STL Sterling Bancorp - 10-K

ITEM 1A. Risk Factors

Risks Related to the COVID-19 Pandemic

The COVID-19 pandemic continues to impact our business, and the ultimate impact on our business, financial position, results of operations and/or cash flows will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the scope and duration of the pandemic and the actions taken by governmental authorities, our clients and our business partners in response to the pandemic.

The COVID-19 pandemic and the resultant deterioration in global macro-economic conditions has continued to impact our business. Considerable uncertainty continues to exist regarding the likely trajectory of the pandemic and the speed of the economic recovery, and

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the ultimate impact on our business, financial position, results of operations and cash flows will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the scope and duration of the pandemic, the actions that will be taken by governmental authorities to both contain the outbreak and to provide continuing support to affected businesses through additional stimulus funds and otherwise, the speed and efficiency of the vaccine roll out in New York state and nationally, and the ongoing response of and impact to our clients and business partners.

The COVID-19 pandemic has negatively impacted the global economy, causing businesses to shut down and unemployment rates to increase, has disrupted global supply chains, and has created significant volatility and disruption in financial markets. In response to the pandemic, governmental and other authorities have instituted numerous measures to contain the virus including travel bans, shelter-in-place orders and business shutdowns.

Our business, financial position, results of operations and cash flows will be impacted by factors which include, but are not limited to: the continued health and availability of our colleagues, continued dampened demand for our products and services, a prolonged period of low or near zero interest rates, a potential further deterioration in the financial condition of our clients resulting in an increase in our allowance for credit losses and the recognition of further credit losses, and a prolonged, deterioration of business conditions in our primary markets, particularly the New York Metro Market and the New York Suburban Market.

We have taken meaningful steps and precautions to safeguard the health and well-being of our colleagues. However, COVID-19 could still impact the availability and effectiveness of our colleagues as a result of illness, mandatory quarantines, mandated financial center closures or other reasons. If our employees are not able to work effectively or a substantial number of employees are unable to work, our business and financial result could be adversely affected.

Our clients face a very challenging business environment. The current economic conditions, especially if prolonged, could negatively impact the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, cause an increase in the number of non-performing loans, impair the value of collateral securing loans, and cause significant property damage, all of which could negatively impact our operating results and financial condition.

The pandemic has resulted in a significant increase in our ACL - loans to $326.1 million or 1.49% of total loans at December 31, 2020 versus $106.2 million or 0.50% at December 31, 2019. During the year ended December 31, 2020, approximately $165.0 million of the $251.7 million of provision for credit loss expense was recorded as a result of changes in the macro assumptions in our forecast model resulting from COVID-19 and the ensuing deterioration in macro-economic conditions. At December 31, 2020, loans criticized as special mention were $461.5 million and classified loans (substandard and doubtful) were $529.1 million. The collateral for these loans is mainly located in the New York Metro Market and includes office, retail, hotel and multi-family properties. At December 31, 2020, we had $208.4 million of loan payment deferral agreements with borrowers. The existing challenging business environment could deteriorate further or become prolonged, especially in our core markets, and this could have a material adverse effect on our loan portfolio and on our ACL - loans in future periods. Additionally, changing economic and market conditions affecting issuers may require us to recognize other-than-temporary impairments on the securities we hold in future periods, as well as reductions in other comprehensive income.

The New York Metro Market and the New York Suburban Market have been particularly impacted by COVID-19. Should the effects of the pandemic and related containment measures continue for an extended period of time, the demand for real estate in the New York City Metro Market may be negatively affected, impacting the value of collateral underlying our commercial real estate loan portfolio. A reduction in demand for commercial real estate would also likely impact our customers’ ability to make loan payments in a timely and / or complete manner. As such, given our business concentration in the New York Metro Market and the New York Suburban Market, our results may be disproportionately impacted when compared to the results and financial condition of other banks or bank holding companies that do not operate in or have a geographic concentration in the New York Metro Market or the New York Suburban Market.

The volatility in global capital markets resulting from the pandemic and related business conditions may restrict our access to capital and/or increase our cost of capital.

To the extent the COVID-19 pandemic adversely affects our business, financial position, results of operations and/or cash flows, it may also have the effect of heightening many of the other risks we face, including the other risks described below.

We continue to work with our stakeholders, including our colleagues, clients, and business partners, to assess, address and where possible mitigate the impact of the pandemic. However, the extent to which the pandemic will materially adversely affect our business and operating results will depend on numerous evolving factors and future developments that we are not able to predict.

Risks Related to Laws and Regulations

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We are subject to extensive regulatory oversight.

We and our subsidiaries are subject to extensive supervision and regulation, see Item 1 “Business-Effect of Compliance with Supervision and Governmental Regulation.” We are supervised and regulated by the FRB and the Bank is supervised and regulated by the OCC, as its primary federal regulator, by the FDIC, as the insurer of its deposits, and by the CFPB, which has broad authority to regulate financial service providers and financial products. The application and administration of laws, rules and regulations may vary by such regulators.

In addition, we are subject to consolidated capital requirements and must serve as a source of strength to the Bank. As a result, we are limited in the manner in which we conduct our business, undertake new investments and activities and obtain financing. This regulatory structure is designed primarily for the protection of the DIF and our depositors, as well as other consumers, and not to benefit our stockholders. The regulatory structure gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to capital levels, the timing and amount of dividend payments, the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes, all of which can have a material adverse effect on our financial condition, results of operations and our ability to pay dividends or repurchase shares. Our regulators have also intensified their focus on bank lending criteria and controls, and on the USA Patriot Act’s anti-money laundering and the Bank Secrecy Act compliance requirements, and there is increased scrutiny of our compliance with the rules enforced by the Office of Foreign Assets Control. In order to comply with laws, rules, regulations, guidelines and examination procedures in the anti-money laundering area, we have been required to adopt new policies and procedures and to install new systems. We cannot be certain that the policies, procedures and systems we have in place to ensure compliance are without error, and there is no assurance that in every instance we are in full compliance with these requirements. In addition, emerging technologies, such as cryptocurrencies, could limit our ability to maintain compliance with applicable requirements to track the movement of funds.

Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional compliance costs, including by requiring additional compliance or other personnel and the implementation of additional internal controls. Further, we may incur compliance-related costs and our regulators may also consider our level of compliance with these regulatory requirements when examining our operations generally or considering any request for regulatory approval we may make, even requests for approvals on unrelated matters. Further, changes in laws, regulations or regulatory policies could adversely affect the operating environment for the us in substantial and unpredictable ways, increase our cost of doing business, and impose new restrictions on the way in which we conduct our operations or adding significant operational constraints that might impair our profitability. We cannot predict whether new legislation will be enacted and, if enacted, the effect that it, or any implementing regulations, would have on our business, financial condition or results of operations.

Our failure to comply with applicable laws, rules and regulations could result in a range of sanctions, legal proceedings and enforcement actions, including the imposition of civil monetary penalties, formal agreements and cease and desist orders. In addition, the OCC and the FDIC have specific authority to take “prompt corrective action,” depending on our capital levels. For example, currently, we are considered “well-capitalized” for prompt corrective action purposes. If we were to be designated by the OCC as “adequately capitalized,” we would become subject to additional restrictions and limitations, such as limits on the Bank’s ability to take brokered deposits. If we were to be designated by the OCC in one of the lower capital levels (such as “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized”), we would be required to raise additional capital and be subject to progressively more severe restrictions on our operations, and management, including the possible replacement of senior executive officers and directors and capital distributions, and, if we became “critically undercapitalized,” to the appointment of a conservator or receiver.

Changes in laws, government rules and regulations and monetary policy may have a material effect on our results of operations.

Financial institutions are subject to significant laws, rules and regulations and may be subject to further additional legislation, rulemaking or regulation in the future, none of which is within our control. Significant new laws, rules or regulations or changes in, or repeals of, existing laws, rules or regulations, may cause our results of operations to differ materially. In addition, the costs and burden of compliance with such laws, rules and regulations continue to increase and could adversely affect our ability to operate profitably. Further, federal monetary policy significantly affects credit conditions for the Bank, as well as for our borrowers, particularly as implemented through the Federal Reserve, primarily through open market operations in U.S. government securities, the discount rate for bank borrowings and reserve requirements. A material change in any of these conditions could have a material impact on the Bank or our borrowers, and, as a result, our results of operations.

Basel III capital rules generally require insured depository institutions and their holding companies to hold more capital, which could limit our ability to pay dividends, engage in share repurchases and pay discretionary bonuses.

The Federal Reserve, the FDIC and the OCC adopted final rules for the Basel III capital framework that substantially amended the regulatory risk-based capital rules applicable to us. The rules phased in over time, and became fully effective on January 1, 2019. The rules apply to us, as well as to the Bank, and require us to have a CET1 to risk-weighted assets ratio of 7%, a Tier 1 to risk-weighted

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assets ratio of 8.5%, and a total capital to risk-weighted assets ratio of 10.5%. Failure to satisfy any of these three capital requirements will result in limits on our ability to pay dividends, engage in share repurchases and pay discretionary bonuses. These rules also establish a maximum percentage of eligible retained income that can be utilized for such actions.

Our ability to pay dividends is subject to regulatory and other limitations, which may affect our ability to pay dividends to our stockholders or to repurchase our common stock.

We are a separate legal entity from our subsidiary, the Bank, and we do not have significant operations of our own. The availability of dividends from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors that the Bank’s regulators could assert that payment of dividends or other payments may result in an unsafe or unsound practice. In addition, we are subjected to consolidated capital requirements and must serve as a source of strength to the Bank. If the Bank is unable to pay dividends to us or we are required to retain capital or contribute capital to the Bank, we may not be able to pay dividends on our common stock or to repurchase shares of common stock.

Risks Related to Accounting Matters

Changes in accounting standards and management's application of those standards could materially impact the Company’s financial statements.

From time to time, FASB introduces changes to the financial accounting and reporting standards that govern the preparation of financial statements. These changes can be difficult to predict and can materially impact how the Company records and reports its financial condition and results of operations. For example, in June 2016 the FASB issued an accounting standard related to credit losses that became effective for the Company on January 1, 2020. This standard replaced the incurred loss impairment methodology with an expected credit loss methodology and required consideration of a broader range of information to determine credit loss estimates. Implementation of the standard resulted in an increase to the ACL, with a corresponding negative impact to our stockholders’ equity at adoption. We elected an interim regulatory capital rule that allows us to delay for two years an estimate of the effect on regulatory capital of the CECL Standard, relative to the incurred loss methodology, followed by a three-year transition period. It is possible that our reported earnings and lending activity will be negatively impacted in future periods as a result of this accounting standard.

Changes in the value of goodwill and intangible assets could reduce our earnings.

We account for goodwill and other intangible assets in accordance with GAAP, which, in general, requires that goodwill not be amortized, but rather that it be tested for impairment at least annually at the reporting unit level, and further requires us to recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit. Testing for impairment of goodwill and intangible assets is performed annually and involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used. Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant world events) which can be highly unpredictable, and may materially impact the fair value of publicly traded financial institutions, such as us, and could result in an impairment charge at a future date.

The need to account for assets at market prices may adversely affect our results of operations.

We report certain assets, including investments and securities, at fair value. Generally, for assets that are reported at fair value, we use quoted market prices, when available, or valuation models that utilize market data inputs to estimate fair value. Because we carry these assets on our books at their fair value, we may incur losses even if the assets in question present minimal credit risk. In addition, we may be required to recognize other-than-temporary impairments in future periods with respect to securities in our portfolio. The amount and timing of any impairment recognized will depend on the severity and duration of the decline in fair value of the securities and our estimation of the anticipated recovery period.

Risks Related to Our Lending Activities

An inadequate ACL - loans would negatively impact our results of operations.

We are exposed to the risk that our customers will be unable to repay their loans according to agreed upon terms and that any collateral securing the payment of their loans will not be sufficient to avoid losses. Credit losses are inherent in the lending business and could have a material adverse effect on our results of operations. Volatility and deterioration in the broader economy may also increase our risk of credit losses. The determination of an appropriate level of ACL - loans is an inherently uncertain process and is based on numerous assumptions. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond our control, and charge-offs may exceed current estimates. We evaluate the collectability of our loan portfolio and record an ACL - loans that we believe is adequate to absorb potential losses over the expected life of the loans based upon various factors, including, but not limited to: the risk characteristics of various classifications of loans; previous loan loss experience;

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specific loans that have loss potential; delinquency trends; the estimated fair market value of the collateral; current economic conditions; the views of our regulators; and geographic and industry loan concentrations. If any of our evaluations are incorrect and/or borrower defaults result in losses exceeding our ACL - loans, our results of operations could be significantly and adversely affected. We cannot assure you that our ACL - loans will be adequate to cover actual loan losses realized on our portfolio.

Commercial real estate, commercial & industrial and ADC loans expose us to increased risk and earnings volatility.

We consider our CRE loans, C&I loans and ADC loans to be higher risk categories in our loan portfolio because these loans are particularly sensitive to economic conditions. At December 31, 2020, our portfolio of CRE loans, including multi-family loans, totaled $10.2 billion, or 46.9% of portfolio loans, our C&I loans (including traditional commercial & industrial, asset-based lending, payroll finance, warehouse lending, factored receivables, equipment finance and public sector finance) totaled $9.2 billion, or 41.9% of portfolio loans, and our ADC loans totaled $642.9 million, or 2.9% of portfolio loans.

CRE loans generally involve a higher degree of credit risk than residential loans because they typically have larger balances and are more affected by adverse conditions in the economy. Because payments on loans secured by commercial real estate often depend on the successful operation and management of the businesses that hold the loans, repayment of such loans may be affected by factors outside the borrower’s control, such as adverse conditions in the real estate market or the economy or changes in government regulation. In the case of C&I loans, although we strive to maintain high credit standards and limit exposure to any one borrower, the collateral for these loans often consists of accounts receivable, inventory and equipment. This type of collateral typically does not yield substantial recovery in the event we need to foreclose on it and may rapidly deteriorate, disappear, or be misdirected in advance of foreclosure. This adds to the potential that our charge-offs will be more volatile than we participated, which could significantly negatively affect our earnings in any quarter. In addition, some of our ADC loans pose higher risk levels than expected at origination, as projects may stall or sell at prices lower than anticipated. In addition, many of our borrowers also have more than one CRE, C&I or ADC loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship may expose us to significantly greater risk of loss.

Continued concentration of loans in our primary market area may increase our risk.

Our success depends primarily on the general economic conditions in the markets in which we conduct most of our business. The economic conditions in these areas may be different from, and in some instances worse than, the economic conditions in the United States as a whole. Most of our loans and deposits are generated from customers primarily in the New York Metro Market, which includes Manhattan, the boroughs and Long Island, and certain portions of the New York Suburban Market including Rockland, Westchester and Orange Counties in New York. We also have a presence in Ulster, Sullivan and Putnam Counties in New York and in Bergen County, New Jersey, as well as other counties in northern New Jersey. Our expansion into New York City and continued growth in Westchester County and Bergen County has helped us diversify our geographic concentration with respect to our lending activities but deterioration in economic conditions in our market area would still adversely affect our results of operations and financial condition.

Loans in our residential mortgage loan portfolio include interest only loans and loans that were originated as interest only loans that have converted to principal amortization status.

At December 31, 2020, included in our residential mortgage loan portfolio were $599.5 million of interest only loans and other residential mortgage loans that have converted to principal amortization status. After conversion to principal amortization status, a borrower’s monthly payment may increase substantially and the borrower may not be able to meet the increased debt service, which could result in increased delinquencies and, accordingly, potentially adversely affect our operating results. At December 31, 2020, there were $8.8 million of loans that are interest only or that were interest only and have converted to principal amortization status that were in non-accrual status.

Risks Related to Our Business

Changes in market interest rates could adversely affect our financial condition and results of operations.

Our financial condition and results of operations are significantly affected by changes in market interest rates. Our results of operations substantially depend on our net interest income, which is the difference between the interest income that we earn on our interest-earning assets and the interest expense that we pay on our interest-bearing liabilities. In general, our balance sheet is modestly asset sensitive because our assets mature or re-price at a faster pace than our liabilities. If interest rates continue at existing levels or decline, net interest income would be adversely affected as asset yields would be expected to decline at faster rates than deposit or borrowing costs. A decline in net interest income may also occur if competitive market pressures limit our ability to reduce deposit costs. Wholesale funding costs may also increase at a faster pace than asset re-pricing.

