CONNECTONE BANCORP, INC. Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations (Form 10-K)

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The purpose of this analysis is to provide the reader with information relevant
to understanding and assessing the Company's results of operations for each of
the past three years and financial condition for each of the past two years. In
order to fully appreciate this analysis, the reader is encouraged to review the
consolidated financial statements and accompanying notes thereto appearing under
Item 8 of this report, and statistical data presented in this document.



Caution Regarding Forward-Looking Statements

See Item 1 of this Annual Report on Form 10-K for information on forward-looking statements.

Significant Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of
Operations is based on our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. Accounting policies considered critical to our financial results
include the allowance for credit losses and related provision and income taxes.
For information on our significant accounting policies, see Note 1a in the Notes
to Consolidated Financial Statements.



Allowance for credit losses and related provision



The allowance for credit losses is an estimate of current expected credit losses
considering available information relevant to assessing collectability of cash
flows over the contractual term of the financial assets necessary to cover
lifetime expected credit losses inherent in financial assets at the balance
sheet date.  The methodology for determining the allowance for credit losses is
considered a critical accounting policy by management because of the high degree
of judgment involved, the subjectivity of the assumptions used, and the
potential for changes in the forecasted economic environment that could result
in changes to the amount of the recorded allowance for credit losses. The loan
portfolio also represents the largest asset type on the Company's Consolidated
Statements of Condition.



Expected credit losses of financial assets are measured on a collective (pool)
basis when similar risk characteristic(s) exist.  If the Company determines that
a financial asset does not share risk characteristics with other financial
assets, the Company shall evaluate the financial asset for expected credit
losses on an individual basis. Financial assets are assessed once, either
through collective assessments or individual assessments.  Standard expected
losses are evaluated on a collective, or pool, basis when financial assets share
similar risk characteristics. For pooled loan segments, utilizing a quantitative
analysis, the Company calculates estimated credit losses using a probability of
default and loss given default methodology, the results of which are applied to
the aggregated discounted cash flow of each individual loan within the segment.
The point in time probability of default and loss given default are then
conditioned by macroeconomic scenarios to incorporate reasonable and supportable
forecasts that affect the collectability of the reported amount.



Financial assets may be segmented based on one characteristic, or a combination
of characteristics. Examples of risk characteristics relevant to the Company's
evaluation included, but were not limited to: (1) internal or external credit
scores or credit ratings, (2) risk ratings or classifications, (3) financial
asset type, (4) collateral type, (5) size, (6) effective interest rate, (7)
term, (8) geographical location, (9) industry of the borrower and (10)
vintage. Various regulatory agencies, as an integral part of their examination
process, periodically review our allowance for credit losses. Such agencies may
require us to make additional provisions for credit losses based upon
information available to them at the time of their examination.  All of the
factors considered in the analysis of the adequacy of the allowance for credit
losses may be subject to change. To the extent actual outcomes differ from
management estimates, additional provisions for credit losses may be required
that could materially adversely impact earnings in future periods. Additional
information can be found in Note 1a of the Notes to Consolidated Financial
Statements.



Income Taxes



The objectives of accounting for income taxes are to recognize the amount of
taxes payable or refundable for the current year and deferred tax liabilities
and assets for the future tax consequences of events that have been recognized
in an entity's financial statements or tax returns. Judgment is required in
assessing the future tax consequences of events that have been recognized in the
Company's consolidated financial statements or tax returns.



Fluctuations in the actual outcome of these future tax consequences could impact
the Company's consolidated financial condition or results of operations. Note 1
(under the caption "Use of Estimates") and Note 10 of the Notes to Consolidated
Financial Statements include additional discussion on the accounting for income
taxes.



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Overview and Strategy


We serve as a holding company for the Bank, which is our primary asset and only
operating subsidiary. We follow a business plan that emphasizes the delivery of
customized banking services in our market area to clients who desire a high
level of personalized service and responsiveness. The Bank conducts a
traditional banking business, making commercial loans, consumer loans and
residential and commercial real estate loans. In addition, the Bank offers
various non-deposit products through non-proprietary relationships with third
party vendors. The Bank relies upon deposits as the primary funding source for
its assets. The Bank offers traditional deposit products.



Many of our clients relationships start with referrals from existing clients. We
then seek to cross sell our products to clients to grow the client relationship.
For example, we will frequently offer an interest rate concession on credit
products for clients that maintain a noninterest-bearing deposit account at the
Bank. This strategy has helped maintain our funding costs and the growth of our
interest expense even as we have substantially increased our total deposits. It
has also helped fuel our significant loan growth. We believe that the Bank's
significant growth and increasing profitability demonstrate the need for and
success of our brand of banking.



Our results of operations depend primarily on our net interest income, which is
the difference between the interest earned on our interest-earning assets and
the interest paid on funds borrowed to support those assets, primarily deposits.
Net interest margin is the difference between the weighted average rate received
on interest-earning assets and the weighted average rate paid to fund those
interest-earning assets, which is also affected by the average level of
interest-earning assets as compared with that of interest-bearing liabilities.
Net income is also affected by the amount of noninterest income and noninterest
expenses.



General


The following discussion and analysis present the more significant factors
affecting the Company's financial condition as of December 31, 2021 and 2020 and
results of operations for each of the years in the three-year period ended
December 31, 2021. The MD&A should be read in conjunction with the consolidated
financial statements, notes to consolidated financial statements and other
information contained in this report.



Operating Results Overview


Net profit available to ordinary shareholders for the year ended December 31, 2021
has been $128.6 millionan augmentation of $57.3 millioni.e. 80.4%, compared to the net result of $71.3 million for 2020. Diluted earnings per share were $3.22 for 2021, an increase of 79.9% compared to $1.79 for 2020.

The change in net earnings from 2020 to 2021 is attributable to the following:

Decrease in allowance for credit losses by $46.5 million. The drop was

mainly due to a high provision for loan losses in 2020 due to the

economic uncertainties surrounding the COVID-19 pandemic.

Increase in net interest income of $24.9 million.

Increase in non-interest income of $1.3 millionmainly due to the increase

net capital gains on loans held for the sale of $1.7 milliongain on disposal of branches of

$0.7 million and net capital gains from the sale/repurchase of securities of $0.2

million, offset by lower deposits, loans and other income of $0.5 million,

income on life insurance held by the bank of $0.2 million and net capital gains on equity

titles of $0.6 million. Higher net gains on loans held for sale

results from mortgage sales, SBA loan sales and high commercial loans

Sales. The increase in the gain on the sale of branches is the result of the Bank

sale of two branches during the first quarter of 2021 linked to the BNJ

acquisition.

Decrease in non-interest expenses of $12.0 millionmainly due to declines

in merger costs of $14.6 millionchange in value of the acquisition price of

$2.3 millionoccupation and equipment of $2.2 millionand FDIC assurance of

$1.3 millionpartly offset by salary and benefit increases

of $5.5 millionother expenses of $2.6 million and professional and advice

of $0.9 million.

Increase in the income tax charge of $25.6 million mainly resulting from a

   higher percentage of income being derived from taxable sources.




Net income for the year ended December 31, 2020 was $71.3 million, a decrease of
$2.1 million, or 2.9%, compared to net income of $73.4 million for 2019. Diluted
earnings per share were $1.79 for 2020, a 13.5% decrease from $2.07 for 2019.



The variation in net income from 2019 to 2020 is attributable to the following items:

Increase in allowance for credit losses by $32.9 million was mainly due to the

continuing economic uncertainties associated with the COVID-19 pandemic.

