# Dime Commercial Bancshares, Inc.: Form 10-Q for the period ended Sep 30, 2019

- Company: [Dime Commercial Bancshares, Inc.](/companies/dcom.md) (CIK 846617)
- Form: 10-Q
- Filed: 2019-11-08
- Accepted by EDGAR: Nov 8, 2019, 16:21 ET
- Period: 2019-09-30
- Accession: 0000846617-19-000072
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/846617/000084661719000072/bdge-20190930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/846617/000084661719000072/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-07-01 to 2019-09-30 | $2.6m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 9 months, 2019-01-01 to 2019-09-30 | $7.6m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Interest expense | 3 months, 2019-07-01 to 2019-09-30 | $9.6m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2019-01-01 to 2019-09-30 | $30.7m | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-07-01 to 2019-09-30 | $3.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2019-01-01 to 2019-09-30 | $10.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-07-01 to 2019-09-30 | $13.9m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2019-01-01 to 2019-09-30 | $37.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-07-01 to 2019-09-30 | $0.70 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2019-01-01 to 2019-09-30 | $1.88 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-07-01 to 2019-09-30 | $0.70 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2019-01-01 to 2019-09-30 | $1.88 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-07-01 to 2019-09-30 | 19,568 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2019-01-01 to 2019-09-30 | 19,552 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2019-01-01 to 2019-09-30 | $47.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2019-01-01 to 2019-09-30 | $1.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2019-01-01 to 2019-09-30 | $13.8m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2019-01-01 to 2019-09-30 | $625.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-09-30 | $131.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2019-09-30 | $4.74bn | us-gaap:Assets |
| Total liabilities | at 2019-09-30 | $4.25bn | us-gaap:Liabilities |
| Shareholders' equity | at 2019-09-30 | $486.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 73,156 characters.

*In this Quarterly Report on Form 10-Q, unless otherwise mentioned, the terms the “Company”, “we”, “us” and “our” refer to Bridge Bancorp, Inc. and its wholly owned subsidiary, BNB Bank (the “Bank”). We use the term “Holding Company” to refer solely to Bridge Bancorp, Inc. and not to its consolidated subsidiary.*

### Private Securities Litigation Reform Act Safe Harbor Statement

This report may contain statements relating to our future results (including certain projections and business trends) that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). Such forward-looking statements, in addition to historical information, which involve risk and uncertainties, are based on the beliefs, assumptions and expectations of our management. Words such as “expects,” “believes,” “should,” “plans,” “anticipates,” “will,” “potential,” “could,” “intend,” “may,” “outlook,” “predict,” “project,” “would,” “estimated,” “assumes,” “likely,” and variations of such similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements include, but are not limited to, possible or assumed estimates with respect to the financial condition, expected or anticipated revenue, and results of operations and our business, including earnings growth; revenue growth in retail banking, lending and other areas; origination volume in the consumer, commercial and other lending businesses; current and future capital management programs; non-interest income levels, including fees from the title insurance subsidiary and banking services as well as product sales; tangible capital generation; market share; expense levels; and other business operations and strategies. We claim the protection of the safe harbor for forward-looking statements contained in the PSLRA.

Factors that could cause future results to vary from current management expectations include, but are not limited to, changing economic conditions; legislative and regulatory changes, including increases in FDIC insurance rates; monetary and fiscal policies of the federal government; changes in tax policies; rates and regulations of federal, state and local tax authorities; changes in interest rates; deposit flows; the cost of funds; demand for loan products; demand for financial services; competition; our ability to successfully integrate acquired entities; changes in the quality and composition of our loan and investment portfolios; changes in management's business strategies; changes in accounting principles, policies or guidelines; changes in real estate values; expanded regulatory requirements, which could adversely affect operating results; and the “Risk Factors” discussed in the our Annual Report on Form 10‑K for the year ended December 31, 2018 as updated by our Quarterly Reports on Form 10-Q. The forward-looking statements are made as of the date of this report, and we assume no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

### Overview

#### Who We Are and How We Generate Income

Bridge Bancorp, Inc., a New York corporation, is a bank holding company formed in 1989. On a parent-only basis, the Holding Company has had minimal results of operations. The Holding Company is dependent on dividends from its wholly-owned subsidiary, BNB Bank, its own earnings, additional capital raised, and borrowings as sources of funds. The information in this report reflects principally the financial condition and results of operations of the Bank. The Bank's results of operations are primarily dependent on its net interest income, which is the difference between interest income on loans and investments and interest expense on deposits and borrowings. The Bank also generates non-interest income, such as fee income on deposit accounts and merchant credit and debit card processing programs, investment services, income from its title insurance subsidiary, and net gains on sales of securities and loans. The level of non-interest expenses, such as salaries and benefits, occupancy and equipment costs, other general and administrative expenses, expenses from the Bank’s title insurance subsidiary, and income tax expense, further affects our net income. Certain reclassifications have been made to prior year amounts and the related discussion and analysis to conform to the current year presentation. These reclassifications did not have an impact on net income or total stockholders' equity.

#### Our Principal Products and Services and Locations of Operations

The Bank was established in 1910 and is headquartered in Bridgehampton, New York. We operate 40 branch locations in the primary market areas of Suffolk and Nassau Counties on Long Island and the New York City boroughs, including 36 in Suffolk and Nassau Counties, two in Queens and two in Manhattan. For over a century, we have maintained our focus on building customer relationships in its market area. Our mission is to grow through the provision of exceptional service to our customers, our employees, and the community. We strive to achieve excellence in financial performance and build long-term shareholder value. We engage in full service commercial and consumer banking business, including accepting time, savings and demand deposits from the consumers, businesses and local municipalities in our market area. These deposits, together with funds generated from operations and borrowings, are invested primarily in: (1) commercial real estate loans; (2) multi-family mortgage loans; (3) residential mortgage loans; (4) secured and unsecured commercial and consumer loans; (5) home equity loans; (6) construction and land loans; (7) Federal Home Loan Bank (“FHLB”), Federal National Mortgage Association (“Fannie Mae”), Government National Mortgage Association (“Ginnie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) mortgage-backed securities, collateralized mortgage obligations and other asset backed securities; (8) New York State and local municipal obligations; (9) U.S. government-sponsored enterprise (“U.S. GSE”) securities; and (10) corporate bonds. We also offer the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) programs, providing multi-millions of dollars of Federal Deposit Insurance Corporation (“FDIC”) insurance on deposits to our customers. In addition, we offer merchant credit and debit card processing, automated teller machines, cash management services, lockbox processing, online banking services, remote deposit capture, safe deposit boxes, and individual retirement accounts as well as investment services through Bridge Financial Services LLC, which offers a full range of investment products and services through a third-party broker dealer. Through its title insurance abstract subsidiary, the Bank acts as a broker for title insurance services. Our customer base is comprised principally of small businesses, municipal relationships and consumer relationships.

### Quarterly Highlights

- Net income for the 2019 third quarter of $13.9 million, or $0.70 per diluted share, compared to $6.5 million, or $0.33 per diluted share for the 2018 third quarter, inclusive of pre-tax charge of $9.5 million, or $0.37 per diluted share after tax, related to the fraudulent conduct of a business customer through its deposit accounts at BNB in the 2018 period.
- Net interest income increased to $36.7 million for the third quarter of 2019 compared to $34.2 million in 2018.
- Tax-equivalent net interest margin was 3.40% for the third quarter of 2019 compared to 3.32% for the 2018 period.
- Total assets of $4.7 billion at September 30, 2019, increased $35.3 million compared to December 31, 2018 and increased $287.3 million compared to September 30, 2018.
- Total loans held for investment at September 30, 2019 totaled $3.5 billion, an increase of $232.5 million, or 7.1%, from December 31, 2018 and an increase of $310.9 million, or 9.7%, over September 30, 2018.
- Total deposits of $3.7 billion at September 30, 2019, decreased $143.1 million from December 31, 2018 and increased $124.1 million compared to September 30, 2018.
- Allowance for loan losses was 0.92% of loans at September 30, 2019 compared to 0.96% at December 31, 2018.
- A cash dividend of $0.23 per share was declared in October 2019 for the third quarter.

### Challenges and Opportunities

Interest rates have been at or near historic lows for an extended period of time. Growth and service strategies have the potential to offset the compression on the net interest margin with volume as the customer base grows through expanding our banking footprint, while maintaining and developing existing relationships. Since 2010, we have opened fifteen Bank branches, including one in November 2018 in Melville, New York. We have also grown the Bank through acquisitions including the June 2015 acquisition of Community National Bank (“CNB”), the February 2014 acquisition of First National Bank of New York (“FNBNY”), and the May 2011 acquisition of Hamptons State Bank (“HSB”). We will continue to seek opportunities to expand our reach into other contiguous markets by network expansion, or through the addition of professionals with established customer relationships. Recent and pending acquisitions of local competitors may also provide additional growth opportunities.

