# Northfield Bancorp, Inc. (NFBK) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Northfield Bancorp, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1493225/000149322524000059/nfbk-20231231.htm
Accession: 0001493225-24-000059
Filing date: 2024-02-29
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/NFBK/
All MD&A years: /company/NFBK/mda/
Previous year: /company/NFBK/mda/fy2022/ (FY 2022)
Next year: /company/NFBK/mda/fy2024/ (FY 2024)

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements of Northfield Bancorp, Inc. and the Notes thereto included elsewhere in this report (collectively, the “financial statements”).

Overview

Net income was $37.7 million, or $0.86 per diluted common share, and $61.1 million, or $1.32 per diluted common share, for the years ended December 31, 2023 and December 31, 2022, respectively. Significant variances from the prior year are as follows: a $33.6 million decrease in net interest income, a $3.1 million decrease in the provision for credit losses on loans, a $3.9 million increase in non-interest income, a $6.5 million increase in non-interest expense, and a $9.6 million decrease in income tax expense. Net income for the year ended December 31, 2023 included $317,000, after tax ($0.01 per share), in severance costs. Net income for the year ended December 31, 2022 included $925,000, after tax ($0.02 per share) of income generated from the accelerated accretion of fees related to the forgiveness of PPP loans and $326,000, after tax ($0.01 per share) in gains on loans sold.

Assets decreased by $2.9 million, or 0.1%, to $5.60 billion at December 31, 2023 compared to December 31, 2022. The decrease was primarily due to a decrease in available-for-sale debt securities of $156.7 million, or 16.5%, and a decrease in loans receivable of $40.0 million, or 0.9%, partially offset by increases in cash and cash equivalents of $183.7 million, or 401.1%, and FHLBNY stock of $9.3 million, or 30.6%.

Liabilities remained at $4.90 billion at both December 31, 2023 and December 31, 2022, as a decrease in total deposits of $271.8 million was largely offset by an increase in FHLB advances and other borrowings of $275.6 million.

Stockholders’ equity decreased by $1.9 million to $699.4 million at December 31, 2023, from $701.4 million at December 31, 2022. The decrease was attributable to $36.9 million in stock repurchases and $22.8 million in dividend payments, partially offset by net income of $37.7 million for the year ended December 31, 2023, a $15.9 million reduction in accumulated other comprehensive loss due to an increase in the fair value of our debt securities available-for-sale portfolio, and a $4.2 million increase in equity award activity.

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Selected Financial Data

The summary information presented below at the dates or for each of the years presented is derived in part from our consolidated financial statements.  The following information is only a summary, and should be read in conjunction with our consolidated financial statements and notes included in this Annual Report on Form 10-K.

[[GREPCENT_TABLE]]
[["","At December 31,"],["","2023","","2022","","2021"],["","(Dollars in thousands)"],["Selected Financial Condition Data:"],["Total assets","$","5,598,396","","","$","5,601,293","","","$","5,430,542"],["Cash and cash equivalents","229,506","","","45,799","","","91,068"],["Trading securities","12,549","","","10,751","","","13,461"],["Debt securities available-for-sale, at estimated fair value","795,464","","","952,173","","","1,208,237"],["Debt securities held-to-maturity, at amortized cost","9,866","","","10,760","","","5,283"],["Equity securities","10,629","","","10,443","","","5,342"],["Loans held-for-investment, net","4,203,654","","","4,243,693","","","3,806,617"],["Allowance for credit losses","(37,535)","","","(42,617)","","","(38,973)"],["Net loans held-for-investment","4,166,119","","","4,201,076","","","3,767,644"],["Bank-owned life insurance","171,543","","","167,912","","","164,500"],["FHLBNY stock, at cost","39,667","","","30,382","","","22,336"],["Operating lease right-of-use assets","30,202","","","34,288","","","33,943"],["Other real estate owned","\u2014","","","\u2014","","","100"],["Deposits","3,878,435","","","4,150,219","","","4,169,334"],["Borrowed funds","859,272","","","583,859","","","421,755"],["Subordinated debentures, net of issuance costs","61,219","","","60,996","","","\u2014"],["Operating lease liabilities","35,205","","","39,790","","","39,851"],["Total liabilities","4,898,951","","","4,899,903","","","4,690,659"],["Total stockholders\u2019 equity","$","699,445","","","$","701,390","","","$","739,883"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2023","","2022","","2021"],["","(Dollars in thousands, except share data)"],["Selected Operating Data:"],["Interest income","$","208,795","","","$","179,688","","","$","172,298"],["Interest expense","84,128","","","21,382","","","16,649"],["Net interest income before provision/(benefit) for credit losses","124,667","","","158,306","","","155,649"],["Provision/(benefit) for credit losses","1,353","","","4,482","","","(6,184)"],["Net interest income after provision/(benefit) for credit losses","123,314","","","153,824","","","161,833"],["Non-interest income","11,896","","","7,983","","","14,453"],["Non-interest expense","83,450","","","76,948","","","79,159"],["Income before income taxes","51,760","","","84,859","","","97,127"],["Income tax expense","14,091","","","23,740","","","26,473"],["Net income","$","37,669","","","$","61,119","","","$","70,654"],["Net income per common share - basic","$","0.86","","","$","1.32","","","$","1.46"],["Net income per common share - diluted","$","0.86","","","$","1.32","","","$","1.45"],["Weighted average basic shares outstanding","43,560,844","","","46,234,122","","","48,416,495"],["Weighted average diluted shares outstanding","43,638,616","","","46,438,119","","","48,754,263"]]
[[/GREPCENT_TABLE]]

49

[[GREPCENT_TABLE]]
[["","At or For the Years Ended December 31,"],["","2023","","2022","","2021"],["Selected Financial Ratios and Other Data:"],["Performance Ratios:"],["Return on assets (ratio of net income to average total assets)(1) (2) (3)","0.68","%","","1.09","%","","1.29","%"],["Return on equity (ratio of net income to average equity)(1) (2) (3)","5.45","","","8.57","","","9.42"],["Interest rate spread(4)","1.82","","","2.82","","","2.89"],["Net interest margin(5)","2.35","","","2.97","","","3.01"],["Dividend payout ratio(6)","60.51","","","39.48","","","34.39"],["Efficiency ratio(7) (8)","61.11","","","46.27","","","46.54"],["Non-interest expense to average total assets","1.50","","","1.38","","","1.44"],["Average interest-earning assets to average interest-bearing liabilities","133.01","","","137.82","","","135.63"],["Average equity to average total assets","12.44","","","12.75","","","13.69"],["Asset Quality Ratios:"],["Non-performing assets to total assets","0.20","","","0.18","","","0.15"],["Non-performing loans to total loans (9) (10)","0.27","","","0.24","","","0.21"],["Allowance for credit losses to total non-performing loans","328.30","","","416.26","","","486.80"],["Allowance for credit losses to total loans held-for-investment, net(11) (12)","0.89","","","1.00","","","1.02"],["Capital Ratio:"],["Tier 1 capital (to adjusted assets)","12.58","","","12.64","","","12.93"],["Other Data:"],["Number of full service offices","39","","","38","","","38"],["Full time equivalent employees","401","","","400","","","385"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","The year ended December 31, 2023, includes $317,000, after tax, of severance costs and $96,000, after tax, of gains on loans sold."],["(2)","The year ended December 31, 2022, includes $925,000, after tax, of net interest income generated from accelerated accretion of fees related to the forgiveness of PPP loans and $326,000, after-tax, in gains on loans sold."],["(3)","The year ended December 31, 2021, includes: (i) $4.0 million, after tax, of net interest income generated from accelerated accretion of fees related to the forgiveness of PPP loans; (ii) $1.4 million, after tax, of accretable income related to the payoff of PCD loans; (iii) $1.0 million, after tax, in gains on loans sold; and (iv) $677,000 of tax-exempt income from bank-owned life insurance proceeds in excess of the cash surrender value of the policies."],["(4)","The interest rate spread represents the difference between the weighted-average yield on interest earning assets and the weighted-average costs of interest-bearing liabilities."],["(5)","The net interest margin represents net interest income as a percent of average interest-earning assets for the period."],["(6)","Dividend payout ratio is calculated as total dividends declared for the year divided by net income for the year."],["(7)","The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income."],["(8)","The year ended December 31, 2023, includes $440,000 pre-tax, of severance costs. The year ended December 31, 2022, includes $1.3 million, pre-tax, of net interest income generated from accelerated accretion of fees related to the forgiveness of PPP loans. The year ended December 31, 2021, includes $5.6 million, pre-tax, of net interest income generated from accelerated accretion of fees related to the forgiveness of PPP loans, $1.9 million of accretable income related to the payoff of PCD loans, and $677,000 of tax-exempt income from bank owned life insurance proceeds in excess of the cash surrender value of the policies."],["(9)","Non-performing loans consist of non-accruing loans and loans 90 days or more past due and still accruing (excluding PCD loans), included in total loans held-for-investment, net, and non-performing loans held-for-sale, included in loans held-for-sale."],["(10)","Includes originated loans held-for-investment, PCD loans, acquired loans, and loans held-for-sale."],["(11)","Includes originated loans held-for-investment, PCD loans and acquired loans (and related allowance for credit losses)."],["(12)","Excluding PPP loans of $5.1 million, which are fully government guaranteed and do not carry any provision for losses, the allowance for credit losses to total loans held for investment, net, totaled 1.01% at December 31, 2022. Excluding PPP loans of $40.5 million, the allowance for credit losses to total loans held for investment, net, totaled 1.03% at December 31, 2021. PPP loans were of insignificant value at December 31, 2023."]]
[[/GREPCENT_TABLE]]

