ConnectOne Bancorp, Inc. (CNOB) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations
The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing under Item 8 of this report, and statistical data presented in this document.
Cautionary Statement Concerning Forward-Looking Statements
See Item 1 of this Annual Report on Form 10-K for information regarding forward-looking statements.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company considers the allowance for credit losses and related provision to be critical to our financial results. For information on our significant accounting policies, see Note 1a in the Notes to Consolidated Financial Statements.
Allowance for Credit Losses and Related Provision
The allowance for credit losses is an estimate of current expected credit losses considering available information relevant to assessing collectability of cash flows over the contractual term of the financial assets necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The methodology for determining the allowance for credit losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded allowance for credit losses. The loan portfolio also represents the largest asset type on the Company’s Consolidated Statements of Condition.
Management believes the following information may enable investors to better understand the changes in our allowance for credit losses for loans. The Company’s allowance for credit losses for loans totaled $90.5 million and $78.8 million as of December 31, 2022 and 2021, respectively. The $11.7 million increase in our allowance for credit losses for loans was primarily driven by our collectively evaluated loans and offset by allowance for credit losses on individually analyzed loans.
The quantitative component of our allowance for credit losses on collectively evaluated loans, which is largely based on a selection of various economic forecasts, increased by $19.4 million as of December 31, 2022 when compared to December 31, 2021. This increase was primarily attributable to both organic growth of $1.4 billion in collectively evaluated loans and deterioration in periodic economic forecasts throughout the year. The qualitative component of our ACL, which is largely based on management’s judgment of qualitative loss factors, was relatively unchanged, on an absolute basis, over the same period-of-time, as qualitative factor trends improved over 2022.
The Company’s allowance for credit losses for collectively evaluated loans totaled $78.0 million as of December 31, 2022, which included $70.1 million of allowance related to commercial and commercial real estate loans. Included in that $70.1 million of allowance related to commercial and commercial real estate loans, $24.7 million was attributable to qualitative loss factors. Changes in managements’ judgement of qualitative loss factors could result in a significant change to the allowance for credit losses for loans. As described in Note 1a, to our financial statements filed as part of this Annual Report on Form 10-K, qualitative loss factors are applied to each portfolio segment with the amounts judgmentally determined by the relative risk to the most severe loss periods identified in the historical loan charge-offs of a peer group of similar-sized regional banks. As of December 31, 2022, on a weighted average basis the most severe historical loss rate for our commercial and commercial real estate loans were 2.20% and 1.85%, respectively.
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The Company’s quantitative component of allowance for credit losses for collectively evaluated loans is calculated with an economic forecast sourced from Moody’s. Management performed a hypothetical sensitivity analysis to understand the impact of changes in the economic forecast as a key input on our allowance for credit losses for collectively evaluated loans. Within the various economic scenarios considered for this hypothetical sensitivity analysis, as of December 31, 2022, the quantitative estimate of the allowance for credit loss for collectively evaluated loans would increase by approximately $40 million under sole consideration of an adverse Moody’s economic forecast. The hypothetical sensitivity calculation reflects the sensitivity of the modeled allowance estimate to macroeconomic forecast data but lacks other qualitative overlays and other qualitative adjustments that are part of the quarterly reserving process. As such, this does not necessarily reflect the nature and extent of future changes in the allowance for reasons including increases or decreases in qualitative adjustments, changes in the risk profile and size of the portfolio, changes in the severity of the macroeconomic scenario and the range of scenarios under management consideration.
Our allowance for credit losses for individually analyzed loans is determined on an individual basis using the present value of expected cash flows discounted using the loan’s effective interest rate or, for collateral-dependent loans, the fair value of the collateral, less estimated selling costs, as applicable. As of December 31, 2022, the Company’s allowance for credit losses on individually analyzed loans decreased $7.7 million from December 31, 2021. This decrease was primarily due to reductions in individually analyzed loans, increases in charge-offs, and increases in the fair value of collateral for collateral-dependent loans, partially offset by increases to the allowance on existing individually analyzed loans.
Overview and Strategy
We serve as a holding company for the Bank, which is our primary asset and only operating subsidiary. We follow a business plan that emphasizes the delivery of customized banking services in our market area to clients who desire a high level of personalized service and responsiveness. The Bank conducts a traditional banking business, making commercial loans, consumer loans and residential and commercial real estate loans. In addition, the Bank offers various non-deposit products through non-proprietary relationships with third party vendors. The Bank relies upon deposits as the primary funding source for its assets. The Bank offers traditional deposit products.
Many of our clients relationships start with referrals from existing clients. We then seek to cross sell our products to clients to grow the client relationship. For example, we will frequently offer an interest rate concession on credit products for clients that maintain a noninterest-bearing deposit account at the Bank. This strategy has helped maintain our funding costs and the growth of our interest expense even as we have substantially increased our total deposits. It has also helped fuel our significant loan growth. We believe that the Bank’s continued growth and profitability demonstrate the need for and success of our brand of banking.
Our results of operations depend primarily on our net interest income, which is the difference between the interest earned on our interest-earning assets and the interest paid on funds borrowed to support those assets, primarily deposits. Net interest margin is the difference between the weighted average rate received on interest-earning assets and the weighted average rate paid to fund those interest-earning assets, which is also affected by the average level of interest-earning assets as compared with that of interest-bearing liabilities. Net income is also affected by the amount of noninterest income and noninterest expenses.
General
The following discussion and analysis present the more significant factors affecting the Company’s financial condition as of December 31, 2022 and 2021 and results of operations for each of the years in the three-year period ended December 31, 2022. The MD&A should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and other information contained in this report.
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Operating Results Overview
Net income available to common stockholders for the year ended December 31, 2022 was $119.2 million, a decrease of $9.5 million, or 7.4%, compared to net income of $128.6 million for 2021. Diluted earnings per share were $3.01 for 2022, a 6.5% decrease from $3.22 for 2021.
The change in net income from 2021 to 2022 was attributable to the following:
| ● | Increased provision for credit losses of $23.2 million. The increase was primarily due to organic loan growth, as well as changes in forecasted macroeconomic conditions. | |
|---|---|---|
| ● | Increase in noninterest expenses of $17.4 million, primarily due to increase in salaries and employee benefits of $16.9 million attributable to increased staff in both the revenue and back-office areas of the Bank, base salary increases and incentive compensation accruals. Additionally, there were increases in acquisition expenses related to BoeFly of $1.5 million, other expenses of $1.1 million, marketing and advertising of $0.4 million, and FDIC insurance of $0.2 million, partially offset by decreases in occupancy and equipment of $1.8 million, amortization of core deposit intangibles of $0.3 million, professional and consulting of $0.2 million and information technology and communication of $0.2 million. | |
| ● | Decrease in noninterest income of $2.4 million, primarily due to decreases in net gains on loans-held-for-sale of $2.1 million, gains on sales of branches of $0.7 million in 2021, decreases in net gains on sale/redemption of investment securities of $0.2 million and an increase in net losses on equity securities of $1.1 million, partially offset by increases in deposit, loan and other income of $0.9 million and income on bank owned life insurance of $0.8 million. | |
| ● | Increase in income tax expense of $1.3 million resulting primarily from higher state tax rates and a slightly higher percentage of income being derived from taxable sources. |
Net income available to common stockholders for the year ended December 31, 2021 was $128.6 million, an increase of $57.3 million, or 80.4%, compared to net income of $71.3 million for 2020. Diluted earnings per share were $3.22 for 2021, a 79.9% increase from $1.79 for 2020.