Increase in non-interest expense of $28.8 millionmainly due to an increase

in salaries and benefits of $9.9 millionmerger fee $5.7

million, occupancy and equipment expenses of $4.2 million and professional and

consulting fees $1.9 million. These increases are mainly due to

the acquisition of BNJ. In addition, the Company saw its value increase by

   acquisition price of $2.3 million related to its BoeFly acquisition.


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Increase in net interest income of $51.7 million mainly due to the acquisition

of BNJ and an 11 basis point widening of the net interest margin.

Increase in non-interest income of $6.4 million mainly resulting from a

increase in deposits, loans and other income, increase in life insurance held by the bank

insurance and net gains on disposal of loans held for sale.

· Decrease in the income tax expense of $1.5 million mainly resulting from a

   decrease in income from taxable sources.




Net Interest Income



Fully taxable equivalent net interest income for 2021 totaled $264.7 million, an
increase of $24.8 million, or 10.3%, from 2020. The increase in net interest
income was due to an increase in average interest-earning assets, which grew by
4.2% to $7.2 billion and a widening of 20 basis-points in the net interest
margin. The widening of the net interest margin was mainly attributable to lower
cost of funds, offset by higher average cash balances and lower yields on loans
and securities. Average total loans, which includes loans held-for-sale,
increased by 3.6% to $6.4 billion in 2021 from $6.2 billion in 2020. The
increase in average total loans is primarily attributable to higher, non PPP,
loan originations.



Fully taxable equivalent net interest income for 2020 totaled $239.9 million, an
increase of $51.9 million, or 27.6%, from 2019. The increase in net interest
income was due to an increase in average interest-earning assets, which grew by
23.6% to $6.9 billion and a widening of 11 basis-points in the net interest
margin. The widening of the net interest margin was mainly attributable to lower
cost of funds, offset by higher average cash balances and lower yields on loans
and securities. Average total loans, which includes loans held-for-sale,
increased by 22.8% to $6.2 billion in 2020 from $5.0 billion in 2019. The
increase in average total loans is primarily attributable to the acquisition of
BNJ.



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Average Balance Sheets


The following table sets forth certain information relating to our average
assets and liabilities for the years ended December 31, 2021, 2020 and 2019 and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods shown.



                                                                            Years Ended December 31,
                                          2021                                        2020                                        2019
                           Average        Income/       Yield/         Average        Income/       Yield/         Average        Income/       Yield/
(Tax-Equivalent Basis)     Balance        Expense        Rate          Balance        Expense        Rate          Balance        Expense        Rate
                                                                             (dollars in thousands)
ASSETS
Interest-earning
assets:
Investment securities
(1) (2)                  $   464,342     $   7,455          1.61 %   $   444,070     $   9,996          2.25 %   $   478,478     $  13,885          2.90 %
Loans receivable and
loans held-for-sale
(2) (3) (4)                6,419,610       294,686          4.59 %     6,198,753       297,756          4.80 %     5,049,458       256,299          5.08 %
Federal funds sold and
interest-earning
deposits with banks          322,692           405          0.13 %       267,824           694          0.22 %        55,819         1,167          2.09 %
Restricted investment
in bank stocks                20,797           971          4.67 %        27,185         1,642          6.04 %        27,389         1,778          6.49 %
Total interest-earning
assets                     7,227,441       303,517          4.20 %     6,937,832       310,088          4.47 %     5,611,144       273,129          4.87 %
Noninterest-earning
assets:
Allowance for credit
losses                       (79,863 )                                   (59,271 )                                   (37,433 )
Noninterest-earning
assets                       587,650                                     574,913                                     440,824
Total assets             $ 7,735,228                                 $ 7,453,474                                 $ 6,014,535

LIABILITIES &
STOCKHOLDERS' EQUITY
Time deposits            $ 1,300,270        14,813          1.14 %   $
1,792,568        34,813          1.94 %   $ 1,549,700        37,177          2.40 %
Other interest-bearing
deposits                   3,451,765         9,955          0.29 %     2,819,908        17,573          0.62 %     2,267,812        28,393          1.25 %
Total interest-bearing
deposits                   4,752,035        24,768          0.52 %     4,612,476        52,386          1.14 %     3,817,512        65,570          1.72 %

Borrowings                   318,700         5,300          1.66 %       537,773         8,435          1.57 %       502,314        12,079          2.40 %
Subordinated
debentures                   153,199         8,669          5.66 %       169,139         9,254          5.47 %       128,708         7,371          5.73 %
Capital lease
obligation                     2,041           123          6.03 %         2,233           134          6.00 %         2,414           145          6.01 %
Total interest-bearing
liabilities                5,225,975        38,860          0.74 %     5,321,621        70,209          1.32 %     4,450,948        85,165          1.91 %
Noninterest-bearing
deposits                   1,454,148                                   1,195,547                                     819,917
Other liabilities             48,082                                      55,586                                      38,174
Stockholders' equity       1,007,023                                     880,720                                     705,496
Total liabilities and
stockholders' equity     $ 7,735,228                                 $ 7,453,474                                 $ 6,014,535

Net interest
income/interest rate
spread (5)                                 264,657          3.46 %                     239,879          3.15 %                     187,964          2.96 %
Tax-equivalent
adjustment                                  (1,779 )                                    (1,888 )                                    (1,645 )
Net interest income as
reported                                 $ 262,878                                   $ 237,991                                   $ 186,319
Net interest margin
(6)                                                         3.66 %                                      3.46 %                                      3.35 %



(1) Average balances are based on amortized cost. (2) Interest income is presented on a tax equivalent basis using federal tax of 21%.

rate.

(3) Includes loan fee income and accretion of purchase accounting adjustments.
(4) Loans include nonaccrual loans.
(5) Represents difference between the average yield on interest-earning assets

and the average cost of interest-bearing liabilities and is presented on a

fiscal equivalence basis. (6) Represents net interest income on a tax equivalent basis divided by the average

    total interest-earning assets.




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Rate/Volume Analysis



The following table presents, by category, the major factors that contributed to
the changes in net interest income. Changes due to both volume and rate have
been allocated in proportion to the relationship of the dollar amount change in
each.



                                      2021/2020                                 2020/2019
                                 Increase (Decrease)                       Increase (Decrease)
                                  Due to Change in:                         Due to Change in:
                         Average       Average         Net         Average       Average         Net
                         Volume         Rate         Change        Volume  
      Rate         Change
                                                    (dollars in thousands)
Interest income:
Investment
securities:             $     325     $  (2,866 )   $  (2,541 )   $    (775 )   $  (3,114 )   $  (3,889 )
Loans receivable and
loans held-for-sale        10,138       (13,208 )      (3,070 )      55,206       (13,749 )      41,457
Federal funds sold
and interest-earnings
deposits with banks            69          (358 )        (289 )         549        (1,022 )        (473 )
Restricted investment
in bank stocks               (298 )        (373 )        (671 )         (12 )        (124 )        (136 )
Total interest
income:                 $  10,234     $ (16,805 )   $  (6,571 )   $  54,968     $ (18,009 )   $  36,959

Interest expense:
Savings, NOW, money
market, interest
checking                $   1,822     $  (9,440 )   $  (7,618 )   $   3,441     $ (14,261 )   $ (10,820 )
Time deposits              (5,608 )     (14,392 )     (20,000 )       4,717        (7,081 )      (2,364 )
Borrowings and
subordinated
debentures                 (4,545 )         825        (3,720 )       2,768        (4,529 )      (1,761 )
Capital lease
obligation                    (12 )           1           (11 )         (11 )           -           (11 )
Total interest
expense:                $  (8,343 )   $ (23,006 )   $ (31,349 )   $  10,915     $ (25,871 )   $ (14,956 )
Net interest income:    $  18,577     $   6,201     $  24,778     $  44,053
    $   7,862     $  51,915



Provision for (reversal of) credit losses



In determining the provision for credit losses, management considers national
and local economic trends and conditions; trends in the portfolio including
orientation to specific loan types or industries; experience, ability and depth
of lending management in relation to the complexity of the portfolio; effects of
changes in lending policies, trends in volume and terms of loans; levels and
trends in delinquencies, impaired loans and net charge-offs and the results of
independent third party loan review.



