2

Sales and maturities of mortgage-backed securities

 

(8,602)

 

(220,971)

 

(26,448)

Principal repayments received on mortgage-backed securities

 

(146,286)

 

(209,530)

 

(144,673)

Net increase (decrease) in mortgage-backed securities

 

167,724

 

(119,389)

 

(34,104)

Balance at end of year

$

572,184

$

404,460

$

523,849

While mortgage-backed securities carry a reduced credit risk as compared to whole loans, such securities remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed and value of such securities.

25

The table below sets forth certain information regarding the amortized cost, fair value, annualized weighted average yields and maturities of our investment in debt and equity securities and interest-earning deposits at December 31, 2021. The stratification of balances is based on stated maturities. Assumptions for repayments and prepayments are not reflected for mortgage-backed securities. Securities available for sale are carried at their fair value in the consolidated financial statements and securities held-to-maturity are carried at their amortized cost.

One year or Less

One to Five Years

Five to Ten Years

More than Ten Years

Total Securities

 

Average

 

Weighted

Weighted

Weighted

Weighted

Remaining

Weighted

 

Amortized

Average

Amortized

Average

Amortized

Average

Amortized

Average

Years to

Amortized

Fair

Average

 

    

Cost

    

Yield

    

Cost

    

Yield

    

Cost

    

Yield

    

Cost

    

Yield

    

Maturity

    

Cost

    

Value

    

Yield

 

(Dollars in thousands)

 

Securities held-to-maturity

Bonds and other debt securities:

Municipal securities (1)

$

 

%  

$

 

%  

$

 

%  

$

50,836

 

3.24

%  

23.73

$

50,836

$

53,362

3.24

%

Total bonds and other debt securities

 

 

 

 

 

 

 

50,836

 

3.24

 

23.73

 

50,836

 

53,362

3.24

Mortgage-backed securities:

FNMA

 

 

 

 

 

 

 

7,894

 

3.31

 

11.34

 

7,894

 

8,667

3.31

Total mortgage-backed securities

 

 

 

 

 

 

 

7,894

 

3.31

 

11.34

 

7,894

 

8,667

3.31

Securities available for sale

Bonds and other debt securities:

US govt. and agencies

 

 

 

 

 

 

 

5,599

 

1.80

 

21.11

 

5,599

5,590

1.80

Corporate debentures

 

 

 

20,000

 

1.70

 

87,423

 

2.19

 

 

 

6.04

 

107,423

 

104,370

2.10

CLO

 

 

 

 

 

76,150

 

1.80

 

5,016

 

2.02

 

8.99

 

81,166

 

80,912

1.81

Total bonds and other debt securities

 

 

 

20,000

 

1.70

 

163,573

 

2.01

 

10,615

 

1.90

 

7.71

 

194,188

 

190,872

1.97

Mutual funds

 

12,485

 

1.16

 

 

 

 

 

 

 

12,485

 

12,485

1.16

Equity securities:

Common stock

 

 

 

 

 

 

 

1,695

 

1.59

 

 

1,695

 

1,695

1.59

Total equity securities

 

 

 

 

 

 

 

1,695

 

1.59

 

 

1,695

 

1,695

1.59

Mortgage-backed securities:

REMIC and CMO

 

 

 

 

 

 

 

210,948

 

1.89

 

30.60

 

210,948

 

208,509

1.89

GNMA

 

 

 

 

 

186

 

7.98

 

10,386

 

2.11

 

27.81

 

10,572

 

10,286

2.21

FNMA

 

 

 

12,618

 

2.96

 

25,025

 

1.53

 

166,134

 

2.26

 

18.16

 

203,777

 

202,938

2.21

FHLMC

 

 

 

 

 

21,474

 

1.58

 

131,286

 

1.88

 

18.73

 

152,760

 

150,451

1.84

Total mortgage-backed securities

 

 

 

12,618

 

2.96

 

46,685

 

1.58

 

518,754

 

2.01

 

23.03

 

578,057

 

572,184

2.00

Interest-earning deposits

 

51,699

 

0.17

 

 

 

 

 

 

 

51,699

 

51,699

0.17

Total

$

64,184

 

0.36

%  

$

32,618

 

2.19

%  

$

210,258

 

1.91

%  

$

589,794

 

2.13

%  

19.05

$

896,854

$

890,964

1.96

%

(1)Does not include allowance for credit losses totaling $0.9 million.

Other Business Activities

The Company has recently contracted with New York Digital Investment Group (“NYDIG”) to offer bitcoin services to the Bank’s customers as the customers’ request.  NYDIG, through its subsidiaries, holds certain cryptocurrency and money transmitter licenses and will be permitted to provide custody, execution, buying, selling, and holding bitcoin-related services to the Bank’s customers. Pursuant to the proposed program, a customer of the Bank could establish a customer account with NYDIG and buy, hold and sell bitcoin for that customer’s NYDIG account. Under the program, the Bank will not provide bitcoin services directly itself but instead will allow access for its customers to such services through NYDIG. One of the purposes of the Bank offering access to NYDIG’s services is for the Bank to attract new customers. The Bank plans to launch this proposed program with NYDIG in the first quarter of 2022. See “Risk Factors – Our New Arrangement with NYDIG to Offer NYDIG’s Bitcoin Services to Our Customers May expose us to Risks.”

Sources of Funds

General. Deposits, FHLB-NY borrowings, other borrowings, principal and interest payments on loans, mortgage-backed and other securities, and proceeds from sales of loans and securities are our primary sources of funds for lending, investing and other general purposes.

Deposits. We offer a variety of deposit accounts having a range of interest rates and terms. Our deposits primarily consist of savings accounts, money market accounts, demand accounts, NOW accounts and certificates of deposit. We

26

have a relatively stable retail deposit base drawn from our market area through our 24 full-service offices and our Internet Branch. Deposits held at certain full-service branches include deposits obtained by our government banking group. We seek to retain existing depositor relationships by offering quality service and competitive interest rates, while keeping deposit growth within reasonable limits. It is management’s intention to balance its goal to maintain competitive interest rates on deposits while seeking to manage its cost of funds to finance its strategies.

In addition to our full-service offices we operate the Internet Branch and a government banking unit. The Internet Branch currently offers savings accounts, money market accounts, checking accounts, and certificates of deposit. This allows us to compete on a national scale without the geographical constraints of physical locations. At December 31, 2021 and 2020, total deposits at our Internet Branch were $188.0 million and $221.7 million, respectively. The government banking unit provides banking services to public municipalities, including counties, cities, towns, villages, school districts, libraries, fire districts, and the various courts throughout the New York City metropolitan area. At December 31, 2021 and 2020, total deposits in our government banking unit totaled $1,618.8 million and $1,615.4 million, respectively.

Our core deposits, consisting of savings accounts, NOW accounts, money market accounts, and non-interest bearing demand accounts, are typically more stable and lower costing than other sources of funding. However, the flow of deposits into a particular type of account is influenced significantly by general economic conditions, changes in prevailing interest rates, and competition. We experienced an increase in our due to depositors’ during 2021 of $242.8 million, primarily due to growth in our core deposits. During the year ended December 31, 2021, the cost of our interest-bearing due to depositors’ accounts decreased 56 basis points to 0.38% from 0.94% for the year ended December 31, 2020. The decrease in the cost of deposits was primarily due to the Company’s quick response to the Federal Reserve lowering rates. While we are unable to predict the direction of future interest rate changes, if interest rates would rise during 2022, the result could be an increase in our cost of deposits, which could reduce our net interest margin. Similarly, if interest rates remain at their current level or decline in 2022, we could see a decline in our cost of deposits, which could increase our net interest margin.

Included in deposits are certificates of deposit with balances of $250,000 or more (excluding brokered deposits issued in $1,000 amounts under a master certificate of deposit) was $217.5 million and $266.9 million at December 31, 2021 and 2020, respectively.