The change in net income from 2020 to 2021 was attributable to the following:
| ● | Decreased provision for credit losses of $46.5 million. The decrease was primarily due to the elevated provision for loan losses during 2020 due to the economic uncertainties surrounding COVID-19 pandemic. | |
|---|---|---|
| ● | Increase in net interest income of $24.9 million. |
| ● | Increase in noninterest income of $1.3 million, primarily due to increases in net gains on loans-held-for-sale of $1.7 million, gain on sale of branches of $0.7 million and net gains on sale/redemption of investment securities of $0.2 million, offset by decreases in deposit, loan and other income of $0.5 million, income on bank owned life insurance of $0.2 million and net gains on equity securities of $0.6 million. The increase in net gains on loans held-for-sale resulted from mortgage loan sales, SBA loan sales and elevated commercial loan sales. The increase in gain on sale of branches was the result of the Bank selling two branches during the first quarter of 2021 related to the BNJ acquisition. | |
|---|---|---|
| ● | Decrease in noninterest expenses of $12.0 million, primarily due to decreases in merger expenses of $14.6 million, change in value of acquisition price of $2.3 million, occupancy and equipment of $2.2 million, and FDIC insurance of $1.3 million, partially offset by increases in salaries and employee benefits of $5.5 million, other expenses of $2.6 million and professional and consulting of $0.9 million. | |
| ● | Increase in income tax expense of $25.6 million resulting primarily from a higher percentage of income being derived from taxable sources. |
Net Interest Income
Fully taxable equivalent net interest income for 2022 totaled $304.6 million, an increase of $39.9 million, or 15.1%, from 2021. The increase in net interest income was due to an increase in average interest-earning assets, which grew by 14.3% to $8.3 billion and a widening of 3 basis-points in the net interest margin. The widening of the net interest margin was mainly attributable to higher yields on loans and securities and lower average cash balances, offset by a higher cost of funds. Average total loans, which includes loans held-for-sale, increased by 15.0% to $7.4 billion in 2022 from $6.4 billion in 2021. The increase in average total loans is primarily attributable to higher loan originations.
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Fully taxable equivalent net interest income for 2021 totaled $264.7 million, an increase of $24.8 million, or 10.3%, from 2020. The increase in net interest income was due to an increase in average interest-earning assets, which grew by 4.2% to $7.2 billion and a widening of 20 basis-points in the net interest margin. The widening of the net interest margin was mainly attributable to lower cost of funds, offset by higher average cash balances and lower yields on loans and securities. Average total loans, which includes loans held-for-sale, increased by 3.6% to $6.4 billion in 2021 from $6.2 billion in 2020. The increase in average total loans is primarily attributable to higher, non PPP, loan originations.
Average Balance Sheets
The following table sets forth certain information relating to our average assets and liabilities for the years ended December 31, 2022, 2021 and 2020 and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown.
| Years Ended December 31, | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||
| Average | Income/ | Yield/ | Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||||||
| (Tax-Equivalent Basis) | Balance | Expense | Rate | Balance | Expense | Rate | Balance | Expense | Rate | ||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||
| Investment securities (1) (2) | $ | 660,760 | $ | 17,640 | 2.67 | % | $ | 464,342 | $ | 7,455 | 1.61 | % | $ | 444,070 | $ | 9,996 | 2.25 | % | |||||||||
| Loans receivable and loans held-for-sale (2) (3) (4) | 7,380,584 | 354,450 | 4.80 | % | 6,419,610 | 294,686 | 4.59 | % | 6,198,753 | 297,756 | 4.80 | % | |||||||||||||||
| Federal funds sold and interest-earning deposits with banks | 186,205 | 2,493 | 1.34 | % | 322,692 | 405 | 0.13 | % | 267,824 | 694 | 0.22 | % | |||||||||||||||
| Restricted investment in bank stocks | 36,744 | 1,655 | 4.50 | % | 20,797 | 971 | 4.67 | % | 27,185 | 1,642 | 6.04 | % | |||||||||||||||
| Total interest-earning assets | 8,264,293 | 376,238 | 4.55 | % | 7,227,441 | 303,517 | 4.20 | % | 6,937,832 | 310,088 | 4.47 | % | |||||||||||||||
| Noninterest-earning assets: | |||||||||||||||||||||||||||
| Allowance for credit losses | (84,209 | ) | (79,863 | ) | (59,271 | ) | |||||||||||||||||||||
| Noninterest-earning assets | 602,657 | 587,650 | 574,913 | ||||||||||||||||||||||||
| Total assets | $ | 8,782,741 | $ | 7,735,228 | $ | 7,453,474 | |||||||||||||||||||||
| LIABILITIES & STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||
| Time deposits | $ | 1,449,826 | $ | 21,331 | 1.47 | % | $ | 1,300,270 | $ | 14,813 | 1.14 | % | $ | 1,792,568 | $ | 34,813 | 1.94 | % | |||||||||
| Other interest-bearing deposits | 3,702,773 | 29,230 | 0.79 | % | 3,451,765 | 9,955 | 0.29 | % | 2,819,908 | 17,573 | 0.62 | % | |||||||||||||||
| Total interest-bearing deposits | 5,152,599 | 50,561 | 0.98 | % | 4,752,035 | 24,768 | 0.52 | % | 4,612,476 | 52,386 | 1.14 | % | |||||||||||||||
| Borrowings | 661,729 | 12,188 | 1.84 | % | 318,700 | 5,300 | 1.66 | % | 537,773 | 8,435 | 1.57 | % | |||||||||||||||
| Subordinated debentures | 153,092 | 8,759 | 5.72 | % | 153,199 | 8,669 | 5.66 | % | 169,139 | 9,254 | 5.47 | % | |||||||||||||||
| Finance obligation | 1,838 | 119 | 6.47 | % | 2,041 | 123 | 6.03 | % | 2,233 | 134 | 6.00 | % | |||||||||||||||
| Total interest-bearing liabilities | 5,969,258 | 71,627 | 1.20 | % | 5,225,975 | 38,860 | 0.74 | % | 5,321,621 | 70,209 | 1.32 | % | |||||||||||||||
| Noninterest-bearing deposits | 1,612,040 | 1,454,148 | 1,195,547 | ||||||||||||||||||||||||
| Other liabilities | 51,048 | 48,082 | 55,586 | ||||||||||||||||||||||||
| Stockholders’ equity | 1,150,395 | 1,007,023 | 880,720 | ||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 8,782,741 | $ | 7,735,228 | $ | 7,453,474 | |||||||||||||||||||||
| Net interest income/interest rate spread (5) | 304,611 | 3.35 | % | 264,657 | 3.46 | % | 239,879 | 3.15 | % | ||||||||||||||||||
| Tax-equivalent adjustment | (2,492 | ) | (1,779 | ) | (1,888 | ) | |||||||||||||||||||||
| Net interest income as reported | $ | 302,119 | $ | 262,878 | $ | 237,991 | |||||||||||||||||||||
| Net interest margin (6) | 3.69 | % | 3.66 | % | 3.46 | % |
| (1) | Average balances are based on amortized cost. |
|---|---|
| (2) | Interest income is presented on a tax equivalent basis using 21% federal tax rate. |
| (3) | Includes loan fee income and accretion of purchase accounting adjustments. |
| (4) | Loans include nonaccrual loans. |
| (5) | Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax equivalent basis. |
| (6) | Represents net interest income on a tax equivalent basis divided by average total interest-earning assets. |
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Rate/Volume Analysis
The following table presents, by category, the major factors that contributed to the changes in net interest income. Changes due to both volume and rate have been allocated in proportion to the relationship of the dollar amount change in each.