We continue to face challenges associated with ever-increasing banking regulations and the current low interest rate environment. A prolonged inverted or flat yield curve presents a challenge to a bank, like us, that derives most of its revenue from net interest margin. A sustained decrease in market interest rates could adversely affect our earnings. When interest rates decline, borrowers tend to refinance higher-rate, fixed-rate loans at lower rates. In addition, the majority of our loans are at variable interest rates, which would adjust to lower rates. However, with the Federal Reserve having cut interest rates during the 2019 third quarter, we have an opportunity to lower our funding costs and stabilize our net interest margin.

We established five strategic objectives to achieve our vision: (1) acquire new customers in growth markets; (2) build new sales and marketing disciplines; (3) deepen customer relationships; (4) expand use of automation; and (5) improve talent management. We believe there remain opportunities to grow our franchise and that continued investments to generate core funding, quality loans and new sources of revenue remain keys to continue creating long-term shareholder value. Our ability to attract, retain, train and cultivate employees at all levels of our Company remains significant to meeting our corporate objectives. In particular, we are focused on expanding and retaining our loan team as we continue to grow the loan portfolio. We have capitalized on opportunities presented by the market and diligently seek opportunities to grow and strengthen the franchise. We recognize the potential risks of the current economic environment and will monitor the impact of market events as we evaluate loans and investments and consider growth initiatives. Our management and Board of Directors have built a solid foundation for growth, and we are positioned to adapt to anticipated changes in the industry resulting from new regulations and legislative initiatives.

### Critical Accounting Policies

#### Allowance for Loan Losses

We consider the allowance for loan losses accounting policy to be the most critical and requires complex management judgment. The judgments made regarding the allowance for loan losses can have a material effect on our results of operations.

The allowance for loan losses is established and maintained through a provision for loan losses based on probable incurred losses in our loan portfolio. We evaluate the adequacy of the allowance for loan losses on a quarterly basis. The allowance is comprised of both individual valuation allowances and loan pool valuation allowances. We monitor our entire loan portfolio on a regular basis, with consideration given to detailed analysis of classified loans, repayment patterns, probable incurred losses, past loss experience, current economic conditions, and various types of concentrations of credit. Additions to the allowance are charged to expense and realized losses, net of recoveries, are charged to the allowance.

Individual valuation allowances are established in connection with specific loan reviews and the asset classification process including the procedures for impairment testing under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) No. 310, “Receivables”. Such valuation, which includes a review of loans for which full collectability in accordance with contractual terms is not reasonably assured, considers the estimated fair value of the underlying collateral less the costs to sell, if any, or the present value of expected future cash flows, or the loan’s observable market value. Any shortfall that exists from this analysis results in a specific allowance for the loan. Pursuant to our policy, loan losses must be charged-off in the period the loans, or portions thereof, are deemed uncollectable. Assumptions and judgments by management, in conjunction with outside sources, are used to determine whether full collectability of a loan is not reasonably assured. These assumptions and judgments are also used to determine the estimates of the fair value of the underlying collateral or the present value of expected future cash flows or the loan’s observable market value. Individual loan analyses are periodically performed on specific loans considered impaired. Individual valuation allowances could differ materially as a result of changes in these assumptions and judgments. The results of the individual valuation allowances are aggregated and included in the overall allowance for loan losses.

Loan pool valuation allowances represent loss allowances that have been established to recognize the inherent risks associated with our lending activities, but which, unlike individual allowances, have not been allocated to particular problem assets. Pool evaluations are broken down into loans with homogenous characteristics by loan type and include commercial real estate mortgages, owner and non-owner occupied; multi-family mortgage loans; residential real estate mortgages, home equity loans; commercial, industrial and agricultural loans, secured and unsecured; real estate construction and land loans; and consumer loans. We consider a variety of factors in determining the adequacy of the valuation allowance and have developed a range of valuation allowances necessary to adequately provide for probable incurred losses in each pool of loans. We consider our charge-off history along with the growth in the portfolio as well as our credit administration and asset management philosophies and procedures when determining the allowances for each pool. In addition, we evaluate and consider credit risk ratings, which includes our evaluation of: cash flow, collateral, guarantor support, financial disclosures, industry trends and strength of borrowers’ management, the impact that economic and market conditions may have on the portfolio as well as known and inherent risks in the portfolio. Finally, we evaluate and consider the allowance ratios and coverage percentages of both peer group and regulatory agency data. These evaluations are inherently subjective because, even though they are based on objective data, it is our interpretation of that data that determines the amount of the appropriate allowance. If our evaluations prove to be incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in the loan portfolio, resulting in additions to the allowance for loan losses.

For Purchased Credit Impaired (“PCI”) loans, a valuation allowance is established when it is probable that we will be unable to collect all the cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimate after acquisition. A specific allowance is established when subsequent evaluations of expected cash flows from PCI loans reflect a decrease in those estimates. The allowance established represents the excess of the recorded investment in those loans over the present value of the currently estimated future cash flow, discounted at the last effective accounting yield.

We use assumptions and methodologies that are relevant to estimating the level of impairment and probable losses in the loan portfolio. To the extent that the data supporting such assumptions has limitations, management's judgment and experience play a key role in recording the allowance estimates. Additions to the allowance for loan losses are made by provisions charged to earnings. Furthermore, an improvement in the expected cash flows related to PCI loans would result in a reduction of the required specific allowance with a corresponding credit to the provision.

The Credit Risk Management Committee (“CRMC”) is comprised of management. The adequacy of the allowance is analyzed quarterly, with any adjustment to a level deemed appropriate by the CRMC, based on its risk assessment of the entire portfolio. Each quarter, members of the CRMC meet with the Credit Risk Committee of our Board of Directors to review credit risk trends and the adequacy of the allowance for loan losses. Based on the CRMC’s review of the classified loans, delinquency and charge-off trends, and the overall allowance levels as they relate to the entire loan portfolio at September 30, 2019 and December 31, 2018, we believe the allowance for loan losses has been established at levels sufficient to cover the probable incurred losses in our loan portfolio. Future additions or reductions to the allowance may be necessary based on changes in economic, market or other conditions. Changes in estimates could result in a material change in the allowance. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments of the information available to them at the time of their examination.

For additional information regarding the allowance for loan losses, see Note 7 of the Notes to the Consolidated Financial Statements.

### Net Income

Net income for the three months ended September 30, 2019 was $13.9 million and $0.70 per diluted share as compared to $6.5 million and $0.33 per diluted share for the same period in 2018. Changes in net income for the three months ended September 30, 2019 compared to September 30, 2018 include: (i) a $2.5 million, or 7.3%, increase in net interest income; (ii) a $0.8 million, or 400.0%, increase in the provision for loan losses; (iii) a $1.3 million, or 27.0%, increase in non-interest income; (iv) a $6.8 million, or 21.9%, decrease in non-interest expense; and (v) a $2.5 million, or 178.9%, increase in income tax expense.

Net income for the nine months ended September 30, 2019 was $37.5 million and $1.88 per diluted share as compared to $25.4 million and $1.28 per diluted share for the same period in 2018. Changes in net income for the nine months ended September 30, 2019 compared to September 30, 2018 include: (i) a $3.9 million, or 3.8%, increase in net interest income; (ii) a $3.7 million, or 264.3%, increase in the provision for loan losses; (iii) a $10.5 million, or 162.8%, increase in non-interest income; (iv) a $5.3 million, or 7.0%, decrease in non-interest expense; and (v) a $3.9 million, or 61.7%, increase in income tax expense.

#### Net Interest Income

Net interest income, the primary contributor to earnings, represents the difference between income on interest-earning assets and expenses on interest-bearing liabilities. Net interest income depends on the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.

The following tables present certain information relating to our average consolidated balance sheets and our consolidated statements of income for the periods indicated and reflects the average yield on assets and average cost of liabilities for those periods on a tax-equivalent basis based on the U.S. federal statutory tax rate. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from daily average balances and include non-accrual loans. The yields and costs include fees and costs, which are considered adjustments to yields. Interest on non-accrual loans has been included only to the extent reflected in the consolidated statements of income. For purposes of this table, the average balances for investments in debt and equity securities exclude unrealized appreciation/depreciation due to the application of FASB ASC 320, “Investments - Debt and Equity Securities.”