We utilize brokered deposits as an additional funding source and to assist in the management of our interest rate risk. At December 31, 2021 and 2020, we had $626.3 million and $1,074.1 million, respectively, classified as brokered deposits. We have obtained brokered certificates of deposit when the interest rate on these deposits is below the prevailing interest rate for non-brokered certificates of deposit with similar maturities in our market, or when obtaining them allowed us to extend the maturities of our deposits at favorable rates compared to borrowing funds with similar maturities, when we are seeking to extend the maturities of our funding to assist in the management of our interest rate risk. Brokered certificates of deposit provide a large deposit for us at a lower operating cost as compared to non-brokered certificates of deposit since we only have one account to maintain versus several accounts with multiple interest and maturity checks. The Depository Trust Company is used as the clearing house, maintaining each deposit under the name of CEDE & Co. These deposits are transferable just like a stock or bond investment and the customer can open the account with only a phone call, just like buying a stock or bond. Unlike non-brokered certificates of deposit, where the deposit amount can be withdrawn with a penalty for any reason, including increasing interest rates, a brokered certificate of deposit can only be withdrawn in the event of the death, or court declared mental incompetence, of the depositor. This allows us to better manage the maturity of our deposits and our interest rate risk. At times, we also utilized brokers to obtain money market deposits. The rate we pay on brokered money market accounts is similar to the rate we pay on non-brokered money market accounts, and the rate is agreed to in a contract between the Bank and the broker. These accounts are similar to brokered certificates of deposit accounts in that we only maintain one account for the total deposit per broker, with the broker maintaining the detailed records of each depositor.

We also offer access to FDIC insurance coverage in excess of $250,000 through the IntraFi Network which arranges for placement of funds into certificate of deposit accounts, demand accounts or money market accounts issued by other member banks of the network in increments of less than $250,000 to ensure that both principal and interest are eligible for full FDIC deposit insurance. This allows us to accept deposits in excess of $250,000 from a depositor and to place the deposits through the network to other member banks to provide full FDIC deposit insurance coverage. We may

27

receive deposits from other member banks in exchange for the deposits we place into the network. We may also obtain deposits from other network member banks without placing deposits into the network. We will obtain deposits in this manner primarily as a short-term funding source. We also can place deposits with other member banks without receiving deposits from other member banks. Depositors are allowed to withdraw funds, with a penalty, from these accounts at one or more of the member banks that hold the deposits. Additionally, we place a portion of our government deposits in IntraFi Network money market and demand accounts which does not require us to provide collateral. This allows us to invest our funds in higher yielding assets. At December 31, 2021 and 2020, the Bank held IntraFi Network deposits totaling $817.6 million and $1,452.7 million, respectively, of which $55.0 million and $720.1 million, respectively, were classified as brokered deposits. The Company had interest rate swaps on brokered CDs totaling $75.0 million at December 31, 2021 and none at December 31, 2020. At December 31, 2021, the interest rate swaps on brokered CDs had an average cost of 0.52%.

The following table sets forth the distribution of our deposit accounts at the dates indicated and the weighted average nominal interest rates on each category of deposits presented.

 

At December 31, 

 

2021

 

2020

 

2019

    

    

    

Weighted

    

    

    

Weighted

    

    

    

Weighted

 

Percent

 

Average

 

Percent

 

Average

 

Percent

 

Average

 

of Total

 

Nominal

 

of Total

 

Nominal

 

of Total

 

Nominal

 

Amount

 

Deposits

 

Rate

 

Amount

 

Deposits

 

Rate

 

Amount

 

Deposits

 

Rate

 

(Dollars in thousands)

Savings accounts

$

156,554

 

2.45

%  

0.13

%  

$

168,183

 

2.74

%  

0.18

%  

$

191,485

 

3.78

%  

0.67

%

NOW accounts (1)

 

1,920,779

 

30.08

 

0.11

 

2,323,172

 

37.86

 

0.28

 

1,365,591

 

26.95

 

1.47

Demand accounts (2)

 

967,621

 

15.15

 

0.00

 

778,672

 

12.69

 

0.00

 

435,072

 

8.59

 

0.00

Mortgagors' escrow deposits

 

51,913

 

0.81

 

0.01

 

45,622

 

0.74

 

0.02

 

44,375

 

0.88

 

0.28

Total

 

3,096,867

 

48.50

 

0.07

 

3,315,649

 

54.03

 

0.21

 

2,036,523

 

40.20

 

1.05

Money market accounts (3)

 

2,342,003

 

36.68

 

0.22

 

1,682,345

 

27.42

 

0.50

 

1,592,011

 

31.42

 

1.87

Certificate of deposit accounts with original maturities of:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Less than 6 Months (4)

 

128,745

 

2.02

 

0.12

 

113,537

 

1.85

 

0.05

 

140,939

 

2.78

 

1.86

6 to less than 12 Months (5)

 

161,624

 

2.53

 

0.33

 

349,621

 

5.70

 

0.48

 

257,408

 

5.08

 

1.85

12 to less than 30 Months (6)

 

530,273

 

8.30

 

0.45

 

523,815

 

8.54

 

1.01

 

779,964

 

15.39

 

2.36

30 to less than 48 Months (7)

 

52,726

 

0.83

 

0.83

 

37,250

 

0.61

 

2.44

 

117,028

 

2.31

 

2.24

48 to less than 72 Months (8)

 

70,030

 

1.10

 

2.64

 

84,970

 

1.38

 

2.51

 

113,622

 

2.24

 

2.27

72 Months or more

 

3,177

 

0.05

 

0.50

 

29,168

 

0.46

 

3.17

 

28,929

 

0.57

 

3.13

Total certificate of deposit accounts

 

946,575

 

14.82

 

0.57

 

1,138,361

 

18.55

 

0.97

 

1,437,890

 

28.38

 

2.22

Total deposits (9)

$

6,385,445

 

100.00

%  

0.20

%  

$

6,136,355

 

100.00

%  

0.43

%  

$

5,066,424

 

100.00

%  

1.64

%

(1)Includes brokered deposits of $178.9 million and $720.1 million at December 31, 2021 and 2020, respectively.
(2)Includes brokered deposits of $2.1 million, and $145.0 million at December 31, 2020, and 2019, respectively.
(3)Includes brokered deposits of $251.1 million and $102.9 million at December 31, 2021, and 2020, respectively.
(4)Includes brokered deposits of $119.0 million, $116.5 million, and $138.3 million at December 31, 2021, 2020, and 2019, respectively.
(5)Includes brokered deposits of $20.0 million, at December 31, 2020.
(6)Includes brokered deposits of $67.9 million, $77.8 million, and $31.1 million at December 31, 2021, 2020, and 2019, respectively.
(7)Includes brokered deposits of $25.4 million, and $49.7 million at December 31, 2020, and 2019 respectively.
(8)Includes brokered deposits of $9.3 million, $9.3 million and $24.6 million at December 31, 2021, 2020 and 2019, respectively.
(9)Include in the above balances are IRA and Keogh deposits totaling $208.6 million, $107.9 million, and $68.8 million at December 31, 2021, 2020, and 2019, respectively.