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Critical Accounting Policies

Critical accounting policies are defined as those that involve significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operation depend, and which involve the most complex subjective decisions or assessments, are the following:

Allowance for Credit Losses on Loans. Effective January 1, 2021, the Company adopted new accounting guidance, which requires entities to estimate and recognize an allowance for lifetime expected credit losses for loans and other financial assets measured at amortized cost. Previously, an allowance for loan losses was recognized based on probable and reasonably estimable incurred losses inherent in the loan portfolio at the balance sheet date. See Note 1 to the Company's consolidated financial statements for further discussion of the Company's accounting policies and methodologies for establishing the allowance for credit losses. We identified our policy on the allowance for credit losses on loans to be a critical accounting policy because management makes subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions.

The allowance for credit losses on loans is a critical accounting estimate for the following reasons:

•    Changes in the provision for credit losses can materially affect our financial results;

•    Estimates relating to the allowance for credit losses require us to utilize a reasonable and supportable forecast period based upon forward-looking economic scenarios in order to estimate probability of default and loss given default rates which our CECL methodology encompasses;

•    The allowance for credit losses on loans is influenced by factors outside of our control such as industry and business trends, as well as economic conditions such as trends in housing prices, interest rates, gross domestic product, inflation, and unemployment; and

•    Judgment is required to determine whether the models used to generate the allowance for credit losses on loans produce an estimate that is sufficient to encompass the current view of lifetime expected credit losses.

The allowance for credit losses on loans has been determined in accordance with U.S. GAAP. We are responsible for the timely and periodic determination of the amount of the allowance required. We believe that our allowance for credit losses is adequate to cover losses.

Management performs a quarterly evaluation of the adequacy of the allowance for credit losses on loans. This quarterly process is performed by the accounting department, in conjunction with the credit administration department, and approved by the Allowance Committee, which consists of the Chief Executive Officer/President, Executive Vice President (“EVP”) & Chief Risk Officer, EVP & Chief Financial Officer, EVP & Chief Lending Officer, Senior Credit Officer, Senior Vice President (“SVP”) Collections and Asset Recovery, SVP & Director of Financial Reporting and the Assistant Vice President Financial Reporting. The Chief Financial Officer performs a final review of the calculation. All supporting documentation with regard to the evaluation process is maintained by the accounting department. Each quarter a summary of the allowance for credit losses is presented by the Chief Financial Officer to the Audit Committee of the Board of Directors.

Under the CECL methodology, the allowance for credit losses on loans has two components. (1) a collective reserve for estimated expected credit losses for pools of loans that share common risk characteristics and (2) an individual reserve for loans that do not share risk characteristics, consisting of collateral-dependent and, prior to January 1, 2023, TDR loans.

51

Allowance for Collectively Evaluated Loans Held-for-Investment

The Company estimates the collective reserve using a risk rating migration model which calculates an expected life of loan loss percentage for each loan by generating probability of default and loss given default metrics. These metrics are multiplied by the exposure at default, taking into consideration prepayments, to calculate the quantitative component of the collective reserve. The metrics are based on the migration of loans from performing to loss by credit risk rating or delinquency categories using historical life-of-loan analysis periods for each loan portfolio pool, and the severity of loss, based on the aggregate net lifetime losses incurred using the Company's historical loss experience and comparable peer data loss history. The model's expected losses based on loss history are adjusted for qualitative adjustments. Among other things, these adjustments include and account for differences in: (i) changes in lending policies and procedures; (ii) changes in local, regional, national, and international economic and business conditions and developments that affect the collectability of our portfolio, including the condition of various market segments; (iii) changes in the experience, ability and depth of lending management and other relevant staff; (iv) changes in the quality of our loan review system; (v) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and (vi) the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in our existing portfolio.

The Company utilizes a two-year reasonable and supportable forecast period after which estimated losses revert to historical loss experience immediately for the remaining life of the loan. In establishing its estimate of expected credit losses, the Company utilizes five externally-sourced forward-looking economic scenarios developed by Moody's Analytics (“Moody's”).

Management utilizes five different Moody's scenarios so as to incorporate uncertainties related to the economic environment. These scenarios, which range from more benign to more severe economic outlooks, include a ‘most likely outcome’ (the “Baseline” scenario) and four less likely scenarios referred to as the “Upside” and “Downside” scenarios. Each scenario is weighted with a majority of the weighting placed on the Baseline scenario and lower weights placed on both the Upside and Downside scenarios. The weighting assigned by management is based on the economic outlook and available information at the reporting date. The model projects economic variables under each scenario based on detailed statistical analyses. The Company has identified and selected key variables that most closely correlated to its historical credit performance, which include: gross domestic product, unemployment, and three collateral indices: the Commercial Property Price Index, the Commercial Property Price Apartment Index and the Case-Shiller Home Price Index.

Our allowance for credit losses is sensitive to a number of inputs, most notably the macroeconomic forecast assumptions as well as the reasonable and supportable forecasting periods that are incorporated in our estimate of credit losses on loans. Therefore, as the macroeconomic environment and related forecasts change or decisions are made to shorten or lengthen the forecasting period, the allowance for credit losses may change materially. The following sensitivity analyses do not represent management’s expectations of the deterioration of our portfolios or the economic environment, but are provided as hypothetical scenarios to assess the sensitivity of the allowance for credit losses to changes in key inputs.

The following table details the five Moody's scenarios utilized in determining the allowance for credit losses on loans at December 31, 2023, and weightings of each scenario:

[[GREPCENT_TABLE]]
[["Model Scenario","","Moody's Scenario Description","","Weight"],["S0","","Upside - 4th Percentile","","4%"],["S1","","Upside - 10th Percentile","","10%"],["S3","","Downside - 90th Percentile","","10%"],["S4","","Downside - 96th Percentile","","4%"],["Baseline","","Baseline Scenario","","72%"]]
[[/GREPCENT_TABLE]]

If we placed 100% weighting on the baseline scenario, the quantitative allowance for credit losses at December 31, 2023 would have been approximately $1.4 million lower. Conversely, if we removed the upside scenarios and reallocated the weights from S0 to S4 and S1 to S3, the allowance for credit losses would have increased approximately $2.7 million. These forecasts revert to our long-term historical average loss rate after a 24 month forecasting period.

Because of the of the high degree of judgment involved in management's estimates of the allowance for credit losses, the subjectivity of assumptions used, and the potential for changes in the forecasted economic environment, there is inherent uncertainty in such estimates. Changes in these estimates could significantly impact the allowance for credit losses on loans.

52

Allowance for Individually Evaluated Loans

The Company measures specific reserves for individual loans that do not share common risk characteristics with other loans, consisting of all loans designated as TDRs prior to the adoption of ASU 2022-02 and non-accrual loans with an outstanding balance of $500,000 or greater. Loans individually evaluated for impairment are assessed to determine that the loan’s carrying value is not in excess of the estimated fair value of the collateral less cost to sell, if the loan is collateral-dependent, or the present value of the expected future cash flows, if the loan is not collateral-dependent. Management performs an evaluation of each impaired loan and generally obtains updated appraisals as part of the evaluation. In addition, management adjusts estimated fair values down to appropriately consider recent market conditions, our willingness to accept a lower sales price to effect a quick sale, and costs to dispose of any supporting collateral. Determining the estimated fair value of underlying collateral (and related costs to sell) can be difficult in illiquid real estate markets and is subject to significant assumptions and estimates. Management employs an independent third-party management firm that specializes in appraisal preparation and review to ascertain the reasonableness of updated appraisals. Projecting the expected cash flows under troubled debt restructurings which are not collateral-dependent is inherently subjective and requires, among other things, an evaluation of the borrower’s current and projected financial condition. Actual results may be significantly different than our projections and our established allowance for credit losses on these loans, which could have a material effect on our financial results. Individually impaired loans that have no impairment losses are not considered for collective allowances described earlier.