We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and securities. Decreases in interest rates often result in increased prepayments of loans and securities, as borrowers refinance their

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loans to reduce borrowings costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments in loans or other investments that have interest rates that are comparable to the interest rates on existing loans and securities. Conversely, increases in interest rates may decrease loan demand and/or may make it more difficult for borrowers to repay adjustable rate loans.

Changes in interest rates also affect the value of our interest earning assets and, in particular, our securities portfolio. The Federal Reserve reduced the federal funds rate two times in fiscal year 2020. Generally, the value of our securities fluctuates inversely with changes in interest rates. As of December 31, 2020, our available for sale securities portfolio totaled $2.3 billion. Decreases in the fair value of securities available for sale could have an adverse effect on stockholders’ equity and comprehensive income.

Uncertainty relating to LIBOR calculation process and phasing out of LIBOR could adversely affect our results of operations.

In 2017, the United Kingdom Financial Conduct Authority (the “UK FCA”), announced that after 2021 it would no longer compel banks to submit the rates required to calculate LIBOR. In November 2020, the UK FCA announced it will consult on its proposal to extend the retirement date of certain offered rates (excluding the one week and two month LIBOR offered rates which otherwise ease after December 31, 2021); and that, the publication of the remaining LIBOR offered rates will continue until June 30, 2023. Given consumer protection, litigation, and other risks, the bank regulatory agencies encouraged banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021.

It is not possible to predict what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments. In particular, regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among other things, published recommended fall-back language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g ., the Secured Overnight Financing Rate or SOFR as the recommended alternative to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments. At this time, it is not possible to predict whether these specific recommendations and proposals will be broadly accepted, whether they will continue to evolve, and what the effect of their implementation may be on the markets for floating-rate financial instruments and on our financial condition and results of operations.

We have a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR has resulted in and could continue to result in added costs and could present additional risk. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to adequately manage this transition process with our customers and internally could adversely impact our reputation financial condition and results of operations. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.

Our outstanding debt obligations and preferred stock, and our level of indebtedness could adversely affect our ability to raise additional capital and to meet our obligations under our existing indebtedness.

We have approximately $1.0 billion in outstanding indebtedness and obligations related to outstanding preferred stock. Our existing debt, together with any future additional indebtedness incurred, and outstanding preferred stock, could have important consequences for our creditors and stockholders. For example, it could:

• limit our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions, and general corporate or other purposes;

• restrict us from making strategic acquisitions or cause us to make non-strategic divestitures;

• restrict us from paying dividends to our stockholders; and

• increase our vulnerability to general economic and industry conditions.

Our results of operations, financial condition or liquidity may be adversely impacted by issues arising from certain foreclosure practices.

Foreclosure timelines in our principal marketplace are longer than the national average. Residential mortgages, in particular, may present us with foreclosure process issues. For example, residential mortgages were 7.4% of our total portfolio loans as of December 31, 2020, but constituted 11.2% of our non-accrual loans on the same date. Collateral for many of our residential loans is located within the States of New York and New Jersey, where there may continue to be foreclosure process and timeline issues.

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We are subject to competition from both banks and non-bank companies.

The financial services industry, including commercial banking, is highly competitive, and we face competition for deposits, loans and other financial services. Our principal competitors include commercial banks, savings banks and savings and loan associations, mutual funds, money market funds, finance companies, trust companies, insurers, leasing companies, credit unions, mortgage companies, REITs, private issuers of debt obligations, venture capital firms, private equity funds and suppliers of other investment alternatives, such as securities firms. Many of our non-bank competitors are not subject to the same degree of regulation as we are and thus have advantages over us in providing certain services. Further, many of our competitors are significantly larger than we are and have greater access to capital and other resources.

In addition, financial products and services have become increasingly technology-driven. The adoption of new technologies, including Internet banking services, mobile applications, advanced ATM functionality and cryptocurrencies could require us to make substantial expenditures to modify or adapt our current products and services or to build new products and services. Our ability to meet the needs of our customers competitively, and in a cost-efficient manner, is dependent on the ability to keep pace with technological advances and to invest in new technology as it becomes available. Many of our competitors have greater resources to invest in technology than we do and may be better equipped to market new technology-driven products and services. The ability to keep pace with technological change is important and may be costly, and the failure to do so could have a material adverse effect on our business, on our financial condition and results of operations.

Our ability to make acquisitions is subject to significant risks, including the risk that regulators will not provide the requisite approvals.

We will continue to evaluate potential acquisitions and may from time to time make opportunistic whole or partial acquisitions of other banks, branches, financial institutions, or related businesses that we expect will further our business strategy, including through participation in FDIC-assisted acquisitions or assumption of deposits from troubled institutions. Any potential acquisition will be subject to regulatory approval, and there can be no assurance that we will be able to obtain such approval in a timely manner or at all. Even if we obtain regulatory approval, these acquisitions could involve numerous risks, including lower than expected performance or higher than expected costs, difficulties related to integration, difficulties and costs associated with consolidation, diversion of management’s attention from other business activities, changes in relationships with customers, and the potential loss of key employees. In addition, we may not be successful in identifying acquisition candidates or preventing deposit erosion or loan quality deterioration at acquired institutions. Additionally, we may not be able to acquire other institutions on attractive terms. There can be no assurance that we will be successful in completing or will even pursue future acquisitions, or if such transactions are completed, that we will be successful in integrating acquired businesses into our existing operations. Our ability to grow may be limited if we choose not to pursue or are unable to successfully make acquisitions in the future.

The success of our and the Bank’s mergers and acquisition transactions may depend, in part, on our ability to realize the estimated cost savings from combining the acquired businesses with our and the Bank’s existing operations. It is possible that the potential cost savings could turn out to be more difficult to achieve than anticipated or that our estimates could turn out to be incorrect and that anticipated cost savings may not be realized fully or at all, and/or may take longer to realize than expected. Moreover, although we have successfully integrated business acquisitions in recent years, there is no assurance that we will be able to continue to do so in the future, which could delay or prevent the anticipated benefits of future acquisitions from being realized fully or at all. Finally, acquisitions typically involve the payment of a premium over book and trading value and thus may result in the dilution of our book value per share.

Risks Related to Our Operations

We are subject to laws regarding the privacy, information security and protection of personal information and any violation of these laws or incident involving the mishandling of personal, confidential or proprietary information of individuals could damage our reputation and otherwise adversely affect our operations and financial condition.

Our business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services. We are subject to complex and evolving laws and regulations governing the privacy and protection of personal information of individuals (including customers, employees, suppliers and other third parties). For example, our business is subject to the Gramm-Leach-Bliley Act which, among other things: (i) imposes certain limitations on our ability to share nonpublic personal information about our customers with nonaffiliated third parties; (ii) requires that we provide certain disclosures to customers about our information collection, sharing and security practices and afford customers the right to “opt out” of any information sharing by us with nonaffiliated third parties (with certain exceptions); and (iii) requires that we develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches.

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Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification requirements in the event of a security breach. Ensuring that our collection, use, transfer and storage of personal information complies with all applicable laws and regulations can increase our costs. Furthermore, we may not be able to ensure that all of our customers, suppliers, counterparties and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means. If personal, confidential or proprietary information of customers or others were to be mishandled or misused, we could be exposed to litigation or regulatory sanctions. Any failure or perceived failure to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage our reputation and otherwise adversely affect our operations and financial condition.

Further concerns regarding the effectiveness of our measures to safeguard personal information, or even the perception that such measures are inadequate, could cause us to lose customers or potential customers and thereby reduce our revenues.

A breach, failure or interruption of information security and other systems, including as a result of   cyber-attacks or other cyber incidents, could negatively affect our earnings or otherwise harm our business.

Increasingly, our data processing, communication and information exchange depends on a variety of computing platforms and networks, both internal and those of external, third-party vendors. We devote significant resources and management focus to ensuring the integrity of our systems through information security and business continuity programs and otherwise. But there can be no assurance that our systems will not experience a breach interruption in service or other failure. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by external or internal security breaches, acts of vandalism, viruses, misplaced or lost data, programming or human errors or other similar events, all of which could have an adverse effect on our results of operations.

Information security risks for financial institutions continue to increase in part because of new technologies, the use of the Internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers continue to engage in attacks against large financial institutions including denial of service attacks designed to disrupt external customer facing services, and ransomware attacks designed to deny organizations access to key internal resources or systems. Moreover, we are not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. We employ detection and response mechanisms designed to contain and mitigate security incidents, but early detection may be thwarted by sophisticated attacks and malware designed to avoid detection. Additionally, we face risks related to cyber-attacks and other security breaches in connection with our own and third-party systems, processes and data, including credit card transactions that typically require the transmission of sensitive information regarding our customers through various third parties, including merchant acquiring banks, payment processors, payment card networks and our processors. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments such as the point of sale that we do not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them.

While to date we have not been the target of a successful, material cyber-attack, breach or other incidents, we cannot guarantee that our systems, or the systems of the third-party vendors we rely on, are free from vulnerability to attack, despite safeguards we and our third-party vendors have instituted.

While we diligently assess applicable regulatory and legislative developments affecting our business, laws and regulations relating to cybersecurity have been frequently changing, imposing new requirements on us, such as the recently adopted New York State Department of Financial Services’ Cybersecurity Requirements for Financial Services Companies regulation. In light of this, we face the potential for additional regulatory scrutiny that will lead to increasing compliance and technology expenses and, in some cases, could constrain our plans for growth and other strategic objectives.

We depend on our executive officers and key personnel to continue the implementation of our long-term business strategy and could be harmed by the loss of their services.

We believe that our continued growth and future success will depend in large part on the skills of our management team and our ability to motivate and retain these individuals and other key personnel. In particular, we rely on the leadership of our Chief Executive Officer, Jack Kopnisky, and our Chief Financial Officer, Luis Massiani, who was also recently appointed Chief Operating Officer. The loss of service of Mr. Kopnisky, Mr. Massiani or one or more of our other executive officers or key personnel could reduce our ability to

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successfully implement our long-term business strategy, could cause our business to suffer, and could negatively impact the value of our common stock. Leadership changes will occur from time to time, such as the previously-announced upcoming transition of Bea Ordonez to the role of Chief Financial Officer, and we cannot predict whether resignations of key personnel will occur or whether we will be able to recruit additional qualified personnel. We believe our management team possesses valuable knowledge about the banking industry and our markets and that their knowledge and relationships would be very difficult to replicate. Although the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and other executive officers have entered into employment agreements with us, it is possible that they may not complete the term of their employment agreements or renew them upon expiration. Our success also depends on the experience of our financial center managers and lending officers and on their relationships with the customers and communities they serve. The loss of these key personnel could negatively impact our banking operations. Further, the loss of key personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations.

Our investments in certain tax-advantaged projects may not generate returns as anticipated or at all and may have an adverse impact on our results of operations.

We invest in certain tax-advantaged investments that support qualified affordable housing projects and other community development initiatives. Our investments in these projects rely on the ability of the projects to generate a return primarily through the realization of federal and state income tax credits and other tax benefits. We face the risk that tax credits, which remain subject to recapture by taxing authorities based on compliance with relevant requirements at the project level, may not be able to be realized. The risk of not being able to realize the tax credits and other tax benefits associated with a particular project depends on many factors that are outside our control. A project’s failure to realize these tax credits and other tax benefits may have a negative impact on our investment and, as a result, on our financial condition and results of operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

For a discussion of our financial condition and results of operations for fiscal 2019 as compared to fiscal 2018, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on February 28, 2020.

Forward-Looking Statements

We make statements in this report, and we may from time to time make other statements, regarding our outlook or expectations for earnings, revenues, expenses and/or other financial, business or strategic matters regarding or affecting us that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “outlook,” “target,” “estimate,” “forecast,” “project,” by future conditional verbs such as “will,” “should,” “would,” “could” or “may,” or by variations of such words or by similar expressions. These statements are not historical facts, but instead represent our current expectations, plans or forecasts and are based on the beliefs and assumptions of the management and the information available to management at the time that these disclosures were prepared.

Forward-looking statements are subject to numerous assumptions, risks (both known and unknown) and uncertainties, and other factors that change over time. Forward-looking statements speak only as of the date they are made. We do not assume any duty and do not undertake to update our forward-looking statements. Because forward-looking statements are subject to assumptions, risks, uncertainties, and other factors, actual results or future events could differ, possibly materially, from those that we anticipated in our forward-looking statements and future results could differ materially from our historical performance.

The following factors, among others, could cause our future results to differ materially from the plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in forward-looking statements:

• our ability to successfully implement growth and other strategic initiatives, reduce expenses and to integrate and fully realize cost savings and other benefits we estimate in connection with acquisitions, and limiting any business disruption arising therefrom;

• oversight of the Bank by various federal regulators;

• adverse publicity, regulatory actions or litigation with respect to us or other well-known companies and the financial services industry in general and a failure to satisfy regulatory standards;

• the effects of and changes in monetary and policies of the FRB and the U.S. Government, respectively;

• our ability to make accurate assumptions and judgments about an appropriate level of ACL - loans and the collectability of our loan portfolio, including changes in the level and trend of loan delinquencies and write-offs that may lead to increased losses and non-performing assets in our loan portfolio, result in our ACL - loans not being adequate to cover actual losses, and require us to materially increase our reserves;

• our use of estimates in determining the fair value of certain of our assets, which may prove to be incorrect and result in significant declines in valuation;

• our ability to manage changes in market interest rates;

• our ability to capitalize on our substantial investments in our information technology and operational infrastructure and systems;

• changes in other economic, competitive, governmental, regulatory, and technological factors affecting our markets, operations, pricing, products, services and fees;

• the ongoing trajectory of COVID-19 and the extent to which and speed at which the global economy recovers, the nature and extent of ongoing governmental measures to contain the pandemic, the speed and efficacy of the vaccine roll out in New York State and nationally, the availability of our colleagues; the impact on our clients and vendors, including the continued ability of our borrowers to repay their borrowings in accordance with loan terms, and the potential impact of a more severe or prolonged dampening in demand for our products; and

• our success at managing the risks involved in the foregoing and managing our business.

Additional factors that may affect our results are discussed in this annual report on Form 10-K under Item 1A, “Risk Factors” and elsewhere in this report or in other filings with the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. You should read such statements carefully.

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Impact of COVID-19

The COVID-19 pandemic resulted in significant economic disruption which adversely affected our business and the business of our clients. We experienced a material decline in revenues in the second quarter of 2020, a result of dampened demand for lending products in our target markets and a significant decline in transactional activity in our receivables management and payroll businesses. While still short of our pre-pandemic forecast and our performance in 2019, we saw a rebound in our revenues during the second half of 2020, as business conditions began to normalize and clients saw an improvement in their performance, driving increased demand for our products and a recovery in the amount of new business generated.

Our consolidated financial statements reflect estimates and assumptions we make that impact the reported amounts of assets and liabilities, including the amount of the ACL we establish. The impact of the COVID-19 pandemic and the severe deterioration in macroeconomic conditions that has resulted from it, as well as the ongoing governmental measures needed to contain it, had a material adverse effect on the amount of our ACL - Loans. Our provision for credit losses is discussed further below in “Results of Operations - Provision for Credit Losses.”

Additionally, COVID-19 required enhanced safety and cleaning measures and we adopted agile workforce policies and practices to allow us to effectively transition to a remote working environment all of, which negatively impacted our operating expenses in 2020.

There is still significant uncertainty concerning the ongoing trajectory of the COVID-19 pandemic, and the extent to which and speed at which economic conditions will normalize, especially in the NY Metro area. The extent to which our business will continue to be adversely impacted will depend on numerous evolving factors and future developments that we are not able to predict, including the duration, spread and severity of the outbreak; the effectiveness of containment measures, including the speed of the ongoing vaccine distribution effort; and how quickly and to what extent normal economic and operating conditions can resume.