The Bank has adopted the CECL as of January 1, 2021. Allowances may therefore become more volatile due to changes in CECL model assumptions regarding credit quality, macroeconomic factors and conditions, and loan mix, which determine the balance of the allowance for credit losses. See Note 1b to our audited financial statements included herein.



For the year ended December 31, 2021, the (reversal of) provision for credit
losses was ($5.5) million, a decrease of $46.5 million, compared to the
provision for loan losses of $41.0 million for the year ended December 31, 2020.
The elevated provision for loan losses for the year ended December 31, 2020 was
due to the economic uncertainties of the COVID-19 pandemic, including
consideration of related borrower payment deferrals requested and/or granted.
The release of allowance for credit losses during the year ended December 31,
2021 was the result of the continually improving macro-economic outlook during
the course of 2021.



For the year ended December 31, 2020, the provision for credit losses was $41.0
million, an increase of $32.9 million, compared to the provision for credit
losses of $8.1 million for 2019. The increase was due to the continued economic
uncertainties associated with the COVID-19 pandemic and increases to specific
reserves within our commercial portfolio.



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Noninterest Income



Noninterest income for the full-year 2021 increased by $1.3 million, or 9.0%, to
$15.7 million from $14.4 million in 2020. The increase was primarily due to
increases in net gains on loans held for sale of $1.7 million, gain on sale of
branches of $0.7 million and net gains on sale/redemption of investment
securities of $0.2 million, partially offset by decreases in deposit, loan and
other income of $0.5 million, income on bank owned life insurance of $0.2
million and net gains on equity securities of $0.6 million. The increase in net
gains on loans held-for-sale resulted from mortgage loan sales, SBA loan sales
and elevated commercial loan sales. The increase in gain on sale of branches was
the result of the Bank selling two branches during the first quarter of 2021
related to the BNJ acquisition.



Noninterest income for the full-year 2020 increased by $6.4 million, or 79.2%,
to $14.4 million from $8.0 million in 2019. The increase was primarily the
result of a $3.0 million increase in deposit, loan and other income. This
increase was largely attributable to loan referral fee income of $2.3 million
generated by BoeFly as a result of its participation in the PPP program.
Additionally, increases in net gains on sale of loans held-for-sale of $1.6
million and increases in bank owned life insurance of $1.5 million contributed
to the overall increase in noninterest income.



Noninterest Expense


Noninterest expenses for the full-year 2021 decreased by $12.0 million, or 9.9%,
to $109.0 million from $121.0 million in 2020. The decrease was primarily due to
decreases in merger expenses of $14.6 million, change in value of acquisition
price of $2.3 million, occupancy and equipment of $2.2 million, and FDIC
insurance of $1.3 million, partially offset by increases in salaries and
employee benefits of $5.5 million, other expenses of $2.6 million and
professional and consulting of $0.9 million. Excluding the impact on expenses
related to mergers costs, expense increases were mainly attributable to
increased levels of business.



Noninterest expenses for the full-year 2020 increased by $28.8 million, or
31.2%, to $121.0 million from $92.2 million in 2019. The increase was primarily
attributable to increases in salaries and employee benefits of $9.9 million,
merger expenses of $5.7 million, occupancy and equipment of $4.2 million,
increase in value of acquisition price of $2.3 million, FDIC insurance expense
of $2.0 million, professional and consulting of $1.9 million and amortization of
core deposit intangibles of $1.1 million. These increases were mainly the result
of the acquisition of BNJ.



Income Taxes


Income tax expense was $44.7 million for 2021 compared to $19.1 million for 2020
and $20.6 million for 2019. The increase in income tax expense in 2021 when
compared to 2020 was primarily the result of higher taxable income. The slight
decrease in income tax expense in 2020 when compared to 2019 was primarily the
result of lower taxable income. The effective tax rates were 25.5% in 2021,
21.1% in 2020 and 21.9% for 2019. The higher effective tax rate during 2021 when
compared to 2020 and 2019, was the result of a higher percentage of income being
derived from taxable sources. The Company expects its effective tax rate to
increase in 2022, as a result of the Company's revenue growth in existing and
new markets.


For a more detailed description of income taxes, see note 10 of the notes to the consolidated financial statements.


Financial Condition Overview



As of December 31, 2021, the Company's total assets were $8.1 billion, an
increase of $0.6 billion from December 31, 2020. Total loans (including loans
held-for-sale) were $6.8 billion, an increase of $0.6 billion from December 31,
2020. Deposits were $6.3 billion, an increase of $0.4 billion from December
31,
2020.



As of December 31, 2020, the Company's total assets were $7.5 billion, an
increase of $1.4 billion from December 31, 2019. Total loans (including loans
held-for-sale) were $6.2 billion, an increase of $1.1 billion from December 31,
2019. Deposits were $6.0 billion, an increase of $1.2 billion from December 31,
2019. These increases were primarily the result of the acquisition of BNJ.

Loan Portfolio



The Bank's lending activities are generally oriented to small-to-medium sized
businesses, high net worth individuals, professional practices and consumer and
retail clients living and working in the Bank's metropolitan, New York market
area, consisting of Bergen, Union, Morris, Essex, Hudson, Mercer and Monmouth
counties, New Jersey, as well as NYC's five boroughs, Nassau, Rockland, Orange
and Westchester counties, in New York. The Bank has not made loans to borrowers
outside of the United States. The Bank believes that its strategy of
high-quality client service, competitive rate structures and selective marketing
have enabled it to gain market share.



Commercial loans are loans made for business purposes and are primarily secured
by collateral such as cash balances with the Bank, marketable securities held by
or under the control of the Bank, business assets including accounts receivable,
inventory and equipment and liens on commercial and residential real estate.
Commercial construction loans are loans to finance the construction of
commercial or residential properties secured by first liens on such properties.
Commercial real estate loans include loans secured by first liens on completed
commercial properties, including multi-family properties, to purchase or
refinance such properties. Residential mortgages include loans secured by first
liens on residential real estate and are generally made to existing clients of
the Bank to purchase or refinance primary and secondary residences. Home equity
loans and lines of credit include loans secured by first or second liens on
residential real estate for primary or secondary residences. Consumer loans are
made to individuals who qualify for auto loans, cash reserve, credit cards
and
installment loans.



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Gross loans to December 31, 2021 totaled $6.8 billionan augmentation of $0.6 billioni.e. 9.5%, on gross loans at December 31, 2020 of $6.3 billion.