We have a concentration of loans secured by real property located in New York, New Jersey, and, to a lesser extent, eastern Pennsylvania. As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisal valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals are reviewed by management and an independent third-party appraiser to determine that the resulting values reasonably reflect amounts realizable on the collateral. Based on the composition of our loan portfolio, we believe the primary risks are increases in interest rates, a decline in the economy generally, or a decline in real estate market values in New York, New Jersey, or eastern Pennsylvania. Any one or a combination of these events may adversely affect our loan portfolio resulting in delinquencies, increased credit losses, and increased credit loss provisions.

Although we believe we have established and maintained the allowance for credit losses at adequate levels, changes may be necessary if future economic or other conditions differ substantially from our estimation of the current operating environment. Although management uses the information available, the level of the allowance for credit losses remains an estimate that is subject to significant judgment and short-term change. In addition, the OCC, as an integral part of their examination process, will review our allowance for credit losses on loans and may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.

Allowance for Off-Balance Sheet Credit Exposures

We also maintain an allowance for estimated losses on off-balance sheet credit risks related to loan commitments and standby letters of credit. The reserve for off-balance sheet exposures is determined using the CECL reserve factor in the related funded loan segment, adjusted for an average historical funding rate. The allowance for credit losses for off-balance sheet credit exposures is recorded in other liabilities on the consolidated balance sheets and the corresponding provision is included in other non-interest expense.

53

Comparison of Financial Condition at December 31, 2023 and 2022

Total assets decreased by $2.9 million, or 0.1%, to $5.60 billion at December 31, 2023 compared to December 31, 2022. The decrease was primarily due to a decrease in available-for-sale debt securities of $156.7 million, or 16.5%, and a decrease in loans receivable of $40.0 million, or 0.9%, partially offset by increases in cash and cash equivalents of $183.7 million, or 401.1%, and FHLBNY stock of $9.3 million, or 30.6%.

Cash and cash equivalents increased by $183.7 million, or 401.1%, to $229.5 million at December 31, 2023, from $45.8 million at December 31, 2022, primarily due to an increase in Federal Reserve Bank of New York balances driven by excess cash from borrowings and proceeds from the maturity and calls of available-for-sale securities. Balances fluctuate based on the timing of receipt of security and loan repayments and the redeployment of cash into higher-yielding assets such as loans and securities, or the funding of deposit outflows or borrowing maturities. During 2023, management believed it was prudent to increase balance sheet liquidity given general market volatility and uncertainty.

The Company’s available-for-sale debt securities portfolio decreased by $156.7 million, or 16.5%, to $795.5 million at December 31, 2023, from $952.2 million at December 31, 2022. The decrease was primarily attributable to paydowns, maturities, and calls. At December 31, 2023, $550.6 million of the portfolio consisted of residential mortgage-backed securities issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. In addition, the Company held $73.9 million in U.S. Government agency securities, $44.4 million in U.S. Treasuries, $125.8 million in corporate bonds, substantially all of which were considered investment grade, and $763,000 in municipal bonds at December 31, 2023. Gross unrealized losses, net of tax, on available-for-sale debt securities and held-to-maturity securities approximated $32.5 million and $279,000, respectively, at December 31, 2023, and $48.6 million and $332,000, respectively, at December 31, 2022.

Equity securities were $10.6 million at December 31, 2023 and $10.4 million at December 31, 2022. Equity securities are primarily comprised of an investment in a Small Business Administration Loan Fund. This investment is utilized by the Bank as part of its Community Reinvestment Act program.

Loans held for investment, net, decreased by $40.0 million to $4.20 billion at December 31, 2023, from $4.24 billion at December 31, 2022, primarily due to a decrease in multifamily loans, partially offset by an increase in commercial real estate loans. The Company continues to focus on the credit needs of its customers, and to a lesser extent, the development of new business notwithstanding the current uncertain economic environment. Multifamily loans decreased $73.6 million, or 2.6%, to $2.75 billion at December 31, 2023 from $2.82 billion at December 31, 2022, one-to-four family residential loans decreased $13.1 million, or 7.5%, to $160.8 million at December 31, 2023 from $173.9 million at December 31, 2022, and commercial and industrial loans decreased $568,000, or 0.4%, to $155.3 million at December 31, 2023 from $154.7 million at December 31, 2022. Partially offsetting these decreases were increases in commercial real estate loans of $30.3 million, or 3.4%, to $929.6 million at December 31, 2023 from $899.2 million at December 31, 2022, home equity loans of $11.0 million, or 7.2%, to $163.5 million at December 31, 2023 from $152.6 million at December 31, 2022, and construction and land loans of $6.0 million, or 24.2%, to $31.0 million at December 31, 2023 from $24.9 million at December 31, 2022.

As of December 31, 2023, non-owner occupied commercial real estate loans (as defined by regulatory guidance) to total risk-based capital was estimated at approximately 456%. Management believes that Northfield Bank (the “Bank”) has implemented appropriate risk management practices, including risk assessments, board-approved underwriting policies and related procedures, which include monitoring Bank portfolio performance, performing market analysis (economic and real estate), and stressing of the Bank’s commercial real estate portfolio under severe, adverse economic conditions. Although management believes the Bank has implemented appropriate policies and procedures to manage its commercial real estate concentration risk, the Bank’s regulators could require it to implement additional policies and procedures or could require it to maintain higher levels of regulatory capital, which might adversely affect its loan originations, the Company's ability to pay dividends, and overall profitability.

At December 31, 2023, office-related loans represented $208.6 million, or approximately 5% of our total loan portfolio, with an average balance of $1.8 million (although we have originated these type of loans in amounts substantially greater than this average) and a weighted average loan-to-value ratio of 58%. Approximately 46% were owner-occupied. The geographic locations of the properties collateralizing our office-related loans are as follows: 54.2% in New York and 45.8% in New Jersey. At December 31, 2023, our largest office-related loan had a principal balance of $90.0 million (with a net active principal balance for the Bank of $30.0 million as we have a 33.3% participation interest), was secured by an office facility located in Staten Island, New York, and was performing in accordance with its original contractual terms.

54

PCD loans totaled $9.9 million and $11.5 million at December 31, 2023 and December 31, 2022, respectively, with the decrease being primarily due to one loan with a balance of approximately $950,000 which was sold during the quarter ended December 31, 2023. The majority of the remaining PCD loan balance consists of loans acquired as part of a Federal Deposit Insurance Corporation-assisted transaction. The Company accreted interest income of $1.3 million attributable to PCD loans for the year ended December 31, 2023, as compared to $1.5 million for the year ended December 31, 2022. PCD loans had an allowance for credit losses of approximately $3.1 million and $3.9 million at December 31, 2023 and December 31, 2022, respectively.

Bank-owned life insurance increased $3.6 million, or 2.2%, to $171.5 million at December 31, 2023, as compared to $167.9 million at December 31, 2022. The increase resulted from income earned on bank-owned life insurance for the year ended December 31, 2023.

FHLBNY stock increased by $9.3 million, or 30.6%, to $39.7 million at December 31, 2023, from $30.4 million at December 31, 2022. The increase in FHLBNY stock directly correlates with higher short-term borrowing balances at December 31, 2023, as compared to December 31, 2022.

Other assets decreased $5.9 million, or 10.7%, to $48.6 million at December 31, 2023, from $54.4 million at December 31, 2022. The decrease was primarily attributable to a decrease in deferred tax assets primarily due to a decrease in unrealized losses on the securities available-for-sale portfolio.

Total liabilities remained at $4.90 billion at both December 31, 2023 and December 31, 2022, as a decrease in total deposits of $271.8 million was largely offset by an increase in FHLB advances and other borrowings of $275.6 million. The Company routinely utilizes brokered deposits and borrowed funds to manage interest rate risk, the cost of interest-bearing liabilities, and funding needs related to loan originations and deposit activity.

Deposits decreased $271.8 million, or 6.5%, to $3.88 billion at December 31, 2023, as compared to $4.15 billion at December 31, 2022. Brokered deposits decreased by $290.0 million, or 74.4%. Deposits, excluding brokered deposits, increased $18.3 million, or 0.5%. The increase in non-brokered deposits was attributable to increases of $223.7 million in time deposits and $8.6 million in savings accounts, partially offset by decreases of $58.1 million in transaction accounts and $155.9 million in money market accounts. Estimated gross uninsured deposits at December 31, 2023 were $1.73 billion. This total excludes fully collateralized uninsured governmental deposits and intercompany deposits of $856.5 million, leaving estimated uninsured deposits of approximately $869.9 million, or 22.4%, of total deposits.