LIBOR Transition and Phase-Out

We have a significant number of loans, borrowings and swaps that are tied to LIBOR benchmark interest rates. It is anticipated that financial institutions will be required to transition new and existing loans, swaps and other borrowings to an alternative to LIBOR and the FRBNY has established the SOFR as its recommended alternative to LIBOR. We have created a sub-committee of our Asset Liability Management Committee to address our transition from LIBOR to an alternative benchmark rate. This committee includes personnel from legal, loan operations, risk, IT, credit, business intelligence, treasury, corporate banking, marketing, audit, accounting and corporate development.

Critical Accounting Policies and Accounting Estimates

Our accounting and reporting policies are prepared in accordance with GAAP and conform to general practices within the banking industry. The preparation of financial statements requires us to use judgment in making estimates and assumptions that affect reported amounts of assets and liabilities, reported amounts of income and expense and the disclosure of contingent assets and liabilities. The following estimates, which are based on relevant information available at the end of each period, are subject to inherent risks and uncertainties related to judgments and assumptions made. We consider the estimates to be critical in applying our accounting policies. Given the considerable uncertainty that may exist at the time the estimate is made, it is likely that changes could occur in our estimates from period to period and these changes could have a material impact on the financial statements.

We believe the judgments, assumptions and estimates utilized in the following critical accounting estimates are reasonable. Although actual events may differ from our assumptions, we do not believe that different outcomes from those assumed are more likely. However, our estimates could prove inaccurate, and changes to those estimates in future periods could result in charges which could materially negatively impact our earnings in those future periods.

ACL - Loans.

We consider the methodology for determining the ACL - loans to be a critical accounting policy and a critical accounting estimate due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for future changes in the economic environment that could result in changes to the amount of the ACL - loans considered necessary.

It is generally believed that the adoption of the CECL Standard will result in greater volatility in reported earnings and capital levels. The CECL Standard requires us to estimate credit losses over the full expected remaining life of a loan and that estimate is highly sensitive to changes in a wide range of forecasted economic activity indicators, at the global, national and local level.

We use several models to estimate expected losses over the estimated life of the loans in our portfolio. Different models are generally used based on the loan type and the characteristics of the loan or pool of loans. The methodologies used to model expected credit

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losses for each of our portfolio segments is disclosed in Note 1. “Basis of Financial Statement Presentation and Summary of Significant Accounting Policies - Recently Adopted Accounting Standards - ACL - Loans.” The key inputs considered in our CECL models and significant assumptions used by us and our third-party data providers are discussed below in “Asset Quality Characteristics and Credit Costs - Allocation of ACL - Loans.”

Our implementation of the CECL Standard was designed to conform to the requirements of GAAP and other relevant regulatory guidance. Our CECL model uses economic forecast data provided by Moody’s in their US macro-economic outlook dataset, which includes forecast data related to unemployment levels, GDP, target benchmark interest rates, CRE prices and other key economic indicators. We use Moody’s baseline estimate and, as necessary, apply additional qualitative factors and assumptions to arrive at our best estimate of expected credit losses. We also prepare and review alternative models including one that assumes a more favorable economic environment and another that assumes a less favorable economic environment, and we consider whether those alternatives are more likely than the baseline scenario.

The ACL - Loans was $106.2 million at December 31, 2019, increased to $196.8 million on January 1, 2020 upon the adoption of the CECL Standard, and increased to $365.5 million at June 30, 2020 following the onset of the pandemic and as a result of the severe deterioration in macro-economic conditions. At December 31, 2020, the ACL - Loans was $326.1 million.

Goodwill and Intangible Assets.

We believe the methodology used to determine the fair value of goodwill to be a critical accounting policy and a critical accounting estimate. In accordance with GAAP, we record goodwill as the excess of the purchase price in a business combination over the fair value of the identifiable net assets acquired. Ordinarily, we perform a review for impairment of our intangible assets annually in the fourth quarter. In response to the onset of the pandemic, the rapid deterioration in economic conditions globally and in our mart area, as well as the negative impact on our stock price, we performed an impairment evaluation during the second quarter of 2020, engaging an independent third-party to evaluate the fair value of the Company compared to its carrying value. The results of this evaluation were that our goodwill and intangible assets were not impaired. Fair value was estimated primarily using a discounted cash flow analysis. Significant assumptions included in the discounted cash flow analysis included the following:

• management’s financial projections for the period 2020 through 2024;

• earnings retention based on maintaining a minimum tangible common capital ratio of 8.00%;

• operating expense cost savings estimated at 10.0%; and

• a capitalization rate of 9.5% based on a 12.5% discount rate less the estimated terminal growth rate of 3.0%.

At December 31, 2020, we concluded that an independent third-party evaluation of the fair value of goodwill was not necessary and that goodwill and intangible asset impairment did not exist. See Note 7. “Goodwill and Other Intangible Assets” in the notes to consolidated financial statements included elsewhere in this report, for additional information regarding our goodwill impairment test. We will continue to monitor and evaluate the impact of COVID-19, and other triggering events that may indicate an impairment of goodwill in the future. In the event that we conclude that all or a portion of our goodwill or intangible assets are found to be impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or our regulatory capital ratios.

Deferred Income Taxes.

We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized to record the value of the expected future tax benefits or consequences, determined by reference to the difference between the financial reporting carrying values of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the benefits of the deferred tax asset in future periods, a valuation allowance is established. Deferred tax assets and liabilities are measured by applying the effect of enacted tax rates and laws expected to apply in the years in which the differences between the reported carrying value and the tax basis of assets and liabilities are expected to reverse. We exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projecting the availability and amount of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.

For additional information on our significant accounting policies, see Note 1. “Basis of Financial Statement Presentation and Summary of Significant Accounting Policies” in the notes to consolidated financial statements.

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General

The Advantage Funding Acquisition on April 2, 2018, the Woodforest National Bank on February 28, 2019 and the Santander Bank acquisition on November 29, 2019 are discussed in Note 2. “Acquisitions” in the notes to consolidated financial statements. These transactions were accounted for as business combinations, and accordingly, their related results of operations are included from the date of acquisition. This discussion and analysis should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and other information contained in this report.

Recent Developments

In addition to the transactions discussed above, recent significant transactions and events include the following:

Change in Accounting Principle

Effective January 1, 2020, we adopted the CECL Accounting Standard, which upon adoption, increased our ACL - loans by $90.6 million, our ACL - HTM securities by $796 thousand and our ACL - off-balance sheet credit exposures by $6.1 million. In accordance with the CECL Standard, we recorded this increase as a reduction to equity. Net of tax, our equity decreased by $54.3 million on January 1, 2020, which was presented as a cumulative effect of a change in accounting principle. See Note 1. “Basis of Financial Statement Presentation and summary of Significant Accounting Policies - Recently Adopted Accounting Standards” for additional information.

Subordinated Notes Issuance

On October 30, 2020, we issued the subordinated Notes - 2030. We injected $175.0 million of the net proceeds as capital to the Bank. During the fourth quarter of 2020, we redeemed $30.0 million principal of the Subordinated Notes - Bank. We anticipate redeeming the remaining balance, which are redeemable beginning April 1, 2021 during the second quarter of 2021. See Note 9. “Borrowings, Senior Notes and Subordinated Notes” for additional information.

Repurchases of Common Stock

In the fourth quarter of 2020, we reinstated our common stock repurchase program and purchased 1,924,594 shares at a cost of $15.88 per share. For the full year, we repurchased 6,825,353 shares of our common stock at a total cost of $111.6 million, or $16.35 per share. Our weighted average diluted shares outstanding decreased by 11,738,285 between December 31, 2019 and 2020.

Quarterly Results of Operations

See Note 24. “Quarterly Results of Operations (Unaudited)” in the notes to consolidated financial statements for information regarding our quarterly results for 2020 and 2019.

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Results of Operations

We reported net income available to common stockholders of $217.9 million, or $1.12 per diluted common share for 2020, compared to net income available to common stockholders of $419.1 million, or $2.03 per diluted common share for 2019, and net income available to common stockholders of $439.3 million, or $1.95 per diluted common share, for 2018.

Results for 2020 include organic growth in loans and deposits from our commercial banking teams and full year results from the two acquisitions we made in 2019, which were:

• the Woodforest Portfolio Acquisition on February 28, 2019; and

• the Santander Portfolio Acquisition on November 29, 2019.

Results for 2019 included organic growth in loans and deposits from our commercial banking teams and revenues from the date of acquisition for the acquisitions mentioned above.

Dollar amounts in the tables that follow are stated in thousands, except for per share amounts and ratios.

Selected operating data, return on average assets, return on average common equity and dividends per common share for the comparable periods follow:

For the year ended December 31,

Tax equivalent net interest income

Less tax equivalent adjustment

Net interest income

Provision for credit losses

Non-interest income

Non-interest expense

Income before income taxes

Income tax expense

Net income

Preferred stock dividends

Net income available to common stockholders

Earnings per common share - basic

Earnings per common share - diluted

Dividends per common share

Return on average assets

Return on average equity

The table above summarizes our results of operations on a tax equivalent basis. Tax equivalent adjustments are the result of increasing income from tax-free securities by an amount equal to the taxes that would be paid if the income were fully taxable based on the 21% federal tax rate that was in effect for 2020, 2019 and 2018.

Net Income

For 2020, net income available to common stockholders was $217.9 million compared to net income available to common stockholders of $419.1 million for 2019, a decrease of $201.2 million. The decline in our net income when compared to the prior year was primarily due to the ongoing impact to the business environment that has resulted from the COVID-19 pandemic which, combined with the adoption of the CECL Standard, resulted in a significant increase in our provision for credit losses.

Results for 2020 included the following other significant items:

• prepayment penalties on extinguishment of FHLB term borrowings of $19.5 million;

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• an impairment charge of $13.3 million, related to losses on the sale of several financial centers and the early termination of certain operating leases pursuant to our real estate consolidation strategy;

• net gain on sale of securities of $9.4 million; and

• amortization of non-compete agreements and acquired customer list intangible assets of $686 thousand.

Excluding the impact of these items for 2020, adjusted net income available to common stockholders (non-GAAP) was $234.1 million, and adjusted diluted earnings per share available to common stockholders (non-GAAP) was $1.20. Note that for purposes of calculating our adjusted net income available to common stockholders (non-GAAP) we used our estimated annual effective tax rate before discrete items of 13.5%.

Results for 2019 included the following significant items:

• gain of $11.8 million on termination of the defined benefit pension plan assumed in the Astoria Merger;

• gain on sale of residential mortgage loans of $8.3 million;

• an impairment charge of $14.4 million to write-off leasehold improvements, land and buildings, and the early termination of several leases pursuant to our real estate consolidation strategy;

• charges for asset write-downs, systems integration costs, retention and severance expenses associated with the Santander Portfolio Acquisition and Woodforest Portfolio Acquisition of $8.5 million;

• net loss on sale of securities of $6.9 million;

• amortization of non-compete agreements and acquired customer list intangible assets of $840 thousand; and

• gain on extinguishment of senior notes of $46 thousand.

Excluding the impact of these items for 2019, adjusted net income available to common stockholders (non-GAAP) was $426.9 million, and adjusted diluted earnings per share available to common stockholders (non-GAAP) was $2.07 for 2019.

Please refer to Item 6. “Selected Financial Data” for a reconciliation of the non-GAAP financial measures highlighted above.

Details of the changes in the various components of net income available to common stockholders are further discussed below.

Net Interest Income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities which are used to fund those assets, such as deposits and borrowings. Net interest income is our largest source of revenue, representing 86.5% and 87.5% of total revenue in 2020 and 2019, respectively. Net interest margin is the ratio of taxable equivalent net interest income to average interest-earning assets for the period.

Our net interest income and net interest margin are impacted by various factors including the volume and mix of interest earning assets and interest bearing liabilities, changes in the levels of interest rates, re-pricing frequencies, contractual maturities and loan repayment behavior. A flattening of the interest rate yield curve, where the spread between short-term rates and long-term rates narrows, makes holding longer-term and fixed rate interest earning assets less profitable as the relative cost to fund those assets with shorter-term deposits and borrowings increases, reducing our net interest margin and therefore our net interest income.

The ratio of interest earning assets to interest bearing liabilities was 133.8% and 128.6% for the years ended December 31, 2020 and 2019, respectively.

The following table sets forth our average balance sheet balances by category, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans are included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of purchase accounting adjustments, deferred fees and discounts and premiums that are amortized or accreted to interest income or expense.

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For the year ended December 31,

Average

balance

Interest

Yield/Rate

Average

balance

Interest

Yield/Rate

Average

balance

Interest

Yield/Rate

Interest earning assets:

C&I and commercial finance loans (1)

CRE (2)

ADC (3)

Total commercial loans (4)

Consumer loans

Residential mortgage loans

Total loans, net (5)

Securities taxable

Securities tax exempt

Interest earning deposits

FRB and FHLB Stock

Total securities and other earning assets

Total interest earnings assets

Non-interest earning assets

Total assets

Interest bearing liabilities:

Demand deposits

Savings deposits (6)

Money market deposits

Certificates of deposit

Total interest bearing deposits

Senior Notes

Other borrowings

Subordinated Notes - Bank

Subordinated Notes - Company

Total borrowings

Total interest bearing liabilities

Non-interest bearing deposits

Other non-interest bearing liabilities

Total liabilities

Stockholders’ equity

Total liabilities and stockholders’ equity

Net interest rate spread (7)

Net interest earning assets (8)

Tax equivalent net interest margin

Less tax equivalent adjustment

Net interest income

Accretion income on acquired loans

Tax equivalent net interest margin excluding accretion income on acquired loans

See legend on the following page.

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(1) C&I and commercial finance loans includes traditional C&I loans and commercial finance loans, which are comprised of ABL, payroll finance, warehouse lending, factored receivables, equipment finance, and public sector finance loans.

(2) CRE loans include multi-family loans.

(3) ADC represents acquisition, development and construction loans.

(4) Commercial loans include all C&I and commercial finance, CRE and ADC loans.

(5) Includes the effect of net deferred loan origination fees and costs, accretion of net purchase accounting adjustments, prepayment fees and late charges and non-accrual loans.

(6) Includes interest bearing mortgage escrow balances.

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

(8) Net interest earning assets represents total interest earning assets less total interest bearing liabilities.

The following table presents the dollar amount of changes in interest income (on a fully tax equivalent basis) and interest expense for the major categories of our interest earning assets and interest bearing liabilities. Information is provided for each category of interest earning assets and interest bearing liabilities with respect to (i) changes attributable to changes in volume ( i.e., changes in average balances multiplied by the prior period average rate); and (ii) changes attributable to rate ( i.e., changes in average rate multiplied by prior period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

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Increase (Decrease)

due to

Total

Increase

(Decrease)

Increase (Decrease)

due to

Total

Increase

(Decrease)

Volume

Rate

Volume

Rate

Interest earning assets:

Traditional C&I and commercial finance loans

CRE (1)

ADC

Total commercial loans

Consumer loans

Residential mortgage loans

Securities taxable

Securities tax exempt

Interest earning deposits

FRB and FHLB Stock

Total interest earning assets

Interest bearing liabilities:

Demand deposits

Savings deposits

Money market deposits

Certificates of deposit

Senior Notes

Other borrowings

Subordinated Notes - Bank

Subordinated Notes - Company

Total interest bearing liabilities

Change in tax equivalent net interest income

Less tax equivalent adjustment

Change in net interest income

(1) CRE loans include multi-family loans.

2020 compared to 2019

For the year ended December 31, 2020, tax equivalent net interest income decreased $55.6 million to $878.2 million compared to $933.8 million for the year ended December 31, 2019. The decrease in tax equivalent net interest income was mainly due to lower accretion income on acquired loans, which declined $52.7 million, to $38.5 million for 2020 compared to $91.2 million for 2019. In addition, interest rates across the interest yield curve were lower in 2020 compared to 2019.

The average volume of interest earning assets decreased $217.7 million, or 0.8%, for 2020 relative to 2019, which was mainly due to an accelerated pre-payment activity in our residential and multi-family loan portfolios and in our mortgage-backed securities portfolio, partially offset by growth in our commercial loan portfolio and the impact of loans made under the PPP. PPP loans are included with traditional C&I and commercial finance loans. PPP loans generated $10.3 million of interest income from an average balance of $357.3 million, a yield of 2.89%.