28

The following table presents by various rate categories, the amount of time deposit accounts outstanding at the dates indicated, and the years to maturity of the certificate accounts outstanding at the periods indicated:

 

At December 31, 2021

 

At December 31, 

 

Within

 

One to

    

2021

    

2020

    

2019

    

One Year

    

Three Years

    

Thereafter

 

(In thousands)

Interest rate:

  

  

  

  

  

  

1.99% or less(1)

$

878,744

$

949,274

$

530,707

$

742,857

$

111,833

$

24,054

2.00% to 2.99%(2)  

 

37,917

 

131,239

 

847,804

 

12,772

 

24,695

 

450

3.00% to 3.99% 

 

29,914

 

57,848

 

59,379

 

245

 

29,669

 

Total

$

946,575

$

1,138,361

$

1,437,890

$

755,874

$

166,197

$

24,504

(1)Includes brokered deposits of $186.9 million, $213.6 million, and $153.7 million at December 31, 2021, 2020, and 2019, respectively.
(2)Includes brokered deposits of $9.3 million, $35.4 million, and $90.0 million at December 31, 2021, 2020, and 2019, respectively.

The following table presents by remaining maturity categories the amount of certificate of deposit accounts with balances of $250,000 or more at December 31, 2021 and their annualized weighted average interest rates.

    

    

Weighted

 

Amount

Average Rate

 

(Dollars in thousands)

 

Maturity Period:

 

  

 

  

Three months or less

$

68,360

 

0.51

%

Over three through six months

 

44,365

 

0.47

Over six through 12 months

 

47,583

 

0.43

Over 12 months

 

57,220

 

1.49

Total

$

217,528

 

0.74

%

The following table presents the deposit activity, including mortgagors’ escrow deposits, for the periods indicated.

For the year ended December 31, 

    

2021

    

2020

    

2019

 

(In thousands)

Net deposits

$

228,642

$

342,126

$

17,322

Acquired in Empire acquisition

685,393

Amortization of premiums, net

 

124

 

100

 

261

Interest on deposits

 

20,324

 

42,312

 

88,057

Net increase in deposits

$

249,090

$

1,069,931

$

105,640

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The following table sets forth the distribution of our average deposit accounts for the years indicated, the percentage of total deposit portfolio, and the average interest cost of each deposit category presented. Average balances for all years shown are derived from daily balances.

At December 31, 

 

2021

2020

2019

 

Percent

Percent

Percent

 

Average

of Total

Average

Average

of Total

Average

Average

of Total

Average

 

    

Balance

    

Deposits

    

Cost

    

Balance

    

Deposits

    

Cost

    

Balance

    

Deposits

    

Cost

 

(Dollars in thousands)

 

Savings accounts

$

157,640

 

2.45

%  

0.16

%  

$

176,443

 

2.74

%  

0.28

%  

$

198,374

 

3.96

%  

0.69

%  

NOW accounts

 

2,165,762

 

30.08

 

0.25

 

1,603,402

 

37.86

 

0.58

 

1,434,440

 

28.61

 

1.64

Demand accounts

 

922,741

 

15.15

 

 

583,235

 

12.69

 

 

407,450

 

8.13

 

Mortgagors' escrow deposits

 

77,552

 

0.81

 

0.01

 

70,829

 

0.74

 

0.06

 

70,209

 

1.40

 

0.33

Total

 

3,323,695

 

48.50

 

0.17

 

2,433,909

 

54.03

 

0.40

 

2,110,473

 

42.10

 

1.19

Money market accounts

 

2,059,431

 

36.68

 

0.35

 

1,561,496

 

27.42

 

0.92

 

1,370,038

 

27.33

 

2.03

Certificate of deposit accounts

 

1,033,187

 

14.82

 

0.71

 

1,167,865

 

18.55

 

1.55

 

1,532,440

 

30.57

 

2.29

Total deposits

$

6,416,313

 

100.00

%  

0.32

%  

$

5,163,270

 

100.00

%  

0.82

%  

$

5,012,951

 

100.00

%  

1.76

%

Borrowings. Although deposits are our primary source of funds, we also use borrowings as an alternative and cost effective source of funds for lending, investing and other general purposes. The Bank is a member of, and is eligible to obtain advances from, the FHLB-NY. Such advances generally are secured by a blanket lien against the Bank’s mortgage portfolio and the Bank’s investment in the stock of the FHLB-NY. In addition, the Bank may pledge mortgage-backed securities to obtain advances from the FHLB-NY. See “— Regulation — Federal Home Loan Bank System.” The maximum amount that the FHLB-NY will advance fluctuates from time to time in accordance with the policies of the FHLB-NY. The Bank may also enter into repurchase agreements with broker-dealers and the FHLB-NY. These agreements are recorded as financing transactions and the obligations to repurchase are reflected as a liability in our consolidated financial statements. In addition, we issued junior subordinated debentures with a total par of $61.9 million in 2007. These junior subordinated debentures are carried at fair value in the Consolidated Statement of Financial Condition. In 2021, the Company issued subordinated debt with an aggregated principal amount of $125.0 million, receiving net proceeds totaling $122.8 million. The subordinated debt was issued at 3.125% fixed-to-floating rate maturing in 2031. The debt is callable at par quarterly through its maturity date beginning December 1, 2026.

The Company uses interest rate swaps on borrowings to help mitigate the impact interest rate increases have on our cost of funds. At December 31, 2021 and 2020, the Company had forward interest rate swaps on borrowings totaling $921.5 million and $1,021.5 million, respectively. For the year ended December 31, 2021 and 2020, the interest rate swaps on borrowings had an average cost of 2.31% and 2.05%, respectively.

The average cost of borrowings was 2.24%, 1.97%, and 2.31% for the years ended December 31, 2021, 2020, and 2019, respectively. The average balances of borrowings were $905.1 million, $1,361.6 million, and $1,251.5 million for the same years, respectively.

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The following table sets forth certain information regarding our borrowings at or for the periods ended on the dates indicated.

At or for the years ended December 31, 

 

    

2021

    

2020

    

2019

 

(Dollars in thousands)

 

FHLB-NY Advances

 

  

 

  

 

  

Average balance outstanding

$

694,824

$

1,147,364

$

1,133,025

Maximum amount outstanding at any month end during the period

 

786,736

 

1,498,059

 

1,334,304

Balance outstanding at the end of period

 

611,186

 

797,201

 

1,118,528

Weighted average interest rate during the period

 

1.96

%  

 

1.77

%  

 

1.95

% ��

Weighted average interest rate at end of period

 

0.38

 

0.56

 

1.85

Other Borrowings

 

  

 

  

 

  

Average balance outstanding

$

210,270

$

214,195

$

118,427

Maximum amount outstanding at any month end during the period

 

449,776

 

419,715

 

152,224

Balance outstanding at the end of period

 

204,358

 

223,694

 

118,703

Weighted average interest rate during the period

 

3.30

%  

 

3.05

%  

 

5.78

%  

Weighted average interest rate at end of period

 

2.61

 

2.78

 

5.06

Total Borrowings

 

  

 

  

 

  

Average balance outstanding

$

905,094

$

1,361,559

$

1,251,452

Maximum amount outstanding at any month end during the period

 

1,236,512

 

1,617,582

 

1,452,490

Balance outstanding at the end of period

 

815,544

 

1,020,895

 

1,237,231

Weighted average interest rate during the period

 

2.24

%  

 

1.97

%  

 

2.31

%  

Weighted average interest rate at end of period

 

0.94

 

1.05

 

2.16

Subsidiary Activities

At December 31, 2021, the Holding Company had four wholly owned subsidiaries: the Bank and the Trusts. In addition, the Bank had two wholly owned subsidiaries: FSB Properties Inc and Flushing Service Corporation. In 2021, Flushing Preferred Funding Corporation (“FPFC”) was dissolved.

FSB Properties Inc., which is incorporated in the State of New York, was formed in 1976 with the original purpose of engaging in joint venture real estate equity investments. These activities were discontinued in 1986 and no joint venture property remains. FSB Properties Inc. is currently used solely to hold title to real estate owned that is obtained via foreclosure.
Flushing Service Corporation, which is incorporated in the State of New York, was formed in 1998 to market insurance products and mutual funds.
Flushing Preferred Funding Corporation, which was dissolved as of June 30, 2021, was incorporated in the State of Delaware, was formed in 1997 as a real estate investment trust for the purpose of acquiring, holding and managing real estate mortgage assets. It was available as an additional vehicle for access by the Company to the capital markets for future opportunities.