40

*(Dollars in thousands)*

| Interest-earning assets: | Three Months Ended September 30, 2019 Average Balance | Interest | Average Yield/ Cost | 2018 Average Balance | Interest | Average Yield/ Cost |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans, net (1)(2) | **$3,442,462** | **$41,053** | **4.73%** | $3,157,422 | $36,243 | 4.55% |
| Mortgage-backed securities, CMOs and other asset-backed securities | **636,352** | **3,775** | **2.35** | 672,757 | 4,370 | 2.58 |
| Taxable securities | **124,372** | **1,034** | **3.30** | 146,085 | 1,254 | 3.41 |
| Tax-exempt securities (2) | **26,663** | **251** | **3.73** | 48,332 | 420 | 3.45 |
| Deposits with banks | **61,853** | **342** | **2.19** | 84,986 | 437 | 2.04 |
| Total interest-earning assets (2) | **4,291,702** | **46,455** | **4.29** | 4,109,582 | 42,724 | 4.12 |
| **Non-interest-earning assets:** |  |  |  |  |  |  |
| Cash and due from banks | **80,180** |  |  | 79,372 |  |  |
| Other assets | **332,120** |  |  | 289,933 |  |  |
| Total assets | **$4,704,002** |  |  | $4,478,887 |  |  |
| **Interest-bearing liabilities:** |  |  |  |  |  |  |
| Savings, NOW and money market deposits | **$2,107,576** | **$5,816** | **1.09%** | $1,955,010 | $4,584 | 0.93% |
| Certificates of deposit of $100,000 or more | **212,159** | **1,139** | **2.13** | 204,400 | 927 | 1.80 |
| Other time deposits | **60,496** | **300** | **1.97** | 120,410 | 536 | 1.77 |
| Federal funds purchased and repurchase agreements | **14,160** | **70** | **1.96** | 3,487 | 12 | 1.37 |
| FHLB advances | **244,011** | **1,179** | **1.92** | 269,909 | 1,181 | 1.74 |
| Subordinated debentures | **78,862** | **1,135** | **5.71** | 78,723 | 1,135 | 5.72 |
| Total interest-bearing liabilities | **2,717,264** | **9,639** | **1.41** | 2,631,939 | 8,375 | 1.26 |
| **Non-interest-bearing liabilities:** |  |  |  |  |  |  |
| Demand deposits | **1,417,159** |  |  | 1,343,107 |  |  |
| Other liabilities | **87,313** |  |  | 43,432 |  |  |
| Total liabilities | **4,221,736** |  |  | 4,018,478 |  |  |
| Stockholders' equity | **482,266** |  |  | 460,409 |  |  |
| Total liabilities and stockholders' equity | **$4,704,002** |  |  | $4,478,887 |  |  |
| Net interest income/net interest rate spread (2) (3) |  | **36,816** | **2.88%** |  | 34,349 | 2.86% |
| Net interest-earning assets | **$1,574,438** |  |  | $1,477,643 |  |  |
| Net interest margin (2) (4) |  |  | **3.40%** |  |  | 3.32% |
| Tax-equivalent adjustment |  | **(101)** | **(0.01)** |  | (135) | (0.02) |
| Net interest income |  | **$36,715** |  |  | $34,214 |  |
| Net interest margin (4) |  |  | **3.39%** |  |  | 3.30% |
| Ratio of interest-earning assets to interest-bearing liabilities |  |  | **157.94%** |  |  | 156.14% |

(1) Amounts are net of deferred origination costs/(fees) and the allowance for loan losses, and include loans held for sale.

(2) Presented on a tax-equivalent basis based on the U.S. federal statutory tax rate of 21%.

(3) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average interest-earning assets.

41

*(Dollars in thousands)*

| Interest-earning assets: | Nine Months Ended September 30, 2019 Average Balance | Interest | Average Yield/ Cost | 2018 Average Balance | Interest | Average Yield/ Cost |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans, net (1)(2) | **$3,364,574** | **$118,712** | **4.72%** | $3,155,093 | $107,720 | 4.56% |
| Mortgage-backed securities, CMOs and other asset-backed securities | **666,759** | **13,007** | **2.61** | 677,084 | 11,919 | 2.35 |
| Taxable securities | **142,158** | **3,486** | **3.28** | 175,853 | 4,191 | 3.19 |
| Tax-exempt securities (2) | **35,140** | **949** | **3.61** | 67,171 | 1,498 | 2.98 |
| Deposits with banks | **85,241** | **1,485** | **2.33** | 44,660 | 633 | 1.90 |
| Total interest-earning assets(2) | **4,293,872** | **137,639** | **4.29** | 4,119,861 | 125,961 | 4.09 |
| Non-interest-earning assets: |  |  |  |  |  |  |
| Cash and due from banks | **80,539** |  |  | 75,788 |  |  |
| Other assets | **321,635** |  |  | 287,343 |  |  |
| Total assets | **$4,696,046** |  |  | $4,482,992 |  |  |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Savings, NOW and money market deposits | **$2,143,474** | **$19,182** | **1.20%** | $1,903,172 | $10,536 | 0.74% |
| Certificates of deposit of $100,000 or more | **209,358** | **3,201** | **2.04** | 176,122 | 2,026 | 1.54 |
| Other time deposits | **80,116** | **1,150** | **1.92** | 101,987 | 1,224 | 1.60 |
| Federal funds purchased and repurchase agreements | **15,722** | **273** | **2.32** | 91,989 | 1,185 | 1.72 |
| FHLB advances | **243,544** | **3,455** | **1.90** | 344,677 | 4,447 | 1.72 |
| Subordinated debentures | **78,828** | **3,405** | **5.78** | 78,688 | 3,404 | 5.78 |
| Total interest-bearing liabilities | **2,771,042** | **30,666** | **1.48** | 2,696,635 | 22,822 | 1.13 |
| Non-interest-bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | **1,372,285** |  |  | 1,290,782 |  |  |
| Other liabilities | **81,588** |  |  | 40,656 |  |  |
| Total liabilities | **4,224,915** |  |  | 4,028,073 |  |  |
| Stockholders' equity | **471,131** |  |  | 454,919 |  |  |
| Total liabilities and stockholders' equity | **$4,696,046** |  |  | $4,482,992 |  |  |
| Net interest income/interest rate spread (2) (3) |  | **106,973** | **2.81%** |  | 103,139 | 2.96% |
| Net interest-earning assets | **$1,522,830** |  |  | $1,423,226 |  |  |
| Net interest margin (2) (4) |  |  | **3.33%** |  |  | 3.35% |
| Tax-equivalent adjustment |  | **(418)** | **(0.01)** |  | (457) | (0.02) |
| Net interest income |  | **$106,555** |  |  | $102,682 |  |
| Net interest margin (4) |  |  | **3.32%** |  |  | 3.33% |
| Ratio of interest-earning assets to interest-bearing liabilities |  |  | **154.96%** |  |  | 152.78% |

(1) Amounts are net of deferred origination costs/(fees) and the allowance for loan losses, and include loans held for sale.

(2) Presented on a tax-equivalent basis based on the U.S. federal statutory tax rate of 21%.

(3) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average interest-earning assets.

#### Rate/Volume Analysis

Net interest income can be analyzed in terms of the impact of changes in rates and volumes. The following table illustrates the extent to which changes in interest rates and in the volume of average interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rates (changes in rates multiplied by prior volume); and (iii) the net changes. For purposes of this table, changes that are not due solely to volume or rate changes have been allocated to these categories based on the respective percentage changes in average volume and rate. Due to the numerous simultaneous volume and rate changes during the periods analyzed, it is not possible to precisely allocate changes between volume and rate. In addition, average interest-earning assets include non-accrual loans.