| 2022/2021 | 2021/2020 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||
| Due to Change in: | Due to Change in: | |||||||||||||||||||||||
| Average | Average | Net | Average | Average | Net | |||||||||||||||||||
| Volume | Rate | Change | Volume | Rate | Change | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Interest income: | ||||||||||||||||||||||||
| Investment securities: | $ | 5,244 | $ | 4,941 | $ | 10,185 | $ | 325 | $ | (2,866 | ) | $ | (2,541 | ) | ||||||||||
| Loans receivable and loans held-for-sale | 46,150 | 13,614 | 59,764 | 10,138 | (13,208 | ) | (3,070 | ) | ||||||||||||||||
| Federal funds sold and interest-earnings deposits with banks | (1,827 | ) | 3,915 | 2,088 | 69 | (358 | ) | (289 | ) | |||||||||||||||
| Restricted investment in bank stocks | 718 | (34 | ) | 684 | (298 | ) | (373 | ) | (671 | ) | ||||||||||||||
| Total interest income: | $ | 50,285 | $ | 22,436 | $ | 72,721 | $ | 10,234 | $ | (16,805 | ) | $ | (6,571 | ) | ||||||||||
| Interest expense: | ||||||||||||||||||||||||
| Savings, NOW, money market, interest checking | $ | 1,981 | $ | 17,294 | $ | 19,275 | $ | 1,822 | $ | (9,440 | ) | $ | (7,618 | ) | ||||||||||
| Time deposits | 2,200 | 4,317 | 6,517 | (5,608 | ) | (14,392 | ) | (20,000 | ) | |||||||||||||||
| Borrowings and subordinated debentures | 6,312 | 667 | 6,979 | (4,545 | ) | 825 | (3,720 | ) | ||||||||||||||||
| Finance obligation | (13 | ) | 9 | (4 | ) | (12 | ) | 1 | (11 | ) | ||||||||||||||
| Total interest expense: | $ | 10,480 | $ | 22,287 | $ | 32,767 | $ | (8,343 | ) | $ | (23,006 | ) | $ | (31,349 | ) | |||||||||
| Net interest income: | $ | 39,805 | $ | 149 | $ | 39,954 | $ | 18,577 | $ | 6,201 | $ | 24,778 |
Provision for (Reversal of) Credit Losses
In determining the provision for credit losses, management considers national and local economic trends and conditions; trends in the portfolio including orientation to specific loan types or industries; experience, ability and depth of lending management in relation to the complexity of the portfolio; effects of changes in lending policies, trends in volume and terms of loans; levels and trends in delinquencies, impaired loans and net charge-offs and the results of independent third party loan review.
The Bank adopted CECL beginning on January 1, 2021. Provision expense may therefore become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance. See Note 1b to our audited financial statements included herein.
For the year ended December 31, 2022, the provision for (reversal of) credit losses was $17.8 million, an increase of $23.3 million, compared to the provision for (reversal of) credit losses of ($5.5) million for the year ended December 31, 2021. The increase in provision for credit losses for the year ended December 31, 2022 reflected strong organic loan growth and changes in forecasted macroeconomic conditions.
For the year ended December 31, 2021, the provision for (reversal of) credit losses was ($5.5) million, a decrease of $46.5 million, compared to the provision for (reversal of) loan losses of $41.0 million for the year ended December 31, 2020. The elevated provision for loan losses for the year ended December 31, 2020 was due to the economic uncertainties of the COVID-19 pandemic, including consideration of related borrower payment deferrals requested and or/ granted. The release of allowance for credit losses during the year ended December 31, 2021 was the result of the continually improving macro-economic outlook during the course of 2021.
Noninterest Income
Noninterest income for the full-year 2022 decreased by $2.4 million, or 15.6%, to $13.2 million from $15.7 million in 2021. The decrease was primarily due to decreases in net gains on loans held for sale of $2.1 million, gains on sale of branches of $0.7 million, net gains on sale/redemption of investment securities of $0.2 million and an increase in net losses on equity securities of $1.1 million, partially offset by increases in deposit, loan and other income of $0.9 million and income on bank owned life insurance of $0.8 million.
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Noninterest income for the full-year 2021 increased by $1.3 million, or 9.0%, to $15.7 million from $14.4 million in 2020. The increase was primarily due to increases in net gains on loans held for sale of $1.7 million, gain on sale of branches of $0.7 million and net gains on sale/redemption of investment securities of $0.2 million, partially offset by decreases in deposit, loan and other income of $0.5 million, income on bank owned life insurance of $0.2 million and net gains on equity securities of $0.6 million. The increase in net gains on loans held-for-sale resulted from mortgage loan sales, SBA loan sales and elevated commercial loan sales. The increase in gain on sale of branches was the result of the Bank selling two branches during the first quarter of 2021 related to the BNJ acquisition.
Noninterest Expense
Noninterest expenses for the full-year 2022 increased by $17.4 million, or 15.9%, to $126.4 million from $109.0 million in 2021. The increase was primarily due to increases in salaries and employee benefits of $16.9 million, change in value of acquisition price of $1.5 million , other expenses of $1.1 million, marketing and advertising $0.4 million and FDIC insurance of $0.2 million, partially offset by decreases in occupancy and equipment of $1.8 million, amortization of core deposit intangible of $0.3 million, information technology and communication of $0.2 million, professional and consulting of $0.2 million and other components of net periodic pension income of $0.3 million. The increase in salaries and employee benefits was attributable to increased staff in both revenue and back-office areas of the Bank, base salary increases, and incentive compensation accruals.
Noninterest expenses for the full-year 2021 decreased by $12.0 million, or 9.9%, to $109.0 million from $121.0 million in 2020. The decrease was primarily due to decreases in merger expenses of $14.6 million, change in value of acquisition price of $2.3 million, occupancy and equipment of $2.2 million, and FDIC insurance of $1.3 million, partially offset by increases in salaries and employee benefits of $5.5 million, other expenses of $2.6 million and professional and consulting of $0.9 million. Excluding the impact on expenses related to mergers costs, expense increases were mainly attributable to increased levels of business.
Income Taxes
Income tax expense was $46.0 million for 2022 compared to $44.7 million for 2021 and $19.1 million for 2020. The increase in income tax expense in 2022 when compared to 2021 was primarily the result of higher taxable income. The increase in income tax expense in 2021 when compared to 2020 was also primarily the result of higher taxable income. The effective tax rates were 26.9% in 2022, 25.5% in 2021 and 21.1% for 2020. The higher effective tax rate during 2022 when compared to 2021 and 2020, was the result of a higher percentage of income being derived from taxable sources. The Company expects its effective tax rate to increase in 2023, as a result of the Company’s revenue growth in existing and new markets.
For a more detailed description of income taxes see Note 10 of the Notes to Consolidated Financial Statements.
Financial Condition Overview
As of December 31, 2022, the Company’s total assets were $9.6 billion, an increase of $1.5 billion from December 31, 2021. Total loans (including loans held-for-sale) were $8.1 billion, an increase of $1.3 billion from December 31, 2021. Deposits were $7.4 billion, an increase of $1.0 billion from December 31, 2021.