Borrowed funds increased to $920.5 million at December 31, 2023, from $644.9 million at December 31, 2022. The increase in borrowings for the period was primarily due to an increase in FHLB and Federal Reserve Bank borrowings of $275.4 million, including $94.5 million of borrowings under the Federal Reserve Bank's Term Funding Program, which included favorable terms and conditions as compared to FHLB advances. Management utilizes borrowings to mitigate interest rate risk, for short-term liquidity, and to a lesser extent from time to time, as part of leverage strategies. During the year ended December 31, 2023, the Company increased borrowings to pay off higher-rate brokered certificates of deposit.

Total stockholders’ equity decreased by $1.9 million to $699.4 million at December 31, 2023, from $701.4 million at December 31, 2022. The decrease was attributable to $36.9 million in stock repurchases and $22.8 million in dividend payments, partially offset by net income of $37.7 million for the year ended December 31, 2023, a $15.9 million reduction in accumulated other comprehensive loss due to an increase in the fair value of our debt securities available-for-sale portfolio, and a $4.2 million increase in equity award activity. During the year ended December 31, 2023, the Company repurchased approximately 3.1 million of its common stock outstanding at an average price of $11.99 for a total of $36.9 million pursuant to the approved stock repurchase plans. As of December 31, 2023, the Company had approximately $3.1 million in remaining capacity under its current repurchase program.

Comparison of Operating Results for the Years Ended December 31, 2023 and 2022

Net Income. Net income was $37.7 million and $61.1 million for the years ended December 31, 2023 and December 31, 2022, respectively. Significant variances from the prior year are as follows: a $33.6 million decrease in net interest income, a $3.1 million decrease in the provision for credit losses on loans, a $3.9 million increase in non-interest income, a $6.5 million increase in non-interest expense, and a $9.6 million decrease in income tax expense.

55

Interest Income. Interest income increased $29.1 million, or 16.2%, to $208.8 million for the year ended December 31, 2023, from $179.7 million for the year ended December 31, 2022, primarily due to a 56 basis point increase in yields on interest-earning assets due to the rising rate environment and a greater percentage of assets consisting of higher-yielding loans, partially offset by a $26.3 million, or 0.5%, decrease in the average balance of interest-earning assets. The decrease in the average balance of interest-earning assets was due to decreases in the average balance of mortgage-backed securities of $181.5 million and the average balance of other securities of $46.7 million, partially offset by increases in the average balance of loans outstanding of $171.2 million, the average balance of FHLBNY stock of $18.1 million, and the average balance of interest-earning deposits in financial institutions of $12.5 million. The Company accreted interest income related to PCD loans of $1.3 million for the year ended December 31, 2023, as compared to $1.5 million for the year ended December 31, 2022. Fees recognized from PPP loans totaled $31,000 for the year ended December 31, 2023, as compared to $1.3 million for the year ended December 31, 2022. Net interest income for the year ended December 31, 2023, included loan prepayment income of $1.6 million as compared to $4.5 million for the year ended December 31, 2022.

Interest Expense. Interest expense increased $62.7 million, or 293.5%, to $84.1 million for the year ended December 31, 2023, as compared to $21.4 million for the year ended December 31, 2022. The increase was due to an increase in interest expense on deposits of $38.5 million, or 373.8%, an increase in interest expense on borrowings of $22.8 million, or 244.8%, and an increase in interest expense on subordinated debt of $1.5 million. The increase in interest expense on deposits was attributable to a 131 basis point increase in the cost of interest-bearing deposits from 0.30% for the year ended December 31, 2022 to 1.61% for the year ended December 31, 2023, due to rising market interest rates and a shift in the composition of the deposit portfolio towards higher-costing certificates of deposit. The increase in interest expense on deposits was partially offset by a $389.1 million, or 11.4%, decrease in the average balance of interest-bearing deposits. The increase in interest expense on borrowings was attributable to a 133 basis point increase in the average cost of borrowings, and a $481.5 million, or 116.4%, increase in the average balance of borrowings. The increase in interest expense on subordinated debt was due to the issuance of $62.0 million in aggregate principal amount of fixed to floating subordinated notes in June 2022.

Net Interest Income. Net interest income for the year ended December 31, 2023, decreased $33.6 million, or 21.2%, to $124.7 million, from $158.3 million for the year ended December 31, 2022, primarily due to a 62 basis point decrease in net interest margin to 2.35% for the year ended December 31, 2023 from 2.97% for the year ended December 31, 2022. The decrease in net interest margin was primarily due to the cost of interest-bearing liabilities increasing faster than the repricing of interest-earning assets. The cost of interest-bearing liabilities increased by 156 basis points to 2.11% for the year ended December 31, 2023, from 0.55% for the year ended December 31, 2022, driven primarily by both higher costs of deposits (and a greater percentage of deposits consisting of higher-costing certificates of deposit) and borrowed funds. The increase in the cost of interest-bearing liabilities was partially offset by an increase in the yield on interest-earning assets which increased 56 basis points to 3.93% for the year ended December 31, 2023, from 3.37% for the year ended December 31, 2022, due to the rising rate environment and a greater percentage of assets consisting of higher-yielding loans.

Provision for Credit Losses. The provision for credit losses on loans decreased by $3.1 million to a provision of $1.4 million for the year ended December 31, 2023, compared to $4.5 million for the year ended December 31, 2022, primarily due to slower loan growth, a decrease in reserves related to non-economic qualitative loss factors in the multifamily and commercial real estate portfolios, and a decrease in reserves related to the PCD portfolio, attributable to improved cash flows and a decrease in PCD loan balances. In addition, there was an improvement in the macroeconomic outlook. The decreases were partially offset by higher net charge-offs and higher reserves for downgraded commercial and industrial loans. Net charge-offs were $6.4 million for the year ended December 31, 2023, as compared to net charge-offs of $838,000 for the year ended December 31, 2022, due to $6.2 million in charge-offs on small business unsecured commercial and industrial loans. Management continues to monitor the small business unsecured commercial and industrial loan portfolio, which totaled $37.4 million at December 31, 2023.

Non-interest Income. Non-interest income increased $3.9 million, or 49.0%, to $11.9 million for the year ended December 31, 2023, from $8.0 million for the year ended December 31, 2022, due primarily to a $3.9 million increase in mark to market gains on trading securities, net. For the year ended December 31, 2023, gains on trading securities were $1.7 million, as compared to losses of $2.2 million for the year ended December 31, 2022. The trading portfolio is utilized to fund the Company’s deferred compensation obligation to certain employees and directors of the Company's deferred compensation plan (the “Plan”). The participants of this Plan, at their election, defer a portion of their compensation. Gains and losses on trading securities have no effect on net income since participants benefit from, and bear the full risk of, changes in the trading securities market values. Therefore, the Company records an equal and offsetting amount in compensation expense, reflecting the change in the Company’s obligations under the Plan.

56

Non-interest Expense. Non-interest expense increased $6.5 million, or 8.4%, to $83.5 million for the year ended December 31, 2023, compared to $76.9 million for the year ended December 31, 2022. The increase was primarily due to a $4.5 million increase in employee compensation and benefits, primarily attributable to a $3.9 million increase in the mark to market of the Company's deferred compensation plan expense, which as discussed above has no effect on net income, coupled with an increase in equity award expense related to awards issued in the first quarter of 2023, annual merit increases, and severance expense of $440,000, partially offset by a decrease in the accrual for incentive compensation. During the second quarter of 2023, due to economic conditions, the Company implemented a workforce reduction plan, which included modest layoffs and the elimination of, and/or not filling, certain open positions. The annual estimated cost savings of this plan is $1.4 million, pre-tax. Data processing expense increased by $723,000, due to continued investments in technology, increased transaction costs related to an increase in the number of customer accounts and related volume of transactions, and higher pricing effective January 2023. FDIC insurance expense increased by $924,000 due to higher assessment rates. There was a $506,000 decrease in the credit loss benefit for off-balance sheet credit exposures due to a benefit of $555,000 recorded during the year ended December 31, 2023, compared to a benefit of $1.1 million for the prior year, attributed to a larger decrease in the pipeline of loans committed and awaiting closing in the prior year as compared to the current year. Partially offsetting the increases was a $440,000 decrease in professional fees attributable to higher recruitment, consulting, and outsourcing fees in the prior year.

Income Tax Expense. The Company recorded income tax expense of $14.1 million for the year ended December 31, 2023, compared to $23.7 million for the year ended December 31, 2022, with the decrease due to lower taxable income. The effective tax rate for the year ended December 31, 2023, was 27.2%, compared to 28.0% for the year ended December 31, 2022.

Comparison of Operating Results for the Years Ended December 31, 2022 and 2021

For a discussion of our results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021, see “Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” Comparison of Operating Results, included in our 2022 Form 10-K, filed with the SEC on March 1, 2023.