*(In thousands)*

| Interest income on interest-earning assets: | Three Months Ended September 30, 2019 Over 2018 Changes Due To Volume | Rate | Net Change | Nine Months Ended September 30, 2019 Over 2018 Changes Due To Volume | Rate | Net Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans, net (1) (2) | $3,344 | $1,466 | $4,810 | $7,311 | $3,681 | $10,992 |
| Mortgage-backed securities, CMOs and other asset-backed securities | (225) | (370) | (595) | (292) | 1,380 | 1,088 |
| Taxable securities | (180) | (40) | (220) | (894) | 189 | (705) |
| Tax-exempt securities (2) | (372) | 203 | (169) | (966) | 417 | (549) |
| Deposits with banks | (276) | 181 | (95) | 680 | 172 | 852 |
| Total interest income on interest-earning assets (2) | 2,291 | 1,440 | 3,731 | 5,839 | 5,839 | 11,678 |
| Interest expense on interest-bearing liabilities: |  |  |  |  |  |  |
| Savings, NOW and money market deposits | 384 | 848 | 1,232 | 1,470 | 7,176 | 8,646 |
| Certificates of deposit of $100,000 or more | 36 | 176 | 212 | 428 | 747 | 1,175 |
| Other time deposits | (585) | 349 | (236) | (374) | 300 | (74) |
| Federal funds purchased and repurchase agreements | 51 | 7 | 58 | (1,419) | 507 | (912) |
| FHLB advances | (469) | 467 | (2) | (1,625) | 633 | (992) |
| Subordinated debentures | 8 | (8) | — | 8 | (7) | 1 |
| Total interest expense on interest-bearing liabilities | (575) | 1,839 | 1,264 | (1,512) | 9,356 | 7,844 |
| Net interest income (2) | $2,866 | $(399) | $2,467 | $7,351 | $(3,517) | $3,834 |

(1) Amounts are net of deferred origination costs/(fees) and the allowance for loan losses, and include loans held for sale.

(2) Presented on a tax-equivalent basis based on the U.S. federal statutory tax rate of 21%.

#### Analysis of Net Interest Income for the Three Months Ended September 30, 2019 and 2018

Net interest income was $36.7 million for the three months ended September 30, 2019 compared to $34.2 million for the three months ended September 30, 2018. Average net interest-earning assets increased $96.8 million to $1.6 billion for the three months ended September 30, 2019 compared to $1.5 billion for the three months ended September 30, 2018. The increase in average net interest-earning assets reflects organic growth in loans and a decrease in average borrowings, partially offset by an increase in average deposits and a decrease in average investment securities. Tax-equivalent net interest margin increased to 3.40% for the three months ended September 30, 2019 compared to 3.32% for the three months ended September 30, 2018. The increase in tax-equivalent net interest margin for 2019 compared to 2018 reflects the higher average yield on loans, partially offset by a lower average yield on investment securities, coupled with higher overall funding costs due in part to the Fed Funds rate increases in 2018.

Total interest income increased $3.8 million, or 8.8%, to $46.4 million for the three months ended September 30, 2019 from $42.6 million for the same period in 2018, as average interest-earning assets increased $182.1 million, or 4.4%, to $4.3 billion for the three months ended September 30, 2019 compared to $4.1 billion for the same period in 2018. The increase in average interest-earning assets for the three months ended September 30, 2019 compared to 2018 reflects organic growth in loans, partially offset by a decrease in average investment securities. The tax-equivalent average yield on interest-earning assets was 4.29% for the quarter ended September 30, 2019 compared to 4.12% for the quarter ended September 30, 2018.

Interest income on loans increased $4.8 million to $41.0 million for the three months ended September 30, 2019 over 2018, primarily due to growth in the loan portfolio. For the three months ended September 30, 2019, average loans grew by $285.0 million, or 9.0%, to $3.4 billion as compared to $3.2 billion for the same period in 2018. The increase in average loans was the result of organic growth in commercial real estate mortgage loans, multi-family mortgage loans, commercial and industrial loans, and real estate construction and land loans, partially offset by a decrease in residential mortgage loans. The tax-equivalent yield on average loans was 4.73% for the third quarter of 2019 and 4.55% for the same period in 2018. We remain committed to growing loans with prudent underwriting, sensible pricing, and limited credit and extension risk.

Interest income on investment securities was $5.0 million for the three months ended September 30, 2019 compared to $6.0 million for the same period in 2018. Interest income on securities included net amortization of premiums on securities of $1.2 million for the three months ended September 30, 2019 compared to $0.8 million for the same period in 2018. For the three months ended September 30, 2019, average total investment securities decreased by $79.8 million, or 9.2%, to $787.4 million as compared to $867.2 million for the same period in 2018. The tax-equivalent average yield on total investment securities was 2.55% for the three months ended September 30, 2019 and 2.77% for the three months ended September 30, 2018.

Total interest expense increased to $9.6 million for the three months ended September 30, 2019 as compared to $8.4 million for the same period in 2018. The increase in interest expense for the three months ended September 30, 2019 is a result of the increase in the cost of average interest-bearing liabilities coupled with an increase in average deposits, partially offset by a decrease in average borrowings. The cost of average interest-bearing liabilities was 1.41% for the three months ended September 30, 2019 and 1.26% for the three months ended September 30, 2018. The increase in the cost of average interest-bearing liabilities is primarily due to higher overall funding costs due in part to the Fed Funds rate increases in 2018. Average total interest-bearing liabilities were $2.7 billion for the three months ended September 30, 2019 and $2.6 billion for the same period in 2018 due to an increase in average deposits, partially offset by a decrease in average borrowings.

For the three months ended September 30, 2019, average total deposits increased by $174.5 million to $3.8 billion as compared to $3.6 billion for the three months ended September 30, 2018 due to increases in average savings, NOW and money market accounts, and average demand deposits, partially offset by a decrease in average certificates of deposit. The average balance of savings, NOW and money market accounts increased $152.6 million, or 7.8%, to $2.1 billion for the three months ended September 30, 2019 compared to $2.0 billion for the three months ended September 30, 2018. The cost of average savings, NOW and money market deposits was 1.09% for the 2019 third quarter compared to 0.93% for the 2018 third quarter. Average demand deposits totaled $1.4 billion for the three months ended September 30, 2019 compared to $1.3 billion for the three months ended September 30, 2018. Average balances in certificates of deposit decreased $52.1 million, or 16.1%, to $272.7 million for the three months ended September 30, 2019 compared to $324.8 million for the three months ended September 30, 2018. The cost of average certificates of deposit increased to 2.09% for the three months ended September 30, 2019 compared to 1.79% for the same period in 2018. Average public fund deposits comprised 14.6% of total average deposits during the 2019 third quarter and 13.8% for the 2018 third quarter.

Average federal funds purchased and repurchase agreements increased $10.7 million, or 306.1%, to $14.2 million for the three months ended September 30, 2019 compared to $3.5 million for the same period in 2018. The cost of average federal funds purchased and repurchase agreements was 1.96% for the 2019 third quarter compared to 1.37% for the 2018 third quarter. Average FHLB advances decreased $25.9 million, or 9.6%, to $244.0 million for the three months ended September 30, 2019 compared to $269.9 million for the three months ended September 30, 2018.

#### Analysis of Net Interest Income for the Nine Months Ended September 30, 2019 and 2018

Net interest income was $106.6 million for the nine months ended September 30, 2019 compared to $102.7 million for the nine months ended September 30, 2018. Average net interest-earning assets increased $99.6 million to $1.5 billion for the nine months ended September 30, 2019 compared to $1.4 billion for the nine months ended September 30, 2018. The increase in average net interest-earning assets reflects organic growth in loans and a decrease in average borrowings, partially offset by an increase in average deposits and a decrease in average investment securities. Tax-equivalent net interest margin decreased to 3.33% for the nine months ended September 30, 2019 compared to 3.35% for the nine months ended September 30, 2018. The decrease in tax-equivalent net interest margin for 2019 compared to 2018 reflects the higher overall funding costs due in part to the Fed Funds rate increases in 2018, partially offset by a higher average yield on investment securities and loans, coupled with a lower volume of borrowings in 2018.

Total interest income increased $11.7 million, or 9.3%, to $137.2 million for the nine months ended September 30, 2019 from $125.5 million for the same period in 2018, as average interest-earning assets increased $174.0 million, or 4.2%, to $4.3 billion for the nine months ended September 30, 2019 compared to $4.1 billion for the same period in 2018. The increase in average interest-earning assets for the nine months ended September 30, 2019 compared to 2018 reflects organic growth in loans, partially offset by a decrease in average investment securities. The tax-equivalent average yield on interest-earning assets was 4.29% for the nine months ended September 30, 2019 compared to 4.09% for the same period in 2018.

Interest income on loans increased $10.9 million to $118.5 million for the nine months ended September 30, 2019 over 2018, primarily due to growth in the loan portfolio. For the nine months ended September 30, 2019, average loans grew by $209.5 million, or 6.6%, to $3.4 billion as compared to $3.2 billion for the same period in 2018. The increase in average loans was the result of organic growth in commercial real estate mortgage loans, commercial and industrial loans, multi-family mortgage loans, real estate construction and land loans, and residential mortgage loans. The tax-equivalent yield on average loans was 4.72% for the nine months ended September 30, 2019 and 4.56% for the same period in 2018. We remain committed to growing loans with prudent underwriting, sensible pricing, and limited credit and extension risk.