As of December 31, 2021, the Company’s total assets were $8.1 billion, an increase of $0.6 billion from December 31, 2020. Total loans (including loans held-for-sale) were $6.8 billion, an increase of $0.6 billion from December 31, 2020. Deposits were $6.3 billion, an increase of $0.4 billion from December 31, 2020.
Loan Portfolio
The Bank’s lending activities are generally oriented to small-to-medium sized businesses, high net worth individuals, professional practices and consumer and retail clients living and working in the Bank’s metropolitan, New York market area, consisting of Bergen, Union, Morris, Essex, Hudson, Mercer and Monmouth counties, New Jersey, as well as NYC’s five boroughs, Nassau, Rockland, Orange and Westchester counties, in New York and businesses and individuals living and working in the communities served by the Bank's West Palm Beach, Florida office. The Bank has not made loans to borrowers outside of the United States. The Bank believes that its strategy of high-quality client service, competitive rate structures and selective marketing have enabled it to gain market share.
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Commercial loans are loans made for business purposes and are primarily secured by collateral such as cash balances with the Bank, marketable securities held by or under the control of the Bank, business assets including accounts receivable, inventory and equipment and liens on commercial and residential real estate. Commercial construction loans are loans to finance the construction of commercial or residential properties secured by first liens on such properties. Commercial real estate loans include loans secured by first liens on completed commercial properties, including multi-family properties, to purchase or refinance such properties. Residential mortgages include loans secured by first liens on residential real estate and are generally made to existing clients of the Bank to purchase or refinance primary and secondary residences. Home equity loans and lines of credit include loans secured by first or second liens on residential real estate for primary or secondary residences. Consumer loans are made to individuals who qualify for auto loans, cash reserve, credit cards and installment loans.
Gross loans as of December 31, 2022 totaled $8.1 billion, an increase of $1.3 billion, or 18.6%, over gross loans as of December 31, 2021 of $6.8 billion.
The largest component of the gross loan portfolio as of December 31, 2022 and December 31, 2021 was commercial real estate loans. Commercial real estate loans as of December 31, 2022 totaled $5.8 billion, an increase of $1.1 million, or 22.2%, compared to commercial real estate loans as of December 31, 2021 of $4.7 billion. The main component contributing to the increase in commercial real estate loans is an increase in the multifamily loans. Commercial loans totaled $1.5 billion as of December 31, 2022, an increase of $173.3 million, or 13.3%, compared to commercial loans as of December 31, 2021 of $1.3 billion. Included in commercial loans were PPP loans of $11.4 million as of December 31, 2022 and $93.1 million as of December 31, 2021. Commercial construction loans as of December 31, 2022 totaled $574.1 million, an increase of $34.0 million, or 6.3%, compared to commercial construction loans as of December 31, 2021 of $540.2 million.
Residential real estate loans totaled $264.7 million as of December 31, 2022, an increase of $9.5 million, or 3.7%, compared to residential real estate loans as of December 31, 2021 of $255.3 million. Consumer loans as of December 31, 2022 totaled $2.3 million compared to $1.9 million as of December 31, 2021.
The following table sets forth the classification of our loans by loan portfolio segment for the periods presented.
| December 31, | December 31, | December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| Commercial (1) | $ | 1,472,734 | $ | 1,299,428 | $ | 1,521,967 | ||||||
| Commercial real estate | 5,795,228 | 4,741,590 | 3,783,550 | |||||||||
| Commercial construction | 574,139 | 540,178 | 617,747 | |||||||||
| Residential real estate | 264,748 | 255,269 | 322,564 | |||||||||
| Consumer | 2,312 | 1,886 | 1,853 | |||||||||
| Gross loans | 8,109,161 | 6,838,351 | 6,247,681 | |||||||||
| Net deferred fees | (9,472 | ) | (9,729 | ) | (11,374 | ) | ||||||
| Loans receivable | 8,099,689 | 6,828,622 | 6,236,307 | |||||||||
| Allowance for credit losses | (90,513 | ) | (78,773 | ) | (79,226 | ) | ||||||
| Net loans receivable | $ | 8,009,176 | $ | 6,749,849 | $ | 6,157,081 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (1) | Includes PPP loans of $11.4 million and $93.1 million as of December 31, 2022 and December 31, 2021, respectively. |
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The following table sets forth the classification of our gross loans by loan portfolio segment and by fixed and adjustable rate loans as of December 31, 2022 by remaining contractual maturity.
| As of December 31, 2022 Maturing: | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| After | After | ||||||||||||||||||
| In | One Year | Five Years | |||||||||||||||||
| One Year | through | through | After | ||||||||||||||||
| or Less | Five Years | Fifteen Years | Fifteen Years | Total | |||||||||||||||
| Commercial | $ | 405,707 | $ | 476,375 | $ | 535,069 | $ | 55,583 | $ | 1,472,734 | |||||||||
| Commercial real estate | 449,887 | 1,781,846 | 3,519,717 | 43,778 | 5,795,228 | ||||||||||||||
| Commercial construction | 391,074 | 183,065 | - | - | 574,139 | ||||||||||||||
| Residential real estate | 4,316 | 25,740 | 65,092 | 169,600 | 264,748 | ||||||||||||||
| Consumer | 2,090 | 197 | 18 | 7 | 2,312 | ||||||||||||||
| Total | $ | 1,253,074 | $ | 2,467,223 | $ | 4,119,896 | $ | 268,968 | $ | 8,109,161 | |||||||||
| Loans with: | |||||||||||||||||||
| Fixed rates | $ | 394,882 | $ | 1,488,757 | $ | 1,399,617 | $ | 143,789 | $ | 3,427,045 | |||||||||
| Variable rates | 858,192 | 978,466 | 2,720,279 | 125,179 | 4,682,116 | ||||||||||||||
| Total | $ | 1,253,074 | $ | 2,467,223 | $ | 4,119,896 | $ | 268,968 | $ | 8,109,161 |
For additional information regarding loans, see Note 4 of the Notes to the Consolidated Financial Statements
Asset Quality
General. One of our key objectives is to maintain a high level of asset quality. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by sending late notices, as well as making personal contact with the borrower. Typically, late notices are sent approximately 10 days after the date the payment is due, followed up by direct contact with the borrower approximately 15 days after payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed, and additional efforts are made to collect the deficiency. Total loans delinquent 30 days or more are reported to the board of directors of the Bank on a monthly basis.
On loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases (“nonaccrual” loans). Except for loans that are well-secured and in the process of collection, it is our policy to discontinue accruing additional interest and reverse any interest accrued on any loan that is 90 days or greater past due. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to the borrower’s ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower’s financial condition and payment record demonstrate an ability to service the debt. Typically, a nonaccrual loan may return to accrual status if the borrower makes the loan current, and then makes six consecutive payments as scheduled.
Real estate acquired as a result of foreclosure is classified as other real estate owned (“OREO”) until sold. OREO is recorded at the lower of cost or fair value less estimated selling costs. Costs associated with acquiring and improving a foreclosed property are usually capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs. Holding costs are charged to expense. Gains and losses on the sale of OREO are charged to operations, as incurred.