57

Average Balances and Yields

The following table sets forth average balance sheets, average yields and costs, and certain other information for the years indicated.  No tax-equivalent yield adjustments have been made, as we had no tax-free interest-earning assets during the years.  All average balances are daily average balances based upon amortized costs.  Non-accrual loans are included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,"],["","2023","","2022","","2021"],["","Average Outstanding Balance","","Interest","","Average Yield/ Rate","","Average Outstanding Balance","","Interest","","Average Yield/ Rate","","Average Outstanding Balance","","Interest","","Average Yield/ Rate"],["","(Dollars in thousands)"],["Interest-earning assets:"],["Loans (1)","$","4,248,355","","","$","181,638","","","4.28","%","","$","4,077,175","","","$","160,911","","","3.95","%","","$","3,862,243","","","$","158,217","","","4.10","%"],["Mortgage-backed securities (2)","682,416","","","14,708","","","2.16","","","863,897","","","12,461","","","1.44","","","975,518","","","10,640","","","1.09"],["Other securities (2)","238,722","","","5,087","","","2.13","","","285,385","","","4,325","","","1.52","","","151,495","","","1,965","","","1.30"],["FHLBNY stock","40,684","","","3,113","","","7.65","","","22,541","","","1,174","","","5.21","","","25,420","","","1,279","","","5.03"],["Interest-earning deposits","97,975","","","4,249","","","4.34","","","85,485","","","817","","","0.96","","","164,553","","","197","","","0.12"],["Total interest-earning assets","5,308,152","","","208,795","","","3.93","","","5,334,483","","","179,688","","","3.37","","","5,179,229","","","172,298","","","3.33"],["Non-interest-earning assets","247,050","","","","","","","259,891","","","","","","","299,664"],["Total assets","$","5,555,202","","","","","","","$","5,594,374","","","","","","","$","5,478,893"],["Interest-bearing liabilities:"],["Savings, NOW, and money market accounts","$","2,463,455","","","$","30,408","","","1.23","%","","$","2,898,048","","","$","3,610","","","0.12","%","","$","2,811,552","","","$","3,031","","","0.11","%"],["Certificates of deposit","571,041","","","18,345","","","3.21","","","525,557","","","6,679","","","1.27","","","505,472","","","3,176","","","0.63"],["Total interest-bearing deposits","3,034,496","","","48,753","","","1.61","","","3,423,605","","","10,289","","","0.30","","","3,317,024","","","6,207","","","0.19"],["Borrowings","895,229","","","32,055","","","3.58","","","413,697","","","9,296","","","2.25","","","501,523","","","10,442","","","2.08"],["Subordinated debt","61,169","","","3,320","","","5.43","","","33,436","","","1,797","","","5.37","","","\u2014","","","\u2014","","","\u2014"],["Total interest-bearing liabilities","3,990,894","","","84,128","","","2.11","","","3,870,738","","","21,382","","","0.55","","","3,818,547","","","16,649","","","0.44"],["Non-interest-bearing deposits","770,939","","","","","","","907,603","","","","","","","812,805"],["Accrued expenses and other liabilities","102,563","","","","","","","102,807","","","","","","","97,385"],["Total liabilities","4,864,396","","","","","","","4,881,148","","","","","","","4,728,737"],["Stockholders\u2019 equity","690,806","","","","","","","713,226","","","","","","","750,156"],["Total liabilities and stockholders\u2019 equity","$","5,555,202","","","","","","","$","5,594,374","","","","","","","$","5,478,893"],["Net interest income","","","$","124,667","","","","","","","$","158,306","","","","","","","$","155,649"],["Net interest rate spread (3)","","","","","1.82","%","","","","","","2.82","%","","","","","","2.89","%"],["Net interest-earning assets (4)","$","1,317,258","","","","","","","$","1,463,745","","","","","","","$","1,360,682"],["Net interest margin (5)","","","","","2.35","%","","","","","","2.97","%","","","","","","3.01","%"],["Average interest-earning assets to interest-bearing liabilities","","","","","133.01","%","","","","","","137.82","%","","","","","","135.63","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Includes non-accruing loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs, which was not material."],["(2)","Securities available-for-sale are reported at amortized cost."],["(3)","Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities."],["(4)","Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities."],["(5)","Net interest margin represents net interest income divided by average total interest-earning assets."]]
[[/GREPCENT_TABLE]]

58

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the years indicated.  The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume).  The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate).  The total column represents the sum of the prior columns.  For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. 

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Year Ended December 31,"],["","2023 vs. 2022","","2022 vs. 2021"],["","","","","","Total","","","","","","Total"],["","Increase (Decrease) Due to","","Increase","","Increase (Decrease) Due to","","Increase"],["","Volume","","Rate","","(Decrease)","","Volume","","Rate","","(Decrease)"],["","(Dollars in thousands)"],["Interest-earning assets:"],["Loans","$","6,944","","","$","13,783","","","$","20,727","","","$","4,493","","","$","(1,799)","","","$","2,694"],["Mortgage-backed securities","(1,661)","","","3,908","","","2,247","","","(1,001)","","","2,822","","","1,821"],["Other securities","(514)","","","1,276","","","762","","","1,982","","","378","","","2,360"],["FHLBNY stock","1,225","","","714","","","1,939","","","(152)","","","47","","","(105)"],["Interest-earning deposits","136","","","3,296","","","3,432","","","(46)","","","666","","","620"],["Total interest-earning assets","6,130","","","22,977","","","29,107","","","5,276","","","2,114","","","7,390"],["Interest-bearing liabilities:"],["Savings, NOW and money market accounts","(459)","","","27,257","","","26,798","","","96","","","483","","","579"],["Certificates of deposit","625","","","11,041","","","11,666","","","110","","","3,393","","","3,503"],["Total deposits","166","","","38,298","","","38,464","","","206","","","3,876","","","4,082"],["Borrowings","16,963","","","7,319","","","24,282","","","(854)","","","1,505","","","651"],["Total interest-bearing liabilities","17,129","","","45,617","","","62,746","","","(648)","","","5,381","","","4,733"],["Change in net interest income","$","(10,999)","","","$","(22,640)","","","$","(33,639)","","","$","5,924","","","$","(3,267)","","","$","2,657"]]
[[/GREPCENT_TABLE]]

Asset Quality

PCD Loans (Held-for-Investment)

Based on a detailed review of PCD loans and experience in loan workouts, management believes it has a reasonable expectation about the amount and timing of future cash flows and accordingly has classified PCD loans of $9.9 million at December 31, 2023 and $11.5 million at December 31, 2022 as accruing, even though they may be contractually past due. At December 31, 2023, 2.9% of PCD loans were past due 30 to 89 days, and 27.1% were past due 90 days or more, as compared to 6.8% and 23.0%, respectively, at December 31, 2022.

Loans

General.  Maintaining loan quality historically has been, and will continue to be, a key element of our business strategy. We employ conservative underwriting standards for new loan originations and maintain sound credit administration practices while the loans are outstanding. In addition, substantially all of our loans are secured, predominantly by real estate. At December 31, 2023, our non-performing loans totaled $11.4 million, or 0.27%, of total loans. At the same time, net charge-offs have remained low at 0.15% of average loans outstanding for the year ended December 31, 2023, as compared to 0.02% for the year ended December 31, 2022, and 0.07% for the year ended December 31, 2021.

59

Non-performing Assets and Delinquent Loans.  The following table details non-performing assets consisting of non-performing loans held-for-investment and non-performing loans held-for-sale at December 31, 2023 and 2022 (in thousands): 

[[GREPCENT_TABLE]]
[["","December 31,"],["","2023","","2022"],["Non-accrual loans:"],["Held-for-investment","$","10,115","","","$","6,548"],["Non-accruing loans subject to restructuring agreements (1) :"],["Held-for-investment","\u2014","","","3,265"],["Total non-accruing loans held-for-investment","10,115","","","9,813"],["Loans 90 days or more past due and still accruing:"],["Held-for-investment","1,318","","","425"],["Total non-performing assets","$","11,433","","","$","10,238"],["Loans subject to restructuring agreements and still accruing (1)","$","\u2014","","","$","3,751"],["Accruing loans 30 to 89 days delinquent","$","8,683","","","$","3,644"]]
[[/GREPCENT_TABLE]]

(1) With the adoption of ASU 2022-02, effective January 1, 2023, TDR accounting has been eliminated.

The following table details non-performing loans by loan type at December 31, 2023 and 2022 (in thousands):  

[[GREPCENT_TABLE]]
[["","December 31,"],["","2023","","2022"],["Held-for-investment"],["Real estate loans:"],["Multifamily","$","2,709","","","$","3,285"],["Commercial","6,491","","","5,184"],["One-to-four family residential","104","","","118"],["Home equity and lines of credit","499","","","262"],["Commercial and industrial","305","","","964"],["Other","7","","","\u2014"],["Total non-accrual loans held-for-investment","10,115","","","9,813"],["Loans delinquent 90 days or more and still accruing:"],["Real estate loans:"],["Multifamily","$","201","","","$","233"],["Commercial","\u2014","","","8"],["One-to-four family residential","406","","","155"],["Home equity and lines of credit","711","","","\u2014"],["Commercial and industrial","\u2014","","","24"],["Other","\u2014","","","5"],["Total loans delinquent 90 days or more and still accruing held-for-investment","1,318","","","425"],["Total non-performing assets","$","11,433","","","$","10,238"]]
[[/GREPCENT_TABLE]]

At December 31, 2023 and 2022, the Company had no assets acquired through foreclosure.