Interest income on investment securities was $17.2 million for the nine months ended September 30, 2019 compared to $17.3 million for the same period in 2018. Interest income on securities included net amortization of premiums on securities of $2.7 million for the nine months ended September 30, 2019 compared to $3.3 million for the same period in 2018. For the nine months ended September 30, 2019, average total investment securities decreased by $76.0 million, or 8.3%, to $844.1 million as compared to $920.1 million for the same period in 2018. The tax-equivalent average yield on total investment securities was 2.76% for the nine months ended September 30, 2019 and 2.56% for the nine months ended September 30, 2018.

Total interest expense increased to $30.7 million for the nine months ended September 30, 2019 as compared to $22.8 million for the same period in 2018. The increase in interest expense for the nine months ended September 30, 2019 is a result of the increase in the cost of average interest-bearing liabilities coupled with an increase in average deposits, partially offset by a decrease in average borrowings. The cost of average interest-bearing liabilities was 1.48% for the nine months ended September 30, 2019 and 1.13% for the nine months ended September 30, 2018. The increase in the cost of average interest-bearing liabilities is primarily due to higher overall funding costs due in part to the Fed Funds rate increases in 2018. Average total interest-bearing liabilities were $2.8 billion for the nine months ended September 30, 2019 and $2.7 billion for the same period in 2018 due to an increase in average deposits, partially offset by a decrease in average borrowings.

For the nine months ended September 30, 2019, average total deposits increased by $333.2 million to $3.8 billion as compared to $3.5 billion for the nine months ended September 30, 2018 due to increases in average savings, NOW and money market accounts, average demand deposits, and average certificates of deposit. The average balance of savings, NOW and money market accounts increased $240.3 million, or 12.6%, to $2.1 billion for the nine months ended September 30, 2019 compared to $1.9 billion for the nine months ended September 30, 2018. The cost of average savings, NOW and money market deposits was 1.20% for the nine months ended September 30, 2019 compared to 0.74% for the nine months ended September 30, 2018. Average demand deposits totaled $1.4 billion for the nine months ended September 30, 2019 compared to $1.3 billion for the same period in 2018. Average balances in certificates of deposit increased $11.4 million, or 4.1%, to $289.5 million for the nine months ended September 30, 2019 compared to $278.1 million for the nine months ended September 30, 2018. The cost of average certificates of deposit increased to 2.01% for the nine months ended September 30, 2019 compared to 1.56% for the same period in 2018. Average public fund deposits comprised 15.7% of total average deposits during the nine months ended September 30, 2019 compared to 16.1% for the same period in 2018.

Average federal funds purchased and repurchase agreements decreased $76.3 million, or 82.9%, to $15.7 million for the nine months ended September 30, 2019 compared to $92.0 million for the same period in 2018. The cost of average federal funds purchased and repurchase agreements was 2.32% for the nine months ended September 30, 2019 compared to 1.72% for the same period in 2018. Average FHLB advances decreased $101.2 million, or 29.3%, to $243.5 million for the nine months ended September 30, 2019 compared to $344.7 million for the nine months ended September 30, 2018.

#### Provision and Allowance for Loan Losses

Our loan portfolio consists primarily of real estate loans secured by commercial, multi-family and residential real estate properties located in our principal lending areas of Nassau and Suffolk Counties on Long Island and the New York City boroughs. The interest rates we charge on loans are affected primarily by the demand for such loans, the supply of money available for lending purposes, the rates offered by our competitors, our relationship with the customer, and the related credit risks of the transaction. These factors are affected by general and economic conditions including, but not limited to, monetary policies of the federal government, including the Federal Reserve Board, legislative policies and governmental budgetary matters.

Based on our continuing review of the overall loan portfolio, the current asset quality of the portfolio, the growth in the loan portfolio and the net charge-offs, a provision for loan losses of $1.0 million and $5.1 million was recorded during the three and nine months ended September 30, 2019, respectively, compared to a provision for loan losses of $0.2 million and $1.4 million, respectively, during the same periods in 2018. Net recoveries were $2 thousand for the quarter ended September 30, 2019 compared to net recoveries of $17 thousand for the quarter ended September 30, 2018. Net charge-offs were $4.3 million for the nine months ended September 30, 2019 compared to net charge-offs of $1.2 million for the nine months ended September 30, 2018. The increase in net charge-offs during the nine months ended September 30, 2019, relates primarily to the $3.7 million charge-off related to one CRE loan totaling $16.3 million which was written down to the loan’s estimated fair value of $12.6 million and moved into loans held for sale in June 2019. The ratio of the allowance for loan losses to non-accrual loans was 764%, 1,119% and 1,639%, at September 30, 2019, December 31, 2018, and September 30, 2018, respectively. The allowance for loan losses totaled $32.2 million at September 30, 2019 as compared to $31.4 million at December 31, 2018 and $31.9 million at September 30, 2018. The allowance as a percentage of total loans was 0.92% at September 30, 2019, compared to 0.96% at December 31, 2018 and 1.00% at September 30, 2018. We continue to carefully monitor the loan portfolio as well as real estate trends in Nassau and Suffolk Counties and the New York City boroughs.

Loans totaling $82.5 million, or 2.4%, of total loans at September 30, 2019 were categorized as classified loans compared to $87.9 million, or 2.7%, at December 31, 2018 and $71.5 million, or 2.2%, at September 30, 2018. Classified loans include loans with credit quality indicators with the internally assigned grades of special mention, substandard and doubtful. These loans are categorized as classified loans because we have information that indicates the borrower may not be able to comply with the present repayment terms. These loans are subject to increased management attention and their classification is reviewed at least quarterly.

At September 30, 2019, $34.0 million of classified loans were commercial real estate (“CRE”) loans. Of the $34.0 million of CRE loans, $33.3 million were current and $0.7 million were past due. At September 30, 2019, $11.8 million of classified loans were residential real estate loans, with $9.8 million current and $2.0 million past due. Commercial, industrial, and agricultural loans represented $35.1 million of classified loans, with $33.7 million current and $1.4 million past due. Taxi medallion loans represented $9.6 million of the classified commercial, industrial and agricultural loans at September 30, 2019. All of our taxi medallion loans are collateralized by New York City medallions and have personal guarantees. All taxi medallion loans were current as of September 30, 2019. No new originations of taxi medallion loans are currently planned and we expect these balances to continue to decline through amortization and pay-offs. In January 2019, seven taxi medallion loans totaling $6.2 million, net of charge-offs, were paid off under settlements we accepted. The charge-offs related to these settlements were recognized in the 2018 fourth quarter. At September 30, 2019, there was $0.8 million of classified consumer loans substantially all of which were current; $0.4 million of classified multi-family loans which were current; and $0.4 million of classified real estate construction and land loans, with $0.3 million current and $0.1 million past due.

CRE loans, including multi-family loans, represented $2.2 billion, or 62.7%, of the total loan portfolio at September 30, 2019 compared to $2.0 billion, or 59.9%, at December 31, 2018 and $1.9 billion, or 60.4%, at September 30, 2018. Our underwriting standards for CRE loans require an evaluation of the cash flow of the property, the overall cash flow of the borrower and related guarantors as well as the value of the real estate securing the loan. In addition, our underwriting standards for CRE loans are consistent with regulatory requirements with original loan to value ratios generally less than or equal to 75%. We consider charge-off history, delinquency trends, cash flow analysis, and the impact of the local economy on CRE values when evaluating the appropriate level of the allowance for loan losses.

As of September 30, 2019 and December 31, 2018, we had individually impaired loans as defined by FASB ASC No. 310, “Receivables” of $32.7 million and $19.4 million, respectively. For a loan to be considered impaired, we determine after review whether it is probable that we will not be able to collect all amounts due according to the contractual terms of the loan agreement. We apply our normal loan review procedures in making these judgments. Impaired loans include individually classified non-accrual loans and troubled debt restructuring loans (“TDRs”). At September 30, 2019, impaired loans also included $2.5 million in other impaired performing loans which were related to borrowers with other performing TDRs, two of which are being restructured as TDRs in the 2019 fourth quarter. At December 31, 2018, impaired loans also included $2.7 million in other impaired performing loans related to three taxi medallion loans which paid off in January 2019. For impaired loans, we evaluate the impairment of the loan in accordance with FASB ASC 310‑10‑35‑22. Impairment is determined based on the present value of expected future cash flows discounted at the loan's effective interest rate. For loans that are collateral dependent, the fair value of the collateral less costs to sell is used to determine the fair value of the loan. The fair value of the collateral is determined based on recent appraised values. The fair value of the collateral less costs to sell or present value of expected cash flows is compared to the carrying value to determine if any write-down or specific loan loss allowance allocation is required. The increase in impaired loans from December 31, 2018 was primarily attributable to new TDRs, partially offset by the payoff of certain TDRs and other impaired performing loans during the nine months ended September 30, 2019. During the nine months ended September 30, 2019, we modified certain loans as TDRs totaling $20.3 million.