The tax equivalent net interest margin decreased to 3.26% for 2020 compared to 3.49% for 2019, mainly due to the decline in accretion income on acquired loans. Interest earning assets yielded 3.81% for 2020 compared to 4.55% for 2019, which was mainly due to declines in market rates of interest. The cost of interest bearing liabilities was 0.74% for the year ended December 31, 2020 compared to

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1.36% for 2019. The decrease in the cost of interest bearing liabilities was mainly due to decreases in market rates of interest and the impact of pricing changes introduced in response to the low interest rate environment.

The average balance of commercial loans outstanding increased $2.3 billion, or 13.4%, during 2020, compared to 2019. The increase was the result of organic growth from our commercial banking teams, and the full year impact of the Woodforest Portfolio Acquisition and the Santander Portfolio Acquisition. Commercial loans represented 90.2% of total average loans during 2020, compared to 84.9% for 2019. The average yield on commercial loans was 4.03% in 2020, compared to 5.02% for 2019. Interest income from commercial loans declined $79.2 million in 2020, compared to 2019. The decrease in yield on commercial loans was due to a combination of factors including a decline of $32.7 million in accretion income on acquired commercial loans. In addition, a change in our portfolio mix, with an increase in lower yielding mortgage warehouse and public sector finance loans, had the effect of further reducing interest income.

The average balance of residential mortgage loans declined $878.1 million during 2020 compared to 2019. The decline was mainly due to continued high levels of repayments resulting from borrowers choosing to refinance in response to declining interest rates. The average yield on residential mortgage loans was 4.25% in 2020 compared to 5.11% in 2019. Accretion income on acquired residential mortgage loans was $8.9 million during 2020 compared to $29.0 million for 2019.

Total accretion income on acquired loans was $38.5 million for 2020 and contributed 18 basis points to the average yield on loans. Accretion income on acquired loans was $91.2 million for 2019 and contributed 45 basis points to the yield on loans.

Tax equivalent interest income on securities in 2020 decreased $28.5 million to $137.0 million, compared to $165.5 million in 2019. This was mainly due to a decrease of $1.1 billion in the average balance of securities, mainly due to elevated levels of repayment. The tax equivalent yield on securities was 3.01% in 2020 compared to 2.91% in 2019. The increase in tax equivalent yield on securities was primarily due to changes in the composition of the securities portfolio a result of elevated repayment activity in our lower yielding mortgage-backed securities portfolio and an increase in our holdings of higher yielding corporate securities. Municipal securities continue to be a large component of our securities portfolio. The proportion of tax exempt securities was 45.4% of average securities in 2020 compared to 41.1% in 2019.

Average interest earning deposits increased $49.6 million in 2020 compared to 2019, mainly due to an increase in our cash balances as a result of constrained loan demand caused by the pandemic and the timing of deposit inflows.

Income from FRB and FHLB stock declined $10.3 million in 2020 compared to 2019. This was due to the decline in the 10-year Treasury rate, which determines the dividends we receive on FRB stock, and a decline in the amount of FHLB stock held during the period, a result of lower borrowing in 2020 compared to 2019.

Average deposits increased $2.0 billion in 2020 to $23.4 billion compared to $21.4 billion in 2019. Average interest bearing deposits increased $1.2 billion to $18.4 billion during 2020, from $17.1 billion during 2019. Average non-interest bearing deposits increased $792.1 million to $5.1 billion in 2020 compared to $4.3 billion in 2019. The growth in average deposits was due to organic growth generated by our commercial banking teams coupled with higher cash balances held by many of our clients. We also saw growth in on-line deposits generated by Brio Direct, our on-line banking offering, and growth in wholesale deposits. The average cost of interest bearing deposits was 0.58% in 2020 compared to 1.12% in 2019. The decrease in the cost of deposits was primarily attributable to changes in market rates of interest and pricing changes implemented by us in response to same.

Average borrowings decreased $1.9 billion to $1.8 billion in 2020 compared to $3.7 billion in 2019. The decrease in average borrowings was a result of an increase in available deposits coupled with a decline in security volumes which allowed us to repay certain high cost borrowings. The average cost of borrowings was 2.40% for 2020 compared to 2.47% for 2019, reflecting the impact of lower interest rates, partially offset by a change in the composition of our total borrowings, with a greater proportion of our borrowings being comprised of longer term and more expensive senior notes and subordinated notes in 2020 compared to 2019. See additional disclosures regarding our borrowings in Note 9. “Borrowings, Senior Notes and Subordinated Notes” in the notes to consolidated financial statements.

For 2020, the cost of total funding declined 62 basis points relative to 2019, primarily as a result of declining market interest rates. We anticipate that additional repricing initiatives in 2021 will further reduce our cost of total funding liabilities in 2021.

Tax equivalent net interest margin excluding accretion income on acquired loans was 3.11% for the year ended December 31, 2020, compared to 3.15% for the year ended December 31, 2019.

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2019 compared to 2018

For this discussion, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - 2019 compared to 2018” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on February 28, 2020.

Provision for Credit Losses - Loans. The provision for credit losses is determined by us as the amount to be added to the ACL - loans after net charge-offs have been deducted such that the ending ACL balance represents our best estimate of expected credit losses on portfolio loans. In 2020, following our adoption of the CECL Standard, provision for credit losses amounted to $252.4 million. In 2019, under the incurred loss model that was applied prior to the adoption of CECL, provision for loan losses was $46.0 million. The increase in provision for credit losses was mainly due to the adoption of the CECL Standard, which requires an estimate of life of loan losses and the impact of the COVID-19 pandemic. See the section captioned “Asset Quality Characteristics and Credit Costs - Provision for Credit Losses - Loans” elsewhere in this discussion for further analysis of the provision for credit losses.

Provision for Credit Losses - HTM Securitie s. The provision for credit losses - HTM securities for 2020 was $703 thousand. There was no provision for credit losses - HTM securities during 2019. The ACL - HTM securities is based on our estimate of loss given anticipated defaults due the deterioration in economic conditions caused by COVID-19. The models we utilize to estimate estimated cash flows and expected credit losses on HTM securities indicated the reserve of $1.5 million adequately covers all expected credit losses.

Non-interest Income. The components of non-interest income were as follows:

For the year ended December 31,

Deposit fees and service charges

Accounts receivable management / factoring commissions and other related fees

Loan commissions and fees

BOLI

Investment management fees

Net gain (loss) on sale of securities

Net gain on called securities

Net gain on termination of pension plan

Gain on sale of premises and equipment

Gain on sale of residential mortgage loans

Other

Total non-interest income

Total non-interest income

Net gain (loss) on sale of securities

Net gain on termination of pension plan

Net gain on sale of premises and equipment

Gain on sale of residential mortgage loans

Adjusted non-interest income - non-interest income net of items noted above

As presented in Item 6. “Selected Financial Data - Non-GAAP Financial Measures,” in calculating our adjusted total revenues and adjusted net income, we eliminate net gain (loss) on sale of securities, net gain on termination of pension plan, gain on sale of premises and equipment, fixed assets and gain on sale of residential mortgage loans. Net gain (loss) on sale of securities is impacted significantly by changes in market interest rates and strategies we use to manage liquidity and interest rate risk. As a result, net gain (loss) on sale of securities is not part of our corporate budgeting or business planning process. In 2019, we recorded a one-time gain on the termination of the defined benefit pension plan we assumed in the Astoria Merger. As we continue our financial center consolidation strategy, we may sell real estate, which may result in gains or losses, which are also not a part of our recurring operating income. Lastly, we sold $1.4 billion of residential mortgage loans in 2019 that were acquired as part of the Astoria Merger and the gain on sale of these loans is not part of our recurring operating income.

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Deposit fees and service charges were $23.9 million for 2020 compared to $26.4 million for 2019. The decrease was primarily due to our decision to waive certain deposit fees in the first half of 2020 in response to the pandemic, as well as consumer deposit attrition, largely related to the continued consolidation of our financial center network.

Accounts receivable management / factoring commissions and other related fees represents fees generated in our factoring and payroll finance businesses. In our factoring business, we receive a nonrefundable factoring fee, which is generally a percentage of the factored receivables or sales volume, which is designed to compensate us for the bookkeeping and collection services provided and, if applicable, the credit review of the client’s customer and the assumption of customer credit risk. In our payroll finance business, we provide outsourced support services for clients in the temporary staffing industry and generate fee income for providing full back-office, payroll, tax and accounting services. Fees in 2020 declined $2.0 million to $21.8 million, primarily as a result of reduced transactional volume as a result of the economic slowdown caused by the pandemic.

Loan commissions and fees include rental income from operating leases, fees on lines of credit, loan servicing and collateral monitoring fees, syndication fees, collateral monitoring fees, gain on sale of commercial loans, and other loan related fees that are not included in interest income. Loan commissions and fees were $39.5 million for 2020 compared to $24.1 million for 2019 an increase of $15.4 million. The increase was mainly due to an increase in rental income from operating leases which was $16.1 million in 2020 compared to $2.4 million in 2019, a result of our acquisition of the Santander Portfolio in November of 2019. Loan syndication fees were $5.4 million for 2020 compared to $4.0 million for 2019, reflecting our investment in growing our syndications team and increased transactional volumes from same. Loan commissions and fees in 2020 included gain on sale of PPP loans of $3.7 million. Residential loan servicing fees were $999 thousand in 2020 compared to $4.8 million for 2019. The decline was mainly due to a reduction in the number of residential loans serviced and an increase in amortization of our mortgage servicing asset to $3.9 million in 2020 compared to $1.2 million in 2019.

BOLI income mainly represents the change in the cash surrender value of life insurance policies owned by the Bank. BOLI income was $20.3 million for 2020 compared to $20.7 million for 2019. In 2019, we restructured $394.8 million of BOLI assets acquired in the Astoria Merger, which consisted mainly of diversifying the investment asset classes available under the program and had the effect of reducing associated fees and other charges and resulted in a gain on the restructuring of $4.8 million.

Investment management fees principally represent fees from the sale of mutual funds and annuities through our financial center personnel. These revenues were $6.7 million for 2020 compared to $7.3 million for 2019. The decrease in 2020 compared to 2019 was mainly due to lower transactional volumes as a result of continued consolidation of our financial center locations.

Net gain (loss) on sale of securities represents net gains or losses incurred on the sale of securities from our investment securities portfolio. We realized a net gain of $9.4 million for 2020 compared to a net loss of $6.9 million for 2019. In 2020, we sold securities in our HTM portfolio related to a single issuer that had demonstrated significant deterioration in credit quality since the date we acquired the securities. See Note 3. “Securities” in the notes to consolidated financial statements for additional information. In 2019, we sold $1.4 billion of available for sale securities, and used a portion of the proceeds to fund the Woodforest Portfolio Acquisition and to reduce wholesale deposits and borrowings.

Net gain on called securities for 2020 represents income earned on securities, mainly government agency securities, that were called by the issuer prior to their contractual maturity.

Net gain on termination of pension plan was $11.8 million for 2019. The gain was related to the termination of the defined benefit pension plan assumed as part of the Astoria Merger and was the result of strong returns on plan assets in 2019 and a better than expected outcome on the annuities purchase terms.

Gain on sale of residential mortgage loans  represents the net gain of $8.3 million realized on the sale of residential mortgage loans held for sale in the first quarter of 2019. The sale was part of our strategy of decreasing our exposure to residential loans.

Other non-interest income principally includes loan swap fees, safe deposit box rentals, insurance commissions and foreign exchange fees. Other non-interest income was $9.0 million for 2020 compared to $15.3 million for 2019. The decrease in 2020 compared to 2019 was mainly due to a decline of $6.3 million in loan swap fees, which were $2.7 million in 2020 compared to $9.0 million for 2019. The decrease was mainly due to a decline in volume related to the pandemic and the impact of declines in interest rates during 2020.

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Non-interest Expense. The components of non-interest expense were as follows:

For the year ended December 31,

Compensation and employee benefits

Stock-based compensation plans

Occupancy and office operations

Information technology

Professional fees

Amortization of intangible assets

FDIC insurance and regulatory assessments

OREO, net

Charge for asset write-downs, systems integration, severance and retention

Loss (gain) on extinguishment of borrowings

Impairment related to financial centers and real estate consolidation strategy

Other

Total non-interest expense

Non-interest expense for 2020 increased $28.6 million compared to 2019. The increase between 2020 and 2019 was mainly due to prepayment penalties on extinguishment of borrowings and an increase in other expense, the result of depreciation on operating leases that were acquired in November 2019 as part of the Santander Portfolio transaction.

Compensation and employee benefits expense and FTEs are presented in the following table:

Compensation expense

FTEs at period end

December 31, 2020

December 31, 2019

December 31, 2018

Compensation expense for 2020 increased $6.3 million compared to 2019. The increase included $5.0 million of severance compensation, which was related to the reduction in FTEs between periods. The balance of the increase in compensation was mainly due to the hiring of commercial bankers, business development officers, information technology and risk management personnel, which was partially offset by a reduction in financial center personnel.

Stock-based compensation plans expense was $23.0 million for 2020 compared to $19.5 million for 2019. The increase for 2020 compared to 2019 was mainly due to an increase in the percentage of compensation paid to our executive management and senior personnel that is made up of stock-based compensation. This is designed to better align the interests of management and colleagues to those of our stockholders. For additional information related to our stock-based compensation, see Note 14. “Stock-Based Compensation” in the notes to consolidated financial statements.

Occupancy and office operations expense was $59.4 million for 2020, compared to $64.4 million in 2019. The decrease in occupancy and office operations expense in 2020 compared to 2019 was mainly due to continued efforts to consolidate our financial centers and back-office locations. We had 76 financial centers at December 31, 2020 compared to 82 financial centers at December 31, 2019. We will continue to consolidate financial centers and other locations consistent with our strategy of reducing our real estate footprint and controlling expenses.

Information technology expense mainly includes the cost of our deposit and loan servicing systems, software amortization and managed services. Information technology expense was $33.3 million for 2020 compared to $35.6 million for 2019. The decrease in 2020 was mainly due to a decline in data processing expense.

Professional fees expense mainly includes consulting fees, legal fees and audit and accounting fees. The increase in 2020 was mainly related to an increase in consulting fees related to our continued investment in digital banking solutions and automation initiatives.

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Amortization of intangible assets expense mainly includes amortization of core deposit intangible assets, non-compete agreements and customer lists. Amortization of intangible assets was $16.8 million for 2020 compared to $19.2 million for 2019. The decrease between the periods was mainly due a decline in amortizable intangible assets.

FDIC insurance and regulatory assessments expense was $13.0 million for 2020 compared to $12.7 million for 2019. The increase in FDIC insurance and regulatory assessments between the periods was mainly due to an increase in assets covered by FDIC insurance.

OREO expense, net includes maintenance costs, taxes, insurance, write-downs (subsequent to any write-down at the time of foreclosure or transfer to OREO), and gains and losses from the disposition of OREO. OREO expense, net increased $1.1 million for 2020 compared to 2019 mainly due to a decrease in gains on sale, and an increase in write-down expense. The increase in write-downs was mainly related to a decline in value of three commercial OREO properties.

Charge for asset write-downs, systems integration, severance and retention expense were as follows:

For the year ended December 31,

Property, leases and other asset write-downs

Charge to restructure information technology systems

Banking systems integration

Severance and retention

Total

Charge for asset write-downs, systems integration, severance and retention for 2019 included a charge of $3.3 million related to the Woodforest Portfolio Acquisition and a charge of $5.1 million related to the Santander Bank Portfolio Acquisition.

Loss (gain) on extinguishment of borrowings was a loss of $19.5 million in 2020, compared to a gain $46 thousand in 2019. The loss in 2020 was a result of the early prepayment of $1.4 billion of FHLB borrowings. The gain in 2019 was a result of the repurchase of $7.0 million principal amount of the 3.50% Senior Notes that matured in June 2020.

Impairment related to the disposition of financial centers pursuant to our real estate consolidation strategy was $13.3 million in 2020 compared to $14.4 million in 2019. The charge in 2020 included loss on sale of financial centers and the early termination of leases. The charge in 2019 included a write-off of leasehold improvements, land and buildings, and the early termination of several long-term leases.