The Company evaluates individual instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated using a collective (pooled) basis. The Company evaluates the pooling methodology at least annually. Loans transition from defined segments for individual analysis when credit characteristics, or risk traits, change in a material manner. A loan is considered for individual analysis when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by the Company in determining individual analysis include payment status and the probability of collecting scheduled principal and interest payments when due. Loans for which the terms have been modified as a concession to the borrower due to the borrower experiencing financial difficulties are troubled debt restructurings (“TDR”) and are individually analyzed if carrying value is $250,000 or higher. Additionally, nonaccrual loans that are $250,000 or higher are also individually analyzed. All purchased credit-deteriorated (PCD) loans are individually analyzed. For loans designated as TDR or nonaccrual with balances less than $250,000, these loans are collectively evaluated, and, accordingly, are not separately identified for analysis or disclosures. Instruments will not be included in both collective and individual analysis. Individual analysis will establish a specific reserve for instruments in scope.
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Asset Classification. Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated an internal asset classification system, substantially consistent with Federal banking regulations, as a part of our credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “special mention.”
When an insured institution classifies one or more assets, or portions thereof, as “substandard” or “doubtful,” it is required that a general valuation allowance for credit losses must be established in an amount deemed prudent by management. General valuation allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets, or portions thereof, as “loss,” it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount.
A bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal bank regulators which can order the establishment of additional general or specific loss allowances. The Federal banking agencies have adopted an interagency policy statement on the allowance for credit losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Our management believes that, based on information currently available, our allowance for credit losses is maintained at a level which covers all known and probable incurred losses in the portfolio at each reporting date. However, actual losses are dependent upon future events and, as such, further additions to the level of allowances for credit losses may become necessary.
The table below sets forth information on our classified loans and loans designated as special mention (excluding loans held-for-sale) as of the dates presented:
| 2022 | 2021 | ||||||
|---|---|---|---|---|---|---|---|
| (dollars in thousands) | |||||||
| Classified Loans: | |||||||
| Substandard | $ | 120,330 | $ | 157,434 | |||
| Doubtful | - | - | |||||
| Loss | - | - | |||||
| Total classified loans | 120,330 | 157,434 | |||||
| Special Mention Loans | 62,105 | 72,286 | |||||
| Total classified and special mention loans | $ | 182,435 | $ | 229,720 |
During the year ended December 31, 2022, “substandard” loans and “doubtful” loans, which include lower credit quality loans which possess higher risk characteristics than “special mention” loans, decreased to $120.3 million, or 1.5% of loans receivable, as of December 31, 2022 from $157.4 million, or 2.3% of loans receivable, as of December 31, 2021. During the year ended December 31, 2022, “special mention” loans were $62.1 million, or 0.8% of loans receivable, while “special mention” loans as of December 31, 2021 were $72.3 million, or 1.0% of loans receivable.
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Nonaccrual Loans, Performing Troubled Debt Restructurings, OREO and Loans 90 Days or Greater Past Due and Still Accruing
Nonperforming assets include nonaccrual loans and OREO. Nonaccrual loans represent loans on which interest accruals have been suspended. OREO represents property acquired through foreclosure in partial or full satisfaction of loans. The Company considers charging off loans, or a portion thereof, when they become contractually past due ninety days or more as to interest or principal payments or when other internal or external factors indicate that collection of principal or interest is doubtful. Performing troubled debt restructurings represent loans on which a concession was granted to a borrower, such as a reduction in interest rate to a rate lower than the current market rate for new debt with similar risks, and which are currently performing in accordance with the modified terms. Loans 90 days or greater past due and still accruing represents purchased credit-deteriorated loans, net of fair value marks, which accrete income per the valuation at date of acquisition. For additional information regarding loans, see Note 4 of the Notes to the Consolidated Financial Statements.
The following table sets forth, as of the dates indicated, the amount of the Company’s nonaccrual loans, other real estate owned (“OREO”), performing troubled debt restructurings (“TDRs”) and loans past due 90 days or greater and still accruing:
| December 31, | December 31, | December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| Nonaccrual loans | $ | 44,454 | $ | 61,700 | $ | 61,696 | ||||||
| OREO | 264 | - | - | |||||||||
| Total nonperforming assets | $ | 44,718 | $ | 61,700 | $ | 61,696 | ||||||
| Performing TDRs | $ | 51,392 | $ | 43,587 | $ | 23,655 | ||||||
| Loans 90 days or greater past due and still accruing (PCD) | $ | 5,591 | $ | 13,531 | $ | 12,821 | ||||||
| Nonaccrual loans to loans receivable | 0.55 | % | 0.90 | % | 0.99 | % | ||||||
| Nonperforming assets to total assets | 0.46 | % | 0.76 | % | 0.82 | % | ||||||
| Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to total loans | 1.26 | % | 1.74 | % | 1.57 | % |
Allowance for Credit Losses and Related Provision
The allowance for credit losses is a reserve established through charges to earnings in the form of a provision for credit losses. We maintain an allowance for credit losses at a level considered adequate to provide for all known and probable incurred losses in the portfolio. The level of the allowance is based on management’s evaluation of estimated losses in the portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic conditions. Loan charge-offs (i.e., loans judged to be uncollectible) are charged against the reserve and any subsequent recovery is credited. Our officers analyze risks within the loan portfolio on a continuous basis and through an external independent loan review function, and the results of the loan review function are also reviewed by our Audit Committee. A risk system, consisting of multiple grading categories for each portfolio class, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated economic conditions and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management feels deserve recognition in establishing an appropriate reserve. These estimates are reviewed at least quarterly and, as adjustments become necessary, they are recognized in the periods in which they become known. Although management strives to maintain an allowance it deems adequate, future economic changes, deterioration of borrowers’ creditworthiness, and the impact of examinations by regulatory agencies all could cause changes to our allowance for credit losses.
As of December 31, 2022, the allowance for credit losses for loans was $90.5 million, an increase of $11.7 million, or 14.9%, from $78.8 million as of December 31, 2021. The increase in the allowance for credit losses was primarily driven by an increase in general reserves, resulting primarily from organic loan growth and changes in forecasted macroeconomic conditions, primarily offset by releases in specific reserves. As a result of the adoption, the Bank recorded a “Day 1” CECL adjustment on January 1, 2021 of $6.5 million that increased the allowance for credit losses for loans. This increase was offset by a release of provision for credit losses of $5.5 million as well as $2.0 million in net charge-offs during the year ended December 31, 2021. The $5.5 million release of provision for credit losses during the year ended December 31, 2021 was the result of a continued improvement in the macroeconomic outlook during 2021. Included in the $2.0 million net charge-offs for the year ended December 31, 2021 was a $1.4 million charge-off of a commercial real estate loan that previously had a specific credit reserve.
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The allowance for credit losses for loans as a percentage of loans receivable was 1.12% as of December 31, 2022 and 1.15% as of December 31, 2021.
Three-Year Statistical Allowance for Credit Losses for Loans
The following table reflects the relationship of loan volume, the provision and allowance for credit losses for loans and net charge-offs for the periods presented.
| December 31, | December 31, | December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| Balance as of January 1, | $ | 78,773 | $ | 79,226 | $ | 38,293 | ||||||
| CECL Day 1 Adjustment | - | 6,557 | - | |||||||||
| Balance as of January 1, as adjusted for changes in accounting principal | 78,773 | 85,783 | 38,293 | |||||||||
| Charge-offs: | ||||||||||||
| Commercial | 2,612 | 382 | 552 | |||||||||
| Commercial real estate | 2,819 | 1,780 | - | |||||||||
| Residential real estate | 9 | 235 | 341 | |||||||||
| Consumer | 3 | - | 7 | |||||||||
| Total charge-offs | 5,443 | 2,397 | 900 | |||||||||
| Recoveries: | ||||||||||||
| Commercial | 54 | 289 | 4 | |||||||||
| Commercial real estate | - | 85 | 802 | |||||||||
| Residential real estate | 63 | 20 | 23 | |||||||||
| Consumer | - | 11 | 4 | |||||||||
| Total recoveries | 117 | 405 | 833 | |||||||||
| Net charge-offs | 5,326 | 1,992 | 67 | |||||||||
| Provision for (reversal of) credit losses for loans | 17,066 | (5,018 | ) | 41,000 | ||||||||
| Balance at end of year | $ | 90,513 | $ | 78,773 | $ | 79,226 | ||||||
| Ratio of net charge-offs during the year to average loans receivable outstanding during the year | 0.07 | % | 0.03 | % | 0.00 | % | ||||||
| Allowance for credit losses for loans as a percentage of loans receivable | 1.12 | % | 1.15 | % | 1.27 | % |
For additional information regarding loans, see Note 4 of the Notes to the Consolidated Financial Statements.