Non-accrual loans were $4.2 million, or 0.12%, of total loans at September 30, 2019, and $2.8 million, or 0.09%, of total loans at December 31, 2018. TDRs represent $436 thousand of the non-accrual loans at September 30, 2019 and $133 thousand of the non-accrual loans at December 31, 2018.

There was no other real estate owned at September 30, 2019. At December 31, 2018, other real estate owned totaled $0.2 million.

The following table presents changes in the allowance for loan losses:

*(In thousands)*

|  | Nine Months Ended September 30, 2019 | September 30, 2018 |
| --- | ---: | ---: |
| Beginning balance | $31,418 | $31,707 |
| Charge-offs: |  |  |
| Commercial real estate mortgage loans | **(3,670)** | — |
| Residential real estate mortgage loans | **—** | (24) |
| Commercial, industrial and agricultural loans | **(796)** | (1,708) |
| Installment/consumer loans | **(13)** | (4) |
| Total | **(4,479)** | (1,736) |
| Recoveries: |  |  |
| Commercial real estate mortgage loans | **—** | — |
| Residential real estate mortgage loans | **112** | 2 |
| Commercial, industrial and agricultural loans | **12** | 494 |
| Installment/consumer loans | **10** | 2 |
| Total | **134** | 498 |
| Net charge-offs | **(4,345)** | (1,238) |
| Provision for loan losses charged to operations | **5,100** | 1,400 |
| Ending balance | $32,173 | $31,869 |

#### Allocation of Allowance for Loan Losses

The following table presents the allocation of the total allowance for loan losses by loan classification:

*(Dollars in thousands)*

|  | September 30, 2019 Amount | Percentage of Loans to Total Loans | December 31, 2018 Amount | Percentage of Loans to Total Loans |
| --- | ---: | ---: | ---: | ---: |
| Commercial real estate mortgage loans | **$11,929** | **43.5%** | $10,792 | 42.0% |
| Multi-family mortgage loans | **2,990** | **19.2** | 2,566 | 17.9 |
| Residential real estate mortgage loans | **1,908** | **14.2** | 3,935 | 15.9 |
| Commercial, industrial and agricultural loans | **14,081** | **19.1** | 12,722 | 19.8 |
| Real estate construction and land loans | **998** | **3.3** | 1,297 | 3.8 |
| Installment/consumer loans | **267** | **0.7** | 106 | 0.6 |
| Total | **$32,173** | **100.0%** | $31,418 | 100.0% |

#### Non-Interest Income

Total non-interest income increased $1.3 million to $6.2 million during the three months ended September 30, 2019 compared to $4.9 million for the three months ended September 30, 2018. The increase in total non-interest income was driven by a $1.2 million increase in loan swap fees, a $0.1 million increase in title fees, and a $0.1 million increase in gain on sale of Small Business Administration (“SBA”) loans, partially offset by a $0.1 million decrease in other operating income.

Total non-interest income increased $10.5 million to $17.0 million during the nine months ended September 30, 2019 compared to $6.5 million for the nine months ended September 30, 2018. The increase in total non-interest income was driven by an $8.1 million increase in net securities gains, primarily attributable to a $7.9 million net securities loss related to the balance sheet restructure in the 2018 second quarter, a $2.5 million increase in loan swap fees, and a $0.3 million increase in service charges and other fees, partially offset by a $0.3 million decrease in other operating income and a $0.2 million decrease in title fees.

#### Non-Interest Expense

Total non-interest expense was $24.2 million during the three months ended September 30, 2019 compared to $31.0 million for the three months ended September 30, 2018. The decrease was primarily due to the impact of the $9.5 million fraud loss recorded for the three months ended September 30, 2018 and lower FDIC assessments, partially offset by higher salaries and benefits, technology and communications, occupancy and equipment, and other operating expenses.

Total non-interest expense was $70.8 million during the nine months ended September 30, 2019 compared to $76.1 million for the nine months ended September 30, 2018. The decrease was primarily due to the impact of the $9.5 million fraud loss recorded in 2018, and lower FDIC assessments and professional services in 2019, partially offset by higher salaries and benefits, technology and communications, occupancy and equipment, marketing and advertising, and other operating expenses in the nine months ended September 30, 2019 compared to the same period in 2018.

Salaries and benefits increased $2.2 million to $14.3 million for the three months ended September 30, 2019 compared to the same period in 2018. The increase in salaries and benefits for the three months ended September 30, 2019 compared to the same period in 2018 is primarily due to additional staff related to business development and risk management. Occupancy and equipment increased $0.2 million to $3.5 million for the three months ended September 30, 2019 compared to the same period in 2018. Technology and communications increased $0.5 million to $2.1 million for the three months ended September 30, 2019 compared to the same period in the prior year, related to investments in new software and systems in the 2019 period. Other operating expenses increased $0.2 million to $1.8 million for the three months ended September 30, 2019 compared to the same period in 2018. FDIC assessments decreased $0.4 million to $18 thousand for the three months ended September 30, 2019, compared to the same period in 2018 due to an FDIC assessment credit totaling $0.4 million in 2019. The Company incurred a $9.5 million pre-tax charge in the three months ended September 30, 2018 related to the fraudulent conduct of a business customer through its deposit accounts at BNB.

Salaries and benefits increased $3.2 million to $41.2 million for the nine months ended September 30, 2019 compared to the same period in 2018. The increase in salaries and benefits for the nine months ended September 30, 2019 compared to the same period in 2018 is primarily due to additional staff related to business development and risk management. Occupancy and equipment increased $0.8 million to $10.6 million for the nine months ended September 30, 2019 compared to the same period in 2018. Technology and communications increased $1.0 million to $5.8 million for the nine months ended September 30, 2019 compared to the same period in the prior year, related to investments in new software and systems in the 2019 period. Professional services expenses decreased $0.5 million to $2.6 million for the nine months ended September 30, 2019, compared to the same period in 2018. FDIC assessments decreased $0.6 million for the nine months ended September 30, 2019, compared to the same period in 2018 primarily due to an FDIC assessment credit totaling $0.4 million in the three months ended September 30, 2019. Other operating expenses increased $0.2 million to $5.6 million for the nine months ended September 30, 2019, compared to the same period in 2018.

#### Income Taxes

Income tax expense was $3.9 million for the three months ended September 30, 2019 compared to $1.4 million for the three months ended September 30, 2018, reflecting higher income before income taxes. The effective tax rate was 21.7% for the three months ended September 30, 2019 compared to 17.4% for the same period in 2018.

Income tax expense was $10.1 million for the nine months ended September 30, 2019 compared to $6.3 million for the nine months ended September 30, 2018, reflecting higher income before income taxes. The effective tax rate was 21.3% for the nine months ended September 30, 2019 compared to 19.8% for the same period in 2018. We estimate we will record income tax at an effective tax rate of approximately 22% for the remainder of 2019.

### Financial Condition

Total assets were $4.7 billion at September 30, 2019, $35.3 million higher than December 31, 2018. Cash and cash equivalents decreased $164.2 million, or 55.6%, to $131.2 million at September 30, 2019 compared to December 31, 2018. Total securities decreased $86.2 million, or 10.0%, to $778.9 million at September 30, 2019 compared to December 31, 2018. Total loans held for investment, net, increased $232.5 million, or 7.1%, to $3.5 billion at September 30, 2019 compared to December 31, 2018. Our focus is on our ability to grow the loan portfolio, while minimizing interest rate risk sensitivity and maintaining credit quality.

Total liabilities were $4.2 billion at September 30, 2019, $2.7 million higher than December 31, 2018. Total deposits decreased $143.1 million, or 3.7%, to $3.7 billion at September 30, 2019, compared to December 31, 2018. Certificates of deposit decreased $59.7 million, or 18.1%, to $270.0 million at September 30, 2019 compared to December 31, 2018. Demand deposits decreased $23.8 million, or 1.6%, to $1.4 billion at September 30, 2019 compared to December 31, 2018. Savings, NOW and money market deposits decreased $59.6 million, or 2.8%, to $2.0 billion at September 30, 2019 compared to December 31, 2018. FHLB advances increased $96.6 million to $337.0 million at September 30, 2019 compared to December 31, 2018.