Human Capital

At December 31, 2021, we had 523 full-time employees and 16 part-time employees. None of our employees is represented by a collective bargaining unit, and we consider our relationship with our employees to be good. At the present time, the Holding Company only employs certain officers of the Bank. These employees do not receive any extra compensation as officers of the Holding Company.

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Oversight & Governance. Our Board of Directors and Board committees provide oversight on certain human capital matters, including our inclusion and diversity program and initiatives. The Board of Directors is responsible for discussing evaluating and reviewing regular updates from management with regard to human capital matters. Our Board of Directors is comprised of diverse cultures, ethnicity, and gender.

Learning and Development. The Company believes that it must find, develop and retain its employees. The Company invests in its employees by providing quality training and learning opportunities, promoting inclusion and diversity and upholding a high standard of ethics and respect for human rights.

Diversity, Equity & Inclusion. The Company is responsible for creating an equitable workplace ensuring diversity at the management and board levels. We pride ourselves on establishing a diverse workforce that serves our diverse customer base in the New York City metro area. At December 31, 2021, our employees were able to speak more than 20 different languages. Our inclusion and diversity program focuses on workforce (our team members), workplace (culture, tools and programs) and community. We believe that our business is strengthened by a diverse workforce that reflects the communities in which we operate. We believe all of our team members should be treated with respect and equality, regardless of gender, ethnicity, sexual orientation, gender identity, religious beliefs, or other characteristics. We have undertaken a series of initiatives to further enhance our existing diversity and inclusion programs, including Flushing Bank Serves volunteer program and the creation of a Diversity & Inclusion Committee. We have also broadened our focus on inclusion and diversity by including social and racial equity in our conversations and equipping and empowering our team leaders with appropriate tools and training.

Total Rewards. The Company believes that our future success largely depends upon our continued ability to attract and retain highly skilled employees. We provide our employees with a rich total rewards program which includes:

Competitive base salaries;

Incentive bonus opportunities;

Equity ownership;

401(k) plan access;

Healthcare and other insurance programs,

Health savings and flexible spending accounts

Paid time off;

Family leave;

Employee assistance program and,

Tuition assistance.

Omnibus Incentive Plan

The 2014 Omnibus Incentive Plan (“2014 Omnibus Plan”) became effective on May 20, 2014 after adoption by the Board of Directors and approval by the stockholders. The 2014 Omnibus Plan authorizes the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) to grant a variety of equity compensation awards as well as long-term and annual cash incentive awards. To the extent that an award under the 2014 Omnibus Plan is cancelled, expired, forfeited, settled in cash, settled by issuance of fewer shares than the number underlying the award, or otherwise terminated without delivery of shares to a participant in payment of the exercise price or taxes relating to an award, the shares retained by or returned to the Company will be available for future issuance under the 2014 Omnibus Plan. The 2014 Omnibus Plan originally covered the issuance of 1,100,000 shares, which was increased. On May 31, 2017,

32

stockholders approved an amendment to the 2014 Omnibus Plan authorizing an additional 672,000 shares available for future issuance. In addition, that amendment eliminated, in the case of stock options and stock appreciation rights, the ability to recycle shares used to satisfy the exercise price or taxes for such awards. On May 18, 2021, stockholders approved a further amendment of the 2014 Omnibus Plan to authorize an additional 1,100,000 shares for future issuance. Including the additional shares authorized from the amendments, 1,171,675 shares remained available for future issuance under the 2014 Omnibus Plan at December 31, 2021.

For additional information concerning this plan, see “Note 12 (“Stock-Based Compensation”) of Notes to Consolidated Financial Statements” in Item 8 of this Annual Report.

REGULATION

General

The Bank is a New York State-chartered commercial bank and its deposit accounts are insured under the Deposit Insurance Fund (the “DIF”) of the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable legal limits. The Bank is subject to extensive regulation and supervision by the New York State Department of Financial Services (“NYDFS”), as its chartering agency, by the FDIC, as its insurer of deposits, and to a lesser extent by the Consumer Financial Protection Bureau (the “CFPB”), which was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in 2011 to implement and enforce consumer protection laws applying to banks. The Bank must file reports with the NYDFS, the FDIC, and the CFPB concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other depository institutions. Furthermore, the Bank is periodically examined by the NYDFS and the FDIC to assess compliance with various regulatory requirements, including safety and soundness considerations. This regulation and supervision established a comprehensive framework of activities in which a commercial bank can engage and is intended primarily for the protection of the FDIC insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with its supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss allowances for regulatory purposes. Any change in such regulation, whether by the NYDFS, the FDIC, or through legislation, could have a material adverse impact on the Company, the Bank and its operations, and the Company’s shareholders. While the regulatory environment has entered a period of rebalancing of the post financial crisis framework, we expect that our business will remain subject to extensive regulation and supervision.

The Company is required to file certain reports under, and otherwise comply with, the rules and regulations of the Federal Reserve Board of Governors (the “FRB”), the FDIC, the NYDFS, and the Securities and Exchange Commission (the “SEC”) under federal securities laws. In addition, the FRB periodically examines the Company. Certain of the regulatory requirements applicable to the Bank and the Company are referred to below or elsewhere herein. However, such discussion is not meant to be a complete explanation of all laws and regulations and is qualified in its entirety by reference to the actual laws and regulations.

COVID-19 Legislation

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) in response to the coronavirus pandemic. This legislation aimed at providing relief for individuals and businesses that have been negatively impacted by the coronavirus pandemic. On December 27, 2020, the Consolidated Appropriations Act, 2021 (the “CAA”) was signed into law, providing for, among other things, further suspension of the exception for loan modifications to not be classified as TDRs if certain criteria are met, as described below. The CARES Act, as amended by the CAA, includes a provision for the Company to opt out of applying the TDR accounting guidance in Accounting Standards Codification (“ASC”) 310-40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of i) January 2, 2022 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2019. The CARES Act includes the Paycheck Protection Program (“PPP”), a program

33

to aid small and medium- sized businesses through federally guaranteed loans distributed through banks and other financial institutions. These loans were intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills.

Impact of COVID-19

Overview

In March 2020, the World Health Organization recognized the outbreak of the novel Coronavirus Disease 2019 (“COVID-19”) as a pandemic. The Spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets we serve. In response to the pandemic, the government placed orders for shelter in place, maintaining social distancing and closed businesses that were not deemed essential.

During these tumultuous times, we were actively assisting our customers by providing short-term forbearances in the form of deferrals of interest, principal and/or escrow for terms ranging from one to twelve months. At December 31, 2021, we had 20 active forbearances for loans with an aggregate outstanding loan balance of approximately $71.9 million resulting in total deferment of $4.8 million in principal, interest and escrow. Given the pandemic and current economic environment, we continue to work with our customers to modify loans. We actively participated in the PPP, closing $138.6 million and $111.6 million of these loans through December 31, 2021 and 2020, respectively. We are one of nine banks in the State of New York participating in the Main Street Lending Program. We are also a proud participant in the FHLB-NY Small Business Recovery Grant Program, helping our customers and communities navigate through the current environment.

Impact on Our Financial Statements and Results of Operations

Financial institutions are dependent upon the ability of their loan customers to meet their loan obligations and the availability of their workforce and vendors. Early in the second quarter of 2020, shelter-at-home mandates and other remediation from the COVID-19 pandemic were enacted. The pandemic and these remediation measures have directly impacted the communities we serve, where commercial activity decreased significantly. As of December 31, 2021, that commercial activity had improved but not returned to pre-pandemic levels. This continuing impact on commercial activity may have continuing adverse results, including on our customers’ ability to meet their obligations to us.