Implicit in the lending function is the fact that credit losses will be experienced and that the risk of loss will vary with the type of loan being made, the creditworthiness of the borrower and prevailing economic conditions. The allowance for credit losses has been allocated in the table below according to the estimated amount deemed to be reasonably and supportably necessary to provide for the possibility of either lifetime expected losses or losses being incurred within the following categories of loans as of December 31, for each of the past three years.
The table below shows, for three types of loans, the amounts of the allowance allocable to such loans and the percentage of such loans to gross loans, along with the amount of the unallocated allowance. Commercial loan type shown below includes commercial, commercial real estate and commercial construction loans.
| Commercial | Residential Real Estate | Consumer | Unallocated | ||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount of | % of Total | Amount of | % of Total | Amount of | % of Total | Amount of | Total | ||||||||||||||||||||||||
| Allowance | Allowance | Allowance | Allowance | Allowance | Allowance | Allowance | Allowance | ||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||
| 2022 | $ | 86,363 | 95.4 | % | $ | 4,143 | 4.6 | % | $ | 7 | 0.1 | % | $ | - | $ | 90,513 | |||||||||||||||
| 2021 | 75,138 | 95.4 | % | 3,628 | 4.6 | % | 7 | 0.1 | % | - | 78,773 | ||||||||||||||||||||
| 2020 | 75,967 | 94.8 | % | 2,687 | 5.2 | % | 4 | 0.0 | % | 568 | 79,226 |
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Investments
For the year ended December 31, 2022, the average volume of investment securities, including equity securities, increased by $196.4 million to approximately $660.8 million or 8.0% of average earning assets, from $464.3 million, or 6.4% of average earning assets, for the year ended December 31, 2021. As of December 31, 2022, the principal components of the investment portfolio are U.S. Treasury and Government Agency Obligations, Federal Agency Obligations including mortgage-backed securities, Obligations of U.S. States and Political Subdivisions, Corporate Bonds and other debt and equity securities.
During the year ended December 31, 2022, rate related factors increased investment revenue by $4.9 million and volume related factors increased investment revenue by $5.2 million. The tax-equivalent yield on investments increased by 106 basis points to 2.67% from a yield of 1.61% during the year ended December 31, 2021.
Securities available-for-sale are a part of the Company’s interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment risk, liquidity management and other factors. The Company continues to reposition the investment portfolio as part of an overall corporate-wide strategy to produce reasonable and consistent margins where feasible, while attempting to limit risks inherent in the Company’s Consolidated Statement of Condition.
As of December 31, 2022, net unrealized losses on securities available-for-sale, which are carried as a component of accumulated other comprehensive loss and included in stockholders’ equity, net of tax, amounted to $61.8 million as compared with net unrealized losses of $0.5 million as of December 31, 2021. The increase in unrealized losses is predominately attributable to changes in market conditions and interest rates. Unrealized losses have not been recognized into income because the issuers are of high credit quality, we do not intend to sell, and it is likely that we will not be required to sell the securities prior to their anticipated recovery. The decline in fair value is largely due to changes in interest rates and other market conditions. This also resulted in a $25.1 million increase in deferred tax assets, attributable to the decline in fair value on securities available-for-sale since December 31, 2021. The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. For additional information regarding the Company’s investment portfolio, see Note 3, Note 15 and Note 20 of the Notes to the Consolidated Financial Statements.
During 2022 and 2021, there were no sales from the Company’s available-for-sale portfolio. During 2020, there were $19.6 million in sales from the Company’s available-for-sale portfolio. The Company had a $195 thousand gain on the redemption of available-for-sale securities during 2021. The gross realized gains on securities sold, called or matured amounted to $29 thousand in 2020. The Company had no impairment charges in 2022, 2021 and 2020. The table below illustrates the maturity distribution and weighted average yield on a tax-equivalent basis for amortized cost of our investment securities, excluding equity securities, as of December 31, 2022, on a contractual maturity basis.
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| Due after 1 year | Due after 5 years | ||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Due in 1 year or less | through 5 years | through 10 years | Due after 10 years | Total | |||||||||||||||||||||||||||||||||||||||
| Weighted | Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||||||||||||||||||||
| Amortized | Average | Amortized | Average | Amortized | Average | Amortized | Average | Amortized | Average | Market | |||||||||||||||||||||||||||||||||
| Cost | Yield | Cost | Yield | Cost | Yield | Cost | Yield | Cost | Yield | Value | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||
| Investment Securities Available-for-Sale | |||||||||||||||||||||||||||||||||||||||||||
| Federal Agency Obligations | $ | - | - | % | $ | - | - | % | $ | 153 | 2.67 | % | $ | 54,736 | 2.18 | % | $ | 54,889 | 2.18 | % | $ | 44,450 | |||||||||||||||||||||
| Residential Mortgage Pass-through Securities | 3 | 3.71 | 418 | 2.57 | 3,062 | 3.44 | 471,780 | 3.12 | 475,263 | 3.12 | 417,578 | ||||||||||||||||||||||||||||||||
| Commercial Mortgage Pass-through Securities | - | - | - | - | 4,033 | 1.52 | 21,452 | 2.86 | 25,485 | 2.65 | 21,104 | ||||||||||||||||||||||||||||||||
| Obligations of U.S. States and Political Subdivisions | 453 | 4.21 | 2,106 | 4.99 | 2,073 | 4.04 | 152,615 | 3.64 | 157,247 | 3.66 | 142,896 | ||||||||||||||||||||||||||||||||
| Corporate Bonds and Notes | 5,000 | 3.29 | 2,000 | 3.58 | - | - | - | - | 7,000 | 3.37 | 6,974 | ||||||||||||||||||||||||||||||||
| Asset-backed Securities | - | - | - | - | 21 | 3.89 | 1,652 | 5.36 | 1,673 | 5.34 | 1,640 | ||||||||||||||||||||||||||||||||
| Other Securities | 242 | 0.25 | - | - | - | - | - | - | 242 | 0.25 | 242 | ||||||||||||||||||||||||||||||||
| Total Investment Securities | $ | 5,698 | 3.23 | % | $ | 4,524 | 4.14 | % | $ | 9,342 | 2.73 | % | $ | 702,235 | 3.16 | % | $ | 721,799 | 3.16 | % | $ | 634,884 |
For information regarding the carrying value of the investment portfolio, see Note 3, Note 15 and Note 20 of the Notes to the Consolidated Financial Statements.