Generally, loans, excluding PCD loans, are placed on non-accruing status when they become 90 days or more delinquent, and remain on non-accrual status until they are brought current, have six consecutive months of performance under the loan terms, and factors indicating reasonable doubt about the timely collection of payments no longer exist. Therefore, loans may be current in accordance with their loan terms, or may be less than 90 days delinquent and still be on a non-accruing status.

Effective January 1, 2023, the Company adopted ASU 2022-02, which eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty. Information on loan modifications prior to the adoption of ASU 2022-02 on January 1, 2023 is presented in accordance with the applicable accounting standards in effect at that time. At December 31, 2023, total non-performing loans included $236,000 of modified loans to borrowers experiencing financial difficulty and $3.3 million of TDR loans that existed prior to adoption of ASU 2022-02 on January 1, 2023.

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The following table sets forth the total amounts of delinquencies for accruing loans that were 30 to 89 days past due by type and by amount at the dates indicated (in thousands):    

[[GREPCENT_TABLE]]
[["","December 31,"],["","2023","","2022"],["Real estate loans:"],["Multifamily","$","740","","","$","189"],["Commercial","1,010","","","900"],["One-to-four family residential","3,339","","","672"],["Home equity and lines of credit","817","","","830"],["Commercial and industrial loans","2,767","","","1,048"],["Other loans","10","","","5"],["","$","8,683","","","$","3,644"]]
[[/GREPCENT_TABLE]]

The majority of the loans past due in the one-to-four family residential and home equity and lines of credit portfolios were due to loans past due 30 days at December 31, 2023, which then became current subsequent to the quarter end, therefore management does not believe the increase in delinquencies in these portfolios is an indicator of credit deterioration. The increase in the commercial and industrial loan delinquencies was primarily due to an increase in delinquencies in unsecured small business loans, attributable to a combination of rising interest rates and a slowdown in business. Unsecured small business loans totaled $37.4 million and $43.3 million at December 31, 2023 and December 31, 2022, respectively. Management continues to monitor the small business unsecured commercial and industrial loan portfolio.

Loans Subject to TDR Agreements prior to the adoption of ASU 2022-02

Included in non-accruing loans were loans subject to TDR agreements totaling $3.3 million at December 31, 2022. At December 31, 2022, three of the non-accruing TDRs totaling $547,000 were not performing in accordance with their restructured terms. Two of the loans totaling $477,000 were collateralized by real estate with an appraised value of $2.4 million. A third loan in the amount of $70,000 was an unsecured commercial and industrial loan, which had a specific reserve against it.

The Company also held loans subject to TDR agreements that were on accrual status totaling $3.8 million at December 31, 2022. At December 31, 2022, $3.6 million, or 94.8%, of the $3.8 million of accruing loans subject to TDR agreements were performing in accordance with their restructured terms. Generally, the types of concessions that we make to troubled borrowers include both temporary and permanent reductions to interest rates, extensions of payment terms, and, to a lesser extent, forgiveness of principal and interest.

The following table details the amounts and categories of the loans subject to restructuring agreements by loan type as of December 31, 2022 (in thousands):

[[GREPCENT_TABLE]]
[["","","","","At December 31,"],["","","","2022"],["","","","","","Non-Accruing","","Accruing"],["Real estate loans:"],["Commercial","","","","","$","3,069","","","$","3,034"],["One-to-four family residential","","","","","\u2014","","","666"],["Multifamily","","","","","126","","","\u2014"],["Home equity and lines of credit","","","","","\u2014","","","27"],["Commercial and industrial loans","","","","","70","","","24"],["","","","","","$","3,265","","","$","3,751"],["Performing in accordance with restructured terms","","","","","83.2","%","","94.8","%"]]
[[/GREPCENT_TABLE]]

61

Allowance for Credit Losses

On January 1, 2021, the Company adopted the CECL standard and as a result of the adoption recorded a $10.4 million increase to its allowance for credit losses on loans, including $6.8 million related to PCD loans. For further discussion of the calculation of the allowance for credit losses, see “—Critical Accounting Policies—Allowance for Credit Losses on Loans.”

The allowance for credit losses to non-performing loans decreased from 416.26% at December 31, 2022 to 328.30% at December 31, 2023. This decrease was primarily attributable to a decrease of $5.1 million, or 11.9%, in the allowance for credit losses as well as an increase in non-performing loans of $1.2 million, from $10.2 million at December 31, 2022 to $11.4 million at December 31, 2023.

The Company utilizes external appraisals to determine the fair value of the underlying collateral in its analysis of impaired loans. A third-party appraisal is generally ordered as soon as a loan is designated as an impaired loan and updated annually, or more frequently if required. Generally, non-performing loans are charged down to the appraised value of collateral less costs to sell for collateral-dependent loans and to the present value of the expected future cash flows for non-collateral dependent loans, which reduces the ratio of the allowance for credit losses to non-performing loans. Downward adjustments to appraisal values, primarily to reflect “quick sale” discounts, are generally recorded as specific reserves within the allowance for credit losses.

The allowance for credit losses to total loans held-for-investment, net, was 0.89% at December 31, 2023, as compared to 1.00% at December 31, 2022. The decrease in the coverage ratio from December 31, 2022 was primarily attributable to a decrease of $5.1 million, or 11.9%, in the allowance for credit losses from December 31, 2022 to December 31, 2023, offset by a decrease in the loan portfolio of $40.0 million, or 0.9%. The decrease in the allowance for credit losses during the year was primarily attributable to slower loan growth, a decrease in reserves related to non-economic qualitative loss factors in the multifamily and commercial real estate portfolios, and a decrease in reserves related to the PCD portfolio, attributable to improved cash flows and a decrease in PCD loan balances.

Specific reserves on loans individually evaluated for impairment increased by $7,000 to $45,200 at December 31, 2023 from $38,200 at December 31, 2022. At December 31, 2023, the Company had 19 loans classified as individually impaired and recorded $45,200 of specific reserves on four of the 19 impaired loans. At December 31, 2022, the Company had 20 loans classified as individually impaired and recorded $38,200 of specific reserves on four of the 20 impaired loans.

62

The following table sets forth activity in our allowance for credit losses, by loan type, at December 31, for the years indicated (in thousands):

[[GREPCENT_TABLE]]
[["","Real estate loans"],["","Commercial (1)","","One-to-four Family Residential","","Construction and Land","","","","Home Equity and Lines of Credit","","Commercial and Industrial","","Other","","PCD","","Total Allowance for Credit Losses"],["2020","$","33,005","","","$","207","","","$","1,214","","","","","$","260","","","$","1,842","","","$","198","","","$","881","","","$","37,607"],["Impact of CECL Adjustment","(1,949)","","","5,233","","","(921)","","","","","419","","","947","","","(188)","","","6,812","","","10,353"],["Balance at January 1, 2021","31,056","","","5,440","","","293","","","","","679","","","2,789","","","10","","","7,693","","","47,960"],["(Benefit)/provision for credit losses","(4,331)","","","(1,903)","","","(124)","","","","","(145)","","","991","","","(3)","","","(669)","","","(6,184)"],["Recoveries","60","","","29","","","\u2014","","","","","26","","","39","","","5","","","119","","","278"],["Charge-offs","\u2014","","","(21)","","","\u2014","","","","","\u2014","","","(646)","","","(3)","","","(2,411)","","","(3,081)"],["2021","26,785","","","3,545","","","169","","","","","560","","","3,173","","","9","","","4,732","","","38,973"],["Provision/(benefit) for credit losses","2,876","","","359","","","155","","","","","287","","","1,243","","","(12)","","","(426)","","","4,482"],["Recoveries","102","","","32","","","\u2014","","","","","19","","","144","","","12","","","178","","","487"],["Charge-offs","(278)","","","\u2014","","","\u2014","","","","","\u2014","","","(446)","","","\u2014","","","(601)","","","(1,325)"],["2022","29,485","","","3,936","","","324","","","","","866","","","4,114","","","9","","","3,883","","","42,617"],["(Benefit)/provision for credit losses","(6,301)","","","(651)","","","(175)","","","","","838","","","8,445","","","(3)","","","(800)","","","1,353"],["Recoveries","71","","","\u2014","","","\u2014","","","","","1","","","63","","","\u2014","","","10","","","145"],["Charge-offs","\u2014","","","\u2014","","","\u2014","","","","","\u2014","","","(6,572)","","","\u2014","","","(8)","","","(6,580)"],["2023","$","23,255","","","$","3,285","","","$","149","","","","","$","1,705","","","$","6,050","","","$","6","","","$","3,085","","","$","37,535"],["(1) Commercial includes commercial real estate loans collateralized by owner-occupied, non-owner occupied, and multifamily properties."]]
[[/GREPCENT_TABLE]]