The largest component of the gross loan portfolio as of December 31, 2021 and
December 31, 2020 was commercial real estate loans. Commercial real estate loans
as of December 31, 2021 totaled $4.7 billion, an increase of $958.0 million, or
25.3%, compared to commercial real estate loans as of December 31, 2020 of $3.8
billion. The main component contributing to the increase in commercial real
estate loans is an increase in the multifamily loans. Commercial loans totaled
$1.3 billion as of December 31, 2021, a decrease of $222.5 million, or 14.6%,
compared to commercial loans as of December 31, 2020 of $1.5 billion. Included
in commercial loans were PPP loans of $93.1 million as of December 31, 2021 and
$397.5 million as of December 31, 2020. The decrease in commercial loans was
mainly attributable to accelerated forgiveness of the outstanding PPP loans.
Commercial construction loans as of December 31, 2021 totaled $540.2 million, a
decrease of $77.6 million, or 12.6%, compared to construction loans as of
December 31, 2020 of $617.8 million.



Residential real estate loans totaled $255.3 million as of December 31, 2021, a
decrease of $67.3 million, or 20.9%, compared to residential real estate loans
as of December 31, 2020 of $322.6 million. Consumer loans as of December 31,
2021 and December 31, 2020 totaled $1.9 million.



The following table presents the classification of our loans by loan portfolio segment for the periods presented.


                               December 31,       December 31,       December 31,
                                   2021               2020               2019

Commercial (1)                $    1,299,428     $    1,521,967     $    1,129,661
Commercial real estate             4,741,590          3,783,550          3,041,959
Commercial construction              540,178            617,747            623,326
Residential real estate              255,269            322,564            320,020
Consumer                               1,886              1,853              3,328
Gross loans                        6,838,351          6,247,681          5,118,294
Net deferred (fees) costs             (9,729 )          (11,374 )           (4,767 )
Loans receivable                   6,828,622          6,236,307          5,113,527
Allowance for credit losses          (78,773 )          (79,226 )          (38,293 )
Net loans receivable          $    6,749,849     $    6,157,081     $    5,075,234



(1) Included in commercial loans are PPP loans from $93.1 million and $397.5

     million as of December 31, 2021 and December 31, 2020, respectively.




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The following table sets forth the classification of our gross loans by loan
portfolio segment and by fixed and adjustable rate loans as of December 31, 2021
by remaining contractual maturity.



                                                           As of December 31, 2021, Maturing
                                                     After             After
                                      In           One Year         Five Years
                                   One Year         through           through              After
                                    or Less       Five Years       Fifteen Years       Fifteen Years         Total
Commercial                        $   582,103     $   256,805     $       323,171     $       137,349     $ 1,299,428
Commercial real estate                399,352       1,114,270           2,998,632             229,336       4,741,590
Commercial construction               425,835         114,343                   -                   -         540,178
Residential real estate                 2,552          21,547              45,966             185,204         255,269
Consumer                                1,695             155                  20                  16           1,886
Total                             $ 1,411,537     $ 1,507,120     $     3,367,789     $       551,905     $ 6,838,351
Loans with:
Fixed rates                       $   443,332     $ 1,027,257     $       997,116     $       329,483     $ 2,797,188
Variable rates                        968,205         479,863           2,370,673             222,422     $ 4,041,163
Total                             $ 1,411,537     $ 1,507,120     $     3,367,789     $       551,905     $ 6,838,351



For more information on loans, see note 4 of the notes to the consolidated financial statements


Asset Quality



General. One of our key objectives is to maintain a high level of asset quality.
When a borrower fails to make a scheduled payment, we attempt to cure the
deficiency by sending late notices, as well as making personal contact with the
borrower. Typically, late notices are sent approximately 10 days after the date
the payment is due, followed up by direct contact with the borrower
approximately 15 days after payment is due. In most cases, deficiencies are
promptly resolved. If the delinquency continues, late charges are assessed, and
additional efforts are made to collect the deficiency. Total loans delinquent 30
days or more are reported to the board of directors of the Bank on a monthly
basis.



On loans where the collection of principal or interest payments is doubtful, the
accrual of interest income ceases ("nonaccrual" loans). Except for loans that
are well-secured and in the process of collection, it is our policy to
discontinue accruing additional interest and reverse any interest accrued on any
loan that is 90 days or greater past due. On occasion, this action may be taken
earlier if the financial condition of the borrower raises significant concern
with regard to the borrower's ability to service the debt in accordance with the
terms of the loan agreement. Interest income is not accrued on these loans until
the borrower's financial condition and payment record demonstrate an ability to
service the debt. Typically, a nonaccrual loan may return to accrual status if
the borrower makes the loan current, and then makes six consecutive payments as
scheduled.


Real estate acquired as a result of foreclosure is classified as other real
estate owned ("OREO") until sold. OREO is recorded at the lower of cost or fair
value less estimated selling costs. Costs associated with acquiring and
improving a foreclosed property are usually capitalized to the extent that the
carrying value does not exceed fair value less estimated selling costs. Holding
costs are charged to expense. Gains and losses on the sale of OREO are charged
to operations, as incurred.



The Company evaluates individual instruments for expected credit losses when
those instruments do not share similar risk characteristics with instruments
evaluated using a collective (pooled) basis.  The Company evaluates the pooling
methodology at least annually.  Loans transition from defined segments for
individual analysis when credit characteristics, or risk traits, change in a
material manner.  A loan is considered for individual analysis when, based on
current information and events, it is probable that the Company will be unable
to collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Factors considered by the Company
in determining individual analysis include payment status and the probability of
collecting scheduled principal and interest payments when due.  Loans for which
the terms have been modified as a concession to the borrower due to the borrower
experiencing financial difficulties are troubled debt restructurings ("TDR") and
are individually analyzed if carrying value is $250,000 or higher.
Additionally, nonaccrual loans that are $250,000 or higher are also individually
analyzed.  All PCD loans are individually analyzed.  For loans designated as TDR
or nonaccrual with balances less than $250,000, these loans are collectively
evaluated, and, accordingly, are not separately identified for analysis or
disclosures.  Instruments will not be included in both collective and individual
analysis.  Individual analysis will establish a specific reserve for instruments
in scope.


Asset Classification. Federal regulations and our policies require that we
utilize an internal asset classification system as a means of reporting problem
and potential problem assets. We have incorporated an internal asset
classification system, substantially consistent with Federal banking
regulations, as a part of our credit monitoring system. Federal banking
regulations set forth a classification scheme for problem and potential problem
assets as "substandard," "doubtful" or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "special mention."

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When an insured institution classifies one or more assets, or portions thereof,
as "substandard" or "doubtful," it is required that a general valuation
allowance for credit losses must be established in an amount deemed prudent by
management. General valuation allowances represent loss allowances which have
been established to recognize the inherent losses associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies one or more
assets, or portions thereof, as "loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount.



A bank's determination as to the classification of its assets and the amount of
its valuation allowances is subject to review by Federal bank regulators which
can order the establishment of additional general or specific loss allowances.
The Federal banking agencies have adopted an interagency policy statement on the
allowance for credit losses. The policy statement provides guidance for
financial institutions on both the responsibilities of management for the
assessment and establishment of allowances and guidance for banking agency
examiners to use in determining the adequacy of general valuation guidelines.
Generally, the policy statement recommends that institutions have effective
systems and controls to identify, monitor and address asset quality problems;
that management analyze all significant factors that affect the collectability
of the portfolio in a reasonable manner; and that management establish
acceptable allowance evaluation processes that meet the objectives set forth in
the policy statement. Our management believes that, based on information
currently available, our allowance for credit losses is maintained at a level
which covers all known and probable incurred losses in the portfolio at each
reporting date. However, actual losses are dependent upon future events and, as
such, further additions to the level of allowances for credit losses may become
necessary.