In addition, the economic pressures and uncertainties related to the COVID-19 pandemic have resulted in changes in consumer spending behaviors in the communities we serve, which may negatively impact the demand for loans and other services we offer. However, the Company’s capital and financial resources have not been materially impacted by the pandemic, as our results of operations depend primarily on net interest income, which benefited from the actions taken by the Federal Reserve to counteract the negative economic impact of the pandemic. Future operating results and near-and-long-term financial condition are subject to significant uncertainty. Our funding sources have not changed significantly, and we expect to continue to be able to timely service our debts and its obligations.

The Company has elected that loans temporarily modified for borrowers directly impacted by COVID-19 are not considered TDR, assuming that CARES Act and/or CAA criteria are met and as such, these loans are considered current and continue to accrue interest at its original contractual terms. Loans modified after January 2, 2022 are no longer eligible to be modified under the CARES Act or CAA. The Company was quick to respond to the pandemic with new health and safety measures, including social distancing, appointment banking and expansion of our remote capabilities. Our staff responded to these changes in a superb fashion and continue to provide our customers with excellent service. Today our staff is returning to work with A and B schedules to maintain social distancing. On any given day, as many as 85% of staff have the capability to work from home.

34

The Dodd-Frank Act

The Dodd-Frank Act has significantly impacted the current bank regulatory structure and is expected to continue to affect, into the immediate future, the lending and investment activities and general operations of depository institutions and their holding companies. In addition to creating the CFPB, the Dodd-Frank Act requires the FRB to establish minimum consolidated capital requirements for bank holding companies that are as stringent as those required for insured depository institutions; the components of Tier 1 capital will be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. In addition, the proceeds of trust preferred securities will be excluded from Tier 1 capital unless (i) such securities are issued by bank holding companies with assets of less than $500 million, or (ii) such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with assets of less than $15 billion. The Dodd-Frank Act created a new supervisory structure for oversight of the U.S. financial system, including the establishment of a new council of regulators, the Financial Stability Oversight Council, to monitor and address systemic risks to the financial system. Non-bank financial companies that are deemed to be significant to the stability of the U.S. financial system and all bank holding companies with $50 billion or more in total consolidated assets will be subject to heightened supervision and regulation. The FRB will implement prudential requirements and prompt corrective action procedures for such companies.

The Dodd-Frank Act made many additional changes in banking regulation, including: authorizing depository institutions, for the first time, to pay interest on business checking accounts; requiring originators of securitized loans to retain a percentage of the risk for transferred loans; establishing regulatory rate-setting for certain debit card interchange fees; and establishing a number of reforms for mortgage lending and consumer protection.

The Dodd-Frank Act also broadened the base for FDIC insurance assessments not to be based on deposits, but on the average consolidated total assets less the tangible equity capital of an insured institution. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions, and credit unions to $250,000 per depositor, per FDIC insured bank, per ownership category.

Some of the provisions of the Dodd-Frank Act are not yet in effect. The Dodd-Frank Act requires various federal agencies to promulgate numerous and extensive implementing regulations over the next several years.

Basel III

The Company and the Bank are subject to a comprehensive capital framework for U.S. banking organizations that was issued by the FDIC and FRB in July 2013 (the “Basel III Capital Rules”), subject to phase-in periods for certain components and other provisions. Under the Basel III Capital Rules, the minimum capital ratios are:

4.5% Common Equity Tier 1 (“CET1”) to risk-weighted assets;
6.0% Tier 1 capital that is CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total Capital that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).

The Basel III Capital Rules also introduced a “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer currently is 2.5%. Banking institutions with a ratio of CET1 to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. As of December 31, 2021, the Company and the Bank met all capital adequacy requirements under the Basel III Capital Rules.

Together with the FDIC, the Federal Reserve has issued proposed rules that would simplify the capital treatment of certain capital deductions and adjustments, and the final phase-in period for these capital deductions and adjustments has been indefinitely delayed. In addition, in December 2018, the federal banking agencies finalized rules that would

35

permit bank holding companies and banks to phase-in, for regulatory capital purposes, the day-one impact of the new current expected credit loss accounting rule on retained earnings over a period of three years.

Economic Growth, Regulatory Relief, and Consumer Protection Act

The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Economic Growth Act”), which was signed into law on May 24, 2018, scales back certain requirements of the Dodd-Frank Act and provides other regulatory relief. Title II of the Economic Growth Act provides regulatory relief to community banks, which are generally characterized in the statute as banking organizations with less than $10 billion in total consolidated assets and with limited trading activities. The Economic Growth Act required the federal banking agencies to develop a “community bank leverage ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A financial institution can elect to be subject to this new definition. The federal banking agencies, including the FDIC, have issued a rule pursuant to the Economic Growth Act to establish for institutions with assets of less than $10 billion a “community bank leverage ratio” (the ratio of a bank’s tier 1 capital to average total consolidated assets) of 9% that such institutions may elect to use in lieu of the generally applicable leverage and risk-based capital requirements under Basel III. Pursuant to the CARES Act, the federal banking agencies in August 2020 had set the community bank leverage ratio at lower percentages until Jan. 1, 2022, when the community bank leverage ratio requirement returned to 9%. As of December 31, 2021, the Bank had elected not to be subject to this new definition. See “FDIC Regulations – Prompt Corrective Regulatory Action.”

The Truth in Lending Act (“TILA”) is the commonly used name for Title I of the Consumer Credit Protection Act, passed by Congress in 1968, which is the consumer protection law specifying what information lenders must share with borrowers before giving them a loan or line of credit. This information includes the annual percentage rate, loan terms, and total cost of the loan. Section 101 of the Economic Growth Act amends the TILA to add a safe harbor for "plain vanilla" mortgage loans originated by banking organizations and credit unions with less than $10 billion in total consolidated assets under existing qualified mortgage and ability to pay rules. This amendment would allow community banks to exercise greater discretion in lending decisions.

Section 619 of the Dodd-Frank Act, commonly referred to as the “Volcker Rule,” generally prohibits insured depository institutions and any company affiliated with an insured depository institution from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund. These prohibitions are subject to a number of statutory exemptions, restrictions, and definitions. Under the Economic Growth Act, community banks, (which for this purpose are generally characterized in the statute as banking organizations with less than $10 billion in total consolidated assets with limited trading activities),  are exempt from the Volcker Rule and its proprietary trading prohibitions.

New York State Law

The Bank derives its lending, investment, and other authority primarily from the applicable provisions of New York State Banking Law and the regulations of the NYDFS, as limited by FDIC regulations. Under these laws and regulations, banks, including the Bank, may invest in real estate mortgages, consumer and commercial loans, certain types of debt securities (including certain corporate debt securities, and obligations of federal, state, and local governments and agencies), certain types of corporate equity securities, and certain other assets. The lending powers of New York State-chartered commercial banks are not subject to percentage-of-assets or capital limitations, although there are limits applicable to loans to individual borrowers.

The exercise by an FDIC-insured commercial bank of the lending and investment powers under New York State Banking Law is limited by FDIC regulations and other federal laws and regulations. In particular, the applicable provisions of New York State Banking Law and regulations governing the investment authority and activities of an FDIC-insured state-chartered savings bank and commercial bank have been effectively limited by the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) and the FDIC regulations issued pursuant thereto.

With certain limited exceptions, a New York State-chartered commercial bank may not make loans or extend credit for commercial, corporate, or business purposes (including lease financing) to a single borrower, the aggregate

36

amount of which would be in excess of 15% of the bank’s net worth or up to 25% for loans secured by collateral having an ascertainable market value at least equal to the excess of such loans over the bank’s net worth. The Bank currently complies with all applicable loans-to-one-borrower limitations. At December 31, 2021, the Bank’s largest aggregate amount of outstanding loans to one borrower was $93.8 million, all of which were performing according to their terms. See “— General — Lending Activities.”