The securities listed in the table above are either rated investment grade by Moody’s and/or Standard and Poor’s or have shadow credit ratings from a credit agency supporting an investment grade and conform to the Company’s investment policy guidelines. There were no municipal securities, or corporate securities, of any single issuer exceeding 10% of stockholders’ equity as of December 31, 2022. Other securities do not have a contractual maturity and are included in the “Due in 1 year or less” maturity in the table above.
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The following table sets forth the carrying value of the Company’s investment securities, as of December 31 for each of the last three years.
| 2022 | 2021 | 2020 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | |||||||||||
| Investment Securities Available-for-Sale: | |||||||||||
| Federal agency obligations | $ | 44,450 | $ | 50,360 | $ | 38,458 | |||||
| Residential mortgage pass-through securities | 417,578 | 316,095 | 270,884 | ||||||||
| Commercial mortgage pass-through securities | 21,104 | 10,469 | 6,922 | ||||||||
| Obligations of U.S. States and political subdivisions | 142,896 | 145,625 | 142,808 | ||||||||
| Corporate bonds and notes | 6,974 | 9,049 | 25,095 | ||||||||
| Asset-backed securities | 1,640 | 2,564 | 3,480 | ||||||||
| Certificates of deposit | - | 150 | 151 | ||||||||
| Other securities | 242 | 195 | 157 | ||||||||
| Total | $ | 634,884 | $ | 534,507 | $ | 487,955 |
For other information regarding the Company’s investment securities portfolio, see Note 3, Note 15 and Note 20 of the Notes to the Consolidated Financial Statements.
Interest Rate Sensitivity Analysis
The principal objective of our asset and liability management function is to evaluate the interest-rate risk included in certain balance sheet accounts; determine the level of risk appropriate given our business focus, operating environment, and capital and liquidity requirements; establish prudent asset concentration guidelines; and manage the risk consistent with Board approved guidelines. We seek to reduce the vulnerability of our operations to changes in interest rates, and actions in this regard are taken under the guidance of the Bank’s Asset Liability Committee (the “ALCO”). The ALCO generally reviews our liquidity, cash flow needs, maturities of investments, deposits and borrowings, and current market conditions and interest rates.
We currently utilize net interest income simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank of future changes in interest rates. As of December 31, 2022, and December 31, 2021, the results of the models were within guidelines prescribed by our Board of Directors. If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be required by the ALCO and Bank’s management.
The net interest income simulation model attempts to measure the change in net interest income over the next one-year period, and over the next three-year period on a cumulative basis, assuming certain changes in the general level of interest rates.
Based on our model, which was run as of December 31, 2022, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would decrease our net interest income by 2.22%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 2.01%. As of December 31, 2021, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 3.35%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 5.64%.
Based on our model, which was run as of December 31, 2022, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would decrease our net interest income by 2.66%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 3.99%. As of December 31, 2021, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 9.77%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 10.41%.
An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of December 31, 2022, would decrease by 10.51% with an instantaneous rate shock of up 200 basis points, and decrease by 1.13% with an instantaneous rate shock of down 100 basis points. Our EVE as of December 31, 2021, would increase by 0.24% with an instantaneous rate shock of up 200 basis points, and decline by 5.20% with an instantaneous rate shock of down 100 basis points.
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The following table illustrates the most recent results for EVE and NII as of December 31, 2022.
| Interest Rates | Estimated | Estimated Change in EVE | Interest Rates | Estimated | Estimated Change in NII | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (basis points) | EVE | Amount | % | (basis points) | NII | Amount | % | ||||||||||||||||||||||
| +300 | $ | 1,192,148 | $ | (205,018 | ) | (14.67 | ) | +300 | $ | 284,695 | $ | (8,243 | ) | (2.81 | ) | ||||||||||||||
| +200 | 1,250,366 | (146,800 | ) | (10.51 | ) | +200 | 286,436 | (6,502 | ) | (2.22 | ) | ||||||||||||||||||
| +100 | 1,312,519 | (84,647 | ) | (6.06 | ) | +100 | 288,295 | (4,643 | ) | (1.58 | ) | ||||||||||||||||||
| 0 | 1,397,166 | - | — | 0 | 292,938 | - | - | ||||||||||||||||||||||
| -100 | 1,381,343 | (15,823 | ) | (1.13 | ) | -100 | 287,036 | (5,902 | ) | (2.01 | ) | ||||||||||||||||||
| -200 | 1,350,498 | (46,668 | ) | (3.34 | ) | -200 | 280,706 | (12,232 | ) | (4.18 | ) | ||||||||||||||||||
| -300 | 1,304,602 | (92,564 | ) | (6.63 | ) | -300 | 276,359 | (16,579 | ) | (5.66 | ) |
Estimates of Fair Value
The estimation of fair value is significant to certain assets of the Company, including available-for-sale investment securities. These are all recorded at either fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, expected cash flows, credit quality, discount rates, or market interest rates. Fair values for most available-for-sale investment securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors. See Note 20 of the Notes to Consolidated Financial Statements for additional discussion.
These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Impact of Inflation and Changing Prices
The financial statements and notes thereto presented elsewhere herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the operations; unlike most industrial companies, nearly all of the Company’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Liquidity
Liquidity is a measure of a bank’s ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. Our principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.
As of December 31, 2022, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’ withdrawal requirements, and other operational and client credit needs could be satisfied. As of December 31, 2022, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $760.0 million, which represented 7.9% of total assets and 9.3% of total deposits and borrowings, compared to $742.1 million as of December 31, 2021, which represented 9.1% of total assets and 10.9% of total deposits and borrowings on such date.
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The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of December 31, 2022, had the ability to borrow $2.0 billion. In addition, as of December 31, 2022, the Bank had borrowing capacity of $450 million through correspondent banks. As of December 31, 2022, the Bank had aggregate available and unused credit of approximately $949 million, which represents the aforementioned facilities totaling $2.4 billion net of $1.5 billion in outstanding borrowings and letters of credit. As of December 31, 2022, outstanding commitments for the Bank to extend credit were $1.2 billion.
Cash and cash equivalents totaled $268.3 million as of December 31, 2022, increasing by $2.8 million from $265.5 million as of December 31, 2021. Operating activities provided $176.8 million in net cash. Investing activities used $1.5 billion in net cash, primarily reflecting an increase in loans. Financing activities provided $1.4 billion in net cash, primarily reflecting a net increase in deposits of $1.0 billion and an increase in net borrowings of $389.4 million.
Deposits
Deposits are our primary source of funds. Average total deposits increased by $0.6 million, or 9.0%, to $6.8 billion in 2022 from $6.2 billion in 2021 and increased $0.4 million, or 6.9%, to $6.2 billion in 2021 from $5.8 billion in 2020. The increase in total average deposits in 2022 and 2021 was attributable to organic growth. The following table sets forth the year-to-date average balances and weighted average rates for various types of deposits for 2022, 2021 and 2020.
| 2022 | 2021 | 2020 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | Rate | Balance | Rate | Balance | Rate | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Demand, noninterest-bearing | $ | 1,612,040 | - | $ | 1,454,148 | - | $ | 1,195,547 | - | |||||||||||||||
| Demand, interest-bearing & NOW | 3,284,866 | 0.80 | % | 3,081,899 | 0.29 | % | 2,583,590 | 0.66 | % | |||||||||||||||
| Savings | 417,907 | 0.70 | % | 369,866 | 0.31 | % | 236,318 | 0.27 | % | |||||||||||||||
| Time | 1,449,826 | 1.47 | % | 1,300,270 | 1.14 | % | 1,792,568 | 1.94 | % | |||||||||||||||
| Average Total Deposits | $ | 6,764,639 | 0.75 | % | $ | 6,206,183 | 0.52 | % | $ | 5,808,023 | 0.90 | % |
The following table sets forth the distribution of total deposit accounts, by account types for each of the dates indicated.