Other non-interest expense was $65.5 million for 2020 compared to $53.8 million for 2019. Other non-interest expense mainly includes depreciation expense on operating leases, advertising and promotion, communications, residential mortgage loan servicing, insurance and surety bond premium, commercial loan servicing, and operational losses. Additional details regarding these expenses is included in Note 16. “Non-Interest Income, Other Non-interest Expense, Other Assets and Other Liabilities” in the notes to consolidated financial statements. In 2020, depreciation on operating leases increased $12.9 million related to lease assets acquired in connection with the Santander Portfolio Acquisition in November 2019.

Income Taxes were $29.9 million for 2020 compared to $112.9 million for 2019, which represented an effective income tax rate of 11.7% for 2020, and 20.9% for 2019. In 2020, we recorded estimated income tax expense at 13.5%, which was lower than our effective tax rate for 2019 mainly due to the material increase in our provision for credit losses expense, a result of both the adoption of CECL and the impact of the pandemic, as well as an increase in 2020 in the proportion of tax exempt income from loans, securities, BOLI and affordable housing investments. Our actual income tax rate in 2020 was lower than our estimated income tax rate due to the impact of discrete items. We elected accelerated depreciation for leases acquired in the Santander Portfolio Acquisition, which resulted in a net operating loss for 2019. Under the CARES Act, we determined we were eligible to carry back the net operating loss to offset taxable income reported in 2014 and 2016. As a result, in 2020 we recorded an income tax benefit of $18.0 million. We also recorded an accrual for uncertain tax positions of $7.0 million, discussed further in Note 12. “Income Taxes” in the notes to consolidated financial statements.

The 20.9% rate for 2019 was based on an estimated effective tax rate of 21.0%, which approximated the federal statutory rate. For more information, see Note 12. “Income Taxes” and Note 13. “Investments in Low Income Housing Tax Credits” in the notes to consolidated financial statements.

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Sources and Uses of Funds

The following table illustrates the mix of our funding sources and the assets in which those funds are invested as a percentage of our total average assets for the period indicated. Average assets totaled $30.5 billion in 2020 compared to $30.1 billion in 2019.

For the year ended December 31,

Sources of Funds:

Non-interest bearing deposits

Interest bearing deposits

FHLB and other borrowings

Subordinated Notes

Senior Notes

Other non-interest bearing liabilities

Stockholders’ equity

Total

Uses of Funds:

Loans

Securities

Interest earning deposits

FRB and FHLB stock

Other non-interest earning assets

Total

General . Deposits, borrowings, repayments and prepayments of loans and securities, proceeds from sales of loans and securities, proceeds from maturing securities and cash flows from operations are our primary sources of funds for use in lending, investing and for other general corporate purposes. Non-interest bearing deposits and low cost interest bearing deposits increased to 76.8% of our funding in 2020 compared to 71.0% in 2019. Growing and maintaining these deposits through our commercial banking teams, financial centers and other deposit gathering sources is key to our growth strategy.

Average deposits were $23.4 billion for 2020 compared to $21.4 billion for 2019. The growth in average deposits was primarily due to organic growth generated by our commercial banking teams, deposits generated by our on-line banking offering and wholesale deposits. As of December 31, 2020, approximately 50% of our deposits consisted of consumer deposits and 50% were commercial deposits, including municipal deposits.

Average loans were $21.8 billion for 2020 compared to $20.4 billion for 2019. The growth in average loan balances in 2020 was mainly due to organic growth generated by our commercial banking teams and the impact of the Woodforest Portfolio Acquisition and Santander Portfolio Acquisition. Average loans represented 80.8% and 76.3% of average earning assets for 2020 and 2019, respectively. Average loans represented 93.1% and 95.4% of average deposits for 2020 and 2019, respectively.

Average securities were $4.6 billion for 2020 compared to $5.7 billion for 2019. As shown in the table above, average securities represented 14.9% and 18.8% of average assets for 2020 and 2019, respectively. Against the context of declining interest rate and compressing yield environment, and with year over year growth in commercial loans, we sold certain investment securities to create a more optimal balance sheet mix. We increased our exposure to tax exempt securities which offered more attractive risk adjusted returns, with average tax exempt securities representing 45.4% of our securities portfolio in 2020 compared to 41.1% in 2019. Taxable securities make up the remainder of the portfolio and primarily consist of mortgage-backed securities, corporate securities and government agency securities.

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Portfolio Loans

The following table sets forth the composition of our portfolio loans, which excludes loans held for sale, by type of loan at the periods indicated.

December 31,

Amount

Amount

Amount

Amount

Amount

Commercial:

Traditional C&I

ABL

Payroll finance

Warehouse lending

Factored receivables

Equipment finance

Public sector finance

Total C&I

Commercial mortgage:

CRE

Multi-family

ADC

Total commercial mortgage

Total commercial

Residential mortgage

Consumer

Total loans

ACL - loans (1)

Total portfolio loans, net

( 1) ACL - loans is applicable to 2020 only. In prior years, the allowance for loan losses was calculated under the former loss incurred model.

Overview . Total portfolio loans, net increased $188.3 million to $21.5 billion at December 31, 2020 compared to $21.3 billion at December 31, 2019. Total commercial loans increased $1.0 billion in 2020 driven by organic growth generated by our commercial banking teams. Residential mortgage and consumer loans decreased in 2020 as a result of more elevated levels of repayments. At December 31, 2020, 91.7% of our portfolio loans were commercial loans, compared to 88.6% at December 31, 2019.

General . Our commercial banking teams focus on the origination of C&I loans and commercial real estate loans including multi-family mortgages. We also originate residential mortgage loans and consumer loans, such as home equity lines of credit, homeowner loans and personal loans.

Loan Approval/Authority and Underwriting . The Board established the CRC, a sub-committee of our Enterprise Risk Committee, to oversee the lending functions of the Bank. The CRC oversees the performance of the Bank’s loan portfolio and its various components and assists in the development of strategic initiatives to enhance portfolio performance.

The SCC consists of senior management and senior credit personnel. The SCC is authorized to approve all loans within the legal lending limit of the Bank. The SCC may also authorize lending authority to individual Bank officers for both single and dual initial approval authority. Other than overdrafts, the only single initial lending authority is for credit scored small business loans up to $350 thousand and an individually underwritten loan up to $500 thousand.

We have established a risk rating system for all of our commercial loans other than our small business loans, which are subject to a separate scoring process. The risk rating system assesses a variety of factors to rank the risk of default and risk of loss associated with the loan. These ratings are assigned by commercial credit personnel and approved by credit personnel who do not have responsibility for loan originations. We determine our maximum single relationship exposure limits based on the rating of the individual loans and the relative risk associated with the borrower’s overall credit profile.

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Underwriting of a commercial loan is based on our assessment of the ability of the principal to make repayments in accordance with the proposed terms, as well as an overall assessment of the risks involved. We typically require a personal guarantee from the principal, with exceptions primarily related to certain factored receivables that the Bank accepts on a non-recourse basis, and loans made to entities that publicly owned and entities that are not-for-profit. In addition to an evaluation of the financial statements of the principal, we supplement our assessment of the principal’s creditworthiness based on a review of credit agency reports, we analyze the adequacy of the primary and secondary sources of repayment to be relied upon, and we assess the value and marketability of any collateral that is being used to secure a transaction.

In connection with our residential mortgage and CRE loans, we generally require property appraisals to be performed by approved independent appraisers with subsequent review by appropriate loan underwriting areas. We also require title insurance, hazard insurance and, if indicated, flood insurance on property securing mortgage loans. Title insurance is not required for consumer loans under $250 thousand, such as home equity lines of credit.

Large Credit Relationships.  In the ordinary course of business, we originate and maintain large credit relationships with numerous commercial customers. For these purposes, credit relationships, including purchased credit relationships, are considered large credit relationships when commitments equal $15.0 million, prior to any portion being sold. In addition to the Company’s normal policies and procedures related to the origination of large credits, the SCC must approve all new and renewed credit facilities which are part of a large credit relationship. The SCC meets regularly, reviews large credit relationship activity and discusses the current loan pipeline, among other things. The following table provides additional information on outstanding large credit relationships:

Number of

Relationships

Period end balances

Outstanding as a % of total portfolio loans

Average loan balances

Committed

Outstanding

Committed

Outstanding

Committed amount at:

December 31, 2020

$35.0 million and greater

$25.0 million to $34.9 million

$15.0 million to $24.9 million

December 31, 2019

$35.0 million and greater

$25.0 million to $34.9 million

$15.0 million to $24.9 million

As part of our determination and review of the ACL - loans, we evaluate concentration risk and measure the amount of loan relationships in our portfolio with committed amounts over $15.0 million.

Industry Concentrations. As of December 31, 2020 and 2019, no single industry, as segregated by North American Industry Classification System (“NAICS code”) accounted for more than 10% of total loans. The NAICS code is a federally designed standard industrial numbering system used to categorize loans based on the borrower’s type of business. The majority of the Bank’s loans are to borrowers located in the greater New York metropolitan region. Several of our commercial loan offerings have a national footprint. The Bank has no foreign loans.

Traditional C&I Lending . We make various types of secured and unsecured C&I loans to small and medium-sized businesses in our market area, including loans collateralized by assets, such as accounts receivable, inventory, marketable securities, other liquid collateral, equipment and other assets. The terms of these loans generally range from less than one year to seven years. The loans are either structured on a fixed-rate basis or carry adjustable interest rates indexed to a lending rate that is determined internally, or a short-term market rate index. C&I loans increased by $565.2 million, or 24.0%, in 2020 and amounted to $2.9 billion at December 31, 2020 compared to $2.4 billion at December 31, 2019. The increase in in the ending balance of C&I loans in 2020 included $141.3 million of PPP loans.

The Bank provides ABL loans to businesses on a national basis. ABL loans are secured with a blanket lien over accounts receivable, inventory, machinery and equipment or real estate. The terms of these loans are generally, one to five years. The loans carry adjustable interest rates indexed to a lending rate that is determined internally, or a short-term market rate index. ABL loans were $803.0 million at

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December 31, 2020 compared to $1.1 billion at December 31, 2019. The decrease in the ending balance of ABL loans was mainly due to accelerated repayments and a decline in borrower demand as a result of reduced economic activity.

Payroll Finance Lending. We provide financing and business process outsourcing, including full back-office, technology and tax accounting services, to temporary staffing companies nationwide. Loans are typically used by our clients to fund their employee payroll and are outstanding on average for 40 to 45 days. Payroll finance loans outstanding at December 31, 2020 amounted to $159.2 million compared to $226.9 million at December 31, 2019. At December 31, 2020 and 2019, approximately one-third of the outstanding balances were comprised of loans in which we provide financing only, and two-thirds were loans in which the Bank provides financing and full back-office services. The decrease in the ending outstanding balance was a result of reduced economic activity caused by the pandemic.

Warehouse Lending. We provide residential mortgage warehouse funding facilities to non-bank mortgage origination companies. These loans consist of a line of credit used as temporary financing during the period between the closing of a mortgage loan until its sale into the secondary market, which on average, occurs within 20 days of closing. We provide warehouse lines generally ranging from $15.0 million to $250.0 million. The warehouse lines are collateralized by high quality first mortgage loans, which include mainly Agency (Fannie Mae and Freddie Mac), government (FHA and VA), and non-agency (Jumbo) mortgage loans. The balance of warehouse lending loans outstanding at December 31, 2020 amounted to $2.0 billion compared to $1.3 billion at December 31, 2019. Warehouse lending balances fluctuate materially over the course of each month and over the year. We saw an increase in warehouse lending balances in 2020 as a result of an increase in the level of mortgage loan refinancing activity, a factor of the decline in market rates of interest.

Factored Receivables Lending. We provide accounts receivable management services. The purchase of a client’s accounts receivable is traditionally known as “factoring” and results in payment by the client of a factoring fee, which is generally a percentage of the factored receivables or sales volume, and is designed to compensate us for the bookkeeping and collection services provided and, if applicable, our credit review of the client’s customer and the assumption of credit risk related to that end customer. When we “Factor” (i.e., purchases) an account receivable from a client, we record the receivable as an asset (included in “Portfolio loans”), record a liability for the funds due to the client (included in “Other liabilities”) and credit to non-interest income the factoring fee (included in “Accounts receivable management/factoring commissions and other fees”). We may also advance funds to our clients prior to the collection of receivables, charging interest on such advances (in addition to any factoring fees). At December 31, 2020, factored receivables balances were $220.2 million compared to $223.6 million at December 31, 2019.

Equipment Finance Lending. We offer equipment financing nationally through direct lending programs, third-party sources and vendor programs. In 2019, we completed the Santander Portfolio Acquisition, which included a geographically diverse portfolio of loans and leases collateralized by equipment and vehicles, and the Woodforest Portfolio Acquisition, which included loans collateralized by transportation, construction, industrial and other assets. At December 31, 2020, equipment finance loans were $1.5 billion compared to $1.8 billion at December 31, 2019, a decrease of $269.5 million. During 2020, in two transactions, we sold $201.4 million of small business commercial transportation loans, which did not meet our risk-adjusted return requirements.The balance of the decline was mainly due to repayments and a decline in economic activity. Our equipment finance lending mainly includes full payout term loans and secured loans for various types of business equipment, with terms generally ranging from two to five years. As of December 31, 2020, we had exposure to residual values on equipment financed under leases of $85.0 million.

Public Sector Finance. We originate loans to state, municipal and local government entities on a national basis. At December 31, 2020, outstanding balances were $1.6 billion, which represented an increase of $359.7 million, or 29.7%, compared to December 31, 2019. The increase was mainly due to new loans to local municipalities to fund investments in infrastructure and other projects. Public sector finance loans are either secured by equipment or are obligations that are backed by the ability to levy taxes, or collect essential service user fees, either generally or associated with a specific project. All loans in this portfolio are fixed rate and fully amortizing and the majority are tax exempt. Public sector finance loans have terms at origination of three to 20 years, with a weighted average term of 15.3 years and a weighted average expected duration of 7.23 years at December 31, 2020.

CRE and Multi-Family Lending . At December 31, 2020, CRE loans were $5.8 billion compared to $5.4 billion at December 31, 2019. Multi-family loans were $4.4 billion at December 31, 2020 compared to $4.9 billion at December 31, 2019 and the decline was mainly due to elevated repayments. We are not actively originating multi-family loans other than to clients with whom we have a full banking relationship.

We originate CRE loans secured predominantly by first liens on CRE and multi-family properties. The underlying collateral of our CRE and multi-family loans consists of multi-family properties, office buildings, retail properties (including shopping centers and strip malls), co-ops, nursing homes, hotels, motels or restaurants, warehouses, schools and industrial complexes. To a lesser extent, we originate CRE

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loans for recreation, medical use, land, gas stations, not for profit and other categories. We may, from time to time, purchase CRE loan participations. Substantially all of our CRE loans are secured by properties located in our primary market area.

The majority of our originated CRE and multi-family loans have terms that range from five to ten years and are structured as (i) five-year fixed rate loans with a rate adjustment for the second five-year period; or (ii) as ten-year fixed-rate loans. Amortization on these loans is typically based on 20- to 25-year terms with balloon maturities generally in five or ten years. Interest rates on CRE and multi-family loans generally range from 200 basis points to 300 basis points above a reference index.

In response to the pandemic and the resultant deterioration in economic conditions in our primary market area we have strengthened our underwriting criteria. For CRE and multi-family loans, we generally lend up to 75% of the appraised value. Decisions to lend are based on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed CRE or multi-family loan, we primarily assess the ratio of the projected net cash flow to the debt service requirement (and generally target a minimum ratio between 120% and 135%.) Net cash flow is computed after deductions for an assumed vacancy factor and estimated property expenses.

CRE and multi-family loans may involve significant loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related real estate project and may be negatively impacted by adverse conditions in the real estate market or the economy more generally. For CRE and multi-family loans in which the borrower is a significant tenant, repayment experience also depends on the successful operation of the borrower’s underlying business.