Under New York State Banking Law, New York State-chartered stock-form commercial banks may declare and pay dividends out of its net profits, unless there is an impairment of capital, but approval of the NYDFS Superintendent (the “Superintendent”) is required if the total of all dividends declared by the bank in a calendar year would exceed the total of its net profits for that year combined with its retained net profits for the preceding two years less prior dividends paid.

New York State Banking Law gives the Superintendent authority to issue an order to a New York State-chartered banking institution to appear and explain an apparent violation of law, to discontinue unauthorized or unsafe practices, and to keep prescribed books and accounts. Upon a finding by the NYDFS that any director, trustee, or officer of any banking organization has violated any law, or has continued unauthorized or unsafe practices in conducting the business of the banking organization after having been notified by the Superintendent to discontinue such practices, such director, trustee, or officer may be removed from office after notice and opportunity to be heard. The Superintendent also has authority to appoint a conservator or a receiver for a savings or commercial bank under certain circumstances.

The Superintendent of the NYDFS has the authority to appoint a receiver or liquidator of any state-chartered bank or trust company under specified circumstances, including where (i) the bank is conducting its business in an unauthorized or unsafe manner, (ii) the bank has suspended payment of its obligations, or (iii) the bank cannot with safety and expediency continue to do business.

On February 16, 2017, the NYDFS issued the final version of its cybersecurity regulation, which has an effective date of March 1, 2017. The regulation, which is detailed and broad in scope, covers five basic areas.

Governance: The regulation requires senior management and boards of directors to adopt a cybersecurity policy for protecting information systems and most sensitive information. Covered companies are also required to designate a Chief Information Security Officer, who must report to the board annually.

Testing: The regulation requires the conduct of cybersecurity tests and analyses, including a “risk assessment” to “evaluate and categorize risks,” evaluate the integrity and confidentiality of information systems and non-public information, and develop a process to mitigate any identified risks.

Ongoing Requirements: The regulation imposes substantial day-to-day and technical requirements. Among others, we are required to develop and/or maintain access controls for our information systems, ensure the physical security of our computer systems, encrypt or protect personally identifiable information, perform reviews of in-house and externally created applications, train employees, and build an audit trail system.

Vendors: The new regulation also regulates third-party vendors with access to our information technology or non-public information. We are required to develop and implement written policies and procedures to ensure the security of our information technology systems or non-public information that can be accessed by our vendors, including identifying the risks from third-party access, imposing minimum cybersecurity practices for vendors, and creating a due-diligence process for evaluating those vendors.

Reports: The new regulation imposes a notification process for any material cybersecurity event. Within 72 hours, a cybersecurity event that has a “reasonable likelihood” of “materially harming” us or that must be reported to another government or self-regulating agency must be reported to the NYDFS. In addition, an annual compliance certification to the NYDFS from either the board or a senior officer is required.

37

U.S Patriot Act and Money Laundering

The Bank is subject to the Bank Secrecy Act (“BSA”), which incorporates several laws, including the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) and related regulations. The USA PATRIOT Act gives the federal government powers to address money laundering and terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the BSA, Title III of the USA PATRIOT Act implemented measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.

Among other things, Title III of the USA PATRIOT Act and the related regulations require:

Establishment of anti-money laundering compliance programs that include policies, procedures, and internal controls; the designation of a BSA officer; a training program; and independent testing;
Filing of certain reports to Financial Crimes Enforcement Network and law enforcement that are designated to assist in the detection and prevention of money laundering and terrorist financing activities;
Establishment of a program specifying procedures for obtaining and maintaining certain records from customers seeking to open new accounts, including verifying the identity of customers;
In certain circumstances, compliance with enhanced due diligence policies, procedures and controls designed to detect and report money-laundering, terrorist financing and other suspicious activity;
Monitoring account activity for suspicious transactions; and
A heightened level of review for certain high-risk customers or accounts.

The USA PATRIOT Act also includes prohibitions on correspondent accounts for foreign shell banks and requires compliance with record keeping obligations with respect to correspondent accounts of foreign banks.

The bank regulatory agencies have increased the regulatory scrutiny of the BSA and anti-money laundering programs maintained by financial institutions. Significant penalties and fines, as well as other supervisory orders may be imposed on a financial institution for non-compliance with these requirements. In addition, for financial institutions engaging in a merger transaction, federal bank regulatory agencies must consider the effectiveness of the financial institution’s efforts to combat money laundering activities. The Bank has adopted policies and procedures to comply with these requirements.

FDIC Regulations

Capital Requirements. The FDIC has adopted risk-based capital guidelines to which the Bank is subject. The guidelines establish a systematic analytical framework that makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations. The Bank is required to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. The ratio of such regulatory capital to regulatory risk-weighted assets is referred to as a “risk-based capital ratio.” Risk-based capital ratios are determined by allocating assets and specified off-balance-sheet items to risk-weighted categories ranging from 0% to 1250%, with higher levels of capital being required for the categories perceived as representing greater risk.

These guidelines divide an institution’s capital into two tiers. The first tier (“Tier 1”) includes common equity, retained earnings, certain non-cumulative perpetual preferred stock (excluding auction rate issues), and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangible assets (except mortgage servicing rights

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and purchased credit card relationships subject to certain limitations). Supplementary (“Tier 2”) capital includes, among other items, cumulative perpetual and long-term limited-life preferred stock, mandatorily convertible securities, certain hybrid capital instruments, term subordinated debt, and the ALL, subject to certain limitations, and up to 45% of pre-tax net unrealized gains on equity securities with readily determinable fair market values, less required deductions. See “Prompt Corrective Regulatory Action” below.

The regulatory capital regulations of the FDIC and other federal banking agencies provide that the agencies will take into account the exposure of an institution’s capital and economic value to changes in interest rate risk in assessing capital adequacy. According to such agencies, applicable considerations include the quality of the institution’s interest rate risk management process, overall financial condition, and the level of other risks at the institution for which capital is needed. Institutions with significant interest rate risk may be required to hold additional capital. The agencies have issued a joint policy statement providing guidance on interest rate risk management, including a discussion of the critical factors affecting the agencies’ evaluation of interest rate risk in connection with capital adequacy. Institutions that engage in specified amounts of trading activity may be subject to adjustments in the calculation of the risk-based capital requirement to assure sufficient additional capital to support market risk.

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe, for the depository institutions under its jurisdiction, standards that relate to, among other things, internal controls; information and audit systems; loan documentation; credit underwriting; the monitoring of interest rate risk; asset growth; compensation; fees and benefits; and such other operational and managerial standards as the agency deems appropriate. The federal banking agencies have adopted regulations and Interagency Guidelines Establishing Standards for Safety and Soundness (the “Guidelines”) to implement these safety and soundness standards. 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 provide it with an acceptable plan to achieve compliance with the standard, as required by the Federal Deposit Insurance Act, as amended, (the “FDI Act”). The regulations establish deadlines for the submission and review of such safety and soundness compliance plans.

Real Estate Lending Standards. The FDIC and the other federal banking agencies have adopted regulations that prescribe standards for extensions of credit that are (i) secured by real estate, or (ii) made for the purpose of financing construction or improvements on real estate. The FDIC regulations require each institution to establish and maintain written internal real estate lending standards that are consistent with safe and sound banking practices, and appropriate to the size of the institution and the nature and scope of its real estate lending activities. The standards also must be consistent with accompanying FDIC guidelines. The institution’s standards establish requirements for loan portfolio diversification, prudent underwriting (including loan-to-value limits) that are clear and measurable, loan administration procedures, documentation, approval and reporting requirements. The real estate lending policies must reflect consideration of the federal bank regulators’ Interagency Guidelines for Real Estate Lending Policies. Institutions are also permitted to make a limited amount of loans that do not conform to the proposed loan-to-value limitations so long as such exceptions are reviewed and justified appropriately. The FDIC guidelines also list a number of lending situations in which exceptions to the loan-to-value standard are justified.