| December 31, 2022 | December 31, 2021 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of total | Amount | % of total | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Demand, noninterest-bearing | $ | 1,501,614 | 20.4 | % | $ | 1,617,049 | 25.5 | % | ||||||||
| Demand, interest-bearing & NOW | 3,085,613 | 41.9 | % | 3,127,350 | 49.4 | % | ||||||||||
| Savings | 375,205 | 5.1 | % | 438,445 | 6.9 | % | ||||||||||
| Time | 2,394,190 | 32.5 | % | 1,150,109 | 18.2 | % | ||||||||||
| Total Deposits | $ | 7,356,622 | 100.0 | % | $ | 6,332,953 | 100.0 | % |
As of December 31, 2022, we held $591.8 million of time deposits that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit, which was an increase of $341.3 million from $250.5 million as of December 31, 2021. The following table provides information on the maturity distribution of the time deposits exceeding the FDIC insurance limit as of December 31, 2022 and 2021:
| December 31, | December 31, | ||||||
|---|---|---|---|---|---|---|---|
| 2022 | 2021 | ||||||
| (dollars in thousands) | |||||||
| 3 months or less | $ | 147,761 | $ | 71,293 | |||
| Over 3 to 6 months | 103,074 | 69,394 | |||||
| Over 6 to 12 months | 213,961 | 63,549 | |||||
| Over 12 months | 126,984 | 46,288 | |||||
| Total | $ | 591,780 | $ | 250,524 |
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Federal Home Loan Bank Advances
Federal Home Loan Bank advances are secured, under the terms of a blanket collateral agreement, primarily by commercial mortgage loans. As of December 31, 2022, the Company had a gross carrying value of $857.6 million, excluding a net fair value discount of $80 thousand, in notes outstanding at a weighted average interest rate of 4.32%. As of December 31, 2021, the Company had a gross carrying value of $468.3 million, excluding a net fair value discount of $120 thousand, in notes outstanding at a weighted average interest rate of 0.73%.
Contractual Obligations and Other Commitments
The following table summarizes contractual obligations as of December 31, 2022 and the effect such obligations are expected to have on liquidity and cash flows in future periods.
| Over 5 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | Less than 1 year | 1 – 3 years | 4 – 5 years | years | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||
| Contractual obligations: | |||||||||||||||||||
| Operating lease obligations | $ | 12,313 | $ | 2,958 | $ | 4,561 | $ | 3,434 | $ | 1,360 | |||||||||
| Other contractual obligations: | |||||||||||||||||||
| Time Deposits | 2,395,643 | 1,571,746 | 614,278 | 209,619 | - | ||||||||||||||
| Federal Home Loan Bank advances and repurchase agreements | 857,702 | 830,000 | 25,000 | 2,050 | 652 | ||||||||||||||
| Finance lease | 1,733 | 323 | 706 | 704 | - | ||||||||||||||
| Subordinated debentures, net of debt issuance costs | 153,255 | - | - | - | 153,255 | ||||||||||||||
| Total other contractual obligations | 3,408,333 | 2,402,069 | 639,984 | 212,373 | 153,907 | ||||||||||||||
| Other commercial commitments – off-balance sheet: | |||||||||||||||||||
| Commitments under commercial loans and lines of credit | 662,515 | 394,442 | 231,345 | 1,000 | 35,728 | ||||||||||||||
| Home equity and other revolving lines of credit | 54,302 | 8,935 | 11,886 | 20,047 | 13,434 | ||||||||||||||
| Outstanding commercial mortgage loan commitments | 433,034 | 209,925 | 195,631 | 2,984 | 24,494 | ||||||||||||||
| Standby letters of credit | 20,770 | 18,739 | 2,031 | - | - | ||||||||||||||
| Overdraft protection lines | 905 | 461 | - | 186 | 258 | ||||||||||||||
| Total other commercial commitments-off balance sheet | 1,171,526 | 632,502 | 440,893 | 24,217 | 73,914 | ||||||||||||||
| Total contractual obligations and other commitments | $ | 4,592,172 | $ | 3,037,529 | $ | 1,085,438 | $ | 240,024 | $ | 229,181 |
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Capital
The maintenance of a solid capital foundation continues to be a primary goal for the Company. Accordingly, capital plans, stock repurchases, and dividend policies are monitored on an ongoing basis. The most important objective of the capital planning process is to balance effectively the retention of capital to support future growth and the goal of providing stockholders with an attractive long-term return on their investment.
The Company’s Tier 1 leverage capital (defined as tangible stockholders’ equity for common stock and Trust Preferred Capital Securities) as of December 31, 2022 amounted to $1.0 billion or 10.7% of average total assets. As of December 31, 2021, the Company’s Tier 1 leverage capital amounted to $909.6 million or 11.7% of average total assets. The increase in Tier 1 capital reflects the Company’s retained earnings during 2022.
United States bank regulators have issued guidelines establishing minimum capital standards related to the level of assets and off balance-sheet exposures adjusted for credit risk. Specifically, these guidelines categorize assets and off balance-sheet items into risk-weightings and require banking institutions to maintain a minimum ratio of capital to risk-weighted assets. As of December 31, 2022, the Company’s CET 1, Tier 1 and total risk-based capital ratios were 10.30%, 11.66% and 14.45%, respectively. For information on risk-based capital and regulatory guidelines for the Parent Corporation and its bank subsidiary, see Note 15 to the Consolidated Financial Statements.
The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the bank regulators regarding capital components, risk weightings, and other factors.
Subordinated Debentures
During December 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part. The floating interest rate on the subordinated debentures is three-month LIBOR plus 2.85% and re-prices quarterly. The rate as of December 31, 2022 was 7.26%.
During June 2020, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2020 Notes”). The 2020 Notes bear interest at 5.75% annually from, and including, the date of initial issuance to, but excluding, September 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on September 15 and December 15 of each year, commencing December 15, 2020. From and including September 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2025. Notwithstanding the foregoing, if the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero.
During January 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”) to certain accredited investors. The net proceeds from the sale of the Notes were used in the first quarter of 2018 for general corporate purposes, which included the Parent Corporation contributing $65 million of the net proceeds to the Bank in the form of debt and common equity. The Notes were non-callable for five years, have a stated maturity of February 1, 2028 and bear interest at a rate that resets quarterly to then current three-month LIBOR rate plus 284 basis points. The 2018 Notes were redeemed in full on February 1, 2023.
During June 2015, the Parent Corporation issued $50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2015 Notes”). As of December 31, 2020, the 2015 Notes had a stated maturity of July 1, 2025, and bore interest until the maturity date or early redemption date at a variable rate equal to the then current three-month LIBOR rate plus 393 basis points. As of December 31, 2020, the variable interest rate was 4.16%, all costs related to 2015 issuance had been amortized and the 2015 Notes were redeemed in full on January 1, 2021.
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Preferred Stock
On August 19, 2021, the Company completed an underwritten public offering of 115,000 shares, or $115 million in aggregate liquidation preference, of its depositary shares, each representing a 1/40th interest in a share of the Company’s 5.25% Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series A, no par value, with a liquidation preference of $1,000 per share. The net proceeds received from the issuance of preferred stock at the time of closing were $110.9 million.