The table below sets forth information on our classified loans and loans
designated as special mention (excluding loans held-for-sale) as of the dates
presented:



                                               2021          2020
(dollars in thousands)
Classified Loans:
Substandard                                  $ 157,434     $ 119,710
Doubtful                                             -           215
Loss                                                 -             -
Total classified loans                         157,434       119,925
Special Mention Loans                           72,286        79,868

Total classified loans and special mention $229,720 $199,793

During the year ended December 31, 2021, "substandard" loans and "doubtful"
loans, which include lower credit quality loans which possess higher risk
characteristics than "special mention" loans, increased to $157.4 million, or
2.3% of loans receivable, as of December 31, 2021 from $119.9 million, or 1.9%
of loans receivable, as of December 31, 2020. The increase of $37.7 million is
primarily attributable to loans migrating to substandard that have recently come
off deferment status. During the year ended December 31, 2021, "special mention"
loans were $72.3 million, or 1.0% of loans receivable, while "special mention"
loans as of December 31, 2020 were $79.9 million, or 1.3% of loans receivable.
As of December 31, 2021, deferred loans were $0.5 million.



Unrecognized loans, distressed debt restructurings, OREOs and loans past due 90 days or more and still outstanding



Nonperforming loans include nonaccrual loans. Nonaccrual loans represent loans
on which interest accruals have been suspended. The Company considers charging
off loans, or a portion thereof, when they become contractually past due ninety
days or more as to interest or principal payments or when other internal or
external factors indicate that collection of principal or interest is doubtful.
Performing troubled debt restructurings represent loans on which a concession
was granted to a borrower, such as a reduction in interest rate to a rate lower
than the current market rate for new debt with similar risks, and which are
currently performing in accordance with the modified terms. For additional
information regarding loans, see Note 4 of the Notes to the Consolidated
Financial Statements.



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The following table sets forth, as of the dates indicated, the amount of the
Company's nonaccrual loans, other real estate owned ("OREO"), performing
troubled debt restructurings ("TDRs") and loans past due 90 days or greater
and
still accruing:



                                                      December 31,       December 31,       December 31,
                                                          2021               2020               2019

Nonaccrual loans                                     $       61,700     $       61,696     $       49,481
OREO                                                              -                  -                  -
Total nonperforming assets                           $       61,700     $  

61,696 $49,481

Performing TDRs                                      $       43,587     $       23,655     $       21,410
Loans 90 days or greater past due and still
accruing                                             $       13,531     $  

12,821 $3,107

Nonaccrual loans to loans receivable                           0.90 %             0.99 %             0.97 %
Nonperforming assets to total assets                           0.76 %             0.82 %             0.80 %
Nonperforming assets, performing TDRs, and loans
90 days or greater past due and still accruing to
total loans                                                    1.74 %             1.57 %             1.44 %



Allowance for credit losses and related provision

The allowance for credit losses is a reserve established through charges to
earnings in the form of a provision for credit losses. We maintain an allowance
for credit losses at a level considered adequate to provide for all known and
probable incurred losses in the portfolio. The level of the allowance is based
on management's evaluation of estimated losses in the portfolio, after
consideration of risk characteristics of the loans and prevailing and
anticipated economic conditions. Loan charge-offs (i.e., loans judged to be
uncollectible) are charged against the reserve and any subsequent recovery is
credited. Our officers analyze risks within the loan portfolio on a continuous
basis and through an external independent loan review function, and the results
of the loan review function are also reviewed by our Audit Committee. A risk
system, consisting of multiple grading categories for each portfolio class, is
utilized as an analytical tool to assess risk and appropriate reserves. In
addition to the risk system, management further evaluates risk characteristics
of the loan portfolio under current and anticipated economic conditions and
considers such factors as the financial condition of the borrower, past and
expected loss experience, and other factors which management feels deserve
recognition in establishing an appropriate reserve. These estimates are reviewed
at least quarterly and, as adjustments become necessary, they are recognized in
the periods in which they become known. Although management strives to maintain
an allowance it deems adequate, future economic changes, deterioration of
borrowers' creditworthiness, and the impact of examinations by regulatory
agencies all could cause changes to our allowance for credit losses.



As of December 31, 2021, the allowance for credit losses for loans was $78.8
million, a decrease of $0.5 million, or 0.6%, from $79.2 million as of December
31, 2020. The Bank adopted CECL as of January 1, 2021. As a result of the
adoption, the Bank recorded a "Day 1" CECL adjustment on January 1, 2021 of $6.5
million that increased the allowance for credit losses for loans. This increase
was offset by a release of provision for credit losses of $5.5 million as well
as $2.0 million in net charge-offs during the year ended December 31, 2021. The
$5.5 million release of provision for credit losses during the year ended
December 31, 2021 was the result of a continued improvement in the macroeconomic
outlook during 2021. Included in the $2.0 million net charge-offs for the year
ended December 31, 2021 was a $1.4 million charge-off of a commercial real
estate loan that previously had a specific credit reserve.



The allowance for credit losses for loans as a percentage of loans receivable
was 1.15% as of December 31, 2021 and 1.27% as of December 31, 2020. Excluding
PPP loans receivable, which are 100% federally guaranteed, the allowance for
credit losses as a percentage of loans receivable was 1.17% as of December
31,
2021.



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Three-year statistical provision for credit losses for loans



The following table reflects the relationship of loan volume, the provision and
allowance for credit losses for loans and net charge-offs for the periods
presented.



                                                      December 31,       December 31,       December 31,
                                                          2021               2020               2019

Balance as of January 1,                             $       79,226     $       38,293     $       34,954
CECL Day 1 Adjustment                                         6,557                  -                  -
Balance as of January 1, as adjusted for changes
in accounting principal                                      85,783             38,293             34,954
Charge-offs:
Commercial (1)                                                  382                552              1,029
Commercial real estate                                        1,780                  -              3,470
Residential real estate                                         235                341                557
Consumer                                                          -                  7                 20
Total charge-offs                                             2,397                900              5,076
Recoveries:
Commercial                                                      289                  4                265
Commercial real estate                                           85                802                 30
Residential real estate                                          20                 23                  3
Consumer                                                         11                  4                 17
Total recoveries                                                405                833                315
Net charge-offs                                               1,992                 67              4,761
(Release of) provision for credit losses for loans           (5,018 )           41,000              8,100
Balance at end of year                               $       78,773     $       79,226     $       38,293
Ratio of net charge-offs during the year to
average loans receivable outstanding during the
year                                                           0.03 %             0.00 %             0.09 %
Allowance for credit losses for loans as a
percentage of loans receivable                                 1.15 %      
      1.27 %             0.75 %



(1) For completed fiscal years December 31, 2019 loan write-offs within the commercial lending segment included $1.0 million related to the taxi medallion portfolio.

For more information on loans, see note 4 of the notes to the consolidated financial statements.



Implicit in the lending function is the fact that credit losses will be
experienced and that the risk of loss will vary with the type of loan being
made, the creditworthiness of the borrower and prevailing economic conditions.
The allowance for credit losses has been allocated in the table below according
to the estimated amount deemed to be reasonably and supportably necessary to
provide for the possibility of either lifetime expected losses or losses being
incurred within the following categories of loans as of December 31, for each of
the past three years.