During the year ended December 31, 2023, the Company recorded net charge-offs of $6.4 million, as compared to net charge-offs of $838,000 for the year ended December 31, 2022, and net charge-offs of $2.8 million for the year ended December 31, 2021. Charge-offs in 2023 were primarily related to small business unsecured commercial and industrial loans. Charge-offs in 2022 and 2021 were primarily related to PCD loans and small business unsecured commercial and industrial loans. The decrease in the allowance for credit losses from 2022 to 2023 for commercial real estate loans was primarily attributable to a decrease in loan balances and a decrease in reserves related to non-economic qualitative loss factors in the multifamily and commercial real estate portfolios. The decrease in the allowance for credit losses in the one-to-four family residential and construction and land loan portfolios was primarily related to a decrease in loan balances. The decrease in the allowance for credit losses for PCD loans was primarily attributable to a decrease in the PCD loan balances and an improvement in cash flows. Allowance for credit losses allocated to the home equity and lines of credit and commercial and industrial loan portfolios increased from December 31, 2022 to December 31, 2023. This increase was primarily due to risk rating downgrades in those portfolios.

63

Management of Market Risk

General.  A majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage-related securities, other securities and bonds and loans, generally have longer maturities than our liabilities, which consist primarily of deposits and wholesale borrowings. As a result, a principal part of our business strategy involves managing interest rate risk and limiting the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established a Management Asset-Liability Committee (“MALCO”), comprised of our SVP & Chief Investment Officer and Treasurer, who chairs this Committee, our President & Chief Executive Officer, our EVP & Chief Risk Officer, our EVP & Chief Financial Officer, our EVP & Chief Lending Officer, our EVP & Chief Branch Administration, Deposit Operations & Business Development Officer, and our SVP & Director of Marketing, and other officers and staff as necessary or appropriate. This committee is responsible for, among other things, evaluating the interest rate risk inherent in our assets and liabilities, for recommending to the Risk Committee of our Board of Directors (“Risk Committee”) the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.

We seek to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we currently use the following strategies to manage our interest rate risk:

•originating multifamily loans and commercial real estate loans that generally have shorter maturities than one-to-four family residential real estate loans and have higher interest rates that generally reset from five to ten years;

•investing in investment grade corporate securities and mortgage-backed securities; and

•obtaining general financing through lower-cost core deposits, brokered deposits, and longer-term FHLB advances, borrowings under the BTFP, and repurchase agreements.

Shortening the average term of our interest-earning assets by increasing our investments in shorter-term assets, as well as originating loans with variable interest rates, helps to match the maturities and interest rates of our assets and liabilities better, thereby reducing the exposure of our net interest income to changes in market interest rates.

Net Portfolio Value Analysis. We compute amounts by which the net present value of our assets and liabilities (net portfolio value or NPV) would change in the event market interest rates changed over an assumed range of rates. Our simulation model uses a discounted cash flow analysis to measure the interest rate sensitivity of our NPV. Depending on current market interest rates, we estimate the economic value of these assets and liabilities under the assumption that interest rates experience an instantaneous and sustained increase of 100, 200, 300, or 400 basis points, or a decrease of 100, 200, 300, or 400 basis points, which is based on the current interest rate environment. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. 

Net Interest Income Analysis.  In addition to NPV calculations, we analyze our sensitivity to changes in interest rates through our net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. In our model, we estimate what our net interest income would be for a twelve-month period. Depending on current market interest rates we then calculate what the net interest income would be for the same period under the assumption that interest rates experience an instantaneous and sustained increase of 100, 200, 300, or 400 basis points, or a decrease of 100 and 200 basis points, which is based on the current interest rate environment.

64

The following tables set forth, as of December 31, 2023 and December 31, 2022, our calculation of the estimated changes in our NPV, NPV ratio, and percent change in net interest income that would result from the designated instantaneous and sustained changes in interest rates (dollars in thousands). Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit repricing characteristics including decay rates, and correlations to movements in interest rates, and should not be relied on as indicative of actual results.

[[GREPCENT_TABLE]]
[["","","NPV at December 31, 2023"],["Change in Interest Rates (basis points)","","Estimated Present Value of Assets","","Estimated Present Value of Liabilities","","Estimated NPV","","Estimated Change In NPV","","Estimated Change in NPV %","","Estimated NPV/Present Value of Assets Ratio","","Next 12 Months Net Interest Income Percent Change","","Months 13-24 Net Interest Income Percent Change"],["+400","","$","4,845,088","","","$","4,222,267","","","$","622,821","","","$","(139,446)","","","(18.29)","%","","12.85","%","","(20.93)","%","","(5.16)","%"],["+300","","4,945,428","","","4,292,831","","","652,597","","","(109,670)","","","(14.39)","%","","13.20","%","","(15.79)","%","","(4.31)","%"],["+200","","5,060,164","","","4,366,834","","","693,330","","","(68,937)","","","(9.04)","%","","13.70","%","","(9.91)","%","","(1.91)","%"],["+100","","5,174,386","","","4,444,681","","","729,705","","","(32,562)","","","(4.27)","%","","14.10","%","","(4.52)","%","","(0.49)","%"],["\u2014","","5,289,153","","","4,526,886","","","762,267","","","\u2014","","","\u2014","%","","14.41","%","","\u2014","%","","\u2014","%"],["(100)","","5,410,037","","","4,618,015","","","792,022","","","29,755","","","3.90","%","","14.64","%","","2.73","%","","(1.32)","%"],["(200)","","5,531,944","","","4,714,497","","","817,447","","","55,180","","","7.24","%","","14.78","%","","4.51","%","","(4.34)","%"],["(300)","","5,653,051","","","4,818,672","","","834,379","","","72,112","","","9.46","%","","14.76","%","","4.39","%","","(9.12)","%"],["(400)","","5,815,435","","","4,954,580","","","860,855","","","98,588","","","12.93","%","","14.80","%","","4.19","%","","(9.12)","%"]]
[[/GREPCENT_TABLE]]

The table above indicates that at December 31, 2023, in the event of a 400 basis point decrease in interest rates, we would experience a 12.93% increase in estimated net portfolio value, a 4.19% increase in net interest income in year one, and a 9.12% decrease in net income in year two. In the event of a 400 basis point increase in interest rates, we would experience an 18.29% decrease in estimated net portfolio value, a 20.93% decrease in net interest income in year one and a 5.16% decrease in net interest income in year two.

[[GREPCENT_TABLE]]
[["","","NPV at December 31, 2022"],["Change in Interest Rates (basis points)","","Estimated Present Value of Assets","","Estimated Present Value of Liabilities","","Estimated NPV","","Estimated Change In NPV","","Estimated Change in NPV %","","Estimated NPV/Present Value of Assets Ratio","","Next 12 Months Net Interest Income Percent Change","","Months 13-24 Net Interest Income Percent Change"],["+400","","$","4,850,423","","","$","4,057,885","","","$","792,538","","","$","(227,578)","","","(22.31)","%","","16.34","%","","(25.83)","%","","(11.03)","%"],["+300","","4,967,247","","","4,126,616","","","840,631","","","(179,485)","","","(17.59)","%","","16.92","%","","(19.51)","%","","(8.90)","%"],["+200","","5,106,889","","","4,198,831","","","908,058","","","(112,058)","","","(10.98)","%","","17.78","%","","(12.01)","%","","(4.41)","%"],["+100","","5,244,669","","","4,274,947","","","969,722","","","(50,394)","","","(4.94)","%","","18.49","%","","(5.33)","%","","(1.19)","%"],["\u2014","","5,375,689","","","4,355,573","","","1,020,116","","","\u2014","","","\u2014","%","","18.98","%","","\u2014","%","","\u2014","%"],["(100)","","5,503,211","","","4,464,131","","","1,039,080","","","18,964","","","1.86","%","","18.88","%","","0.76","%","","(3.80)","%"],["(200)","","5,626,336","","","4,586,245","","","1,040,091","","","19,975","","","1.96","%","","18.49","%","","0.00","%","","(8.91)","%"],["(300)","","5,749,256","","","4,717,723","","","1,031,533","","","11,417","","","1.12","%","","17.94","%","","(0.29)","%","","(11.15)","%"],["(400)","","5,912,105","","","4,859,064","","","1,053,041","","","32,925","","","3.23","%","","17.81","%","","(0.63)","%","","(13.15)","%"]]
[[/GREPCENT_TABLE]]

The table above indicates that at December 31, 2022, in the event of a 400 basis point decrease in interest rates, we would experience a 3.23% increase in estimated net portfolio value, a 0.63% decrease in net interest income in year one and a 13.15% decrease in net income in year two. In the event of a 400 basis point increase in interest rates, we would experience a 22.31% decrease in estimated net portfolio value, a 25.83% decrease in net interest income in year one and an 11.03% decrease in net interest income in year two.