The FDIC and the FRB have also jointly issued the “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” (the “CRE Guidance”). The CRE Guidance, which addresses land development, construction, and certain multi-family loans, as well as commercial real estate loans, does not establish specific lending limits but rather reinforces and enhances these agencies’ existing regulations and guidelines for such lending and portfolio management. Specifically, the CRE Guidance provides that a bank has a concentration in lending if (1) total reported loans for construction, land development, and other land represent 100% or more of total risk-based capital; or (2) total reported loans secured by multi-family properties, non-farm non-residential properties (excluding those that are owner-occupied), and loans for construction, land development, and other land represent 300% or more of total risk-based capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. If a concentration is present, management must employ heightened risk management practices that address key elements, including board and management oversight, strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, along with maintenance of increased capital levels as needed to support the level of commercial real estate lending.

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Dividend Limitations. The FDIC has authority to use its enforcement powers to prohibit a commercial bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. Federal law prohibits the payment of dividends that will result in the institution failing to meet applicable capital requirements on a pro forma basis. The Bank is also subject to dividend declaration restrictions imposed by New York State law as previously discussed under “New York State Law.”

Investment Activities. Since the enactment of FDICIA, all state-chartered financial institutions, including commercial banks and their subsidiaries, have generally been limited to such activities as principal and equity investments of the type, and in the amount, authorized for national banks. State law, FDICIA, and FDIC regulations permit certain exceptions to these limitations. In addition, the FDIC is authorized to permit institutions to engage in state-authorized activities or investments not permitted for national banks (other than non-subsidiary equity investments) for institutions that meet all applicable capital requirements if it is determined that such activities or investments do not pose a significant risk to the FDIC insurance fund. The Gramm-Leach-Bliley Act of 1999 (the “GLBA”) and FDIC regulations impose certain quantitative and qualitative restrictions on such activities and on a bank’s dealings with a subsidiary that engages in specified activities.

Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For such purposes, the law establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.

Under current FDIC regulations, a bank is deemed to be “well capitalized” if the bank has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 8% or greater, has a common equity tier 1 capital ratio of 6.5% or greater, has a leverage ratio of 5% or greater, and is not subject to any order or final capital directive by the FDIC to meet and maintain a specific capital level for any capital measure. A bank may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it received an unsatisfactory safety and soundness examination rating. As of December 31, 2021, the Bank was a “well-capitalized” bank, as applicably defined. The Dodd-Frank Act made permanent the standard maximum amount of FDIC deposit insurance at $250,000 per depositor. In addition, the deposits of the Bank are insured up to applicable limits by the DIF. In this regard, insured depository institutions are required to pay quarterly deposit insurance assessments to the DIF. Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based upon supervisory evaluations, regulatory capital level, and certain other factors, with less risky institutions paying lower assessments based on the assigned risk levels. An institution’s assessment rate depends upon the category to which it is assigned and certain other factors. Assessment rates range from 1.5 to 40 basis points of the institution’s assessment base, which is calculated as average total assets minus average tangible equity.

Enforcement. 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 by the FDIC. The FDIC has extensive enforcement authority to correct unsafe or unsound practices and violations of law or regulation. Such authority includes the issuance of cease-and-desist orders, assessment of civil money penalties and removal of officers and directors. The FDIC may also appoint a conservator or receiver for a non-member bank under specified circumstances, such as where (i) the bank’s assets are less than its obligations to creditors, (ii) the bank is likely to be unable to pay its obligations or meet depositors’ demands in the normal course of business, or (iii) a substantial dissipation of bank assets or earnings has occurred due to a violation of law of regulation or unsafe or unsound practices. Management does not know of any practice, condition, or violation that would lead to termination of the deposit insurance for the Bank.

Brokered Deposits

FDIC and other regulations generally limit the ability of an insured depository institution to accept, renew or roll over any brokered deposit unless the institution’s capital category is “well capitalized” or, with the FDIC’s approval, “adequately capitalized.” Depository institutions that have brokered deposits in excess of 10% of total assets are subject to increased FDIC deposit insurance premium assessments. However, for institutions that are well capitalized and have a CAMELS composite rating of 1 or 2, reciprocal deposits are deducted from brokered deposits. Section 202 of the Economic

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Growth Act amends the Federal Deposit Insurance Act to exempt a capped amount of reciprocal deposits from treatment as brokered deposits for certain insured depository institutions.

Undercapitalized institutions are not permitted to accept brokered deposits. Pursuant to the regulations the Bank, as a well-capitalized institution, may accept brokered deposits.

Incentive Compensation Guidance

Federal banking agencies and the NYDFS have issued comprehensive guidance intended to ensure that the incentive compensation policies of banking organizations, including bank holding companies, do not undermine the safety and soundness of those organizations by encouraging excessive risk-taking. The incentive compensation guidance sets expectations for banking organizations concerning their incentive compensation arrangements and related risk-management, control and governance processes. In addition, under the incentive compensation guidance, a banking organization’s federal supervisor, which for the Bank is the FDIC and the Company is the FRB, may initiate enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the organization. Further, provisions of Basel III described above limit discretionary bonus payments to bank and bank holding company executives if the institution’s regulatory capital ratios fail to exceed certain thresholds. The scope and content of the banking regulators’ policies on incentive compensation are likely to continue evolving.

Transactions with Affiliates

Sections 23A and 23B of the Federal Reserve Act and FRB’s Regulation W generally:

Limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one  affiliate;
Limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with all affiliates and;
Require that all such transactions be on terms substantially the same, or at least favorable to, the bank or subsidiary, as those provided to a non-affiliate.

An affiliate of a bank is any company or entity which controls, is controlled by, or is under common control with the bank. The term “covered transaction” includes the making of loans to the affiliate, the purchase of assets from the affiliate, the issuance of a guarantee on behalf of the affiliate, the purchase of securities issued by the affiliate, and other similar types of transactions.

A bank’s authority to extend credit to executive officers, directors and greater than 10 percent shareholders, as well as entities controlled by such persons, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the FRB. Among other things, these loans must be made on terms (including interest rates charged and collateral required) substantially the same as those offered to unaffiliated individuals or be made as part of a benefit or compensation program and on terms widely available to employees and must not involve a greater than normal risk of repayment. In addition, the amount of loans a bank may make to these persons is based, in part, on the bank’s capital position, and specified approval procedures must be followed in making loans which exceed specified amounts.

Community Reinvestment Act

Federal Regulation. Under the Community Reinvestment Act (“CRA”), as implemented by FDIC regulations, an institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC, in connection with its examinations, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The CRA

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requires public disclosure of an institution’s CRA rating and further requires the FDIC to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. The Bank received a CRA rating of “Outstanding” in its most recent completed CRA examination, which was completed as of June 25, 2018. Institutions that receive less than a satisfactory rating may face difficulties in securing approval for new activities or acquisitions. The CRA requires all institutions to make public disclosures of their CRA ratings.

New York State Regulation. The Bank is also subject to provisions of the New York State Banking Law that impose continuing and affirmative obligations upon a banking institution organized in New York State to serve the credit needs of its local community (the “NYCRA”). Such obligations are substantially similar to those imposed by the CRA. The NYCRA requires the NYDFS to make a periodic written assessment of an institution’s compliance with the NYCRA, utilizing a four-tiered rating system, and to make such assessment available to the public. The NYCRA also requires the Superintendent to consider the NYCRA rating when reviewing an application to engage in certain transactions, including mergers, asset purchases, and the establishment of branch offices or ATMs, and provides that such assessment may serve as a basis for the denial of any such application.