The table below shows, for three types of loans, the amounts of the allowance
allocable to such loans and the percentage of such loans to gross loans, along
with the amount of the unallocated allowance. Commercial loan type shown below
includes commercial, commercial real estate and commercial construction loans.



               Commercial                Residential Real Estate                Consumer               Unallocated
                        Loans to                          Loans to                      Loans to
        Amount of        Gross          Amount of           Gross       

Amount of Gross Amount of Total

        Allowance        Loans          Allowance           Loans        

Allowance Loans Allowance Allowance

                                                          (dollars in 

thousands)

2021   $    75,138           95.4 %   $       3,628             4.6 %   $         7           0.1 %   $           -     $    78,773
2020        75,967           94.8 %           2,687             5.2 %             4           0.0 %             568          79,226
2019        36,506           93.7 %           1,685             6.3 %             3           0.1 %              99          38,293




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Investments



For the year ended December 31, 2021, the average volume of investment
securities, including equity securities, increased by $20.3 million to
approximately $464.3 million or 6.4% of average earning assets, from $444.1
million, or 6.4% of average earning assets, for the year ended December 31,
2020. As of December 31, 2021, the principal components of the investment
portfolio are U.S. Treasury and Government Agency Obligations, Federal Agency
Obligations including mortgage-backed securities, Obligations of U.S. States and
Political Subdivisions, Corporate Bonds and other debt and equity securities.



During the year ended December 31, 2021rate-related factors reduced investment income by $2.8 millionwhile volume factors increased investment income by $0.3 million. The tax-equivalent return on investments decreased by 64 basis points to 1.61% from a return of 2.25% in the year ended December 31, 2020. This was mainly due to the overall decline in prevailing interest rates over the course of 2021.



Securities available-for-sale are a part of the Company's interest rate risk
management strategy and may be sold in response to changes in interest rates,
changes in prepayment risk, liquidity management and other factors. The Company
continues to reposition the investment portfolio as part of an overall
corporate-wide strategy to produce reasonable and consistent margins where
feasible, while attempting to limit risks inherent in the Company's Consolidated
Statement of Condition.



As of December 31, 2021, net unrealized gains on securities available-for-sale,
which are carried as a component of accumulated other comprehensive income
(loss) and included in stockholders' equity, net of tax, amounted to $0.5
million as compared with net unrealized gains of $7.9 million as of December 31,
2020. The decrease in unrealized gains is predominately attributable to changes
in market conditions and interest rates. For additional information regarding
the Company's investment portfolio, see Note 3, Note 15 and Note 20 of the Notes
to the Consolidated Financial Statements.



During 2021, there were no sales from the Company's available-for-sale
portfolio, as compared with $19.6 million in sales in 2020 and $183.7 million in
2019. The gross realized gains (losses) on securities sold, called or matured
mounted to approximately $195 thousand in 2021, $29 thousand in 2020 and $(280)
thousand in 2019, while there were no impairment charges in 2021, 2020 and 2019.
The table below illustrates the maturity distribution and weighted average yield
on a tax-equivalent basis for amortized cost of our investment securities,
excluding equity securities, as of December 31, 2021, on a contractual maturity
basis.



                                                            Due after 1 year              Due after 5 years
                         Due in 1 year or less               through 5 years               through 10 years              Due after 10 years                           Total
                                         Weighted                       Weighted                       Weighted                        Weighted                      Weighted
                      Amortized           Average       Amortized       Average        Amortized       Average        Amortized        Average       Amortized       Average        Market
                         Cost              Yield           Cost          Yield           Cost           Yield            Cost           Yield           Cost          Yield          Value
(dollars in
thousands)
Investment
Securities
Available-for-Sale
Federal Agency
Obligations          $          -                 - %   $        -              - %   $         -              - %   $     50,336           2.38 %   $   50,336           2.38 %   $  50,360
Residential
Mortgage
Pass-through
Securities                      3              3.57            442           2.56           3,535           3.29          313,131           1.63        317,111           1.65       316,095
Commercial
Mortgage
Pass-through
Securities                      -                 -              -              -           4,079           1.52            6,735           1.62         10,814           1.58        10,469
Obligations of
U.S. States and
Political
Subdivisions                  395              4.11          4,216           4.15           4,275           4.18          136,159           3.31       
145,045           3.36       145,625
Corporate Bonds
and Notes                   2,500              3.28          5,987           2.05             481           7.33                -              -          8,968           2.68         9,049
Asset-backed
Securities                      -                 -              -              -             380           0.76            2,183           0.93          2,563           0.90         2,564
Certificates of
Deposit                       150              1.54              -              -               -              -                -              -            150           1.54           150
Other Securities              195              0.25              -              -               -              -                -              -            195           0.25           195
Total Investment
Securities           $      3,243              3.12 %   $   10,645         
 2.90 %   $    12,750           3.10 %   $    508,544           2.15 %   $  535,182           2.19 %   $ 534,507



For more information on the carrying value of the investment portfolio, see note 3, note 15 and note 20 of the notes to the consolidated financial statements.

The securities listed in the table above are either rated investment grade by
Moody's and/or Standard and Poor's or have shadow credit ratings from a credit
agency supporting an investment grade and conform to the Company's investment
policy guidelines. There were no municipal securities, or corporate securities,
of any single issuer exceeding 10% of stockholders' equity as of December 31,
2021. Other securities do not have a contractual maturity and are included in
the "Due in 1 year or less" maturity in the table above.



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The following table presents the book value of the Company’s investment securities, as at the 31st of December for each of the past three years.


                                                          2021          2020          2019
                                                               (dollars in thousands)
Investment Securities Available-for-Sale:
Federal agency obligations                              $  50,360     $  38,458     $  28,237
Residential mortgage pass-through securities              316,095       270,884       200,496
Commercial mortgage pass-through securities                10,469         6,922         4,997
Obligations of U.S. States and political subdivisions     145,625       142,808       136,519
Corporate bonds and notes                                   9,049        25,095        28,382
Asset-backed securities                                     2,564         3,480         5,780
Certificates of deposit                                       150           151           150
Other securities                                              157           157           140
Total                                                   $ 534,507     $ 487,955     $ 404,701



For further information regarding the Company’s marketable securities portfolio, see Note 3, Note 15 and Note 20 of the Notes to the consolidated financial statements.

Interest rate sensitivity analysis



The principal objective of our asset and liability management function is to
evaluate the interest-rate risk included in certain balance sheet accounts;
determine the level of risk appropriate given our business focus, operating
environment, and capital and liquidity requirements; establish prudent asset
concentration guidelines; and manage the risk consistent with Board approved
guidelines. We seek to reduce the vulnerability of our operations to changes in
interest rates, and actions in this regard are taken under the guidance of the
Bank's Asset Liability Committee (the "ALCO"). The ALCO generally reviews our
liquidity, cash flow needs, maturities of investments, deposits and borrowings,
and current market conditions and interest rates.



We currently utilize net interest income simulation and economic value of equity
("EVE") models to measure the potential impact to the Bank of future changes in
interest rates. As of December 31, 2021, and December 31, 2020, the results of
the models were within guidelines prescribed by our Board of Directors. If model
results were to fall outside prescribed ranges, action, including additional
monitoring and reporting to the Board, would be required by the ALCO and Bank's
management.


The net interest income simulation model attempts to measure the change in net
interest income over the next one-year period, and over the next three-year
period on a cumulative basis, assuming certain changes in the general level
of
interest rates.