ADC Lending . We originate construction loans to well qualified borrowers in our primary market area and in connection with our affordable housing tax credit investments nationally. At December 31, 2020, ADC loans were $642.9 million compared to $467.3 million at December 31, 2019. The majority of the growth in ADC loans was related to construction loans related to our affordable housing tax credit investments, in which the construction loan is converted to a combination of long-term debt and equity financing once construction milestones are achieved. Except in cases of owner occupied construction loans, repayment of construction loans on residential subdivisions is normally expected from the sale of units to individual purchasers. In the case of income-producing property, repayment is usually expected from permanent financing upon completion of construction. We provide permanent mortgage financing on most of our construction loans on income-producing property. Collateral coverage is maintained and overall risk is mitigated by restricting the number of model or speculative units in each project.

ADC lending exposes us to greater credit risk than permanent mortgage financing. The repayment of ADC loans generally depends on the sale of the property to third parties or the availability of permanent financing upon completion of all improvements.

Residential Mortgage Lending . Residential mortgage loans held declined $593.5 million to $1.6 billion at December 31, 2020 compared to $2.2 billion at December 31, 2019. The decline was mainly due to repayments and was also impacted by the sale of $53.2 million of non-performing residential mortgage loans in the third quarter of 2020. Residential mortgage loans represented 7.4% of our total portfolio loans at December 31, 2020 compared to 10.3% at December 31, 2019.

The Bank currently originates residential mortgage loans in the Greater New York metropolitan area. Previously, the Bank operated a residential mortgage banking and brokerage business through loan production offices and our financial centers. In order to mitigate interest rate risk, we sold the majority of our conforming fixed rate residential mortgage loans in the secondary market.

Our portfolio includes conforming and non-conforming, fixed-rate ARM loans with maturities up to 30 years and maximum loan amounts generally up to $4.0 million, that are fully amortizing with monthly or bi-weekly loan payments. ARM loan products are secured by residential properties with rates that are fixed for a period ranging from six months to ten years. After the initial term, if the loan is not already refinanced, the interest rate on these loans generally resets every year based upon a contractual spread or margin above the average yield on U.S. Treasury securities, adjusted to a constant maturity of one year, as published weekly by the FRB and subject to certain periodic and lifetime limitations on interest rate changes. Many of the borrowers who select these loans have shorter-term credit needs than those who select long-term, fixed-rate loans. ARM loans generally pose different credit risks than fixed-rate loans, primarily because the underlying debt service payments of the borrowers rise as interest rates rise, thereby increasing the potential for default.

In connection with the Astoria Merger, we acquired residential mortgage loans originated in 2010 or earlier that are interest-only ARM loans with terms of up to forty years, which have an initial fixed rate for five or seven years and convert into one year interest-only ARM loans at the end of the initial fixed rate period. Interest-only ARM loans require the borrower to pay interest only during the first ten years of the loan term. After the tenth anniversary of the loan, principal and interest payments are required to amortize the loan over the remaining loan term, which typically results in a material increase in the borrower’s monthly payments. At December 31, 2020, our

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residential mortgage loan portfolio had $599.5 million of loans originated as interest-only ARM loans, and substantially all of these had already converted to their amortization period.

We require title insurance on all of our residential mortgage loans, and also require that borrowers maintain fire and extended coverage or all risk casualty insurance (and, if appropriate, flood insurance) in an amount at least equal to the loan balance or the replacement cost of the improvements, but, in any event, in an amount calculated to avoid the effect of any coinsurance clause. Residential mortgage loans generally are required to have a mortgage escrow account from which disbursements are made for real estate taxes and for hazard and flood insurance.

As of December 31, 2020, residential mortgage loans serviced for others, which are not recorded on the consolidated balance sheets, excluding loan participations, totaled approximately $877.9 million, compared to $1.0 billion at December 31, 2019. The decrease was due to an increase in the level of repayments. We do not expect that we will acquire or retain additional servicing assets in 2021.

Consumer Lending . We originate a variety of consumer loans, including homeowner loans, home equity lines of credit, new and used automobile loans, and personal unsecured loans, including fixed-rate installment loans and variable lines of credit. We offer fixed-rate, fixed-term second mortgage loans, referred to as homeowner loans, and we also offer adjustable-rate home equity lines of credit secured by junior liens on residential properties.

Loan Portfolio Maturities and Yields . The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2020. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in less than one year. Weighted average rates are computed based on the rate of the loan at December 31, 2020.

Less than one year

One to five years

Over five years

Total

Amount

Rate

Amount

Rate

Amount

Rate

Amount

Rate

Commercial loans:

Traditional C&I

ABL

Payroll finance

Warehouse lending

Factored receivables

Equipment finance

Public sector finance

Total C&I

Commercial mortgage:

CRE

Multi-family

ADC

Total commercial mortgage

Residential mortgage

Consumer

Total loans

The following table sets forth the composition of fixed-rate and adjustable-rate loans at December 31, 2020 that are contractually due after December 31, 2021:

Fixed

Adjustable

Total

Traditional C&I

Equipment finance

Public sector finance

CRE

Multi-family

ADC

Residential mortgage

Consumer

Total loans

All ABL, payroll finance, warehouse lending and factored receivables are contractually due within 12 months and are mainly adjustable rate.

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Asset Quality Characteristics and Credit Costs

Loan Portfolio Delinquencies. The following table sets forth certain information on our loan portfolio delinquencies at the dates indicated:

Loans delinquent for

30-89 Days

90 days or more still

accruing & non-accrual

Total

Number

Amount

Number

Amount

Number

Amount

At December 31, 2020

Traditional C&I

ABL

Payroll finance

Equipment finance

CRE

Multi-family

ADC

Residential mortgage

Consumer

Total

At December 31, 2019

Traditional C&I

ABL

Payroll finance

Equipment finance

CRE

Multi-family

ADC

Residential mortgage

Consumer

Total

At December 31, 2018

Traditional C&I

ABL

Payroll finance

Equipment finance

CRE

Multi-family

ADC

Residential mortgage

Consumer

Total

At December 31, 2017

Traditional C&I

Equipment finance

CRE

Multi-family

ADC

Residential mortgage

Consumer

Total

At December 31, 2016

Traditional C&I

Payroll finance

Factored receivables

Equipment finance

CRE

Multi-family

ADC

Residential mortgage

Consumer

Total

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Collection Procedures for Commercial, Residential and Consumer Loans. A late payment notice is generated after the 16th day of the loan payment due date requesting the payment due plus any late charge assessed. Legal action, notwithstanding ongoing collection efforts, is generally initiated 90 days after the original due date for failure to make payment. Unsecured consumer loans are generally charged-off after 120 days. For commercial loans, charge-off procedures vary depending on individual circumstances.

Past Due, Non-Performing Loans, Non-Performing Assets (Risk Elements) . The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.

December 31,

Non-accrual loans:

Traditional C&I

ABL

Payroll finance

Factored receivables

Equipment finance

CRE

Multi-family

ADC

Residential mortgage

Consumer

Total non-accrual loans

Accruing loans past due 90 days or more

Total non-performing loans

OREO

Total non-performing assets

TDRs accruing and not included above

Ratios:

NPLs to total loans

NPAs to total assets

There were no non-accrual warehouse lending or public sector finance loans for any periods presented.

Loans are reviewed on a regular basis and are placed on non-accrual status upon the earlier of (i) when full payment of principal or interest is in doubt; or (ii) when either principal or interest is 90 days or more past due, unless the loan is well secured and in the process of collection. Interest accrued and unpaid at the time a loan is placed on non-accrual status is reversed against interest income. Interest payments received on non-accrual loans are generally applied to the principal balance of the outstanding loan. However, based on an assessment of the borrower’s financial condition and payment history, an interest payment may be applied to interest income on a cash basis. Appraisals are performed at least annually on non-performing assets as required by their status as classifieds loans.

At December 31, 2020, our non-accrual loans totaled $166.9 million and there were $170 thousand of loans 90 days past due and still accruing interest. Such loans were considered well secured and in the process of collection. At December 31, 2019, we had non-accrual loans of $179.1 million, and we had $110 thousand of loans 90 days past due and still accruing interest.

NPLs decreased $12.1 million at December 31, 2020 to $167.1 million compared to $179.2 million at December 31, 2019. The decrease was mainly due to the sale of $53.2 million of residential mortgage NPLs in the third quarter of 2020. Other factors that impacted the change in NPLs included net charge-offs taken in 2020. These declines were partially offset by increases in CRE and ADC that are in the retail, industrial and hotel sector and had requested two or more CARES Act deferrals of principal and interest.

TDR . We have formally modified loans made to certain borrowers. If the terms of the modification include a concession, as defined by GAAP, to a borrower that was experiencing financial difficulties at the time of the modification, the loan is considered a TDR, and is also considered an impaired loan. Total TDRs were $79.0 million at December 31, 2020, of which $41.5 million were non-accrual; $37.0 million were current and performing according to terms; $491 thousand were 30 to 59 days past due; none were 60 to 89 days past due; and none were 90 days or more past due. At December 31, 2019, total TDRs were $75.7 million, of which $25.8 million were non-accrual, $49.3 million were current and performing, and $547 thousand were 30 to 59 days past due; none were 60 to 89 days past due;

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and none were 90 days or more past due. A detail ed listing of TDRs is presented in Note 4. “Portfolio Loans - Troubled Debt Restructuring” in the notes to consolidated financial statements.

A TDR accruing interest income is a loan that, at the time of modification, was not in non-accrual status and is continuing to perform in accordance with the terms of the modification, or a loan that had been placed on non-accrual, which has demonstrated a period of satisfactory performance after modification, which is generally at least six months of timely payments. Loan modifications include actions such as an extension of the maturity date or the lowering of interest rates and monthly payments. As of December 31, 2020, there were no commitments to lend additional funds to borrowers with loans that have been modified in a TDR. The decrease in the balance of traditional C&I TDR loans and TDR loans on non-accrual at December 31, 2020 compared to December 31, 2019 was mainly due to the continued work-out and run-off of our taxi medallion relationships. The increase in CRE TDR loans on non-accrual was mainly related to one borrowing relationship in which we made a concession that included consolidation of three facilities with an interest-only repayment requirement for a 12-month period. The decrease in residential mortgage loan TDRs was mainly due to the sale in the third quarter of 2020 of non-performing residential loans.

Forbearance under the CARES Act. The CARES Act permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the coronavirus emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. On April 7, 2020, various regulatory agencies, including the FRB and the OCC, issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and provided practical expedients for evaluating whether loan modifications that occur in response to COVID-19 are TDRs. The regulatory agencies confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not considered to be TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. We are applying this guidance to qualifying loan modifications.

The relief related to TDRs under the CARES Act was extended by the Consolidated Appropriations Act of 2021. Under the Consolidated Appropriations Act, relief under the CARES Act will continue to the earlier of (i) 60 days after the date the COVID-19 national emergency comes to an end or (ii) January 1, 2022.

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At December 31, 2020, we had approved CARES Act conforming payment deferrals on outstanding loan balances as shown in the following table:

Loan balance outstanding

Deferral of principal and interest

Commercial

Traditional C&I

ABL

Payroll finance

Warehouse lending

Factored receivables

Equipment finance

Public sector finance

Total C&I

Commercial mortgage:

CRE

Multi-family

ADC

Total commercial mortgage

Total commercial

Residential

Consumer

Total Portfolio loans

Deferrals consist mainly of 90-day principal and interest deferral with the ability to extend an additional 90-day period at our option. We are closely monitoring and working with our clients to determine ongoing deferral extensions and requests.

OREO . Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as OREO until such time as it is sold. When real estate is transferred to OREO, it is recorded at fair value less estimated cost to sell. If the fair value less cost to sell is less than the loan balance, the difference is charged against the ACL - loans. After transfer to OREO, we regularly update the fair value of the property. Subsequent declines in fair value are charged to current earnings and included in other non-interest expense as part of OREO expense. The table below presents OREO activity for the years ended December 31, 2020, 2019 and 2018:

For the year ended December 31,

Balance beginning of year

Loans transferred to OREO

Sales of OREO

Write downs of OREO

Balance end of year

Classification of Assets . Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality such as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as “loss” are those considered uncollectible and of such little value that their continuance as assets is not warranted and

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these are charged-off. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are designated as “special mention”.

At December 31, 2020, we had $461.5 million of assets designated as “special mention” compared to $160.0 million at December 31, 2019. The increase was mainly due to an increase in special mention CRE loans of $223.0 million and in special mention multi-family loans of $42.7 million. The special mention CRE loans relate mainly to retail, hotel and office property types. The CRE and multi-family loans are mainly located in New York City. The majority of these loans requested and received some form of forbearance or relief under the CARES Act. These loans are designated as special mention based mainly on current cash flow, debt service coverage ratios and estimated loan to value.

At December 31, 2020, classified assets consisted of loans of $529.1 million and OREO of $5.3 million compared to $295.4 million and $12.2 million, respectively, at December 31, 2019. The increase in classified assets at December 31, 2020 was mainly due to an increase in substandard loans. The increase in substandard loans was mainly in our CRE and multi-family portfolios, which saw increases of $200.8 million and $28.6 million, respectively. The majority of these loans received some form of forbearance or relief under the CARES Act. These loans were designated as substandard mainly due to delinquency status, current cash flow, debt service coverage ratios and estimated loan to value. The majority of special mention and substandard loans are performing; however, many are relying on secondary and tertiary sources of cash flow, including in many instances guarantor support.

For the year ended December 31, 2020, gross interest income that would have been recorded had non-accrual loans remained on accrual status throughout the period amounted to approximately $8.4 million. We recognized less than $1.0 million of interest income on such loans during 2020. For additional information, see Note 5. “ACL - Loans” in the notes to consolidated financial statements.

ACL - Loans. The ACL - loans is a valuation account that is deducted from the amortized cost basis of portfolio loans to present the net amount expected to be collected on portfolio loans over their contractual life. Loans are charged-off against the allowance when we believe any portion of a loan balance is uncollectible, and the expected recoveries do not exceed the aggregate of amounts previously charged-off or expected to be charged-off.

We estimate the balance of the ACL - loans using relevant available information from internal and external sources, including information relating to past events, current conditions, and reasonable and supportable forecasts. The factors considered in estimating the ACL - loans include historical loss information, adjusted for current loan-specific risk characteristics such as differences in underwriting standards, portfolio composition, delinquency levels, loan terms, as well as changes in environmental conditions such as changes in GDP, unemployment rates, credit spreads, property values, and other relevant factors, that are reasonable and supportable. Our methodologies revert back to historical loss information at the individual macro variable level, which begins in two to three years and converges to its long-run equilibrium, when we can no longer develop reasonable and supportable forecasts.

The ACL - loans is measured on a collective (pool) basis when loans exhibit similar risk characteristics. We measure our warehouse lending portfolio and certain consumer loans on a pooled basis. Generally, for all other loan types, the estimated expected credit loss is calculated at the loan level and pool assignments are only utilized for aggregating the allowance estimates of similar loan types for financial statement disclosure purposes. See Note 1. “Basis of Financial Statement Presentation and Summary of Significant Accounting Policies - Recently Adopted Accounting Standards” for a discussion of how we segment our loan portfolio and estimate the ACL - loans.

Under the loss rate method, expected credit losses are estimated using a loss rate that is multiplied by the amortized cost of the asset at the balance sheet date. For each loan segment identified above, we apply an expected historical loss trend based on third-party loss estimates, correlate them to observed economic metrics and reasonable and supportable forecasts of economic conditions and overlay qualitative factors determined to be relevant by management.

Under the discounted cash flow method, expected credit losses are determined by comparing the amortized cost of the asset at the balance sheet date to the present value of estimated future principal and interest payments expected to be collected over the remaining life of the asset. Our loss model generates cash flow projections at the loan level based on reasonable and supportable projections, from which we estimate payment collections adjusted for curtailments, recovery time, probability of default and loss given default.

Under the probability of default and loss given default method, expected credit losses are calculated by multiplying the probability that the asset will default within a given time frame (“PD”) by the percentage of the asset’s value that is not expected to be collected due to default (“LGD”), and multiplying this factor by the amortized cost of the asset at the balance sheet date. The PD and LGD are calculated based on third party historical information of loan performance, real estate prices and other factors, adjusted for current conditions and reasonable and supportable forecasts.

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Qualitative loss factors are based on our judgement of company, market, industry or business specific data, loan trends, changes in portfolio segment composition, delinquency and loan rating.