Total stockholders' equity was $486.4 million at September 30, 2019, an increase of $32.6 million, or 7.2%, from December 31, 2018, primarily due to net income of $37.5 million, a decrease in accumulated other comprehensive loss, net of deferred income taxes, of $6.9 million and share based compensation of $2.8 million, partially offset by $13.8 million in dividends. During the nine months ended September 30, 2019, there were 22,600 shares purchased under the 2019 Stock Repurchase Program.

### Liquidity

Our liquidity management objectives are to ensure the sufficiency of funds available to respond to the needs of depositors and borrowers, and to take advantage of unanticipated opportunities for our growth or earnings enhancement. Liquidity management addresses our ability to meet financial obligations that arise in the normal course of business. Liquidity is primarily needed to meet customer borrowing commitments and deposit withdrawals, either on demand or on contractual maturity, to repay borrowings as they mature, to fund current and planned expenditures and to make new loans and investments as opportunities arise.

The Holding Company’s principal sources of liquidity included cash and cash equivalents of $3.2 million as of September 30, 2019, and dividend capabilities from the Bank. Cash available for distribution of dividends to our shareholders is primarily derived from dividends paid by the Bank to the Holding Company. For the nine months ended September 30, 2019, the Bank paid $20.0 million in cash dividends to the Holding Company. Prior regulatory approval is required if the total of all dividends declared by the Bank in any calendar year exceeds the total of the Bank's net income of that year combined with its retained net income of the preceding two years. As of September 30, 2019, the Bank has $71.6 million of retained net income available for dividends to the Holding Company. In the event the Holding Company subsequently expands its current operations, in addition to dividends from the Bank, it will need to rely on its own earnings, additional capital raised and other borrowings to meet liquidity needs. The Holding Company did not make any capital contributions to the Bank during the nine months ended September 30, 2019.

The Bank's most liquid assets are cash and cash equivalents, securities available for sale and securities held to maturity due within one year. The levels of these assets are dependent on the Bank's operating, financing, lending and investing activities during any given period. Other sources of liquidity include loan and investment securities principal repayments and maturities, lines of credit with other financial institutions including the FHLB and FRB, growth in core deposits and sources of wholesale funding such as brokered deposits. While scheduled loan amortization, maturing securities and short-term investments are a relatively predictable source of funds, deposit flows and loan and mortgage-backed securities prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank adjusts its liquidity levels as appropriate to meet funding needs such as seasonal deposit outflows, loans, and asset and liability management objectives. Historically, the Bank has relied on its deposit base, drawn through its full-service branches that serve its market area and local municipal deposits, as its principal source of funding. The Bank seeks to retain existing deposits and loans and maintain customer relationships by offering quality service and competitive interest rates to its customers, while managing the overall cost of funds needed to finance its strategies.

The Bank's Asset/Liability and Funds Management Policy allows for wholesale borrowings of up to 25% of total assets. At September 30, 2019, the Bank had aggregate lines of credit of $373.0 million with unaffiliated correspondent banks to provide short-term credit for liquidity requirements. Of these aggregate lines of credit, $353.0 million is available on an unsecured basis. As of September 30, 2019, the Bank had no overnight borrowings outstanding under these lines. The Bank also has the ability, as a member of the FHLB system, to borrow against unencumbered residential and commercial mortgages owned by the Bank. The Bank also has a master repurchase agreement with the FHLB, which increases its borrowing capacity. As of September 30, 2019, the Bank had $47.0 million FHLB overnight borrowings outstanding and $290.0 million outstanding in FHLB term borrowings. As of December 31, 2018, the Bank had no FHLB overnight borrowings outstanding and $240.4 million outstanding in FHLB term borrowings. The Bank had $1.0 million and $0.5 million at September 30, 2019 and December 31, 2018, respectively, of securities sold under agreements to repurchase outstanding with customers and no such agreements outstanding with brokers. In addition, the Bank has approved broker relationships for the purpose of issuing brokered deposits. As of September 30, 2019, the Bank had $42.1 million outstanding in brokered certificates of deposit and $20.1 million outstanding in brokered money market accounts. As of December 31, 2018, the Bank had $101.6 million outstanding in brokered certificates of deposit and $150.2 million outstanding in brokered money market accounts.

Liquidity policies are established by senior management and reviewed and approved by the full Board of Directors at least annually. Management continually monitors the liquidity position and believes that sufficient liquidity exists to meet all of the Company’s operating requirements. The Bank’s liquidity levels are affected by the use of short-term and wholesale borrowings and the amount of public funds in the deposit mix. Excess short-term liquidity is invested in overnight federal funds sold or in an interest-earning account at the FRB.

### Capital Resources

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital requirements that involve quantitative measures of the Company's and Bank's assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The Company's and Bank's capital amounts and classifications also are subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total, tier 1 and common equity tier 1 capital to risk weighted assets and of tier 1 capital to average assets. Tier 1 capital, risk weighted assets and average assets are as defined by regulation. The required minimums for the Company and Bank are set forth in the tables that follow. The Company and the Bank met all capital adequacy requirements at September 30, 2019 and December 31, 2018.

On January 1, 2015, the Basel III Capital Rules became effective and include transition provisions through January 1, 2019. These rules provide for the following minimum capital to risk-weighted assets ratios as of January 1, 2015: a) 4.5% based on common equity tier 1 capital ("CET1"); b) 6.0% based on tier 1 capital; and c) 8.0% based on total regulatory capital. A minimum leverage ratio (tier 1 capital as a percentage of total average assets) of 4.0% is also required under the Basel III Capital Rules. The Basel III Capital Rules additionally require institutions to retain a capital conservation buffer, composed of CET1, of 2.5% above these required minimum capital ratio levels. The capital conservation buffer requirement was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increased by 0.625% each subsequent January 1, until fully implemented at 2.5% on January 1, 2019. Including the capital conservation buffer, the Company and the Bank effectively have the following minimum capital to risk-weighted assets ratios: a) 7.0% based on CET1; b) 8.5% based on tier 1 capital; and c) 10.5% based on total regulatory capital.

The Company and the Bank made the one-time, permanent election to continue to exclude the effects of accumulated other comprehensive income or loss items included in stockholders' equity for the purposes of determining the regulatory capital ratios.

As of September 30, 2019, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum total risk-based, tier 1 risk-based, common equity tier 1 risk-based and tier 1 leverage ratios as set forth in the tables below. Since that notification, there are no conditions or events that management believes have changed the institution's category.

In accordance with the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies have adopted, effective January 1, 2020, a final rule whereby financial institutions and financial institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9 percent, will be eligible to opt into a community bank leverage ratio framework (“qualifying community banking organizations”). Qualifying community banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than 9 percent will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules and will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action statutes. The agencies reserved the authority to disallow the use of the community bank leverage ratio framework by a financial institution or holding company, based on the risk profile of the organization.

The following tables present actual capital levels and minimum required levels for the Company and the Bank under Basel III rules at September 30, 2019 and December 31, 2018:

*(Dollars in thousands)*

| Common equity tier 1 capital to risk-weighted assets: | September 30, 2019 Actual Capital Amount | Ratio | Minimum Capital Adequacy Requirement Amount | Ratio | Minimum Capital Adequacy Requirement with Capital Conservation Buffer Amount | Ratio | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Consolidated | **$386,808** | **10.4%** | **$167,537** | **4.5%** | **$260,614** | **7.0%** | **n/a** | **n/a** |
| Bank | **462,374** | **12.4** | **167,530** | **4.5** | **260,602** | **7.0** | **$241,987** | **6.5%** |
| Total capital to risk-weighted assets: |  |  |  |  |  |  |  |  |
| Consolidated | **499,257** | **13.4** | **297,844** | **8.0** | **390,921** | **10.5** | **n/a** | **n/a** |
| Bank | **494,823** | **13.3** | **297,830** | **8.0** | **390,902** | **10.5** | **372,288** | **10.0** |
| Tier 1 capital to risk-weighted assets: |  |  |  |  |  |  |  |  |
| Consolidated | **386,808** | **10.4** | **223,383** | **6.0** | **316,460** | **8.5** | **n/a** | **n/a** |
| Bank | **462,374** | **12.4** | **223,373** | **6.0** | **316,445** | **8.5** | **297,830** | **8.0** |
| Tier 1 capital to average assets: |  |  |  |  |  |  |  |  |
| Consolidated | **386,808** | **8.4** | **184,165** | **4.0** | **n/a** | **n/a** | **n/a** | **n/a** |
| Bank | **462,374** | **10.0** | **184,169** | **4.0** | **n/a** | **n/a** | **230,211** | **5.0** |