Based on our model, which was run as of December 31, 2021, we estimated that
over the next one-year period a 200 basis-point instantaneous increase in the
general level of interest rates would increase our net interest income by 3.35%,
while a 100 basis-point instantaneous decrease in interest rates would decrease
net interest income by 5.64%. As of December 31, 2020, we estimated that over
the next one-year period a 200 basis-point instantaneous increase in the general
level of interest rates would increase our net interest income by 0.70%, while a
100 basis-point instantaneous decrease in interest rates would decrease net
interest income by 5.18%.



Based on our model, which was run as of December 31, 2021, we estimated that
over the next three years, on a cumulative basis, a 200 basis-point
instantaneous increase in the general level of interest rates would increase our
net interest income by 9.77%, while a 100 basis-point instantaneous decrease in
interest rates would decrease net interest income by 10.41%. As of December 31,
2020, we estimated that over the next three years, on a cumulative basis, a 200
basis-point instantaneous increase in the general level of interest rates would
increase our net interest income by 3.89%, while a 100 basis-point instantaneous
decrease in interest rates would decrease net interest income by 8.56%.



An EVE analysis is also used to dynamically model the present value of asset and
liability cash flows with instantaneous rate shocks of up 200 basis points and
down 100 basis points. The economic value of equity is likely to be different as
interest rates change. Our EVE as of December 31, 2021, would increase by 0.24%
with an instantaneous rate shock of up 200 basis points, and decline by 5.20%
with an instantaneous rate shock of down 100 basis points. Our EVE as of
December 31, 2020, would decline by 7.76% with an instantaneous rate shock of up
200 basis points, and increase by 5.70% with an instantaneous rate shock of
down
100 basis points.



                                     -43-





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The following table illustrates the most recent results for EVE and NII at
December 31, 2021.


 Interest Rates      Estimated        Estimated Change in EVE       Interest Rates     Estimated       Estimated Change in NII
 (basis points)         EVE             Amount             %        (basis points)        NII            Amount             %
       +300        $ 1,191,457     $     (18,961 )       (1.57 )             +300     $ 275,470     $      12,565          4.78
       +200          1,213,269             2,851          0.24               +200       271,700             8,795          3.35
       +100          1,220,872            10,454          0.86               +100       267,500             4,595          1.75
        0            1,210,418                 -           0.0                  0       262,905                 -           0.0
       -100          1,147,448           (62,970 )       (5.20 )             -100       248,081           (14,824 )       (5.64 )




Estimates of Fair Value



The estimation of fair value is significant to certain assets of the Company,
including available-for-sale investment securities. These are all recorded at
either fair value or the lower of cost or fair value. Fair values are volatile
and may be influenced by a number of factors. Circumstances that could cause
estimates of the fair value of certain assets and liabilities to change include
a change in prepayment speeds, expected cash flows, credit quality, discount
rates, or market interest rates. Fair values for most available-for-sale
investment securities are based on quoted market prices. If quoted market prices
are not available, fair values are based on judgments regarding future expected
loss experience, current economic condition risk characteristics of various
financial instruments, and other factors. See Note 20 of the Notes to
Consolidated Financial Statements for additional discussion.



These estimates are subjective in nature, involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.



Impact of inflation and price changes

The financial statements and notes thereto presented elsewhere herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the operations; unlike most industrial companies,
nearly all of the Company's assets and liabilities are monetary. As a result,
interest rates have a greater impact on performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.



Liquidity



Liquidity is a measure of a bank's ability to fund loans, withdrawals or
maturities of deposits, and other cash outflows in a cost-effective manner. Our
principal sources of funds are deposits, scheduled amortization and prepayments
of loan principal, maturities of investment securities, and funds provided by
operations. While scheduled loan payments and maturing investments are
relatively predictable sources of funds, deposit flow and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition.



As of December 31, 2021, the amount of liquid assets remained at a level
management deemed adequate to ensure that, on a short and long-term basis,
contractual liabilities, depositors' withdrawal requirements, and other
operational and client credit needs could be satisfied. As of December 31, 2021,
liquid assets (cash and due from banks, interest-bearing deposits with banks and
unencumbered investment securities) were $742.1 million, which represented 9.1%
of total assets and 10.9% of total deposits and borrowings, compared to $697.4
million as of December 31, 2020, which represented 9.2% of total assets and
10.9% of total deposits and borrowings on such date.



The Bank is a member of the Federal Home Loan Bank of New York and, based on
available qualified collateral as of December 31, 2021, had the ability to
borrow $1.9 billion. In addition, as of December 31, 2021, the Bank had
borrowing capacity of $25 million through correspondent banks. The Bank also has
a credit facility established with the Federal Reserve Bank of New York for
direct discount window borrowings with capacity based on pledged collateral of
$1.8 million. As of December 31, 2021, the Bank had aggregate available and
unused credit of approximately $894.0 million, which represents the
aforementioned facilities totaling $1.9 billion net of $1.0 billion in
outstanding borrowings and letters of credit. As of December 31, 2021,
outstanding commitments for the Bank to extend credit were $1.2 billion.



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Cash and cash equivalents totaled $265.5 million as of December 31, 2021,
decreasing by $38.2 million from $303.8 million as of December 31, 2020.
Operating activities provided $202.3 million in net cash. Investing activities
used $689.9 million in net cash, primarily reflecting an increase in loans.
Financing activities provided $449.4 million in net cash, primarily reflecting a
net increase in deposits of $376.0 million, net proceeds raised from the
issuance of preferred stock of $110.9 million, a decrease of $50.0 million from
the redemption of subordinate debt and an increase in net borrowings of $42.3
million.



Deposits


Deposits are our primary source of funds. Average total deposits increased by
$0.4 billion, or 6.9%, to $6.2 billion in 2021 from $5.8 billion in 2020 and
increased $1.2 million, or 25.3%, to $5.8 billion in 2020 from $4.6 billion in
2019. The increase in total average deposits in 2021 was attributable to organic
growth, while the increase in 2020 was attributable to both the acquisition of
BNJ and organic growth. The following table sets forth the year-to-date average
balances and weighted average rates for various types of deposits for 2021,
2020
and 2019.



                                  2021                          2020                          2019
                          Balance         Rate          Balance         Rate          Balance         Rate
(dollars in
thousands)
Demand,
noninterest-bearing     $ 1,454,148             -     $ 1,195,547             -     $   819,917             -
Demand,
interest-bearing &
NOW                       3,081,899          0.29 %     2,583,590          0.66 %     2,102,274          1.33 %
Savings                     369,866          0.31 %       236,318          0.27 %       165,538          0.24 %
Time                      1,300,270          1.14 %     1,792,568          1.94 %     1,549,700          2.40 %

Average Total
Deposits                $ 6,206,183          0.52 %   $ 5,808,023          0.90 %   $ 4,637,429          1.41 %



The following table shows the breakdown of total deposit accounts, by account type for each of the dates indicated.