When a foreclosure is deemed probable, we estimate the fair value of the collateral at the reporting date to record the net carrying amount of the asset and determine the ACL. When repayment is dependent upon the sale of the collateral, the fair value of the collateral is adjusted for estimated costs to sell. If repayment depends on the operation, rather than the sale, of the collateral, an estimate for cost to sell is not included in the fair value of the collateral.

For certain loans in the consumer segment, we charge-off the full amount of the loan when it becomes 90 to 120 days or more past due, or earlier in the case of bankruptcy, after giving effect to any cash or marketable securities pledged as collateral for the loan. For C&I loans, we prepare a cash flow projection, and charge-off the difference between the net present value of the cash flows discounted at the effective note rate and the carrying value of the loan, and may recognize an additional charge-off amount to account for the imprecision of our estimates.

ADC lending exposes us to greater credit risk than permanent mortgage financing. The repayment of ADC loans often depends on the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. These events may adversely affect the borrower and the collateral value of the property. ADC loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated. All of these factors are considered as part of the underwriting, structuring and pricing of the loan. We have deemphasized traditional acquisition and development loans in favor of investments in subsidized low income housing developments.

CRE loans subject us to the risks that the property securing the loan may not generate sufficient cash flow to service the debt or that the borrower may use the cash flow for other purposes. In addition, the foreclosure process, if necessary, may be slow and properties may deteriorate in the interim. Market values of the underlying properties are impacted by a wide variety of factors, including general economic conditions, industry specific factors, environmental factors, interest rates and the availability and terms of credit.

C&I lending exposes us to risk because repayment depends on the successful operation of the business, which is subject to a wide range of risks and uncertainties. In addition, the ability to successfully liquidate collateral, if any, is subject to a variety of risks because we must gain control of assets used in the borrower’s business before liquidating, which we cannot be assured of doing, and the value in liquidation may be uncertain.

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The following table sets forth activity in our ACL - loans under the CECL Standard for 2020, and in our allowance for loan losses under the loss incurred model for all earlier periods presented.

For the year ended December 31,

Balance at beginning of period

CECL Day 1

Charge-offs:

Traditional C&I

ABL

Payroll finance

Factored receivables

Equipment finance

CRE

Multi-family

ADC

Residential mortgage

Consumer

Total charge-offs

Recoveries:

Traditional C&I

ABL

Payroll finance

Factored receivables

Equipment finance

CRE

Multi-family

ADC

Residential mortgage

Consumer

Total recoveries

Net charge-offs

Provision for loan losses

Balance at end of period

Ratios:

Net charge-offs to average loans outstanding

ACL - loans to NPLs

ACL - loans to total loans

There were no charge-offs or recoveries on warehouse lending or public sector finance loans in any period presented.

Loans acquired in a business combination through merger or acquisition were recorded at fair value with no ACL - loans at the acquisition date. Under our current credit and accounting guidelines, once a loan relationship reaches maturity and is re-underwritten, the loan is no longer considered an acquired loan and is included in originated loans. In addition, acquired performing loans that were subsequently subject to a credit evaluation, such as after designation as criticized or classified or placed on non-accrual since the acquisition date, are also included in originated loans.

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The ACL - loans increased $219.9 million in 2020 to $326.1 million compared to $106.2 million at December 31, 2019. The increase in the ACL - loans was mainly due to the adoption of CECL and the resulting recognition of life of loan loss estimates, as well as the impact of the COVID-19 pandemic to our loan loss modeling.

Net charge-offs in 2020 were $122.4 million, or 0.56%, of average loans outstanding compared to net charge-offs of $35.4 million, or 0.17%, of average loans outstanding in 2019. The increase in 2020 included charge-offs of $40.4 million incurred in connection with the sale of $106.2 million in small balance transportation finance loans and $17.1 million incurred in connection with the sale of $53.2 million of non-performing residential mortgage loans. These loans were held in portfolio loans prior to sale, and the charge-offs were required to reduce the carrying value of the loans to fair value. The loans were transferred to held for sale prior to sale. Also, charge-offs in 2020 included $15.9 million in charge-offs to reduce the carrying value of our remaining taxi medallion loans.

The ACL - loans at December 31, 2020 represented 195.2% of NPLs and 1.49% of the total loan portfolio compared to 59.3% of NPLs and 0.50% of the total loan portfolio at December 31, 2019. The increase in the ACL - loans as a percentage of NPLs and total portfolio loans was mainly due to the adoption of CECL and the impact of the pandemic on our CECL loss modeling.

Provision for Credit Losses - Loans. We recorded $251.7 million in loan loss provision for 2020 compared to $46.0 million in 2019. Provision for credit loss expense in 2020 was impacted by our adoption of the CECL Standard as well as the impact to economic forecast models used in estimating our provision that resulted from the onset of the pandemic. Provision for loan losses in 2019 mainly reflected the amount of provision required to offset net charge-offs, changes in the levels of criticized and classified loans, organic loan growth and loans acquired in prior mergers and acquisitions that were initially recorded at fair value, but were subsequently renewed or otherwise considered for purposes of our allowance for loan loss analysis.

Collateral Dependent Loans. A loan must meet both of the following conditions to be considered collateral dependent:

• Repayment of the financial asset is expected to be provided substantially through the operation or sale of the collateral.

• A determination is made that the borrower is experiencing financial difficulty as of the financial statement date.

Generally, loans are identified as collateral dependent when the loan is in foreclosure, is a TDR, or is a loan that was measured for impairment at December 31, 2019 (see “Impaired Loans” below). For collateral dependent loans, we measure the expected credit losses based on the difference between the fair value of the collateral and the amortized cost basis. If the loan is in foreclosure, or we determine foreclosure is probable, we reduce the fair value of the collateral by our estimate of costs to sell the asset. If we expect repayment from the operation of the asset, we do not reduce for the cost to sell.

Collateral dependent loans were $145.0 million at December 31, 2020. The increase in collateral dependent loans compared to impaired loans at December 31, 2019, was mainly due to one ADC relationship. Prior to 2020, equipment finance and residential mortgage loans were measured for impairment only if the loan balance exceeded $750 thousand. Following adoption of the CECL Standard, our methodology now allows us to determine fair value and expected credit losses for each loan individually, and loans are determined to be collateral dependent based on the criteria discussed above.

Impaired Loans. Prior to adoption of the CECL Standard, a loan was impaired when it was probable we would be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loan values were based on the difference between our amortized cost basis on the loan when compared to one of three measures: (i) the present value of expected future cash flows discounted at the loan’s effective interest rate; (ii) the loan’s observable market price; or (iii) the fair value of the collateral if the loan is collateral dependent. If the fair value of an impaired loan was less than its recorded investment, our practice was to write-down the loan against the allowance for loan losses so the recorded investment matched the impaired value of the loan. Impaired loans generally included a portion of non-performing loans and accruing and performing TDR loans. At December 31, 2019, impaired loans amounted to of $109.0 million.

Purchase Credit Deteriorated (PCD) Loans. As part of our adoption of the CECL Standard, loans that were classified as PCI and accounted for under ASC 310-30 were designated PCD loans. We did not reassess whether PCI loans met the criteria of PCD loans as of the date of adoption and determined all PCI loans were PCD loans. The amortized cost basis of PCI loans at adoption was $116.3 million being the balance at December 31, 2019. The balance increased to $128.8 million on January 1, 2020 reflecting an increase of $22.5 million representing the credit related portion of the remaining purchase accounting adjustment for PCD loans. At December 31, 2020, the balance of PCD loans declined to $79.0 million mainly due to repayments, and PCD loans included in our sales of non-performing residential mortgage and equipment finance portfolios.

Allocation of ACL - Loans. The following tables set forth the total loan balances by category of loans and the corresponding ACL - loans allocated to each, and excludes loans held for sale. In 2019 and earlier periods the total loans also exclude acquired loans as

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discussed below. The table further indicates, the percent of loans in each category to total originated loans at the dates indicated. The ACL - loans allocated to each category is not necessarily indicative of future losses in any particular category and it is possible that we would use the allowance for credit losses to absorb losses related to loans in other categories.

December 31,

ACL - loans

Loan

balance

% of total portfolio loans

Allowance

for loan

losses

Loan

balance

% of total originated loans

Allowance

for loan

losses

Loan

balance

% of total originated loans

Traditional C&I

ABL

Payroll finance

Warehouse lending

Factored receivables

Equipment finance

Public sector finance

CRE

Multi-family

ADC

Residential mortgage

Consumer

Total

ACL - loans to loans subject to the allowance

In 2020 the ACL - loans is applicable to the entire loan portfolio. In 2019 and earlier periods, acquired loans that were recorded at fair value with a purchase accounting adjustment that reflected life of loan loss estimates, were generally not included in our allowance for loan loss estimates. Total originated loans represent loans we originated and loans that were originally considered acquired loans but have since migrated to the originated loans portfolio as they have reached maturity, were re-underwritten, were designated criticized or classified or have been placed on non-accrual since the acquisition date.

December 31, 2017

December 31, 2016

Allowance

for loan

losses

Loan

balance

% of total originated loans

Allowance

for loan

losses

Loan

balance

% of total originated loans

Traditional C&I

ABL

Payroll finance

Warehouse lending

Factored receivables

Equipment finance

Public sector finance

CRE

Multi-family

ADC

Residential mortgage

Consumer

Total

ACL - loans to loans subject to the allowance

For all periods presented, the aggregate ACL - loans increased compared to the earlier period. The primary factors contributing to the increase in 2019 and earlier periods included the increase in the balance of loans a result of organic loan growth and the inclusion of certain acquired loans in allowance for loan loss calculation.

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Our estimate of credit losses at December 31, 2020 incorporates baseline US macro-economic outlook data from Moody’s published on December 20, 2020, and the January 9, 2021 state and MSA level data. During 2020, we have utilized the Moody’s baseline scenario and have applied when appropriate certain qualitative factors to adjust the recorded amount of the ACL - loans to better present our estimate of life of loan credit losses inherent in our portfolio.

The Moody’s baseline macro-economic outlook provides and incorporates a number of forecast macroeconomic indicators and assumptions and variables including the following:

• An additional round of stimulus enacted in December 2020 or early January;

• Certain assumptions related to the ongoing impact of the pandemic including a projection of the number of cases;

• That a COVID-19 vaccine is widely available by February 2021;

• Estimates for unemployment rates;

• Estimates for GDP;

• Estimates related to residential and commercial real estate prices; and

• Estimate of the target range for the federal funds interest rate.

To address potential uncertainties inherent in the model and to better represent our estimate of future losses, we apply qualitative factors to the estimates calculated based on the quantitative assumptions discussed above. The qualitative factors include the following:

• Our lending policies and procedures including changes in lending strategies, underwriting standards, collection, write-off and recovery practices;

• The experience, ability and depth of management and lending and other relevant staff;

• Nature and volume of our loans and changes therein;

• Changes and expected changes in general market conditions within the geographic area or industry where we have exposure;

• An adjustment for economic conditions during a reasonable and supportable period; and

• An adjustment to account for certain additional factors including issues related to data quality and changes in the number of assumptions used in our quantitative models.

The ACL - loans increased $219.9 million to $326.1 million at December 31, 2020 compared to December 31, 2019. The ACL - loans represented 1.49% of total portfolio loans and 195.2% of NPLs at December 31, 2020.

Investment Securities

Overview. Our Asset and Liability Committee sets and periodically reviews our investment guidelines, investment program and the overall size and composition of our investment portfolio. Our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Investment Officer/Treasurer and certain other senior officers have the authority to purchase and sell securities within specific guidelines established in our investment policy. The Board’s Enterprise Risk Committee oversees our investment program, evaluates our investment policy and objectives and reviews a summary of all transactions at least quarterly.

Our objective for the investment securities portfolio is to hold high quality, liquid securities with a structure and duration profile designed to limit the impact of changes in the interest rate environment on the fair value and overall return of the portfolio. Investment securities are also utilized for pledging purposes as collateral for borrowings from FHLB, municipal deposits, and other borrowings. We regularly evaluate the portfolio within the context of our balance sheet optimization strategy, our liquidity position, and our objective of producing earnings and attractive risk adjusted returns. We evaluate the portfolio’s size, risk and duration on a daily basis. At December 31, 2020, investment securities represented 15.4% of total earning assets compared to 18.8% at December 31, 2019. Our long-term target is to manage our investment portfolio within a range of 15.0% to 17.5% of total earning assets.

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At the time of purchase, we designate a security as held to maturity or available for sale, depending on our intent and ability to hold the security. Securities designated as available for sale are reported at fair value, while securities designated as held to maturity are reported at amortized cost. We do not have a trading portfolio.

AFS Portfolio . The following table sets forth the composition of our available for sale securities portfolio at the dates indicated.

December 31, 2020

December 31, 2019

December 31, 2018

Amortized

cost

Fair value

Amortized

cost

Fair value

Amortized

cost

Fair value

Residential MBS:

Agency-backed

Other MBS 1

Total MBS

Other securities:

Federal agencies

Corporate bonds

State and municipal

Total other securities

Total available for sale securities

1 Other MBS at December 31, 2020, 2019 and 2018 is mainly comprised of multi-family Ginnie Mae securities.

The fair value of AFS securities held decreased $797.0 million, compared to December 31, 2019, mainly due to repayments and sales. We manage the size and composition of our securities portfolio based on the relative risk-adjusted return of various asset classes, focusing mainly on MBS, municipal and corporate securities. At December 31, 2020 the estimated weighted average life of AFS securities was 3.15 years compared to 3.84 years at December 31, 2019. Total net unrealized gains on AFS securities was $115.5 million at December 31, 2020 compared to $52.6 million at December 31, 2019. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity concerns. The fair value of investment securities generally increases when interest rates decrease or when credit spreads tighten. In 2020, market interest rates decreased and credit spreads compressed, which was the main cause of the increase in the unrealized gain on AFS securities.

HTM Portfolio . The following table sets forth the composition of our held to maturity securities portfolio at the dates indicated.

December 31, 2020

December 31, 2019

December 31, 2018

Amortized

cost

Fair value

Amortized

cost

Fair value

Amortized

cost

Fair value

Residential MBS:

Agency-backed

Other MBS

Total MBS

Other securities:

Federal agencies

Corporate bonds

State and municipal

Other

Total other securities

Total held to maturity securities

On an amortized cost basis, HTM securities declined $237.3 million at December 31, 2020 compared to December 31, 2019 mainly due to maturities and an increase in repayments. In addition, as discussed in Note 3. “Securities” in the notes to consolidated financial statements, we sold $93.0 million of state and municipal securities that were classified HTM. Related to this sale, we evaluated the issuer and individual securities and determined that the issuer had demonstrated significant deterioration in its creditworthiness since our acquisition of the securities. At December 31, 2020, the estimated weighted average life of HTM securities was 3.33 years at December 31, 2020 compared to 5.54 years at December 31, 2019.

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Investment Portfolio Activity. At December 31, 2020, the carrying value of investment securities was $4.0 billion, a decrease of $1.0 billion, or 20.4%, compared to December 31, 2019, primarily as a result of elevated prepayment and early redemption activity in our portfolio as a result of declines in market rates of interest. During 2020, we purchased $374.0 million of AFS securities and $9.7 million of HTM securities and sold $484.9 million of securities that were classified as AFS at the time of sale, which allowed us to reduce the level of investment securities to total earning assets. Tax exempt securities represent $2.0 billion, or 48.6%, of our investment portfolio at December 31, 2020, compared to $2.2 billion, or 42.7%, at December 31, 2019.

Portfolio Maturities and Yields. The following table summarizes the composition, maturities and weighted average yield of our investment securities portfolio at December 31, 2020. Maturities are based on the final contractual payment dates and do not reflect the impact of prepayments or early redemptions that may occur. Yields for state and municipal securities yields are shown on a tax equivalent basis.