*(Dollars in thousands)*

| Common equity tier 1 capital to risk-weighted assets: | December 31, 2018 Actual Capital Amount | Ratio | Minimum Capital Adequacy Requirement Amount | Ratio | Minimum Capital Adequacy Requirement with Capital Conservation Buffer Amount | Ratio | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Consolidated | $360,688 | 10.4% | $155,836 | 4.5% | $220,767 | 6.375% | n/a | n/a |
| Bank | 438,963 | 12.7 | 155,831 | 4.5 | 220,761 | 6.375 | $225,089 | 6.5% |
| Total capital to risk-weighted assets: |  |  |  |  |  |  |  |  |
| Consolidated | 472,382 | 13.6 | 277,041 | 8.0 | 341,973 | 9.875 | n/a | n/a |
| Bank | 470,657 | 13.6 | 277,033 | 8.0 | 341,963 | 9.875 | 346,291 | 10.0 |
| Tier 1 capital to risk-weighted assets: |  |  |  |  |  |  |  |  |
| Consolidated | 360,688 | 10.4 | 207,781 | 6.0 | 272,712 | 7.875 | n/a | n/a |
| Bank | 438,963 | 12.7 | 207,775 | 6.0 | 272,704 | 7.875 | 277,033 | 8.0 |
| Tier 1 capital to average assets: |  |  |  |  |  |  |  |  |
| Consolidated | 360,688 | 8.1 | 177,782 | 4.0 | n/a | n/a | n/a | n/a |
| Bank | 438,963 | 9.9 | 177,776 | 4.0 | n/a | n/a | 222,220 | 5.0 |

## Market risk

As filed, 8,419 characters.

### Asset/Liability Management

Management considers interest rate risk to be our most significant market risk. Market risk is the risk of loss from adverse changes in market prices and rates. Interest rate risk is the exposure to adverse changes in our net income as a result of changes in interest rates.

Our primary earnings source is net interest income, which is affected by changes in the level of interest rates, the relationship between rates, the impact of interest rate fluctuations on asset prepayments, the level and composition of deposits and liabilities, and the credit quality of earning assets. Our asset and liability management objectives are to maintain a strong, stable net interest margin, to utilize our capital effectively without taking undue risks, to maintain adequate liquidity, and to reduce vulnerability of our operations to changes in interest rates.

Our Asset and Liability Committee evaluates periodically, but at least four times a year, the impact of changes in market interest rates on assets and liabilities, net interest margin, capital and liquidity. Risk assessments are governed by policies and limits established by senior management, which are reviewed and approved by the full Board of Directors at least annually. The economic environment continually presents uncertainties as to future interest rate trends. The Asset and Liability Committee regularly utilizes a model that projects net interest income based on increasing or decreasing interest rates, in order to be better able to respond to changes in interest rates.

At September 30, 2019, $657.4 million, or 87.6%, of our available for sale and held to maturity securities had fixed interest rates. At September 30, 2019, $2.7 billion, or 77.6%, of our loan portfolio had adjustable or floating interest rates. Changes in interest rates affect the value of our interest-earning assets and, in particular, our securities portfolio. Generally, the value of securities fluctuates inversely with changes in interest rates. Increases in interest rates could result in decreases in the market value of interest-earning assets, which could adversely affect our stockholders' equity and results of operations if sold. We are also subject to reinvestment risk associated with changes in interest rates. Changes in market interest rates also could affect the type (fixed-rate or adjustable-rate) and amount of loans we originate and the average life of loans and securities, which can impact the yields earned on our loans and securities. In periods of decreasing interest rates, the average life of loans and securities we hold may be shortened to the extent increased prepayment activity occurs during such periods which, in turn, may result in the investment of funds from such prepayments in lower yielding assets. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities. Additionally, increases in interest rates may result in decreasing loan prepayments with respect to fixed rate loans (and therefore an increase in the average life of such loans), may result in a decrease in loan demand, and may make it more difficult for borrowers to repay adjustable rate loans.

We utilize the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. Management routinely monitors simulated net interest income sensitivity over a rolling two-year horizon. The simulation model captures the impact of changing interest rates on the interest income received and the interest expense paid on all assets and liabilities reflected on our consolidated balance sheet. This sensitivity analysis is compared to the asset and liability policy limits that specify a maximum tolerance level for net interest income exposure over a one-year horizon given 100 and 200-basis point upward shifts in interest rates and a 100-basis point downward shift in interest rates. A parallel and pro-rata shift in rates over a twelve-month period is assumed.

In addition to the above scenarios, we consider other non-parallel rate shifts that would also exert pressure on earnings. The current low interest rate environment presents the possibility for a flattening of the yield curve. During the nine months ended September 30, 2019, the yield on U.S. Treasury 10-year notes decreased 101 basis points from 2.69% to 1.68%, while the yield on 3-month Treasury bills decreased 57 basis points from 2.45% to 1.88%. The decreased gap between short-term and long-term yields resulted in a flatter yield curve at September 30, 2019 versus December 31, 2018. A continued flattening of the yield curve in 2019 may adversely affect net interest income as borrowers tend to refinance higher-rate fixed rate loans at lower rates and we may not be able to reinvest those prepayments in assets earning interest rates as high as the rates on those prepaid assets.

The following reflects our net interest income sensitivity analysis at September 30, 2019 and December 31, 2018:

*(Dollars in thousands)*

| Change in Interest Rates in Basis Points | September 30, 2019 Potential Change in Future Net Interest Income Year 1 $ Change | % Change | Year 2 $ Change | % Change |
| ---: | ---: | ---: | ---: | ---: |
| 200 | **$700** | **0.48%** | **$12,965** | **8.85%** |
| 100 | **428** | **0.29** | **8,343** | **5.69** |
| Static | **—** | **—** | **—** | **—** |
| (100) | **(1,245)** | **(0.85)** | **(4,458)** | **(3.04)** |

53

*(Dollars in thousands)*

| Change in Interest Rates in Basis Points | December 31, 2018 Potential Change in Future Net Interest Income Year 1 $ Change | % Change | Year 2 $ Change | % Change |
| ---: | ---: | ---: | ---: | ---: |
| 200 | $(2,212) | (1.57)% | $8,767 | 6.23% |
| 100 | (898) | (0.64) | 7,355 | 5.23 |
| Static | — | — | — | — |
| (100) | (435) | (0.31) | (266) | (0.19) |

As noted in the table above, a 200-basis point increase in interest rates is projected to increase net interest income by 0.48% in year 1 and increase net interest income by 8.85% in year 2. Our balance sheet sensitivity to such a move in interest rates at September 30, 2019 decreased as compared to December 31, 2018 (which was a decrease of 1.57% in net interest income over a twelve-month period). This decrease is the result of an increase in non-interest-bearing demand deposits and a reduction in brokered deposits, coupled with a higher portion of our loans repricing to market rates. We also continue to show the ability to hold the costs of interest-bearing deposits to below market rates. Overall, our strategy is shifting to a focus on reducing our exposure to falling rates. Over the intervening year, the effective duration (a measure of price sensitivity to interest rates) of the bond portfolio decreased from 3.05 years at December 31, 2018 to 2.28 years at September 30, 2019.

The preceding sensitivity analysis does not represent a Company forecast and should not be relied on as being indicative of expected operating results. These hypothetical estimates are based on numerous assumptions including, but not limited to, the nature and timing of interest rate levels and yield curve shapes, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment and replacement of asset and liability cash flows. While assumptions are developed based on perceived current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences may change. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals, prepayment penalties and product preference changes and other internal and external variables. Furthermore, the sensitivity analysis does not reflect actions that management might take in responding to, or anticipating, changes in interest rates and market conditions.

## Controls and procedures

As filed, 885 characters.

An evaluation was performed under the supervision and with the participation of the Company's management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a‑15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2019. Based on that evaluation, the Company's Principal Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this quarterly report. There has been no change in the Company's internal control over financial reporting during the quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

## Risk factors

As filed, 327 characters.

There have been no material changes to the risk factors disclosed in Item 1A., Risk Factors, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as supplemented by the disclosure in Item 1A, Risk Factors, included in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.

Filed Nov 8, 2019.
Source: SEC EDGAR, the filing index for accession 0000846617-19-000072. Last ingested by Listed: Nov 7, 2026, 12:41 ET. No prices; not investment advice.