                                                December 31, 2021                December 31, 2020
                                             Amount         % of total        Amount         % of total
(dollars in thousands)
Demand, noninterest-bearing                $ 1,617,049             25.5 %   $ 1,339,108             22.5 %
Demand, interest-bearing & NOW               3,127,350             49.4 %  
  2,861,820             48.0 %
Savings                                        438,445              6.9 %       294,163              4.9 %
Time                                         1,150,109             18.2 %     1,464,133             24.6 %

Total Deposits                             $ 6,332,953            100.0 %   $ 5,959,224            100.0 %




As of December 31, 2021, we held $250.5 million of time deposits that exceed the
Federal Deposit Insurance Corporation ("FDIC") insurance limit, which was a
decrease of $117.8 million from $368.3 million as of December 31, 2020. The
following table provides information on the maturity distribution of the time
deposits exceeding the FDIC insurance limit as of December 31, 2021 and 2020:



                       December 31,       December 31,
                           2021               2020
                           (dollars in thousands)
3 months or less      $       71,293     $      100,654
Over 3 to 6 months            69,394            101,487
Over 6 to 12 months           63,549             95,061
Over 12 months                46,288             71,079

Total                 $      250,524     $      368,281




                                     -45-





  Table of Contents


Federal bank advances on home loans



Federal Home Loan Bank advances are secured, under the terms of a blanket
collateral agreement, primarily by commercial mortgage loans. As of December 31,
2021, the Company had a gross carrying value of $468.3 million, excluding a net
fair value discount of $120 thousand, in notes outstanding at a weighted average
interest rate of 0.73%. As of December 31, 2020, the Company had a gross
carrying value of $426.0 million, excluding a net fair value discount of $84
thousand, in notes outstanding at a weighted average interest rate of 1.07%.



Contractual obligations and other commitments



The following table summarizes contractual obligations as of December 31, 2021
and the effect such obligations are expected to have on liquidity and cash
flows
in future periods.



                                                    Less than 1                                           Over 5
                                       Total            year          1 - 3 years       4 - 5 years        years
December 31, 2021                                               (dollars in thousands)
Contractual obligations:
Operating lease obligations         $    13,579     $      2,807     $       4,651     $       3,441     $   2,680
Other long-term
liabilities/long-term debt:
Time Deposits, gross sub-total        1,149,993          745,411           273,245           131,337             -
Federal Home Loan Bank advances
and repurchase agreements, gross        468,313          390,549            50,000            27,050           714
Finance lease                             1,935              321               676               706           232
Subordinated debentures, net of
debt issuance costs                     152,951                -                 -                 -       152,951
Total other long-term
liabilities/long-term debt            1,773,192        1,136,281           323,921           159,093       153,897
Other commercial commitments -
off balance sheet:
Commitments under commercial
loans and lines of credit               647,971          408,664           187,544            47,253         4,510
Home equity and other revolving
lines of credit                          53,180            8,736            13,758            11,270        19,416
Outstanding commercial mortgage
loan commitments                        514,473          136,136           358,486               350        19,501
Standby letters of credit                25,271           22,738             2,533                 -             -
Overdraft protection lines                  973              472                42               152           307
Total off-balance sheet
arrangements and contractual
obligations                           1,241,868          576,746           562,363            59,025        43,734
Total contractual obligations and
other commitments                   $ 3,028,639     $  1,715,834     $     890,935     $     221,559     $ 200,311




Capital



The maintenance of a solid capital foundation continues to be a primary goal for
the Company. Accordingly, capital plans, stock repurchases, and dividend
policies are monitored on an ongoing basis. The most important objective of the
capital planning process is to balance effectively the retention of capital to
support future growth and the goal of providing stockholders with an attractive
long-term return on their investment.



The Company's Tier 1 leverage capital (defined as tangible stockholders' equity
for common stock and Trust Preferred Capital Securities) as of December 31, 2021
amounted to $909.6 million or 11.7% of average total assets. As of December 31,
2020, the Company's Tier 1 leverage capital amounted to $694.9 million or 9.5%
of average total assets. The increase in Tier 1 capital reflects the Company's
retained earnings during 2021, and the issuance of $115 million in aggregate
Tier 1 qualifying fixed-rate non-cumulative perpetual preferred stock.



United States bank regulators have issued guidelines establishing minimum
capital standards related to the level of assets and off balance-sheet exposures
adjusted for credit risk. Specifically, these guidelines categorize assets and
off balance-sheet items into risk-weightings and require banking institutions to
maintain a minimum ratio of capital to risk-weighted assets. As of December 31,
2021, the Company's CET 1, Tier 1 and total risk-based capital ratios were
10.64%, 12.19% and 15.26%, respectively. For information on risk-based capital
and regulatory guidelines for the Parent Corporation and its bank subsidiary,
see Note 15 to the Consolidated Financial Statements.



The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the bank regulators regarding capital
components, risk weightings, and other factors.



                                     -46-





  Table of Contents



Subordinated Debentures



During December 2003, Center Bancorp Statutory Trust II, a statutory business
trust and wholly owned subsidiary of the Parent Corporation issued $5.0 million
of MMCapS capital securities to investors due on January 23, 2034. The trust
loaned the proceeds of this offering to the Company and received in exchange
$5.2 million of the Parent Corporation's subordinated debentures. The
subordinated debentures are redeemable in whole or part. The floating interest
rate on the subordinated debentures is three-month LIBOR plus 2.85% and
re-prices quarterly. The rate as of December 31, 2021 was 2.98%.



During September 2020, the Parent Corporation issued $75 million in aggregate
principal amount of fixed-to-floating rate subordinated notes (the "2020
Notes"). The 2020 Notes bear interest at 5.75% annually from, and including, the
date of initial issuance to, but excluding, September 15, 2025 or the date of
earlier redemption, payable semi-annually in arrears on September 15 and
December 15 of each year, commencing December 15, 2020. From and including
September 15, 2025 through maturity or earlier redemption, the interest rate
shall reset quarterly to an interest rate per annum equal to a benchmark rate,
which is expected to be Three-Month Term SOFR (as defined in the Second
Supplemental Indenture), plus 560.5 basis points, payable quarterly in arrears
on March 15, June 15, September 15 and December 15 of each year, commencing on
September 15, 2025. Notwithstanding the foregoing, if the benchmark rate is less
than zero, then the benchmark rate shall be deemed to be zero.



During January 2018, the Parent Corporation issued $75 million in aggregate
principal amount of fixed-to-floating rate subordinated notes (the "Notes") to
certain accredited investors. The net proceeds from the sale of the Notes were
used in the first quarter of 2018 for general corporate purposes, which included
the Parent Corporation contributing $65 million of the net proceeds to the Bank
in the form of debt and common equity. The Notes are non-callable for five
years, have a stated maturity of February 1, 2028 and bear interest at a fixed
rate of 5.20% per year, from and including January 17, 2018 to, but excluding
February 1, 2023. From and including February 1, 2023 to, but excluding the
maturity date, or early redemption date, the interest rate will reset quarterly
to a level equal to the then current three-month LIBOR rate plus 284 basis
points.



During September 2015, the Parent Corporation issued $50 million in aggregate
principal amount of fixed-to-floating rate subordinated notes (the "2015
Notes"). As of December 31, 2020, the 2015 Notes had a stated maturity of July
1, 2025, and bore interest until the maturity date or early redemption date at a
variable rate equal to the then current three-month LIBOR rate plus 393 basis
points. As of December 31, 2020, the variable interest rate was 4.16% and all
costs related to 2015 issuance have been amortized. The 2015 Notes were redeemed
in full on January 1, 2021.



Preferred Stock



On August 19, 2021, the Company completed an underwritten public offering of
115,000 shares, or $115 million in aggregate liquidation preference, of its
depositary shares, each representing a 1/40th interest in a share of the
Company's 5.25% Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series A,
no par value, with a liquidation preference of $1,000 per share. The net
proceeds received from the issuance of preferred stock at the time of closing
were $110.9 million.

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