1 Year or Less

1-5 years

5-10 years

10 years or more

Total

Amortized

cost

Yield

Amortized

cost

Yield

Amortized

cost

Yield

Amortized

cost

Yield

Amortized

cost

Fair

Value

Yield

AFS:

Residential and multi-family MBS:

Agency-backed

Other MBS

Total residential MBS

Federal agencies

Corporate bonds

State and municipal

Trust preferred

Other

Total

HTM:

Residential MBS - agency-backed

Federal agencies

Corporate bonds

State and municipal

Other

Total

MBS . MBS are created when the issuer pools mortgages and issues a security collateralized by the pool of mortgages with an interest rate that is less than the interest rate on the underlying mortgages. MBS typically represent a participation interest in a pool of single-family or multi-family mortgage. The issuers of such securities, generally U.S. Government agencies and government sponsored enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae pool and resell the participation interests in the form of securities to investors, and guarantee payment of principal and interest to these investors. Investments in MBS involve a risk that actual prepayments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby affecting the net yield and duration of such securities. We regularly review prepayment estimates made at purchase to ensure that prepayment assumptions are reasonable considering the underlying collateral for the securities and current interest rates, and to determine the yield and estimated maturity of the MBS portfolio.

A portion of our MBS portfolio is invested in REMICs backed by Fannie Mae, Freddie Mac and Ginnie Mae. REMICs are types of debt securities issued by special-purpose entities that aggregate pools of mortgages and MBS and create different classes of securities with varying maturities and amortization schedules, different risk characteristics and different priorities with respect to the distribution of principal and interest cash flows. Our practice is to limit fixed-rate REMICs investments primarily to the early-to-intermediate tranches, which have the greatest cash flow stability. Floating rate REMICs are purchased with an emphasis on the relative trade-offs between lifetime rate caps, prepayment risk, and interest rates.

Government and Agency Securities . While these securities generally provide lower yields than other investments, such as MBS, our current investment strategy is to maintain investments in such instruments at a level which is appropriate for purposes of our liquidity and as collateral for borrowings and municipal deposits.

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Corporate Bonds . We limit our exposure to corporate bonds to the lesser of 5% of total assets or 25% of Tier 1 capital. Corporate bonds have a higher risk of default due to the potential for adverse changes in the creditworthiness of the issuer. In recognition of this risk, our investment policy limits purchases of corporate bonds to securities with maturities of fifteen years or less, to those rated “Baa3/BBB-” or better by at least one nationally recognized rating agency at time of purchase, and to a transaction size of no more than $25.0 million per issuer. Exceptions to our policy, which occur mainly when a security is not rated by a nationally recognized rating agency, require that we perform a further risk based analysis of the potential investment. At December 31, 2020, we held $183.2 million of AFS securities and $19.9 million of HTM securities in the form of non-rated corporate bonds. Such securities are either issued by a bank or bank holding company.

State and Municipal Bonds. We limit our exposure to state and municipal bonds to the lesser of the lesser of 15% of assets or 150% of Tier 1 capital. Further our investment policy imposes a transaction limit of $25.0 million per municipal issuer and generally limits purchases of municipal bonds to securities with maturities of less than 20 years that are rated as investment grade by at least one nationally recognized rating agency at the time of purchase. However, we also purchase securities that are issued by local government entities within our service area. Such local entity obligations are generally not rated, and are instead subject to internal credit reviews and risk assessments. At December 31, 2020, we held $6.3 million of unrated municipal obligations as HTM and $21.5 million as AFS. Included in the AFS balance at December 31, 2020 were $20.5 million of bonds issued by a state in which the rating was withdrawn when the bonds were refunded.

Deposits

The following table sets forth the distribution of average deposit accounts by account category and the average rates paid at the dates indicated.

For the year ended December 31,

Average

balance

Rate

Average

balance

Rate

Average

balance

Rate

Non-interest bearing demand

Interest bearing demand

Savings

Money market

Certificates of deposit

Total interest bearing deposits

Total deposits

Average deposits for 2020 were $23.4 billion and increased $2.0 billion compared to 2019. The increase was mainly due to growth generated by our commercial banking teams, deposits generated by our on-line banking product and an increase in wholesale deposits, and further impacted by various government stimulus measures. The average cost of interest bearing deposits was 0.58% for 2020 compared to 1.12% for 2019. The average cost of total deposits was 0.45% for 2020, compared to 0.90% for 2019. The cost of deposits declined in line with decreases in market interest rates and as a result of deposit pricing strategies implemented in response to same. We anticipate we will be able to further reduce our cost of total deposits in 2021.

Distribution of Deposit Accounts by Type. The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated.

December 31,

Amount

Amount

Amount

Non-interest bearing demand

Interest bearing demand

Savings

Money market

Subtotal

Certificates of deposit

Total deposits

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The following table presents the proportion by business type of each component of total deposits for the periods presented:

December 31,

Retail and commercial deposits - excluding certificates of deposit

Municipal deposits

Retail and commercial certificates of deposit

Wholesale deposits

Total

As of December 31, 2020 and 2019 we had $1.6 billion and $2.0 billion, respectively, in municipal deposits. Municipal deposits experience annual seasonal flows associated with school district tax collections and typically peak in September and October and then gradually return to normalized levels in the fourth quarter. The decline in municipal deposits was mainly due to the deposit pricing strategies we implemented in response to the declining interest rate environment. Wholesale deposits, consisting mainly of brokered deposits, were $1.6 billion at December 31, 2020 and $1.9 billion at December 31, 2019. We reduced our reliance on brokered deposits mainly in response to the growth in commercial and consumer deposits. Retail and commercial certificates of deposit were $1.8 billion at December 31, 2020, compared to $2.6 billion at December 31, 2019. The decrease was mainly a result of depositors moving balances out of CD deposit accounts and into money market and other interest bearing accounts.

Certificates of Deposit by Time to Maturity . The following table sets forth certificates of deposit by time remaining until maturity as of December 31, 2020.

Period to maturity

3 months or

less

3-6 months

6-12 months

Over 12

months

Total

Rate

Certificates of deposit $250,000 or less

Brokered certificates of deposit over $250,000

Other certificates of deposit over $250,000

Substantially all brokered deposits balances are an aggregation of individual deposits balances that are below the FDIC insurance limit of $250 thousand.

Brokered Deposits. We generally limit our use of brokered deposits and other short-term funding to less than 10% of total assets. We manage the maturity of our brokered deposits to coincide with the anticipated inflows of deposits in our municipal banking business.

Listed below are our brokered deposits:

December 31,

Interest bearing demand

Money market

Certificates of deposit

Total brokered deposits

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Short-term Borrowings . Our primary source of short-term borrowings, borrowings with a maturity less than one year, are advances from the FHLB. Short-term borrowings also include federal funds purchased and repurchase agreements.

The following table sets forth information concerning balances and interest rates on our short-term borrowings at the dates indicated.

December 31,

Balance at end of period

Average balance during period

Maximum amount outstanding at any month end

Weighted average interest rate at end of period

Weighted average interest rate during period

Short-term borrowings are mainly used to fund loan growth. On a daily basis, the amount of short-term borrowings will fluctuate based on the inflows and outflows of deposits and other sources and uses of funds.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

In the normal course of our operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in our financial statements. We enter into these transactions to meet the financing needs of our clients and for general corporate purposes. These transactions include commitments to extend credit and letters of credit and involve, to varying degrees, elements of credit, interest rate, and liquidity risk. We minimize our exposure to loss under these commitments by approving and reviewing them in accordance with our standard credit approval and monitoring procedures.

Our off-balance sheet arrangements are described below.

Lending Commitments . Lending commitments include loan commitments, unused credit lines, and letters of credit. These instruments are not recorded on the consolidated balance sheets until funds are advanced under the commitments.

For our non-real estate commercial customers, loan commitments generally take the form of revolving credit arrangements to finance customers’ working capital requirements. At December 31, 2020, these commitments totaled $1.2 billion. For our real estate businesses, loan commitments are generally for residential, multi-family and commercial construction projects and totaled $551.5 million at December 31, 2020. Loan commitments for our consumer clients are generally home equity lines of credit secured by residential property and totaled $90.5 million at December 31, 2020. In addition, loan commitments for overdrafts were $29.6 million. Letters of credit issued by us are generally made up of standby letters of credit. Standby letters of credit are commitments issued by us on behalf of our customer/obligor in favor of a beneficiary and specify an amount we can be called upon to pay upon the beneficiary’s compliance with the terms of the letter of credit. These commitments are primarily issued in favor of local municipalities to support the obligor’s completion of real estate development projects. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Amounts committed under letters of credit as of December 31, 2020 totaled $181.9 million.

See Note 19. “Off-Balance-Sheet Financial Instruments” in the notes to consolidated financial statements for additional information regarding lending commitments.

Contractual Obligations . In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for right of use assets related to our financial centers and corporate offices. The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by contractual maturity date as at December 31, 2020. Payments for borrowings represent the amount of principal repayable and do not include interest. Payments for operating leases are based on payments due as specified in the underlying contracts. Loan commitments, including letters of credit and undrawn lines of credit, are presented based on the amount of credit extended; however, since many of these commitments have historically expired unused or partially used, the total amounts of these commitments do not necessarily reflect future cash requirements.

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Payments due by period

1 year or less

1-3 years

3-5 years

5 years or more

Total

Contractual obligations:

FHLB borrowings

Other borrowings

Subordinated Notes - Company

Subordinated Notes - Bank

Time deposits

Operating leases

Other commitments:

Letters of credit

Undrawn lines of credit

Total

See Note 19. “Off-Balance-Sheet Financial Instruments” in the notes to consolidated financial statements for additional information regarding our contractual obligations.

Impact of Inflation and Changing Prices

The consolidated financial statements and related notes have been prepared in accordance with GAAP, which 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 primary impact of inflation is reflected in increased operating costs. Our assets and liabilities are primarily monetary in nature and, as a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

Liquidity and Capital Resources

Capital. At December 31, 2020, stockholders’ equity totaled $4.6 billion compared to $4.5 billion at December 31, 2019. The factors that contributed to the change in stockholders’ equity for the periods are presented in the following table:

For the year ended December 31,

Beginning of period

Cumulative effect of change in accounting principle: adoption of CECL Standard

Net income

Stock-based compensation

Treasury stock purchased

Other comprehensive income

Dividends on common stock

Dividends on preferred stock

Balance at end of period

The increase in stockholders’ equity for 2020 was mainly due to net income of $225.8 million, other comprehensive income of $44.6 million and stock-based compensation of $19.2 million. These increases were partially offset by the repurchase of 6,825,353 common shares at an aggregate cost of $111.6 million, dividends on common stock of $54.5 million, dividends on preferred stock of $8.8 million and the cumulative effect of change in accounting principle from the adoption of the CECL Standard.

The AOCI component of stockholders’ equity totaled a net, after-tax unrealized gain of $84.8 million at December 31, 2020 compared to $40.2 million at December 31, 2019, an increase of $44.6 million. The increase in 2020 was the result of a $45.5 million increase in the net after-tax value of unrealized gains on available for sale securities as well as an increase of $286 thousand related to the accretion of

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the unrealized holding loss on securities transferred to held to maturity in connection with a prior merger. These increases were partially offset by an unrealized loss of $1.2 million related to retirement plan obligations.

Under current regulatory requirements, amounts reported as AOCI related to securities available for sale, securities transferred to held to maturity, and retirement plan obligations do not increase or reduce regulatory capital and are not included in the calculation of leverage and risk-based capital ratios. Regulatory agencies for banks and bank holding companies utilize capital guidelines to measure Tier 1 and total capital and to take into consideration the risk inherent in both on-balance sheet and off-balance sheet items. See Note 18. “Stockholders’ Equity” in the notes to consolidated financial statements.

At December 31, 2020, we held 36,949,554 shares in treasury compared to 31,417,601 at December 31, 2019. We generally use treasury shares for stock-based compensation purposes.

Stock Repurchase Plans. On February 24, 2020, our Board refreshed our authority to repurchase shares under our common stock repurchase program, giving us authority to repurchase up to 50,000,000 shares, an increase of 20,000,000. At December 31, 2020, there were 14,747,182 shares available for repurchase.

We anticipate that future common stock repurchases plus common and preferred dividends will approximate 50.0% of net income available to common stockholders for 2021. See Part II, Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters, Issuer Purchases of Equity Securities” included elsewhere in this report.

Dividends. We paid a quarterly dividend of $0.07 per common share in each quarter of 2020, 2019 and 2018. We also pay a quarterly dividend of $16.25 per preferred share.

Basel III Capital Rules. The Basel III Capital Rules became fully effective for us and the Bank on January 1, 2019. In connection with the Basel III Capital Rules, we elected to opt-out of the requirement to include most components of AOCI in regulatory capital. Accordingly, amounts reported as AOCI related to AFS securities, securities transferred to HTM in connection with a previous merger and our remaining post-retirement benefit plans do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage ratios. Regulatory agencies for banks and bank holding companies utilize capital guidelines designed to measure capital and take into consideration the risk inherent in both on-balance sheet and off-balance sheet items. See Note 18. “Stockholders’ Equity - (a) Regulatory Capital Requirements” in the notes to consolidated financial statements.

Liquidity - Bank Liquidity. Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a bank reflects its ability to originated loans, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a bank to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds. The objective of our liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund our operations and to meet obligations and other commitments on a timely basis and at a reasonable cost. We seek to ensure that funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on our balance sheet and ensuring we have the ability to raise additional funds in the wholesale markets as needed.

We are not subject to minimum regulatory liquidity ratios; however, our internal liquidity and funding policies include a limit on our loans to deposits ratio of 105%, a limit of wholesale funding to total assets of 40%, and a limit of total borrowings to total assets of 30%. We were in compliance with these policy guidelines at December 31, 2020.

We have significant liquid assets and several sources of liquidity including: cash, interest-bearing deposits in banks, AFS securities, loans held for sale and liquidity provided by inflows from scheduled loan payments of principal and interest, as well as prepayments. Liquid assets totaled approximately $2.6 billion, or 9.8% of earning assets at December 31, 2020 compared to $3.4 billion, or 12.6% of earning assets at December 31, 2019. The decline in liquid assets held at December 31, 2020 compared to 2019 was mainly due to repayments related to our AFS securities portfolio.

We have access to funding sources which include core deposits, wholesale deposits, FHLB borrowings, federal funds purchased, repurchase agreements and other borrowings. Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic activity, volatility in the financial markets, unexpected credit events or other significant occurrences. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. As of December 31, 2020, management is not aware of any events that are reasonably likely to have a material adverse impact on our liquidity,

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capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us.

At December 31, 2020, the Bank had $305.0 million in cash on hand and unused borrowing capacity at the FHLB of $6.1 billion. While there are no firm lending commitments in place, we believe we could borrow approximately $600.0 million in the form of federal funds purchased through existing relationships with several correspondent banks. In accordance with our internal policies, we had unused capacity for wholesale and brokered deposits of $1.4 billion. In addition, we are permitted to borrow overnight from FRBNY via the discount window. At December 31, 2020, our borrowing capacity at FRBNY was approximately $165.0 million.

Liquidity - Sterling Bancorp Liquidity. We are a bank holding company and do not conduct operations other than through our subsidiaries. Our recurring cash requirements primarily consist of dividends to common and preferred stockholders and interest expense on outstanding borrowings. As part of our on-going asset/liability management and capital management strategies we also use cash to repurchase shares of our outstanding common stock. These cash needs are mainly satisfied by dividends received from the Bank and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be paid by the Bank. The Bank has developed internal capital management policies and procedures and, under these policies and procedures, which are more restrictive than the requirements necessary to maintain a well-capitalized regulatory designation. The Bank could pay dividends to us of approximately $198.0 million at December 31, 2020 without prior regulatory approval.

At December 31, 2020, we had cash on hand of $128.7 million and capacity under a revolving line of credit facility of $35.0 million. Cash on hand at December 31, 2020 included a portion of the proceeds from our issuance of Subordinated Notes - 2030 that was completed on October 30, 2020. After closing this transaction, we injected $175.0 million as additional paid in capital at the Bank. We expect to call all of the Subordinated Notes - Bank will be redeemed in 2021. These notes are redeemable on April 1, 2021 and quarterly thereafter.

On August 31, 2020, we renewed our $35.0 million revolving line of credit facility with a third-party financial institution. The renewed line is provided for general corporate purposes and matures on August 31, 2021. The facility requires us and the Bank to maintain certain ratios related to capital, non-performing assets to capital, reserves to non-performing loans and debt service coverage. We and the Bank were in compliance with all requirements of the line of credit facility at December 31, 2020.

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