Our policies provide that, in the event of a 200 basis point decrease or less in interest rates, our net present value ratio should decrease by no more than 300 basis points and 10%, and in the event of a 400 basis point increase or less, our net present value should decrease by no more than 475 basis points and 35%. In the event of a 200 basis point decrease or less, our projected net interest income should decrease by no more than 10% in year one and 20% in year two, and in the event of a 400 basis point increase or less, our projected net interest income should decrease by no more than 39% in year one and 26% in year two. At December 31, 2023 and December 31, 2022, we were in compliance with all Board-approved policies with respect to interest rate risk management.

65

Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in net portfolio value and net interest income. Our model requires us to make certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. However, we also apply consistent parallel yield curve shifts (in both directions) to determine possible changes in net interest income if the theoretical yield curve shifts occurred gradually. Net interest income analysis also adjusts the asset and liability repricing analysis based on changes in prepayment rates resulting from the parallel yield curve shifts. In addition, the net portfolio value and net interest income information presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although interest rate risk calculations provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net portfolio value or net interest income and will differ from actual results.

Liquidity and Capital Resources

The Board of Directors of the Bank has approved a liquidity policy that it reviews and updates at least annually. Senior management is responsible for implementing the policy. The MALCO is responsible for general oversight and strategic implementation of the policy and management of the appropriate departments are designated responsibility for implementing any strategies established by MALCO. Senior management receives, at least daily, cash position reports and monthly cash forecasts to ensure that all short-term obligations are timely satisfied and that adequate liquidity exists to fund activities. Reports detailing the Bank's liquidity reserves are presented to appropriate senior management on at least a quarterly basis, and the Risk Committee at each of its meetings. In addition, a twelve-month liquidity forecast is presented to MALCO in order to assess potential future liquidity scenarios. A forecast of cash flow data for the upcoming twelve months is presented to the Risk Committee on a quarterly basis.

Liquidity is the ability to fund assets and meet obligations as they come due. Our primary sources of funds consist of deposit inflows, loan repayments, borrowings through repurchase agreements, advances from money center banks, the FHLBNY, the Federal Reserve Bank, and repayments, maturities and sales of securities. While maturities and scheduled amortization of loans and securities are reasonably predictable sources of funds, deposit flows, mortgage prepayments and security sales are greatly influenced by general interest rates, economic conditions, and competition. Our Risk Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and withdrawals of deposits by our customers as well as unanticipated contingencies. We seek to maintain a ratio of liquid assets (not subject to pledge or encumbered) as a percentage of deposits and borrowings of 35% or greater. At December 31, 2023, this ratio was 39.23%. 

Systemic events of March 2023 impacted liquidity in the overall banking system, particularly for mid-size and regional banks. Management took a number of actions to enhance Northfield’s liquidity management, including monitoring daily deposit inflows and outflows, temporarily increasing the amount of cash held on the balance sheet, maximizing investment securities available for pledge for borrowers, and executing strategies to grow our retail time deposit portfolio. Additionally, on March 12, 2023, the Board of Governors of the Federal Reserve System created the BTFP, which aims to enhance liquidity by allowing institutions to pledge certain securities at par value, and at pay a borrowing rate of ten basis points over the one-year overnight index swap rate. The BTFP is available to eligible U.S. federally insured depository institutions, with advances having a term of up to one year and no prepayment penalties. As of December 31, 2023, the Company had borrowed $94.5 million under the BTFP. We believe that we had sufficient sources of liquidity to satisfy our short- and long-term liquidity needs at December 31, 2023.

We regularly adjust our investments in liquid assets based on our assessment of: 

•expected loan demand; 

•expected deposit flows;

•yields available on interest-earning deposits and securities; and

•the objectives of our asset/liability management program.

66

Our most liquid assets are cash and cash equivalents, corporate bonds, and unpledged mortgage-related securities issued or guaranteed by the U.S. Government, Fannie Mae, or Freddie Mac, that we can either borrow against or sell. We also have the ability to surrender bank-owned life insurance contracts. The surrender of these contracts would subject the Company to income taxes and penalties for increases in the cash surrender values over the original premium payments. We also have the ability to obtain additional funding from the FHLB and Federal Reserve Bank, utilizing unencumbered and unpledged securities and multifamily loans if a need for additional funds arises. Any amount pledged for such deposits under the line of credit reduces the Company's available borrowing amount under the FHLB advance agreement. The Company continues to maintain an adequate liquidity position and expects to have sufficient funds available to meet current commitments in the normal course of business.

The Company has a diversified deposit base, with long-standing client relationships across multiple customer segments providing stable funding. Government deposits are collateralized by assets or letters of credit issued by the FHLBNY. Uninsured deposits (excluding fully collateralized uninsured governmental deposits and intercompany deposits of $856.5 million) are estimated at approximately $869.9 million, or 22.4%, of total deposits as of December 31, 2023.

The Company had the following primary sources of liquidity at December 31, 2023 (in thousands):

[[GREPCENT_TABLE]]
[["Cash and cash equivalents(1)","","","$","215,617"],["Corporate bonds(2)","","","$","110,914"],["Multifamily loans(2)","","","$","930,990"],["Mortgage-backed securities (issued or guaranteed by the U.S. Government, Fannie Mae, or Freddie Mac)(2)","$","382,787"]]
[[/GREPCENT_TABLE]]

(1) Excludes $13.9 million of cash at Northfield Bank.

(2) Represents remaining borrowing potential.

At December 31, 2023, we had $7.0 million in outstanding loan commitments. In addition, we had $292.7 million in unused lines of credit to borrowers. Certificates of deposit due within one year of December 31, 2023 totaled $635.8 million, or 16.4% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including loan sales, securities sales, other deposit products, including replacement or brokered certificates of deposit, securities sold under agreements to repurchase (repurchase agreements), and advances from the FHLBNY and other borrowing sources. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit. Based on experience, we believe that a significant portion of such deposits will remain with us, and we have the ability to attract and retain deposits by adjusting the interest rates offered.

We have a detailed contingency funding plan that is reviewed and reported to the Risk Committee at least quarterly. This plan includes monitoring cash on a daily basis to determine the liquidity needs of Northfield Bank. Additionally, management performs a stress test on Northfield Bank’s retail deposits and wholesale funding sources in several scenarios on a quarterly basis. The stress scenarios include deposit attrition of up to 50%, and selling our securities available-for-sale portfolio at a discount of 20% to its current estimated fair value and its impact on capital levels. Northfield Bank continues to maintain significant liquidity under all stress scenarios.

Northfield Bancorp, Inc. is a separate legal entity from Northfield Bank and must provide for its own liquidity to fund dividend payments, stock repurchases, and other corporate items. The Company’s primary source of liquidity is the receipt of dividend payments from the Bank in accordance with applicable regulatory requirements. At December 31, 2023, Northfield Bancorp, Inc. (unconsolidated) had liquid assets of $29.2 million.

Northfield Bank and Northfield Bancorp, Inc. are both subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning assets and off-balance sheet items to broad risk categories. At December 31, 2023, both Northfield Bank and Northfield Bancorp, Inc. exceeded all regulatory capital requirements and are considered “well capitalized” under regulatory guidelines.  See “Item 1. Business - Supervision and Regulation” and Note 15 of the Notes to the consolidated financial statements.

67

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit, and unused lines of credit. While these contractual obligations represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process applicable to loans we originate. In addition, we routinely enter into commitments to sell mortgage loans. Such amounts are not significant to our operations. For additional information, see Note 14 of the Notes to the consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

ASU No. 2023-07. In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”. The amendments in this ASU require improved reportable segment information on an annual and interim basis, primarily through enhanced disclosures about significant segment expenses. This update will be effective for financial statements issued for fiscal years beginning after December 15, 2023, and interim periods for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of this standard on the consolidated financial statements.

ASU No. 2023-09. In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. The amendments in the this ASU require improved annual income tax disclosures surrounding rate reconciliation, income taxes paid, and other disclosures. This update will be effective for financial statements issued for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of this standard on the consolidated financial statements.

Impact of Inflation and Changing Prices

Our consolidated financial statements and related notes have been prepared in accordance with U.S. GAAP. U.S. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The effect of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater effect on our performance than inflation.