Federal Home Loan Bank System

The Bank is a member of the FHLB-NY, one of 11 regional FHLBs comprising the FHLB system. Each regional FHLB manages its customer relationships, while the 11 FHLBs use its combined size and strength to obtain its necessary funding at the lowest possible cost. As a member of the FHLB-NY, the Bank is required to acquire and hold shares of FHLB-NY capital stock. Pursuant to this requirement, at December 31, 2021, the Bank was required to maintain $35.9 million of FHLB-NY stock.

Holding Company Regulations

The Company is subject to examination, regulation, and periodic reporting under the Bank Holding Company Act of 1956, as amended (the “BHCA”), as administered by the FRB. The Company is required to obtain the prior approval of the FRB to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior FRB approval would be required for the Company to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than 5% of any class of voting shares of such bank or bank holding company. In addition before any bank acquisition can be completed, prior approval thereof may also be required to be obtained from other agencies having supervisory jurisdiction over the bank to be acquired, including the NYDFS.

FRB regulations generally prohibit a bank holding company from engaging in, or acquiring, direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the FRB to be so closely related to banking or managing or controlling Bank as to be a proper incident thereto. Some of the principal activities that the FRB has determined by regulation to be so closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary, investment, or financial advisor; (v) leasing personal or real property; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan association.

The FRB has adopted capital adequacy guidelines for bank holding companies (on a consolidated basis). At December 31, 2021, the Company’s consolidated capital exceeded these requirements. The Dodd-Frank Act required the FRB to issue consolidated regulatory capital requirements for bank holding companies that are at least as stringent as those applicable to insured depository institutions. Such regulations eliminated the use of certain instruments, such as cumulative preferred stock and trust preferred securities, as Tier 1 holding company capital.

Bank holding companies are generally required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding twelve months, is equal to 10% or more of the Company’s consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice, or would violate any law, regulation, FRB order or

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directive, or any condition imposed by, or written agreement with, the FRB. The FRB has adopted an exception to this approval requirement for well-capitalized bank holding companies that meet certain other conditions.

The FRB has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the FRB’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality, and overall financial condition. The FRB’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity, and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. The Dodd-Frank Act codifies the source of financial strength policy and requires regulations to facilitate its application. Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions.

Under the FDI Act, a depository institution may be liable to the FDIC for losses caused the DIF if a commonly controlled depository institution were to fail. The Bank is commonly controlled within the meaning of that law.

The status of the Company as a registered bank holding company under the BHCA does not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.

The Company, the Bank, and their respective affiliates will be affected by the monetary and fiscal policies of various agencies of the United States Government, including the Federal Reserve System. In view of changing conditions in the national economy and in the money markets, it is difficult for management to accurately predict future changes in monetary policy or the effect of such changes on the business or financial condition of the Company or the Bank.

Acquisition of the Holding Company

Under the Federal Change in Bank Control Act (“CIBCA”), a notice must be submitted to the FRB if any person (including a company), or group acting in concert, seeks to acquire 10% or more of the Company’s shares of outstanding common stock, unless the FRB has found that the acquisition will not result in a change in control of the Company. Under the CIBCA, the FRB generally has 60 days within which to act on such notices, taking into consideration certain factors, including the financial and managerial resources of the acquirer; the convenience and needs of the communities served by the Company and the Bank; and the anti-trust effects of the acquisition. Under the BHCA, any company would be required to obtain approval from the FRB before it may obtain “control” of the Company within the meaning of the BHCA. Control generally is defined to mean the ownership or power to vote 25% or more of any class of voting securities of the Company or the ability to control in any manner the election of a majority of the Company’s directors. An existing bank holding company would, under the BHCA, be required to obtain the FRB’s approval before acquiring more than 5% of the Company’s voting stock. In addition to the CIBCA and the BHCA, New York State Banking Law generally requires prior approval of the New York State Banking Board before any action is taken that causes any company to acquire direct or indirect control of a banking institution that is organized in New York. 

Consumer Financial Protection Bureau

Created under the Dodd-Frank Act, and given extensive implementation and enforcement powers, the CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit “unfair, deceptive, or abusive” acts and practices. Abusive acts or practices are defined as those that (1) materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product or service, or (2) take unreasonable advantage of a consumer’s (a) lack of financial savvy, (b) inability to protect himself in the selection or use of consumer financial products or services, or (c) reasonable reliance on a covered entity to act in the consumer’s interests. The CFPB has the authority to investigate possible violations of federal consumer financial law, hold hearings and commence civil litigation. The CFPB can issue cease-and-desist orders against banks and other

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entities that violate consumer financial laws. The CFPB may also institute a civil action against an entity in violation of federal consumer financial law in order to impose a civil penalty or an injunction.

Mortgage Banking and Related Consumer Protection Regulations

The retail activities of the Bank, including lending and the acceptance of deposits, are subject to a variety of statutes and regulations designed to protect consumers. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. Loan operations are also subject to federal laws applicable to credit transactions, such as:

The federal Truth-In-Lending Act and Regulation Z issued by the FRB, governing disclosures of credit terms to consumer borrowers;
The Home Mortgage Disclosure Act and Regulation C issued by the FRB, 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;
The Equal Credit Opportunity Act and Regulation B issued by the FRB, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
The Fair Credit Reporting Act and Regulation V issued by the FRB, governing the use and provision of information to consumer reporting agencies;
The Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and
The guidance of the various federal agencies charged with the responsibility of implementing such federal laws.

Deposit operations also are subject to:

The Truth in Savings Act and Regulation DD issued by the FRB, which requires disclosure of deposit terms to consumers;
Regulation CC issued by the FRB, which relates to the availability of deposit funds to consumers;
The Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and
The Electronic Funds Transfer Act and Regulation E issued by the FRB, 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.

In addition, the Bank and its subsidiaries may also be subject to certain state laws and regulations designed to protect consumers.

Many of the foregoing laws and regulations are subject to change resulting from the provisions in the Dodd-Frank Act, which in many cases calls for revisions to implementing regulations. In addition, oversight responsibilities of these and other consumer protection laws and regulations will, in large measure, transfer from the Bank’s primary regulators to the CFPB. We cannot predict the effect that being regulated by a new, additional regulatory authority focused on consumer financial protection, or any new implementing regulations or revisions to existing regulations that may result from the establishment of this new authority, will have on our businesses.

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Data Privacy

Federal and state law contains extensive consumer privacy protection provisions. The GLBA requires financial institutions to periodically disclose their privacy practices and policies relating to sharing such information and enable retail customers to opt out of the Bank’s ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers. The GLBA also requires financial institutions to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records and information.

Cybersecurity

The Cybersecurity Information Sharing Act (the “CISA”) is intended to improve cybersecurity in the U.S. through sharing of information about security threats between the U.S. government and private sector organizations, including financial institutions such as the Bank. The CISA also authorizes companies to monitor their own systems, notwithstanding any other provision of law, and allows companies to carry out defensive measures on their own systems from potential cyber-attacks.

Federal Restrictions on Acquisition of the Company

Under the Federal Change in Bank Control Act (“CIBCA”), a notice must be submitted to the FRB if any person (including a company), or group acting in concert, seeks to acquire 10% or more of the Company’s shares of outstanding common stock, unless the FRB has found that the acquisition will not result in a change in control of the Company. Under the CIBCA, the FRB generally has 60 days within which to act on such notices, taking into consideration certain factors, including the financial and managerial resources of the acquirer; the convenience and needs of the communities served by the Company, the Bank; and the anti-trust effects of the acquisition. Under the BHCA, any company would be required to obtain approval from the FRB before it may obtain “control” of the Company within the meaning of the